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Mark's Market Blog

4-4-09: First Quarter results, JPMorgan, TARP, executive pay

By Mark Lawrence

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We've now finished the 1st quarter. That's right, about 20 minutes ago we were all celebrating the new year, 15 minutes ago was the inauguration, and now we're a quarter of a year older. Markets are "up," having just finished the biggest four week gain since 1933. Is this it? Is the bad stuff behind us? Can we now get on with being Americans, the Masters of the Universe?

S&P 500, Jan 2 '09 to April 3 '09

Notice three remarkable things about this chart (I'm going to remark on them, that's how you know they're remarkable...) First, we're nowhere near the high on January 2nd, we're still 10% down from the start of the year. Second, we're nowhere near the 150 day moving average (gold line), so this movement does not yet classify as bullish. Third, the curve moving upwards is dome-shaped, you can see that if it continues this trend it will level off at about 875, still well below the 150 day average and the January 2 value. This curve will change in about a week or two, because otherwise it will level off and stop moving, and the markets never do that.

I think the market is going down. For this reason I sold my Google and Apple stocks. I was mildly annoyed to sell my Apple at 113.5, then watch it move around 115.5 on Friday. In a rare show of maturity my 18 y/o son pointed out that pretty much everyone else in the world has lost their shirts in this market, but I made a bit of money, so I have no business complaining that I left a touch more on the table. I sold my Google at 370.25, which was pretty much the high for the year, and again I made money. Please allow me to put this in perspective: the money I made would be pretty much wiped out by a tank of gas and a couple trips to McDonalds, but I didn't lose money on these stocks. My intent is to buy them back at a price about 20% lower than today's price.

The coming week is a short week that many people take off: it's spring break for the kids, it's the beginning of Passover, and it's coming up on Easter. Stock trading will be light, and most likely the established trend will continue to be followed. The week after that first quarter results will be coming in for a bunch of companies and we'll see how much blood was flowing in the first quarter streets.

U.S. consumer confidence rose slightly in March but remained near record lows as the economy remained weak and job prospects grew increasingly uncertain. Housing prices continue to drop. Car sales continue to fall. Car sales in February were 50% the sales of a year ago. Unemployment continues to increase dramatically. This recession will not really be over until unemployment, housing and auto prices stabilize, and I think we're at least a year away from that. The market will not really start going up until the recession is really over.

As we've seen, this financial crisis was brought on most immediately by a requirement for banks to pay off on CDSs, credit default swaps, related to mortgages. Who wrote these CDSs? The numbers are now in. Of the $16 trillion written, five US banks account for 98%: J.P.Morgan accounted for 53%, 17% for Citi, 13% for BofA, 9% for Goldman Sachs, and 6% for HSBC. Every one of these companies took on exposure well in excess of their capital. In the case of Goldman, their risk exposure was over seven times their available capital. Basically the plan was if everything went well, they were all rich, and if things went badly. . . well, here we are. 100 years ago, John Pierpont Morgan was credited with bailing out the Government during two crisis. Today, the firm that bears his name is substantially responsible for producing one of the worst crisis in the history of the world.

On Wednesday, the House of Representatives passed the Pay for Performance Act of 2009 by a vote of 247-171. This empowers Treasury Secretary Timothy Geithner to define what constitutes reasonable compensation, as well as to ban bonuses not based on performance standards. Geithner's guidelines would apply to companies receiving assistance from the government's Troubled Asset Relief Program, or TARP. Since last year the Treasury went around encouraging and pressuring pretty much every bank in the country to take TARP money whether they needed it or not ("The new symbol of stability in an uncertain economy"), this means the Treasury is now participating in the board meetings of most every US bank. Remember, many banks are now trying to repay their "loans," and are being told no mechanism for repayment exists yet. Beware Geeks Bearing Gifts.

Obama was in England all week for the G20 meeting, the meeting of the presidents and economic advisors from the 20 largest economies. They have agreed to upgrade an international body called the FSF, the Financial Stability Foundation, to a regulatory body controlling international banks and hedge funds. This body will supposedly have powers to regulate leverage, risk, and executive pay world-wide. Right-wingers are up in arms that the Declaration of Independence has just been burned, we're now once again under Europe's control. I dunno, I don't recall any treaty being signed, and I don't see Congress letting Obama give away a bunch of their powers to some European committee. Of course what will really happen is there will be a committee made up of a bunch of central bankers who will agree (or not) on some international standards, then see if anyone pays attention to their agreement. It will still be up to the individual countries to pass and enforce corresponding standards. It does seem clear that since banking is now very much international, we need some international standards on whether financial products are acceptable.

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