Random Articles For The Day

Some articles...

• US GDP growth comes in at -0.3% (Bloomberg): I'm playing around with a contrarian macro call for a better economic growth than the market is pricing in. I don't have a firm view yet but I'm thinking that economic growth is not going to be terrible (worse than 2000 or 1990 recessions but not probably not as bad as 1974.) The problem with a GDP call is inflation. I'm still not leaning one way or another when it comes to future inflation.
  
• Critical thought about hedge funds in Canada (The Globe & Mail): Good thing the unsophisticated public--you and me--can't invest in what passes for hedge funds these days. At least when it comes to Canada, it's quite correct to say that many so-called hedge funds have nothing to do with hedging (most have high positive correlation to the index) and simply leveraged bets on resource companies.
  
• Hartford Financial, an insurer, facing problems (MarketWatch): This just goes to show how overrated American executives are. Aren't insurance companies supposed to be conservative? Guess not. First we have the bond insurers. Then the big one, AIG. Now, it looks like Hartford, a once-not-so-tiny insurer, is facing potential capital shortfalls (it's actually so bad that management can't even tell how much capital it has.) One would have thought that insurers would build a business model that accounts for capital market disruptions. If there is any positive to the current crisis, I suspect it is the ridiculous compensation for executives and the tendency for many in North America to place management on pedestals.
  
• Pension shortfalls starting to appear (The Globe & Mail): It looks like some Canadian pensions are facing minor problems now that the stock market has fallen. Warren Buffett rarely makes general long-term calls but one of his most powerful was his multiple warnings that pension obligations are not adequately accounted for. I think everyone realizes that government pension plans are totally messed up (I am expecting a big political clash between the old and the young within the next 20 years.) But my feeling is that the market and investors don't extend that view to corporate pensions. If you are a long-term investor in North America (or countries with sizeable pension obligations,) this will have a huge impact. The key point Buffett made was that pension administrators and executives were assuming too high of a return from their assets. Well, if their assets fall and don't rise (or don't rise as the project,) there will be shocks. I'm not a legal expert I believe pension obligation take higher precedence over shareholder or bondholder obligations so keep that in mind.
  
• Some Government officials question the IRS tax rule promoting bank mergers (Bloomberg): I never really understood the merits of the tax rule change that promoted bank mergers and some politicians are questioning it as well. Recall that this was the change that let Wells Fargo buy Wachovia (Wells Fargo wouldn't have bought it without the tax benefit.) It's too late to change anything but I really don't know why such a change was made out of the blue. Let me also say that I am not a fan of the Bush-Paulson-Bernanke strategy of trying to save the system by creating 'super' banks. It seems very much like a short-sighted strategy to pass the problem to the future. Recall that one of the reasons a country like Iceland had problems was because the banks were much larger than the country. No one could take anything the Icelandic government or central bank said seriously. USA is nowhere near that but it at the rate that it is going, I wonder. I also question the wisdom of (implicitly) claiming that the larger you are, the stronger the system is. One of the reasons Morgan Stanley collapsed was because its balance sheet hit $1 trillion (due to leverage) and there was no way anyone could have a grasp of the inherent risk.
  
• GMAC may convert to a bank (The Globe & Mail): I have nothing against GMAC but I'm sure this is not what the US government or its taxpayers had in mind with their bank aid plan.
  
• Ambac wants to tap the Treasury bailout (Ambac): Not sure what to make of this. This will clearly help the bond insurers but it isn't what you would find in the 'Book of Capitalism'. One thing though about helping the bond insurers is that you get more bang for the buck with them than with banks (who may not lend the monetary benefit they receive.) Ambac and other bond insurers will likely post very poor numbers next week but the question is whether they have sorted out their collateral posting requirements, and manage the losses on the insured portfolio.