Thursday, April 22, 2010

Is John Paulson Watching The Kudlow Report?

Billionaire hedge-fund manager John Paulson has received quite a bit of press lately, all arising from his involvement in Goldman Sach’s 2007 Abacus deal which netted him a king’s ransom of $1 billion. Say what you will about the man, Mr. Paulson is a terribly smart investor — one of a small handful who accurately predicted the housing market’s turn with highly successful bets against mortgage securities.

Now, what is less well known about Paulson is that he has turned rather bullish on the U.S. housing market and the overall economy. In a conference call with investors yesterday, Paulson said he was concerned earlier this year about a potential double-dip recession. But he went on to say that he is “not concerned about that at all today. It’s more likely there could be a V-shaped recovery.” Whoa. Mr. Paulson, are you tuning in to The Kudlow Report each night? Of course, I have been discussing — at length — the various and key pieces of evidence that support a clear case for a V-shaped recovery.

Incidentally, Mr. Paulson also remarked that corporate earnings are coming in ahead of expectations, that there’s a vibrant credit market, and that the stock market is stronger. Yes indeed, sir.

Heck, I’ve never seen or owned a synthetic CDO. That’s above my pay grade. But I certainly agree with Paulson’s take on the economy. (Hat tip to my pal and economics professor Mark Perry of the Carpe Diem blog site. He’s been signaling Paulson’s call.)

And now for some worrisome news: While stocks did eke out small gains Wednesday, outside of Morgan Stanley’s 4 percent rise from a big earnings number, all the big banks got clobbered by an average of around 2 percent. The list includes Goldman, Citi, US Bancorp, JPMorgan, BofA, Wells Fargo, and State Street.

Why did the big boys get hit? Financial regulation is going to pass. That ain’t good for banks. First, it may put an end to proprietary trading for these boys. Second, it may squash their lucrative derivatives business. Third, it may take away their too-big-to-fail status.

So be on the lookout for some rocky moments ahead for the big boys on the road to financial reform. While this may be good news for U.S. taxpayers, it’s not necessarily so good for the nation’s biggest banks.

Another point on this bank bill worth noting: Sen. Blanche Lincoln’s derivatives legislation means trading will wind up moving to Chicago, which has much better infrastructure than New York. So, in a sense, you could actually call this a Chicago jobs bill. In the longer term, New York City will be very hurt by this.

Elsewhere, some good news: With 20 percent of the S&P having already reported, roughly 85 percent of the S&P companies have beat expectations. Guess what? If this continues, it will be the best performance since 1993.

On an interesting but somewhat unrelated note, the Treasury and the Fed have unveiled a new $100 bill with a lot of high-tech security embedded in it. Ben Franklin is still on the front, and it’s going into circulation next year. An interesting factoid about the C-note: It’s the highest denomination of all U.S. currency and has huge circulation around the world. Over the past 25 years, global demand has pushed these Benjamins up to $890 billion from $180 billion, with two-thirds circulating outside the United States. As for me, I’m still waiting for the new Ronald Reagan note.

But let me close with this key point regarding the V-shaped recovery: Rising corporate profits equals rising jobs in the future. If businesses are profitable, they will hire. Bank on it. After all, we witnessed such a steep falloff in employment because businesses were so unprofitable.

Again, I’ve never owned a synthetic CDO in my life. But I do entirely agree with John Paulson’s bullish call for a V-shaped economic recovery. I’m delighted to hear he shares my view.