Economic Potpourri December 20, 2008

The barrage of noteworthy economic news continues unabated. Here are a few headline news reports of interest from the past couple days.

Legg Mason to Add Miller to All Cap Fund Manager Team

Bill Miller, the Legg Mason Inc. money manager whose two funds have each lost more than half their value this year, will help run a third fund as the firm tries to reverse record outflows.

Miller will be added to the Legg Mason Partners All Cap Fund on Jan. 1, Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, said in an interview today. David Nelson will also be added to the management team, led by Jay Leopold.

Legg Mason is taking steps to stem customer redemptions that took $37 billion from its stock funds in the first nine months of 2008. Miller’s Legg Mason Value Trust has declined 56 percent this year after failed bets on companies including American International Group Inc. and Freddie Mac.

Miller, 58, known for guiding the $4.3 billion Value Trust to a better performance than the Standard & Poor’s 500 Index for a record 15 consecutive years, has trailed the benchmark since 2006. His $1.3 billion Legg Mason Opportunity Trust has declined 65 percent this year, while the S&P 500 has fallen 40 percent.

Brilliant Strategy To Shore Up Confidence

Now there's a brilliant strategy to shore up investor confidence if I ever saw one: Take the guy who is down 65% and add him to yet another team to mismanage. I have a better idea. Fire him.

Oil producers call for more price stability

The world's largest oil producers and consumers called for more cooperation Friday on measures to increase stability in oil prices and guarantee the investment necessary for future supplies.

OPEC President Chakib Khelil, also attending the meeting along with the head of the International Energy Agency, said that $75 a barrel should in the long run "be a fixed price that we shouldn't be allowed to fall below."

"There is no agreement, but $75 is an idea and I think it's a good idea," Khelil told the Associated Press.

Saudi Arabian oil minister Ali Naimi, the representative of OPEC's biggest oil producer, has previously said that $75 a barrel was a "fair and reasonable" price.

But Indian oil minister Murli Deora, representing one of the biggest oil consumers at Friday's meeting, said the current price of $40 to $50 was "reasonable" and high enough to encourage investment.

Point of View on "Fair and Reasonable"

Notice the difference of opinion on fair and reasonable between producers and consumers. Also note the calls for "price stability" now from the producers after oil has collapsed. Where were the calls that $75 was a fair and reasonable price when crude was at $140?

The idea that anyone can fix a price is absurd. Demand is falling and speculation has collapsed. Indeed prices have fallen so much that I think we are seeing verification of the idea that massive speculation was keeping prices elevated.

Pimco Muni Funds Down as Much as 60% to Buy Back Auction Shares

Pacific Investment Management Co. plans to redeem preferred shares from six closed-end municipal bond funds that lost as much as 60 percent this year.

The Pimco funds, which plummeted after suspending dividend payments to common shareholders, said yesterday they will redeem $407 million in auction-rate shares next month, after declines in the municipal market drove their holdings below minimums relative to the amount of money they’ve borrowed.

Plunging debt prices have pushed closed-end funds to defer dividends and reduce borrowing to comply with U.S. securities law. Funds that issue preferred shares are required to maintain net assets of at least 200 percent of the amount of leverage. Municipal-fund investors are likely to show little patience for those that miss dividend payments, said Jeff Laverty, a closed- end fund analyst at Oscar Gruss & Son Inc. in New York.

The funds are Pimco New York Municipal Income, Municipal Income Fund II, California Municipal Income Fund II, Municipal Income Fund III, California Municipal Income Fund III and New York Municipal Income Fund III.

Closed-end funds, unlike the open-end variety, issue only a fixed number of common shares that trade on an exchange like stocks. Investors in the funds have suffered a series of blows this year that have pushed share prices to record discounts. In February, the auction-rate market collapsed, eliminating a source of new financing and leaving holders of preferred shares unable to sell. In recent months, falling prices on the bonds in their portfolios have forced the funds to cut their borrowing.

“When Pimco suspended their dividends on six of their municipal funds because of asset coverage issues, their share prices tumbled,” Cecilia Gondor, a closed-end fund analyst at Thomas J. Herzfeld Advisors Inc. in Miami, said in an e-mail earlier this week.

It is fitting that California is involved in another mess. Two of the Municipal Bond Funds that collapsed are California Municipal Income Fund II and California Municipal Income Fund III. Consider this a warning shot about investing in anything related to California. It looks like I have to add yet another addendum to California Implodes In Multiple Ways.

Discover Wins Federal Reserve Approval to Become Bank

Discover Financial Services, the fourth-largest credit-card network, won approval to become a bank holding company, joining American Express Co. and other financial firms in a rush for government funds and retail deposits.

The Federal Reserve approved the credit-card company’s conversion, according to a regulatory filing today. The change may make Riverwoods, Illinois-based Discover eligible for funds from the Treasury’s rescue plan to bolster financial firms.

American Express, the biggest U.S. credit-card issuer by sales, became a bank holding company last month, leaving Discover as the last stand-alone consumer card company in the country. That business model no longer works because it’s too dependent on the capital markets, said David Robertson, publisher of the Nilson Report.

I have a friend in DC who just pinged me with this "I am heading out to see navy play at the EagleBank Bowl. A game between navy and Wake Forest. EagleBank is a small bank in Washington that for some reason is sponsoring a bowl. They just took $32.8 million in TARP money. I don't know how much the bowl cost them to sponsor, but the government sort of paid for part of it."

Everyone wants TARP funds. The solution is simple. Make everyone a bank.

Paulson Urges Release of Next $350 Billion From TARP

Treasury Secretary Henry Paulson urged Congress to release the second half of the $700 billion financial rescue fund after the government exhausted the first $350 billion in less than three months.

Congress, which passed the Troubled Asset Relief Program on Oct. 3, “will need to release the remainder of the TARP to support financial market stability,” Paulson said today in a statement released in Washington.

Today’s statement from Paulson wasn’t a formal request for the funds, a move President George W. Bush or his successor would have to make. Paulson intends to consult with Congress and President-elect Barack Obama’s staff on the strategy for officially requesting the next $350 billion, a Treasury official told reporters on a conference call. The official, who spoke on condition of anonymity, said he expected talks to begin soon.

Most Republicans on Capitol Hill are opposed to giving Paulson any additional funds. Still, Democrats may take Paulson’s actions on housing and the car industry as positive steps and not mount a campaign against the request, lobbyists and congressional staff said.

When you are throwing money at banks, credit card companies, insurance companies, auto manufacturers, and even sponsoring the EagleBank Bowl, it's no wonder the first half has already been spent. The solution of course is to waste another $350 billion.

Japan’s Budget Hits Record as Aso Seeks for Recovery

Japan’s government expenditure will increase to a record next year as Prime Minister Taro Aso tries to spend his way out of a recession and lift his slumping popularity ahead of an election.

In his first budget since taking the helm in September, Aso is expanding a debt burden that’s already the largest in the industrialized world as the economic slump cuts revenue and forces him to spend more to spur growth. His approval rating fell by half this month as voters and lawmakers in his own party shunned his handling of the world’s second-largest economy.

“Aso has little choice but to take more measures to restore his political leadership and regain support from voters,” said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “Fiscal reform may be put on the shelf for the next three years as the economy is getting worse, forcing the government to spend more.”

Aso’s approval rating fell to 16.7 percent from 38.8 percent last month, Jiji Press reported yesterday.

The budget deficit will widen to the most in four years. The so-called primary deficit, the excess of spending over revenue excluding bond sales and interest payments, will balloon to 13.1 trillion yen from this year’s 5.2 trillion yen, the ministry said.

The yen has rallied even though Japan is borrowing more to finance the deficit. The currency is up 25 percent against the dollar this year as the seizure in credit markets leads investors to reverse so-called carry trades, where they took out loans in Japan to take advantage of the lowest benchmark interest rates among the Group of 10 industrialized nations.

Aso and Bush are right up there in terms of popularity. Both tried to spend their way put of a crisis with massive budget deficits. The policy was a complete disaster, but it is the only policy that anyone knows. It's like going to the superbowl with only one play in the playbook. The code name for that play is "spend".

Canada offers $3.29 billion auto bailout

The federal and Ontario governments will provide the Canadian subsidiaries of the Detroit Three automakers with 4 billion Canadian dollars ($3.29 billion) in emergency loans, the prime minister said Saturday.

The announcement follows a pledge Friday by U.S. President George W. Bush to offer $17.4 billion in emergency loans to General Motors Corp. and Chrysler LLC.

Prime Minister Stephen Harper said Canada's bailout plan, the equivalent of 20 percent of the U.S. aid package, will help keep the plants afloat while the automakers restructure their businesses to retain one the country's most important economic sectors.

"We cannot afford, in the United States or Canada, the catastrophic short-term collapse of the Big Three automakers. The U.S. has signaled that they are not going to allow these companies to fail, and we will do our share of the North American package to see that this doesn't happen either," said Harper speaking at a news conference in Toronto.

This is a clear case of Monkey See, Monkey do, just as predicted.

Weather, Discounts Collide as Holiday Shoppers Dither

Shoppers’ search for bargains during a recession may be disrupted by wintry weather in parts of the U.S. as the holiday-shopping season enters what may be a make-or- break weekend for some retailers.

Today may be the busiest shopping day of the holidays, said Michael Niemira, chief economist at the International Council of Shopping Centers. Shoppers who have waited for deeper discounts probably will be rewarded as retailers seek to clear inventory and salvage what may be the worst season in 40 years, even though their fourth-quarter profits may suffer as a result.

Snowstorms and freezing temperatures might put a crimp in those plans, said Scott Bernhardt, operating chief of Planalytics Inc., a Wayne, Pennsylvania-based weather consulting firm.

“Saturday has become more important from a weather perspective because a lot of major markets lost Friday, and Sunday we have another storm coming in,” Bernhardt said. “It’s so close to Christmas, shoppers are running out of time.”

Macy’s Inc., the second-largest U.S. department-store chain, is offering $800 sapphire or ruby and diamond rings for $249 during part of the day. Gap Inc.’s Banana Republic chain is advertising clothing for as much as 60 percent off. A $2,100 Marc Jacobs dress was listed at $629.95 on Saks Inc.’s Web site.

“I do believe this is going to be one of the largest weekends in retail history,” Toys “R” Us Chief Executive Officer Gerald Storch said yesterday in an interview. “There’s a lot of pent-up demand, and there’s going to be fantastic deals.”

Pent-Up demand? Where? Fantastic deals are a sign of little demand.

Prepare for a barrage of companies such as Toys “R” Us, all blaming the weather for a miserable Christmas. One thing is clear: consumers are not reading the same playbook as the Fed. Spending is out, saving is in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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