An interesting interview with George Soros. He is putting alot of emphasis on the G20 meeting which I was sort of considering a non event. He is expecting that it is probable that nothing will come from it. Agree there.
The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”
If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”
I fail to understand why the G20 is a make a break occasion because it seems so worthless (just a bunch of bureaucrats playing politics) but Soros would know better than I.
Tuesday, March 31, 2009
Monday, March 30, 2009
Market Stumble
Today ended up being pullback Monday. No real surprise after two monstrous weeks. The market pundits will put the blame on numerous reasons but my guess is no matter what the market would have pulled back today. This week could continue to prove tough. I still wouldn't be surprised to see the 740 to 750 area which has sort of been my boogie on a pullback. I still don't think this bear market bounce is done with but we shall see.
Thursday is the much anticipated scam release, whoops, I mean FASB 157 announcement on the probable change of accounting rules for the banks. It is possible the banks will have some massive "gains" to book if they have their way.
Interesting route the government is taking with the automakers. I have a suspicion Paul Volcker is involved and taking the hardline (unlike the Geithner and Summers and the other bank cronies). My understanding is the economic advisory team is heavily involved which Paul Volcker is in charge of. Bankruptcy and warranty guarantees makes sense though I am not holding my breath that the government will figure out how to mess it up somehow before it is over with. Actually the auto space is the one area of the economy I think that looks pretty favorable over the next twelve months. The run rate on car purchases is way way to low. I think at the last few months purchase rate America would be replacing the cars every 27 years which is obviously not sustainable. This tax break that is being proposed could also cause some pent up demand to come forward (like me). In general, I don't see this as a big negative for the market if handled correctly and this is one of the few areas it looks like the government is handling correctly (x the billions we already put down the rat hole with the companies). Said differently, I don't see it as a systemic risk to the market. Yes some jobs will be lost, salaries coming down, but once the uncertainty blows over of exactly what is going to happen, I think it will become quickly a non issue. In fact, buying some speculative calls or leaps on auto suppliers may even be a bit interesting.
Thursday is the much anticipated scam release, whoops, I mean FASB 157 announcement on the probable change of accounting rules for the banks. It is possible the banks will have some massive "gains" to book if they have their way.
Interesting route the government is taking with the automakers. I have a suspicion Paul Volcker is involved and taking the hardline (unlike the Geithner and Summers and the other bank cronies). My understanding is the economic advisory team is heavily involved which Paul Volcker is in charge of. Bankruptcy and warranty guarantees makes sense though I am not holding my breath that the government will figure out how to mess it up somehow before it is over with. Actually the auto space is the one area of the economy I think that looks pretty favorable over the next twelve months. The run rate on car purchases is way way to low. I think at the last few months purchase rate America would be replacing the cars every 27 years which is obviously not sustainable. This tax break that is being proposed could also cause some pent up demand to come forward (like me). In general, I don't see this as a big negative for the market if handled correctly and this is one of the few areas it looks like the government is handling correctly (x the billions we already put down the rat hole with the companies). Said differently, I don't see it as a systemic risk to the market. Yes some jobs will be lost, salaries coming down, but once the uncertainty blows over of exactly what is going to happen, I think it will become quickly a non issue. In fact, buying some speculative calls or leaps on auto suppliers may even be a bit interesting.
Friday, March 27, 2009
Highway Bound
On the road for the next day or two. Hope everyone has a good weekend. Next week will be very interesting with the end of the quarter and what could happen if the latest buying was just window dressing. Today was the lowest volume day of the month so not much conviction. I still think we are in bear market bounce mode though would not be surprised to see a sell off to that 750 area in the first couple of weeks in April. Should be interesting to see how it plays out.
Thursday, March 26, 2009
Blood Curling Screams
Those blood curling screams you hear are short sellers on the wrong side of the current trade. Another brutal day of the market working against the shorts. Today we surpassed the biggest rally we have had since the bear market began in 2007. In November we had a rally of 24.22%. Today we are right at 25%. I personally think we still have alot more to go on the upside. I also personally think we have seen an absolute low without a major systemic event. There are two problems with that statement. One, systemic events are inherrently unpredictable but I would say we have a very high probability of having one - either in Europe or the insurance industry. The second problem with that is if we have one, there is no way to guess on timing. Personally I would guess summer to early fall.
I heard a disturbing stat today. Apparently the entire short interest in the NYSE went up 10% from the previous reading. They measure it twice a month and this was the mid month March reading. To me this means that alot of people tried to call the top to early and that alot of the shorts have not gotten squeezed out. More evidence of plenty of buying pressure that could continue to push the markets higher.
Famed short seller Doug Kass had a great write-up on Why the Bears are Wrong where he continues to lay out his case that the low in March will be a likely generational low. Once again I would agree with him without another systemic event. To repeat myself I would say historical precendent would indicate a high likely probability of another systemic event.
In summary, 10 out of 12 factors (including our newest, market internals) on my watch list are in an improving mode. Though many variables are currently accorded relatively low grades and the outlook remains debatable, the delta (rate of change) in almost my entire watch list is improving and flashing a green light for the U.S. stock market.
A classic "wall of worry" is being reinforced by an overwhelming consensus that the recent advance was a bear market rally. Moreover, the negative chatter appears loosely constructed and fails to credibly argue against the salutary effect that $4 trillion of stimulus will have on the domestic economy.
and
While it is unrealistic to expect a straight up move, I am growing increasingly confident in my variant and optimistic view that the early March low was not only a yearly low but, quite possibly, a generational low.
One of the 2 factors that is not signaling the all clear for Mr. Kass is maybe the most important one, the debt markets. Mr. Kass fully recognizes this and it worries him. Something I am following very closely the last few days. A good summary can be seen here in this WSJ article.
If there really are signs of financial recovery, nobody told the bond market. Treasury.....But credit markets have hardly budged. Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but now have stalled, with spreads about four percentage points over Treasurys, based on Markit iBoxx indexes. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank-bond spreads remain at their widest levels since Lehman Brothers collapsed.
This cannot be ignored but worlwide there are signs of life. I would just guess somewhere in the road ahead the life may just scquechled by an unpleasent surprise as the unwind continues.
I heard a disturbing stat today. Apparently the entire short interest in the NYSE went up 10% from the previous reading. They measure it twice a month and this was the mid month March reading. To me this means that alot of people tried to call the top to early and that alot of the shorts have not gotten squeezed out. More evidence of plenty of buying pressure that could continue to push the markets higher.
Famed short seller Doug Kass had a great write-up on Why the Bears are Wrong where he continues to lay out his case that the low in March will be a likely generational low. Once again I would agree with him without another systemic event. To repeat myself I would say historical precendent would indicate a high likely probability of another systemic event.
In summary, 10 out of 12 factors (including our newest, market internals) on my watch list are in an improving mode. Though many variables are currently accorded relatively low grades and the outlook remains debatable, the delta (rate of change) in almost my entire watch list is improving and flashing a green light for the U.S. stock market.
A classic "wall of worry" is being reinforced by an overwhelming consensus that the recent advance was a bear market rally. Moreover, the negative chatter appears loosely constructed and fails to credibly argue against the salutary effect that $4 trillion of stimulus will have on the domestic economy.
and
While it is unrealistic to expect a straight up move, I am growing increasingly confident in my variant and optimistic view that the early March low was not only a yearly low but, quite possibly, a generational low.
One of the 2 factors that is not signaling the all clear for Mr. Kass is maybe the most important one, the debt markets. Mr. Kass fully recognizes this and it worries him. Something I am following very closely the last few days. A good summary can be seen here in this WSJ article.
If there really are signs of financial recovery, nobody told the bond market. Treasury.....But credit markets have hardly budged. Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but now have stalled, with spreads about four percentage points over Treasurys, based on Markit iBoxx indexes. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank-bond spreads remain at their widest levels since Lehman Brothers collapsed.
This cannot be ignored but worlwide there are signs of life. I would just guess somewhere in the road ahead the life may just scquechled by an unpleasent surprise as the unwind continues.
Wednesday, March 25, 2009
Warning Shots
I look for little things that could mean very big things in the future. The scent of trouble. Sometimes it develops and sometimes it doesn't. Today there were two things that caught my eye that smelled of potential trouble though they don't reek as of yet.
First was the the U.K. Bond Auction Failure.
The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.
and
“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”
The second piece of news that caught my eye was the ousting of the Czech government in Eastern Europe. This weakened the Koruna and creates uncertainty once again.
The rally in the Czech Koruna, Europe’s best performing currency in the past month, may crumble after Prime Minister Mirek Topolanek lost a vote in Parliament, ousting his government.
The Koruna weakened as much as 0.6 percent to 27.300 per euro today, eroding its 5.8 percent gain in the month since Feb. 24, and dropped 3.1 percent against the dollar in the past two days, the biggest decline in emerging-market currencies.
First was the the U.K. Bond Auction Failure.
The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.
and
“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”
The second piece of news that caught my eye was the ousting of the Czech government in Eastern Europe. This weakened the Koruna and creates uncertainty once again.
The rally in the Czech Koruna, Europe’s best performing currency in the past month, may crumble after Prime Minister Mirek Topolanek lost a vote in Parliament, ousting his government.
The Koruna weakened as much as 0.6 percent to 27.300 per euro today, eroding its 5.8 percent gain in the month since Feb. 24, and dropped 3.1 percent against the dollar in the past two days, the biggest decline in emerging-market currencies.
Monday, March 23, 2009
Financial Panic - On the Upside
We broke 800, faster than I thought we would. I figured there were a couple of days left of consolidation. Bulls and Bears hate days like this (at least both should). It is as much mindless panic on the upside as it is on the downside and impossible to really to be apart of (or at least I should say you should avoid being apart of it). If your rushing in orders today to initiate new positions, I think your doing exactly the wrong thing. I did not place a trade today, I barely even looked at the market (I worked out, read some, and caught up on some mail). Let the madness and instability settle. The spark for this rally was of course the revealing of the Geithner plan which should be a tell in itself that this rally is not based on fundamentals. Regardless of whether this plan will be successful, after all the other plans that were tried failed, will not be known for months or even over a year. It is inherently unknowable whether this plan will work. I have extreme doubts and place the probability pretty low but I disagree with Nobel winner Krugman that it has zero chance of succeeding (there are other Nobel winners who think there is high probability of success). The key will be two fold. Private capital willing to come in and banks willing to sell at agreed upon prices. Of the two, I think the first actually is the least likely. I come up with little one liners when people ask my opinion that sort of give away what I really feel about the situation (close to a month ago it was S&P 900 before 600, though I was almost to early and thought we may hit 600 sooner than I thought) before qualifying it with other possibilities. Today the one liner was that at best the plan will fail and at worst it will be money laundering. It makes the AIG bonuses look like momma's apple pie if you start digging back the onion on what this could end up meaning and who will benefit. This post at naked capitalism is a must read. In actuality this could hypothetically work and the money the tax payers lose would be much smaller if it solved the problem in the entire world and we are back to positive economic growth and everything fixes itself and we grow out of our problem. I just put the probabilities of that to be very very low.
Even if you think we are about to enter the next era and are full of hope about the Geithner plan, I caution you to look at the debt markets. They moved up, a little, but comparatively the move was tepid and in some spaces almost non existent. Investment grade debt, junk debt, abx, cmbx, they all improved, but very little. I heard, have not been able to confirm, that the CDS on banks tightened only slightly despite financials equities moving up 16.5% (as defined by the XLF). So basically the debt markets yawned at Geithner's plan while the equity markets reacted in mass hysteria.
Finally, to wrap things up, there is an article in the Financial Times that mentions China is floating the idea of a potential new world reserve currency. This is only a shot across the bow of our ship but I think this will eventually happen in some form or fashion which is why I am very long gold. If this were to occur, you would see a quick deterioration of the dollar and gold climbing so fast it will make your head spin. Like I said, this is nothing yet (I think such a reality is probably years out), but at the same time it is everything.
Even if you think we are about to enter the next era and are full of hope about the Geithner plan, I caution you to look at the debt markets. They moved up, a little, but comparatively the move was tepid and in some spaces almost non existent. Investment grade debt, junk debt, abx, cmbx, they all improved, but very little. I heard, have not been able to confirm, that the CDS on banks tightened only slightly despite financials equities moving up 16.5% (as defined by the XLF). So basically the debt markets yawned at Geithner's plan while the equity markets reacted in mass hysteria.
Finally, to wrap things up, there is an article in the Financial Times that mentions China is floating the idea of a potential new world reserve currency. This is only a shot across the bow of our ship but I think this will eventually happen in some form or fashion which is why I am very long gold. If this were to occur, you would see a quick deterioration of the dollar and gold climbing so fast it will make your head spin. Like I said, this is nothing yet (I think such a reality is probably years out), but at the same time it is everything.
Athletes Going Broke - In Good Times and Bad
Fasicinating article in SI Valut about big name athletes who are constantly filing chapter 11 despite making millions. Really has nothing to do with the current market but a fascinating read (at least for me). It is long and lengthy. Thanks goes to Jody.
In a less public way, other athletes from the nation's three biggest and most profitable leagues—the NBA, NFL and Major League Baseball—are suffering from a financial pandemic. Although salaries have risen steadily during the last three decades, reports from a host of sources (athletes, players' associations, agents and financial advisers) indicate that:
• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
• Within five years of retirement, an estimated 60% of former NBA players are broke.
• Numerous retired MLB players have been similarly ruined, and the current economic crisis is taking a toll on some active players as well. Last month 10 current and former big leaguers—including outfielders Johnny Damon of the Yankees and Jacoby Ellsbury of the Red Sox and pitchers Mike Pelfrey of the Mets and Scott Eyre of the Phillies—discovered that at least some of their money is tied up in the $8 billion fraud allegedly perpetrated by Texas financier Robert Allen Stanford. Pelfrey told the New York Post that 99% of his fortune is frozen; Eyre admitted last month that he was broke, and the team quickly agreed to advance a portion of his $2 million salary.
In a less public way, other athletes from the nation's three biggest and most profitable leagues—the NBA, NFL and Major League Baseball—are suffering from a financial pandemic. Although salaries have risen steadily during the last three decades, reports from a host of sources (athletes, players' associations, agents and financial advisers) indicate that:
• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
• Within five years of retirement, an estimated 60% of former NBA players are broke.
• Numerous retired MLB players have been similarly ruined, and the current economic crisis is taking a toll on some active players as well. Last month 10 current and former big leaguers—including outfielders Johnny Damon of the Yankees and Jacoby Ellsbury of the Red Sox and pitchers Mike Pelfrey of the Mets and Scott Eyre of the Phillies—discovered that at least some of their money is tied up in the $8 billion fraud allegedly perpetrated by Texas financier Robert Allen Stanford. Pelfrey told the New York Post that 99% of his fortune is frozen; Eyre admitted last month that he was broke, and the team quickly agreed to advance a portion of his $2 million salary.
Sunday, March 22, 2009
Bridgewater's Ray Dalio
The article by Fortune on Bridgewater and Ray Dalio is a must read. Does a great job describing the culture of Bridgewater which is I how I think any hedge fund should be run. Also discusses the D-process which Ray Dalio describes as an economic downturn as a result of deleverging instead of the normal business cycle semi controlled by the FED. As a result he is still very bearish. Thanks goes to Pete.
Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn't like to use the term "depression." He thinks it's too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: "D-process."
Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.
This is the money paragraph and what I think hits to the heart of defining Bridgewater's success. This intellectual humility / honesty is very very very rare in the hedge fund world. I hate when people ask me what I think is going to happen or my view on x. No one knows. It is a probability and almost nothing is a 100% probability.
He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."
Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn't like to use the term "depression." He thinks it's too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: "D-process."
Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.
This is the money paragraph and what I think hits to the heart of defining Bridgewater's success. This intellectual humility / honesty is very very very rare in the hedge fund world. I hate when people ask me what I think is going to happen or my view on x. No one knows. It is a probability and almost nothing is a 100% probability.
He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."
Friday, March 20, 2009
AIG Bonus
On the road and had no intention of blogging but had to give a couple of cents on this whole AIG thing. What Congress is doing is close to criminal. It is another indication of the lack of leadership we have in our nations capital. I am not defending the bonuses, they are a travesty but let's consider something. This AIG bonus plan was in legislation. It was approved by the very same Congressional leaders who are "outraged." If they didn't know about it, it is because they didn't read what they voted on!!! Treasury Secretary Tim Geitner claims he didn't know about these bonuses on March 10th. Wrong!!! He was asked about it in Congressional testimony March 2nd!!! (may have been the 3rd I forget). Did you know in this legislation there is like 300 million supposed to be handed out a year from now? Basically, the politicians got caught playing politics and in front of the public with their pants down. As a result they try to distort and confuse the situation stirring everyone up to be mad at AIG when they came up with this bonus plan in constructing the legislation and a majority passed it, Republicans and Democrats. IT IS ASININE what they are trying to do.
Then there is another issue. AIG employees should not have gotten the bonus but what signal do you send to the market and about capitalism when once you give it to them, voted on by Congress no less, you take it back. Rule 1 we voted on not no longer applies but instead we are going to issue rule 2 and stir up hatred at you. Does that help us get out of this situation????
It is a total freak show.
Then there is another issue. AIG employees should not have gotten the bonus but what signal do you send to the market and about capitalism when once you give it to them, voted on by Congress no less, you take it back. Rule 1 we voted on not no longer applies but instead we are going to issue rule 2 and stir up hatred at you. Does that help us get out of this situation????
It is a total freak show.
Thursday, March 19, 2009
A View on China
I found this writeup in the The Atlantic totally fascinating. I agree with the general premise and that is China should be compared to America during the Great Depression more so than Japan in the 90s or the Soviet Union in the 80s. Paints a pretty bleak picture for China in the short term (though it also contradicts itself a couple of times). I disagree with some peripheral conclusions (like it was worse for the United States than Europe during the Great Depression, I don't believe that to be the case) but many things to ponder. It is lengthy but I highly recommend it. Thanks goes to Peyton.
By the way, early tomorrow morning I hit the road again. So I will be out and traveling. March has been a busy month.
China's Way Forward
You never know which statistics to believe in China, but in January a local official in Dongguan told me that at least 1 million factory workers had recently lost their jobs within five miles of where I was, and probably another million in nearby manufacturing areas of Guangdong province.
and
In proportional terms, today’s China is five times as reliant on foreign customers to create domestic jobs as America was in 1929. So unless China can find a way to keep selling when its customers have stopped buying, it will face a proportionately greater employment shock.
By the way, early tomorrow morning I hit the road again. So I will be out and traveling. March has been a busy month.
China's Way Forward
You never know which statistics to believe in China, but in January a local official in Dongguan told me that at least 1 million factory workers had recently lost their jobs within five miles of where I was, and probably another million in nearby manufacturing areas of Guangdong province.
and
In proportional terms, today’s China is five times as reliant on foreign customers to create domestic jobs as America was in 1929. So unless China can find a way to keep selling when its customers have stopped buying, it will face a proportionately greater employment shock.
Wednesday, March 18, 2009
Kudlow and Laffer on Today's Fed Action
I am not a Kudlow fan, nor am I an Art Laffer fan. Both tend to be cheerleaders but I thought this Kudlow video was very good. The issues they bring up are the ones that should be tossing around in investors brain. Don't assume their right on their conclusions. Form your own conclusion which may or may not correspond with theirs. It should be the area of focus.
A Rally to Behold
This rally has been maybe the biggest rally since this whole thing started. The entire S&P 500 is basically up 20% in the last 7 trading days. The financial index (XLF) is up 50%!!! It has been monstrous and caught alot of people off guard. You could sense through the tape the traders desperately trying to get long exposure and get out of shorts. We held the 800 to 805 region today just like I thought we would and pulled back. My guess is the next 20 points in the S&P 500 will be lower not higher but the psychology has changed and outside a major event I think we are headed higher after a likely pullback. The FED is now the hero, not the goat. The banks are now on the way to prosperity not bankruptcy. The consumer will get a 2nd wind not dig a hole for a grave. The turnaround in market chatter has been remarkable. The thing is, there is no free lunch. The FED printing money has massive costs. Take banks. The yield curve flattened dramatically today. Well that takes away a large amount of bank profits (which, up until today, was the bull catalyst for banks). Greatly weakens the dollar which causes outside countries (remember those were the ones worst off than we were until today) to be more uncompetitive. NIKKEI is essentially flat right now after a huge surge in the Yen which hurts Japanese profitability. Resource prices will go up if we print more money. Does the FED then tighten 9 months out even if the economy is still weak? If prices start really rising without with no corresponding economic growth, it will cause the economy to be worse off. Then your really screwed. Printing tons of money, creating higher prices, and no economic growth which means everyone is worse off. I have been screaming about this for months.
From an equity investor standpoint, it makes it really really difficult. If you get a depression inflation type of scenario (something Bridgewater thinks is very possible) you have intrinsic valuations going down in absolute terms but going up in currency terms. The German stock market after WW1 skyrocketed with inflation before finally just getting wiped out. From 1914 to 1922 the stock market rose 89x from 100 to 8900. In January 1923 the German stock market was 21,400. In November (11 months later) it was 26,890,000, a rise (if my math is right) of 125,654%. I am not saying we are going to see anywhere close to that type of inflation (Let's pray we don't) but take some iteration of that. If we had 1/50 of that (even 100th), you would have large appreciation in the stock market from inflation even as intrinsic value drops. As an investor how do you play that?
Let me be clear. I don't think this starts tomorrow and I don't think we need to get in a panic but one must be watching very carefully the signs of large increases in prices while economic activity does not budge. I will continue my bullish chant on gold as something you want to own over the next 3 to 5 years.
From an equity investor standpoint, it makes it really really difficult. If you get a depression inflation type of scenario (something Bridgewater thinks is very possible) you have intrinsic valuations going down in absolute terms but going up in currency terms. The German stock market after WW1 skyrocketed with inflation before finally just getting wiped out. From 1914 to 1922 the stock market rose 89x from 100 to 8900. In January 1923 the German stock market was 21,400. In November (11 months later) it was 26,890,000, a rise (if my math is right) of 125,654%. I am not saying we are going to see anywhere close to that type of inflation (Let's pray we don't) but take some iteration of that. If we had 1/50 of that (even 100th), you would have large appreciation in the stock market from inflation even as intrinsic value drops. As an investor how do you play that?
Let me be clear. I don't think this starts tomorrow and I don't think we need to get in a panic but one must be watching very carefully the signs of large increases in prices while economic activity does not budge. I will continue my bullish chant on gold as something you want to own over the next 3 to 5 years.
Cramer - Bernanke is the Greatest Guy in the World
Good grief. Jim Cramer took a shot of andreline and now thinks Ben Bernanke is on the level of George Washington, Winston Churchill, Michael Jordon, even God. Quote from the video from Cramer: "In Ben Bernanke I trust" We should see a nice shot of more optimistic sentiment readings as we go from the end of the world is coming to all is saved and we will all become rich. I have seen ridiculous but this Cramer video is up there with the best of them.
Shot Heard Around the World From Helicopter Ben's Fighter Apache
It wasn't a cannon at Lexington and Concord but it might as well have been. It came from not that far away. The Fed surprised most people announcing they would buy $300 billion in long term Treasury's to help the economy recover. Basically the printing presses have started. Wait a minute. Wasn't Bernanke on 60 minutes just a few days ago saying everything is fine and the U.S. economy would be out of a recession by the end of 2009? This is drastic maybe even desperate action by the Fed and as the adage goes actions speak louder than words.
From a trading perspective this is actually setting up nicely. You have some major resistance between 800 and 805 on the S&P. We have gone just straight up the last two weeks. I would not be surprised to see some sort of correction back to the 740 level. This should be an exhaustion buying end today (or maybe in the first or second hour tomorrow morning) before I thin we have a very high probability to pull back. I think we will end up breaking 800 before this bear market rally is done but just like we can't go straight down, we can't go straight up. Of course it is never easy. The option expiration is on Friday and you have the end of the quarter on Tuesday (which I believe in countries like Japan is actually the end of fiscal year). Both of those could throw wrinkles in everything.
Gold had a massive reversal!!! Down close to $30 a ounce it is now up over $10 an ounce.
The race to debase. Here we go.
From a trading perspective this is actually setting up nicely. You have some major resistance between 800 and 805 on the S&P. We have gone just straight up the last two weeks. I would not be surprised to see some sort of correction back to the 740 level. This should be an exhaustion buying end today (or maybe in the first or second hour tomorrow morning) before I thin we have a very high probability to pull back. I think we will end up breaking 800 before this bear market rally is done but just like we can't go straight down, we can't go straight up. Of course it is never easy. The option expiration is on Friday and you have the end of the quarter on Tuesday (which I believe in countries like Japan is actually the end of fiscal year). Both of those could throw wrinkles in everything.
Gold had a massive reversal!!! Down close to $30 a ounce it is now up over $10 an ounce.
The race to debase. Here we go.
Fund Managers Optimism at 3 Yr High????
You have got to be kidding me. Weren't we just two weeks ago staring at the abyss and the first signs of revulsion starting to finally seep in. Oh no. The hope lives. The unabated optimism thrives.
Fund managers most optimistic in three years
Fund managers are their most optimistic about the outlook for the global economy since late 2005, thanks to renewed hopes for growth in China, though risk appetite has deteriorated, according to Merrill Lynch's monthly survey.
Are you kidding me?? This China hope is a joke. China's economic indicators are still plummeting and there is no way China's spending can come close to replacing the lost wealth or lost purchasing power of Americans. After some steel inventory build up, Chinese steel prices are once again going down. China will not save the world, of that I am confident of.
The number of managers expecting economic growth over the next 12 months exactly balanced the number expecting a further contraction, the survey found. That compares to a net 24% expecting a contraction at the start of the year.
Exactly what has changed since Jan 1st? I think the picture has gotten more bleak as more wealth has been lost since January 1st.
Rather amazing how the conditioning to look for a rebound drilled in since 1982 is taking so long to get beaten out of society's mind.
Fund managers most optimistic in three years
Fund managers are their most optimistic about the outlook for the global economy since late 2005, thanks to renewed hopes for growth in China, though risk appetite has deteriorated, according to Merrill Lynch's monthly survey.
Are you kidding me?? This China hope is a joke. China's economic indicators are still plummeting and there is no way China's spending can come close to replacing the lost wealth or lost purchasing power of Americans. After some steel inventory build up, Chinese steel prices are once again going down. China will not save the world, of that I am confident of.
The number of managers expecting economic growth over the next 12 months exactly balanced the number expecting a further contraction, the survey found. That compares to a net 24% expecting a contraction at the start of the year.
Exactly what has changed since Jan 1st? I think the picture has gotten more bleak as more wealth has been lost since January 1st.
Rather amazing how the conditioning to look for a rebound drilled in since 1982 is taking so long to get beaten out of society's mind.
Tuesday, March 17, 2009
Meredith Whitney - Banks Worse off in 2009 than 2008
Meredith Whitney was on CNBC this morning. A video well worth watching. Thanks goes to Pete.
Update:
More Meredith Whitney here and here.
Update:
More Meredith Whitney here and here.
Monday, March 16, 2009
Gold and Dollar Are Friends
Interesting article in the WSJ yesterday entitled Dollar, Gold Are Suddenly Inseparable. The article ponders the recent correlation of gold and the dollar since historically they have been uncorrelated. I have been talking about the liklihood of this as gold moves back into a currency role. I think it also shows their may be statistical deflation but actual currency inflation. It is the stealth inflation that you can't see because prices are actually moving down but how much more would prices move down if money supply wouldn't be increasing? One possible measure is to see how gold is moving up in relation to the dollar even as the dollar is also strengthening. Anyway, interesting read though the article just dances around possible causes.
For the better part of this decade, the price of gold and the value of the U.S. dollar tended to move reliably in opposite directions -- when gold went up, the dollar went down, and vice-versa. The reasoning is that a weaker dollar can feed into worries about inflation. That in turn prompts investors to turn to gold, a hard asset in limited supply whose value typically rises in inflationary times.
For the better part of this decade, the price of gold and the value of the U.S. dollar tended to move reliably in opposite directions -- when gold went up, the dollar went down, and vice-versa. The reasoning is that a weaker dollar can feed into worries about inflation. That in turn prompts investors to turn to gold, a hard asset in limited supply whose value typically rises in inflationary times.
Sunday, March 15, 2009
Jim Cramer Gets Owned on the Daily Show
Finally got around to watching the much anticipated Jim Cramer Daily Show interview. Several days ago Jon Stewart completely tore apart CNBC. I posted the link previously. Well Jim Cramer wanted to come on and respond. Part 1, 2, and 3 are all available for your viewing pleasure. First time I have ever seen Jim Cramer get schooled and put in his place. Part of the reason is, he really doesn't have an argument. Cramer is part of the problem and have speculated more than once that gun that supposedly goes off when we are at a market inflation adjusted bottem is when Mad Money is canceled from the CNBC broadcasting line up. Anyone who actually follows Jim Cramer's stock picks are wanting to lose there money. The only time I have traded off Jim Cramer was literally to go short something he said to go long. Yet, people seem to like to "have fun" when they lose their money and so run to antic jumping Jim Cramer to do it.
I wish I could have read Jim Cramer mind as he was being pounded. I think he realized he bit more off than he could chew fairly quickly. Cramer is like all the other villains in this economic debacle, he just wants to be loved. Greenspan, Bernanke, SEC, Congress, the list goes on, and you can add Cramer don't really want the truth, they really just want to be liked. Being liked is never the way to being heroic. Cramer was in a hurry to cut a deal and get off the Daily Show as he realized this interview was not going to help his likability and drive tv ratings and book sales.
I wish I could have read Jim Cramer mind as he was being pounded. I think he realized he bit more off than he could chew fairly quickly. Cramer is like all the other villains in this economic debacle, he just wants to be loved. Greenspan, Bernanke, SEC, Congress, the list goes on, and you can add Cramer don't really want the truth, they really just want to be liked. Being liked is never the way to being heroic. Cramer was in a hurry to cut a deal and get off the Daily Show as he realized this interview was not going to help his likability and drive tv ratings and book sales.
Zulauf - Major Rally - Than 50% sell off
I believe we have jsut started a pretty major rally. I fall in line with some of Zulauf comments from early last week.
http://online.barrons.com/article/SB123638344892658021.html
Echoing the forecast he made at this year's Barron's Roundtable ("Rocky Road," Jan. 19), Felix, the founder of Zulauf Asset Management in Zug, Switzerland, still believes the S&P 500 will bottom in 2011 in the 400s, down from last week's 680 and a 2007 high of 1,565. But, first, he asserts, stocks are poised for a bear-market bounce from a low this month. It could last two to four months, and boost the S&P 25% to 40%, to roughly 900. (The corresponding level of the Dow industrials would be about 8,750.)
and
By his calculation, "the private sector has to get rid of $8 trillion of debt."
http://online.barrons.com/article/SB123638344892658021.html
Echoing the forecast he made at this year's Barron's Roundtable ("Rocky Road," Jan. 19), Felix, the founder of Zulauf Asset Management in Zug, Switzerland, still believes the S&P 500 will bottom in 2011 in the 400s, down from last week's 680 and a 2007 high of 1,565. But, first, he asserts, stocks are poised for a bear-market bounce from a low this month. It could last two to four months, and boost the S&P 25% to 40%, to roughly 900. (The corresponding level of the Dow industrials would be about 8,750.)
and
By his calculation, "the private sector has to get rid of $8 trillion of debt."
Eric Hovde - Already in a Depression
This was from a couple of weeks ago. It is really good video and Eric says some obvious things that Washington somehow doesn't think is obvious. Thanks goes to Pete.
http://www.cnbc.com//id/29510268
http://www.cnbc.com//id/29510268
Banks Mark to Market Actually Few Assets As a Percentage of Total Assets
I have been wondering what percentage of assets are marked to market on banks balance sheet. It is lower than what I even thought.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=aD11FOjLK1y4
Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=aD11FOjLK1y4
Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.
Saturday, March 14, 2009
On the Road
On the road again (have been since Thursday). I am getting behind on emails and other things people are asking about. I'll get to them but first comes St. Patrick's Day Saturday (actual St. Patrick's day is Tuesday)
Thursday, March 12, 2009
A Massive Coming Problem - Insurance Companies
I haven't talked about this topic on this blog, but have had many conversations with many people about the coming insurance crises. The problem is many fold. For one the accounting is mostly mark to historical cost. What that means is that if you buy a bond at par (at 100) and it goes to 70 you still mark it at par. As a result the insurance companies have not been in the spotlight since it isn't screamingly clear that they have issues. This also causes the issue of the problem being bigger than it otherwise would be since it is ignored longer. You also have the issue that the insurers are regulated at the state level, not the federal level. As a result, there is no set designated way for the federal government to bailout the insurers, unlike the banks. Thanks goes to Pete.
http://online.wsj.com/article/SB123681439092901753.html
The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence.
and
Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.
http://online.wsj.com/article/SB123681439092901753.html
The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence.
and
Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.
Wednesday, March 11, 2009
China Flooded With Oil
I heard this on Monday. I wonder what the average price is of the 100 million barrells? I bet like most government purchases, that it is much higher than it should be. Buy high and sell low tends to be the typical government investing mantra. It sounds like they are still buying though.
ww.reuters.com/article/rbssEnergyNews/idUSPEK20879620090309
* China ship exec says strategic oil reserves full up
* First acknowledgement of 100 mln bbls govt inventories
* Urges Beijing to rent floating storage to add to stocks (Adds more analyst comment, corporate reserve, writes through)
and
China plans to build a second-phase strategic reserve that will nearly triple the first batch to 280 million barrels by 2011, and industry executives have said the current storage capacity has already become a hurdle to bringing in more imports.
and
The remark is consistent with recent comments by government officials that China should better use its massive foreign exchange reserve to stock up key commodities from grain to metals to crude oil, and last week Beijing announced that it would boost its budget for stockpiling resources by $10 billion.
and
Together with record high stocks of gasoline and diesel accumulated ahead of last summer's Olympics, the stockbuild also meant Chinese oil demand may have slowed more than it appeared.
ww.reuters.com/article/rbssEnergyNews/idUSPEK20879620090309
* China ship exec says strategic oil reserves full up
* First acknowledgement of 100 mln bbls govt inventories
* Urges Beijing to rent floating storage to add to stocks (Adds more analyst comment, corporate reserve, writes through)
and
China plans to build a second-phase strategic reserve that will nearly triple the first batch to 280 million barrels by 2011, and industry executives have said the current storage capacity has already become a hurdle to bringing in more imports.
and
The remark is consistent with recent comments by government officials that China should better use its massive foreign exchange reserve to stock up key commodities from grain to metals to crude oil, and last week Beijing announced that it would boost its budget for stockpiling resources by $10 billion.
and
Together with record high stocks of gasoline and diesel accumulated ahead of last summer's Olympics, the stockbuild also meant Chinese oil demand may have slowed more than it appeared.
Jamie Dimon Speaks Out
I am back, though only for a few days before I am traveling again. Great trip to Knoxville where I saw and awesome University of Tennessee vs. Alabama basketball game (Bama won at the buzzer) and had a cultural experience watching going to a bluegrass concert at a bar.
A really good 25 minutes video of Jamie Dimon giving a speech. It helped turned the markets around mid afternoon. I am always impressed when he speaks. He bleeds confidence unlike many other Wall St. and Washington zombies.
http://www.cnbc.com/id/15840232?video=1058977582&play=1
Update: An additional 10 minutes of question and answers.
http://www.cnbc.com/id/15840232?video=1059006672&play=1
A really good 25 minutes video of Jamie Dimon giving a speech. It helped turned the markets around mid afternoon. I am always impressed when he speaks. He bleeds confidence unlike many other Wall St. and Washington zombies.
http://www.cnbc.com/id/15840232?video=1058977582&play=1
Update: An additional 10 minutes of question and answers.
http://www.cnbc.com/id/15840232?video=1059006672&play=1
Saturday, March 7, 2009
Traveling
I am on the road in Knoxville Tennessee traveling. Won't be back on the blog until Tuesday, maybe Wednesday.
Today Goldman Sachs got killed on rumors of exposure in Eastern Europe. Supposedly it is not true (at least that is what they are saying). At the end of day the market rallied. Some short covering and it seems like there may have been a coordinated effort among some traders to push the market higher. This was done by circulating old news and making it important news. A bank was bailed out overnight in Spain. Started getting talked about in the last 15 minutes. Then England announced an agreement with Lloyds which I don't really consider news either.
Anyway, pretty weak day after such a horrid week.
Today Goldman Sachs got killed on rumors of exposure in Eastern Europe. Supposedly it is not true (at least that is what they are saying). At the end of day the market rallied. Some short covering and it seems like there may have been a coordinated effort among some traders to push the market higher. This was done by circulating old news and making it important news. A bank was bailed out overnight in Spain. Started getting talked about in the last 15 minutes. Then England announced an agreement with Lloyds which I don't really consider news either.
Anyway, pretty weak day after such a horrid week.
Thursday, March 5, 2009
Daily Show Goes Off on CNBC
This is a must watch clip of the daily show. I was laughing so hard. It is why if you watch CNBC you have to know how to use the station and not use the station. Cramer is a moran when it comes to practical financial advice. He can have a few decent tidbits of info that come from his mouth on the inner workings of Wall St that can be beneficial. Fast Money is horrid if your looking at what to buy and sell. It is a great recap of the day if you don't know what happened in the stock market.
They take a shot a Rick Santelli for his rant on mortgage owners. To be fair, he has been against most if not all of the Wall St bailouts also. It is not as one sided as they make it appear when it comes to Rick. The butt of the joke should have been centered around Charlie Gasparino.
http://www.thedailyshow.com/video/index.jhtml?videoId=220252&title=cnbc-gives-financial-advice
They take a shot a Rick Santelli for his rant on mortgage owners. To be fair, he has been against most if not all of the Wall St bailouts also. It is not as one sided as they make it appear when it comes to Rick. The butt of the joke should have been centered around Charlie Gasparino.
http://www.thedailyshow.com/video/index.jhtml?videoId=220252&title=cnbc-gives-financial-advice
Europe Oblierated
Europe was getting pummelled all day today but in the last hour going into the close it fell off a cliff. German's DAX down 5%, DJ Euro down 4.5%, several others down over 5%.
Relationship in Gold Versus Oil
The trading relationship between oil and gold is well documented. I am betting this relationship breaks down over time (Look at my February 19th posts to understand why).
http://www.thestreet.com/story/10466537/1/when-gold-trades-at-25-times-oil.html
Traders are abuzz about a possible technical relationship between the price of gold and the price of oil.
and
According to the legend, traders should expect a shift in gold and oil prices whenever the price of gold is at least 25 times greater than the price of oil.
and
The chart shows that the price ratio of gold to oil has exceeded 25 times only seven times since 1970. Also, on those few occasions when the gold/oil ratio surpassed 25, it didn't stay there for long. Rather, something happened that quickly pulled the ratio back to normal levels.
and
Schork performed some statistical detective work on the relationship between gold and oil in his newsletter on Wednesday. According to Schork, "the relationship between gold and oil had a historical correlation of 0.2. As the commodity boom took hold over the 2003-2007 time step, their relationship strengthened with a correlation co-efficient of 0.26. Prices were especially strong in 2008, with a correlation coefficient of 0.36, almost double the historical value."
However, the strong correlation between gold and oil broke down along with the global economy last fall.
http://www.thestreet.com/story/10466537/1/when-gold-trades-at-25-times-oil.html
Traders are abuzz about a possible technical relationship between the price of gold and the price of oil.
and
According to the legend, traders should expect a shift in gold and oil prices whenever the price of gold is at least 25 times greater than the price of oil.
and
The chart shows that the price ratio of gold to oil has exceeded 25 times only seven times since 1970. Also, on those few occasions when the gold/oil ratio surpassed 25, it didn't stay there for long. Rather, something happened that quickly pulled the ratio back to normal levels.
and
Schork performed some statistical detective work on the relationship between gold and oil in his newsletter on Wednesday. According to Schork, "the relationship between gold and oil had a historical correlation of 0.2. As the commodity boom took hold over the 2003-2007 time step, their relationship strengthened with a correlation co-efficient of 0.26. Prices were especially strong in 2008, with a correlation coefficient of 0.36, almost double the historical value."
However, the strong correlation between gold and oil broke down along with the global economy last fall.
Wednesday, March 4, 2009
Looking For a Rally....Somewhere
Been scanning the horizon for a true multi week multi month bottom with 15% plus type of rally that seems almost inevitable after weeks of stock selling and it is still not clear that it is coming. I thought it could start this week with some positive resolution coming out of Europe. That dd not happen and instead the reverse occurred and the market has gotten creamed (even after factoring today's rally).
You need something for traders to latch onto for this type of rally. I thought the two most likely candidates would be an European solution (really it would just be a band aide) or a change in mark to market accounting. So far neither have materialized and may not materialize but there is growing evidence that we may be moving that direction.
Europe is working painfully slowly towards there band aide. I think this will get resolved by the IMF not Western Europe. All it will do will be to buy time. It won't fix anything.
This was reported today and got a little buzz.
http://www.reuters.com/article/managementIssues/idUSN0454048120090304
A U.S. House Financial Services subcommittee plans a hearing on mark-to-market accounting rules, which have been blamed for forcing banks to report billions of dollars in write-downs, a source briefed on the matter told Reuters on Wednesday.
The subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.
This is a subcommittee and it isn't until next week. I don't think this will develop into anything quickly.
However, one obstacle is gone and that is the recently departed chief accountant for the SEC who stood strongly opposed to the removal of FAS 157.
http://www.reuters.com/article/americasRegulatoryNews/idUSN0453163720090304
"I think that mark-to-market does help the investor," Hewitt continued. "Mark-to-market brought to focus the problems we have had in our financial institutions much faster."
That describes why the realization of Europe's mess is still ahead of them. Our accounting revealed more than their accounting earlier. American banks raised something like $400 billion in capital before the private markets closed shut. Europe raised very little because "they didn't have a problem." Article continues:
Under the Troubled Asset Relief Program, the U.S. Congress mandated the SEC to complete a study of fair-value accounting.
However, Hewitt said Wednesday the SEC's recent study of fair value accounting was done as "a compromise," and that he believes that politics should be kept out of accounting standard setting. The study, released in December, concluded that mark-to-market accounting was not a major factor in 2008 bank failures.
Influential business groups like the Business Roundtable and the American Bankers Association continue to urge the SEC to suspend or significantly alter mark-to-market accounting.
The coming hearing is probably a direct result of some of those influential business groups.
So I am scanning the horizon for something to call an interim bottom on but not seeing anything yet. Just spec's. Of course it could come from something I am not looking at (alot of buzz on China recently).
You need something for traders to latch onto for this type of rally. I thought the two most likely candidates would be an European solution (really it would just be a band aide) or a change in mark to market accounting. So far neither have materialized and may not materialize but there is growing evidence that we may be moving that direction.
Europe is working painfully slowly towards there band aide. I think this will get resolved by the IMF not Western Europe. All it will do will be to buy time. It won't fix anything.
This was reported today and got a little buzz.
http://www.reuters.com/article/managementIssues/idUSN0454048120090304
A U.S. House Financial Services subcommittee plans a hearing on mark-to-market accounting rules, which have been blamed for forcing banks to report billions of dollars in write-downs, a source briefed on the matter told Reuters on Wednesday.
The subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.
This is a subcommittee and it isn't until next week. I don't think this will develop into anything quickly.
However, one obstacle is gone and that is the recently departed chief accountant for the SEC who stood strongly opposed to the removal of FAS 157.
http://www.reuters.com/article/americasRegulatoryNews/idUSN0453163720090304
"I think that mark-to-market does help the investor," Hewitt continued. "Mark-to-market brought to focus the problems we have had in our financial institutions much faster."
That describes why the realization of Europe's mess is still ahead of them. Our accounting revealed more than their accounting earlier. American banks raised something like $400 billion in capital before the private markets closed shut. Europe raised very little because "they didn't have a problem." Article continues:
Under the Troubled Asset Relief Program, the U.S. Congress mandated the SEC to complete a study of fair-value accounting.
However, Hewitt said Wednesday the SEC's recent study of fair value accounting was done as "a compromise," and that he believes that politics should be kept out of accounting standard setting. The study, released in December, concluded that mark-to-market accounting was not a major factor in 2008 bank failures.
Influential business groups like the Business Roundtable and the American Bankers Association continue to urge the SEC to suspend or significantly alter mark-to-market accounting.
The coming hearing is probably a direct result of some of those influential business groups.
So I am scanning the horizon for something to call an interim bottom on but not seeing anything yet. Just spec's. Of course it could come from something I am not looking at (alot of buzz on China recently).
European Rally - A Plan for the EU
Late afternoon and the financial index is down over 1%, JPM down 8%, Wells Fargo down 11%, GE was down 10% (now 5%). And the market is up over 3%. I think adds evidence that these financials at this point are less important than the media would have you think and not driving the overall market. (several days like this and the markets would follow in sympathy) Europe was off like a rocket today and you can see heavily sensitive European names leading the charge completely ignoring the continued financial chaos.
This may be why though like the U.S. plans it is light on specifics and misses a big part of the issue. Thanks goes to Pete.
http://www.telegraph.co.uk/news/worldnews/europe/eu/4934020/EU-pledges-eurozone-rescue.html
Europe's financial authorities have revealed the existence of a contingency plan to rescue eurozone states at risk of default, giving the first clear assurance that the EU will mount a defence if monetary union comes under speculative attack.
This next part is funny.
Mr Almunia said the probability of a eurozone break-up is "zero", despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. "Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing," he said.
and
The ECB is expected to cut rates from 2pc to 1.5pc on Thursday, and is exploring options for "quantitative easing" along US, British, and Japanese lines.
The ECB is actually getting on board? This next part is very important because nothing is still being done on Eastern Europe.
Mr Almunia's promise of a eurozone bail-out is certain to anger East European leaders. They were denied backing for Hungary's €190bn plan to prop up the region's financial system at an EU summit over the weekend. They were advised to look to the IMF instead for external support.
This may be why though like the U.S. plans it is light on specifics and misses a big part of the issue. Thanks goes to Pete.
http://www.telegraph.co.uk/news/worldnews/europe/eu/4934020/EU-pledges-eurozone-rescue.html
Europe's financial authorities have revealed the existence of a contingency plan to rescue eurozone states at risk of default, giving the first clear assurance that the EU will mount a defence if monetary union comes under speculative attack.
This next part is funny.
Mr Almunia said the probability of a eurozone break-up is "zero", despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. "Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing," he said.
and
The ECB is expected to cut rates from 2pc to 1.5pc on Thursday, and is exploring options for "quantitative easing" along US, British, and Japanese lines.
The ECB is actually getting on board? This next part is very important because nothing is still being done on Eastern Europe.
Mr Almunia's promise of a eurozone bail-out is certain to anger East European leaders. They were denied backing for Hungary's €190bn plan to prop up the region's financial system at an EU summit over the weekend. They were advised to look to the IMF instead for external support.
Tuesday, March 3, 2009
Dominoes Are Falling Faster and Faster
The government avoided a total fiancial collapse in October. Like everything the government has done they may have simply pushed it off not changing the overall projection. More and more links in the chain have become broken. We can add Illinois to the list. Thanks goes to Pete.
http://www.chicagotribune.com/business/chi-mon-illinois-finances-0302-mar02,0,3727667.story
Illinois is on the verge of a financial meltdown, and hard choices will be necessary to contain the economic damage, according to a report from a group of prominent businesses executives.
http://www.chicagotribune.com/business/chi-mon-illinois-finances-0302-mar02,0,3727667.story
Illinois is on the verge of a financial meltdown, and hard choices will be necessary to contain the economic damage, according to a report from a group of prominent businesses executives.
Monday, March 2, 2009
Europe - The World Is Revolving Around It
I got upteen emails or had conversations on why the market was down today. Following our my opinions. Maybe I am wrong but I am going to get on my soapbox because I have been writing about this and investors seem clueless. Everything below is as I see it so this is my qualifier versus the normal qualifiers I would throw in throughout my written dialogue.
There are two big dangers in the market. The biggest and most important is Europe. I don't care how you slice or dice it, this is big!!!! I did a post on Sunday talking about the lack of anything coming from the emergency summit in Brussels. I said because I do not know how politics work in Europe it was unclear to me what really came from the summit but it looked bad. I said you could get up at 2:00 a.m. and you would know how the U.S. markets would trade. If you would have gotten up at 2:00 a.m. you would have seen Europe was down about 2%, at 4:00 am 3%, 6:00 am 4%, and by 10:00 am about 5%. During this whole time the European currencies picked up speed selling off against the dollar. This is the most important thing driving the U.S. and I would argue the world markets. 95 out of 100 years (making the number up but making a point) currencies, and a macro issues with another continent doesn't matter. Now it does. Europe is 30% of world GDP. Without Europe the world economy doesn't go around. There is massive pressure in Eastern Europe as the Eastern Europe currencies collapse. Western Europe lent to Eastern Europe tons of money in the Euro and Swiss Francs not local currencies. As the currencies collapse in Eastern Europe the debts skyrocket in currencies terms because they are priced in foreign currencies greatly increasing the likelihood of default. On top of that, economic activity collapses also increasing the likelihood of default. Western Europe is primarily the nations on the hook which increases the likelihood of a EURO collapse as Western European countries decide if it is every country for themselves (why should Germany bail out Poland?). This creates huge stress on the currencies in relation to the U.S. dollar which creates huge problems for U.S. companies who do business in Europe. I have used this example before. Why is Microsoft going down further? It is cheap on every metric and has a massive cash hoard. I would argue because over 20% of their business comes from Europe and the market is starting to value their European business close to 0 or maybe even less than 0. Why would you value that less than 0? Simply because companies are not going to pull out of Europe but to keep the business going (especially if things really collapse) will cost alot of money. Now extrapolate that across thousands of companies. Checkpoint (CKP) which is cheap cheap but was down 14% today. They do 40% of their business in Europe. Or KSWS which is close to selling for cash but does 50% of their business in Europe. I was listening to a conference call today of an America company who has maybe 20% of their business in Europe and because of currency issues revenue in U.S. dollars was about 4% less than it otherwise would have been because of the EURO and the British Pound. This was at the end of the 4th quarter!!! Look at what the EURO has done since January and February. This is big and I keep preaching it on my blog and I keep getting the question of, well i don't understand, what was the news. The news was Sunday in Brussels. Seeing how the market reacted to interpret the news was all you needed to know!!!! Add on top of that the potential civil unrest and you have a powder keg. Latvia's governing coalition collapsed last week (may been the week before). The country is on the verge of bankruptcy. How many of you know that? My guess is if you said you didn't know that, you are an American. How many of you invest who didn't know that? Normally who gives a jack squat but you have to realize what is important now and all of a sudden it is important not only on its own but because of the warning bells that should go off extrapolating what it means to the rest of Eastern Europe. Sweden has $25 billion U.S. dollars lent to Latvia individuals. Swedbank, SEB, and Nordea (all Swedish banks) are the ones primarily on the hook. Germany has $5 billion lent to Latvia.
This is a link with a short video and write up on Latvia
http://www.euronews.net/en/article/01/03/2009/latvia-on-the-brink-of-collapse/
This is a link that shows which Western European company has exposure to which Eastern European Country.
http://www.ft.com/cms/s/0/ea19fec8-028e-11de-b58b-000077b07658.html
This article sums up Europe's problems. (Thanks goes to Pete for originally giving me the article several days ago). There is also a little video on the left hand side that is decent.
http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs,cs,db,hbc
In relation to this last link I was asked what % of GDP do our banks run. I do not know but the reason it is not relevant is because you have to look at the biggest banks in relation to GDP, not the entire banking sector. Not every US bank is in trouble. Iberia bank was the first bank who paid back the TARP money. Many banks never took TARP money. There are solvent banks. The question is the biggest bank in relation to the country. This is what happened to Iceland. The biggest banks were to big for the country to save. The U.S. also has the advantage (probably unfairly) for being the world reserve currency. This gives us much greater flexibility than Switzerland whose two biggest banks UBS and Credit Suisse could swamp the nation. I was also asked why there is such an emphasis for the statistics of loans, losses, as a percentage of GDP. The reason is because GDP is like a country's income stream. Look at Iceland. When a bank fails and the government takes it over, the balance sheet is essentially merged with the country's balance sheet. If you have total assets of 10 after taking over a massive bank and total GDP of 2 you have all of a sudden created potential massive leverage for the country if the assets go bad. There is a limit to claims on tax revenue to pay back this debt. When it passes the tipping point the trust in the currency becomes broken and it collapses.
I was also asked why this isn't getting coverage. The answer is it is. IT IS EVERYWHERE except in the U.S. Americans are self centered, myopic, narrow brained people. We have years of being mentally conditioned that we determine what will happen. 99% of time that is true. 2008 the U.S. was ground zero. 2009 Europe is ground zero. I said this two months ago in my letter, on this blog, and in conversations. I watched CNBC World last night. Every 10 minutes the conversation was on Europe. CNBC America it was barely mentioned. Asian papers, European papers, it is making headlines. In the U.S maybe the third page. Somewhere in December I realized where the story was shifting towards Europe. My daily routine changed. I no longer started my morning reading U.S. blogs and the WSJ. I now start the morning reading the Guardian business section, UK Times, European blogs, and recently a few free Central European Online articles. If I get to the WSJ, it is after dinner because frankly, there news is not really that important currently.
If you watched CNBC today, all you heard was AIG. CNBC is horrific in identifying cause and affect. If you watch CNBC realize this. AIG means jack squat in its own right. This does lead to the second big danger and that is the implosion in the U.S. insurance industry. Like Europe, this is a real danger. Insurance companies receive premiums for policies and then invest them. As stocks collapse along with other asset classes, the insurance companies who eventually have to pay claims have less and less money to pay those claims. This could be deadly. The only way AIG means jack squat is if you can glean any information for what is happening to the rest of the industry.
One last tidbit. As the day wore on you could see that the selling I think eventually came because of margin calls. You could see this in gold. I got an email from a friend that said Dennis Gartman (who is a trader) said he was selling gold because margin calls in other assets would force funds to liquidate gold holdings. Gold was up all last night and most of the morning until big selling pressure took over. I believe any dips in gold should be looked at as opportunity though margin selling could accelerate and you could see gold down 10% or $100. This doesn't change the fundamental story.
Okay, done with my soapbox. Have a good evening.
There are two big dangers in the market. The biggest and most important is Europe. I don't care how you slice or dice it, this is big!!!! I did a post on Sunday talking about the lack of anything coming from the emergency summit in Brussels. I said because I do not know how politics work in Europe it was unclear to me what really came from the summit but it looked bad. I said you could get up at 2:00 a.m. and you would know how the U.S. markets would trade. If you would have gotten up at 2:00 a.m. you would have seen Europe was down about 2%, at 4:00 am 3%, 6:00 am 4%, and by 10:00 am about 5%. During this whole time the European currencies picked up speed selling off against the dollar. This is the most important thing driving the U.S. and I would argue the world markets. 95 out of 100 years (making the number up but making a point) currencies, and a macro issues with another continent doesn't matter. Now it does. Europe is 30% of world GDP. Without Europe the world economy doesn't go around. There is massive pressure in Eastern Europe as the Eastern Europe currencies collapse. Western Europe lent to Eastern Europe tons of money in the Euro and Swiss Francs not local currencies. As the currencies collapse in Eastern Europe the debts skyrocket in currencies terms because they are priced in foreign currencies greatly increasing the likelihood of default. On top of that, economic activity collapses also increasing the likelihood of default. Western Europe is primarily the nations on the hook which increases the likelihood of a EURO collapse as Western European countries decide if it is every country for themselves (why should Germany bail out Poland?). This creates huge stress on the currencies in relation to the U.S. dollar which creates huge problems for U.S. companies who do business in Europe. I have used this example before. Why is Microsoft going down further? It is cheap on every metric and has a massive cash hoard. I would argue because over 20% of their business comes from Europe and the market is starting to value their European business close to 0 or maybe even less than 0. Why would you value that less than 0? Simply because companies are not going to pull out of Europe but to keep the business going (especially if things really collapse) will cost alot of money. Now extrapolate that across thousands of companies. Checkpoint (CKP) which is cheap cheap but was down 14% today. They do 40% of their business in Europe. Or KSWS which is close to selling for cash but does 50% of their business in Europe. I was listening to a conference call today of an America company who has maybe 20% of their business in Europe and because of currency issues revenue in U.S. dollars was about 4% less than it otherwise would have been because of the EURO and the British Pound. This was at the end of the 4th quarter!!! Look at what the EURO has done since January and February. This is big and I keep preaching it on my blog and I keep getting the question of, well i don't understand, what was the news. The news was Sunday in Brussels. Seeing how the market reacted to interpret the news was all you needed to know!!!! Add on top of that the potential civil unrest and you have a powder keg. Latvia's governing coalition collapsed last week (may been the week before). The country is on the verge of bankruptcy. How many of you know that? My guess is if you said you didn't know that, you are an American. How many of you invest who didn't know that? Normally who gives a jack squat but you have to realize what is important now and all of a sudden it is important not only on its own but because of the warning bells that should go off extrapolating what it means to the rest of Eastern Europe. Sweden has $25 billion U.S. dollars lent to Latvia individuals. Swedbank, SEB, and Nordea (all Swedish banks) are the ones primarily on the hook. Germany has $5 billion lent to Latvia.
This is a link with a short video and write up on Latvia
http://www.euronews.net/en/article/01/03/2009/latvia-on-the-brink-of-collapse/
This is a link that shows which Western European company has exposure to which Eastern European Country.
http://www.ft.com/cms/s/0/ea19fec8-028e-11de-b58b-000077b07658.html
This article sums up Europe's problems. (Thanks goes to Pete for originally giving me the article several days ago). There is also a little video on the left hand side that is decent.
http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs,cs,db,hbc
In relation to this last link I was asked what % of GDP do our banks run. I do not know but the reason it is not relevant is because you have to look at the biggest banks in relation to GDP, not the entire banking sector. Not every US bank is in trouble. Iberia bank was the first bank who paid back the TARP money. Many banks never took TARP money. There are solvent banks. The question is the biggest bank in relation to the country. This is what happened to Iceland. The biggest banks were to big for the country to save. The U.S. also has the advantage (probably unfairly) for being the world reserve currency. This gives us much greater flexibility than Switzerland whose two biggest banks UBS and Credit Suisse could swamp the nation. I was also asked why there is such an emphasis for the statistics of loans, losses, as a percentage of GDP. The reason is because GDP is like a country's income stream. Look at Iceland. When a bank fails and the government takes it over, the balance sheet is essentially merged with the country's balance sheet. If you have total assets of 10 after taking over a massive bank and total GDP of 2 you have all of a sudden created potential massive leverage for the country if the assets go bad. There is a limit to claims on tax revenue to pay back this debt. When it passes the tipping point the trust in the currency becomes broken and it collapses.
I was also asked why this isn't getting coverage. The answer is it is. IT IS EVERYWHERE except in the U.S. Americans are self centered, myopic, narrow brained people. We have years of being mentally conditioned that we determine what will happen. 99% of time that is true. 2008 the U.S. was ground zero. 2009 Europe is ground zero. I said this two months ago in my letter, on this blog, and in conversations. I watched CNBC World last night. Every 10 minutes the conversation was on Europe. CNBC America it was barely mentioned. Asian papers, European papers, it is making headlines. In the U.S maybe the third page. Somewhere in December I realized where the story was shifting towards Europe. My daily routine changed. I no longer started my morning reading U.S. blogs and the WSJ. I now start the morning reading the Guardian business section, UK Times, European blogs, and recently a few free Central European Online articles. If I get to the WSJ, it is after dinner because frankly, there news is not really that important currently.
If you watched CNBC today, all you heard was AIG. CNBC is horrific in identifying cause and affect. If you watch CNBC realize this. AIG means jack squat in its own right. This does lead to the second big danger and that is the implosion in the U.S. insurance industry. Like Europe, this is a real danger. Insurance companies receive premiums for policies and then invest them. As stocks collapse along with other asset classes, the insurance companies who eventually have to pay claims have less and less money to pay those claims. This could be deadly. The only way AIG means jack squat is if you can glean any information for what is happening to the rest of the industry.
One last tidbit. As the day wore on you could see that the selling I think eventually came because of margin calls. You could see this in gold. I got an email from a friend that said Dennis Gartman (who is a trader) said he was selling gold because margin calls in other assets would force funds to liquidate gold holdings. Gold was up all last night and most of the morning until big selling pressure took over. I believe any dips in gold should be looked at as opportunity though margin selling could accelerate and you could see gold down 10% or $100. This doesn't change the fundamental story.
Okay, done with my soapbox. Have a good evening.
Sunday, March 1, 2009
World Wide "New Deal"
First I have heard of this. British Prime Minister meeting with President Obama on Tuesday to unveil a Global New Deal program to save the world economy.
http://www.foxnews.com/politics/2009/03/01/british-pm-propose-global-new-deal-rescue-worlds-economy/
British Prime Minister Gordon Brown hopes to forge a "global new deal" with President Obama to rescue the world's economy when he makes his first visit to the White House since Obama's inauguration.http://www.timesonline.co.uk/tol/news/uk/article5822265.ece
Brown is under pressure to persuade American political leaders to sign up to bold aims for the G20 summit of industrial and leading developing nations, which is to be held in London next month.
and
The prime minister will borrow from the rhetoric of Franklin Roosevelt, who introduced the government-financed New Deal to tackle the US Depression of the 1930s. He will argue that his 21st century “global new deal” will also require public spending on a huge world-wide scale.
Eastern Europe - Your on Your Own....Maybe
There was an emergency summit in Brussels this weekend which I was watching closely. The headlines are not good such as Financial Times headline that "EU rejects eastern Europe rescue plan." I don't think you can slice this as a positive for the markets but I am not sure it is a total blow up either. I just don't know enough abotu European politics to make an absolute judgment.
http://www.ft.com/cms/s/0/fdac296e-0682-11de-ab0f-000077b07658.html
Article starts out with this:
European Union governments vowed on Sunday to conquer the financial crisis and recession gripping their economies by extending help to beleaguered eastern European states on a country-by-country basis and respecting the rules of the single European market.
Well lets imagine those countries are banks. That is what the United States is doing so far instead of taking over the entire banking system. In European political speak, what does that mean?
Then you read this:
While recognising the need to stop financial contagion spreading from east to west, the leaders rejected an appeal from Hungary for a €180bn aid programme to recapitalise the banking systems of central and eastern Europe and reschedule foreign currency debt.
Okay, so was there an agreement and plan or just a rejection of everything and then political lip surface mumbling about doing it on a country by country basis?
Well some of the Eastern Europe countries apparently weren't on board.
The Hungarian proposal ran into objections not just from Germany, the largest contributor to the EU budget, and other rich western European states, but from former communist countries such as the Czech Republic and Poland.
They contended that, in contrast to Hungary, which received an emergency $25bn aid package last year from the International Monetary Fund, the World Bank and the EU, their economies were fundamentally sound and did not need emergency help.
Now back to the bank analogy - it sounds like Hungary is the Citigroup who need help and Poland is Wells Fargo who doesn't need help until it does.
Anyway, I am not sure how this plays out. Find out about 3:00 a.m. when the Europeans markets are trading. This may be really bad or there may be more good than meets the eye. I just don't have a feel on European Politics and what yes means yes and what yes means no and vice versa.
http://www.ft.com/cms/s/0/fdac296e-0682-11de-ab0f-000077b07658.html
Article starts out with this:
European Union governments vowed on Sunday to conquer the financial crisis and recession gripping their economies by extending help to beleaguered eastern European states on a country-by-country basis and respecting the rules of the single European market.
Well lets imagine those countries are banks. That is what the United States is doing so far instead of taking over the entire banking system. In European political speak, what does that mean?
Then you read this:
While recognising the need to stop financial contagion spreading from east to west, the leaders rejected an appeal from Hungary for a €180bn aid programme to recapitalise the banking systems of central and eastern Europe and reschedule foreign currency debt.
Okay, so was there an agreement and plan or just a rejection of everything and then political lip surface mumbling about doing it on a country by country basis?
Well some of the Eastern Europe countries apparently weren't on board.
The Hungarian proposal ran into objections not just from Germany, the largest contributor to the EU budget, and other rich western European states, but from former communist countries such as the Czech Republic and Poland.
They contended that, in contrast to Hungary, which received an emergency $25bn aid package last year from the International Monetary Fund, the World Bank and the EU, their economies were fundamentally sound and did not need emergency help.
Now back to the bank analogy - it sounds like Hungary is the Citigroup who need help and Poland is Wells Fargo who doesn't need help until it does.
Anyway, I am not sure how this plays out. Find out about 3:00 a.m. when the Europeans markets are trading. This may be really bad or there may be more good than meets the eye. I just don't have a feel on European Politics and what yes means yes and what yes means no and vice versa.
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