Tuesday, April 5, 2011

Marc Faber Expose on CNBC.com

I know a lot of readers here are fans of Marc Faber, but even if one is not, there are very few who can entertain like this man while offering his market views.  While tagged as "doom and gloom" I generally find much of what he says very realistic - especially in the near and intermediate term.  In the long run, we're all dead.   If you are a fan, there is a quite lengthy expose on the man's career on CNBC.com which I found to be an interesting read.  Unfortunately there is no video specific to the piece- much like Hugh Hendry, a story on this guy without an accompanying video is just a shame.

Click here for full story.  Some snippets:

  • The thing about predictions is that if you make enough of them, eventually they’ll start to come true. Being a good enough prognosticator to hold the investor community’s attention most of the time is an entirely different matter.  That’s what economist and market forecaster Marc Faber has clearly become. But even he isn’t perfect. His best prediction of all time, he says, was also the worst investment call he’s ever made. “That was the prediction that the tech bubble would burst,” which he made in 1998. “But it came two years too early.”
  • Identifying market lows is much easier than calling market highs, Faber believes. Bubbles always seem to blow up further than expected. “I have always underestimated the madness of the investment community,” he says.
  • In terms of timing, his best bet was to recommend selling stocks a week before the 1987 crash. But even that had more than an element of luck. “It was a coincidence that it happened a week later,” he admits.
  • Still, it’s those kinds of calls that have made Faber a favorite board member, panelist and prognosticator. Subscriptions to his monthly “Gloom, Boom & Doom Report” run as high as $1,500 per year, or $300 for an abbreviated market commentary.
  • “He sometimes gets it wrong,” Hong Kong-based writer Nury Vittachi notes, “but one doesn’t mind someone getting it wrong as long as they have taken a stance. It’s the people that don’t take a risk who don’t get any respect.” 
  • His outspoken nature, and deep knowledge of the history of financial markets, have made him a popular speaker. TV anchor Bernie Lo, who has interviewed him since the early 1990s, says he is one of the most anticipated guests, generating a flood of emails and inquiries ahead of any appearance.
  • Faber is one of the few Asia-based experts who command worldwide attention. He ranks along with investment gurus Mark Mobius and Jim Rogers in terms of the attention his predictions get, Lo says, noting it’s standing-room-only to hear his addresses at investment conferences. “People love him,” Lo says. “He is entertainment and historical perspective, all in one package.”
  • Given a hectic travel schedule, Faber spends only a week out of every month at home, and three weeks on the road.
This is a hilarious outtake from the article:
  • The same kind of logic applied to his run on Wall Street, which began in 1970 at the firm White Weld & Co. with a role summarizing economic research to send to overseas offices, in the pre-Internet days. He got to know future U.S. Federal Reserve Chairman Alan Greenspan, who gave a briefing to the firm every two weeks.  “At the end I was the only person attending because all he did was summarize the Wall Street Journal of the previous day,” Faber says.

Latest views:
  • Faber predicts now that the financial system will ultimately break down, and even forecasts that the current fad of printing money in the West will lead to World War III. In the meantime, own stocks, real estate and commodities, not bonds and cash, he recommends.
  • Among his favorite current calls: invest in natural gas, now very cheap, and Japanese stocks. Beware the U.S. stock market, particularly small- and mid-cap stocks. Gradually buy gold. Real estate is a bargain, though not in China and Hong Kong. Emerging markets are likely to continue to correct, and the U.S. dollar should gain.

Market is Working Off Overbought Condition via Time not Price

Much as we've seen since August 2010 (excluding the 2 quick and dirty selloff of three weeks each in November 10 and March 11), there is no pulling back in this market.  Big moves up can be consolidated by price (a pullback) or time (sideways action).  The latter has been the case consistently since QE2 was promised and then delivered to this market.  The last 4 days the S&P 500 has been in a very tight range, on piddling volume, consolidating a huge 2 week move. This action bodes well for bulls and poorly for bears - especially since all bad economic news has been ignored.  Rally, consolidate sideways, and rally some more has been the pattern of this market and until that pattern changes, traders will continue to assume it continues and act accordingly. Until we see the behavior change, it is quite useless to fight it.

I've placed the 10 day moving average on the chart below because the move up has been so relentless since August 2010 that (excluding those 2 quick corrections) we don't fall farther than level during the rallies.  In fact during the move from early December to mid February only one day (the day massive Egyptian violence broke out) was this level seriously punctured.

While this move up has again come on pathetic volume, that is nothing new to the new paradigm action - where you once looked for confirmation of moves upward by expanding volume, now we can move up constantly on a trickle of volume.   While the small and mid caps have already moved forward to new highs everyone is simply waiting for the S&P 500 to break through the old February highs in the mid 1340s so we can continue the song and dance.  I would not be surprised to see this happen via a gap up open, sooner rather than later.

As an aside, copper continues to be lost at sea and not confirming the glee in equities. Since so many old rules of the market seem to have been tossed aside, I assume (for now) this one also doesn't matter. 

[Video] CNBC - Hedge Fund Legend Michael Steinhardt Takes Dramatic Jab at Warren Buffet in Between a Series of Macro Views

One of the pioneers of the hedge fund world, Michael Steinhardt, is not that well known by much of the current trading community because if anything most of his era was pre "Wall Street" (Charlie Sheen version) - late 60s through early 90s.  If interested there is a short write up here but the numbers tell the tale.

Steinhardt Partners achieved a performance track record that still stands out on Wall Street: 24% compound average annual returns – more than double the S&P 500 – over a 28-year period

That said it was a different time, with far less competition, and pre HAL9000 - the landscape is so much different know... and so many hedge fund managers are essentially running the same models or techniques.  Far less opportunity to find situations to exploit and profit from.

This morning CNBC had a 16 minute interview with the man, mostly on his macro views (which correspond to mine in many ways).  Strangely, about half way through he went on a rant against Warren Buffet.  The commentary is not so strange because if anyone does PR good it's Buffet - one of the most savvy and hard driving investors of our era, but cloaked in "aww shucks" - but it's the public undressing of the man is what catches one off guard.  Reading between the lines it seems like one of Steinhardt's friends was let go by Buffet during his one wayward attempt at investing in a Wall Street financial firm (excluding the Goldman investment a few years back), and Steinhardt has not forgotten.  Then again he may have been taking a poke at Becky Quick who is the personal PR machine for Buffet on CNBC.  Who knows.  Based on how blunt he is, one wonders if once you get past a certain age, your guard comes down and you are willing to actually speak your mind publicly.

Either way, the rest of the interview focuses on mostly macro views, and his comments on what is happening in America will be very familiar to the FMMF audience. 

16 minute video, email readers will need to come to site to view

[Jun 6, 2009: Michael Steinhardt: "A Lot More Pain"]

ISM Services Slows Much More than Expected at 57.3

Head scratcher today on the economic news front as the ISM Services figure slowed down substantially; a 2.4 point drop month over month.  This was also a large miss versus expectations - actually it came in lower than the prediction of any of the 69 economists surveyed.  While still fully in expansion mode this report is far more important than last week's ISM Manufacturing report since services make up a lion's share of economic output in the U.S.  Some of the underlying data was also quite weak as well.

The equity market currently could care less about data, as we are firmly in a "it only matters when it matters" moment again - and after a 2 minute selloff, we're back in the green on the S&P 500 - but this is one to keep an eye on next month to see if there is a rebound.  One might also find it curious that $105 oil was a reason to selloff a month ago, but now once more... no one cares.

Via Bloomberg:

  • U.S. grew less than forecast in March, a sign the biggest part of the economy is trailing the gains in manufacturing. The Institute for Supply Management’s index of non- manufacturing businesses decreased to 57.3 from 59.7 in February. Economists forecast the gauge would fall to 59.5, according to the median estimate in a Bloomberg News survey. A reading above 50 signals growth for about 90 percent of the economy.
  • Estimates in the Bloomberg survey of 69 economists ranged from 57.7 to 61. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began. It’s averaged 52.9 since the current recovery started in June 2009 through February, trailing the 56 reading on the group’s factory measure during the same period.
  • The measure of new orders decreased to 64.1 from 64.4 in February, while the gauge of business activity fell to 59.7 from 66.9. The group’s employment gauge dropped to 53.7 from 55.6 a month earlier. The index of prices paid declined to 72.1 from 73.3.
  • The ISM services survey covers industries that range from utilities and retailing to health care, finance and transportation.

NASDAQ to Rebalance Nasdaq-100 to Rely Less on Apple (AAPL)

Important news out if you trade one of the most popular ETFs in the market - QQQ (Powershares QQQ).  This ETF is essentially the high beta equivalent of the SPY, but for tech stocks.  Apple's (AAPL) incredible ascent over the past few years has put it in a dominant position in the NASDAQ 100 - this one stock had taken a weighting of 20.5% of the ETF, leaving the rest for the other 99 companies.  NASDAQ is going to move this weighting down by 8.2% (along with 81 other stocks).  Meanwhile 19 will see an increase with the most prominent below:

Google (GOOG) +1.6%
Intel (INTC) +2.4%
Microsoft (MSFT) +4.9%
Oracle (ORCL) +3.4%

While better for diversification reasons, I don't think the trading community will like this because aside from Oracle, the other names have been non performers for quite a while.  I do wonder if this news was leaked as discussions took place the past few weeks, as Apple (AAPL) has been down 5 of the past 6 sessions; sharply so the past two.

Via WSJ:
  • In a move likely to ripple across the stock market, Nasdaq OMX plans to announce Tuesday a rare rebalancing of its Nasdaq-100 index, which will reduce the big weighting of Apple Inc. The company currently makes up more than 20% of the index.
  • The rebalancing was driven in part by the seemingly unstoppable rise in Apple shares, which are up more than fourfold in the past two years. The tech company's big weighting means that a change in fortune for the maker of iPhones, iPods and iPads has a huge impact on one of the most heavily traded indexes in the market. After the rebalancing, which takes effect May 2, Apple will make up 12% of the Nasdaq-100.
  • The Nasdaq-100 consists of the 100 largest nonfinancial stocks that trade on the Nasdaq and is the index tracked by the heavily traded QQQ exchange-traded fund and many other securities. The move matters to investors because more than $330 billion worth of assets track the index via exchange-traded funds, mutual funds, options and futures
  • The move could mean significant selling pressure on Apple shares by money managers tracking the index. Because of the way the index has been calculated, Apple was given more than twice the weight in the index than it should have had based on its number of shares. Under the new plan, it will be reduced to the weight it should have given its size.
  • Apple's market capitalization is roughly $300 billion, twice that of Google. But its weighting in the index was five times that of Google. After the rebalancing, Google's share of the index will be 5.8% compared to Apple's 12.3%.
  • In addition to Apple, 81 other stocks will see their share of the index reduced. The remaining 18 stocks will get a boost in the index. Among the biggest beneficiaries will be Microsoft Corp., whose weighting in the index was reduced in the only other special rebalancing of the index 13 years ago. Microsoft will see its weighting boosted to 8.3% from 3.4%.
  • There are more than 2,900 financial products tracking the Nasdaq-100 in 27 countries, Nasdaq says. That includes the $24.4 billion PowerShares QQQ exchange-traded fund, which over the past year has been the sixth most actively traded stock on U.S. exchanges.

No positions

Monday, April 4, 2011

[Chart] Economix - The Dependence Economy, Only Half of the Average American's Income Comes via Wages

I've often written how dependent the average American has become on transfer payments as nearly 20% of income now comes via this route.   [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High  But this graph via NYT Economix shocked me, because it cross references the growth in transfer payments with the shrinkage in wages in terms of the average American's % of income.  From nearly 70% sixty years ago, we are fast approaching the point where wages only make up half of a typical person's income. Startling, especially when you consider this is not a chart for the bottom 1/3rd, or bottom half of Americans, but everyone.  One can only imagine how much more heavily it would skew for the lower socio-economic classes.

I would assume a large proportion of this growth has to do with the outsized gains in healthcare costs, especially in the past 25-30 years, but it still is an eye opener.

As an aside, I wish I had the inputs for this chart so I could figure out where the other "30%" of income is coming from if 50%ish is from wages and 20%ish from transfer payments.   Whatever the case, and for whatever reasons (some of which are very clear), the average humanoid is becoming increasingly dependent on the government ...   Of course "the government" is nothing more than taxes on other citizens + exponential growth in borrowing.  Smells like a Ponzi... sounds like a Ponzi....

Via NYT Economix
  • Over the weekend I attended a talk by Credit Suisse’s chief economist, Neal Soss, on the structural and cyclical challenges facing the economy. The cheekily titled chart  — showing how much more dependent Americans have become on government money— is taken from his presentation.
  • The red line shows what share of personal income comes from wages — that is, what Americans earn from working. The blue line shows what share comes from  transfer payments, which are made to individuals, usually by the federal government, through social benefit programs like unemployment insurance, disability insurance and Social Security. (Note that the two lines use different scales, shown on the vertical axes, and that the scale for wages does not start at zero.)
  • ............the lousy job market accounts only for the spike at the end of the blue line (and likewise the steep slide at the end of the red line), where the numbers correspond with the Great Recession and its aftermath. The chart shows that the overall trends long predate the financial crisis.
  • These underlying trends are partly because of demographic changes; an aging populace means that an ever-smaller share of Americans are working, and so a larger share are receiving Social Security benefits and Medicare, which is also getting more expensive. 
  • Policy changes, more Americans’ going on disability and growing inequality, which in some cases may be leaving more Americans on the dole, are also likely contributing to the growing Dependence Economy.
  • Whatever the causes, these  trends are not infinitely sustainable. The money for transfer payments has to be transferred from somewhere, after all — and if not from other people’s wages, then from China and other foreign creditors.

[Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]

WSJ: Fed's Low Interest Rates Crack Retirees' Next Eggs

This front page story in the Wall Street Journal could have been ripped from the virtual pages of FMMF over the past few years. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]   Essentially we have had a huge wealth transfer from the savers of America to the bankers and debtors - hence once again prudence is punished in this country.  I never had a way to quantify it but bank analyst Chris Whalen estimates the price tag at $750 billion annually.  That's a massive implicit theft of the saving class.

Bigger picture, the incentive system our central command has built for the worker rats in America is quite amazing... First, don't save... go spend (or the terrorists have won).   If you do save, we will punish you with nearly invisible interest rates.  Hence, use that money to go speculate - get in the stock market, immediately.  Last but not least... if you don't pay your mortgage we have government programs to reward you - of course we cannot help until you've not paid your note for at least 6 months.  If you are sacrificing to make the payment and ask for help, we can't help you - sorry.  Or even better just don't pay and live for a few years rent free... and to go full circle, use the money you saved to either (a) speculate or (b) spend [see points 1 and 2]  Understood?  Did I mention no cost of living adjustment for those on fixed income because there is no inflation? 


  • .....with short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
  • "It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."  Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.
  • A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
  • Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
  • In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.

  • A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
  • As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959.  
  • Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February. 
  • "Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."
  • Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts. 
  • Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out. 
  • By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.
  • .....more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele.  "The fear is palpable at this point in their lives," he says. "Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or 10-year CDs." 

[Apr 20, 2009: How Banks will "Outearn" their Losses]

Consider Taking Some Profits in Sina (SINA)

If you are an active trader, and came into Sina (SINA) sometime during my 'pounding the table' phase on the name, I'd consider taking some off the table to lock in profits (and try to buy back later) as the name is beginning to go parabolic.  I tend to get antsy when stocks start to break away from their 10 day moving average like this, but I am relatively conservative in my trading style. I am not implying the run is over, as we are officially in "lemming mode" now as people pile in with no regard to price or value.

Since the first mention publicly in December, the stock is up over 65%.  In just the past 2.5 weeks, it is up 35%!

Even Sohu.com (SOHU) which is a similar type of company but without Weibo ("Chinese Twitter") inside is seeing a breakout as speculators are trying to find something similar to Sina to play.   When the speculator class begins to look for lower quality merchandise as a parallel plaything, it's usually another warning sign.

No positions

McDonald's (MCD) Set to Hire 50,000 on April 19th

Good news, bad news on this one.  As store traffic picks up and more stores go to 24/7 hours, McDonald's is set to hire 50,000 Americans, or roughly 3-4 per store.  Obviously the quality of these jobs is not the highest, but it should help to bump up the employment figures in April as it appears everyone will be hired on the 19th.  Once more we are seeing some quantity of jobs return, but the quality leaves much to be desired in the American 'service economy'.  [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]  Average pay $8.30 an hour which comes to about $17K a year (and that includes the managers set to be hired at far higher pay)... but Wall Street will surely surge on the 'better than expected' jobs figures about a month from now.

Via CNNMoney:

  • McDonald's said Monday that it is planning a one-day hiring spree of 50,000 new workers on April 19 for its U.S. restaurants.   McDonald's  said that these new "Mcjobs" will include crew and management positions, part-time and full-time.  
  • McDonald's, which has 14,000 restaurants in the United States, said the hires will occur nationwide. "We're excited to offer 50,000 new jobs, all across America, all in one day," said Jan Fields, president of McDonald's U.S.A.
  • .....said the 50,000 new hires will increase the U.S. workforce to 700,000 from its current level of 650,000.
  • She said the average pay for the jobs is $8.30 an hour. That's compared to the federal minimum wage of $7.25 an hour, though in some states the minimum wage is higher. She said that restaurant managers can make $50,000 a year.
No position

    Sandwich Week

    Looking at the docket of economic news it is a quiet week aside from ISM Non Manufacturing on Tuesday.  Over in Europe the ECB is expected to raise rates to combat inflation for the first time in a few years, but that is well telegraphed to markets so not really news.  Meanwhile the ultra easy US money policies have no end in sight, causing pressure on the dollar and lifting every asset priced in dollars ever higher.  You should be noticing the nearly $4 gas near you quite soon.

    Earnings season kicks off in the latter half of next week so I would consider this a sandwich week in between some heavier economic data last week and earnings driven action next.  Hence technicals should dominate... everyone waits for the breakout to new highs in the SP500 to pile on more exposure as appanently marging pressures and $4ish gas are only things to worry about for the little people....


    Walmart (WMT) CEO: "Inflation is Going to be Serious"

    While our friendly government statisticians continue to substitute and hedonically (is that even a word?) adjust away nearly all forms of inflation in their propaganda figures [Dec 16, 2010: Shadowstats.com - Inflation as Measured in the 1980s Would be 8%+, as Measured in 1990: 4%] the head of a the company that churns through 1 of every 10 U.S. retail dollars peeks not the future supply chain and says otherwise.

    As in 2008, it will only matter to the market when it matters.  And not a moment sooner.

    • U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday.   The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.
    • Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said. "We're seeing cost increases starting to come through at a pretty rapid rate."
    • Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.
    • "We're in a position to use scale to hold prices lower longer ... even in an inflationary environment," Simon says. "We will have the lowest prices in the market."
    • Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have "access to any factory in any country around the globe" to mitigate the effect of inflation in the U.S., Long says.  Still, "it's certainly going to have an impact," Long says. "No retailer is going to be able to wish this new cost reality away. They're not going to be able to insulate the consumer 100%."

    [May 13, 2008: News of the Day - Inflation]
    [May 22, 2008: Bill Gross - Inflation Underplayed]
    [Jan 5, 2011: [Video] ABC News - Consumer Reports Showing People are Paying for Less]

    Sunday, April 3, 2011

    [Video] CBS Sunday - 50+ Crowd Finds Job Market Even More Difficult than Younger Peers

    An interesting story this morning on the plight of the 50+ year old crowd in America's job market.

    Despite improving job data, older unemployed workers are having more trouble finding work, as companies favor less-experienced, cheaper candidates. Tracy Smith looks into what it takes to find a job for an unemployed baby boomer.

    8 minute video

    "People over 50 are in a very tough spot these days, because employers are cautious about taking on not only the salaries but the benefits they expect," said Jordan Goodman, an author and personal finance expert. "Many cases, people 50+ can't replace the job they had before, even though they have lots of experience," Goodman said. "Experience is less valuable to employers these days than being cheap."

    Friday, April 1, 2011

    Market No Longer Has a Middle Ground

    Looking back at the market since August 2008 when The Bernank explicitly added "pushing up asset prices" as the Fed's 3rd mandate there has been no middle ground in the market.  We are either in a V shaped non stop rally mode OR a very short term, but swift 6-7% type of correction that only comes about due to an exogenous event - Ireland in Nov 2010, and Japan/Libya a few weeks ago.  If there is no exogenous event, there is no stopping the V shape rally.  There is no longer the typical "rally for 2 months, then consolidate the move" action that used to be the norm. Until the pattern changes, traders will continue to play it... it will work until it no longer works.

    The S&P 500 has smashed through any form of resistance the past few weeks (much of it in the overnight session of course), and the only thing that stands in its way now is yearly highs in the mid 1340s.   Once that double top is cleared, off to the races we go again as technicians will pounce on that pattern. 

    Today is yet another example of how the market has done little during the day, but the entire gain was in the overnight session (with 50 minutes to go in the session).   Therefore, to capture much of the gains you no longer can avoid overnight risk but embrace it or see your returns lag.  In this 12 session rally, 7 days have been led with gap up opens - many of substantial manner.  And many where the market did nothing (or fell) during normal market hours.  I am still scratching my head to see a market bottom on a gap up open (two weeks ago Thursday) -  another atypical event we need to file under "new paradigm market action".


    Speaking of April Fool's, it appears the SEC has pulled one on me.  It's now been over three weeks since they verbally committed sending our review letter 'next week'.  Three 'next weeks' have passed and still we twist in the wind.  I must have been filed in the 'purgatory' basket on someone's desk.

    NYT: Many Low Wage Jobs Seen as Failing to Meet Basic Needs

    With government defined poverty surging the past few years, the pressure on wages has created a new class of "working poor" - employed, but living in a high cost of living country. [Jan 6, 2011: Census Estimates 1 in 6 Americans Live in Poverty, 65+ Crowd Expanding Rapidly]  [Sep 19, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated]  For example, adjusted for (government reported) inflation, many American men now make the same wages they made in the 1970s.  

    During this recession and 'recovery', a huge surge in transfer payments has helped to allay part of this issue [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare[May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High] , but if things don't dramatically improve economically and the U.S. goes back to a typical budget deficit of say 3% of GDP rather than 10% GDP anytime in the future (which is obviously not going to happen), the reality under the surface will be exposed.   Looking at food stamps alone, when I started this website 1 in 11 Americans were on the program... now it is 1 in 7. 

    Recall, if you make $23,000 for a family of 4 - you are not in poverty per government measure.  If you are single and make $14,000 you are not in poverty.  Most people living in the real world who actually have to pay rent, and eat, or own a vehicle, and pay insurance probably would differ with the government cut offs.

    The New York Times has an in depth look at the plight of these workers as a new study was released today showing what is a more realistic level of income to be just above poor and on the lower end of middle class.  Clearly the bifurcated economy continues to create some winners, but it appears a seemingly larger lot of losers.
    • Hard as it can be to land a job these days, getting one may not be nearly enough for basic economic security.  Many of the jobs being added in retail, hospitality and home health care, to name a few categories, are unlikely to pay enough for workers to cover the cost of fundamentals like housing, utilities, food, health care, transportation and, in the case of working parents, child care.
    • A separate report being released Friday tries to go beyond traditional measurements like the poverty line and minimum wage to show what people need to earn to achieve a basic standard of living. The study, commissioned by Wider Opportunities for Women, a nonprofit group, builds on an analysis the group and some state and local partners have been conducting since 1995 on how much income it takes to meet basic needs without relying on public subsidies. The new study aims to set thresholds for economic stability rather than mere survival, and takes into account saving for retirement and emergencies.
    • According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, (that seems a lot more reasonable than the government's sub $11K threshold)  and nearly twice the federal minimum wage of $7.25 an hour.
    • A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.  That compares with the national poverty level of $22,050 for a family of four.  (while one can quibble with the $68K for 2 children, let's take that down by 25% and make it $51K - that is still more than double what the government says is poverty - I mean seriously, $22K for a family of 4?)
    • Wider Opportunities and its consulting partners saw a need for an index that would indicate how much families need to earn if, for example, they want to save for their children’s college education or for a down payment on a home.  “It’s an index that asks how can a family have a little grasp at the middle class,” said Michael Sherraden, director of the Center for Social Development at Washington University in St. Louis
    • To develop its income assessments, the report’s authors examined government and other publicly available data to determine basic costs of living. For housing, which along with utilities is usually a family’s largest expense, the authors came up with “a decent standard of shelter which is accessible to those with limited income” by averaging data from the Department of Housing and Urban Development that identified a monthly cost equivalent for rent at the fortieth percentile among all rents paid in each metropolitan area across the country.
    • They chose a “low cost” food plan from the nutritional guidelines of the Department of Agriculture, and calculated commuting costs “assuming the ownership of a small sedan.” For health care, they calculated expenses for workers both with and without employer-based benefits. Ms. Kuriansky said that the income projections do not take into account frills like gifts or meals out. “It’s a very bare-bones budget,” she said.
    • Obviously, the income needs change drastically depending on where a family lives. Ms. Kuriansky said the group was working on developing data for states and metropolitan areas. 
    • The report compares its standards against national median incomes derived from the census, and finds that both single parents and workers who have only a high school diploma or only some college earn median wages that fall well below the amount needed to ensure economic security.  
    • Workers who only finished high school have fared badly in the recession and the nascent recovery. According to an analysis of Labor Department data by Cliff Waldman, the economist at the Manufacturers Alliance, a trade group, the gap in unemployment rates more than doubled between those with just a high school diploma and those with at least a four-year college degree from the start of 2008 through February.
    • For some of the least educated, Mr. Waldman fears that even low wages are out of reach. “Given the needs of a more cognitive and more versatile labor force,” he said, “I’m afraid that those that don’t have the education are going to be part of a structural unemployment story.”
    • Even for those who do get jobs, it may be hard to live without public services, say nonprofit groups that assist low-income workers. “Politicians are so worried about fraud and abuse,” said Carol Goertzel, president of PathWays PA, a nonprofit that serves families in the Philadelphia region. “But they are not seeing the picture of families who are working but simply not making enough money to support their families, and need public support.”
    • In New York, Áine Duggan, vice president for research, policy and education at the Food Bank for New York City, estimates that about a third of the group’s clients are working but not earning enough to cover basic needs, much less saving for retirement or an emergency. She said that among households with children and annual incomes of less than $25,000, 83 percent of them would not be able to afford food within three months of losing the family income. That is up from 68 percent in 2008 at the height of the recession.

    [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]
    [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy] 
    [Oct 22, 2010: Reuters - The Haves, the Have Nots, and the Dreamless Dead]
    [Sep 3, 2010: FT.com - The Crisis in Middle America]
    [July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]

    Consumers Continue Trend of Paying Credit Cards Before Mortgages

    This was a topic we explored quite a bit in 2008 and 2009 but I have not touched on it in a long time.  (it's been so long I cannot find the old posts in the archives)  In a complete change of ethos from how defaulting used to be done in the 'good ole days', the practice of paying credit cards ahead of mortgages not only has continued, but has increased from 2008-2009 levels.  This should come to no surprise as we brought an army of "home owners" into the country who put nothing down into "their" house with these new fangled 'innovative' mortgages, hence had no skin to lose by not paying the mortgage.  Effectively we were giving away homes under terms even cheaper (out of pocket) that renting... which requires a security deposit at least.  (keep in mind many of our 'innovative' mortgages in the bubble years rolled closing costs into the mortgage balance)

    Of course that was the situation in the earlier days of the crisis - now as we have moved in 2010 and 2011, we have armies of strategic defaultors plus those who simply cannot pay due to loss of jobs or taking new jobs with substantially lower pay levels.  Therefore, paying for the item that provides immediate cash flow (credit card) versus the sunk cost, illiquid asset has become a no brainer when choosing between the two.   This is a world of difference versus the pre "innovative mortgage" era, when the fact people actually had to put a substantial amount of money down on their home, would create a focus on saving it above all else during financial hardship.  Just another unintended consequence of a system gone dysfunctional.

    The last point is one never cited in these stories - when you don't pay your mortgage, it's easy to pay down/off the credit card balance each month with the extra money ....

    Via AP:
    • It's not just mortgages that are upside down. People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.  Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.
    • Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. 
    • That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.
    • In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.
    • "As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.
    • Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country -- in the third quarter of 2007.
    • The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

    If the latest data (Q4 2010) is any indication, this trend is not changing anytime soon - indeed I could see this continuing for many more years into the future, as housing enters the 2nd leg of a double dip. 
    • Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

    Bespoke: Chart of ETF Performance in Q1 2011; Go Italia

    The always excellent Bespoke Investment Group, put out an excellent chart showing the performance in Q1 of many of the major ETFs.  For the S&P 500 it was the best first quarter since 1998, edging out 2010's Q1 with a gain of nearly 5 and a half percent.   Mid caps (my sweet spot) and small caps continue to outperform.  No surprise was the massive outperformance in silver and energy.... but Italy? Who knew?

    On the downside, we noted what a rough start to the year India had - it has since recovered some in the past month, but thus far 2011 has been a struggle.  Nat gas continues in its multi year bear market.

    [click to enlarge]

    ISM Manufacturing Continues to Show Strength with Reading of 61.2, Prices Paid Surges to 85

    Continuining the global pattern, U.S. ISM Manufacturing showed a very strong 61.2 (vs 61.4 in February), while price pressures continue without relent.  The latter reading jumped from 82 to 85, which is now at levels last seen in summer 2008, as the commodity bubble peaked (ala $147 oil)
    • The ISM’s production index increased to 69, the highest since January 2004, from 66.3. The new orders measure fell to 63.3 from 68, and the gauge of export orders decreased to 56 from 62.5. 
    • The employment gauge slipped to 63 from 64.5 in the prior month. 
    • The index of prices paid jumped to 85, the highest since July 2008, from 82.

    Chinese Manufacturing Data Rebounds, European Measures Slow - Input Cost Pressures Continue Upward Globally

    The first day of the month is when global manufacturing reports are released.  U.S. ISM Manufacturing comes out at 10 AM and this has definitely been the strongest part of the U.S. economy (ex federal government spending!) the past few years as international markets, especially of the Asian kind, have been kind to U.S. exporters.  Positive reports across the globe have generally led to outsized gains the first day of the month as well.

    Thus far, we have a mixed bag - China has rebounded in its Purchasing Managers indexes, while most of the European manufacturing gauges fell back; albeit from quite high levels.  And to no one's surprise (except perhaps those at the Fed), prices continue to jump across the globe.  It is now widely expected the ECB will be raising rates next week as their sole mandate is inflation fighting.

    First to China where we have 2 PMI reports - government and private.  This is about the only report out of China I put much weight in, simply because there is a private measure competing with what the government churns out. Please keep in mind we had Lunar New Year in February so some of the slowdown in the previous month was overstated.

    Via AP:
    • China's manufacturing sector regained momentum in March, easing fears of a sharp slowdown, on strengthening demand for autos and machinery, according to surveys released Friday. 
    • The state-affiliated China Federation of Logistics and Purchasing reported its purchasing managers index, or PMI, rose to 53.4 last month, from 52.2 in February and 52.9 in January.
    • The rebound in demand was partly due to the dampening effect of a weeklong holiday for the Lunar New Year in February, it said. The rise ended a three-month decline, though the reading has remained above 50, the benchmark for expansion, for over two years.
    • Bank of America-Merrill Lynch economist Lu Ting said the data was distorted by migrant workers returning to their jobs after a weeklong Lunar New Year holiday and high inventory levels may point to a looming slowdown in manufacturing.
    • A second, competing survey, the HSBC China Manufacturing Purchasing Managers Index, edged up to 51.8 in March from a seven-month low of 51.7 in February.
    • Strong new orders for vehicles, machinery, equipment, furniture and garments suggest that demand is picking up in those key sectors, economist Jun Ma of Deutsche Bank Hong Kong said.
    • Input prices rose at a slower pace, the survey suggested.
    • The HSBC survey covers 400 companies. The federation's report covers 820 companies across a range of industries.

    Over in Europe (obviously the main focus is on powerhouse Germany), via Bloomberg
    • Factory growth from Germany to Switzerland to the U.K. slowed in March as the region’s recovery struggled to keep momentum, leaving the global economy reliant on emerging markets to drive expansion.
    • A gauge of manufacturing in the 17-member euro region fell to 57.5 from 59 in February
    • Europe’s economy faces headwinds from surging energy costs burdening businesses and households, and a spate of government austerity measures. Faster inflation may prompt the ECB to raise interest rates next week, pushing the euro higher and hampering the region’s exporters by making their goods more expensive.
    • Today’s data adds to signs “that in the developed world growth in the manufacturing and trade-led cycle is petering out,” said David Owen, chief European economist at Jefferies International. “These countries will have to strengthen domestic demand to offset the falloff in exports. The euro exchange rate certainly doesn’t help exporters, even within the euro area, as Chinese goods are much cheaper.”
    • The index in Germany, Europe’s largest economy and the region’s manufacturing powerhouse, dropped to 60.9 from 62.7 while the gauge of U.K. manufacturing growth fell to 57.1 in March from 60.9.  
    • In the U.K. prices charged index hit a survey record.
    • Sustained growth in orders allowed European manufacturers to pass on the costs of soaring raw materials to customers, with prices rising at their fastest rate since at least late 2002The output price index rose to its highest level since Markit began tracking it in November 2002.

    March Unemployment Rate Dips to 8.8% as Labor Force Participation Lacks Any Meaningful Rebound, 216,000 Jobs Created

    The first pass a March job gains shows a 216,000 gain: +230,000 in private sector offset by a -14,000 in the public sector.  This is a bit above the ADP report earlier in the week and a bit above economists expectations.

    The widely followed unemployment rate ticked down 0.1% to 8.8%.  However, for those who follow this closely we've seen a strange issue the past few years where the labor force participation rate has dramatically dropped so a few million people simply have fallen off the radar.
    • The civilian labor force participation rate held at 64.2%
    If the U.S. had a more normal level of labor force participation the unemployment rate would be about 2% higher.  That said, almost everyone only focuses on the headline figure of 8.8% so it's all relative in terms of whether you want reality or not.*  One continues to wonder where these people disappeared to - some proportion have gone back to school, some to welfare, etc but the vast majority just simply seem to have dropped off the map.

    *Further, with the adjustment in the 1990s and 2000s as to how the unemployed are measured, the actual figure would be significantly higher if measured as we did it in the 1980s.  Remember, in America if you are not actively seeking work for 4 weeks you no longer count as unemployed.

    U-6 which is the broader unemployment rate including marginally attached workers, fell 0.2% to 15.7%.

    Average hourly earnings held flat, while the average work week for all workers also stayed flat at 34.3 hours.


    All in all an "ok" report; this far into a recovery we still have struggled to find the 300-400K type of job growth month(s) that should have hit a few quarters ago.  Please keep in mind, aside from quantity of jobs (which has been poor in the recovery) is the quality of jobs.  And that has been especially discouraging as many high paying jobs lost in the Great Recession have been replaced with far lower paying jobs - a very lightly discussed fact in the media.  [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]
    • Bernhardt's analysis of the first seven months of 2010 found that 76% of jobs created were in low- to mid-wage industries -- those earning between $8.92 to $15 an hour, well below the national average hourly wage of $22.60.

    Full report here.

    Wednesday, March 30, 2011

    Copper Continues to Not Confirm the Equity Market's Giddiness

    Speaking of "Doctor Copper" we continue to see a divergence between the equity markets domestically, and the state of affairs in the copper market.  The chart below has a 1 day delay, but copper is down nearly 2% again today, under $4.27, breaking back below the 50 day moving average.  Something's amiss...

    No position

    WSJ: State and Local Revenue Bounces Back

    Actual good news here - at least partially.  Tax revenue has almost bounced back to pre-recession highs as of year end 2010.   This is a much needed event, considering so much money has come into the states the past few years via federal stimulus.  Of course spending has increased during that time, since government is always expanding (plus all those public worker healthcare and pensions costs) so revenue levels of 2011 need to eventually get much higher than those of 2007/2008 to keep pace.

    What would be interesting to know, but is immeasurable do to all the moving parts, is how much of this rebound in revenue is due to higher taxes & fees versus a general increase in economic activity.  Further the states are doing better than the local municipalities, since the latter relies far more heavily on property taxes.

    Via WSJ:

    • State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.  But the improvement masks deeper problems for state and local governments that are likely to linger for years.
    • To weather the recession, state governments relied on now-depleted federal stimulus funds, which allowed them to put off painful cuts that would have otherwise been necessary to balance budgets. Meanwhile, demand for government services and the tab for public-worker pensions and health care have continued to grow.
    • Total tax receipts for state and local governments hit $1.29 trillion in 2010, just 2.3% shy of the $1.32 trillion taken in during 2008, not adjusted for inflation, according to Census Bureau data.  Peak tax revenue was reached during the first year of the recent recession, which began in December 2007, due to the usual lag between the time a downturn hits and when it is reflected in tax receipts.
    • The latest tallies show a diverging trend in the fiscal health of state and local governments. While state tax revenue increased every quarter of 2010, including a 6.7% jump in the fourth period compared with a year earlier, local tax revenue fell in the first and fourth quarters—in part because of slumping real-estate tax receipts. 
    • While states are primarily funded by sales and income taxes—which tend to grow along with an expanding economy—the nation's 89,000 cities, school districts and other local governments depend heavily on property taxes. 

    • Local "governments are still very much in the midst of the downturn and are likely to have a couple of tough years ahead," says Chris Hoene, director of research for the National League of Cities, adding that local governments will struggle until there is a rebound in housing markets.
    • State income-tax revenue jumped 10.9% in the fourth quarter of 2010 compared with a year ago, as Americans' healthier incomes and stock-market gains translated to higher income-tax payments. Sales taxes grew 1.9% over the period, according to the Census.
    • While state finances are improving, their current fiscal woes largely reflect lingering problems that have yet to be resolved. For decades, the cost of state and local government has risen faster than overall inflation, in part because of pension and health-care promises governments made to their employees.
    • Meanwhile, in the 2012 fiscal year that starts in July, states will no longer have the roughly $150 billion in stimulus funds that over the past two years have been used to fill gaps in states' budgets. That means governors and legislators are just now considering cuts that, but for the stimulus, would have been made years ago.
    • The growing stress on local governments is likely to put more pressure on state budgets, even as states' own revenues improve. State and local finances are intertwined, with states paying for many local services. Also, cities' fiscal woes can raise doubts among bond investors about a state's fiscal health.

    Easy Enough, S&P 1330 is Here

    Well that was easy enough.  We've now rallied 6.5% straight up in just under 2 weeks.  S&P 1330 which was the old incremental high is now being touched, and once we climb over that level the technical problem we had a few weeks ago in terms of lack of a new higher high will be over and done with.

    A few more gap ups in the overnight session and we'll be at highs of the years.... looking at the chart we've gapped up 6 of the past 10 sessions.  Amazing.

    Apparently short of nuclear implosions and/or fears of major European debt meltdown (Ireland, November 2010) the market no longer has the ability to go down.  And even those events, only caused 3 weeks of issues.  Those are the only two things that could stagger this market even momentarily since Ben Bernanke added 'pushing the stock market up ' as the Fed's 3rd initiative at Jackson Hole, Wyoming late last summer.  Since the Fed's two other initiatives (price stability and full employment) are not working, I guess he wanted something much easier to handle.  1 for 3 ain't bad.

    V shape is the new normal.... what you knew before 2009 is no longer of use.

    WSJ: In India, Doubts Gather Over Rising Giant's Course

    While I read this piece in the Wall Street Journal, I was struck by the parallels you see in the U.S. - of course, it goes without saying being poor here is a very different thing than being poor in India or any emerging or developing country.   But the distinction between who is benefiting and who is not in the economy, [Oct 22, 2010: Reuters Special Report - The Haves, the Have Nots, and the Dreamless Dead] along with political dysfunction, corruption, empty promises, and the like sounds so very familiar.   Little known fact - after the U.S. the country with the most billionaires at Davos was India. 

    I would assume at some point in the future, to make sure the hundreds of millions at the bottom don't start an uprising, the Indian government will follow the American policy of circus and bread to keep the lower tranches of society occupied and fed. A very good read for those who are investing in India to understand the backdrop.

    • India's economy is going great guns. Among the world's major nations, its growth is second only to China's. Yet in recent months, the mood in the planet's most-populous democracy has soured badly—to the point where even some of India's richest people have begun to complain that things are seriously amiss.
    • No one is disputing that the boom has created huge wealth for the business elite and much better lives for hundreds of millions of people. But the benefits of growth still haven't spread widely among India's 1.2 billion residents. And a string of corruption scandals has exposed an embarrassing lack of effective governance.  (after the first few sentences, I thought the story was about the U.S.
    • This wasn't supposed to be the picture 20 years after India abandoned its Soviet-style, centrally planned economic model, embraced capitalism and jump-started economic growth. Historic reforms begun in 1991 held out the promise of transforming the country from an agrarian backwater into an industrial powerhouse, lifting almost everyone's standard of living in the process. 
    • India enjoyed years of heady growth, despite problems its East Asian peers didn't share, such as its deep caste divisions. Now, though, a host of problems has stalled the transformation.  The public-education system is a shambles. No significant publicly owned businesses have been privatized in years. The promised modernization of the financial system has happened only in fits and starts. Land reform needed to stimulate industrialization has been a political nonstarter. And malnutrition remains widespread. 
    • Ravi Venkatesan, until this week chairman of Microsoft Corp.'s India arm, says his nation is at a crossroads. "We could end up with a rather unstable society, as aspirations are increasing and those left behind are no longer content to live out their lives. You already see anger and expressions of it," he says. "I strongly have a sense we're at a tipping point: There is incredible opportunity but also dark forces. What we do as an elite and as a country in the next couple of years will be very decisive."
    • India's economic liberalization was kicked off by a financial crisis in 1991, when the nation was on the verge of defaulting on its debt. Manmohan Singh, the nation's current prime minister, was finance minister at the time. The initiatives he introduced staved off financial collapse.  Economic growth, which had fallen to about 1% in 1991, quickly picked up. 
    • In many important respects, the changes turned this nation into a success story. Life expectancy rose to 64 years in 2008, from 58 in 1991. Literacy has risen. Hundreds of millions have seen their incomes improve. Per capita gross domestic product increased to $3,270 in 2009, from $925 in 1991, according to the World Bank. 
    • Other important gauges of national well-being paint a more troubling picture. "What has globalization and industrialization done for India?" asks Mr. Venkatesan, Microsoft's former India chairman. "About 400 million people have seen benefits, and 800 million haven't."
    • Calorie consumption by the bottom 50% of the population has been declining since 1987, according to the 2009-10 economic survey conducted by India's Ministry of Finance, even as those at the top of society struggle with rising obesity.  (seems like an ideal time for a food stamp program to keep the poor from getting unruly 
    • Infrastructure in cities and the countryside remains woefully inadequate: In recent years, China has added, on average, more than 10 times as much power as India to its electricity grid each year.
    • Data from McKinsey & Co. show that the number of households in the highest-earning income bracket, making more than $34,000 a year, has risen to 2.5 million, from 1 million in 2005. But the ranks of those at the bottom, making less than $3,000 a year, also have grown, to 111 million, from 101 million in 2005.  
    • But among the most visible signs of India's modernization is an entrenched consumerist creed. Sales of luxury goods are booming. Mansions are replacing one-story homes in middle-class neighborhoods. Upscale malls are sprouting up around the country.  
    • Many of the urban poor, in contrast, are slipping backward because of rising prices—a persistent and destructive accompaniment to India's high growth rate.  Food inflation today is running at about 10%, and general inflation in excess of 8%.  
    • Politics are partly to blame for stalling the liberalization drive. The Congress party, which has ruled the nation for most of the 64 years since India gained independence from Great Britain, depends on smaller regional parties to maintain its governing coalition in parliament. That makes policy formulation risk-averse, since small allies hold the power to break ranks and sink the coalition.  
    • Frustration over the economic miracle's limited trickle-down is fueling political movements around the country. Most base their appeal, in part, on the idea that the poor are being ill-served in the new India.
    • But corruption is considered more prevalent now than ever before, because economic expansion has created more opportunities for graft—for example, in the granting and funding of infrastructure projects.
    • The amount of business activity that evades direct taxes has soared, says Arun Kumar, chairman of the Center for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi and a specialist on the "black economy."   A landmark study in the mid-1950s, he says, estimated that the black economy accounted for 4% to 5% of India's gross domestic product. Rather than declining, he says, the black economy has become systemic. He estimates it reached 40% of GDP by 1996, and 50% by 2006.  (that is simply astounding)  "The reason it has grown is that illegality in society has become more and more tolerable," he says.  
    • India's modernization was expected to prompt a mass movement of workers from farms to factory floors—a critical component in the transformation of China, South Korea and other Asian nations. But manufacturing as a share of India's economy stood at 16% in 2009, the same as in 1991, according to the World Bank.  
    • Services have increased dramatically as a proportion of gross domestic product, rising to 55% in 2009, from 45% in 1991, according to the World Bank, becoming the chief engine of India's economic strength. But many of the fastest-growing areas, such as finance and technology, employ relatively few and rely heavily on skilled employees. The entire software and technology-services sector, including call centers and outsourcing, directly employs just 2.5 million workers, a tiny fraction of the overall work force.
    • Agriculture's share of the economy, meanwhile, has declined to about 17% in 2009, from 30% in 1991. But the number of people working in agriculture hasn't dropped commensurately, according to Arvind Panagariya, a professor of Indian political economy at Columbia University in New York. "The dependence on agriculture remains incredibly high when you compare India's high-growth phase with others," he says. "The potential of the country is to grow at 11% to 12%, and it's growing only at 8% to 9%."

    "Doctor Copper" Turning into "Banker Copper" in China?

    A quite fascinating blurb in FT.com's Alphaville popped up yesterday, calling into question the reasoning behind the huge copper stores in China.  If one is to believe this report, it appears copper - generally used as an indicator of economic activity due to it's use in so many applications (hence the term "Doctor Copper") - is now being used as a form of fiat currency, by property developers trying to work around the Chinese government's tightening actions.

    With China being the dominant force globally in the purchase of the red metal, [May 13, 2009: Commodities - It's China's World: We Just Live in It]  [Mar 23, 2009: FT.com - Chinese Stockpiling Spurs Copper Price Rally] this report indicates not only is so much copper in storage, they can't even fit it all inside the warehouses in Shanghai.... but anywhere from 40-80% of the copper sitting around (at those locations) is not even being for construction but for rather as some sort of fiat currency, almost like gold.   So is Doctor Copper now Banker Copper in China?

    Of course it goes without saying what sort of havoc could incur if the value of your form of 'financing' - which is now a commodity - ever fell substantially

    [please note, anything in italics below is from the original research note]

    Via FTAlphaville:

    • We’re calling it the “The Great Chinese Commodity-as-Collateral Financing” fiddle.  That is, the purchase of commodities like copper on deferred payment terms for the sole purpose of raising cheap financing for reinvestment in higher yielding assets.
    • The latest comes in the shape of a Standard Bank note by a team freshly back from a Chinese field trip.  Not only do they provide excellent new estimates of just how pervasive the practice in China really is, they’re sounding the loudest alert to the copper market yet.
    • Here are some particularly useful anecdotes we found from the note:
    • We visited China last week, with the aim of gauging Chinese sentiment, the impact of monetary tightening measures on consumers and also investigating the scale and implications of copper’s use as a financing tool. We were already fairly bearish towards copper’s near term prospects before the trip. That negative feeling has intensified, with significant downside risks to copper prices emerging.
    • Anecdotally, something in the region of 600,000 mt of refined copper is currently sat in bonded warehouses in Shanghai, with perhaps another 100,000 mt in the southern ports. This is equivalent to around 11% of China’s total refined consumption and around 40% of China’s net refined copper demand.
    • Bonded stocks have climbed by around 300,000 mt since the beginning of this year, pointing to the absence of end use demand at the moment. The amount of metal is so high, that spare capacity at some bonded warehouses is running out, with some metal being stored outside.
    • The scale of the refined inventory casts into doubt the size of the expected refined deficit in the copper market this year, and raises the prospect of a balanced market, or even a small surplus.
    • More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.
    • Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.
    • Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance, or the imposition of interest rates of anything from 10-20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.

    The big news of course is that Standard Bank attributes the lion’s share of the commodity “fiddle” to property developers.  That means, in their opinion, not only is the arrangement exposed to falling copper prices, it’s equally vulnerable to falling Chinese real-estate prices. Potentially, more so.

    • A scenario of falling Chinese property prices, perhaps combined with a government clampdown on alternative sources of funding, would therefore be a devastating outcome for the copper market, simultaneously robbing the metal of an end-user and leading to a mini credit crunch. The obvious home for the bonded material would then be the LME warehouses in the Asian region, with very negative implications for sentiment towards copper prices.

    [Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?]

    Qihoo 360 Technology (QIHU) IPO Set to be Star Event of the Day

    For reasons unclear, we had yet another gap up in what has shaped up as a V shaped, low volume bounce during the past 2 weeks.  While an line ADP report was out this morning, the market was at premarket highs well in advance of that figure. S&P 1330 is a level I have my eyes on as it was an old high in the market, and technicians want to see a new higher high created to resume the uptrend.  That said, since we are now gapping up (many days on no news in particular) 0.4, 0.5% three or four times a week, making new highs should be easy.

    We have a new Chinese IPO that is getting a ton of buzz Qihoo 360 Technology (QIHU); should commence trading imminently.  It priced last night @ $14.50 and early indications show roughly a 100% gain with a price in the upper $20s at the open.   I realize valuations don't mean anything when you combine an IPO + China + Internet, but the company was prices at a nose bleed 25x sales at IPO, and speculators look to open it at 50x sales.  To repeat, a tech stock at 6-7x sales would be considered a premium valuation in normal times...

    Via Marketwatch:
    • A China-based Internet company has commenced an initial public offering of shares that some analysts expect could be one of the biggest IPOs out of that country this year.  Qihoo 360 Technology,  which offers free Internet browsing and security products to a growing base of users in China, priced its IPO on Tuesday night at $14.50 per depositary share, above the expected range. 
    • Beijing-based Qihoo had planned to sell 12.1 million shares at a price range of $10.50 to $12.50 a share, according to a filing with the Securities and Exchange Commission. Underwriters include UBS Investment Bank and Citi. 
    • Sweet called Qihoo “one of the best Chinese IPOs” to come out since the fourth quarter of last year, describing the company as “a dominant force in the Chinese Internet space” in a note to clients. He upgraded his rating on the deal from 3 to 4, citing strong investor interest.
    • Stephanie Chang, analyst with Renaissance Capital in Greenwich, Connecticut, said the Qihoo IPO is “definitely attracting interest because it plays into the trends that are popular now” — that is, the Internet and China, the world’s biggest Internet market
    • With more than 300 million monthly users in China, Qihoo runs the second-most popular browser in China, after Microsoft Corp’s Internet Explorer, according to the company’s SEC filing.
    • For the year ended Dec. 31, 2010, the company reported net income attributable to shareholders of $5.5 million, on revenue of $57.7 million, according to the company’s filing. That compares with a net income of $2.1 million, on revenue of $32.3 million for the year-earlier period. 
    • The company’s biggest customer is Google (GOOG) which pays Qihoo 360 in exchange for referral of Internet search traffic, the prospectus said. Google accounted for 21% of Qihoo’s revenue in 2010, according to the filing. 
     No position

    Tuesday, March 29, 2011

    [Video] An In Depth Look at China's Empty Cities

    Australia's SBS Dateline has an in depth on the ground look at the construction boom in China, which is created a subset of empty cities.  We've touched on this in the past but this is the most comprehensive piece I've seen yet.  It looks like Jim Chanos, Hugh Hendry and the like are definitely onto something... seems like the country has more than one Ordos.  [Nov 13, 2009: Ordos - China's Empty City]

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

    Hat tip to BusinessInsider for this find.

    Earlier posts on the topic:

    [Dec 16, 2009: CNBC Video - Hedge Fund Maven Jim Chanos on Autos, Banking, and China] 
    [Jan 8, 2010: Hedge Fund Manager Jim Chanos Continues to Sound the Warning on China]
    [Mar 4, 2010: Hugh Hendry Continues to Doubt China]
    [Jul 21, 2010: A Reader's Observations of China] 
    [Dec 10, 2010: Jim Chanos Remains Bearish on China with some Compelling Statistics]
    [Jan 14, 2011: [Video] Behold China's Nearly Empty Mega Mall]

    Nearly 1/3rd of Home "Owners" in the U.S. in Default Have Not Made a Payment in 2 Years - a Boon to the Economy

    Nearly a year and a half ago I was one of the first to identify a huge stealth stimulus the government, Fed, and banking system was creating - the strategic default stimulus.  [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  By the spring of 2010, Cramer and quite a few in the financial blogosphere began picking up on it.  Now as we enter spring 2011, we are seeing truly how pervasive this stimulus has become per a whopping statistic on Mish Shedlock's blog.  Regular readers will know that 1 in 10 American households that has a mortgage is now in default.  But of that 10% of our home "ownership" class (I use the word loosely) living 'rent free', nearly 1 in 3 has not made a mortgage payment in 2 years.  That's astounding.

    [click to enlarge]

    Another 17% has not made a payment in 18-23 months.  So roughly HALF of defaulters have not made a payment in a year and a half.  Mull that for a moment....

    However, as I wrote throughout 2010 that is a BOON to the economy.  Granted, it's a hit to the banks and/or those who hold the securitized mortgages but the Fed is taking care of that problem to compensate them [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] [Apr 20, 2009: How Banks will "Outearn" their Losses]  Just another method of ponzi scheme in the new paradigm economy.

    You can do the math pretty easy on the benefits to a typical household - let's say a $1300 mortgage x 24 months = $31,200 into the pockets of the home "owner" to spend on vacations, eating out, car payments, iPads, et al - that's a huge stealth stimulus.  Just imagine what you could do with an extra $15-$16K a year.  Of course many have mortgages in excess of $1300 a month, hence have even greater benefit.  And we're not even discussing all the people who have not made a payment for 12 months, 15 months, etc.

    Perversely, one of the major things that will slow down the economy in the next few years is when these households are finally forced out of the "rent free living arrangement", and have to make a house payment again. Frankly, it's a wonder consumer spending is not doing better with so many Americans living in a household where the view is those who make mortgage payments are "suckers".

    [Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]
    [Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]
    [Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
    [May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
    [Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]

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