Thanks Carl Levin

May 29, 2010

Bloomberg is reporting that the Treasury is looking to pick a lead banker to sell GM back to the public out of conservatorship.  Wonder how the conversations are going around considering Goldman as advisor to sell GM and simultaneously hanging them for allegations of fraud.  Would have been smarter to have waited until they sold all their private assets before the US Government went on a rampage to persecute the folks affecting the transactions.  Goldman was probably one of the best suited to value a transaction of this nature.  I imagine hiring them would be riddled with too many conflicts and public backlash.  Then again, why would we expect the government to have any business acumen. What a boondoggle.  I suppose this would help drive the urgency for a settlement from the government’s point of view.  The full article is pasted below.

Treasury Said to Pick Lead Bank for GM IPO as Soon as Next Week

By Serena Saitto and David Welch

May 29 (Bloomberg) — The U.S. Treasury and General Motors Co. may choose a lead underwriter for the automaker’s initial public offering as soon as next week, two people familiar with the matter said yesterday.

GM, 61 percent owned by the U.S., must decide soon on an underwriter in order to sell shares publicly by the fourth quarter, said the people, who asked not to be identified revealing private information. The Treasury, which helped pay for the automaker’s restructuring last year, probably will have more say than the automaker in the selection, the people said.

Chief Executive Officer Ed Whitacre, appointed chairman when GM emerged from bankruptcy in July, has said the automaker may sell shares to the public as early as this year. GM needs to begin shortly to sell stock before the Nov. 2 congressional elections, said Joe Phillippi, president of AutoTrends Consulting in Short Hills, New Jersey.

“If they want to get it done in the fourth quarter, they have to start now,” he said yesterday in an interview. “This isn’t some little tech company. It’s a big story. This will be a global road show.”

Randy Arickx, a GM spokesman, said yesterday that he wasn’t aware of any imminent decision. Andrew Williams, a spokesman at the Treasury Department, didn’t return telephone calls or an e- mail request seeking comment yesterday before the Memorial Day holiday weekend.

GM and Treasury officials met with senior executives from Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley this month in Washington about hiring a lead underwriter, said one of the people.

Strategy Questions

Banks were asked questions on their strategy for the IPO, including how much stock they recommend selling, how much GM may be worth and what obstacles may emerge along the way, one of the people said.

Whitacre wants to secure an automotive lending unit before a public offering in the fourth quarter, people familiar with the plan have said. Detroit-based GM hasn’t had such a subsidiary since former CEO Rick Wagoner sold 51% of GMAC to private-equity firm Cerberus Capital Management LP in 2006.

Whitacre was installed as chairman by President Barack Obama’s automotive task force when it replaced more than half of the directors in July.

Choosing a lead underwriter in the next week or two would allow GM to file an S-1 initial registration form by July and sell shares in October or early November, one of the people said.

Treasury Stake

The Treasury has hired Lazard Ltd. for $500,000 a month to advise on selling its stake, according to a document on the Treasury’s website. The Treasury Department has about $40 billion of its $50 billion investment in GM tied up in the company’s equity.

Ron Bloom, who took over as chief of the U.S. autos task force after Steven Rattner stepped down last year, is a former Lazard vice president.

GM Chief Financial Officer Chris Liddell said May 17 the automaker’s $865 million first-quarter net profit, the first since 2007, was a “good, useful step” on the way to an initial public offering that may come this year.

He also said at the time that it wouldn’t be necessary to have an automotive financing unit before going public.

GM management has been preparing for an IPO so they will be ready whenever the timing is right, said a GM executive who asked not to be identified discussing internal matters.

To contact the reporters on this story: David Welch in Southfield, Michigan, at; Serena Saitto in New York at

Last Updated: May 29, 2010 00:01 EDT (


A Case for Bonds

May 29, 2010

I stumbled on this the other day looking for research on the inflation adjusted (real) return on the market over longer periods of time, up to and including recent times.  I found this page from Mathematics Professor Krzysztof Burdzy of the University of Washington to be of interest.  I am reposting it in case it were ever removed, but am providing a link to the original page here.  All text and images below are from the original site. (

Free Financial Advice

Are you fortunate to be a young person planning to retire in 30 years? All financial advisers will tell you to invest in the stock market now and enjoy wealth when you retire. Here is a simple and rough estimate of your future fortune.

Consider the Dow-Jones Industrial Index data from 1928-2008 (annual averages), and put them on the logarithmic scale (see Figure 1). Perform linear regression on these data and find the 95% confidence interval in 2038. See the regression line and the endpoints of the confidence interval in Figure 1.

If you invest 10,000 dollars now, you will have between 27,000 dollars and 131,000 dollars in 2038. The return on your investment will be between 170% and 1,200%, with probability 95%.

Figure 1

The naysayer version – free advice from 100% certified skeptical financial adviser.

Consider the Dow-Jones Industrial Index data from 1928-2008 (annual averages), and express them in constant dollars using the Consumer Price Index (see Figure 2). Perform linear regression on these data and find the 95% confidence interval in 2038. See the regression line and the endpoints of the confidence interval in Figure 2.

If you invest 4,000 dollars now, you will have between 3,800 dollars and 8,000 dollars in 2038. The return on your investment, in real terms, will be between 5% loss and 100% gain, with probability 95%.

Figure 2


British Petrolium in 20 Years

May 15, 2010

The damage done to BP’s reputation is arguably as bad as the damage done to Exxon after the Valdez oil spill in 1989.  I was in high school then, and to this day have never used an Exxon gas station (not that I drive anymore) unless my tank was on empty and I was not alone in the car.

It is probably not on the forefront of most people’s minds that in the wake of Valdez, and the current BP crisis, that the world’s largest company by Market Capitalization is actually Exxon, even after the recent sell-off in energy companies, and the $10 drop in the price of oil.

Largest Public Companies by Market Cap May 2010

(Chart courtesy:

It would be hard to believe that BP is going anywhere, and for those with a really long term view, this might represent a worthwhile entry-point, if you can stomach the volatility tied to the headlines.  Originally posted on May 15, 2010.

A Lesson In Dilution

May 12, 2010

Many people fail to realize the permanent impairment that occurred for many equity investors in 2009.  While some stocks look cheap on the surface, as measured by their stock price, and their historical highs and lows, many uneducated investors, and sadly even smart people miss the powerful impact that dilution has on shareholder value.

Using Citigroup as our guinea pig, take the two charts below.  The first is a historical price chart of C.  The latter is a historical market capitalization chart of C.  The first is more common, and a simple way to follow the price history of Citigroup stock.  What is often left out of people’s minds, is what the stock price represents.  Taken alone, a stock’s price means almost nothing.  What is also important to know is the number of shares outstanding and the underlying value you own in the company.  This is intuitive when stocks split, or reverse split and the investor sees dollar for dollar and share for share how the price and shares traded change.  In these circumstances you still effectively own the same percentage of the company.   Common examples of splits are when the price doubles and the number of shares outstanding halves, or  when the number of shares double and the price halves.

What happened in 2009, however, was not simply a splitting of shares and prices.  What happened to many companies in dire need of raising capital is that they sold equity at very depressed prices.  This means that existing shareholders held the same amount of shares, but that they lost part of their percentage ownership when new investors were allowed to buy the company for less than they paid for it. What does this mean?  Well simply put, Citigroup stock was one of many, but possibly the best example of the Great Dilution of 2009.  At its height in December 2006, Citigroup stock traded as high as the mid $50’s with a market capitalization at that time of about $270 billion.  Today, Citigroup trades just above $4 with a market capitalization of about $120 billion.  Thus in order for Citigroup to trade at a level that would make it worth as much as it was worth at the top of the last bull market, the stock would have to rise only to $9.50.  If Citigroup were to rise back to the mid $50’s, the company would then have a market cap of approximately $1.5 trillion.  Said another way, this ain’t gonna happen anytime soon, or ever (in at least the next 20 years).  Of course stock buybacks would reverse the effect of the dilution, but one would have to presuppose that Citigroup is in a position to post outsized profits for a very long period of time with enough free cash flow, in excess of reinstating a dividend to buy back shares, highly unlikely.

Citigroup Price Chart

Citigroup Market Cap Chart

Charts courtesy of

Citigroup is one of many examples, but the size of the dilution created by the capital raises and government bailout/ownership/exit makes it a prime example.  Anyone who thinks stocks like Citi look cheap today, ask yourself this: Do you think Citigroup can appreciate to a level where its value becomes greater than twice today’s value of Bank of America, Goldman Sachs, JP Morgan, Wells Fargo and HSBC combined?  If you think that is possible, please email me as I have a bridge that you might love to own.

Cashin’s Comments – May 7, 2010: On Yesterday’s Market Action

May 7, 2010

What Happened Yesterday? How It Looked From Ground Zero – The stock market opened wary and a bit nervous yesterday. They were still shaky about the scenes presented in the streets of Athens in the prior two days.Shortly after the opening, Mr. Trichet ended his ECB press conference. The sense was that he had punted the Greek problem back to the nation states of the EU. If the ECB was adopting a “not my problem” attitude, the euro didn’t like it at all. As the euro weakened, further pressure built on U.S. stocks.

Around 10:00, the bulls tried to circle the wagons. The attempt was brief and ineffective. Stocks quickly rolled over.

Prices moved lower and the Dow slipped to minus 150.

In early afternoon, the Greek protestors, who had surrounded Parliament, hoping to prevent the vote on the austerity package, began to disband. As they did so, they began to confront the police.

Around 2:00, the scene in Athens began to turn more fractions. TV screens across the floor (and across America) were filled with scenes of police wading into pockets of riotous protestors. Each foray was marked by audible reactions on the floor.

Bids began to cancel all around. The level of selling picked up and prices moved steadily and sharply lower – down 250, then 275; 325; 375; 400 then down 450.

Around 2:40, the selling grew very intense. Prices began to cascade lower in waterfall fashion. The Dow seemed to fall in 50 point increments.

At this point, we should talk about structure.The NYSE market model has some built-in safety checks. They are somewhat like the speed bumps you might find around a school zone. They are not intended to stop the car, just to slow it down enough to prevent a serious accident. Trading is slowed very slightly by those protective speed bumps allowing better reaction time and attempting to inhibit a rush over the cliff.

Some of the players, however, tried to get around the NYSE speed bumps. To do that they sent their sell orders to other, thinner markets.

One of the examples cited in the press was Proctor & Gamble (PG). The stock was trading on the NYSE at 56. The boys who circumvented the safety speed bumps were selling PG at 39 in other thinner markets. Some sold into bigger air-pockets with 40 dollar stocks trading at a penny or less.

When the sellers saw they had rushed to sell at inferior prices (How could I sell PG 17 points below the NYSE last sale??), two things happened. First, you stop selling – immediately. Second, you try to buy back some of that stock you just sold at “give away” prices.

That kind of action is what caused the Dow to drop 600 points in a matter of minutes and completely reverse in a similarly brief period. A 17 point price gap between ticks in PG would result in a 136 point move in the Dow. That’s just from one stock.

Another assumed factor in the zany trading was thought to be a possible trader error. One, two, or even three different firms were rumored to have hit a bad button and sold more shares than intended. The media suggests it was a typo error – instead of entering “M” for million, they typed “B” for billion.

That’s highly unlikely. A more plausible explanation is that many trading desks have computers pre-programmed to limit key strokes. Instead of hitting three key strokes to sell 100, you teach the computer to “assume” the “00”. That allows you to hit a single key “1” which is then translated into 100 shares. Not much of an error if you’re selling 100, but if you try to sell 1 million, those two invisible zeroes changes your order into 100 million. That’s a market mover, especially if you’re selling a basket rather than one stock.

The rumors of “trader error” could not be confirmed but they were, and are, pervasive.

One other oddity occurred after the close of business. Several venues decided to cancel a variety of those “outlier trades”. Under their rules, they can announce a trade void and participants often have no right to appeal.

So, if you bought XZY at “bargain” prices at 2:43 and then sold it much higher at 3:30, then at 4:30 your buy order had been canceled. Your sale is still good, however, so you are now, accidentally, net short, at what looked like a good price but now looks like a bad one.

That could bring some buy interest this morning as folks seek to cover these accidental shorts. It all depends on how pervasive the cancellations were.

Another factor could be the rumored trader error. If it occurred, did they cover by the close? Did they hedge overnight? We may know on the opening.

Electronic Trading to Blame for Plunge, NYSE Says (Update2)

May 6, 2010

Electronic Trading to Blame for Plunge, NYSE Says (Update2)

By Chris Nagi and Matt Miller

May 6 (Bloomberg) — Computerized trades sent to electronic networks turned an orderly stock marketdecline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq OMX Group Inc. canceled trades in 286 securities that rose or fell 60 percent or more.

While the first half of the Dow Jones Industrial Average’s 998.5-point intraday plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”

The selloff briefly erased more than $1 trillion in market value as the Dow average tumbled 9.2 percent, its biggest intraday percentage loss since 1987, before paring the drop. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are reviewing “unusual trading” that contributed to the plunge.

NYSE Volume

More than 29.4 billion shares changed hands in all U.S. markets today, including traditional exchanges such as the NYSE, rivals Bats Global Markets Inc. in Kansas City and Jersey City, New Jersey-based Direct Edge LLC, and other electronic platforms. The level compares with 2.58 billion traded on the NYSE, making it the biggest gap between the two in more than three years, data compiled by Bloomberg show.

Increasing automation and competition have reduced the Big Board and Nasdaq’s volume in securities they list from as much as 80 percent in the last decade. Now, two-thirds of trading in their companies takes place off their networks because orders are dispersed across dozens of competing venues.

Nasdaq OMX in said it will cancel stock trades that were more than 60 percent above or below price levels at 2:40 p.m. New York time, just before U.S. equities plummeted. The New York-based firm investigated trades between 2:40 p.m. and 3 p.m.

‘Snapped Back’

“The fact that it snapped back so quickly made it clear that it was an aberration,” Leibowitz said. “When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side.”

The NYSE doesn’t know where the trades that triggered the selloff originated, according to Leibowitz. Citigroup Inc. said it found “no evidence” that it was involved in erroneous trades, a finding supported by futures market CME Group Inc., after U.S. equity markets plunged today.

The market rout triggered scrutiny from lawmakers. U.S. Representative Paul Kanjorski, a Pennsylvania Democrat, set a May 11 hearing. U.S. Senator Ted Kaufman, a Delaware Democrat, questioned whether markets that increasingly rely on computer algorithms to execute thousands of transactions in seconds triggered false trades.

“This is unacceptable,” Kanjorski, who leads a House Financial Services subcommittee that oversees the SEC, said in a statement. “We cannot allow a technological error to spook the markets and cause panic.”

Accenture, Exelon

Accenture PlcExelon Corp. and Philip Morris International Inc. were among 27 U.S. stocks with at least $50 million in market value that dropped more than 90 percent as U.S. equities tumbled, before recovering by the close, according to Bloomberg data excluding exchange-traded funds.

The Nasdaq’s decision means that trades in Cincinnati-based Procter & Gamble Co., which fell as much as 37 percent for the biggest intraday drop in the Dow industrials, would stand. The world’s largest consumer products company said stock trades that pushed its shares down were probably an error.

“Our greater concern is not the fact that a trade error occurred at all but the magnitude of its impact,” Birinyi Associates Inc., the research and money-management firm founded byLaszlo Birinyi, said in a note today. “We propose that when trading errors have occurred in the past, their impact has not been as significant and impactful because of the existence of human intervention.”

To contact the reporters on this story: Chris Nagi in New York atchrisnagi@bloomberg.netMatt Miller in New York at

Last Updated: May 6, 2010 22:18 EDT

Statement from SEC and CFTC

May 6, 2010



Washington, D.C., May 6, 2010 — The Securities and Exchange Commission and the Commodity Futures Trading Commission today released the following statement:

“The SEC and CFTC are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules.

“We will make public the findings of our review along with recommendations for appropriate action.”

# # #

We will be waiting with anticipation.  One interesting take on todays events, well explained, and seemingly quite plausable can be found here courtesy of Zero Hedge.  The Day The Market Almost Died (Courtesy Of High Frequency Trading) Highly recommended reading!