M & T on the Banking Industry

I owe this one to Mario Gabelli who recently spoke to Tom Keene from Bloomberg. While speaking with Tom, Mario mentioned that every politician should read M & T Bank's 2010 Annual Report. He referred to the section titled "Regulation and The State of The Banking Industry." This is a wonderful read highlighting many changes that have occurred in the banking industry over the last 80 years. Below is a link to the whole Annual Report, the banking industry section starts on PDF page 15.

This explanation is worth so much, defining systemic risk, M&T CEO Wilmers says, "the aggregation of risks in the hands of so few has the potential to impact the fortunes of so many." What a great way of explaining a concept that has been thrown around so much and never explained in the most general sense. 

M&T Bank 2010 Annual Report

China Shakes the World

"If the Chinese were ever to consume at the American levels of 2001, they would need to guzzle three times the world's total consumption." This is a quote from China Shakes the World by James Kynge; I recently finished reading this. The book has been around for 5 years or so, and I thought I'd share a some of the things that I found particularly interesting and revealing. 

• "Each year since 2004, China has installed the equivalent of all the generating capacity of a country such as Spain"

The Weekly Spot Rate

I was scanning through Business Insider earlier and came across this post. There are some great examples of creating brand awareness, like Baltica Dry.

http://www.businessinsider.com/24-clever-advertisements-guerilla-marketing

Also the YouTube video below is from Shark Tank, a venture capital reality TV show. This product is just plain funny. Enjoy!

Check them out below and have a great week.

The Weekly Spot Rate

I should have posted this a while ago, it's an hour-long interview of Steve Wynn by Charlie Rose. This is one of the best interviews I have seen. Steve Wynn is one of the most spirited and inspiring business men. I came away excited and driven to achieve something incredible at the very moment I had finished watching the interview. I hope you enjoy it as much as I did.

This is the link to the online streaming video.
http://www.charlierose.com/view/interview/752

These are links to Amazon if you want to purchase a copy of the interview in DVD or download format.
Charlie Rose with Steve Wynn (July 8, 2005) [DVD]
Charlie Rose with Steve Wynn (July 8, 2005) [Download]

Hedge Fund Wisdom

I recently finished Inside the House of Money by Steven Drobny. The book is a series of interviews with global macro strategy hedge fund managers. Global macro has many definitions as a read through Drobny’s book will show you, but one can think of it as the ability to invest in any market and instrument around the world. These are some interesting quotes and thoughts from the book. (There is a link to the book at the end of this post)    

Answering a question about missing “the trade [that] never would have happened” Christian Siva-Jothy says markets “are unbelievably slow to react to big events that there is no script for.” I like this quote because it reminded me of the ‘never sell in a panic’ and similar cliques; it explains that markets are driven by humans who exhibit irrational behavior, especially when surprised.

How often are we taught the lesson of ‘if it sounds too good’…Dr. John Porter reminds us why this occurs in finance and business time and again: “It’s funny how people are very reassured by numbers just because they’re numbers. They rarely look at where the numbers come from or how stable they might be.” It would be valuable to remember this lesson.

Some quick quotes for you…

If you’re right at the wrong time, you’re wrong.

-Yra Harris

Politicians throughout history have gotten things wrong turning a semicrisis into a crisis and then into a disaster.

            -Jim Rogers

A little education about short selling:

This quote explains how the return from shorting is maximized and that waiting for the downtrend to start is equally profitable. Scott Bessent said, “You made just as much shorting $100 million of Enron at $25 as you did shorting $100 million of Enron at $50. It’s better to have more conviction and do twice as much.”

And a little something for the GREED in us…

Anybody who knows how much he is worth does not have enough.

            -Jim Rogers

Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets

The Weekly Spot Rate

This week's spot rate is all about inflation. Friday I was listening to Bloomberg Radio's On The Economy where they interviewed Jagdish Bhagwati a professor at Columbia University. I greatly enjoyed Professor Bhagwati's description of the current food inflation problem. He says that with the lack in global food production and increased food inflation, in order to bring down food prices we need to increase production and "to provide new agricultural productivity. That means we've got to bite the bullet with all these worries about Frankenstein foods, because Frankenstein is only potential whereas the Grim Reaper is here and now." What Professor Bhagwati means is that we need to embrace the use of genetically modified foods (Frankenstein) to feed the world today, and not let the Grim Reaper (the dearth of food and rising prices) starve out our population; better save people with something that may or may not cause harm than knowingly let people die. I thought this way of viewing the problem was amusing and insightful, hope you do to. 

The Billion Prices Project is a project led by two MIT professors who are trying to capture daily inflation fluctuations. They are using a basket of millions of online products to determine what the inflation rate is in a variety of countries. It is worth noting that the United State's official inflation rate is significantly below that of the Billion Prices Project's. The link is posted below.

Have a great week. 

http://bpp.mit.edu/

Bank Information Website

I was just searching through Google and came across this website http://www.bankregdata.com/main.asp It is definitely worth a look, some great information available. I am not sure about the accuracy, but it would be a great starting point for any analysis. 

The Weekly Spot Rate

Alan Blinder the vice chairman of the Federal Reserve wrote a great article in the WSJ about the Carbon Tax idea. This struck me as a great way to implement a new tax, regardless of what it is. Blinder's plan is to approve the tax legislation and tier the tax up over time, but the part I really like is to start at a 0% tax rate. This is a great way, as Blinder point out, to allow business to see where rates will go in the long term and give them time to adjust. Below is a link to the article. 

Bloomberg Radio had an interview with Peter Schaffrik, head of Euro fixed income strategy for RBC capital markets in London, on February 7th, 2011. In this interview Schaffrik spoke about 2 kinds of inflation: internal and external. He defined internal inflation as economic overheating and external inflation as rising commodity prices. As can be seen, one form is controllable by the state and the other is not. I though that this was a great insight, as all too often we find people focusing on inflation, as they should, but they do not separate inflation into the controllable and non-controllable forms. Something to keep in mind when we think about inflation and deflation for that matter. 

The Carbon Tax Miracle Cure by Alan Blinder

http://online.wsj.com/article/SB10001424052748703893104576108610681576914.html

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In the "The Crisis of Credit Visualized" Mr. Jarvis offers a wonderful simplified explanation of how the housing bubble was built up, peaked and fell. 

The original source of the video is http://crisisofcredit.com/

Semiannual Bond Pricing Template

     This is a template to price bullet semiannual bonds with maturities up to 40 years. All you need are the face value, coupon rate and a yield (YTM or required return) to get the model price. Feel free to download the template and pass it around. 

Pricing Semiannual Bonds

The Weekly Spot Rate

     This is the inauguration of The Weekly Spot Rate, a weekly article, video, cartoon or other form of media that I have found particularly interesting. The media may be from the current week or something from the past of interest. 

     To kick us off I have selected a video of various newscasters trying to pronounce the name of the Icelandic Volcano that erupted this past Spring. Not that I could do any better. Enjoy!

Proprietary Trading Gone Forever or Temporarily Hiding?

     Michael Lewis begins a recent article with, "In the run-up to the vote on the financial overhaul bill, the big Wall Street banks squashed an attempt by Senator Carl Levin to pass a simple ban on any form of proprietary trading." It would appear that the big banks were protecting their freedom; however, Lewis points out that recently "Morgan Stanley, JPMorgan and Goldman Sachs all intend either to close their proprietary trading units or to sell their interests in the hedge funds they control." Which begs the question, why fight to save something you don't plan to utilize? Lewis offers a few ideas, but I believe he avoids another likely possibility. 

The Classic Subprime Powerpoint

     This is a presentation that circulated soon after the crash in 2007 when people were curious about how we got to where we were. The slideshow comically addresses the way in which the housing bubble rose to such proportions and affected a variety of "institutional" investors. 

CDO Powerpoint SubPrime Primer

Umbrella Partnership REIT Structure

     URREITs offer significant tax advantages for property owners. The structure is used as a means to avoid unwanted capital gains, and subsequent taxation. Essentially these structures allow property owners to adjust their cost basis upwards by transferring their property to the REIT in exchange for operating partnership units. The value of units exchanged will equal the value of the property. By undergoing this transaction the original property owner receives units, which can be sold without incurring a capital gains.

     For example: one owns a property at a cost basis of $10 million, which has appreciated to $20 million. In order to avoid the capital gains on $10 million ($20mln - $10mln), the owner can exchange their property for units in a UPREIT. The UPREIT would supply say 20,000 partnership units to the owner worth $1,000 each. The original property owner could then exchange their partnership units for shares in the REIT. These shares could then be sold for their $20 million value, and as the cost basis is $20 million there would be no capital gains tax and the investor gained. 

The link below is to an article that outlines some of the challenges and advantages of engaging in a transaction with a UPREIT. 

The benefits of selling property through an UP-REIT

A little humor

This clip from South Park has got to be an all time favorite!

What a creative way to explain some of the causes of the crisis.

I found this great video while searching around another blog.

Tricky Policy

     What follows is a response to the the Economist's article "Economics focus: War footing” of Sept 4, 2010.

     This article discusses the challenges of simultaneous fiscal and monetary policy implementation. Having reached interest floors, central bankers are concerned with the sole option of applying fiscal policy. Although neither fiscal nor monetary policy is ineffective in theory; Eric Leeper’s presentation addresses the practical difference, whereas monetary policy undergoes vast economic analysis, “fiscal policy is highly politicised.” Politicization decreases the timeliness and effectiveness of policy, leading Leeper to say “Fiscal alchemy can undermine monetary science.”

     Leeper warns, if the public loses confidence in the Government’s ability to cover the cost of its fiscal stimulus and the central bank will “inflate away the debt,” hyper-inflation may ensue. To prevent this problem central bankers are calling for austerity measures or limits to fiscal stimulus. Along with the historically low interest rate environment, inflation expectations have been driven away, similar to Japan’s “lost decade.” To avoid deflation, Mr. Leeper suggests, “simultaneous fiscal and monetary expansion.”

     A key caveat to quantitative easing is that central bankers cannot “force banks to lend or companies and households to borrow.” Therefore, although QE is intended to increase the money supply and lower interest rates, the potential benefits may never reach the economy. This would lead to sustained high unemployment and the threat of deflation.

     The depression of interest rates and long-term threat of inflation caused by QE must be carefully dealt with. This is evident from the United States’ implementation of fiscal and monetary stimulus during WWII, which led to inflation thereafter. To avoid such a problem stimulus must be injected into the economy today and fiscal austerity imposed in the future. 

“A Bull Market in Pessimism”

     The following is a brief summary and response to the Economist article “A Bull Market in Pessimism” from Aug. 21, 2010.

     Currently in a tough place, the Federal Reserve is facing two threats: deflation and inflation. The Fed must tread lightly to avoid spiraling either monetary effect out of control. Were the Fed to inflate its way out of potential deflation, real-returns would rapidly turn negative (especially given the current low interest rate environment), thus leading to a mass exodus of Treasury bond-holders. Furthermore, were the fed to raise interest rates, bond-holders would also be squeezed out of the market, given the inverse relationship between bond prices and yields, the value of their bonds would decrease. As if the situation were not challenging enough, by purchasing Treasuries with the monies provided by maturing mortgage debt the Fed is adding to the downward pressure on Treasury yields. These combined effects; along with increased investor demand for Treasuries (putting further downward pressure on yields) has positioned the Fed with an inflexible exit strategy. Given the challenging situation the Fed’s attempts to alter monetary policy will likely be rife with error. 


The Economist

A lens into macro policy: Pension problems

     News outlets have recently been discussing underfunded pension funds. This discussion has been well timed given a recent concern of mine regarding macroeconomic policies. I have been questioning why it is that deflation and slow or no growth economic periods are so harmful to our economy, but more so why must macroeconomic policy always be pushed as expansionary? I don't understand why we must push for greater and greater growth than can be achieved without government intervention. The way I see it, expansionary policies are a form of economic leverage. For example, as opposed to having economic growth of 1%, expansionary policies leverage this growth to 3.5%. Why must a nation constantly force greater growth, as opposed to allowing organic expansion?

     I cannot see how any form of "macro-management" can go on forever, there must be a point at which economic policies cannot continue to support unsustainable growth rates. The US may be good modern example of when expansion works for a time, but will eventually be unsustainable. One would be hard pressed to find someone who believes that the US can continue to borrow to finance its economic expansion, as that is what all the borrowing is for. Yes, the US borrowed to stabilize its economy, but nonetheless this was to prevent economic contraction, but why not allow things to run a more natural course. Although I am a firm believer that the economy needed to be buoyed during this crisis, I do not see sustainability in constant expansionary policies.

Just don't call it stimulus

    Discussing Obama's recent economic proposals the Economist published an article by the title Just don't call it stimulus in its Sept 11th 2010 publication. There were a few things that caught my attention in this article: (1) the infrastructure bank and (2) the oil and gas tax breaks.     

     For a politician so hellbent on increasing transparency and decreasing politicization why would you propose an infrastructure bank. The economist cites one opinion of this as a politicizing action, but nonetheless it is upsetting to see hypocritical rhetoric and action. How another bureaucratic institution will  benefit the American public is beyond me. Paying more people to funnel money around to some more people who get paid to move that money to someone else is not efficient nor transparent. 

     Apparently to finance this infrastructure bill we will need to eliminate the "tax breaks for multinationals and oil and gas companies." How does eliminating the tax breaks for natural gas companies help utilize the abundant energy resources that the US posses? If the US is determined to eliminate its dependence upon foreign energy resources than why not facilitate the expansion of natural gas usage? This would be a logical step in securing the US' self-sufficiency in energy. However, eliminating the economic incentives for the private sector to expand upon this resource (especially considering the current economic conditions) is just plain stifling growth. 

Greed is good or maybe not…

     Mr. Gekko (played by Michael Douglas) said, “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.” However, a quick look at the US unemployment rate would make anyone question the current environment…

     So what brought us to these levels of unemployment? Have we not been greedy enough? Have we, in fact, been far too greedy?