Stuck

4 Big Mortgage Backers Swim in Ocean of Debt

By MARY WILLIAMS WALSH

Published: December 16, 2009

Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support.

Entire NewYorkTimes Article

Paying The Top

Goldman's announcement of vesting its top 30 executives with 'at risk' stock is done in hopes of deflecting some criticism leveled at the firm over its compensation policies. The thought of the firm's top boys taking a risk on their own stock is probably making them all nauseous. How will they survive without an immediate piece of the transactional cash bonanza the firm produces each year, a large part of what the firm mistakenly calls trading profits. You see, trading is trading and charging for trading, well, is not trading. The good news for those at the top is that the stock is cheap at current levels.

The continued argument concerning the losing of top talent at investment banks if they are punished by compensation restrictions never is quite able to get traction. Pay me or I will quit is just another form of whining and Congress does not care. Everyone knows that if the last dime in the world were tossed on the ground, two hundred bankers would dive for it.

Harvard announced it was shutting down the the construction of its high-tech project which was to open in 2011. The project was initiated by previous Harvard president Lawrence Summers when the world of the upside had no end in sight. Now Harvard's endowment is down to its last $26 billion but in a larger way points to the long term problems of the ability to generate wealth for all market participants. If Harvard cannot get on track with its sea of generational connections, the greater population's adjustments may be much worse.

Geithner / Dollar / Housing

Geithner apparently is upset at the 'bonus unleashed' attitude of Wall Street executives who not so long ago prayed for cash and forgiveness. Of course the Treasury Secretary 'doth protest too much' since he basically gave the keys to Goldman and JPMorgan when he made them good at 100 cents on the dollar in many things including AIG's obligations. Geithner talks tough but winks a lot.

The dollar remains the focus of much attention even though it is a who cares trade. But given the bomb it laid in 2009, don't be short the dollar in 2010. That was easy.

Housing gains on data are a laugh since the macro simply is that the banks are not going to fund equity in homes for the foreseeable future. Real equity is what you can get to and most will not be able to get to anything there. Housing will find bottom pickers in 2010 and will wander through over supply for several years.

Each year is a stock pickers year despite the general overall lifting associated with up trends. Cult stocks such as AAPL and GOOG are overbought but they always run hot until the idiot bell rings and they all get out dripping positions until they are looking at real damage. Better to own IBM, MSFT, and yes even GS.

Deep Hole

From Washington Post

Digging out of a deep hole

Chart

Bill Gross of Pimco

Reprint of Bloomberg article:

Oct. 27 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said the six-month rally in riskier assets is likely at its pinnacle, with U.S. economic growth to lag behind historical averages.

Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, made the forecast in a commentary posted on Newport Beach, California-based Pimco’s Web site. Pimco has called for a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“Investors must recognize that if assets appreciate with nominal gross domestic product, a 4-5 percent return is about all they can expect even with abnormally low policy rates,” Gross wrote. “Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets -- while still continuously supported by Fed and Treasury policy makers -- is likely at its pinnacle.”

U.S. policy makers are in a predicament much like Japan faced in the last decade because they have to keep interest rates low to support asset prices in order to create growth while also worrying about the effects of excess liquidity, Gross wrote.

“The Japanese example over the past 15 years is an excellent historical reference point,” Gross wrote. “Their quantitative easing and near-zero percent short-term interest rates eventually arrested equity and property market deflation, but at much greater percentage losses, which produced an economy barely above the grass as opposed to buried six feet under.”

Gross wrote that economic growth in the U.S. will approach 4 percent in the second half of this year, although sustaining that rate of expansion is uncertain.

“The ability to sustain those levels once inventory rebalancing and fiscal pump-priming effects wear off is debatable,” Gross wrote.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

Fixing To Big To Fail

Washington getting continued heat on bank/brokerage subsidies, so legislation is going to be offered to address the" to big to fail " problem.

(NewYorkTimes) .Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble.

Sideways

The monthly DJIA chart shows the current 50% retracement underway (alltime highs vs March 09 lows) with a target of about 10300. These charting basics, which most real traders use as trash, illustrate the trading pattern of the 30 stock index and the somewhat flat net overall performance of the last 10 years. The current rally off the March lows has been powerful despite massive investments in US treasuries by the entire world. Unfortunately for the bulls, money on the sidelines is obviously staying on the sidelines and probably will not find stocks quite as appealing for some time to come. So stock allocations to date and normal front running of the "sidelines" trade have little hope of escaping the continuation of the DJIA's sideways purgatory.

Trading Forcasters

We live in a world where a Supreme Court elects a President, the largest financial institutions have to be saved by tax dollars, and markets increasingly perform in rapid boom/bust fashion putting significant risk upon non professional investors. Now the first condition is the result of one party having been able to stack the highest court with partisans. The second condition is a result of the same party's trashing of regulatory oversight. The third condition is mindless chase for returns, which has up through this decade so far, has resulted in a market unable to retain gains on any significance, except for those transactional profits charged by the same folks that needed all those tax dollars.

It is often said the stock markets look out six months ahead or more and essentially forecast conditions in the future. Now having been in the trading business for nearly thirty years, traders are not that smart. They look at today, then later today, and then the close. But let us look at one of their forecasts. One thousand dollar gold. The reason given, the dollar's future value. Probably not. As the TIPS trade has shown lately by its popularity, professional and herdsman alike believe a stimulus induced tsunami of inflation is inevitable. As in most instances, they are probably wrong, but stocks are in front of the same trade of chasing unreasonable expectations about future performances of companies whose futures have been constructed, not by market share advances, but by cost reductions which ultimately prevent serious expansion.

So is this rally any good? Probably not. But another bus will be by to either run you over or pick you up.

The Dog's New Chain

Battle over projected economic growth between the fixed income folks and stock analysts has resulted in some wide variations. Choices range between the 2% "new normal" with a deflation twist, or the much stronger projections by equities folks and their vision of a new profit cycle. It is hard to fight people such as Bill Gross of Pimco, who coined "new normal", since he has probably been the best trader on the macro side over the last two years. He is buying long term treasuries and believes the economy is just not going to have the ability to muster any sustained push due to the huge inventory of bad debt and increased tendency for public savings. The stock market insiders see great performing companies, cash on the sidelines ready to roll, and M&A activity rebounding.

Now Gross is always talking his position on Bloomberg but his outlook is a bit more realistic than the stock pushers who have had proven quite dramatically their skills rely on a great underlying secular bull, which they had for so long. The buy and hold mentality of a generation will have its moments for shorter periods, but the new dog has a much shorter chain and there is not much slack left. Besides, investing will mean trading more frequently over the coming years and that is not a model used to gain the public's confidence or an eagerness to invest. In and out is hard for 41Ks but easier for the trading industry. So a much more rolling trading affair will wear on the general investing public as their long term investments stay flat as Pimco's prediction of modest growth presents few opportunities for increased employment and overall economic expansion.