1. Goldman Sachs’ Code and the Elephant In the Room, Ethan S. Burger and Kenneth Gray. This article details the alleged theft of trading software code from Goldman Sachs, its possible implications and what policymakers and firms could do to solve the problem.

2. Net Neutrality, Two More Words You Can Never Say On Television, Kenneth Gray. The FCC detailed its plans for net neutrality regulations on the internet and for wireless. This piece suggests an alternative that would solve many of the problems the net neutrality debate reveals while bringing U.S. network infrastructure back to its world leading position.

GlobalFinance.Net Blog hopes you enjoy the articles. Please head over to RGE, read the articles and participate in the discussion.

The Obama Administration announced that the Group of 20 (G-20) Summit scheduled for September, 2009 will take place in Pittsubrgh, Pennsylvania. Your author grew up in Pittsburgh, so the location is interesting for a number of reasons.

Random choice, or does Pittsburgh send a message?

Does the choice of Pittsburgh signal a U.S. turn to focus on manufacturing and industry as a path for economic revival? Pittsburgh was once one of the world’s industrial capitals and even today sits atop the largest coal seam on the planet. But modern day Pittsburgh’s largest industry is healthcare (with education and IT slightly behind). Will the G-20 be a showcase for how these new industries can replace the old?

The Wall Street Journal’s Bob Davis answers part of the question:

The decision to convene the leaders of the Group of 20 countries in the U.S. this fall around the time that heads of government gather at the United Nations in New York presented U.S. officials with a delicate decision: How to gather the 20 leaders in a way that didn’t insult those from countries that aren’t included.

Yinz is Triple yoi wrong! With all due respect, Pittsburgh’s symbolism stands for exactly what the world economy needs.

(… more commentary after the jump)

To suggest that Pittsburgh was picked because it is an Appilachian country town that won’t offend leaders who are not in the G-20 bears ignorance of what Pittsburgh went through and where the city is going. (Did the WSJ really just say that nobody would miss Pittsburgh?)

A Study in Survival, and Revival

Pittsburgh was left dead and dying by the Reagan policies of the 1980s. The population of the city in the 1950s was over 600,000 people, today that population is under 300,000. Many, like this author, emigrated to economically better areas. But for a city not beset by war or natural disaster, losing over 50% of the population is nothing short of an astounding collapse.

With America’s domestic industry written-off for dead in the 1980s, Pittsburgh embarked on an ambitious project to transform itself from a steel and coal town to a medicine and tech town. The city now boasts some of the world’s premier medical facilities and its medical personnel like Dr. Thomas Starzl (father of modern organ transplantation) and Jonas Salk (inventor of the polio vaccine) are only a few of a rich scientific heratige the city can lay claim to.

As the world continues to suffer from the economic crisis, Pittsburgh is a model of how we can change from non-working economic models to new paridigms. The former steel town is now a green city with a vibrant arts community, premier medical facilities, leading technology, and now – a truly international profile.

We will have more here on both the G-20 and Pittsburgh as the summit draws closer. Below are some links to other relevant articles covering the announcement:

• BBC News, US to host next G20 world meeting
• Pittsburgh Business Times, G-20 Summit Coming to Pittsburgh in November

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We made this chart as part of an upcoming article we plan to publish about the financial crisis in Russia and what the government has been doing to solve it. However, we thought that our readers might enjoy seeing an interesting chart of Russia before the article comes out.

You can find more data on the RTS (in English) at http://www.rts.ru/en/, though the Russian pages are more up to date. The Russian pages are at http://www.rts.ru/.

The picture on the top-left is the Church on Blood of All Saints Resplendent in the Russian Land. The Church sits on what was once Ipatiev House, where Tsar Nicholas and his family were held hostage and executed by the Bolsheviks in 1918. I’m not trying to say something bad about the markets here, but I thought is was more intetesting that all of the usual Kremlin pictures.

To view the RTS chart on our pages, visit this link or go to the charts page. The chart is also below, please click on it for a larger version:

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You can find our charts page at: globalfinance.net/charts.

Here are the charts we have updated on the page so far:

Dow Jones 1900-2009. A chart of the Dow Jones Industrial Average from 1900 to the present day (2009).

Four Presidents and the Dow. A chart comparing the Dow Jones Industrial Average performance during the first year of the administrations of Presidents Franklin D. Roosevelt, Ronald Reagan, Bill Clinton and Barack Obama.

Obama’s Approval and the Dow. This chart compares President Obama’s approval rating data from Rasmussen Polls and the change in the Dow Jones Industrial Average.

We will update the charts on both the charts page and here in the blog, though the blog will contain our analytical and background posts (the charts page is just a link for those who want only charts). We hope you find this useful!

For anyone who remembers the talking-to John Stewart gave to now-defunct CNN gabfest Crossfire and its hosts Paul Begala and Tucker Carlson, the CNBC crew should be thinking about cleaning up its act or suffering the a similar fate. Crossfire is no more, Begala and Carlson have done no more than make cameo appearances as “commentators” on others’ political talk shows and CNN still lacks a headline political debate program to replace Crossfire’s former glory. CNBC’s bad calls, failure to do real journalism at times, growing competition from Bloomberg TV and Fox Business and the fact that they are owned by GE (whose stock price slips day by day) does not portend anything good. John Stewart may just be a comic, but comedy is also social commentary. Go ask Tucker or Paul!

The market close March 2 was not good. Perhaps the only faint glimmer of hope was that the S&P 500 index managed to hold above the important 700 level (though it barely held there). The Dow closed at 6763.29, making it feel like 1997 all over again.

The purpose of this post is to update our usual Dow 1900-2009 charts and our shorter-term arithmetic chart for 1997-2009. Our discussion of the market is coming, but what is haunting us right now is our post from back in November 2008:

Dow 4000?

We need to look at the 1900-2008 chart to see the magnitude of the situation we are in. We will not attempt to discuss what got us here right now (debt, federal reserve, innovation, …), the fact is, we are here. Most of the large gain in the Dow is the 4000-14000 run from 1995 to 2007.

Only two more years backward to go before we reach 1995. One other observation with today’s charts is that the bull-runs of 1999-2002 and 2005-2008 appear to form a double top at the very peak of a much larger wave. In technical analysis (and I don’t put that much weight in technical analysis), this is a sign that things are about to fall.

(More on the Dow’s decline, the double-top and the charts after the jump…)

Double top visible for the decade of 1999-2008

A double-top pattern can be seen in the 1900-2009 chart from 1999-2008. This double-top forms at the end of a bull run that got its start right after the 1987 market crash (the ‘87 crash is barely visible on the chart):

The arithmetic chart of 1997-2009 shows the damage report for the day:

Perhaps the market will decide it has seen enough.

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The news media has been pushing  an attack on the Obama administration connecting the severe decline in the markets. Barry Ritholtz covers the alleged paid revolt started by Rick Santelli at CNBC, but the negative coverage from the MSM begs a larger question – does Obama need to start worrying about the markets?

In short, any political consultant getting a daily poll for the President would probably advise a gradualist course of action. The reason is Mr. Obama’s high approval ratings and low disapproval numbers. As to the opposition, well, the Republicans have proven themselves good at self-destruction.

But those approval/disapproval metrics may be changing is a way that should worry the pols in Washington, and there is a clear correlation with the Dow Jones.

(Charts and discussion after the jump…)

Bad times cause deep division

We plotted a chart of Obama’s approval and disapproval number since the election on November 20 alongside the Dow Jones. the chart is below with some discussion:

Our chart data comes from Rasmussen polling data conducted since November 20. We have edited the data points so that the poll and the Dow match day by day (polls were taken on some days the market was closed and the polls took a holiday on some trading days). Also, we should caution that each pollster has political biases, in this case Rasmussen is conservative, but the data would be useful to a Democratic White House interested in keeping away political problems. Finally, keep in mind that this is just a simple graph, correlation does not imply causation!

What is apparent from the chart is that as the Dow sinks and develops a down-trend, Obama’s poll number become subject to a pincer effect. That is, we see the red state vs blue state phenomenon crop up again. A majority of those polled still support Obama, but opposition starts to rise. This may not seem critical if one looks only at approval numbers, but it becomes important if that approval number drops in to the 50% range, having a large, vocal opposition in a time of crisis is not a good thing. Unfortunately, that is the picture that is forming on the chart.

Update to historical performance vs FDR, Reagan and Clinton

The four presidents chart is also starting to look bad. While we noted that FDR started with a market downturn (and obviously very, very severe economic problems), his quick action managed to turn the markets and result in a large gain for his first year as President. Here is the chart as it stands now:

Obama has also started with a downturn, but it will take immediate action and more work to get his numbers to be competitive with FDR. Not impossible, but difficult. I think I am with Paul Krugman on this one, each 2-4% down day on the market, I get more and more in to despair.

(Presidential photo from whitehouse.gov)

Update: More on the Santelli affair at Barry Ritholtz’ blog The Big Picture.

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Major media notices the decline

The attacks on Obama’s Dow Jones average started in earnest from conservative blogger Michelle Malkin attributed Obama’s Dow performance back to November 2008 making this week a “2000 point tumble”.

While it wasn’t a criticism of the Administration’s stock market average, CNBC host Rick Santelli led a self-proclaimed “revolt” against the Obama housing plan from the floor of the Chicago Board of Trade. A clip of Santelli’s revolt can be seen on CNBC or YouTube.

(Chart comparing the Dow under Obama, FDR, Reagan and Clinton after the jump…)

But is it that bad, yet?

The Obama Dow Jones slide has not become a collapse, yet. Relative to other Presidents, Obama is still within 10% of initial performance. Also, we have not been through the first year, so unless Obama clearly puts the market on a downward trajectory with no hope for a rebound in sight, it is not certain that he will be any worse than Reagan’s first year (a market performance of worse than 11%).

But, there are always two sides to every trade, so it can always get worse. To show the increasing bearishness of Obama’s Dow performance, here is the updated chart of the Four Presidents (Obama, FDR, Reagan and Clinton) Dow Performance in their first year in office:

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Without much more text, follow the jump below for the Dow charts to close out this otherwise bad week on the markets…

The first chart is one we like to show to keep things in perspective. It is the chart going back to 1900. We’ve updated it to today and we can see some drop-off at the end as the correction of 2009 takes hold:

The next chart is from 1997 to 2009. This is relevant as the market broke through lows today not seen since 1997. We can see the correction on the chart below:

Keep in mind that the 1997-2009 chart is an arithmetic chart, not a logarithmic chart so there is some distortion in the price movements. But, for illustrative purposes it makes the point that we are back where we were 12 years ago.

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This is an interesting chart we have been meaning to put up on the site for some time. The chart tracks the price of oil (West Texas Intermediate) denominated in ounces of gold (price determined on the NY Commodities Exchanges). Our chart data reached back to 1900, so it is interesting to see the swings in the oil market without the noise from dollar exchange rate fluctuations.

(The charts and some analysis after the jump . . . )

First we produced a chart of oil priced in ounces of gold. The chart appears below:

The data in the chart is monthly before 1982. What we can see from the chart is that pricing oil in gold (as opposed to “fiat” currencies) does little to save from commodity price volatility. This is for two reasons. First, we see spikes around oil shortages. No matter what we price oil in be it dollars, gold, or heads of cattle, oil will be expensive when supply tightens or demand increases. Second, the oil price in gold decreases when the price of gold increases relative to other assets. This happened in the 1980s gold spike and it is happening today as gold strengthens relative to world currencies.

The next chart is a simple price chart showing both gold and oil in US dollar terms from 1900. It draws on the same data for the above chart. Keep in mind that it does not adjust for inflation or return, so price moves (and the price rises towards recent times) look exaggerated. Here is the chart:

The chart does give some picture as to how volatile the prices for both commodities have been over the past century (and especially in recent decades). However, we should look at this chart alongside the first chart to recognize that blending commodity risk (backing the dollar with gold) would actually increase volatility, not decrease it.

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Effect on the DJIA

Both Citigroup and Bank of America are components of the Dow Jones Industrial Average (DJIA). The Dow is a price-weighted index comprised of 30 major corporate stocks (the term “industrial” is a bit of an anachronism). Based on the methodology Dow Jones & Company, Inc. uses to calculate the average, removing the two stocks would have little impact.

(More with a full Dow weighting table, Citibank, Bank of America and others after the jump . . . )

The table below shows the weightings of the Dow 30 stocks in the index as of February 20, 2009 at 11:00am EST:

The market’s “problem child” companies, General Motors, Citigroup and Bank of America, are the least weighted stocks in the Dow. Were any or all of the three to go to zero, they would have a minimal immediate impact on the index. Behold the predictive power of Charles Dow, the pain in the market from these companies has already been inflicted!

There is, of course, a flip side to potential impact that a GM bankruptcy or bank nationalization would have. The feedback in to the general economy would, of course, effect other companies (such as Exxon selling less gas or JP Morgan coming under pressure) and that would have a larger impact on the Dow. So, for now, Dow’s methodology may vindicate buy the rumor, sell the news, but if the news tomorrow is even worse . . .

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Remember Iridium, the satellite phone that was supposed to bring global phone connectivity with a $10,000 handset for $10 per minute, provided you were calling from outdoors from an open location? It went bankrupt, taking $7 billion in investor capital with it.

To avoid the spectacle of de-orbiting, basically crashing and burning some 70-odd satellites in the atmosphere with unknown consequences (and wrecking a very expensive and good service for things like emergency response and military), the company was revived by private equity for a mere $25 million. The service still requires users to be in the line of sight of a satellite, but prices are lower, only $1-2 per minute for a phone call and it still works anywhere in the world, well almost anywhere until now . . .

It seems that yesterday gave us a small, albeit exciting preview of what that de-orbiting might have been like. An Iridium satellite crashed in to a non-functioning Russian satellite in low earth orbit. No service outages, injuries or any earth visible effects are reported. Iridium satellites are known for Iridium flares (reflections of the sun from their solar panels as they orbit), bit there are no fireworks from this incident. Perhaps an enterprising personal injury lawyer is on his or her way to Tempe, Arizona to pitch a lawsuit idea to the Iridium people as we speak?

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A lot has been made in the conservative press of President Obama’s reportedly “failed” administration. More noise has been made by progressives in a similar, though more helpful vein. Both sides point to Tuesday’s nearly 5% drop in the Dow Jones after Treasury Secretary Tim Geithner’s brief introduction to the bank rescue program. But after less than 20 trading days on the job, has Obama really failed to do the job? What about the track record of other Presidents who inherited difficult economic circumstances? Our chart for this week is a comparison of the Dow in the first year of the administrations of Franklin Delano Roosevelt (FDR),  Ronald Reagan, Bill Clinton and the first 17 trading days of Barack Obama. You’ll be surprised to see who was really the market guru.

Four Presidents, four scenarios, four outcomes?

Of our selection of four Presidents (at least since the 1920s), only FDR and Obama inherited a grave economic crisis. Reagan inherited a growing set of economic problems that would increase later in his term, while Clinton inherited what those of us living through the current crisis would consider to be quite mild.

Here is how the Dow reacted for the first year in office for each president (the trading days are logarithmically compressed at the end so that the early trading days, where there is actually data for Obama, are easier to discern):

(More of the story below the jump . . . )

Presidents by the numbers

The table below shows the performance for each of the selected presidents:

The best performer his first year on the job was FDR, though because of the extraordinary circumstances of the time, FDR’s performance is at once an anomaly and absolutely amazing. Of our group, the most consistent first-year performer was Bill Clinton, scoring an initial good market reception and a good first year number. Reagan comes in last, though much of his performance is due to a double-whammy of inheriting a bad economic situation and solving it by extending some painful changes.

Obama’s performance is, of course, unknown, but to say that he is somehow “failed” or that the market has turned against him is wholly inaccurate. If we look at FDR’s early days, the market clearly gave a no confidence vote, but at the end of one year, a the market was obviously happy about something. Under Obama’s first 17 trading days the Dow is where it was on January 20 in geometric terms and looking at the numbers, Obama is actually better off than some of our “historic” Presidents.

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“All the news that fits, we print!”

This is the news summary from mainstream media sources (MSM), blogs, financial professionals and our analysis. We provide this to give you a short overview of what is happening in the world based on some of this blog’s themes (international finance, charts, markets, and so on). Please comment so we can improve our selection to make this section useful.

Global summary

Markets delivered a Bronx cheer to Treasury Secretary Geithner’s bank bailout proposal. European markets closed before the speech, but here was the reaction in the US:

The Dow was off around 4.5% by 2:30pm EST. Leading the losses were financials with Citi (C) off 13% and Bank of America (BAC) off 18%. The London FTSE sold off just before its close (and just before the speech), it ended down 2.2%, Hong Kong closed even.

Oil continued its march down as well with crude futures at $38/bbl. This is probably in expectation of continued economic problems and dashed hopes of recovery.

(More news after the jump)

Politics

• About the only news was US Treasury Secretary Tim Geithner’s press conference announcing the long-awaited bank bailout. The announcement and web site are at www.financialstability.gov. Here’s a roundup of the (mostly bad) reactions:

• • naked capitalism – Geithner Bank Bailout Plan Fiasco
  • US News – Toxic Assets Toxic to Geithner
  • Clusterstock – Will Geithner’s Weak Speech Spur Another Panic?
  • Our reaction to the speech was to ask a lot of questions. Here is what we wrote, awaiting a longer post on the private equity component (or at least our thoughts since the “plan” didn’t have much in it).

International Markets

• Russia may experiment with a bad bank program, or at least letting its banks manage impaired assets with government assistance. The Russian government is also attempting to stimulate its economy and domestic production by subsidizing auto loans. Russia’s stock market was up 6% earlier today, the rouble does appear to have stabilized against the dollar, though it is still at a historic low of around 36.

From the Blogosphere

• Nouriel Roubini writes “The Anglo-Saxon Model has Failed” in concluding that our model of financial regulation is no longer viable. Roubini’s piece is a list of answers from readers [free registration required].

I finished watching Secretary Geithner’s press conference on the bank rescue package. Much of the information can or will be found on www.financialstability.gov. My initial reaction was to write a post on the private equity portion of the bank rescue, that is the Treasury’s plan to use government guaranty funds to mobilize private capital. That post will take some time to write as I want to explain the history of the concept, the pluses, the minuses and a proposed structure. What I did realize over the past hour was that this administration has a Herculean task ahead of it, setting up such a fund (and this is only one part of the plan) will not be easy, nor will it be assured of success. Here is my initial take:

Who is private equity?

To show just how far behind Secretary Geithner is in planning this phase of the rescue, he did not define what private equity is. The largest definition is that it is investment in any instrument that is not traded publically, though many private equity funds may have mixed portfolios of public shares and private investments. The definition is important because different PE players have different skill sets, a hedge fund is different from an LBO shop, which is different from venture capital which is different from a fund of funds. So what are these bank assets and who buys them?

(The when, what, why, how and some existing US Government private equity programs after the jump . . . )

When will the structure, deal and terms be announced?

Established PE deals (venture, buyout, hedge, …) can be set up in a matter of days or weeks, but more complex deals and funds, such as those involving the government, usually take many months. The Obama administration may have been working on this plan since last summer, even so, final terms will take a long time to put in place. I think the market’s negative reaction was in part due to the realization that any distressed asset fund will not be in place for a while. However, where information is key, a timeline would be helpful.

What will this really cost?

The information sheet put out by Treasury stated a fund size of $500-$1,000 billion (that’s up to one trillion). But is that figure total fund size or simply government contribution.? Is the government contribution in the form of investment guarantees, direct loans or equity? To really be a government accounting nerd, is the government size the whole government commitment or is it simply the amount of government subsidy (in other words, the commitment is much larger)? Does the government actually expect this to be profitable?

Any good fund plan needs to have a business plan with targets, goals and benchmarks. There should be a transparent manager selection process and clear asset valuation process. We should wait for the plan to roll out, but again, absent this information, it is impossible to judge.

Why is PE the best alternative?

The original TARP was supposed to be able to purchase bad assets, until it wasn’t (it was supposed to recapitalize the banks). We heard a great deal about the good bank-bad bank plan that would accomplish removal of impaired assets. Of course, there is the simple solution of just writing these assets down and closing/restructuring the banks that are insolvent die to write-downs. Why are those options worse than trying to raise a PE fund?

How will this be executed?

What is the guarantee that PE money will buy in to these funds and assets. A number of PE groups will not participate in government funds because of government disclosure and other contractual requirements. Will the government waive those requirements or are those pools of capital off the table? Do the funds have to be majority US owned (can Dubai buy up everything)?

If the government has to use a high amount of leverage to attract capital (in other words, Treasury has to guaranty a large portion of investment), isn’t this just shifting our current problem from the private sector on to the taxpayer while giving PE funds a shot at making a profit? If PE can’t get high leverage, will they come? Just because you build it . . .

Conclusion

I was impressed that the Obama administration and Secretary Geithner would be this innovative. The positive is that they are using new, big, bold solutions to fix the financial crisis. What worries me is that these plans are not developed or thought out. Having managed 35+ such public-private funds myself, I can say from experience that it is not as easy as it looks and there are no guarantees. Anyway, there are some US Government examples where this has been done and I hope President Obama and Secretary Geithner are busy seconding employees from these programs to Treasury this afternoon.

SBA’s SBIC Program (the first public-private private equity program in the US)

OPIC’s Investment Funds Program

CIA’s In-Q-Tel venture capital program

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