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"Unanalyzable financial institution" is redundant, like "sullen teenager" or "burdensome tax." To the outside observer, even the c. 1933 Bailey Bros. Building & Loan was a blind pool. Still less comprehensible is the 21st-century, derivatives-enhanced mega-bank. The mega-bank managers themselves seem confused enough. Pity the public investors. What's wrong with the modern financial institution, however, isn't what Sen. Christopher Dodd, the chairman of the Senate Banking Committee, keeps trying to fix....
"Large numbers of these second liens have no real economic value," Rep. Barney Frank, chairman of the House Financial Services Committee, wrote to the chief executive officers of four big commercial banks on March 4. "[T]he first liens are well underwater, and the prospect for any real return on the seconds is negligible." Frank's breezy markdown of a trillion dollars or so of home-equity loans could not have failed to moisten the palms of the hands that held his letter....
The sanguine projections of out-year interest expense contained in the Grant's model Treasury prospectus of two weeks ago prompted a San Francisco reader to imagine an alternative scenario. Let us say, that the interest-rate forecast of the Congressional Budget Office, which Grant's quoted, proves too low. Assume, instead, a proper bond bear market....
More than a few readers have weighed in to lament the quality of the investment ideas currently being presented here. We seemed so much on top of things in 2008 and even 2009, they say. But this year, they grumble, they might as well be reading Runner's World or The American Scholar. What's gone wrong? No happier than they are, we invoke extenuating circumstances. The inflation that nobody can see on Main Street is in full flower on Wall Street....
Earnings season is almost over, but for GLD it never began. Not since the earth's crust cooled has the 79th element in the Periodic Table earned a dime. Yet that hasn't stopped SPDR Gold Trust, a.k.a. GLD, from becoming an institutionally recognized investment asset. Still, the question hangs in the air: What's an ounce worth? Now begins a reappraisal of our Nov. 27 reconsideration . . .
To earn investment-grade, double-digit yields denominated in U.S. dollars, you need a time capsule and a ticket back to 1981. Nowadays, certifiably "safe" income-producing securities fetch zero. Triple-B-rated corporate bonds are quoted at all of 6.4%, junk bonds at 9.5% and 10-year California general obligation bonds at 4.5% (that's tax-free, not risk-free). . . Everyone, these days, needs income, while no one needs permanent capital impairment. And most everybody is jumping at shadows. . .
March 6 marks the first anniversary of the world not coming to an end. On that date one year ago, the Standard & Poor's 500 Index put in its low. The broken bones of credit began to knit, and the economy stopped shrinking and resumed growing. So powerful is the recovery today that it is almost possible to imagine a company hiring an employee and a bank making a new loan. Compared to the darkness of the abyss, even a partly cloudy sky looks dazzling. The world economy has, it seems, been saved from a fate even worse than our Great Recession. But at what cost?
At last, some good news for shipowners, including the new seagoing private-equity investors who may just have bought in at the lows: World trade by the Grant's measure (the dollar value of imports from the U.S., Britain, the euro zone, Japan, and the BRICs) grew 2% year-over-year in November, the first positive reading in 13 months, with December logging a further 9% gain. . .
Forecasts of a 2010 fiscal-year deficit of $1.6 trillion, a shade of red never before seen in the federal accounts, sent statesmen to the airwaves and pundits to their keyboards. President Obama condemned the obstructionism of the Republican Party in his State of the Union address: "Just saying no to everything may be good short-term politics, but it's not leadership." Newspaper columnists denounced Congress, especially the Senate, where it takes 60 ayes to block a filibuster. How this country came to such a sorry fiscal pass is a very good question, and we happen to have an answer. . .
You, let us say, are the State of Wisconsin Investment Board, and you have a problem. You are heavily exposed to the stock market (55% of pension assets). Still more heavily are you exposed to the stock market's volatility (90% of fund volatility is from that source). You are wedded to a 7.8% actuarial-return assumption, which you privately despair of meeting. What do you do?
Amateurs were debarred from subscribing to last week's $2.55 billion offering by [COMPANY--and a good thing, too. The investment appeal of a money-losing, debt-stuffed, covenant-breaching, oligarch-bossed, top-tick-prone cyclical on the brink of insolvency is chiefly apparent to professionals. . .
The failure of [Bank] last week is expected to set back the Deposit Insurance Fund (DIF) by $825.5 million, a pretty stiff bill for an institution with only $2.18 billion in assets. Concerning which a stunned subscriber asks, "Shouldn't a loss this big be mathematically impossible?" Actually, it's old hat. . .
Addressing the annual meeting of the American Economic Association in Atlanta on Jan. 3, the chairman of the Federal Reserve Board exonerated the Fed and its interest rates from blame in the great mortgage mess. Why, the central bank's own vector autoregression model closes the
Do you, gentle reader, fancy a 3.5% renminbi-denominated yield? To snag it, would you reach all the way to the Golden Sunflower loan product No. 97, recently on offer from China Merchants Bank? WuHan DingJin Food Corp. is the borrower, but China Merchants Bank, the No. 5 bank in the People's Republic with assets of $288 billion, is not the lender. You, to repeat, are the lender, or would be if you chose to forgo the presumptive safety of a 2.4% account at China Merchants Bank and venture into loan No. 97. A huge debt bubble is inflating China's economy and, by extension, the world's.
The fiscal news is bad from Greece to California, though bondholders would hardly know it from the wages they're earning for worry. On a three-year maturity, the Golden State's debt yields 1.89%, that of the Hellenic Republic, 3.45%. Go out 30 years and California is quoted at 5.59% and Greece at 6.26%. Yes, spreads have been widening. But, still, we wonder: What would complacency look like?
Hard on the heels of the worst modern credit disaster, hundreds of billions of dollars of professionally managed assets are bearing non-trivial risks for literally no return. "Return-free risk" was how the bond bears characterized the value proposition in the government securities market last year. They could not have imagined that today's money funds would make the 3% long bond look like a value stock.
For the next three years, the Treasury Department muttered up its sleeve on Dec. 24, the sky's the limit on the government's net-worth-plugging investments in Fannie Mae and Freddie Mac. Furthermore, Timothy Geithner's bureaucracy disclosed, on a day not ordinarily given over to the announcement of major changes in public policy, the mortgage behemoths will not be prohibited from growing in 2010 after all. They will rather be allowed to expand their combined balance-sheet size to $1.8 trillion (as of November, they jointly weighed in at $1.5 trillion). We say these are evil omens, but the market has its own ideas.
"It is a victory for the U.S. government," says an interest-rate strategist at Citigroup Global Markets, speaking last week of the Treasury's epic 2009 borrowing campaign. "It is a defeat for the world's investors," says Grant's of the very same borrow-a-thon. At auction last year, according to calculations quoted by The Wall Street Journal, two-year notes yielded an average of just 1.002%, 10-year notes an average of just 3.262%. Never mind flu season: For 2010, expect a pandemic of buyers' remorse.
"[B]ecause companies have been very much in a de-leverage mode and preservation-of-capital mode and a strengthening-of-the-balance-sheet mode," Andrew Cecere, chief financial officer of U.S. Bancorp, told a Goldman Sachs bank conference last month, "loan demand will come back quickly once it does come back." Cecere was singing our tune. Bank lending plunged in the 2007-09 downturn as it had never done in any previous post-World War II recession. Now what? Why, a new cycle of lending and borrowing. It seems it's already begun.
"Perhaps," we suggested in the June 12, 2009, issue of Grant's, "Mr. Market would be so obliging as to mark it back down to book, or, say, 1.2 times book at a minimum, in order to afford the value-minded investor a margin of safety?" Now look: "It"--Redwood Trust (RWT on the Big Board)--trades at 1.24 times book and yields 6.9%, down from 1.6 times book, with a yield of 6.6% in June. Sometimes you just have to ask.
Bank lending is shrinking and money supply growth is laboring--not exactly the expected fruits of the Fed's heroic balance sheet expansion. But the credit data for November may point to a change in trend. The sum of loans and securities held by commercial banks, a.k.a. commercial bank credit, jumped by $57 billion, to $9.1 trillion. Higher, too, was the volume of loans held on bank balance sheets, up by $51 billion, to $6.8 trillion.