Rhody Trader

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

The Financials are down like 8%. Those darn shorts must be back in there driving prices lower.

Oh, wait. There are no shorts.

Doh!

The other day it was suggested to me that I check out Zeitgeist - The Movie. I was told it’s a real mind trip. Haven’t had the chance to watch it yet, but I’m looking forward to making the time (2 hours). The trailer is interesting. If you follow the link you can watch the trailer (first video) and the movie (second) right from that page.

Have you watched it already? What did you think?

I don’t know how this bailout, RTC type mortgage bailout plan is going to be structured, but I had a thought this morning on my way into work.

My big concern, as so many others are expressing, has been that if the Treasury is going to put $500 bln into the market then we’re talking about a lot more government debt and money sloshing around. That means more stress on the taxpayer and the gov’t budgetary structure, and inflationary implication due to larger money supply. That would mean higher interest rates and obviously higher costs of consumer goods.

Ironically, this plan has the potential to really push mortgage rates higher.

Oh, and we’re still going to have tighter lending standards because we still have bankers who have been burned.

Here’s the thought I had about how at least some of this stuff could be avoided. Rather than the Treasury, through whatever instrument/vehicle, buying mortgage securities we go a different route. We create a trust (or whatever you want to call it) into which all the mortgage instruments go, and that the banks who put the securities in are given shares based on the value of those securities. The final result is the banks all own the trust.  They have the mortgages off their books, and it’s replaced with the shares in the trust - which I suggest should be publicly tradable so the banks can sell them to raise cash if needed. The value of those shares would be based on the principle value of the mortgages, so they would be repaid based on the return of that principle. The government, in turn, gets all the interest payments as it’s part for setting the thing up and running it.

The question which is left, of course, is valuing those securities and how to allocate shares. The valuation question is going to be an issue regardless, so no matter when the Treasury buys them on my idea of share allocation is employed (or some other), the valuation thing will have to be sorted out.

The point of my plan, however, is that if we go this route we can avoid the Treasury having to issue hundreds of billions in new debt, and moreover being in a position to earn income from the deal to help offset potential losses from the Fannie/Freddie takeover or whatever.

Thoughts?

The other day I posted a screen shot of what was happening in Treasury yields. They were falling rapidly. Now things are going the other way even faster.

These moves are some of the largest I’ve ever seen, even going back to the days when I was a fixed income analyst. To give you an idea of what these moves mean, a 4 point move in the Treasury Bond futures contract is worth $4000.  The Eurodollar contracts are up 30+ ticks. That’s a move of more than $750 on a contract, on what is the most actively traded futures contract (1 million plus volume per day).

Following up from my post yesterday (The Fed AIG loan and takeover - they’re getting it wrong!), here’s another example of people who should know better getting it totally wrong.

“Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee. (from CNN).

Come on! A member of the Banking Committee can’t get it right? Obviously, this is political, but it’s also misleading the public.

And here’s an example of the media seemingly taking a nothing statement and drawing a conclusion I just can’t see in regards to a question John McCain was asked about how relations would be with Spanish president Zapatero under his administration (they are strained now):

During an interview in Miami earlier this week with Spanish-language station Union Radio, a reporter asked McCain whether, if elected, he would receive Zapatero in the White House. McCain answered, “Honestly, I have to analyze our relationships, situations, and priorities, but I can assure you that I will establish closer relationships with our friends, and I will stand up to those who want to harm the United States.”  (from Time)

The article author went on to say “Ouch”, obviously reading into McCain’s statement that he would not receive Zapatero. Where does that interpretation comes from? I read McCain’s response as a typically non-committal response of the sort you always hear from candidates.

Yesterday Suze Orman appeared on CNBC at least once during the day expressing the opinion that the Fed absolutely must bailout AIG. Her reasoning was that the company which insures so many people and businesses all over the world. Basically, she was implying that policy-holders were at risk.

Someone with such a large profile must be more responsible.

As the state insurance regulators have been saying repeatedly this morning, and as AIG stated yesterday (and I’m almost positive was stated elsewhere yesterday), policyholders were never at risk. By implying otherwise (as she did again last night on Larry King), Suze did something akin to setting up a bank run.

In times like this, the people like Suze who have a loud voice have to be sure they get it right. The flood of people to the AIG offices in Asia is an indication of what can happen when misinformation is disseminated.

One thing I need to correct in this whole Fed AIG loan story is the impact this has on the US taxpayer. It has none. Oh sure, you can talk about indirect impacts of money supply considerations, interest rates, etc. That’s not my point. My point is that the US federal government - and thus taxpayer money - is not involved in this deal.

The Fed is a self-contained entity. It’s income statement and balance sheet are not part of the federal budget in any way (aside from the excess interest income on Treasury securities it pays back). That means when the Fed loans money to AIG (and takes an equity stake) or backstops the JP Morgan purchase of Bear Stearns there is no implication to taxpayer money. The federal government will neither make nor lose any money on the deal. The Fed will, but not the government.

This is something that’s driving me nuts. The media is getting it wrong when they suggest this is a government takeover.  This is a little peave of mine.

Now the Fannie/Freddie situation is completely different.

In case you were wondering just how crazy things are in the markets, a look at the Treasury market will help. Check out the changes since Friday.

Flight to quality is driving the Treasury move. It’s also got Gold up. Oil is down because of major economic concerns. The Dollar move is the real thing to watch. It’s under pressure now, mostly because this is so far a US issue, but given the moves in some of the European banks (I saw HBOS down 25%), don’t expect it to remain that way.

One question I’ve heard a couple of times is “Why isn’t it worse?”

Keep in mind a couple of things. First, traders have been preparing for this for a while. Second, the financials are a much reduced proportion of the market. Had this sort of thing happened a year ago it would have been a huge negative reaction.

It’s been a while since I joined Facebook (my profile), but I’ve never really made a great deal of use of it. That’s something I’m thinking about changing. To that end I purchased a copy of I’m on Facebook - Now What???.

I picked up this book to learn some ways I could make use of the social network to first and foremost expand and improve my business and professional efforts, but also to reconnect with friends, classmates, and colleagues from the past. There’s a lot of great stuff in the book - lots of tips, insights, and suggested resources. It’s a quick read unto itself, but leaves you will loads of things to do beyond it’s pages - practical stuff to better understand Facebook and make use of it to achieve your desired aims.

Definitely recommended if you’re thinking about signing up for Facebook or already have, but want to get more out of it.

Oh, and if you’re on Facebook and have some suggestions for me, by all means let me know.

I’ve had a rant building and it’s coming out now.

At what point did we start believing that everyone who participates should be given a trophy just for doing so? That it shouldn’t be about winning and losing? That we shouldn’t keep score?

I know it was some time after I was a kid, that’s for sure. That definitely seems to be the theme in youth sports these days, though. And it’s ruining the upcoming generations.

I started hearing from a professor friend a while back about how the students in class had started to change. He was starting to see a sense of entitlement creaping in progressively. We’re talking a small state school here, not some Ivy League institution where rich kids expect everything handed to him (as the stereotype would suggest - having worked at one I can say that’s not really true). These are “normal” kids from middle class families who are expecting everything to be done for them and presented on a platter.

Blame it on those youth programs where every kid gets a trophy just for turning up.