Sunday, February 28, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 30

Year 3, Week 30 Major Position Changes

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

Cash: 80.6% (v 70.3% last week)
18 long bias: 12.1% (v 24.0% last week)
5 short bias: 7.3% (v 5.7% last week) [Includes 2 'long dollar' positions, 1 option related]

23 positions (vs 25 last week)

Weekly thoughts
While the last week brought quite a bit of volatility day to day, there was almost no net movement.  The "stick save" (Canada 3-USA 2) Thursday after large morning losses threatened to bring damage to the technicals of the indexes, was epic with big losses stymied by yet another "rally out of nowhere".  The best explanation I have found so far are "rumors" of Apple splitting shares (almost laughable to cause such a rally) or a Greek rescue?  As for the latter ... huh?  Didn't we rally 2 weeks ago on the same thing?

In 6 months I wonder if we'll look back into this week as one that foreshadowed the "recovery" (government sponsored) as beginning to run out of speed.  Many economic data points came in worse than expected but the market is currently happy to ignore it or explain the recovery as "choppy".   Both existing (more important) and new home sales were worse than expected.  Consumer confidence (something I put little stake in but the market worships) faltered.  Weekly jobless claims jumped almost back to half a million, and the only real positive was a slight uptick revision in GDP for Q4 and some regional purchasing managers indexes which usually don't move markets.  With all that, all it took was Ben Bernanke saying both Wednesday and Thursday "I am here to give you free money for as long as I wish" and speculators were happy to brush off reality on the ground.  It is what it is - and as we always say, it only matters when it matters.

Whatever the news on the ground, it really doesn't participants only care about free money and the continuance of a global moral hazard routine.  (in this case praying for bailouts for Greece)  We now have a goldilocks economy (circa Kuldow 2006) where the economy is of course recovering but certainly not at a pace that emergency interest rates or liquidity measures can be reversed.  A very convenient situation indeed.

As for the indexes we are at the top end of a recent range... and "Magical Monday" approaches (Mondays have been the nexus of almost the entire rally of the past 6 months).  Further, Chinese PMI comes out overnight and almost every Chinese PMI report for a year has been enough to get a wonderful gap up in US markets - so we'll see if it happens yet again tomorrow.  Since markets are having such a hard time breaking to the upside during normal hours, the course of action for the past year has been to juice them overnight.... this would be yet another perfect opportunity.  As for those indexes, we have an interesting situation in both the S&P 500 and NASDAQ when we compare 'exponential' moving averages versus 'simple' (neither is "right" or "wrong" to use, and usually there is not much of a difference).  The [simple] charts below will show you a nice premarket surge can get the indexes to where they "need to be" in the simple moving averages.....

In (my) exponential world - things look more solid, but it seems the simple moving averages are dominating things right now so I am respecting that.

I thought (and have stated a few times last week) we'd have more downside ahead but the moment I said it Wednesday Bernanke said easy money! and the market surged 1% in 30 minutes.  Then Thursday we had the mystery rally - so once more it is nearly impossible to bet against a market for long that acts like that... too easy to take extreme pain.  Hence, I have not been actively shorting indexes much but using the US dollar which has been working out well for us.  The dollar is actually coming into support after 3 down days, so the next few sessions will be interesting as the 20 day moving average has not been penetrated in a month and a half...

As for the indexes S&P 1109 is the pivot point and NASDAQ 2240-2250 would be the same.  I'd expect the computers to come rolling in if these levels are broken to the upside, and if I know that - the figures who enjoy piling into futures at opportune times know how to lead the computers in Pied Piper strategy as well.   If the market cannot jump over these resistance levels, even with the help of Magical Mondays, and surges of SPY buying - then the obvious path will indeed be down.  Unless Bernanke breaks in on live CNBC coverage to whisper "easy money".   We are also waiting for the official news of bailout of Greece which thus far has been nothing more than a kick the can approach with vague commentary such as "we support Greece". 

Due to inability to access data for part of the last week, I culled some positions (along with taking profits Monday on some winners and a SPY call position) but will be looking to run down the cash exposure by 10-20% relatively quickly.... in which direction that money will go, will be dependent on what happens early in the week.  Other than some early week sales to lock in profits, Braskem (BAK) was closed out, and Seagate Technology (STX) was re-expanded when it fell back Thursday morning.  If the market doesn't begin another "student body left" run if and when S&P 1109 is cleared, then I'd like to begin building a more balanced portfolio of long and short individual positions, otherwise we'll just concentrate on adding to some very nice charts on the long side.

Earnings season is more or less over except for some smaller and foreign type companies (a lot of Chinese stocks report this week) but the economic calender is very heavy this week, highlighted by Friday's monthly labor report.  Frankly, with the huge swarm of new census workers to be hired I thought we'd see some very good (if temporary) labor data March - June 2010, but with weekly jobless claims so awful the past month, I am reconsidering my position.  I thought by this point with the public sector more or less protected by countless stimuli and the private sector "bled out" the past 2.5 years, there would not be that many more private sector jobs to lose - but they just keep on coming....

But as we saw last week, a lot of not so good news was completely ignored ... so let's see what this week brings

Monday - a report the market loves, ISM Manufacturing comes out at 10 AM.  This report has been better than expected much of the past few months - which would be awesome if the US still had a 1960s/1970s economy but it affects far less of the economy in the new paradigm debt laden, finance based service economy.   Construction spending, and personal income and outlays also are reported.

Tuesday - auto sales... eh.

Wednesday - a report I care more about, ISM Services comes out at 10 AM.  This finally broke over 50 last month - barely (which means expansion versus shrinkage) but has lagged far behind Manufacturing.  Since it represents so much more of the economy, it should mean much more but for whatever reason the market focuses far more on Monday's ISM Manufacturing.  Expectation is for a 51 reading - anything in the low to mid 50s should set the market off, anything below 50 should hurt the market.

Thursday - very busy day with the weekly jobless claims first... one would expect this to improve versus last week's horror show.  Productivity and costs comes out at the same time; I expect productivity to continue to soar as less Americans are asked to do the same amount of work.  Expectation is for 6.3%.  Factory orders and pending home sales are at 10 AM.

Friday - the monthly labor reports are released.  Interestingly, despite a -20K print last month, economists think we'll see -50K this month.  (I thought things were improving?)  The squirrly unemployment rate dropped from 10% to 9.7% last month, economists now say it will jump back to 9.8%.  Remember, all these figures are more or less a fiction now - since all the changes we have done as a nation to our estimates since the early 90s have improved the sunshine factor.  Effectively if we measured as we did in the 70s and 80s, we're talking the difference between a 14% unemployment rate and 13.7%, or 13.8%.   But whatever the case, last month it appears there was a once a year adjustment in population which helped to bring the unemployment rate down... I am still wondering where all these people who have dropped out of the work force have gone.

So a very data dependent week, with a lot of reports issued pre-market.  A great opportunity to run the market up, or cull any major losses from bad data if need be, by the SPY futures buyers.  I expect some whippy action, and despite the deluge of data Thursday perhaps some people sitting on their hands until we see Friday's labor reports.  Again, to reiterate the nonsense labor data is going to become even more nonsense in the next 6 months as 1.3M Americans suddenly find employment as census workers, so we won't be back to quasi normal until mid fall or later.

Indian Inflation - Especially of the Food Variety - Starts to Surge

As noted last week, India's GDP "slumped" (we can only wish for such figures) to 6%, losing almost 2% from the previous quarter.  However, the same reason for much of the slowdown - a weaker than average monsoon season - is causing inflation to surge, especially in foodstuffs.  This is putting the central banker in quite the pickle...

Via BusinessWeek:
  • Movie night and restaurant meals are out for Vinod Kumar. As prices for sugar, onions, and other staples have surged after poor monsoon rains damaged harvests, Kumar has been forced to cut back to keep food on the table for his family of four. "It's never been so bad in my working life," the 35-year-old mechanic says as he shops at Bangalore's Johnson Market, a century-old tangle of food stalls. 
  • It's not just food that's getting more expensive. Inflation in India is at a decade high, with consumer prices rising faster than in any other major economy. Industrial output in January increased at the fastest pace in 17 months, pushing up prices for raw materials. Cotton has jumped by 13% since October, while other commodities are rising fast. The benchmark wholesale price index, up 7.3% in December, could hit double digits within two months, predicts brokerage CLSA. That would spur even higher consumer prices and dent the spending power of ordinary Indians. 
  • India's central bank governor, Duvvuri Subbarao, is trying to cool things down. To lower the amount of capital available for lending, the Reserve Bank of India on Jan. 29 increased the cash reserve ratio for banks (the minimum they have to keep on hand) by 0.75 percentage points, to 5.75%. Tighter interest rates are probably next. The bank has moved from "managing the crisis to managing the recovery," Subbarao told reporters on Jan. 29. 
  • Despite India's thriving tech sector, it remains beholden to the vagaries of the monsoon. Less than half of India's fields have irrigation, so a drought last summer led to food shortfalls in several states. Poor railroads and highways make it tough to transport food, leading to shortages and higher prices in many cities. "You don't have enough roads, you don't have enough railroads, you don't have enough ports," says Nikhilesh Bhattacharyya, an economist with Moody's (MCE) "That amplifies any price shock." 
  • Rising prices are a big headache for Prime Minister Manmohan Singh. In the past 15 years, Indians have ousted two national governments after inflation eroded spending power. Higher interest rates will make it harder for companies to expand, and with the budget deficit at a 16-year high, the government can scarcely afford to boost spending on infrastructure. 
  • Indian companies meanwhile, fear higher labor costs. "The rise in food prices will have a cascading effect," says M.S. Unnikrishnan, managing director of Thermax, a Pune-based maker of heating and cooling equipment. "We can't keep paying people the same amount if their cost of living is increasing."

Major World Index Returns Year to Date through February 2010

With 2 months in the books for 2010, a lousy January has been offset with a solid February to take US markets to virtually unchanged (using the broader S&P 500 over the narrower DJIA)  After a sizzling 2009 China, Brazil and India have been laggards in 2010 - and Europe has been weighed down by Greece.   By virtue of being the least ugly (versus Europe at least) the US and Japan have been areas of relative strength.  So in an ironic twist, PIMCO's Bill Gross' idea to invest in less levered countries has not been working so far in '10 [Jan 26, 2010: PIMCO's Bill Gross: Invest in Less Levered Countries]

Andrew Horowitz & team over at The Disciplined Investor offer us some nice eye candy for world return's through end of February 2010.

[click to enlarge]

Updated Position Sheet

Cash: 80.6% (v 70.3% last week)
Long: 12.1% (v 24.0%)
Short: 7.3% (v 5.7%) [long US dollar positions are considered "short"]

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

[click to enlarge]

LONG (2 photo files)



Friday, February 26, 2010

A Whole Lot of Nothin'

When I finally got back onto my computer late last night, the S&P 500 closing print from when I left on my trip was 1106.  As I type this it is 1105 (rounded up).  A whole lot of nothin' going on.  Perhaps the indexes shall just be range bound for a while.  If so a strategy of being able to have both short and long individual positions might work once more - rather than student body trading we've been subjected to for 2 years now.  The range we are in right now is very narrow - 1109ish is the obvious top side resistance and we have both the 20 and 50 day moving average below (exponential).  Using the major moving averages we have 2 completely different stories based on exponential v simple - quite a dichotomy.  But the "simple" story shows why there is so much of a roadblock at 1109.  Perhaps it will take our almost mechanical premarket "mark up" on Magical Mondays to get the index going in the "right" direction.

Exponential Moving Average Lines

Simple Moving Average Lines

I am unclear what rallied the markets yesterday, when I got on the plane the Dow was down nearly 200, and I see 75% of that was reclaimed by the end of the day, despite breaking both the 20 and 50 (exponential) day intraday.  [perhaps it was a bounce off the 20 day simple moving average?]  Other than Ben Bernanke repeating the same dog and pony show for the Senate that he did for the House, I could not find any specific reason for celebration after a weekly claims figure of nearly 500,000 this *deep* into the recession recovery.  Oh yes - the claims were high due to "bad weather" ;) That explains every bad data point this winter. Funny how the Canadians somehow are able to buy houses and keep jobs despite cold weather - must be an American thing.  Ahem.

Frankly with census jobs ramping up, the data should be skewing to the upside as 1.3M people suddenly find themselves with work, rather than going the other way.  Hence, while the weekly jobless data is volatile and you can't read too much into any 1 week, the fact it is ramping back to near 500K in any week, even as many of the unemployed now are turning into census workers, says a lot about the "recovery".

Share on Facebook

A reader emailed me how to share blog content on Facebook... I know some readers have done this but being the last person in the US below the age of 40 not on Facebook I am not 100% sure what method they have been using.

But at the bottom of each post is "Tell a Friend" button - this has various methods for sharing posts.  You can email, you can instant message it, or there is an option for "social", which has Facebook, LinkedIn, MySpace Etc.

When clicking on social, then Facebook it brings up a pop up box with the link to the entry.  From there, click share and it asks you to log into your account.  I assume after you log in, it does the rest from there.  If anyone has done it this way feel free to chime in as this is not my expertise.  ;)

TriQuint Semiconductor (TQNT) - Solid Earnings, Guidance Good

Aside from lobbyists, and government spending, the only real organic growth story I can find is this mobile internet thing.  TriQuint Semiconductor (TQNT) is one of the many names that should be benefiting from it, but last quarter the market was disappointed in a report I considered just fine.  [Oct 21, 2009: TriQuint Semiconductor Destroyed in After Hours Trading]   But you cannot argue with the herd, and the stock faced a sledgehammer.  More recently, the company raised guidance mid January but was still able to beat that raised guidance a bit.  More importantly the smartphone side of their business is now really taking off and the network side is finally showing some recovery for 2010 per executives.

Chart wise, TriQuint now has amongst the best charts with yesterday's positive reaction finally taking the stock over January's highs.  It now has to work through the huge gap down created by the ill received earnings report of October.

Some snippets from the report:

Via Reuters:
  • Wireless communications products supplier TriQuint Semiconductor Inc (TQNT) posted a quarterly profit that edged past Wall Street expectations, driven by its mobile devices business, and forecast better-than-expected first quarter.
  • For the fourth quarter, the company posted net income of $17.5 million, or 11 cents per share, compared with a loss of $34.3 million, or 23 cents per share, a year earlier.  ...posted earnings of 14 cents a share, excluding items.
  • Revenue rose 30 percent to $193.3 million.
  • Analysts expected earnings of 13 cents a share, excluding exceptional items, on revenue of $188.3 million. (again this guidance was raised just 6 weeks ago)
  • The company expects 2010 to be a "solid growth year" for its network business, with market recovery, and also said demand for its products is expanding with higher broadband requirement, a company executive said on a conference call with analysts.  Within mobile devices, TriQuint is expecting revenue growth with all its major customers, helped by increased smartphone unit volume and expanded Radio Frequency content.
  • iPhone is TriQuint's strongest device at this point but the company is seeing strength for other customers as well like Korea's Samsung Electronics, Charter Equity Research analyst Edward Snyder said.  "Their handset business is doing really well and it looks like their networks business is going to do particularly well next quarter," Snyder added.  The company has a very high book-to-bill ratio, which suggests that it is holding a lot of orders for the networking business for the next period, the analyst said.
  • TriQuint explained that its fourth-quarter revenue from mobile devices grew 55% year-over-year and 15% sequentially
  • The company expects adjusted earnings of 8 cents to 10 cents a share on revenue of $170 million to $175 million for the current quarter. The company anticipates its first-quarter revenue will fall between $170 million and $175 million. Analysts had predicted revenue of about $169 million. Analysts were looking for earnings of 7 cents a share, excluding items on revenue of $168.6 million, according to Thomson Reuters I/B/E/S.
  • "As of today the company is nearly fully booked to the midpoint of revenue guidance for the first quarter," the company said in a statement.
Long TriQuint Semiconductor in fund; no personal position

January Existing Home Sales Falter; Treasury Allows it Has a Plan to Cease Every Foreclosure Pending Review.

Existing home sales were just released and they were not good.  This number is FAR more important than new home sales released earlier in the week, since 90% of transactions in the US are for existing sales.  Now to be fair, just as I derided the mainstream media (financial and otherwise) in the spring and summer for being giddy over "improved" sales since they were assessing the real estate market on a sequential basis (month over month) rather than how it should be - year over year, I will say the same now.  You cannot determine how the real estate market is doing by comparing January to September, or May to November.  This is a very seasonal business and one should compare year over year.  So some of today's hand wringing is misplaced as will the certain to be cries of joy when May 2010's data is better than February 2010's.
  • Sales of previously occupied homes took a large drop for the second straight month in January, falling to the lowest level since summer. It was another sign the housing market's recovery is faltering.
  • The National Association of Realtors said sales fell 7.2 percent to a seasonally adjusted annual rate of 5.05 million from a downwardly revised pace of 5.44 million in December.  Economists expected a slight increase to a rate of 5.5 million.
  • The report "is certainly not good," said Lawrence Yun, the trade group's chief economist.  (if you've been following Lawrence Yun, as we have since 2007, you know he is the cheeriest industry cheerleader economist in the galaxy - so to get him saying "it's not good" means a lot)
  • Sales declined throughout the country, falling the most -- nearly 11 percent -- in the Northeast. Sales fell by about 7 percent in the South and Midwest and by more than 5 percent in the West.
  • The median sales price was $164,700, unchanged from a year earlier and down 3.4 percent from December.
  • The bleak report comes after the government reported Wednesday that sales of newly built homes plunged 11 percent to a record low in January. The report, which measures signed contracts to buy homes rather than completed sales, also came as surprise to economists.
[Cursory goldilocks economy excuse: "it was the weather's fault!"]

With that said, I will stick to my assessment than the now fully subsidized housing market is going nowhere fast.  While prices won't spiral downward as they did in the first part of this bubble bursting, I would not expect any great recovery.  Prices are now reaching the levels I predicted in 2007, when almost all the punditry said housing prices could never fall on a national scale in Cramerica.  [Dec 6, 2007: Analysis - What Should Housing Prices be Today?]  But now that prices once more are somewhat in line with the long term ratio to income, you have a very debilitated US consumer, especially in the lower 2/3rds of the income strata.

Further, the patient is now full of morphine, being handed historically low mortgage rates, with multiple government agencies (FHA, Freddie, Fannie) now purposefully losing money [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] so that the housing market can be supported... along with outright bribery to get people to buy homes via tax credits, which in many states are now being used in lieu of down payments.  All that and we still are seeing quite limp activity in the housing market.  Reason? Despite record affordability we still are ABOVE the long term trend line of home ownership.  Many potential buyers of 2010-2012 were brought into the 2009 market by the hail mary (kick the can) of $8000 first time taxpayer credit.  Hence we need to now reach for ways to bring in the 2013-2015 home owner (most of which are probably in high school or college) with the next round of morphine.

Like any good drug junkie, it will now take even bigger and bigger doses of said drugs to get the same high.  Meaning mortgage rates would need to go to mid 4% or lower, or tax credits would need to be expanded from $8000 to something even higher, etc.   We have now created a government dependent monster and taking away the crutches will be even more painful.  So for now all we have accomplished is a repeat of the same policies that caused the issues in mid decade - but skipped the banks and put the liabilities directly on government (now and in the future) - after all there is no greater sucker than the US taxpayer (born or preferably unborn - after all the unborn have no say) [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"]   Don't even ask what happens in the housing market if mortgage rates see 6.5% on average, with no government bribery or multiple federal bodies willing to take losses quarter after quarter (piled onto future generations of taxpayers) so as to support home prices today. 

Long time readers will know of all the proposals that have been enacted or proposed the past few years - there are so many I have lost count.  Among my favorites - can't afford to be a real homeowner? No worries - you can be a faux homeowner - rent your own home back from Fannie Mae.  [Nov 5, 2009: Fannie Mae's New Deed for Lease Program - Rent your Home from the Government]  Well, as the government creeps more and more (is it possible?) into the real estate sector, we have reports that there is a program floating in Treasury to stop all foreclosures at the door until it is run through the government's HAMP program.   And why not - I am just waiting for the ultimate proposal - the government buying our homes back at 2006 prices.  Or paying the mortgages outright.  After all money is free in America.  And then Wall Street can be 'astounded' by the 'strength' in the housing market as it was last year and run stock prices up, and we all win here.  Throw a few trillion at any problem, and we can "fix" everything.
  • The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.  The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.
  • About 89 percent of outstanding residential mortgage loans are covered by the voluntary HAMP program.
While the GOP most likely is opposing this for no other reason that it's a Democratic based idea, I agree with them on this one.   Let these people start over, let home prices fall to the right spot (i.e. a market price) and stop stealing from the savers, renters, and future children of the country so to subsidize the homeowners (of which I am one) and non savers.  At a certain price point (however low) new people can enter the real estate market as home owners on their own 2 feet without government hand holding.  I believe that's how it used to work - but at this point Mother Russia probably has a more free market in real estate than the United States of Handouts. 
  • “By every empirical measure, HAMP has failed,” according to the 18-page report released by Republicans on the House Oversight and Government Reform Committee. “In its current form, HAMP both hurts homeowners who might otherwise spend their trial-period mortgage payments on rent and also distorts the housing market, delaying any recovery.”
At what point does government say home prices are not allowed to fall below $X?  This is where we are heading....

India Q4 GDP Slows to 6%, but Government Pledges Deficit Trimming Which Buoys Market

India's still heavily dependent on agriculture economy suffered through a weak monsoon season and GDP came in at only 6% versus 7.9% the previous quarter.  [Nov 20, 2009: India's Q3 2009 GDP Jumps to 7.9%, Highest in 6 Months. Stimulus Could be Exiting Stage Right] However, a forecast for higher growth in the current quarter & a government pledge to address the deficit seemed to placate investors - we'll see how those promises work out in due time.  For now, words are enough.

Via Bloomberg:
  • India’s expansion slowed in the fourth quarter, reflecting a poor monsoon rainfall that hurt farm output, underscoring the influence of agriculture in a nation aiming to become the world’s fastest growing economy.
  • Gross domestic product grew 6 percent from a year earlier after gaining 7.9 percent in the previous quarter, the Central Statistical Organisation said in New Delhi today.
  • The government forecasts growth to quicken to 7.2 percent in the year to March.
  • The one-off drop in GDP is due to agriculture and not a reflection of trend growth, which is strong,” said Rahul Bajoria, an economist at Barclays Capital in Singapore. “Tackling inflation and curbing the fiscal deficit will be a major policy challenge in the short term.”
  • Agricultural output fell 2.8 percent in the quarter ended Dec. 31, today’s report showed. Manufacturing gained 14.3 percent, the most since March 2007, while hotel, transport and communication services increased 10 percent, according to the report.
  • Mukherjee may raise excise and service tax to curb excessive consumer demand from accelerating inflation, which touched 8.6 percent in January, the most in 15 months, economists said.  (very few countries on earth have this sort of problem right now

Bloomberg on the new deficit pledges:
  • India’s government pledged to shrink its budget deficit by more than one percentage point of gross domestic product this year from the highest level since 1994, spurring a rally in the nation’s stocks.
  • Finance Minister Pranab Mukherjee, presenting the annual budget to parliament, said he plans to narrow the gap to 5.5 percent of GDP in the year starting April 1 from 6.9 percent the previous year.
  • He also said economic growth may reach 10 percent in “not-too-distant future.”
  • Mukherjee outlined tax increases -- including a fuel levy that prompted opposition lawmakers to storm out of the building -- and 400 billion rupees ($9 billion) of state asset sales in his budget. The effort may help bolster investor confidence in India, which has the lowest sovereign-debt rating among the BRIC nations that include Brazil, Russia and China.
  • “The headline numbers are encouraging,” Andrew Colquhoun, director at Fitch Ratings’s Asia-Pacific Sovereign Group in Hong Kong, said in an interview. “We are marginally less encouraged to go for a downgrade at this point,” referring to India’s sovereign-debt rating. Fitch’s local-currency grade is BBB-, the lowest investment grade.
  • Mukherjee raised the excise tax on almost all products to 10 percent from 8 percent in his budget.  The minister also increased the minimum alternative tax for companies to 18 percent from 15 percent and widened the net for services taxes to include electricity exchanges and real-estate companies.  (I guess there is no GOP in India ?)  Aiming to slow food inflation, Mukherjee removed the service tax from transporting cereals and pulses by road.
  • “Containing the budget deficit is a big deal,” said Harsh Pati Singhania, President of the New Delhi-based Federation of Indian Chambers of Commerce & Industry. “He has touched all the right buttons. The stimulus rollback is gradual and calibrated.”

Interesting to read how money is allocated in India's budget - the impact of fertilizer and agricultural subsidies is huge.  There was a fascinating story in the WSJ earlier this week on how the "urea" fertilizer lobby is dominant and the fertility of the land is degrading because the government subsidies have caused an over reliance on one nutrient at the expense of others.  So to get the same yield, even more urea is being used... so it's a self reinforcing death sprial.  Ah, politics....
  • Subsidies for food and fertilizer now consume 9 percent of the budget. With another 11 percent devoted to defense, 19 percent to pay interest on the national debt and 27 percent given to states as their share of the federal government’s revenue, that limits the capacity to spend for schools, power plants and other investments that can boost growth.

[Sep 30, 2009: India's Monsoon Season Driest in 3 Decades]
[Aug 7, 2009: India's Growth May Suffer Due to Weak Monsoon Season]

Former Fed Governor Robert Heller: "Double Dip Still in the Cards"

Judging from what we hear from current Federal Reserve members versus previous members, it appears one is only allowed to whisper about reality once you exit the body.  Below we have a 5 minute video from former Fed Governor Robert Heller who opines about many of the same issues discussed on the blog on a daily basis.  Of course it was not on CNBC USA, but pushed off into Asia because it doesn't fit the green shoot mosaic. ;)  Kind of strange to hear a former Fed Reserve member sound all "doomsy" aka Marc Faber, rather than whistling about the Alice in Wonderland existence we enjoy.
  • “A double dip recession is still very much in the cards,” Heller told CNBC.  “The big elephant in the room is the huge federal deficit, and that will eventually will force up interest rates. And as interest rates go up, it will kill both businesses and consumer recovery.”
  • Therefore the economy is likely to weaken again, said Heller. He expects a spike in interest rates in the near future, which he described as the "danger" awaiting investors.
My only disagreement with Heller here, is not knowing when interest rates will "spike" - with so much damage in Europe, and Japan - the US is still benefiting from the 'safety trade', and as people pile into bonds each time the S&P drops 0.5%, along with quantitative easing policies, knowing the timing of the visit from the bond vigilantes is nearly impossible.

(email readers will need to come to site to view video)

Thursday, February 25, 2010

Bookkeeping: Buying Back some Seagate Technology (STX)

I did not have a limit purchase order waiting unfortunately this morning in the $18s, so instead of buying in upper $18s I am buying back the Seagate Technology (STX) sold Monday in $20.60s in the $19.30s.  Adding a 1.25% allocation.  The thought process here worked perfect (sell a good portion of position since stock was nowhere near support, buy back at lower price) but execution could of been better.

Long Seagate Technology in fund; no personal position

Holding Near the Low from Tuesday

After a quick swoosh down, the S&P 500 is back to that 1090 level.  While Ben Bernanke swiped me yesterday with his testimony of "easy money forever... and ever" that changed the chart within minutes after one of my posts, I will repeat yesterday's refrain that the conditions seem more ripe for some downside than upside.  The gap at S&P 1078 still remains in place.

Will be back at the turret full time tomorrow and be out of pocket rest of day; otherwise I'd be pressing index shorts as long as 1100 is not regained.

As an aside TriQuint Semi (TQNT) had a good report, and is one of the only green names I see in my lists.  More on that name tonight or early tomorrow.   Chart looks excellent now as well.

Long TriQuint Semi in fund; no personal position

NYT: Banks Bet Greece on Debt They Helped Hide

One would think this is an over the top headline but frankly it appears to be quite accurate.  One can argue banks are simply enablers - without demand for these services there would be no market, which is true.  But like many mortgage products the "financial innovations" of the past decade are akin to selling someone an asbestos laden house and then buying life insurance contracts against said human being.  Boo yah - the new finance based economy is so fun for the marionette players.

Via NYT:
  • Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruinEchoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
  • These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
  • It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
  • As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
  • A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.  (very similar to what happened to Bear Stearns, Lehman Brothers, Merrill Lynch and ironically Goldman Sachs - along with Morgan Stanley, before they ran to the Federal Reserve to hide as a bank holding company)
  • On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
  • But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.  Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
  • On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.  “It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
  • The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.  In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.  Markit says its index is a tool for traders, rather than a market driver.
  • Some money managers say trading in Greek swaps alone, not the broader index, is the problem.  “It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
  • ... until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.  “Credit-default swaps give the illusion of safety but actually increase systemic risk.”

Wednesday, February 24, 2010

Bookkeeping: Closing Braskem (BAK) as Brazilian Market Mimics America's

Brazilian chemical maker Braskem (BAK) now has a chart I'd be searching for when seeking short candidates, so I am going to punt the remaining holding position of 0.15%.  The majority of this position was sold in latter January, with more going out in early February - both in the mid to upper $14s which is just above where the stock is now.

[Dec 9, 2009: Braskem - Brazilian Chemical Maker]

The greater Brazilian market, after peaking its head over the 20 and 50 day moving averages, continues to struggle as well... in a world where computers now have created almost perfect correlation across assets the globe over, this chart looks similar to the S&P 500.  At this point it is hard to envision any great move up globally with Greece casting a shadow on Europe, & China, India, and Brazil not participating.  Perhaps Mr.Bernanke can pledge low rates for an extended period of time for the entire planet to help give them all a boost.  Or start making 1 country after another a bank holding company with access to the Fed's discount window... boo yah.

No position

WSJ: India Joins China in Global Hunt for Commodities

A few weeks ago we noted the world's largest coal producer, Coal India, was on the hunt for global assets to expand their reach.  [Feb 12, 2010: WSJ - World's Largest Coal Producer Has $6 Billion in the Bank and is on the Prowl for Assets]  It appears this is now part of a broader national strategy mimicking what China has been doing the past half decade+.  

If you have any Malthusian bones in your body,  [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012] you have to wonder as certain countries waste all their national treasure on bailing out banks, financing the lifestyles of those who refuse to save for themselves, and funding pet projects of their politicians -  while others are attempting to snatch up as many long lived assets across the globe, what the long term implications will be.  This is more or less parallel to a company who lives for today - happy to kick the can down the road -  rather than spends heavily on R&D to prosper for tomorrow. Of course any such national directives would be considered "socialistic" in certain countries, hence anathema to even consider as national policy.   Oh well, much better to send countless paper monies out into the atmosphere to help prop up home prices and capital market values from going where they belong - a much sounder national directive.

Via WSJ:
  • India wants to join the club of global energy giants.  Some of the country's largest private and state-run firms are in hot pursuit of oil and gas assets overseas as they seek to take advantage of depressed asset prices during the downturn and break free of burdensome regulations at home.
  • In the latest move, oil-to-textiles conglomerate Reliance Industries Ltd., run by billionaire Mukesh Ambani, raised its bid over the weekend for LyondellBasell Industries, a bankrupt petrochemical maker and oil refiner. The new bid values the Netherlands-based firm at $14.5 billion, according to a person familiar with the matter.  A deal with Lyondell would significantly advance the ambitions of Reliance's Mr. Ambani to build a global energy conglomerate. It would create a behemoth with $80 billion in combined revenues and interests in oil-and-gas exploration, refining and petrochemicals used for food packaging to textiles. (Reliance is akin to a combination of General Electric and Exxon Mobil in the States - a powerhouse in India with hands in countless industries)
  • Reliance, India's largest private company by market value, already operates the largest oil refining complex in the world, a site in the western state of Gujarat that can process 1.24 million barrels of crude a day. The facility is designed to handle the kind of ultra-heavy crude that could be extracted from Value Creation's oil sands.
  • Reliance also is scouting other foreign targets, including Canada's Value Creation Inc., which has large oil-sands deposits in Alberta, people familiar with the company's thinking said. (China has also been in Canada purchasing oil sand deposits)  Smaller rival Essar Group is stepping up its own bargain hunting abroad, with an eye on assets that Royal Dutch Shell PLC and other oil majors are unloading.
  • In recent months, Reliance and Essar, both based in Mumbai, have hired top executives from global oil majors to aid their international expansion efforts. 
  • Meanwhile, India's flagship state-run oil company, Oil & Natural Gas Corp., said recently it may spend as much as $30 billion over the next decade on an international acquisition binge
  • Indian companies are scouring the globe to secure crude resources and reduce their dependence on imported oil. India imports 70% of its oil, with a price tag of more than $90 billion annually. The companies are also looking to expand their global footprint with refineries and other assets in far-away markets. And they want relief from the regulatory headaches of their home turf, where government influence in exploration and pricing of natural resources has slowed expansion.
  • India is likely to face competition as it shops for oil and gas, especially from Chinese firms. Last summer, Sinopec Group, a large Chinese oil company, paid $7.2 billion for Addax Petroleum, a Geneva-based company that has oil and gas assets in the Middle East and Africa.  "We see the international players being more often the buyers of these types of assets now, and there's no reason to think that won't continue," said Jon McCarter, oil-and-gas transactions leader for the Americas at Ernst & Young.
  • Cross-border acquisitions by Indian companies fell 37% last year to $11.4 billion, according to Dealogic. But activity is picking up as Indian companies rev up for big-ticket deals in sectors such as energy, telecommunications and media
  • The country's largest cellphone company, Bharti Airtel Ltd., offered $10.7 billion last week for most of the Africa assets of Kuwaiti operator Mobile Telecommunications Co., known as Zain.  Essar Group, a conglomerate with $15 billion in revenue and interests in steel, oil and telecom, controls oil exploration blocks in places including Nigeria, Madagascar, Myanmar and Vietnam.  Now the company has emerged as an eager buyer for European and U.S. oil companies that are struggling with extra refinery capacity due to slumping demand for fuels.
You can almost feel the sands shifting under our feet, month by month - year by year.

STEC (STEC) - When Momo Stocks Go Bad v2.0

STEC (STEC) is simply mutilating it's stock holders today; and it's not the first time in the past half year.  [Nov 4, 2009: STEC Crashes 30% on EMC Inventory Warnings] Quite an amazing turnaround for this once high flying momentum stock, but an abject lesson in what happens when you run with the momo crowd.  It's fun while it lasts but when the music stops... yowsers.  This time around it looks like yet another inventory issue, along with Q1 guidance.
  • Shares of Stec Inc. plunged Wednesday after the maker of data storage devices said first-quarter revenue would be as much as 53 percent lower than what Wall Street expected.
  • Late Tuesday, Stec forecast first quarter 2010 revenue of $33 million to $35 million and an adjusted loss of 11 cents a share to 13 cents per share. Analysts expected revenue of $70 million and an adjusted profit of 20 cents per share, according to Thomson Reuters.
  • Stec said an inventory carry-over at its largest customer, EMC Corp., will hurt sales in the first half of 2010. (identical issue in November, but with a different time frame this time around) The company does not expect "any meaningful production orders" from the client during this time.
  • Stec, based in Santa Ana, Calif., was downgraded by JPMorgan analyst Mark Moskowitz to "Neutral" from "Overweight."  "We had been too optimistic," he said in a research note. "The disappearance of sustainable revenue momentum up-ended our prior view that Stec was the high-growth story" in small to mid-cap stocks.
  • Moskowitz said the outlook shows that the troubles with EMC isn't a one-quarter problem. (bingo)
And the analysts now come out en masse with the downgrades.  Is there value here?  Certainly - but if you cannot trust management to forecast their own business you are simply a blind squirrel.
  • Wedbush Securities' analyst Betsy Van Hees said investors should remain on the sidelines till there is more clarity on adoption rates of solid state drives (SSDs), customer production ramps, single-level cell (SLC) NAND flash pricing trends and the competitive landscape.

What a year for the stock!  Almost a "round trip" at this point.  Note the May 2009 gap which at one point looked like it would "never" be filled, has done so in 9 months.

No position

(Video) Fear the Boom and Bust - a Hayek v Keynes Rap Anthem

Quite a hilarious (but somehow educational) rap video pitting 2 of the most famous economists against each other - John Maynard Keynes & Friedrich von Hayek.  In today's term you might hear this as "Keynesian" v "Austrian" economics.  Everything being done in the world today is going along the path of the former while those in the camp of Hayek scream bloody murder.

A clever video none the less...

Interesting Reversal

After our now almost traditional mark up in the indexes either in premarket or the first 30 minutes, the markets have reversed and given back some gains.  This is quite atypical of the action we have seen much of the last year... more or less any day you have light volume and a "mark up" morning either (a) the index drifts sideways all day in the "square root" formation or (b) it drifts up on vapor all day.  Hence this action is interesting in that it's different.

At this point like a magnet the twin exponential moving averages of the 20 and 50 day bracket the S&P 500, with that gap waiting down at 1078 if and when.  A clean break of yesterday's low would set up some for a potential of a nice swoosh down especially if it happened today since some bulls surely were sucked in first thing in the AM...

Bulls want this level to hold, bears attack below 1090 with the "easy trade" to 1078.  In a normal era this type of action today would call for further downside as the way to lean.  In the "mark up morning" market era (where stocks can go up for weeks and months with little volume) of the past year, we just never know as historical precedence seems to matter little.  Still going with my old school lessons, and hedging some more for downside.

Recall the next few days are all about our drug dependence on Ben Bernanke.

EDIT 10:50 AM - never mind that reversal.  All it takes is Ben Bernanke to pledge free drugs for an extended period of time and the speculators cry in joy and try to buy stocks as fast as possible in between the tears.  Nearly 1% tagged onto the market in minutes.  It's great to know this market is entirely hostage to one man's willingness to throw kerosene in unmitigated matter...

The goldilocks speculator economy continues - Bernanke assures us we have a recovery, but not enough of a recovery to bother to dispense with emergency rates.  
  • Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that record-low interest rates are still needed to ensure that the economic recovery will last and to help ease the sting of high unemployment. Bernanke struck a confident tone that the recovery should endure.

First Phase of Singapore Casino for Las Vegas Sands (LVS) to Launch in April

With Las Vegas flailing, and the new City Center project causing even more pressure on room rates, the idea in gaming, as in almost all things nowadays is to Go East Young Gambler. (or Old)  While Macau has been an investor favorite, one ace in the hole for Las Vegas Sands (LVS) to compensate for the dreck that is Vegas is Signapore. 

Last night we received the announcement that the first phase should launch in April.  This will be only the 2nd casino open in Asia's financial hub:

Via Reuters:
  •  Las Vegas Sands (LVS) will open the first phase of its Singapore casino on April 27, earlier than expected, bringing into play a project CEO Sheldon Adelson says will generate $1 billion in annual profits.
  • Las Vegas Sands said the Singapore casino's official opening is scheduled for June 23 when the firm expects to open more retail and dining outlets along with the nightlife offerings.  The Marina Bay Sands' April start date is in line with what Las Vegas Sands has forecast, but comes as a bit of a surprise as construction is still taking place at the waterfront site near Singapore's central business district.
  • The $5.5 billion Marina Bay Sands casino will start operating along with 963 hotel rooms, part of the shopping mall and convention centre, and several dining outlets, Las Vegas Sands said in a statement on Wednesday.
  • The opening of the Marina Bay casino follows on the heels of the opening of Singapore's first casino, rival Genting Singapore's  Resorts World at Sentosa, on Feb 14.   "Given Marina Bay Sands' centralized location and possibly a higher quality product offering, Resorts World will likely see challenges in attracting casino patronage," said Deutsche Bank analyst Aun-Ling Chia in a note to clients. "Resorts World needs to ramp up fast to fully leverage on the first-mover advantage," Chia said.  Singapore's first casino, Resorts World, has had a mixed performance since its opening 10 days ago.
  • In a report on Wednesday, the Straits Times newspaper said while the shops and eateries were packed and hotels fully booked, the number of people entering the casino was much smaller than numbers reported by casinos in Macau after their opening.
  • The Marina Bay Sands occupies a waterfront site at the edge of Singapore's central business district, and was the more fiercely contested licence when Singapore gave the green light to casinos in 2005 in a bid to attract more tourists.
  • News of the Singapore opening date comes amid pressure on the share prices of Las Vegas casino operators due to falling room rates and on worries about MGM Mirage's (MGM.N) newly opened $8.5 billion, 6,000-room CityCenter project.
Long Las Vegas Sands in fund; no personal position

Tuesday, February 23, 2010

IBD: Could Priceline (PCLN), Expedia (EXPE) Hit Headwinds?

IBD reports on one of the hottest stocks on the planet - (PCLN) along with lagging peer Expedia (EXPE).  Usually multiples are based on growth rates, and Priceline warned in their latest earnings report [Feb 18, 2010: - Another Stellar Earnings Report] not to expect the same growth rates go forward as comparisons get tougher from here.  The question now is what expectations of the future are already in Priceline's stock and is this one of those times buying a weaker peer might actually offer more upside.


Via IBD:
  • Online travel agency Priceline (PCLN) has been sailing with the wind for more than a year and demand is billowing, especially in Europe.  Priceline said Wednesday that its gross international bookings, mainly in Europe, soared 81% in the fourth quarter vs. the year-earlier quarter. Its hotel room nights booked jumped 60% worldwide. Its per-share profit has beaten analyst views by at least 18 cents in each of the last six quarters.
  • Other online travel firms also have been lifted. Expedia (EXPE) said on Feb. 11 that its fourth-quarter earnings rose 36% on a 26% rise in bookings. But some analysts — and Priceline itself — note the weather pattern might be shifting. Visitor growth to online travel sites is slowing, and recent economic turmoil in Europe might hurt the travel business.
  • At the same time, sales and marketing expenses are creeping up as the global economy recovers, driving up costs for companies like Priceline and Expedia. And as the economy rebounds, some airlines and hotels might opt to sell plane seats and rooms on their own Web sites rather than offer them to online travel agents.
  • "There's some potential for disappointment in online travel" later this year, said Standard & Poor's equity analyst Scott Kessler. He says a shifting market might hit Priceline the hardest, since it's been doing so well. He says Priceline will face especially tough quarterly comparisons, given its stellar 2009.
  • "The recurring theme and issue for Priceline is the fact that expectations have gotten so high, a lot of the investing public expects them to exceed their guidance," Kessler said.  With Priceline trouncing analyst views routinely, Kessler says a quarter that misses views or only mildly beats might unnerve investors.

  • U.S. visitor traffic to Priceline cooled late in 2009, after surging earlier in the year. One possible explanation is that consumers aren't as passionate about scouring Priceline for travel deals as the economy recovers.   Tracker ComScore Media Metrix says that visitor traffic to Priceline rose 28% in December compared with December 2008, to about 8.8 million unique visitors. But the site's traffic jumped 50% in August and 52% in September.
  • On the plus side, Priceline's hotel reservation service in Europe saw traffic soar 83% in November and 72% in December.
  • To be sure, Priceline provided strong guidance for the current quarter. It expects total gross bookings to jump 42% to 48%. It sees international bookings soaring 65% to 73%, with U.S. bookings rising 10% to 15%. It expects revenue to rise 23% to 27%. That would be up from 15% in first-quarter 2009 vs. first-quarter 2008.
  • But Kessler says it's still unclear how the government financing problems facing European nations like Greece will impact travel spending.
  • ... the euro has been weakening against the dollar. Priceline's Boyd noted on his conference call that it's difficult to predict how future currency moves will affect the company's foreign-denominated sales.
  • As the global economy in general picks up, though, so will ad prices of advertisers such as Priceline, says S&P's Kessler.
  • He also notes that while travel suppliers are eager to sell unsold plane seats and rooms on travel sites when the economy's bad, they lose some incentive when the economy improves. Kessler says Priceline and other Web travel firms will be hurt if airlines and hotels get stingy about offering deals on their inventories.
  • He points out that Expedia has a much stronger corporate travel arm than Priceline, a plus as the global economy recovers. Expedia has also been making efforts to crack the Chinese market through its Egencia corporate travel unit. Aside from Agoda, an online hotel reservation service based in Singapore that books rooms in Southeast Asia and China, Priceline has little presence in the Chinese online travel market.  "Expedia's starting to get back on the ball again and their international expansion efforts are paying off," said Morningstar's Miller.
  • Expedia said domestic bookings rose 19% last quarter, while international bookings soared 38%. Global hotel revenue surged 16%.  Kessler says Expedia's TripAdvisor unit, which reviews hotels, restaurants and other travel-related services, is doing well. The service makes money from online ads, so it will gain as ad rates rise. "It's a natural hedge for Expedia," he said.

No position

NY Post: Watered Down Volcker Rules, to be Watered Down Further

Government Sachs (GS) wins again.  (insert audible gasps of shock here)  While the NY Post is generally not the "go to" source for data, you can assess the veracity of these stories out of D.C. by the stock price of Goldman Sachs. 

The "surprise" of the (watered down) Volcker rule truly shocked our oligarchs. [Jan 27, 2010: Bloomberg - Financial Oligarchs Completely Stunned by "Volcker Rules"]  Obviously there was some teeth to real regulation being considered a month ago but "the market" did not like it, and now we run the entire country on what "the market" wants.  And our friends at 85 Broad are the most important private player behind "the market" - when they throw temper tantrums all must be halted.  Judging from the recent strength in the stock - even on a down day like today - the bank lobbyists have 'done good' and now we are getting the typical song and dance... something to trumpet the peasantry, but with almost no impact. [Feb 2, 2010: Senator Shelby - We Don't Need no Stinkin' Volcker Rules]  A watered down version of what was already a watered down proposal.

Fully backstopped via taxpayer hedge funds within investment banks - only in Cramerica.

Via NY Post:
  • The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed "Volcker rule" governing how banks operate, according to people familiar with the situation. 
  •  Sources told The Post that instead of issuing an outright ban on prop trading -- or trading done on behalf of only the bank itself -- the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks.
  • The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban. (please check the campaign contributors of these lawmakers for the real reason behind said rejection)
  • The Volcker rule had problems almost from the start, with Volcker and Deputy Treasury Secretary Neal Wolin having difficulty explaining the proposal and its necessity to the Senate Banking Committee.  (that probably speaks more to what type of people are sitting in our Congress than anything else...)
  • ....even as a group of former Treasury secretaries, including John Snow, George Schultz and Paul O'Neill, threw their support behind the prop-trading ban, Volcker himself is said to be only somewhat optimistic about his proposal's chances
  • Well, I for one, feel better now (ahem)

Berkshire Hathaway's Charlie Munger - Basically, It's Over: A Parable About How One Nation Came to Financial Ruin

While Warren Buffet gets all the press and is a media darling, his partner who works in shadows is a person I find much more interesting.  Perhaps because Charlie Munger is one blunt son of a gun as we saw a year ago [May 3, 2009: Berkshire Hathaway's Charlie Munger Says 'Venal' Banks May Avoid Needed Reform]

This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”

We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”

No surprise, Charlie was right on this one.

Today we have a fascinating piece Mr. Munger wrote in titled ''Basically, It's Over" - well worth the full read.  I will let you read between the lines, and of course with a caveat that this is just one of many issues affecting "Basicland".  A few snippets:
  • In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
  • The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
  • Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

  • .....even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
  • The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
  • Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
  • And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
  • How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
  • The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
  • Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems.
  • As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
Welcome to Sorrowland...

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