Monday, October 31, 2011

Chinese PMI Falls to 50.4 vs 51.2 - Back Near the Expansion / Contraction Line

As always there are two Chinese Purchasing Manager Index reports - the government which focuses on larger, state controlled companies, and the HSBC report which focuses on smaller companies.  The Government report is out and we have a reading of 50.4 versus the 51.2 in September.  The estimate was 51.7 so this was a bit of a disappointment.   That said, for those who love easy money this heartens their case for China to re-engage in easy money policies sooner rather than later; even as the country is dealing with the havoc of many bad loans from their last round of easy money.

  • The manufacturing index from the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries. The gauge hasn’t fallen below 50, the level dividing expansion from contraction, since February 2009.
  • The new orders index fell to 50.5 from 51.3 in September and a measure of output dropped to 52.3 from 52.7. New export orders contracted, declining to 48.6 from 50.9 the previous month, the logistics federation said.
The prices index dropped dramatically....
  • ...the input prices subindex, an indicator of inflationary pressure, declined to 46.2 from 56.6 in September.

The HSBC report comes out later in the day (night) but the two are generally within a point of each other.

Bloomberg: Bonds Beat Stocks Over Past 30 Years, First Time That's Happened Since Civil War

If we need any evidence the past thirty years, especially the past twelve or so, have been horrid for investors, this Bloomberg article notes that (government) bond returns have actually beaten stock returns over thirty years.  Ouch.  They say stocks win out in the 'long run' but for the average person's life span, you don't want to go out forty years to get a superior return.  Obviously this is very atypical - it's the first time it has happened since the Civil War time frame! 

To be fair, yields were very high on government bonds in the early 80s/late 70s as Paul Volcker was fighting off inflation so the starting point for prices was quite low in a relative sense (prices low, yields high), but it's still an amazing statistic.

Just more evidence we should never stop QE'ing - QE for 30 years and more artificial returns will make us all mad money!

  • The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.
  • Fixed-income investments advanced 6.25 percent this year, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.
  • The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.
  • The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”
  • Stocks had risen more than bonds over every 30-year period from 1861, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, until the period ending in Sept 30.   The last time was in 1861, leading into the Civil War, when the U.S was moving from farm to factory, according to Siegel, author of the 1994 book “Stocks for the Long Run,” in a telephone interview Oct. 25.
  • U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch’s U.S Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent.

Spiegel: Has America Become an Oligarchy?

Thanks for Barry R. for flagging this artickle over at Spiegel Online: The Second Gilded Age - Has America Become an Oligarchy.  I've been arguing this point for many years, especially in our corporate sector where many industries are dominated by a handful of names.  That dominance feeds into the political system, and self reinforces.  True "free market capitalism" might be seen in the restaurant business and a few others, but a lot of sectors (telecom, defense, banking, retail etc) are dominated by the few and mighty.   Spiegel uses a good term "The winner take all economy". 

Of course the Occupy Wall Street movement has broadened the discussion to the citizenry of America as well as thirty years of 'trickle down economics' and free trade has created a massive gain for the 'capital class' while the labor class has suffered (sans 'lower prices' at their local Walmart).   Citigroup famously wrote about it mid decade so it's no secret - just obvious now with all the extra blood squeezed out of the stone (women entering the workforce, the house ATM, et al)  [Sep 7, 2009: Citigroup - A Modern Day Plutonomy] These trends did not happen overnight, and one really does not see any of it changing as the genie is out of the bottle.  With hundreds of millions of laborers across the globe in the workforce, I've long argued that the middle class in developed countries would 'revert' to the mean (i.e. downward).  [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]  That said public policy to address these issues in the U.S. is non existent (one must admit the problem before even trying any solutions) and in many cases accelerating this fall.  One just wonders how far the envelope can be pushed before OWS one day morphs into something far more revolutionary - maybe a decade or two.  It is possible that other developed countries will feel their "Egypt/Tunisia" moment earlier as this is not just happening in the U.S.

p.s. I think the 1%, 99% divide is far too "simple".

  • The Occupy Wall Street movement is just one example of the sudden outbreak of tension between America's super-rich and the "other 99 percent." Experts now say the US has entered a second Gilded Age, but one in which hedge fund managers have replaced oil barons -- and are killing the American dream.
  • At first, the outraged members of the Occupy Wall Street movement in New York were mainly met with ridicule. They didn't seem to stand a chance and were judged incapable of going up against their adversaries, Wall Street's bankers and financial managers, either intellectually or in terms of economic knowledge.
  • "We are the 99 percent," is the continuing chant of the protestors, who are now in their seventh week of marching through the streets of Manhattan. And, surprisingly, they have hit upon the crux of America's problems with precisely this sentence. Indeed, they have given shape to a development in the country that has been growing more acute for decades, one that numerous academics and experts have tried to analyze elsewhere in lengthy books and essays. It's a development so profound and revolutionary that it has shaken the world's most powerful nation to its core.
  • Inequality in America is greater than it has been in almost a century. Those fortunate enough to belong to the 1 percent, made up of the super-rich, stand on one side of the divide; the remaining 99 percent on the other. Even for a country that has always accepted opposite extremes as part of its identity, the chasm has simply grown too vast.
  • Statistics indicate that the growing disparity is genuinely overwhelming. In fact, the 400 wealthiest Americans now own more than the "lower" 150 million Americans put together.
  • Nearly two-thirds of net private assets are concentrated in the hands of 5 percent of Americans. In comparison, the upper 5 percent of Germany hold less than half of net assets. In 2009 alone, at the same time as the US was being convulsed by mass layoffs, the number of millionaires in the country skyrocketed.  Indeed, if you look at the reports it compiles on every country in the world, even the CIA has concluded that wealth disparity is greater in the US than in Tunisia or Egypt.
  • In a book published in 2010, American political scientists Jacob Hacker and Paul Pierson discuss how this "hyperconcentration of economic gains at the top" also existed in the United States in the early 20th century, when industrial magnates -- such as John D. Rockefeller, Andrew Carnegie and J. P. Morgan -- dominated the upper stratum of society and held the country firmly in their grip for years.
  • Writer Mark Twain coined the phrase "the Gilded Age" to describe that period of rapid growth, a time when the dazzling exterior of American life actually concealed mass unemployment, poverty and a society ripped in two.  Economists and political scientists believe the US has entered a new Gilded Age, a period of systematic inequality dominated by a new class of super-rich. .
  • The academics fear this change could have serious consequences for the country's economic future. As they see it, this extreme inequality threatens to dramatically slow growth in the world's largest economy. This is part of a development, they argue, that has been under way for years but remained largely hidden in the years of cheap credit, rising real estate prices and excessive consumption -- when it seemed everyone was on the way up. And the problems only came to light with the arrival of the financial crisis.
  • Through the 1970s, income for Americans across all social classes rose nearly in lockstep, by an annual average of roughly 3 percent. Starting in the 1980s, however, this trend underwent a fundamental transformation. Granted, the economy continued to grow -- but almost exclusively to the benefit of the country's top earners.
  • At least since the beginning of the millennium, it has no longer been a simple matter of two societal extremes drifting further apart. Instead, the development is also accelerating. In the years of economic growth between 2002 and 2007, 65 percent of the income gains went to the top 1 percent of taxpayers. Likewise, although the productivity of the US economy has increased considerably since the beginning of the millennium, most Americans haven't benefited from it, with average annual incomes falling by more than 10 percent, to $49,909 (€35,184).

  • Even for a country that loves extremes, this is a new and unprecedented development. Indeed, as Hacker and Pierson see it, the United States has developed into a "winner-take-all economy."  The political scientists analyzed statistics and studies concerning income development and other economic data from the last decades. They conclude that: "A generation ago, the United States was a recognizable, if somewhat more unequal, member of the cluster of affluent democracies known as mixed economies, where fast growth was widely shared. No more. Since around 1980, we have drifted away from that mixed-economy cluster, and traveled a considerable distance toward another: the capitalist oligarchies, like Brazil, Mexico, and Russia, with their much greater concentration of economic bounty."
  • This 1 percent of American society now controls more than half of the country's stocks and securities. [Nov 10, 2010: Who Will Any Form of Intermediate Wealth Effect Really Help? Not the Masses] And while the middle class is once again grappling with a lost decade that failed to bring increases in income, the high earners in the financial industry have raked in sometimes breathtaking sums. For example, the average income for securities traders has steadily climbed to $360,000 a year.
  • Still, that's nothing compared to the trend in executives' salaries. In 1980, American CEOs earned 42 times more than the average employee. Today, that figure has skyrocketed to more than 300 times. Last year, 25 of the country's highest-paid CEOs earned more than their companies paid in taxes.
  • By way of comparison, top executives at the 30 blue-chip companies making up Germany's DAX stock market index rarely earn over 100 times the salaries of their low-level employees, and that figure is often around 30 or 40 times.
  • Larry Bartels, one of America's leading political scientists, also believes America has entered a new Gilded Age. Bartels' 2008 book on the subject, "Unequal Democracy: The Political Economy of the New Gilded Age," has drawn a great deal of attention and even been quoted by President Barack Obama.
  • "The really dramatic economic gains over the past 30 years have been concentrated among the extremely rich," Bartels writes, "largely bypassing even the vast majority of ordinary rich people in the top 5 percent of income distribution." He doesn't see this fundamental shift in the distribution of wealth as having resulted from market forces or drastic events, such as the financial crisis. Instead, he believes they are "the result of policy choices."
  • As Bartels explains, much as the economic giants of the Gilded Age developed such enormous influence that they could dictate basic political conditions, today's Wall Street bosses and CEOs have successfully arranged extensive deregulation for their industries.  Former Citigroup CEO Sanford Weill, for example, kept a framed pen in his office as a symbol of his influence. It was the pen President Bill Clinton -- at Weill's instigation -- used in 1999 to sign into law legislation repealing the provisions in the Glass-Steagall Act of 1933 that separated the transactions of investment and commercial banks.
  • At the same time, Bartels writes, the wealthy receive enormous tax breaks worth hundreds of billions of dollars. In the 1970s, capital gains tax was 40 percent, and the highest income tax bracket paid a rate of 70 percent. Under George W. Bush, these rates dropped to 15 percent and 35 percent, respectively. For example, it emerged a few weeks ago that legendary investor Warren Buffett earned $63 million last year but was only required to pay 17 percent in taxes.
  • In a medium-term, the consequences of this societal divide threaten the productivity of the entire economy. Granted, American economists in particular have long espoused the view that inequality is simply a necessary side effect of above-average growth. But that position is now being called into question.
  • In fact, recent research indicates that the economies of countries experiencing periods of pronounced inequality often show considerably less growth and more instability. On the other hand, it also finds that economies grow faster when income is more evenly distributed.
  • In a study published in September, the International Monetary Fund (IMF) also concluded that: "The recent global economic crisis, with its roots in US financial markets, may have resulted, in part at least, from the increase in inequality" in the country.
  • Cornell Univesity economist Robert Frank analyzes this development in his recently published book "The Darwin Economy." In it, he concludes that financial realities are best described not by Adam Smith's economic models but, rather, by Charles Darwin's thoughts on competition. Frank writes that, with its often extreme deregulation, today's financial and economic system makes it impossible for individuals' self-serving behavior to ultimately contribute to the prosperity of society as a whole, as Smith had envisioned it. Instead, it leads to an economy in which only the fittest survive -- and the general public is left behind.
This is a key point.  While still "possible" for anyone to rise from nothing to something, economic mobility in the U.S. has fallen below even that of some of the "socialist" European countries.  (I've read this as long ago as three years ago)  That should be a damning blow.  In the past, the inequalities were looked over because 'anyone could make it' - but when it's easier to move up the economic ladder in countries often looked down upon in the U.S., than it is here - one really has to question the system.
  • Differences between rich and poor are tolerated as long as the rags-to-riches story of the dishwasher-turned-millionaire remains theoretically possible. But studies show that increasing inequality and political control concentrated in the hands of the wealthy elite have drastically reduced economic mobility and that the US has long since fallen far behind Europe on this issue. Indeed, only 4 percent of less-well-off Americans ever successfully make the leap into the upper-middle class.
  • "The major difference between this Gilded Age and the last one is the relative absence of protest," historian Gary Gerstle told the online magazine Salon in October. "In the first Gilded Age, the streets were flooded with protest movements." Manhattan hasn't yet quite reached that point.
I don't think American Idol or the NFL were as popular in the 20s and 30s.... nor was 1 in 4 American children on food stamps   [Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]  - so the "circus and bread" strategy is working much better nowadays.

Despite Selling Today, S&P 500 on Track for 12th Best Month Ever

What a month.  Despite today's modest losses, the S&P 500 should finish with its 12th best showing ever in a month.  (This chart from Bespoke is from Thursday)  If you exclude the 1930s which saw massive crashes and rallies, it will be the 3rd best month ever.  History either way.

[To be around in July-August 1932 when the market did back to back mid to upper 30% gains?! Wow]


After a month of treats, global markets are in a bit of a trick today.  Obviously things are extremely overbought, and after busting through the 200 day 'simple' moving average as if it was not even there Thursday, we have pulled back slightly below it today on the S&P 500.  I'm posting a chart with both the 200 day simple and exponential moving averages to highlight the variance between the two.

Despite the now bullish setup in the market, I would find this week one to hold cards close to the vest as we have the potential to gap up or down each and every day with the bevy of economic data headed our way.   That said, it would seem likely that those who missed part or most of the move will be antsy to 'buy the dip' if there are any substantial ones, as performance anxiety hits them hard.  There has been a 180 degree change in attitude from fearing big losses, to fearing missing out on upside.

On an unrelated note, former Goldman head and ex NJ governor has in under a year run MF Global (MF) into the ground, and the company just filed for bankruptcy.  One wonders what sort of salary and bonus he is receiving for doing such wonders.  I assume the going rate for taking a viable company and in under 12 months destroying it, is $20-$30M.

Sunday, October 30, 2011

[Video] 60 Minutes - Ruth and Andrew Madoff

Here is a video tonight of an interview with wife Ruth and son Andrew, of Mr. Bernie Madoff

Part 1

Part 2

If you want the text, instead of video go here.

Happy 7th Billion Person Planet Earth

If the United Nations estimates are anywhere near correct, today marks the day the world's population hits 7 billion.  Could be off a few days one way or the other, but you get the gist.  I actually did a story about this in 2008 - looks like it came a few months earlier than predicted!  [Jun 20, 2008: World Population to Hit 7 Billion by 2012]

Obviously this is not a 'fast money' trading event, but considering it was just twelve years ago the planet hit 6 billion, it's a pretty amazing milestone.  Projections are for another two billion in about 2 generations (2050ish).  From an investing perspective the growth of the world's middle class is an important development, as is the wage/labor pressure from hundreds of millions continuing to flood the world's labor markets.  Tom Stevenson from Fidelity takes a look at three key outcomes from this, some of which we've discussed quite a bit a few years ago.  Note - Nebraska farmland is up 20-30% year over year, as the 'farmland' trade is one of the big long term winners.

  • It is just 12 years since we reached six billion and the growth is set to continue, to nine billion by 2050 it is estimated – that's around three times the number of people on Earth when I was born. These figures would be unimaginable to the pessimists, from Thomas Malthus onwards, who have consistently warned that the world cannot sustain any more people.
  • The challenges presented by such rapidly growing demands on the planet's water, energy resources and farmland are significant. Yet, human ingenuity has succeeded thus far in not just providing for a rising population but massively increasing the living standards of most people.
  • One of the curious paradoxes of population growth is that the more able people are to sustain large families, because they become wealthier, the less inclined they are to actually have more children.
  • So, while greater affluence is often blamed for increasing the strains on the world's finite resources, it is possible that a richer world may be a more sustainable one because it will cause a natural levelling off in population growth.

  • That is some way off, however. In the short term the number of people will continue to rise and this has a number of implications for investors. Three of the more important are related to food, urbanisation and growth in consumption.
  • It is estimated that food production will need to rise by 50pc by 2030. In part this is to do with more mouths to feed, but it is also a consequence of those mouths' changing appetites. As people grow wealthier their diets change and they consume more protein such as meat and dairy products.
  • With 7kg of grain required to produce just 1kg of meat, this puts an increasing strain on existing agricultural acreage. The solution cannot simply be to bring more land into cultivation because the most productive has already been used and industrialisation and urbanisation are eating into what is already under the plough.
  • The second consequence of the current rate of population growth is a rapid increase in the proportion of urban dwellers. In 1950, around one third of the world's people lived in cities but by 2025 it is forecast that 60pc will live in urban areas.
  • The biggest implication of this growth is for infrastructure spending and the raw materials that make that kind of development possible. One recent estimate by the OECD suggested that 3.5pc of the world's economic output needs to be channelled each year into building, or rebuilding, electricity, road, rail, water and telecoms networks.
  • The third big consequence of population growth is a rapid increase in the high-consuming middle class. This group of people, which has moved beyond subsistence to a life in which it can realistically aspire to own consumer goods and spend money on services such as health care, education and finance, is predicted to rise from around 400m to 1.2bn between 2000 and 2030. As the chart shows, much of this will be in just two countries, China and India.
  • Understanding changing consumption patterns is a key concern of investors today. For example, the growing female participation rate in the workforce in many developing markets is important because of women's differing spending patterns. Brazil is already the world's third largest market for cosmetics, fragrances and toiletries.
  • Other areas of growth include financial services – where mortgages and consumer loans are relatively undeveloped in emerging markets like Russia; beverages – Nigeria is now the world's biggest market for Guinness; and, inevitably, cars – the ultimate signifier of "arrival".

[Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears]
[Jun 18, 2008: The Ultimate Shortage ->Water]

NYT: Who is Mario Draghi?

Readers who are interesting in central bank policies, probably want to familiarize themselves with the new ECB President, Mario Draghi.  This role was in theory going to go to fiscal hawk Axl Weber of Germany about a year ago at this time, but Mr. Weber was gently pushed out the door, Paul Volcker style as his policies did not make those who love easy money happy.  So as we say goodbye to Jean Claude Trichet, what is the background and philosophy of the new Italian head of the bank?  (hint: he is a Goldman man!) The New York Times takes an extended look.

  • One European central banker, for instance, predicted that Mr. Draghi would try to curtail a controversial central bank program intended to prop up financially weak nations like Greece, Ireland, Portugal, Spain and Italy — Mr. Draghi’s native country — by buying those nations’ government bonds on the open market.
  • The tactic, which in effect has turned the central bank into the lender of last resort from the Baltic to the Mediterranean, is deeply unpopular here in Germany, the Continent’s economic engine. Many here view the program as tantamount to a taxpayer-funded bailout of nations that should never have been let into the euro club to begin with.
  • But another high-ranking monetary official in Europe predicted just the opposite for Mr. Draghi: that he would be more willing to unleash the full power of the central bank. Both officials spoke on the condition they not be identified to avoid alienating him. Mr. Draghi declined to be interviewed for this article.
  • The question is whether Mr. Draghi, 63, can satisfy his competing constituencies as he confronts a euro-zone crisis that keeps testing the limits of policy-making.   “I can only guess where he will go with monetary policy,” says Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y.
  • UNTIL last Thursday, when leaders outlined their latest plan, Mr. Trichet had long argued against a severe reduction in the value of Greece’s bonds. He had maintained that euro-zone economies must pay their debts, even if they are on the verge of insolvency, as Greece is.  
  • Last July, in one of his first big speeches after his appointment had become official, and just before Greece would need a second bailout, Mr. Draghi seemed to break with Mr. Trichet.   “The solvency of sovereign states has ceased to be a foregone conclusion,” Mr. Draghi told bankers in Rome. It is too soon to tell whether he will adopt a more pragmatic, flexible approach at the central bank, which under Mr. Trichet came to be seen as rigid. It is the only major central bank that has not reduced interest rates to near zero.
  • Those closest to Mr. Draghi say his economic views have been shaped by his challenges at the Italian finance ministry in the 1990s, when Italy was expelled from the euro zone’s predecessor, the European Exchange Rate Mechanism and, like Greece today, came close to bankruptcy.
  • His record is not without controversy. In Italy and later, as a vice chairman for Goldman Sachs in Europe, Mr. Draghi was a proponent of nations and other institutions like pension funds using derivatives to more efficiently manage their liabilities. In some cases, many experts now contend, these transactions helped mask the finances of Greece and Italy before those nations were allowed into the euro.
  • People who know Mr. Draghi point to his time at the Massachusetts Institute of Technology in the late 1970s, when economists there emphasized taking a practical approach to solving economic problems, rather than hewing to a particular ideology.   “He is a pragmatist,” says Olivier J. Blanchard, the director of research at the International Monetary Fund who received his economic doctorate from M.I.T. in 1977, a year after Mr. Draghi.
  • Even so, Mr. Draghi is unlikely to challenge the founding dogma of the European Central Bank, which demands that it adhere to its German-inspired mandate to fight inflation. That he has been endorsed by Germany’s political and economic establishment suggests that he will be constrained from taking an unorthodox approach.
  • But central bank watchers worry how Mr. Draghi might be perceived if Italy experiences its own financial crisis — a prospect he himself has not discounted.   “Mr. Draghi knows that he will be in a very exposed position if he is president and the bank has to keep buying more Italian bonds,” says David Marsh, a former journalist at The Financial Times and the author of “The Euro: The Battle for the New Global Currency.”
  • There is a glide and panache to Mr. Draghi, who favors hand-cut black suits and has the assured pace of the basketball player he was in his youth, that set him apart from the general frumpiness of his fellow central bankers.  In Italy, he is known as Super Mario, a moniker he earned in the 1990s when, as the Italian economy neared the brink, he became the acceptable public face of his country to foreign investors. He oversaw one the largest European privatization efforts ever and paved the way for Italy’s entry into the euro.
  • All central bankers must be politically adroit. In Mr. Draghi’s case, his deft touch and, perhaps more important, his essential malleability, are legend.   He has produced a deep treatise on government debt, served as chairman of a world-spanning regulatory body, run Italy’s central bank (while remaining coolly removed from the scandals and fracases of Italian politics) and made a pile of money working at Goldman Sachs — all without being pigeonholed as an academic, regulator or investment banker.
  • People who worked for Mr. Draghi during his 10-year run at the Italian treasury say he applied the M.I.T. approach that put aside models and theories for what actually works.  It was an action-packed 10 years, starting in 1991, with Mr. Draghi representing Italy at the talks that established the framework for the common monetary zone. The fragility of Italy’s application — high levels of debt, runaway deficits — was underscored the next year when Italy was expelled from the exchange rate mechanism and came close to running out of money.
  • But Mr. Draghi’s insistence that countries that delay reforms can go broke shows a departure from Mr. Trichet’s stance. Dating back to the early 1990s, Mr. Draghi has thought deeply about how governments can manage their debt burdens.
  • In one paper he co-wrote in the spring of 2002, just months after he joined Goldman Sachs to lead its effort to win investment banking business from European governments, Mr. Draghi argued that governments might use financial derivatives like interest rate swaps “to stabilize tax revenue and avoid the sudden accumulation of debt.”   The description of how this would work did not obey the letter of the controversial swaps program hatched by Goldman that masked the size of Greece’s debt. But it is faithful to the spirit — namely, that governments as well as pension funds can make use of derivatives to better manage their liabilities.
  • MR. DRAGHI’S Goldman connection has been the one mark on an otherwise spotless résumé and a cause for continued suspicion from some in Europe.   In June, at an appearance before the European Parliament after his appointment, he was asked once more about the Goldman swaps and, in a rare loss of his public cool, cited again his lack of involvement. He said that while at Goldman, he had no interaction with the public sector, despite being hired for that purpose. “I was not in charge of selling stuff to the governments,” Mr. Draghi said. “In fact, I worked in the private sector even though Goldman Sachs expected me to work in the public sector when I was hired.”
  • Those statements came as a surprise to Pascal Canfin, a French member of the Parliament’s economic and monetary affairs committee.   “Are we supposed to believe that he had a discussion with Goldman executives that he cannot have business with sovereign governments even though that was what he was hired to do?” he asked. “It’s very weird. The swaps are not illegal — the question is did he lie before Parliament?”

Friday, October 28, 2011

No Rest for the Weary

The first week of the month is normally jam packed, and next week is no exception with a Fed meeting thrown into the soup for good measure!  With several Fed members hinting at QE3, this is the first time the market seems a bit confused on what is going to be announced in a long while.  We haven't heard anything explicit from Mr. Bernanke himself, but we did have that leak in the WSJ a week ago today, so it remains to see if it happens this meeting or next. 

Bernanke will also have his quarterly press announcement Wednesday 2:15 PM so that might be the opportunity to stress to markets QE is coming if they don't deliver at the meeting.


Overnight Monday we will have the Purchasing Managers Indexes from China and Europe.

Tuesday: ISM Manufacturing

Wednesday: ADP Employment Report with the FOMC announcement in the afternoon

Thursday: ISM Non-Manufacturing

Friday: Employment data


Unlike the past few months where expectations were very low, we've piled on some 200 S&P points in a month, so economic data needs to start coming in better for the momentum to continue. 

We can also begin the hand wringing over the super committee which has an initial deadline towards the end of November to come up with a plan to find over $1T in cuts.

[Video] Stephen Roach - Fed "Repression" Punishes Savers, U.S. Consumers' Balance Sheet Won't be "Fixed" in His Lifetime

Based on this morning's data, Americans are back to their old ways - personal income rose 0.1% (after last month's -0.1%!) yet spending rose 0.6%.  This sounds like 2006 all over again expect the house ATM has been replaced by the federal government ATM (nearly 1 in 5 dollars of income now comes from transfer payments!)  The personal savings rate (which incredibly fell to a negative reading mid decade) has fallen from the mid 5% to low 6% over the past few years, back down to 3.6%. 
  • The saving rate, the percentage of disposable income socked away, fell to 3.6 percent, the slowest since December 2007, from 4.1 percent in August.

Frankly that's a realistic response to a Federal Reserve policy which is incredibly negative for savers.  We've been waving that flag for a few years [Mar 31, 2010:  Ben Bernanke Content to Sacrifice Savers to Recapitalize Banks and Benefit Debtors] but more voices are coming to the issue.   This reduction in savings is incredibly negative in the long run, as that's a large part of what got us in this huge mess in the first place but all government and central bank policy is for the short term and perverting long term outcomes.

Yesterday Morgan Stanley's Stephen Roach discussed that subject amongst many others in this 9 minute interview with CNBC.   It was actually quite a snippy interview!!(email readers will need to come to site to view)

  • The Federal Reserve is penalizing consumers by keeping interest rates near zero, threatening long-term savings and the U.S. economy, Stephen Roach told CNBC Thursday.  The Fed said in August it will keep interest rates at the current low rate until 2013.  Roach said doing so raises a serious question "about the financial repression practiced by your favorite central bank, the Federal Reserve. The idea that we can run zero interest rates in perpetuity and penalize savers is absurd."
  • Roach said the U.S. consumers' balance sheet won't be "fixed" in his lifetime.  "We’re going very, very slowly," said Roach, who is also a senior fellow at Yale University's Jackson Institute.  He said one of the big disconnects in the U.S. policy debate right now is a fixation on stimulus packages, the Fed's "unconventional monetary policy," and President Barack Obama's jobs bill at the expense of helping Americans get rid of their increasing debt load so they can save more.
  • "Do you know that half of American workers have no retirement fund?" he asked. "Until we address the debt overhang of the American consumers, especially mortgage debt…this consumer recovery is going to be anemic and hobble U.S. economic growth and U.S. employment growth." He added: "We’ve got to get together and get real on policy debate here. We’re not doing it at all."
  • Americans need to save a lot more over the medium to longer term, Roach said.  "How else are we going to fund economic growth?" he asked "Right now we’re borrowing surplus savings from abroad because we don’t save a nickel at home, and we have to wean ourselves from that."
  • As to Asia, he scoffed at the "China doomsday crowd" that "comes out of the closet and they talk about the coming collapse of China." Roach said he believes China is doing a good job in navigating treacherous global waters and called that "an opportunity for us in the west rather than a threat."

[Sep 22, 2011: [Video] Stephen Roach - U.S. Did Not Learn from Japan]
[Jun 7, 2011: Stephen Roach Revisits U.S. & China, Plus the Debt Connection]

[Jan 14, 2011: [Video] CNBC - Stephen Roach Talks U.S. & China]
[May 31, 2009: Stephen Roach on Asia - No Sail]

Best Performing Stock Year to Date? Silicon Motion Technology (SIMO)

While this is one highly correlated market, with almost everything moving en masse for much of the year there are still pockets of under and out performance at the edge.  I ran a screen last night on my typical pool of eligible companies (this excludes the very small caps below $300M, and those without liquidity - i.e. at least 200K average volume) and came back with 95 stocks that returned at least 50% year to date.  I estimate that 6-8 of these were buyouts but that still leaves 85+ big time performers, in a market that is essentially just above flat for the year.  (here is the screen if you are curious)  Sometimes you can find some interesting new ideas by seeing where the money is flowing over the past 3 months, 6 months, year to date, etc.

Who was at the top of the list? $510M market cap Silicon Motion Technology (SIMO) at a 289% return.  Never heard of it before last night but its a fabless semi company based in Taiwan which focuses on flash memory.  (Company website here)  They do have their hands in a lot of interesting markets however.

Silicon Motion Technology Corporation (NasdaqGS: SIMO) is a fabless semiconductor company that designs, develops and markets high performance, low-power semiconductor solutions for multimedia consumer electronics applications, such as mobile phones and smartphones, digital cameras, camcorders, notebook and tablet PCs, and personal navigation devices.
Founded in 1995 in San Jose, California, Silicon Motion is currently headquartered in Taiwan, with design centers and sales offices in Taiwan, Korea, China, and the US, and a branch office in Japan.

Silicon Motion has three product lines: mobile storage, mobile communications, and multimedia SoCs. Mobile storage products are composed of microcontrollers used in NAND flash memory storage products such as flash memory cards, USB flash drives, solid state drives (SSDs), and embedded flash solutions. Mobile communications products are composed primarily of mobile TV IC solutions and CDMA RF ICs. Multimedia SoC products are composed primarily of embedded graphics processors.

As we can see on the chart, even with a company up ~300% it's all about timing.  The entire move came from January thru mid April.... and then in October.  Between mid April and September, the stock was dead money.

These type of companies don't normally have a high PE ratio due to the cyclical business (and high competition) but SIMO seems to be in a narrow window of opportunity.  At $0.94 EPS projected for 2011, the company has a forward PE of 17.6.  2012 is currently projected at $1.13.  Last year's EPS was $0.42 so you can see it's been quite a year of bottom line growth.   The company reports next week (Nov 1).

Last quarter showed some impressive metrics:
  • The company just reported second-quarter sales of $50.5 million for a year-over-year jump of 58%. On the bottom line, non-GAAP earnings per depositary share soared from $0.09 to $0.29.


While everything in this market nowadays is about guessing macro events, and front running central bank and government intervention (not very fun) it still is interesting to discover these individual stories.
No position

Census Confirms a Historic Reveral of Fortune for Internal Migration Among Americans

Generally Americans have been amongst the most mobile of populations, especially within the country.  If there was a job in a far flung part of the country, many would pull up roots and go there.  Other countries are much more family centric - generally you live with your parents much longer, and even when you move out you tend to stay within a certain radius of your parents/family. 

Back in 2009, we mentioned a few stories about how the housing crisis / recession had created a change to this pattern.  The recession effects were pretty typical - less household formation as adult children stayed at home.... but we also have read many more stories of parents moving in with children.   [Apr 8: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]   But what was especially different this time around was the fact so many people are stuck in underwater homes, and hence can't sell and move on. [Dec 24, 2009: WSJ - Recession Alters Migration Patterns in U.S.] [Apr 23, 2009: As More Homes Fall Underwater, Trapped Americans Cannot Migrate]

Migration around the U.S. slowed to a crawl last year, especially for this decade's boom towns, as a weak housing market and job insecurity forced many Americans to stay put. Demographers say the dropoff in migration, shown in Census data to be released Thursday, is among the sharpest since the Great Depression. It marks the end of what Brookings Institution demographer William Frey calls a "migration bubble."

Migration typically slows during recessions. But in past downturns, the slowdown has been more regional in scope, with workers fleeing weaker job markets for places where companies were still hiring. In the deep 1980s recession, for instance, laid-off auto workers fled the industrial Midwest for energy-rich states in the South with more plentiful jobs. What's unique this time is migration has slowed almost everywhere.

The bureau found that the number of people who changed residences declined to 35.2 million last year, the lowest number since 1962, when the nation had 120 million fewer people.

More data from the recent census confirms this issue:

  • Americans are staying put more than at any time since World War II, as the housing bust and unemployment keep young adults at home and thwart older Americans' plans for a beachfront or lakeside retirement.
  • New information from the Census Bureau is the latest indicator of economic trouble, after earlier signs that mobility was back on the upswing. It's also a shift from America's long-standing cultural image of ever-changing frontiers, dating to the westward migration of the 1800s and more recently in the spreading out of whites, blacks and Hispanics in the Sun Belt's housing boom.
  • Rather than housing magnets such as Arizona, Florida and Nevada, it is now more traditional, densely populated states -- California, Illinois, Massachusetts, New York and New Jersey -- that are showing some of the biggest population gains in the recent economic slump, according to the data released Thursday.
  • Residents have been largely locked in place; families are stuck in devalued homes and young adults are living with parents or staying put in the towns where they went to college.
  • "The fact that mobility is crashing is something that I think is quite devastating," said Richard Florida, an urban theorist and professor at the University of Toronto's Rotman School of Management. He described America's residential movement as a key element of its economic resilience and history, from development of the nation's farmland in the Midwest to its coastal ports and homesteading in the West.  "The latest decline shows we are in a long-run economic reset and that we never really recovered -- we've just been stagnating along," Florida said.
  • Roughly 11.6 percent of the nation's population, or 35.1 million, moved to a new home in the past year, down from 12.5 percent in the previous year. The current level of low mobility comes after the recession technically ended in mid-2009, beating a previous low of 11.9 percent in 2008.
  • It is the lowest in the 60-plus years that the Census Bureau has tracked information on moves, dating back to 1948.
  • The shares of people moving have been declining for decades, due in part to increases in two-income families that are more tied down by jobs and to an aging population that is less mobile. The peak for U.S. mobility came in 1951, when it hit 21.2 percent. The rate had leveled off at around 13 percent before falling off notably in 2008 during the recession.
  • Among young adults 25 to 29 -- the most mobile age group -- moves fell to 24.1 percent from 25.9 percent in the previous year. Longer-distance moves, typically for those seeking new careers in other regions of the country, remained largely flat at 3.4 percent. The biggest drop-off occurred in local moves, down to 15.4 percent from 17.7 percent in 2010, a sign that young adults in the prolonged slump weren't even willing to venture outside their counties, continuing instead to live with relatives or on college campuses.
  • Americans most often cite a desire to live in a new home as the main reason for moving, as well as reasons of family or economy such as marriage or a new job. But analysts say with many young adults delaying marriage while struggling to find employment and aging baby boomers expressing financial worries about retirement, the current mobility freeze could continue for several more years.
  • The annual growth of retirement-destination counties -- typically in Sun Belt states such as Florida, Arizona and New Mexico -- has fallen sharply since the recession that began in late 2007. It's down nearly half compared with the period 2000-2007, according to recent census data.
  • Renters were more mobile: Overall, 68.8 percent lived in the same rental unit one year ago.

The findings were based on the Census Bureau's Current Population Survey as of March 2011, as well as comparisons of the 2005-2007 and the 2008-2010 American Community Survey to provide a snapshot of every U.S. community with at least 20,000 residents. Figures on income inequality come from a census analysis of survey data from 2005-2009.

Revisiting the Germany Call

Back in mid September, I wrote [Sep 13, 2011: At Some Point Germany Has to Become an Appealing Investment]

As I was looking over the charts last night, it was stunning to see a country like Germany, the fourth largest economy in the world, mangled to the tune of a 33%+ loss in under two months.  No matter the outcome of this crisis (and fact the Eurozone is probably headed for recession anew), this is a very dynamic economy which has probably melded the best parts of 'capitalism' and 'socialism' (I hate the labels) to create an export machine with a high standard of living. 

The DAX has now given back 2 years of gains, and now sits at levels last seen in summer 2009.  Granted it could get 'worse', but at some point here this country full of multinationals (the elite standard in a globalized world), has to become a very appealing long term investment.

While it was not an immediate 'buy' thesis, it was something I'd be close to pulling the strings on - at the time iShares Germany (EWG) was just under $18, after bouncing off the $17 level.  It would bounce off that $17 level twice more in the coming weeks before starting a rebound.  Yesterday it touched $23, before closing just below it.  Even if you were 'early' and had bought on the date of the story, that would have been a cool ~28% in about 7 weeks.  Not too bad.

[click to enlarge]

No position

Thursday, October 27, 2011

Baidu (BIDU) Beats by 3 Cents, with a Very Strong Revenue Number

Baidu (BIDU) just reported and investors are very happy, taking the stock up $12 as I type this (on top of the 6% move in normal hours).  The company beat substantially on top line: $654.7M vs $618.6M, and that led to a 3 cent beat on the bottom line: 86c v 83c.  I would have expected a bigger beat on the bottom line with that magnitude of a revenue beat so I assume operating costs went up more than analysts' models.  That said the market is not looking at such detail and much like an this is very much a revenue growth story.  Full report here.

  • Baidu reported total revenues of RMB4.175 billion ($654.7 million) for the third quarter of 2011, representing an 85.1% increase from the corresponding period in 2010.
  • Online marketing revenues for the third quarter of 2011 were RMB4.174 billion ($654.4 million), representing an 85.1% increase from the corresponding period in 2010. Baidu had approximately 304,000 active online marketing customers in the third quarter of 2011, representing an 11.8% increase from the corresponding period in 2010 and a 2.0% increase from the previous quarter. Revenue per online marketing customer for the third quarter was approximately RMB13,700 ($2,148), a 65.1% increase from the corresponding period in 2010 and a 19.1% increase from the previous quarter.
  • Traffic acquisition cost (TAC) as a component of cost of revenues was RMB334.1 million ($52.4 million), representing 8.0% of total revenues, as compared to 8.9% in the corresponding period in 2010 and 7.9% in the second quarter of 2011.
  • Selling, general and administrative expenses were RMB460.2 million ($72.2 million), representing an increase of 55.4% from the corresponding period in 2010, primarily due to increased personnel costs and marketing expenses.
  • Research and development expenses were RMB382.7 million ($60.0 million), an 86.9% increase from the corresponding period in 2010. The increase was primarily due to increased R&D headcount.
  • Operating profit in the third quarter of 2011 was RMB2.226 billion ($349.1 million), an 88.5% increase from the corresponding period in 2010.
  • Net income attributable to Baidu in the third quarter of 2011 was RMB1.882 billion ($295.0 million), a 79.8% increase from the corresponding period in 2010.
  • Diluted earnings attributable to Baidu per ADS(2) (EPADS) for the third quarter of 2011 were RMB5.38 ($0.84); diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses (non-GAAP) for the third quarter of 2011 were RMB5.49 ($0.86).
  • Baidu currently expects to generate total revenues in an amount ranging from RMB4.410 billion ($691.4 million) to RMB4.535 billion ($711.0 million) for the fourth quarter of 2011, representing a 79.9% to 85.0% year-over-year increase. This forecast reflects Baidu's current and preliminary view, which is subject to change.

Analysts were at $647M next quarter, so its a nice increase in revenue guidance.....


Technically, very similar situation to the previous entry on Las Vegas Sands - it's been nothing to write home about.  A long consolidation period - after these long consolidation periods you usually have a very nice move... once it starts.  

The chart below does not reflect the after hours action - we're at $150 which were highs multiple times in August and September.

No position

Las Vegas Sands (LVS) Beats by 3 Cents, Slight Beat on Top Line

Not sure any of this 'stock specific' stuff matters much in the "student body left" trading environment where everything goes up, or goes down but I continue to cling to some old school ways.  First on the agenda tonight is Las Vegas Sands (LVS) which along with Wynn has essentially become an Asian play.  (LVS has both Singapore and Macau, Wynn just Macau)  Both companies had been hit hard by worries about slowdown in China a month ago but have run with the rest of the market.

LVS beat the bottom line by 3 cents, and has a small beat on the top line ($2.41B v $2.34B).  Full report here.
  • Net Revenue Increases 26.2% to Record $2.41 Billion
  • Consolidated Adjusted Property EBITDA Increases 43.2% to Record $924.1 Million
  • Consolidated Adjusted Property EBITDA Margin Increases 460 Basis Points to 38.4%
  • Marina Bay Sands Adjusted Property EBITDA Increases 71.3% to $413.9 Million
  • Macau Property Operations Adjusted Property EBITDA Increases 16.1% to $388.3 Million
  • Adjusted Earnings per Diluted Share Increases 61.8% to $0.55

Forgetting Las Vegas (which actually showed some decent improvement), here are the properties that matter:
  • In Singapore, Marina Bay Sands produced a record $413.9 million of adjusted property EBITDA during the quarter and an EBITDA margin of 52.2%. Record VIP, mass gaming and slot volumes coupled with steady growth in visitation and non-gaming revenue streams including hotel, food and beverage, retail and entertainment reflect the broad appeal of the property to Singapore's visitors from across the Asian region.
  • In Macau, we experienced stronger gaming volumes in our Sands China Ltd. property portfolio, while adjusted property EBITDA reached $388.3 million and adjusted property EBITDA margin expanded to reach a market-leading 33.3%. The consistent growth of our higher margin mass table and slot businesses, together with the contribution from the important non-gaming (hotel, retail and convention) components of our integrated resort business model, continue to drive margin improvement at Sands China Ltd.
And in 5 months we have Sands Cotai Macau to join the party....

The stock is down by about half a buck in after hours but of course was up 4% along with the rest of the market, so little reaction.  EDIT 4:16 PM - as investors digest, the stock is now up a buck in after hours.

Technically the chart is ok, but a lot of other merchandise is in full break out mode, so until this consolidation period ends, there are other ways to make money.

No position

U.S. Markets on Pace for Best Month Since January 1987

So much for resistance!

I've been saying this move has been ferocious, and even a week and a half ago was saying it's been one of the strongest moves during the entire rally off the March 2009 bottom.  Of course, we've continued to rally since then, and we're making serious history now.  With just two and a quarter days left in the month, October 2011 (at current levels) would be the best month in the market since January 1987.  That's saying something for those of you who lived through 1999 - which granted, was much more focused on the NASDAQ than the S&P 500 or Dow.  For the NASDAQ it's the best month since January 2001.

  • If October ended today, the Dow would be up 13.8%, which.... would make this the best percentage gain for the Dow since January of the year 1987.
  • And it’s not just the Dow, which is sometimes disconnected from the broader market by dint of its strange composition and price weighting and such.  No, the S&P 500, too, is up 13.2% this month, which would also be the best percentage gain since January 1987.
  • The Nasdaq, which is more accustomed to these sorts of methamphetamine-induced joyrides, is only having its best October percentage gain, up 12%, since September 2010 and its best point gain, about 290, since January 2001.

Fortune: Cargill - Inside the Quiet Giant that Rules the Food Business

Normally we focus on public companies for obvious reasons, but this Fortune story on privately held Cargill is quite interesting in many aspects, so I thought I'd pass it along.  The only association market wise I've had with Cargill is its holdings of fertilizer co. Mosaic (MOS), but it certainly is a company that has its hands in all of our lives, via the food chain.  I did not realize how massive it was - it is double the size (by revenue) of Archer Daniels Midland (ADM).  It's the largest private company in the United States, and if public would be #18 on the Fortune 500 ahead of IBM.

Worth heading over to Fortune to read the whole piece (fascinating section about how Cargill brought cocoa harvesting to Vietnam since it had similar climate to the Ivory Coast)  but I'll bring over some excerpts:

  • With $119.5 billion in revenues in its most recent fiscal year, ended May 31, Cargill is bigger by half than its nearest publicly held rival in the food production industry, Archer Daniels Midland (ADM). If Cargill were public, it would have ranked No. 18 on this year's Fortune 500, between AIG (AIG, Fortune 500) and IBM (IBM, Fortune 500). Over the past decade, a period when the S&P 500's revenues have grown 31%, Cargill's sales have more than doubled.
  • But those numbers alone don't begin to capture the scope of Cargill's impact on our daily lives. You don't have to love Egg McMuffins (McDonald's buys many of its eggs in liquid form from Cargill) or hamburgers (Cargill's facilities can slaughter more cattle than anyone else's in the U.S.) or sub sandwiches (No. 8 in pork, No. 3 in turkey) to ingest Cargill products on a regular basis. Whatever you ate or drank today -- a candy bar, pretzels, soup from a can, ice cream, yogurt, chewing gum, beer -- chances are it included a little something from Cargill's menu of food additives. Its $50 billion "ingredients" business touches pretty much anything salted, sweetened, preserved, fortified, emulsified, or texturized, or anything whose raw taste or smell had to be masked in order to make it palatable.
  • Despite Cargill's extraordinary size, strength, and breadth, it has long been remarkably successful at keeping out of the public eye. But the days when the company could get away with saying nothing and revealing less are over. "I think the world has curiosity about where its food comes from that is more earnest than it's been in the past," says Page, who earlier this year took the unprecedented step of allowing Oprah's cameras inside a Cargill slaughterhouse. (No video of the actual slaughtering, however.)
  • The simple fact is that the bigger Cargill gets, the more attention it draws. Timothy Wise, research director at the Global Development and Environment Institute at Tufts University, points to several factors that have increased concerns about Cargill's rising power, including recent wild gyrations in commodities markets, "sticky-high" prices at the supermarket, and the ever deeper integration of Big Ag with global financial markets.
  • Perhaps the most hot-button issue of all is food safety. In August, Cargill announced the largest poultry recall in U.S. history -- 36 million pounds of ground turkey linked to a salmonella outbreak at a factory in Arkansas that sickened 107 people in 31 states and killed one. "The public is justified in being wary of having any part of our food system controlled by a small number of large corporations," says Wise.
  • Page is the third CEO in a row to come from outside the family. Today not a single Cargill or MacMillan remains in a senior executive position at the company. Outsiders (six) and managers (five) outnumber family members (five) on the board. What hasn't changed is ownership. Cargill introduced a limited employee stock ownership plan in the '90s that allowed some family members to cash out. However, roughly 100 descendants of the founders still own around 90% of the stock, worth some $52 billion as of the last official tally.

  • Cargill ships other commodities too: soybeans and sugar from Brazil; palm oil from Indonesia; cotton from Asia, Africa, Australia, and the Deep South; beef from Argentina, Australia, and the Great Plains; and salt from all over North America, Australia, and Venezuela. The company owns and operates nearly 1,000 river barges and charters 350 oceangoing vessels that call on some 6,000 ports globally, ranking it among the world's biggest bulk shippers of commodities. "In one sense, you can think of Cargill as just a big transportation company," says Wally Falcon, deputy director at the Center on Food Security and the Environment at Stanford University. "Their game is: extremely efficient, high volumes, low margins, and just being smarter and quicker than anybody else."
  • Sometimes the same ship that picks up a load of soybeans at Cargill's deepwater Amazon port in Santarem, Brazil, after unloading in Shanghai, will carry coal from Australia to Japan before rinsing out its holds and returning to Brazil for more beans. In fact, Cargill's ocean-transport business moves more coal and iron ore for third parties than it does foodstuffs, oils, and animal feeds for itself, by a factor of two.
  • Cargill reluctantly sold its 64% stake in fertilizer manufacturer Mosaic (MOS) for $19 billion earlier this year, and it exited the seed-engineering business long ago. But farmers in many of the 63 countries where Cargill operates -- 60% of earnings are generated outside the U.S. -- can still buy everything they need to plant their crops and feed their livestock from a local Cargill rep, as well as crop insurance, hedging instruments, and marketing advice.
  • As mighty as Cargill may be, it is not immune to setbacks. In fact, the company's fiscal 2012 is off to a dismal start. Revenues rose 34% in the quarter ended Aug. 31, but earnings were down 66%. That after earnings rose more than 60% in the first quarter of fiscal 2011.
  • Page blames a perfect storm of unforeseen events: spring flooding in the Midwest (Cargill spent $20 million to prevent the Missouri River from washing out its corn-milling plant in Blair, Neb.); the salmonella outbreak in its turkey plant, which led to a partial shutdown and layoffs ("instead of a business that was making money, we have one absorbing the costs of the recall"); a significant wrong bet on a single, unnamed commodity; a "risk-on, risk-off" market environment that otherwise neutralized Cargill's vaunted trading expertise; and, above all, the global recovery that wasn't. "We underestimated the degree to which the world was gonna back up," says Page.
  • Remarkably, though, Cargill didn't slow down. The company maintained what Page calls a "big acquisition agenda," completing deals for a Central American poultry and meat processor, a German chocolate company, an Italian feed company, and the grain business of AWB Ltd., formerly the government-owned Australian Wheat Board. (Page says the $1.3 billion AWB purchase fills a hole in Cargill's global grain network: "We're in Russia," says Page, "we're in the Ukraine, we're in Canada, we're in the U.S., we're in Argentina, and we just didn't have as vibrant a footprint there.") Cargill also has a pending $2.1 billion offer for Provimi, a global feed company with 7,000 employees in 26 countries; that deal is expected to close by year-end.
  • Few public companies could be that aggressive after bad results. "People always ask, 'Why is Cargill private?' " says Page. "This is probably one of those moments."
  • Page may not be under pressure from the family shareholders, but that doesn't mean that he is unworried about the future. The real threat to Cargill's long-term prosperity, Page says, is that forces beyond the company's control will infringe on its freedom to operate across markets. Cargill is clearly concerned with the way the global conversation is bending on food security. "You don't want to end up with policies that are counterproductive to feeding everyone," says Page, "and we don't want to end up with a business model that doesn't have any freedom to operate."

[Video] Extended Hugh Hendry Interview

After a long absence from public view we finally located the very acerbic Hugh Hendry at the end of last month [Sep 28, 2011: The Mystery of Where Hugh Hendry Went is Solved]  Apparently he had hired a CEO, and moved himself 'down' to CIO, and was told to stay out of the public eye.  So go forward there won't be much Hendry (sad face).

A reader found this series of videos from something called 'The Alternative Investments Conference'.  Actually a pretty high profile event based on the type of attendees the past few years.  It looks like this interview was in January 2011 - before Hugh was told to go underground!  Unfortunately, there is no one else on the stage with Hugh other than the host, and Hendry usually is at his most menacing when he has a foil to play off of.  That said, it's a 1 on 1 interview with some interesting takeaways just from the first video alone (that's as far as I've gotten thus far).  And he has a good host to work with as he opened with this salvo: "And Hugh, I'd like to keep this moving pretty quickly, so let's kind of target one minute maximum per answer and save the speeches for the politicians."  To which Hugh let out a deep sigh... haha.

Video 5 is a Q&A with audience

It's about 50 minutes in all, so probably evening viewing for most.

Video 1

Hugh Hendry at LSE AIC 15 - I should be... by ChineseCentralTV

Video 2

Hugh Hendry at LSE AIC 25 - spending money... by ChineseCentralTV

Video 3

Hugh Hendry at LSE AIC 35 - the Yen could... by ChineseCentralTV

Video 4

Hugh Hendry at LSE AIC 45 - You have no chance... by ChineseCentralTV

Video 5

Hugh Hendry at LSE AIC 55 - I work.... by ChineseCentralTV

Right Up Against the 200 Day Simple Moving Average

Usually the 200 day simple and exponential moving averages don't have such a wide variance but we have a nearly 40 point difference between the two right now.   I usually focus on the exponential (there is no 'right' or 'wrong' one to use), but since it has an impact on the current situation let me highlight the 200 day simple moving average up here at 1275.

Obviously coming into the week nearly overbought, we are now there.

First Pass of Q3 GDP is 2.5%

I don't take too much stock in the GDP figures due to how they are created - the agency that creates GDP does not even use the same inflation figures as what is considered official (CPI).  Generally it's been a far lower inflation figure, which inflates GDP but that's a conversation we've had many times in the past.   Further, this figure gets revised twice more so any reaction to the data today is usually humorous in light of a number that sometimes is 30-50% different a few months from now.  But (drumroll) we have the best GDP figure of the year at 2.5%.

Ironically this is during a time frame the Fed stopped QE, and commodity prices - namely gasoline - dropped.  Meanwhile, while the Fed was going hot and heavy driving up asset prices we had much weaker GDP in Q1 and Q2.  Obviously they don't see that connection as the drum beat starts for QE3.  To that end, personal consumption jumped to 2.4% growth versus 0.7% the previous quarter.   So it was finally a quarter that the 2% payroll tax cut could be enjoyed by the masses, rather than being handed to the Saudis.

Inflation in this report was offered at 2.0%, excluding food and energy: 1.8%.  

Is that a European Rescue Plan in Your Pocket, or Are You Just Happy to See Me?

Global equity markets are screaming across the board, as "the package" has been delivered - sorta.  A framework has been agreed to, and frankly it is nothing new from what has been reported the past week.  Essentially the 3 part deal: (a) a "voluntary" 50% haircut on Greek debt (earlier the rumor had been 60%) (b) a recapitalization of European banks to the tune of roughly $180B USD and (c) the ESFS levered to $1.4T (right on the dot to what had been the rumor) - but now partly due to levering and partly due to SPV [Special Purpose Vehicle].  With the SPV, the IMF should be involved which means the U.S. taxpayer gets to help bailout Europe.  Sarkozy is also to speak with China to get on his knees and beg for Chinese money.  While much of this had been discussed in the countless rumors the past few weeks, the market continues to rally both on the rumor and the news.  ('sell the news' is unfashionable, and old school)

Somehow the Europeans are claiming the 50% haircut is not a 'credit event' (I guess because it is "voluntary") and hence those who bought insurance on Greek default (CDS) should not get to claim their goodies.   There is also a 21B Euro kicker (sweetner) of aid to European banks - not sure where this money comes from.

In short, we have an epic kick the can.  All that is missing is changing the accounting standards to stop mark to market and then European banks can live in the same fantasy world the U.S. banks do.

If you want details here are various news stories:

  1. Reuters
  2. AP
  3. Bloomberg
  4. Marketwatch

U.S. futures are up around 2%, and we quickly approach that resistance area mentioned as the next area to deal with (mid June lows) once the S&P 500 cleared the 200 day exponential moving average.  This area is roughly 1260 to 1267.  A move to 1260 from the lows just over three weeks ago would be a 17% move - again remarkable in ferocity of the move.  It used to be a staircase up and elevator down in markets.... in the new era, it's an elevator both ways.

Wednesday, October 26, 2011

[Video] Marc Faber Back to his Normal Self

I admit to being a Marc Faber-aholic when it comes to listening to his interviews.  His entertainment value is normally off the charts - while providing a lot of sensible trading calls in the near term.  That said, his past few interviews have been much too formal for my liking.  But in this interview with CNBC today he has his normal few zingers.  Enjoy - 7 minutes. (email readers will need to come to site to view)

Visa (V) Beats on Bottom Line by 2 Cents, Tiny Miss on Top Line

Visa (V) shares are down just under 2% in after hours - apparently a $10M miss on revenue (on a $2.38B base) has people upset a tad.  The company is putting another $1B towards a share buyback program (however, announcements of share buybacks don't always mean the company will follow through).  Full report here.

  • For the fourth quarter ending September 30, 2011, GAAP net income was $880 million, an increase of 14% over the prior year. GAAP diluted class A common stock earnings per share were $1.27 - an increase of 20% over the prior year on a GAAP basis, or an increase of 34% over the prior year on an adjusted basis. 
  • GAAP net operating revenue in the fiscal fourth quarter of 2011 was $2.4 billion, an increase of 13% over the prior year and driven by strong contributions across all revenue categories. Currency fluctuations contributed 2 percentage points of growth towards quarterly net operating revenues.
  • Total processed transactions, which represent transactions processed by VisaNet, for the three months ended September 30, 2011, were 13 billion, a positive 9% increase over the prior year.
Share buyback:
  • During the three months ended September 30, 2011, the Company repurchased approximately 5.2 million class A common shares, at an average price of $80.87 per share, for a total cost of $423 million.
  • Today, the Company announces that its Board of Directors has authorized a $1 billion increase to its previously announced $1 billion share repurchase program. The authorization will be in place through July 20, 2012, and is subject to further change at the discretion of the Board.


Visa Inc. affirms its financial outlook for the following metrics through 2012:

•Annual net revenue growth: high single to low double digit range; and
•Adjusted annual diluted class A common stock earnings per share growth: mid to high teens range.


Mastercard (MA) and Visa (V) continue to be machines and now that Mr. Durbin is done messing with the sector, the stocks have had a wonderful past 3-4 months.

No position

College Prices Rise on Average 8.3%

Little known is university costs have surged well ahead of those of healthcare the past few decades.  The chart to the right is 3 years old... it has gotten worse as wages stagnate for the great middle as costs continue to drive up.

We see that yet again this year, as the average tuition price has increased 8.3%.   This is creating a bubble in student debt.  [Oct 19, 2011: Student Loan Debt Continues to Hit New Records]  Looks like Obama is introducing a plan to 'refinance' into lower rate debt on student loans, but perversely this just allows tuition to go up even more.  The two things most subsidized in this country are healthcare and tuition - and both have been increasing at pace well in excess of wages.  People don't seem to get the connection.  If you had a non subsidized market, prices would have to fall to what the masses could afford.  It would require a few hard years as markets adjust, but in the long run many more people would prosper with a correctly prices product.  Good intentions gone bad.

I'm not sure if online universities and colleges are included in these numbers, but it would be interesting to see how they play into it.
  • As President Obama prepared to announce new measures Wednesday to help ease the burden of student loan debt, new figures painted a demoralizing picture of college costs for students and parents: Average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or 8.3 percent, compared with a year ago.
  • Nationally, the cost of a full credit load has passed $8,000, an all-time high. Throw in room and board, and the average list price for a state school now runs more than $17,000 a year, according to the twin annual reports on college costs and student aid published Wednesday by the College Board.
  • The large increase in federal grants and tax credits for students, on top of stimulus dollars that prevented greater state cuts, helped keep the average tuition-and-fees that families actually pay much lower: about $2,490, or just $170 more than five years ago. Some argue that while Washington's largesse may have helped some students, it did little to hold down prices.
  • "The states cut budgets, the price goes up, and the (federal) money goes to that," said Patrick Callan, president of the National Center for Public Policy and Higher Education. "For 25 years we've been putting more and more money into financial aid, and tuition keeps going up. We're on a national treadmill."

  • Obama will use executive authority for two loan-relief measures. First, he will move up the start date -- from 2014 to 2012 -- of a plan Congress already passed that reduces the maximum repayment on federal student loans from 15 percent of discretionary incomes to 10 percent. The White House says about 1.6 million borrowers could be affected, and that remaining debt would be forgiven after 20 years, instead of 25.
  • The administration also will allow 5.8 million borrowers with outstanding loans from two federal programs -- direct lending the Family Education Loan Program -- to consolidate into a direct loan, potentially saving some borrowers hundreds of dollars per month.
  • Those changes may not help new borrowers much, but they could put cash in the pockets of millions still paying back their loans. They also could encourage more borrowers to take advantage of the income repayment options that are already in place, but not widely known.
This next blurb is something rarely talked about - as part of the 2009 Stimulus Act, many public workers (who for the most part now have pay and benefit packages better than the private sector) will have their debt forgiven after a decade.  This policy harkens back to an era when public workers were paid less (and had worse benefits) than those in the private sector ... but in return had much more relative stability.  It's quite amazing this factoid received such little press.  I think this is only the 3rd story in 3 years I've read where it is stated.
  • Finally, by consolidating into direct lending, more could qualify for that program's public service loan forgiveness, which can forgive debts after just 10 years of repayments for people working in nonprofit or public service jobs.

  • In the College Board's latest price report, some of the increase was driven by huge increases at public universities in California, which enrolls 10 percent of public four-year college students and whose 21 percent tuition increase this year was the largest of any state.
  • But even without California, prices would have increased 7 percent on average nationally -- an exceptional burden at a time of high unemployment and stagnant family incomes.
  • Terry Hartle, senior vice president at the American Council on Education, which represents colleges in Washington, said the cause of the price increases for the 80 percent of college students who attend public institutions is clear. State appropriations to higher education declined 18 percent per student over the last three years, the College Board found, the sharpest fall on record.
  • The College Board reports roughly 56 percent of 2009-2010 bachelor's degree recipients at public four-years graduated with debt, averaging about $22,000. At private nonprofit universities, the figures were higher -- 65 percent and around $28,000.
  • Meanwhile, both community colleges and private four-year colleges reported lower tuition inflation than public universities.
  • At nonprofit private four-year colleges, tuition and fees were up 4.5 percent to $28,500. Factoring in aid, the average total net cost, including room and board, was about $22,970 -- lower than five years ago. At community colleges, where list prices rose 8.7 percent nationally to just under $3,000, net costs also are lower than five years ago, and aid generally covers the whole price.
  • Still, while net costs are important to note, they don't tell the whole story. They don't cover living costs, which for many students are a higher obstacle than tuition, especially if they can't work as much while enrolled.
  • Hartle and others say this year's sharp increases came despite the last chunks of stimulus dollars from Washington used to plug holes in education spending. Looking forward, state budgets remain broken and there's little indication Washington will come riding to the rescue. "I'm not exactly sure where higher education in the United States is going," he said. "But I have a feeling California is going to get there first."

[Aug 19, 2011: The Atlantic - The Debt Crisis at American Colleges, Plus a Chart Showing the Incredible Explosion of College Loans]
[Dec 21, 2010: Video - CNBC, the Price of Admission - America's College Debt Crisis]
[Dec 14, 2008: WSJ - K-12 Schools Slashing Costs, College Bills Wallup Families]
[Dec 5, 2008: NYT - College May Become Unaffordable for Most in US]

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