Friday, September 30, 2011

Quarter 3 a Horror Show for Commodities

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While the S&P is down low double digits for the quarter, the real damage was elsewhere.  Small caps have been obliterated, as the Russell 2000 is down well over 20%, and commodities have simply been decimated.  Below is the quarterly performance in the group with a few hours to go.  You eeked out some small gains in gold and ...err, rough rice and live cattle.  Otherwise, it's a sea of double digit red.

[click to enlarge]


[Video] David Stockman Makes a Visit to CNBC

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The now 'controversial' former GOP maven David Stockman visited the set of CNBC this morning.  No Joe Kernen there however, so less fireworks than there would normally be.  At this point Stockman has become very much a 'centrist' so no modern American party has a home for him....

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







Chris Martenson also did an interview with Stockman which you can access here (47 minutes)
Full transcript here, or go to Zerohedge for Cliff notes.


[Nov 2, 2010: [Video] More David Stockman]
[Jul 27, 2011: Another Old School Republican - Bruce Bartlett - Says Heavy Tax Cuts are Contributor to Deficit]

BW: Amazon (AMZN) - The Company that Ate the World

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BusinessWeek has what looks like a cover story, taking a very in depth of the world that is Amazon.com (AMZN).  All talk about valuations aside, it's been quite an amazing journey for Jeff Bezos and co. - one of the few names from the Internet bubble of the late 90s to really deliver on its promise (and more).   On Twitter yesterday I was having a discussion with some others who noted that in this era of corporate short termism ("do everything to make the quarter! We'll worry about next year, next year!") Bezos is one of the few CEOs who has eschewed Wall Street's demands of the near term, to focus on long term vision.  Even more ironic, in that Bezos came from Wall Street himself.

It's a quite lengthy article so I'd suggest a full read here, but I'll pull a few snippets here.

  • Amazon’s 1990s slogan—“Earth’s largest bookstore”—stood for an ambition that now seems cute. Amazon boasted of its unlimited selection of books, even though in most cases it was simply having them shipped directly from distributors. Today, Amazon sells millions of goods and services, from toys and high-definition televisions to server space for other Internet companies and digital reading devices for book lovers. Borders found it impossible to match Amazon’s selection and went out of business earlier this year. Best Buy (BBY) has watched Amazon undercut it and commoditize whole product categories, and is now trying to shrink the square footage of its superstores. Wal-Mart Stores (WMT) has struggled to match the ease and reliability of Amazon’s shipping network, and posted nine straight quarters of declining same-store sales. Websites that have matched Amazon in selection, price, and customer service—Zappos, Diapers.com—Bezos has quickly acquired.
  • As its rivals steadily asphyxiate, Amazon is ringing up 50 percent growth in quarterly revenues, and could reach $50 billion in sales this year. Walmart needed almost twice the time—33 years—to cross that threshold.
  • If the Kindle Fire is half as good as it looked in Bezos’ conference room, it will fan the fears about Amazon’s growing dominance. The tablet funnels users into Amazon’s meticulously constructed world of content, commerce, and cloud computing. Just like owners of Kindle e-reading devices tend to start buying all their books from Amazon, Kindle Fire owners are likely to hand over an increasing chunk of their entertainment budget to Jeff Bezos.
  • Even with only 28.7 million iPads sold, e-commerce sites say they see an increasing amount of traffic coming from tablets. Forrester Research (FORR) reported this summer that online purchases made on tablets now account for 20 percent of all mobile e-commerce sales, and that nearly 60 percent of tablet owners have used them to shop. Bezos says tablets “are a huge tailwind for our business.” Amazon once saw spikes in traffic during the workday lunch hours. Now traffic is more evenly distributed as people pick up their tablets anytime of the week, buying the books and albums they see on television and making impulsive decisions about replacing their dishwashers.
  • Bezos won’t say what kind of devices he’s cooking up next. People with knowledge of the division’s plans say that the Kindle Fire is only the first of a line of Amazon tablets, not an isolated product, and that the group has always considered the possibility of building Amazon cell phones and Internet-connected TVs. “We are a company with a lot of ideas,” Bezos says, when asked directly about his plans. And then, of course, he laughs uproariously.
No positions

Global News - China's PMI Remains at 49.9, German Retail Sales Drop Most in 4 Years, European Inflation Surges to 3%

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A lot of news overnight as we head towards an extremely busy week ahead.

1) First in China we have the private sector PMI reading from HSBC (I believe the government figure is released overnight tonight).  It remained steady at slightly (ever so) contraction - 49.9.  Close enough to 50 to consider it a "meh".

  • China's manufacturing sector contracted for a third consecutive month in September, while factory inflation quickened.
  • The HSBC purchasing managers' index (PMI), which previews business conditions in a range of industries before official output data, was at 49.9 in September, unchanged from August. The final PMI, released on Friday, was stronger than the flash reading published last week.
  • "The PMI reinforces our view that the potential slowdown in China's economy will likely be a gradual," said Connie Tse, an economist at Forecast in Singapore. "The trade sector no doubt faces increasing risks, but recent export growth momentum is holding up decently. China is not facing a collapse in global demand yet, as witnessed in 2009."
  • The latest reading represents the longest period of contraction since the global financial crisis, when it came in below 50 for eight successive months from August 2008.
  • The HSBC survey's new export orders sub-index remained below 50 for a fifth straight month, while the sub-index for overall new orders hovered below 50 for a second successive month.
  • China's official PMI, which is due to be published on Saturday, may have edged up in September, after a rise in the previous month from a 28-month low in July, driven by seasonal factors and domestic demand.  The official PMI, which is weighted more toward big state firms, generally paints a rosier picture of Chinese factories than that of HSBC, which includes small private firms that have been hit harder by credit curbs and weaker demand.
  • Friday's data showed input costs rising rapidly, which could imply upward pressure on consumer inflation.  Factory inflation in China quickened markedly in September, with the sub-index for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.

2) German retail sales dropped quite dramatically - another sign the engine of Europe is slowing.

  • German retail sales declined the most in more than four years in August as concerns about the economic impact of Europe’s sovereign debt crisis sapped consumers’ willingness to spend. Sales, adjusted for inflation and seasonal swings, slumped 2.9 percent from July, when they rose 0.3 percent, the Federal Statistics Office in Wiesbaden said today. That’s the biggest drop since May 2007. Economists forecast sales would fall 0.5 percent.
  • The retail sales figures “are volatile and don’t reflect that the trend remains positive as consumer confidence is actually holding up relatively well,” said Christian Schulz, an economist at Joh. Berenberg Gossler & Co in London. “However, the crisis may prompt households to postpone some big-ticket purchases this winter.”

3) The most strange figure was inflation in the Eurozone which surged by a massive half a percent, from 2.5% to 3.0%. One wonders if this will have any impact on the ECB, which is supposed to be the watchdog for price stability, but is being pressured to cut rates.

  • European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.
  • The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.
  • The ECB, which aims to keep annual gains in consumer prices just below 2 percent, said earlier this month that inflation may average 2.6 percent this year and 1.7 percent in 2012.
  • Italy’s harmonized inflation quickened to 3.5 percent in September from 2.3 percent in August. In Germany, Europe’s largest economy, inflation also accelerated more than economists forecast this month, with consumer prices rising 2.8 percent from a year earlier, up from an annual 2.5 percent. Spain’s harmonized inflation rate jumped to 3 percent from 2.7 percent. There’s no September data available for France.

[Video] ECRI's Lakshman Achuthan Makes the Call: Recession

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Two weeks ago ECRI's Lakshman Achuthan told NPR he would be able to make a definitive call on if we face recession within 75 days.  It didn't take that long.  ECRI's indicators now point to recession, per a CNBC interview this morning.  Clients were actually told last week, but this is their first public acknowledgement.  This would confirm what copper has been 'telling' us.  Based on their track record, it's essentially now in the bag.  Or what government statistics (always biased to sunny side up due to 'statistical adjustments' over the past few decades) say.  As to depths of the recession - he says it is too soon to say.

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







[Aug 29, 2011: Video - ECRI Updates its Thoughts on Potential Slowdown]
[Jun 14, 2011: Video - ECRI's Achuthan - Prolonged U.S. Slowdown Underway]
[Jul 7, 2011: Video - ECRI's Achuthan Sticking to Script that Slowdown is not Transitory]

Thursday, September 29, 2011

If You Want More Gundlach

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My buddy Josh from the Reformed Broker was actually at the (100 person) luncheon, because that's just how he rolls.  Josh has a far more detailed account from his own notes, than I had earlier from the mainstream media story.  Good stuff - go here.

p.s. are you kidding me on this volatility? 20 S&P points in 50 minutes ... I'm shaking my head.

Carbon Copy of Yesterday

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We've gapped up 4 out of 4 days this week, with yesterday being the only one that was quite small.  However the past two days we've sold off to turn red late in the day.  In fact, Tuesday we sold off from the highs (+2% to 1%ish gains) after Steve Liesman told us not to get ahead of ourselves.  So that's really 3 days in a row that all the positive action was in premarket and most of the daytime action actually stunk.   Kind of reminds me of a period in 2010 where we gapped up 4 out of every 5 days (not as by large of an amount as we have this week) and then would either do nothing all day (go sideways) or sell off during the actual market action.



It continues to be a market that really stinks - you are guessing each day what the gap will be, based on some news event no one can predict.  Today was especially troubling because many of the leadership stocks were weak all day.  If it's a hedge fund blowing up - who knows.  But you don't want to see the generals cracking.

For all the bailouts, and handouts, and votes, and European breathless headline watching, and CNBC coverage, we're right back where the market started Monday morning on the S&P 500.  Oh joy.

Keep in mind next week is back to economic news in a heavy fashion with Chinese and European PMIs, US ISMs, and the monthly employment report.  I don't expect great shakes from this data so we'll see what is "baked into the market" already.

Jeffrey Gundlach: ‘We’re in a Recession Right Now’.

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My posts today seem to have a Negative Nelly tone - I am looking very hard for some positive stories to offset what I'm posting. ;)

WSJ's Dealbook has an interview with one of the smartest men in the room - Doubeline's Jeffrey Gundlach.  Many would consider this guy the best bond investor on planet Earth, alough PIMCO's Bill Gross gets all the press.  His Total Return Fund is once again smacking its index year to date. 

Gundlach believes the U.S. is in recession right now - I'll wait for the ECRI to confirm, but the bigger picture is, no matter if 'official' GDP is -1% or +1%, that does not matter much for economic prospects.  This economy needs to be moving at 3%+ for quarters on end to truly have any serious impact on the lives of most Americans.  At best we're at muddle through speed, despite massive stimuli.

More from Gundlach:

  • The country is already in a recession, according to bond manager Jeffrey Gundlach, who predicted “there’s going to be a big loss in Europe.”  The much-watched head of Los Angeles-based DoubleLine Capital addressed a crowd of roughly 100 financiers and reporters at the New York Yacht Club this afternoon.
  • Gundlach reinforced his often dark views about the status of the U.S. economy and future for Europe. “We’re in a recession right now,” Gundlach said, as he reviewed a hefty deck of slides with dreary data. Statistics on the polarization of wealth in the U.S., dim headlines about sentiment in locales abroad and the European bond market were among the reasons Gundlach cited for his dour forecasts.
  • Echoing the sentiments of many money-managers, Gundlach said that the Eurozone is bound for problems. “I don’t know what is going to happen,” he said. “But I think there is going to be a big loss in Europe.” DoubleLine has no investments in Europe, he said.
  • He then flashed a chart of 10-year sovereign debt spreads for the so-called “PIIGS” (Portugal, Italy, Ireland, Greece, Spain) and circled their recent spike in red. Next to the spike he wrote “These are crashes, why no understanding of that?” in red ink. Greece’s spreads showed signs of woe as far back as February 2010, he said.
  • As for what’s ahead in the United States, Gundlach pointed out that the rally in the municipal bond market was helped by many states not having a choice but to balance their budgets.  However, that may mean that “the man on the street thinks it’s a depression,” he says, as many local governments have slashed jobs, cut down hours for public resources and stalled projects.  He pointed to the closing of bathrooms near his home in Southern California as an example. “You can’t go to the beach and drink your lemonade because there’s no bathroom,” he says.
  • DoubleLine’s strategy has no exposure to Europe, Gundlach says, and is entirely denominated in dollars.
  • The bets have paid off so far. The DoubleLine Total Return Fund is up 8.76% year to date, according to Morningstar Inc., compared to a 2.52% increase in the Barclays Aggregate index.



[Aug 10, 2011: [Video] Morningstar Interviews Bond Guru Jeffrey Gundlach]
[Mar 9, 2011: [Video] Doubeline's Jeff Gundlach Joins Chorus Warning on Muni Bonds]

[Jan 9, 2011: [Video] CNBC - Jeff Gundlach of Doubleline Capital]

Goldman Sachs: 40% Chance of "Great Stagnation" in Developed Markets

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Interesting tidbit on the CNBC site:

  • Having analyzed 150 years of macroeconomic data, Goldman has found 20 examples of stagnation similar to those experienced by Japan in the 1990’s, most of which occurred during the last 60 years in developed economies.
  • “During these episodes, GDP per capita growth hovers below 1 percent and is less volatile than usual. They are also characterized by low inflation, rising and sticky unemployment, stagnant home prices, and lower stock returns,” Jose Ursua, an economist at Goldman Sachs, said in a research note on Thursday.
  • He predicts a 40 percent chance of stagnation in the world's developed markets.
  • “Stagnations are more likely than you would like. Because these events are correlated with financial crises, the conditional probability of stagnation in the current environment is higher than normal," he said. “Trends in Europe and the US are so far still following growth paths typical of stagnations.”
  • In order to avoid such an outcome, Ursua said, requires governmental policy that restores confidence and growth.  “Whether these countries manage to avoid a ‘Great Stagnation’ by a pick-up in the recovery is likely to depend on policy being able to restore confidence and putting in place reforms that can decisively jolt growth,” he said.
  • A lack of reliable data makes it difficult to know what sorts of policy remedies have helped pull economies out of stagnation in the past, he said, but there is a clear correlation on what causes stagnation.  “Stock-market crashes, currency crises, external debt crises and a higher income level raise that probability. Twin crises, higher growth or higher volatility lower that probability, either because they signal a worse outcome or a better outcome, not a stagnation,” Ursua said.
  • “The good news is that policymakers are more aware—thanks to Japan’s experience—of at least a part of that historical experience, if not all that we present here," he said. “The bad news is that it is still far from clear whether enough has been done to jolt economic growth upwards and outside the zone where prolonged stagnation is a serious risk."

Some Horrid Action in the Chinese Internet Stocks - Even Baidu (BIDU)

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Not sure what is going on in the Chinese internet complex, but even the best of the best such as Baidu (BIDU) are getting obliterated.  Aside from this group, a lot of the momo stocks are not participating in the rally (GMCR, WYNN, FOSL smashed) - very strange action today.  One wonders if a momo hedge fund is being blown up somewhere.  Also some rumors on twitter of a fraud investigation - seems strange for a company like Baidu to be subject to something along those lines. 

Rumors DOJ Investigating Chinese Accounting Claims of Fraud in $BIDU and $SINA

This is not Joe Schmoe's $200M market cap Chinese reverse merger.... I'd be grabbing me some BIDU action at least for a trade here at $108-$109. A move back to just $120 gets a nice 9% return. (edit: 3% stop loss from entry point in place of course) =)

EDIT 11:35 AM - here is some more detail on the so called "DOJ investigation"  (source: Barron's)

Shares of Chinese search engine Baidu (BIDU) are down $10.82, or almost 9%, at $110.60 as reports circulate the U.S. Department of Justice is assisting a Securities & Exchange Commission probe of “accounting irregularities” among U.S.-listed Chinese firms.

The Guardian’s Andrea Shalal-Esa and Sarah Lynch this morning quote SEC enforcement chief Robert Khuzami as stating parts of the Justice Department are “actively engaged” in looking at the practices, along with the SEC and the FBI, which have been looking into the matter for a year now.

No charges have been brought, the authors note, and the SEC and FBI are struggling just to get ahold of the requisite paperwork from the companies.

Some examples of the better thought of Chinese names:

Baidu (BIDU)

Sina (SINA)



Sohu (SOHU)



No position

'Bear Market' in Copper Suddenly Getting a Lot of Attention

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I mentioned about two weeks ago, 'Doctor Copper' was looking quite sickly.  Things have deteroirated since.


In the past, copper was an excellent indicator of industrial usage, and hence economic activity but over the past 4-5 years, China has really come to dominate this market, so I believe the level of purchases by the Chinese are now becoming as important as 'general economic growth' to the movements in copper.  When China sneezes, copper catches the cold if you will.  Along those lines, China's stock market (another indicator) has been acting amongst the worst in the world, and excluding summer 2010's swoon, is at its lowest levels since the spring 2009 lows!



These were both issues yesterday (copper & China's stock market), but in an environment where speculatrors have the attention span of a 3 year old on Ritalin, the 'better than expected' GDP figures, and weekly data claims have taken over the attention of the markets this morning.  I believe we've now gapped UP every day this week.  Hope is eternal.  But for those whose attention spans surpass that of toddlers, we have some major issues - the WSJ discusses the issue in copper which usually tracks ahead of the action of the stock market itself.

  • Copper prices have plunged 23% this month—a decline of 20% or more is commonly considered a bear market. The declines have far exceeded the slide in the stock market, where the Standard & Poor's 500-stock index has lost 5.6%.
  • The fall in copper is seen as particularly significant because the metal is used in everything from Apple Inc.'s iPads to indoor plumbing and electrical wires, making it a good leading indicator for the global economy, and the stock market. Some investors are such believers in its ability to forecast economic conditions that they refer to it as "Dr. Copper."
  • Some also see it as bad news for investors hoping stocks will soon find a foothold, rather than begin a new leg down. "You're seeing copper's declines outpace equities', which is telling me that equities are too buoyant at this point in the recovery," said Adam Klopfenstein, a strategist with MF Global.
  • Copper has been a good predictor of stock performance before, notably, in the peak of the financial crisis. The metal slumped well ahead of other markets heading into 2009, and the correlation between copper and stocks now looks eerily similar to back then, according to Katie Stockton, chief market technician at MKM Partners.
  • In December 2008, copper slumped, reaching a bottom late in the month. Stocks didn't follow until March 2009.  "There was a really decisive bottom that was put in copper in late 2008. The S&P was starting to put its bottom in during that time, but it had further to fall," said Ms. Stockton. "You want to see copper stabilize before we can expect the stock market to do the same."
  • Traders seeking to explain copper's sudden slump point to obvious influences such as signs China's economy is slowing—potentially sapping a huge source of demand for products that use copper.  As well, a general contraction globally would hurt copper in particular.
  • But other factors are likely at play. For a start, copper has been on a powerful bull run since finding its nadir in 2008. Prices had tripled through February of this year, and they hovered near those highs until the recent rout.  As copper began to decline, hedge funds and other speculators bailed out. Data from the Commodity Futures Trading Commission show that, in late August, speculative investors had more bets copper would fall than rise for the first time since September 2009.
  • Many are also looking at China, which accounted for 40% of world refined copper consumption last year.   Copper imports in China this year were down 26% from year-ago levels, China's General Administration of Customs said last week.
  • That follows HSBC's preliminary gauge of Chinese manufacturing, which showed shrinking industrial activity for a third consecutive month in September. Additionally, copper prices in China are falling toward the world benchmark set in London. The difference between the two is the smallest since May, indicating China's appetite is waning.
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p.s. nice find from reader Josh who points out Goldman's 'not so excellent' call on copper a few months back  [Jun 15, 2011: Goldman Calls for a Substantial Rally in Copper Prices in 2nd Half 2011, as Chinese Stockpiles have Potentially Fallen 50%]

Despite Slowing Economy, German Unemployment Rate Falls Yet Again to 6.9%

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While all eyes in Europe were focused on the vote in the German parliament regarding the ESFS funding (yes it passed!), we continue to see astounding data on the unemployment front.  Somehow despite an economy that barely expanded in Q2, the unemployment rate (adjusted for seasonality) dropped from 7.0% to 6.9%  (6.6% not adjusted for seasonality).  While employment may be a lagging indicator and set to worsen in the coming 6-12 months, this country's economic system (and government responses) have been far better than anything we've offered stateside.   [Oct 1, 2010:  German Unemployment Rate Down to 7.2% after Peaking at 8.7%; Can We Learn Anything?]  Especially impressive considering how their currency has been strong the past 2 years.... and considering the region has been in one form of crisis or another for 18+ months.

Of course there is a lot we could learn from what they have done, not just in the past 3-4 years, but the past 10+, but to even hint anything a country in Europe does better than we do, is inviting yourself to be called a "socialist".  [Jun 16, 2009: As Euro Zone Unemployment Spikes; Job Saving Measures Emerge - Completely UnAmerican]   Much more easy to parrot bullet points about high unemployment & slow growth.

  • Unemployment in Germany fell to its lowest level in more than 20 years in September as the labor market shrugged off fears of a pending economic slowdown, official data showed Thursday.
  • The German jobless rate, which measures the proportion of people registered as unemployed against the working population as a whole, fell to 6.6 percent in September from 7.0 percent, according to raw or unadjusted figures published by the Federal Labour Agency in Nuremberg.  That was the lowest level since German unification and a much steeper fall than analysts had been expecting.
  • In concrete terms, the total number of people out of work was down by 149,000 from August to September, and down by 231,000 year-on-year to stand at 2.79 million, the agency said in a statement.  It is the first time since 1992 that the jobless total has been below 2.8 million
  • Unemployment tends to fall in September as a result of seasonal factors, such as the end of the summer holidays.  To iron out such fluctuations, the Bundesbank calculates seasonally adjusted data, and these showed the jobless total down by 26,000 over the month and the adjusted jobless rate slipping to 6.9 percent from 7.0 percent.
  • "In face of the uncertainty on the financial markets, the labor markets are having a stabilising effect on the economy as whole," Roesler said.
  • Despite leading indicators pointing to a imminent slowdown in the wake of the eurozone debt crisis, the German labour market is proving resilient, said Christian Schulz, senior economist at Berenberg Bank.  "The German jobs miracle is continuing," Schulz said.
  • "Employment is continuing to rise faster than unemployment is falling. Better still, core employment -- workers earning enough to be subject to social security contributions -- rose in July," the analyst said.
  • "And the fact that temporary workers are still high in demand proves that the labor market sees no cyclical downswing yet. Otherwise, temporary workers would be the first to be hit," Schulz said.


[Sep 13, 2011: At Some Point Germany Has to Become an Appealing Investment]
[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]
[Jan 6, 2010: China Passes Germany as World's Largest Exporter
[Jun 30, 2009: Will Germany Transform Itself? Does it Need To?]
[May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US]

Wednesday, September 28, 2011

Thank You Again for the Patience

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Just wanted to send a quick note out publicly to say thank you for the patience for those who have expressed an interest in the future mutual fund.  (of course if/when approved, you must read the prospectus before investing)

I can't talk too much about what is going on behind the scenes but suffice to say the process has taken much longer than expected.  The initial paperwork was filed back in December 2010 and I naively thought we'd be up and running by May-ish, perhaps June.  (5-6 months)  Due to a lot of circumstances, we are still in review - currently in the 3rd round.  It's now been 9+ months of review.  According to legal counsel this is a very atypical amount of reviews, so it's frustrating for all of us.  When I receive emails asking where we stand, I can only say we are still in review.  I can't say much more other than to again say thanks for sticking around - I know some of you have been around for 3-4 years - and the process continues.

Amazon.com (AMZN) to Destroy Apple (AAPL) iPad with $199 Kindle Fire

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Please note - that title is facetious, I just wanted to get on the bandwagon for hyperbole that comes out with the "(insert object here) killer".  (please no hate mail from Apple fanboys)  :)  That said the price point for the new Amazon Kindle Fire is great and the product is immediately positioned for a completely different part of the market than the Apple iPad.  Apple is positioned much like Nike in its niche.  There is room for a Reebok or three.  Less bells and whistles with the Kindle Fire but for the 'common man's' tablet, its going to do a lot better than any iPad 'competitor' in this space.

..in comparison with the iPad, the Kindle Fire has a 33 percent smaller display, no cameras, no 3G wireless, less memory and only two-finger multi-touch (thus limiting its gaming capabilities).

Further, Amazon has the unique ability to make this a 'razor blade' type of business as they can make small profits on the hardware and make more money on increased sales of movies, music, and the like.

I am surprised by the price action in AMZN today - I didnt think this was a surprise as everyone knew there was a product coming this fall in time for the Christmas season.  Maybe the price point of $199 rather than the estimated $250 was the main surprise today.



The WSJ takes a look

  • Priced at $199, the Fire tablet has a 7-inch screen and can access Amazon's app store, streaming movies and TV shows, the company said. By comparison, the lowest price for a new iPad is $499. The Kindle doesn't offer a cellular connection, working only with Wi-Fi. It also doesn't have a camera or microphone.
  • Mr. Bezos noted that all the content on the Fire will be backed up remotely on Amazon's servers at no cost to the consumer.
  • Questions, though, remain about the device's technical limitations and lackluster selection of apps, especially in comparison to the iPad.
  • Nonetheless, Janney Capital Markets analyst Shawn Milne expects between 2 million and 3 million tablets will be shipped in the fourth quarter before the analyst expects a beefed-up version, possibly with a 10-inch screen and dual processor, to become available early next year
  • Amazon, though, appears to be following the same formula that has helped to make its Kindle the de facto standard for dedicated e-readers and the bestselling product in Amazon's history. Specifically, with the new tablet, Amazon is offering an attractively priced device with basic, easy-to-use features, and accompanied by an intense promotion campaign on the company's heavily visited website.
  • "Amazon has an advantage that other tablet manufacturers don't in that millions of people already visit its site on a regular basis," said Ken Sena, an analyst who covers Amazon for Evercore Partners. He added that those consumers will be regularly exposed to advertisements for the device. "It certainly creates a competitor to the iPad," Mr. Sena said.
  • So far, iPad rivals have struggled to compete with the device's price, functionality and popularity. As a result, competitors like Research In Motion Ltd.'s PlayBook, Hewlett-Packard Co.'s TouchPad, Samsung Electronics Co. Ltd.'s Galaxy Tab and Motorola Mobility Holdings Inc.'s Xoom have failed to attract mass audiences.
  • Amazon's Fire tablet, meanwhile, is seen benefiting from the company's relationships with various content providers. The tablet will have access to more than 100,000 movies and TV shows; 17 million songs; 1 million books; and hundreds of newspapers and magazines.
  • Another advantage is Amazon's long-standing relationships with consumers, who give the company sensitive information, including email addresses and credit card information. That will make it easy for Amazon to market additional products for its tablet, as well as charge for them.
  • In addition, by linking Amazon's Prime membership with the tablet, the company could help its core retail business. Prime members, who receive free shipping on products purchase, spend four times the amount of the typical Amazon customer, Janney's Mr. Milne said.


No position

The Atlantic: The Value of College is (A) Growing, (B) Flat, (C) Falling, (D) All of the Above

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The debate on college costs versus return on value was an early topic here on FMMF, but has hit the mainstream the past two years.  The Atlantic has a big series of graphs showing arguments on both sides - I think one caption probably described the situation best:

college works less like an investment than an insurance policy against poverty 

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

Older stories on the topic:


[Aug 19, 2011: The Debt Crisis at American Colleges]
[May 20, 2011: Nearly 50% of 2009 College Graduates are Either Jobless, or Working in Jobs that Don't Require a College Degree]

[Jan 18, 2011: Report - First Two Years of College Show Small Academic Gains]
[Dec 21, 2010: Video - CNBC, the Price of Admission - America's College Debt Crisis]
[Dec 14, 2008: WSJ - K-12 Schools Slashing Costs, College Bills Wallup Families]
[Dec 5, 2008: NYT - College May Become Unaffordable for Most in US]  

From Penthouse to Outhouse - Investors Want to Avoid Holding what John Paulson Holds in Front of October Redemptions

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Let me preface this by saying, there is no reason to shed tears of John Paulson - he made $5B last year alone (not his fund, but personal wealth) and I believe now is worth somewhere around $15B.  [Jan 28, 2011: WSJ - John Paulson Bests $4B Gains of 2007, with $5B Year in 2010]   So he'll be ok, no matter what happens here in the next few months, or if he has a terrible year.  But performance this year [Aug 10, 2011: John Paulson's Main Funds are Down 21% and 31% YTD], and stories like this in today's WSJ shows how quickly the worm can turn.  Worries about some serious investor redemptions at the end of October, are causing a ruckus it appears.

Paulson has been nearly giddy on economic prospects the past year (strangely), and a big proponent of the banks in particular.  [Aug 26, 2009: Citigroup Surges on John Paulson Investment] [Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]   Due to a once in a lifetime bet during the subprime crisis he has worldwide cache, and his movements are followed very closely.   That said, managing a mega huge fund is very difficult and some wondered if unlike Bridgewater Associates, size would get in the way of performance.  [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]  I think it has more to do with his economic outlook (which was wrong) and his areas of emphasis (some of the worse performing groups ex gold).  He also was hit by a now infamous China company scandal.[Jun 21, 2011: John Paulson Takes Potential $720M Loss in Sino Forest]

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Via WSJ:

  • As the hedge-fund manager suffers through the worst losses of his career, Mr. Paulson now is facing a flock of vulture investors who hope he will be forced to conduct a fire sale of stock and debt holdings.  Rival hedge funds, brokers and other firms are combing through Paulson & Co.'s investments, trying to anticipate what Mr. Paulson might sell if he needs to return cash to investors.
  • According to traders, some firms have been selling investments they have in common with Mr. Paulson, worrying he will have to sell some holdings if clients withdraw cash.
  • Meanwhile, other firms are approaching Mr. Paulson with lowball offers. For example, at least one firm recently offered a below-market price for some of the bonds his firm owns in Lehman Brothers Holdings Inc., according to people close to the matter. Lehman filed for bankruptcy in 2008, but debt issued by the securities firm is still traded.
  • So it goes on Wall Street when a high-profile investor comes under pressure. As word seeps out, rivals are often eager to find ways to profit—or at least avoid losses—from a competitor's misfortune.
  • Earlier this year, Mr. Paulson held such sway that when he bought an investment, others quickly followed, sending prices higher. His recent bullishness has stood out amid the market's gloom.
  • But because two of Mr. Paulson's largest hedge funds have suffered losses of more than 20% so far this year, through August, some traders believe it is a matter of what—not if—he will be selling.
  • Most of Mr. Paulson's investors must inform him by the end of October if they want their money back by year-end. For now, the requests have been in line with recent quarters, according to someone familiar with the matter.
  • And while brokers say the hedge-fund firm has done some selling in recent days, people close to Mr. Paulson stressed the firm isn't selling the bulk of its debt and equity holdings  "People are looking over his portfolio. There are constant conversations about what he owns," said one hedge-fund trader. "People are avoiding his names or trying to get in front of them."

There are some pretty interesting examples in the remainder of the story - but some days when you wonder why the stock you own is acting berserk, you really realize what a small mite you are in this world.  Circumstances completely out of the norm may be affect you - for example:
  • Shares in Lear Corp., where Mr. Paulson's firm owned a 4% stake as of June 30, also sank 12% last week. A hedge-fund manger who owns the stock said he thought its underperformance was tied to suspicions Paulson might sell.


[Jun 6, 2011: John Paulson's Funds have Rough May]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]

The Mystery of Where Hugh Hendry Went is Solved

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The surly hedge fund manager Hugh Hendry used to be one of our favorite mavens to quote.  He used to make media appearances often but I literally sent a tweet out last week asking where he has disappeared to.  Therefore, I was heartened to see a story this morning on Business Insider with Hendry being noted.  However at the end of the story it says Hendry, who founded Eclectica, is no longer the CEO but now the CIO - and the CEO banned him from media appearances?(Hugh makes a joke about that in the beginning of the interview)  Hmmm...

Whatever the case here are some of his latest thoughts - of course take in mind his views are from the standpoint of an investor who probably has some bets against Europe.  But he speaks the truth about how these bailouts are all about bailing out the creditors who made the stupid loans, and it punishes the people.  Unfortunately he is sharing the roundtable with 2 very boring people.  (source to original interview/debate here - 30 minutes)

  • Hedge fund manager Hugh Hendry, whose prediction of the crisis in the Eurozone was spot on, says we're at a rare moment in economic history.  "The problem is greater than the ability of the politicians to respond," he says in a radio debate on BBC's Bottom Line.  "There is no policy prescription that they can offer that will redeem the situation. The redemption will come through the citizens of Greece and elsewhere throwing the politicians out and rejecting the European ideal."
  • Hendry's view on what the solution should be (a Greek default that doesn't protect the creditors) is quite different than Evan Davis' — the BBC host — and Brent Hobermann's of mydeco.com, another guest on the show.
  • Hendry has other ideas about a solution. He says, "Bankruptcy is a solution [because] creditors who extended that debt [to Greece] — that was a folly. All this firefighting is trying to protect the creditors, as opposed to the oppressed person."
  • Hendry's view is that Greece should default and leave the Euro. "Greece needs a real exchange rate," he says. "If you go on a drachma and [a beer in Greece is] .50p, there's a stimulus that's not open to them today [cheaper money]."
  • Hendry says the UK is in depression - not recession - and it will take years to get back to where we were in 2006 and 2007. It's been 5 years since the financial crisis, and it might take another.
  • That Hendry's opinion differs from that of economists is not surprising. Economists and politicians will point the finger frequently at hedge fund managers and "speculators" now. Hendry believes their anger is rooted in the inability of a policy prescription to solve the Eurozone crisis.
[Jan 11, 2011: Bloomberg Markets Magazine Profiles Hugh Hendry]
[Mar 4, 2010: Hugh Hendry Continues to Doubt China]
[Oct 30, 2009: High Hendry Resurfaces on CNBC  October 2009]
[Jun 18, 2009: Hugh Hendry Eclectica Fund Letter to Investors]
[Jul 8, 2009: FT.com - Hugh Hendry-Thon]
[Apr 28, 2009: The Latest Hugh Hendry]
[Apr 16, 2009: Hendry, Citiwire Interview]
[Mar 20, 2009: Hugh Hendry of Eclectica Asset Management is Wickedly Good]

    Tuesday, September 27, 2011

    The Steve Liesman Market

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    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?

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    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.

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    • 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

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    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

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    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

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    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

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    (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

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    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?

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        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!!"

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        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!"

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        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%

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        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

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        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

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        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



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

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        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)
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        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.

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