The Short End of the Long View

April 30, 2012
by Edward H. D'Alelio

Déjà vu all over again?… This was one of Yogi Berra’s famous sayings and it applies to European contagion. The GDP numbers from Europe verify that recession is underway and Spain has started to implode a bit. Funding costs are rising and austerity in Europe is starting to have a destabilizing effect on  things, including the regime change in Holland and increased uncertainty around the re-election prospects of France’s Sarkozy — a chief architect in the bailout in Europe.

The difference this time around is that the markets are ignoring it all and “cherry picking” the bits of good news on earnings while ignoring the news from Europe and the below-par GDP news back here in the USA.   Stocks have come a long way very fast, and earnings do not feel like they will keep pace. The Fed is in a bit of a box currently — GDP is sluggish, but not enough to make the case for QE 3.   Meanwhile, inflation has been sneaking up, mainly driven by oil and food prices.

How long this bullish sentiment will last is anyone’s guess. While stocks do not look expensive by historical measures, the headwinds are growing..


Buyers of last resort…The news is out on who is buying all of those US Treasury bonds. It is not the Chinese. No — it is the same government who issued the bonds that is buying them back (in the form of the Federal Reserve). In 2011, the Fed reported buying back 61% all of all US Treasury issuance. It is also reportedly bought back 90% of all US Treasury long bonds!  Say WHAT?? Yes, you heard that right, 90% of all long US Treasury bonds.

If this is not debt monetization on a large scale, what is? The U.S. is not the only one playing this shell game. The ECU will be forced to buy Spanish debt and any other country sovereign debt to maintain the semblance of an orderly market for sovereign debt. It Sounds to me like the case for gold, silver and hard assets is better than ever.


Real Tax Rates on the Rich..Never let the facts get in the way of a good story. The Obama spin-meisters would have us believe that runaway spending is not the real problem (after all, if the government can issue debt to pay for that and then effectively issue the currency to pay for it…Who really cares?) It’s the fact that the wealthy simply have not paid their fair share of taxes, hence it is a revenue problem.

In other words, if we can only get the hard working, successful taxpayers (those terrible 1% people) to pay their “fair share” we would not have this problem. The American tax code was designed to be a progressive tax code. The popular press has convinced us that the tax is regressive because people like Mitt Romney (and now Scott Brown and others) are not paying the maximum tax rates.

Recent data from the IRS prove this is not the case. There is a tiny sliver of taxpayers, those earning over $10 million a year (roughly 8,000 of the total tax paying domestic base) that pay lower rates than otherwise indicated by the maximum tax rates. In fact, the majority of the wealthiest are paying a higher tax rate now than was the case in 2008.

New IRS data shows that the top one percent pays a higher tax rate than any other group. This now includes all tax payers earning over $1.0 million (not including the 8,000 uber rich as noted above).

So the uber rich (Forbes 400 guys) get a break, but they still pay a higher rate than any other group. Most of the top earners earn their W-2 as salaries. Of course the Obama camp can still argue that the top rate is not high enough, but the system is progressive. In any case, clearly the problem is not one of  revenue but rather one of runaway spending.

All attempts to divert voters’ attention from this fact by waging class warfare will come to no avail whatsoever until government spending is reigned in. So far the tea leaves do not look good for this problem to be recognized and dealt with effectively…


April 2, 2012
by Edward H. D'Alelio

Structural Unemployment..The WSJ has run several interesting articles on this topic lately. One addressed unemployment with the male population in their prime working years and the other the longer-term (or chronic) unemployment in this recession. In both cases, the aggregate data masks a growing reality which is likely causing this Fed a great deal of concern. The lag in employment at this phase of the current recovery provided the basis for Bernanke’s recent comments regarding a potential QE3.  These comments helped moved the market higher in the past week or so.

The longer-term unemployed tend to fragment from those actively seeking work. The term used lately is hysteresis.  Borrowed from chemistry, it implies that the past affects the present. In this case, the longer a person is out of work, the more this seems to influence his or her ability to get a job. This phenomenon has long been observed but rarely explained in the past. It could be just the stigma of having been out so long hindering one’s ability to get a new job. But in this cycle, the phenomenon seems far more pronounced.

It could be that there is such structural shrinkage in jobs connected to a previously dominant industry, such as housing, that a person with those skills has little to offer in growing sectors with new employment, such as wireless technology.  Most recoveries imply cyclical factors in re-employment, but those blur with secular if the basic business does not come back with vigor. This seems to be the case in a lot of industries in this recession.

It is not clear if stimulative economic policies will have much if any effect on chronically unemployed. With fiscal restraint in place, the only lever is left with the Fed, making the case for QE3 that much closer to launch..

MF Global…Bidding in the secondary market for MF Global claims has really heated up.  A number of institutions are now willing to pay 87 cents on the dollar and assume the recovery risk and timing issues associated with the securities. Perhaps this is due to the current low return environment or perhaps there is a clearer path to recovery for MF Global customers who lost their money when it was swept away from them in the chaotic final days of the firm.

This is a much higher price level than was envisioned several months ago. It could be that the counterparties may be forced to make restitution in a bigger way than was thought at the start of the fiasco.

In the meantime, emails now imply that Corzine gave ‘direct instructions’ to effectively steal client funds. This from the man who testified that he had no idea what happened to the monies. It does not look good for Mr. Corzine…

March 19, 2012
by Edward H. D'Alelio
1 Comment

‘Financial Repression’ and 1099’s…Financial Repression is a concept that was articulated in the 1970’s but has come back into academic vogue lately. Carmen Reinhart has written a lot about it recently in the financial press. The simplified version is that it is a form of taxation forced upon savers as governments target negative real interest rates. As such, it is effectively a transfer of wealth from individual savers to the government sector as the government artificially lowers the absolute rate of interest to shore up a growing fiscal deficit.

As noted in my last post, since President Obama’s election the federal deficit is up 40% with what amounts to a zero interest rate policy. One can only imagine what that is going to look like should rates rise.

The notion of Financial Repression really hit home with me this week as I scurried around to provide information to my tax accountant. In one account with an average annual balance in the six figures, I had no 1099 form. I went to the local bank and asked if I could get a duplicate as I had misplaced the original. The banker told me that since less than $10 of interest had been paid on the account they did not have to issue a 1099!!

No wonder investors are piling into risk assets! This is one of the desired outcomes of Financial Repression as conservative investors are forced out the risk curve in search of some form of absolute return. Oh for the days of the 5% passbook account!

Japan a Year Later…  We are just crossing the one year anniversary of the tragic earthquake and tsunami that rocked Japan. The devastation was monumental as measured in human, emotional and financial terms. Japan has been caught up in a decade-plus tenure of grinding deflation. The yen has been too strong for its export business and the BOJ has been too tight in its monetary policy. The debt in Japan has made it one of the largest indebted countries on the planet. Its financial markets have been dismal.

Year to date however, Japan is tied for the best performing equity market with Brazil. The BOJ has gotten looser in its monetary positioning. Could this be the big turn in the Japanese equity markets that people have been looking for in a decade plus? Small fortunes have been lost trying to predict this turn but it may finally be different in Japan.

Japanese equities account for 10% of the world indices and active managers have been woefully underweight Japan for some time now. It could be time to dabble in Japanese equities. If the turn is here there will be a land rush by world equity managers to participate….

March 7, 2012
by Edward H. D'Alelio
1 Comment

Greek Debt Restructuring..  An interesting twist occurred recently on the debt restructuring. Even though the covenants did not permit this, the ECB was able to make their claims senior to other claim holders, even though they were in the same class. Effectively the ECB retroactively changed an indenture.

If this can be done, what will other authorities do? Will the BOJ change the coupon on its debt? Will Spain unilaterally extend maturities? In the past there was a legal regime that enforced corporate debt covenants but then these are sovereign governments or quasi government authorities.

Buyers beware!!

“How am I doing?” Former Mayor Ed Koch made this line famous in seeking out approval for his mayoral term. How would the facts stack up on the US Economy if President Obama were to ask “How am I doing?” Here are the statistics, courtesy of the TIS Group since the President took office in Jan 2009:

-The % of unemployed for 52 weeks has risen from 15% to 30%..

-There are 1.2mm fewer jobs…

-Worker health costs have increased 22%…

-Gas prices are up 90%…

-Home values are down 13%…

-Americans living in poverty have increased by over 6.0mm…

-Americans dependent on food stamps have risen from 14mm to 46mm..

-The National Debt is up 44%…


Is this the “change” in America we were hoping for???

February 21, 2012
by Edward H. D'Alelio

Greece..The fires are burning in Athens, but the mood from the Troika has been colder than the weather in Eastern Europe. While Greece finally agreed to the terms of its next bailout, the European powers have delayed the much needed next capital infusion pending yet more Draconian austerity for the country. For Greece, it is as though the effects of the chemotherapy are worse than the cancer.

One has to wonder if the Greeks will initially agree to almost anything, then say down the road, “Sorry that you believed us, but we really can’t service this debt (unless of course you lend us more to service your current debt..) and the country has grown to a halt, so we will have to default.”

Following a furious move on the upside for the equity markets across most sectors, market caps, and styles, the markets are now pulling back for the first time since the beginning of 2012  — perhaps reflecting continued concern with the Greek issue.


Oil..The trend has been toward firming GDP in the US, and China is showing signs that it may be past its concern over inflation and ready to stimulate its economy overtly with looser monetary policy.  The situation in Syria is not good for their oil exports.  Same case with Iraq, where in the absence of US military presence, the regime can pursue its sectarian policies — risking a civil war among the various Muslim factions in the country.  Then there is Iran, with its heavy saber-rattling about its nuclear program drawing more attention from the Israelis.  Add to all this the low level of reserves in the US, and you have a recipe for higher oil prices.

A recent Wall Street Journal article raises the concern that costlier oil could derail the nascent recovery. This would not be the first time that this has happened. The Fed is running out of bullets. They have already stated that a zero-interest policy will be in effect through 2014. There is little that the monetary authorities can do to offset the drag of higher oil prices.

Oil is one of those commodities that has what economists call a “second order effect” when its price is rising. That is to say that oil affects a number of prices because it is the major factor in energy costs for almost everything. Not only does the consumer feel it at the pump and every time the oil delivery truck pulls up, but also when purchasing other consumer products across the board.


Banco Della Cosa Nostra..  The Telegraph reports that the Mob has increased its “lending “practices in Southern Italy in the wake of the credit crisis in Europe. Reportedly the Mob has accrued 65bb Euro which turns a profit of 140bb Euro. This would make it the largest bank in Italy! And certainly the most profitable.  They are doing plenty of lending and they don’t own any Greek debt! Their hours are flexible (unlike most establishments in Italy) and they require little documentation.

This is an effort that would make Tony Soprano proud! Bad debts are dealt with swiftly and repayment schemes incentivize those who can still walk to pay promptly…

February 6, 2012
by Edward H. D'Alelio
1 Comment

MF Global and the “missing money”… The NY Times reports that investigators know quite well now where all the missing money is. They have not divulged details, given that it might impact their ability to retrieve the funds. It stands to reason that they would know where the money is, as broker/dealers are required to have detailed and reliable records and the movement of wire funds would be easy to trace.

One report has suggested that some of these funds were lost as ‘Hail Mary passes’ in an attempt to ‘double down’ and  bail out the sinking ship on top of the already irresponsibly stupid and risky bets put on by the firm. If so, that would make this theft even worse.

Recovery of the money hinges upon whether or not the counter parties who were due the funds correctly followed the process of asking where the funds came from.  In other words, were they customer account funds? Or general funds of the corporate entity MF Global? Now if this was asked and the people on the MF Global side lied, then there is likely criminal activity but no basis to get at the funds. If on the other hand some —  or perhaps all — of the counter parties failed to inquire as to the source of the funds, then there could be a basis for recovery. Otherwise, all is lost and John Corzine still is walking the streets a free man. That cannot go on for long.


Mitt’s Tax Rate…There was a virtual firestorm when Mitt Romney was forced to divulge his tax return and therefore his implied tax bracket. This dovetailed neatly with President Obama’s ‘paper tiger’ effort to enact what is referred to as the Buffet tax (a minimum tax rate of 30% on all wealthy Americans making over $1.0mm in any given tax year).

The problem of equity (if there is any real issue there) lies within the tax code. The big driver of the controversy in my mind is the notion of carried interest. This is a complex tax ruling that allows partners in private equity funds, venture capital funds and hedge funds to invest their monies which can later be treated as long-term capital gains and not taxable ordinary income.

There is no doubt that this sliver of the top 1% has an advantage over the average taxpayer. However they are still putting their capital at risk. If Governor Romney worked at a firm that did not produce stellar long- term performance (read: capital gains) and lost money on a regular basis, then he would have losses and not a lot of capital built up at a very low tax rate. For argument’s sake we can call this sliver of the 1% the very smart wealthy. They have a God-given talent to make money (capital gains) or at least affiliate themselves with smart people who can do that on a consistent and regular basis (read: Warren Buffet).

“But”, you say, “only wealthy investors have access to this option”. Yes, that is true, due to government regulation of what is called a “Qualified Investment Buyer” (QIB). This rule exists so that Madoff-type knock-off’s cannot sell to less sophisticated investors. Vehicles for smaller investors are generally heavily regulated by the likes of the SEC (i.e., mutual funds). If you were to sign up to invest in Bain Capital it would have a large minimum investment (generally in the $millions) and you would need to sign a document stating that your net worth was at least $1.0mm (the QIB clause).

Now the smart wealthy share that talent with institutional investors who run pension plans for corporations, state and government employees and other non-profit institutions (the press never mentions that of course). One could debate if this “talent” should be taxed as ordinary income (max rates) but this is not the purpose of my writing at this time.

There are other very wealthy people who have other great talents. Some are great actors (Hollywood); others can throw a football or pitch a baseball and the like. It does not mean that they are not smart but they don’t have the ‘carried interest’ option that a number of private investors and partners of private equity and the like have.

They have the option to take some or all of their income currently and pay taxes now at the maximum rate for ordinary income or defer some of that money in approved vehicles which will pay out later as income.  If they invest with ‘smart’ money wealth, and their assets appreciate well, they will make more capital but they will still have to pay the maximum rates when those monies are taken out. If they’d spent it all on real estate in Miami at the top of the market, they will have lost capital. So they too have ‘capital at risk’.

Now you and I can also put capital at risk and buy Apple stock, for example. If we did that several years ago, we would have a long-term capital gain that would be taxed at 15% (sort of like Mitt without the carried interest issues). We could also buy what are called qualified dividend stocks whose dividend income is only taxed at 15%. In both cases we would need to be long-term savers and not spenders (same for Mitt).

What people do not talk about or see in the press is that even people like Mitt Romney likely paid W-2 income in the early years of his career. Otherwise, he would not have had cash to send his kids to college, afford a down payment on a house, etc. Looked at another way, the wealthy pay tax on some W-2 income (cash pay), pay a second tax on investment income and gains and then if they are lucky and accumulate wealth, a third tax which is the Estate Tax (that is a whopper at 50% for an estate above certain thresholds).

So what is unfair about all of this? Is it unfair that Mitt Romney, Warren Buffett and all the hedge fund managers are ‘smart’ and found great companies to invest in that appreciated in value? Is it unfair that George Clooney made millions of dollars in movies that were popular? Is it unfair that Tom Brady makes millions of dollars (probably pays the max rate) because he goes out for 16 plus Sundays and works 3 hours?

Isn’t all of this the American Way? Now we can penalize all the ‘smart’ wealthy people and all the ‘talented’ wealthy people, but history has shown that if we do they will take their capital to other places where on an after-tax basis their capital will grow. After all they are smart and talented……

January 22, 2012
by Edward H. D'Alelio

The Markets…It is still amazing to me — having been in the capital markets for many years now — how psychology can turn on a dime. Concerns about Europe have faded, though no concrete progress has yet been made on the Greece restructuring and the economic news from Europe continues to be dismal.

The worst performing markets in 2011 have been the best performing markets thus far in 2012. Returns have been led by China and the emerging markets, both up nearly 10% in the first few weeks of the year. China has reported sharp slowing in economic growth — but this year that is perceived as positive in that the Bank of China will need to ease interest rates to stimulate the economy (go figure?).

The fundamental news from the U.S. has been decent but the market has moved a long way up very quickly. The clock is running on Greece. I am sure that many of these bonds are now in ‘vulture’ hands, that is, distressed investors who know how to play hardball on restructuring.  If my assumption is correct, these bondholders likely purchased the securities for nominal amounts and hold the CDS (insurance) against them.

In my prior life as a High Yield investor, we called this “the hold out” strategy. These guys play tough and  really want a default to collect on their insurance.  Unlike with the major European banks, the authorities have little leverage on these players.  I don’t think the market is focusing properly on this issue — likely because it is not really clear to the investment community who the really owns Greek bonds at this point.

It would not exactly merit a badge of honor to disclose that particular investment to the investing public…


Hildebrand and the Swiss Central Bank Scandal…This did not get a lot of press over here in the states, but it did get a lot of press in Europe (from which I have just returned from a business trip). This was the case where Philipp Hildebrand, head of the Swiss Central Bank, was forced to resign after his wife was discovered to be “front running” the Swiss Bank before it intervened in a massive way on the Swiss Franc.

Hildebrand’s wife bought $500k in dollars just before the intervention. Both used to work for a large hedge fund in New York and had a glamorous lifestyle. I wonder what the Swiss Central Bank was thinking about when they hired Hildebrand from the private sector hedge fund business. Did they assume that he and his wife would be honest and not front-run the bank? Seems like a reasonable assumption. Or was the Swiss Bank naïve enough to assume that several high powered former hedge fund managers would put their investment acumen to bed and simply have tea in Zurich?

Some things just don’t change. The compulsion to make large profits from illicit and confidential information in the capital markets is a powerful tonic, whether from insider trading here in the U.S. to abusing the sovereign power of the Swiss Central Bank to make profits. An old-time investor used to use a good expression:  “Leopards don’t change their spots”. There is no simple answer to the problem of ethics. You are either born with it or it is cultivated by a good moral compass. Otherwise, you harbor the temptation to gain from the capital markets illicitly.

The abusers seem to find new ways each year to beat the system but they rarely go too long without being caught.


Eastman Kodak, RIP…The Company that George Eastman founded in 1880 filed for bankruptcy last week. It was a lion of the Dow Jones Averages for nearly 75 years. In 1885 Eastman invented the film roll which became the forerunner for motion picture film. By 1976 Kodak controlled 90% of the film market and almost the same dominant share of the camera market. The company coined the term “a Kodak moment” that forever will be synonymous with the perfect picture opportunity.

In 1975, Kodak introduced the first digital camera. Ironically this was the start of its slow decent into oblivion. Fuji of Japan took Kodak on head-to-head in the roll film market. Kodak could simply not compete with the new digital technology, a problem which softened its lock on the picture market. Kodak was around for 130 years, but now the pace of change is so rapid in so many industries, that companies come and go almost unnoticed and never achieve the brand recognition that Eastman Kodak earned for itself.

Several generations before us knew only Kodak (and later Polaroid with the marvel of the instant photograph) as the dominant force in still and moving pictures. Many of our most treasured family memories were due to George Eastman and the Kodak name. There is no price and value you can put on that type of asset. It is rather sad that Eastman Kodak will fade into the memory of the capital markets, ironically having enabled priceless picture memories that will last forever for generations of Americans present and past.

January 9, 2012
by Edward H. D'Alelio

The Consensus…It is always a sobering experience to look back at past Wall St. projections for the New Year. These forecasters are paid a lot of money…and they always sound very convincing and credible on CNBC. Last year the Street strategists were a fairly bullish group. They predicted real US GDP  +3 .4% (actual was +1.8%). They had year-end S&P going to 1450 (actual was about 1265), and core CPI + 0.5% (actual +1.7%).  They called for a closing yield on the 10-year US Treasury bond of 3.75% (actual 2%).

Many who perform the “dismal  science” of prognostication had a major sell (short) on US Treasury bonds which were far and away the best performing assets on the planet. Many on the street were pushing emerging markets allocation very hard. That sector was the worst performing one in the market with places like China down over 25%! Many had oil prices screeching higher (not the case). In short, not too many people were right on either the trends or magnitude for 2011.

Alas, it does not look like too many Wall St. strategists are unemployed. Rather, they seem to just move from firm to firm. We’ll see what 2012 brings..


Alabama and Municipal Bonds…With the European Kabuki Theater playing out, there has not been much else to fit in the financial press. One saga that bears watching is that of the bankruptcy of Jefferson County Alabama. These are so called “general obligation bonds”. This means that there they are backed by “the full faith and credit” pledge of the county, i.e., that the county will raise taxes or create some source of revenue to service the debt.

But Jefferson County has broken precedent with conventional patterns and has stopped paying its debts. There is a big difference between “ability to pay” and “willingness to pay”. Other counties and municipalities have traditionally tried to service the debt in some fashion and honor the time old “moral obligation” to pay.

Jefferson County has filed the largest Chapter 9 bankruptcy in the nation’s history. Chapter 9 is at best a Byzantine process. The interesting tidbit here is that Jefferson County does not have the constitutional ability to raise taxes. Only the State of Alabama does. So you ask, how is it that a county that does not have the constitutional ability to raise taxes can issue debt with a pledge that it can? Good question.

Sounds to me that the bankers may have gotten ahead of themselves here stamping out record amounts of GO debt (hard to imagine that would ever happened on Wall St!!) and either nobody during due diligence (if there was any..) questioned the ability of the county to honor its pledge. Worse yet, maybe somebody knew and figured “what the heck..These guys will honor the debt..and if not it will be somebody else’s problem .”

Well, we are all about to find out some lessons on municipal finance that could be painful to the municipal bond market in general, as who knows how many other Jefferson Counties are out there who have pledged “full faith and credit” but don’t have the constitutional ability to enforce it. Even if they did, raising taxes on the general public to make municipal bond payments for certain 1%-ers is not going to be all that popular. In the words of the infamous George Wallace, former Governor of Alabama, “the chickens are coming home to roost” in Jefferson County.


Irrational Exuberance?..The markets opened up with a bang at the start of the New Year. The economic news from the U.S. continues to be encouraging and shows the U.S. to be in a bottoming trend here so far. January tends to be a bullish month in general as many investors make New Year contributions and in particular, 401-k plan contributions. The U.S. markets appear to be trying to decouple from the European malaise.

However, the European news is still less than encouraging. Hungary is having more acute problems and funding costs for the weaker members of the Euro community have not improved that much. In addition, new macro uncertaintanties are simmering. We should expect some saber-rattling from North Korea (looks like it is aimed at Japan at the moment). Also, Iran has been doing posturing in the Persian Gulf which has caused oil prices to spike again.

Years of binging on debt cannot be expected to end quietly with start of a new year. There are likely to be fits and starts and the European’s have still not exhibited a great deal of urgency and leadership given the acuity of the crisis.

December 22, 2011
by Edward H. D'Alelio

A year to remember (or to forget)

To say that this year was a difficult one for world investors would be an understatement.  It started out with Egypt’s uprisings and the “Arab Spring”, follow by civil war in Libya and then by Japan’s devastating earthquake and tsunami in March. In the meantime, Greece nearly defaulted, and most of Europe teetered on the edge as country after country and bank after bank encountered liquidity concerns.  More global unrest occurred toward the end of the year with turmoil in Russia and the death of Kim Jong Il potentially leading to further instability in North Korea.

In short, investors have been forced to abandon traditional rules for evaluating companies and instead must attempt to understand global macro events and their impacts on stocks and bonds. It has not been an easy time for investors. Only cash, bonds (US Treasuries) and gold have had positive returns as of this writing. I read a recent statistic that something like 40% of actively managed funds have underperformed their respective benchmarks by 200 bps. This is the worst performance since 1998. Even typically stellar long-term investors like Bill Gross have had horrendous years.

However, there have been some pleasant surprises mixed in.  According to many gloom and doom analysts, municipal bonds were supposed to experience Armageddon. Nothing bad really happened, as states and municipalities muddled along and muni bonds turned in excellent positive returns in 2011. Gold, despite its ups and downs, did pretty well. US Treasuries were again, a hands-down winner.

2012 and beyond…I have never been really good at predictions. So I am not going to start now. Nevertheless, a few thoughts on the landscape for 2012 may be in order. Next year is an election year and crazy things can happen to markets in election years. The preliminary data from the U.S. has not been all that bad. Housing data seems to be flattening a bit and the jobs situation does seem to be bottoming a bit as well. Overall it feels like domestic stocks (especially large cap, unlevered dividend-paying companies) could fare reasonably well. Instability in Europe and elsewhere has still made the US a good safe haven, and the dollar could still benefit from that trend in 2012.

Europe is another matter. Things seem to be slowing there and policies there have been more restrictive and less encouraging.  There is no reason at present to see that the problems are over. The ratings agencies still have a large stick and they appear fearless in wielding it so far. China bears close watching. There could be another big shoe to drop there. (More on that subject in 2012).

The good news is that each year brings new hopes and aspirations.

Merry Christmas, Happy New Year and best hopes for prosperous investing in 2012 !

December 12, 2011
by Edward H. D'Alelio
1 Comment

Color Me Orange…Christmas is the time for reds and greens, but for John Corzine, it sure likes like orange could be his new color. That is Orange, as in federal prisoner #245 from MF Global fame. Ignorance is not a good platform for a legal defense when you are the CEO of a company which basically stole customer money for a leveraged bet on European sovereign debt. Corzine was the first member of the Senate to be subpoenaed by its body in over 100 years. Ironic that the person who helped draft the Sarbanes-Oxley legislation, thus making CEO’s personally accountable for signing off on the financials, does not know where the customers money went.

It now would seem that the segregated customer accounts were stolen from customers in the eleventh hour to meet massive liquidity needs presented by the irresponsible, highly-leveraged and failed bets on European debt. Even in the most desperate hours of Lehman and Bear Stearns, while the fires burned out of control on stupid leverage bets akin to the European bets at MF Global, the customers’ accounts remained intact.


So who was robbed you asked?  Farmers attempting to hedge their livelihood in the grains market, only to find out that it was squandered on a firm bet that brought down MF Global. These people will be calling and writing their congressmen – so this will not end quietly.

In many respects, this is much worse than Madoff. There, people gave their money to an investor and gave him full discretion over their funds. Here, people had control over their own money (or they thought they had) giving no discretion to MF Global other than to trust them with executing their commodities trades. At least in the case of Madoff there is an aggressive trustee who is doing a very adept job at finding deep pockets to recover from those who actually benefited from Madoff, and others who are implied parties to the fraud. Here, the money was part of a bet made on behalf of the firm. Good luck trying to get that money back from the counterparties who took the other side of that bet and had the contractual obligation to collect on it.


Europe… It has been an interesting several weeks over in Europe. The “bazookas” were fired with tons of liquidity, not by the Europeans, but by a concerted worldwide bank intervention. At least the broader world recognized the contagion risk that the European authorities had decisively refused to address.  Rumors had it that Soc Gen was on the verge of going under — hence the massive and largely unprecedented actions by the world’s central bankers. World markets assumed that this was it and by way of a big summit (how many of those have we had here in the last two years?) surely the Euro would survive.

News from the so called “summit” is that a fiscal monitoring scheme has been agreed to in principal. So what? The real issue is: what are the penalties for cheaters and how will they be enforced?  The agreement was to work on a scheme of fiscal responsibility and penalties. All of this still needs a vote.

Greece, for years, thumbed its nose at the “rules” and built up massive debt (off balance sheet) and what were the sanctions against them? Too little too late. It seems that as long as the world financial markets buy what “Merkozy” and Co. are selling there is likely little resolve for true fiscal union. As long as there is not a real crisis (like the failure of Soc Gen) then there is a desire for the status quo…just limp along. It is hard to see how this strategy is going to help finance the massive amounts of debt maturities on the continent.

All of this, along with uneasiness with China’s growth rate, is making the much maligned dollar and the US markets look like a pretty good haven for now.


Russia…Mr. Putin had planned on being “Premier for Life”. It does not feel like the electorate agrees with that platform at present. Russia is now seeing the largest protests since the Soviet-era. Russian equity markets were reeling after election results last week. Putin did what all former oligarchs do when under pressure and promptly blamed America (Hilary Clinton) for stirring the pot. So what does this mean for the world markets?

It may not mean much at all, but with the Arab Spring freshly behind us, turmoil in Russia would not be a welcome ingredient on the world scene. Russia is large producer of oil and the transition to quasi-capitalism has been a largely pleasant one. Wealthy Russians have been bidding up real estate prices worldwide and investment in Russia from many credible worldwide institutions has been growing.

It is too early to predict how the elections will affect Russia and how much Putin is prepared to concede to the growing dissent. But global investors will now have to add another country to the growing worry list of macro-economic problems. Ah, for the good old days when P/E’s and company forecasts were all that mattered in the investing world!

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