Connelly on Commerce

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

This week we will see the whites of the eyes of third quarter GDP: again, the number itself will almost certainly be wrong by a factor of 10% to 25%, owing to the fact that it will contain mostly proejctions for the month of september rather than hard data. Nevertheless, it may clue the next turn in the financial markets, more so than various consumer confidence and other measures expected by Friday.

That said, which way would a “good” number turn the markets in terms of the US currency, oil, bonds and stocks?

At week’s start, stocks were under stress due to a snap-back of the US dollar (since almost the whole world was short, this should be no surprise and is probably interim). Bonds suffered a bit due to the overhand of huge Treasury issues in the next few days. Gold traded off along with hard commodities (but sugar and coffee stayed sweet and perky).

So let’s say GDP comes in at 3% or better: does this encourage the stock market that the rally over the past six months is somewhat more justified than many believe (especially those sitting on the sidelines waiting for a chance to come in and dress up their portfolios)? Or does it foretell an earlier than expected increase in the Fed funds rate and thus a panic out of stocks? Could go either way on the same data. Practically everyone would discount the sustainability (if not the credibility — see above comment) of a number with a “3″ on it; perhaps, then, there will be less panic about the Fed moving more quickly.

It is also evident that hedge funds that have missed the rally will be trying to drive the market south in advance of Thursday’s GDP announcement in anticipation of getting some stocks on the cheap by nightfall Wednesday, ahead of a GDP-induced run-up.

Also on deck this week are Senate action on extending or phasing out the new homebuyers tax credit..look for this by mid-week or not at all. First inklings of a stretched out “compromise” on this sent bank and homebuilder stocks reeling. We do love ou own bailouts but not the others guy’s.

Also coming will be weekly unemployment numbers, with perhaps a clue to where the monthly report wil come out Friday November 6.

Meanwhile the Congress and the Fed will also progress their work on financial institution reform and banker pay limits, and the Yankees will be in at home in the World Series against some pretty tough pitching from the left-side (and featuring a couple tough lefty hombres of their won): perhaps there is someting to this rise of Socialism theory of Rush Limbaugh’s; but only rich traders can afford World Series tickets, so let’s hope they are not disappointed by the Yankees, the Congress or the Fed (the latter two, however, lack a Derek Jeter as captain).

And speaking of banker pay: remember, Warren Buffett tried to rein that in single-handedly (I believe he’s a lefty, too)  when he ran Salomon  Brothers in 1991-1992; but in his own words he failed to do so, because the other firms took  out his best talent rather than follow his lead. No wonder then that only the Government can serve as the great equalizer and save these institutions from themselves.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

“Change We Can Believe In”

Here is what President Obama should do to get Health Care Reform done:Unclog your vetting process and admit some experienced business professional to your government, not just academics, DC lawyers, think tankers and former affiliations congressional staff. Not everyone who worked on Wall Street is an untouchable

Confront the negativity, don’t add to it; folks are  overdosed on pessimism.

It’s time to stop appearing to demonize business, insurance companies, banks and corporations: there are real demons out there, mostly in Fox News, but you need a successful and growing economy to reform healthcare. 

Simplify: a PowerPoint chart could put your HC opposition on the spot, not off the hook .

Don’t just laugh off the absurd call it what it is (death panels, concentration camps, etc.)

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

What passes for conventional wisdom from CNBC, Fox and multiple radio commentators these days on the economy is reflecting more politics and ideology than hard analysis.

For example — Obama has failed because he hasn’t secured passage of  comprehensive health care legislation in his first six months in office: what utter nonsense. Whether or not legislation passes later this year, the idea that a he should be written off because in that short a time he hasn’t accomplished what 11 Presidents before him failed in the their full terms to do  is preposterous except on cable TV.

The stimulus package has failed: if so, then why is 2nd quarter GDP down only 1% while the previous two quarters were down by over 5% each?

The “cash for clunkers” program is a Katrina-like failure of Federal government intervention: then why were the appropriated funds exhausted in on only the first week of eleigibility?

The Chinese and other foreign central banks are going to stop buying US Treasury securities: then why were the vast majority of recent Treasury note auctions quite successful from the US taxpayers’  standpoint?

Warren Buffett was a fool to take an option on Goldman Sachs at $115/share: enough said, with Goldeman now at $160 or so.  And his GE is climbing in share price as well.

The government has no business involved in the auto industry, and will surely botch the bankruptcies of GM and Chrysler: then why are both already out of bankruptcy succesfully, faster than any airline in history, and why are auto sales up? (See “cash for clunkers”, above, as well.) And what do these commentators suggest the Government do with its equity interests in the compnaies — sell them now and deprive the taxpayers of any upside?

If the Government fails to step in to save CIT, it will be another Lehman Brothers with dire consequences for small business: but CIT lives on and obtained private credit and bridge financing.

TARP is a failure, a waste of taxpayer money  and a boondoggle: then why have the biggest and best banks already paid their TARP loans back, with profitable interest, to the US taxpayer?

Ken Lewis was an idiot to buy Merrill Lynch, and the Government was a knave for forcing him to do so: then why is Ken crying all the way to the (pardon the expression) bank with the flush of cash generated by the folks at Merrill this fiscal year?

Carol Bartz should do a deal with Microsoft; but when she does a deal, she shouldn’t have — let’s wait maybe a week to see how things sort out!

The Obama Adminstration is spending too much money and Bernanke is printing too much money and neither will be able to stop runaway inflation: OK, so let’s go back to the Hoover  approach and and adopt an austerity budget and contract the money supply — worked before, right?

Those who want to use ideology as a basis for stock trading are welcome test the returns that type of focus brings. But let’s not replace the “efficient market”  hypothesis with another fantasy version of real economic behavior.

 Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

 Rarely has there been a Fed meeting proking more market anxiety when the the chance of an interest rate increase is absolutley nil than the ongoing meeting that will end Wednesday June 24.

Rarely has the role of the Fed as market psychiatrist-in-chief been more front-and-center in the market’s consciousness — or unconsciousness, for that matter.

The market would, it thhinks, like the Fed to tell it when it will get concerned enough about potential inflation to take the wraps off interest rates; whether and when it will continue to buy Treasury securities and government agrency paper; whether and when the nation’s bansk will collecively no longer present a “systemic rsik’ without direct governmental aid; what the ‘top’ willl be in unemployment and the “bottom’ will be of housing; whether tit sees “green shoots” in the economy or ‘”ellow weeds”?

The honest answer to each of these questions is “We’ll see.” And Chairman Bernanke will probably find a way to say just that and not much more — the good doctor found out long ago that a placebo works just as well as Valium when it comes to market anxiety, and he must bear in mind that he is running for re-eelction in a primary where there is only one Voter-in-Chief.

Besides, if the Fed actually could answer those questions with precision and did so, the market would quickkly remeber the phrase “Be careful what you wish for”. The markets eyes want answers, but its stomach surely does not — precisley because the fed would lose all credibility if it actually tried to forecasrt beyond the macro numbers it ususally deals in.

We will have to be satisfied with a “steady as she goes” statement even if where she is going isn’t all that clear yet. What is more or less clear is that we have dodged Armageddon — whether that fact drives the US dollar’s relative value up or down in the wake of expanded fiscal deficits remains to be seen, and will be the first signal of how the market views what the Fed has to say — the markets for oil, commodities, and yes even fertilizer, not to mention banks (which have been dealing in fertilizer of sorts over the past couple years) will follow.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Can a State qualify for TARP assistance; would its financial collapse threaten to create a “systemic risk”?

For the municipal bond market, the answer to the latter question is probably yes. The situation in the Golden State bears an uncanny resemblance to AIG last fall:  financial mismanagement; floundering leadership; profligate spending and risk-taking with it’s balance sheet; excessive leverage. And, perhaps most importantly, no good tools available to the Federal government for an orderly restructuring of its affairs.

FDIC receivership is of course out of the question as the State is not a bank. And under our bankruptcy laws, municipalities can file for bankruptcy, but not states. Nor does the new legislation making its way through Congress to provide a framework for winding up the affairs of financial holding companies like Lehman and AIG and Citigroup will apparently  not apply to states, either. GM and Chrysler can get their  contracts reshaped in Chapter 11 to preserve their “wasting assets” and keep their workforces alive as going concerns, but not California.

What’s a Governator to do? Perhaps by cutting expenses  wherever he can by declaring a state of “disaster” and going over the legislatures heads. Perhaps by trying to substitute Federal stimuklus money for currently budgeted California’s own budgeted  expenditures.

But the guess here is that, just when you thought that TARP was being shunted at least to the recycle bin by the post-”Stress Test” rush by the systemic risk banks to raise capital “on their own”, along comes yet another systemic risk petition, this time from Sacramento. Maybe not today or tomorrow, but July 4? — then we’ll know what it cost to prop GM and Chrysler to their next lives post-bankruptcy, and a few banks may have even met the terms for repaying the TARP. But California, like it or not, will then be the next systemic shoe to drop on Washington’s table.

We are not likely to see an analogy to the famous New York Daily News headline in the mid-70’s  “Ford to NYC — Drop Dead”  — but we may well see similar intervention to what eventually occurred in New York by way of the State government– a sort of ad hoc receivership of California’s government in exchange for a Federal Aid package — like a domestic IMF loan. What a comeuppance for the world’s seventh-largest economy. But if it could get disciplined about its finances, what an engine of change it could once again be for the country. This could be a TARP loan worth the effort.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Much of what passes for thought on cable news coverage of the Great Recession is as bankrupt as Chrysler and desperately in need of a “Chapter 11″ restructuring.

Witness today: Larry Kudlow on CNBC claiming the Obama Administration is directing GM to stop making trucks and produce only two-door hybrids. Utter fabrication; exaggerated nonsense; yet this kind of drivel goes unchallenged by anyone other than the increasingly isolated Steve Leisman.

Meanwhile, the similar incessant blubbering about the “sanctity of contract” on behalf of hedge fund investors in Chrysler’s secured debt by  Kudlow and Melissa Francis and Michelle Caruso-Cabrera and Dennis Kneale, along with the rants against “Socialism” from the morning host Mark Haynes,  continue to position CNBC as the clone of its competitor Fox News in vying for the title of the most vitriolic anti-Obama network on the air, and useless in terms of actual market perspective, not to mention actual knowledge of bankruptcy procedures.

No problem with critiquing Obama’s administration or his policies; but how about fair and balanced — somebody — All these people who supposedly “report” on the market during the trading day are becoming specialists in ideological ranting, so that those of us who would like not to be shouted at but rather be more informed are left with only Bloomberg TV as a choice. Dull, but at least not a GOP pep-rally.

If Kudlow wants to run for the Senate in Connecticut,  let him stand and deliver elsewhere other than as a supposed market reporter from 10 AM to 11 AM — he has a commentary show later in the day, for example, where  unbalanced opinion is at least properly positioned as such. Reporting on Anit-Obama sentiment among traders of course is entirely appropriate in terms of market-color. Fanning the flames of that sentiment, however,  is like the umpire taking a swing — interesting, but outside the rules of the game. Because then you know you have no umpire, and that the game is rigged.

Interestingly, the CNBC “commentary” shows like  Jim Cramer and Fast Money later in the day after the markets close show more balance of opinions, however exaggeratedly ludicrous (“all numbers coming out of China are false”).

Maybe the CNBC management believes they’ve got a winner with the hysterical rants of their anchors against all things Obama, but I’m not so sure they aren’t driving away an audience of serious people who want to find solutions to the Recession problems in something other than the simple mantra of unbridled capitalist animal spirits, which did us so much good between 2004 and 2007.

Notice how quiet so many of these day-anchors  are the past few days after the catastrophe they predicted when the “stress test”‘ results were announced failed to materialize, and many of the financial institutions in question were able to raise private capital in the public markets: something they said was impossible under  our “socialist” regime.

It’s enough to hear Dick Cheney laying the groundwork for a coup in the event of another terror  attack (which he pronounced as inevitable even during his own Administration, by the way). We don’t need to see the best financial news apparatus turned over lock, stock and barrel to one particular  political viewpoint hour after hour in a way that clearly frustrates some of its best on-air reporters who are trying to deal with the real as opposed to the ideological world.

After months of raving about “too big to fail” — an easy shot when you have no public responsibility for the financial system — the so-called anchors now rail against the very procedures of the bankruptcy courts that they argued should be left to handle the mess. We need something better from CNBC during the market day than shills for the hedgies  and would-be Treasury Secretaries in the Palin Administration.

Finally, there are those who argue what’s the difference with CNBC going one-sided political while MSNBC has its leftists Chris Matthews and Keith Olberman and Rachel Maddow — it’s real simple, those folks’ programs cover politics , and their political opinions are balanced by regular contributors like Pat Buchanan and Joe Scarborough and others who always get a full shot with their views and aren’t summarily cut- off by serial interrupters like Kudlow and Kneale. Moreover, the Fox lineup from dawn to dusk is more than a match with O’Reilly and Hannity (who like CNBC simply use contrarian political sentiments as punching bags).

Let’s hope CNBC finds a way to de-politicize its market day reporting and brings more balanced people like Steve Leisman and Julia Boorstin and the increasingly marginalized Erin Burnett back into prominence.

We are approaching a pivotal time in the US financial markets, where things that have gone before will be forgotten and the future will become more clear.

Between April 27 ans May 4 — the time of a long road trip in the new baseball season — we will learn the following;
–1: Third quarter 09 GDP initial estimate;
–2; Federal Reserve interest rate decision and economic outloook;
–3: Chrysler bankruptcy, merger or both;
–4: Bank stress test results — first the leaks and then the real thing;
–5: April unemployment.

The key dates are Thursday, April 30 for items 1, 2 and 3, and Friday May 4 for items 4 and 5. But the dates are not nearly so important as the numbers and the directions to the economy and national policy that will be revealed.

And the market action may be more volatile and frantic in the days immediately preceding and following the official announcements.

What will be the difference between good results for the markets and bad one– or as the Las Vegas traders might say, what is the “over-under”?

(1) On the Q1 GDP: bearing in mind that the first estimate reflects merely an educted guess about the March contribution, any number “less” than a negative 5% (ie, -4.7%) would probably be considered a “win” for the economy, and a negative 6% or worse would doubtless be viewed negatively. Here is definitely a case where “lesss is more” — so let’s go with -5% as the tipping point.

(2) The Fed is surely going to leave interest rates unchanged, so the swing issue is how they will characterize the economy. Will the statement cite anything positive about the housing, credit or consumer markets (forget anything positive about the job market for now)? Noting the very recent drop in new home inventory would be good for starters. For once, the Fed’s statement will come after the GDP estimate is released earlier that morning, and they can craft their post-meeting words acordingly. Our bet — some reference to the Fed’s continuing commitment to do “whatever it takes” to restore the economy to health while inflation risks remain subdued.

(3) Chrysler: many are betting on a bankruptcy filing before Thursday — it could even be a “trial ballon” of sorts to scare the wits our of GM’s unsecured creditors and unions. Chrysler’s creditors are in the main secured, so they may even figure to fare better in a bankruptcy, even if their TARP-lender friends at the Us Treasury, which is also trying to resolve Chrysler, disagree. The US Government would seem to have more conflicts of interest in this situation than a rating agency back in the old days (say, 2006). But the truth is that the secured creditors are in the drivers seat here more so than Fiat or Geithner, so a deal will have to be made because the Treasury will not risk pulling their TARP out from under them or exercizing its inchoate equity voting rights to the detriment of other shareholders’ best interests (although that apparently was not the case last December with Bank of America and Merrill Lynch). Bet on a structured dismemberment of our generation’s Studebaker, with Fiat getting a reasonalby good deal.

(4) Stress test results are best kept between you and your cardiologist, but these results are going to be shared with the victims’ (oops, patients’) creditors. This would be like your primary health insuance carrier having a direct feed from you EKG and adjusting your premium rates accordingly. Since no one expects that any bank fingered for having serious capital adequacy problems would ever be able to raise it in the public or private markets, look for a couple of forced dismemberments or forced marriages (somewhat like Bank of America/Merrill, but without the subterfuge, since the results would be thoroughly disclosed). And some bank heads will roll in the process (the over-under is 1.5, like an NFL point-spread).

(5): Unemployment above another 600,000 for the month would be a clear negative to the markets, and less than 500,000 something of a positive, so let’s go with this range as the margin of the moment for the markets by next Friday, if all this has not been drowned out by the latest swine flu news — one enemy we can all agree on how to fight.