Shawn Baldwin from CMG (Chicago) 2009 Critical Capital Management Series




March 23 2009 Market Commentary


The market closed up 497 points today for a stunning rally accompanied by cheers from pundits and participants alike. The upswing occurred whether anyone liked or disliked Mr. Geithner’s appearance on CNBC or his Wall Street Journal dissertation, neither of these factors were notwithstanding for the parade of bulls. Geithner still seemed a little unsure, uncertain and a bit tepid while speaking before the cameras, it’s possible that people don’t like him because he doesn’t exude supreme confidence… or maybe the markets simply don’t like him because he isn’t Obama. Whatever the case, the markets seemed to rally regardless for what most would say is a clear case for rampant bullishness. I will have to staunchly disagree on the basis of knowing market fundamentals, the uncertainties present along with being aware that the levers to move the market have not been pulled—only the triggers for their deployment. This is clearly a Bear Rally. We will discuss those levers along with the triggers that were pulled.





The Fed gave a tremendous boost to mortgage securities when it announced that it was going to buy another $750B of these securities (this will bring their total purchases to $1.25T, up to March the Fed had purchased roughly $217B), this created tremendous downward pressure on the 30 year fixed rate causing it to fall to 4.89%– the lowest it has been since 1990. These actions would seem to indicate bullishness since the latest announcement of buying $300B created the single largest drop in rates for borrowers in over 20 years.


Both Fannie and Freddie Mac (which by the way needs $30B to stay competitive) will be flooded with mortgages and re-financings and if the Fed hadn’t acted as it did we would have surely seen higher rates-thank you Mr. Bernanke. A number of banks will benefit from this and their respective stocks responded accordingly. This was excellent coordination on the behalf of the administration—the Fed is clearly creating time for President Obama to enact his plan.


We then correspondingly saw financial stocks move ahead last week on the plan to buy debt by the Fed along with the similar announcement by the Bank of England. These actions have allayed deflation fears while re-igniting ones for inflation simultaneously. These fears are not unfounded.



In concert with this orchestration was the TALF (Term Asset-backed Lending Facility) debut which gave rise to the stocks of both automakers and bank financial stocks alike since both will benefit from the successful deployment of these facilities because their services need the lending that these schemes will stimulate and aid.


The TALF in combination with the purchases by the Fed, is a well conceived attempt to revise the securities market for debt instruments in which low cost, non-recourse money is thrust into the coffers of matched private company money in a low interest rate environment to get these organizations to take on the calculated risks of lending to businesses and real estate. The alternative investment management firms engaged in these activities use what are called “Credit Strategies”—these firms will do very well in this environment. It will be very hard not to.


In terms of investment banking and the lagging deal market which is 62% down from 2008, yet another creative solution was devised for the non-apparent LBO (Leverage Buy Out) market: The “EBO” (Equity Buy Out) was heralded as a way for deals to now be done since prices were down some 50%, without leverage therefore negating the need for debt in the environment. The EBO’s seemingly will be able to tout a similar return over the same time period as an LBO in a given 5 year period (provided that they can pay a one time special dividend in the 5th year of the investment when the debts markets are better). These constructs create a very elegant plan and solution.



A review of all these plans and possible solutions would lead most to think that we indeed are headed to a speedy recovery, especially when you consider that most of the economic crisis was concentrated on western banks and financial companies.


The Obama Administration is coordinating far better than his critics are giving him credit for because he is effectively engaging in (3) practices at once:


1) Credit Easing-printing money to buy assets [TALF]


2) Quantitative Easing-printing money to buy treasuries [Fed purchases/Treasury scheme]

3) Enhanced Credit Support-lowering the interest rate [Fed lowering rates/purchases]


These solutions clearly address the current market deficits and are aimed at driving interest rates lower which will in theory increase consumer spending. While lowering rates for mortgages, homeowners will be spurred to refinance their homes. These rates lower their costs while generating tremendous fee revenue for the banks and the new loans create capacity and spread for both Fannie and Freddie. Bear in mind that two-thirds of our economy is consumer spend. As my colleagues from graduate school would say-“Absolutely brilliant”.


Given all of these factors you might ask why I am not exuding ebullient bullishness. The answer is very clear and also very elegant. Uncertainty. There are a number of prices and values that haven’t been discovered and these will be absolutely necessary to establish a firm bull market. These steps have clearly put in necessary measures that create a firm foundation, however a number of macro-economic factors continue to hinder that bull run. A number of economists agree that earnings won’t increase until 2010 due to those various factors are in place. A number of very compelling opportunities lie await abroad in the interim. I will discuss the uncertainty, negative drag factors, opportunities abroad and following topics in my next commentaries:



A) The Dearth of Buyers-Investor fatigue


B) The Rise of Public/Private Partnerships-Coordinated rate cuts/infrastructure opportunities


C) The Global Trade-opportunities that arise from protectionist/government stimulus and emerging market growth—along with the inevitable impact of globalism.



D) Liquidity Solutions-global opportunities, non-traditional finance and structuring innovation.


In the course of exploring global opportunities we will determine profitable trades outside of the United States on an area and sector basis. We will also examine the preceding topics and corresponding factors that will determine profitable trading and investing in the U.S. equities markets and abroad. First we will explore the gray area- uncertainty. Get ready to dig in.


About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago.