Monday, May 9, 2011

Ritholtz: When to Fire Your Mutual Fund Manager

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Barry Ritholtz has a quite compelling piece in the Washington Post - the title is self explanatory on the topic.  Frankly it could be applied to any money manager for most of the items (excluding "too big" which would be an issue for hedge or mutual funds but not individual accounts), but I thought it was a useful list.  Link to the longer piece here - but here are the bullet points.  Interestingly with his last two points he mentions why "performance" (at least in the short term) is not one of his reasons.

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While there are many reasons to hire a fund manager, there are just as many reasons to fire one. Here are my main criteria:

When they suffer from style drift: This happens quite often; a manager developed an expertise in a given area but is looking beyond that. Maybe they got bored. Maybe the new cow in the pasture caught the bull’s eye. Whatever it is, they are doing less and less of why you bought them in the first place. That’s your signal that it’s time to move on.

When they become too big: Some managers find a niche that they can profitably exploit. But beyond a certain size — which can range from less than $1 billion to about $5 billion — they no longer can create alpha with that strategy. This may be true for eclectic segments such as convertible arbitrage, but I have found it is especially true for small cap and technologies, and emerging markets.

When they fight the dominant market trend: Bill Miller’s market-beating 15-year streak came to an end amid a value trap. He bought more and more of his favorite holdings — banks, GSEs and investment houses — right into the financial collapse. Doubling down again (and again) is not a valid investment strategy. Whatever advantages he had heading into 2008 disappeared.

When they seem to lose their edge: Whether it’s success or money or a loss of interest, managers sometimes lose the “fire in the belly.” Determining this is admittedly challenging. We often find out about some personal demons — divorce, alcohol, whatever — after the fact. Regardless, when whatever it was that made them a top stock picker starts to fade away, you should also.

When they become a closet indexer:  (Mark's note - this is a major pet peeve of mine... so many 401k plans have 8 'large cap' funds whose holdings are all essentially a mimic of the S&P 500.  Also why buy your 174th best idea?)  When a fund owns 100, 150, 200 names, it effectively becomes a high-cost index. Even if they have the top performing stocks, it will be in such small quantities as to not move the needle. This is an easy fix — you replace them with a low-cost, passive index.

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Notice that performance is not a factor in any of the points above. There are two reasons for that:

Process, not outcome: Investors ought to be focused on creating a reproducible methodology, regardless of luck or misfortune in any given quarter. Investing is a probabilistic exercise, and performance can slip for a quarter or two — even when the manager is doing everything right.

Mean reversion: The opposite of chasing performance (and buying high) is dumping a weak quarter (selling low) that then snaps back.

Doctor Copper Breaks the 200 Day Moving Average

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While I think copper to a large degree has become dominated by the whims of the Chinese buyer, many still view it as an indicator of broader economic activity since its an input to so many items.  If still relevant as such, the drop to (and through) the 200 day moving average Friday should be troubling.  The red metal is up 4 cents today but still below that key level at $3.99.

[click to enlarge]



This move along with the large drop in yields since mid April on the 10 year bond the past few weeks, might be confirming that awful ISM non manufacturing number we saw last week.  At this point equity markets could care less as it dances with every whim of the U.S. dollar, but these are secondary indicators one should be taken note of....

[click to enlarge]



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LinkedIn (LNKD) Files IPO for Minimum $3B Valuation

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The Kool Aid delicious valuations in social media continue.  The latest is everyone's favorite professional networking site - LinkedIn (LNKD).  As with all the companies (well most of them) in this broad sphere of 'social networking' the contention is not with the growth metrics, but the valuations all this easy money is imparting on the business.  While quarterly revenue is up 110% year over, it was off a tiny base of $43M.  And what incremental profit did that 110% revenue growth generate?  Not much - only 14% year over year.  Obviously expenses are ramping up almost 1:1 with revenue.  Eventually net income is what matters....

At the bottom of the current range, LinkedIn is being valued at $3 billion.  Their latest quarter was a $93M print.  We won't use trailing 4 quarter revenue (as we should) to be nice, but even if we annualize the $93M over a year that's under $400M per year, or nearly a 10x sales value.  For a company growing the bottom line under 15%.  And we can be sure this is one of those stocks that will pop 50%+ on IPO day so that $3B valuation is going to be $4.5B or $5B.   Oh well - compared to RenRen (RENN) or Youku.com (YOKU) I guess it's a "steal" at these prices.  Party on Garth.

Via Forbes

  • LinkedIn increased its IPO plans Monday, saying it intends to raise a maximum of $315.6 million by offering 7.84 million shares at $32 to $35 per share, according to an amended S-1 filing.
  • The total offering (NYSE: LNKD) would raise a maximum of $315.6 million at the top of the range, not including fees. The company expects net proceeds of $146.6 million at the midpoint of that range. If underwriters increase the offering LinkedIn could raise up to $183.2 million.  
  • The $315.6 million number is way up from LinkedIn’s previous filing in January, when it said it planned to raise $175 million.
  • The company will have 94.5 million shares in total after the IPO, giving the company a valuation above $3 billion even at the low end of the IPO range.
  • For the quarter that ended March 31, LinkedIn reported net revenue up 110% to $93.9 million, from $44.7 million in the year-ago period. The company has three main revenue lines: hiring solutions, marketing solutions and premium subscriptions. Hiring solutions is the largest piece, at $46 million in revenue in the quarter–it also grew the fastest, up 174% from the year-ago period.
  • Net income in that most recent quarter was $2.1 million, up 14% from $1.8 million in the year-ago period.
  • LinkedIn’s largest shareholders are founder and chairman Reid Hoffman with 21.2%, Sequoia Capital with 18.7%, Greylock Partners (where Hoffman is now a venture capitalist) with 15.6%, and Bessemer Venture Partners with 5.1%. They are all selling very small pieces of their stakes.  Morgan Stanley, Merrill Lynch and J.P. Morgan are leading the deal.
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Any News?

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Any reason for this good fortune?  Only watching the market with one eyeball today as I'm enjoying the thrills of multi hour emailing...


WSJ: China's Rising Wages Propel U.S. Prices

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The story of rising labor costs in China is one we've been tracking the past few years, but not getting enough attention in the media.  [Feb 27, 2008: China Raising Minimum Wage] [Feb 3, 2008: China's Inflation Hits American Price Tags] [Jan 27, 2011: China Hikes Minimum Wage Again]  I expect in a decade a lot of people to be "surprised" by this development - which already is years in the making.

For a few decades, the U.S. (and the world) has enjoyed price deflation in many goods as labor was shifted from higher cost countries to cheaper cost countries (with China being the nexus).  Specific to the U.S. this was the grand bargain we were offered in exchange for losing millions of good paying jobs.  But the past few years, the tide has slowly been turning... and attention to the issue heightened in a spate of suicides by megafirm Foxconn (which employs more people than any company in the U.S. outside of Walmart)

Long story short, at minimum the pace of price improvements for American consumers will slow... and quite likely the golden era of uber cheap will begin to see a reversal as the Chinese laborer demands entry into a reasonable form of middle class. [Jun 2, 2010: Cheap Labor Fighting Back in China] [Apr 6, 2011: Rising Costs, Higher Wages Drive Low Cost Manufacturing Out of Southern China]  Just another pressure coming down the pike for the American middle (and former middle) class.


The WSJ touches on this topic today:

  • Wages are rising in China, heralding the possible end of an era of cheap goods. For the past 30 years, customers would ask William Fung, the managing director of one of the world's biggest manufacturing-outsourcing companies, to make his products—whether T-shirts, jeans or dishes—cheaper. Thanks to China's seemingly limitless labor force, he usually could.
  • Now, the head of Li & Fung Ltd. says the times are changing. Wages for the tens of thousands of workers his Hong Kong-based firm indirectly employs are surging: He predicts overall, China's wages will increase 80% over the next five years. That means prices for Li & Fung's goods will have to rise, too. "What we will have for the next 30 years is inflation," Mr. Fung said. "A lot of Western managers have never coped with inflation."
  • "Inflation has been damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost," said Hal Sirkin, a consultant at Boston Consulting Group. The years of dramatic reductions in costs are over, the firm says.  
  • Li & Fung traces the start of rising wages to the "Foxconn Effect." Foxconn is the trade name of Hon Hai Precision Industry Co., maker of iPads for Apple Inc., and computers for Hewlett-Packard Co., among others. After a string of worker suicides last year at one of its China plants spurred Foxconn to defend its treatment of employees, the company raised wages 30% or more in a bid to improve worker conditions. That raise came as workers at other factories, including staff at a Honda Motor Co. parts plant, went on strike for higher pay.
  • Since then, the Chinese government has supported higher wages in part to address labor unrest, but also as way to boost domestic consumption and reduce reliance on exports to expand the economy. The rising wages affect both foreign and domestic companies.  
  • Other factors besides rising wages are pushing up the price of goods. Chinese workers, for one, are starting to buy more with their higher salaries. That's contributing to higher prices for commodities such as cotton and oil, which are already climbing in part because of a weaker dollar. Rising living standards in developing economies like China will keep prices of natural resources high as demand outpaces supply.
  • China's move to let the yuan slowly appreciate in value—something eagerly sought by its Western trading partners—adds fuel to the fire. A stronger yuan makes it cheaper for China to import the raw materials it needs, such as iron and soybeans, helping tame domestic inflation. But it makes its exported goods more expensive for other countries to buy. 




    • "This idea that we have moved from an era of easy deflationary environment to one of inflation is correct," said Jeffrey Sachs, economist and director of the Earth Institute at Columbia University.  During China's 30 years of economic growth, hundreds of millions of factory and urban jobs soaked up surplus rural farm labor. In the past three or four years, he says, that extra labor has been exhausted.  
    • Many analysts predict that China's vast labor force will begin declining in the next year or two, the result of family-planning policies. Others say there's already a shortage of the most active members of the factory floor, workers aged 15 to 34. That group has been steadily declining since 2007, according to Jun Ma, Deutsche Bank's chief economist for Greater China. A shrinking work force will need higher salaries to support an expanding population of elderly.
    • There's some debate about the impact and extent of these wage increases on foreign markets. The pace of inflation for U.S. imports is running around 7% this year,..... with real wages stagnant for decades, many Americans .....have grown dependent on cheap imported goods.  
    • China still has cheap labor in its interior, away from its developed coastal cities, and productivity gains could mitigate higher wage costs. For example, Foxconn announced it was expanding operations to inland areas near Chengdu, Wuhan, and Zhengzhou, away from its coastal base.Li & Fung is encouraging its suppliers to invest more in their factories to increase worker productivity and raise the quality of goods.
    • There are limits to what those measures will achieve. Some analysts say that the wage increases will sharply outpace any productivity gains. Moving inland means lower wages, but higher transportation costs on China's crowded highways and railroads. Furthermore, locating the factories in China's hinterland puts them in a better position to service China's growing domestic consumer market instead of exporting to consumers in the U.S. and elsewhere.  
    • Faced with rising wages within China, some companies are shifting resources elsewhere to keep costs down. Yue Yuen Industrial (Holdings) Ltd., the world's biggest shoe maker, has started moving manufacturing of low-cost shoes from China to countries such as Bangladesh and Cambodia.
    • But the wage gap between China and other developing countries will shrink, said Mr. Fung, echoing views shared by Boston Consulting Group, because "China was the thing that kept the price low," he says. "China was the benchmark. With the China price rising, everyone else wants to raise prices."  
    • As factories relocate to other countries, local wages will rise faster than they did in China because the potential pools of surplus labor are smaller. In addition, because no other country can replicate the massive scale of China, logistics will become a larger part of costs as companies are forced to slice up their manufacturing over several countries, analysts say.  
    • "Things will be more expensive and people will buy less," Mr. Fung warns. That means that the West will have to adopt new consumption trends.

    Housing Market Double Dip Surprises Economists - Just as Original Crash Did

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    The same economists shocked by the original housing crash (prices can't go up forever?), now appear to be in the fetal position as the much too obvious second leg of the downturn has arrived.  While I do have an economist degree, living in the locale experiencing a 1 state Depression [Jan 27, 2011: Metro Detroit Home Prices Back to 1994 Levels...Before Accounting for Inflation]  had me much more negative than those who live in the ivory towers of Manhattan or D.C..  I wrote a few years ago about a few articles that also opened my eyes to what was going on out there in the rest of the country. [May 30, 2005 - Fortune: Riding the Boom] [Sep 11, 2006: Option ARMs - Nightmare Mortgages]  Hence in late 07, I showed with simple math why we were in for a doozy of a drop in the housing market.  [Dec 6, 2007: What Should Median Housing Prices be Today?]

    As you can see from the mid/late 1970s to 2001/2002 the ratio was consistent in a tight range between 2.6x to 3.0x. Essentially this means the median home price in this country was 2.6x - 3.0x median household income. And it's been right around 2.8x for most of that time. That's 30 years....

    Then in 2002+, we had innovation.... great innovation... and 1% interest rates. Easy money. No mortgage regulation. Happy times. And crazy housing prices that detached from reality. In 2006 at the height of 'innovation' (where were these politicians 1 year ago? seriously), the ratio went "off" the chart, it appears 4.0x. After the 'correction' we've had, that ratio has fallen all the way to.... 3.8x.

    In July 2006 at the height of insanity the median price of a home was $230,200
    It has already fallen in less than a year (October 2006) to $207,800

    Pain over, correction done - time to party. Right? Wrong.

    What are median incomes nowadays? As of 2006 the median household income was $48,201.

    $48,201 x 2.8 ratio (historical average for past 30 years) = $134,962

    Folks that is still nearly $73K away.... or a drop of 35% from October 2007 levels. And a drop of 41% from peak levels in July 2006.

    Correction over? Not by a long shot.

    Now that's assuming we return to historical norms. I am fully confidant that by the time this is all said and done NEW financial innovations will be introduced (along with bailouts) which will keep prices elevated above where they 'should be' without the 'not so invisible hand' propping things up.

    Sure enough we've had bailouts, handouts, the type of Federal Reserve policy I never imagined, etc etc.  Much of it just good money thrown down a rabbit hole to try to stop reality.   [Mar 5, 2009: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners] [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble]

    So here we are 3.5 years later.  With record affordability.  And close to record mortgage rates.  And still housing prices are dropping.  I won't go into the litany of reasons that we discussed ad nauseam in 2008-2009 on why this would be the type of housing downturn the likes we've never seen before.  But let's be clear, despite the protestations of most on financial infotaintment TeeVee we have years more to go before prices clear.*  And of course, this May, June, July we will see an uptick in housing activity - as we DO every spring/early summer - and the Kool Aid drinkers will be making their bottom call yet again.  (3rd year running)  One day these broken clocks will be correct.

    *As always I am excluding places with bubble economics like Washington D.C. [Mar 11, 2010: [Video] America's 3 Wealthiest Counties Now Ring Washington D.C.], areas where Federal Reserve handouts galore continue to the financial community like Manhattan, or "America's Australia" aka the northern plains states.

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    This morning's Wall Street Journal cover piece is about the "shocking" downturn in the housing market, without the government paying people to buy homes as we did 12-24 months ago.

    • Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.  Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, pushed down by an abundance of foreclosed homes on the market, according to data to be released Monday by real-estate website Zillow.com. Prices have now fallen for 57 consecutive months, according to Zillow.
    • Last year, the housing market showed signs of improving as price depreciation slowed in some markets and stabilized in others. In response, a number of economists began forecasting that housing would hit a bottom in late 2011, then begin to recover. But the improvements, spurred by federal programs that gave buyers up to $8,000 in tax credits, proved fleeting. (uhh, I believe the current parlance is "proved transitory")  Sales collapsed when the credits expired last summer, and prices in many markets have been falling ever since.  
    • While most economists expected sales to decline after tax credits expired, the drag on the market has been greater than many anticipated. "We expected December and January to be bad" as the market reeled from the after-effects of the tax credit, said Stan Humphries, Zillow's chief economist. But monthly declines for February and March were "really staggering," he said. They indicate "a reflection of the true underlying demand, which is now apparent because most of the tax credit is out of the system, and it's being completely overwhelmed by supply."
    • Prices are decelerating in large part because the many foreclosed properties that often sell at a discount force other sellers to lower their prices. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represented a 23% increase from the previous quarter. More could be on the way: They held another 218,000 properties at the end of March, a 33% increase from a year ago.  
    • The companies are bracing for more bad news: On Friday, Fannie reported a $6.5 billion net loss, largely as it boosted loan-loss reserves in anticipation of falling home prices. (I used to post the Fannie Mae losses on the blog, but it appears no one cares anymore about Fannie coming to the taxpayer every quarter and asking for more handouts - it's just the new American status quo I suppose.  I do get a kick they still do it on a Friday evening each quarter when everyone is headed home for the weekend)
    • Paul Dales, a senior U.S. economist with Capital Economics, says prices could fall by as much as 10%, down from his previous forecasts of around 5%. A March survey of more than 100 economists by MacroMarkets LLC forecasts a 1.4% drop in prices this year, down from the December estimate of a 0.2% decline.
    • Other home-price indexes also show weakness. The widely followed Case-Shiller index published by Standard & Poor's showed that prices climbed from April 2009 until last summer, when they started declining as tax credits expired. Today, prices are on the verge of reaching new lows, the index shows. The Case-Shiller index tracks repeat sales of previously owned homes using a three-month moving average.  
    • According to the Zillow index, a handful of California markets and Washington, D.C., saw price appreciation last year, but that has since reversed. Mr. Humphries attributes the "double dip" in those markets, which include Los Angeles, San Francisco and San Diego, to the way in which the tax credit stimulated demand from buyers. When the tax credit went away, markets were left with rising supply from foreclosures but with less demand from buyers. 
    • To be sure, steep declines in home prices along with mortgage rates near their lowest levels in decades have helped make housing more affordable than at any time in the past 30 years, according to Zillow. Markets that have lower levels of foreclosures, such as Dallas, and those with better job-growth prospects, such as Washington, are faring better.  
    • Buyers who qualify for mortgages are demanding bigger discounts as added insurance against further declines in values. Sellers, meanwhile, are balking. "More often, they don't want to take the first offer," says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. "What they don't realize is, in an oversupplied market, the next offer is for less."
    • While some analysts have argued that home prices need to fall to "clearing prices" that will attract more buyers, price declines could also complicate any recovery by pushing more borrowers under water. Zillow estimates that more than 28% of borrowers owe more than their homes are worth nationally. Those numbers are much higher in hard-hit markets such as Phoenix, where more than two-thirds of borrowers owe more than their homes are worth.



    Markewatch.com also weighs in today:
    • Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month, according to Zillow.    
    • Zillow now predicts prices will fall about 8% this year and says it no longer expects the market to bottom before 2012.  “There’s no way we can get to flat, from these depreciation levels, in the last nine months of the year,” says Zillow economist Stan Humphries. “Demand is a lot more anemic than we had previously thought.” 
    • Falling real-estate prices mean spiraling hidden losses throughout the economy, from banks to homeowners.  Remember Japan’s “zombie banks”?  Here in America we have “zombie homeowners.”

    51Job (JOBS) - A Way to Play the Chinese Employment Market

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    Introducing a new China centric name to the website today, that I have been following for a few quarters - 51Job (JOBS).

    51job, Inc. is a leading provider of integrated human resource services in China with a strong focus on recruitment related services.  Through online recruitment services at www.51job.com and print advertisements in 51job Weekly, 51job enables enterprises to attract, identify and recruit employees and connects millions of job seekers with employment opportunities.  51job also provides a number of other value-added human resource services, including business process outsourcing, training, executive search and compensation and benefits analysis.  51job has a call center in Wuhan and a nationwide sales office network spanning 25 cities across China.

    The company reported earnings Friday, and experienced a serious gap up, on a massive volume surge.... but could not quite take out early April highs.  I thought the results were very solid .... but the upside reaction of that magnitude took me by surprise.  There are quite a few companies in China growing at a faster rate, but this is a 'scarcity' play in that there are not many pure play ways to play China employment in the equity markets.


    Some positives - online recruitment outperformed the rest of the business substantially, and now is over half the revenue stream.  Gross margins expanded substantially.   The negative remains valuation - JOBS trades at 35xish forward estimates.

    Via the earnings report.

    • Total revenues increased 27.6% over Q1 2010 to RMB324.5 million (US$49.6 million), exceeding the Company's guidance range of RMB305 million to RMB315 million. 
    • Online recruitment services revenues increased 57.5% over Q1 2010 to RMB172.8 million (US$26.4 million)
    • Gross margin expanded to 70.5% compared with 64.3% in Q1 2010"Through operational discipline and improved efficiency, we also successfully drove margin expansion despite higher employee costs and investments for the long term. " 
    • Fully diluted earnings per common share were RMB1.55 (US$0.47 per ADS).  Excluding share-based compensation expense and foreign currency translation loss as well as their related tax impact, non-GAAP adjusted fully diluted earnings per common share were RMB1.71 (US$0.52 per ADS), exceeding the Company's guidance range of RMB1.20 to RMB1.30 

    More on the online business
    • The increase primarily resulted from a greater number of unique employers using the Company's online recruitment services as well as higher average revenue per unique employer.  
    • Unique employers increased 37.9% to 154,823 in the first quarter of 2011 compared with 112,245 in the same quarter of the prior year driven by greater customer acceptance and usage of online recruitment services.  
    • Average revenue per unique employer increased 14.2% in the first quarter of 2011 as compared to the same quarter in 2010 due to stronger market demand and increased spending on online services by employers. 


    The company raised guidance over where the analyst community is....
    • For the second quarter of 2011, based on current market and operating conditions, the Company's revenue target is in the estimated range of RMB325 million to RMB335 million (US$49.6 million to US$51.2 million).  
    • Excluding share-based compensation expense and any foreign currency translation loss or gain as well as their related tax impact, the Company's non-GAAP fully diluted earnings target for the second quarter of 2011 is in the estimated range of RMB1.60 to RMB1.70 per common share (US$0.49 to US$0.52 per ADS).  The Company expects aggregate share-based compensation expense to increase in the second quarter of 2011 to approximately RMB10 million (US$1.5 million).

    No position

    Friday, May 6, 2011

    2011 Has Not Been Kind to BRIC Nations

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    Interesting day - as I type this the S&P 500 has just about given up the entire gap up rally....

    While the U.S. market (with the help of the orphaned dollar) has already hit most Wall Street strategists' year end price targets (1350-1375), the story has not been so good for the much loved BRIC nations.  India started the year in horrible fashion, has rebounded somewhat, but is straining under a series of interest rate hikes to contain rampant inflation.  China is more or less where it started - it fumbled to start the year, rallied sharply for a few months, but has been busy giving that all back the past 3 weeks.   Russia was the star of the group as its a de facto "oil trade" for HAL9000.... until the past month.  While still up for the year, it's given back much of its gains.  Brazil?  Pretty horrid - just broke a double bottom.  Not sure if this is an implication of a slowdown in exports to China or what is going on, but it's not pretty.  It sure looks like institutions also are treating Brazil as nothing but another de facto commodity trade.

    India



    China



    Russia



    Brazil



    ---------------------------------------------

    On the other hand, while not part of the BRICs, my little gem Indonesia has had a stellar 2011 after faltering late in 2010.  I'll repeat it again - it's time for iBRIC.

    Indonesia



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    Rumor of the Day: Greece Wants to Leave EU

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    The euro is being pressured by a rumor placed in Der Spiegel about Greece potentially leaving the EU.   While I don't think this carries much water because too many players have too much invested in keeping the EU together, it most likely would be the best way for Greece to resolve its issues.  It could then turn into a mini US, print money to its heart's content and devalue the currency.  Greece is no stranger to defaulting on its debts so nothing new there.  

    At this point all the periphery countries simply are uncompetitive with the euro at these levels, so they are facing years upon years of issues.  Of course all these bailouts for Greece, Ireland, and Portugal are truly bailouts for the banks of Germany, France, and UK.  This rumor has strengthened the dollar, weakened the euro, and of course if the dollar rallies everything else must be sold.  We are back the "stupid" market where everything is a binary trade.

    Ironically a year ago today we had the flash crash - if you remember, the market was down significantly early in the day due to (wait for it)..... the Greek debt crisis.

    Via Der Spiegel

    The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

    Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

    Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

    Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.



    'Considerable Devaluation'
    Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.
    "It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

    It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

    What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.

    "The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

    In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

    Banks at Risk
    Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

    The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds,  which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads. In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

    USA Today: U.S. Tax Burden at Lowest Level Since 1958

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    We can have our cake and eat it too.  Despite an explosion of services and federal spending, individual taxpayers are paying the lower level of taxes as % of income since 1958.  Combined with corporate taxes that are at the lowest level as a % of GDP in generations, it's good times in America.  I will be very interested if the 2% payroll tax holiday instituted at the end of 20101 will be allowed to vaporize Dec 31st, or if we throw this one under the barrel of "can't raise taxes in this environment!" as well.

    Via USA Today:
    • Americans are paying the smallest share of their income for taxes since 1958, a reflection of tax cuts and a weak economy, a USA TODAY analysis finds.  The total tax burden — for all federal, state and local taxes — dropped to 23.6% of income in the first quarter, according to Bureau of Economic Analysis data.
    • By contrast, individuals spent roughly 27% of income on taxes in the 1970s, 1980s and the 1990s — a rate that would mean $500 billion of extra taxes annually today, one-third of the estimated $1.5 trillion federal deficit this year.
    • The latest dip in the tax burden came from a Social Security tax cut included in a December budget deal between Democrats and Republicans. It will reduce taxes $100 billion this year.
    • "We have a 1950s level of taxation and a 21st-century-sized government," says Robert Bixby, executive director of the Concord Coalition, a deficit-reduction advocacy group.


    • Federal, state and local government spending hit a $5.6 trillion annual rate in the first quarter. That's the highest ever.
    • USA TODAY examined the full range of taxes that individuals pay to all levels of government. That includes income taxes for Medicare, property taxes for schools and gas taxes for roads.
    • At the national average, a person with an income of $100,000 would pay $23,600 in taxes today vs. $28,700 in 2000 and $27,300 in 1990. 
    • The recession of 2001 and tax cuts championed by President Bush started a decade-long trend of taxing less income. The 2007-09 recession and new tax cuts in Obama's stimulus effort accelerated the change.  The one-year Social Security tax cut reduces the worker's rate from 6.2% to 4.2% — or $2,000 a year on a $100,000 income.
    Other findings:
    Taxes per person. Individuals paid taxes at an annual rate of $10,549 per person in the first quarter — about the same as individuals have paid since 1990 when adjusted for inflation. Incomes have grown; tax payments haven't.
    Spending per person. Government spent at an annual rate of $18,086 per person in the first quarter. That's up from $13,552 in 2001, adjusted for inflation.


    Goldman Sachs (GS) Lobbying Hard to Weaken Volcker Rule

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    With Paul Volcker having given up and riding off into the sunset, Goldman Sachs (GS) and its army of lobbyists is busy doing "God's work" in weakening any impact he might have, according to this Reuters report.   Again, in America the BEST return on investment for large corporations is lobbying - it makes the ROI on their actual businesses look like peanuts.  For a relatively few millions, oodles of tax breaks, protections, or new contracts can be secured.  For an investment bank the sums to buy up politicians direct policy is relatively tiny - effectively for the salary of a handful of vice presidents per quarter, the world is their oyster. $5M annually for Goldman is not even a rounding error.  I am pleased to report the more things change, the more they remain the same.

    • Goldman Sachs Group Inc has just a few more months to put its stamp on the Volcker rule, and it is not wasting any time.  The rule, designed to limit banks from speculating with their own money, will cost Goldman at least $3.7 billion in annual revenue, by one estimate. And billions more could be at stake if regulations now being drawn up are extra-tough. 
    • The Volcker rule was one of the main topics on the agenda when Chief Executive Lloyd Blankfein met recently with U.S. Securities and Exchange Commission Chairman Mary Schapiro.  Wall Street chiefs do not often lobby top regulators directly, but this issue is unusually important to Goldman. 
    • "They're totally freaked out about Volcker," said a Goldman lobbyist who declined to speak on the record for fear of losing the contract. "People are working on that a lot, with agency staff, with lawmakers, you name it."  Indeed, lobbying disclosures show Goldman representatives have been working both sides of the political aisle and meeting with top officials in the White House and regulatory agencies.  
    • One big area of concern for Goldman is that regulators who are interpreting the Volcker rule will severely limit the amount of time a bank can hold a security or derivative. Positions held long term can be backstairs bets on markets.
    • The Volcker rule is not the only element of financial reform that Goldman is resisting. Important issues on its lobbying docket also include derivatives reform, capital requirements and bonus restrictions. 
    • Other bank heads, including Morgan Stanley's James Gorman, have met Schapiro about the Volcker rule. But the provision is most important for Goldman, whose business is far more weighted towards trading, three lobbying sources said.
    • Goldman has hired an all-star team of lobbyists and former government officials, leveraging powerful connections to get its message across to regulatory and political leaders.  Michael Paese, former deputy staff director for the U.S. House Financial Services Committee, heads its internal lobbying group. His team includes former staffers from the U.S. Senate Banking Committee, the White House and regulatory agencies.
    • Outside of its own payroll, Goldman also has several high-profile legislative veterans working on its behalf in Washington, hailing from both sides of the political aisle. Among them are former Republican lawmakers Trent Lott and John Breaux and former Democratic House Majority Leader Dick Gephardt.
    • "....Goldman is everywhere." 
    • Under last year's Dodd-Frank law, regulators have until July to come up with specific rules for implementing the Volcker provision, meaning banks have limited time to try to shape the regulations.  Adding to the complexity of lobbying efforts is the number of parties involved.  The SEC and four other regulators are in the process of writing separate versions of the Volcker rule, which must then be reconciled and shaped into a single set of regulations.
    • "Volcker is the subject of a very quiet, closed-door battle right now, not just between us and Wall Street, but among the agencies as well," said Bart Naylor, who has lobbied regulators for consumer-rights coalition Americans for Financial Reform.


      • Lawmakers say the Volcker rule will ensure that big banks are not gambling in markets, and that taxpayers will not be left on the hook when their bets backfire.  Implementing the Volcker rule will be tricky, though. When a bank buys a security from a client, it is difficult for a regulator to determine whether the bank is serving the client or betting on the market itself.  Limiting holding periods could be a simple way to ensure that banks are not making secret bets under the guise of helping clients 
      • Goldman argues that holding on to securities for a long period of time can be a crucial part of trading on behalf of customers because assets trade infrequently in some markets.  A substantial amount of the securities that Goldman trades seems to fall into the longer-term category. In a February presentation, Goldman said it held about a third of the securities and listed derivatives on its trading books for three months or more, and 8 percent for more than a year.  The bank did not disclose how long it holds unlisted derivatives positions, where it also has significant exposure.

      • The intensity of its efforts is evident in at least one concrete way: the amount of money it is spending on lobbying. That figure totaled $1.32 million in the first quarter of 2011. That's 15 percent higher than the same period a year ago, putting the bank on course to break its annual record for lobbying expenditure of $4.61 million, set in 2010. 
      • For Wall Street, where a bank can earn billions of dollars a year, a $5 million lobbying budget may seem paltry.  But in Washington it's a lot of money. And relative to revenue, Goldman's spending is exponentially higher than that of its competitors.
      • It is common for large companies to seek influence in government, but old hands in Washington say Goldman stands out both in its wide network of high-level contacts and its ability to leverage those relationships to its advantage.
      • "The individuals at Goldman have been incredibly powerful over time," says Hillary Sale, a law professor at Washington University in St. Louis who specializes in Wall Street regulation. "When you're a consumer, it gives you the creeps thinking about that kind of influence over regulation. But from the bank's side, it's a perfectly smart strategy."

      April Employment +244K, Unemployment Rate Ticks Up to 9% Despite No Change to Participation Rate

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      Sorry for the delay this morning...

      April employment data out this morning is more in line with what has been expected the past few months - but did not come to pass - as the BLS tells us +244K jobs were created with +268K in the private sector.   For those of you keeping track at home, the birth death adjustment was +175K, a quite massive figure.  (as always this number cannot be directly subtracted from the total but obviously helps to influence the final figure)  [Jan 27, 2008: Monthly Jobs Report & Birth Death Model]

      Whatever the case, this number seems more in line with the economic data from February and March, but in those months the monthly employment data from the government was not as strong as expectations.  This month, expectations had been lowered the past 48 hours as the ISM non manufacturing and weekly claims this week showed weakness, so we have a case of 'better than expected'.  

      The labor force participation rate remained stuck at 64.2%, hence the increase in the unemployment rate to 9% from 8.8% is interesting.  Usually you'd expect in recovery for more people to flood back into the job market seeking work, which is why the unemployment rate rising would not necessarily be a bad thing.  However that was not the case in April.  A more typical 66-67% labor force participation rate would add a few % to the unemployment rate.

      U16 - the broader measure of unemployment including those marginally attached, jumped back 0.2% to 15.9% from 15.7%.

      Hourly wages rose 0.1%.  Average workweek was flat at 34.3 hours.

      The market seems to be grabbing strictly on the +244K total (and +268K private sector) and is content with the figures, despite some underlying weakness in the supporting data.

      p.s. I am unclear if the much heralded 50,000 McDonald's hires would hit in April's data or May's.  

      Here is everyone's favorite chart showing the huge hole we must dig ourselves out of via Calculated Risk blog.


      Thursday, May 5, 2011

      Priceline.com (PCLN) Continues to Awe and Impress

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      One of my worst blunders of 2010 was selling Priceline.com (PCLN) in the low $200s after booking a very nice gain.  In the 15 or so months since, it has rallied another 150%ish.  As Homer S would say "DOH!".  I would think at some point the expectations would be too high for this company to continue to beat, but that day has yet to come.  The company just reported a $2.66 v $2.45 expectation on a 38.5% year over year revenue growth rate.   International sales, which are now almost half of the business, were blockbuster! (+80%)  They just moved guidance well over analysts $4.40 for next quarter as well.  



      Via earnings report:

      • The Group had revenues in the 1st quarter of $809.3 million, a 38.5% increase over a year ago. The Group's international operations contributed revenues in the 1st quarter of $389.1 million, an 80% increase versus a year ago (approximately 79% on a local currency basis). 
      • The Group's gross profit for the 1st quarter was $505.8 million, a 58.5% increase from the prior year. International operations contributed gross profit in the 1st quarter of $388.2 million, an 81% increase versus a year ago (approximately 79% growth on a local currency basis).
      • Non-GAAP net income in the 1st quarter was $137.0 million, a 57.1% increase versus the prior year.  Non-GAAP net income was $2.66 per diluted share, compared to $1.70 per diluted share a year ago. First Call analyst consensus for the 1st quarter 2011 was $2.44 per diluted share. 
      • "In the 1st quarter, the Group benefitted from strong growth in our global hotel business, particularly at Booking.com and Agoda," said Jeffery H. Boyd, Priceline President and Chief Executive Officer.  "Room nights booked grew by 55.8% and our international gross bookings grew by 79% compared to prior year first quarter.  The Group's hotel business continues to benefit from improving ADRs, a continuing shift from offline to online bookings, increased penetration of core European and North American markets and outstanding growth in new markets throughout the Asia-Pacific region and South America."
      • "The Group's global rental car operations grew rental car days booked by 64.7% in the 1st quarter 2011 as compared to the prior year.  A significant portion of this growth can be attributed to the Group's acquisition of TravelJigsaw and its international car hire operations, which continues to grow at impressive rates.  Priceline.com's airline ticketing business returned to positive growth in the 1st quarter, with a 2.1% gain in ticket sales and improving growth in opaque ticket sales."

      Guidance

      The Priceline Group said it was targeting the following for 2nd quarter 2011:
      • Year-over-year increase in total gross travel bookings of approximately 53% - 58%.
      • Year-over-year increase in international gross travel bookings of approximately 76% - 81% (an increase of approximately 53% - 58% on a local currency basis).
      • Year-over-year increase in domestic gross travel bookings of approximately 8% to 13%.
      • Year-over-year increase in revenue of approximately 36% to 41%.
      • Year-over-year increase in gross profit of approximately 57% to 62%.
      • Non-GAAP EBITDA of approximately $310 million to $320 million.
      • Non-GAAP net income of between $4.70 and $4.90 per diluted share.


        [Feb 24, 2011: Priceline.com Delivers Again]
        [Aug 3, 2010: Priceline Rides Foreign Markets for Huge Earnings Beat]
        [Feb 23, 2010: IBD - Could Priceline.com and Expedia Hit Headwinds?]
        [Feb 18, 2010: Priceline.com - Another Stellar Earnings Report]
        [Nov 10, 2009: Priceline.com Hits an Earnings Home Run]
        [Aug 10, 2009: Priceline.com - Recession Recsmession! Continued Impressive Results]
        [May 14, 2009: Priceline.com in Investors Business Daily]
        [May 11, 2009: Priceline.com Continues to Execute Well]
        [Feb 19, 2009: Priceline.com Impresses on Earnings]
        [Aug 6, 2008: Priceline.com - Down 17% on Good Earnings?]
        [May 8, 2008: 2 Earnings Reports of Note: AIG (AIG) and Priceline (PCLN)]


        No position

        Polypore (PPO) - Star of the Day

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        For the second consecutive earnings season, our old friend Polypore International (PPO) popped significantly on earnings day.



        I am surprised by the magnitude (16 cents) of the beat since the one segment of the business that has investors excited (lithium) is relatively small, but the entire battery segment (i.e. energy storage) was strong this quarter. Lead acid battery separators was the line item out of left field, with a 33% year over year gain.  The less exciting separations media business only grew 12%, but is now approaching only 25% of quarterly revenue.

        From the earnings report

        In the quarter, sales for the Energy Storage segment were $136.6 million, an increase of $35.2 million, or 35%, compared with the prior-year period.
        • Sales of lead-acid battery separators were $94.5 million, an increase of $23.5 million, or 33%, compared with the prior-year period, with strength demonstrated across all geographic regions.
        • Lithium battery separator sales were $42.1 million, an increase of $11.7 million, or 39%. The increase reflects strong demand in consumer electronics, growing demand in Electric Drive Vehicles (EDVs) and the incremental benefit of new capacity during the quarter. 
        ----

        Via AP:

        • Polypore International Inc. said Wednesday that its profit climbed 47 percent in the first quarter, aided by higher revenue.   The company, which makes membranes for a variety of industrial uses including electronics, reported net income of $25.7 million, or 55 cents a share, for the three months ended April 2. That compares with net income of $17.5 million, or 38 cents a share, in the same quarter last year.
        • Revenue grew to $185.7 million, up from $145.3 million.
        • The results trumped analysts' consensus forecast for earnings of 39 cents a share on $165.2 million in revenue, according to FactSet.
        • Management said demand trends remain very positive.
        [Feb 24, 2011: Polypore Impresses the Street]
        [Dec 7, 2010: Polypore Surges Higher on Upgrade]
        [Nov 4, 2010: Earnings Report Swamps Polypore]
        [Aug 26, 2010: Polypore Introduced to Cramer Nation]

        No position

        [Videos] Barry Ritholtz on Outlook for the Stock Market, Housing Market, and Discussing if the Market is "Rigged"

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        Barry Ritholtz is among a small group of folks who appear in financial media who are neither perma bull (the majority of Wall Street, because after all they want your money and must sell sunshine), or perma bear.  He also happens to be what I call the "godfather" of financial blogging, as The Big Picture was the first blog to hit the stratosphere and reach critical mass - a place I was a regular reader in simpler days when I had more time.

        Below we have a series of 3 videos with Yahoo's Daily Ticker.  In a broad sense I agree with him on all three topics discussed.  In the past few weeks, Barry has recently lowered his cash stake from 50%ish to 10%ish as the market made another of its improbable V shaped low volume bounces.  Email readers will need to come to site to view the videos.  (each video is about 5 minutes long)

        Despite Selloff, Ritholtz Remains - Cautiously - Bullish




        The Daily Ticker's Aaron Task and Daniel Gross spoke about the market with Barry Ritholtz, money manager at FusionIQ and author of The Big Picture blog. Despite the recent weakness, Ritholtz remains cautiously optimistic, because that's been the willing trade since March 2009.  "If every time the market twitched 100 points you headed for the hills, you left a lot of money on the table," he says.

        However, for a guy who remains 90% long, he listed a lot of reasons for concern on his blog this morning:

        -- Hot money seems to be rotating from speculation to speculation, rather than inflows accumulating longer-term holdings.
        -- Traditional measures of stocks (P/E, return on capital) suggest stocks are no longer cheap. Longer-term measures of valuation -- Q ratio, Shiller's 10 year P/E -- show stocks are actually pricey.
        -- China is on the verge of rolling over, falling nearly 8% in a single session. That wiped out three months of gains.
        -- Defensive sectors -- especially health care, but also staples, telecom and utilities -- have found a bid. Often telegraphing a reduction of buying by fund managers.
        -- Way too much cap weight is tied up in a handful of stocks. Apple (AAPL) is responsible for far too much of the Nasdaq gains than is healthy.
        -- The rally that began March 2009 -- now well over two years old -- may have gotten ahead of itself.
        -- The rampant speculation in silver and its collapse is a reminder that money that piles into a sector very quickly heads out the door even faster.
        -- Assumptions about earnings seem to project double-digit gains forever.
        -- The end of QE2 removes a significant bid under equities and bonds. It also will allow the dollar to rally, potentially punishing commodity traders.
        -- While earnings have been good, future guidance from companies is starting to moderate. This does not bode well for earnings supporting S&P 500 1400-1500 future levels.
        -- Speaking very generally, the low volume markets just feel tired here.

        Housing Could Struggle for Another 5-10 Years




        "Subpar GDP, very anemic job creation, slow deleveraging on both the governmental and consumer basis," is typical of a post-credit crisis recovery, he says, citing the work of Carmen Reinhardt and Ken Rogoff. "The only silver lining on that is corporate America is fairly deleveraged, and what debt they are carrying is at very, very low rates."


        The biggest overhang for the economy remains a sluggish housing market, Ritholtz contends. "It's not going to be a bright spot in the economy and probably not for five to 10 years," he tells Aaron Task and Daniel Gross in the accompanying video.

        Why? We still have millions of Americans who remain in homes they couldn't afford to buy. Ritholtz suggests half of the lot has already defaulted, but there's still a long way to go. Plus, housing prices are still too high.
        Until these issues are worked out, the economy won't truly return to previous productivity levels, he argues.

        Is the Market Rigged? Survey Says Yes!




        It's back to square one for the jurors in the insider trading case of hedge fund billionaire Raj Rajaratnam. Jurors will have top start the process all over again starting today after a juror was dismissed for "medical" reasons.

        Meanwhile, more evidence the stock market is not a level playing field: 47% of respondents in a survey of 400 investors from across the world found one-on-one meetings with companies regularly lead to price sensitive information being divulged, according to the Rotterdam School of Management.


        Surveys like this, along with the Rajaratnam trial, the saga over David Sokol's Lubrizoil trades and a overwhelming sense the market is stacked against them helps explain why mom & pop haven't piled back into stocks even after a more-than 2-year bull market.

        In the accompanying interview The Daily Ticker's Aaron Task and Daniel Gross discuss just how prevalent insider trading is on Wall Street with Barry Ritholtz director of research at FusionIQ.

        "It may not be completely and totally rigged but damn if the odds aren't against the average investor," exclaims Ritholtz. That does not however mean the pros are trading secrets amongst themselves. "Real inside information is actually surprisingly rare [but] I wouldn't be surprised if it's traded on pretty actively," he says.

        In Ritholtz's experience what separates the successful professionals from the average individual investor is an information edge, in terms of research and analysis, not privileged information. Most of the rumors whispered around trading floors simply don't hold water, he says.

        Even if professionals are getting illegal tips from their one-on-one meetings, as the survey suggests, Ritholtz says there are few slam dunks, outside of inside information about pending mergers. Either way, it's not the way you want the markets to function.

        Gas Prices Better Drop this Weekend

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        I know "refined product" is the not the same as "crude oil" but I'll be darned if every time crude oil pops 70 cents, that the price of gas doesn't jump $0.03.  In that case, I better be able to buy some gas for a discount tomorrow.



        Run Forrest Run!


        It looks like Mr. Trichet did the U.S. peso a favor by sounding dovish in today's ECB speech.... we finally got that long awaited oversold bounce.

        No positions

        Will QE Ultimately Lead to Weaker Labor Markets?

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        The Fed has a dual mandate of price stability and full employment.  They are failing miserably at both, although I really don't think it makes any sense that a central bank is responsible for employment.  A country's fiscal policies, tax laws, educational system, incentives, and the like are the backbone for job creation - not where the Fed's interest rates are.  But I digress.

        If you listen to the propaganda from the Fed they believe they have created 3M jobs via QE's.   [Jan 11, 2011:  Federal Reserve's Yellen: Q1 + Q2 to Create 3M Jobs]  (If true - why don't they just 'print' another $10 trillion and then every American will have a job.)

        They also believe (or at least say in public) QE has nothing to do with the price increases in commodities; even though the stated intention of QE2 (via editorial by the Bubble Blower in Chief) was "an increase in asset prices".  (i.e. manipulation)  Only in their convenient world does QE increase asset prices in the stock market BUT NOT commodities.  Living in ivory towers is an awesome experience.

        Now while the unemployment rate has dropped the past few months (sharply in fact) much of this is due to the fact the labor force participation rate has dropped.  We've lost a few million Americans, who have simply gone missing.  It appears some of them (1M or so) have enrolled into disability the past 2 years - which is helping the unemployment rate drop, but has nothing to do with job creation.  So the unemployment rate falling has been happening mostly for the wrong reasons... sorry Ms. Yellen.

        -----------------------------------------

        I cannot find the original post but back in the fall of 2010, as I thought how this would work out, I opined it would very plausible than as QE plays out, it could actually hurt the job market rather than help it.  In this piece from October 2010 I wrote:

        Profit margins are going to be squeezed as this (price increases) begins to filter through the system - the Chicago PMI is already showing it.  (remember, my outlandish theory is as corporations work to protect profit margins, as input prices surge they will begin a new round of labor cuts - thanks Ben!) 

        Again this February:

        If job cuts (to protect margins) are the ultimate outcome of central banking easy money policies, the irony will be fantastical....

        Again in March:

        Ironically the more QE to come, the more speculators will drive up commodities.... which will impair corporations (who might cut jobs to preserve profit margins) and consumers... which (in the Fed's mind) will require more QE.  Circular logic anyone?  But in The Bernank's view his actions only make the stock market go up and not other assets (read: commodities) so he won't make the connection.  

        I keep using the word irony because this band of economists seems to be lost.  While they chant for higher inflation as official policy goal, they are simply imposing a tax on countless people who cannot afford these pricing pressures.  The reality is they are aiming for a misguided "wealth effect" mantra that helps the top 10% (and especially top 1%) which is simply a corrupted offshoot of "trickle down economics" dogma (clearly a massive failure for anyone in the bottom 2/3rds of this country the past two decades).

        This "tax" they are creating, has the potential to cause corporations to pull back on hiring as Wall Street pressures them to hit earnings targets and protect margins.  Obviously this is inverse of what the Fed mandate is.  Let us see how the hiring picture plays out in the next 3-6 months to see if my theory is playing out.

        In my opinion the best thing the Fed could do is state to the world there is zero chance of QE3.  The dollar would rally, commodities would be crushed, and Main Street would benefit.  But that action might hurt Wall Street and since the country is run for the select few, I expect Fed policy to continue down the same road.  We've had 2 middling quarters of growth during QE2, so as we all know.... if it doesn't work the first or second time, just keep repeating it.  Surely the third (or fourth, fifth, nth) time will be the charm.

        Time to Panic About Employment (Again)?

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        Initial claims had jumped over the 400K level the past few weeks, after 2 months of mostly staying below that level.  This morning's 474K figure was from out of left field vs expectations of 410K.  Time to panic?  Too early to tell - some of this could be due to the tornado situation in the southeast last week.  There also appear to be "one time adjustments".
        • A Labor Department analyst attributed the surprising increase to one-time administrative factors, including additional layoffs in New York state due to spring break, which doubled the number of claims in the state. Other reasons cited were a new emergency benefit program in Oregon, and additional automobile industry claims
        But it seems clear the economy has taken a turn downward the past 8 weeks - in perfect relation to the spike in gasoline prices over the $3.75ish level.



        These claims figures won't impact tomorrow's numbers.... but the clouds should be forming over next month's report.

        Ironically all those economists calling for 3.5-4.0% GDP in Q1 (which instead came in at 1.8%), now have to look deep into their souls at the Kool Aid they have been drinking about Q2 and full year 2011.  Especially with the ISM Non Manufacturing figure we saw yesterday.  The Bernank's QE programs continue to harm the REAL economy even as it creates new misallocations of capital on Wall Street.

        Now as always the economy is NOT Wall Street - remember usually when a company chops 40,000 workers, the stock surges!  Dan Gross of Yahoo Finance wrote an awesome piece on why it's a great time to be a Fortune 500 company (horrible U.S. labor market, weak private sector labor unions, cheap money, friendly government, lobbyists running the country, and big overseas markets to exploit) - nothing new to long time readers of FMMF but I like to see these type of articles in more mainstream media.

        (h/t for chart to ZH)

        HAL9000 Taking a Break?

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        According to the WSJ, the lack of volume in the market signals HAL9000 and his merry band are not finding as many opportunities as in the good ole days.  While a contributing reason, I also believe a lot of people in their 40s and 50s, burnt twice by double bear markets the past decade, have simply thrown in the towel on equities.  The flash crash a year ago probably chased out quite a few as well.  Whatever the case, a lot of old adages in the technical analysis arena that are related to volume have had to be ignored to participate in the almost non stop rally.

        • When stocks collapsed in a free fall last May, the fear was that the market had been taken over by high-speed computers that had run amok.  A year after the "flash crash," which saw the Dow Jones Industrial Average plunge 600 points in less than 10 minutes, the stock market is a much quieter place.
        • Companies that use fast-trading, computer-driven strategies, which were painted by some as culprits of the collapse, have curtailed trading. So, too, have many long-term investors, for whom the trauma of that May 6 afternoon was the final straw after a decade of stock-market turmoil
        • In their absence, trading volume and volatility have plunged, further deterring high-frequency traders.  High-frequency strategies "have less to work with, so they don't participate, which creates less volume," said Will Mechem, a managing partner at high-frequency trading firm Pan Alpha Trading. "This would seem to be a vicious cycle."



          • In the first four months of this year, average daily trading volume of stocks listed on the New York Stock Exchange and Nasdaq Stock Market is down 15% from 2010's pace, running at an average rate of 6.3 billion shares a day. Volume has been edging lower throughout the year, with April's daily average of 5.8 billion shares marking the slowest month since May 2008.
          • Volume had marched higher for most of the last decade, escalating during the financial crisis. It doubled between 2006 and March 2009, when an average of nine billion shares changed hands every day.
          • The declines in volatility and volume have been bad news for high-frequency traders, whose strategies generally rely on squeezing profits out of the tiny differences between the buy and sell orders of stocks within a fraction of a second.
          • Rosenblatt Securities Inc. estimates that high-frequency traders would have made, on average, five cents to 7.5 cents per 100 shares traded in the U.S. stock market in 2010. That is down from 10 cents to 15 cents per 100 shares in 2008.
          • Also contributing to lower volume, traders said, is a number of hedge funds that use computer-driven strategies known as statistical arbitrage have scaled back trading or shut down altogether as poor returns in recent years sent investors fleeing.
          • Some observers said those lofty levels of trading activity were never an accurate picture of demand among investors to buy or sell stocks.  Rather, it was a reflection of computer-driven traders passing securities back and forth between day-trading hedge funds.  This phantom liquidity, they said, was unmasked during the flash crash.
          • "Retail investors returning to the market would help," said Pan Alpha's Mr. Mechem. "Also, there has been a recent increase in cash flowing into hedge funds, so we would expect that to drive volume as capital is deployed."


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