Markets. Business. Life.: January 2010

Friday, January 29, 2010

Hitting the Nail on the Head

Article in WSJ this morning hits the nail on the head. The money flow into commodities is playing havoc with prices as producers attempt to manage supply in response to market signals. That money though is fickle, triggering higher volatility. Some excerpts:

Matthew Maloney, a corn trader with R.J. O'Brien & Associates, who called the reaction to the Jan. 12 crop report "one of the most dramatic changes of fortune" he has seen in 19 years on the trading floor.

Takai, general manager of financial services at Sumitomo Corp., said the amount of money wagered on commodities has risen sharply in the past decade and likely will keep climbing.

The number of open contracts to buy or sell copper has dropped by more than 7% since the end of last year, according to the Commodity Futures Trading Commission.

"The high prices of a year ago are still having their effect," [Dan Basse of AgResource] said. "The market does its job."

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Tuesday, January 26, 2010

Depressing...

now this is depressing!

All is Not Well in the World

Look no further than this tidbit to see that all is not well in the world. Key takeaway: investors don't trust GMAC (or GM for that matter). Or at least not at the price of this deal. Which means that the Canadian government is effectively giving an interest rate subsidy to GM, knowing that businesses will always take the low cost route. Why the auto industry has adopted this "protected status" is another issue. Let's just hope these assets don't implode on BDC's balance sheet.

the Business Development Bank of Canada, an entity owned by the federal government, completed the purchase of $1.263-billion in auto loan receivables-backed notes from GMAC Canada under the so-called Canadian Secured Credit Facility (CSCF) program. That $12-billion program, which is slated to close at the end of March, was set up last year by the federal government in response to the global financial crisis and the resulting drying up of liquidity. The BDC, which is the administrative agent under the CSCF, was the sole buyer of the securities, which yielded 2.716% and whose so-called final scheduled distribution date is May 2016. This deal is the second by BDC.

Great Site

I'm a little late on this one admittedly, but here is a great site:

www.BusinessInsider.com

Monday, January 18, 2010

Digging Out of Debt (from Economist)

The Economist says it best:

The rich world’s debt reduction has barely begun:

http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=15269334

The only thing I could add is that according to Soros, in 1929 total credit was 160% of GDP, peaking at 260% in 1932. Ouch.

Sunday, January 17, 2010

Quotes - Don Coxe

Don Coxe is always entertaining, and his December note proved no exception. It offered these gems:

The cash the Fed created to save [the banks] from the consequences of their own folly sits as T-bills or fed funds on their balance sheets, providing little more stimulus to the real economy than sending out daily re-broadcasts of Jimmy Carter speeches on economic malaise."

There are three considerations in global equity investing: the first is currency, the second is currency, the third is, what makes this an attractive company?"

Some years ago, Washington's National Press Club ran a contest for a newspaper headline that would attract the least readership. The hands-down winner: "Interesting new policy proposals from Canada."

Quotable - Boom-Bust

"In every boom-bust sequence people come to believe that the normal rules do not apply, but they usually do."
-George Soros

Wednesday, January 13, 2010

We've seen this movie before - (from Soros)

Continuing with the theme that we haven't learned anything from history (of public markets, that is), I came across these writings by George Soros in the "Alchemy of Finance". This was written in the mid 1980s in response to the international lending crisis, but we could almost substitute the word "sub-prime" for every instance of "international lending". I wish I had read this in early 2007! (Note I have re-ordered the text and made some minor deletions/changes [in brackets] for ease of readability.)

On the credit cycle:
It is only net new lending that stimulates, and total new lending has to keep rising in order to keep net new lending stable.

The process continues until a point is reached where total credit cannot increase fast enough to continue stimulating the economy. By that time, collateral values have become greatly dependent on the stimulative effect of new lending and, as new lending fails to accelerate, collateral values begin to decline.

Eventually, the realization that the trend is unsound and unsustainable comes crashing in. The prophecy is self-fulfilling and the trend is reversed, often with catastrophic consequences. ... the boom is drawn out and acelerates gradually; the bust is sudden and often catastrophic.

On International Lending:
... international lending was too profitable to leave much room for caution. Business could be transacted on a large scale, the risk of adverse interest rate movements could be minimized by the use of floating rates, and administrative costs were much lower than in the case of corporate loans. Fierce competition kept spreads between borrowing and lending rates quite narrow; nevertheless, international lending became one of the easiest and most profitable forms of banking activity, attracting many banks with no previous experience in the field. ...more than a quarter of Citicorp's earnings came from Brazil. ...international lending became the fastest growing sector of the banking industry. Naturally, if banks had set up reserves that would have been appropriate in light of the subsequent experience, the business would not have been as profitable as it seemed at the time.

Banks were so anxious to obtain business that they asked very few questions. It is amazing how little information borrowing countries had to supply in order to obtain loans. Lending banks did not even know how much money the countries in question were borrowing elsewhere.

International lending grew so rapidly that the banks involved became overextended: their capital and reserves could not keep pace with the growth of their balance sheets.

The larger banks typically leveraged their equity 14 to 16 times, with the Bank of America running as high as 20 times. ...many banks had reached the point where they were pushing against the limits of what was considered prudent leverage by the standards of the time. If they wanted to continue growing they would need to raise additional equity capital.

On the reasons for the international lending boom and regulators response to it:
Why the commercial banks were willing and able to sustain such explosive growth in their international loan portfolios is a fascinating question that will be hotly debated for years to come. Part of the answer is that banks did not consider themselves responsible for the soundness of the system. Banking is an intensely competitive business, which is, however, subject to regulation. It is the job of the central banks to prevent excesses. Commercial banks operate under a protective umbrella; they seek to maximize their profits within the framework of existing regulations and they cannot afford to pay too much attention to the systemic effects of their activities. A commercial banker who refuses to go after what seems like profitable business is liable to be pushed to the side, and even if a bank decided to abstain there are many others anxious to take its place. Thus, even those who realized that the international lending boom was unsound found themselves obliged to participate or lose their places.

There is an important lesson here: participants are not in a position to prevent a boom from developing even if they recognize that it is bound to lead to a bust. That is true of all boom/bust sequences. Abstaining altogether is neither possible nor advisable. The best a participant can do is to cease to be a participant at the right time.

The history of central banking is a history of crises followed by institutional reform. It is truly surprising that the lessons of the international debt crisis have still not been learned. The champions of unregulated competition are more vocal, and more influential, than ever. ...regulations are generally designed to prevent the last mishap, not the next one.

Why did the [regulators] fail to [regulate international lending?] ... Had the [US regulators] imposed regulatory restrictions [on US banks], the banks under their supervision would have lost business to [foreign banks].

Thoughts for the future:
Monetarism holds that inflation is a function of money and not of credit. If monetarism is valid, the growth of money supply needs to be regulated, not the growth of credit.

...I can point to the empirical evidence that shows that the money supply always fails to behave in accordance with regulators' wishes.

Economic activity takes place in the "real" economy, while the extension and repayment of credit occur in the "financial" economy.

the Collective system is held together only by the threat of breakdown.
-George Soros

Friday, January 8, 2010

Quotes

"As we make our way in the world our sense of self evolves. The relationship between what we think we are and what we are in reality is the key to happiness - in other words, it provides the subjective meaning of life."
-George Soros

"Mothers may still want their favorite sons to grow up to be President [...] but they do not want them to become politicians in the process."
-John F. Kennedy

Saturday, January 2, 2010

Quote - Changing World

"The world moves so quickly it's hard to keep pace with the times."
-David Sarnoff, President of RCA made this statement to the NY Times in 1929.

Some things never change (or the pace of human innovation never ceases)

Markets. Business. Life.