Saturday, October 24, 2009

OT: Microsoft's Founding Members

I found this picture in the article by Times Online (U.K.). The article is about how Bill Gate's Gates Foundation is funding "think-outside-the-box" projects by young researchers.

But the picture... "Would you have invested?" Good question.

Someone did, and many others invested in countless other start-ups cropping up in the late 1970s. Apple started back then. I personally know people who started their PC and/or software businesses around that same time period in Silicon Valley and got their businesses funded by angel investors and venture capitals. Any of them could have been a Steve Jobs or a Bill Gates, if things had turned out slightly differently.

Despite all the economic (political, social, you name it) doom and gloom, I'm hopeful, when I look at this picture, that somewhere some crazy people will start creating something new and disruptive. Just when everyone writes the U.S. off.

Thursday, October 22, 2009

Borrowings from Fed Down, Reserves Way Up what gives?

The Federal Reserve chairman Ben Bernanke, when he outlined his so-called "exit strategy" back in July, said that the bank reserves at the Fed would naturally decrease as the various loan programs winded down. (If you want to review his strategy, here's my post from July.)

Well, the Fed's various loan programs have been winding down. At their peak, the total borrowings by depository institutions (=banks) exceeded $400 billion. They have been flat about $100 billion since April this year. Have the bank reserves come down?

Answer: Not at all.

I created the graph using St. Louis Fed's FRED. The red line is the bank reserves. The blue line is the total borrowings by the banks from the Fed. As you can see, the bank reserves recently spiked to a new high to $1 trillion. In the latest Federal Reserve Statistical Release H.4.1 Factors Affecting Reserve Balances (10/22/09), the bank reserves are recorded at: $1,034,078 million, up $52,459 million from last week.

$1 trillion minus $100 billion equals $900 billion. How has this $900 billion in the bank reserves been earned? What securities could the banks have given to the Fed in exchange for the credit to their reserves, outside those lending programs that are winding down?

Scanning the Fed's Statistical Release, my eyes stopped at these line items:

Federal agency debt securities (2) 137,866 + 3,320
Mortgage-backed securities (4) 766,543 + 63,970
The first column is the total, the second column is the change from last week. If you add the two numbers in the first column, you get: $904,409 million. Rounding it up, $904 billion.

Oh what a coincidence.

Is it possible that, as the lending programs wind down and the banks takes the collateral back, the banks are selling them back to the Fed as part of the Fed's permanent open market operations (POMO)? So now it's not a loan any more, the sale has been made. The banks have sold the agency bonds and agency-backed MBS that hardly anyone in the world wants to the Federal Reserve, and in exchange they got their bank reserves credited. Probably at the face value, good as cash.

I may be missing some important things and I could be totally wrong and it is just a coincidence, but if this is what has happened, then all the Fed has done is to shift temporary assets (loan collateral) to permanent assets backed by the government.

At least, we now know that Bernanke's "exit strategy" No.1 didn't work. According to Zero Hedge, the New York Fed experimented on another of his strategy to use reverse repo with the primary dealers and the experiment reportedly ended in disaster.

The only way to effectively shrink the balance sheet would be to sell long-term securities in the open market. Treasuries, agency bonds and MBS, which account for $1.678 trillion of the Fed's $2.230 trillion balance sheet.

Why was Mr. Bernanke so eager to be reappointed to be the Fed chairman, given this practically impossible task?

Unless the Fed's interest is not to save the system or the economy, but save its credibility... (One Fed board member said as much, remember?)

Or, unless someone has decided that the proverbial "bad bank" is to be the Federal Reserve, never to fail...

OT: Bug Is Fixed on Comment Section

For those of you who got frustrated with the comment section, I've fixed the underlying HTML code so that you can now scroll down to get the word verification and "Post Comment" button. It should work now.

It turns out to be a very common Blogger bug, but Google hasn't bothered to fix it. If you have the same problem on your blog, here's the site I went to.

The Real Blooger Status - What Blogger won't tell you

(Thank you for the fix, guys.)

They've Lost Control Part 2

President's man Robert Gates loses it in Japan.

U.S. pressures Japan on military package
(John Pomfret and Blaine Harden, 10/22/09 Washington Post)

"Worried about a new direction in Japan's foreign policy, the Obama administration warned the Tokyo government Wednesday of serious consequences if it reneges on a military realignment plan formulated to deal with a rising China.

"The comments from Defense Secretary Robert M. Gates underscored increasing concern among U.S. officials as Japan moves to redefine its alliance with the United States and its place in Asia. In August, the opposition Democratic Party of Japan (DPJ) won an overwhelming victory in elections, ending more than 50 years of one-party rule.

"For a U.S. administration burdened with challenges in Pakistan, Afghanistan, Iraq, Iran, North Korea and China, troubles with its closest ally in Asia constitute a new complication.

"A senior State Department official said the United States had "grown comfortable" thinking about Japan as a constant in U.S. relations in Asia. It no longer is, he said, adding that "the hardest thing right now is not China, it's Japan." "

(You can read the entire article by clicking on the link above.)

If the U.S. considers Japan as its closest ally in Asia, it sure hasn't treated it as such. To the U.S., Japan is not an "ally"; it is just a vassal state to do its bidding, whether it is an economic policy or foreign policy. The U.S. has "grown comfortable", so much so that it dispatched the new ambassador to Tokyo who is a virtual "nobody" in the eyes of Japanese, many of whom took it as an insult.

Then, in comes DPJ (Democratic Party of Japan, many of whose members are ex-LDP politicians after all) and says it wants to reconsider the alliance with the U.S., including its military assistance to the U.S. (refueling operation for the U.S. on Indian Ocean, relocation of the Marines helicopter base). The new ministers of the Hatoyama administration, o horror of horror and indignation to the American counterparts, dare talk back.

Flipped out, the Obama administration, through Mr. Gates, tells Japanese of "serious consequence". Like what? Invade Japan?

Let's think about the logic here. The Obama administration clearly considers China as "threat", and demands that Japan, a country sitting right across from China whose trade with China and the rest of Asia is bigger than that with the U.S., be part of the U.S. instead of Asia.

There may be more to this news, as can be inferred from Mr. Gates' behavior in Tokyo. According to the article, he skipped dining with defense officials there, and skipped the welcoming ceremony at the Defense Ministry. What looks like a childish snub to protocol-conscious Japanese coming from an experienced player like Mr. Gates makes me wonder if Japanese are finally kicking the U.S. troops out of Japan. (That would be extremely popular with Japanese people.)

Wednesday, October 21, 2009

They've Lost Control

All President's men (and women).

Obama's Pay Czar will cut the salaries of top executives of the firms that have received the government bailout fund by whopping 90%. Can someone tell me why anyone should listen to him? He is not an elected official, only appointed by the President. What if you don't obey his orders? Is it a crime not to obey an appointed official? What would be the penalty?

And the stock market tanked on the news, led by (hold your breath) financials.

U.S. dollar continued the descent, hit the 52-week low against Euro before it reversed hard upward as the stock market tanked. Not a peep from Geithner or Bernanke or their boss.

Not surprisingly, crude oil and gold went higher.

House Democrats are calling "public option" "Medicare for Everyone" and hope everyone agrees that it's a good thing.

And in Nancy Pelosi's mind, $900 billion is a chump change, and that is somehow supposed to reduce the deficit. (Hello, anybody up there?)

In Iraq, U.S. soldiers are getting so bored they've started a book club. (Why can't they come back home?)

But over Afghanistan, even the Defense Secretary is getting impatient for Obama's slow decision. (No, Mr. Gates, President can't be bothered now. He's busy having a grand time partying at the White House.)
Senator Lamar Alexander is fed up with the White House's "street-brawling" tactics against critics and opponents. (What else do you expect from Chicagoland?)
Rasmussen's Daily Presidential Tracking Poll: Obama's ratings sink again, approval index nearing all-time low.

Republicans in House Committee of Ways and Means have this to say about Obama's $787 billion stimulus package (remember that one?). Let's just blame it on George Bush, shall we? To be fair, the administration has said the bulk of money will go out next year (just in time for the mid-term election, what a coincidence). Then I'm sure 6 million new jobs will be created to make up for the 7-month loss of 2.7 million jobs. (Not.)

Well, we just have to have another bigger and better stimulus. How about $1 trillion every quarter?

Or is it time to "wag the dog"?

Obama's Pay Czar Working the Market

The stock market collapsed in the last hour of trading Wednesday when this news came:

3:26 PM The government will reportedly order deep pay cuts from the biggest bailout recipients in a plan the Treasury will announce in the next few days. The seven companies that got the most assistance will have to cut cash payouts to their top 25 execs by an average of 90% - to be replaced by stock that they'll be restricted from immediately selling - and cut their total compensation by 50%. [from Seeking Alpha Market Currents]

Dow Jones Industrial Average went from 20 points gain to 80 points loss (100 points reversal) in less than 20 minutes on a heavy volume.

If this isn't the blatant government intervention in the market, I don't know what is. Good job, Mr. Feinberg. Lucky you are not accountable to anyone but your President.

Tuesday, October 20, 2009

Showdown in Chicago, to Counter "Tea Party" Goers?

Counter or co-opt...

This is a curious site I ran into on an online message board.

Showdown in Chicago - Put People First!

The home page has this to say:

"The same financial institutions that caused the economic crisis and took billions in taxpayer bailouts are back to earning incredible profits. Meanwhile, Americans face shrinking pensions, rising foreclosures and unemployment, state budget cuts, predatory lending, outrageous overdraft fees, and sky-high credit card interest rates.

"The American people want oversight, accountability and common-sense financial reform NOW. This is the classic David vs. Goliath fight, with Wall Street spending millions and millions on lobbying to defeat reforms that would protect the American people and our economy.

"JOIN US on October 25-27 for a series of demonstrations when thousands of Americans - retirees, farmers, workers, homeowners, renters, students, clergy, and small business owners - come together on the streets of Chicago to demand a banking system that puts the American people first and a Congress that makes it happen! Take a look at the Showdown schedule of events, stay informed about event details and join our mailing list, and fill out the Showdown inquiry form to tell us when and where you want to plug into the fight!"

It sort of sounds like it has borrowed a page from Tea Party movement that the left-leaning sites and blogs have attacked. So I clicked on "About Us" page, and I found this list as their "allies":

My eyes were drawn to AFL-CIO and SEIU. Hmmm.

Then I looked at "Our Solution" page. Top of the list is "Modernize the Community Reinvestment Act (CRA)". They have now removed the link to their detailed solution proposal, but when I first looked at the page it had such a link and I copied it:

The paper has this as the title:

The site turns out to be National Training and Information Center (NTIC), based in Chicago. It is "a national organizing, policy, research, and training center for grassroots community organizations dedicated to building power to reclaim our democracy and advance racial and economic justice." In other words, a community organizer.

Among their "Successes", they proudly list:

  • Spearheaded efforts to pass the Community Reinvestment Act and the Home Mortgage Disclosure Act in the 1970s – often referred to as the most important economic justice public policy for neighborhoods.
  • Lead a successful and productive partnership with Fannie Mae to develop mortgage products to meet the home mortgage needs of underserved neighborhoods. To date, this 8-city partnership has resulted in $4 billion in loans to families.

In other words, they are responsible, along with the government regulators/agencies and banks, for the subprime debackle that triggered the worldwide financial crisis that tanked the stock markets and economies into recession.

And "National People's Action (NPA)" turns out to be another community organizer.


Showdown in Chicago "Our Solution" page had another link, which they later removed. It was about "Modernize Home Mortgage Disclosure Act (HMDA)", and it had the same red header with red stars. I suspect that "Solution" was also a NPA paper.

Then I saw Michael Moore as one of their "Allies".


My tentative conclusion: This may be an answer from the administration's supporters - labor unions, community organizers (if not the administration itself) to "right-wing" "racist" people of all ages who descended on Washington DC in September to hold a gigantic "Tea Party", protesting all sorts of government policies from healthcare reform to gun control to war in Afganistan.

I don't know whether all these "Allies" of Showdown in Chicago are aware of their affiliation.

Lastly, why October 25-27 for "series of demonstrations"? That's when the American Bankers Association holds its annual meeting in Chicago Sheraton Hotel. So this organization (Showdown in Chicago) could be just a one-time setup for the occasion.

But when I saw that paper's header in red, with words like "People's Action" and two red stars, and recalling one of the White House communication director's favorite philosophers (Mao Zedong), I have to say it made me feel uneasy.

US Dollar to 50 Yen, Says Sumitomo Strategist

and the U.S. economy to double-dip in 2010.

Somehow I missed this cheerful news when it hit the wire, but here it is:

Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says
(Shigeki Nozawa, 10/15/09 Bloomberg)

"Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

"“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

" “We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said." [emphasis is mine.]

If anyone in the world knows about the futility of currency intervention, it must be Japanese. Bank of Japan's massive intervention to stem the rise of yen against U.S. dollar only profitted the currency traders.

According to the article, Mr. Uno bases his prediction on the Elliott Wave theory that tells him the dollar is heading for the trough of a 40-year super-cycle that started in 1971:

"The dollar is now at wave five of the 40-year cycle, Uno said. It dropped to 92 yen during wave one that ended in March 1973. The dollar will target 50 yen during the current wave, based on multiplying 92 with 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 yen level seen in the second quarter of 2007, according to Uno."

(You can read the entire article by clicking on the link above.)

I don't profess to know enough about the Elliott Wave theory, but I think "wave five" is the last wave before the new cycle begins. What's interesting to me is that Robert Prechter, president of Elliott Wave International called for a multi-year rally of the dollar back in August, looking at the same wave five. Mr. Prechter thinks wave five is already over, and Mr. Uno thinks it continues.

If you look at the long-term monthly chart of the U.S. dollar index, the target price seems to be even lower than Mr. Uno's. The chart is from the post I wrote back in May. It looks to me like a massive "head and shoulders" formation with neckline at 80, with the "right shoulder" already formed from 2004 to 2007 and the neckline is already broken once in 2008. A technical rebound from that low of 72 was to be expected, and it did happen. The neckline was broken again in July, and the index has never regained 80 since.

The price target of this head and shoulders pattern would be the neckline minus the height of the head: 80 - (120-80) = 40

By the way, the U.S. dollar index's current decline, which started in early March, coincides with the stock market rally. Almost a mirror image. Also, the dollar index decline (and stock market advance) seems to coincide with the unwinding of the Fed's central bank liquidity swaps. (See my post.)

Today, U.S. dollar is having a sharp rebound, as the stock market is dropping fast. Currently, Dow Jones Industrial Average is down 87 points, threatening to break 10,000-mark. Nasdaq is down 17 points to 2,158, S&P 500 down 9 points to 1,088. The U.S. dollar index is up 0.235 point to 75.745.

Monday, October 19, 2009

Senate Health Care Bill (S.1796) Is 1,502-Page Long

as posted by Senate Finance Committee.

Finance Committee bill has been filed (10/19/09 Politico)

Who is going to read this monstrosity? Just like there were people who read the House bill (H.R. 3200) and post the summary on the Internet, I'm sure someone's already on it.

This bill is being merged with the Health Committee's bill, apparently in behind the scene negotiation, as Politico's UPDATE 3 indicates [emphasis is mine]:

"UPDATE 3: It's important to remember that the bill won't exist in this form for long. Senate Majority Leader Reid and Sens. Max Baucus and Chris Dodd along with senior White House aides are merging the Finance and Health Committee legislation into one bill that will be considered on the floor of the Senate. The behind-closed-doors dealings have drawn criticism from Republicans, particularly because President Obama had promised a transparent process and pledged to negotiate the health care bill on C-SPAN."

Housing Boom in London (No, This Is Not 2007)

with low inventory, seller's asking price all-time high.

More green shoots.

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record
(10/19/09 Bloomberg)

"Oct. 19 (Bloomberg) -- London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said.

"The average cost of a home in the capital rose 6.5 percent, the most since records began in 2002, to 416,157 pounds ($680,000), the owner of the U.K.’s biggest residential property Web site said today in a statement. Prices climbed 2.8 percent across Britain as transaction levels dropped by half from 2007."


"“There’s an acute shortage of property,” said Robert Green, a real-estate agent at John D Wood & Co. in Chelsea, southwest London. “Demand is very strong. Also mortgage availability is improving. It’s unlikely we’ll see enough supply come to the market to see prices falling.”

"Demand from foreign buyers is also helping drive up prices in central London due to the weakness of the pound, Green said. The U.K. currency has dropped about 17 percent against the euro in the past year."

(You can read the entire article by clicking on the link above.)

Major Bank Earnings Reports This Week

Morgan Stanley and Wells Fargo report this week.

Tuesday October 20, 2009 (before market open)

  • Bank of New York Melon (BK): Estimates: 0.60 0.467 0.30 (High Mean Low)
  • Blackrock (BLK): Estimates: 2.17 1.901 1.68 (High Mean Low)
  • State Street (STT): Estimates: 1.14 1.022 0.80 (High Mean Low)
Wednesday October 21, 2009 (before market open)
  • Morgan Stanley (MS): Estimates: 0.56 0.286 0.11 (High Mean Low)
  • Wells Fargo (WFC): Estimates: 0.50 0.364 0.04 (High Mean Low)
  • US Bancorp (USB): Estimates: 0.33 0.267 0.17 (High Mean Low)

Sunday, October 18, 2009

SEC Names 29-Year-Old Goldman VP as Its COO

I thought it was a joke at first.

Goldman Exec Named First COO of SEC Enforcement
(10/16/2009 AP via NY Times)

"WASHINGTON (AP) -- A Goldman Sachs executive has been named the first chief operating officer of the Securities and Exchange Commission's enforcement division.

"The market watchdog agency said Friday that Adam Storch, vice president in Goldman Sachs' Business Intelligence Group, is assuming the new position of managing executive of the SEC division.

"The move came as the SEC has been revamping its enforcement efforts following the agency's failure to uncover Bernard Madoff's massive fraud scheme for nearly two decades despite numerous red flags.

"Storch, who will be responsible for project management and operations, will report to SEC Enforcement Director Robert Khuzami." (You can read the rest of the article by following the link above.)

AP's article doesn't say how old Mr. Storch is. But Bloomberg's article does, which says he is 29-year old. But Business Insider dug deeper than AP or Bloomberg, and they came up with a very youthful photograph of Mr. Storch at this link:

FOUND: Photo of Adam Storch, 29-Year-Old Goldman Guy Who Is Now COO Of The SEC (John Carney, 10/16/09 Business Insider)

If your confidence in SEC is inspired by looking at the photo, please let me know. I will sell you Golden Gate Bridge.