Seeking Insight

The final quarter for 2007 has begun and we are anticipating an array of “unpredictable” developments for 2008. Why unpredictable? There are a set of colliding circumstances in the broader economic sense, as well as within the investment/financial services industry that are developing -Growth, amid layoffs and business failures; new stock market milestones, among mergers and moves for cost containment; political entertainment, amidst the more serious work of selecting a new leader of the free, secular, capitalist world. The dueling is not only being staged and waged within the two major political parties, but eventually this duel will be limited to the final skirmish between the party victors.  We then assume that we will be on a new course.

The collision of circumstances taking place, despite soaring market indices, there are interest rate eases, re-structuring and layoffs underway in our industry.  Although limited to business segments, more bothersome is the economic impact on the overall financial institution involved. 

The sub-prime mortgage credit explosions have ripped into Financial Services firm profits with varying degrees of impact, which has led to firings, and re-positioning of strategies related to fixed income groups; but this cratering threatens to make for a rough ride in the next year for related departments within banks and brokerage firms…it’s all about credit.

We wonder as free marketers whether the government needs to get involved, and how broad the nasty effects will hit other related industries. While some firms dedicated entirely to Mortgage Credit are holding on for their very survival, there are related industries such as building, trades, home improvement, and building materials that will feel the impact too. Consumers will feel tighter scrutiny and possibly become unable to make purchases planned. On the other hand, after all the write-downs that banks and brokers will take, some prognostications are that this could be a one-quarter phenomenon? I doubt that very seriously. Then, can everyone get back to work?

Relating to investment banking, IPO’s are set to make 2007 the biggest year since the tech crash in 2000. Interest rates are still low, although oil at $100 per barrel, has been openly discussed as perhaps not the conflagration it was thought to be. Private equity firm successes and hedge funds going public are making more billionaires and millionaires. The market indexes are at all-time highs, unemployment is still at a competitively low rate, incomes are holding steady, yet restructuring is taking place quite commonly. Prognostications of how much of a leader the US economy is, related to the rest of the global players, is being openly debated. Will commodity prices be driven ever higher by the demand from rapidly developing China? Will wars be fought over natural resources? Where does India figure in all of this? Is Russia really the democratically reformed entity we thought? Or are they still an ugly villain to be feared?

More locally or regionally, small banks on Main Street are starting up seemingly everywhere. In California, while large ones continue to gobble up smaller ones, smaller ones continue to rise. And some of the most well-established wealth management firms, banks, and brokerage firms have seen unprecedented employee turnover and change, along with mergers: business models are struggling for viability and market share. The battle for talent rages, with skilled professionals enjoying significant compensation inflation.

European banks are fighting to wring profits out of their U.S. subjects. US Trust continues to fight the turmoil in their ranks- and trying to stabilize, amid staff departures. They’re seeking stability in their ranks since the Schwab-Bank of America swap of ownership; Wachovia is coming. Yes, Wachovia has the Wells, the BofA’s, and the Smith Barney bank programs watching closely. With Wachovia’s takeover of AG Edwards, and the conversion of World Savings branches to Wachovia, the name seems to be everywhere -and yes, they’re hiring. Washington Mutual seems to be fighting to stay afloat -or to at least define its position within the markets after leaving the commercial banking sector, and now seeing a weakening mortgage sector erode their actual viability. Takeover target?

Lehman, Credit Suisse, and Goldman Sachs are making “notable hires” and performing “lift-outs” within our California market.  I get the sense that First Republic, now owned by Merrill Lynch, will be making a run for acquiring high-caliber wealth management professionals. We may see the same from Fidelity Investments, whose counter-competitor, Charles Schwab, has the assumed primary position in their sector in the west.

Boutiques, private equity firms, hedge funds and family offices are carving out considerable niches and market share. They are also attracting large numbers of both seasoned and young professionals, who are attracted to more entrepreneurial environments and potentially higher compensation. RIA’s are attracting financial advisors to their less-thorny regulatory platforms, and these environments probably represent a refreshing downshift in lifestyle pressures for certain advisors. Financial advisors are retiring in droves, leaving a competition to win clients. I’m seeing professionals more carefully measuring their life/work balance as the need to be there for their family’s increases, and their parents demand more of their energy and time, in their twilight years. Professionals struggle to support their college-kids way through expensive schooling years.

Available and developing technology is enabling many of the changes above to take place, with communications and workstations available on smaller and more impressive portable devices. Work is just easier to access.  Technology is also bringing home many of the professional obligations and pressures we deal with everyday, making work available -even when we should be resting.

Finally, the story of the housing market, which is followed with greater enthusiasm than some sporting events in California, is “adjusting” (never say crash) downward, making the market affordable to more, while troublesome to owners with adjustables. Prognostications continue over what effect the housing precipice will have on consumer spending. In the meantime, the Dow Jones Industrial Average has climbed to new record highs. These are indeed, unique times of colliding circumstances.

IndyMac

IndyMac Bancorp Inc. said Friday it may swing to a loss in the upcoming quarter as it expects to sell fewer loans into a balky secondary market and as it cuts back on making riskier loans.

Countrywide

Countrywide was ordered to open its books and records to investigate possible manipulation of stock option grants to executives.

Mortgage Losses

In the woes of the mortgage fall, many financial companies are taking great losses. The following companies reported losses in the 3rd quarter:

• Merrill Lynch: $4.5 billion
• UBS: $3.4 billion
• Deutsche Bank: $3.09 billion
• JP Morgan: $2.1 billion
• Citigroup: $1.4 billion
• Bank of America: $1 billion
• WaMu: $110 million

Acquisitions and Mergers

Canada's Toronto Dominion Bank has agreed to acquire New Jersey-based Commerce Bancorp in a 75% stock and 25% cash deal valued at $8.5 billion, or roughly $42 per share based on yesterday's closing price of TD Bank.  The deal will double the scale of TD's U.S. banking business, create an entity with about $250 billion in deposits, and make it the seventh-largest bank in North America as measured by branch locations.

Standard Chartered, an international banking group based in London, will acquire the banking operations of American Express for $1.1 billion.

Korean Financial Advisor Sentenced

The former owner and operator of the now-defunct downtown investment adviser firm C+ Capital Management LLC was sentenced Monday afternoon to 87 months in federal prison.  Won Charlie Yi was sentenced for defrauding Korean-American investors out of more than $28 million in assets, the court said.  Yi was ordered to pay $29 million in restitution to individual investors as well as an additional $2.4 million to Wells Fargo Bank.

Best employer’s in Los Angeles

The Los Angeles Business Journal has named, by company size based on number of employees, Capital Group (1,464 employees) the number one company to work for in Los Angeles.  The second best employer in Los Angeles goes to Wells Fargo (8,714 employees).

The Rich get Richer, and the Poor get Poorer

The Wall Street Journal has reported that the gap between the wealthiest and the poorest American’s is at the widest level since the 1920’s.  The Journal also reported that the wealthiest 1 percent of all Americans earned 21.2 percent of all of the nation's income in 2005, up from the previous high of 20.8 percent in 2000.

Unemployment

U.S. employment rebounded last month on robust public education and other service-sector hiring, and August's decline was revised to a gain, signaling resilience in the labor market and reining in hopes for further aggressive easing by the Federal Reserve. The unemployment rate rose 0.1 percentage point in September to 4.7%.

The Jetson Era

After 30 years of research, a California company unveiled plans for a $90,000 hovercraft called the M200G Volantor.  Moller’s machine can fly up to 100 mph at 10 feet off the ground.  The disk-shaped craft runs off of ethanol and is an ultra-low emissions vehicle.  Unfortunately, not all quirks have been worked out of this Jetson-typed vehicle –the sound of it registers at 85 decibels from 30 feet away, the threshold for hearing loss if exposed to it for a long period of time.

Sleep is linked to Heart Disease

Are you getting enough sleep?  According to a Brittish study, lack of sleep nearly doubles a person’s chance of dying from heart disease.  The researchers are uncertain exactly why this link exists, but said not getting enough sleep seemed to lead to an increase in blood pressure, which raises the risk for heart disease. 

Bicycle Transit System

The city of Paris introduced a self-service bicycle transit system, and since July, more than 53,000 Parisians signed up for a year subscription, according to The Times of India.  The city provided more than 10,000 bikes at 750 bike points throughout the city, and users can pick up and drop off bicycles. 

High School Drop-Outs
 
The U.S. Census Bureau has reported that 1 in 4 students drop out of high school, far more than the 10% estimate. 

Dealing with People

Flatter me, and I may not believe you.  Criticize me, and I may not like you.  Ignore me, and I may not forgive you.  Encourage me, and I may not forget you.
-William Arthur Ward, scholar

Fear

Let fear be a counselor and not a jailer.
-Anthony Robbins, motivational speaker

Friends

If all men knew what each said of the other, there would not be four friends in the world.
-Blaise Pascal, mathematician

Courage

Have the courage to take your own thoughts seriously, for they will shape you.
-Albert Einstein, physicist

Freedom

People hardly ever make use of the freedom they have – for example, freedom of though; instead they demand freedom of speech as a compensation.
-Soren Kierkegaard, philosopher

Technology

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency.  The second is that the automation applied to an inefficient operation will magnify the inefficiency.
-Bill Gates, Microsoft co-founder

Perspective

The nine most terrifying words in the English language are, “I’m from the government, and I’m here to help.”
-Ronald Regan, 40th US President