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4 January 2011. A US economy stuck in neutral, with persistent and growing unemployment.

An on-going financial crisis in Europe.

Everybody knows 2010 has been a fiscal disaster throughout the "developed" world.

But because traders like to point out, there will always be ways to make money —

even if the global situation is filled with gloom.

And as fewer of those exact same traders are willing to admit, even more importantly,

there’s often very little connection between what goes on in the marketplaces, equity and otherwise,

and also the "real economy", in which they are allegedly rooted.

So despite all the negatives — and a few surprises, like the actual terrifying “flash crash” of the stock market in May, which STILL hasn’t been explained —

2010 proved in the end to be a pretty good year not less than SOME investors —

especially if those possessing shares in some high-flying tech shares, old-fashioned industrials, or gold.

The typical equity fund in the United States returned nearly 19 percent in 2010,

while the conventional and Poor’s 500-stock index flower 12.8 percent.

That had been below the gains of 2009, when the markets rebounded from the economic crisis and the S.&P. index soared 23 percent.

Few expected such robust results for 2010 when the year began, stated Tobias M. Levkovich, chief United States collateral strategist at Citigroup.

So why did stocks do well this year when so much is clearly going wrong?

Perhaps the most important factor was the pro-corporate guidelines of the Obama administration,

notably, the Federal Reserve’s decision in early November to function $600 billion into the economy by purchasing Treasury assets,

along with continuation of the pro-corporate / pro-wealthy individual tax slashes passed by the lame-duck Congress in December,

which together helped launch a year-end rally, lifting the actual benchmark S.&P. catalog by about 6.Five percent in December alone.

The general result was a predictable increase in corporate earnings,

helped along, obviously, by rampant slashing in work forces throughout the year,

a convergence that, not surprisingly, was mirrored in broad market increases.

But in what is likely to be a worry with regard to next year,

profits were bolstered by job cuts and other restructuring efforts AND NOT revenue growth.

In the third quarter of the year, for instance, earnings were 31 % higher than last year, but revenue increased by just 8 percent.

The disparity was even greater in the first 1 / 4, as earnings jumped Fifty eight percent but revenue rose only 11 percent.

With just so much room to cut expenses — after all, how many times can you fireplace the same workers ??? —

that kind of overall performance will be difficult to repeat, boding sick for stocks this year.

Not surprisingly, analysts expect profits to increase by 13.4 percent this year,

far lower than the estimated Thirty seven.8 percent gain for 2010, according to Thomson Reuters.

To make matters worse, Wall Street is brimming with optimism,

which, within the looking-glass world of investing, can actually be considered a signal to sell.

“The good news continues to be priced in, and the potential negatives have been ignored,”

said Jerr Hsu, chief investment officer of Research Affiliates, a money manager in Newport Beach, Calif., which oversees $70 billion in assets.

“The market is going to get more nervous at these valuations.”

In this context, the Dow Johnson industrial average finished with a good 11 percent gain in 2010.

The Standard & Poor’s 500-stock index had been less than a point lower, at 1,257.64.

The Nasdaq misplaced 10.11 points, or 0.38 percent, to finish at 2,652.87.

While stocks performed well over all, a small group of listings played a good outsize role.

Within the S.&P. 500, Mr. Levkovich said, the very best 50 performing stocks added about 60 percent of the jump in the index.

Technology was again a star, paced through Netflix, up 219 percent, which makes it the single best performer in the index.

F5 Networks, which makes equipment to manage Internet traffic, wasn’t any. 2, rising about 146 %.

Cummins, the engine maker, took third place with a 140 percent gain.

Automakers also do well, with Ford rising about 68 percent,

even because General Motors returned to the stock exchange in a $23 billion initial public offering, the biggest in United States history.

But numerous individual investors missed the party, having taken their cash out of stocks.

They were frightened off, it seems, because of the unpredictability that followed the brief 1,000-point drop on May 6, the so-called flash crash,

as along with lingering concerns from the financial crisis of 2008, including a real estate and unemployment hangover.

“Investors generally tend to have a reduced tolerance with regard to risk,” said Brian Reid, chief economist of the Investment Company Institute.

The institute estimates that investors withdrew $80 billion from domestic equity mutual funds in 2010,

while they added more than $250 billion to bond funds.

To be sure, investors still have roughly $4 trillion in domestic inventory funds,

but that flight in the market is reflected in additional figures, like shrinking buying and selling volume.

Total volume was down 16 percent from 2009, and was 24 percent below the levels of 2008,

according to Howard Silverblatt, a senior index analyst with Standard and Poor’utes.

That ate into the results of major banks and brokerage companies, like Morgan Stanley and Charles Schwab, which depend on trading commissions.

The government bond market was precarious as well.

Typically, bond prices go up and yields drop when financial growth is anemic,

reversing course when economic activity picks up and the threat of inflation reawakens.

Indeed, as it became clear the economy was sputtering early in the year and the European debt turmoil worsened,

investors began pouring money into bonds, eventually delivering yields to all-time lows through early October.

The yield around the two-year government bond, for example, dropped below 0.4 percent in early October, a record low.

But with the announcement of the Federal Reserve’s aggressive asset-purchase program,

and the extension of Bush-era tax cuts that were due to expire,

bonds began to sell off in November and Dec even as stocks rallied, sending produces higher.

James Caron, head of global interest rate and currency strategy at Morgan Stanley, said

2010 was a year of reversals in the bond market.

He added, “You had a 180-degree shift from gloom as well as doom to optimism.”

For the year, the typical bond fund came back 5.6 percent, according to Morningstar.

Bonds can be a traditional refuge in violent markets, but it was precious metal that really shined.

Like bonds, gold benefited from a flight to safety sparked by the European debt crisis.

But it also raced higher on fears that budget loss in Western countries, including the United States, are unsustainable

and that lax monetary policies might weaken the value of paper foreign currencies over time.

The returns of typical gold mutual fund, including mining companies and a selection of precious metals, moved higher by 40 percent.

Crude oil, another closely watched commodity —

albeit one with real USE-VALUE, unlike the purely speculative gold —

rose from $79.86 a barrel to $91.38 the barrel, less than 15 percent,

after rising 78 percent in 2009, according for this article in the New York Times.

Anyone that pretends to know what’s going to happen in ANY of these markets, of course,

is kidding themselves, not to mention anyone foolish in order to heedlessly follow their words.

But the most summary analysis of the items happened in 2010

should provide pause to anyone who really believes "happy days tend to be here again."

They clearly are not.

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com

 

22 October 2010. Examples such as these effortlessly draw one to the conclusion that banks are often run very little more than a series of banana republics, as well as together, the banking elites really are a force whose power may put your run of the mill Caudillos to shame. Like several strongmen, bank chairmen are equally thin-skinned, combative and able to eliminate whomever they believe intends their reputation or their notions of “honour”. And with those institutions called courts, that needs Death Squads?

Take what happened to Richard X Bove, a bank analyst who likes to take what he calls “extreme positions.” He occasionally moves the stock market, which has earned him a certain amount of prestige as well as notoriety — but has also gotten him fired several times.

One current Tuesday morning, for instance, Mr. Bove opined from his bright-orange home office, within this town just north associated with Tampa, Florida, that new government rules would curb mortgage profits and, therefore, financial institution profits, too.

It wasn’t an especially extreme pronouncement, by Bove standards. Yet shares of Wells Fargo, the actual nation’s largest mortgage lender, started to drop, and his phone lit up.

“That’s what makes the sport fun, right?” he says.

But for the last two years, Mr. Bove has been involved in a lonely legal battle to retain his ability to say whatever he likes, an ordeal that he says has been anything but fun. BankAtlantic, a Florida bank, sued him, blaming him of defamation after he wrote a report concerning the banking industry in This summer 2008, just as the financial crisis was starting to boil over. The financial institution contended that the report wrongly suggested that the institution was at trouble.

The case was resolved three months ago , and Mister. Bove didn’t pay a dime to BankAtlantic. Still, it was hardly a definite victory for Mr. Bove or even, for that matter, freedom of talk on Wall Street, where some say the need for independent, probing voices has never been much more apparent.

Although Mr. Bove is among the best-known experts on Wall Street, the majority of his colleagues deserted him or her after BankAtlantic filed its match. None of the professional associations which represent analysts or the securities industry rallied to his aspect, and his employer ultimately abandoned him. And Mr. Bove, 69, is stuck with nearly $800,Thousand in legal fees.

“Even though from the legal standing I won, from a real-world point of view I misplaced big,” he says.

The Bove report that resulted in the lawsuit, titled “Who’s Next?,” ranked 107 bank businesses from riskiest to least risky, using two financial percentages as benchmarks on 2 lists. BankAtlantic Bancorp, the publicly traded keeping company that controls BankAtlantic, was ranked 10th on one checklist, 12th on the other.

Alan B. Levan, the chairman and C.E.O. of BankAtlantic Bancorp, has frequently clashed with disgruntled investors and critics in his 40-year career within Florida real estate and financial. He says he filed his suit against Mr. Bove to protect his bank’s reputation.

“In the last three years, every business in America continues to be under extreme pressure because of the economy,” says Mr. Levan, Sixty five. “In that kind of a scenario, whenever rumors begin that are incorrect or portray a business in a light that is not true, after that, in times of stress, companies have to correct those misconceptions instantly because otherwise it can turn out to be quite dangerous.”

As it turns out, however, Mr. Bove’s rankings possess proved to be largely correct. Around the first set of rankings, Eight out of the 20 companies he explained were most at risk have failed, and most of the others’ stock prices possess spiraled downward and remain low. Around the second list of rankings, Nine of the top 20 banks are gone.

BankAtlantic Bancorp’s stock deals at just under $1, down from its record high of $100 at the end of 04. The company continues to struggle underneath the weight of its huge Florida real estate holdings, and some analysts say tighter banking regulations will only add to financial stress at the company.

While it is not uncommon for bank executives in order to grumble about analysts, it’utes highly unusual for them to sue. To begin with, many lawyers believe that it is hard to successfully sue someone more than his or her opinions. It’s also a challenge to prove that the report from a single analyst really hurt a company’s business.

But the BankAtlantic suit, closely watched in the banking industry, seemed to catch the angst that many bank leaders felt in 2008, when even some of the most venerable establishments faced the precipice.

Mr. Levan was not the only real bank executive to blame other people as his company’s inventory tanked. A chorus of banking chiefs at the likes of Lehman Brothers and Morgan Stanley publicly blamed skeptics and investors betting towards them as the reason their own shares fell.

Few banking executives, however, have pushed their own complaints as far as Mr. Levan.

IF Mr. Levan is sensitive about his bank, it may be because he constructed it from a sleepy cost savings and loan into Florida’s second-largest bank, behind BankUnited. He controls the bank and the holding company along with a small group of associates, including his son, Jarett Levan, who had been named chief executive of the bank in 2007.

The ownership structure is complex: Alan Levan and the associates control a company known as BFC Financial, which owns gives in BankAtlantic Bancorp, the company that, in turn, owns BankAtlantic. Mr. Levan and his affiliates control BFC and BankAtlantic through unique classes of voting shares.

“All of us don’t like different courses of shares,” says Paul Hodgson, senior research associate at the Corporate Library, which screens corporate governance practices. “All of us don’t think they are great for public shareholders, and our reasoning behind that is which it’s too easy for the controlling shareholder to run the company for their financial benefit rather than the benefit of public shareholders.”

Mr. Levan states that he doesn’t agree with this kind of criticisms. His company’s stock structure has allowed him to remain impartial while many other Florida banking institutions have been absorbed by out-of-state banking institutions or gone out of business. He notes that the stock structure is similar to that of The New York Times Company.

Mr. Levan moved to Florida after a brief stint upon Wall Street and started within the real estate business. In the mid-1980s, he entered banking by buying upward shares of BankAtlantic, then the Ocean Federal Savings and Mortgage Bank. By 1987, he or she was running the place.

As D.E.O., Mr. Levan oversaw 20 years of expansion. He renamed BankAtlantic as “Florida’s most convenient bank,” keeping branches open upon weekends. The bank’s strong branch network is one of the company’s best assets, analysts state, providing it with a steady source of funding.

Along the way, Mr. Levan has often gone to excellent lengths to protect his bank’utes fortunes and his own reputation.

In the 1980s, for example, after several quarters of losses, BankAtlantic was in such dire straits that Mr. Levan had to scramble financially to keep it afloat, according to court documents.

Mr. Levan, who was running partnerships that invested in Florida property, persuaded thousands of small investors in his deals to swap their stakes for financial debt in BFC. He then turned around and sold that real estate, giving him money to bolster BankAtlantic’s finances, court records show.

Some of the investors later prosecuted Mr. Levan, arguing that they had already been cheated. A judge in a associated case supported that view, writing that the transactions had been a deal that “a person actually mildly familiar with investments might conclude was unfair.”

ABC News broadcast a critical report on Mister. Levan’s real estate deals, and he sued the network, blaming it of slander. ABC ultimately won, after the Supreme Court rejected to hear the case.

More recently, because BankAtlantic’s loan portfolio was battered in the recession, Mr. Levan took several steps in order to shore up the bank’s financial situation and to appease regulators, such as an announcement this month that the bank was seeking to increase $125 million in capital.

He has additionally shifted troubled assets through BankAtlantic to its holding company. Because regulators don’t require the holding company to be as monetarily sound as BankAtlantic, the move around appeased regulators while transferring the burden to the holding organization.

In 2008, Mr. Levan sold $101.5 million of distressed industrial loans from the bank to the holding company for 93.5 cents on the buck. Since then, the loans have forfeit half their value, but the transfer prevented that recession from more seriously undermining BankAtlantic.

Legislators as well as regulators, as part of the recent monetary overhaul, are planning new regulations that would require holding businesses, as well as their subsidiaries, to be more financially sound.

As his career ascended, Mr. Levan was in the news over a individual matter. In 1988, three gun-toting thieves broke into his Coral Gables home, kidnapped his first wife and their daughter and demanded nearly a quarter of the million dollars in ransom. Mister. Levan paid the kidnappers, and his family was later found unscathed in the trunk of their Mercedes-Benz, based on the Miami Herald.

A former colleague at BankAtlantic says that while Mr. Levan includes a friendly, slow-talking demeanor, he is quick to size up situations and try to ready to jump into combat. He doesn’t respond nicely to criticism and has a tendency to continue battles for too long, states this person, who requested anonymity because he didn’t want to push away Mr. Levan.

Mr. Levan disputes that declaration. “If anything has become clear through recent events, it is we have encouraged and tolerated dissenting sights almost to a fault,” he says. “We survived the last banking crisis, when giants failed, by being flexible in our approach to complex issues and in front of the curve.”

Mr Bove, who grew up within New York City, is a bit of an anomaly among bank analysts. He is two times as old as many of his competitors and relishes talking to the news media. He has been covering banking for about three decades, even as many of his contemporaries have moved on to professions in money management and other more profitable work.

Even in the midst of the BankAtlantic lawsuit, Mr. Bove continued to create at least one report a day and sometimes as many as five. He says he tries to capture the big picture rather than focus on the granular financial details found in earnings statements.

“What’utes the reason to pay me to become the 14th guy to tell you what is going to happen in the second 1 / 4 at Citigroup?” he says. “There’s simply no utility for a man at a boutique that operates pretty much on his own to replicate the work of other analysts.”

A higher point in Mr. Bove’s profession came in 2005. That August, he issued an eight-page statement titled “This Powder Keg Is Going to Blow.” He argued which loose lending standards experienced created the housing bubble which was going to come to an abrupt or painful end. After correctly parsing the looming banking crisis, Mister. Bove felt that by the spring of 2008, the worst had passed. He made a major blunder by encouraging investors to buy up bank shares at the time and remained bullish through the summer.

Even as he offers bounced from one firm to another, he has maintained a healthy list of clients. Banks and mutual funds are his biggest customers, followed by hedge funds, he says.

Some bank executives who have known Mr. Bove over the years hold him in high regard.

“We certainly haven’t always decided with his assessments,” says Steve A. Allison IV, the former chief executive of BB&T, the major regional bank based in Winston-Salem, N.D. “My experience was that he gave a very thoughtful overview. I would rate him highly.”

Mr. Bove has his share associated with detractors, too, who condemn him for ubiquitous press appearances and a predilection for changing his views too quickly. Several suggest that Mr. Bove is inconsistent, making a brilliant insight one week, a mediocre one the next.

But Andy Kessler, a former Wall Street analyst, states it’s common for analysts to change their style to cater to their clients. “If your customers are mostly hedge funds, you’lso are going to give lots of short-term evaluation,” he says.

THE oddity of the BankAtlantic lawsuit, Mr. Bove says, is that he was actually trying to show that he had been more bullish on banks than other analysts, that turned out to be a mistake, given the financial crisis that followed. The subtitle of “Who Is Next?,” in fact, is “Less Many Candidates as One Would Think.”

After the report had been filed, it took simply eight days for BankAtlantic to file for its lawsuit. Mr. Levan said in a statement at the time: “If there is anyone who knows ‘Who Is Next?,’ it would be the folks at the F.D.I.C., with mountains of detailed monetary information about every institution enjoying deposit insurance. They, however, keep what they know to themselves — for good reason.”

The bank wanted Mister. Bove to correct his report, which in fact had ranked the holding organization, not BankAtlantic itself. Mr. Levan proposes that the media misinterpreted the report and reported the bank, rather than the holding company, was in trouble. The distinction is essential, he said, because the bank has always been well capitalized. Those capital levels kept regulators happy, even as some analysts questioned the health of the holding company.

To a particular extent, Mr. Levan is simply splitting hairs: it’s the keeping company that is publicly traded, and it is assets are almost completely made up of BankAtlantic assets, so the prospects of the two entities are firmly linked.

Mr. Bove said that if he hadn’t fought the suit, he and other analysts would find their work and careers undermined by constant flurries of suits.

“I’m trying to protect my ability to do my job,” he says. “Any company could direct my research basically had allowed this to go through.”

Still, apart from a few pundits, no one stepped forward to help him, Mister. Bove says. Mr. Bove’s former employer, the investment bank Ladenburg Thalmann, made a decision to settle its end of the case by paying BankAtlantic $350,000, with out admitting to any wrongdoing, and departing Mr. Bove to defend himself; he explained he quit the company in February because of arguments over the lawsuit. He now works for Rochdale Securities.

The Financial Industry Regulating Authority, an independent securities watchdog, started an investigation of Mister. Bove in 2008, demanding their records on BankAtlantic and questioning him for half a day. He was never penalized.

Ladenburg declined comment, as did the expert, which also declined to say the reason why it began its analysis of him.

John C. Espresso Jr., a law professor at Columbia University, likens Mr. Bove to a news reporter who is prosecuted over an article. But, he states, the press typically rallies around reporters whose First Amendment rights are challenged, while investments analysts are a much less cohesive group.

Nonetheless, Mr. Coffee states the stakes in the Bove situation were high because a negative outcome could “chill free and robust debate.”

“Anyone who needs to settle in a case like that increases the chances that a combative C.E.O. will prosecute the next analyst who problems him,” Mr. Coffee provides.

As part of his lawsuit towards Mr. Bove, Mr. Levan maintained which BankAtlantic was financially healthy. While it’s true that BankAtlantic has met its regulator’s financial requirements, the actual holding company, which has absorbed a large chunk of BankAtlantic’s stressed assets, has lost cash for the last 12 quarters. Also it was the holding company that Mr. Bove was position, not the bank subsidiary housed inside of it.

Although Mr. Levan said in an interview that their bank didn’t apply for government bailout money during the financial crisis, the bank’s own financial filings show that it did apply. Inquired about this, Mr. Levan sent an e-mail clarifying the matter: “We filed an application to keep our options open but withdrew it prior to the time it was acted upon. At no time did we ever make a determination to accept federal monies.”

In Feb this year, Mr. Levan approached some of BankAtlantic’s debt holders as well as asked them to sell their own securities back to the bank for 25 cents on the dollar. Investors balked, led by a New York hedge fund called Hildene Capital Administration. Instead of asking the debt holders to accept a discount, Mr. Scannell states he suggested that Mr. Levan and his son take large pay cuts. Mr. Levan states he doesn’t recall details of his conversations with Hildene, however says the firm didn’t influence his decision in order to ultimately give up on the debt trade offer.

Last month, a government judge in a shareholder lawsuit against BankAtlantic’s holding organization questioned Mr. Levan’s ethics, ruling that Mr. Levan had made false statements in 2007 about the extent of bad loans. The litigants argue that Mr. Levan did so intentionally in order to artificially bolster the stock price.

Mr. Levan denies that accusation and doesn’t agree with the judge’s assessment, either, but on Thursday the actual judge turned down Mr. Levan’utes request to reconsider the matter. The case is pending.

Mr. Levan, meanwhile, is dueling with investors of other companies in which his organization owns stakes — Benihana, the restaurant chain, and Woodbridge Holdings, formerly known as the Levitt Corporation, the home contractor famous for building Levittown on Long Island.

BankAtlantic entered into settlement talks along with Mr. Bove in his case within March. In the case, Mr. Levan said Mr. Bove’s report experienced damaged the bank’s status.

But “at the end of the day, that may not have been a strong case for them,” says Thomas F. Holt Jr., a lawyer for Mr. Bove. If the situation had gone to court, Mr. Holt stated, he planned to counter-top BankAtlantic’s argument by placing the bank’s reputation upon trial.

Mr. Levan disagrees with that evaluation. “There was nothing Mr. Holt stated he was going to say or even do that had any bearing on our view of the case against Mr. Bove,” he says.

Mr. Levan says he or she and BankAtlantic got exactly what they wanted out of the lawsuit against Mr. Bove. As part of the settlement, Mister. Bove issued a statement reiterating which his rankings didn’t include BankAtlantic. (But they did include it’s holding company.)

Yet Mr. Levan may not have won everything he searched for. For one, he said the bank didn’t sue Mr. Bove for money; nevertheless, e-mails from BankAtlantic’s lawyer reveal that the company sought as much as $650,Thousand from the analyst. In addition, BankAtlantic had sought a much more strongly worded statement than Mr. Bove ultimately issued, the e-mails show.

Regardless, Mister. Levan remains upbeat about their bank. He and his son rang the bell at the New York Stock Exchange last month, and Mr. Levan suggests that his company is “a fantastic banking story of a financial institution that really did extremely well in this recession.”

Mr. Bove, meanwhile, says their feud with Mr. Levan was mainly dispiriting. He’s particularly frustrated along with government regulators, whom he or she believes ignored red flags from BankAtlantic for years.

As he continues to turn out opinions about bank stocks, Mr. Bove says he has no intention of opining on BankAtlantic Bancorp again. Nothing personal, he says, but the financial company is simply too small to interest his clients.

“It’s the purely economic decision,” he states.

Hee En Ming

Guest Editor

EconomyWatch.com

 

 

23 September 2010.

Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.

Investors withdrew a staggering $33.12 million from domestic stock market mutual funds in the first 7 months of this year,

according towards the Investment Company Institute, the actual mutual fund industry industry group.

Now many are choosing investments they deem safer, such as bonds.

If that pace continues, more money will be pulled out of those mutual funds in 2010 compared to any year since the Eighties,

with the exception of 2008, when the global financial crisis peaked.

Small traders are “losing their urge for food for risk,”

a Credit Suisse analyst, Doug Cliggott, said in a recent are accountable to investors.

One of the phenomena of the last several decades has been an upswing of the individual investor.

As Americans have become more responsible for their own pension,

they have poured money into stocks with such faith which

half of the country’s households right now own shares directly or even through mutual funds,

which tend to be by far the most popular way Americans invest in stocks.

So the turnabout is actually striking.

So is the timing.

After past recessions, ordinary investors have typically regained their enthusiasm for stocks,

hoping to profit as the economy recovered.

This time, even as company earnings have improved,

Americans have grown to be more guarded with their opportunities.

“At this stage in the economic cycle, $10 to $20 billion would usually be flowing into household equity funds”

rather than the billions that are flowing out,

said Brian Nited kingdom. Reid, chief economist of the investment start.

He added, “This is very unusual.”

The idea that stocks tend to be safe and profitable investments with time seems to have been dented

in exactly the same that a decline in home ideals and in job stability recent years

has altered Americans’ sense of financial security.

It may take many years before it is obvious whether this becomes a long-term transfer of psychology.

After technology and dot-com gives crashed in the early 2000s, for example,

investors were quick to re-enter the stock market.

Yet larger economic calamities like the Excellent Depression affected people’s behaviour toward money for decades.

For right now, though, mixed economic data is presenting a picture of

an economy that’s recovering feebly from recession.

“For several ordinary people, the economic recuperation does not feel real,”

said Loren Sibel, a senior analyst at Strategic Insight, a New York research and data firm.

“Individuals are not going to rush towards the stock market on a sustained basis

until they feel more confident of work growth

and the sustainability of the economic recovery.”

One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas, tx.

Over the past four years, he has adjusted the proportion of their investments from 65 percent stocks and 35 percent bonds

so that the $1.A million he has invested is now equally balanced.

He had worked like a portfolio liquidity manager for that local Federal Home Loan Bank and retired four years ago.

“Like everyone, I lost” throughout the recent market declines, he explained.

“I needed to have a more conservative allocation.”

To be sure, a lot of money continues to be flowing into the stock market

from little investors, pension funds along with other big institutional investors.

But ordinary traders are reallocating their 401(k) retirement plans,

according to Hewitt Associates, a consulting firm that monitors pension plans.

Until two years back, 70 percent of the money in 401(nited kingdom) accounts it tracks was invested in stock funds;

that proportion fell to 49 percent by the start of 2009

as people rebalanced their portfolios toward bond investments

following the financial crisis in the drop of 2008.

It is now back again at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years.

People continue to be staying with bonds.

Another force at work is the aging of the baby-boomer generation.

As they approach retirement, People in america are shifting some of their opportunities away from stocks

to provide regular guaranteed income for the years when they’re no longer working.

And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash

and may simply need the money to pay for regular expenses.

Fidelity Investments recently documented that a record number of people required

so-called hardship withdrawals from their pension accounts in the second quarter.

These are early withdrawals intended to purchase needs like medical expenses.

According to the Investment Company Start, which surveys 4,Thousand households annually,

the appetite with regard to stock market risk among American investors of all ages

has been declining steadily since it peaked about 2001,

and the change is the majority of pronounced in the under-35 age group.

For a couple of months at the start of this year, things were looking up for stock market trading.

Optimistic about growth, investors were again putting their money into stocks.

In March and 04, when the stock market rose 8 percent,

$8.1 billion flowed into domestic stock shared funds.

But then came a grim reassessment of America’s economic potential customers

as unemployment remained stubbornly high

and personal sector job growth declined to take off.

Investors’ nerves were additionally frayed by the “flash crash” upon May 6,

when the Dow jones Jones industrial index dropped 600 points in a matter of moments.

The authorities still do not know the reason why.

Investors pulled $19.1 billion from domestic equity funds within May,

the largest outflow because the height of the financial crisis in October 2008.

Over all, investors pulled $151.4 billion out of stock market mutual funds within 2008.

But at that time the market was tanking in shocking fashion.

The shock this time around is that Americans are withdrawing money

even when reveal prices are rallying.

The stock market rose Seven percent in July because corporate profits began rebounding,

but even that increase was not enough to tempt ordinary investors.

Instead, these people withdrew $14.67 billion from household stock market mutual funds in July,

according to the investment institute’utes estimates,

the third straight 30 days of withdrawals.

A big beneficiary has been bond funds, which offer regular fixed interest payments.

As traders pulled billions out of shares,

they plowed $185.31 billion into relationship mutual funds in the first seven months of this year,

and total bond fund opportunities for the year are on monitor to approach the record set in 2009.

Charles Biderman, chief executive associated with TrimTabs, a funds researcher, said

it wasn’t any wonder people were putting their money in bonds

given the depressing performance of equities over the past decade.

“People have lost lots of money over the last 10 years in the stock market,

while there has been a bull market in bonds,” he said.

“In the financial markets, there is one truism: flow follows performance.”

Ross Williams, 59, a residential area consultant from Grand Rapids, Minn.,

began to take profits from his stock funds when the market began to recover last year

and invested the money in short-term bonds,

afraid that shares would again drop, according to this article from the New York Occasions.

“We have a very volatile marketplace, so we should be in ties in case it goes down again,” he explained.

“If the market is moving up, I noticed we should be taking this money

and putting this into something more safe rather than leaving it at risk.”

 

David Caploe

Editor-in-Chief

EconomyWatch.com

President / acalaha.com

 

 

8 September 2010. David Caploe PhD, Chief Political Economist, EconomyWatch.com

And we don’capital t mean “Bachelors of Science” – particularly since most of the people we’re talking about have at least one PhD, if not more.

While the dominance of computers, and the evident correctness of Moore’s Law – at least until this point –

has obviously been a huge benefit to every aspect of mind-based economic hobbies,

it has also brought with it a really evident downside, in two locations above all:

stock trading and standard academic economics – and the two are not unrelated,

especially since every “discipline” began to come under the quantitative impact at about the same time.

In stock trading, the so-called “quantitatives”, or quants, were revered because the brightest minds in finance,

who could outwit Wall Street with their Ph.D.’s and superfast computers.

But following blundering through the financial panic, losing big in 2008 and lagging badly in 2009,

these so-called quantitative investment managers no longer look like geniuses,

and some investors have fallen from love with them.

The combined assets of quantitative funds specializing in United States stocks have plunged to $467 billion,

from $1.2 trillion in 2007, a 61 percent decline,

according to eVestment Alliance, a study firm.

That drop reflects each bad investments and withdrawals by clients.

The assets of a broader universe of quant protect funds have dwindled by about $50 billion.

One in 4 quant hedge funds has closed since 2007, according to Lipper Tass.

“Should you go back to early 2008, when Bear Stearns blew up,

that’s when a lot of quant managers got taken out of the water,”

said Neil Rue, the managing director with Pension Talking to Alliance in Portland, Ore.

“For a lot of, that was the beginning of the end,” he or she added.

Wall Street’s rocket researchers have been written off before.

When the actual hedge fund Long Term Capital Management nearly collapsed in 1998, for instance,

some predicted that quants would never regain their former glory.

But this latest problem is nonetheless a stinging comedown for the wizards of higher finance.

For a generation, managing a quant account — and making millions or perhaps billions for yourself —

seemed to be the important dream in every math as well as physics department.

String theory experts, computer scientists and nuclear physicists

came down from their ivory systems to pursue their prospects on Wall Street.

Along the way, they turned investment management on its head,

even as their critics asserted they deepened market collapses like the panic associated with 2008.

Granted, Wall Street is not about to pull the plug on it’s computers.

To the contrary.

A technical arms race is under way to design financial software

that can outwit and out-trade the most advanced computer systems on the planet.

But the decrease of quant fund assets nonetheless runs against what has already been a powerful trend in finance.

For a change, flesh-and-blood money managers do better than the machines.

Much from the money that is flowing out of quant funds is flowing into funds managed by people, rather than computers.

Terry Dennison, the United States overseer of investment consulting at Mercer,

which advises pension funds and endowments,

said the quants had disappointed numerous big investors.

Despite their high-octane pc models — in fact, because of all of them —

many quant funds failed to protect their investors from losses

when the actual markets came unglued two years ago.

And many managers who jumped into this field during happy times

plugged similar investment criteria to their models.

In other words, the computer systems were making the same bets, and all won or lost in tandem.

“They were all fishing in the same pond,” Mr. Dennison said.

Quant money is still struggling to explain exactly what went wrong.

Some blame personnel changes.

Others complain that nervous clients withdrew so much money therefore quickly

that the funds were forced to sell investments at a loss.

Still others say their models merely failed to predict how the marketplaces would react

to near-catastrophic, once-in-a-lifetime financial events like Black September 2008 and the collapse of Lehman Brothers.

“It’s funny, but when quants do well, they all call themselves brilliant,

but when things don’t proceed well, they whine as well as call it an anomalous market,”

said Theodore Aronson, the quant fund manager in Philly

whose firm’s assets have fallen to $19 billion, from $31 billion in the spring of 2007.

But Mr. Aronson, who has been using quantitative theories to take a position

since he was at Drexel Burnham Lambert in the 1970s,

said investors would eventually come back.

“In the good years, the money rolled in, so I can’t really complain now concerning the cash flow going out,” Mr. Aronson stated.

“If somebody can give me personally proof that this is a horrible way to invest,

then I’m going to get out of it and retire.”

Still, a few of the biggest names in the business are shrinking after years of breakneck development.

During the last 18 months, assets possess fallen at quant funds managed by

Intech Investment Management, a unit of the mutual fund company Janus;

by the large money management company Blackrock;

and by Goldman Sachs Asset Management.

Even quant legends like Jim Simons, the former code cracker who founded Renaissance Technologies, have seen better days.

Mr. Simons was recognized as the King of the Quants

after their in-house fund, Medallion, posted an average return of nearly 39 % a year,

after fees, from 2000 to 2007.

It was an impressive run rivaling some of the greatest feats in investing history.

But since then, traders have pulled money out of two Renaissance funds

that Mr. Simons experienced opened during the quant boom.

After dropping 16 percent in 08 and 5 percent in 2009,

assets in the larger of the two funds have dropped to about $4 billion from $26 billion in 2007.

Ironically enough, that fund is up regarding 6.8 percent this season,

compared with a loss of about 3 % marketwide.

In an effort to woo back investors, some quants are tweaking their computer models.

Others tend to be reworking them altogether.

“I think it’s dangerous right now just because a lot of quants are working on what We call regime-change models,”

or strategies that can shift suddenly with the underlying currents in the market,

said Margaret Stumpp, the main investment officer at Quantitative Administration Associates in Newark.

The firm has $66 billion in assets under management,

and its oldest large-cap fund has had only two down years — 2001 and 2009 — because opening in 1997.

“It’utes tantamount to throwing out the infant with the bathwater if you engage in at wholesale prices changes to your approach,” Ms. Stumpp said.

But many quants, particularly past due arrivals, are hunting for something, something, that will give them a new edge.

Those who fail again might not survive this shakeout.

“What we’re seeing is that not all quants are created equal,”

said Maggie Ralbovsky, a managing director with Wilshire Associates,

which gives investment advice to pension funds and endowments,

according to this post in the New York Times.

And nor, Maggie, are all economists,

especially the ones that disregard the political and historical aspects of economics –

in short, just about all of them.

Now, the reasons for the “quantitative” domination of academic economics

are just about just like for their ubiquity in stock trading:

numbers tend to be impressive, especially when you consider the actual ever-increasing speed and amounts of information

of which even the tiniest computer systems can now make sense.

But numbers account for only so much of what goes on in the real world,

and the most successful stock traders pay just as much attention to emotion

as they do to numbers when trying to figure out how to handle their money.

The most obviously related emotions, of course, are greed –

the desire for more / more / much more –

and fear – what are you going to perform when you start losing or, in the worst case scenario, face the possibilities of losing it ALL.

Which has led a lot of economists to the current weird version of conventional psychology, however –

since that TOO has been mathematized over the last Twenty five years –

that has only re-doubled the fundamental problem:

the unwillingness to deal with politics and background,

the structures that set the actual framework and meaning of action.

So while behavioral economics may be a little improvement over purely mathematical financial aspects,

neither begins to acknowledge there are bigger structures

within which all people have operated all the time, and always will.

Because, of course, there is a definite drawback in recognizing

the reality of politics and history in being able to make sense of economic behavior:

losing the certainty which comes from an allegedly / self-styled / so-called “rigorous” approach.

And it’s obvious this certainty provides emotional security, especially when it comes to money –

which is why “quants” of disciplines stick so militantly for their graphs and equations,

as Margaret Stumpp so simply puts it in the quote just before Maggie’s:

“It’s tantamount to throwing out the baby with the bathwater if you engage in at wholesale prices changes to your approach”

just because something happened that a) you didn’capital t predict or b) even think would ever happen,

although you might think someone with an open thoughts would do exactly that

if their prior work had failed to permit the possibility of precisely the sort of major event that DID occur.

Indeed, her attitude is summed up more generally by people who argue above:

“their designs simply failed to predict how the markets would react to near-catastrophic,

once-in-a-lifetime financial events like Black September and the collapse of Lehman Brothers.”

The problem, of course, is that anyone familiar with history –

or anthropology or sociology or their systematic combination into medianalysis –

knows it is precisely these so-called Or self-styled / alleged “once in a lifetime” events that are what matter,

the times where history turns, after which life – as the quants are finding – is never quite the same.

Obviously, this particular realization is a bit more immediate for traders,

who must deal with the actual realities of life every single day in a way more cloistered academics – particularly those with tenure –

can avoid more often than not, and spent most of their effort in doing just that: engaging in the most intense forms of avoidance and denial.

But the simple fact of the matter is that those “once in a lifetime” events DID happen.

And not only did the actual “quants” in both areas completely fail to predict their possibility,

and create a mockery of those who actually said they could happen,

but we are also just about all STILL dealing, now, two years later,

with merely the IMMEDIATE effects of those events.

Indeed, I would venture to predict,

we are only JUST realizing their medium- and longer-term consequences,

above all, the dreaded moment when the “other shoe” –

namely, those “financial weapons of mass destruction,” the derivatives – begin to fall.

And when that happens, just as with their correlatives in the realm of physics,

there are likely to be both immediate “blast effects” and then longer-term “fallout.”

Once those strike, you can be pretty sure that,

while the quants of both trading and conventional economics

will be sure they can tell us the exact dimensions of the actual mess into which we will have fallen,

it would seem to become wise to take those predictions with a ton of salt as well.

Because it’s pretty unlikely any of them every considered “it would actually come to this.”

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com

 

 

26 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

As consistent readers of this site are well aware, we are not huge fans of the so-called “reform” of the US finance sector

authored by President Obama, and barely squeaking through the Senate, which has pretty much misplaced whatever prestige it may have once had.

We’ve detailed what we saw as unclear as well as problematic in what the legislation actually does contain,

and were shocked by its avoidance of these two major issues that ANY “reform” should have confronted:

 the whole issue associated with “too big to fail” [ TBTF ] banks AND its wimpy stance on the STILL unexploded “weapons of mass financial destruction,”

the DERIVATIVES that have already caused so much, and will cause even more, horrific damage in the future.

We characterized it as a jobs bill for lobbyists even before it passed,

and then, after we got a glimpse of its more than 2000 pages,

noted how many of individuals lobbyists are ex-regulators,

hired explicitly for their already existing “working relations” with their ex-colleagues in the regulatory agencies,

who have been provided immense power as a result of this particular so-called “reform.”

So to us it’s hardly surprising to see how the banking institutions themselves have been preparing for several weeks, if not years,

to deal post-legislation along with whatever they couldn’t kill pre-legislation.

And, as always, they seem to be way ahead of the politicians – certainly not states –men or –women – in Washington.

Indeed, before the ink was dry on this massive tome of mandated rules and studies that nevertheless evades most of the key issues,

after spending many millions of dollars to lobby against it, lenders are now turning to Plan B:

adapting to the rules and switching them to their advantage – a practice where we’ve seen how well these people excel.

Faced with new limitations on fees associated with debit cards, for instance,

Bank of America, Wells Fargo yet others are imposing fees upon checking accounts.

Compelled to SUPPOSEDLY trade derivatives in the daylight of closely regulated clearinghouses,

rather than in murky over-the-counter markets that we feel, frankly,

given the gigantic loopholes in this “legislation”,

are going to continue, if not necessarily on the same scale as before,

titans like T.P. Morgan Investment Bank as well as Goldman Sachs are building up their types brokerage operations.

Their goal is to make up any lost earnings — and perhaps make even more cash than before —

by becoming matchmakers in the huge market for these instruments,

which had been without question the principal cause of the financial crisis.

And you think we’re being too cynical 😉 ???

Even with regards to what is perhaps the biggest new rule —

barring banks from making bets with their own money —

banks have found what they think is a answer:

allowing some traders to continue making those wagers,

as long as they also work with clients.

Banking chiefs concede they intend to pass many of the costs associated with the bill to their customers.

Well, at least they’re honest about that.

“In the event that you’re a restaurant and you can’capital t charge for the soda, you’lso are going to charge more for that burger,”

said Jamie Dimon, the chairman and chief executive of JPMorgan Chase,

after their bank reported a $4.8 billion profit for the second quarter.

“Over time, it will all be repriced into the business.”

Indeed, Jamie, that it will.

Short term, the changes imposed by this legislation along with other recent reforms

could cut profits for that banking industry by as much as 11 percent, analysts estimate.

Have a person noticed, by the way, how in so-called business journalism, there are always “experts,”

just as when it comes to macro- issues, there are always “some economists” ???

These little media tricks all make it sounds so, oh, I don’t understand, respectable –

when, as Black September 2008 and its ensuing revelations such as Repo 105 made clear, it’s anything BUT.

Long term, Wall Street will be able to plug a minimum of part of that hole by doing what it does greatest:

inventing products that take advantage of the new rules.

At Morgan Stanley, the board has already had extensive meetings on strategies re how to adapt.

Citigroup has already shed risky investment units forbidden by the bill,

freeing upward cash it can quickly set up into new areas.

At J.G. Morgan, 90 project teams tend to be meeting daily to review the rules and retool businesses accordingly.

“We’ng been gearing up for this like a merger,”

Mr. Dimon said in a current interview.

He said new limitations on credit and debit card charges, as well as derivatives,

could cost their bank at least several hundred zillion dollars annually

but added the bank would find new sources of income to plug that gap.

No doubt.

There are signs that’s already happening across the industry.

Free checking, a banking mainstay of the last decade,

could quickly go the way of free toasters for new account holders.

Banks are already moving to make up the revenue they’ll lose

on lower overdraft as well as debit card transaction charges by raising fees on other services.

Banks like Wells Fargo, Regions Financial of Alabama and Fifth Third of Ohio, for instance, 

charge new customers a monthly upkeep fee of $2 to $15 per month — as much as $180 a year —

on the most basic company accounts.

Even TCF Financial of Minnesota, whose marketing mantra championed “totally free checking,"

started imposing fees this year in anticipation of the new rules.

To be sure, oftentimes customers can escape the brand new checking account charges

by maintaining a minimum stability or by using other banking services,

like direct deposit with regard to paychecks and signing up for a debit card.

Still, with checking account fees spreading, Financial institution of America rolled out a fee-free, bare-bones account on the eve of the United states senate vote.

The catch – or don’t let say catch/es ???

To avoid any charges, customers must

·        forgo using tellers at their local branch,

·        use only Bank of America cash machines, as well as

·        opt to receive only online statements.

“You are going to see more of these specific offers,”

said David Owen, Bank associated with America’s payment product executive.

Fifth Third, for example, has added extra services to its basic checking account, such as fraud alerts and brokerage firm discounts,

but now tacks on a monthly maintenance fee.

JPMorgan Chase is considering hiking annual fees for debit cards

that offer rewards factors, or scaling back how many they dole out.

“The rule of thumb is it costs a bank in between $150 and $350 a year” to maintain a checking account,

said Aaron Fine, a partner from Oliver Wyman, a financial consultancy.

If banks cannot recoup that money, he additional, they may feel justified in jettisoning unprofitable customers.

Sans doute, as the French would state.

While commercial banks are expected to have the effects first,

investment banks are bracing for more fundamental changes

in lucrative businesses like derivatives trading.

And there those pesky derivates are AGAIN –

only we question how “fundamental” those changes are going to be.

In the past, banks would sell complex derivative contracts directly to purchasers, pocketing hefty fees.

Now, most types will supposedly be traded via clearinghouses,

which will bear the risk, departing banks to simply broker the actual transaction.

And that, of course, raises the question of WHY anyone would want to establish a clearinghouse,

since they will be bearing the risks, but not participating in any huge profit-making ???

At least so far, no one from Congress / the chief branch / or the media has come up with a clear answer to that key issue.

The shift in order to clearinghouses will supposedly turn derivatives trading from a highly profitable niche –

because everything was done in secret, so no one had any idea what the actual real risk / benefit ratios were –

to a more volume-based business, in which banks will have to compete upon customer service and price.

As a result, banking institutions have already spent tens of millions of bucks to rewire their personal computers so they are more efficient within the leaner times ahead.

Don’t you feel bad for the poor banks, having to rewire their personal computers ???

We do.

NOT.

Even as bank lobbyists fought successfully to dilute the most transparent parts of the new types rules –

namely, as we have pointed out, making sure they are limited to “standard” contracts,

when, in reality, almost ALL derivative dealings are “unique”,

hence exempting them FROM the clearinghouse nexus –  

these same institutions quietly faster plans to adapt to whatever guidelines would eventually pass.

At T.P. Morgan Investment Bank, more than 100 people, from traders to risk managers as well as computer programmers,

have been busy for months retooling the bank’s large derivatives business.

Citigroup has taken off several dozen employees upon similar projects, and may form a global clearing services company unit.

Although the derivative guidelines will not go into effect till 2011 –

giving the banks plenty of time to figure out how to get around these brand new “rules”,

not least by having their insurance supporters “consult” with their former colleagues in the regulatory agencies that are supposedly going to “watch over them” –

major banks have been pitching these new clearing services to hedge funds along with other potential clients since late ’09.

“If you are in the business of electronic trading, inevitably this is getting brought up in conversation and priced into your clearing deal,”

Donald Motschwiller, managing partner and co-president of Very first New York Securities said in the following paragraphs from the New York Times.

Indeed, Don – INEVITABLY it’s going to be “priced into” your own deal – what else would you expect ???

Just as the derivatives clients are likely to mutate — but hardly vanish —

proprietary trading –

that is, betting on a single deals in which you’re advising clients … conflict of interest, anyone ??? –

is unlikely to disappear anytime soon.

In that case, banks like Citigroup and others – full disclosure: Citibank is my personal bank, and that i LOVE their service –

have began to dismantle stand-alone desks that use the bank’s own money to make speculative bets,

shifting those traders to desks that work with respect to clients.

But those traders it’s still able to make occasional bets on the market,

even if their primary responsibility is to serve clients.

Now, correct me if I’m wrong, however in a situation like that –

as we have seen already from Goldman Sachs betting against the really securities it was selling customers –

isn’t there a STRUCTURAL conflict of interest ???

Whose interests would be the banks going to serve – your own or theirs ???

And if you need a good explicit answer to that,

then allow me to show you documents proving my personal ownership of the Golden Gate Bridge –

which, since I no longer live in San Francisco, I don’t need anymore,

and will happily target you at a price I’m SURE you can afford.

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com

 

19 August 2010.

Let me embark on a limb and make a prediction; innovation in financial providers will increasingly move to rising markets as the ‘developed’ world is constantly on the grapple with Too Big In order to Fail banks that need to maintain the payment of large amounts of profit to their ‘talent’ (a third or a half of profits being ‘invested’ this way is not uncommon), in marketplaces that are stagnant or declining.

 

Emerging market banks have the opposite challenge. Described in business terms, we would talk about capturing growing rapidly markets segments, particularly those huge low income markets exactly where financial services may have been entirely informal in the past. My colleague David talked about some of this particular in his excellent article upon new strategies to capture rising middle classes yesterday.

 

It is true that one of my friends (a former bank who shall remain anonymous!) said rather unkindly that actually rising market banks are envious of their TBTF brethren and want to grow themselves into the too-big-to-fail/ backstop-me-and-give-me-cheap-unlimited-finance category in the next crisis. But look, I’m an optimist, so I shall choose to believe that instead they have used recent lessons to coronary heart and they are out to build much more sustainable businesses.

 

So let us concentrate on the present. What they are doing right now is innovating, and in particular, re-thinking financial and using technology to bring new financial services to rapidly growing markets. Yes, western visitors, you heard that correct. Focusing on bringing new services in order to customers, not using citizen money to stay alive, and never on how to continue to pay outsize bonuses while cutting credit lines to small businesses and households.

 

I happen to be thinking more this subject recently, both due to my personal involvement with Economy Watch, and through my work at my day job in internet marketing. There I have been working with Standard Chartered Bank around the launch of their new on the internet, mobile and internet banking support, Breeze by Standard Chartered.

 

Standard Chartered is listed in the UK, but has only focused on emerging markets for the last 150 years or so. It is not well-known as a result, but that postioning now seems prescient.

 

This is surely the time for someone like Standard Chartered to sparkle. To the best of my knowledge, it has avoided the amazing trading/ derivatives shenanigans that have afflicted Walls St. It focused on entry and community banking, enshrined in its new positioning tagline, Here For Good. And it is now looking to play on the world stage, greatest embodied perhaps in its new deal to sponsor the t shirts of that global (albeit troubled) icon, Liverpool FC.

 

One of the very first things you notice about their new Breeze platform is that it appears like it has been developed in Silicon Area. The interface looks more like something from mint.org than it does a financial institution, and yet it has been developed in Singapore. It is also home to a world first, the e-cheque or e-check (depending on whether you want real English or Americanish). This service allows you to sign a cheque electronically on your computer or iPhone. Regular Chartered (or SCB for short) will then instantly print and mail which cheque for you. Millions of clients rely on cheques out of necessity, which type of innovation can turn what’s been a peripheral service such as mobile banking into their new standard operating process.

 

Indeed, a report just out through Juniper Research states that there is going to be 150m mobile banking users globally by 2011. Personally, I believe this number is understated because it is focusing on mobile phone users who log in to an internet banking support.

 

Mobile banking has been turned on its head by services that allow mobile phone users to transfer money using their phones on your own. This service is growing rapidly in emerging markets and started in Kenya, most notably through the M-Pesa service.

 

The key insight here is that’s it much easier for less affluent people to get a mobile phone accounts than a bank account. A traditional credit score score will say that these types of billions of people are not worthy associated with credit and therefore can’t get a bank account. But if they prepay for mobile phone credits, then in fact their credit is golden. (Don’t forget which credit rating agencies are part of the reason for the Financial Crisis using a business model that is questionable at best.)

 

M-Pesa allows mobile phone users to transmit and receive money using their cell phone accounts. They can even transact with individuals who don’t hold cell phones using a system of nearby agents who fulfill the ‘Last Mile’. Now that is innovation in its finest form, simultaneously bringing necessary service to those previously omitted while unlocking new markets.

 

And that’s the reason it seems clear to me that innovation is leaving the traditional centers of the US, Europe as well as Japan, and moving in order to countries previously on the outside. In case you missed it, the three reasons are:

 

1.     Western banks are focused on preserving as well as extending the wealth of their own employees, and their ‘innovations’, such as High Frequency Trading, are increasingly focused on these economically useless uses

 

2.     Innovation in emerging financial markets are focused on unlocking access to new markets using the latest technology as enablers

 

3.     This particular innovation provides true economic value. It gives services to people who previously didn’t have it, and helps to create wealth for enterprises in the process

 

 

Now, if that is not a rallying cry with regard to responsible banking, I don’t know what is.

 

Keith Timimi

EconomyWatch.com Contributor

Qais Consulting Chairman

 

 

1 July 2010.

Only on Wall Street, in the rarefied realm of buyout moguls, could you actually have too much money.

Private collateral firms, where corporate takeovers are planned and plotted, today sit down atop an estimated $500 billion.

But the offer makers are desperate to discover deals worth doing, and the clock is ticking.

 

Public pension money, university endowments, insurance companies and other institutions

have promised to invest many billions along with them —

provided the deal makers can find companies to buy.

If they fail, traders can walk away, taking profitable business with them.

Private equity funds generally tie up investors’ money with regard to 10 years.

But they typically must commit all the money within the first three to five years of the funds’ life.

For large buyout funds raised within 2006 and 2007, at the height of the bubble, period is short.

They must invest their money soon or return it to clients —

presumably along with some of the management fees the firms have already gathered.

Corporate buyout specialists generally raise money from big investors and then buy undervalued or underappreciated companies.

To maximize investment returns, they typically leverage their cash with loans from banks or bond investors.

In the past few years, private investment firms have amassed business empires rivaling the mightiest public corporations,

buying up big names like Hilton Hotels, Dunkin’ Donuts and Neiman Marcus.

Critics contend that leveraged buyouts can saddle takeover targets with dangerous levels of debt, according to this short article in the New York Times.

But in contrast to indebted homeowners, highly utilized companies under the care of private equity have so far dodged the big bust many have predicted.

After a good unprecedented burst of buyouts throughout the boom leading up to 2008, an enormous majority of these companies are dangling on.

Whether they will avoid a reckoning is uncertain.

So for now acquistion artists are searching for their subsequent act.

Some of the industry’s biggest players –

David M. Rubenstein of the Carlyle Group, Henry Kravis of Kohlberg Kravis Roberts and David Bonderman associated with TPG –

have more than $10 billion apiece in uncommitted capital —

what is known as “dry powder” —

according to Preqin, an industry research firm.

Some buyout firms are asking their clients for more time to search for companies to buy.

Many more are rushing to invest their cash as quickly as possible, whatever the price.

Many in the industry are getting caught in bidding wars.

Firms are assigning surprisingly high values to companies they are acquiring,

even though the lofty prices will in all likelihood reduce profits for their investors.

A big drop in returns would be particularly vexing for pension funds,

which are counting on private equity, hedge funds and other so-called alternative opportunities to help them meet their installation liabilities.

Given the prices being paid for companies, investors’ returns over the life of the actual fund are likely to drop into the low to mid-teens,

said Hugh H. MacArthur, head of global private equity at the consulting firm Bain & Company,

which used to be associated with Bain Capital, the private equity company.

Returns will be even lower as soon as fees are factored in.

Private collateral firms typically charge a yearly fee of 2 percent and take a 20 percent cut associated with a profits.

While investing in private equity will probably be more lucrative than investing in public markets,

“those are not even close to the gross returns of the mid- to high teens that people saw a few years ago,” Mr. MacArthur said.

One factor in the modest forecast is rising prices for buyouts.

Kelly DePonte, a partner at Probitas Partners in Bay area, which helps private equity firms raise cash, said

“tough competition for deals” had driven up valuations recently.

One of the biggest and costliest deals so far this year was the acquisition of a stake in the Interactive Information Corporation,

a financial market data company, by two private equity firms, Silver Lake and Warburg Pincus,

according to Capital IQ, that tracks the industry.

A third, unidentified private equity partner dropped away because the price was excessive.

The two buyout shops compensated $3.4 billion, or $33.Eighty six in cash for each share of I.D.D. —

a premium of nearly Thirty-three percent to the going cost in the stock market.

Technology companies frequently command high valuations.

Silver River and Warburg Pincus declined in order to comment for this article.

Last year, when banks balked at financing deals and private equity companies worried the economic crisis would drag on,

the number of deals — and prices paid — fell sharply.

In This summer 2009, for instance, Apax Partners paid $28.50 a share, or $571 million, for Bankrate,

which owned a number of consumer finance Web sites.

The cost represented a 15.Eight percent premium.

Apax had to pay the entire bill itself, without any money from banks.

But these days, even small and midsize companies are inside a bidding frenzy.

More than a dozen buyout firms made preliminary bids for the Virtual Radiologic Company,

a company that interprets healthcare images remotely.

Providence Equity Partners eventually paid a 41 percent premium for the company.

When a small online education organization called Plato Learning hung up the “for sale” sign, several suitors demonstrated interest.

When Plato last tried to market itself, in the fall of 2007, it found absolutely no takers.

Private equity players concede that competition has heated up and prices are rising.

But they reason that prices, from a historical perspective, remain attractive.

Prices are well underneath the stratospheric levels of 2007 and 2008, according to Capital IQ.

Buyout executives also say it is too quickly to determine what profits will come from all of these deals.

And, they say, losers within bidding wars always claim the winners overpaid.

Still, those with dry powder are bidding aggressively, in the United States, Europe and Asia.

TPG — which, according to Preqin, has one of the largest stockpiles from more than $18 billion —

has bid strongly at several auctions, according to several investment bankers.

In fact, TPG has spent $9.2 billion to date this year, investing in 11 businesses, including ones in India and Brazil.

That makes TPG the industry’s top deal maker, according to Dealogic, a research firm.

A spokesperson for TPG declined to remark.

Noting that buyout firms tend to be “feeling a lot of pressure to put the money to work,”

William R. Atwood, head of the Illinois State Board of Investment, said he wished the firms would not stretch too much for deals.

“There is a large counterpressure — a requirement for prudence as well as returns from their investments,” he said.

As literally millions of Americans and other people around the world struggle daily to outlive,

Wall Street big shots possess, literally, more money than they get sound advice with.

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com