Word is Getting Out on Sina's (SINA) Secret - Weibo

My stealth pick stock of 2011 is running away without me it appears - 3x normal volume and a new breakout today.  And already up 17% in less than a week and a half in 2011. [Dec 9, 2010: The Twitter of China]  Frustrating :)

 Investor's Business Daily is the last to highlight the gem inside of Sina (SINA) last week  - Chinese Internet Giant Has High Hopes for Twitter-Like Service.

No position


x

[Video] The Bears Talk China's Manipulated Currency

Using the same service that brought us "I want my Salesforce.com" and the fantastic explanation of "QE for Dummies", some person made a video discussing the manipulation of currency by China.  I think regular readers will get a laugh out of it as it touches on some of the themes we scoff at (circus and breads), but it is definitely not politically correct, and some would say unfair to our American exceptionalism. ;)  If you are easily offended, jump to the next post.

6 minute video - email readers will need to come to site to view






As long as we are on the topic of controversial topics re: China v US - the top read article on the Wall Street Journal website is titled "Why Chinese Mothers are Superior"; it has generated over 2700 comments so you can tell it has touched a nerve.  (click here)

BW: The BRIC Debate - Drop Russia, Add Indonesia?

Long time readers will have a giggle out of the headline since that thought was on FMMF's pages long before it hit BusinessWeek!  Back in summer 2009 I wrote:

So perhaps we are looking at IBRIC? Or BRICI?

That said, I never was able to catch the tail on the donkey named Market Vectors Indonesia ETF (IDX) as the only true pullback it had in 1.5 years (last May), I missed my limit order by a few dimes.  Clearly it would have been far better to just buy the very extended chart in May 2009 around $40 and take the ride, but we are always so much smarter with the ability of 20/20 hindsight.  Probably one of my biggest regret's the past 2 years was not once catching this train.

However at this point the Indonesia market is expensive, despite the long term positives.  And Russia is actually quite cheap after doing little the past year, especially if oil stays above $90 for the foreseeable future.  (this is very much a resource driven economy)*   Hence, the BusinessWeek article is one of those short to intermediate term contrarian indicators from this seat at least (even if I agree in the long run).  The media is offering it is time to chase into one of the hottest markets of the past 2 years.... probably just like most media outlets were saying you must get into China (down in 2010) or Brazil (flattish) about a year ago.  Then again the S&P 500 added Netflix (NFLX) and F5 Networks (FFIV) after multi 100% runs in 2010, so performance chasing is the rule amongst humans.  Most likely Indonesia is set for a period of near term consolidation much like those 2 BRIC highfliers had in 2010.

*Due to "government" issues Russia is not exactly my favorite long term investment. 

Via BW:

• Goodbye BRIC, hello BIIC?  In 2001, three years after Russia's ruble collapsed, Goldman Sachs named the country a member of the BRICs—Brazil, Russia, India, and China—the emerging markets it said would be four of the most dominant economies by 2050. Over the next several years, BRIC-fixated investors piled into Russia as its resource economy thrived in the era of fast-rising oil prices. 
• For plenty of money managers and economists, however, the Russo euphoria is all but gone. From Nouriel Roubini to Morgan Stanley, they are calling either for Russia to be ousted from the BRICs altogether in favor of Indonesia or, at the least, for Indonesia to join the other four. They are put off by the policymaking drift in the Kremlin, Russia's demographic atrophy, and endemic corruption. 
• Indonesia's fiscal prudence, economic growth—6 percent this year, according to the International Monetary Fund—and strengthening social and political institutions have far more appeal. Twice-elected President Susilo Bambang Yudhoyono has directed funding toward schools and health care, and Indonesia's coffers are full enough to put the onetime IMF bailout case on the brink of an investment-grade credit rating. (the other advantage is Indonesia is not export driven, so is much more of a self sustaining organic economy)
• "Russia is just not a good place to put your money," says Richard Shaw, managing principal of QVM Group, a South Glastonbury (Conn.) investment advisory.  Shaw says he avoids putting clients in Russian stocks and funds, and steers clear of BRIC-linked investments because of their Russia exposure. He would rather own Indonesian exchange-traded funds: "While Indonesia isn't a paragon of virtue, it's better, especially to participate in the Asian boom."
• Indonesia, the world's fourth-most-populous country and largest Muslim democracy, has corruption, too. In part, that's a legacy of the Suharto dictatorship that ended in 1998. 
• Yet Tom Lydon, president of Global Trends Investments, says the Asian nation has more going for it than Russia. "Beyond natural resources, it is supported by improving domestic consumption, and anticorruption efforts appear to be working." Indonesia has sentenced several politicians and former ministers for corruption. 
• In its latest Global Competitiveness Report, the World Economic Forum ranked Indonesia 44th out of 139 countries—up from No. 54 the prior year. (Russia came in at No. 63.)
• While Morgan Stanley has called for Indonesia to join the BRICs—Goldman has called the country a "Next-11" nation, in a runner-up list of sorts—economist Nouriel Roubini of New York University has argued that Indonesia should replace Russia in the bloc. "From an American perspective," he wrote last year in a column, "Indonesia is an attractive alternative to Russia, which has vied with Venezuela for leadership of the 'America in decline' cheering section."
• 12 years after its financial crisis the archipelago is China's third-largest trading partner, foreign investment has more than tripled since 2004, and gross domestic product is growing faster than Russia's. 
• While Russia's Micex index has fallen 22 percent from its December 2007 peak, the Jakarta Composite Index is approaching an all-time high. 
• Russia's market fortunes have fallen so low that some investors are taking a second look, especially since Russian corporate profits have been robust. "Russia really stands out as being cheap and attractive," says Maarten-Jan Bakkum, an emerging-market equity strategist at ING Investment Management in The Hague.
• Indonesia's supporters say that over the long haul the Asia nation has the edge. More than half of the population is under 30, while aging Russia faces a paucity of productive labor. The Kremlin may have to commit increasing sums to care for the elderly, says Wijayanto, managing director of the Paramadina Public Policy Institute in Jakarta. "Indonesia," he says, "has the potential to become a key global player."

[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]  
[Aug 10, 2009: Indonesia Expands at Fastest Pace in Southeast Asia]
[Jan 22, 2010: FT.com - How the BRIC was Born]
[Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
[Aug 8, 2010: NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model]
[Oct 9, 2010: [Video]  CNBC's Tim Seymour & Team - The Prospects of Indonesia]

No positions

Bloomberg Markets Magazine Profiles Hugh Hendry

I was an 'early adopter' of Hugh Hendry, highlighting him on these virtual pages before he became fashionable to print within the financial blogosphere.  Anyone who is this acerbic (sometimes unfairly so), but in a transparent and honest manner is someone I can get behind.  As always, watching a video of Hugh is 50x better than reading anything about him, but for now we are left with a write up - although an in depth one - on the man behind the wit.  Some surprises for me was his relative youth (41) and his relative low amount of assets (just over $200M in his flagship fund), especially in relation to the publicity he has received the past 2 years.  Then again, secrecy is more treasured in the hedge fund world than in other investment veins where 'talking your book' is not only encouraged, but a standard operating procedure.

There are some investing themes within the article (betting against China rather than Europe because the cost for European bearish bets has skyrocketed), and some explanation for a relatively poor 2010.  Since there is no real way to bet against Chinese stocks within the country he has an interesting strategy.  Whatever the case he is a real "hedge" fund manager, unlike the hordes of American beta chasing leveraged mutual funds masquerading as hedge funds - but exposed as nothing of the like in 2008.

Some highlights from the Bloomberg article:

• Provocative statements and aggressive positions are Hendry hallmarks. The 41-year-old fund manager says he’s proud to have profited from trading interest-rate options after the near collapse of the European and U.S. banking systems. His chaos play triggered a public spat with European Union lawmaker Poul Nyrup Rasmussen, a former Danish prime minister, who is driving efforts to regulate hedge funds.  The fund manager dismissed Rasmussen as one of Europe’s “champagne socialists” determined to penalize success. 
• “The truth today has become unpalatable, and these jokers don’t want to hear it,” Hendry said in a riposte to Rasmussen, who is president of the Party of European Socialists. “They are now afraid because the magnitude of the problem confronting Greece is now greater than these guys and their ability to respond to it.” 
• Hendry’s Eclectica Fund, which bets on broad global macroeconomic indicators, gained the notice of investors in 2008 when it posted a 31.2 percent return, in a year when the Standard & Poor’s 500 Index dropped 38.5 percent.  As of Nov. 30, 2010, the $233 million Eclectica Fund had climbed 119.3 percent since its inception in 2002. 
• “It’s not our year (2010); nothing profoundly bad has happened,” said Hendry in mid-December, projecting that his total 2010 gain would be about 5 percent. 
• Hendry isn’t always right. In 2006 and 2007, before the financial crisis, his flagship hedge fund underperformed the HFRX Macro Index, a benchmark of rival funds. (was he wrong? or just early?) In 2009, when funds tracking the S&P 500 returned about 23 percent, Hendry lost 8 percent -- his worst performance since the fund’s inception.
• Hendry isn’t always right. In 2006 and 2007, before the financial crisis, his flagship hedge fund underperformed the HFRX Macro Index, a benchmark of rival funds. In 2009, when funds tracking the S&P 500 returned about 23 percent, Hendry lost 8 percent -- his worst performance since the fund’s inception.
• “In a way, he’s real hedge material,” says Jacob Schmidt...... “Hedge-fund material should not be mainstream -- it should be different. That explains his performance. In difficult markets, you’re getting fantastic performance. In good markets, you might get disappointing performance.”
• Now, Hendry is focusing his rhetoric -- and investing strategy -- on a bigger target: China. He’s betting that growth in the world’s No. 2 economy will collapse because of rampant real-estate speculation, sending shock waves through Asia and beyond. 
• The problem, Hendry says, is that China’s gross domestic product growth isn’t matched by wealth creation at home. In his doom-laden scenario, a plunge in Chinese stock prices and property values will be exacerbated by a softening demand for the country’s exports, triggering an extended period of global deflation and slower growth. 
• Hendry, a combative Scotsman, is betting against China in an unusual way, by snapping up credit-default-swap protection on bonds issued by Japanese industrial companies, which have benefited from China’s construction boom. Hendry is convinced that Japanese banks are selling such protection too cheaply.  If the Japanese corporate bond CDS spreads widen to equal or surpass their record highs of 2009, Hendry’s fund could rise by as much as 50 percent, he says. 
• Hendry’s bets on Japan have a time horizon of between two and five years, indicating that he expects China to crash sometime before 2015. 
• Having ridden Europe's sovereign-debt crisis in early 2010, Hendry says he won’t be joining the speculators seeking to profit from the euro’s current troubles.  “Because the euro problem is known, the cost of insuring against it is very high,” he says. “If I defray into Asia, I think I’m buying something very similar but at 80 to 90 percent less. If it all goes belly up, I’m going to make 50 percent.” 

Here is an interview from last summer when he talks about the Asian credit bets... less acerbic than usual. :)




[Mar 4, 2010: Hugh Hendry Continues to Doubt China]
[Oct 30, 2009: High Hendry Resurfaces on CNBC  October 2009]
[Jun 18, 2009: Hugh Hendry Eclectica Fund Letter to Investors]
[Jul 8, 2009: FT.com - Hugh Hendry-Thon]
[Apr 28, 2009: The Latest Hugh Hendry]
[Hendry, Citiwire Interview]
[Mar 20, 2009: Hugh Hendry of Eclectica Asset Management is Wickedly Good]

Federal Reserve's Yellen: QE1+2 to Create 3 Million Jobs

The arrogance of these people... or at least their models.  I'd have to search through my records but didn't I hear our economic leaders in the administration tell us if only we pass this $800B stimulus in early 2009 we'd keep unemployment below 8%?  Or indeed Ben Bernanke saying QE1 would create some millions of jobs (I can't recall the amount - one man can only keep track of so many empty promises).  Now the new VP of the Fed, Janet Yellen promises us QE2 will create 1.2M jobs by 2012.... on top of the 1.8M the Fed has already created.  Since no one can ever disprove her, I guess it's fine and dandy to say whatever you wish.  Considering a lackluster 200K jobs a month (we need 125K+ simply to keep up with population growth) will create 2.4M jobs "by 2012" this is not saying much but hey it's only $2.3 Trillion.  And what's a few trillion amongst friends?

As I said during every other promise of

XYZ monies = ABC more jobs

why not just pro rate it and get us back to full employment.  So if Janet says $2.3T creates 3M jobs why not get us back to full employment with say $8T quantitative easing?  Bigger question is - who knew just doing QE was all it took to create jobs!  Why bother with K-12 and university education - our central planners at the Fed can create all the jobs they want with a press of a button. 

Who are we to doubt anything coming out of the Fed...





Another interesting comment - the Fed will be back to a "possible" normal balance sheet in 2059 2018.  She thinks.  Maybe.  But there will be no pinkie swearing.  Of course this assumes no recessions in the next decade (drink Kool Aid here).  Or a huge mop up job the Fed is going to have to do again when the bubbles they are creating today, cause global dislocations in the future. (insert leaping unicorns here)  Leading us to QE6, QE7, and QE8.


Via Bloomberg:

• Federal Reserve Vice Chairman Janet Yellen presented a possible timeline of about seven years before the Fed’s balance sheet is restored to normal levels, while saying the central bank’s asset purchases will end up creating 3 million jobs by 2012. 
• The researchers conclude that private employment is currently 1.8 million higher than it would have been without the policy and will get an added boost of 1.2 million by 2012.  (I believe this is called the "finger in air" model) 
• Yellen referred to a model created by Fed economists that assumes the central bank will complete its second round of large-scale Treasuries purchases within a year. The Fed’s balance sheet would stay “elevated” for two years before returning to a normal size over five years, she said, alluding to the economists’ research. 
• The Fed’s moves won’t hinder growth overseas, are having “only moderate effects on the foreign exchange value of the dollar,” and do not appear to be triggering “significant excesses or imbalances in the United States,” she said. 

I believe that is identical to what Alan said in 2004.  Give it time Janet and let's check back with each other down the road. 

[Mar 12, 2010: US Dollar Takes a Hit as Janet Yellen Leaked to be Nominee to Replace Donald Kohn as Fed VP]

Gliding Along the 13 Day Moving Average - Deja Vu

The SPY futures rally between 6 AM and 7 AM is back.  Today we added a nice solid 4 points (thru 7:08 AM) or a good 0.30% in that 70 or so minutes, on no news at all other than it's premarket, why not buy?  Really there is no reason to open the market during normal hours with all the positive action we get almost every premarket.  Just let that 'urgent buyer' who is completely price insensitive and happy to buy futures in a sloppy way that almost always pushes them up do 'God's work' and then the rest of us can use normal market hours to go to the mall and support the U.S. economy.  Everyone can just buy Vanguard index funds and no one ever loses.

Anyhow....

If you recall from September 1 to mid November the unshortable market rallied non stop without any major pullback.  There was not a single session where the S&P 500 closed below the 13 day moving average - indeed most days the market would not even pullback to the 5 day moving average but every so often we'd rest a little.  Then that minor thing called Ireland flared up and we had a few weeks of issues.  But starting December 1st (remember, the first day of the month must now almost always be up per decree), we went back to our normal pattern - straight up and no closes below the 13 day moving average.

So another 6 weeks in a row of gains, and working on a 7th - gosh darn that nasty 0.1% selloff yesterday breaking our streak of always wonderful Mondays.  (but those troublesome bears could not stop the NASDAQ).  Indeed they dared to open the market with a gap down which of course was met with a tsunami of buyers who were thankful to see a once every 5 week intraday session of greater than -0.5%.

While I am more cautious the higher we go as I stated Friday, I'd at this point only be hedging with VIX calls counting on some volatility at some point (maybe the Portugal bailout ... err I mean negotiations) or an earnings miss by some multinational in the coming weeks.  But similar to November, you can't really work on actual shorting (of indexes at least) until that 13 day moving average is broken on a closing basis.  And then bears may be given a week or two to pretend they are still relevant entities.....before the next non stop months long rally in which we will never break the 13 day moving average. 

S&P 1262ish has been the floor the past week, and traders await ready to pile on, on any break over the highs of last week.   From S&P 1280 only 120 points (10%ish) until we reach most of the bulls' year end targets of 1400.  Then we go for all time highs since pullbacks are for other countries markets only!  A Goldilocks-nanke environment, indeed.

Indian Stocks Off to Rotten Start in 2011

The speed and ferocity of global capital flows only increases by the year, and one major drawback of the easy money policies of the West, is the flood of capital seeking higher returns, especially in fixed income.  In the larger scope, it is basic supply and demand - too much capital is chasing too few opportunities; after a short term hiatus the global carry trade utilizing easy money is allowing the monied elite to return to their reindeer games.  Since there is a lack of credit worthy borrowers in the U.S., much of our capital is chasing into Asia & Brazil, causing headaches for those nations.  Unlike the U.S., where food inflation is an afterthought and should be excluded from your memory - or any government measure (after all how important is food to your budget?) it is very closely watched in Asia.  It has a nasty habit of toppling governments.

Indian food inflation is nearing 20% per the last report - this is causing consternation about the need for more rate hikes after a campaign of six in 2010.   If the description of the problems facing the East v West sounds like two separate worlds it is; the one constant is Uncle Ben pressing his food on the accelerator.   He will take care of the mess (that he is creating) when our heads bash through the windshield later.  For people in other countries - you are on your own. 

Since Indian markets do not have daily POMO injections they are suffering thus far in 2011.  The charts below have a 1 day delay, but Indian markets finished down for the 5th session in a row, with the Sensex down nearly 1000 points in 2 sessions, and the Nifty approaching 300.  Both are quickly approaching their worst levels since August 2010, & seem headed for a test of their 200 day moving averages.

(1 day delay, Sensex now at 19,224; Nifty 5763)

It is not just India; Indonesian shares were down 4.2% overnight - its worst loss since November 2008 -  as inflation concerns ramp.  Chinese and Brazilian shares have been in the dumps for months on similar issues.  I keep repeating it, but we are in a carbon copy of late 2007 to mid 2008 on the commodity front.  Indeed, the first food riots (Algeria) occurred last week.  On the plus side some Western investment bankers are taking Ben's gifts and making mad money....maybe the trickle on down effect will help the Indians... err, I am sure it says so in some textbook.  Ahem.

As U.S. markets continue to propel higher because once more "nothing matters until it does", I've become much more cautious on equities as a "Goldilocks-nanke" environment is being priced in, while growing dislocations all over the globe are being ignored.   Baltic Dry Index anyone?  Oops - that chart is only to be waved in the air when it supports the bull case.

Via Bloomberg:

• India’s stocks fell for a fifth day, with the benchmark index completing its longest losing streak in eight months, amid concern rising prices will prompt the central bank to tighten monetary policy this month.   Persistent price gains may require an interest-rate increase this month, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said in a Jan. 7 interview.
• India is facing the problem of an unstable price regime, Finance Minister Pranab Mukherjee said on Jan. 8. The wholesale- price index probably increased 8.3% from a year earlier, according to the economists surveyed, after gaining 7.48% the previous month.  
• Food inflation climbed to 18.32% in the week ended Dec. 25 from a year earlier, according to a commerce ministry statement in New Delhi on Jan. 6. Onion prices soared 80% during the week. 
• In the past 15 years, Indians have voted out at least two national governments after inflation eroded the spending power of the poor. The World Bank estimates 828 million Indians live on less than $2 a day.

No position

[Videos] 3 Videos of Jared Lee Loughner

Here are the Youtube videos of the suspected shooter in Tuscon, AZ - Jared Lee Loughner.  More or less a lot of gibberish; the 3rd video is some sort of video manifesto - seems to be the anarchist type. Apparently his last message on his Myspace page was "goodbye, friends" so it appears he assumed today was going to be his last day.

Screen grab of his Myspace page before it was taken down here

His book list paints an interesting picture:

Books:I had favorite books: Animal Farm, Brave New World, The Wizard Of OZ, Aesop Fables, The Odyssey, Alice Adventures Into Wonderland, Fahrenheit 451, Peter Pan, To Kill A Mockingbird, We The Living, Phantom Toll Booth, One Flew Over The Cuckoo's Nest, Pulp,Through The Looking Glass, The Communist Manifesto, Siddhartha, The Old Man And The Sea, Gulliver's Travels, Mein Kampf, The Republic, and Meno.

Dec 6






Dec 15 #1






Dec 15 #2

Whitney Tilson's T2 Partners Year End Letter

While we have very different 'trading' styles, I very much share the 40,000 foot point of view on how to manage a portfolio with Whitney Tilson.  Try to reduce downdrafts and protect against downside, and let the upside take care of itself.  Sometimes that strategy leaves you behind in the dust when the market goes on a steroid induced rampage as we saw the last 4 months of 2010, but this is a marathon and not a sprint.  The benefits of this strategy don't show up during the steroid era; that said, his long term record in the hedge fund is superlative.

Tilson runs a long short book and has bet against some of the most popular stocks in the market today ala Netflix (NFLX) and Lululemon (LULU).  While outperforming the first 8 months of the year, Tilson opines he did not believe enough in our new paradigm 'free markets' as practiced by Ben Bernanke, and championed by David Tepper - and hence missed the "can't lose" market the Bernanke Put offered in the last third of the year.  He provides his always frank analysis on the year 2010 in his year end investor letter below:


Whitney Tilson T2 Accredited Fund Annual Letter-2010
[Aug 10, 2010:  Whitney Tilson Becomes More Bearish on Economic Prospects of the U.S.]
[Nov 4, 2009: Whitney Tilson T2 Partners October 2009 Investor Letter; Housing Recovery Still Has Long Way to go]

Can the Unshortable Market be Shorted?

I have called this the unshortable market for many months as it acts very strange.  Again it is not so much the move up that is strange as the total inability for even short term pitstops in the months of Sept, Oct, Dec and thus far January.  November was an outlier event due to Ireland ...save for those headline events I am sure November would have acted similar to the other months.

Frankly as a contrarian when you hear people talking about unshortable markets you want to fade that...but doing so the past many months would have ripped your face off. So do we just give up until Jul 1 and QE2 ends? I doubt it will be that convenient.  During QE1 there were at least a few pullbacks...summer 09 comes to mind.  Further almost every strategist now thinks SP 1400 to 1425 is in the bag for year end 2011.  The problem is we are about 10% away from that target just days into the year.  Considering there are 11 more first days of the month this year (which are now almost always up) and 51 more Mondays (which lead to morning gap ups about 80% of the time nowadays) that does not leave much leeway for Monday afternoons through Friday for price appreciation.  Unless we are headed to a repeat of fed induced bubble mania circa 1999.

In the near term complacency is supreme.  But I could have said that 3 weeks ago or 13 weeks ago. The retail investor after a few years of fleeing the market is finally returning.  Equity inflows are positive the past few weeks.  (Don't ask how a market rallies 80% in 2 yrs without new inflows...its the new magic)  So that is a new event and again from a contrarian standpoint not a great one.  Generally the retail investor is last to the party and handed the bill.  But we do not live in normal times nor normal markets so we'll see how that goes.

I said early this week I would be interested in attempting a short strategy for the first time in a long time once the news was out of the way this week.  I like SP 1280 as a stop out point and I would probably be interested even more so if we get the traditional Monday morning gap up.  If the SP blasts through 1280 and makes a run for the roses next week...so be it, one has a defined level to trade against and stop out from.  But at minimum a hedge like VIX calls out a few months (April) seems sensible after a 4+ month run.  This is where I would be starting today in the low 17s.  One day people will believe the market can go down again and I would expect VIX to reflect that by popping into the low 20s.  So some April 20 or 22.5 calls make some sense to me.

Earnings begin next week and while the first few weeks are dominated by the multinationals who have the best of all worlds, many are priced 30-50% higher than they were last earnings season.  Thus the bar is much higher as we saw  yesterday with the reaction to december same store sales in the much worshiped retail space.

December Payrolls Mixed

Another head scratcher...please recall there are actually 2 surveys released today - one impacts the unemployment rate (household survey) while the other is the headline number.

The headline figure of +103K is not very good considering expectations but the household figure showed a decline of about half a million people who are unemployed hence the much followed unemployed rate dropped from 9.8% to 9.4%.  This was 9.6% 2 months ago.  Still looking into reason for the half million drop.

U6 fell back down to 16.7% but really no long term progress on that one.

Workweek flat.  Average hourly earnings up 0.1%.

Labor force participation continues to be terrible.  Fell another 0.2% to 64.3%.  This is now about 2.3% below the long term average which does not sound like much in percentage terms but means some 4 million dropped  out of the workforce the past few years and if we had a normal participation rate, the unemployment rate would be 2%ish higher...and getting worse as this figure was a substandard 64.5% last month.  We continue to wonder where all these people went.

November was not revised up that much...thought it would spike higher on a revision.  Up to 71K from 39K but it shows the folly in our knee jerk reactions  as speculators since whatever is said today will change in a handful of weeks anyway.

AP: Census Estimates Suggest 1 in 6 Americans Live in Poverty, 65+ Crowd Expanding Rapidly

One of the biggest mega trends happening in America is the bifurcation of society between the haves and the have nots.  Many of the jobs the 'underclass' once did are gone forever, while others spent freely when times were good, and when the tide turned have little buffer.  [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]   After all, saving for a rainy day is what boring people do.  Others really never got off the ground, as the K-12 education system has degraded dramatically the past few decades.  Frankly the underlying trend - as bad as it is on the surface - has been hidden by multiple bubbles, and most recently a level of government assistance never seen before. [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]  In terms of government spending, this brings up a host of issues as any changes to the social safety net are going to be send millions past GO and directly to impoverished.  (and yes there are people gaming the system, but not tens of millions).  There are myriad societal effects of the transformation of America from a relative egalitarian society in the 1960s to a 2 or 3 class system - but those are topics for other posts we have done.

The official U.S. government tally of who is living in poverty is a joke.  We last looked at it about 16 months ago [Sep 19, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated]  For example, if you make $23,000 for a family of 4 - you are not in poverty.  If you are single and make $14,000 you are not in poverty.  I'm not sure in what counties ex rural Mississippi you can accomplish that cost of living but apparently the government believes a middle class lifestyle is available at $25K for a family of 4 in all of America.    Or at least it would be inconvenient to admit otherwise. And yes once more let me put the caveat that being "poor" in America is different than being poor in Malawi, but in theory we should be comparing ourselves to other first world countries.

The AP has an interesting report of a new measure of poverty in the U.S., based on the census.  It has a different band of parameters and shows an increase over the government's incredibly generous definition of poverty.  As striking is the large increase in those in the over 65+ camp who fall into poverty.  Due to our consumption culture (encouraged by the government at every turn, since we've transformed our economy from good producing to services and consumption) many are entering the golden years with little to nothing.  Where once many had their mortgage paid off by the time they retired and hence could live on a much lower income as their largest expense was eliminated, now after a generation of serial refinancing and cash out to finance buying 'what we deserve', many still have the mortgage to worry about even at age 70+.   There are many other factors we've discussed often - i.e. the move from pensions to do it yourself savings in a country where saving is a sin and spending is worshiped, the disaster that is the 401k system, etc.  Unlike the mortgage crisis which is playing out in a relative short period of time (6-8 years), this grand economic experiment of running an economy on consumption & services (you do my nails, I'll cut your hair, you serve me a beer, I'll cut your lawn, you build a house, I'll default on it) is taking decades to play out.  But we're starting to see the first wave of results the past 5-10 years, and it's not pretty.

Bigger picture there are enormous stresses being formed at the bottom end of the society, and more and more are being caught in the net.  Anyone who truly believes there will be any serious spending cuts at the federal level does not realize the (increasing) dependency that has been created by the a multitude of poor decisions over the past few decades.  Indeed we fast approach the time when 1 in every 5 dollars of "income" are government transfers.   [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]   At this point, the genie is out of the bottle and with a dysfunctional government whose only solution is layer on more debt to kick the can down the road, our modern day plutonomy only grows in power. [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]  However, there appears nothing to be worried about since we've been well trained to parrot the fact that as long as the S&P 500 only goes up, everything in America is fine.  Nothing to see here, move along (buy stocks as you are moving of course).

Via AP

• The number of poor people in the U.S. is millions higher than previously known, with 1 in 6 Americans -- many of them 65 and older -- struggling in poverty due to rising medical care and other costs, according to preliminary census figures released Wednesday.
• At the same time, government aid programs such as tax credits and food stamps kept many people out of poverty, helping to ensure the poverty rate did not balloon even higher during the recession in 2009, President Barack Obama's first year in office.
• Under a new revised census formula, overall poverty in 2009 stood at 15.7 percent, or 47.8 million people. That's compared to the official 2009 rate of 14.3 percent, or 43.6 million, that was reported by the Census Bureau last September.
• Across all demographic groups, Americans 65 and older sustained the largest increases in poverty under the revised formula -- nearly doubling to 16.1 percent. As a whole, working-age adults 18-64 also saw increases in poverty, as well as whites and Hispanics. Children, blacks and unmarried couples were less likely to be considered poor under the new measure. 
• The new measure will not replace the official poverty rate but will be published alongside the traditional figure this fall as a "supplement" for federal agencies and state governments to determine anti-poverty policies. Economists have long criticized the official poverty measure as inadequate because it only includes pretax cash income and does not account for medical, transportation and work expenses.  (much like inflation, as long as you don't eat, use energy, pay for healthcare, or have kids in college - you are fine.   For poverty as long as you don't go to the doctor, need to drive to work, need daycare, or wear clothes at work - your income is sufficient)
• "Under the new measure, we can clearly see the effects of our government policies," said Kathleen Short, a Census Bureau research economist who calculated the revised poverty numbers. "When you're accounting for in-kind benefits and tax credits, you're bringing many people in extreme poverty off the very bottom."
• The official measure is based on a 1955 cost of an emergency food diet and does not factor in other living costs. (that is perverse)  Nor does it consider non-cash government aid when calculating income, which surged higher in 2009 during the recession. 
• The effect was seen most notably among older Americans. Under the official poverty rate, about 8.9 percent lived in poverty, mostly because they benefit from Social Security cash payments. But when taking into account out-of-pocket medical expenses and other factors, that number rises to 16.1 percent.
• Among the findings:
  --Without the earned income tax credit, the poverty rate under the revised formula would jump from 15.7 percent to 17.7 percent. 
• --The absence of food stamps separately would increase the poverty rate to 17.2 percent.
  --Taking into account millions of uninsured people in the U.S. had little effect in increasing poverty, mostly because those without insurance tend to forgo medical care rather than find ways to pay for it.

[Feb 20, 2009: NYT - Newly Poor Swell Lines @ Food Banks Nationwide]
[Oct 22, 2010: Reuters - The Haves, the Have Nots, and the Dreamless Dead]
[Sep 3, 2010: FT.com - The Crisis in Middle America]
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]

Paul Volcker Gives Up, Resigning as Obama Advisor

I originally had high hopes when the news broke that Paul Volcker would work as an advisor for the Obama administration.  This was a no nonsense, tell it like it is guy who actually has the 'people's' interest in mind.  But hope goes to Washington D.C. only to die.  The man was marginalized dramatically by Larry Summers, and any impact he had on financial "regulation" was effectively loop holed to death by the banking lobbyists.  [Jun 26, 2009: Bloomberg - Paul Volcker Marginalized; Major Push Back on Curbing Excess. Our Life of Financial Oligarchy Does not Change] [Feb 23, 2010: Watered Down Volcker Rules, to be Watered Down Even Further] [Feb 2, 2010: Senator Shelby - We Don't Need no Stinkin' Volcker Rules]  I give him credit for hanging in there for 2 years - I would have thrown my hands up in disgust by day 2.

Lobbyist dollars by top 10 banks 1st half 2010 (representing perhaps 300K Americans): $16.3M
Lobbyist dollar by consumer protection groups (representing 300M+ Americans): $0.8M

-----------------------------

Charlie Gasparino, formerly of CNBC, wrote a nice summary of the situation in The Daily Beast: Volcker Rule is a Sad End to a Brilliant Career.

He's one of the greatest economists of our time and tamed inflation as Fed chief, but when Paul Volcker resigns as Obama's adviser, he'll be forever tied to a watered-down financial reform that won't prevent another collapse.

One of the saddest things about Paul Volcker’s probable resignation as one of President Obama’s top economic advisers is how he will be remembered. He won’t just be the Fed chairman who decades earlier performed a national service by defeating the economic evil known as inflation, but the bureaucrat who helped craft a convoluted financial “reform” law that has done little in the way of reforming activities that caused the 2008 financial collapse.


Volcker spent much of his first year in the administration with very little influence on economic policy. The White House and its economic brain trust of Treasury Secretary Tim Geithner, chief economist Larry Summers, and senior adviser Valerie Jarrett were still cozying up to bankers and campaign contributors like JPMorgan Chase’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein. They didn’t want to hear advice from the crazy old man who showed up occasionally at economic policy meetings and groused about putting an end to Wall Street risk-taking once and for all.

Volcker didn’t seem to care. He spent long hours devising his plan to take Wall Street out of the risk-taking business, meeting occasionally with bankers he knew and trusted from his days as Fed chairman and later as a chief economist for an independent investment firm. These people said he spent most of his time listening to how Wall Street changed over the past three decades leading to the financial collapse, how it became less of a business that was paid to give advice and more of a gambling den that rolled the dice with shareholders' money with little accountability from regulators.

Volcker, of course, had never really liked the big banks. He once quipped that the greatest innovation coming from the men of high finance was the ATM. He didn’t like the banks when he was Fed chairman, certainly not when he was out of government (just check some of his speeches), and certainly not now. And because of that, the bankers’ friends in high places, namely Geithner and Summers and ultimately the president himself, marginalized Volcker’s plan to make Wall Street a safer place.

[Apr 9, 2008: Paul Volcker Speaks]
[Mar 6, 2009: Where is Paul Volcker?]
 [Oct 15, 2009: All of Tim Geithner's (Wall Street) Men]  
[Jun 18, 2010: Gamling With Other People's Money]
[Sep 10, 2009: Goldman Sachs CEO - "Ok I Admit It, Some of our Financial Innovations are Socially Useless"]

Market has Essentially Pulled Back Once in 25 Sessions

What has been remarkable about this run - yet another "V" shaped move - is not the run up itself, but the lack of any pullback.  Aside from today the S&P 500 is up 20 of 25 sessions.  Of those 5 down sessions, 4 have been 0.16% or less.  The other session was -0.5%.  +/- 0.1% is a rounding error in the big picture, so effectively 24 out of 25 sessions have been flat or up.  That's ridiculous.

Jeff Saut - strategist at Raymond James - says a normal bull market run is 25 to 30 sessions.  This one is approaching 90 sessions.  He has never seen that in 40 years.

We saw similar "non stop up" runs with no pullback in September and October 2010.  Indeed, if not for the crisis in Ireland in November, we might be on the 5th month straight of no real pullbacks.  The action is completely out of character for a 'free market'.  Even NASDAQ 1999 had sharp pullbacks from time to time within its parabolic move.

As I wrote this past fall, the only time the stock market acted 'normally' since the call for Obama to "buy stocks" (March 09) in my view was between late April 2010 and early summer.  (excluding the 'fat finger' of May 6th) That was also the only time since March 2009 we have not been operating under QE1, QE 1.5 (reinvestment of MBS runoff) or QE2.  I don't think it is a coincidence.  While at this point even the bulls are crying out for a pullback so they can get more long exposure, I don't expect any form of normal to return to the market until the Fed stops handing $8 to $10 billion a day to primary dealers.  So yes PIMCO we do have a new normal.... ponzi style.

p.s. for all those crying the market is cheap or a great value, small caps now trade at 32x earnings.

General Motors (GM) Breakout

Picture worth a thousand words...

No position

World Food Prices Surpass 2008 Record; Prepare for the Riots?

As the 'financialization' of every commodity of earth continues at pace, and easy money pores out of almost every major central bank, we have now reached the point where food prices have surpassed the record levels of 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] [Apr 3, 2008: Corn Hits $6, Start Stocking Up on Soda Pop]  What happened back then?  Just some minor issues such as rioting in many '2nd' and '3rd' world countries.  Looks like we need to prepare for another hot summer.  And domestically those food stamps are not going to go quite so far as they used to.  [Nov 10, 2009: Walmart Executive - "There are Families Not Eating at the End of the Month"]  

Oh well, just consider it collateral damage in The Bernank's plan to make us (and Goldman, JPMorgan, et al) all rich via asset inflation.   (I will stop by some local food banks to let them know they can make some mad money in the markets to offset the rising prices - as long as we all have Etrade accounts, we're good!)  Just remember to blame it all on China - that was a great excuse back in 08, even though we saw once leverage was taken out of the financial system prices of commodities suddenly crashed.  Or demand for food in China suddenly dropped 60% - pick your rationale.  This repeating epidemic has no relationship at all with financial speculation at all.  Nope.

On a related note - a tip of the hat to Congress for the recent ethanol funding expansion, pushed through in in the lame duck.  If there is one thing that makes sense when we have the potential for global food crisis, it is putting inefficient corn in our cars.  [Mar 27, 2008: WSJ - Farm Lobby Beats Back Assault on Subsidies]  The main saving grace at this time is rice, which is massively important in the East. [Mar 19, 2008:  Philippines Brace for Rice Shortage]  [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks]  Thus far prices remain well below 2008 levels - so we're safe for now.  Too bad there is not a rice ETF or else speculators using Ben's easy money supply and demand dynamics could push rice prices up much more quickly.


Via Bloomberg:

• World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.  
• An index of 55 food commodities tracked by the Food and Argiculture Organizartion gained for a sixth month to 214.7 points, above the previous all-time high of 213.5 in June 2008, the Rome-based UN agency said in a monthly report. The gauges for sugar and meat prices advanced to records.
• Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years in Chicago. Food prices may rise more unless the world grain crop increases “significantly” in 2011, the FAO said Nov. 17. 

• Last month’s year-on-year rise compares with the 43 percent jump in food costs in June 2008. Record fuel prices, weather- related crop problems, increasing demand from the growing Indian and Chinese middle classes, and the push to grow corn for ethanol fuel all contributed to the crisis that year.
• “In 2008 we had rapid increases in petroleum prices, fertilizer prices and other inputs,” Abbassian said. “So far, those increases have been rather constrained. It doesn’t really reduce the fear about what could be in store in the coming weeks or months.”
• In response to the 2008 crisis, countries from India and Egypt to Vietnam and Indonesia banned exports of rice, a staple for half the world. Skyrocketing food prices sparked protests and riots in almost three dozen poor nations including Haiti, Somalia, Burkina Faso and Cameroon.
• Rough rice last traded at $13.90 per 100 pounds in Chicago, compared with $20.21 at the end of June 2008. (this is the key one if you 'enjoy' riots)
• The surge in the FAO food index is principally on the back of rising costs for corn, sugar, vegetable oil and meat, which are less important than rice and wheat for food-insecure countries such as Ethiopia, Bangladesh and Haiti.
   

[Video] ABC News - Consumer Reports Showing People are Paying for Less

We spoke about this topic a few years ago, but lost in the multitude of obfuscation about inflation by the government, is the Vulcan mind trick our corporations are playing on us, in terms of packaging - especially in the grocery aisles.  Indeed, I noticed the first 59 oz plastic bottle of orange juice just yesterday.  After all, 59 oz is 7.8% less than 64 oz and what's 7.8% inflation amongst friends?  Especially if you can pull the wool over the many who don't pay attention.  I am sure our government statistics will overlook this minor issue - because as long as prices don't go up, who cares if you get 5, 10, 20% less product. And really is it important? After all government says food and energy are too volatile to really care about measuring - just move along, no inflation here.

ABC News did a quickie 2 minute story on this last night.  Make sure to turn your peanut butter jars upside down to check for hollowed out bottoms. ;)

ISM Non Manufacturing Pops to 57.1, Highest Reading Since Recession Began

The ISM Non Manufacturing reading came in very good today; unlike Monday's ISM Manufacturing which only represents about 10% of the economic activity and employment, this report is far more tangible to the current U.S. economy.  The headline figure came in at 57.1 (vs 55.00 in November) however just like Monday's ISM report, the employment component lagged severely.  The figure dropped to 50.5 from 52.7; in light of this morning's ADP report which showed a massive surge in employment in the service sector, we have some head scratching conflicting data. 

In other data points:

New orders were very good - jumping 5.3 points to 63.  One hopes the employment data is some sort of lagging indicator - i.e. headline figure jumps, new orders jumps... and eventually employers need to hire to take care of this situation, but "they" have been telling us employment is a 'lagging indicator' for nearly 2 years now.

Prices surged from 63.2 to 70.0 - mirroring what we saw in ISM Manufacturing.   Takeaway?  Inflation is jumping in every report except for those generated by the U.S. government.  How convenient. ;)  [Dec 16, 2010: Shadowstats.com - Consumer Inflation as Measured in 1980 Would be 8%+, as Measured in 1990, 4%]

This is the first time I can remember the headline figure on ISM Non-Manufacturing besting its peer in some 3 years...

PIMCO's Bill Gross' January 2011 Letter - Off with Our Heads

I'm starting to become afraid as Bill Gross is starting to sound a lot like Tradermark. ;) Some of the things in the January 2011 letter are almost verbatim from various entries on FMMF.   The thrust (literally) of January 2011's letter, is what I have labeled intergenerational arbitrage.  Taking from the those with little or no voice (tomorrow) to give to the today.  A selfish act, but one we have perfected.  We often speak of the lack of cost-benefit analysis in modern America; everything is benefit-benefit analysis.  "If we only spend/tax cut/stimulate/hand out/beg/borrow/steal $XXX, well we can make almost any economic figure surge".   Indeed, PIMCO itself noted we just bought some extra GDP with the massive package passed late in 2010.  [Dec 10, 2010: PIMCO Joins Goldman in Raising GDP Forecasts for 2011 as United States "Buys Itself" to Prosperity]  I am still giggling at the hard fought "compromise" between the GOP and Dems on that one - only in Cramerica do you call it compromise when you give both sides what they want.  Did I mention how hard fought it was?

The current excuse is we are just going to grow our way out of all our problems.  Sure, why not - it's only money.  I've proposed we cut all taxes to $0 and hand every American $10 million ... surely with the prosperity we create from those acts we will "grow" in a way no other country in the history of countries has.  Why do it half way? After all it's all about benefit-benefit analysis. :)

Anyhow as long as we see the benefits today, and any and all costs are pushed out til tomorrow (preferably to a generation we never have to look in the eye) it's all good.  Buy stocks - David Tepper style (we can't lose remember?).  And houses. And cars.  And shop your local mall - often.  American exceptionalism baby.

---------------------------

Here is a link to this month's letter, entitled "Off with Our Heads" - some highlights

• Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at a dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills.
• Unlike Euroland or the United Kingdom, which appear to have gone on an extreme fiscal diet, the American answer to a bulging waistline is always “mañana.” Debt commission recommendations are tossed in the trashcan, tea party election rhetoric eventually focuses on minuscule and merely symbolic earmarks, and both Democrats and Republicans congratulate each other on their ability to reach a bipartisan agreement for the good of the nation. Munch! Munch! Off with our heads!
• The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognise now what the ultimate cost of blueberries will mean for American citizens of tomorrow.

Four major factors come to mind:

1. American wages will lag behind CPI and commodity price gains.  Because policy stimulus is focused on maintaining current consumption as opposed to making the United States more competitive in the global marketplace, American workers’ real wages will almost necessarily lag historical norms. Chart 1 points out the graphical evidence of an erosion of labor’s share of the American economic pie, falling from 62% of GDP just recently to a current anemic 58%. Blame it on poor education, blame it on globalization, but an ongoing rebalancing of rich country/poor country wages inevitably will keep US wages compressed as deficit spending serves to reflate commodity and end product prices in future years but not paychecks. Americans will feel the pain but like the male mantis, probably not understand why they’ve lost their head.
2. Dollar depreciation will sap the purchasing power of US consumers, as well as the global valuation of dollar denominated assets. Unique amongst almost all other global citizens, Americans are ignorant of the merits (and the negatives) of currency depreciation. Unless they are smacked with the reality of an expensive hotel or a meal in a foreign port of call during summer vacation, we have few concerns when the dollar depreciates against a basket of foreign currencies. If our stock market goes up 10% annually in dollar-denominated terms, we assume we are 10% richer even if the dollar sinks at the same time. If the cost of imported goods and especially gasoline goes up more than our paychecks, we blame it on a political conspiracy. The fact is that annual budget deficits in the trillions of dollars add a like amount to the stock of outstanding dollars, resulting in currency depreciation, higher import inflation, and a degradation of dollar based assets in global financial markets. We become less, not more wealthy, losing our heads while we “hold on firmly and go on with (our) business”! 
3. One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible. Currently, the Fed is doing both, holding short term interest rates near zero, and engaging in Ponzi like Quantitative Easing II purchases of longer dated Treasuries in the open market. The combination offers bondholders about as an attractive situation as the one facing a male praying mantis: zero percent interest rates if you stay in cash, or probable principal losses if you take durational risk by buying 5 and 10 year maturities. Eventually, as reflationary policies take hold, long-term bondholders lose their heads (and a portion of their principal as well), as yields rise to reflect higher future inflation. Bondholders’ metaphorical warning: “don’t go near those longer term bonds you fool”.
4. Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable: witness Greece, Ireland, or a host of Latin American countries of generations past. According to Carmen Reinhart and Kenneth Rogoff’s excellent research in This Time Is Different, once a country’s debt approaches 90% of GDP (as the U.S. is now doing), its economic growth slows by up to 1% annually as the interest payments drain resources that should be going for productivity enhancements. Sovereign credit risk increases and yield spreads rise relative to global competitors. Future generations pay the price for their parents’ mindless thrusting.
5. 
   

[Dec 3, 2010: PIMCO's Bill Gross' December 2010 Letter - We're All Living in Allentown, PA]
[Oct 27, 2010: PIMCO's Bill Gross: Fed QE is "Truth be Told, Somewhat of a Ponzi Scheme"]

ADP December Payrolls Up a Whopping 297,000

Two back to back off the wall figures in ADP.  Usually the government's monthly report comes in about 70-80K higher than ADP but November's 92K in the ADP report was strangely much higher than the government report 2 days later, which came in below 40K. This time we have an off the charts figure of just under 300,000 in ADP.   Obviously we have a lot of seasonal hiring in December but one would think this is adjusted away somehow.  Almost all gains were in the service providing sector: +270K which would make sense in terms of a big jump in seasonal retail.  whatever the case the expectation for Friday's reports should go up but right now the relatiinship between ADP and government data seems more out of sync than normal.  January should likewise be interesting as we see how many of these gains potentially fade away as some seasonal workers are let go.  I thought the numbers this Friday would be positive to make up for a very strange November report, but no one is looking for 300Kish.

Mosaic (MOS) - Back in the Saddle

Fertilizer producer Mosaic (MOS) was my top dog position for much of latter 2007 into early 2008, often sitting at 6-7% of the portfolio.  While much of the rest of the market was falling apart after the October 2007 peak, there was a harbor of safety in the commodity space....until there wasn't.  After the blowup of commodities that started in mid 2008 - it, along with a host of companies across the commodities spectrum (and indeed the entire market) went into a death spiral.  In retrospect, once more the "front page" indicator worked like a charm in this space - no different than most investment crazes.  (be wary of the 'rare earth metal' cover story coming soon!)  [Apr 30, 2008: Finally (a Year Late) Fertilizer Hits the Front Page of the NYTimes; and an Interview with Mosaic CEO]  Much like auto companies/suppliers the fertilizer space has extremely high leverage with a supreme level of fixed costs.  So when business goes bad, it tends to go really bad - but when it is good, gross margins balloon, andmuch of the incremental revenue drops straight to the bottom line.

• Mosaic's gross margin for the second quarter of fiscal 2011 was $768.3 million, or 29 percent of net sales, compared with $307.0 million, or 18 percent of net sales, a year ago. 

Now appears to be one of those times... the stock is up some 100% in just over 6 months and reported another very nice quarter last evening.   I keep saying it, but this feels like deja vu with latter 2007, early 2008 across the commodity space.

Frankly, I am shocked there was never a bid for Mosaic somewhere along the line the past 2 years - perhaps the 64% stake by Cargill poses problems for an outside investor.  At $33B in market cap, there are now far fewer potential suitors.

Interestingly, Mosaic was able to pull this off with potash prices down year over year - but phosphates still are the dominant product line.  Potash prices are still far off the crazy times of a few years ago.  [Apr 23, 2008: Potash Hits $1000 on Spot Market]  [Apr 2, 2008: Potash Makers Already Talking $750; Up from $625] [Mar 27, 2008: Canpotex Potash Contracts Secured with India @ $625]

• Mosaic said today its average international selling price for potash in the second quarter fell to $331 a ton from $370 a year earlier.  Mosaic sold diammonium phosphate for $461 a metric ton in the fiscal quarter, up 61 percent from a year earlier.

Full earnings report here.

Via Reuters:

• Strong demand for fertilizer driven by high U.S. crop prices helped Mosaic Co's (MOS) quarterly profit and revenue beat Wall Street's expectations.  With prices for corn and soybeans near multiyear highs, farmers have strong incentive to plant as much as possible, a process requiring more phosphate and potash fertilizer.
• "I think people will focus on the high crop prices," Soleil Securities analyst Mark Gulley said. "It's hard to find a chink in the armor right now. The outlook is very solid."  It remains to be seen if U.S. farmers plant more corn than soybeans in 2011, Chief Executive Jim Prokopanko told Reuters, adding that the "fight for acres hasn't been fought yet."
• "Everything on the horizon that we see is in support of higher prices," he said. "We really feel good and confident about the business. Demand is booming, and our outlook looks good from any angle."
• Mosaic, which is majority owned by U.S. agribusiness giant Cargill, earned $1.03 billion, or $2.29 per share, in its fiscal second quarter, ended Nov. 30, compared with $107.8 million, or 24 cents per share, in the year-ago period.  Excluding gains from the 2010 sale of a stake in a Brazilian fertilizer producer, Mosaic earned $1.01 per share.   By that measure, analysts expected earnings of 91 cents per share, according to Thomson Reuters I/B/E/S.
• Sales of phosphate, the second-most important fertilizer for farmers, rose 49 percent to $1.97 billion during the quarter.  For the fiscal third quarter, Mosaic expects phosphate volumes of 2.4 million to 2.7 million tonnes. 
• Phosphate production has been curtailed in recent months due to the partial shut-down of a large Florida mine.  Returning the mine to 100 percent capacity is "one of our highest priorities," Prokopanko said. The company has an extension agreement in place with authorities to mine 200 acres through the end of March, he said.
• To reduce dependence on its phosphate business, Mosaic is in the middle of a $5 billion campaign to boost its potash capacity by more than 5 million tonnes over the next 10 years.  For the fiscal third quarter, Mosaic expects to ship 1.9 million to 2.1 million tonnes of potash.
• During the fiscal second quarter, sales of potash rose 69 percent. 
• Mosaic's overall revenue rose 56.4 percent to $2.67 billion. Analysts expected $2.44 billion.

[Jan 18, 2008: One Lonely Voice Agrees with Me on Food Inflation]
[Jan 14, 2008: Beating a Dead Horse - Fertilizer]
[Nov 19, 2007: Revisiting "Analysts Still Doubt Fertilizer Stocks"]
[Oct 23, 2007: Analysts Still Doubting Fertilizer Stocks]

No position

Qualcomm (QCOM) Near Deal to Buy Atheros Communications (ATHR) for $45/Share

Grrr.... so frustrating.  One of our mainstay holdings for the past 2 years - Atheros Communications (ATHR) looks like it will be bought out for Qualcomm for $3.5 Billion of $45/share.  Not only do we miss out on the buyout but one less candidate for the future portfolio. Indeed I said in early December to keep an eye on this one.  [Dec 1, 2010: Keep an Eye on Atheros Communications]

Bigger picture this is becoming an increasing problem for investors such as myself.  A lot of the small to mid cap secular growth stories - namely in tech - are being snapped up or never make it public since the mega cap giants buy them all up - hence their big growth gets embedded in a much slower giant.  Much like Xbox is stuck inside of Microsoft.  (in that case of course, Xbox originated within MSFT but it's the same idea of a high growth arm of a slow plodding giant) I think this might be the reason the remaining independent high growth names have such a premium - scarcity value. There are so few domestic opportunities for secular growth, that for those that remain stand alone, people are willing to pay any premium.  Atheros would not even be considered the cream of the crop in terms of growth like some of the other names that had ridiculous 2010 price appreciation, and probably have priced themselves out of being acquisition targets.


Per NYT:

• Qualcomm is near a deal to buy Atheros Communications, a semiconductor manufacturing company, for about $45 per share, or $3.5 billion, according to two people with direct knowledge of the talks.
• A deal could be announced as soon as Wednesday, said these people, who requested anonymity because they were not permitted to talk publicly about the deal. They added that the talks were in their final stages but could still fall apart.
• The deal would represent a roughly 22 percent premium to where Atheros’s stock traded midday on Tuesday. Atheros stock has jumped about 50 percent off its lows in September as the outlook for business and consumer spending has improved.
• A purchase of Atheros would be Qualcomm’s largest acquisition ever. Over the past year, Qualcomm, based in San Diego, has quietly sat on a pile of more than $10 billion in cash, while its rival Intel has gone on a buying spree. Last August alone, Intel spent nearly $10 billion acquiring McAfee, the antivirus software maker, as well as units of Texas Instruments and Infineon.
• Atheros, based in Santa Clara, Calif., makes chipsets for a range of wired and wireless devices, including desktops, laptops and tablets. On Monday, it announced two new wireless products that bring Wi-Fi and Bluetooth technology to notebooks and tablets while reducing reducing power consumption and increasing the longevity of batteries in such devices. 

[Oct 26, 2010: Atheros Communications with Solid Report, but Guidance Soft]

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Trading Community Beginning to Turn Against Gold?

Increasingly my belief is large money has the capacity to move markets, and the ability to influence others via options market activity is increasing.  So many people are looking for any edge, and as we saw in 2008 with the banks - once players began blasting these institutions with put buying everyone began asking "what do they know that we don't know" and that led to selling... or more put buying... and it tends to feed on itself.   We saw similar activity in the CDS market for sovereign debt more recently.  The same goes for the upside, especially with so many services now alerting market players to large institutional scale activity in the options market.  One could say in some ways this is using the market psychology to manipulate things if you are a big enough fish.

i.e. short XX in scale, then start blasting the option markets with out of the money put purchases, which scream out to everyone in a market where any dislocation is picked up by algorithms the world over, which then leads to people asking "what does this big boy know?", which leads to copycat behavior or "shoot now, ask questions later".... which leads to ....

You get the point.  A very large player can move markets simply due to their scale causing others to mimic or question their own position.  That original shorting of XX in scale is a winner due to all the following factors.   Not to mention the follow up puts.

Apparently the "trading floors" are buzzing with large scale put purchases of the gold ETF at the 115 strike price (apparently in March).  This same player could have been shorting GLD (the ETF itself) in size ahead of this now very obvious put buying.  So does this feed on itself?  Already the questions begin "what does this person know?"  And so the human psychology plays on itself as the CNBC Fast Money crew jumps on it - so both the retail investor and the institutional investor now know "someone smart" is doing something.  If the herd follows the Pied Piper, the original put buyer (who potentially also has a big short position of the ETF itself) will make mad money frankly only due to the scale of his put position causing herding behavior. 

As we can see from the chart GLD 115 would be a dramatic drop, down below the 200 day moving average.  But frankly it need not go anywhere near that for said purchaser of puts to make mad money.  Indeed with today's 3% drop today this institutional buyer has already made some excellent change.  Even a drop to the upper 120s from the 134s would derive very big profits.  And all it took was said "smart money" leaving his/her large 'footprint' all over the market.

p.s. for your technicians out there, one could make the case gold has just made a head and shoulders formation.  

Here is a video of the Fast Money crew talking it up....




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