Greenspan Says Interest Rates Could Double to Thwart Inflation

This is pretty scary stuff:

WASHINGTON — Former Fed Chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise interest rates to double-digit levels in coming years to thwart inflation. Greenspan, 81, says in The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede. At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global. And the shift "may be upon us sooner rather than later," he says. Evidence: Prices of Chinese imports coming into the USA started rising earlier this year. That suggests that in the "next few years," inflation will build unless action is taken.

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I wonder what the market will think of the Maestro's comments; and/or if they care ... if the US interest rate is going to double digits anytime in next half decade that would be calamitous for a nation which lives on credit.

I do agree on the inflation issues in China being 'exported' to the rest of the world as I have written numerous times, but was not thinking anywhere along the lines of 10%+ interest rates.

So when the ex-Fed Chief said things the market likes, the market goes up - will this news simply be ignored and brushed aside ? If people think it has any credence, we could be talking about a serious repricing of assets across the board. And such predictions right ahead of a meeting in which it's generally assumed Fed will cut rates, no less. Maestro loves the attention....

Greenspan has some interesting political comments as well in the article, if you care to read...

Very interesting... very interesting.

Consumer Spending Continues, Where is the Money Coming from? Credit Cards

Americans, are turning back to credit cards... with far higher rates then their home equity loans (their home ATM), to continue to spend over their means. Truly - this trend amazes me, not from the point we are a consumer culture but at what point do people look in the mirror and say enough is enough.

The numbers are astonishing - in fourth quarter 2005 at the height of housing boom, Americans extracted $105.5 Billion in equity to fund spending. By first quarter 2007, not even 18 months later, that number dropped 35% to $67.9 Billion. How are we making up for it? Read on....

• Consumers are carrying a record $907 billion in credit card debt, and that looks likely to jump now that the housing slump has blunted another popular financing tool -- home equity loans.
• "The home equity spigot has been really shut off over the last nine months or so. With (home price appreciation) stagnating, borrowers have not had the opportunity to refinance as much as they had, or cash out for spending needs," said Joe Astorina, securitization analyst at Barclays Capital.
• "Growth in credit card receivables is offsetting the decrease in home equity borrowing for consumer spending. Consumers are using their credit cards again," said Astorina.
• The problem is, credit cards typically come with steeper interest rates and fees, and usually a much lower limit on borrowing. And if credit terms tighten further and card issuers clamp down, consumers will have little choice but to cut back on spending -- a worrisome thought for the U.S. economy as the all-important holiday shopping season approaches.
• U.S. Federal Reserve data released on Monday shows that as of July, consumers had racked up $907.4 billion in revolving credit, which is made up of credit and charge cards. That was up 6.6 percent from a month earlier, bringing the annual growth rate to 6.5 percent -- more than three times the level for nonrevolving credit, which includes closed-end loans for things like cars or college education.
• "Households have apparently substituted credit card debt for mortgage equity withdrawal," said Haseeb Ahmed, U.S. economist with JPMorgan in New York. "The acceleration in revolving credit growth over the past year underscores downside risk to the consumer from recent tightening in lending standards."
• As that spending shifts to credit cards, financing won't come as cheap. According to the Fed, the average interest rate on credit cards was 13.46 percent in May, the most recent month for which data was available. The national rate for a $30,000 home equity loan was 8.43 percent, according to tracking firm Bankrate.com.
• Liam McGee, head of consumer banking at Bank of America Corp, said it was too early to determine how the credit crunch would affect consumers, but already the bank was seeing a decline in spending on discretionary items like recreation.

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Takeaway: Well I wonder who is holding these "credit card asset-backed securities" - looks like yet another shoe to fall in about 12 months. I guess now you could make a case for Fed fund cuts - at least that will keep interest rates on credit cards stable/lower... (what a case, eh?)

What Happens When New Home Prices are $100K less than Existing Homes?

I was waiting for this shoe to fall; now it's starting. Homebuilders desperate for the cash flow are throwing massive discounts onto the market. Until now, stubborn sellers who refused to sell for less than they bought during bubble days could just sit out and wait, and say "this will bounce back soon". But now with brand NEW homes on their block selling for a major discount to older homes... not so much.

Also interesting to see Hovnanian (HOV) doing this sort of action to (in part) make quarter end numbers. I don't think management gets it that the numbers right now in their financials don't matter one iota. Beating a dragged down earnings estimates don't mean squat when their is no sunshine on the horizon. The market is a discounting mechanism 6-9 months forward, but we are talking a multi year issue. So if not for 'beating the quarter' reasons, one must wonder about cash flow. And viability. Some of these companies are still paying dividends for gosh sakes, when they should be hording every last cent....

I can only imagine what buyers of this merchandise in 2005/2006 must feel like looking 3 streets over and seeing similar homes going for 10, 20, 30% off. I doubt this will be the only builder pulling such antics.

• Upscale home builder Hovnanian Enterprises Inc (HOV) is holding a nationwide three-day sales that effectively cuts home prices by up to $100,000 through incentives and offers extra appliances and upgrades.
• Hovnanian said on Friday the sale, held amid a slumping U.S. housing market that many do not see recovering before 2009, will be held Friday through Sunday in the 19 states the home builder serves.
• "It's not going to give you a shot in the arm for your brand, but it's a way to generate cash," Standard & Poor's equity analyst Ken Leon said. "Looking at their cost structure, Hovnanian decided they need to sell at least 1,000 homes this weekend."
• Home prices in the various communities in the sale, dubbed "The Deal of the Century," range from the high $100,000s to the mid $1,000,000s, the Red Bank, New Jersey-based company said.
• The sale comes about a week after the No. 6 U.S. home builder posted a third-quarter loss and a 27 percent decline in sales. Hovnanian also warned on September 6 that conditions in most of the regions it operates remain challenging.

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What will next quarter's sale be called? "No this one REALLY is The Deal of the Century".

Again, these calls for Fed fund cuts to spur housing are inane. A 0% interest rate won't make homes affordable for these high price regions for the typical teacher, accountant, firefighter, retail worker, etc. Where will these buyers be coming from that will stampede in to save the day? Nowhere. Not at these prices.

The Top 25 Stocks for the Past 25 Years

An interesting article from this past summer, highlighting the top 25 stocks of the past 25 years.

If you put $100 into each of these stocks 25 years ago, your $2500 investment would of grown into $650,000 - not too shabby.

It's always interesting to see these lists because it truly shows if you pick correctly and have patience you can make serious bucks with just 1 correct selection. Of course you'd need to pick a stock with no hype (i.e. you won't get these results with a VMWare (VMW)), and you'd have to buy the company when it has a very small market capitalization to reach such results. But even getting 1/3 of these results on 1 name could make up for a lot of other mistakes. Of course letting your winners run for that long of a time takes loads of patience. Also with the pace of change and globalization, it's hard for companies in this era to retain a defensible moat for that long of a period of time anymore.

I think everyone's first inclination is the top performing stuck must be Microsoft (MSFT). However, that's number 8! It's not even the top tech stock. Interesting to see the first few spots are in such staid industries such as asset management and industrial measurement.

1. Franklin Resources (BEN) +64,224%
2. Danaher (DHR) +47,913%
3. Eaton Vance (EV) +38,444%
4. UnitedHealth (UNH) +37,672%
5. Cisco Systems (CSCO) +33,632%
6. International Gaming Technology (IGT) +33,436%
7. Biomet (BMET) +30,531%
8. Microsoft (MSFT) +29,266%
9. Best Buy (BBY) +28,703%
10. Oracle (ORCL) +28,535%

And the list continues down to #25 Harley Davidson (HOG) +17,808%

I was surprised to see our favorite Smithfield Foods (SFD) over there in slot 21 @ +19,414% - who knew

Looking at the top 3 spots, 2 of the 3 are asset managers... interestingly I have a very small cap asset manager which is basically ignored by all the news outlets, and just sort of does its thing: Diamond Hill Investment Group (DHIL). I've slowly built up this position to be 2.25% of the fund, and with a market cap of a measly $171 million. To get any of these type of returns this company would have to build itself into some sort of financial powerhouse but I would be happy with 1000% return ;) I'm not greedy.

Diamond Hill has great growth in its assets under management, nice growth in EPS and management is planning to buy back 15% of its shares, and it only has 2.2 million shares to start out with! So if any stock in my group has a chance to replicate this sort of return, this would probably be the one, simply because you need to start with very small companies to get such tremendous returns.

Long Diamond Hill Investment Group in fund; no personal position

Bookkeeping: Rising Tide Growth Fund Performance

Price of Rising Tide Growth: $10.463
Performance to date (vs Aug 3, 2007): +4.63%

SP500: 1,484.3 (+1.29%)
Russell 2000: 783.5 (1.08%)

Fund vs SP500: +3.34%
Fund vs Russell 2000: +3.55%

Since the market cap of the median stock in the Rising Tide Growth fund is significantly below the SP500 index but higher than the median market cap in the Russell 2000, I am measuring the fund against both indexes to be more accurate.

Basis for indexes
SP500 (5 day weighted average Aug 3-9): 1,465.2
Russell 2000 (5 day weighted average Aug 3-9): 775

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Stories That You May or May Not Be Interested In

Stuff of interest (many non financial) in my web surfing this week

Do you know what Club Penguin is? I didn't - but its a hugely popular website

A neat instrument that shows you all the most recently uploaded photos on Blogger.com - it's addicting, I don't know why!

Goldman Sachs Alpha Fund had one tough August

Russia Tests the Father of all Bombs (scary)

How CPI should really be figured?

Russia has a sex day

Which economic indicators are in good shape, which are in bad?

So this is what a bank run looks like

Bookkeeping: Weekly Changes in Fund Positions

Fund positions can be found in the right margin under the label cloud and recent comments areas; I've just updated it to reflect this week's action.

All positions of 1.0% or more are shown each week. Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs.

Previous weekly fund changes can be found here.

Cash: 23.0% (vs 22.5% last week)
58 positions (vs 57 last week)
55 long bias: 68.1% (vs 65.7% last week)
3 short bias: 8.9% (vs 11.8% last week and close to 14% early Friday)

Top 10 positions (excluding cash): 30.1% of fund (vs 33.7% last week)
33 of the 58 positions are at least 1% of the fund's overall holdings

Major changes and weekly thoughts
Another relatively quiet week - despite volatility, not much really happened this week - the large caps moved up and the small caps remained weak. Essentially everyone is waiting for next Tuesday. Some of the major changes to the fund this week:

1. Closed the fund's position in Akamai Technologies (AKAM) - click to read why
   
2. Sold 75% of the fund's position in CME Group (CME) - click to ready why
3. Sold some General Cable (BGC) due to the huge run after the announcement of it's purchase to make it a more global operation. Stock is now down to 1.0% of the portfolio.
4. Initiated positions in 2 coal producers, Peabody Energy (BTU) and Consol Energy (CNX) - click to read why
5. Added to the fund's Suntech Power (STP) position - click to read why
6. Cut back on my Russell 2000 and financial related short ETFs ahead of the Fed meeting to raise cash.
   

Long CME Group, General Cable, Peabody Energy, Consol Energy, and Suntech Power in the fund; long Suntech Power in personal account

Moment of Truth

Just scanning the charts in other sectors I am not really exposed to but are levered to the Fed funds... looks like most of the major financials such as Goldman Sachs (GS), Morgan Stanley (MS), et al have rallied to just below a major resistance level, whereas the retailers that are of interest i.e. the Targets, Abercrombie's, American Eagles, Coach's et al all have rallied back just a tad bit above resistance levels, and are treading water. A lot of waiting is going on... waiting... sitting... waiting...

So it looks like a lot of stocks sitting right near (just below/just above) resistance levels - and everyone sitting on their hands until Tuesday.

Everyone is just anticipating what the other person will do... longs assume bears are all in, and 'everyone' assumes a drop will come post Fed, so long is the way to go. Shorts assume bulls are all in, expecting a huge rally off of a cut, so short is the way to go. The charts are of no help - all the major indexes save Russell 2000 are also sitting right at (literally to the point) on support/resistance. It's just a bunch of waiting at this time. I will be taking a little short exposure off just because this market is completely 50/50 - while economic logic would imply 1 direction the last thing one wants to do is give the market the benefit of the doubt in regards to logic ;)

There are so many ways to read this

• Everyone anticipates a huge move up or down, so the market will go nowhere and have muted reaction
  
• The market is lulling the longs to sleep, right now people feel pretty safe that the Fed will fix things, and bad news is being ignored (always a bullish sign) so this will draw in even more reluctant people from the sidelines (who don't want to miss a huge move up).... right when bulls wade in, in scale the market will drop them with a quick massive body blow when they least expect it.
• The complete opposite viewpoint to the one right above on the long side.

So many people are adamant in both camps it's hard to judge what will happen. Most importantly, what do the computers think will happen? They seem to be doing 70%+ of the trading these days... if anyone has a computer for me to interview, let me know! I'd love some insight. I think cash looks a lot smarter now, because if any move is to be sustained either up or down, missing the first 1% of the move won't be too important in the big scheme of things... so I will raise a bit here.

No positions

I'm Watching that Coach (COH) Like a Hawk

I am watching the stock very closely of Coach (COH), for reasons outlined in this post. Now Coach is moving into international expansion ex-Japan, which should offset a slowing US consumer but I am still very interested in using it as a 'tell'. The past 2 sessions, Coach has rocketed up and closed above the 200 day moving average (which served as resistance) yesterday, and continues holding thus far today. This would be a bullish signal (to me).

Polo Ralph Lauren (RL) similar performance of late?? Not so much.

No positions

China Raises Interest Rates Yet Again!

Another prick to the Chinese bubble?

Via AP, China Raises Interest Rates for 5th Time this Year in Bid to Cool Inflation

• BEIJING (AP) -- China raised interest rates Friday for the fifth time this year amid signs that repeated attempts to cool the sizzling economy so far have had little effect.
• The interest rate on a one-year loan will rise by 0.27 percent, to 7.29 percent, as of Saturday, the Central Bank said. Rates paid on bank deposits also will rise by a similar margin, to 3.87 percent.
• A rate hike was widely expected after the government said this week that inflation rose to an 11-year high of 6.5 percent in August, driven by a surge in politically sensitive food prices.
• "We expect at least one more rate increase in the next six months," Ulrich said. "Inflation risks are on the rise in China, sparked by structural changes in the demand-supply situation for foodstuffs, as well as excess liquidity on the back of the widening trade surplus."
• Chinese leaders want to maintain high growth to reduce poverty but worry that the current boom, fueled by exports and investment, could push inflation to dangerous levels or ignite a financial crisis.
• The economy grew by 11.9 percent in the last quarter, and the World Bank this week raised its forecast for the full year's expansion by almost a full percentage point to 11.3 percent.
• Also Friday, the government said spending on factories, real estate and other urban assets in the first eight months of the year rose 26.7 percent from the same period last year.
• "This round of macroeconomic controls has continued for over four years. The relevant agencies have introduced many policy measures. But the effects haven't been obvious," the main Communist Party newspaper People's Daily said Friday.
• But economists question whether such small increases in interest rates will have any impact. Many Chinese companies finance investments out of revenues rather than with bank loans, so interest rate changes have no direct effect on them.
• The reserve rate rises are more than offset by the torrent of new deposits pouring into banks as booming exports send cash flooding through the economy.

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Takeaway: Managing 11% GDP growth is a problem, but there are a lot worst problems to have I suppose. Let's keep an eye on that food inflation - it seems the measures so far by the Chinese institutions have been paltry at best to stem the flood of currency running through the Chinese economy. These are just tiny little steps, 27 basis points here, 27 there... (if anyone knows why 27 and not 25?? I'd love to know - I am sure there must be some interesting reason)

Long Chinese inflation

Adding to the Fund's 2.0% position in Suntech Power (STP)

Despite general misgivings about the market in whole, I am picking here at some individual names the past few days. One that I have liked for the long term, whose chart has improved significantly in the past 48 hours is Suntech Power Holdings (STP). This company is the Google (GOOG) of Chinese solar producers... best research, best management, biggest scale. However, due to a large relatively large share count it does not 'fly' like some of the smaller solar players in the space. It's the most conservative way to play this angle in China however.

I am unclear why the solar stocks are not reacting to this $80 crude; I assume there is just a major consternation about the ability for these companies to acquire enough polysilicon to fund their expansion plans in 2008 (right not there is a worldwide shortage of this commodity, driving up prices). This is an overhang on all stocks in the sector which use this raw input. Note: a company such as First Solar (FSLR) uses a different technology, called thin film, which shields it from these current issues with polysilicon.

For all you ever wanted to know about solar cells click here.

The stock had spiked to mid $40s in early August before a free fall to $33 range in late August, which put the stock below both its 200 day ($35ish) and 50 day (mid $36 range). In the past 5 sessions including today's the stock has made higher highs and higher lows in each consecutive session. With a break above the 50 day moving average, I am now going to add to my 2.0% position in the name with 300 more shares - this will bring up my position to 2.9% of the fund.

Suntech Power is not a cheap stock by any means, but keep in mind this is a company growing at >50% year over year pace. Earnings estimates call for $1.01 in 2007 and $1.60 in 2008, giving a forward PE ratio of 37x (2007) and 23x (2008).

Now the key driver in most of the solar stocks is the availability and cost of polysilicon. When the inevitable overproduction of polysilicion does happen (China is ramping up production), gross margins in this sector should improve dramatically. This material makes up 65-75% of the cost of goods for many of these companies!

On a related note, an American competitor SunPower (SPWR) terminated a solar cell contract with a Chinese supplier JA Solar (JASO), due to quality issues. As I have opined before these quality issues are now catching up to the Chinese manufactures across all industries - when new quality standards are increased this leads to higher prices (to customers) and/or lower profit margins (for Chinese companies). I don't think this is 'priced' into the Shanghai market... and yet another reason Big Ben must be careful as the Chinese start exporting 'inflation'....

Long Suntech Power in fund and in personal account

Confessions of a Mortgage Broker

What is fascinating about this is the constant reference in this story by "the lenders pushed us to..."

Confessions of a Mortgage Broker (3 minutes ABC News video)

I think the understated factor in this huge mess, which everyone in the chain needs to take blame for, is just how aggressive the lenders were who pushed these brokers into selling these most awful of mortgages. The problem is after all the investigations, who will be left to sue? Most of these companies are now dust.... however, what will be interesting is to see if the mortgage arms of the more 'prominent US financial institutions' also participated in this behavior. Their parent companies have deep pockets so they could be an easy target for lawsuits. That said, by the time this gets through the legal system we will be talking 2015.

I expect this fall to see story after story of this on 20/20, 60 Minutes, Dateline NBC etc.

Isn't it amazing how only the name of the bubble changes, but the human behavior never does. Free markets and all....