Tuesday, September 27, 2011

The Steve Liesman Market

Much like it was the Charlie Gasparino market a few years back (remember the nearly daily rumors about solutions or bailouts for MBIA and Ambac? they now seem quaint), it is now the Steve Liesman market - he says bailout, the market cheers... he says not so fast, the market cries.

It's all become a bit ridiculous, but this is what happens when the entire market is based on politicians and central bankers.

Nice 20 point drop there in the last hour or so on the S&P 500 - would have been 25 if not for that U-turn in the closing minutes.

More "constructive" action (tongue in cheek)....

So tomorrow put your chips on black or red!  Or what Steve Liesman reports!

Money Interviews Richard Koo - Are We the Next Japan?

Richard Koo is a well respected economist, but he does not get much play on the major U.S. business infotainment channels.  He is probably considered the foremost expert on the malaise that has been Japan the past 2 decades.  Money magazine just published an interview with the man, and his comments are quite interesting.  Warning for those leaning right: on first glance, he sounds like Krugman-lite, although his framework is a bit different.


  • There's no shortage of debate as to whether the Obama administration and Congress have done the right things in attempting to avert a debt crisis and revive the stalled economy. Richard Koo, the chief economist for the Nomura Research Institute, a Japanese think tank, says that government spending is the key to getting the economy back on track -- and that 2009's massive stimulus package didn't go far enough
  • While Koo's kind of thinking is decidedly unfashionable, there are good reasons to listen to him. A Japanese-born Taiwanese-American, he worked at the Federal Reserve Bank of New York in the 1980s. For the past 27 years he's lived in Japan, studying its economy in depth and writing what many consider the definitive analysis of Japan's "lost decade" -- "The Holy Grail of Macroeconomics: Lessons From Japan's Great Recession." Koo, 57, recently spoke with MONEY senior writer Kim Clark; their conversation has been edited.

Why do you say that this recession is different from others the U.S. has had?
Typical recessions are part of normal business cycles, when overconfident businesses overproduce and then have to cut back. This is what I call a balance-sheet recession. It's caused by an overload of debt.  It's a very rare type of recession that happens only after the bursting of a nationwide asset bubble, like a real estate bubble. Once the bubble bursts, the debt remains. The assets, in this case homes, are underwater; their prices are way down, but all the consumers' original debt remains.

The Federal Reserve recently said it won't raise interest rates for two years. Won't that help?
No. Monetary stimulus doesn't work until balance sheets are repaired.  Right now consumers are using their cash to pay down their debt. The economy is depressed because no one is borrowing or spending. Consumers don't want to borrow, even at [very low] interest rates. And lenders don't want to make loans to consumers who will struggle to pay them back. You need fiscal stimulus. That means the government should borrow and spend the money in the private sector.

When Japan fell into recession about 20 years ago, we had no idea what was happening. Interest rates were lowered to zero, but the economy still did poorly. Every time the government stimulated the economy, it rebounded nicely. Then when they pulled back, it lost steam again.

Some people look at Japan and say the government spent huge sums on public projects and there was no real growth, so spending didn't really cure the economy.
The early '90s recession in Japan was far worse than people realize. Commercial real estate prices nationwide in Japan fell 87% from the peak. Imagine U.S. housing prices down 87%. The fact that the Japanese government halted what could have been an enormous drop in GDP in the early '90s speaks to the success of its economic policies.

But Japan did suffer a major recession again in 1997.
The Japanese made a horrendous mistake in 1997. The Organization for Economic Cooperation and Development and the International Monetary Fund said to Japan, "You are running a huge fiscal deficit with an aging population. You'd better reduce your deficit."

When the government cut spending and raised taxes, the whole economy came crashing down.
I see exactly the same pattern in the U.S. today. If the government acts to cut the deficit while people are continuing to pay down their debts, then we could have a second leg of decline that could be very, very ugly.

Since 2008 the Fed has been trying to boost the economy -- and prevent price deflation -- by buying Treasury bonds. What has that done?
The Fed's so-called quantitative easing has failed to contribute to economic growth. By taking the new Treasury supply away, it forced the private sector to put its money into equities, commodities, or real estate.

With real estate in a tailspin, the money went to commodities and equities on the assumption that the economy or profits would pick up. The effect was to push stock prices to higher levels than could be justified by genuine cash flow or corporate growth.  Now, with fiscal stimulus disappearing and GDP growth slowing, people have realized that equity prices are essentially overvalued, and that is the correction we are currently seeing.

So are you saying that the stimulus package didn't go far enough?
Obama kept the economy from falling into a Great Depression. But you never become a hero avoiding a crisis.  The economy is still struggling, so people say that money must have been wasted. Not true. The expiration of that package is behind the economy's weakness right now. Yes, the Bush tax cuts were extended last year, but tax cuts are the least efficient way to support the economy during a balance-sheet recession because a large portion of the cut will be saved or used to pay down consumer debt. Government spending is much more effective.

MONEY recently interviewed Carmen Reinhart, an author of what's now thought of as the authoritative history of financial crisis. She warned that economies that build up gross deficits in excess of 90% of GDP weaken significantly. The U.S. recently passed that mark.
Before the next balance-sheet recession comes, you'll have plenty of time to cut the deficit. (Mark's note - in theory the government should cut back in good times, and spend in bad times.  The reality is the government never cuts back during good times, because everyone is drinking Kool Aid and wants to get re-elected

Of course, Congress recently committed to slash our deficit by $2.5 trillion as part of the agreement to avoid default.
It is good that Congress managed to avoid default. But they should keep in mind that Japan's deficit actually increased when the government tried to cut the budget while the private sector was paying down debts. The cutback caused a second recession.

Think about the Great Depression; war spending is what finally pulled the economy out.
The Japanese government didn't do enough spending in the early 1990s and added another 10 years to the problem. If the U.S. avoids that mistake, maybe in a couple of years you will be out of this mess.

Two Days, and Already Almost Up to Resistance

The S&P 500 is about 15 points away from the first resistance, up there at the 50 day moving average.  We've cleared well over 4% for the 'week' (a day and a half).

Some funny comments on CNBC from Steve Liesman - this rally essentially started yesterday afternoon around 2 PM after he was used as media leak broke the news of the latest grand plan for Europe.  Today he is out saying if the market is rallying on my rumor, it is ahead of itself.  Just have to love this market nowadays.

“if the market is going up on my rumor, it is ahead of itself.” 

[Video] Bloomberg - Thoughts from PIMCO's El-Erian on Europe, and Goldman Jan Hatzius on Chance of U.S. Recession

Below we have 2 videos from Bloomberg from two of the world's most watched mavens.  Frankly, Jan Hatzius has had a rough year in forecasting - he was amongst those who was calling for 4% type of growth in the U.S. economy, and seems to have been blindsided by the turn in the economy.  That said, he is generally a smart man.  El-Erian of course is usually the brightest bulb in most rooms he is standing in.

(Unfortunately, I don't see a way to stop the Bloomberg videos from auto starting - so you will have to pause one video to watch the other)

4 minute video with El-Erian

7 minute video with Hatzius

Sledding Remains Tough for Cities

Back in the real economy.....

While state revenue is still down about 8% from levels seen 3 years ago, it has improved somewhat from the depths of the Great Recession [Sep 1, 2011: Positive News - U.S. States' Q2 Tax Revenue Up 11.4%]  The situation at the city level is not faring as well, as the latter relies far more on property tax revenue.  That revenue actually help up better during the leading edge of this slowdown, as tax assessments have a long lag time, but with foreclosures and sales (and I assume a lot of property owners petitioning to get a far lower assessment) over the past few years, the actual impact has been hitting more recently.  Of course that is only one side of the ledger (inflows) - expenses continue to balloon as promises made during the heyday of the bubble (and earlier) come due.  Bloomberg takes a look at the situation at the local level.

  • For U.S. cities, the effects of the real-estate collapse and the recession it helped spark in 2007 are showing few signs of ending. More than half, 57 percent, of municipal officials said finances were worse in fiscal 2011 than in 2010, the National League of Cities said today, citing a survey of municipal officials. 
  • Inflation-adjusted revenue is headed for a fifth- straight annual drop, while worker health-care and pension costs rose for more than 80 percent. Half said state aid has declined.
  • The plight of cities has exerted a drag on the economy as local officials move to cut spending to cope with diminished tax collections and reduced assistance from states dealing with their own budget deficits, government data show. More than a half-million jobs have been cut from municipal payrolls in the past three years, according to U.S. Labor Department figures. States have slashed 1.3 million positions since August 2008.
  • The real-estate rout that’s pushed down home prices in major metropolitan markets by almost a third from the July 2006 peak has cut into property levies, while ebbing consumer confidence has curbed retail sales-tax collections by municipalities. They are also shouldering rising medical-care expenses for workers and face widening unfunded pension liabilities after tumbling markets led to losses in 2009. 
  • Local governments have only recently begun to feel the full brunt of the housing market’s drop because values used for taxes typically lag behind markets by 18 months or more, according to the League. Receipts likely will decline in fiscal 2012 and 2013 for the same reason, the group said.
  • On the whole, cities are paying their bills and balancing their budgets by eliminating jobs, canceling projects and charging more for services, Hoene said.  Half of cities cut or froze employee pay, 31 percent fired workers and 30 percent cut health-care benefits, the League said.
  • Three out of five municipalities delayed or canceled “capital infrastructure projects,” according to the survey. Mayors and city councils also took steps to increase revenue. Fees charged to residents were raised in 41 percent of cities, while 23 percent imposed new charges and 20 percent raised property-tax rates, the League said.
  • Given the direction of the economy, it may be two to five years before local revenue grows enough to let cities fully emerge from the slump spurred by the recession that ended in June 2009, Hoene said. A housing market recovery will be key to any rebound, given the dependence on real-estate taxes.
    • The survey of 1,055 municipal finance officers, including those in all U.S. communities with more than 50,000 residents, was conducted by mail and e-mail from April to June. The results are based on 272 responding cities.

[May 25, 2011: WSJ - State Tax Revenue Improving, but Local Governments Struggling]

Everything is Looking Up

(note: original title for this post was "Risk On!!")

Unlike the past 4-5 days, this is truly a "student body left" day, as even gold (+5%) and silver are ramping sharply this morning, along with crude oil.  The mega bailout proposal from Europe has everyone giddy - although it was a strange delayed reaction yesterday.  Apparently all the world's economic ills won't matter this week - we'll worry about economic reports next week.

The market the past two and half weeks is starting to look like a sign wave - huge swooping moves up and down.  Two weeks ago it was a 6%+ rally, last week was a 6%+ fall, and this week we are well on the way to a 6%+ rally, 2% up yesterday and this morning we have another 1.5%+ in the can just in the premarket.

The mega range of 100 points from 1120 to 1220 remains the one people are trading, and with 4 days left in the quarter normally we get our quarter end "mark ups" in days 2-4 before the end of quarter (Friday), which would be Tue-Thur.   Yesterday we were talking downside targets - and now in this bipolar market we immediately have to switch to upside targets.  Normally, I'd say S&P 1220 - because saying that has worked the past few months, but that 50 day moving average is now down to 1205ish, so I'll be curious if that provides resistance.

It remains a market to simply buy en masse, or sell en masse on political macro headlines - very little thinking at this time.  I look forward to October and some earnings reports, so we can react to something other than breaking news from said European officials.

Monday, September 26, 2011

Bit of a Head Scratcher Today

The action today has me a bit confused.  I expected a big rally off the open on the bailout framework in Europe.  Instead we have bounced around between negative and positive, or unchanged until around 2 PM - and then the furious rally of 2% to close out the day.  The one I expected at the open.  The only thing I can see on the newswire is some European officials saying "no, we're really quite serious about recapitalizing the banks".  CNBC also is breaking what appears to be a new 'twist' on the bailout.

It would have been a lot more typical if we gapped up and rallied within the first 30 minutes and then went sideways at the +2% level most of the rest of the session.

But either way our pattern of massive moves continue.  We had a +6% week followed by a -6% week, and already we have 2% down this week, 4% to go.  "Healthy" action... not.


This seems to be another plan - not sure if it's the same one we discussed this morning.  It's a new twist as far as I can tell, with the same intent. Now they are talking about a "special purpose vehicle", funded by the EFSF.  Then that vehicle would issue bonds.  With the money from the bonds, the SPV would purchase the sovereign debt.  It's so circular at this point, it's beyond me.  I assume some of these maneuvers are done to avoid having to go back to individual governments and getting approval.
  • The plan appears to have a lot of moving parts. It would involve money from the European Financial Stability Facility (EFSF), a bailout vehicle created in 2010 to alleviate the sovereign debt  crisis in Europe, to capitalize a special purpose vehicle that would be created by the European Investment Bank, a bank owned by the member states of the European Union.  The special purpose vehicle would issue bonds from investors and use the proceeds to purchase sovereign debt of distressed European states

And since the ECB cannot at this moment buy sovereign debt from EU nations directly - it can instead "buy" it from this special purpose vehicle.  Although we'll call it collateral to make the ECB feel 'pure' and not just another The Bernank.  Oooohhh, creative....
  • The bonds issued by the special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages.
  • Although the structure is complex, the underlying result is relatively simple. Banks would essentially be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle created by the European Investment Bank capitalized with funds from the EFSF. In some ways, this resembles the original plan for the Troubled Asset Relief Program (TARP).

      WSJ: Do 'Alternative' Mutual Funds Deliver?

      Interesting piece in the WSJ, on the difficulty of balancing upside gains versus downside protection in the growing sector of the mutual fund marketplace: 'alternative funds'.  I think in an environment where correlations are so extreme, and headlines from politicians and central bankers mean more than company fundamentals, it's not an easy environment for anyone.  [Jun 13, 2011: The Reformed Broker - Stockpicking is Hard]  It's a very atypical environment.  That said, when the headlines were a bit less prevalent such as latter 2009 and first half 2010, one should have been making some hay.  A little use of technical analysis - which seems almost completely absent in the mutual fund world - would help performance in my opinion....

      • Amid a rocky few years for U.S. stocks, investors have poured billions of dollars into "alternative" mutual funds, which employ strategies used by hedge funds to protect against stock-market declines while still providing growth.  In general, the funds have held up reasonably well during stock-market selloffs—but many have squandered that advantage by missing out on rallies.
      • Investors have flocked to alternative mutual funds in recent years, and more than half of all such funds have been launched in the past three years. (I was ahead of the curve) Assets in the two biggest categories have essentially doubled—to $18.6 billion today from $10 billion in 2006 for "long short" funds and to $20 billion from $7.4 billion for "market neutral" funds over the same period.
      • The recent period of high volatility "is precisely the market environment when you would want these funds," says Nadia Papagiannis, an analyst at investment researcher Morningstar. But she calls the funds' three- and five-year track records "disappointing."
      • Alternative funds typically have wide latitude to reduce their exposure to the stock market by using futures, options and other derivative instruments, and by selling stocks short—that is, betting that a security's price will fall. Some pursue "arbitrage" strategies, which involve betting on price discrepancies between investments.
      • Long-short funds can bet both for and against stocks and are designed to lose much less than the stock market during downturns. Over the past three years, they have fallen by an annualized 1.17%, according to Morningstar. By contrast, the Standard & Poor's 500-stock index gained an annualized 0.02%.  Over the past five years, the category posted an annualized loss of 1.28%, versus a loss of 0.9% for the S&P 500.
      • From Jan. 1 to July 22—a period in which the S&P 500 jumped 8.1%—the average long-short fund gained just 1.25%, participating in only 15% of the market's rise.
      • Managers say long-short funds have performed as they should. This breed is "not designed to slaughter the S&P 500," says Jonathan Lamensdorf, manager of the Highland Long/Short Equity Fund, which has outperformed most of its peers over the past three years. Instead, he says, the funds strive to provide returns similar to equities, with fewer ups and downs.
      • While market-neutral and long-short funds still dominate the alternative-funds category, it has expanded in recent years to include currency funds as well as managed-futures funds, which can invest in futures contracts in a variety of markets; bear-market funds, which profit when markets decline; and multi-alternative funds, which use a variety of strategies.

      [June 11, 2010: CBSMarketwatch - More Investors Turn to Flexible Mutual Funds
      [Nov 24, 2009: Bloomberg - Investors Rushing into Alternative Mutual Funds]
      [Nov 12, 2009: WSJ - More Mutual Funds Attempt to "Time" the Market
      [Aug 4, 2009: WSJ - Mutual Funds Try "Hedge" Approach in Effort to Trim Stock Losses]
      [Apr 10, 2009: More Stock Mutual Funds Declare Cash is King]

      "Risk On!!"

      Haha, ok I could not resist.  I promise that's the last "RISK!" headline of the day. Apple has reversed 2% of its loss (from -3% to -1%) and so with that the whole market can now run.  Commodities also catching a bid after being trounced.  These are massively oversold after the action last week.. 

      As an aside the 50 day (exponential) moving average has dropped from 1217-1218 to 1205-1206 area, so if we go to the upside of the range we have been in for 2 months, I will be curious if the S&P 500 stalls near 1205 or still goes to the old highs of 1220.

      It is bemusing to watch the mood changes by the hour nowadays...

      "Risk Off!"

      Quite an ugly reversal this morning.  I don't see any real news - the market was selling off way ahead of these fugly new home sales figures.   With sentiment so poor I thought the news of a framework for an eventual European bailout would spring this market at least for a day, but not so much.  Apple (AAPL) is down around 3% on news a supplier has cut production by 25% on iPads, which seems to have spooked the market.
      • JP Morgan’s Gokul Hariharan, who covers contract manufacturer Hon Hai Precision, writes that the assembler of the iPad appears to be cutting production of the iPad for Q4, citing multiple sources from the electronics supply chain. 
      • Hariharan writes that the cuts, the first he has heard of ever for the iPad, appear not to be prompted by share loss, as Hon Hai seems destined to try and hold onto 100% of the business, shutting out competitor Pegatron. He notes the cuts are also not tied to any new iPad introduction, as that is unlikely to take place until next year some time.

      Some are speculating Foxconn is moving some production to Brazil, hence the cutback in China, but the reason doesn't really matter.  Apple is down, and if the stock everyone is hiding in can't rally, the market is going nowhere fast.  The NASDAQ has about a 1% negative divergence to the S&P 500 at this moment.

      S&P 1120 continues to be a level every human (and his/her computer) is staring at.  I would have thought it would have broken by now, but an immense fight to support that level ensues each time we have hit it the past 2 months.  Based on how poor the longer term set up is technically for the S&P 500, it seems like this level will finally crack at some point.  Remember if you turn this chart upside down, it looks like a basing moment before the next move up - hence, when we look at it the right side up, you can make the easy conclusion on where the next move should be.

      What is being somewhat lost in the Europe mess, is the global economy appears to be slowing dramatically.  Next week is the doozy for global data (global PMIs, ISMs, unemployment report).  I wonder if it will take one of these reports to crack that 1120.

      p.s. I find these CNBC terms "Risk On", "Risk Off" to be incredibly annoying - I am using them almost daily now, in very tongue in cheek fashion.  It's irritating to see the entire market move in lockstep.

      Facebook Now Uses Up 16% of Time Americans are Online, Pasing Google's 11%

      While Groupon and Zynga failed to strike while the iron was hot for their 2011 IPOs, everyone waits on the big one - Facebook (coming to a theater near you in 2012).  While I'm not a user, apparently there were some major changes to the site in the past week, and change always causes a ruckus.  WSJ's Marketbeat blog has some interesting notes from Citi's Mark Mahoney on the monster that is Facebook - it now sucks up 16% of all time on the internet by Americans, passing Google's 11% and Yahoo's 9%.  More important in that note is potential implications for advertising as Mahoney believes more search will move to the Facebook platform - and hence away from the other two.

      As people spend more time on Social Media sites, it would be logical to assume that they would do more Search activity on these sites. Use of portal sites and direct entry (to Websites) appear to have declined as a means to Search for content. Today, most of the Searches done on Facebook are “people” searches, but as Facebook increasingly socializes content and commerce, we would expect people to find rich Search results influenced by social signals from their friends.

      Social networks predominantly earn revenue via Online Display advertising and a majority of the ad spend comes from self service (i.e. advertisers posting ads directly themselves). Inventory remains relatively inexpensive; engagement time is high, and therefore inventory levels are significant. This is reflected in the growth in share of Ad impressions in the US over a year from little over 20% at the end of 2009 to 34% at the end of 2010. More specifically, per comScore, Facebook was number 1 based on Ad impressions in 2010, and delivered almost double the number of Ad impressions as the next closest player.

      [Mar 5, 2010: WSJ - Facebook CEO in No Rush to "Friend" Wall Street]

      "Risk On!" As Mega Bailout Package for Europe Takes Shape

      I woke up this morning around 4 AM EST, and was surprised to see futures doing nothing in the U.S. as a plan seems to be forming in Europe to copy the United States of Bailout plan for 2008.  A few hours later they are ripping higher.  While there is still a long road to get 17 countries to agree and pass something along these lines we have a European sort of TALF + TARP + FED taking shape.  Ironically this is essentially what Tim Geithner instructed Europe to do a week ago, before he was sent home with his tail between his legs.  But after a week of market turmoil, European ears are far more 'constructive' towards learning how Americans bail out bankers.

      In summary what the master plan appears to be is keep Greece on life support with bailouts, until Europe reaches a point the ECB + ESFS (on steroids) can take over, and provide enough of a ring fence around Italy and Spain.  Then Greece can go through with an orderly default, and said ring fence would be so massive as to mock speculators.

      Now just a week ago the ECB wanted to hand off all bailout responsibilities to the ESFS (think European TARP), but with the potential for an "unlimited" balance sheet, the ECB is the bazooka (in Hank Paulson's terms) waiting to be unleashed.  That's not in their charter, as the ECB used to be the 'hard money' central bank, but the world is quickly changing.  With Trichet set to leave later this year, and all sorts of Germans (hard money types) either being pushed away (Axel Weber) or resigning over how the ECB now acts, once Mario Draghi comes into power - we should be ready for the ECB to act much more like the Fed.  Much as it was (and is) in America it is much easier to have the central bank do the dirty work rather than a federal government.  But to that end the original ESFS (which was around 440 billon euro) will now be levered up - potentially to 2 trillion+ euro (with backstops and guarantees from the ESFS and ECB) and be the [potential] bailout fund for Italy and Spain.  The idea here is to make the backstop so big, that it won't need to be used.  Again, this is a mimic of the United States plan.  The only thing missing is a change in accounting rules so the banks can mark debt on their balance sheets to whatever they see fit, rather than to current market prices.

      So while solving little other than creating a huge moral hazard, creating an epic kick the can moment, and pushing more private sector debt into two 'off balance sheet' accounts (ESFS + ECB), we as market speculators rejoice.  Because in "free market capitalism" we want the government out of our hair as long as the market is going in the right direction, but the minute prices go in the wrong direction we demand they deliver the taxpayers money to us.  Of course we are now dealing with 17 governments rather than Hank Paulson running to Congress with 2 sheets of paper demanding a trillion, so the process is going to be quite messy.

      Here is an outline of the plan via UKTelegrap

      • German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiralling out of control.  Their aim is to build a “firebreak” around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered “too big to bail”.
      • According to sources, progress has been made at the G20 meeting in Washington, where global leaders piled pressure on the eurozone to fix its problems before plunging the world back into recession. In a G20 communique issued on Friday, the world’s leading economies set themselves a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.
      • First, Europe’s banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders.
      • Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) – the eurozone’s €440bn bail-out scheme. 
      • The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target
      • The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”. If the EFSF bore the first 20pc of any loss, the fund’s warchest would effectively be bolstered to Eu2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion. 
      • Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic. 
      • As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50pc – more than double the 21pc proposal currently on the table. A new bail-out programme would then be devised for Greece.
      • Officials would hope the plan would stem the panic in the markets and stop bond vigilantes targeting Italy and Spain, which European and IMF figures believe should not be in any immediate distress but are in need of longer-term structural reform.

      Sunday, September 25, 2011

      [Video] Austan Goolsbee, Mohamed El-Erian, and Chrystia Freeland on ABC's This Week

      A decent roundtable here on this morning's This Week - considering the caliber of participants - especially El-Erian and Freeland, I was a bit disappointed with the discussion.  Goolsbee, who used to make a lot of sense when he did guest appearances on CNBC 3-4 years ago, is fresh off his stint at the White House and offers nothing substantial other than (in so many words) "we can't do anything about the global situation except focus on U.S. growth".  George Will offers the typical right leaning fare you'd expect.  Freeland, who I enjoy most of the time, seemed a bit alarmist at the beginning but eventually became more interesting.  El-Erian was the only one who really shined...

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

      video platformvideo managementvideo solutionsvideo player

      WSJ: Market Rout Claims New Victims - Precious Metals (GLD) (SLV)

      I wrote late last week that the action in precious metals the past few days smelled of liquidations; the action was very similar to what we saw in 2008 when institutional money was selling what they were forced to, not necessarily what they wanted to.  Silver ended up losing almost 1/5th of its value Friday alone! The WSJ delves deeper into this topic, claiming European banks were also selling to help raise more capital:

      • Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold's worst week since 1983
      • Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.
      • Investors have grown increasingly skeptical of policy makers' ability to revive the global economy, and of their willingness to bring about a resolution to the European debt crisis.  The broader rout has left many investors with unexpected losses, driving some to part with some of their better performing investments, among them gold and silver.  
      • The declines are a turnabout for gold, in particular, which has recently found strong demand in good times and bad. It has enjoyed a special status as a safe haven from financial crisis and political turmoil, as well as a hedge against inflation.  Gold has risen six-fold in the past decade, including a 15% gain this year..
      • Some hedge funds were selling to raise cash to meet margin calls from lenders. Other investors were using proceeds of silver and gold sales to replenish other parts of their portfolios, which had fallen in value in recent sessions, said George Gero, precious metals strategist at RBC Global Futures.
      • In addition, it appeared that European banks were selling gold, possibly in order to raise cash and shore up their balance sheets, Mr. Gero said. This selling was then magnified by so-called momentum traders whose strategy is to piggyback on moves up or down in price.  
      • Silver faces the added woe of being widely used in industry, and therefore vulnerable to fears that weak economies will consume less. Moreover, the Shanghai Gold Exchange said Friday that it will expand the upper and lower trading limits for its silver contract.
      • The fact that gold is falling along with other assets complicates life for those who bought gold because they thought it would rise or fall independently.  "There is nowhere really to hide at the moment," said Fredrik Nerbrand, global head of asset allocation at HSBC.  (well technically that's incorrect - U.S. Treasuries have been having a ball)

      The NYT also chimes in with - A Gold Rush Wanes as Hedge Funds Sell
      • Some traders said that hedge funds were beginning to unwind, or close out, what has been a very popular and profitable trade for the last 18 months as they bet the dollar would fall and that gold would rise. In the last month alone, the euro has fallen nearly 4 percent against the dollar amid worries about the European debt crisis. 
      • Other market participants said hedge funds were selling their positions in gold to raise cash to meet increased capital demands for their borrowings from Wall Street banks as the assets they have put up as collateral, like other commodities or stocks, have declined sharply in value
      • Others say some hedge funds may be selling to meet redemption requests from investors who have been spooked by the recent market volatility and fear a repeat of the problems of late 2008. “The tendency for individual hedge funds or anybody is to sell winners before they sell losers. What’s been one of the few winners this year? It’s been gold,” Mr. Gayed added.

         No positions

        Friday, September 23, 2011

        Stocks Are Not Supposed to Fall in the 3rd Year of a Presidential Term

        While I dont take much stock in things such as Super Bowl indicators or hem line indicators in terms of giving us a tell on where the economy or market is heading, one quite prescient indicator has been a simple one - the third year of a presidential term indicator.  Generally, as a president heads to a re-election year he tries to push through some beneficial packages to help stoke the economy - which often leads to artificial bumps in GDP and profits - hence stocks follow.  But in this case, we've been on massive stimulants for years in a row.  We did get a new payroll tax reduction and extension of the Bush tax cuts in late 2010, but the market has increasingly needed ever larger steroids just to keep going sideways.  If we were in normal times, the type of package passed in early 2009 would have been something usually reserved for 2011 (although of course we normally don't see stimuli of THAT scale).  Of course, we also have the minor issue called Europe wrecking havoc to this indicator.

        The WSJ's Kelly Evans reports on how rare it is for the market to suffer losses in 3rd years of the term - please note, we could have a massive rally still to come in the next 3 months to make the trend continue. ;)

        • So much for the third-year rally.  One reason Wall Street was so bullish on stocks going into 2011: This is the third year of President Barack Obama's term. Typically, "third years" are great for stocks.  Since 1962, the S&P 500-stock index has on average gained 19% in the third year of a presidency, according to Birinyi Associates. 
        • Going back further, GMO's Jeremy Grantham noted last fall that in only one of 19 such post-World War II periods have stocks ended down for the year. As he put it then, "Who wants to bet on the 20th being different this time?"  
        • Well, 2011 is different all right. The S&P 500 is down 10% year to date.
        • That isn't because the typical drivers of the third-year rally, fiscal and monetary stimulus, aren't in place. Rather, it is because they have been trumped by the severity of this economic malaise. That doesn't bode well for 2012.
        • Even if President Obama's proposed "American Jobs Act" were to pass in its entirety, it would only move fiscal policy from being a 1.25-point drag on GDP next year to being roughly neutral, according to Goldman Sachs. In reality, a watered-down version is more likely.
        • Of course, the economy could somehow strengthen on its own. But hoping for a miracle isn't much of an investment strategy.
        Ms. Evans has become quite the cynic....

        Another Remarkable Chart - Remember that Hot IPO E-Commerce China Dang Dang (DANG) - the "Chinese Amazon.com"?

        Just scrolling through some charts on this quiet day and there is some remarkable action out there.  The hot "next generation" Chinese internet IPOs really caught my eye since Youku.com (YOKU) (the "Chinese Youtube!!") is up nearly 20%.  But that's not the name that caught my eye - instead the chart of E-Commerce China Dangdang (DANG) (the Chinese Amazon.com!") almost had me falling off my chair.  Look at this hot mess that our Wall Street bankers were happy to bring to market to feed the frenzy.  You see who made the money in the end - those "very good customers" (also known as 'smart money') who dumped the shares day 1 on the public, and the bankers who made the fees.  Anyone else?  A disaster. 

        [click to enlarge - but hide the children]

        At $5 - heck I may take a second look to see if there is some value.  Market cap is now $430M.  That's down from "STUPID" 9 months ago.  Sub $500M is probably what the value should have been at IPO.  I remember the price to sales ratios on all these "the Chinese version of (insert American internet company)" were off the charts. Sadly, I thought this one had a better business model than Youku.

        [Dec 8, 2010: Meet China's Newest Billionaire - E-commerce China Dangdang's CEO Peggy Yu Yu]
        [Jan 18, 2011:  Morgan Stanley Does *NOT* Initiate Coverage on E-Commerce China Dangdang]
        [May 20, 2011: E-Commerce Dang Dang - Paying Up for Growth, not Profits]

        No position

        Hedge Funds Must be Liquidating Out of Precious Metals - Silver (SLV) Obliterated Past 2 Sessions

        While gold has been hammered off a bearish double top formation [Sep 7, 2011: Potential Double Top in Gold]  (and what i assume to be hedge fund liquidations - i.e. sell what you can), silver had a double whammy as it's part industrial metal, and part precious metal.  With the thumping in the cyclicals and commodities (see copper!), silver is getting pounded from both ends.  I am using the silver ETF (SLV) for charting purposes - you can see the carnage. 

        [click to enlarge]

        File this under the headline "When hedge funds are forced to sell" - reminds me of a lot of commodity stock action summer 2008 before the Lehman crisis.  They were the one area everyone was hiding out (me included) and then BOOM!

        Thus far the Donald Trump top seems to be in! [Sep 16, 2011: Did Donald Trump Just Mark a Near Term Top in Gold?]

        No positions

        Hewlett-Packard's (HPQ) Leo Apotheker Takes a $25M Severance Package Out the Door, after 11 Months of Work

        This is not quite on the level of the $200M Home Depot paid Bob Nardelli to be shown the door, but Nardelli worked more than 11 months.  In another sign of the completely broken down and corrupted board of director/CEO system (one even Carl Icahn can rarely break through), Mr. Apotheker received $25M in cash and options as a bonus for his good work for 11 months.  One wonders why what is good for the goose is not good for the ganders - shouldn't every American worker get a nice fat bonus for being fired?  I mean we want to align interests of management with workers right?

        I'll leave the rest of the piece without comment, as we've gone over this topic ad nauseum in 2008/2009.  Ok one small comment - I do continue to be in awe of a system which if was in place for the worker bees would allow IT (or HR, or sales, or accounting) workers at peer companies to set the pay for IT workers at other companies.  As everyone 'helps' their peers at fellow companies the circle of good vibes would lead to massive wage inflation.  Not shockingly, this is exactly what has happened in the American public company CEO class via the nonsense board of director system.  If you just exist in that vacuum for 2 years (or 11 months) you create generational wealth - no matter how effective a job you do.   (how much market cap did HPQ lose during this guy's tenure?) Sorry, my complaining is of course "class warfare"...

        p.s. if anyone knows what Meg Whitman was granted for the day she eventually gets fired let me know.  I'll prepare the story for 2014....

        • Hewlett-Packard's CEO revolving door is costing the company a fortune.  On the job as chief executive for not even 11 months, Leo Apotheker will leave HP a wealthy man: He has already taken home most of his $1.2 million annual salary, a $4 million signing bonus, and an additional $4.6 million awarded for relocation assistance and to offset payments that he forfeited from his previous employer, SAP.   
        • Apotheker was ousted on Thursday, but he'll collect more money on his way out the door. The former CEO will take home $7.2 million in cash as severance, plus $18 million more in stock.
        • According to the employment agreement HP signed with Apotheker in September 2010, the company will owe him twice his salary and twice his average performance bonus in cash as a goodbye payment. Since Apotheker didn't stick around long enough to collect a performance bonus, the company will just use his bonus target as the "average," which is equal to twice his salary.
        • Additionally, nearly all of Apotheker's stock grants will vest immediately, giving him access to about 800,000 shares of HP. Apotheker had not stayed on long enough to see any of his stock grants vest on the planned schedule -- most were supposed to be given to him annually over the course of two years. Only one stock grant, a 120,000-share grant that was supposed to be doled out gradually as a three-year reward, will be pro-rated.
        • At today's closing share price of $22.80, those grants will be worth $18.2 million. Combined with the cash, Apotheker will take home $25.4 million.
        • HP CFO Cathie Lesjak filled the gap between Hurd and Apotheker. As thanks for her three-month CEO stint, she was granted a $1 million cash bonus and $2.6 million in stock grants in recognition of her "exceptional service," according to a regulatory filing.
        • And Carly Fiorina, who resigned (read: was shoved out the door) as CEO in 2005, was given a $21.4 million cash severance in addition to another $21.1 million in stock grants.
        • In all, the ousters of its past three CEOs, including the bonus for the interim CEO, have cost HP $83.3 million.

        [Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Area Rugs]
        [Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]
        [Sep 27, 2008: Heads We Win, Tails We Win]
        [Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]
        [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain]

        [Video] Jim Rogers Talks to CNBC About the Current Dire Straits

        Sometimes Jim Rogers gets repetative since he usually pounds the same theories - which is not bad from the viewpoint he has a long term outlook, but in this interview with CNBC yesterday there are some interesting items regarding his current positions (currently long dollar even though he does not believe it to be a safe haven), and some trade / currency tensions developing.  I must have missed the news about Brazilian import tariff on Chinese goods.

        For those newer to trading I think his view on the dollar is important to understand from a lesson standpoint.  Even if you the dollar is 'cooked' long term, time frame is important.  For the near term, the U.S. dollar still is considered a safe haven (best house on a street full of crack homes) and in panic people flee to U.S. Treasuries and the dollar.  So while Jim believes U.S. leadership (I use that word loosely) is constantly doing damage to its currency, he understands the way the other people in the market will react and will take advantage of it.  (Rogers is a huge long term bear on the currency)

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

        • The U.S. dollar is going higher “against major currencies,” well-known investor Jim Rogers told CNBC Thursday. The dollar "is going up against everything right now” for a number of reasons, said Rogers. One may be that everybody is panicking "and for some reason they’re rushing into the U.S. dollar.”  “The U.S. dollar is not a safe haven, if you ask me, but I do own it,” he added. 
        • Also, Rogers noted he would own the U.S. dollar, or the Swiss Franc, or agriculture. “Agriculture prices [are] getting banged right now. I am kind of planning on buying Swiss francs, more dollars and agriculture.” 
        • In addition, he weighed in on China’s economy, saying, “They’re doing their best to cool things off … I expect them to continue to do it, and that is causing more slowdown around the world.” 
        • But “the major problems are coming from the west," Roger stressed. “They are coming from Europe and the [United States]. We are much worse off than we were in 2008 because the debt has gone through the roof.”  “At least in 2008 there was the possibility that the governments could bail us out. Now, of course, the governments have gotten deep, deep, deep into debt themselves,” he added. “Everybody is in much worse shape.” 
        • Plus, there are all sorts of trade tensions and currency tension developing, Rogers went on to say. “Brazil  is sort of ignited a trade war [by putting a 30 percent import tariff on China and Korea ]. And right now China is trying to get the Europeans to let them open up the trade with China more. The Europeans are saying no, so China is saying, 'No, we won’t bail you out.'"
        • “I hope the trade war doesn’t break out" because throughout history when it does it has "caused depressions,” Rogers added. “You saw what happened in the 1930s. It led to depression and it also led to war. So I hope it can be contained.” 
        • Ben Bernanke's idea that low-interest rates are good, "is killing the people who save and invest, and that's really hurting a very, very large part of the population," concluded Rogers. (something we've said countless times)  [Mar 31, 2010: Ben Bernanke Content to Sacrifice Savers to Recapitalize Banks and Benefit Debtors]

        Meanwhile Back on the Micro Front - Discover Financial (DFS) Puts Out Solid Quarter

        So much for breaking 1120 - quite a rally in the premarket and opening minutes to make sure we did not test it.  Now everyone (and their mother) knows that level is super important, so we'll see if after feasting for a few days the bears stand to the side knowing rumor mongering is going to get hot and heavy this weekend.


        We have been dominated by the macro for months, but can continue to look for interesting stories at the micro level.  Back when this blog started in 2007 I was incredibly bearish on the U.S. consumer - who had racked up huge debts, was living off the house ATM, etc etc - all so they could enjoy the 'aspirational' lifestyle.  How things have changed.  I wrote countless pieces on credit card usage - of course then the blowup in 2008 came. 

        About a year ago I changed my tune on the credit card industry - partly due to the fact that so much default had happened the prior few years [Jun 15, 2010: WSJ - Default, not Thrift, Pares U.S. Debt] and many of those customers won't be getting new cards anytime soon.... but also due to the little realized idea that so many Americans are living in houses that they don't make a payment on anymore (for up to 2 years in many cases) they can instead pay their credit cards and get those balances taken care of.  [Apr 1, 2011: Consumers Continue Trend of Paying Credit Cards Instead of Mortgages] Indeed if you don't pay a $1400 mortgage for even 1 year that is just under $17,000.  With the average credit card balance far under that, even using a fraction of the money that used to go to the mortgage payment towards the credit card would be a boon to these companies.  This is of course an entirely new behavior we've seen the past 4-5 years - in the old days, when people actually had skin in their homes (i.e. large down payments) they would pay the mortgage at all costs, and other line items in the budget would suffer. 

        Now the nut in all this, is many of those same companies benefiting from the new behavior in credit cards, suffer from the lack of payment of mortgages.  Citi, JPMorgan, and Bank of America are huge issuers of credit.  The two outliers would be Capital One Financial (COF) and Discover Financial (DFS) - so those are the two I've been focusing on the past 12-15 months.  Discover has been acting far better of the two of late, and yesterday (lost in the mess of the market) produced a quite solid quarter.  That said, there are some interesting nuggets on WHY card usage has gone up - i.e. a lot of people are putting gasoline purchases on their cards, so as the price of gas goes up, their expenditures go up - but overall I liked the report.  [Jul 21, 2011:  Credit Card Usage in U.S. Up 10.7% But an Increasing Amount is Going to Basics Like Food and Gas] The chart is not horrible all things considered with the action in the broader market.

        Some details via AP:

        • Discover Card users used their plastic more often during the summer, with higher gas prices adding to increased pursuit of the card's cash-back rewards.  The increased use, combined with better payment habits, helped Discover Financial Services fiscal third-quarter profit more than double.
        • The Riverwoods, Ill.-based credit card company's results solidly beat Wall Street expectations.  The company reported net income attributable to common shareholders soared to $642 million, or $1.18 per share, for the three months ended Aug. 31. That was up from $258 million, or 47 cents per share, in the year-ago quarter.  Revenue rose 5 percent to $1.79 billion from $1.71 billion last year.
        • Analysts, on average, were expecting profit of 96 cents per share, on revenue of $1.77 billion, according to a survey by FactSet.
        • Higher gas prices helped push sales volume on Discover cards up 9 percent to $26.3 billion for the quarter. The average price per gallon during the June to August period was $3.648 per gallon, up from $2.729 the prior year.
        • CEO David Nelms said gas purchases make up about 10 percent of sales, and the higher prices contributed about 2 percent of year-over-year growth. While he suspects that some customers have substituted spending on gas for other purchases, Nelms said the company has had difficulty measuring any shift. "The trick is, you don't know what people otherwise would have spent," he said in an interview.
        • Nelms also said customers are keeping their accounts open longer. "We are seeing attrition rates that are the lowest we have seen in over 10 years in our card member base," he said during a conference call to discuss the results. "We are doing a pretty good job of hanging onto our customers."  One reason for the reduced customer loss is less competition. That can be attributed in part to a law that took effect at the beginning of 2010 that restricts how quickly and how frequently card companies can raise rates. The rules make it "harder for competitors to come in and steal customers," the CEO said during the interview.
        • An increased number of merchants that accept Discover cards -- up 7 percent from last year -- also helped boost spending.
        • The higher usage was spelled out in figures that showed the volume of purchases its networks processed, including Discover, Diners Club International and its Pulse debit card network, rose 13 percent to $71.89 billion. Revenue from transaction processing rose 10 percent to $44 billion.
        • The balances customers carried on cards rose 2 percent, the first such increase since the spring of 2009. Yet the company says it also sees more customers paying their balances off each month.
        • Discover also sharply cut its provision for loan losses, or the money it sets aside to cover unpaid balances, to $100 million, from $713 million last year.  It was able to do so because late payments fell to an all-time low, dropping to 2.43 percent of balances on an annualized basis. That's down from 4.39 percent in the third quarter of 2010, and less than half the all-time high delinquency rate of 5.6 percent in the fourth quarter of 2009.
        • The rate of defaults, or charge-offs, also dropped by half, to $440 million, or 3.85 percent of balances, from $875 million, or 7.73 percent of balances, a year ago.
        • Nelms attributed the improvements to the fact that those customers who didn't default during the height of the recession are increasingly reducing their debt.
        • The reserve release helped drive earnings higher, but Sterne, Agee analyst Henry Coffey said investors should focus on the increased spending and higher balances customers are carrying. "That's what drives the business forward," he said, adding that Discover turned in "an amazing quarter."

        No position

        S&P 1120 Should be Broken this Morning, 1100 is Next Support

        As assumed yesterday, it looks like yesterday's late day 'rally' was just short covering and nothing else.  This morning futures are taking back all those gains from the last 30 minutes or so, and the S&P 500 looks set to open below that very strong support of 1120.  Hence we will be out of the 100 or so point range that the S&P 500 has been in for over 2 months.

        While the action has been horrid since The Bernank gave us his Twist Wednesday afternoon, we are not quite at extreme oversold levels yet.  The percent of S&P 500 stocks below their 50 day moving average is also at an oversold levels, but we've seen some cases where it can get worse.

        The action this afternoon will be interesting because I will be interested to see whom wants least to own positions over the weekend - bulls or bears.  Also it will be interesting to see if this 1100 level holds as we are selling off on the same news each day, so we'll see when the market gets fatigued from reacting to the same data points.  Also we should begin to hear all sorts of rumors of interventions and bailouts... which is why its very difficult to be a bear.

        Yesterday a reader commented a coal company I have not looked at in a while - Alpha Natural Resources (ANR).  I was shocked by the stock price (from $60 to $20 since May!), as I tend to focus on relative strength so the whole commodity complex has not been showing up in my stock screens the past few months.  This type of name is almost all the way back to March 2009 lows!

        And it's not the only one.  So clearly the cyclical type of stocks are singing a very different tune than the Chipotles or Amazons.  The divergence is stark.

        No positions

        Thursday, September 22, 2011

        Looks like Some Short Covering to Close the Day

        We've bounced some 13-14 S&P points here in the last 20 minutes.  I would not get super excited - anyone lucky fortunate enough to be index short 25 hours ago just made 3-4 months worth of money.

        1120 did hold of course.  Again, this action should NOT point to any great gap up tomorrow but we have seen very strange things the past 3.5 years so who knows what we will be greeted with.  It would actually be better intermediate term to flush out and get panic selling in the near term, rather then a gap up.


        And there went 1120.  We have fallen a long way in about 25 hrs...amazing volatility both ways.

        EDIT 3:35 PM - this sort of close should lead to a bad open tomorrow - not a gap up. Not sure anything 'new' is going to come out of Europe overnight - we've heard it all before.  For very short term traders, a bad open tomorrow could be a (traders) buyable opportunity especially if 1100 is broken on the S&P 500 and a lot of stop losses are triggered.

        Interesting Statistics of the Rental Market - Over 27% Pay Over Half their Income in Rent

        There are some very interesting statistics in this USA Today piece on the rental market.  As Americans' incomes have dropped (-2.2% adjusted for inflation per 'official stats' last year) affordability has suffered some.  If rents increase as they have the past few years, then we have more of an issue. The story has a forecast of a +4% increase in rents - we'll see if the economy is this poor if that can be pushed through.

        More shocking to me was over a quarter of people pay at least 50% of their income in rental costs.  Looking at these stats it is becoming far more favorable on a cash flow income to pay a mortgage than a rent - however of course the upfront costs are the issue there.  Also keep in mind many people with mortgages have refinanced to much lower rates the past few years.

        Via USA Today:
        • More renters found housing unaffordable last year as incomes declined, and more are likely to be squeezed this year, given rising rents  .The share of renters paying 30% or more of their household income on housing costs — the government threshold to determine if housing is unaffordable — rose to 53% last year from 51.5% in 2009 and about 50% in 2008, according to 2010 Census data released today.
        • While median rents remained stable last year at $855 a month, median national household incomes, adjusted for inflation, fell 2.2% — putting the squeeze on renter budgets.
        • The share of renter households spending half or more of their income on housing rose to 27.4% last year from 26.4% in 2009, (would have loved to seen what this stat was in 2006, but still a shocking amount) while the share of homeowners with mortgages in the same situation rose to 15.1% from 14.7%, the data show.
        • Last year, 38% of homeowners with a mortgage paid 30% or more for housing. That was up only slightly from 37.6% in 2009, Census data show.
        • The Census Bureau's definition of housing costs includes mortgage payments, insurance, taxes and utilities.
        • Renters will face higher costs this year, says Stan Humphries, economist for real estate website Zillow.  Nationwide, rents are expected to rise about 4% this year, Humphries says, and will also rise in 2012. Strong demand is driving rents up as homeowners lose homes to foreclosure and become renters. Skittish consumers are also delaying home purchases, given concerns about the economy.
        • The renter household market was fairly stable from 1990 to 2006, McCue says. But since 2006, when housing prices peaked, the number of renter households in the U.S. has grown each year. Last year, the share of occupied housing units that were rented increased to 34.6% from 34.1%, the Census data show.
        • Nationwide, the homeownership rate dipped last year to 65.4% from 65.9% the year before. The rate has been declining since 2006 when it was at 67.3%, this Census survey shows.
        • At some point, lower home prices and higher rents will attract more home buyers, Humphries says. "They will realize they can buy a home for less than it costs to rent," he says.
        • Already, investors are snapping up homes and converting them into rentals. In August, investors accounted for 22% of existing home sale activity, the NAR says. Cash buyers, who are most often investors, accounted for 29% of sales.

        Housing affordability in 2010

        Last year, more than a third of owners with mortgages and more than half of renters paid 30% or more of their household income on housing costs.
        Share of income spent on housing (owners with mortgages):
        Less than 20%
        20% to 24.9%
        25% to 29.9%
        30% to 34.9%
        35% or more
        Share of income spent on housing (renters):
        Less than 15%
        15% to 19.9%
        20% to 24.9%
        25% to 29.9%1
        30% to 34.9%
        35% or more
        States with highest percentages of households spending 30% or more on housing in 20102:
        Owners with mortgages:

        New Jersey
        National average

        National average
        1 = 2006-2010 difference is not statistically significant.
        2 = The percentages are estimates with margins of error, and rankings cannot be made with precision.
        Note: Housing costs for homeowners with mortgages include mortgage payments, taxes, insurance and utilities. Renters’ costs include rent and utilities if not included in rent.
        Source: U.S. Census Bureau

        Making a Run to Test that 1120 Level

        After holding in the low to mid 1130s all morning, we've finally seen a break here in the past 10 minutes, and dropped to mid 1120s in short order.  As stated many times the previous past few weeks/months, 1120 seems to be a magical level.  All eyes will be on it.

        No position

        Talk About Risk Off - Indonesia Down 8.9% Overnight

        Little noticed in the mess overnight, is a tremendous drop in Jakarta Composite Index, to the tune of 8.9%.  While many may say - "Indonesia? Who cares?", this has been possibly the best performing market the past 3 years.  Even as other Asian markets - especially India and China, have suffered through 2011, Indonesia has been essentially teflon, until the past few weeks.   And this comes off incredibe results in 2009 and 2010.

        Seeing such a large drop in this 'risk on' market is another canary in the coal mine.  Much like gold, it appears this has become a very crowded trade - and now many lemmings appear to be trying to run out of the same door.

        • Indonesia stocks plunged by the most since October 2008 as overseas investors cut holdings, while the rupiah rallied from a one-year low after the central bank said it will intervene to slow the currency’s drop.
        • The Jakarta Composite Index (JCI) sank 8.9 percent to 3,369.14 at the 4 p.m. local-time close as investors sold riskier assets amid concern global economic growth will slow. The gauge has tumbled 19.7 percent from a record high on Aug. 1.
        • “Investors are afraid that if they don’t sell now, shares will plunge further given the worsening condition of the global economy,” said Soni Wibowo, who helps manage $1.98 billion at PT Bahana TCW Investment Management in Jakarta. “Risk aversion has risen.
        • Indonesian stocks are the most “crowded” trade this year on a net-foreign-buying basis, Credit Suisse Group AG said in a report this week.
        • The rupiah is still the best performer among the 10 most- active currencies in Asia outside of Japan since end-2008, having gained 20 percent, according to data compiled by Bloomberg.
        • Foreign investors are dumping local assets,” said Akbar Syarief, who helps manage $98 million in assets at PT MNC Asset Management in Jakarta. “They’re seeking the safety of U.S. Treasuries while waiting out developments in the U.S. and in Europe.”

        No position

        [May 22, 2009: Indonesia: A Must Own Emerging Market]
        [Jul 9, 2009: Indonesia's Star Continues to Rise on Back of Yudhoyono's Re-election]  
        [Aug 10, 2009: Indonesia Expands at Fastest Pace in Southeast Asia]
        [Jan 22, 2010: FT.com - How the BRIC was Born]
        [Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
        [Aug 8, 2010: NYT: After Years of Inefficiency, Indonesia Emerges as an Economic Model]
        [Oct 9, 2010: [Video]  CNBC's Tim Seymour & Team - The Prospects of Indonesia]
        [Jan 11, 2011: BW - The BRIC Debate, Drop Russia, Add Indonesia?
        [Feb 7, 2011: Irony in Indonesia]
        [May 27, 2011: NYT - Jakarta Struggles to Cope with Rapid Growth]

        [Video] Stephen Roach - U.S. Did Not Learn from Japan

        Morgan Stanley's Stephen Roach, seen by some as a nearly perma bear, but by others as very realistic visited CNBC this morning, and offers his latest views on what is happening.  Essentially, as written in these pages a few years ago, the U.S. is going through a Japan-lite crisis.  Much of it due to Fed policy.  Half the discussion on that topic, and about half on China.

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

        Here is a link to a follow up discussion on Europe - 4 minutes.

        [Jun 7, 2011: Stephen Roach Revisits U.S. & China, Plus the Debt Connection]
        [Jan 14, 2011: [Video] CNBC - Stephen Roach Talks U.S. & China]
        [May 31, 2009: Stephen Roach on Asia - No Sail]

        "Risk Off!" as Fed Admits to Some Reality, and European and Chinese Economic News is Poor

        I wrote at the beginning of the week, on the back of a 6% move up, that the action in the market remained unhealthy.  I probably sounded a bit daffy at the time, considering up is "good" and down is "bad".  But gapping up and down 1-2% each day, reacting viciously to headlines (or conference calls), and begging troikas or central bankers for handouts/bailouts/et al, is not healthy.  It just feels so when the action is up rather than down.

        In a matter of 3 sessions (Tuesday thru this morning) we are going to rescind that entire move of last week, nearly 100 S&P points.  This reinforces my point that it remains unhealthy out there.  The direction of the moves is quite irrelevant to that thinking, it is the type of 'action' which marks health.

        Technically after bumping into resistance again Tuesday near 1220, we are going to open somewhere in the 1120-1130s area.   Readers will recall 1120 has been a line in the sand for the past few months.  The S&P 500 has only broken that level once, and that was on Fed announcement day when we saw a break to 1100 intraday, before a bounce.

        Yesterday in the FOMC statement there seemed to be some reality in the economic prognosis.  Apparently when all the data points to weakness (along with copper) market participants can sort of pretend it is not there.  But when Bernanke says it, then its real.  Of course this is the guy with one of the worse economic prediction track records in the business.  Watching the market take its cues from 'sunny side up' Federal Reserve forecasting is all a bit bemusing.

        Meanwhile back in the world outside of ivory towers, both China and Europe reported disappointing economic figures overnight.  Not surprisingly, overseas markets are being walloped.
        • A preliminary index of China purchasing managers was 49.4 this month, according to HSBC Holdings Plc and Markit Economics. A reading below 50 indicates contraction.  
        • The PMI figures pointed to further slowing ahead. Both the new orders and new export orders sub-indices fell further below the 50-point mark in September.
        • Euro-area services and manufacturing output also contracted in September, for the first time in more than two years, a report from London-based Markit Economics today showed. The composite index declined to 49.2 this month from 50.7 in August. 
        • The PMI reading for the services sector plunged to 49.1 from a reading of 51.5 in August, while manufacturing PMI dropped to 48.4 from 49.0

        Commodities are being crunched - even gold, which is down nearly 3% as of this writing.  Copper continues to plunge - down nearly 6%, and oil is down over 3%.  The latter being the one piece of good news for the U.S. (and global economy).

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