Monday, May 18, 2009

Gamestop (GME) Facing Potential Challenge from Walmart (WMT) on Used Video Games

It is quite amazing how often "the stock" knows, ahead of the news... Gamestop (GME) despite a virtual monopoly on pure play video game retail (one of the few recession proof niches) has been a massive underperformer, especially as institutional money flows into the retail niche as an "early cycle recovery" thesis. In fact it's closer to March lows than recent highs.

Today we have some news that Walmart (WMT) is experimenting with rental & used game kiosks - obviously if this giant treads on your turf, it's not good news for profits. Last time we looked at Gamestop was 2 months ago when moved into used games [Mar 5, 2009: Gamestop Hit by's Move into Used Games] - I was not that concerned about that move because we have an instant gratification society and most people are not going to wait (wait for it...) days to get their video game fix. But Walmart is only a few miles from most people's homes....

Back in January we noted how important used games were to Gamestop [Jan 21, 2009: WSJ - Used Games Score Big for Gamestop]

I didn't realize used games were about a quarter of sales... and frankly the cost they sell the used games is not that much below a new game - savvy business model there.

What sets it apart from other game retailers is its virtual lock on used game sales
. Those sales are expected to reach $2 billion, or 23%, of GameStop's revenue for its fiscal year ending Jan. 31, according to Pacific Crest Securities. That is up from $1.6 billion, or 22.4%, of revenue a year earlier. Its business has gathered steam in the recession as consumers pinch their pennies. In the nine weeks ended Jan. 3, its sales of new games and consoles increased 19% to $1.9 billion. But sales of used games and consoles rose an even stronger 32%, to $543.5 million. Nobody else has that used-games draw," said retail analyst Joseph Feldman of Telsey Advisory Group.

Now this is just a pilot program for Walmart but again... it's Walmart - you don't want them on your turf as a competitor. So said American consumer can drop off old game at kiosk, collect money as they cross GO and then head over to Walmart video game section and buy new game. Or just rent a game for $1 a night. Photos of the kiosks already surfacing on the internets! See here.
  • Wal-Mart might be considering a challenge to specialty videogame retailer GameStop, if a new test of self-service kiosks that allow for videogame rentals and trade-ins as well as DVD rentals is any indication. Kiosk operator E-Play, based in Columbus, Ohio, will install machines at 77 Wal-Marts in New York, Massachusetts, Connecticut and Rhode Island by the end of the month.
  • In addition to offering $1-a-night DVD rentals like kiosk leader Redbox, the E-Play machines will let users turn in Nintendo Wii, Microsoft Xbox and Sony PlayStation games in exchange for credit on their credit cards, the companies said. The E-Play kiosks, which can hold about 4,000 movie and game discs, pay as much as $25 for a copy of a high-demand game such as Resident Evil 5 or as little as 50¢ for older titles, E-Play CEO Alan Rudy said.
  • “The Redbox machine does not sell games or allow for trade-ins,” said Wal-Mart spokeswoman Melissa O’Brien, who added that the company hadn’t made plans to install more E-Play machines beyond the pilot program. “We’re interested because of the added convenience of games in these units. It provides a great competitive price for games.”
  • The kiosks will charge $1 a night for both DVD rentals and game titles, and $2 for the first night for Blu-ray titles and $1 for each night thereafter.
No position

Ken Heebner's 1st Quarter 2009 Moves - CGM Focus (CGMFX): Financials and Retailers

Ken Heebner of CGM Funds is one of few mutual fund managers we keep a close eye on; he is a very aggressive fund manager [May 6, 2008: Ken Heebner's Trading for CGM Focus Tripled in 2008] and through last summer had an incredible winning streak going - then he was placed on the cover of Fortune [May 28: Ken Heebner - America's Hottest Investor] and for you Sports Illustrated fans - you know what happens next. Since he is aggressive, has the ability to short, and has been a lot more right than wrong over the years, I like to keep watching even as he has recently struggled. Year to date in 2009 he is still down nearly 10%...

I went back and looked at his major moves for Fourth Quarter 2008 (Oct - Dec 2008) and ironically his huge move into insurance stocks was "right", but "early". [Feb 18: Ken Heebner's Fourth Quarter 2008 Moves]

These were his 10 biggest additions to CGM Funds during Q4 2008 (as of Dec 31, 2008)

Biggest Additions in the Quarter:
  1. Metlife (MET) - Insurance
  2. Hartford Financial (HIG) - Insurance
  3. Apolle Group (APOL) - Adult "re-education"
  4. Baxter International (BAX) - Healthcare
  5. Aflac (AFL) - Insurance
  6. Gilead Sciences (GILD) - Biotech/healthcare
  7. Research in Motion (RIMM) - Technology
  8. Newmont Mining (NEM) - Precious metals
  9. Prudential (PRU) - Insurance
  10. Berkshire Hathaway (BRK-A) - Insurance and others
Now at the time I thought this was premature as the insurance companies had some massive problems but I was still under the mistaken world view of free markets existing in the U.S.... I am still slowly adjusting to the new world order where the federal government backstops everything and lo and behold [Mar 12: The Next Big Bailout Choice - Insurers] in the past few weeks we've seen the government decide insurers can't go bust either. Remember our pockets are bottomless, and our trees that grow money are fruitful.

Anyhow, I was under the assumption that Heebner would of benefited from this move to draw a fire circle around the insurers but now that we have the 1st quarter data, it appears he sold out of most of his stake in the sector ahead of March 31, 2009. And across the board, these stocks were lower (much lower) in many cases on March 31st (even with a furious 3 week rally at the time) than anytime in 2008. For example...

So we can see above, the same situation many of us face - perhaps being correct on a thesis but if your timing is off you can still lose, and lose big. Based on TV interviews I don't think he sold out in January 2009 from the insurance space so somewhere in February or March would be when he let go much of the inventory. Obviously waiting for April or May would of been far superior but in hindsight we're all geniuses.

His top holding as of Q4 2008 with a 10% stake in CGM Focus (CGMFX) was Abbott Laboratories (ABT) with a 10% stake - I don't follow this company so I am not sure what the catalyst is here... this company didn't help much during Q1 either with a huge swoon towards the end of February.

Walmart (WMT) was another major position going into the new year at 8.5% and again - as people fled into riskier assets, Walmart actually suffered after being a star in 2008.

I could be wrong here, but I don't remember CGMFX ever being this concentrated in so many positions at the top... Heebner literally had 35% of his holdings in his top 4 stocks as of Dec 31st.


So that explains some of the under performance - let's now look at what he did during Q1 2009 ending March 31st. But remember with his style - this is now 6 weeks later and this entire portfolio could be different ;)

Once more let's look at the biggest additions in the quarter, by order of weight
  1. Morgan Stanely (MS) [added to current position]
  2. (AMZN) [new]
  3. Best Buy (BBY) [new]
  4. Goldman Sachs (GS) [added]
  5. Petrobras (PBR) [new]
  6. CVS Caremark (CVS) [added]
  7. Teva Pharam (TEVA) [added]
  8. JP Morgan (JPM) [added]
  9. PNC Financial (PNC) [new]
  10. Kohl's (KSS) [new]
These changes show a big push into financials and retail - Heenber went heavy into financials in Q3 2008, prematurely [Nov 14, 2008: Ken Heebner Moves into Financials Big Time] Now again, you have the government behind you and he added or started stakes in specific leaders - either the 2 remaining independent big time investment banks - Morgan Stanely (MS) and Goldman Sachs (GS), or best of breed "do it all" bank JP Morgan (JPM) along with PNC Financial (PNC) which is now the 5th largest US based commercial bank right after the "big 4". So this is a directional bet but he is buying the top of the food chain - surprisingly Wells Fargo (WFC) is not in the list; this has been a name he has been in the past, and a Warren Buffet favorite. If you are not too familiar with how we've "saved" the system; after dealing with "too big to fail" we've decided as a solution we need to make the banks even "too bigger to fail" - and the top 4 banks now dominate the assets in America [Apr 20, 2009: BB&T (BBT) - A Better Gauge on How Banks Will Try to "Outearn" Their Losses]

...essentially we have created 4 monsters, with the smallest, Wells Fargo at $1.3 Trillion in assets, being over 4 times the size of the next largest US based financial institution - PNC Financial (PNC) at under $300 Billion, which is itself a combination of 2 super regionals, National City and PNC.

So we can argue about the sense of it all til we are blue in the fact but the US government has enpowered the largest 4, and made them even more systematically important - that's how oligarchy works. And then in the investment banking system Goldman Sachs (GS) wins again as most of its major competition has been wiped out or weakened immensely. If I didn't have qualms with what they are doing hand in hand with "the important people", I'd be buying this 4th branch of government myself...

His other main theme is retail which is the prototypical early cycle recovery play - can't argue too much with the purchases as Best Buy (BBY) only really has Walmart as a major competitor in the electronics space, with Circuit City now defunct - and Kohls (KSS) is the good middle class value play in the apparel space. (AMZN) has been a great performer both operationally and as a stock - the issue here has always been valuation but it is almost never cheap. Petrobras (PBR) is the one commodity stock of his major purchases - frankly with the way Ken talked about this company in 2008 I was shocked to see him sell it off... as a note he had sold both PBR and KSS out of the portfolio the quarter before.

While not so focused on what he has sold out of, since he could already be back in these positions these were some sales of note...

Some Major Names Completely out of: (many insurers as we mentioned above)
  1. Prudential (PRU) [this was 4th largest position at 7.5% stake in CGMFX as of Dec 31st]
  2. Research in Motion (RIMM) [this was a 5% stake as of Dec 31st]
  3. McDonalds (MCD) [this was a 5.7% stake as of Dec 31st]
  4. Aflac (AFL) [this was a 5.7% stake as of Dec 31st]
  5. Hartford Group (HIG) [this was a 5.9% stake as of Dec 31st]
  6. Berkshire Hathaway (BRKa) [this was a 3% stake Dec 31st]
Smaller names he completley exited as of March 31st that we've touched on in the blog - Fidelity National Financial (FNF), First American (FAF), EZ Corp (EZPW), ProLogis (PLD), Lowes (LOW), Dollar Tree (DLTR), General Electric (GE), Intuitive Surgical (ISRG), Ford (F), Express Scripts (ESRX), Medco Health (MHS)

Some Major Nations with Material Cut Backs, in Order of Magnitude:
  1. Abbott Labratories (ABT) [was largest position as of Dec 31st]
  2. Baxter (BAX) [was 8th largest position as of Dec 31st]
  3. Walmart (WMT) [was 3rd largest]
  4. MetLife (MET) [was 2nd largest]
* please note the above commentary relates to CGM Funds in total, not just CGM Focus fund

[Sep 10: Ken Heebner to Launch Hedge Fund]

Bookkeeping: Selling Majority of Quality Systems (QSII) into Barron's Hype on Cerner (CERN)

Barron's had a nice article out this weekend on medical health records, specifically Cerner (CERN)... ironically Quality Systems (QSII) is getting a better bounce that Cerner itself. This has probably been the most unrelenting stock in my portfolio - with the best chart; it does not do the sexy +10-15% moves but it grinds out wins day after day, week after week. I am going to cut out almost my entire position here as we now approach mid 30x forward PE... the lion share of these shares were bought in the $37-$39 range, and we quickly approach $60. I know valuation seems to mean nothing to market participants but everywhere I turn things are starting to get extremely rich. I am going to look to buy cheaper valuations with similar growth if the uptrend continues, although in this type of market valuation protects you very little on the downside as the 'student body left' environment sells everything. If the stock continues, so be it - I will have gotten my pound of flesh. I am selling all but a handful of shares in the $58s. QSII has an unusually long gap in between earnings reports [Jan 30, 2009: Quality Systems Earnings Solid], and the next one appears in early June - with this sort of valuation going in, I could see the potential of a sell off ... stimulus money is going to be a long tailwind, not a near term explosion.

Quality Systems, Inc. engages in the development and marketing of healthcare information systems in the United States. Its system automates various aspects of medical and dental practices, and networks of practices, such as physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. The company offers proprietary electronic medical records software and practice management systems under the NextGen3 product name.

Here is the article from Barron's - obviously you can replace much of the bullish reasoning and apply it to any stock in the sector; we mentioned a handful of names in January [Jan 6, 2009: Analyst Throws Water on "Hope" in Medical IT] [Jan 9: Bookkeeping - Starting Quality Systems]
  • SHARES OF CERNER, A HEALTH-CARE INFORMATION- technology company, have jumped more than 50% since early March. A powerful driver has been the $787 billion federal stimulus package, which includes billions of dollars of incentives to encourage more widespread use of health-care IT -- electronic medical records in particular.
  • "I've been in health-care IT for 17 years, and it's the strongest tailwind I've seen," says Sean Wieland, a senior research analyst at Piper Jaffray.
  • THE IMPETUS FOR THAT UPGRADE was the impact of the American Recovery and Reinvestment Act of 2009. Signed by President Barack Obama in February, the legislation includes $36 billion of incentives to encourage wider use of electronic medical records, and penalizes providers that don't make the effort. The goal is to make the sprawling U.S. health-care system more efficient, less costly -- and safer.
  • Many health-care providers have adopted clinical information technology slowly, due to its considerable expense and to resistance from doctors reluctant to abandon familiar paper records. Electronic billing systems are common. But in hospitals -- Cerner's bread-and-butter customers -- big IT gaps remain, notably for computerized clinical-order entry and electronic medical records.
  • The electronic records are essentially a repository of clinical data, documenting virtually every step of a patient's hospital stay, from test results to vital signs to radiology images. Computerized order entry lets a doctor or nurse request a test or prescription electronically. The aim: improving coordination among the parties that deliver health care, while minimizing mistakes.
[Mar 25, 2009: Stimulus Funds for E-Records Augur Big Windfall for Small Health Firms]

Long Quality Systems in fund; no personal position

Bookkeeping: Selling Almost All HDFC Bank (HDB)

I love India as much as the next guy, but I am going to take this 20%+ pop today to sell almost my entire HDFC Bank (HDB) position; I kept 1 share only. There is an obvious gap to fill here one day in the future.

Long HDFC Bank in fund; no personal position

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 41

Year 2, Week 41 Major Position Changes

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

Cash: 44.6% (vs 34.2% last week)
33 long bias: 44.9% (vs 37.1% last week)
9 short bias: 10.5% (vs 28.7% last week)

42 positions (vs 39 last week)

Weekly thoughts
First down week after 9 consecutive winners in the NASDAQ (best streak since the 1999 bubble), and effectively the same in the other major indexes as well as the only losing week they had in that time frame was roughly half a percent. I won't rehash my technical thoughts since I laid it out mid week in [40,000 Foot Point of View of S&P 500] and it is represented by the chart below...

To that I'd like to add this chart which shows the uptrend's channel...

In the "40,000 Foot" entry I noted multiple support area - first at the 20 day moving average which we bounced off of both Thursday and Friday and below that all important S&P 875. Now what happened late in the week was despite bouncing off support, we broke down below the lower end of the 'channel' that bracketed this rally. Bulls will want to see the indexes close back within the channel quickly ... or it will start to act as a resistance area. Again, I'd like to repeat I hate paying this much attention to the overall market and charts but we do not trade in a vacuum (ever) and since summer 2008 the overall market has determined 80-90% of the move. Individual stock selection in my opinion has become moot during this time frame so sometimes I wonder why I even bother with individual stocks in this atmosphere.... the student body either runs left; or right. With that said, if we do begin to break down below S&P 875 are we just resigned to another 20%+ move down? Are we just going to ping pong between what the press describes as "bear" and "bull" markets (20%+ moves)? Rhetorical questions ... personally it's still a bear market; we've had multiple 20%+ rallies since fall 2007 - they are only bulls on paper.

To summarize economic news... blah blah blah... blah blah blah... green shoots. Further, we can see blah blah blah... blah blah blah... green shoots. That's pretty much been the market's attitude for well over 2 months now. All news is good news... as we wrote entering 2009, we'd swing from hope to reality and back... and we have. Trust me, on the next downturn a lot of the same news that has been completely dismissed will be rehashed and then it will "matter" again. The reality is the news has little changed, it is just a matter of if we decide to play hear no evil, see no evil, speak no evil or not that week / month. The debate has shifted from "where does this freefall end?" to "what sort of recovery can we expect?" My thoughts are well known, and I'll continue to say (as I have since 2007), despite all the government's efforts to literally hand off money to anyone with a pulse, the big surprise (to the market) will be consumers lack of demand as we exit this era. The current "green shoots" from this perch are tax returns, combined with house ATM, combined with an increasing number of people living in homes "rent free" while waiting to get kicked out, combined with government throwing many in every direction (and I include the Federal Reserve in government although technically it is not). For those of you who are subscribers to RealMoney, I'd suggest a post from Robert Marcin: A Gimmick Economy for a Wimpy Populace. It essentially summarizes many of the thoughts seen on these virtual pages - effectively instead of addressing our structural problems we are "buying time" by repeating, and indeed exaggerating, the same policies that got us here. We somehow believe there is no cost to it... as ostriches who put their heads into the sand often do. Anyhow, blah blah blah... green shoots.

Position wise, with the market at a crossroads I've lowered my short exposure as the market went down substantially and we were able to buffer a large long position quite well with our hedging. While I did some buying into the dip, I'll change course if S&P breaks 875 on a closing basis and cut back position weights and add to short exposure. Frankly it is difficult to tell what to short anymore because there are so many conflicting thesis running around - one day its the return of commodities, the next day its the return of the consumer, the next its the return of corporate IT budgets... it's all theoretical and people trying to front run trends that are nowhere but in people's imaginations for the most part. I'm sure in the weeks to come I'll be looking at stocks I was forced to cover due to rising 15-20% a day, going in exactly the opposite direction as hope is replaced with reality. But as always, timing is the thing... guessing the market psychology these days is extremely difficult since it changes by the day.

One area of strength last week were agricultural names, and I lightened up some fertilizer exposure late in the week.

China appears to be buying every commodity under the Earth as a replacement for lousy US paper currency, so maybe foodstuffs will be next. So far nothing in the earnings reports or guidance indicate any iota of real recovery in the fertilizer space, but then again you could say the same for natural gas and we saw a monster move in some named the past few weeks. I will continue to ask each week, at what point does surging commodity prices stop being something to be gleeful about as a sign of global growth (which it is not, it's all China) and instead be seen as a major headwind for the globe's shoppers: Americans. We'll see when that switch is made if indeed the combination of China and Ben Bernanke is successful in stagflating us to prosperity.

p.s. wonder if Ben can inflate the deficits right out of the states budgets? Do we even care anymore or are we just waiting for the inevitable bailout by the federal government along with US taxpayer backstopping municipal debt? Same solution to every problem in the country...

India: Singh's Scale of Victory "Game Changer"

A quite interesting election overnight in India - Prime Minister Singh's party really consolidated power which could pave the way for some serious capitalist waves. Why should you care? As a reader of FMMF you are ahead of the majority of the populace who has yet to realize that the rest of the world indeed matters - see how one country is pushing the price up of every commodity on Earth. Second, there is a great chance the balance of power in the coming decade(s) shifts from West to East... or better put BACK to East from West. Third, judging from the names on my Paypal donations I have a quite strong contigent of Indian Americans (thanks for the donations by the way!) By the way, one of those readers told me to short India ahead of the elections due to uncertainty- not to self: never listen to readers. ;) The Indian stock market jumped "limit up" >10% overnight.

EDIT: The benchmark Sensex index jumped 17%, or 1,306 points, to 14,272, forcing the Bombay Stock Exchange to shut down for the day. Trading had already been halted earlier, after investors pushed stocks above their daily maximum limit.

I have not touched on this since last summer since the stock market is all about the nose in front of our face instead of looking out 5-10 years, but as we bring online a few hundred million Chinese and Indians into lower "middle class" (their version of it, not ours) and out of abject poverty - the implications of this sea change will be staggering. I really don't think people are understanding what a strain this will be on natural resources... but as stock market investors, we have to think like the crowd and only worry about where things are heading the next 3-5 days or weeks. Anything past that is for intellectual types...

Via Bloomberg
  • Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty. India’s benchmark stock index soared more than 10 percent, triggering a trading halt after breaching the daily limit. The rupee rallied the most in 11 years against the dollar, gaining 2.2 percent to 48.37.
  • “This is an absolute game changer,” said William Nobrega, the co-author of “Riding The Indian Tiger,’ who advises U.S. companies on investing in the world’s largest democracy. “It can truly move India in a much faster pace to where it deserves to be in the global economy.” Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third-largest economy. “There were so many major initiatives that were sidelined,” Nobrega said. “It will have a phenomenal boost on the Indian economy this year and next.”
  • Singh’s ruling Congress party will start forming a new government today, without needing the support of communist lawmakers who frustrated plans to entice foreign investment and sell state-owned companies in his first five-year term. The ruling Congress party won its most seats since 1991 in the election, which concluded May 16. Congress and its allies won 260 of the 541 lower-house seats for which results have been declared. Congress alone will have 205 lawmakers, 60 more than in 2004 and almost twice as many as the opposition Bharatiya Janata Party.
  • The main communist party, Singh’s partner in the last administration, won only 16 seats, less than the 43 they gained in the last election. The communists, who resisted increased foreign ownership of insurers and any outside investment in retailing, tried to bring down the government last July over a civil nuclear energy accord with the U.S.
  • Gross domestic product has risen more than four times since 1991, when Singh, then finance minister, abandoned Soviet-style state planning and introduced free-market measures. He cut red tape, removed state-enforced production caps on steel and cement makers, and allowed overseas companies such as Ford Motor Co. to set up Indian operations.
  • India received about $38 billion of foreign direct investments last year, about a fifth of the flows that went to neighboring China, which opened its economy 13 years earlier. Investments into India have been constrained by an unreliable power supply as well as choked roads and railways.
Now, I am not saying it will be easy, or fast - but in a country where so many still live without electricity; try to think where things could be in 10, 20 years. Meanwhile we are combating this modernization (and ensuing stress on all natural resources) by "turning off light bulbs one extra hour a day". Just moving a couple hundred million people from "abject poverty" up to "quite poor" in Chindia will cause a lot of strain to the semblance of supply / demand dynamics. But I guess we'll Kick the Can on that discussion for another 10+ years since this is the status quo in America as a solution to all problems. "KTC"
  • India, whose international political ambitions include a permanent seat on the United Nations Security Council, wants to maintain annual growth rates in excess of 8 percent for two decades to reduce poverty. About 231 million Indians are undernourished, more than in Sub-Saharan Africa, according to the Food & Agriculture Organization. The World Bank estimates 41.6 percent of Indians live on less than $1.25 a day. More than three-fifths of Indians live in the countryside.
[Jan 13, 2009: Barron's - Why India Won't Rebound Soon]
[Jan 9, 2009: India's with 2nd Stimulus Plan in a Month]
[Dec 28, 2008: New York Times - How India Avoided the Crisis]
[Aug 29, 2008: India Q2 Economic Growth Slows to 7.9%]
[Aug 15, 2008: Cost Cutting in New York, but a Boom in India]
[Mar 6, 2008: 2 New ETFs for "India Bugs"]
[Mar 5, 2008: Thirsty for Energy in India]

Sunday, May 17, 2009

Updated Position Sheet

Cash: 44.6% (v 34.2% last week)
Long: 44.9% (v 37.1%)
Short: 10.5% (v 28.7%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

(click to enlarge)

Saturday, May 16, 2009

WSJ: Housing Rescue Plan Adds 'Short Sales'

Just throw everything in... save everyone. It's only money and we can always print more. Via WSJ
  • The Obama administration on Thursday laid out additions to its housing-rescue plan that are designed in part to make it easier for financially troubled homeowners to sell houses that are worth less than their mortgages. The newest initiative creates a standardized process and adds incentives for so-called short sales, in which a borrower -- with lender approval -- sells the home for less than the amount owed.
  • The government also said it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a "deed in lieu" of foreclosure, helping the companies avoid a potentially costly and time-consuming foreclosure process. (i.e. yet another cost benefit to banks with huge mortgage arms)
  • The government will pay mortgage-servicing companies up to $1,000 and borrowers up to $1,500 for successful short sales or "deeds in lieu" transactions. It will also spend up to $1,000 to help defray the cost of getting holders of second mortgages to release their liens so these transactions can be completed.
  • Another part of the program provides additional payments to lenders, servicers and investors for loan modifications in areas where home prices have been dropping. Payments under this program could in some cases total thousands of dollars per loan, administration officials said, and are designed to offset concerns that investors will face additional losses if the modified loans redefault. (more free money for banks with large mortgage arms - normally I'd ask "where is all this money coming from?" but money is now free - it falls from the sky and we can make all the mistakes go away, and help the oligarchs profit from the excesses they created - heads they win, tails they win)
  • The latest announcement is aimed in part at borrowers who can't be helped by a loan modification. (is there anyone left to subsidize for bad decisions... err, I mean "help"?)
  • Short sales have accounted for 15% to 20% of sales of existing homes this year, according to the National Association of Realtors.
And this quote sums it up...
  • Thomas Lawer, an independent housing economist..."giving borrowers money to encourage them to sell their homes without having to repay their debt is a slap in the face to everyone else."
This quite frankly is the perfect program - it rewards those who bought homes with nothing down (renters we turned into home owners) under the superficial belief that "home prices only go up" ... and are now underwater i.e. facing reality. Ironically the government per a series of posts I listed the past 2 weeks is creating a new class of these same people - thankfully we have all the bailouts waiting beforehand this time instead of frantically having to create them on the fly - so the underwater homeowner of 2011? Not to worry - programs already in place to hand you money for your "mistake". AND it gives handouts to the same banks who had massively loose criteria that let said borrowers into these homes in horrendous mortgages in the first place. So those banks win with profits on the way in when they offered the loans (then packaged them to suckers across the world), AND they win with taxpayer handouts on the way out (the current phase). Can you hear the oligarchs laughing about all this? Listen closely (they are in Martha's Vineyards this weekend)

I'd classify this as yet another win / win / win - especially since money is free in this new era. Readers, please I ask you do not teach your children anything about "consequences" because in our society there are none. Just teach them: we always win - no matter what decision we make. This is a birthright. The government is our friend with money from trees showered upon us in case we are in danger of not winning. Which turns us from potential losers into immediate winners.

We're all winners in America. Hug your favorite oligarch.

Brights Spots in the Economy - Running Shoes, Spam, Gardening Seeds, Self Tanning Products

A year ago we mentioned how the "Spam" Indicator (propriety indicator here at Fund My Mutual Fund) was signaling recession even as the Bush rebate was flooding the economy with paper dollars to hide the fact. We quickly forget but you remember that R word was not allowed to be uttered - after all it was an election year. It was just a "slowdown" that was "solved" via rebate checks. Presto! Since we don't traffic in Kool Aid, I had another spin ... the truth. In [May 29, 2009: To Laugh or Cry - Spam is Hot] I wrote...

Sigh. The pooring of America has taken a very dark form - the return of Spam.

I somewhat joked about this in a few previous entries, one regarding the measure of inflation by the government (i.e. substitution effect) [Apr 8: Now on to Airline Inflation]

Now the way the government reports inflation they have a cute thing called "substitution" - when something gets too expensive (beef) their measurements assume you move down (substitute) to a lower value item (say... spam) - so hence your inflation is flat or maybe even goes down. That's the magic of government reporting.

And just a few weeks ago in one our earnings roundups I mentioned how we will trade down to Hormel's jewel of a product

Dicks Sporting Goods (DKS) - while this is a Wall Street favorite this is exactly the type of product that a poorer America will have to cut back spending on. So instead of going out and playing golf or sports that actually require exhaling at a fast rate, we will continue to sit on our behinds and play video games from Gamespot (GME). And instead of eating healthy, we'll be eating cheap - such as SPAM from our friends at Hormel (HRL).


So it is here folks; the substitution effect is in full force. This means as Americans have moved from steak (2004, paid for by home equity) to hamburgers (2006, hmm my home went down in value and my wages are not keeping up with gas prices) to... spam (2008, recession? what recession - government reports say everything is rosy!), the government can now say inflation is negative.

  • Sales of Spam — that much maligned meat — are rising as consumers are turning more to lunch meats and other lower-cost foods to extend their already stretched food budgets

Now I have not spent much time since summer 2008 talking about the government hocus pocus that is the inflation report. But for recent readers, trust me it is a lot like the employment report.... if indeed Ben Bernanke is able to reinflate this economy you will see very little of it in official government reports of CPI and PPI. Just like we saw little of it last year; or my favorite way to measure it... inflation was benign excluding food and energy. i.e. as long you don't eat, heat your home, turn the lights on in your home, or drive a car - you had nothing to worry about. This is yet another government report that over the years has been massaged to make bad things go away- the "substitution effect" above is among my favorite ways 'they' adjust this number. Also wages are an extreme overweight in the CPI (consumer price index) so as Americans face stagnant wages, the government report will show inflation far below reality - just check your medical bills, tuition bills for the kids, et al. Meanwhile, ask Mrs. soccer mom what she is ALREADY seeing in the grocery aisle even in the depths of recession. And not just in the SPAM aisle.

But I digress - we'll get back to the facetious CPI numbers I am sure by next fall or winter, especially if Uncle Ben is successful in stagnating the nation in paper printing prosperity. Geez Louise, this was supposed to be a happy go lucky post about the "good things" happening in the economy but when I think of government reports I always go off kilter.

Anyhow on to the "good news" aka super green shoots front: AP - Hot in Recession: Chocolate, Running Shoes, Spam. As you read this remember to repeat the dogma: The US Consumer is back, 2006 is right around the corner, house ATMs have resurfaced, and I need to buy consumer discretionary stocks because that's the "Wall Street playbook" as we emerge from every recession.
  • It's not all doom and gloom in the U.S. economy. Some products are bucking the recession and flying off store shelves. Sales of chocolate and running shoes are up. Wine drinkers haven't stopped sipping; they just seem to be choosing cheaper vintages.
  • Gold coins are selling like hot cakes. So are gardening seeds. Tanning products are piling up in shopping carts; maybe more people are finding color in a bottle than from sun-worshipping on a faraway beach.
  • Strong sales of Spam, Dinty Moore stew and chili helped Hormel Foods Corp. post a 6 percent increase in first quarter sales in its grocery products unit.
  • Consumers have trimmed household budgets and postponed buying cars, major appliances and other big-ticket items. Yet they still are willing to shell out for small indulgences and goods that make life more comfortable at home, where they are spending more time. "People are much more focused on their homes and their immediate happiness and they're buying things that they can use themselves -- seeds, fishing equipment. Lipstick and chocolate are small rewards that make you feel better."
  • Profits in the first three months of 2009 at Hershey Co., the nation's second-largest candy maker, surged 20 percent and beat Wall Street's expectations. Kraft Foods Inc. reported double-digit growth in macaroni and cheese dinners -- the consummate comfort food. (it's not comfort food; it's cheap food)
  • "If you're used to eating out, maybe you're now buying a high-end steak at the supermarket," said Bill Patterson, a senior analyst in Chicago with Mintel International, which supplies consumer, product and media intelligence. "If you eat at home mostly, maybe you are going down from the branded product to a private label."
  • The financial meltdown produced more interest in home safes. Coin dealers are awash in customers as investors big and small see the safety of gold.
  • But economic woes are as rough on the tummy as they are on the wallet. Chicago-based market researcher Information Resources Inc. reports that sales of laxative liquids and powders rose 11.5 percent for the 52 weeks ending April 19. Sales of stomach remedy tablets, including Pepto-Bismol and Phillips brands, climbed 8 percent. (the growth in these items I assume are related to financial stress; apparently the green shoots were not quite so apparent on Main Street as they have been to Wall Street)
  • There's no statistical evidence, but dentists such as Dr. Matthew Messina in Cleveland, Ohio., are seeing more people with tooth-grinding injuries. "The body responds the same way to a real threat, `There's a burglar in the house,' as it does to a perceived stress like `I'm worried I'm going to lose the house,'" Messina said.
  • Guns are selling well, too. Total firearms sales rose 27.5 percent at Smith & Wesson for the three months ending Jan. 31. It's not a sudden interest in hunting behind the increase; hunting firearm sales at the company declined during the quarter by 46 percent. Gun sales are being driven by concern that the Obama administration will tighten gun laws. But people also are feeling a level of fear and heightened interest in self-reliance as they weather the recession.
  • "They are looking down the road going `What could happen here?'" Underhill said. "I think a lot of Americans are truly scared. One of the things that tickles is our pioneer ethos, which is, `I feel better with a year's supply of toilet paper' and `Maybe I should start canning and pickling.'" (I don't understand this fear - simply look at the stock market which is signaling all will be well in "4-6 months" just as it did 3-4 times in latter 2007, and throughout 2008 - I mean how wrong could an indicator be that has forecast 5 of the last 0 recoveries?)
  • The number of home vegetable gardens is predicted to jump more than 40 percent this year, compared with two years ago, according to the National Gardening Association. Sales of vegetable seeds such as green beans, tomatoes, cucumbers, squash and lettuce climbed 30 percent as of March at W. Atlee Burpee, a large seed company in Warminster, Pa. (I have about 4 stories under this heading that I have not had time to write a full entry on - home gardening is taking off, both here and in Japan - pooring 101)
Ok that's the happy go lucky green shoot article of the week; back to reality at least for blog readers. For continued 24/7 coverage of green shoots please see CNBC.

John Paulson Continues to Pile Into Gold (GLD); George Soros Sells Some Petrobras (PBR) and Potash (POT)

Now that SEC filings for 1st quarter 2009 have come in, a very quick look at some moves from the hottest hedge fund manager over the past 3 years, John Paulson and venerable George Soros.

Paulson continues to grow his gold stash as he views inflation rather than deflation the coming scourge. [Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)] Amazingly his fund now owns 8.7% of the entire SPRD Gold Trust (GLD) - wow. And if I read this correct a 15% stake in the Gold Miners ETF (GDX).

Via Bloomberg
  • Paulson & Co., the hedge-fund firm run by billionaire John Paulson, increased its investment in gold and gold-mining shares in the first quarter, according to a regulatory filing. As of the end of the first quarter, Paulson was the largest holder of SPDR Gold Trust, an investment fund that buys gold bullion. The New York-based firm owned 8.7 percent of the fund, valued at $2.8 billion as of March 31, according to a filing with the U.S. Securities and Exchange Commission.
  • That position was established as a hedge, the company said in a statement, because its funds have a share class that is denominated in gold rather than in dollars or euros.
  • Paulson bought or added to several gold companies in the quarter as well. He purchased a 15 percent stake in Market Vectors Gold Miners ETF, a fund that mirrors the move in the Amex Gold Miners Index. That stake was worth $638 million at the end of the quarter.
  • Paulson also bought a 2.6 percent of Gold Fields Ltd., becoming the fourth-largest holder of the Johannesburg-based gold miner. The investment firm, which manages $26 billion, also bought an additional 2.4 million shares of Kinross Gold Corp. Paulson owned 4.4 percent of the Toronto-based gold producer and was its third-largest holder at the end of the quarter.
  • Paulson reported owning an 11.3 percent stake in AngloGold Ashanti Ltd., also based in Johannesburg, in March.
  • Paulson’s largest fund, the Advantage Plus Fund Ltd. returned 4.8 percent through April.
[Nov 18, 2008: Paulson Buying Mortgage Backed Securities]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]

Meanwhile George Soros cut back some of his holdings in Petrobras (PBR) and Potash (POT) - although not too much in the latter after making huge pushes into both a quarter previous. [Feb 18, 2009: George Soros Increases Stakes in Potash & Petrobas]

Via Bloomberg
  • Soros Fund Management LLC, billionaire investor George Soros’s hedge-fund company, cut stakes in Petroleo Brasileiro SA and Potash Corp. of Saskatchewan, its biggest holdings in the first quarter, according to a filing.
  • The New York-based fund sold 5 million U.S. shares of Petrobras, (PBR) as the company is known, during the quarter, according to a filing today with the U.S. Securities and Exchange Commission. Soros’s remaining 32 million shares of the Brazilian state-controlled oil company were valued at $963 million at the end of the quarter.
  • The fund also held 5.6 million shares of Saskatoon, Saskatchewan-based Potash (POT) at the end of the first quarter, compared with 5.9 million shares as of Dec. 31.
Other moves
  • Soros bought 968,000 shares of Entergy Corp (ETR)., the second- largest U.S. operator of nuclear power plants, and 3.59 million shares of Houston-based Plains Exploration & Production Co.(PXP) in the first quarter. Soros sold off its stake in Schlumberger Ltd.,(SLB) the world’s largest oilfield-services provider, and U.S. coal producer Consol Energy Inc.
  • Soros’s company oversees about $21 billion. Its Quantum Endowment Fund returned 7.2 percent in the first quarter.
Just a quick look, I'll be peaking at SEC filings to get further insights.

Long Potash in fund, no personal position

Friday, May 15, 2009

Marc Faber: This was a Central Bank Printing Press Rally

Have a good weekend and the US is doomed.

Marc Faber

Below we have two videos and two stories from the original Dr. Doom (and Gloom, and Boom) Marc Faber. Of course he is hidden over at CNBC Asia because this sort of talk is too gloomy for airing during hours the normal American would be viewing. Remember, these green shoots are still fragile. This gives us two leading long term strategic minds (along with Jim Rogers) thinking along almost identical paths. [Mar 19, 2009: Both Marc Faber and Jim Rogers Predicting Civil War or Unrest] George Soros is not too far behind the same curve either.

First the videos

After GDP data showed countries within Europe contracted again in the first quarter, Marc Faber, author & publisher of 'The Gloom, Boom & Doom Report, doesn't see the global economy recovering "anytime soon." Bob Parker from Credit Suisse joins the discussion.

Asian banks don't have the same problems with toxic assets that are affecting Western markets, Marc Faber, editor & publisher of 'The Gloom, Boom & Doom report,' told CNBC


Related articles - CNBC: Money Printing Pushed Stocks Up

Major central banks' efforts to lift the world economy by printing money have boosted asset prices, so stocks are unlikely to hit their lows from November and March, Marc Faber, the author of "The Gloom, Boom & Doom Report," wrote in his latest research report.

"I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by 'printing money' in order to lift or support asset prices, it can be done," Faber wrote.

"This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn't mean that a new bull market in global equities a la 1982-2000 has begun," he said.

"But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world's central banks and fiscal deficits have begun to impact asset prices positively," Faber wrote.

Many investors did not take advantage of the recent rally because they thought it was a bear-market rally, so they stayed on the sidelined, hoarding cash. But stocks are not likely to collapse, as more players take courage to dip into the market, he said.

"Put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50 percent of his clients' money and missed the recent rally," Faber wrote.

"What is he likely to do? I would think he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative," he said.

But very high volatility and "price fluctuations that don't appear to make any sense" will be the new dominant characteristic of the market, he warned.

The lows reached by resource and mining stocks, as well as Asian equities and most emerging markets, are likely to hold for now, according to Faber. But the US long-term government bond market "has the highest probability" of having reached a high, he said.

And - CNBC: Capitalism Could Fail Like Communism

A sustainable recovery will occur only when the corporate system will be cleaned of losses and capitalism risks collapsing if this does not happen, Marc Faber, the author of "The Gloom, Boom & Doom Report," told CNBC Friday.

The central banks will continue to print money at full speed, but long-term this strategy will lead to a fall in purchasing power and living standards, especially in developed countries, Faber said.

The years 2006 and 2007 were "the peak of prosperity" and the world economy is not likely to return soon to that level, he added.

"I think the final low in markets will occur when the system is cleaned out," Faber said.

Unless the system is cleaned out of losses, "the way communism collapsed, capitalism will collapse," according to Faber. "The best way to deal with any economic problem is to let the market work it through."

US Will Go Bust

The Federal Reserve's policy of printing money is destabilizing the markets and creating "enormous volatility" said Faber, who in his latest "Gloom, Boom & Doom Report" wrote that it was money printing that had pushed stock prices up.

"The US government for sure will go bust. That I guarantee you. Not tomorrow, but it will go bust," he added.

US government bond yields bottomed out in December 2008, he said.

"I think this is the beginning of a long-term bear market. And I think the government will have to keep interest rates artificially low because deficits will be too high," Faber said.

As for the recent rally in the stock market, most investors missed it because they focused on the economy rather than look at the technicalities.

"People said fundamentals are bad and markets are going up for no reason. But money printing is a reason," he said, explaining why quantitative easing will continue.

"The worse the statistics will be, the more money will be printed. Believe me, globally all the central banks will print money like there's no tomorrow."

One City Block in Detroit

It is hard to explain what is going on in Detroit to those not around here - for a long time the metro area was really 2 separate worlds: a choking inner city and then a quite thriving suburbia. However, now the suburbia is suffering as masses of white and blue collar workers lose their livelihood or are trading down in massive ways. So much commercial real estate lays empty even in "well off" areas. The city itself, outside of a small university area, a small riverfront area and a small niche near the baseball and football stadiums is a very depressing area by and large. Much of it has to do with size - you can fit Boston, San Fran, and one more similar sized city into the geographic boundaries of Detroit - it is very spread out. As the population has imploded you have huge pockets of "empty", interspersed with huge pockets of depressed. The city itself (with all that area) does not have 1 major department store and if memory serves not one major supermarket chain.

I always like to warn readers that I have Michigan economic bias [Jun 25, 2008: I have Michigan Economic Bias], so I will be skewed worse than the average bear because of what I see here. Obviously there are many city specific issues that have exaggerated the situation, but one should hope this sort of blight does not hit other areas of the country as we continue to move "jobs you do with your hands" overseas. With only 30% of the country having a college degree - I continue to pointedly ask "what about everyone else?" - they all cannot be Walmart greeters or cleaning up after infirm old folks. Every solution is just to create more money from air, spread it in every direction and talk up "prosperity". That gets us through to the next political election... meanwhile the structural breakdown for the bottom 30-40% continues slowly but surely. [Do the Bottom 80% of Americans Stand a Chance?] So the market can go up, down - throw more fiat money at the problem until everything inflates, but the real economy - in my eyes - is changing structurally in a way that is leaving a lot of people who don't appear on CNBC behind. Until I see the next great job boom that does not have to do with refinancing or building even more homes, or government transfer payments I cannot create an air of great optimism.

There is a great story here with video from a local paper. I think you will not believe it is from America when you view it. And trust me, there are many blocks identical to this one in Detroit. I always chuckle to myself when I hear people from other parts of the country say "wow housing is so cheap in Detroit" - if you only knew ... I know there is this sort of poverty also in parts of the south and W. Virginia et al, but in a major urban area - when it is so concentrated is quite striking. Now when I overlay all the money we have handed out to the most important people of society and think what could of been done with that to help the peasantry, all i can think of is "green shoots".

Just repeat the dogma after you view this: richest country on Earth.... (ex debt of course)

Go here to see the video
  • Robinwood was an integrated and well-kept block just five years ago, the remnant people say. And then it was gone in the blink of an eye. It started at the east end of the block when a house was rented to 5 adults and 20 children. More families moved out. More renters moved in. The radios started. The brown bags. The gangs of young men. The gunshots. The dope houses. The fires.
  • If you are feeling confused or overwhelmed by the circumstances of our times, if you need a place to consider where we've been and where we are, make a drive to West Robinwood Street. It is a haunted, damnable portrait of what we've become. The neighborhood is a burned-down ghost town of 56 raped and looted houses east of Woodward and north of McNichols. It is empty save for five elderly families and a middle-age couple who live near Woodward and refuse to open their doors.
  • "Do I live in Hell? Yes I do and no I don't," said Jerry Williams, who lives at 666 Robinwood and spoke through a steel gate dressed in a bathrobe and dirty socks. "It would be Hell if I was dead, but I ain't. So that just makes the place ugly. The most ugly thing that human beings can create."
  • The neighbors to Williams' left were evicted and, three days later, somebody firebombed the house.
  • The dead dope man used to live to the right of Williams. To the right of the dope man's house lives Fatimah Muhammad, the only other house occupied on the north side of that block of Robinwood Street. Last week, in broad daylight, three men forced their way into her house. One held her at gunpoint in her bathtub, while the other two managed to steal some sneakers.
  • On Monday, a police cruiser rolled through. "I've never seen a place like this," said the white cop. "Vietnam," said the black cop. "Hard to believe this is America, but it is," said the white cop.

Bookkeeping: Adding to Powershares DB Double Gold Long (DGP)

The boys are back in town?

I noted silver had a quite substantial move the past week, and now gold is making a nice series of higher highs and higher lows. Based on chart alone one would think GLD has a chance for $95 before any serious roadblocks. I added to my Powershares DB Gold Double Long (DBP) on this strength.

Remember as noted in [40,000 Point of View on S&P 500] we have 2 support areas right next to each other; the 20 day moving average and then S&P 875. We now are back at the first support - if these both break, the whole story changes and it's bear time. Gold might be foreshadowing that... or not. Until then, I'm ambivalent ... but it is quite amazing how quickly the story can change (per squiggly line analysis) with just 10 S&P points. Green shoots can turn yellow quickly... news ignored for months can matter again. We shall see.

Long Powershares DB Gold Double Long in fund; no personal position

Robert Prechter of Elliot Wave Theme Still Extremely Bearish

Let me preface this by saying I have never studied Elliot Wave theory so I can't comment much on it, but the proponents of this analysis are probably only lagging behind gold bugs in terms of their "belief" :) I was hoping Robert Prechter had a market call in this Bloomberg story because he was about 2 weeks early in calling for shorts to reign themselves in (effectively an intermediate bullish call) in February [Feb 24, 2009: Robert Prechter of Elliot Wave Fame Advises Closing Shorts]

Elliott Wave International Inc.’s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor’s 500 Index tumbled to a 12-year low. He warned of a “sharp and scary” rebound for anyone still wagering on a retreat, according to this month’s “Elliott Wave Theorist.” “The market is compressed,” Prechter said in the note published yesterday. “When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.”

In July 2007, Prechter advised shorting U.S. stocks, saying “aggressive speculators should return to a fully leveraged short position.” He has now reversed that call.

In retrospect, despite the market falling hard for another two weeks (I tried to get long one week after Prechter's call, and promptly got whipped) in the longer term view it was a good call -- being correct within 2 weeks is solid in my book. And indeed it was scary to be short!

Unfortunately this piece is not making a near term call one way or the other but if you believe it - all I can say is ... "Danger, Will Robinson"
  • Robert Prechter, known for examining stock charts to make market forecasts, says dividend payouts, the ratio of share prices to earnings and dwindling cash at mutual funds mean U.S. equities may plunge as much as 80 percent.
  • The 43 percent drop by the Standard & Poor’s 500 Index since October 2007 hasn’t taken prices to levels typical of the beginnings of bull markets, according to Prechter, the founder of Elliott Wave International Inc.
  • Have we fallen far enough on this to say that the bear market’s probably over?” Prechter, who expects the stock market to lose half to four-fifths of its value, said at a meeting of the Market Technicians Association in New York yesterday. “On our model, there should be more to come.
  • The dividend yield for the 30 stocks in the Dow Jones Industrial Average is too low at 3.71 percent, he said, citing an analysis of prior market peaks in 1929, 1966 and 1977. “We have a long way to go to where the market may be at bear-market-bottom yields,” he said. Valuation measures including price-to-earnings, price-to- book value and bond payouts relative to dividend yields are also still too high based on historical averages, Prechter said.
  • Mutual fund managers have less than 6 percent of their assets in cash, another indication that there isn’t enough buying power to sustain a long-term rally in stocks, Prechter said.
  • Based on the amounts of cash fund managers had at the start of bull markets in 1974, 1982 and 1990, “we should be expecting double-digits for a really good bear-market bottom,” Prechter said. (but all I hear on a daily basis is all the mountains of cash waiting on the sidelines to enter the market?)
  • The price-earnings ratio on the S&P 500 was about 60 at the end of last year, based on 2008 profits, according to data compiled by S&P. In prior bear-market lows, the measure sank to 6 or 7, Prechter said. “That gives you a flavor for how much the market’s going to have to come down, or earnings will have to suddenly soar,” he said.
But of course there are different price to earnings ratio - you can use the bulls or the bears; whatever fits your world view
  • There are different measures of the price-to-earnings ratio. Yale University Professor Robert Shiller tallies the figure using 10 years of profits to smooth out short-term fluctuations. His current reading is about 15.7, near the historic average of 16.3 going back over the past 128 years, according to data on his Web site. Shiller’s P/E ratio got as low as 5.6 during the Great Depression.
In you are unfamiliar with this type of "tea leaf reading" (I use that term with affection)
  • Prechter, the 60-year-old advocate of a theory of market analysis developed by accountant Ralph Nelson Elliott during the Great Depression, achieved fame in 1987 for predicting that year’s crash two weeks before it occurred. He’s published a monthly newsletter, The Elliott Wave Theorist, since 1979.
  • Elliott Wave Theory holds that market trends follow a predictable, five-stage structure of three steps, or waves, forward, two steps back. In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.
To finish
  • Prechter, the author or editor of 13 books on forecasting, also argues that markets are fundamentally driven by social psychology. (agree) The current trend toward saving and avoidance of debt is leading to an economic depression and deflation, he said. (it certainly is a most fascinating economic experiment we are in - how it turns out will be just as fascinating when we look back in half a decade)
EDIT 12:45 PM - I see more here from Reuters
  • Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.
  • Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said. (hmmmmm... he is firmly in the deflation camp with Mr Hugh Hendry)
  • "It's not the start of a new bull market," said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. "Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932," he told Reuters in a wide ranging interview. "It's a very rare event," he added.
  • "I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety," he said. As in his 2002 book "Conquer the Crash," which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.
What about all the commodity bursting higher on "green shoots"?
  • Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said.
  • As banks continue to accumulate losses and corporate earnings fall, "the difficulties will probably last through about 2016," he said. "There will be plenty of rallies along the way."
  • Oil may rally further from current levels just below $60 per barrel but the upside will be capped at about $80 per barrel as the commodity is locked in a long-term bear market, he said.
  • "Deflation is coming, it's going to lead to a depression. We're not at the bottom yet," Prechter said. "I think we are going to have bouts of deflation separated by recoveries."
  • Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.
  • Treasury bond prices are likely to fall in a long term bear market, with huge government debt issuance being the main catalyst. "People got very enamored with bonds and very enamored with gold and I don't like to be invested in markets that are over subscribed," Prechter said.
  • "The Treasury (Department) has taken on so much bad debt" at a time tax receipts are falling, that "there will be a slow, but very steady change in the way people will view the U.S. government," said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said.
  • The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added.
  • Next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets, he said. "Corporates in terms of price have the big wave down coming. This has been a prequel," Prechter said. "Many corporations who (now) say we can borrow more money and take more risks: those are the ones who will get in trouble," he said. "Many municipalities will default," he added.
This will be fascinating - if he gets all this correct, I'll convert to whatever he is selling.

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