The stock market has remained highly volatile. Contributing to the instability this week is the Federal Reserve's bungling. First they cut rates by only 25 basis points, which means that the relationship of the Fed's target rate to the 10 year T-bill. This means that member banks are effectively being "taxed" a rate higher than the market rate. The banking system can not work if you can not borrow short and lend long. The inverted Federal Funds rate essentially assures that this frozen liquidity will not be unfrozen.
Second, they announced this coordinated plan with other central banks around the world to provide some additional liquidity into the global financial system. This is not going to hurt anything, but is not going to overcome the first problem.
The Federal Reserve must, at least temporarily, "float" the Federal Funds Rate to correct the rate inversion in the market. The Fed can not set a target rate that is disconnected to the market rates.
I'm not sure the Fed is able to see past academia to the practical reality of what is happening in the real world. This is dangerous. I hope they will come to their senses soon.
Defensive stocks and high growth big tech stocks will continue to be the safest bets while we wait.
Wednesday, December 12, 2007
Hillary's Class Warfare Hypocrisy
Hillary Clinton just made a bold statement - that she opposes repealing the estate tax, aka "death tax" because it is un-American. Senator Clinton's rationale is that passing earned wealth goes against the principle of America being a meritocracy. The clear implication is that the government must confiscate this wealth to force each generation to start over in our merit-based society.
Let's be clear. Every penny of the money that remains in an estate when an individual dies, unless it resides in an a tax deferred retirement account (i.e., IRA, 401(k)), has been taxed at least once. Even though the money has already been taxed for income, capital gains, or dividends, when you die the money is taxed again at exorbitant rates. For money in an IRA or 401(k), it is taxed as income, and then taxed again at the much higher estate tax rates.
Now here is the hypocrisy part of this class warfare position. Where does the money go that is confiscated by the estate tax to promote a meritocracy? Hillary and the Democrats want to use it for income and wealth redistribution. In other words, the money is taken away from the people that earned it and given to people, through entitlements and other redistribution policies, and given to people that did not earn it.
How does this support a society based on merit? Of course it does not. It is simply disingenuous language to promote an increasingly aggressive redistribution of wealth.
Here is a question to ponder. Think about the proposals for domestic policies advocated by Hillary Clinton and all of the other Democratic presidential candidates. Is there a single policy proposal that does not involve income or wealth redistribution? Is there a single domestic policy view that instead of income redistribution creatively uses the power of the government to enable success without taking money from producers and giving it non-producers? If you can think of one, then it is the exception that proves the rule.
Let's be clear. Every penny of the money that remains in an estate when an individual dies, unless it resides in an a tax deferred retirement account (i.e., IRA, 401(k)), has been taxed at least once. Even though the money has already been taxed for income, capital gains, or dividends, when you die the money is taxed again at exorbitant rates. For money in an IRA or 401(k), it is taxed as income, and then taxed again at the much higher estate tax rates.
Now here is the hypocrisy part of this class warfare position. Where does the money go that is confiscated by the estate tax to promote a meritocracy? Hillary and the Democrats want to use it for income and wealth redistribution. In other words, the money is taken away from the people that earned it and given to people, through entitlements and other redistribution policies, and given to people that did not earn it.
How does this support a society based on merit? Of course it does not. It is simply disingenuous language to promote an increasingly aggressive redistribution of wealth.
Here is a question to ponder. Think about the proposals for domestic policies advocated by Hillary Clinton and all of the other Democratic presidential candidates. Is there a single policy proposal that does not involve income or wealth redistribution? Is there a single domestic policy view that instead of income redistribution creatively uses the power of the government to enable success without taking money from producers and giving it non-producers? If you can think of one, then it is the exception that proves the rule.
Wednesday, December 5, 2007
Bush Administration's Subprime Solution - Is it Legal? Is it Right?
Secretary Paulson has been working on a number of fronts to address the credit mess triggered by excesses in the subprime market. My current concern is the plan to put a hold on foreclosures and to freeze subprime teaser rates - for as much as 5 years.
If the holders of a mortgage want to voluntarily work out new terms with the homeowner that is fine. I've seen some pundits that have argued that it is in the best fiduciary interest for the mortgage companies to "work out" a deal that will keep people in the homes rather than foreclose. If in fact it is in the best financial interest of the mortgage holder to make a new arrangement then I'm sure they will.
But I don't see how the government can mandate, or legislate, a freeze on interest rates. The government can not override a private legal contract between two independent parties. This would constitute an illegal seizure of property.
There is the added difficulty of how the many individuals risking foreclosure will be classified as being eligible or ineligible for the freeze on interest rates. The tort lawyers are licking their chops. Class action lawsuits are probably already being drawn up.
Individuals and mortgage companies entered into a contract. Loans were made to people that couldn't really afford a house and both the holders of the loans and the people living in the homes will be hurt. But the government muddling around trying to centrally orchestrate a "solution" will only make things worse. The "market" has the capacity to work this out without the government mounting a Katrinaesque "rescue" operation.
What is equally disappointing is the rhetoric from Hillary Clinton and others on the left that Wall Street is to blame for the mess and must be held accountable. In fact, the many securitizations that Wall Street firms packaged, provided large amounts of liquidity to the mortgage market, helping many people become homeowners who would not have been otherwise.
For years the Democrats railed against the mortgage industry about needing to be more aggressive in providing mortgages to lower income families. When they finally did the results speak for themselves.
Interestingly, housing prices recovering from the excesses of Greenspan liquidity, will make homes more affordable for a greater number of Americans.
If the holders of a mortgage want to voluntarily work out new terms with the homeowner that is fine. I've seen some pundits that have argued that it is in the best fiduciary interest for the mortgage companies to "work out" a deal that will keep people in the homes rather than foreclose. If in fact it is in the best financial interest of the mortgage holder to make a new arrangement then I'm sure they will.
But I don't see how the government can mandate, or legislate, a freeze on interest rates. The government can not override a private legal contract between two independent parties. This would constitute an illegal seizure of property.
There is the added difficulty of how the many individuals risking foreclosure will be classified as being eligible or ineligible for the freeze on interest rates. The tort lawyers are licking their chops. Class action lawsuits are probably already being drawn up.
Individuals and mortgage companies entered into a contract. Loans were made to people that couldn't really afford a house and both the holders of the loans and the people living in the homes will be hurt. But the government muddling around trying to centrally orchestrate a "solution" will only make things worse. The "market" has the capacity to work this out without the government mounting a Katrinaesque "rescue" operation.
What is equally disappointing is the rhetoric from Hillary Clinton and others on the left that Wall Street is to blame for the mess and must be held accountable. In fact, the many securitizations that Wall Street firms packaged, provided large amounts of liquidity to the mortgage market, helping many people become homeowners who would not have been otherwise.
For years the Democrats railed against the mortgage industry about needing to be more aggressive in providing mortgages to lower income families. When they finally did the results speak for themselves.
Interestingly, housing prices recovering from the excesses of Greenspan liquidity, will make homes more affordable for a greater number of Americans.
Stock Market Bottom Continuing to Firm
Last week was a strong up week. Monday and Tuesday this week were down but today was a very strong up day with good volume. The general "action" looked pretty good. The S&P 500 has closed in on major resistance of 1490, ending at 1485 today.
I continue to be optimistic on an improving market into year-end. The tech stocks have recovered and are performing very well. The financial stocks have improved but I think there will continue to be a lot of us and downs. I have added to my positions in the financials over the last week. One position I have increased is Bank of America. I believe that Bank of America will be a major beneficiary of the shift of mortgage origination and servicing now that all the non-bank players have been blown out of the water. Consumer staples are strong as many are looking for more defensive positions going into next year.
A major "tell" for the financial sector will be the brokerage and investment earnings, coming up in over the next several weeks.
I continue to be optimistic on an improving market into year-end. The tech stocks have recovered and are performing very well. The financial stocks have improved but I think there will continue to be a lot of us and downs. I have added to my positions in the financials over the last week. One position I have increased is Bank of America. I believe that Bank of America will be a major beneficiary of the shift of mortgage origination and servicing now that all the non-bank players have been blown out of the water. Consumer staples are strong as many are looking for more defensive positions going into next year.
A major "tell" for the financial sector will be the brokerage and investment earnings, coming up in over the next several weeks.
Sunday, December 2, 2007
A Case for Value in Freddie Mac
http://www.kiplinger.com/columns/picks/archive/2007/pick1129.htm
Rich Pzena made a compelling case for Freddie Mac as a value play at last week's Value Investing Conference. Based on his Mr. Pzena's discussion, my own research, and my belief that a bottom is forming in the stock market, I took a position in Freddie Mac on Friday. I continue to be concerned with the lack of congressional reform of Freddie and Fannie but the upside potential after the correction is just too compelling. I also increased my position in Bank of America last week.
Disclosure: at the time of this posting the author was long FRE and BAC.
Rich Pzena made a compelling case for Freddie Mac as a value play at last week's Value Investing Conference. Based on his Mr. Pzena's discussion, my own research, and my belief that a bottom is forming in the stock market, I took a position in Freddie Mac on Friday. I continue to be concerned with the lack of congressional reform of Freddie and Fannie but the upside potential after the correction is just too compelling. I also increased my position in Bank of America last week.
Disclosure: at the time of this posting the author was long FRE and BAC.
Activision - A Bit of Luck
Activision is a company that has seen terrific growth year after year. The recent phenomenal success of Guitar Hero 3 has been a huge boost to the company. Activision just raised guidance for the quarter and the year based on its strong start to the holiday season.
Today it was announced that a majority stake is being purchased in Activision by Vivendi. A new company will be constituted that combines Activision with the gaming division of Vivendi, forming an $18.9B gaming colossus: Activision Blizzard. Vivendi will purchase Activision shares at a tender price of $27.50. Friday's close was $22.15, giving the deal a premium of almost 25%.
There is an old saying that good luck is when opportunity meets preparation. I purchased Activision calls a while back. The stock had not moved that much in response to the Guitar Hero 3 launch or the raised guidance - so I doubled down. I will book a very healthy profit when the market opens on Monday.
Today it was announced that a majority stake is being purchased in Activision by Vivendi. A new company will be constituted that combines Activision with the gaming division of Vivendi, forming an $18.9B gaming colossus: Activision Blizzard. Vivendi will purchase Activision shares at a tender price of $27.50. Friday's close was $22.15, giving the deal a premium of almost 25%.
There is an old saying that good luck is when opportunity meets preparation. I purchased Activision calls a while back. The stock had not moved that much in response to the Guitar Hero 3 launch or the raised guidance - so I doubled down. I will book a very healthy profit when the market opens on Monday.
CNN - "Corrupt News Network"
http://www.latimes.com/entertainment/la-et-rutten1dec01,0,4122002.column?coll=la-home-center
This article from the normally liberal leaning LA Times articulates the bias, incompetence and self-serving corruption of CNN that was highlighted in the recent GOP presidential "debate".
The author correctly points out that when 5,000 YouTube questions are submitted, and CNN chooses a small number for the event, they are really CNN's questions. What seems to be ignored by CNN is that this is a GOP primary debate. That means that the debate is for the benefit of Republicans and should explore issues that are important to people that are going to be voting in the primaries to choose a GOP presidential candidate.
Instead, the questions selected by CNN seemed to exclusively focus on issues that were less important, but also that would paint conservatives in a negative light. How else do you reconcile selecting questions on the infallibility of the bible, the confederate flag, gays in the military and the like?
To expand on the LA Times commentary, I'm not sure what to make of the whole debacle. There are certainly convincing arguements that can be made for both incompetence and bias. Frankly, I think it demonstrates how the liberal media outlets view conservatives. They think all conservatives are right wing extremist kooks. It is possible that this bizarre selection of questions and questioners represents CNN's view of "mainstream conservatives". One of the questioners looked like the Unibomber had been let out of prison and given access to YouTube.
The now infamous truth that questions were selected from committed Democrat voters can only be explained by a deliberate effort to support the Democratic Party or complete incompetence. There are no other choices. A simple Google search by whoever at CNN that was charged with vetting the questioners would have discovered the Democratic Party connections. But when you not only feature a question by a member of a Hillary Clinton campaign committee, but also fly him in to further challenge the GOP candidates, the denials by CNN that "we didn't know" ring hollow.
Not only has CNN confirmed the liberal agenda in their portrayal of the news but also that they are too incompetent to be viewed as a legitimate news source.
This article from the normally liberal leaning LA Times articulates the bias, incompetence and self-serving corruption of CNN that was highlighted in the recent GOP presidential "debate".
The author correctly points out that when 5,000 YouTube questions are submitted, and CNN chooses a small number for the event, they are really CNN's questions. What seems to be ignored by CNN is that this is a GOP primary debate. That means that the debate is for the benefit of Republicans and should explore issues that are important to people that are going to be voting in the primaries to choose a GOP presidential candidate.
Instead, the questions selected by CNN seemed to exclusively focus on issues that were less important, but also that would paint conservatives in a negative light. How else do you reconcile selecting questions on the infallibility of the bible, the confederate flag, gays in the military and the like?
To expand on the LA Times commentary, I'm not sure what to make of the whole debacle. There are certainly convincing arguements that can be made for both incompetence and bias. Frankly, I think it demonstrates how the liberal media outlets view conservatives. They think all conservatives are right wing extremist kooks. It is possible that this bizarre selection of questions and questioners represents CNN's view of "mainstream conservatives". One of the questioners looked like the Unibomber had been let out of prison and given access to YouTube.
The now infamous truth that questions were selected from committed Democrat voters can only be explained by a deliberate effort to support the Democratic Party or complete incompetence. There are no other choices. A simple Google search by whoever at CNN that was charged with vetting the questioners would have discovered the Democratic Party connections. But when you not only feature a question by a member of a Hillary Clinton campaign committee, but also fly him in to further challenge the GOP candidates, the denials by CNN that "we didn't know" ring hollow.
Not only has CNN confirmed the liberal agenda in their portrayal of the news but also that they are too incompetent to be viewed as a legitimate news source.
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