Monday, October 10, 2011

Took All Day But....

That 1188ish level held for a good 5 hrs, but they snatched it away there in the last 5-10 minutes.

next range is 1190ish to 1225ish.  The bulls now have their mojo back with the global bailout power back in force.

Volume stunk, but no one cares about volume in the new intervention era post 2008.

Don't have final #s yet, but since 1940, the NYSE has never had a 90% up day on the lowest volume in a month. $$

(until today) ;)

Doug Kass - 10 Questions for the Bears

Isn't it amazing after a frantic run up in the first hour, we have sat in a +/- 2 point range on the S&P around that 1188 level I mentioned  for hours on end?  Ahh, computers....

Last week hedgie Doug Kass asked 10 questions for the bulls; this week he has 10 for the Bears... and not just how they expect to stop Detroit's offense tonight on Monday Night Football. (duu duh duu duu)

  1. Pace of domestic economic growth: Third-quarter 2011 GDP (in real terms) will likely expand by over 2.5%, well above 2011's first-half growth of less than 1%. This pace of growth is stronger than the consensus forecast was as recently as a month ago, as business fixed investment, personal consumption expenditures and the improving trade deficit will all be positive contributors to growth. As well, third-quarter S&P 500 corporate profit growth (aided by a still-weak jobs market, strong productivity gains and rising production) should advance to a near $100-per-share annualized rate. Sure, beyond the current results, visibility is limited, as the manufacturing orders less inventory mix produced the third negative reading in four months and the household sector labors under a decline in stock and home prices, a contraction in government jobs and stagnating wages and little progress in real incomes.
    Nevertheless, both the residential real estate and the U.S. automobile industries are deeply depressed, represent historically low percentages of GDP and pent-up demand will be unleashed at some point. Almost all of the other recent domestic economic releases (e.g., jobless claims, the national ISM and lower food and energy prices) signal that the U.S. will muddle through into 2012. Meanwhile corporations have already proven that they are positioned to prosper even in a relatively sluggish backdrop -- for instance, in the first half of this year, earnings exceeded expectations despite sub-1% GDP growth. Corporate balance sheets are liquid, inventories are conservatively aligned relative to sales, and profits are at record returns in third quarter 2011 (as profit margins having benefited from, among other factors, years of cutting fixed costs).
  2. Europe and China: While Europe is a wild card, it rarely ever pays to bet on catastrophe. European leaders, though slow in response, no doubt have a full understanding of the consequences of not addressing their debt crisis. As I mentioned recently on "Fast Money," the eurozone and its banks are now experiencing a La Dolce Vita moment -- in the same way in which Marcello Mastroianni struggled between the allure of the cafe life in Rome and the responsibilities of living with his girlfriend. This was exactly what the U.S. and our financial institutions experienced three years ago -- as a country, we were forced to find our way back to recovery and our banks were forced to accept responsibility (and recapitalize) for their misdeeds.
    My expectation is that the eurozone will become domesticated and accept the consequences of its actions (and recapitalize). Indeed, on Sunday, Merkel and Sarkozy agreed to a eurozone bank recapitalization.
    As to China, the September Chinese HSBC Markit Service PMI climbed back to 53.0, a blow to those who believe in a hard landing.

Read the other 8 here.

CBO Estimates Fiscal 2011 Deficit Matches 2010 at $1.3 Trillion

Not sure if this is 'better than expected' or 'worse than expected' but the hits keep on coming.  Revenue was hit on both the corporate and individual side (social security) due to tax cuts.  Without those hits the gap would have narrowed a bit.
  • Spending and tax revenue both grew, but by equal amounts: about $140 billion. That left spending at $3.6 trillion and revenue at $2.3 trillion.
The one 'improvement' is since the economy grew, the deficit was 'only' 8.6% of GDP versus the prior year's 8.9%.

I'd expect a deficit well in excess of a trillion in fiscal 2012 as well (Oct 2011-Sep 2012).

  • The federal government ran an estimated $1.3 trillion budget deficit in fiscal 2011, the same amount as in the previous year, the Congressional Budget Office said Friday.
  • In its monthly assessment of the government's finances, the nonpartisan congressional scorekeeper said the $1.3 trillion deficit was equivalent to 8.6% of gross domestic product, down from 8.9% in fiscal 2010 but still the third-highest percentage of GDP recorded since 1945
  • Spending on education, commerce, housing and space programs fell, and spending on defense, Medicare, Medicaid and Social Security grew more slowly than usual.
  • Not all tax receipt categories grew, however. Nor did all spending categories fall or moderate.
    Corporate income tax revenue overall fell about 6% due to stimulus-based tax cuts that let companies accelerate their deductions. Similarly, social insurance tax receipts, which support Social Security and Medicare, fell 5.3% because of the payroll tax cut approved by Congress in December 2010.
  • The national debt now stands at $14.9 trillion and interest payments on the debt shot up last year to $266 billion. 

Short Selling Rises Most Since 2006 in September - Just Ahead of Rip Roaring Rally of October

It almost never fails does it?  Just as investors position themselves for zig.... instead zag happens.  Apparently we just saw the largest increase of short selling since 2006 in September - which worked out nicely for about 1.75 days in October, before this face ripping rally of 10%.  One can be sure part of this move upward is those newly placed shorts covering - indeed we saw such a vicious move last Tuesday in the closing 45 minutes, I have to assume many of those positions were harpooned that day.

  • Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.  Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006.
  • Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
  • Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market. 
  • “The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.”
  • About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995. 
  • Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show. 
  • The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.

And the last time this happened?
  • Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value.

Like Clockwork...1188

That did not take long... we are already seeing a 1188 print on the S&P 500 as of 10:22 AM.  This is now a 10% move from late Tuesday afternoon (3 PMish) when the S&P hit 1080, and that news report hit on about a plan for a plan for recapitalizing the European banks.

Certainly the mood has taken a 180 degree turn, but chasing 10% up (in 4 sessions) does not appear to be an awesome risk/reward scenario.   From here, if the index breaks above and closes over say 1190 you have a new range (part of the old range in fact) to look at which is essentially 1188 to 1225.

As stated for the past few months, one would like to see a break back over the 200 day moving average to get a lot more constructive.  We are talking 1240 minimum.

I am not sure how many more days we can rally on essentially the same news - it's been 4 of of the past 5.  We get it - the private debts of Europe will be transferred and backstopped by the public ala USA.  The Paulson / Geithner ethos has won - party on Beavis.

[Video] Alan Grayson Describes What Occupy Wall Street is All About on Real Time w/ Bill Maher

Former Rep Alan Grayson was considered a bit of a loose cannon when serving in Congress, but was a favorite of the blogosphere for being quite blunt - agree or disagree with his views.  As the 'Occupy Wall Street' "mob"* strengthens, the question is what is their main message - especially as a lot of groups piggy back.  Grayson was on Real Time with Bill Maher and probably explains the main thrust better than I've seen in a lot of other media outlets.  My main beef with his explanation is I believe the issue is 'corporatism' rather than 'Wall Street' - blaming Wall Street for the what has corrupted the system is incomplete.  Broadly speaking many people feel that the political system is bought and paid for, and their voice is no longer heard.  As long as we had bubbles of the stock and real estate sort to distract, and create a sense of wealth that was transitory, that was 'ok', but now that the tide has washed out, and economic opportunities are lacking for many - it has become an issue.

This is a 5 minute video - but you can skip straight to minute 1:40 for where Grayson begins to talk.

*Cantor's words....

Rallying on a Plan for a Plan in Europe

After a hiatus Friday afternoon, markets have picked up where they left off since Tuesday afternoon when the reported a plan for a plan to recapitalize European banks.
  • German Chancellor Angela Merkel and French President Nicolas Sarkozy on Sunday said a comprehensive response to the debt crisis would be finalized by the end of the month, including a detailed plan to ensure European banks have adequate capital.  
  • Merkel has said that policy makers will do "everything necessary" to provide enough capital to banks to stem a debt crisis.  
  • Paris wants to tap the EFSF to shore up its banks, worried that pouring its own money into them could compromise its coveted triple-A credit rating.  Officials in Berlin have made clear that they believe the fund should be used only as a last resort, when euro zone member states don't have the means to support their banks on their own.
  • German news agency DPA, citing financial sources, reported on Sunday that euro zone finance ministers were working on scenarios involving a 60 percent reduction in Greece's debt.

David Cameron is channeling Hank Paulson:
  • As they met, British Prime Minister David Cameron urged them to take a "big bazooka" approach to the crisis, telling the Financial Times that euro zone leaders had to break their cycle of doing "a bit too little, a bit too late."

As for U.S. markets, the conversation is identical to what we mentioned late last week.  That 50 day exponential moving average, near 1188, is one traders will keep an eye on as it has represented resistance for the better part of three months.  If that is broken, then the next level to watch is the mid 1220s, which is now both the highs during this selloff from late August, as well as where the 100 and 200 day moving averages are quickly headed to.

Thankfully, earnings season slowly begins this week so we have something else to talk about other than Europe.

Saturday, October 8, 2011

So Funny - Whatever Happened to Alex P. Keaton

If you are old enough to remember the iconic Alex P. Keaton character from Family Ties, plus have been following markets the past two decades, this tongue in cheek piece by The Reformed Broker, will tickle your funny bone to the extreme.  It takes a look at what Alex's journey would have been like in the 2 decades after securing his dream job in 1989 at a major Wall Street investment firm. 

In the final episode of Family Ties, which aired in the spring of 1989, Alex P. Keaton (played by Michael J. Fox) was en route to his dream job at a major Wall Street investment firm after graduating college.  He was 23 years old and had spent the entire Reagan decade preparing for his yuppie ascendance.  Let's take a look at Alex's career in finance over the ensuing two decades...

1990 - 1993:  Alex makes his bones as a junior investment banker at Lazard Freres & Co in New York.  His team takes advantage of the Savings and Loan crisis in which 787 deposit institutions failed costing almost $100 billion to mop up by snagging real estate all over the country at pennies on the dollar.  Alex is in his mid-20's and still rocking the suspenders/white collar-on-blue shirt look.

1993-1996:  An explosion of more than 500 Initial Public Offerings finds Alex riding high as an underwriter at Merrill Lynch.  He takes a myriad of deals public including Boston Chicken, Snapple Iced Tea and Callaway Golf to name a few.

1998:  Alex is now operating out of Silicon Valley as a research analyst/investment banker for Thomas Weisel.  The deal flow is fast and furious and Alex is in a position to both bring web companies public and then 'rate" them on the sell side.  It's a win-win for both the bankers and the companies...not so much for the retail investors who buy in the secondary.


Follow the link for the rest... haha.

John Paulson's Main Advantage Fund Down 47% thru September!


While John Paulson still has his $15 or $20B in personal wealth, the performance of his main hedge fund in 2011 is going to go down in the books as a spectacular flame out - and take a big hit out of his reputation.  September appears to have been an epic disaster.  Bloomberg is reporting his main hedge fund has almost lost HALF of its value year to date thru the end of September.  That's simply incredible.  While I have not agreed with his rosy economic outlook the past 2 years, and his emphasis on financials, I am not sure how you do that badly, especially when the broader market is only off 8-12% for the year.  It might take years to get this fund generating performance fees, due to the clawback provisions.  It will be interesting to see how much money is taken out by investors by the end of October.

  • John Paulson, the billionaire who is betting on an economic recovery by the end of 2012, has lost 47 percent this year in his largest hedge fund, according to three people with knowledge of the matter.  Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies, uses leverage to amplify returns
  • The fund’s gold share class declined 32 percent this year through the end of September, said the people, who asked not to be identified because the fund is private.
  • Paulson, 55, would have to return about 89 percent in the remainder of the year to break even in the Advantage Plus Fund. Paulson & Co., which is based in New York and manages $30 billion, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp.
  • The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, has fallen 31 percent this year, according to the people.

[Sep 28, 2011: From Penthouse to Outhouse - Investors Try to Avoid Paulson's Positions]
[Aug 10, 2011: John Paulson's Main funds Down 21% and 31% for the Year]
[Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]
[Jun 6, 2011: John Paulson's Funds have Rough May]
[Jun 21, 2011: John Paulson Has Potential $720M Loss in Sino Forest]

Friday, October 7, 2011

2010 Census Reveals Interesting Nuggets on the Housing Market

Quite a bit of interesting information on the housing market courtesy of the 2010 census data.  Perhaps, most important the home ownership rate is quickly returning to the 'mean' we've seen pre-bubble in America.  I believe the rate peaked somewhere right around 69%, whereas we are already down to 65.1% - generally this figure has been around ~64%.

What can't be measured here in the raw data, is the change in attitude towards home ownership.  Where it was once a 'no brainer' and 'can't lose' proposition, now many don't want to be exposed to all the 'risk'.  Not sure on the long term implications, because this is going to have far reaching effects - many young adults and teenagers exposed to the bust are going to have a very different attitude the next few decades, than those who grew up in the 80s or 90s.

  • The American dream of homeownership has felt its biggest drop since the Great Depression, according to new 2010 census figures released Thursday.  The analysis by the Census Bureau found the homeownership rate fell to 65.1 percent last year. While that level remains the second highest decennial rate, analysts say the U.S. may never return to its mid-decade housing boom peak in which nearly 70 percent of occupied households were owned by their residents.
  • Unemployed young adults are least likely to own, delaying first-time home purchases to live with Mom and Dad. Middle-aged adults 35-64, mostly homeowners who were hit with mortgage foreclosures or bankruptcy after the housing bust in 2006, are at their lowest levels of ownership in decades.
  • Measured by race, the homeownership gap between whites and blacks is now at its widest since 1960, wiping out more than 40 years of gains. Blacks, who as a whole have lower income and higher unemployment than other groups, were particularly set back by the housing bust. Their homeownership rate fell from 46.3 percent in 2000 to 44.3 percent; among whites, the rate dipped slightly from 72.4 percent to 72.2 percent. Whites are now on average 1.63 times more likely than blacks to own a home, the widest gap since 1960.
  • "The changes now taking place are mind-boggling: the housing market has completely crashed and attitudes toward housing are shifting from owning to renting," said Patrick Newport, economist with IHS Global Insight. "While 10 years ago owning a home was the American Dream, I'm not sure a lot of people still think that way."
  • Nationwide, the homeownership rate fell to 65.1 percent -- or 76 million occupied housing units that were owned by their residents -- from 66.2 percent in 2000. That drop-off of 1.1 percentage points is the largest since 1940, when homeownership plummeted 4.2 percentage points during the Great Depression to a low of 43.6 percent.
  • Since 1940, the number of Americans owning homes had steadily increased in each decennial census due to a mostly booming economy, favorable tax laws and easier financing. The one exception had been 1980-1990, when ownership remained unchanged at 64.2 percent.
  • The U.S. housing crisis is far worse than the experience in most Western industrialized nations, which, unlike the U.S., did not foster markets of subprime lending to promote homeownership. The U.S. continues to maintain a relatively high rate of homeownership, surpassed only by countries such as Spain, Ireland, Australia and England.
  • "In the U.S., there's still a strong cultural pull toward homeownership, because in normal times it's always been seen as a way to build net worth and equity," said Dan McCue, research manager at Harvard's Joint Center for Housing Studies. But with many former homeowners now renting, he said, clearly that dynamic has changed: "It puts a renewed focus on rentals, and on ways to create new opportunities for low-income households to build their wealth."
  • In all, nearly 44 percent of all renters in the U.S. are minorities, compared with only 22 percent of homeowners.

Other census findings:
  • Homeownership rates decreased in each region of the country over the last decade. Midwesterners were most likely to own a house, at 69.2 percent, followed by Southerners at 66.7 percent, Northeasterners at 62.2 percent and Westerners at 60.5 percent.
  • For the fourth census in a row, West Virginia had the highest homeownership rate, at 73.4 percent. The District of Columbia, with its high share of single twenty- and thirty-somethings who rent, had the lowest at 42 percent.
  • While homeowners were the majority in most of the nation's metropolitan areas, they were outnumbered by renters in many of the nation's largest cities. They included New York City, where renters made up 69 percent of households, Los Angeles at 61.8 percent, Chicago at 55.1 percent and Houston at 54.6 percent.
  • By age, the highest ownership rate nationwide is for those 65 and older, about 77.5 percent. Older Americans are more likely to own their homes debt-free and thus be less exposed to the foreclosure crisis. Still, their homeownership rate is down slightly from a 2000 peak of 78.1 percent.
  • Among adults 34 and younger, homeownership was nearly 40 percent, the highest since the mid-1990s.  (that's an interesting anomaly) For adults in the 35-44, 45-54 and 55-64 age groups, homeownership rates fell to their lowest since at least 1980.

Someone Just Sneezed in Europe, S&P Drops 10 Points in a Few Minutes

It remains a nonsense, headline driven market - unhealthy to the extreme.  Things were coasting along on a very quiet Friday afternoon and then suddenly the S&P 500 lost 10 points in minutes ... best I can tell is because there is a quote of Merkel saying Eurobonds are the wrong way to go.  Is that the reason?  Who knows - the point is we are not trading on anything sensible anymore.  Fitch also just downgraded the debt of Spain and Italy - shocker! The volatility due to headlines is complete nonsense.  At any moment you can turn your head and the market can be moving to the tune of 1-2% due to a headline a computer reads....

Marketfolly: Hedge Fund Performance Figures for September and YTD

Hedge funds a whole had a quite rotten September, and quarter - indeed the worst quarter since 2008.  That said, as a whole they outperformed the general market (while mostly underperforming to the upside the past few years)
  • For hedge funds around the world, the average loss was 5.02 percent in the three months ended Sept. 28, according to Hedge Fund Monitor, a report compiled by analysts with Bank of America. Not since the third quarter of 2008, when the global financial system ground to a halt and hedge funds posted an average decline of 9.48 percent, has the $2 trillion industry performed so poorly.
  • Last month, managers who specialize in going long and short on stocks were hit particularly hard, with those hedge funds registering an average decline of 4.76 percent. Firms that focus on going long and short on stocks saw declines of 10.89 percent this past quarter.  Traditional long/short funds make bets on some stocks rising and other falling.

Marketfolly has a nice breakdown of a lot of the major hedge funds performance for both September and year to date.  Go there for the full list, but I'll pull over a few names better known, or that I follow more closely.

Lee Ainslie's Maverick Capital: Maverick Fund $1 billion
-7.91% in Sept, -16.92% ytd

Andreas Halvorsen's Viking Global
: Equities III Fund $1.6 billion
-2.19% in Sept, +0.70% ytd

Leon Cooperman's Omega Advisors: $1 billion Overseas Partners
-7.58% in Sept, -12.36% ytd

Jim Simons' Renaissance Technologies
: Institutional Equities $240 million
+0.76% in Sept, +24.37% ytd

David Einhorn's Greenlight Capital
: $7.2 billion
-0.76% in Sept, -6.16% ytd

John Thaler's JAT Capital: $1.4 billion
-3.2% in September, +30.68% ytd

Bill Ackman's Pershing Square Capital Management: $5.1 billion fund AUM, $8.8 billion firm AUM
-5.7% net in September, -15.8% year-to-date

John Paulson's Paulson & Co
Advantage Fund -6% in September, -28% ytd

Paul Tudor Jones' Tudor Investment Corp: $8.3 billion fund AUM
+4.9% in Sept, +5.45% ytd (BVI Global Fund)

Bruce Kovner's Caxton Associates: $6.8 billion fund AUM
+0.28% ytd through September 30th (Limited Fund ran by Andrew Law)

Louis Bacon's Moore Capital Management: $7.6 billion fund AUM
-1.64% ytd through September 29th

Brevan Howard (Flagship Fund): $24.3 billion fund AUM
+12.98% ytd as of September 23rd (run by Alan Howard)

Whitney Tilson's T2 Partners
-9.5% in September, -29.6% year-to-date

(as a side note, I went to go look at John Thaler's holdings - and he very much delves into very much the same stocks I do - of course we cannot see his short book, since it is not required to be disclosed to the SEC)

Some Quick Math on Unemployment Benefits

A few things of interest this morning.  One investment maven on twitter mentioned part of the reason for the huge spike in U-6 (from 16.2% in 16.5%) was a surge in the number of workers working 'part time for economic reasons': from ~8.8M to 9.3M.  That's half a million people.

I wonder if this is partly due to the exhaustion of 99 weeks of unemployment benefits finally starting to take hold (remember depths of the job losses were in 2008 and 2009) en masse.  Hence people who have been holding out for their old type of job, being forced to take any job. [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!] [Sep 4, 2009: Job Seekers Across America Willing to Take Substantial Pay Cuts] [Sep 2, 2010: NYT- New Jobs Mean Lower Wages for Many]

On another note, in another story I was reading there was a blurb that if the provision to continue the extension of 99 weeks of benefits was not approved (as part of Obama's jobs plan) 2.2M Americans would lose benefits by mid February.

Please note, I do expect that extension to be approved as part of some 'bargaining' with the GOP - but just to show you how much public assistance is contributing to GDP growth, I did a quick run on how much just losing this benefit would hit the economy.

The average weekly benefit across the country is ~$300.

Annualized, if we lose those 2.2M people getting unemployment benefits its
52 weeks x $300 x 2.2M people ~ $34.2 Billion

That's a quite dramatic 'anti-stimulus' if it were to be taken away (which again, I don't believe will happen)

[As an aside, the Obama administration estimates if there is no extension, 6M people would lose benefits by end of year 2012.  So you can take that $34B and triple it for the annual hit by end of 2012]

[Nov 5, 2010: USA Today: Anti-Poverty Programs Surpass Cost of Medicare in US]
[May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]

September Employment 103K vs Expectation of 60K, Unemployment Rate Steady at 9.1%

Markets are reacting favorably this morning to a 'better than expected' figure for employment.  The bar remains very low as the country needs 125K+ jobs a month simply to keep up with population growth, but with 60K as an expectation this figure of slightly over 103K is deemed positive.   As mentioned a few times this week, 45K of the 'job creation' was Verizon workers returning from strike.

Private sector added 137K, government dropped 35K.

Unemployment rate remained steady at 9.1%.

Hourly wages gained 0.2%

U-6 (broader measure of unemployment, including those who are working part time but wish for full time jobs, etc) jumped sharply from 16.2% to 16.5%.

Previous two months were revised upward by 99K total (positive) - usually the government seems to be revising figures downward not upward, so this is a change.

In a touch of irony, August's figures were originally counted as 0.  It has been revised up to 57K.  If you add back the striking Verizon workers, August's growth would have been.... 103K.  (which just so happens to be this month's net growth as well).  Of course if you add back the striking workers from August's figures, you'd need to subtract them from September's.


As always what the true number will be after revisions - who knows.  (see the previous month's revisions)  But the market reacts to each economic data point as gospel.

As mentioned yesterday, a better than expected jobs figure could put us nearer to that 1188ish level - which would be a remarkable move since Tuesday afternoon.  Well, it's already a remarkable move of some 9%.

Thursday, October 6, 2011

[Video] Bloomberg; Michael Lewis Interviewed on New Book 'Boomerang', as Well as 'Moneyball' and the Economy

If you are interested, here is a 14 minute interview Michael Lewis did on Bloomberg that covers his new book, one of his non financial books being made into a movie, and a general discussion of the economy and Wall Street.

Email readers will need to come to site to view

Ports in a Storm - Best Performing Stocks During this Down Movement

While the S&P 500 peaked for the year at the turn of May, there was a secondary high in early July from which this leg down began.  This is now about 3 months ago.

I thought it would be interesting to take a look at what names have performed the best during that time frame.

As always, we'll exclude the smallest names (>$300M market cap), and illiquid (>200K shares traded), and stick to names over $10.  There is a small sampling (71 stocks and ETFs) of names that returned at least 5%.  I segregated the ETFs in their own area, as many of the best performers are of the 'inverse' variety.


Ticker Company Return  Mkt Cap  Industry
MMI Motorola Mobility Holdings, Inc. 66.74%          11,209 Diversified Communication Services
STMP Inc. 63.59%                327 Catalog & Mail Order Houses
EM Emdeon Inc. 41.62%            2,185 Business Services
ALXN Alexion Pharmaceuticals, Inc. 33.53%          11,941 Drug Manufacturers - Other
HRBN Harbin Electric, Inc. 28.68%                681 Industrial Electrical Equipment
LQDT Liquidity Services, Inc. 26.12%                883 Internet Software & Services
GR Goodrich Corp. 25.57%          15,041 Aerospace/Defense 
CALP Caliper Life Sciences, Inc. 25.48%                569 Scientific & Technical Instruments
ATHN athenahealth, Inc. 24.50%            2,043 Business Services
ARJ Arch Chemicals Inc. 23.48%            1,190 Specialty Chemicals
NLC Nalco Holding Co. 22.69%            4,967 Synthetics
PANL Universal Display Corp. 22.01%            2,066 Computer Peripherals
VRUS Pharmasset, Inc. 22.01%            5,752 Drug Manufacturers - Other
CPHD Cepheid 21.96%            2,549 Scientific & Technical Instruments
NETL NetLogic Microsystems Inc. 19.99%            3,331 Semiconductor- Memory Chips
SIMO Silicon Motion Technology Corp. 19.27%                387 Diversified Electronics
MXWL Maxwell Technologies Inc. 17.29%                541 Diversified Electronics
EVEP EV Energy Partners LP 16.63%            2,315 Oil & Gas Drilling & Exploration
KCG Knight Capital Group Inc. 15.72%            1,292 Investment Brokerage - Regional
RGR Sturm, Ruger & Co. Inc. 15.63%                513 Sporting Goods
GOLD Randgold Resources Ltd. 15.44%            8,884 Gold
NEM Newmont Mining Corp. 15.17%          34,243 Gold
JAZZ Jazz Pharmaceuticals, Inc. 15.04%            1,689 Biotechnology
PPDI Pharmaceutical Product Develop 13.81%            3,633 Medical Laboratories & Research
SPRD Spreadtrum Communications Inc. 13.47%                907 Semiconductor - Broad Line
BMRN BioMarin Pharmaceutical Inc. 13.41%            3,642 Biotechnology
OPTR Optimer Pharmaceuticals, Inc. 12.85%                634 Biotechnology
REXX Rex Energy Corporation 12.70%                532 Oil & Gas Drilling & Exploration
WMGI Wright Medical Group Inc. 12.58%                695 Medical Appliances & Equipment
THS Treehouse Foods, Inc. 12.29%            2,163 Processed & Packaged Goods
ELGX Endologix Inc. 11.74%                613 Medical Instruments & Supplies
VFC V.F. Corporation 11.72%          13,843 Textile - Apparel Clothing
BMY Bristol-Myers Squibb Company 11.44%          55,827 Drug Manufacturers - Major
AUY Yamana Gold, Inc. 11.17%          10,237 Gold
LOPE Grand Canyon Education, Inc. 10.98%                721 Education & Training Services
DG Dollar General Corporation 10.49%          12,881 Discount, Variety Stores
XRTX Xyratex Ltd. 9.30%                331 Data Storage Devices
PCYC Pharmacyclics Inc. 9.29%                789 Drug Manufacturers - Other
DLTR Dollar Tree, Inc. 9.07%            9,344 Discount, Variety Stores
PSMT PriceSmart Inc. 8.82%            1,948 Discount, Variety Stores
HITK Hi Tech Pharmacal Co. Inc. 8.74%                406 Drugs - Generic
BVN Compania de Minas Buenaventura  8.62%          10,907 Gold
BAP Credicorp Ltd. 8.60%            7,258 Money Center Banks
QCOR Questcor Pharmaceuticals, Inc. 8.59%            1,828 Biotechnology
RGC Regal Entertainment Group 8.23%            1,951 Movie Production, Theaters
MLNX Mellanox Technologies, Ltd. 8.07%            1,174 Semiconductor - Broad Line
ARCO Arcos Dorados Holdings Inc. Cla 7.54%            5,048 Restaurants
CHL China Mobile Limited 7.18%       197,656 Wireless Communications
RNOW Rightnow Technologies Inc. 6.93%            1,133 Application Software
KMB Kimberly-Clark Corporation 6.53%          27,559 Personal Products
AZO AutoZone Inc. 6.38%          13,192 Auto Parts Stores
AAPL Apple Inc. 5.89%       350,672 Personal Computers
CHD Church & Dwight Co. Inc. 5.72%            6,212 Cleaning Products
IDCC InterDigital, Inc. 5.71%            2,261 Wireless Communications
CERN Cerner Corporation 5.63%          11,480 Healthcare Information Services
RRC Range Resources Corporation 5.50%            9,693 Independent Oil & Gas
EGO Eldorado Gold Corp. 5.47%            9,241 Gold
RGLD Royal Gold, Inc. 5.40%            3,493 Gold
NI NiSource Inc. 5.21%            6,008 Diversified Utilities


Ticker Company Return  Mkt Cap  Industry
FAZ Direxion Daily Financial Bear 3X  54.37%            6,821 Exchange Traded Fund
TZA Direxion Daily Small Cap Bear 3X  53.67%            1,812 Exchange Traded Fund
SKF ProShares UltraShort Financials 41.77%            2,351 Exchange Traded Fund
SCO ProShares UltraShort DJ-UBS Crude Oil 39.20%          74,583 Exchange Traded Fund
TLT iShares Barclays 20+ Year Treas Bond 30.20%            3,617 Exchange Traded Fund
SDS ProShares UltraShort S&P500 26.66%            2,738 Exchange Traded Fund
BAB PowerShares Build America Bond 12.51%            3,346 Exchange Traded Fund
QID ProShares UltraShort QQQ 11.28%            3,100 Exchange Traded Fund
IEF iShares Barclays 7-10 Year Treasury 10.19%            3,324 Exchange Traded Fund
GLD SPDR Gold Shares 6.91%          65,395 Exchange Traded Fund
IAU iShares Gold Trust 6.89%            6,184 Exchange Traded Fund
TIP iShares Barclays TIPS Bond 5.09%          21,171 Exchange Traded Fund

Quickly Approaching Resistance

That report in the FT late Tuesday has done wonders.  The S&P 500 was sitting at 1080, and then we had that 45 minute explosion to close out the day.  Other than a little hit first thing yesterday morning, and first thing today (a massive reversal at 10 AM) we've been straight up.  To the tune of around 80 S&P points... that's a >7% move in just over a day and a half of market time.  The volatility continues to mark an unhealthy market, but as always unhealthy feels better when its to the upside rather than the downside.

The 50 day moving average has been a very good tag as resistance since late August, so we'll see if that happens again.  It has a very steep downward slope now, so has dropped below 1190, from the mid 1210s a few weeks back.  Bulls would like to see this level cracked, to begin to get more constructive.

That level is about 2.6% higher from here, and if for example it was hit tomorrow it would be a full 10% move since about 3 PM Tuesday.  Wicked volatility.

Remember we have the monthly employment data tomorrow, which might skew upward due to the 45K Verizon workers returning from strike - but to keep this sort of hectic momentum going we're most likely going to need a nice upside surprise.

Average Rate on 30 Year Mortgage Drops Below 4%

I joked around 3 years ago that ultimately Ben Bernanke would push mortgage rates down to the 3% range - that was a tongue in cheek comment.  Lo and behold, it truly has happened.  Probably as amazing, is historically low rates all year the "housing rebound" bulls have been speaking of for 3 years, has yet to materialize.  I contend we are still years away.  That said, all this refinancing (for those who can) is extremely beneficial to cash flows.
  • Consider a homeowner who owes $250,000 and is paying 5.09 percent on a 30-year fixed mortgage. That was the average rate being offered in January 2010. Refinancing the loan at 3.94 percent could save him or her more than $2,000 a year.  But many homeowners with good jobs and stable finances have already refinanced over the past year.
  • The average rate on the 30-year fixed mortgage fell to 3.94 percent this week, the lowest rate ever. For those who can qualify, it's an extraordinary opportunity to buy or refinance.
  • Mortgage rates could fall even further now that the Federal Reserve plans to reshuffle its portfolio of securities to try and lower long-term rates.
  • On Thursday, Freddie Mac said the average rate on a 30-year fixed mortgage dropped from 4.01 percent last week, the previous low. The average rate on a 15-year fixed loan, a popular refinancing option, dipped to 3.26 percent, also a record.
  • Still, rates have been near historic lows for more than a year and have done little to boost home sales. Many people don't have enough cash or home equity to get a loan, or they are reluctant to take the risk in this market.
  • This year is shaping up to be among the worst for sales of previously occupied homes in 14 years.


Considering the drop in rates, yesterday's data in purchases and refinances is (to over use the word) amazing.  One would think refinance activity (if not purchasing) would be flying.
  • The MBA said overall mortgage application volume was down by a seasonally adjusted 4.3% from the prior week.  Refinance applications were down by 5.2% from the prior week, while home-purchase apps were down by 0.8%, according to the MBA.

Also we haven't heard anything in the past month about the program floated to refinance every American with a government backed loan to these new rates.  [Aug 26, 2011: White House Considering Plan for Country Wide Refinance of Government Backed Mortgages]  Hmm...

    Average U.S. Mutual Fund Lost 16.7% in Q3

    Ouch, a very rough quarter for the average diversified U.S. mutual fund.   While it was ugly all around [Oct 4, 2011: 3rd Quarter Performance for All of the Key ETFs] the mutual fund complex underperformed both the S&P 500 and NASDAQ  significantly.  It did outperform the Russell 2000 (-22.3%).

    Via IBD:  (unfortunately very little data in the story)

    • The average U.S. stock fund plunged 16.7% in the July-through-September period.  That's the worst quarter since the third quarter of 2008.
    • International large-company core funds, one of the most popular types of foreign funds, dropped 20.4%. Funds that invest in China swooned 25.6%, falling even more than Europe funds, which posted a 23.1% loss. Japan funds fared the best globally, losing a modest 5.3% in the third quarter.
    • As gold and silver prices fell from their highs, commodity precious metals funds lost 3.9% in the third quarter. Other commodity-related funds were down across the board in the third quarter as raw material prices fell amid the global economy's slowdown. Likewise, basic materials funds performed the worst, crumpling 27.1%.

    Bank of England Re-Joins the QE Parade with Additional 75B Pounds

    The Bank of England returned to the QE market, for the first time since 2009, by raising the amount of its asset purchase program from 200B pounds to 275B pounds.  75B pounds is about $115B US dollars.  While we have been conditioned to big numbers and hence this doesn't 'feel' like a huge amount, relative to the English economy it is huge.  In U.S. terms (the U.S. economy is roughly 6.5x the size of the U.K. economy) this would be the equivalent of just under $750B i.e. bigger than QE2 in relative terms.  And it will be done in a relatively short amount of time - 4 months. The pound is of course taking it on the chin, as the global race to the bottom in currencies continues.

    Bigger picture, with inflation far above the targeted rate in England, this shows a change in thought from central bankers away from worrying first about price stability.  Something that has been hinted at elsewhere.
    • Today’s expansion shows policy makers are prioritizing the recovery over the threat from inflation, which was 4.5 percent in August, more than double the Bank of England’s target

    Via Bloomberg:

    • The Bank of England pledged to buy the most bonds since the depths of the last financial crisis as officials raced to stop the euro-region debt turmoil from pushing the economy back into recession.  The nine-member Monetary Policy Committee led by Governor Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted an increase in asset purchases.
    • The central bank expects the new round of stimulus will take four months to complete and it will keep the program “under review.” 
    • The pound dropped and bonds jumped after the decision, which came a day after a report showed Europe’s second-biggest economy grew less than previously estimated in the quarter through June. The central bank said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.”
    • “I think it’s a dramatic intervention and signals the urgency of the situation,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London, who predicted a 50 billion-pound expansion. “I expect the size of the program to be increased further.” 
    • The pound fell as much as 1.2 percent against the dollar after the decision to $1.5272

    Wednesday, October 5, 2011

    Steve Jobs of Apple (AAPL) Just Passed Away

    Damn - knew he was sick, but didn't think anything of this nature would happen so soon. R.I.P. - one of the best innovators ever.  Can't think of a better known business name to the masses in this era other than Bill Gates.


    CNBC has coverage now if you are watching TV.

    Nice piece on Yahoo by Dan Gross

    And another very in depth one at Wall Street Journal.

    Fron the Apple (AAPL) Board

    We are deeply saddened to announce that Steve Jobs passed away today.

    Steve’s brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve.

    His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts.

    ISM Non Manufacturing Solid at 53.0 vs Expectations of 52.8

    ISM Non Manufacturing came in at 53.0 which was slightly above expectations of 52.8.  I am however stroking my proverbial beard, as we are not getting the type of pop we saw Monday on the 'better than expected' figure in the ISM Manufacturing data.  The U.S. economy is much more service oriented so this data point actually means more.  But maybe we used up a lot of our wad in the last 40 minutes yesterday. EDIT 10:07 AM ok now we are reacting, and just tacked on 6-7 S&P points.

    Still holding that 1120 level which every human and silicon eye has its gaze at. 

    Full report here.   Overall the underlying metrics for new orders and prices are good, but employment fell flat on its face).


     "The NMI registered 53 percent in September, 0.3 percentage point lower than the 53.3 percent registered in August, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 1.5 percentage points to 57.1 percent, reflecting growth for the 26th consecutive month. The New Orders Index increased by 3.7 percentage points to 56.5 percent. The Employment Index decreased 2.9 percentage points to 48.7 percent, indicating contraction in employment after 12 consecutive months of growth. The Prices Index decreased 2.3 percentage points to 61.9 percent, indicating prices increased at a slower rate in September when compared to August. According to the NMI, nine non-manufacturing industries reported growth in September. Respondents' comments reflect an uncertainty about future business conditions and the direction of the economy."

    • "Weak consumer confidence and high gas prices are placing downward pressure on retail sales volume." (Information)
    • "Business volume outlook and confidence across many market areas in North America appear to be softening." (Mining)
    • "It appears everyone is waiting to see what happens next. No trust in the economy or the federal government to do what is needed." (Accommodation & Food Services)
    • "The 2012 outlook is not optimistic; though we keep hoping for a rebound, we see little sign of an improved economy — nothing at least that will spur growth, investment or expansion. Improved investment performance in early 2011 caused us to begin several large capital projects, and although we have broken ground, we cannot help but question if our timing was right." (Educational Services)
    • "Third and fourth quarters appear to be slowing down in order volumes. Uncertainty over U.S. and European economy is causing clients to hold off on new orders." (Professional, Scientific & Technical Services)
    • "Negative forecast for housing market's future leads us to think we will be at current levels of business at best for the foreseeable future." (Wholesale Trade)
    SEPTEMBER 2011
    Non-Manufacturing Manufacturing
    Index Series
    Direction Rate
    NMI/PMI 53.0 53.3 -0.3 Growing Slower 22 51.6 50.6 +1.0
    Business Activity/Production 57.1 55.6 +1.5 Growing Faster 26 51.2 48.6 +2.6
    New Orders 56.5 52.8 +3.7 Growing Faster 26 49.6 49.6 0.0
    Employment 48.7 51.6 -2.9 Contracting From Growing 1 53.8 51.8 +2.0
    Supplier Deliveries 49.5 53.0 -3.5 Faster From Slowing 1 51.4 50.6 +0.8
    Inventories 51.5 53.5 -2.0 Growing Slower 8 52.0 52.3 -0.3
    Prices 61.9 64.2 -2.3 Increasing Slower 26 56.0 55.5 +0.5
    Backlog of Orders 52.5 47.5 +5.0 Growing From Contracting 1 41.5 46.0 -4.5
    New Export Orders 52.0 56.5 -4.5 Growing Slower 2 53.5 50.5 +3.0
    Imports 47.5 53.5 -6.0 Contracting From Growing 1 54.5 55.5 -1.0
    Inventory Sentiment 59.0 56.0 +3.0 Too High Faster 172 N/A N/A N/A
    Customers' Inventories N/A N/A N/A N/A N/A N/A 49.0 46.5 +2.5

    September ADP Employment Comes in at 91K vs 75K Expectation

    This report is not moving markets much - a slight positive bias since the data came out, but we'll mention in anyhow.  The data for September actually matched the previous month (91K in each), before August was revised down a tad to 89K.  Expectations were for 75K.  Full report here.  ADP shows bulk of hiring in small businesses, while large businesses actually retrenched.

    Keep in mind this figure does not include the striking Verizon workers, which hurt last month's official government report by 45K, and will help Friday's report by 45K.

    Of course the relationship between ADP and official government data is not linear - last month the government reported zero jobs versus the 91K (at the time) from ADP.

    I don't usually mention the Challenger layoffs report (I don't know the exact term but it signals large scale cuts) but this morning it was also reported at levels not seen since 2009.  It appears the U.S. Army and Bank of America accounted for about 2/3rds of the announced mass layoffs.
    • Employers announced 115,730 planned job cuts last month, more than double August's total of 51,114, according to the report from consultants Challenger, Gray & Christmas, Inc.  The figure was the highest since April 2009 when 132,590 layoffs were announced.
    • The 50,000 military cuts were the result of drawing down forces in two wars and cost-cutting efforts in all areas of the federal government. September's cuts followed an announced 17,500 reduction in August.
    Here is a quick video on the Challenger report.


    As for the market, we're back to that very important 1120 line on the S&P 500. Thus far indications are for an open above that level, as Europe is repeating what the U.S. did in the closing 30 or so minutes yesterday.

    By 9:59 AM the ADP report will be long forgotten as we look towards ISM Non Manufacturing.

    Tuesday, October 4, 2011

    Here is the Financial Times Story that Caused the Meltup

    If you are a FT subscriber, go here.

    I'm not, but Zerohedge is, so some snippets

    Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis...

    “There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

    Mr Rehn cautioned that while there was “no formal decision” to begin a Europe-wide effort, co-ordination among EU’s institutions – including the European Central Bank, European Banking Authority and the European Commission – on necessary measures had intensified."


    Not much to it other than (translated): people are starting to get freaked out, and when they freak out they break all the old rules.  (See USA 2008)  Frankly they could float this type of story out every 2 weeks ... not much different (and even more vague) than some rumors a few weeks ago about levered ESFS.


    What a move in these closing minutes... all the way back up to resistance, once support near 1120!  35 S&P points in the last 45 minutes?  That's a 3% move! Nice work PPT.

    EDIT - we went through 1120, now at 1123... wow.

    EDIT 4:08 PM - ok it appears a rumor the 18,275th European rescue plan was the cause.

    ....following a report that EU finance ministers are examining possible ways to recapitalize banks

    Michael Lewis (Vanity Fair) - California and Bust

    After tackling Europe for the past year, it seems famed writer Michael Lewis has turned his attention back to the states - specifically California.  His lengthy expose appears in this month's Vanity Fair - as always he brings a unique perspective...

    The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops—the local level, where the likes of San Jose mayor Chuck Reed and Vallejo fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society.

    Some older Lewis pieces here:

    That Just About Summarizes It

    Since Josh at the Reformed Broker often links to us, I should return the favor every so often.  His post this morning, titled 'Season of the Witch' is a worthy submission, which summarizes very nicely the state of global affairs. Worth a read.

    And as October 2011 begins, we find ourselves at the very nearest to the World of the Dead that we've been since the darkest days of the crash.

    There is little separating us from the outright deflationary hell-cycle that monetary policy and optimism had staved off for so long.  The Celtics dressed in costumes on Samhain in the hopes that the evil spirits they feared might not recognize them that night...given our current economic condition, I'm not sure that disguising in costumes would quite do the trick.

    The veil between recovery and recession has never been thinner and all the old ghosts of the past have returned to haunt us once again, some of them almost exact replicas of their prior incarnations.


    Also check out Doug Kass' 10 Questions for the Bulls'

    This week, I will ask 10 questions to both the bulls and the bears, the answers to which will help us determine the outlook for equities over the balance of the year and into 2012.  Today I will start by asking 10 questions to be addressed to bullish investors. (Later in the week, I will get to the bears.)

    Bespoke Invest: 3rd Quarter Performance of All the Key ETFs

    Avert eyes.  Hide the children.  Bespoke Invest shows us the 3rd quarter performance (and September alone) of the major ETFs and it isn't pretty.  Unless you like government bonds.  Or the yen.  The NASDAQ is notable for its 'relative' outperformance.

    [click to enlarge]

    The Bernank Calms Markets with Hint of QE3

    For the past year, in my mind it's only been a matter of when, not if.  It appears the groundwork for QE3 slowly begins today.  Ben says there are no inflation issues, hence it's good to go on more easing.

    "The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said.

    Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future. 

    “Bernanke is not saying anything that we haven’t heard recently,” notes David Ader at CRT Capital, but the idea of being “prepared to take further action can only mean QE3,” which means bulking up the Fed’s balance sheet...

    Pavlov dogs are responding accordingly with the NASDAQ now in the green.  They never change their stripes.  (let's see how long of a lift this one gets, versus yesterday's ISM Mfg data)

    It is amazing how drug dependent we now are.  If you look at the time frames the past 2+ years there has been no QE, the market has been in almost constant freefall.  When QE is on, we celebrate like its 1999.

    In an unrelated note - he did not apologize for being completely wrong with his 'transitory' comments this spring, as it related to the slowdown.  He also did not say oops on how badly off the Fed economic forecasts have been (yet again).  Because he is accountable to no one.

    Washington Post - America: Where all (Public Co.) CEO's are Above Average

    The nonsense where board of directors, chock full of CEOs and C-level executives from various companies, set the pay of other CEOs, has long been a pet peeve project here at FMMF.  I used to write a lot more stories about the subject but essentially have given up the ghost.

    As repeated countless times, if all company employees had their pay determined this way (a board of IT folk at 10 peer companies set the pay packages of the IT department, a board of HR folk at 10 peer companies set the pay packages of the HR department, etc) just about every company would be bankrupt within a few years, as human nature took over.  But since it's just the top position where pay is set this way, it's more easily absorbed on the P&L.  Therefore, the ratio of CEO pay to common worker bee has exploded from something like 40:1 in the 70s to 300:1 nowadays.

    Of course we are not even discussing the signing bonuses, perks, option grants, and 'bonuses' for being fired ... err, to spend more time with the family.  Somehow, executives of multinationals in Germany and Japan and other countries are able to lead their companies at far lower pay rates (and ratios versus the worker bees)- but I guess they just are not very talented people. 

    The Washington Post (with Bloomberg) takes a look at the country where every public company CEO is 'above average'.

    • As the board of Amgen convened at the company’s headquarters in March, chief executive Kevin W. Sharer seemed an unlikely candidate for a raise.  Shareholders at the company, one of the nation’s largest biotech firms, had lost 3 percent on their investment in 2010 and 7 percent over the past five years. The company had been forced to close or shrink plants, trimming the workforce from 20,100 to 17,400. And Sharer, a 63-year-old former Navy engineer, was already earning lots of money — about $15 million in the previous year, plus such perks as two corporate jets. 
    • The board decided to give Sharer more. It boosted his compensation to $21 million annually, a 37 percent increase, according to the company reports.  Why?  The company board agreed to pay Sharer more than most chief executives in the industry — with a compensation “value closer to the 75th percentile of the peer group,” according to a 2011 regulatory filing.
    • This is how it’s done in corporate America. At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.  
    • The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving.  But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect. 
    • It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.
    • Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group.  

    Mark's note - Again, think about how this would work in the rank and file - if the 'board of directors' for your IT department said to retain talent the IT folk had to be paid above the median.... and then EVERY public company in America... or at least 90% of them... had the same view, what would happen to IT wages across the country?  Then extrapolate that thinking to HR, accounting, sales, marketing, finance, R&D, engineering.  Labor costs would overwhelm the company (and all companies competing in this rat race of nonsense) and they'd be going BK.  It would be an outrageous concept at the worker bee level - but it is ok in the C-suite.

    [click to enlarge]

    • Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, (which goes against everything these boards say - i.e. 'we want the CEO pay to be aligned with shareholders returns blah blah)  according to two independent research efforts based on the new disclosures. “Peer benchmarking has a significant influence on CEO pay,” Bizjak said. “Basically, you can’t have every CEO paid above average without pay ratcheting upward over time.”
    • The gap between what workers and top executives make helps explain why income inequality in the United States is reaching levels unseen since the Great Depression.  Since the 1970s, median pay for executives at the nation’s largest companies has more than quadrupled, even after adjusting for inflation, according to researchers. Over the same period, pay for a typical non-supervisory worker has dropped more than 10 percent, according to Bureau of Labor statistics.  (now to be fair, the type of globalized companies, some of these CEOs manage, have become more complicated, and pay going up to compensate for that makes sense.  But 4x as much as the 70s?  Further, many public CEOs are not of the multinational type
    • Even before the extent of the practice was known, it drew criticism from prominent business figures. After the Enron scandals, a blue-ribbon committee led by Peter G. Peterson, then chairman of the Federal Reserve Bank of New York, and John Snow, former chairman of the Business Roundtable, called for setting executive pay “unconstrained by median compensation statistics.” 
    • Legendary investor Warren Buffett, in one of his famously plain-spoken letters to investors, likewise derided the method. “Outlandish ‘goodies’ are showered upon CEOs simply because of a corporate version of the argument we all used when children: ‘But, Mom, all the other kids have one,’” he wrote.
    • The practice has persisted because corporate board members, many of whom have personal or business relationships with the chief executive, (you scratch my back, I scratch yours) have been unwilling to abandon the practice.  At Amgen, for example, four of the six members of the board compensation committee had personal or business connections to Sharer before joining the board. In fact, he nominated at least two of the six to the board, according to a company source and reports.
    • These kinds of ties — between chief executives and the boards that oversee them — permeate corporate America. On a typical board, the chief executive considers about about 33 percent of the board of directors as “friends” rather than as mere “acquaintances,”according to a survey of chief executives at about 350 S&P 1500 corporations conducted over 15 years by University of Michigan business professor James Westphal.
    • More tellingly, the chief executive is likely to find even more friends on the compensation committees of corporate boards — almost 50 percent.  

    Mark's note - So take the example of peers at 10 other companies setting the pay of yourself, and then narrow it further to say 5 of those 10 peers are personal friends.  Imagine how ludicrous that would sound if you walked into the office of your boss and you explained that is how your compensation should be set... "look I can find 10 peers at other companies who do my kind of work, indeed I am personal friends with 5 of them - they know what I am worth.  Err, and that's 75% percentile or higher.  And by the way when those 10 people go to their companies and get their pay package set, they will of course be consulting me in return.  And they are certainly worth 75% percentile or higher as well."  You'd be laughed out of the room.  But this is essentially the crony capitalism system we employ at the top.

    • Moreover, the effects of his raises are not limited to Amgen.  In fact, because of peer benchmarking, raises at one company have ripple effects across corporate America: Thirty-seven other companies name Amgen as a “peer,” including Wal-Mart, MasterCard and Time-Warner, as well as other drug companies, according to Equilar.  Next year, at those companies that use Amgen as a peer, Sharer’s new compensation package will be used as a benchmark, propelling executive pay upward.

     The rest of the story mostly focuses on Amgen, but you get the point.


    [Sep 23, 2011: HPQ's Leo Apotheker Takes a $25M Severance Package Out the Door, after 11 Months of Work]
    [Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Area Rugs]
    [Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]
    [Sep 27, 2008: Heads We Win, Tails We Win]
    [Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]
    [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain]

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