Tuesday, September 30, 2008

Third time is the charm - revised bailout bill more likely to squeak by on Thursday

The third time is the charm. The Senate will take a shot at revising The Big Bailout Bill with an increase in the FDIC insurance limit and some other goodies and the bill is quite likely to pass when voted on tomorrow night. Then on Thursday the angst-ridden House will vote on the revised bill, maybe with even more gimmicks to soothe the holdouts, and that third vote on the same basic bill will then probably pass by a modest margin. There is a general feeling that a fair number of House members are feeling deep remorse for the mistake they made on Monday. But from my perspective, this is a classic Washington ploy, with the first vote basically being a show to give members an opportunity to vent and grandstand for the people back home, and then later they can vote on a revised bill and change their minds and then simply make up some lame excuse about how they tried to fight the bill, as evidenced by their first vote, but they had little choice but to eventually go along. And this time they have The One's blessing and even insistence that it is the right thing to do.

If the House does decide to festoon the revised bill with goodies, that would mean that a conference commitee would have to resolve the differences between the House and Senate versions of the bill, but such a committee is hand-picked by the leadership and is unlikely to do anything to slow the bill down.

In short, there is now a high probability that A Big Bailout Bill will in fact be passed this week and maybe even signed into law by Pesident Bush on the weekend.

-- Jack Krupansky

Sovereign Bank bounces back from a near-death experience

Sovereign Bank, my new bank, bounced back strongly today, erasing a hefty chunk of its 72% drop on Monday. I went to bed Monday evening believing that there was a 50% chance that the FDIC would "save" them by morning. Instead, the bank appointed a new CEO and somehow that convinced people to have a little more faith. Or at least it convinced some analysts to say that the 72% drop was overdone.

Coincidentally, I transferred some cash from Fidelity to my new Sovereign account so that I would have enough cash at Sovereign to qualify for a hefty new account bonus in 90 days. I'll put the cash in a Sovereign Money Market Account and actually earn more than my cash was earning at Fidelity, and get FDIC protection to boot.

-- Jack Krupansky

Obama: There will be time to punish those who set this fire, but now is the moment for us to come together and put the fire out

Hey, maybe Barack Obama's flowery style of speech does have some benefits. He actually argued a credible case for why Congress needs to pass The Big Bailout Bill. A Washington Post blog post by Perry Bacon Jr. entitled "Obama Pushes Passage of Wall Steet Rescue Bill" calls out some of his best points and tells us that Obama "has shifted to aggressively pushing passage of the bill." Good move. Barack's line that I thought was most cogent and dirt-easy for any damn fool to make any sense out of was:

There will be time to punish those who set this fire. But now is the moment for us to come together and put the fire out.

I could not agree more with that sentiment, but I am sure there are still plenty of left-wing activists from MoveOn and other Progressive organizations that organized a "Vote No" campaign for Monday's vote who are probably chanting "Burn Baby Burn!" rather than even wanting to see the fire put out. Scumbags.

He also had a great point that nobody could make before the vote on Monday:

Over one trillion dollars of wealth was lost by the time the markets closed on Monday. And it wasn't just the wealth of a few CEOs on Wall Street. The 401Ks and retirement accounts that millions count on for their family's futures are now smaller. The state pension funds of teachers and government employees lost billions and billions of dollars. Hardworking Americans who invested their nest egg to watch it grow are now watching it disappear.

I agree 100% with that, but it is also true that there are plenty of Americans without either 401Ks or pension plans or retirement accounts who are really struggling and resent having to struggle even more to protect somebody else's "nestegg."

Of course we should applaud Barack for stating the challenge that should be (but wasn't) apparent to all parties:

To the Democrats and Republicans who opposed this plan yesterday, I say -- step up to the plate and do what's right for this country.

But of course there is in fact plenty of ideological difference on exactly what is "right for this country."

In any case, I am thrilled to see one of the presidential candidates actually "step up" and speak up for taking some action rather than simply engaging in ideological sniping and self-serving butt-covering.

-- Jack Krupansky

Should the FDIC insurance limit be raised?

I have written before that I believe that the FDIC insurance limit should be raised to $1 million so that small businesses and people with a lifetime of savings or the proceeds from a home sale do not have to worry about bank safety and getting themselves involved in these bank "runs" that we are actually encountering now. Obama suggested a rise to $250,000, but to me that is too half-hearted a bandaid. I suspect that the motivation for the magic $250,000 number is the same as his upper limit for who should get tax relief, an artificial boundary to separate the middle class from the supposedly "rich." McCain is proposing the same change, but seems like a little bit of monkey-see/monkey-do. It makes no sense that McCain would abandon small businesses and responsible savers, but maybe that is simply a populist election ploy.

Actually, my most recent thoughts are to raise the FDIC limit to even $10 million so that essentially all small businesses will be covered. Even for a relatively small business with 100 employees, there may be periods during the year where income and expenses are not coincident and there could be several million dollars sitting in the bank for a short period of time, especially for businesses with seasonal peaks, as well as cash that accumulates for quarterly payments and in advance of major capital expenditures.

The other key change needed for the FDIC is to explicitly state that it is simply a "reserve" fund and that the U.S. Treasury will ultimately backstop all valid claims even if they exceed the reserve fund. The point of the reserve fund is that institutions are contributing so that it will generally cover most losses and so that they are reminded of the need to behave responsibly. This change will eliminate the need to infuse a large pile of capital. Maybe the insurance fee should be raised as well, but I am not convinced since a higher limit may attract money back to banks from money market mutual funds and cause an increase in the total amount of insurance paid.

-- Jack Krupansky

Monday, September 29, 2008

Is Sovereign Bank on death row as well?

Despite the ban on short-selling of financial stocks, Sovereign Bank, my new bank, saw its stock fall by a jaw-dropping 72% today. I do not own any stock in Sovereign Bancorp (SOV) and I have less than $100,000 in assets with them so I am 100% protected, but there is actually now a very real chance that they could go under, meaning that the FDIC would move all of the assets to a stronger bank.

I searched the news and could not find any fundamental reason for their decline. I also suspect that there are too many loopholes in the short-selling ban to rule out a bear attack.

The big concern (not mine, though) is that a plummeting bank stock can also trigger a run on that bank.

Actually, tomorrow morning I am going to transfer a pile of cash to Sovereign Bank to keep in a money market fund (earning 2.75% APY). I intend to go ahead with that transfer since I will be 100% FDIC protected.

In short, I know of new fundamental reason not to continue doing business with Sovereign Bank.

Whether their stock might be a good speculative play is another story and I have to admit that I do not have a solid clue as to the specific motivations of the sellers.

-- Jack Krupansky

Is The Big Bailout Bill really dead?

Yes, The Big Bailout Bill really is dead. It is dead, dead dead. Having said that, the $640 billion question is how dead is it? For sure, it is dead in its current form, but with some changes, it really could be brought back to life. I listened to the last hour of the House debate, and there were a bunch of changes suggested which might be enough to get a revised bill passed. Not everybody can be readily satisfied, especially in an election year, but some threads of opportunities were obvious:

  1. People just need more time. One week just won't cut it.
  2. People need more time to study the proposal.
  3. People need more time to ask questions about the proposal.
  4. The rank and file, not just the congressional leadership and designated negotiators need to feel that they are part of the process.
  5. There has to be great clarity about the degree of relief that homeowners will get, including reduction in principal, reduced rates, and better protection from foreclosure.
  6. There has to be some clarity that responsible howeowners are not subsidizing irresponsible homeowners and speculators. There has to be a sense of fairness.
  7. Congressional representatives and senators need time to travel throughout their states and districts to present the proposal and discuss it with their constituents. And then there has to be time to incorporate some of that feedback into fine tuning of the bill. People need to feel that their concerns are being addressed.
  8. Citizens need enough information to see that it is they, the people, and not Wall Street that are likely to reap a windfall.
  9. People need more information about enforcement to understand that enough people will be tried and sent to jail for causing this crisis.
  10. President Bush needs to be much more deeply involved in give-and-take discussions with individual members and groups within Congress so that they can feel that they are getting a fair hearing.
  11. There has to be at least fairly detailed preliminary discussions of a new regulatory regime which makes the point that we actually did learn from our mistakes.
  12. Do a better job of phasing the outlays so that people do not reject the proposal simply based on sticker shock.
  13. Drop the threat of a Great Depression. Yes, the failure to have a bail-out results in A Big Mess or even A Bigger Mess, but nothing on the order of a Great Depression. I would also note that Benanke got overly worried about deflation back in 2005, so people need to discount his worries at least a little bit.

There are probably more changes needed, but that is a start. In truth, it is really more about process than the actual details of the bill. Put simply, too many people felt that they were being railroaded. Oddly, it was the Republicans who felt most railroaded.

Ultimately, the vote was very close, so even a modest degree of change to the bill coupled with some elapsed time for people to work through it may do the trick.

I suspect that we will have a revised bill and process proposal within a couple of days, maybe the end of the week or next Monday.

Meanwhile, Treasury, the Federal Reserve, and the FDIC will continue to do a great job of coping with the crisis on an ad hoc daily basis. And, I would add that the private sector itself is actually doing a semi-decent job of working through the mess. With WaMu and Wachovia now out of the picture, the number of looming disasters is incrementally shrinking.

-- Jack Krupansky

Municipal money market fund yields remain sky-high

Tax-free municipal money market mutual funds have traditionally paid fairly lousy yields since they were priced for the highest tax bracket and even then were rarely competitive with taxable money market funds, but now the world has been turned upside down. The Fidelity Select Money Market fund (FSLXX), currently #2 on the Crane Data Top-Yielding Individual Money Funds list, currently has a 7-day yield of 2.61%, but the federal tax-free Fidelity Municipal Money Market fund (FTEXX) now has a 7-day yield of 5.57%. A month ago that same tax-free fund was yielding around 1.65%.

A 7-day field of 5.57% federal tax-free is equivalent to 8.20% taxable in the 35% tax bracket or 7.11% for the 28% tax bracket. When was the last time we saw money market fund yields like that?

Why the huge spike in yield? Probably simply because of the massive redemptions from money market funds last week which resulted in a buyers market for the very short-term tax-free securities that municipal money market funds buy and a lower price means a higher yield.

Now, why these yield spikes are occurring for tax-free funds and not for taxable funds is somewhat a mystery, but is probably simply related to differences in how the municipal market works. Or, maybe some of the old ARS securities have finally been repackaged to be acceptable for money market funds and that caused the glut.

The $64 billion question is how long this pricing anomaly will continue or whether in fact this is part of "the new world financial order." It has mean two weeks since municipal money market funds leaped above 3%.

-- Jack Krupansky

Silver lining: Commodities prices decline sharply

As disappointing as the reaction to the death of The Big Bailout Bill was, there was a nice silver lining to that dark cloud as commodities, notably crude oil and gasoline, fell very sharply. Crude oil is back under $100 and wholesale gasoline futures fell by 28 cents. The October RBOB unleaded gasoline futures fell over 10% to $2.3840, which implies a retail price of $2.98 to $3.03 per gallon, which is over 60 cents below the current AAA national average. It may take a few weeks for consumers and businesses to see these declines in their wallets and pocketbooks, but they are on the way.

I think part of the decline in commodities is caused by hedge funds facing redemptions and banks needing to raise more liquid capital.

Maybe we really are finally passing the tipping point for commodities speculation, the point when hedge funds and the proprietary in-house trading desks at banks can no longer throw vast piles of cash at commodities with wild abandon.

-- Jack Krupansky

The Big Bailout Bill dies in the House

The voting just finished up and The Big Bailout Bill has died, 205 for passage and 228 against with a simple majority needed. As I have said before, this will not mean the end of the world. All it means is that the Federal Reserve and Treasury will simply be doing a lot more ad hoc, one-off interventions, as well as some ad hoc congressional bills tailored to narrow proposals.

I personally am not terribly surprised or disappointed that the bill failed, although I would have preferred that it had passed.

Back in 1999, I wished that the Fed had not intervened and that we had gone "cold turkey" and really cleaned up a lot of the lingering mess that may in fact have come back to haunt us. On the other hand, there are a lot of normal people who might not like the level of pain that can follow a full-blown "turkey freeze."

I am sure that we will muddle through the current crisis, but it is unfortunate that we do it with an unnecessary level of pain and "chaos."

Maybe the joint strategies are that the Democrats will be able to claim that they acted responsibly and the Republicans will be able to say that they voted against Bush.

-- Jack Krupansky

The Big Bailout Bill voting time has expired, but the vote continues

The 15 minute voting period for the House vote on The Big Bailout Bill has expired, but the vote remains open. It is currently 207 for passage and 226 against, meaning it has failed to gain enough support for passage. It is not unusual for the voting period to be extended as last minute horse-trading goes on. Maybe there is some hope that some votes can be changed in the next few minutes. But for now, the bill looks dead.

And, it is the Republicans who are killing it, with only 66 voting for it and twice as many, 132, voting against it. 141 Democrats have voted for it and only 94 against it.

Maybe the joint strategies are that the Democrats will be able to claim that they acted responsibly and the Republicans will be able to say that they voted against Bush.

-- Jack Krupansky

The Big Bailout Bill looks headed for failure

It looks like the votes are simply not there for passage of The Big Bailout Bill. It will not be the end of the world, but it will be rather messy.

-- Jack Krupansky

Mud sandwich

The House Republican Minority Leader John Boehner just admitted that The Big Bailout Bill is a "mud sandwich" but that passage of the bill is essential and is "in the best interests of our country."

The vote should begin shortly. It may take a half hour or more for the voting process.

Watch (or listen to) the House debate The Bill Bail-Out bill on C-SPAN online.

-- Jack Krupansky

Moment of truth coming up...

The House is almost done debating The Big Bailout, so The Big Vote will be coming up shortly. It will not be the end of the world if the bill fails to pass, but a lot of innocent people will be hurt if it does not passes. Sure, eventually the economy will bounce back even without the bill, but the bill really is the best of a bunch of lousy options.

Watch (or listen to) the House debate The Bill Bail-Out bill on C-SPAN online.

-- Jack Krupansky

Watch or listen to the House debate and vote on The Big Bailout

Watch (or listen to) the House debate The Bill Bail-Out bill on C-SPAN online, with the final vote scheduled for 12:30 p.m. ET. The vote is expected to be close. Then, the bill has to be debated by the Senate.

I remain optimistic that it will pass, but in a tight election year nothing is guaranteed.

Either Rep. Barney Frank will be seen as a true hero or the ultimate villain, or probably both. I give him a huge amount of credit for his leadership and bipartisanship. He makes the presidential candidates look like political midgets.

Maybe our national motto should be "Divided We Squander."

-- Jack Krupansky

Why the big stock sell-off in the face of great news on the bailout front?

Traders and speculators love market volatility and are all too eager to push the market as hard and far and fast as they can in whichever direction seems to have the least resistance. Although the progress on the bailout front is nothing short of spectacular, the unfortunate fact is that a lot of retail investors are hurt and angry and confused and anxious and have been pulling money from their mutual funds. This provides an underlying downwards pressure on the market upon which traders and speculators are layering their bets. Although short-selling is restricted on some stocks, primarily those with a significant finance component, it is not restricted in general or on ETFs, so there is probably a significant degree of short-selling going on which exaggerates any underlying market movement.

Another new factor exerting downwards pressure on the market is that so-called "Long/Short" hedge funds which make a combination of long and short stock bets have been dumping long positions since they are unable to make as many interesting short bets in an environment in which shorting is restricted. Or, they shift to stocks that were not formerly under as much pressure.

Not all hedge funds short stock, and there have been significant redemption pressure on hedge funds, so liquidating their positions frequently means dumping stocks.

Also, we are at the end of the month and the end of the quarter, so there is a fair amount of window dressing and position-squaring.

According to AMG Data Services, for the week ended last Wednesday, "Excluding ETF activity, Equity funds report net cash outflows totaling -$9.318 billion, the largest net outflow since 1/23/08; with Domestic funds reporting net outflows of -$5.277 billion and Non-domestic funds reporting net outflows totaling -$4.040 billion." Money flows for mutual funds do not always immediately translate into money flows for the stock market. Sometimes there can be a lag of several days or a week or more as the mutual funds manage their cash positions and try to avoid actually dumping stock at a time of market stress.

Eventually retail investors will come around, but given that this is an election year and the media loves to exploit even a hint of negativity, it is difficult to blame mere retail investors if they feel more than a little gun-shy about the stock market these days.

Me... I am not selling anything. Actually, I am selling part of one money market fund so that I can put the money in a higher-yield bank money market account. But my stocks I am hanging on to. And most of my cash will remain in money market funds at Fidelity.

-- Jack Krupansky

Revised details of the Troubled-Asset Relief Program (TARP)

The CNN posting of the congressional bill for the "Emergency Economic Stabilization Act of 2008" appears to be an older version since it is only 106 pages. The Wall Street Journal has posted a 110-page version which is an updated version.

The intro is updated to mention that the government will be offering insurance for troubled assets:

To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes.

-- Jack Krupansky

Sunday, September 28, 2008

Great news for taxpayers: Recoupment under TARP for The Big Bailout

In case you are still worried that taxpayers will foot the bill for the $700 billion banking bailout, take a look at Section 134, "Recoupment", in the TARP proposal:


Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case in which there is a shortfall, the President shall submit to the Congress a legislative proposal that recoups from entities benefitting from the program an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the budget deficit or the national debt.

Whether this provision will work out in reality remains to be seen, but at least it is a solid stab at protecting the pocketbooks of taxpayers.

The basic idea is that taxpayers will likely make money on this deal over a five-year period, but in the event that this fails to happen, the bailed-out banks will have to come up with the difference.

-- Jack Krupansky

Details of the Troubled-Asset Relief Program (TARP)

CNN has posted a draft of the proposed $700 billion Wall Street bank bailout bill, known as the "Emergency Economic Stabilization Act of 2008." The meat of the proposal is for the Troubled Assets Relief Program, which people refer to as TARP. I personally have not digested the full proposal yet, and I would not recommend trying to make much sense of it yourself since it is written in the non-English foreign language used by Congress. Actually, pieces are readable, but the flow is rather arcane.

It starts with the seemingly innocent:

To provide authority for the Federal Government to purchase certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes.

But... you have to wonder when then take that too-innocent "and for other purposes" at the end.

Try making sense of the final provision of the bill:


(a) EXTENSION.--Subparagraph (E) of section 18 108(a)(1) of the Internal Revenue Code of 1986 is amended by striking ''January 1, 2010'' and inserting ''January 1, 2013''.

(b) EFFECTIVE DATE.--The amendment made by this subsection shall apply to discharges of indebtedness occurring on or after January 1, 2010.

This has to do with mortgage modification and that a reduction in the principal owed is not considered as taxable income. Why the effective date is more than a year from now is a mystery.

-- Jack Krupansky

Will the U.S. Treasury actually fully own mortgages?

If the U.S. Treasury will actually buy up all of the outstanding "toxic" mortgage backed securities, they would in fact own the mortgages and be able to control them and modify them to help homeowners, but I read in an Associated Press article entitled "Tentative accord reached on bailing out bankers" that "To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes." Wait... what do they mean by "try" renegotiating? Shouldn't they simply dictate terms? Well, this means that the government might not be the owner of 100% of the MBS for particular mortgages and the remaining MBS that cover those mortgages might balk and not agree to mortgage modifications. That would really suck. What is needed is some sort of eminent domain so that they U.S. Treasury can take over the remaining MBS. If that simply required paying the holdouts "market" value, that would probably be okay if "market" value was roughly the same as the haircut discount that the banks were eating. If I were a holder of such an MBS that I thought was going to bounce back after the crisis, I would want something more, but I think the whole point of buying at a discount is that the general consensus is that housing prices and the rate of foreclosures are not going to bounce back that far unless the mortgages are modified.

If you want to write to your elected representatives complaining about the bailout, please point out that the U.S. Treasury must have the flexibility to modify the terms of all mortgages for any MBS that it acquires under the bailout.

OTOH, there may be some precedent in bankruptcy law where the court is determining what to do with assets and a minority of bondholders are refusing to go along.

At a minimum, the U.S. Treasury and Congress need to be able to publicly post the names of the offending bondholders for all the world to see how shamefully they are behaving.

Somehow, I think this issue can be finessed so that the U.S. Treasury can unilaterally modify mortgage terms, but the bottom line is that a lot of people are going to be very upset if they find out that the U.S. Treasury will not have the authority to effectively dictate the terms of the mortgages for which it is paying such a princely sum.

-- Jack Krupansky

Friday, September 26, 2008

Maybe the House Republican bailout proposal is worse consideration

An Associated Press article by Julie Hirschfeld Davis and David Espo entitled "Rep. Barney Frank predicts bailout deal by Sunday" on the status of the financial bailout negotiations says that House Republicans "demanded 'serious consideration' for a plan of their own, involving less government intrusion and lower cost to the taxpayers than the $700 billion that Treasury Secretary Henry Paulson has been seeking" and that the Republican plan would provide that "the government would insure the distressed securities rather than buy them. Tax breaks would provide additional incentives to invest." I think the concept of leaving the mortgage securities in place and offering government insurance could work and should be considered by Treasury (for about 30 seconds), but I suspect that Wall Street would profit more greatly from such insurance than the taxpayers would profit from the majority of mortgages that can be made workable by Treasury if they can be bought with a steep haircut and then the terms of the mortgages adjusted to permit the homeowners to avoid foreclosure. But if the insurance is a premium that Wall Street would pay over a number of years and would be calculated to completely cover a realistic estimate of foreclosures, it could still be attractive to taxpayers. Still, I think the real point is that the only way to avoid a large number of foreclosures that the government would cover is to modify the mortgage terms in the near future. Simply letting mortgages foreclose and then having the taxpayers pay the full cost of something than even now can be avoided is just plain silly.

One element of any mortgage modification plan that I would like to see is that if the government reduces the principal owed by the haircut discount at which the mortgages or securities are purchased, then the government should then own that portion of the proceeds should the homeowner eventually sell the house at a higher price than the discounted principal. This would assure than post-bailout homeowners do not get a completely unfair windfall compared to homeowners who are still paying on their full principal. In fact, maybe the government could offer such a principal buyout deal to other homeowners as well on a case-by-case basis. It could actually turn into a win-win for all parties involved. In truth, the party taking on the bigger risk would be likely to win the most, and that could in fact be the U.S. Treasury.

-- Jack Krupansky

Fidelity snail mail confirmation of link to Sovereign Bank checking account

Yesterday I received a snail  mail letter from Fidelity informing me that they have approved the linking of my Sovereign Bank personal checking account to my Fidelity account, but the only hitch is that they inform me that I will not be able to use the link (MoneyLine) until Monday, September 29, 2008.

Unfortunately, I neglected to sell my Fidelity Select Money Market fund before 4:00 p.m., so I may have to wait until Tuesday before I try to transfer the cash from my main Fidelity account to my Sovereign personal checking account and then from there to my Sovereign money market account.

-- Jack Krupansky

Thursday, September 25, 2008

Getting my Sovereign Bank accounts up and running

I am making some good progress at getting my new Sovereign Bank accounts up and running. I successfully linked my Sovereign personal checking account to my PayPal account and managed to successfully transfer the majority of my PayPal balance and then transferred the money from the checking account to the money market account where it will earn 2.50% APY until I transfer more money to pass the threshold for earning 2.75% APY and maybe even 3.00% APY.

I also received the two check cards (one for personal checking, one for business checking) and activated them and changed the PINs at the local ATM and even used both to take out a little cash.

I even used the personal checking card to make a purchase, so I only need five more purchases on that card to get my bonus money after 90 days.

Now, the next major milestone is to transfer a large pile of cash from my Fidelity account. Unfortunately, Fidelity has a 7-10 day "block" on linking to new bank accounts. They still have not submitted a "probe" payment even though PayPal was able to do so very promptly. Hopefully this will be completed by the end of next week.

Meanwhile, I notice more and more banks offering yields over 3.00%.

One last little thing that I appreciate about Sovereign Bank that I have not seen in quite a few years... they even gave me those little tyvek sleeves to protect my cards. I have not seen them given out freely in well over 15 years.

-- Jack Krupansky

The Big Bailout: Example of why I do not support The Progressives

Even Barack Obama and Democratic leaders in Congress recognize the need to address the current financial crisis. They may not agree on all of the details, and there may be a fair amount of pontificating on all sides since this is an election year, but there does seem to be some consensus emerging on the overall shape of a bailout and that despite widespreadh misgivings on all sides, approval of a modified plan is very likely very soon. The administration has already agreed in principle with some of the "demands" of Congress. Meanwhile, what are The Progressives doing? They are staging rallies to "say 'NO' to the Bush Bailout plan." Do they at least acknowledge that there is a problem that needs to be resolved immediately? Nope. Do they acknowledge that with congressional modifications it is no longer "Bush's" plan? Nope. Do they acknowledge that the plan was not created or put forward by President Bush, but by Treasury Secretary Paulsen and Federal Reserve Chairman Bernanke? Nope. Do they offer an alternative plan for the immediate crisis? Nope. Their only goal seems to be to exploit the crisis for partisan political gain.

Here is the email letter I received this morning from Democracy for America (a Progressive group):

Supporter -

Since Monday, progressives around the country have been calling their Senators and Representatives to say "NO" to the Bush Bailout plan. Congress is starting to get the message.

We can't stop now.

Today at 5pm, America will say NO to the Bush Bailout -- and we need you to be there.


The Bush Bailout is still a new tax on every American that would amount to a $700,000,000,000 check to bail out Wall Street. The Bush Bailout would be the largest giveaway of public money in American history.

Our friends at True Majority are leading the way for over 20 different groups including MoveOn, USaction, and ACORN to name just a few. They organized the events, now we need to turn out and help make the events a success.

Rallies held over the last two days in cities across the country have received a lot of coverage already. These events have helped back up the phone calls, emails, and letters against the Bush Bailout that Congress has been receiving all week.

Now, with a nationwide coordinated action with hundreds of rallies on the same day, we will amp up the pressure and make sure Congress hears the message loud and clear: America says NO to the Bush Bailout.


I signed up for the rally near me. I hope you will sign up too.

Thank you for everything you do,


Jim Dean, Chair
Democracy for America

Literally, there was no mention of an alternative plan or any effort to improve the current proposed plan.

Truth be told, it appears that The Progressives would prefer that the U.S. economy fall into a deep recession so that they can then blame Bush and then blame McCain using guilt by association.

Lucky for us, there are still quite a few sensible centrists and even sensible moderate liberals in Congress who understand that by working with Paulson and Bernanke they can jointly craft a very sensible bailout plan that actually does advance the aims of centrist and moderate Democratic liberal principles.

In any case, this useless and counterproductive "Just say 'NO' to the Bush Bailout" campaign illustrates perfectly why I oppose the left-wing Progressives and why even though I will probably vote for Barack Obama, I cannot give him or his Progressive supporters any of my support.

But, by all means feel free to let your elected representatives know specifically which terms of the bailout you do object to and which terms you do support, and how you would like to see the plan changed. But hurry, because the rough details are likely to be put in place very soon.

My own personal biggest concern is to make sure that we buy mortgage assets at a steep enough discount that we have a good shot at being able to re-sell mortgages or defaulted properties at a modest profit. That may be a 10% to 25% discount to "full list price". The banks might object, which is fine, but I doubt that any financial institution will really have any serious problem if they escape from this mess and "only" get 80 cents on the dollar. Bernanke wants to buy assets at full price rather than "fire-sale" prices to assure that the banks are well-capitalized and healthy, but I would argue that true fire-sale prices would be down under 50 cents on the dollor or even 20 cents on the dollar, so offering 75 to 85 cents on the dollar would seem quite fair to the banks. Besides, if they really can argue that assets are worth more than 90 cents on the dollar, why would they need a big government bailout?

-- Jack Krupansky

Wednesday, September 24, 2008

Municipal money market fund yields leap into the sky

Tax-free municipal money market mutual funds have traditionally paid fairly lousy yields since they were priced for the highest tax bracket and even then were rarely competitive with taxable money market funds, but now the world has been turned upside down. The Fidelity Select Money Market fund (FSLXX), currently #2 on the Crane Data Top-Yielding Individual Money Funds list, currently has a 7-day yield of 2.62%, but the federal tax-free Fidelity Municipal Money Market fund (FTEXX) now has a 7-day yield of 4.65%. A few weeks that same tax-free fund was yielding around 1.65%.

Incidentally, 4.65% federal tax-free is equivalent to 7.15% taxable in the 35% tax bracket or 6.46% for the 28% tax bracket.

Why the huge spike in yield? Probably simply because of the massive redemptions from money market funds last week which resulted in a buyers market for the very short-term tax-free securities that municipal money market funds buy and a lower price means a higher yield.

Now, why these yield spikes are occurring for tax-free funds and not for taxable funds is somewhat a mystery, but is probably simply related to differences in how the municipal market works. Or, maybe some of the old ARS securities have finally been repackaged to be acceptable for money market funds and that caused the glut.

The $64 billion question is how long this pricing anomaly will continue or whether in fact this is part of "the new world financial order."

-- Jack Krupansky

Monday, September 22, 2008

Who can be a better steward for the economy, the Republicans or the Democrats?

Given the current anxiety over the economy and financial system, it is to be expected that the Republicans will be blamed for all the bad things that have happened "on their watch" (ignoring the fact that the Democrats have "controlled" Congress for the past two years), but that begs the question of who can really be a better steward for the economy. After all, does anybody really have a credible, non-partisan accounting of the past eight years that can tell us whether the dot-com hangover, the impact of 9/11, and low interest rates were not at least partially responsible for the mess we are in? Did the Democrats ever complain that interest rates were too low? Did the Democrats ever complain that too many lower-income families were getting mortgages beyond their means? Actually, there were a few, but very, very few who did in fact complain that subprime mortgages were "abusive", but mostly almost everybody, regardless of party, was thrilled that housing was booming. Now, the Democrats blame the Republicans for the housing boom. Still, all of this continues to beg the question of who can credibly claim to be the better stewards of the economy.

In my book, Bill Clinton can claim credit for being a great steward of the economy. But, he was a centrist, and as Barack Obama (with Hillary's "assistance") has shown us, the Centrists are now out of favor in the Democratic Party. The Progressives are ascendant. Yes, they are gunning for power, but they actually do not have any economic track record to speak of.

What the Democrats can credibly claim is that they are better at building and deploying economic and financial safety nets, including Social Security and FDIC back on FDR's watch. Wall Street just showed us that they were a high-wire act performing without a safety net. Sure, the U.S. Treasury is now "rescuing" Wall Street, but that is more like arriving at a train wreck and helping the survivors rather than using a net to prevent a disaster. Besides, many millions of Americans have now been negatively impacted by Wall Street's death spiral, so it is rather difficult for the Republicans to claim that they protected any of us from Wall Street. Sure, the belated Treasury money market fund guaranty program is reasonably "progressive", but I believe that is an exception to the Republican M.O. rather than something we can expect from Republicans on a regular basis.

OTOH, the non-Centrist Democrats cannot even begin to credibly claim that they have they faintest clue as to how to rebuild the economy and create new jobs. Sure, the Republicans are struggling right now too, but that is mostly because that is the way things are when an economy is in or near a recession. Once the contractionary forces have dissipated, the outlook will change and change dramatically.

The key is of course to have the right mix of regulation and safety nets. The centrists understand this, but the Republicans overall have a misguided loyalty to under-regulation while the Democrats overall have a misguided loyalty to over-regulation.

In short, both parties are mediocre stewards of the economy and the economy actually survives in spite of Washington rather than because of what happens in Washington.

So, where we are right now is that McCain is talking tough but seems likely to want less regulation overall and Barack Obama is outraged that the Republicans have somehow mismanaged the economy and Wall Street and seems likely to introduce an excess of regulation.

Where are the Centrists when you need them? Bill and Hillary are exiled off to left field to smile and say a lot of nice words about Barack Obama, but otherwise not do anything to actually help the economy. Others have retired from Congress because being non-partisan is disdained these days.

Personally I think both McCain and Obama are a bit more centrist they their political chatter suggests. A lot of what they say is designed to inspire "the chorus" rather than appeal to the center majority of America.

From where I sit now, I think that Barack is a bit smarter and more sensitive to changing trends so that he is better positioned to sense the direction that the economy and Wall Street should head in the future. I also know that a number of heavy-hitters at the New American Foundation, a centrist think tank in Washington, D.C., are involved with advising the Obama campaign, so I have at least some reason to suspect that economic and financial policy in an Obama administration has at least a plausible chance of having a centrist tone.

In short, I think Barack will be a somewhat better steward of the economy than McCain, but that is in spite of his being a Democrat rather than because of his party affiliation. OTOH, I think McCain can handle the job as well, but I do worry that he is being a little too much of a conventional Republican these days to be a first choice.

Contribution from Biden and Palin? Ummm... how about "none of the above."

-- Jack Krupansky

Why the big spike in the price of oil?

Although there is some legitimate concern about ongoing outages due to Hurricane Ike and talk of reductions in production by the Saudis, the real cause of the big spike in the price of oil today is a combination of short-covering for rolling over to the new front-month contract and a belief that the U.S. dollar is about to fall off a cliff due to the massive amount of new Treasury debt needed to fund the "rescue" of Wall Street. Monday was the last trading day for the October NYMEX crude oil futures contract. Anybody holding a short position expecting further declines had a choice between taking delivery or buying out of their short position in the current front-month contract (October) and then selling the new front-month contract (November) short to continue to bet on future declines. There is usually unpredictable volatility on these monthly transitions, but the events of the past week have just added to the unpredictability. With all of the economic weakness, a lot of people were probably bettting on further oil declines and they just got caught in a classic short squeeze.

A third factor is that there may be a feeling that the old "long commodities, short the dollar" trade that worked so well earlier this year might be coming back in vogue if the dollar continues to slide due to new Treasury issuance.

A fourth factor is that wuth the financial stocks off limits to hedge fund shorting, beaten-down commodities were probably looking appealing again.

The real bottom line is that even though the October front-month contract closed at $120, the new front-month contract of November closed at only $109.7. It may take a couple of days for the new front-month contract to settle down. OTOH, if hedge funds (and the big banks) do seriously go after commodities again in a big way, the trend could become even more unpredictable.

Maybe the feeling is that since Congress will be so focused on the big "rescue", nobody will waste any breath complaining about evil speculators manipulating energy and commodities prices.

Meanwhile, the retail price of gasoline continues to decline off of the Ike Spike, down 1.8 cents yesterday alone and down 11.6 cents from the peak of the Ike Spike. In other words, trading demand by speculators exceeds actual real demand for the product.

-- Jack Krupansky

Treasury likely to profit from The Big Fix

I am one of the (few) people who thinks Treasury is likely to make a bundle on the $700 billion "rescue" over five years or so, but it depends on how low a purchase price Paulson can negotiate for all of these mortgage securities. If he pays "full retail", we will lose money, but if he negotiates a hefty haircut (gets the stuff for us wholesale), we could do quite well. The tipping point is that he has to be able to resell houses and mortgages at a significantly lower price than the original mortgage. So, if  the average house price is expected to decline by say 20%, he needs to try to get a 25% haircut. The banks will not like that, but Congress and Main Street will enjoy "sticking it" to Wall Street for a change. OTOH, the need for a steep haircut is only true for mortgages that are actually in trouble, not those that stay current. Treasury will earn a decent income from the "good" mortgages. I am presuming that not all of the so-called "toxic" MBS/CDO is actually defaulting now or likely to default in the near future and that a fair chunk of "toxic" simply means that the risk is unknown, cannot be quantified today, or just a class that people are afraid of based on its name rather than its actual fundamentals or current results. In other words, the vast majority of the "toxic" securities are simply unwanted or are difficult to value rather than being intrinsically worthless if held to term.

I will go so far as predicting that Treasury will end up reselling a huge chunk of the mortgages at a very nice profit. It might simply be that the "packaging" of MBS and CDO is confusing the issue. I strongly suspect that Treasury will be able to adjust the terms of many mortgages so that they in fact become bona fide "conforming" mortgages that Fannie Mae and Freddie Mac can securitize into credible new MBS bonds.

-- Jack Krupansky

Why the big stock sell-off?

At this stage of the game, I strongly suspect that we are seeing a delayed reaction by retail mutual fund customers who saw the chaos last week and put in fund redemption requests that are working their way through the system. No mutual fund manager wants to sell into weakness since that only perpetuates a downward spiral, but when retail customers get scared and start selling en masse, the managers do not have a lot of choice.

The other obvious explanation is that short-sellers are now focusing on nonfinancial stocks.

And, since we are seeing oil and gold spike up on the same day as the marker turns and heads south, that strongly suggests that hedge funds are re-opening "long commodities, short the dollar/stocks" trades.

-- Jack Krupansky

Sunday, September 21, 2008

When Pigs Fly -- No more major investment banks!

Yet another piece of news to file under When Pigs Fly: The Federal Reserve has approved the conversion of the two remaining large Wall Street investment banks, Morgan Stanley and Goldman Sachs, to be actual "bank" banks, or bank holding companies. Poof... just like that... no more major standalone investment banks. The "pillars" of Wall Street are now gone. Well, in reality they really are still "investment" banks rather than "bank" banks, but at least superficially they are now simply "banks" to the Federal Reserve. This permits them to gain access to all of the bailout resources that the Federal Reserve has been offering to "bank" banks. Merrill Lynch is also gaining access to the Fed bailout resources (ability to put mortgages and MBS up as collateral to get "credit" directly from the Federal Reserve) as their merger with Bank of America is pending.

-- Jack Krupansky

Clarifications from the U.S. Treasury on the new money market fund Guaranty Program

Hot off the presses, the U.S. Treasury just posted the following clarifications ("Treasury Provides Further Clarity For Guaranty Program for Money Market Funds") on their Web site within the past hour:

Washington – The U.S. Treasury Department is continuing to develop the specific details surrounding the temporary guaranty program for money market funds that was announced on September 19, 2008.

While these details are being finalized, Treasury is making the following clarifications:

1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.

2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19, 2008.

4. Further details on other aspects of the temporary guaranty program and the required documentation for funds to participate will be provided in the coming days.

That is all fine and dandy, except for point #3 which seems to suggest that only existing balance amounts as of Friday are covered, implying that any new monies deposited in money market funds will not be covered!!! I have trouble believing that will be the case, so it looks as if we need clarification of the clarification.

Either way, I personally am not worried for my own money since I continue to have high confidence in Fidelity.

-- Jack Krupansky

Tidal wave of U.S. Treasury securities coming?

I was just reading the fact sheet for the U.Treasury "rescue" plan (Proposed Treasury Authority to Purchase Troubled Assets) and I see that it says that "Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. " That is a large boat-load of Treasuries to flow into the bond market. OTOH, based on the fact that demand for T-bills alone pushed the yield for a 3-month T-bill down to 1.07% on the most recent weekly auction last week, I would say that there is an excellent chance that the Treasury will have no problem finding buyers at very reasonable rates. OTOH, if Treasury does have trouble, that would push rates up and give us investors a great opportunity to get great yields at very lost risk.

-- Jack Krupansky

Industrial production continues to decline on a recessionary track

Lost in the noisy chaos last week was the latest Industrial Production report which showed a -1.1% decline in August, certainly pointing in the direction of a recession. Industrial production has now declined -1.5% over the past year, which is clearly recessionary for the manufacturing sector. Fortunately, manufacturing is a relative small fraction of the total economy which is now primarily a "service" economy.

Although Gustav was a factor, it is estimated that it contributed only -0.1% of the decline. The bulk of the decline was caused by a drop of 11.9% in the production of motor vehicles and parts. Ex motor vehicles and parts, the total decline would have been -0.3%.

-- Jack Krupansky

Saturday, September 20, 2008

SIPC in action

There has been confusion over what exactly SIPC protects, so it is instructive to actually see it in action. I cannot personally ever recall seeing it in use, but this week we did see it with the bankruptcy of Lehman Brothers. From an Associated Press article entitled "Judge says Lehman can sell units to Barclays":

The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.

That is half of what SIPC does, simply guaranteeing that the contents of your brokerage account is literally moved from the bankrupt broker to another (solvent) brokerage firm. Although the article says "liquidated Lehman accounts", I think that is a mistake or misnomer. Maybe from a bankruptcy court perspective the accounts were "liquidated" in the sense of any claim against assets of Lehman were eliminated, but I am reasonably certain that this so-called "liquidation" keeps all security positions intact and does not mean that stocks and bonds were sold.

In short, if you had an account at Lehman you now have an account at Barclays that has all of the same assets.

The other half of what SIPC does relates to replacing your assets if your broker absconded with them.

But in neither case does SIPC insure the market value of your assets. Unlike with FDIC insurance, SIPC would only protect the number of shares but not the value of each share. For example, SIPC is not invloved with the "breaking the buck" for the Reserve Primary Fund. People with money in the Reserve Primary Funds still retain ownsership of the same number of shares, even if the NAV of those shares has declined and redemption has been delayed.

You can read the official press release on Lehman from SIPC.

And read the official How SIPC Protects You brochure.

-- Jack Krupansky

Friday, September 19, 2008

Still comfortable with Fidelity money market funds

Despite all of the financial turmoil this week, including a dramatic case of "breaking the buck" by a large retail money market fund, I remain confident and comfortable with keeping my cash in Fidelity money market funds. Even without the new Treasury "insurance", I would still be confident and comfortable.

I would note that the new Treasury insurance is in theory only temporary, for the next year, but I do expect that an equivalent permanent insurance program will be set up well before a year passes. I personally am not expecting to be dependent on either program either now or in the future.

I do expect that I will diversify my cash a little, especially since I can get a better interest rate with FDIC-insured accounts at a number of banks. Fidelity still offers me a number of convenience factors that outweigh completely moving cash to traditional banks. Simply having higher rates and FDIC protection is still not enough to erase all of the annoying "traditions" of traditional banks that result in a lower quality of overall service. OTOH, banks to offer services that Fidelity, et al are unable to provide, such as being able to go to their ATM, get some cash, and then walk to the teller window to convert all of those annoying $20 bills to more convenient $5 bills.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls moderately and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately (-0.63% vs.-0.18% last week) but the six-month smoothed growth rate rose slightly (to -11.5 from -11.6), but that is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With the WLI level sliding to a new five-year low, a business cycle recovery is not yet in the cards."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

Given that the WLI has continued to deteriorate lately, I will increase my own forecast for the probability of recession, again...

I am revising my personal assessment upwards to a high level confidence that there is no more than a 85% chance of recession (up from 80%) and a moderate level of confidence that there is no more than a 55% chance of recession (up from 50%) based on the fact that we are seeing only a few hints of moderation mixed in with all of the gloomy news.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signaling to me, as well as ECRI's assessment and recession "call."

The bottom line is that the economy remains at "the edge" of a recession, but persists in refusing to overtly "fall" into recession.

-- Jack Krupansky

When pigs fly?!?! - Treasury to insure money market funds! - Yes, REALLY!

File this under "When Pigs Fly"... the U.S. Treasury has actually announced that they will be fully insuring money market funds, both retail and institutional. Imagine that. Who would have thought? Sure, I have always imagined that eventually there would be an insurance program analogous to FDIC, if for no other reason than that some insurance companies would figure out how to milk that industry. I certainly didn't expect the government to jump in this quickly. But with the financial turmoil this week and a large retail money market actually "breaking the buck", it now makes a lot of sense.

In truth, MMF insurance is not really so much a matter of helping out the folks on Main Street as it is providing a lifeline to one of the few remaining viable businesses on Wall Street, commercial paper, medium term notes, and repurchase agreements, which are what the trillions of dollars of money market funds are based on.

With dramatic withdrawals from money market funds this week, there was probably very little demand for fresh commercial paper, medium term notes, and repurchase agreements. The problem is that a lot of businesses expect to be able to roll over their short-term debt, so a lack of demand for buying fresh short-term paper was likely causing a very dramatic liquidity crunch.

Sure, retail customers win as well, but it was in the interests of Wall Street that likely came first.

Next, we also need to see a dramatic hike in FDIC coverage. It is too easy for non-wealthy individuals to run above the $100,000 FDIC insurance limit. Sure, there are schemes like CDARS to work around the limit, but average people, including a lot of small business owners or people with a lifetime of savings or who sold a house, just do not have the time, energy, or expertise to waste on working around that limit. What is needed is to simply raise the limit to at least $2 million (or maybe $5 million or even $10 million). That would cover the lion-share of small businesses and individuals who have simply saved over a lifetime or maybe simply sold a house that appreciated over the years.

I think it would make more sense to fold the new Treasury MMF insurance into the FDIC program. I also think we need to state the charter of FDIC more clearly that it is a "reserve" for insuring deposits and that ultimately the U.S. Treasury itself is the full backstop. This would eliminate mindless discussions of whether FDIC technically "has enough money" to cover all losses. We should also look into whether FDIC insurance could be privatised, again with the U.S. Treasury as the ultimate, full backstop should "the unexpected" occur. From what I read recently, even Warren Buffett was unwilling to continue offering deposit insurance, but I would think he would be interested in offering a form of re-insurance where the U.S. Treasury would cover claims if a truly catastrophic crisis were ever to occur. Besides, the issue is not really paying claims for actual extreme events but simply people worrying about what would happen in potential extreme events.

I know Barack Obama disagrees (he actually said so), but we really do need a full-fledged commission (ala the 9/11 commission) to study the current financial episode and to propose a much more carefully thought-out longer-term approach to the simple problem of how to manage money.

-- Jack Krupansky

Gasoline prices are now falling as the "Ike panic" fades

After spiking up sharply in anticipation of damage from Hurricane Ike, retail gasoline prices have fallen almost 5 cents in the past couple of days, with steeper declines to come. Based on the AAA Daily Fuel Guage Report, gasoline peaked at $3.855 two days ago and are now down to $3.807, a decline of 4.8 cents. The wholesale price (October RBOB futures) is at $2.5809, indicating that the retail price is headed to about $3.18 to $3.23 (a decline of about 60 cents) in the weeks ahead, especially as the late summer driving season winds down.

-- Jack Krupansky

Thursday, September 18, 2008

New customer of Sovereign Bank

As I mentioned yesterday, I was seriously looking at opening an account at Sovereign Bank here in Manhattan. I went ahead and opened the account this morning. Actually, I opend three accounts, a business checking account, a business owner "premier" personal checking account, and a personal money market account. This evening I went through the process of registering for online banking. Now I am basically waiting for the ATM "check" cards (one for business, one for personal) which may take 7 to 10 business days.

I also went ahead and linked the personal checking account to my Fidelity account. Unfortunately, the Fidelity Web site now says that it may take 7 to 10 days to verify by bank information. I have done this a couple of times before, but I do not recall it taking that long before or the Web site saying that it might take that long. I think that all they really need to do is send a very small payment (a dollar or less) and see that the transaction completes. I suspect that they may have added a delay to make it more difficult for people to quickly decide to move their money from Fidelity to a bank.

My next step is to sell $15,000 of my Fidelity Select Money Market fund (FSLXX) and then transfer that to my new Sovereign personal checking account once Fidelity verifies the status of my new bank account. From there I will transfer the cash to the money market account. Once I do that, all I need to do is use the two check cards a total of six times each over 90 days and Sovereign will credit my accounts for $300 within 15 days after a 90 day period. That will be on top of the extra interest I will earn on the $15,000 in the Sovereign money market account.

Actually, I just took my next step, which was to link my new personal checking account to my PayPal account. Since my new money market account will pay a higher interest rate than Fidelity or PayPal, I will shift some of my PayPal savings to Sovereign Bank. PayPal just started the process of making two small payments (each less than a dollar) to my checking account. Once I see those payments appear in my checking account I enter the amounts in PayPal and that completes the bank account verification process, and then I can transfer a pile of cash. PayPal says it could take several days for the verification transactions to be completed. PayPal is currently paying a 2.35% 7-day yield.

I may also look into setting up a second money market account to use for keeping my accumulating estimated income tax money separate from "my" money. I was using the PayPal account for that purpose. But, since that is a smaller amount of money in a separate account, it will earn a lower interest rate of 2.50% APY.

I am thinking that I will probably want to raise my main money market account to $25,000 since the interest rate then goes up to 3.00% APY.

And all of this is 100% FDIC insured and 100% instantly liquid. I have considered a CD, but the nature of my current career and financial situation dictates that I be as liquid as possible, for now.

-- Jack Krupansky

Ban the automatic loaning of customer long positions to short sellers

I despise short selling as much as any bullish investor, but I think the optimal solution to short-selling abuses (e.g., naked short selling) is for the SEC to ban mutual funds and pension funds and insurance companies from loaning stock to short-sellers and to ban brokerage firms from automatically loaning customer long stock positions to short sellers without their explicit permission. How many mutual fund shareholders or employees represented by pension funds or customers keeping stock in their brokerage accounts are even aware that it is they who are the suppliers of stock that short sellers are selling short??!! Brokerage firms, mutual funds, and pension funds are supposed to be operating with a fiduciary duty to protect the interests of their customers but they are failing to do so. Fix this fiduciary duty problem and short sellers will instantly become a very minor force in the market rather than the tail wagging the dog that they currently are. It really is this simple.

One pragmatic logistical change which would help correct a lot of short selling abuses would be to go to T+0.0 settlement rather than the current T+3 settlement. Rather than giving short sellers a 3-day free ride to come up with borrowed shares, force them to cough up the borrowed shared up-front before the short-sale transaction can even be requested to be executed. T+3 is not needed these days and is a dog's age in today's computerized stock market. Even T+0 settlement (by the end of the trading day) is insufficient to deal with naked short-selling. T+0.0 settlement is needed and it is needed... yesterday.

These two changes would literally solve the current systemic problem with short-selling without preventing short-sellers or the beneficiary owners of long stock positions from engaging in stock loaning and short-selling if they so choose.

I find is horrifying and reprehensible that a brokerage firm is permitted to loan a customer's stock without the customer's explicit, up-front, opt-in permission to short sellers, and without any notice to the customer that it may or has been done. Opt-out would not be sufficient. It needs to be opt-in and without any onerous penalty for refusing to opt in.

Why the silly Democrats are not jumping up and down and loudly proclaiming this need  to get rid of this automatic opt-in and irresponsibly loaning by mutual funds and pension funds and insurance companies is rather baffling, other than simply that, as the saying goes, "they don't get it."

-- Jack Krupansky

Wednesday, September 17, 2008

Why do I keep my cash in money market funds?

Could somebody please remind me again why I keep my cash in money market funds? The standard, traditional reason is that banks pay too skimpy an interest rate. But... that is no longer completely true. Sure, it is still true that most banks pay as close to zero as they can manage with a straight face. Just last week a bank representative actually made a face and cringed when she said that the account that she could offer me paid 0.1%. I mean, like why even bother?! But, as the so-called credit crisis has spread, suddenly there are more and more banks that are not just competitive with money market funds, but even pay yields well above the top money market funds. Sure, some of them are clearly on thin ice, such as Countrywide and Capital One Bank (and Indymac Bank was one of them), but others seems on relatively solid ground. Besides, they are FDIC-insured anyway.

Actually, there is one other reason for choosing money market funds: you have a lot more than $100,000 and it is too much hassle keeping your millions spread between dozens of banks. Sure, as we saw yesterday, a money market fund could "break the buck", but a lost of 3 cents or even 10 cents is nothing compared to losing 100% of your excess over $100,000 in a bank. If you have millions in cash, institutional money market funds do pay higher yields than all but a relatively small number of banks. And, money market funds do tend to have more flexibility than high-yield bank accounts and CDs.

But for those of us who do not have millions and may in fact have under $100,000 in cash, some banks are in fact once again appealing places to store cash.

One remaining reason for money market funds is for corporate 401k retirement plans, but I am out of that business, for now.

I currently have a small account at Capital One Bank here in New York City, but I have not been completely satisfied with their service, so I have been looking around. I considered CommerceBank since they offer free accounts and I had an account there four yours ago. Unfortunately, they are actually having trouble opening a new account for me since I had an account that was closed. Besides, they offered me a checking account that paid 0.1% and their money market account yields were rather skimpy. It turns out they do have a money market account that yields 3.00% APY for balances above $25,000, but below that the rates are poor.

In truth, interest checking at banks is still quite abysmal, and I am reasonably happy with doing my checking from my Fidelity account.

Just today I walked by Sovereign Bank a few blocks from my apartment and saw that they were offering a $300 bonus for new business accounts. If you open up a free business account and a free personal account and put $15,000 in any accounts, including their money market account that yields 2.75% APY or a 6-month CD that yields 3.50% APY, and you use the check cards for the two accounts at least six times each, then after 90 days (actually 105 days) they will credit $300 to your accounts. That is actually a fairly good deal, especially in today's environment. No money market mutual fund comes even close.

When I first starting talking to Sovereign, they did not mention anything about the rates and even when I said I was not happy with the kinds of rates banks were paying they still did not say anything. I was expecting that my $15,000 would be earning 1% or even less in a money market account. Then I casually asked what the rates were and even the assistant manager was surprised when he looked them up on his computer and found that they were paying 2.75% APR for only $15,000 in a simple personal money market account. Not bad. Not bad at all. Even better, that rate jumps to 3.00% APY for balances above $25,000 and 3.25% APY above $75,000. All with FDIC insurance.

As far as I can tell, Sovereign Bank is in decent financial shape. They are a regional bank here in the Northeast. The main consideration is that my cash will be FDIC insured. Even if the bank were in great shape today, who knows what shape they might be in six months from now.

Tomorrow morning I may go ahead and open the accounts and later move $15,000 from my Fidelity account. I'll continue to do my primary "banking" through Fidelity (especially since I do get a semi-decent interest rate for core cash that rises and falls each month as my income flows in and I pay my bills). I'll see how well the Sovereign account works out and how the interest rates evolve and then consider moving more of my Fidelity cash a few months down the road.

The real bottom line is that I earn 2.60% 7-day yield at Fidelity versus the prospect of a 3.00% APY (equivalent to about 2.94% 7-day yield) at Sovereign with FDIC insurance to boot.

Convenience is still a big factor for me, but it looks as if I can in fact get a really sweet deal on a bank account without a lot of hassle.

In any case, the allure of money market funds is fading quickly. It will be interesting to see if banks recognize and exploit this historic opportunity.

Even so, I still find it annoying that Fidelity offers me a more attractive deal for "checking" than any of the banks do. The advantage for the banks is that there are still some traditional "banking" features that Fidelity does not offer.

The bottom-bottom line here is that I am still very comfortable with keeping my cash at Fidelity in money market funds, but banks are once again a competitive option for storing cash. At least this is the case today.

How all of this will evolve in the coming months and years (or even weeks and days) remains to be seen.

-- Jack Krupansky

Confidence in Fidelity money market funds

Counter to my disdain for Wall Street, I have a lot of confidence in Fidelity Investments in general, and in their money market funds in particular. I have a big (for me) pile of cash in the Fidelity Select Money Market fund (FSLXX), which is currently at the top of the heap for yield for retail money market mutual funds at 2.60%, as well as using the Fidelity Municipal Money Market fund (FTEXX) for my core cash at Fidelity. Even if they on occasion have modest exposure to the debt of companies in the news, they simply do a great job of managing risk and getting a decent return at the same time. And even if Net Asset Value (NAV) were to technically fall below $1.00, I have confidence that Fidelity has the resources to make good on a $1.00 NAV.

I have read all of the news reports on the Reserve Primary Fund and still do not quite fathom why there was such a huge run on that one fund. Their exposure to Lehman was only about 1.3% before the run started. That hardly seems to be the kind of exposure to cause 65% of assets to head for the exits. Of course, panics are never very rational. Still, there must be some very juicy story about rumors that caused such a massive, concentrated exodus.

One other twist that I know about: a lot of us paid estimated taxes on 9/15, so that had to be something of a factor in withdrawals on Monday.

I also read that TD Ameritrade customers may have an exposure to the Reserve fund. Maybe TD Ameritrade or similar organizations or some retirement fund managers might have made policy decisions for a broad class of retail customers that caused major withdrawals from the Reserve Primary Fund even without the individual investors doing anything at all. It just seems odd to me that a large number of investors would have made $40 billion in withdrawals so quickly (two days) from one fund, without news of the run in progress coming to light.

In any case, I am confident that with Fidelity this is not a very likely scenario.

-- Jack Krupansky

Cleaning up the sewer on Wall Street

I read in an email alert from Morningstar that:

"The carnage in the financial markets has taken down several pillars of the U.S. financial system, including Bear Stearns, Lehman Brothers, and Merrill Lynch, and currently threatens Morgan Stanley and Goldman Sachs," said analysts at Action Economics.

My reaction: Good riddance! ... and why is it taking so long to take out the remaining two so-called "pillars"??!!

I am not a big fan of big banks, but the self-serving profiteering on Wall Street and their lack of interest in providing decent services to Main Street is a blight on the concept of capitalism. I would much rather see investment banking under the thumb of traditional bankers rather than the pirates we currently have operating on Wall Street. I actually hate to cheer on Chase and Bank of America, et al, but Wall Street really gives me no choice. The terms "investment bank" and "brokerage firm" seem destined for the dustbin of financial history.

I am also not a big fan of short selling let alone naked short selling, but if that is what it takes to obliterate the so-called "pillars" that have been plaguing the financial system for the past decade, so be it! Actually, I would not go that far, but given the reprehensible behavior of investment banks on Wall Street, it is at least tempting.

-- Jack Krupansky

Cleaning up the sewer on Wall Street

I read in an email alert from Morningstar that:

"The carnage in the financial markets has taken down several pillars of the U.S. financial system, including Bear Stearns, Lehman Brothers, and Merrill Lynch, and currently threatens Morgan Stanley and Goldman Sachs," said analysts at Action Economics.

My reaction: Good riddance! ... and why is it taking so long to take out the remaining two so-called "pillars"??!!

I am not a big fan of big banks, but the self-serving profiteering on Wall Street and their lack of interest in providing decent services to Main Street is a blight on the concept of capitalism.

I am also not a big fan of short selling let alone naked short selling, but if that is what it takes to obliterate the so-called "pillars" that have been plaguing the financial system for the past decade, so be it! Actually, I would not go that far, but given the reprehensible behavior of investment banks on Wall Street, it is at least tempting.

-- Jack Krupansky

Mortgage application up for both refinance and purchase

The Mortgage Bankers Association reports that mortgage applications for both refinance and purchase are up strongly. The four week moving average for the seasonally adjusted Market Index is up 13.5%. Lower Treasury yields and the conservatorship of Fannie Mae and Freddie Mac are helping to push mortgage interest rates down. This is very good news.

Even though housing starts are down, there are plenty of "For Sale" signs waiting for buyers. In fact, it is probably good news that starts are down until the housing inventory numbers fall a lot further.

-- Jack Krupansky

Chrome issue: Sharebuilder web site does not yet support Chrome

One of the issues that will constrain me from fully switching to the new Google Chrome Web browser is that the Sharebuilder investment Web site does not support Chrome, yet. The Web site has a list of supported browsers and eventually I am sure they will support Chrome, but for now the site displays the message "Please note: you are using a browser that is not supported for use on the ShareBuilder site. Please upgrade now." Actually, I think the site does work fine with Chrome, but when money is involved you want to be especially careful.

-- Jack Krupansky

Tuesday, September 16, 2008

Monthly GDP for July fell by -0.4% (-5.0% annualized), Q3 tracking for a 1.5% annualized gain

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee (NBER BCDC) uses to judge recession start and end dates, fell moderately in July (-0.4% or -5.0% annualized) , according to Macroeconomic Advisers (MA). The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Cycle says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As as Macroeconomic Advisers put the report for June:

Monthly GDP declined 0.4% in July.  Growth of monthly GDP was revised up for June to 1.0% from 0.7% previously.  The decline in monthly GDP in July was roughly accounted for by declines in PCE and net exports.  The level of Monthly GDP in July was 2.0% above the second-quarter average at an annual rate.  Our latest tracking forecast of 1.5% growth of GDP in the third quarter assumes average monthly declines of about 0.1% per month in August and September.

Although GDP declined in July, it was still higher than May and January, the previous peak months before June. Regardless of the doom and gloom promoted by the Democrats, this economy is still refusing to fall into an outright recession.

It is curious that MA is forecasting that monthly GDP will decline for three consecutive months (July, August, and September), a full quarter, but still result in the quarter being higher than the previous quarter. This is simply because the quarterly number is the average for the quarter rather than the ending month of the quarter. The June peak was undoubtably also spiked with the tax rebate checks. It is actually heartening that Q3 will be as strong as MA forecasts, even without the direct influence of those rebate checks.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

Monday, September 15, 2008

AIG rescue in the works

It is not quite clear at this moment what a "rescue" or bailout of AIG might look like, but it is abundantly clear that some form of bailout is absolutely needed, and needed ASAP. Whether it comes in the form of direct aid from the Federal Reserve or the U.S. Treasury or a consortium of the remaining Wall Street banks, or a shuffling of assets between AIG subsidiaries, it does need to happen. AIG is not just another "bank", but is an insurance company that many people and businesses are absolutely dependent upon. Its guarantees for derivative constracts are a big concern.

Of course, all of this begs the question of what AIG, an insurance company, is doing by being so synchronized with Wall Street banking. The core problem is that AIG got involved way over its head in underwriting of risks that nobody on Wall Street or anywhere on Planet Earth had a clue how to evaluate. Even now, the best estimates are probably that a lot of these risk evaluations will probably eventually come back down to earth, but it the heat of battle liquidity is the big concern. This is looking more like the same problem that LTCM had back in 1998, where eventually their risky bets did work out, but only after they got a massive infusion of capital to give them enough liquidity to weather the storm.

-- Jack Krupansky

Gasoline prices headed much lower - after the "Ike panic" fades

Although there has been some panic about Hurricane Ike causing a spike in the retail price of gasoline, much of that is grossly overblown and retail gasoline prices are actually headed much lower in the near future. I see a  frightening headline in The Washington Post on an article entitled "Gas Prices Continue to Rise as Hurricane Destroys Oil Facilities." Yes, according to AAA, prices have spiked by about 15 cents or so, but what is this about "Destroys Oil Facilities"? Have the majority of oil refineries, ship terminals, and pipelines really been "destroyed"??!! After all, I read elsewhere that Wall Street was relieved that so little damage was done. The Post says "federal officials said a preliminary survey of damage found that a number of production platforms in the Gulf of Mexico had been destroyed by Hurricane Ike." But later this same article says that "It was unclear yesterday how badly the storm had crippled the Gulf oil infrastructure. Eileen Angelico, a spokeswoman for the Interior Department's Minerals Management Service, said flyovers Saturday and yesterday showed 10 destroyed oil platforms. There are 717 manned platforms in the Gulf, and as of yesterday 591 of them had been evacuated in anticipation of the storm." 10 out of 717 does not sound like the kind of major disaster that the headline seems to be proclaiming. And then, finally, the article closes with the truth:

... only four of 17 oil refineries on the Texas coast from Corpus Christi to Beaumont remained closed, six were ramping up and the rest were operational, Kolevar said.

Operators of two major pipelines that serve the Eastern Seaboard, the Plantation and Colonial pipelines, said they were able to resume operations yesterday carrying diesel, heating oil, jet fuel and gasoline from the Gulf Coast at reduced rates.

Exxon Mobil said power was restored to its Baytown facility and that a start-up plan was being developed. Its Beaumont facility remained without power. Bill Day, a spokesman for Valero Energy, the nation's largest refiner, said it would take several days for power to be restored to its Houston, Texas City and Port Arthur refineries. Shell said last night that two of its refineries had not resumed operations while two others were operating on a limited basis.

Nonetheless, assessment crews found no significant structural damage to the Valero facilities. Exxon Mobil said damage appeared to be limited at its Baytown complex. Shell, too, had only moderate damage to some of its facilities, including its Pasadena terminal, which it reopened. Its Houston terminal, however, did sustain some damage and was being assessed further, the company said.

In other words, there is no major disaster at all for "oil facilities"! Yes, some offshore rigs may have been "destroyed", but all of the important facilities seem to be in decent shape.

In fact, Wall Street agrees with my assessment, with October wholesale gasoline futures down over 16 cents to $2.6034 per gallon. That will translate into a retail price of $3.20 to $3.25 a gallon, which would be 60 cents below the price of $3.842 reported by AAA today. A big part of that price gap is good old-fashioned price gauging, some actual short-term regional supply disruptions, and a good measure of outright uncertainty, but the overall tone of the Post article did little to enlighten consumers or businesses or policymakers.

And Wall Street has the price of October crude oil futures down $4.76 to $96.42 a barrel.

Neither the facts on the ground nor the view of the markets justify the very negative tone of the Post article.

My conclusion: It is an election year and The Post is improperly engaging in fearmongering to promote its own political interests.

The article is in fact filled with a lot of useful facts, but the overall tone and style of presentation is decidedly not enlightening to the casual reader or browser of headlines.

-- Jack Krupansky

Saturday, September 13, 2008

Bank of America and Lehman Brothers?

I am leaning towards the idea of Bank of America acquiring Lehman Brothers. Although there are issues with any deal of this nature, I think this combination makes sense, particularly given the interest in real estate of both parties. A big benefit is that the operations of Lehman can be kept mostly intact. And, BofA would instantly have the best access to a lot of the "excess" talent that Lehman may need to shed in any deal.

My view was at least partially informed by an article in The New York Times by Ben White and Eric Dash entitled "Lehman and Its Staff Await Next Step."

One interesting aspect of the current financial turmoil is that the concept of an "investment" bank separate from a traditional "bank" bank is losing appeal very rapidly. Sure, investment banking is rather different from retail banking, but does that distinction really need separate companies for dealing with the different aspects of commercial financing? Why should "lending money" require different kinds of institutions? Besides, Wall Street investment banks have been edging into commercial lending anyway. OTOH, mashing "bank" banks and businesses in the "securities" industry into the same lump will present interesting turf issues for the Federal Reserve and SEC. Looking further out, the whole "stock" market and "bond" market is likely to evolve in a manner that we are as yet unable to even imagine.

The biggest looming problem is that Wall Street is kind of the "wild west", but consumers want "bank" banks to be rather boring and ultra stable and predictable. How does any executive team make those two work together?

-- Jack Krupansky

Friday, September 05, 2008

ECRI Weekly Leading Index indicator rises moderately but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately (+0.71% vs.-0.29% last week and seven consecutive weeks of decline) and the six-month smoothed growth rate rose slightly (to -11.7 from -11.8), but that is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth near a 28-year low, a business cycle upturn remains out of sight."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

Given that the WLI has deteriorated so much in the past two months, I will increase my own forecast for the probability of recession, again...

I am revising my personal assessment upwards to a high level confidence that there is no more than a 80% chance of recession (unchanged) and a moderate level of confidence that there is no more than a 50% chance of recession (up from 45%) based on the fact that we are seeing some hints of moderation as well as hints of some worsening mixed in with all of the gloomy news.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signaling to me, as well as ECRI's assessment and recession "call."

The bottom line is that the economy remains at "the edge" of a recession, but persists in refusing to overtly "fall" into recession.

-- Jack Krupansky

Employment continues recessionary trend

Although technically the overall economy is still not in a recession (GDP is still growing, personal income is still not falling, and industrial production is rising again after a short decline), employment is clearly on a recessionary trend. Total employment has declined and unemployment insurance claims are at a recessionary level.

There are actually two separate stories here, employment and unemployment. The overall economy is still growing and is adding new jobs at a semi-decent pace. Unfortunately, the "old" economy is shedding old jobs at a faster pace. As a result, the number of people who have lost  jobs over the past year is somewhat higher than the net decline in employment.

Actually, there is a third story as well, that the U.S. population continues to grow and health care is helping to keep more people alive and in the labor pool, so the pool of available workers continues to grow even as the economy sheds "old" jobs.

The weekly unemployment insurance initial claims number is above the 400,000 rule-of-thumb threshold that traditionally indicates that the economy is recessionary. Initial claims have been above that 400,000 threshold for seven consecutive weeks, plus a week at the end of June. Being only a rule-of-thumb, this is not a slam-dunk indicator of a recession, but if we do not see some significant improvement over the next month, it will be difficult to deny that this data series is pointing in the direction of a recession. One complication with interpreting this data is that some percentage of the "initial" claims are the result of federal unemployment insurance benefits for people who have been unemployed for some time.

To me, it still only feels as if we are only at the "edge" of a recession, and not fully off the cliff. Even the latest employment report shows only a 84,000 decline in payroll employment. This year we have not seen even a single month with a true, hard-core recessionary decline in the hundreds of thousands.

Nonetheless, employers are acting as if they are experiencing a recession.

The bottom line is that total net job losses are still relatively mild for a traditional recession, but are still at least superficially on a recessionary track.

The real bottom line is that the "old" economy is clearly in recession and the "new" economy is keeping the overll economy from experiencing an overall, true, hard-core recession. Alas, the "new" economy is still not large enough to completely eclipse the "old" economy.

-- Jack Krupansky