Tuesday, April 14, 2009

CNBC: US Economy Could Recover Much Sooner than Expected

I've outlined in these virtual pages over the past two years why calls for an economic downturn was both (a) first missed [or dismissed as crock] by the punditry and (b) second, mis-characterized by those who used the early 90s and early 00s playbooks as the typical "corporate led recession". Indeed, I said this was to be the first consumer driven recession we've had since the late 70s/early 80s, and an extremely deep one at that... that has come to pass. Many times the market would rally in the face of these prognostications on a "belief system of denial" - so while the forecasts were quite accurate, they only mattered when the market finally was faced with a mountain of overwhelming evidence to dispute both points (a) and (b) above.

Now, as I predicted the white knights of government would come in to "fix" these problems - but even I did not imagine the scope they were willing to go. Thankfully for them, the U.S. dollar is the world reserve currency so what I did miss was that the US dollar would indeed sharply rally as more and more fiscal and monetary juicing took place. Contrast that to the United Kingdom, which are embarking on almost identical "solutions" as the U.S. for example - who had no such luck.
  • Today sterling is weaker than it was 17 years ago. Its near 30pc decline on a trade-weighted basis since mid-2007 is the steepest on record. Of the 17 currencies that make up its trade-weighted basket, sterling has fallen against all but three. It has even fallen against the Hungarian forint – a currency that has already received two dollops of IMF aid; and believe it or not, the Iraqi dinar.
Praise the currency gods we are the reserve currency or what we've see thus far would be child's play. So while I once called for a protracted multi year recession; now I believe said recession will be intersected by the "paper printing prosperity" - i.e. steal enough from the future via borrowing (or just plain printing) to create upticks in economy today. The Kick the Can solution that embodies much of US policy response the last 3 decades. Ironically this would be again somewhat similar to the late 70s and early 80s where we had a double dip recession, although the forces then were natural business cycles. We can contrast that today ....where the forces are government; not "natural". Essentially my views have changed since the quantitative easing we did foreshadow would come [Dec 1, 2008: Uncle Ben Signals the End Game], happened far earlier than predicted, and in scope not earlier imagined. Further, we thought Congressional oversight of taxpayer funds would limit the steps the government could do - but this has been completely superseded by the rogue Federal Reserve which essentially has no oversight. In "emergency times" they can do whatever they wish, and seemingly are doing so. In one of my [13 Outlier 2009 Predictions] I said the Federal Reserve balance sheet would grow to $5 Trillion before it was all said and done - we seem on our way. (please note it was $800 Billion of low risk US Treasuries before this mess started). Hence as conditions have changed - so will my views.

Now, of course I could eventually join the majority of punditry over the past 2 years, and be found completely wrong about these latest views. All good streaks must eventually end. We never know until we look back, but so far so good on the economic calls. If my view however is once more correct, we will follow an identical pattern of fall 2007 when we were in complete denial (no recession & Fed has our backside covered) and the market raced to all time highs, or multiple periods in 2008 (use early 90s, early 00s recession playbook - buy early cyclical stocks because recovery is coming in 6 months and oh yes, the Fed has it covered). This will be yet another cycle of divergence as we outlined in [Apr 3: The Current (and Coming) Disassociation Between Economics and Stock Markets] With the "paper printing prosperity" we'll see in economic figures bulls will begin preparing the game plan for the return to normalcy in 2010.

But this will be where our 2 paths shall diverge as I believe many of America's problems are not cyclical but indeed structural. Once the normal "inventory rebuilds" are over with, and every American who can will be refinanced into sub 4.4% mortagages to get one last sugar high of house ATM, and every car that can be will be sold once more at 0.0% 72 month loans (backstopped by you dear taxpayer) with unemployment insurance so that you are covered by "someone" even if you lose your job and the like - we'll once again face what got us here in the first place. A lack of productive assets in relation to what we used to have (making stuff other people want), a lack of savings by the citizenry [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] who now have 3 bubbles to "make up" (2 stock, and 1 real estate), and wage competition (stagnation) due to the flatter globe. We can continue to mask it through repeated Federal Reserve bubbles - and we have chosen to. Indeed many of these loans we will be backstopping to "Kick the Can down the road" (paper printing recovery) will now be your obligation - as it will be sitting on the Federal Reserve balance sheet (only AAA loans mind you!!) But the reality still lays beneath and won't go away; a country where 70% of the engine is based loosely on "shopping" does not really work once the Ponzi scheme of ever growing paper currency creation is acknowledged. Layered on top of these structural deficits will be yawning national debts created by this "recovery" [Mar 25, 2009: Taxpayer Welfare to the System $3 Trillion Down, $9 Trillion to Go] , in addition to entitlement program deficits we have not even begun to plan for [Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears], structrually broken state and local budgets, and new higher taxes/fees to pay for said debts. And the potential specter (if the Fed is "successful) for damning inflation which is indeed the most regressive tax on the planet.

Or if you are a bull, the thesis is we can print away all these problems with more and more US currency and hope China's a miracle unto itself to push the entire world into recovery. As we move to the "new normal" (the economy after we bounce from traumatic lows to more of a "replacement cycle" level i.e. annual car sales won't be 9 million a year, but 12-13) let us see what the more optimistic among us believe with this story from CNBC below. Because as we stated above, we must always allow for the fact (a) that we are wrong and (b) even if we are correct, the market believes for long periods of time we are wrong.
  • You've heard all the gloom and doom about this recession. Now here's some good news: the economic recovery could happen much sooner—and be much stronger—than anyone thought possible. Suddenly, a small but growing group of private-sector economists is disputing the idea that the recession will drag on for months and that the rebound will be as weak as those following the the 1991 and 2001 downturns.
  • People have been talking about an L-shaped recession,” adds Michael Mussa, senior fellow at the Peterson Institute for International Economics. “The record shows you come back sharply from deep recessions” like the current one. These economists and others see a V-shaped pattern, similar to that of the recession-recovery periods of the 1970s and 1980s. And they say there is ample evidence to support it.
  • Among the reasons for the new optimism: a significant easing of the credit crunch, improvement in consumer spending—including better auto sales—a potential bottom in housing, a less-grim jobs picture and expectations that the government's massive stimulus spending could start boosting economic growth almost immediately.
  • .... those forecasting a strong recovery point first and foremost to the waning effects of the Lehman Brothers collapse last fall, which roughly coincides with the worst of the credit crunch, and triggered a massive chain reaction in payroll and production cuts.
  • The initial adjustment tends to be too big, then there’s some reversal of that,” says Ram Bhagavatula, managing director at the hedge fund, Combinatorics Capital. That dynamic will lead to swifter and stronger recovery in both the economy and employment that many economists are forecasting.
  • Economists also cite several reasons for better labor market conditions this time. They expect job losses as well as the unemployment rate to peak close to the time growth bottoms out, as was the case in the 80s and 90s, and thus not resemble the jobless recoveries of the two most recent recessions. “Once recovery starts, it won’t be long before the unemployment rate begins to decline,” says Mussa, who doesn’t see the jobless rate breaking 10 percent.
  • Though the recession of 2001 ended in November of that year, 12 months later the economy had added just 200,000 jobs. Moreover, the jobless rate kept rising through June of 2003. By contrast, payroll losses bottomed out one month after the recession of 1982 ended in November. Payrolls were 3 million higher a year later.
  • No one is expecting such robust job growth this time, but economists say the relatively strong showing in productivity during this recession points to lean payrolls, which will have to be fattened up--in some cases, quickly--as the economy improves. "When you have high peaks in jobless claims, you have sharp declines in claims," says Brusca.
  • More broadly, economists also point to a number of economic factors that bode well, despite lingering concerns about he credit crunch. “Cyclical forces trump secular forces,” says Brusca, referring to the massive de-leveraging by both consumers and business. “This is especially true when authorities have stepped in to stabilize it,” after a shocking event like Lehman.
  • Macroeconomic Advisers, whose economist forecast for 2010 is more optimistic than that of the White House, estimates the government fiscal stimulus package will add 2 percent to GDP in the second quarter, one reason why the firm expects the economy to shrink by only 0.5 percent during the period. (this is part of the "paper prosperity" I speak of, similar to how the Bush rebate checks created an illusion of "things were not as bad as the bears said" because aggregrate economic data didn't show it)
  • Then there are a handful of cyclical elements on the verge of being positives. Consumer spending is growing again, while inventories are being wound down. Housing and autos, in particular, says economists, hint at both pent-up demand and a production rebound. “When you look at how quickly motor vehicles sales fell off the table last year--that big decline had a lot to due with the lack of financing.”

Dendreon (DNDN) Cancer Vaccine Appears to be a Success; Analysts Miss It

I wish I could say I never heard of Dendreon (DNDN) before today, but a reader was good enough to email me about this stock not even a month ago in the $3s. As a general rule, except for some of the really huge biotech stocks, I stay away from these type of names - the stock market is difficult as it is, and small cap biotech stocks make the normal stock market gambling look like child's play. Of course after today's news I wish I had investigated further. Outside of the stock reaction, it is hopefully a promising new turn in medicine.

Reuters - Dendreon Cancer Vaccine Works
  • An experimental medicine from Dendreon Corp improved survival in men with advanced forms of prostate cancer, the company said on Tuesday, bolstering chances of it becoming the first approved therapeutic vaccine for any type of cancer. Unlike traditional vaccines that prevent disease, the company's Provenge medicine treats it by stimulating the body's own immune system.
  • Shares of Dendreon (DNDN) more than tripled in heavy morning trading to as high as $22.10 and were up 138 percent at $17.38 in afternoon trade as the study results suggested a revolutionary form of therapy is on the horizon for one of the most common cancers.
  • The Phase III clinical trial met the main study goal of improving survival, prompting Dendreon to say it will seek U.S. regulatory approval of Provenge in the fourth quarter.
  • Paul Latta, an analyst with McAdams Wright Ragen, said Provenge stood to be a $200 million product if it is approved only in the advanced prostate cancer patient group, but could expand to a $1 billion blockbuster if it is expanded to men with earlier stages of the disease.
  • Aside from OrbiMed, other big institutional shareholders included BAM Capital, Barclays Global Investors, Visium Capital Management and Vanguard Group, according to Reuters data.
  • On a conference call with analysts, Gold said the trial's results were "unambiguous" and "robust" but the company deferred giving detailed data until a formal presentation on April 28 at the American Urological Association annual meeting in Chicago.
  • OrbiMed's Borho predicted Provenge, which is administered only once, would cost more than $50,000.
  • Gold (CEO) in February told Reuters he was supremely confident the IMPACT study would succeed, saying, "We're on the 10-yard line and close to putting it into the end zone." Still, Wall Street was skeptical. Dendreon shares touched a 52-week low of $2.55 in March, and no analysts polled by Reuters Estimates had a "buy" rating on the stock. (the problem is EVERY CEO talks like this - a lot of crying wolf)
  • "Nobody wanted to stick their head out because over the last 15 years no cancer immunotherapies worked in clinical trials," said Borho.

Sort of ironic story here re: our dear analyst group.
  • Research analysts are often criticized for overly promoting companies they follow despite obvious risks, but they missed the boat with an uncharacteristically conservative stance on Dendreon Corp.
  • Not one of seven analysts who published a rating on Dendreon's stock recommended buying it ahead of the release of positive results on the prostate cancer vaccine Provenge that more than doubled the share price on Tuesday. For a time the price more than tripled.
  • To be fair, Provenge was an incredibly risky bet given the 100 percent failure rate of prospective cancer vaccines that had previously reached late stage testing. "If the result would have been negative, (the share price) probably would have dropped down to cash value, which is about $1 a share," said Paul Latta, an analyst with McAdams Wright Ragen, who rates the stock "hold." "It was kind of a roulette type of game here -- all or none." (i.e. right up the current mentality of Wall Street"investing")
  • Merriman Curhan Ford analyst Joe Pantginis, one of two analysts who had a "sell" rating on Dendreon shares, admitted to getting it wrong. "While we were wrong on our call for the outcome of the story, seeing the risk as too high, today's news is a great outcome for Dendreon," Pantginis said. Yet Pantginis was not willing to go out on what now seems like a much less shaky limb and recommend buying Dendreon shares, instead joining most of his peers by bumping his rating up to "neutral.
  • Other analysts with "hold" or "sell" ratings on Dendreon, who watched as the shares jumped from Monday's $7.30 close to as high as $22.10 before settling back to around $17, maintained their conservative stance.
  • "Given the remaining regulatory hurdles for Provenge and in the absence of full presentation of the final data, we view Dendreon shares as fairly valued at the current level, which is a premium to the peer-group average that includes profitable companies," wrote Lazard Capital Markets analyst Joel Sendek, who has a "hold" rating on the shares.
  • Brean Murray Carret & Co analyst Jonathan Aschoff was unmoved by Tuesday's news and remains downright bearish on Dendreon. "We remain unconvinced until details are provided," Aschoff wrote in a research note. (it's hard to say "I'm wrong") "We are sticking with our ("sell") rating and $1 price target given the lack of details and will revisit our rating and target price on April 28," he said.
No position

WSJ: Recession Now Hits Jobs in Health Care

Part of my reason for pessimism over the medium term is trying to figure out what, ex-government transfers and ex-trying to create a new housing bubble - will create the next generation of jobs. All I can come up with is either (a) some green energy revolution even though we're about a decade behind Germany and Japan or (b) becoming a lot like Australia and being a conduit for the great Chinese consumption binge of the next 30 years. The latter would be very ironic in so many ways.

If neither of those happen I am at a loss outside of bigger and bigger government. One very bad trend I've been pointing out repeatedly is the job growth we've seen has been concentrated in 2 areas - (a) government and (b) healthcare - which is heavily reliant on government (Medicare/Medicaid). Over a year ago I highlighted this in [Apr 2, 2008: The Underemployment Rate is Rising]

Last point, we have 2 huge beaurocracies - federal government and healthcare. To keep the government from going even more insolvent we should in theory be cutting jobs from these 2 white elephants. Healthcare costs spiral out of control and we hire more people - I believe healthcare is now 16% of GDP. But how do you cut costs without cutting jobs? Thats the other dark secret - most of our recent gains in jobs are either government or healthcare related. So how do you fix the long term problems in either? Chicken or egg? They are sapping our national wealth away by their huge excesses/costs BUT they also provide the main job growth as well. As with everything my expectation is the "kick the can down the road" theory will continue - keep growing these massive beaurocracies (create more jobs and costs now) and let another generation pay for it.

I don't see any changes to this path - it took this long into the recession for the government to finally begin to lose jobs; but it was tiny (-5000) in the last monthly employment report [Apr 3: Real March Unemployment Rate Reaches 12.5%] and as each state and local government cuts job to "try" to balance the budget, we create a new one in D.C. And as you know folks, once a job is created in D.C. as part of "stimulus" it surely goes away during "good times" (not)

As with almost all the impending car crashes I don't know when the music stops in healthcare - maybe when spending is 1 out of every 4 dollars in the US. Or maybe 1 in 3. According to this article 1 in 8 people now work in healthcare... that's startling. But this recession has become so bad (excluding green shoots that are sprouting everywhere of course) that even the most protected of all vocations are FINALLY seeing weakness. But really should it be surprising considering the stories we've posted of Americans, trying to find any corner to cut, taking less trips to the doctor? [Sep 24, 2008: As Economy Gets Tough, Americans Begin to Cut out "Extras" - Like Healthcare]

  • Employment in health care, the only major industry outside the federal government still adding jobs, is succumbing to the recession.
  • Across the country, hospitals are taking financial hits. They are seeing losses in the portfolios that they rely on for investment income. The number of uninsured patients is rising. Elective procedures -- which reap big profits -- are down at a third of hospitals nationwide. Nursing homes are trimming payrolls. And with state governments continuing to cut budgets and talk of health-care reform from Washington, industry executives are preparing for even leaner times.
  • More than 16 million people -- one in eight workers on U.S. payrolls -- work in health care today, up from just 1% of the work force 50 years ago. Employment in health care and social assistance -- which includes hospitals, doctors offices, nursing homes and social services such as day care -- has grown by half a million jobs since the recession began in December 2007, while the rest of the economy has shed 5.1 million jobs.
  • But the pace of job growth in health services has slowed sharply this year. The sector added an average of 17,000 jobs per month in the first three months of the year, less than half last year's pace. Health care usually weathers downturns better than many other industries because consumers tend to cut spending on cars or clothes before they forgo trips to the emergency room or pharmacy. But this recession is the deepest in a generation.
  • Big hospitals such as the University of Pittsburgh Medical Center and Akron General Health System in Ohio have announced layoffs recently. In February, the number of mass layoffs for hospitals was double what it was a year ago, according to government data.
  • Since the Labor Department began tracking monthly unemployment figures in 1958, there have been nine recessions, but employment in health services has declined only a handful of times. The only significant losses to date occurred in mid-1984, as the industry shed 41,000 jobs, based on slightly different historical data, following the double-dip recession of the early 1980s. Since then, no month has seen a drop of more than 4,000 jobs in health care, and there have been no back-to-back declines. (remarkable - a 25 year run in job growth)
  • The decline, while unusual, is still likely to be a temporary break in the industry pattern. Growth in health-care spending, and thus employment in the sector, is likely to rebound when the recession ends, a function of the enormous advances in medical technology and Americans' strong appetite for health care. President Barack Obama has also named the sector one of his three pillars of the future U.S. economy, alongside energy and education. Health expenditures as a share of gross domestic product have more than tripled in the past 50 years to about 16% today, and the government's Centers for Medicare and Medicaid Services say that figure is likely to hit 20% within a decade. (I doubt it will take that long)
  • "Health care is the growth industry of the 21st century."
USA Today: Federal Payrolls Keep Growing Despite Downturn

Bookkeeping: Beginning a Basket of Retail Shorts - Macy's (M), Best Buy (BBY) and Bed, Bath & Beyond (BBBY)

It is hard for me to just short 1 stock anymore and go "all in" because short squeezes are happening everywhere - therefore I am going to build a basket of shorts in retail for at least a short term pullback. The Kool Aid is so thick with consumer recovery talk that it might only be for the next 5% down in the market and then I'll be out. There is an ETF for retail Retail HLDRS (RTH) but it is 25% Walmart (WMT) and and 13% Home Depot (HD) so it is a quite lousy ETF to short since its a quarter is one stock. Most of the retail ETFs I can find are similar in lousy construction.

Instead I've build a basket of 3 retail stocks I am shorting - Macy's (M), Bed Bath & Beyond (BBY), and Best Buy (BBY). If this was a normal market I'd hedge this with a long position in another retail name like say Nordstrom (JWN) but this is "student body left" trading where every stock in a sector moves together so hedging is useless.

Both BBBY and BBY lost their main competitors to bankruptcy (Linens N Things and Circuit City) yet still reported nearly -5% same store sales last quarter. And that's good? But bulls celebrated that as "better than expected". I don't try to apply logic to things - too many hedge funds were caught short and bulls overran them.

On a technical basis, Macy's (M) is a mile away from even the 20 day moving average and is approaching the 200 day moving average ($13) which it touched yesterday intraday. A "safe set up" - if this explodes through $13, we're 'wrong' and take the loss.

Best Buy (BBY) and Bed Beth & Beyond (BBBY) have similar charts - huge gaps created by sand blasting shorts off "not so special" earnings reports and gaps to fill. Also potential double tops formed in both - if it works out we can cover BBY under 35 and BBBY under 28. I have little conviction since short covering has meant more than fundamentals, so we'll see if these work out.

As a "basket" I allocated about 6%ish to this "position" - so effectively for me, it's shorting retail with a 6% fund allocation via 3 names or a mini ETF.

As an aside the "government" report on retail sales (which I take little stock in, I'd rather listen to the companies) says retail sales were weak last month.... again, it means little to me but the herd that is Wall Street uses government reports as gospel.
  • Retail sales fell unexpectedly in March, delivering a setback to hopes that the economy's steep slide could be bottoming out. The Commerce Department said retail sales dipped 1.1 percent in March. It was the biggest decline in three months and a much weaker showing than the 0.3 percent increase that analysts expected.
  • A big drop in auto sales led the overall slump in demand. Sales also plunged at clothing stores, appliance outlets and furniture stores. Sales at appliance stores fell 5.9 percent last month and furniture stores reported a 1.7 percent decline. Sales at specialty clothing stores fell 1.8 percent and dipped 0.2 percent at general merchandise stores
Ironically many of those stores above have surged 100%+ on "green shoot" sightings.

Once more, we now have a wave of tax returns which will goose retail spending in Q1 and part of Q2. Then after that we have a the Ben Bernanke "house ATM" effect that should get consumers who are not underwater (or only 5% underwater as Obama's plan allows people who owe 105% of their home to use it as an ATM) to pull money out of their house to pump up the economy. And then by next Christmas we'll be looking around begging Uncle Ben to take mortgage rates to 3% since every last way to get consumers to spend has been exhausted.

Short BBY, BBBY, M in fund; short M in personal account

Bookkeeping: Limit Order Hit for First National Financial (FNF) on Share Offering; Cutting some Blackstone (BX)

An outstanding limit order hit this morning for First National Financial (FNF) - the stock fell significantly on a share offering which is how it is "supposed" to work; unlike the REITs which are rocketing on short covering as share offerings are announced. The dilution is not that bad - only 13.3M shares on a 215M share base but at this point some stocks are so far away from even their 20 day moving average, once the tide turns I expect a lot of retracing.
  • First National Financial said Tuesday that it plans to sell 13.3 million shares in a public offering of its common stock. The firm, which provides title, insurance, specialty insurance and claims management services, said the proceeds of the sale will be used for general corporate purposes, including the potential repayment of some of the debt under its existing $1.1 billion syndicated credit agreement
We just need an excuse... now that Goldman Sachs (GS) drove the entire market up to allow it to sell its stock at the highest price possible, maybe they will now allow the market to go down. FNF is my go to stock for the "housing recovery" (title insurance) and unlike so many stocks which just are ramping with no pullback, we are getting a chance to rebuild some exposure we sold earlier.

I am also cutting half my remaining Blackstone Group (BX) long as speculative juices continue to push into lower quality financials. I will look to buyback lower.

I continue to have no feel for this market, this is entering week 3 of "blindness"; I want to short retail stocks very badly but all I see are shorts being splattered on walls on squeeze after squeeze. As I watch these small cap speculative stocks that we discussed yesterday explode higher, along with sub $5 financials every inclination from history is to get short this market at least for a quick push down - but it's been so easy to lose money on the short side that it is now hard to pull the trigger.

It has been tiring to be on the short side of the stick and good fortune has to turn my way soon - I refuse to allow this losing streak to continue! ;)

Long First National Financial in fund and personal account

Cities Turn to Fees to Fill Budget Gaps; States Slashing Social Programs

While the "Main Street" economy once again (similar to 2007) no longer matters, since the parallel "Wall Street" economy seemingly can surge forward based on money printing; it shall be very interesting to see how the increased taxes / slashes social services we've been predicting (and now coming to fruition) affects the green shoots sprouting everywhere. Now with that said, I expect if the federal government can just print money to its heart content minor things like record deficits in the states can be "plugged" and all our problems go away. The printing press is indeed the most important invention of the past century.

We've been watching this story unfold for a long time [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] It is funny how my sarcastic comments about printing money even BACK then, were to come true....

One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.

Then as the "green shoots" of spring 2008 were talked up we mentioned in [Apr 25, 2008: Shoes Beginning to Fall in the States]

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury.

All in good time folks... most of the economic issues of the real economy will take quarters to play out while Wall Street wants its solutions "now" and can't forecast out more than then their next paycheck cycle.... they continues to refuse to see the impact the real economy is happening on Main Street. Today, an AP article is stating these effects we predicted are now happening.

Again, I keep repeating this: The pundits who are telling you we either have shallow recession or are coming out of recession are the same fellas who denied recession was even possible 6 months ago. How the same people who denied a recession was even possible, now have the cajones to tell us don't worry, we are going to be out of it by end of summer, is beyond me.

Sound familiar? One of these times this green shoot talk is actually going to be correct. The same talking heads who denied a recession could even happen, then claimed it would be shallow, then claimed we'd rebound in "6 months" for the better part of a year, are back to tell you - this time they mean it. At this point, even I will throw in the towel and say as long as the Federal Reserve is willing to print money at a rate unprecedented in man's history to paper over our problems - well green shoots it is! Except on Main Street.

Remember EX federal government/Federal Reserve stealing from grandchildren and/or borrowing from China this is the reality for the future - higher taxes [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%] [Dec 4: Bloomberg - Hoboken New Jersey Increases Taxes 47%], and reduced services. We've been saying that going on 2 years now. At some point (I don't know where) the buck stops and we cannot just print money to fill craters of our own doing forever. I'll have more on this topic in the days to come as a lot of states are finally facing the music (to some small degree)

Aside from increased taxes, you can look forward to a myriad set of new fees. Via NYTimes
  • After her sport utility vehicle sideswiped a van in early February, Shirley Kimel was amazed at how quickly a handful of police officers and firefighters in Winter Haven, Fla., showed up. But a real shock came a week later, when a letter arrived from the city billing her $316 for the cost of responding to the accident. “I always thought this sort of thing was covered by my taxes.”
  • “I’m not paying,” she said, “because it isn’t fair.” (why should you pay dear? the government now has created the nanny state where walking away from obligations is not only ok, it's rewarded! the bigger mess you make - the more federal tax dollars you get. )
  • It used to be. But last July, Winter Haven became one of a few dozen cities in the country to start charging “accident response fees.” The idea is to shift the expense of tending to and cleaning up crashes directly to at-fault drivers. Either they, or their insurers, are expected to pay.
I actually don't mind this concept myself - if I am a citizen who does not use these services often why should I pay? But that's not really the issue here - this is.
  • Such cash-per-crash ordinances tend to infuriate motorists, and they often generate bad press, but a lot of cities are finding them hard to resist. With the economy flailing and budgets strained, state and local governments are being creative about ways to raise money. And the go-to idea is to invent a fee — or simply raise one.
  • Ohio’s governor has proposed a budget with more than 150 new or increased fees, including a fivefold increase in the cost to renew a livestock license, as well as larger sums to register a car, order a birth certificate or dump trash in a landfill. Other fees take aim at landlords, cigarette sellers and hospitals, to name a few.
  • Wisconsin’s governor, James E. Doyle, has proposed a charge on slaughterhouses that would be levied on the basis of each animal slaughtered. He also wants to more than triple the application charge for an elk-hunting license to $10, an idea that has raised eyebrows because the elk population in the state is currently too small to allow an actual hunting season.
  • Washington’s mayor, Adrian M. Fenty, has proposed a “streetlight user fee” of $4.25 a month, to be added to electric bills, that would cover the cost of operating and maintaining the city’s streetlights.
  • New York City recently expanded its anti-idling law to include anyone parked near a school who leaves the engine running for more than a minute. Doing that will cost you $100.
  • n Pima County, Ariz., the County Board of Supervisors increased an assortment of fees, including the cost of AIDS testing. Florida has proposed raising medical visit co-payments for inmates in state prisons. Parking fees at the Honolulu Zoo could rise by 500 percent if a proposal there goes through.
As I stated above, CONCEPTUALLY I don't mind the idea of targeted fees for those who use specific things - it makes sense. But once it gets into the hands of politicians it will be taken into a completely bad direction - as always.
  • Politicians tend to regard fees as more palatable than taxes, and more focused too. If a state needs to finance an infrastructure to oversee fishing, why shouldn’t fishermen foot the bill? But groups like the nonpartisan Tax Foundation in Washington worry that governments are now using fees to shore up budget shortfalls rather than cover specific costs incurred by specific users.
So the fees and taxes will be on the revenue side of the ledger; on the other side are the cut in services. [Nov 24, 2008: WSJ - States Cut Services for Elderly, Disabled]

Via NYTimes
  • Battered by the recession and the deepest and most widespread budget deficits in several decades, a large majority of states are slicing into their social safety nets — often crippling preventive efforts that officials say would save money over time.
  • President Obama’s $787 billion stimulus package is helping to alleviate some of the pain, providing large amounts of money to pay for education and unemployment insurance, bolster food stamp programs and expand tax credits for low earners. But the money will offset only 40 percent of the losses in state revenues, and programs for vulnerable groups have been cut in at least 34 states.
So by borrowing from China or stealing from grandchildren we fixed 40% of the problem. If only we had done a $2 trillion stimulus program! All our problems go away. Now what happens next year when the same problems exist? Ah, nevermind - green shoots shall have sprouted into oak trees espoused in packed malls, daytrading homes, and S&P 1500. Keep going Ben, drop those dollars from the heavens - make it all go away.
  • Ohio and other states face large cutbacks in child welfare investigations, which may mean more injured children and more taken into foster care. Despite tax increases, California has ended dental coverage for adults on Medicaid, all but guaranteeing future medical problems.
  • New York State is using stimulus money and a tax increase to avoid most of the large cuts in child care, nurse visits to inexperienced mothers and other services that were originally proposed. But if revenues keep falling by the billions, “all bets are off,”
Now this statement can be a parallel for all U.S. policy
  • “There’s no question that we’re getting short-term savings that will result in greater long-term human and financial costs,” said Linda J. Blessing, interim chief of the Arizona Department of Economic Security, expressing the concerns of officials and community agencies around the country.
So let's review - full 100% payment to Goldman Sachs, and a bevy of international and domestic banks and in return cuts for the peasants. Works for me - remember we're all in this together and if we don't save the 4th homes of those executives we all go down together.
  • Reluctantly endorsing another $1 million in cuts next year to salvage a different program, Mr. Beach told legislators, “It’s like trying to decide whether to give up your first-born boy or your first-born girl.”
And as you know dear reader - once a state does a tax increase, they quickly reduce it when good times return....
  • Arizona expects a $3 billion shortfall in the next fiscal year. In a speech to legislators in March, Ms. Brewer proposed to fill the chasm with $1 billion in spending cuts, $1 billion in federal stimulus money and — in a risky idea she floated after emphasizing her conservative credentials — $1 billion raised through “a temporary tax increase.”
So to review, 1/3rd doing the right thing (spending cuts) which unfortunately is necessary due to government's being run like frat houses, 1/3rd from your grandchildren/China, and 1/3rd from "temporary tax" increases (wink wink)

[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]
[Dec 6, 2008: How Bad is Minnesota's Budget Deficit? Mega-Bad]
[Dec 12, 2008: California - Missed the Budget Shortfall by THAT Much]
[Dec 19, 2008: New York Times - States' Funds for Jobless Dry Up]
[Feb 17, 2009: Kansas Joins California in Budget Woes]

Monday, April 13, 2009

Goldman Sachs (GS) Pre-Announces 14 Hours Early

This is quite amusing; Goldman Sachs (GS) was so excited that they have been able to swindle errr, been able to game the system err, have run their business with flawless execution (ex asking the government to change them into a bank holding company, pay in full their AIG exposure, benefit from FASB changes, and receive TARP money) that they could not even wait until tomorrow morning to announce.

Of course they beat by a massive amount which was a (ahem) surprise. They also smartly are offering $5 Billion worth of shares now that their shares have nearly doubled in a month. Now I do believe that the terms Warren Buffet gave to Goldman Sachs are more onerous than the generous government subsidy [Sep 23, 2008: Warren Buffet Finally Decides to Start Buying Distressed Assets] - so in theory it would make more sense to pay back Buffet first. Ah ... but then the management compensation structure would still be at risk, so let's pay off the least expensive debt first. Sort of like paying off your 5% credit card before your 19% credit card... makes no sense to the entity but plenty of sense to the management.

So thank you taxpayer for supporting us in time of need; thanks for the AIG money; but now that you threaten our bonuses we are going to get this money right back to you and away we go - business as usual. In the meantime 1 of the 4 major competitors went bankrupt, and 2 others were forced to merge under duress. Our plan is working perfectly. It's Goldman Sachs world; we just live in it.

Riddle me this, somehow Goldman Sachs (GS) was able to post earnings higher than a year ago when capital markets were much healthier and there was at least "some" business going on"? (pre Bear Stearns implosion). But I suppose with black box accounting in financials, we really never know what is going on - and that is basically how we got here. Solution to lack of transparency that breeds distrust, runs on banks, and government saviors? More of the same.

EPS of $3.39 v $1.64
  • The Goldman Sachs Group, Inc. (NYSE: GS - News) today reported net revenues of $9.43 billion and net earnings of $1.81 billion for its first quarter ended March 27, 2009. Diluted earnings per common share were $3.39 compared with $3.23 for the first quarter ended February 29, 2008.
  • Net revenues in Investment Banking were $823 million, 30% lower than the first quarter of 2008 and 20% lower than the fourth quarter of 2008.
  • Net revenues in Trading and Principal Investments were $7.15 billion, compared with net revenues of $5.12 billion for the first quarter of 2008 and negative net revenues of $4.36 billion for the fourth quarter of 2008. (that's where the growth came from) Net revenues in FICC were $6.56 billion, more than double the amount in the first quarter of 2008. These results reflected particularly strong performance in interest rate products, commodities and credit products, as FICC operated in a generally favorable environment characterized by client-driven activity, particularly in more liquid products, and high levels of volatility.
  • Net revenues in Equities were $2.00 billion, 20% lower than the first quarter of 2008. Net revenues in the shares business were lower compared with the first quarter of 2008 due to lower commissions, primarily reflecting lower levels of activity outside of the U.S
  • Net revenues in Asset Management and Securities Services were $1.45 billion, 29% lower than the first quarter of 2008 and 17% lower than the fourth quarter of 2008.

$5 Billion Offering
  • The Goldman Sachs Group, Inc. (NYSE: GS - News) announced today that it has commenced a public offering of $5 billion of its common stock for sale to the public. Goldman, Sachs & Co. will serve as the sole underwriter for the transaction.
  • After the completion of the stress assessment, if permitted by our supervisors and if supported by the results of the stress assessment, Goldman Sachs would like to use the capital raised plus additional resources to redeem all of the TARP capital.
No position

Speculation Returns to Chinese Small Caps

You know things are hot and heavy when the blast off of Chinese small cap stocks returns. These name many times put on 30-50% daily moves in October 2007, as traders rotated from one name to another, driving them up - and them moving to the next name. This happened a few times in 2008 as well [Feb 4, 2008: China Small Cap Speculation is Back] and the names really never change. This same behavior is now repeating...

And many more in the 15-20%+ type of gain range.

Our old holding in A-Power Energy (APWR) which we waited month after month to move, finally is doing so. Of course, without us.

More and more lower quality fare is now exploding higher... without sounding like a granny clucking warnings, that generally is behavior we see nearer to end of moves. Combining this with shorts who are being blasted out of position after position we have the potential to be setting up for a speculative intermediate top relatively soon. But just as trying to go long a few days too early in late February and early March 2009 could cost you 10% in the blink of an eye, the same can be said now in the opposite direction. Since I don't like chasing stocks that are up 50% in 4 days it is hard for me to find new positions to buy on the long side, even if I am predicting upside to S&P 870. Which, I can almost predict shall happen tomorrow AM with Government Sachs (GS) of course printing a better than expected number.

So to summarize
  1. Worst of breed financials (sub $5) or Chinese stocks with fundamentals most traders could care less about running like mad
  2. Shorts running into walls aflame in pain
  3. Goldman Sachs is going to take their AIG payoffs, FASB rule changes, on top of all their normal chicanery - and create singing CNBC anchors tomorrow morning
This is the point where you keep dancing but keep your eye on the chair, knowing the music stops at some point and you don't want to be the sucker holding the bag (stock). We are now at froth level Orange heading to code Red.

Bookkeeping: Closing Prudential (PRU) Short

As stated this weekend, I am quickly running out of "bad charts" to short - so many stocks are running without relent. To be long you are forced to chase stocks up after huge moves, but it is quite painful on the short side.

The financial sector is on fire now that we will all wink and say nothing on the balance sheet matters - remember, the FASB change of mark to market will increase earnings by an estimated 20% across the sector as per the Bloomberg story we posted. It is quite neat when you can mark to whatever your own estimate is for losses... fantasy world.

But if it is right or wrong, or a farce or not - the hot money does not care and that money is bowling us over. If the government wants AIG stock to soar, it will do it. Such leaders as Fannie Mae, AIG, and Citigroup are taking us higher. Companies that would not even have a common stock if not for taxpayers.... joyous.

I am covering the last of my Prudential (PRU) short, we only had a 0.4% stake left and its a solid 20%+ loss, but only a few thousand in real terms (on $1M+ portfolio). Prudential and peers are the beneficiaries of a newly announced TARP bailout last week... the beat goes on.

With Goldman Sachs (GS) reporting tomorrow - and you know all the favors they have been given .... I would not be surprised to see another gap up and off to the races day. It is quite remarkable how this market has absolutely no resting points. I am getting squeezed out of short position after short position, which means when the retracement comes I will of course have very little short exposure...

I am now coming to the theory that those companies under the wing of government will beat expectations while those who have to deal with the real economy in a non fantasy accounting world will be the ones to disappoint. But with this week full of financial earnings - those are the ones subsidized by taxpayers, so I'm going to continue to hit the exits after chart after chart turns against us.

Marc Faber said it very well in this piece from Bloomberg
  • “You have essentially a government that gives financials free money at the expense of the taxpayer,” Faber said. “With this free money, they may actually have decent earnings in the near future.”
No position

Research in Motion (RIMM) Squeezes Blackberry Suppliers as Economy Falls

As we did last week, I am hoping to begin being able to talk more about company and sector specifics instead of discussing the bailout or the Federal Reserve paper printing operation of the week. I doubt it will last long but I'm going to try ...

Interesting story from Bloomberg re: Research in Motion's (RIMM) squeeze on suppliers. Since the earnings report at the beginning of the week, the stock has had no quit in it [Apr 3: Research in Motion Soars on Solid Numbers] Along with revenue growth, the obsession with RIMM is always its margins, especially as it accelerates its diversion away from the corporate market and into the consumer market.

Gross margin is expected to come in between 43 and 44 percent, the company said, up from 40 percent currently. Investors had been concerned about gross margins after a terrible recent showing. RIM's shift from its high-spending business-user focus to a broader, costlier consumer smartphone market has crushed margins. In the span of a half year, RIM's gross margins narrowed to 40% from the 50.7%.

In light of that, this story makes a lot of sense; the company indicated they expected a rebound in margins in the coming quarter from this period's 40%.
  • Research In Motion Ltd. Co-Chief Executive Officer Jim Balsillie said the BlackBerry maker is reducing supply costs as surging growth provides him with leverage to press for bargains during the recession. “Being a strong growth company in a challenging environment makes you an important customer,” Balsillie said in an interview at his office in Waterloo, Ontario. That is probably helping RIM to elicit better terms from the companies that make equipment for its BlackBerry phones, he said.
  • Shrinking expenses, coupled with fresh sources of revenue such as the App World application store, may help the device maker bolster profit margins and thrive in the worst global recession since World War II. RIM has offered discounts on the Storm and other new models to attract customers reluctant to spend as they wait out the slowdown.
  • This month, RIM said gross margin, the percentage of sales left after production costs, will expand this quarter, signaling the company is absorbing the impact of introductory offers. Before that, the stock had dropped about 12 percent over two months as investors fretted about the effect discounts would have on margins, following RIM’s February prediction that fourth-quarter profit would come in at the low end of targets.
  • “Their volumes are increasing by leaps and bounds, which has to increase their purchasing power,” said Nirav Parikh, senior vice-president and equity analyst at TCW Group Inc. in Los Angeles. “The margin step-down has already occurred and the stock has been punished duly.”
  • RIM’s five biggest suppliers account for almost 90 percent of its production costs, according to data from relationship- mapping software Connexiti. Electronics manufacturer Elcoteq SE makes up a third of RIM’s costs and relies on the company for 20 percent of annual sales. (those must be some interesting negotiations) “Markets are getting more difficult and everyone is trying to minimize costs,” said Elcoteq spokesman Carsten Barth. “We obviously always try to help our customers because if they are successful, we are successful.”
  • Elcoteq, based in Luxembourg, is joined by Jabil Circuit Inc., (JBL) a electronics maker, and by chipmakers Marvell Technology Group Ltd (MRVL)., Multi-Fineline Electronix Inc. and Qualcomm Inc., (QCOM) according to Connexiti.
  • RIM and rivals such as Cupertino, California-based Apple are vying for subscribers as the pool of spending dwindles. Sales growth of smart phones, handsets with Web and e-mail functions, will slow to 3.4 percent this year, about one-sixth the pace of 2008.
  • Keeping profit margins high will be difficult given how fickle consumers constantly expect new devices, said Jonathan Goldberg, an analyst at Deutsche Bank Securities Inc. “To keep consumers upgrading they have to stay on the Hit Parade or innovation treadmill indefinitely and that may prove to be beyond RIM’s abilities,” he said. “We see these issues creating margin pressure over time.” San Francisco-based Goldberg rates the stock “hold.”
  • The company also expects to generate more cash through App World, which opened last week, and now offers about 1,000 programs. Application developers get 80 percent of the royalty from every download, while RIM will split the remaining 20 percent with its carrier partners. New revenue sources like that and the company’s phone- ordering partnership with Ticketmaster Entertainment Inc. “are going to come in to enhance” gross margin, Balsillie said. The company projects a margin of 43 percent to 44 percent this quarter.
For such a growth story, it's taken a long while to push down expectations - see below!

[Feb 11, 2009: Research in Motion Outlook Snares Bulls]
[Dec 3, 2008: Research in Motion Warns]
[Sep 25, 2008: Research in Motion Disappoints on Guidance and Misses Quarter]

No position

Bookkeeping: Closing ITT Educational (ESI)

I am not sure what to make of the recent performance in adult education stocks if you are a proponent of "efficient market theory" (which I am not). A few months ago I said this sector would end in flames as it became over hyped but the charts continued to support these stocks... as I wrote in the weekend summary we had pockets of strength: drugs, adult education, supermarkets - a few sectors... during the big downdraft. Now these groups have been abandoned as people move into riskier fare.

So if you believe in the "market knows all" and is "Oracle like in nature" the downdrafts of stocks like adult education and Walmart (WMT) are telling us - (a) the economy will be just fine in 6 months as jobs are created and people no longer need adult education / shopping at Walmart or (b) the consumer is so bad off that even Walmart and adult education stocks are seeing pressure. Obviously those are 2 completely different views - and just another reason why "efficient market" nonsense is just that... at least in the short to intermediate term. The more likely culprit from my cynical shoes is "hot money" is moving on to other thesis since this one is "played out" and the average market participant has the patience of a 4 year old toddler. If a stock is "not working" hot money flees.

I am closing out my ITT Educational (ESI) today, as it is now below both the 20 and 50 day moving averages. Things were ok as the stock hovered over its 50 day moving average, but then the chart took a turn for the worse last week. The stock has support at $95is (200 day moving average) and indeed could be creating a double bottom - but with so many stocks surging, I find the behavior (so weak) very curious. So counter to what I have done, a more aggressive stance would be to buy here in the $96 to $98 range and then flip it on a bounce to $110 or so. I'm trying to stick with a strategy of keeping to stronger charts on the long side and with a few exceptions that's what we own. Since I'm not a big believer in the fundamentals of this sector (this was a "join the Kool Aid" train of thought trade) I will exit with a 12% loss and see if the chart improves in the coming months.

The company reports Apr 23rd, and frankly down here the valuation is not too expensive as long as they don't disappoint.

No position

China - Some Good, Some Bad; Market Participants Focus on the Good

While I've been a proponent that emerging markets will actually lead this eventual global recovery, the evidence for recovery thus far is more or less all based around some slightly improved Chinese data. Since data from within that country is not so trustworthy a common sense approach would be to look at export data from most of the world's largest countries - say the U.S., Japan, and Germany. They have been dismal. But never let facts get in the way of green shoots.

Ah, the all important "2nd derivative improvement".... NYT: Chinese Exports Fall for 5th month, but More Slowly
  • Chinese exports fell for a fifth consecutive month in March and imports continued to decline despite government efforts to stimulate the nation’s economy, according to trade figures released Friday. (not so good) Exports, which make up about one-third of China’s economy, were 17.1 percent lower in March than a year earlier, the government said. That made a fifth consecutive month of declines as the world economy slowed to a crawl last year, sending demand for goods from China and other exporting countries sharply lower. Imports to China fell 25.1 percent from a year ago, a slide that was steeper than February’s drop and more than economists had expected.
  • Friday’s export figures showed an especially large drop in shipments to Europe — 20 percent. Exports to the United States were down 12.6 percent from a year earlier.
  • The figures painted a moderately encouraging picture, however, as the rate at which exports were falling appeared to be slowing. (needless to say - ignore the previous 2 bullet points... it's 2nd derivative time - green shoots)
  • At the same time, despite the nascent signs of a bottoming-out, economists caution that a full-fledged recovery remains a long way off. Many of China’s major trade partners, including the United States, have reported sharp declines in imports. On Thursday, the United States said that its imports had fallen 5 percent, to $152.7 billion, in February.
So while I don't take much credence in government reports in the U.S., and don't know enough about methodology in Japan or greater Europe to make an assessment let's put it this way; the global economy is so poor that even the United States trade deficit is improving! For non economists - that's sort of a joke. Our trade deficit is huge (we import far more than we export) but it's gotten to the point we are actually doing what many have urged for years - reducing that huge imbalance. Unfortunately, it is only because our imports are falling off a cliff faster than exports.

For a different view we can see this story in the Wall Street Journal - and yes I am in the camp that with a lot less bureauacracy (for better or worse) China's stimulus is far more effective & targeted... as opposed to our policy of (a) promising stimulus but mostly filling a bill with pork and (b) to offset this use the Federal Reserve as weapon of mass dollar construction to work around the failing of Congress. Remember, we've been outlining all the various "restocking" events from iron ore, to copper, to oil. The big debate is whether these are mustard seeds (green shoots) of the birth of a new era of global trade borne from China, or simply a country buying a lot of "stuff" at cheap prices.

The bulls favorite shipping index when it's moving in the right direction, the Baltic Dry Index, is in free fall. But yet again - when facts don't support your case... gloss over the data point. Each time I post this I need to repeat that a level of 3000 to 5000 was normal in pre commodity spike - so not only did we not reach the lower end of normal, after a spike which those in the industry attributed to nothing more than China restocking of iron ore [Feb 9: China and the Baltic Dry Index - What's Really Going On?], we promptly fell right back off in dramatic nature.

  • China's massive $585 billion government stimulus program appears to be kicking in, new data suggested Friday, raising the chances that the world's third-largest economy may be turning a corner.
  • Chinese demand for raw materials, hard hit in past months, is showing signs of recovery, with crude-oil imports hitting a one-year high in March, the government reported Friday. Steel mills in March imported record quantities of their key raw material, iron ore, in anticipation of a pickup in demand in coming months.
Again, great irony in claiming steel orders as a "green shoot" when we saw a story just a few weeks ago that Chinese rushed in doing orders and were premature. [Mar 16: WSJ - Some Steelmakers Jump the Gun in Response to Stimulus]

The next positive point is huge loan growth... indeed, China did learn one thing from the U.S. - how a central bank can blow up a bubble with easy money. [Feb 16 2009: Is China Pulling an Alan Greenspan?] As I wrote then

Some very interesting data out of China of late in terms of loan growth - in fact staggering data. Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values.

The data was as follows
  • Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.

What will be interesting (and I doubt we will ever know) is how all these loans turn out in a few years. But nevermind that - the WSJ story about the strength in the Chinese economy lauds the new loans, certainly a "sign of strength". (even though there is a deflating real estate bubble combined with lack of demand for exports - but just build something, anything)
  • Banks have extended 2.7 trillion yuan, or nearly $400 billion, of new loans in the first two months of the year, and early signs indicate the boost continued into March
So the real trick is to get Chinese, notoriously thrifty to turn more like their American counterparts. The Chinese economy, so dependent on exports needs these folks to start spending so the balance between internal consumption and growth via levering US (and European) consumers is more balanced. Now, over time I do believe this will happen - but many years. However, in the magical world of green shoots we can expect people brought up on generations of experience to change behavior in 1 quarter.
  • While its aggressive spending plan reflects the power of its state-dominated economy, there are signs that its thrify consumers are starting to spend more. Car sales hit a monthly record in March, according to figures issued Thursday, marking the third consecutive monthly rise. Housing sales in major cities have also picked up, with lower prices attracting buyers.
  • Overall, it appears that the state's push has helped keep China from slipping into a downward spiral where poor economic conditions and declining confidence feed off each other. The impressive size of China's stimulus, announced in November, gets some credit for that.
Now while this next portion might be considered heresay for those who believe in the (near) perfection of corporate American socialism.... I'm sorry! American capitalism....

.... but while not always the most efficient allocators of capital, the "central command" certainly can push out a ton of stimulus all in the same direction.... much more effectively than our policy of "turn on fire hydrant - spray in all directions"
  • But the vestiges of China's command economy have also proved useful. "China is unusual in that it has this incredible capacity to mobilize all its institutions," said Vikram Nehru, the World Bank's chief economist for Asia. The government's ability to direct bank lending and investment spending has meant its stimulus efforts have worked faster than many initially expected. "There is now a growing degree of confidence that the stimulus package is having an impact," he added.
Now it's not all rosy
  • The global slump in demand has battered Chinese exporters, leading to millions of lost jobs.
  • China needs support from demand in the rest of the world to sustain a recovery. Without that, it is still unclear that China's economic engine, having been jump-started by massive government investment, can keep running at a higher gear.
  • Export manufacturing remains the primary employer of China's 140 million rural migrant workers. About 20 million of them are unemployed, and if the export crunch continues for several more months, that could exhaust their families' meager savings.
And this next section pretty much summarizes why I believe the U.S. shall enjoy a "paper prosperity" derived from tossing money in every direction, which will simply inflate prices (and economic reports) over where they should be - rather than some other, more responsible countries. I stated back then it was ludicrous to imagine a country facing the twin threats of a mangled financial system AND recession would rebound before countries only facing recession. But I guess we won't see if I am correct for a year or two - remember, all the talk a year ago was FIFO! The narcissistic view that "We are U.S.; we shall lead" - First In, First Out! With that said, I never expected (at that time) THIS level of Federal Reserve paper creation.
  • But the government is pushing cash through the economy, and the state investment program is driving hundreds of new infrastructure projects. The funds budgeted for investments that started in the first two months of 2009 surged 88% from a year earlier, the highest increase on record.
  • Like China, the U.S. government also has launched a significant fiscal stimulus, of $787 billion, the impact of which is only now beginning to show up in the economy as tax cuts swell worker paychecks. U.S. consumers -- their retirement accounts and home values depressed -- are showing a reluctance to spend as readily as they usually do. Car sales in the U.S., in contrast to the records being set in China, are extremely low. Spending on infrastructure is taking a while to kick in, despite all the talk of "shovel ready projects." Weaknesses in U.S. banks and, even more, the near paralysis of the important market for securitized credit, remain major impediments to renewed economic growth.
Now clearly the Wall Street Journal is a very liberal elite newspaper, trying to show that indeed communism is the way to go! (another inside joke for those who know the typical political stance of the WSJ) Or perhaps the WSJ is simply implying a hybrid version of capitalism could be more effective; as shown to us by perhaps the best capitalists on Earth right now. (perish the thought that weakly regulated free markets run by politically connected "haves" is not the most efficient allocator of capital or production!) Anyhow, I will join in any boycott readers would like to start against such a liberal stance by the Wall Street Journal...

To finish off
  • "I think it's fair to say the economy has bottomed. But bottoming is not recovery," said Ben Simpfendorfer, an economist at Royal Bank of Scotland.
Ah Mr. Simpfendorfer - clearly you are not a stock market participant. Nor a consumer of green shoots.

With all that said, and with a global audience waiting on it (along with quite a few 10s of millions of migrant workers) I am sure the "un-massaged" internal economic data will continue to skew upward from here in China... providing green shoots galore (just please ignore that silly Baltic Dry Index - unless it starts rising again, then we can trumpet it again!)

Sunday, April 12, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 36

Year 2, Week 36 Major Position Changes

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

Cash: 56.4% (vs 48.0% last week)
25 long bias: 29.2% (vs 38.8% last week)
11 short bias: 14.4% (vs 13.2% last week)

36 positions (vs 40 last week)

Weekly thoughts
The green shoot economy has now sprouted saplings in all directions. As it had in latter 2007 when the equity market raced to all time highs while the bond market signaled distress, or multiple times in 2008 when the equity market bounded higher forecasting a recovery only it could see - we are back at it again. 5 weeks ago investors felt the market had no bottom, and the drops would be ceaseless - despair was high. 5 weeks later investors feel the market has no top, and the gains will be ceaseless - euphoria is high. The truth lies somewhere in the middle.

Two weeks ago I wrote in my technical analysis piece [Mar 27: Where We Stand, a Technical Look at the S&P 500]

If bulls become even more comfortable we can expect a lot more speculative action in the low price stock arena, and reports of stocks moving 40,50% in a day based on... nothing. Heck, if things really get crazy even commercial real estate stocks could begin to explode higher.

In last week's weekly summary I wrote [Apr 5: Bookkeeping - Weekly Changes to Fund Positions, Week 35]

Now if the pattern continues (squeeze, spec buying, more squeeze) we could have the same situation we saw in commercial real estate, play out in credit cards and insurance so I am ever vigilant and will be bailing out on short exposure there on first signs of rabid foam on mouth of bulls in those groups.

Every so often I should listen to the guy who writes this blog. The government came in and took care of the insurance problem - more bailouts. And commercial real estate took off for... well, highly shorted positions.

At we head to our prediction of S&P 870 (just one easy 1.6% move away) it has become quite an interesting situation (really, when is it not interesting lately?) It is nearly impossible to short things because those names are heavily shorted by others and as any "green shoot" emerges, shorts panic and very narrow doors are filled with many bodies, causing explosive moves up. Despite entering last week with a nearly 4:1 long/short ratio of exposure (which proved correct) we lost money because the names short exploded higher while most of the long exposure we had was rotated away from and into more speculative fare. Further, any "paired trades" are not working because the stock shorted against is moving so rapidly up that it destroys any "offset" gains on the long side. After American Express (AXP) turned positive on the charts last week, but Capital One Financial (COF) lagged below a key technical level; I briefly considered a pair of AXP long and COF short. In a normal market that would be an interesting trade - in this market, the student body all moves left or right together so these trades become unfruitful. (p.s. a quite compelling piece in this week's Barrons on AXP). Last, technical analysis on individual stocks has become moot because news events combined with the above mentioned short covering are causing stocks to explode higher, rendering resistance areas on charts harmless. So without the safety of charts, creating new short positions or adding to is like running in the dark with scissors.

With that said, while we drink to green shoots - ultimately stocks are a reflection of earnings. As I've facetiously said with so much money being poured into this market by powers that be, perhaps we have a recessionary stock market with P/Es of 30, 40x. At this point, for example - after these run ups I see retailers with FORWARD P/Es of 20+ in a CONSUMER led recession. These are valuations that were seen when credit was loose and house ATMs were the calling card of America. Even if one DOES believe in such recoveries and "forward earnings are understated" (which is one seriously optimistic view), valuations are still extreme in many sectors. But that's logic, and logic does not apply at this point - neither do charts. All that matters are green shoots. To that point I loved this quote

PNC Chief Investment Strategist E. William Stone said in a note this week. "Some economic data ... have turned less negative, which is certainly welcome, but some portion of this so-called 'recovery' is due to the fact that numerically it was difficult for the data to get much worse.

So as just 5 weeks ago it seemed all was lost and this market could never rebound, so has the pendulum swung - so quickly - in the opposite direction. This was the swing between hope and reality we discussed would be the hallmark of 2009. For now we have endless rallies on nothing more than "we have seen flattening or small upticks from worst ever readings on economic data" or "banks handed the tax payer dollars, along with cost of capital approaching zero can indeed find a way to make money - just don't talk about their balance sheets. Or stress tests." More signs of green shoots are emerging - just this weekend I have heard of the return of 0% financing on autos for 72 months. Excellent! We're learning greatly from our excesses of 2004-2007.

Just as the pessimism was at extremes just 5 weeks ago, now we are getting extremes on the other end. And just as we were shocked (even as economically leaning bears) that the market could fall so much, so quickly, and so far away from the 200 day moving average - without relent, so we have to be prepared for the opposite side. But in the end there has to be some reconnect with earnings - the market is indeed, a price discounting mechanism over the long run on said income streams. And that's the arena we enter now as we hit the meat of earnings season. In a strange twist of irony, the government supported banks given a yield curve of ungoldy proportion by Uncle Ben and his team of mad bomber economists could create (and I use that word purposely) "better than expected" earnings in the financial arena, while those stocks that still face that lowly area called "Main Street" could disappoint. And the further we go up - with so many charts without any meaningful support - the larger the air pockets we create so when any signs of weakness (reality) are acknowledged as something more than "backwards looking"; well you know how that turns out. But as always, the timing is everything.

I continue to stand by my shifting basis to a more of a double dip recession, which is really one big recession interspersed with government intervention of an order of degree never imagined. We now are in the phase where that order is both recognized and anticipated - as we have stated countless times, economic figures will become meaningless on many levels over the coming 9-12 months as a tsunami of dollars is showered from the powers that be. Then we'll hit the steady state of the new normal - the refinances at 4.50%... 4.25%? 3.75%? will be complete, the unemployment figures will still be well over 10%, the commercial office and retail space will still sit empty, the "replacement of inventory" orders will have been completed and Wall Street denizens will require more than "it's not getting worse than all time historically low data" to create rallies. But between now and then I'll expect at least 212,972,481 sightings of the words "green shoots" - the new Kool Aid.

As for strategy, right now it is a very difficult environment - the past two weeks especially hard. The market is gapping up or down in significant manner almost every day on news releases which is impossible to game. Charts on individual stocks have become unreliable. And trying to guess which bad earnings reports will be viewed as "a reality check" vs "needless information since we're looking ahead" will provide even more confusion. So while - at this pace - we can expect a moderate sized decline in due time as the bullish become more soaked in a lather; when it happens we don't know & how much money can be lost by "valuation means nothing to me" buying (and short covering) while we await that point - is large. Until the charts begin to behave in a more rational manner we're going to stay smaller in position size - without guideposts that work, it does not make much sense to continue to make sizable bets. We'll continue to hold solid companies on the long side, take some profits on big runs and try to buy some portion of the positions back on pullbacks. On the short side while we have some placeholders - as chart after chart turns back to "good" we are quickly running out of candidates from a technical perspective at least. On a fundamental basis many remain - but those are buffeted by "just wait 6 months from now when the story improves - even if the CEOs don't say that, we believe it". So shorting on fundamentals at this point is a fool's game until the pendulum swings back.

On that end, 5 weeks ago I could find almost no charts or groups that were holding up (for example stocks above 20, 50, and 200 day moving averages) i.e. potential long candidates from a "technical perspective" - most of the few winners were in such areas as drug makers, adult education, and supermarkets. Now, I can find very few charts where stocks are below all 3 key moving averages - and indeed the ones that are our mostly found in .... you guessed it: drug makers, adult education, and supermarkets. The shift is that profound. So to win at that juncture you had to short "good charts" and go long "bad" - i.e. signposts meant nothing.

If I were a betting man I'd say the indexes shall return - on a quite sizeable pullback - to S&P 810ish or so sometime in the next two weeks, but at this point this dip must be bought as we green shoot our way to dollar papered prosperity.

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