Tuesday, February 15, 2011

[Video] CNBC - Nouriel Roubini & Ian Bremmer Discuss the New World Order of "G0"

Nouriel Roubini and Eurasia Group's Ian Bremmer were on CNBC and actually were allowed to talk, rather than being interrupted every 23 second by Joe Kernen.  A fresh approach Joe!  The discussion centered mostly around the changing balance of power across the world as the G20, and G7 lose some relevance.   Some discussion (mostly from Roubini) about the joke that is the political process and "deficit reduction" (currently defined by increasing spending by 25% in a few years than freezing it) ... as we call it "kick the can". I am of course posting this because much of what these 2 say, reinforces topics I've been discussing for 3+ years.

2 videos - email readers will need to come to site to view

11 minutes

7 minutes

Kyle Bass' Hayman Capital February 2011 Letter - The Cognitive Dissonance of it All

13Ds of all the top managers are being analyzed today, and much of the clucking over the top managers' positions I find to be a bit bemusing.  How many times can I buy Citigroup (C) because Tepper and Paulson are in it?

Instead of focusing on what Buffet sold last quarter (45 days after the fact), let's showcase the always insightful Kyle Bass, through the lens of his February 2011 investment letter.  I haven't had time to read the whole of this yet but since it is Kyle Bass I will assume it is enlightening.  There is also an attachment highlighting the professional backgrounds of the 11 Fed board of governors and based on the structure of the piece, I assume Bass is highlighting what little corporate experience most have (6 of the 11 appear to have never worked outside of academia).

As always hit 'full screen' for the easier read

First the letter -

Kyle Bass - Hayman Investor Letter - February 2011                                                                

Next the Fed Governor backgrounds -

Kyle Bass - Hayman Investor Letter - February 2011 - Fed Governors Attachment                                                                

Courtesy Absolute Return+Alpha

[Oct 7, 2010: Kyle Bass of Hayman Capital at Barefoot Economic Summit - Part 1]
[Aug 18, 2010: Kyle Bass on CNBC August 2010]
[May 13, 2010: Kyle Bass of Haman Capital - The Pattern is Set, Betting the Bank on a Keynesian Free Lunch]
[Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]
[Oct 5, 2009: Kyle Bass Hayman Capital October Letter to Investors]

Global Fund Managers Most Bullish in 10 Years

Another sentiment gauge hitting an extreme - but as with everything else nowadays it will only matter when it matters.  It used to be when everyone was on the same side of the boat, the market went the opposite way....

Via Reuters:

  • Investors were their most bullish on equities and commodities in nearly 10 years this month as optimism about growth surged, while inflation concerns led them to drastically sell down emerging stocks, a survey showed on Tuesday. 
  • The monthly global fund managers' survey from Bank of America-Merrill Lynch showed a net 67 percent of respondents were overweight equities in February, compared with 55 percent in January.  This month's reading means the difference between overweights and underweights is 67 percentage points -- a level seen for the first time since the poll started in April 2001.
  • The poll, which surveyed 188 participants who manage total assets of $569 billion, also showed a collapse in emerging markets allocations. A net 5 percent of respondents are overweight here -- the lowest since March 2009 -- compared with 43 percent in January and an average reading of 27 percent.  Inflation expectations hit a 6-year high, with a net 75 percent of respondents expecting higher inflation in the next 12 months.
  • "It's one of the most bullish surveys we've had in a long time. Basically the story is growth expectations keep going on higher... What we're seeing is fairly extreme asset allocation decisions," said Patrick Schowitz, equity strategist at BofA Merrill Lynch.
  • "Warning lamps are really flashing. But we've seen a ...shift out of fixed income and into equities. You would expect some extreme asset allocation into risky assets while that shift is going on," Schowitz said.
  • Commodities are the second most favored asset class after stocks, with a record net 28 percent of investors being overweight from 16 percent last month.
  • Cash underweight positions moved to a net 9 percent, levels not seen since January 2002, from 5 percent in January.
  • Hedge funds were also becoming bullish, raising their gearing levels. The ratio of gross assets held by hedge funds relative to their capital rose to 1.49, their highest since March 2008, from 1.26 last month.  (hedge funds are levering up, and in a substantial way between January and February)
  • Their net exposure to equity markets -- measured as long minus short as a percentage of capital -- rose to 39 percent, the highest since July 2007, from 31 percent in January.

Temporary European Rescue Fund to be Replaced by (Bigger) Permanent European Rescue Fund

This is getting little play in the U.S. but as moral hazard runs rampant the world over (make a mistake? run your government into the ground? banking sector gone wild? no worries - that is what taxpayers are for)..... the temporary European Rescue Fund (named European Financial Stability Facility - EFSF) is going to be replaced by a much larger permanent rescue fund in 2013.  Partially funded by my fellow Americans (via IMF).  To which we say - you're welcome.  The new rescue fund shall be named the European Stability Mechanism (ESM)... I love acronyms, they make bailouts sound so warm and cuddly.

Per Spiegel Online

  • Euro-zone finance ministers have agreed to effectively double the volume of the euro rescue fund from 2013 when it becomes a permanent mechanism. The fund will have an effective lending capacity of 500 billion euros, said Luxembourg Prime Minister Jean-Claude Juncker. 
  • Euro-zone finance ministers meeting in Brussels on Monday agreed that a permanent rescue mechanism to be set up from 2013 would total €500 billion euros ($675 billion) -- significantly higher than the current rescue fund.
  • The new fund, the European Stability Mechanism (ESM), will be part of a package of measures European leaders are hoping to agree at two summits in March to resolve the debt crisis.  Apart from the euro zone, the ESM would also get cash from the International Monetary Fund ....
  • The ESM is intended to replace the temporary euro rescue fund, the European Financial Stability Facility (EFSF), which was hurriedly set up in May to avert a collapse of the single currency in the wake of the Greek debt crisis.

  • The EFSF currently has a volume of €440 billion but can only lend up to €250 billion to ailing euro member states because it has to keep a large cash buffer in order to maintain top credit ratings. Juncker said the ESM's €500 billion would be the "effective lending capacity" of the new rescue fund.

But don't worry - it could get even bigger if need be.  No taxpayer must be spared if there is someone to bail out...
  • EU officials are worried that the current fund may not be big to cope if Portugal and Spain were to follow Greece and Ireland in needing a bailout.

Germany of course is trying to preach responsibility but they might as well be from the planet Mars.  Fiscal sanity does not drive consumption or push stock markets up.
  • Germany is opposing an immediate increase in the EFSF unless other euro zone member states agree to cut public spending and make their economies more competitive.  
  • Germany's " competitiveness pact", supported by France, includes higher retirement ages, a German-style "debt brake" to limit government bond issuance, a common corporate tax base and an end to inflation-linked wages. But other euro-zone countries are resisting the proposal.

Chinese Inflation at "4,9%" Despite Lowering of Food Component; British Inflation at 4%

For the past few months data has not really mattered to the market but for informational purposes, worth sharing a few tidbits. 

First, in China - despite the inflation figure being smirked at, market participants still keep a close eye on it.  The Chinese have figured out the American way of government statistics... when you don't like what the data is telling you, change the inputs.  Food inflation is getting out of hand so the Chinese government has decided to reduce it's weighting in the index.  Presto magic - inflation has gone down.  Don't laugh - because this is what the U.S. has done since the early 90s in multiple government reports.
  • Consumer prices in China rose 4.9% in January when compared with the same month a year earlier, the government reported Tuesday, as inflation continued to bedevil the economy. 
  • The rise in prices was less than expected, but some economists said the data was difficult to judge because the statistics bureau recalculated the index to give less weight to food costs and more weight to housing costs. Those shifts and other changes designed to catch up with consumption patterns made it impossible to directly compare the January data to earlier months. 
  • While food prices rose most sharply, the costs of a broad array of other goods and services also ticked upwards. “This shows a broadening of inflation away from just food,” said Paul Cavey, head of China economics at Macquarie Securities.  
  • Nearly half of the employers in mainland China said they raised salaries between 6 percent and 10 percent last year, the survey showed. 
  • The producer price index, which tracks wholesale prices, rose 6.6%, reflecting higher wages, commodity prices and other costs. Economists at Australia and New Zealand Banking Group wrote that labor shortages have spread widely through China’s coastal factories and are likely to drive salaries up further. 
I don't want to spend too much time on the specific figures out of China, because even the Chinese people scoff at what is being reported.  


Second, in Britain - which is probably the best comparable to what is really happening in the U.S., inflation hit 4% aka double the target rate.  Why so high in Britain yet so low in the U.S.?  British consumer inflation does not have an "owners equivalent rent", whereas that is the largest component in U.S. consumer inflation figures (CPI).   Considering Britain has entered a period of government austerity, but accounting for an increase in VAT tax that just hit (from 17.5 to 20%), it is most likely that if the U.S. measured inflation similar to Britain (700 goods and services) we'd be closer to 4% than 0%.  But that would not be convenient for "no inflation here" Bernanke to justify printing to his heart's content.

To keep easy money flowing, the UK central banker is going under the guise of "we can not do a thing about it" which is the 'hear no evil' defense.  (which is ironic because a central bank is supposed to create price stability - posing the question of why do you exist if you can't do anything about price dislocations?)  That differs from the U.S. 'see no evil' defense - whatever it takes to keep the spigots on full blast.
  • Inflation in Britain rose to 4% in January, the highest level in two years, after the government increased a sales tax and the price of oil continued to climb.  
  • The figure forced Mervyn King, the governor of the Bank of England, to write a letter to the Treasury explaining why inflation rose above the bank’s target. It was Mr. King’s fifth letter of that kind in a year. 
  • In the letter, Mr. King blamed the price increases on higher commodity and energy prices and a rise in sales tax. He also said inflation could climb to almost 5% in the next few months, higher than the Bank of England had previously predicted
  • “There is a great deal of uncertainty about the medium-term outlook for inflation,” Mr. King wrote in the letter, which was published on the Bank of England’s web site. “As the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”

Friday, February 11, 2011

NYT: In China, Tentative Steps Toward Global Currency

The move of the yuan as a global currency is a very important one in the long run, as it will have potentially dramatic effects on the U.S. dollar as the sole reserve currency but for now things are going along at a snail pace.  In the interim, the Chinese currency is essentially pegged to the U.S. dollar (for better or worse).   Until the % of growth in China from exports is reduced, and they are far more reliant on internal consumption I don't see this loose peg changing anytime soon.

Longer term, with 3 ugly ducklings (euro, dollar, yen) dominating the world's FX markets, the cart will eventually be turned over when a country (or region) coming from a position of fiscal strength rather than weakness enters the fray. 

Via NYT:

  • Now that it has passed Japan to become the world’s second-largest economy after the United States, China is considering the next step as a world power: making its money a global currency.  No one expects that to happen immediately. And even the Chinese government is wary of making some of the free-market moves that would enable the renminbi to take its place alongside the dollar, euro and Japanese yen as a fully convertible reserve currency.
  • Still, over the last year Beijing has begun to gradually loosen its tight currency controls. For the first time, for example, American companies like McDonald's and Caterpillar have been allowed to finance their China projects by selling renminbi-denominated bonds in Hong Kong.
  • Meanwhile, in Russia, Vietnam and Thailand, some cross-border trades with China can now be settled in renminbi, so that trading partners do not have to convert in and out of dollars. One pilot program lets Russian companies like Sportmaster, a retail chain based in Moscow, buy or sell goods using Chinese currency.
  • And in New York, the Chinese government has permitted an overseas branch of Bank of China to accept deposits in renminbi. That enables depositors outside China to bet on a currency that is widely expected to appreciate against the dollar over the next few years.
  • “This is all encouraging the internationalization of the renminbi,” Kelvin Lau, an economist at Standard Chartered Bank who is based in Hong Kong, said of Beijing’s recent moves. “They want to make the Chinese currency a popular currency.”
  • At Thursday’s exchange rates, renminbi were trading just below 6.59 to the United States dollar — a level that many experts say values the Chinese currency artificially low, as a result of Beijing’s intervention efforts. Five years ago, the renminbi was trading at slightly more than 8 to the dollar.
  • Beyond mere bragging rights, China has economic motives for trying to go global with the renminbi. Analysts say the moves, if successful, could strengthen China’s influence in overseas financial markets and begin to erode the dollar’s dominance. Beijing could also eventually reap the rewards, like cheaper debt financing, that come with being recognized as a world reserve currency. 
  • Global importers and exporters could reduce their currency-fluctuation risks by settling China-related trade deals in renminbi rather than dollars or euros. 
  •  Robert A. Mundell, a Nobel laureate economist whose research is credited with helping develop the euro, says the renminbi’s rise is all but inevitable. “The RMB is likely to become a reserve currency in the future, even if the government of China does nothing about it,” Professor Mundell said in an e-mail response to questions. He noted that the renminbi was already a regional currency in Southeast Asia, where China had become the dominant trading partner of many countries.
  • If China does eventually open its capital market by eliminating currency exchange controls, he said, “the progress of the RMB as an international currency will be assured.”
  • But analysts caution that right now the renminbi is far from ready to mount a serious challenge to the United States dollar as the world’s leading reserve currency. For one thing, China needs to assure investors that its political system is stable and that its economy still has plenty of growth ahead. For all its rapid growth over the last 30 years, China remains relatively poor compared with the United States, the Europe Union or Japan.
  • As an influence on global financial markets, the renminbi is “still a distant, distant, distant fourth,” said Albert Keidel, a China specialist at the Public Policy Institute at Georgetown University in Washington. “People are going to start holding more renminbi, but it will be at least a decade or two for it to become a leading world reserve currency.”
  • China is the world’s largest exporter and one of the biggest destinations for foreign direct investment, but the Chinese government still maintains strict control over its currency and banking system and the flow of money in and out of the country. 
  • Economists say these restrictions allow Beijing to manage — some say manipulate — the renminbi exchange rate, keeping the currency undervalued enough to bolster exports. The policies also restrict the amount of capital that can enter the country — or exit in the event of a sudden downturn. 
  • China has been reluctant to make its currency fully convertible because its banks and financial system are still immature. What is more, allowing money to flow in and out of the country with few restrictions would effectively mean surrendering control over vital aspects of the state-run banking system.
  • But analysts say Beijing may eventually be forced to change its approach because its self-imposed financial restrictions leave the door to international markets only half open for China, undermining its global ambitions.  China’s tight management of exchange rates also leads to complex market distortions that analysts say force Beijing to accumulate huge foreign exchange reserves — much of them in the form of American Treasury bonds.
  • As long as China continues tightly linking the renminbi to the dollar, analysts say, the People’s Bank of China is effectively outsourcing the nation’s monetary policy to the United States Federal Reserve. And as the value of the dollar has dropped in recent years, Beijing has begun complaining that the United States’ soaring budget deficits are eroding the value of China’s huge dollar-denominated holdings.

[Dec 14, 2010: WSJ - Offshore Trading in Yuan Takes Off]
[Jul 21, 2009: China's Plans for Replacing the Dollar]

Update on Mutual Fund

The current update on the mutual fund is unfortunately there is no material update to report.  I was hoping for some news by early February, but thus far we have not had any initial response from the SEC.  I was told to expect a response in 45 to 60 days from filing, and it's in the 50s day range now, but thus far no contact.  We did have a holiday week to deal with in late December so also could be a factor but I don't know.  I'll give another update in 2 weeks (or sooner) if I get the initial round of response back.

[Video] OpenTable (OPEN) CEO On with Cramer

Jim Cramer below with an interview with OpenTable's (OPEN) CEO Jeff Jordan.  In markets like this investing like Cramer is the best way to maximize profits: the first 30-45 seconds of spiel explain how "balls to the walls" investing works.  Essentially don't worry about anything, just buy - and win. Not my style, but I definitely under perform in markets that only go up for essentially 6 months in a row.

"It's time for you to stop worrying," Cramer said Thursday. "Learn to love high-flying, turbo-charged growth stocks."  Take OpenTable for example. The San Francisco-based company provides online restuarant reservations. Its stock is up roughly 350 percent since it went public in 2009 and up 28 percent since Cramer highlighted it on Dec. 23, 2010 at $69.85. Some investors, he said, may think they missed the move. On Tuesday, however, OpenTable reported postive earnings results and the stock continued to climb.

Cramer likes OpenTable's incredible growth, but also how it makes its money. It charges restaurants an installation fee and then a monthly subscription fee, as well as a fee for every person who books a reservation through their products. Last quarter, its system was installed in more than 23,000 restuarants in the U.S., which is a 62 percent increase from the year prior and a 31 percent increase from the previous quarter. Its reservation revenue, which is driven by the number of diners, increased by 52 percent. With more than 6,200 restaurants around the world, its international business is also doing well.  OpenTable is only in 37 percent of restaurants, though, so Cramer thinks its story is just beginning. Being as only 9 percent of reservations are made online, Cramer thinks the number could increase to 70 percent for an additional $1 billion in revenue.

No position

Another Breakout as Traders Position for Premarket Monday Gap Up

As I said this morning, traders would pile in as they are now conditioned for the gap up Monday morning.

Speaking of which, Merger Monday is just 1 session away so expect traders to pile in ahead of the now 80% probability of a premarket surge of 0.3 to 0.4% (no matter the news) 72 hours from now.  Money in the bank 8 out of 10 Mondays a year.

After this week's Monday morning gap up, and Tuesday extension - the market consolidated for 48 hours and now has broken to a new high.  Onward and upward we go... non stop.  The market remains unshortable... and remarkable in it's inability to correct.  The Dow excluding a rounding error yesterday in which it fell less than 0.1% has been up 10 session in a row.  I've run out of adjectives to describe this market - seeing the NASDAQ finish green yesterday after a 14% drop in bellweather Cisco Systems is simply something one can not fathom.


Western Banks Pushing Out Hawks - Presumed Next Head of ECB Axel Weber and Kevin Wash of Fed Both Headed Out the Door

Some pretty amazing developments in the past 48 hours in the world's 2 largest "easy money" central banks, that very few are talking about.  If you are a conspiracy theorist this is one you are going to enjoy....

First over in Europe, the ECB's head Trichet is facing the end of his term soon.  It has been long thought German hawk (hawk = favors fiscal discipline and tighter money) Axel Weber was the shoo in for the job.  But he is against handing money out in every direction to any country with its hand out (Greece, Ireland, Portugal, Spain... and someday Italy, France).  I was actually fascinated to see how Weber would handle what Europe is doing (which is some combination of TARP + QE lite) since much of it seemed to go against his personal beliefs.  But now there will be no opportunity to see how it would have played out.  Out of the blue this week, he has withdrawn his name from a job that was presumed to be his.

Via Bloomberg:
  • The campaign for the top job at the European Central Bank was thrown open as the sudden and unexplained withdrawal of German front-runner Axel Weber cleared the way for a slew of candidates to replace Jean-Claude Trichet.
  • Central bankers Mario Draghi of Italy, Luxembourg’s Yves Mersch and Erkki Liikanen of Finland saw their chances of winning Europe’s top economic post rise as did Germany’s Klaus Regling, who runs the region’s bailout fund. Trichet’s non- renewable eight-year term expires in October.
  • The top candidate is now out of the game,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “We can now focus on alternative candidates and the political push behind appointing the next ECB president.”
  • The fate of Bundesbank President Weber whipsawed the euro, forcing the debate over the world’s second-most important monetary post after U.S. Federal Reserve chairman into the spotlight just as European leaders grapple with how to put an end to the sovereign debt crisis that has shaken the single currency’s foundations.
  • Unsourced media reports yesterday of a pullout by Weber shattered German efforts to steer the ECB nomination behind the scenes, prompting a telephone confrontation with Merkel and subsequent confirmation by Weber associates.  Weber, 53, plans to quit the Bundesbank in a decision that would rule him out of the ECB running, said a person who spoke with him yesterday. He will leave about a year before his term ends in April 2012.
  • Until his exit, leaders would have had to balance Weber’s two-decade academic record and citizenship of Europe’s largest economy with his outspokenness and opposition to the ECB’s bond- buying program, a key part of Europe’s crisis-fighting strategy.
  • Weber summoned the Bundesbank board to a hastily scheduled meeting late on Feb. 8 to announce plans to quit after one term, the Financial Times reported today, without citing sources. Merkel, learning the news from the media, pressured him to delay a public statement until she taps a successor, the newspaper said.

In the U.S., hawks are a rare breed.  But there was one sitting very close to Ben B by the name of Kevin Warsh.  He is a guy who has been vocally against QE infinity.  Yesterday he decided its time to take his services elsewhere.  Hmmmmmm.....

Via Washington Post:
  • Kevin Warsh, a Federal Reserve governor and key lieutenant to Chairman Ben S. Bernanke during the financial crisis, is leaving the central bank at the end of March, giving President Obama a chance to continue reshaping the Fed. 
  • Warsh's departure will leave the governing board of the powerful central bank almost entirely in the hands of Obama appointees. Obama will have named six of seven governors once the Senate confirms nominee Peter Diamond to a vacant slot and Warsh is replaced. 
  • Warsh has been a skeptic of Bernanke's policy to try to boost the economy by buying hundreds of billions of dollars' worth of Treasury bonds, and Fed watchers think it likely that a new Obama appointee would be more supportive of the strategy.
  • You lose a forceful internal advocate for ending QE and trying to renormalize policy quicker,” said Reinhart, referring to the stimulus program known as quantitative easing. 
  • Warsh was one of a small number of Bernanke's closest collaborators during the most intense phase of the 2007-09 financial crisis. Often working all night, he helped decide which financial companies to bail out and, more broadly, how to keep the entire financial system from unraveling.  
  • While he has perhaps been Bernanke's closest adviser on financial market issues, the two men have been less closely aligned on questions of monetary policy. Warsh was a reluctant supporter of Bernanke's plan to try to strengthen the economy by buying $600 billion in Treasury bonds, announced in November. He voted in favor of the measure. But he explained in a speech shortly afterward that he had no great confidence that the action would help the economy.  "I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy," said Warsh in a Nov. 8 speech. "There are significant risks that bear careful monitoring." 

One wonders if talking like this caused him to "pursue new opportunities".

[Video] Doug Kass, Barry Ritholtz, and Jim Lecamp Discuss the Market with Kudlow

It was fun to see old favorites Doug Kass, and Barry Ritholtz in the same TV segment, and they were joined Jim Lecamp who also generally does a very good job of providing balanced, astute commentary.  Doug is net short, and Barry is 53% cash mostly because the "only goes up" market has pushed valuations to high levels and many of his stocks hit his firm's targets.  Lecamp is trend following and has yet to see a break in the charts - which is the same theory I've been working under.  It is unshortable until it no longer is.

Poor Kass still thinks we're in some sort of normal market, and has been making "top" calls for 100 S&P points - he has not adjusted to the new reality, where every 0.2% drop in the market (however rare) is the best buying opportunity of all time.  It's a new paradigm Doug... new paradigm.  Barry outlines the conundrum anyone in these markets faces, in his opening salvo.  You will assimilate.  Speaking of which, Merger Monday is just 1 session away so expect traders to pile in ahead of the now 80% probability of a premarket surge of 0.3 to 0.4% (no matter the news) 72 hours from now.  Money in the bank 8 out of 10 Mondays a year.

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

Google's (GOOG) Soon to be Ex CEO Obviously Reads FMMF as He Says Signs of Internet Bubble Forming.... as Facebook Valuation Jumps $10 Billion in 4 Weeks

It was just a month ago that Facebook's value was placed at $50B per the Goldman Sachs private placement offering.  Well folks, that was last month.  This month... $60B.  You can do the math from here - $10B a month from here, as we do QE3-7 until it is worth more than the GDP of Germany.

I see Google's (GOOG) Eric Schmidt has been reading the website, as he agrees with me we're entering a new bubble - this time 1999's eyeballs have been replaced by 2011's 'friends' or 'followers'.'

  • There are clear signs of a new Internet bubble in corporate valuations, Google's chief executive Eric Schmidt said in an interview with a Swiss magazine on Thursday. 
  • Asked about the high valuations being put on companies such as social network company Facebook and game developer Zynga, Schmidt said in an interview with Bilanz: "There are clear signs of a bubble ... But valuations are what they are. People believe that these companies will achieve huge sales in the future."

This is true... valuations were what they were in 1999 as well.  Until they were not.   As an aside, I just want to let everyone know I am adding a social networking arm to FMMF - hence the valuation of this website will instantly go from $8,210 to $12 billion.  Boo yah!

As for Facebook, which now goes up $10B a month?
  • Facebook Inc. is considering letting employees sell as much as $1 billion of their shares in an offering that would value the company at almost $60 billion, according to two people with knowledge of the matter.
  • A stock sale would allow large institutions to invest in the social-networking company, according to the people, who declined to be identified because the deliberations are private. 
  • Facebook recently raised $1.5 billion in a financing round from Goldman Sachs Group, and Digital Sky Technologies, valuing the social network at $50 billion. Neither Goldman Sachs nor Digital Sky will participate in the new offering, said one person familiar with the matter.
  • The stock sale would give a windfall to employees as they wait for an initial public offering.

Knowing how the herd of lemmings works, if Facebook came public today at $60B you know people would be falling over each other to buy the IPO and it would probably be worth $120B in minutes.  Hence if Facebook comes public in 2012 at $150B it should be worth more than Apple in the first few minutes of trading.  No bubble here baby.  100x sales is cool, and 200x sales would be better.

Thursday, February 10, 2011

ETF "Stripping" - The Latest Way to Disguise Insider Trading?

An interesting article in FT.com via CNBC's website - something I've never heard of before called "ETF Stripping".   Considering the methodology involved you would need to have a super good prime broker (hello vampire squid) to pull this off, since you'd need to borrow short a whole lot of inventory but essentially here is the game.  If you want to hide the fact you have inside information on an advantage of information (i.e. you are called "smart money"), and you don't want the SEC to know about it by building a big position in the stock or via call options, you can use an ETF.  How?

Find an ETF which owns the stock - build a big position there while concurrently shorting every other stock in the ETF.  This makes you uber long the stock you have insider information an information advantage on.  Again, genius.  More of God's work done by people 2 generations ago who would have been working at NASA or creating the next innovation in science or medicine. 

While no fan of the SEC's lax oversight let me be the first to say "oh my gosh", it appears the agency is actually investigating the practice.  Almost shocking. Kudos! 

  • The Securities and Exchange Commission is investigating whether Wall Street traders are using exchange-traded funds as a means of disguising insider trading. ETFs have emerged as a possible mechanism for maximizing gains in one stock while potentially masking trading patterns, people familiar with the matter say. 
  • In one scenario, a trader could learn information about a company, buy an ETF that includes the company’s stock, and short sell the other stocks in the ETF. The practice, known as ETF-stripping, would allow the trader to benefit from movements in the company’s share price without directly buying or selling that stock.
  • Regulators, who work closely with the US justice department, are concerned that traders are adopting this approach, and others, to mask insider trading.  (key words - "and others")  They are also looking into whether traders are using swaps to stay off their radar. 

That said, the people doing "God's work" are not stupid and already have defenses lined up.  After all only amateurs walk into a heist without an exit plan.
  • The concerns come as US authorities escalate their probe into alleged insider trading.  Law officials said they needed to use unconventional tactics because traders had become sophisticated. The so-called mosaic theory, whereby investors gather large volumes of data to arrive at conclusions that look like they might be derived from insider trading, can be used as a legal defense.  One fund manager charged with insider trading on Tuesday allegedly told an analyst that he need not worry since he was using mosaic theory.
Boo yah - mosaic theory explains it all.  Simple as that... now let me out of these cuffs.

Should You Have been Shocked by the Akamai (AKAM) Guidance? Not if You Believe in Information Leak

One of the reason I think many people who do not use technical analysis are really leaving a big part of their tool belt unused, is information leak on Wall Street.  Like it or not, people in the know (aka 'smart money') generally has an information advantage.  Where it crosses the line to insider trading is the gray area - but let's be honest, every day in the options market big outsized bets are made and this type of money is not thrown around on 50/50 coin flips.  You do this long enough and you see those spikes in volume (in stock or call options) hours before a merger is announced, or vice versa ahead of bad news - and the truth is pretty apparent.  One could argue an entire SEC department should be investigating big option market bets (or stock volume surges ahead of news) to see why people are "so confident" in laying down so much money on a future event - but let's not turn into dreamers.  Even along more innocent lines, if you happen to be an investment bank that has hundreds of former employees working inside of government you have a massive information advantage over the masses in terms of legislation and future effects on companies. Gordon Gekko said it best -

The most valuable commodity I know of is information.  

So as a small time institutional or retail investor .....or one not working inside one of our oligarchs (i.e. "smart money") you are at a disadvantage.  But this is where I believe technical analysis helps even the playing field.  If you see a weak chart in a rampaging bull market you need to be questioning things.  Often.  Does it always play out that bad chart = bad news event?  No - but the market is all about probabilities.  If you can turn a speculation from 50/50 to 72/28 - huge advantage.  I bring this up today because of momo favorite Akamai Technologies (AKAM).   This is the type of market that has run up almost everything, but especially the "high growth" momo names.  But look at the chart of AKAM

Warning signs all over the place.  In a normal market anything trading below the 50 day moving average would send a yellow flag up, but in a market as historically strong as this one - up 8 out of every 10 days - a stock trading even below the 20 day has to have you wondering.  Akamai was not only below the 20 day but below the 50 day.   Not just for a few days but for almost all of December and January (and Feb MTD).  If you never looked at a chart or practice technical analysis, you'd just have been frustrated by a sideways stock in a market that melts up continuously.  But by adding a very simple technical framework you would at worst have been extremely cautious going into this earnings report (reducing your position) or preferably avoided it entirely.

Again, is this fool proof?  No.  Sometimes a stock will surge on earnings despite a bad chart. (or vice versa)  But more often than not the "smart money" has already figured things out (by whatever method) and your only clue to that is the way the stock is acting i.e. the chart. 

  • Shares of Akamai Technologies Inc. plunged Thursday after a weak forecast for the current quarter and as competition from other vendors forces the company to renew contracts at lower prices.
  • Though the company topped Wall Street analysts with its fourth-quarter earnings report late Wednesday, it also said it expects first-quarter revenue of $265 million to $275 million, short of the $284 million analysts had predicted.
  • Oppenheimer analyst Timothy Horan, who rates the company as "Perform," noted that Akamai's business has become more cyclical, with the first quarter being a traditionally weaker period. He added that Akamai's customers likely bargained for volume discounts and mentioned competitors such as Level 3 Communications Inc. to negotiate lower prices.
  • In general, he said, those pricing pressures should cause stocks across the Web management sector to fall.  "We believe that shares will remain pressured for a few months given their very strong run and relatively high historical valuation," Horan wrote. Horan lowered his 2011 earnings forecast to $1.59 per share from $1.62.

No position

Social Media Bubble Grows as Twitter Valuation Doubles in 2 Months

Ah, memories of 1999....

The WSJ reports fast growing but revenue sparse Twitter has jumped from a valuation of $3.7B to potentially $8-$10B in just under 2 months.  (maybe this is due to Howard Stern joining - after all he is essentially the entire valuation of Sirius)  I love liquidity tsunami's. Better buy in quick, because if it's $10B today, certainly it will be $30B by the time QE3 starts.

For $45M in revenue - we are now talking 200x+ price to 2010 sales.   Even on 2011 projected revenue we're talking 80 to 100x sales. This is reaching insane frenzy levels - again a good technology buyout is along the lines of 6-7x sales.  "Special" companies are generally around 10-12x. 

  • As Internet valuations climb and bankers and would-be buyers circle Silicon Valley in an increasingly frothy tech market, many eyes are on one particularly desirable, if still enigmatic, target: Twitter. Discussions with at least some potential suitors have produced an estimated valuation of $8 billion to $10 billion.
  • Executives at both Facebook Inc. and Google Inc., among other companies, have held low-level talks with those at Twitter Inc. in recent months to explore the prospect of an acquisition of the messaging service, according to people familiar with the matter. The talks have so far gone nowhere, these people say.
  • But what's remarkable is the money that people familiar with the matter say frames the discussions with at least some potential suitors: an estimated valuation in the neighborhood of $8 billion to $10 billion. This for a company that, people familiar with the matter said, had 2010 revenue of $45 million—but lost money as it spent on hiring and data centers—and estimates its revenue this year at between $100 million and $110 million.
  • Twitter, which started selling ads last spring against its business of allowing users to send messages of no more than 140 characters, is just one of many tech targets being batted about as valuations climb. In December, when it got $200 million in new venture capital, Twitter was valued at $3.7 billion
  • "Are these prices justifiable based on financial multiples? No," said Ethan Kurzweil of venture capital firm Bessemer Venture Partners. But these start-ups are building social services and have lots of data about their users and "the market is valuing that mightily right now." (the same logic we heard in 1999)

  • Both Google and Facebook have discussed buying Twitter in the past and have kept their lines of communication open, people familiar with the matter said. One of these people said companies including Facebook and Google have expressed "latent interest" in an acquisition.
  • Twitter's revenues and valuation have risen even as the company continues to work on ways to translate its more than 200 million registered users into a profitable business. Twitter, which was created in 2006, introduced advertising into its service last year. 
  • One of the new Twitter ad services, called Promoted Trends, has been selling out its inventory every day, said one person familiar with the matter. The other two ad products, Promoted Tweets and Promoted Accounts, are also doing brisk business, this person said.
  • "The company is having great ad-sales momentum right now, but we still think they need to do something big to increase usage and get more people seeing and interacting with tweets," said Debra Aho Williamson, an eMarketer analyst. "Most of their advertisers are just experimenting at this point; the challenge will be to get those advertisers to come back and buy more," she said.

Cisco Systems (CSCO) Weighs on Markets

Quite a few interesting reports last night, including a not so hot reaction to Akamai (AKAM) and quite positive earnings report from Whole Food Markets (WFMI), but much of the attention is focused on the 2nd disappointing report (in as many quarters) out of Cisco Systems (CSCO).  This has led to something very rare nowadays - a materially negative premarket.  We will see how many hours minutes it will take for the dip buyer surge in, but with the Dow up every single day since the Egypt selloff there is some chance we actually close in the red.  But never fear, the now almost patented Monday morning premarket gap up is not far away, and you know what that means - we all have to buy into the market by Friday afternoon to get our "free money" Monday.

While it is a Dow component the inane structure of the DJIA is price weighted, hence a company like IBM at $160 is roughly 8x as more influential than Cisco at just over $20.   CSCO is down over 10% in premarket, back into the upper $19s.

  • Cisco Systems, the largest provider of networking equipment, posted a gross margin that missed analysts’ estimates as the company spent more to develop products and competitors undercut them on prices.  Gross margin, or the percentage of profit left after subtracting production costs, fell to 62.4 percent in the period ended Jan. 29. That missed the 63.3 percent average of projections compiled by Bloomberg.
  • Cisco may be cutting its prices and extending better terms to its customers, giving them longer to pay, said Mark Sue, an analyst at RBC Capital Markets. “The product gross margins declined quite meaningfully,” Sue said. “We know demand is improving, but will Cisco capitalize on that? And will it have to resort to price cuts to get its fair share?”
  • Profit excluding some items this quarter will be 35 cents to 38 cents a share, short of the 40-cent average prediction. Sales will rise 4 percent to 6 percent from a year earlier, the company said today on a conference call. That would mean revenue of $10.8 billion to $11 billion. Analysts on average estimated sales of $10.9 billion, with some projecting as much as $11.3 billion.
  • Investors look to Cisco as a bellwether for the technology industry because it dominates the market for routers and switches, products that direct the flow of Internet traffic. Companies buy its switches for corporate networks, while phone and Web-service providers typically purchase Cisco’s more- expensive routers.
  • Earnings excluding some costs were 37 cents a share, Cisco said. That compared with 35 cents, the average of projections compiled by Bloomberg. Sales rose to $10.4 billion, also topping the average $10.2 billion estimate.
  • The public sector in the U.S., Europe, and Japan is facing budget constraints that will affect spending for the next several quarters, Chief Executive Officer John Chambers said on a conference call with analysts.
  • “They’ve become the Procter & Gamble of networking,” said Joanna Makris, an analyst at Mizuho Securities USA Inc., referring to the world’s largest consumer-products company, which has more than 70 brands. “The stocks that have outperformed them have been the more focused, nimble companies.”
No position

Wednesday, February 9, 2011

Here We Corn Again as USDA Says Stocks Hit 15 Year Lows

At this point I am just going to start cutting and pasting all my 2008 posts about food inflation - they are almost all repeating in identical fashion.  [Apr 3, 2008: Corn Hits $6, Start Stocking Up on Soda Pop]  Only edit I have to do is I was stressing about $6 corn in 08, now we are about to touch $7. 

Partly due to "super cool ethanol" (fully subsidized by you) corn stock in the US is down to a 15 year low.  On the plus side, the Mercedes and BMW lots in Des Moines, Sioux Falls, and Omaha should be extremely busy in the months and years ahead.

Via WSJ:

  • Federal forecasters predict U.S. corn supplies will match lows not seen in 15 years as strong demand from ethanol producers raise new concerns about low global grain supplies.  
  • The U.S. Department of Agriculture in its monthly crop report made a larger-than-expected cut of more than 9% to an estimated 675 million bushels of domestic corn supplies as of Aug. 31, causing futures to surge to more than 2½-year highs Wednesday. 
  • The USDA mostly left wheat- and soybean-supply estimates unchanged, yet futures climbed on concerns that world grains supplies are precariously low.  (this is sort of a funny line, because as we know by now prices no longer react to supply and demand - no matter what the USDA said about wheat and soybeans, prices can only go up!)
  • Agricultural commodities have boomed since last summer, reaching their highest levels since a record-setting rally in 2008. Food prices have followed, with the United Nations Food and Agriculture Organization food-price index hitting a record high in January.
  • The USDA's projections put corn supplies as a percentage of usage at 5%, identical to the level 15 years ago. That is the ratio of supplies at the end of the crop year against how much corn would be used in a year. Supplies as a percentage of usage have fallen below 10% in only four years since 1960, Mr. Norton said.
  • The USDA's forecast of reduced corn supplies was due mainly to higher-than-expected ethanol usage. Domestic production of ethanol in the U.S. is at record levels, with exports of the corn-based fuel additive tripling in the last year. The USDA projects 4.95 billion bushels of corn will go to ethanol production in the current crop year, about 40% of the domestic harvest.
  • Wednesday's report could reignite the debate over whether arable land should be used to grow crops for fuel rather than food, particularly as the export boom undercuts arguments that ethanol makes the U.S. more independent of foreign oil imports.
  • Escalating global demand, a weak dollar and record domestic production are giving U.S. ethanol makers an edge.  U.S. ethanol production ramped up over the last decade amid government policies started under President George W. Bush to rely more heavily on biofuels than imported oil. The U.S. has in recent months raised the amount of ethanol that can be blended into fuel to 15% for cars built during the past decade, up from 10%, and Congress last year extended a 45-cent tax credit that gasoline producers get for every gallon of ethanol they blend into fuel.
  • "We have long argued that demand needs to be rationed in this supply constrained environment—and continue to believe that corn will need to trade to at least $8 [a bushel] to ration ethanol demand," analysts at Morgan Stanley wrote in a note to clients Wednesday.
  • Further pressure on corn supplies could come later in the year if exports pick up, with some analysts contending the USDA is underestimating export demand particularly if China starts buying from the U.S.
  • Supplies of other agricultural commodities, particularly soybeans, are tight as well. The USDA left its U.S. soybean-supply projection unchanged at 140 million bushels. Analysts had been expecting a modest decline, down to 135 million.
  • U.S. wheat supplies also remained unchanged, with the government projecting ending stocks of 818 million bushels. Analysts were forecasting 810 million.
  • Corn for March delivery at the Chicago Board of Trade was up 3.3% to $6.962 a bushel.

Polo Ralph Lauren (RL) Smashes Estimates, Doubles Dividend, and Announces $250M Stock Buyback

Polo Ralph Lauren (RL) continued it's excellent earnings performance this morning, and showcases the high end is where it's at.  [Oct 8, 2010: No Recession in High(er) End]  On the U.S. front, within an increasingly bifurcated society almost all the actions of The Bernank flow to the top sliver of the economic demographic, [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Help? Not the Masses] and the increasing global consumption (especially in Asia) of high end 'aspirational brands' is benefiting the company as well. 

While we can wring our hands about the economic and policy decisions stateside, this is the reality on the ground and one has to invest accordingly... the high end (and low end in the States) is where the"growth" is as the middle classed slowly erodes.  RL has pricing power (to offset commodity inflation) and a global consumer who is far less affected by the economic cycle.  Period.

EPS was off the charts at $1.72 versus estimates of $1.29, and revenue beat a bit $1.5B v $1.46B.  This puts the company in line to print $6 of EPS for (fiscal) year end 2011 which for RL is March 2011.

Via Reuters:

  • Polo Ralph Lauren Corp (RL) posted a bigger-than-expected jump in quarterly profit on strong clothing sales over the holiday season and said its momentum should continue in the current quarter.
  • The upscale clothier and retailer, whose brands include Polo, Club Monaco and Chaps, reported double-digit percentage sales increases in every part of the business, including sales to department stores and sales at its high-end shops and outlets.  Polo also doubled its dividend.
  • Revenue from its wholesale business, which accounted for nearly half of overall sales and includes sales to chains such as Macy's Inc (M) and Nordstrom Inc (JWN) rose 21 percent. 
  • Sales at Polo's own stores open at least a year, or same-store sales, were up 15 percent.
  • Polo, which posted its fourth consecutive quarter of sales gains, has also succeeded in catering to "aspirational shoppers" who crave brand names but are on tighter budgets than luxury shoppers through its chain of outlets. Same-store sales at those locations rose 15 percent. 
  • Polo predicted its hot streak would continue in the current quarter, its last of the fiscal year, forecasting revenue for the full year will be up by a low double-digit percentage.
  • Polo said net income rose to $168.4 million, or $1.72 a share, in the fiscal third quarter ended Jan. 1, from $111.1 million, or $1.10 a share, a year earlier. That was far above the $1.29 analysts polled by Thomson Reuters I/B/E/S had expected. 
  • Net revenue rose 24 percent to $1.5 billion, also above Wall Street forecasts.
  • Gross margins grew by 40 basis points on a strong selling mix offset by inflation in the cost of goods sold.
  • RalphLauren.com sales increased 33% in the third quarter of Fiscal 2011.

RL now has a $12B market cap so $250M of stock buyback is not a big deal, but better than a sharp stick to the eye.
  • The company's board doubled the quarterly cash dividend to 20 cents a share and authorized an additional $250 million stock buyback program.

No position

JDS Uniphase (JDSU) - a "Bit" Overbought?

In a normal market, I'd say JDS Uniphase (JDSU) is a *bit* overbought and a candidate for a quick in and out short until it gets anywhere near the earth's gravity pull.  It is an astounding 30% over the 20 day moving average.  RSI extreme.... MACD off the charts.

That would be in a normal market.  In this market?  Shorting appears to be a banned practice.

No position

Smart Phones Outsell PCs for the First Time

On the long side I like finding long tail secular growth stories.  As an added bonus generally the Fed is blowing bubbles of one form or another, so these secular growth stories not only have their inherent positive attributes, but easy money is sloshing throughout the globe to supersize the returns on investments.  Until a brick wall is hit someday down the road.  But as Chuck Prince told us, we have to keep dancing until we hit the iceberg.  Back in 99 the secular growth story was Internet 1.0.  Now we are in Internet 2.0 - Mobile.  Ironically some of the same names I used to play back in 99 are back in vogue the past few years, but of course most from 1999 died (or were absorbed) once the bubble burst.  I am sure some of the names now going up 10-15% a month will be dead by 2020, but in the long run we're all dead. 

So as the the smartphone/social media/must stay connected every second of our life transition plays out, a very important milestone just occurred.   In the last quarter of 2010, more smartphones were sold then PCs.  While true that people upgrade their phones more often than their computers, it is still historic, especially as we move to a world where I envision most of our banking, shopping, and social experiences go mobile. 

  • For the first time ever, smart phones such as Apple Inc.'s iPhone are outselling personal computers, according to a report by research group IDC that was released Monday. Worldwide, consumer electronics makers shipped 100.9 million smart phones in the last three months of 2010, an 87 percent jump from a year earlier. PC shipments were weaker than expected, edging up just 3 percent to 92.1 million.
  • The two trends aren't necessarily related, said IDC analyst Ramon Llamas. Smart phones and PCs serve different purposes, and consumers generally need both. PCs remain important for writing papers, editing photos and creating other kinds of content.  PC sales are, however, have been hurt by competition from tablet computers -- namely Apple's iPad.
  • Meanwhile, smart phones are getting a boost from falling prices. It's not uncommon to find brand-new models on sale for $100, a price Llamas says consumers are willing to pay. Some retailers, such as Amazon.com Inc., are willing to offer smart phones at steep discounts, sometimes for as little as a penny.
  • Smart phone sales are also getting a push from growing interest in Google Inc.'s Android software, which powers dozens of phones made by HTC Corp., Samsung Electronics Co. Ltd., Motorola Mobility Holdings Inc. and others. "Android continues to gain by leaps and bounds, helping to drive the smart phone market," Llamas said.
  • People also tend to replace their phones much more often than they do their computers. Consumers might wait three to five years to replace computers, some of which are protected under warranties that last several years. Meanwhile, cell phone subscribers often have the option of upgrading to a newer phone well before their two-year service contracts are up.

OpenTable (OPEN) Keeps the Momentum Train Going

OpenTable's (OPEN) valuation is now making Netflix (NFLX) blush [Nov 3, 2010: OpenTable is the New Netflix] - based on last night's earnings, OPEN just completed 2010 with a 85 cent EPS year; using last night's quote of $85 the math is pretty simple to figure out the trailing EPS.  Even more impressive the market is giving this name a $2B valuation for $100M in sales - that's 20x revenue.  Whew!

Looking ahead a year, 2011 estimates are currently $1.12; I will assume there is a premium to that figure closer to $1.40.  This will give a forward P/E (far into the future) of about 60.  But in a market that can only go up, much like in 1999, valuation is really an only a concept and not a reality; we can pay any valuation for any company because tomorrow someone will show up to pay more.  So to answer our question from September (which can now apply to any stock in the world - not just Netflix) [Sep 16, 2010: Does One Dare Short OpenTable?] The Bernank says no.

OpenTable beat estimates of 22 cents by 11 cents, while revenue of $30.8M barely surpassed estimates of $30.2.  Obviously analysts did a poor job of modeling the business if they nailed revenue so closely but did not figure out the rest of the income statement.  Full report here. As always with the momo stocks, the party continues to rock until a brick wall is hit.  I will be interested to see what happens in 90 days if management's guidance is accurate, as decelerating revenue growth is not something momo traders like.
  • OpenTable management declined to provide revenue and earnings guidance, but said that it expects Q1 will be a “strong quarter of seated diners” but that year-over-year revenue growth is unlikely to be as strong as in Q4, given that the year-ago Q1 was particularly strong, and given inclement weather.

Via AP:

  • OpenTable Inc. said Tuesday that its fourth-quarter net income grew 65 percent as more diners used its free service to book restaurant reservations and more restaurants signed up for its electronic booking system.
  • In the last three months of 2010, the company posted net income of $5.1 million, or 21 cents per share, up from $3.1 million, or 13 cents per share, in the same period in 2009.  Excluding one-time charges for acquisitions, stock options for employees and other expenses, OpenTable said it earned $8 million, or 33 cents per share. Analysts polled by FactSet had expected earnings of 22 cents per share.
  • Revenue in the same period rose 61 percent to $30.8 million from $19.2 million. Analysts had expected $30.3 million.
  • The company said its operating expenses rose 68 percent to $25.4 million, mostly because it hired more employees. The company's work force grew 55 percent.
  • The company went public in May 2009 at $20 per share; the stock has risen more than fourfold since then.
  • OpenTable makes money from the monthly fees that subscribing restaurants pay for its service. It also receives a fee for each meal reservation that ends with a diner paying a bill at the appointed restaurant.
  • The company said 13,795 restaurants in North America are signed up for its services, 27 percent more than a year earlier. The number of diners who used opentable.com to make a reservation and then ate at the restaurant grew 51 percent to 17.8 million
  • The company's international division -- which is about half the size -- grew faster, and the number of diners making reservations on their smart phones jumped 189 percent.
  • For the year, OpenTable's net income nearly tripled to $14.1 million, or 58 cents per share, from $5.1 million, or 22 cents per share, in 2009. Revenue grew 44 percent to $99 million from $68.6 million.

OpenTable is a leading provider of free, real-time online restaurant reservations for diners and reservation and guest management solutions for restaurants. The OpenTable network delivers the convenience of online restaurant reservations to diners and the operational benefits of a computerized reservation book to restaurants. 

No position

[Video] Ron Paul - Next U.S. Crisis Will Bring Changes "Almost Equivalent to Change that Occurred in Soviet System"

First let me preface this entry by saying I was incorrect thinking we'd see some fireworks today as Ben Bernanke was to appear in front of Ron Paul's subcommittee.   Instead, Bernanke will be on Capital Hill in front of another committee while Ron Paul's subcommittee will be focusing on other issues, with no Federal Reserve member represented.  It looks like the two won't face off until March.

That said, last evening was probably the most bearish I've heard Ron Paul on the way things are unfurling in the country, based on the abuses in the monetary system.  Indeed, he believes things will get so dire he modeled what is to come as similar to the unraveling of the USSR.  Very interesting comments, because the U.S. has gotten away with so much due to owning the reserve currency of the world, and for this level of crisis to occur one would think there would need to be an abandonment of this status.  I cannot see this happening anytime soon for the simple matter there is no real alternative - the U.S. dollar remains the prettiest ugly duckling.  Maybe this changes in 10 years when the yuan becomes a global currency but we're a long ways away.

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

Tuesday, February 8, 2011

Behold the 79.9% APR Credit Card

I originally read this story about the 79.9% APR credit card, wondering what suckers would actually use such a card.  Then I realize the American people have figured out the system as currently structured.  Those who run up debt (helping GDP surge, and the 70% of the American economy hum) and then walk away from the debt are modern society's winners.  [Jun 15, 2010: WSJ - Default, not Thrift Pares U.S. Debt] They've learned the past few years how losing a few hundred points in FICO score for a few years is just a short term impediment.  When 1 in 10 home "owners" in the country can live in homes for 2 years without paying the mortgage, and save tens of thousands of dollars they can then use to "shop".... who are we to judge those who just run up a few thousand on their 79.9% card?  Indeed, I don't believe they are fulfilling their full potential in the "debt is just a figure on a piece of paper" culture we are creating.

  • ....about six months after opening the card -- at the end of 2009 -- she received an unwelcome surprise in the mail.  "I about had a heart attack when I got a disclosure notice saying that my starting rate of 29.9% was going up to 79.9%," said Riss. "It was ludicrous. Talk about a highway robbery."
  • At that same time, First Premier Bank launched a new credit card with the sky-high 79.9% rateThe card proved popular with consumers, said First Premier Bankcard CEO Miles Beacom, but the performance was bad: "A lot of the people ran up the card, defaulted and went directly to charge off."
The lab rates of America have learned to game the system after much training.  Paying debt obligations is for the remaining suckers! (hand raised)  I'll give you 170 FICO points in return for the goodies I do so deserve.  Hey, if the banks can do it - I can do it!  Then in 2 years you'll give me a new card.  We all win here. 

Unfortunately there are still some suckers remaining in the system, who believe they need to pay back debt.  Indeed Frontier Bank went to 59.9% and actually has some who carry a balance.  Some proportion even (don't snicker) send money to the bank in return for their charged goodies.
  • As a result, they dropped the rate to 59.9%.  Since then, nearly 700,000 people have signed up for the card -- and more than half of them carry a monthly balance.  
  • And yes, that rate is completely legal. The Card Act, which was passed in late 2009 to protect consumers from predatory lenders, only prevents issuers from raising rates retroactively. Credit card issuers are free to charge whatever rate they want at the front end.
Some amazing statistics, 3M people is 1% of the entire U.S. population, including babies.
  • The company said it serves nearly 3 million customers nationwide and receives anywhere from 200,000 to 300,000 applications a month.

Bloomberg Markets Magazine: Rich Take from Poor as U.S. Subsidy Law Funds Luxury Hotels

I could not resist clicking on this story over at Bloomberg based on title alone, and I am glad I did.  It is always a 'fun' time reading how our best and brightest, rather than working on future innovations to create industry and jobs, have been incented to work inside our banking oligarchy finding ways to pilfer the American taxpayer and get around any regulation known to man.  I do have to admit being very impressed by the tactics in this story - it is comforting to know our top B-Schools are churning out such financial innovation aka "God's work".  I'd leave the story to anyone interested but here are some of the highlights:
  • The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 U.S. presidents, opened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan.  What’s surprising isn’t the opulent makeover: It’s how the project was financed. The work was subsidized by a federal development program intended to help poor communities
  • The biggest beneficiary of taxpayer help for the Blackstone revamp was Prudential Financial, the second-largest U.S. life insurer. The company got $15.6 million in tax credits from the U.S. Department of the Treasury for helping to fund the project.  JP Morgan Chase the second-largest U.S. bank by assets, also took in money by serving as a lender and the monitor of Blackstone construction financing.
  • Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group, U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it. 

Essentially, a program was devised late in the 90s that was supposed to help poor communities.  The guideline was individual poverty of 20% or greater, based on census tracts.   But the 'best and brightest' we have to offer figured out incredibly shrewd ways to develop luxury developments by (for example) finding census tracts where say many college aged kids live because after all, many have poverty wages (or none at all).  This is "God's work" as I understand it.
  • Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. The program, endorsed by Republican Senator Rick Santorum and House Speaker Dennis Hastert and adopted by Congress, was signed into law by President Bill Clinton in 2000. 
  • The agency bases decisions on census tracts, which are supposed to have common economic standards. Only tracts with at least a 20 percent poverty rate or with a population earning 20 percent less than the median family income of the surrounding metropolitan area qualify for subsidized projects.  The numbers are from the 2000 census.
  • Building high-end commercial projects goes against the intent of the New Markets program, says Cliff Kellogg, a former senior policy adviser at the Treasury Department who helped design New Markets.    “Things like luxury hotels are entirely contrary to what we set out to do,” says Kellogg, who’s now a bank consultant. “Some hotels may create jobs and spur other nearby investment, but you have to ask if these projects prevent worthwhile ones from getting done.” 

It's not about "intent" Mr. Kellogg - it is about loopholes baby.   Please notice where Mr. Kellogg landed after doing "God's work" inside the Treasury. 
  • The 15-block tract that’s home to the renovated Blackstone -- census No. 3206 -- qualifies because it had an individual poverty rate of 26 percent in 2000. A closer look at the demographics tells a different story and shows how investors can game the system.  The poverty profile reflects the large number of students who attend two schools -- Columbia College Chicago and Roosevelt University -- in the area. Among families, the poverty rate is just 3.9 percent, according to the census
  • Three miles (5 kilometers) west of the Blackstone, there are no hotels, banks or supermarkets in a census tract in the Kendrie Avenue neighborhood on Chicago’s West Side. Area unemployment there was 35 percent in 2000. The neighborhood, dotted with abandoned homes and trash-strewn lots, languishes without money from New Markets.  (I assume no one in this tract could afford $699 a night hotel rates?  If not - JPMorgan and Prudential cannot be bothered with taking taxpayer's money)
  • The program’s standards open up some of the nation’s wealthiest areas to development, according to Treasury records. Taxpayers have subsidized projects in tracts with median family incomes as high as $200,000, records show. 
  • “The way the rules are written, it’s allowing a kind of cherry-picking by financial institutions to find favorable census tracts,” says Virginia Parks, a social services professor at the University of Chicago. “It’s so easy to qualify that all you need to do is hire a good demographer. It’s not rocket science.”

The rest of the story goes through various examples of projects "to help poor communities".  They are all quite enlightening but please don't read it on a full stomach - some of it might regurgitate.  Here is one I particularly liked since it showed the type of thinking that we do not need in our math and sciences, and instead is fantastically located in our high finance oligarchy.
  • In Tacoma, Washington, investors found a way to get New Markets handouts in an area with just a 1 percent family poverty rate. U.S. Bancorp and two other investors used a $34 million Treasury authorization in 2010 to finance construction of an antique car museum. The museum, which will house the private collection of Harold E. LeMay, a deceased trash-hauling tycoon, needed creative financing to fit New Markets rules. 
  • Companies that operate mostly by exhibiting art or other items don’t qualify for New Markets.   To get around the restriction, Minneapolis-based U.S. Bancorp and its partners set up a related company in 2010 to acquire the assets from the museum and then lease back the property. The new company, America’s Car Museum, qualified because a loophole in the rules allows galleries to get New Markets money by using affiliated corporations.  (now that's innovation!)  The maneuver allowed U.S. Bancorp, which invested a total of $34 million in cash or loans with development partners, to win $13.3 million in tax credits
  • As a result of the deal, federal taxpayers will pick up 39 percent of the cost of erecting a $34 million shrine housing 500 of LeMay’s cars in a mostly commercial tract with a 24 percent individual poverty rate.   (you're welcome! I assume I still have to pay full price to get in? Or do I get 39% off since I helped pay for it?)

I love reading stories like these - good ole investigative journalism.  And for every one the press uncovers we can imagine there are 100s more very much the same that will never see the day of light.  

Indian Stocks Falter Again, Dropping 1.5% to 7 Month Low as Chinese Raise Interest Rates and Brazilian Monthly Inflation has Highest Spike in 6 Years

In the "nothing matters until it matters" category a cacophony of news overnight from the BRIC countries.   Inflation fears continue to fan the flames overseas and the global hot money is on the move. 
  • For the week to Feb. 2, BRIC equity funds had net outflows of $316 million, a 10th consecutive week of redemptions.
With institutional speculators utilizing easy money continuing to surge into commodities.... until some sort of blow off top occurs, I am not sure that any of the actions by Asian central bankers are going to succeed in stopping politically sensitive food inflation.

First from India, the Sensex has fallen 1.5% overnight to a 7 month low @ 17,775.  This brings it almost exactly in line with the late August 2010 low - most likely hours before Ben Bernanke sounded the all clear on world wide speculation in anything that moves at Jackson Hole, Wyoming.  Technically this is a very key level, because if it breaks you could be looking at another 500 points down easily before the next light support.  This chart is one day delayed.
  • Analysts said with foreign funds pulling out more than $1 billion from Indian equities since the start of January, the outlook for the near term remained subdued.

India is the worst of the BRIC's this year, already dropping 13.3% in just some 6 weeks.  Ouch.   For all of 2010, the index was up 17% so much of that has now been erased.  Aside from inflation fears, there is a drama over a bribery scam in relation to telecom spectrum licenses.
  • “Cost pressures remain a key risk to earnings and market momentum. Although top-line growth has kept pace with inflation in nominal terms, pressure on bottom lines from rising raw-material prices, wages and interest costs are intensifying across sectors,” Nomura analysts led by Prabhat Awasthi wrote in a report Tuesday. 
  • A recent monthly release from HSBC showed India’s composite purchasing managers’ index climbed to 59.6 in January from 58.9 in December, but with “input-price inflation rising at the strongest rate in the history of the series.”

Brazil has not been a party either, with a loss of just under 6%.  The country reported that it's monthly inflation gauge jumped the most in 6 years.
  • Brazilian officials say inflation in January was the highest monthly jump in almost six years. That increases worries Brazil's economy is overheating.  The government's IBGE statistics bureau says Tuesday that January inflation was 0.83%. That's the biggest monthly jump since April 2005.
The monthly inflation pace increase in Brazil is pretty dramatic - in December it was +0.63%, in January +0.75% and now it has jumped to +0.83%.  February's figure would be 10% annualized versus the official target of 4.5% inflation.

China raised interest rates overnight as investors return from Lunar New Year as it tries to deal with its own banking sins, plus the ultra easy money moving around the globe.  Shanghai is slightly negative for the year.
  • China's central bank raised interest rates for the second time in just over a month in a bid to dampen high inflation and guide blistering economic growth to a sustainable level. The People's Bank of China announced Tuesday on its website that the benchmark 1-year deposit rate would rise by a quarter percentage point to 3% and the 1-year lending rate would increase by the same amount to 6.06%. The increases are effective Wednesday.
  • Its last rate hike came on Christmas Day, when the bank raised both benchmark rates by a quarter point. 
  • China's leaders have sought to cool surging inflation that could pose a threat to political stability.  Rising prices are especially sensitive in a country where poor families can spend up to half their incomes on food. Higher incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power. 
  • China's battle with inflation marks a sharp contrast with the United States, Europe and Japan, where growth has been muted in the aftermath of the financial crisis.
  • Chinese leaders ordered a shift from easy credit to a "prudent monetary policy" in 2011 in a planning report issued in December.  Last year's rapid growth was driven by a flood of investment in property and other areas. Analysts have urged Chinese authorities to do more to rein in the lavish lending by state-run banks that is driving investment, a large chunk of which is believed to be in speculative property deals.  Authorities are also considering ways to penalize banks for flouting orders to cut back lending.
  • Borrowing for real estate development and other projects is the lifeblood for the sales by local governments of land use rights that provide a huge share of their revenues. Such sales rose 70 percent in 2010, helping push property prices 6.4% higher compared with a year earlier.
  • A huge pool of nonbank financing nearly doubled the amount of money available for investment last year, much of it "off balance sheet" lending whose exact scale is unknown.  (hmmm.... more "off balance sheet" accounting ala Citigroup, Enron and the like - sounds vaguely familiarI am sure it will end well.)

Last but not least, on the plus side Russia aka "the country which institutional investors treat as an oil ETF" is up 8.7% for the year.

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