Tuesday, August 10, 2010

Whitney Tilson Becomes More Bearish on Economic Prospects of the U.S.

Hedge fund manager Whitney Tilson of T2 Partners - well known to viewers of financial entertainment TV (CNBC) - has his monthly note out.  While I am not that interested in his stock specific views since he is a deep value "buy and hold" type of investor (not that there is anything wrong with that, just a completely different style) - I was struck by his commentary on the economy.  It is starting to fall in line with my views.

He lays out 3 scenarios and was leaning to the muddle through outcome (#2) but now appears to be tilting more to #2 or #3.  Those would be my own 2 outcomes as well due to the structural imbalances in the country and nature of globalization on the labor force that have been papered over for a decade or two.  The only difference between the 2 outcomes will be how much money the federal government and central bank apply to the economy to create an illusion.  Judging from their performance in the past 24 months the answer seems "limitless".  So perhaps the "nirvana" of outcome #2 can continue as we kick the proverbial can ever more.  Which is exactly what we've been doing thus far - placing a mountain of manipulation inside of a recession to create a statistical "recovery"....

From Tilson:

In general, we believe that in the aftermath of the bursting of the biggest asset bubble in history, we are in uncharted waters and there is a very wide range of possible outcomes over the next 2-7 years. Broadly speaking, they fall into three scenarios:

1) A V-shaped economic recovery with strong GDP growth (3-5%), a falling unemployment rate, and reduced government deficits. Under this scenario, the stock market would likely compound at 7-10%.

2) A “muddle-through” economy with weak GDP growth (1-2%), unemployment remaining high (7-9%), and continued government deficits. Under this scenario, the stock market would likely compound at 2-5%.

3) A double- (and triple-, and quadruple-) dip recession where periods of growth are followed by periods of contraction, with no overall GDP growth, unemployment around 10% (with the actual level higher due to people giving up looking for work), and large deficits as the government tries to stimulate the economy (but with little impact). Under this scenario, which looks like what Japan has gone through for more than two decades, the stock market would be flat to down.

Both as investors and as Americans, we’re of course hoping for 1), but fear that this is the least likely of these scenarios. A few months ago, we would have guessed (and it’s no more than an educated guess) that the odds were 25%, 50% and 25%, respectively, but in light of recent weak economic indicators, the odds have shifted unfavorably. Hence, we are positioning our portfolio more conservatively, trimming some of our longs, adding to our short book, and increasingly shifting our long portfolio into big-cap, strong-balance-sheet, dominant-market-position blue chips like Berkshire Hathaway, AB InBev and Microsoft, as well as short-duration, special situation investments like BP and Liberty Acquisition Corp. warrants.

Full letter below - hit full screen for an easier read


Hat tip ZeroHedge

[Nov 4, 2009: Whitney Tilson T2 Partners October 2009 Investor Letter; Housing Recovery Still Has Long Way to go]

Market Pleased with Confirmation of QE Lite: The Empire Strikes Back

So long story short, the Fed balance sheet will not be shrinking.  Translation, each month more assets will be purchased and parked on the Fed's balance sheet, whereas 60 days ago we were talking 'exit strategies'.  How quickly things change.

The Fed says they will be buying long term Treasuries which is effectively full scale monetization of debt.  i.e. a license for the government to spend as much as it wants, because we now run a Banana Republic where the left pocket buys from the right pocket and we all clap like seals, talking about the best economy on Earth.  What is cool is no one is outraged by this stuff anymore; we have become immune to these policies that if whispered about 3 years ago would have people shocked.  Now it is simply business as usual, and if it can manipulate assets upward, we're content.

There is some hand wringing about buying Treasuries rather than MBS but frankly if the Fed bought mortgage backed securities OR US debt outright it does not matter to me.  They are both now US debt in my mind as almost the entire housing market is now a government run program, with Fannie and Freddie wards of the state.  (and FHA being run like a subprime lender circa 2005)  Their debt is the obligation of the taxpayer, with open ended expenses as made clear in the still of the night Christmas Eve as Tim Geithner pulled a fast one on the US taxpayer.   [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]   So it's all just an accounting trick; the mortgage debt is guaranteed by the full faith of the government as are its traditional debts.  So what does it matter if the Fed buys MBS or UST?

The market rallied strongly as the Fed gave in to the demands of the whiny children.  (rule 1 of fight club: never "upset the market") This is just a first step; I expect full fledged QE (QE III: Return of the Jedi) post election and into first quarter 2011.  Buy anything you wish, Ben Bernanke has your back.  You remember March 2009 to April 2010 don't you??  Please don't ask any questions about why a rip roaring economic "recovery" requires the Fed to backstop every orifice known to man - just smile and tell your European friends how awesome and flexible our economy is, and how theirs sucks.  Make sure to call them socialists why you are at it, while beating your fist on your chest and screaming "We're #1!".

p.s. as long as we are on the subject of Fannie, Freddie debt I am now reading stories about Fannie giving "nothing down" mortgages again.  That worked out wonderfully in the past.  A few years ago I'd scream and be outraged....now I'm too busy laughing at the absurdity of it all.  But who cares if we lose money on these "awesome deals" - the Fed will make it whole and take all our pain away.  Free market capitalism baby; go team go.

AP: Forced to Retire, Some take Social Security Early

It appears part of the mystery of "where everyone disappeared to?" as the labor force participation rate plunges is:  Social Security.   Early payments (at reduced amounts) jumped significantly for both the male and female population; strikingly high for males who have been harder hit in this recession as manual jobs disappear and the economy continues to focus on services.  In both cases, almost three quarters of people taking social security in 2009, filed early.

Please keep in mind, in America if you are not looking for work "actively" for 4 weeks you are no longer unemployed.  That fact (many discouraged workers), along with a host of other factors such as this "forced early retirement" trend is making the unemployment rate look far better than it is.  If the U.S. had a more traditional labor force participation rate, the unemployment rate would be a few % higher simply from that one factor alone.

Via AP:

  • Paul Skidmore's office is shuttered, his job gone, his 18-month job search fruitless and his unemployment benefits exhausted. So at 63, he plans to file this week for Social Security benefits, three years earlier than planned.  "All I want to do is work," said Skidmore, of Finksburg, Md., who was an insurance claims adjuster for 37 years before his company downsized and closed his office last year. "And nobody will hire me."
  • It is one of the most striking fallouts from the bad economy: Social Security is facing a rare shortfall this year as a wave of people like Skidmore opt to collect payments before their full retirement age.   "I knew I had to have an income from somewhere, and my business wasn't giving it to me," she said. "I just went online and, boom, three weeks later I had the check."
  • 63-year-old Jan Gissel of Tustin, Calif., also was forced into retirement early. She turned to unemployment benefits when her technical support business failed and filed for Social Security last September. Together, the checks are keeping her afloat.
  • More people filed for Social Security in 2009 -- 2.74 million -- than any year in history, and there was a marked increase in the number receiving reduced benefits because they filed ahead of their full retirement age. The increase came as the full Social Security retirement age rose last year from 65 to 66.
  • Nearly 72% of men who filed opted for early benefits in 2009, up from 58% the previous year
  • More women also filed -- 74.7% in 2009 compared with 64.2% the previous year.
  • "When you retire early, you are taking a hit in your monthly check, and most people don't do that voluntarily," she said. "They either do that because they aren't healthy enough to keep working or because they lost their job."

Bookkeeping: Selling 1/3rd Acme Packet (APKT) on CNBC Mention

I am going to squirrel away a few more gains and make them 'realized' rather than 'unrealized' and hence prone to go 'poof' if the bipolar reaction in a few hours is 'down'.  Acme Packet (APKT) has a similar technical setup to Netflix although its recent 52 week high is much more recent.  That said, the strategy is identical.  I'm going to take some profits here and happy to repurchase on a breakout to new highs (or a pullback).

I charged back into the stock once it regained support on August 4th at $29.96 so we have a nice profit in a short while.  Helps to make up some of the unrealized gains we lost in the post earnings slap to the face.

The stock was mentioned on CNBC in its own segment today, which (a) makes me nervous and (b) makes me wonder how this woman can love the stock more than I. ;)  On the plus side, at least the mention did not come in the 6 PM hour sending a flurry of "home gamers" running to their brokerage accounts screaming "buy buy buy!".

(3 minute video - email readers will need to come to site to view)

Long Acme Packet, Netflix in fund; no personal position

Bookkeeping: Selling Half of Netflix (NFLX) on Epix Streaming Movies Announcement

I am selling roughly half my Netflix (NFLX) exposure [which we just restarted Friday] as the stock dances upward to the tune of 7% in a bad tape.  I have a quick 11.5% gain in just 2 days, and the stock is approaching old highs, so I want to sell here and then buy back on a move OVER the 52 week high (or a pullback).  As with any announcement of news like this, the timing for us is just plain luck, no skill involved.

With the Fed announcement in a few hours (which I've noted could be a disappointment since the market is expecting some sort of huge handout that I don't think is coming... yet) I have been content to lock in some profits along the way.  If I am wrong on the Fed and a helicopter drop of fiat currency gets speculators giddy, we'll just reconfigure once S&P 1132 is breached.  Keep in mind there is still a small gap at S&P 1106.44 that needs to be filled sooner or later.  Could be 2:16 PM if Ben does not bend to Wall Street's ransom demands.

Out these shares go near $125; over $127.50 (June highs) OR on a pullback (lower to mid teens), I am interested in buying these stock certificates back.

Today's news that is making the stock dance:

  • Netflix Inc (NFLX) reached an exclusive deal that allows members of the online video rental site to watch new films from the three studios that own the pay TV channel Epix.  The deal, which begins on September 1, makes Netflix the exclusive Internet-only distributor of movies from Paramount Pictures, Metro-Goldwyn-Mayer Studios and Lions Gate Entertainment Corp (LGF).  The films will be available 90 days after their premium pay TV and on-demand debuts.
Long Netflix in fund; no personal position


Two Percent of Small Businesses Surveyed Plan to Hire

These annoying small businesses are really throwing a wrench on the greatest multinational era of all time.  I contend we should shut down all small business and hence any surveys done on this sector since all they do is report bad news, due to their lack of Asian customers.  Today's NFIB report was one in a string of pathetic surveys, from the one sector which actually still creates jobs for Cramericans.  So I have some good news and some bad news.

Bad news:  Only 2% of small businesses surveyed have plans to hire.

Good news:  That's an improvement from the last survey when it was 1%

Conclusion: Green shoots.

Conclusion #2:  Who cares about small business in America? They are not listed in the stock market and all we care are about are our multinationals ability to shed American jobs and sell to the Asian market, while lobbying our good Congressional representatives to hand them goodies of all sorts.  As long as that continues our (narrow) prosperity continues.  In the meantime all those annoying Cramericans who do not have enough money to invest in the stock market and hence partake in the new paradigm prosperity (where income derived from stock holdings replaces the old school 'wages') have enjoyed the upteempth extension of unemployment benefits as of 2 months ago, and as of this morning another $26 billion of stimulus taxpayer money is going out to support the public sector worker.  Ponzi style.

And the beat goes on.  Small business owners of America - a pox on you for not understanding how "super cool" the new paradigm economy is.  Granted, you are not handed tens and hundreds of billions of 'stimulus' every 9-12 months to keep the ponzi scheme going as if you were a state, county, city, or school district but stop your complaining.  I've advised everyone who has read my website to get OUT of the private sector and INTO the public sector which is the end all, be all of the Cramerican economy; you only have yourself to blame for your "striking it out on your own" thinking.  That's so 1964 or 1989 of you.  If only we could outsource all our small businesses and then these problems would go away and Dow 35,000 would be in sight.

/tongue removed from cheek.

  • Small business owners became more downbeat in July as expectations of weaker economic growth in the second half of the year reinforced a reluctance to hire, according to a survey published on Tuesday.  The National Federation of Independent Business (NFIB) said its optimism index fell 0.9 point to 88.1 in July.
  • "Virtually all of the decline was due to weaker expectations for business conditions six months from now," said William Dunkleberg, the group's chief economist.  "With no pricing power and real sales volume weak, profits are not able to recover," the report said.  (but other than that, everything is looking fine - the stock market says so)
  • Only 2 percent of respondents said they had plans to create new jobs. That actually represented an improvement from June's 1 percent reading.  (sheesh, 12 months ago the stock market would of rallied 3% on the "2nd derivative improvement")

Monday, August 9, 2010

CNNMoney: Is the Party About to End in Brazil?

I always want to see the other side of the trade, even if I disagree so today I will post a story via CNNMoney that paints the potential downside in Brazil.   I think I read a similar story in Barron's about 2 years ago - obviously that one was off the mark but again, there is always someone on the other side of every trade so it pays to understand why and stress test your own thesis.

While Brazil is in part booming due to China, and someday when that country implodes from their own easy money policies I expect all emerging markets to take a fall, exports account for less than 15% of Brazilian GDP.  Which is a stat that surprised me, considering that from afar everyone thinks Brazil's entire story is as a commodity exporter.  But frankly when the time comes, that export market "fact" won't matter much because HAL9000's algorithm will say "if commodities down then Brazil equals sell"; facts never get in the way of a good algorithm.

One other worry: I dislike the fact almost every mainstream financial publication is now trying to get Joe6Pack to try to invest in the country.  I am starting to see Brazil all over Kiplinger's, Money Magazine, et al. When Tom your barber starts talking up the prospects of Rio v Sao Paolo, it is going to be time to head for the hills.

  • Marcelo do Rio stands outside his new Brazilian pizzeria, grinning. The sale of his brewpub chain financed the launch of his new business -- and the purchase of his swank Rio home.  This Brazilian's success story is but one in millions. "Brazil is like the US in the 1950s," beams do Rio, who plans two more pizzerias, a dough factory and selling his secret sauce in stores. "It's a great time to be here."  (ironically I've written in many posts that investing in some of these BRIC countries is akin to getting a second chance at being able able to invest in the U.S. in the 1950s/1960s)
  • Last year, Brazil's bourse soared 83% and in May, its stocks comprised an astounding one-sixth of emerging markets portfolios. In February, new Sao Paulo apartment sales surged 84% year-on-year; vehicle purchases rose 30% a month later. And as Greece imploded, Brazil's economy grew at a torrid 9% pace.
  • What fueled this boom? Seven years of soaring soy and steel exports to China, which sparked a virtuous circle of new manufacturing jobs, retail businesses and brisk home sales on flush credit by Brazil's growing middle class. But unlike prior upticks, this one has had staying power for this massive country of 192 million. Prudent fiscal policies under union leader-turned-president Luiz InĂ¡cio Lula da Silva helped tame Brazil's sky-high inflation, interest rates and a wildly fluctuating currency.
  • But there are signs that winds could shift, despite the fact that the country is beginning to prepare for its moment in the global spotlight with the 2016 Olympics. Behind the euphoria, seasoned investors are starting to squirm. Interest rates and inflation -- now at 10.75% and 4.8%, respectively -- are beginning to creep up. Skeptics worry that Brazil's China-like growth could cause bottlenecks as capacity struggles to keep up with demand, investment falls, and public spending continues to rise. Investors particularly fret over Brazil's failure to enact reforms like looser tax laws that would shore up tepid growth and domestic spending in the event of a major downturn.
  • Throw in uncertainty about a new president come October, a strong currency, and a Chinese pullback on commodity buys, and many investors who rode Brazil's bull market are mulling a move elsewhere. Brazilian stocks already shed 11% in the first half of this year.

  • Alan Nesbit, portfolio manager at First State Investments who recently pruned his Brazilian holdings, thinks the market ran more on momentum than fundamentals. "I worry about unsophisticated investors heavily exposed to Brazil," he says.
  • Already, steel prices are falling as China tightens lending to cool a building boom. And the dragon is pegged to buy 31% less soy abroad in August. Sluggish growth in Europe, Brazil's top export market, is also worrisome. There's concern that jobs may suffer if exports slip and consumer spending -- which comprises 63% of Brazil's economy -- slows.
  • And though big bucks flowed into stocks, other long-term investments still wane. Foreign investment inflows of $26 billion in 2009 were down 42% from 2008's $45 billion -- a steeper than global average fall, according to UN investment tracking agency UNCTAD.  Foreign investment in Brazil as a percentage of GDP has been low, at roughly 26% last year versus 37% for the region. "Brazil will run out of fuel," worries Mauricio Rosal, an economist for Raymond James there. "Our 15% savings rate is insufficient. We need capital or reforms to boost productivity."
  • Long-term investors are shying away from Brazil because of its high taxes and state involvement in some sectors, which changed little with Lula. Pension reform awaits. That's worrisome because spending on state salaries doubled from 2003 to 2009, rather than flowing into the better roads and schools Brazilians need.
  • Others point to Brazil's interest in making waves on the global stage instead of on efforts to prepare its own economy for slower growth as reason for worry. Lula has meddled more in sectors including energy and is throwing his weight behind controversial causes like Iranian nuclear. "When the bull market ends, will Brazil resort to dictatorships, coups or printing money? Now is the time to open up," says Jim Rogers, co-founder of the Quantum Fund.
  • For sustainable growth, Brazil needs a more nimble economy and small business incentives encouraging long-term investment in factories, plants and roads. "It's important to avoid investors selling as the Rio Olympics begin," says Matthew Cole, a partner at the private equity firm North Bay Equity. "Standing still is not enough. Brazil needs a long term view."
  • To be sure, Brazil's stratospheric rise is overdue and well deserved. The country is laden with natural resources and many promising consumer plays today. It also boasts heady offshore oil finds and national champions like meatpacker JBS which gobbled US icon Swift in 2007. Brazil's young population assures a big future labor force (and buying class).  But that may not be enough to weather slower economic growth. Though the carnival spirit has been merited in recent years, the post-party mop-up, as much of the world has learned, isn't always pretty.

There was an interesting comment about the Olympics towards the end of the story; as long time readers know the Chinese market endured a slump even ahead of the Olympics as the "infrastructure buildout" trade was abandoned in early 08, even as other world markets rebounded because the government/Fed had "saved us" with their rescue of Bear Stearns.  Something to keep in mind in the years ahead for Brazil.

[July 14, 2010: Rio Gains on Sao Paolo]
[Jun 9, 2010: Brazil GDP Grows at "China Like" 9% in First Quarter]
[May 21, 2010: The Economist - Brazil: Too Much Government Spending?] 
[Oct 20, 2009: Ben Bernanke's Money Printing Parade Forces Brazil to Slap a Tax on Outside Investors]
[Oct 27, 2009: Goldman Sachs - "Hazardous" to Underweight Brazil]
[Sep 23, 2009: Brazil's Credit Rating Raised to Investment Grade]
[Aug 11, 2009: BW - Brazil's Coming Rebound]
[May 16, 2008: Brazil is Sexy]

Bookkeeping: Cutting Spreadtrum Communications (SPRD) in Half

Our one Chinese small cap is showing some life all the sudden.  This has to be one of the cheapest stocks in the market relative to growth rate, and with earnings later this week (the 12th) this is a name that could pull an earnings surprise and rocket overnight 20%.  But I'll leave that to the gamblers.  Technically the stock has run into old highs so either it is about to make a double top or break out over this level.  Obviously the former is bearish and latter is bullish.  Volume has been huge the past 2 sessions - hmmm!  Perhaps it hit a daytrader's board or something.

I'll take half off the table here with just under a 10% gain, and let the other half run into earnings.

I just re-entered this position July 26th.

Spreadtrum Communications, Inc., a fabless semiconductor company, designs, develops, and markets baseband processor solutions for the mobile wireless communications market. It sells products directly to brand manufacturers, independent design houses, and original design manufacturers primarily in the People's Republic of China, Hong Kong, and Macau.

Long Spreadtrum Communications in fund; no personal position


Bookkeeping: Layering the 2nd Half of a Short on Whirlpool (WHR)

When I shorted Whirlpool (WHR) Friday I said I am going small because the stock had a propensity to run to its 20 day moving average, hence I'd rather short there

It has been trending down for a few months, and the 20 day moving average has been a good place to short the past 6 weeks.  That is currently up in the $87s, so while I am establishing a foothold I want to short more either on (a) a rally back to the 20 day or (b) a new low below $82

We are here now, so I am going to put the 2nd half of the position on.  If the stock breaks decisively over the 20 day we'll be gone.

Short Whirlpool in fund; no personal position


Bookkeeping: Selling Direxion Large Cap Bull 3x (BGU)

My target of S&P 1128 has been hit, and slightly exceeded, ahead of the Fed meeting.  Certainly eager traders who know view the stock market as "risk less" (with new rounds of Federal Reserve gunpowder coming our way) may take the market ever higher right into tomorrow's announcement but I don't want any part of the bipolar action that will happen, with a levered ETF.   As I wrote Friday you never know which of the levered ETFs will outperform and in this case my old horse TNA has outperformed BGU by a 2:1 margin on the day today as small caps outperform large caps.  That said, I am going to take the 2.25% gain for 24 hours of work and exit the stake.  Would have preferred the 4%+ of course!

I will re-assess an index position post meeting when the risk profile on the market is lower.  However, absent news I have to say the technical condition is shaping up quite bullish... if Ben delivers his goodie basket, a move over S&P 1131 is going to set off celebrations in the silicon (HAL) and carbon based world.

No position


Three Years Ago Today

August 2007 was the month I started this blog and this adventure.  In retrospect, what a time to begin.  But I suppose if you can manage through these type of epic financial times that we've seen, where government rescue and central bank action mean more than corporate earnings.... and Sunday evening announcements of bailout and mergers became the norm, most years ahead will seem like cake.

August 2007 also marked the first 'rescue' by our global central bankers.  The irony of the timing should not be lost as speculators the world over are on bended knee, praying for The Godfather of Easy Money - Ben Bernanke, to bestow them with yet another handout/freebie/bailout/giveaway at 2:15 PM Tuesday.  Because surely just one more hit of drugs will do the trick.  And if not, there is always December 2010.... or March 2011.... or ... well somehow I'm sure I'll be doing a similar post a year from now celebrating the 4 year anniversary as speculators the world over have their hands out to Ben Bernanke asking for an extension, continuation or indeed a new plan to "save us".


Via Bloomberg:

Three years ago today, the European Central Bank provided an unprecedented 95 billion euros ($126 billion) as the credit crisis made commercial banks unwilling to lend to each other. The unexpectedly steep drop in U.S. nonfarm payrolls reported last week, strengthened speculation that the Fed may announce more stimulus measures to boost growth.  “It’s a sign of how long this crisis has been reverberating around that we now enter a week that could see fresh quantitative easing from the Fed,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a report.


$126 billion from a central bank seems so quaint nowadays, doesn't it?  Pocket change in the new paradigm.

Green shoots.

Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 1

Year 4, Week 1 Major Position Changes

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

Cash: 62.5% (v 79.6% last week)
24 long bias: 32.4% (v 17.8% last week)
3 short bias: 5.1% (v 2.6% last week)

27 positions (vs 17 last week)

Weekly thoughts
A week heavy on economic reports was met with a shrug by bulls at any weaker data points, as they are secure in their knowledge that bad news = more easy money headed their way.   As bad news has been ignored the past few weeks, I wondered out loud if we were back to the 2009 psychology where good news = good news, and bad news = good news (because it means more cheap money handed to speculators under the guise "it will help the economy).  I wanted to see the market reaction to a bad data point.. while the ISM data this past week were not great, they were not terrible.  The job figures Friday were a good test case, especially with the revision down of the June job losses by an additional 100K.  The knee jerk reaction was down, so I thought perhaps my thesis was incorrect, but by mid afternoon lo and behold the "we'll be saved by Ben!" crowd was back at it again.  Not that anyone is asking the vital question of how desperate things are that the entire U.S. economy is now dependent on either fiscal (government) steroids or monetary (Fed) steroids - or preferably both, I suppose.  We are supposed to be quarters into a rip roaring recovery borne of green shoots; instead we are now asking for the same handouts we (as speculators) were begging for when supposedly the economy was much weaker.   It is what it is, and as money managers you have to react to the situation but when you take a few steps back it truly is a pathetic situation.  Wall Street speculators are like the baby birds in the nest with their beaks outstretched waiting for mother Ben to regurgitate fiat money down their throats so they will stop their whining.  Otherwise, massive temper tantrums.

And really that is the main risk of the week - the market seems to think policy will change on their whim.  They want quantitative easing round 2, so Ben must make it happen.  I don't think this will happen yet... certainly not the full blown iteration, until after the election and the 'coast is clear'.  At best this at this week's meeting we're looking at QE2-"lite" which would be a pledge not to lower the size of the balance sheet; which means as mortgage securities mature and fall off the balance sheet, new ones (or Treasuries) themselves of equal amount will be bought.  This should account to $200B a year.  If that enough to placate the whiners in our immediate gratification society?  We'll know at 2:16 PM Tuesday.

As for the rest of the market, same old same old.  Companies strong in international markets - especially emerging - are booming.  Companies reliant on the U.S. consumer - even with 7M not bothering to make housing payments and thus free to spend like the "good ole days" - are mostly not faring as well.

Bigger picture, the market is sitting at key resistance and levels that everyone knows and is waiting on.  Loosely speaking after jumping over S&P 1100 the market has been able to hold it and we can use that level and 1115ish as support levels.  The 1115 was broken Friday intraday on bad news, until people came to their senses and realized bad news = free money handed out.  The very obvious top side targets are 1128 (where the S&P 500 stalled out multiple times) and 1131 which is the mid June 2010 high.  Technically, buyers await above 1131.  So either a breakout awaits or we are in a topping process here.

Copper and China both held up last week so these remain bullish signals.  Seeing copper jump over $3.40 would be a nice sign for bulls that there is more upside ahead.

China broke over its 50 day moving average and now has been basing the past 2 weeks, digesting the big move off early July lows.  If it breaks back below the 50 day, it will be something to take note of; if not it should attempt a run to the 200 day moving average, which would again signal more near term upside in 'risk assets'.

The bond market completely disagrees with equity markets - and usually the bond market is proven correct.  This was last seen in 2007 when the 2 diverged sharply, and equity investors kept drinking Kool Aid en masse, taking U.S. markets to all time highs through October 2007... completely missing the wall that was ahead of it that the bond market was screaming about ("the market is a discounting mechanism" - yeh right).  So either the bond market is screaming once more (and being ignored again) or this is what happens to yields in a deflationary environment.  Whatever the case - this sort of action is traditionally very scary....


On the economic front, I am not sure much matters here in the good news = good news, and bad news = free money scenario.  The most watched reports came last week and they were brushed off, until a month from now we'll have less important data mostly centering around housing which we know is in the dumps.  So it's all about Ben Bernanke I guess.

Tuesday - Productivity & Costs; we've seen record productivity as Americans are squeezed - the highest it goes, the less need to hire new bodies.  FOMC Announcement - unlike much of the past year, it will begin to matter again because the market now has heightened demands for their own personal bailout/handout plan.
Wednesday - International Trade
Friday - CPI, Retail Sales, Consumer Sentiment.  Consumer Sentiment has been at BELOW recessionary levels and yet we celebrate any tick up and boo any tick down.  This thing needs to move some 20-30 points to matter, yet we are reacting to 1-2 point moves; it's silly.  Retail sales from government is another silly data point that we all act like lemmings to - we just heard from the retailers last week... why oh why do we care what the government has to say about retail sales, when we just heard from the horse's mouth?


For the portfolio, I've been following the theme that as long as no one is asking "WHY" it is necessary for the Fed to even propose more rounds of easy money, we can rally on the thought process.  While people should be scared we have become so dependent on the central bank pumping constant doses of drugs in our systems, instead - as good junkies - we welcome the "hit" and ask for more.  So until the joy of the drug delivery stops, and the market sits above key technical levels, a long bias is most likely appropriate.  The joy for shorts has only come in very small bursts of time - as anyone could see Friday.  Bigger picture it is a perverse reasoning we are using to buy... the worse the domestic economy gets, the better for risk assets as more assistance of all forms will be thrown into the market.  As always, it will end badly but timing is everything.

On the long side:

  • Monday, as we had a return to a hallmark of the 2009-early 2010 rally (the Monday morning melt up), I started a basket of commodities.  Since I did not know which "one" to get into I simply put 0.5% into Potash (POT), Freeport McMoran (FCX), Walter Energy (WLT), and Cleveland Cliffs (CLF) to create a 2% position.  In my mind this is "one position". 
  • I cut Priceline.com (PCLN) exposure by about 2/3rds ahead of earnings... in this case this removed the chance to partake in large gains with a much larger position as the stock skyrocketed post earnings.  By Friday, with the stock up some 35% from my entry point not too long ago, I sold almost all remaining shares.  This does *not* mean the stock cannot keep running, I am simply managing from a portfolio perspective.  
  • I added 1.8% exposure to Monsanto (MON) as the stock seemed ready to make a new move up, after consolidating for a few weeks. 
  • Tuesday, I cut back 2/3rds of Polypore International (PPO) ahead of earnings.  Like Priceline, but to a lesser degree the stock shot up post earnings.  Just as I did with Priceline, I sold almost all shares Friday.
  • Wednesday, I added back to positions in Acme Packet (APKT) and VMWare (VMW); the former had regained some key technical levels after a negative earnings reaction (to a good report) while the latter was simply churning along, making new high after new high.
  • I restarted a position in Amazon.com (AMZN) after covering the short in the same name Tuesday evening.
  • Thursday, I closed out a Direxion Bullish Small Cap 3x (TNA) position ahead of the Friday labor data, and took a 2% loss. 
  • Friday, I restarted positions in Netflix (NFLX) and Powershares DB Double Gold (DGP) as both recaptured key moving averages. 
  • I sold the majority of BorgWarner (BWA) simply to lock in profits of an overbought chart. 
  • Late Friday I went long Direxion Bullish Large Cap 3x (BGU) anticipating a "Monday morning mark up" and a run to S&P 1128 ahead of the Fed meeting where I'd be happy to sell. 

On the short side:

  • Late Tuesday my limit price for the short for Amazon.com (AMZN) hit and I exited with a modest lost of about 3%. 
  • After the market reacted mildly to the labor data Friday, I put on a short via TNA with the prediction that post Fed meeting this week the market would come down to fill a gap at S&P 1106.44.  Within an hour this *almost* came true as the S&P 500 skimmed across 1107, as a selloff out of the blue happened.  I did not cover there because I wanted to see 1106.5 hit, so instead covered later in the day when the market began picking up some steam.  Still had some gains but not as nice as the ones a few hours earlier. 
  • To replace my index short (my only short exposure at the time) I started looking for some weaker individual charts.... I chose a basket of 3 to begin with: Whirlpool (WHR), Global Payments (GPN), Gentiva Health Services (GTIV).

Sunday, August 8, 2010

NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model

Looks like my proposal to have the BRIC acronym transformed into iBRIC is catching on.  A nice article in the New York Times on a market I've highlighted in the past, but foolishly did not get exposure to.   Much like we see in Brazil, it appears good political leadership *does* make a difference.  Further, as global capital hops and skips from one country to another in the never ending search for ever cheaper labor, Indonesia could be joining Vietnam as a potential new "it" spot in the coming decade.

  • After years of being known for inefficiency, corruption and instability, Indonesia is emerging from the global financial crisis with a surprising new reputation — economic golden child.   The country’s economy, the largest in Southeast Asia, grew at an annual rate of 6.2 percent in the second quarter of this year, data released Thursday showed. That is an acceleration from 2009, when gross domestic product expanded 4.5 percent.
  • The stock market hit a record high last week and has been among the best-performing equities markets in Asia this year, rising more than 20 percent since Jan. 1. The country’s currency, the rupiah, has appreciated nearly 5 percent this year against the dollar, among the strongest showings in Asia besides that of the yen.  
  • Its low debt, high growth and a sense of optimism compare favorably with a mood of despondency in developed markets like the United States, Japan and Europe.
  • Foreign direct investment, which was held in check for years after the 1997 economic crisis in Asia, is also returning. The country had 33.3 trillion rupiah, or $3.7 billion, in foreign direct investment in the second quarter of this year, a 51 percent rise from a year earlier, the Investment Coordinating Board in Indonesia said last week. The country is on track to attract more foreign investment this year than it did in 2008, when it lured in $14.87 billion.
  • Such statistics have some here cautiously saying that the country, a Muslim-majority democracy and one of the world’s most populous countries, could soon merit the kind of attention that investors now lavish on China and India.
  • Undoubtedly, significant obstacles to sustained growth remain. Despite progress on corruption, investors complain of confusing regulations and labor laws that make it difficult to dismiss employees. Little infrastructure has been built since the Asian economic crisis in 1997, and rolling blackouts have plagued the country for years. While the education system has been successful in fulfilling basic requirements like literacy, the universities and colleges in the country are widely considered archaic.
  • But more than a decade after the chaotic overthrow of the Suharto dictatorship in 1998 — and subsequent fears of disintegration at the hands of separatist groups, as well as the threat of Islamic militancy — the country seems to have stabilized. It is rich in natural resources like palm oil, copper and timber, commodities that are in great demand in China.
  • The administration of President Susilo Bambang Yudhoyono has won plaudits for reducing debt and has achieved some success fighting graft. Mr. Yudhoyono was resoundingly re-elected to a second five-year term in 2009, and changes aimed at introducing more democracy have seen power devolved to local governments, where elections have been largely peaceful, orderly affairs.
  • The huge consumer market in the country, accounting for more than two-thirds of G.D.P., has largely been credited for maintaining growth. Although the global economic crisis crimped confidence, Indonesia’s relatively young population of 240 million and government stimulus policies, as well as a popular program of direct cash transfers to the poor, have kept consumption humming.
  • Yet there is criticism that economic growth has had less effect than it should have for the majority. About 15 percent of the population lives below the country’s official poverty line of around $1 a day, but advocates for the poor say the percentage would be larger if Indonesia set the bar a little higher, say, at $1.25. Relatively sluggish growth in labor-intensive industries has meant slow progress in curbing unemployment, which is over 7 percent.
  • The government believes that one solution to moving to a higher level of sustained growth is foreign investment, particularly in industries like manufacturing. The government’s investment coordinating board, known as BKPM, is hoping to attract $30 billion to $40 billion in annual foreign investment by 2015 — three to four times as much as it achieved last year, said Gita Wirjawan, head of the agency.
  • The government recently eased investment rules in areas including health care, construction and electricity generation. At the same time, it is working to put the flow of “hot,” or speculative, money to better use, passing rules on government bonds requiring foreign investors to keep their money in the country for longer.
  • Such efforts seem to be paying off. The government announced this week that China’s sovereign fund, China Investment Corp, was hoping to invest $25 billion in infrastructure projects in Indonesia. Posco, the South Korean steel giant, signed a $6 billion deal on Wednesday to build a plant in Indonesia with the local producer Krakatau Steel.
  • We’re seeing an increasing relocation of factories by the Taiwanese, the Koreans and Japanese from Vietnam and China, given their rising labor costs and given the increased stability that people are seeing in Indonesia from an economic and political standpoint,” he said.
  • All this exuberance has raised some fears that inflation could become a big problem. The country’s central bank, Bank Indonesia, decided to hold its benchmark interest rate at 6.5 percent this week, despite a jump in annual inflation to 6.22 percent in July.

[July 2, 2010: Two Markets That Have Held Up Well in the Global Selloff: India and Indonesia]
[Apr 1, 2010: Indonesian Market Continues to Shine in 2010; Market at All Time Highs as Country Opens Itself Further to Foreign Investment 
[May 22, 2009: Indonesia: A Must Own Emerging Market]  
[Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]

Updated Position Sheet

Cash: 62.5% (v 79.6% last week) 
32.4% (v 17.8%) 
5.1% (v 2.6%) 

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on thewebsite. 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 (1 photo file)




Friday, August 6, 2010

Bookkeeping: Long Direxion Large Cap Bull 3x (BGU)

While I'm normally a TNA man, the current 'decoupling' action we are seeing should favor large(r), international type companies over those facing the U.S. consumer.*  Again, there are exceptions, especially those smaller companies which sell into larger corporates.  It's always a crap shoot knowing which of these ETFs will do better on a day to day basis, but instead of TNA I am going to go long some BGU as some sort of spike around 2:45 PM sent the S&P in a straight line from 1112 to 1116, breaking through resistance like swiss cheese.  I assume this was the Fed agreeing to Goldman's terms on what will happen next Tuesday**

Whatever the case, that spike turned the technical condition from potentially troubling to "labor data? what labor data?".  Over S&P 1115 I don't want to be too bearish, so I believe I will get jiggy with it until Tuesday 2:10 PM or so.  We are slaves to the 'technical action' as whomever did that spike an hour ago, surely knows.

Fast Money traders from across the land shall talk tonight about the "impressive action" in spite of the economic news, and swig big jugs of Kool Aid (it's an iPhone app) as they point to Monday morning premarket markups in our future.  I shall hope to partake in my own small way.

I'll add a 3.25% allocation of BGU and sing songs of S&P 1128.

* unless such consumer works in the public sector, which is about to be handed another $26 billion of taxpayer money to preserve their rightful place at the top of the socioeconomic food chain.
**pure speculation and scuttlebutt

Long BGU in fund; no personal position


Comparing Job Losses in Post WW2 Recessions

I've posted this chart from Calculated Risk a few times on the website, but might as well update it for newer readers as the 'recovery' continues  (cursory green shoot chant here).

[click to enlarge]

I do like the dotted line showing job growth ex-census, nice touch to showcase the 'bounce' that really is not.

The problem with these charts is they are U.S. centric.  A "global chart" would show a far different shape - in fact "V shape"!  Jobs are being created, but in a global marketplace many of those that 30-40 years ago would be created in Indiana, Florida, California or Pennsylvania are now being created in Western China or Southern India.  Foxconn alone has 800,000 employees - mull that for a moment as you consider that one company employes 1/10th of the nearly 8M jobs lost in the US in this recession:

So if this was 1972 rather than 2010 Tom and Joe would be making these super cool products and making a living wage.  Instead Tom and Joe are praying for a new housing bubble so they can build houses no one needs, and/or scouring Walmart in hopes of being a greeter or cashier.  Then, if the ivory tower textbooks are right, in 40 years the Asian middle class will demand products from the U.S.  (of course no one asks what products they will actually need from us, considering most of it is already sourced in Asia) ;)  The textbook never fails those in academia so don't ask any questions beyond that.  It will all work out - just give it 4 decades.  Whatever the case, this is not the type of work we want in America anymore; it's old school and below us as a people.  Everyone will be a high achiever, get that liberal arts degree, and do service work & avoid getting dirt under fingernails.  The new bell curve of utopia.

Again, as the speculator class we love this chart, in fact 90% unemployment would be much better than 9% because that means corporations are running REALLY lean.  (if only we applied these same concepts to the government).   I mean if you can cut 40,000 workers just imagine if you cut 400,000 - profits galore for the remaining 4% who could afford stocks.  I am taking it to the extreme but you catch the drift.


On a related note, saw a great quote in BusinessWeek for another reason (if you will) of why job gains in recoveries have been taking longer and longer... in an article titled "Machines Don't Get Paid Overtime".  While a controversial theory (I do agree with it) it does shine the light on *our* most recent iteration of capitalism corporate socialism.  Labor is disposable, capital is everything - no need for a balance between the two.

So as long one's core beliefs are that maximizing corporate profits, with capital owned by the top sliver of a society will lead to "trickle down" benefits for the masses, the U.S. is executing the game plan set into motion a few decades ago to perfection, and as a whole the society is far better off.   To disagree apparently means you are a socialist of the highest order... if not communist. ;)  As we apparently all were in this country in the 1950s and 1960s when this tenant of 'shareholder value maximization above every other aspect of society' was not the ideal and people had a middle class living on 1 wage.  Communists!

  • The stock market plays a role, too, says Sinai. By 1990 the doctrine of maximizing shareholder value had gained wide acceptance at publicly traded companies in the U.S., and executive compensation was by then firmly linked to boosting the stock price. "Stocks always respond positively when head count is permanently reduced," says Sinai, "because profits are then expected to come in higher. We are the only country where the mantra of maximizing shareholder value is so intense." 
  • Until these pay incentives are changed, and until U.S. workers become less expensive, high unemployment could be a chronic problem.
These are the type of conversations we should be having as a nation, but will be impossible to ever have as immediately extremists from both sides will latch onto the subject and it's end of conversation.  You are either a marxist or capitalist, no middle ground can be allowed.

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