Making Sense

Rather than pick a topic and write extensively about it I am reverting my old form and will discuss a variety of current topics.

Let's begin with the economic recovery. An article in the Wall Street Journal ponders why investors remain jittery in spite of "clear signs" of economic recovery. The fact is that, other than equity bulls, problems remain within the economy. In actuality, much of the "recovery" has been due to cheap capital, inventory replacement and unsustainable incentives such as Cash for Clunkers and the home buyer tax incentive. Not every one sees the clear signs.


Also in the Wall Street Journal is an editorial by Christopher Wood points to the disturbing fact that the nascent recovery is heavily dependent on government stimulus. He points to the artificial demand for homes and cars bringing demand forward at best and enticing consumers to purchase for whom it is not in their best interest to do so.

This opinion was echoed by Bill Gross and Nouriel Roubini. Mr. Gross believes that growth will be below historical trends and Mr. Roubini believes that cheap leverage (for those who can get it) is creating more asset bubbles in equities and commodities. I believe that they are both correct. Consumers will not and cannot borrow as they had during most of the past 20 years. This will remove significant consumer demand from the economy. Since consumer spending is responsible for approximately 70% of U.S. economic activity, pent up demand may not be what the bulls expect.


On the auto front UAW workers at Ford continue to reject concessions to help make Ford competitive with GM and Chrysler which, after bankruptcy, have much lighter debt loads. What is going through the minds of auto workers. Apparently not much. Speaking of autos, FIAT announced that Dodge will specialize in "blue-collar muscle cars" and trucks. The more plebeian car line will consist of FIAT models, but that it will take several years to bring over the little FIATs as they do not currently meet U.S. safety and emission standards. The popular Dodge Caravan mini van will be axed. The smells a lot like AMC / Renault and we all know how well that turned out.

Morgan Stanley continues to hawk $1000-par fixed to floater LIBOR-based preferreds. The first MS argument was that when "rates" rise the value of these preferreds will rise. I have previously demonstrated that it is a flattening yield curve which results in higher prices. Contact me for mathematical and historical evidence.

Looking for another angle, MS is now marketing these preferreds by pointing to their attractive yields to call. Even though the calls are unlikely to occur for economic reasons, MS believes that they will be called as banks want to instill confidence by calling in Tier-1 securities. 1) Banks want more, not less Tier-1 capital. 2) If banks wanted to retire such securities they could buy them in the open market at discounts. There is no reason to call them at par. They are trading at discounts because the street does not believe a call to be likely. I have it from reliable sources that MS is loaded with these issues and is using retail accounts to move the inventory. Very few firms market $1000 preferreds to retail clients as they are institutional vehicles and illiquid in retail sizes. Trades of 1mm are the norm.