I read an interesting article about how Norway has survived the current recession by saving and not spending. I had the chance to observe and learn about all of the Nordic peoples while at our embassy in Finland. I came to some short descriptions of each: Swedes viewed themselves as the leaders and trendsetters of the group, Danes saw themselves as fun lovers, far removed from their status as the most savage and barbaric people 1000 years ago - the Vikings, Finns wanted nothing more than to top the Swedes, and the Norwegians lived the motto of Gold´s Gym, “No pain, no gain.”
To understand how Norwegians came to this state, one has to remember that the country became independent only at the start of the 20th Century and at that time was one of the poorest of the countries in Europe. This nation of fishermen, lumbermen and farmers expended much blood, sweat and toil in building one of the highest standards of living in the world.
But a funny thing came in the 1970s, Norway found great reserves of oil and gas in its territorial waters. By now the country had already achieved one of the highest income levels in the world. Finding petroleum was the icing on the cake.
Fearing that the easy money from oil and gas exports would undermine their carefully built stolid pursuit of the good life, Norway chose to husband much of its petroleum income. The practice paid off. While all the world is desperately going deeper into debt to overcome the recession, Norway is simply dipping into its reserve funds.
Perhaps the Norwegians will now be able to lighten up a bit and be more like their fun loving cousins the Danes, who also enjoy a high standard of living, but spend less time at Gold´s Gym.
Leo Cecchini
May 2009
Saturday, May 16, 2009
Tuesday, May 12, 2009
STRESSLESS
Well the report is in, the 19 banks given a “stress” test by the Feds are all able to survive and continue as key financial institutions. Ten need to build up their asset bases and nine have adequate funds. The result was seen even before the report was released, financial shares on the stock exchanges rose like rockets at lift-off.
One thing not revealed in the public information about the tests was the role played by lifting the “mark-to’market” rules. While nothing was specifically said about this, clearly the banks would not have been able to perform so well if they had not been able to revise valuations of assets to “long-term” or “maturity” values, instead of marking them to notional markets.
Proof of how fast the banks have recovered enough to lend again, I am in Spain where its largest bank just issued a new Euro 1.5 billion securitized debt bond based on mortgages. Say what, aren’t these the “toxic assets” that caused the recession? Well yes, they are, but, as I have said all along, we now know that traditional sources of credit are not sufficient for our “New Economy.” We need securitized debt to regain where we were in 2007 and go beyond, even in Spain.
A major hurdle has been crossed. Now to the Obama stimulus plan.
Leo Cecchini
May 2009
One thing not revealed in the public information about the tests was the role played by lifting the “mark-to’market” rules. While nothing was specifically said about this, clearly the banks would not have been able to perform so well if they had not been able to revise valuations of assets to “long-term” or “maturity” values, instead of marking them to notional markets.
Proof of how fast the banks have recovered enough to lend again, I am in Spain where its largest bank just issued a new Euro 1.5 billion securitized debt bond based on mortgages. Say what, aren’t these the “toxic assets” that caused the recession? Well yes, they are, but, as I have said all along, we now know that traditional sources of credit are not sufficient for our “New Economy.” We need securitized debt to regain where we were in 2007 and go beyond, even in Spain.
A major hurdle has been crossed. Now to the Obama stimulus plan.
Leo Cecchini
May 2009
Wednesday, May 6, 2009
ON THE MONEY
Well no sooner did I write the last blog titled "Time to Invest" the mavens came out of the woodwork to confirm my notes. One guru on CNBC even pointed to my own portfolio as the best way to go, i.e. Bank of America, Citibank, Freddie Mac and such.
But none was as impressive as the coments from Jimmy Buffet's dad Warren at his annual meeting of his investment firm. He too spoke about investing in financial stocks. His most memorable line, however, was that, "if it takes a computer or calculator to determine how good a stock is, then I don't buy it."
For all of this last year I have been constantly hammering at the "wunderkind" with their electronic Ouija boards givine erroneous values to securitized debt and other derivatives, structured products and so on. People kept saying how could they be wrong, they are highly educated financial professionals. Well Buffet has called them out and they are now exposed as glib charlatans hiding behind the "smoke and mirors" of their trade.
By the way the stock market is rocking and rolling.
Leo Cecchini
May 2009
But none was as impressive as the coments from Jimmy Buffet's dad Warren at his annual meeting of his investment firm. He too spoke about investing in financial stocks. His most memorable line, however, was that, "if it takes a computer or calculator to determine how good a stock is, then I don't buy it."
For all of this last year I have been constantly hammering at the "wunderkind" with their electronic Ouija boards givine erroneous values to securitized debt and other derivatives, structured products and so on. People kept saying how could they be wrong, they are highly educated financial professionals. Well Buffet has called them out and they are now exposed as glib charlatans hiding behind the "smoke and mirors" of their trade.
By the way the stock market is rocking and rolling.
Leo Cecchini
May 2009
Monday, May 4, 2009
Time to Invest?
There are signs that the economic recovery plans are kicking in. Credit is once more available for housing and other purchases. The Obama stimulus plan is coming on stream. Banks seem to be back on the hale and hearty list. For many now seems to be the time to strike and get in early on rebounding investments. So what do I advise?
PROPERTY. I have been flogging "short sale" and foreclosure low priced rental units. "Short sale" is a term invented to describe properties sold for less than the value of their mortgage balance with the bank taking the loss. I can sell you one of these for as little as $40,000 for a unit that has a gross monthly income of $800. That means $9600 for the year less taxes and insurance of maybe $3500 or a net of $6100 or 15%.
SECURITIZED DEBT. The bad boys of the recession are back and selling very well. The easiest way to get in on the action here is to buy Fannie Mae and Freddie Mac. You should also look for products from the TAFL program of the Federal Reserve Bank.
SILVER. Funny, lots of people like to hold gold in their investment portfolio. And commodities should do well over the balance of the year. I prefer silver. While gold doubled in value over the last five years, silver trebled in value.
STOCKS. Put your money in financial shares - banks, lenders, investment groups. They took the biggest hit during the recession and promise the biggest gains in the come back.
ANYTHING GREEN. The corporate world has glommed onto the environmental movement and sees "green" to be made in being "green." Check energy technologies, no matter how far fetched, since all will get development funds. Recycling companies loom large. Another good choice is transportation that provides more efficient use of fuel, e.g. railways.
BIOTECHNOLOGY. With stem cell research now open for Federal funding and waiting cloning in the wings any group engaged in this research should see a renewal of interest.
EDUCATION. Private education led by online universities is booming. Start your own school or put your money into one.
Maybe a bit early for the faint of heart but definitely the time for the steely nerved investor.
Leo Cecchini
May 2009
PROPERTY. I have been flogging "short sale" and foreclosure low priced rental units. "Short sale" is a term invented to describe properties sold for less than the value of their mortgage balance with the bank taking the loss. I can sell you one of these for as little as $40,000 for a unit that has a gross monthly income of $800. That means $9600 for the year less taxes and insurance of maybe $3500 or a net of $6100 or 15%.
SECURITIZED DEBT. The bad boys of the recession are back and selling very well. The easiest way to get in on the action here is to buy Fannie Mae and Freddie Mac. You should also look for products from the TAFL program of the Federal Reserve Bank.
SILVER. Funny, lots of people like to hold gold in their investment portfolio. And commodities should do well over the balance of the year. I prefer silver. While gold doubled in value over the last five years, silver trebled in value.
STOCKS. Put your money in financial shares - banks, lenders, investment groups. They took the biggest hit during the recession and promise the biggest gains in the come back.
ANYTHING GREEN. The corporate world has glommed onto the environmental movement and sees "green" to be made in being "green." Check energy technologies, no matter how far fetched, since all will get development funds. Recycling companies loom large. Another good choice is transportation that provides more efficient use of fuel, e.g. railways.
BIOTECHNOLOGY. With stem cell research now open for Federal funding and waiting cloning in the wings any group engaged in this research should see a renewal of interest.
EDUCATION. Private education led by online universities is booming. Start your own school or put your money into one.
Maybe a bit early for the faint of heart but definitely the time for the steely nerved investor.
Leo Cecchini
May 2009
Tuesday, April 28, 2009
PRIVATE SECTOR FUNDS PUBLIC TAKOVER
Over the last week while visiting friends and family in California I have come to more clearly see the exquisite humor in what has happened over these last several months due to our faltering economy.
I have repeatedly commented on how the Federal Government has taken on an even larger role in the economy. Already the largest consumer, it will be even more so with the new budget that will increase Uncle Sam's take from 20% to over 25% of output. Already the central banker, the Federal Reserve System, Uncle Sam now owns a substantial share of the private banking sector. Already the rules maker for the economy, Uncle Sam will now engage in a round of enacting even wider controls over the financial sector. And of course the new role for Uncle Sam, the single largest stock holder in corporate America.
I have reduced this event to a terse comment, "What it took the Bolsheviks a sea of blood to do in Russia, Uncle Sam has done for peanuts." What I mean is that the Bolsheviks seized the means of production by force, while Uncle Sam is doing it for a rather small price.
I say small price because Uncle Sam is doing all this with money borrowed at small cost, in the main for less than 1% interest. And his capacity to borrow is not yet exhausted. I calculate that he can double the national debt without causing serious harm.
So what do we have. Uncle Sam is borrowing funds from the private sector at ridiculously low cost and he is using the funds to buy up the private sector. In other words the private sector is funding the Federal Government to buy it out. As I said, I find this to be exquisite humor.
Leo Cecchini
April 2009
I have repeatedly commented on how the Federal Government has taken on an even larger role in the economy. Already the largest consumer, it will be even more so with the new budget that will increase Uncle Sam's take from 20% to over 25% of output. Already the central banker, the Federal Reserve System, Uncle Sam now owns a substantial share of the private banking sector. Already the rules maker for the economy, Uncle Sam will now engage in a round of enacting even wider controls over the financial sector. And of course the new role for Uncle Sam, the single largest stock holder in corporate America.
I have reduced this event to a terse comment, "What it took the Bolsheviks a sea of blood to do in Russia, Uncle Sam has done for peanuts." What I mean is that the Bolsheviks seized the means of production by force, while Uncle Sam is doing it for a rather small price.
I say small price because Uncle Sam is doing all this with money borrowed at small cost, in the main for less than 1% interest. And his capacity to borrow is not yet exhausted. I calculate that he can double the national debt without causing serious harm.
So what do we have. Uncle Sam is borrowing funds from the private sector at ridiculously low cost and he is using the funds to buy up the private sector. In other words the private sector is funding the Federal Government to buy it out. As I said, I find this to be exquisite humor.
Leo Cecchini
April 2009
Monday, April 20, 2009
WE ARE ALL NOW GREEN
President Obama has stated that economic recovery and future progress must be addressed at the same time as our energy supply and environmental concern, especially global warming. In fact he has linked the three as integral parts of the same problem.
I have no problem with global warming, the earth has been on a warming trend for the last 10,000 years. Now I say this as someone who lives at 18 inches above sea level on an island and has a second home so close to the sea that it is caked in salt residue after strong storms. I know hurricanes, having lost parts of both homes to hurricanes. The island I live on was actually the product of a hurricane in the early 20Th Century. I live my talk and I repeat I am not afraid of global warming, in fact I welcome it since the earth is basically a cold place.
I find that my friends are about evenly split between those who state unequivocally that global warming is a problem and we better do something about it immediately and those who deny that global warming is even occurring. Both sides have plenty of ammunition and supporters. Neither one has won the battle for public opinion. The average Joe is worried by cries that the sky is falling but is equally concerned that stemming global warming will cost him an arm and a leg.
As far as I am concerned the debate is over. The corporate world has now embraced global warming and is using it as the best marketing tool since the American dream of owning a home and a car. We are now constantly barraged by ads urging us to be "green." WalMart proudly announced that it intends selling millions of new light bulbs that use much less energy. Auto makers are flogging ad nauseum their "hybrid, electric, and new fuel" cars. We are urged to eat food grown without chemicals. In fact we are urged to eat less, period.
I wonder how the avid environmentalists view their cause being usurped by the very corporations that they held up as the villains causing all the ecological disasters. How will they deal with a march to global purity led by such bad guys as Exxon, DuPont, Dow, and so on? Talk about unintended results.
Leo Cecchini
April 2009
I have no problem with global warming, the earth has been on a warming trend for the last 10,000 years. Now I say this as someone who lives at 18 inches above sea level on an island and has a second home so close to the sea that it is caked in salt residue after strong storms. I know hurricanes, having lost parts of both homes to hurricanes. The island I live on was actually the product of a hurricane in the early 20Th Century. I live my talk and I repeat I am not afraid of global warming, in fact I welcome it since the earth is basically a cold place.
I find that my friends are about evenly split between those who state unequivocally that global warming is a problem and we better do something about it immediately and those who deny that global warming is even occurring. Both sides have plenty of ammunition and supporters. Neither one has won the battle for public opinion. The average Joe is worried by cries that the sky is falling but is equally concerned that stemming global warming will cost him an arm and a leg.
As far as I am concerned the debate is over. The corporate world has now embraced global warming and is using it as the best marketing tool since the American dream of owning a home and a car. We are now constantly barraged by ads urging us to be "green." WalMart proudly announced that it intends selling millions of new light bulbs that use much less energy. Auto makers are flogging ad nauseum their "hybrid, electric, and new fuel" cars. We are urged to eat food grown without chemicals. In fact we are urged to eat less, period.
I wonder how the avid environmentalists view their cause being usurped by the very corporations that they held up as the villains causing all the ecological disasters. How will they deal with a march to global purity led by such bad guys as Exxon, DuPont, Dow, and so on? Talk about unintended results.
Leo Cecchini
April 2009
DIAMONDS AND MORTGAGES
A reader raised an interesting point, while he finds my articles to give "lucid" explanations of the current economic drama he believes that most readers do not understand financial markets. In looking at how to better explain the way the financial markets work I struck on an idea, why not use the market for diamonds as a way to describe the mechanism?
Diamonds are valued by the familiar "4 Cs" - carat, clarity, cut and color. Let us consider carat or weight and clarity to determine the "intrinsic" value of a diamond while we can consider cut and color to determine the "subjective" value of a diamond.
The carat or weight of a diamond can be accurately determined by a scale. Turning to a mortgage we can call its carat or weight to be its balance due, times its interest rate, times the period for repayment of the loan. This can be readily and accurately calculated.
The clarity of a diamond means how clear it is of imperfections or flaws which can be readily seen with a microscope. Such flaws and imperfections determine the potential for the stone to break and can be accurately measured. Turning to mortgages we can consider "clarity" to be determined by defaults and foreclosures which can also be accurately measured.
The color of a diamond can range from white to blue to lemon to "root beer." The demand for certain colors changes over time and this the value goes up and down according to fashion. Likewise the cut of a diamond can be of several types with demand for a certain cut affecting the value. At present the most sought after cut is the "Leo" diamond (no, I had nothing to do with this, unfortunately). The point here is that cut and color constitute "subjective" valuation of a diamond that can change over a wide range.
Subjective valuation of mortgages has to do with perceptions of their reliability. Thus they are subject to variable measures, rather than constant measures. Last year sub prime mortgages were consider to be the weakest mortgages and their values were smartly reduced, no matter what the "intrinsic" value may have been. Now prime rate mortgages are causing concern and they are being devalued smartly.
Another subject valuation stems from the fact that no one knows the full scope and scale of "securitized debt" built on mortgages. At first we panicked and cut valuations to the bone. However, as we get a better handle on this pile of "toxic assets" we are able to better value them.
I have argued since last summer to drop the "subjective" values derived from "mark-to-market" rules and value mortgages and mortgage based assets to their "intrinsic" value. This was done on April 2 of this year. This change will lead to banks increasing the values of their mortgages and mortgage based assets and thus allowing them to lend again.
P.S. More notes on diamonds:
1. Diamonds are found throughout the world, from the frozen wastes of Canada and Siberia to the steamy jungles of the Congo to the deserts of Namibia to the gentle hills of Arkansas.
2. The main suppliers of diamonds are South Africa and Botswana where they are mined and Namibia where they are culled from the desert sands.
3. For the last 100 years the supply and thus value of diamonds was controlled by the De Beers organization owned by the Oppenheimer family of South Africa. De Beers has now changed to a market strategy of being the "supplier of choice" in the wake of intense competition from Russia and Australia.
4. I once met the late, legendary patriarch of the Oppenheimer family, Harry Oppenheimer on a visit to Washington DC. I caught his attention when in response to his direct question I said I was negotiating the entry of the first American mining company into Mozambique, his back yard.
5. The diamond market rests squarely on its symbiotic relationship with love and marriage. If the demand by women for a diamond as the visible symbol of their marriage should change to some other stone, the market for diamonds would, get ready, drop like a rock.
Leo Cecchini
April 2009
Diamonds are valued by the familiar "4 Cs" - carat, clarity, cut and color. Let us consider carat or weight and clarity to determine the "intrinsic" value of a diamond while we can consider cut and color to determine the "subjective" value of a diamond.
The carat or weight of a diamond can be accurately determined by a scale. Turning to a mortgage we can call its carat or weight to be its balance due, times its interest rate, times the period for repayment of the loan. This can be readily and accurately calculated.
The clarity of a diamond means how clear it is of imperfections or flaws which can be readily seen with a microscope. Such flaws and imperfections determine the potential for the stone to break and can be accurately measured. Turning to mortgages we can consider "clarity" to be determined by defaults and foreclosures which can also be accurately measured.
The color of a diamond can range from white to blue to lemon to "root beer." The demand for certain colors changes over time and this the value goes up and down according to fashion. Likewise the cut of a diamond can be of several types with demand for a certain cut affecting the value. At present the most sought after cut is the "Leo" diamond (no, I had nothing to do with this, unfortunately). The point here is that cut and color constitute "subjective" valuation of a diamond that can change over a wide range.
Subjective valuation of mortgages has to do with perceptions of their reliability. Thus they are subject to variable measures, rather than constant measures. Last year sub prime mortgages were consider to be the weakest mortgages and their values were smartly reduced, no matter what the "intrinsic" value may have been. Now prime rate mortgages are causing concern and they are being devalued smartly.
Another subject valuation stems from the fact that no one knows the full scope and scale of "securitized debt" built on mortgages. At first we panicked and cut valuations to the bone. However, as we get a better handle on this pile of "toxic assets" we are able to better value them.
I have argued since last summer to drop the "subjective" values derived from "mark-to-market" rules and value mortgages and mortgage based assets to their "intrinsic" value. This was done on April 2 of this year. This change will lead to banks increasing the values of their mortgages and mortgage based assets and thus allowing them to lend again.
P.S. More notes on diamonds:
1. Diamonds are found throughout the world, from the frozen wastes of Canada and Siberia to the steamy jungles of the Congo to the deserts of Namibia to the gentle hills of Arkansas.
2. The main suppliers of diamonds are South Africa and Botswana where they are mined and Namibia where they are culled from the desert sands.
3. For the last 100 years the supply and thus value of diamonds was controlled by the De Beers organization owned by the Oppenheimer family of South Africa. De Beers has now changed to a market strategy of being the "supplier of choice" in the wake of intense competition from Russia and Australia.
4. I once met the late, legendary patriarch of the Oppenheimer family, Harry Oppenheimer on a visit to Washington DC. I caught his attention when in response to his direct question I said I was negotiating the entry of the first American mining company into Mozambique, his back yard.
5. The diamond market rests squarely on its symbiotic relationship with love and marriage. If the demand by women for a diamond as the visible symbol of their marriage should change to some other stone, the market for diamonds would, get ready, drop like a rock.
Leo Cecchini
April 2009
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