Tuesday, January 18, 2011

65x Forward Earnings for Arm Holdings (ARMH)? No Problemo Says Goldman Sachs - Buy It!

To say ARM Holdings (ARMH) is stretched on the chart is an understatement.  Last Thursday at it's peak it was more than 25% over its 20 day moving average - to not sell at least part of one's position into that level of extreme is looking a gift horse in the mouth. It is becoming increasingly difficult to justify valuation for many of us... but not Goldman Sachs' British analyst.  After missing the huge run (Goldman was at neutral) NOW the firm changes to buy - thanks for the value add guys!  Where were you the last 50%?   Indeed where you 35% ago (i.e. less than a month ago)

Once more (as in 1999) we are seeing analysts justify valuations today by picking some far off year (rather than the next 12 months) and then reverse engineering a figure that allows for them to say "what a great value".  Many of those assumptions in their reverse engineering are massively aggressive and assume that almost every mid cap tech company on earth is the next Apple, Amazon, or Google.  Thank you Bernanke for bringing back 1999.

Via Barron's

  • Goldman Sachs analyst Simon Schafer this morning raised his rating on the ordinary shares of ARM Holdings (ARMH) to Buy from Neutral, with a price target of 700 pence, about 30% above today’s price in London trading of 539.50.
  • Schafer makes the case that Microsoft’s (MSFT) recent decision to build the next version of Windows both for Intel (INTC) and AMD (AMD) chips as well as ARM-based designs, “opens new doors” for ARM. It could boost ARM’s penetration of computing to 45% by 2015, versus less than 10% today, up from a prior forecast of just 28% or so. That could add an additional $1.2 billion in royalty revenue, he writes.

So aside from the 45% penetration among computer devices versus less than 10% today (which is incredibly aggressive) here is the rest of the reverse engineering.
  • Since royalties are 100% profit for ARM, it should go straight to profit, and Schafer sees ARM’s royalty rate across various products rising from maybe 1% to 2% to 2.5%, on average. That could boost income per device to $1, on average, from a current five cents per piece.
  • Based on average unit growth of 13% over the next 10 years, and a 2% inflation in royalty rates, Schafer sees royalty revenue rising a compounded 16% over the next decade. Schafer models ARM’s royalty revenue rising to 222 million Great British pounds this year, 282 million next year, 365 million in 2013, 485 million in 2014, and 557 million in 2015.
  • While Schafer has the company producing just 11 pence in 2012, which is lower than some estimates (RBC Capital’s Nick Hyslop last week modeled 15 pence on much the same scenario), Schafer sees EPS exploding by 2015, at 30 pence per share. Hence, his 700 pence price target is based on a P/E multiple of 23 times that number.
So let's review... Intel will sit on its hands for the next 5 years.  ARM's royalty rate will go up over time, not down.  And since there is no way to justify valuations today, we'll put a price target on ARMH that is "only 23x, our pie in the sky 2015 EPS guestimate"... that says an ARM chip will be sitting in 1 of ever 2 computing devices produced at the time. The only best case scenario this analyst left out was the "someone may buy ARMH to boot!" 

No position

Morgan Stanley (MS) Does *NOT* Initiate Coverage on E-Commerce China Dangdang (DANG)

It's like a soap opera around here.  After the weekend 'exchange of ideas' (for the sordid explicit details feel free to head over to the BusinessInsider) on Weibo, Morgan Stanley (MS) has not issued the traditional "buy buy buy" coverage this morning now that the quiet period is over.  You can bet their analyst was told to sit on the report by higher ups based on the embaressment this weekend.  (again it appears that no actual Morgan Stanley employee was part of this web altercation, just someone posing as a Morgan Stanley employee - but DANG's CEO comments surely pissed off one of America's most powerful oligarchs all the same)  As interesting, the other lead underwriter, CS also did not initiate coverage this morning - very strange to see the leads not waving the green flag on their product.

Both Youku.com (YOKU) and E-Commerce China Dangdang (DANG) are down 7%ish today as other analysts have chimed in with a host of 'neutrals'.... in Wall Street language "Sell".   For an analyst to put a 'neutral' on companies like this, it means things are truly egregious in valuation (which they are) - after all the main job of analysts from the sell side are to say nice things so the investment banking arms of their banks can win future business help investors.

Via Herb Greenberg over at CNBC

  • With the post-IPO quiet period now over for Youku and E-commerce China Dangdang, two of the hottest Chinese deals in years, analysts from the firms' investment banks are out with a dash of reality: Unless you’re a long-term investor, these things are expensive.  And even then, it may pay to read the fine print as it relates to risks.
  • On Dangdang Piper Jaffray's Gene Munster says the stock is fully-valued. His 12-month target: $30. (It is currently around $31.) At current levels, he says, investors “are investing for the five-plus year opportunity.”  (Gene is being generous in his language by saying "are investing for the five plus year opportunity" - essentially this means the only way the valuation makes any sense is hyper growth for 5 years and investors TODAY are already pricing that in at current prices)
  • Cowan analyst Jim Friedland, noting Dangdang’s 112 percent rise since its IPO, “already reflects a strong growth scenario in an environment that remains highly competitive.”  Competitors include Amazon’s Joyo.com, 360buy.com (China’s largest online merchant of consumer electronics), and Taobao, which operates China’s largest online marketplace.
  • Co-Lead bankers Credit-Suisse and Morgan Stanley have not yet chimed in. Morgan Stanley says it’s not unusual to be a banker on the deal and not issue a report on the company for some time.
  • On Youku,China's YouTube/Netflix: Munster of Piper is equally neutral, with a target of 40, or higher than the current price. “We expect Youku to be a significant beneficiary of the growth in online video ad dollars in China,” he says. “However, we note that current market valuations appear to price in similar expectations."
  • James Mitchell of lead banker Goldman Sachs, also weighed in with a neutral rating and a target of $37. He said the company could get profitable quickly—perhaps as soon as late this year or early next year. He also noted the cost of content is rising rapidly.

Much like Gene at Piper I said back in December at today's insane valuations, a company like Youku.com could grow 100% a year for 4-5 years and only then maybe make some sense (maybe!) - but this is already priced in today as if there will be no competitors and a $50M revenue company will be $400M one in 4 years with no roadblocks.  [Dec 13, 2010: Careful of that Youku on your Shoe]  This is the same logic we were using in 1999 to justify Alan Greenspan pumping the market full of steroids, and valuations that no one could really defend.

No position

Report: First Two Years of College Show Small Academic Gains

A fascinating book highlighted in today's USA Today - Academically Adrift - Limited Learning on College Campuses - which puts another strike in the U.S. education system.  Even more troubling it is in the one part of the domestic education system that is still supposedly world class (universities).  The sampling is only 3000 students, but if it is any indication of what is happening at a broader level this is another argument to shelve the whole idea of going to university, taking on mountains of debt, only to emerge not much better educated and with a mini mortgage to take care of, while many of the job opportunities one once had now either pay less.... or are in Bangalore or Beijing.   [Dec 21, 2010: Video - CNBC, the Price of Admission - America's College Debt Crisis]  Maybe this should not come as a surprise, because the 'dumbing down' of education to make sure almost anyone with a heartbeat passes in K-12 (can't hurt any kid's self esteem after all), has to bleed into the college system at some point.  Maybe not the Yales, Stanford, et al set but certainly it seems to have taken root lower down the food chain.

So if half the students gain almost no knowledge after 2 years, and 1/3rd none after 4 years - what exactly are they paying these immense fees (who inflate at rate that makes healthcare look a bargain) for again?  I continue to believe we are fast approaching the point the ROI (Return on Investment) of college is going to be an open question. [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]   But for many colleges it is about having warm bodies (who pay money, borrowed or otherwise) in seats.  Everything else is just details.  Yet another part of society where your incentives our broken.
  • The culture of college needs to evolve, particularly with regard to "perverse institutional incentives" that reward colleges for enrolling and retaining students rather than for educating them. "It's a problem when higher education is driven by a student client model and institutions are chasing after bodies," he said.

Random pathetic statistic: according to the study the average college kid spends 50% less time doing somewhat important things like... well studying, than her peer from a few decades ago.

Anyhow, no worries - I am told the Federal Reserve can fix any problem with more quantitative easing. 

Via USA Today:
  • Nearly half of the nation's undergraduates show almost no gains in learning in their first two years of college, in large part because colleges don't make academics a priority, a new report shows.  (uhhh?)
  • Instructors tend to be more focused on their own faculty research than teaching younger students, who in turn are more tuned in to their social lives, according to the report, based on a book titled Academically Adrift: Limited Learning on College Campuses
  • Findings are based on transcripts and surveys of more than 3,000 full-time traditional-age students on 29 campuses nationwide, along with their results on the Collegiate Learning Assessment, a standardized test that gauges students' critical thinking, analytic reasoning and writing skills.
  • The universities are not identified — the authors only say they represent “a wide range” of the nation’s approximately 2,000 four-year institutions. 
  • After two years in college, 45% of students showed no significant gains in learning; after four years, 36% showed little change
  • Students also spent 50% less time studying compared with students a few decades ago, the research shows.
  • "These are really kind of shocking, disturbing numbers," says New York University professor Richard Arum, lead author of the book, published by the University of Chicago Press.  He noted that students in the study, on average, earned a 3.2 grade-point average. "Students are able to navigate through the system quite well with little effort," Arum said.  (calls into question what a 3.2 GPA in the 'average college' is really demonstrating)
  • 35% of students report spending five or fewer hours per week studying alone. Yet, despite an "ever-growing emphasis" on study groups and collaborative projects, students who study in groups tend to have lower gains in learning.
  • 50% said they never took a class in a typical semester where they wrote more than 20 pages; 32% never took a course in a typical semester where they read more than 40 pages per week.

Much more on this in a story on the 'Inside Higher Ed' website
  • Those students who do show improvements tend to show only modest improvements. Students improved on average only 0.18 standard deviations over the first two years of college and 0.47 over four years. What this means is that a student who entered college in the 50th percentile of students in his or her cohort would move up to the 68th percentile four years later -- but that's the 68th percentile of a new group of freshmen who haven't experienced any college learning.
  • "How much are students actually learning in contemporary higher education? The answer for many undergraduates, we have concluded, is not much," write the authors, Richard Arum, professor of sociology and education at New York University, and Josipa Roksa, assistant professor of sociology at the University of Virginia. For many undergraduates, they write, "drifting through college without a clear sense of purpose is readily apparent."
  • The main culprit for lack of academic progress of students, according to the authors, is a lack of rigor
  • ....the book acknowledges that many college educators and students don't yet see a crisis, given that students can enroll, earn good grades for four years, and graduate -- very much enjoying themselves in the process. But in an era when "the world has become unforgiving" to those who don't work hard or know how to think, Arum said that this may be a time to consider real change.

Bottom line - we seem to be deluding ourselves by creating systems that create a facade.  However, in an increasingly globally competitive environment, this self delusional mirage is becoming increasingly useless.  But at least we are graduating college educated baristas with high GPAs....and self confidence!

E-Commerce China Dangdang's (DANG) CEO Criticizes IPO Underwriter Morgan Stanley on Weibo!

A pretty amusing story in the Wall Street Journal on a rant towards an (alleged) Morgan Stanley employee on China's version of Twitter (Weibo), by E-commerce China Dangdang's CEO in regards to undervaluing the IPO (hence shortchanging the company).  A few points - first his wife did not seem to have much issue it when she was asked that exact question the day of the IPO [Dec 8, 2010: Meet China's Newest Billionaire - E-commerce China Dangdang's CEO Peggy Yu Yu]  and second, don't hate the playa, hate the game!  Investment banks want to create buzz so they want to price IPOs so they get huge first day spikes.  The IPO frankly was quite fairly priced on any rationale basis.  We no longer live in a rationale market, so it just happened to price in a market where Ben Bernanke guarantees no one loses and Chinese internet IPOs are being priced like U.S. internet IPOs of 1999.
  • The original midpoint valued the company at 48 times annual earnings, based on third-quarter results. That was 64% higher than the median of 29.2 times estimated profit for 11 U.S.-traded Internet retailers.
Last, don't worry - the quiet period ends this week so you can be sure the Morgan Stanley analyst will be shouting from the rooftops to the retail crowd what a "value" the stock is, even up 100%+ from the IPO price of just a month ago.  You and your wife are instant billionaire's - just be happy and let the Wall Street machine do the rest.

Via WSJ:
  • E-Commerce China Dangdang Inc. Chief Executive Guoqing Li lost his temper Sunday on China's biggest Twitter-like microblogging service, accusing Morgan Stanley of undervaluing his company's initial public offering and exchanging off-color insults with a user who claimed to work for the financial services firm.  
  • Mr. Li made the remarks on microblogging service Sina Weibo to a user going by the name Mishi De Weiyi, whose profile listed Morgan Stanley as her employer.  "I am here openly criticizing investment banks, criticizing Morgan Stanley, what, Morgan Stanley can't be criticized? Not be cursed? You foreigners' flunky!" he said to the user.  
  • Dangdang, often likened to Amazon.com, is an online bookseller looking to expand its product range to fuel growth. It sold $272 million of shares in its IPO, including more than $56 million sold by Mr. Li and other existing shareholders, before listing on the New York Stock Exchange on Dec. 8. Morgan Stanley was a lead underwriter. Dangdang's American depositary shares recently traded at $33.86, versus their IPO price of $16.00.
  • "I regret not giving the job to Goldman Sachs," Mr. Li—who co-founded Dangdang with his wife, Peggy Yu—said in his Sunday tirade.
  • Mr. Li's remarks included made-up "rock-and-roll song lyrics," as he called them, that managed to mix talk of the IPO silent period with highly profane mother insults. Mr. Li's microblogging opponent, Mishi De Weiyi, was at least as vicious and foul-mouthed, using crude terms to suggest Li's father shouldn't have conceived him and saying he has an "IQ so low you don't even understand the basic principles of being human."
  • Morgan Stanley, after a preliminary investigation, said it doesn't believe any of its employees actually wrote the blog posts, a company spokesman said. "These comments are offensive, highly unprofessional and do not reflect industry practices. We condemn such behavior that can risk damaging a company's brand and reputation," he said. Morgan Stanley declined to comment on Mr. Li's allegations of undervaluing its shares.
  • Dangdang said in a statement Mr. Li's remarks were his own, and that they also serve as a warning to other companies seeking a U.S. listing.

No position

Sunday, January 16, 2011

The Atlantic: The Rise of the New Global Elite

Rarely do I come upon an article that is as eye opening as this one from Chrystia Freeland, in the Atlantic.  Freeland has recently moved to global editor at large for Reuters but before that was U.S. managing editor of the Financial Times so has a diverse global background that is pretty rare among journalists.  The gist of this article - The Rise of the New Global Elite - is to answer a form of question about the upper upper upper 0.1% I've seen posed in so many comments the past 3+ years:  "Don't they care about what is happening to the rest of the country?" or "How do they sleep at night?" or similar.   [Sep 7, 2009: Citigroup 2006 - America, a Modern Day Plutonomy]  While I don't want to generalize and put a whole subset of people under one canopy, your questions are finally answered.  Big picture - Lloyd the investment banker in the U.S. has far more in common with Sergey the Russian oligarch than he does with the 'common man' walking the streets of the States.  As Friedman said, the world is flat -hence much of the 'global elite' is in a way 'nation less'.  Another fascinating take away is many of the wealthy are not 'blue bloods' but first generation (not always 'self made' since government connections mean so much in other parts of the world), so their attitudes are completely different.  Plus the amounts of money made now are so enormous, they have reached 'escape velocity' versus the orbit most others in any country on earth live in. As I wrote years ago the long term implications for the American middle class are far reaching.  [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]  As investors it can explain why American business, especially those of the global multinationals, can do well... while there is rampant unemployment and many are left behind in the domestic economy.  All things we've discussed at length, but this insight into the thinking of the 'global elite' is fascinating.

I highly recommend the read.

A few snippets:
  • F. Scott Fitzgerald was right when he declared the rich different from you and me. But today’s super-rich are also different from yesterday’s: more hardworking and meritocratic, but less connected to the nations that granted them opportunity—and the countrymen they are leaving ever further behind.
  • Through my work as a business journalist, I’ve spent the better part of the past decade shadowing the new super-rich: attending the same exclusive conferences in Europe; conducting interviews over cappuccinos on Martha’s Vineyard or in Silicon Valley meeting rooms; observing high-powered dinner parties in Manhattan. Some of what I’ve learned is entirely predictable: the rich are, as F. Scott Fitzgerald famously noted, different from you and me.  
  • What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth
  • Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves

On America's middle class:
  • The good news—and the bad news—for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled. 
  • I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.” 
  • ....  Speaking at the same conference, Thomas Wilson, CEO of Allstate, also lamented this global reality: “I can get [workers] anywhere in the world. It is a problem for America, but it is not necessarily a problem for American business … American businesses will adapt.”  Wilson’s distinction helps explain why many of America’s other business elites appear so removed from the continuing travails of the U.S. workforce and economy: the global “nation” in which they increasingly live and work is doing fine—indeed, it’s thriving.

Since the new global elite are 'first generation' their attitude towards their countrymen are more along the lines of "I did it, why can't they?"
  • For the super-elite, a sense of meritocratic achievement can inspire high self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others.  
  • Russian oligarchs have been among the most fearless in expressing this attitude. A little more than a decade ago, for instance, I spoke to Mikhail Khodorkovsky, at that moment the richest man in Russia. “If a man is not an oligarch, something is not right with him,” Khodorkovsky told me. “Everyone had the same starting conditions, everyone could have done it.” 
  • ....many American plutocrats suggest, as Khodorkovsky did, that the trials faced by the working and middle classes are generally their own fault. When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford.
  • It is this not-our-fault mentality that accounts for the plutocrats’ profound sense of victimization in the Obama era. You might expect that American elites—and particularly those in the financial sector—would be feeling pretty good, and more than a little grateful, right now. Thanks to a $700 billion TARP bailout and hundreds of billions of dollars lent nearly free of charge by the Federal Reserve (a policy Soros himself told me was a “hidden gift” to the banks), Wall Street has surged back to pre-crisis levels of compensation even as Main Street continues to struggle. Yet many of America’s financial giants consider themselves under siege from the Obama administration—in some cases almost literally. Last summer, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private-equity-firm compensation—by treating “carried interest” as ordinary income—was “like when Hitler invaded Poland in 1939.” 
  • You might say that the American plutocracy is experiencing its John Galt moment. Libertarians (and run-of-the-mill high-school nerds) will recall that Galt is the plutocratic hero of Ayn Rand’s 1957 novel, Atlas Shrugged. Tired of being dragged down by the parasitic, envious, and less talented lower classes, Galt and his fellow capitalists revolted, retreating to “Galt’s Gulch,” a refuge in the Rocky Mountains. There, they passed their days in secluded natural splendor, while the rest of the world, bereft of their genius and hard work, collapsed
  • This plutocratic fantasy is, of course, just that: no matter how smart and innovative and industrious the super-elite may be, they can’t exist without the wider community. Even setting aside the financial bailouts recently supplied by the governments of the world, the rich need the rest of us as workers, clients, and consumers. Yet, as a metaphor, Galt’s Gulch has an ominous ring at a time when the business elite view themselves increasingly as a global community, distinguished by their unique talents and above such parochial concerns as national identity, or devoting “their” taxes to paying down “our” budget deficit. 

  • In an op-ed in TheWall Street Journal last year, even the economist Klaus Schwab—founder of the World Economic Forum and its iconic Davos meeting—warned that “the entrepreneurial system is being perverted,” and businesses that “fall back into old habits and excesses” could “undermin[e] social peace.” 
  • .... ultimately, that is the dilemma: America really does need many of its plutocrats. We benefit from the goods they produce and the jobs they create. And even if a growing portion of those jobs are overseas, it is better to be the home of these innovators—native and immigrant alike—than not. In today’s hypercompetitive global environment, we need a creative, dynamic super-elite more than ever. 
  • There is also the simple fact that someone will have to pay for the improved public education and social safety net the American middle class will need in order to navigate the wrenching transformations of the global economy. 
  • The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda....
  • Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.” 
  • The lesson of history is that, in the long run, super-elites have two ways to survive: by suppressing dissent or by sharing their wealth. It is obvious which of these would be the better outcome for America, and the world. Let us hope the plutocrats aren’t already too isolated to recognize this. Because, in the end, there can never be a place like Galt’s Gulch.

        I've attached a video from "Morning Joe" which is the only discussion I could find on the topic in video format below.  7 minutes long.

        [Video] Tunisia - Confluence of Corruption, Unemployment, Food Shortages, Wikileaks, and Twitter

        Pretty amazing developments happening overseas in northern Africa as some combination of revelations from Wikileaks and rocketing food prices (along with structural unemployment) caused a boiling point.  What will be interesting to see go forward is if other countries in the region rise up against their 'elected' leaders.

        Friday, January 14, 2011

        [Video] Bloomberg: Behold China's Nearly Empty Mega Mall

        China is taking Field of Dreams to a new level.  Build it and they will come.  Someday.  Maybe.  With the majority of the country in relative poverty, but China needing to employ people to keep their economic miracle going and social strife low, what they build apparently matters little.  They just need to keep people busy.  So whether it is empty cities [Nov 13, 2009: Ordos - China's Empty Cityor nearly empty malls, just build it.

        Below is a 2 minute video via Bloomberg of a mega mall in Dongguan, China.  What is striking is (a) most of the people who go there, go for the amusement park not the shopping and (b) this is not a mall in some far western or central region, it is on the prosperous east coast, not far from 2 of the 4 largest cities in China - Shenzhen & Guangzhou.  So what is the mall developer saying about the project?  At the end of the video he says he has expansion lined up!  Sure why not! I am sure this will end well. :)

        hat tip, Ritholtz.

        [Nov 13, 2010: Video - Chinese Build Entire 15 Story Hotel in 6 Days]
        [Jul 21, 2010: A Reader's Observations of China]

        Eight is Enough?

        Barring the unthinkable...that is a stock market able to fall more than 0.2% on the close, we shall finish with a 7th straight up week.  Next week we have a holiday shortened week but the barrage of earnings begin.  As always the global masters of the universe (US mulitnationals) report the first few weeks of earnings season, so one would expect the normal revenue surge from overseas emerging markets, cost savings from the slashing and burning of American labor, tax rate gifts from various lobbying efforts & global tax arbitrage.... and the like.  Indeed 15 multinational CFOs will meet with Geithner this afternoon to make sure any and all corporate tax policy revision in no way takes away their favored goodies.  Otherwise they will claim they cannot create jobs for Chinese and Indians.  (this is where they trot out the dogma about egregious 35% tax rates they suffer under, whereas in reality the only people paying that rate is small business, while our multinationals are playing 'dutch sandwich'* or 'double irish' to make sure they pay an effective 17% or less.)

        *dutch sandwich?? see here.

        With the unshortable market packing away 7 straight up weeks we shall see if eight is enough. 

        [Oct 10, 2010: Eaton's Combination of Domestic Cost Cutting and Foreign Sales Displays the Power of Multinational Industrials]
        [Oct 21, 2010: Caterpillar Scores with Now Redundant Playbook - Slashed Domestic Labor + Emerging Market Growth = Mad Money]

        Coinstar (CSTR) Fills the Gap - the Hard Way

        I may be a bit biased because I never thought of the Coinstar (CSTR) story as something that was sustainable as 'high growth' in the long run (DVD kiosks? cmon), but the action today to adverse guidance is part of the worry I have with many names people are chasing in day after day, without regard to risk control.  Many stocks are now up 40, 50, 60%+ since the last earnings period (CSTR was up over 40%) and in many cases at these valuations even guiding to 'in line' results or guidance is going to disappoint.  Now, I would not hold Coinstar itself up to the standard of a lot of stocks I target in terms of secular growth stories, but it showcases the danger lurking in the earnings season ahead, even for superior companies.

        Chart wise - this is classic 'filling the gap' action.  Ouch.

        Via Bloomberg:
        • Coinstar Inc, operator of Redbox DVD vending machines, fell the most since July 2003 after preliminary fourth-quarter sales and profit missed projections because of delayed access to Hollywood’s newest movies.
        • The company has agreed to a 28-day delay in receiving the latest DVD releases from Hollywood, giving studios a four-week window to sell their latest movies before offering them for rental in Redbox kiosks. 
        • The delay requires management to do a better job of selecting titles to keep customers renting while they wait for newer releases, said Eric Wold, an analyst at Merriman Curhan Ford & Co. in New York. “They made the wrong decisions on what titles to stock,” said Wold, who rates the shares “buy” and doesn’t own them. “There’s a learning process.”
        • The company, which has taken sales from traditional retailers such as Blockbuster, previously exceeded analysts’ net-income estimates for eight straight quarters.
        • “We underestimated the impact that the delay would have on demand during the fourth quarter,” Chief Executive Officer Paul Davis said in the statement. “We also expected much better performance from Blu-ray.”
        Preliminary Results
        • Fourth-quarter profit was 65 cents to 69 cents a share, excluding some items, compared with previous company projections of 79 cents to 85 cents, according to the statement. Sales rose 31 percent to $391 million, missing forecasts of $415 million to $440 million.
        • Analysts had predicted profit of 86 cents a share, the average of seven estimates. They projected sales of $426.1 million, the average of 14 estimates.

        No position

        [Video] CNBC - Stephen Roach Talks U.S & China

        Long time no listen to Stephen Roach, who used to be Morgan Stanley's point man in Asia.  As guest host, we have some extended interviews below - most I agree with, although the part of a 'global central bank coordination' thesis is out of bounds and scary.   Big picture, Roach says the Fed has learned nothing and only knows how to blow bubbles as a solution to everything, inflation is an issue overseas but outside of food and energy not in the U.S. and that despite property bubbles in China, he thinks the country will manage to transform itself from the current export laden structure to self sufficient internal demand over the long run.

        2 videos - email subscribers will need to come to website to view

        12 minutes

        6 minutes

        [May 31, 2009: Stephen Roach on Asia - No Sail]

        Would be Taking Some Profits on E-Commerce China Dangdang (DANG) Early Next Week

        Lost in the Youku.com (YOKU) hype was E-Commerce China Dangdang (DANG).  After the initial IPO spike, the stock fell back to where it first opened at on its IPO day.  I curtailed all trading activity December 3rd to focus on launch of the fund, but I said on December 16th this is where I'd be happy to make some speculative purchases if I were active in the market.  This comment came when DANG was a touch over $25.

        I'd be interested in taking some shots here or there in building a position with the caveat that if the market ever corrects again this type of stock can lose 10-15% in a day very easily.  If DANG is treated in the investing community like say a Baidu.com (BIDU) it will never be 'cheap' in traditional terms - it will simply waver from very expensive to quite expensive.  (BIDU has a far more profitable business model)

        The chart back then...

        The chart now....

        Yesterday, the stock closed over $34, so in just under a month, it is up close to 40%.  The quiet period for the underwriters ends Monday so expect the normal Wall Street game of "buy buy buy our awesome IPO!!". (no conflict of interest of course).  If active, I would be selling a large portion of the position I would have created in mid December (at least 2/3rds) into the lemmings running into the stock on the brokers recommendations coming in a few days.  The valuation remains ridiculous but hey, it's 1999 redux so valuation is for weenies.

        Next we prepare for "the Facebook of China" IPO, RenRen which hopefully will come public sometimes in Q1 2011.  Of course that would be married with the "Twitter of China" (Weibo), which is inside Sina (SINA) for the long(er) term.  One day we'll look back and laugh at the valuations we imparted on all things social media, but for now we dance.

        [Dec 8, 2010: Meet China's Newest Billionaire - E-commerce China Dangdang's CEO Peggy Yu Yu]

        No position

        Thursday, January 13, 2011

        [Videos] Simon Johnson Throws his Hands Up

        Simon Johnson is one of my favorites... if you have not read his piece in the Atlantic from a few years ago entitled "The Quiet Coup", it comes with my highest recommendation.

        The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

        He has some interesting thoughts via Yahoo Tech Ticker today, but for long time readers it will be familiar material.  Oligopolies. Cross pollination between government and banking.  (Former OMB Director Orszag now is embedded within Citigroup, while Bill Daley jumps from JP Morgan back into the White House).  TBTF (too big to fail).  The massive subsidization in funding costs similar to what Fannie and Freddie enjoyed by being an implicit government ward.  The fact our investment banks can sit at the discount window and suck in the Fed's easy money to go speculate.  (these are not commercial banks!)  Heads they win, tails they still win.  Moral hazard to the nth degree.  (does anyone believe if Goldman or Bank of America blew up tomorrow the government would not ride to the rescue with taxpayer funds?)  It would all be so amusing if it was some 3rd world country.  The only person apparently above the fray is the FDIC's Sheila Bair who declared this morning she has no intention of heading to Wall Street once her gig is done in D.C..  That's 1 of them.  For everyone else - let the turnstile continue.

        Anyhow, here are the videos - do not watch if you just ate lunch.   Even better... as long as the stock market goes up, who cares right?  That's the path they want you to be on.

        (I) Bill Daley's Appointment Proves "The Bankers Have Won Completely"

        President Obama's new chief of staff, Bill Daley has been greeted with cheers and jeers - from both sides of the aisle - for his strong business and banking ties. 

        To some, like Sen. Mitch McConnell, it's a positive sign the President has taken more pro-business stance. To Simon Johnson, author of 13 Bankers and the former IMF chief economist, it's a sign "the bankers have won completely."

        The fact that President Obama's top aide is the former Midwest chairman of JPMorgan Chase proves "the White House fails to understand that, at the heart of our economy, we have a huge time-bomb," according to Johnson.

        Why is Daley's appointment so troubling to Johnson?

        "These banks again have unfettered access to the very top of the political decision making in the United States and, reflects the fact their status is completely undiminished, despite all the mistake they made and all the damage they did to the rest of the economy," he tells Henry in this clip.

        That time-bomb he was referring to is another credit and banking crisis.  Without more reform and a break-up of the 'too big to fail' banks, which is even less likely with Daley as chief of staff, Johnson is convinced banks are destined to repeat the same mistakes. "They have every incentive" to "blow themselves up," he laments, predicting another credit crisis will occur in the next three-to-seven years

        (II) Now U.S. Taxpayers are Subsidizing Goldman's Investment in Facebook

        Although most Americans may think that the financial crisis and Wall Street bailouts are now just an embarrassing and regrettable moment in the country's history, this is far from the case, MIT Sloan School of Management professor Simon Johnson says.

        In fact, the taxpayer subsidies for the major Wall Street banks continue to this day.

        These subsidies, professor Johnson says, take the form of special access to the Fed's "discount window" and ongoing, unwritten "Too Big To Fail" guarantees that the US taxpayers will cover any major losses the banks incur--by bailing them out all over again.

        These subsidies allow the big banks to borrow money at a lower cost than their smaller competitors, and, thereby, win market share and produce higher profits.

        Bizarrely, professor Johnson adds, the subsidies mean that the US taxpayer is even subsidizing Goldman Sachs' recent $450 million investment in Facebook, one of the hottest tech companies on the planet.

        Goldman made the investment in Facebook using money borrowed from the Fed at subsidized rates.  If the investment works out, of course, Goldman and its shareholders will keep all the profits. If the investment fails--and enough other things go wrong that Goldman needs another bailout--US taxpayers will pick up the tab.

        This heads-I-win, tails-you-lose arrangement contributed to the last financial crisis, professor Johnson says--the crisis that led to the bailouts and almost brought the economy down. And the fact that the arrangement hasn't changed--that US taxpayers are still subsidizing Wall Street risk-taking and implicitly agreeing to cover all major losses--means that Wall Street has just gone right back to gambling up a storm again.

        And that, professor Johnson predicts, will eventually lead to another financial crisis.

        [Nov 29, 2009: Simon Johnson Talks Dubai on PBS Newshour]
        [Sep 14, 2009: Baseline Scenario - Economic Donkeys]
        [May 7, 2009: Simon Johnson Comments on Bank Stress Tests]
        [Apr 21, 2009: Simon Johnson on Yahoo Tech Ticker]

        Dancing with Myself

        As I sit in tapping my fingers mode waiting for the SEC process to play out, I have spent the last month+ looking at names I wanted to put into the portfolio of the actual fund upon launch.  Since almost every thoroughbred of mine from the portfolio in 2010 had such a huge run from August 2010 I was looking at a few new names that had lagged and still had a catalyst - some not discussed on the blog, some only touched upon.  I am chuckling to myself since the 2 names I had slated for the top of the portfolio have exploded in the past 2-3 weeks.

        ARM Holdings (ARMH) is up 31% since Dec 20.  (crazy overbought, RSI off the charts)

        Sina (SINA) is up 23% since Dec 30.

        So much for laggards.  At this point is is impossible to find anything that I really like that has not had an epic run.  I've run out of drawing boards to go back to.

        No positions


        Amazing Statistic and Why Those who Use History or Mean Reversion are Being Smashed by the Bernanke Put

        "Rev Shark" at Realmoney.com posted an amazing statistic which I believe he found at sentimenttrader.com.

        According to Sentimentrader.com, the S&P 500 has now gone 92 days without closing below its 50-day moving average. That has only happened 17 times since 1928. But what is really amazing is that over the past 30 days, we haven't closed below the 10-day moving average even once. That has never happened in the last 82 years of market history

        As I've stated multiple times it is not the rally we are experiencing that is strange, it is the total inability to pullback at any point that is boggling to anyone who has more than 6 months of market history under their belt.  

        Don't forget in September and October we did not close below the 13 day moving average for 2 months in a row.  Indeed other than a hiccup caused by Ireland we might be working on the 5th month of no pullbacks.

        This is an abnormal market.  Anyone using historical context to trade, is lost at sea.  Congratulations to Mr. Brian Sack, the Bernank, and his POMO crew for making a mockery of traditional somewhat 'free' markets.

        Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.

        Amen Brian.  In the future I'd just eliminate the middle man (primary dealers) and just buy SPY futures directly on a daily basis, much more efficient than our current charade.  Granted that removes the Wizard of Oz effect (don't look behind the curtain - it's magic), but at least it would be intellectually honest.  (I know, I know - primary dealers don't "buy stock directly" blah blah)   [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]

        50 Cent Pushes Penny Stock as the Ghost of Jonathan Lebed Strikes; More 1999 Redux

        More and more of the bubble activities of 1999 seem to be behind every corner as the Bernanke Put (buy anything, the Fed will make sure it all works out) permeates as an echo boom to the Greenspan Put.   If you were not around in that era and thus are unfamiliar with the Jonathan Lebed story wikipedia has the Cliff Notes version here.

        Jonathan Lebed (born September 29, 1984) is an American notorious for using internet technology to hype stocks. Between September 1999 and February 2000 Lebed made hundreds of thousands of dollars by posting in internet chat rooms and on message boards encouraging people to buy penny stocks he already owned, thus, according to the SEC, artificially raising the price of the stock. The SEC under Arthur Levitt prosecuted him.

        In 2001 Lebed and the SEC negotiated an out-of-court settlement in which Lebed forfeited $285,000 in profit and interest he had made on 11 trades without admitting any wrongdoing — allowing him to keep close to half a million dollars. The case was controversial — the SEC had never prosecuted a minor — and produced significant media interest. Lebed contended that his activity forecasting stock prices was no different from and no more illegal than what professional Wall Street analysts do every day, only he utilized the internet.

        For the long version please see Michael Lewis' excellent essay from 2001 here.   (yes that same Michael Lewis).  I was more of a Tokyo Joe guy back in the day.

        Yun Soo Oh Park, owner of an Internet investing site that was one of the hottest sources of stock picks on the Web, has settled a civil complaint brought last year by the Securities and Exchange Commission. Mr. Park, known to his subscribers as Tokyo Joe, neither admitted nor denied the S.E.C. charges, but agreed to pay $754,630 to settle the case.

        In the case, filed in January 2000, regulators said Mr. Park defrauded his customers by buying ahead of his recommendations and selling as subscribers were getting in. The S.E.C. said that on 13 occasions, Mr. Park failed to tell subscribers that he was trading ahead of them, an illegal practice known as scalping

        Remember if Goldman Sachs does it, it is "business as usual on the Street" but when small fry do it, it's punishable by the SEC.  Right Martha Stewart?

        Flash forward 10+ years and switch internet chat rooms and message boards with Twitter, toss in a little celebrity and you have the case of 50 Cent.  It appears Mr. Cent was not aware of the story of Lebed and Tokyo Joe and promoted a penny stock he has a heavy personal stake in .....although based on some tweets shortly after his "buy buy buy" recommendation, was quickly offered some 'counsel'.  Ahem. 

        Go shorty... it's your birthday.

        Via ProPublica:

        • Over the weekend, the popular rapper 50 Cent urged his 3.8 million Twitter followers to buy the stock of a microscopic company in Florida. The penny stock jumped 290 percent on Monday. The rapper, who owns 7.5 million shares and warrants for 22.5 million more in the company, had a paper profit that was briefly worth almost $5.2 million on paper.
        • "HNHI is the stock symbol for TVG there launching 15 different products. they are no joke get in now," went one promotional tweet  from the rapper. 
        • The company, H&H Imports, sounds like it might be related to the famed maker of New York bagels. No such luck. H&H is a Clearwater, Fla., company that distributes headphones favored by Curtis Jackson, the real name of rapper 50 Cent. It's the parent company of TV Goods Inc., which markets its products through infomercials and the QVC channel, has virtually no revenue ($293,000 in its most recent quarter), and loses money
        • As the Twitter hype (Twype?) wore off, the stock fell from 39 cents to 30 cents a share on Tuesday and a further 4 cents Wednesday morning, meaning 50 Cent gave back just over 290 million cents ($2.9 million dollars). The company has a miniscule market capitalization of $63 million. It traded for 10 cents last week.
        • Strip away the involvement of a celebrity and the use of social networking and this story bears some resemblance to one of the oldest stock market games around: The pump and dump. In their classical form, such schemes work this way: Insiders talk up the attributes of a worthless stock (the pump) and then sell when its price jumps (the dump). So far, 50 Cent appears to have avoided violating laws against this sort of behavior because he has not sold H&H stock.
        • A spokesman for the rapper pointed out that the 7.5 million shares are restricted -- meaning they can't be sold until certain conditions are met. The warrants allow him to buy up to 22.5 million shares, which gives 50 Cent a powerful incentive to talk up the stock. They can only be profitable if the price of H&H rises above certain thresholds. He paid $750,000 for the shares and warrants.
        • "This kind of stuff has given the SEC headaches for a long time," says Rick Sauer, a former Securities and Exchange Commission attorney who wrote a book about fighting stock fraud at the agency called "Selling America Short." "It's probably OK unless he knew the stock was bad and touted it anyway, which is hard to prove."
        • Several hours after his first tweet about H&H, 50 Cent tweeted some suspiciously sober cautionary notes. I'm taking a wild guess that they were suggested, though not copy-edited, by a worried lawyer. And the initial promotional tweets were wiped from Twitter, though they live on forever on the web.
        • But is what 50 Cent did really that different from what happens all day long on CNBC when professional money managers take to the airwaves to praise the stocks of companies they already own?
        • Back in the days of the Internet bubble, the SEC charged a 15-year-old kid, Jonathan Lebed, with engaging in a serial pump-and-dump operation, which netted him hundreds of thousands of dollars.  Michael Lewis, in a famous piece in the New York Times Magazine, argued at the time that there was little distinction between Lebed and the Merrill Lynches of the world. Indeed, a few years later, then-New York Attorney General Eliot Spitzer wrung a $1.4 billion global settlement out of Wall Street for promoting stocks that they privately didn't believe in.

        I'm just waiting for the barber to start pumping some F5 Networks or the cab driver to tell me how I need to be in wheat futures. 

        No positions

        Germany Puts Finishing Touches on Impressive 2010

        The German model has held up very well during the financial crisis and ensuing recovery period.  While no longer the world's largest merchandise exporter   [May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US], this financially conservative nation has balanced the needs/demands of the worker v corporation v government better than most other systems.  It has not come without sacrifice as wages have stagnated in the country to keep corporations competitive, but in return the corporations and government worked together to avoid the 'slash and burn' tactics of U.S. multinationals during the downturn.  [Jun 16, 2009: As Euro Zone Unemployment Spikes; Job Saving Measures Emerge - Completely UnAmerican]   Rather than a legacy of hordes of long term unemployed losing their skill set and increasingly despondent (or bitter towards government)... and almost completely dependent on massive government transfer payments to consume, Germany was able to spend far less of GDP in supports and has come out the other side with demonstrably lower unemployment.  And a much sturdier fiscal position, with deficits headed back to a manageable 3% of GDP.  Of course when I rhetorically asked last fall if America can learn anything from this model, there was blowback since of course I am a socialist for even offering that this country could learn one thing from any other ;) [Oct 1, 2010:  German Unemployment Rate Down to 7.2% after Peaking at 8.7%; Can We Learn Anything?]  Oh well no worries - our economic model of blowing serial bubbles and massive deficit spending to keep the gerbil running, is working like a charm.  Why change what is "working"?

        Via AP:
        • The German economy grew last year by a powerful 3.6 percent, its fastest pace since reunification two decades ago, as a rebound in exports was accompanied by strengthening domestic demand, official data showed Wednesday.  The preliminary growth figure for Europe's biggest economy contrasted with a painful contraction of 4.7 percent in 2009, which was by far its worst showing since World War II.
        • "We grew twice as fast as the European Union average," said Economy Minister Rainer Bruederle, who had forecast growth of 3.4 percent. The figures show that "people are rightly looking optimistically into the future," he added.
        • A key trigger for the strong recovery was powerful growth in exports into a recovering world economy -- a 14.2 percent gain last year reversed a 14.3 percent decline in 2009. Germany is the world's second-biggest exporter after China.
        • However, "what was striking in 2010 was the fact that economic growth was not only based on foreign trade, but also on domestic demand," the Federal Statistical Office said in a statement.  Household spending rose 0.5 percent, recovering from 2009's 0.2 percent decline.  Imports rose 13 percent, more than making up a 9.4 percent drop the previous year.
        • Germany has been helped by tame unemployment, which stood at 7.2 percent in December. It was kept in check at the height of the financial crisis as a government-subsidized short-time work plan allowed employers to reduce production without cutting employees, and has fallen over recent months.
        • The DIW economic institute said German companies' specialization in so-called investment goods that draw strong foreign demand helped the country to bounce back, and firms were able to adjust quickly to the upswing because they had kept well-qualified staff.
        • Wednesday's data showed that Germany's budget deficit came in at 3.5 percent of gross domestic product last year -- exceeding the 3 percent limit laid down by European Union rules for the first time in five years.  In 2009, Berlin just managed to comply, with a deficit of 3 percent.
        • "Just remember that less than a year ago, the German government still expected a 2010 deficit of 5 1/2 percent of GDP," Brzeski said, adding that the outcome is "a good illustration of the importance of economic growth for public finances."  Austerity measures being implemented this year and further economic growth should push the deficit back below 3 percent this year, he said.

        [Aug 26, 2009: China Poised to Tie Germany for World's Lead in Merchandise Exports]
        [Jan 6, 2010: China Passes Germany as World's Largest Exporter]

        Wednesday, January 12, 2011

        [Video] Gerard Celente Returns to Yahoo Tech Ticker

        If you are unfamiliar with trend forecaster Gerard Celente, please see this post from exactly a year ago. [Jan 12, 2010: Trend Forecaster Gerald Celente on Yahoo Tech Ticker]  His long term track record is quite compelling, but obviously not as useful for short term investment decisions - these are more broad societal trends.  While I generally agree with a lot of what he says in the "long long" term, we have seen the past 3 years that governments and central bankers will do anything to kick the can down the road - so I disagree with the timing of things. That said, worth a listen if you agree or not.

        Before the Yahoo posts here is a general interview on his views on 2011


        (I) Bailouts Postponed, but Can't Prevent "Greatest Depression"

        For the last few years Gerald Celente, publisher of the Trends Journal has come on Tech Ticker and other media outlets talking of a further economic collapse, which he calls "the Greatest Depression."

        Yes, the economy is not robust, growth still hasn't returned to pre-crisis levels and unemployment remains above 9%. But by most metrics things are getting better, not worse. In the accompany clip, Aaron and Henry ask Celente how he accounts for this.

        Celente argues his dire predictions would have come to fruition if it had not been for an unprecedented set of bailouts that continue today. Most shocking to Celente was the disclosure, in late 2010, that the Federal Reserve lent hundreds of billions to foreign banks to bail them out during the height of the crisis in 2008 and 2009. "Absent those kind of schemes, if capitalism take it's course, at some remote level it used to be, we see the crash," he says.  (Mark's note - there is very little capitalism happening outside of small business domestically - we have corporate socialism in the States, but mostly focused on big business.  Where the lobbyists are the money goes.  The savers and average folk will be sacrificed to keep the status quo for as long as possible - hence we can forget about 'capitalism washing out the weak players' unless you are the part of society that does not have a lobbying firm working for you.)

        Here's how he puts it in his Top Trends of 2011 release:
        "In 2011, with the bailout funds and arsenal of other schemes to prop up the economy depleted, teetering economies will collapse, currency wars will ensue, trade barriers will be erected, economic unions will splinter, and the onset of the 'Greatest Depression' (a trend we forecasted before the massive bailouts existed) will be recognized by everyone…"  (Mark's note - I'd argue we are already in currency wars as the 3 main currencies of the world are in a race to the bottom, with policy makers making decisions to debase the savers of their countries)

        The only way to avoid the coming disaster is do what we did coming out of the Great Depression - start manufacturing quality goods the world wants. "You can't print your way out of this," he argues.
        The only way to do that is to improve productive capacity through either manufacturing industrial goods or technological innovation. Otherwise, Celente says the "Greatest Depression" is inevitable.

        (II) Brace Yourselves - Our Society is Going to the Dogs

        In case you're obsessing about normal problems like your food being overcooked, your clothes not fitting quite right, or your kids not doing their homework, don't bother.

        Because soon, says trend-forecaster Gerald Celente publisher of The Trends Journal, you're going to have a lot more important things to worry about.

        Such as a huge spike in crime, as towns and cities are forced to cut back on police enforcement to pare their massive budget deficits.

        And higher taxes, as the government tries to save its own skin by producing revenue any way it can.

        And a loss of liberty, as the government tries to preserve its own power by tracking every aspect of your life.
        Fortunately, says Celente, civilization itself will not collapse.  But it's going to get really bad for a while.

        [Aug 20, 2010: Gerard Celente - the AntiKool Aid]

        Canada and Brazil Taking on U.S. Like Characteristics in Debt Exposure

        We've mentioned in the past how Australia and Canada [Jun 30, 2010: BW - Vancouver, Canada; Housing Bubble North of the Border?] seem to be following the same path as the U.S. in some of their debt markets - especially housing.  That said, you never know when these things end as anyone who was shouting warnings in the U.S. in 2006 can attest to.  And unlike American central bankers who were on Capital Hill suggesting all Americans take out adjustable rate mortgages (thanks Alan!) or American regulators who never see a risk they cannot overlook, there are at least warnings being declared (and actions taken by regulators) in these other countries - we'll see if they are heeded.

        We continue to see troubling LONG term signs out of Canada, and now we can add Brazil to the list of countries who are following the U.S. path to "prosperity" in terms of debt fueled consumption.   Canada is especially troubling because much of their residential mortgage market is one big adjustable rate rollover plan (or short term fixed rate plans that "roll"), and their rates have almost nowhere to go but up.

        First to our neighbors to the north, via Bloomberg.
        • Canada’s top economic officials yesterday urged households to be wary of taking on too much debt after data showed the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years.  Bank of Canada Governor Mark Carney, Finance Minister Jim Flaherty and Prime Minister Stephen Harper said in separate public appearances that they are concerned about rising debt. The ratio of household debt to disposable income in Canada was 1.48 in the third quarter according to Statistics Canada, exceeding the U.S. level of 1.47.
        • “Our parents were more inclined to pay off that mortgage as soon as possible, and some Canadians are not as inclined to do that now,” Flaherty told reporters yesterday. “I encourage them to do it.”
        • The comments by the policy makers underscore government concern that debt levels in Canada could threaten the recovery if borrowing costs rise and households struggle to pay their bills. Canada has relied on regulatory steps to rein in mortgage borrowing, most recently in February, and Flaherty said yesterday he is prepared to take additional measures if needed.
        • The fear is that were we to see sharp rises in interest rates or were we to see sharp rises in unemployment, that a significant number of people might not be able to afford their debt obligations,” Flaherty said.  In Canada, where banks largely escaped the global financial crisis and continued to lend even as credit dried up elsewhere, low interest rates have encouraged consumers to take on debt.
        • Carney, 45, left the benchmark target rate at 1% this month to gauge the global recovery after three earlier increases.
        • While Canada’s economic recovery could be threatened in the future by elevated debt levels, higher Canadian interest rates could also cause the Canadian dollar to appreciate. Carney noted that the bank had flagged as a risk to the economy that “persistent strength of the Canadian dollar” and weak productivity could crimp exports and hinder Canada’s recovery.
        • Measures to restrain lending taken earlier this year included changes for government-backed mortgages that forced buyers to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates. Limits on refinancing were made stricter and down payment rules were tightened.
        • The proportion of Canadians in a stretched financial position “has grown significantly,” Carney said in his speech -- entitled “Living with Low for Long” -- adding that authorities continue to monitor households’ finances.  “We have debt levels that are unprecedented in this country,” Carney said in an interview broadcast today on BNN Television. “We are in uncharted territory.
        That should sound familiar to American readers, flashback 5 years...


        Meanwhile down in Brazil, one of the long term positives is the transformation of an economy with limited credit to one where mortgages and credit cards become more mainstream.  (things we take for granted in the States)  However, you don't want to see a super surge at any point as debt should expand with income not at a pace far ahead of it.  Via BusinessWeek:

        • The Nov. 9 rescue of Brazil's 21st-largest bank, Banco PanAmericano, has exposed cracks in what many had regarded as one of the most solid financial systems among emerging-market countries
        • Brazil's economy grew at a 8.4% clip in the first nine months of 2010—its fastest pace in more than 15 years—powered in part by a sharp increase in government-subsidized loans and a rapid expansion in consumer credit. That can be a lethal cocktail. 
        • The data in Brazil are troubling: Late payments on credit cards and other consumer loans jumped 23% in November from a year earlier, prompting government leaders to begin scaling back their easy-credit policies. "It's time to be a little bit careful about the B in BRIC," says Jim O'Neill, chairman of Goldman Sachs Asset Management and the man who coined the BRIC acronym for Brazil, Russia, India, and China.
        • Former President Luiz Inácio Lula da Silva, a founder of Brazil's Workers' Party, impressed Wall Street with his commitment to free-market policies. Yet even he was unable to resist the temptation of indulging in an age-old Brazilian tradition: the election-year splurge. The national development bank, known as BNDES, made $101.1 billion in loans in the 12 months to October, a 33% increase from the same period a year earlier. Lula's protégée and successor, Dilma Rousseff, pledged to rein in spending as she assumed power on Jan. 1.
        • The country has witnessed a fivefold expansion in consumer credit over the past eight years, with the total value of outstanding loans reaching $440 billion in October, according to central bank figures. This explosion was triggered in part by a 2001 regulatory change that allowed lenders to package auto, payroll, and other consumer loans into securities called FIDCs. The market for such notes has grown from nearly $290 million in 2003 to more than $35 billion last year. (i.e. securitization)
        • Big Brazilian banks have stopped buying the credit portfolios since a November government probe into PanAmericano revealed losses stemming from improper accounting of sales of its loans. "PanAmericano was the wake-up call," says Denise Debiasi, the São Paulo -based managing director for Latin America at FTI Consulting .... "There's risks people may be overlooking—like credit quality—as the market booms."
        • To head off a subprime-style crisis, Brazilian authorities in December upped reserve requirements on time deposits held by banks to 20 percent from 15 percent. Banks must put aside more capital to back consumer loans whose terms exceed 24 months.
        • The average debt load of Brazilian consumers amounts to 18% of total disposable income, compared with 13% in the U.S. In a Nov. 30 interview, Henrique Meirelles, who at the time was Brazil's central bank chief, indicated that a special task force would be convened to study the industry. "Some supervision could be proper," he said. "The case of PanAmericano showed how important this is." 
        Unlike U.S. regulators who claim no problem can be seen in advance and their only job is to mop up the crashes their lack of supervision cause with a tsunami of liquidity, other countries are taking a more pro-active stance on regulation to try to stave off an "American-like" outcome.  We'll see how successful they are in the coming years.

        S&P 500 Breaks to New Highs, Short Sellers Dropping Like Flies

        After a 7 day consolidation, the S&P 500 broke above last week's highs after yet another premarket melt up.  Thus far today's gains have been contained at roughly the same amount as the premarket surge... as was the case yesterday.  Meaning much like the rally since March 2009, very little happens many days during the normal market hours and most of the gains happen overnight.  Whatever the case the melt up with no relent continues (working on 7 weeks in a row of gains in the latest iteration after nonstop gains in Sept/Oct), as the index surges toward strategists year end targets - only 115 points to go (less than 10%) to reach the popular pin the tail on the donkey figure for year end 2011 of S&P 1400.  The break over S&P 1280 sets that as new floor and onward and upward we go.

        Short sellers have been cowered as they are extinguished by the Federal Reserve's plan to manipulate prices "higher than they otherwise would be".  In normal times this hodge podge of indicators (margin debt surging up, investor confidence off the charts, short sellers giving up, et al) would be a contrarian investors dream.  But we don't live in normal times as central bankers are backstopping every asset on earth - debt or equity.  In the theater of the absurd yesterday a country with 200% debt to GDP (Japan) offered to provide funds to Europe's bailout package.  The grand shell game continues - but as Chuck Prince once said, we dance until the music stops.  The addendum to that is "and then we wait for the next multi trillion program by the Fed to fix the music."

        Via Bloomberg:
        • Bets against the Standard & Poor’s 500 Index fell to a one-year low.  Short interest on the S&P 500 dropped to 6.87 billion shares, or 3.9% of shares available for trading, as of Dec. 31, down 5.7% from two weeks earlier. It was the third straight period that S&P 500 short selling fell. 
        • The benchmark measure of U.S. equities completed its sixth straight weekly gain on Jan. 7, the longest winning streak since April. “Most investors can see that momentum is going forward and they are reducing this risk trade because the odds are not in their favor,” said Daniel Genter, president of RNC Genter Capital Management in Los Angeles, which oversees about $3.7 billion. “There’s a lack of volatility, which makes it tough to short on a daily basis, and the upward momentum means it’s a losing proposition to bet against stocks in the longer term.”

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