Tuesday, April 12, 2011

March Federal Deficit $188 Billion, Bringing Six Month Total to $829 Billion

The U.S. is well on its way to another record year of deficits besting those of 2009 and 2010; the current pace shows an excess of $1.6 Trillion in deficit spending for fiscal 2011.  With U.S. GDP of roughly $14.6 Trillion (via IMF) this is an 10.9% annual deficit - astounding. 

To put these figures in perspective prior to the past few years the record was $400 Billion.  Hence the variance between "then" (which was a record) and "now" is $1.2 Trillion - similar to the figures the past 2 years.  For those applauding the "miracle" that is the U.S. economy (moaning and groaning along at 2.5-3.25% growth), I ask you to take out $1.2 Trillion (i.e. the growth versus previous records) off a $14.6T base and think about what the organic economy would look like without this superlative spending spree.

Or to simplify it more, $1.6 Trillion is more than the entire economic output of Canada; the world's 9th largest economy.

(as an aside the more I read about the $38B in 'cuts' our fearless leaders just agreed to, much of it sounds like accounting gimmickry and/or reductions in programs that were already frozen and could not be tapped - either way in light of the deficit you can see $38B is a bit of a joke - it's about 1 week of the annual deficit)

  • The U.S. government recorded a budget shortfall of $188 billion in March, the Treasury Department said Tuesday in a report likely to add new fuel to the raging political debate about government debt and spending. 
  • ....brings the deficit to $829 billion for the first six months of fiscal 2011.  This compares with $717 billion the prior fiscal year to date.
  • The government spent $339 billion in March, according to the Treasury report, and took in nearly $151 billion. 
  • For the first six months of fiscal 2011, the government has spent about $1.85 trillion. Receipts for the first half of the year are $1.02 trillion. 
  • The IMF projected that the U.S. will have a fiscal balance as a percentage of GDP of -10.8% in 2011, the biggest percentage among advanced countries.

"We're #1!"

    [Video] CNBC - Muddy Waters: Beware the Chinese Reverse Merger

    Quite an interesting interview Carson Block of Muddy Waters Research on CNBC today re: some of the scams happening in Chinese companies which have entered the U.S. market via reverse mergers with existing shells.  Apparently there are some 300 such companies out there - quite a few have blown up lately, which has cast suspicion on many of the Chinese small caps.  Frankly the fact some of these have U.S. auditors who apparently only resign after being outed by a firm like Muddy Waters says a lot about the state of our auditors.

    7 minute interview

    NY Mag: The Revolving Door Between Washington and Wall Street

    As regular readers know, there is a fast track revolving door between Washington D.C. and Wall Street.  All part and parcel with a captured government run for a small cabal of corporations and their leadership.  After all corporations are people too - the Supreme Court says so.  There is a lengthy but insightful story in New York Magazine on the latest to make the transition from D.C. to Wall Street - Peter Orzag.  Actually the piece intertwines the fate of Robert Rubin and Orzag, but really if we're talking Rubin, Orzag, Summers, Daley, Paulson, et al - the names can simply be interchanged.  [Jun 26 2009:  Bloomberg - Volcker Marginalized: Our Life of Financial Oligarchy Does not Change]  One puts in a few years of doing "God's work" on behalf of the oligarchy in D.C., then goes to get their just rewards in the private sector.  Orzag (now proudly wearing a Citigroup name tag) is but the latest in the daisy chain.  As an aside if you have never read "The Quiet Coup" article by Simon Johnson from 2009 I consider it a MUST READ (link here).

    [click to enlarge]

    • When Peter Orszag left his post as White House budget director last summer, it made perfect sense, on several levels, that he ended up in an office next to Bob Rubin. Rubin, the Clinton-era Treasury secretary, had the year before resigned his position as senior counselor to Citigroup, a job for which he was paid $115 million, plus options, over nine years. Rubin’s tenure ended shortly after the bank’s near implosion and subsequent $45 billion government bailout.
    • When Citi announced that Orszag was joining the bank as a vice-chairman in December 2010, an angry chorus of progressive columnists immediately howled that he was a sellout, cashing in on his Washington connections. Orszag’s critics were animated by their belief that Obama had failed to get tough on Wall Street—and now one of his central economic players was reaping the rewards. Even Orszag’s mentors raised their eyebrows.  
    • The close alliance among Wall Street and the economics departments of the major universities and the West Wing of the White House is the military-industrial complex of our time. That it has an effect on our governance is beyond question. How pernicious and distorting these effects are, how cynical many of its participants might be, and what might be done to change the system are being fiercely debated in Washington.
    • In fact, to the layperson, the most surprising thing might be the degree to which people like Peter Orszag see the government and Wall Street as, essentially, parts of the same industry. Aside from some bad publicity, going from one to the other is not a leap at all, not any kind of sellout, but a natural progression for a member in good standing of the super­meritocracy like Peter Orszag.
    • But another way of looking at this is that Wall Street has Washington over a barrel—and the values of one can’t help but be the values of the other. Even in Democratic administrations like the current one, once and future Wall Streeters are in position to pull the teeth out of regulations—for what they see as perfectly sensible, perfectly ordinary reasons. There’s no need to cue the scary music; it’s not a conspiracy. It’s just that having lived in the same worlds, read the same textbooks, imbibed the same maxims, been tutored by the same mentors, attended the same confabs in Aspen and Davos—and, of course, been paid with checks from the same bank accounts—they naturally think the same thoughts. 

    These are just a few snippets, as I said - a lengthy piece.

    Stocks Cheap? According to Shiller's Cyclically Adjusted PE Ratio We're Approaching Peak Valuations Before Serious Corrections

    Most of the commentary in regards to the value of stocks looks at the 1 year trailing or forward PE ratio, and applies some sort of premium or discount to that due to interest rates.  Indeed with estimated earnings in the mid $90s on the S&P 500 and record low interest rates the market looks relatively 'cheap' at around 13x end of year 2011 estimates.  As always please understand the market is substantially more expensive than the raw numbers show as many companies take numerous exemptions for 'one time' expenses such as options expensing - which are of course not one time.... but Wall Street still is happy to exclude these very real costs in the game of "wink wink".

    Of course this mid $90s S&P 500 target is in an environment where steroids are running through every vein of the system.  Massive global government spending (including record levels in the US), the cheapest money in our history, record profit margins as labor wages are pressured, and record low taxes by corporations as a % of GDP.  All things that in theory should revert to a mean over time.   Hence a longer term view might be of use.  This is where the Cyclically Adjusted Price Earnings ratio, originated by the highly respected Yale University professor Robert Shiller comes in handy.  According to this measure the market is 43% over its long term average value, and at levels seen only 4 times before: 
    • The late 1920s, right before the 1929 stock market crash
    • The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms
    • The late 1990s, just prior to the popping of the internet bubble
    • The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch.

    Does that matter immediately?  No - very high valuations can beget even higher valuations - and this can continue for a long period ... as always it doesn't matter, until it does on Wall Street.  Indeed, CAPE peaked at 40 during the Alan Greenspan flooding of the system with liquidity in the late 90s.  More important is to realize that "the market is cheap" argument has some holes in it when we take a longer term view - unless we assume nothing reverts to a mean in the new paradigm Fed supported stock market.

    • There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.  
    • This modified P/E was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book “Irrational Exuberance.” In this modified P/E, the denominator is not current earnings per share but average inflation-adjusted earnings over the trailing 10 years. This modified ratio — sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio) — has a markedly better forecasting record than the simple P/E. 
    • According to Shiller’s website, the CAPE currently is 23.5, or some 43% higher than the CAPE’s long-term historical average.
    • Perhaps the bulls’ best argument, in the face of the current high CAPE level, is to point out that valuations can remain high for some time before they come back down to earth. The CAPE at the height of the Internet bubble in early 2000 was above 40, for example. And it was above 30 right prior to the 1929 stock market crash. Compared to those two lofty levels, the current CAPE might suggest that the bull market still has room to run.

    Source: Marketwatch

    Goldman Sachs Turns Near Term Bearish on Their Recommended Basket of Commodities

    Yesterday was quite a weak day in the commodity markets, with a few staging 'outside reversals' on their charts.  It appears some (much?) of this weakness was due to a report by the very influential Goldman Sachs to close out a trade they had offered to their client base in December 2010.  Obviously we won't know until down the road if this was a 1 day hiccup, or the start of something bigger. As QE2 comes to its conclusion in June, and traders begin to front run that event, the price action in commodities the next few months should be very interesting.  We also need to see if the dollar can show any signs of life in the coming months, as part of this commodity trade is simply a direct correlation to the weakness in the currency.

    • Oil and metal prices fell back ... after Goldman Sachs warned that the recent commodities boom is probably running out of steamFour months after advising its clients to put their money into crude oil, copper, cotton and platinum, the Wall Street firm declared that they should close the trade. The "CCCP basket", as it is dubbed, has delivered profits of around 25% since December, when Goldman tipped it.  Goldman is the world's biggest commodities trader.
    • "Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours … the basket," said Goldman's commodity team in a research note.
    • Goldman argued that the high oil price, and the economic damage caused by the Japanese earthquake and tsunami, is likely to dent demand for copper and platinum. "Copper also remains vulnerable to slowing observed demand as high prices and tight credit motivate tight inventory management from key consumer China," it added.
    • The recommendation knocked nearly $3 off the cost of a barrel of Brent crude oil, which fell to about $123.40. US crude fell by a similar amount, to $109.20. Platinum and copper, which had been trading near recent highs, also fell back.
    • The CCCP basket has a 40% weighting in oil, 20% copper, 20% platinum and 10% cotton. The final 10% of the trade is devoted to soya beans, which Goldman believes are likely to keep climbing in value. Soya bean imports to China have risen by 51% in the last year, as the country feeds its growing number of pigs and other livestock.

    Part of Goldman's issue is the level of speculation in commodities markets; every Tom, Dick, and Harry is in the same trade and we saw in 2008 what happens when that reverses.
    • Critically, Currie highlights the sheer level of speculative bullish bets in the oil market. Any number of bearish catalysts could lead to a disorderly unwinding of such record speculative length, and a sharp retreat in prices.   "Not only are there now nascent signs of oil demand destruction in the United States, but also record speculative length in the oil market, elections in Nigeria and a potential ceasefire in Libya that has begun to offset some of the upside risk owing to contagion," Currie noted.
    • Goldman estimated in a research note on March 21 that every million barrels of oil held by speculators contributed to an 8-10 cent rise in the oil price.  
    • ....investors accumulated the equivalent of almost 100 million barrels of oil between mid-February and late March on top of their existing positions, adding approximately $10 to the 'risk premium', Goldman said.
    • The U.S. Commodity Futures Trading Commission said that as of last Tuesday, hedge funds and other financial traders held a total net-long positions in U.S. crude contracts equivalent to a near record 267.5 million barrels.
    • Using Goldman's estimates, that indicates the total speculative premium in U.S. crude oil is currently between $21.40 and $26.75 a barrel, or about a fifth of the price.  (wait, I thought speculators only contributed to liquidity in commodities aka "God's Work", and did not affect price? or so that was the argument in 2008) :)

      No positions

      Rare Gap Down Leads to Intraday Break of 13 Day Moving Average

      Normally the 10 or 13 day moving averages would have little significance as support levels, but since late August 2010 they have been the de facto support lines for the entire move, as the market has had incredible strength.  I'd normally look at a longer term MA such as the 20 day or the 50 day as support in a more normal acting market.  Even in the past 2 days you can see the 13 day moving average (green line) held as support - it was broken briefly late in the day yesterday but a buyer came in to save the day in a late day surge.

      This morning we have had the rare as a dodo bird premarket gap down, and in the early going the 13 day has been broken.  As always the close is more important than the intraday action but with this level being such a stringent support it is something to be take notice of.   The 20 day (exponential) moving average is 1319 which again is a more normal support area.   Much more important in a traditional sense is the 50 day down at 1307. Or if you use simple moving averages, we're talking 1315 or so, which thus far are the lows of the day.

      (50 day simple moving average)

      After the vicious rally from mid March to end of March, the market has been weak during normal market hours and simply staging gap ups in premarket, and then fading during the actual trading day.

      Bigger picture, if things don't change from current course we have what looks to be a "double top" (bearish) in the S&P 500.   I said a few weeks back I did not expect the market to bottom on a gap up and that we should retest the lows - in the near term that was very wrong; but if we can get a break of both 50 day moving averages, it might be a correct thesis eventually.

      U.K. Retail Sales Plunge by Largest Amount Since 95 as Austerity and Inflation Combine Forces

      I am very closely watching what is happening across the pond, as the "mini me" to the U.S. has chosen a path of quite serious short term pain, with the hopes of a far better longer term outlook.  While the U.S. quibbles over a relatively tiny $38B in spending cuts (relative to a $14T economy), the British government went in with a chain saw, cutting many government departments by about a fifth.  [Oct 21, 2010: United Kingdom Unveils Serious Austerity Measures - Potential Slashing of Half a Million Government Jobs]  This along with a VAT tax increase at the turn of the year, is obviously going to pressure the economic fortunes of the country in the near term (as quite a few developed economies are now dependent on the steroid drip of massive government spending), and potentially push it back into recession.  Obviously the U.S. has taken the opposite tact, with the 'kick the can' approach .... continued federal deficits in the 10% of GDP range are helping to produce a government funded 2.5-3.5% type of GDP.  But obviously creating a massive amount of liabilities for another generation to deal with.   Hence the divergence of the 2 countries is very fascinating from an economic viewpoint, as both attempt to cope with the same globalization issues and damage to the middle and lower classes.  It will probably take many years before we can ascertain which path worked out best.

      March sales in the U.K., released this morning, were awful.  On the plus side (relatively speaking) inflation showed a surprise drop as food prices of all things retracted - it seems purchasing power has been so sharply affected producers simply cannot pass along the higher prices to the end consumer. Frankly it is amazing that food sales have so much elasticity - you'd not expect sales volume in an essential such as food to drop like this.

      Via UK Telegraph:

      • Sales fell by 1.9%, the largest monthly decline in the 16 years in which the British Retail Consortium (BRC) and KPMG have collated sales. Like-for-like sales, which strip out the impact of stores that have been open for less than a year, fell by 3.5% in March.
      • Sales in every category bar footwear fell, including food, clothing and furniture.
      • Stephen Robertson, the director general of the BRC, said: "This is the worst drop in total sales since we first collected these figures in 1995. Non-food retailers were particularly hard-hit. This is strong evidence of the pressure customers and traders are under. This year's later Easter is a factor but this fall goes way beyond anything that can be explained by that alone."
      • Mr Robertson said that "uncomfortably high" inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years. "Mounting fuel and utility costs, falling house prices, higher VAT and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to." Mr Robertson added.
      • Food sales were "well below" their levels last year, the BRC said.

      On the positive side, a bit of a surprise on the inflation front - via UK Guardian:
      • Data released by the Office for National Statistics revealed that inflation as measured by the Consumer Prices Index dropped from 4.4% in February to 4% last month – the first decline since July last year.  Sharp drops in the cost of food and drink were the main factors behind the fall, which wrong-footed City analysts who had been predicting that inflation in March would edge closer to 5%.
      • Financial markets have been fretting in recent weeks that UK inflation has been running at more than double the government's 2% target for the CPI, but today's easing of upward price pressures will stifle calls for borrowing costs to rise next month.

      Monday, April 11, 2011

      Bloomberg: Discouarged Workers Complicate Fed's Response to Jobless Fall

      One area this website, and a few others in the blogosphere, have been highlighting the past year is the decrease in the labor force participation rate.  This reduction has helped the unemployment rate drop sharply the past 4 months - indeed, in a piece of irony, a more healthy job market SHOULD bring a temporary higher unemployment rate as more people come off the sidelines and re-enter the job search market. 

      We are now over 2 years since the months where the U.S. had the most traumatic job losses in winter 2008-2009  (i.e. January 2009 around 700K), and any of those people who have not found work are certainly out of unemployment benefits and lost somewhere in the system.  Also recall, if you are not "actively searching" for work for four weeks in America - you no longer are unemployed.

      That said, it has been a mystery as to where so many working age Americans have disappeared to (well in excess of 2M) - only part of that could be explained by going back to school or 'early (forced) retirement'.  We did discover last week some half a million Americans in 2010 alone joined the disability rolls [Apr 7, 2011: Nearly 1 in 20 Working Age Americans are on Disability] and 2009 seems to have printed a similar number.  So that might explain where 1M people 'disappeared' to.  Whatever the case the unemployment RATE (which like almost all U.S. statistical measures, has been massaged sunny side up versus how it used to be measured in the 1980s and early 1990s - I've estimated it's about a 4% variance as measured versus 1980s), is not telling us the whole story - as this report in Bloomberg expands on.

      • The sharpest drop in unemployment in more than a quarter century obscures a simple fact: The jobs market still isn’t working for many Americans.  Some 6.3 million people have been out of work and looking for a job for more than six months. The employment-to-population ratio is lower than it was when the recession ended as companies have been slow to add to payrolls. And big sources of hiring in the past -- government, health care and retailing -- may not be able to reprise that role in the future as lawmakers limit outlays and consumers curb spending. 
      Mark's note - This chart is about 18 months old, but it shows you how the public sector and what I call pseudo public (healthcare - dependent on Medicare, Medicaid... and education - dependent on property taxes) have driven all the job growth in the country)

      • “The trends are a little bit scary,” said Nobel laureate Michael Spence, a professor at New York University. “There’s been a break in an important part of the social contract” for many Americans who are finding they can’t get ahead.
      • Mixed messages from the jobs numbers make decisions more difficult for Federal Reserve Chairman Ben S. Bernanke and his central bank colleagues as they wrestle over monetary policy.  Rising prices and falling unemployment -- the jobless rate dropped to 8.8 percent in March from 9.8 percent in November, the biggest four-month decline since 1983 -- suggest that the Fed should raise rates from near zero later this year to keep inflation in check, according to Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York.
      • The ratio of people employed to the population stood at 58.5 percent in March, down 0.8 percentage point from July 2009 when the recovery began and up just 0.3 point from a 27-year low of 58.2 percent in November 2010, according to data from the Labor Department.  The ratio is a better measure of the jobs market because, unlike the unemployment rate, it isn’t affected by changes in the size of the labor force.
      • The employment-to-population ratio in the last expansion, which began in 2002, never reached the 64.7 percent peak it attained in 2000 during the previous upturn. 
      • About half of the fall in the jobless rate during the last four months was caused by Americans who gave up looking for work and left the labor force -- a development that he said isn’t something to welcome. “It’s people getting so discouraged that they’re dropping out,” said Leamer, who is also director of UCLA Anderson Forecast.
      • That number may grow later this year as extended government unemployment benefits run out, Krueger added. To collect those benefits, the jobless must show that they are searching for work, and the longer people are without a job, the less time they spend looking, according to a study of 6,025 unemployed that Krueger conducted with Andreas Mueller of Stockholm University in 2009 and 2010.
      • Some 45.5 percent of those classified by the Labor Department as jobless in March had been without work for more than six months, just off the record high of 45.6 percent set in May last year.
      • Rising income inequality and sluggish wage growth during the last expansion also suggest that the labor market’s troubles are ingrained, Spence said. Average hourly earnings showed little growth from 2002 to 2007 when adjusted for inflation.  (we've obviously been talking about this for years on end)   [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?
      • Economists posit a variety of reasons for the dysfunction. Spence attributes it partly to globalization, as China and other emerging markets take work Americans once did. Leamer points to technology, with machines replacing people in the production process. [Mar 28, 2011: Productivity - (Wo)Man v Machine

      Very important comments here - essentially the few areas of job growth in the U.S. the past few decades are those that the global labor arbitrage pool with a few hundred million new workers coming online, can't compete with.  i.e. that Chinese migrant worker, can't cut your hair.
      • The challenges facing the U.S. involve both the quality and quantity of jobs created, Spence said. A study he did with NYU researcher Sandile Hlatshwayo showed that virtually all of the growth in employment between 1990 and 2008 was in the nontradable sector of the economy, which isn’t subject to international competition. Government and health care together accounted for almost 40 percent of the jobs added. 
      • The result, according to the paper: growing income inequality as many of the jobs the U.S. created were low-paying ones that added limited value.    “The American dream is being seriously tested right now,” Leamer said. “It’s an emergency for the middle class.”

      Cursory anecdotal example to finish the piece.
      • Gwen Robbins, a 61-year-old resident of Savannah, Georgia, is a self-styled 99er, so called because her 99 weeks of employment benefits ran out in January. Robbins, an office manager until December 2008, said she’s “applied for probably close to 400 jobs” since then.“I’m giving up on the private sector,” said Robbins, when asked if she’s continuing her search. Many companies seem more interested in hiring younger applicants, she said, adding that she now is seeking public-sector work with the city.

      Gasoline Sales Fall in U.S. For 5th Consecutive Week

      It looks like the demand destruction has begun in the U.S. gasoline market despite the 2% payroll tax which gave every worker an immediate raise on Jan 1.  This is also a bit concerning from the aspect we are in tax season, and in a note I read two weeks ago, Americans are expected to get back $300B - which in and of itself is a massive stimulus.  Hence, if there is anytime these higher prices can be shouldered it is now ... yet Mastercard is reporting the 5th consecutive week of lower gasoline sales.

      • With the price of gas averaging $3.77 a gallon Monday, there are signs that Americans are cutting back on driving, reversing a steady increase in demand for fuel.   Gasoline sales have fallen for five weeks, first time that has happened since November, according to MasterCard SpendingPulse, which tracks spending at 140,000 service stations nationwide.  Before the decline, demand had increased for two months.  
      • “More people are going to work,” said John Gamel, director of gasoline research for MasterCard. “That means more people are driving and they should be buying more gas.”  Instead, about 70% of the nation’s major gas-station chains say sales have fallen, according to a March survey by the Oil Price Information Service. More than half reported a drop of 3% or more — sharpest since the summer of 2008, when gas soared past $4 a gallon.  Gas is already 41 cents more expensive than at this point in 2008, when it peaked at $4.11 in July. 
      • MasterCard’s report shows drivers bought 2.7 billion gallons of gas last week, down 3.6% from the same period in 2010, when it was 80 cents a gallon cheaper.

      Reported Deal Between Facebook and Baidu (BIDU) to Create Social Networking Site, Pressures Sina.com (SINA)

      Sina.com (SINA) is showing the first weakness in a while, on reports Facebook is entering China via a partnership with Baidu (BIDU).   That said, after the initial (over)reaction which shaved about 7 points off the name, the stock has bounced back well in the afternoon.

      The hit to Sina seems wrong for a few reasons - first there are already a handful of very significant social networking sites in China, 2 of which are expected to go public in the US this year - and whose IPOs I expect to rocket.  (in fact, the first ... Kaixin001.com has already secured the investment bankers)  Second, Sina's platform is a peer of Twitter, not Facebook.  That said, Baidu is a powerhouse in the country (in search) so this means more competition for everyone in the 'social communication' space.  Baidu's stock is reacting favorably to the news, although off highs of the day.

      Via Bloomberg:

      • Facebook Inc. has signed an agreement with Baidu Inc. to set up a social-networking website in China, Sohu.com reported, citing unidentified employees at the Chinese search-engine company. The agreement followed several meetings between Facebook Chief Executive Officer Mark Zuckerberg and Baidu CEO Robin Li, Sohu.com reported on its website today. The China website won’t be integrated with Facebook’s international service, and the start date is not confirmed, according to the report.
      • Baidu, owner of China’s most-used search engine, plans to develop more social-networking services, Li said on Feb. 1. The commercial value of social products is “meaningful,” he said.
      • China bans pornography, gambling and content critical of the ruling Communist Party, and blocks websites including Facebook, Twitter Inc. and Google Inc.’s YouTube that don’t follow the nation’s self-censorship rules. Google pulled its search engine out of China last year after deciding it would stop censoring its content. 

      No position

      Blast from the Past - Global Crossing (GLBC) Acquired by Level Three (LVLT)

      For those of you around in the late 90s, you most likely will remember Global Crossing (which at the time had a different symbol).  This was the company that went haywire laying fiber optic cable across the earth, including across ocean floors, in anticipation of the boom of the internet.  While they were correct (eventually) of the need, a lot of the fiber laid dark as it was not needed anytime soon, and the company went into a tailspin - eventually filing for bankruptcy.  It was eventually reborn, and brought back to public markets but with none of the fanfare of the old days.  Today, Level Three (LVLT) announced it was acquiring Global Crossing for $1.9B; a hefty 56% premium.

      Via Marketwatch:

      • In a deal that harkened back to the days of the first Internet boom, telecom-networking companies Level 3 Communications Inc. said Monday it would acquire Global Crossing Ltd. in an acquisition worth $1.9 billion. 
      • The all-stock transaction also includes Level 3 assuming $1.1 billion in Global Crossing’s debt, bringing the total deal worth $3 billion. The deal values Global Crossing at $23.04 a share, or a 56% premium over the company’s closing stock price on Friday
      • The companies are best known for operating fiber optic networks and will be able to serve 70 countries after the deal closes. The acquisition also brings together two of the companies that had been high-fliers during the Internet bubble of more than a decade ago. ST Telemedia bought its controlling stake in Global Crossing in 2003 after that company file for Chapter 11 bankruptcy protection in 2002.

      No position

      Going Nowhere Fast

      Today is the upteempth time the past few weeks where the market gapped up and/or started strong, only to listlessly trade during the trading session, often in negative fashion.  But the action during regular normal hours is being masked by the premarket jumps.  Whatever the case, the market is definitely in a consolidation sideways stage, which has been a rare situation the past 8-9 months.  This sideways action should lead to a substantial move once we get going, either up or down.  For bulls, we'll keep repeating the mantra of needing to clear mid S&P 1340s, to create a new high.  For bears, until the new breakout higher occurs, they can lean on the potential 'double top' that has formed in the S&P 500.  As a sidenote - the 13 day moving average has been an absolute bulwark since late August 2010 for the S&P 500; we continue to see that being held around 1323-1324.  I would consider it to be a relatively important signpost if we see it break.

      Interestingly, the Russell 2000 - more small cap heavy - which has lead the move up, has been a leader to the downside the past few sessions.  But overall, all the major indexes are coming into range of the 20 day moving average.

      With earnings season kicking off tonight with Alcoa (AA) perhaps this will be the catalyst to see us move out of this somewhat sleepy moment. Alcoa is not so much an event, but the large cap multinationals begin later this week, and dominate earnings the following few weeks.  I expect another good earnings season versus lowball expectations, but commentary about inflation and margins in future quarters is what one should be focusing on.

      Friday, April 8, 2011

      Nice Bounce

      Nice rally in the closing 30 minutes to get us right back into the range we sat all week.  Perfect bounce off that 13 day moving average.  You can't keep a market priced in a devalued currency down.

      Spoke too Soon

      So much for the very tight range we could not break out of all week.  Finally some action.  There is a little gap in the chart from a 'gap up' almost 2 weeks ago at S&P 1320 so it will be interesting to see if we can fill that in the last hour.  We've broke the 10 day moving average, and sit right at the 13 day - which has been alternating with the 10 day as the major support line since late August. Neither of these is normally a major support area but the market has been so impervious to selloffs, they have served as the key lines during much of the past half year+.  Normally you'd use something more like the 20 day or 50 day ....

      Meanwhile, crude oil has hit $112 - another thing that won't matter, until it does. Unlike 2008 when it took $130+ oil to get $4 gas, we're already facing it here in the $110ish area. Can't wait for Memorial Day.

      The dollar broke a double bottom today, and is in a complete freefall - apparently something that makes Christina Romer giddy.  Hence not only are Americans losing money in the market in nominal terms today, but in real terms as well.  Double whammy.  Lucky us.

      [Video] Ex White House Council of Economic Advisor's Chair Christina Romer "Bring on QE3!"

      Looks like Christina Romer, after her stint in the White House (and of course now back in academia), is angling to be the replacement of "easy" Ben Greenspan.... err Alan Bernanke.  It's too bad Christina, "even easier than Ben or Alan" Janet Yellen is current VP and ready to continue the American policy of inflate, create bubbles, and propser once Ben hits the road.  [Mar 12, 2010: US Dollar Takes a Hit as Janet Yellen Leaked to be Nominee to Replace Donald Kohn as Fed VP]   With economic  leaders like this running country policy, who needs enemies of the state?

      I don't necessarily disagree with her observations of the problems in the country; I just cringe when the only solution we can think of is print and/or massively deficit spend (and preferably both)!  Everything is about injecting the patient with steroids rather than addressing root causes.

      7 minute video

      It's a "mistake" for the Fed to end QE2 in June as planned, Romer continues. "The evidence is it's been very effective. I don't understand why we'd be dialing back that tool."  Romer lauds QE for helping to weaken the dollar. A weaker dollar makes U.S. goods more competitive overseas, boosting exports and GDP growth, and ultimately hiring. While that's true, she seems to overlook the impact a weak dollar has on ordinary Americans in terms of falling buying power and punishment for savers and those living on fixed-incomes.

      Very Narrow Week

      An incredible lack of volatility this week, as the S&P 500 has stayed in a 11 point range the entire week: 1328 to 1339.  If not for the gap ups Wednesday and today, the market would be negative on the week but due to the overnight/premarket action we've essentially been stuck in quicksand.

      S&P 500 intraday this week - click to enlarge

      On the plus side, this is the first real consolidation after a big rally we've seen in over half a year - that is more normal action than the straight up action (90% of the time) or straight down (10% of the time) experienced since QE2 unleashed as a concept to market participants.   As always, the longer the sideways action the more powerful the ensuing move - either up or down.

      Apartment Vacancies Drop to 3 Year Low, as Rents Rise - Apartment REITs Benefit

      Lost in the tragedy that is the U.S. housing market (ex Washington D.C. and Manhattan) is a potential boom time in the rental market.   With modest building of new units, and a flood of new renters (many of which were home owners over the past 5 years), we do seem to have the perfect storm brewing.  Homeownership rates - which bubbled to nearly 70% at the peak of the mania are STILL above the long term average by a few %.

      In stock market terms, the obvious play here are the apartment REITs - however, I think the market has sniffed this out well in advance as the stocks of names such as Equity Residential (EQR), Essex Property (ESS) and  AvalonBay Communities (AVB) have been in a steady trend up, with little relent.

      Via Bloomberg:

      • U.S. apartment vacancies dropped to the lowest in almost three years in the first quarter as the weak homebuying market fueled demand in what is usually a slow period for rentals. The vacancy rate declined to 6.2 percent from 8 percent a year earlier and 6.6 percent in the fourth quarter of 2010, the New York-based research firm said in a report today. The rate was the lowest since it reached 6.1 percent in the second quarter of 2008.
      • Unemployment of close to 9 percent and a surge in home foreclosures have pushed many people to rent, driving a rebound in multifamily properties during the past year. Construction of apartments has climbed from a 50-year low on expectations that rents will increase and more people will seek to lease.
      • “There is a bias against homeownership at this point, especially if you feel home prices won’t rise and you can wait,” Victor Calanog, chief economist at Reis. “Most of the applications for construction and building loans are for multifamily buildings.”
      • Effective rents, or what tenants actually pay, increased in 75 of the 82 markets Reis tracks, to an average $991 a month from $967 a year earlier and $986 in the fourth quarter. 
      • Landlords’ asking rents also climbed, to $1,047 from $1,027 a year earlier and $1,043 in the previous quarter, according to the report.
      • Home ownership in the U.S. dropped from a peak of 69.2 percent in 2004 to 66.5 percent at the end of 2010, with each percentage point representing about 1.1 million households, according to the Census Bureau.
      • Developers have stepped up rental projects in anticipation of rising demand. AvalonBay Communities Inc. (AVB), the second-biggest publicly traded U.S. apartment owner, started 11 developments in 2010 with a combined 2,446 apartment units.

      No position

      [Video] It's Friday Morning, Do You Know Where Marc Faber Is?

      Well, well, well - speak of the devil....his ears must have been ringing [Apr 5, 2011: Marc Faber Expose]  The always entertaining Marc Faber on CNBC this morning...

      By printing money,  the earnings power of the proletariat is diminishing, while the assets held by the wealthy are going up. And at the same time, the wealthy are outsourcing more and more production to China, to further rob the masses.

      11 minute video

      Thursday, April 7, 2011

      Good News, Bad News with SEC

      Bad news - still no letter back with comments on the application.

      Good news (when you are stretching for good news) - just found out the SEC is required to respond to the mutual fund filing by the 6 month mark.  Rather than being launched in April as I assumed, we are (sadly) approaching the 4 month mark.  But at least there is a worse case scenario date that cannot be breached.

      Off to bang my head against a wall for another week...

      Nearly 1 in 20 Working Age Americans are on Disability, a Doubling versus 1990

      While I've spent a lot of time talking about the massive increase in food stamp usage (when I started the blog it was 1 in 11 Americans, it is now 1 in 7 Americans ... including 1 in 4 children), I have rarely touched the somewhat contentious issue of disability benefits.  This is not even one of the key anti poverty programs that have exploded in use [Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare] in the "Dependence Economy" .[Apr 4, 2011: Economix - The Dependence Economy; Only Half of Average Americans Income Comes via Wages]

      So aside from these numbing statistics,in a country of just over 300M....

      50 million Americans on Medicaid  (keep in mind this excludes the substantial fraction of Americans with no health insurance)
      10 million on unemployment benefits (peaked at 12m, but some people are exhausting their 2 years of eligibility)
      40 million Americans on food stamps
      4.4 million on welfare

      ....this NYT story indicates 1 in 21 working age Americans (age 21 to 64) is on disability insurance.  That was pretty shocking to me - it is not an area I have studied much.  At just under 5% of all working Americans, that is a doubling from the levels seen just 2 decades ago.  In 2010 alone, the number of people enrolled jumped by half a million which can help us explain part of the huge drop in workforce labor participation in the U.S. (some 2M Americans have simply dropped off the map)  If a somewhat similar number was seen in 2009 (which looking at the 45 degree angle of growth in the chart below would appear very likely) that would explain away half of the 2M Americans who have disappeared from the workforce.

       Without getting into the typical arguments about "someone is scamming the system" it does make one scratch your head when you consider much more work in the US is "service oriented" (and in theory should take less of a toll on the body) than the manufacturing type of work that used to be more common in the 60s, 70s, and even 80s.  The article says this is due to a sharp increase in mental illness and muscular-skeletal/back ailments than in previous generations.

      Of course as the % enrolled has doubled, the cost has actually tripled since 1990 - from $40B a year to $120B annually.   That would place the cost above food stamps + welfare combined.... again, I had no idea about this until reading these stories.  I also did not know after 2 years in the disability program, you qualify for Medicare regardless of age.

      Without getting all "GOP", one wonders if we are reaching a tipping point where so many Americans are dependent on government, that it will be impossible to ever truly cut back on these programs as so much of the population now has a stake in receiving monies from one or multiple programs. 

      • ....at a time when employers are struggling to create spots for the 13.5 million people actively looking for jobs, helping people like Mr. Howard find employment — or keeping them working in the first place — is becoming increasingly important to the nation’s fiscal health.
      • For the last five years, Social Security has paid out more in benefits to disabled workers than it has taken in from payroll taxes. Government actuaries forecast that the disability trust fund will run out of money by 2018.
      • About 8.2 million people collected disabled worker benefits totaling $115 billion last year, up from 5 million a decade earlier. About one in 21 Americans from age 25 to 64 receive the benefit, according to an analysis of Social Security data, compared with one in 30 a little over a decade ago.
      • Along with monthly checks that are based on the worker’s earnings history, beneficiaries generally qualify for Medicare — otherwise reserved for those over 65 — two years after being admitted to the disability rolls.
      • There are several reasons for the increase in beneficiaries. Baby boomers are hitting the age when health starts to deteriorate, and more people are claiming back and other muscular-skeletal ailments and mental illnesses than claimed those as disabilities a generation ago
      • Lawyers who solicit clients on television and on the Internet probably play a role. And administrative law judges say pressure to process cases sometimes leads to more disability claims being accepted.
      • But given the difficult job market, some economists say they believe that an increasing number of people rely on disability benefits as a kind of shadow safety net.
      • The program was designed to help workers who are “permanently and totally disabled,” and administration officials say that it is an important lifeline for many people who simply cannot work at all. But Social Security officials can take into consideration a claimant’s age, skills and ability to retrain when determining eligibility. So one question is: How many of these beneficiaries could work, given the right services and workplace accommodations? 
      • Nicole Maestas, an economist at the Rand Corporation, has examined Social Security data with fellow economist Kathleen J. Mullen, and concluded that in the absence of benefits, about 18 percent of recipients could work and earn at least $12,000 a year, the threshold at which benefits are suspended.  Other economists say that even among those denied benefits, a majority fail to go back to work, in part because of medical problems and a lack of marketable skills

      Once you are "in", it appears you never leave.
      • Even if claimants have more ambiguous medical cases, once they are granted disability benefits, they generally continue to collect. Of the 567,395 medical reviews conducted on beneficiaries in 2009, Social Security expects less than 1 percent to leave because of improved health.  The benefits have no expiration date, like the current 99-week limit for collecting unemployment. 
      • And because many people spend years appealing denials and building their medical case before being granted benefits, their skills often atrophy and gaps open on their résumés, making it more difficult for them to get back to work.
      • Out of 12.5 million disabled workers and those who receive benefits for the disabled poor, only 13,656 returned to work over the last two and a half years, with less than a third of them earning enough to drop the benefits


      In a very related story, the WSJ says insolvency looms as states drain the U.S. disability fund.  According to this article, we have yet another future bailout (along with the state and local pension plans) coming down the road.

      Strange fact - Puerto Rico has the highest % of people who get their application approved, at 63%, 4% higher than any of the traditional U.S. states.

      [click to enlarge]

      • The SSDI is set to soon become the first big federal benefit program to run out of cash—and one of the main reasons is U.S. states and territories have a large say in who qualifies for the federally funded program. Without changes, the Social Security retirement fund can survive intact through about 2040 and Medicare through 2029. The disability fund, however, will run dry in four to seven years without federal intervention, government auditors say.
      • In addition to the uneven selection process, SSDI has been pushed to the brink of insolvency by the sour economy. A huge wave of applicants joined the program over the past decade, boosting it from 6.6 million beneficiaries in 2000 to 10.2 million in 2010. New recipients have come from across the country, with an 85% increase in Texas over 10 years and a 69% increase in New Hampshire. 
      • Unlike Medicare or the Social Security retirement fund, which provide benefits mostly based on age, SSDI decisions are based in large part on medical opinions, which can vary from doctor to doctor, state to state.  Because someone else pays the bills, local officials have little incentive to keep the numbers low. The feds have tried to enforce consistency, but the process relies heavily on the judgment of doctors and administrative law judges who hear appeals.  
      • In 2009, benefits averaged $1,064 a month. But the program opens up access for recipients to other government programs, multiplying the ultimate cost to taxpayers.  Anyone who spends two years on SSDI qualifies for the Medicare health program, which usually is available only for those 65 years old and older. SSDI recipients tend to remain tethered to the program for years, and the government's lifetime financial commitment averages $300,000 per person, estimates David Autor, an SSDI expert who teaches at the Massachusetts Institute of Technology. "The system has profound problems," Mr. Autor said.
      • Supporters say SSDI serves a vital need for millions of people who have paid into the system, qualify for the benefits and depend on the income. Some contend its problems can be fixed by raising taxes or by diverting money from the Social Security fund for retirees.
      • Critics have raised concerns about the solvency of the program, backed by a report last year from the nonpartisan Government Accountability Office alleging that the government was paying benefits to some people who didn't deserve them.  
      • The disability insurance trust fund was created in 1957 to provide a backstop to people who worked several years before suffering a debilitating illness or injury. Disability beneficiaries can now include those with cancer, chronic back pain, persistent anxiety and schizophrenia. Applicants should no longer be able to work in a substantial, gainful way, and must provide medical records affirming the likelihood the applicant won't be able to work for at least another year, or that their health problems would eventually result in death. 
      • In 2005, SSDI began spending more money than it brought in through tax receipts. In 2010, the number of beneficiaries grew by 489,488, the largest one-year increase ever. It is projected to spend $153 billion on benefits and other costs in 2015, $22 billion more than it brings in through tax revenue and other income. Its surplus funds built up over the years are expected to be extinguished in four to seven years.
      • Doctors in the area say applicants are still pouring into the system. Several said the SSDI program has become so large, and in some cases so dependent on medical opinions, that patients have worked out which doctors and government officials are less stringent, a phenomenon that lawyers in the U.S. said is also occurring in different parts of the country. They say this explains the high concentrations of beneficiaries in certain areas.

      10 Day Moving Average Rule Hits as S&P 500 Goes through 6th Day of Consolidation

      The market continues to show tremendous resiliency and an inability to pull back.  This is the 6th day of a tight trading range, and that has allowed the 10 day (exponential) moving average to catch up to the freight train that has been the market.  Outside of exogenous global events, the S&P 500 has essentially held the 10 to 13 day moving average range the entire rally.

      Speaking of exogenous events, it is remarkable how global bailouts are now taken in stride.  Nearly a year ago the Greece sovereign crisis led to a worldwide selloff - some of the heaviest selling since the rally began in March 2009.  Then in November 2010, we had a more modest selloff of about 6-7% due to the Irish sovereign debt crisis.

      The current Portugal sovereign debt crisis, in which a formal request to be bailed out was announced in the past 24 hours?  Who cares!  Business as usual in the bailout nation globe.   Of course part of this has to do with the ESFS (a sort of TARP for European countries), but the market has become numb to things that would be unthinkable just 3 years ago.

      Wednesday, April 6, 2011

      Josepth Stiglitz: Of the 1%, By the 1%, For the 1%

      A pretty interesting commentary by economist Joseph Stiglitz in Vanity Fair on the concentration of wealth and inequality in the United States.  For those not familiar with Stiglitz he would definitely be considered "left" ala Paul Krugman.  That said, some fair points in this piece as the U.S. continues to take on more characteristics of a lot of other countries (that we don't want to be like).   Certainly 'equality of all' is not the goal in terms of economics - no one wants to be the old USSR - and economic incentives are very important for productivity, but the gaping (and expanding) chasm between top and bottom has many potential societal issues. [Sep 7, 2009: Citigroup 2006 - America, a Modern Day Plutonomy]

      Aside from concentration of wealth one big worry is that what was once America's strength was economic mobility.  It was relatively easy to advance from the economic 'class' you were born, to a significantly higher one.  While still possible today, from a few surveys I've read the past year the U.S. now has less economic mobility than many of the "socialist" countries we deride in Europe.  I think that would come to a shock to many since we still have the "Facebook effect" - i.e. the 1 in 10 million chance you can go from nothing to billionaire.  Anyhow, with the political class captured I expect nothing to change and indeed this path we've been on the past few decades to continue.  Bread and circuses for the rest.

      It is a lengthy piece so follow the link below for the entire thing.

      Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

      Via Vanity Fair:

      • It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent
      • One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. 
      • All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran.  
      • Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. 
      • The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin. 
      • Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.
      • ....many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy. 
      • The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. 
      • In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general
      • As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

        [Jan 16, 2011: The Atlantic - The Rise of the New Global Elite]
        [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]

          AP: Rising Costs, Higher Wages Drive Low Cost Manufacturing Out of Southern China

          Even in a country of over a billion the relentless push to find cheaper and cheaper labor has limits.  First the relatively prosperous coastal east became pricey in terms of labor, and now it appears it has spread to the south.   [Jan 27, 2011: China Raises Minimum Wage... Again] [Feb 27, 2008: China Raising Minimum Wage] [Jun 2, 2010: Cheap Labor Fighting Back in China]   The far more remote western and central regions appear to be the last bastions... then?  If the supply chain is not going to move wholesale to Indonesia or Vietnam (which would be doubtful) the multi decade push down in exported product prices that the Chinese manufacturer has produced, could reverse.  Then again, automation could prosper for Chinese manufacturers to lower costs... but then what to do with all the excess labor?

          Via AP:

          • When millions of workers didn't return to their southern China factory jobs after Lunar New Year holidays, a turning point was reached for foreign manufacturers scraping by with slim profit margins.  Companies were already under pressure from rising raw material costs, restive workers and lower payments for exports because of a stronger Chinese currency. Despite hiking wages, labor shortages kept getting worse as workers increasingly spurned the often repetitive and unskilled jobs that helped earn China its reputation as the world's low-cost factory floor.
          • "I don't know of any factory in China that can absorb both the raw material prices we have, the labor issues we've been looking at and the renminbi," China's strengthening currency, said Hubbs. The currency is also known as the yuan.  He's joining a wave of export manufacturers, big and small, that are moving from China's coastal manufacturing regions to cheaper inland provinces or out of the country altogether, in a clear sign that southern China's days as a low-cost manufacturing powerhouse are numbered.
          • Foxconn Technology Group -- the world's biggest contract electronics manufacturer with customers including Apple Inc., Sony Corp. and Hewlett-Packard Co. -- is planning to gradually cut its workforce of 400,000 in the southern Chinese city of Shenzhen by a quarter and move the bulk of manufacturing inland. 
          • China watchers at Credit Suisse, an investment bank, call the shift an "historical turning point" for China's economy and perhaps the world as the country's role in keeping global inflation low by supplying cheap goods is set to end.
          • "It may take a decade for China to see its export competitiveness erode, but we have seen the beginning of this happening," the Credit Suisse report said, predicting that salaries for China's estimated 150 million migrant workers would rise 20 to 30 percent a year for the next three to five years.
          • That's partly because China's traditional advantage -- its vast, cheap pool of workers -- is drying up. Economists say it's the result of a rapidly aging population after 40 years of the one-child policy.
          • The ripple effects of rising costs in China are already being felt around the globe. U.S. clothing retailers are raising prices for shirts and other garments by 10% on average after a decade of price falls, partly due to higher labor costs in China.
          • China's blistering growth has also lifted incomes and created more opportunities in poorer inland provinces, which means fewer people leaving for jobs in the richer coastal cities.  Some 30 to 40% of migrant workers didn't return to their factory jobs in Guangdong province's Pearl River Delta manufacturing heartland after the annual Lunar New Year holiday in February, said Stanley Lau, deputy chairman of the Hong Kong Federation of Industries. Typically the proportion is 10 to 15%That was despite Guangdong authorities raising minimum wages by up to 20% in March.
          • Many factories already pay more to retain workers but are still having a hard time finding manpower.  Hubbs employs about 500 workers earning 1,800 to 2,000 yuan ($275 to $306) a month, a lot higher than Guangzhou's 1,300 yuan minimum wage, which came into effect March 1. But he's still short about 100 people, resulting in a 90-day turnaround time for orders, twice as long as he'd like. 
          • He wants to move 30 to 40% of production to a new factory in Cambodia, Laos or even Myanmar in six to eight months.  Hubbs has looked at moving elsewhere in China but doesn't think the cost savings would last beyond two or three years as wages and prices even out across the country.
          • Greater use of automation is also becoming more economic.  CBL Group, a contract manufacturer, has five welding robots used to assemble brackets for hospital beds and seat frames for new carriages on the New York subway. Chairman Gideon Milstein said he bought them in 2007 and 2008 for $600,000 because they could track welds by computer to ensure they were up to standard.  At the time, it was cheaper to weld by hand but that's changing because wages for skilled human welders are going up.  "It will soon be cheaper to weld by robot than it is by human in China," Milstein said.

          [Apr 7, 2010: Vietnam Begins to Lure Business Away from China]
          [Rising Factory Costs Erode China's Edge]
          [China's Inflation Hits American Price Tags]

          [Chart] As S&P 500 Surges, Volume Plunges - Old Rules Continue to be Useless

          I often bemoan how so many of the rules those of us in the market pre 2009 had learned, have become useless in the new paradigm Fed supported era.  One of the most flagrant is the concept that healthy moves up should be supported by volume expansion - frankly that is a bedrock concept in the technical analysis community.  This rule has been obliterated during the past few years.  Ritholtz over at the Big Picture flagged this amazing graph via Bloomberg that cross references the advance in the S&P 500 with volume.  As they say a picture says a thousand words.... volumes have fallen by some 40% in stair step fashion since the market bottom in spring 2009, yet the markets go up almost non stop.  Remarkable.

          If current trends persist I assume when the S&P hits 2500, there will be 100 shares trading a day?

          [click to enlarge]

          • The CHART OF THE DAY compares the Standard & Poor’s 500 Index with daily share trading in exchange-listed companies, as compiled by Bloomberg, during the past two years. The latter is represented by a 200-day moving average, which smoothes out day- to-day swings in buying and selling.

          [Video] Yahoo Breakout: Eric Sprott Says Silver Doubles from Here

          Before the body of the piece, for those wondering whatever happened to Jeff Macke after his infamous CNBC meltdown, he has resurfaced on Yahoo's expanded Finance section, sharing a platform with ex-CNBCer Matt Nesto.

          Yesterday 'the boyz' had a video session with a man much more famous in Canadian financial markets, than American - Eric Sprott.  [Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme EverKeep in mind, like most managers, Sprott is talking his book as he has a multitude of commodity based products under his wing... but he reaffirmed an extremely positive view on silver.  Indeed despite the 22% gain in Q1 2011 alone, he sees it doubling again to $80.

          With all the major currencies headed by central bankers happy to devalue it, the case against precious metals is difficult to make.  One can assume when the next recession happens (cyclically it should be here within 3 years), the only game plan in town nowadays is another global round of quantitative easing and fiscal deficit spending to the moon.  Rinse. Wash. Repeat.

          (lost in the Fed speak the past few weeks, I read yesterday the Bank of Japan has put in $275 BILLION USD worth of yen into the system since the earthquake - relative to their economy size, that would be akin to the Fed doing $1 TRILLION - in a few weeks!)

          In the nearer term, as the Fed works on creating the 3rd bubble in 12 years, it looks like commodities are going to be the "winners" this time around.   As we saw with NASDAQ stocks and U.S. real estate, the last stages of the bubble will be parabolic moves upward - and then the crash.  But until then, speculators will want to play the Fed's mandate to create bubbles.  And unlike the appreciation in housing and stocks during the last 2 Fed bubbles, the move UPWARD in commodities is causing all sort of pain for citizens globally.  Got corn?


          6 minute video

          • Sprott, the chief investment officer and CEO of Sprott Asset Management, doesn't see a bubble in gold, calling it wildly under-owned when viewed in historical terms. But if you want to get the genial Sprott really worked up, ask him about silver. Even at three-decade highs near $40 an ounce, Sprott says silver will more than double from here.
          • What would change his mind? Global stability and rational central bank behavior. Nothing, in other words.
          • When pushed, Sprott says $2,000 gold and $50 silver are possible in 2011. But he's got the kind of macro bullishness that leads to buying any and all dips, as he believes higher levels for precious metals are inevitable.
          • "I've owned gold for 11 years, and I've never sold any of it," Sprott says with conviction. And gold is only his second favorite metal. As befitting a hedge fund manager, Sprott is betting on other assets declining in price as his precious metals soar. He's bearish on base metals -- those used in production -- and he's shorting financial and consumer-related companies.
          No position

          Gap Up Open Right on Schedule

          Yesterday I wrote

          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.

          And this morning, we have a large move up in futures for no apparent reason other than it's been a few sessions since we've had one.  Sorry to be cynical about it, but anyone watching this market the past few years can see anytime we struggle with a technical level, the "urgent buyer" (someone who apparently does not care what price 'he' pays, but is happy to drive the entire market up in the overnight session usually for no good reason) comes in, and off to the races we go.

          Looking back at the February highs, the intraday high was 1344 on the 18th, with the closing high at 1343 so I'd expect the premarket surge to take us right near those levels.  After most of the dirty work is done in the overnight session, we often see either flat or downward moves during the actual regular hours, so we'll see how today goes.  This is definitely the pivot point of the week as I outlined Monday - and with little in the way of economic news, we'll continue to trade on technicals until earning season comes upon us.

          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.

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