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Of Shenanigans Past And Prospective


Monday was a reasonably quiet day, with stocks up 1% on no real news (gap open and then trade dully), as they continue to build momentum back towards the January highs. The day’s highs correspond pretty cleanly to the neckline of what even a school child can see is an inverted head-and-shoulders (although purists would say that the decline from the January highs wasn’t deep enough in relation to the scale of the head-and-shoulders to conclude that normal projections will apply). Further advance on Tuesday will likely create some itching among techies to at least re-test the highs.

June T-Notes were down 3/32nds, and 10y yields remain aimlessly in the middle of the range at 3.61%.

The economic data was not particularly exciting, either. Personal Income was a little weaker-than-expected, Personal Spending a tad stronger. ISM was 1 point weaker than expected at 56.5, but the Employment subindex rose to 56.1 from 53.3 (although New Orders and Production subindices declined), so you can take what you want out of that figure.

AIG sold a $35.5bln chunk of the company and is working on calving off other pieces. Folks seem to think this is great news, but they seem to think that it’s great news for everyone (taxpayers, AIG management, the buyers) and few of the observations seem to have anything to do with the price at which the unit was sold. I don’t have an opinion on that, but it seems to me like it might matter. Well, perhaps to AIG the value of getting the public off its back outweighed any haircut they took on the assets. I hope that isn’t Benmoche’s reasoning, because I doubt the people carrying flaming brands up to AIG’s castle care very much about the particulars of acquisitions and divestitures. Especially the ones who are agitating the masses in order to divert the masses away from their own castles.

Speaking of scapegoats, Richmond Fed President Jeff Lacker apparently feels put-upon, and that some people are scapegoating the Fed for similar reasons relating to politics. Perish the thought, but what is interesting is what Lacker also said in the context of the Federal Reserve and the crisis. For example, he opined that the Fed ought to be out of the mortgage finance business, and is likely to end mortgage purchases on schedule this month (as almost everyone expects). Of course, it was the Fed who originally put themselves into that business. Lacker also declares that the Fed’s emergency authority ought to be “sharply” limited.

Well, he will get a lot of “amen!” from the congregation on that one, although less-charitable souls may point out that the prior limits on the Fed’s authority didn’t seem to bind them during the crisis when they felt that, for example, guaranteeing low-quality, non-bank assets to facilitate the “purchase” of Bear Stearns by JP Morgan was acceptable because, darn it, something needed to be done! Lacker, as a member of the FOMC but not of the Board of Governors, was not party to the invocation of exigent circumstances, and this may be his reasonably-tactful way of pointing out that someone needs to put restraints on Frankenstein’s monster in case he wrecks the place next time.

I generally agree with most of what Lacker said, including his comment that there is a relatively minor risk of a double-dip recession. I just think that the one we are still in isn’t going to be over very soon! But as a former member of another scapegoated demographic (traders on Wall Street), I don’t have a lot of sympathy for his pity party on that score. Cry me a river, Dr. Lacker.

One person I am surprised hasn’t gotten more positive attention in all this mess is about to publish a book (due out tomorrow) that I am anxious to read. Harry Markopolos, who tried to alert the SEC to inconsistencies in Bernie Madoff’s pitch for a long time, gave a Bloomberg interview today in which he declared that the SEC should pay “Wall-Street-like bonuses” for finding financial fraud. I think this is a brilliant idea, and it probably wouldn’t even cost very much since you could cut the actual size of the staff if they were incentivized properly to find the real problems. Of course, I could be cruel and point out that “Wall-Street-like bonuses” aren’t what they used to be; one of my former employers is in the process of paying US employees uniformly $0 for the second year in a row (whether your book was +$100mm or -$100mm…yes, that’s the way to incentivize good performance!). Anyway, Markopolos’s book “No One Would Listen: A True Financial Thriller” is due out tomorrow. I hope people will read that book. Want my advice? Order it with the new edition (due March 7th) of Howard Schilit’s fantastic “Financial Shenanigans” which is really a must on the analyst shelf (the subtitle is “How To Detect Accounting Gimmicks & Fraud In Financial Reports).

You might as well order the books. There aren’t any crucial economic reports out on Tuesday, although auto sales will be released throughout the day. Keep an eye on the S&P “neckline,” as that may well be the main source of excitement for the day. And stay out of trouble.

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