Tuesday, August 11, 2009

Bookkeeping: Beginning Placeholder Stake with AsiaInfo Holdings (ASIA)

I am beginning a very minor position (0.1% exposure) in a name we discussed last Friday - AsiaInfo Holdings (ASIA) [Aug 7, 2009: Niche Play on China Telecom - AsiaInfo Holdings]

I've had AsiaInfo Holdings (ASIA) on 1 of my "to do" lists to research for 6 months now and only in the past 2 weeks have created some time to actually dig into it. This is a $800M market cap company, growing at a stellar rate, profitable, no debt, reasonably valued unlike much of the nonsense being run up at 50, 60, 80x forward estimates. Their website is here, and a good overview of the company via .pdf file can be found here. Specific info on their product lines here.

With the caveats that I've turned very cautious on (a) the markets and (b) Asia specifically, I still want to get this off my watch lists and into a place I'll pay more attention to it. As I said in the piece Friday at heart I prefer to have long term core positions I can keep, and then trade around as they ebb and flow. This market has not favored that sort of strategy - its been a "everything is good" or "everything is terrible" market for the better part of 18 months.

At heart I enjoy finding longer term secular growth stories and investing accordingly; unfortunately the world is not exactly awash with them since most developed countries seem to be relying on bubble creation for prosperity, rather than actual paradigm changing innovations. Plus with almost every stock moving together in "student body" left trading for the better part of 18 months individual stock selection has meant little. However if we ever return to a more normal market, something that is catching the fancy is the mobile internet - which we've been talking about for quite a while. Basically repeating the late 90s thesis, but "in the air" rather than "by landline"- hopefully without Pets.com v2.0. A related secular growth story is the telecom buildout & modernization in China. Even as I am wary of the conditions created by the massive loan growth in that country - which are affecting real estate, stock market, and commodities; I think the telecom modernization is the real deal. Now if China corrects seriously will this secular growth story matter? No - not one bit... student body trading morphs into "baby out with the bathwater" once the music stops.

So if China and/or the markets in general has a correction everything will be sold as the student body stampedes out the same narrow door. Hence we are just putting a very small position on and will look to add if the price goes lower. The chart is quite poor actually - a double top (bearish) followed by a breakdown below the 200 day moving average - I assume I'll buy some at the 50 day moving average but if that breaks it could fall much farther. But this will be part of a core holding group built on mobile Internet and telecom modernization until / unless I see anything company specific that leads me to believe AsiaInfo Holdings is not worthy.

We put our toe in the sand today around $17 as the stock is down 17% in 5 sessions... I'd like to be a buyer of scale lower OR on higher on a recapture of the 50 day moving average. For now it is in no man's land technically - how it acts if and when it rallies back to low $18s is the near term tell. It *is* filling an early July gap below $17 as I type this.

Long AsiaInfo Holdings in fund; no personal position

Robert Prechter of Elliott Wave Meets Yahoo Tech Ticker

For you Robert Prechter / Elliott Wave theory fans, he has a series of videos on Yahoo Tech Ticker. Prechter made a great call about 2 weeks early in late February - which was about the same time I was getting bullish. [Feb 24, 2009: Robert Prechter of Elliot Wave Fame Advises Closing Shorts] Of course even being 2 weeks early during that type of panic cost some money ...

Here are the videos, I don't profess to know much about Elliott Wave but I am just giving readers another view point and his call in February was good so I'd like to see if how these next calls work out. He is quite the bear and has some contrary view on the dollar and inflation as well. If he is correct on these calls below, i.e. not only will we retest S&P 666, but break it - his fan base will expand exponentially. Much like Hugh Hendry he is in the deflation camp, not inflation ....

Dollar Hits a "Major Bottom" Prechter Says: Why That's Not such Good News

Forget all the talk about the dollar being in terminal decline. The recent rally in the greenback is for real, says Robert Prechter, president of Elliott Wave International. The man who correctly predicted the 1987 crash and last year's peak in oil prices now says we're "going to be up for a year or two in the dollar."

Reuters and other mainstream news outlets attribute the recent uptick in the dollar versus other major currencies to an improving economy signaled by Friday's "stronger-than-expected U.S. jobs numbers." Prechter, ever the contrarian, says the U.S. dollar has put in a major bottom but not for the reasons everyone else is pointing to.

Prechter points to three factors:

  • The Elliott Wave Pattern: Without getting too technical (for your sake and mine) Elliott Wave Theory looks at markets cycles in terms of wave structures that come in five parts. Five waves up followed by five waves down. Well, according to Prechter's research the pattern confirms we recently hit the fifth wave down. Next stop: up.
  • Sentiment has reached an extreme: "The Dollar Sentiment Index for the Dollar Index reports just 3% bulls among traders, an extreme level only five times in the past 20 years, usually near an important low," Prechter wrote on Aug. 5. "The last time we saw readings like this was March-July 2008, just before the dollar soared." In other words, the "short the dollar" trade is overly crowded.
  • The biggest risk to the economy is deflation not inflation: As he lays out in his book, Conquer the Crash, Prechter thinks the bursting of the latest bubble will lead to a major economic depression.
As we discuss in forthcoming segments, this good news for the dollar spells bad news for most other asset classes including stocks, commodities and real estate.

Inflation Not a Problem, "Deflationary Depression" in Our Future, Prechter Says

In July, Ben Bernanke told a town hall meeting, "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." According to New York Times columnist Paul Krugman in that regard he's succeeded. Bernanke's rescue of the financial sector in tandem with the Obama Administration's stimulus plan prevented a "full replay" of the Great Depression, the Nobel Prize-winning economist writes.

But like President Bush declaring "Mission Accomplished" in 2003, Elliott Wave International founder, Bob Prechter thinks Krugman and Bernanke are premature in declaring victory over the credit crunch. Prechter, who famously predicted the 1987 stock market crash, tells Tech Ticker "the march towards depression, which is being fueled by deflationary trend, is pretty well intact."

So forget all you've heard about recovery and inflation, "we've only seen the first phase," of the downturn according to Prechter. Next to come, is "a credit implosion" that will once again destroy the value of stocks, commodities and especially real estate. "The biggest area of overvaluation because of credit extension is the real estate area," he says. "And if you'll notice that’s the area that's had the weakest of any kind of attempt at a recovery."

When this next phase of "deflationary depression" happens the only investment advice he can give is: safety first. "Make sure as an individual you're in the safest possible investments so you can ride this out."

Bob Prechter "Quite Sure" Next Wave Down Will be Bigger and March Lows will Break

In late February, Robert Prechter of Elliott Wave International said "cover your shorts," and predicted a sharp rally that would take the S&P into the 1000 to 1100 range.

With that prediction having come to pass, Prechter is now saying investors should "step aside" from long positions, and speculators should "start looking at the short side."

"The big question is whether the rally is over," Prechter says, suggesting "countertrend moves can be tricky" to predict. But the veteran market watcher is "quite sure the next wave down is going to be larger than what we've already experienced," and take major averages well below their March 2009 lows.

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.

The 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have balance that out with some sort of significant retrenchment."

[May 15, 2009: Robert Prechter of Elliott Wave Theory Still Bearish]

LA Times: Amid Cost Cutting, Los Angeles City Pensions Continue to Soar

The dichotomy between the private and public is going to be one of the big issues in the decades to come. Just as with our entitlement programs we have promised too much; although I'd argue at least a whole mass of people "benefit" from the misalignment in Social Security and Medicare. In our public workforce (no offense if you are part of it) we have created an ivory tower parallel class who exist in a different world than the private worker. Many are no longer affected by the free market - even as we watch city after city and state after state suffer with massive shortfalls, we still see huge payouts. I see it here in story after story in Michigan - in a state that never truly came out of the 2001 recession. If it is happening in the 1 state Depression known as Michigan, it will happen in your state.

In May 2008 Vallejo, CA went bankrupt [May 7, 2008: Vallejo, California Votes for Bankruptcy] After some digging we found out in a decent sized town of 100,000 people - some 300 city workers made over $100K; many of those over $150K and more than 30 over $200K. And that is just salary - we did not even scratch the surface of the gold plated benefits and pensions that many are receiving. While their private worker peers are seeing pensions go the way of the dodo bird, and left with 401k plans. Job security between the two sectors is a whole different conversation but until the taxpayer wakes up, I continue to urge you to raise your child to be a government worker. Or switch careers yourself.

We will have a massive bailout down the road in public pensions [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout] States and cities are now literally selling off assets to pay the salaries and benefits of a very few citizens.

While this is specific to pensions it really is a parallel to almost every major program in the U.S. at both federal and state level. Promises that had no chance to be fulfilled in the name of "kicking the can down the road". Unfortunately multiple roads are converging at a dead end. If the federal government is going to bail these all out it is basically a transfer of wealth from those without these pensions to those that do....many of which are government employees as the vast majority of private enterprises have done away with the pension plan.

[Bloomberg] Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy. The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.

The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years. The quick fix for pension funds becomes a future albatross for taxpayers.

Effectively the stimulus plan is plugging in holes in many state budgets for 2009; that money is basically a transfer from the taxpayer nationwide to the subset in the public sector. And that transfer at a smaller scale, is exactly how these salaries and budgets get approved without regard for supply and demand. I mean what's another 0.2 millage? If you spread it over 40,000 households, whats another $18 a year in taxes (no skin off your nose!) to make sure a tiny sliver of the population is not affected by the same forces their neighbors are. And then another $23 the next years, and then $35 the next... rinse, wash, repeat.


Here is a great story from the LA Times showing the complete disassociation between reality and what is going on in the public sector. As I noted last week, public and pseudo public jobs (of which healthcare has now become with the massive subsidies - you can also include education here) is now 1/3rd of our entire workforce... and it's growing like a weed. So 2/3rds are subsidizing 1/3rd ... today. And it will only grow from here. When is the breaking point? 50/50? When 1/3rd outside government is supporting 2/3rds inside government / healthcare? I don't know. But it will end badly.

Just mark this as another crisis that we clearly see, but do nothing about. Because no one wants to say no ... who wants to be unpopular. You already see the massive protests anytime any public sector salary or benefit is even considered to be "adjusted" to reality. As long as we can borrow more, put it on IOU, and make another generation pay for it... it's good. Sound familiar? And when the end game approaches, we'll all look around and say "no one could see it coming" Yep... no one. [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]
  • Collecting nearly $318,000 a year, the former head of Los Angeles' Department of Water and Power tops a list of 841 city pension recipients paid six-figure benefits, according to newly obtained records.
  • And, like many of the retirees, former DWP General Manager Ronald Deaton will be paid more beginning this summer -- boosting his annual retirement pay to more than $327,000 -- because of annual cost-of-living increases, records and interviews show.
  • Former DWP Assistant General Manager Frank Salas ranks second on the list, receiving about $290,000 a year. Councilman Bernard C. Parks, a former Los Angeles police chief and head of the city's budget committee, is third. The Times reported in May that Parks, 65, who has publicly warned about soaring payroll and pension costs, received $265,000 a year in retirement payments on top of his $178,789 council salary. (watch what they do, not what they say) With a cost-of-living adjustment that took effect this month, Parks' pension has grown to $273,000 annually, roughly 10% more than his final pay as police chief, records show.
Here is the list, hundreds of people - almost all making $100K+ in yearly pension; on your dime. Not just California's dime, but since this "stimulus" was used by many states to plug budget holes, it is YOUR money being transferred to these individuals. So please review their names - perhaps they will mail us all thank you notes or Christmas cards. And if you are a Californian? Please please have your child get a job at the Department of Water and Power. They will be set for life!
  • New DWP pension data provide a fuller picture of the city's largest retirement packages at a time when City Hall is cutting services, the public is being hit with recession-driven tax increases to cover government budget shortfalls and rising public pension costs are under close scrutiny.
  • The Times previously reported that nearly 600 pensioners received $100,000 a year from the city's police, fire and general government retirement plans. The new data from the city's utility adds close to 250 names to the list, which includes retirees or, in some cases, beneficiaries.
This comment seems logical... thankfully, logic has no place in government.
  • "We should never, ever design a pension formula that provides more for a person when they retire than when they are working. It defies any common sense," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, a nonprofit pension reform group headed by former GOP Assemblyman Keith Richman.
  • "But that's what we're finding" in some school systems and public safety agencies, Fritz said.
That's just LA baby..... greater California has 5000 of these folk ... >$100K each.
  • The group has publicized more than 5,000 names of state and local government pension recipients across the state collecting more than $100,000.
How could this happen? Something about a fox guarding the hen house would apply.
  • Fritz said high-end public pensioners are worthy of attention. They include "people who were advising, in closed-door labor negotiations . . . negotiating benefits," she said. "These are the ones that made this whole thing happen."
If you follow the entitlement problems in the US (Medicare especially) this will sound so very familiar. The share of LA budget going to pensions? It will rise from 15% of all funds to a mind blowing 33% in half a decade. Yes, 1 in every 3 dollars will be going into (insert Medicare OR public pensions in LA) - it's the same "long term planning"; just replace the name of the benefit. Kick the can policies 101.
  • One recent projection warned that the share of the city general fund receipts required by two large pension funds would jump from 15% this year to 33% in 2013-14.
  • That would amount to an increase of nearly $1 billion, making pension contributions the fastest-growing area of city spending, said Asst. City Administrative Officer Tom A. Coultas, an employee relations specialist.
Remember what I posted above from the March 4th Bloomberg story? How are cities and states "getting around" the issue i.e. hiding it? Accounting changes ... (man, just like our banks - if in doubt, lobby for accounting changes)
  • Recent market gains and accounting changes have eased the financial blow somewhat.
And this won't get fixed... once promised, it's pretty much an American right.
  • Court rulings generally protect benefits provided to retirees and promised to current employees, officials say. Altering pension plans involves negotiations with unions and, in some cases, voter approval.
Anyhow, the bottom line is these plans are underfunded and will get more so. Many pension funds assume annual gains from investments of 6-7-8%+ as they try to figure out how much they can pay out. That return has not exactly happened the last decade. While we whine about "no money for education" or "lack of social services" just remember the money is there for pensions. And when these "accounting" changes no longer can hide the reality and the shortfalls arise? That's where you come in - or more specifically, your wallet. Knowing this (moral hazard) why should anyone in public office ever plan for a rainy day or adjust long term benefits in a self sustaining manner.

Answer: they have zero incentive. Bailout Nation assures them they don't need to.

[Apr 5, 2009: AP: $1 Trillion Hit to Pension Funds Could cost Taxpayers, Workers]
[Oct 24, 2009: WSJ - Pensions Funds Taking Serious Hits]

Fluor (FLR) - Solid as Usual

I have not had a chance to do a write up on Flowserve's (FLS) earnings yet, but Fluor (FLR) in engineering / construction and Flowserve in water services are 2 dominant machines. [Feb 26, 2009: Fluor and Flowserve Continue Best of Breed Ways] Fluor is trading at 14x this year's estimate but at this point 2010 is looking to be less profitable than 2009; we shall see how it plays out. Fluor reported last night - a slight beat on the bottom line and inline on the top line. Inline on guidance - as always the key with these E&C names is backlog; things seem to be holding up well there too.
  • New project awards for the quarter amounted to $6.8 billion, compared to $6.4 billion last year.
Full report here.

The stock is down today but it has been performing better than most of the peer group the past few months. I take it more as a 'sell the news' reaction.

If you are a full blown bull you should be buying these names hand over fist as energy prices skyrocket along with the global economy, and we pretend this credit implosion was just a nightmare that never really happened. I still am wary - funny thing we see today that China imported 18% more oil in July than June - yet oil prices didn't skyrocket in July (as they would of a year ago on similar news).... even with the dollar crumbling most of the month of July. Is it just happenstance that this "non reaction" in oil prices happened at the same time regulators finally are focusing on financial speculators' impact on the energy futures markets? Nah... just happenstance I am sure ;)

Long story short I am not exactly clear what the "clean" price of oil is anymore since Goldman, Morgan, JP, Citi and the boys have had their hands all over the market the past few years ... ahem, providing "liquidity" of course. Figuring out how markets work with some form of real regulation is a whole new ball game we need to adjust to. Fluor has more than half its business in "energy" and while most of the projects are very long term in nature you can see the CEO's comments below in regards to what his customers are saying. It sounds like the energy producers are similarly confused on what the outlook on pricing should be.

Via Reuters
  • Fluor Corp (FLR), the largest publicly traded U.S. engineering company, reported a better-than-expected profit along with growth in its order backlog despite a "very challenging economic environment." Fluor's backlog on June 30 had grown to $30.9 billion from $29.1 billion three months before, helped by its win of a contract to build the first phase of Imperial Oil Ltd's Kearl oil sands project in Alberta.
  • Chief Executive Alan Boeckmann reiterated his view in a conference call with analysts that the backlog would be over or "within shouting distance" of $30 billion by year-end, though he did see a tremendous amount of unease among clients about the strength of oil and gas prices. Fluor's oil and gas segment backlog, for example, has dropped by 25 percent since last year to $15.8 billion.
  • Fluor said on Monday that its second-quarter net income fell to $169 million, or 93 cents per share from $208 million, or $1.12 a share in the year ago period, which included 27 cents made on the sale of a stake in a wind farm. (so in reality ex wind farm, FLR made 85 cents last year and profit was up year over year) Analysts, on average had expected 91 cents, according to Reuters Estimates.
  • Fluor stuck with its full-year profit outlook of $3.80 to $4.10 per share.
Decent buzz from this analyst, who was content with the report.
  • An analyst applauded second-quarter results from Fluor Corp. Tuesday, citing improved profitability at the engineering and construction company's oil and gas business. R.W. Baird analyst Andrea Wirth maintained her "Outperform" rating and raised her price target to $67 from $60, saying the Irving, Texas-based company's business "saw few negatives in the quarter."
  • Fluor's global services business, which works with plant owners to improve operations, has been hurt by deferrals in small capital spending projects and other problems, Wirth said in a client note. In addition, Fluor's industrial and infrastructure business, which builds and renovates public works projects, faces "challenging margins" as construction begins on several projects, Wirth said.
  • However, the oil and gas business had strong margins despite expectations that pricing pressures will rise, Wirth said. "Looking forward, while management does not expect a meaningful number of 'elephant' contracts to come through in the next few quarters, it does expect to still win a meaningful number of mid-sized contracts and hold its backlog steady at roughly $30 billion throughout the remainder of the year," Wirth wrote.

A quick look at the business segments; in order of size - both Global Services and Power struggled year over year. Government of course grew like a banshee ... up 60%.
  1. Fluor’s Oil & Gas segment reported second quarter revenue of $3.0 billion, down 9 percent from the second quarter of 2008, while segment profit grew by 7 percent to $181 million. Results were driven by a reduced level of project execution activity, offset by an increase in segment margin in the quarter.
  2. Fluor’s Industrial & Infrastructure segment reported second quarter revenue of $998 million, up 9 percent over last year. Segment profit for the second quarter was $34 million, compared to $121 million a year ago. Results from last year included $79 million from the sale of Fluor’s joint venture interest in the Greater Gabbard Offshore Wind Farm project. Segment performance for the current quarter was impacted by lower margins on certain projects due to a higher content of construction activity.
  3. Revenue for the Government segment was $479 million for the second quarter of 2009, compared with $300 million a year ago. Segment profit was $34 million, up threefold from $11 million a year ago.
  4. The Global Services segment reported revenue of $452 million, down 35 percent from the second quarter of last year, and segment profit declined by 48 percent to $34 million. These declines were primarily due to sharply reduced levels of small capital projects and continued delay of refinery shutdown and turnaround work.
  5. Fluor’s Power segment reported revenue of $335 million, down 36 percent from $522 million last year. Segment profit increased to $27 million in the second quarter, compared with $25 million a year ago. Revenue declined as a large coal-fired project in Texas progressed closer to completion. Segment profit and margin improved due to favorable achievement of milestones on certain projects, and a greater mix of higher margin engineering and front-end projects
[Dec 3, 2008: Back of Envelope Look at Infrastructure Sector]
[Aug 12, 2008: Fluor to Hedge Fund Computers: The World Does not End at $110 Oil. Or $80. Or $50]
[Aug 11, 2008: Global Infrastructure Night in Earnings]
[May 16, 2008: Fluor as a Wind Play? $1.8 Billion Says Yes]
[Jul 9, 2008: Fluor vs Perini - a Rising Tide does not lift all Boats]
[Feb 28, 2008: Fluor with Great Report and Boosts Guidance]

No position

Perfect World (PWRD) Continues to Impress in Execution

For a stock that used to sit in complete ambivalence, Perfect World (PWRD) has blossomed into a star of late. There were times I held this stock for months and it did nothing, now it seems to only go up...

The company is out with another solid earnings report and more importantly in our world of analyst expectations being the only meaningful thing; those were also bested. I see nothing to change the story. It's not even very expensive relative to the companies being bid up on a daily basis who are shrinking instead of growing; PWRD should make $2.50 with their eyes closed so being conservative its a forward PE of 16... it would not be a surprise to see them closer to $2.65. Full report here.
  • Perfect World Co., a Chinese developer and operator of online games, said Monday its second-quarter profit jumped 60 percent, crediting a strong performance from its recently launched game "Battle of the Immortals."
  • The Beijing-based company behind games like "Perfect World" and "Ether Saga Online" said it earned 262.6 million yuan ($38.4 million), or $4.94 yuan (72 cents) per American Depository share.
  • Revenue increased 56 percent to 521.3 million yuan ($76.3 million) from 334.4 million yuan.
  • The results beat Wall Street predictions. Analysts polled by Thomson Reuters expected a profit of 64 cents per share on $73.2 million in revenue.
  • Perfect World said that on average, about 761,000 people in China were playing its games at any one time during the quarter, up from 619,000 in the same period last year.
  • The number of active paying customers in China rose to about 1.9 million from 1.5 million. The average revenue per active paying customer increased 26 percent.
  • The company credited the increases in active players and customers mainly to the strong performance of "Battle of the Immortals" and the continued popularity of several of its existing games.
  • Overseas licensing revenues totaled 46.2 million yuan ($6.8 million), up from 35 million yuan in the second quarter of last year.
  • Perfect World said it expects its third-quarter revenue to total between 547 million yuan ($80 million) and 563 million yuan, which would represent a 43 percent to 47 percent increase over the same period in 2008.
[Jun 19, 2009: Perfect World Raises Guidance]
[Nov 10, 2008: Earnings for Perfect World Solid]
[Oct 15, 2008: Perfect World Announces Share Buyback Program]
[Aug 18, 2008: Perfect World Earnings Mostly Inline]
[May 20, 2008: Motley Fool on Chinese Gaming]

Long Perfect World in fund; no personal position

BusinessWeek: Brazil's Coming Rebound

A quite comprehensive article from BusinessWeek on many of the things we've discussed on the blog over the past 2 years on what makes Brazil an enticing long term story. [May 16, 2008: Brazil is Sexy] Or perhaps we can put this story this under the category of countries who act fiscally conservative, expand their middle class, and will benefit in the long run. [May 29, 2009: US v Japan v South Korea]

Or [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn]
As it now seems abundantly clear in this country permanent short term gratification by utilizing "kick the can" policies will have us rolling from one emergency to another over the coming decades. I guess this continues until one day there is no blood left to squeeze but perhaps we can keep the gig going for another 10, 15, 20 years. So we'll continue looking for opportunities outside the borders in responsible '2nd' or '3rd world' countries - Chile appears to be one country with a leadership that actually thinks out past the next 180 days.

It might sound overdramatic and it will take many years to deconstruct a superpower but as the middle class slowly erodes year by year, you are seeing the foundation exposed for what it is. The peasants realize "something" is wrong the past decade but can't put their finger on it. It appears unlike the late 1920s when "the wrong" was righted by huge change, this time the path we were on... will just continue.

But enough about that - we're kicking the can again and doing the kicking motion of Alan Greenspan and our former political "leaders" proud! You'd think our leg would have fallen off by now with how much action it is getting. Prosperity (of the paper printing variety) is everywhere (see those cars flying off the lots!) Let's turn back to Brazil....

We mentioned a newer ETF which helps get exposure to Brazilian consumers back in early June - an enticing proposition as it is nearly impossible for US investors to easily get exposure to "middle class Brazil". [Jun 2, 2009: Market Vectors Brazil Small Cap (BRF) - a New ETF for Exposure to Brazil]. Unlike iShares Brazil (EWZ) which is nearly 50% allocated to two companies - Petrobras (PBR) and Vale (VALE) [hence I find flawed as a way to get exposure to a country] BRF is very broad. It has performed very well since my piece but again - how much of this is due to "great investment selection" and how much is due to the massively correlated "rising tide lifts all boats" (aka student body trading) that seems to dominate all markets nowadays, is an open question.

I was also curious if over time the two ETFs would separate or if they would just track 1:1 as "smaller cap consumer based" Brazil simply was hostage to "large cap commodity based" Brazil. My hope was the consumer based ETF would have some extra oomph but when we last looked it was too new to tell. Since June 2nd EWZ has rallied from $57.40 to $60.80 (+5.9%) while BRF has rallied from $28.75 to $36.00 (+25.2%)

So at least in the short run, my preference for something more broad based and facing the consumer was superior to buying an ETF that is predominantly 2 companies. This good performance has also created some more interest in the ETF as we are getting a lot of 200K and 300K share days, as opposed to 100K share days a few months ago; the more liquidity the better. Let's keep this one on our radar when the next major correction ensues.

On to the BusinessWeek article
  • Brazil will likely be one of the first countries to emerge from the slump: The economy may grow slightly this year and by as much as 4.5% in 2010, helping lift millions of Brazilians out of poverty.
  • (President) Lula has reason to be proud. The former union activist, who never finished elementary school, has been a surprisingly careful steward of Brazil's economy. In a country long plagued by hyperinflation, devaluations, and defaults, Lula last year won investment-grade status for Brazil's sovereign debt. And he did it while expanding social programs that have dramatically reduced poverty rates and spurred expansion of the middle class. (dogma alert: oooh noooo - programs to help the middle class!! socialists! even worse - they're "European like!"... the horror of it all)
  • Veteran Brazil watchers say the country's resilience is due to a combination of abundant natural resources, an embrace of globalization after decades of looking inward, and resilient businesspeople and policymakers who have learned to survive difficult times.
  • So as soon as the economy started to contract last year, Brasilia trimmed income taxes and cut levies on key consumer goods, helping manufacturers boost sales and avoid layoffs.
  • Although the economy fell into recession in the first quarter, consumer confidence and spending quickly rebounded owing to the stimulus and sound domestic finances. A comfortable $212 billion cushion of foreign reserves (a foreign concept in the US) and a decade of budget surpluses (an even more foreign concept in the US) have allowed the central bank to slash interest rates to a record low of 8.75% from 13.75% in seven months while pouring liquidity into the market to keep credit flowing.
Now the irony in the above bullet point is the US has done the exact same things - slashing interest rates and pouring liquidity into the market. And we didn't need no stinking foreign reserves or budget surpluses to do it! We have money trees. (ok ok, technically they are your grand children's future living standards)
  • "Brazil's fundamentals are very strong—we don't have any of the problems that created the bubble in the U.S.," says central bank President Henrique Meirelles.
Ooooh, 'dem are fighting words.

Some interesting statistics here - even as Brazil is viewed in the US as a "commodity" country that essentially is a servant to China and nothing else - it's more than that.
  • Just as important, though, is Brazil's huge domestic market. While outsiders focus on the country's shipments of iron ore, steel, and soy to China, exports are just 12% of Brazil's $1.5 trillion economy.
  • It's the 190 million people and the fast-growing middle class—now more than half the population—that drive growth.
  • In the past seven years a government program called Bolsa Família has helped nudge 24 million Brazilians above the poverty line. And 8 million jobs have been created since 2003, while the minimum wage has increased 45%.
Yikes, BusinessWeek might get banned at FOX News after that last bullet point. ;) Minimum wage increases coincident with job creation? Scientifically impossible; this has to be the 7th sign.

As always, let's not gloss over the issues - as with China and India, Brazil still has huge tranches of poverty. And similar to India, infrastructure is still a major issue. But when you actually have budget surpluses and positive reserves you can address these issues without stealing from future generations at an ungodly rate. As for corruption? Please, look around you - corruption thrives here just as anywhere else.
  • That's not to say Brazil isn't still a tough place to do business. Its highways, railroads, ports, and electric grid are outdated and congested.
  • The government collects 36% of gross domestic product in taxes, similar to Europe, but delivers Third World services.
  • Political corruption and a nightmarish bureaucracy can hobble growth. And government spending is starting to rise in the runup to next year's elections, which will mark the end of Lula's eight-year presidency.
So what of the future? Remember, after the oil shock of the 1970s what did Brazil do? Forget about energy investment within 5 years once oil prices dropped and continued down the path of not looking out more than 1 election cycle? Nope - they become effectively oil independent with (much more efficient) sugar ethanol production - which took decades to ramp. Which will allow them to sell oil to countries that never plan out more than 1 Congressional term. Which countries would those be... hmmmm
  • State oil company Petrobras is a case in point. Last year the company discovered vast deepwater reserves that it is developing with a five-year, $174 billion investment program. The goal is to double Brazil's production, to 3.5 million barrels a day, by 2012, making the country a top oil exporter. "Our deepwater discoveries didn't just fall from the sky. They're the product of a very long-term development program going back 30 years," says Petrobras CEO José Sergio Gabrielli de Azevedo. "It's the Brazilian equivalent of sending a man to the moon."
Now of course sitting on a huge reservoir of oil is luck of the draw but with or without .... they are not reliant on those potential reserves - or the kindness of others with oil reserves - to subsist.
  • Brazilians are also buying more food, clothing, and household goods. "Over the next five years, we'll see a doubling of sales of durable goods in Brazil," says José Roberto Tambasco, vice-president for operations at Pão de Açúcar.
  • Even hapless General Motors is enjoying fat times in Brazil, where it's investing $1 billion through 2012 to develop a new small car. Whirlpool (WHR), which has a 40% share of Brazil's appliance market, has benefited, too. Sales jumped 20% in May and June compared with a year earlier.
Similar to China and India you simply have "modernization" as a simple but powerful secular trend - think the US in the 1950s, 60s.
  • In wealthier cities, 55% of households have a washing machine, but in the poorer Northeast, less than a quarter do. "Think how many washers we can sell in this country," Drummond enthuses. "Washers and microwaves are the new necessities."
  • Many of those goods will be bought with credit cards. Purchases with plastic have been growing 22% a year during the past decade, and since fewer than half of Brazilians have cards, there's immense potential.
This speaks to the long term thesis in the duopoly that is Mastercard (MA) and Visa (V). While the US market is saturated - boy oh boy, is is saturated, much of the rest of the world is just being introduced to plastic.
  • Credit to the private sector is just 44% of GDP—up from 36% a year ago—but still well below the U.S. level.
As for housing? We own Gafisa (GFA) and have for much of the past 2 years... again, simple modernization and urbanization are going to be powerful drivers. Mortgages, like credit cards are just in their birthing stage the past few years - people in these countries actually have to SAVE to CONSUME. It's like the Dark Ages folks.
  • Brasilia aims to get at least 1 million homes built by 2011 due to initiatives such as My House, My Life, launched in April. That plan "is going to completely transform the housing construction industry in Brazil," says Leonardo Guimarães Corrêa, chief financial officer of MRV, Brazil's largest low-income homebuilder.
  • MRV saw $231 million in home sales in the first quarter and doubled that in the second quarter. It has 200 construction sites nationwide, and its stock price has quadrupled this year.
  • Does Brazil run the risk of a real estate bubble? During the long years of high inflation, mortgages were nonexistent, and today they represent just 2.5% of GDP, vs. 80% in the U.S. So few see much risk of the market overheating anytime soon. "
  • "There's so much pent-up demand," Corrêa says. "It's not like the U.S., where people got up to their ears in debt. We're talking about simple, affordable apartments."
And yes, eventually 1 day things will overreach - humans are the same everywhere and excess will pervade: Brazilians will be maxxed out on their credit cards, go to the malls weekly as a social ritual, outsource their production jobs to some "cheap locale" like Peru, and be flipping homes like daytraders. But for the foreseeable future they won't have most of our bad habits; we have a few decades before we have to worry about them behaving like modern Americans. Until then, it's still Ozzie and Harriet habits in much of the developing world - they have much to learn from us.

Long Gafisa in fund; no personal position

Monday, August 10, 2009

Bing Cashback Program: Microsoft (MSFT) Pays You to Use Their Search Engine

Microsoft is offering an interesting program of cashbacks for using their search engine Bing, and in fact it is being supersized during back to school shopping. Cash for Stuff is here in yet another form, although at least this time we are tapping Microsoft's massive cash hoard rather than your grandchildren's piggy bank. Effectively the "affiliate" fee that a vendor would pay Microsoft for the traffic is going directly to you instead - and now it is being doubled for 3 weeks.

Via Bing.com

What is Bing cashback?

Bing cashback is a great way for you to save money when you shop online. Find great deals on millions of products from hundreds of brand name stores that you know and trust. You'll earn a percentage of the product price as cashback. The search advertising fees from participating stores are passed on to you. After we wait for potential returns and exchanges, your savings will be rewarded to you by your choice of a deposit to your PayPal account, direct deposit to your bank account, or a check in the mail. It's that simple.


Even better from today (August 10th) to the end of the month, cashback is doubled

What are Double saving days?

Double saving days are a Bing cashback promotion where the amount of cashback offered by most stores will be doubled (up to a total cashback reward of 50%) for a limited time.


Here is a list of the multitude of retailers who are using it - effectively almost everyone. You can sort from highest discount to lowest. I think if you go directly from this launch page you don't really even need to use Bing search.


A complete FAQ can be accessed here.

Or in Cliff Notes version, Mashable tells us

To start shopping through Bing and collect your cashback, all you need to do is conduct your search as usual and you’ll notice a Bing cashback icon that you can click to expand to view all shopping results with listings that show item starting prices and the cashback percentage range. You can then click Bing Cashback on individual listings and you’ll either be directed to the site to make a purchase (and sign in with your account to earn rewards) or presented with a list of sellers, their price for each item, the cashback percentage, and shipping information.


Just doing my small part, as a patriot, to get the conspicuous consumption economy rolling again.

Hat tip to Boaz Berkowitz for bringing this to our attention.

GeoEye (GEOY) Beats Expectations on Bottom Line, Slight Miss on Top; No GeoEye-2 Until Government Steps Up

GeoEye (GEOY) is one of the few stocks I can find that is not overextended, yet still has a chart where prices are holding support. However, I did not want to expand the position ahead of earnings - today we have the results and all systems seem to be go after the scare about a technical malfunction has weighed on the shares.

Via Reuters
  • Satellite imagery company GeoEye Inc (GEOY) posted a better-than-expected quarterly profit, helped by full recognition of revenue from its newest satellite, GeoEye-1.
  • Second-quarter net income was $9.6 million, or 46 cents a share, the company said in a filing with the U.S. Securities and Exchange Commission. Revenue more than doubled to $72.7 million.
  • Analysts were expecting earnings of 39 cents a share, before items, on revenue of $73.9 million, according to Reuters Estimates.
  • Backlog was about $325.2 million at June 30, the company said.
  • Canaccord Adams analyst Jeff Rath said the incremental improvement from the previous quarter was almost all from GeoEye-1.
More details
  • The company also said it does not expect to build or commission an accelerated GeoEye-2 satellite without assurances of an expanded National Geospatial-Intelligence Agency (NGA) agreement.
  • The NGA, a U.S. Department of Defense agency, is GeoEye's largest customer accounting for about 65 percent of its revenue. GeoEye-1 was funded by a $500 million contract that the company won under NGA's NextView program. "Only when we have visibility on the expected contractual demand for a new satellite from the NGA do we expect to make a decision as to whether to invest the capital necessary to build and commission GeoEye-2 on an accelerated basis," the company said in a filing with the U.S. Securities and Exchange Commission.
  • Dougherty & Co analyst Jeff Evanson said the company will not seek a capital raise for GeoEye-2 that will be dilutive to shareholders. "If the government wants GeoEye-2 by 2013, they will have to make financial commitment to it. Otherwise, GeoEye is going to fund the next satellite with free cash flow," Evanson said in an e-mail.
  • The company said if it does not build GeoEye-2 on an accelerated basis, it would most likely proceed in such a way that it could be used as a replacement satellite for GeoEye-1 in the 2016 to 2017 timeframe.
I've been surprised (again) how little attention these niche growth companies are getting as people flood into speculative junk, losing money left and right or "shrinking" their way to prosperity via a bevy of cost cutting. Competitor DigitalGlobe (DGI) IPO'd in May and has been a complete snoozefest. [May 13, 2009: Starting GeoEye on; Should Benefit from DigitalGlobe IPO] And frankly so has GeoEye. DitigalGlobe actually has the better metrics of the two.

Just another example of things that really make little sense.

Long GeoEye in fund; no personal position

Bookkeeping: Short Quality Systems (QSII); Added a Touch More to ValueClick

I am taking a very low risk flier here with a 4% allocation, shorting Quality Systems (QSII). After breaking support last week, the stock is up on an analyst upgrade. Right to a former support, now turned resistance. I am shorting at $53.40 and will be out roughly 1.5% higher on a stop loss over $54.25. If the market begins to rally I expect to be out of this within hours.

I also added 25% to my short ValueClick (VCLK) position that we began Friday (around $11.07) as that one has also rallied exactly to a key trend line. This brough my cost basis up from $10.87 to $10.91. I am going to give this one a bit more room - up to $11.50 before stopping out. This is now a 4% exposure as well.

One thing I forgot to mention in the weekly roundup was that while the S&P 500 went to a new high Friday, NASDAQ did not. NASDAQ (and China) led the markets up - now we have slight divergences forming. Could be a head fake - or a precursor. Too soon to tell. But today we have some negative action in leaders such as Research in Motion (RIMM)... while being led up by stalwart welfare recepient Freddie Mac (FRE). The quality of this rally continues to deteriorate.

Short Quality Systems, ValueClick in fund; short both in personal account

Bookkeeping: Exiting Most Discover Financial Services (DFS)

These days almost all the rules you learned over the previous 5, 10+ years are thrown out the window. Discover Financial Services (DFS) placed a share offering [Jul 7, 2009: Discover Financial to Offer $500M in Stock] , the stock fell ... for a whole 2 days... and has since ramped in mighty fashion due to the fact its a financial, and financials are the new potash. Back when I had to place telephone orders in 1/8th increments (uphill, both ways, in the snow, barefoot) when a company diluted you, it hung over the stock for months if not longer. You cursed to yourself, dumped it, and didn't need to look at it again for half a year. Heck, that was even the case 2 years ago. But it's not your daddy's stock market anymore and bulls have incredible margin for error when all news is good news.

I am going to sell almost all of my position around $12.50 and get this back to a 0.1% stake. One day in a galaxy far, far away ... when the stock market falls, we'll try to get some exposure back. The stock is up 25%+ in a few weeks but compared to some other financials, early cycle machinery, REITs - this is nothing. Heck AIG (AIG) rises 25% a day now.

I won't bother you with a valuation discussion because all 3 major pure play credit card companies now trade at valuations that are from... well speaking of another galaxy. As if pets.com and all its peers has invaded our Earth again a decade later.

[Jul 2, 2009: Beginning Discover Financial Stake]

Long Discover Financial in fund; no personal position

Ocwen Financial (OCN) - When Stop Losses are Fruitless

Ignore most of this post - see the edit at 1 PM below

Let me reiterate I am thrilled we exited Ocwen Financial (OCN) at just under $14 immediately after they announced a secondary offering diluting shareholders by 25%. [Aug 14, 2009: Ocwen Financial Beats on Earnings, but Issues $250M of Shares - Exiting for Now] I am still amazed the stock did not react at first.

Today Ocwen Financial (OCN) beat the analyst estimates as I imagined but announced a massive offering relative to their size ($250M shares for a $1B company). When I saw that news this AM my heart jumped to my throat and I assumed the stock would be down 20%. Instead it's down less than 2% as I type this. I just throw up my hands right now - even when these things are working in our favor. Some things simply make little sense.

First rule of making money is ... don't lose money. While I tend to head for the exits prematurely from time to time, it also saves us from a situation like this. Where a stop loss would be completely useless. This was our largest position at times during the past 9-12 months, and one of our longest held stocks - but there is no room for feelings in the stock market. It was time for her to be shown the door.

That said, down here at these prices - especially at $9 I like the value as the dilution is now "in" the stock. At $9 the stock had a 35% discount to $14 - hence attractive. With the stock below the 200 day moving average we'll see if Ocwen can start the long slog back.

EDIT 1PM: "Smack forehead" Alert - thanks to reader Jason for reminding us that one of the reasons we exited was the spinoff of Altisource Portfolio Solution (ASPS) - which is what happened today and is causing the "drop". Sometimes I need to go and reread my own blog entries. The secondary appears to price later this week...

[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]

No position

Priceline.com (PCLN) - Recession Recsmession; Continued Impressive Results

Priceline.com (PCLN) has to be among the handful of stocks that has impressed me the most the past 18 months. It's relative (and absolute) performance during this downturn - for a company levered to the travel industry and consumer - has been ovation worthy. Many don't realize they have a large exposure to Europe so some of the weakness in the American consumer has been mitigated but even in the U.S. they have performed well. Today we have yet another "beat and raise"...

Unfortunately we were stopped out of this name in early July on a break of long term support, and with my attention elsewhere I never re-acquired a material position so we've been watching this move mostly from the sidelines in regards to PCLN. So while I am happy at the continued success in identifying companies who are going up WITH good fundamentals (not despite bad ones) we have not gained much in the pocket book with this one in the past 6 weeks.

The company beat expectations by 27 cents, and guided Q3 revenue and EPS above analysts consensus. They now see Q3 at $2.70 - $2.85 versus expectations of $2.52 with revenue growth of 19-23% year over year. It now seems feasible the company can put in a $7 EPS year and frankly in this market - where many stocks have no earnings to speak of, and others trade at 60, 70, 80x forward estimates on hopes that a V shaped recovery will make the price seem cheap in 12 months, this is STILL a bargain at 20ishx forward estimates. These guys are simply trouncing the Expedia's (EXPE) of the world.

Via AP
  • Online travel company Priceline.com Inc. said Monday its second-quarter profit and sales grew, boosted by stronger-than-expected leisure travel demand despite the bad economy.
  • Revenue rose 18 percent to $603.7 million from $514 million.
  • The company earned $67 million, or $1.38 per share, up 35 percent from $49.8 million, or $1 per share, in the same period a year earlier. Excluding items, the company earned $2.02 per share in the latest quarter. Analysts, on average, were expecting a profit of $1.75 per share, excluding items, on sales of $575.1 million, according to a poll by Thomson Reuters.
  • "Despite a difficult economic climate, leisure travel demand for the summer peak season has been stronger than expected, driven in part by the availability of compelling discounts," said President and CEO Jeffery H. Boyd in a statement. The quarter's results, he added, reflect improving demand but also show the effect of lower unit-prices when compared with a year earlier.
  • For the third quarter, the company expects a profit of $2.15 to $2.30 per share and adjusted earnings of $2.70 and $2.85 per share. It expects revenue to grow by about 19 percent to 23 percent.
  • Analysts, on average, are expecting a profit of $2.52 per share on sales of $613.5 million, up about 19 percent from year-ago sales of $514 million.
  • Priceline also expects gross travel bookings to increase by about 20 percent to 26 percent.
  • The Company noted that because of the uncertainty of consumer behavior as a result of the worldwide recession, its actual performance during the 3rd quarter 2009 against the guidance above continued to be subject to greater variability than it had been in the past.
Full report here.

[May 14, 2009: Priceline.com in Investors Business Daily]
[May 11, 2009: Priceline.com Continues to Execute Well]
[Feb 19, 2009: Priceline.com Impresses on Earnings]
[Aug 6, 2008: Priceline.com - Down 17% on Good Earnings?]
[May 8, 2008: 2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)]

Long Priceline.com in fund; no personal position

Indonesia Expands at Fastest Pace in Southeast Asia

Indonesia continues to be a compelling story ... since we highlighted the country in May, we've seen a further 30% rally. [May 22, 2009: Indonesia: A Must Own Emerging Market] [Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election] Now with correlations at extreme levels I am not sure how much of this is Indonesia specific and how much is "green shoots" (especially of the Asian variety), but the underlying story remains positive.

Via Bloomberg
  • Indonesia’s economy expanded 4 percent in the second quarter, the fastest pace in Southeast Asia, as low borrowing costs and the re-election of President Susilo Bambang Yudhoyono buoyed consumer spending.
  • Gains in services, construction and manufacturing helped Indonesia’s $513 billion economy resist the global recession and the threat of terrorist attacks such as those that killed nine people in Jakarta last month. Domestic demand and foreign investors drove the rupiah 12 percent higher this year, the most of any Asian currency, and the Jakarta Composite index is the region’s second-best performing.
  • Consumption grew 4.8 percent in the quarter, the statistics agency said. Government spending rose 17 percent, while the services sector growth accelerated 7.4 percent.
  • Lending by Indonesian commercial banks rose to 1,339 trillion rupiah ($135.25 billion) in May from 1,325 trillion rupiah in early January, according to the latest available data from the central bank.
So while as in China government spending has shot up, unlike China it's not a massive outbreak of bank loans driving growth. Indonesia is much more reliant on internal consumption growth and due to a relative lack of exports the country has been a relative island on its own... ironic considering the geographic landscape.
  • The government plans to unveil policy measures to spur investment and improve infrastructure within the first 100 days of the next administration taking office, he said. Yudhoyono’s second five-year term begins Oct. 20.
  • Income for Indonesian plantation farmers jumped 5.2 percent in the six months from December to June, according to an index compiled by the statistics bureau.
  • Car sales jumped 10 percent to 109,989 units in the three months to June 30 from 100,263 in the first quarter, according to the Indonesian Automotive Industries Association.
Peers in Southeast Asia...
  • Indonesia’s second-quarter growth is the fastest in the region followed by Vietnam, which expanded 3.9 percent in the same period. Singapore’s economy contracted 3.7 percent and Thailand’s central bank forecasts its GDP shrank 5.4 percent in the second quarter.
As always take the absolute number with grains of salt as they are government reports; but directionally it should make sense.

No positions

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 1

Year 3, Week 1 Major Position Changes

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

Cash: 67.2% (vs 60.9% last week)
22 long bias: 17.5% (vs 17.5% last week)
11 short bias: 21.6% (vs 21.6% last week)

33 positions (vs 38 last week)

Weekly thoughts
A fourth straight strong weekly showing put the major indexes up >2%... with a large part coming on the "better than expected" labor report Friday. If you are keeping track at home we're working on the 6th straight positive month (rare), a 50% move off the March 6th bottom with no retrace (7% drop in the 1 correction we had the past half year), and now 20 straight sessions that the S&P has not fallen over 0.5%. If memory serves only 3 of those sessions were greater than -0.2%. In those 4 weeks, we've moved up 15%. If you've forgotten what it is like when the market falls, I don't blame you - it's been a month worth of trading days for even 1 iota of trepidation to cross a bull's thought process.

Technically, there is nothing bad outside of an "extended" chart which doesn't mean a thing - the market can get even more extended. All the indexes are over all key moving averages and the S&P 500 is a mere days away from joining the NASDAQ in showing a "golden cross" - i.e. the 50 day moving average crossing (from below) over the 200 day.

We have 2 gaps growing ever distant by the day - NASDAQ 1800 and S&P 906. The market is a mass psychology experiment in the near term, bouncing between greed and fear. The only solace for bears appears to be that the market never goes down anymore, and everything is aligned for the bulls. Greed is everywhere; fear is nowhere. We're looking for 2 signs as we outlined (a) stocks stop reacting well to good news or news perceived as good and (b) parabolic euphoria in junk type stocks. We are now in full throttle on point b, but we're still acting decently to "good news"; in fact I am scratching my head that every piece of news that is almost identical to the last drives the market up. For example - there are 4 main housing reports (1) existing (2) new (3) pending (4) Case Shiller. Each of them are reporting identical data - but each time they come out, even if within days of each other - we act surprised and the market gaps up or shoots up (usually around 10 AM). When will the same news not be a surprise?

Things are not quite so beautiful once you look under the hood but really who has time for that? We have stocks to buy; digging into data only slows down that pursuit. The unemployment rate "fell" for reasons we outlined in the previous post. ISM Services which is close to 90% of our economy was not so wonderful last week, unlike ISM Manufacturing which as we see now can be "assisted" via government intervention a lot easier than services. To that point a New York Times article here disputing the cash for clunkers thesis that "hey it might be stealing from our grandkids but it saves the environment!" And Friday afternoon - lost in the green shoots of euphoria - came the Fed report showing US consumer debt fell by an annualized 4.9%; and the 5th straight down month. Depending on your time horizon this could be construed as good or bad. If you believe in the long run Americans should spend within their means and pay down debt, this news is great. If however, you are running a consumption led economy that relies on Americans to take money they don't have (either via their house or nowadays via the government) to add more debt to their P&L, then it's not so good. Both revolving and non revolving debt dropped by $5 Billion.
  • Outstanding U.S. consumer debt fell by $10.3 billion, or 4.9 percent at an annual rate, to $2.5 trillion, the Federal Reserve said. That's a much steeper cut than the $4.7 billion analysts expected, according to Thomson Reuters.
  • Revolving debt, such as credit cards, fell by $5.25 billion in June, a record 10th straight drop, according to the Fed’s statistics. Non-revolving debt, including auto loans and mobile- home loans, declined by $5.04 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
  • The five straight monthly declines in consumer credit mark the longest stretch of pullbacks since consumer borrowing fell for seven consecutive months from June through December 1991.
This touched on the paradox of thrift (savings) we've discussed a few times - what is good for an individual is not necessarily good for the country as a whole. Especially when that country relies on "shopping" as its primary driver. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] [Jan 11, 2009: WSJ - Hard Hit Families Finally Start Saving, Aggravating Nation's Economic Woes]

The paradox of thrift (or Paradox of Saving) is a paradox of economics propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth.

Now the truly sick thing is now that Americans are action rationale in comes the government repeating ALL the SAME things that got us here in the first place - with perverse incentive plans for us to get back in even more debt. Honestly I just sit here in awe that we are repeating the same steps Greenspan did but many times bigger and the exact same worship we gave to Greenspan (until the emperor was shown to have no clothes) is now bestowed on Bernanke. For the exact same policies. So we deserve what is to come of us in the future - we do not learn. Mark my words - sometime in the middle of this next decade, Bernanke will be looked upon just as Greenspan is now... soiled. Especially when he bows to political pressure and keeps rates too low for too long (election year 2010 folks!) stoking many bad things that will crumble in 4-6 years. And we'll ask again - how we got here? When the answer is obvious...

As to the market, anything that makes things happier in the short run is a good thing. Pull in October 2009-January 2010 car sales into July-August 2009? Green shoots. We'll worry about the implications of what we wrought another day... or just keep doing spending incentive plans until Americans are devoid of every last penny of savings. Anecdotally, in the auto industry people are being put back to work temporarily as inventories were cut very lean and ironically some car dealerships are devoid of inventory in hot selling models. But judging from the consumer credit and employment numbers what we face after the sugar high of the next 6-8 weeks is going to be not only the "new normal" but the new normal ex-a lot of consumers who would of bought cars in the following 6 months. Oh well, we live for today and tomorrow is for another guy to worry about.

(p.s. you might not know this but Chrylser is running $3500-$4500 rebates that have nothing to do with Cash for Clunkers. i.e. if you combine C.F.C. with the Chysler rebates you could be handed $7000-$9000. How you ask? With the magical pot of money called your tax dollars - Chrysler exists at your whim - as does the financing arm doing much of its deals [GMAC], and somehow a bankrupt company has money trees growing inside their mfg plants to offer such fantastic terms. Thankfully these companies don't actually have to be run for profit but simply as a subsidization scheme to give Americans new cars that they deserve on 36 month cycles)


Anyhow a quick look ahead to the week; we are essentially done with the big name S&P 500 type companies in earnings season - some smaller names report along with more foreign companies and domestic based. Speaking of the Fed, we have meetings Tuesday and Wednesday which means Wed at 2:15 PM we all have to act like lemmings as the stock market jerks one way or the other based on words in a statement. On the economic front are some secondary reports like the trade report (remember when imports implode its good for GDP, I am not kidding), retail sales (please exclude gasoline prices before you shout green shoots), and the woefully measured CPI (consumer inflation).

In the last week, we basically went nowhere with our hedged exposure - our shorts essentially offset our longs. My plan continues to play for the intermediate term and get net short going into S&P 1050 (if and when) and/or into football season. While we have liquidated a monster amount of long exposure the past 3 weeks, we have tried to get some back but seem to be getting stopped out of "quality names" near moving averages - almost at a 80% clip. I am not sure what that says. In the meantime we've locked in some intraday trading gains on indexes while biding our time and helping to offset some losses on the short side.

The more I think things through 2010, the more pensive I become. China's first half 2009 loan growth made their entire 2008 figure look like child's play. That won't continue in 2010 - in fact I am worried about the damage these loans in this 6 month period will do to the banking system in 2011-2012; it's that egregious. If you are a regular reader of Fund My Mutual Fund, we've been warning of the potential for this blowing up since February. I saw a story in the New York Times this weekend that literally could of been ripped off the pages of the blog, verbatim: China Faces Delicate Task of Reining in Bank Lending. We're usually early around these parts....

Aside from China, US housing loses its seasonality benefits within a month and such easy month over month comparisons will face headwinds rather than tailwinds. I believe back to school and Christmas spending will again be poor - keep watching Target's (TGT) data each month as the "mainstream America" spending proxy; despite very easy year over year comparisons they reported sales down 6.5% last month. Unemployment in the private economy (ex government and healthcare) will continue to suffer. While consumers will gladly take government handouts, excluding that ...I believe they will continue to retrench and rebuild. And right now those 2 axis (a) US consumer and (b) China - are what drives a great portion of the world economy. And let us not forget the state budget issues that have been tossed to the side, that will arise - even larger - next fiscal year. So if I am correct, and the stock market is the great Oracle like entity, so prescient in looking out 6 months (which I don't believe it is for 1 moment) we should start discounting these headwinds in 1st half 2010 sometime this fall.

Whatever the case - just know Goldman Sachs will make money 97% of the days, and please don't question why Hank Paulson (ex CEO of Goldman and former Treasury Secretary) was on the phone with the current Goldman's CEO 24 times in the week of the AIG Bailout - where Goldman received $13 billion of your money. That's for Hank to know, and for you to never find out. But please buy his book that will be coming out next year.

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