HIDDEN VALUE

Dear Value Seeker,

As I sit down today, President-elect Obama is making his way to Capitol Hill. (He’ll be President Obama by the time you read this.)

Obama campaigned on a message of change. His inauguration speech today in expected to focus on hope.

Unfortunately, hopes for banks are fading fast.

“Financial stocks clobbered,” reads a MarketWatch headline today.

Chaos in Britain’s financial system, along with more weak earnings from regional banks, dragged financial markets lower again today.

Neel Kashkari, who is running the Treasury’s TARP program, has written to 20 banks in receipt of handouts demanding monthly reports on business and consumer loans. Kashkari wants an “insight” into how the banks are spending taxpayers’ money.

What a good idea! Shame we had to throw $350 billion down the toilet before he thought of it…

Not that it

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Paul Kedrosky has observed that a statistical analysis (word cloud) of the American Economic Association session titles, or even of the papers, leads to the impression that the economics profession has been relatively uninterested in the ongoing financial and economic crisis. Unfortunately, this observation misses ignores the fact that session proposals are submitted a full eleven months ahead of the ASSA meetings. Think back to January 2008, and the terms ascribed to those who warned of a severe slowdown ("alarmist", etc.), and the whole discussion is cast in a different light.

Furthermore, the correlation between scheduled paper titles and actual is, shall we say, fairly loose. In any case, the main messages of the papers are usually discussed in the context of current events.

I'll illustrate this last point by discussing the only complete session I made it to (most of my time was spend interviewing job candidates): "The

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Short-term aid, long-term assistance. According to the IHT, this sums up Barack Obama’s attitude toward the government’s role in the US auto industry. Obama is pushing President Bush to use some of the $700 billion bailout package to prop up GM (NYSE:GM).

- The wrangling between Bush and Obama comes in the wake of news that GM’s shares tumbled to 1946 prices, closing down 23% to $3.36, as analysts downgraded the stock on worries it would soon run out of cash and shareholders would be wiped out by any federal bailout.

- GM has 263,000 workers worldwide. If it does go under, that’s a hell of a lot of people joining dole queues.

- This, of course, would have disastrous consequences in the US, where unemployment rates are spiraling. If you take the U6 count of unemployed, which includes “marginally attached” workers and those who are

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The U.S. isn’t the only country rolling back on free-market principles. Communist China is also busy bailing out its economy. Over the weekend, the People’s Republic announced a $586 billion ’stimulus’ plan of it own. U.S stock futures are up on the news.

- Italy may be the next country to ‘rescue’ its economy with taxpayers’ money. According the The Times the Italian government was working on plans over the weekend to pump as much as $26 billion into its biggest banks.

- Uncle Sam is about to bailout AIG from its bailout. Apparently, the original handout was too tough on poor old AIG. So now its going to get a sweeter deal. This from the WSJ:

The U.S. government reached a deal Sunday night to scrap its original $123 billion bailout of American International Group Inc. and replace it with a new $150

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This post is a guest contribution by Paul Kedrosky*, friend and venture capitalist who also blogs about what shakes and stirs in the financial world on the Infectious Greed site.

That same broken dollar is now king. It won’t last. Think of it as a temporary scarcity of life jackets.

The dollar bulls are out for dollar bills. After having tumbled over the last few years while the U.S. economy grew smartly, that same broken dollar is now up 16% against the euro this year - and up more against other major currencies.

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U.S. stocks futures fell this morning despite yesterday’s barnstormer rally and heavy hints of a further rate cut by the Fed. “S&P 500 futures dropped 21 points to 917.70 and Nasdaq 100 futures fell 32.5 points to 1,275.50. Dow industrial futures dropped 200 points to 8,889.00,” according to MarketWatch.

– Yesterday, the Dow surged 11%. It was the second-largest gain in the the history of the index (all 112 years of it). Before you pop the champagne corks, it’s worth remembering that despite yesterday’s show-off surge Dow indsutrials are still 36% off their October 2007 record close. That puts U.S. blue chips deep in bear territory.

– While analysts desperately pour over their charts and numbers in search for a bottom in stocks, economists are on the lookout for a turnaround in the U.S.

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What stocks are going to be left standing after the current crisis has run its course? Paul Kedrosky of Ten Asset Management believes it will be companies that handle financial risk and tranparency well.

“CME has really laid out a nice path forward,” he said Monday on CNBC. He thinks they will be a player in moves to bring greater transparency to financial instruments like credit default swaps.

 

 

Riskmetrics and Factset Research Systems will also be beneficiaries, Kedrosky said. 

“Even though we’d like to say in the future only thing we’re going to do to manage risk is just cut leverage that’s just not realistic. It’s going to happen for sure we’ll go along with much lower leverage but we’re also going to continue use risk models and we’re going to go to the providers of risk models that do the most credible job of giving us data

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Leverage AnalysisLeverage Analysis of Financial Institutions

I wanted to post up this image (courtesy of Paul Kedrosky), because it illustrates the amount of leverage employed at various financial institutions. Numerous institutions on this list have high leverage. And, the scary part is that many of them have increased leverage from 2007 to 2008.

(click to enlarge)Then, take the info above and compare it to a list from my previous post on financial institutions regarding writedowns, losses, and capital raised. Although the data is very generalized and does not offer specifics into each institution's situation, it still provides us with a list of some banks that would make very good shorts assumming the short selling ban on financials is not in place. After all, a mix of high leverage, large writedowns, and low capital raised can be quite deadly....

As I am travelling in Europe at the moment (see “Another town, another train…”), this week’s edition of “Words from the Wise” does not provide the customary review of the financial markets’ movements and economic statistics. Given time constraints, today I will only share with you a number of video clips in lieu of excerpts from news items and quotes from market commentators. Quite a few of the video items include links to related articles for those who prefer the written word.

Firstly, as we are awaiting word on the bail-out plan, a very topical quote from Jim Welsh (Welsh Money Management): “We will be told that the Federal Reserve and

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By V Anantha Nageswaran

On September 19th, the U.S. Treasury Secretary Paulson issued a statement in which he said that the Federal government “must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy”. He called it the ‘Troubled Asset Relief Program’. Many have taken to abbreviating to TARP and from there, it is a short leap of imagination to call it a TRAP. The government had sent the legislation to the Congress for approval and it might be approved any time soon. We have something to say about it later.

But, even before the bill is passed and its ramifications known, stock markets around the globe heaved a sigh of relief and rallied hard towards the end of last week. It is a delightful irony that most markets showed a flat profile from Friday, September 12th to Friday, September 19th at the

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