Tuesday, September 13, 2011

Bespoke: Year to Date Returns by Country - It's Been a Bad Year to be an Investor

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Things have certainly taken a turn for the worse the past three months, as the landscape for finding positive gains has been dour.  In the first third of the year, there were many more places of joy as "QEinfinity" created great tales of economic growth, and asset price inflation - especially of the U.S. kind.  The BRIC's stunk - especially India and Brazil, but Europe was generally 'ok' as we mostly ignored the issues.  That obviously all has changed since the beginning of summer.

Ironically the best performer year to date is ... Venezuela.

via Bespoke


Another Fidelity Magellan (FMAGX) Manager Bites the Dust, as Harry Lange is Booted

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For those old enough to remember, Fidelity Magellan (FMAGX) - led by legendary manager Peter Lynch - was once the most famous mutual fund around; along with (for a time) being the largest.

By the end of the century the Fidelity Magellan Fund had well over $100 billion in assets under management. For quite some time it was the single largest mutual fund in the world. In April 2000, Vanguard’s S&P 500 index fund displaced Magellan as the largest mutual fund in the world. By the time Stansky retired in 2005 the assets under management for Magellan were back down to $52.5 billion.

Magellan is so famous it has its own Wikipedia page.

Peter Lynch took the reins in May 1977 and remained the manager of Magellan for the subsequent thirteen years. Between 1977 and 1990 the fund averaged a 29% annual return. He created the investment process commonly referred to as “Buy What You Know”

Since Lynch's departure in 1990, the fund has run through 4 managers - with little success.  Number 5 has now taken the helm, as Mr. Lange will be moving to 'another position within Fidelity'.  For a fund that once had over $100B, and as recently as 2005 had $52.5B, it is now down well below $20B.  Lesser known Fidelity Contrafund (FCNTX) [Sep 9, 2008: Will Danoff in Kiplinger Magazine]  has been the far better place for investors to hang out the past 20 years.

Via Reuters:

  • Fidelity Investments replaced Harry Lange Tuesday as portfolio manager of its famed Magellan Fund after years of underperformance at the one-time flagship.  Lange becomes the latest in a long line of Fidelity managers who failed to repeat the success of Peter Lynch, the star stock picker who became a household name before retiring in 1990.
  • Lange stumbled repeatedly at Magellan, betting on victims of the 2008 financial crisis such as American International Group Incand Wachovia, and favoring mobile phone maker Nokia.
  • Over the past five years, the fund has lost an average of 2.2 percent annually, trailing 96 percent of peer funds. Lange has been contrite in his notes to investors and acknowledged he made weak picks in technology and consumer stocks, but some analysts have wondered why he was left him in place as long as he was.
  • Magellan trailed 85 percent of rival funds over the past five years and shrank in size by 66 percent during Lange’s almost six-year tenure .
  • In a statement, the closely held Boston fund firm said it named Jeffrey Feingold as portfolio manager of the $17.4 billion fund. Feingold will continue to manage several other Fidelity funds as well, the company said.
  • Feingold, 40, manages the $1.04 billion Fidelity Trend Fund, which has beat 84 percent of competing funds over the last year.
  • Lange will remain with Fidelity in a position to be determined, Loporchio added.

No positions

TheStreet.com: Doug Kass - Where I Stand Now

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A good overview of the entire market and economic environment from hedge hogger Doug Kass.  I find myself agreeing with the majority of his thought process here. Worth the full read, here are the arching overviews.

As an aside, there are some stunning data points on equity outflows from the market the past few months... and since 2007.  If one believes prices are a the inflection of supply and demand, one has to wonder how the market put in such a rally the past few years during massive outflows ;)  $400 BILLION has been removed by the retail investor yet the market essentially doubled.  Somehow less money INTO the market has created HIGHER prices. Hmmm - wonder how. [Jan 6, 2010: Charles Biderman of TrimTabs Claims U.S. Government Supporting Stock Market]  Anyhow that is not the focus of the piece - just an astounding rejection of economics 101.

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I view share prices of many companies as having become generally more attractive over the last two months, but, at this point in time, there are four factors that keep me from being more heavily committed to equities:
  1. the stock market's continued volatility and instability;
  2. the growing sovereign debt contagion in Europe (and failure of their leaders/central bankers to respond intelligently);
  3. continuing political partisanship (and failure of our leaders to properly confront our fiscal imbalances and to promote pro-growth policy); and
  4. an inability to gauge whether the erosion in the August sentiment measures (impacted by U.S. stock market and domestic/overseas economic uncertainties) will translate into weakness in hard domestic economic data.
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In this setting, there are more numerous economic (and stock market) outcomes than are usual. As I have expressed recently. I see the following four potential outcomes:

Scenario No. 1 (probability 15%): The pace of U.S. economic recovery reaccelerates to above-consensus forecasts based on pro-growth fiscal policies geared toward generating job growth), still low inflation, subdued interest rates and the adoption of aggressive plans by the government to deplete the excess inventory of unsold homes. Corporate profits meet consensus for 2011, and 2012 earnings estimates are raised (modestly). Europe stabilizes, and China has a soft landing. Stocks have 25% to 30% upside over the next 12 months. S&P 500 target is 1500.

Scenario No. 2 (probability 15%): The U.S. enters a deep recession precipitated by a more pronounced negative feedback loop, a series of European bank failures and likely sovereign debt defaults in the eurozone. While 2011 corporate profits and margins disappoint somewhat (we are already well into full-year results), 2012 earnings estimates are materially slashed. China has a hard landing. Stocks have a 20% to 30% downside risk over the next 12 months. S&P target is 885.

Scenario No. 3 (probability 30%): The U.S. and Europe economies experience a shallow recession. Earnings for 2011 are slightly below expectations, but 2012 corporate profits are cut back to slightly below this year's levels. Stocks have 10% to 15% downside risk over the next 12 months. S&P target is 1030.

Scenario No. 4 (probability 40%): The U.S. and European economies "muddle through" in a modest expansion mode (hat tip for the term to John Mauldin). Profits for 2011 meet consensus expectations, but slippage in margins brings down 2012 corporate profit growth projections somewhat. Stocks have 10% to 20% upside over the next 12 months. S&P target is 1355.

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In June, nearly $21 billion was redeemed from domestic equity funds by retail investors. In July, almost $29 billion was withdrawn. In August, it has been estimated that more than $35 billion poured out. The $85 billion of outflows from June to August will likely approach the previous three-month record of $88 billion, which came out of domestic equity funds between September and November of 2008.

Thus far in 2011, individual investors have sold about $75 billion of domestic equity funds, only $10 billion less than last year's total outflows. Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion -- in the same period, $835 billion of fixed-income funds have been purchased. That spread between stock outflows and bond inflows ($1.235 trillion) is unprecedented in the annals of financial history.

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In summary, investors should be prepared to expand net long exposures when:
  1. we gain better macroeconomic clarity (both domestically and overseas);
  2. the world's stock markets begin to stabilize;
  3. we see evidence that the sovereign debt crisis in the Euro Zone has subsided (because of more proactive ECB policy); and
  4. our political leaders (hopefully) grow less divided and begin to promote and sanction pro-growth fiscal policies.

Government Report Poverty Rises to 46.2M, or 15.1% of Population - Reality Far Worse

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A few years ago I did a post on the poverty rate in the country [Sep 11, 2009: US Poverty Rate Rises to 11 Year High - But Still Vastly Understated] - it become one of my most widely commented posts over at Seeking Alpha as I declared it's all hocus pocus mostly due to the fact what the government considers enough income to be "NOT" in poverty is a sad joke.

Back then the poverty rate had just climbed from 12.5% to 13.2% of the population.  And 39.8M people.  Today we have a report showing that has climbed (in 2 years) by an additional 6.4M and to 15.1% of the population.   But that's not the whole story.

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

2 years ago the threshold for 'poverty' for a family of four was $22,025.  It has been upped by a whopping 1.4% over the past 2 years to $22,314.  These thresholds are why I believe the headline yelling about the poverty rate to be silly.

So if you have a family of four and make say $24,000 - you are not in poverty, per government statistics.  I'd challenge most 4 person households to live a decent standard of living at that level of PRE tax income.  Perhaps achievable in rural Nebraska, but highly unlikely in any mid sized or larger city, with cost of living.  Again that's gross income, not after taxes. 

Singles?  The threshold is $11,139.  Again pre tax.  If you make $12,000... or $13,000 or $15,000 as a single - you are not in poverty, per the government.  So at $1000 a month gross - you are not in poverty.  Somehow after taxes you must afford a place to live, a mode of transportation, utilities, food, et al.

(another way to look at it - if you make the federal minimum wage of $7.25 as a single person, you make just over $15,000 a year and are therefore not in poverty.)

A household of two?  The threshold is $14,218.  $7000 a person, gross, to sustain a basic lifestyle for a year. You get the drift.

(source for poverty thresholds here)

Obviously determining 'poverty' is open to opinion.  What the actual rate is, is impossible to determine - but most fair minded people would argue a single person making $12,000 has not escaped poverty.  Of course immediately the catcalls begin for 'yeah but they can afford smokes and soda pop so they can't be in poverty'.  Obviously, 'poverty' in the U.S. is different for those in the U.S. than in sub Saharan Africa.  One should hope so.  After all, this is the 'richest country on Earth'*  But the great hollowing out of the middle class (and increasingly working poor) continues.  So when you hear the 15.1% rate tonight discussed on the nightly news, just realize the data behind the headlines.

*ex all our debt!


Here is the full report [click the full screen icon for an easier read] - hat tip to Ritholtz


2010 Report Plot Points


Please note - food stamps and housing subsides such as section 8 are not counted as income.

[Nov 5, 2010: USA Today - Anti-Poverty Programs Surpass Cost of Medicare in U.S.]
[Oct 22, 2010: Reuters - The Haves, the Have Nots, and the Dreamless Dead]
[Sep 3, 2010: FT.com - The Crisis in Middle America]
[July 26, 2010: [Video] DatelineNBC - America's Increasing Ranks of Poor]
 [Nov 10, 2009: Walmart Executive "There are Families Not Eating at the End of the Month"] 
 [Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]
 [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy]

At Some Point Germany Has to Become an Appealing Investment

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While we've had a quite serious correction in domestic markets, Europe has been crushed the past few months - for obvious reason.  As I was looking over the charts last night, it was stunning to see a country like Germany, the fourth largest economy in the world, mangled to the tune of a 33%+ loss in under two months.  No matter the outcome of this crisis (and fact the Eurozone is probably headed for recession anew), this is a very dynamic economy which has probably melded the best parts of 'capitalism' and 'socialism' (I hate the labels) to create an export machine with a high standard of living.  I'd argue (frankly I don't see any solid counter argument) that these policies have created a much better recovery for 'Main Street' Germany than the 'recovery' in the U.S. the past few years.  [May 13, 2011: German Economic 'Miracle' Continues as 5.2% GDP Growth Blasts Past U.S.] [Jan 13, 2011: Germany Puts Finishing Touches on Impressive 2010] [Oct 1, 2010:  German Unemployment Rate Down to 7.2% after Peaking at 8.7%; Can We Learn Anything?]  Of course Germany is being weighed down by the anchors in the region, but ironically as the euro finally gets hit, this will actually help their exports.

[click to enlarge]



The DAX has now given back 2 years of gains, and now sits at levels last seen in summer 2009.  Granted it could get 'worse', but at some point here this country full of multinationals (the elite standard in a globalized world), has to become a very appealing long term investment. 

Here is the ETF for iShares Germany (EWG) - very top heavy with those multinationals; thankfully mostly industrial rather than 'financial':



SIEMENS AG-REG 10.49%
BASF SE 8.09%
BAYER AG 6.58%
SAP AG 6.20%
DAIMLER AG-REGISTERED SHARES 6.05%
ALLIANZ SE-REG 5.78%
E.ON AG 4.87%
DEUTSCHE BANK AG-REGISTERED 4.66%
DEUTSCHE TELEKOM AG-REG 4.39%
BAYERISCHE MOTOREN WERKE AG 3.31%
Total60.42%

[Jun 30, 2009: Will Germany Transform Itself?  Does it Want to?]
[May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US]

No position

What a Market

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Similar to 2008, everyone is just sitting around and waiting for someone to rescue something before life can go back to 'normal'.  There is no fundamental analysis at all on individual companies - everything is a macro trade and intervention trade - bots and humans scanning the headlines for the next miracle cure.  This morning futures jumped from deeply in the red on some rumor of a statement from Germany/France - when that rumor was denied, the futures fell back about 0.7%.  It's all nonsense right now.

EDIT - we remain in about a 100 point range between S&P 1120 and 1220.

Monday, September 12, 2011

Boom!

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What a rally.  22 S&P points in 25 minutes or so. +1.9% in under half an hour.  I love me some Chinese bond buying rumors in the late afternoon.  More rip your head off action today - while fun*... still not healthy.



*not fun for bears.

FT.com Reports Rumor of Chinese Negotiation to Buy Italian Debt - S&P Jumps 10 Points

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If you wondered what that 10 point S&P rally off of 1036 is, the Financial Times is reporting talks of China buying Italian debt.  Just another day in Rumorville as computers scanning headlines buy before you can put down your glass of water.  (psst - China was buying Greek bonds a year ago - how did that work out?)

Update 3:10 PM - here is what Bloomberg says

The Italian government is making approaches to China with the aim of selling the cash-rich Asian country “significant” quantities of Italian bonds and investments in strategic companies, FT reports.
* China Investment Corp. Chairman Lou Jiwei was in Rome last week for discussions with Italian Finance Minister Giulio Tremonti and Italy’s Cassa Depositi e Prestiti, a government entity that has established an Italian Strategic Fund open to foreign investors, FT says, citing unidentified Italian officials
* Italian officials met China Investment Corp. and the country’s State Administration of Foreign Exchange, which manages most of China’s $3,200 trillion foreign exchange reserves, in Beijing two weeks ago, FT says
* Italy’s Head of Treasury, Vittorio Grilli, met Chinese investors in the Chinese capital in August, FT reports
* Further negotiations are likely to take place soon, FT says, citing unidentified Italian officials.

Fortune - Chipotle's (CMG) Growth Machine

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Chipotle Mexican Grill (CMG) has been one of the stars of the market the past half decade [Oct 30, 2007: Chipotle Mexican Grill - The One Impervious Restaurant Stock], as its a high growth company, in a country staved for public companies still in early to mid stages of growth.  One lesson this market has taught is that as long as there is no major stumble in the growth trajectory you can forgot about worrying about valuations (to some degree at least) as there is such a premium put on the finite amount of names that can deliver consistent high level growth.  Of course once a company stumbles, than the valuation suddenly becomes a major issue.



Fortune has a quite in depth story on the company, and if they can expand the brand with ShopHouse Southheast Asian Kitchen.  Some excerpts.

  • It's fast food, but it still may be the most anticipated restaurant launch in town. In a modest unmarked storefront near Dupont Circle in downtown D.C., ShopHouse Southeast Asian Kitchen is finalizing the menu and training the staff. Scheduled to open within days, the innovative restaurant has tantalized both eaters and investors. The food will feature a mix of meats and fresh vegetables served in a bowl with spicy sauces and aromatic herbs. The flavors will be a blend of Thai, Vietnamese, and Malaysian. The style will be "fast casual": Customers move along a cafeteria-style line, with servers behind the counter customizing each meal. You can sit down and eat -- there's room for roughly 40 -- or take out your meal. The intriguing thing about ShopHouse, though, is it's not the startup of a fledgling, but the wholly owned experiment of Chipotle Mexican Grill Inc., already a national leader in fast-casual cuisine and No. 54 on Fortune's 2011 list of the 100 Fastest-Growing Companies. If the ShopHouse concept works, it represents an opportunity for the company to expand even beyond its current torrid pace. Bob Derrington, a managing director at Morgan Keegan, says some of his clients are asking, "Is this the birth of a billion-dollar baby?"
  • Chipotle's (CMG) growth has been remarkable. Revenue for the 12 months ending June 30 was more than $2 billion, up 23.5% from the prior year. Since 2006, revenue has nearly tripled; in the same period the number of restaurants in the chain doubled. In restaurants open at least a year, sales were up 11% in the first half of 2011. Profit margins in Chipotle restaurants have been in the 25% to 26% range -- among the highest in the fast-food industry.
  • The high margins can be explained by other efficiencies, like that its top-performing locations can move 300 customers an hour; that rate of service -- "throughput" -- is a Chipotle obsession. "Slow food, fast," the company boasts. 
  • It doesn't hurt that the average tab runs upwards of $9 -- more than a Big Mac and fries. Chipotle's margins, along with its rate of growth and its decision not to franchise, accounts for its generous market capitalization relative to other fast-food chains. Chipotle's relative value per restaurant -- $9 million or so -- is more than triple that of McDonald's.
  • While Pan-Asian isn't a wholly new idea in fast casual -- Pei Wei Asian Diner, owned by P.F. Chang's China Bistro (PFCB), has about 170 outlets, and Panda Express has more than 1,300 "quick service" locations -- the fact that ShopHouse comes from one of the big entrepreneurial players in the industry has raised hopes among investors.
  • Steve Ells, Chipotle's intense 46-year-old founder and co-CEO, sees ShopHouse as a chance to validate his business model, which is based on operational proficiency and social responsibility. "Chipotle succeeds not because of the burritos," he told me one afternoon in a ShopHouse tasting kitchen in Manhattan. "It works because of our system: fresh, local, sustainable ingredients, cooked with classic methods in an open kitchen where the customer can see everything, and served in a pleasing environment." 
  • "ShopHouse isn't yet a growth strategy," he says. "But it is a growth opportunity." The "big question," says analyst Derrington, "is whether Ells can make the same magic twice: Can Asian be as broadly appealing as Mexican?"
  • The Chipotle rules can be very specific. For example, the menu is limited to four core basics, but it offers a range of garnishes like salsa and cheese and guacamole that can produce scores of combinations. Ells serves neither dessert nor coffee. (Too complicated.) There's no dollar menu or "limited-time offers." (Too gimmicky.) And while the Dulles Airport restaurant serves scrambled eggs for breakfast, Ells has declined to begin breakfast operations elsewhere.
  • Yet despite a rigid focus, Ells's system also offers employees the chance to advance quickly. His best store managers -- who often begin in the service line and are paid near minimum wage -- can become "restaurateurs," which often means annual compensation above $100,000, including performance bonuses and stock options. (His youngest restaurateur is 23.

No position

Caterpillar (CAT) CEO Pillories U.S. Education System - "The Education system in the U.S. Basically has Failed Them...We have to Retrain Every Person We Hire""

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Interesting blurb via Reuters dealing with the jobs issue and Caterpillar (CAT).  Essentially what the U.S. is churning out (despite the most per capita spending on students in K-12, and the highest cost universities in the world) is not the type of product the CEO needs.  Another part of this is the hollowing out of the manufacturing base (in terms of number of jobs)... those with relatively high ceilings are generally not going to go into an area where the long term prospects of employment are poor.  CAT itself dumped a lot of its U.S. workforce a few years ago....

  • Caterpillar Inc is struggling to add skilled workers in its manufacturing operations despite high U.S. unemployment levels that have forced President Barack Obama to take extraordinary measures, the company's chief executive said on Friday.
  • The dichotomy in the makeup of the workforce is threatening U.S. and Canadian competitiveness, Caterpillar CEO Doug Oberhelman said.
  • "We cannot find qualified hourly production people, and for that matter many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States," he told a business audience at the Spruce Meadows equestrian facility outside Calgary.  "The education system in the United States basically has failed them and we have to retrain every person we hire."
  • Oberhelman said the service technician shortage is hurting Caterpillar's dealers as well. "These things have pretty sophisticated instruments and we have to train for that. I would hope our education system could help and make up for some of that," he said. "Today it's several thousands shortage of those technicians for us around the world. It's acute."
  • Oberhelman said it is too early to tell if the United States or Europe is heading for another recession.  "Certainly the storm clouds have thickened a bit," he said.
  • He was in Calgary for a business roundtable on manufacturing.
No position

No Crisis Today - U.S. Markets Go Green as IMF Officials Expect Greek Bailouts to Continue as Planned

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Looks like all is well in the world again ;)  You can't leave your seat for even a few hours.  The S&P500 just went positive.

Based on a proposed property tax, that should bring in 2B Euros a year in Greece, IMF officials believe the country will continue to get a lifeline and we can kick the can down the road ... again.  Personally, I'd just like to see this default over with since pulling this band off over multiple years is trying.  But that's me.

Here is the story that seems to have made markets happy.

  • Greece's creditors are expected to give the thumbs-up for the disbursement of the next tranche of its 2010 bailout pact later this month after the Greek government announced new taxes to cover a EUR2 billion revenue shortfall, said two senior International Monetary Fund officials familiar with the matter.
  • The IMF officials, who have direct knowledge of the talks, warned, however, that this was Greece's last chance and that the scheduled December installment would be more difficult to arrange unless budget targets are met.
  • The two IMF officials dismissed speculation of an impending Greek default or exit from the euro-zone. But they said Greece nonetheless remains the biggest problem for the common currency and that it is imperative that Athens follows up on its promises to cut down the public sector and tackle tax evasion.
  • "The pressure in Greece has increased from all sides because it has repeatedly failed to deliver what it promises. But there is no real talk on a Greek default or an exit from the euro zone, at least not yet. Such a development would really rock countries like Italy and Spain," one of the officials told Dow Jones Newswires. "The Greeks took new measures which address the shortfall and we expect there will be agreement with the troika for the September loan tranche."
  • Finance Minister Evangelos Venizelos Sunday imposed a new property tax over the next two years to cover the EUR2 billion revenue shortfall, in line with a promise to Greece's creditors in exchange for receiving fresh aid.
  • Without the aid, Greece will run out of cash within weeks, according to senior Greek officials.
  • "I think this is Greece's last chance," the first official said. "If promised reforms are not implemented by the next review in December, things for Greece will become much more difficult with the next loan tranche far from certain. The Greek government knows that emergency measures like new taxes can only get them to a point before the population reacts in a dramatic way. They need sustainable measures with a smaller public sector where everyone is paying his fair amount of taxes. Only then the country can return to a sustainable path."

[Video] Former Treasury Secretary Paul O'Neill Visits CNBC

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Paul O'Neill, much like Paul Volcker, is definitely a man who speaks his mind.  While we never know the exact story behind the curtain the Secretary of the U.S. Treasury early in George W Bush's first term, apparently ruffled many feathers by his 'truthiness'.  That doesn't sit well in a town like Washington D.C. but remains an admirable quality.  I rarely see him on CNBC nowadays, but he was on Friday to commemorate 9/11.  That takes up the first 3 minutes of the interview, but probably more interesting is his comments on the current environment.   He doesn't hold back - no surprise there.  He actually mentions the same point I have been making - how ironic it is we are raiding the revenue sources for (an already empty) Social Security lockbox with these payroll tax cuts.   Along with quite a few other statements that show why this man had a very short half life in a town like D.C.

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




Europe Continues to Tumble as French Banks Hit Hard on Greece Default Idea

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The whole Greek tragedy is getting a bit tiring after two years of discussing it.  As mentioned Friday, it was leaked Germany was preparing to ring fence their banks from a Greek default, which was a change of direction after years of insisting no one in the EU would be allowed to fail.  Of course the issue now is other countries - especially France - now have to do the same thing and backstop their banks ala USA 2008, as these institutions are carrying paper on their balance sheets which is worth far less than they have been forced to admit.  Today the French banks have taken it on the chin as I suppose 'the market' is demanding the same from France as Germany did last week.

  • Mounting fears over the possibility of a Greek debt default and signs of division within Europe's policymaking circles over how to deal with the crippling crisis combined Monday to send bank stocks sharply lower.
  • Senior German politicians have suggested publicly in recent days that an orderly bankruptcy of Greece may be part of a solution to the country's problems. The notion, which has been a taboo so far in Europe's handling of the crisis, has spawned uncertainty in financial markets.
  • .....many of the continent's leading financial groups, such as Deutsche Bank and BNP Paribas, down some 10% as investors worried over their exposure to potentially bad European debt. 
  • France's Societe Generale, which dropped 10%, tried to calm investors with a statement saying its exposure to the euro's more imperiled economies is diminishing -- at euro3 billion -- and that it was accelerating plans to raise over euro4 billion ($5.4 billion).


Once 'the event' is over (with Greece) it will be interesting to see where 'the market' focuses on next i.e. do attacks on Portugal begin anew? Or are they considered in better shape?  Whatever the case it appears central banks are going to be busy backstopping everything on Earth once more.  Ironically the resignation of Mr. Stark Friday - who was against bond buying by the central bank - could open the door for the ECB to go full Bernanke down the road.  (which of course the markets will love!)

As for markets the levels I've been speaking about the past few weeks are still in play, 1120(ish) and then 1100 (intraday low on Fed announcement day). With 3 big bad days in a row (including today) we're again prone for a snap back rally at some point mid to latter week perhaps, but it remains a market only for short timers. Also later this week markets should begin their Pavlonian giddy reaction to anything Helicopter Ben does - which is certain to be 'Operation Twist' a week from Wednesday.


Sunday, September 11, 2011

Norway - A Piece of Persion Gulf Living in Northern Europe

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A pretty interesting piece here on the good life in Norway - due to it's exposure to oil.  It's a bit like a northern European Persian Gulf.  (or in U.S. terms, it's as if the whole country is North Dakota)  While I had known about the oil aspect, I didn't realize the cost of living issues in Oslo, nor the level of wages in the county.   Due the relative stability I've been surprised the Norwegian krone has not been treated like the Swiss franc - as a 'safety trade'.

  • While much of Europe is struggling to pay its way out of the debt crisis, Norway has been awash with cash and is set to get more. Two major oil finds are revitalizing the country's aging energy sector and promise to buoy it through the downturn looming over the global economy.
  • In fact, one of its main financial concerns is how to keep all its money from overheating the economy.  "In Norway, we live in a big bubble, independent of what happens in the rest of the world," said Beniamin Johansen, a personnel consultant in Oslo.
  • Recognized by the U.N. as the world's best country to live in, the land of breathtaking fjords and majestic mountains has used years of oil income wisely to keep unemployment low, incomes high, education free and health services working.
  • For a decade, however, Norway's North Sea oil production has been sliding as the wells slowly run dry. Companies have increasingly had to explore further north, in harsh Arctic conditions, to get to new reserves.  So this summer's discovery that two North Sea oil fields are substantially bigger than previously thought was as unexpected as it was welcome.  The find, announced in July, potentially raises the country's daily crude output of 1.7 million barrels by as much as 300,000 barrels.
  • In bookkeepers' terms, the industry has accounted for value creation -- revenue that exceeds expenses -- of nearly $930 billion since the 1970s, and future good times appear certain with the additional supplies beneath Norway's part of the North Sea floor.
  • The country's main challenge has been managing the oil wealth and keeping it from overheating the economy of the tiny country of 5 million people.  After financing welfare programs that are the envy of the rest of Europe, the Norwegian government still has so much money that it is forced to invest it outside the country for fear of creating bubbles in the domestic financial and real estate markets.
  • The country's $550 billion sovereign wealth fund, set up in 1996, owns through its investments some 1.9 percent of the European stock market and holds about 1 percent of traded global shares.
  • But despite the government's efforts to protect the economy from bubbles, the national wealth has created unbalances that are difficult on Norwegians not involved in the oil sector.
  • With virtually no unemployment, wages are high -- the average salary equals almost $7,000 a month. That, and a strong currency are backfiring on industrial workers as companies consider moving to cheaper countries or outsource production to nations like India, which already has major IT contracts with dozens of Norwegian companies.
  • "Our competitiveness has been weakened year by year during the last decade," says Tor Steig, from the Confederation of Norwegian Enterprise. Other experts note that spending oil money on health services, housing and expanding the public sector creates a bigger work force that -- while ensuring that standards remain high -- does not directly contribute to the nation's productivity 
  • And the prosperity that comes with oil has a high price tag. A recent survey by the Swiss bank UBS, ranked the capital, Oslo, as the most expensive city in the world.  Many Norwegians near the border with Sweden cross regularly to their eastern neighbor -- itself one of Europe's most expensive countries -- to stock up on food, alcohol and tobacco at prices often 40 percent lower than at home.
  • McDonalds' signature Big Mac burger costs the equivalent of $5.79 in Norway compared with $3.54 in the United States and an average of $4.38 in the European Union, according to the Economist's worldwide Big Mac index that uses the price of that fast-food item as one measure of prosperity.
  • Still, Norway's oil riches to some extent trickle through the economy, which is largely built around the one sector. And as the oil wealth fund keeps growing, it provides a valuable backstop for the economy.  During the 2008 global downturn, it proved to be a lifesaver, with the government providing billions in extra funds for public building projects and helping keep the wheels of the country's economy turning.
  • The country is not totally impervious to the economic turmoil in Europe. Any major stock tumble would hit the oil fund, shrinking Norway's fortune. Also, a renewed global recession would hurt Norway's export driven industry and could drive down oil prices, further slashing revenues.  For now, though, those prospects do not appear to worry Norwegians, who seem to be exempt from the economic pessimism choking off consumer spending elsewhere in Europe.

Friday, September 9, 2011

Bespoke: Market Performance Since 9/11/01 - Along with Best Performing Stocks

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A few interesting tables in this entry by Bespoke Investment blog.  First are the broad asset returns by asset class - notice the dollar has lost a third of its value so by definition the asset you need to invest in (If you are American) needs to appreciate by 50%ish just to break even.   To repeat, as American policy is to steal from savers by devaluing, one needs a 50% gain in assets simply to stand in place on a consistent currency basis.  With the S&P 500 returning a whopping 10% over that time, you feel a 'bit' short.  This is what many people don't understand when they see the market rally while the dollar is crushed - you can't look at one without the other.  (conversely if the market did little for a decade, but the currency rallied - savers would benefit.  Debtors not so much!)  This was discussed in length a few times on the website i.e. [Dec 23, 2010: Is the U.S. Dollar Weak or Not?]

For example if you price the market in gold (or silver) terms the returns look atrocious - here is a 3 year return (during one of the best rallies of all time in U.S. indexes) in the S&P 500, priced in gold.  Now to be fair gold has had a great run during some (not all) of this rally in the S&P 500 - especially lately.



More fair would be to price the S&P 500 in a relatively stable currency like the Canadian loonie or Australian dollar.  (I wont use the Swiss franc because someone can claim the same issue as with gold - it has had a great run of late)  So that mega rally in the S&P 500, priced in a stable currency does not look very good at all.


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

Anyhow here are the statistics from the major asset classes - just imagine all that CEO, board of directors, and upper level C suite compensation given to create nearly a 50% loss over a decade in the financial sector.  A lot of people looted the store....looking at you Mr. Rubin. 



Also I cut out the chart of the best performing stocks - if you had a few of these you could battle the Greenspan/Bernanke devaluation regime quite nicely. ;)

[click to enlarge]


WSJ: Zynga - Virtual Products, Real Profits

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While both Groupon and Zynga were proposed to be IPOs in the second half of 2011, it appears now Groupon might be hedging a bit and pushing out their IPO data due to the theatrics in the market.   Have not heard such language from Zynga yet.  The WSJ takes a look at this unique hypergrowth online video game maker; it is definitely a very unique business model versus say Electronic Arts (ERTS).

  • To understand why Zynga Inc. is among the tech industry's hottest companies, consider how it gets people to buy a bunch of things that don't exist.  Last year, Zynga product managers for a videogame called "FishVille" discovered something intriguing while sifting data that Zynga collects when people play its online games. Players bought a translucent anglerfish at six times the rate of other sea creatures, using an imaginary currency people get by playing the game.The "FishVille" managers had artists whip up a set of similar imaginary sea creatures with translucent fins and other distinctive features, says Roger Dickey, a former Zynga general manager who left the San Francisco company recently. This time, they charged real money for the virtual fish, and players snapped them up at $3 to $4 each, says Mr. Dickey.
  • Zynga is transforming the game industry. Traditional videogame companies create games they think players will like, then sell them. Zynga offers free games through Facebook Inc.'s social network, then studies data on how its audience plays them. It uses its findings to fiddle with the games to get people to play longer, tell more Facebook friends about them and buy more "virtual goods." At the heart of the whole process is Zynga's ability to analyze reams of data on how players are reacting to its games.
  • "We're an analytics company masquerading as a games company," said Ken Rudin, a Zynga vice president in charge of its data-analysis team, in one of a series of interviews with Zynga executives prior to the company's July filing for an initial public offering.
  • Over 95% of Zynga's players never spend a nickel on its games. But its audience of 150 million unique monthly users is so large that the small percentage that buy $5 imaginary chickens in "FarmVille" and $3 imaginary skyscrapers in "CityVille" generate big bucks for the company. Some players spend hundreds or even thousands of dollars a month—they're called "whales" inside Zynga, the same term casinos use for high rollers.
  • Zynga's revenues rose to nearly $600 million last year from $121 million in 2009, according to the company's Securities and Exchange Commission filings for an IPO. While many tech upstarts are money pits, Zynga made a $91 million profit last year.
  • Recent stock-market turbulence has created uncertainty about IPOs and could force Zynga to delay and lower the valuation of its offering. When it filed for its IPO, the company was planning to seek a market value of as much as $20 billion, say people familiar with the matter. That would be nearly the combined value of veteran game publishers Activision Blizzard Inc. and Electronic Arts Inc.

  • Sales of traditional games are flat in the $10-billion-a-year videogame industry. And Zynga's success is attracting a wave of companies that develop free games supported by the sale of virtual goods. Walt Disney Co. and Electronic Arts both acquired Zynga rivals for hundreds of millions of dollars each. Electronic Arts launched a free Facebook version of "The Sims," a top-selling traditional game, a few weeks ago. The game already has nearly eight million active daily players.
  • No one expects traditional games to disappear. But momentum is shifting. Total virtual goods sales in the U.S. are expected to jump 50% to $2.22 billion this year, while retail sales of games are likely to rise only 1% to $9.7 billion, estimates brokerage firm ThinkEquity.
  • Zynga's dependence on Facebook for nearly all of its revenue is also a potential liability. Last year, the social network cracked down on the ways in which companies like Zynga could send messages to Facebook members, many of whom had come to despise the come-ons to play various games as forms of spam. By the time of that change, Zynga had a large audience of players to whom it could promote future games in ways still permitted by Facebook.
  • By building its business on Facebook, Zynga has access to a deeper well of data about its users' online activities than ordinary websites do. When people install a game from Zynga or another Facebook developer, they give the companies permission to record their names, genders and lists of Facebook friends, among other information. Zynga can then use that information to figure out tactics to get people to invite friends to play its games, something a company with mostly anonymous players can't do.
  • Zynga executives respond that they design games to attract a broad audience, not just hard-core gamers that form the backbone of the traditional games business. In most of Zynga's games, players don't "win" by blasting away an opponent with a gun. Instead, they seek status and fulfillment by having the most abundant farms or well-developed cities. "We're making mass-market entertainment everyone can play," says Brian Reynolds, Zynga's chief game designer and a veteran of traditional games companies.

[Jun 29, 2011: Zynga Could File for IPO as Early as Today]
[May 25, 2011: Sources - Zynga Ready to File for IPO]

No position

Smack Dab Back to the Middle of this Mega Range - and Germany Prepares for Greek Failure

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I mentioned early in the week we are simply in a huge trading range of roughly 100 S&P points, between 1120ish and 1220ish.  Today's excuse du jour is an ECB member resigning due to his resistance to bond buying, and (wait for it) worries about Greece.  If I had a nickel for every time I wrote "worries about Greece" the past two years.  Germany also just announced they are preparing to shield their banks from Greek default - which means you know what's coming down the pike.  We've just wasted a lot of time waiting for the inevitable.
  • Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.
  • The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. 
  • The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress. 


With that we are essentially smack dab in the middle of this mega range.  European markets have now closed (badly).



These 1, 2, 3% daily moves up or down (much of it premarket gapping) are not healthy - even the days we see the market up 2 or 3% and everyone is clapping like seals.  That doesn't signify any health - just computers (and what remain of humans) darting in and out reacting to every news item, in a very unstable environment.  One day this week we had gold down nearly 3%, and the next day almost reversed the entire move.  Complete nonsense action.

It will be safer above S&P 1250 to be a buyer... or much lower.  Until then it looks like consolidation after a big move down - which is not bullish action.  In this mega range we just are getting a lot of white noise and it's only an environment for daytraders or people who hold positions for 48-72 hours.  A chop zone.  Don't read anything into the 'action' unless/until we break out of this range.

Lululemon (LULU) Beats Nicely on Bottom Line, but Guidance Not Strong Enough for Such a High Multiple Stock

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Lululemon (LULU) has been one of the stars of retail the past few years, and as a rare high grower has been handed a premium valuation.  Of course that carries more risk around earnings season, as these type of names usually need to beat and raise to keep the momentum going.  The company beat earnings estimates by a solid 4 cents but the guidance picture was not as rosy.  The stock is being hit, but it's not that bad all things considered - often when momo stocks disappoint you will see a 10-20% drop.



Even after today's drop the company trades at nearly 50x forward estimates.

Full report here.

Via IBD:

  • Fitness clothing shop Lululemon Athletica (LULU) continued its streak of better-than-expected earnings Friday, thanks to strong growth at its existing stores and a sharp increase in its direct-to-consumers online channel. But a cautious third-quarter outlook pressured shares.
  • The Canadian yoga and fitness clothier posted second-quarter earnings of 26 cents a share, up 73% from a year ago, after adjusting for this summer's stock split. Revenue came in at $212.3 million, up 39% from a year ago. Analysts were looking for 22 cents, on revenue of $206 million.
  • Sales at stores open more than a year climbed 20%.
  • However, Lululemon issued more cautious guidance for the third quarter, predicting earnings per share of 22-24 cents. Wall Street has expected 24 cents.
  • Demand for the specialty retailer's high quality but pricey yoga and running clothes has held strong, despite high fuel prices and other economic pressures on consumers. But Lululemon has struggled to keep its shelves stocked in recent quarters, chasing inventory and racking up higher shipping costs in the process.

Gross profit margin remains awesome (for a retailer) at nearly 60%!  Especially considering commodity prices have ran up this year.
  • Gross profit for the quarter increased 52% to $122.1 million, and as a percentage of net revenue gross profit increased to 57.5% for the quarter from 52.8% in the second quarter of fiscal 2010.

[Jun 20, 2011: Lululemon - No Recession in Yoga]

No position

Ray Dalio and Bridgewater Associates Continue to Amaze with 25% YTD Gains

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I'm not sure what sort of witchcraft is going on over at Bridgewater, but the firm is putting together another fantastic year, at 25% year to date gains - this after a spectacular 2010.  This would be impressive for a $2 or $5 Billion hedge fund, but Bridgewater is nearing $125B in assets!  Well, we do know part of the witchcraft - the firm was long gold and Treasuries and nailed it on both, but still - a wicked return.   I am going to go back to that (rare) March interview and rewatch!

A nice story on Bloomberg that discusses more than just the returns:

  • Bridgewater Associates LP founder Ray Dalio can rattle off the investing fads he’s witnessed since he began trading as a 12-year-old golf caddie: the Nifty-50 stock craze of the 1970s, the 1980 gold bubble and even the 60- 40 stock-to-bond mix.  “Manias occur when there is group thinking,” Dalio says.
  • Dalio, 62, built Bridgewater into the world’s largest macro hedge-fund firm, with $122 billion in total assets, by tacking against consensus. He’s created a distinct workplace culture and a research-driven investing process that spreads risk across scores of markets.
  • “Making money is a zero-sum game, so to be successful you have to be willing to stand apart from the crowd,” Dalio says. “And you have to be right.”
  • The founder was right often enough during and after the worst financial crisis in decades starting in 2008, helping to cement his reputation as a leader in his industry. Three Bridgewater hedge funds placed among the 100 top-performing large funds in Bloomberg Markets’ annual ranking in February, including its flagship, Pure Alpha II. The No. 3 fund posted a 38 percent return for the 10-month period through October 2010.
  • In August 2007, as credit markets were tightening, the newsletter warned, “Hedge funds in general are unlikely to provide much diversification to help protect against poor performance of traditional markets.”  The next year, funds lost an average of 19 percent.
  • At its bucolic headquarters in Westport, Connecticut, Bridgewater devotes a great deal of resources to research. The firm’s 1,200 employees -- more than at many midsize investment banks -- help generate the data and analysis that inform bets on macroeconomic trends. In June, researchers tracked the percentage of world gross domestic product generated by Western Europe, the U.S., Africa, China and other markets to the 16th century to show long-term shifts in economic power.
  • In July 2007, more than a year before the bankruptcy of Lehman Brothers Holdings Inc. (LEHMQ), the newsletter cited “pervasive fragility” in the financial system. It noted the 50 percent growth in the notional value of credit derivatives, to $29 trillion, during just the last half of 2006. So Pure Alpha II piled into Treasury bonds, shorted stocks and loaded up on gold. It finished 2008 with a gain of 9.4 percent, investors say.
  • By the start of 2010, against a forecast of anemic growth in the U.S. and Europe, Pure Alpha II’s wagers were spread more widely than usual. It made money on developed-market currencies, equities and emerging-market debts and currencies as well as commodities. Investors say the fund generated a 44.8 percent return last year.
  • And amid the market turmoil of 2011, the fund is up 25.3 percent through Aug. 31.
  • All told, Pure Alpha II has returned 15 percent annualized since its December 1, 1991 start.
  • Dalio’s transformational effect on money management dates to the early 1980s. While many investors embraced a simple asset mix of stocks and bonds, Bridgewater spread its bets across myriad markets, eventually to more than 100 of them. The firm wagered on every-thing from Treasury yield curves to Australian dollars to crude. That diversification, including bets not related to the overall direction of the market, helped the hedge fund prosper in good markets and bad -- and lure huge pensions and other big institutions to an industry then dominated by wealthy families and endowments.
  • He says the principles complement his firm’s effort to be “radically truthful” and “radically transparent.” Bridgewater employees -- Dalio included -- are required to publicly talk about their and their colleagues’ mistakes and weaknesses as a means to improvement. Conversations are either audio or videotaped so that employees can make their own assessments.
  • These days, the view from Bridgewater is dour. He divides the world into two groups: developed debtor nations that are deleveraging and emerging creditor countries that are leveraging up. After years of overspending financed by borrowing, the former are being forced to lower their debt relative to their income levels, constraining spending levels and employment gains.
  • Developed debtor countries, including Greece, Spain and Italy, that can’t print money to make it easier to service their debts and to make up for slow credit growth will have decade- long depressions and debt defaults.  “We worry about Europe not being able to solve its problems,” Dalio says.
  • Dalio expects emerging creditor nations to be tomorrow’s economic leaders. Countries such as China and India that have currencies and monetary policy linked to those in the U.S. are experiencing inflationary bubbles because their interest rates are too low, he says. They will have to unlink from the U.S. or face intolerable conditions. Emerging economies will account for 70 percent of global GDP in 15 to 20 years versus 47 percent now.
  • Dalio views the August market turbulence as consistent with Bridgewater’s expectations. “Emerging creditor countries are trading more like blue chips; the U.S. is trading more like a country in decline,” the Daily Observations read on Aug. 8.
Sound familiar? ;) [[Video] Oct 9, 2010: Should the United States Be Classified as an Emerging Market for Investing Purposes?]

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Other Dalio....


[Jul 18, 2011: Bridgewater Associates - How Ray Dalio Built the World's Richest and Strangest Hedge Fund]
[Mar 3, 2011: Rare TV Interview with Manager of World's Largest Hedge Fund - Ray Dalio]

Obama's $447B Don't Call it a Stimulus is Larger than the $862B Plan from 2009!

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Well the leak of a $300B proposal earlier in the week was quite inaccurate, to the tune of over 50% wrong.   While we are not allowed to call it a stimulus because after all stimulus is a bad word, this "don't call it a stimulus" is actually probably a bit bigger on an annual basis than the $862B plan launched in early 2009 that ran essentially over 2 years.  Almost all of this $447B stimulus friendly help is for 2012. 

The fiscal boost from the jobs package next year would be larger than in the first year of the 2009 economic stimulus, said Mark Zandi, chief economist at Moody’s Analytics Inc.


The economy on steroids continues. [Nov 18, 2009: Minyanville - Our Economy is on Steroids]

And as expected how will it be paid for?  By some vague notion of revenue enhancements and cuts over the NEXT DECADE.  Which we know never happens - a decade is 5 political cycles in the U.S.

Obama stressed that he would pay for the entire jobs package with offsetting spending cuts and increases in tax revenue over the next decade. He said he would announce the offsets by Sept. 19.



Anyhow this is a starting point - although a much larger one than expected - so I'd assume by the time its said and done something along the lines of $200-$250B might get passed.  Especially since its tax cut heavy, so the GOP can buy off on it.  So a great negotiating ploy to start at nearly half a trillion.

I do continue to giggle that we take money out of the already empty social security trust fund.

One thing that totally awed me was Obama used what I thought would be the GOP's line on the payroll tax cut.  I literally said a year ago that the 2% payroll tax cut would be extended a year from now because (a) the economy would stink and (b) the GOP would yell that Obama is raising taxes in a time the economy can't handle it.  Instead Obama used that line last night!

“I know some of you have sworn oaths to never raise any taxes on anyone for as long as you live,” he said. “Now is not the time to carve out an exception and raise middle-class taxes, which is why you should pass this bill right away.”



If you want details, Bloomberg has a decent story on it.

  • Tax cuts account for more than half the dollar value of the president’s latest plan to turn the economy around, and administration officials said they believe that will have the greatest appeal to Republicans in Congress.
  • The centerpiece of the plan is the cuts in payroll taxes, which cover the first $106,800 in earnings and are evenly split between employers and employees. Obama would reduce the portion paid by workers next year to 3.1 percent from 6.2 percent. The rate had been cut 2 percentage points under the terms of a tax deal reached last year, and that reduction is set to expire Dec. 31.
  • Businesses would get the same 3.1-point reduction on taxes they pay on the first $5 million of their payroll, a limit that skews the benefit toward smaller firms. The full 6.2 percent employer contribution would be waived on the first $50 million net increase in a company’s payroll.
  • The proposal includes additional tax credits for hiring veterans and workers who have been unemployed more than six months.
  • The package includes spending favored by Democratic constituencies. It would include a $105 billion infrastructure proposal for school modernization, transportation projects and rehabilitation of vacant properties. Most of the economic impact from the infrastructure spending would be next year.

Thursday, September 8, 2011

[Video] Tom Friedman Visits CNBC's Squawk Box

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One thing I realized this past week is Mr. Friedman is almost as polarizing as George Soros ;)  But I think he is a bit less partisan.  While still hawking his book, he had an interesting interaction this morning with the Squawk Box crew - two of which tilt extremely to the right.  Conversation ensues -

15 minute video - email readers will need to come to site to view:




The Atlantic - The Greater Recession: America Suffers from a Crisis of Productivity

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It is good to see in the past 12+ months more and more of the mainstream press 'getting it' from the perspective of rather than just taking political sound bites, they are looking under the covers to see the structural issues that have manifested in the country the past decade or two.  While these articles may come to different conclusions, they certainly have moved past the simple thinking of its all due to (insert simple reason A) or (insert simple reason B).

The Atlantic has an in depth article which focuses on the benefit/curse of productivity - good for capital, not so good for labor.  [Mar 28, 2011: Productivity - Wo(man) vs Machine]  At least in the short to medium run - in theory it should be great in the long run.  But in the long run we are all dead.  While GDP has surged, most of the rewards have gone to a smaller and smaller group of people (effectively creative thinkers, and capital owners).  This has happened over decades - again it did not just begin in 2007 - we hid it by a great influx of women entering the workforce, and then the use of credit, especially of the housing kind (in the past decade) to offset the lack of wage growth for Average Joe.

The second half of the article deals with the pressure on wages, and offsets of massive inflation of education and healthcare - topics long time readers will recognize back from 2007-2008.  I talked about a lot of this in 2007 [Dec 2007: Do the Bottom 80% of Americans Stand a Chance?], but again my stuff is in a tiny corner of the blogopshere, and back then very few were reading - we were still celebrating the fact subprime was contained ;)  Either way it's good to see this sort of conversation entering the type of media where many more people absorb it than our few thousand readers.  Before we can even begin to think of solutions, we need to admit the problem.  We are not even close to that as you will see tonite at 7 PM - instead more of the same old, same old.

I encourage the read - there are a few interesting charts as well, some of which are very similar to things we've been posting here at FMMF the past few years.

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  • Before the Great Recession, there was a greater recession for the American worker. And it's been much worse than most of us thought.  Here's what we thought we knew. In the last three decades, gross domestic product doubled but the typical worker's real wages barely increased. For those with only a high school degree, salaries fell slightly. Some economists called this period of lazy wage growth the "Great Stagnation."  It turns out that "stagnation" was too optimistic.
  • In fact, real wages for middle class men have declined by 28 percent since 1969, according to a report from the Hamilton Project. For men without a high school degree, they've fallen by a whopping 66 percent. "Stagnation is too weak a word," said Michael Greenstone, author of the report. "This is decline."  (Mark's note - these first 2 paragraphs are accurate - my assumptions were those of paragraph one.  These figures look worse than what I usually see, which is something akin to 'adjusted for inflation, wages for men have been 'flat' since the 1970s)

Here is why the report from the Hamilton Project says the assumption was wrong - you may or may not disagree with the logic of including people who are completely out of the workforce, but of working age, and setting their salary at 'zero':
  • Economists got it wrong, Greenstone said, because they compared wages among all working men rather than among all "working-age" men. That distinction is key, because fewer and fewer working-age men are actually working. Since 2009, one in five has been idle. When you factor in millions of men without weekly salaries, male wages sink to their lowest level since the 1950s.

  • Americans have a complicated relationship with productivity. We obsess about our personal efficiency, but we don't think much about efficiency across broad swaths of the economy. Productivity is the not-so-secret sauce in our GDP. We're the second-largest manufacturer in the world even though manufacturing jobs have shrunk to less than 10 percent of our economy. We're the world's third-largest agricultural nation even though only 2 percent of us farm. The reason we can do so much work with so little is that the U.S. economy is incredibly, and increasingly, efficient at making some things cheaply.
  • .... technology and offshoring is replacing jobs for the middle-educated middle-class. "Almost one of every 12 white-collar jobs in sales, administrative support, and nonmanagerial office work vanished in the first two years of the recession," Peck writes, and one in six blue-collar jobs disappeared in production, craft, repair, and machine operation.
  • We know where the jobs are going -- to machines, software, and foreign workers. We also know why they're going away. Global competition gives companies the incentive to be more productive, and technology and foreign labor gives companies the means to be more productive. Automation lets one employee handle the work of three, or three hundred. Off-shoring lets ten Asian workers receive the salary of one.
  • What's so bad about 1950s wages, anyway? you may ask. They worked for the 1950s. We could make do with them today if the price of everything -- from socks, to televisions, to medicine -- moved at the same rate. But that is not what's happened.

The rest of the article goes to talk about the cost of life in America and especially focuses on the twin bubbles of healthcare and higher education costs - topics we've discussed at length here.  If interested please continue to the rest of the article.

[Jul 27, 2011: WSJ - What's Wrong with America's Job Engine?]
[Oct 4, 2010: WSJ - Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices]

Oaktree's Howard Marks - What's Behind the Downturn

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A nice piece below by Oaktree's Howard Marks

Hit full screen for the easy read




Howard Marks on What's Behind the Downturn 09-07-11

Bad Trends for the Self Employed

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Some very troubling data in this story in USA Today on the self employed - it further reinforces what a joke the birth/death model (which has 'created' some half a million jobs in the past year) in the monthly employment data is.  [Jan 27, 2008: Birth Death Model]  Supposedly a plethora of small businesses (too small to count in the surveys) are sprouting up across America the past few years (green shoots) if you believe the 'estimates' of the birth death model.  The reality seems more in tune with what we see down on Main Street.  (note - I was a bit surprised by this number myself as I figured that many of the corporate downsized were now trying to start their own businesses, but it appears not as much as I thought)

  • In August, 14.5 million people were self-employed, down 2.1 million from the most recent peak in December 2006, according to Bureau of Labor Statistics data.
  • The number of "incorporated" self-employed workers — those who incorporate to gain legal protection and other benefits — began its decline in 2008. Last month, 5.1 million people were in this category, down 726,000 from August 2008.
  • The decline is a "troubling" trend, says Scott Shane, professor of entrepreneurial studies at Case Western Reserve University. This category, which usually represents businesses that hire more employees than the "unincorporated" self-employed, was showing healthy growth before the recession, he says.  
  • Unincorporated self-employed — at 9.4 million last month ....(is) hovering at its lowest level in 25 years, says BLS economist Steven Hipple.

The article points to a few major issues on why the self employed are not thriving during this 'rebound' (again I'd point to lack of end demand as reason #1 but not cited in the story)
  • Financial issues. With tightened bank lending, reduced savings and sluggish consumer spending, many can't afford to start a business or keep an existing one going. Adding to the trouble: Diminished home values make it difficult to get the home equity loans that the self-employed often use for capital. (that is a very good point - home as the ATM machine was a big driver of spending and 'credit' mid decade)
  • Vocational moves. Self-employed workers who have lost income-generating opportunities — such as real estate agents and construction workers who were victims of the housing market's slide — could be moving to more secure lines of work or opting out of the workforce altogether, says Ellen Rissman, a Federal Reserve Bank of Chicago economist. 
  • Psychological worries. "Constant news about the difficult economy makes people hesitant to venture out on their own," says Kristie Arslan, CEO of the National Association for the Self-Employed. (reduced risk taking which is a strike to the heart of the American experience - instead a generation hunkers down just content to survive)


Leaker in Chief Jon Hilsenrath Puts Finishing Touches on Fed's Committment to Act

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As I said a few weeks ago, the Fed will use the Wall Street Journal's Jon Hilsenrath as a source to leak what they will be doing in the late September meeting.  The market does not like surprises so Ben wants the whole world to be prepared ahead of time.  Jon's latest story could not be titled in a way to make things obvious - 'Fed Prepared to Act'.  I think this was already obvious to those following markets closely (10 year yields have already plummeted, doing the Fed's work in advance), and by the reaction post speech by the market after an initial moment of confusion (giddiness!) - but it's clear as day now.

Here are the options, with 'Operation Twist' gaining steam.  QE3 seems like it will come later down the pike - woo hoo.  Just like stimulus is now an annual event, it appears so will unconventional means of monetary easing.  With gas at $3.85 locally, I can't wait for the full QE3 later this winter!

  • Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.
  • One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities. The move—known to some in markets as "Operation Twist" and to some inside the Fed as "maturity extension"—is meant to further push down long-term interest rates and thus encourage economic activity. The program draws its name from a similar 1960s effort by the U.S. Treasury and the Fed, in which they tried to "twist" interest rates so that long-term rates were lower relative to short-term rates.
  • Anticipation of the move—along with grim economic news and the Fed's public plan to keep short-term interest rates near zero through 2013—has helped push yields on 10-year Treasury notes, above 3% in late July, to around 2%.
  • A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank
  • The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. Some officials believe the Fed shouldn't reward banks for holding cash instead of making loans
  • A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.  Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates.

Home on the Range

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After the market broke a key long term support (the 200 day moving average) in early August, it has been quite a wild and wooly ride.  Stock picking has once again been thrown out the window and everything has turned into a macro economic or government/central bank intervention news headline market.  In the bigger picture the broader market, and S&P 500 in specific, have become range bound in a 100ish point range, 1120(ish) to 1220(ish).  We've only been below that area once (on the Fed announcement day) and above it twice (last week). 

[click to enlarge]



Hence, all the analysis and discussion during the movements in this range really don't mean much other than those making 1-3 day trades, or for daytraders.  All of the key longer term moving average (50, 100, 200) are now trending down, and the index has not been able to yet jump back through even the weakest of these three resistance lines.  Until we see that, it remains a sell on rally market.

If you twisted this chart upside down, we'd be consolidating after a big move up (bullish), so you have to respect the setup until it changes as right now we are consolidating after a big move down (bearish).  At this point I'd like to see the S&P 500 over 1250 on a good bit of volume to return to anything other than neutral on the market.

Mr. Bernanke speaks at 1:30 PM so traders will look for pixie dust, and then Obama tonight.  Otherwise Europe seems to have taken most of the focus this week.

Wednesday, September 7, 2011

Obama's Speech Tomorrow - $300B More in Stimulus?

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Due to the structural issues in the economy 'stimuli' is now becoming an annual event. We started with the Bush rebate checks of 2008.  Of course we had the mega stimulus ($900Bish) launched in spring 2009 that generally covered 2 years (apprx $450B a year).  That was topped off with a 2% payroll tax cut (I believe roughly $120B) beginning in Jan 2011.  Not to mention the extension of the Bush tax cuts late last year.  All put together, this has generated pretty flaccid GDP over the past few years.  But it's time to inject the patient with more steroids since the hollowed out economy no longer has the ability to function on its own.  (We won't even discuss never seen before monetary policy)

Reuters reports we'll be getting a $300B plan, with a resumption of the 2% payroll tax cut, along with more infrastructure plans (remember when all those companies surged in late 2008 and early 2009 on 'shovel ready projects'?) and more state aid similar to what we saw in the 09 plan.  At first I thought it sounded like '2009lite' in regards to the 2009 plan but that one was set to run over 2 years, and considering this is all supposed to go into 2012, its not that much less on an annual basis than the 09 mega stimulus.  Election year after all ...

"Of course" in the current environment this new spending will be offset by 'proposed' revenue measures - which I am sure the GOP will gladly go along with.  So in summary it will be more spending without any funding ;)  Or some far off (think 2019) 'cost neutral' nonsense offset.


  • President Barack Obama plans to propose some $300 billion in tax cuts and government spending, U.S. media reported.  The price tag of the proposed jobs package, to be announced by Obama in a nationally televised speech to Congress on Thursday, would be offset by other cuts that the president would outline, CNN reported, citing Democratic sources
  • Bloomberg News said the plan would inject more than $300 billion into the economy next year through tax cuts, spending on infrastructure, and aid to state and local governments.
  • Obama would offset those short-term costs by calling on Congress to raise tax revenues (this is where you laugh)  in a deficit-cutting proposal he will lay out next week, the news agency reported, without citing sources.
  • Bloomberg said nearly half the stimulus in Obama's plan would come from tax cuts, including an extension of a payroll tax cut paid by workers and a new decrease in the amount paid by employers. (and as we saw yesterday, the temporary payroll tax cut for employers will do nearly nothing...by the way arent these 6.2% payroll taxes supposed to be filling the [empty] social security lockbox??)
  • Direct aid to local governments will focus on stopping layoffs of teachers and first responders, Bloomberg said.

Let the circus begin:

  • "I have no doubt the president will propose many things on Thursday that, when looked at individually, sound pretty good, or that he'll call them all bipartisan. I'm equally certain that, taken as whole, they'll represent more of the same failed approach," said the top Senate Republican, Mitch McConnell.


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