Monday, October 3, 2011

CNNMoney: Double Your Salary in the Middle of Nowhere, North Dakota

Let's talk about some good news....

North Dakota, and indeed some of the central plains states (Nebraska has been another big winner) have become a sort of sheltered world aka the "Australia" of America.  [Aug 2, 2009: Slice of Central US Safe from Recession Shrinking]  The natural resources economy has been one of the true green shoots - right next to the taxpayer economy centered around Washington D.C.  [Mar 11, 2010: [Video] America's 3 Wealthiest Counties Now Ring Washington D.C.]

CNNMoney takes a look at the wonders that surround the Bakken Shale in North Dakota - as long as you are willing to stomach the weather, and lack of nightlife, the economic rewards are quite substantial.

  • Believe it or not, a place exists where companies are hiring like crazy, and you can make $15 an hour serving tacos, $25 an hour waiting tables and $80,000 a year driving trucks.  You just have to move to North Dakota. Specifically, to one of the tiny towns surrounding the oil-rich Bakken formation, estimated to hold anywhere between 4 billion and 24 billion barrels of oil.
  • .......along with the manpower needed to extract the oil, the town is now scrambling to find workers to support the new rush of labor.  Watford City is at the center of the Bakken formation. While it is home to less than 3,000 permanent residents, there are about 6,500 people there right now, as job hunters relocate to seek out high-paying jobs.
  • Aaron Pelton, the owner of Outlaws Bar & Grill in Watford, said his sales have been nearly doubling every year -- and it's only getting busier. Servers at his restaurant make about $25 an hour when tips are factored in, and kitchen staff employees make around $15 an hour.
  •  ....McMullen now works as a nanny in exchange for housing. Her husband, who worked on behavior management programs for a school system in North Carolina where he took home about $1,600 a month, found a job working in the oilfields where he makes that same amount of money in one week -- adding up to an annual salary of about $77,000.  "We want to be debt-free, so we came here to play catch-up," said McMullen. "But when I came here, I thought I was on Mars. It's just so crazy that the rest of the country has no jobs, and here's this one place that doesn't have enough people to fill all the jobs."
  • With oil companies paying top dollar to the new onslaught of workers they need -- doling out average salaries of $70,000, and more than $100,000 including over-time -- other local businesses are boosting their pay to compete.
  • Entry level jobs everywhere from restaurants and grocery stores to convenience stores and local banks pay a minimum of $12 per hour, according to the McKenzie County Job Development Authority. Truck drivers make an average of $70,000 to $80,000 a year.
  • The pay bump was even bigger for Nathan Pittman, who was thinking about retiring from the trucking company he owned in Indiana, but put his plans on hold when he heard about the boom.  Pittman quickly landed at a trucking company in Watford making $20 an hour with "a lot" of overtime. In all, his salary more than doubled to about $2,225 a week in Watford.  "You can make at least a thousand dollars a week more here than anywhere else in the country," he said.
  • "There's not a business you can start in North Dakota right now that wouldn't make it," said Pittman.
  • Gene Veeder, executive director of McKenzie County Job Development Authority, which includes Watford City, said he gets calls every day from developers wanting to start housing projects. But for now, good luck finding a place to live.  Among the inconveniences the boom has caused for locals -- including a higher cost of living, more traffic and higher turnover rates among businesses that lose employees to the oilfields -- there's a huge housing shortage.  "It's been absolutely crazy lately -- we just can't build fast enough," said Shawn Wenko, workplace development coordinator for the city of Williston. "We've probably seen 2,200 housing units come online this year, but we probably have demand for more than 5,000."
  • Wenko said one-bedroom apartments can run at around $1,500 a month, while two to three bedroom apartments are often around $3,000. Local hotels and motels are at 100% occupancy. Some companies have cashed in on the low housing supply and have built more affordable workforce units, known as "man camps", which are basically clusters of dorm-style trailers that house workers.
  • "If you were to come up right now, you would see campers stuffed in about every corner, people sleeping in their cars in the Wal-Mart  parking lot and tents popping up here and there," said Wenko. "It's best to secure housing before you come here, or else you'll be staying in your car for a while too -- and North Dakota winters tend to get pretty cold."

[Jun 8, 2008: A Real Green Shoot - the Dakotas]
[Aug 2, 2009: Slice of Central US Safe from Recession Shrinking]
[Dec 9, 2010: [Video] - Need a Job? Head to Williston, North Dakota]

Finally Broke S&P 1120, Looking at Some Longer Term Support

Finally!  Sheesh we've been working on that 1120 level for ages.  As I mentioned each time we came near to testing 1120, the next level of support is 1100 which was the intraday low on Fed decision day, quite a while ago.  (mid August)

As I scale the chart back further, in case 1100 falls, the next level of substantial support is down at 1040s area, which takes the index back to late August 2010 lows.   If you remember, that is where The Bernank came to the 'rescue' by utilizing $600 Billion to prop up the stock market....err, prevent deflation... the hint was dropped at Jackson Hole, WY and off we went.  That same 1040ish area is also the level we hit in early summer 2010, before the ultimate July low of that year, so I'd expect it to be a quite good support level.

That said, all rallies remain ones to be sold, and flipped - this is not a buy and hold market.  Very agile traders can try to play these oversold bounces here and there, but at this point not until 1240ish level would I really be constructive.  Or at substantially lower levels, of course.

In the nearer term, we'll see how the S&P acts in between 1100 and 1120.   A late day reversal pushing us through and back over 1120 would be a nice win for bulls in the very near term.  A close below 1100, obviously would bode ill.

S&P 1120 We Meet Again

Amazing how many times we have been at this level the past few months.  We are here again.... eventually this level has to break.  In theory, the more times you test a level, the more apt it is to crack.  We'll see if today is the day.  If so once it cracks we could have a swoosh down...

PIMCO's Bill Gross October Letter: Six Pac(k)in'

The latest from Bill Gross of PIMCO in his October letter - he delves deeper into the issue of gains to the economy that have been shared by labor versus capital (and capitalists/shareholders).  This of course has skewed dramatically to the side of capital (in developed countries, esp. USA) with the onset of globalization and the quest for lower global taxes, and labor costs.   Many in the country make the same (inflation adjusted) as they did in the 1970s.  Long time readers of FMMF will notice many themes in Gross' commentary, that we've discussed at length over the years.  Frankly we were talking about this stuff in 2007, but again it's good when people who are very well known discuss it.


Six Pac(k)in'
  • Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. 
  • There is only a New Normal economy at best and a global recession at worst to look forward to in future years. 
  • If global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible.

The midriff “bulge” would be a rather kind description of today’s debt crisis. No muffin top there – if anything, sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack. Still, if global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible. Several of the structural roadblocks have been publically identified by myself and Mohamed El-Erian over the past several years: 1) Globalization has hollowed developed economy labor markets, 2) technology has outdated entire industries that produce physical as opposed to “cloud”– oriented goods and services – books, records, postal letters and DVDs among the most recent dinosaurs, and 3) an aging demographic is now favoring savings as opposed to consumption in almost all developed nations.

It has been these three structural hurricanes that have led to our economy’s six-pac becoming a one-pac over the past several decades. Globalization and technological innovation have been extremely negative influences on domestic wages and employment. China and “cloud space” have favored cheaper consumption, but have been decidedly job unfriendly in developed economies if observers were to be honest about it. Schumpeter’s “creative destruction” has been destructive of product and related labor markets yet has failed to recreate many jobs in the process. In order to maintain our caloric intake, policies favoring debt accumulation as opposed to savings took hold. Falling interest rates, lower taxes, deregulation and financial innovation all favored financial asset growth that unrealistically brought future earnings and spending power forward to peak levels last seen at the popping of the dotcom and housing bubbles. Developed economies now resemble a 110-pound weakling as opposed to Charles Atlas or a much younger Arnold.

Yet to return to my initial criticism of cyclically finance-based as opposed to structural policy solutions, almost all remedies proposed by global authorities to date have approached the problem from the standpoint of favoring capital as opposed to labor. If the banks could just be stabilized, if the “markets” could just be elevated back in the direction of peak 401(k) levels, if interest rates could just be lower so that borrowers would inevitably take the bait, then labor – job creation – would inevitably follow. It has not. The explanation for why not must at least include the rationale that Wall Street and Main Street are symbiotically connected and if one benefits at the expense of the other, then both ultimately can falter.

That there is a current imbalance is obvious from Chart 1, which shows before-tax corporate profits as a percentage of Gross National Income (GNI). It is obvious that “capital” as opposed to “labor” – moving from 8 to 13% of GNI over the past three or even 30 years – has been the cyclical and secular champion. Why one or the other should be policy and politically advantaged is not commonsensically clear. Granted, the return on capital as opposed to the return to labor should logically be higher if only to encourage savings. But once an historical midpoint or range has been established, a relative equilibrium should be observed. Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road. Until recently, economic recovery has been relatively robust if one were a deployer of capital as opposed to the laborer who made that deployment possible. Near zero percent interest rates have allowed profit margins to widen even in the face of anemic end demand. As well, “productivity” has remained high, but only because of layoffs and the production of goods and services with fewer people. While that is a benefit to capital, it obviously comes at a great cost to labor.
Ultimately, however, both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize. Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. Washington, London, Berlin and yes, even Beijing must accept this commonsensical reality alongside several other structural initiatives that seek to rebalance the global economy. The United States in particular requires an enhanced safety net of benefits for the unemployed unless and until it can produce enough jobs to return to our prior economic model which suggested opportunity for all who were willing to grab for the brass ring – a ring that is now tarnished if not unavailable for the grasping. Policies promoting “Buy American” goods and services – which in turn would employ more Americans – should also be reintroduced. China and Brazil do it. Why not us?

If structural solutions are not put in place, a six-pac market observer should look at both stocks and bonds as rather flabby knock-offs of their former selves; no resemblance at all to Jack LaLanne but more to a 55-year-old terminator grown fat and rendered out of shape by years of neglect and perhaps greed for short-term profits as opposed to long-term balance. There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years. A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”
William H. Gross
Managing Director

ISM Manufacturing Comes in at 51.6 vs Expectation of 50.5

The gloom was so pervasive this morning that a "meh" figure of 51.6 on ISM Manufacturing was enough to lift the S&P futures nearly 10 points instantly.  Amazingly it happened just as we saw a test of that 1120 level, which has been a rock for months.  Nothing to write home about, but in the context of a doom and gloom world traders are content.

I tweeted about an hour ago

@fundmyfund $$ ISM manufacturing at 10 AM has a low bar at 50.5, so any upside surprise could reverse margin (market) short term from its perverse gloom.

S&P up 15 points now as I type, from the lows.... we'll know in a few hours how much of this is simply short covering. 


Full report here.  New orders were flat (bad), employment ticked up 2 (good), and prices were up 0.5 (don't know if the market wants higher prices or not at this time).
  • "The economy continues to be a drag on our business outlook. We are trying to deal with new and additional FDA regulations which are costing significant dollars. It is hard to recoup any of these additional costs in our pricing levels without losing significant sales volumes." (Chemical Products)
  • "Market is cautious, but still steady." (Electrical Equipment, Appliances & Components)
  • "Global demand for semiconductors is down and maybe not yet 'bottomed out.' Inventory reduction activities are a priority." (Computer & Electronic Products)
  • "Still strong automotive demand." (Fabricated Metal Products)
  • "Orders remain consistent and steady — no sign of lower demand." (Paper Products)
  • "Japan supply chain issues are over, but exchange rates and raw material prices are hurting our profit." (Transportation Equipment)
  • "We sense a weakening in demand, but it is not extreme at this point." (Plastics & Rubber Products)
  • "Overall, business is improving with a measurable uptick in orders this month. Part of that is due to pre-holiday season orders." (Miscellaneous Manufacturing)
  • "Business continues to be sluggish." (Furniture & Related Products)



PMI 51.6 50.6 +1.0 Growing Faster 26
New Orders 49.6 49.6 0.0 Contracting Same 3
Production 51.2 48.6 +2.6 Growing From Contacting 1
Employment 53.8 51.8 +2.0 Growing Faster 24
Supplier Deliveries 51.4 50.6 +0.8 Slowing Faster 28
Inventories 52.0 52.3 -0.3 Growing Slower 2
Customers' Inventories 49.0 46.5 +2.5 Too Low Slower 30
Prices 56.0 55.5 +0.5 Increasing Faster 27
Backlog of Orders 41.5 46.0 -4.5 Contracting Faster 4
Exports 53.5 50.5 +3.0 Growing Faster 27
Imports 54.5 55.5 -1.0 Growing Slower 25
OVERALL ECONOMY Growing Faster 28
Manufacturing Sector Growing Faster 26
*Number of months moving in current direction.

New Quarter, Same Issues

While the calendar changes, and a new quarter begins - we are in the same quagmire we faced as we exited the last quarter.  We are not even getting the beginning of month/beginning of quarter ramp up we were so used to in many months in 2010 and early 2011.

S&P 1120 has been a level cited so many times the past few months as support, and it looks to be tested yet again this morning.  As of this writing it looks like the S&P 500 might pierce it, but let's wait for the open.  Below 1120 is 1100 but that secondary level has not been in play for a long time.  We'll deal with what happens at 1100 or below if/when we get there.

Troubling was the weakness in leadership stocks late last week, or what I call 'the generals'.  There were a lot of blowups in some names a lot of people are hiding out in - it looked like a forced liquidation to me the day it happened, but something to keep an eye on.


As for the economic docket, this is the one week of the month where news comes hot and heavy ... and more importantly people in the market actually pay attention (they've more or less given up on housing or inflation data as market moving).

Key reports:

Monday - ISM Manufacturing 10 AM, consensus 50.5 (down from 50.6)
Wednesday - ADP Employment 8:15 AM, consensus 90K (down from 91K) [of course this figure was nowhere near close what the government reported last month(
ISM Non Manufacturing 10 AM, consensus 52.9 (down from 53.5)
Friday - Employment report 8:30 AM, consensus +65,000 - of which 45,000 will be returning Verizon workers from strike. (up from 0 last month).  Unemployment rate consensus 9.2%.

Over in Greece, it looks like they have missed their deficit targets yet again (yawn).

Thankfully, earning reports begin soon, so we'll have something to talk about that is not macro related.

Friday, September 30, 2011

Quarter 3 a Horror Show for Commodities

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

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

BusinessWeek has what looks like a cover story, taking a very in depth of the world that is (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,—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%

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

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

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

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’.

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

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)

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

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.

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%

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

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

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. 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

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

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]


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

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, 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: - 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

    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]

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