from online.wsj.com
REAL ESTATE
Mortgage Rates Near a Year High
By RUTH SIMON and JAMES R. HAGERTYJuly 23, 2008; Page C14
Home-mortgage rates are nearing their highest levels in a year, adding to pressures on the already weak housing market.
Rates on conforming 30-year fixed-rate mortgages rose by nearly 0.40 percentage point in the past week to an average of 6.71%, according to HSH Associates in Pompton Plains, N.J. Rates on jumbo loans, which are too big to be eligible for purchase by Fannie Mae or Freddie Mac, currently average 7.84%.
The higher rates are making it more difficult for borrowers to refinance and putting another crimp on weak home sales. "It's a tough market and rates going up isn't helping it," said Steve Walsh, a mortgage broker in Scottsdale, Ariz.
Mortgage rates typically move in line with rates on 10-year Treasurys. Treasury rates have risen, but so has the spread between rates on 30-year mortgages and 10-year Treasurys, said Nicholas Strand, a mortgage strategist at Barclays Capital.
Banks set their interest rates on mortgages based on demand for those loans from investors, including Fannie Mae and Freddie Mac. When demand is weaker, they must offer investors a higher interest rate.
Walter Schmidt, a senior vice president at FTN Financial Capital Markets in Chicago, said the latest increase largely reflects fears that Fannie Mae and Freddie Mac wouldn't be able to buy as many mortgages in the months ahead as they have recently. The two companies are the biggest buyers of mortgages and related securities. Both are facing heavy losses on defaults, and investors believe they probably will have to raise large amounts of capital to cope with those losses.
Freddie added to jitters last week by saying it might sell some mortgage securities to reduce capital needs. And some smaller Asian banks have been selling mortgage securities, said Arthur Frank, a director at Deutsche Bank Securities in New York.
Can you say credit crunch?
Wednesday, July 23, 2008
Tuesday, July 22, 2008
F&F Mess: Cost of Bailout
from www.nytimes.com
July 23, 2008
Cost of Loan Bailout, if Needed, Could Be $25 Billion
By DAVID M. HERSZENHORN
WASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.
The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.
The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has not been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill.
According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that “a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009.”
Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. “There is very significant uncertainty involved here,” he said.
The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.
The rescue plan, put forward last week by the Treasury secretary, Henry M. Paulson Jr., would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded.
Mr. Orszag said that the analysis by his office did not distinguish between the different forms of aid that might be offered — a credit line or a stock purchase — and that the analysis showed no short-term potential financial benefit for taxpayers even if Fannie Mae and Freddie Mac perform well.
But he said the analysis found substantial risk for taxpayers if the companies had steep losses and would not say if his office had analyzed the implications of a full government takeover of the companies.
How much the government will end up spending on a rescue, if one is needed, would depend on many factors, he said, including sentiment on Wall Street. “A key question becomes how does the market view the entities?” he said.
Fannie Mae and Freddie Mac are commonly referred to as government-sponsored entities, because of the long implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse.
One thing that is certain as a result of the rescue proposal is that the guarantee of government aid is now much more explicit, and Mr. Orszag said that the government’s assurance that it would not let the companies fail would have to be included in any analysis of their long-term financial prospects.
Most immediately, the $25 billion cost estimate provides a precise amount that Congress will have to offset with spending cuts or tax increases if lawmakers intend to comply with “pay as you go” budget rules in the House. Lawmakers could also decide that the $25 billion should be viewed as emergency spending and simply added to the national debt.
There was little immediate reaction to the projections on Capitol Hill as lawmakers and staff members reviewed the complicated calculations and the various assumptions they were based on.
Mr. Spratt, the chairman of the Budget Committee, issued a statement praising the Congressional Budget Office for moving quickly to produce its analysis. “Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty,” Mr. Spratt said. “And not everyone will necessarily agree with every aspect of C.B.O.’s analysis.”
But he added: “C.B.O. is performing its important institutional role by providing in a timely manner its best professional and independent assessment.”
The analysis by the Congressional Budget Office also offered a sobering assessment of the mortgage giants based on several different metrics.
Under generally accepted accounting principles, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies held more than $80 billion in capital at the end of March and for regulatory purposes were considered to be "adequately capitalized" by the Department of Housing and Urban Development.
But on a fair value basis, the value of the mortgage companies’ assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion, and an indication of why there have been numerous calls for the companies to raise additional capital. Mr. Orszag also noted that on July 11, before the Bush administration proposed its rescue plan, the total value of shares in Fannie Mae and Freddie Mac had fallen to a low of $11 billion. Shares in the companies are now worth about $20 billion.
The House is expected to vote on the larger package of housing legislation, including the rescue plan for the mortgage companies, as early as Wednesday, and the Senate is expected to quickly follow and send the bill to President Bush.
Among the issues that lawmakers have been debating is whether to exempt from the federal debt limit any expenditure that the Treasury Department makes on behalf of the mortgage companies. The current debt limit is $9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion.
Congressional Democrats have expressed opposition to exempting the rescue plan from the debt limit, saying administration officials should come back to Congress for emergency authorization if additional spending is needed. Officials said it was probable that a compromise would be reached and the debt limit would still apply.
The housing legislation also includes the creation of a regulator for the mortgage companies, an agency apart from the Department of Housing and Urban Development, which oversees the mortgage giants.
Some critics have questioned whether the new regulator would have sufficient authority to swiftly increase capital requirements — the amount of cash that the mortgage companies need to maintain to protect against losses.
In his letter to Mr. Spratt, Mr. Orszag suggested that simply enacting the proposed rescue plan could bolster the confidence of Wall Street in Fannie Mae and Freddie Mac.
“Private markets might be sufficiently reassured to provide the GSE’s with adequate capital to continue operations without any infusion of funds from the Treasury,” he wrote. “during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten.”
But Mr. Orszag said his office had also consulted with market investors with a different outlook. “Many analysis and traders believe there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets,” he wrote, “and such continuing problems would increase the probability that this new authority would have to be used.”
Taking into account all of the different possibilities and sentiments, and measuring them against the budget “scorekeeping” rules, Mr. Orszag said his office had concluded “that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.”
25 bil huh? Try 10x that number....
July 23, 2008
Cost of Loan Bailout, if Needed, Could Be $25 Billion
By DAVID M. HERSZENHORN
WASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.
The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.
The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has not been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill.
According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that “a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009.”
Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. “There is very significant uncertainty involved here,” he said.
The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.
The rescue plan, put forward last week by the Treasury secretary, Henry M. Paulson Jr., would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded.
Mr. Orszag said that the analysis by his office did not distinguish between the different forms of aid that might be offered — a credit line or a stock purchase — and that the analysis showed no short-term potential financial benefit for taxpayers even if Fannie Mae and Freddie Mac perform well.
But he said the analysis found substantial risk for taxpayers if the companies had steep losses and would not say if his office had analyzed the implications of a full government takeover of the companies.
How much the government will end up spending on a rescue, if one is needed, would depend on many factors, he said, including sentiment on Wall Street. “A key question becomes how does the market view the entities?” he said.
Fannie Mae and Freddie Mac are commonly referred to as government-sponsored entities, because of the long implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse.
One thing that is certain as a result of the rescue proposal is that the guarantee of government aid is now much more explicit, and Mr. Orszag said that the government’s assurance that it would not let the companies fail would have to be included in any analysis of their long-term financial prospects.
Most immediately, the $25 billion cost estimate provides a precise amount that Congress will have to offset with spending cuts or tax increases if lawmakers intend to comply with “pay as you go” budget rules in the House. Lawmakers could also decide that the $25 billion should be viewed as emergency spending and simply added to the national debt.
There was little immediate reaction to the projections on Capitol Hill as lawmakers and staff members reviewed the complicated calculations and the various assumptions they were based on.
Mr. Spratt, the chairman of the Budget Committee, issued a statement praising the Congressional Budget Office for moving quickly to produce its analysis. “Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty,” Mr. Spratt said. “And not everyone will necessarily agree with every aspect of C.B.O.’s analysis.”
But he added: “C.B.O. is performing its important institutional role by providing in a timely manner its best professional and independent assessment.”
The analysis by the Congressional Budget Office also offered a sobering assessment of the mortgage giants based on several different metrics.
Under generally accepted accounting principles, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies held more than $80 billion in capital at the end of March and for regulatory purposes were considered to be "adequately capitalized" by the Department of Housing and Urban Development.
But on a fair value basis, the value of the mortgage companies’ assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion, and an indication of why there have been numerous calls for the companies to raise additional capital. Mr. Orszag also noted that on July 11, before the Bush administration proposed its rescue plan, the total value of shares in Fannie Mae and Freddie Mac had fallen to a low of $11 billion. Shares in the companies are now worth about $20 billion.
The House is expected to vote on the larger package of housing legislation, including the rescue plan for the mortgage companies, as early as Wednesday, and the Senate is expected to quickly follow and send the bill to President Bush.
Among the issues that lawmakers have been debating is whether to exempt from the federal debt limit any expenditure that the Treasury Department makes on behalf of the mortgage companies. The current debt limit is $9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion.
Congressional Democrats have expressed opposition to exempting the rescue plan from the debt limit, saying administration officials should come back to Congress for emergency authorization if additional spending is needed. Officials said it was probable that a compromise would be reached and the debt limit would still apply.
The housing legislation also includes the creation of a regulator for the mortgage companies, an agency apart from the Department of Housing and Urban Development, which oversees the mortgage giants.
Some critics have questioned whether the new regulator would have sufficient authority to swiftly increase capital requirements — the amount of cash that the mortgage companies need to maintain to protect against losses.
In his letter to Mr. Spratt, Mr. Orszag suggested that simply enacting the proposed rescue plan could bolster the confidence of Wall Street in Fannie Mae and Freddie Mac.
“Private markets might be sufficiently reassured to provide the GSE’s with adequate capital to continue operations without any infusion of funds from the Treasury,” he wrote. “during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten.”
But Mr. Orszag said his office had also consulted with market investors with a different outlook. “Many analysis and traders believe there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets,” he wrote, “and such continuing problems would increase the probability that this new authority would have to be used.”
Taking into account all of the different possibilities and sentiments, and measuring them against the budget “scorekeeping” rules, Mr. Orszag said his office had concluded “that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.”
25 bil huh? Try 10x that number....
Cost of College
from www.nytimes.com
July 21, 2008
With No Frills or Tuition, a College Draws Notice
By TAMAR LEWIN
BEREA, Ky. — Berea College, founded 150 years ago to educate freed slaves and “poor white mountaineers,” accepts only applicants from low-income families, and it charges no tuition.
“You can literally come to Berea with nothing but what you can carry, and graduate debt free,” said Joseph P. Bagnoli Jr., the associate provost for enrollment management. “We call it the best education money can’t buy.”
Actually, what buys that education is Berea’s $1.1 billion endowment, which puts the college among the nation’s wealthiest. But unlike most well-endowed colleges, Berea has no football team, coed dorms, hot tubs or climbing walls. Instead, it has a no-frills budget, with food from the college farm, handmade furniture from the college crafts workshops, and 10-hour-a-week campus jobs for every student.
Berea’s approach provides an unusual perspective on the growing debate over whether the wealthiest universities are doing enough for the public good to warrant their tax exemption, or simply hoarding money to serve an elite few. As many elite universities scramble to recruit more low-income students, Berea’s no-tuition model has attracted increasing attention.
“Asking whether that’s where our values lead us is a powerful way to consider what our values are,” said Anthony Marx, the president of Amherst College, who considered the possibility of using Amherst’s $1 million-per-student endowment to offer free tuition but concluded that it would make no sense, given Amherst’s more affluent student body and the fact that the college already subsidizes about half the cost of each student’s education.
“We’re not Berea, much as we respect them,” Mr. Marx said, adding there would be no social justification for giving free tuition to students from wealthy families.
Although this year’s market drop is taking its toll, the growth in university endowments in recent years has been spectacular. Harvard’s $35 billion endowment, Yale’s $23 billion, Stanford’s $17 billion and Princeton’s $16 billion put them among the world’s richest institutions.
Such endowments have helped make higher education one of the nation’s crown jewels. As Harvard’s president, Drew Gilpin Faust, said in her spring commencement speech this year, endowments at Harvard and other research universities help fuel scientific advances as government support is eroding, and help drive economic growth and expansion in a difficult economy.
Although most universities have only modest endowments, the wealth of the richest has made them increasingly vulnerable to criticism from parents upset about rising tuition costs, lawmakers pushing them to spend more of their money and policy experts arguing that they should be helping more needy students.
“How much do you need to save for future generations, and at what point are you gouging today’s generation?” said Lynne Munson, of the Center for College Affordability and Productivity in Washington.
In January, the Senate Finance Committee requested detailed endowment and spending data from 136 colleges and universities with endowments of at least $500 million, with a possible eye to forcing them to spend at least 5 percent of their assets each year, as foundations are required to do. Large, tax-free endowments “should mean affordable education for more students, not just a security blanket for colleges,” said Senator Charles E. Grassley, Republican of Iowa, who is reviewing the data.
The commissioner of the Internal Revenue Service’s tax-exempt section said this spring that he wanted his agency to be more aggressive in ensuring that universities made “appropriate use” of their endowments. And officials in Massachusetts are studying a proposal for a 2.5 percent tax on the part of university endowments greater than $1 billion — a threshold exceeded by nine of the state’s universities.
“The endowments have grown to such an astonishing extent that people are asking, if the wealth and the value of the tax exemption are increasing, is the public benefit increasing, as well?” said Evelyn Brody, a tax professor at Chicago-Kent College of Law.
This year, Ms. Brody said, the debate has entered new territory. Traditionally, discussion about endowments has focused on the balance between using the money for the current generation versus saving it for the benefit of future generations.
“Endowment spending has usually been a ‘when’ question, about when the money would be used for a charitable purpose,” she said. “But now, it’s also being viewed as a ‘what’ question. What is the money for? And I think that’s new.”
In part, it is simply a question of itchy fingers. When one sector amasses great wealth, other sectors find it irresistible.
“That’s why Henry VIII dissolved the monasteries in the 16th century,” Ms. Brody said. “In those days, it was real estate, which was not easy to hide. Now it’s the disclosure, which makes the universities’ wealth impossible to hide.”
The mounting scrutiny by lawmakers has already prompted some action. Dozens of wealthy colleges have increased their aid to low- and middle-income students, many substituting grants for loans. Many have announced plans to expand their student bodies, and some are doing broader outreach and working with nearby K-12 schools to improve academic preparation.
Nonetheless, according to 2002 data, only one in 10 of the students at the nation’s most selective institutions come from the bottom 40 percent of the income scale. And the proportion of low-income undergraduates at the nation’s wealthiest colleges has been declining, as measured by the percentage receiving federal Pell Grants, for families with income under about $40,000. At most top colleges, only 8 to 15 percent of students receive Pell grants.
At Berea, more than three-quarters of the students receive Pell grants.
Overall, Berea’s statistics speak worlds about the demand for affordable higher education; this year, the college accepted only 22 percent of its applicants. Among those accepted, 85 percent attended Berea, a yield higher than Harvard’s.
Berea can be a haven for the lower-income students at high schools where expensive clothes and fancy homes demarcate the social territory.
“When I first heard about Berea, I didn’t think I wanted to come here,” said Candice Roots, who will be a junior in the fall. “But I visited in my senior year, and as soon as I got here, I knew this was what I wanted. Everybody was like me. You don’t have to have all this money to fit in.”
With its hilly campus, Georgian president’s mansion and old brick buildings, Berea looks much like any elite New England college. But its operating budget is less than half that of Amherst, which has a $1.7 billion endowment and about 100 more students. Faculty pay is much lower, and the student-faculty ratio higher. With no rich parents and no legacy admission slots, fund-raising is far more difficult at Berea.
Lacking tuition, Berea receives 80 percent of its $43 million education and general budget, and about two-thirds of its $55 million operating budget, from the endowment income.
Families bringing a student to a campus interview may stay, free, in a four-bedroom house, complete with flat-screen television and handmade sleigh bed. Students who are single parents have their own residences.
To satisfy the work requirement, some students have jobs in the academic departments, administrative offices and labs, while others are assigned to the college farm, the workshops that make and sell traditional mountain crafts (its handmade brooms, especially, are well-known treasures) or the college-owned hotel, which anchors the town square.
Mr. Marx, in homage, keeps a Berea broom in his Amherst office.
While Mr. Marx is not trying to match Berea’s student population, he is proud of Amherst’s efforts to attract top students from all income brackets. The college has increased the proportion of Pell recipients to nearly 20 percent of its student body, from about 15 percent five years ago, for example. With more than half of Amherst’s students on financial aid, the college announced last year that it would replace loans in all aid packages with grants. A full-time staff member recruits community college graduates as transfer students. Admissions are need-blind, for both American and international applicants.
Although he, like other college presidents, opposes the idea of a required 5 percent payout, Mr. Marx said the current debate over the use of endowments was healthy.
“Congress, the media, the public all have an interest in knowing whether we’re using our resources to make sure the best students have access to the best education,” he said. “They should be asking, are we really affordable? Are we offering the highest quality education? Are we directing graduates to think about their social responsibilities?”
Berea’s president, Larry D. Shinn, also opposes a required 5 percent payout but wants colleges pushed to do more for needy students.
“You see some of these selective liberal arts colleges building new physical education facilities with these huge sheets of glass and these coffee and juice bars, and charging students $40,000 a year, and you have to ask, does this contribute to the public good, or is it just a way for the college to keep up with the Joneses?” Mr. Shinn said. “We are a tax-exempt institution, so I think the public has a right to demand that our educational mission be at the heart of all of our expenditures.”
I had applied to Berea as an international student from India back in 1991. If memory serves me right, I got a nice letter back from them saying that they appreciated my credentials but their policy was to reserve spots for US Citizens ideally from Appalachia. Even back then, Berea had a solid reputation and its model is very unique and ought to be emulated.
July 21, 2008
With No Frills or Tuition, a College Draws Notice
By TAMAR LEWIN
BEREA, Ky. — Berea College, founded 150 years ago to educate freed slaves and “poor white mountaineers,” accepts only applicants from low-income families, and it charges no tuition.
“You can literally come to Berea with nothing but what you can carry, and graduate debt free,” said Joseph P. Bagnoli Jr., the associate provost for enrollment management. “We call it the best education money can’t buy.”
Actually, what buys that education is Berea’s $1.1 billion endowment, which puts the college among the nation’s wealthiest. But unlike most well-endowed colleges, Berea has no football team, coed dorms, hot tubs or climbing walls. Instead, it has a no-frills budget, with food from the college farm, handmade furniture from the college crafts workshops, and 10-hour-a-week campus jobs for every student.
Berea’s approach provides an unusual perspective on the growing debate over whether the wealthiest universities are doing enough for the public good to warrant their tax exemption, or simply hoarding money to serve an elite few. As many elite universities scramble to recruit more low-income students, Berea’s no-tuition model has attracted increasing attention.
“Asking whether that’s where our values lead us is a powerful way to consider what our values are,” said Anthony Marx, the president of Amherst College, who considered the possibility of using Amherst’s $1 million-per-student endowment to offer free tuition but concluded that it would make no sense, given Amherst’s more affluent student body and the fact that the college already subsidizes about half the cost of each student’s education.
“We’re not Berea, much as we respect them,” Mr. Marx said, adding there would be no social justification for giving free tuition to students from wealthy families.
Although this year’s market drop is taking its toll, the growth in university endowments in recent years has been spectacular. Harvard’s $35 billion endowment, Yale’s $23 billion, Stanford’s $17 billion and Princeton’s $16 billion put them among the world’s richest institutions.
Such endowments have helped make higher education one of the nation’s crown jewels. As Harvard’s president, Drew Gilpin Faust, said in her spring commencement speech this year, endowments at Harvard and other research universities help fuel scientific advances as government support is eroding, and help drive economic growth and expansion in a difficult economy.
Although most universities have only modest endowments, the wealth of the richest has made them increasingly vulnerable to criticism from parents upset about rising tuition costs, lawmakers pushing them to spend more of their money and policy experts arguing that they should be helping more needy students.
“How much do you need to save for future generations, and at what point are you gouging today’s generation?” said Lynne Munson, of the Center for College Affordability and Productivity in Washington.
In January, the Senate Finance Committee requested detailed endowment and spending data from 136 colleges and universities with endowments of at least $500 million, with a possible eye to forcing them to spend at least 5 percent of their assets each year, as foundations are required to do. Large, tax-free endowments “should mean affordable education for more students, not just a security blanket for colleges,” said Senator Charles E. Grassley, Republican of Iowa, who is reviewing the data.
The commissioner of the Internal Revenue Service’s tax-exempt section said this spring that he wanted his agency to be more aggressive in ensuring that universities made “appropriate use” of their endowments. And officials in Massachusetts are studying a proposal for a 2.5 percent tax on the part of university endowments greater than $1 billion — a threshold exceeded by nine of the state’s universities.
“The endowments have grown to such an astonishing extent that people are asking, if the wealth and the value of the tax exemption are increasing, is the public benefit increasing, as well?” said Evelyn Brody, a tax professor at Chicago-Kent College of Law.
This year, Ms. Brody said, the debate has entered new territory. Traditionally, discussion about endowments has focused on the balance between using the money for the current generation versus saving it for the benefit of future generations.
“Endowment spending has usually been a ‘when’ question, about when the money would be used for a charitable purpose,” she said. “But now, it’s also being viewed as a ‘what’ question. What is the money for? And I think that’s new.”
In part, it is simply a question of itchy fingers. When one sector amasses great wealth, other sectors find it irresistible.
“That’s why Henry VIII dissolved the monasteries in the 16th century,” Ms. Brody said. “In those days, it was real estate, which was not easy to hide. Now it’s the disclosure, which makes the universities’ wealth impossible to hide.”
The mounting scrutiny by lawmakers has already prompted some action. Dozens of wealthy colleges have increased their aid to low- and middle-income students, many substituting grants for loans. Many have announced plans to expand their student bodies, and some are doing broader outreach and working with nearby K-12 schools to improve academic preparation.
Nonetheless, according to 2002 data, only one in 10 of the students at the nation’s most selective institutions come from the bottom 40 percent of the income scale. And the proportion of low-income undergraduates at the nation’s wealthiest colleges has been declining, as measured by the percentage receiving federal Pell Grants, for families with income under about $40,000. At most top colleges, only 8 to 15 percent of students receive Pell grants.
At Berea, more than three-quarters of the students receive Pell grants.
Overall, Berea’s statistics speak worlds about the demand for affordable higher education; this year, the college accepted only 22 percent of its applicants. Among those accepted, 85 percent attended Berea, a yield higher than Harvard’s.
Berea can be a haven for the lower-income students at high schools where expensive clothes and fancy homes demarcate the social territory.
“When I first heard about Berea, I didn’t think I wanted to come here,” said Candice Roots, who will be a junior in the fall. “But I visited in my senior year, and as soon as I got here, I knew this was what I wanted. Everybody was like me. You don’t have to have all this money to fit in.”
With its hilly campus, Georgian president’s mansion and old brick buildings, Berea looks much like any elite New England college. But its operating budget is less than half that of Amherst, which has a $1.7 billion endowment and about 100 more students. Faculty pay is much lower, and the student-faculty ratio higher. With no rich parents and no legacy admission slots, fund-raising is far more difficult at Berea.
Lacking tuition, Berea receives 80 percent of its $43 million education and general budget, and about two-thirds of its $55 million operating budget, from the endowment income.
Families bringing a student to a campus interview may stay, free, in a four-bedroom house, complete with flat-screen television and handmade sleigh bed. Students who are single parents have their own residences.
To satisfy the work requirement, some students have jobs in the academic departments, administrative offices and labs, while others are assigned to the college farm, the workshops that make and sell traditional mountain crafts (its handmade brooms, especially, are well-known treasures) or the college-owned hotel, which anchors the town square.
Mr. Marx, in homage, keeps a Berea broom in his Amherst office.
While Mr. Marx is not trying to match Berea’s student population, he is proud of Amherst’s efforts to attract top students from all income brackets. The college has increased the proportion of Pell recipients to nearly 20 percent of its student body, from about 15 percent five years ago, for example. With more than half of Amherst’s students on financial aid, the college announced last year that it would replace loans in all aid packages with grants. A full-time staff member recruits community college graduates as transfer students. Admissions are need-blind, for both American and international applicants.
Although he, like other college presidents, opposes the idea of a required 5 percent payout, Mr. Marx said the current debate over the use of endowments was healthy.
“Congress, the media, the public all have an interest in knowing whether we’re using our resources to make sure the best students have access to the best education,” he said. “They should be asking, are we really affordable? Are we offering the highest quality education? Are we directing graduates to think about their social responsibilities?”
Berea’s president, Larry D. Shinn, also opposes a required 5 percent payout but wants colleges pushed to do more for needy students.
“You see some of these selective liberal arts colleges building new physical education facilities with these huge sheets of glass and these coffee and juice bars, and charging students $40,000 a year, and you have to ask, does this contribute to the public good, or is it just a way for the college to keep up with the Joneses?” Mr. Shinn said. “We are a tax-exempt institution, so I think the public has a right to demand that our educational mission be at the heart of all of our expenditures.”
I had applied to Berea as an international student from India back in 1991. If memory serves me right, I got a nice letter back from them saying that they appreciated my credentials but their policy was to reserve spots for US Citizens ideally from Appalachia. Even back then, Berea had a solid reputation and its model is very unique and ought to be emulated.
Be Patient!
from www.nytimes.com
July 23, 2008
Paulson Urges Americans to Be Patient on Economy
By MICHAEL M. GRYNBAUM
Treasury Secretary Henry M. Paulson Jr., said on Tuesday that Americans need to remain patient as the economy works through its problems, and he warned of “continued stresses” in the months ahead before a full recovery can be made.
“Our markets won’t make progress in a straight line, and we should expect additional bumps in the road,” Mr. Paulson said in remarks at the New York Public Library in Midtown Manhattan. “We have been experiencing more bumps recently, and until the housing market stabilizes further we should expect some continued stresses in our financial markets.”
Although Mr. Paulson acknowledged the need for broad reforms of the nation’s existing regulatory structure, he sought to assure Americans that he expects the nation to “work through this period,” and “emerge stronger and better poised for robust growth.”
“The American people have every reason to remain confident that the U.S. banking system is sound,” he said.
Mr. Paulson spoke just a week after the government announced a plan to help prop up Fannie Mae and Freddie Mac, the giant mortgage buyers that were recently at the center of widespread market anxiety. The episode, Mr. Paulson said, made it “all the more apparent” that systemic reforms are necessary.
“Now, more than ever, we need Fannie and Freddie out there, financing mortgages,” he said. “Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions.”
Mr. Paulson said there were currently no plans for the companies to tap any federal money, even though the administration’s proposal calls for extending billions of dollars in credit if necessary. Asked about the effect of the plan on taxpayers, he said the credit lines offered a “flexibility” that “minimizes the likelihood they will be used.”
In his remarks, Mr. Paulson repeated his calls for greater transparency and effective regulation of the financial industry, saying such changes would “add to market stability and mitigate the likelihood that a failing institution can spur a systemic event.”
“We need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail,” he said. He also singled out certain sophisticated markets — including over-the-counter credit derivatives — as particularly in need of greater oversight.
Mr. Paulson pointed to the recent failure of IndyMac Bancorp as an example of the government’s ability through the Federal Deposit Insurance Corporation to protect depositors when a large bank collapses. “No one has or will lose a penny of insured deposits,” he said. “The F.D.I.C. took over the bank on a Friday, worked effectively over the weekend, and on Monday morning the bank reopened for business as usual.”
In a question-and-answer session after his speech, Mr. Paulson tried to end the appearance on a more positive note. “As I look around the world, I don’t see other industrial nations, developed industrial nations that have better long-term prospects than we do,” he said.
Limited Role Seen for Fed
KING OF PRUSSIA, Pa. (Reuters) — The Federal Reserve has a limited role in a government plan to provide financial support for the ailing mortgage finance companies, Fannie Mae and Freddie Mac, the president of the Philadelphia Federal Reserve, Charles I. Plosser, said Tuesday.
“We were not the lead instigators” in the plan, Mr. Plosser said after a speech to local business leaders. “The Fed is not intentionally seeking to expand its powers.”
Mr. Plosser is a voting member this year on the Fed’s interest rate-setting Federal Open Market Committee and is known to be one of the Fed’s more hawkish members.
So... which large, complex, interconnected institutions is Paulson talking about really? List of suspects are well known.
July 23, 2008
Paulson Urges Americans to Be Patient on Economy
By MICHAEL M. GRYNBAUM
Treasury Secretary Henry M. Paulson Jr., said on Tuesday that Americans need to remain patient as the economy works through its problems, and he warned of “continued stresses” in the months ahead before a full recovery can be made.
“Our markets won’t make progress in a straight line, and we should expect additional bumps in the road,” Mr. Paulson said in remarks at the New York Public Library in Midtown Manhattan. “We have been experiencing more bumps recently, and until the housing market stabilizes further we should expect some continued stresses in our financial markets.”
Although Mr. Paulson acknowledged the need for broad reforms of the nation’s existing regulatory structure, he sought to assure Americans that he expects the nation to “work through this period,” and “emerge stronger and better poised for robust growth.”
“The American people have every reason to remain confident that the U.S. banking system is sound,” he said.
Mr. Paulson spoke just a week after the government announced a plan to help prop up Fannie Mae and Freddie Mac, the giant mortgage buyers that were recently at the center of widespread market anxiety. The episode, Mr. Paulson said, made it “all the more apparent” that systemic reforms are necessary.
“Now, more than ever, we need Fannie and Freddie out there, financing mortgages,” he said. “Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions.”
Mr. Paulson said there were currently no plans for the companies to tap any federal money, even though the administration’s proposal calls for extending billions of dollars in credit if necessary. Asked about the effect of the plan on taxpayers, he said the credit lines offered a “flexibility” that “minimizes the likelihood they will be used.”
In his remarks, Mr. Paulson repeated his calls for greater transparency and effective regulation of the financial industry, saying such changes would “add to market stability and mitigate the likelihood that a failing institution can spur a systemic event.”
“We need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail,” he said. He also singled out certain sophisticated markets — including over-the-counter credit derivatives — as particularly in need of greater oversight.
Mr. Paulson pointed to the recent failure of IndyMac Bancorp as an example of the government’s ability through the Federal Deposit Insurance Corporation to protect depositors when a large bank collapses. “No one has or will lose a penny of insured deposits,” he said. “The F.D.I.C. took over the bank on a Friday, worked effectively over the weekend, and on Monday morning the bank reopened for business as usual.”
In a question-and-answer session after his speech, Mr. Paulson tried to end the appearance on a more positive note. “As I look around the world, I don’t see other industrial nations, developed industrial nations that have better long-term prospects than we do,” he said.
Limited Role Seen for Fed
KING OF PRUSSIA, Pa. (Reuters) — The Federal Reserve has a limited role in a government plan to provide financial support for the ailing mortgage finance companies, Fannie Mae and Freddie Mac, the president of the Philadelphia Federal Reserve, Charles I. Plosser, said Tuesday.
“We were not the lead instigators” in the plan, Mr. Plosser said after a speech to local business leaders. “The Fed is not intentionally seeking to expand its powers.”
Mr. Plosser is a voting member this year on the Fed’s interest rate-setting Federal Open Market Committee and is known to be one of the Fed’s more hawkish members.
So... which large, complex, interconnected institutions is Paulson talking about really? List of suspects are well known.
Monday, July 21, 2008
The Moose Stays in Cash
From www.decisionmoose.com
By William Dirlam
JUL 18— The WallStreet Journal raised its newsstand price to two dollars this week. With Starbuck’s lattes going for five, the price of morning coffee and a paper, for those who want to be both trendy and in the financial know, is now seven dollars. Not Lira, not Pesos, not Yen… Dollars. Seven dollars for coffee and a newspaper! No doughnut. No OJ. No Russian Tea Room atmospherics. Just a stimulant made of beans and a depressant made of wood pulp.
All those government types who’ve been telling us that inflation from food and energy had not passed through to the general economy obviously drink instant and don’t read. Not that I know that much about Starbuck’s or favor the Journal myself. Frankly, I prepare my own coffee and get my written news off the internet. Sometimes the coffee is Starbuck’s, which I buy at Costco. Most times it’s just grocery store fare. I do grind the beans fresh each day now, which I admit to have considered effete when I was young enough to think coffee was hot tap water over a spoonful of Folgers Crystals.
In retrospect, my one visit to Starbuck’s was traumatic enough to make it my last. First off, there were a lot of truly wired people in the place, and their palpable nervousness seemed like it might be contagious. (Are fidget-cooties airborne? I didn’t know.) I also felt like a clueless tourist in Bhutan, entirely unfamiliar with the language and customs. So while I was trying to translate the Franco-Italianate menu and determine which of the hyperactive barristas I should talk to first, I was nearly trampled by a stampeding pack of caffeine-starved customers.
Let’s just say that I was clearly trying everyone’s impatience.
When my two-cup $8 order finally came (I’d gone there at a friend’s request) I nearly caused a fist-fight by accidentally picking up another guy’s coffee (which was sitting next to mine) and polluting it with sugar before he could hiss at me that they put all the orders on the counter at once in no particular sequence, and that I had ruined his life. Excuse me, but all the cups look the same on the outside, buddy. Since I’ve rendered your grande-black-quadruple-caff entirely undrinkable, Mr. Type A freakazoid, let me buy you another.
So I netted out at $12 and some serious stress for my two cups of Starbuck’s. Nowadays, I guess it would have been $15. I got off light. Even so, I’ve never gone back.
Given $5 coffees and $2 daily newspapers, it was somewhat comforting to see the latest consumer and producer price indices confirm what most of us have encountered in the real world for the last year. At least we no longer feel as if the govmint is lying to us. That was about the only comforting thing, however.
Inflation is not only alive and well, but, as we’ve noted here for some time, has been bulking up on the monetary steroids coach Ben has been pushing behind the Fed clubhouse. Wholesale prices are up 9% year-over-year, and consumer prices are up 5%. We’ve only just begun.
This week’s market action generally followed the post-bailout relief scenario outlined here last week. Once the Fed, the Treasury, and the SEC made guaranteed safety-net sounds over Fannie and Freddie on Tuesday and Wednesday, the relief sent recent history into reverse. Stocks rallied, interest rates rose, the Dollar gained, and gold backed off, all later in the week— all as predicted.
The only unexpected development was that non-precious metals commodities did not rally along with stocks. Normally stocks rise in anticipation of a stronger economy and this tends to push materials prices higher too. It didn’t happen that way this time (the divergence, in fact, was very stark), which suggests one of two possibilities.
Either the market considered commodities, especially oil (down 11%), short-term overbought going into options expiration and took profits, expecting to get back in synch with stocks in the coming weeks. Or the market saw the rally in stocks as a short-covering exercise instead of a prediction of an all clear in financials and stronger growth ahead, and sold commodities in anticipation of a global recession.
There is ample evidence that the sharp move in equities this week was a government orchestrated short-covering rally, particularly the historic surge in financial stocks. The SEC announced an emergency order banning naked short sales in the financials, and the most shorted sector responded brilliantly. Even though naked shorts were already illegal and have been for a long time, financials (XLF) rocketed 20% higher in three days. It was an historic move for a beaten-down sector, but it showed just how clueless the market remains, both about values in the sector, and about the impact the shifting rules (or confused jawboning) of an increasingly activist government may have on the trading process.
Still, when you look at comparative interest rates, the Fed Funds rate is about half the European rate and less than half Britain’s. Dollars are cheap, but once you own them and throw global inflation into the mix, you realize they are less than worthless. You get rid of them as quickly as you can by buying something, and since commodities are traded in Dollars, they have been a convenient haven. Once global growth slows, however, and you have less need to take delivery of commodities, you shift to precious metals, which are a more permanent store of value.
Fed Funds futures were all over the map this week— going from a 58% bet that the Fed would HIKE rates by 25 basis points before December to a bet that they would CUT rates by 50 basis points, to a bet that there would be no change. Whatever, the Dollar’s outlook is dicey. If anything, all pretense of an inflation-fighting Fed appeared to vanish in the face of an increasingly desperate financial situation.
I’m certainly in no position to second-guess the wisdom of the Fed. I can’t even navigate a Starbucks. I’ve been evaluating the Fed Check, however, for some time now, and it’s forecasting ability still appears robust. If anything, this Fed’s propensity to do the opposite of what the commodity and bond markets are telling it has reinforced my theories about what happens when they act that way. To tell the truth, this Fed has kind of hit us over the head with it.
In retrospect, the Fed missed a chance to cut rates in 2006, and by standing pat, flattened the yield curve, which curbs bank profitability. While that didn’t create the sub-prime banking crisis a year later (Greenspan’s far larger miscues did that), it certainly didn’t strengthen the banks going forward. Then, once the crisis hit, the Fed ignored strong inflation signals in late 2007, and chose to cut rates to protect a weakened banking system. In fairness, it was a damned if you do, damned if you don’t call, but it has led to increasing inflationary pressures, which, if theory holds, won’t be peaking until a year after the cuts stopped— i.e., next spring. Thus, commodities and gold still probably have legs.
There are a couple of ironies in all this that should be mentioned. One is the most obvious, which is that the more government screws up, the more power it feels it needs to rectify the situation. I mean, do we really need to give Bozo bigger, redder shoes? Two days of Congress, Fed, Treasury, and SEC on the tube was an ego boost for them, I’m sure, and for me too (although it was an “eyes-glaze-over” type e.g.o. thing for me). But apart from face-time in an election year, what did they accomplish? I’m still waiting.
The second irony is mostly hypothetical. If the Fed acted in concert with bond and commodity markets to dampen swings, instead of in opposition, it would be more effective in stabilizing growth and inflation. That would reduce market volatility, but make both forecasting and trading more difficult. So while the American in me would like to see them get it right, the Moose in me isn’t so sure. If they weren’t messing up the markets so obviously all the time, I might not know what to make of it.
Trading aside, I do think a more compliant Fed would bring back investing. This past week alone is ample evidence that the investor has fled our markets. Stocks plunging 20% one Friday, and then surging 20% by the next is more like manic depression than planning for the future, which is what investing is supposed to be all about. There are enough exogenous forces (weather, terrorism, war, cartels, earthquakes, etc.) pumping uncertainty into our markets without our government magnifying their impact.
As for this week’s signal, several very perceptive Moosaholics have asked why, with cash in first place and GLD in second, given that GLD is POS short and medium term, that it is not the current choice. The reason is author discretion, and indecision. (If you think you hear a feint “puck, puck, puck”, that is the chicken on my keyboard.) Let me explain.
When I first developed the model, there was no gold (GLD), only gold shares (ASA), which behave very differently from bullion-- more like stocks than a commodity. So when the Fed Check, as it does now, said “avoid equities”, I would avoid gold shares. No brainer.
When I substituted bullion for gold shares a couple of years ago, although I did not have enough back data to check my assumption, I reasoned that GLD should be exempt from the Fed Check's occasional blanket aversion to stocks and bonds (promises) because it was a hard asset (reality).
As it turned out, bullion has occasionally gone down (25% of the time) when the Fed Check was predicting paper would. It seems that when stocks go to hell in a hand-basket, people sometimes sell the good stuff to cover or raise cash. The baby can get thrown out with the bathwater. That said, GLD recently gave the Moose a preliminary buy signal (three weeks ago), pre-banking crisis. Longer term, it should be headed up.
The model generates a “confidence number” for each asset, however, based on the tape, the market, and the Fed, and GLD’s remains just below a “Confirmed Buy”. Now I'm waiting for a price pullback since, as the Bear Stearns case suggested, gold retreats once a "crisis" is averted. I'm not sure this latest Fannie-Freddie credit crisis has been averted, but if the market thinks it has, gold should correct as stocks rally. In a week or two, GLD may be a buy.
There’s a reason the banking crisis broke a year ago. It’s because this is when the banks release their quarterly statements after the spring real estate mortgage season, when all the 1, 3 and 5 year ARMs roll over, or as we’ve seen lately, go belly-up. This year, we’ve gotten some numbers that stink, but our noses expected worse. We still have another week, though. The better the banks report next week, the stiffer the correction in gold. Since Citibank got a standing O for “only” losing 2.5 billion this week, the bar defining success is obviously set pretty low (underground). Might as well wait.
The thing is, when I get too fancy (and the above reasoning is fancier than a gigolo in room full of dowager aunts), I usually find I’ve been too smart by half.
Nevertheless, another week in cash. Worst that can happen is we miss out on the chaos. In my view, a small price to keep one’s pants dry.
Some of the funniest commentary from Bill yet. The gigolo analogy is classic. I have commented on Bill's methodology & website previously and reiterate that it is one of the best. Thank you Bill for all that you do.
By William Dirlam
JUL 18— The WallStreet Journal raised its newsstand price to two dollars this week. With Starbuck’s lattes going for five, the price of morning coffee and a paper, for those who want to be both trendy and in the financial know, is now seven dollars. Not Lira, not Pesos, not Yen… Dollars. Seven dollars for coffee and a newspaper! No doughnut. No OJ. No Russian Tea Room atmospherics. Just a stimulant made of beans and a depressant made of wood pulp.
All those government types who’ve been telling us that inflation from food and energy had not passed through to the general economy obviously drink instant and don’t read. Not that I know that much about Starbuck’s or favor the Journal myself. Frankly, I prepare my own coffee and get my written news off the internet. Sometimes the coffee is Starbuck’s, which I buy at Costco. Most times it’s just grocery store fare. I do grind the beans fresh each day now, which I admit to have considered effete when I was young enough to think coffee was hot tap water over a spoonful of Folgers Crystals.
In retrospect, my one visit to Starbuck’s was traumatic enough to make it my last. First off, there were a lot of truly wired people in the place, and their palpable nervousness seemed like it might be contagious. (Are fidget-cooties airborne? I didn’t know.) I also felt like a clueless tourist in Bhutan, entirely unfamiliar with the language and customs. So while I was trying to translate the Franco-Italianate menu and determine which of the hyperactive barristas I should talk to first, I was nearly trampled by a stampeding pack of caffeine-starved customers.
Let’s just say that I was clearly trying everyone’s impatience.
When my two-cup $8 order finally came (I’d gone there at a friend’s request) I nearly caused a fist-fight by accidentally picking up another guy’s coffee (which was sitting next to mine) and polluting it with sugar before he could hiss at me that they put all the orders on the counter at once in no particular sequence, and that I had ruined his life. Excuse me, but all the cups look the same on the outside, buddy. Since I’ve rendered your grande-black-quadruple-caff entirely undrinkable, Mr. Type A freakazoid, let me buy you another.
So I netted out at $12 and some serious stress for my two cups of Starbuck’s. Nowadays, I guess it would have been $15. I got off light. Even so, I’ve never gone back.
Given $5 coffees and $2 daily newspapers, it was somewhat comforting to see the latest consumer and producer price indices confirm what most of us have encountered in the real world for the last year. At least we no longer feel as if the govmint is lying to us. That was about the only comforting thing, however.
Inflation is not only alive and well, but, as we’ve noted here for some time, has been bulking up on the monetary steroids coach Ben has been pushing behind the Fed clubhouse. Wholesale prices are up 9% year-over-year, and consumer prices are up 5%. We’ve only just begun.
This week’s market action generally followed the post-bailout relief scenario outlined here last week. Once the Fed, the Treasury, and the SEC made guaranteed safety-net sounds over Fannie and Freddie on Tuesday and Wednesday, the relief sent recent history into reverse. Stocks rallied, interest rates rose, the Dollar gained, and gold backed off, all later in the week— all as predicted.
The only unexpected development was that non-precious metals commodities did not rally along with stocks. Normally stocks rise in anticipation of a stronger economy and this tends to push materials prices higher too. It didn’t happen that way this time (the divergence, in fact, was very stark), which suggests one of two possibilities.
Either the market considered commodities, especially oil (down 11%), short-term overbought going into options expiration and took profits, expecting to get back in synch with stocks in the coming weeks. Or the market saw the rally in stocks as a short-covering exercise instead of a prediction of an all clear in financials and stronger growth ahead, and sold commodities in anticipation of a global recession.
There is ample evidence that the sharp move in equities this week was a government orchestrated short-covering rally, particularly the historic surge in financial stocks. The SEC announced an emergency order banning naked short sales in the financials, and the most shorted sector responded brilliantly. Even though naked shorts were already illegal and have been for a long time, financials (XLF) rocketed 20% higher in three days. It was an historic move for a beaten-down sector, but it showed just how clueless the market remains, both about values in the sector, and about the impact the shifting rules (or confused jawboning) of an increasingly activist government may have on the trading process.
Still, when you look at comparative interest rates, the Fed Funds rate is about half the European rate and less than half Britain’s. Dollars are cheap, but once you own them and throw global inflation into the mix, you realize they are less than worthless. You get rid of them as quickly as you can by buying something, and since commodities are traded in Dollars, they have been a convenient haven. Once global growth slows, however, and you have less need to take delivery of commodities, you shift to precious metals, which are a more permanent store of value.
Fed Funds futures were all over the map this week— going from a 58% bet that the Fed would HIKE rates by 25 basis points before December to a bet that they would CUT rates by 50 basis points, to a bet that there would be no change. Whatever, the Dollar’s outlook is dicey. If anything, all pretense of an inflation-fighting Fed appeared to vanish in the face of an increasingly desperate financial situation.
I’m certainly in no position to second-guess the wisdom of the Fed. I can’t even navigate a Starbucks. I’ve been evaluating the Fed Check, however, for some time now, and it’s forecasting ability still appears robust. If anything, this Fed’s propensity to do the opposite of what the commodity and bond markets are telling it has reinforced my theories about what happens when they act that way. To tell the truth, this Fed has kind of hit us over the head with it.
In retrospect, the Fed missed a chance to cut rates in 2006, and by standing pat, flattened the yield curve, which curbs bank profitability. While that didn’t create the sub-prime banking crisis a year later (Greenspan’s far larger miscues did that), it certainly didn’t strengthen the banks going forward. Then, once the crisis hit, the Fed ignored strong inflation signals in late 2007, and chose to cut rates to protect a weakened banking system. In fairness, it was a damned if you do, damned if you don’t call, but it has led to increasing inflationary pressures, which, if theory holds, won’t be peaking until a year after the cuts stopped— i.e., next spring. Thus, commodities and gold still probably have legs.
There are a couple of ironies in all this that should be mentioned. One is the most obvious, which is that the more government screws up, the more power it feels it needs to rectify the situation. I mean, do we really need to give Bozo bigger, redder shoes? Two days of Congress, Fed, Treasury, and SEC on the tube was an ego boost for them, I’m sure, and for me too (although it was an “eyes-glaze-over” type e.g.o. thing for me). But apart from face-time in an election year, what did they accomplish? I’m still waiting.
The second irony is mostly hypothetical. If the Fed acted in concert with bond and commodity markets to dampen swings, instead of in opposition, it would be more effective in stabilizing growth and inflation. That would reduce market volatility, but make both forecasting and trading more difficult. So while the American in me would like to see them get it right, the Moose in me isn’t so sure. If they weren’t messing up the markets so obviously all the time, I might not know what to make of it.
Trading aside, I do think a more compliant Fed would bring back investing. This past week alone is ample evidence that the investor has fled our markets. Stocks plunging 20% one Friday, and then surging 20% by the next is more like manic depression than planning for the future, which is what investing is supposed to be all about. There are enough exogenous forces (weather, terrorism, war, cartels, earthquakes, etc.) pumping uncertainty into our markets without our government magnifying their impact.
As for this week’s signal, several very perceptive Moosaholics have asked why, with cash in first place and GLD in second, given that GLD is POS short and medium term, that it is not the current choice. The reason is author discretion, and indecision. (If you think you hear a feint “puck, puck, puck”, that is the chicken on my keyboard.) Let me explain.
When I first developed the model, there was no gold (GLD), only gold shares (ASA), which behave very differently from bullion-- more like stocks than a commodity. So when the Fed Check, as it does now, said “avoid equities”, I would avoid gold shares. No brainer.
When I substituted bullion for gold shares a couple of years ago, although I did not have enough back data to check my assumption, I reasoned that GLD should be exempt from the Fed Check's occasional blanket aversion to stocks and bonds (promises) because it was a hard asset (reality).
As it turned out, bullion has occasionally gone down (25% of the time) when the Fed Check was predicting paper would. It seems that when stocks go to hell in a hand-basket, people sometimes sell the good stuff to cover or raise cash. The baby can get thrown out with the bathwater. That said, GLD recently gave the Moose a preliminary buy signal (three weeks ago), pre-banking crisis. Longer term, it should be headed up.
The model generates a “confidence number” for each asset, however, based on the tape, the market, and the Fed, and GLD’s remains just below a “Confirmed Buy”. Now I'm waiting for a price pullback since, as the Bear Stearns case suggested, gold retreats once a "crisis" is averted. I'm not sure this latest Fannie-Freddie credit crisis has been averted, but if the market thinks it has, gold should correct as stocks rally. In a week or two, GLD may be a buy.
There’s a reason the banking crisis broke a year ago. It’s because this is when the banks release their quarterly statements after the spring real estate mortgage season, when all the 1, 3 and 5 year ARMs roll over, or as we’ve seen lately, go belly-up. This year, we’ve gotten some numbers that stink, but our noses expected worse. We still have another week, though. The better the banks report next week, the stiffer the correction in gold. Since Citibank got a standing O for “only” losing 2.5 billion this week, the bar defining success is obviously set pretty low (underground). Might as well wait.
The thing is, when I get too fancy (and the above reasoning is fancier than a gigolo in room full of dowager aunts), I usually find I’ve been too smart by half.
Nevertheless, another week in cash. Worst that can happen is we miss out on the chaos. In my view, a small price to keep one’s pants dry.
Some of the funniest commentary from Bill yet. The gigolo analogy is classic. I have commented on Bill's methodology & website previously and reiterate that it is one of the best. Thank you Bill for all that you do.
Friday, July 18, 2008
F&F: America's AAA rating
Jul 16th 2008
From www.financialarmageddon.com
The Beginning of the End for America's AAA Rating?
Over the past three days, the price of a credit default swap (or CDS, a form of "insurance" on creditworthiness) on 10-year U.S. government debt has risen by 8.3 basis points (one-hundreths of a percentage point), or 61 percent, to 21.8 basis points, and is now almost 80% higher than the median value of this CDS since it was first quoted on April 2.
There is no doubt that talk of a bailout of Fannie Mae and Freddie Mac has spurred what could be a short-lived spike. Still, it makes you wonder if the market is starting to price in what many say is inevitable after years of profligacy and failed policies: a credit downgrade for the United States.
From www.financialarmageddon.com
The Beginning of the End for America's AAA Rating?
Over the past three days, the price of a credit default swap (or CDS, a form of "insurance" on creditworthiness) on 10-year U.S. government debt has risen by 8.3 basis points (one-hundreths of a percentage point), or 61 percent, to 21.8 basis points, and is now almost 80% higher than the median value of this CDS since it was first quoted on April 2.
There is no doubt that talk of a bailout of Fannie Mae and Freddie Mac has spurred what could be a short-lived spike. Still, it makes you wonder if the market is starting to price in what many say is inevitable after years of profligacy and failed policies: a credit downgrade for the United States.
Thursday, July 17, 2008
Stone age and the Shortage of Stones.
July 18, 2008
Gore Calls for Carbon-Free Electric Power
By DAVID STOUT
WASHINGTON — Former Vice President Al Gore said on Thursday that Americans must abandon electricity generated by fossil fuels within a decade and rely on the sun, the winds and other environmentally friendly sources of power, or risk losing their national security as well as their creature comforts.
“The survival of the United States of America as we know it is at risk,” Mr. Gore said in a speech to an energy conference here. “The future of human civilization is at stake.”
Mr. Gore called for the kind of concerted national effort that enabled Americans to walk on the moon 39 years ago this month, just eight years after President John F. Kennedy famously embraced that goal. He said the goal of producing all of the nation’s electricity from “renewable energy and truly clean, carbon-free sources” within 10 years is not some farfetched vision, although he said it would require fundamental changes in political thinking and personal expectations.
“This goal is achievable, affordable and transformative,” Mr. Gore said in his remarks at the conference. “It represents a challenge to all Americans, in every walk of life — to our political leaders, entrepreneurs, innovators, engineers, and to every citizen.”
Although Mr. Gore has made global warming and energy conservation his signature issues, winning a Nobel Prize for his efforts, his speech on Thursday argued that the reasons for renouncing fossil fuels go far beyond concern for the climate.
In it, he cited military-intelligence studies warning of “dangerous national security implications” tied to climate change, including the possibility of “hundreds of millions of climate refugees” causing instability around the world, and said the United States is dangerously vulnerable because of its reliance on foreign oil.
Doubtless aware that his remarks would be met with skepticism, or even ridicule, in some quarters, Mr. Gore insisted in his speech that the goal of carbon-free power is not only achievable but practical, and that businesses would embrace it once they saw that it made fundamental economic sense.
Mr. Gore said the most important policy change in the transformation would be taxes on carbon dioxide production, with an accompanying reduction in payroll taxes. “We should tax what we burn, not what we earn,” he said.
The former vice president said in his speech that he could not recall a worse confluence of problems facing the country: higher gasoline prices, jobs being “outsourced,” the home mortgage industry in turmoil. “Meanwhile, the war in Iraq continues, and now the war in Afghanistan appears to be getting worse,” he said.
By calling for new political leadership and speaking disdainfully of “defenders of the status quo,” Mr. Gore was hurling a dart at the man who defeated him for the presidency in 2000, George W. Bush. Critics of Mr. Bush say that his policies are too often colored by his background in the oil business.
A crucial shortcoming in the country’s political leadership is a failure to view interlocking problems as basically one problem that is “deeply ironic in its simplicity,” Mr. Gore said, namely “our dangerous over-reliance on carbon-based fuels.” “We’re borrowing money from China to buy oil from the Persian Gulf to burn it in ways that destroy the planet,” Mr. Gore said. “Every bit of that’s got to change.”
And it can change, he said, citing some scientists’ estimates that enough solar energy falls on the surface of the earth in 40 minutes to meet the world’s energy needs for a year, and that the winds that blow across the Midwest every day could meet the country’s daily electricity needs.
Senator Barack Obama of Illinois, the presumptive Democratic candidate for president, immediately praised Mr. Gore’s speech. “For decades, Al Gore has challenged the skeptics in Washington on climate change and awakened the conscience of a nation to the urgency of this threat,” Mr. Obama said.
A shift away from fossil fuels would make the United States a leader instead of a sometime rebel on energy and conservation issues worldwide, Mr. Gore said. Nor, he said, would the hard work of people who toil on oil rigs and deep in the earth be for naught. “We should guarantee good jobs in the fresh air and sunshine for any coal miner displaced by impacts on the coal industry,” he said by way of example. “Every single one of them.”
“Of course, there are those who will tell us that this can’t be done,” he conceded. “But even those who reap the profits of the carbon age have to recognize the inevitability of its demise. As one OPEC oil minister observed, ‘The Stone Age didn’t end because of a shortage of stones.’ ”
This is a gutsy speech. Trillions of dollars are at stake here. There are carbon based energy sources that are becoming viable as energy prices rise: in tar sands, shale etc. Gore is calling for a complete transformation in 10 years. The size and the scope of his call is absolutely TRANSFORMATIVE and breathtaking. I for one am sceptical. Can you truly within 10 years replace all carbon sources???? Show me the actual plan of how this can be done. If it can - HOLY COW - where do I sign up. Its an absolute no brainer.
Gore Calls for Carbon-Free Electric Power
By DAVID STOUT
WASHINGTON — Former Vice President Al Gore said on Thursday that Americans must abandon electricity generated by fossil fuels within a decade and rely on the sun, the winds and other environmentally friendly sources of power, or risk losing their national security as well as their creature comforts.
“The survival of the United States of America as we know it is at risk,” Mr. Gore said in a speech to an energy conference here. “The future of human civilization is at stake.”
Mr. Gore called for the kind of concerted national effort that enabled Americans to walk on the moon 39 years ago this month, just eight years after President John F. Kennedy famously embraced that goal. He said the goal of producing all of the nation’s electricity from “renewable energy and truly clean, carbon-free sources” within 10 years is not some farfetched vision, although he said it would require fundamental changes in political thinking and personal expectations.
“This goal is achievable, affordable and transformative,” Mr. Gore said in his remarks at the conference. “It represents a challenge to all Americans, in every walk of life — to our political leaders, entrepreneurs, innovators, engineers, and to every citizen.”
Although Mr. Gore has made global warming and energy conservation his signature issues, winning a Nobel Prize for his efforts, his speech on Thursday argued that the reasons for renouncing fossil fuels go far beyond concern for the climate.
In it, he cited military-intelligence studies warning of “dangerous national security implications” tied to climate change, including the possibility of “hundreds of millions of climate refugees” causing instability around the world, and said the United States is dangerously vulnerable because of its reliance on foreign oil.
Doubtless aware that his remarks would be met with skepticism, or even ridicule, in some quarters, Mr. Gore insisted in his speech that the goal of carbon-free power is not only achievable but practical, and that businesses would embrace it once they saw that it made fundamental economic sense.
Mr. Gore said the most important policy change in the transformation would be taxes on carbon dioxide production, with an accompanying reduction in payroll taxes. “We should tax what we burn, not what we earn,” he said.
The former vice president said in his speech that he could not recall a worse confluence of problems facing the country: higher gasoline prices, jobs being “outsourced,” the home mortgage industry in turmoil. “Meanwhile, the war in Iraq continues, and now the war in Afghanistan appears to be getting worse,” he said.
By calling for new political leadership and speaking disdainfully of “defenders of the status quo,” Mr. Gore was hurling a dart at the man who defeated him for the presidency in 2000, George W. Bush. Critics of Mr. Bush say that his policies are too often colored by his background in the oil business.
A crucial shortcoming in the country’s political leadership is a failure to view interlocking problems as basically one problem that is “deeply ironic in its simplicity,” Mr. Gore said, namely “our dangerous over-reliance on carbon-based fuels.” “We’re borrowing money from China to buy oil from the Persian Gulf to burn it in ways that destroy the planet,” Mr. Gore said. “Every bit of that’s got to change.”
And it can change, he said, citing some scientists’ estimates that enough solar energy falls on the surface of the earth in 40 minutes to meet the world’s energy needs for a year, and that the winds that blow across the Midwest every day could meet the country’s daily electricity needs.
Senator Barack Obama of Illinois, the presumptive Democratic candidate for president, immediately praised Mr. Gore’s speech. “For decades, Al Gore has challenged the skeptics in Washington on climate change and awakened the conscience of a nation to the urgency of this threat,” Mr. Obama said.
A shift away from fossil fuels would make the United States a leader instead of a sometime rebel on energy and conservation issues worldwide, Mr. Gore said. Nor, he said, would the hard work of people who toil on oil rigs and deep in the earth be for naught. “We should guarantee good jobs in the fresh air and sunshine for any coal miner displaced by impacts on the coal industry,” he said by way of example. “Every single one of them.”
“Of course, there are those who will tell us that this can’t be done,” he conceded. “But even those who reap the profits of the carbon age have to recognize the inevitability of its demise. As one OPEC oil minister observed, ‘The Stone Age didn’t end because of a shortage of stones.’ ”
This is a gutsy speech. Trillions of dollars are at stake here. There are carbon based energy sources that are becoming viable as energy prices rise: in tar sands, shale etc. Gore is calling for a complete transformation in 10 years. The size and the scope of his call is absolutely TRANSFORMATIVE and breathtaking. I for one am sceptical. Can you truly within 10 years replace all carbon sources???? Show me the actual plan of how this can be done. If it can - HOLY COW - where do I sign up. Its an absolute no brainer.
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