9 July 2008 – The Aleph Blog

Federal Reserve, Tend to Your Own House

Posted on 9 July 2008 by David Merkel

I am not in favor of the Federal Reserve as a greater regulator over the financial system.? Why?? They can’t even do their own job right, or use the tools that they have today effectively.

Is the stock market too frothy?? Let them adjust margin ratios.

Are they worried about the solvency of investment banks?? Let them increase the level of capital that needs to be held against investment banks.? Hedge fund worries?? Same drill.

There should be a bright line distinguishing the regulated from the non-regulated financial companies.? Capital requirements on loans from the regulated to the non-regulated shoul be very high, forcing the non-regulated entities to be mainly equity-financed.

Beyond that, the Federal Reserve has enough of a hard time with their existing mandate, balancing inflation, unemployment, and the health of the banks that they regulate.? Adding additional balls for them to juggle will make their paralysis greater.

Better we should consider giving the SEC some real teeth, and funding it appropriately to do it.? Let the next President put forth a good proposal to make it happen.

Another Hand in the Pocket of Investors — ADR Pass-through Fees

Posted on 9 July 200810 July 2008 by David Merkel

One thing that is different about me as a blogger — I not only write about the economy, but I am actively trying to apply my views through investing.? So, sometimes readers will get the micro-level aspects of investing.? This evening I got the unwelcome surprise of additional fees on some of my ADRs — It seems that the SEC has allowed for the passthrough of custody fees to shareholders.

Now, I know that there are implicit fees on sponsored ADRs, and both of the ADRs that I got hit with fees on are sponsored.? My question is this: did the banks sponsoring the ADRs give up their other fees in order to charge explicit fees to the shareholders?? I expect not.? I am considering writing to the companies whose shares I own, in order to get them to consider choosing another bank that will not charge fees to its ADR holders.

It is not just one bank — both BNY Mellon and JP Morgan took fees from me.? Particularly galling were the fees on SABESP, where since the dividend was taken in two parts, they took two equal fees, even though one dividend was tiny and the other big.

I don’t begrudge legitimate fees, but I really dislike fees that surprise me.? Consider this as you invest in ADRs, and contact the Investor Relations areas of those companies to choose banks that will not charge ADR holders.

Full disclosure: long SBS

Halftime for 2008

Posted on 9 July 2008 by David Merkel

Well, June was nothing great.? I was ahead of the indexes, but that doesn’t mean much in absolute terms.? For the year, I ended June ever so slightly negative.? Good in relative terms, but I aim for better.

July has been ugly for me — I am down considerably more than the market, but these things happen… energy is off, and though I am market weight, the names I own have considerable operating leverage.

While I was on vacation, I did the following trades: bought some International Rectifier, Smithfield Foods, and Officemax.? I enjoyed my time off, and disciplined my computer use to half and hour around lunch, and some time after the kids went to bed.

I am still working on my portfolios reshaping, and should have some trades by early next week.

Full disclosure: long IRF SFD OMX

General Motors = General Malaise

Posted on 9 July 2008 by David Merkel

I’ve never been a fan of General Motors [GM].? At RealMoney, I had somewhat more than 70 notes on GM across five years, though I stopped writing about it because I got bored of waiting for the disaster.? Oh, also, the market moved temporarily against my views, and I had better things to write about with the pains in depositary? and credit-sensitive financial stocks.

One of my basic rules is that heavily indebted corporations with bloated cost structures facing stronger competition are rarely good investments. How will the equity get dividends?? Who would buy the company out?

You can’t cut your way to greatness, particularly when there is high debt and high overhead costs.? Those costs need to be spread over a large volume of cars/trucks.? Cutting volume will not help much, except for cash flow in the short run.? In the long run, the accrual items will bite, whether pensions or other fixed obligations.

As Felix points out, bankruptcy may offer options.? That said, the surviving company would be much smaller and less significant to the US economy.? I also doubt that Chevrolet could be spun off without a fraudulent conveyance suit from the senior bondholders.

When I was a corporate bond manager, I sold all of my inherited GM exposure at significantly over par in 2001 (spreads were under 200 bp).? I did not want my clients to face the degradation of value from a mismanaged company.? Not owning GM and owning a tiny amount of Ford debt was a big bet relative to the indexes, but it was one that paid off.

My advice remains the same.? Underweight GM and Ford, both equity and debt.? It may take a while, but eventually the overindebted companies with high fixed costs will be outcompeted by their Japanese rivals.