Tuesday, August 25, 2009

Bookkeeping: Closing Allegiant Travel (ALGT) - Swine Flu Not a Threat?

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As I scroll through the charts of positions on the long side, Allegiant Travel (ALGT) has one of the most challenged. It tried to rally through a key resistance the past 3 days and has been rejected - setting this up to be more of a short term technical short, rather than long. But truth be told, this one has a mind of its own and hasn't really traded in tune with charts since I've first started watching it.

We just had a placeholder type of stake so it stays on my first line of radar, but it's just been sitting there in purgatory for a while. So I am going to boot this for now and we'll reassess later.

Perhaps I am overreacting to the Swine Flu threat, but this really could be a big story if even half of what I'm reading comes to fruition.
  • Swine flu may hospitalize 1.8 million patients in the U.S. this year, filling intensive care units to capacity and causing “severe disruptions” during a fall resurgence, scientific advisers to the White House warned.
  • Swine flu, also known as H1N1, may infect as much as half of the population and kill 30,000 to 90,000 people, double the deaths caused by the typical seasonal flu.
  • The president’s advisory council describes as a “plausible scenario,” that 30 percent to 50 percent of the U.S. population will be infected in the fall and winter. “This is a planning scenario, not a prediction,” according to the report. “But the scenario illustrates that an H1N1 resurgence could cause serious disruption of social and medical capacities in our country in the coming months.”
  • The scenario projections were “developed from models put together for planning purposes only,” said Tom Skinner, a spokesman for the CDC, at a briefing in Atlanta today. “At the end of the day, we simply don’t know what this upcoming flu season is going to look like. It could be severe, it could be mild, we just don’t know.”
  • “This isn’t the flu that we’re used to,” said Kathleen Sebelius, U.S. health and human services secretary. “The 2009 H1N1 virus will cause a more serious threat this fall."
  • New Zealand and Australia, in the midst of their normal flu seasons, have reported intensive care units taxed to capacity by swine flu patients. The experience provides clues to what the U.S., Europe and Japan may see when the H1N1 virus returns.
While normal flu kills 36,000 a year - it's usually those high at risk in the senior community. H1N1 is a different animal and hence why if there is an outbreak, and scores of middle and high school kids take a hit; it's going to cause much more of a mania... if it was serious.
  • The median age of those with the pandemic virus has been 12 to 17 years, the WHO said on July 24, citing data from Canada, Chile, Japan, U.K. and the U.S.
Another highly susceptible group?
  • Pregnant women, who have “a disturbingly high burden of disease” from swine flu, only get vaccinated for seasonal flu about 15 percent of the time. Pregnant women are a top priority for vaccinations, she said.
Good news AARP age readers, you appear safe!
  • Seasonal flu usually kills about 36,000 Americans. Swine flu causes more severe illness needing hospitalization among younger people than seasonal flu, while leaving people 65 and older relatively unscathed, said Mike Shaw, associate director of laboratory science at the CDC’s flu division.
Yesterday the 'go to' momentum stocks in the "flu" area exploded higher, and I might potentially add one of them down the road if for nothing more than knowing if Swine Flu does come to America in a big way some of these could jump 100%+. Some of these stocks can pop 30% in 5 minutes if daytrader see a breaking news alert, so if we start hearing of mass outbreaks at schools or the like, it could lead to a large speculative move, even for the names that have zero to do with a vaccine. HAL9000 would help out with enormous buy programs as well, I am sure.

On the other hand, airlines wouldn't do quite so well in such a situation. Nor do I believe the "efficient" market is discounting any probability of something of this sort happening. We shall see - it's a big unknown.

No position

Bookkeeping: Short Shanda Interactive (SNDA)

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With Quality Systems (QSII) taking me out of my short position, I am going to replace that 4% short exposure with a stock I've been stalking for the entire month of August; which despite the euphoria on green shootery refuses to spike to my countless limit order locations; Shanda Interactive (SNDA). [Aug 7, 2009: Shanda Interactive - Weak] So I am just going to do a market order here in the $48.20s now that I have a "slot" open on the dark side of the portfolio.

This is just a technical scalp type of trade with hopes for a cover in the $44s, and a stop out above the 50 day moving average (i.e. $51ish)

Short Shanda Interactive in fund and personal account

Blue Coat Systems (BCSI) Falling Off a Cliff Ahead of Earnings

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Blue Coat Systems (BCSI) is falling off a cliff going into earnings post 4 PM... down nearly 5% in a series of selloffs throughout the day. So if the company reports bad earnings will the attorneys at the SEC care to look at "whom was doing the selling" ahead of the news? Nah... too difficult to spot such anomalies such as this (cough)

Only reason I care other than morbid curiosity is we were stopped out of a long position last Thursday:
Not very heartening action in Blue Coat Systems (BCSI) this morning - the infamous drop 6% on no news on a positive day for the market. A week before earnings.... I've seen this story far too many times. Unfortunately the SEC almost never sees it. Let's keep today in mind if "a disappointment" happens on the 25th.

Always makes me think "someone in the know" is heading for the exits - volume is already 400K [before 11 AM] and this puppy does under 800K a day.


Plus we are short one of BCSI's main competitor's Riverbed Technology (RVBD) which is one of those stocks which has shown ZERO signs of life as the market rallies day after day the past week. (Always a good sign it will demon drop the next time the market corrects circa 2014)

My popcorn is out - I will love to be proven wrong and Blue Coat reports resoundingly good numbers but to all (except the SEC) if you play the "probability" game - this is starting to look very shady. A selloff on a huge volume spike a week ahead of earnings, and then a material drop the day of? Even if the grassy knoll theory is incorrect, I would not touch this with my investors 10 foot pole!

Short Riverbed Technology in fund and personal account


Court Orders Federal Reserve to Disclose Emergency Loan Details

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Thank the founding fathers for the judicial branch - the only one of the three which still seems to work as originally planned. Also the only one not subject to lobbyists influence - surely, there is no connection.

I continue to marvel at the black box the Federal Reserve wants to be - it shall be the "decider" of things, while acting as a psuedo hedge fund, while not having to reveal what it is doing with the banks in the background because doing so will 'upset the markets'.

My question - if what the Fed is doing with the banks in dark alleys would upset the markets, maybe the Fed shouldn't be doing it. The excuse 6 months ago was pure panic and fear on what was being done would just pile emotions onto a crash state of both the economy and market. Well that's no longer a good excuse, the market has rallied 50%+ so even if what the Fed reveals causes "panic" we could use a 20% drop and still be up smartly from the lows. I know exposing the cockroaches to the light might upset some people but see sentence 1 of this paragraph.

Thank you Bloomberg (and Fox News which also put in a similar suit) - I just hope there is not some sort of appeal that keeps this secret brotherhood society going for another few quarters.
  • The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit. Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.
  • Bloomberg said in the suit that U.S. taxpayers need to know the terms of Fed lending because the public became an “involuntary investor” in the nation’s banks as the financial crisis deepened and the government began shoring up companies with capital injections and loans.
  • “When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know,” said Matthew Winkler, the editor-in-chief of Bloomberg News.
  • The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders.
I hate this argument. Since the US now backstops anything that moves or has carbon based DNA just backstop every dollar of depositors money... the shells that house said money are completely irrelevant for "prosperity" - the business model is not evolutionary or impossible to replicate. If they die due to their bad decisions (which in theory is how the US used to work), others will take their place. Creative destruction... or something like that.
  • The judge said the central bank “improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act. She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports, and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs.
  • The central bank “essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed,” Preska wrote. “Conjecture, without evidence of imminent harm, simply fails to meet the Board’s burden” of proof.
  • The Fed’s balance sheet about doubled after lending standards were relaxed in the wake of the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008. For the week ended Aug. 19, Fed assets rose 2.3 percent to $2.06 trillion as it continued to buy mortgage-backed securities under a program allowing the central bank to purchase non-government securities for the first time.
  • The public deserves to know what’s being done with the money,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press. “This ought to be a wake-up call for the public that they need to be far more educated about this.”
I wish they cared Lucy, I truly do. But NFL Season starts in 2 weeks, and then American Idol in January 10, then there are the new apps to download on the iPhone - have to spend time on that, and then... well it's just hard to care about these things. They involve numbers and such... we don't do numbers in America Lucy. Unless those numbers include how much money my government will give me to shop! Make them smile with free handouts Lucy; and the pitchforks never come out. ;)

Ah yes...
  • David Skidmore, a Fed spokesman who said the board’s staff was reviewing the 47-page ruling, declined to comment on whether the central bank would appeal.




Basically the Fed is warehousing the toxic assets so the banks don't have to suffer from the consequences they birthed. We said long ago this would be the end game and the Fed would quietly suffer losses in the out year on these "AAA" securities. They are also of course buying mortgage bonds left and right so that the correct rate to balance risk in America is not reached - because that would not allow enough people to buy homes at 5.1% mortgage rates. In a related note - Goldman Sachs strategist Jan Hatzius says there are so many green shoots forming that the subsidization of America's economy by the Fed might in fact double yet again from here - pushing the Fed balance sheet from the current $2T to $4T. Which clearly makes sense with so much "improvement" in the economy.
  • Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., said the Federal Reserve could double the size of the central bank’s balance sheet again if needed to support economic growth. A rise in the balance sheet to $4 trillion is a “possibility,Hatzius said in an interview on Bloomberg Radio in New York. “It is going to depend on not just what inflation does, but also on whether the economy does move back to a slower growth pace.”
  • The size of the Federal Reserve’s balance sheet has increased to $2.02 trillion as the central bank purchased assets aimed at lowering interest rates.
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York

Bookkeeping: Stopped Out of Quality Systems (QSII)

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Considering this market is up 6% straight, and on it's sixth straight positive day we are not taking a huge amount of damage on the short side. A few names have been completely flaccid during this entire rally, and a few others while rallying have stopped doing the "+5% a day gain" dance.

Quality Systems (QSII) had been ok up til today; we shorted August 10th in the mid $53s; I had originally placed my stop order at $54.25 but moved it up 20 cents yesterday to give it more leeway, but that level was just breached and we'll be out of the position for a 1.7% loss. (current price $54.54) No harm no foul on this one - the main thing we lost was a realized gain. We had about a 4% stake.

I like the stock fundamentally and it was a long position of ours for a long time; it is quite rich now but with the US stock market now at valuations not seen since 2004, I guess valuation is a moot point.

No position


Observations on the Groundhog Day Market

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Let's go over some observations on what has now become a fully subsidized economy and stock market - taking from the future to push up economic activity and stock market values today.

(1) First, a housing report came out today ... let us say we were shocked. Just shocked I tell you about the results. I mean when the same exact data point happens 32 times in a row, it is right to be shocked and drive the stock market up on the "incremental new data point". Because as we know the stock market is efficient ... so efficient that random bloggers can predict what is going to happen days in advance... as we wrote in our weekly summary.

Looking at the economic calendar for the week; even MORE housing data that we can be "surprised" by - I use the exact same quotes each of the past few weeks around the word surprise because I continue to be amazed we can be surprised by the same news each and every week. Tuesday we can be suprised by Case Shiller index & Wednesday we can be surprised by new home sales. Just remember, whatever the news - be surprised and buy stocks in joyous rapture.


(2) There was another consumer confidence survey today - unlike the one a week and a half ago, this one surprised to the upside. As we wrote Sunday, please act shocked ... and buy stocks.

Tuesday brings us another consumer confidence survey - however if its bad we WON'T be surprised since we just saw one a week ago Friday, hence you can buy stocks on that too - even if it's bad.


Boo yah - 2 for 2.

(3) Back in March and April I was noting how much of the moves in the market were overnight. Day after day we'd see S&P futures negative at midnight but between 7 AM and 9 AM they'd almost always furiously rally as "someone" wanted to buy the market to such a degree that they did not care about what price they would pay. Many days it was in excess of 1%. You see dear reader, if an institutional money manager wants to buy something he doesn't want to actually move the price... that only hurts his profits. Only one institution in the world really would want to buy in such a manner day after day after day, in a way that would drive up the price. An institution that is not viewing it as an investment but simply a way to inspire confidence. You can figure it out. Whatever the source of said buying - we are now seeing that same pattern but instead of overnight it's happening every day now in the first 30-90 minutes; almost at a 80%+ clip the past month.

In fact as I watch the market the past 3-4 weeks intraday it feels like an airline flight. We ascend up at the open (who is so eager to buy this market day after day in that hour and a half?), reach altitude by 11 AMish... then do nothing almost every day between 11 AM and 3:30 PM [The Dead in the Middle of the Day Market] as the high frequency traders milk this system. Then the free for all happens post 3:30 PM where your heart starts to race as you see the runway approaching and you always think of the worst (aka "my gosh the stock market might actually fall today!") ... but it almost always works out "correctly" and you land safely ("ahhh, another day in the green").

I .. and apparently everyone has.. has complete apathy between 11 AM and 3:30 PM. All the market does the past month, almost every day, is ping pong back and forth in a tight range after the "morning push". The "trend days" from 6-8 weeks ago have been replaced by snooze fests. Until the landing strip is in sight of course at 3:30 PM. Speaking of which.... its noon ... zzzz...

(4) What a market... what a market. I look at the market in 4 week increments - and the first 7 days of this "period" is already approaching 60% of the gains of the previous 4 week increment. Which in and of itself was the 2nd best period of the year - only trailing the "reverse off the March 6th low" period. It might feel like a helium balloon at this point as we're up nearly 20% in 6.5 weeks, with nary a pullback of >2.5%. But as always, if you look under the hood it is not quite so pretty. Speaking of those high frequency traders - volume is pathetic nowadays; it is like X amount of computers are trading with another Y amount and that's "the market". Even worse - look where the volume IS. Yesterday I read 20% of ALL volume was in FANNIE MAE and FREDDIE MAC. 2 stocks... making up 20% of all volume? That's a stock market? And THOSE are the 2 stocks? Last Friday 40% of ALL volume was in 4 stocks: AIG, FANNIE MAE, FREDDIE MAC, and CITIGROUP. My gosh - look at those names. What sort of developed 1st world country has 40% of its volume in those stocks? I know what type - the type where computers are just running the same stocks up and down, in a tight range (see previous post) all day. This is what we've developed in the US of A.

(5) You think I am being facetious when I say this is a subsidized economy and stock market. A cogent case can be made that of those 4 stocks that dominated volume last Friday than ZERO of them should even have common stock trading. In the old US of A, when a company defaulted, the company would go bankrupt. And the stock would stop trading. But we have a new paradigm; the government supported system - throw $200B at AIG, throw $100B at Fannie, Freddie, throw $300B at Citigroup - make sure NONE of the bondholders take a hit, and let the stock speculation continue on. So for the low cost of $600 Billion we now enjoy the "payoff" - thank gosh for that because if not for that $600B, 40% of last Friday's volume would not of existed.

(6) I spent some time scanning the financial blogosphere last night, specifically stock oriented websites - and I could find almost no bloggers short. Granted, almost everyone now employs a momentum oriented strategy (buy high, sell higher) but the complete lack of bearish bent is interesting. Some are bearish in concept but have given up trying. That used to be mean something (in a contrarian way) before the US markets were subsidized...

(7) Turning back to the economy and it's subsidization I have no idea what is going on anymore since every economic report has been bastardized by massive waterfalls of money. Industrial production up? Really? Is that what happens when I stoke auto production via handouts? Yes. But what now America? We wake to a new dawn on car dealerships this morning... my expectation is the next 8 to 12 weeks car dealerships will not only be back to pre cash for clunkers level but worse. Since we brought in many months of demand into a 4 week orgy. I can almost hear the drumbeats (circa Thanksgiving) demanding a new cash for clunkers program because dealers are suffering. Extrapolate that example to our entire economy - where the government is doing handouts - we see "green shoots galore". Where they are not - we see the truth. It's the subsidized economy and let me tell you Wall Street loves it... Wall Street could care less about long term costs; it just wants the "awesome" gains today from layering on more debt onto the future generations. They lauded Alan Greenspan for all the steps he took to try to erase the business cycle - and give them nearly free money in the process to speculate. He was the Maestro... for the NYC crowd. Unfortunately for Main Street there was a price to pay for the emporor having no clothes

(8) Speaking of which, the announcement came down from Mount Olympus that Sir Bernanke will be reappointed. I am flabbergasted the stock market did not gap up 5% on this news. Bernanke is Greenspan 2.0. When Wall Street barks, he jumps. Because the last thing you want to do is "upset the markets"... that would "wreck confidence". I am not picking on Bernanke specifically - it is the whole institution and concept. The brainwashing we've undergone - where we think a "group of wise (wo)men" sitting in a room together once every 6 weeks, pulling levers and pushing buttons to direct an economy, is correct? Didn't we call that communism / socialism in the day? Central command directives? But in the Fed's case we applaud it, and worship the players in fact. They are so wise! Even though they completely missed this downturn and even when faced with it said it was "contained" in 2007. They said unemployment would "jump" to 6% in 2008... they said... ah nevermind. All I know is when a regulator completely messes up - the sensible solution is to expand their powers. Which we are doing. If it's Ben or Larry or Tom the plumber... it is irrelevent. The Fed is the bank to the banks, and it is acting that role. Everything it has done has been a godsend to the banks - so on that charge they have fulfilled their mission. Wall Street should be thrilled it has a bigger, badder version of Greenspan now - a person who promised 2 years ago almost to the day he would not bail out institutions from bad decisions. Then spent the next 2 years furiously doing the opposite. Reward that man.

If indeed you live on Main Street you should not be so joyous. Well I should couch that - if you enjoy spending over your head and borrowing you should be thrilled. Especially if your vision for the future lasts out no longer than 18 months. You can borrow money at very low rates - our "lever of prosperity" (leverage) remains intact. If instead you either (a) care about the future out past 18 months or (b) are a saver - you should be crest fallen. Point (a) speaks for itself in the myriad of posts we've put up over 2 years. Much like Greenspan was once lauded, in fact worshiped at the time - because he made Wall Street hum and Main Street spend... without any fallout.... so is Bernanke today. But mark my words, when we look back in retrospect and the current bubbles forming burst in the future - the same opinion of Greenspan will be handed to Bernanke. For point (b) I am just sorry to say - the days your parents or grandparents enjoyed where savers were rewarded in this country is over. And has been for a decade+. Putting money in a CD and getting (gasp) 5-6%.... we cannot do that anymore. Because your fellow citizen is NOT a saver - he is a borrower. And the majority rules.

And let me put out a special note of condolence to the last group - he in the bottom 30-40% of America. I realize you don't read this blog, because it would be fanciful for you to actually have money saved over to invest with your jobs being shipped away, and inflation eating away at your buying power year after year. But I'm sorry to say that the man reappointed today first and foremost wants to make sure your cost of living increases even further. Sure, if one makes $60-$80K its not really much skin off their nose to pay 8% more for healthcare, 9% more for university, 4% more for food, 7% more for energy. But since the median wage in America is $36K and you Mr. 30-40% of America are obviously below that - Ben Bernanke and his institution ... so lauded by Wall Street for the speculative fervor they constantly fund, is quite possibly your worst enemy. Unfortunately you will never see this but I will be thinking about you in the years to come as Wall Street roars with glee over the success of the new bubbles the Fed is creating. There is a cost to said glee, and you in the bottom third will feel it most directly as the powers that be are hell bent are maximizing the most regressive tax on the consumer there is.

Until then - hey the stock market is up, and as you know Mr/Mrs Bottom 30-40% "Wall Street = Main Street" - a market rallying means good times are here again. Surely you know this even as you don't have time to read the blog as you try to survive the day to day. See you at the used car lot - what's that? Used car prices have gone up due to taking 750,000 of the cars you used to buy off the market? Oh well, the economy is not run for you. Sorry.

(9) Swine flu. I was shocked to read yesterday that half of America might be hit with Swine Flu in the coming season. Black Swan? Who knows - depends on how prevalent and what version we get. Another story I read said some universities are segregating entire dorms just for future swine flu victims. Knowing how the US media works, this could set up for quite a mania... if indeed anything serious happens on this end, I can only imagine the hysteria. Won't be quite so bullish for consumer discretionary - retail, travel, and the like. Might even hit GDP although "Cash for Swine Flu Victims" would surely follow.

(10) China down 5% overnight before rebounding to only fall 2%. Not a problem. Baltic Dry Index all the way back down to early May levels despite a few trillion dollars spent by worldwide governments to create prosperity. Not a problem. (Insert any issue here) Not a problem. The Fed has it covered... see point 8.

Guest Post: The Fallacy of Cash on the Sidelines

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Below is a guest post from a money manager from the Great White North, who maintains the blog: Gestalt. No, I had never heard of that word either. In conversations with him he tends to use 3 and 4 syllable words found mostly on the SAT test (if at all), but thankfully as he is an avid contributor to our comments section he uses more simple 1 and 2 syllable wording that us Americans can handle. Please note, Canadians also misspell "center", as do the British. They also like curling - please don't let those shortcomings bias you as an American reader.

In this piece "Gestalt" argues that the commonly tossed around "massive amounts of money on the sidelines" just waiting to come into the market is a fallacy. At least if you include the money from traditional places that used to support the stock market. But it's a new day and age in our subsidized economy / stock market. If instead you include the massive influx of money our Federal Reserve is pruning from it's money trees and pumping into the banks (up from $90B to $900B in 18 months) - than we are talking about a whole 'nother animal. Per some Bloomberg readings much of the money the Fed is handing to the banks (at 0 to 0.25% rates) is being turned around by the banks to buy US Treasuries. Do you see the shell game going on? Aside from the shell game portion this is basically a handout to the oligarchs - take from the people at 0 to 0.25% and invest at any Treasury over a 1 year note and make money. Magic. Another portion of this money is most certainly being used to speculate in the stock markets - many of our largest banks are now seeing a surge in "trading gains" the past 2 quarters, and I am not just talking about Goldman Sachs (GS) - check out Bank of America (BAC) or JPMorgan (JPM). It is good to be a financial oligarch - our feudal system is working like a charm.

Using that money the Fed is handing out to actually create loans? (chuckle) That is so old school... forget it. Why bother lending to high risk Americans when you can (a) buy "no risk" US Treasuries that certainly yield far more than 0 to 0.25% and get money for free and (b) speculate in the stock market with essentially free money.

Below are Gestalt's views....

Merrill Lynch posted the results of its most recent Survey of Fund Managers for August this morning. The survey covered 204 fund managers in 80 countries who control $554 billion in assets, and the data dispels the myth of excess cash on the sidelines.

Barry Ritholtz at ritholtz.com summarized the findings. Note that U.S. markets peaked in September 2007:

Cash balances plunge to 3.5%, lowest since July'07;

Highest equity allocation (34% from 7%) since Oct'07;

Bond allocation (-28% from -12%) lowest since April'07;

• Tech (28%) is the most favored sector everywhere.

Barry concluded, 'While I keep hearing about cash on the sidelines, the professionals seem to be "All In."'

As an addendum to the Merrill Lynch survey (full release linked below), please see the attached chart of US commercial paper and Money Market assets. The chart was originally posted by WallStreetExaminer.com using US Federal Reserve data. Annotations in red are my own.



Click image for larger version


Conclusion: Investable Money Market fund assets are no higher than at the peak of markets in September 2007. Retail holdings of MM funds have now retraced to the levels of Sept 2007. The spike in Institutional MM assets from Sept 2007 is exactly equivalent to the drop in CP assets over the same time period, offering compelling evidence that companies have simply moved treasury working capital out of CP and into IMM funds. This is NOT parked investment capital, and is unlikely to find its way into stocks.

Investors appear to be exactly as fully invested as they were in September 2007, at the peak of the bull market. This dovetails nicely with the Merrill survey.

That said, the Primary Dealers are swimming in reserves. Liquidity parked in Securities Open Market Accounts at Primary Dealers is also back at September 2007 levels (See PD Liquidity Chart). If the money-centre banks decided to leverage these reserves into the system, they could single-handedly push stocks, commodities and corporate bonds higher. It remains to be seen whether banks will hold these as reserves against 'Level III' assets on their balance sheets or put it to work speculating.

Click image for larger version

Original Press Release
----------------------------------------------------
http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/08-19-2009/0005079889&EDATE=






UK Telegraph: China Powers Ahead as it Seizes the Green Energy Crown from Europe

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This story is exactly why I say if we're going to (ahem) bring a new generation of jobs to America via the green energy revolution we better get going. We can only employ so many former construction workers installing solar panels...

We're a decade behind Germany in "green" and just about the same behind Japan. Our only hope was to jump in line ahead of China.
  1. [Aug 28, 2008: China to Subsidize Wind Turbines]
  2. [Jun 19, 2009: Reuters - Incentives Add Shine to China's Solar Drive]
Not so much... oh well, our destiny with more healthcare and government jobs it will be - until we can reinflate housing. Then I suppose keep rotating about these 3 sectors. In the meantime, go East young man!

One of my favorite newspaper writers is Ambrose Evans-Pritchard who writes for the UK Telegraph
  • China is running away with the green technology prize. It has conquered a third of world market for solar cells and is on a breakneck course to build 100 gigawatts of wind turbines by 2020, doubling again the global capacity for wind power across vast stretches of Inner Mongolia and Xinjiang.
  • The credit crunch has been brutal for solar start-ups in the West, but not for Chinese firms with access to almost free finance from the state banking system. They have taken advantage of the moment to flood the world with solar panels, driving down the retail price from $4.20 per watt last year to nearer $2 in what some say is a cut-throat drive for market share.
  • German pioneers Solarworld and Conergy allege foul play and have called for EU sanctions, accusing Chinese rivals of practices that "border on dumping". China's finance ministry says it intends to cover half the investment cost of solar projects.
  • It is a life-and-death moment for the German solar industry, pioneers who provide 75,000 jobs and once led the world. "A large number of German solar cell and solar module producers will not survive," said UBS's Patrick Hummel. Q-Cells is cutting four production lines and 500 jobs at its base in Thalheim, switching assembly to Asia.
Which is exactly why I said for a few years - solar the industry will grow, but solar the investment is a very dangerous thing. [Jan 3, 2008: The Long Term in Solar] Many companies along the path will be destroyed.

The following should sound familiar...
  • Roughly speaking, Chinese firms can undercut the Germans by 30pc. At root, it is a currency problem. China has stolen a march against Europe over the last five years by linking an already undervalued yuan to a weak dollar.
  • While Beijing sheds crocodile tears about the falling greenback, it is deliberately riding dollar devaluation to protect its own export share. What is happening to German solar firms is a revealing case study of the slow-burn damage caused by currency misalignment.
Some of our former investments splattered all over this story:
  • Suntech Power (STP) in Wuxi has just broken the world record for capturing photovoltaic solar energy, achieving a 15.6pc conversion rate with a commercial-grade module.
  • Trina Solar (TSL) is neck-and-neck with America's First Solar, the low-cost star that has already broken the cost barrier of $1 (61p) per watt with thin film based on cadmium telluride. (really? that's news to me - fact check someone?)
  • The Chinese trio of Suntech, Trina and Yingling (YGE) all expect to be below 70 cents per watt by 2012, bringing the magical goal of "grid parity" with fossil fuels into grasp. The concept of grid parity is subject to fierce debate, mostly revolving around which form of fuel – nuclear, oil, coal, or renewables – enjoys the biggest implicit subsidy, and what the future price of crude is likely to be.
The solar industry is currently in a supply glut but the big hope is the massive internal demand for solar via China that we've been waiting... and waiting... and waiting... on. It should be coming finally. Then they can use those panels in house and supply demand can somewhat normalize again in the rest of the world.
  • The solar glut will not last. China is orchestrating a big switch into solar power for its own households with a feed-in tariff that lets people sell electricity to the grid. But that may come too late to save German firms.
There is hope Seattle!
  • Jeremy Leggett, founder of Britain's Solar Century, says that even this cloudy island can achieve grid parity for households by 2013, seven years sooner than expected. South-facing roofs and facades could one day provide a third of UK electricity needs.
As for wind...
  • China has tripled its goal for wind power to 100 gigawatts by 2020. While the West bails out banks, China is spending a big chunk of its $600bn stimulus on "clean tech" projects and a smarter grid.
When it comes to clean energy or a direct transfer of wealth from the many to our financial oligarchs, I always choose the latter. Support your local oligarch!
  • Yes, you still have to wear a face mask to breathe in the soot-blackened industrial hubs of the interior. By the same token, the solar-and-wind hub of Baoding has become the first carbon-positive city in the world.
I continue to say - as I did in 2007, as I did in 2008, as I surely will in 2010... this very inward looking country has no idea what is coming from the East.
  • Whether China is pushing the green agenda because it believes in global warming is almost irrelevant. The country fears being caught short as the global scramble for diminishing resources starts in earnest.
A view we share... thankfully in a country that cannot plan out 1 election cycle (look in mirror) we'll keep kicking the can until one day we run straight into the wall. [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] Overheard in 2023: "So China can you spare a dime so we can bid against you for ABC natural resource commodity? No? Ok then - to the printing presses Batman!"
  • We may soon be moving into a phase of history when ill-prepared countries cannot be sure of obtaining energy – whatever the price.
Energy will pale in comparison to fresh water. Food should be interesting too - as hundreds of formerly poverty stricken Asians begin living the "American lifestyle". Oh well, it will all work out in the end I am sure - it 'always does'.

[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]
[Feb 6, 2009: NYT - Dark Days for Green Energy]
[May 30, 2008: German Solar Subsidies to be Cut Less than Feared]

Monday, August 24, 2009

Sun Tzu Speaks Again

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After the market corrects more than 3% will you say "I just knew it!"? No excuses if you fall into that camp.

The victorious strategist only seeks battle after victory has been won, whereas he who is destined to defeat first fights, and afterwards looks for victory.

Bloomberg: Coal Rally Ending as China Shuns Imports, Opens Mines

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I continue to be beguiled by the ignoring of the degradation in many of the factors that were once used as reasons to buy stocks. The China market correction has led to 1 whole day (a week ago Monday) of worry. The Baltic Dry Index (which when it was rising was a green shoot) continues a swan drive after a short break last week. [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Precursor to Loan Growth Slowing?] China has begun curtailing the mind numbing amount of loans it pushed out in 1st half 2009. Yet for now none of it matters.


At this point, so many commodities and the Baltic Index itself have been captured by China's overweighted influence [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] [May 13, 2009: Commodities - It's China's World: We Just Live in It] so I cannot tell if this is a "resting spot" while China negotiates on iron ore prices, or if this is (as stated above) a leading indicator of the plummet in Chinese loans. We heard similar stories as we see below in terms of copper about 4 months ago but instead it just was a few week break before China stockpiled even more of the metal. [Apr 6, 2009: Analysts Estimate Copper Prices Could Fall 21% in Q2] So it is hard to tell what is going on in commodities anymore since 1 country's actions are dominating the action.

As I look through individual subsectors of commodities, coal has actually been an out performer the past month... so we'll see when we look back in a few months if this is actually a change in direction by China or just a pause in the action for that market. Via Bloomberg:
  • China’s unprecedented appetite for imported coal is about to be sated, jeopardizing a five-month rally in prices by adding to a global surplus of the fuel used in power plants from Perth to Chicago.
  • After importing a record 48 million tons in the first six months, China is opening mines idled by worker deaths this year following safety upgrades in a bid to bolster economic growth. Huadian Power International Corp. expects China’s largest coal- mining province, Shanxi, to boost output by 60 percent in the second half of the year. That would mean an increase of 150 million metric tons, almost twice what Germany burns annually. (that's just staggering when you think about it)
  • China, the world’s largest producer and consumer of coal, ordered the closure of almost all 10,000 of the country’s small pits during the Spring Festival in January, and plans to open some were delayed following a deadly accident in February. Small mines that account for about 25 percent of China’s production were told to merge and those deemed unsafe were closed.
  • Of the 10,000 small mines in China, about 2,598 are in Shanxi, according to the China Daily newspaper. Output in Shanxi may rise to 400 million tons in the second half from 250 million tons in the first six months
  • With little need to buy coal outside the country, prices may tumble, falling as much as 7 percent in Europe alone, Barclays Capital says.
  • China’s purchases will plunge 33 percent between June 30 and Dec. 31, based on the median estimate of four analysts surveyed by Bloomberg. (we'll see, but the main takeaway is as with copper, oil, iron ore, potash, anything outside natural gas - China is the marginal buyer in the world; if you only knew their 3 month foreward plans you'd be set)
  • “In the first half, China really supported the market and put a pretty firm floor under the thermal-coal price because it was sucking in so many imports,” said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney. “It’s difficult to be confident that it will continue at such a rate.”
  • China’s July coal imports fell 13 percent to 13.9 million tons from 16 million tons in June, a record high, customs data show today.
  • Six-month supply contracts signed by Chinese buyers in February and March are expiring and aren’t likely to be renewed at the same amounts as global costs remain high and as domestic supplies rise, said Huang Teng, the general manager of Beijing LT Consultant Ltd., a coal consultant based in the capital city.
Meanwhile there is a game of cat and mouse going on - Europeans are stockpiling coal in anticipation of further increases in Asian demand. Which also has driven prices up - since this coal is not on the open market. So everyone looks around and asks "Whose on first" (when does this global recovery ex- government transfer payments begin again?)
  • Reduced demand may swell global supplies that ballooned during the recession. Stockpiles held by electricity generators in the U.K., Europe’s biggest importer of coal, rose 68 percent in May from a year earlier to 17.4 million tons, the most since at least 1995, government data show.
  • Europeans are fully stocked, but not reselling because they fear higher prices with an Asia-led economic recovery,” said Emmanuel Fages, a Paris-based commodities analyst at Orbeo. “The cost of carry for storing coal is cheaper than buying the coal for later delivery.”
Same in the U.S.
  • In the U.S., inventories jumped 15 percent in the first four months of the year, compared with a 1.1 percent gain in 2008 and 2.4 percent in 2007.
One of the reasons I was bullish on the commodity subsector of coal in 2007 was unlike natural gas it is much easier to transport and I saw Asian demand, specifically that of China, as a way to transform what was once a mostly domestic resource into something much more global. [Sep 18, 2007: Another Look at Coal] Hence coal would (slowly) become something more akin to crude oil, and less like natural gas.

A key driver of this demand has been China's emergence as a net importer of coal in 2007. The country is firing up a new coal-burning plant each week, and this growing appetite has devoured coal from Australia, South Africa and other suppliers that would normally ship to European markets.

Some European consumers have therefore turned to U.S. suppliers to replace coal that is now too expensive to ship all the way from Asia.


As usual, I am early on these big picture things (which sometimes hurts) but this prediction is beginning to bear fruit...
  • The rapid increase in Chinese coal output may upset the calculations of producers in other countries, including the U.S., where exports rose 38 percent last year.
  • St. Louis-based Peabody Energy Corp. sold 16 percent of its coal production outside the U.S. last year, regulatory filings show. The company’s sales outside the U.S. climbed 30 percent to 40.3 million tons, outpacing total sales growth of 8.2 percent to 255.5 million.
Long term I am still very bullish on coal. Near term? Ask China.

[Jan 14, 2008: New Coal ETF (KOL) Introduced from Van Eck Global]
[May 20, 2008: Market Vectors Coal (KOL) Red Hot]

John Hancock Technical Opportunites Fund (JCTAX) Becomes 2nd Technical Analysis Based Mutual Fund to Launch

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Good things are finally happening in the mutual fund world - albeit slowly. We've seen a slew of offerings of more "hedged" type variety (long v short) [Aug 4, 2009: WSJ - Mutual Funds Try "Hedge" Approach in Effort to Trim Stock Losses] although they still make up a tiny fraction versus the "long only" cadre ... and now we have the 2nd technical analysis based mutual fund launch. The more variety of choices of strategies... the better.

The fund, John Hancock Technical Opportunities Fund (JCTAX),[link] is already quite popular pulling in $1 million a day, despite a 5% front end load (or one could say due to that load) and a resounding 2.05% annual expense ratio. I am quite taken aback by that level of ratio by a company as large as John Hancock who has a huge asset base of assets to spread the costs of this new fund over.

As with any fund, of course the proof will be in the pudding and as with a fundamentally based fund, the talent of those running the fund will determine if their brand of TA is successful. Personally I think a mix of both fundamental and technical analysis is best, but if someone is a success solely focused on one or the other, more power to them. I am very curious to see what instruments this fund will hold but since it is not even a month old we don't have any historical reference yet.

The fund invests in equity and equity-related securities of companies located throughout the world, including the United States and emerging countries, and denominated in any currency. The technical indicators that the subadviser may consider include, but are not limited to, price, volume, momentum, relative strength, sector/group strength and moving averages. It may invest in cash and other liquid short-term fixed-income securities within a wide range.


Via Bloomberg
  • John Hancock Funds is betting its money-management clients are ready for Bollinger bands, Moving Average Convergence/Divergence and the Relative Strength Index.
  • The John Hancock Technical Opportunities Fund, started this month by the Boston-based unit of Canada’s Manulife Financial Corp., is the second in the U.S. to rely solely on stock charts for investment decisions, according to data compiled by Bloomberg. It’s among the 10 most-popular of John Hancock’s 54 funds, attracting about $1 million a day, said Keith Hartstein, the company’s president and chief executive officer.
  • John Hancock Technical Opportunities, which has a minimum investment of $10,000, can shift all its assets into cash when the managers foresee a slump in stocks. Only one other U.S. mutual fund, the $8.6 million Huntington Technical Opportunities Fund begun in May 2008, uses technical analysis exclusively.
So you can see the difference in distribution - never heard of Huntington Technical Opportunities and despite being part of a relatively large bank, it only has $8.6M in assets in about 15 months of life. Meanwhile the John Hancock fund, with an army of brokers pushing a product (to share in the load) can acquire that much within 9 days. If you are curious the Hutington fund is down 24% in the past 1 year period and has a whopping 2.94% expense ratio. (from it's holding list it simply holds various ETFs - which makes sense since that seems to be all anyone is doing nowadays when not speculating in Fannie Mae or AIG)

What was the impetus at John Hancock? One of the reasons actually is one of my main beefs with the industry - the fact a cash holding is considered "wrong", when in fact it can be a "position".
  • Hartstein developed a fund that could shift all its money out of equities after attending a conference of financial advisers at the Ritz-Carlton in Boston in January. “Listening to those folks talk about their frustrations about managers not being able to raise cash, I came back from that and starting asking, ‘Who out there has a strategy that we could leverage, that has the flexibility to raise cash?’” he said.
How did Wellington's TA strategy (the basis for the Hancock fund) do over the past year? Not great but 6 % better than the S&P.
  • Wellington’s technical analysis strategy for institutional clients lost 22 percent in the year ended June 30, beating the S&P 500 by 6 percentage points.
  • Teixeira avoided losing as much as the S&P 500 last year by boosting cash to more than 90 percent of assets and owning fewer than 15 stocks.
  • Teixeira, 42, invests in companies of all sizes and from all over the world. The fund is unlikely to own more than 75 stocks at a time, and the average holding period is less than two months.
Not too disimilar to what we're employing actually although we're even more concentrated.

More...
  • Technical analysis, ridiculed as “alchemy” by Burton Malkiel in his 1973 book “A Random Walk Down Wall Street,” is attracting investors after techniques based on profits and valuations failed during the worst year for stocks since the Great Depression. In an e-mail today, he said he still holds that view, “except that there is some momentum at various times.”
  • “Ultimately the skepticism toward technical analysis will completely disappear,” said Jasmina Hasanhodzic, who has a Ph.D. from the Massachusetts Institute of Technology and co- wrote a book on technical analysis. In recent years, “a number of academic studies have provided both the theoretical foundation for the existence of patterns in price data and empirically validated technical trading rules,” she said.
  • Technical analysts decide what to buy and sell using price and volume trends. They shun strategies based on company financial statements and valuations pioneered by Benjamin Graham and David L. Dodd in their 1934 textbook “Security Analysis.” That puts its adherents at odds with so-called fundamental analysts who manage most U.S. mutual funds.
  • “At the core of technical analysis is the study of supply and demand, but also the risk-control aspect of it, which a lot of other disciplines don’t necessarily use,” said Frank Teixeira of Wellington Management, which runs the John Hancock fund. “That’s why technical analysis is having a little bit more of a rebirth.”
  • Technical analysis “becomes more popular the more difficult the market is,” John Roque said. “When stuff is undecipherable with regard to fundamentals, people tend to look to it for some sort of insight.”
Here is a cute side note in the Bloomberg story - just keep it in mind as you listen to analysts, pundits, and strategists wax poetic about targets.
  • In August 2007, with the S&P 500 at about 1,450 and headed toward a record 1,565.15 on Oct. 9, the average year-end forecast among Wall Street strategists surveyed by Bloomberg was 1,592.
  • At the end of the year, with the index at 1,468.36, the average forecast was for an 11 percent advance in 2008.
Oops.

CNinsure (CISG) - China's Version of Prudential? (PRU)

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While I am seriously starting to question the need for any fundamental research anymore when stocks with the poorest decile of earnings (read: none) are performing as good, or better than those with the best (i.e. buy anything, it all goes up) I still need to pretend to have justification for buying ABC stock. For example I could of bought AIG (AIG) a few weeks ago, after a 20 to 1 reverse split (in normal times that is an extremely bearish thing) and made close to 200%... reasoning? You don't need any - bad fundamentals, good fundamentals; they all go up when central bankers throw money in every direction.

CNinsure (CISG) is one of a bevy of Chinese smaller cap stocks I've had on a watch list to "get to"; I've been trying to present some of these over the past few weeks as time becomes available. Think of CNinsure as China's version of AIG. Wait! Strike that! Think of CNinsure as China's version of Prudential....

CNinsure Inc., together with its subsidiaries, operates as an independent insurance intermediary company in the People's Republic of China. It provides insurance brokerage and agency services, and insurance claims adjusting services, such as assessment, survey, authentication, and loss estimation to individuals and institutions.


Since Investor's Business Daily was kind enough to provide a good overview of the company let me not reinvent the wheel and instead let them describe the background and market opportunity. CNinsure was a late 2007 IPO benefiting from the fall 2007 craze for anything related to China. It's had it's up and downs as any stock, Chinese or otherwise, has had in the past few years and now is approaching original IPO valuation... currently is is just over $800M in market cap.

Bubble via loan growth or not; there are some exciting companies in the early stages of growth in China. While their valuation will be driven by the ebbs and flows of investor sentiment in the short run, the market opportunities for some of these companies - either through acquisition or organic growth (or both) far surpass anything we see in the U.S. as China is far earlier in its modernization push.

The company reports earnings Wednesday; I'll be considering a position after that point.
  • CNinsure sells life, property and casualty insurance underwritten by domestic and foreign insurance companies operating in China. It also offers insurance claims adjusting services, such as assessment, survey and loss estimation.
  • Soon after going public nearly two years ago, CNinsure hit the acquisition trail with a vengeance. From its Oct. 31, 2007, market debut to April 30, 2009, the China-based insurance broker and agent closed on 29 deals to expand its distribution and service offerings. Through these deals, it gained a controlling stake in 11 insurance agencies, one insurance broker and three insurance claims adjusters and established 14 new insurance agencies.
  • Now, as CNinsure's (NasdaqGS:CISG - News) management embarks on a new game plan that will take the company onto new turf, watchers see more deals on the horizon. Aggressive acquisitions have helped drive the company's growth, said Roth Capital Partners analyst Sean Jiang in an e-mail.
  • Earnings have climbed at double-digit rates in all but one of the past five quarters. And sales have soared by double and triple digits over that time frame. (of course that is acquisition driven, nor organic growth)
Potentially this could become more than just a pure play on insurance.
  • Last month, management unveiled a strategy aimed at expanding the company's scope beyond selling insurance and turning it into a diversified financial services group. Management expects to move into the fast-growing financial services sector, it said in a statement without giving a timeline.
  • Once it does, it plans to expand CNinsure's offerings to include other financial products, such as mortgage loans, mutual funds and securities.
  • "Expansion of CNinsure has been achieved mainly through acquisitions," said Jiang. "My speculation is that (it) will likely use the same strategy by acquiring other companies in the financial services business."
Ahem... well maybe it will become more like AIG rather than Prudential...
  • The company said as it diversifies it will stay focused on its current business model and market positioning. That means it will limit its scope to brokerage and service outsourcing without assuming underwriting or credit risks.
Whew - ok, not like AIG then.
  • The rationale behind the new strategy? "As Chinese people accumulate significant levels of wealth as a result of China's economic growth, we have seen growing demand for more diversified financial solutions and huge potential in the consumer financial market," said Chief Executive Yinan Hu in a statement.
  • He said the move will also increase profitability by drawing on its existing distribution network and operating platform to achieve better economies of scale and lower operating costs.
How have they been doing thus far?
  • CNinsure is faring well with its current lineup. In the first quarter, earnings rose 36% to 15 cents per American depositary receipt, or ADR. Sales surged 62% to $31.6 million.
  • But followers forecast CNinsure's growth will stay flat when it reports results Wednesday. Analysts polled by Thomson Reuters expect it to earn 19 cents a share, the same as last year. Why the flat earnings forecast? Jiang says its operating margin was likely squeezed in the second quarter vs. 2008 because of business expansion and acquisitions, and its gross margin was lower than the prior year.
  • Still, analysts expect the company to regain momentum in the third and fourth quarters for a full-year rise of 25% to 76 cents per ADR. They see 2010 earnings up 26%.
Analysts' view on expansion into new business lines.
  • Jiang gives the new game plan to move into financial services a thumbs up. He says the strategic change makes sense because areas it's likely to move into, such as mortgage and auto loan brokerage, have a similar business model as its current one. Plus it can draw on its existing distribution network.
  • That network is vast. As of April 30, the company had 29,215 sales professionals, 866 claims adjusters and 367 sales and service outlets operating in 21 provinces. Its distribution and service network reaches some of China's most economically developed regions and some of the most affluent cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen.
  • "I think there's a high possibility for them to be successful, given their excellent acquisition record," he said. "The management has been very prudent and experienced in making acquisitions, including proper structuring of the deals and setting performance targets to former management."
  • He says given the company's strong cash position, management could start to implement its new strategy this year if it can find a suitable target to acquire.
  • Piper Jaffray analyst Michael Grasher says the financial services products the company is looking into carry higher margins than the property and casualty brokerage business. "They have developed quite a good reputation," he said. "They have eight to 10 of the top 20 insurance agencies in China. They're building a platform where they'll be a financial supermarket."

No position

Cumulative Deficit Estimate for Next Decade Increased $2 Trillion... Since May

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I guess we'll post this along the lines of "if you pass the stimulus plan, unemployment will only go to mid 8%s" or "if you don't give Goldman Sachs the TARP money, the world will end immediately" and other such incorrect mythologies. Long time readers know where I stand on government figures which are backwards looking; not to mention guestimates of the future... if the guess from government is correct THIS time around (chuckle here) the budget deficit for the next decade now will stand at $9 Trillion.

Last time government chimed in with an estimate? Way back... 3 whole months ago; when they said the deficit would be $7.1 Trillion. Missed it by *that* much. That's ok, government estimates are made to be broken. Usually I try to give them more than 3 months to be wrong by a factor of 27% but I think within government circles that accuracy (+/- 25%) is considered "dead on", and reason for promotion.

$9 Trillion over a decade is just under $1 Trillion a year. Consider until this year (partly by phony accounting for wars and financial rescues that were not counted in the budget by the former administration) the largest annual budget deficit we ever had was under $500 Billion. [Jul 28, 2008: US Budget Deficit to Half a Trillion] This year we have an excellent chance of $1.6 Trillion. Heck we just put up a $180B month [Aug 12, 2009: July Budget Deficit $180.7B]. With the economy only slowly recovering in 2010 (and subject to a double dip with higher inflation), and the main drivers of tax revenue (employment, real estate, consumption) not expected to be recovering much next year I think we have an excellent chance for another $1.5ish Trillion year in '10. Especially after Obama and the Dems number fall this winter as the "Main Street" economy is not quite so awesome as the "Wall Street" economy and plans for Stimulus 8.0 are drawn up. Plus the next housing program give away; the next cars program; and helping the states out with their budget shortfalls in 2010. Oh yes, increased food stamps, another 13 week extension of long term unemployment, , increased welfare for those who still fall out of unemployment, and I am sure a few other things I am forgetting. (cursory green shoots inserted here)

Now the good thing by layering on debt to inflate asset values AND stoke "prosperity" [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [Jul 30, 2009: Cash for Clunkers a Bit Hit, Government Asks "What Can we Buy You Next?"] , is you might punish your currency month after month, but it should drive incremental tax revenue gains from stocks and (gosh) even real estate as more (ahem) "wealth" is created. Not in real terms, but in nominal... and most Americans only live in a nominal world. So if the currency drops 15% and your government is able to stoke some combination of your 401k, and house up 15% - you really gained nothing but you'll feel great because most people only look at their 401k and housing values, without understanding the currency. Now if you happen to be one of those American souls who simply is trying to get by in a harsh world, and you don't happen to own stocks or real estate? Well, you're job then is to pay for your life with 15% more of a devalued currency - making everything 15% more expensive in real terms. But really, it's not about you - we have a financial and political elite to take care of and only by coming together as one can we do it. Reverse Robin Hood style. Remember, inflation is GREEEEEEAT! (as long as you're are not in the bottom half) [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold]

Even more funny is that the nominal increase in tax revenue (created by government shuffling money from the future to now to create "GDP growth") might put a dent in near term deficits ... by pathetically adding to long term deficits. Remember - in a nominal world there is no cost benefit analysis; only benefit benefit analysis. We get our goodies today, and the costs get stuffed "somewhere else" for "someone else" to deal with. Listen to the masses with the siren call of "free government money, I want mine!" not realizing they are taking from themselves... with interest. That's called living in a nominal world. And not being real.

***********************

America is (but not for long) still under 100% debt to GDP. We are on a clear path to surpass Japanese debt to GDP (a staggering 200% debt to GDP) within the decade. US Debt Clock (as of Aug 09) read $11.7T; US GDP is say $13.5T. Throw the next decade's (conservative) $9T on top and you are at a juicy $21T debt circa 2019 aka 150% of GDP. I think that's conservative - we are overachievers and will "beat" that. Since the government figures were just raised $1.9T in 3 months you can see how quickly we could jump from $21T in 2019 to (some higher number). Once we pass 200% debt to GDP, it will all be uncharted territory for a modern developed country. Our annual growth rate of debt is now trouncing Japan, so it's the story of the tortoise and the hare. Although in this case you don't really want to be the hare. I also conveniently left out the $40T in unfunded liabilities (i.e. IOUs) sitting in Medicare. I've also left out the healthcare "reform" - considering the original estimates of Medicare were off by a factor of 10x within the first year of it's implementation... well, you can do the math. And just for kicks let's throw in the $1 Trillion pension disaster that is looming (currently being hidden by... accounting tricks) [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout] That's just sort of icing on the cake at this point.

Did I mention how the debt will increase even more quickly if government debt interest rates permanently jump up as the world sees the increasing risk of investing in America?

Stanford University economics professor John Taylor, an influential economist, told Reuters Television Friday the U.S. budget deficit poses a greater risk to the financial system than the collapse in commercial real estate prices.

"If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt, then that can slow the economy down. So, that's the more systemic concern I have," Taylor said.



Via Bloomberg
  • The U.S. government’s long-term budget outlook is darker than expected, with projected deficits over the next 10 years totaling $2 trillion more than had been forecast, according to an Obama administration official.
  • A White House budget review set for release Aug. 25 will show cumulative deficits over the next decade amounting to $9 trillion, up from $7.1 trillion that the administration predicted in May, the official said on condition of anonymity because the figures haven’t been made public.
Really a trillion here, a trillion there - what does it matter. All I know is many Americans were gleeful per my review of national news this weekend they got new cars. (granted many now have a new layer of debt) Others are gleeful they can get their first house via money trees grown in D.C.. (and when many default on their close to no money down mortgages in 3 years - it will be ok, no skin in the game after all) Citigroup and Bank of America bondholders are happy that they never had to take a hit despite the biggest crisis in 80 years. Goldman Sachs is happy they got fulfilled dollar for dollar on AIG counterparty risk. AIG is just happy to be in existence and seeing its stock surge 20% a day, subsidized by US taxpayer. And we're all happy these actions plus more are making the stock market inflate. It's really all about happiness after all. Can we put a price on that?

[Mar 31, 2009: Financial Rescue Pledges Now $12.8 Trillion] Hey! That was supposed to be a rhetorical question!

[May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household] Stop it! There is no price too high to bear for happiness of our people and concurrent transfer of wealth from the middle to our financial oligarchs. Get with the program!

For another source to fact check the Administration:
  • The nonpartisan Congressional Budget Office has estimated deficits between 2010 and 2019 will total $9.14 trillion.
Considering the CBO thought we'd be $1.1 T in hock for 2009 in (one third of the way into the fiscal 2009 year) December 2008 - they only understated the reality by 45% ...

Now we want them to guestimate how bad things will be not 1 year but 10 years out, so let's take it all with multiple grains of salt. If they are only off in the decade by the same amount they were off in this 1 year it is really +/- $5 Trillion over 10 years. And since no one really knows how it will turn out, the best course of action is to continue policies as is and buy happiness (not to mention higher equity prices). "Someone else" (benefit benefit) analysis will worry about these things in 2019.

[May 23, 2008: David Walker on CNCB this Morning]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]
[Nov 23, 2008: David Walker in Fortune Magazine]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[Aug 5, 2009: Federal Tax Revenue Plummeting]


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