8.8.09

The bunny is Not Amused.

After vigilantly upholding his one principle prohibiting the Three P's in this blog (porn, profanity, and politics), he has been forced to break his own rule.

The instigator: the United States Congress.

The bunny has had enough.

Hypocrisy, it must be said, has been part of the politician's makeup for so long now that it is widely taken for granted, nay, even expected by voters who re-elect the swine term after term (while the Founding Fathers were clear on presidential term limits, the bunny concludes that when it came to Congressional ones, they must have all been too busy campaigning for re-election to write in this most crucial of clauses).

But on this sunny Saturday, when the bunny was looking forward to a day of tending to his coat and crunching intermittently on raw almonds, he was so shocked and awed to open the morning papers and see such an avalanche of Congressional duplicity he just had to blog about it.

Exhibit A is the tooth-gnashing tour brochure of a ten-member Congressional New Year's lurch around the world to study climate change (four with their spouses in tow) on an Air Force C-130 modified with rockets and skis to handle the load and terrain. The cost to taxpayers? A paltry $103K. That, at least, was the figure reported by those intrepid lawmaker/explorers. The actual cost, according to the Defense Department (which is somewhat more versed in the real-time costs of keeping combat aircraft flying), topped $500K. (This according to "an analysis piecing together the specifics of the excursion"--the piecers of today's missive being Brody Mullins and T.W. Farnam of the WSJ).

This occurs in the same issue (three pages later, above the fold, also with Mullins sharing the byline) as Exhibit B, the grousing of that selfsame Defense Department which was fingered for the purchase of eight passenger jets which (shockingly) the DoD said it neither needed nor wanted. Lawmakers cut back with a volley of statistics showing military usage (with perhaps one faulty round in the chamber, since according to their own data they themselves use the jets 14.5% of the time). Total cost: $550 million. That should've been covered by the termination of future orders for F-22 fighter jets, except that (aw, shucks!) funds were allocated for an engine redesign for the forthcoming F-35. Total cost: $560 million. Never mind that this more than doubles the original presidential request for four of the jets, including two currently under lease from the Air Force (at a comparative cost of $220 million). Never mind that this comes on top of the $485 million revival of a contract for a presidential helicopter already shunned by the White House for its absurd cost creep, which has already surpassed that of the 747 jumbo jet known as Air Force One (see posting 3.25.09).

This comes a mere three days after Exhibit C, which the bunny came across online after seeing a a CNBC headline he just couldn't pass up ("Stimulus Spending Fails to Follow Unemployment, Poverty", 8.5.09). According to ProPublica ("an independent, non-profit newsroom that produces investigative journalism in the public interest" according to CNBC--how's that for a lede?), the $787 billion stimulus package passed at the beginning of the year (which the president had to admonish Congress to bring down below $800 billion from over $900 billion in its original--Capitol--form before he would sign it) has blown all over the map without rhyme or reason, ignoring some of the hardest-hit states while showering money on others less impacted by the financial crisis. The ProPublica survey goes down to the county level--you can view it at http://projects/propublica.org/recovery.

Never mind that Congress has cashed in on public outrage over executive excess and blundering to make itself the public pillory of any corporate executive that will get a legislator's face on camera. Never mind that nonstop Congressional grandstanding about corporate financial excess belies the greatest increase in government spending since WWII. Never mind that after endless on-air harangues about the financial abuses of corporate America, the highest body of lawmakers in the land is voting to give itself more private planes (hey, c'mon, the military needs more airborne swivel chairs!) months after taking the titans of Detroit over the coals for their private jets (and for whom they just kicked out another $2 billion in car subsidies before conveniently going on vacation).

Hypocrisy, thy name is congressman.

Bunny Bombs Away:

"Lawmakers' Global-Warming Trip Hit Tourist Hot Spots" by Brody Mullins and T.W. Farnam, Wall Street Journal (8/8/09)

"Pentagon Takes Aim at Jets for Congressional Travel" by Brody Mullins and August Cole, Wall Street Journal (8/8/09)

"Hair of the Dog" by Alan Abelson, Barron's (8/8/09)

"Stimulus Spending Fails to Follow Unemployment, Poverty", CNBC.com (8/5/09)/"How Much Stimulus Funding is Going to Your County?" by Michael Grabell, Jennifer LaFleur, Dan Nguyen, and Jeff Larsen, ProPublica.org/recovery (8/5/09--source claims data current as of 7/20/09)

Singer, P.W. Wired For War: The Robotics Revolution and Conflict in the 21st Century. New York: Penguin Press, 2009.

3.25.09

Never before has the future been so now.

Just when the bunny was all set to resuscitate his blog with an excoriation of the times in which we find ourselves mired (apologies for the long sabbatical, but he’s been working on a book), along comes Wired for War (Penguin Press), a look at military robotics by think tanker P.W. Singer (Children at War) of ye olde Brookings Institution down in D.C.

After such saturation coverage of the Great Unwinding Redux, the bunny welcomed the opportunity to delve into a field which has quietly burgeoned into a stealth growth industry.

How much so, Joe? queried the bunny by phone. “Some numbers that illustrate this massive growth are the US going into Iraq with a handful of drones [UAVs] in’03,” claimed the author. “We now have over 7,000 drones in the inventory. On the ground, we utilized zero robots during the invasion in ’03. We now have more than 12,000.” The bunny was particularly surprised to hear of ground applications for unmanned systems, to the extent that concerned companies contracted are tasked even to provide robot “hospitals” for their products which bear the brunt of unfriendly fire. Take Foster-Miller, manufacturer of the Talon, a tracked robot with an articulated arm that first saw service sifting through rubble at Ground Zero following the 9/11 attacks. According to the author, the Iraqi theater alone accounts for nearly $500 million in robot and repair contracts: “Foster-Miller’s got a $20 million contract to run a repair yard for robots, a robot hospital, in Baghdad.” This facility, he claimed, repairs 50-60 Talons per month (of an approximated 2,000 units in service). Or consider General Atomics, which makes the headline-grabbing Predator UAV, as well as its heavier-armed progeny, the Reaper.

Being that the bunny is both burrower and prey animal, he is not overfond of the proliferation of machines that can fly (or roll, or swim) for lengthy periods, equipped with high-resolution sensors which can spot a burrow from low geosynchronous orbit, and which in some cases are even equipped with “smart” munitions capable of hitting a yard-wide target from miles away with an accuracy measureable in inches. No, the bunny doesn’t care for such developments one bit.

However, taking the long view as he does, he cannot help but marvel at the rapid growth of humanity’s dependence upon its lethal new creations, especially given the age-old phobia of artificial intelligence gone amok. When and how did the pendulum swing?

Ah, the Sixties.

“The industry really takes off in the 1960s, where you start seeing factory line work being done by robots,” Singer explained to your leery lagomorphic reporter. “When you move into the realm of war, the industry predated 9/11, but as companies in the marketplace describe, it was very much a matter of trying to ‘push’ it onto the customer, the customer being the Pentagon. After 9/11, it becomes a ‘pull’ environment. It goes from their phone calls aren’t answered, they won’t endorse, the doors won’t open, to being told after 9/11 to ‘make them as fast as you can.’”

Naturally, the rise of robotics (as opposed to AI, the industry’s more cognitive but less operational offshoot) runs parallel to humanity’s ever-increasing dependence on computers. Military applications for unmanned systems are a logical (and cost-effective) extrapolation of this trend, particularly with increased miniaturization of wireless handheld computers. (Consider Vcom3D Inc.’s Vcommunicator system employed by the US Army in both the Iraq and Afghan theatres, which is an iPod-based translator designed to provide troops with appropriate speech and gestures in unfamiliar locales.) If necessity is the mother of invention, war is one big mother: “Most analysts I spoke with told me the robotics industry now is akin to where the auto industry was circa 1908,” Singer said. “In that year, Ford sold just under 300 Model T’s. With the spurring effect of WWI, by 1918 they were selling almost a million a year.”

Since the funding for most robotics R&D is military-based, sooner or later the government gets involved, which would make any bunny flatten its ears with derision. Consider the wayward VH-71 Kestrel, the new presidential helicopter designated to replace Marine One (built by a team of manufacturers led by Lockheed-Martin). Due to a pileup of add-ons and delays, the president’s new chopper is now more expensive than the 747 used as Air Force One (“This is something Obama will probably cut,” Singer claimed flatly). This is an example of the phenomenon known as “requirements creep”, a neat little fungus in the moist, fetid environment of human bureaucracy. “It starts out with the client [the Pentagon] asking for a system but not knowing exactly what it wants in that system, be it because it hasn’t worked out the right concept for its operation, or because the people making the decisions don’t actually understand the technology they’re buying,” Singer explained. “They often give a somewhat vague or incomplete contract out. Companies take that contract and soon after the Pentagon comes back and says, ‘We said we wanted X, but now we want X+2, or X and Y.’ The company says it’ll cost more, but they’re happy to do it. So you get this back-and-forth where the original idea and estimate is nothing like what you ultimately get.”

But that’s the manned world, and the unmanned one which Singer is so interested in seems to already be outstripping its skin-and-bones creators. It’s happening so fast, Singer says, that it’s bending the very notion of what war is and what it means to fight it. “For 5000 years the idea of going to war meant, to use my grandfather’s experience in WWII, he went to a place of such danger that the family didn’t think he’d come home again. Compare that to a Predator drone pilot. Their experience of going to war against insurgents in Iraq or Afghanistan had them not leaving Nevada. Had them waking up in the morning, getting into work, spending twelve hours putting missiles on targets, then getting back in their car, and twenty minutes after being at war, being at the dinner table with their kids talking about their homework.”

Great googly-moogly.


Bunny bridges to nowhere:

"The Downside of Letting Robots Do the Bombing" by Mark Mazetti, New York Times, 3/22

“Intel, Lockheed Tell Obama on Taxes, Not In This Economy” by Mark Drajem and Holly Rosenkrantz, Bloomberg.com, 3/17

“iPods On The Frontlines” by Patrick Durkin, Tactical Weapons, 5/09 (p.34)

“In The Line Of Fire: Why America’s defence industry is in for some lean years”, The Economist, 3/21 (p.70)

4.6.08

The bunny is having one of those existential moments we've all had, when you wonder if you are insane, or if the rest of the world is.

He cannot fathom the relentless optimism surfing the tsunami of bad news. Talk about "irrational exuberance"--and the former Fed chief who coined that phrase himself went on the record stating there's better than a 50/50 chance the country could be in a recession, though of course that hasn't happened yet despite rising unemployment (from 4.8% to 5.1%), the dollar falling to a 12.5-year low, declining factory orders (1.3% in February, after 2.3% in January), a record national housing slump (too much source coverage to list), continuing acute credit-market constipation (ditto), a 30% jump in bankruptcy filings in March alone,and a financial industry so full of holes its notorious opacity has been thinned to a gossamer translucence.

Take, for example, the Dow's spike this past week on the news that UBS would take an additional $19 billion in writedowns (for a titillating total of $37 billion in losses), or that Lehman Brothers--which Wall Street sharpies have been betting is the next investment banking horse to lose, be shot and processed into dog food--will have to raise an additional $4 billion in capital because, y'know, just in case. This was interpreted as Good News because (so the rationale goes) these writedowns take us past the halfway point of the estimated $1.2 trillion global credit loss, roughly $460 billion of which will be sustained by "leveraged" US financial institutions (so sayeth the anonymous economists of Goldman Sachs, according to equally anonymous journalists at Reuters), and therefore, there's nowhere to go but Up.

This is about the time the bunny puts his head in his paws and emits a world-weary sigh through his fuzzy black nostrils. (As with all members of the Checkered Giant breed, the bunny's face bears the singular mask of black over the snout, eyes and ears. Closer inspection reveals natural brindle highlights--no Sun-In for this bunny.)

Such financial psychosis, the bunny concedes, may be in part a reflex reaction to the torrent of terror following the Bear Stearns debacle, arguably the industry's worst trauma since 9/11 (or, even more arguably, the industry's very own 9/11). But it seems to carry the seeds of its own perpetuation by policy. The bunny cites Andrew Bary's excellent article in yesterday's Barron's ("Wall Street's Latest Illusion", p.40), which illustrates the alchemy by which tottering financial firms turn their losses into profits on their books. Abracadabra:

"Here's how the accounting works: When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value."

Got that? If not, here's the bunny's breakdown. Let's say you're an investment bank. You issue a ten-year bond with a maturity value of one thousand smackeroos. Two years on, the bond's market value drops to $800 due to reduced demand. You know you're still getting the full grand eight years out, so you book the loss as anticipated profit. This is not only legal, it's common practice, or, as one of Bary's sources sums up, "a natural consequence of fair-value accounting." As Bary himself notes:

"Lehman, for instance, reported earnings in its most recent quarter of 81 cents a share, above the consensus estimate of 70 cents. However, the $600 million gain from the reduced value of its liabilities essentially added about $400 million, or about 70 cents a share after taxes. Excluding that gain, Lehman's profits would have been below the consensus."

If that sort of financial wizardry sends a distinct shiver of discomfort up your spine, you're not alone. The bunny thinks this practice is but one of a whole spread of torpedoes fast closing on the carrier which has slowed to recover planes. Get clear, greedy bipeds, he warns. Get airborne and get clear before it's too late.


Bunny ballast:

"Wall Street's Latest Illusion" by Andrew Bary, Barron's, 4/7/08

"The Dollar and the Credit Crunch" by Ronald McKinnon, Wall Street Journal, 3/31/08

"Soros Sees Additional Market Declines After Reprieve" (update 1) by Katherine Burton, Bloomberg.com, 4/3/08

"After Meltdown, Dollar May See Some Relief" by Gertrude Chavez-Dreyfus, Reuters, 3/14/08

"Muni Losses May Put Taxpayers on Hook for $7 Billion" (update 2) by Martin Z. Braun and Jeremy R. Cooke, Bloomberg.com, 4/3/08

"US Sees Biggest Jobs Drop in 5 Years as Downturn Spreads" by Kelly Evans, Kris Maher and Timothy Aeppel, Wall Street Journal, 4/5/08

"Bankruptcies Jump 30% in March, Led by Housing-Bust States" by Bill Rochelle and Bob Willis, Bloomberg.com, 4/5/08

"Pushovers at the Fed", editorial, Wall Street Journal, 3/25/08

"To See a Stock Market Bubble Bursting, Look at Shanghai" by David Barboza, nytimes.com, 4/2/08

"Goldman sees $1.2 trillion global credit loss", Reuters, 3/25/08

"Factory Orders in US Decline More Than Forecast" by Bob Willis, Bloomberg.com, 4/2/08

3.30.08

Today the bunny is pleased to welcome Colin Harrison, author of six novels, including The Finder, which will be published by Farrar, Straus & Giroux on 10 April. Mr. Harrison is also a senior editor at Scribner, a division of Simon & Schuster (itself a division of Viacom). The bunny thinks that makes him an excellent candidate to question about the book publishing industry, since he has the view from both sides of the desk.

The Bunny Papers: Where is the publishing industry now?

Colin Harrison: As a writer and as an editor, I am bullish on the future of books, for the foreseeable future. Call it 10, 15, 20 years. After that, who knows, we’ll all be reading books on the inside of our eyelids. I’m not worried about the book business. Now, it’s true, the book business has big challenges, but those challenges are well-known. People like books, they like to feel books, they like throwing them into their bags.

TBP: So people still like to read. But will they read in print or on screen?

CH:I have a broad theoretical answer to that. My theory is that content in its short form has lost almost all its market value. Once upon a time, if you wanted to have stock prices that were pretty current, you needed to pay $11K to have a little box on your desk. Now it’s free. 20 minutes delayed, but free. There are a bunch of newspapers now you don’t have to subscribe to, because they’re free. People will download short films, but will still go to movie theaters for feature-length films. I think the structural pressure is on magazines and newspapers. The way this is maybe going to be solved is with these new electronic readers. But I say "maybe". With an electronic box, people drop it on the pavement, it might break. When it comes to books, the culture still celebrates books as a fetish item. Books are still something people collect. One of my pet phrases is, "There’s nothing like a book."

TBP: There's nothing like the consignment model of returns, which the industry has been running on since the Depression, either.

CH:The book business still sells newly-printed books published 50 or 75 years ago or more. You don’t see the same parallel in the auto industry. Books don’t have the same kind of obsolescence curve other consumer items do.

TBP: Have you ever worked in sewage?

CH: No. I just thought it was an intriguing way to kill somebody.

(Author photo by Joyce Ravid)

3.23.08

The bunny is in a reflective frame of mind these days. In particular, he's been thinking of 1981 and 1982, and how they might be seen as offering a premonition of the current morass.

No, it wasn't Reaganomics, or crack cocaine. It wasn't Ultravox or AIDS, Swatch watches or masses of black rubber bracelets. These were the years that saw the theatrical releases of The Road Warrior, Escape from New York, and Blade Runner, seminal filmic visions of the full-throttle progress of modernity smashing head-on into the retaining wall of dystopia. The bunny wonders if David Bowie, who preceded this mood of celluloid Da-Sein himself, on vinyl, by a good decade, saw any of these movies, and what he made of them. Come to think of it, he wonders the same about Fritz Lang, Adam Smith, Thomas Malthus, and Aristotle. But that could just be all the blueberries he scarfed for breakfast going to his head.

Towards the point: the bunny sees this cute little crevice of doomsday augury (replete with some choice rides!) as perhaps offering a metaphorical prism through which to view a trend that was actually going on, though not in those years specifically (the bunny likes to truncate time, it's one of his few indulgences, humor him). To wit: the shift in mentality that seemed to occur as more and more financial houses went public. Again, it's not specific to 1981-82. It's not some sort of averaging of dates, not with the staggered IPOs of Merrill Lynch (1971), Bear Stearns (1985), Lehman Brothers (1994) or Goldman Sachs (1999). Remember, we are in the realm of allegory, not algorithm.

What has transpired since the start of the 1980s is not merely the longest bull market in (US) financial history, but also a transformation, nay, transmogrification, of the financial mindset from one of thrift, efficiency and self-sustainability to the firebombed casino before you today. And that, the bunny believes, is because the industry became a game of Playing With Other Peoples' Money.

The bunny can already hear the nay-sayers out there, braying about transparency and responsibility to shareholders. And what, the bunny would retort with a wry whisker twitch, would they make of the Bear Stearns debacle? What did they make of Alan Schwartz desperately saying anything he could to prevent a Pamplona-style run on the bank, while Jimmy Cayne and Warren Spector played bridge as Bear burned? For that matter, what did they make of Credit Suisse CEO Walter Kieholz mugging for the TV crews in Davos saying they didn't have large fourth-quarter write-downs, followed by sf2.86 billion in losses due to "trading improprieties" not two months later?

This, the bunny believes, is a classic case of oversophistication. Put too many people into too many dollars NOT THEIR OWN and promise them astronomical bonuses based on performance (you don't think the shareholders in investment banks, even solvent ones, get paid first, do yez?), and you will get Uncontrolled Investment Diversification Mitosis, the technical term for which is Greed. And greed, as all bunnies know, metastasizes.

This oversophistication is a direct result of financial sharpies constantly dreaming up new ways to make money, which is a lot easier to do when you're not gambling with your own. Let it go long enough and you get an unraveling of the whole gesamkunstwerk (yes, the bunny knows German), which then prompts government regulators to get involved, who are guaranteed to screw things up further, thus leading to the sort of meltdown depicted in the three films named at the top of this rant. Oversophistication, cheap money, SOMEONE ELSE'S MONEY, and human greed led humanity down this road.

The bunny sincerely hopes the bipeds can sort things out amongst themselves. A bit of self-restraint, doncha know. The bunny is a prey animal. He has no self-imposed delusions of morality as humans do. His concerns are to eat without being eaten, and to find enough does to sire his kittens before meeting up with the Black Rabbit of Death. His kind have been at this a long time (90 million years, give or take, and still counting!). He knows about survival. He hopes the banks and brokerages that made this mess will have the instincts to pull themselves--and the rest of their world--out of it, or we'll all be listening to that opening voiceover from The Road Warrior in live Surround Sound.

But, he fears, there's just too many of them in charge who clearly don't know what the buck they're talking about.

Bunny buttresses:

"Credit Suisse faces first-quarter loss" by Simon Kennedy, Marketwatch, 3/20/08

"UBS enters ranks of record losers after $14 billion subprime write-down" by Warren Giles, Business Report, 1/30/08

"Mortgage crisis talks under way" by Chris Giles and Krishna Guha, Financial Times, 3/23/08

"What Created This Monster? by Nelson D. Schwarz and Julie Creswell, New York Times, 3/23/08

"What Went Wrong", Economist special report (pp.79-80), 3/22/08

"Natural History of the Rabbit (Oryctolagus Cuniculus), by Alexandra Sardi and Janelle Cooper,

http://www.baa.duke.edu/companat/BAA_289L_2004/Natural_History/Rabbit/rabbit_Natural_History.htm

3.16.08

O, to be blessed with an embarrassment of riches, chortles the bunny to himself.

Ordinarily, he doesn't like to think of himself as the sort that chortles, sniggers, or otherwise engages in gloating. A creature of the land, he is well versed in its gentry's mores.

But these are extraordinary times, and the getting's just too good. It's a bumper crop, a bounteous harvest of misery and woe and finger-pointing, with much of it being done exceptionally well. If pressed, he'd have to give the laurel wreath to Gretchen Morgenson in this morning's Times:

"But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street...Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A.R. Baron, clearing dubious stock trades. And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt.) It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there...As of February, according to Bloomberg data, 15% of those loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4%..." (p.1)

Great going, Gretch, cheers the bunny. Give it 'em good, by jingo!

Here's another, from Liz Rappaport and Justin Lahart in today's Journal:

"The US is at the recieivng end of a massive margin call...For years, the US economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer...The growing crisis of confidence now extends to the credit-worthiness of borowers across the spectrum--touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and the US government to rapidly repair the problems." (p.A1)

Marvelous stuff, isn't it? Give it up for Tom Cahill and Katherine Burton at Bloomberg last week:

"'If you have leverage, you're stuffed,' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back."

Bully for you, Bloombergers, rants the bunny. Rah, rah, sis-boom-bah, greedy bipeds all go BROKE BROKE BROKE!

The bunny does his best to keep his nose above politics, so it's not the fetid fumes from the national mudslinging contest nor state sex scandals (as if that would really roil a rabbit's equilibrium) that have gone to his head. Nay, this is karma in its terrible eternal majesty, the great circling of the cosmic clock. In a word: payback.

The Great Unwinding, as the bunny has come to think of it, is all atwirl like a streamer of firecrackers dangling from the fire escape of a Mott Street community center on the Lunar New Year. For years, the great pyramid of banks, brokerage firms, funds of all stripe and spot, Blackberry-toting businessmen and Joe Sixpacks alike have all spun to the same tune of Intangible Investing, AKA Spend What You Don't Have (perhaps taking their cues from their elected leaders). Then after dancing as fast as they could the music stopped, the markers were called in and lo, borrowing from Peter to pay Paul just didn't work when Paul showed up with his bros, a roll of electrical tape, two tire irons and a case of beer. (In a telling aside, casino revenues in Vegas are down almost 5%.) The panjandrums of Wall Street and Points Hedged clearly thought they would be immune to credit-borne pathogens, and now that their condition has progressed from symptomatic to full-blown, they have (predictably) become dependent on the Quick Fix handed out by Uncle Sam on the quarterly corner (or even a block or two away).

The mountain of leverage, like that of garbage in Naples, has come crashing down. Government intervention teamed with deep private pockets (J.P. Morgan, wherever he may be, must be greatly amused) can only prolong the inevitable reckoning. Those with debt-to-equity ratios too swollen from too many trips to the borrowing trough will be called to account. Once again the perils of cheap money are thrown into sharp relief, and the all-but-done rate cut coming this Tuesday won't help.

The bunny is a burrower. Now's as good a time as any to dig deep and wait out the carnage happening topside. Lest we forget, it's Tax Time.

Bunny Barrage:

"Rescue Me: A Fed Bailout Crosses a Line" by Gretchen Morgenson, New York Times, 3/16/08

"Debt Reckoning: US Recieves a Margin Call" by Liz Rappaport and Justin Lahart, Wall Street Journal, 3/16/08

"Hedge Funds Reel From Margin Calls Even on Treasuries (update 1)" by Tom Cahill and Katherine Burton, Bloomberg.com, 3/10/08

"One Ill Compounds Another, Hammering the Economy" by Vikas Bajaj, New York Times, 3/14/08

"Hedge Funds Squeezed As Lenders Get Tougher" by Carrick Mollenkamp and Serena Ng, Wall Street Journal 3/7/08

"Mortgage Fallout Exposes Holes in New Bank-Risk Rules" by Damian Paletta and Alistair MacDonald, Wall Street Journal, 3/4/08

"New Spasm Jolts Credit Markets" by Liz Rappaport, Joellen Perry and Deborah Lynn Blumberg, Wall Street Journal, 3/6/08

"Chips are down as Las Vegas feels pinch", ny Matthew Garrahan, Financial Times, 3/9/08

2.26.08

Ave, Jeffrey Robinson!

The bunny has been working the phones, trying to assuage the nagging suspicion that's been buzzing around his brain like a noisy gnat. He would much rather be getting familiar with his Tibetan cousin (Ochotona himalayana), but once again, humanity has driven him to distraction.

What's been driving the bunny batty lately is the rapid insinuation of sovereign wealth funds' capital into large financial institutions. It's not that SWFs are anything new (indeed, one early bird wormed out the fact that this vehicle's make dates at least to 1956), but the speed with which they have amassed container ships of cash for immediate injection into badly battered banks (can you stand all the alliteration?) without much need (nor, indeed, requirement) for oversight sets the bunny's incisors on edge. In fact, it's worrisome enough that Bob Davis at the Wall Street Journal got a front-page above-the-fold slot today for putting his finger on the swollen, throbbing problem at the heart of the matter:

"Executives from the world's largest SWF--the Abui Dhabi Investment Authority--and from the Government Investment Corp. of Singapore met Thursday with a US Treasury delegation led by the assistant secretary for international affairs, Clay Lowery. The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the US, Canada and Europe at a time of global financial turmoil."

The bunny would like to thank Mr. Davis for his deep visceral grasp of such a thorny obstruction. How does a UBS or a Citigroup, both of which have received massive capital transfusions from SWFs recently, respond when a simple request for transparency is met with a resounding "Hell, no" in various languages?

Mr. Davis is not alone in such sentiment. In the New York Times on 2/9, Steven Weisman wrote that "leaders of funds in Russia, the Middle East, China and other parts of Asia say that the West's demand for regulations is hypocritical in light of the failure to regulate European and American banks and hedge funds."

To be fair, some SWF captains have read the entrails and are acting accordingly. The China Investment Company (CIC) has gone out of its way to rise above the veil of secrecy for which SWFs are widely known, according to an article in the Financial Times by Andrew Wood on 2/4. Morgan Stanley, which rates CIC the sixth-largest SWF by assets (~$200 billion), was quoted in the same piece as predicting CIC would be the largest SWF by 2009.

Also, to be fair, the growth of SWFs can be tied directly to two factors--the astounding spike in oil and gas prices, and the massive accrual of savings, particularly in nations hardest hit by the Asian financial crisis of 1998. Neither one of these factors is illegal. And, in fact, the reversal of fortune displayed in the flow of capital from emerging back into established economies is, in the words of an Economist editorial from 1/19, "proof that capitalism works."

Ah, but is it? This is what bothers the bunny, and where the aforementioned Mr. Robinson comes in. This gentleman is the author of THE MERGER and THE LAUNDRYMEN, which chronicle (respectively) the mechanisms by which criminals optimize old-fashioned illegal moneymaking schemes in the modern age, and how they "wash" the proceeds through the digital economy to make "black" money "white". If 2% of assets traded worldwide are controlled by SWFs (this according to the Economist), Mr. Robinson notes that it is worth remembering that 2% of global GDP is black money. It therefore stands to reason that at least some of this black money would wash up in SWFs, though how much would be very difficult to quantify, not least because the fund managers probably cannot effectively document the origins of the money in their coffers themselves. So if some of the funds going into a UBS or Credit Suisse come from illegal drugs, or from the bodies of teenage prostitutes hooked on said drugs, or from the sales of guns sold to their pimps by rogue militas, what then? Mr. Robinson points out that while the US government claims jurisdiction over all financial crimes committed in US dollars (through the Treasury Department's Financial Crimes Enforcement Network, or FinCEN), it is in fact extremely difficult to enforce its own regulations across borders (case in point--BCCI).

Moreover, he points out that beyond the difficulties of auditing a foreign government, quantifying and qualifying its assets, and if necessary trying to impose a different government's set of rules...would you really want to? There is an estimated $7.5 trillion in offshore money today, he says, a good 10% of which is likely to be black money, mostly from drugs. If this kind of wealth were wiped out by a magic wand of uber-legislation, the ensuing wave of bankruptcies would likely usher in a new dark age.

This issue isn't going away anytime soon. The bunny will keep on digging, as is his nature.

(Emails to FinCEN at the US Treasury Department were not returned as of this writing.)


Begin at the beguining, bunny:

"The Invasion of the Sovereign Wealth Funds" (p.11) and "Asset-Backed Insecurity" (pp.78-80), The Economist, 1/19/08

"Asia Is Opening Up and Welcoming External Help" by Andrew Wood, Financial Times, 2/4/08

"Overseas Funds Resist Calls for a Code of Conduct" by Steven R. Weisman, New York Times, 2/9/08

"US Pushes Sovereign Funds to Open to Outside Scrutiny" by Bob Davis, Wall Street Journal, 2/26/08

1/27/08

You’ll have to excuse the bunny for a moment.

He’s had enough and is losing his cunicular cool.

This past week’s inter-meeting rate cut struck him as precipitous, political, and most of all, panicked. That it was motivated at least in part by the fact that other nations’ financial institutions are prone to the same human greedworm eating away at our own (Société Générale? Belgium’s Fortis, England’s Northern Rock, and the UAE’s Abu Dhabi Commercial Bank are all adding to that bitter bouillabaisse, just to name a few). The blatant pandering of the pols has spread to the Fed, and the bunny just can’t take it anymore.

To recap: it is not the Fed’s job to babysit Wall Street (nor to police it—that’s what Treasury’s for). The Fed’s mandate is twofold—first, to promote full employment, and second, to maintain a sound monetary policy to prevent the sort of hyperinflation and bank runs that lead to widespread misery, xenophobic massacres, and pseudo-intellectual pontification that’s the verbal equivalent of an M.C. Escher drawing. Incremental rate adjustments over measured periods (and none at all in election years) help keep the Ship of State on an even keel. Taking a halberd to interest rates, especially when other central banks around the world did not, can only appear as a declaration by the Fed of a state of emergency with which other governments (friendly or otherwise) do not seem to agree. (Never mind that rate cuts take 6-12 months to make their way through the national economy, a period only slightly less than the length of the last two recessions).

Why would Wall Street expect another 50-point cut this coming week, taking rates to 3% (or, the bunny shudders to think, even lower)? Again, the answer is twofold. First, it means that things are worse than the Fed admits to, and second, the Fed is letting Wall Street dictate its moves. This would be a political decision, and a hruffy, murthified one at that. It would be an outright invitation to inflation. Is this a dollar I see before me, getting ink on my clean white paws? Why no, the bunny declares hothfully, it is less than a dollar, and the dollar will continue to be crushed should rates continue to be scythed, not to mention a spike in already spiking import prices. Ur grubba naar, hraf fuffing shoom bletzkwell! Phlap wabble therwin potok! (When the Rabbit Rage is upon him, the bunny's first victim is verbiage.)

Politics and politicos, gentle reader, are bad for the bunny's brain, as you have seen, and even worse for economic policy. Let us hope that in the weeks ahead, cooler heads prevail over itchy trigger fingers.



Bits o’ Bunny Collateral Damage:
“Evolution of economy will tell whether Fed overreacted” by Krishna Guha, Financial Times, 1/26/08
“The start of the great unwinding”, editorial, Financial Times, 1/26/08
“Société Générale’s Sales May Have Incited Market Plunge” by Nelson D. Schwartz and Nicola Clark, New York Times, 1/26/08
“Stimulus Deal Spurred by Fears of Voter Backlash” by Michael M. Phillips, Sarah Lueck and Sudeep Reddy, Wall Street Journal, 1/26/08
“A Global Fed”, editorial, Wall Street Journal, 1/26/08
“Mideast banks to report subprime losses”, Reuters, 1/26/08

1/21/08

So who's worried?

After all, despite a $150 billion bad-loan sump, the global finance system hasn't collapsed, right?

And despite a year-over-year inflation spike of over 4% and global commodity prices indices at new highs, manufacturing hasn't collapsed, right?

And just because of dismal seasonal retail sales, a widening trade deficit and unprecedented and yet-uncharted credit card defaults, the consumer economy hasn't collapsed, right?

And just because incumbent and incontinent politicians alike are one-upping each other with emergency stimulus packages designed to put negligible amounts of tax-relief cash into the hands of voters least likely to save it thanks to lowering interest rates and prior to the elections that will shortly be followed by massive tax increases, the matrix of civilization (or at least its 24-hour news cycle) hasn't collasped, right?

The bunny would like you all to take a moment to relax and pass hraka. (He duly bobs his hirsute head to Richard Adams.)

On the last point especially would he like to focus his energies. That the US economy is in the midst of contraction is uncontested, and attested to by the frenzy with which the carping constipated corps of politicos, pundits and pen-wielding press pests is howling for more gruel and grist. Tax cuts. Lower interest rates. Bad loan bailouts. Cash on the barrelhead. With each news cycle, more mouths join the banshee choir.

The bunny has no patience for such nauseating drivel. Unlike many of his mammalian brethren, the bunny does not possess the ability to regurgitate hairballs after grooming, relying instead on the bounteous nature of timothy hay, which, like kasha, bulldozes the badness back and beyond. In bunnies, as in the great rivers of the world, the current goes one way.

The media maelstrom also obscures what is in fact an old tactic deployed on a new playing field: political use of money (or monetary policy) to curry favor at election time. He (or she) pushing payouts pre-primary is more likely to effect the short-sighted worried about mortgage or credit-card debt, as opposed to later (and potentially felonious) dangerously deferred tax debt, while he (or she) champing cheap money (i.e., immediate rate cuts), which are the darling of institutional investors such as hedge funds (which themselves are not above the occasional donation to a candidate's war chest) might also be (already) forgetting the fact that cheap money was what ignited the subprime storm to begin with. And 5% national unemployment is historically considered full employment (and compares favorably with economies of scale across the pond). And that, very quietly, the core blue chip companies of the S&P have been racking up earnings well beyond what's needed for ballast in these roiling 1Q '08 waters.

The bunny does not deny that there is some serious skinning going on. But this flensing should also be viewed as a cleansing. A 15% correction is still a correction; markets go down as well as up. This is part of the business cycle, the corrective mechanism by which, eventually, the ship of state of things rights itself with keel down and mast held high. What's different from 2000-2002? No foreign attacks? Well, actually, the bunny is wrinkling his nose at the increasing bankrolling of US financial nodes by foreign sovereign wealth funds (but hey, beggars can't be choosers). He has been grinding his teeth over this, and will in postings to come. Among other worries, he would like to know how you get the investment arm of an entire country to open its books; he knows of no lawyer-subhumans with this sort of suction, and very much doubts the political clot has such clout either.

The bunny watches.

The bunny waits.

The bunny is back.


Things that line the bunny's box of late:

"The Invasion of the Sovereign Wealth Funds"; "Asset-Backed Insecurity"; "A Delicate Condition"; "Economic and Financial Indicators", The Economist, 1/19-25/08

"'Til Next Paycheck, a Stimulus" by Michael Santoli, Barron's,1/21/08

"Adjustment or Affliction? Why the Dollar's Drop is Failing to Rebalance the World" by Chris Giles. Financial Times, 12/11/07

"No Quick Fix to Downturn: Some Fear Stimulus is Already Too Late" by Peter S. Goodman and Floyd Norris, New York Times, 1/13/08

11/2/07

The bunny feels betrayed.

All week long he has read nothing but dirty disclosures from top banks about their exposure to the subprime morass. Writedowns, shakeups, CEOs falling on hundred million-dollar swords. It seems each new announcement brings a triple-digit swing to the indices; p/e ratios are so compressed as to muddle fair valuation.

The bunny is so dispirited he could just bypass this whole edition and go to sleep. But that would be unfair to you.

So he will focus on two examples—no more.

Just when you thought it couldn’t get any worse with Citigroup, those early birds at Dow Jones have announced the company is holding an emergency meeting this weekend. (That’ll mess up some golf games.) Is it a Star Chamber to decide Charles Prince’s fate once and for all? For a spin session to try to put a brave face on the prospect of further writedowns, which may affect the company’s ability to pay dividends, which may make shareholders bray for blood? (The bunny is reminded of Georges Danton’s last request to his executioner: “Show my head to the crowd—it’s worth it.”)

This is the biggest bank in the US we’re talking about. The bunny is lop-eared with dismay.

Now, on the far side of the pond, UBS, which has already been bled by the slings and arrows of outrageous fortune, is now being forecast to take another $5 billion in Q4 subprime losses—this is on top of the three billion-dollar loss they’ve just reported. (Okay, that’s an extreme call, from a Merrill analyst—Bear Stearns is only calling for a $2 billion hemorrhage.)

This is a conservative, clients-first Swiss bank, the kind you trust to protect what assets you have when the Nazis are about to invade or the collapse of Communism is set to unleash internecine tribal warfare next door. Now the bunny is supposed to believe that this stalwart European colossus is but a house of cards? Say it ain’t so, Roh!

Neither the bunny’s brain nor his heart will take any more.. He senses a familiar chill in the air, an early darkening of days. It’s time to go to ground.

Bunny milestones of woe:

“UBS Reports a Larger-Than -Expected Loss” by Nick Cumming-Bruce, New York Times 10/30/07
“UBS May Take $5.2 Billion Q4 Subprime Hit” by Steve Goldstein, Marketwatch.com, 11/2/07
“Merrill Lynch Downgrades UBS” by Ramya Dilip, Reuters Research Alert, 11/1/07
“CIti Shares Up on Board Meeting Report”, Reuters, 11/2/07
“Analyst Raises Doubts About Citigroup Dividend” by Eric Dash, New York Times, 11/2/07
“CIBC’s Whitney Spurred Market Swoon on Citigroup Call (update 2)” by Nick Baker and Michael Patterson, Bloomberg.net, 11/2/07

10/15/07

Welcome to the view from the cliff.

The 20^th anniversary of the biggest one-day stock market plunge to date comes after a torrent of bad news. But one thing stands out from the rest of the morass, one ominous cumulus that portends the sort of mayhem that makes the bunny feel as though he is once again peering into the abyss.

No, it wasn’t the New York Post-style screaming banner of this week’s Barron’s (BLACK MONDAY!!!).

It wasn’t the clever Doomsday headline of the Wall Street Journal piece from 10/11 (“The United States of Subprime”), which for the first time the extent of the mortgage mess, and in so doing drove home the point that it is much, much worse than even the most blindly optimistic liar shoved in front of a CNBC camera crew can dismiss.

It wasn’t Landon Thomas quoting Paul Tudor Jones II quoting Robert R. Prechter in the New York Times on 10/13 that the market is set for the biggest bear mauling since 1929 ( hangin’ ten on dat Elliott Wave, brah).

It wasn’t the viral analogy in the very next day’s Times comparing the America’s financial sniffles (which apparently no longer infect the rest of the world) to the pathology of that dastardly bastardly bug influenza.

It wasn’t a torrent of big banks and brokers coming out with multibillion-dollar losses lo the live-long week.

It was Leslie Norton’s feature tucked within the raven wings of the BLACK MONDAY!!! edition of Barron’s, describing the Chinese comet, a stock market making triple-digit percentage jumps year after year. Not only is the dragon flying to yet untrammeled chakras on high, but gweilo investors are chasing said dragon in droves; the bunny nearly choked on his alfalfa reading about how the U.S. Global Investor China Region Opportunity fund (USCOX) is up 73.4% in one year.

Now, it is true that rabbits are social animals, huddling together in their warrens to share warmth and food. But even within such groups, there is an alpha buck, one who crouches alone to master his fate by himself. Such is the lapine scribe of this blog you now peruse. And this solitude gives the bunny the long view of the meditative monk. What he sees is the next rush of lemmings over the cliff (a distant relation by dint of biology, gentle reader, not one the bunny is proud of). Why, the bunny wonders, do humans invest in packs? Chasing the flavor of the moment, all the way back to those dreamy Dutch tulips, hive mentality reigns supreme. It is yet another case of sheep following sheep (astute readers will notice how people have lost their human identity in this edition—the bunny is nothing if not subtle).

The Chinese bubble is but one among several growing around the world, and as prices rise, instead of walking away, het-up homo sapiens rush to grab the comet’s tail in the hopes that (now severely devalued) dollars will rain on their eager upturned faces.

The bunny will take bunker philosophy over the philosophy of crowds any day.

Bunny bullets:

·“Just How High Can China’s Shares Fly?” by Leslie P. Norton, Barron’s, 10/15/07

· “A Pause To Recall the 1987 Crash” by Conrad De Aenlle, and “Sniffles That Precede A Recession” by Robert J. Shiller, New York Times, 10/14/07

·”The Man Who Won As Others Lost” by Landon Thomas Jr., New York Times, 10/13/07

·”The United States of Subprime” by Rick Brooks and Constance Mitchell Ford, Wall Street Journal, 10/11/07

10/5/07

YEEEEEE—HAAAAAAA!

All the pent-up energy building since the dog days of August has finally exploded in a cascade of inexplicable investor frenzy, driving the Dow and S&P back through their July highs and beyond. (Even the Nasdaq is a little over half its March 2000 value!) All this is coming on the back of oil at an all-time high. And gold at a 27-year high.

The US dollar is at an all-time low against most major currencies (touching $1.42 to the Euro). US Treasury prices are on the decline (the yield on the 10-year note is hovering around 4.53%). And the US housing market, long the boost behind the economy lo these last five years, is in its worst slump in history.

Major homebuilders and some large money-center banks are posting horrendous third-quarter results and drawing up layoff lists. The wave of M&A activity which reached arc-welding temperatures in the first half of this year froze solid in August and is only just beginning to thaw. And politicos, pundits, and pugilistic pontificators alike have been whacking around the R-word tetherball again.

What the hell?! Why is this happening? Has night become day, down become up, fuschia become the new black? This has the makings of being one of those bottomless conundrums of the universe, like abiogenesis or the fact that if Pac-Man were three-dimensional, he would resemble a French cream doughnut.

It is the instinctual impulse of Oryctologus cuniculus to discern the cause of the mania, rather than simply embrace it. Dem’s dat does, commences ta perishin’, once the teeth and claws come out. (And they always do.) O, temptation is strong and omnipresent; to just chalk it up to human pigheadedness, as the Financial Times’ John Authers succinctly put it in his 10/3 editorial, “Party Like it’s 1999?”: “The instinctive reaction of many in the fixed income markets is to put this down to stupidity. Equity traders simply do not know what they are doing, or at least do not understand the ramifications of the damage that has been done to the structured credit market.”

Zounds. The bunny thinks the good columnist might be on to something here. For months, he has been experiencing a sense of déjà vu. Maybe it’s been the preponderance of hedge-fund Capulets and Montagues dueling at the Red Cat and Gotham Bar & Grill with flashes of gold and platinum plastic (distinguishable by their French-cuff shirts with dazzling cufflinks, made more visible by the absence of jackets and ties). Or perhaps it’s the eerie similarity, not just to 1999 but early 2002, in which a Fed rate cut dovetailing with a cut on overseas tax earnings pull a US economy mired by recession and the fallout from 9/11 out of stagnation and into—a bubble. (Some have made the case that not only 2001 begat 2007, but 1998, with its rate cut following the Asian financial crisis triggering the dot.com bubble, begat 2001—karma bows to no one.) All the elements are in place—a Fed rate cut, lenient capital-gains tax rates, and a weak dollar which is now favoring large-cap multinational corporations which book a higher percentage of profits from their overseas operations. And the plunging greenback’s overseas effects may not look so bad from a Beltway standpoint. While being able to claim that a weak dollar helps goose exports and lower the trade deficit, it also functions as a tariff-without-a-tariff on those from whom we import manufactured goods (i.e., China), and puts inflationary pressure on those from whom we import commodities (i.e., Saudi Arabia).

This has made for an environment favoring capital flight—whether into the bonds of foreign governments paying higher rates of interest than our own, currencies stronger than our own, or the flavor-of-the-moment investment with the wide-ranging title “emerging markets”.

The bunny does not waver from his dictum that Cheap Money Creates Problems. Bond traders are betting that today’s jobs data will preclude another rate cut at the next FOMC meeting later in the month, but the bunny begs to differ. The next bubble isn’t coming, it’s already here, and the markets setting new records despite the ever-lengthening shadow of the unwinding subprime mess might just bear him out. The hedge funds and buyout firms now squealing like rats in the vacuum of a fast-sinking ship grew out of such a troublesome witch’s cauldron. Capital is no longer flowing into the US in record amounts, but out of it.

And yet Wall Street is whooping it up like the cowboy out on the town at the beginning of Near Dark, and he got exactly what he was looking for. The game will end (and it always ends) once the money stops being cheap, and the signals of the tightening that precede it are already evident. The bunny is well-attuned to listening for the sound of bared fangs in the night, and he knows that no amount of whoopin’-it-up can stave off the whuppin’ those pointed canines carry.

But hey, who’s worried, really?

A selected bunny bibliography:

“What Bad News? Stocks Roar to a Record High” by E.S. Browning and Justin Lahart, Wall Street Journal, 10/2/07

“Party Like It’s 1999? Faith in Emerging markets Fuels an Equity Market Rally” by John Authers, Financial Times, 10/2/07

“Dow Hits Record Despite Losses at Big Banks” by David Reilly, Robin Seidel, and Carrick Mollenkamp, Wall Street Journal, 10/2/07

“Stock Strength Seems to Belie Economic Reality” by Justin Lahart, Wall Street Journal, 10/1/07

“Multinationals Drive US Rally on Weak Dollar” by Francesco Guerrera and Michael Mackenzie, Financial

Times, 10/3/07

“Emerging Markets and Oil Bubble Up” by Justin Lahart and Joanna Slater, Wall Street Journal, 9/20/07

“World Economy in Flux as America Downshifts” by Michael M. Phillips, Wall Street Journal, 9/20/07

“Falling Dollar Squeezes US Trade Partners” by Joanna Slater, Wall Street Journal, 9/21/07

“Our One-Dollar Dilemma” by Judy Shelton, Wall Street Journal, 9/27/07

“Housing Chill Grows Worse, Bites Consumers” by Sudeep Reddy and Michael Corkery, Wall Street Journal (date unknown)

“Merger Frenzy Winds Down After 6 Years” by Dennis K. Berman, Wall Street Journal, 10/1/07

“Treasurys in a Fog Over Rates” by Deborah Lynn Blumberg and Laurence Norman, Wall Street Journal, 10/3/07

“Stocks Rise, Through it All” by Peter A. McKay, Wall Street Journal, 10/1/07

“Cautious Words from a Chastened Bull” by Henry Blodget, New York Times, 10/3/07

8/12/07

"Let them eat cake" is the phrase usually (and probably mistakenly) attributed to Marie Antoinette, referring to the starving non-manicured classes beyond the Versailles hedgerows.

The bunny would add his own version, updated for the present: Let Them Go Broke.

The current Fed helmsman Ben Bernanke is caught up in history, much like newlyweds who buy a home and commence to renovate it only to find that the plumbing is shot, the foundation is skewed and the whole place is haunted by the ghosts of a Waffen SS unit.

Oh, how fickle humans are, chortles the bunny to himself. Life truly is show business--you're only as hot as your last hit. For those without subscriptions, the bunny offers this tasty summation by Alan Abelson in the 8/13 issue of Barron's (p.7):

"Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates...As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G. has proved himself an undisputed master."

Such adroit verbal fencing tickles the bunny's fancy. After all, it's no secret that the current round of bloodletting is due to past Fed policy of cheap money--something the bunny has railed against with abandon in blogs past. Low rates and easy credit a bubble did make. Bursting it is! (For no apparent reason, the bunny channeled Yoda for a moment. Chalk it up to cable TV.) But, ever a keen student of history, the bunny knows this (and the consequent round of chapter 11 filings) is the corrective mechanism of markets at work. Bring on the leeches.

Oh, but if only they would. Instead, the Fed injected billions into the system to keep its glands moist, which smacks of (yeechh!) bailout. But even beyond pleas for cash, the ambient noise machine is now droning for a rate cut--which would only make matters worse. Hedge funds, mortgage lenders and other assorted bottomfeeders who sculpted this steaming bolus would merely go back to their sordid practices, driving us past the ridiculous right into what Mel Brooks in Spaceballs termed simply "Plaid". A rate cut (which Mr. Bernanke, to his credit, has steadfastly resisted, a practice which has probably gotten him crossed off the A-list of every top-tier party circuit from East Hampton to Grand Cayman) is wrong on every level, not least of which is the message it sends to the wrongdoers. It raises what Louis Uchitelle called "'moral hazard'--meaning that the risk-takers who brought on this panic would feel bailed out and likely to do it again" ("Opinions Are Plentiful, as Bernanke Faces His First Crisis", New York Times p. C1, 8/11/07). The logic is simple. If you went away for the weekend and your child turned your bathroom into a meth lab, would you buy him an iPhone? Let the corrective mechanism work--if a thousand hedge funds (of the nine thousand or so which have rather suddenly sprung up in recent years) go under, risk is removed and markets will stabilize. The bad seeds will be purged to make room for a healthier crop. Wall Street works best striving for homeostasis, it is intestinal. Overreaching, running too hot, too much oily spicy food and what have you got?

Bankruptcy, not bailouts, is the markets' Maalox, greedy bipeds, cautions the bunny. Listen to the bailout brayers do not. Let them eat cake--if you stick with timothy hay, the Great Bowel will smile upon you.

7/29/07

You don't have to be a higher mammal to read body language. The bunny is on the defensive.

Long has lagomorphic logic held that the rampant buying binge stemming from cheap money would create a cascade effect, blowing a hole in the bubble of debt-financed speculative acquisitions. This weekend's Wall Street Journal is awash in tales of carnage, though in the bunny's opinion, the New York Times had the best headline (and photo) on 7/27 : "Easy Credit Evaporates, and So Does the Market's Buyout Frenzy" by Sorkin and de la Merced.

CDOs, CLOs, LBOs, IPOs used to finance LBOs--the bunny could never digest this torrent of alphabet soup served up daily by the media. (His kind saw the benefits of a high-fiber diet not long after the last of the dinosaurs went belly-up.) He had been laying low for past few weeks, reading under his fan while the rest of the higher orders sweated out the heat and humidity (you would probably do likewise if you had a fur coat you could never take off).

One thing that has made the bunny's ears stand at acute angles recently was KKR's feeding frenzy. (Try to imagine an amoeba with a swagger.) Of particular jaw-grinding interest was the firm's tooth-gnashing buyout attempt for credit card processor First Data, a deal valued variously at $26 or $29 billion (depending on who covered the story), which stirred up a spat with backer Chase JP Morgan (see Michael Flaherty's Reuters piece from 4/26, "First Data Deal Sparks Spat Between KKR, JPMorgan"). While the tiff centered on the fate of a Chase/First Data joint venture, it was the nature of the deal that set the bunny's mighty mandibles on edge. KKR (which had filed for a $1.25 billion IPO to raise additional cash, according to a Bloomberg story posted 7/16 by Richard Evans and Elizabeth Hester ("KKR to Raise $1.25 Billion in IPO After Blackstone [update 2]), and which is now an object of gloomy don't-think-so speculation, according to the aforementioned Times article by Sorkin & Merced from 7/27, not to mention a piece from Wall Street Journal Europe by Dwight Cass, Nicole Lee, Simon Nixon and Fiona Maharg-Bravo on 6/27) had set out to raise $14 billion in financing for an already agreed-upon deal in so-called "covenant-lite" loans (not to mention another $8 billion in junk bonds), which, according to Dana Cimilluca in the WSJ on 7/9 (p.C1), "don't require borrowers to live up to certain performance metrics for cash flow or profits." Ms. C went on to note that the mechanics of the deal would load up First Data with debt equivalent to ten times its cash flow, which caused the bunny to eviscerate the entire issue with tooth and claw. No wonder Chase was upset--as one of the primary backers of the deal, it would be stuck holding the bag if the credit market soured--just as it seems to be doing. This while KKR has been trying to acquire British retailers Sainsbury and Alliance Boots, Dollar General, and, of course, TXU. (See also "An Assessment of KKR's First Data Bet" in NYT Dealbook edited by Andrew Ross Sorkin 7/10; "Covenant 'Lite' Ranks Swelling in Loan Market" in WSJ's LBO Wire by Cynthia Koons 7/18; and "Buyout Produces Record Cov-Lite Loan" by Dan Andrews in the International Financial Law Review.)

The bunny could just spit, if only he had the glands.

The long period of historically low interest rates has unleashed a torrent of cheap money, which always brings trouble. Look no further than the blowup of two Bear Stearns funds (A-rated by the usual three agencies) that in a matter of one week's time became totally and admittedly worthless. In this case it has led to an orgy of strip 'n flip acquisitions by private equity firms and hedge funds, built largely on credit structures derived from high-risk loans of all stripes. When the house of cards falls, as it inevitably does, as it did and is still doing at Bear Stearns, the vibrations, like those of an earthquake, radiate outward in all directions. This week's bloodbath on Wall Street should not have surprised anyone watching the bloated buyout backlog of recent months. (Though the the bunny counsels that the impulse to panic is overdone. After all, a garden variety stock market correction is historically ten percent, which from a high of 14,oo0 would mean the Dow would come to rest at 12,600--and this would be par for the course.)

Long has the bunny bemoaned the evils of cheap money, high-risk loans, lightly regulated investor pools, and junk paper. Look down, look DOWN that junk road, greedy bipeds, warns the bunny (sounding incongruously like William Burroughs trying to cop on Wall Street). Buying on borrowed money (borrowed from careless lenders) carries an inevitable payoff that no one wants to face, but that everyone eventually will.

6/19/07

Humans are funny creatures. The more they learn about themselves, the more weaknesses they think they have. And the more weaknesses they think they have, the more they scramble for ways to address them, usually with chemicals. And the more they do that, the more conflict emerges between groups advocating their approach as better than everyone else's.

The bunny is too savvy to put his paws into the American healthcare debate (AKA The Morass), but he is curious about the direction of Big Pharma, particularly in the US.

The Democratic-majority Congress, not surprisingly, has declared war on it. The courts have made headlines uncovering all sorts of hanky-panky in cases involving doctors or drugmakers (like the 2005 silicosis case, http://findarticles.com/p/articles/mi_hb268/is_200509/ai_n18878338), doctors have painted drugmakers out to be drug-pushers (check out Elliot Valenstein's Blaming the Brain, http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780743237871&itm=2)
and then there's the age-old problem of passing costs on to consumers--you lives by de big R&D budget, you dies by de big R&D budget, since the comapny that supplies you with the drugs you may need to stay alive have to keep pace with rising prices too.

Putting aside the prickly points which will doubtless be done to death during the '08 campaign, the bunny sees the big problem as being one of patent rights. All big pharma companies worry about when their product protection expires. Some go to great lengths to hedge against it, others go to ludicrous ones. Take Bristol-Myers Squibb, for which 2007 has been The Year of Digging Out From Bad Decisions Going Back A Decade. Finally emerging from a two-year Federal probation for prior no-no's, and winning a lawsuit to protect the patent on its blockbuster drug Plavix (which the generic competitor, Apotex, is sure to appeal), the company now has to decide if it can get back on its own two feet, or if it would be better off merging with its European partner Sanofi-Aventis (for more on this, check out today's Reuters piece by Ben Hirschler and Ransdell Pierson, "Rumors Fly But hurdles Remain to Sanofi, Bristol Deal"). Litigation is a constant risk for big pharma companies (the bunny figures this is why Warren Buffett never moved to snap up Bristol's battered stock), not to mention the possibility that (besides Federal interference) their product may not work so well (Vioxx, anyone?),

Or the drug dreadnoughts could simply diversify. Johnson and Johnson, for instance, sees about 40% of its revenues coming from drugs, with the balance coming from its highly successful consumer staples. Who says drug companies need make only drugs? The bunny wonders if Big Pharma might borrow a page from the book of Big Manufacturing. 3M makes a variety of drug delivery systems (http://solutions.3m.com/wps/portal/3M/en_WW/DDS/DrugDeliverySystems/), General Electric has moved aggressively into medical imaging and early-detection systems(http://www.gehealthcare.com/usen/products.html).

The bunny figures Big Pharma will feel more Federal scrutiny, not less, though it will not disappear. However, in an election year, with healthcare the perennial issue, the industry will have to come up with new business models to accomodate an increasingly hostile political climate, unending media scrutiny, an army of ambulance-chasing litigators slavering for a payout, and a population that's just sick of it all.

June 18, 2007

The bunny senses trouble on the way.

All the chest-thumping and saber-rattling over a trade war with China (http://www.csmonitor.com/2005/0616/p16s01-cogn.html, http://www.foreignaffairs.org/20050701faessay84407/neil-c-hughes/a-trade-war-with-china.html,
http://www.iht.com/articles/2007/02/02/business/chitrade.php) isn't helping anyone. The massive US trade deficit with China (not helped by prodigious American consumption of Chinese-made goods and a stampede of American investors chasing the dragon), as well as China's enforcement of its currency level despite white-hot economic growth, hardly makes for a level playing field. Then there's the touchy issue of copyright infringement (always a hot topic in an election year), which China is accused of flagrantly ignoring along with other WTO regulations (not entirely a baseless charge, since China's ability to reverse-engineer anything on the planet surpasses even Japan's once-vaunted ability to reverse-engineer anything on said planet).

Then there's the thorny matter of China's trump card--its huge holdings of US public debt. China owns a ton of it. Japan comes close, and any trader with a heart condition likely remembers June 23, 1997, when Japan's prime minister pondered aloud about the consequences of selling some of its US debt holdings, giving the Dow its biggest single-day drop since the crash of 1987. (http://www.thetrumpet.com/index.php?page=article&id=2265) If the US follows through on its tough talk towards the PRC, Beijing may simply decide to dump its US debt holdings. And why not? It's not like they haven't hinted at it already (http://www.chicagotribune.com/business/chi-0703100152mar10,0,4916055.story?coll=chi-business-hed). The impact in the US would be enormous, driving up interest and mortgage rates which would be felt across the board, from buyout/buyback-hungry corporations to anyone carrying debt on a house, car, business, or their education (not to mention the impact on an already weakened dollar).

The bunny thinks this latest slopping-out of Washington rhetoric as being similar to the the latrine full of anti-OPEC litigators. (For more on that lunacy, check out Josef Herbert's 5/22/07 AP filing "House Approves Anti-OPEC Bill", as well as Tina Seeley's Bloomberg dispatch "US Gas Prices Are Due to Outages, Demand, FTC Says" on the same date.) He knows that China has been exporting its unemployment and using its trade surplus to buy other currencies (a process known as "sterilization").

But just as the US cannot maintain its rate of debt increase, so China cannot indefinitely maintain its annual rate of growth (as much as 15%). In time, China's chosen path will force a change in its policies. (The bunny suggests looking at the generation gap in China, between semi-skilled factory workers in living in projects in Shenzhen and their offspring who own--or want to own--cars and cellphones, and who wirelessly surf the Web to brush up on the latest releases from Milan and Hollywood. It's not that wide, and he asks you to consider just how badly the new generations would want to go back to the Good Ol' Days.) But rampant protectionist legislation will only do more harm than good. We should know, we've already tried it. Remember Smoot-Hawley. (http://www.state.gov/r/pa/ho/time/id/17606.htm)

5/27/07

It's not exactly breaking news that the once-vaunted and venerable US auto industry is now a bit rusty, to say the least. Earlier this month, private equity hellhound Cerberus bought a majority stake in the crumbling Chrysler jalopy for $7.4 billion (http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1455392120070514),
with newly liberated Daimler division happily motoring off into a strong Euro-tinged sunset
(http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1537748220070516).

(The strong Euro may prove a mixed blessing. Legendary automotive gran sasso Ferrari is having trouble keeping up with demand for its fabulously cool, extraordinarily expensive products in nations with currencies trouncing our own [see "How to Slow Down a Ferrari: Buy It" by Gabriel Kahn, Wall Street Journal p.B1, 5/8/07], while the Bavarian bouncer ramps up its US-made production lines to keep Das Overhead down [http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1540108020070515]).

Even the once Jolly Green GM isn't feeling the flush flow, having reported a $1.1 billion Q1 loss this year. In the general motoring scheme of things, said Washington Post scribe Greg Schneider on 4/20, "A generation ago, half of all the vehicles Americans bought each year were made by GM; today it's just over a quarter." (You can get the opening salvo at http://pqasb.pqarchiver.com/washingtonpost/access/824304831.html?dids=824304831:824304831&FMT=ABS&FMTS=ABS:FT&date=Apr+20%2C+2005&author=Greg+Schneider&pub=The+Washington+Post&edition=&startpage=A.01&desc=Industry+Giant+Falling+Behind%3A+GM+Reports+%241.1+Billion+Loss
but you'll have to pay the ferryman at the WP archives to read the whole thing.)

Where did the wheels come off?

Once again, the bunny tries to see the big picture.

In the post-bellum US, trade unionism became a social and economic necessity, to correct managerial abuses. Up to and during WWI, unions (more than government) played a leading role in this struggle.

Following WWII, unions (which by this point represented the majority of big industry labor) deviated from the path taken by European unions (which were more willing to accept lower wages in exchange for a greater spectrum of benefits, such as guaranteed employment, longer vacations, maternity leaves etc.). Stateside, unions pressed industry leaders and politicians into a "get more, give less" position. Given their position of power in US industry, management (along with government) caved in.

The business model created from this dynamic can no longer support the modern automotive industry. To begin with, modern US auto manufacturers are no longer manufacturers in the sense that they build cars from blueprint to turnkey all by themselves. Rather, they function as large-scale assemblers of components made by other companies. These others (Delphi? Navistar? American Racing--what's more quintessentially American than a set of Torq-Thrust Ds on granny's Maverick?), having built plants around the Big Three auto makers, face the same labor problems as they do, and consequently must pass on the related costs.

Another problem was the Big Three's egocentric thinking. They didn't go overseas looking for new markets (like,say, those in the oil industry). Foreign plants making American cars (to exploit lower local labor costs) were built primarily to export back to the US. It was an "all about us" mentality, a corporate hubris that considered itself above the pit of collapse lurking beneath all companies that don't make the cut.

For GM, the latest body blow came from within. Its financing arm GMAC (of which it owned 49%, the other 51% held by mortgage company Ditech, a large supplier of ARMs and annoying television commercials) was yet another casualty in the subprime lending fiasco.

American car makers have become bloated bearers of ballooning insurance costs, pension liabilities, and IOUs that will never be collected (and incidentally also make cars). How will the automotive industry, once a pillar of the US economy, survive the 21st century?

Enter Rick Conte and Jim Kaplan, a couple of engineering grads from Clemson University. They are the president and CEO (respectively), of a bold start-up called the Southern Motor Company, based in Liberty, SC (http://www.southernmotorcompany.com/).

Kaplan (who is president of electronics manufacturer Cornell Dubilier [http://www.cde.com], a maker of capacitors nearly a century old), saw the trend in retro car design of recent years as falling short of the mark, and so decided to make his own clean machine, one which would be fully compliant with all Federal safety standards as well as those for emissions (with both California and Canada providing the benchmarks--nothing on the EU as yet).

To do this, Kaplan devised a plan whereby a small facility seeded by his capacitor company would design and build the tools necessary to produce a custom superstructure (cab, panels, bed, and exterior parts), to be grafted onto aftermarket running gear. The entire production procedure would be supervised by another American startup, Panoz Auto Development (http://www.panozauto.com), a maker of high-performance sports cars, to insure a vehicle that's fully compliant for US roads.

Just like that? The bunny was dubious. So he called the good Mr. Conte, who was gracious enough to school him on Southern's genesis and its pilot product, the 358 truck (pictured at top).

"The real strength in this whole company is its business plan," he said in a telephone interview. "Jim Kaplan came up with the concept. We’ve been working on this for over two years now, so he’s put a lot of thought and energy into the program. We’ve identified not only a product that has a huge demand, but taken it through the whole development phase, doing the marketing research, building the prototype, and designing the facility."

Kaplan and Conte's vision of the 358 derives from an existing 1954 Chevy 5-window pickup, tweaked by computer for the 21st century. "We stretched the cab to give more legroom, we tapered the hood to give it a sleeker look, we redesigned the grille, we raised the bed, other subtle changes here and there," he explained. "The exterior will be custom designed and tooled. We’re going to the expense for the body panels, the cab, all the exterior body parts, the bed—all of that will be tooled from the ground up custom for this program." The equipment or "tools" used at this stage will serve throughout the 358's low-volume production, which Conte reckons will be a large savings over the life of the program. The truck's running gear will be based on Ford's aftermarket S-197 platform and 330-horsepower small-block V8 (the heart of the current Mustang GT).

Since Southern Motor has only four employees including Conte, the 358's production will be entirely outsourced to Panoz, which will put the pre-production prototypes of the 358 through their paces. "We contracted with them to design and certify our vehicle," Conte said. "They’ll help us build the pre-production vehicles, and take us through the full safety and emissions certification program. There’s a lot of give and take with them on the design, but they have total responsibility to take this vehicle to full compliance. There are literally hundreds of Federal regulations that have to be satisfied. So we’ll take our prototype and build about six pre-production vehicles, and they’ll take them through all the tests, from EPA to front, rear and side impact, rollover, fuel leakage, visibility, lighting, they’ll take those pre-production vehicles and use those to get us through the certification process."

That satisfied the bunny's perennial paranoia for safety, but why build a new vehicle now, in this climate?

"Because the timing is right," Conte said without hesitation (really, check the tape!). "One, the technology is there, you can design efficiently both the vehicle and the tooling. There’s simulation programs that let you do a lot of the work up front without actually having to build and test. Secondly, there’s the aftermarket. Ten years ago, you didn’t have the aftermarket you have today. You can purchase components, you don’t have to design and build them yourself. You can piggyback on existing technologies."

Kaplan and Conte looked before leaping, a most rabbit-like reflex. They commissioned market research from Automotive Insight, Inc. (http://www.automotiveinsightinc.com) to test consumer response to the 358. "At first we thought it would be mostly male baby boomers with excessive income," Conte said (Arlene Brunner, president of Automotive Insight, specified heads of 3-car households with six-figure incomes). "We're learning though the segment is much wider. 10% of our pre-sold vehicles are from women, 10% from retirees, and another 10% from under the age of 40. We're also finding at that we are seeing a large segment from individuals who aren't necessarily into classic vehicles, they simply love the look of our truck."

The Liberty, SC facility was designed to keep two vehicles in production over their respective sales cycles, which will pay off the cost of tooling and design. "That’s what makes the program feasible. We’re going to produce the same truck over and over, we’re not going to have an extended-cab version, four-door version, or multiple engine choices. Every vehicle gets the same options." Said options are primarily color (which spans a glorious PPG spectrum, viewable on the SMC website). Most of the "options" will actually be standard--no plastic on the interior, unlike the Big Three's heaps, just leather and sheet metal, the way the hot rod god intended. Automatic or manual (6-speed stick) about covers it.

According to Conte, the company has pre-sold 58 vehicles at a cost of $55K apiece. A truck purchased today would be delivered in 2009. "We’re going to start off real slow," he continued. "We’re only going to produce about 40 vehicles in the first six months, to make sure we get it right, make sure we can track new vehicles in the field, evaluate their performance, resolve any issues we may have, feed that back into the process. In ’09 we’ll start focusing on increasing our capacities." Conte said the company aims for a target of 1500 vehicles over a 5-7 year sales cycle, during which another vehicle prototype, possible a sedan, will be explored as Southern's next possible product line.

All this does not exactly make Southern Motor a threat to the Big Three, although the bunny considers it an intriguing alternative. "We consider ourselves a niche, low-volume producer," Conte said. "We’re targeting about 1500 vehicles per year, which is a very small number, when compared with the larger-volume programs that have to sell hundreds of thousands of vehicles per year to make a profit. We’re going after a small niche of semi-luxury vehicles (it’s not too high priced), there’s a demand for the product, we did our marketing analysis, and the results proved that even if this were a full-volume project, the demand would be there. American auto manufacturers may be struggling, but they’re still selling millions of vehicles. We’re just a blip on their screen."

(For readers interested in more on the Southern Motor Company and the 358 truck, the bunny recommends reading Dan Carney's fine feature "Retro Miracle in the Making: Southern Motor 358 Pickup" on Edmunds.com Inside Line (http://www.edmunds.com/insideline/do/Features/articleId=116863), as well as Mark Krzos' News-Press.com business article "New High-End Automaker Seeks Investors in Bonita Springs" (http://www.news-press.com/apps/pbcs.dll/article?AID=/20070328/BUSINESS/70327077/0/SS08)