Monday, May 25, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 42

Year 2, Week 42 Major Position Changes

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

Cash: 52.8% (vs 44.6% last week)
34 long bias: 38.2% (vs 44.9% last week)
10 short bias: 9.0% (vs 10.5% last week)

44 positions (vs 42 last week)

Weekly thoughts
After a deep drop the prior week, we had a very small gain in the major indexes last week but essentially "flattish". I don't have a great feel here one way or the other on the general market since we are at an inflection point and until we see which way things break, it is hard to overweight one way or the other. As we sit in the upper S&P 880s, we have seen resistance at recent highs of S&P 930 and above that the 200 day moving average up near S&P 960. A run to that latter level would still give a healthy +8% move. But breaking through this key resistance I expect to be a tough road to hoe. Just for historic perspective we have not been above the 200 day moving average since May 2008... back at S&P 1400.

On the downside we were looking at multiple supports this week from S&P 875 to 885, we fell to S&P 880 but did not breach 885 on a closing basis due to ... well some interesting action late Thursday. Friday's action meant nothing to me because most of the people playing in the market on a Friday before Memorial Day are the same folks who play the day after Thanksgiving. The 50 day moving average is down at S&P 850 so we have a 110 point S&P "band" if you will between the 200 day and 50 day moving averages.

As we noted last week, the S&P has been above the 20 day moving average (on a closing basis) since March 12th - we threatened to break that level Thursday before a mad rush of buying in the last 30 minutes. We are again right at that level... hence let's expect futures to be up tomorrow morning ;) I think the biggest question from here is if we are going to continue the pattern we've now had for a year of 20% moves up and down OR instead we are going to have more shallow moves, which allow individual stock picking to matter again.

Normally, I'd spend some time talking about the economic picture or life on Main Street but none of it matters at this time to market participants as hope dominates. If one believes $60 is a plausible earnings number for the S&P 500, we are at a forward PE ratio of near 15. I think that is aggressive.... but many bulls have already dismissed 2009 and say now we have to look at "normalized" earnings in 2010. (i.e. we not only have to look out 7 months, we have to look out 19 months to find "value"!) Funny, they were saying the same thing last summer about 2008 (ignore it! and look forward to 2009 when the recovery is hot and heavy) Bulls have it very nice, they can constantly ignore reality and talk about "discounting the future". I have seen nothing other than a tsunami of government and Federal Reserve rain showers of fiat currency to say there is any magnificent recovery coming. So over the next few quarters we'll still be debating the shape and duration of the recovery...

p.s. I often like to talk about how the market listens to the Federal Reserve as some omnipresent center of wisdom...i.e. Ben says green shoots, we all jump. Ben says GDP will bounce later in the year, we all jump. So the people who missed this entire mess (as the key regulator) somehow are worth listening to. For perspective, in July 2008 the Fed had forecast unemployment in Q4 2008 @ between 5.5-5.8%, and in Q4 2009 @ between 5.2-6.1%. As we sit at "official" 8.9% you can see how once again, the ones we take all our cues from - are bathed in Kool Aid. But now as they whisper sweet songs of recovery we must honor their 'vision'. And why not, with a track record like they've shown us. Hope springs eternal. Or is it denial?

After being obliterated by trying to short anything for weeks on ends, I am starting to see some decent charts to short, and with hedge funds now run out of town in many of these stocks it should be "safer" to short names without fear of waking up to +25% moves the next morning. American Express (AXP) was added on the short side this week....

... and a lot of consumer discretionary names are returning to old haunts after obliterating shorts in March and April.

So if the consumer "back" or did we just see a plethora of hedge funds shorting the "right stocks" get run over by Kool Aid man (sporting green shoots)?

We'll see if we can run a more balanced approach go forward ....

I have raised cash this past week (back to >50%), but again - once we begin to make a strong move one way or the other, I'll apply it... but on which side of the ledger, we'll let the market tell us.

Richard Fisher Speaks Sense

A quite impressive interview with Richard Fisher, President of the Dallas Fed, in the Wall Street Journal. After reading through this I see there is no chance on Earth he will ever replace Ben Bernanke as he is not a political puppet; he reminds me of a Paul Volcker (who appears to be a mentor of sorts) rather than a Greenspan/Bernanke. In fact if you don't want to read the whole piece let me leave you with 2 scary items.
  1. In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." (think about that number for a moment - it is hard to comprehend. Our entire economy is $13-14T and we owe $11T per official national debt. Then think of $99 Trillion of obligations... however long it is spread out over)
  2. Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. (and that pretty much sums up the context of our problems - if truthful information is "troublesome" eliminate the source of that information and speak happy talk)
If you prefer the non Cliff Notes version of the type of person who should be head of the (cough) "independent Federal Reserve" go onward past this point...
  • From his perch high atop the palatial Dallas Federal Reserve Bank... Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper. (moral hazard, the Fed put, whatever you want to call it - backstop nation)
  • Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."
  • The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it.
  • He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China." [May 21, 2009: China Becoming More Picky About Debt]
  • Mr. Fisher was educated at Harvard, Oxford and Stanford. He spent his earliest days in government at Jimmy Carter's Treasury. He says that taught him a life-long lesson about inflation. It was "inflation that destroyed that presidency," he says. He adds that he learned a lot from then Fed Chairman Paul Volcker, who had to "break [inflation's] back."
  • Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee's (FOMC) lead inflation worrywart.
  • In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. (speaks the truth)
  • He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger." (more truth, someone stop this man)
  • In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion."
  • In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. (wait, I thought this was a new open and transparent Fed? Would of loved to be a fly on that wall)
  • So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I've flown to Dallas to see what he's thinking now.
  • Regarding what caused the credit bubble, he repeats his assertion about the Fed's role: "It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns." (Later, he adds that this is not to cast aspersions on former Fed Chairman Alan Greenspan and reminds me that these decisions are made by the FOMC.)
  • "The second thing is that the regulators didn't do their job, including the Federal Reserve. (solutions we are offering? Give Federal Reserve more power)
  • And finally, he says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment."
  • What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn't mince words. "I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details
  • That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.
Remember to that last point, the Fed is only buying "highest quality AAA paper!" to spare taxpayers risk! hah
  • I wonder whether the same bubble-producing Fed errors aren't being repeated now as Washington scrambles to avoid a sustained economic downturn. He surprises me by siding with the deflation hawks. "I don't think that's the risk right now." Why? One factor influencing his view is the Dallas Fed's "trim mean calculation," which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that "the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index."
  • Mr. Fisher says he also has a group of about 50 CEOs around the U.S. and the world that he calls on, all off the record, before almost every FOMC meeting. "I don't impart any information, I just listen carefully to what they are seeing through their own eyes. And that gives me a sense of what's happening on the ground, you might say on Main Street as opposed to Wall Street." (so talking to a group of bankers in NYC - and Charlotte - does not give you a clear world view? Hmm, might want to tell Ben)
  • "Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it."
  • Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that?
  • This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. "The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street. "Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it," he says with a defiant Texas twang that I had not previously detected. "I don't think that it'd be the best signal to send to the market right now that you want to totally politicize the process."
  • Speaking of which, Texas bankers don't have much good to say about the Troubled Asset Relief Program (TARP), according to Mr. Fisher. "Its been complicated by the politics because you have a special investigator, special prosecutor, and all I can tell you is that in my district here most of the people who wanted in on the TARP no longer want in on the TARP."
  • At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. "You know that I am a big believer in Schumpeter's creative destruction," he says referring to the term coined by the late Austrian economist. "The destructive part is always painful, politically messy, it hurts like hell but you hopefully will allow the adjustments to be made so that the creative part can take place."

NYT: In South Korea, All of Life is Mobile

South Korea has been known much of the past 10-15 years for being well ahead of the game in mobile... Australia seems to want to challenge that. In [Apr 8: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies / Broadband] we wrote
First, news out of Australia for a massive $30B ($47B in Australian dollars) broadband network - something I thought was on President Broadband's agenda but once Pelosi got a hold of the "stimulus" plan it turned into pork barrel projects instead of actual investments in this country. And yes, I'm jealous to see so many countries making real investments during this time, rather than butterfly museums. [Meanwhile South Korea is out to get 1 Gbps out to everyone in a $25 Billion program] This was a talking point for Obama but it seems to have died once Congress got involved. (sigh) GDP by country (2007)
  1. U.S. $13.8 B
  2. Aus $0.9 B
  3. South Korea $0.9 B

Meanwhile, we're "investing" in making sure the financial oligarchs have swindled the common man out of as much national treasure as possible. So all 3 companies seem to be on the right path per their "vision". Ahem

An interesting story here in the New York Times about South Korea that touches on the mobile "lifestyle"... judging from the past, (speaking of oligopoly) our few telecom companies who essentially seem to run what and when we will get such treats, should have us on the same path within 6-9 years. Notice a trend here in all our major industries? But the cool thing about being so behind those "not 1st world countries" is we can see our future far in advance.

  • Kim Hee-young, a statistics major at Sookmyung Women’s University in Seoul, holds more or less her whole life in her hands. She wakes up in the morning when her mobile phone detonates an alarm, a loud Korean pop song. She checks weather forecasts on its screen before selecting what to wear. In the subway, Ms. Kim breezes through the turnstile after tapping the phone on a box that deducts the fare from a chip that contains a cash balance. While riding to school, she uses her mobile to check if a book has arrived at the library, slays aliens in a role-playing game, updates her Internet blog or watches TV. On campus, she and other students touch their mobiles to the electronic box by the door to mark their attendance. No need for roll call — the school’s server computer logs whether they are in or how late they are for the class. “If I leave my wallet at home, I may not notice it for the whole day,” said Ms. Kim, 21. “But if I lose my cellphone, my life will start stumbling right there in the subway.”
  • For Kim Hee-young, her mobile is the Swiss Army knife of the digital era. When she wants ice cream, she just asks her phone, and it shows a list of ice cream shops — complete with their menus and customer reviews — and the shortest way to get there.
  • ... experts say South Korea, because of its high-speed wireless networks and top technology companies like Samsung and LG, is the test case for the mobile future.
  • In 2005, South Korea became the first country in the world where mobiles could receive digital television signals — something Americans with their latest iPhones are just beginning to get used to. (not bad, only 3-4 years behind on this; we're making progress - thank you Apple!)
  • Here, people sometimes even raise pets by phone, part of a global fad that began in the late 1990s with the Japanese invention of the Tamagotchi digital pet. You feed, walk and clean up behind the digi-dog that lives inside your mobile. If you neglect it, it sulks, withers and dies. (allright, some things we could do without)
  • Among all these features, however, one enterprise the country’s wireless carriers are banking on is bringing cash and credit to the mobile phone, “thusmaking South Korea a walletless, cashless society,” said Ju Hee-sang, a manager for mobile cash payments at SK. (this will be a big trend for America "one day" - the question is how many more years will it take and whom will be the winners?) Each month last year, four million South Koreans bought music, videos, ring tones, online game subscriptions and articles from newspaper archives and other online items and charged them to their mobile phone bills, without going through any bank or credit card. The amount totaled 1.7 trillion won, or $1.4 billion at current exchange rates, last year. South Koreans have done this since 2000.
  • From late last year, people use “T-money” — electronic cash stored and refilled in their SIM cards and other phone chips — as Ms. Kim does when she rides the subway and bus or buys snacks from a 7-Eleven at her neighborhood or the vending machines and cafeteria of her school. Instead of giving their children cash, parents can transfer money to their kids’ T-money account.
  • T-money also makes mobile gift-giving possible. Someone can check into a mobile carrier’s online shop, buy an icon depicting a Starbucks Frappuccino and send it to his girlfriend’s phone. She can then go to the Starbucks, show the icon and get the drink. Each day, 70,000 mobile gifts — from Dunkin’ Donuts and pizza to underwear and cosmetics — are delivered through SK’s networks. (this is pretty darn cool stuff we could be doing with our tax dollars if the telecom oligarchs decide it's going to take another half decade, but we have Goldman, Citi, Bank of America executives to make rich - all in good time fellow peasants)
  • Since 2000, South Koreans also use their mobile phones for Internet banking. For a fixed rate of 1,000 won a month, mobile phone users can check their bank accounts or send money, away from the A.T.M. or personal computer, and sitting, for example, in the taxi. Last year, Citibank began offering mobile-banking software for customers who use the iPhone (2000... 2008. 2000... 2008. 2000.... 2008 - we're almost catching up to these "non richest country on Earth" places - within a decade on this one)
  • For South Koreans, efforts to replace credit cards and cash hit their stride in 2004, when banks began issuing integrated circuit chips that slot into the mobile phones and allow them to work like credit cards at A.T.M.’s. (2004 in South Korea? Should hit stateside in with splashy "innovative" advertisement around 2012) Instead of scratching or feeding the plastic card into the A.T.M., the customer places the phone on a tray-like reader.
  • Mobile payment has been adopted in many parts of Europe and Asia, especially in Japan. (yo! some love here in America?)
But not everything is perfect...
  • ...banks and wireless companies are still squabbling over who should pay for the cost of installing the chip reader.
There are certainly some great invest-able themes above; but as stated earlier... who knows when this sort of technology will ever make it across the vast oceans so that we too may be blessed with this magic. Heck, we're psyched when Verizon offers FiOS in the home!

Louise Yamada: 2000s Uncanny Resemblance to 1930s; David Rosenberg: Worst to First Unsustainable

When last we checked in with technical analyst supreme Louise Yamada, we were 4 weeks into a monstrous bounce... she was cautious [Apr 9, 2009: Did this Rally Turn Louise Yamada Into a Bull?] and not changing her tune. It's been 6 weeks, and thousands of green shoots later and we've only suffered one serious weekly setback. Barron's has a piece with her latest thoughts. If you are not familiar with her, in November 2008 [Nov 21, 2008: Fear Louise Yamada] she suggested S&P 600 (with downside to 400). We were at S&P 800 at the time, and the index fell to 750 in the days to come, before rallying for about 7 weeks on Obama / Geithner green shoots... to S&P 950. Then proceeded to crash to S&P 666. She did not back off from those calls when we last looked in early March [Mar 2, 2009: Louise Yamada - Sheeeee's Back]

The latest...
  • So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I've read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?
  • Market historians have been pointing to 1938 as an antecedent for this year's action, as Mike Santoli has noted in his Streetwise column. So, too, has Louise Yamada, the doyenne of technical analysts, who now counsels clients via her LY Advisors after her long career at Smith Barney.
  • "It is almost uncanny the degree to which 2002-08 has tracked 1932-38," Yamada writes in her latest note to clients. She has posited in her so-called Alternate Hypothesis that the structural bear market would be less like its most recent predecessor, from 1966-82, and more like 1929-42.
  • So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise's chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.
I do believe history rhymes if not repeats... but frankly if we pulled back 10% and then reversed and gained 20%ish from there... that would be quite amazing.

  • From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II.
  • Then came a series of bull and bear trades -- down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows.
I do believe we will trade in a quite large range, and as we entered 2009 I stated as much... the ping pong between hope and reality. We've already has a multitude of "technical" bull and bear markets (mindlessly set as a +/- 20% move) just in the past 18 months.
  • The positive aspect of this, writes Yamada, is that the arduous process permitted individual stock consolidations to develop over years ultimately provided the base for a bull market in 1942.
  • But, she emphasizes, that means investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far -- topped only by 1929-32 -- the structural bear has several years to go to complete the repair process.
So if this indeed somehow play out in parallel we are in 1938 and the next bull begins 2013. That would fit into the 1938 = now, and 1942 = 2013. And would put us in the front end of the 13-16 year bear market theory. Probably works well with what some of the Elliott Wave guys forecast but I don't know enough about that art to comment. [Robert Prechter of Elliott Still Extremely Bearish] Now with that said, there are so few statistical comparisons to this type of era, that it takes some leaps of faith ...
  • As for the current rebound, it is rather like a bungee jump, with an elastic snap-back after a terrifying plunge. And it has been a kind of worst-to-first move. David Rosenberg, ensconced at Gluskin Sheff in Toronto after years of distinguished duty as Merrill Lynch's North American chief economist, observes that the best performers have been the lowest-quality stocks or those with biggest short interest. "In other words, this was a rally built largely on short-covering, pension-fund rebalancing and the emergence of hope wrapped up in 'green shoot' data points," he contends. That makes its sustainability in doubt.
Boy, we've lived and breathed that... shorting "worst" has been a painful experience for the past 10 weeks.
  • WHAT IS LIKELY TO DISAPPOINT THE BULLS is the pace of recovery in corporate profits, according to the perspicacious Smithers & Co. of London. Earnings per share -- the sustenance of equity investors -- will be hampered by punk economic growth ahead and the need to repair corporate balance sheets.
  • Deleveraging means share issuance rather than buybacks -- a reversal of the trend of recent years that worked to the benefit of corporate chieftains' bonuses. "The growth rate of earnings per share is thus likely to be worse than that indicated by profit margins alone," his report logically infers.
  • Investors had come to regard the record profit margins of recent years as the new norm. Last year's were above average, despite the general perception they were squeezed. With U.S. growth likely to stabilize at only 1% into 2010, the outlook for earnings is apt to be, in a word, lousy.
This is also my theory. The "new normal" will be a very different situation but if American consumers rebuild their balance sheets over the next 3-4 years, they can forget the lessons we've just gone through .....and return to their proliferate ways. Right around 2013.

It's all coming together splendidly.

Sunday, May 24, 2009

Cribs: Seth Green Style

If you have ever seen a video of "Cribs" on MTV this video will cause you great laughter ... basically the show lets celebrities show off their toys (home, cars, bling) so that you to can allow the system (as is) to go unchecked so that you can have the 1 in 10 million shot of living their lifestyle. Yo! Here is a link for those of you who perhaps don't frequent that channel - you can check out a segment to see what you are missing out on.

Apparently there is an ABC Special geared to young adults on how to handle your money... umm, on a Friday night.

Friday May 29th at 9/8c on ABC the one-hour special UN-BROKE: What You Need to Know About Money" takes an unconventional look at the fundamentals of everyday finance featuring Will Smith, Samuel L. Jackson, the Jonas Brothers, Christian Slater, Cedric the Entertainer, Seth Green, Sesame Workshops Oscar the Grouch, Rosario Dawson, the E*Trade Babies and more!

Yep - I believe if you want to catch young adults, putting a special on at 9PM Friday is the way to hit that demographic. Word. If there is one place I want to get my money advice it is from the Jonas Brothers - are any of those guys even 20 yet? (Hat tip to reader Patrick for keepin' it real and showing me what is being taught as this is no longer my demographic)

3 minute video - now this is a serious crib! (if the embed doesn't work - seems to be giving me trouble; you can see the video here)

NYT: As Economy Struggles, Russia's Market Has Surged

Ironically this headline could be applicable to any number of countries the past 10 weeks... of the BRIC countries, the "R" gives me the most quakes, but you can't argue with the recent performance [May 20, 2009: Year to Date Returns by Country, Go Peru] ... you need to have serious antacid supplies to invest in Russia through thick and thin. While it has had the best performance of the BRIC countries (Brazil, Russia, India, and China if you do not know the term) this year - it had a debilitating fall beforehand. Essentially I find Russia to be a call option on oil, I am sure if you plotted oil and Russia together you'd see a similar arc although the beta (swings) in Russia would potentially be even more vicious than oil has been the past few years.

Market Vectors Russia (RSX) which is probably the broadest way to play the country peaked just under $60 May 2008 - remember back then we were hiding out in commodities as they were the one group "decoupled" from the general market correction, and then fell to just a fraction over $10 by October. After a >100% gain off the bottom it still trades in the low $20s... in fact it has just now come back to "fill the gap" in the chart from a death drop in the first few weeks of October. You can toss in a short lived war during that time frame as well.,, and a series of ruble devaluations. Oh yes, the stock market was closed a few times... :) Wednesday of last week RSX crossed back over the 200 day moving average for the first time in a long time. But again, as goes oil - so seems to go Mother Russia.

Via New York Times:
  • Despite continuing weakness in the Russian economy, the stock exchange here has surged to become the best performing in the world, after being the worst last fall. (hmm, I guess Peru was passed in the past week?)
  • After the sell-off last year pushed the valuations of Russian companies to record lows, rising energy prices in recent months have drawn investors back into the market, traders said, even as the government has twice downgraded its expectations for growth this year. Other big emerging markets, including China, India and Brazil, have rebounded sharply in recent months on signs that the fractured global economy may be beginning to heal, but none have been more buoyant than Russia.
  • Investors are not analyzing macroeconomics when deciding whether to invest in Russia,” the chief economist in Moscow for Merrill Lynch, Yulia Tseplayeva, said. (that's an understatement) “They look at oil prices, and believe that when oil prices rise so will the Russian market,” she said. “And that is true.” ... for all Moscow’s effort to diversify the economy, the rise in Russian equity values has closely tracked the price of oil, by far its largest export commodity — much as the market plunge last fall coincided with the collapse of oil prices.
  • Officials now expect a contraction of more than 6 percent in the Russian economy before it begins to improve. The Micex index of major Russian company shares, for example, is up 105 percent after bottoming out on Oct. 27.
  • For some investors, the very air of dismal news hanging over the country inspired contrarian bets in February and March that shares were oversold. “It seemed a consensus emerged generally that Eastern Europe was going to hell,” Ian Hague, a partner at Firebird Capital Management, a New York hedge fund that focuses on the former Soviet Union, said by telephone. “When you see that, it is very bullish. Because the reality is never as bad as people’s fears.” (whatever happened to Eastern Europe? Did paper printing prosperity suddenly make all those fears people were listing go "away"? Paper printing is truly a magical solution to all the world's ills) [Feb 27, 2009: John Mauldin on Yahoo's Tech Ticker] [Feb 18, 2009: Banks Reel on Eastern Europe's Bad News]
  • In the second half of last year, oil prices declined 75 percent and the RTS index fell by 72 percent, said an investor note from UralSib, a Moscow brokerage firm. This year, crude prices have risen 59 percent and the RTS index 58 percent. (well that answers my question above - the variance tracking is remarkable... 1:1)
  • Still, Russian stocks plunged last fall not only because of oil price declines, but also because many Russian industrialists had pledged shares as collateral for loans, and were required to sell when credit lines were called in. Then, uncertainty over the stability of the ruble prompted foreign investors to sell shares. By late January, however, the ruble had stabilized and the forced selling was over, eliminating two Russia-specific risks and leaving a very depressed market behind. Then oil prices ticked back up.
  • And the Russian stock market bounce came in spite of looming troubles in the real economy that analysts say make it look tenuous. (don't worry about the real economy - that's just a minor detail; we don't worry about it here - just talk green shoots and bid stocks up as central banks offer money to anyone ... chicks are free too)
  • Since its inception after the collapse of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to Renaissance Capital, a Moscow brokerage. (another remarkable fact - someone kick me to remind me the next time Moscow devalues its currency and closes down the stock market next time around to "GET LONG RUSSIA")
[Dec 22, 2008: WSJ - Oil Crash Stirs Unrest in Russia & Protectionism on the Rise]

Updated Position Sheet

Cash: 52.8% (v 44.6% last week)
Long: 38.2% (v 44.9%)
Short: 9.0% (v 10.5%)

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)

WSJ - Job Fight: Immigrants versus Locals

Remember the phrase "Mexicans will do work that Americans won't do?" That is so 2006...

Let's see as the unemployment rate continues upward into latter 2009 and settles at a very high rate (per my vision of what is to come) if this becomes a larger source of conflict on the much ignored place called "Main Street". As you read this, this is the definition of "underemployed"... that we've long talked about as politicians denied the "R" word in 2008. [Apr 2, 2008: The Underemployment Rate is Rising] Because if you deny it, it doesn't mean it is happening - as ostriches who play on beaches know.

  • SHELBYVILLE, Tenn. -- Hard times recently drew scores of locals and immigrants to a cold sidewalk in this town, where they spent an anxious night waiting to compete for jobs in a slaughterhouse.
  • Burmese refugee Cho Aye traveled 60 miles from Nashville on a Thursday morning in late March to take a place at the head of the line outside Shelbyville's state employment office. The next day, the office was to take applications for $9.35-an-hour jobs processing chicken at the local Tyson Foods plant. Directly behind Ms. Aye, sitting on blankets atop the concrete, were 16 more Burmese refugees who had come from as far away as Idaho and Florida. "I don't mind doing any kind of work," Ms. Aye, a petite 22-year-old, said that evening as she settled into a reclining beach chair she bought at Goodwill.
  • Farther back in the line, marked by orange tape and monitored by police, locals like David Curtis seethed. "This is the worst job I have ever applied for," said the 31-year-old welder, who had already failed to find work at a convenience store, a pen factory and a Pizza Hut. Eyeing those ahead of him, he added: "I'm very annoyed foreigners are taking jobs that Americans need."
  • Slaughterhouse jobs can be difficult and dangerous. Meat-processing work tends to pay more than fast-food or retail jobs, and the jobs on offer in Shelbyville come with benefits. But such work is strenuous. In modern-day poultry plants, hundreds of workers stand elbow-to-elbow at conveyor belts, donning earplugs and wielding knives or scissors to debone, slice and snip raw chickens. The tasks, often done at a frenetic pace, can strain wrists, arms and backs. With annual turnover running as high as 100%, slaughterhouses have long had more openings than they could fill locally.
  • Now, with U.S. unemployment at a 25-year high, they are also fiercely coveted. American workers -- who for years have largely avoided fruit-picking, office-cleaning and meat-processing shifts -- are increasingly vying for these jobs with immigrants, creating flashpoints in places like Shelbyville.
  • The rising friction has been on display at the employment center here. When Tyson put out an earlier call for applications, in February, shoving and cursing broke out between locals and immigrants jockeying for position at the head of the line. With too few jobs to go around, outraged locals demanded that the work go to residents, not immigrant workers from outside Shelbyville.
  • "The despair is new," says employment-center worker James Cupp. "People need jobs."
  • Now such plants are reporting a surge in applications from U.S.-born workers, ....Outside Phoenix, a metropolis that helped define the recent building boom, college-educated Americans are applying for jobs at the JBS SA beef-processing plant, says human resources vice president Bob Daubenspeck. Tyson, too, reports that it is getting more applications from local residents at its facilities across the U.S. A company spokesman says hourly pay ranges from about $9.00 to $12.50, with medical, retirement and insurance benefits kicking in after three months of service.
  • Tyson had asked the agency to take 100 applications, state officials say. When the doors opened, job seekers jostled to get inside. Resettlement agency officials say disgruntled Americans tried to cut in front of the foreigners.
  • Brian South was surprised to see a line already forming. The unemployed Tennessean, who had planned to head to the employment center at 5 a.m. the next morning... Mr. South made $26 an hour as a bricklayer before losing his job in October, he said. Now living with his inlaws, Mr. South has been visiting the employment center often. "There's nothing -- nothing at all," Mr. South said. "For me to apply for a job like this is killing my pride."
  • "They've been doing jobs we wouldn't do," Scott Hunter said, surveying the immigrants in the line. "Now the economy is so bad, we're all willing to do them."
  • (Egyptian) Shereen Bakhit, said he was back after applying for a Tyson job in February. Trained as an accountant, Mr. Bakhit said he was going on six months without work. "I thought I would find good everything" in the U.S., said the 38-year-old father of two. "Not anything good: No money. No job." (America is not really like the movies, sorry ... )
But not to worry, China's stimulus plan will fix all this ---> thesis. As will inflating assets via the Federal Reserve pumping... that's the basis for our "prosperity". Jobs? Nah... don't need em, just an extra costs for our companies. Only slows down the ascent of stocks. We'll just tap our toes waiting for the next bubble the Federal Reserve policies will create ... that's how we create jobs in our new age economy now.

Saturday, May 23, 2009

Weekend Reading: Memorial Day Edition

In keeping with the long weekend, I'll post some stories of lengthier nation you may or may not be interested in - I have not had time to slice and dice these into Cliff Notes versions.

The Economist: Bust and Boom - The Precipitious Fall in Oil Prices Over the Past Year May Just be Paving the Way for Another Spike
  • We've written in very similar fashion so obviously we share this view. If indeed $50-$60 oil is "legit" during a global recession of the type not seen in the post World War 2 era, one must ask what we'll face during normal times... with an inflation happy, money printing Federal Reserve to boot.
Bloomberg: Bear Stearns to Algebra I Means Lost Dollars in Trickle-Down
  • Ah trickle down economics... when misallocation of resources in ways not seen since the late 1920s meant everyone was a winner in the financial district. Now the opposite is happening - and waitresses no longer make $85,000 working 3 nights a week, and folks don't drop $10 or $20G a night at restaurants for group outings.... Some have been forced to (wait for it) cut their own lawns. Interestingly, many are learning what "normal life" is like, doing things that are somewhat useful to society (not that creating toxic paper and selling it to unsuspecting local governments in Finland was not "useful") ... such as teaching.
Bloomberg: Inflation "Cure" Exposed When In Laws Move in
  • Earlier this week I wrote a piece on how some economists were cheering for higher inflation - at least 6% so that we can get out of our obligations (i.e. pay back earnestly earned debts both as a government and as citizens with ever cheaper dollars). Aside from being a relatively immoral attitude to take (hey how can we cheat the people who we owe money to?), I wrote how regressive this would be on the lower tranches to society. Folks, we live in the age of absurd. The Bloomberg piece is an opinion piece but with great quotes like this "In the Middle Ages, they threw people who failed to repay their debts into debtors’ prisons. Today debtors are rewarded with all kinds of government perks. Look how far we’ve come!" you can get an idea where the writer is coming from.
  • "Borrowers took out mortgages they couldn’t qualify for to buy homes they couldn’t afford. When the housing market collapsed, they were rewarded with government-subsidized mortgage modifications and, in some cases, partial forgiveness on their loan balances. And now, under Rogoff’s 6 percent solution, debtors would see more of their burden lifted. And we, the savers, get screwed again."
  • "How’s that for creating the wrong incentives? Retirees who worked and saved their whole lives and are living on fixed incomes can look forward to their dollars buying less in their old age. Those of you who are still working can make room for your mother-in-law, who is moving in tomorrow."
  • "The idea was given short shrift in the blogosphere, especially by those whose economics is decidedly Austrian. The Mises Economic Blog calls Rogoff’s and Mankiw’s descent into madness the “Zimbabwe Solution.” Kevin Depew, executive editor of Minyanville, chides the economists for peddling snake oil, which is what inflation is."
I'll forgive her for not mentioning Fund My Mutual Fund which similarly derided such a "solution".

Washinton Post: The High Cost of Poverty - Why the Poor Pay More
  • Just a fascinating piece on how expensive it is to be poor in America.... especially "working poor" which is grabbing a larger and larger slice of the country - remember the median wage is about $15/hour (meaning half are below that) ....examples:.
  • You don't have a car to get to a supermarket, much less to Costco or Trader Joe's, where the middle class goes to save money. You don't have three hours to take the bus. So you buy groceries at the corner store, where a gallon of milk costs an extra dollar.
  • The poor pay more in hassle: the calls from the bill collectors, the landlord, the utility company. So they spend money to avoid the hassle. The poor pay for caller identification because it gives them peace of mind to weed out calls from bill collectors.
  • The average have direct deposit for their paychecks. The poor have check-cashing and payday loan joints, which cost time and money. Payday advance companies say they are providing an essential service to people who most need them. Their critics say they are preying on people who are the most "economically vulnerable."
  • "The poor pay more for financial services. A lot of people who are 'unbanked' pay $3 for a money order to pay their electric bill. They pay a 2 percent check-cashing fee because they don't have bank services. The reasons? Part of it is lack of education. But part of it is because people target them. There is evidence that credit-card mills have recently started trolling for the poor. They are targeting the recently bankrupt."
  • Then there's credit. The poor don't have it. What they had was a place like First Cash Advance in D.C.'s Manor Park neighborhood, where a neon sign once flashed "PAYDAY ADVANCE." Through the bulletproof glass, a cashier in white eyeliner and long white nails explained what you needed to get an advance on your paycheck -- a pay stub, a legitimate ID, a checkbook. This meant you're doing well enough to have a checking account, but you're still poor. And if you qualify, the fee for borrowing $300 is $46.50. That was not for a year -- it's for seven days. On your $300 payday loan -- borrowed for a term of seven days -- the effective annual percentage rate is 806 percent.
Fortune: Advanta - the Credit Card Company Everyone Hates
  • The credit card business has grown so wretched that one major issuer is clipping its customers' cards and giving its investors a haircut. Advanta (ADVNA), the nation's No. 14 card issuer and a top lender to small businesses, said last week it will shut down its card business to stem losses. The move is a momentous one, because credit cards bring in nearly all Advanta's revenue.
  • The company will close customer accounts next month, leaving a million borrowers looking for credit at a time when lenders are pulling back. And Advanta's small-business customers aren't the only ones in limbo: So are the investors whose bond purchases financed Advanta's expansion over the past decade.
  • Advanta may have made its problems worse by jacking up some customers' interest rates, prompting them to cancel. John Dykstra, a computer consultant in Kenmore, Wash., was spending between $2,000 and $3,000 a month on an Advanta rewards card before the company gave notice in August of a plan to boost his rate to 26% from 8%.
WSJ: Citizen Spies Lift North Korea's Veil
  • Interesting reverse engineering done via Google Earth and internet sleuths on figuring out what exactly North Korea looks like
Time: Lady Golfers for Rent?
  • Need an attractive golfer to spice up your male oriented corporate event... well, we have just the thing for you. Only costs $2,500 to $25,000 to rent one of 24 "professional golfers". Some things are indeed... (wait for it) recession proof.

Friday, May 22, 2009

BW: Are Business Schools' to Blame for Crisis?

As we've written in countless pieces there is enough blame to hand out in every direction... no one from misguided government programs, "only think for today" financially illiterate consumers, conflicted credit agencies, laughed at (and purposefully weakened) regulators, lobbyist groups running Congress,and many of our best and brightest in the corporate world - are innocent. And there are others I did not include even in that list...

Frankly, much of this disaster goes to the US ethos of: I want it now, I want it bigger, I want it better, and I deserve it - that seems to have overtaken the nation. Combine that with "kick the can down the road" on any problem and a lack of cost benefit analysis (we only think of benefits) and here we are. In the corporate world specifically - instant gratification, combined with a completely broken board of directors system (poor internal oversight in a "scratch my back, I'll scratch yours" world), along with "heads we win, tails we win" compensation culture (just "exist" in the top spot for 3 years no matter what you do and you have generational wealth) are the backbone of the ills in our public companies. So was much of this taught in the business schools? Yes "shareholder value" was "king" - but to point it out as a primary cause is far too simplistic. We have much broader structural issues here and policy dominated by extremist dogma rather than rational, centrist discussion...

That said, this is a thought provoking piece in BusinessWeek: MBA's - Public Enemy #1?
  • It's easy to see why MBAs are getting blamed for the financial crisis. In the 1970s when Lehman Brothers' Richard Fuld was attending NYU Stern School of Business and Merrill Lynch's Stan O'Neal was knocking around Harvard Business School , the gospel of shareholder value was gaining a stranglehold on the nation's business schools. Fuld, O'Neal, and other newly minted MBAs of their generation would go on to inherit a world where following that gospel—by boosting shareholder returns in the short-term—left them exceedingly rich. So it comes as no surprise that Fuld and O'Neal would, nearly 30 years later, make big bets on mortgage-backed securities that they believed would improve their bottom lines, but would ultimately destroy their companies and deal a body blow to the world economy.
  • The opposite case could just as easily be made. For one thing, a lot of MBAs go on to live the kinds of lives that could charitably be described as virtuous. And a lot of corporate leaders who were among the worst offenders in the current economic crisis never came within a stone's throw of an MBA, including Jim Cayne at Bear Stearns, Frank Raines at Fannie Mae, and the whole motley crew at AIG.
  • Whether, and to what extent, the nation's business schools laid the groundwork for the economic crisis is a debate that's engulfing the world of management education these days. Philip Delves Broughton, who received an MBA from Harvard and wrote about his experiences there in Ahead of the Curve: Two Years at Harvard Business School (Penguin Group, July 2008), calls the three-letter acronym "scarlet letters of shame," and suggests they stand for "Masters of the Business Apocalypse."
  • Harvard Business School itself—which produced a glut of recent failures, including Merrill Lynch's John Thain and General Motors' Rick Wagoner—is studying its role in the crisis. ... an HBR online debate about business schools' culpability in the crisis has raged on for weeks—with two out of three respondents to HBR's online poll saying business schools were at least partially responsible for their graduates' ethical lapses.
  • Business schools experienced a similar bout of external criticism and internal soul-searching in 2002, after the collapse of Enron ushered in an era of curriculum reform, ethics classes, and other changes. This time, the charge is more serious and systemic.
Key point
  • Business schools not only turned a blind eye to their students' ethical shortcomings, this argument goes, they enabled them. By focusing on shareholder value, they created the intellectual preconditions and theoretical frameworks that allowed a kind of moral relativism to flourish on campus and, ultimately, in the business world itself. "The unbridled free market as the answer to all problems became the basis for business education,"
Now, considering the 2nd most powerful man on Earth, the head of the Federal Reserve who is in part a REGULAR - also believed this, is it really a surprise? This was the national ethos? I have always said, if people are going to act in the best interest of the collective and regulation should disappear in the ethos, why do we even have policemen? The "free market" should fix itself - see Baghdad about 2 years ago. The problem is every time you bring up 'regulation' it's like 'socialism' - the extremes at the right and the left give their clarion call and then attack each other in 45 second sound bites. Booing and Hissing dominate... and that's our national debate. Sensible middle ground never has a chance.
  • While the shareholder maximization model gathered steam, business schools began fighting for top spots in media rankings. As a result, some business schools are more concerned with helping place students in high-paying jobs, say critics, than with educating them about how their decision making could affect the companies the work for and the economy at large.
  • "Business schools fell into the same trap as business media. They were not critical enough of what was going on, which made them complicit to the problem."
  • For business schools, the question of complicity in the crisis is a tricky one. Those who maintain that business schools are to blame are admitting a serious error in pedagogical judgment. Those who say the poor judgment of executives with MBAs who were implicated in the current crisis was entirely of their own making—the product of innate values and decades of on-the-job training—run an even bigger risk. "MBAs created a dominant view of business and its language and tools," says Angel Cabrera, president of Thunderbird School of Global Management . "To say we have no responsibility is to say the MBA is irrelevant."
  • For many in the business school community, the very notion of culpability is ludicrous. Sydney Finkelstein, professor of leadership and strategy at Dartmouth's Tuck School of Business "We don't create CEOs, and we don't destroy companies in business school,"
  • For many business school critics, the problem with how MBA programs approach the sorts of ethical conundrums that can result in global economic catastrophes is that in many cases they're treated as an afterthought. By creating ethics electives, programs have made it possible to spend two years in business school without pondering right and wrong in any systematic way—they've made integrity optional.
  • Complicating matters is the fact that the business leaders with MBAs who were at the heart of the crisis all received their degrees 30 years ago—long before the schools' current curriculums were developed, long before the current faculty arrived on the scene, and long before the rankings. Those men and women are products of an educational system that no longer exists. If business schools are to blame, then reform—in whatever form it takes—may be 30 years too late.
  • Khurana says the idea of self-interested leadership, as it's now advanced in the business school world and practiced in the world of business, must give way to something new: servant leadership with a focus not on self-aggrandizement, but "guided self-interest."
To that last point may I not quote but summarize Gordon Gecko: Keep dreamin'. Competent people with good morals will always be the same people with or without snazzy degrees. What needs to be asked in the business community is why "these" types don't seem to be rising to the top of the ladder of some of the "most important" public companies in America.

Again - we have structural and systematic issues....safeguards need to be built around the idea that some proportion of bad actors will always rise in any system. In our system, the bad actors get the same benefits as the good actors, and that in of itself - is a major cause of our ills.

Bookkeeping: Adding some Ocwen Financial (OCN) Exposure

I still believe this is the best positioned company to benefit from the avalanche of programs to keep almost every breathing American inside a house with taxpayer handouts. I'll continue to add to Ocwen Financial (OCN) on dips, and sell some on jumps - this name seems to have very little correlation with the market and dances to its own drummer. Analysts are finally beginning to understand the story here, with 2009 estimates raised from $0.80 to $1.00 over the past quarter, and 2010? From $0.85 to $1.30.

At some point the gravy train runs out (2011? 2012?) as every ounce of blood will have been squeezed out of the stone, but with my views on what is yet to come in the housing market, and sustained unemployment - there is still a lot of taxpayer money to be thrown after bad money. And more government programs or expansions of current ones - hip hip hooray.

Until the squiggly red line is broken OCN is a buy on dip story - not even 12x forward earnings for some supreme growth coming in the next few years yet it remains ignored while people want to go buy organic food retailers at 40x earnings. Aye carumba. I added a 0.7% stake (around $11.90) to my already "top in portfolio" exposure of 3%; I'll let some of this go on the next jump to $13 if and when. Squiggly red line is $11.40, so if it gets there I'll add more.

p.s. I am still ambivalent on the market, today the big money is up at the Hamptons chuckling about how they always win (even this time!), and we're range bound here with the obvious floor we cited yesterday and for now S&P 930 seems to be the upside... This gives us about a 50 point range where people are just trading back and forth or chasing the theme of the day. (the "consumer is back" trade is now old news, and we've moved to the "commodity is back" trade) Until we make a decisive move up or down; I'm just staying high in cash waiting to see if it should be deployed short or long.

[May 7, 2009: Ocwen Financial (OCN) with Large Beat]
[Apr 22, 2009: Fight the Power - or at Least Hedge Against It with Ocwen Financial]
[Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans]
[Apr 16, 2009: Bookkeeping - Starting to Ramp Up Purchases in Ocwen Financial]
[Feb 3, 2009: Freddie Mac to Outsource Delinquent Collections - Ocwen Financial Chosen to Start]
[Jan 9, 2009: Bookkeeping: Starting Ocwen Financial]

Long Ocwen Financial in fund; no personal position

Guest Post: Indonesia - A Must Own Emerging Market

My comments appear here, and below the charts will be a guest post....

I've invested over the years (via ETFs) in Singapore, Malaysia, India, Taiwan, and Hong Kong - as the "China will fix all the world's problem's" thesis plays out all these names, (along with resource based countries) have flown higher. While I believe this is how it will play out eventually (China leads) - I think this is a premature evaluation (ahem) and China can only take the rest of the world so far. If I am correct or incorrect we'll know better in about 2-3 quarters - but for now all that matters is the herd, and the herd believes it - and some of these indexes have raced to the type of gains that one would wish for over a 3 year period in under half a year [Year to Date Returns by Country, Go Peru] What has been ironic is some of these countries I follow pretty closely have posted horrific GDP figures, Singapore a month ago [Mar 26, 2009: WSJ - Signapore's Boomtown Dream Gets Hazy] and just this week Taiwan posted a scary bad GDP.
  • Taiwan’s economy shrank an unprecedented 10.24 percent last quarter as exports fell and businesses cut spending, a decline that may mark the trough in the island’s recession... is the biggest slump since official records began in 1952.
But never fear, China is here... and the markets are forward looking.

One country I admit to having not looked at until the past few months is Indonesia - when I did a lot of coal research in latter 2007 Indonesia kept coming up so it was on my radar but I never dug deeper. Much like the countries above there are a dearth of US based ways to get involved in the country ... but there is an interesting opportunity here. Little known is despite being a country made up of some 17,000 islands, it is the 4th most populous on Earth. (China, India, US ahead of it) So on "demographics is destiny" alone you have a compelling situation here. What caught my eye of late is while most of the smaller Asian countries I keep an eye out on are falling by double digits in GDP - Indonesia's actually rose.
  • Indonesia's economy grew at its slowest annual pace in five years in the first quarter, reinforcing expectations the central bank will cut interest rates again to support domestic demand.
  • Southeast Asia's biggest economy was hit by slower investment and shrinking exports in the first quarter, but resilient private consumption and higher public spending was supportive, and some analysts said the slowdown in growth may be bottoming out. Gross domestic product rose 4.4 percent in the first quarter from a year ago, down from 5.2 percent growth in the fourth quarter of 2008.
  • Increased spending by political parties to woo voters in an election year and fiscal spending from a stimulus package in the second quarter could help support economic growth, Sadewa added.
  • Indonesia has managed to avoid recession during the global downturn, unlike some of its more export-reliant neighbours. Both Singapore and Hong Kong are in recession and Malaysia and Thailand are likely slipping into a recession, too, analysts say.
  • Private consumption accounts for about two-thirds of Indonesia's GDP, helping compensate for a drop in exports of key commodities such as palm oil and nickel as global demand sputters.
So unlike a lot of "Asian Tigers" - Indonesia is still focused on internal consumption over the export business. That said, it is quite rich in natural resources as well.

In January, Van Eck Global launched a new ETF - Market Vectors Indonesia (IDX) to compete with the main way to get broad coverage in the past: Indonesia Fund (IF). After reviewing the newer offering (website here), I much prefer it to the older fund (similar reasoning as outlined by guest blogger below) - however both vehicles have pathetic volume (20,000 shares a day) so if these strike your fancy you will be an investor in them, and not a trader. (or at least a very long term trader) Now I would not go chasing any of these country ETFs after the enormous runs they have had, but when a "real recovery" happens that is sustainable - I expect the same cadre of countries (and country ETFs) to outperform. I caught an article on IDX from the guest blogger below; I'll let him take it from here....

The following content is from Joe Kunkle who runs Options Hawk, website here. His style is described as: I monitor the options market to find unusual action in the options market that leads to great trading opportunities, whether it be to takeover rumors, earnings, FDA data, or other reasons. I also provide a variety of trading ideas based on technical analysis, momentum stocks, and stocks that have a great fundamental story.

Here are his views:

I recently came across a new offering from Market Vector Funds, the Indonesia Index (IDX), and after doing some research I began to really like the prospects with the emerging economy. Portfolios looking to diversify some holdings into an emerging market will have a tough time finding a better place to invest for the future.

The IDX sector breakdown is as follows: 29% Financials, 20% Energy, 17% Materials, 12% Consumer Staples, 7% Consumer Discretionary, 6% Telecom, 6% Utility, and 3% Industrials. More than 50% of the companies are considered mid-cap, with 41.8% large cap. The PE Ratio for the fund is around 13, which is extremely cheap considering the growth prospects as compared to comparable industries in other countries.

Some of the largest components in the IDX include Bumi Resources, PT Astra, Bank Central Asia, Telecom Indonesia, Perusahaan Gas Negara, Bank Madiri, and Adaro Energy.

Launched in January, the IDX has climbed 60% in 5 months, but still has room to rise when considering the Indonesian economic growth prospects combined with valuation and an upcoming political event that could be a favorable catalyst for the economy (think India, which gained 17% in one day on an election win today).

It was reported in the Jakarta Post, that Indonesian Presidential candidate Jusuf Kalla expects economic growth to accelerate to 8% per annum by 2011 if he wins the upcoming election, which would be competitive with the Chinese economy that is starting to slow with the rest of the World. Kalla also plans a progressive tax system and the construction of more coal-powered plants, which provides clues to individual investment ideas in Indonesia.

Indonesia is rich with minerals, metals, oil and has a budding tourism industry. Indonesia is blowing away other Southeast Asian economies in GDP growth due to less reliance on exports, low interest rates and surging consumer confidence that creates the formula for an economy set to succeed for years to come. Recent agreements with Vietnam on mineral and energy ties is also bullish for the Indonesian markets.

Indonesia has shown resilience and has swiftly recovered from the Southeast Asian crisis of the late 1990's through sound fiscal and monetary policies combined with rebuilding the country's infrastructure. Since 2003, Government debt as a percentage of GDP has almost been halved to around 30%, while inflation has settled in around 6%, and private investment has risen nearly 20%. The ongoing fiscal policy initiatives combined with the liberalization of the economy will make Indonesia a sound investment for years to come.

Indonesia oil production has declined in recent years due to aging reserves and it formally exited OPEC in 2008, becoming an oil importer, but it ranks second in the world in liquefied natural gas exports and is less reliant on oil exports than in recent years. It also has the third largest amount of coal reserves in the world, ranks first in tin production, and has significant gold, silver, copper, and nickel deposits.

With the fourth highest population in the World, around 240 million, private consumption is continuously expanding. Also, being made of 17,000+ islands makes it ideal for Agriculture, which the world will always have a need for, and it is a top exporter of palm oil (alternative fuel prospects), rubber, wood, tobacco, cocoa, coffee, tea, spices and shrimp.

There are also encouraging signs of foreign investment coming in, as more favorable laws are passed, and reforms promote the investment process, as foreign direct investment jumped 150% from 2006 to 2007.

The Indonesian (IDX) Fund will come with some added volatility (1.8 Beta and 36.45% annualized volatility) and may not be for the safer crowd, but offers possible huge returns, and has the lowest correlation of all economies to the developed markets that make it an attractive addition to any portfolio.

I recently highlighted Indonesian Telecom (TLK) as a great investment idea for an individual stock in the region, but for traders with access to foreign markets, many of the mineral and coal plays trade at a valuation much lower than US counterparts, and offer attractive reward/risk scenarios.

The other fund for investing in Indonesia is a closed-end fund, Indonesia Fund (IF), but I prefer the Market Vectors IDX due to a lower expense ratio, more diversification and exposure to the energy and mineral sectors, and better correlates with the return of the Indonesian equity markets.

The IF has 20.29% of its fund concentrated in Indonesia Telecom (TLK) and 12.43% in Bank of Central Asia, with a total of 70.18% of its holdings concentrated in the Top 10 Holdings, while the IDX has 25 constituents with only 60% of its holdings concentrated in the Top 10 Holdings.

The sector breakdown of the IF is as follows: 24.75% in Financials, 24.54% in Telecom, 16.8% in Consumer Goods, 9.71% in Basic Materials, 6.46% in Industrials, 5.98% in Utilities, and 11.77% Other. Therefore the IDX is much more focused on Energy and Commodities which are rallying globally as the US Dollar falls and inflation signals begin to sound.

Disclosure: Holdings in IDX

Joe Kunkle

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