Tuesday, November 22, 2011

Futures Blasted on Dexia Woes ... and Poor Preliminary China HSBC PMI Data

In between watching all the humor on CNN, we are seeing a rip roaring kick to the guts in the futures market tonight.  That 1180ish level that was holding the past two days is being ripped to shreds as the S&P 500 is sniffing at 1170 as bad news circles in from the globe.   As I mentioned mid day, that IMF news would be forgotten within 30 minutes and was a non starter.

The flash (read: preliminary) reading of PMI in China via HSBC is contractionary at 48, down from 51.  This is a 32 month low.  Asian stocks are being hit quite hard.

  • HSBC's initial "flash" reading of its China manufacturing survey fell to a contractionary reading of 48.0 for November, well below forecast and swinging from a mildly expansionary 51.0 reading for October. Forecasts for the HSBC flash manufacturing Purchasing Managers Index had called for a 50.1 result, just about the 50 level that separates expansion from contraction. The flash PMI includes roughly 85%-90% of total responses which comprise the final version, due out next week.

Outside of that worries over Belgium bank Dexia are resurfacing.

Bigger picture, as we said once S&P 1206 was broken, this is no market for heroes.  Duck and cover.  This is shaping up for one of the worst Turkey week's ever for markets.

S&P 500 Spikes 10 Points on the 287,572th European Rescue - this Time by IMF

This is getting tiring .... but for the upteempth time we have headlines driving the market, as yet another rescue fund is put into place.

Conveniently the S&P 500 bounced right off yesterday's lows (1184) to 1194ish.  Based on how each iteration of the drugs offered by the powers that be has less effect, I expect the euphoria of this headline to wear off within 30 minutes.

Via Zerohedge


A Chart to Open Our Eyes - Staggering Change in U.S. Multinational Hiring Practices Domestically In the 00s Versus the 90s

Many ask where all the 'job creation' that the 2001 and 2003 tax cuts were supposed to bring, went.  If you believe the claims that these tax cuts directly create jobs (which many would call a spurious theory as demand for product generally is the main job creator) then, based on data from the Commerce Department, the answer is "just about everywhere but the U.S.".  This chart on how U.S. multinationals acted domestically in terms of job creation in the 90s versus the 00s is simply staggering.  And I'd argue showcases how little tax policy changes the direction of decision making, as opposed to secular growth/demand dynamics.

What surprised me here is the relatively static jobs created 'abroad' over the decade of the 00s.
Please note, the numbers below seem to be an update from this story in May, where the data was even worse.

Keep in mind the number of long term unemployed in the country (those unemployed for more than half a year) currently stands at 5.9M.  If our multinationals exhibited no growth of job creation in the 00s versus the 90s, and simply were static in their actions decade over decade, there would have been roughly a +5.3M variance in job creation.  You can do the math when you ask why we have a jobs issue in this country.  Of course these are the same entities that dominate the political process and lobby for the loopholes and favorable tax treatments.... oh yes, and are now people too, per the Supreme Court.

(as an aside, I don't 'blame' our multinationals for this behavior - in an era of globalization, this is what happens.  Many in our power elite class just don't want to admit it - instead it's environmental regulation or 'confidence' that is to blame.  If corporations are only here to maximize profit - they are doing what they are created for.  I just blame them for contributing to the orthodoxy and ideology that dominates the political landscape - while buying off the political class.)

Via WSJ:
  • U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported.
  • The faster growth abroad was concentrated in emerging markets, such as China, Brazil, India and Eastern Europe, according to economists Kevin Barefoot and Raymond Mataloni, of the U.S. Commerce Department.
  • The data show the dramatic changes in the nature of globalization during the past decade, when U.S.-based multinationals concentrated their growth opportunities abroad. And it is likely to become fodder in the political debate over U.S. and foreign corporate tax codes and policies aimed at encouraging companies to produce more jobs at home.
  • (this is increasingly dangerous to America's prospects of the future as well, and little discussed - when you move manufacturing, you eventually more your R&D capability next to it)  The newly released data also show that while American companies still do the bulk of their capital investment and research-and-development spending inside the U.S., an increasing share is being done abroad.  The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad.
  • Among companies in industries outside of finance, 57% of overseas hiring between 1999 and 2009 took place in Asia. The firms added 683,000 workers in China, a 172% increase over the decade, and 392,000 workers in India, a 542% increase. Another 18% of the overseas hiring occurred in Latin America.
  • Overseas, U.S.-based corporations still employ more people in Europe than in any other part of the world. Most of the hiring during the 2000s took place in lower-wage countries in Eastern Europe. The companies cut 14,700 workers in Germany during the decade and added only 8,700 in France, while increasing their payrolls in Poland by 135,500 and in Hungary by 53,700.
  • The U.S.-based multinational companies employed 23.1 million workers in the U.S. in 2009 and 10.8 million in majority-owned affiliates in other countries, a total that doesn't reflect millions more employees at unaffiliated overseas companies from which U.S. companies make large purchases.
  • Between 1989 and 1999, U.S. -based multinationals, both financial and nonfinancial, added 4.4 million workers in the U.S. and 2.7 million workers overseas.
  • In the 2000s, as the government reported in April, the firms cut their work forces in the U.S. as they expanded them abroad. The latest data show that the firms cut 864,600 workers in the U.S. between 1999 and 2009 and added 2.9 million workers abroad.
  • The update for 2009 turned up multinational firms with large U.S. work forces that weren't included in the preliminary data released in April. The earlier data showed that U.S. multinationals had cut 2.9 million workers in the U.S. in the 2000s and added 2.4 million abroad.
  • Much of the overseas investment and hiring by U.S. multinationals has been in the service sector and other industries outside manufacturing. Among U.S. multinational firms in manufacturing, about 60% of employment is still in the U.S. But the manufacturers cut their U.S. payrolls by 2.1 million in the 2000s and added 230,000 workers overseas.
  • In all, U.S. multinational manufacturers employed 6.9 million workers in the U.S. in 2009 and 4.6 million abroad.

And a video discussion on the topic


Looks like a lot of people took off early for the holiday based on the action today.  It's been a bit of a snoozer.  I thought 'they'd' run the S&P 500 up back to test the simple 50 day moving average up there at 1206, at least for amusement purposes, but that move up petered out very early this morning.  Instead, we are now testing yesterday's lows and the 50% retracement level of the entire October - early November move.... again.

If these levels break down, it just is not a very good picture for those of a bullish persuasion.

The only real news today is Q3 GDP dropped a bit on it's latest revision: from 2.5% to 2.0%.

Monday, November 21, 2011

Reuters Reporting No Deal from Super Committee

Oh well, it was good for a 13-14 point lift in the S&P 500 -

FLASH: Congress deficit-reduction panel co-chairs will announce their panel failed to reach deal -Senior Congressional aide

Doug Kass Says We are Rallying Due to Some Vague Comments about the Super Committee Still Working from Sen Baucus

Per twitter

@DougKass Stocks rallying a bit on some vague reports that Senator Baucus is saying things still going forward. We shall see.

And if anyone knows about how to play the market, per that 60 Minutes piece two weeks ago, it's Baucus.... one assumes Baucus got long 45 minutes ago, made bullish comments, and has now flipped for a profit.  Triple leverage ETF in size I assume. Tacked on some 10 S&P points in the last 45 minutes.

Now that's 'smart money' - perfectly legal in America to boot, yo!

Correction 3:05 PM - Rep Spencer Bachus (R-AL) is the guy featured in the 60 Minutes. Max Baucus (who Kass is mentioning) is a Democratic Senator from Montana.

That said they can both insider trade legally so it's moot.


Technically, we bounced off a 50% retracement level from the lows of 1074 to the high of 1292, down at 1183. h/t Steve Grasso.

Until the S&P gets back over 1206, it's all moot except for daytraders.

Warren Buffet Piles On Europe...

Warren's remarks to CNBC make clear what is obvious to most - either Europe needs to get much more closer together (fiscal union, eurobonds, etc etc) or start breaking off pieces.


  • The crisis in the euro zone has exposed the flaws of the 17-member currency union, and its leaders will need to take urgent action if they want the euro to survive, veteran investor Warren Buffett told CNBC on Monday.
  • The system as presently designed has revealed a major flaw. And that flaw won’t be corrected just by words. Europe will either have to come closer together or there will have to be some other rearrangement because this system is not working,” Buffett said in an interview.
  • Asked whether the union would survive this crisis, Buffett said: “That’s in doubt now.”
  • Buffett, chairman and chief executive of conglomerate Berkshire Hathaway said he did not see many parallels between the crisis in the euro zone and concerns over debt in the United States, adding that the euro system has a major flaw.  “17 countries in the world gave up the right to issue bonds in their own currency. That is 100 degrees away from being able to issue them in your own currency like the United States,” he said. “The situation there is fundamentally different.”
  • The debt crisis has pushed sovereign debt yields higher in Europe but Buffett said he wanted to steer clear of debt in the region. European stocks on the other hand were attractive, he said.  “When I left Omaha I left an order to buy one European stock which we will undoubtedly be buying today and we’ll probably be buying it tomorrow and the next day and next week and next month,” Buffett said.
  • “I can think of a dozen European stocks that are quite attractive. Whether they’re more attractive than something else I can find in the United States depends on the prices on any given day or given week but there are European stocks I like,” Buffett said. “There are some wonderful businesses in Europe, and the prices have come down on some of them,” he said.

[Video] Famed Investor Barton Biggs Says 60-70% Chance of Recession in First Half 2012, and is Cutting Back Exposure

Barton Biggs has not had a very good track record of late in terms of tactical trading calls, but certainly has a long held reputation on the Street.  This morning he appeared on Bloomberg to give his thoughts on the market and the economy - neither of which is terribly bullish.

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

A True Economic Indicator on Main Street - U.S. Births Reach 11 Year Low

A few months ago, I asked if having a child in the United States was increasingly becoming a luxury item?* [Sep 21, 2011: Are Children Becoming a Luxury Good in the U.S.?  Cost of Raising One Jumps 40% in Past Decade]  It appears the 'marketplace' is adjusting to the new reality, despite the multi year economic 'recovery' as the national birth rate has dropped to a 11 year low.  The absolute number is actually worse than that when you consider the population is substantially larger now than it was 11 years ago.  These type of figures are a far more realistic take on what is happening in the real economy, versus the government hocus pocus statistics.  It also speaks to the increasingly skew of income distribution and eroding middle class I've been talking about for 4 years (far before it was fashionable).  Readers from 2007 and 2008 will remember the "pooring of America" theme....

*excluding government assistance for those on the lower end of the income spectrum.

Via Bloomberg:

  • Similar decisions to postpone or forgo having babies may delay the recovery from the five-year U.S. housing slump and restrain future consumer spending on goods and services from child care to diapers, soaps and toothpaste. Expenditures associated with one child for a middle-income family are $226,920 over 17 years, with housing the biggest expense, the U.S. Department of Agriculture estimated in June.
  • The number of births fell to an estimated 4 million last year, the fewest since 1999, according to National Center for Health Statistics data. 
  • American families -- whose finances have been hurt by high unemployment, falling home prices and low pay raises -- lack confidence to plan for “explosions in spending” required by a new child, says Peter Francese, a demographic- trends analyst in Exeter, New Hampshire, for the MetLife Mature Market Institute. 
  • Families in the child-bearing years “have been hit hard” by the recession, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who estimates population for his economic forecasts. “Slower population growth will exacerbate the slowing in economic growth.”
  • “The potential impact of a more-sluggish birthrate is huge,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “More households will likely choose to rent for longer periods of time, and there will be fewer trade-up buyers. I fear this is a trend that will likely persist.
  • “Birthrates usually fall during recessions,” (but we've been in 'recovery' for nearly 3 years Mr. Becker) said Gary Becker, a University of Chicago professor and 1992 Nobel laureate who studies human behavior. “Their effects on the economy depend on whether births rise when good times come, partly to make up for these delays.”
  • The low birthrate continues to be lower than was forecast early in the year, and so you’re just not having as many new moms,” Thomas Falk, chief executive officer of Kimberly-Clark Corp., maker of Huggies diapers, said on a conference call with investors Oct. 24. “With the weaker economy in the near term, I’d say the category is probably going to be a little softer in 2012 than our prior long-range forecast would have indicated.”
  • Newell Rubbermaid Inc., which makes strollers and car seats, faces “sustained challenges” in its baby business, Chief Executive Officer Michael B. Polk said in a conference call with investors Oct. 28. Birthrates “just haven’t recovered,” so “we’re going to be living with slow-to-no growth markets next year.”
  • The annual cost of raising a child ranges between $11,880 and $13,830 for a two-parent family earning $57,600 to $99,730, according to the Department of Agriculture. After housing, the largest expenses are for child care, pre-college education and food. The total for a child in an upper-income family may reach $377,040 by age 17.
  • States with the largest economic declines in 2007 and 2008 were most likely to have relatively large declines in babies from 2008 to 2009, based on an analysis in October by the Pew Research Center. (that factoid required a study?)  Arizona, Florida, Georgia and Nevada all suffered birthrate drops that exceeded the U.S. average, Pew data show. 
  • Housing equity has been a key source of spending on children, according to a National Bureau of Economic Research study published last month by University of Maryland economists Lisa Dettling and Melissa Kearney. Each 10 percent rise in housing prices results in a 4 percent increase in births among homeowners, they found.
  • “People don’t have children when they don’t feel secure enough to provide for those children,” demographer Francese said. “Births reflect confidence in good or rising income over the next 10 years.” A shortfall “reflects a lack of hope for the future.”
  • Family size fell during the Great Depression to an average of 2.3 children in 1933 from 3.5 children in 1900, according to the U.S. Centers for Disease Control and Prevention. The number rebounded to as many as 3.7 in the 1950s, then began to decline again with the advent of modern contraceptives, stabilizing at about two children in 1972, government data show.
  • Two-thirds of 1,000 mothers in an August Johnson & Johnson BabyCenter survey said financial concerns would affect how many children they have, with most planning two rather than a desired three.

Crisis Does Not Take a Break for the Holidays

As mentioned Friday, we resolved a technical condition on the charts (a 'triangle'), by breach of the narrowing range (see chart here)  to the downside.  I was surprised by the general level of apathy to this development but perhaps it is because it seems half of Wall Street takes an early weekend on Fridays.  True to form, we are waking up this morning to anti apathy as futures are screaming downward.  The S&P 500 is currently in the mid 1190s, which will be the lowest level since the early October breakout.

The 50 day (simple) moving average down at 1206 was the last real support so tactical traders once again need to be pulling in their horns and go to a conservative stance, until the charts speak otherwise.  We are back to 'broken' on most of the major indexes, even though we can now expect furious oversold, dead cat bounces to arrive sooner or later.

Europe has been Europe - Spanish yields have crossed over 6.50% and inch towards the 7% that cause general consternation.  It seems the ECB generally comes into the market and buys just enough to keep yields for Italy and Spain in current range, and then steps back.  There was a report late last week that the ECB is limiting itself to 20B euros ($27B USD) a week... which still adds up significantly ($1.4T if that was maximized).

Back in the U.S. the 'Super Committee' is showing once again that the only thing working in D.C. is the ability of Congress to inflate their portfolios with insider trading tips.  In the big scheme of things $1.2T over a DECADE is a drop in the bucket ($120B a year) relative to a $14T economy and $3T+ of spending a year.  But with one side unwilling to budge on taxes on the other unwilling to budge on entitlements even with the accounting games (i.e. using new baselines, changing the way inflation is adjusted) these fools don't seem to be able to accomplish the bare minimum.

Friday, November 18, 2011

Some Info on the Yelp (YELP) IPO Filing

I expect Yelp (YELP) to have a successful IPO simply on brand recognition alone.  As we've seen lately, losing hordes of money means little, and Yelp actually loses a lot less money (relative to revenue) than some of the IPO "winners" we've seen the past year.   But as its revenue slows (which the company says is likely in the filing), while expenses still must go up - the long term prospects - short of an international roll up, are probably not quite so awesome.  Still a fun service to use, however.

Here are some details on the company per Dealbook:

  • The reviews site is on track for a $100 million initial public offering, based on a figure used to calculate the registration fee. Yelp, which plans to trade under the appropriate ticker “YELP,” has hired Goldman Sachs to be its lead underwriter and Citigroup and Jefferies & Company to be joint bookrunners. 
  • Founded in 2004, the company has a large database of user-generated reviews for local businesses like restaurants and hair salons. It is part of a rising class of Internet start-ups, like Groupon and Angie’s List, that helps customers discover local vendors through the Web and mobile applications. 
  • So far, investors have embraced such start-ups. Earlier this month, shares of Groupon rose 31 percent on their first day of trading. Angie’s List, which went public on Thursday, soared 39 percent at the start of trading.
  • Like its peers, Yelp has increased its user base sharply over the last year. According to the filing, Yelp now has 22 million reviews on its site, a 66 percent jump from the previous year. It also recorded a monthly average of 61 million unique visitors for the third quarter, a 63 percent surge from the year-ago period.
  • Yelp, which makes the bulk of its revenue from advertising contracts with local businesses, is not yet profitable. Though revenue rose 79.9 percent, to $58.4 million for the first nine months of this year, the company recorded a loss of $7.4 million.
  • Yelp also warned investors that it expected revenue growth rate to slow, as the business matures and the company spends more money on corporate expenses, like marketing and international expansion.
  • According to the filing, Yelp’s venture capital investors own the largest slices of the company. While Jeremy Stoppelman, Yelp’s co-founder and chief executive, owns 11 percent of the company, Bessemer Venture Partner and Elevation Partners own about 22 percent each.

Here is the full SEC filing.

BW: The Mortgage of the Future (and the Past)

A very insightful piece from BusinessWeek on the history of the mortgage in the United States (from the 1920s-1930s era) through the current mess.... and then a discussion of a potential framework to take us away from the current market which is almost completely socialized.  A lot of interesting things out the history of the housing market I did not know - especially how the thirty year fixed mortgage was born and how the fallout of the Great Depression was fixed (hint: a helpful Congress).  I also did not know that Denmark and the United States are the only 2 countries you can get a long term "low rate" 30 year fixed mortgage - adjustables seem to be the rule in much of the rest of the world.  (adjustables put less risk on the bank in case interest rates rise over time)

Here is a look at the history -- the rest of the article discussions potential changes to the future mortgage market:

  • Up until the 1920s, loans typically were for half the value of homes or less, which was good and bad: Lenders had a thick safety cushion, but creditworthy people were cut off from homeownership. 
  • Starting in the 1920s, building and loan associations started offering loans up to two-thirds of the home value as well as second mortgages that raised total lending to 80 percent of home value; by 1929 those institutions dominated the mortgage market.  It was, like the 2000s, a decade of innovation and overleverage. Private mortgage insurers grew rapidly. There was even an early stab at securitization: Collateral trust certificates of participation, as they were called, passed through to investors the cash flows on underlying mortgages. Housing finance was entirely private; there were no government guarantees.
  • The system came crashing down in the 1930s, destroyed by the bust in home prices and record unemployment that left homeowners unable to keep up payments. Private mortgage insurers failed, building and loans stopped making loans, and participation certificates lost most of their value. 
  • That’s when things got interesting. FDR concluded that fixing housing was not only merciful but essential to getting the U.S. economy back on its feet. On Apr. 13, 1933, he asked Congress for legislation to protect homeowners from foreclosures and to reduce the burden of mortgage debt.
  • Congress responded with a speed that modern lawmakers could scarcely imagine. “Senate hearings were started after a week’s delay but were terminated after two days to speed action,” C. Lowell Harriss of Columbia University wrote in a 1951 study of the episode. In pushing ahead, Congress turned aside objections from the New York State League of Savings and Loan Associations, which said “every reasonable consideration” was already being extended to worthy homeowners. (identical language we've heard the past few years from the TBTF banks)
  • Legislation establishing a Home Owners’ Loan Corp. passed the House 383 to 4 and sailed through the Senate in June 1933 on a voice vote. The new agency bought defaulted mortgages from lenders, generally at 100¢ on the dollar, and replaced them with healthier ones—fully amortizing loans with long terms (originally 20 years) and fixed rates of interest. Down payments were a conservative 15 percent. By 1936, when the Home Owners’ Loan Corp. stopped restructuring loans, it held mortgages on 1 in 10 owner-occupied homes in the U.S.
  • But to make safer loans possible, the federal government thrust itself into what had always been a private matter—borrowing to buy a house. Lenders were unwilling to make long-term fixed-rate loans without a safety net. So, through new agencies such as the Federal Housing Administration (1936), the government promised it would make lenders whole if borrowers defaulted. That opened the spigot of private credit.
  • The seat-of-the-pants experiments of the New Deal changed American housing finance forever, mostly for the better. Even today, the U.S. and Denmark are the only countries in the world in which borrowers can pay off their mortgage over a period of as long as 30 years and at an interest rate that never changes.

Will Europe Ruin the Traditional Thanksgiving Week Rally?

Should be interesting to see if head traders take off early next week as they traditionally do ahead of the Thansksgiving holiday.  Long time market participants recognize the positive nature of Thanksgiving week, which tends to drift upward on very light volume - especially so on the two days bracketing Thanksgiving itself.  Not sure why that is.... maybe good spirits, or maybe because those days are dominated by those just looking for quick beta trades.   Whatever the case the data over the past 70 years shakes out very positively:
  • Since the holiday was officially recognized in 1941, the S&P has averaged a 0.49% gain for the week, with positive moves 64% of the time
  • As a comparison, since 1941 the average one-week return for the S&P is 0.16%, and positive 56% of the time.
Since all the trading nowadays is based on European yields, maybe the big money will check in each morning to see if the ECB is buying sovereign debt, and as long as yields dont pop north of 7% on Italian debt, or Spanish debt doesn't start surging, they'll leave next week to the junior traders so we can get our normal happy happy time.

What would be a fantastic event (in terms of drama), would be if next Thursday there was some wicked movement in European markets, while we are locked out.... ooohh....

Of course, adding to the trickery, is the fact that the inside traders in Congress have a deadline for the Super Committee on the 23rd as well.  So the chances for the traditional snoozefest next week seem slim.

Resolving the "Triangle" - Did We Breach to the Downside Yesterday?

Many adapt traders in the blogosphere and 'twittersphere' have been talking about the triangle forming in the charts the past month or so.  I have mostly been mentioning the top side of that shape - the series of lower highs, but as seen below with the orange lines indeed we have the triangle shape - lower highs on the top side after a peak, and higher lows on the downside.

[click to enlarge]

'Normally' when you break out of this triangle, you tend to see a significant move that follows the direction of the break.  Yesterday seemed to indicate that move will come to the downside.  Of course, true to course in this new paradigm market where strange things happened, in the closing minute of the day the S&P 500 rallied about 5 points upward, and this morning we are getting (of course) a gap up.  So I hesitate to trust much of the old rules of technical analysis nowadays since there seems to be an invisible hand that makes a lot of the old rules inept.  Those who were around last year remember a massive head and shoulders formation that should have led to a breakdown in the market - instead we got QE2 and we were off the races.

Anyhow, thought I'd point it out... even if it proves to be useless within days.... or hours.

Thursday, November 17, 2011


Barring a last minute miracle we will be closing below all the major exponential moving averages.  All that is left is the 50 day simple moving average down there at 1205.  Then we are back to a chasm, while we wait for the next FT.com, Steve Liesman, or Reuters rumor about 'rescue'.  p.s. whatever happened to that 1.4T ESFS that solved all the world's ills.  I guess that had a short half life.

Anyhow, back to other stories - CNNMoney reports that demand for gold continues to surge especially in... (wait for it) Europe*.And central bankers seem pretty antsy to acquire it as well.  Interestingly, gold has not been that great of a safe haven of late - but if when the "QE of all QE's comes from the ECB", I'd expect it to go on another run.

*excluding Gordon Brown who was happy to liquidate much of England's stash in the $300s.

  • Even near record high prices, gold hasn't lost its luster ... especially in Europe.  Investors in Europe purchased a record $6.2 billion in gold bars and coins in the third quarter, the World Gold Council reported Thursday.
  • While that's not a record in terms of weight, Europe's demand for about 118 metric tonnes nevertheless amounts to nearly a third of all the investment-grade gold demand worldwide in the quarter. It also marks a 135% surge in demand from Europe from the same quarter last year.
  • Worldwide, demand for gold bars and coins was up 29% compared to a year ago.
  • The increase in demand came even as gold became more expensive than ever. Gold prices surged 20% in July and August and briefly topped record highs above $1,900 an ounce in trading, before falling back since then.
  • "Fears generated by the deepening sovereign debt crisis in Europe were manifested in a strong desire to buy gold," the World Gold Council said.
  • Even foreign central banks stepped up their buying, purchasing 148.4 tonnes of gold in the quarter, up from 22.6 billion tonnes a year ago.
  • The U.S. dollar and the euro remain the top currencies on reserve at central banks, but "questions surrounding the creditworthiness of western governments' debt" has increased the appeal of gold as an alternative, the Council said.
  • Thailand, Russia and Bolivia were among the central banks that publicly disclosed gold purchases. Not all central banks report this information on a regular basis though.

More on the central bank buying here - apparently the amount disclosed 'stunned' traders.
  • Gold traders and analysts have been stunned by the final figure provided for the quarter. Most say it was around 100 tons above what they had originally tallied.
  • Bullion dealer GoldCore suggested a number of central banks may be quietly and gradually accumulating large quantities of bullion. “They are not declaring their purchases due to concerns that this may further devalue their currency reserves, which are mostly in U.S. dollars and also in euros, and would result in them having to pay higher gold prices for their new gold reserves,” it said.
Translation - the euro and dollar are both perceived junk but central banks who own them, don't want to say it publicly... at least until they are done buying more gold ;).
  • “While one can account for some of the purchases—from Thailand, Bolivia, Russia etcetera–there is an unaccounted amount out there. A clue probably lies in the fact that a lot of [recent] buying has been from central banks that have been in surplus, [in regions] like Asia and Latin America.”

There does appear to be some 'crowding out' however as prices skyrocket over the years...
  • But some analysts aren't quite as optimistic that gold can keep up its winning streak.  "You have a continuation of patterns that should worry the bulls," said Jon Nadler, a senior analyst with Kitco Metals in Montreal.
  • Global demand for gold jewelry, which has typically accounted for about two thirds of all gold demand, fell 10% year-over-year and is dragging near its lowest level in 25 years, Nadler said.

As for supply?
  • Meanwhile, the gold supply is increasing. Mine output increased 5% year-over-year in the third quarter, and the supply of recycled gold rose 13%.

Angie's List (ANGI) Quietly Having a Nice IPO Day in a Rotten Market

Unlike Linkedin (LNKD) or Groupon (GRPN) which had to resort to ultra tiny floats to manipulate a supply/demand dynamic, Angie's List (ANGI) did a more normal sized offering and still outperformed the latter.  The stock is currently up about 27%, down from the >30% gain earlier in the day but all things considering - a success.


Another high revenue grower with no profits to be seen.... which on Wall Street is a win win!

Via CNNMoney:

  • Angie's List priced its offering of nearly 8.8 million shares at $13 each, the top of its range, late Wednesday. 
  • The company was founded in 1995. Angie's List runs reviews of dentists, doctors, veterinarians, gardeners, plumbers and other businesses offering local services. At the ripe age of 16, it's much older than its fellow Internet companies that have recently gone public, including Groupon, LinkedIn and Pandora.  But like most of its younger IPO-ing peers, Angie's List is not profitable. In 2010, the company reported a $27.2 million net loss on sales of $59 million.
  • For the first nine months of 2011, Angie's List pulled down almost $62.6 million --- up from $42.9 million for the same period last year. But the company logged a $43.2 million loss at the same time, which is far steeper than its $19 million lost in the first nine months of 2010.
  • Angie's List has two revenue streams. When the site launches in a new area, it offers free memberships to attract new users and reviews. After about two years, the new market is converted to paid memberships, where readers have to pay to access reviews. An Angie's List representative said rates vary by market, but subscriptions cost an average of $6 per month.
  • The site is now in 175 paid membership markets in the U.S., and in October it passed the 1 million mark for paying members.
  • Angie's List also lets service providers who are highly rated by its members advertise discounts and other promotions on the site. As of September 30, more than 210,000 of the 815,000 service providers reviewed on Angie's List were eligible to advertise.
  • Only 10% of the eligible service providers were advertising as of September 30, but that business makes up most of Angie's List's revenue. In 2010, service providers paid $33.9 million and members paid $25.1 million in fees.
No position

Youku.com (YOKU) and Renren (RENN) - Both Disasters Post IPO

Remember the "Facebook of China" Renren (RENN) and the "Youtube of China" Youku.com (YOKU)?  While I lambasted both for valuation reasons (Renren also had a bunch of other red flags)  [May 2, 2011: RenRen IPO Appetite Seen as Huge, but Red Flags Abound] , the Wall Street hype around these names was quite sickening.  Once the machine dropped the stock in the hands of the retail base, the true colors have come to light.  Fugly charts.

No positions

Broken Support

First break of that 50 day in about 6 weeks.  As always the close is more important than the intraday action so let's see what the rest of the day brings.

EDIT 12:41 PM - wow once those supports go there are serious air pockets - already down to 1212 from 1219 when I posted this just minutes ago.

The Man Who Once Beat the S&P 500 15 Years in Row, Legg Mason's Bill Miller, Booted from Value Trust Fund (LMVTX)

Big news in the mutual fund world, as 'legendary' investor Bill Miller of Legg Mason, has been "escorted" away from Legg Mason Value Trust (LMVTX).  In the 90s and early 00s Miller had an incredible streak of beating the S&P 500 fifteen years in a row.  However the more recent past has not been very kind to him at all.  This was one of the earliest examples of a 'good' concentrated fund (i.e. the fund usually held 30-50 stocks), but when the stock picking goes bad, concentration is obviously not a positive thing.

The now one star fund still has close to $3B of assets in it (amazingly), despite a 5 year annualized returned of -9.6% and 10 year annualized return of -1.5%.  Of course that is down from over $20B - partly due to losses from performance, a redemptions.  Actually I am shocked to see its expense ratio is just under 1.8% for a fund with billions in assets to spread its costs over... especially since trading activity is low (sub 50% turnover per year) and it's essentially a long only fund (no need to pay borrowing costs for shorting).   On top of a front end load no less.  Looks like a nice cash cow for Legg Mason.

Miller will still be with the company and stay managing the 1 star (1.92% expense ratio ... plus load) $1B Legg Mason Opportunities (LMOPX) fund.

Via Bloomberg

  • Bill Miller, the Legg Mason Inc. (LM) manager known for beating the Standard & Poor’s 500 Index for a record 15 years through 2005, will step down from his main fund after trailing the index for four of the past five years.
  • Miller, 61, will be succeeded by Sam Peters as manager of Legg Mason Capital Management Value Trust (LMVTX) on April 30, the Baltimore-based firm said today in an e-mailed statement. Miller will remain chairman of the Legg Mason Capital Management unit while Peters will assume the role of chief investment officer.
  • Miller, known for picking stocks he deems cheap based on financial yardsticks such as earnings, became mired in the worst slump of his career as he wagered heavily on financial stocks during the 2008 credit crisis. Value Trust lost 55 percent that year as the S&P 500 dropped 37 percent, including dividends, prompting a wave of withdrawals. The fund’s assets have plunged from a peak of $21 billion in 2007 to $2.8 billion as of Nov. 15.
  • Miller, who has been a manager of Value Trust since its 1982 inception, in 2010 named Peters, a former Fidelity Investments stockpicker who joined the firm in 2005, to become his co-manager and eventually his successor. Miller initially co-managed Value Trust with Ernie Kiehne, then took sole responsibility in 1990, the year before his winning streak started. Research firm Morningstar Inc. named him fund manager of the decade for his performance in the 1990s.
  • As markets rebounded in 2009 and 2010, Miller bet the U.S. economy would return to its old strength by investing in financial stocks and consumer-oriented companies. The fund topped peers and the S&P 500 with a 41 percent return in 2009 as markets rebounded, only to fall behind benchmarks again last year with a 6.7 percent gain. Value Trust declined 5.5 percent this year through Nov. 16, trailing 60 percent of similar funds, according to data compiled by Bloomberg.
  • The inability of famed stock pickers such as Miller to protect investors from the market declines has spurred withdrawals from actively managed equity funds as clients shift money into bonds and index products.

Testing Support Again on the S&P 500

The latest Euro rumor is to get around the nasty rules it has to deal with the ECB could lend to the IMF, who could then lend to European countries directly ... or I suppose buy their bonds at issuance. ;)  Usually this sort of rumor would drive the market up 2-3%, so either like a drug that is losing its effect the rumors are getting tiring, or the fact it is so out from left field - we are not seeing any upward movement from the latest floated 'solution'.

Looking at the S&P 500 we are once again at key supports... having just broken below the 200 day moving average and sitting at the 100 day.  The 100 day has actually been more of the support level the past few weeks... but since mid October when we broke back above key resistance levels, strangely the 50 day moving average has been the most important level (blue line).  We have not fallen below that one even once, while we have seen both the 100 and 200 day breached briefly.  Kind of strange, because that's not normally the way it works...

As highlighted earlier this week - we have a series of 'lower highs' forming, which is traditionally bearish. I use the words traditionally because a lot of things that used to mean 'something', mean 'less' in the market of the past three years. Volume this week has also been nowhere to be found. I assume a lot of people are simply not playing with the binary events happening in Europe and the fact we now gap up or down 1-2% three out of five days a week. Too difficult.

EDIT: Actually in the time it took for me to write this, we broke the 100 day moving average and are sitting at S&P 1226 which is right above the 50 day moving average in the 1224 range.  If the 50 day breaks that would be the first penetration of that level in about 6 weeks.

Awesome Post by Ritholtz

I've written similar posts (calling it a Corporate Plutocracy or Oligarchy) but sometimes other people are far more eloquent than I am.... this morning Barry Ritholtz (who essentially is the 'godfather' of financial blogging) wrote a doozy - The U.S. is a Corporate Monarchy

I did an interview with a print reporter yesterday about what has been going on with lack of prosecutions, the banks, and Wall Street in general. We discussed the corrupt exchanges and HFT.

I dropped lots of F-Bombs, called out cowards and crooks and held nothing back. (“That $%$%#@ belongs in prison; this son of a @&*^% should hang“)

Afterwards, she commented that I seemed angry.

I wrote back suggesting that I am a happy dude, and its not Anger — its closer to an ineffable sadness that comes once you realize you have lost something dear. I am old enough to have grown up when this nation was a Democracy, but that era has passed. We now live in a nation no longer run by the citizens — it is aCorporatocracy — and that makes me sadder than angry . . .

She suggests perhaps a better word is outraged.

Wednesday, November 16, 2011

Congrats Everyone - U.S. National Debt Just Passed $15 Trillion, See You at $16 Trillion Soon

Of course technically part of this debt is money we owe ourselves via transfers but ...


Since these numbers are far too big for anyone to comprehend, it's better to do it by citizen... it's just under $50K per humanoid in the country, including that baby just born 2 seconds ago... and that one 4 seconds ago... and that one... and that one...

[click to enlarge]


What did I miss in the last hour?

Put another way, why were our Senators selling en masse in the closing 60 minutes?

(scratches chin)

EDIT: Oh, I see now.  Fitch telling us something we all already knew.  Masters of the obvious.
  • A warning from Fitch Ratings that large U.S. banks could be hit hard if Europe's debt crisis spreads.

Canada Introduces Plastic $100 Bill, More Denominations to Come in 2012

As the movie says.... one word: plastics!  Canada joins a host of countries (I didn't realize this was so widespread) in moving away from paper currency with the introduction of the polymer $100 bill.  Interested in how it feels, and also how the cost of production differs from paper but apparently it's cheap enough to roll out bills as small of a denomination as $5 in 2012.   Still not as cool as a loonie. ;)

  • Paying with plastic now has a double meaning in Canada. The central bank has introduced a polymer-based $100 bill as our northern neighbor moves away from paper currency.
  • The thin, shiny, high-tech, recyclable bill, released Monday by the Bank of Canada, is reportedly almost impossible to rip and thought to be nearly counterfeit-proof, according to the bank and news reports. Security features include holographic elements and a metallic strip running through a transparent window.
  • The new polymer $50 bill goes into circulation in March, with the $20, $10 and $5 bills coming in 2013.
  • "We've been working with the market for over two years to make sure that ATMs and all banknote-processing equipment are ready for these polymer notes," the bank's scientific adviser, Martine Warren, told The Globe and Mail. "We distributed test notes and advance designs of the genuine notes to machine manufacturers far earlier than we have in the past to make sure that the circulation system is ready for these polymer notes."
  • Canada joins about 30 other countries that have exchanged paper for plastic. Australia was first, in the 1980s.

Here is a video of the bill

The Globe & Mail outlines the 'printing process'.

[click to enlarge]

Farmland Boom (and Brewing Bubble) Continues as Midwest Land Jumps 25% Year over Year, Led by Nebraska's 40%

We've been highlighting the opportunity in farmland for the past 3+ years.  I've called it the best 'long term' investment I can see.  That said, the move in the past few years, and especially this year has been astounding and feeling 'bubble-licious'.  In Nebraska, farmland has risen 40% year over year according to the latest data... in Iowa 31% - that doesn't make much sense, aside from he fact so much easy money has been created and it's starved for a home. The Midwest region as a whole is up 25% year over year, which is actually an acceleration over levels seen last we heard in May.  Like all good Fed induced bubbles, this one will end badly - let's look for the typical signs.... in this case a Ferrari dealership opening in Omaha should be a good one.

Via AP:
  • The average value of farmland in several Midwest and Western states soared 25 percent over last year in the third quarter.
  • Nebraska farmland values increased the most with a roughly 40 percent jump over 2010.
  • The Federal Reserve Bank of Kansas City, Mo., said Tuesday that bumper crops and strong farm income in northern Plains states, like Nebraska, helped the region overcome drought and flooding.
  • The Federal Reserve says this new survey of 243 banks showed the largest annual increase in land values since the survey started in 1994.
  • The 10th Federal Reserve District covers Kansas, Nebraska, Oklahoma, Wyoming, Colorado, northern New Mexico and western Missouri.

Full survey here.


And it's not just the Kansas City Fed district - even the Chicago district has seen its best appreciation since 1977.
  • According to the Chicago Fed, farmland values in its district had their largest increase since 1977, jumping 7% from the previous quarter.  Iowa farmland prices led the Chicago Fed's district, jumping 31% from last year's 3rd quarter.

[May 16, 2011: U.S. Plains States Farmland Boom Continues, With 20% Year over Year Gains]
[Mar 11, 2011: [Video] Former FDIC Head Bill Isaac Talks about the Dud that is Dodd-Frank, and the Potential for a Farmland Bubble]
[Mar 7, 2011: NYT - In Prices of Farmland, Echoes of Another Boom]
[Feb 16, 2011: WSJ - Midwest Farmland Surges Double Digits in Q4 2010 Alone]
[Nov 15, 2010: Farm Economy Headed for Record]
[Dec 31, 2009: Bloomberg - Ethopian Farmers Lure Investor Funds as Workers Live in Poverty]
[Jun 2, 2009: The Economist - Outsourcing's 3rd Wave - Buying Farmland Abroad]
[Jun 14, 2008: Bloomberg: Farmland Reaps Bonanza for TIAA]
[Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming]

Want to Short Groupon (GRPN)? Borrowing Costs are So High You'd Need it to Hit Near Zero to Make a Profit if You Held for a Year

One of the embedded costs to shorting is the need to borrow the shares first on margin.  Usually it's a relatively (although not inconsequential) rate... but with the scarcity of shares available for recent IPO Groupon (GRPN), the borrowing costs are so high on an annualized basis - you'd actually have to see the stock go to zero to make a profit.  (Assuming borrowing costs don't fall over time, which they will as more shares are unlocked down the road)  Of course, any institution shorting right now is probably doing it on a much shorter time frame than a year - due to cost alone!

  • On paper, Groupon Inc appears to be a juicy target for short sellers: it loses money, it has changed its accounting twice, and its unproven business model faces competition from Google and Amazon.  But the shorts may have to wait as betting against the daily deals website is just too expensive right now because of its tiny share float.
  • To make money shorting the $15 billion company, which went public earlier this month, investors would have to see the stock go close to zero for a year-long bet.  "It would be very premature and highly risky to consider shorting Groupon soon after the IPO," said Fred Moran, an analyst at Benchmark Co. "It's very difficult to borrow the stock on a newly issued security and it has a very low float."
  • Groupon sold a stake of about 6 percent in its initial public offering, one of the smallest in the past decade.  That means there is little stock available for short sellers, who have to borrow shares before they can sell them. If the stock drops, they can buy it back at a lower price, return them to the lender and pocket the difference as profit.
  • A scarce supply had some brokers charging an annual rate of 90 percent to 100 percent last week to borrow Groupon stock, according to two hedge fund managers, one independent trader and one prime broker. They spoke on condition of anonymity to preserve their counterparty relationships.
  • A 100 percent rate, or negative rebate as it is known, means a trader has to pay $20 to borrow a $20 stock for a year. In this instance, Groupon stock would have to drop to close to zero within a year for a short seller to break even. So traders are only shorting the shares for very short periods, such as a few hours, or avoiding the trade all together.
  • Another way to bet against the company is to buy put options, which give the holder the right to sell shares by a given date at a particular price.  The cost of put options on Groupon were high on Monday, the first day of options trading. Put options that expire in December and carry a $24 strike price were priced at about $3. Factoring in that premium, an investor would be betting on shares to fall below $21.
  • Call options -- a bet on a stock rise -- traded at a $1.50 premium, suggesting more demand for the stock to fall.
  • "Everyone is expecting the stock to slide and there is definitely a higher skew to put activity, but you need to really believe that there will be a drastic move on the downside to buy puts at this premium," said Ryan Detrick, senior analyst at Schaeffer's Investment Research.

No position

It's All About the ECB

Quite a round trip in the futures market.  I went to bed with futures screaming downward to the tune of -11 on the S&P 500 as worries continued about European sovereign debt.... woke up very early (4:30 AM EST) to a happy happy place on futures as apparently the ECB came in with guns blazing buying Italian and Spanish debt on the secondary market.  Futures were actually green on the Dow - and European markets were positive.  Then within 2 hours (6:30 AM) the S&P 500 was back down 11, and European markets red.  Allrighty then.

Really, it remains all about the ECB.
  • Pressure eased on Europe's government debt market on Wednesday, with Italian borrowing costs back below the 7 percent level viewed as unsustainable after the European Central Bank was seen buying up bonds.
  • Italian 10-year bond yields were at 6.85 percent, having peaked well above 7 percent on Tuesday, the level generally viewed as requiring an outside bailout.
  • Traders said the ECB was behind the move.  "They're heavily in on Italy and Spain, 2-10 years," one bond trader said.
  • The European bond market is becoming very binary, and ECB-dependent,” said Mohit Kumar, head of European interest- rate strategy at Deutsche Bank AG in London. “Whenever the ECB steps in, the market likes it, when it steps back, you see pressure. There are no real buyers.”


In other news, employment data out of the U.K. continue to point to a dour situation.
  • U.K. Q3 unemployment 8.3%, +0.4 percentage point on the quarter and increasing to the highest since 1996. Number of jobless +129,000 to 2.62M, the highest since 1994.
  • In the three months through September, unemployment among 16-24-year-olds increased by 67,000 to 1.02 million, the highest since comparable records began in 1992. The jobless rate in that category was a record 21.9 percent.
The Bank of Japan and Bank of England both slashed growth forecasts overnight, and the BOE is open to more QE
  • In its quarterly Inflation Report, the BoE indicated it may have to add to its 275 billion pound asset purchase program, as it predicted inflation would fall to 1.3 percent in two years time. It expects inflation to fall below its 2 percent target by the end of 2012.
  • Inflation eased to 5 percent in October and King said in an explanatory letter to the government on Tuesday that he expected it to fall sharply in the next six months and return to around target by the end of 2012 as one-off effects from this year's VAT rise fall out of the data.

Tuesday, November 15, 2011

Ezra Klein: Who Has the Better Central Bank? The U.S. or Europe?

This is of course a topic I bring up at every cocktail party.... hah.  But it's an interesting topic... moral hazard has been breached years ago in the States, starting with Long Term Capital Management in the 90s, to the point Lehman Brothers was sitting there expecting rescue from "someone" (federal govt and/or central bank) for all their errors and ills.  It's progressed far worse since even 2008 due to QE - we are now at the ridiculous point every time the S&P 500 falls 10% the speculator class demands the Federal Reserve come to the rescue - as if stock market valuations are a third mandate.  (of course Bernanke does nothing to extinguish this as he has stated the wealth effect is something he cares about - not sure how that fits in the mandates of inflation or employment, but let's not worry about details such as that.)  Meanwhile, MF Global has recently gone down in flames as its leader expected "Fed like" action out of the European Central Bank.  If the ECB was like the Fed, Greek's leadership would still be there, as would Italy's.... the rescues would have came years ago. Instead the ECB puts most of the hardest fixes back on the political leadership .... something far more complicated in a 17 country organization than what we have to deal with here.  Of course, both have pros and cons - Ezra Klein (who from this article seems to lean Krugman... or Charles Evans) of the Washington Post takes a closer look.

  • Who has the better central bank, Europe or the United States? It’s not exactly water-cooler conversation. But in April, when European Central Bank president Jean-Claude Trichet announced he would hike interest rates even as the euro zone was sputtering — in essence, opting to choke off economic growth to avert an uptick in inflation — the comparisons with Ben Bernanke quickly flared.
  • Inflation hawks hailed Trichet’s vigilance: “Yes, Americans are now being schooled by the French on how to run a sound monetary policy,” wrote economist Michael Pento. On the other hand, those worried about the euro zone’s sluggish growth argued that the ECB was being run by maniacs. “[T]he ECB makes Ben Bernanke look like William Jennings Bryan,”wrote Paul Krugman. Even if Bernanke wasn’t doing enough to jolt the U.S. economy, Krugman argued, at least he wasn’t as fanatical about stifling growth as Trichet was.
  • This split view has persisted, even after Mario Draghi replaced Trichet as ECB president in November. The Europeans are seen as overly cautious in the face of crises, obsessed with inflation and willing to tolerate weak growth in the name of austerity. Bernanke, by contrast, has earned a reputation as someone willing to throw the kitchen sink at a financial crisis — even if many economists think he could go much, much further in helping the recovery along. “The Fed has been vastly more aggressive in just about everything,” says Alan Blinder, an economist at Princeton University.
  • Yet a closer comparison reveals some subtle differences between the world’s two most powerful central banks. Bernanke has been willing to test the boundaries of what the Fed can do in order to preserve financial stability at a time when U.S. political institutions are failing. Europe’s central bankers, by contrast, have been more focused on pressuring Europe’s failing institutions to reform themselves, rather than on circumventing them to save the economy. Here’s a look at the strengths and weaknesses of each approach:

1) Balancing growth and inflation.

  • The Fed has been far more fervent than its European counterpart about slashing interest rates to boost the economy. This partly stems from a difference in the banks’ mandates. The ECB’s main task is to keep inflation low, whereas the Fed, in theory, has a “dual mandate” to fight inflation and unemployment. What’s more, the ECB targets “headline” inflation — a broader price index that includes things the Fed doesn’t fret as much about, like the Libya-related oil spike this year — which leads Europe’s bank to hit the brakes more often.
  • At the moment, the U.S. economy has recovered to the point where it’s about 0.6 percent bigger than it was before the crash. The euro zone, by contrast, is still 0.3 percent smaller than it was pre-crisis. That’s partly due to the ECB hiking interest rates at a couple of key points during the downturn, including twice this year, even as the Fed is pledging to keep rates near zero for the foreseeable future. (Under Draghi, the ECB has reversed course and cut rates slightly, but analysts don’t expect him to go as low as the Fed has.)
  • Now that the euro zone is likely to enter yet another recession, the ECB’s tight-fisted approach doesn’t look too good. That said, Bernanke doesn’t get off easy, either. A number of prominent economists have argued that even the Fed has also been too timid and too inflation-averse, leaving millions of Americans out of work unnecessarily.

2) Pumping money into the market during crises. 

  • During the worst of the financial crisis in 2008, the Fed began an emergency lending program to keep money flowing through the economy. All told, the bank loaned out some $3.3 trillion to anyone and everyone: U.S. banks, European banks, General Electric, McDonald’s… The Fed also engaged in two rounds of quantitative easing to boost the economy, buying up more than $2 trillion of mortgage-backed securities and other bonds.
  • Clearly, Bernanke wasn’t above taking unprecedented — and sometimes legally murky — steps to avert a meltdown. “In many cases, the Fed was stretching the law like mad,” says Blinder. (The one big exception was when the Fed concluded that it had no authority to save Lehman Brothers in the fall of 2008.) Even though Europe’s bank often has a lot more flexibility to get involved in open-market operations, Blinder adds, “they’ve been a lot more worried about stretching the law.”
  • That said, Blinder adds that the ECB also has good reason to be wary of un­or­tho­dox actions like quantitative easing. If the Fed loses money on its purchases, it has the U.S. Treasury to back it up. It’s not clear who would backstop Europe’s bank.

3) Getting involved in politics. 

  • Rick Perry and other Republicans have slyly hinted that Ben Bernanke has tried to goose the economy to help Barack Obama. The evidence for this is pretty thin. The Fed has generally acted as a lender of last resort — backstopping the economy — with seemingly little regard for politics. By contrast, the ECB has been muchmore selective in shoring up the euro zone’s troubled states — and, in the process, it has become quite active in E.U. politics, to the point where it has ousted elected leaders.
  • Consider the ECB’s position in Europe’s debt crisis. There are several countries, Italy and Spain especially, that would benefit greatly if the central bank loaned them money so that they didn’t have to face high borrowing costs on the open market. And, while the ECB has bought up some sovereign bonds — about 185 billion euros worth — it hasn’t been willing to unconditionally backstop the debts of European countries. If it did, it would lose its leverage to push the sorts of austerity measures it openly favors. “If the ECB had gone in two weeks ago and declared openly that we stand behind Italian debt,” says Kirkegaard, “then Silvio Berlusconi would still be in office.”
  • The defense of the ECB is that it’s probably the only institution in Europe that actually can force structural reforms. But, Kirkegaard notes, the bank is playing “a very clear game of chicken.” By refusing to extend an unconditional helping hand, the central bank can force countries like Italy to rein in their debts. But the ECB is also running the risk of a full-blown financial crisis that brings down the Euro zone.

S&P Up About 11 Points Since Federal Reserve's Charles Evans Took to the CNBC Airwaves Talking Up More Easing

The one dissent at the last Fed easing was Charles Evans.  His dissent was of the very rare kind - it was a dissent against current policy because it was not easy enough!  This in a world of multiple QEs, Operation Twist, 0% Fed Fund rates (til at least mid 2013) etc.

Mr. Evans took to the airwaves at CNBC this morning in the 11 AM hour - while the market did not immediately react, the S&P 500 has since surged 11 points or 0.9% as Pavlov dogs react in glee to the groundwork being laid for more easing.

While I agree with Evans with the concept of lack of wage/price spiral due to WAGES, as the U.S. in the 1970s was more of a contained economy, and now we have a global labor force, the damage done by ANY inflation in the modern era are going to be far more dangerous.  While 30-40 years ago employees could actually go to employers and ask for wage hikes to some degree, and the power of unions were far stronger, now when inflation hits, employees will be laughed at if they ask for wage hikes to compete.  Then again, there is little to no inflation in a world where food, energy are excluded and tuition, healthcare premiums, et al are just rounding errors.

There is a lot of talk of the Fed now following the British model, where official inflation has been far in excess of the official target due to the dual mandate.  Somehow the Fed believes more and more easy money create jobs... despite the failure of the past three years.  So if they will just continue to make money ever easier until the unemployment rate gets back to 5% we have years upon years of the spigot turned to high ahead.  [May 19, 2011: Prepare for a Fed Hike... in 2018?  So Says Goldman Sachs]

  • "I’m advocating a more aggressive stance of monetary policy," he told CNBC. "I think we should be more aggressive and that frankly makes a lot of people nervous."
  • "I just think that this is the time to stretch the boundaries a little bit more and take a few chances," he said.
  • "The economy needs more accommodation. I think the unemploymentt rate at 9 percent is unacceptably high," he said, noting that the jobless rate should be at 6 percent or less. "I think we should be doing as much as we can."
  • Evans said he was more worried that the U.S. central bank could repeat the errors of the 1930s than those of the 1970s.  "In the 1970s you had a wage growth. You had the wage/price spiral where prices would go up, workers would demand that wages go up to keep up, and it would keep spiraling upwards," Evans said. "I don’t know if anybody expects wages are going to go up to that extent that it’s gonna propel inflation higher."
  • If anything, Evans said, there is more downward pressure on wages, and he doesn't see that pushing inflation  higher.  "It’s a different time period. You’re always tempted to fight the last war," he said. "The 1970s are the last war. I’m much more worried about the 30s experience in Japan the last 15 years."

Three Charles Evans videos below if interested

Vid 1 - 8 minutes

Vid 2 - 8 minutes

Vid 3 - 3 minutes

Morningstar Makes Move to Rate Mutual Funds Like Stocks

A sea change at Morningstar, as it is adding a brand new analyst rating (more subjective) to it's now infamous 5 star rating system.  It appears the human element will be added to try to guestimate how funds will do in the future, as the star rating system is based on past performance.

I was startled the past few years to read what % of money goes into 4 and 5 star rated funds (I don't remember the figure but it's something north of 70%), so it will be interesting to see if this new analyst rating system has such an impact.

Here is a video discussion of the topic (7 minutes) - email readers will need to come to site to view

Here are the pillars that the new analyst ratings will be based on.  (the link does an in depth discussion of the 5 pillars - people, process, parent, performance, and price.  Looks like 300 funds already are rated, with the goal to get to 1500 (out of about 8000 funds).

  • In the past, we've used a four-person Picks committee to vet each fund nominated to be an Analyst Pick. Now, we have three separate ratings committees based on asset class, and we've spent the past five months vetting ratings.
  • As with our picks and pans, we are rating funds based on their long-term potential for superior risk-adjusted performance. We judge each fund's competitive advantages and disadvantages to come up with an overall rating.
  • Our ratings have five levels: Gold, Silver, Bronze, Neutral, and Negative. We're not imposing a bell curve on the ratings but you'll see funds spread throughout that spectrum. Even some big funds will be in the Negative and Neutral camps.
  • The ratings reflect a synthesis of each fund's fundamentals. We break those fundamentals down into five pillars: People, Process, Parent, Performance, and Price. These are the big, fundamental areas that are vital to a fund's long-term success. 
  • However, we don't simply tally up the pillars, as each one has some overlap with the others. It's really about how they work together, and that varies from fund to fund. For example, an index fund's price matters a heck of a lot more than its people. A focused stock fund, however, is mostly dependent on people and process, so we would weight those more heavily.

Long form (4 pages) methodology paper here.

Remember in 2009 When the FHA Was Doing "Stoopid" Things and Claimed They Would Not Need a Bailout? Err...

Back in 2007/2008 I was harping on the disaster that was Fannie and Freddie - as they took step after step that pushed them into more risk.  [Feb 27, 2008: OFHEO Increases Allowance for Fannie Mae] [Mar 19, 2008: Fannie, Freddie Layered with MORE Risk]   We know how that turned out.  [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]

I then turned to the FHA - which I frankly have not written a piece about in at least 18 months.  Once a bit player in the mortgage market, this organization began doing a lot of "stoopid" things as well.  I had a litany of warning posts throughout 2009:

  1. Warning: [May 6, 2009: FHA - The Next Housing Bust]
  2. Warning: [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance]
  3. Warning: [May 13, 2009: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
  4. Warning: [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures]
  5. Warning: [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]
  6. Warning: [Aug 14, 2009: Ginnie Mae CEO Resigns After 1 Year on the Job]
  7. Warning [Sep 18, 2009: Washington Post - FHA's Cash Reserves Will Drop Below Requirement]
  8. Warning [Oct 14, 2009: NYT - FHA Problems Raising Concerns of Policy Makers]
  9. Warning [Nov 18, 2009: Toll Brothers CEO: "Yesterday's Subprime is Today's FHA"]
  10. Warning [Nov 20, 2009: NYT - With FHA Help, Easy Loans in Expensive Areas - Barney Frank Pushes for Permanent Higher Limits, Approaching 1 Million]

The problems were very evident in 2009 - consider how loans the FHA were making that were 1 to 2 years old had already began defaulting at a rate of 1+ in 5!!:

  • A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino. Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.
  • (this was from a 2009 piece)  But he acknowledged that some 20 percent of F.H.A. loans insured last year (2008) — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.

Why so bad?  Same issue as the subprime, alt A, blah blah culture.  Our oligarchs in the banking industry  [Sep 18, 2009: 3 Oligarchs Now Dominate Mortgage Market - All Backstopped by You]  originate the loan but have NO SKIN in the game as FHA is on the hook if things go bad (as insurer).
  • (from 2009) The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago.

I wrote this in November 2009:

Replace the words 2006 with 2009, and banks with US taxpayer. We not only have forgotten the lessons of 20, 50, 80 years ago. We've forgotten the lessons of 1 year ago. But not to worry, I'm sure it will work out better this time around. I just want you to remember these people when you are asked to pony up taxdollars to fund FHA (although it won't be a bailout since they can borrow money directly from the US Treasury Dept without asking Congress)

Good timing from this gentleman, again from late 2009:
  • “It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony prepared for the hearing.

Checking in with Barney....

  • Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.  “I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Here are some quotes from a 2009 story from the borrowers themselves - note how some are amazed the government even loaned them money.

Borrower #1
  • Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else. 
Love this quote from Ms. Shimon, I did not know it was government's obligation to take risk on people.....
  •  “The government,” she said, “is doing what it needed to do — taking a risk on people.

Borrower #2

  • Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. 

Borrower #3
  • “I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22.  “I thought, ‘Wow, I’m surprised I pulled that off.’

And we're surprised these defaulted at a rate of 1+ in 5, within 1-2 years of origination?  But again, if you can shovel of all the risk to the government and collect fees at go as an originating too big to fail bank - why not! It's 2005 all over again - woo hoo!

I could go on .... but what's the point.


Anyhow, this morning the WSJ reports that FHA's cash reserves have fallen so low there is a "close to 50% chance" the agency could run out of money and require a taxpayer bailout in the next year.   But the FHA does not even need to go through Congress so I guess it won't really be a bailout if no one hears the tree falling.
  • The Federal Housing Administration's cash reserves have fallen so low that there is a "close to 50%" chance the agency could run out of money and require a taxpayer bailout in the next year, according to the annual independent audit of the FHA's finances.
  • The audit, to be released Tuesday by the FHA, estimated that the value of the agency's reserves stood at $2.6 billion as of Sept. 30, down 45% from an already low $4.7 billion last year. The drop reflects the impact of rising home-loan defaults amid falling home prices, which together generate greater losses on the sale of foreclosed homes.

[click to enlarge]

  • The FHA's perilous state underscores one of the hidden costs of the U.S. government's extraordinary efforts to rescue the housing market. In the past four years, as private lenders have pulled back from the mortgage market, the FHA's market share has swollen. It backed one third of mortgages used to finance home purchases last year, up from around 5% in 2006. The FHA doesn't make loans but insures lenders against defaults on mortgages that meet its standards.
  • The report comes even as Congress considers returning the maximum FHA loan limits to higher levels. The limits fell modestly in about 600 counties on Oct 1.
  • The outsize role the FHA has played in the mortgage market has depleted its resources. Every year, independent auditors use a complex formula to determine the so-called economic value of the agency's reserves by making estimates about future losses and then subtracting that amount from existing reserves.
  • Using that measure, the FHA's projected reserves, which are set aside to cover future loan losses, accounted for just 0.24% of all $1.1 trillion in mortgages insured, as of Sept. 30. That is down from a 0.5% reserve ratio last year
  • Federal law requires the agency to stay above a 2% level, which it breached two years ago
  • Still, so far the FHA hasn't run out of money and hasn't needed any Treasury funds. That is in part because the FHA has repeatedly increased homeowners' insurance premiums to raise cash and enforced tighter risk controls.

So here is the "good news".
  • The report assumes that home prices will fall 5.6% this year before hitting bottom and then rising by 1.2% in 2012. Under that scenario, the FHA would avoid a taxpayer bailout and the agency's reserves would rise back to the 2% level required by law by 2014.
If that wonderful scenario does not play out?
  • However, there is close to a 50% chance that home prices could suffer greater declines, according to the report, generating larger losses and wiping out the FHA's reserves, forcing the agency to seek government funds for the first time in its 77-year history

But then here is more "good news" - no need to go through Congress!  Tim can write a check, and the taxpayer has no say.
  • Because the FHA has "permanent and indefinite" budget authority, it wouldn't need to ask Congress for money and could simply go to the Treasury.

  • Under a more pessimistic scenario that assumes a further 9% drop in prices in the coming year, the FHA would require a $13 billion bailout from the Treasury, according to the report.
  • Price declines of 16% and 20% would trigger infusions of $29 billion and $43 billion, respectively. "Just how much assistance might be requested would principally be a function of how much home prices fall in the near future," said the report.

And here is the catch 22 - Fannie, Freddie FHA are >90%+ of the mortgage market.  There have been no real steps to wean the housing market off the government teat and let the 'private market' take over - whatever that means in this day and age.  So the big dance is this.... without the FHA involved prices would fall farther.... and as you see above, if prices fall farther, the losses to FHA grow bigger.  So... it's all a big mess:
  • Without FHA financing, "we would have seen a much bigger downward spiral in house prices," said Peter P. Swire, who served as a top White House housing adviser until last year. "More people would be underwater."
  • Still, because many FHA borrowers have minimal equity to begin with (3.5% down is typical), they have little protection if home prices fall and they lose their jobs or run into trouble making payments. 
  • One worrying sign is that mortgage delinquencies remain high on FHA loans, even as they decline among most others. Around 630,000 loans backed by the agency were three or more months past due on their mortgages at the end of September.
  • Many of today's losses are coming from loans made in 2007, 2008 and early 2009. (Mark's note - give it time on the latter 2009/2010 vintage - it really requires some skill to start defaulting on a 30 year mortgage within the first 12-18 months.)   

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