[Video] Niall Ferguson on The Colbert Report

We had a more serious set of interviews with Niall Ferguson posted last week, but simply due to the fact this one is with Colbert, just had to post it for entertainment value.  (as an aside the rest of the episode was actually quite enlightening as we saw how PACs are now working around limitations to how much they can contribute to a politician by running ads that have the politician in them but characterizing them as "issue" ads rather than "political" ads - its so corrupt as to amaze)

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

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Niall Ferguson
www.colbertnation.com
Colbert Report Full Episodes Political Humor & Satire Blog Video Archive

Market Goes Vertical After News Report Berlusconi to Resign

We just lifted about 7 S&P points on a news report Italian PM Berlusconi will resign ....

Berlusconi will resign after passing of new financial stability laws, senior officials tell FT

Apparently all of Italy's problems stem from this one man - at least that is how the market is acting....

The 200 day simple moving average is right above at 1272....which is essentially where the market topped out earlier in the session, we are near it again.

Priceline (PCLN) Completely Shrugs Off Yesterday's After Hours Action

I was scratching my head a bit at the after hours reaction last night in Priceline (PCLN) [down around 3% at first] but while I expected dip buyers to show up, I didn't expect the name to be amongst the best performers of the day today.  Technically, that $550 level is important as it's been a resistance area for much of the past few quarters.  But today's action is impressive as this has been one of the few momo names still standing, in a quarter that has demolished a lot of others.

No position

Cargo from Asia to U.S. Drops for First Time Since 2009

We continue to see weakness in the international shipping sector - last month we highlighted the slowdown at U.S. ports [Oct 12, 2011: NYT - What are U.S. Ports Saying About the Economy?] and today Bloomberg is reporting the first drop in cargo volume to the U.S. from Asia since late 2009.  Not dramatic drop offs, but more signals of very sluggish action.

These data points continue to be interesting as the market goes in one direction, and we wait to see if ECRI's recession call will be validated over the next 6 months.  (generally the time it takes markets to recognize a recession from the time ECRI makes the call).  On a side note - I'd like to highlight once more that Walmart (WMT) is breaking out.... not something you want to see as a bull.  [Oct 12, 2011: Good or Bad? Walmart Says Things are Pickup Up This Quarter]  Last time Walmart showed acted like this you can guess what happened to the economy.

• U.S. imports on the world’s biggest trading route are dropping for the first time in almost two years as consumer confidence weakens to the lowest level since the recession that ended in 2009.  Container volumes on the Asia-to-U.S. route fell 3.8 percent in the third quarter, the first decline since the last three months of 2009, according to Newark, New Jersey-based PIERS, a unit of UBM Global Trade that compiles cargo data. The slump probably continued last month, said Mario Moreno, a UBM economist. 
• Rates for 40-foot containers to the West Coast, a benchmark, tumbled 24 percent this year, according to data from Clarkson Plc, the world’s biggest shipbroker.
• “This is another piece of data that suggests growth will remain slow for the foreseeable future,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC. “Consumers are still getting used to the idea that they are not going to make as much money or accumulate as much wealth as they thought they would a few years ago.”
• Ships from Asia to Europe, the second-biggest trade route, are doing even worse, with rates of $613 per 20-foot box, Clarkson data show. Maersk estimates the fuel charges at $800, implying a loss of $187 on every container.
• Analysts expect the slump from Asia to the U.S. to end. Volumes to the West Coast will rise 6 percent to the equivalent of 14.1 million 20-foot containers next year, from 13.3 million this year, according to Clarkson. While that’s 24 percent more than in 2009, it would still be fewer than the 14.4 million in 2007, the data show. Trade back to Asia will also advance, climbing almost 8 percent to 8.3 million units in 2012, Clarkson estimates.
• Growth in world trade will expand 5.8 percent next year, compared with 7.5 percent in 2010, the International Monetary Fund estimates, and about 90 percent moves by sea, according to the Round Table of International Shipping Associations.
• Furniture is the single largest item brought into the U.S. by container, he said. Boxes from Asia accounted for 75 percent of total container trade into the country last year.

No position

[Video] Hmmm... Wonder Why this Interview with Greek Parliament Member Eva Kaili is the Most Popular Bloomberg Clip

lol....men.

About twice a week I head over to the Bloomberg video section of the site to see if there are any interesting clips of guests.  They have sections such as most popular, editor's selection, etc.  At the top slot in the most popular videos section is a 2 minute interview with a Greek lawmaker named Eva Kaili.  Despite watching the video numerous times, I can't quite place my finger on what is so insightful about what she is saying that makes the video so popular.  Hmmm.... what could it be?

2 minute video - feel free to do your own analysis...

Chinese Purchases of Gold Leap Six Fold, as Country Purchases as Much Gold in 1 Month as Almost Half of 2010

Looks like with the relatively small dip in gold prices (considering the move the past 3-4 years), the Chinese swooped in to load up in September.  In September alone, they bought as much as they did during half of 2010, the FT reports.  With the U.S. working overtime since 2008 to trash its currency, and Europeans most likely eventually forced to, this looks like a logical move.  Also keep in mind how small of a horde of gold has relative to other countries. [Oct 13, 2009: Largest Gold Reserves by Country]

As important for investors, it is good to have such a large buyer providing a floor in the metal.

• Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010.
• The buying spree follows a sharp drop in the price of the precious metal. After hitting a nominal all-time high of $1,920.30 a troy ounce in September, gold fell to a three-month low of $1,534 an ounce later in the month. Chinese investors snapped up the metal as prices fell.
• Analysts expect the September import surge to continue until the end of the year as Chinese gold buyers snap up gold in advance of Chinese New Year, China’s key gold-buying period.  “In September we saw some bargain hunters come back into the market on the price dip,” said Janet Kong, managing director of research for CICC, the Chinese investment bank.
• China is the world’s second largest gold consumer and demand has grown rapidly over the past year as Chinese investors buy gold to hedge against inflation and consumers buy more gold jewelry. Beijing does not publicly disclose its gold imports, but analysts consider the Hong Kong import figures a good directional proxy for the country’s total gold overseas buying.
• Data from the Hong Kong government showed that China imported a record 56.9 metric tons in September, a sixfold increase from 2010. Monthly gold imports for most of 2010 and this year run at about 10 metric tons, but buying jumped in July, August and September. In the three-month period, China imported from Hong Kong about 140 metric tons, more than the roughly 120 metric tons for the whole 2010.
• China has liberalized regulations for importing gold over the past year, widening the number of banks authorized to import gold. “China’s gold demand will continue to increase as per capita income increases,” said Shi Heqing, a Beijing analyst with Antaike. “There aren’t many investment channels available in China other than the stock market, property market and some commodities.”

Priceline (PCLN) With Yet Another Solid Beat on Earnings, but Guidance a Bit Light - Stock Hit a Tad in After Hours

Priceline (PCLN) continues to astound and amaze - this is the one that 'got away' for me the past few years as I sold down in the $200s a few years back thinking the run was overdone.  Ouch.  This is now a truly international story and it continues to perform in excellent fashion.  Tonight another beat: $9.95 v $9.30 on the bottom line.  Revenue was a slight beat but still 45% growth!  However, the stock is taking some small damage after hours as the company guides a tad light, but PCLN has been surpassing all their guidances for a few years now so it's probably just lowballing.

Technically, the stock has been basing since April - consolidating a massive move from the prior few years.  As always, the longer the base, the bigger the move once it breaks out.  The only question is direction.

Full report here.

Guidance

• Priceline predicted fourth-quarter earnings of $4.90 to $5.00 per share, which is below analysts' average forecast for $5.13. .
• Priceline predicted a year-over-year increase in travel bookings of 39 percent to 44 percent for the fourth quarter.

EDIT 4:23 PM - stock is already back to flat as bargain hunters jump in.

No position

Congress Considering Moving to a New Measure of Inflation Which Would "Measure Away" Even More Inflation - Continuing Trend of Past 30 Years

When you don't like the information given to you, change the way it is created.  Been working like a charm on a bevy of U.S. government statistics the past 30 years, so why stop now?  [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators].  [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government]  We've measured "away" a good ~6% of inflation as opposed to how it would be reported in 1980, and a good ~2% versus how it would have been reported in 1990.  [Dec 16, 2010: Shadowstats.com - Consumer Inflation as Measured in 1980 Would be 8%, as Measured in 1990 4%] 

Long time readers will know inflation is amongst the most controversial of measures due to a bevy of changes made over the past few decades - namely the substitution effect (i.e. if steak is too expensive you will move down to a lower grade of meat - poof, you face no inflation) and hedonics (if you buy a washing machine that is $200 more than an old washing machine but you derive more pleasure from the new washing machine... i.e. $200 more worth of pleasure - tada! No inflation!).   Another example - if you pay 10 cents due to a federal gasoline additive to help the environment, there is no inflation for you because you derived 10 cents more of 'pleasure' form the lack of pollution.  Yes, I'm serious....

It's really a wonder the government has not been reporting deflation the past 10 years with all the hedonic pleasures we receive.

This is an important topic to understand when you scratch your head why our government measures such little inflation - yet so many live a different existence at the gas station, grocery store, doctor's office, and college aid office.  And no, it's not some "blogosphere" "Zerohedge" conspiracy - even the biggests bond investor on the planet says it's a joke.  [May 22, 2008: Bill Gross - Inflation Underplayed]

 

Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.



Americans are fooling themselves if they think U.S. inflation is under control, the manager of the world's largest bond fund said. Bill Gross, chief investment officer of Pacific Investment Management Co (PIMCO) said in his June investment outlook that he has been arguing for some time that inflation statistics "were not reflecting reality at the checkout counter."


He said statistical practices in calculating price growth had favored lower U.S. inflation over the last 25 years and called for change. "Being fooled some of the time is no sin, but being fooled all of the time is intolerable," Gross said.

Look, it is hard to come up with actuall budget cuts in Congress - someone is going to lose votes if they don't cater to their special interest.  Can't have that, these people have offices to win and hold for 3-4 decades.  So instead we'll find savings the innovative way - statistical analysis!  Behold, the new measure that will make inflation go "poof" even more than it has. 

• Just as 55 million Social Security recipients are about to get their first benefit increase in three years, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families -- the biggest impact falling on those with low incomes.
• If adopted across the government, the inflation measure would have widespread ramifications. Future increases in veterans' benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance than under the current measure.
• Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.
• Despite fierce opposition from seniors groups, the proposal is gaining momentum in part because it would let policymakers gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. (yeah! honesty trickery is the best policy!) Changes at first would be small -- the Social Security increase would be cut by just a few dollars in the first year.  But the impact, as well as savings to the government, would grow over time, generating about $200 billion in the first decade and much more after that.
• The proposal to adopt a new Consumer Price Index was floated by the Obama administration during deficit reduction talks in the summer. Now, it is one of the few options supported by both Democratic and Republican members of a joint supercommittee in Congress working to reduce government borrowing.
• The committee of six Democrats and six Republicans is struggling to come up with a plan to reduce government red ink by at least $1.2 trillion over the next decade. Changing the inflation index alone would put them a sixth of the way there.  "I think the thought process behind this is, slip this in, people won't understand it," said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare.
• The inflation measure under consideration is called the Chained Consumer Price Index, or chained CPI. On average, the measure shows a lower level of inflation than the more widely used CPI for All Urban Consumers.
• Many economists argue that the chained CPI is more accurate because it assumes that as prices increase, consumers switch to lower cost alternatives, reducing the amount of inflation they experience. (wait, I thought we were already doing that under the substituion effect?  Or is this the plan where we chew on pieces of wood for food since we can find wood free in our local parks?  there experiencing zero inflation?)
• For example, if the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters.
• The new measure would reduce Social Security cost-of-living adjustments, or COLAs, by an average of 0.3 percentage points each year, according to the Social Security Administration.
• Under the chained CPI, yearly benefits for a typical 65-year-old would be about $136 less, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. At 85, the cut would be $984 a year, and at 95, the annual income loss would amount to $1,392.
• "For someone in the first year, it may not seem a lot," said AARP's David Certner. "But as people get older and then they get poorer and more reliant on Social Security, the cut gradually gets larger and larger."  (I like it.... this is genius, because people in wheelchairs are easy to tear gas when they demonstrate.  Excellent plan Congress)
• In all, adopting the chained CPI would reduce Social Security benefits by $112 billion over the next decade. Federal civilian and military pensions would be $24 billion lower, according to the nonpartisan Congressional Budget Office.
• If adopted across the government, fewer people would be eligible for many anti-poverty programs because the poverty level also would increase at a lower rate each year. That would result in fewer people living below the official poverty line, despite having the same income. (another bonus!  We can anti-inflate away poverty!)
• The tax increases would hit low-income families the hardest, while high-income taxpayers would see smaller changes. (what's not to love? anything that protects the 0.02% I am for - after all only they create jobs.)
• For example, by 2021, taxpayers making between $10,000 and $20,000 would see a 14.5 percent increase in their federal taxes with a chained CPI, according to an analysis by the Joint Committee on Taxation. Taxpayers making more than $1 million would get a tax increase of 0.1 percent.  (should unleash a bevy of jobs only paralleled by what we have seen the past decade as tax rates plummeted.  What's that? Job growth stunk the past decade?  Away with you and your facts!)

We talked about this lovely measure in July ---> [Jul 8, 2011: Have You Heard of the Chained Consumer Price Index? Time to Learn as Social Security Benefits May be Altered]

Best and Worst Performing S&P 500 Stocks

While stocks increasingly move en masse due to changes in the structure of the market over the years (especially the growth of the ETF market, and HFT trading), they still vary in their movement in terms of degree.  Further, there are always the outliers who move to their own beat - although it seems far less today than in yesteryear. 

Below Bespoke Invest shows us the best and worst performing stocks in the S&P 500 year to date thru the close of trade Friday.  Keep in mind this is for a market that is essentially flat on the year - although it's been a heck of a ride getting to flat....

Mike Mayo Exposes the Analyst Community and the Banking Industry in his New Book

I've heard Mike Mayo's name often the past 10-15 years, but frankly since he was covering the banking industry, it was of little concern to someone focused on more 'growthy' areas of the market.  That said, I knew he was controversial because he was a 'truthy' type of guy, in an industry where truthy is not so cool.  Then last week he was on CNBC as a guest host for an hour or two and I was very impressed with the guy.  He has a new book out and hence is doing the publicity tours - below we have pieces from an excerpt he has in the Wall Street Journal.  This is good information for those of you newer to the markets and who rely on analysts - I wrote a piece almost 4 years ago (sheesh have I been around that long?) on the FMMF site highlighting how rare a 'sell' rating is by the analyst community.  [Dec 5, 2007: The Games Analysts Play - Why Almost No One Says Sell] 

One must always remember what the motives are for analysts, and where they are in the food chain of a bank. There was a big fuss after the late 90s and all these "new proposals" were put into place to make the analyst community change to a more useful service instead of beholden to other interests within a bank. Everyone asked why is there almost never a "sell" rating?? As with all things regulatory in this country - this fuss was raised, fines (minor ones) were levied, we were told everything was fixed, and everything went back to business as usual within 2 years. I just have to laugh when I see all these sells NOW showing up for the financials... it would be amusing if the reasoning behind it were not so pathetic. Read on to learn about "business as usual"

Newer investors should know why that is, and Mayo provides first hand experience of the treatment an analyst receives when he dares to put out an honest opinion that might hurt the relationship his employer has with said corporation.

Over the past 12 years, longtime banking analyst Mike Mayo has issued numerous calls to sell bank stocks, a rarity in a system where nearly all stocks are rated buy or hold. His negative ratings have frequently gotten him in trouble with banks, clients and his own bosses, who didn't want to alienate those companies. In this excerpt from his new book, "Exile on Wall Street," Mr. Mayo gives an inside view of the fights, the scolding and the threatening phone calls he received as a result of yelling "sell".

Taking a negative position doesn't win you many friends in the banking sector. I've worked as a bank analyst for the past 20 years, where my job is to study publicly traded financial firms and decide which ones would make the best investments. This research goes out to institutional investors: mutual fund companies, university endowments, public-employee retirement funds, hedge funds, and other organizations with large amounts of money. But for about the past decade, especially the past five years or so, most big banks haven't been good investments. In fact, they've been terrible investments, down 50%, 60%, 70% or more.

Analysts are supposed to be a check on the financial system—people who can wade through a company's financials and tell investors what's really going on. There are about 5,000 so-called sell-side analysts, about 5% of whom track the financial sector, serving as watchdogs over U.S. companies with combined market value of more than $15 trillion.

Mike Mayo told the Senate Banking Committee in 2002 that financial analysts "are on the front lines of holding corporations accountable." However, he says, they haven't always upheld this trust with investors.

Unfortunately, some are little more than cheerleaders—afraid of rocking the boat at their firms, afraid of alienating the companies they cover and drawing the wrath of their superiors. The proportion of sell ratings on Wall Street remains under 5%, even today, despite the fact that any first-year MBA student can tell you that 95% of the stocks cannot be winners.

Over the years, I have pointed out certain problems in the banking sector—things like excessive risk, outsized compensation for bankers, more aggressive lending—and as a result been yelled at, conspicuously ignored, threatened with legal action and mocked by banking executives, all with the intent of persuading me to soften my stance.

Looking inside the world of finance—with its pressures to conform and stay quiet—may offer some insight into why so many others have fudged. And it may offer some answers as to how crisis after crisis has hit the economy over the past decade, taking the markets by surprise, despite what should have been plentiful warning signs.

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

Mayo goes on to explain specific situations and the fallout that happened when he went negative (i.e. dared to say sell) - while not surprising, it is still sickening to see 'inside baseball'.

Hairdressers and Pastry Chefs are Among 600 Jobs Considered Hazardous in Greece - Hence You Can Retire at Age 53 with 90% of Salary as Pension

No wonder these Greeks always seem to have a smile on their face - this looks like a fun show, wish we had it here in the States. I'd be watching!

Go Greek for a Week

Three British families try out the tax, pensions and work practices that caused Greece's economic crisis and brought on the austerity measures aimed at cutting the deficit and qualifying for EU bailouts.

A 54-year-old British hairdresser discovers the generosity of the Greek pensions system, which still allows hairdressers, pastry chefs, radio continuity announcers and people in almost 600 other jobs to retire aged 53 at 90% of their final salary because their jobs are defined as hazardous.

A bus driver reaps the rewards of the Greek approach to state-run services, where bus drivers could be paid up to almost double the national average salary and receive extra bonuses for arriving at work early and for checking bus tickets.

And a British surgeon is delighted to discover how paying income tax the Greek way will transform his disposable income.

The personal experiences of the three main characters are supported by expert interviews that establish the patterns of tax evasion, corruption and mismanagement that have helped to sink the Greek economy.

[Video] ECRI Sticking to Recession Call Despite Market's Swing Upward

After the historic run up in markets in October, we asked if the market was correct (the market supposedly being an efficient forecaster) or if ECRI was correct in its recession call?  [Oct 21, 2011: Does the Market Have it Wrong? Or Does ECRI?]  With a tremendous track record, the two seemingly diverged but as Lakshman Achuthan points out the market is far more focused on coincident indicators, or very near term future indicators rather than longer term points of interest.  Indeed, often as the ECRI is making a call for the beginning of a recession, the market is rallying and ignoring said calls.  Even more interesting, most recessions start in a quarter where GDP is positive.... (of course like all government data, GDP is subject to revision down the road).


This morning, Achuthan returned to CNBC for the first time in about 6 weeks - or right before the market went on its rampage - and stuck to his guns.  Unfortunately, half the interview is wasted by Steve Liesman trying to pry the long term indicators which make up the brew of ECRI's recession call, which are the basis of their for profit business.  Liesman also seemed shocked anyone could be calling for recession when the brain trust on Wall St. (which missed the debacle of 2008) says everything is fine and dandy in the U.S. economy.

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

Greece is So Last Week, Now We Worry about Italian 10 Year Bond Yields. Also, German Economic Figures Continue to Slow.

"Risk Off!"  After a jam packed week of economic data, things slow down domestically so once again all eyes back to Europe.  The 'bazooka' announced a week ago Thursday has seemingly not stopped the crisis - all it did was give world market's a 10-20% boost.... before last week of course.  So we're back to watching hectic intraday and pre/post day moves, due to headlines out of random officials and/or newspapers and/or financial infotaintment TV.

Even as the Greek political drama still plays out, the markets have already moved onto Italy.  It truly is amazing to see the situation play out, country after country, as they are restricted from following U.S./Japanese/U.K. policy of printing more currency to 'solve all problems'.  I keep repeating if these countries were not bound in the E.U. all the world would be facing is a bad inflation issue as almost all these countries would be following the U.S. playbook of helicopter drops.... gold would probably be significantly higher however. 

Ten year yields in Italian debt were jumping last week, DESPITE the ECB buying, which is quite amazing actually.  They continue to surge today.  But keep in mind, unlike the Federal Reserve which can buy (print) in unlimited quantities, the ECB has a limited capital base.  I've been saying for about 2 years the end game here is the ECB charter has to change (despite German objections) and in the end the ECB will pull a Bernanke.  That's the only way to contain Spain, Italy, and France.  Yes France, which seems to be getting a free pass despite some ugly fiscal figures!   But that's a crisis for another day, as bond vigilantes go country by country....

• Italian benchmark yields climbed to a euro-era record amid concern the region’s third-largest economy is struggling to manage its debt loads, while growth in the region is faltering.
• German two-year note yields were within six basis points of an all-time low before European finance chiefs meet to discuss the region’s bailout fund.  The extra yield investors receive for holding 10-year Italian debt over similar-maturity bunds fell from a euro-era record after Il Foglio said Prime Minister Silvio Berlusconi may step down within “hours.”
• Italy’s 10-year bond yield climbed 19 basis points, or 0.19 percentage point, to 6.56 percent at 11:10 a.m. London time, after rising to a record 6.68 percent. That pushed the difference in yield, or spread, over German securities to as wide as 491 basis points.
• The Italian two-year note yield surged 54 basis points to 6.0 percent, narrowing the spread over 10-year yields to 80 basis points, the least since September 2008.
• Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step aside. Two defected to the opposition last week, and a third quit late yesterday, while six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.

-----------------------
 
Meanwhile, back in the real economy, Germany - the driving force in Europe - continues to post dramatically slower economic data.  It is quite clear now with the data we've seen the past 2-3 months, that Europe is in recession.

• German industrial production down -2.7% m/m in Sep. This compares to -1.0% in Aug and a consensus of -0.5%.  German manufacturing production down -3.0%, construction -0.8% and energy -0.7% m/m.

European retail sales were also punk:

• European retail sales declined more than economists forecast (-0.1%) in September, dropping 0.7% from August, the biggest fall since May.   Sales of food, drinks and tobacco in the euro area in September were flat. Sales of goods other than fuel fell 0.8%.
• Germany saw a 0.4% increase in retail sales in Germany in September, compared to August, but there was a decline in France, where sales fell 0.6%.  In Spain, the single currency's fourth-largest economy, sales fell 1.7% as the country struggles with the highest jobless rate in the euro zone that is crimping consumer spending.

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

Speaking of rumors - in the time it took me to write this, rumors are surfacing that Berlusconi will resign and the Italian market just went from -2% (after being down 3% earlier) to +2%.  Uh, in about 10 minutes.

This is no one's idea of fun other than headline grabbing computers ...

[Video] 60 Mihnutes - Jack Abramoff Tells Us How Washington D.C. Really Works

One of D.C.'s top lobbyists tells 60 Minutes how it really all works...and how nothing has changed....

Food Stamp Usage Up from 9% of Population to 15% of Population in Life of My Website

I was one of the earliest in the financial blogosphere to point out how much of the population was reliant on food stamps back in 2007.  At that time it was 1 in 11 Americans (9%).   Each year it seems we've hit a new milestone and as of the last count 45.8 million Americans use the service.  Let that number sink in... FOURTY FIVE MILLION CITIZENS.  That is simply astounding when you sit back and think about it - fully 15% of the population.  In the 'richest' country on Earth.

In the last year alone, there has been an 8.1% increase.  During part of a 2+ year economic 'expansion'.  One shudders to think what happens during the next 'recession'.

[Nov 5, 2010:  USA Today - Anti-Poverty Programs Surpass Cost of Medicare]
[Nov 10, 2009: Walmart Executive - "There are Families Not Eating at the End of the Month"]
[Oct 30, 2009: Costco to Roll Out Food Stamps Nationwide]
[Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]
[Jun 8, 2009: 1 in 9 Americans on Food Stamps] 
[Feb 20, 2009: NYT - Newly Poor Swell Lines at Food Banks Nationwide]

[Video] Niall Ferguson Asks if he West is Doomed, and Blames Income Inequality on Poor Education System

Harvard professor, smart guy, and shameless self promoter Neill Ferguson is out with his latest book and is making the rounds hawking it.  That said, he always has thought provoking, if sometimes controversial, views - so he is a fun listen.  Today he talks about the long term future of the West, and blames the poor education system for not helping the middle class keep up with the havoc caused by globalization.  

I wish I were famous, because it is amazing to see so many news stories in the past 12 months, on topics we were pounding on furiously 3-4 years ago.  As usual, we're very early here at FMMF - but then again even Ross Perot was pointing out the issues that globalization would cause.  It definitely has created winners (those who own capital, cheap labor overseas) and losers (expensive labor in the West).  And I don't think the solutions are as simple as 'more education'.  (although statistics bear our the failings of the U.S. public education system versus competitors in northern Europe and Asia)  That said, not everyone can be a scientist or engineer - what the West has to grapple with is what to do with these tens of millions who no longer have the old school middle/lower end jobs because they are priced out of the market by those in the East.  As I wrote quite a few times in 2008-2009:

Here is what I have to hope per economic dogma - some string of perfect outcomes that are predicted by a textbook: By (a) these 350 jobs going to China, (b) a new small group of middle class will be developed. As I extrapolate this 350 jobs to countless others moved overseas - (c) a huge swathe of middle class will eventually be built. Who will then, (d) in some number of years, demand products from America ... which will allow (e) the 850 people I fired in March to have work in America creating something the Chinese want. At some point in the future - but who knows when.

That all sounds quite convenient and fantastic on the surface - as long as I can figure out a place to stuff these people in the near term (Walmart? more restaurants? bars? can we please reinflate the housing bubble so they can be a realtor, broker, or construction worker? More healthcare jobs we cannot afford?). But some questions

1. How many years will take place between the displacement of "today" in America and the "middle class demanding things in China" from America?
2. What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (health care)?
3. What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)?
4. What exactly are Americans making today that the Chinese want and need to import excluding large scale industrial weapons / defense?
5. What exactly will Americans be making in "some day in the future" (5? 10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?
6. Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?

I don't know these answers - I am just here to ask them, since almost everyone I talk to is in the happy boat of "it will all work out in the end; that's what the textbooks say". A rising tide lifts all boats - that has a nice ring. In 15-20 years a massive class of middle class Chinese will stop demanding products already made in their own country (have you been through a Walmart of late to see where the stuff is from?) and suddenly want American exports of XYZ products instead.

Ummm....

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

Anyhow onto Mr. Ferguson who sat down with Yahoo Tech Ticker for 2 videos - email readers will need to come to site to view

Video 1 - 5 minutes

After 500 years of predominance, the West is facing some huge challenges. At least that's the premise of Harvard professor, Niall Ferguson's latest book, Civilization: The West and the Rest.

The good news, according to Ferguson is, "we're not absolutely doomed to decline." The bad news, when things turn south it'll happen in a hurry. "Things don't decline gradually, they tend to fall off a cliff," Ferguson tells The Daily Ticker's Aaron Task and Henry Blodget in the accompanying clip. "We don't have as much time as people assume."

In a nutshell, the West is struggling right now because of a decline in the same ideas that propelled us to dominate the global economy. To borrow a phrase from technology, Ferguson calls these ideas the "Killer Aps."  There are six he highlights in the book: competition, science, property rights, modern science, consumption and work ethic. Unfortunately, Ferguson says while the rest of the world has copied that model, the West has rested on its laurels.

Big declines in competitiveness and work ethic are especially troublesome. "The fact that these new workers from Asia work very hard and have very rapidly rising productivity is the key part," he says. "The average South Korean works nearly a thousand hours more a year than the average German." That does not bode well for Europe and can easily happen in America as well.

He sees proof of this in his classrooms. I fear most teenagers in the West have a certain complacency about the future," notes Ferguson. In the interview he recaps a conversation he recently had with his 17 year old son that captures the thought well. He tells his son, "there are probably about 26 Chinese boys your exact age who are working twice as hard as you to have the lifestyle that you think you're just going to be handed on a plate."  [Feb 2008: Two Million Minutes - a Global Examination of Education in China, India, and the U.S.]


 As said earlier, that doesn't mean the West's demise is set in stone. He notes that while China does have a growing middle class and educated class, they still lack basic property rights and self representative government that is also key to the formula. Until, those are granted, China will face its own difficulties.

Video 2 - 4 minutes

"Many things about Wall street were wrong," he tells Henry Blodget. "But, you can't say all of our problems are because of the criminality of one percent of the population."

What IS to blame for America's growing wealth gap?

In a word: globalization.  "It's globalization that mainly causes inequality by exposing the unskilled in the United States to competition from much cheaper labor in Asia," he says. "That's a much bigger cause of inequality than malpractice on Wall Street."

Ferguson blames the lack of skilled workers in this country on a "very poor public education at the high school level. We are failing kids in the poorer parts of this country."

The remedy, Ferguson contends, is not to tax the rich and expand federal programs as Sachs recommends. Instead, Ferguson says public high schools need more competition to raise the bar. The best way to do that, in his opinion, is to create more charter schools. "The charter school movement is one very straightforward way in which the ordinary citizen can actually help improve the quality of high school education."

Groupon (GRPN) Comes Public Near $20B Valuation

Well what can you say, for a 3 year old company to be valued near $20B is one amazing thing.  Keep in mind Google (GOOG) made an offer for Groupon (GRPN) at approx. $6B just over a year ago.  This is another tiny float winner, with less than 5% of shares available to the public and the feeding frenzy has moved the stock price from an offering of $20 (which valued the company at $12.7B) to an open

With many of its business metrics already slowing, my bet is Groupon is going to be the short of the year in about 24-36 months.  But we need to see a lot of shares come unlocked before any form of reasonable market can be made in the stock.  Of course 24 months might as well be the year 2087 for a stock market where 'long term' = next week.

EDIT 10:56 AM - Now a >50% pop, at over $30 a share....

Meanwhile back in the real world, Italian 10 year yields just hit 6.4%.....

No position

LinkedIn (LNKD) Earnings Not Enough to Maintain Lofty Valutaion, Company Already is Doing a Stock Offering

It is ironic that we had LinkedIn's (LNKD) earnings last night just ahead of the frenzy that will be Groupon (GRPN) today.  LinkedIn set the model on how to float a TINY amount of your shares in the IPO therefore causing a manipulation of the supply / demand dynamic.  Anyone who took Econ 101 knows price is based on supply v demand - and if you supply the marketplace with a tiny amount of shares, the price will be artificially high.  Groupon is following that tact with LESS than 5% of its shares to be available for trading....

Anyhow, not 6 months after IPO LinkedIn is already coming back to the marketplace with a NEW share offering - a bit humorous if you ask me.  Maybe if they had actually sold more shares in the IPO they wouldn't need to be raising new money!!  But with the above mentioned plot and massive valuation of >$8B, $100M (with potential of up to $500M) is a mere pittance I suppose.

As for earnings, LinkedIn fell back into the red after last month's positive earnings.  And if you exclude those nasty one time items (that happen each quarter but for some reason Wall Street tells us should be ignored as they are one time in nature) the company earned 6 cents.  Like many companies of this ilk it is spending for revenue growth with the idea that profits come later.  Revenue growth was very good but even if you annualize the $139M, to $556M - the price sales ratio is 15.  (I won't even bother with the traditional trailing price to sales ratio) Extreme - but it all goes back to that tiny float.

Via Reuters:

• Professional networking company LinkedIn posted quarterly results that beat estimates and raised its full-year outlook, but margin expectations and plans for a share offer drew scrutiny from investors.
• LinkedIn, which went public in May, said on Thursday that it expects to report adjusted earnings before interest, tax, depreciation and amortization (EBITDA) for the year of $83 million to $85 million on revenue of $508 million to $512 million.  It had previously targeted a full-year adjusted EBITDA profit of $65 million to $70 million and revenue of $475 million to 485 million.
• The company, started in the living room of ex-PayPal executive Reid Hoffman in 2002 and launched in May 2003, also gave an outlook for the current quarter, which some analysts said was too cautious.  "The results were good, other than fourth quarter EBITDA guidance seeming a little conservative," Ken Sana of Evercore said.
• "Stock trading where it is, it has to be a perfect quarter," Herman Leung of Susquehanna Financial Group said, adding that company margin expectations of 12.8 percent on average were somewhat below estimates of 13.4 percent. 
• In addition, a proposal to sell up to $500 million in stock raised concerns that it would dilute company shares.  LinkedIn said it wanted to raise capital for the company but also "facilitate an orderly distribution of shares."  A 180-day lock-up period -- agreed to after its listing in May -- prohibits employees and others from selling their stock. Come Nov. 21 the restrictions will be lifted, potentially resulting in a massive sell-off.
• LinkedIn's third-quarter revenue rose 126 percent to $139.5 million, above Wall Street expectations of $127.6 million, according to Thomson Reuters I/B/E/S.  Net loss was $1.6 million, or $0.02 per share, compared with a profit of $4.0 million a year earlier. Wall Street had expected a loss of $0.04.
• LinkedIn added 15.4 million more accounts in the quarter to end September with 131.2 million members.  
• LinkedIn added 282 employees during the quarter to end September with nearly 1,800.
• The Mountain View, California-based company makes money by selling premium subscriptions to its members and by helping companies with hiring and marketing.

[Aug 5, 2011: LinkedIn Reports First Quarter as Public Company]

No position

October Employment Data: +80,000, Unemployment Rate Falls to 9.0%

The monthly data is in (all to be revised in the future) and drumroll....

+80,000 on the job front (a slight miss versus expectations)
However, the unemployment rate fell from 9.1% to 9.0% (one assumes the labor force again contracted which is not the reason you want the unemployment rate to fall)

Private sector: +102,000

Revisions: +102,000 added back to the previous 2 months.

Some underlying stats

Hourly wages: +0.2%.
Average work week unchanged at 34.3.
U-6 (broader unemployment including those who wish to work full time but work part time): 16.2% down from 16.5%.
Labor force participation rate remained flat at a very low 64.2%.

There is some crowing about a drop off in long term unemployed - one wonders if those "99ers" found jobs or simply disappeared from the workforce.  Remember in America once you are not actively looking for work, you no longer count in the labor force.

• In October, the number of long-term unemployed (those jobless for 27 weeks and over) declined by 366,000 to 5.9 million, or 42.4 percent of total unemployment.

Data is consistent with much of what we are seeing elsewhere - a "meh" economy that is churning along slowly but not enough to make a dent to unemployment or make those who feel like we are in a recession, change their mind.

The market rallied from down about 0.4% to positive 0.2% on the news.  BLS report here.

Holy Mercadolibre (MELI)

I have not talked about this stock in ages, but Mercadolibre (MELI) is 'en fuego' following its earning report last night - up some 30%.  This is yet another stock that has been struggling for a good portion of the latter part of the year, so with relatively poor relative strength and a chart most people would not touch coming into the day, it was a nice set up for a major surprise.

Even with this tremendous move, the stock is only back to its July highs.  Full report here.

Via IBD

• Shares of MercadoLibre (MELI) rocketed more than 32% in late-morning trading Thursday after the South American e-commerce and payments provided shattered Wall Street views on an unexpected jump in regional e-commerce transactions.
• Buenos Aires, Argentina-based MercadoLibre, whose markets include Brazil, Venezuela and Mexico, said late Wednesday that Q3 earnings surged 40% from the year-earlier quarter to 60 cents a share, 40% higher than the 43 cents a share expected by analysts polled by Thomson Reuters. Sales soared 46% to $81.6 million. Analysts had expected $78.5 million.
• "MercadoLibre had an excellent third quarter, highlighting the importance of solid execution in driving our own results," CEO Marcos Galperin said in a statement. "Recent innovations on our platform combined with secular trends that continue to favor e-commerce in our region, generating strong growth throughout our marketplace, and our entire ecosystem."
• Gross merchandise volume soared 51.8% from Q3 2010 to $1.35 billion, while total payment volume rose 94.1% year-over-year to $368.5 million. Gross merchandise volume includes the total U.S. dollar value of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft, real estate and services.
• The number of items sold on MercadoLibre in Q3 jumped 38.1% to 14.4 million, while total payments transactions through MercadoPago grew 103% to 3.9 million.
• The company didn't issue an outlook for the current quarter.

[Dec 24, 2009: IBD Mercadolibre- E-Commerce Sales Soar as Latin American Households Get Wired]


No position

PIMCO's Bill Gross November Letter: Pennies from Heaven

The latest monthly missive from Bill Gross:

Pennies from Heaven

Article Introduction

• Once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more return if economic growth doesn’t follow. 
• Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth.
• In fixed income assets, we suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance.

Article Main Body

Speaking of luck, the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier:  As long as these policies generate growth.

Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure. But growth is the commodity that the world is short of at the moment, as shown in Chart 1. No country has enough of it – not even China – and many of the developed countries (specifically in Euroland) seem to be shrinking into recession.

The lack of growth, as explained in prior Outlooks over the past few years, is structural as opposed to cyclical, and therefore relatively immune to interest rate or consumption stimulative fiscal policies. 1) Globalization, 2) technological innovation, and 3) an aging global demographic have all combined to dampen policy adjustment post Lehman and will inexorably continue to work their black magic going forward. To defeat this misunderstood structural voodoo, countries would have to mint pennies by the billions, pretend to lose them, and then incredibly find them strewn all across their city streets like some global Easter egg hunt. Not gonna happen.

The situation, of course, is compounded now by high debt levels and government spending that always used to restart capitalism’s private engine. However, as economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80-90% of GDP acts as a barrier to growth. Because debt service and interest rate spreads start to rise at these debt levels, a greater and greater percentage of a nation’s output must necessarily be diverted to creditors who in turn become leery of reinvesting in a slowing economy. The virtuous circle becomes vicious in its reflexive counter reaction, spiraling into a debt/liquidity trap á la Japan’s lost decades if not stopped in time.

Halting the downward maelstrom is what current monetary policy is attempting to accomplish. With fiscal policy in most developed countries incredibly restrictive instead of stimulative, central banks have assumed the helm on their own – but it has been a long and relatively futile watch. Structural growth problems in developed economies cannot be solved by a magic penny or a magic trillion dollar bill, for that matter. If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more? As a matter of fact, savers will have to save more just to replicate their expected retirement income from bank CDs or Treasuries that used to yield 5% and now offer something close to nothing.

My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest.

The investment implications are numerous although far from certain. Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth. A market P/E ratio of 15X is actually a 6.5% earnings yield – not a bad return compared to 2% 10-year Treasuries, but actually a little bit short when placed against Baa and High Yield corporate bonds, which represent a senior claim against earnings in a rather uncertain global economic environment.

Despite 2% 10-year Treasuries, low economic growth rates are usually supportive of high quality sovereign debt and they may likely continue to be as long as QEs continue. Investors should be mindful of the global bond market’s most recent historical example of sovereign debt returns in a slow/no growth environment – Japanese JGBs. Even after yields reached relative rock bottom by 2003, bond returns managed to outpace inflation as holders of 5–10 year maturities “rolled down”¹ a relatively steep yield curve and added capital gains to a relatively paltry interest coupon. The same strategy can be conceptualized in the United States. A seemingly anorexic 1.00% 5-year Treasury yield would be turned into a 2% annual return by allowing it to “age” for 12 months and become a .75% 4-year with an assumed attendant 1% upward price movement. Sort of like finding a lucky penny – but dependent of course on a Fed policy that shows no sign of moving off the 25 basis point goal line.

One should not stray too far, however into Japanese la-la bond land. Developed economies – the U.S. included – have experienced 3%+ inflation in the midst of a New Normal economy where expectations 12 months ago would have been for far less. Sovereign monetary and fiscal policies, while generating undersized real growth, have managed to produce disproportionately large inflation. While “output gaps” represented by high unemployment might normally contain the rise, it has not done so to date. The answer might be found in the narrow output gap in developing economies and the transmittal of their inflation back into the U.S., U.K. and Euroland.

My point on the bond side is not to discourage the ownership of fixed income assets despite the relatively low expected returns, but to suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance. Despite the Fed’s twist program, which promises to absorb almost all 20-30 year supply over the next 6 months, future QE programs hinted at by Yellen and Dudley – two of the three Fed Musketeers – are likely to push long-term yields higher because their policy objective is 2%+ inflation. Investors should consider migrating to the relatively safe haven of 1–10 year maturities offering “rolldown” total returns of 2–3% with far less duration risk. In addition, Agency mortgages are back on the Fed’s menu and may be a featured “special” in months to come.

In sum, with both earnings and bond yields near historic lows as a result of a lack of real growth in developed economies, investors will need to find lots of pennies to produce asset returns much above 5% in bonds or equities. Pension funds, Washington politicians, and indeed Main Street investors are likely expecting much more. One of the big problems of an asset-based economy is that once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more if economic growth doesn’t follow. Such appears to be the case today. Unlucky…very, very unlucky.

Greek Finance Minister Says No Referendum So Everything is Honky Dory Again

Carry on rallying....  big turnaround from last night when futures were down about 15 points at 2 AM EST.

• Greece's prime minister abandoned his explosive plan to put a European rescue deal to popular vote and opened emergency talks Thursday with his opponents, who reversed themselves and agreed to broad austerity measures in exchange for a European bailout.
• Prime Minister George Papandreou ignored widespread calls for his resignation and instead invited the opposition to join negotiations on the bailout, telling an emergency Cabinet meeting that early elections would force Greece into leaving the 17-nation euro currency, with disastrous effects for both Greece and other European economies.
• Papandreou sparked a global crisis Monday when he announced he would put the latest European deal to cut Greece's massive debts -- an accord that took months of negotiations -- to a referendum. The idea horrified other EU nations and Greece's creditors, triggering turmoil in financial markets as investors fretted over the prospect of Greece being forced into a disorderly default.
• Two officials close to Papandreou said Thursday the referendum idea has now been scrapped, after the debt deal won support from the opposition. Papandreou spoke with conservative opposition leader Antonis Samaras in the afternoon, his office said, before a major address to his Socialist party deputies in parliament.
• Papandreou flew to Cannes on Wednesday, where French President Nicolas Sarkozy and German Chancellor Angela Merkel told him Greece would not get the latest funds from its existing bailout until after any referendum. They also said any referendum should be on whether Greece wants to stay in the eurozone or not.
• After returning to Greece with Papandreou, his finance minister, Evangelos Venizelos, broke ranks and declared his opposition to a referendum. "Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt," he said.  Venizelos said the country's attention should instead be focused on quickly getting a crucial euro8 billion ($11 billion) installment of international bailout funds, without which it faces bankruptcy with weeks.

GSE's Continute to Feed at the Taxpayer Trough as Freddie Mac Asks for $6B Bailout

It appears people have bailout fatigue as the quarterly bailout Freddie and Fannie receive now barely registers as a blip as a news item.  Six billion used to be a lot of money but in a world where the Fed injects hundreds of billions into the marketplace, and Europe is creating special entities over a trillion I guess it is just a rounding error.

You might wonder why the numbers are still so big this many years after the heart of the crisis - most of the truly horrible loans have long gone bust after all.  Well each time we speak of new government plans for refinancing or 'rescuing' home owners there is both a cost and a benefit.  Usually the press (and administration) only talks about the benefits - but someone has to love.  When there is a lower coupon payment via a refinance on a government loan - Fannie or Freddie lose.  And since Fannie and Freddie are fully supported by the taxpayer, it's a direct subsidization by the taxpayer to the homeowner.  If that is the right or wrong thing for society to do is another subject, but it should be clear for what purposes these 2 agencies are being run.

Going back to the earlier comment about paying attention to this, it's a win for the political class because the new programs to 'help' homeowners get all the attention while the quarterly bailouts now seem to get little attention.  In fact this is the first time I can remember Fannie or Freddie reporting their need for bailout during the week - usually the requests come late on a Friday night when no one is paying attention.  Which was the same tactic Mr. Geithner took when rather than sticking to the original script of a limited amount of dollars & years that the federal government would continue to bailout the GSEs, he subjected the U.S. taxpayer to unlimited losses for an additional three years.... announced on Christmas Eve 2009.    [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]

• Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.  Freddie Mac said Thursday that it lost $6 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.
• This quarter's $6 billion request from taxpayers is the largest since April 2010.  Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default. 
• The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.
• Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014.

With the new refinancing program announced last week, it looks like the losses for Fannie and Freddie should begin to accelerate relatively dramatically.  We can see from the CEOs comments, Freddie is no longer run for the taxpayer's benefit - in fact he is touting the interest payment savings.  Sounds like he is running a charity in fact.  Damn the company's finances - that's for someone else to be responsible for.

• Charles E. Haldeman Jr., Freddie's chief executive, said many homeowners are refinancing at lower mortgage rates or are shortening the terms of their mortgage. While that saves homeowners money, it is pushing Freddie deeper into the red.  "In fact, borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year," he said.

--------

• Still, many homeowners are still defaulting on their mortgages. The percentage of those who are late by 90 days or more on their monthly mortgage payments was virtually unchanged at 3.51 percent in the July-September quarter.
• Another reason Freddie needs more aid is because it has received less money from mortgage insurers.  Many riskier mortgage loans require insurance, which is meant to protect lenders and investors from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The borrower pays a monthly premium for the insurance, typically a set percentage of the total mortgage loan. But when those mortgage insurers fail, they pay out less in claims.
• For example, the main subsidiary of private mortgage insurer PMI Group was seized by Arizona insurance regulators last month. That followed heavy losses the group incurred after the housing market collapsed. PMI is now paying claims at just 50 percent.
• As a result, the amount that Freddie has set aside for losses increased from $2 billion in the January-March quarter to $3.6 billion in the July-September quarter.
• Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and then sell them to investors around the world. When property values drop, homeowners default -- either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.

ISM Non Manufacturing a Mixed Bag

October's ISM Non Manufacturing data offered a mixed bag under the headline number of 52.9.  While that reading was under expectations of 53.5, it was only a slight degradation from September's 53.   In the underlying data the employment figure jumped from 48.7 to 53.3 so one wonders if the holiday hiring is starting to show up here.  As with manufacturing the prices index fell, although nowhere as sharply (57.1 from 61.9).  Note that this reading is still well above 50, unlike what we just saw in the manufacturing report.  On the negative side new orders dropped from 53.3 to 48.7.  Another report indicating nothing dramatic happening in the economy as we muddle along in a slight expansion.  Full report here.

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

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 52.9 percent in October, 0.1 percentage point lower than the 53 percent registered in September, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 3.3 percentage points to 53.8 percent, reflecting growth for the 27th consecutive month. The New Orders Index decreased by 4.1 percentage points to 52.4 percent. The Employment Index increased 4.6 percentage points to 53.3 percent, indicating growth in employment after one month of contraction. The Prices Index decreased 4.8 percentage points to 57.1 percent, indicating prices increased at a slower rate in October when compared to September. According to the NMI, eight non-manufacturing industries reported growth in October. Even though there is month-over-month growth in the Employment Index, respondents are still expressing concern over available labor resources and job growth. The continued strong push for inventory reduction by supply management professionals has resulted in contraction in the Inventories Index for the first time in eight months. Respondents' comments are mixed and reflect concern about future business conditions."

WHAT RESPONDENTS ARE SAYING ...

• "Business is fairly flat, with a slight increase noted for the month." (Health Care & Social Assistance)
• "Sales are increasing slightly, but are still lower than they have been historically." (Public Administration)
• "Some slowdown in the last month." (Finance & Insurance)
• "Business is steady, with a lot of price competition at the selling end of our business." (Agriculture, Forestry, Fishing & Hunting)
• "The poor economy is creating a drag on expected revenue through the end of this year." (Information)
• "Overall, we are still growing, but we are beginning to see some cautiousness reflected in our customers." (Wholesale Trade)

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS* OCTOBER 2011
	Non-Manufacturing						Manufacturing
Index	Series Index Oct	Series Index Sep	Percent Point Change	Direction	Rate of Change	Trend** (Months)	Series Index Oct	Series Index Sep	Percent Point Change
NMI/PMI	52.9	53.0	-0.1	Growing	Slower	23	50.8	51.6	-0.8
Business Activity/Production	53.8	57.1	-3.3	Growing	Slower	27	50.1	51.2	-1.1
New Orders	52.4	56.5	-4.1	Growing	Slower	27	52.4	49.6	+2.8
Employment	53.3	48.7	+4.6	Growing	From Contracting	1	53.5	53.8	-0.3
Supplier Deliveries	52.0	49.5	+2.5	Slowing	From Faster	1	51.3	51.4	-0.1
Inventories	45.5	51.5	-6.0	Contracting	From Growing	1	46.7	52.0	-5.3
Prices	57.1	61.9	-4.8	Increasing	Slower	27	41.0	56.0	-15.0
Backlog of Orders	47.0	52.5	-5.5	Contracting	From Growing	1	47.5	41.5	+6.0
New Export Orders	54.0	52.0	+2.0	Growing	Faster	3	50.0	53.5	-3.5
Imports	48.0	47.5	+0.5	Contracting	Slower	2	49.5	54.5	-5.0
Inventory Sentiment	57.5	59.0	-1.5	Too High	Slower	173	N/A	N/A	N/A
Customers' Inventories	N/A	N/A	N/A	N/A	N/A	N/A	43.5	49.0	-5.5

* Non-Manufacturing ISM Report On Business^® data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. Manufacturing ISM Report On Business^® data is seasonally adjusted for New Orders, Production, Employment, Supplier Deliveries and Inventories.

Long Awaited Groupon (GRPN) IPO to Arrive Friday

While I think in the very long run this one will end badly, I expect fireworks Friday as Groupon (GRPN) comes public with one of the smallest floats every seen.  (less supply = artificially high prices)  Obviously this one has a name recognizable to the retail masses, which will also help feed the frenzy.

Via AllThingsD:

• According to sources close to the situation, daily deals site Groupon is planning on pricing its IPO tomorrow and officially becoming a public company Friday, listing on Nasdaq under the ticker symbol GRPN.
• The company and its investment bankers have not yet decided whether to boost the price of the offering, now aimed to raise $540 million at a valuation of $11.4 billion. Although the Chicago-based Groupon has endured an unusual amount of controversy over a variety of issues — including accounting treatments, executive turmoil and growth prospects — sources said the offering is likely to be oversubscribed as investors clamor to get into a possibly lucrative IPO.
• Executives from Groupon, including its CEO Andrew Mason, have been hawking the company — which sells an assortment of discounted services from a variety of local merchants — to investors all over the country. Despite the intense criticism, the quirky Groupon had pushed on through and will now face its toughest test — acting like a big-boy company with public shareholders.

Doug Kass - How to Survive an Emotionally Driven Market

While we wait for Mr. Bernanke to come down from Mount Olympus to talk to us plebs, I wanted to highlight this piece by hedgie Doug Kass - one of the better articles I've read in a long while on the nonsense that is the current market, and how to deal with it.  Perhaps I liked it because he repeats some of the concepts and themes I've commented on, but he takes things in a much broader direction.  Lengthy piece, but worth the read!

Some snippets:

• Emotion is taking over the market. On any given day (or maybe any given hour!) the U.S. stock market can swing by several percent based on a rumor, a flimsy blog or by a statement by a central banker or world leader.  In one brief four-week period, the fear of return of capital has been replaced with the fear of an inadequate return on capital as fear of the downside has been replaced with fear of missing the upside.

• I have long written that the crowds usually outsmart the remnants, but in today's emotionally charged and volatile market (which demonstrates no memory from day to day) confusion reigns and the crowds seem to bend with the emotion (and news) of the day.  What's causing these rapid changes in sentiment, and how should the average investor responds.

(Kass points out the dominance of the hedge fund crowd - not in total assets, but in dominance of trading, along with the EFT+HFT duo I've complained about.  He takes it a step further with the 'business infotainment' [my words, not his] media as well....)

• Arguably this manic crowd behavior (manifested in the ups, downs and insane volatility that follow) is reflected in the mood swings from depression to euphoria that have been goosed and exacerbated by the media, by performance-chasing investment managers and by high-frequency trading, momentum-based strategies and levered ETFs.

Kass goes in depth into each of these items - but since I have not spoken much about the media I'll highlight that piece - I love his idea of disclosing how much advertising dollars the guest's firm has spent on that channel.  Truth in disclosure!

• The business media's role is to objectively and without prejudice tell "the score"; provide a market perspective (in describing what the market is doing and why); present other professionals' opinions of individual companies; analyze the economy, economic releases and news; and interpret government and central bank policy -- all for the purpose of improving the public's understanding of the market's influences.  But too often media coverage becomes theatre.
• The media is too often positively biased (though there are occasionally some exceptions) and their objectivity is sometimes lost in their cheerleading and chorus of "Everything's Coming Up Roses."  Who can blame them for the use of their bully pulpit, as there are obvious reasons for this. The media has a vested interest in stocks rising; their audience (and ratings) contract in times of market downturns and advertising suffers. If things turn really bad, their salaries and employment status may be adversely impacted. The market's theatre (sometimes of the absurd) is far more exciting when stocks are in the green rather than in the red. As a result (and almost regardless of market environment), bullish "talking heads" who appear in the media routinely outnumber bearish "talking heads."
• A little-discussed secret is that representatives of significant media advertisers (print, radio and television) often appear with greater regularity than other "guests." This helps to explain, in part, the media's sometimes limited criticism of glib, formerly wrong-footed bulls (names are excluded to protect the guilty!) -- many of whom failed to see the drop into the debt and equity abyss in 2008-09 -- compared to the relative quickness in criticizing recently wrong-footed bears like David Rosenberg, Nouriel Roubini and Meredith Whitney. 
• Perhaps in 2011 it should be legally mandated that guests/talking heads in the business media disclose that their employers are important advertisers on the platform on which they are appearing. After all, when I or anyone else mentions a stock in the media, a disclosure of ownership in my hedge fund must be made. For example, BlackRock Vice Chairman Bob Doll's appearances on Bloomberg might disclose BlackRock's significant business/advertising relationship with Bloomberg. And, as another example, Jim Paulsen's frequent appearances on CNBC might disclose that Wells Capital Management is a significant advertiser on the network. 

I love that idea... and now I see why Jim Paulsen and Bob Doll are on CNBC seemingly every week.

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The latter part of the piece discusses hedge funds and HFT.  Then Kass gives 8 steps on how an investor should deal with this emotionally charged market.... some of it is relatively canned advice but some good ones in there too.