Monday, December 27, 2010

WSJ: Silver, Silver, Silver! (Said in the Voice of Jan Brady)

If you are new to the miracle of silver, the WSJ has a nice piece on one of the hottest commodities of 2010. [Commodity-palooza - Year to Date Returns in the Commodity Complex] Silver has a combo bet going on - it is part precious metal so an alternative currency like gold (a place for people to flee the antics of central bankers and their effects on fiat money), and part industrial metal so it benefits from good vibes from the global economy ala copper.  And like many commodities it has been 'financialized' over the past decade so much easier for large swathes of money to move in (and out) of.   Hence true physical supply and demand apparently means very little... see oil for much of mid 2009+ and almost all of 2010.  When the hot money starts to abandon ship, I expect a very ugly ending here... but it could be years away.

While I get antsy seeing so much attention being a contrarian, the time to be very fearful is when you see silver on the front page of Money Magazine, Kiplinger's or indeed something like USA Today.  For now, it's only yellow flag time.

  • An unexpected surge in investor demand is sending silver prices soaring—and speculators and mining companies are digging in.  In the past four months, the metal has upended forecasts, rising 51% to a series of 30-year highs, before inflation. Silver closed Thursday at $29.31 a troy ounce, up from $16.822 at the beginning of 2010.  Gold, by contrast, is up 26%.
  • Prices are rising despite oversupply and a lackluster recovery in industrial demand. Many analysts expected those factors would keep a lid on prices in 2010. What they didn't expect was an overwhelming flow of money into the market from investors eager to ride a commodities rally.   "This is a story almost entirely about investment," says Stephen Briggs, senior metals strategist at BNP Paribas.
  • Exchange-traded funds backed with silver have enabled investors to invest in a market that traditionally was harder to participate in. The largest silver ETF, the $10.2 billion iShares Silver Trust, has seen a $1.1 billion net inflow for the first 11 months of this year. In recent months, concerns about inflation, the European debt crisis and the U.S. Federal Reserve's recent moves to boost the economy have driven investors to hard assets, also benefitting silver prices.
  • The global silver appetite partly reflects world economic improvements. Investors from the U.S. to China turned to "hard" assets such as copper and other commodities in part as a hedge against inflation worries. Silver benefits from a dual role as industrial commodity and precious metal. 
  • The craze has reached the coin market. In November, silver American Eagle coins sold by the U.S. Mint amounted to 4.26 million ounces, a monthly record in the agency's history. 
  • Silver's reliance on investors to prop up the price could cause it to tumble suddenly. "When investor support for the metal fades, the downside is going to be pretty substantial," says Credit Suisse analyst Tom Kendall. He forecasts an average price of $30.10 per troy ounce next year as "a lot of factors that have led people to buy silver would still be there in 2011." But he cautions, "The number is only going to be achievable as long as fresh money keeps moving in."
  • This year investors are expected to pile a record $4.5 billion into the silver market, accounting for 24% of the world's total demand.  (that's incredible... 1 in 4 dollars for silver are due to investment demand, not actual usage)  Silver's relatively small market size—$19 billion compared with $170 billion for gold—has also played a role in amplifying the impact of investors

While $30 seems high, in inflation adjusted terms it still has a long way to go to reach old highs.  Of course there was the little issue of the Hunt Brothers cornering the market... then again we now have the JPMorgan brothers, who unlike the Hunt clan is backstopped by the U.S. government (TBTF) and Federal Reserve.  
  • Silver's all-time high was set in January 1980 at $48.70 an ounce, or $129.32 when adjusted for inflation.

  • The strength in silver prices has prompted a flurry of development around the globe and pushed anticipated production in 2010 to 733.2 million ounces, up 3.3% from 2009 levels, and up 14% since 2006.  
  • Concerns are lingering over excess supply. The market is set to see a surplus of 64.4 million ounces in 2010, says Barclays Capital, which could curb prices. 
  • Silver has some inherent appeal due to its industrial use in electronics, silverware and coins. And reserves are limited. According to the U.S. Geological Survey, there are fewer years of U.S. silver production left in the ground than any other precious metal including gold.

Next on the docket in the "financialization of commodities" appears to be copper... so yet another metal that should skyrocket for reasons that have little to do with actual usage, indeed institutional money already seems to be front running the 2011 physical ETFs in the pipeline.

No position

      Oil ETF v Oil Stocks? No Real Choice for Individual Investors

      In some commodities investors have a viable choice between buying an ETF that attempts to reflect the movement of the commodity versus buying stocks that are related to that commodity.  For example, gold etf v gold stocks or silver etf v silver stocks.  However many commodity ETFs are highly flawed due to their construction - they deal in contracts that must be rolled out each month and hence cause a lot of dislocations in price, and the investor does not get the bang for their buck.  You might see said commodity rise 17% and you wonder why your ETF which is tracking that commodity is up 3%.   Oil is one such commodity.  The most popular ETF that I know of to track the commodity is the United State Oil Fund (USO) which trades nearly 9M units a day, and has close to $2B worth of assets.  But while crude oil is up some 14%ish for the year, USO has returned 0%.  Hence, in this case there really is no choice in the "do I buy the commodity or the stock?" debate if you are not an institutional trader who has access to the commodity pit itself.

      While not a huge fan of buying ETFs to cover a host of stocks in a sector rather than picking or choosing a few individual names myself, the oil space is one area I do like the ETF strategy, since there are so many public exploration companies and most tend to move together in our "HFT + EFT" driven market.  As goes one oil stock, so shall go most of them as HAL9000 and his merry crew make a decision to move en masse to the hot new sector.  Now not all ETFs are made the same and the oil space is no different - many times you will see ETFs top loaded with the big boys like Exxon (XOM), Chevron (CVX) and a few huge integrated companies.  Rather than go that route a far more inclusive ETF would be something like SPDR S&P Oil & Gas Exploration & Production (XOP).  Here are the top 10 holdings as of 11/30/2010.  We see it is not concentrated in a few mega cap names, and indeed the top 10 holdings only make up 1/3rd of the entire portfolio.  You even have some refiners thrown into the mix for a truly broad exposure to the sector.  XOP is also liquid with some 3.6M units trading each day, unlike many other sector specific ETFs.

      SPDR S&P Oil & Gas Exploration & Prod: Top holdings

      Top holdings
      Company name% Net assets
      Atlas Energy Inc3.76%
      Tesoro Corporation3.29%
      Newfield Exploration Company3.26%
      Concho Resources, Inc.3.24%
      EXCO Resources, Inc.3.23%
      SM Energy Co3.19%
      Holly Corporation3.14%
      Pioneer Natural Resources Company3.09%
      Anadarko Petroleum Corp.3.03%
      Whiting Petroleum Corporation3.02%

      Percentage of holdings  32.25%

      How has an ETF like USO compared to an ETF like XOP?  Clearly one has been the superior performer and in 2010 at least has actually surpassed the performance of the physical commodity itself.

      [click to enlarge]

      No positions

      Did You Buy the Dip?

      Don't say this market never gave you the chance to get in?  The S&P 500 was down a full 0.4% this morning and you had an hour to join the party.

      Back in September and October the market held each time it fell to the 13 day moving average and bounced; this continued for over 2 months.  Now we have a month where even a fall to the 10 day moving average is rare - it has only happened once; hence in the market that can only go up or sideways we have to be thankful for even a drop to the 5 day moving average.

      This morning's selloff (hard to use that word with a straight face) was pinned on the Chinese who raised interest rates a tad.  I believe the more reasonable answer is the 'urgent buyer' (he who buys SPY futures at any price as he is not price sensitive and simply cannot wait until 9:30 AM to get into the stock market each morning) who has showed up almost daily since Obama told us in March 2009 it would be a great time to buy stocks (hint hint) between 6 AM and 9 AM to boost premarket futures by 0.3-0.4%, obviously lives on the East Coast and was not able to make it into work this morning to offer his normal gifts.  Hence we did not get our normal morning mini gap up.

      Bigger picture as I think about the grand year that 2011 will be, with many targets now for S&P 1400ish, that only offers about 11% upside from here. (and I assume 8% of it will come in premarket)  Spread over 12 months that is only about 1% a month.  Hence we are in danger of returning to a market that........ (wait for it) .....can experience periods of downtime that last longer than 45 minutes again.  It will take some adjusting to no longer receive 4-6% a month as we have enjoyed constantly since 'The Bernank' pledged to manipulate the market upward (as is apparently now stated as the 3rd obligation of the Fed charter ....printed in font size 1) back in late August.

      Other than that, this market has become intolerably boring - when there is no 2 way action it is like playing a table where the dealer always wins. 


      Friday, December 24, 2010

      Bespoke: Bullish Sentiment Reaches Historical Extremes

      If the market continues its levitation through next week and the first day of the month (which almost always is up) odds would favor at least a short term bearish position on the 2nd trading day of the new year or so as bullish sentiment is approaching 'off the chart' levels.  The two main sentiment surveys Investors Intelligence and the American Association of Individual Investors, taken alone each show extremes, but in this measure that Bespoke put together combining them show where we are historically.

      Essentially we have not seen these levels aside from right before the historical crash of 1987 ("Black Monday"), the height of the NASDAQ bubble in 1999, and a few weeks in 2003-2004.   Excluding 1987 one parallel to today and 1999 and 2003-2004 was a Fed gunning the system with easy money (Y2K money in 99, and at the time historic 1% rates that set the seeds of the housing fiasco in 2003-2004).  Who says the Fed does not move markets?

      We are now above any level in the post March 2009 period by a long shot, and even above the mood that hung over investors at the market peak in fall 2007.   Our world shall be very interesting if the Fed ever takes its peddle off the metal.

      Have a good Christmas.

      Thursday, December 23, 2010

      Mock Up of New Fund Website & Launch Timeline Update

      Since our launch date is 'open ended' I want to give future investors a better timeline now that I have a better understanding of the next few months and how it will unfold.  I will continue to put updates on progress on the tab 'Fund FAQ/Pledges' as I have more information to report.

      We are currently in SEC review 'stage 1' awaiting first comments back on the prospectus and SAI (Statement of Additional Information).  The SEC waits about 6-8 weeks to respond to your initial request (I'll save any jokes about why things take so long at a governmental agency).  This should take things to end of January/first week of February.   We then respond to their comments/questions after a review with counsel, and can get that done in about 5 days (requires specific type of filings).  Then one moves to final review and approval by SEC, which will hopefully be "a matter of weeks" after our response to their first round of comments.  Hence my working target will be late February, early March 2011 for the SEC to put the final stamp of approval on.  That is not a firm date, or a promise - could be sooner, could be later.  It is out of my hands of course, but this is what 'should' happen but this portion of the launch is mostly reliant on other organizations and not myself.

      As noted in previous posts, once approved the fund can be launched to direct investors and we can apply to brokerage accounts to petition for approvals on various platforms.  The application process is generally 4-6 weeks, but a handful are 2-3 weeks.  From my survey a few weeks ago, in my limited sample of investors, about half are coming with direct accounts and half via brokerages.  Therefore I am planning to launch the fund to the public roughly 3 weeks after SEC approval to close the time gap between when direct investors can begin to invest and when those coming in via brokerages can invest.    The key reason for that of course is the first few weeks will be seeing heavy fund inflows and I can't really begin with a coherent strategy if on day 8 I have $3M and on day 22 I have $7M to work with.  (that is 100%+ growth in 2 weeks)  My goal is to have the bulk of the fund's initial capital from the reader base in house within 4 weeks of launch, so I can begin to implement strategy.

      So the process will work like this:
      1. Fund Approved by SEC
      2. Immediately apply to brokerages to get approved on their platforms
      3. Officially launch fund 3 weeks after SEC approval to investors creating direct accounts
      4. The brokers which grant approval, should have the fund available for investors to purchase on their platform 4-6 weeks after initial application is put in.


      On a related front, the person who is volunteering (many hours) to help me with new fund website, and I, decided to do an overhaul of the design the past week to hopefully give it a more professional air.   Still a work in progress in terms of text alignment, content, and some design issues but here is a first pass of the home page.   Even when the design is done, I am not allowed to release it until another regulator (not SEC) reviews it, and it is just not a high priority item yet so I'm standing in line on that issue as well.  I was hoping it would be up in December but we're stymied on this one.

      I'll move this entire post to the front page of FMMF during the holiday weekend for those who missed it.

      [click to enlarge]

      Commodity-palooza - Year to Date Returns of the Commodity Complex

      Via Finviz we see if you threw a dart in the commodity pit you made money in 2010 as long as you missed natural gas, cocoa, and rice.  Cotton [Oct 17, 2010: Get Your Cotton On]  continues to be the star of the year along with silver, palladium, and coffee.  Thankfully this chart means nothing to the Fed, so QE-infinity it is.  [Dec 16, 2010: Consumer Inflation as Measured in 1980 Would be 8%+, as Measured in 1990 Would be 4%]

      [click to enlarge]

      On a serious note, as I've noted in the past the big one is crude oil.  It's been quite benign this year sitting between $70 and $90.  It just broke out over $90 earlier this week, so any continued upward trend is the potential game changer.  If it has a 'sugar like' year in 2011, it will be back over $110; if it has a 'corn like' year in 2011, it will be back to $130.  A 'silver like' year in 2011?  $150+.  We just have to see where Goldman and JPMorgan take it....err, I mean where the free market of supply and demand based on emerging market demand takes it.  Ahem.

      One of the major downside risks being completely ignored by the market at this point in any material move by crude in 2011 - this is a massive tax on consumer and producer alike.  This helped put the final nail in the coffin of the economy in 2008, and many consumers are in worse shape now than they were then.  It will pressure corporate profit margins just as it did in 08.

      That said, on the consumer side with 7M households not paying a mortgage up to 2+ years ($1200-$2000 a month straight to their pockets), many others recently refinanced down to a coupon that offers an extra $200-$300 a month of cash flow, and the payroll tax deduction of 2011 giving a household of $50K an additional $2000 per year, and a household of $100K an additional $4000 - we have a buffer built in for part of society to absorb a move to $110-115 oil.  For those who rent, who subsist on fixed income, or are unemployed - the story is not so positive.

      p.s. do you really think we're going to allow the 2% payroll tax deduction revert back up a year from now with unemployment at 9%+?  Especially if Ben continues to inflate our commodities to the moon with his free money policies?  Once a tax is reduced in America in can never be raised again. So that's $120B a year less to go into an already empty social security fund... ponzi baby.

      Reuters Special Report: Is America the Sick Man of the Globe?

      A year ago at this time, as 'green shoots' sprouted the discussion was when the Federal Reserve would withdraw "emergency" policies and begin to do things such as expunge some of the massive inventory of mortgage bonds it had bought during QE1.  Of course despite the 'recovery', and a few trillion thrown at the economy via fiscal and monetary means we never reached that point.  Indeed, the only major setback in the stock market's relentless rally from March 2009, was a period post April 2010 when the Fed stopped buying bonds under QE1 and before they began recycling maturing debt back into new purchases during QE1.5 in late summer.  That was the only time the economy and market seemed to be acting in a somewhat organic way and both weakened in a material way.

      Of course you know the story since QE2 - the David Tepper world of "we can't lose" and a globally backstopped system of moral hazard run amok.   [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment]  Even though in theory we are in a wonderful recovery.  With a new fiscal stimulus finalized earlier this month to mirror the $800B version in early 09, this will be close to $2 trillion of debt financed stimulus in the period of 2009-12, and that only includes the 2 major Congressional blockbuster packages.  We are not discussing the multitude of homeowner backstop / bailouts, cash for clunkers, cash for appliances (did you forget that one already?), the surge in unemployment benefits, [Nov 5, 2010: USA Today - Anti Poverty Programs Surpass Cost of Medicare in US] the usage of food stamps in the country from 1 in 11 Americans to 1 in 7 [Dec 8, 2010: Food Stamp Usage Nearing 1 in 7 Americans], the self created stimulus of many Americans defaulting on their mortgage but still living in the house (7M households) [Jun 2, 2010 - Even More Anecdotal Benefits of Strategic Default], etc.    I could go on but the list could fill an entire blog.

      The larger comment is, we are in a steroid filled economy when in a typical economic recovery we should be rip roaring at 4-5%+ GDP growth from ORGANIC means.  Indeed after such deep recessions as we suffered, we should have had multiple quarters of 5-6%+.  Instead, we are struggling to maintain 2-3% GDP with completely SYNTHETIC means.  We are celebrating the chance of 3-3.5% GDP in 2011 - ignoring the reasons of how it is being achieved.   This is not how a 'recovery' should be proceeding - many quarters after the recession 'ended' the Fed is continuing emergency policies and indeed the debate has begun whether a new round of said policies will begin next summer.  Our fiscal policy likewise is similar to what we did in the depths of the Great Recession.  With all the 'recovery' going on, why are we putting additional programs in with similar price tags?

      I concluded long ago the country (and globe) is going through structural adjustments, and the outcome of these changes for many in Americans will be dour - especially in the lower to middle tranches of the economic food chain. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]  We have evolved to a 3 tier system - the top 20%, the public + pseudo government (healthcare, education) worker, and everyone else.  [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]  I am beginning to read more and more news outlets, and 'experts' come around to these views.  Now again, you might wonder with all the happiness (indeed giddiness) of late on the prospects of 2011, how this fits?  After all the stock market is up, and we all become rich by yet another Fed induced gaming scheme (it worked so well in 1999 NASDAQ and 2004-2006 housing, what could go wrong this time around!?) - although clearly any wealth effects will be concentrated mostly in the top tranches of society.  [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help?  Not the Masses]  We won't even discuss the long run costs of what creating a transitory Fed induced wealth effect does to the real economy (think crashes in stocks 2000-2002 and housing 2007-2010+).  Just remember to clap and worship 'the Bernank'. (spelling intentional)

      It is quite clear - we are buying 'growth' with our steroids.  I'll gladly pay you Tuesday for a hamburger today.  If we want to inject $2 Trillion into a $14 Trillion economy each year (a 14% steroid injection), we can create a synthetic high and mask reality.  (or in our favorite terms, kick the can)  Indeed, we saw earlier this week that net liabilities rose $2 trillion in 2010.
      • The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose, a U.S. Treasury report showed on Tuesday.
      • The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government's liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier.  The biggest increase in net liabilities in fiscal 2010 stemmed from a $1.477 trillion increase in federal debt repayment and interest obligations.
      • Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.  
      You don't want to know what happens in accrual type accounting if the interest rates on our long term Treasuries begin to spike. We continue to benefit from historically low rates, and hence our obligations - as fast as they are rising - are not showing the true potential of what very likely is headed our way.  It is just impossible to know when.


      But in Wall Street terms: "who cares?"  We live for today, and tomorrow is another issue.  Anything out past a week is too long term to care about.  Indeed I saw a gentlemen on Mr. Kudlow's show last evening who literally said this - he wants QE3, QE4, and QE5 - he only cares about making money, at any cost.  He was giddy about 2011 and said he'll worry about 2012 when it gets here.  Anyone who disagrees with this thesis needs to understand this appears to be the prevailing thought on 'the Street'.  I only assume these people do not have children because apparently long term consequences for heirs means nothing as long as bonus check comes in next year.

      I know from emails and comments on the site many readers don't share such a view, and wish to balance the long term with the near term.  So for those of you, I wanted to point out a fantastic read on many of the structural issues we've discussed ad nauseum in a special report Reuters has out: Is America the Sick Man of the Globe? (click here to go there)  While the topics are very familiar to readers of FMMF, if you are newer to the site - this is an excellent overview of the challenges we face as a nation and why both our federal government and central bank are forced to continue to take actions consistent with a deep recession, even as we celebrate the statistical recovery and glowing prospects of 2011 .<<<---bought and paid for by the grandchildren

      Outside of that, we'll return to your normally scheduled melt up - although early this morning we seem to have a malfunction.  I see a disaster scenario playing out as the S&P 500 is down 0.1%.  This must be the 'dip' they were talking about...

      [Sep 3, 2010: - The Crisis of Middle America]
      [July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]
      [Jul 29, 2009: Japan's "Herbivore" Men - Young American Men's Future?]

      Is the US Dollar Weak or Not?

      Some interesting conversations on financial infotainment TV the past few days regarding the contention that the U.S. dollar is actually quite stable, and people should stop complaining that the Fed is impacting it with debasement policies.  The problem is, as with everything, things are not so simple.

      There are 3 major currencies in the world - dollar, yen, and euro.  (one could throw the British pound in there if they are very lenient)  These are the most liquid currencies and hence easy for billions upon billions to slosh through at a moment's notice.  They just so happen to reflect regions which are highly indebted, and whose central bankers have taken extraordinary steps to debase themselves to kick the proverbial can down the road.  In short, we call this "the race to the bottom".  All major currencies of the world are in an ugly duckling contest.

      Further, the U.S. dollar is the world's reserve currency - so in times of crisis, it is the least ugly, being the most liquid.  (in many countries in Africa, or the Middle East, or Asia, or Latin America you could go and exchange dollars in commerce - not so much the yen or the euro for example)  So ironically, as the U.S. was the nexus of the global crisis in 2008 and early 2009, a very strange thing happened.  People fled into the country's currency (and bonds).  That is completely atypical - usually people flee the country at the center of the crisis, causing all sorts of havoc.  So the U.S. benefited greatly in terms of stability from concurrently being the cause of global crisis, yet having people flee TO it, rather than AWAY from it.

      So when we view the dollar over the past few years versus the euro or yen (or pound) we are comparing mirror imagines of the U.S. - highly indebted, slower growth economies.  (there are a few exceptions in Europe but I am speaking broadly about the union)  Hence to infer any 'strength' by comparing the team who is ranked 30th in the NFL versus the team ranked 28th is silly - they both stink.

      What we can do is compare the greenback versus countries whose fiscal house is viewed much more favorably - even if their currency is less liquid on a global stage (and hence not a place trillions of money can slosh to in an instant).

      U.S. Dollar v Canadian Dollar

      U.S. Dollar v Australian Dollar

      U.S. Dollar v Swiss Franc (the spike in 2010 was due to the Greek crisis)

      (and as a bonus)  U.S. Dollar v non fiat money (Gold)

      What we see above is very consistent - excluding the 'flight to safety' trade in 08 and early 09, the loss of value in the dollar continues when compared to more prudent countries. (or a currency with no liabilities - gold)  While the Fed and policy makers can defend themselves by saying the USD is "holding in there" when compared to the other major currencies - all of which are running similar schemes to the U.S. to try to self debase their currencies to 'inflate' their way out of their massive debts - it is certainly not shaping up well against countries in the next tier. 

      So is the dollar withstanding the actions of our policy makers?  Only if your bar is extremely low - our drunken stupor is about equal to that of the Japanese, and Euro Union.  And those currencies (along with the pound) make up the majority of the dollar index - so things appear benign on the surface lately.  If however you compare said greenback to countries whose fiscal policies would be considered sensible, the story changes dramatically.  Against that basket, our policy makers are slowly but surely eroding our wealth via inflationary theft... i.e. debasement of our currency and hence, our savings and/or ability to eventually consume.  We're doing the same work, but being rewarded with a less valuable item in return.  Another strike against the saver class of Cramerica and why the magical rise in the stock market in nominal terms means something very different than in real terms.

      No positions

      Wednesday, December 22, 2010

      NASDAQ Fast Approaches October 2007 Highs

      As the market continues to only go up or sideways (down is unfashionable), the NASDAQ is making a run for October 2007 highs of 2817.  As I type, the index is about 5.5% away... at current pace we would be there by the 2nd week of January 2011 or so.

      [click to enlarge]

       Of course we are still a tad bit off all time highs in the NASDAQ....ahem.

      We now appear to be operating under the Alan Greenspan model of 1999 (although we replaced the phantom enemy of Y2K with deflation), although with the debt overhang in the real economy Ben is probably going to have to go to QE4 or QE5 to match the incredible 'prosperity' that Alan gave us in 99 and early 00, at least on the NASDAQ.  He is going to have a much easier time banging the S&P 500 higher since the speculator class of the last decade was busy bidding up rather than Caterpillar.  At current pace, the index should be able to surpass all time highs by mid 2011 as we rally 5-7% every month.  (ok ok bears, we'll give you one month of -5% somewhere in first half 2011 just so you won't go home crying)  That will be just about the time QE2 ends and the cries from the speculator class for QE3 begin.  ("I don't care if oil is $125, GDP is 4% and S&P is 1800, just give me more steroids!")  Actually it is going to be pretty bemusing to see markets at all time highs with unemployment over 9% - talk about the two worlds of Wall Street and Main Street.  But indeed this is the corporate nirvana we have worked towards, and we're achieving it.

      (if you are curious, the Russell 2000 is only 7.5% away from all time highs... with the 35% move since end of August, that should mean new highs in about 6 weeks at current pace)

      Party on Garth....

      edit: NASDAQ in gold terms - not so impressive last 3 years.  Thankfully everything is priced in dollars so we can be giddy about losing the value of the dollar while making it up in stock prices.   We're actually lower than summer 2009 priced in a non fiat currency.

      [Video] Cute - the Digital Story of the Nativity

      While not politically correct to say Merry Christmas, I think people of all religious stripes (or those that have none at all) will get a kick out of this cute video.  What the story of the nativity would be like some 2000 years later.  Thanks for a reader for sending this...

      3 minutes of super creative

      Infrastructure Stocks are Back - Fluor (FLR), Jacobs Engineering (JEC), Foster Wheeler (FWLT), Et al

      This market has been very rotational as buyers move from one sector to another.  After a long period of underperformance, one area of strength the past 6 weeks has been the infrastructure stocks which were an area of emphasis back in 2007 and early 2008.  This is a group that does well mid to late cycle as they require a stable financial environment for long term projects.... hence per the 'playbook' (the same playbook that said to buy early cyclical names a year ago) [Mar 7, 2010: CBSMarketwatch - Riding the Rally, How to Money in the Bull Market's 2nd Year] this is a go to group.  The charts are showing fantastic strength across the board among the major players. 

      Recent Spikes

      Fluor (FLR)

      Jacobs Engineering (JEC)

      Foster Wheeler (FWLT)

      Straight Up Without Pause Since August

      Shaw Group (SGR)

      McDermott (MDR)

      KBR (KBR)

      Chicago Bridge & Iron (CBI)

      [Dec 3, 2008: Back of Envelope Look at Infrastructure Sector]
      [Jan 11, 2008: Infrastructure Companies Cleaning Up on Contracts]
      [Nov 2, 2007: Time to Add to Infrastructure]

      No positions


      One Trader Holds 80-90% of the LME's Copper & Aluminum, 50-80% of Nickel & Zinc, and 40-50% of Tin

      Speaking of the "financial innovation" in the commodities market, this issue was something I brought quite a few times up in latter 2007 to mid 2008 [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] [Apr 28, 2008: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin] when levered institutional buyers (and the investment banks themselves) went on a buying binge skewering prices.  It is one thing when the Overlords of Finance effect stock prices, but quite another when they dominate pricing of items actual companies (and people) need to produce & consume.  But no worries - our regulators* are on the case!

      *this is where you laugh

      Heck we've reached a point where a single drunken trader can move the entire global oil market by over $1.50 - that sounds like a viable and sensible system to me. [Jul 1, 2010: Drunk British Trader Moves Oil $1.65 Single Handedly]


      There were many questions of why oil was staying at such high levels through 2009 and early 2010 despite utter pathetic demand in the developed market; reports surfaced that JP Morgan was buying physical oil, storing it on tankers out at sea, and then selling future contracts against their holdings to make mad money.  I guess all the world is your oyster when the Federal Reserve gives you money for free, right?   (wait you thought our banks were busy doing things like making loans? that is so old fashioned! Just a sideshow to their too big to fail speculation.) It appears these same games now apply to most of our metals markets as well.

      I noted in a March 2010 piece a little noted transaction in which too big to fail Goldman Sachs and JP Morgan made a move to control the warehousing of said metals.
      • Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.

      A few months later I wrote this: worries - as long as the rainmakers make their money by "providing liquidity"... it's all good. Thankfully early in 2010 we saw news that JPM and GS were busy buying up industrial metals storehouse capacity to help make those metals dance to their own tune.... errr, provide liquidity.

      You might call me a cynic, but look at what has is happening within a few quarters.  The laughable part is it has become SO predictable.  Once you get used to how corporate oligarchy works - the outcomes are much more easy to forecast.  (I know, I know - commodity prices are flying due to China! Just like in 2008 right?)

      Remember, whenever you call anyone out for speculative excess they reply "we are just providing liquidity".  Per the WSJ, a lot of 'liquidity' is being provided by good old Jamie Dimon and crew at JPMorgan.  These are just part and parcel with all the excesses created by a global easy money campaign by central banks, a hollowed out anti-trust laissez-faire belief system, and a captured regulator ethos.

      So we'll clap like seals and talk up "emerging market demand" (just as we did in mid 2008 when oil hit $120, $130, $140) before we saw "emerging market demand" suddenly caused the price of oil to fall some 100 bucks.  Who knew levered financial institutions playing games in speculative markets "emerging market demand" could change by a factor of 70% in 6 months?   Thankfully, we have learned nothing from the biggest financial crisis in 80 years, and our TBTF institutions are right back to their old reindeer games - America's financial oligarchs are back baby.  Bigger and better than ever.  The Bernank must be beaming somewhere today....

      (p.s. there is talk JPMorgan is preparing a physical copper ETF and hence their hording is for a specific reason ... but the bigger question is, what in the world are we doing having a system where a handful of players can control larger swathes of physical commodities needed for everyday commerce?)

      Via WSJ:

      • As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.
      • The report coincided with copper prices soaring to new records on Tuesday. (random coincidence I am sure...err, I mean it's due to China - JPMorgan is only providing liquidity, just ask them)   Copper soared to a new record of $4.2705 per pound on Tuesday in New York, and is up 28.3% this year. 
      • JP Morgan Chase & Co. recently had a large position in copper, though it is unclear whether the U.S. bank increased its holdings, or whether a new player has taken dominant position. "Regardless of who owns it, the only thing of note here is that we are being told that one person has a substantial position," said David Threlkeld, president of Resolved Inc., a metals consultancy. 
      • Last month, the LME reported that a single holder owned more than 50% of the exchange's copper. People familiar with the matter at the time said J.P. Morgan was the holder. On Tuesday, the LME reported that a single holder now has as much as 90% of the stockpiles, without naming the firm.

      And it's not just copper ... now that Goldman and JPMorgan hold the keys to the warehouse, I bet I could guess pretty closely who dominates the holdings in all the metals below.
      • Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% to 80% of those metals and one firm has 40% to 50% of the LME's tin stockpiles.
      • While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices.  ("could"?  ah, such a generous view - if I own 50% of the world's stockpile of anything I "could" skew the price...)

      • The LME has strict rules to prevent market squeezes but does not limit how much metal a single trader may hold. Instead, the exchange demands the dominant holder make metal available for short-term periods at very limited profit margins. The LME says it closely watches individual holdings.
      And who owns the depots where half the LME's stockpiles are held?  Hence influencing the LME? Errr.... ummm.... yes I am sure the LME has everything under control and views things in a non biased way.
      • As one example, Swiss commodity trading firm Glencore International AG bought about 1.6 million tons of the metal from United Co. Rusal Ltd. earlier this year, market participants said at the time. Glencore then turned around and presold the metal. So even though the aluminum is sitting in LME warehouses, visible to all traders, it is effectively locked up.  (What Glencore did sounds identical to what JPM was doing in the oil market with their storage of the commodity in offshore tankers)
      And this hocus pocus trading has what to do with actual physical demand for aluminum?  Oops, I'm sorry - these rhetorical questions stand in the way of 'financial innovation'.  As long as a small sliver of society can take easy money and slap around commodity prices while dominating inventories, the consequences for the rest of the world are just details.  Let them eat (mud) cakes! [Jan 30, 2008: Hungry Haitians Resort to Eating Dirt]  [Apr 14, 2008: Food Inflation, Riots Spark Worries for World Leaders]
      • These sorts of deals have skewed physical trading in these metals, as other consumers have paid increasing premiums to get hold of stocks, even though the metal looked like it was available in warehouses.
      • The recent boom in metal prices has enabled traders to purchase the physical metal, sell a futures contract at a much higher price and still make a profit after paying for storage and insurance.
      It's all good.  Just remember, you are supporting the TBTF banks each time you buy or consume anything, or a producer passes along price increases to you due to them having to pay a premium due to financial innovation.  It is our patriotic duty to make sure JPM and GS traders do well... remember, when they do well - we all do well.... trickle down economics. 

      [Jan 11, 2009: 60 Minutes - Speculators and Oil]
      [Jul 17, 2009: Jon Stewart - the Pyramid Economy, with Goldman Sachs as the Eye]
      [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]

      Russell 2000 Up 34% Since Jackson Hole Wyoming, S&P Up 6.4% in December Alone

      Many times over the past few years I've written about the changing nature of the market as it becomes increasingly dominated by ETFs and HFT (high frequency trading) at the margin.  There is still far more money in mutual funds ($11.5T) and pension funds, than ETFs (which just cleared $1 Trillion in assets last week) but the marginal buyer is the hedge fund community, many of which are now the 'hot money'.  One of the main changes we see in markets are the shape of uptrends (and to some degree downtrends) - they are far more linear now than those of us who have been around for some time, are used to.  We've had long uptrends before but they were punctuated by much more volatility in the past and pullbacks were seen more often within the uptrend.  Now, we see "V shaped" moves constantly - once a trend begins, it just continues with little to no rest.  We are experiencing one of those moves in December, after just coming off one in September and October.  Indeed you could make a case we've had a 4 month "V shaped" move only interrupted by a few weeks of European issues that dragged the market down 5%.   If not for that event, perhaps this would be 4 straight months without a 1-2% drop.

      There are many theories on why things act the way they do but I believe the dominance of the ETF as the hedge funds weapon of choice has changed the game tremendously.  Trading in SPY ETF (which tracks the S&P 500) often makes up 10% of ALL volume on any particular trading day.  I believe what is happening is the tail is wagging the dog.  When hedge fund and other institutional traders want to "put on exposure" it is a very different experience than 6-7 years ago.  One can quickly pile in (or in theory out of) to one of the most popular ETFs instantly - they provide immense liquidity.  Hence, rather than having to scramble to buy 150 stocks or 50 stocks or 250 stocks, one can instantly buy 500 stocks with this ETF.   And as money flows into the ETF, it flows through to the stocks.  Hence, the tail wags the dog.

      I also believe this tail wagging the dog has an even more dramatic effect in smaller cap stocks and sector funds.  (Commodity markets are a whole 'nother discussion - the 'financialization' of commodities is another dark side of 'financial innovation')  While S&P 500 stocks are very liquid, when large institutional pockets of money want to buy smaller cap exposure, rather than having to pick and choose amongst thousands of smaller companies they can go into an ETF like Russell 2000 iShares (IWM).  That money than flows through to all associated stocks and lifts them up en masse.  Very different than the past when ABC hedge fund would buy a basket of 18 small caps, and XYZ hedge fund would buy a basket of 22 completely different small caps, and so forth.  Sector funds work the same way, and I've noted many times we see "student body left" trading where everything in a sector moves together, regardless of individual metrics - especially if there is an ETF involved in that sector.

      We can bemoan the fact that this is the new structure of the market, but the reality is one must adjust.  Observing the market the past 3-4 years - both up and down, what was once the natural human herding behavior is now only reinforced by the ease of moving in (and out) of a large number of stocks at once via these instruments.  As ETFs continue to grow in popularity and more money flows into the relatively few popular ones, it is probable that this issue only continues to grow.  Hence "V shaped" moves - once the exception - now may become the rule.  In physics terms, once a body is in motion it truly seems to remain in motion, due to the changing dynamics of our markets.

      To that end, the Russell 2000 is up a remarkable 35% since Jackson Hole, Wyoming (the infamous hinting strongly of QE2) - this is under 4 months.  Annualized, we're talking a 105% gain in the small cap index.  There have been no serious pullbacks in this time.

      The S&P 500 is up 6.4% in December alone and we're not yet finished with the month.   That's a 77% pace.  (and up 20.5% since Jackson Hole)  Again, with no serious pullbacks.

      I do believe statistics like this (this is not the first time we've seen such incredible statistics in short periods of time since the March 2009 bottom), support the view that HFT + EFT have changed the nature of our markets substantially.  Of course, this also means the next time there is a dislocation in markets, the downside moves could be just as spectacular.

      Tuesday, December 21, 2010

      [Video] CNBC - The Price of Admission, America's College Debt Crisis

      Little known in America (except for a select few such as FMMF regular readers) is that the cost of college in America has been inflating at a pace that actually surpasses the much more publicized healthcare. [Dec 14, 2008: WSJ - K-12 Schools Slashing Costs, College Bills Wallup Families] [Dec 5, 2008: NYT - College May Become Unaffordable for Most in US]  As always, we are very early to a crisis but I see one developing here.  In fact, based on some information I discovered some 6 months I see 2 developing - the latter displaying America's full on ponzi scheme financing for everything.

      First the obvious - there are 2 sectors highly subsidized by the government in what is apparently good intentions - healthcare and higher education.   But since there is not market based pricing, those are the 2 sectors where costs have run far in advance of wage growth for multiple decades.  So what does that lead to?  You guessed it - the need for ever higher subsidization as the gap between what people could afford out of pocket and what a highly subsidized sector charges.  In fact, this incentive program actually incents the healthcare and education fields to charge higher than they need?  Why?  Why not!  Just about anything they charge - the federal government will subsidize to "do the right thing".  There is no price sensitivity in these sectors - heck our drug lobbyists have been successful in blocking price negotiations by the largest buyer of drugs on the planet.  Only in Cramerica do you lose efficiencies of scale... in any other country (or in the private sector) the largest buyer would use that power to get LOWER prices.  But politicians need to win elections and without corporate dollars... well you know how it goes. 

      Much like the disaster that is our public sector wage and benefits situation, this is not something that just happened over the past 3 years - it has been building for decades.  The Great Recession just helped to expose it... hence now as revenues from the state have fallen off we are seeing some stratospheric tuition increases - some universities in California have seen price hikes of 30%+ in 1 year.  Why such little protest?  No worries - the federal government will give loans.... who cares if a person who exits college making $37,000 has no hope of paying back $85,000.... (assuming they want a normal life and not to life like a miser until age 53)

      Eventually we will get to the breaking point where the ROI (Return on Investment) of going to college is going to outweigh the salary variance between those who graduate college and those do not.  The high school graduate will continue to get lower wages but will start his/her working life 4 years earlier and at age 22-23 will have little to no debt, and a 4 year head start on savings.  Whereas the typical American graduate now is in the low to mid $20Ks in debt at that same age and many struggle (in the new paradigm service economy) to locate jobs that pay much higher than the high school graduate.   Tough to pay off that college debt working as a barista.   But these strains are only going to get worse as tuition continues to inflate at its 8-10%+ rate... the college graduate of today leaving with $24K in debt is going to be the college graduate of 2022 who graduates with $43K in debt.   Don't ask what the college graduate of 2032 will be leaving with.

      That's crisis #1 - one we've been talking about for quite a few years.


      Recently I found crisis #2 - a factoid I bet 95% of americans do not realize was passed a few years ago.  I often tell everyone I know to get into government (or pseudo government) work - the private sector is no longer worth it.   Pay is better, benefits are far better, and job security is through the roof. [Nov 29, 2010: On the Safety of Public Work]   Now I have one more reason for you to seek employment in the public sector.  We have a new ponzi scheme in America - all public sector workers (not just city workers, but any who work in non profits such as schools and hospitals) can default on all their loans from the federal government after 10 years.  Yes sir... if the higher wages, benefits, [Aug 11, 2010: Federal Workers Benefits Now Approaching Parity with Wages in the Private Sector] and job security were not enough of a reason to attract America's best and brightest, they had to throw the carrot of walking away from your debt (strategic defaults for college!) on top of it.   It is called the Public Service Loan Forgiveness Program.   Here is the link right there on the government's student aid website.

      The Public Service Loan Forgiveness Program was created to encourage individuals to enter and continue to work full-time in public service jobs. Under this program, you may qualify for forgiveness of the remaining balance due on your eligible federal student loans after you have made 120 payments on loans under certain repayment plans while employed full time by certain public service employers.

      Now I used to think 'public service' meant something like going to a impoverished Latin American or African country - spending 2 years overseas for little pay but gaining experience.  But now even those folks who retire at age 52 with $100-200K pensions (or more) plus the full benefits package are doing 'public service'.  At least in the government's eyes... and surely they are not biased. 

      Here is the real kicker... (it's amazing when you put all these pieces together).  Sallie Mae - which was in tremendous financial distress due to the loans it was servicing, as a private/public loan providers (sort of Fannie Mae for student loans) was instructed by the federal government in 2009 to stop offering private sector loans.  Instead Uncle Sam would be the source of ALL the lending for Sallie Mae.

      Why does that matter?

      Because only loans students take out from Uncle Sam (who work in the public sector.... as a 'service' of course) are eligible for "10 years and default".  By eliminating private sector loans go forward, all of Sallie Mae's loans will now be eligible for default.  I believe we call this a win-win in modern day America.  Or a Ponzi scheme of epic proportion.

      How big of a cost are we looking at?  In the fiscal 2009 year that was a $90B bogey.  As the cost of tuition goes up we can expect that to increase annually - especially since you can be sure the government will (just like our mortgage market) take up more and more of the lending - after all the government doesnt care about making money on loans, so they will offer the easiest terms.  So $90B (and growing) per year can easily be in excess of $1T in a decade.  If market share holds constant and does not increase - which I am sure it will (who can compete with the government's terms?)   About 25% of American workers are eligible to go into these 'public sector' jobs (again it includes schools, hospitals... not just city, state, federal government work).  Hence in a decade at minimum $250B of loans (25% of the $1T) or so should be eligible to be strategically defaulted on - we just have to educate our youth on the opportunities for them to default so they can take advantage of this quite wonderful option.

      The takeaway is it's even worse than I imagined as I only focused on crisis #1 these past few years.  Crisis #2 is seeding right now and in about 8 years the taxpayer of America should begin to hemorrhage the losses from "Bailout Nation" as the leading edge of those poor souls who sacrifice themselves for "service to the country" begin to default en masse. 

      Either way, I am attaching myself back to the matrix as all is well in the world, but wanted to highlight that CNBC has a special that premiers tonight (and I am sure will be replayed often) that will discuss crisis #1.  Crisis #2 we'll have to wait until 2020... I believe that special will be called "The 6th Largest Ponzi Scheme in America - Strategic Defaults of University Debt by Public Sector Workers".   To conclude, I repeat once more - all of us in the private sector are bona fide idiots.   Every incentive program in the country caters to the public sector.  Now not only do the public sector get wonderful benefits & pensions (some in the hundreds of thousands per year) in their (early) retirements, they also will be able to walk away from debts accrued in their youth.  It's a good life.... who says we don't have people enjoying a European lifestyle?

      2 minute video

      AIG (AIG) Up 50% in the Past 3 Months - Bruce Berkowitz Wins Again

      Bruce Berkowitz of Fairhome Fund (FAIRX) wins again.  His overweight of AIG (AIG) is another winner ... the stock is up some 50% in 3 months.  (then again, what isn't in the teflon market?) ;)

      From last week:
      • Treasury, which invested more than $49 billion to prop up AIG, plans to convert its preferred stake into common stock by March 15 and will sell the shares to private investors. The U.S. may need one to two years, depending on market conditions, to sell all of its AIG shares, which will be more than 90 percent of the stock in the New York-based insurer, Miller said.

      Unfortunately it appears Bruce pared back his holdings of AIG from a >10% weight to "only" 7%... but FAIRX is still up 6% for the month.  The next great battle stock is St Joe Corp (JOE) where Berkowitz is pitted against hedge fund honcho David Einhorn - talk about a showdown.  Thus far Einhorn's revelation he shorted JOE has crushed the stock, but Berkowitz just joined the board of directors in the past week or so - and I am sure he has been adding stock at a rapid clip as the price goes down.  (last disclosure was a sub 4% stake) In the end I would expect both men to 'win' as they have different time frames....

      Bigger picture learned from this seat (for next crisis) is to learn to think more like a citizen of the USSR circa 1975: don't bet against anything the U.S. government will bring all its horses (and men) to defend.  Even AIG which was a hull of a corporation and in any form of free market would have been destroyed in 2008 is a 'winner'.  Speaking of which, Berkowitz is heavy into Citigroup (C), and Bank of America (BAC).  (Maybe in the next disclosure statement, he will have added General Motors as well)  Free market capitalism corporate socialism is a fine thing, indeed!

      [Dec 10, 2010: Bruce Berkowtiz of Fairholme Funds - the Megamind of Miami]
      [Aug 30, 2010: Bruce Berkowitz of Fairholme Fund Interviewed on Consuelo Mack WealthTrack]
      [Jan 31, 2010: Bruce Berkowitz of Fairholme Funds Slashes Pfizer Stake, Exits Boeing and Northrop Grumman; Add to Berkshire Hathaway
      [Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds
      [Feb 3, 2009: Fairholme Funds (FAIRX) 2008 Report]

      No positions

      Goldman's Jim O'Neill; 2011 - The Year of the USA?

      Is there any more room on this party boat?  Count the father of BRIC, Goldman Sach's Jim O'Neill among those tipping champagne glasses towards the heavens... indeed, he asks will 2011 be the year of the USA?  20% gains in 2011?  No problem.  Overseas he points to Indonesia and Turkey (two countries I am very interested in) along with Korea and Mexico as very interesting venues.

      Again, we have to ask at what point does "everything is rosy, and backstopped by governments and central banks" get priced into the market - it has been 4 months of revelry.  Apparently the near term answer is: not yet.  (hat tip Zerohedge)


      2011. THE YEAR OF THE USA?
      At a London client Christmas Pension Fund dinner I traditionally speak at, I found myself dubbing 2011 as the likely year of the USA last week. Since then, we have seen more evidence of improving economic recovery, further increases in US bond yields, and an increased number of GDP forecast revisions for 2011.
      As outlined in the GS US Economics Weekly, Jan Hatzius and his team are now forecasting a rather robust 3.4 and 3.8 pct real GDP growth for 2011 and 2012. I strongly concur. I notice Alan Greenspan has thrown his hat into the more optimistic ring also. This growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease.

      All of this will result in a mood that the US is returning to “normal,” which will have predictable consequences for financial markets. The US stock market will continue to rise, probably with another 20 pct increase. US bond yields will rise further, although I am not sure that they will get to the 5 pct “normal” I discussed last week. On the foreign exchanges, the Dollar could rally quite a bit, although US policymakers will be eager to resist a significant increase. Of the alternatives, the Yen strikes me still as easily the most vulnerable currency, as the whole Japan comparison that is so popular in Tokyo will fade.

      Of course, things will not return to pre-crisis normality in the US, as it wasn’t really that normal before the crisis. The US can’t survive with an over-levered consumer, a low personal savings rate, and a large current account deficit, and it won’t. I think 2011, in this regard, will be the beginning of a new phase in which the US has strong GDP growth, but it will be led by exports and investment.

      Against this background of the US, next year could see the world growing by close to 5pct.

      2011 will also be the year that economists and investors will learn to distinguish between what are genuine modern “growth economies” and those that are still emerging. While many of these distinctions are somewhat arbitrary, GSAM will be moving to brand the four BRIC economies and some other important ones; Indonesia, Korea, Mexico and Turkey as “growth economies.” All eight are already one percent or more of global GDP and are likely to see their share grow even more. This means that they are increasingly, economically speaking, substantial countries where investors will be able to choose investments with increasing flexibility and alternative thought. They will have their own dynamics and will be remain key contributors to the world economic cycle in their own right.

      Other “N11” economies have the chance of joining this club in the future with Nigeria, the Philippines and perhaps even Iran, as those that could reach such size in the future. There are no doubt others also, but they are not so identifiable. While many other emerging economies have the potential to grow strongly and have many attractions, they should generally be regarded as “emerging” as they are still small and highly dependent on the economic cycle and policies of the G7and the other “growth economies.”

      2011 is likely to witness a lot more dilemmas surrounding the indebted countries a nd the structure of EMU. As I have discussed recently, I don’t think this is truly a crisis of debt; it is more one of leadership and governance. As I have written, the weighted average debt position (and deficit) of the Euro Area is much better than that of the US, the UK, and Japan. Only Canada stands out in the G7. The US fiscal position is pretty comparable to Portugal, but the US isn’t facing the same dilemmas. That is probably because investors have faith in the structure of US governance and economic leadership, which, in turn, is probably easier as the US is a single nation.

      Portugal’s problem is similar to that of Greece, Ireland, possibly Spain, maybe Italy and, in some circumstances, perhaps even France. Will ALL key European policymakers support them? The answer is: we simply don’t know. I think at some stage, the answer is going to be “yes.” All of them, Germany included, will be there, but it might still be messy and tricky. There was an excellent story in Friday’s Financial Times suggesting that German leaders are now starting to talk more of their “European-ness” and I think this will come through in 2011. When it does, hindsight might have suggested current wide bond spreads were attractive. But, this is one for the buy and hold, and don’t watch every day, category.

      [Oct 21, 2010: Godfather of BRIC Nomenclature, Jim O'Neill, Interviewed on CNBC]
      [Jan 22, 2010: - How the BRIC was Born]
      [May 22, 2009: Indonesia: A Must Own Emerging Market]
      [Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
      [Jul 6, 2010: Turkey - Where East Meets West, and Prospects are Improving

      AP: As U.S. Debates, China Acts with an Infrastructure Boom

      Despite any real or perceived negatives of a somewhat central planned economy, no one can argue that speed of action is an issue in the Chinese economy.  With the ability to force banks to push through a massive (relative to size of GDP) fiscal stimulus in early 2009, China's economy boomeranged up... even if many bad loans were most likely made.  . [Feb 16 2009: Is China Pulling an Alan Greenspan?]   On the infrastructure side, while the U.S. will debate a project with environmentalists for a decade, and then have to deal with red tape that differs from 1 state to another - large, multi province projects in China are a relative snap. [Sep 3, 2009: Fortune - China's Amazing New Bullet Train]

      Remember all that hype about "shovel ready" projects in early 2009 as the 'stimulus' was debated? (countless infrastructure related stocks shot up in late 2008 as the market tried to front run the huge infrastructure projects the U.S. was about to embark upon!)  Well it turns out much of that massive infrastructure spend ended up in tearing up and repaving roads.... heck, even the French did a better stimulus.   [Jul 8, 2009: NYT - France's Stimulus Projects, Unlike in US - Were "Shovel Ready"]  Bigger picture, many who travel overseas - especially in emerging Asia - now feel like they are landing in a 1st world country when they arrive in those countries... and a 2nd world when they land back in the States.

      Via AP:

      • Gravel-laden barges glide past the willow-fringed banks of the Grand Canal, plying a trade route built 2,500 years ago to bring grain from China's fertile south to its rulers in the north.  Now the 1,800-kilometer (1,125-mile) passage is part of an even grander scheme: a $150 billion plan to bring water from the mighty Yangtze river to the parched north in what is the world's most expensive infrastructure project.
      • Increasingly, a group of rising economies -- from Brazil to the United Arab Emirates -- is building the showcase projects that once were mainly the pride of the U.S., Western Europe and Japan. America's Hoover Dam made headlines in the 1930s; today, it is China's $25 billion Three Gorges Dam.
      • Just as railways and highways transformed America into an industrial superpower, the 21st-century building boom is laying the foundations for these rapidly growing economies to join the top leagues. Half of the 30 most expensive projects globally are in China, Brazil, the Middle East and other parts of the developing world, according to a list compiled by The Associated Press. A dozen are in the rich countries, and three others are energy pipelines that will link Western Europe with Russia and Turkey. 
      • Topping the list is China's South-North Water Diversion plan, which would use the Grand Canal and two other routes to channel water to Beijing and other fast-growing northern cities. Alone, its price tag dwarfs the $65 billion for all five U.S. projects in the top 30.
      • The $65 billion in U.S. projects includes a new $20 billion air traffic control system, which ranks 13th on the list, followed by separate $14 billion projects to upgrade flood barriers in New Orleans and build two nuclear power plants in the state of Georgia.
      • Overall, just 2 percent of the U.S. gross domestic product goes to infrastructure construction. Europe spends 5 percent of its GDP, and China, 9 percent, according to a U.S. government report.
      • Developing countries, led by China, are devoting $384 billion to the biggest dams, highways, railways, bridges, canals and energy projects. Brazil is building a 518-kilometer (320-mile) $18.4 billion high-speed train link from Rio de Janeiro to Sao Paulo and an $11.3 billion hydroelectric complex on the Madeira River, a major tributary of the Amazon.
      • One country where public works construction has lagged is India, which has only one project on the list, a $9.3 billion nuclear power plant deal it signed with France this month. Many economists see weak infrastructure has one of India's biggest handicaps -- as well as a potential growth area for the world's construction industry.
      More on China, who needs to keep building at apparently any cost to keep the hundreds upon hundreds of millions of newly urbanized working and content.
      • The Communist Party's routine suppression of public dissent means projects tend to get done -- and quickly.  While U.S. states are talking about high-speed rail, China is set to double its network -- already the world's longest -- to 16,000 kilometers (10,000 miles) by 2020.
      • Inevitably, some see big drawbacks to the building boom. They worry that too much construction is unwieldy, resulting in schools or clinics that collapse, and that services such as old-age homes and firefighting equipment can't keep up with rapid urbanization.
      • Continued spending at the current pace is unsustainable, said Nicholas Lardy, a China expert at the Peterson Institute for International Economics, a Washington think tank. "They're not building bridges to nowhere, but if they keep this up for a few more years they might be," he said.

      Sideways is the New Down

      In many ways the market has become very repetitive in December; there is very little to add that was not said 1 week ago or 2 weeks ago - you cannot short it.  Either the indexes go up or sideways, after a premarket mark up of 0.2 to 0.5% (of course that means it could be down 0.4% during the actual session but thanks to the urgent buyer who shows up daily we still get flat). Sentiment gauges in many cases have returned to peak levels of late 2007, as the David Tepper thesis dominates  - either things will improve and the market will go up, or the government/central bank will step in and push the market up.  It is now universal that 2011 will be another steroid filled year of economic and market gains, and kicking the can down the road has become the national ethos.  Free markets rule.

      One can only ask when does it matter when everyone is on the same trade, and everyone believes the same things.  With sellers on strike until 2011, and the urgent buyer showing up each morning to make sure everything remains in order, it does not appear to be a question for the remainder of this year.  Onward and upward we go as Santa Uncle Sam and Santa Bernanke combine to give us a market where sideways is the new down.

      Sunday, December 19, 2010

      [Video] 60 Minutes - States; the Day of Reckoning

      We are generally quite early to a trend, which in actuality is a bit of a negative from an investing standpoint because trends tend to go much longer than anticipated (and whistling past a graveyard aka ostrich head in sand, are national pasttimes).... and as we've seen the past 3 years, government and central bankers willingness to kick the can is almost unending.   So while we were discussing the coming disaster that was state budgets in 2007,  [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] that can has been 'kicked' the past 2 years with stimuli after stimuli to shore up state and municipal budgets. [Jun 18, 2010: States Nationwide Plead for More Backdoor Bailouts... err, "Stimulus"] I will be very interested to see if the Tea Party club that joins Congress in 2011 bows to the states now yearly desperate pleas to spend far in excess of what they bring in.  As for those underfunded state pension plans?   [Jan 5, 2010: - US Public Pensions Face $2 Trillion Deficit[Apr 5, 2009: AP: $1 Trillion Hit to Pension Funds Could cost Taxpayers, Workers]  Furgeddaboutit... that's going to be a Federal Reserve/federal government bailout one of these days (ponzi baby).... or perhaps Ben's master plan to take the S&P to 3000 will fix everything. [Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme Ever] [Oct 27, 2010: PIMCO's Bill Gross -  Fed's QE is "If Truth be Told, Something of a Ponzi Scheme"]

      60 Minutes has been touching a lot of interesting topics of late - tonight they began introducing the topic FMMF readers have had waved in their face for 3 years.  Guest appearances by Governor Christie of New Jersey (a viable 2016 presidential candidate if he 'fixes' New Jersey)  [Feb 18, 2010: [Video] NJ Governor Chris Christie Talks Tough on Out of Control Spending, with Some Shocking Statistics] , and Meredith Whitney.

      14 minute video


      By now, just about everyone in the country is aware of the federal deficit problem, but you should know that there is another financial crisis looming involving state and local governments.

      It has gotten much less attention because each state has a slightly different story. But in the two years, since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion dollar hole in their public pension funds.

      The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.

      [Oct 29, 2010: This Day in Taxpayer Abuse - Buffalo Teachers Skim $9M in 2009 Alone for Cosmetic Surgeries]
      [Jan 24, 2010: For the First Time, More Union Workers Work in Government versus Private Sector
      [Aug 11, 2009: LA Times - Amid Cost Cutting, Los Angeles City Pensions Continue to Soar]
      [Dec 4, 2009: Public Workers Continue to Live the Good Life in New Jersey]

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