Issue of the Week

Though not precisely an issue for this week so much as for the next several weeks to come, the imminent culmination of the Fed’s QE2 has more than a few people concerned. Just to set the stage, if QE2 was so crucial to the survival of the human species last October when it was proposed, why is it not so after June 30? Do we not want to leap right into a QE3 if for no other reason than to postpone the end of civilization as we know it? Are we to believe that with the Fed’s retirement from actively supporting Treasury bond prices by being a committed buyer at almost any price will Treasury bond prices now come off the rails? These are not trivial questions, or so they seem. (Okay, that’s a little sarcastic for everyday comment, but it is really hard to take the subject all that seriously. Western Civilization as we know it was never going to cease, just because of a little economic misstep.)

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We were speaking with one of our many advisors last week and the conversation turned to the fears that permeate the market these days. We are supposed to worry about the budget deficit, the trade deficit, global warming, financial instability, inflation, the social safety net and all sorts of general problems facing Americans and a similar set of concerns for most folks around the world. Yet, we made new recovery highs last week. There are lots of well-known pundits telling anyone who will listen that the market is either fully valued or overvalued. Yet, we made new recovery highs last week. Read more

 Now, we are looking at a world where the Treasury isn’t AAA/Aaa anymore and things don’t look all that good. Standard and Poor’s have decided today to cry wolf on the US debt situation by changing the outlook for US debt from stable to negative. Well duh!

The situation hasn’t materially changed in the last several months as we continue to print money as fast as possible and turn the Fed into the government’s lender of last resort. So why today? Maybe it just took S&P that long to finish the report or screw up their courage enough to take the whack they are going to take from the Treasury for stirring up controversy? Maybe this is a response to the debate on the debt ceiling or to the budget (see below). Read more

 In recent weeks, government discussions have (again) picked up concerning how to prevent a repeat of the recent mortgage crisis.  The problem is multi-faceted, but all begins in the loan origination process, which eventually turns to the heart of how and to whom business is incented during that process.  Intertwined in that discussion is what to do with Fannie Mae and Freddie Mac—the government-sponsored mortgage securitization entities now in conservatorship and effectively owned by the American public.  According to recent statistics, approximately 90% of the U.S. residential mortgage market is currently backed by the government in some fashion.  Read more

A Favorite Story

We are going to reprise one of our favorite stories for you this week, a story of good intentions and all the ill that can befall people with good intentions. It is the tale of the Parachuting Cats of Borneo.

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When you hear pundits say this or that, most pundits are wrong most of the time, especially those that call for extraordinary action. In the long run, stock markets go up because the fundamentals of the companies tend to get better. The product gets improved, the quality gets improved, the quantity gets improved, and ultimately the company gets improved. Sure, some companies are in their death throes, but there are more companies that are in the growth part of their life cycles. On balance this works out. We are not contingent on the world being a happy place as investors. Read more