The Market Ticker

Let's talk about Political Candidates for a second...

Over the weekend Senators released their financial disclosure documents.

The following ought to raise alarms among voters - or perhaps not, given how silly we all are as Americans when it comes to personal financial management:

"Senators John McCain and Barack Obama released their Senate financial disclosure statements on Friday, revealing that Mr. McCain and his wife had at least $225,000 in credit card debt....

The bulk of the McCains’ obligations stemmed from a pair of American Express credit cards that are held in Cindy McCain’s name. According to the disclosure reports, which present information on debts in a range rather than providing a precise figure, Mrs. McCain owed $100,000 to $250,000 on each card.

Another charge card, held by what was described as a “dependent child,” had also accumulated debts of $15,000 to $50,000. In addition, a credit card held jointly by the couple was carrying $10,000 to $15,000 in debt, the filing indicated, at a stiff 25.99 percent interest rate. "

Good God.

At least $225,000 in revolving debt, with at least some of it carrying "subprime" rates?  By the way, that $225,000 is the minimum - it could be as high as $565,000, but the Senate does not require exact disclosure - just ranges.

What in the Sam Hell is McCain doing?

And how can you possibly service that with the base salary as a Senator of $169,300 per year, before taxes?

Now to be fair, the McCains' have quite the income, with Mrs. McCain drawing over $300,000 as chairwoman of Hensley (a beer distribution company founded by her father), and John receives an annual pension as a Navy Officer of just over $58,000.

But the sheer size of this debt on credit cards is astonishing.  American Express truly loves the McCains - they should be spokespeople.

More to the point, however, is whether such a person is qualified to manage the financial health of the nation with the largest GDP in the world.  Clearly, having lots of debt, and plenty of it on revolving accounts, doesn't bother the McCains.

Well it bothers me.  I have nutty credit lines and use 'em regularly, but they are also paid off in full at the end of every month.  I haven't paid a nickel of interest on any of those charge accounts in the last ten years, and if I was reporting my debt on revolving accounts I would (accurately) describe it as "zero".

What's worse for McCain, however, is his ties to Phil Gramm. 

Mr. Gramm was the architect of the repeal of Glass-Steagall, the Depression-era law that held apart investment and commercial banks.  I've referenced this before; you need to go back and read this entire entry, as the section on Mr. Gramm's involvement (about halfway down) details the former Senator's lobbying as recently as this last December.

Now we get this; the more I learn, the more I dislike.  The concept of a President that thinks its perfectly fine to carry around somewhere between $250,000 and $500,000 in debt on credit cards ought to scare the hell out of every American, especially when we as a nation are nearly $100 trillion in the hole!

"Fiscal responsibility" and "McCain" can't be used in the same sentence.

The G-8 summit released a statement that said:

"Finance ministers from the Group of Eight nations said surging food and fuel prices have replaced the credit squeeze as the biggest threat to the world economy.

``The predominant concern is the inflationary effect that oil in particular and also food prices are having,'' U.K. Chancellor of the Exchequer Alistair Darling said yesterday after G-8 officials ended talks in Osaka, Japan. Deputy German Finance Minister Thomas Mirow said oil's rise to a record means ``an enormous withdrawal of purchasing power.''"

This would be funny if they weren't serious - but they are.

The idiocy of refusing to address the reason we are seeing a tremendous price surge in commodities astounds.

Once again, this has happened as a direct consequence of The Federal Reserve's policies in The United States, specifically, The Fed's unwise and unwarranted dumping of excess liquidity into the system in order to tamp down short interest rates.

The underlying problem in the economy was not weak demand for which excess liquidity and thus lower short-term rates might be appropriate.  It was in fact the very provision of that excess liquidity and unreasonably-low interest rates in the first place which led to a credit bubble of unprecedented size.

You can't fix a junkie by giving him more heroin! 

You must force them to withdraw by removing the drugs.

Bernanke's "alphabet soup" does exactly the opposite in that it swaps used toilet paper for Treasuries, which are then Repo'd for cash.  This is the worst sort of "heroin fix" for a junkie (Wall Street Banks) that have proven time and time again that they cannot behave well.

Since Bernanke's Fed has done precisely the wrong thing in their insane bid to "bail out" their buddies in the banking system we now are faced with negative real interest rates across the entire yield curve when one factors in actual price inflation.  This causes investors to look for something that cannot be debased at the whim of a cocksure Fed Chairman, and what they have decided upon is commodities.

Again, the reason for this is clear and obvious if you have even the first hint of intelligence - a barrel of oil will always and forever return about 20 gallons of gasoline and another 10 of diesel fuel.  Always.  No man can debase the inherent value of that barrel of oil; the number of BTUs in that barrel is a constant and thus the amount of physical work that can be performed utilizing it is also a constant.

Bernanke's error is in thinking that he can play "Ivory Tower Professor" and preach to the market, telling it that "you will treat Treasuries as money-good assets." 

Uh, no Ben. 

You can ask but you can't force.

When you act in a directly opposite manner to your proclaimed intentions, debasing your holdings at The Fed to the point that you replace half of your balance sheet with used toilet paper, you should not be surprised when the money leaves that asset class and goes looking for something that you cannot destroy the inherent value of!

If you want this to stop, the answer is to remove the "excess liquidity" from the system and disgorge the garbage on your balance sheet, putting the Treasuries back. 

Force the Junkie to undergo his DTs and detox.  If it kills him because he's ingested too much toxic waste, then it does.  That's unfortunate but it is not avoidable.

The sad part of this whole saga is that the destabilization of world commodity markets that Bernanke has caused could easily result in civil wars breaking out and lead to the sort of serious geopolitical instability that the world has been notably free of for the last fifty years.

Let's hope that we don't go down that road.

Speaking of Bernanke's Fed and the believe that "they can fix it", you need to pay attention to the H.4.1 data release.  The last one came out on the 12th and it has some really ugly numbers on it.  Let's go over a few....

Notice that the current holdings of Treasury bills is $25 billion.  This is down from some $250 billion a year ago, or a net reduction of 90%.

If you remember, I have in past Tickers talked about how The Fed isn't buying any more Bills when they are issued, and that this has contributed to the lack of interest in these issues over the last couple of months - while Treasury has been issuing them like madmen to fund the "stimulus" checks.

Well, The Fed doesn't want to cause a major bond market selloff, you see, and Bills are by definition very short-term instruments (less than one year.)  They typically are 4, 13 and 26 week instruments - that is, they mature on roughly one, three and six month terms.  I have a fairly sizeable amount of these myself through Treasury Direct; its a nice safe place to park cash and so long as you don't need it back with less than 4 weeks notice (if you're in the 4-week bills) all at once you can "ladder" into these so you have the ability to pull your cash on anything from a 4 to 26-week schedule - you simply allow them to "peel off" as they mature and take the funds out, not rolling them over.

This is what The Fed has done - as their bills have matured they've taken the money and used it to fund the slosh and other facilities - to the tune of $225 billion worth in the last year.

They are doing the same thing with notes and bonds (maturities of up to 30 years but longer than one year) but the redemption cycle on them is, of course much longer.

So why not just sell off the notes and bonds?

In short, because doing so would unleash a panic in the bond market.  If you wait for them to roll over and redeem them, there is not much of a net impact in the market's price, and thus the interest rate paid on them.  If The Fed were to start dumping bonds, on the other hand......

So what does this all mean? 

Bottom line: They are out of low-impact ways to swing the market around.

Yes, the Fed could sell off notes and bonds, but doing so would spike the yield curve and destroy what is left of the housing market, since mortgage rates are linked closely to the 10 year bond's interest rate.

They can allow more notes and bonds to mature, but that's a slow process - it doesn't get them funds now.

And in the short-term bill department they have only $25 billion left, and then it is gone!

Those of you who pray at "The Fed is Omnipotent" altar are fixing to get a really nasty surprise - soon.

Now does all The Fed "jawboning" of the last week or two make sense? It should. 

They don't have much in the way of actual firepower left, and they're hoping that idiots in the market will ignore the facts and believe they are omnipotent, when in fact their power is limited by their checkbook just like you and I.

The truth is that their checkbook of low-impact instruments with which to tamper with the market is almost empty, having been consumed by their various bailout initiatives!

And it gets better.  Hattip to "Great Depression 2006":

Hmmmm.... Some of the security CUSIPs I recognize the prefix of, and know who they belong to.  CBASS, for example, is the infamous super-SIV that caused all the trouble for Radian and MTG when they were planning to merge.  Most of these CUSIPs look to be from the infamous folks in the subprime arena.

Go read the entire article.  Who is that organization throwing this party? On behalf of Wells Fargo as Trustee of these instruments being auctioned.  Is this one of those "extra special" SIVs, or is there a window involved somehow, somewhere?

Finally, anyone know where Soros is these days and what he's up to?  He's known for taking a cheap shot at a currency - or a central bank - when they have their backs up against the wall.  All for profit of course.

If you think he won't do it again (this time to us) you're very wrong.  He both can and will, and just like Britain the last time our politicians will discover that Bernanke really isn't omnipotent.

If I had to bet, my money would be on him targeting the bond market, not the dollar - simply because the balance of risks suggest that he could easily back Treasury and Bernanke into a corner if he was to get aggressively short, especially if The Fed depletes its bill supply.  I personally think Soros' politics suck, but when it comes to the currency markets he's sharp (less so when it comes to equities; he lost a buttload getting involved in tech right in front of the explosion in 2000!)

AIG's CEO got blown out by the credit mess. 

"Willumstad, who replaced Martin Sullivan as CEO yesterday after record losses tied to subprime loans, said he plans to review all of AIG's operations, which include offices in more than 100 countries and more than $45 billion of hard-to-value assets. AIG gained 4 cents to $34.22 in German trading."

Another one bites the dust!

Lehman released their actual results; I found the press release amusing.  The most important thing in there, from my point of view, is that expenses - including compensation - increased while they managed to lose more than $5/share.

How you can possibly justify paying people more when they produce these sorts of "results" is beyond me, but the initial reaction in the market was to move the stock up a buck a share.  So long as shareholders refuse to punish companies that continue to pay executives at an insane rate when they lose billions, this sort of stupidity will continue.

Finally, a topic I've been banging the drum on for months is getting some press - that stocks are expensive relative to return:

"Profits are declining as U.S. companies' input costs rise faster than they can pass them on to consumers. At the end of March, producer prices including food and energy rose by 6.9 percent, compared with a 4 percent increase in consumer prices, according to quarterly data compiled by Bloomberg.

The last time U.S. companies had so little pricing power was in 1975, after the Middle East oil embargo ushered in a decade of stagnant growth and price increases known as ``stagflation.''

Ding ding ding ding ding.

Empire Index was down to -8.68 .vs. -3.23 last month.  This is the NY area manufacturing index, and to be blunt, it sucked.  This appears to be the reason for the dump in the futures right around 7:15.

As an update on The Ticker over the weekend, both Dodd and Conrad spoke about their Countrywide mortgages:

"U.S. Senators Christopher Dodd and Kent Conrad denied getting advantageous loan terms from Countrywide Financial Corp., the lender criticized by lawmakers over policies blamed for spurring the subprime crisis."

There were reports that Conrad wrote a $10,000 check to charity to "remove any appearance of impropriety", but that has curiously disappeared from later updates.  Now both of them are out vehemently denying they received "special treatment."

Well guys, from where I sit that dog ain't gonna hunt.  If your loan goes through a "VIP" program and you got a better rate than an ordinary person who applies with the same sort of credit score and earnings profile then you got special treatment!

And since this was a firm that had engaged lobbyists to do work for them in trying to keep Congress out of their hair, the appearance of impropriety is certainly there, along with the what sure looks to me like a clear violation of Ethics Rules.  The only question there is whether there was awareness of the better terms. 

Maybe yes, maybe no.  But if you're "sophisticated" (and if you're on these committees I hope you are, as you're writing regulations for this part of our nation's economy!) then I would certainly hope you were smart enough to know that you got a better than you'd expect interest rate and terms.

Now whether there is a violation of the law is a far murkier matter - to be a bribe there has to be a quid-pro-quo somewhere, and so far, nobody has established one.

But I do find Angelo Mozilo's "kid glove" treatment during his latest appearance on The Hill curious; indeed, most of the reps and senators "questioning" him were apologetic that he was there.  That never did make sense to me when I was watching the televised hearings, but it sure as hell makes plenty of sense now!

The more serious matter from my point of view, however, is not whether a bunch of Senators and Reps got "better than normal" terms on their mortgages.  That's good-old garden-variety favoritism, and is old as is our Republic.  It should lead to sanction but in terms of the potential impact on our nation this is relatively mild.

The more important issue is whether or not these Reps and Senators were and/or are participating in the "Bubble House" games of either flipping property or cash-out refinancing!

The latter is probably not a violation of ethics rules, but it sure as hell puts some color on what the real motivations are behind these "bailout" bills!

If these Senators and Reps indeed were cash-out refinancing property they own then there is an extremely serious matter afoot as these individuals are trying to save their own skins and are proposing to spend half a trillion dollars, with $160 billion of it already gone, to do so!

THAT is the real issue here, and is the question I want answered.