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.

(1) Federal Reserve Chairman Ben Bernanke’s best move in 2008:

(a) surprises financial markets with a 50 basis point cut in interest rates in January, getting stocks off to a roaring start;

(b) holds to a slow, measured reduction in rates through mid-year, then keeps them steady to ward-off inflation;

(c) arranges with the SEC for a special “accounting pause” allowing major banks to defer fire sales of their remaining mortgage-backed securities positions thus staving off a credit depression;

(d) finally cracks his composure and publicly asks Alan Greenspan to just shut-up and stop quoting odds on a recession.

(2) The biggest economic “bust” of 2008:

(a) the Chines stock market (after the Olympics);

(b) ethanol;

(c) the new Google phone;

(d) the US dollar.

(3) Most notable “upside surprise” of 2008:

(a) housing stocks;

(b) bank stocks;

(c) the Japanese economy;

(d) the San Francisco Giants.

(4) First to resign in 2008:

(a) Treasury Secretary Paulson;

(b) Baseball Commissioner Bud Selig;

(c) Hillary Clinton’s campaign manager;

(d) Senator Larry Craig.

(5) “Commodity of the Year”

(a) water;

(b) oil;

(c) uranium;

(d) gold;

(e) solar silicon.

(6) “Comeback of the Year”

(a) Citigroup;

(b) Katie Couric;

(c) Tony Blair;

(d) George W. Bush;

(e) land-line telephones;

(f) Don Imus.

(7) “Bombshell of the Year” in California:

(a) Supreme Court rules in favor of gay marriage;

(b) Gov Schwarzenegger’s health care initiative approved by the voters;

(c) John McCain wins Republican Presidential primary;

(d) State deficit balloons;

(e) all of the above.

(8) “Financial Scandal of the Year” will involve:

(a) Iraq contracts;

(b) major debt rating agencies;

(c) television evangelists;

(d) a leading Wall Street securities firm;

(e) the Chinese stock market;

(f) cell phone billing.

(9) Democratic Presidential nominee:

(a) Hillary Clinton;

(b) John Edwards;

(c) Barack Obama;

(d) Joe Biden.

(10) Democratic Vice Presidential nominee:

(a) Bill Richardson;

(b) Joe Biden;

(c) Chris Dodd;

(d) George Mitchell;

(e) Evan Bayh;

(f) Bob Kerry.

(11) Republican Presidential nominee:

(a) Rudy Giuliani;

(b) Mike Huckabee;

(c)    John McCain;

(d) Mitt Romney;

(e) Fred Thompson.

(12) Republican Vice Presidential nominee:

(a) Governor Crist of Florida;

(b) ex-Governor Bush of Florida;

(c)  Sam Brownback;

(d) Lindsay Graham;

(e) Mike Huckabee;

(f) Kay Bailey Hutchinson;

(g) Haley Barbour.

(13) Will run as an Independent for President:

(a) Mike Bloomberg;

(b) Lou Dobbs;

(c)  Ralph Nader;

(d) Ron Pau

(14) Decisive state in Electoral College Presidential vote:

(a) Florida;

(b) Ohio;

(c)  Missouri;

(d) Colorado;

(e) none of the above: a “landslide” winner.

(15) Most significant military confrontation involving US forces will occur in:

(a) Afghanistan;

(b) Iraq;

(c)  Iran;

(d) Congo.

(16) Direction of US stock market in 2008:

(a) starts weak, finishes strong as US escapes recession;

(b) starts weak, finishes weaker on recession fears for 09;

(c)  starts strong, fades into summer but rallies through election;

(d) a significant “crash” event due to further deterioration in credit and business spending.

(17) Most successful company of the year:

(a) Apple (again);

(b) McDonald’s (dethrones Starbucks for coffee);

(c) Goldman Sachs (Federal Reserve borrows from them);

(d) Boeing (the 787 flies);

(e) Google.

(18) Most economically significant strike action in 2008:

(a) Nigerian oil workers;

(b) South African miners;

(c) French civil servants;

(d) US truck drivers.

(19) “Deal of the Year”:

(a) JP Morgan buys Bear Stearns;

(b) NY Stock Exchange buys NY Mercantile Exchange;

(c) Yahoo and AOL merge;

(d) Google buys Garmin (GPS);

(e) Chinese acquire a major Canadian oil company;

(f) Russian telco buys major US wireless carrier.

(20) Price of oil per barrel at year end:

(a) $105;

(b) $85;

(c) $65;

(d) 75 Euros.

The Dean’s Answers: 1-b; 2-a; 3-c; 4-c; 5-a; 6-c; 7-e; 8-b; 9-c; 10-d; 11-c; 12-c; 13-b; 14-e; 15-a; 16-c; 17-b; 18-d; 19-b; 20-b.

The public equity and debt markets in the US acted like the Fed was truly the “Grinch That Stole Christmas” immediately after the Board announced a decision to cut the Federal funds and discount rates by merely a quarter point rather than half point  many market participants had argued for in the case of each rate, and even both. The Fed pronounced a judgment of ”uncertainly” about the future direction of both economic growth and inflation, while these market players clearly believed that the risks of a recession should far outweigh the risks of inflation in the Fed’s determinations.

One could feel perhaps enough sympathy for the Fed Board as it seems locked in a battle of wits and wills with a market that thinks they do not know what they are doing. One could almost conclude, then, that the Fed’s move the next morning announcing a new auction mechanism to inject $40 billion into the international credit markets was not a “flinch” in the face of market uproar but rather a kind of “sucker-punch” to the equity and debt market players who had so quickly bet against the Fed’s judgment. (That’ll teach ‘em not to flock to Treasuries!) 

The truth may lie someplace else, however; Thursday’s and Friday’s seriously elevated PPI and CPI data introduced a novel proposition to the markets — maybe the Fed is right! Maybe there is more uncertainty than any other phenomenon just right now. Maybe the Fed was correct in holding a bit of its firepower and engaging in a more surgical attack on the illiquid conditions in the global credit markets — especially the excruciatingly high LIBOR inter-bank rate, a benchmark for a wide range of routine credit financing.

 Thus far, LIBOR has not really responded, but that will be an interesting number to watch next week to see the Fed’s auctions will indeed make a difference. Ironically, it could be that a renewal of confidence in the Fed’s judgment may now be a prerequisite for the classic “December rally”that  equity market participants are pining for (when they are not swooning to get the Fed’s attention).

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.

The Paulson Plan to provide relief for homeowners with subprime mortgages due to reset in early 08 has been attacked as a both a dangerous “moral hazard” and “too little, too late” — quite logically, it can’t be both! If it’s minor, it’s not hazardous, and if it’s really a bailout of immoral proportions, well then it’s not “too little”.

The reality is more related to the legal constraints under which the Treasury Secretary was operating than anything else. Indeed, the very narrow category of homeowners who are eligible for the relief fits neatly into the standard clauses in the securitization documents allowing mortgage eervices to vary repayment and reset arrangements only when, in summary, the outcome of such changes would be most likely to be better for the holders of the obligations than sticking with the original terms (ie,  and let foreclosure happen and take chances with the resale market).

This contractual test would appear likely to be met in the case of borrowers with substandard credit scores and whose mortages are 97% or more of the value of the home at current market; these borrowers — the prescribed beneficiaries of the Paul Plan — virtually define a category most likely to default into foreclosure. The Paulson Plan, accordingly, hardly can be said to do violence to the ’sanctity of contract’ since it basically tracks the circumstances where contracts, on-a-case by case basis, actually provide for the type of relief proposed. All Paulson has done is wrap it all up in what the Administration is surely loath to call a “class action”.

The problem for the market and the economy (not to mention the homeowoners) is that this same category of borrowers has little to gain from signing up for the extension of even their existing ‘teaser’ rate mortgages — which were improvident in the first place — especially against a backdrop of home values that have  fallen to such a shallow margin over the amount of the mortgage. Financially, they could well be better off dropping  drop off the keys and renting!

In the end, this Plan is no panacea for the next round of resets due by the Spring, and not surprisingly the equity and debt markets are beginning to more seriously consider the real prospect of a recession in the next year. Will the Fed be as disappointing as the Treasury?