Tuesday, June 9, 2009

LA Times: Some Owners Who Used Homes to Buoy Finances are Sinking

We posted a story or two like this in 2008 when trying to explain why the housing bust was going to take far longer and be far deeper than the pundits acknowledged (many of whom denied housing prices could ever fall nationally in the first place). [Dec 8, 2007: Analysis - What Should Housing Prices Be Today?] [Jan 24, 2008: They Said it Could Never Happen. Ever.] It was also why I choked on my Kool Aid a few times when I hear certain economists say "what's the big deal about housing anyhow? It's only 4.5% of GDP". They simply did not understand how pervasive use of the house ATM had become as a replacement for actual savings or in lieu of traditional loans (in the case of small business)... and I think people still do not understand it. We posted stories about how people were serial refinancers - extracting equity from their homes every 18-24 months to pay for their lifestyle, while others were using it as a place to refinance credit card debt (which essentially is just a transfer of debt from 1 shell to another).

We will bottom in housing eventually, but until housing prices begin to re-appreciate at a meaningful pace Americans are going to be stuck doing things the old fashioned way... saving. And that's just a complete change in national mindset.

This story deals more with the small business side of things - taking care of cash flow problems that will inevitably come up via the house ATM. Via LA Times
  • In better economic times, Santa Clarita mortgage broker Fred Arnold relied on a home equity line of credit if his cash flow was uneven and he needed to cover payroll. But when home sales crumbled last fall, there was no such backstop for the business. His home was still worth more than the mortgage, but his bank was retrenching and had shut down the credit line. So Arnold sold his house, used some of the proceeds to keep his business afloat and bought a smaller home. "I thought about cashing out my retirement money and the college savings for the kids, but that wasn't the way to go," Arnold said.
  • That makes Arnold, president of the California Assn. of Mortgage Brokers, a lucky guy compared with hosts of small-business owners who relied on their housing wealth to start companies, buy equipment and manage payrolls. No longer buoyed by the housing boom, many now find their businesses and homes sinking in the backwash from the easy-money era.
  • ... using home equity credit lines and cash-out refinancings for business purposes was widespread during the good times. After all, 95% of small-business owners also own their own homes.
  • To get cash for business expenses, one-third of California small-business owners took out exotic, high-risk products, such as those that required little proof of income or allowed borrowers to pay so little that their loan balances rose. (the latter are called option ARM loans and many still wait out there - when I read about these in BusinessWeek in 2006, I was shocked & realized this would end badly) [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?]
  • Bornstein, who has studied the issue extensively, predicts the business owners, many now far underwater on their loans, could shed 2.1 million jobs in the state over the next four years, creating even more problems than the initial wave of subprime mortgages. (mmm... that does not square with green shoot analysis) "The second tsunami is particularly going to inundate small businesses," Bornstein said. (I thought small businesses were creating 200K jobs a month? My government tells me that in the birth death model of their monthly employment report... hmmm. You are trying to imply small businesses are in trouble - certainly you should be reading government reports to get your facts straight)
  • "People were saying that if you don't do it you are crazy, you don't know what's going on," he said. "And they said if you can't pay when the loan resets, you just refinance again." (lovely - I am sure these loans were AAA rated as well, and now as a taxpayer we're all on the hook for them. I love the ethos though: "Can't pay back your loan? Refinance!")
  • What Sokhom calls the "foreclosure crisis" among his clients started last year, when gasoline prices shot up. "Many of them came to us and said, 'We cannot do any more deliveries because every trip out we lose money.' Many of these people, when they bought a truck, used their home equity or an equity loan outright to buy the truck," Sokhom said. "Now when the business goes sour, they cannot pay the mortgage also."
  • The National Federation of Independent Business survey found that of the small-business operators who owned homes, 26% had mortgaged the residences to provide capital for the business. Answering a separate question, more than 10% said they had pledged their homes as collateral to buy other business assets.
  • That's a far greater number than those who use SBA loans, the government-guaranteed loans made by banks and credit unions. (clearly it appears the SBA actually has standards unlike mortgage originators - why bother with an SBA application process when all you need to do is call Chuck the mortgage guy who'll get your refinance approved in 48 hours or less) "Only about 5% of people seeking business loans use SBA," said Robert A. Borden, an SBA regional spokesman in San Francisco.

[Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
[Jan 19, 2009: WSJ - Would You Pay $103,000 for this "Fixer Upper"?]

Reader Survey Alert

I just wanted to send a quick notice out regarding an upcoming survey that some readers will be seeing sooner rather than later. I posted 4 polls last week to get some understanding of the readers, but those were of my own origin, and for my use... this survey is for the 3rd party group who I do my advertising package with. Apparently, a 20 question form will 'hover' over the site for randomly selected readers, and it will be an on and off thing over time. The questions are your standard demographic type things that you've seen countless places so nothing out of the ordinary there.

Last winter we had discussion whether to make part of the site subscription only but after listening to the varied feedback we decided to just go with an advertisement model, supplemented with readers donations or (voluntary) subscriptions. So part and parcel with that choice of advertising model comes fun things like surveys.

But before it happened I just wanted to let readers know this was on the docket.

Sequenom (SQNM) up 55% Since Noon

For about 6 weeks now, there has been a bevy of daytraders chasing into sub $5 stocks - the cheaper the better. The sectors have been different but biotech has been the big one the past 2 weeks. About an hour ago I received a flurry of emails about "what's going on with Sequenom (SQNM)?" That was when the stock was up around 25%. The chart below is 20 minute delayed so it does not show you the full glory and its only 3:40 PM as I write this, but the stock is up 55%. Since noon. The stock was dead before then but the right 'call' must of been made in a daytrading chat room and in this market volume draws in volume and away we go. I don't have an intraday chart up but right after noon the stock jumped from 3.30 to 3.60 on a volume spike and for the bevy of folks who look for just that thing, it was time to pile in. Since then, aside from a short drop before 2 pm from 4.40 to 4.15, it has been straight up. Casino 101.

Over the years you try different things to see what suits your style - I always tell folks new to investing to do what works for you. Try different styles, try using technical analysis or fundamental or whatever mix - and find something that suits your temperament. I tried this daytrading on momentum thing for a few months sometime in the past decade in my evolution, and I could not take the heartburn. But when it works you can strike it big very quickly - you just have to hold a tight grip on the steering wheel, buy high - sell higher ... and make sure when you look around and the stock crashes back (the music stops) you are not the one holding the bag. Trust me, about 98% of the people who bought Sequenom today have no idea what it is, what it does or anything about it other than it has 4 letters :) But they are making good money and in this game, that is really the bottom line isn't it?

Right about this time, another crew is looking to jump in because charts like this usually gap up the next morning and then you can sell it off to a whole new class of folks who have no qualms buying a stock up 70-80% higher than 24 hours earlier. As long as they can find someone to buy it from them at 85-90% higher than 24 hours earlier. Someone loses at the end of the chain... and then onto the next stock. Rinse. Wash. Repeat.

Technically this could be compared to a Ponzi scheme but then again, so are many things nowadays ;)

No position

One Stop Shopping for "Energy" Exposure: Blackrock Energy and Resources (BGR)

Let me preface this piece by saying I stole this specific instrument from Jeffrey Saut, who mentioned it in his weekly missive.

Long time readers will know I've mentioned this market has become all about asset allocation, and sectors - I noticed this late in 2007 when we were hiding out in commodities while many other sectors were imploding but other than a few periods when "everything" is going down (or up) it appears a lot of individual stock selection is going out the window and "sectors" are more important. Some themes are broad like "China" or "commodities" (which in many ways are now the same theme), where others are narrower such as "casual dining restaurants". I don't know if its the dominance of program trading or the growing popularity of ETFs but this seems to be a secular change in the stock market. When a sector is hot - even one with such diverse entrants as casual dining restaurants - and you can simply throw a dart and be a winner, no matter which individual stock you choose.

Obviously we've been talking about the (now) very crowded reflation trade... in countless posts in first half 2008 I used to say "throw a dart, it all works" in the commodities space. Natural gas = oil = copper = wheat = potash = iron = coffee = coal. It's all the same to this market and the HAL9000s of the program trading parade. I see the same thing now ex natural gas (the commodity). While I think this is an overcrowded theme right now, prone for a correction - I do believe it is the ultimate 'correct' direction... but the crowd might be ahead of itself.

So one way to have exposure to the very broad "energy" "reflation" "commodity" "China / Brazil" trade is an ETF - most are focused on niches, but Saut mentioned a closed end fund Blackrock Energy and Resources (BGR) and when I looked at its holdings; it has exposure up and down the daisy chain. Now this is a closed end fund, not an ETF so these trade at a discount / premium to NAV - which means part of your risk / return is dependent on the variance versus NAV. The fund is currently trading at a 3.6% discount to NAV but that is actually at the top end of its historical range (0 to -15% discount). But if you want to kep it simple and want to have a broader exposure to the energy spectrum then you would with just a subsector of energy such as coal [May 20, 2009: Market Vectors Coal (KOL) Red Hot],, this looks like a comprehensive way to do it. And if you want to marry the "carbon" trade with the "not so carbon" trade you can marry an ETF like this with a solar ETF, such as TAN [Apr 16, 2008: A One Stop Shop for Solar - Get TAN]

Here is a link to the product page - per the description

The BlackRock Energy and Resources Trust, BGR, is a perpetual closed-end equity fund. BGR commenced operations in December 2004 with the investment objective of providing total return through a combination of current income and capital appreciation. Under normal market conditions, the Trust will invest at least 80% of its total assets in the equity securities of energy and natural resources companies and equity derivatives with exposure to the energy and natural resources industry. Companies in the energy and natural resources industry include those companies involved in the exploration, production or distribution of energy or natural resources, such as gas, oil, metals and minerals as well as related transportation companies and equipment manufacturers.

Daily volume is 200,000 which is not bad; it's liquid enough for most people to get in and out of easily. The fund also has about half a billion in assets so it's not some new entrant into the ETF landscape.

Performance is as follows
  • 2006: +12.1%
  • 2007: +34.2%
  • 2008: -48.3%
  • 2009 YTD: +45.1%
Volatile indeed but as the horde rushes into thesis and the student body jumps in and out, this is the cost. If you are in inflationiosta than we're just getting started down the path and this would be an interesting name to build a position into if there is a decent pullback.

There are about 65 positions, with 30% in the top 10 holdings - but as I noted above the key with this name is the incredibly broad exposure to the entire energy food chain. There are a plethora of names we've owned individually in the past...

Here are the top 5 holdings (with weightings) as of 3/31/09
  • Transocean (RIG) 4.4%
  • Consol Energy (CNX) 4.0%
  • Petrohawk Energy (HK) 4.0%
  • Whiting Petroleum (WLL) 3.2%
  • National Oilwell Varco (NOV) 3.0%
We've owned 4 of the top 5 names oursleves in the past 2 years, and right off the top you have a marine driller, a coal company, a natural gas name and the largest rig builder in the world.

Other major holdings by sector
  • Coal: Massey Energy (MEE), Peabody Energy (BTU) and Arch Coal (ACI)
  • Services: Schlumberger (SLB)
  • Pipelines: Enterprise Products Partners (EPD)
  • Fertilizer: Potash (POT)
  • Gas/Oil Exploration in Natural Gas/Crude: Apache (APA), Exco Resources (XCO), Penn Virginia (PVA), Petrobras (PBR), Southwestern Energy (SWN) and Range Resources (RRC)
You even get a little metals mining exposure (3%) in there with BHP Billiton (BP) and Goldcorp (GG)

There are also a host of options, both puts and calls, written which is interesting. You can see the entire list of holdings here per SEC filing.

Country exposure is very dependent on the US with 75%, and Canada second as 12%. You also get great diversification in terms of market cap - large caps over $10B make up over a third of the holdings but companies of the $300M to $2B market cap are 20%. But like I said above - when 'reflation' is on, companies of all sizes will move together so it's a bit of a moot point. And while you are buying this sort of name because hedge funds across the land are piling into the same old trade, you also get a 5%+ dividend yield to boot.

Long BHP Billiton, Potash in fund; no personal position

China's Car Sales Jump 47% Year over Year on Subsidies; Extends Lead as Largest Global Market

Now if you are going to do stimulus, China shows us how to do it! As car sales jumped 47% year over year in May, the profits at auto makers fell 28%, and revenue dropped 11% for the first 4 months of the year... but that's how you juice the numbers. Someone has to sacrifice... and after the implosion of the US auto market, the domestic sales in China continue to surge ahead of America - as the largest market in the world. Already. Via Bloomberg
  • China’s passenger-vehicle sales rose 47 percent in May, the biggest jump since February 2006, as tax cuts and government subsidies helped extend the country’s lead over the U.S. as the world’s biggest auto market this year. Chinese drivers bought 829,100 cars, sport-utility vehicles and other passenger vehicles last month, the China Association of Automobile Manufacturers said in a statement today. Overall vehicle sales rose 34 percent to 1.12 million.
  • China has cut retail taxes on vehicles and handed out subsidies in rural areas after auto sales slowed on the global economy and job concerns.
  • “Sales of small cars have been driving growth,” said Ricon Xia, an analyst with Daiwa Institute of Research (H.K.) Ltd. in Shanghai. “Whether automakers can reverse profit declines this year will depend on demand for big cars and heavy- duty trucks that carry bigger profit margins.”
  • Combined profit at the country’s top 19 automakers fell 28 percent in the first four months, while revenue declined 11 percent, according to the association. During the period, five automakers boosted profit, 10 reported declines and the rest had losses, it added.
Like 2 ships passing in the night....
  • Industrywide China vehicle sales rose 14 percent to 4.96 million units in the first five months. By contrast, sales in the U.S. fell 37 percent to 3.95 million.
We'll be back China... once we can borrow from our homes again to use instead of actually attempting to save money... we'll be back.

EDIT 12:15 PM - my apologies, I forgot momentarily that money grows on trees in America. Not only are we offering 0% 5 year loans once more for vehicles through GMAC (bailed out twice by government) but if that is not enough we'd like to offer you $4500 for your new car. Mr and Mrs American citizen... you will buy a car one way or the other. Put another one on the grandkids tab and please enjoy that new car smell.
  • Consumers could receive rebates of up to $4,500 for turning in their gas-guzzling cars and trucks for more fuel-efficient vehicles under a House proposal. President Barack Obama has urged Congress to approve consumer incentives for new car purchases as part of the government's efforts to reorganize General Motors Corp. and Chrysler LLC through the bankruptcy courts.
  • Under the House bill, car owners could get a voucher worth $3,500 if they traded in a vehicle getting 18 miles per gallon or less for one getting at least 22 miles per gallon. The value of the voucher would grow to $4,500 if the mileage of the new car is 10 mpg higher than the old vehicle.
  • Since the yearlong vehicle program is expected to cost $4 billion, lawmakers would attempt to find the additional money later this year. (key word 'attempt'... pssst - its just fiat money, you don't really need to "find it" anywhere. Just put it on the tab)

New York Times Opinion Piece by Lewis and Cohan

I rarely will post someone else's full opinion on these virtual pages because... well, hey - that's my job around here. But I did back in January on an quite excellent piece [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn] (actually 2 pieces) entitled (a) 'The End of the Financial World as We Know It' and (b) 'How to Repair a Broken Financial World'

If you have never seen those pieces I highly recommend them. Frankly, what is sad is as we hear about "change" most of the issues in that article have not really changed... we've glossed these epic problems over by concentrating power in even fewer hands, whether in our financial oligarchs or now with our top regulator - yes, the one that was asleep at the wheel and who can be so dominated by 1 man (in this case Alan Greenspan) that an entire regulator's philosophical structure is altered... in this case "free markets solve everything".

I came upon another fantastic editorial this weekend in the New York Times by Sandy Lewis, and William Cohen entitled The Economy is Still at the Brink

Sandy B. Lewis, an organic farmer, founded SB Lewis & Co., a brokerage house. William D. Cohan, a contributing editor at Fortune and former Wall Street banker, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.” Mr. Lewis, was convicted on federal charges of stock manipulation in 1989, pardoned by President Bill Clinton in 2001 and had his lifetime trading ban overturned by the Securities and Exchange Commission in 2006; documents relating to the case can be found at sblewis.net.

The title of the story is actually misleading in terms of the topic of the opinion piece -in general they pose some highly important questions more to the financial structure of what we have in this country, and why nothing is really changing. Seeing the direction of things the past 2 decades, these concerns will be summarily ignored - and we'll continue down our "Reverse Robin Hood" path of taking from the many to give to the few. As long as the stock market goes up, we'll say "the all knowing market approves" and "Main Street = Wall Street" so please don't raise a fuss... as long as your 401k goes up 11% this year it is right that your grandchildren are saddled with a few lifetimes of debt. Until the next fiscal emergency.

Readers I literally have a que of 10+ articles I have not had time to get to, to post to the blog regarding what exactly the lobbyists (especially of the financial type) are getting away with. It is reaching the point of hilarity; I have an email folder bursting at the seams and trying to figure out which is the most egregious and hence worthy to post to the blog is a challenge in and of itself. Will it ever change? Nah.... since as peasants we lay prone and uninterested it only continues. Until one day we can no longer borrow at levels necessary to create 'prosperity' while maintaining this transfer of wealth game, I suppose it can keep going this way and maybe another 1 or 2 generations of our oligarchs can profit. I will keep repeating until I am blue in the face how this current episode is the biggest swindle of all time - the transfer of debts from the private to the public. But as Doug Kass says, as investors we just have to keep ticking, make no moral judgements and try to profit from said swindling. But that doesn't mean we cannot blog about it ...

(as always - when I do any post that names political figures let me be clear, I am non partisan; I believe both parties are incredibly similar and doing an excellent job at destroying the country from the inside out)

I am going to cut and paste many portions of this opinion piece below but this is another one that deserves your full reading.
  • WHETHER at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible. “It’s safe to say we have stepped back from the brink, that there is some calm that didn’t exist before,” he told donors at the Beverly Hilton Hotel late last month.
  • Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.
  • We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game.
  • The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse.
  • We have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world.
  • (1) Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.
  • As a start, the best-compensated executives at the top of these big banks, hedge funds and private-equity firms should be treated like general partners of yore. If a firm takes prudent risks that pay off, this top layer of management should be well compensated. But if the risks these people take are imprudent and the losses grave, they should expect to lose their jobs. Instead of getting guaranteed salaries or huge bonuses, they should have the bulk of their net worth completely at risk for a long stretch of time — 10 years come to mind — for the decisions they make while in charge. This would go a long way toward re-aligning the interests of these firms with those of their shareholders and clients and the American people, who have been saddled with their risks and mistakes.
As readers who have been around a while know; I call the American system of public corporate compensation "heads we win; tails we still win" ... it is everywhere but in our financial system it was most egregious. There has been a completely dogmatic arguement each time these issues are brought up... and we sit with a completely broken corporate governance system (board of directors) as well. The good should be rewarded, the bad should not. Being fired or doing an awful job in the top reaches of corporate America gets you a lifestyle 98% can only dream of. [May 2, 2009: WSJ - CEOs Need to Bring Investors Along for the Ride] [Sep 27, 2008: Heads We Win, Tails We Win] [Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay] [Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work] [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain]

  • (2) Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?
To which I say, one must only look who pays for political campaign contributions; this question posed in the editorial is simply rhetorical... we know why.
  • (3) Instead of promising the imminent return of good times, why isn’t Mr. Obama talking more about the importance of living within our means and not spending money we don’t have on things we don’t need? We used to be a frugal nation. The president should be talking about kicking our addictions to easy credit, to quick fixes and to a culture of more is better (and Congress’s new credit-card legislation, while perhaps eliminating some of the worst aspects of that industry, certainly didn’t send the right message about personal finance).
A national ethos of having it all and not having to pay for it is all I can figure out. Those who worry about such things are branded as "pessimists" and "against America". Those are the people who actually lay awake at night worried about the direction of it all. Those who ignore reality and only care about the benefit part of "Cost / Benefit" analysts are cheered. Apparently they must sleep well under the ignorance is bliss credo.

I actually do think Obama has occassionally said things about "living within our means" but then we go and spend another trillion here, or go buy another half trillion of mortgage backed securities with money we don't have. The only arguement we have is "we need to grow our way out of bad times so reckless spending is the way". I find that arguement as specious as "trickle down economics".
  • (4) Why is the morphine drip still in the veins of the financial system? These trillions in profligate federal spending are intended to make us feel better again even though feeling pain, and dealing with it responsibly, would be healthier in the long run. It is time to stop rescuing the banks that got us into this mess. If that means more bank failures on a grander scale or the dismemberment of Citigroup, so be it. Depositors will be protected — up to $250,000 per account — but shareholders, creditors and, sadly, many employees will, for the long-term health of the system, need to feel the market’s wrath.
I could not agree more. If there is one thing to backstop it is all depositers money... other than that, the rest should of been allowed to fail as a "free market" would of punished the bad actors and rewarded the good. It does not matter what financial institution those monies were in; if the name was Bank of America, Citigroup, or Joe Schmoe's Local Thrift. As long as the money was "backstopped" nothing else needed to be. But then again, Joe Schmoe is not one of the top political contributers to both parties. So instead, Joe Schmoe's Local Thrift will not only not be rewarded for acting responsibility, he will be fighting the powerhouses, federally backstopped giants who want to take away his business. That sounds like a 'free market' to me.
  • (5) Is there to be any limit on bailouts? We have now thrown money at the big banks, any number of regional ones, insurance companies, General Motors, Chrysler and state and local governments. Will we soon be bailing out Dartmouth, which just lost its AAA bond rating? Is there no room left for what the Austrian economist Joseph Schumpeter termed “creative destruction”? And what is the plan to get the American people out of all these equity stakes we now own and don’t want?
  • Furthermore, for government leaders to decide who shall live and who shall die in an economic sense opens them up to legitimate charges of crony capitalism and favoritism. We will benefit in the long run from a return to market discipline.
Just repeat "We are not Japan" while you ignore this question...
  • (6) Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? Ever since traders started disappearing from the floor of the New York Stock Exchange in the last decade of the 20th century, there has been less and less transparency about the price and volume of trades. The New York Stock Exchange really exists in name only, as computers execute a very large percentage of all trades, far away from any exchange.
How then would we be using Goldman Sachs to funnel US treasure into the markets at appropriate times to prop up the market? Oh snap - I did not just say that. (grassy knoll alert) I thought we were going to be "Google-izing" everything... heck we can't even get an audit of the most powerful organization on the planet. The "independent" Federal Reserve...
  • As a result, there is little flow of information, and small investors are paying the price. The beneficiaries, no surprise, are the remains of the old Wall Street broker-dealers — now bank-holding companies like Goldman Sachs and Morgan Stanley (this is where I remind you that Wall Street = Main Street)that can see in advance what their clients are interested in buying, and might trade the same stocks for their own accounts. Incredibly, despite the events of last fall, nearly every one of Wall Street’s proprietary trading desks can still take huge risks and then, if they get into trouble, head to the Federal Reserve for short-term rescue financing.
What part of Wall Street = Main Street did I not make clear. If that dogma does not work may I interest you in "If the stock market goes up, all is right in the world and the market clearly has made a judgement that the correct decisions have been made." Heck with everything done to protect the interest of the top honchos in the market, we should be up at S&P 2500.
  • As for those impossibly complex securities that caused so much of the trouble — among them derivatives, credit-default swaps and asset-backed securities — the S.E.C. should have the power to make public all the documentation surrounding these weapons of mass financial destruction, including all data about the current costs of buying and selling them and the cash flow underlying them.
  • (7) Why is the government still complicit in making the system ever less transparent, even when it comes to what should clearly be considered public information? For instance, it took more than a year for the Federal Reserve to disclose that it had agreed to pay BlackRock — the huge money manager that is 45 percent owned by Bank of America — and others $71 million in a no-bid contract to manage the $30 billion of toxic assets that JPMorgan did not want when it bought Bear Stearns in March 2008. And that is only one of the five contracts BlackRock has with the government as a result of this crisis — the nature of the other contracts remains secret.
What's a year among friends? Or secrets? See this is how it works - Americans have very short memories. Remember all that TARP outrage? Gone. Remember the AIG outrage? Done. Remember the transfer of taxpayer money at 100 cents on the dollar for AIG obligations to firms throughout the world? Not even mentioned. If you just delay things we lose interest. We are easily sated by nice words, green shoots, and a stock market that goes up. Then as we nap peacefully... content to watch our NFL Games and Jon & Kate Makes 8 - then you can go ahead and do your cute cronyism. Just wait us out - heck we got bored of Hurricane Katrina within half a year - we don't have the money to rebuild those neighborhoods. But we do have money for our oligarchs. Priorities.
  • It was only a lawsuit filed by a watchdog group that convinced the Treasury to divulge details of former Secretary Henry Paulson’s October meeting with the chief executives of the 10 largest Wall Street firms to force them to take money from the Troubled Asset Relief Program.
  • A lawsuit filed last November by Bloomberg News to force the Federal Reserve to reveal the details on more than $2 trillion in loans that went to banks including Citigroup and Goldman Sachs is still pending in federal court.
Shhh... a new era of transparency. Oh yes, and delays... see previous comments above.
  • And what has become of the S.E.C.’s year-old investigation into who made short-dated, out-of-the-money bets in March 2008 hoping Bear Stearns would fail — bets that were suddenly worth millions of dollars when the company did collapse later that month?
Shhh, those guys are helping us with well placed dark pool futures orders at approriate time. So they made a few bucks betting against a rival imploding. Happens every week.... just watch options activity before almost any buyout (ppssssst - call buying surges)
  • (8) Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis? There may be a way to find out. There is much talk nowadays coming from top bankers — Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorganChase, John Mack of Morgan Stanley and even Ken Lewis of Bank of America — about seeing how quickly they can repay to the Treasury the TARP money Mr. Paulson forced on them. One precondition of their being allowed to repay the funds should be a requirement that each gives a public deposition and explains, under oath, what truly happened and why.
Oh my, quite probably the best idea of the decade. If this was the case, you can bet TARP money might never be repaid! :)
  • Such a public hearing would be meant only to offer a truthful assessment of the errors in judgment made at each firm and to promote understanding, so that we — somehow — can avoid repeating the same mistakes again. It would not be about indictments.
It's really quite easy. When these were private partnerships they were run in responsible manner. Once they went public and took other people's money, levered it - and prospered (heads we win, tails we still win) either way - you can take whatever risks you want. Too big to fail after all.

To conclude...
  • We are in one of those “generational revolutions” that Jefferson said were as important as anything else to the proper functioning of our democracy. We can no longer pretend that our collective behavior as a nation for the past 25 years has been worthy of us as a people. (yes we can! wait, where have I heard that?) Many of us hoped that Barack Obama’s election would redress the dire decline in our collective ethic. We are 139 days into his presidency, and while there is still plenty of hope that Mr. Obama will fulfill his mandate, his record on searching out the causes of the financial crisis has not been reassuring. He must do what is necessary to restore the American people’s — and the world’s — faith in American capitalism and in our nation. Answering our questions may help us get back on track. But time is wasting.
And with quetions like this you can see why every effort must be made to get this stock market as high as possible as quickly as possible. Because once the market has through price appreciation "said everything is ok" these type of questions can be briskly swept under the rug.

Well it was an enjoyable read; while not every point is completely spot on in my opinion... it stroked my intellectual curiousity. And with that, I do now take this blue pill, and quickly forget about it all, while looking forward to purchasing stock in increasing amount and doing my part to make sure all this is quickly behind us.

Monday, June 8, 2009

WSJ: Global Migration Reverses for First Time Since Great Depression

An interesting situation has developed across the globe, which has mirrored the retardation of migration within our own country. [Apr 23, 2009: As More Homes Fall Underwater Trapped Americans Cannot Migrate] The global situation has nothing to do with people sitting in underwater homes, but simply a global retrenchment in prosperity.

  • The developed world, which for decades has offered a difficult but promising path to upward mobility, appears to be losing its allure. Unemployment is rising, and backlashes against foreign workers are mounting.
  • The result is potentially the biggest turnaround in migration flows since the Great Depression, economists say.
  • Full migration numbers for most countries are only available after a long lag, and so don't yet capture all the effects of today's economic crisis. But anecdotal reports and data from government ministries and outside organizations indicate that the flow of immigrants from poor to wealthier countries is slowing significantly for the first time in decades while more people are returning home.
  • Among the returnees: road builders from Bangladesh, domestic servants from the Philippines, factory workers from Indonesia and Vietnam, construction workers from Mexico, as well as bankers, lawyers and real-estate professionals from around the world who were working in Singapore and Dubai.
  • Emigration from Mexico to the U.S. dropped 13% in the first quarter of this year compared to the same period last year, with more Mexicans leaving the U.S. than coming in. Indonesian authorities expect 60,000 or more citizens to be sent home from Malaysia, South Korea and other wealthy neighbors this year, as immigrant workers lose their jobs. Tens of thousands of Indians are washing their hands of Dubai as jobs there dry up and work permits expire. And in the U.K., the number of registered workers coming from new European Union member nations like Poland and the Czech Republic dropped 55% in the first quarter of 2009 compared to the same quarter a year earlier.
  • Dilip Ratha, an economist and migration expert at the World Bank in Washington, D.C., .... calls this reverse migration "very new" and "unprecedented."
  • Such migratory shifts could have profound consequences for developed nations, especially in places where domestic populations aren't growing fast enough to fill jobs or pay for social needs. High-skill immigrants are an important source of tax revenue in some cities, and their kids fill the classrooms of universities and private schools. In the developing world, remittances sent home by migrant workers are also slowing, meaning less income -- and potentially, less growth.
  • Migration levels soared through the end of the 20th century and into the early years of this decade, as rapid economic growth led to rising demand for foreign workers. The U.S., U.K. and Canada once again became big receivers of foreigners, as did the U.A.E. and other newly wealthy countries. The percentage of immigrants in America's labor force rose to nearly 16% in 2007, from about 9% in 1990, according to Mr. Wadhwa.
  • In the U.S., long a lure for Latin American immigrants, the number of undocumented workers from the region appears to have peaked, and may now be falling, according to a recent study by the Pew Hispanic Center. The population of South Americans, for example, has declined by as much as 400,000 from a peak of about three million in 2006, says Pew demographer Jeffrey Passel. Much of the declines are among high-skilled workers from Colombia, where the security situation has improved, and Brazil, whose economy has seen huge growth in recent years.
  • "What we're seeing is the normal outflow" of migrants leaving the U.S. to go back home, and "a huge drop-off in the inflow" coming into the U.S., says Mr. Passel.
  • Singapore's push to attract immigrants has had as much to do with a construction boom as with a bid to add vigor to a slow-growing population. More than 75% of Singapore's population increase between 2003 and 2008 was attributable to foreigners, including many high-skilled workers attracted by the country's booming economy and low taxes, according to Credit Suisse. But with job opportunities dwindling, as many as 200,000 foreigners may leave Singapore this year and next, Credit Suisse said recently. If that happens, it could have far-reaching implications for the local economy, including a drop in property prices. Enrollment in local international schools has already started to dip, according to local media reports.
Some countries are literally offering incentives for people to "go home" ... I've read of a few programs specific to Japan
  • The migratory shifts are likely to continue as governments increase visa restrictions or otherwise make it harder for immigrants to enter and stay. Spain and Japan have offered cash incentives for immigrants to go home. Australia recently announced that it intends to cut its intake of skilled migrants this year by 14%. Malaysia has frozen work permits for foreign workers in some sectors of the economy and is asking employers to lay off foreigners before they lay off native-born residents.

But is it temporary or long lasting?
  • Some analysts question whether the latest migration reversal will outlast the current recession, or turn out to be as big as migration experts predict. Many immigrants have worked hard to establish themselves in their adopted countries and will be unwilling to leave, even if jobs disappear. Others say the trend could be more long-lasting, especially if returning workers help give developing economies a boost or if rich-world economies take many years to recover.
Implications for the globe if it is more lasting?
  • The shift in migration poses a new challenge to the promise of globalization. Many economists and policymakers have long argued that widespread labor movement is a win-win because it boosts opportunities for people from poor countries while giving rich-world employers more options for labor, allowing them to increase efficiency and keep costs low. That, in turn, can keep inflation in check and contribute to higher standards of living. Many economists still believe that, but it's becoming harder to make their case as unemployment surges, income gaps widen and home-grown workers increasingly view foreigners as competitors for scarce jobs.
  • Many countries, including Mexico, the Philippines and Vietnam, rely heavily on money sent home from overseas workers. Such remittances are expected to decline by up to 8% this year, according to the World Bank, after rising to $305 billion in 2008, more than double the level of 2002.
  • Rich countries could feel a pinch, too. Immigrants make up a significant portion of the home-buying market in communities from Sydney, Australia to Phoenix, Ariz. The loss of foreign workers could lead to inflation when economies recover and some employers are forced to raise wages to attract native-born labor.
  • .... immigrant inventors contributed a quarter of global patent applications from the U.S. in 2006, while 52% of all Silicon Valley start-ups between 1995 and 2005 were started by immigrants.
  • In the past, "when you came to the United States, you came on a one-way ticket on the Mayflower or Air India," says Vivek Wadhwa, a senior research associate at Harvard who recently completed a study on migration trends. "But now, there are many lands of opportunity."

  • ....study found that among Chinese nationals who emigrated to the U.S. and later returned home, 72% said they thought professional opportunities were better in their own country. Among Indians who returned home, 56% said so. (that's remarkable data that should open the eyes of all those chanting dogma)

Boo Yah!

Another lesson for those who think they want to fight the Invisible Hand - just as that Friday the week before last, a quiet day of nothing and then a 1%+ rally within 5 minutes. Just as that Friday, someone with untold billions decided they REALLY needed to get into the market and they could not spread the buys over a long period of time to get themselves good prices. Nope, they needed to buy it all at once to spike the index.

Clearly the free market is working its magic here.... yep. Or maybe it was that exciting 3:22 economic report. Now we're saying it's the magic of Paul Krugman uttering a sentence. (that's bordering on hilarity - the next time Paul Krugman moves equity markets will be the first time) But for now, I'm going to phone Nouriel Roubini and ask him when the first time he utters "recession over" so I can mortgage house and go all in long for 3 minutes before he says it...

Dennis Gartman: Short Term Bearish on Oil

I have not posted any Dennis Gartman content on the blog before, but this is a well followed commodity pundit. Below is a 6 minute video from CNBC with his takes on oil (getting crowded, short term bearish - but long term bullish), the specter of the Fed raising rates by the end of 2009 (complete garbage just like I said), and a theme we've been pressing for 2 years... the lessening importance of America on the world stage as Asia continues to steady ascend. Let me repeat, that does not mean America is "not important" - but we are very inward looking and for a long time simply believe everything revolves around us. That is changing (notice how Chinese economic data has become as important if not more than ours!) but a lot of people still live in a world of 2 decades ago.

I also wanted to point out a blurb I found in the Wall Street Journal late last week on what traders are doing with oil - due to the low leverage requirements there is a very popular trade going on, and Dennis references it in the video above. The body of the story has to do with just how much impact does China really have on the oil market but the interesting takeaway was this very popular trade.
  • "We create our own reality." With oil inventories high and demand down year on year, yet prices surging, "fundamentalists" are puzzled. Market participants, however, always have an eye on the future and locking in a profit.
  • Recently, commodities bulls have been aided by the Federal Reserve keeping rates low and banks' short-term funding flowing. This facilitates commodities trading and stokes fears of inflation. As cash flows into oil futures, their prices rise relative to spot prices. That makes it profitable to buy physical oil, store it and sell it forward.
So here is the trade, and this is why I love the markets - you can learn a new thing every week no matter how many years you do this.

Energy economist Phil Verleger demonstrates how lucrative this can be. On March 1, the cash price of light, sweet crude was $40.15 a barrel, while the 12-month forward contract sold for $50.26. Assume an investor bought the physical barrel borrowing 80% of the money at a rate of 3%, sold it forward, and paid 50 cents a month for storage. The resulting profit of $3.15 a barrel equates to a 39% return on investment.

Ah leverage - the mother's milk of profits. Financial Engineering the world over - it impacts all our lives.

Keep in mind we mentioned in this weekend's reading [Jun 6: Weekend Reading] we noted a Bloomberg piece that said JPMorgan was buying physical heating oil and storing it for the first time in its history.

And how much of oil demand is China? While they are a huge marginal buyer - increasing imports by one third between Jan and Mar, they still account for less than 10% of the world's purchases.
  • China's appetite for commodities is well-established, but the card looks overplayed this time. First, China is big, but not that big. In the first quarter, it accounted for 9% of global oil demand, compared with 55% for the largely recessionary industrialized world.
So it appears much of your gains are the "reflation trade", a weakening dollar, and good ole financial speculation.

1 in 9 Americans on Food Stamps

When I started this blog nearly 2 years ago, 1 in 11 Americans was on food stamps. In fact it was as recently as May 2008 [May 7, 2008: Some Things I'm Reading]

28 Million Americans are on food stamps, thats almost 10%, and it's rising - but with food prices going up so much; they are falling even further behind (no worries, buy stocks)

One in 11 Americans receive food stamps, according to federal statistics. As the economy weakens, more and more people are turning to this support system

Over the past 6-9 months I've been quoting 1 in 10 Americans are on food stamps. Now the latest data shows we are up to 1 in 9 Americans. Our society continues to bifurcate [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] slowly but surely, and my guess is most of those on food stamps are not enjoying the largess of an ever lifting stock market sloshing around with increasingly abundant US dollars.

Thankfully the stock market is telling us things on the ground are improving markedly; I hope those 1 in 9 people are getting the message.
  • One in nine Americans are using federal food stamps to help buy groceries as the country's deep recession forced another 591,000 people onto the federal anti-hunger program at latest count.
  • Enrollment jumped 2 percent to 33.2 million people in March, the fourth consecutive month that rolls hit a record, said the Agriculture Department. The average monthly benefit was $113.87 per person.
  • In 20 states, as many as one in eight are on the food stamp program, according to the Food Research Center.

U.S. enrollment in recent months:

March - 33.157 million

February - 32.556 million

January - 32.205 million

December 2008 - 31.784 million

November 2008 - 31.097 million

October 2008 - 31.050 million

Sept 2008 - 31.587 million

[Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]

[Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide]

[Nov 14, 2008: Wall Street Journal - A Run on (Food) Banks]

Bookkeeping: Closing DeVry (DV) Short

You sometimes just have to laugh... within a day of my short of DeVry (DV) the company is added to the S&P 500. This caused a big gap up last Tuesday.... those are the type of things out of left field you can't account for.

That "gap" from the news announcement has now been filled late last week and I covered a good portion of the short into that for a very small loss. But now instead of sitting below the 50 day moving average, the stock is above it, and our original thesis has changed. $47 remains the line in the sand to the upside but this name was being used as a general hedge and at this point there are better candidates.

I am going to close out the remaining short for a 6% loss on about 1.2% of the portfolio; as stated above the majority was covered for about a 2% loss late last week.

No position

Bookkeeping: More BHP Billiton (BHP) Trading

As mentioned Friday in [Jun 5, 2009: Bookkeeping - Continuing to Trade BHP Billiton]
With the stock over $60 today, I liquidated 1/3rd of the position for a quick 10% gain. (1 day) That takes us down from a 3%ish stake to 2%.

I will sell 95% of the remaining holding below the low of the day, which is $59.91. To give myself leeway,
$59.80 or so will be a stop loss. Then we once again created a gap in the chart this morning and I'll repurchase at the bottom of the gap... around mid $57s. The 20 day moving average continues to move up and is now mid $55 which is where I'd buy more

I've executed the first 2 parts of this trade this morning - I was taken out of almost the entire position this morning at $58.00 (the stock gapped down so my $59.80 was blown right through) and I just bought back about 50% of the position down in the $57.50s. In theory if the stock was not gapping up and down this would of worked nicely but because the open was a "jump" down instead of gradual it didn't work out quite as well as it should of.

The "gaps" in this chart have been filling extremely quickly - sometimes gaps don't fill for months; in BHP's case it has been happening almost every other day. I'm looking for a retrace to the 20 day moving average to buy another batch which is now around $55.

This has been 2 successful round trips on this name in a week; as long as reflation is the trade this name should continue to work but I am wary that 'reflation' is so crowded as a theme. If? When? the market ever reverses in a serious way I actually am going to be shorting 'reflation' quite hard, at least temporarily. A lot of hot money who does not care about fundamentals is now in this trade, so they will leave quickly.

Today S&P 928 seems to be the level the bulls are defending but it's pretty quiet out there otherwise.

Long BHP Billiton in fund; no personal position

A Real Green Shoot - The Dakotas

While some think this is the home of yellow or indeed brown shoots, I have no problem pointing out green shoots... as long as they are rooted in reality rather than hope. Even as we discussed the coming recession in 2007 (denied by politicians until late 2008, and denied by economists until 3rd quarter 2008) we said there would be regional pockets of strength. The upper plains is one of those regions; we can think of them as mini Australia's or Canada's. Resource heavy (producing product other countries actually want) & running fiscally tight ships. I actually received a fund pledge last week from a reader in South Dakota (struck me, because I believe that's the first from these relatively sparsely populated locales) and he said even these areas are slowing down, but again - it is all relative. What is a slowdown in those areas would be considered a return to growth in parts of the industrial Midwest or some portions of the coasts.
  • North and South Dakota and Alaska, the states with the lowest rate of mortgage delinquencies, are also the states with the lowest credit card delinquencies, TransUnion data showed.
We haven't spoken much of the state budget disasters we predicted long ago [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] [Apr 25, 2008: Shoes Beginning to Fall in the States] would be coming this year and next of late; in our new policies of harvesting trees for new fiat money, parts of the fiscal "stimulus" are plugging holes and rest assured more will be coming next year. And if push comes to shove... federally backed state debt, bailouts, whatever is necessary will be coming. Because our pockets are endless. Thankfully some states won't be in the position to have their hands out; unfortunately, in the big picture their share of national GDP is tiny.

The Wall Street Journal has a nice article on North Dakota and how they have continued to do well, during the worst post World War II recession in the States.
  • California has the Golden Gate Bridge, New York has the Empire State Building, Illinois has the Magnificent Mile. And North Dakota? It has a hefty budget surplus those states would envy. While many states scrounge for ways to repair budget deficits, North Dakota is cutting taxes and fretting over how much of its budget surplus to spend or save.
  • ... in a report Thursday that North Dakota and Wyoming remained the only two relative bright spots in a nation mired in recession. Both resource-rich states expect revenue collections to come in above their budgeted forecasts, while 38 states anticipate revenue shortfalls, according to the report on state finances, which was co-written by the National Association of State Budget Officers.
  • Meanwhile, North Dakota expects to have a surplus of about $700 million in June 2011, the end of its next budget cycle. In the legislative session ended last month, North Dakota lawmakers shifted more of the responsibility for funding education to the state and required local governments to reduce property taxes proportionately, saving taxpayers $295 million. Individuals and businesses also received about $100 million in income-tax cuts. At the same time, lawmakers increased spending on K-12 and college education, health care, infrastructure and other programs.
  • The remote Plains state, with a population of just over 640,000, has benefited from spikes in oil and crop prices. While the rest of the U.S. economy was tumbling last year, energy and agricultural commodities stayed frothy before beginning a long slide in the summer. Lately, they have begun climbing again....
  • High prices help North Dakota in myriad ways. State revenues rise thanks to taxes on oil production and extraction. Energy-industry workers and farmers pay more in income taxes and spend more, boosting sales-tax receipts.
  • Chiefly because of the commodities boom, North Dakota had the fastest-growing economy in the nation last year, as the state's gross domestic product increased 7.3%
  • The state also missed much of the bubble in housing prices and dubious lending practices that bedeviled much of the nation, so it isn't struggling as much with foreclosures.
  • Republican Gov. John Hoeven likes to credit his administration's efforts to diversify the economy, including fostering "value-added" agriculture, such as food-processing plants, and alternative-energy production, from wind to ethanol and other biofuels. Spinning wind turbines have become a more common sight on the state's rolling plains. North Dakota has 865 megawatts of wind power completed or under development, up from less than two megawatts four years ago.
  • State and local officials have been traveling to Ohio and Michigan to recruit laid-off workers. North Dakota's seasonally adjusted unemployment rate -- 4.0% in April -- is the lowest in the U.S.
  • Legislators say they want to avoid the roller coaster of spending sprees followed by cutbacks. The state isn't immune to recession ripple effects: Heavy-equipment maker Bobcat Co., the state's biggest manufacturer, recently laid off nearly 250 workers at its plants in the state. Microsoft Corp. and American Express Co. also have announced layoffs or closures.
  • Gov. Hoeven said he worries about the federal deficit. "I'm also concerned about some of the states, like California," he said. "At what point does their deficit problem become our collective problem?" (sooner than you think Gov Hoeven; but for now... time to kick the can down the road: print and borrow more. )

[Apr 14, 2009: Cities Turn to Fees to Fill Budget Gaps; States Slash Social Programs]
[Feb 17, 2009: Kansas Joins California in Budget Woes]
[Dec 19, 2008: New York Times - States' Funds for Jobless Dry Up]
[Dec 6, 2008: How Bad is Minnesota's Budget Deficit? Mega-Bad]
[Dec 12, 2008: California - Missed the Budget Shortfall by THAT Much]
[Nov 24, 2008: WSJ - States Cut Services for Elderly, Disabled]
[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 44

Year 2, Week 44 Major Position Changes

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

Cash: 55.3% (vs 46.9% last week)
29 long bias: 35.4% (vs 33.8% last week)
9 short bias: 9.3% (vs 9.0% last week)

37 positions (vs 42 last week)

Weekly thoughts
Not much to say, another up week (yawn) ... Groundhog Day. I went back to review the week and was scratching my head at why we gapped up Monday. These gap ups one after the other, soon all start to look the same. I was searching my archives and looking through the economic reports... than I remembered; China PMI. (which is about a 4-5? year old report from one of the least transparent government's in the world - but let's put our chips on it). Strangely Friday, on a "great" employment number the market did not do much. Essentially the gains of Monday was "the move" and the rest of the week was spent rallying in the last 5-10 minutes most days or futures improving premarket. I am thinking in this new era to simply be long the market in the premarket and the last 10 minutes of each day - that's when most of the upward action seems to be ...

I gathered some fun facts below rather than offer any economic analysis - because the only analysis worthwhile now is "buy stocks".
  • The market is up 11 of the past 13 weeks, one of those "down" weeks was something in the range of -0.4%.
  • Stocks in the S&P 500 with positive earnings have underperformed those with losses (or no profits) by a 24% margin since March 9.
  • Stocks that pay dividends have been dragging behind those that don't.
  • The smaller a company, the more money it is losing and the deeper in debt it is, the hotter its stock has been over the past three months.
  • Corporations have unloaded nearly $80 Billion of new stock on investors. ...more than 150 other companies raised $82.2 billion this quarter, beating the record pace at the height of the technology bubble in 2000, according to data compiled by Bloomberg. The combination of adding shares and restricting dividends will reduce annual equity returns as much as 4.1 percent, the data show. (that assumes PE ratios are flat of course, but when money is flown in from helicopters it appears PE ratios can go to whatever we wish)
  • “What we find is that secondary-equity offerings frequently signal a view in management suites that prices are rich.”
I cannot remember any similar period I've been around other than fall/early winter 1999 when we were in the heart of the technology / internet bubble and I was on the other side of the trade than where I am today. I was gleefully buying every dip, not caring about valuations, and laughing at those who were not partaking in how 'easy' this was. Ironic really - when I knew a lot less and had a lot less experience I did a lot better in these sort of maniacal runs. ;) Being a lemming was a pleasant thing - both then and now. We were all laughing at those "value managers" back then who were sitting on the sideline and having the money sucked out of their funds since they did not understand the new paradigm... with that said, I did get splattered on the windshield in 2000. And value managers had a good 3 year run.

All the world now awaits for another "triangle" to resolve. We had a similar triangle about 7-8 weeks ago that once resolved to the upside led to a new leg up, and I'd expect the same here. I keep thinking one of these surges up through a resistance line will create a trap door for longs (i.e. a reversal), but with that insistent bid in the last 10 minutes of the day along with almost every morning between 7 and 9 AM the market is "clearing and holding" each level. Still shaking my head at what happened a week ago Friday in the last 5 minutes So I suppose since we can never expect a reversal once S&P 950 is "held and cleared" another round of desperate institutional money who needs to "make performance" to match the indexes will rush in and away we go. Here is the chart every desk across NYC has ....

So as we've noted this week there are 2 quite different looking charts based on if you use simple or exponential moving average because the 200 day MA is moving downward at such a sharp rate on the "simple" side. In my world, we still have not cleared the 200 day moving average but even if one uses simple moving averages the very obvious level of S&P 950 is the resistance. And once broken a new avalanche of buyers awaits via HAL9000 and friends. (at one point when things were *this* obvious I'd say there is no chance it happens, but that was another era) The upward sloping line connecting recent lows is one side of the triangle and we will resolve this in very short order one way or the other.

... and as always the 20 day moving average is the support in the market as it has been now for 3 months... currently about S&P 912 (rising very quickly). As long as the market holds that there will be no fear.

For those curious I am not necessarily sitting here waiting for a pullback so I can "load up" for the "very easy next leg up" on the "road to S&P 1200". I am just sitting here watching a lot of historical rules completely broken - such as, when one side of the trade is so easy, for so long... the market reverses. Or... the market hates complacency and likes to inflict pain on the "obvious" play. Or... when so many people are in the same trade, it stops working. But the Invisible Hand (grassy knoll alert) was not such an active friend in any other time, so a lot of rules may not apply. But each time in my memory there has been so much complacency about a market, things go in the other direction and it makes the complacent uncomfortable... i.e. in this case all the folks who are waiting for a simple 5-7% pullback to "reload" will lose money on those purchases as the pullback will be far stronger. But I've been saying that for 5-6 weeks now so ignore the broken record...

As for economic reports we have a light week - we have a government retail report (in which we ignore everything the retailers are telling us and instead await the government to tell us what is correct)... with gas prices rising I can already see it now, we see futures surging Thursday as retail sales came in 'better than expected'. No one will point out the fact that gas prices jumping month over month will account for much of the 'surge in spending'. The other main thing will be the 10 year, and 30 year bond auctions coming that we've highlighted the past few days.

Other than that we remain hostage to the dollar and oil. The market loves higher oil and until that changes the same old trades will keep going. We closed out Axsys Technologies (AXYS), (buyout) Regions Financial (RF) (would rather own larger banks that the government has built a ring of fire around) on the long side, and 3 of our then smallish commercial real estate shorts...

In terms of positioning, like a lemming I will be resigned to chase the market ever higher on a close over S&P 950, and then openly rooting for the "futures bid" to stay around so I won't be Charlie Browned* by Lucy and have the football taken away from me. Remember, we are at S&P 940 now but could drop a good 25 points and not fall out of our upward trajectory.

*a market reversal once every last short has thrown in the towel and performance angst has pushed every long fund manager out of cash

Sunday, June 7, 2009

Jim Rogers: Currency Crisis Looming But Don't Short

The latest from Jim Rogers; he continues to avoid shorting as the amount of paper printing "prosperity" is overwhelming.

"Very few times in my life had I not had shorts." In fact he believes its the first time since 1987 he has abandoned his hedges. This type of thinking makes me really give pause - he is not bullish on the US economy, he simply is in abject fear of the level of paper printing going on that will drive up all assets regardless of the intrinsic value. [May 20: Jim Rogers Agrees with Marc Faber] [May 15, 2009: This was a Central Bank Printing Press Rally]

As we've been writing for the better part of the past year, the US has decided to kick the can the final time - this time moving risks and obligations from the private sector to the public sector (taxpayers). And this is how one eventually gets a currency crisis. When? Who knows... it could be years. But there is no place left to kick the can once you've used your government entities to suck up the bad decisions from the private sector.

He does talk about what the bond yields rising indicates in his mind... very similar to what we've been writing.

p.s. Oh Dennis Kneale, would it bother you THAT much to do some research on your guests? I know it's just a well paid TV gig that you can say whatever you want as long as it includes "buy stocks" and "I'm bullish" but can you at least give the appearance of doing homework. I mean, if you are not going to do "research" on Jim Rogers background ("I don't know how you were invested in the past" "So how long have you been living in China?") - who happens to be one of the most successful long term investors of a few generations... I can only imagine the 'research' done to trying to form questions to any other guest. But really I suppose it does not matter when every day ends with "I'm bullish" and "I love stocks".

Video 1...

A currency crisis is imminent, so investors should avoid shorting the market, said Jim Rogers, chairman of Rogers Holdings.

"I’m afraid they're printing so much money that stocks could go to 20,000 or 30,000," Rogers said. "Of course it would be in worthless money, but it could happen and you could lose a lot of money being short."

Rogers typically holds both long and short positions, but his perception of global currencies' instability has led him to pull out all his shorts, he said. The last time he can remember doing so was before the market fiasco in 1987.

Rogers called the US dollar a "terribly flawed currency," adding that it could be the starting point for the next currency crisis.

"I would suspect that somewhere along the line...someone's going to say, 'I'm going to start selling mine before everybody else does,'" Rogers said. "That's when you have a currency crisis."

But instead of pouring money into stocks, Rogers said investors should turn toward commodities. This sector will lead the recovery if the global economy improves, and if it doesn't, they'll still be the best place because of inflation, he said.


Video 1 is 7 minutes of mostly Rogers with host interruptions... below is a 14 minute video with an engaging roundtable discussion about the situation in bonds - both the CEO of Cantor Fitzgerald, Howard Lutnick, and Jim Rogers agree on our ultimate destination - it's just a matter of timing (as is everything in the markets). I thought I misheard at first but since it was repeated later in the interview Lutnick says the US won't return to "real growth" until 2014/2015. Somehow that doesn't just jive with green shoot city...

Well worth a listen, just skip all the CNBC hosts and you're good.

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