Thursday, December 29, 2011

Corzine's Blind Ambition: In case of Emergency, Break Glass

MF Global Files for Bankruptcy, Corzine resigns and turns down a $12 million severance pay. Wall Street analysts already knew how over-loaded the company was with Euro debt, so it was not a surprise outcome, by any means. However, as the story began to unfold and the facts surrounding the collapse started to unravel, suspicion grew about the probability of foul play. There were more questions than answers, and that's always a red flag. Once customer funds were discovered missing, and an SEC investigation revealed that a large sum of money was transferred into an account overseas, just two days before MF Global filed for bankruptcy, it was clear that something was terribly wrong here.

For the second time in December, Jon Corzine, former head of the now defunct MF Global, met with the senate to further explain his involvement with the missing customer funds. This time, he was accompanied by two MF Global executives, COO, Bradley Abelow and CFO, Henri Steenkamp, who also claimed to know nothing about the money. I find this very curious, since most brokerage firms have policies in place that limit check writing and transfer-of-money authority to upper management, with additional authorization from the CFO, or Treasurer in his or her absence. The Senate hearing did not turn up anything that would satisfy investigators or investors. Nevertheless frustrated Farmers (primary investors in land commodities) were able to voice their disdain for MF Global, and one in particular was quoted as saying "What they call 'unlawful comingling' on Wall Street is called 'stealing' back on Main Street,"

Jon Corzine admitted that there was a "break glass" contingency plan in place, but did not disclose the details of the emergency plan. After questions intensified, he denied that raiding the customer funds was one of the recommendations in the emergency plan. According to Corzine, he did not know what happened to the money, and proclaims that he did not direct anyone to misuse customer funds. Corzine tried his best to convince the Senate Agricultural Committee that he did not "intend" to break any rules concerning the handling of customer funds, with respect to keeping customer funds segregated from the firm's money. This is reference to the requirement of all commodities and futures trading firms to segregate customer funds from company money. According to the CMEgroup.com, (Watchdog for Commodities and Futures Industry) segregating the funds protects investors in the event of defaults or bankruptcy. This regulation has a major advantage for investors, because when a company files for bankruptcy (as in the case of MF Global) , investors are last on the list, behind creditors, to see any of their money - particularly because it's next to impossible to identify how much of the company's assets belongs to the customers. Segregated funds facilitate the process of identifying which accounts belong to investors, thus investors will be able to recoup their funds without much delay. Apparently the "Segregation of Funds" regulation was not practiced at MF Global. Corzine went so far as to explain that perhaps an employee misinterpreted his instructions in an effort to try to save the company. The former CEO conveyed to the Senate subcommittee that he was not aware of any problem with segregated funds until October 30th, the day before they filed for bankruptcy.

In a new twist to this already redundant story of fraud, greed and entitlement, the Federal Authorities investigating the collapse of MF Global are now turning their attention toward one of the Wall Street watchdogs. Since MF Global was a Commodities brokerage firm, their primary regulator should have been the CME Group. The Commodities Futures and Exchange Commission is leading the investigation to examine CME's conduct before MF Global filed for bankruptcy protection. If the CME Group is the commodities regulator safeguarding customer’s money, what were they doing instead?

The downfall of MF Global (and Corzine’s career) is yet another display of Wall Street greed and deception. The bottom line is, Corzine should be held accountable regardless of whether or not he "directed" anyone to move funds. In his effort to exonerate an employee, he painted a vivid picture of the company culture. The firm's inattention to compliance, without regard for their customers" protection is inexcusable. As I've stated previously in an article concerning Corzine and MF Global, the fact that he turned down the severance pay is almost an admission of guilt for some aspect of the company's downfall. I’ll continue watching this case closely to see where the investigation of the CME Group and the search for the missing $1.2 billion leads. Fortunately, the Wall Street Journal reported that the judge overseeing the bankruptcy case has approved $4.1 billion to be returned to the customers, of which $2.2 billion in frozen customer accounts will be released.

Cohn-Reilly Report posted an article about the obvious under story of misguided ambitions of Jon Corzine, prior to the reports of mission funds. Corzine’s blind Ambition

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Monday, December 19, 2011

Europe's Deficit Deal Takes Shape: Uncertainty Lingers

The highly anticipated Euro-zone deal, which we thought would positively impact the market failed to do so. There was a knee-jerk reaction to the news with a slight up-tick in the DOW, which indicates bolstered confidence - but this was short lived. As it turned out, before the end of the trading day the Euro had fallen, along with a tripple digit drop in stocks. Uncertainty rippled through the markets creating a domino effect, that finally resulted in a rise in borrowing costs for Italy and Spain alike. Ultimately, it appears that investors were decidedly unimpressed with the Summit deal to control the Europe's fiscal crisis. Economists believe the market rally was deflated due a resurgence of uncertainty surrounding the bailout pact, as it did not include unlimited backstop for the Euro currency.

As the saying goes; "the devil is in the details". The Euro-zone deficit deal has been structured, but economists, investors and stakeholders know its only the beginning. According to Frances's President, Sarkozy, the legal parameters and compliance for the new accord to reinforce the bailout rules are expected to be worked out before Christmas. The longer it takes to put this put this chapter behind them, the more chance for erosion of confidence, currency, and credit rating.

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Wednesday, November 23, 2011

Sarkozy's New Challenge: Protecting France's Credit Rating

Given the fact that the European Union's recovery is riding on the full faith and credit of a select few of the strongest union members. Sarkozy ia facing yet another challenge as guardian of France’s credit rating. Particularly in light of fact that France is the primary guarantor for the bailout program.

Hope for an improved fiscal outlook for both Greece and Italy, allowed markets to exhale this month. This was fueled by the progress Greece made toward naming a new president, and the new bail-out plan. Many markets have already made back much of the losses over the past few months, but volatility continues to be a concern. Attention was temporarily transferred away from Greece, and the growing concern about Italy after S&P erroneously issued a warning that they may downgrade France’s rating. In an instant, the overly sensitive market reacted, resulting in higher bond yields for France’s debt, marking a 4 month high.

For the bailout to work, the euro-zone requires other triple -A nations to step up and increase their guarantees. The bailout fund is structured to hold a triple-A-rating, but this is based on the underlying strength of France’s credit rating. France is the second largest economy in the European Union, following German. However, as far as the resolution to the EU fiscal crisis, France is the blue-chip guarantor - representing the Union’s ability to navigate themselves out of the financial hole. Accordingly, a reduced rating France, will undoubtedly have an impact on the firepower of the fund.
Frances President, Sarkozy, has made it his mission to protect France’s credit rating. The Wall Street Journal reported that Sarkozy’s has made guarding their Triple-A credit rating a “battle ground for the coming presidential elections in the spring” Sarkozy unveiled, not one, but two austerity packages since late august in an effort to signal to investors that France can and will meet its deficit targets.

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Tuesday, November 8, 2011

Corzine's Blind Ambition: The Collapse of MF Global

MF Global is essentially in ICU, and nothing short of a miracle will save the company as we know it. Who was at the wheel when the company crashed and burned last week? Corzine. Corzine, former governor of New Jersey, who was once the head of Goldman Sachs, went back to his roots on Wall Street to head MF Global. As CEO of MF Global, Corzine, built the company to $41 billion business. It sounds like another Wall Street dream, but this success story, quickly turned into a nightmare, for the company and for its CEO.

The announcement came Thursday, November 3rd, that Corzine is stepping down as CEO on the heels of an investigation of the company’s unraveling. Their troubles started when the European crisis began to impact the company’s bottom line, since MF Global was heavily invested in European bonds.

MF Global is the first big financial company to tank at the hands of the Euro -crisis. The company’s Partners pulled back with increased concerns about their Euro bond exposure, which descended into a severe cash deficiency. MF Global’s investment in Spain, Italy and Portugal bonds had amassed to $6 billion in debt. The firm’s stock declined 66% last week when the company reported its worst quarterly losses ever. Meanwhile,the transatlantic continent’s gloomy future is hanging in balance, and sure to bring MF Global to its knees. The swift sell-off of its stock precipitated the company filing for bankruptcy. To put this horror story in perspective according to bankruptcydata.com, the MF Global bankruptcy filing is the 8th-biggest financial institution in the US, placing them over Chrysler, (in 2009), but smaller than Lehman Brothers.

It is beginning to appear that Corzine set out to redefine MF Global's Business Model, and aggressively redirect the company’s focus and trading objectives in an effort to create his own Goldman Sachs. He wanted to build an international empire, only he failed to consider the global economic mayhem, and particularly the crisis unfolding across the Atlantic, where Corzine wanted to heavily invest. The financial discord in Europe was no secret, so what was he thinking? A cocktail of insatiable greed and ambition tends to have a blinding effect on the soul.

Behind the scenes, the Wall Street Journal reported that MF Global was seeking investors or buyers to alleviate the cash crunch. But alas, there were no takers and unfortunately no alternatives emerged before the regulators’ deadline. The company was subsequently delisted. This is a classic case of an overly eager, unethical CEO with his own agenda. The level of ambition and arrogance was so steep, it apparently impaired his ability to lead with the company's best interest at heart. Meanwhile, nearly a thousand people will be out of work in a couple of weeks, just in time for Thanksgiving. The bright side is that many of the employees will continue with their lives and eventually find stability, but Corzine is finished - both politically and professionally.

Given the anti-Wall St. sentiment, I was not surprised to learn that Corzine declined a $12 million severance pay. No matter how you choose to spin this fact, his decision to walk away from millions of dollars he was entitled to, speaks volumes.


K. Reilly
The Cohn-Reilly Report

Thursday, November 3, 2011

PM Papandreou: Biting the Hand that Feeds Him

The world collectively let out a sign of relieve when the news broke that an agreement was reached to resolve the faltering Greece economy. The Eurozone Finance Ministers gathered in Brussels to discuss the Greek debt problem, fully aware that the political and economic impact reaches well beyond the Eurozone. The US market responded to the news closing in positive territory after two days of three digit losses. We were barely able to process the news when word began to circulate about the seemingly ungrateful Prime Minister , had decided to conduct a referendum vote for the bailout proposal, and – to add insult-to-injury, the PM George Papandreou was contemplating leaving the Euro zone.

Just days away from defaulting on its debt, at a 160% of its GDP, you can only imagine the what was going through Sarkozy and Merkel’s heads. As was said to be Greece preparing to conduct a vote on the bail-out resolution, the dynamic duo (Sarkozy and Merkel) reacted to the new, and administered intense pressure for PM George Papandreou to make a swift decision as to Greece’s fate with the EU. Political pressure from around the world forced George Papandreou abandon the idea of conducting a bailout vote.

As details concerning the highly anticipated bailout program began to emerge, analysts and economist wasted no time weighing in. To attempt an overly simplified description, In order to dig Greece of its financial hole, the member Banks will also have to take on some of the losses, along with bond holders, who will be contacted as to how deep the losses will be. I will research the detail of the bailout plan what is said to aid Greece to reduce its growth-to-debt ratio from 140% to 120% by 2010.

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Monday, October 31, 2011

$700 Million Bank Heist: SEC Investigates Citibank

Did Citbank swipe $700 million from investors? Well according to an SEC filing, which alleges that Citibank sold securitized housing bonds, which they knew were sub-standard, and bet against them, something is definitely amiss. It’s easy to see why Banks are no longer seen as a safe place to invest your money, as a depositor or shareholder.

Citibank, being charged with fraud, is fighting the charges, but Recommended settlement of $285 million is likely going to stick. The SEC asked a federal judge to approve the amount, citing that $285 million would not unfairly punish the shareholders, who were essentially victims of the bank's unethical acts. Of the $285 million, the settlement breaks down as follows: $95 million is the fine, $160 million in for ill-gotten profits and $30 million in interest. We're about 18 months post signing of the Finance Reform Bill, and we're still unraveling the spoils of unbridled greed.

The national Occupy Wall Street Protest was founded on just this type of offensive conduct. I had a feeling that the near collapse of our financial markets in 2008 was the tip of the iceberg, and so far it has proven to be true.

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Friday, October 14, 2011

Netflix: Losing Its Grip

In business, being the first to market an product or service places the company (market leader) at a huge advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades. Of course, there are exceptions to every rule; and Netscape was one of the unlucky market leaders that was not able to hold its edge over followers. That said, Netflix may prove to be another such exception to the rule if they are not careful.
Netflix is still recovering from the summer debacle, where they raised their fees 60% and attempted to separate the physical DVD rental business, from the streaming videos business. The strategy to shift their business model was ill-fated. The response to the announcement should have given them all the warning they needed not to move forward with the plan. The idea probably sounded brilliant in the boardroom, but it was obviously not founded on solid research, or customer surveys. In roughly three months time, Netflix stock price dropped 36% to $115 per share. To put it in perspective, on July 7th. Netflix stock sold for $292 a share. That is quite a fall from grace.
Netflix reported a loss of 800,000 subscribers in the 3rd quarter. Analysts predicted a loss of 600,000, which had caused the stock to swiftly decline 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. In the meantime, RedBox is enjoying the flood of subscribers looking for refuge from Netflix who took their loyalty for granted.

Netflix‘s short sightedness, is clearly a result of both lack of due diligence and arrogance. Hastings, founder and CEO of Netflix had the vision and leadership to innovate and steer the company to tremendous success, so what happened? It is hard to believe it the same person at the helm steering the company recklessly away from its customers. The loyal, or stubborn shareholders that choose not to dump the stock are looking for an explanation. The public apology did eventually come from Hastings, but the damage was already done. As they say, you can’t un-ring a bell. I am willing wage a bet this debacle has already become a "what not to do" lesson that will be remembered by Hastings, and board of directors for years to come. It will be interesting to see what strategy the company will implement for damage control, and rebuilding its US customer base.

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K. Reilly
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Monday, October 3, 2011

Job Stability & Economic Recovery May be a Long Way Away

The economic uncertainly is beginning to take root, and override any hope we may have had for a full economic recovery. Consumer confidence is at its lowest levels in two years, while corporations sit on their cash. The global financial discord is helping to fuel the fluctuating uncertainly. For the most part, the fiscal and monetary policies implemented to stimulate the economy have been lack luster. The high priced stimulus packages have fizzled out, amounting to inadequate results. What the average American doesn’t know is that these same programs would have worked famously under different economic circumstances.
The Financial crisis in the US and around the world, is far deeper than first realized. Neither the Bush Administration nor the Obama Administration were prepared for what we are facing today. The republicans can use the market fears and crawling economy for their political gain, but I dare say that NO Chief Executive in the white house, Democrat, or Republican, Black or White, would have gotten the U.S. economy moving any faster. What’s worse is that none of the world leaders appear to be willing to admit to their constituents or the world how bad finances are in their country. If the world leaders are not being completely transparent about the extent of their country’s fiscal troubles, we may never really know the depth of the financial crisis, or the optimal approach to repairing it.

Many of the economic indicators appear to be slightly off kilter, and the market seems disconnected to what's going on - particularly when you consider that corporations are reporting historically high profits for this year. All the while, Capitalism is struggling to save face, with an obscene number of fraud investigations and trading scandals coming out of the woodwork. It makes one wonder if capitalism and greed come as a two-for-one package deal, or if it's actually possible to have the presence of capitalism in a low percentage of fraud. The good news is we're not the only continent on the planet threatened with financial discord. The bad news is, we’re not the only continent on the planet threatened with financial discord. This is a complex, unprecedented situation we’re have here. In essence we have a global recession on steroids, so it’s going to take a combination of high octane, super powered fiscal and monetary programs to get the U.S. economy off life support.

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Wednesday, September 21, 2011

Boomerang Economics:
the darkside of Globalization

In the past the effects a poor economy in one area, would impact other nearby regions or tri-state area in the case of the U.S.. Globalization, as a result of technological advancements, is a powerhouse game changer. We are no longer autonomous in our successes or failures as a nation. The U.S. financial fallout in of 2008 and 2009, sent trimmers across the Atlantic, as our economies are now more connected that ever. The financial Tsunami that followed the near collapse was powerful enough to shake the fiscal foundation of many other nations. Europe’s financial crisis began to surface in the Fall of 2010, but is now beginning show familiar signs of a near fiscal collapse for a number of its EU members. Our troubles certainly had an impact on the overseas markets, but we are not entirely to blame for the financial crisis which is quickly unraveling before us.
In a boomerang-like cycle, it is possible that the financial discord in Europe, will have a negative impact on the U.S. So much so, it is feared that this Boomerang effect may spur another recession. This was the concern of the IMF yesterday, as they discussed the importance of the EU tackling the debt crisis. If Europe fails to lasso the problem soon, there is a strong possibility that both regions will fall into a recession.

Who would have thought that boomerang economic would become one of the harsh side effects globalization.

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Thursday, September 15, 2011

U.S. Economy Stalls as Europe's Fiscal Crisis Worsens

It’s almost certain that the U.S. economy will continue to stagger through the 4th quarter. Budget and economic analysis provided to congress by the CBO (a bipartisan federal agency) supports the theory of continuing slow growth, and an unyielding jobless rate through 2012. I contend that the jury is still out were 2012 is concerned, as there are so many pending elements to the economy that leave room for reasonable doubt. For example, Obama’s jobs creation program, which offers tax cuts and other incentives to corporations has the potential to positively impact the economic picture for 2012. According to a WSJ article by Stacy Curtin, the results of austerity measures implemented in Greece are questionable and may prove to be in large part overated. Nevertheless, the fate of the EU’s financial crisis, has the potential to an impact on the US economy, negatively or positively. Being a generally optimistic person, I’m reluctant to say the idea of the U.S. slipping back into a recession is not out of the question. Meanwhile, Europe is not out of the woods either. In fact, the continent seems to be experiencing a deepening crisis.

T
he EU crisis has reached a new level, as the alarms are set off concerning the likelihood of Greece defaulting on their debt. Thankfully, for some inexplicable reason, the U.S. financial markets don't appear to be fluctuating as drastically in reaction to bad news from Europe. Nevertheless, the European Union's Fiscal discord is the primary focus of a meeting scheduled for this Friday, as EU Prime Ministers prepare to gather in Poland. Resolving Greece's financial crisis is undoubtedly at the top of the agenda, but the larger economies are also under heavy financial pressure. Angela Merkel, the Chancellor of Germany, took her message to the media in an attempt to diffuse the rising fears of Greece defaulting on its debt. In one radio interview, Merkel emphatically proclaimed that the EU was doing everything in its power to avoid a Greek default.

E
choing my opinion in previous articles concerning the financial crisis, Chancellor Merkel, also stated "We face a completely new challenge - one that has no historic precedent". Speaking of historical precedence, U.S. Treasury Secretary, Timothy Geithner is expected to attend the meeting with the EU Finance Ministers on Friday. This should prove very interesting, and serve to enhance our battered image.

Also, see Article citing Soros' views of the EU crisis in the Huffington Post.


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Saturday, September 10, 2011

Facebook: Untouchable, & in a League of Their Own

It is clear that Zuckerberg is Superman, and his Facebook is untouchable. In the midst of a downgraded, underrated, crawling economy, Facebook managed to double its revenues in the first half of this year with a staggering $1.6 billion, according to the Wall St. Journal. There was much talk about Facebook feeling the pressure from competitors, which was obviously completly unfounded. Although, at somepoint, Facebook may have to face external threats to its marketshare, but at the moment, they're in a league of their own. As market leader, having overtaken Myspace, leaving them in struggling to retain name recognition, Zuckerberg has successfully carved a permanent mark on the pop culture around the world.

In a Superman-esque feat, Zuckerberg’s Facebook platform saved the internet advertising industry. Although, it's safe to say social networking has revolutionized the online advertising, Facebook alone accounted for nearly 1/3rd of the internet display advertising impressions in June, which is more than Yahoo, Google, MicroSoft Corp and AOL combined. This illustrates the tremendous power of Facebook, and more importantly, the power of social networking as a whole. You don't have to be a marketing guru, or economist to see the impact social networking will have on allocation of advertising dollars in the not-so-distant future. But for now, it’s all about Facebook and the hundreds of millions of people, spending millions of minutes just "hanging out" on their page, or checking out their friend's pages.

The growing obsession has created global opportunities for advertisers, and businesses looking to market directly to their target in a personal environment - which (in the case of social network sites), is a captive audience.

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Sunday, September 4, 2011

Corporations Hoard Cash, Await Signs of Stability

There was reported 1.9 trillion in corporate profits by the end of 2010, and hoarding of cash at record levels. This tells a story of corporate fear and uncertainly when you consider the back drop of a flat job creation report for the month of August, and a S&P downgrade of US debt. I strongly believe that the catalyst for the low hiring rate last month is the S&P downgrade. The S&P downgrade shifted the climate dramatically from hopeful to not sure. Employers seem to have been shaken by the uncertainty and elected to curb their enthusiasm about the Country’s economic future. This sentiment is echoed by Jeffrey Kleintop of LPL Financial, who was quotes in the Associated Press as saying the new job figures are likely skewed by the unusual events that may have made employers reluctant to add jobs in August.

Let’s clarify; there were definitely new jobs created in the month of August (I happen to know of two in particular), but unfortunately there were just as many jobs lost, yielding a net zero for the month. In about 4-6 weeks there will likely be an adjustment made on the August numbers for better or worse. Being of a a glass-half-full mindset myself, I believe the adjustment may prove to be slightly better than the net-zero reported on Friday before the Labor day weekend. Nevertheless, fear of the country dipping back into a recession is having a dramatic impact on the market.

Friday’s New jobs report was disappointing, leaving Investors and economists alike surprised. The expectation was that there would be approximately 93,000 new jobs added, but there was no indication that jobs growth would be completely and utterly flat.. The months of June and July were revised lower, so the overall jobs growth picture for the summer is looking more and more bleak as the U.S. economic drama unfolds.


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Friday, August 12, 2011

Where Do Investors Turn for Safety?

As the market appeared to gradually recover from the S&P downgrade of US Debt, there was still a sense that institutions and investors were pausing for a sign that the economy is on solid footing. There were those sitting on the sidelines like sharks waiting for a discount buying opportunity, but for the most part, fear had taken hold on investors. This is clearly reflected in the trading shifts that can be seen just by looking at rising gold prices.

The financial crisis which has had a death grip on US economy, has not been kind to Europe either. This is extremely unusual time where financial markets are concerned. Historically investors and institutions would diversify their portfolios by spreading the risk between stocks, bonds and European securities or foreign currency.

The wisdom of this strategy is simply this: when stocks are not doing so well, the bond yields and overseas securities and currency trades, would mitigate the overall portfolio losses. This is precisely why the mantra for investing has been to diversify. Remember the devastated employees of Enron, and WorldCom who had enjoyed fat portfolios values in the millions. These unsuspecting employee/shareholders swiftly went from being millionaires to being completely broke. Why, because they had only one stock in their portfolio -no other stocks, government bonds, or foreign investments to offset the plunging Enron stock - which ultimately became worthless. Traditionally portfolio managers would use government treasuries and bonds, along with foreign investments as safe havens.

Given the sluggish U.S. economy and S&P downgrade, the overseas market would normally serve as safe havens. However, the coninuing rash of bailouts overseas eliminates the prospects of a safe place to invest, while awaiting economic stability in the U.S.

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Tuesday, July 5, 2011

Horror on Wall St.- Rated PG:

Another Finance Industry Horror Begins to Unfolds

Like a bad horror film, relentless slashing is imminent, and likely resulting in a blood bath of Wall Street employees, running for cover(unemployment line). Thousands of innocent victims scattered on the street as a result of massive Wall St. cuts....you get the idea. In all seriousness though, this will be a living nightmare for those hard working employees who will lose their jobs in the coming months.

As trading remains lackluster, the impact on returns have forced Banks to consider another merciless round of trimming. Certainly many perceived that the Market's continuous climb past DOW 12,000 meant it was going to be safe from a repeat of the economic trauma that plagued 2008. Well, from my standpoint, Wall St. may not revisit the lows and panic of 2008, but the Market is far from being “safe”.
Although the economy has managed to gain traction over the past 18 months, and bring the unemployment rate below 10%, it has not stabilized substantially enough - at least not in the way we had hoped. The monetary and fiscal policies of the Obama Administration and Federal Reserve have not had the impact on the economy that they anticipated either. This comes at a bad time for the President and the Democrats as they gear up for next year’s elections.

In the last 3 years, businesses have been sleeping with one eye open, if they're sleeping at all. Let’s face it, the economy is just not recovering fast enough. If you combine bank losses from the first 6-months of last year, and the first 6-months of 2011, it is estimated at $20 billion globally. That number only represents the lost revenues of 9 of the top banks. The Wall St. Journal Article “Wielding the Ax” quoted Michael Karp of Options Groups as saying “banks are cutting a lot of deadwood and live wood”. Based upon the word on the Street, this apears to be a statement of truth.

Banks have taken just about all they can stand from the Wall Street slump, and report plans to take steps toward trimming down the staff. A few of the tops Banks are ready to make severe cuts in annual expenses, as early as this week. Austerity is not limited to the borders of Europe, J.P. Morgan, alone, is preparing to trim nearly a billion in annual expenses. Credit Suisse Group laid off investment banking employees, as part of the planned layoff of 400-600 jobs, while Barlcays is expected to cut additional jobs - on top of the 600 jobs eliminated in January. Goldman Sachs' annual Survival-of-the-fittest program ( 5% annual reductions) wont be enough this year, therefore deeper cuts can be expected. Surprisingly though, Goldman still plans to add jobs in Brazil, India and Singapore.

There's a saying; When Wall St. sneezes, the rest of us catch a cold. That said, prepare for the worst, and hope forthe best.

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Wednesday, June 1, 2011

Justice is Served: Hedge Fund Titan is Slammed

Like a woman scorned, Lady Justice took the ultimate revenge; A Guilty Verdict. The Manhattan U.S. Attorney, Preet Bharara, made good on his promise to crack down on illegal trading on Wall Street. After a week of deliberations, the verdict is in and Galleon Group Founder, Rajaratnam, was found guilty on 14 counts of securities fraud and conspiracy. The co-founder and former head of the Galleon Group is officially a convicted Felon, facing 15-19 years in prison. Three cheers for Justice and the fight against unbridled greed in corporate America.

During the trial the Jurors listened hours of testimony and dozens of secretly recorded calls that clearly revealed that Rajaratnam was trafficking in illicit information. An interview of the jurors revealed their efforts not to rush to judgment. Ms. Gorman, one of the jurors, explained that they painstakingly comb through the stock charts, trading records and witness photos. Adding that they went through the evidence deal by deal. When questioned, jurors admitted to being very impressed by the Sri Lankan defendant and referred to him as a “smart man”. Nevertheless, the prosecutor provided hard evidence that was very persuasive in the end.

In my view, insider trading is a directly related to greed, and the prevalence of it in the finance industry is rampant. These hedge fund managers and traders feel privileged, above the law, and think that they’re so much smarter than the rest of us. They’re so blinded by their own narcissism and conceit, that they are convinced no one will ever see through their scheme. Rajaratnam was ever so clever, but obviously not clever enough. This case is a tragedy on many levels, particularly that which concerns humanity. I think of how this brilliant Sri Lankan could have been a celebrated hero to poor, young men and women in his country and to struggling immigrants here in America, but instead he opted to worship money and disgrace his family and his country.

This is not the last we will hear about this vast insider trading case, there are aparently 12 more traders that have been lassoed into this case, so I am sure they are beginning to realize the severity of their predicament.

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Saturday, March 19, 2011

GM: Watching a Success Story Unfold

The once stellar Blue Chip company, which had all but fallen off a cliff, was rescued days before it threatened to shut its doors for good. Against all odds, and with the involuntary support of the taxpayers (bailout Funds) GM went into structured bankruptcy like a battered lamb, and emerged like a lion. Eighteen months ago, there were more than enough economists, auto industry analysts and political figures arguing against bailing out the big three auto makers. The American people had also had their fill of Bailouts, especially as increasing numbers feared being laid off.
Keeping hope alive, GM pressed on.
The IPO issued November of last year, brought in over $20.1 billion, with an additional $2 billion raised in the days following the historic offering. GM’s offering goes down as the biggest Initial Public offering Ever. There were several objectives at play here; to capitalize the new firm to get back on its feet, pay off creditors, pay back most (if not all) of the Government bailout funds, and revitalize their brand. The company’s market valuation was estimated to settle somewhere in the range of $50-70 billion after the much anticipated IPO. However, in reality analysts estimated that the company needed to yield a total valuation closer to $70 billion if the government was going to break-even on the bailout funds.
Although GM’s marketing campaign was well received in the weeks leading up to the sale, the IPO did not stand up to the hype and expectations. Ultimately, the valuation landed on the bottom range of the estimate at $50 billion, with a share price of $33 per share. Still, considering the size of the IPO, it was a huge success.

As the sales numbers continue to climb a success story begins to take shape. Reuters reported that last month marked a 49% jump in auto sales for GM, as a clear affirmation that their business strategy is working. Further, the 102-year old corporation posted four consecutive profitable quarters, which yielded a net income of 4.7 billion for the calendar year, with gross revenues of $135.6 billion in its first full-year of operations. Well done GM, well Done.

So far, it would appear that GM has taken lemons and set up a lemonade stand. It is exciting to watch the GM comeback success story unfold.

Interesting Article concerning GM's Move to Cut unnecessary spending amid Japan Disaster, Click Here

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Friday, March 11, 2011

Myspace: Down but Not Out

Presently down, but in no way out of the game, Myspace, which is currently owned by News Corp, has hired investment banking firm Allen & Company to sift through the nearly two dozen firms interested in an acquisition or merger with the social networking site. Although Myspace’s popularity has been edged out by Facebook in recent years, it still has over a quarter of a million users. Since the social networking pioneer is free to it members, advertisers and affiliate contracts has been the main source of income, thus revenues began to take off by '2005. We’ve reported how well Facebook’s Mark Zuckerberg made out with a recent infusion of $1.5 billion via creative financing put together by Goldman Sachs. The Goldman-Zuckerberg finance documents indicated a Facebook value of an astounding $50 billion.

To put it in perspective, of the growing number of social networking sites, Myspace is ranked 3rd - just under Facebook and Twitter. So, what is the likely valuation? By the 2nd quarter of 2007, Myspace was on track to surpass the expected $500 million in revenues, but has since seen revenues decline steadily with intense competition stemming from Facebook and Twitter.

The Wall Street Journal Reported that News Corp is open to merging Myspace with another business in exchange for cash or equity in the merged firm. Myspace is a longway from the solid financial footing of Facebook, but New Corp realizes there is untapped potential in the Myspace brand. Considering the reported 4th quarter losses amounting to over $150 million, how can this, still viable, business be restructured, and re-marketed to emerge profitable once again? I suppose that will be for the winning bidder, and their business strategists to determine.

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Thursday, March 3, 2011

Will Oil Derail the Recovery?

Here we go again. As we know by now, most of the major downturns that have occurred in the US and the world, since the 1970s, have been preceded by sudden increases in oil prices. We are at levels, currently around the $100/barrel mark, that will impact inflation, GDP growth and potentially employment.

As described by the U.S. Energy Information Administration, since the United States is a net importer of oil, higher oil prices affect the purchasing power of U.S. national income through their affect on the international terms of trade. The increased price of imported oil forces U.S. businesses to devote more of their production to exports, as opposed to satisfying domestic demand for goods and services, even if there is no change in the quantity of foreign oil consumed.

When oil prices increase, the consumer suffers – sounds all too familiar. Purchasing power diminishes as consumers use more of their income to pay for products that are directly affected by oil such as gasoline, heating petroleum, and jet fuel. Less money is spent on other goods and services causing a vicious cycle of contraction, due to decreases in retail expenditures and diminishing confidence. Since companies depend on oil for transportation and other operational needs, the increased costs to run businesses are passed along to the consumer in the form of inflationary prices. To further compensate for increased energy costs and less demand, firms will reduce the bottom line of expenses by laying off workers. This scenario results in lower GDP and higher unemployment.
Since we have made some real progress during the last 12 months for economic recovery, I am hoping we do not fall back into a recession pattern, but oil is a real risk here. After Tunisia, the unrest spread to Egypt, causing a spike in prices due to worries about the possibility of the Suez Canal shutting down; one of the most important oil transport passageways in the world. The Libya uprising caused more market jitters as 1.5 million barrels a day of oil was choked off, later covered by Saudi Arabia, the world’s largest oil exporter, to prevent shortages. The unrest appears to be continuing and spreading as protests have been reported by CNN in Iran, Iraq, Syria, Algeria, Morocco, Jordan, Oman, Yemen and others in the region. Interestingly, it was reported yesterday that there could be protests in Saudi Arabia coming. Since it doesn’t take much for oil prices to react quickly - that would certainly adversely affect the market if it really happened. Also, the high peak spring/summer driving months are approaching - could we have $5 a gallon gas prices? Some analysts think it is possible, given the uncertainly of what is happening in the world and how oil reacts to it. I certainly hope not, because the scenario I outlined above could become a reality.

Read about the higher Oil Prices' Impact on Housing Recovery
C. Cohn
Cohn-Reilly Report

Monday, February 28, 2011

US Dollar: A Safe Haven Reversal

The US Dollar is generally a safe-haven when the global markets are volatile. This was illustrated this past summer, during the EU financial crisis, when the dollar rose nearly 10%. According to the WSJ, the dollar actually rose 24% against major currencies during the financial crisis, which had a global rippling effect. But alas, the Dollar has hit a snag, as political unrest in Africa and the Middle East sends the dollar in the other direction. Investors are likely concerned over regions in turmoil prices overshadow the foreign exchange markets. The key difference is the attention to our heavy reliance on energy, as we watch the oil prices climb. This is what is driving the currency downward against other major currencies.
Even though America’s overall reliance on oil has declined in recent years, oil remains our capital weakness. US Consumption is still much higher than Europe and Japan, whose currencies are not as impacted by the mid-east fallout. There is a saying: “One man’s loss, is another man’s gain”: as the US Dollar suffers declines as a result of anticipated Oil price surge, other currencies, such as the Swiss Franc, the Norwegian Krone, and Canadian Dollar have seen gains. In contrast to the Unites States, the latter two countries are large oil exporters, with lower consumption than the US. France’s consumption is also much less than the US, which perhaps explains the currencies jump to high levels against the dollar last Thursday. As for the US Dollar; Fasten your seat belts, this is going to be a bumpy ride.

Monday, February 21, 2011

Too Small to Survive: Impact of the Recession on Neighborhood Banks

The impact of the recession could not be more devastating than it has been for the banking industry. While Bear Stearns and Merrill Lynch were able to narrowly escape extinction, there were hundreds of local banks that struggled to survive the volatility stemming from the steep recession. Since 2007, when the recession is alleged to have begun, as many as 348 banks have failed. That translates to over $651 billion in aggregate assets, and a staggering $76.1 billion in FDIC payouts to depositors.
In 2010 alone 157 neighborhood banks across the country were forced to shut their doors, accounting for over 45% of the total number of banks that have failed during this recession. Apparently by default, they were too “small to succeed”. Totally passed over for TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.

It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys when they were passing out survival kits in the form of Cash. While it is primarily the small commercial banks, who make up over a half a trillion dollars in assets now lost. Meanwhile, politicians and lawmakers fail to realize that the small, neighborhood banks are the backbone of communities throughout the country. It is the small bank that often provides construction and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. Although the economists proclaimed the recession was officially over in 2009, this year has already seen 23 banks shut down, and we are only in the first quarter.

Given the role of Banks in the near collapse of the financial markets, it is difficult to defend their position, particularly when they continued to distribute huge bonuses in the wake of the crisis. Nevertheless,it is not realistic to perceive that the small commercial banks were involved in packaging and selling large volumes of toxic collateralized loans (one of the key causes of the financial crisis).

Neighborhood banks are a vital part the economic vitality of the communities they serve. They are responsible for fostering business development and growth, while stimulating the local economy. This is an unfortunate fallout from the recession that is clearly a travesty, but surprisingly remains under-reported. Without a small bank association, lobbyist or public figure advocating for the plight of the small bank, there has not been much attention drawn to this matter.
See interesting article about Small Banks being co-dependent.

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K. Reilly
The Cohn-Reilly Report

Sunday, February 13, 2011

Too Small to Succeed: Neighborhood Banks Becoming Extinct

There were hundreds of local banks that have struggled to survive the volatile economic wave over the past two years. Since 2008, 238 banks have failed. That translates to 613.2 billion in assets, not to mention the amount of losses that had to be covered by the FDIC for depositors. In 2009 alone, 140 neighborhood banks across the country were forced to shut their doors, accounting for nearly 60% of the total number of banks that have failed during this recession. Apparently, they were too small to succeed. Totally passed over by the TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government. It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys, who made up over a half a trillion dollars in assets. Meanwhile the small banks are the backbone of many communities throughout the country. It is the small bank that often provides construction loans, and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. This year has seen 73 banks close, and we are only in the second quarter. I am not a big fan of banks, given their unsavory role in the near collapse of the financial makets, but I always take a stand for the overlooked and underserved.

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K. Reilly
The Cohn-Reilly Report

Tuesday, February 8, 2011

Google: Reinventing itself

In the headlines several times in the last couple of weeks, Google appears to be making major changes to bolster its competitive advantage, and gear up for the next plateau in technology. Following failed attempts to expand into the instant messaging /social network genre with Google Wave, and the Nexus One phone, Google is bent on exploiting every ounce of its brand equity to slide into other online businesses. To this end, CEO Eric Schmidt is stepping down to hand the reins over to co-founder Larry Page, 37, to take the company where no man has gone before (hopefully).


Schmidt, for the most part, successfully accomplished what he set out to. He was brought on to bring some “grey hair” into the fold; meaning provide the company with steady, experienced management, while the two co-founders, then only 27 year old, gain more management experience as they tweaked their golden goose to perfection. Co-founders Larry Page and Sergey Brin were essentially kids at the time, and certainly did the right thing by bringing on someone with Schmidt’s expertise to keep the operation afloat. Schmidt, by the way, is a former board member of Apple, Inc, and was CEO of Novell when he left to become Chairman and CEO of Google. Eric Schmidt has been criticized for not have the technical dexterity of his bosses, Brin and Page, but in his defense, that is not what he was there for. Nevertheless his stint at Google was extremely successful, which is made abundantly clear by the 4th quarter earnings report showing Google had a 29% jump in revenues. Since August of 2001, Schmidt, Page and Brin ran the company as a triumvirate, and the company’s shares grew more than six-fold.

What’s Next for the Iconic Internet Giant, with 67% Market Share of the Internet Search Engines industry,
whose name has become a verb?

For starters, Google expected to acquire ITA software for $700 million. As the story goes, an agreement was reached for the acquisition of ITA software, which powers travel sites, including Kayak.com, as well as the reservation systems of American and Continental Airlines. Although the golden goose of the internet was initially cleared for by the Federal Trade Commission, but it is anticipated that the next hurdle will be met with resistance. It is reported that the government may be preparing to file an anti-trust suit against Google to stop this deal in its tracts. Google has had some issues come up about privacy, and concerns about the lack of security of the information Google has gathered, as well as how this information is being used. It would seem that if Google also had proprietary information collecting from million of airline customers, they may prove to be deemed a little too much “information” or a conflict of interest, or both. I will be watching to see how this plays out. It is certainly intriguing to say the least.

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________________Comment
Anonymous said......
It looks like Google's founders may have grown into their roles as chief executives, but can they stay ahead of the technology curve as Apple has been able to do, time and time again? Schmidt should probably stay on as a consultant, to keep an eye on the ship, while the barely seasoned founders find their rhythm.
________________Comment
K. Reilly said......
I understand your feeling, and Schmidt has certainly been a solid guardian for Google, but I tend to believe the Mssrs. Page an Brin have earned great experience over the past 10 years, and well prepared to lead the company to the next level.

Tuesday, February 1, 2011

Financial Crisis Retrospect


According to a recently released inquiry report investigating how the 2008 financial crisis unraveled, 12 of the 13 largest U.S. financial institutions "were at risk of failure", while at least 50 hedge funds tried to capitalize on it.

The report indicates a huge run occurred on the bank at Morgan Stanley and describes the alleged trading practices of a secretive hedge fund, while tallying the number of such funds betting against U.S. homeowners. The 545-page document paints a picture of a financial system let loose by lax regulation and spiraling out of control. Regulators now are hammering out a financial-regulatory overhaul spear-headed by the Dodd-Frank act, though some analysts say not enough has been done since to prevent a recurrence.

The report described a shadow banking system that helped trigger a more than tenfold surge in financial-sector debt, to $36 trillion in 2007 from $3 trillion in 1978. Then it crumbled, Federal Reserve Chairman Ben Bernanke told the commission in a November 2009 interview. "As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression," Mr. Bernanke said, according to the commission's report. Of the 13 most important U.S. financial institutions, "12 were at risk of failure within a period of a week or two," the report quoted Mr. Bernanke as saying.

The list of potential failures included Goldman Sachs Group Inc., people familiar with the report said. The only major financial institution not at risk at the time was J.P. Morgan Chase. Spokesmen for J.P. Morgan Chase and Goldman Sachs declined to comment on the report. Hedge funds pulled $86 billion in assets from Morgan Stanley in the week following the Sept. 15 Lehman bankruptcy filing, stemming from concerns about Morgan Stanley's viability, according to a Morgan Stanley email at the time to the New York Federal Reserve titled "Liquidity Landscape." "Many of our sophisticated clients started to liquefy," Morgan Stanley Treasurer David Wong told the commission in October. A Morgan Stanley spokeswoman declined to comment.

The report also provided clarity about the number of hedge funds gambling homeowners couldn't pay their mortgages. In an interview with the commission, former Deutsche Bank AG trader Greg Lippmann, who played a key role in facilitating short bets, told the commission that in 2006 and 2007 he handled trades for at least 50 hedge funds and "maybe as many as 100" betting that mortgage-backed securities would fall. An FCIC survey of some hedge funds found they had a total of $45 billion of short bets, which easily outweighed roughly $25 billion of bullish positions they had on mortgages. The panel also scrutinized the conflicts of interest involving Wall Street banks, hedge funds and investors created by the pools of mortgage debt known as collateralized debt obligations.

We hope that Dodd-Frank will help prevent a repeat of the crisis, as regulators interpret the 254 page document that details sweeping reforms of how financial institutions will conduct their business. This will include derivatives regulation, broker-dealer disclosures and consumer protection clauses that must be implemented by Wall Street firms or by law, they won't be able to continue operating. Look for updates in future articles.

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C. Cohn
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Friday, January 21, 2011

Unemployment: The Weakest Link

Joblessness is still in the forefront of the nation’s consciousness. Although the economy continues to add jobs, it struggles to keep up with a growing workforce. Therein lies the weakest link to the economic recovery (although some would argue that the Housing Market is actually the heavy, draining the life out of recovery). Even though the jobless rate has dropped to its lowest point in nearly 2 years, the reason for the huge drop in the rate this time around is because the number of unemployed fell by over 500,000. That, fortunately brings the unemployment number down to 14.5 million. Economists believe that this is not reflective of increased employment, but rather the uncounted faction of the unemployed that have simply stopped looking for work. Nevertheless, the Labor Department stats illustrate a sharp decline in unemployment applications in the past month, which represents the least applications over a 4-week period in 18 months.
So, What Needs to Happen to Bring the
Unemployment Rate Down Significantly?

In the past quarter, the monthly average job-growth has been 128,000. That’s great for those lucky enough to be sliding into new jobs, but unfortunately it's just enough to keep up with population growth. It is estimated that the economy needs to see at least twice as many jobs added each month to bring the unemployment rate down significantly. You're probably wondering if this is achievable anytime soon? Well, there are certainly signs that are pointing to a real possibility, as the economic recovery appears to be gaining momentum. Further, it is anticipated that this year we'll finally begin to see traction in private sector job growth. Economists have indicated that this year should double the 1.1 million jobs added in 2010. That, along with the extended Bush tax cuts, should rev up consumer spending. Increased consumer spending will eventually spur business spending - and business spending is good news for job creation.

I was encouraged to learn that the Obama Administration has created an advisory board, headed by Jeffrey Immelt (GE's CEO), which will focus on fostering private-sector job growth. This panel will be officially unveiled in the President's State of the Union Address this week. Ever the optimist, I remain hopeful.

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