Modern News

Updated March 14

Matt Miller of Bloomberg Television did a very wide-ranging interview with two prominent market participants: Philip Orlando of investment giant Federated Investors and Todd Colvin of MF Global Inc. I will be commenting on this through the weekend.

Miller raised the issue of interest rates. This is key in the current market environment, as the stock market has been buoyed by short term interest rates that are effectively zero. But what goes down must go up, and should the Fed be forced to raise rates, the market could get the chills, especially if there are earnings disappointments. (2:00-4:00 of video)

Orlando expects an earnings bump in tech stocks, as capital spending by corporate America put on hold at the beginning of the recession resumes. However, an uptick in tech stock prices depends on investor perception that the nascent recovery is sustainable (8:45-10:15)

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It’s not as if Uncle Sam isn’t trying to spend his way out of recession. February’s $221 billion deficit tally turned out to be a blockbuster , easily surpassing the previous record of $194 billion in February 2009.

The government also estimates that the total 2010 deficit will actually surpass 2009’s, coming in at $1.56 trillion compared to $1.42 trillion.

What does a $1.5 trillion deficit mean? Here’s a simplistic illustration. Current short term borrowing rates are extremely low, with the three month T-Bill yielding .15%. If the government financed this year’s deficit via this instrument, the interest tab would be $2.25 billion.

Should the T-Bill rate recover to more normal levels, say 3%, that amount climbs to $45 billion. And since we would have to finance last year’s deficit as well, the tab for both years would be roughly $90 billion. Or, in other words, something that exceeds the famous $87 billion Iraq war spending bill that worried the Democrats so, and which John Kerry voted for before voting against it.

Well, that’s change of a sort. But not much hope for a future.

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Is the Federal Housing Authority heading towards its own financial cliff because of its efforts to prop up the nation’s shaky housing market? Andrew Caplin, professor of economics at New York University, explains his concerns on Bloomberg Television:

Caplin believes the FHA is systematically understating the risk in their loan portfolio. For example, when they restructure a loan, they immediately treat it as a success – i.e., it’s removed from their book of troubled loans. But there is a possibility that the borrower will fall behind on that loan as well, and of course the risk is intensified by the recession, and the fact that the borrower was often a shaky credit in the first place. But the FHA does not reserve for this.

Caplin believes that the need for an FHA bailout is a near certainty. This would continue the “waterfall” phenomenon we have seen throughout the financial crisis. As each segment of the system gets stressed, the problem is not adequately measured and is only partially alleviated to avoid the immediate pain of drastic surgery. In effect, the regulatory powers allow it to flow downstream until it stresses another part of the system. The taxpayer picks up the tab multiple times, prolonging the crisis.

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For those of you who don’t know who Charles Munger is, let’s just say he and Warren Buffett have been making money together for a long time. Munger is the Vice-Chairman of Berkshire Hathaway Corp. and considered by Buffett to be his partner there. He knows what he’s talking about. Mr. Munger often writes parables to explain complicated financial matters in a way that the average person can understand. I think he must be a great storyteller and I would love the opportunity to hang with him for an evening by the fire. It would be fascinating!

His latest parable is disturbing, however. Posted on Slate.com a couple Sundays ago, “Basically, It’s Over” is a tale about the birth, growth and death of “Basicland” (clearly meant to be the United States) and its’ demise into “Sorrowland”. I won’t comment on it other than to suggest you click above and read it. When guys like Munger say things like this, I listen…and I worry.

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While the US economy continues to lose permanent positions, there is some good news on the job front. Temporary employment, which is a leading indicator of economic revival, has been climbing.

Bloomberg Television’s Lori Rothman discusses this phenomenon with Tig Gilliam, head of Adecco SA’s North American division. Mr. Gilliam cautions that the overall job situation remains weak, but the increase in temporary hiring is a positive signal. He also notes that if the recovery continues, we may see a structural shift to contract positions.

While any increase in employment is good news, such a structural shift would lead to more volatility in employment numbers and more uncertain access to benefits such as health insurance.

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By Jeremy Pelofsky

WASHINGTON (Reuters) – Two AIG units settled federal charges that they discriminated against black home buyers on fees for mortgages and will pay $7.1 million for restitution and education efforts, the U.S. Justice Department said on Thursday.

The units, AIG Federal Savings Bank and Wilmington Finance Inc, will provide $6.1 million to about 2,500 borrowers in at least 19 major metropolitan cities who were affected by the alleged discrimination, according to the department.

“This sort of practice is what I often call discrimination with a smile, because I would predict that many of the victims that we will contact will have no idea that they were victimized,” said Thomas Perez, head of the Justice Department’s civil rights division.

Blacks were charged fees by mortgage brokers that were on average one-fifth of a percentage point higher than whites for the mortgages, which were all subprime loans, Perez said. The victims will receive on average about $2,300 back.

He also said that there were some 45 lending discrimination cases pending.

The AIG subsidiaries will also provide at least $1 million to organizations that provide credit counseling, financial literacy and other educational programs that target blacks, according to the documents.

(more…)

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SAN FRANCISCO (Reuters) – A federal appeals court affirmed on Thursday a contempt finding against Dish Network Corp and EchoStar Corp in their long-running patent case against digital video recorder maker TiVo Inc, sending TiVo shares soaring 52 percent.

The U.S. District Court for Eastern Texas had previously imposed contempt sanctions against sister companies Dish and EchoStar for violating a court-ordered permanent injunction to stop making and selling DVRs.

TiVo had sued EchoStar back in 2004, and a jury found that its DVR technology infringed TiVo patents.

Analysts hailed the ruling as a huge win for TiVo, one that potentially opens up major new market and licensing opportunities.

TiVo’s options volume heated up to 14 times the norm in afternoon trading. In all, about 191,000 calls and 75,000 puts had traded, according to option analytics firm Trade Alert.

Janney Montgomery Scott analyst Tony Wible recommended that clients “buy the stock aggressively up to $15.”

“Today’s overwhelming victory significantly improves TiVo’s ability to win new business and the rates it can demand for its technology from future deals, while also improving penetration of its DVR advertising platform,” he wrote in a research note.

He said the ruling should also help TiVo in its litigation against AT&T Inc, Verizon Communications Inc, and Microsoft Corp.

TiVo said it was pleased with the appeals court ruling, and said it paves the way for the company to receive $300 million in damages and contempt sanctions awarded to it for EchoStar’s infringement through July 1, 2009.

TiVo said it plans to seek further damages and contempt sanctions for infringement after July 1.

(more…)

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James Chanos thinks so. You may remember Mr. Chanos, the skeptical hedge fund manager and Enron skeptic, who was featured in the Enron documentary “The Smartest Guys In the Room”.

In this intriguing interview, Chanos reminds us that China remains basically a socialist command economy with very able people, and its free market sector is subordinated to government dictates. So government can overbuild and overbuild in order to generate jobs and GDP statistics, to a degree that is hard to imagine in the West.

While Abu Dhabi could rescue a Dubai, who could rescue a China? If China’s imbalances do cause structural turbulence, we could be in for interesting times! Worth following.

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Richard Teitelbaum of Bloomber has posted an intriguing story on the AIG rescue orchestrated by the New York Fed under the direction of Timothy Geithner, now Secretary of the Treasury.

The main cause of AIG’s demise was its credit default swap (CDS) business. CDS transactions guarantee debt issues should the obligor be in danger of default. The following sequence of events left the US taxpayer holding a very, very large bag:

-big investment banks underwrite huge amounts of securities with new and complex structures

-the banks hedge their risk by purchasing CDS contracts from entities like AIG, which issues $62.1 billion of such swaps. Goldman Sachs is the largest purchaser at $17.2 billion, followed by Merrill Lynch at $13.2 billion.

-the securities (remember the underwriters put the deals together) turn out to be lousy credits, despite often rosy credit ratings, and badly flawed structurally to boot. Their values plummet, triggering the CDS payouts.

-AIG can not make the payments, thus becoming insolvent

-the Fed bails out AIG, and orders it to pay the CDS obligations in full to the banks (who started the mess). Prior to the Fed’s intervention, AIG had been trying to negotiate a discounted payout- i.e. a “haircut”.

It’s a mind-boggling scenario. The banks could go into overdrive creating risk because of their CDS fallback, and the Fed spared the banks the consequences of creating so much risk that it took the CDS issuer down. Given the banks’ role in creating the exotic securities, marketing them, and hiding (knowingly or unknowingly) their credit deficiencies, they should have been on the hook for the consequences. But, fellow taxpayers, YOU paid for the consequences.

The whole sorry tale is just another example of the distortions and unfair outcomes when private companies can game a government program, however well-intentioned and even essential the program might be (as I believe the bailout was).

Ugh!

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By Edward Krudy

NEW YORK (Reuters) – U.S. stocks fell on Tuesday as consumer sentiment dropped sharply and house prices unexpectedly dipped, denting optimism about a economic recovery.

Concerns about the economy overshadowed better-than-expected quarterly earnings from retailers, including Home Depot Inc <HD.N>. The top U.S. home improvement chain beat estimates and raised its profit forecast, sending its shares up 1 percent to $30.62.

The February consumer confidence data fell in February to the lowest in 10 months, and the Standard & Poor’s/Case-Shiller indexes unexpectedly slipped in December. The releases followed an unexpected decline in business sentiment in Germany, which pressured overseas markets and fed uncertainty among investors who were worried about the U.S. Federal Reserve’s plans for interest rates and worries over possible sovereign debt defaults in Europe.

“Overall, there’s not a lot of positive stuff to see,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut. “With equity markets having retraced about two-thirds of their recent decline, today’s report (on consumer sentiment) could be the catalyst that leads to profit taking.”

The Dow Jones industrial average <.DJI> dropped 60.16 points, or 0.58 percent, to 10,323.22. The Standard & Poor’s 500 Index <.SPX> fell 8.84 points, or 0.80 percent, to 1,099.17. The Nasdaq Composite Index <.IXIC> lost 22.37 points, or 1.00 percent, to 2,219.66.

Investors were also confronted by a report from the Federal Deposit Insurance Corp that the total number of “problem” U.S. banks jumped 27 percent to 702 during the fourth quarter of 2009, reaching the highest level since 1993 amid signs the industry’s recovery is still shaky.

(Reporting by Edward Krudy; Additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

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