What Bottom?

Look up the phrase “Better late than never” and I’m quite sure Merrill Lynch CEO John Thain will be prominently displayed. The writedown of mortgage-related assets is a massive destruction of shareholder equity and the company has been struggling to raise capital without diluting current shareholders out of existence. This process has often been referred to as “deleveraging” when in fact it is maintaining the same leverage as the value of equity falls. This may appear to be increasing equity only because banks are not disclosing their losses. As long as banks are raising capital to prevent excessive leverage, the macroeconomic effect will be the same as increasing the reserve requirement. The Federal Reserve has long appreciated that adjusting the Fed Funds rate is a better tool for making changes in monetary policy than adjusting reserve requirements because the Fed Funds rate results in smaller changes to the money supply allowing time for the economy to adjust without causing excessive whipsawing of the business cycle. The key to the current financial crisis lies not with clever restructurings of Fannie and Freddie, mortgage bailouts, consumer stimulus programs, or even commodity prices. (The negative externalities of a gas tax holiday could fill several books.) A simple but unpopular solution would be for every financial institution with significant holdings of mortgage backed securities to periodically sell a small portion to determine market prices and disclose those prices to shareholders. By no means are all fixed income securities created equal, but we need a starting point from which to deviate when valuing illiquid securities because the current models are insufficient. Lack of information on the magnitude of losses will only prolong the problem leaving a weakened dollar and the Fed distracted from unemployment and inflation targets.

这小狗爬上Purgatory Chasm

Yesterday, the amazing climbing Beagle, Milo, managed to negotiate Purgatory Chasm on his own while our slightly less athletic Beagle, Peanut, did require some assistance getting up the larger boulders. Milo has experience on much more difficult hikes but this one required substantial jumping from rock to rock.

Financial Time Machine

I read a research report this morning from JP Morgan analyst Ehud Gelblum regarding the Qualcomm settlement with Nokia. The report was dated 25 July 2008 but used the stock price from 18 July 2008 to justify the Buy rating. If I knew that the stock was going to pop 15% then I would have bought more of it last week too. Usually, I would not be surprised given my complete lack of respect for sell side analysts but I met Dr. Gelblum at the JP Morgan Tech conference earlier this year and left with the impression of a sharp guy who actually understands technology rather than the usual cream puffs that JP Morgan calls financial analysts. I’m sure there is some jealousy involved in this post. As a buy side analyst I am evaluated on actual results and it would certainly be easier to get paid twice as much to tell people to buy stocks last week. If you want to be a historian, stop calling yourself an analyst. It’s embarrassing to the rest of us.

Save the Bees

I was looking for a good documentary on colony collapse disorder, but I couldn’t find one that was both comprehensive and well presented so I opted for entertaining instead. 1 B = No B’s

First WordPress Experience

I just imported my Blogger account to WordPress through a very smooth, idiot proof process. Boss gave me another $5 million to play with until the end of the month but I can always roll it into August if needed. Earnings season will likely limit my blogging output in the near term but I hope to play around with the WordPress iPhone app soon.