By Shah Gilani
Contributing Editor
Money Morning
A new Federal Deposit Insurance Corp. (FDIC) plan to offload busted banks to vulture investors strikes an uneven balance between private equity players and public taxpayers and may inadvertently sow the seeds for another round of bank failures.
The FDIC currently insures bank depositors up to $250,000 – up from $100,000 prior to the financial crisis. So far this year, 81 banks have failed, costing the FDIC an estimated $21.5 billion.
And the situation is almost certainly going to get worse.
A Growing List of Troubled Banks
The FDIC reported yesterday (Thursday) that the number of distressed banks rose to the highest level in 15 years during the second quarter, thanks to an economic malaise that’s saddling banks with a growing level of bad loans.
The number of troubled banks rose to 416 at the end of June from 305 at the end of March. The FDIC hasn’t had that many banks on its “problem list” since June 1994, when there were 434, the agency said. Assets at these troubled institutions totaled $299.8 billion – the worst level since the end of 1993, according to the FDIC.
The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the second quarter cost the insurance fund an estimated $9.1 billion. These hits were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.
The FDIC just took another hit due to the recent failure of Colonial Bank, which cost the fund an estimated $2.8 billion, and the failure last week of Guaranty Bank, which cost an estimated $3 billion. FDIC Chairman Sheila C. Bair is determined to not have an insolvent FDIC turn to the U.S. Treasury Department to draw on a $500 billion line of credit set up for just this purpose, although that move is clearly inevitable.
In a fatalistic twist of irony, however, the FDIC’s demand for another special assessment in the fourth quarter and another expected special assessment in the first quarter of 2010 may tip several more banks into failure.
Although there seems to be a desperate need for private equity capital to come running to the rescue, the reality unfortunately isn’t that simple.
A Disappointing Decision
As most all consumers and investors know, the FDIC only covers insured deposits. However, the ongoing cost of a busted bank becomes higher for the FDIC if the agency cannot merge that failed institution with a healthy player, or can’t sell it outright. When The FDIC can’t find a willing partner or buyer, the agency must instead manage the “unwinding” of every failed bank’s stockpile of illiquid and toxic assets. With so many more banks in trouble and so many fewer banks willing to acquire additional suspect assets, private equity firms have offered to step up and buy failed banks these professional investors believe can be turned around.
On July 9, the FDIC published and sought comments on its “Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions.” The controversial proposed policy statement suggested tough terms and conditions under which the federal agency would be willing to sell failed banks to non-traditional buyers – specifically, private equity firms.
A total of 61 comments were filed during the 30-day comment period – most of them from private-equity firms, their lawyers, financial-services trade associations and lobbyists. There were also comments from academics, four U.S. senators and six individuals. The FDIC also received 3,190 form-letter comments in support of the controversial proposal.
The FDIC issued its final decision on the matter on Wednesday. The new version was much weaker, once again underscoring the federal government’s proclivity for weakening banking regulations – a willingness we’ve repeatedly warned will have dire consequences for the U.S. financial system, as well as for the broader economy.
These alterations are setting the stage for an escalation in bank failures. The real losers will once again be the U.S. taxpayers, who will end up footing the bill for the FDIC’s failure to take a tough stand.
How much weaker were the new regulations, when compared with the earlier proposals? In one instance, instead of the initially proposed requirement that new investors maintain a 15% Tier 1 common equity capital ratio – three times what traditional bank holding companies are required to maintain – the new entry hurdle is only a 10% ratio.
Private equity firms will be spared the requirement of other bank holding companies and will not be called upon as a “source of strength,” should their investment in a bank need shoring up.
Bank holding companies have to make their resources available if their banking operation requires support. But private equity companies don’t want to expose their vast pools of capital to any one investment. Just as Cerberus Capital Management LP refused to put any more money into its failed Chrysler LLC investment – leaving taxpayers to bail it out – firms are loathe to be put into a position to support a bank holding with anything more than what was deemed as a suitable capital investment at the outset.
The FDIC granted other compromises granted in favor of private equity buyers. For instance, the agency spared them from having to cross-guarantee their portfolio-bank investments – unless they owned at least 80% of two or more banks.
Getting “Real” About Private Equity
Private equity interests certainly didn’t get everything they wanted. For one thing, the final policy statement prohibits “insider” and “affiliated” loan transactions and strips firms of using a controversial “silo” structure to obfuscate ownership and control positions.
The final policy statement reads like the painful enunciation of a split decision in a controversial heavyweight title fight. The valiant efforts Bair, the FDIC chairman, to keep the howling wolves of private equity at the door and out of the banking henhouse were ultimately undermined by the rapidly dwindling coffers of the Deposit Insurance Fund, which brought the FDIC to its knees. The compromises in the final policy statement grant the private-equity crowd a lot of what it was lobbying for while only momentarily sparing the FDIC the embarrassment of being knocked out.
But make no mistake. That day of reckoning is on its way. And not even the entrepreneurially gifted private-equity set will be able to keep that from happening.
Let’s be clear: We’re not saying that the private-equity sector is made up of angels (angel investors, yes, but outright angels, no way). Indeed, as we’ve demonstrated in past columns, the private-equity set is actually a group of uber-capitalists who are hell-bent on turning their gargantuan ambitions into extraordinary wealth – and who aren’t above shopping for regulators or hardballing Congress to get what they want.
Private-equity players demanded – and got – the FDIC to agree to share whatever losses they might incur, whereby the government (meaning taxpayers) must bear the brunt of the losses incurred when risky loan pools are acquired.
In all fairness to private equity firms, acquiring banks also have loss-sharing agreements with the FDIC. But they are regulated entities and private equity firms are not. Nor will private equity firms willingly become regulated in order to buy banks.
And there are actually some advantages in having private equity investors acquire failed banks – including a host of issues that critics describe as “self-serving,” grousing that the private-equity benefits come only at a cost to taxpayers.
Given the new set of rules, private equity firms can swoop in and pick up failed banks by banding together and dividing the equity commitment and investment liability assumed upon purchase. If there is no recourse against other private equity firm assets or even any cross-guarantees against other acquired banks, unless they are 80% owned, the consortiums cannot be called upon and certainly not relied upon to be a “source of strength” for their depository, taxpayer-backed portfolio banks.
Regardless of any rules on self-dealing, as sure as “bank” is a four letter word, private equity firms will find a legal way to lend from their taxpayer-backed banks to leverage their other portfolio companies and extract their usual exorbitant fees. If they don’t lend to their own portfolio companies, they will surely lend to other private equity firms’ portfolio companies in a modified version of the “club deals” that bind them together. These firms have a mutual interest in generating deal fees and in controlling their lucrative franchises.
A Glimpse of What’s to Come
The problem with banks is that they became too leveraged. When they couldn’t amass assets on their books, against which they had to set aside “reserves,” they established “off-balance-sheet” vehicles to acquire leveraged pools of assets. They were leveraged inside and out.
But now the originators of the leveraged-buyout business model want to control taxpayer-backed banks, to apply another round of leverage to already crippled banks in order to squeeze out all the profits possible. Although this comes at a cost to duped and already drained taxpayers, regulators, legislators and the American public would be foolish to expect anything else from the private equity crowd. If the FDIC thinks it has a problem now, wait until the next implosion of leveraged banks happens.
In a comment letter to the FDIC on the original policy proposal, the Private Equity Council, an industry advocacy group, without recognizing the irony of its comment, suggested that mandating higher capital ratios for private equity buyers of failed banks would actually increase the risk at those banks because their owners would essentially have to employ more leverage to generate sufficient returns to meet the higher capital standards – while still generating returns high enough to satisfy the investors in their private-equity funds.
If that’s not an advance look at the next round of financial-sector problems we could be facing, we are deluding ourselves.
Private equity should be allowed to buy banks, but should also be held to a higher standard. They have a proven record of success at leveraging companies when they have access to cheap funding, and they also have a record of spectacular failures that resulted from their leverage. The last thing that American banks need – especially right now – is a hyper-aggressive management that leverages them to the hilt in order to generate “acceptable” rates of return for a select group of private investors.
Unfortunately, we’ve once again placed ourselves in a position where the viable solutions to the problems that were created will end up causing an entirely new set of problems – problems that always seem to provide a benefit to the old crony network while leaving the battered U.S. taxpayer as the ultimate victim.
We have no one to blame but ourselves.
More town hall meetings and more vocal opposition to being duped and used by Wall Street would be a good place to start.
Saturday, August 29, 2009
Wednesday, August 19, 2009
Why Asia Will Supplant Detroit as the Global Center of the Auto Industry
By Martin Hutchinson
Contributing Editor
Money Morning
Asia is poised to become the “new” Detroit.
Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.
But that new hope is destined to be short-lived.
It’s true that - in terms of value delivered for the money invested - “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.
Financial Crisis Fallout Reshapes Sector
Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.
But regional differences are already emerging.
In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.
(Prior to the global financial crisis and accompanying recession - which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles - the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)
It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.
Granted, India’s auto market - around 2.5 million cars and light trucks a year - is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.
Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.
That’s why Asia will become the new Detroit - the future center of the automaking world.
Gone For Good?
In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.
For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.
General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.
The United States’ One “Better Idea”
Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from "Cash for Clunkers," and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market - as the most-effective manufacturer of the large automobiles that Americans continue to prefer - no matter what the government tells Ford to do.
Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.
Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious - particularly in the emerging economies of Asia - that upscale portion of the auto market should continue to be strong.
Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.
But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.
The New Leaders
For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano" car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.
Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.
Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.
The bottom line: Tata and its India-based competitors - Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) - as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.
By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.
Contributing Editor
Money Morning
Asia is poised to become the “new” Detroit.
Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.
But that new hope is destined to be short-lived.
It’s true that - in terms of value delivered for the money invested - “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.
Financial Crisis Fallout Reshapes Sector
Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.
But regional differences are already emerging.
In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.
(Prior to the global financial crisis and accompanying recession - which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles - the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)
It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.
Granted, India’s auto market - around 2.5 million cars and light trucks a year - is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.
Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.
That’s why Asia will become the new Detroit - the future center of the automaking world.
Gone For Good?
In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.
For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.
General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.
The United States’ One “Better Idea”
Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from "Cash for Clunkers," and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market - as the most-effective manufacturer of the large automobiles that Americans continue to prefer - no matter what the government tells Ford to do.
Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.
Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious - particularly in the emerging economies of Asia - that upscale portion of the auto market should continue to be strong.
Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.
But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.
The New Leaders
For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano" car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.
Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.
Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.
The bottom line: Tata and its India-based competitors - Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) - as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.
By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.
Friday, August 14, 2009
High Frequency Trading: Wall Street’s New Rent-Seeking Trick
Martin Hutchinson
Contributing Editor
Money Morning
Goldman Sachs Group Inc. (NYSE: GS) disclosed recently that it had 46 “$100 million trading days” in the second quarter of 2009. That was a record number, even for one of the biggest players on Wall Street.
When the U.S. economy is facing collapse and merger and acquisition volume is way down, it seems odd that investment banks like Goldman had record quarters.
Well, here’s the secret: They’ve found a new way to skim more of the cream off the top of U.S. economic activity. It’s called “High-Frequency Trading” (HFT).
High-frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; HFTs now represent about 70% of the trading volume in the U.S. equity market.
HFT computer servers are able to beat other computers because they are located at the exchanges. They take crucial advantage of the finite speed of light and switching systems to front-run the market. They also gain information on orders and market movements more quickly than the market as a whole. They operate not only on the New York Stock Exchange (NYSE), but also on the electronic trading exchanges such as the NYSE hybrid market.
According to a paper “Toxic equity trading order flow on Wall Street” by the brokerage Themis Trading LLC, there are a number of different types of HFT. Liquidity rebate traders take advantage of volume rebates of about 0.25 cents per share offered by exchanges to brokers who post orders, providing liquidity to the market. When they spot a large order they fill parts of it, then re-offer the shares at the same price, collecting the exchange fee for providing liquidity to the market.
Predatory algorithmic traders take advantage of the institutional computers that chop up large orders into many small ones. They make the institutional trader that wants to buy bid up the price of shares by fooling its computer, placing small buy orders that they withdraw. Eventually the “predatory algo” shorts the stock at the higher price it has reached, making the institution pay up for its shares.
Automated market makers “ping” stocks to identify large reserve book orders by issuing an order very quickly, then withdrawing it. By doing this, they obtain information on a large buyer’s limits. They use this to buy shares elsewhere and on-sell them to the institution.
Program traders buy large numbers of stocks at the same time to fool institutional computers into triggering large orders. By doing this, they trigger sharp market moves.
Finally, flash traders expose an order to only one exchange. They execute it only if it can be carried out on that exchange without going through the “best price” procedure intended to give sellers on all exchanges a chance at best price execution. The Securities and Exchange Commission (SEC) has now promised to ban this technique, and flash trading on the Nasdaq will stop on September 1.
This toxic trading has caused volume to explode, especially in NYSE listed stocks. The number of quote changes has also exploded and short-term volatility has shot up. NYSE specialists now account for only around 25% of trading volume, instead of 80% as in the past.
The bottom line for us ordinary market participants is that insiders are using computers to game the system, extracting billions of dollars from the rest of the market. While it is illegal to trade on insider knowledge about company financials, these people are trading on insider knowledge about market order flow. That’s how Goldman Sachs and the other biggest houses make so much from trading. By doing so they are rent-seeking, not providing value to the market.
There are two ways to stop this: Ideally, the SEC will employ both. First, they can introduce a rule that all orders must be exposed for a full second. That will reduce the volume of HFT, but still doesn’t truly protect non-computerized outsiders.
The second, and better, solution is to introduce a small “Tobin tax” on all share transactions. It could be tiny; maybe 0.1 cents per share. (The SEC would also need to ban “exchange rebates” to traders.) Such a tax would make the worst HFT types unprofitable without imposing significant costs on retail investors. It would also provide funds to help run the vast apparatus of regulation and control that seems to be necessary to run a modern financial system.
Goldman Sachs, and other financial institutions of its ilk, have imposed huge costs on the U.S. public with their “too big to fail” status. Now they are adding to the problem by scooping out money from the stock market through HFT. It’s about time the government imposed some taxes to stop the worst of these scams and recover the public some of its money.
Contributing Editor
Money Morning
Goldman Sachs Group Inc. (NYSE: GS) disclosed recently that it had 46 “$100 million trading days” in the second quarter of 2009. That was a record number, even for one of the biggest players on Wall Street.
When the U.S. economy is facing collapse and merger and acquisition volume is way down, it seems odd that investment banks like Goldman had record quarters.
Well, here’s the secret: They’ve found a new way to skim more of the cream off the top of U.S. economic activity. It’s called “High-Frequency Trading” (HFT).
High-frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; HFTs now represent about 70% of the trading volume in the U.S. equity market.
HFT computer servers are able to beat other computers because they are located at the exchanges. They take crucial advantage of the finite speed of light and switching systems to front-run the market. They also gain information on orders and market movements more quickly than the market as a whole. They operate not only on the New York Stock Exchange (NYSE), but also on the electronic trading exchanges such as the NYSE hybrid market.
According to a paper “Toxic equity trading order flow on Wall Street” by the brokerage Themis Trading LLC, there are a number of different types of HFT. Liquidity rebate traders take advantage of volume rebates of about 0.25 cents per share offered by exchanges to brokers who post orders, providing liquidity to the market. When they spot a large order they fill parts of it, then re-offer the shares at the same price, collecting the exchange fee for providing liquidity to the market.
Predatory algorithmic traders take advantage of the institutional computers that chop up large orders into many small ones. They make the institutional trader that wants to buy bid up the price of shares by fooling its computer, placing small buy orders that they withdraw. Eventually the “predatory algo” shorts the stock at the higher price it has reached, making the institution pay up for its shares.
Automated market makers “ping” stocks to identify large reserve book orders by issuing an order very quickly, then withdrawing it. By doing this, they obtain information on a large buyer’s limits. They use this to buy shares elsewhere and on-sell them to the institution.
Program traders buy large numbers of stocks at the same time to fool institutional computers into triggering large orders. By doing this, they trigger sharp market moves.
Finally, flash traders expose an order to only one exchange. They execute it only if it can be carried out on that exchange without going through the “best price” procedure intended to give sellers on all exchanges a chance at best price execution. The Securities and Exchange Commission (SEC) has now promised to ban this technique, and flash trading on the Nasdaq will stop on September 1.
This toxic trading has caused volume to explode, especially in NYSE listed stocks. The number of quote changes has also exploded and short-term volatility has shot up. NYSE specialists now account for only around 25% of trading volume, instead of 80% as in the past.
The bottom line for us ordinary market participants is that insiders are using computers to game the system, extracting billions of dollars from the rest of the market. While it is illegal to trade on insider knowledge about company financials, these people are trading on insider knowledge about market order flow. That’s how Goldman Sachs and the other biggest houses make so much from trading. By doing so they are rent-seeking, not providing value to the market.
There are two ways to stop this: Ideally, the SEC will employ both. First, they can introduce a rule that all orders must be exposed for a full second. That will reduce the volume of HFT, but still doesn’t truly protect non-computerized outsiders.
The second, and better, solution is to introduce a small “Tobin tax” on all share transactions. It could be tiny; maybe 0.1 cents per share. (The SEC would also need to ban “exchange rebates” to traders.) Such a tax would make the worst HFT types unprofitable without imposing significant costs on retail investors. It would also provide funds to help run the vast apparatus of regulation and control that seems to be necessary to run a modern financial system.
Goldman Sachs, and other financial institutions of its ilk, have imposed huge costs on the U.S. public with their “too big to fail” status. Now they are adding to the problem by scooping out money from the stock market through HFT. It’s about time the government imposed some taxes to stop the worst of these scams and recover the public some of its money.
Friday, July 24, 2009
The Three Reasons China Will Lead the Global Rebound
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
For U.S.-centric investors who question whether it’s really necessary to invest in “risky” overseas markets, here’s an important fact to consider: It’s China - not the United States - that’s leading us back from the brink of a global financial collapse.
At a time when the U.S. economy continues to wrestle with joblessness, a housing hangover, and heightened inflationary fears due to a questionable central bank “exit strategy,” Beijing just reported that China’s economy advanced at a 7.9% clip in the second quarter, up from 6.1% in the first quarter.
This is well ahead of what most mainstream analysts had been projecting - particularly those who were writing the Red Dragon’s eulogy back in January - but as we’ve been telling Money Morning readers since the start of the New Year, China could well be on track for growth of 8% or more this year.
If you factor in the cash that’s not included in official state statistics - but that does influence economic growth - it’s possible that China’s growth rate could grow by an additional 3% this year and as much as 5% in 2010.
That’s not likely, mind you, but it is possible. And Beijing knows it.
Largely attributed to China’s massive $586 billion stimulus program, the country’s economic acceleration may seem startling when juxtaposed against the travails of other major markets and the United States in particular.
While Corporate America has admittedly buoyed investor sentiment with some better-than-expected earnings of late, many stalwarts continue to struggle. Take General Electric Co. (NYSE: GE), which is widely regarded as a global company, and which saw its profits drop 47%. Credit spreads remain tight and lenders are certainly in the pits as has been amply displayed by CIT Group Inc. (NYSE: CIT), which teeters on the brink of bankruptcy. Moreover, consumers continue to struggle in the United States, Europe and Japan.
In China, however, there’s a very different story coming to light. Thanks largely to an emerging middle class of 330 million people (more than the population of our entire country), Chinese consumers are coming into their own. With savings that are as much as 35% of earned income and a desire to have what we have, goods are flying off of store shelves. The expected increase in Chinese consumer spending in 2009 is greater than the forecasted consumer spending increases in the United States, Japan and the Eurozone combined.
At the same time, China’s property markets are rising again, and home values are increasing as well. Automobile sales, always a litmus test for consumer health in any developing country, are up 48% from last year and are accelerating so rapidly that China is already supplanting the United States as the world’s largest car market - a full three years ahead of my projections.
But, critics ask, what happens when the music stops? They’re worried that once the money runs out, China’s markets could crash all over again.
To China’s credit, the government acknowledges that there still are challenges and, as a seasoned China watcher, that gives me comfort. I find it reassuring to see that China’s leadership understands the game they’re playing. In fact, there are three key areas that could trip up the country’s global-growth strategy, but to keep that from happening, China’s leadership is focusing carefully on each of the three: unemployment, lending and currency.
Let’s look at each one in detail.
Unemployment: President Hu Jintao and his cabinet are acutely aware that if unemployment gets out of control, social unrest will become a major problem. So China’s leadership will do everything it can to ensure that this doesn’t happen.
Most Westerners will no doubt read into this comment with an emotional overlay, especially when the media has been filled in recent weeks with stories of the waves of riots and killings in China’s Western Xinjiang region. But, they shouldn’t. The Uyghur riots, while extremely unpleasant by any measure, are racially motivated clashes. That’s not to downplay the tragic nature of this violence, but the very nature of these riots does suggest that the chance they’ll spread beyond the largely Muslim region is minimal.
What concerns Beijing when it comes to unemployment is that riots spawned by shortages of basic human needs are a very different phenomena because they could prompt a now-divided and largely indifferent populace to unite against the government across a much broader geographic area.
And that would not only risk China’s growth, but powerful ruling elite, too, which is why Beijing is so insistent on direct stimulus benefits that keep people working. If it hasn’t dawned on you, yet, I’m sure it will in short order - China is playing it smart.
Here in the United States, Washington took its turnaround plans to Wall Street.
But in China, Beijing has taken its plans to Main Street.
While our leaders continue to pay lip service to unemployment, they really don’t care so long as protected (and connected) institutions remain standing when they should have been put out of their misery.
Lending: Since this crisis began, China has largely avoided the financial plague that has devastated Western economies. This is due in large part to historically tight restrictions on local banking practices and the confinement of derivatives and other potentially toxic financial assets to a few externally focused banks. But now Beijing has a different issue to contend with.
To ensure that the stimulus programs flow freely throughout China - and have the beneficial impact that Beijing hopes - Beijing’s bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt U.S. financial institutions today. They’re entirely different forms of lending, but the concerns seem to be inseparable.
To be fair, that might be the case. However, the thing to keep in mind is that China is not just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we’re seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers - all at Beijing’s insistence.
The result of all this is that China’s financial system should become increasingly stable even as it grows by leaps and bounds.
Obviously there will be fits and starts, but this is a far cry from the warped system U.S. investors have been forced to rely upon to date - a system whose hallmarks seem to be inept leadership, somnambulant or sleazy regulators, conflicted lenders and greedy Wall Street executives who focus on profits no matter the cost.
Chinese Currency: Many Western observers worry about China’s intentions when it comes time to purchase our debt. I think that’s overblown. The real question is what Beijing will do to manage the concentrated U.S. dollar risk it currently faces.
To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of U.S. Treasuries and U.S. dollars. But don’t expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.
Therefore it’s logical to expect China to diversify its holdings with additional oil, gold and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses such “hard-asset” investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.
Here’s one final thought to consider.
Unlike the West - which views the financial crisis as a burden, a mistake, or a bad dream to be lived through - China’s leaders see this as the most significant opportunity of a generation. It’s a chance for their country to establish itself as a leading global power.
That’s why China will continue to pull further ahead. And that’s why U.S. investors who don’t wish to be left behind can no longer ignore China.
Investment Director
Money Morning/The Money Map Report
For U.S.-centric investors who question whether it’s really necessary to invest in “risky” overseas markets, here’s an important fact to consider: It’s China - not the United States - that’s leading us back from the brink of a global financial collapse.
At a time when the U.S. economy continues to wrestle with joblessness, a housing hangover, and heightened inflationary fears due to a questionable central bank “exit strategy,” Beijing just reported that China’s economy advanced at a 7.9% clip in the second quarter, up from 6.1% in the first quarter.
This is well ahead of what most mainstream analysts had been projecting - particularly those who were writing the Red Dragon’s eulogy back in January - but as we’ve been telling Money Morning readers since the start of the New Year, China could well be on track for growth of 8% or more this year.
If you factor in the cash that’s not included in official state statistics - but that does influence economic growth - it’s possible that China’s growth rate could grow by an additional 3% this year and as much as 5% in 2010.
That’s not likely, mind you, but it is possible. And Beijing knows it.
Largely attributed to China’s massive $586 billion stimulus program, the country’s economic acceleration may seem startling when juxtaposed against the travails of other major markets and the United States in particular.
While Corporate America has admittedly buoyed investor sentiment with some better-than-expected earnings of late, many stalwarts continue to struggle. Take General Electric Co. (NYSE: GE), which is widely regarded as a global company, and which saw its profits drop 47%. Credit spreads remain tight and lenders are certainly in the pits as has been amply displayed by CIT Group Inc. (NYSE: CIT), which teeters on the brink of bankruptcy. Moreover, consumers continue to struggle in the United States, Europe and Japan.
In China, however, there’s a very different story coming to light. Thanks largely to an emerging middle class of 330 million people (more than the population of our entire country), Chinese consumers are coming into their own. With savings that are as much as 35% of earned income and a desire to have what we have, goods are flying off of store shelves. The expected increase in Chinese consumer spending in 2009 is greater than the forecasted consumer spending increases in the United States, Japan and the Eurozone combined.
At the same time, China’s property markets are rising again, and home values are increasing as well. Automobile sales, always a litmus test for consumer health in any developing country, are up 48% from last year and are accelerating so rapidly that China is already supplanting the United States as the world’s largest car market - a full three years ahead of my projections.
But, critics ask, what happens when the music stops? They’re worried that once the money runs out, China’s markets could crash all over again.
To China’s credit, the government acknowledges that there still are challenges and, as a seasoned China watcher, that gives me comfort. I find it reassuring to see that China’s leadership understands the game they’re playing. In fact, there are three key areas that could trip up the country’s global-growth strategy, but to keep that from happening, China’s leadership is focusing carefully on each of the three: unemployment, lending and currency.
Let’s look at each one in detail.
Unemployment: President Hu Jintao and his cabinet are acutely aware that if unemployment gets out of control, social unrest will become a major problem. So China’s leadership will do everything it can to ensure that this doesn’t happen.
Most Westerners will no doubt read into this comment with an emotional overlay, especially when the media has been filled in recent weeks with stories of the waves of riots and killings in China’s Western Xinjiang region. But, they shouldn’t. The Uyghur riots, while extremely unpleasant by any measure, are racially motivated clashes. That’s not to downplay the tragic nature of this violence, but the very nature of these riots does suggest that the chance they’ll spread beyond the largely Muslim region is minimal.
What concerns Beijing when it comes to unemployment is that riots spawned by shortages of basic human needs are a very different phenomena because they could prompt a now-divided and largely indifferent populace to unite against the government across a much broader geographic area.
And that would not only risk China’s growth, but powerful ruling elite, too, which is why Beijing is so insistent on direct stimulus benefits that keep people working. If it hasn’t dawned on you, yet, I’m sure it will in short order - China is playing it smart.
Here in the United States, Washington took its turnaround plans to Wall Street.
But in China, Beijing has taken its plans to Main Street.
While our leaders continue to pay lip service to unemployment, they really don’t care so long as protected (and connected) institutions remain standing when they should have been put out of their misery.
Lending: Since this crisis began, China has largely avoided the financial plague that has devastated Western economies. This is due in large part to historically tight restrictions on local banking practices and the confinement of derivatives and other potentially toxic financial assets to a few externally focused banks. But now Beijing has a different issue to contend with.
To ensure that the stimulus programs flow freely throughout China - and have the beneficial impact that Beijing hopes - Beijing’s bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt U.S. financial institutions today. They’re entirely different forms of lending, but the concerns seem to be inseparable.
To be fair, that might be the case. However, the thing to keep in mind is that China is not just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we’re seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers - all at Beijing’s insistence.
The result of all this is that China’s financial system should become increasingly stable even as it grows by leaps and bounds.
Obviously there will be fits and starts, but this is a far cry from the warped system U.S. investors have been forced to rely upon to date - a system whose hallmarks seem to be inept leadership, somnambulant or sleazy regulators, conflicted lenders and greedy Wall Street executives who focus on profits no matter the cost.
Chinese Currency: Many Western observers worry about China’s intentions when it comes time to purchase our debt. I think that’s overblown. The real question is what Beijing will do to manage the concentrated U.S. dollar risk it currently faces.
To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of U.S. Treasuries and U.S. dollars. But don’t expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.
Therefore it’s logical to expect China to diversify its holdings with additional oil, gold and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses such “hard-asset” investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.
Here’s one final thought to consider.
Unlike the West - which views the financial crisis as a burden, a mistake, or a bad dream to be lived through - China’s leaders see this as the most significant opportunity of a generation. It’s a chance for their country to establish itself as a leading global power.
That’s why China will continue to pull further ahead. And that’s why U.S. investors who don’t wish to be left behind can no longer ignore China.
Monday, July 20, 2009
Market Recoils as CIT Edges Toward Bankruptcy
By Jason Simpkins
Managing Editor
Money Morning
The probably bankruptcy of CIT Group Inc. (NYSE: CIT) could have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant.
With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.
Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.
“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”
While CIT is not nearly the household name of Citigroup Inc. (NYSE: C) or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.
Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”
Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.
An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO), McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq: AMZN) join the mix.
U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await. As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days. Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.
Market Matters
The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street. Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.
Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.
Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations. After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out. CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others. But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.
Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations. A CIT failure could prove devastating for those firms considered the lifeblood of American business.
In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters. Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq: DELL) warned that lower margins are impacting its operations and Google Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.
The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE: MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.
Economically Speaking
The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul. Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.
Investors shrugged off the CIT developments and focused on positive earnings and economic data. Stocks surged early on the Goldman news and soared right through the technology reports. Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts. Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades. Oil rebounded on the favorable market and economic signs.
While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending. Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.
But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges. Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.
Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.
On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.
Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength. Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.
The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year. Most Fed watchers do not see any change in the funds rate for the foreseeable future.
On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal). The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.
Managing Editor
Money Morning
The probably bankruptcy of CIT Group Inc. (NYSE: CIT) could have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant.
With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.
Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.
“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”
While CIT is not nearly the household name of Citigroup Inc. (NYSE: C) or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.
Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”
Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.
An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO), McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq: AMZN) join the mix.
U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await. As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days. Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.
Market Matters
The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street. Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.
Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.
Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations. After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out. CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others. But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.
Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations. A CIT failure could prove devastating for those firms considered the lifeblood of American business.
In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters. Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq: DELL) warned that lower margins are impacting its operations and Google Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.
The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE: MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.
Economically Speaking
The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul. Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.
Investors shrugged off the CIT developments and focused on positive earnings and economic data. Stocks surged early on the Goldman news and soared right through the technology reports. Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts. Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades. Oil rebounded on the favorable market and economic signs.
While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending. Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.
But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges. Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.
Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.
On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.
Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength. Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.
The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year. Most Fed watchers do not see any change in the funds rate for the foreseeable future.
On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal). The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.
Friday, July 17, 2009
How to Profit From China’s “Hot Money” Strategy
China made headlines around the world this week when it revealed that its foreign reserves had eclipsed the $2 trillion market for the first time, rising by a record $178 billion in the second quarter – thanks to a flood of “hot money” that flowed into the world’s most promising economy.
Complete story
http://www.moneymorning.com/2009/07/17/china-hot-money-strategy/
Complete story
http://www.moneymorning.com/2009/07/17/china-hot-money-strategy/
Monday, July 6, 2009
Real Estate: Firing your agent is a serious matter
By BOB & DONNA McWILLIAMS, For The Capital
Published 07/05/09
When you sell your house with an agent, you'll enter into a written agreement with the agent and their brokerage firm to list your property for sale.
Depending on which company you select, these agreements may differ somewhat, but they all contain a lot of the same basic information. For example, the agreement will specify a term of the listing (many last for a period of six months); it will obviously contain the agreed-upon list price, and numerous other clauses will address the various other responsibilities of the broker, agent and seller. Not too long ago, listing agreements were only a page or two long. Today, they can be six pages or more. The additional detail is all directed toward making sure there is maximum clarity about who is going to do what.
One part of all these agreements is a paragraph that outlines the conditions and procedures for terminating the listing.
This brings us to the topic of our column - firing your agent. The process of selling a house can be a long and stress filled event. In this environment, even the best of client/agent relationships can be put to the test. Also, market conditions may change, causing a client to reconsider the whole concept of selling.
Regardless of the reason, terminating a listing agreement is a very serious matter and there are a number of things you should remember, before going down that road, including:
Does the agent deserve it? If you want to terminate the listing contract, because you've just decided you no longer want to sell, that's one thing. But, if you want to give the listing to another agent, that's an entirely different matter. As we have said in previous columns, agents get paid nothing unless a house goes to settlement. Agents pay out of their own pockets for virtually everything associated with putting a house on the market. So, if an agent loses a listing, not only are they obviously out the commission, they also realize a significant financial loss for things such as signs, showing services, brochures, Internet services, advertising and myriad other expenses associated with selling your house. Plus, an agent can quickly spend hundreds of hours of time establishing and servicing your listing. Add it all up, and an agent may have five or ten grand invested in your place in no time at all. Pull your listing, and it's all just money down the drain.
As a result, carefully examine the reason why you want to switch agents and make sure you have legitimate beef. Before you just haul off and give them the heave ho, call your agent and let them know what's bugging you. Chances are you may find out that your concerns are either ill founded or the agent was simply unaware of the existence or degree to which you had a problem.
In most cases, issues with an agent/client relationship can be traced to a lack of communication. Don't let an issue fester. Bring concerns up with your agent before they rise to the level where you want to terminate the agreement.
Finally, recognize that there are many things which are beyond your agent's control. Especially these days, market conditions are rapidly changing. Just because your agent said you could get $500,000 for your place, that could change - two months from now it might only be worth $450,000.
Being up-to-date with the competitive environment and how it might affect the sale of your house is an important duty for a listing agent. But, if the news is bad, don't shoot the messenger. It's not a perfect world and, from time to time, things are going to get messed up. We forgot who first said it, but we like the quote, "Excellence does not require perfection".
Know what it says in your listing agreement. If, for whatever reason, you've decided to terminate your listing agreement, make sure you understand the process for doing so. In most listing agreements, there will be a paragraph that says something like this: "Either Owner or Broker, by giving written notice, may cancel this Agreement so that it will terminate at midnight ( x ) days from the date of receipt of such written notice. Owner and Broker may also terminate this Agreement at any time by mutual written agreement." The number of days for that written notice is something you would have agreed to when you first signed the agreement. Many times, you'll see 30 days in there. But, once again, listing agreements can vary from company to company and agent to agent.
So, if you've decided you're going to call it a day with your agent and send in the written notice, please give them a call, talk it over one final time, and if the problem can't be resolved, let them know the letter will be forthcoming. It's not fair to the agent to just let a termination letter show up unannounced in their fax machine or e-mail. Remember, this thing works both ways. It's not unheard of to have agents fire their clients.
Understand the impact of terminating your listing. Even after you terminate a listing, this does not completely sever your relationship with the former agent. Most listing agreements will state that for six months (this time can vary) after you end the listing, you may still owe the agent a commission if you sell the house to someone who was made aware of the property during the time you had the property listed with that agent. This clause is usually in listing agreements to protect the agents from unscrupulous sellers who use an agent to attract a buyer, then try to dump their agent in an effort to avoid paying commissions.
Another misconception some sellers have is that changing agents will make their property appear as though it's new to the market. In this market, houses can be on the market for a long time and sellers worry that their property could become stale or stigmatized. But, unless you take your house completely off the market for at least 90 days, the counter that keeps track of how long you've been for sale will not reset to zero. Just changing agents won't help this. Besides, don't get too worried if your house has been on the market for a while. These days, seeing a house be around for 200 or 300 days isn't uncommon, and buyers don't see that as a red flag like they used to. In fact, some buyers may see a long time on the market as testament that a seller is ready to make a deal. In that way it can even be looked upon as a positive in generating an offer.
In conclusion, terminating a listing agreement is not something to be taken lightly. You have signed a contract with someone who is going to shell out considerable time and money on your behalf, all with absolutely no guarantee that there will be a pay day at the end of the road. Keep the communication going, and it will probably avoid the unpleasant process of parting ways.
Published 07/05/09
When you sell your house with an agent, you'll enter into a written agreement with the agent and their brokerage firm to list your property for sale.
Depending on which company you select, these agreements may differ somewhat, but they all contain a lot of the same basic information. For example, the agreement will specify a term of the listing (many last for a period of six months); it will obviously contain the agreed-upon list price, and numerous other clauses will address the various other responsibilities of the broker, agent and seller. Not too long ago, listing agreements were only a page or two long. Today, they can be six pages or more. The additional detail is all directed toward making sure there is maximum clarity about who is going to do what.
One part of all these agreements is a paragraph that outlines the conditions and procedures for terminating the listing.
This brings us to the topic of our column - firing your agent. The process of selling a house can be a long and stress filled event. In this environment, even the best of client/agent relationships can be put to the test. Also, market conditions may change, causing a client to reconsider the whole concept of selling.
Regardless of the reason, terminating a listing agreement is a very serious matter and there are a number of things you should remember, before going down that road, including:
Does the agent deserve it? If you want to terminate the listing contract, because you've just decided you no longer want to sell, that's one thing. But, if you want to give the listing to another agent, that's an entirely different matter. As we have said in previous columns, agents get paid nothing unless a house goes to settlement. Agents pay out of their own pockets for virtually everything associated with putting a house on the market. So, if an agent loses a listing, not only are they obviously out the commission, they also realize a significant financial loss for things such as signs, showing services, brochures, Internet services, advertising and myriad other expenses associated with selling your house. Plus, an agent can quickly spend hundreds of hours of time establishing and servicing your listing. Add it all up, and an agent may have five or ten grand invested in your place in no time at all. Pull your listing, and it's all just money down the drain.
As a result, carefully examine the reason why you want to switch agents and make sure you have legitimate beef. Before you just haul off and give them the heave ho, call your agent and let them know what's bugging you. Chances are you may find out that your concerns are either ill founded or the agent was simply unaware of the existence or degree to which you had a problem.
In most cases, issues with an agent/client relationship can be traced to a lack of communication. Don't let an issue fester. Bring concerns up with your agent before they rise to the level where you want to terminate the agreement.
Finally, recognize that there are many things which are beyond your agent's control. Especially these days, market conditions are rapidly changing. Just because your agent said you could get $500,000 for your place, that could change - two months from now it might only be worth $450,000.
Being up-to-date with the competitive environment and how it might affect the sale of your house is an important duty for a listing agent. But, if the news is bad, don't shoot the messenger. It's not a perfect world and, from time to time, things are going to get messed up. We forgot who first said it, but we like the quote, "Excellence does not require perfection".
Know what it says in your listing agreement. If, for whatever reason, you've decided to terminate your listing agreement, make sure you understand the process for doing so. In most listing agreements, there will be a paragraph that says something like this: "Either Owner or Broker, by giving written notice, may cancel this Agreement so that it will terminate at midnight ( x ) days from the date of receipt of such written notice. Owner and Broker may also terminate this Agreement at any time by mutual written agreement." The number of days for that written notice is something you would have agreed to when you first signed the agreement. Many times, you'll see 30 days in there. But, once again, listing agreements can vary from company to company and agent to agent.
So, if you've decided you're going to call it a day with your agent and send in the written notice, please give them a call, talk it over one final time, and if the problem can't be resolved, let them know the letter will be forthcoming. It's not fair to the agent to just let a termination letter show up unannounced in their fax machine or e-mail. Remember, this thing works both ways. It's not unheard of to have agents fire their clients.
Understand the impact of terminating your listing. Even after you terminate a listing, this does not completely sever your relationship with the former agent. Most listing agreements will state that for six months (this time can vary) after you end the listing, you may still owe the agent a commission if you sell the house to someone who was made aware of the property during the time you had the property listed with that agent. This clause is usually in listing agreements to protect the agents from unscrupulous sellers who use an agent to attract a buyer, then try to dump their agent in an effort to avoid paying commissions.
Another misconception some sellers have is that changing agents will make their property appear as though it's new to the market. In this market, houses can be on the market for a long time and sellers worry that their property could become stale or stigmatized. But, unless you take your house completely off the market for at least 90 days, the counter that keeps track of how long you've been for sale will not reset to zero. Just changing agents won't help this. Besides, don't get too worried if your house has been on the market for a while. These days, seeing a house be around for 200 or 300 days isn't uncommon, and buyers don't see that as a red flag like they used to. In fact, some buyers may see a long time on the market as testament that a seller is ready to make a deal. In that way it can even be looked upon as a positive in generating an offer.
In conclusion, terminating a listing agreement is not something to be taken lightly. You have signed a contract with someone who is going to shell out considerable time and money on your behalf, all with absolutely no guarantee that there will be a pay day at the end of the road. Keep the communication going, and it will probably avoid the unpleasant process of parting ways.
Subscribe to:
Posts (Atom)
