Tuesday, April 19, 2011

VMWare (VMW) Beats, Guides Up - Sending Shares Up 11% in After Hours Trading

Lots of "better than expected reports" tonight - IBM, CSX, INTC, WYNN, et al.  VMWare (VMW) is the high beta name of the night though, with a 11% rally in after hours after both beating on the top and bottom line on the quarter, and guiding up substantially.  It has been a strange year for this once high flier as the stock has struggled; then again it's been trading at 45-55xish forward estimates for quite a while.

  • The company said it earned 29 cents a share, a dime ahead of its year-ago profit, on revenue of $834.7 million, up from $633.5 million. On a non-GAAP basis, it would have earned 48 cents a share.  License revenue jumped 34 percent to $419 million, while service revenue rose 32 percent to $424.7 million.
  • Analysts were expecting the firm to earn 42 cents a share on revenue of $815.3 million.
  • VMWare also guided for second-quarter revenue of $860 million to $880 million, easily beating the $845.1 million analysts had forecast. 
  • The company also said it expected its non-GAAP operating margin for 2011 to "expand slightly" from 2010. Three months ago Chief Financial Officer Mark Peek said the company expected "little if any margin expansion in 2011".   

Some analyst comments via Bloomberg:

  • Clients are using VMware software to turn more of their servers -- computers used to run websites and networks -- into multitasking machines that can operate several different applications, said Brian Freed, an analyst at Wunderlich Securities Inc. The company has been ramping up new ventures, including entering security and storage, investing in research and development and increasing its headcount, he said.  
  • “They released 18 new products last year, and here we are almost six months later,” Robert Breza, an analyst at RBC Capital Markets, said in an interview. “You’re starting to see the new products penetrate the customer base.”

Full report here.

No position

Hilarious (or Sad) Headline of the Day

This groundbreaking proposed regulation in the mortgage market just in from the Federal Reserve....

Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

Wow.  What a concept!

But won't that stifle "innovation" in the financial product field?  That's what I heard in 2005-2006.

The Fed is seeking comments on the proposal through July 22.  Please feel free to let The Bernank know your thoughts.... as this type of stifling regulation will destroy our mortgage market, where making a payment has become optional the past few years....and mostly reserved for "suckers".

I for one am against penalizing the banks with onerous terms like this - let the Canadian banks make viable loans, we are America!  I much prefer the old system where no one in the daisy chain of the mortgage market gives a damn that the borrower can pay, and we bundle 1000s of these loans together, slap a AAA rating on it vampire squid style, and sell the CDO to small towns in Norway.   Booyah.

Is Capitalism Failing the Middle Class? Nobel Laureate's Working Paper Seems to Indicate So

While dabbling in the dark arts of economics myself, I am certainly no Nobel Laureate; indeed I have a tough time even spelling "Laureate".  That said, in the earliest days of this website (2007) I wrote one of the most popular entries - Do The Bottom 80% of Americans Stand a Chance? [see here].  While that was still early in the housing crisis and part of the piece focused on the damage that was to come due to the reliance on the home equity ATM, much of the piece was devoted to structural changes happening in terms of globalization, inflation, wage stagnation, and the growing income inequality.  A few years later (2009) I found a research report by Citigroup describing America as a "Modern Day Plutonomy"  [see here]

In a "plutonomy", according to Citigroup global strategist Ajay Kapur, economic growth is powered by and largely consumed by the wealthy few.

There have been quite a few other stories along the way, but the reality is in return for cheaper prices, many Americans - especially in the lower 2/3rds - have lost a grip on what used to be a middle class lifestyle.  We still seem to be in denial about this, and frankly even if we were not still in the denial stage, finding solutions would be extremely difficult.  As investors we need to focus on the reality of what is... and in the U.S. that means a barbell approach - focus on companies serving the top end, and the low end - as the middle is being hollowed out.   And as I often write, this is not bad for "humankind" as many in relatively poor countries now move up the food chain - but not without a cost for those in relatively rich countries.

The most excellent journalist Cynthia Freeland highlighted a paper - The Evolving Structure of the American Economy and the Employment Challenge - by Nobel Laureate Michael Spence, which essentially comes to the same conclusions I've been writing about for nearly 4 years.  She declares (or her headline writers declares!) 'Capitalism is Failing the Middle Class'.  It is definitely an interesting read for those interested on the topic, so I thought I'd highlight it.  The variance between the tradable sector (i.e. areas that jobs that can be outsourced) versus nontradable is striking, but we've discussed that in length before as all the net job growth in the country of late has been in government, healthcare, and education - the latter two heavily supported by taxpayer, and impossible to outsource en masse.

PDF file for the original paper.


This Working Paper by Nobel Laureate Michael Spence and Sandile Hlatshwayo is a detailed examination of the changing shape of the American economy and the effect of these changes on the labor market and the cost of goods. Spence and Hlatshwayo focus on trends in value added per employee in the tradable and nontradable sectors over the past twenty years.

They note that the American economy has seen the lower and middle components of the value-added chain moving to the rapidly growing markets abroad and warn that soon higher-paying jobs may follow low-paying jobs in leaving the United States.

The actions of the free market have made goods less expensive for Americans, but the free flow of labor and capital has also diminished the employment opportunities available in the United States and will, the authors warn, continue to do so at all levels of society. Spence and Hlatshwayo suggest that policymakers acknowledge the trade-off between the cost of goods and the availability of jobs, and they explore policies that may improve it. While the authors acknowledge that there is no simple policy fix to improve the trade-off between inexpensive goods and diminished domestic job opportunities, they argue that given the political salience of the issues at stake, policymakers must work to tackle this enormous question of inequality and economic distribution.


Here is Cynthia's take on the subject:
  • Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.
  • Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated. 
  • The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.
  • Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: “Many goods and services are less expensive than they would be if the economy were walled off from the global economy, and the benefits of lower prices are widespread.” He also points to the positive impact of globalization on much of what we used to call the Third World, particularly in China and India: “Poverty reduction has been tremendous, and more is yet to come.”
  • Spence’s paper should be read alongside the work that David Autor, an economist at the Massachusetts Institute of Technology, has been doing on the impact of the technology revolution on U.S. jobs. In an echo of Spence, Autor finds that technology has had a “polarizing” impact on the U.S. work force – it has made people at the top more productive and better paid and hasn’t had much effect on the “hands-on” jobs at the bottom of the labor force. But opportunities and salaries in the middle have been hollowed out.
  • Taken together, here’s the big story Spence and Autor tell about the U.S. and world economies: Globalization and the technology revolution are increasing productivity and prosperity. But those rewards are unevenly shared – they are going to the people at the top in the United States, and enriching emerging economies over all. But the American middle class is losing out.
  • To Americans in the middle, it may seem surprising that it takes a Nobel laureate and sheaves of economic data to reach this unremarkable conclusion. But the analysis and its impeccable provenance matter, because this basic truth about how the world economy is working today is being ignored by most of the politicians in the United States and denied by many of its leading business people.
  • Spence says that as he was doing his research, he was often asked what “market failure” was responsible for these outcomes: Where were the skewed incentives, flawed regulations or missing information that led to this poor result? That question, Spence says, misses the point. “Multinational companies,” he said, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So there is no market failure.”
  • This conclusion is a very big deal – Spence is telling us that global capitalism is working the way it should, but that the American middle class is losing out anyway. Since global capitalism is the best way we’ve come up with so far to run our economy, that creates quite a dilemma.
  • Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.

[Jan 16, 2011: The Atlantic - The Rise of the New Global Elite]

Gold Brushes $1500 Intraday

While silver has attracted all the attention this year with its powerful performance, gold just came within spitting distance of the psychological round number of $1500 intraday, before pulling back.  (silver of course is also up over 1%, and is rapidly approaching $44)


Longer term

No position

[Video] CBS Evening News - Recession Pressure on Teachers' Union

A 5 minute video via CBS Evening News on the impact the states' troubles are having on unions, specifically teachers.  Recall despite the public sector workforce being a fraction of the private workforce, union memberships in the public sector has actually surpassed that of the much larger private sector.   Obviously the larger question is not "unions, bad or good?" but a question of aligning the costs of the public sector, especially benefits, back in line with the traumatic changes in the private sector - i.e. conversion from pensions to 401ks, major cost increases in healthcare, etc.

Another Chinese Internet Day

More of the same as the hot money goes into the same group of stocks - this has been the "go to" area the past month.

Perfect World (PWRD) +10%
E-Commerce China Dangdang (DANG)  +8%
Qihoo 360 Technology (QIHU) +7%   [recent IPO]
Sohu.com (SOHU) +6%
Changyou.com (CYOU) +5%
Sina (SINA) +4%
Youku.com (YOKU) +4%

The valuation on some of these such as YOKU and QIHU has moved from ridiculous to absurd, but it doesn't matter in a "momo" world.


As for the greater market we've drift back up to the 50 day exponential moving average.   Buy the dip still wins as yesterday's dip buyers should be congratulated for the Pavlov dog response.  At this time, a break of S&P 1295 is needed for bears to continue their recent winning streak.

No positions

WSJ: 7% of Q1 Chinese Foreign Trade Conducted in Yuan, Up from 0.5% a Year Earlier

The growing importance of the yuan in global trade is a very long term trend, and we're still in the early innings but with the world's major currencies all involved in a race to the bottom, a freely floating yuan would be a very interesting proposal.  This is probably still a decade away, but step by step China is expanding its reach.  In just a year, the percent of Chinese foreign trade conducted in yuan has increased from 0.5% to 7%.


  • About 7% of China's foreign trade in the first quarter was done in transactions denominated in yuan, up from 0.5% a year earlier, illustrating the Chinese currency's rapidly growing—though still small—international role. 
  • The volume was up from 309.3 billion yuan in the fourth quarter of 2010, or 5.7% of foreign trade, and was nearly 20 times the 18.4 billion yuan in such deals in the first quarter of 2010, according to earlier data from the People's Bank of China.
  • Until a couple of years ago, effectively all of China's foreign trade was done in dollars or, to a much lesser extent, other foreign currencies, a byproduct of the country's tight controls on the use of its currency outside its borders.
  • Since the global financial crisis, however, China's leaders have become increasingly determined to reduce the use of the U.S. dollar. In recent months, they have aggressively pushed the expansion of yuan trading outside mainland China, setting up Hong Kong as a trading hub and encouraging yuan trading in major financial centers such as New York and London. They also have entered into deals with Russia and Brazil to give companies the option of settling trade deals in local currency rather than in dollars. And Chinese officials have allowed some foreign firms to issue bonds in yuan, including Caterpillar Inc., McDonald's Corp. and Unilever NV. 
  • Mark Williams, an economist at research firm Capital Economics, said there is likely a limit to how much foreigners will be willing to accept in yuan payments, because there are still strict curbs on their ability to invest those assets, the result of the still-extensive capital controls that help Beijing manage the yuan's exchange rate. "There's a contradiction between these aims to internationalize the currency on the one hand and to maintain your hold on the value of the currency on the other," he said. "You cannot achieve both those things over the long run."

[Feb 11, 2011: NYT - In China, Tentative Steps Towards a Global Currency]
[Dec 14, 2010: WSJ - Offshore Trading in Yuan Takes Off]
[Jul 21, 2009: China's Plans for Replacing the Dollar]

RenRen (RENN) Set to IPO May 4th, Valuation Causes Another Surge in Sina (SINA)

Yesterday was another blockbuster day for Sina (SINA) as it elevated into the stratosphere despite a bad day in the market.

Apparently the filing for "Chinese Facebook" RenRen (RENN) and the proposed valuation of its 30M+ 'active users' lend to the original these we laid out many months out that the "Twitter" portion of Sina (Weibo) is being undervalued.  That said, with some nonsensical valuations in things like "Chinese YouTube" (YOKU) we are seeing the same game that was being played in 1999.  When company A stock was valued at X, no matter if X made sense, speculators could make a claim that company B should then be valued more than company A - it's the relative valuation game, and we're back to it in the Chinese internet/social networking space.  But as Cramer said last week - you just play it, until it crashes - knowing full well a lot of what is happening now is the 'nonsense stage'.


Back to RenRen (RENN) - a company I have been waiting quite a while to come public - there are actually a few "Facebooks of China" but this is the first to go public.  And the company is not without warts.  Growth seems to have stalled a bit as the user base grows slower and quarterly revenue is not seeing the dramatic quarter over quarter and year over year growth of previous years.  Not that any of that matters to the crowd that will surely bid this name up 50-100% in the first few minutes of trading, but if you still trade on fundamentals or valuation, I just wanted to point it out.

The company's revenue is mostly advertising and gaming add-ons, although a very tiny "group buying" site Noumi.com (launched last summer) is part of the mix.

[click to enlarge]

Via WSJ:
  • Beijing-based Renren Inc., a social networking site in China, is scheduled to begin trading May 4 on the New York Stock Exchange under the symbol RENN. The company, which is planning to raise as much as $584 million, claims to be the leading "real name" social networking website in China--as opposed to sites that allow visitors to use aliases or virtual identities--as measured by total page views, total visits and total user time, according to iResearch.
  • One clear sign of how hot this deal could be comes from the willingness of a group of big-name international investors to piggyback on the IPO to buy an extra tranche of shares at whatever price the public names. Alibaba Group, China Media Capital and CITIC Securities Co. (600030.SH) have agreed to purchase a total of $110 million worth of stock at the IPO price.
  • The company, formed in 2002, plans to sell 53.1 million American depositary shares at a price between $9 and $11.
  • Renren makes its money primarily from online games, which represented 45% of its total net revenue in 2010, and from online advertising, which came to 42%. Online game revenue is generated by purchases of virtual accessories. Revenue has been rising in recent years; net revenue rose 64% to $32 million in 2010 as both online ads and game revenue rose from 2009 levels.
  • The company had operating income of $7.7 million in 2010 compared to an operating loss of $2.2 million in 2009, but in both years it booked net losses of $64 million and $70 million, respectively. The net loss was the result of a change in the fair value of warrants, which won't be a factor in coming years; those warrants were all exercised in December.
iChinastock has a nice 26 page slide on RenRen that can be viewed here.  One can see one troubling issue is 'active users' - while growing - is not growing anywhere near the pace of Weibo, which has been reported to add 10M a month.  Further, many of RenRen's users are not active - hence the 117M 'users' is simply a note of registrations, not who is using the site.  Twitter in the US has a similar problem actually.

[click to enlarge]

If you are a Realmoney.com subscriber, Eric Jackson has a good piece on RenRen here.

No positions

Monday, April 18, 2011

Three Down Weeks in a Row? Now Rare

CNBC is claiming "the market" has not seen 3 down weeks in a row since January 2010.  I ran a weekly chart to cross reference this because it seemed impossible with 'flash crash', the tough summer of 2010 (pre Jackson Hole Wyoming) and perhaps the November selloff due to Ireland.   I do see three down weeks last August in the S&P 500 chart right before Bernanke promised to manipulate asset prices upward via the QE2 era, so I think CNBC might be wrong.  The same pattern goes for the DJIA.

Needless to say three down weeks in a row has become a rare thing.  When we do sell off, it is fast and quick - and right after said selloffs we have "V shaped" rebounds that once were rare (pre 2009) but now are the rule.

Thus far we are off to a rough start to this third week of selloff, and have only three (and a half) days to make it up.

p.s. on the previous entry I forgot to write another strategy is to wait for a new low of the day now that we are in a few hours in, and jump in at that point on the short side.  That would be a break of 1295....

[Chart] Next Level of Support for S&P 500

With my "line in the sand" at S&P 1307 looking like it has an excellent chance to be broke on a closing price (4 PM) basis today (finally), I would offer the next level of support is the 100 day (exponential) moving average, which served as support in the mid March swoon.  This number has creeped up from 1280 to 1281.5 the past few days so let's call it 1280ish.

Much as we had reflexive bounces off 1307 three days in a row last week, I would not be surprised to see a cursory bounce off 1280ish if and when we get there.  It will be interesting to see how the market acts at that time, and if 1280 is broken, the lows of March in the 1240s come into play.  The technical damage to the market would be quite severe in that outcome, but bulls would have a firm level to make upside bets against, as a potential 'double bottom' would be in place. 

While I did say last week I thought we had more downside to go, saying it and playing it are very different things.  The Friday rally, combined with the Pavlov dog "Monday morning gap up" would have had me not benefiting much from today's swoon, other than being in a defensive cash rich position due to the weakness in the market of late.  One does not expect to walk in Monday morning to >1% drop in the current era.   That said, one could put on some downside protection this morning using either S&P 1300 (tight) or S&P 1307 (loose) as stop out levels, aiming for the downside levels I mentioned above.  But it's never really easy, even when the market goes in the direction you presume...

HDFC (HDB) Continues to Execute - Even in Rising Rate Environment

Lost in this morning's drama is the fact we're launching into the heaviest few weeks of the earnings season.  Over 100 S&P 500 companies will report this week, and due to the holiday this will be crammed in 4 days.  Of course, there are interesting companies outside the S&P 500 as well; we'll turn our focus more company specific the next few weeks as long as the macro picture stays relatively benign.

One of India's top banks - HDFC Bank (HDB) - is out this morning with yet another impressive report, especially considering the rising rate environment in India.  The stock took a big hit along with everything in India at the beginning of 2011, but has rebounded very nicely the past two months.  I've had a tough time with the valuation since this time last year, but it first traded around the current price last August, so has had 3/4 of a year to "grow into its valuation".  It also remains one of the relatively few ways to play India via U.S. ADRs, and showcases impressive growth - especially for a financial firm.

 Via WSJ:
  • India's HDFC Bank Ltd. Monday beat market expectations to post a more than 33% jump in its fiscal fourth-quarter net profit, helped by higher earnings on loans and strong fee income.  Net profit for the January-March period rose to 11.15 billion rupees ($252 million) from 8.37 billion rupees a year earlier, higher than the 10.90 billion rupees estimated in a Dow Jones Newswires poll of 13 analysts.
  • Net interest income--the difference between interest earned and interest expended--rose 21% to 28.40 billion rupees from 23.51 billion rupees a year earlier, the country's third largest lender by assets said.  The higher net interest income was led by a wide net interest margin of 4.2% and a strong loan growth of over 27%. Net interest margin is broadly the difference between yields on advances and cost of funds over the net loans.
  • But loan growth in the next quarter is likely to slow as the central bank's continuous interest rate tightening to tame stubbornly high inflation may start impacting growth.  "It [inflation and rate tightening] certainly could shave off a bit from what the underlying growth potential [could be] in the economy," Paresh Sukthankar, HDFC's executive director, said during a post-earnings conference call.
HDFC seems to believe they can maintain net interest margins, despite the central bank increases
  • Banking analysts say the continued tightening may put pressure on lenders' net interest margin in April-June, which is traditionally a slower quarter for businesses.  But HDFC begs to differ.  "I don't see net interest margins, despite the pressure [from the rising cost of deposits], moving outside the 3.9% to 4.3% range, which we have maintained over the last many years," Mr. Sukthankar said on the call.
  • The confidence partly stems from the bank's ability to keep fund costs low through its large share of low-cost current and saving bank deposits. Current and saving bank deposits amounted to about 51% of the bank's total deposits of 2.09 trillion rupees as at the end of March.
  • Mr. Sukthankar also said the lender is likely to outpace the banking system's expected 20% loan growth this fiscal year. He doesn't expect lending or deposit rates to rise further near-term.
  •  Fees and commissions alone contributed 10.01 billion rupees to other income followed by foreign exchange and derivatives gains of 2.45 billion rupees, it said.

Other metrics also continue to impress:
  • Other income, including fees, commissions, treasury and foreign exchange transactions, for the bank jumped 32% to 12.56 billion rupees.
  • The asset quality of the bank improved with gross bad loans as a percentage of total advances falling to 1.1% from 1.4% a year earlier. 
  • The capital adequacy of the bank declined to 16.2% from 17.4% in the year ago period but remained far above the regulatory minimum of 9%.

[Jul 20, 2010: HDFC - Another Solid Quarter]
[Apr 26, 2010: HDFC Bank Beats Estimates but Valuation Getting Quite Rich]
[Jan 15, 2010: HDFC Bank Earnings Rise 32% Year over Year]
[Oct 15, 2009: HDFC Bank's Earnings Propel Upward 30%]

No position

Markets Hit as S&P Downgrades U.S. Long Term Fiscal Outlook to Negative, Warns of Potential Loss of AAA Rating in 2 Years

U.S. premarket futures were down this morning on more hand wringing over sovereign debt issues in Europe.  However just after 9 AM, a surprise came in the form of the S&P rating agency which backhanded the U.S. in the form of a downgrade of the long term fiscal outlook.

Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

Further, they stated there is a 1 in 3 chance the U.S. could lose its AAA status in two years.  

We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

While none of these things should be a surprise to anyone with a pulse, the shock value seems to have hit investors.  Obviously the combination of tax cuts + spending increases = kicking the can down the road has been awesome in terms of filling our veins with steroids but eventually will come home to roost.

The S&P 500 has fallen to the 1300 level, and is now firmly below the S&P 1307 level I've been citing the past few weeks.

WSJ: Russell 2000 Trading at Record Forward P/E, Along with Generational Premium to Large Caps

More comments this morning on valuation issues, something we spoke of last week.  Again, just as in 1999 - when a central banker goes bonkers in flooding the system with liquidity, historic valuation tends to be thrown out the window as so many more dollars chased a relatively fixed amount of stock.  That said, small caps (as represented by the Russell 2000) are now at record forward P/E ratios, and at their largest premium over large caps in a generation.  For those newer to the market, small(er) caps have been the horse to ride since the bubble burst in 2000; each year a bevy of fund manager show up on CNBC saying "this is the year of the large cap" - and wrong yet again.


  • The market's smallest stocks are commanding the largest premiums—and some of their biggest fans are becoming alarmed.  The Russell 2000 Index, which comprises about 2,000 stocks with small market capitalizations, is within about 2% of a record closing high. It is a milestone that it looks destined to reach well before larger peers such as the Dow Jones Industrial Average and the Standard & Poor's 500-stock index, which are off their record highs by 13% and 16%, respectively.
  • Small companies now command the widest premium over large-cap stocks in at least a generation, based on the ratio of price to earnings. Small caps, which typically have a market value of about $2 billion or less, often do better than large-cap stocks in the first stages of a recovery. With valuations so high, some are girding for a period of underperformance by the Russell 2000.
  • The Russell 2000 is trading at almost 18 times one-year forward forecast earnings, a record high, according to Bank of America Merrill Lynch. 
  • That P/E ratio is about 1.3 times the P/E of the market's largest 200 companies as measured by Russell Indexes, according to Lori Calvasina, director of small-cap equity strategy at Credit Suisse, the highest since at least 1979, when her data begin.  
  • The valuation gap has approached this level only twice before, in 1983 and 2007. After both instances, small-cap stocks vastly underperformed their larger brethren, Ms. Calvasina says.

Wait for it.....
  • "We're on borrowed time," she says. "We are transitioning into a new phase of leadership in which large will outperform small."

  • The rally from the March 2009 bottom has seen the Russell 2000 rise 143%, topping the Dow's 89% gain and the S&P's 95% rise.
  • Small caps largely outpaced bigger companies in revenue growth in the past few quarters, Mr. DeSanctis says. They also slashed costs by 10.7% during the downturn of 2008 and 2009, according to Mr. Singh, which compares with 3.2% among S&P 500 companies.
  • Smaller companies have also benefited disproportionately from the Federal Reserve's moves to pump liquidity into the financial system. The added cash has helped buoy all risky assets—and small caps are considered among the most risky in the stock market.
  • .......the Russell 2000 is more heavily weighted toward consumer discretionary stocks than the S&P 500 and less exposed to energy stocks. If oil continues to rise, that may mean the Russell 2000 lags behind.

Friday, April 15, 2011

[Video] Trailer for HBO's "Too Big to Fail"

It will be interesting to see if a financially based movie, 2+ years after the fact, will catch anyone's attention in the mainstream viewing audience.  But here is the first trailer for HBO's Too Big to Fail which appears to be coming out in May.  It actually has a pretty impressive cast - Paul Giamatti as The Bernank, James Woods as Richard Fuld, William Hurt as Hank Paulson

BW - This Tech Bubble is Different

An interesting take in BusinessWeek as we embark on yet another bubble, this time in social media. (which you must embrace as a momo investor, until they crash) Unlike previous "tech" bubbles (say PC era, or internet era), which left something tangible behind when they busted, this time around there appears we'll have little to show for a central banker gone mad showering the world with liquidity.  (heck yesterday an unprofitable car rental company that had no market interest last fall went ballistic on its IPO)

As an aside, Groupon looks to be coming public in Q3 at a valuation of $15-20 Billion.  I bet it doubles on the first day - after all, money for nothing and chicks for free.... 

  • As a 23-year-old math genius one year out of Harvard, Jeff Hammerbacher arrived at Facebook when the company was still in its infancy. This was in April 2006, and Mark Zuckerberg gave Hammerbacher—one of Facebook's first 100 employees—the lofty title of research scientist and put him to work analyzing how people used the social networking service.  
  • Over the next two years, Hammerbacher assembled a team to build a new class of analytical technology. His crew gathered huge volumes of data, pored over it, and learned much about people's relationships, tendencies, and desires. Facebook has since turned these insights into precision advertising, the foundation of its business. It offers companies access to a captive pool of people who have effectively volunteered to have their actions monitored like so many lab rats. The hope—as signified by Facebook's value, now at $65 billion according to research firm Nyppex—is that more data translate into better ads and higher sales.
  • After a couple years at Facebook, Hammerbacher grew restless. He figured that much of the groundbreaking computer science had been done. Something else gnawed at him. Hammerbacher looked around Silicon Valley at companies like his own, Google, and Twitter, and saw his peers wasting their talents. "The best minds of my generation are thinking about how to make people click ads," he says. "That sucks." 
  • Online ads have been around since the dawn of the Web, but only in recent years have they become the rapturous life dream of Silicon Valley. Arriving on the heels of Facebook have been blockbusters such as the game maker Zynga and coupon peddler Groupon. These companies have engaged in a frenetic, costly war to hire the best executives and engineers they can find. 
  • Investors have joined in, throwing money at the Web stars and sending valuations into the stratosphere. Inevitably, copycats have arrived, and investors are pushing and shoving to get in early on that action, too. Once again, 11 years after the dot-com-era peak of the Nasdaq, Silicon Valley is reaching the saturation point with business plans that hinge on crossed fingers as much as anything else. 
  •  "We are certainly in another bubble," says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. "And it's being driven by social media and consumer-oriented applications."
  • There's always someone out there crying bubble, it seems; the trick is figuring out when it's easy money—and when it's a shell game. Some bubbles actually do some good, even if they don't end happily. In the 1980s, the rise of Microsoft, Compaq, and Intel  pushed personal computers into millions of businesses and homes—and the stocks of those companies soared. Tech stumbled in the late 1980s, and the Valley was left with lots of cheap microprocessors and theories on what to do with them. The dot-com boom was built on infatuation with anything Web-related. Then the correction began in early 2000, eventually vaporizing about $6 trillion in shareholder value. But that cycle, too, left behind an Internet infrastructure that has come to benefit businesses and consumers.
  • This time, the hype centers on more precise ways to sell. At Zynga, they're mastering the art of coaxing game players to take surveys and snatch up credit-card deals. Elsewhere, engineers burn the midnight oil making sure that a shoe ad follows a consumer from Web site to Web site until the person finally cracks and buys some new kicks.
  • So if this tech bubble is about getting shoppers to buy, what's left if and when it pops?
  • ...... says that venture capitalists have become consumed with finding overnight sensations. They've pulled away from funding risky projects that create more of those general-purpose technologies—inventions that lay the foundation for more invention. "Facebook is not the kind of technology that will stop us from having dropped cell phone calls, and neither is Groupon or any of these advertising things," he says. "We need them. O.K., great. But they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings."
  • And if that fuel of innovation is exhausted? "My fear is that Silicon Valley has become more like Hollywood," says Glenn Kelman, chief executive officer of online real estate brokerage Redfin, who has been a software executive for 20 years. "An entertainment-oriented, hit-driven business that doesn't fundamentally increase American competitiveness."
  • "It's clear that the new industry that is building around Internet advertising and these other services doesn't create that many jobs," says Christophe L√©cuyer, a historian who has written numerous books about Silicon Valley's economic history. "The loss of manufacturing and design knowhow is truly worrisome."
  • Dial back the clock 25 years to an earlier tech boom. In 1986, Microsoft, Oracle, and Sun Microsystems went public. Compaq went from launch to the Fortune 500 in four years—the quickest run in history. Each of those companies has waxed and waned, yet all helped build technology that begat other technologies. And now? Groupon, which e-mails coupons to people, may be the fastest-growing company of all time.  Its revenue could hit $4 billion this year, up from $750 million last year, and the startup has reached a valuation of $25 billion. Its technological legacy is cute e-mail.
  • No one is suggesting that the top tier of ad-centric companies—Facebook, Google—is going down should the bubble pop. As for the next tier or two down, where a profusion of startups is piling into every possible niche involving social networking and ads—the fate of those companies is anybody's guess.

Forbes - Is the Financial Sector Gobbling Up the U.S.' Would be Entrepreneurs?

An interesting take on a topic we've discussed many times in this story via Forbes.  I think the question in the title is rhetorical, anyone with common sense would assume that by herding a multitude of PhDs and other high achievers into one sector, with the carrot of outsized compensation, another part of the economy must lose.  Unfortunately, there is no real solution one can think of because as the article states - human capital will generally move to where the best risk adjusted returns are...

  • There can be no doubt that a healthy economy and society depend on a healthy financial system. But what do we mean by a healthy financial system? Is it one that provides simple intermediary services to the so-called "real," or nonfinancial, economy? Or can it be more than that without cannibalizing the rest of the economy's vital organs?
  • The Kauffman Foundation recently addressed this issue in a paper by Paul Kedrosky and Dane Stangler, "Financialization and Its Entrepreneurial Consequences." The authors recognize that the financial services sector plays a key role for entrepreneurs, providing systems for obtaining funding and managing cash flow, which might otherwise be inaccessible. But when the financial sector becomes too large, as they argue it has in the U.S., it drains talent from entrepreneurial ventures, thereby depleting our economic strength.
  • Since the end of World War II, the financial industry as a percentage of GDP has quadrupled to its present 8.4%, offering spectacular rewards to those capable of profiting from it.
  • Kedrosky and Stangler, however, argue that the net effect of this has been negative, as too much financialization may have stifled the creation of new firms. Per-capita rates of firm formation today are lower than they were in the early 1980s. Growth in financial services is not entirely to blame, of course. But it does appear to have leached away talent and capital from new businesses which might have created more jobs and greater long-term wealth for the economy than yet another hedge fund.
  • Any visitor to a college campus in recent years can tell a story of talented students in engineering, technology or even liberal arts seduced away from these professional paths by the financial lures of banks, hedge funds or private equity firms. Brilliant computer scientists forgo the risks and opportunities of building the next Google, for the surer bet of designing algorithms for a hedge fund. Gifted physicists abandon research to build multilayered derivatives for Goldman Sachs. These employees no longer serve the rest of the economy, but rather spend their time engineering products to tilt the markets in their favor.
  • Between 2003 and 2006 the percentage of graduates from MIT going into financial services rose from 13% to almost 25%.  (quite amazing)  Financial services hiring among Harvard Business School's M.B.A. class fell from 40% to 30% between 2007 and 2008, but was back up to 34% last year. A mere 12% went into general management roles, supposedly the purpose of the school's curriculum.
  • Glancing at the incentives, one can hardly blame these young hires. Financial firms offer considerably higher pay, better career prospects and insulation against off-shoring, than traditional science and engineering companies. Human capital, like financial capital, is attracted to opportunities with the highest risk-adjusted returns
  • Imagine if Larry Page and Sergey Brin had applied their talents to trading rather than Internet search? Not only might it have taken them longer to build their multibillion-dollar fortunes, but the world would have been deprived of Google. Our suspicion is that the easy lures of finance have robbed us of more than one Google. 
  • Kedrosky and Stangler also note that highly skilled graduates have migrated into financial services just as financing opportunities have expanded for entrepreneurs. So now we find ourselves in the strange situation where more money is going into startups that have lower-quality founders and thus lower chances of success. This is the stuff of destructive economic bubbles.

The rest of the article is about "what should be done" but it is quite vague on ideas - frankly it is impossible without any change to the incentive system, which will never happen.  Ironically, at some point the financial sector had become a leech on the system - rather than serving the economy, the economy now serves the financial sector.  When the market tried to course correct this issue in 2008... well that's where your hard earned tax dollars came in to make sure the status quo remained.  Booyah.

BW: How to Pay No Taxes

Tax avoidance is not just for the Greeks or American multinationals.

Quite a fascinating cover story in last week's BusinessWeek, on strategies (all perfectly legal) the top 0.1% utilize to pay little to no taxes.  I was unaware of all this, and some of them are so sophisticated, only the brightest minds doing "God's work" could have originated them.  A lot of the techniques seem to be borrowing against assets for cash flow - which replace "generating income".

Some examples
  1. The "No Sale" Sale - cashing in on stocks, without triggering capital gains
  2. The "Friendly Partner" - an investor can sell property without actually selling, or incurring taxes

Here is a quick video on the topic - 4 minutes

Link to story here

  • For the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years.  "This is clearly far and away the most generous tax situation that's existed," says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. "It's a once-in-a-lifetime opportunity." 
  • For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS.
  • The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That's because those figures fail to include the additional income that's generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes.
  • Developers such as McCourt, according to a declaration in his divorce proceeding, "typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes."
  • For those who can afford a shrewd accountant or attorney, our era is rife with opportunity to avoid, or at least defer, tax bills, according to tax specialists and public records. It's limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters.

Thursday, April 14, 2011

Three Days in a Row... and Google (GOOG) Misses

S&P 500 closing price

April 12th: 1314.2
April 13th: 1314.4
April 14th: 1314.5

Something tells me S&P 1314-1315 is sort of important...


First glance on Google (GOOG) report shows a miss of 5 cents....$8.08 v $8.13. Knee jerk reaction -4%. Welcome to your new job, Mr. Page.

Guess who is going to fill a gap in their tonight?

Bouncing Between the 50 Day Simple and Exponential Moving Averages

This morning we quickly made a journey below S&P 1307 aka the 50 day exponential moving average but rather than leading to an extensive selloff, a buy order came in quickly sending the S&P 500 back up at a 45 degree angle, back into a safe zone.  As I always say the end of the day price is far more important than what happens intraday and I'm not the only one who knows that (hint hint).

The rest of the day has been spent bouncing around in a small range between the 50 day simple moving average as the ceiling (1315) and the 50 day exponential moving average as the floor (1307).  Generally I don't like to mix and match the two, but right now both seem to be in play.  Bears would like to see 1307 broken on a closing basis... keep in mind Google (GOOG) reports after the bell, so maybe they say something good and we gap up tomorrow.  We are overdue for a gap up after all. ;)

On a related note I often get the question why do you use exponential moving averages rather than simple; I don't have a great answer for that other than I seem to be able to have more luck reading tea leaves with the former rather than latter.  Other people use the simple and do very well in their technical trading.  Neither is 'right' or 'wrong'.  For that matter technical analysis is not fool proof.  It's just another tool for the belt to help put odds in your favor and give you some sort of road map. 

At this point 6 of the past 7 sessions have been negative on the S&P 500 so an oversold bounce would not be out of the question.  But the action overall is not very healthy.

Feedback on Mutual Fund

Being purposefully vague, there has been a development in the process. 

Concurrent with that development, I have been advised to remove all language on FMMF pertaining to status other than the wording "There is a retail mutual fund in registration with the SEC".  Therefore, I will scraping the site of other details, other than that specific language later today.   So consider this is a 'quiet period' on that specific topic go forward, until everything is complete.

[Video[ Bond Guru Bets Against PIMCO's Bill Gross (and Conventional Wisdom) on What Happens After QE2 Ends

For those who are unfamiliar with Jeff Gundlach, he is considered oe of the top minds in the bond market but generally stays out of the public eye.  In fact, other than a few interviews with CNBC's Strategy Session during 2011 - I really had not seen him on infotainment financial TV.  If unfamiliar, there is a cover story on him in Barron's a month or so ago.

Gundlach had a very interesting theory today, that goes completely opposite of what bond guru Bill Gross of PIMCO is thinking (and the general market consensus) - that is, once QE ends (i.e. the Fed stops buying bonds), bond yields will fall, not rise.  If that happens, it would catch a lot of people wrong footed.  He lays out the reasoning in this interview along with a few other thoughts:

9 minute interview - email readers will need to come to site to view  (while the topic might sound wonkish the interview is quite good)

[Mar 9, 2011: [Video] Doubeline's Jeff Gundlach Joins Chorus Warning on Muni Bonds]
[Jan 9, 2011: [Video] CNBC - Jeff Gundlach of Doubleline Capital]

IBD: Riverbed Technology's Move into the Cloud

A nice piece in Investor Business Daily, speaking to Riverbed Technology's (RVBD) move from focusing solely on WAN and into the cloud - something we touched on last summers. [Jul 23, 2010: Riverbed Technology Impresses the Street; Announces New Product so it Can be Part of the "Cloud"]  Again, yesterday's pre-announcement was not due to an incredible quarter, but the view on the name had soured so quickly that I think even an "in line" report would have led to a nice rally. I have followed this company for years on end, and I remain flabbergasted Cisco (CSCO) or Jupiter Networks (JNPR) never snapped it up.  That said, with so few high growth U.S. companies (most are snapped up by giants in their sector early in their life) left in the public market, I am thankful.


  • In November, Riverbed Technology (RVBD) launched its Whitewater appliance, which took Riverbed's product line into the world of cloud storage. For most of its nine-year existence, Riverbed specialized in ramping up the speed of wide-area networks, or WANs, which allow enterprises to connect their branches in different cities and even countries.
  • Riverbed's appliances combine hardware and software to track network traffic and strategically compress data files to free up space. That business has been very good lately, as the company showed late Tuesday when it released preliminary first-quarter results that beat analysts' expectations.
  • It was a natural progression to move from the WAN to the cloud. Cloud computing is much like a WAN, except that instead of its own in-house network, the enterprise uses the Internet. That should only increase the current trend toward data-center consolidation, analysts say.
  • "There could come a day when companies don't have big data centers," said R.W. Baird analyst Jayson Noland. "In that world, it's a pretty difficult life for a lot of vendors because there are fewer, larger buyers. But in the world that is Riverbed, that's a good trend because every office becomes a branch office."
  • On the same day that Riverbed announced Whitewater, it also launched Cloud Steelhead, "the first wide-area-network optimization solution purpose-built for public cloud environments," according to the press release. Steelhead focuses on Riverbed's traditional business of helping move data around. 
  • Noland is more interested in Whitewater, however, as it offers a cloud-based version of a hot technology known as data deduplication.  Deduplication removes all the multiple copies of data that inevitably build up with current backup and archiving methods. Every time you backup, you copy your latest material along with everything you previously backed up, often multiple times. Deduplication software has to be smart enough to eliminate the chaff without destroying anything crucial.  "When you back up your data, you want to get it off-site to some other place, and you don't want to build a facility in the desert," Noland said. "It kind of lends itself to the cloud."
  • It says something about analysts' interest in Whitewater that, in Riverbed's fourth-quarter conference call on Jan. 27, the very first questioner asked how Whitewater was doing. "We're really pleased with the market reaction to Whitewater," replied Eric Wolford, Riverbed's senior vice president for business development and marketing. "And, in fact, both of our cloud products' position is great." But he reminded the group that the products are so new that the firm expects no impact on revenue this year.
  • In his March 7 initiation report on Riverbed, ThinkEquity analyst Rajesh Ghai opined that even though the WAN market has grown rapidly in the last few years, there's still plenty of room for expansion. He cites not only the cloud and consolidation trends, but also virtualization, which allows techies to pack even more computing power into their hardware.
  • Historically, Riverbed has grown even faster than its market by taking share. Noland says that in the middle of the last decade, there was some worry that Cisco Systems (CSCO) would integrate WAN optimization into its networking products, eliminating the need for a separate purchase from Riverbed. But that hasn't happened.
  • "Cisco has not executed well," Noland said. "And Riverbed's gone from 20% to 45% of the market. This is clearly a product, not a feature." Riverbed also differentiates itself by the breadth of its product offering, which it has sometimes expanded through small acquisitions. Last year it scored two of them.

[Aug 13, 2010: IBD - Riverbed Technology: Its Network Technology Feeds a Digital World Hungry for Speed]
[Feb 11, 2010: IBD - Riverbed Technology: Making the Network Faster Pays Off] 
[Jun 29, 2009: Even Handed Story on Riverbed Technology on CBSMarketwatch]   
[Nov 27, 2007: Riverbed Technology - Fortune Article]

No position

[Video] Cramer Jumps on the Sina (SINA) Bandwagon and Advises to Play the Social Media Bubble

I believe what is currently happening in the social media space is akin to the internet bubble in 1999.  Bubbles are always based on an underlying truth (i.e. "the internet will change the world") - and a subset of companies will have their valuation taken to the moon, until one day reality sets in.  That reality could be in 9 months or 3 years - who knows.   All we do know now is the valuation of the Twitter's, Groupon's and Facebook's of the world seemingly increase by 20% a month in the private market.  [Feb 10, 2011: Social Media Bubble Grows as Twitter Valuation Doubles in 2 Months] [Dec 31, 2010: NYT Dealbook - New Round of Financing for Groupon Sets Stage for Late 2011 IPO]  What makes this go around interesting is the majority of the social media troupe is still private, so we have a plethora of "once in a lifetime" IPOs still to come - perhaps the IPO of Facebook circa 2012-13 will mark the top of this era.  Whatever the case the investment methodology for this type of move definitely is not textbook - you just buy with no regard to valuation, until someday it all comes tumbling down.  While that sounds facetious that's really how a lot of people are treating it.  It worked in 1999... as long as you did not get the last chair.

Jim Cramer (for all the hysterics) spoke about this last evening on Mad Money via the lens of Sina.com (SINA).  I can't really justify the valuation of the name anymore on earnings (despite being a bull), as it is now being priced on the potential of "the Chinese Twitter" Weibo.  Indeed, an analyst came out yesterday giving a $200 price target.  However, compared to some of the other companies being bid to the stratosphere such as "the YouTube of China" aka Youku.com (YOKU), something like Sina or Baidu (BIDU) could be considered a 'value' stock.  These all just turn into momentum plays at times like this.

This video by Cramer is actually worth listening to, because it explains what the thinking is for those playing in this group of stocks is, rather than what you read in a textbook about what the stock market is all about.

  • In some ways, Cramer thinks social media is similar to the dot-com bubble.  Those who get in on social media names early could make a killing, he said, so long as they take profits on the way up and don't get too greedy.
  • Based in Shanghai, Sina gets the majority of its business from display advertising. Cramer likes that model being as advertising dollars continue to migrate online from print media. What's driving Sina's stock higher, though, is Weibo. The microblog site is similar to Twitter and boasts more than 500 million active users. In addition, Cramer thinks Weibo is a budding online ecosystem. After having launched in December 2010, the site has more than 500 applications. Sina also has 90 percent market share by total hours spent on all microblog services.
  • When it comes to real metrics, though, Cramer said it will take Sina at least 18 months to monetize Weibo. Once they do, he thinks it could be huge given the number of users and amount of time spent on the site. In addition, its users tend to be relatively wealthy, which is something advertisers love. That said, Cramer thinks now is the time to invest in Sina.  Cramer acknowledged that Sina has already posted a 200 percent gain in the last year. He doesn't think that means investors have missed out, though.

[Mar 8, 2011: Forbes (SINA) Weibo]
[Feb 18, 2011: BW - A Twitter Knock Off has China Talking
[Jan 11, 2011: Word is Getting Out on Sina's Secret - Weibo]
[Dec 9, 2010: The Twitter of China - Weibo]

No position

Two Gap Downs in One Week? Mercy

Hell must be freezing over.  With a market that since early 2009 has trained speculators to buy right before the close to flip on the open as the majority of gains have come in the overnight session, it has become second nature to see either a flat or gap up open in U.S. markets.  Hence seeing two gap down opens in one week, without any news event (i.e. Middle East issues, European sovereign debt issues), is a strange event indeed.  I cannot remember the last time it happened, since getting even one gap down in a week is now rare.  I would assume it was summer 2010 pre-QE2 promise at Jackson Hole, Wyoming.

While some might blame today's combination of higher weekly unemployment claims (back over 400K), plus continued inflation pressures in the PPI - futures were down well in advance of these two reports at 8:30 AM.  There was a scathing Congressional report on the banks during the crisis, but really who cares - sticks and stones don't break their bones.

I continue to point to S&P 1307 - the 50 day exponential moving average - as a key line of support.  The S&P 500 has bounced off this level twice in 2 days but looks to gap down below it at the open.  Ironically, the 50 day simple moving average has been exactly where the market has closed the past 2 sessions - so I posted both on the chart below.

[click to enlarge]

In the comments section yesterday, a reader asked what the next support would be if we begin to break down.  I offered the 100 day exponential moving average - currently around 1280 - as this was the support in the mid March swoon as shown above.  If we fall to that level and don't bounce, I'd offer the original thesis I outlined quite a few weeks ago of a retest of old lows in the 1240s.  Holding that level and bouncing would be a bullish event, as we'd create a double bottom.   If the 1240 level breaks... well then we have a very interesting situation.  But these are the areas to look at over the intermediate term.  With the market creating what now appears to be a "double top", I'd expect some more downside in the coming weeks.... the question is how far.

U.S. Corporate Taxes: 1955 v 2010

Barry Ritholtz at the Big Picture has an interesting piece up this morning on corporate taxes in America in 1955 v 2010.  While a contentious issue surrounded by a lot of dogma, what is obviously clear is the tax burden / responsibility of our corporations has shrunk dramatically in the past 5-6 decades, requiring individuals to pick up (part of) the slack.  The rest simply is put off to another generation via ever larger debts. Tax departments (and lobbyists) have become as important as operations in our mega corporations.  While the story in the New York Times a few weeks ago on how the country's largest company, General Electric, is not only avoiding federal taxes but receiving rebates the past half decade, has caught the public's attention this has been a long standing issue.  [Mar 25, 2011: NYT - G.E.'s Strategies Let it Avoid Taxes Altogether]  "Double Irish" and "Dutch Sandwich" anyone? (what are these? see here)

Much like our multinational's have been able to game the global system with labor costs, they also are "winning" with tax policy - not just within countries, but within states.  Any astute reader can pick up his local paper and see a large corporation threaten to close and move a facility to another state if they are not handed a package of tax breaks.  Often these packages are offered by states with large deficits who can't even afford the money to put towards their pension obligations.  So you have a race to the bottom as desperate politicians try to keep jobs in state - offering incentives that are not paid for.  With a dwindling amount of jobs available in the country, the laws of supply and demand work in favor of those who offer the jobs.  And the same 'blackmail' (if you will) can be applied across countries as well.  So who is stuck paying the egregious and well publicized 35% corporate tax rate?  Small domestic based businesses.

What is the fallout from this subject via a stock market perspective?  It is fantastic - lower taxes means more profits... and higher stock prices. 

More from Ritholtz below....


GE paid no taxes; Goldman Sachs paid $14 moillion last year. The GAO reported in 2008 that “two out of every three United States corporations paid no federal income taxes from 1998 through 2005.”

As the graphic below shows, the change in corporate tax rates over the past half century is astounding.
Corporate Taxes as a Percentage of Federal Revenue
1955 . . . 27.3%
2010 . . . 8.9%
Corporate Taxes as a Percentage of GDP
1955 . . . 4.3%
2010 . . . 1.3%
Individual Income/Payrolls as a Percentage of Federal Revenue
1955 . . . 58.0%
2010 . . . 81.5%
Anyone who is serious about closing the US deficit should consider the changes in what corporations pay in taxes and the rise of the deficit.

The U.S. uncompetitive on the global stage when it comes to taxes?  Not in reality - see chart below
  • ....the effective corporate tax rate is actually lower than in the U.S. than many other countries. A recent study by the World Bank showed that the U.S. effective tax rate was below that of many of our top competitors, including Germany, Canada, India, China, Brazil, and Japan. As well, corporate taxes make up a lower percent of GDP in the U.S. than in many other industrialized countries.

[click to enlarge]

Original source material.

Wednesday, April 13, 2011

[Video] ABC News - Baby Boomers Forced to Redefine Retirement

Nothing new here for regular readers, but as the baby boomer generation nears retirement, a cold splash of reality seems to be finally dawning for many of those who chose not to plan out more than a year or two ahead... and/or were hit by the wrenching changing in American society the past few decades.

[Video] Byron Wein Talks Inflation, the S&P 500, and Why Cutting the Deficit Most Likely Causes a Recession

It has been a while since we posted any Byron Wein video, but he made an appearance on CNBC this morning.  While he talks about numerous subjects I want to highlight to readers a comment he made that touches on a subject I have been stressing the past 2-3 years - how dependent this recovery has been on government steroids.  (I am not even discussing what the Fed is doing).  Indeed, I just mentioned it yesterday in the piece about the the budget deficit.  It is remarkable how weak our growth is in the country despite running well in excess of a trillion of budget deficit OVER our previous record levels ($400B) the past 3 fiscal years.  You'd think we'd be getting 5-6% GDP, rather than struggling with quarters of 2-3%.  Again, I am not speaking of the variance versus a balanced budget, but how far in excess we are over our pre recession record levels of deficit spending. 

Here is Byron's comment reflecting on what I have been stressing but using percentages.

Let's say you did the Paul Ryan plan and cut an enormous amount out of it. You know, the economy is dependent on government expenditures. The government is representing 25% of the gdp right now. and taxes are 16%. there's a 9% gap. If the government really did cut the budget deficit, there's a possibility that we could go into a recession. so, you're walking a fine line here.

I used to couch this as 'cost-benefit' analysis back in 2009 and 2010.  Each time we talk about our economic reports, especially when they do 'better than expected' we MUST realize the costs involved.  They get brushed aside by Wall Street, all giddy like.  Take retail sales the past 3 months (including today's report) - does anyone mention there was a 2% payroll tax holiday that boosted every worker's income as of Jan 1? And cost $110 Billion?  Nope.   But that is just one of many examples.

Larger picture... 25% of our nation's GDP is now coming directly from government - which is nothing more than transfer payments + borrowing.  That's not entrepreneurial private sector business or wealth creation.  That does not represent 'healthy' in any shape or form.  (and yes some of it is needed i.e. infrastructure) Unfortunately, we've become addicted to our drug dealer Uncle Sam, as our multinationals and "free trade" agreements have carved out much of the private sector the past few decades - so there is no real easy path away from continued government stimulus.  I fear the dependence has become so great, that unless the Fed is engineering a bubble that can create jobs (ala housing) we will just head back to another recession as the 'real economy' is exposed.  Quite a conundrum.

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

A Positive Nugget? Most Job Opening Since September 2008

Trying to be fair and balanced.... it does appear we have some positive news in the job market as the number of job openings now has recovered to fall 2008 levels, when the wheels really fell off the U.S. economy.  While the ratio of job seekers to job openings is still 4.4 to 1, that is a sharp reduction from the 7 to 1 we saw nearly 2 years ago (ironically July 2009 which is when the recession officially "ended").  A healthy job market should show a ratio of 2:1.  Also, as I have written many times the past few months, let's keep in mind the quality of jobs coming back has not been of the highest quality [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Quality Stinks!], but in this era any job is better than no job I suppose.

Via AP:
  • Businesses in February posted the largest number of job openings in more than two years, evidence that hiring is picking up as the economy grows.  The Labor Department said Wednesday that employers advertised 3.1 million available jobs that month, the most since September 2008. That was the height of the financial crisis, when Lehman Brothers collapsed.
  • The competition for those jobs is easing, though still intense. The department's report shows that there were 4.4 people, on average, competing for each available job in February. That's down from nearly 7 in July 2009, but still above the approximately 2 to 1 ratio that exists in a healthy economy.
  • Job openings are usually filled within one to three months after posting, which means the report can be an indicator of future hiring activity.
  • The number of jobs advertised has increased by nearly 1 million since they bottomed out in July 2009, a month after the recession ended. But they are still well below the 4.4 million openings that were advertised in December 2007, when the recession began.
  • Openings rose sharply in professional and business services, which include accountants, legal services and temporary help agencies. Education and health care and hotels and restaurants also posted big jumps in job postings. Openings in state and local governments, which fell sharply last month, edged up slightly.

[Sep 4, 2009: Job Seekers Across America Willing to Take Substantial Pay Cuts]
[Sep 14, 2009: Global Wage Arbitrade at the Micro Level: Marvell Technology

[Feb 15, 2010: Newsweek - Layoff the Layoffs; an Overreliance on Downsizing is Killing Workers & the Economy]
[Sep 2, 2010: NYT- New Jobs Mean Lower Wages for Many] 
[Apr 4, 2011: McDonald's Set to Hire 50,000 Workers April 19th

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