Wednesday, December 31, 2008
One thing 2008 I think showed all was the stupidty of our national leaders and the various government branches. I am not very hopeful that the change of a calendar year or presedential adiministration will change that much if at all.
Monday, December 29, 2008
I feel like I have almost turned into a professor studying the history of monetary policy and inflation going back to the Egyptians in 4000 B.C. (something that i have already had an interest in) The timing of/if the inflation hits I thinks determines almost everything from an investment perspective except for the most undervalued individual securities. I will be the first to say I don't know and think your are being intellectually dishonest honest with yourself if you think you know. I will have much more thoughts better written out in my next letter in mid to late January.
The quick and dirty:
1) Biggest danger is the failure of England or Switzerland. I put it at at a 20% chance in 2009 that one of the countries will fail and a 50% chance that it would happen in 2009 or 2010.
2) Hence regardless the pound and swiz franc continues to decline (to me this is the absolute biggest duh out there)
3) Oil continues lower and will be below 25 by July 1st4) All currencies move down with regards to non industrial commodities (crops, livestock, precious metals - this move could be explosive - if that is the case (the explosive move) it will drag the industrial commodities higher in dollar terms but in real terms they will continue to fall - this ties in to my number 8 below). Hence gold in the next three years crosses $2000 an ounce. I am very unclear what happens in the next 6 to 12 months though I would guess higher.
5) I still expect a strong market rally out of the gate in 2009 into early February. In the end the market will break November lows in 2009.
6) Debt trounces equities (though not saying debt will have a spectacular return in 2009)
7) The coming storms of corporate bankruptcy will continue to mount and this will cause unemployment to go up much higher and much faster than anyone imagines.
8) I am still very unclear whether we have to worry about inflation in the next 36 months (I know that statement is thought of as lunacy). I think if we get inflation in the next 12 to 24 months it will be almost strictly as a result of a panic of trust on government currencies as a whole. It will have nothing to do with pushing individuals into taking risk or spending or supply constraints (what could be argued as good inflation). This is the biggest danger of all and the government is playing chicken by saying we will cause inflation at all costs.
Doug Kass first 2:
1. The Russian mafia and Russian oligarchs are found to be large investors with Madoff. During the next few weeks, a well-known CNBC investigative reporter documents that the Russian oligarchs, certain members of the Russian mafia and several Colombian drug cartel families have invested and laundered more than $2 billion in Madoff's strategy through offshore master feeders and through several fund of funds. There are several unsuccessful attempts made on Madoff and/or his family's lives. With the large Russian investments in Madoff having gone sour and in light of the subsequent acts of violence against his family, U.S./Russian relations, which already were at a low point, are threatened. Madoff's lawyers disclose that he has cancer, and his trial is delayed indefinitely as he undergoes chemotherapy.
2. Housing stabilizes sooner than expected. President Obama, under the aegis of Larry Summers, initiates a massive and unprecedented Marshall Plan to turn the housing market around. His plan includes several unconventional measures: Among other items is a $25,000 tax credit on all home purchases as well as a large tax credit and other subsidies to the financial intermediaries that provide the mortgage loans and commitments. This, combined with a lowering in mortgage rates (and a boom in refinancing), the bankruptcy/financial restructuring of three public homebuilders (which serves to lessen new home supply) and a flip-flop in the benefits of ownership vs. the merits of renting, trigger a second-quarter 2009 improvement in national housing activity, but the rebound is uneven. While the middle market rebounds, the high-end coastal housing markets remain moribund, as they impacted adversely by the Wall Street layoffs and the carnage in the hedge fund industry.
Thursday, December 25, 2008
Monday, December 22, 2008
Sunday, December 21, 2008
The world ran out of trust in 2008 -- but there is no shortage of money because the Fed is printing like mad. It's the wrong approach, with potentially dire consequences, says James Grant.
Saturday, December 20, 2008
Thursday, December 18, 2008
Friday is going to be very confusing and potentially violent with major options expiration occurring. This probably added to the sell off at the end of the day. Heard some rumors in the market that some firms with major hedges that would be naturally rolled over are having trouble securing credit to roll them over. I don't know but I would expect a plus or minus day tomorrow of over 2%. I think the odds slightly favor a major positive day tomorrow.
The stakes are high whenever you invest, but they're extra high when you're managing your money amid a historic financial mess and record volatility.
For advice equal to the task - in a setting chosen to inspire thoughts of security - we invited five champion fund managers to sit down inside a massive underground vault that's now part of a restaurant a block from Wall Street: Bob Rodriguez of First Pacific Advisors, who manages the FPA Capital and New Income funds; Susan Byrne, who heads Westwood Holdings Group; Leslie Christian, president and chief investment officer of Portfolio 21 Investments; Tom Forester, manager of the Forester Value fund; and Jeremy Grantham, chairman of asset manager GMO
What's it like when your grandpa is the richest man in the world? For Nicole Buffett, it means forgoing cable TV and health insurance and making do on $40,000 a year. Here, she dishes on her upbringing and why her grandfather Warren Buffett disowned her.
Wednesday, December 17, 2008
I even heard some fears that the FED may know something we don't yet about some fund blowing up which is why they moved as aggressively as they did. I have no idea but you always have to consider such a possibility.
So far this year's holiday retail sales are shaping up to be the weakest since the early 1990s as consumers are cutting back in the face of a worldwide economic slowdown.
Since Black Friday kicked off the critical holiday shopping season on November 28, sales at specialty apparel retailers are down 22.9 percent from a year earlier through December 6, according to SpendingPulse, the retail data service of MasterCard Inc's MasterCard Advisors unit.
That is slightly worse than the 19.5 percent decline seen in the period that began November 1, SpendingPulse said.
Of course spending on luxury goods is on the way out:
Double-digit declines in holiday spending continued in the first week of December in key categories, with luxury posting a startling 34.5% drop from year-earlier levels, according to new numbers from MasterCard Inc.'s SpendingPulse unit.
Is consumer tastes really changing? Not necessarily. Instead of living without, individuals turn to the other side of the law
According to the nationwide study, 84% of retailers, including department stores, specialty apparel companies, electronic stores and drugstores, have seen an increase in theft and amateur shoplifting over the last three months. More than 75% of stores report a rise in financial fraud, and 80% cite intensified organized retail crime. RILA would not disclose the names of stores that have seen increases in crime.
Tuesday, December 16, 2008
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.....The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.
There has never in the history of FED statement's been wording about the duration of federal funds rate. The words of using all available tools is also significant as is the reference to open market operations. If your a FED follower these statements are jaw dropping. It is the taking the kitchen sink and not only throwing it at the problem but taking a kitchen sink launcher supercharged with jet propulsion and using that to send the kitchen sink hurling in the air.
Will it work? The FED has essentially used its last bullet, after today it is "click, click, click" if they pull the trigger. It becomes a fiscal stimulus game now. So will it work? I don't know. Exactly the answer you wanted to hear right? At the bottom of this post is a link to an interview of Mohamed El-Erian, Bill Gross's right hand man and co-CEO of Pimco. He echoed my thought (or my thoughts echoed his thoughts) that whether it will work or not will be determined by the mass psychology of Americans. What does that mean? Essentially the FED is taking a gun, placing it to the temple of conservative American's who would be savers and saying borrow, spend, stimulate the economy. Your money is going to get nothing sitting in savings so take risk buying riskier assets. It is a failed cattle drive and the cowboys are making one last effort to prod the cattle in the direction they want to go. If American's get on bored, this will work. Investors and individuals will start grasping for risk and our next fear will be inflation twelve to twenty four months from now. If American's say "f you," I want to stay tightly bound in my bunker then this will be the beginning of the end. I don't know and would be a moron if currently I thought I did.
The real danger is unintended consequences. You could see the dollar start going into full crash mode (I personally don't think is going to happen). You could have the W economy I referenced in another post which would wipe out everybody who was short as the market rallied and inflation picked up for months or even longer before once again wiping out all the long investors once you rolled over. You could have our international lenders say enough is enough and stop lending us money (that goes with the dollar collapse above). You could start another large spike in commodities, especially gold, as investor flee to hard assets. You could have foreign countries take action trying to destroy the U.S. actions. Look at the YEN today. It surged. Is Japan going to sit by while they become more uncompetitive as the U.S. government devalues their currency? Many unknowns.
One thing I think is fairly certain is this will cause the current rally to continue for the foreseeable future. I have been saying buy on dips for several weeks and think this reconfirms it. I now think you will see 1000 on the S&P before you see 850 again. Think of all the bad news in the last two weeks that could not drive the markets down. The markets want to rally and this will add to the excuse needed to rally. MOST IMPORTANTLY I think you must remain small. There is no need to be a hero with so many ways this can play out. There is the possibility that the investors will step back and say oh ****, the FED can't do anything more, we are screwed, sell sell sell.
I don't think you will have an idea of whether this FED missile did its deed until later January to mid February at the earliest. Six months to a year ago my response to the bulls clamoring to buy stocks was that credit tightening doesn't show up for nine months just like credit easing doesn't show up for nine months. Bulls like to forget this when it is working against them. As a bear I don't want to forget it on the other side of the coin. The action of the Treasury and the FED in the last 3 months has been unprecedented. It is being combated with further tightening in the private market but regardless this is alot money the government is throwing into the financial system and it will take 6 to 9 months for it to work if it were to work. This is the W economy I have been referring to.
Once again I don't know the outcome of all this. My personal opinion is that you can't change the inevitable. You can change the way inevitable looks, you can postpone, but in the end you will end up at the exact same spot. What I mean by that is the world is headed for a once in 50 to 100 year slowdown and the FED can change the way the inevitable looks but in the end can't change the inevitable. People will still crawl into their bunkers as more jobs are lost and excess capacity in all industries is taken out through the capitalism destruction process. You may have massive inflation in the interim but if the system is broken and needs to be purged it will purge itself (Germany after WWI) What is less clear to me is what it looks like in the interim. Stubborn bears could be wiped out in the next few several months if the FED causes a return to risk taking.
The interview I referenced above. I highly recommend it:
What it shows is that next year, 2009, there will be a massive bulge in the value of bonds issued by European companies that have to be repaid.
Or, to put it another way, about $1000bn of "old world" companies' borrowings in the form of tradable debt has to be paid back during the next 12 months - with something like $800bn of this owed by financial companies and $200bn by non-financial companies.
Monday, December 15, 2008
I looked at a random blog that I never looked at before and it had some random videos of an interview from many years ago of the late Richard Feynman, a famous physicist and Nobel Laureate. I started watching the videos and found them fascinating. Has nothing to do about investing but at the same time I find they have everything to do about investing. The production is called "The Pleasure of Finding Things Out." It is split up into 6 videos. The first three I found much more insightful than the second three. He talks about how his father taught him things and how he learned algebra which was much more different than the way most kids learned algebra. That he understood the ultimate goal of algebra was to figure out what x was not the process of figuring out what x was which is what the schools taught. In the videos he talks about doing things for the fun of it and the prize is not honors (he despises honors) but rather the pleasure of finding things out.
Anyway I recommend these videos.
Below is a paragraph on who Richard Feynman was from Wikipedia.
Richard Phillips Feynman (IPA: /ˈfaɪnmən/; May 11, 1918 – February 15, 1988) was an American physicist known for the path integral formulation of quantum mechanics, the theory of quantum electrodynamics and the physics of the superfluidity of supercooled liquid helium, as well as work in particle physics (he proposed the parton model). For his contributions to the development of quantum electrodynamics, Feynman was a joint recipient of the Nobel Prize in Physics in 1965, together with Julian Schwinger and Sin-Itiro Tomonaga. Feynman developed a widely used pictorial representation scheme for the mathematical expressions governing the behavior of subatomic particles, which later became known as Feynman diagrams. During his lifetime and after his death, Feynman became one of the most publicly known scientists in the world.
Industrial production is plunging around the world as demand dries up. China’s electricity output fell by 9.6 percent in November from a year earlier, today’s figures showed. Pig- iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.
Saturday, December 13, 2008
In the bleakest stock market of the past 70 years, when hedge funds and 401(k)s alike have cratered, few people are smiling. But short-seller Jim Chanos, whose fund is up 50 percent, is having the time of his life.
Was able to do some hunting with a couple of buddies. Bagged a giant hog, quail, and a good management buck. Combine that with a little "Band od Brothers", two stepping, and some fun fellowship and it was a fun few days.
I followed the markets sporadically throughout the week but what has amazed me more than anything getting back was the depth of bad news compared to the market action. Wow, just flipping through normal web sites I monitor it looks like a few bombers dropped a few major explosives on the economy. Yet, the NASDAQ was up over 1% during the week and the DOW and S&P were close to break even. We continue to be in rally mode and pyschological framework needed for these bear market rallies. I don't know if I have seen so much bearisness in my life. I am also very bearish but just think we still have several weeks or months for the markets to grind higher. Friday was a perfect example. What could have looked more bleak? At midnight Thursday night futures were down hundreds of points. All day we grinded higher and finished higher on the day. It is incredible market action and points in my mind to continued rally mode. 850 is your mark on the S&P. Markets weren't able to break down below it on Friday. I have been saying for several weeks that buying on dips or hedging your short book has been the way to go. Not seeing anything that changes that.
I have many emails to go over which I am about to get working on. If you sent me something that I am supposed to respond to and don't respond in the next 24 hours please email it again.
Sunday, December 7, 2008
Friday, December 5, 2008
Wednesday, December 3, 2008
The French government's plan to shore up the capital position of France's six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.
The French government reacted furiously to the Commission's argument. One senior official described it as "ridiculous" and "stupid" because it would exacerbate the credit crunch - the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.
Tomorrow and Friday may be the two most important days for the markets for the month of December and will go along way to confirm whether we have seen the 2008 lows. Tomorrow is huge for Europe which has some major economic data coming out and central bank rate cuts forthcoming. How big those cuts will be nobody knows. Friday is the U.S. jobs report of course. We get through both and the GM hearings with the markets above 800, especially above 850, and you might be able to tie a ribbon on 2008. Of course things have constantly been coming from left field so who knows.
During the day there was a stupid leak by the National Association of Realtors concerning a supposed plan for pushing down 30 year fixed rate mortgages to 4% to 4.5%. The reason it is stupid is because apparently it is a long way from happening (it was a leak to put pressure on the Treasury). Secondly, it once again doesn't address the true problem in housing, which is foreclosures. I think eventually we will get to 4.5% and if you are not concerned about job security, house appreciation, but just looking for a good home it will be a great time to lock in 30 year mortgage rates.
Tuesday, December 2, 2008
Basic conclusion from above:
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well.
Monday, December 1, 2008
800 is still my number. This pullback was natural, though dramatic and not something I expected in one day. If we break 800 all bets are off. Goes back to something I said on Wednesday (maybe Tuesday) that if your buying at the close you got it backwards. You could not be buying last week Wednesday or Friday. You had to be selling or sitting tight. Today I bought a little of a name I like on the long side. Do opposite what you emotionally want to do.
Tomorrow is going to be interesting. This pullback if even violent was natural. Below 800 and I think the game starts changing. I am not trading. My purchase today as small as it was, is intended for the long term. We are in no man's land in good risk reward trades.
As an analyst, it is my job to do fundamental research and call it as I see it, and my bailiwick is financials. My outlook has been negative for over a year and, technically, I have been "right" on my calls. Seeing massive capital destruction has brought me no pleasure, but unfortunately I see little on the horizon that would change my outlook. In fact, after observing the US economy so derailed, I feel that I must act as a citizen of this great country to attempt to offer solutions to this economic train wreck we are all involved in.
First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers.
She goes on and gives four recommendations on how to help the situation.
Below is a bloomberg article that came out today mentioning some concerns about Switzerland.
An isolated European country with an economy geared toward finance and winter sports is no longer a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.
Even Switzerland is wondering if it’s immune to the forces ravaging Iceland.
The franc has tumbled against the dollar.