Tuesday, August 23, 2011

Apparently Gold (GLD) Can Go Down

Gold is down for the first time in 7 sessions (I'm using the ETF for charting purposes).  Lots of attention yesterday and this morning on non financial news networks I was skimming.  As mentioned yesterday the gold ETF was incredibly overbought and since early July, GLD has always bottomed at or above the 10 day moving average.  At this point, this is nothing but a much needed back and fill... frankly this can get all the way back down to the 50 day moving average without doing a lick of long term technical damage.  I'd expect whatever is said Friday to be the next catalyst - up or down.

As for the S&P 500, we remain in that 1120-1175 range.  1120ish has been a very strong floor the past few weeks.

No position

Earthquake Hits Virginia - Felt All the Way to NYC

The market has sold off here a bit on this earthquake (5.9ish) in VA.  While it may be a knee jerk reaction anytime you feel a tremor around D.C. or NYC (where many people on twitter said it was felt as well) very bad thoughts immediately come to mind.

A 5.9-magnitude earthquake shook Washington, D.C. and Virginia on Tuesday afternoon, according to the U.S. Geological Survey. The quake, which was centered 83 miles southwest of the nation's capital and 41 miles northwest of Richmond, Va., occurred at 1:51 p.m. Eastern. Parts of the White House, U.S. Capitol building and the Pentagon were reportedly evacuated. Originating at a depth of less than a mile, the tremor was widely felt in the D.C. metro area and as far away as New York City.

Vanity Fair - It's the Economy, Dummkopf! (Michael Lewis)

Michael Lewis has been one of the best authors on all things financial (even though he is not specifically a financial writer) the past decade.  Lately he has been concentrating on Europe - first Greece, then Ireland, and now it appears Germany.  A reader pointed out to me a very lengthy article in Vanity Fair which should be interesting for some of FMMF's readers:  It’s the Economy, Dummkopf! (full link here)

With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street’s con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country’s Nazi past, all of which help explain its peculiar new status.

Some older Lewis here...

Social Security Disability on Heads Towards Eventual Insolvency as Benefit Program Flooded with New Applicants

One of the great mysteries of the past few years is where have the jobless gone?  The U.S. employment participation rate has dramatically dropped, to the point that if we had a 'normal' participation rate, the unemployment rate would be about 2% higher.  Some of these folks probably are back in school, while others have 'retired early', but it cannot explain the majority of the drop off.

[click to enlarge]

Back in April, we found part of our answer - the U.S. disability program has been flooded with new applicants. [Apr 7, 2011: Nearly 1 in 20 Working Age Americans are on Disability]  One in twenty working age Americans are now on disability, a doubling versus 1990.  I wrote then:

In 2010 alone, the number of people enrolled jumped by half a million which can help us explain part of the huge drop in workforce labor participation in the U.S. (some 2M Americans have simply dropped off the map)  If a somewhat similar number was seen in 2009 (which looking at the 45 degree angle of growth in the chart below would appear very likely) that would explain away half of the 2M Americans who have disappeared from the workforce.

Of course as the % enrolled has doubled, the cost has actually tripled since 1990 - from $40B a year to $120B annually.   That would place the cost above food stamps + welfare combined.

That's all fine and dandy, if that's how you want to run an economy and stuff millions 'off balance sheet;... but we seem to have hit an issue.  This program was not designed for 5% of the American working age population to partake in.  Costs are exploding higher.

Per new Congressional estimates we're headed for another insolvency (and coming bailout).  It's more Ponzi scheme economics.

  • Laid-off workers and aging baby boomers are flooding Social Security's disability program with benefit claims, pushing the financially strapped system toward the brink of insolvency. Applications are up nearly 50 percent over a decade ago.
  • The stampede for benefits is adding to a growing backlog of applicants -- many wait two years or more before their cases are resolved -- and worsening the financial problems of a program that's been running in the red for years.
  • New congressional estimates say the trust fund that supports Social Security disability will run out of money by 2017, leaving the program unable to pay full benefits, unless Congress acts. About two decades later, Social Security's much larger retirement fund is projected to run dry as well.
  • Much of the focus in Washington has been on fixing Social Security's retirement system. Proposals range from raising the retirement age to means-testing benefits for wealthy retirees. But the disability system is in much worse shape and its problems defy easy solutions.
  • This year, about 3.3 million people are expected to apply for federal disability benefits. That's 700,000 more than in 2008 and 1 million more than a decade ago.
  • "It's primarily economic desperation," Social Security Commissioner Michael Astrue said in an interview. "People on the margins who get bad news in terms of a layoff and have no other place to go and they take a shot at disability,"
  • The disability program is also being hit by an aging population -- disability rates rise as people get older -- as well as a system that encourages people to apply for more generous disability benefits rather than waiting until they qualify for retirement.  Retirees can get full Social Security benefits at age 66, a threshold gradually rising to 67. Early retirees can get reduced benefits at 62. However, if you qualify for disability, you can get full benefits, based on your work history, even before 62.
  • Also, people who qualify for Social Security disability automatically get Medicare after two years, even if they are younger than 65, the age when other retirees qualify for the government-run health insurance program.
  • As policymakers work to improve the disability system, they are faced with two major issues: Legitimate applicants often have to wait years to get benefits while many others get payments they don't deserve.
  • Last year, Social Security detected $1.4 billion in overpayments to disability beneficiaries, mostly to people who got jobs and no longer qualified, according to a recent report by the Government Accountability Office, the investigative arm of Congress.

Psychology Returns to 2009, 2010 when Bad News = Good News Because it Means Intervention

This morning we have seen another two very poor economic reports - new home sales (no surprise there), and the Richmond Fed.  However the market is rallying.  Why?  Well for one, we are extremely oversold - but we've been oversold many days the past month and not seen a rally.  More importantly, we appear to have returned to the psychology of 2009 and 2010 - that is, bad news = good news because it means intervention of the central bank or federal government kind.  Hence, the worse the news, the more said news forces someone's hand, however reluctantly.

It's perverse but it worked wonders in 2009 and 2010.

In terms of news, like the Philly Fed, the Richmond Fed reading disappointed at -10 (vs -5 expectation and -1 July), the worse reading since June 2009.  Usually this Fed gauges are not that well followed, but right now every little piece of data is being analyzed to decipher where the U.S. economy stands.

New home sales are a disaster at under 300K but not even worth talking about.  Existing home sales are >90% of the market, and came in horrid last week and until they rebound, new home sales are an afterthought.


The Fed's Bullard is out this morning with comments that the speculators also like; however please note there is an inflation indicator in there, so one would think the Fed needs at least 1-2 weaker readings on the inflation front before it moves onto the next step of desperation:

  • The Federal Reserve will take action if the economy weakens substantially and deflation reappears, a senior Fed official said in an interview with Japan's Nikkei business daily published on Tuesday.  St. Louis Fed President James Bullard said he would support action if that occurred.
  • "If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard told the Nikkei.
  • Bullard also said the Fed has already implemented a very easy monetary policy and the inflation risk has increased in the United States.
  • The head of the St. Louis branch does not have a vote on the policy-setting FOMC this year.

[Video] Marc Faber Phone Interview with CNBC

I promise this is the last Marc Faber mention for a while - it's been a Faberpalooza lately.  But whenever we can get some Faber in audio format it's generally a good time.  This morning's talk with CNBC was quite tame versus the usual acerbic tone, but Marc does go into some detail on how to position a portfolio if you have multiple girlfriends.  On a serious note - without the usual pans of the government and Fed, there is a lot of economic and market oriented conversation.  Probably because Joe Kernen was not there to turn it into a political discussion.

10 minute video - email readers will need to come to the site.

Chinese Preliminary Manufacturing Index Rebounds a Bit, While European Mfg PMI Contracts

While today's economic data from overseas is not very good, the bar has been lowered significantly the past month or two so 'ok' data is good enough for the market.  '

First, in China we receive a preliminary HSBC manufacturing number a week or so ahead of the actual data which comes in at the turn of the month.   The prelim number has come in at 49.8 versus 49.3 in July.  While still contractionary - and a number that would have created a massive fuss a few months ago - it's an improvement from the previous month and near the 50 reading which is the line in the sand between contraction and expansion.

  • A preliminary reading of 49.8 for a manufacturing index released by HSBC Holdings Plc and Markit Economics today compares with a final reading of 49.3 for July. The final August number is due Sept. 1. A reading below 50 indicates a contraction.
  • The data suggests that growth in China is moderating rather than collapsing and the slide in the index in July may have been a one-off “blip,” HSBC said. “This should help lower fears of a hard landing akin to 2008 autumn’s sharp slowdown,” said Qu Hongbin, a Hong Kong- based economist for HSBC. “Inflation, not growth, remains the top near-term macro risk.”
  • China’s commerce ministry cautioned today that exporters face weak demand and rising costs.
  • HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies.
  • The final reading fell below 50 in July for the first time in a year. The official manufacturing index released by the statistics bureau and the China Federation of Logistics and Purchasing had a reading of 50.7 in July.
  • Morgan Stanley and Deutsche Bank AG last week cut estimates for China’s expansion as the debt burdens and elevated unemployment of developed nations threaten demand for exports. 

Second, European data was not very good but generally came 'in line', which again - with a lowered market expectation - is 'good enough' for now.  German manufacturing PMI was flat with July but ahead of expectations.  I am not sure why we are getting this data today rather than the turn of the month as usual, perhaps the European holidays in August.

  • Manufacturing activity in the eurozone shrank in August for the first time in two years, a survey has indicated.  The Markit Manufacturing PMI measure for the eurozone fell to 49.7 from 50.4 in July. A reading below 50 indicates contraction in the sector.
  • Markit also said that the service sector in the eurozone grew only modestly.  Its service sector PMI measure fell to a 23-month low of 51.5 in August from 51.6 in July.
  • In Germany, Europe's biggest economy, output grew across both manufacturing and services but showed the weakest rate of expansion for almost two years.
  • The French service sector saw growth pick up in August but manufacturing output fell for the first time since June 2009.
  • Outside the eurozone's two largest economies, output fell for the third month in a row.
  • "The eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years," said Chris Williamson, Markit's chief economist. "The data raise the prospect that economic growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June. Most worrying is the near-stagnation in Germany, which suggests that the region's main engine of growth has stalled."

Monday, August 22, 2011

Bespoke: The Worst and Best Stock Price Reactions to Earnings this Quarter

Bespoke Invest blog reports this earnings season was the worst in terms of stock reaction, since at least 2000.

The average one-day change in response to earnings for the 2,150 companies that reported was a pathetic -1.92%.  The second worst earnings season came in Q3 2008 when the average stock declined 0.70%, so this season was more than two and a half times as bad as the previous worst earnings season.  Sixty-percent of companies that reported went down in response to their reports, and nearly 30% went down more than 5%!  That's an astonishing number.  Eighty-three companies that reported lost 20%, or a fifth of their value, on the day of their earnings reports. 

Now of course much of that is because we do not live in a vacuum and the market has had a rough period during the heart of earnings season.  But it does provide opportunity.  Usually when a stock reports a great quarter, it gaps up and is off to the races in the ensuing months.  But a wicked market can bring those names back to earth, offering a chance for those who hate to chase stocks a more reasonable entry point.  Here are 33 stocks that went up at least 18% on their earnings day:

[click to enlarge]

Of course for those who have much more patience and like 'value' there is also the lovable losers list - here are 31 companies who lost at least 30% of their value post earnings report.  With at least some of these, once they create a longer term base there could be opportunity as well.

No positions

CF Industries (CF) Trading in Another Dimension

This old name from the portfolio, fertilizer stock CF Industries (CF) is trading as if it exists in another dimension.  I have to assume nitrogen prices are not feeling any effects from the global slowdown.  Amazing relative strength.

Mosaic (MOS) and Potash (POT) are not showing any similar sort of strength so it's not like its a broad move among the entire fertilizer space.  Head scratching.

No position

Gold Goes Parabolic as SPDR Gold Trust ETF (GLD) Approaches Valuation of SPDR S&P 500 ETF (SPY)

We are starting to see many of the same characteristics in gold that we saw in silver earlier this year.  After rallying nicely from the moment Bernanke hinted of QE2 at Jackson Hole Wyoming (2010), silver started really running in February, and went parabolic in April - usually the last part of the move is the most breath taking and this was no exception.  It finally stalled when it hit all time highs (a multi decade 'double top'), and exchanges started increasing (multiple times) margin requirements.  One hint of the fervor was a story on April 28th in the WSJ, showcasing how volume in the silver ETF (SLV) actually surpassed that of the most liquid (and popular) trading vehicle in the market - the SPDR S&P 500 ETF (SPY).  I wrote then

This story in the WSJ highlights how much fast money has moved into silver.  The most popular trading vehicle for the general market is the SPDR S&P 500 (SPY) ETF.  On Monday, volume in the silver ETF actually surpassed SPY!  And Tuesday was quite close as well.  Amazing for an ETF that is relatively new to the market, but this is fever pitch action at its best.

That was essentially the top (within a day or two).

Now we are seeing similar action in gold - it is still far off (relatively) from inflation adjusted all time highs around $2400, but a nice big round number of $2000 approaches.  Sometimes those create psychological impacts.  Also we have a Bloomberg story indicating the market cap of the SPDR Gold ETF (GLD) now approaches that of SPY.  Based on today's action (another 2%+ rally in gold, and flattish action in SPY) they might cross.  I don't find that indicator as significant as the one in silver from April (as the silver indicator was about volume and intensity of buying), but it is something to note as the yellow metal goes parabolic.  Even as a gold bull (not as inflation hedge, but as reckless central banker hedge), I would begin to get quite cautious here and be watching like a hawk for one of those ugly reversals.  Every secondary indicator is massively overbought.

[click to enlarge]

Thus far I've only seen one margin requirement hike - I think silver was hit with 4-5 in short order if memory serves.

Via Bloomberg:

  • Gold is approaching a new milestone in its role as an investment and haven, with the leading exchange-traded fund that tracks bullion closing in on its equities counterpart as the biggest ETF by market value.  SPDR Gold Trust’s market capitalization rose to $76.7 billion on Aug. 19, according to the most recent data compiled by Bloomberg, as the metal topped $1,881 an ounce for the first time. SPDR S&P 500 ETF Trust (SPY), which has been the industry’s largest exchange-traded fund since 1993, stood at $78 billion, a 1.7 percent advantage. 
  • At the start of the year, the Standard & Poor’s 500 Index-tracking ETF was 56 percent larger.
  • The metal is up more than 32 percent in 2011, which would be its 11th straight year of gains, while the S&P 500 Index (SPX), a benchmark of the biggest U.S. stocks, has lost 9.5 percent including dividends. 
  • “The dramatic surge in demand for gold reflects the aggregation of many investor preferences -- for example, from those seeking shelter from lower stock markets to those protecting against currency debasement by central banks,” El- Erian wrote in an e-mailed response to questions.
  • The SPDR Gold Trust ETF, created by the World Gold Council in November 2004, is the biggest ETF tracking the price of the precious metal. State Street, based in Boston, is the sales and marketing agent for the fund, which is physically backed by gold bars deposited in a London vault. 
  • The growth in SPDR Gold Trust this year has been largely driven by the rising value of gold, as the number of shares outstanding in the fund increased by about 1 percent. Since July 1, the number of shares in Gold Trust has climbed by 7.1 percent, contributing to the gain in assets.
  • SPDR Gold Trust has climbed every year since inception, including a 30 percent gain in 2011. The gold ETF has more than doubled in price since the collapse of Lehman Brothers Holdings Inc. in September 2008 roiled financial markets, while the SPDR S&P 500 ETF has fallen 4.7 percent including dividends.

No positions

Rally Snuffed Out

While still up for the day, the intraday action has been poor.  From a high of S&P 1145, the index is now down to the 1125s, delivering a loss of 20 S&P points from the peak.  That translates to a loss of 1.7%.  It remains bear market action and while there are the occasional neck snapping rallies it is ugly and capital preservation is job #1, not chasing ethereal rallies.

At minimum it seems we need to break through some lows to get the 'bottom callers' to panic (again) as we saw happen a few weeks ago.

Bank of America (BAC) continues to speak to weakness, and has been leading the market down most of the morning.

Twiddling fingers remains the best course of action for now. It's not exciting and you feel foolish the days the market surges in dead cat fashion, but it's the right thing to do until the character of the market changes.

Beating the dead horse from last week, 1120ish on the S&P 500 is support #1 (closing lows from a few weeks back) and below that is 1100, the intraday low on Fed day two weeks ago.  Waiting...

No position

No Leak of Major Further Easing to WSJ - But Maybe a 'Twist'

I am having some doubts anything supersonic will be announced Friday, as The Bernank likes to use the press to leak things ahead of time.  At the Wall Street Journal, Greg Ip used to be the vessel of choice but since he has moved on to The Economist, Jon Hilsenrath has become 'the chosen' one (to use as the leak).  He has a story out this morning titled For Bernanke, No Summer Fun at Jackson Hole.  I don't see anything in it to indicate 'QE3', and frankly the Fed just took a huge step mere weeks ago by promising free money for at least 2 more years.  But like a toddler the speculator class is whining for more steroids injected into their veins, even if the QEs are proving detrimental to the real economy by creating commodity inflation and higher prices for a populace struggling for wage gains... or jobs for that matter. 

There is some talk of 'Operation Twist' which would technically not be an expansion of the balance sheet - and hence not a QE - in that the Fed would buy long term Treasuries but offset that buying 1:1 by selling short term Treasuries.  This would raise near term rates, and lower long term rates - I guess in the belief if 4.1% thirty year mortgages can't goose the housing market, maybe 3.7% will.  It's all a bit surreal because I remember typing on these virtual pages in 2008 that Bernanke would one day be so desperate we'd get 30 years mortgages in the 3%'s.  We're not far off.

Some excerpts from Hilsenrath:

  • A few months ago, Mr. Bernanke and his Fed colleagues were hoping the economy was on solid footing and could heal without more support from the central bank. Instead, economic growth has disappointed, the Fed has opened the door to new easing measures, markets have gone haywire, and Mr. Bernanke has once again become a lightning rod for politicians.  The economy is his dark, inescapable underworld. Jackson Hole is where he finds himself every turbulent August, plotting next steps.
  • The Fed chairman's first challenge on Friday will be to explain the central bank's changing narrative for the economy. Before the Aug. 9 policy meeting, Fed officials' public forecast, made in June, was markedly more optimistic than the latest private forecasts. Fed officials said the economy would grow by 2.8% in 2011; private forecasters in August were saying 1.6%. For 2012, Fed officials forecast growth of 3.5%; private analysts, 2.5%. The Fed has signaled the forecast is now considerably lower.  
  • For months, Fed officials largely dismissed the economy's poor performance as a transitory reaction to Japan's natural disaster and oil-price increases driven by Middle East turmoil. Officials expected the powerful forces that since World War II have tended to bring the U.S. economy back from recession—self-sustaining cycles of improved confidence, hiring and spending—to win out over temporary bumps as the year proceeded.
  • The new, emerging narrative is that stiffer headwinds could restrain the U.S. recovery for longer than hoped—perhaps not enough to send it back into recession, but enough to keep growth painfully slow. Fiscal policy, for example, could be a drag on growth for years. Housing isn't coming back quickly. Households are still trying to rid themselves of debt, and their wealth has eroded.  
  • The deteriorating forecast is the main reason the Fed decided earlier to make a conditional commitment to keep short-term interest rates near zero through mid-2013. Expressing doubt that the economy will get much stronger between now and then is hardly likely to inspire much confidence, but at least it will keep financial conditions easy.  
  • Economic theory, always important to Mr. Bernanke, a former Princeton professor, was at play. Theorists Mr. Bernanke follows have argued for years that long-term commitments to keep rates low are primary weapons central bankers should use to fight the kind of malaise that has plagued Japan since the 1990s.
  • There are other small steps he might take—such as reducing the 0.25% interest rate that the Fed pays banks that keep money on reserve with it. The thinking: Why reward banks for not lending? Or the Fed might tweak the composition of its securities portfolio to aim at reducing long-term interest rates further.  (that would be Operation Twist)
  • .....another obstacle is the risk that inflation doesn't retreat as the Fed expects, or rises, which could force it to raise interest rates sooner than promised, damaging its credibility.  
  • Mr. Bernanke correctly predicted that commodities prices would retreat from highs earlier this year. Yet underlying inflation outside of commodities has advanced more than expected, a surprise to some at the Fed given the economy's weakness. They expect it to retreat, too. But is it possible that even small periods of growth in this debilitated U.S. economy or pressures from overseas prices or a weak dollar could cause an oversize rise in prices?
  • The nagging worry that inflation might take root, despite the weak economy, is one reason why Mr. Bernanke and his colleagues might choose a cautious path in the months ahead.

And in the closing line perhaps we have the message Ben wanted to send the markets:
  • At Jackson Hole last August, Mr. Bernanke heralded a second round of bond-buying aimed at propelling the economy known as quantitative easing, or QE2. The Fed's recent declaration that it's prepared to take other measures to promote the recovery clearly opened the door to QE3. But don't expect the Fed chairman to rush through that door on Friday.

Percent of Stocks in S&P 500 Below 50 Day Moving Average Hit 2008 Lows

I like to look at this chart - Percent of S&P 500 stocks below the 50 day moving average - for a feeling of how oversold things are....and it's quite nasty.  The reading is actually worse than the low of March 2009 and at lows of fall 2008.  Generally once you are below 30% you have a quite oversold condition... 20% even more so, but when you get these 5-10% readings it is usually quite rare.

While we have new home sales this week (existing home sales last week was a more important reading) and a second revision to GDP Friday, all eyes will be on Europe and the Jackson Hole, Wy speech. 

With this morning's premarket gap up, S&P 1120 is holding as support for now, as noted last week.

Sunday, August 21, 2011

Lots of the Leadership Stocks Approaching their 200 Day Moving Average - LULU, CMG, BIDU, WYNN

While the indexes are down less than 20% from their peak, this week's round of selling did a lot more damage to the leadership stocks (what I call the generals) than we saw a few weeks ago.  A few names like Netflix (NFLX) have completely been obliterated, while others like Priceline.com (PCLN) now have broken key long term support.

[click to enlarge any chart]

A whole host of other names (LULU, CMG, BIDU, WYNN) are either sitting at, or approaching their 200 day moving average.  Usually when people start throwing in the towel on the generals we are closer to the end than the beginning of a selloff.

No positions

90 Stocks/ETFs Up 30% for the Year

With 2011 now almost two thirds complete (have you begun your Christmas shopping?), and the major indexes solidly in the red thus far, it's time to see what names have had winning years.  The list below is 90 stocks and ETFs which gained at least 30% year to date.  I've excluded those companies below $300M, with trading volume that averages less than 100K shares a day, and stock prices below $10.  I've also separated the gold/silver complex (along with a few inverse ETFs) into another area at the bottom - that leaves 80 names, 6 of which are up over 100%.  Of course some of these 80 were potential buyouts.

I've sorted by industry group....

Ticker Company YTD Industry  Mkt 
HANS Hansen Natural Corporation 52.1% Beverages - Soft Drinks      7,045
BIIB Biogen Idec Inc. 34.3% Biotechnology    21,842
VRTX Vertex Pharmaceuticals Inc 32.7% Biotechnology      9,674
REGN Regeneron Pharmaceuticals, Inc. 65.6% Biotechnology      4,982
MRX Medicis Pharmaceutical Corp. 31.5% Biotechnology      2,165
QCOR Questcor Pharmaceuticals, Inc. 81.3% Biotechnology      1,664
JAZZ Jazz Pharmaceuticals, Inc. 74.8% Biotechnology      1,436
MA Mastercard Incorporated 34.2% Business Services    38,138
EM Emdeon Inc. 36.6% Business Services      2,144
RADS Radiant Systems Inc. 43.0% Business Software & Services      1,140
LO Lorillard, Inc. 36.1% Cigarettes    15,036
ELMG EMS Technologies Inc. 66.7% Communication Equipment          506
TLVT Telvent Git S.A. 51.1% Computer Based Systems      1,167
CSH Cash America International, Inc. 36.4% Credit Services      1,473
FCFS First Cash Financial Services Inc. 36.5% Credit Services      1,304
BLUD Immucor Inc. 35.2% Diagnostic Substances      1,890
PSMT PriceSmart Inc. 41.2% Discount, Variety Stores      1,584
MMI Motorola Mobility Holdings, Inc. 30.1% Diversified Communication    11,168
GLBC Global Crossing Ltd. 104.6% Diversified Communication       1,620
SGI Silicon Graphics International Corp. 67.2% Diversified Computer Systems          468
SIMO Silicon Motion Technology Corp. 140.7% Diversified Electronics          316
VRX Valeant Pharmaceuticals Int'l 40.2% Drug Delivery    11,722
ECYT Endocyte, Inc. 40.0% Drug Manufacturers - Major          375
SHPGY Shire plc 31.3% Drug Manufacturers - Other    17,751
VRUS Pharmasset, Inc. 166.3% Drug Manufacturers - Other      4,374
CBST Cubist Pharmaceuticals Inc. 51.4% Drug Manufacturers - Other      1,980
PRGO Perrigo Co. 34.7% Drug Related Products      7,897
HLF Herbalife Ltd. 47.5% Drug Related Products      5,914
CV Central Vermont Public Service  64.0% Electric Utilities          468
SUG Southern Union Co. 72.9% Gas Utilities      5,141
LXU LSB Industries Inc. 34.0% General Building Materials          723
WCG WellCare Health Plans, Inc. 34.0% Health Care Plans      1,730
SCSS Select Comfort Corporation 40.9% Home Furnishings & Fixtures          720
HK Petrohawk Energy Corporation 112.0% Independent Oil & Gas    11,754
COG Cabot Oil & Gas Corporation 76.3% Independent Oil & Gas      6,958
MFN Minefinders Corp. Ltd. 42.1% Industrial Metals & Minerals      1,268
BIDU Baidu, Inc. 31.5% Internet Information Providers    44,292
SINA Sina Corp. 30.9% Internet Software & Services      5,932
LQDT Liquidity Services, Inc. 45.0% Internet Software & Services          576
KEYN Keynote Systems Inc. 37.2% Internet Software & Services          343
MKTX MarketAxess Holdings Inc. 30.6% Investment Brokerage - National      1,020
AH Accretive Health, Inc. 53.8% Management Services      2,404
KCI Kinetic Concepts Inc. 56.1% Medical Appliances & Equipment      4,777
MAKO MAKO Surgical Corp. 101.1% Medical Appliances & Equipment      1,268
EVEP EV Energy Partners LP 67.0% Oil & Gas Drilling & Exploration      2,149
HFC HollyFrontier Corporation Commo 64.6% Oil & Gas Refining & Marketing      7,012
FTO Frontier Oil Corp. 81.9% Oil & Gas Refining & Marketing      3,440
CVI CVR Energy, Inc. 61.1% Oil & Gas Refining & Marketing      2,118
WNR Western Refining Inc. 46.2% Oil & Gas Refining & Marketing      1,405
DK Delek US Holdings Inc. 83.4% Oil & Gas Refining & Marketing          770
GRM Graham Packaging Company, Inc. 94.5% Packaging & Containers      1,718
RDEN Elizabeth Arden, Inc. 31.5% Personal Products          878
REV Revlon, Inc. 30.1% Personal Products          668
WTW Weight Watchers International, Inc. 53.2% Personal Services      4,203
ULTA Ulta Salon, Cosmetics & Fragrance 45.9% Personal Services      3,036
GMCR Green Mountain Coffee Roasters  155.9% Processed & Packaged Goods    12,872
DMND Diamond Foods, Inc. 35.2% Processed & Packaged Goods      1,578
LOOP LoopNet, Inc. 59.0% Property Management          589
DTG Dollar Thrifty Automotive Group Inc. 31.0% Rental & Leasing Services      1,795
ACTG Acacia Research Corporation 32.3% Research Services      1,471
MPEL Melco Crown Entertainment Ltd. 89.6% Resorts & Casinos      6,455
CMG Chipotle Mexican Grill, Inc. 31.4% Restaurants      8,758
DPZ Domino's Pizza, Inc. 56.9% Restaurants      1,521
RRGB Red Robin Gourmet Burgers Inc. 35.5% Restaurants          444
OCN Ocwen Financial Corp. 31.8% Savings & Loans      1,269
CPHD Cepheid 34.4% Scientific & Technical Instruments      1,917
NSM National Semiconductor Corporation 79.9% Semiconductor - Broad Line      6,271
IPGP IPG Photonics Corporation 60.1% Semiconductor - Integrated Circuits      2,403
VSEA Varian Semiconductor Equipment  63.0% Semiconductor Equipment & Mat'l      4,649
GLNG Golar LNG Ltd. 101.2% Shipping      2,354
ZAGG ZAGG Incorporated 90.0% Specialty Retail, Other          354
RGR Sturm, Ruger & Co. Inc. 95.4% Sporting Goods          558
SFN SFN Group, Inc. 42.8% Staffing & Outsourcing Services          683
MG Mistras Group, Inc. 31.6% Technical Services          482
CHT Chunghwa Telecom Co. Ltd. 41.9% Telecom Services - Domestic    32,890
NZT Telecom Corp. of New Zealand Ltd. 35.7% Telecom Services - Foreign      4,242
LULU Lululemon Athletica Inc. 34.5% Textile - Apparel Clothing      3,266
TBL Timberland Co. 73.9% Textile - Apparel Footwear & Acc      2,174
CROX CROCS Inc. 36.3% Textile - Apparel Footwear & Acc      2,087
IDCC InterDigital, Inc. 51.9% Wireless Communications      2,862

GOLD Randgold Resources Ltd. 33.9% Gold    10,019
ANV Allied Nevada Gold Corp. 51.3% Gold      3,555
AUQ AuRico Gold Inc. Ordinary Share 63.9% Gold      2,320
GRS Gammon Gold, Inc. 63.9% Gold      2,313
XG Extorre Gold Mines Ltd. Ordinar 60.5% Gold          963
SLV iShares Silver Trust 38.1% Exchange Traded Fund    13,400
FAZ Direxion Daily Financial Bear 3X  46.5% Exchange Traded Fund      7,346
SKF ProShares UltraShort Financials 36.1% Exchange Traded Fund      2,419
AG First Majestic Silver Corp. 45.4% Silver      1,947
EXK Endeavour Silver Corp. 41.3% Silver          871

[Chart] "Hedged" Funds... or Not?

Quite a chart in a broader story on recent hedge fund performance in in The Economist.  While the HFRI Composite Index is obviously a collection of many hedge funds, it shows, as a whole the term 'hedge' seems to be less than advertised.

I wonder if this has to do with the influx of new entrants over the past 15 years.  To that end, in the first half of the 1990s, the hedge fund index was a bit less correlated and also outperformed. That began to change in the latter 90s when the hedge fund industry really began to boom.  There was a shining moment in the 2000-2002 bear as the index stayed 'flattish' as the S&P 500 was crushed, but from 2003 the HFRI index looks like nothing other than a S&P 500 ETF tracking fund, with the only saving grace less losses in the depths of the selloff in 2008/early 2009.

Saturday, August 20, 2011

Marketwatch Talks with Gary Schilling

While Gary Shilling is less of a trader, and more of a macro guy his long term views continue to be more 'right' then 'wrong' although he has suffered through some market action that has gone against him as never seen before levels of government and central bank intervention created a hazy shade of steroid injections globally.  But such calls as remaining long U.S. bonds, ultimately, have been proven correct.  Ironically he has a 180 degree different view on US Treasuries (and stocks) than Faber.  I share some views with both at this moment...

Marketwatch likewise has '5 moves' Shilling is offering for investors.

  • Stock investors are suffering as shocked markets grapple with the grim prospect of another U.S. economic recession, but anyone paying attention to economist A. Gary Shilling can say he saw this coming.  Shilling is president of economic consulting firm A. Gary Shilling & Co. and author of the recently published “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth.” 
  • He’s long predicted that the Federal Reserve’s efforts to stimulate the U.S. economy would fall short, and that a global stock market fueled by cheap money and a government-engineered bailout would come to no good end.  For Shilling, the U.S. economy sliding into recession within 12 months is a matter of when, not if. “Recession is more likely than not,” Shilling said.
  • It wouldn’t take much for a vulnerable economy to slide into recession, he added. That shove could come from “another big nosedive” in the fragile housing sector, Shilling said — sending average home values down as much as 20%. “We going to see a pickup in foreclosures and a lot more houses dumped on the market,” he added. In fact, the economy could be in recession now, Shilling noted.
  • Shilling guesses that official quarterly U.S. growth figures will be revised downward in coming months. Said Shilling: “The odds are that next time they revise the data it will be to make it even weaker. We could be looking at numbers that are positive but may not be six months from now.”
  • The major drag on economic growth is consumer debt, Shilling said. There’s just too much of it — the detritus from years of easy borrowing that Shilling expects will take the better part of this decade to unwind. Accordingly, constrained consumer spending and higher household savings makes a Japan-style deflation — declining prices for many goods and services — a more likely scenario for the U.S. in Shilling’s view than inflation.
  • Investing in such a slow- or no-growth environment requires what amounts to a full reversal from recent years. Defensive, capital preservation takes precedence over risk-taking. Bonds — especially Treasurys — rule. Cash is not trash, but home ownership is. Commodities and emerging markets take a big hit. And stock investors pile into the biggest, strongest and richest corporate boats. 
  • “The economies of the world are slipping,” Shilling said. “We are going through this deleveraging process and its going to dominate. The attempts by governments to overrule it are simply insufficient.
With that in mind, Shilling advises investors to take these steps:


1. Buy Treasury bonds

  • Economic weakness and the unlikely chance of another Federal Reserve stimulus has investors flocking to safe havens, and U.S. Treasury bonds are still considered safest of all.
  • Treasury prices are rallying and yields are falling as a result, and Shilling expects that to continue. He’s even comfortable with the riskier long end of the Treasury curve, where investors can make more money as yields decline.
  • “We like the 30-year [Treasury],” Shilling said. “You get a lot more bang for buck with a decline in interest rates.” For example, if the 30-year bond yield moves to 3% from 4%, an investor stands to pocket a 19% total return, Shilling said.
  • Of course, Treasury buyers can easily get whipsawed if interest rates march higher, but Shilling is confident that won’t happen anytime soon, especially with the U.S. government now more focused on austerity than stimulus. 
  • “The Fed and the government are pretty much out of ammunition,” Shilling said. “The Fed has tried the printing press — $1.6 trillion in excess reserves and what’s happened? It’s just sitting there. It’s up to the banks and credit worthy borrowers to turn those reserves into money and they haven’t been. It’s the classic pushing on a string.”

2. Bank on the U.S. dollar

  • Continuing along the safe haven path brings Shilling to a bullish stance on the much-maligned U.S. dollar.  It’s a controversial call, but Shilling contends that among the world’s major currencies, the dollar is “the best of a bad lot.”
  • Of course the weak U.S. economy is problematic for the dollar, but the outlook for the eurozone is worse, Shilling said. He predicts the euro will crack, tumbling to 1.20 to the dollar from about 1.41 now.

3. Bet against commodities

  • Not surprisingly, Shilling is bearish on commodities. “It’s a market not priced for realities,” he said.  Commodity bulls may call the slump in energy and agriculture prices a midcourse correction and contend that China’s continued growth will buoy these markets. Shilling said that line of thinking reminds him of Wile E. Coyote in the Road Runner cartoons, who doesn’t realize he’s run off a cliff until it’s too late.
  • “The fundamental argument for the commodity bubble, and it is a bubble because so many non-commodity users are involved, is that China is going to buy like there’s no end in sight and continue to do so,” Shilling said.  But a global recession and miserly U.S. consumers will take a toll on China’s economy. As China’s growth declines, Shilling said, so will its appetite for commodities.

4. Bet against stocks

  • When the best offense is a good defense, stock buyers look to companies that pay above-average dividends and operate in sectors that can withstand the worst. Traditional areas include utilities, health care, consumer staples.
  • Stocks that Shilling said he’d avoid, meanwhile, include shares of homebuilders, automakers and others in the consumer discretionary sector, and banking companies under pressure to delever their balance sheets.
  • Shilling recommends being short the Standard & Poor’s 500-stock index SPX -1.50%  and other broad market bellwethers, along with China stocks and housing-related shares — areas of the market that are overpriced given the heightened prospect for another recession.

5. Sell your house

  • U.S. housing prices are likely to lose another 20% over the next couple of years, Shilling said. There’s still a huge oversupply of available housing, he added, and a 20% decline would simply bring values in line with their long-term historical trend — and 45% below their 2006 peak.  “Sell your house or second home or investment housing property,” Shilling said.
  • Commercial real estate holds more promise, in contrast. “I like rental apartments and medical office buildings,” Shilling said. “A lot of people cant qualify for mortgages, so they end up in rentals. And house prices can and do fall. A place to live and a great investment are no longer combined in a single family house. Younger families say let’s stay in a rental.”
  • The aging population and the new health-care law boosts demand for medical office space, Shilling added. Plus, he noted that more physicians are moving out of storefront, street-level space and into office buildings. “This is a growth area,” he said.
  • One of the few remaining, it seems. The U.S. economic recovery since early 2009 has been two-tiered, Shilling said. Wealthier Americans with stock portfolios enjoyed a rebound, but everyone else felt like the recession hadn’t ended.
  • What’s changed, Shilling added, is that “the guys at the top” have been affected. “A lot of the people on the top that dominate the security markets talked about a ‘soft patch’” for the economy,” Shilling said. “To them, this was all temporary.”
  • Now, he said, “the areas that made people all this money and gave them confidence that all this was a soft spot have gone against them.”
  • The tide has turned, and markets are only beginning to realize it, Shilling points out. As more investors come to terms with this new era of debt-shedding and frugality, money will flow to investments -— mostly defensive ones — that can benefit. It won’t be a pretty transition, but, Shilling said, “There isn’t much you can really do. You just have to wait for this whole thing to work itself out.”

[Jun 24, 2011: Gary Shilling Calls for Recession in 2012]
[Mar 24, 2011: [Video] Yahoo Tech Ticker  - Gary Shilling "The Two Tier Recovery"]
[Jul 7, 2009: Gary Shilling - Recovery a Year Away]
[May 14, 2009: Gary Shilling's Latest Thoughts]

Marketwatch Talks with Marc Faber

It's starting to get all 'bearish' up in here, when Marc Faber stories top the most popular list at places like Marketwatch.  '5 Money Moves Dr. Doom is Making' was the top story yesterday and remains in the top 5 today.  Faber has had a very hot hand of late, coming into the month of August claiming 'The Bear Market is Starting' (video here) - the timing was impeccable - and then a week later looking for a very short term oversold bounce (link here) - again excellent short term trading as the 9th was Fed day and the worst of the lows before 100 S&P points of a bounce.

I always prefer Faber in video format for pure entertainment purposes, but he is always worth the listen in whatever format.  While his long term views are quite consistent (and doom-y) you can see the path he has prescribed that governments and central banks would go down... has become very accurate. 

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

  • Faber is to financial-market optimists what the Grinch is to Christmas. He doesn’t often like what he sees, and nowadays he finds even less to like about the world’s economic situation than he did in 2008 — as if that wasn’t bad enough. 
  • “Financial conditions are today worse than they were prior to the crisis in 2008,” he said in a telephone interview earlier this week from Thailand. “The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional.”
  • Faber doesn’t take a contrarian stance in the strict sense; it’s more of a constant vigilance — capital preservation over capital appreciation — so that one can live now to fight for investment gains another day. (a viewpoint more investors - and managers -  should take!)
  • “The way I look at it,” Faber said, “I am ultra-bearish about everything geopolitically. In an environment of money printing, we have to ask ourselves, how do we protect our wealth? ... Where do we allocate the money?
  • Good question, but in fact a fairly straightforward one if, like Faber, you believe that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market’s recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.
  • The Federal Reserve is a very evil institution,” Faber said with characteristic bluntness, “in the sense that they punish decent people who have saved all their lives. “These are people who don’t understand about stocks and investments,” he added, “and suddenly they are forced to speculate.” 
  • Such a miserly attitude can become a self-fulfilling prophecy. Faber noted that corporate earnings will likely disappoint stockholders across the board, including commodity shares, with the exception of traditional defensive sectors such as health care, consumer staples and utilities.
  • Moreover, one of the main ways corporations are spending money — on mergers and acquisitions rather than on hiring and equipment — is ultimately inflationary, Faber said. “The corporate sector is not spending much money on capital investments and new investments — that’s why they have this huge hoard of cash,” Faber said. “There will be many more takeovers and industry consolidation in the years ahead. It destroys jobs, but this is what will happen. As industries consolidate, they get more pricing power, and the cost of living increases.”
  • Of course, Faber points out, while such dealings might not be ideal for Main Street, it can sustain Wall Street, which leads Faber to a prognosis for stocks that may surprise the doctor’s patients. “I’m not that negative about equities,” Faber said. “If you’re bearish about the world, you’ll probably be better off in equities than in government bonds and cash.”
So batten down the hatches, double-check the locks and keep Faber’s to-do list handy:


1. Avoid Treasurys

  • “It’s a suicidal investment to own 10-year or 30-year U.S. Treasurys,” Faber said. What about the Treasury rally in the wake of economic weakness, stormy stock markets and investors’ flight to safe havens?
  • “What does a weak economy mean?” Faber said. “It means collapsing tax revenues. The deficits go up. You have to issue more government bonds.” The abundance of new debt would dilute credit quality, he added, only further sapping investors’ confidence in Treasury debt. 
  • “U.S. government bonds are junk bonds,” Faber said. “As long as they can print, they can pay the interest. But another way to default is to pay the interest and principal in depreciating currency.
  • “For that reason I would advocate a wide basket of diversification out of dollar-based assets,” Faber added. “The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver.”

2. Cash is trash

  • Given his bleak assessment of the U.S. dollar, it’s no surprise that Faber doesn’t recommend holding cash as a long-term cushion against portfolio shocks.“It would be very dangerous to say ‘I don’t trust stocks, gold, real estate, I want to keep my money in cash.’ That’s a way to end up losing a lot of money,” Faber said.  Specifically, the problem in Faber’s view is the loss of purchasing power as inflation whittles away the value of money.
  • “We’re in a paradoxical situation where under a traditional monetary system the safest places are cash, Treasury deposits, government bonds,” Faber said. Nowadays, he noted, “they have been made by monetization into the most unsafe assets from a longer term perspective.
  • “Weak economies usually have higher inflation rates than stronger economies,” Faber added. “In weak economies you have loose fiscal policies and money printing. And the U.S. is the world champion in loose monetary policies. I don’t believe a single word of what the Bureau of Labor Statistics is printing about inflation figures. “Paper money has lost its value,” Faber said. “Hyperinflation is the pattern to come.”

3. Stocks offer some safety

  • “I am not completely bearish about stocks,” Faber said. “If I have cash, government bonds and stocks, for the long term, I’d take stocks.”  Just not necessarily U.S. stocks.
  • While Faber said the U.S. market is “oversold” and the Standard & Poor’s 500-stock index could rebound to the 1250 to 1270 range, he expects U.S. equity values to decline — though not in a full-blown capitulation.  “My assumption is that March 2009 was a major low, and that we will not go back below that low,” Faber said. “Can we go to 900 on the S&P? Yes.”
  • But as the S&P 500 slides closer to 1000, the Federal Reserve could step in with a third round of stimulus for investors to cheer, Faber said.  Fed action, he noted, “may not lift stock prices to new highs, but it may stabilize them. If you print money, stocks will not collapse.”

4. Emerging markets will expand

  • In contrast to his dim view of U.S. and other developed markets, Faber is downright sunny about investing in emerging nations. “I do not think that investors fully appreciate the enormous shift that has and is occurring in the balance of economic power from the Western world to emerging economies,” he told subscribers In a market commentary published in early August.
  • This week, Faber reiterated his opinion that emerging markets will reward buyers over the long-term. “I happen to feel that somewhere in the world we can make 7% on equities for the next 10 years,” he said. “I can buy you a portfolio of high-dividend stocks in Asia that would have a yield of 5% to 7%.” Dividend predictability is one reason that Faber also recommends holding corporate bonds.
  • Faber’s own stock portfolio is centered on dividend-paying Asian shares, particularly in Malaysia, Singapore, Thailand and Hong Kong. These include a variety of real estate investment trusts and utilities.
  • Lately he’s also turned positive on Japanese banks, brokerages and insurance companies. “They have a better loan portfolio than the European banks,” Faber said of Japanese banks. “The banks in Asia are in a very solid position. All these are a play on the recovery in the stock market in Japan.”

5. Gold is worth its weight

  • Gold blew through $1,800 an ounce on Tuesday, continuing its forward march as investors seek higher ground. Given his world view, Faber is convinced that the price of gold will continue rising and that any pullback is a buying opportunity.
  • To understand why, you have to see gold like Faber does — as a currency, an alternative to the U.S. dollar, that will be increasingly in demand as the U.S. and other governments print more and more money.
  • “The function of paper money is to facilitate the exchange of goods and services, to be a store of value and a unit of account — the U.S. dollar fails on all three,” Faber said. “Intelligent people, instead of holding cash in U.S. dollars with zero interest rates, why not hold money in gold and silver?”
  • And as a currency, Faber said gold should be held in its physical form and not in shares of gold miners or even exchange-traded funds. That would rule out popular vehicles such as SPDR Gold Trust or iShares Gold Trust   
  • Be sure to store your gold in banks in Switzerland, London, Singapore, Hong Kong, Australia — just not in the U.S., Faber said. “Physical gold in a safe deposit box is the safest,” Faber added. “Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital.

Friday, August 19, 2011

Amazing Stat of the Day; Apple (AAPL) Worth More than Top 32 European Banks - Combined

We could replace Apple (AAPL) with Exxon (XOM) but you get the picture - you can combine the top 32 European banks and they would not be worth as much as either of the 2 companies above.  But they sure cause a lot more trouble.

  • Earlier on Friday the DJ STOXX euro zone banks index fell 4 percent, valuing its 32 members at $340 billion. That's based on the market capitalization of their free-float shares, which for some French banks in particular is less than 100 percent. 
  • The index has crashed by a third since the start of July, hammered by fears banks will lose billions from their holdings of euro zone government bonds and a failure of policymakers to stop a euro zone debt crisis from spreading.  The euro zone banks have lost three-quarters of their value since peaking in May 2007

Now if we ever reach a point that Crocs (CROX) is worth more than the top 32 European banks, we know we are in serious trouble. ;)
    No positions

    Lows of the Day... and Week, with 90 Minutes to Go

    Always interesting to watch the closing hour or so on a Friday to get a gauge of psychology.  Do shorts cover in anticipation of a 'weekend miracle'? (how many of those did we see in 2008 and 2009?)  Or do longs dump positions to avoid weekend risk.  I'm not sure that anything more can go 'wrong', other than the status quo - but right now the status quo just is not cutting it.

    With 90 minutes to go, we are at lows of the day on the S&P 500 and the worst levels of the week.  About 10 points away from key support at 1120.  Obviously the market acts sick, is technically damaged, and no longer has the 'incredibly oversold' levels as a benefit.  Let's see how they close 'em.

    The Atlantic: The Debt Crisis at American Colleges - Plus a Chart Showing the Incredible Explosion of College Loans

    I've been talking about this subject since 08 on the website (longer in personal life), but it really has been starting to hit the mainstream the past 18 months or so.  Aside from Peter Thiel offering $100K for some of the brightest minds to not to go to college (more for publicity of the issue), we are starting to see media recognize what has been another bubble - that of college cost.  Much like healthcare, higher education is heavily subsidized, which leads to very little price control as there is not a free market.  Healthcare gets all the attention because it affects everyone, but indeed university 'inflation' has far surpassed that of healthcare.  This data is a few years old - suffice it to say, I am sure the green line and the red line have pushed even further apart since.

    If colleges could only charge what the free market would pay, I'd offer tuition would be substantially lower.  How can I say that?  If you put a price that only 25-30% of the people can afford out of pocket - you won't have demand.  Economics 101.  Empty classes don't work - so prices would need to be lowered until classes filled.  The adjustment period from here to there would be difficult, with cries of "your freezing out those in the 'lower class' because they can't afford the costs" but that's actually 100% wrong.  Give colleges 2-3 semesters of empty classes and suddenly a lot more people from every class will be able to afford college.

    Compare that to the current situation, where the only reason a great many of Americans are 'affording' the current price is through massive loan growth.  This chart from The Atlantic is startling but puts it in context.  It graphs the explosion of college debt versus all other debt - keep in mind the 2000s were a period of massive expansion of all forms of debt so the fact borrowing for education is so above trend during that sort of time frame in our history, is even more jaw dropping.

    [click to enlarge]

    Here's a chart based on New York Federal Reserve data for household debt. The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period. 

    Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

    And we have not even talked about the reward for such costs.  We seem to be failing there as well as we are pushing people through the system with grade inflation [Jul 18, 2011: On U.S. Grade Inflation] but apparently little learning [Jan 18, 2011: Report - First Two Years of College Show Small Academic Gains] - but as long as the money keeps rolling in, very few seem to question what is broken.  Apparently everyone is a winner (grades A & B tossed around easily), although your skills have little application in the real world. [May 20, 2011: Nearly 50% of 2009 College Graduates are Either Jobless, or Working in Jobs that Don't Require a College Degree]

    This also has real effects on the economy.  As newly minted graduates (or those who did not graduate but have the bevy of bills) struggle with huge debt loads that is less money they have for an eventual down payment, less money for consumerism (70% of the American economy), less household formation, and the like.  Just another government (or Fed) sponsored bubble - we've got them in every direction in current society.


    The Atlantic has a very in depth piece out now, worth the read - The Debt Crisis at American Colleges (link here)

    • How do colleges manage it? Kenyon has erected a $70 million sports palace featuring a 20-lane olympic pool. Stanford's professors now get paid sabbaticals every fourth year, handing them $115,000 for not teaching. Vanderbilt pays its president $2.4 million. Alumni gifts and endowment earnings help with the costs. But a major source is tuition payments, which at private schools are breaking the $40,000 barrier, more than many families earn.
    • As this semester begins, college loans are nearing the $1 trillion mark, more than what all households owe on their credit cards. Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings. The College Board likes to say that the average debt is "only" $27,650. What the Board doesn't say is that when personal circumstances go wrong, as can happen in a recession, interest, late payment penalties, and other charges can bring the tab up to $100,000.
    • At Loyola University in Chicago, 77 percent enroll with loans, as do 85 percent in New Hampshire's Franklin Pierce. At historically black colleges, where endowments are low and students are often poor, it's usually 90 percent. Nor is soaring private tuition the only reason. At public Kentucky State University, with only $6,210 in charges, 76 percent sign up for loans; so do 85 percent at the University of North Dakota, where state residents pay $6,934. What these figures suggest that borrowing is as much to finance living away from home as for bursars' bills.
    • Of course, borrowing looms large in American life: homes, cars, boats, even buying stocks on margin. But student loans are taken out by eighteen-year-old freshmen, not exactly the most experienced clientele, nor can this be assumed of all parents. Indeed, the lending industry's lobbyists ensured that teenagers can sign up on their own, even before they're able to order wine with dinner. And unlike cars and boats, college repayments can dunned for several decades.
    • If you want to get a name as an economic seer, try this one. The next subprime crisis will come from defaults on student debts, starting with for-profit colleges and rising to the Ivy League. The parallels with housing are striking. In both, the written warnings aren't understood, especially on penalties and interest rates. And in both, it's assumed that what's being bought will rise in value, in one case the real estate, in the other the salaries which will accrue with a degree. One bubble has burst; the second is already losing air.

    [Dec 21, 2010: Video - CNBC, the Price of Admission - America's College Debt Crisis]
    [Dec 14, 2008: WSJ - K-12 Schools Slashing Costs, College Bills Wallup Families]
    [Dec 5, 2008: NYT - College May Become Unaffordable for Most in US

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