Reform Fannie!

Larry Summers says that mortgage giants Fannie and Freddie are feeding off the public trough. He has a good point: some changes are needed.

Fannie and Freddie buy up mortgages, pool them, and issue securities that pay in line with the mortgages. The implicit backing of the Fed is critical to them.  Banks and others buy almost all the “Agency” bonds they want. This keeps the mortgage rates low.

Without the government’s approval, Fannie and Freddie are just more players in the financial markets. Most mortgage rates would rise. And that wouldn’t be good for anyone.

But there’s a catch. If the agencies mess up, we’re on the hook. Summers therefore thinks that dividends should be suspended and other shareholder perks should go away. Maybe that’s a little draconian. But why not treat them like any other regulated monopoly? Monitor their returns, and evaluate their business practices. Limit them, like we do utilities. But also guarantee a return.

No question, things have to change. But destroying shareholder rights is not where we want to go.


Douglas R. Tengdin, CFA
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“Pimp your Whopper”

Burger King is trying to jazz up it’s image. They’re betting that a hip-hop style will jump-start results.

The Miami-based company has unveiled plans to build “Whopper Bars,” similar to McDonald’s McCafe coffee bars. Only these are built around the chain’s signature sandwich. Featuring chrome, wood, and plasma-screened TVs with flames on them, the restaurant will build up to 10 types of Whoppers in front of the customer with “theater and panache” according to company spokesmen.

Gee, like—Subway? Or the Chinese food joint at the airport? No offense, but fast-food workers usually aren’t the best “presentation artists.” I go to a Burger joint for food, not theater. The key to chain performance is operators and location. Having the “Angry Whopper” or “Pimp your Whopper” doesn’t seem to cut it..


Douglas R. Tengdin, CFA
Chief Investment Officer
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A Bear Too Far

If everyone is entitled to only one truly brilliant insight during his or her career, the New York Fed‘s President Tim Geithner may be pushing his luck.

Geithner is a career civil-servant who took over at the New York Fed in 2003. A few years ago he made banks standardize their credit default swaps. The result was spectacular. The growth of these swaps has allowed banks to diversify, selling their risk to parties who want it, like hedge funds or others.

Some say that the Fed’s arranged takeover of Bear Stearns was Geithner’s idea. Unlike standardizing swap language, it’s pretty controversial. For example, it encourages investors to relax when they do business with a big dealer. After all, if the Fed is the backstop, why worry?

Tim’s rise has been meteoric. The 46-year old Asian Studies major is now one of the Masters of the Universe. Here’s hoping that his big Bear deal doesn’t prove to be a bridge too far.


Douglas R. Tengdin, CFA
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Home Sweet Savings

Today we hear about the savings rate. Actually, what we hear about is the growth in personal income and personal consumption. The difference is assumed to be savings. And a whole host of scolds will tell us that we’re just not saving enough.

Earlier I mentioned how the “Great Moderation” has improved our economic security. Another factor in the low savings rate in the US is the high rate of homeownership here.

By convention, my entire mortgage payment is considered to be spending, even though a large portion of that payment may go to pay the loan’s principal. As ownership has risen in the US, more and more people are building equity in their homes. But this trend isn’t captured.

I don’t want to bore you with the numbers. But it’s curious that countries where more people rent their residences have higher savings rates. While real estate may no longer be considered a fool-proof investment, it should still count for something. The scolds just don’t seem to get that.


Douglas R. Tengdin, CFA
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Hold the Hysteria

Paul Samuelson says to hold the hysteria, and for once, I agree with him.

Samuelson is famous for saying that just because Milton Friedman claimed something doesn’t mean it is automatically false. While I usually find Friedman’s writings much more original and insightful than Samuelson, in this case, they agree.

The core of our problem is housing. People who view the economy as inherently unstable see lower prices leading to more foreclosures leading to more supply leading to more foreclosures. Just as in the depression, the resulting vicious cycle will spread the slump through the economy.

By contrast, Samuelson notes that if lower prices bring more buyers to the market, as appeared to happen last month, then the cycle will be self-correcting. So far, the correction in housing has been unexceptional. If disaster strikes, it will probably come from some source we haven’t yet imagined. I’m betting that it isn’t so different this time.


Douglas R. Tengdin, CFA
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National Savings, National Shame?

Friday we’re going to hear about the savings rate. And a whole host of economic scolds will berate the US consumer for his profligate ways.

It’s no secret that the savings rate has declined. 25 years ago US workers set aside over 10% of their reported income. Now the rate is about zero—or even negative.

Many observers look at this and only see the wastefulness of the American public. “Goodness,” they exhort. “People should be more careful.”

I look at it another way. People tend to save money when they are uncertain about the future. The savings rate was pretty high from  World War 2 until the early ‘80s, when Paul Volker began to slay the inflation dragon. Since then, during what economists call the Great Moderation, the savings rate has been falling.

By this view, the low savings rate is not a sign of national weakness. Rather, it is an indicator of economic security.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Modern Cassandras?

They’re back. Those disciples of the dismal science, the neo-Malthusians, are knocking on our door. And they won’t go away.

Thomas Mathus was an 18th-century economist who predicted widespread starvation because food production can’t keep pace with population growth.  He was wrong then, and his disciples, who keep banging the same drum, are wrong now.

Because speculators have recently driven the prices of oil, gold, copper, zinc, and other resources to record levels, the “Limits to Growth” crowd predicts that wars, famines, and economic disasters will result. They needn’t worry. The input Malthus failed to consider was human intelligence. As prices rise, ingenious and enterprising people adapt to higher prices by developing substitutes or using the materials more effectively. There’s no reason to think that the current resource crunch is any different.

The neo-Malthusians are often called modern-day Cassandras because, like the Trojan princess, they are always predicting disaster. But the difference is this: Cassandra’s prophecies, although not followed, were accurate. The neo-Malthusians have yet to get one right.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Housing Water Torture

Today we hear more about the housing market. I don’t know about you, but these housing reports are beginning to wear on me. They’re like the drip, drip, drip of a leaky faucet.

Well, today we hear how existing home sales did for the month of February. I’ve got a prediction: they were lousy. Not only is the housing market in the worst recession it has seen since the early ‘90s—and  it’s been that way since late 2006—but the weather was lousy, too. Then you multiply these effects by all the “seasonal adjustment factors” that the government uses to get an annualized number, and February’s number will look terrible.

This is a theme I’ve hit on for a while: housing numbers issued in the dead of winter don’t really mean much. All they say is what we already know. Housing has pulled back.

The one silver lining in this cloud is the stocks of homebuilders. Call it foolish optimism, or bad money chasing good, but the stocks of these companies hit at least a temporary bottom a couple of months ago, and are up almost 50% from their lows. That’s real people putting real money to work. And I’d be surprised if it doesn’t indicate some real activity out there.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Strong Hand (Part 2)

So how do you strengthen your hand? How do you develop the convictions that will help you weather the storms of market turmoil like we’re experiencing now?

Strange as it may seem, the best ally I’ve ever had in dealing with market volatility has been my kitchen table. Sitting down and working through my numbers, from how much I’m making and saving to how much my kids’ tuition is going to be is the best way to come up with a plan for investing. And the best place to work through those numbers had been my kitchen table.

For one thing, spreading out my papers there means I have to talk about them with my family. For another, having the papers where we’ve got to sit down and eat means a.) there’s going to be an end to this; and b.) fighting should be limited to words alone. No throwing food!

It’s been said that people never plan to fail, but they often fail to plan. By planning around the kitchen table, failure is just not palatable.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Strong Hand

Winnowing. That’s what the market is doing now. It’s winnowing out the weak players, and rewarding those who are disciplined enough — or bored enough — to avoid panicking just as the market bottoms.

It’s a paradoxical fact, but it’s true: people who fidget and adjust their investment portfolios tend to do worse than the buy-and-hold investor. Studies have shown that just looking at a portfolio too often causes investors to adjust it and underperform the underlying index.

The dictionary defines winnowing as separating the stronger elements from the weaker. In this period of high market volatility, the best thing a lot of investors can do is go take a nap.


Douglas R. Tengdin, CFA
Chief Investment Officer
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