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.
Subscribe to:
Posts (Atom)
