Monday, July 18, 2011

On U.S. Grade Inflation

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Quite fascinating study highlighted by NYTimes Economix on the rampant grade inflation in the USA the past 50 years or so.  A huge amount of 'C's' have migrated to 'A's'.  The reasons for this are subjective but the implications are quite obvious.

  • We’ve written before about some of the work of Stuart Rojstaczer and Christopher Healy, grade inflation chroniclers extraordinaire. They have put together a new, comprehensive study of college grading over the decades, and let me tell you, it is a doozy.
  • The researchers collected historical data on letter grades awarded by more than 200 four-year colleges and universities. Their analysis (published in the Teachers College Record) confirm that the share of A grades awarded has skyrocketed over the years. Take a look at the red line in the chart below, which refers to the share of grades given that are A’s:




  • Most recently, about 43 percent of all letter grades given were A’s, an increase of 28 percentage points since 1960 and 12 percentage points since 1988. The distribution of B’s has stayed relatively constant; the growing share of A’s instead comes at the expense of a shrinking share of C’s, D’s and F’s. In fact, only about 10 percent of grades awarded are D’s and F’s.
  • As we have written before, private colleges and universities are by far the biggest offenders on grade inflation, even when you compare private schools to equally selective public schools. Here’s another chart showing the grading curves for public versus private schools in the years 1960, 1980 and 2007:



  • As you can see, public and private school grading curves started out as relatively similar, and gradually pulled further apart. Both types of institutions made their curves easier over time, but private schools made their grades much easier.
  • By the end of the last decade, A’s and B’s represented 73 percent of all grades awarded at public schools, and 86 percent of all grades awarded at private schools, according to the database compiled by Mr. Rojstaczer and Mr. Healy. (Mr. Rojstaczer is a former Duke geophysics professor, and Mr. Healy is a computer science professor at Furman University.)
  • Southern schools have also been less generous with their grading than institutions in other geographic regions, and schools that focus on science and engineering tend to be stingier with their A’s than liberal arts schools of equal selectivity.

What accounts for the higher G.P.A.’s over the last few decades?

  • The authors don’t attribute steep grade inflation to higher-quality or harder-working students. In fact, one recent study found that students spend significantly less time studying today than they did in the past.
  • Rather, the researchers argue that grade inflation began picking in the 1960s and 1970s probably because professors were reluctant to give students D’s and F’s. After all, poor grades could land young men in Vietnam.
  • They then attribute the rapid rise in grade inflation in the last couple of decades to a more “consumer-based approach” to education, which they say “has created both external and internal incentives for the faculty to grade more generously.” More generous grading can produce better instructor reviews, for example, and can help students be more competitive candidates for graduate schools and the job market.
  • The authors argue that grading standards may become even looser in the coming years, making it increasingly more difficult for graduate schools and employers to distinguish between excellent, good and mediocre students.

  • More disturbing, they argue, are the potential effects on educational outcomes. “When college students perceive that the average grade in a class will be an A, they do not try to excel,” they write. “It is likely that the decline in student study hours, student engagement, and literacy are partly the result of diminished academic expectations.”

Bridgewater Associates - How Ray Dalio Built the World's Richest and Strangest Hedge Fund

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If you are into the world of hedge hoggers, the New Yorker has a pretty fascinating piece on Ray Dalio and Bridgewater Associates.  Technically, Bridgewater is the world's second largest hedge fund 'firm' behind JP Morgan but JPM has a few other (minor) businesses like being the country's largest TBTF.  We almost never see Dalio speak, but I've referenced his March 2011 CNBC interview. [Mar 3, 2011: Rare TV Interview with Manager of World's Largest Hedge Fund - Ray Dalio]

This is quite a lengthy piece, but I'll post some of the items that are investor specific; much of it runs parallel to thoughts I've published on FMMF.  Indeed, he might be more dour than I am. ;)

  • This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.
  • Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said.
  • Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. (where I differ is I believe eventually the ECB will be backed into a corner and "print" and follow the Fed model)  The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”
  • Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.

Still Weak but Danger on Both Sides

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As I mentioned Friday the action was not too impressive, considering the normal 'beats' plus the Google outperform on the earnings front.  While technical analysis loses some of its mojo when headlines are thrashing the market around, we can see the S&P 500 has firmly broken both the 50 and 20 day moving averages, an area it was having a lot of trouble with Friday.



Interestingly, this is happening as the 'go to' stock of growth fund managers across the globe, Apple (AAPL) is breaking out ahead of earnings.  Generally you don't see this sort of disassociation.



One worry for the bears here is whenever the debt ceiling is passed, we're going to see a quite dramatic knee jerk reaction rally.  If it happens during market hours, one can be stopped out quite quickly but if it happens overnight it's going to be a rough go for it.  Hence hedging is tricky here.

No positions

Key Earning Reports this Week

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This week we enter the heart of earnings season.  Normally this would be the main focus of markets, but with the debt ceiling issue in the U.S. (a lesser concern), and the never ending mess in Europe (a larger concern), the typical market machinations to earnings data are most likely going to be less prevalent.   This morning is a great example as was Friday.  We had some of the typical 'beat the low ball analyst earnings' along with legitimate surprises such as that which came from Google (GOOG) - but it did little for the market,save for that late day hockey stick rally in the closing hour.

Bespoke Invest once again has a very nice summary for us of the key earnings reports of the week - along with YTD stock performance of said stocks, plus the typical earnings beat rate (which again is nonsensical considering the game that earnings have become). 

The most interesting reports we'll focus on below are (Monday) IBM, (Tuesday) Apple, Chipotle [momo stock] Harley (reflection of bigger ticket item sales), (Wednesday) American Express, (Thursday) Baidu, (Friday) Ford, Caterpillar.


No position

Friday, July 15, 2011

Consumer Confidence Falls Back to March 2009 Lows

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Usually I don't take much stock in consumer confidence, but this figure has never really jumped anywhere close to levels usually associated with recovery the past 2 years.  Today's figure is downright putrid, falling back to areas last seen in March 2009.  Ironically that was the low in the market, but the economic situation was quite awful back then.  Obviously for those not enjoying the Ben Bernanke wealth effect [Nov 10, 2010: Who Will the Any Form of Intermediate Wealth Effect Really Help? Not the Masses] the economic 'recovery' of the past two years is not 'trickling down' much.

Again, normally I focus on what people are doing - not saying - but these figures are so awful they should be noted.

Via Reuters:

  • Consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, a survey released on Friday showed.
  • Confidence in government economic policies also curdled, the Thomson Reuters/University of Michigan survey showed. U.S. lawmakers are wrangling over a budget deal that would allow the government to raise the debt ceiling -- needed so the United States can fund its obligations next month.
  • The preliminary reading for the consumer sentiment index dropped to 63.8 in July from 71.5 the month before, falling far short of expectations of an increase to 72.5, according to a Reuters poll of economists.
  • The survey's barometer of current economic conditions fell to 76.3, the lowest since November 2009, from 82.0. The gauge of consumer expectations was also at its lowest since March 2009, tumbling to 55.8 from 64.8.
  • "Whenever the Expectations Index has been this low in the past, the economy has been in recession," survey director Richard Curtin said in a statement.
  • Overall, the data suggests real consumer spending in the second half of the year may be barely higher than the first half, the survey said.
  • Twice as many consumers reported hearing about new job losses compared with job gains, while half of all consumers said the economy had recently worsened. Last week, data showed the economy added a scant 18,000 jobs in June.
  • "We remain in a very slow recovery with extraordinarily grudging employment. The public at large still feels the recovery is, at best, a neutral factor," said Patrick O'Keefe, director of economic research at J.H. Cohn in New York. "They're not seeing a lot of benefits."

[Video] David Rosenberg - One Small Shock Away from Another Recession

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While considered a perma bear by many, David Rosenberg has been quite correct on his economic views the past few years.  However, market calls have been lacking.  His latest views per CNBC this morning.

4 minute video 



8 minute video


Not too Impressive

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Not that impressive of action considering some of the earnings beats and M&A action happening out there today. We've broken slightly below the 20 and 50 day moving averages, and there have been a lot of late day sell the news reactions this week.



It remains strange how quickly the mood has been changing in this market - a month ago we were in panic mode... then it was followed by 2 weeks of unadulterated euphoria... then random choppy action dominated by the phrasing of a Bernank comment.

Google (GOOG) - Like the Good Ole Days, with a 13% Surge in Premarket off Earnings Beat

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Google (GOOG) is surging 13% in premarket on a quite impressive beat on both the top and bottom line last evening.  It's almost like 2007 again.  Obviously near $600 the stock will be well clear of the 200 day moving average, and at its highest levels since early March.



Via Reuters:

  • Google Inc's results soundly trounced Wall Street's most bullish expectations easing concerns that its battle with Facebook and Twitter is costing too much and hindering growth. The Internet giant's flagship search advertising business, combined with new efforts like display and mobile advertising, boosted the company's revenue by 36 percent in its first three months under the helm of new Chief Executive Larry Page.
  • Page told analysts the company had signed up more than 10 million people for Google+: the company's biggest foray into the hot social networking arena and the vanguard of its battle with Facebook and Twitter for websurfers' time and attention.
  • "Google should be viewed as a growth company again this quarter," said Stifel Nicolaus analyst Jordan Rohan. "The combination of mobile search, Android, ad exchange, YouTube, and the core search businesses, they're all doing well. Google is no longer a one-trick pony.""The number to focus on is really the GAAP earnings number. Google spent aggressively, hiring just as many people this quarter as the did last quarter."
  • Investors had feared Google's ever-increasing spending would eat into margins. Operating expenses leapt 49 percent to $2.97 billion in the second quarter, to about a third of revenue.
  • Analysts said the big increase in sales more than compensated for the rise in costs, but Google might find it increasingly difficult to shore up margins while it continues to hire, acquire and invest.  "Revenue growth overrides the hiring and the expense issues," BGC Partners analyst Colin Gillis said in response to the share price jump.
  • Net income in the second quarter climbed to $2.51 billion, or $7.68 a share, from $1.84 billion, or $5.71 a share, in the year-ago period.  Excluding certain items, it earned $8.74 a share, ahead of analysts' average expectations of $7.85 a share. 
  • Over 135 million Android smartphones or tablets -- made by the likes of Motorola and Samsung Electronics -- had been activated in total, Google executives said. And its Chrome browser is now employed by more than 160 million users.



    No position

Thursday, July 14, 2011

Bernanke this... Bernanke that....

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Third day in a row the market is responding to every phrase or comma in a statement by The Bernank.  Essentially he has repeated himself 3 days in a row (the first being via the Fed minutes) but today the 'bombshell' was he was not ready to act immediately on additional easing.
  • ...the market started selling off on some of Bernanke's comments, including "not prepared at this point to take action," according to Peter Boockvar, equity strategist at Miller & Tabak + Co, in a note to clients.
Wow, nothing new there - but the market speculators took their balls and went home. (pouting)  Commodities sold off (just as they rose yesterday on even the hint of more easing at some point, some day) and with that went the 'risk on' trade.



This is the third day in a row we have also tested two support levels, so we'll see if this 1312-131 area holds.  The restistance areas have not meant a thing on the rallies, so it is interesting how we seem to cater much more to support than resistance nowdays.

Why Growth Stocks Get a Premium - They are Rare

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Interesting chart via JPMorgan showing how few stocks in the S&P 500 have even a 15% annual revenue growth rate.   Those that do, get quite a premium.  While this is a reflection only on the largest companies in the index, we of course see a similar premium (if not much larger) within the Russell 2000.
  • "Our analysis of S&P 500 companies shows investors are willing to pay for outsized revenue growth as it suggests more sustainable long term EPS growth…Only 9% of companies in the S&P 500 are growing revenue above 15% and they trade at a ~60% premium to the rest of the index," they write.
[click to enlarge]



Via BusinessInsider

Wednesday, July 13, 2011

Consumer Discretionary, Industrials, and Tech SPDR ETFs Back to 2007 Highs

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While the broader indexes are not back to 2007 highs quite a few sectors, as expressed by their SPDR ETFs are already back there.  Financials of course are not one of them.

Industrials and technology are not that unexpected, but the move by consumer discretionary the past few years surely has surprised many of us. 

[click to enlarge]



hat tip Abnormal Returns

Ren Ren (RENN) Eventually There is a Valid Price for Everything

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There were all sorts of warts on "Chinese Facebook" (not really) Ren Ren (RENN) when it came public.  [RenRen IPO Appetite Seen Huge, but Red Flags Abound]   This did not stop the investment bankers from gifting their best customers with shares that could be flipped to the public in the low to mid $20s on IPO day.  While a complete bust, breaking below its IPO price of $14 within a week or two [May 10, 2011: Thus Far RenRen a Bust]  While impossible to catch a falling knife, those who were genius enogh to buy at $6 could have made 100% in just under 2 weeks with a perfect entry and exit.  For the rest of us mere mortals, a nice opportunity to skim 20-30-40% in a very short period of time also existed.



A price around $8 to $10 was most likely far more reasonable to come IPO at, and without the hype of the first day pop, would have led to a far more stable course for the stock.  But the larger point is, there is a valid price point for everything - unfortunately, a lot of people learned that the hard way on this one.

No position

All That Glitters...

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I am using the Gold Etf (GLD) for charting purposes, but we have essentially an identical setup in the commodity itself.  As Bernanke hints again more policy easing would be appropriate if the economy doesn't wake up (shocker!) and the European debt issue lends itself to one final solution (ECB printing), the yellow metal continues its run.  Gold is now at yearly highs and unless we have a double top forming, seems well on its way to break out to a new level.

As I have been saying for a few years, the move in gold has little to do with the traditional hedge against inflation and everything to do with the abject disrespect for fiat money by the world's central bankers - ours in particular.



No position

China Q2 GDP Stabilizes at '9.5%'

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I'm not necessarily saying these figures are accurate out of China, but just reporting them.  The country claims GDP growth beat expectations at "9.5%".  What the true number is, is anyone's guess. [Dec 7, 2010: Wikileaks - China's GDP Figures are "Man Made" ... ] [Aug 5, 2009: China's Provincial Growth Figures Far Overstated versus National Figures]  At least the inflation figure, reported over the weekend at 6.4% , is making some sort of sense nowadays after 2 years of being nonsensical in relation to a "10% GDP".  [Sep 13, 2010: What's China's Real Inflation Rate? (What's China's Real Anything?)]  [Nov 12, 2010: Even China Accuses China of Fibbing about Inflation]

  • China's Consumer Price Index  showed prices rose 6.4% over the last 12 months ending in June, China's National Bureau of Statistics reported Saturday.  That marks the fastest pace in inflation since July 2008 and an acceleration from May's 5.5% rate.
  • Food, which accounts for more than a third of an average Chinese person's monthly expenses, rose 14.4% year-over-year. Meat and poultry prices were the worst culprit in that category, surging a whopping 32.3%. Pork prices rose 57.1%.

Of course being the world's marginal buyer of everything on Earth, knowing if China is trying to accelerate or decelerate their economy is important to know.   Judging from their presentation of nearly double digit growth with increasing inflation, it looks like they are signaling to the world that the slowdown of the past 4-5 months they are trying to engineer is still in process.  Some economists however disagree, and think we're at the end of the tightening cycle.

Via Bloomberg
  • Gross domestic product rose 9.5% in the second quarter from a year earlier, the statistics bureau said in Beijing today, after a 9.7% gain in the previous three months. The median estimate was 9.3% in a Bloomberg News survey of 18 economists. 
  • Industrial output advanced 15.1% in June, the most since May 2010, even after the central bank boosted lending rates five times since mid-October and lifted bank reserve requirements to a record. 
  • Signs of a slowdown have spanned weakness in imports, a manufacturing index falling in June to the lowest level since February 2009, and carmaker General Motors Co. (GM) saying that sales may be at the low end of a forecast.

Video below discussing the figures from CNBC Asia




Tuesday, July 12, 2011

Caption this Photo

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In developing news, intense negotiations between finance ministers and the ECB continued as Europe's fiscal future hangs in the balance...

....errrrr.....


Belgian Finance Minister Didier Reynders, left, and Greek Finance Minister Evangelos Venizelos, center, speak with European Central Bank President Jean-Claude Trichet during a round table meeting of eurozone finance ministers at the EU Council building in Brussels on Monday, July 11, 2011. European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of a second bailout for Greece. 

My caption is

"Haha taxpayers suckers!"

or

"So what German or French bank will you be working for once we make sure these institutions never suffer a loss from a bad decision?  Just heard Axel Weber got the chairman gig at UBS.  Winning!"

LOL Market

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It is simply so pathetic how desperate the speculators in NYC are for more easy money.  Even a hint of it in the Fed minutes spiked the market up 8 S&P points.  QE3 watch begins!  Even though we are in the midst of QE2.5 ($300B annually) and QE2 ended... uhh, 7 market sessions ago.

The rest of the economy be damned.  Personally I am hoping for QE3 so Ben can say "not me" when everyone asks why prices of oil are skyrocketing again.  Maybe he'll tell Obama to drop some more SPR onto the market because clearly he has nothing to do with commodity inflation.  After all the Fed has a magic wand that inflates 'good' asset prices (stocks) but not 'bad' ones (commodities).

Still sticking to my call for QE3 by winter, as the next round of desperation arrives.

Circus and bread.
  • “The key takeaway from these minutes is that FOMC members are as perplexed about the economic outlook as almost everyone else, and that there is a split on the Committee as to whether the next move, whenever it may be, is more likely to be QE3 or tightening,” said Joshua Shapiro, chief U.S. economist at MFR Inc. 

Ballsy Move by Netflix (NFLX) as it Raises Prices Sharply on Combo Plans

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Looks likes Netflix (NFLX) is herding its customers to go streaming only as it just raised prices substantially on combo plans.  It will be interesting if there is any backlash...however customers have limited alternate choices out there. (Coinstar I suppose)

This will be a positive for profits as long as there are no large scale defections.  It is estimated in a Bloomberg report that these combo plans represent 80% of the current user base.  (current price for the combo plan is $9.99 so anyone who does not change by Sept 1 is going to see a 60% price increase)  Fourth quarter revenue could see a very big spike as some people will be too lazy to make a switch, until it begins to hit them in the pocketbook.

Via Marketwatch

  • Netflix said Tuesday that it would no longer offer unlimited plans that include both streaming and DVDs by mail. Users must now either subscribe to a stream-only plan, a DVD-only plan, or a combined plan. 
  • The unlimited streaming plan will remain at $7.99 a month. 
  • The price for obtaining both unlimited streaming and unlimited DVDs will be $15.98 a month ($7.99 + $7.99)
  • For new Netflix members, the changes will be effective immediately. For existing members, the new pricing will start for charges on or after September 1. 
  • Netflix founder and Chief Executive Reed Hastings has said for some time that the DVD market would exist for at least another decade. Not every title available on DVD or Blu-ray is yet available for streaming, particularly older library titles of a type preferred by many of Netflix's core customers.


No position

Boring

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Like watching paint dry today.


20 and 50 Day Moving Averages Held this Morning

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After a wild and wooly (sp?) overnight session in which futures were crushed, markets rallied through the 7-8 AM hours and opened to mild losses.  At this point the 20 and 50 day exponential moving averages have held firm as good support levels.  That said, with the market in a bipolar state - sometimes focuses on the macro, and sometimes ignoring it - news flow can overwhelm any form of technicals.  Italy did not suddenly become an issue overnight, but not until middle of last week, did the market seem to 'care'.



Until/unless these levels break I expect dip buyers to keep trying - especially those who missed the move of the previous 2 weeks and now have performance anxiety.  If not for the ever present European issues, the move into earnings season would be dominating, and generally over the past 2 years (excluding a few periods such as last July) this has been a gleeful time for stocks.

Not much on the economic radar this week other than inflation figures, which the market has ceased to care about long ago since easy money Ben will not relent on the helicopter dumping of dollars.

As for Europe I think the end game is simple - the ECB will lose any last shard of credibility and turn into the Fed - buying all sorts and manners of Italian, Spanish, Greek (done), Portuguese (done), and Irish (done) debt.  It's just a matter of when they give in - most likely when the market forces their hand.  They will become the great European garbage dump.  I still am amazed France is getting off with no damage, they have an ugly debt profile themselves.  This chart is from 18 months ago but you can see France is right there with.... Portugal.


Fortune: Don't Call it the Next Tech Bubble Yet

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We'll skip past the obvious news of the day for now, and take a look at an interesting cover story in Fortune revealing how Silicon Valley is enjoying an economy completely disassociated from the majority of the country.  While suffering a tremendous skid in 2008 along with the greater economy, the boom/bust cycle is firmly in boom as the social media bubble phenomenon overtakes the region, creating millionaires a plenty.  Home prices in Palo Alto are up over 20% in 6 months and with the lock up period for many of the hot IPOs set to hit in the coming 6 months, a lot of new money is ready to be unleashed in the region.  The WSJ had a story last week about how the 'perk bubble' is back in the Valley - companies lavishing all sorts of treats on their employees circa 1998-1999.

This is a long story but a pretty fun read in terms of people living in an alternative universe.
  • Michael Dreyfus, 49, is a leading real estate broker in the heart of Silicon Valley. During the winter he sensed the housing market was coming back, though he hadn't a clue what he'd be in for. In February prospective sellers came to him with a listing for a perfectly respectable property in Palo Alto: four bedrooms, three bathrooms, 7,500-square-foot lot, needs work. He recommended that the sellers ask $1.9 million. When the house went on the market in April, they had bumped the price to $2.3 million. Seven offers came in above that price; $2.7 million won the frantic bidding. Several buyers attempted to make offers even as the broker was supervising repairs to a kitchen flooded by a burst pipe. What's a little leak when the price tomorrow may hit $3 million? "We live in an alternative universe here," Dreyfus acknowledges.
  • Welcome to the Bizarro World of Silicon Valley Summer 2011, where financial fervor is fueling yet another real estate boom. Billions of dollars in fresh venture capital is being invested, and tech IPOs are hitting the stock market weekly. The rest of the country may be in the economic doldrums, but here the winds are fair and the sails of the newly rich captains are full.   Proceeds from IPOs this quarter -- nearly $12 billion so far -- are already more than double last year's total.
  • Only three years ago the place was altogether miserable. The recession of 2008 paralyzed venture capital and strangled growth.    Boom and bust has been the way of Silicon Valley -- as it's been for all California since the Gold Rush. Genentech in the 1970s launched the biotech industry. Intel (INTC) and Apple (AAPL) gave birth to personal computers. Netscape created the modern web revolution. Companies thrived, then hit the inevitable hard times.
  • Netscape's highest public valuation obviously pales in comparison to Facebook's current evaluation -- or even Twitter's private valuation at about $8 billion based on secondary-market action. The argument for big valuation -- and against Netscape's way back when -- is that the current generation of dotcoms have better business plans and rely on more than mere "eyeballs" to measure potential profitability. 
  • Who's correct? For any 10 people you ask, you'll get 11 answers. Reasonable folks can disagree about the prospects for boom or bust. But their reckoning is about psychology more than economics.  "I think it's a wanna-bubble," says longtime Valley observer Paul Saffo. "Investors are desperate for something -- anything -- with a prospect of returns, and there is a lot of hot money looking for a home." 
  • Travel round the valley, and you can see what worries the poker-playing VC. It isn't just about high valuations and too much investor money chasing too few sound deals. Nor is it only about a rush to take questionable companies public. There are also cultural data points that are unmistakable: fast cars, homes priced for Marie Antoinette, and numbered bottles of balsamic vinegar from Italia.
[click to enlarge]


    • Barely presentable engineers just out of schools like Stanford and MIT are commanding higher beginning salaries than lawyers. (Yes, some might call that progress.) On Highway 101, the main drag of the Valley, billboards compete to attract engineers.  Bidding wars for the next extraordinary engineer -- someone who's content to be an employee with some options, rather than immediately getting into the startup game -- have resulted in salaries as high as $250,000. That's almost double what top talent got in the late 1990s.
    • Of the roughly 1,300 pre-IPO employees at LinkedIn, the vast majority became paper millionaires the day of the offering. Leaving aside the executives, the shares of the rank and file were worth as much as $190 million. (Co-founder Reid Hoffman became a multibillionaire that day.)
    • Dreyfus, the Palo Alto broker, says housing is "really hot" in premium areas of the Valley -- the best since boom days in the late "wacky" 1990s (though not yet at the prices of those days gone by).  What especially surprises Dreyfus, he says, is that so many buyers are from elsewhere -- particularly New York and London -- filling the management ranks at expanding social-network companies like Facebook. 
    • Buyers at the top end of the market -- above $5 million -- often pay all cash. Because newly flush employees at companies like LinkedIn cannot sell any of their shares for at least 180 days after the IPO, those employees have yet to hit the Sunday open houses. The marketplace may therefore get hotter still, fueling perceptions of froth.
    • In the past six months the median price of a home in Palo Alto has risen 24% to $1.2 million, according to DataQuick. Dreyfus says his own statistics in May showed only a 27-day supply of homes for sale -- assuming one home sold per day. A year earlier, supply was three times that.
    • Now 40, Montulli doesn't yet see many signs of a bubble, but he hears echoes of the times of Netscape. "There's still conservatism in the Valley," he says. "There's a lot of money chasing a very small number of companies -- those that actually show traction and are achieving real revenue and massive numbers of users. Those are the companies now getting bid up." The question, he says, is whether those valuations -- born in part of scarcity -- eventually will affect all those lesser companies around which fear still prevails over greed. He senses less fear of late. 
    [click to enlarge]

    [Apr 15, 2011: BW - This Tech Bubble is Different]

    Monday, July 11, 2011

    Facebook Facing a Threat from Google+ (GOOG) ?

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    While sure to be the biggest IPO of 2012, if not the decade, Facebook best think of coming public while it is still in hyper growth mode.  Already in the U.S., the company has begun to shrunk as 1 in 2 humanoids is already on the service (saturation) but of course there are many opportunities to monetize these clients further, plus many opportunities continue abroad.
    • One research firm, Inside Network, recently reported that Facebook's U.S. users dropped six million to 149 million during May.

    That said Google+ has just launched, and the author of this article in the WSJ believes Google+ could be a credible threat.  This is course does not mean toppling the empire, but for Wall Street purposes a lower trajectory of growth eventually means lower valuations.

    Here are the reasons (disclosure - I dont do social networking on either platform)

    • In what appeared to be a hasty response to the launch of Google's rival social-networking product, called Google+, Mr. Zuckerberg on Wednesday unveiled Facebook's new video-chatting feature. He called it "super awesome." Too bad Google made the same feature available in 2008. Indeed, Facebook suddenly looks vulnerable. This could be bad news for investors who have recently paid top dollar for stock in Facebook in private sales.
    • Rule No. 1 when launching a social network: Make everyone wait in line. Exclusivity was how, in its early days, Facebook built buzz. For more than two years, you couldn't get in unless you had an email address ending in .edu. Google is using a similar strategy with Google+. 
    • Facebook should take note that Google used the strategy before to kneecap Yahoo in all-important email, a key driver of Yahoo's traffic. Then Google rolled out Gmail—but only by invitation at first
    • Rule No. 2 is to deliver a better service. Adopting a new social network could prove similar to adopting a new email address: Many will try it out, but to keep using it, they have got to be given good reason. That Gmail offered significantly more storage space than typical Web mail meant millions were willing to make the switch. Similarly, Google+ offers upgrades on what many perceive to be Facebook's shortcomings.
    • For starters, Google+ gives users a handy way to organize their social contacts into different "circles"—friends, relatives, colleagues, etc.—with which they can share appropriate things. Though Facebook now offers the option to create "Groups," users broadcast their information to everyone by default.
    • Google+ also offers group video chats. That is why Facebook's announcement of one-on-one video on Wednesday seemed to fall short. Facebook has yet to introduce group video chat.
    • The biggest hurdle for Google+ is getting users, of course. But it is integrating the service with Gmail, which already has 240 million unique users world-wide, according to comScore. Meanwhile, the user experience on Facebook is a victim of the site's success. Users have accumulated so many online "friends" it can be difficult to organize them. And users often feel assaulted by too much or irrelevant social information, like Zynga game updates. Ultimately, Google+ is a chance for social networkers to start over.
    • This doesn't mean people will drop out of Facebook overnight. Gmail users didn't necessarily drop their Yahoo email addresses. Indeed, Yahoo Mail still has more unique visitors, but its growth has been stagnant, whereas Gmail continues to expand quickly.

    [Video] PIMCO's Mohamed El-Erian on the European Debt Situation

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    El-Erian chimes in his views on the whack a mole that is the burgeoning debt situation.

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


    Zachary Karabell Gets It - Jobs Aren't Coming Back

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    An excellent piece by one of my favorites Zachary Karabell in The Daily Beast on the employment issue.  To even begin to fix a problem (that is in part 'unfixable') one must acknowledge it exists.  The United States (and many developed countries) [Feb 7, 2011: The Youth Unemployment Bomb] remain in denial about what has been happening the past 10-12 years, hence are relying on 'solutions' that are not solutions.  Instead we remain in an environment dominated by easy to print out talking points that work great for cable TV, but are useless in the real world.

    This chart is about 2 years old but it showcases the 'job creation' of the past 10-12 years has been almost solely government or pseudo government created - healthcare and education largely funded via taxes and deficit spending... and government obviously being government.  Of course as pointed out 3 years ago, any real large scale cost efficiencies to health care - will be reducing jobs from the one place the bevy of net job creation has come from the past decade+.  Hence, a conundrum - continue a ponzi that is the only huge source of job creation, or actually try to limit costs, but lose jobs.


    Meanwhile the 'rest of the economy' aka private sector? Buffeted by a housing bubble (jobs ballooned, than eliminated) as real jobs moved offshored or eliminated via technology.  [Mar 28, 2011: Productivity - (Wo)man Versus Machine]  A big problem - with no easy solutions.

    This also has implications for the market - increasingly the U.S. economy can disassociate from the prospects of the S&P 500 companies as long as foreign growth - especially of the Asian kind - remains solid.  Handing these companies ever more tax cuts in a desperate ideology to 'create jobs' is useless other than on the margin.  One also must look at the chart above, and ask what the Bush tax cuts of 2001 and 2003 accomplished for employment.  Supposedly these reduction were to unleash a great wave of capitalism and job creation...  (not that I want higher taxes, but let's be honest on whom these policies help)

    Glad to see some few in the mainstream spreading the message to help fight the denial, as opposed to some of us two bit bloggers.  More from Zach

    • Americans remain in denial. Economists rely on models that correlate GDP growth and other indicators with past patterns of employment and assume that because GDP is expanding 2 to 3 percent this year, job creation will follow. The political class continues to treat employment as a product of the recession and sees government policy as either helpful to future job growth (Democrats) or harmful (Republicans). 
    • We are stuck in a framework that treats unemployment today as a cyclical phenomenon, and assumes that employment will return as the overall economy recovers. The truth, it is becoming clear, is that unemployment is a structural issue, and that the tools being used are based on the wrong analysis and will therefore continue to fall short.
    • In fact, there has been almost no net job creation in the past year, according to the Bureau of Labor Statistics, with about 139 million people employed in June 2010 and about the same now. There are, by the way, many issues with how these numbers are compiled (based on telephone surveys and adjusted by statisticians with complicated formulas meant to compensate for seasonality and other factors). But they do provide an indication of overall patterns of employment, and those patterns are clear: job creation is not happening, and there is little indication that it will. 
    • To be fair, this is a new problem for the United States in the modern era. Everyone now alive has only a memory of employment being a cyclical issue, and with every downturn since the middle of the 20th century, unemployment spiked with recession and then recovered as growth resumed. No longer
    • First of all, it’s clear that companies can make a lot of money with no need for extra bodies. Corporate profits continue to rise at a double-digit rate, and as the companies of the S&P 500 report their financial results in the coming weeks, that reality will stand in stark contrast to employment and wages that remain stagnant. Even when companies do open factories in the United States, they need hundreds of highly skilled workers to manage factory floors that are increasingly sophisticated and mechanized where they might have needed thousands upon thousands decades ago. Lowering tax rates, and thereby increasing the amount of cash in individual and institutional hands, won’t help. There is no dearth of cash on hand for many companies and many wealthy individuals; yet they aren’t using that cash to hire.
    • Second, we don’t live in a simple economic system. We live in a multifaceted one, where people with a bachelor’s degree or above are almost fully employed (with a 4.4 percent unemployment rate, according to the latest report) and people without a high-school degree or minimal college and people of color have unemployment rates in the high teens. Some regions are booming (oil states, agricultural states); some are still mired in structural challenges (manufacturing states like Ohio, real-estate bust states like Arizona). And some are both booming and busting, such as the wide gulf between Silicon Valley and the Central Valley in California. There is no one-size-fits-all employment policy that will magically create employment across the country.
    • Finally, our policies assume cyclical patterns. We have spent more than $300 billion on unemployment benefits since the recession began because we think that jobs will magically appear as activity picks up and all we have to do is get people through the rough patch. It only makes sense to spend that much on unemployment insurance if it is perceived as temporary or cyclical. If the issue is structural, that money only subsidizes unemployment and low-level consumption and does nothing to create jobs. It is right not to let those out of work suffer profoundly in a society as wealthy as ours, but we are fooling ourselves if we think that money will help change the employment picture.
    • Indeed, with that $300 billion, it would have been more cost-effective (and probably better for collective morale) to hire millions of people on government payrolls and have them do some sort of productive work à la New Deal–era programs. But government would only do that if we collectively reached a point where we admitted that we didn’t know what to do about long-term unemployment, which is essentially what happened in the mid-1930s. It wasn’t a solution to the problem, but it was at least recognition that it was a problem for which we didn’t have a solution.
    • Today, there is little willingness to confront a changed economy that is not following past patterns. ..... avoids consideration that the United States is embedded in a global economy fueled by information technology on one end of the spectrum and commodities on the other—both of which put pressure on the living standards of 20th century–style high-wage earners that typified the middle-class society of the United States.
    • This time, it’s different.


    [May 11, 2010: The World's Dollar Drug]
    [Oct 14, 2009: Zachary Karabell - Deficits and the Chinese Challenge]

    USA Today: Fewer Temp Workers May Signal Dim Hiring Outlook

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    Remember all the pundits and economists who promised us that the uptick in temporary hires ALWAYS leads to a surge of hiring afterwards?  Meanwhile, some of us said 'this time it is different' and the U.S. is slowly moving to a disposable workforce (easy on, easy off) [Feb 16, 2010: USA Today - Use of Temps to Fill Jobs May No Longer Signal Permanent Hiring]

    What I wrote in Feb 2010

    The theme of this USA Today story is a concept I've been debating mentally the past few months; for many years in the manufacturing field there has been something called 'just in time' inventory to promote efficiency.  Now we might be moving to an era of 'just in time' labor - easily hired, easily fired.  Or in 1980s lingo - wax on, wax off!  The implications for the society are profound, but for economic reasons it might make one of the commonly used 'old school' barometers of economic recovery less useful - that is "temporary hiring surges before full time employment recovers".    Let's keep this in the back of our cranium as we watch the employment data over the next year.

    With the United States being the only major Western country that requires its companies, large or small, to foot the bill for employee healthcare - my only surprise is that this trend has not happened earlier.  The longer healthcare costs go unchecked in this country, the higher the marginal cost will be to hire each employee - which will be a drag on full time employment.  Another conundrum for America. 

    Lost in the discussion Friday in the horror filled employment data was the loss of 12,000 temporary jobs.  So if the bulls claim a spike in temporary hiring should be the precursor to great full time job gains (which never happened) while should they say about the fall in temporary hiring?

    Via USA Today:

    • The total number of temporary employees placed by staffing agencies dipped by 12,000 last month and is down 19,000 the past three months, the Bureau of Labor Statistics reported Friday.  That doesn't bode well for a rapid turnaround in the broader job market because employers typically hire temporary workers to meet increased demand, then convert them to permanent positions when they're confident growth will be sustained.
    • Friday's job report wasn't heartening. The average workweek edged down to 34.3 hours from 34.4 hours in May. Employers typically increase the hours of existing employees before bringing on new workers.
    • Temporary workers, however, could be the most telling signal. The number of contingent workers started growing in fall 2009, about six months before the broader job market began to emerge from the recession. From September 2009 to March, employers added nearly 500,000 temporary workers.
    • Roy Krause, CEO of Spherion, a top staffing agency, says temporary placements for white-collar jobs in accounting, computers and legal remain strong. But those for lower-skilled light industrial, clerical and certain call-center jobs — which accounted for most of last year's growth — have slowed. "They tend to be more sensitive to economic conditions," he says.


    Another Week, Another Emergency European Meeting - This Time Target is Italy

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    Looks like we've skipped over Spain and headed straight to Italy for the never ending "it's a crisis until we hand people in debt with more debt, so that German and French banks never lose a dime".  Not sure why something that has been simmering for months on end, suddenly matters in the past few days but that's the issue when you never truly take care of a problem and simply kick the can(s) in every direction.

    To solve the problem of too much debt, Italy has declared short sellers must be watched ever closer! (taking a page from the U.S. book circa 2008)  Because short sellers are of course is the nexus of all the world's ills.

    I'm just waiting for someone to notice France has a massive debt load itself... and its supposed to be the one bailing everyone else out.


    Via AP
    • Europe's finance ministers are meeting in Brussels today to seek ways to shore up Greece and defend the region’s other heavily indebted nations. The premium investors demand to hold Italy’s debt over German bunds hit a euro-era high of 267 basis points today
    • ....the yield on Italian 10-year bonds meanwhile increased to 5.4 percent from 5.3 percent, following sharp rises on Thursday and Friday.  "The fact that contagion is spreading marks the failure of politicians to draw a line under the Euro-crisis to date," Rabobank analyst Jane Foley said. "As yields rise and debt financing costs become even more exaggerated the difficulties of containing the crisis become even bigger."

    Via Bloomberg:
    • Italy’s market regulator moved to curb short selling after the country’s benchmark stock index fell the most in almost five months and bonds tumbled on investor concern the nation may be the next crisis victim. Consob ordered yesterday that short sellers must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make new filings for each additional 0.1 percent. 
    • Italian politicians including Paolo Bonaiuti, an aide to Prime Minister Silvio Berlusconi, blamed the market slide on “speculators” and pledged action to rein in investors perceived to be attacking Italy. Bonaiuti said Italy would be united “in blocking the effort of speculators.” 

    Friday, July 8, 2011

    Big Win for Bulls Today

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    I tweeted this morning around 10 AM that if the market was not so overbought (+7% in a week and a half) that the indexes would have a good chance of going green today. 

    fundmyfund: Mild selloff. If the market had not come in so overbought I'd think we could go green by end of day as 2nd half recovery meme dominates. $$


    No one was selling the Apples or Netflixes and really less workers = more corporate profits (woo hoo).  Just remember Main Street = Wall Street only when Wall Street needs a bailout from Main Street - otherwise increasingly there is less and less connection, especially in the multinational group.

    I'd consider today a huge win for the bulls as this selloff was barely a glancing blow, considering how pathetic the employment report was.  When markets shrug off bad news, that is very bullish.  Wall Street is anticipating another "better than expected" (wink wink) earnings season and it appears the macro is just details for now.



    Scary stat of the day: Canada, 1/10th the size of Cramerica, added more jobs in June than we did.  And I don't believe Canada has the birth death model to boost their figure by a 100-175K here or there (or nearly every month).

    David Einhorn Greenlight's Capital Q2 Letter

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    One of the newer hedge fund industry's shining lights David Einhorn's Q2 letter below.  He is of course having a relatively tough 2011.  Ironically he threw in the towel on his shorts at maximum pain level in May 2011, just as the market was soon to have a 7 week correction.


    Hit full screen for the easy read  (the embed seems to be hit or miss so here is a link to the letter)

    Qlet2011-02




    [May 2, 2011: David Einhorn Throws in the Towel on Many Short Positions as Ben Bernanke Squashes Him]
    [Dec 6, 2010: [Video] The Always Eloquent David Einhorn]
    [May 27, 2010: David Einhorn Op-Ed: Easy Money, Hard Truths]
    [Oct 19, 2009: David Einhorn's Speech at Value Investing Congress]
    [Jan 5, 2009: New York Times Opinion Piece by Lewis and Einhorn]

    Marketwatch: 10 Reasons We are Doomed to Repeat 2008

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    A reader pointed out this article in comments section a few days ago, and I thought it worthwhile to bring over.  It repeats quite a few themes long time readers of FMMF will be familiar with but ties them up together nicely.  The author, Brett Arends might be considered one of the more realistic financial journalists around.

    I'm just going to list the 10 reasons, head over to Marketwatch for the extrapolation of each.

    1. We are learning the wrong lessons from the last one. 
    2. No one has been punished. 
    3. The incentives remain crooked.
    4. The referees are corrupt.
    5. Stocks are skyrocketing again. 
    6. The derivatives time bomb is bigger than ever — and ticking away.
    7. The ancient regime is in the saddle.
    8. Ben Bernanke doesn’t understand his job. (I disagree with this one - his job is to serve and protect the banking class - he has done a marvelous jobOh yeah there is some boiler plate about price stability and employment but judging from the value of the dollar and the 'real' employment rate - he has a F on those counts)
    9. We are levering up like crazy.
    10. The real economy remains in the tank.

    [Video] Goldman's Jan Hatzius Upgrades Chance of U.S. Recession in 2012 to 1 out of 5

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    While a technical recession in the U.S. is two quarters of negative GDP, for many there has never been an exit from recession.  Polls show this - often broadcasting that 60%ish of Americans believe we are still in a recession.  [Feb 17, 2011: 57% of Americans Still Think We are in Recession] A lot depends on where you are on the income totem pole.  Further, a lot depends on if you believe the government inflation figures.  Within GDP another inflation gauge is used (called a deflator) which is even lower than CPI most of the time.  [May 1, 2008: Is it an Official Recession?]  As inflation rises, GDP falls... so if you believe government is understating inflation by 2% or more, we've been in a recession the past 2 quarters.  The fact that government uses one type of  inflation for X reports, and another type for Y reports is just all part of living in the Matrix.

    Whatever the case, even using the lenient government statistics for GDP, Goldman's Jan Hatzius has moved up the chances of a recession in 2012 to 15-20%.  While he has been as wrong as just about everyone on Wall Street with the talks of 4%+ GDP in 2011, he is still the most widely followed economist amongst the major banks due to a quite good track record. (relatively speaking)

    Please note this video is BEFORE today's employment report

    21 minute video






    Some highlights:

    • Jan Hatzius, the chief U.S. economist of Goldman Sachs, started out the year among the most bullish economists on Wall Street about 2011 economic growth. Six months later, after a disappointing first half, he’s less optimistic and growing a little antsy about the risk of renewed recession.
    • In an interview with The Wall Street Journal, Mr. Hatzius said he saw a 15% to 20% chance of renewed recession next year. His baseline forecast is still for a resumption of stronger growth in the second half of 2011 and into 2012, but he has taken down his 3.5% to 4% forecast by a half percentage point and increased his unemployment rate forecast to 8.25% from 8% by the end of 2012.
    • If you were to see, over the next three months, an increase in the unemployment rate by say a half a percentage point or so, I would be pretty nervous about a renewed recession,” Mr. Hatzius said. “It is not our expectation, but that would that would make me fairly nervous.”
    • Goldman has been noting recently its “three-tenths rule.” Since World War II, an increase in the three-month moving average of the U.S. unemployment rate by more than 0.3 of a percentage point has always led to a much bigger increases in the unemployment rate and recession. The three-month average rate has increased by 0.07 percentage point since April. It would need to be sustained around 9.2% for several months for the rule to apply now.
    • Goldman economists were bullish early in the year because they believed that households had been making good progress in paying down their debts and were in a better position to resume spending. Mr. Hatzius said a combination of shocks from abroad and a softer underlying growth led its forecast astray for the first half of the year. But he said households are still making progress repairing their balance sheets, and therefore, he expects growth to pick up speed in the months ahead. “The progress that was evident six months ago is still visible,” he said.
    • On the policy front, Mr. Hatzius said he didn’t see the Federal Reserve raising interest rates until early 2013, and he doesn’t think it will restart its asset purchase program unless inflation slows and the economy fails to regain momentum. 

    Via WSJ

    Have You Heard of the Chained Consumer Price Index? Time to Learn as Social Security Benefits May be Altered

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    Some interesting leakage on on a proposal to slow the growth of social security benefits as part of the debt ceiling negotiations.  It appears the idea being floated is to use an inflation gauge that is counts even less of real inflation than the consumer price index (CPI).  For those of us who already think the CPI (which has been adjusted in myriad ways since the 1980s) undercounts inflation [Dec 16, 2010: Shadowstats.com - Consumer Inflation as Measured in 1980 Would be 8%+, as Measured in 1990 4%]- a move to an even more skimpy way to count inflation would be incredibly bemusing if not for the fact it is going to impose serious hardship on those at the lower end of the economic scale.  Of course in our political system, those are the folk who do not have a lobbyist group nor offer much in terms of monetary contributions to campaign funds, so their interest are not really relevant to the powers that be.

    Frankly I had never heard of the 'chained consumer price index' until yesterday.  If you have not - it's probably time to learn.  By using this measure the politicos can 'cut' social security benefits, without actually technically using the word 'cut'.  Genius.

    Larger picture - the U.S. plan to deal with the massive deficits is to devalue the dollar ... which will create ever more inflation as the year pass.  That increased inflation can be under reported even further [May 22, 2008: Bill Gross - Inflation Underplayed] using such snazzy measures as the 'chained consumer price index'.  Which will allow the powers that be to claim there is little to no inflation (hence you get no COLA adjustment) as they devalue the country's currency to pay off our debt.  I love it when a plan comes together.

    Did I mention it's genius?

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

    Via AP:

    • Once considered untouchable, Social Security is now in play in the debt-ceiling negotiations. And that could mean higher income taxes for many U.S. families in addition to shaved benefits for tens of millions of retirees as they age.  Low- and middle-income families could be hit.
    • Adopting a new inflation measure would allow policymakers to gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. The inflation measure under consideration is called the Chained Consumer Price Index. On average, the measure shows a lower level of inflation than the more widely used CPI.
    • A Chained CPI assumes that as prices increase, consumers buy lower cost alternatives, reducing the amount of inflation they experience. (so does CPI) For example, if the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters
    • The change would mean smaller annual increases in Social Security payments, government pensions and veterans' benefits. Current payments would not be affected, but recipients would get smaller increases in the future.
    • Overall, the proposal would cut Social Security benefits by $112 billion over the next decade, according to the nonpartisan Congressional Budget Office. It would cut government pensions and veterans' benefits by $24 billion over the same time period if adopted for them as well.
    • In most years, Social Security payments are increased based on a measure of inflation called the Consumer Price Index for Urban Wage Earners and Clerical Workers. If Social Security adopted the new measure, annual increases would be 0.3 percentage points smaller, according to the program's actuaries.  (doesn't seem like much but this compounds over time... )
    • That could be a tough hit for seniors who have gone two years without a cost-of-living adjustment. 
    • As the possible cuts are phased in, a typical 65-year-old who started receiving Social Security benefits at age 62 would get an annual reduction of about $130, according to an analysis of data produced by the Social Security actuaries. By the time that retiree reached 75, the annual cut would be $560. At 85, the cut would be $984 a year.
    • Average Social Security benefits are about $1,100 a month, or about $13,000 a year.
    • Adopting the Chained CPI would mean smaller adjustments to the tax brackets, leading to higher taxes for people at just about every income level.  Low-wage workers would eventually see the biggest increases, while high-income taxpayers would see only small changes.  For example, by 2021, taxpayers making between $10,000 and $20,000 would see a 14.5 percent increase in their income taxes with a Chained CPI, according to an analysis by the Joint Committee on Taxation. Taxpayers making more than $500,000 would get a tax increase of 0.3 percent, while those making more than $1 million would get a tax increase of 0.1 percent.

     [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators]
    [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government]

    Yikes, Government Reports 18,000 Jobs Created

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    Houston we have a problem.

    +18,000 jobs versus the 110,000 or so expected.
    57,000 in private sector versus 39,000 jobs lost in government.

    Unemployment rate 9.2%

    Obviously in sharp contrast to ADP yesterday.  I wouldn't read too much into any one number, but this is 2 months back to back where the government data is very poor.

    Hourly wages were essentially stagnant (down 1 cent)

    Average workweek fell from 34.4 to 34.3 (this is the equivalent of losing a couple hundred thousand additional jobs)

    May's already paltry 54,000 figure was also revised down to 25,000.

    Birth death model 'created' 131,000 jobs in June .... so those of you in the know, realize how bad the data 'really' is. [Jan 27, 2008: Monthly Jobs Report & Birth Death Model]  Birth death created 205,000 jobs in May as well.... I guess small businesses are booming across America again (at least per government statisticians)

    All in all it looks like the summer of recovery 2.0 is well on it's way.  On the other hand less jobs = more corporate profits so it's not really that bad of news for Wall Street.  Just a disappointment for the day in a very overbought market.

    EDIT 8:45 AM: Thinking out loud - McDonald's hired about 60,000 workers in May.  With the revision down in May's figures, McDonald's essentially created all the net hiring in the U.S. in May + June.  A pretty good statement on life for Main Street outside of Manhattan, Washington D.C. and some of the booming agriculture, great plains states.

    EDIT 10:00 AM: More ugly numbers.  U-6 (broad unemployment including those marginally attached to the workforce) jumped from 15.8 to 16.2% - a huge one month spike. 

    And somehow the labor force participation rate dropped another 0.1% to 64.1%.  If this rate had held steady from the beginning of the 'recovery' in June 2009 at 65.7%, the unemployment rate would be 11%.  All these dropouts from the labor force are masking a world of hurt below the surface.

    Thursday, July 7, 2011

    WSJ: 2006 401K Law Supresses Saving for Retirement

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    Hmmm, some interesting unintended consequences of a law passed in 2006 which one would think would have increased savings. 

    The study shows while more people are participating, those who are automatically enrolled due so at the company set rate, which is below what people who enroll on their own normally do.  Hence inertia is an issue.    I'd also argue one potential issue is the timing of the law - it happened just before the beginning of the Great Recession so far fewer people have jobs (and hence 401ks), and those who do retain employment don't have the house ATM to utilize as their secondary piggy bank - hence have less for retirement savings.  But plain inertia might be the primary cause.

    Via WSJ:

    • A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people.   Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own. The measure was intended to encourage more people to bulk up their retirement nest eggs—a key goal in a country where millions of people aren't saving enough.
    • But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found. The nonprofit performed a complex computer simulation of savings patterns drawing on data from more than 20 million 401(k) participants.
    • The problem: More than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise. That's far below the 5% to 10% rates participants typically elect when left to their own devices, the researchers said.
    • "Automatic enrollment is a double-edged sword," said Brigitte Madrian, a professor at Harvard University who is an expert on 401(k)s. "On the one hand, there's more participation. On the other hand, lots of employees are stuck at whatever default the employer selects." 
    • The total annual amount being put into 401(k) plans has increased by 13% since 2006, to an estimated $284.5 billion this year, according to consulting firm Cerulli Associates. That is largely because the rule has successfully prodded millions of people who wouldn't have saved a penny for retirement to start saving something. 
    [click to enlarge]


    • EBRI evaluated the contribution rates of people of similar ages and salary levels eligible for 401(k) plans with automatic enrollment versus those in plans that require workers to join voluntarily, examining data stretching back 11 years. To project future savings patterns among auto-enrolled participants, EBRI ran a computer simulation based on a variety of scenarios concerning wage growth and the adoption of higher contribution rates over time.
    • Simple inertia takes over for many workers, said Kristi Mitchem, head of the global defined-contribution business at State Street Global Advisors, which manages more than $297 billion in 401(k) plans.
    • The Pension Protection Act of 2006, which was designed to shore up the pension system, also encouraged wider adoption of auto-enrollment in 401(k) plans. It removed obstacles such as state laws that restricted the practice and shielded employers who use certain types of investments from liability for losses suffered by participants who are auto-enrolled.
    • The law has boosted auto-enrollment and participation rates dramatically. About 57% of large companies now automatically enroll new employees in 401(k) plans, up from 24% in 2006, according to Aon Hewitt. While employees are free to opt out, companies report average participation rates above 85%, compared with 67% for those without auto-enrollment, Aon Hewitt says.
    • Yet 401(k) participants' average savings rates have fallen in recent years. Among plans Aon Hewitt administers, the average contribution rate declined to 7.3% in 2010, from 7.9% in 2006. The Vanguard Group Inc. says average contribution rates at its plans fell to 6.8% in 2010, from 7.3% in 2006. Over the same period, the average for Fidelity Investments' defined contribution plans decreased to 8.2%, from 8.9%.  Vanguard estimates about half the decline "was attributable to increased adoption of auto-enrollment."
    • Many companies said they selected a 3% default contribution rate in part out of concern that a higher rate could prompt employees to drop out of these plans.  
    • Another factor may be pushing down default rates: Some companies that match some employee contributions can save money with a lower default rate. According to a 2011 Aon Hewitt survey, 73% of employers without auto-enrollment cite "the increased cost of the employer match as a primary barrier" to adopting it this year.


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