Following this morning’s disappointing retail sales numbers, it was hard for one to be optimistic about the economy, but speeches by President Obama and Ben Bernanke changed all that.

President Obama delivered a 45-minute speech on the economy at Georgetown University today designed to update the American people on where we are, what we have to do going forward, and lay out the steps that the government is taking to transition us from recession to recovery. During his speech Obama said “There is no doubt that times are still tough. But by no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope.” I consider those to be very encouraging words.

Similarly, at a speech today to faculty and students of Morehouse College, Federal Reserve Chairman Ben Bernanke was upbeat about the economy as well. Bernanke said that he sees “tentative signs” that the steep contraction in U.S. economic activity may be waning, and that he is confident in the economy’s long term prospects. Bernanke cited recent figures on housing, consumer spending and new vehicle sales as some of those signs that the recession is slowing.

The words now coming from government officials are only echoing what the markets have been telling us for the last month as they rebounded off the lows. In fact, as of late, market expectations for economic data have been too dire, and the actual data releases have been consistently surprising to the upside.

Bill Hester of the Hussman Funds provides us with the following chart and writes:

“The rebound in the stock market has been at least partially fueled by economic data that consistently came in better than expected last month. Some part of this rally is likely relying on the continuation of these “positive” surprises.

To track the trends in economic performance, we keep an ongoing tally of how data is announced relative to expectations – a method of analysis originally inspired by Bridgewater Advisors . Economic data that surpasses expectations gets added to a 3-month running total. Data that comes in weaker than expected gets subtracted. A rising line means that economic data is generally coming in above expectations, while a falling line means that the data has disappointed. A descending line could be the result of an economy that is not expanding as quickly as economists predict or – like in 2008 – it could be the result of an economy that is contracting at a faster rate than expected…

The red line in the graph above tracks the S&P 500 Index and it shows that stocks have recently closely tracked the trend in data surprises. The market fell along with the deteriorating surprise line last year, rallied slightly prior to improved news in December, and then rolled over again as the news weakened versus expectations in late January. In March the market rebounded along with a more pronounced persistence in favorable economic news versus expectations.”

Even other indicators of “flight-to-quality” and fear have declined significantly since March. Gold is off its highs and is currently testing its 200 day moving average.

I’m optimistic that the worst is behind us.

Uncategorized bernanke, economic data, gold, obama

It looks like this is the end of the road for General Motors and Chrysler as we know it. Over the weekend, the Obama administration rejected the restructuring proposals of both GM and Chrysler and ordered them back to the drawing board —AGAIN! Chrysler has 30 days to complete a proposed alliance with Fiat and GM has 60 days to restructure or face bankruptcy. The government also booted GM CEO Rick Wagoner and will not contribute any more aid to the flailing companies until its demands are met.

These companies have been virtually bankrupt for years now and it is unfortunate that is has taken this long for these companies to start restructuring. This process needs to happen QUICKLY and bankruptcy is the best option.

As I sit here writing this post, the WSJ is reporting that the Obama administration supports bankruptcy for both GM and Chrysler. The government’s plan would split both companies into both “good” and “bad” components, where the “good” components would exist as standalone companies or be acquired. The “good” automakers would not hold billions of dollars of retiree and health care obligations that have strapped these companies for years.

This is clearly the right solution and is long overdue. However, I don’t believe bankruptcy will be as quick and painless as some people expect. Both GM and Chrysler are complex organizations in complete disarray, and it would be unreasonable to expect them to reorganize under bankruptcy in 30 or 60 days. It will not take a year however, as GM and Chrysler have had bankruptcy attorneys devising plans for such a move over the recent months.

To protect against hysteria from auto buyers, the government has already agreed to back the warranties issued by both GM and Chrysler. It is important for auto buyers to understand that this bankruptcy will be a REORGANIZATION not a LIQUIDATION. The government needs to get this through the heads of consumers but of course, some people just wont buy the cars of GM and Chrysler regardless.

We need to get this process started now and force everyone back to the bargaining table so we can return these automakers to profitability. It’s a shame we will have to wait another 30 to 60 days to do something that should have been done a long time ago.

Uncategorized chrysler, gm, obama

Lloyd Blankfein of Goldman Sachs, Kenneth Chenault of American Express, Kenneth Lewis of Bank of America and Edward Yingling of the American Bankers Association walk down the driveway at the White House.

The nation’s most prominent Bank CEO’s were in Washington again today, this time for a lunchtime meeting with President Obama to discuss important issues such as limits on executive compensation.

The CEO’s attending were the following:

Jamie Dimon, JP Morgan Chase
Ken Chenault, American Express
John Koskinen, Freddie Mac
Ronald Logue, State Street
Robert Kelly, BONY-Mellon
Rick Waddell, Northern Trust
James Rohr, PNC
Lloyd Blankfein, Goldman Sachs
John Mack, Morgan Stanley
Vikram Pandit, Citigroup
John Stumpf, Wells Fargo
Cam Fine, Independent Community Bankers
Edward Yingling, ABA
Richard Davis, US Bank
Ken Lewis, Bank of America

The consensus from the CEO’s after emerging from the meeting is that it was very informative and they will do as a group what they feel is best for the country and what will help to get our economy back on track. No CEO made any earth shattering comments following the meeting, but they did give some insight into some important issues.

On Executive Compensation:

• There was consensus that compensation policies went too far and need to be reformed. The interests of individual employees must become more closely aligned with the interests of the Firm as a whole. Several firms have already begun to reform these policies by increasing the percentage of stock in bonus packages and longer vesting schedules. There was no direct comment on the 90% tax on bonuses passed by the House.

On Returning TARP Funds:

• No firm will return TARP funds until the government bank stress tests are completed in April. Some banks expressed the desire to return TARP funds but did not set any timetable for doing so and will be coordinating with the Treasury department. These banks also feel that the return of TARP funds is in the “best interest of the taxpayer” as those funds could be deployed elsewhere in the economy.

On the Public-Private Partnership:

• Looks like not much was said on this in the meeting. It doesn’t appear that Goldman and Morgan Stanley will be selling assets into the program as it only applies to assets held on the bank level. Remember, Goldman and MS are recently converted investment banks. It seems that they have the majority of their assets at the holding company level which don’t seem to qualify by the way John Mack was speaking.

On Profitability:

• Both the CEO’s of JP Morgan and Bank of America indicated that March was a tough month for their trading books.

Uncategorized banks, obama

As I sit here watching some very exciting NCAA tournament games, a fire still burns in my belly regarding the recent outrage over Wall St bonuses and this 90% tax introduced by the House. I think an overwhelming majority of Americans will agree that the compensation system on Wall Street needs a long overdue overhaul, and I agree with this point, but the House legislation goes too far.

On Wall St, the incentives of individual employees were not aligned with the firms they work for nor with the financial system as a whole. Traders at these firms were encouraged to “swing for the fcnces” due to lavish bonus payments and inadequate risk controls. Essentially, your employment at the firm was like an option with the maximum downside being the loss of your job and the upside being almost unlimited in terms of the amount of dollars you could be paid. Look at Brian Hunter, the Ex-Amaranth trader, who lost almost $7 billion for his firm. Do you think he loses sleep at night over the $7 billion he lost when he can sit and count his millions and drive around in his Bentley Arnage and Ferrari F430 Spider? This is exactly the type of behavior that needs to be changed. Wall St firms are already taking the steps to do so and I am hopeful that reasonable legislation and oversight will come from the government as well.

The nation’s financial system is in shambles and it will take a massive effort by the government along with the private sector to fix it and get it back on track. We can’t afford to waste energy quibbling about relatively small bonus payments when the amount of money committed by the government and the potential economic loss is in the TRILLIONS. Unfortunately, it will be hard to stabilize this nation’s financial system and revamp the compensation system on Wall St at the same time. If I could choose on issue to focus on, it would be the economy. Financial institutions cannot afford to lose its best people because the government now decides they are making too much money. The poor performance of financial shares today illustrates this point.

For President Obama, this will be a defining moment. No one is saying to not revamp the compensation system on Wall St, he needs to take this bull by the horns, reign in the anger expressed by the public and channel it in a more effective direction — fixing this nations economy. The bill passed by the house doesn’t do this.

Uncategorized bonuses, economy, obama, tax, wall street

In Tuesday’s Wall Street Journal opinion section, Richard Lefrak and A. Gary Schilling present a compelling argument that by offering permanent resident status to those foreigners who purchase a home (not for rent) we can properly stabilize our housing market. At first, the idea seems a bit radical, but it does address the inherent flaw in our housing market whereas the current plan from the Obama administration does not.

The problem facing our housing market can be explained by the simple principles of supply and demand. The total supply of homes in this country is much greater than the demand at the current price levels. In the midst of the housing boom, many people speculated in the market or were given loans they could not afford, creating “artificial demand”. Now as the economy slows, and more people find themselves out of work, demand continues to wane as homes that used to be affordable currently are not for many American families.

In order to rectify the problem and bring us back to an equilibrium condition between supply and demand, we can do only three things:

• Reduce Supply
• Lower Home Prices
• Increase Demand

In the first case, we would demolish existing properties for which there is no demand. This leads to dramatic wealth loss as banks and developers would suffer massive losses and would not be in any condition to contribute to the economy, but the housing crisis would be solved. It’s unlikely we will head down this route.

In the second case, we just let nature take its course and let prices fall to their equilibrium level. Again, there will be dramatic wealth loss for the majority of Americans as their wealth is directly tied to the value of their home. The Obama administration seems determined not to let the housing price bubble deflate entirely, just like the stock market bubble did not deflate entirely by 2002.

The Obama admistration has already taken steps to stabilize demand through its $275 housing bailout plan, but the plan is designed to keep people in their homes and does not address the large overhang of inventory of unsold homes in cities like Miami, Phoenix, and Las Vegas. Without sharply reducing this inventory, home prices will continue to fall.

In order to increase demand and reduce existing inventory, the authors of the WSJ article propose that we “offer permanent residence status to the many foreigners who are clamoring to get into the U.S. — if they buy houses of minimal values (not shacks)”. Under the plan they wouldn’t need to live in the unit, but couldn’t rent it. At first, participants would be given temporary residence status that would convert to permanent residence status, after a period of say 5 years if they still owned the houses.

The plan is likely to attract highly educated, wealthy foreigners who are clamoring to get into this country. The article mentions: “Each year, 85,000 H-1B visas are granted for foreigners with advanced skills and education, and last year, 163,000 petitions were filed in the first five days after applications were accepted. The Ewing Marion Kauffman Foundation estimates that as of Sept. 30, 2006, 500,040 residents of the U.S. and 59,915 individuals living abroad were waiting for employment-based visas”. These are exactly the types of individuals we need as we try to restart the economy as they will contribute to existing businesses or start their own.

There is already precedent for allowing foreigners to achieve permanent resident status in return for investing in this country. The EB-5 visa program provides a path to permanent residency for those who invest $1 million in a new enterprise in the US. Other countries also offer similar programs for those who invest in businesses, tourism, or other sources. I don’t see why this same concept cant be extended to benefit those who invest in our country’s housing market.

Our country is a melting pot of immigrants and I believe this program could be effective if implemented on a limited scale in conjunction with the steps already taken by the Obama administration. Additional incentives should be given to foreigners who purchase property in hard-hit, less glamorous cities like Detroit and Cleveland. Immigrant populations have proven that they can regentrify communities and improve the overall quality of life for its residents.

I hope this plan receives serious consideration from the Obama administration.

Full text of the WSJ article can be found here.

Uncategorized housing, obama