Tuesday, May 31, 2011

Apple (AAPL) Strength Helping a Lot of Indexes Today

Apple is the dominant being in most tech oriented indexes and many ETFs so the big (for it) move of nearly 3% is helping to push this market up.  The NASDAQ is leading all indexes here at the close of the day with a +1.2% gain.

It has been a rough month and a half for Apple, so one wonders if this is some tape painting to end the month.

Another day when a slew of poor economic data means nothing, and a weak dollar means everything.

No position

Peru, Columbia, and Chile Merge Stock Markets

This completely was off my radar, but online buddy Josh Brown at The Reformed Broker mentioned that the stock exchanges of Peru, Columbia, and Chile are combining into one.  While you might at first glance yawn, Peru [May 20, 2009: Year to Date Returns by Country - Go Peru!] and Chile in particular have quite exciting (if relatively small) markets, are were amongst the best performers in the past few years.  I do not not much at all about Columbia however.

Here is an older story that focuses on Chile  [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn], and one on Peru [Jul 2, 2010: NYT - Economies in Latin America Race Ahead]

Via Christian Science Monitor

  • Peru, Colombia, and Chile will formally merge their stock markets Monday, creating the second-largest bourse in Latin America after Brazil and promising to increase liquidity in the mineral-rich Andean region.  
  • The market alliance of the three right-leaning nations spanning most of South America's Pacific coast gives investors better exposure to assets linked to the region’s natural resources and its rising middle class
  • The launch of the regional bourse, dubbed the Mercado Integrado Latino Americano (MILA)
  • Mining companies dominate all three bourses, accounting for 60 percent of the Lima stock exchange alone, according to analyst Hector Collantes of Apoyo. “The MILA brings closer to the market the opportunity to gain exposure to Peruvian consumption investment vehicles via those companies listed in Bogotá and Santiago,” says Mr. Collantes. “[M]ore investors and investment options might increase overall liquidity.”
  • On the MILA, the Lima exchange is the largest by number yet the smallest by market capitalization, with $83 billion spread over 248 companies at the end of April. The Santiago stock exchange had $343 billion among 230 companies at the end of April while the Colombia exchange had $217 billion among 83 companies.

Very Impressive Bounce by Polo Ralph Lauren (RL) as it "Fills the Gap" the Other Way

Last week, Polo Ralph Lauren (RL) was flattened by an earnings report which investors originally did not like (margin pressure and inventories the main culprits).  This selloff filled a 'gap' from early February to the downside.  Normally in these type of situations, the selling continues for a few days - I generally give it three days to allow the selling to wear off before sniffing around.  However, that was not the case with RL.  I believe the stock was upgraded the very next day which helped it hold the lowspol.  Friday it had a very nice bounce, and today it has filled the 'gap' again - but this time to the upside.  Quite a round trip... and an impressive movement!

No position

Bailout Bounce Quite Limp

It's not like the good ole days when a U.S. or European led bailout on a Sunday night would lead to a 2-3% gap up the next morning and buying all day.  While there was a nice 1%ish pop today off the Greece bailout 2.0, people MIGHT finally be coming to the realization that nothing is being solved with these bailouts, and it simply is kick the can.  We will be revisiting the same issues 6-9-12 months down the road.

I wanted to see the S&P 500 close over the most recent high in the mid 1340s, to mark a change in character.  Thus far we have been unable to create a "higher high", and are drifting above a few support areas.  The four day rally has also helped to offset a lot of the extreme oversold conditions in secondary technical indicators.

The dollar is down 0.4%, having been clearly beaten back from resistance at the 100 day moving average.  It says a lot when a region who is battling multiple potential defaults and just agreed to hand one of its member countries tens of billions in euros sees its currency STRENGTHEN against the greenback.  Until proven otherwise the dollar bounce looks to have been simply a technical oversold bounce as a 'crowded trade' came unwound.

[chart below is 1 day delayed]

Number of Americans Employed Only Equal to 1999 Levels

While Wall Street focuses on the minutia of "beating expectations" in any one month in terms of the monthly labor data, those who look at the forest rather than the trees, see how poor the situation really is for many in America.  Despite substantial population growth, the number of employed Americans in 2011 is no different than it was in 1999.  Or 2001.  Or 2003.  This is why I keep highlighting each month how poor the labor force participation rate is.  Simply to keep up with population growth the U.S. needs to be creating in excess of 125K jobs a month.

Of course, specific to manufacturing the story is much more dire - less jobs in America today than before World War 2.  [Nov 29, 2010:  America Has Less Manufacturing Jobs Today than Before the War

The promises of the ivory tower folk of how excellent globalization would be for America have thus far fallen flat..... unless you are of course a multinational corporation.  Middle class American?  Not so much.

Try to keep this in mind as the financial infotainment folk cheer an extra 20,000 +/- each first Friday of the month.  We have a tremendous hole to work ourselves way out of, and we're already in the mid cycle of this 'recovery'.  If the next recession is another major blood letting, it's going to get even darker out there for "average Joe".

hat tip Ritholtz

[click to enlarge]

Friday's Payroll Report Should be "Better than Expected" as McJobs Flood In

This is one week market participants seem to actually care about economic data each month, as key labor, manufacturing (ISM in U.S., PMIs in Europe and China) and service data roll in.

I am unclear why economists have brought the expectation for May hires down so low versus April, when Friday's data should be highly influenced by an influx of McJobs.  The story below gives a hint - seasonal adjustments - but that can't explain it all.  Recall in April, McDonald's Announced an intention to hire 50,000 with a job fair April 19th.  [Apr 4, 2011: McDonald's Set to Hire 50,000 on April 19th]  But since it would be highly doubtful any decisions were made 'on the spot', May's data should be highly influenced by this event.  In fact, McDonald's hired 62,000 (mostly) just above minimum wage workers, so that's an additional 12,000.  With economists lowballing the May data, any figure that does not come close to April's data should be extremely disappointing considering May has a huge head start over a normal month.

Via Marketwatch:

  • For over two decades, the term “McJob” has been used as code word for the kind of low-paying, low-skilled employment that all too often has characterized the opportunities available in an economy with an eroding manufacturing base. But the May payrolls report, due Friday from the Labor Department, really will be influenced by hiring from McDonald’s.
  • On April 19 — about a week after the government conducted its survey for the April jobs report — the hamburger chain ran a promotion designed to hire 50,000 workers. In fact, the fast food giant hired 62,000, most of whom will receive just little above the federal minimum wage.
  • Given that economists polled by MarketWatch were expecting May payrolls to slow to 180,000 from 244,000 in April, there’s a possibility that McJobs will account for a big slice of the jobs created by the U.S. economy during the month.
  • Making it even more confusing is the possibility that seasonal adjustment could sweep away much of the McDonald’s hiring push. “Some of the increase will likely be swallowed up by the seasonal adjustment of this subcategory, since the March-to-June period is typically the peak hiring season as restaurants boost staff levels for the summer months,” said Carl Riccadonna, an economist at Deutsche Bank, in a note to clients.  “Nonetheless, it is our impression the recent hiring day substantially exceeded the usual gains, and as a result should have a measurable impact on overall hiring.”
  • Economists are expecting a slight improvement in the unemployment rate, to 8.9% from 9.0% in April.

  [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]

Monday, May 30, 2011

Mark Mobius Agrees with Robert Rodriquez in How Nothing has Been Fixed. Mobius Says "Financial Crisis Around the Corner"

Much like FPA's Robert Rodriquez (highlighted yesterday), another of the world's brightest financial minds, Templeton's Mark Mobius says we wasted a crisis, and nothing really has been fixed - the same thoughts this humble writer offered in 2008 and 2009 as bailout after bailout was granted, with no fundamental change to the system.  While Mobius says it is "around the corner" I have great faith than the world's central banks will be able to print enough money to keep the balls juggling for quite a while more.  Much like Rodriquez I have no idea when the proverbial manure hits the fan, but the seeds of said crisis are sown nicely.  We can however be assured that a Fed who under Greenspan and Bernanke knows how to do nothing but create bubbles while kicking cans... and then crater the system, while being the bank's drug dealer in chief, will have another mess (of their own making) to clean up in due time.  And just like this last time around when the house comes burning down, The Bernank (or maybe easy money Yellen by that moment) will race to the scene of their crime, pour water on the burning system and tell everyone to thank them for rescuing us!   And no one will ask why we keep having the same problems, and who is the nexus of them all.

Until then we dance!

Via Bloomberg:

  • Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.  “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
  • The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.  The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns.
  • “With every crisis comes great opportunity,” said Mobius. When markets are crashing, “that’s when we’re going to be able to invest and do a good job,” he said.
  • The freezing of global credit markets caused governments from Washington to Beijing to London to pump more than $3 trillion into the financial system to shore up the global economy.
  • The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.  “Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”

The World Goes on Memorial Day Edition - China Falls for 8th Straight Day, EU Rushes to Prepare Greek Bailout 2.0

While most Americans, at least those not living in Columbus OH, enjoy Memorial Day - the rest of the world goes on.  China's market quietly has fallen for 8 sessions in a row, although today's 0.13% loss was modest.   That market is firmly in oversold condition in the near term, but the push pull between fighting inflation and a soft 'slowdown' in economic activity continues.

Meanwhile, in yet another KICK the CAN moment, in a now nearly 4 year global kicking motion, preparations are being made to bail out banksters in Germany, France and the U.K. for another bailout of Greece.  Much like an indebted to eyeballs consumer, clearly the only solution is to hand that consumer even more debt.  They'll pay it back somehow!  Just like was promised last year!  Can't let the European banks take a haircut on their holdings. 

European markets are taking the bailouts in stride, with smallish losses, as the expectation now is that no one will ever take medicine, and moral hazard is now ingrained in world markets.  Don't worry if you missed this story, I expect in summer 2012 we'll be talking about a new round of monies handed to the Greeks so they can keep the European bankers whole.  And don't forget the Irish who should be ready for their second rescue soon enough.  Round and round we go, where the bailouts end, no one knows.

Via Reuters:
  • The European Union is urgently working on a second bailout package for Greece in a race to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.
  • Greece's conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance.
  • Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for next year.  Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said.Greece currently aims to raise 50 billion euros from privatizations by 2015 to help stave off a fiscal meltdown, but the country lacks a proper land registry and ownership of many potentially lucrative assets is legally uncertain.
  • Greece took a 110 billion euros ($158 billion) rescue package from the EU and IMF last May but has since fallen short of its deficit reduction commitments, raising the risk of a default on its 327 billion euro debt -- equivalent to 150 percent of its economic output.
  • The tax cuts sought by the opposition could aggravate a revenue shortfall which a "troika" of EU/IMF inspectors found on a review mission in Athens, due to be concluded this week.
  • EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatization program. "It would require collateral for new loans and EU technical assistance -- EU involvement in the privatization process," one senior EU official said, speaking on condition of anonymity.
  • Extra funding for Greece faces fierce political resistance from fiscal conservatives and nationalists in key north European creditor countries -- Germany, the Netherlands and Finland -- complicating EU governments' task. 
  • Mass unemployment and wage and benefit cuts due to the EU/IMF austerity plan have triggered spontaneous youth protests in Greece as well as a series of one-day strikes by powerful trade unions.
  • Weekend comments by an Irish minister that Dublin too may need a second rescue package may also fuel alarm about further bailouts.  Transport Minister Leo Varadkar told The Sunday Times newspaper that Ireland was unlikely to be able to return to capital markets next year as foreseen in its EU/IMF program.  "It would mean a second program (of emergency loans)," he was quoted as saying.
  • The European Central Bank for its part continues to oppose any attempt by EU politicians to restructure Greece's debt mountain, even by asking investors to accept a voluntary extension of bond maturities.

Sunday, May 29, 2011

AP: Culture Class Complicates China's Brazil Push

One of the increasingly important relationships the past decade has been between 2 of the growing world powers contained within the "BRIC" - Brazil & China.  While most focus on the commodity output from Brazil feeding into China, China also has many boots in the ground within Brazil.  A strategy the Chinese have adopted worldwide in fact. [Aug 2, 2010: New "Silk Road" Built by China Connects Asia to Latin America]  In the past, China would import their own workers as they made inroads abroad, but in certain countries (i.e. Brazil) the government is not going for that. When that happens - issues can occur.  Specific to this story the Brazilian way of doing things and the Chinese way of doing things are not necessarily wholly compatible.  AP reports:

  • (from Brazil)  Stocking shelves in a Chinese grocery store, Thiago warned that he didn't want to be caught chatting during working hours. Within seconds, however, the Brazilian unleashed a pent-up flood of complaints about the owners, who lingered just beyond hearing distance.  "My bosses have never heard of a day off," said the 20-year-old, who would only allow his first name to be used, for fear of losing his job. "Vacations? Forget it. They pay well and they pay for extra hours, but they don't understand that some things are more important to Brazilians than money.  "I've seen many workers walk in, see the Chinese way of doing things, and quit the very same day."
  • Such cross-cultural tensions have become a stumbling block in an otherwise meteoric rise in business ties between China and Brazil, two of the world's fastest-growing economies.  Chinese companies' direct investment in Brazil jumped to $17 billion last year, nearly 60 times the investment the previous year.
  • .... about 30 of China's big state-run companies with annual revenues above $1 billion are now in the country, more than three times the number five years ago.  China and Brazil's bilateral trade surpassed $56 billion last year, up from $2.3 billion a decade earlier. In 2009, China replaced the U.S. as Brazil's biggest trading partner.
  • At the same time, more Chinese companies are hiring local workers rather than following their old practices of bringing in Chinese laborers That new reality has meant frequent contact between two cultures that hold vastly different expectations about the role of workers, government regulations and unions.
  • Brazilians enjoy some of the most labor-friendly protections in the world, with guarantees such as one-month annual bonuses and stipends for meals and transportation. China, on the other hand, has quickly become the world's second biggest economy on the strength of a low-paid work force and, in practice, virtually nonexistent labor protections, according to the U.S.-based nonprofit Global Institute for Labor & Human Rights. Brazil's strong independent labor movement also clashes with a centralized Chinese system of company unions without collective bargaining power.  "You're looking at a whole different model of how society operates," said Charles Kernaghan, the institute's director. "That means no rights to organize, virtually no labor protections."
  • Chinese companies are attempting to export that model and, at least in Brazil, have been finding it difficult to retain workers, even in management positions.  A survey of 500 Brazilian executives working for Chinese, North American and European companies recently conducted .... found that 42 percent of Brazilian executives working for Chinese companies left their jobs within a year, a 68 percent higher turnover rate than found in the other firms studied.
  • Brazilian workers complain that their Chinese employers don't understand the country's culture of developing personal relationships among co-workers. Brazilians also bristle against a centralized office hierarchy that puts little trust in local executives.  "The cultural misunderstandings are going to frustrate the development of Chinese business in Brazil," said Marcelo de Lucca, director of Michael Page's Brazil operations. "Multinational companies, when they arrive in Brazil or any country, have to adapt to the local culture. But the Chinese, with their old culture, being a country ruled by a strong Communist party with extreme levels of hierarchy, for them this process will take longer."
  • "It was not the quantity of work -- we're all chained to our Blackberry, working 24 hours a day, seven days a week," she said. "But the Chinese bosses wanted people physically in the office 100 percent of the time so they could control them.  "That's definitely not how deals are closed in Brazil. It's over dinner, at lunch, having a drink. You cannot keep your work force locked up in an office and expect to make headway in Brazil."
  • Brazil isn't China's first foray into Latin America -- Chinese companies have a strong presence across the region, from mining operations in Argentina to manufacturing in Mexico. China has bilateral trade agreements with Peru, Costa Rica and Chile.
  • Zhang Jianhua, chief of the Bank of China's operations in Sao Paulo, said Chinese companies have been enticed by Brazil's wealth of iron ore, soy, oil and other natural resources, and many companies are finding it more cost effective to move closer to the commodities. Chinese companies also see Brazil's booming middle class as a lucrative market.
  • Asian executives have had their own complaints about what they've seen as the lax work ethic of Brazilian employees, but are up against laws that require all foreign companies in Brazil to hire locally.
  • Charles Tangwho founded the Brazil-China chamber of trade and industry 25 years ago, vividly recalls the difficulties he encountered when the Bank of Boston first sent him to Brazil in the mid-1970s. He was particularly frustrated with what he said was some Brazilians' lack of punctuality.
  • Tang said he soon learned the Brazilian way -- essentially to relax, realize nobody is going to arrive at a meeting on time and understand that informality doesn't necessarily equate with a lack of professionalism. He realized that the differences in style ultimately didn't affect the bottom line.
  • In fact, data from the U.S.-based business group The Conference Board show Brazilian workers were 30 percent more productive last year than their Chinese counterparts. Chinese worker productivity, however, grew at more than twice the annual rate than that of Brazilian workers.
  • In the past, Chinese firms circumvented such complications by importing thousands of their own workers, a practice Brazilian officials don't tolerate.  "They know that here they have to work mostly with Brazilian laborers, the government has made that clear," Barros said. "In places like Africa, they resolved work force problems by ignoring the problem, by working with Chinese workers."

[Jun 10, 2010: China's Thirst of Any Commodity that Moves Leads to Thawing of Relations with Russia]
[Apr 13, 2010: China's Quest for Resources Makes Billionaires Out of Some Australians]
[Feb 16, 2010: India Worries as China Builds Ports in Southeast Asia]
[Dec 15, 2009: China's Economic Power Unsettles Neighbors]
[Nov 11, 2009: China Continues Expanding "Infrastructure for Resources" Policy with Agreement in Malaysia]
[Sep 30, 2009: China Attempting to Secure 1/6th of Nigeria's Proven Oil Reserves]

FPA's Robert Rodriquez: We'll Have Another Crisis

FPA's Robert Rodriquez is one of those rare breed who can invest prescient macro observations with an astute investing mind.  He does not mind going against the masses, and waiting for his thesis to play out.  More often than not he has been proven correctly.  After taking a 1 year sabbatical from FPA in 2010 [Mar 12, 2009: "FPA Funds" Robert Rodriquez to Take 1 Year Sabbatical], he has returned to the company and in this recent interview with Money Magazine is warning we really have not fixed (nor learned) much of anything related to the crisis of 2008-2009.

Some excerpts below:

  • Few mutual fund managers could pull off what Robert Rodriguez did. During the tumultuous 2000s, his FPA Capital stock portfolio, which is closed to new investors, managed to earn an annualized 9% even as the S&P 500 lost money.  At the same time, he also co-managed FPA New Income, a bond fund that earned a spot on our Money 70 list of best funds
  • Rodriguez, 62, is known for thinking big: In early 2007 he laid out a detailed case for why housing debt could trigger a crisis. Now he's just as worried about the federal debt.
  • Rodriguez took a sabbatical in 2010 -- he traveled the globe, read about the fall of Rome, indulged his car-racing hobby -- and has returned to FPA as CEO, with an advisory role on the funds. He spoke with editor-at-large Penelope Wang; the conversation has been edited.
  • Now that you're back, do you have a different perspective on the economy?  I would say a lot of nothing has changed. Before I left, I was vocal about the difficulties that were going to hit the U.S. economy: the growing federal debt and the lack of meaningful fiscal reform. These issues still have not been addressed.  Meanwhile, banks are operating much as before -- "too big to fail" is continuing. Investors are still chasing after higher yields and loading up on risky investments. The search for safety in the wake of the financial crisis lasted maybe two years. Very little has been learned.
  • Won't the economic recovery help us grow out of these problems?  At best, we're facing a substandard recovery. It will probably take another eight years for the consumer to recover. But mainly I worry about the swelling debt of the U.S. government, which is ballooning faster than the economy is expanding.
  • So you see rates rising, and bond prices falling. How big will the correction be? Before my sabbatical, I told clients that if present trends in government continue, we will have another financial crisis within three to seven years -- by 2018. I still believe that. We still have time to start the process of fiscal rectitude. But the window of opportunity is shrinking because 2012 will be an election year, when nothing happens.  But it's hard to put a forecast together because when problems occur, they don't occur in a linear fashion. Take Greece. When the moment came that the emperor had no clothes, what happened to the Greek bond? It went from 4% rates to 10%.
  • Speaking of stocks, your team doesn't seem to see much opportunity there either -- FPA Capital is 30% cash. Is there anything you like?  So far the biggest opportunities we're seeing in stocks are in energy, where we've been investing heavily for more than 12 years. It's a supply-demand situation. Wherever I traveled last year, the one word that came to mind was "gridlock." Cities from Korea to Moscow to South America were totally filled with cars. It makes the 4 o'clock rush on San Diego Freeway in Los Angeles look like a speedway in comparison. There will be more and more demand for oil as consumers' incomes rise in developing nations.

Please follow the link above for the full interview if interested.

Friday, May 27, 2011

[Video] PIMCO's Bill Gross on Disadvantaged U.S. Savers

PIMCO's Bill Gross below on how U.S. policy is essentially theft from the saver class and subsidization for the debtor class and banking class. Banking analyst Chris Whalen has estimated this 'theft' comes to the tune of some $750B a year. [Apr 4, 2011: WSJ - Fed's Low Interest Rates Crack Retirees' Nest Eggs]

7 minute video

[Mar 31, 2010: Bernanke Content to Sacrifice American Savers to Recapitalize Banks and Benefit Debtors]

NYT: Jakarta Struggles to Cope with Rapid Growth

After a stellar 2010, Indonesian stocks sold off sharply at the beginning of 2011 but have experienced a tremendous surge since and continue to make new highs.  While everyone focuses on the BRIC countries (which have mostly struggled this year as their central banks take action to try to fight off Ben Bernanke's flood of U.S. dollars), this country's stock market has been a superstar the past few years.  I'll continue to highlight it and push for iBRIC as the new acronym.  If interested in how to invest in this market, see earlier posts for the 2 ETFs that focus on the country - they essentially trade in lockstep from what I have seen the past 12-15 months.

The New York Times takes a look at a "good problem" - the struggle with growth; specific to Indonesia - quite horrible infrastructure. 

  • For a lesson in the promise and pitfalls of Indonesia’s economic resurgence, hours stuck in traffic on Jalan H. R. Rasuna Said, one of the main thoroughfares here, is as good a start as any.   The glut of idling new cars tells one part of the story: strong growth. The Indonesian economy, the largest in Southeast Asia, grew 6.1 percent last year, and domestic consumption is increasing.
  • Indonesians bought 286,000 cars in the first four months of this year, according to the Indonesian Automotive Association — 16 percent more than in the period last year — and it can sometimes feel as if they have all congregated in one place.
  • But the country’s infrastructure has not caught up. A dedicated bus lane relieves some of the pressure from commuters, but heavy rain frequently floods the road. Along the middle of the street, abandoned concrete pylons stand as memorials to a plan to build an urban monorail system, begun in 2004 but left to languish after money troubles and legal disputes among partners.
  • For businessmen like Stefanus Sulimro Lim, who runs a midsize freight forwarding company, Global Abadi Perkasa, it is a worsening headache. Clogged ports, potholed roads and persistent gridlock mean extra costs in the form of blown truck tires, broken shafts and wasted time.
  • Mr. Lim’s frustration contrasts with the enthusiasm of international investors for Indonesia. Considered only a few years ago as a laggard in the region, Indonesia is fast becoming a darling of financial markets. Foreign investment in the country rose 52 percent in 2010, to $16.2 billion, from the previous year. The credit rating agency Standard & Poor’s raised its sovereign debt rating for Indonesia to BB+ last month, becoming the last of the three big agencies to rate the country one peg below investment grade.
  • The improving grades from the ratings agencies are considered a reflection of sober fiscal management under President Susilo Bambang Yudhoyono, who has overseen falling public debt ratios and growing foreign exchange reserves. The country is widely expected to reach investment grade next year, drawing it closer to emerging market heavyweights like China and India.
  • But as the attention on Indonesia grows, so does the focus on flaws that, according to analysts, may restrict future growth.  The country, with a population of 240 million, suffers from corruption, its bureaucracy is inefficient, and — most important, economists say — its infrastructure is strained to the limit.
  • Across the country, the underpinnings of power and transport networks are fraying. Ports and airports are largely antiquated and inefficient, while frequent electricity shortages cause disruption to homes and businesses.  Gridlock in Jakarta is estimated by the government to cost the economy $1.5 billion a year, through wasted fuel, lost working hours and illness. Plans to improve infrastructure, like a project to complete a series of toll roads across the island of Java by 2014, routinely run into barriers, largely because of the frustrating difficulty of acquiring land. 
  • The Indonesian government is moving to address the problems. One flagship change, a long-awaited bill on land acquisition that would make it easier to take land for infrastructure projects in return for compensation, is expected to be passed by the Indonesian House of Representatives this year, although it has faced some resistance.  
  • “We’re not like China,” he said. “We don’t make decisions like China does.” Indonesia is “a democracy, a newly working democracy that’s trying to understand how to put the different pieces of the puzzle together.”
  • Mr. Wirjawan pointed to the latest investment data to back his assertion that foreign investment was flowing beyond Indonesia’s primary industries like mining and agriculture: $13.2 billion of the $16.2 billion in foreign investment last year went to industries like transportation, food and manufacturing. “I think there’s going to be more and more money being put into manufacturing and infrastructure,” he said. “That’s good. That’s what I call smart capital.”
  • Indonesia, he said, also finds itself in a demographic “sweet spot,” with about 60 percent of the population 39 years old or younger, an opportunity that will prevail for the next 15 years.
  • For Fauzi Ichsan, senior economist in Indonesia at the bank Standard Chartered, the country remains an attractive destination, despite its flaws.  “Even though infrastructure development is slow, the other two pillars of the economy — i.e., domestic consumption and commodity exports — are doing well,” he said.

[May 22, 2009: Indonesia: A Must Own Emerging Market]
[Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]  
[Aug 10, 2009: Indonesia Expands at Fastest Pace in Southeast Asia]
[Jan 22, 2010: FT.com - How the BRIC was Born]
[Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
[Aug 8, 2010: NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model]
[Oct 9, 2010: [Video]  CNBC's Tim Seymour & Team - The Prospects of Indonesia]
[Jan 11, 2011: BW - The BRIC Debate, Drop Russia, Add Indonesia?
[Feb 7, 2011: Irony in Indonesia]

No position

[Video] Marc Faber Predicts that China will Fall into "Technical Recession" in a Year

Pretty interesting commentary from Marc Faber in this Bloomberg video, considering he is usually a mega Asian bull.  While his terminology for a recession is different than what is commonly used (two quarters of negative GDP growth) we saw what even a mild slowdown in China did post 2008 Olympics spending spree.   If this comes to bear, the impact on the commodity market would be of course enormous as China is the world's marginal buyer of everything, dominating some markets to the tune of 50% of all global purchases.  Ironically lower commodity prices would be helpful to the strained U.S. consumer, but I don't think the stock market would be looking that far ahead.  Anyhow, just one man's opinion but someone I enjoy listening to. His indicators of why he is seeing bubble activity on the ground in China are also quite interesting. 

As for the Chinese market? It's not acting well at all lately.

Marc also touches on the long term implications of the soaring inequality of wealth distribution in the U.S. - something I've been flagging from day one on this site. 

6 minute video - email readers need to come to site to view.

Typical Pre Holiday Trading

As mentioned early in the week, I expected the market to drift up late in the week as "holiday trading" rules kicked in.  With the big boys off in the Hamptons, and volume light, U.S. markets seemingly always drift up on light volume or at worse 'hang around' in a neutral stance near holidays.  (the pre Thanksgiving trade is notorious)  With the oversold conditions the market was facing (along with poor sentiment) it was becoming a good bet the normal holiday trading effect would kick in and it has.

The action did start one day earlier than I anticipated, and hence the S&P 500 has been able to move over the 50 day moving average and now is grappling with the 20 day.  It remains a chopfest out there where most active traders are simply skimming in and out of positions, waiting for the next intermediate move.  For bulls the game remains the same - a new higher high would be positive i.e. a move over 1345ish.  For bears, breaking back below support and indeed breaking the intraday lows of the week (1312ish) on a closing basis, would help their cause.  In between those two areas is just a ton of meaningless ping pong.

If the action continues like this through mid next week, some of the relatively extreme oversold secondary technical indicators will be relieved.   The dollar now has been turned back at the resistance we mentioned yesterday, down by half a percent; therefore the same tiring anit-dollar trades are on.

Thursday, May 26, 2011

Market Only Down a Few % from Highs, but Market Sentiment Horrible

Usually market sentiment is a great contrary indicator at extremes.  For some reason, despite a market that has barely sold off (down less than 3% from the peak) the American Association of Individual Investors sentiment indicator is at lows not seen since August 2010.  You know what happened at that point.  Not sure why such a negative view - perhaps the news from Europe is weighing more on sentiment than U.S. stock performance.

Via Bespoke Investment

US Dollar at Resistance

Helping this slow motion selloff has been the strength of the U.S. dollar - the almost perfect inverse correlation, while maddening, must be respected.  The dollar is down a bit  today, but the market is not responding in kind (i.e. it normally rallies).  While this chart is delayed by a day (the dollar is under 75.80 today), one can see the obvious technical culprit holding the dollar back.

A move over this 100 day moving average would bode well for a continued move upwards in the greenback, and as long as recent patterns hold, not a great sign for the greater equity market.  We can see when the dollar first approached the 50 day moving average about four weeks ago it had a handful of days it struggled to burst through before it finally did so.  Would not be at all surprised to see a similar situation here at the 100 day.

No position

Five Day Vacations

Judging from the action in this somewhat lifeless market, I'd assume many of the big boys have embarked out early this week and are enjoying a 5 day vacation.   Last week we were 'ping ponging' between 1330 and 1340 on the S&P 500.  We opened this week in not so fine fashion, breaking the floor of support, and this week the market is 'ping ponging' between 1312 (April's gap down) and 1325.  Very narrow ranges of 10-12 points each week.

Yesterday's rally ended with a thud as the market surged late in the afternoon only to suffer some quite heavy selling in the closing 20+ minutes.  We remain quite oversold in the near term - enough to make a bear wary, but as I said yesterday I don't expect any great shakes to the upside either.  Much like one looks for basing action in an upside move, this sort of looks like basing action in a downward move.

If the intraday lows of the past 4 days finally do break, a quick move to that 100 day moving average looks to be the next step but with no volume in this market, I'd expect more ho hum action after a bounce there.

On a related note, the 20 day moving average is quickly approaching the 50 day - about 5 points separate the two.  The 20 day has not been below the 50 day since mid September.  It would be another bearish signal if that happened.  (the opposite also holds true - when the 20 day broke over the 50 day mid September we had a two quarter long rally ensue)


In economic news, weekly claims remain elevated over 400K yet again as the long awaited jobs recovery remains "right around the corner".  GDP Q1 second revision was a disappointing 1.8% despite record federal govt spending (10% annual deficit), QE2, payroll tax cuts of 2%, 1 in 10 households who live in a home not making a mortgage payment (hence have lots more money to pay off credit cards and shop), 1 in 7 on food stamps, and record amount of personal income (nearly 20%) derived from transfer payments. 

It remains scary to think what the economy looks like without 18 IVs attached pumping steroids into every vein.  We're now nearly 2 years into the 'recovery' and it's almost entirely China and US deficit spending driven. I don't expect Q2 GDP to show much better than Q1 - and I'd argue U.S. GDP is overstated, since inflation figures are understated.  The economy continues to be "meh", but corporate profits continue to be solid as the labor force is squeezed.  Which to come full circle, is part of the reason we have so many government programs running to substitute for the catalysts that should be occurring in an organically healthy economy where labor and capital are far more in balance.

Tiffany (TIF) Continues to Be in the Sweet Spot

While Polo Ralph Lauren (RL) took a hit yesterday, the high end is still the place to be in an increasingly bifurcated society as signified by the results this morning from Tiffany (TIF).  The Federal Reserve's explicit targeting of the stock market has benefited the top 10%, and especially top 1%, [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] and the weak dollar has been a boon for the NYC flagship store as foreigners show up in droves.  The ability to pass along price hikes for this sort of consumer is much more easy than the rest of the consumer discretionary food chain.
  • Gross margin rose to 58.3% from 57.8%. Total same-store sales rose 19%, or 15% on a constant-exchange-rate basis. 
The attractiveness of 'name brands' for the new affluent class in Asia is also developing into a major driver. 

Tiffany beat estimates by 10 cents (67c v 57c estimate), beat on revenue ($761M v $704M estimate) and raised year end targets (Jan 2012) to $3.45-$3.55 vs $3.33 estimate.  Japan performed much better than expected this quarter [partly due to currency USD v Yen] which seems to be where the analysts (and Tiffany itself) were off in estimating.  Full report here.

Via Reuters:

  • Tiffany & Co said sales in Japan have picked up more quickly than expected after the March earthquake, and the upscale jeweler raised its full-year profit forecast.  Globally, sales rose 20 percent to $761 million in the first quarter, with the largest gains in Asia outside Japan and in the Americas. 
  • Overall sales in Japan, where the chain operates 57 stores, rose 7 percent during the quarterTiffany, which gets 18 percent of its sales in Japan, had forecast in March that sales there would fall 15 percent during the quarter as a result of Japan's massive earthquake and the tsunami and nuclear disaster that followed.  Sales at Japan stores open at least a year fell 3 percent, but Tiffany said all of its stores there that had closed after the quake have reopened.
  • Sales in Asia outside Japan rose 37 percent, while in the Americas, they were up 19 percent. 
  • At Tiffany's flagship store on Manhattan's Fifth Avenue, sales rose 23 percent.
  • Tiffany forecast on Thursday that global net sales would rise by a mid-teens percentage in the current quarter. 
  • Net income rose 25.8 percent to $81.1 million, or 63 cents per share, from $64.4 million, or 50 cents a year earlier.  Excluding one-time items, Tiffany earned 67 cents a share, beating Wall Street forecasts of 57 cents, according to Thomson Reuters I/B/E/S. 
  • Tiffany raised its full-year profit outlook by 10 cents and now expects to earn between $3.45 and $3.55 per share in the fiscal year that ends in January 2012. That compares with Wall Street forecasts of $3.33.

[Nov 24, 2010:  All that Glitters is the High End US Consumer, and Foreign Buyers]

No position

Goldman Drops 2011 S&P 500 Target by 50 Points to 1450

Coming into the year the popular year end 2011 Wall Street target for the S&P 500 was in the 1350ish area.  That was essentially accomplished by mid February so the game began to raise year end targets even further.  Since then we've mostly stayed in a range of 1300-1340 for the better part of 3 months.  Of course as the S&P 500 rallied non stop, most strategists did what they usually do and ramped up their targets for the year right along with it.

I don't recall Goldman Sachs year end target for 2011 coming into the year, but I do believe they increased it sometime in the past 4 months (could be in error on that assumption). Whatever the case, this morning they have lowered the 1500 target down 50 points to 1450.  That is about 5% upside over the yearly highs.

2012 S&P 500 earnings forecast was also lowered, and this is probably the more important line item... as are the reasons.  Namely margin compression (a topic we've been discussing since QE2 was hinted at in late August 2010) pressuring earnings.  S&P earnings for 2012 were lowered from $106 to $104.  Essentially this sort of commentary would indicate that 2011 will be the peak of the margin cycle (margins are at record levels), and Goldman expects elevated commodity prices for a long period of time.  Which has an excellent chance of happening if my prediction that The Bernank will panic next winter and institute QE3.

hat tip Zerohedge for report.

We have lowered our S&P 500 2012 EPS forecast to $104 from $106 and our year-end 2011 price target to 1450 from 1500. At the sector level, the largest changes in our earnings estimates are a $2 increase in Energy 2012 EPS, a $1 decrease  in Information Technology, a $2 decrease in Financials earnings and a smaller negative revision to Consumer Discretionary. We made further minor changes to other sectors that are not large enough to highlight.
We expect S&P margins to contract in 2012, focus on sales growth. The combination of higher commodity prices, lower global GDP growth and rising inflation raises our sales forecasts but lowers S&P 500 expected margins in aggregate. We focus on sectors and stocks best positioned to grow earnings through higher sales. We expect Energy, Consumer Staples and Info Tech to post the highest revenue growth in 2012.
Our new 3-, 6-, and 12-month price targets: 1400, 1450 and 1500

We forecast S&P 500 will grow sales by 10% in 2011 and 8% in 2012, similar to consensus. But we expect margins will peak at 8.9% this year and slip to 8.8% in 2012. Consensus forecasts margins rise to 9.6% in 2012.

Our commodities strategists forecast 20%+ gains in oil, copper, zinc

We expect a slow but sustained GDP growth environment that will tighten key supply constrained markets and drive prices higher in 2012. Persistent impact of MENA events will push Brent crude to $140/barrel by end-2012.

Stocks with fast sales growth should perform even if margins fade
Firms forecast to generate high sales growth in 2012 are better positioned to absorb rising commodity prices and still post strong EPS gains than companies with average or lackluster sales prospects.

Full report here - click fullscreen for easy read

GS Equity 5.26

Wednesday, May 25, 2011

WSJ: State Tax Revenue Increases by 9.1%, but Local Governments Struggling

A piece of good news for embattled states - tax revenues in Q1 2011 jumped 9.1%, the fastest rate in 5 years.  While revenue is still below pre-recession highs, and expenses continue to burgeon, this type of growth is necessary to help offset the massive inflow of dollars into the states from the federal government stimulus plans. It would have been helpful to see these figures broken out to see how much of the increase was due to tax hikes versus organic growth, but Goldman seems to believe that tax hikes were not the main driver.

For a state by state breakdown see here.


  • State tax collections grew at an accelerating pace in the first three months of the year, with a number of states seeing the upswing continue into the second quarter.  Tax revenue grew 9.1% in the first quarter for 47 states that have reported collections, the fifth straight quarter of growth and the fastest rate in five years, according to a report released Tuesday by the Nelson A. Rockefeller Institute of Government.
  • State tax revenue is still 3.1% below the pre-recession levels of three years ago. And many states are facing a growing imbalance between revenue and longer-term expenses, particularly the expanding cost of employees' pensions and health care
  • The revenue gains, which were driven by a 12.4% jump in personal income taxes, reflect the improving economy as well as tax increases passed during the recession
  • Sales taxes grew 5.6% while corporation income taxes, which are volatile and make up only a small portion of states' tax collections, grew 6.9% in the quarter.
  • Goldman Sachs, in a separate report Tuesday, said average state revenue in April was up 12% from a year ago for 11 big states—including California and New York—that the bank tracks. Much of that growth came from underlying strength in wages and retail sales rather than higher tax rates." "Although a few states enacted high profile tax increases for this year, the most recent revenue gains appear to be due mostly to underlying economic strength."
  • However, that doesn't mean states are out of the woods."Many states still face fiscal challenges and are struggling in balancing budgets, particularly in the absence of federal stimulus money that they relied on for the last three years," said Lucy Dadayan, a senior policy analyst at the Rockefeller Institute.

    That said, what is happening at the state level is not happening at the local level because of the reliance on property taxes:
    • And while state finances are recovering, the outlook for local government revenue is starting to deteriorate. That's because while states get most of their money from income and sales taxes, local governments rely more on property levies. Property taxes can take years to respond to falling home prices, and have only recently started to decline.

    Sources: Zynga Ready to File for IPO

    On the back of a string of successful internet 2.0 IPOs (Russian, Chinese, American), online ("social") gaming company Zynga - famous for "Farmville" -  appears ready to file for IPO, per AllThingsD.  With a $10B valuation in the private market, this one should be a massive IPO - considering the performance of recent offerings, one could see Zynga hitting the public market at $15-$20B.

    • Zynga is poised to file for its initial public offering, according to sources close to the situation.  The filing with the Securities and Exchange Commission could come as early as this week, or next week at the latest.
    • The move is not entirely unexpected, given how well the recent IPOs of several Internet companies have done recently, including business networking site LinkedIn last week and Russian search giant Yandex.  Their strong performances show the huge investor appetite for fast-growing and high-profile Web 2.0 firms.
    • Zynga’s valuation in its last round of funding was $10 billion, but it is likely to price itself higher in an offering.  After all, LinkedIn now has a market valuation of $9 billion, double its pre-IPO price.
    • Whatever the price, a Zynga IPO is a major coup, especially given how quickly it has morphed into one of the most important forces in online gaming, largely via distribution on the Facebook platform.
    • The company claims that it has 250 million people actively playing its games every month. Its largest game currently is CityVille, which attracts 90 million monthly users, reports AppData. Its original Poker game still manages to attract 35 million monthly users.
    • Its early titles, such as FarmVille and Mafia Wars, first vaunted the San Francisco-based company into consumer prominence, and it has recently struck a number of high-profile branding deals with Lady Gaga and the makers of the upcoming animated movie “Kung Fu Panda 2,” among others.
    • That’s also meant a solid business. Zynga reportedly generated about $400 million in profit last year on about $850 million in revenue, although sources said the filing will reveal much more robust numbers.
    • Sources said Goldman Sachs will be among the lead bankers in the Zynga offering.

    No position

    Polo Ralph Lauren (RL) Margin Squeeze a Shot Across the Bow for Retailers?

    It's been interesting to see some investors push into consumer discretionary retailing stocks the past few weeks.  That may be a function of lower gasoline prices, but it seemed to ignore the coming impact of higher commodity prices on margins.  Since it takes a few quarters to work such prices through the food chain, the surge in commodity prices that began from The Bernank's declaration to inflate everything starting in late August 2010, now appears to be hitting.  Polo Ralph Lauren's (RL) earnings this morning are a fine example, as margins were squeezed to the tune of 220 basis points.  Yes there was a 5 cent miss but I think that degree of margin compression is what has been hitting the stock.  Also some inventory buildup, but that could be 'transitory'.

    Now we could in theory make a bull case for the longer term in retail, especially the higher end [Oct 8, 2010: No Recession in High(er) End] - especially until QE3 is announced this winter (my guess).  To compensate for the higher input costs, retailers with pricing power (i.e. the high end) are raising prices.  Right now those price increases are not high enough to compensate for the increase in inputs.  But as the dollar strengthens, people take 'risk off' and commodities sell off (as they have done now for 3+ weeks) the same retailers suffering from higher input costs will see lower input costs a few quarters down the line.  But they obviously won't be lowering prices - hence they hit a sweet spot.  We'll see how it works out - right now the market is not looking that far ahead.

    RL has had a huge run since the lows in September 10, running from $75 to $135: +80%.  In the context of that sort of move today's 7% drop is not severe, other than the fact it caused a lot of damage in the chart.  And once that sort of damage is done, you lose the trend following investors who are willing to buy every dip as long as its not technically insulting.  And once again we see a 'gap' filled (this one from mid Feb).

    Via Briefing.com

    Polo Ralph Lauren misses by $0.05, reports revs in-line; sees Q1, FY12 revs above consensus (RL) 129.39 : Reports Q4 (Mar) earnings of $0.74 per share, $0.05 worse than the Thomson Reuters consensus of $0.79; revenues rose 7.2% year/year to $1.38 bln vs the $1.39 bln consensus. Gross profit margin was 56.8%, 220 bps below the prior year level. The decline in gross profit margin reflects the impact of cost of goods inflation that was partially offset by improved retail segment margins and overall channel mix.

    Outlook: In 1Q12, the co expects consolidated revenues to increase in the mid 20% range (cons: +12.7%). Wholesale revenues are expected to grow at a low 20% rate in the first quarter and retail revenues are expected to grow slightly faster, including comparable store sales that are projected to increase by a low double-digit rate. The co expects the operating margin from continuing operations for the first quarter of Fiscal 2012 to be ~equivalent to that in the comparable prior year period. The co currently expects consolidated revenues for FY12 to increase by a mid teens percentage (cons: +9.8%), with retail revenues growing slightly faster than wholesale revenues. Based on the anticipated impact of cost of goods inflation and increased investment in strategic growth initiatives, in addition to business disruption in Japan, the co expects the operating margin from continuing operations for Fiscal 2012 to be 100-150 bps below the prior year. The Fy12 tax rate is estimated at 33%. Capital expenditures are planned at ~$325 million in Fiscal 2012.

    Via Barron's:

    • Operating expenses rose 12%, faster than revenue (up 7%), as the company invested more in growth initiatives and paid higher incentive-based compensation. Input cost pressures are weighing on results. And the company said it faces uncertainty as consumers start to deal with inflation.
    • One analyst says that investors should be wary of buying on the drop. “Investors are viewing the fourth quarter earnings shortfall and cautious fiscal 2012 operating margin commentary as indicative of a shift in the medium-term fundamentals of the business,” wrote Wall Street Strategies analyst Brian Sozzi. “Hard to dispute that notion.”
    • “[T]he amount of gross margin deceleration relative to the third quarter (-220 bps 4Q11 year over year ; +47 bps year over year 3Q11) is concerning, as was the inventory position compared to projected future sales (+mid-teens percentage revenue guidance against a +39% rise in inventory).”

    [Feb 9, 2011: Polo Ralph Lauren Smashes Estimates, Doubles Dividend, and Announces $250M Buyback Program]

    No position

    RIP Mark Haines

    Sad news this morning, Mark Haines of CNBC passed away.  He was actually one of my favorites because he always said what was on his mind and did not let visitors get away with softball answers.   Did not suffer fools lightly.


    Via CNBC

    • Veteran journalist Mark Haines, a fixture on CNBC for 22 years, died unexpectedly Tuesday evening. He was 65 years old.  Haines, founding anchor of CNBC's morning show "Squawk Box," was co-anchor of the network's "Squawk on the Street" program, providing insight and commentary sometimes humorous and occasionally acerbic.
    • CNBC President Mark Hoffman called Haines a "building block" of the financial networks' programming. Hoffman said Haines died at his home. "With his searing wit, profound insight and piercing interview style, he was a constant and trusted presence in business news for more than 20 years," Hoffman said in a statement to CNBC employees. "From the dotcom bubble to the tragic events of 9/11 to the depths of the financial crisis, Mark was always the unflappable pro.

    Interesting Juncture

    The S&P 500 has essentially had intraday lows almost exactly at the "gap" it needed to fill from mid April, the past three sessions.  This morning it opened at 1311.80 (before a small bounce), yesterday the intraday low was 1313.87, and today 1312.88.  So let's call it 1312-ish. (the gap was at 1312.70)

    We are starting to get oversold enough on some secondary indicators where a cursory bounce would not be out of the question, but excluding the era of "V shaped" moves, that sort of bounce should not have much energy.  With light trading days Friday and then Tuesday around the Memorial Day holiday - that could be where that sort of bounce happens (plus it's month end "mark up" time), barring some exogenous European news.  But really that sort of action is just for the nimble daytrading or 1-3 day swing trading types.

    At the minimum we need to see this market return back over the 50 day moving average (upper 1320s), and better yet make a new higher high in the mid 1340s, to put back on our happy face.

    Prior to 2009 what I'd expect is a weak sort of bounce in the next few days to relive some of the 'oversold' readings.... that would be an excellent opportunity to remount some short exposure.  We'll see what happens in this new era.

    For bears, a break below the intraday lows of the past 3 days remains the goal.  The 100 day moving average has moved up from 1301 to 1305 the past few sessions, so I'd expect a stand there for the bulls - if the S&P 500 does indeed break through the lows of late.  If that 100 day breaks, it will be very interesting; that has only happened 1 day since September 2010.

    In terms of % of stocks in the S&P 500 below their 50 day moving average, we are at a 'bottom' if this is only going be a mild correction, but obviously nowhere near that if the market is headed for a more serious episode.

    This is a very slow motion selloff, which is actually a lot harder to make money shorting indexes than the dramatic swoons. 

    Tuesday, May 24, 2011

    Yandex (YNDX) Up Almost 60%

    Not a bad day for the Yandex (YNDX).  Up 57% after opening up around +40%.  Once it broke over the early day highs of $36, off it went for a new leg up.  So at this point all the valuation metrics I pointed out this morning, have to be increased by about 1.6x.   Or do what everyone else is doing and don't worry about valuation metrics and simply "buy buy buy".

    As to the greater market, still not a fan of this action. Remaining cautious. Will be interesting to see if the normal end of month 'mark up' games ensue at the end of the week, especially with everyone who matters in the Hamptons Friday.

    No position

    Tax Cheats Receive $24 Billion of Stimulus Money

    In a story harkening back to [Oct 8, 2010: 72,000 Deceased and 17,000 Prisoners Received Stimulus Payouts] we have news today that some $24 BILLION of stimulus funds were paid out to some 3700 government contractors and non profits who owe the government $757M in back taxes.  Nice.  Indeed, this is just an estimate and the GAO cautioned the number could be higher.

    Via AP
    • Thousands of companies that cashed in on President Barack Obama's economic stimulus package owed the government millions in unpaid taxes, congressional investigators have found.  The Government Accountability Office, in a report being released Tuesday, said at least 3,700 government contractors and nonprofit organizations that received more than $24 billion from the stimulus effort owed $757 million in back taxes as of Sept. 30, 2009, the end of the budget year.
    • The report said the tax delinquents accounted for nearly 6 percent of the 63,000 contractors and grantees examined and cautioned that the real number might be higher because the known tax debt does not measure such factors as income underreporting.
    •  In one "extreme case," an engineering firm that received more than $100,000 in stimulus owed more than $6 million in back taxes. That company purchased three new cars totaling about $90,000 and paid its top three chiefs $700,000 while it still owed employment taxes, according to GAO investigators.
    • A social services nonprofit that received more than $1 million in stimulus funds owed taxes of $2 million. The executive of that company filed "numerous" questionable business expenses with the IRS and spent hundreds of thousands of dollars at casinos each year, the report found.
    • The investigators highlighted 15 cases of stimulus recipients who owed payroll taxes. Four were construction companies, recipients of more than $1 million in stimulus awards each, who owed between $400,000 to more than a million in mostly payroll taxes
    • Federal law does not prohibit tax delinquents from getting government contracts or grants, though there are provisions that enable the government to withhold payments in some cases. While the federal government requires contractors to present documentation that their taxes are paid, some recipients escaped federal review because the money was disbursed at state or local levels.
    • The stimulus package, enacted in February 2009, funneled some $821 billion into the recession-hit economy. Of that, about $275 billion was designated for contracts and grants, of which nearly $200 billion had been paid out as of March 25, 2011.
    • The report noted that about 35 percent of the unpaid taxes were for debts incurred prior to 2003 and that more than half of the apparent violations, $417 million, were from unpaid corporate taxes. Another quarter, $207 million, came from unpaid payroll taxes.
    • The most serious documented case was a security firm that owed $9 million, mainly in unpaid payroll taxes from the mid-2000s. IRS records indicated that the company paid other creditors while shirking its tax obligations. The company, which received more than $100,000 in stimulus money, had a history of being uncooperative, missing deadlines and repeatedly filing appeals, according to the records.

    II: Fairholme's (FAIRX) Bruce Berkowitz is Beating Hedge Fund Managers at their Own Game

    If you are invested with "Mutual Fund Manager of the Decade" Bruce Berkowitz are simply interested in reading up on the man, there is a quite lengthy piece on him in Institutional Investor.   It does appear the 'magazine cover' indicator has struck again ala Ken Heebner with CGM Focus (CGMFX).  [May 28, 2008: Ken Heebner - America's Hottest Investor] Berkowitz was highlighted in late 2010 in Fortune Magazine.  Since then, the fund has struggled.   Still, it has only been a half a year, which is a relatively short period of time, and running such a concentrated fund will lead to these sort of periods.

    Some excerpts from the story:
    • Given the financial uncertainty of the postcrash world, where pockets of opportunity may be found in all kinds of places, flexibility is essential. Hedge fund managers like Einhorn have long known this. But Berkowitz has learned it too, growing Fairholme to more than $20 billion in assets since founding the firm nearly a dozen years ago.   
    • In many ways, Berkowitz (who along with Fernandez and other insiders has some $300 million invested in Fairholme) is a traditional value investor who plows through piles of paperwork and reams of financial data to find unappreciated companies. Like Buffett, he follows the principles of Benjamin Graham, the legendary value investor who focused on a company’s assets and ability to generate cash. But his strategy stands apart, marked by extremely concentrated holdings and a willingness to go where others fear to tread, and then to wait, often doubling down as stocks fall in the short term 
    • Fairholme is the largest investor in American International Group, after the U.S. government. The reviled insurer represents 7.5 percent of  Fairholme Fund’s portfolio, which is loaded up with financials and other loathed sectors. Additional big holdings include Bank of America Corp., CIT Group, Citigroup, Goldman Sachs Group, Morgan Stanley and Regions Financial Corp. Consumer names are sparse, and the one that is there is the retailer almost no one wants: Sears Holdings Corp. To counter any risk that the portfolio might crater, and to take advantage of opportunities fast, Berkowitz keeps massive amounts of cash on hand — 23 percent of  Fairholme’s assets as of March 31.  
    • The returns of Berkowitz’s strategy have been terrific. Since the Fairholme Fund launched in December 1999, it has beaten the market every year except one; from inception through the end of last year, the fund had an annualized return of 14.47 percent, versus just 0.45 percent for the Standard & Poor’s 500 index. By comparison, Hedge Fund Research’s HFRI fund-weighted composite index returned 6.75 percent annualized over that period.
    • But the financial world has changed since Berkowitz started investing two decades ago, and he and Fernandez expect that many of the best opportunities going forward won’t involve domestic stocks — the mainstay of  Fairholme over the past decade — but will exist in various corporate restructuring efforts as companies around the globe unwind their debts and shore up their balance sheets
    • At the same time, Fairholme faces the constraints of its own success: Its ballooning asset size means that bets will need to be ever larger and that investments in smaller companies won’t make a meaningful enough contribution to returns. In the 12 months through February of this year, investors put $4.6 billion in new money into the flagship Fairholme Fund, according to Morningstar. 
    •  For the first four months of this year, the Fairholme Fund lagged the S&P 500 — down 2.7 percent versus the index’s 8.4 percent rise — a rare period in which it has not only underperformed but lost money for investors.   “It’s sheer fantasy to think that someone could go up consistently every month for years upon years,” Berkowitz says. “It is just insane to think that a four-month period is anything.” 
    • I think Bruce has modeled himself to a great degree after Warren Buffett, and it is an enormous competitive advantage,” says William Ackman, founder of New York–based hedge fund firm Pershing Square Capital Management, who worked with Fairholme and Canada’s Brookfield Asset Management to bring real estate developer General Growth Properties out of bankruptcy last year. Berkowitz’s word, like Buffett’s, can be counted on, a rarity in the fast-moving world of finance, Ackman notes. “If you are not partnered with the right people, they can take advantage of the changes to retrade the deal,” he says. With Berkowitz and Fernandez, “every time there was a twist or turn, they were willing to work with us and the company.”  

    That's only part of the first quarter of the story - it goes very in depth from there especially on his investment history.  A fun read.

    [Feb 2, 2011: [Video] Mutual Fund Manager of the Decade Bruce Berkowitz Comes to CNBC]
    [Dec 21, 2010:  AIG Up 50% in 3 Months - Bruce Berkowitz Wins Again]
    [Dec 10, 2010: Bruce Berkowtiz of Fairholme Funds - the Megamind of Miami]
    [Aug 30, 2010: Bruce Berkowitz of Fairholme Fund Interviewed on Consuelo Mack WealthTrack]
    [Jan 31, 2010: Bruce Berkowitz of Fairholme Funds Slashes Pfizer Stake, Exits Boeing and Northrop Grumman; Add to Berkshire Hathaway
    [Feb 17, 2009: Hedge Funds Pile into Citigroup; as does Bruce Berkowitz of Fairholme Funds
    [Feb 3, 2009: Fairholme Funds (FAIRX) 2008 Report]

    Troubled Home Market Creates Generation of Renters

    Lost in the metrics and talk of the housing market, is the psychological change happening under the surface.  Much like stock investors went through not one buy two anguishing crashes in a decade, the severity of the housing crash is going to have an effect on psyche for many many years.  And unlike the stock market, which is skewed to a relatively small portion of the population, the housing market is much like the energy market - everyone is a part of it; 2/3rds of households are indeed 'owners'.  In the broader sense it will be interesting to see how risk averse those Americans currently in their 20s become over the next 1-2 decades, facing a worst in a multi generation job market, nearly half decade housing bear market, and a stock market prone to a Federal Reserve induced boom bust cycle.  When you see these issues affecting one's parents, and yourself as you enter adulthood, it must pull on some chord.

    Specific to the housing market, this story is yet another that showcases the attractiveness of the apartment/rental market now and in the coming years, as more Americans no longer see housing as the 'sure thing' it was for decades.  With mortgages now requiring more than "$0 down!", the lack of savings across many households is going to be yet another headwind for the housing market - much easier to put a month or two deposit down on a rental than 3-10% of the purchase price of a home. 

    Via AP:
    • A growing number of Americans can't afford a home or don't want to own one, a trend that's spawning a generation of renters and a rise in apartment construction. Many of the new renters are former owners who lost homes to foreclosure or bankruptcy. For others who could afford one, a home now feels too costly, too risky or unlikely to appreciate enough to make it a worthwhile investment.
    • The proportion of U.S. households that own homes is at its lowest point since 1998. When the housing bubble burst four years ago, 31.6 percent of households were renters. Now, it's at 33.6 percent and rising. Since the housing meltdown, nearly 3 million households have become renters. All told, nearly 38 million households are renters.

    Among the signs of a rising rental market:
    • -- The pace of apartment construction has surged 115 percent from its October 2009 low. It's still well below a healthy level. But permits for apartments, a gauge of future construction, hit a two-year peak in March. By contrast, permits for single-family home are on pace for their lowest annual level on records dating to 1960.
    • -- The number of completed apartments averaged about 250,000 a year before the boom. They fell to 54,000 last year and will probably number around the same this year. But then the number will likely double to about 100,000 in 2012 and hit 250,000 by 2013 or 2014, according to the CoStar Group, a research firm. The lag is due to the time it takes for an apartment building to be completed: an average of 14 months.
    • -- Demand is driving up rents. The median price of advertised rents rose 4.1 percent between the end of 2009 and the end of 2010, census data shows. Few expect the higher prices to stem the flood of renters, though. One reason: Younger adults don't value homeownership as earlier generations did and many prefer to rent, studies show.
    • -- Rental housing is giving builders more work just as construction of single-family homes has dried up. Still, that economic lift won't make up for all the single-family houses not being built. Apartments account for only about one-fourth of homes. And renters are outspent roughly 2-to-1 by homeowners, who pay for items from lawn care to remodeling and help drive the economy.
    • Many younger Americans see owning as risky. It hardly seems the best way to build wealth, especially when prices are falling.  "There's been this idea for years, a part of the American dream, that owning a home improves and strengthens communities," said John McIlwain, a senior fellow at the nonprofit Urban Land Institute. "But what we've learned over the past few years is that many people simply are not ready to own a home."
    • In the past four years, the median price of a single-family home has sunk 37 percent, by $57,500, to its lowest since 2002. Yet in some areas, owning is still too expensive for many. "It's becoming so difficult for most Americans to afford a home, with larger down payments and tighter credit, that it is creating a renter's nation," says Robert Shiller, a Yale economist and co-creator of the Case-Shiller home price index. "The home is no longer an investment; it's a burden."

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