Saturday, September 26, 2009

Will The Stock Market Rally Continue?

The Dow and S&P pulled back this week, failing to reach the 10,000 and 1100 marks respectively; levels not seen since last October. Is this the start of a downturn, or just a lull before the next move up?

Where has the money been coming from to propel the markets, since trillions of investor dollars have been sitting on the side-lines throughout the recession in a hold pattern? A secret was kept for years, with few people aware - since the crash of 1987 the government has been supporting the markets by buying up futures contracts at opportune times to avoid steep short-term drops. The group responsible was called the “Plunge Protection Team”, and was used to avoid huge one-day collapses that have occurred historically. When Secretary Paulson announced that massive intervention would take place, he was really confirming what has been happening for the past twenty years; this time expanding the role of government intervention exponentially into areas not interfered with before at this magnitude. The government has been seeding the financial markets with stimulus money, stoking the emotions of investors - drawing on the classic greed feeling: “I don’t want to be left behind and miss out”.

What will happen when the stimulus funding stops, which will occur in the not too distant future? Also, don’t forget, there are still plenty of toxic assets sitting on the Fed’s books that have not been disposed of. This combined with a number of economic cracks in the rosy picture that analysts continue to portray, could lead to quite a different story from what is being told to us in the media today. Here are several examples of things that we have to watch out for: Sheila Bair, Chairperson of the FDIC, commented that 84 regional banks have failed this year. There is potential for another 100 to 300 banks to fail as well in the year ahead. It was reported this week that corporate staples such as Sprint Nextel - with the potential to lose 4.4 million subscribers, Macy’s - with same store sales falling and $2.4 Billion debt maturing, Goodyear - with massive debt and pension obligations, CBS - with $3.2 Billion in debt coming due in 5 years and weak advertising, and AMD - with $5 billion in debt, losing $3 billon in 2007-2008, may all face potential bankruptcies.

In the short-term, the key question, mentioned in a prior post, will be: how long will investors wait until they see real top-line revenue growth from companies before they become disenchanted with chasing stock prices? The answer is they won’t have to wait very long. We are fast approaching another earnings season that will take us into the historically volatile month of October through November. This will be a critical period where corporations will have to prove that profits are derived from revenues, not from cost cutting. If they fail to produce, there will be a strong reaction from the investor community, with cascading repercussions.

C. Cohn

Sunday, September 20, 2009

Banking On Geithner

Part 1 of 2

Last week marked one year after the fall of Lehman Brothers, pundits, newspapers, and financial news programs, both Cable and Network, felt compelled to weigh in on where the economy stands today, compared to where we were then. For whatever it’s worth, I believe we are on the path to recovery, though mixed indicators tell us that we should fasten our seat belts, because there will be bumps in the road. I was surprised to learn that the majority of Americans polled by CNBC believe that we are poised for another collapse. This is actually one of the questions Treasury Secretary, Geithner, was asked in the “ Banking On Geithner” special, among many other tough questions from the audience. After all that we’ve been through as a country, the American people have a need to know. The Treasury secretary was confident in his delivery when he stated that he did not see another collapse of the financial system. He added “It is in our power to prevent it. If we stick to it until we get this economy moving again”.

The past year felt as if the rug was pulled out from under us. With steep declines in pension and mutual funds, the loss of millions of jobs and housing values shifting below their underlying mortgages (often called upside-down mortgage), we have earned the right to be concerned about the future. Millions of hard working Americans believed in the American Dream, only to find that the country narrowly averted a nightmare, the likes of which we have never seen. To quote Timothy Geithner, “The financial system almost fell off a cliff.” I was relieved to hear the words that echoed my sentiments as it was unfolding last year. The “Banking on Geithner” special was aired on September 10th on CNBC, in a Town Hall-type setting, hosted by Erin Burnett and Steve Leisman. There were a litany of questions that were probably never asked but the ones that did make it to the floor were all about security, stability and taxes. They were all worded differently and maybe even sounded more eloquent, but in the underlying issues were the same; security, stability and taxes.

Geithner, who was referred to as the country’s chief financial officer, explained to a captive audience that the country went too long living beyond our means and built up too much leverage, so it will take a while to fix the economy. He went on to explain that we were behind the curve and did not move quickly enough, in response to the issues concerning the government’s over spending, and involvement in the private sector. In other words, the drastic measure that were taken, were necessary. He’s right. It was way too late to completely avoid the inevitable. At the time it was obvious to me and probably others in the financial industry, that the bail outs were desperate “last minute” measures to save the Country from a fate that we cannot even imagine. At this point last year, the country financial system was about to slip into a comma, the bail outs were efforts to keep the economy from flat-lining. The media coverage fostered panic and speculation, while the subsequent press conferences held by the Bush administration appeared to be strategies to improve global perception, and damage control.

Capitalism had spun out of control. Meanwhile, Investment Banks, Commercial Banks, Mortgage companies and Hedge Funds had to have known at least 18-months prior that their housing portfolios, loans, and mortgage backed securities represented high risk transactions. There were other high risk derivative positions that added to the losses. But like gambling addicts they irrationally thought that something, or some event would miraculously turn the losses around and no one would ever know. Further, knowing that they were sitting on billions in losses, how did they justify the distribution of bonuses - not just any bonuses, but multi-million dollar compensation packages to the folks who took excessive risks that amounted to massive losses, and in some cases, the downfall of companies. This is Capitalism at its worst. Greed has become the new four-letter-word. click for part 2

K. Reilly
Cohn-Reilly Report
WSJ:9/18/09, “Bankers Face Sweeping Curbs on Pay”

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Saturday, September 12, 2009

A Look At The Past Week And The Markets

This week, we saw consumer sentiment up by 4 points to 70.2. Consumer sentiment is supposed to be related to the strength of consumer buying, however, as my colleague stated in a prior post, indicators can be skewed and biased. The reality is that consumers are not spending, they are saving. They are still concerned about losing their jobs and if they are unemployed, they certainly are not spending, with less or little household disposable income available. Also, commodity prices have been rising - we have seen the dramatic increase in oil from its lows in the $30s during 2009 to over $70, with some predicting $85 by year-end. Import prices were reported to be up by 6% this week. Can inflation be rearing its ugly head in the near future, further eroding the spending power of the consumer and forcing the Fed to raise interest rates?

On another note, fundamentals do not support the rally we are experiencing in the equities markets. Sure, Q2 earnings beat expectations; however, they were based on lowered estimates and in many cases earnings improved because of bottom line cost cutting, not top line revenue growth.

The technical daily and weekly charts show that the S&P and Dow are currently over-bought, and are due for a pull back. I will cover technical analysis and charting in future posts and articles in detail. Volume is an important indicator to confirm a trend. For example, in the Dow, the weekly volume for the last five weeks has been substantially below its 50 week average of 1.5 billion, ranging between .5 billion to 1 billion per week. This shows a lack of conviction in the buying. Also, the weak dollar and the continuing propping up of the markets by the government are major factors contributing to the current lofty heights. These reasons alone could continue to propel the market upward, but it appears riskier to chase prices at these levels, as the rally is getting a bit long in the tooth and a correction is needed.

C. Cohn

Sunday, September 6, 2009

Unemployment, Recession & Recovery

Many financial news services are parading analysts on their programs, proclaiming that the recession ended in August or is about to end shortly; but is this really true? Friday's unemployment report shows that 26 million, or 16.7 % of the population is under employed or unemployed. The actual unemployment rate is 9.7 %, the highest in a couple of decades. This does not account for people who are not reporting or have given up looking for jobs.

I am sad to say that part of the increase in unemployment is due to teachers being laid off around the country. Also, the National Association of Manufacturers stated that it will take quite a long time before things improve.

People focus on the decrease in unemployment claims being reported and say that unemployment increases towards the end of a recession. That may be true, but employees are still being fired every week, and until that changes, we will not be out of the woods.

Some feel that the consumer is coming back as they look at the back to school purchases in the prior month and Labor Day, but that is seasonal necessity buying. Have you walked around malls lately? Many are emptier than ever, with some mid to high-end stores discounting as much as 75%, and still there is tremendous inventory that is not moving. If people do not have jobs they will cut back their spending and again, until this improves, we will not have a meaningful recovery. The consumer accounts for 70% of the economy.

Also, most agree that we must have a robust Equities market to support a recovery. We have come off the March lows nicely, but over the last few weeks trading has been in a narrow range. There are many double-dippers out there who believe we will go through another big correction before things get better.

Let's see what happens in the coming weeks. For now, we should maintain an air of cautiousness. click for part 2

C. Cohn

Friday, September 4, 2009

The Long Awaited Blog Makes Its Debut!

Welcome to Cohn-Reilly Report
This site is authored by Charlie Cohn and Katherine Reilly, who have worked in the financial industry both directly and indirectly for over a decade.
We have been debating about the market for years and decided to share our views.

We will discuss, debate, analyze and argue about the Economy as it relates to Financial Markets, the Federal Reserve, Banks, Housing, and everything that may be affected by the current events on Wall Street, Main Street and Capital Hill. Further, there will Special Posts and Articles from our colleagues to keep us intrigued and well informed.

Bernake is quoted as saying "the economy is leveling out". With economic indicators appearing to stabilize, Wall Street is poised to make complete recovery. Nevertheless, the new unemployment numbers say one thing but mean another. Statistics don't tell the whole story - when you zoom into the lives of millions who are still unemployed, but not receiving unemployment checks. The a-la-cart recovery is not all inclusive.

My colleague Charlie Cohn has his spin on what the numbers say to him in the article
"Unemployment, Recession and Recovery".

K Reilly

Thursday, September 3, 2009

Tuesday, September 1, 2009

The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by, Credo Action,, Free Press and the Progressive Change Campaign Committee. summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.
Are we truly net neutral today and if so,
How long can it be sustained?

There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number of ISPs have often referred to firms like Google and Skype as ‘freeloaders’ for making money using networks that they have provided at a cost of billions. Secondly, many suggest what we have right now isn’t in fact net neutrality at all. The biggest firms can invest in higher bandwidth deals and server replication to provide faster access for its users in comparison to smaller sites that wouldn’t be able to afford such infrastructure, for net neutrality isn’t even something that exists to uphold. Thirdly, the increase in rich media means infrastructure providers have far more pressures on their resources than was once the case. Bret Swanson of the Wall Street Journal suggests Youtube streams as much data in three months as the world’s radio, cable and broadband television channels stream in one year, i.e. 75 petabytes. By extension he believes telecommunications firms are simply not ready for the era of ‘exabyte’ delivery and something needs to give.

What’s next? In a recent bill introduced in Congress, U.S. House Democrats failed to win Republican support needed for legislation giving regulators temporary authority over how companies led by Comcast Corp. and AT&T Inc. provide Web service, Representative Henry Waxman said. A measure that would let the U.S. Federal Communications Commission enforce net-neutrality rules for two years won’t be introduced immediately, Waxman, a California Democrat and chairman of the House Energy and Commerce Committee, said on September 29, in an e-mailed statement. “This development is a loss for consumers and a gain only for the extremes,” Waxman said. “We need to break the deadlock on Net Neutrality.” The bill aimed to ensure the FCC has the power that was called into question when a U.S. court in April ruled it lacked authority over Internet-service providers. Republican leaders decided “there is not sufficient time to ensure that Chairman Waxman’s proposal will keep the Internet open without chilling innovation,” Representative Joe Barton of Texas, the top Republican on the committee, said in an e-mailed statement. Congress is to adjourn within days to campaign for the Nov. 2 elections. “It is not appropriate to give the FCC authority to regulate the Internet,” Barton said The bill may be introduced after the elections, Waxman said. The measure would restore the FCC’s authority to prevent the blocking of Internet content, bar phone and cable companies from unjustly or unreasonably discriminating against any lawful Internet traffic, and apply strictures to wireless providers, Waxman said.
“Under our proposal, the FCC could begin enforcing these open Internet rules immediately, with maximum fines increased from $75,000 to $2,000,000 for violations,” Waxman said. FCC Chairman Julius Genachowski in September 2009 proposed rules aimed at ensuring net neutrality. He hasn’t sought a vote while the commission considers its reaction to the April court ruling.
Today’s development prompted renewed calls for Genachowski to proceed with his idea to claim power over Internet service using rules written for monopoly telephone service in the 20th century. AT&T and Verizon Communications Inc. oppose such action and say it may prompt more regulation, including price controls. Lawmakers and advocacy groups have urged Genachowski to proceed, saying customers need protection. Waxman’s bill would bar the FCC from using the phone rules during its two-year duration. “If our efforts to find bipartisan consensus fail, the FCC should move forward,” Waxman said.
Complete freedom of open access on the Internet or tiered payment approaches to stimulate corporate innovation.- you decide.

C. Cohn
The Cohn-Reilly Report