Friday, May 30, 2008

Return of the Credit Crises?

This was in the comments section and I thought I would bring it to the front. ABX tranches continue to deteriorate also. Thanks goes to Justin

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.


Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.


But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

Thursday, May 29, 2008

Today's Action

I thought today's action in the market was very interesting. We continue to follow the script almost perfectly for the highs we set last October (almost to the day). In fact it is almost to perfect which makes me nervous. You continue to see the normal same window dressing going into the end of the month which is probably adding to buyer interest. Also I am sure it it is at the forefront of every traders mind what happened April 1st and May 1st. Will the first trading day in June offer another gift? In the last two day volume has been non existent. I mean it is even low based on the last three months. Volume is all but gone. You also saw a sell off once you approached that 1410 level today. The financials have not participated in any bounce until today. They led me the market higher today. If your a bull those financials have to regain leadership and put several positive trading days together. The ABX indexs seem to be breaking out of their trading ranges they have been in the last two months to the downside which is not good. You also have more downgrades by S&P and Moody's which is going to cause problems for banks. If your a bull the one thing you can grasp onto is the Yen. It has fallen apart the past week meaning that the carry trade is probably coming back in favor.

Anyway the next couple of days will be interesting. I continue to think we have hit the interim high point and in the next couple of weeks will be testing 1350 instead of 1450 but if the market bust through 1410 it may mean the bulls are around for some more fun.

HSBC Warns on Inflation

Not often you see big bank management saying we should hike rates.

Europe’s biggest bank accused central bankers of failing to address inflation yesterday and called on them to raise interest rates to curb spending, even if it hurt consumers in the short term.

Michael Geoghegan, chief executive of HSBC, said that some economic decision-makers were ignoring the risk of rocketing inflation because they were keen to support ailing housing markets and preserve a feel-good factor.


He said that Americans had been comforted by low interest rates in the wake of the collapsing housing market and he predicted that US interest rates would not rise until after November’s presidential election. “Inflation is a long-term problem because there’s no long-term will to solve it,” he said.

Moronic Undertakings

I don't know all what is going on or the entire proposal so I need to be careful but at first glance the story on page C1 has got to be one of the more dumb moronic things I have read. It talks about the effort to overhaul the credit rating system and adding new symbols which somehow gives more information. ARE YOU KIDDING ME?? So for example. The new proposal is that a bond would be rated AAA.sf which indicates the bond is a structured finance bond as opposed to a government or corporate bond. Excuse me?? I am sorry, personally I study and look at the bond and then go look at the rating. Hopefully I know it is a "structured finance" bond and not a government bond. How in the world does that help the system? Another proposal is to change to a numeric system. I.E. 111 instead of AAA. Does that change anything?

The problem is not what symbols you prescribe to rating. Why not make it Good, Dumb, Idiot rating? It isn't the characters used it is the system. The problem is where incentives lie. The fact that the rating agencies get paid by the bankers wanting a rating not the investors who use the rating. How can the SEC and Senate banking committee be so moronic in thinking these proposals actually solve or address anything. In the words of Charlie Munger "its asinine."

Sorry I usually don't rant and usually not emotional but that article infuriated me.

Wednesday, May 28, 2008

Ken Heebner

Absolutely fascinating article about Ken Heebner. From reading through this his thematic style seems similar to how I think. Thanks goes to Pete.

Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500.


He works long hours trying to identify emerging trends in the economy. When he finds a promising one, he'll go all in, making huge bets on the stocks poised to benefit. Asked how long it takes him to identify those stocks, Heebner answers, "About ten minutes. I've been at this a long time."


CGM is pretty much a one-man show. Heebner's entire investment team consists of two traders - Elise Schaefer and Sue Small - and Columb, the U2 fan. Being an analyst for Heebner is a bit like being a beauty consultant for Halle Berry, so Columb knows better than to try to suggest stocks. She operates more like a sleuth. Heebner will ask her to dig up the latest information on, say, scrap steel prices in China or deep-sea oil rig leases, and within an hour or two her findings are on his desk.


Heebner thinks steel prices could double and oil could blow past $200 a barrel. (He also thinks inflation will hit double digits within the next five years: "I don't know why anyone would buy a bond.") Yet he is constantly on the lookout for any sign that the economic slowdown in the U.S. may be infecting emerging economies abroad. That would deep-six his whole investment thesis, which hinges on China and other emerging nations using more energy and building more infrastructure. "I'm not waiting for Morgan Stanley to tell me there's something wrong in China," Heebner says. "By then it's too late."


Heebner enjoys his job enormously, which is the key to his longevity. "It's not a business for him, it's a pleasure," says his brother Jeffrey, 70, who ran a home-security business before retiring


Jeff Heebner says that his brother has always been a little obsessed with making a buck - even though spending it has never been his thing.


After getting his MBA, Heebner wanted to go to work on Wall Street as an investment banker. Nobody would hire him.

Tuesday, May 27, 2008


Berkshire was up today over 3%. A shares were up $3940 a share on relatively heavy volume. I didn't see any major news today. I wonder if European buyers stepped in after the conclusion of the European tour. Big rich families who have never really heard of Berkshire.

Another possibility (less likely) is that this trip may have yielded fruit in a pending deal. Rumors could be floating around.

Thirdly is that Kass is covering his short after making some nice money in the short term as it appears more clear that the financials are moving down again.

I just saw it as an interesting anomaly and started wondering why and one of those may be reason.

Hussman Write-Up

His weekly write-up this week was especially interesting. Talks about the stock market action last week and oil.

I tried to include an excerpt from the link but was unable to for some reason. The blogger would not let me. I highly recommend the whole thing.

Meat Prices Set to Increase

I hope everyone had a great weekend. Mine was spectacular.

I have been saying this for close to 6 months now and really started pounding the table on it about 2 months ago. The article below is about beef prices. I think the rising prices will be acros the board in all meats.

Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.

The highest corn prices since at least the Civil War, based on Chicago Board of Trade data, mean U.S. feedlots are losing money on every animal they sell, discouraging production as rising global incomes increase meat consumption and a declining dollar spurs exports.


Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed. Cattle are the seventh-worst performer of the 26-member UBS Bloomberg Constant Maturity Commodity Index in the past year, a time when soybeans, oil and copper jumped to records. After adjusting for inflation, cattle are down 27 percent from their 1988 peak.


Feedlots lost money on animals sold for slaughter the past 11 months, including $139.56 a head in April, compared with a profit of $46.79 a year earlier, said Erica Rosa, an economist at the Livestock Marketing Information Center in Lakewood, Colorado. Losses were a record $169.80 per animal in March, and feedlots may not be profitable until after October, she said.

The result - cutting supply

As of May 1, feedlots held 11.1 million head, down 1.4 percent from a year earlier, the government said. Ranchers last year cut the number of young females they held by 3.5 percent to 5.67 million on Jan. 1, the second straight annual decline.

Even as demand increases.

Global demand for beef, pork and chicken may grow as much as 50 percent by 2020

The easiest direct way to play this is the ETF COW which is like 2/3 beef and 1/3 pork prices. I do not own this and have been looking at other targeted ways to benefit from rising meat prices. It is coming.

Friday, May 23, 2008

Ira W. Sohn Investment Research Conference

Every year some of the best investors give presentations at the Ira W. Sohn Conference. The are now numerous articles out there. This one goes through all the speakers and a very short paragraph on what they pitched. Thanks goes to Pete.

This was one of my favorite because it was so random.

*Carl Icahn: support his dissident proxy slate at Yahoo Inc and don't support Democrat Barack Obama. "I personally think he'd be a terrible president!"

Just totally random. I thought it was funny.

This is probably my last post until next Tuesday unless I see something interesting over the next couple of hours. I am about to head out for the long weekend. Hope everyone has a good one!!

Thursday, May 22, 2008

Irony at its Finest

This is amusing. (Thanks goes to Pete)

S&P today placed Moody's A-1 short-term debt rating on CreditWatch negative.

This is where the irony really kicks in.

In putting Moody's rating under review, S&P cited broader declines in revenue that have affected both companies since the collapse of the subprime home loan market sapped new issues of mortgage-backed bonds and collateralized debt obligations, which package pools of debt into new securities.

You got to love it. I constantly get images of Dumb and Dumber when I hear the names of these companies mentioned.

On a more serious front S&P cut $6 billion of prime jumbo mortgages that were mostly AAA. This is very important because AAA is the grease of the financial system. Cut of A and BBB securities are important but AAA securities can be brought to FED window and are excepted readily as collateral at other banks. These securities are very important to the financial system.

Bill Gross Monthly Letter

I always enjoy Bill's thoughts. He is often times referred to the Warren Buffet of bonds. This one I think is the best one I have read in the last six months and unlike some of his thoughts I strongly agree. His write-up covers inflation. Highly recommend reading it.

I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control.


A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.

More on Oil

A buddy sent me this link to a presentation by Matt Simmons of Simmons & Company International. He is a peak oil theorist and fairly extreme looking through his presentation so like anything discount what he says but there were some interesting points. (Thanks goes to Andrew)

- If motorists all decided to top off tanks it would drain our gasoline pool in 2 to 3 days.
- Motorists and service stations running on 2/3 rds empty

I would discount this a little more if at the Berkshire Hathaway Annual Meeting Munger and Buffett did not sort of lead the slightest bit of credence to the peak oil pundits.

There are two outcome to all of this I think.

One is as I have said we are headed for a commodity bubble. As this stuff gains popularity you create massive hoarding which actually does create a supply problem (supply for where the products are actually useful). At some point this kills off economic activity and all that stored supply eventually floods the market. It provides supply for years to come depressing commodity prices. This is a 10 to 30 year cycle. Very long and very painful for everyone who uses energy on the way up and produces energy on the way down. It is psychological as much as fundamental. It is psychological that once the cycle starts on the upside people way overestimate the shortages and store way more than ever imagined and on the way down supplies are depleted beyond what they should be because the thought there will always be energy at very cheap prices.

The second outcome (and I have not bought into this yet) is that we really are at peak oil and total output will be declining for years to come. This also has happened before. When? What was the primary energy source in the late 1700 and most of the 1800s? Give up? Whale oil. This lighted the houses and factories of millions. We reached peak whales. Whales started getting depleted and prices soared and people were panicking on how the economy would run as it did before. You had a couple of depressions in the 1800s that never gets studied and talked about that was partly caused by high energy prices. What happened? A guy named Drake found a way to produce a new oil in Pennsylvania solving the problem and supplying a new energy source.

Nothing is new under the sun. Both scenarios have happened and will happen again. If we really are at peak oil a new energy source will come from somewhere. Capturing the energy of the sun. Or capturing energy from the separation of various compounds in saltwater (it is being studied). There will be pain under both scenarios for various parties. There will also be great wealth created by others.

China's Crude Oil Imports Continues to Rise

China's crude oil imports for the January to April period climbed 10% from a year earlier to 448.3 million barrels, according to data released by the General Administration of Customs Thursday. Imports for the month of April fell 4% to 106.80 million barrels, the bureau said.

I am assuming the April number is compared to March. In anyway I have had a theory that I touched on in my annual letter that marginal demand was being created by China for resources (metals, oil etc.) leading up the Olympics. Besides the infrastructure build China has been stockpiling oil in preparation for the Olympics to make sure there is no embarrassing shortage. My guess is this was probably amplified after the earthquakes as the military responded in force with rescue efforts. Just theorizing but it is possible you could see oil crunch right before to after the Olympics if that marginal demand suddenly disappears. Once again just theorizing.

Wednesday, May 21, 2008

The Ultimate Bear

There was an interesting write up by Bloomberg on David Tice of the Prudent Bear fund. He is the extreme view so discount what he says but I found it interesting the way he trades shorts and his background. Just an overall interesting read. Thanks goes to Pete.

Tice, founder of the Prudent Bear Fund, is in his element as short sellers savor a rare advantage in their tug of war with Wall Street's bulls. Tice, an economic history addict who lines his office bookshelves with volumes on the Great Depression, is the most bearish of bears. He's been preaching for almost a decade that runaway mortgage lending would blow up.

Tuesday, May 20, 2008

Have We Rolled Over?

After touching the 200 day moving average the sellers came in mass today. Is that it? Has this massive bounce ended? I would not say it is certain but we may be close. Several signs have popped up. I have thought we were in a topping phase though admittedly about a 20 S&P points ago. The biggest thing that seems to have changed is the financials. The financials have led this market up with the XLF busting through 27. It is now leading this market down. Last week the banks were the worst performing sector in the market finishing down on the week while the S&P and NASDAQ surged over 2.5%. Even at the markets peak yesterday when the Dow was up 150 XLF was flat. Today it got murdered. The markets cannot keep going higher without the financials participating. The bulls would argue it was just a Meredith Whitney sell off but there are other issues. CIFG (one of the smaller less known bond insurer) got its rating cut to junk today. It did have a AAA rating a few years ago, oh no I am sorry, I mean March. In less than 3 months it got cut from AAA to Ba2. Nothing like the rating agencies to stay on top of a business deterioration. Other things that have been telling is the return of bullish optimism. Also the Japanese Yen has been strengthening in comparison to the U.S. dollar the last couple of weeks and broke through 104 again. Once again I think the whole oil thing given as a reason is a bunch of blawhoie. Is 129 really different than 128 compared to 125 compared to 120? I have said many times it doesn't matter on Wall St. until it does so I think it mattered a long time ago and now maybe Wall St. will really start looking at it since it seems to be affecting retailers (surprise surprise).

Who knows. I am definitely not betting on it either way (though I did sell some covered calls on my second largest position yesterday as the market looked like it was starting to roll over) and I really wouldn't be surprised to see us test that 200 day moving average again but if we are in a bear market bounce this one should be about done and it would be classic in length and breadth. I said back on April 1st ( I would not be surprised if the S&P bounced in the 1400 to 1450 range (1450 was where the 200 day moving average used to be). We are right there. Maybe it has the muscle to get to 1500. I sort of doubt it but time will tell. The bulls have not packed up and gone home because of one miserly pullback after the massive rally last week. That is for sure.

Commodity Bubble?

I am on record about a year ago saying the next bubble will be in commodities and the emerging markets. I think it still has a long way to go over a few more years though there could be a dramatic pullback in the interim.

Record-breaking commodities prices that were drawing in hundreds of billions of dollars in new investments threaten to create an asset bubble, broker Lehman Brothers has warned.

And this is just weird.;_ylt=ArUaJscKzPL6gUlounAF3tFu24cA

When it comes to comfort, Kirk Christie's cows have it all — a new barn, a flat-screen television and waterbeds.

That's because of the dairy farmer's philosophy that a happy cow is a productive cow. More milk means more money, so Christie doesn't mind providing the frills.

Barron's Takeaways

This is what I found interesting in Barron's this week. I offer no opinion on the data. Just what stood out to me.

There were four rallies during the 2000-2002 bear market of 10-20%. However the trailing and forward market multiples are well below those after any of those rallies.

Lettuce prices are down 8.5% from last year and USDA Choice, boneless sirloin steak is down 4.7% over the last year.

Storm Exchange, a New York weather-related risk manager; is predicting corn yields this year will fall 7% below trend and total corn production in the U.S., by far the world's biggest producer will plunge 14% from last years record harvest. Farmers are planting less and bad weather is delaying palnting. The last time the planting was so cool and wet was in 1995 when corn yields fell 10% below trend line doubling prices from $2.50 a bushel to $5.00 a bushel. Every day planting after May 15th is delayed the yield drops 1.7 bushels a day.

This from the USDA report today,3206,1213+56068,00.html
The report showed that 73% of the overall corn crop was planted as of Sunday compared to 88% last year. This was only 22% progress for the week versus expectations of 25% or more. The 10 year average for this time of year is 85%. The highest percent complete was 94% in 2000, while the lowest was 47% in 1995.

Great quote by Warren Buffett: "If your business model depends on borrowed money, your existence depends on what the world things of you each day."

Bill Ackman of Pershing Square is the keynote speaker on Wedneday at the 13th annual Ira W. Sohn investment confab in NYC.

VIX las week fell below 16.50 which is the lowest level since the peak last October.

Money managers who expect a global recession fell from 40% in April to 29% in May.

Tiffany's boosted their dividend.

S&P 500 saw earnings decline 25.9& from a year ago. Third quarter of decline.

42% of S&P 500 companies were trading over their 200 moving average the highest percentage since November.

If the S&P can make a substantial move above its 200 day moving average the next technical target could be around 1525 according to John Roque.

Eddie Lampert raised his stake raised his stake of AutoNation to 38.7%. He bought 1.82 million shares for an average price of $16.02.

In the seasonal adjustment universe which assumes gas spike 7% in April the actual 5% increase turned into a 1.5% drop. In actuality gasoline prices were up 24% versus the seasonally adjusted decline of 1.5%.

Consumer confidence dropped to its lowest level since June 1980 which was at the tail end of the Carter Administration and the botched Iran hostage situation. The misery index was 21.8% (inflation of 14.3% plus unemployment 7.5%). The current misery is is 8.9 (5% +3.9%). Housing price declines have to be the answer.

First Quarter profit margins were "decimated" as oil prices rose faster than gasoline prices. The refiners are not making money right now. Valero margins decreased by 59%. First quarter income decline 77%

CRP program (government program that pays farmers not to farm their land) is losing appeal. Total farm acreage planted is estimated to increase to 252 million acres from 245 million acres or 3% from the year previous. There are still 34.6 million acres in the program though many doubt the true suitability the farmland is for farming. It is estimated that 10 million of these acres is high quality farmland while 15 million acres is low quality. Even if farmers wanted to plant this land idle land is under 10 to 15 year contracts with government. To plant and break the contract is expensive costing $50 an acre.

Feeder Cattle were at $113 near a season high of 115 Lean Hogs were 76.35 compared to a season high of 81.10 and low of 66.02. Regular cattle were at 93.87 compared to a season high of 97.25 and season low of 86.65. (you read that as cents per pound so 76.35 is $.7635 per pound).

Last week the worst performing sectors were in financials as financials did not participate in the rally. Banks were the 95th out off 99 worst performing sector down .58% on the week. Consumer finance was 97th and full line insurance was the worst performing sector at 99th.

Earning yields on transports dropped from 6.07% a year ago to 4.27%. LTM PE of 23.42 compared to 16.48.

AAII index measure of bullishness was actual down to 45.2% from the two week ago measure of 52.8%.

Consumer confidence was 62.3 compared to 106.3 a year ago.

Average week of unemployment was 16.9 weeks compared to 17.0 a year ago. Unemployed increased however to 7,629,000 from 6,829,000.

Put call ratio dropped to .64. 3 times in the last 6 months it has been slightly lower. November 2nd and December 28th of last year. February 1st of this year. All previous market peaks.

Doug Kass like the idea of shorting the dental industry. His favorite is Danaher but also like Henry Schein and Patterson.

Sunday, May 18, 2008

Response to Kass Article

I promised a write-up on Doug Kass’s article on Warren Buffett which several of you have not let me forget. Kass’s word usage in the article is brilliant in creating strong reactions of Buffett followers. As a writer for is that not that what he is supposed to do, to generate greater readership if not irate reactions? So you first must consider his motive when he compares Warren Buffett “style drift” to the “whoring” of Ben Franklin and inferring that his latest annual meeting was somehow akin to Napoleon’s Waterloo. It is nothing more than brilliant word utilization. However, unlike most writers, he has apparently backed up his words shorting Berkshire in March and thus far would have made money on the trade.

So what about Buffett’s style drift? Is it occurring? Is Buffett stepping out of his circle of competency through his increased derivative exposure? Was the poor first quarter indicative of anything? That is what we shall examine.

Let us look at the first two questions as one. Is Buffett experiencing style drift and is he stepping out of his circle of competence by investing in “risky” derivative contracts? First let us consider exactly what a derivative is and what it can be used for. Derivatives are very wide in scope. They can be a simple standard call option on a stock, to a very complicated customized credit default swap on a piece of debt, or even a derivative on another derivative. People buy them mostly for one of two reasons. A) to speculate on price appreciation of their derivative contract or B) to buy insurance on an underlying security you own. A is buying a put on General Electric when you have no position in General Electric because you believe GE will go down and B is buying a put on General Electric because you own GE and want to protect your downside if something goes wrong with the company. I would argue that the proper way to look at such a contract from a sellers standpoint is always looking at it from an insurance contract perspective. One has no idea who is buying the put I am selling but the central question I should ask myself is am I being compensated for the risk of having to step in and provide compensation for the loss if GE goes down. It is the same question an insurance company would ask when selling fire insurance on a house. Am I being compensated enough for taking the risk of having to make payments if the house burns down? As premiums on the derivatives go up and down, the financial dynamics change in whether you should be a seller of insurance or buyer of insurance. What affects the premiums of a derivative contract? You can go deep into option theory but essentially there are two things that affect option pricing. A) The time the option (derivative) has remaining and B) the inherent volatility of the underlying security. Starting in August of 2007 the volatility aspect of the equation for world markets skyrocketed. This changed fundamentally how I approached the option (derivative) market. I wrote in my 2008 annual letter:

In 2006, volatility priced into the market was extremely low causing the options to be extremely cheap. I was a buyer of options, both puts and calls, using these instruments to both hedge and enter into positions. Currently, volatility is at five year highs causing options prices to surge as well. As a result, starting in September of 2007, I became almost strictly a seller of options (both covered and naked options).

This is exactly what happened in 2005 and 2006 with hurricane insurance. Premiums skyrocketed and Buffett stepped in selling massive amount of hurricane insurance. There may be one thing Buffett is even better at then finding solid undervalued companies to invest in and that is pricing risk and selling insurance contracts. Derivatives, those “financial weapons of mass destruction,” have opened a large new world of insurance type transactions for Buffett. Is Buffett experiencing style drift by participating in that murky world? I would argue a resounding no and if anything he may even be better making money in this world than the stock market world. There is a difference in these contracts than say hurricane insurance and that is the accounting. Imagine for a moment that on September 30th there was a category 5 hurricane sitting in the Atlantic headed west. Those hurricane insurance contracts in the hands of homeowners would be more valuable than they were two weeks before. When the books close at the end of the quarter there is no adjustment on the books for the valuation of those insurance contracts even as the probability of claims getting paid out goes up. Maybe the hurricane slams into Florida or maybe it curves north and dies in the northern Atlantic. Either way on the last day of the quarter there is no adjustment to the insurance (“derivative”) book of Berkshire. Now jump to financial derivatives. On March 31st of this year right after Bear Stearns there was huge accounting losses even though no claims were paid. This is exactly what Buffett meant when he has said he would rather take a lumpy 10% then a smooth 8%. By entering into the financial derivative market his returns will become lumpier but my guess is they will be greater than they otherwise would be. Either way this is at the core of his circle of competency.

There have been two major moves by Buffett into these derivatives. One was a couple of years ago when a large investment fund (my guess is some retirement fund) essentially bought puts on the market that lasted like twenty years (I forget the exact number). The strike price was somewhere around 20% below the market’s current price and payments would only be made if at the date of expiration the market was below the strike price level twenty years later. This is nothing more than an insurance contract that a fund thought prudent to buy. My guess is the fund hopes it expires worthless (if you own fire insurance do you want your house to burn down?). These are the type of transactions that General Re (insurance subsidiary of Berkshire) specializes in. The other big push was late in the 4th quarter of last year when Buffett started selling CDS insurance on certain companies. The CDS spreads had blown out to levels Buffett though was ridiculous and stepped in to sell insurance in case the underlying company defaulted. Both of these transactions worked against him in the 1st quarter. Both are likely over time to have extremely large gains.

Is this new found market something Buffett is excited about? I do not think so. Others will use it under the emotion of greed and potentially destroy the financial system. This goes back to the WMD comparison. In fact at the Wesco meeting Charlie Munger (Buffett’s partner) addresses this:

If you ask me, would I give up all of the opportunities of derivative trading to go back to a simpler cleaner world like engineering of yore--I would do it in a heartbeat.

In fact this is the core difference between Berkshire derivative book and MBIA’s derivative book. MBIA losses make them insolvent. Berkshire quarterly losses do not. MBIA made very poor bets to juice returns, Berkshire hopefully made very wise bets even though in the short term it hurts results. MBIA transactions were motivated by greed, Berkshire’s were motivated to take advantage of fear.

So back to the final question, is the first quarter indicative of anything? If it is indicative of anything it is that the results of Berkshire could be lumpier going forward. If they were to make this a large part of their insurance operations, the accounting aspect of it will dictate greater swings in gains and losses quarter to quarter. This will create buying opportunities as Wall St. misunderstands what is happening.

Either way I really think all of this has nothing to do with Berkshire’s drop in stock price. Mr. Kass I believe is missing the causality. My thought of why Berkshire has gone down is because Berkshire in itself was an insurance contract. If I had to invest 20% of my portfolio in financials what better place to do so as the financial world was blowing up than in Berkshire? After it became clear that the Fed would bailout the financials, those fair weather buyers started moving money out of Berkshire into other financial companies seeking higher risk and higher return. Berkshire's stock price may go nowhere for the next couple of years but I would strongly bet the intrinsic value will continue to increase.

Saturday, May 17, 2008

Interesting Week

A very interesting week to say the least. Oil sets a new all time high while at the same time S&P breaks 1425 and looks poised to move higher. Wall St. is in the business of explaining things but this week showed why these day to day explanations are meaningless. Last week when the Dow dropped over 100 points it was because of oil. Well guess what oil was higher this week than last week and the Dow finished higher this week than before the drop. This week was driven by a large part by options expiration on Friday. Hard to take anything away from the strong move Thursday and Friday (Friday was a strong recovery). My guess is we will be down at least initially on Monday as investors repositions their portfolios after the options expiration day. The S&P broke some key technical levels though so who knows.

This past week the news was again pretty abysmal on all economic fronts. That has been reason to send the market up. The worse the news the stronger it rallies. Genius. At some point it will catch up. One thing that I don't think is as bad as the bears are making it is the consumer confidence data. Came out on Friday that it was the lowest it has been since 1980. I look at that number skeptically. It is based off of Americans who for the most part have lived in 25 years in a period of economic growth and prosperity and who have been able to consume consume consume. So now all of a sudden you can't buy your 16 year old little spoiled princes a Prada purse and the world is falling apart and the economy is blowing up. The 1980 reading was after years of the Vietnam War, staggering inflation, and Cold War threats heard daily. Americans were much more hardened to deal with pain and things were indeed much worse economically in 1980 than they are today. Don't get me wrong, there are things that troubling today economically that the market seems to be completely ignoring but the average consumers are glum because they can't buy toys like they did in the years past not because gasoline is being rationed or they don't have a job.

Friday, May 16, 2008

Global Food Prices Down in April

World food prices fell in April for the first time in 15 months, according to figures from the United Nations Food and Agriculture Organisation (FAO).

Its food price index fell to 216.7 from 217.0 in March, having surged from last April's figure of 141.7.


Mr Segal pointed to factors such as population growth still outstripping food production, increased affluence pushing up meat consumption, and the use of grain for biofuels.

Who knows what happens month to month but it did break a 15 month winning streak. When it comes to inflation in the U.S. you see in the grocery store there would need to be a very large drop in grain commodities before you saw a slowdown in price increases. First everyone is still playing catch up. Secondly, and more importantly, most of the large food producers are substantially hedged 1 to 2 years out. So companies like Kraft input prices are still at much lower prices (I am assuming this with Kraft, I have not actually studied this particular company) than those same input prices would be if they bought in the spot market.

Wednesday, May 14, 2008

I Was Waiting for This
MBIA Inc. questioned Wednesday the latest warning about bond insurers' ratings from Moody's Investors Service, arguing that it has less exposure to the riskier mortgage securities that the ratings agency singled out.

MBIA is undertaking the same tactic they did with Fitch. Try and destroy the messenger.

As shady and shoddy as S&P and Moody's are, believe me they do not want these companies rated AAA anymore than I do. It weakens their brand. Like I said yesterday I think the Moody's release was just a shot across the brow to test the waters and see how the markets would react and see if they can't put some pressure to force the companies to raise more capital.

The soap opera is nowhere near over.

Buffett Succumbing to Style Drift??

I have received this from several people. Doug Kass shorted Berkshire in March and takes issue with some of Buffett's recent movement into derivatives.

It is a good read. I plan on posting a response to this article in the next few days. Stay tuned.

Fertilizer Crises

Interesting video on the growing fertilizer crises. The price of Potash and other American fertilizer companies I wouldn't touch. Valuations are very high but there are others in the world that are interesting.

One key point in this video is that the MC has risen dramatically. Even if we are in a "bubble" (I don't think we are yet) the new equilibrium price is much higher than it was 4 years ago.

Tuesday, May 13, 2008

The Impossible, the Improbable, the completely Unbelievable

Poor performance of second lien residential mortgage-backed securities (RMBS) could impact the credit ratings of bond insurers, Moody's Investors Service said on Tuesday. Bond insurers have significant exposure to second lien RMBS, mainly through guaranties on the securities and, to a lesser extent, through exposure to collateralized debt obligations backed by such assets, the rating agency noted.

I can't believe Moody's would even be hinting at such a thing. Could they actually downgrade them? Is that even a possibility? I am in awe. XLF lost almost a 1% on the news and ABK and MBIA both dropped over 5%. This is probably just a warning shot across the bow forcing both companies to start working on raising more capital. A downgrade does create a liquidity situation that Mr. Brown has been bragging about that doesn't exist.

Monday, May 12, 2008

If You Needed Another Reason to Short Lehman

There may not be much talk about vacations at Lehman Brothers these days, but when i-bankers start thinking about tee times and tanning again, VP Dan Guertin could find himself more popular than most of his colleagues. The reason? He's Lehman's chief meteorologist.

To be fair if you read the article he makes weather forecasts for the commodity traders but good grief, talk about needless overhead.

Wesco Transcript
The site also has the Berkshire transcript.


The earnings came out from MBIA. No real surprises. Losses were massive but the status quo remains.

These losses, unlike Ambac, were well publicized on the street. This is why the stock is up today. My hope was the stock would open down 5% or more and my plan was to cover 30 to 50% of my short position. After Ambac and AIG I thought no matter what the news was it was going to be sell the rumor buy the news type of reaction from Wall Street. Sure enough that is what happened and unfortunately I didn't even get my 5% drop at the open.

I am once again in awe of how MBIA has managed (manipulated) the street. As much as I can't stand the management and think is borders on illegality, they should be a case study for all Harvard MBAs who may go and be a CEO for a Fortune 500 company.

If you remember they raised $1 billion in the latest fund raising to keep there rating. Well it came out last week that they still held that money at the holdco level instead of passing it down to the insurance level. This infuriated alot of people because the money was raised to keep their rating and then they didn't move it to support those operations that depended on the AAA.

Well what they did was pure genius. They leaked that information out last week before the earnings release. Some people were up in an uproar. Then after this earnings release they announce they will move $900 million of it into the insurance unit. This creates the illusion that they just added capital in response their losses and so shouldn't be required or don't need to raise additional capital. It also quites those individuals who were upset at them not moving the money to the opco level originally. If they would have moved that money when they were supposed to and then announced a large loss those people would be screaming about MBIA needing to raise more capital. Now any such chatter is immediately squelched with a quick response pointing to the fact that"well no, MBIA just moved 900 million to the opco level. They are fine."

The other thing is the CEO Jay Brown keeps pounding on their liquidity situation which diverts the attention completely away from the solvency issue. First they only have an ample liquidity situation because the rating agencies will not (can not) downgrade them and because they are not writing much new business. Once again though this is masterfully spun.

At least from me, no real surprise about the numbers or the stock price reaction today.

Also if management was as good at making money as they are at surviving and managing the street I would load up the boat in whatever stock they were managing. You really have to be impressed.

Grain Inventory Levels Continue to Decline


Old crop ending stocks were pegged at 1.383 billion bushels compared to 1.283 billion bushels last month. However, for the 2008/09 season, ending stocks were dropped to just 763 million bushels. Beginning stocks were revised higher by 100 million bushels for 2008/09 due to a decline in ethanol demand to 3.0 billion bushels for the current season, but ethanol demand is expected to jump to 4.0 billion next year. The USDA also assumes a 400 million bushel decline in corn exports for the coming season and an 850 million bushel decline in feed usage. World corn ending stocks for the 2007/08 season were pegged at 109.69 million tonnes vs. 102.97 million tonnes last month. New crop (2008/09) ending stocks were pegged at just 99.03 million tonnes, and the 10 million tonne drawdown in ending stocks drives the world corn stocks/usage to just 12.6%. This is the lowest world ending stocks since 1983 and the lowest stocks/usage ratio since 1973.


Analysts indicate that the outlook for new crop soybeans is now much tighter than previously estimated due to slightly higher projected usage by the USDA. This leaves little room for a below average yield this season. The Supply and Demand Report pegged US old crop soybean ending stocks at just 145 million bushels compared to 160 million bushels on last month's report. Exports were pegged at 1.09 billion bushels compared to 1.075 billion bushels last month. Crush was unchanged compared to 1.84 billion bushels last month. For the new crop season, ending stocks are pegged at just 185 million bushels which is about 100 million below trade expectations. Total new crop demand (2008/09) was raised to 3.073 billion bushels from 3.024 billion for the 2007/08 season. Many traders had been expecting a drop in demand due to high prices. Oil ending stocks for 2008/09 were pegged at 2.679 billion pounds compared to 2.792 billion pounds this season.

Friday, May 9, 2008


I am heading out to go camping near Austin tonight and then heading to Dallas on Sunday for a Saturday Texas Rangers baseball game. Should be fun.

Couple of interesting things to read.

Who has more level 3 assets than capital? There are 10 of them.

This discusses the Value Investing Congress out in California. I go to the one in New York City in the fall. As I get bigger I hope someday to also go to the one in the spring.

Bill Ackman and David Einhorn

I haven't heard Ackman talk much later. He joined David Einhorn on CNBC. Two of the investors I most highly respect. Very interesting conversations. He argues that MBIA and ABK is no longer a systemic risk which was not the case in February. His logic is very interesting.

Part 1

Part 2

There are many other interesting videos with just David Einhorn.

David Einhorn on poker and how it translates to Wall St. and investing

David Einhorn talking about his book and Allied Capital

David Einhorn talking about shorting

David Einhorn talking about his philosophic view of truth seeking

Thursday, May 8, 2008


American International Group reported a $7.81 billion first-quarter net loss late Thursday as the giant insurer was hit hard by the credit crunch.

The worse-than-expected results were driven by a $9.11 billion write-down on a credit derivatives portfolio and $6.09 billion of net realized losses from AIG's investment portfolio.

AIG also said it plans to raise $12.5 billion by selling new shares, equity-linked securities and fixed-income securities with a large equity component included.

Still, AIG increased its dividend by 10% and Chief Executive Martin Sullivan said the company's main insurance businesses continue to perform "satisfactorily."

The world we live in is beyond insane. Massive losses. These are large numbers even for AIG. You lose $7.8 billion. You need to raise $12.5 billion and then you raise your dividend 10%. That is asinine. MORANIC!! That increase the dividend payment $50 million a quarter and you will be getting very expensive capital to pay it out.

Why do they even need to raise capital??? Everything is fine right? Move on nothing to see here. Just play by the MBIA and Ambac rules that see no evil and hear no evil and throw a tantrum if someone speaks ill of them.

Assured Guaranty the supposed "good" insurer is down over 10% also after reporting numbers after the bell.

Wednesday, May 7, 2008

Market Comments

I have not editorialized on the market much recently because to put simply, I don't know (you never know, it is a probabilities game but when you don't know if the probabilities are not heavily in your favor). When you don't know it is often best to just sit back and do nothing. Doing something for the sake of doing something can be a killer. Anyway today was a definite reversal which was important. The question is how important. A day is not a market make. We broke through 1400 in the S&P and broke through 27 on the XLF but we were due a decent pullback even if it is only short term. I honestly thought the news flow was worse yesterday than it was today. Everyone who is blaming oil I think is looking at the wrong thing. Don't get me wrong oil is important. If the government is able to starve off a serious downturn for six months great, I think all you did was starve it off. The world needs a slowdown for capacity to catch up, get rid of excesses etc. That is why in economics your freshmen year in college you are taught that recessions are okay. They are normal and healthy. Instead you get every type of intervention possible to try and prevent one from happening. Well you can push it off but the unintended consequences (i.e. $200 oil) will eventually cause one. Anyway oil adding another couple of bucks did not all of sudden change the dynamics of anything. Market used it as an excuse but there is nothing fundamental concerning slightly higher oil than yesterday.

You also had people blaming the new SEC regulation that would require banks to disclose capital and liquidity levels. Please, somehow that is more important than say Ambac losing billions? It was an excuse to sell financials that have been on fire but the only fundamental thing about it is that it would expose the man behind the curtain. Of course if you know there is a man and you are just keeping up a dog and pony show that others don't know about then maybe it is fundamentally bad.

No the real true significant item in my mind (your not seeing much press coverage) is this.

President Bush brought out the threat of a veto Wednesday, voicing his opposition to a housing rescue package working its way through Congress. The Democratic bill is designed to have the government insure up to $300 billion in new mortgages in an effort to prevent additional foreclosures.

I have said that if the Barney Frank bill gets passed it will cause me to seriously rethink my shorts. It is not that I think that after that the market compounds annually at 10% over the next five years. I think it does mean the market could tread water for quite a while and the true bear case of continuing declining housing prices would be seriously impaired.

What you could see is the market demand it until Bush has to react. Similar to what you saw with interest rates and Bernanke. The market would tumble, its own version of a tantrum, until the pressure came to great and caused Bush to buckle signing the bill.

Anyway in the short term that 1400 to 1410 level is critical. We broke below 1360 after breaking that important level to the upside before rocketing above it again. To finish out the week it will be very interesting if we stay below 1400 ish.

Like I said I just don't know. I usually have some probabilistic outcome scenario in my mind with how the market moves over the next couple of weeks that I use to hedge around fundamental picks but I don't know. As I said when I don't know, I just don't do much.

At the end stay focused on the fundamentals. All the other stuff doesn't mean much longer than a few days.

Quote of the Day...It's not even 9:00 a.m.

MBIA are such squirrels. They know how to work the system and survive, I will give them that.

CEO quote from the press release which I am making the Quote of the Day.

"I continue to believe that investors in MBIA should understand that this number is nothing more than a barometer of credit market sentiment and market liquidity or illiquidity and does not accurately reflect the actual losses that would be expected at MBIA," Brown said in the letter.

This number I am sure refers to earnings number coming out next week. Okay so the number is going to bad, sounds like really bad, but everyone should ignore it. It is meaningless because of market sentiment. That may actually be legitimate if Ambac had not seriosly upped the actual losses number they now expect. Then also this.

Bond insurer MBIA Inc. says it has the liquidity it needs in its insurance and asset management segments and won't spend the $1.1 billion it raised until it boosts capital in the insurance unit and decides how it will run the business long-term.

How ridiculous. Yeah you don't need the capital. YOU HAVEN'T BEEN DOWNGRADED and you aren't writing any substanital new business. You don't need the capital until you have to post additional collateral if you actually were writing substanial business or you were downgraded and you are not being downgraded because you would wreck the system. Yet somehow this is all supposed to be a sign of strength.

Talk about twisted.

I have made alot of money on this as a short but it has to be the most frustrating short I have ever been in.

Tuesday, May 6, 2008

Richard Russell and Dow Theory

I mentioned Richard Russell in my Barron's overview and someone posted this link taking issue with a couple of Richard Russell's comments.

Instead, what caught many investors' attention was the following Russell sentence: "Interestingly, at the 2002 low... I believed the bull market was still in its 'expensive' and speculative phase, and that there would be a major recovery, with probable new highs." Oh yeah? That certainly wasn't my recollection of what he was saying at the time.


My hunch was right.

Throughout 2002, in fact, Russell consistently argued that the primary trend of the market was down. And far from giving bullish noises on October 9, 2002, the day of the low, Russell argued that the bear market was very much alive and well.

Anyway I thought I would bring it to your attention since I mentioned it. Thanks goes to whoever posted that link. It doesn't mean Richard is wrong but it is good to know the fallacies in his Barron's article. The editorial points this out:

After all, Russell's market timing performance puts him in the upper echelons of the market timing newsletters the HFD has tracked since 1980.

Take his points for what they are and use them to input into your overall model for the market.

Barron's Roundup

Barron's roundup. What I found interesting. You make your own interpretation.

Short sales as a percentage of all NYSE volume hit a record of 25.6% the week of April 11th.

Corporate insiders have recently picked up their selling to levels that are no longer bullish.

To many folks appear to be hoping the commodity trade to unravel (66% in last weeks Barron Big Money poll).

Citigroup increased their common equity offer to $4.5 billion.

Thursday is when U.S. retailers report comparable sales. Expectation is 2.3% increase after last years very weak April which saw a decrease of 1.8%.

Wrigley is trading at $75.69. Over $4 below the $80 deal price. The stock with dividends has an annualized return of close to 10% assuming the transaction closes by year end. Analysts believe this deal has a very high probability of closing. Berkshire's stake could be as high as 15%.

Wrigley's global gum shares is estimated at 34% versus 27% for Cadbury.

Analyst thinks because the rebate money will be arriving in consumer pockets in just a few months it will be more like the equivalent of 4% of gross domestic profit. Even so the effects likely will peter out in the final quarter of the year.

Sun Microsystems saw revenues down .5% in the quarter from a year ago. Had a 10% drop in U.S. revenues. Storage system sales were down 5.4% while computer hardware sales were down 1.8%. Sales in both areas came up $100 million short in sales compared to internal projections. They said they started seeing customers hesitate on new orders in the quarter and pushing projects into the future.

Dow theorist like the market. Richard Russel of Dow Theory Letters ( says what investors have endured since the market's October 2007 peak hasn't been a bear market at all. It is just a correction in the huge bull market that started in 1980.

On January 22nd the Dow transports recorded a low, along with industrials. A rally ensued, followed by a decline in which the industrials broke to a further low that was unconfirmed by the stronger transportation average. From there, the transports headed higher dragging the industrials along.

The ISM survey of manufacturing highlights one key reason for the better performance between then and now (referring to 2001). The week dollar, together with the robust global economy, continues to drive exports. Thursday, ISM reported that its index of exports ran 57.5 in April, which signals expansion. The same index stood at 47.5 as of April '01, which signaled contraction.

The whole editorial entitled Not By Bread Alone I found very interesting.

Late last week, nearly 77% of components of the S&P 500 have run ahead of their 50 day averages similar to levels las seen near stocks October peak.

For April the S&P 500 was up 4.8%.

Money market funds stand at $3.5 trillion the highest level since early 2003.

Merril's Rosenburg said the cheap dollar has ushered in a made in America manufacturing renaissance as labor costs relative to the rest of the industrialized world fall to the lowest level in three decades.

A box shortage is developing which ought to be welcome news for the container and packaging industry that has suffered the double whammy of high raw material prices and rising transport costs.

Libor remains stubbornly high with the three month at 2.815% which is higher than it stood before the Fed's previous rate, to 2.25% from 3% on March 18th.

Airlines was the best performing industry group last week. Platinum and precious metals was the worst performing.

PE Ratio for the S&P 500 was 21.36 last week up from 21.12 the previous week and 18.47 last year. Earning yield was 4.68% down from 4.73% last week and 5.41% last year. Price to book was 2.80 compared to 3.32 last year.

For the Dow Jones Industrial Average PE was 70.34 compared to 57 last week and 17.6 last year. Price to book was 3.9 compared to 3.8 last year.

AAII index was 53.3% bullish and 26.3% bearish compared to 30.4% bullish three weeks ago and 48.7% bearish.

Put call ratio hit .67 the lowest level since January 1st when it was .63. October 5th it was .57.

Monday, May 5, 2008

Marc Faber in Dallas

A friend of mine heard Marc Faber give a presentation in Dallas today. I asked him to give me his main takeaway and he was kind enough to write some detail. Below is the email he sent and said I could reproduce. (As a side note it is important to note Marc is a bear. I think that is always important in sense of context by which to digest individuals opinions)

The email below:
His main takeaway is the global boom has been driven by U.S. consumption + resi construction driven by lax monetary policy. Thinks consumption goes from ~70% of GDP back to mid 60s like it was in the early 90s (it was low 60s in early 70s).

He thinks this is all beginning to reverse to the detriment of global growth. He really poo pooed the decoupling argument. He pointed out that all past boom cycles had been limited to specific sectors, where as this boom has been global and virtually all-encompassing. Also showed lots of charts/stats on growing trade interdependence.

However, longer-term he thinks we are in the very early stages of the commodity boom. Spent a lot of time discussing inflation, the lack of new capacity, emerging market consumption, etc. He opined that the U.S. has been in recession since late October if inflation is correctly measured.

Also spent a fair amount of time discussing the strategic implications of the boom. Discussions regarding the multi-century dominance of the Western/developed countries that is beginning to reverse. Also pointed to the increasing rise of global conflict from this and over commodities.

Real interesting stuff.

One interesting stat I thought I'd share with you as you mentioned it this week. He showed a long list of commodities and noted that China was #1 or #2 consumer of all. Only one item was not #1 or #2 and it was beef - #4.

Oh, he also echoed your comments on Japan. Said that at all the conferences he attends no one goes to the Japan presentations.

Also was bullish on rising consumption in emerging markets - noted healthcare and real estate as way to play.

Very bearish on anglo-saxon real estate, pointing out UK, Australia, and New Zealand.

Sunday, May 4, 2008

April Jobs Number

As I said last week I suspected the jobs number would be higher than forecast and relatively a good number. April is notorious for overstating jobs growth or understating decline. It appears that the discrepency was even worse than I thought it would be.

From Up and Down Wall Street (you should know that this column has been and continues to be bearish)

NO NEED TO WAIT FOR THE LAST BALLOT to be counted -- it's all over but the shouting. This is not -- repeat, not -- a prediction about the outcome of the election or even the pillow fight between Hillary and Obama. We're talking instead about something much more important, namely, who'll get the Pulitzer Prize for Fiction.

The winner hands down, we fearlessly forecast, will be that brilliant narrative confected by, of all people, the Bureau of Labor Statistics, and published just last Friday under the deceptively bland title "The Employment Situation: April 2008." Although we're loath to deprive you of even a modicum of the thrill of devouring this marvelous work of magic realism by revealing too much of its contents, rest assured it's carefully designed to leave you with a comfy feeling in these rather trying times.

No doubt you've already gleaned the beaming news that instead of the 75,000-80,000 or even greater job losses and higher unemployment rate that the soothsayers were prognosticating, payrolls last month were trimmed by a much more modest 20,000, and the unemployment rate dipped to 5%, from 5.1%. Hallelujah! It's such a happy contrast to those nasty expectations and to the 81,000 jobs that vanished in March.

What makes the report all the more extraordinary is that it comes in the face of otherwise dismal dispatches from the employment front. Layoffs last month, according to Challenger Gray & Christmas, the placement firm, tallied 90,015, a hefty 68% greater than in March. New claims for unemployment insurance in the last full week in April rose to 380,000, from 345,000 the week before, while continuing claims topped the three million mark. Monster, the online want-ad outfit, reported a 6% drop in its April index compared with the same month a year ago, and the Conference Board's help-wanted index sagged to a new low while its measure of employment opportunities showed, not surprisingly, jobs are ever-harder to come by.

The BLS report, then, was like a burst of sunshine dispelling the gloom. So we take this occasion to tip our hat to the bureau's artistry in being able to fashion a comparatively heartening picture of the job market out of some very unpromising raw material. The populace, as recent soundings make clear, is plenty uneasy and disgruntled about the stumbling economy, feeling the pinch and worried about a paycheck; so anything that can provide a lift to sagging spirits is more than welcome.

Actually, the praise really belongs to the unknown (at least to us) and certainly unsung numbers-bender who crafted the so-called birth/death adjustment, supposedly created to capture the additional jobs of firms too new to be captured by the survey. As it has demonstrated time and again, it's much more a product of the imagination than of dull data, as, of course, any worthwhile work of fiction is.

We have on occasion pointed out the contribution the birth/death adjustment has made to the payroll total, but we have trouble remembering when the additional slots it conjured up were anywhere near as massive as they were in the April reckoning, when it "generated" 267,000 jobs. Put another way, ex the adjustment, last month's job loss would have ballooned to 287,000. Bit of a difference, eh?

Just one illustration points up the, shall we say, peculiarity of what the BLS adjustment has wrought. According to the birth/death model, 8,000 jobs were added in April -- are you sitting down? -- in the financial sector. Which, we assume, will come as a stunning surprise to the gosh knows how many poor souls who have been laid off by the banks, the brokerage houses and the rest of the not-very-robust financial fraternity. Must be something really wrong with our vision, moreover, since new firms in that sector appear to be conspicuous by their absence.

As Philippa Dunne and Doug Henwood, the very bright bulbs who run The Liscio Report, point out -- though they usually view the birth/death model more kindly than we do -- among the stranger additions made via its agency in the April report was the 45,000 to construction jobs. (In case you've been vacationing on the moon, construction is not exactly booming.)

They also suggest that the 83,000 new slots supposedly created in the leisure and hospitality field is definitely suspect. "With vacation plans at near-record lows and restaurants reporting reduced traffic," they feel many of these supposed job gains could simply disappear come the next benchmark revision.

After reviewing the defects in the household version of last month's employment trends, Philippa and Doug warn, "given all its internal blemishes," it would be wrong to conclude from the April report that the economy and the job market are stabilizing. And they caution, "An economy providing lots of part-time jobs to the young and few full-time jobs to the prime-aged" is an economy that could have a tough time "sustaining life."

Back from Omaha

Well I am back from a whirlwind and great weekend. The Berkshire weekend is always a blast.

In general I think the meeting is getting to big. My first one was 4 years ago I think the attendance was in the low 20,000s. This weekend it was supposedly a little over 31,000. You are looking at 30% growth in just a few years. It has gotten so big that I think it has become somewhat less enjoyable as you shouldn't even think about going to the Borsheim's event anymore on Friday night. You also have to worry about getting a seat in the main auditorium. There are many private parties which are always fun where you can talk to old friends and professional investors can swap viewpoints.

The other problem is that it seems to becoming more politicized. There were questions involving advertisements Berkshire companies are involved with supporting supposed violent tv shows, pollution of rivers that Berkshire's energy company is supposedly involved with, issues surrounding the Olympics, and religion. I came to hear Buffett talk about investing and the economy not other peoples agendas.

Don't get me wrong I had an awesome trip and I will probably be back next year but I am just bemoaning what people are turning it into and how big it has gotten.

On a side note I was amazed how bearish the professional investors I talked to were. I was hoping I would get more bullish vibes as a signal that the last bears had given up and we were ready to move down again. Of course my sample set could just be among the top investors who would make the trip to Omaha and who are not going to change their opinion even if the market rallies another 10% to 20% who see what I see. Either way I was just overly surprised at the overall bearishness money managers voiced in concerns going forward.

On the way back from Omaha on the connection flight between DFW and San Antonio I saw next to a homebuilder in San Antonio (he has his own small company). I suggested that San Antonio was holding up okay and he shook his head no that things have changed and that inventory is surging and things are not moving. He was really worried going forward. He said homes in the 250k area are still moving somewhat but anything over 300k are not. He said that previously alot of his buyers were from California who would sell there house in California for extraordinary prices and then move the entire family to Texas buying an equally nice but much cheaper house. Those buyers are completely gone.

I found this very interesting as I was suspecting that Texas would never really enter into a downturn. Other anecdotal evidence I am hearing about Dallas is also showing signs of strain. If this is all true I think Texas could start feeling the recessionary strains in 6 to 9 months.

Thursday, May 1, 2008

Bunch of Everything

Well everything that didn't happen yesterday happened today. The dollar rebounded strongly, commodities dropped sharply, and the market had a true breakout both on XLF and the S&P 500. Breadth wasn't as good as maybe you would have liked and the volume wasn't as strong as maybe you would have liked but the bulls are firmly in control. Yesterday was a wash for bulls and bears, today was a bull touchdown in the 4th quarter.

This sort of surprised me today with the employment number coming out tomorrow. My guess would have been this type of move would have come tomorrow if the employment number was just bad.

Maybe it has to do with the beginning of the month. Seems like day one of each month starts a drastic shift on money.

As a side note about that employment number tomorrow, I have read several articles saying that the way the government calculates employment that April is most biased upwards of all the months. The way the government calculates how many private jobs were created or something like that.

So we remain overbought on a technical basis but that can became more overbought. We are about 5 weeks into this current rally. The September October rally had about 6 to 8 weeks. The next big level is the channel trend and 200 day moving average which is somewhere around 1425 to 1440. You take that out and we really will have broken almost everything from a technical perspective.

I am a fundamental guy and the only thing to do to pass the time waiting for some break in a huge reversal rally is look for points where maybe the trend will reverse. I can look at the fundamental data coming out and right now it just does not matter. How can an increase in jobless claims back up to that 380,000 level mean a 3% up move in the NASDAQ? How can Citigroup raising and diluting thier equity base mean a 4% move up? You can't tell me that fundamentally Ambac is worth as much today as it was where a couple of weeks ago before they announced massive losses. I just can't believe that is a fundamental move to go up 100% in two weeks. Maybe I am wrong. Time will tell.

This may be my last post for a few days. I am flying to Omaha for the Berkshire Hathaway annual meeting. Should be an interesting meeting.

Quarterly Letter

I sent out my quarterly letter for my fund today to partners and friends. If you are a reader of this blog and would like a copy let me know and I will email you a copy.