Monthly Archives: September 2010

Credit Unions + tax breaks + Obama

Lets examine a couple events that occurred this week.

1. Governments Seize Three Credit Unions.

2. $50 Billion Credit Union toxic securities resold with government backing.

3. Small Business may snub $30 Billion loan

While #3 is titled poorly, many of the mentions in the article are interesting.

Chase said the bank already has enough capital to meet the paltry demand for loans. “Our business customers are mired in uncertainty and are reluctant to invest in their businesses.

Sounds like this bank is investing in treasuries instead of businesses..

Next clip.

The $30 billion fund will be run by the Treasury Department, and money will be awarded to banks deemed strong by regulators. Banks that have less than $10 billion in assets are eligible.

Community banks will have to pay an annual dividend of 5 percent to the U.S. Treasury. However, when banks increase their lending to small businesses, their dividend rate declines on a sliding scale. So, if a bank increases its small-business lending portfolio by 2.5 percent, the dividend payment goes down to 4 percent and so on, said Paul Merski, chief economist at the Independent Community Bankers of America, the lobbying group for small banks.

The dividend payment increases to 7 percent if banks don’t lend to small businesses.

Look out below fellas.  The feds shut down bad credit unions, removed their toxic assets, and are now offering an “incentive” structure for small banks to loan money to businesses.

What business/bank would be opposed to such opportunity…?  Obviously, large banks and big companies…

Examine the movement last week in small caps…  Not a coincidence, and no it wasn’t the durable good order.

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immigration caps hurting the economy?

Very interesting article.

http://www.ft.com/cms/s/0/bd693cee-c1d3-11df-9d90-00144feab49a.html

The key to this conversation was this quote.

“He said companies were moving jobs overseas in response to punitive caps that left them unable to hire key staff.”

I find that this could also be the case here in America.  Most Americans don’t realize how much of their income was off the back of immigrants.  Both H1B and illegal.  We have sold them homes, cashed their checks, and provided them with minimal government services.

By not accept immigrants, a nation is saying no to many jobs and industries.  Is this necessarily a bad thing?  Maybe yes, maybe no.  The greater problem is that we are probably not being rational / using proper justifications for tighter immigration policies.  Obviously, allowing “illegal” activity is not a solution either, then again, it worked quite well in the 80’s and 90’s.  One can even say that the immigrants did lead the boom.

everyone is an expert on japan

http://www.ft.com/cms/s/0/3401f12e-c0f9-11df-99c4-00144feab49a.html

It may have been a victory lap of sorts. One day after the ruling Democratic Party of Japan leadership contest was resolved in prime minister Naoto Kan’s favour, the Japanese government intervened in the currency market to weaken the yen. While the move is a welcome escape from Tokyo’s policy paralysis, its significance is more political than economic.

Sureeee.  Then read this.

Foreign exchange interventions are more likely to stick if deployed in co-ordination with other countries and when they target speculative bets rather than fundamental market forces. As long as the Japanese allow chronically lower inflation than their trading partners, they must get used to irrepressible upward pressure on their nominal exchange rate. As fattening trade surpluses and historical comparisons show, the real exchange rate is hardly overvalued.

Doesn’t the author get it?  Currency rates can determine inflation, just as much as inflation can determine rates.  If Japan is successfully able to weaken their currency, then they will have inflation.

Ever since the Volker era, it has been much easier to control inflation through currency.   The raising of rates in the 80’s was simply that.  A currency intervention tactic.  No  coordination required.

Do people really think the world has coordinated the deflation that has occurred in japan?

they didn’t like the tax break

Obama releases a proposal to give investment tax breaks to corporations.  All in the name of boosting the economy.  The financial markets and writers reacted pretty quickly.  A big thumbs down.  Bond holders aren’t here to finance pork barrel bills.

Obviously equities rallied and treasury bonds suffered.  I’m sure the administration will get it sorted out.

fantasy football

Business week published an article about fantasy football.  The excerpt is interesting.

The problem is, it’s not. Challenger, Gray & Christmas estimates that American companies could be losing as much as $1.5 billion in productivity during an average football season because of fantasy leagues. As a result, a war is escalating between office managers and rank-and-file fantasy junkies. And, like surfing questionable sites from your cube, playing in an office fantasy league can now get you fired. Last October four employees at Fidelity Investments in Westlake, Tex., were let go for alleged participation in a fantasy football league, which was deemed a violation of the company’s anti-gambling policy. Among the accused was 26-year-old Cameron Pettigrew, who had worked as an account representative at Fidelity for almost three years. He was taken into a conference room and interrogated about his fantasy football activities for, by Pettigrew’s estimate, 90 minutes.

“It seemed so over the top,” Pettigrew remembers. “They were really intent on getting me to name names.”

While workplace gambling is a serious problem, I am not so sure it should be isolated to football.  It is not a surprise that an office staff built around incentive pay and regular business gambling habits would have a strong fantasy football following.  In the end, I am sure there are some upper level managers that are intimidated to know that there are superior strategic gamblers within the ranks of their office.

What if we have another crisis.

As a teenager in Orange County, I remember the days when Citron got busted for going long.  An over simplified summary is that, this man borrowed short and went long on treasuries.  How could anything go wrong?  Borrow at a low short term rate, and lend at a higher long term rate?

As more banks,treasurers, and retail investors do the same, the value of the long bond continue to increase.  With money tied up in treasuries, inflation tamed, and treasuries rose more.  Citron was a hero.

The problem is that the long bond can’t forever drop.  Once the spread hits a certain level, investors that are leveraged are called on.  They have to sell their longs.  As a result the treasuries begin to rise.

This can have a disastrous effect on the economy.  When leveraged investors/banks have to sell an asset declining in price, money literally vanishes from our money supply.  Yields can increase while money is sucked back into the banks writedowns.  Overnight, a treasury yield increase of 1% may in fact equate to a real yield increase of 3-4%.

Are there any investors trying to capitalize on this opportunity?  Of course, otherwise we wouldn’t see any participants  willing to fund 0.4% interest CD’s and money market funds.