Monday, September 29, 2008

Go Figure

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EDIT 4:30 PM: Ouch. How the heck could I be calling for all these bad things since day 1 in the blog, and the one day everyone else wakes up to it, have a 3% short exposure. The market is cruel (and unusual). Now we have to turn from 18 hours of CNBC coverage to 24 hours straight - and watch Asia implode overnight. Great. I'm still going to watch Prison Break and CNBC cannot stop me. Ok, I'll watch both... from the cold linoleum floor. p.s. the fund beat the S&P500 by 3%+ today... yet lost 5.7%. Now that's a rough day.

Since January 2008 I have never had my short exposure lower than 10%... most of the past 3 months I've had it in the 22-27% range. The one day I lift the short exposure, the market decides to go down 6%. This is the irony of life :)

Down 6.6% on the S&P 500 as I type this, we now are reaching the next support level... once a support is broken (1165-1170) the market falls immediately to the next (1135)

For those interested, if this level breaks, next is 1100 which takes us back to fall 2004. Then it looks to be 1055/1060 level from summer 2004.

Below that you don't want to know... 2003 was a year the market basically went straight up, which means it created very little support levels. There is a little something there around the 960s, and then below that is decade lows, below 800.

Whistle while you work... 2008 is starting to look a lot like 2002. For those of you around in 2002, you know that was a a most unkind period. If you were not around please read on [Jan 18: Bear Market? This is Nothing Kids!]

Wow - just saw Congress did not pass the bill?? No wonder the market just fell off the cliff. So this is what it is to live history. I'd much rather read about it, than live it! Yikes. I still think this thing passes as there will be deal making and arm twisting (look, please vote yes and we'll vote yes on your next earmark) It appears there was so much voter outrage and people want to look like they are on the side of the voters. And too many went that way on the first count. I still predict they'll arm twist 11 votes and get this passed. Dare they mock the market gods?? When (if) that happens let's see how the market reacts.

Ah... just analyzing stocks on their fundamentals is so quaint a notion. Can't wait for 2011 when it comes back in vogue ;)

The current Emergency Economic Stabilization Act vote tally comes at 207 for the plan, 226 against, with one vote remaining. A total of 218 votes were needed to pass the vote. House members can still change their vote, and as a result the number of yes votes did tick a few points higher.

Democrats voted 141 for, 94 against. Republicans voted 66 for, 132 against.

This is Madness. Even Constellation Energy (CEG) which has a $26.50 buyout offer from Warren B is falling to mid teens? This sums up the past year.



Bookkeeping: Buying more James River Coal (JRCC) and Mosaic (MOS)

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Apparently we are going to return to the stone ages... or at least pre 1840s (or whenever coal became "cool")

Or more realistically hedge funds across America are blowing up and blowing out stock at any price. Mosaic has now given back a year of gains. At some point these fertilizer companies are going to take themselves private and/or a Rio Tinto or Vale would be smart to pick them up.

We continue to layer in - I can't believe 1 week ago I closed 2 coal positions and sold out 99% of JRCC at $36. How quickly things change. Again JRCC is not our favorite but we decided to simply consolidate the "coal" position into 1 stock

JRCC we bought in the $20s
MOS in the $68s

Only 68 more points down for Mosaic before it gets to zero. I think down from 6x earnings to 5, do we hear 4? Looking at their balance sheet last quarter they had $2 Billion in cash/equivalents versus $1.6B in debt - so net $400M. Their cash flow was $1 Billion in 1 quarter alone. With realized prices higher this past quarter than the previous they should generate even more than the $1 B in cash last quarter. This will allow them to reduce their debt significantly and be somewhere around $1.5B cash net of debt. And add at least $1B every quarter after for quite a long time. With a $30B market cap starting in 2009 they should be able to generate $5B in cash a year which in theory means they can buy back 1/6th of the company every year, and by 2015 be private ;)

Added a bit to Potash (POT) as well since I know CEO Doyle is buying back shares and there is one entity worldwide with cash in a creditless world - governments.

The only thing worse than masses of humanity peeved at losing 30,40,50,60% of their investing net worth, is a hungry populace who has lost 30,40,50,60% of their investing net worth. Potash prices have simply not budged one iota in the past 4 months - oh well, darn the logic.

JRCC up to a 3.9% stake
MOS up to a 3.6% stake
POT up to a 2.0% stake

Tomorrow when they are all down 10-20% we'll add another batch. Or I could buy some of these bulletproof (too big to fail) banks at 18-21x earnings I suppose

Long all names mentioned in fund and personal account

Bookkeeping: Can't Afford to get "Wachovia'd" - Cutting some Regions Financial (RF)

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Well, the FDIC showed confidence in Regions Financial (RF) but the market is in panic mode for many mid and small sized banks. Only the largest appear to be good enough for the socialistic government to protect so without the umbrella of the government protection it appears its sell, sell, sell.

To whit...
Capital Corp (CCOW) -65%
Sovereign Bancorp (SOV) -47%
National City (NCC) -47% (we said this one should of been folded this weekend by the FDIC last Friday)
Fifth Third (FITB) -35%

The latter two are Ohio based, Midwest banks - and let me tell you the economy here is a lot worse than wherever you are.

Not out of panic but just for the fact an emotional market can do very bad things, I have cut part of the Regions Financial position through the morning - it is now down 30% for the day falling to the $9.90s. This was not an "investment" but a trade. Unfortunately that trade has downside to $8 (or heck $0 I suppose in this market) It could be down another 50% tomorrow on nothing other than fear. Can't take that chance with a 5% type of position.

I took 1000 shares out at $11.42 and 750 shares out at $10.99, so half the position dropped. 1750 shares left.

Still have half the position on; if it breaks below $7 we just have to hit the eject button since that will mean a crisis of confidence.

Long Regions Financial in fund; no personal position

Interested in Joy Global (JOYG) Under $42 But...

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I am interested in Joy Global (JOYG) here as it breaches below $42, which is now lower than it was before it announced its massive share buyback program. [Sep 11: Joy Global to Buyback 1/5th of Shares this Year; 2/5ths by 2011]. However, the problem with a lack of credit is just about all major sales purchases of any major product, the world over, is based on financing. Without financing, we have no global economy. We have no big ticket purchases such as huge mining equipment. Etc. Hence, we remain on a precipice to see if the banks will stop hoarding cash or not. The one problem with this bailout other than being too small in size to address the problem is, there is no guarantee that the cash we give them won't just sit on their balance sheet to protect themselves. Instead of the true intent - to be lent out. You would think this would be a moment where the banks of countries who actually have savers can swoop in and take the place of American (and some European) institutions on the global stage but we are not seeing that yet as everyone sits on their hands. It is quite an amazing moment in history.
  • As the world's mining equipment makers meet here for their quadrennial trade show this week, they should be in a celebratory mood given the booming business they have done since they last got together. Instead, a mood of uncertainty prevails at MINExpo, with one question hanging over the event like fog: how much of a toll will the global financial crisis take on their sales?
  • There are signs that the global credit crisis and historic changes on Wall Street are affecting the industry's sales financing model, which relies on securitization of customer loans.
  • On Saturday, Sergio Marchionne, chief executive of Italian industrial company Fiat, said the credit crisis had brought the financing business at Fiat's construction and farm equipment units to "an absolute standstill." He predicted there would be a "phenomenal repricing of risk" that would not spare anyone in the equipment industry. (this would be a disaster for the Caterpillars, Deere's, CNH Global's etc)
  • The four years since the manufacturers last met have been wildly profitable. With prices of copper, nickel, iron ore and other metals rising with consumption and infrastructure investment in developing countries, mining companies worldwide stepped up orders for such equipment as gigantic shovels, drills and excavators. Two-year waits for some equipment became common as companies like Caterpillar Inc (CAT) and Komatsu Ltd dealt with the spike in demand and a shortage of some supplies, like huge tires and large metal castings.
  • "Is this a correction or the end of the bull market?" Nicholas Brooks, head of research and investment strategy at ETF Securities, asked last week. "This is the key question." It is also the key question at companies like Bucyrus International (BUCY), Joy Global (JOYG) and Terex (TEX), which make draglines and mining trucks, some the size of small office buildings, on display at the show
  • In July, Jim Owens, Caterpillar's chief executive, said commodity prices could fall "significantly ... I'm talking 30 percent-ish and still be at levels that would be attractive to drive investment in the mining and oil and gas industries because there has been such a prolonged period of underinvestment." Speaking in Beijing a month later, Owens said: "Caterpillar has so many orders for heavy mining and power generation equipment that it is sold out of most items through 2010." (that's fine and dandy but....no financing = no orders at least in the Western world - some in the East still have cash I suppose)
  • But even if that business holds up, a potential trouble area for the companies is the coal industry, which was until recently a bright spot for equipment manufacturers. The big story has been China, which used to be a coal exporter but is now an importer as it builds about two new coal-fired power plants a month.
  • Analysts believed China's planned power generation expansion alone would increase global coal demand by nearly 4 percent per year through 2011. That doubled the Central Appalachian spot coal price in the last year and caused U.S. coal exports to rise 42 percent in the first quarter, along with production increases in the United States and Canada. But as private companies have scrambled to get into the Chinese utility market, margins have contracted. In a recent note, JP Morgan's Ann Duignan estimated that 80 percent of the country's power producing industry was losing money, suggesting companies may have overestimated demand.
Good times. Every investing decision now is such a complex matrix and until we see if banks begin to lend we simply cannot make a decision.

No position


Barron's: The Pain of Deleveraging

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I saw this link to a very good Barron's story over at Marketfolly blog and wanted to bring it over here. The gentleman being interviewed pretty much word for word agrees with much of what we've been bringing forth. Now, I cannot be in Barron's every week, so I can understand why they interviewed him instead of me ;)

INTERVIEW

The Pain of Deleveraging Will Be Deep and Wide

Felix Zulauf, Founder, Zulauf Asset Management
By LAWRENCE C. STRAUSS

AN INTERVIEW WITH FELIX ZULAUF: A bleak long-term view on stocks

AS THE CREDIT CRISIS INTENSIFIED LAST WEEK, radically altering the Wall Street landscape and the government's role in stabilizing the financial system, Barron's sought out Switzerland-based Felix Zulauf for a global macro perspective. A longtime member of Barron's

Roundtable, the founder of Zulauf Asset Management is now equity-averse -- he prefers gold and government bonds -- but further out, sees untapped growth potential in emerging-markets.

[pic]
Gary Spector

Barron's: It's been an unprecedented time in the financial markets, with Lehman filing for bankruptcy protection, Merrill Lynch being bought by Bank of America and AIG getting rescued by the U.S. government. What's the fallout going to be?

Zulauf: The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system -- that is, the global credit system dominated by the investment-bank giants that have been the major creators of credit in the last cycle -- turns down, the fallout is going to be terrible.

Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I've been fearful of this.

So far, what we're seeing is the pain in the financial system. Later on, we'll see the echo effect of the pain in the real economy. I can't understand economists talking about no recession or mild recession. This is the worst financial crisis since the 1930s. It's different than the '30s, but is the worst since then, and the consequences will be very, very painful for virtually everybody in our economies.

So it's a global downturn?

That's right. It started out in the U.S., but it is a global event, led by the [excessive lending practices that grew up in the] housing boom in the U.S. But we also had housing booms in some of the European countries, and in some of the emerging countries. People are already talking about a glut of unsold homes in China.

How will these countries fight this severe downturn?

Governments, particularly those in the industrialized economies, will use fiscal stimuli to prop up the system and prevent them from collapsing. Usually, those stimuli are a little too small to really have a lasting impact, which is usually spent after two to three quarters. So we could have a pop in the market in '09 and the economy into 2010, and then it disappears again; then there is the next fiscal program, and so on. That can go on for a long time.

By issuing more debt, all of these governments are trying to stimulate deteriorating economies. But what do you see as some of the other consequences of all that additional debt?

Government debt is going to rise dramatically over the next five to 10 years. Government debt is at 300% of [gross domestic product] in most industrialized countries, if you calculate correctly. That can increase to 400% and 500%, but at some point the government-bond market will not take this without any consequences. That will lead to rising long-term interest rates. But because the economy is not on solid footing yet, short-term rates will stay low for a long time. So you will have a very steep yield curve for many, many years, and this is bearish for bonds since their prices keep falling.

What's your take on the inflation outlook?

Most governments and central bankers are still concerned about the inflation rate. I think for cyclical reasons that inflation will probably drop sharply into '09, partly due to lower commodity prices. But what's more important thereafter is that there will be a secular rise of the inflation rate, because governments and central bankers will be forced to reflate these economies in a big, big way, and this will be bad for nominal assets, whose value decreases because of less purchasing power. But it will be good for real assets at some point of time in the future. For example, companies can adjust by raising their prices and growing their incomes.

What does all of this deleveraging, in which firms try to get various forms of debt off their balance sheet, mean for those involved?

When the deleveraging starts due to declining asset prices, there is no one there to reverse it. I cannot see the private sector stopping this and turning it around. It has to be the government, together with the central banks, and they are starting to do that.

What's your assessment of the steps Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson have taken to stem these problems?

It's a challenging job. Bernanke and his team and Treasury are doing the utmost, but doing the utmost means they're always one step behind. So far, it seems that the Fed is constrained by not being able to expand its balance sheet. It has replaced a lot of Treasury paper with other paper of lower quality, and the level of Treasury paper on the Fed's balance sheet has now reached such a low point that it cannot expand more without really monetizing debt.

You can't stop this [downturn] or turn it around without going to monetization, a step the central bank hesitates to take. But eventually the developments will force the Fed to do it.

What's your reaction to Friday's announcement that Paulson is crafting a plan for the federal government to buy illiquid assets from various financial firms?

Treasury, together with the Fed, is taking a big step forward to keep the system from melting down. It will work, but it has to be at least $1 trillion in size and the Fed has to help by cutting rates. The idea is good; now the Treasury has to make it solid and the Fed has to lend its support. This is probably the beginning of a medium-term bottom. Usually a good bottom, even medium term, doesn't stand on one leg. In the coming three or four weeks, the low will be tested, but from there we have a chance for a good medium-term rally.

Could you elaborate?

What the Fed has to do is buy paper in the asset market, including Treasuries and corporate bonds, and create new money in the financial system -- because the deflationary process created by the deleveraging is at work. Deflationary power is growing dramatically, and the Fed has to replace the dollars that have disappeared into a black hole. The private credit system cannot do that anymore. The Fed and government are really the lenders of last resort.

From your vantage point, what do you see happening to the Eurozone's economy?

Short term, it will probably get a little bit worse in Europe, because we have a different policy mix than in the U.S. Your central bank has cut rates. They've been aware of the problem. The fiscal situation is expansive already, whereas in Europe we have tightening fiscal policy, and we have still a restrictive central bank that's looking at holding the value of the euro. So Europe could get hurt a little more than the U.S. in the short term, but I think it will do better over the medium term.

Why is that?

First of all, Europe can finance itself, meaning it's not dependent on outside money. It runs a slight current-account surplus and, net-net, it is not indebted to the rest of the world. The U.S. is indebted to the rest of the world; that's a major difference. Also, Eurozone households [collectively] run a financial surplus, while U.S. households have deficits. So when you look at the large European economies such as those in Germany or France, the consumer is in much better shape and the banks are probably in a little bit better shape than in the U.S., although some internationally active banks and investment banks are like their U.S. competitors.

What about emerging-market economies?

Even emerging economies are getting hurt. We have seen how real-estate prices in some emerging economies, from the Baltic States to some Asian countries, are coming down. But these countries have a better situation from a very, very long-term point of view because of demographics. They are much younger nations. They are much lower in their standard of living, they are going up the ladder, and they are competitive.

Another thing to consider is that current-account and trade deficits will shrink. So what used to be a big stimulus for emerging economies will be curtailed and it will hurt those economies in the short run much more than the markets assume.

What do you see ahead for the U.S. economy and elsewhere?

The U.S. economy goes flat for several years, and from time to time there probably will be major fiscal programs, each one bigger than the previous one, to help the economy. Europe will be similar; its potential growth is relatively low, with a stagnating population.

The emerging economies have much higher potential growth rates. They are going through a down-cycle, but they will come up again in the next cycle and have higher growth rates. But it is going to be a very tough 2009, a global recession. Whoever gets elected president in November will come through with a fiscal program. Monetary policy is really ineffective in this situation. When you have a balance-sheet recession and everybody is deleveraging, monetary policy cannot do the trick. It doesn't work because there is no one willing to leverage up their own balance sheet.

Around these parts there has been a lot of focus on Merrill, Lehman and AIG, not to mention Fannie Mae and Freddie Mac, which the U.S. government bailed out recently. What does the future hold for financial firms globally?

Bankers have to learn that banking is an industry like any other industry. The financial sector has grown dramatically over recent decades, and I think it has grown to a level that is too big in proportion to total GDP.

Global financial-sector debt has gone up fivefold in the last 25 years relative to GDP. So what you now see is a reversal back to the mean. That means that the financial sector as a profit generator, as an employer and as a provider of services will shrink over many years -- back to a level that is more normal than in recent years. The financial-services industry has been treated extremely well for a long time and people made a lot of money and created careers, etc. But it is going to be much, much tougher in the next 10 years globally.

Do you see any industries that look promising at the macro level?

First, we go through a down-cycle, and it will affect virtually every industry. After that down-cycle is over, particularly in the emerging economies that have higher growth potential, it will turn up again. It could again be infrastructure-related assets or commodity-related assets that will perform very well. If I'm right in this scenario, what will happen is we will create a stimulus to grow in the future. And those who grow the best in a world of stimuli will be those that have the highest growth potential, namely the emerging economies. And then we will see rising bond yields. They will go in cycles, of course, and they will not shoot up straight. But they will go up.

What investments look interesting to you?

In this environment, those who do not lose win. For the average guy, I'd say go into the most defensive position. I'm not really interested in any longs in equities. I'm holding a lot of government bonds on the long side. I suggest that American investors stick to shorter-term Treasuries with maturities of up to two years.

Any other suggestions for equity holdings?

If you have extra money left and want to be more aggressive, you can play the markets short-term. There are going to be a lot of runs up and down in a declining market.

This is all sounds very bleak, Felix.

I'm not interested in any longs in equities. If you are an optimist by nature and if you want to be long, the one area that you should look at is daily necessities, notably consumer staples. Companies like Procter & Gamble [ticker: PG], General Mills [GIS] and maybe Johnson & Johnson [JNJ]. Those are the defensive names. But I have absolutely no interest in investing on the long side in anything that is cyclical in nature, because this cycle could last longer on the downside and go deeper than most investors assume.

Thanks very much.


About that Bailout Rally....

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not so much on the bailout rally...

Regionals Financial (RF) is being killed - why not. Danger is now any medium sized bank they can panic sell and it can be down 40% as people avoid risk in all banks not named JPMorgan, Bank of American or ....Wells Fargo (WFC) - which on the other hand is up 2% - the stock that can't be brought down. Not a good situation. I am still boggled where Citigroup (C) is getting the money to take $42 Billion worth of writeoffs when their balance sheet is mangled. Something just doesn't smell right in that situation.

The good news is thus far we have held the previous support of 1165-1170 on the S&P 500 which coincides with October 2005 lows.

The bad news is its not even 11 AM.

Apple (AAPL) obliterated to the tune of 15%+ on multiple downgrades and that's the "people's stocks" so another strike to confidence.

Not a good day. It could be worse - I could of followed Cramer's pound the table buy of Wachovia (WB)...

Sunday, September 28, 2008

Citigroup (C) & Wells Fargo (WFC) Bidding for Wachovia (WB)

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Two questions/comments - I was wondering why Wells Fargo was so strong Friday and where is Citigroup getting the money for this when they themselves are a huge risk? Hmmm....

Before you read this article, if you do not know what an option ARM loan is you need to read this [Aug 13: Option ARMs - Who Thought Up These Time Bombs?] Then after you read that, consider Wachovia has $122B of this type of mortgage on its balance sheet. And consider, by the time it is said and done, my belief is 70-80% of these option ARMs (the most toxic of all mortgages) will be "walk aways" and hence dead money. Which means there is no income stream and its just an empty piece of paper. Then consider this is the type of mortgage that the government will be sopping up and putting onto our national balance sheet while talking the talk that "hey if we hold these long enough we could make money on the deal!". No, option ARMs are going to be for the vast majority - dead. If home prices don't rise their usefulness is deemed nil.

This is one bank, granted the 4th largest in the nation, and on one balance sheet $122B of that $700B could be used. For ONE TYPE of MORTGAGE. This is why I think $700B is just a fraction of what is really needed and after an initial happy period we are going to be gulping again. But if you are Wells Fargo and you buy Wachovia optionARM-less, handing the risk off to you and me (taxpayers) you are one smart cookie. Don't hate the player, hate the game.

Again I keep asking what happens if one of the big 3 gets in trouble anytime in the next decade? Citigroup, Bank of America - Countrywide - Merrill Lynch, or JPMorgan - Washington Mutual - Bear Stearns. They obviously cannot be allowed to fail... what happens then? Much like we've found the answer to "easy money" policies of Alan Greenspan to be ... well a lot more easy money; so have we decided that the answer to "too big to fail" is.... well create even larger entities. Do you see how we never learn from past mistakes? Or in times of desperation there are no good solutions?
  • Federal regulators on Sunday night were pressing for the sale of yet another troubled bank — this time, the Wachovia Corporation — in a move that would concentrate power within the nation’s banking industry in the hands of a few giant lenders.
  • Wachovia, the nation’s fourth-largest bank, was negotiating to sell itself to Wells Fargo or Citigroup. Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer. (oh really? well there are 2 ways to skin that cat - instead of direct loan guarantees ala Bear Stearns, why not just a direct sale of toxic loans to US government - it's now not only AN option, but THE option - so what exactly is the government "resisting"?)
  • A sale to either Wells Fargo or Citigroup would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and whichever bank acquired Wachovia. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors. (unintended consequences - less competitors, less choices) While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts.
  • Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department who, took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books. (Robert K Steel - another Goldman man who in the span of 4 months will receive an enormous payout - while the stock will most likely drop 70-80-90% on his watch) Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial backstop, according to people briefed and involved with the process.
  • People involved in the talks said Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday. (or $16 that it was earlier in the week)
Eyeing Wells Fargo

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 8

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Year 2, Week 8 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash (1 position [SHV] + cash): 44.8% (vs 38.5% last week)
32 long bias: 51.4% (vs 49.8% last week)
7 short bias: 3.8% (vs 11.7% last week)

39 positions (vs 45 last week)
Additions: Regions Financial (RF)
Removals: Amazon.com (AMZN), Walter Industries (WLT), Massey Energy (MEE), Constellation Energy (CEG), Big Lots (BIG), BJ's Wholesale Club (BJ), Millipore (MIL)

Top 10 positions = 30.4% of fund (vs 23.2% last week)
24 of the 39 positions are at least 1% of the fund's overall holdings (61%)

Major changes and weekly thoughts
If you've been reading along I don't have much to add to this market. It is unlike any many have experienced and unfortunately I do not see that changing soon. We have the mother of all bailouts coming and everyone will be watching the credit markets to see if this soothes the nerves - it is all about confidence. My gut tells me the problem is so much larger than even $700B so after an initial "happy" period this will become clear to the market and this will set the path for another leg down. When the timing of this is, is beyond me. I hope I am wrong in this prediction for obvious reasons as it would cause a lot of further pain.

As for individual stocks, it is really dart throwing out there... very little has to do with fundamentals so hence our basis for investing is useless in this market and has been for a long time. Despite what I've been forced to do here, I much prefer to build core positions and trade around the edges, as opposed to the wholesale trading in and out that has become necessary the past few months. In the first part of this bear market there were at least a few groups that were immune and doing sustained runs - now there is very little of this nature. So what works today, you can assume will be sold off in 3-5 days, and vice versa. It is a troubling time for investors. To that end I rarely carry positions with 5-6-7% type of stakes like I used to, nor do I have a major exposure in the top 10 positions as I used to. The risk of a stock blowing up and dropping 40% in hours is too great.

I've adopted a high cash position and basically exposure to healthcare and darting in and out of the market in the more volatile sectors to try to create some gains in a market that is cruel and unusual. The week end cash position and short position are actually understating the defensive measures we are in - I was nearing the maximum cash outlays Marketocracy.com will allow (35% cash and 25% in any 1 position) mid week as we were >55% in cash or cash equivalents (SVH). I had a much larger short position most of the week but began lifting that midweek as I did not want to be standing in front of any "hey the government is here to save us again". This is very repetative as we've had the same rally going back over a year - when the Fed first cut rates we actually raced to all time highs as "the government is here to save us" (I know, I know the Federal Reserve is an "independent entity" free from a political nature and not really the government - yeh right), then when they bailed out Bear Stearns in March we had 7 weeks of happiness as the government was here to save us, then when they took over Freddie and Fannie we had a full 24 hours of "celebration" as we were again saved, and so on and so forth. I was not optimistic in any of those "saves" and I'm not optimistic here, but that doesn't mean the market cannot rally on misguided hope. It's put on some serious short smashing rallies during the past 14 months, which eventually it gave up as "reality" eventually trumped "hope". But if you stand in front of hope you can take major losses so that's all we are trying to avoid - timing is everything - even for shorts. The tough part of this market is we've been really outperforming the market on down days but getting completely crunched on the huge rallies within this bear market as we have sector short ETFs as opposed to being able to short individual names. Hard to make any sustained upward movement in the overall portfolio without perfect market timing which no one can do.

I am hoping for a rally to S&P 1250 at which point I can see an easy place to get aggressive again on the short side. Complicating matters are earnings season beginning - and as I outlined this week - the same message I've been pressing all year - there is no "2nd half 2008 recovery" and earnings expectations do not reflect this. So I see a lot of danger from that front ahead as 4th quarter estimates need to be ratched down, big time. Ironically some of the stocks with the greatest earnings stability are the ones being hurt the most right now. Hence, there is no place to run or hide in this market - so no reason to put a lot of capital at risk. We do have a relatively large "long financial" exposure to start the week - only for a trade on bailout happiness. And we bought some commodities late in the week as they were destroyed (again) - most have now given back an entire year of gains even though many have earnings 50-100% higher than a year ago. The bears will say that was the top of the cycle, and earnings are going back to where they were 2-3 years ago. Perhaps, but I don't believe it to be true for all commodities - potash prices in fact are completely flat the past 4 months while the stocks have been destroyed. But that is talking a fine tooth needle in a market that using sledgehammers. This only reinforces the fact that this is not a market that serves our style of finding good growth prospects - we have many stocks now trading at single digit multiples for 30-50%+ growth. It does not matter - they just keep going down.

The larger weekly changes (chronologically) to the fund below:
  1. Monday: we had put a "trade" only on Amazon.com (AMZN) in the post bailout rumor rally last week, in case the market continued its run up, but on Monday the stock broke support so we quickly sold the stock for a small loss in the $78s. By the end of the week the stock had fallen another 10%+ as Research in Motion (RIMM) put a bad taste around most technology stocks.
  2. As James River Coal (JRCC) spikes to $36 we took off almost our entire position and dropped it to a 0.1% stake. There is no investing in this market, only trading - by the end of the week JRCC had dropped to the $24s - otherwise known as a 33% drop between Monday and Friday. This is an example of what I would consider a "great trade" yet we still took a hit on this position this week since we began buying back 1 day too early.
  3. Speaking of, we closed Massey Energy (MEE) and Walter Industries (WLT) in that spike Monday. As stated we cut out all other coal positions since they all trade in unison and you could see that Friday when they all were hit to the tune of 7-10% losses. Hence we are just focusing on 1 name in the sector and "trading" it... that's all this market offers at this time. This turned out to be a good trade as well as Monday was the highlight of the week for this group. I still like this group for the long run - but fundamentals mean little so we are going to respect that and avoid further carnage.
  4. We closed the trade of Constellation Energy (CEG) for a small loss; I was hoping for a better buyout price for this wounded animal, but management decided to take Buffet's offer to protect itself from the death spiral of credit agency downgrades and short attacks. This has been a lethal combination for other companies.
  5. Speaking to the nature of a market with no memory or logic, Lennar (LEN) sold off on its earnings to the tune of nearly 10%, but the next day rallied nearly 20%. Logic I tell you. I took profits on Lennar on that near 20% move Wednesday.
  6. Sequenom (SQNM) had very positive data to report for its next stage of results from the Down Syndrome's test, and the stock (which reacted quite mildly really in afterhours) took off like a rocket the next morning. After the stock was up 25% Wednesday morning we took 1/3rd off the table just under $26.
  7. Wednesday I started Alabama based Regions Financial (RF) as a "bailout" trade - this is a smaller regional bank with a high beta (volatility) so a good trading vehicle - however I should of bought Wells Fargo (WFC) as well which I assume right now is among the most highly sought after stock in the institutional world judging by how strong the chart is. I did add more Friday as the market panicked on "no they're fighting again and maybe there won't be a bailout after all" trade down in the morning.
  8. I began rebuilding the James River Coal I sold Monday near $36 in the $27/$28 range not 48 hours later - a market with no memory. But I started slowly saying I'd get more aggressive in the $24 range. Which we got Friday, so I added more there.
  9. Thursday, I cut some of my consumer exposure with sales of Big Lots (BIG) and BJ's Wholesale Club (BJ). Basically I am adopting the same strategy as the rest of the portfolio. Everything is a trade now, not an investment so it's better to have fewer positions in each "sector" - when that sector is in favor - you can sell it down - then 48-96 hours when its out of favor you buy it back. Keep repeating and hopefully you can make a few bucks. This strategy is too time consuming to do with 5-6 names in a sector so I've been consolidating. Again, these stocks simply do not trade on individual merits anymore - its just a big sector allocation trade every day, and has been for months on end.
  10. I have added a lot of healthcare stocks the past 2 months, so I decided to cull the herd a bit - the weakest chart is Millipore (MIL) so I closed that position. Simple as that, it broke multiple support areas so until it gets back above those - it is a short on a rally, not a buy.
  11. I started rebuilding Mosaic (MOS) ahead of this week's earnings. Aha, 1 day too early and in this market that means you lose 10% in a jiffy. But I'm an incremental buyer so we only went up to a 2.6% stake Thursday, and then up to 3.4% Friday. I also added to Potash (POT) and CF Industries (CF) Friday taking them up from 0.1% stakes as they are nearing an oversold condition. Again, no investing here - just trading. When they bounce to near resistance I am going to avoid the Kool Aid of "people love commodities again" and just sell them, and wait for the next demolishment. It is tiring but the only way to make a buck off these stocks. One day this will change. Who knows when.
  12. Last, I cut more Sequenom (SQNM) to lock in profit Friday - if it blows past $29 I'll pay up to get these shares back as this will be a new breakout (which we rarely see in this type of market), and bought some exposure in other healthcare stocks. I have such little long exposure that if the market rallies (on hope) I partake very little - but I trust so little the only space I really want exposure is healthcare. I also bought some Buckle (BKE) on the pullback - again I've cut back consumer exposure earlier in the week, so with fewer names I can build the remaining names into larger position.
The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows

27 Stocks Returning 6%+ this Week

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Very slim pickings this week - generally a 6%+ bogey is a low bar but only 27 results this week. This is a 'deflation' in all sectors, asset classes, and investments. The action under the surface is far worse than the surface is showing. No real pattern other than a few foreign stocks rebounding somewhat after months of slashing. Sequenom (SQNM) was obviously event driven... Microsoft (MSFT) and Nike (NKE) announced a buyback, and Goldman Sachs (GS) gave away the store to Warren Buffet. Not much out there at all to cling to.

Criteria
  1. Market capitalization $1.50B+
  2. Average trading volume 100K+
  3. Stock price $10+
  4. Return this week 6%+
Green names we own, blue names we have owned in the past or discussed in the blog.

Symbol Company Name % Price Change 1 Week
SQNM Sequenom Inc 36.9
ORH Odyssey Re Holdings Corp 18.6
FDP Fresh Del Monte Produce Inc 17.8
SIG Signet Jewelers Ord Shs 16.0
VRTX Vertex Pharmaceuticals Inc 15.9
PZE Petrobras Energia ADR 14.8
TEO Telecom Argentina ADR 11.2
LM Legg Mason Inc 11.0
ITYBY Imperial Tobacco Group ADR 10.2
BWP Boardwalk Pipeline Partners LP 9.9
REP Repsol YPF Depository Receipt 9.9
ZFSVY Zurich Fin Svc Depository Receipt 9.2
MDZ MDS INC 9.1
MSFT Microsoft Corp 8.9
BTM Brasil Telecom ADR 8.6
HMY Harmony Gold Mining ADR 8.2
NMR Nomura Holdings ADR Reptg One Ord Shs 7.8
ANZBY Australia and New Zealand Banking ADR= 7.8
MICC Millicom International Cellular SA 7.6
FFH Fairfax Financial Holdings Ltd 7.5
CPL CPFL Energia SA 7.5
BRP Brasil Telecom Participacoes ADR 6.7
MBI MBIA Inc 6.7
UDR UDR REIT 6.6
NKE NIKE Inc 6.4
GS Goldman Sachs Group Inc 6.3
SAN Banco Santander Depository Receipt 6.2

Saturday, September 27, 2008

Heads We Win; Tails We Win

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Speaking of Executive Pay in a "Heads we win! Tails we win!" culture - Bloomberg: Wall Street Executives Scored $3 Billion as Banks Rose and Fell

Again let me remind you - there are only a few people in the world with the skill set to run a company (into the ground) and create a (lax) system of (gross in)competance - so therefore we need to pay them these levels of dollars. Because if we did not, we'd be stuck with people of far less intellect and ability. Yep. That's the bill of goods we're sold for years on end. And why the wealth differential among the top and bottom (socialist alert!) is the widest since the late 1920s. Which ushered in quite a nice era in the 1930s ;) And remember, anyone who complains about the system is simply not working hard enough to get to the top. That's what I repeat to all these people working 2 jobs to get by who claim this system is a "bit" top heavy - simply not working hard enough.

EDIT Sunday: Latest golden parachute is Washington Mutual CEO who has been on the job under 3 weeks. For that work he looks to be getting somewhere in the range of $13-$19 million. (different sources quote different numbers) It's good work if you can get it. I wonder if this will raise a political firestorm.
  • Washington Mutual's new CEO Alan Fishman -- who had been on the job a measly 17 days -- was paid nearly $20 million in the last month. That includes a $7.5 million bonus when he was hired Sept. 8. And it includes a mind-blowing $11.6 million cash severance now that the company has gone under. That's on top of his base salary -- a cool $1 million a year. Plus, he was eligible for annual bonuses worth up to 365 percent of his base pay.
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  • Wall Street's five biggest firms paid more than $3 billion in the last five years to their top executives, while they presided over the packaging and sale of loans that helped bring down the investment-banking system. (do we get a refund? Can we roll $2.5B of that into the bailout bill? I mean that still leaves $500M for the executives to somehow scrimp by in life)
  • Merrill Lynch & Co., once the largest U.S. brokerage, paid its chief executives the most, with Stanley O'Neal taking in $172 million from 2003 to 2007 and John Thain $86 million after a month's work last year. The company agreed to be acquired by Bank of America Corp. for about $50 billion on Sept. 15. Bear Stearns Cos.'s James ``Jimmy'' Cayne made $161 million before the company collapsed and was sold to JPMorgan Chase & Co. in June. (oh some old friends! [Sep 17: Merrill's Thain, Aides get $200M for Year] I always think about what island Stanley O'Neil is sipping fruity drinks on as the financial world he and friends bilked collapses [Oct 30: You're Fired! Now Here is $160M to Help Ease the Pain])
  • U.S. Treasury Secretary Henry Paulson, the former Goldman Sachs Group Inc. CEO, who received about $111 million between 2003 and 2006, said in testimony to Congress on Sept. 24 that he would accept such limits as part of the plan, after initially opposing them. (for those that don't know he was able to sell all his Goldman Sachs stock TAX FREE as part of his deal to join the US Treasury - I've seen estimates of his wealth at $700M but since I can't source them it's just heresay )
  • ``Shareholders and boards should have done something about this a long time ago,'' said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. ``They justified these levels of pay on the idea that they're all geniuses. I think that balloon has burst.'' (uhh, but sir - the boards are usually other CEOs or other C level executives - haha, you see when the fox watches the hen house then... ah, nevermind - we'll see a downtick/sideways in compensation for 1-2 years like after Enron/Worldcom and then we'll forget all our lessons and just repeat it - short attention spans in America - unfortunately Mr Elson I could of lifted your quote directly from stories I read 2001... or in fact 1992 - things never change because the system architecture never changes)
  • Wall Street firms have shared profits liberally with employees. The five biggest -- Goldman, Morgan Stanley, Merrill, Lehman Brothers Holdings Inc. and Bear Stearns -- paid their 185,687 employees $66 billion in 2007, as problems with subprime mortgages mounted, including about $39 billion in bonuses. That amounts to average pay of $353,089 per employee, including an average bonus of $211,849. The five firms had combined net income of $93 billion during the five years through 2007. (so they paid out more in 1 year to employees than their combined net income in 5 years. That's a need trick - how could they do that? Ah stock and stock options - see this Wall Street game has a very cool trick - issue options each year, and the investors subsidize the insiders to riches - since many investors are scrambling for ways to generate income for retirement we all play along the game - i.e. "The Great Transfer of Wealth" game - it's quite a neat set up really - in my hope to make 8% a year so I can send Johnny to college, I combine with 100,000s of others and we send our money in, and then you sell me secondaries so you can reward those creating awesome innovations to American finance like CDOs and MBSs)
  • The $3.1 billion paid to the top five executives at the firms between 2003 and 2007 was about three times what JPMorgan spent to buy Bear Stearns. Goldman Sachs had the highest total, with $859 million, followed by Bear Stearns at $609 million. CEO pay at the five firms increased each year, doubling to $253 million in 2007, according to data compiled from company filings. (this is because so few in the world are qualified to do what they do - keep repeating it on FOX - I'm brainwashed after seeing it for 10+ years)
  • Goldman Chief Executive Officer Lloyd Blankfein made $57.6 million in 2007 in salary and bonus, which includes stock and options granted at the beginning of the fiscal year to reward performance the previous year. Co- presidents Gary Cohn and Jon Winkelried each got $56 million. (so how does it work = lead a company to bankruptcy = $20-30B a year. Keep a company out of bankruptcy = $55B a year? Got it. I know, I know - the services they provide are invaluable and a company led by a CEO with a $2 million pay package would never be able to do such incredible work. Now as a reward let's get that bailout going to help them out from their missteps)
  • Morgan Stanley's current and former chief executives, John Mack and Philip Purcell, were paid about $194 million over the last five years. Mark Lake, a spokesman for Morgan Stanley, pointed to Mack's decision not to take a bonus for 2007 and said he doesn't make ``a lot'' compared with other CEOS. (whew! glad to know - as a socialist I was about to make a comment about the $40 Million PER year but I was too busy writing a check to Congress to subsidize this salary and hundreds just like it)
  • The U.S. government has a weak record when it comes to regulating compensation, said Kevin Murphy, a professor of finance at the Marshall School of Business at the University of Southern California in Los Angeles. ``Every government attempt that has existed to limit or regulate CEO pay has backfired,'' Murphy said. ``I'm fairly confident this one will backfire too. There are always loopholes.'' (of course)
  • Rather than government regulation, the solution is in better corporate governance, Elson said. Companies should negotiate more aggressively with executives and should establish rules that encourage shareholders to protest excessive pay (sounds nice on paper, but nah - let's just fuss about it for a year and then people will forget about all this by 2010 and we can go back to the "good ole days")
Hey lookee here, I'm just as greedy as the next capitalist in America. But at some point it does get a bit ridiculous when so many are struggling just to make it by and the only response to their plight is "work harder" or "move to Canada if you want to be a socialist". When most of us fail, we get no reward for it. Something is very backwards. Since we're all socialists now I guess I can say these things without fear of being called a "Canadian" (the horror)

Michael Brush over at MSN has a good report on the latest "crackdown" on not rewarding those we are going to bailout with excessive pay.... i.e. we subsidize away their problems on the balance sheet and they still laugh to the ... err, bank. Conclusion: It's toothless as usual. Remember, this is America - you pay for the politicians and you set the rules. Occassionally once a decade an emergency so great happens that this gets rule gets pushed back for a few months - and then we return to business as usual. Black Swans commence - we ask how it all happened, and then repeat it every 6-8 years. Booyah.

Interesting Reactions Worldwide - What Years of Neglect and Lack of National Policy is Creating

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Remember, we've been talking about the Post-American era that is coming soon, where there is not 1 superpower [Aug 19: Coming Soon: A Post American World], but due to its self inflicted wounds and gluttony, the "Rise of the Rest" (Fareed Zakaria) will occur (if you are new to the blog I'd highly recommend reading this post from May) Remember, we are shouted at daily ("We're #1") that the US led the world into this mess, and we'll lead them out. I believe differently. This is such a deep rooted mess, the rest of the world will lead us out, not vice versa. We'll know in a few years but I wrote often in fall 2007 that we have a very inward looking ("if it doesn't happen in America, it doesn't matter") arrogance about us. So of course WE will lead the rest of the world out of this mess... no one else is strong enough. This is a global world, with competitors running at us hard and fast - the quicker we get out of our inward gaze and realize this - the better. Perhaps being taken down a few rungs will help us on that path... I hope so. But we'll see. We have very short memories.

We talked a few days ago about the reactions in Asia and Europe [Views of the US from Abroad] - remember during the late 90s Asian crisis we berated those "2nd world countries" for not allowing the free market to work, and to stop their darn government interference - take the pain and join us "in the light" as free market capitalists. If they did not, we would not allow the IMF (International Monetary Fund) to give them loans - that's what bullies do. Now it's biting us in the rear. From my reading in the online UK papers, a lot of Asians feel quite smug about what happened here now, and how we turned into hypocrites when we do not practice what we preach.

Before the meat of the post - remember we're the world's biggest debtor. We are hostage to our creditors - our creditors wanted us to nationalize Fannie/Freddie since they held the paper - they got what they wanted. Our creditors are now worried about us as a whole. Without our creditors our system collapses. Here is what our creditors are saying now
  • Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
  • ``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
  • Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.
  • China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added. ``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.'' (translation - we own you. You do what we want you to do - we sell our US debt holdings into the open market, and your dollar turns into toilet paper and your system fails. Did I mention we own you?)
  • Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said. (it's really no different than our energy policy. Ooops, did I say policy? I meant non policy. We don't control our destiny so when oil gets too high we send our VP to Saudia Arabia to beg for more oil outflow - the parallels are striking - begging those who support us to keep the flow (oil, debt) going - this is how it works when you have no national policy and every decision is made for a 4-6 year political cycle and "how can I pander and get re-elected" instead of a 20-30 year vision) ``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
  • The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' ``This is paper and it may default and it will not increase China's national welfare.'' (scariest comment in the whole piece. Once more, if the rest of the world ever decides to stop buying our debt and financing our lifestyle and consumption - we're done - on our current path I think it happens within 15-20 years and the US defaults on its debt like some 3rd world banana republic but I'm an outlier on that one)
On to Europe - here are some interesting reactions from Germany.
  • Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it must now accept more market regulation and a loss of its financial superpower status.
  • German criticisms of Washington were echoed by leaders of governments from around the world meeting this week at the United Nations in New York. Many criticized the financial record of President George W. Bush's administration and warned that U.S. financial mistakes now threatened the global economy. It has emboldened voices in Europe, Latin America and elsewhere, who are uncomfortable with American-style capitalism and who want tighter regulation of markets.
  • German Finance Minister Peer Steinbrueck said the U.S. will lose its position as the world's undisputed financial ``superpower'' and called for a ban on speculative short-selling to help restore the global economy.
  • Steinbrueck, in a speech on the financial-market crisis to lawmakers in Berlin today, set out an eight-point plan urging greater regulation and larger capital reserves for banks. He championed the German banking system over its U.S. counterpart, dismissing the ``Anglo-Saxon'' model as having ``an exaggerated fixation on returns, along with a lack of political backbone to stand up to what he characterized as bankers’ greed. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
  • ``The long-term effects of the crisis are impossible to gauge,'' Steinbrueck said. ``One thing seems probable to me: The U.S. will lose its status as the superpower of the global financial system. The global financial system will become multipolar.''
  • Steinbrueck's comments underline a deepening divide between European and U.S. attitudes to the financial system and how to resolve the rout triggered by the worst U.S. housing slump since the Great Depression. European members of the Group of Seven leading industrial nations refused to back a U.S. bank-rescue plan Sept. 22, with Steinbrueck saying that the U.S. situation ``is not comparable'' to that in Germany.
  • Steinbrueck said that sovereign wealth funds and banks from Asia, the Middle East and Europe will play a bigger role in the new financial world. In the medium- and long-term, ``new pledges of voluntary action or self-regulation by the financial sector'' will not resolve the current crisis, he said. (hey, self regulation has worked like a charm so far!) ``That's not enough,'' he said in the speech. ``For me the important answer is stronger, internationally agreed regulation at the international level because the crisis goes beyond measures that can be taken by nation states.'' (yes but our financial firms have the lobbyists - so we'll agree to your international standards and higher regulation for a while but give it about 4 years and we'll loosen all the regulations we'll put into place slowly behind the scenes, and have a new disaster in about 8 years - it's all about the bottom line baby - those who pay, set the rules here - under our newly found socialist veneer, the self serving capitalist lives. Remember all those post Enron and Worldcom regulations??? Did it matter?? They were loosened once the fuss and attention turned to something else. You can't stop a capitalist where the compensation structure is set up to take the most risk to achieve generational wealth in just a few years - and by the time it blows up you're "golden parachuted" and someone else is left to clean the mess)
  • Steinbrueck, in his speech to the lower house of parliament, the Bundestag, blamed the U.S. as the source of the current crisis that will leave ``deep scars'' globally. ``The U.S. is the origin and the clear focal point of the crisis,'' Steinbrueck said, adding that the ramifications are now ``spreading worldwide like a poisonous oil spill.''
  • ``In my view, it's the irresponsible overemphasis on the `laissez>-faire' principle, namely giving market forces the most possible freedom from state regulation in the Anglo-American financial system.''
  • French President Nicolas Sarkozy, whose country holds the rotating EU presidency, has called for a global summit to overhaul what he has called a "crazy" financial system. (in the old days we could say "those damn socialists - why listen to them" - but frankly we are the damn socialists now so we can't use that excuse)
Note - this is not an anti-American rant. And it is so tiring to hear "why should they say anything because they would not even be around if we didn't save them in WWII" That excuse to ignore everyone in the rest of the world worked for the past 70 years - at some point it becomes useless. This is a "we need to stop being so arrogant and realize we're in a new interconnected world, and we don't have all the answers" rant. Or that we've build a system on excess and gains to fewer and fewer people (with no accountability) and eventually the dam bursts. Or if I'm anti-American for preaching such views, I guess so is Jack Welch.
  • Former General Electric Co Chairman and Chief Executive Officer Jack Welch said the U.S. economy faces a deep downturn in coming quarters, and he supports a proposed $700 billion government rescue package for the financial sector. "I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be "brutal."
  • Welch said mortgage lenders, legislators, investment bankers and others are all to blame for the crisis, which stemmed from easy credit and investors' appetite for yield. "The problem was money didn't cost anything," Welch said. "People took swings."
  • He likened the crisis to Agatha Christie's "Murder on the Orient Express," in which all the suspects turn out to be guilty; but he singled out the role of investment banks in the crisis. "We have to look at the damn investment bankers," he said. "They're playing with other people's money. The only penalty was a cut in their bonus, not their head."
Jack, that's what I've been saying - corporate America lives in a "heads we win, tails we win" executive compensation system. You take high risks, try to achieve as much compensation as possible by "beating the numbers" anyway possible and ride off in the sunset with generational wealth for your great grandkids. (hedge funds too) If you succeed - you make alot of money. If you fail - well - the outcome is NO different! You make a lot of money. The boards who determine your pay are filled with cronies, friends, and other CEOs! What a system!

There is no losing in our top echelon compensation culture and this is the result of it. Go ask Bob Nardelli and his $200M be bilked out of Home Depot. For getting fired. Anyone who argues against it is called a socialist and says if we don't pay these people the highest dollar then America will lose all its CEOs. Sure, why not - I mean terrible companies in Europe somehow are surviving by paying their CEOs far less - how are they competing globally without giving away the store to 2-3 men at the top? It's a wonder all those European and Australian and Asian companies are not bankrupt without paying their CEOs 275x the average worker. I mean 100x is outrageous - how can a CEO survive? Somehow in the US we had good companies in the 60s and 70s and 80s when CEOs did not make 250x the average wage of the worker. Somehow America did ok then? I know, I know - I'm a socialist for even bringing it up - but aren't we all now?

I've always said boxing would be a far better sport and regain its luster if it was "winner take all" - compensation systems can be tweaked for better outcomes. I've said, we'd have far fewer trials and need for lawyers (America has 80% of the world's attorneys) if the loser of the trial had to pay all costs. That would make people think twice about filing wasteful lawsuits. Compensation can help control outcomes - again. Why not the same for corporate CEO salaries? You know - if you had a terrible year - heck you only get paid $750,000. I know, it's a tough way to go through life and your kids would be shamed. Maybe a yacht would have to be sold. But if you had a great year you can make your normal $18M+
  • In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker.
I will tell you, as Medicare costs increase, global inflation increases in the long run as more humans compete for the same resources ("World of Shortages" did not go away - it will be back once the world economies rebound), and wages are depressed in the US as corporations move jobs to cheaper locales or can keep a lid on employee costs by even the threat.... it is going to set up some serious strife in the coming decade among "rich" and "formerly middle class" as people see these type of compensation systems while they fall farther behind and lifestyles erode. We have moved from a more egalitarian society in the 50s, 60s, 70s to a much more 2nd world type where the few at the top control vast resources ("overlord" class). When the sheep are getting their 3.5% wages and inflation is 2% I guess they can be sated. But with either a whole class of services that will need to be cut, or a whole class of taxes imposed on the masses to keep up with our long term obligations.... on top of the excesses at the top... the potential for social unrest in the US will increase down the road. It's going to take a long time to build and we'll create a new bubble along the way first (like tech stocks, housing, et al) to create an illusion that "we all have a chance for riches together" but after the next "Black Swan" blows up maybe middle of next decade, we should be getting closer to a day of reckoning. We are just in preview stage with the anger and uproar over this $700B bailout. Again, our Medicare obligations which no one talks about because its a problem "for another day" ('kick the can' policymaking in the US) are going to make these dollar figures look like a walk in the park.

It's going to be an interesting 20 years ahead as the sheep finally are pushed to buck against "the system". Buckle up kids.


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