Tuesday, February 27, 2007

The Year the Piggies went to Market

There is much unrest in the market this evening, as the haze-glazed sun puddles into the Philippine Sea, West past Guambat's Tumon Bay burrow. With the Australian market consolidating its newest century mark at 6000, Guambat has become inured to the relentless advance of fair Australian investors, whelmed by the new market alchemy that has turned all market directions oneway -- up, to infinity and beyond.

The Oz Mkt has been an absolute ripper. See

this and this and this. Since its low of roughly 2700 about 4 years around ago, the market has gone virtually without correction up over 100%.

But that makes it a mere piker.
As Market Oracle Marty Chenard points out, the (mainland, commie) Chinese market has risen over 200% in the last year and a half! His take on the consequences of that kind of parabolic run, for the Chinese market, is:

"Let me say this very simply ...

China's Stock Market will Crash sometime this year ."

As Marty points out, the LA Times recently ran a story on this capitalist-running-dog of a Chinese market. It's a story full of the anecdotes that Greenspan must have heard before he uttered his infamous, and famously early, comment, "irrational exuberance":
Millions of Chinese have entered the trading frenzy in the last year amid the strongest bull market in the nation's young capitalist history. The Shanghai composite stock index has doubled since August after four years of dismal performance.

Many individual investors have reaped handsome profits, but a growing number of them are tapping their credit cards and using their homes as collateral for cash to buy more stock, say bankers and analysts.

Such optimism may seem misplaced. Since China's stock markets opened 16 years ago, they have been plagued by scandals, the government's high ownership of shares and weak regulation. Investors have seen wild price swings and sudden collapses of fortunes. Just two years ago, the Shanghai index was languishing at 900.

But these days the mood is jovial.

"Look, look … how could this rise so high," shouted one elderly man, peering at a big electronic board at Wanguo Securities' trading hall in central Shanghai one morning this week.

By the opening of markets at 9:30 a.m., all 30 computer stations at the hall were occupied. Many people were standing in the lobby, laughing and telling jokes. One man slapped his thigh after watching a stock move up.

"I want to purchase more bank stocks and maybe tourism ones. People travel a lot during the holidays…. Maybe wine stocks too," said a man in his 60s who gave only his last name, Song.

Technically, day trading isn't allowed in China; investors can't buy and sell the same shares within 24 hours. But there are ways to get around that, and many investors are clearly in it for the short term.

Most analysts agree that the fundamentals are better than in the past. By one common valuation, the average share price is running about 30 times earnings; it was twice that during the last big boom in the '90s.

"A new generation of investors is appearing in China," said Zhang Qi, an analyst with Haitong Securities in Shanghai. "They are young people with better knowledge and understanding of the market. They use the Internet to research companies … and they are more confident."

Su Cheng, a 26-year-old native of Anhui province, jumped into the market last year. He plowed his entire savings into shares and then turned to his former classmates for more funds.

So far, Su has seen his investments soar 80% and now has about $13,000 in his stock account.

"My gain is not too bad until now, but my capital is still not enough," said Su, who works for a Shanghai investment and acquisitions firm. "If I had 1 million instead of $6,500, then I would have 2 million in my account now."
So what has made the market so nervous this evening?

China's Stocks Have Biggest Tumble in 10 Years; Vanke Plunges By Zhang Shidong and Yidi Zhao:
China's stocks tumbled the most in 10 years on concern the government will crack down on illegal investments that helped drive benchmarks to records.

The move was the biggest fluctuation among markets included in global benchmarks. The measure, which jumped 13 percent in the past six sessions, closed at a record 2707.68 yesterday.

Today's rout wiped out $107.8 billion from a stock market that doubled in the past year as 249 of the measure's 300 shares plunged by the 10 percent limit. China Vanke Co., the nation's biggest property developer, and China United Telecommunications Corp., which controls the nation's second-largest mobile-phone operator, declined.

The State Council, China's highest ruling body, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market, the government said. The group will provide advice on regulations and policy explanations of the securities market, according to a statement published Feb. 25 on the central government's Web site.

The government must pay attention to "bubbles'' in its stock market before they get out of hand, Cheng Siwei, vice chairman of the Nation's People Congress, wrote in a commentary published Feb. 6 in the Chinese-language Financial News. The Congress next convenes for an annual meeting on March 5.

Stocks surged last year after a government plan to make more than $200 billion of state-owned stock tradable revived investor demand and paved the way for sales by some of the nation's biggest companies. The economy, which in 2005 overtook the U.K. as the world's fourth biggest, averaged annual growth of 9.6 percent in the past five years.

"China has gone up so much,'' said Winson Fong, who manages $2 billion as chief investment officer at SG Asset Management in Singapore. "It's not a bad thing to have a healthy correction as it provides an opportunity to correct over-valuations and allow people who have missed out to start buying.''

See Even commies have bubbles?

Global hazing

Wednesday, February 14, 2007


Guambat is not given to running, so has not been seen running with the bulls. Guambat tends to be a sedentary and non-gregarious soul, and does not consider himself part of any herd. But Guambat will have to ruminate on that possibility in light of the comments from the fund manager who blogs as "Between the Hedges".

Many of the notions about the state of the market Guambat accepts as true are held up to be untrue or speculation by BtH. And, while Guambat stubbornly continues to believe his day will come, the days have already been coming and continue to come for BtH.

If it is reality check time, (see Barry Ritholtz on this: It really matters "how you define your reality . . .") Guambat's check is still in the mail. BtH thinks guambats are in a "negativity bubble".

Here's some snippits of how BtH assays the market in his bullish essay. It's a long and detailed read that requires going to the source.
I continue to believe that steadfastly high bearish sentiment in many quarters is mind-boggling, considering the S&P 500's 19.0% rise in about eight months, one of the best August/September/October runs in U.S. history, the fact that the Dow made another all-time high this week, the macro backdrop for stocks is improving and that we are in the early stages of what is historically a very strong period for U.S. stocks after a midterm election.

I continue to believe this is a direct result of the strong belief by the herd that the U.S. is in a long-term trading range or secular bear environment.

Bears still remain stunningly complacent, in my opinion. The 50-week moving average of the percentage of Bears is 36.8%, a very high level seen during only two other periods since tracking began in the 80s.

Nasdaq and NYSE short interests are very close again to record highs. Moreover, public short interest continues to soar to record levels.

Many of the so-called “bullish” U.S. investors are only "really bullish" on commodity stocks and U.S. companies with substantial emerging markets exposure, not the broad U.S. stock market.

Notwithstanding a 94.4% total return (which is equivalent to a 16.5% average annual return) for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 15.8. The 20-year average p/e for the S&P 500 is 23.0.

I still believe the coming bullish shift in long-term sentiment with respect to U.S. stocks will result in the "mother of all short-covering rallies."

I do not believe sub-prime woes are nearly large enough or will become large enough to bring down the U.S. economy. As well, the Fed’s Poole said this week that, “there is no danger to the economy from sub-prime loan defaults.”

Home values are more important than stock prices to the average American, but the median home has barely declined in value after a historic run-up, while the S&P 500 has risen 19.0% in just over seven months and 94.4% since the Oct. 4, 2002 bear market low. Americans’ median net worth is still very close to or at record high levels as a result, a fact that is generally unrecognized or minimized by the record number of stock market participants that feel it is in their financial and/or political interests to paint a bleak picture of America.

Energy prices are down significantly, consumer spending remains healthy, unemployment is low by historic standards, interest rates are low, inflation is below average rates, stocks are surging and wages are rising at above-average rates. The economy has created 1.23 million jobs in the last seven months.

Both main consumer confidence readings are now very near cycle highs and many consumers are chomping at the bit to buy new spring clothing after such a warm fall muted holiday clothing sales. I expect new cycle highs for both measures of consumer sentiment over the next few months.

Just take a look at commodity charts, gauges of commodity sentiment and inflows into commodity-related funds over the last couple of years. There has been a historic mania for commodities. That mania is now in the stages of unwinding. The CRB Commodities Index, the main source of inflation fears has declined -9.4% over the last 12 months and -16.5% from May highs despite a historic flood of capital into commodity-related funds and numerous potential upside catalysts.

The commodity mania has pumped air into the current US “negativity bubble.” I continue to believe inflation fears have peaked for this cycle as global economic growth slows to average levels, unit labor costs remain subdued and the mania for commodities continues to reverse course.

I continue to believe oil made a major top last year during the period of historic euphoria surrounding the commodity with prices above $70/bbl. Falling demand growth for oil in emerging market economies, an explosion in alternatives, rising spare production capacity, increasing global refining capacity, the complete debunking of the hugely flawed "peak oil" theory, a firmer U.S. dollar, less demand for gas guzzling vehicles, accelerating non-OPEC production, a reversal of the "contango" in the futures market, a smaller risk premium and essentially full global storage should provide the catalysts for oil to fall to $35 per barrel to $40 per barrel this year.

The US budget deficit is now 1.5% of GDP, well below the 40-year average of 2.3% of GDP. An eventual Fed rate cut should actually boost the dollar as currency speculators anticipate faster US economic activity relative to other developed economies.

In my entire investment career, I have never seen the best “growth” companies in the world priced as cheaply as they are now relative to the broad market. There are very few true "growth" investors even left after six years of underperformance. By contrast, “value” stocks are quite expensive in many cases. Many “value” investors point to the still “low” price/earnings ratios of commodity stocks, notwithstanding their historic price runs over the last few years. However, commodity equities always appear the “cheapest” right before significant price declines.

I continue to believe a chain reaction of events [in emerging markets] has already begun that will result in a substantial increase in demand for US equities.

One of the characteristics of the current US “negativity bubble” is that most potential positives are undermined, downplayed or completely ignored, while almost every potential negative is exaggerated, trumpeted and promptly priced in to stock prices. “Irrational pessimism” by investors has resulted in a dramatic decrease in the supply of stock. Booming merger and acquisition activity is also greatly constricting supply. I suspect accelerating demand for U.S. stocks, combined with shrinking supply, will make for a lethally bullish combination this year.

Considering the overwhelming majority of investment funds failed to meet the S&P 500's 15.8% return last year, I suspect most portfolio managers have a very low threshold of pain this year for falling substantially behind their benchmark once again. The fact that last year the US economy withstood one of the sharpest downturns in the housing market in history and economic growth never dipped below 2% illustrates the underlying strength of the economy as a whole. A stronger US dollar, lower commodity prices, seasonal strength, decelerating inflation readings, a pick-up in consumer spending, lower long-term rates, increased consumer/investor confidence, short-covering, investment manager performance anxiety, rising demand for US stocks and the realization that economic growth is poised to rise around average rates should provide the catalysts for another substantial push higher in the major averages this year as p/e multiples expand significantly. I expect the S&P 500 to return a total of about 17% for the year. "Growth" stocks will likely lead the broad market higher, with the Russell 1000 Growth iShares(IWF) rising a total of 25%. Finally, the ECRI Weekly Leading Index fell slightly this week and is still forecasting modestly accelerating US economic activity.

Tuesday, February 13, 2007

Drug pushers

Marketing Pharmaceuticals: Legal Drug Money
Pharmaceutical marketing representatives in the medical world account for about 58,000 sales positions in the United States. They provide direct marketing of everything from Viagra to the latest toe fungus treatment. Physicians depend on these reps' extensive knowledge so they as doctors can provide the most sought-after medications to their patients. It's a marketing job best suited those natural born salespeople, but requires the stamina and business skill fostered through an MBA degree.

Online Business Degree: Do It Anywhere!
Becoming a drug rep sounds super, but what if you don't have the time to pursue it? One of the best features about this position is that all the numbers and direct marketing strategies can be studied at home through an online business degree. While background knowledge of the health care industry is helpful, an MBA degree provides you the most important tools for the pharmaceutical world--not to mention an edge above your competitors:

* You'll learn the basics of business: accounting, finance, direct marketing and management and you will apply them to real life scenarios. This will help prepare you for the direct sales experience in medicine.
* Develop your ability to analyze your market and make equitable decisions with your company's product.

Get Your Foot in the Doctor's Door
The drug world is competitive and being strong in sales and direct marketing alone simply isn't enough. Pursuing your online business degree helps you network within the pharmaceutical market as drug companies witness your credentials and your drive. Once you're in, the side effects aren't half bad. In fact, the competitive salary and benefits will probably keep you coming back for more.

Accidental drug-poisoning deaths on the rise
Unintentional deaths due to drug poisoning -- primarily with prescription drugs -- increased by 68 percent between 1999 and 2004, and is second only to motor vehicle crashes as a cause of death from unintentional injury in the US, investigators at the Centers for Disease Control and Prevention report.

The annual poisoning-death rate increased from 4.4 per 100,000 population in 1999 to 7.1 per 100,000 in 2004.

Of all sex, racial, and ethnic groups, the greatest increase was among non-Hispanic white females. The age group most affected was persons aged 15 to 24 years.

The state with the largest relative increase was West Virginia, where rates rose 550 percent. Increases ranged from 195 percent to 226 percent in Arkansas, Montana, Maine and Oklahoma. Accidental poisoning mortality rates actually decreased in Delaware, Maryland, New York, and Rhode Island.

The drugs most responsible were psychotherapeutic drugs, narcotics and hallucinogens, and unspecified drugs.

In an editorial note, the CDC researchers write: "Effective response to increasing fatal drug overdoses requires strengthening regulatory measures to reduce unsafe use of drugs, increasing physician awareness regarding appropriate pharmacologic treatment of pain and psychiatric problems, supporting best practices for treating drug dependence, and potentially modifying prescription drugs to reduce their potential for abuse."

Pharmaceutical marketing
The marketing of medication has a long history. The sale of miracle cures, many with little real potency, has always been common. Marketing of legitimate non-prescription medications, such as pain relievers or allergy medicine, has also long been practiced. Mass marketing of prescription medications was rare until recently, however. It was long believed that since doctors made the selection of drugs, mass marketing was a waste of resources; specific ads targeting the medical profession were thought to be cheaper and just as effective. This would involve ads in professional journals and visits by sales staff to doctor’s offices and hospitals. An important part of these efforts was marketing to medical students.

Physicians are perhaps the most important players in pharmaceutical sales. They write the prescriptions that determine which drugs will be used by the patient. Influencing the physician is the key to pharmaceutical sales. Historically, this was done by a large pharmaceutical sales force. A medium-sized pharmaceutical company might have a sales force of 1000 representatives. The largest companies have tens of thousands of representatives. Sales representatives called upon physicians regularly, providing information and free drug samples to the physicians. This is still the approach today; however, economic pressures on the industry are causing pharmaceutical companies to rethink the traditional sales process to physicians.

Pharmaceutical companies are developing processes to influence the people who influence the physicians. There are several channels by which a physician may be influenced, including self-influence through research, peer influence, direct interaction with pharmaceutical companies, patients, and public or private insurance companies.

There are a number of firms that specialize in data and analytics for pharmaceutical marketing (Yellowikis).

Currently, there are approximately 100,000 pharmaceutical sales reps in the United States [3] pursuing some 200,000 pharmaceutical prescribers. [4] A pharmaceutical representative will often try to see a given physician every few weeks. Representatives often have a call list of about 200 physicians with 120 targets that should be visited in 4-6 week cycles.

Because of the large size of the pharmaceutical sales force, the organization, management, and measurement of effectiveness of the sales force are significant business challenges. Management tasks are usually broken down into the areas of physician targeting, sales force size and structure, sales force optimization, call planning, and sales forces effectiveness.

Since the 1980s, new methods of marketing prescription drugs to consumers have become important. Patients are far less deferential to doctors[citation needed] and will inquire about, or even demand to receive, a medication they have seen advertised on television. In the United States, recent years have seen an increase in mass media advertisements for pharmaceuticals. Expenditures on direct-to-consumer (DTC pharmaceutical advertising) have more than quintupled in the last seven years since the FDA changed the guidelines, from $700 million in 1997 to more than $4 billion in 2004.[citation needed]

The mass marketing to consumers of pharmaceuticals is controversial. It is banned in every western country except the US and New Zealand, which is considering a ban.

Influence of direct to consumer pharmaceutical advertising and patients' requests on prescribing decisions: two site cross sectional survey (2002)
Only the United States and New Zealand allow advertising of prescription drugs directed at patients. US spending on such advertising grew rapidly during the 1990s, reaching $2.47bn (£1650m) in 2000.1 The dramatic increase in investment by the US pharmaceutical industry is evidence of an expected effect on sales. On the rationale that such advertising provides important information to consumers and patients who may benefit from advertised products, pharmaceutical manufacturers have campaigned in the European Union2 and Canada3 for the relaxing of current regulatory restrictions. We examined the relation between direct to consumer advertising and patients' requests for prescriptions and the relation between patients' requests and prescribing decisions.

We carried out a cross sectional survey of a cluster sample of primary care patients in Sacramento, California, from March to June 2001 and in Vancouver, British Columbia, from June to August 2000. We used questionnaires to determine the frequency of patients' requests for prescriptions and of prescriptions resulting from requests. Seventy eight physicians participated in the study, 40 in Vancouver (all family physicians) and 38 in Sacramento (14 general internists and 24 family physicians).

Patients were all 18 years and over, spoke English, and provided informed consent. The unit of analysis was a matched set of patient-physician questionnaires covering a single consultation. We estimated adjusted odds ratios using a generalised estimation equation. We classified drugs as advertised to consumers if they were among the 50 drugs with the highest US advertising budgets4 or were described as advertised to consumers in Canadian media reports5 in 1999-2000, or both.

Patients requested prescriptions in 12% of surveyed visits. Of these requests, 42% were for products advertised to consumers. The table provides details of factors associated with requests. Physicians prescribed the requested drugs to 9% (128) of patients and requested advertised drugs to 4% (55) of patients. The prescribing rate was similar for advertised and non-advertised drugs (about 74%).

We asked physicians: "If you were treating another similar patient with the same condition, would you prescribe this drug?" An answer of "very likely" indicated confidence in choice and "possibly" or "unlikely" indicated some degree of ambivalence. Physicians were ambivalent about the choice of treatment in around 40% of cases when patients requested drugs (advertised and non-advertised, 62/143 v 62/500, 5.4, 3.5 to 8.5) and about half the cases when patients had requested advertised drugs (30/60 v 62/500, 7.1, 4.0 to 12.6) compared with 12% for drugs not requested by patients.

Patients' requests for medicines are a powerful driver of prescribing decisions. In most cases physicians prescribed requested medicines but were often ambivalent about the choice of treatment. If physicians prescribe requested drugs despite personal reservations, sales may increase but appropriateness of prescribing may suffer. Concerns about the value of opening up the regulatory environment to permit direct to consumer advertising in the EU and Canada seem well justified.

See: Direct-to-consumer advertising

Direct-to-consumer advertising in the United States

Unintentional Poisoning Deaths --- United States, 1999--2004

Prescription Drug Marketing Act (PDMA) (1987)


Thursday, February 08, 2007

The light at the end of the tunnel comes from the fire sale

And no doubt, MacBank will be the vulture tearing at the carcass.

Fire sale as tunnel price plummets by Danny John, Vanda Carson and Jordan Baker
THE [Sydney] Cross City Tunnel, which cost more than $900 million to build, is now worth little more than a third of that, based on documents obtained by the Herald.

Files lodged with the Australian Securities and Investments Commission show that three big Australian banks are owed $110 million by the tunnel's owners. About $460 million is also owed to foreign banks.

The documents also show that despite assurances from the State Government, taxpayers have been left out of pocket.

A list of unsecured creditors - traditionally the last to recoup money - shows they were owed a total of almost $300,000, including about $100,000 to state and federal agencies.

The commission list was dated December 27, when CrossCity Motorway went into receivership. On the same day the Roads Minister, Eric Roozendaal, said there was no financial risk to taxpayers.

The documents, compiled by receivers KordaMentha, show that local superannuation funds are owed nearly $115 million in unsecured loans to the State Government, and the Tax Office is facing unpaid bills of tens of thousands of dollars.

Industry sources estimate that a toll road operator, the most likely buyer, will pay only around $350 million for the tunnel.

That price would leave the banks, led by Westpac, which is owed $46 million, facing losses of $220 million. The rest of the creditors would get nothing.

That would almost certainly prompt KordaMentha, under pressure from the banks, to launch a court action for damages against the NSW Government over the reversal of the road closures which finally tipped the tunnel into receivership.

The cost of building the tunnel.
$350m Estimated sale value.
What the banks are owed.
Likely loss for the banks.
The looming court claims.

97,000 Original daily traffic estimate.
30,000 The current daily traffic flow.

Suggested reading:

Wednesday, February 07, 2007

Where's this Wally?

Time to play another round.

This Wally may be more erudite than others.

This Wally searched for "dunderhead "alexander downer"".

This Wally is currently situated in a large Australian mining center.

This search may be this Wally's Swan song, or otherwise sent up the rio, because the search was conducted from a very large mining company's webservice.

So, where's this Wally?

For the record, Guambat never called Alexander Downer a "dunderhead". Woulda but did'na.

Irrational exuberance

Paul Farrell is getting exuberant about irrationality.
I'm sick and tired of those arrogant, stuffed-shirts behavioral finance academics and high-priced Wall Street insiders looking down their noses at America's 95 million Main Street investors like we're clueless inferiors who can be easily manipulated using esoteric quant algorithms, so Wall Street's old boys club can make big bucks.

Here's how those eggheads and fatheads see us: Wall Street "needs investors who are ... irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets. Get it? Their goal is to get you to buy "overpriced" securities by keeping you "woefully uninformed" and distracted by "strange preferences." Why? Because that makes it easy for them to treat the market like a private hunting reserve where they can bag unwary targets at will.

On cable, in ads and sales pitches The Street panders to your ego: You're "the man," a "rational man." You can beat the averages, the indexes. But behind your back, they laugh; they know you're irrational when it comes to investment decisions. Moreover, they actually prefer a market filled with irrational investors. That way, they can manipulate you easily without you ever really knowing it.

Oh, they'll let you make modest gains, enough to keep you in line, to prevent a full-scale rebellion. But the playing field's not level and they're backed by an elite force of roughly a million in the financial-services industry -- brokers, salesmen, advisers, analysts, talking heads, slick admen, slicker lobbyists -- "foot-soldiers" armed with superior tools, advance data, huge monetary incentives and the protection of friendly legislators and regulators.

But you already knew all this, right. Since the Buttonwood Agreement created the NYSE in 1792, Wall Street has always been able to control the markets and manipulate investors to its advantage. It's been a one-way street for a long time.

So what is new? Behavioral finance, the new science of irrationality, also known as behavioral economics, quant-trading, neuro-investing, etc. Wall Street has added this powerful new "weapon of mass manipulation" to its arsenal. And with it Wall Street has refined "mind control" to a high art, making absolutely certain you do not stand a chance trading. [Weapons of mass manipulation.]

You bet "I'm mad as hell." It's time to stand up to those self-appointed "arbiters of rationality" ... tell them "we're not going to take it anymore" ... that we're going to stop playing their game by their rules ... that we know there's a better way ... that we really can do everything "wrong" (that is, ignore the rules of their "rational investing" game), and still live happy and die rich ... playing by our own rules.

Unfortunately that's not easy, it challenges the "rational" mindset that's so deeply locked into our cultural brain it sounds almost anti-American. Look around, "rationality" is everywhere....
This rigid, ultra-rational mindset is blinding us, transforming 95 million investors into robots who believe that if you want to become a millionaire you must minimize irrational behavior and maximize rationality.

Well folks, they're wrong and they're misleading you! If you really want to be a successful and happy millionaire, I say shift your focus and aim at becoming an "Irrational Millionaire!" I believe it's time to go contrary, debunk the conventional wisdom and embrace irrationality.

We need to see the world differently.... Forget that "rational man" mantra, it's a myth. Forget the new science of behavioral finance, their quant math and algorithms. Why? Because none of that stuff will ever change your basic irrational nature ... that's what you are and always will be. [There's more, including "9 traits of the successful 'Irrational Millionaire'", if you're interested.]

Carry on

Whatever reason you may want to put on it (e.g., excess liquidity, diminishing supply of stocks, fund manager's warming to globabl risk), the linkage between the theories and the real world of making money these days has been the carry trade: borrow cheaply in yen or yuan, invest richly in Brazil or that other debt-ridden country, USA.

No wonder, then, that former Goldie Head, US Treasury Secretary Henry Paulson, has hosed down the Continental clammering (see below) to strengthen the yen.

Rex Nutting reports for MarketWatch:
There is no evidence of intervention or manipulation by the Japanese government to keep the yen weak, Treasury Secretary Henry Paulson told congressmen on Tuesday.

The yen is trading at a 20-year low, Paulson acknowledged, "but as far as we can see there has been no intervention." Paulson said he would be discussing the yen and other issues at the Group of Seven meetings this weekend in Germany.

"It is my job to be vigilant and watch all currencies," he said.

(Feb 6 Reuters, Reporting by Gertrude Chavez-Dreyfuss) -
The yen slipped broadly on Tuesday after U.S. Treasury Secretary Henry Paulson said the Japanese currency's value is set by fundamentals.

His comments suggested that the U.S. government does not see anything fundamentally wrong with the yen's broad weakness, analysts said.

The spineless Bank of Japan
by Philip Bowring
Japan has become, if only by sins of omission, a malign influence on the global economy. Finance ministers of the Group of 7 industrial countries meeting in Germany this week would do well to focus on those sins, the least-recognized cause of the bubbles and imbalances in the global economy and financial markets.

The prognosis is not encouraging. The Europeans are increasingly concerned about the weakness of the yen, which is causing the euro to bear the brunt of the dollar's decline.

But the United States remains fixated on the value of the Chinese yuan, not the Japanese yen, and the size of China's current account surplus, not that of Japan. The U.S. Treasury secretary, Henry Paulson, seems in a state of denial, suggesting that the yen's weakness is market-driven while China is deliberately keeping its currency undervalued.

Most central bankers, both in Asia and the West, are also guilty of lax monetary policies and are under political pressure to keep interest rates low. So there is limited appetite for finger-pointing at Japan. And with no Asian nations other than Japan represented at the G-7 meeting, pressure on Tokyo looks likely to be modest.

But let there be no doubt about the pernicious effects of Japan's interest rates being held near zero, despite steady economic growth and the end of deflation. The policy is sustained by pressure on a spineless Bank of Japan by Shinzo Abe's myopic government.

The major consequences of Japan's low interest rate, ultra-cheap yen policy are:

* The so-called carry- trade, by which yen are borrowed for investment in higher yielding currencies and assets ranging from New Zealand bonds to corn futures. The size of the carry-trade is in dispute, as leverage is provided through derivatives, but naked exposure could be as much as $1 trillion.

The carry-trade is a major contributor to the very low global cost of money and the collapse of the price of risk, which together have enabled global asset markets to rise almost in unison. This rise, most dramatically reflected in China and India, is potentially destabilizing.

As for the carry-trade itself, a sudden reversal could be catastrophic. It is a gigantic gambling game, reflected in the dramatic increase in the balance sheets of investment banks and the explosion in assets of private equity and hedge funds. The phenomenon is also perpetuating global trade imbalances by allowing deeply indebted countries — including the United States and Australia — to continue to over-borrow.

* The continued undervaluation of other east Asian currencies. Some of these are also used for carry- trade activities as interest rates are held down to prevent currencies rising against the yen. Countries that have allowed their interest rates and exchange rates to reflect economic conditions, such as South Korea and Thailand, have found their currencies rise rapidly, to the discomfort of exporters, pressuring them to impose capital controls.

The necessary re-alignment of all East Asian currencies cannot take place while the yen is held back by the Bank of Japan's interest rate policy. To expect China to agree to faster revaluation while Japan does nothing defies common sense — and exacerbates China's sense of grievance. The United States is unwise to focus on China, meanwhile Japan can never claim leadership in Asian financial affairs while it sustains a policy dictated by the narrow political interests of the Abe government.

Tuesday, February 06, 2007

Savings grace?

Myth of a low-savings rate
Martin Crutsinger of The Associated Press scored big with a deceptive story about the nation’s savings rate. After-tax savings rate, that is — the rate that does not include the $3.2 trillion Americans have socked away in 401(k)s and other pretax savings plans. But Crutsinger’s report led to the headlines sought, like this one in the Columbus Dispatch: “Savings rate lowest since Depression.”

Economists split over negative U.S. savings rate By Tricia Bishop
For the second year in a row, Americans spent more than they earned - $116 billion more in December alone. That's causing scores of economists to wring their hands over the lack of financial foresight, which could have disastrous effects on the economy if consumers suddenly, and widely, overcorrected the problem.

But the figures, announced yesterday with the release of new U.S. Department of Commerce data, might not be as bad as many think. In fact, they just might say more about the changing nature of wealth than about the country's careless cash outlay.

Since the Great Depression, the country's "personal savings rate" (the amount left over after disposable income is used up) was positive. That changed in 2005 when it dipped into negative territory for the first time since 1933.

The situation grew worse last year, according to the data, which means Americans are spending more than their current incomes, most disturbingly by borrowing against their homes or on their credit cards.

But the rate, now at a negative 1 percent compared with 2005's negative 0.3 percent, doesn't factor in spending by those who have nest eggs from prior years, whether from pension payouts, home equity, successful stock portfolios or big bank accounts. Capital gains are not included in the savings rate.

Some Americans are simply cashing in a portion of their stored-up wealth.

So, the issue is, if your profit and loss statement has a loss but your balance sheet shows good equity, why worry. Barry Ritholtz isn't worried, but advises caution.

Household Cash versus Debt: The Liquidity Paradox Posted on Feb 4th, 2007

Ignore Statistical Oddities at Your Peril
James Altucher wrote a thought-provoking column ..., The Underlevered American Household.

While I am sympatico with several of the points he raises, I vehemently disagree with his take on the relative unimportance of a negative personal savings rate in the U.S. I also believe his views on the net household assets of Americans are oversimplified. These issues are far more complex than was suggested by his column, and I'd like to address them.

Rare Data Events Are Worth Examining
The significance of a negative savings rate is due, in part, to its rarity: It has only occurred twice in the past 100 years. Combine that with the shifting distribution of assets across consumer households, and you have a pair of issues worth exploring.

Together, these have potentially significant ramifications for investors. In particular, they may greatly affect several stock sectors, and are especially worrisome for quite a few specific companies.

A fresh take on the subject comes courtesy of MacroMaven's Stephanie Pomboy (via Alan Abelson). Stephanie notes not just the negative national savings rate, but two other relevant data points: The ratio of cash to debt, and how that cash and debt is distributed in the country:


"THE PARADOX OF A LIQUIDITY-FUELED STOCK MARKET in a land rife with illiquid inhabitants is pointed up by the little chart on the right. The one that depicts cash as a percentage of household debt. Which, as is evident at a glance, is shrinking like the proverbial snowball in hell.

That highly graphic graphic comes to us from the excellent Stephanie Pomboy and her irreverent and invariably informative (block those alliterations!) MacroMavens commentary. As she observes, "For all the bragging about the $6 trillion in cash households have sitting on their balance sheets, relative to household debt, this cash cushion is at a record low!"

More disturbing still, Stephanie goes on, is that the households with the cash (and assets) "are not the ones with the debt." Rather, alas, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt.

What Stephanie envisions is that just as "the story in 2005-2006 was the cash buildup on corporate balance sheets," the story for 2007-2008 might very conceivably be "a similar increase in saving by households, as they endeavor to repair the damage inflicted by the burst of the housing bubble."

What might this mean? The precise timing is difficult to ascertain - but if the "great mass of consumers finally takes a deep breath and cuts back on their profligate spending," it would not be a particularly positive event for the economy or corporate earnings. And corporate earnings in Q4, we learn this morning, look like they have finally broken their streak of double digits gains.

As to the stock market, it has been driven by liquidity and momentum, and that can continue for quite a while, regardless of the fundamentals.

In defense of leverage Felix Salmon | Jan 22, 2007
Once upon a time, if somebody wanted to set up a company, he would have to spend his own money to do so. That limited the size of companies, and the speed at which they could grow; it also meant huge barriers to entry in most industries. Then bankers came along. If you could borrow money before you earned it, you could set up and grow companies much more quickly. Even so, however, if your enterprise failed, you were still on the hook for the whole enterprise value of the company: you lost all of your equity, but you still owed the same amount of money to the bank.

Today, the world is much more sophisticated, and risk gets chopped up into countless types of security. We're far beyond the simple invention of limited-liability companies now, where the owners of the company have zero personal liability for the company's debts. Rather than just having two asset classes, debt and equity, there's a whole spectrum of asset classes, from senior secured debt at one end, through senior unsecured and junior and mezzanine and PIK debt and preferred equity all the way up to pure equity at the other end. Some debt instruments are so risky that they behave more like equity; others are perfectly safe. There's a security for every risk appetite, and markets are gloriously efficient.

So why the worries about leverage? Yes, it's entirely possible that certain types of equity are so highly levered that a 2% fall in asset prices will wipe them out entirely. You need to have a very aggressive risk appetite to buy that kind of equity, but if that's your risk appetite, then it's out there for you. The junior debt associated with such assets is also, obviously, very risky as well, since there's a good chance that it, too, can be wiped out relatively easily if prices drop. The riskiness of such debt is reflected in the high yields that it commands in the market. In fact, those yields are so high that often the junior debt outperforms the equity. So if the holder of such highly-volatile debt gets wiped out, don't shed too many tears. For one thing, anybody holding such debt has done very well for themselves in recent years. And for another, they know exactly what they're letting themselves in for, and there's a good chance that all or some of their position is hedged in any case.

This is not a "credit house of cards", or a "Ponzi Game", or any other metaphor in which the collapse of one part of the structure leads inexorably to the collapse of the next. If equity gets wiped out, junior debt can still get paid in full; if junior debt gets wiped out, senior debt can still get paid in full. And so on. What's more, if the equity gets wiped out, that simply is not the same as "the entire capital" of the company being wiped out. In fact, it's only 2% of the capital of the company being wiped out: remember, debt is capital too.

Now there may – or there may not – be systemic risks associated with the global rise of leverage. If banks lend a lot of money into unhedged high-risk debt tranches, it's conceivable that those banks could fail in the event of a credit bust. And no one likes it when banks fail. Similarly, there might well be people who love equity-like positive returns from the debt market in the present but who will be shocked and upset if they get equity-like negative returns from the debt market in the future. But leverage in and of itself is not a bad thing: it's merely symptomatic of an increasingly sophisticated tranching of capital structures.

Although it might be a good time to buy stock in bankruptcy attorneys.

100 Bottles of Beer on the Wall by PIMCO's Bill Gross
Two domestic bubbles in the last decade are testimony to the power of levered money and the recirculation of price insensitive reserves back into U.S. financial markets.... Bond, stock, and real estate trends then, have recently been increasingly at the mercy of relatively price insensitive and levered financial flows as opposed to historical models of value or the growth of the real economy itself.

[M]y critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity. What used to be an Economics 101 “CIG + exports-imports” analysis leading to predictions for interest rates and stock prices has turned into an Economics 2007 analysis of corporate buybacks, international reserve flows and hedge fund/private equity positioning seeking to front run or take advantage of the first two.

Investors have no more significant example of the influence of financial flows on asset prices than tracking the pace of the U.S. trade deficit in the 21st century, as good a point as any to mark the beginning of our new financial era, since it encompasses both equity and housing asset bubble peaks. In effect, despite the chicken and egg aspect of why the trade deficit exists – because foreign investors want to invest in the U.S. or because U.S. consumers want to buy things – there is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually. Without it, both bond and stock prices would be much lower, the $800 billion for instance representing 3 - 4x our current federal budget deficit. Almost perversely, then, an increasing current account deficit supports and elevates U.S. asset prices as the liquidity from it is used to buy stocks and bonds.

[T]here is an inherent logic to it: more money in the “bank” – asset prices go up; fewer deposits – asset prices go down or perhaps up less. The logic no doubt is complicated, however, by the continued thrust of financial innovation and the willingness on the part of investors to take additional risk with even the same pot of money. Financial derivatives of all (almost unimaginable) varieties have sprouted to the surface in recent years allowing homeowners to lever home prices, institutions to compress risk spreads, and almost all assets to occupy a seemingly permanently higher plateau based on increased liquidity and perceived diversification of risk across the system.

I have my doubts about this permanent plateau, but the market seemingly does not, and there’s no doubt therefore that “flows” are not the entire answer, even if they have increased their level of influence in recent years. If risk takers decide to “play,” there is a casino awaiting them 24-hours a day, trade deficit or no trade deficit.

Combined, the total rise in corporate share buybacks and the financing for bond and stock markets via the increasing trade deficit have injected an average of perhaps $1 trillion annually of purchasing power into our asset markets since the end of the 2001 recession.

Because hedge funds and levered players of all types have been aware of this trade deficit/share buyback “put” and have acted upon it, the incalculable but conservatively estimatable pump from these two sources alone have poured in several trillions of purchasing power per year. Take that money and use it to invest in further high powered and levered financial instruments such as CDOs, CPDOs, and 0% down funny money mortgages of all varieties and you can understand why asset markets have done so well in recent years, and why, as my initial Outlook sentence suggested, it is so hard to analyze “value” in asset markets these days. Prices are increasingly being determined by value insensitive flows and speculative leverage as opposed to fundamentals.

[A]s Alan Greenspan stated in August of 2005: “The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets and the liabilities that finance them.” If financial innovation and the resultant leverage derived therefrom are reflective of our 21st century liability creation, and if the U.S. trade deficit and corporate share buybacks are responsible in part for asset capital gains, then asset prices are increasingly being determined by flows and the leveraging of those flows, as is economic growth itself.

In a pickle over nickel

JP Morgan is taking on Deutsche Bank and Merrill Lynch over the direction of nickel, according to this story by Bloomberg:

Nickel Price Outlook Divides Deutsche Bank, JPMorgan (Update3) By Chia-Peck Wong and Chanyaporn Chanjaroen
When it comes to nickel, the best performing commodity the past 13 months, JPMorgan Chase & Co. is determined to prove Deutsche Bank AG is full of so much hot air.

At stake is $55 billion of metal mined from New Caledonia to western Canada, and the rising cost of 300,000 stainless-steel products from General Electric Co. jet engines to kitchen sinks. More than $11 billion is riding on a Deutsche Bank call that nickel will appreciate again in 2007.

Prices of nickel, used to make stainless steel, have doubled in seven months to $37,000 a metric ton, after reaching the highest in more than two centuries of trading on Jan. 26. Nickel soared during the past five years as China stepped up stainless-steel production and overtook Japan as the world's largest supplier of the commodity.

The market is "over-inflated," says Jon Bergtheil, the head of global metals strategy at JPMorgan in London and an industry analyst for three decades. "Nickel's fall will be worse than the pace copper has seen," dropping at least 25 percent this year, he said.

Nonsense, says Deutsche Bank analyst Michael Lewis, who told customers on Jan. 12 that nickel is the favorite pick among industrial metals because producers can't keep up with demand. Germany's biggest bank raised its forecast for average nickel prices to about $31,500 in 2007 and to $31,000 in 2008. Nickel in 2006 averaged about $24,150.

"The ramp-up in Chinese stainless steel capacity in 2007-08 is now expected to sustain strong demand growth for nickel at elevated levels," the bank said in a report. Lewis, who works in London, couldn't be reached to comment.

Merrill Lynch & Co. analyst Daniel Hynes says prices will tumble and average $23,700 a ton, 40 percent less than today. Hynes, who works in Sydney, spent six years with nickel producer WMC Resources Ltd. before it was bought by BHP Billiton Ltd., the world's biggest mining company.

"Nickel gains came after the Chinese put up a large amount of stainless-steel capacity," said Bergtheil, 52, of JPMorgan, the third-largest U.S. bank. "Now we are reaching the stage of having too much stainless steel. The Chinese government has tightened regulations to rein in overheated industries, and one of the latest aims at stainless steel."

Some analysts say China has found an alternative in nickel pig iron, a lower-cost metal mined in the Philippines. The substitute may cause imports of refined nickel by China to drop 11 percent this year because it costs 40 percent less than the refined metal, said Xu Aidong, a metals analyst at Beijing Antaike.

Each time nickel prices doubled in a year during the past two decades, as they did in 2006, they've fallen the next year.

A drop in nickel prices would hurt Russia, Canada and Australia, the world's three biggest exporters. Profits would suffer at producers including Cia. Vale do Rio Doce, Brazil's second-largest company, and OAO GMK Norilsk Nickel, where shares have gained 14 percent this year.

World's strongest currency? Get real.

Real Makes Brazil Dollar Beater, Haven for Capital by Adriana Brasileiro and Alexander Ragir
[T]he real strengthened as much as 1.1 percent on Feb. 1, its biggest rally since September. The gain is the latest spurt in a four-year, 71 percent advance that made it the world's best-performing currency against the dollar. This year, the real has risen against every one of 70 currencies tracked by Bloomberg except Iceland's krona and Thailand's baht.

A boom in exports of orange juice, sugar, coffee, soybeans and iron ore, as well as interest rates at 12.9 percent, are luring investors to the real. The currency gained 0.6 percent today to 2.0932 reais per dollar, its strongest since May.

Demand for the currency has risen as international investors buy the country's debt. Yields on one-year benchmark government securities are 7.35 percentage points more than comparable U.S. Treasuries and 8.48 points higher than German bunds.

Brazil's benchmark local-currency, zero-coupon bond due January 2008 returned 18.2 percent during the past 12 months. Converted into dollars, the bonds returned 24.8 percent

The higher yields have made Brazil popular with investors borrowing in Japanese yen -- where the benchmark lending rate is 0.25 percent -- and reinvesting in real debt, the so-called carry trade. Foreign investors boosted holdings of real debt more than five-fold last year to 38.4 billion reais ($18 billion).

Flows of funds into Brazil have overwhelmed central bank efforts to contain the currency's advance. Banco Central do Brasil has sold reais for dollars every day since July. That has pushed foreign reserves to a record high of $91.6 billion from $56.8 billion a year ago and $32.4 billion in June 2002.

The steady gains in the currency over such a long period are unusual in Brazil, a country that has had eight currencies since World War II and suffered a 35 percent plunge in the real as recently as 2002. The real is now less volatile than the Norwegian krone and New Zealand dollar, based on prices quoted by options traders.

Saturday, February 03, 2007

Flying like a Led Kite

Red Kite's Lilley Says Copper Will Rebound on Demand By Xiaowei Li Jan. 23, 2007

David Lilley, a partner at Red Kite Management Ltd., which has base-metals hedge funds worth more than $1 billion, says copper prices will rebound on rising industrial and housing demand in China and the U.S.

The metal has tumbled far enough from an all-time high last May to have reached "fair value," and investors should buy now, Lilley, 40, said in an interview Jan. 20 in Shanghai.

Red Kite was founded two years ago and is also run by Michael Farmer, a former head f the world's largest copper trading unit, MG Metal and Commodity Co., where Lilley worked. The company has two funds, one actively traded and which is not raising new money, and a second, longer-term fund that was started in November and remains open, Lilley said.

"We started with $50 million in January 2005," he said, adding: "We now have over $1 billion...."

Lilley, at a conference in Shanghai on Jan. 20, said copper consumption in China has grown at an average of 16 percent a year for the past six years, and the trend may continue. "I think the pressure on copper prices has probably peaked," Lilley told the conference. Rising Chinese imports and a strengthening U.S. housing market will support prices "in the first quarter."

"It is a good time to buy."

Zinc, Copper Plunge After WSJ Report of Losses at Red Kite Fund By Millie Munshi and Pham-Duy Nguyen Feb. 2, 2007

Zinc plunged the most in nine years and copper dropped to a 10-month low, fueled by a report of losses by metals-trading hedge fund Red Kite Management Ltd.

Red Kite's $1 billion fund lost 20 percent in the year to Jan. 24, the Wall Street Journal reported, citing an "unofficial estimate" the fund gave to one investor.

"The fear is that it's an Amaranth" Advisers LLP, the hedge fund that lost $6.6 billion last year on natural-gas trades, said Michael Guido, director of hedge-fund marketing at Societe Genearle SA in New York. "The problem is that we don't know how serious it is, and uncertainty breeds liquidation."

Red Kite's performance in January was the worst for any month in at least a year, the Wall Street Journal said today, citing an investor who saw the fund's results. One of Red Kite's funds last year gained more than 190 percent betting on metals, the newspaper reported.

David Lilley, who co-founded Red Kite with Michael Farmer and Oskar Lewnowski III, declined to comment when contacted by Bloomberg. Farmer wasn't available to comment on the Wall Street Journal report.

"There's absolutely no reason for metals to fall this way," said Michael Metz, chief investment strategist at Oppenheimer Holdings Inc. in New York. "The decline reflects the stress on one or more leveraged players. When the locals smell a catastrophe, they liquidate. In my opinion, it's a good time to buy."

Friday, February 02, 2007

On the importance of presentation when handling food for thought

Guambat hattips his old mate Mort for directing him to this fabulous example for the impact of well-designed graphic communication.

Click here.

Thursday, February 01, 2007

Even commies have bubbles?

Don't Bet on China's Collapse TheStreet.com (subscription)

Guambat doesn't have a subscription but likes to click the link to see smarmy Jim Cramer. But whatever the article had to say which might have corroborated the headline would be interesting reading in light of other stories of the day.

Irrational exuberance? China's stock market is soaring
Less than two years after a crash that disillusioned many Chinese, China's stock markets are almost going mad. The leading Shanghai Composite Index is approaching 3,000, and Chinese investors are flocking to buy shares in record numbers.

The bull market is so powerful -- the Shanghai market hit a record high last week and was among the best performers in the world last year -- that one senior Chinese official has warned against "blind optimism."

College students, young professionals, retirees and others are buying individual shares or investing in China's swelling mutual funds. One mutual fund raised $5 billion in a single day.

Day trading, meanwhile, is becoming popular with investors, many of whom monitor the market from home on personal computers.

The run is particularly striking because China's stock markets have historically been stagnant financial backwaters, marred by scandal, weak oversight and fundamental contradictions.

Even as China's economy has roared, the stock market has rarely inspired public confidence or great interest. China's markets nearly disintegrated in 2005.

Many Chinese investors are leaving the bubbly national real estate market and moving money into stocks. Roughly 2.7 million new investment accounts were registered last year, more than triple the number from 2005.

The result is an almost goofy buying binge that many analysts expect to continue.

"We've gone from a historic low to a historic high in the space of a year," said Stephen Green, a senior economist with Standard Chartered Bank in Shanghai who specializes in China's equities markets. "Obviously, everyone is getting a bit scared about the scale of the ramp-up."

In Shanghai, one of the most popular local television programs is "Stock Market Today."

Shares plummet in 'overvalued' market
"Such a short-term correction will not change the long-run bull sentiment," said Qiu Zhicheng, a Haitong Securities Co analyst. "It is wise to buy into some quality shares amid the correction if investors are seeking long-term returns, rather than short-term speculation."

China's Stocks Tumble Most in 21 Months on `Bubble' Warning
Only 30 percent of companies listed on the Shanghai Stock Exchange "are good to invest in by Western standards," and investors in the remaining 70 percent will probably lose money, Cheng Siwei, vice chairman of the National People's Congress, said yesterday at a conference in Dubai.

High Court gets priorities right

The Australian High Court has finally announced its decision in the Sons of Gwalia case, which many lenders and debt holders wail will be the ruination of us all.

Gwalia ruling riles lenders by Andrew Trounson

Guambat was highly sceptical of such claims some time ago. See, A question of priorities and Lenders are having another lend of us

Ruling on Gwalia reinforces existing shareholder rights by John Walker
It is not the role of the legislature to afford additional protections to the debt markets. The debt markets are more than able to protect themselves.