Thursday, May 29, 2008

Freudian typo

This typo didn't carry over into the linked article, but the synopsis said more than the story:

From MarketWatch front page May 29, 2008 at 6:09 a.m. (U.S. E.T.)
Fisher sees rate shift even if growth weakens
Dallas Fed president says inflation is insidious enemy, predicts rate shit "sooner rather than later" if inflation threat increases.
Mishkin to leave Fed, return to academia
Timely reversal needed to whip inflation, Stern says"
True. Wonder how long it will take them to notice it? And how long to change shit?

Today's rants, 29 May 08


What's with this insipid logo? (Not picking on this one particularly; there've been several of late, turning an originally cute idea into too cutesy, too often):

Is Google loosing the plot? Did it ever have one? How many good ideas/songs/books can one person have before it all starts to unravel?


With Guambat's power bill tipping out over $1,000/month (Guam has a horrible power generation issue; see this and this and this and this), Guambat has been crawling around the townhouse looking for things to turn off. I mean turn OFF.

Not possible. It seems that every appliance that plugs into a power mains has some kind of gizmo or other (useless digital clocks being a big culprit, especially on Guam where there are so many power bumps that having a digital clock at all is as useless as an outdoor ice-skating rink).


A succession of reports about Kim Jong Il

Guambat noticed the Tokyo market was soaring today, apparently for no reason at all. Then, came across the wire this report from Reuters:
TOKYO, May 29 (Reuters) - The Nikkei stock average rose 3 percent on Thursday, led by high-tech exporters as the yen softened and further boosted by an unsubstantiated report that North Korean leader Kim Jong-il may be dead.

Actually, earlier reports had it that the rumoured Dearly Departed Dear Leader had been assassinated. but that was not mentioned in this linked revised coverage.

But just hold on there, Pilgrim. The South Korean government, which has an interest is tracking and spinning these kinds of stories, denied the rumour, in reports such as this:
The South Korean government has denied a report by a little-known local internet news site that the North Korean leader Kim Jong Il has been assassinated.

"The alleged death has been confirmed as false," Unification Ministry spokesman Kim Ho-nyeon said on Thursday.

Reports of Kim's demise have surfaced before, sometimes appearing as rumours in financial markets.

Looking for the supposed fire when there is supposed smoke, Guambat dug this report, out a couple of days ago, from the BBC:
A recent report showed that more than half of the 22 Ph.D. researchers at the Korea Institute for Defense Analysis expect a form of group leadership will take place in North Korea after Kim Jong Il dies.

The majority of them said Kim’s second son Kim Jong Chul, 27, is the dictator’s favorite, but first son Kim Jong Nam, 37, and brother-in-law Chang Song Taek, 62, are thought to have a stronger power base for succession.

The U.S. government reportedly posted the report on North Korea’s succession on the Open Source Center, a government website to which only U.S. officials can have access on May 14.

The release of the report indicates that the U.S. government began to review North Korea’s succession issue amid recent improvements made in the U.S.-North Korea relationship along with the resolution of nuclear issues.

The report takes into consideration what are deemed the most important factors in the North Korean leadership succession -- whether Kim Jong Il is alive or not, the way he dies and Pyongyang’s power structure – to suggest six types of succession.

Guambat reckons those PhD smartey pants didn't count on the possibility of women scorned as one motivated factor in his conjectured demise:
North Korean Women Fight Back as Kim Orders Them Out of Markets By Bradley K. Martin and Hideko Takayama May 29 (Bloomberg)

There are, of course, opposing views of Kim Jong Il.

Here's one from the Songun Blog:

Here's another from the Idiosyncracies blog:

Spot the difference?

Exxon-Mobile's Strategic Petroleum Reserves

From A rare look at the U.S. strategic oil reserves by Simon Romero
Published on 6 Dec 2004 by New York Times / IHT. Archived on 6 Dec 2004.
FREEPORT, Texas A swamp near here is one of the most secretive places in America. There are no signs, just a 500-acre complex protected at all times by 30 armed guards in combat fatigues patrolling in sport utility vehicles.

This is part of the world's largest and most expensive filling station, the U.S. Strategic Petroleum Reserve, where a large portion of the government's nearly 700 million barrels of oil are stored in underground salt shafts that are supposed to be stable for the next thousand years or so.

American taxpayers have invested some $20 billion to build and stock this reserve - and three others in hidden locations - since it was created in 1975 in response to the Arab oil embargo. And now, after 29 years, it is finally about to be filled up to the brim for the first time.


That's peanuts when compared to ExxonMobile's strategic reserves, according to the NYT DealBook blog's story, "Exxon’s Texas-Size War Chest":
Exxon Mobil has amassed a large pile of common stock held in treasury. At the end of 2007, the company had 2.367 billion shares held in treasury, for which it paid $113 billion over the last 10 years, according to a regulatory filing. If that stock were valued at the current market price of $90 a share, it would be worth $237 billion, or $124 billion more than what Exxon Mobil originally paid for it.

The article tells us Exxon had built up a war chest like that in the 1990's and used it to buy up Mobile, its then rival, further re-concentrating the "broken up" Standard Oil Company **.

So what's in store for this strategic reserve this time? No one is telling, but the NYT DealBook is speculating:
It refuses to invest in projects that would lower its industry-leading return on capital employed, which is now around 35 percent. [And thereby increase production and supply of oil. **]

So what could Exxon Mobil buy with a quarter-trillion dollars in stock? ConocoPhillips has a market capitalization around $140 billion, so Exxon Mobil could snap that company up whole and give a modest premium to shareholders, if it were so inclined. The second-largest United States oil company, Chevron, has a market capitalization of around $206 billion, so Exxon Mobil could swallow it up instead.

** See Guambat's post just a day or so ago: Missed this anniversary date: May 15


May 29, WSJ, "Oil Exporters Are Unable To Keep Up With Demand":
The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic....

"Unable"? More unwilling than unable, Guambat reckons.

"Market logic"? More doodoo economics than logic, Guambat reckons, when the cozy cabal of suppliers (the big oil companies and oil countries) are more keen to cartel than compete.

Dell ding-donged

Court Finds Dell Guilty of Fraud by Nancy Gohring, IDG News Service
Dell was found guilty on Tuesday of fraud, false advertising, deceptive business practices and abusive debt collection practices in a case brought by the New York attorney general.

The Albany County Supreme Court found that Dell deprived customers of technical support that they bought or were eligible for under warranty in several ways, including by requiring people to wait for very long times on the phone, repeatedly transferring their calls and frequently disconnecting their calls.

Dell also often failed to provide onsite repairs for customers who bought contracts for such support and often blamed software when hardware was actually the problem, the court found. The company also sometimes refused to offer support when a support contract ended, even though the user had first complained about a problem before the end of the contract. Subscribers to a "next-day" repair service sometimes waited as long as a year for support, the court found.

Dell and affiliate Dell Financial Services also advertised special no-interest financing, but denied almost everyone those terms. It often sold customers products without informing them that they didn't qualify for the special financing terms and then charged them interest rates as high as 30 percent, the court said.

Dell and DFS also often incorrectly billed people for cancelled orders and for accounts they didn't authorize. The companies then harassed the people for payment, using illegal billing and collection practices, the court said.
But otherwise, it's a Dell of a company.

It was elsewhere reported that (beware of loud ad when clicking this link)
"Dell said in a statement that “We don’t agree with this decision and will be defending our position vigorously. Our goal has been and continues to be to provide the best customer experience possible. We are confident that when the proceedings are finally complete, the court will determine that only a small number of customers have been affected.”

End of an error

It must be lame duck hunting season.

Why, just today, the WSJ carried two stories, confessionals really, from Bush insiders distancing themselves from his administration.

One, an opinion piece "How Bush Sold the War" from long-warrior Douglas J. Feith, says, notwithstanding Bush ran out of proofs that US security interests were threatened by Sadam, he should have maintained his course and insisted that grave and defensible US interests justified the Iraq invasion.

Of course, that's a long war story, not easily digested in political sound bites. Indeed, Guambat's not insubstantial digestion system is having a hard time ruminating on the subject since first he became aware of it.

Second, the Journal joins the throng "discussing" the slings and arrows of Scott McClellan's new book "What Happened: Inside the Bush White House and Washington's Culture of Deception."

Some of the arrows got slung right back at him. Guambat was particularly impressed by the bitchiness of this retort from a Republican close to the White House: "It looks like a desperate attempt to salvage his reputation by junking the one positive attribute people saw in him -- loyalty."

When you live by the sword of truth, you can die by the sordid truth.

Wednesday, May 28, 2008

Missed this anniversary date: May 15

Guambat was perusing the WSJ MarketBeat blog and noticed this from the Tim Annett post, "Merrill: No Crude-Oil Problem. Yet." (quoting from Merrill's Francisco Blanch):
“In just ten years, the weight of oil in the world economy has moved from 1.5% to 6.5% on the back of rising demand and prices. Looking back at history, the share of oil in world GDP scratched 8% in 1979 during the second oil crisis.”

“While non-OPEC crude oil supply is struggling to grow, there are still plenty of resources in the ground. Still, even though crude oil is not really the problem just yet, the lack of investment in the petroleum sector and the high concentration of suppliers may ultimately create a true crude oil supply shortage in the next decade.”

Annett's post tended to put the spotlight on the demand side of the oil economics. Guambat looked at that supply side structure of a highly concentrated supplier bottleneck and their lack of investment in new supply and sighed.

The suppliers will be railing about how there is plenty of the stuff in the ground but NIMBYs and Eco-Nazis are keeping them from it, but Guambat remembers a briefing reported a few of years ago by Jeff Mathews and mentioned in "Model behaviour" a Stew piece then. That post was added WAY back when oil prices had just surged to a record level about one-and-a-half times LOWER than now. With oil prices breaking over $50/bbl back then, one of the highly concentrated suppliers was letting slip the plan that they would not consider any investment in new supply that could not earn a decent profit based on an oil price of $20/bbl.

Jeff's post was "Why We Have an Oil Crisis, Or; Wait 'Til Chuck Schumer Gets a Load of This" and he had this to say:
The British Petroleum investor relations person presented yesterday at the BankAmerica conference, and during the breakout session she defended the fact that BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.

When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.

Since it takes five to seven years to bring a big project on stream, “it is reckless to be investing (based) on (today’s) oil price.”

That is true enough, I suppose…but when asked if $20 a barrel was not a little on the low side of recklessness, she noted that at the $20 per barrel “test” price, BP has enough exploration and production projects “to grow production 5% per year.”

And since world oil production is growing “at half” that rate—i.e. around 2.5%—then “we are doing more than our fair share.”

Now, this is where the numbers get easy to follow, even for a U.S. Senator.

How much of its cash flow is BP actually spending to explore for and produce oil this year, you might wonder?

“$9.5 to $10 billion,” according to the investor relations person.

And how much of its cash flow is BP “returning to shareholders” in the form of dividends and share repurchase, you might wonder?

$17 billion.

Therefore, British So-Called Petroleum is giving back to its shareholders 70% more of the cash flow it makes thanks to $65 oil prices than it is spending to find new sources of oil supply.

Perhaps they should change the company's name to “British Dividends & Share Repurchases.”

In other words, the industry has long held back on increasing production. And why? Because like a dog licking its balls, it can. Due to its highly concentrated nature, there is no natural competition.

Which brings us to the missed anniversary date of a couple of weeks ago. It was on May 15, 1911 that the US Supreme Court rendered its decision to break up Standard Oil's monopoly, a decision that up to this minute and the next continues to raise ire and retaliation from some sectors of established economia.

Guambat is too dull to argue the point but does notice that none of the big break-ups actually worked because all that was broken up was legal ownership, not the cabal of related interests. In the case of Standard Oil, for instance, it was like one of those scenes from a sci-fi movie where the alien is smashed into a pile of little pieces, and then those little pieces rush off with one mind, more hell bent than ever on their mission. Standard Oil was "broken up" into 34 companies, "among them those that became Exxon, Amoco, Mobil and Chevron."

And when the highly concentrated yet monopoly-busted oil companies start to quit complaining and learn to love the monopolized OPEC cartel, things get a little taxing for all the rest of us.

Nevertheless, happy anniversary Sherman Act. RIP.

Tuesday, May 27, 2008

Dark pools under your eyes

Well, here he goes again: Guambat diving deep beyond his comprehension into the magical phantasmagoria of finance.

Dark pools of liquidity have just bubbled up to the surface before Guambat's eyes. Evidently, they've been around for a while, but have had to take second or third or nth billing to the alphabet soup cooked up by the financial wizzes of late. But the financial culinary arts have been busy in the outdoor kitchen, cooking up another, so it smells to Guambat, who tends to follow his nose in these matters, deliciously indigestible pot of toil and trouble.

Dark liquidity pools, as a concept, were today introduced to Guambat via FT Alphaville:

Ft Alhpaville: "Guambat, please meet Dark Liquidity Pool".

Guambat: "Pleased to meetcha, I'm surely hopefully sure."

Dark Liquidity Pool: "Piss off, ya moron."

It seemed to Guambat, upon first reading of the FT Aphaville news that Lehman Bros. was adding Japanese stocks to its dark liquidity pool, that these things were sort of the speakeasy of off-market, back-room, beyond regulation, corruptible if not corrupt market trading in securities and all the other things that hum along over the financial wires that constitute the strings connecting the puppets and puppeteers.

Now, bear in mind, that such shenanigans wouldn't bother Guambat in the least if he was in any way assured that, first, none of his hard earned and saved wasn't being wisked off into these dark dank spots by "funds" and "managers" and others who play with his money under the rubric of financial intermediation. Nor if there was any certainty that this undisclosed and incalculable devise was something other than the same kin of algorithm that brought down CPDO and R2D2.

But Guambat, being the silly old fudge that he is, just lacks the je ne sais quoi to quoi what's going on here. Regardless whether it is ET or Alien, Guambat retreats at the mere hint of this sort of out-of-this-world gimmickry. He'll sneak out of his burrow later to see what all the fuss is really about.

And what are dark liquidity pools all about? Guambat couldn't begin to guess, let alone translate, so this is what he's found, so far:

Will Dark Pools Swallow Wall Street? by Kit R. Roane Jul 9 2007
In search of lower prices, less scrutiny, and fewer rules, some of the biggest securities traders are turning to private exchanges called dark pools to make their biggest deals.

These pools are basically internal systems for trading stocks privately, off of public exchanges and out of the public eye. They are growing rapidly, both in number and in volume of trades.

Behind the boom in dark pools are large hedge funds and institutional clients that want to build and liquidate large stock positions at lower costs, while also being shielded from those who might profit by knowing their intentions.

The mainstream exchanges see the pools as yet another group attempting to steal revenue-producing trades and liquidity from their markets. That's in addition to a welter of new electronic-trading platforms that offer faster execution and lower transaction costs. These platforms alone have triggered a wave of consolidation among traditional exchanges.

Exchanges are at a disadvantage as they try to compete with dark pools. The S.E.C. regulates traditional exchanges, and new rules being phased in over the next few months will require them to share information fairly and mandate that trades be routed to whichever exchange gives the best and fastest price.

Dark pools, by contrast, can largely avoid regulation if they keep their trading volumes under a set threshold. This makes them attractive to big institutional traders seeking to avoid being so transparent about their trading patterns that competitors can anticipate their actions or otherwise gain an edge.

The S.E.C., meanwhile, is worried that the fundamental lack of transparency in these pools might lead to price manipulation or other abuses.

The idea behind dark pools isn't exactly new. Brokerages have long tried to cross (or satisfy) trades internally, by matching one customer's sale with another customer's purchase. The first true dark pool is believed to be Investment Technology Group's two-decade-old Portfolio System for Institutional Trading, or Posit.

But now new technologies have combined with market changes to make these alternative, private exchanges a hotter place to invest.

Shedding light on the dark liquidity pools May 2007
Fragmentation in the market has formed a lot of ‘dark pools’ of liquidity, which can only be accessible through electronic means.

Paul Scott, director of trading solutions specialist FIXCITY, explains that increased electronic trading means financial institutions can execute trades and secure liquidity from many different venues. “Automated platforms offer the opportunity to match ‘off exchange’ with other buyers and sellers, without showing the available liquidity to the market,” he says.

“Dark pools refer to the non-displayed or hidden nature of the buy and sell orders that reside in a crossing platform. The term dark liquidity can also be applied to all forms of non-displayed liquidity such as the order blotters of buy-side dealing desks.”

According to Mr Palmer, fragmentation of the market is responsible for the growth in these pools – “because there are so many venues to execute trades on”. Mr Scott adds: “In the US, the influx of crossing networks and alternative venues, and the rapid adoption of electronic trading technologies, has driven the growth of dark pools.”

Crossing networks, he explains, “allow dealers to match orders off-market and access ‘hidden’ natural liquidity. Trades can be processed anonymously, without impacting the price.”

Currently, dark pools are primarily a US phenomenon, although Mr Scott expects the use of alternative trading venues, which has driven their growth in the US, to catch up in Europe “as traders integrate electronic trading strategies and streamline their execution facilities”. According to Jerry Lees, head of alternative execution at CA Chevreux, there are 30-40 dark pools of liquidity in the US, but “not many in the European or other markets”.

Richard Balarkas, head of Advanced Execution Services sales at Credit Suisse, adds: “There are only two crossing networks outside of the exchanges in Europe – ITG and Liquidnet. But there is dark liquidity. One area is through the exchanges having iceberg orders – people may have a lot more to trade than is displayed on the screen at any time. The biggest sources of dark liquidity are within the investment banks and major brokers.

Says Mr Balarkas: “One of the biggest problems for any sizable money manager wishing to trade is lack of liquidity and signalling risk. A dark pool is a very simple way you can hopefully capture lots of liquidity and achieve a large proportion of your order being executed without displaying anything to the market.

Algorithms Sweep Dark Books By Ivy Schmerken October 24, 2005
Several brokers are designing algorithms that sweep crossing networks and so-called dark books - liquidity pools that match buy and sell orders without publishing a quote. Similar to crossing networks, dark books are an alternative to the public equity markets that brokers are exploring for their algorithmic trades.

For example, in October, Piper Jaffray was set to launch Fusion, an algorithm that works within the public equity markets and simultaneously searches multiple crossing networks and dark books for hidden liquidity. "We can either send larger orders to the block-crossing networks or send smaller orders to the dark books, and, in every case, we're searching for liquidity," says David Mortimer, head of product development, Piper Jaffray Algorithmic & Program Trading Group (APT). Mortimer explains that Piper is in a position to have relationships with large crossing networks because the broker represents institutional flow, as opposed to statistical arbitrage flow, and doesn't trade for its own proprietary account.

Additionally, in July, Investment Technology Group released Dark Server - an algorithm that scans multiple alternative trading systems (ATSs), including ITG's own POSIT, NYFIX Millennium and Pipeline Trading, simultaneously. "What all of our clients want to do is have access to a lot of the ATSs through one source," says Tony Huck, managing director at ITG. Further, institutions want to soak up as much natural liquidity as possible without leaving a footprint in the market, he adds.

Meanwhile, Credit Suisse First Boston has had the capability to scan multiple ATSs with its Guerilla algorithm for about a year and a half. Manny Santayana, managing director and head of advanced execution services sales and marketing, Americas, for CSFB, says Guerilla is a stealth algorithm that provides a trading solution for the small cap and mid cap environment.

"It hides in the electronic bushes, and it waits for liquidity to appear," Santayana describes. "When liquidity shows itself, the guerilla comes out firing orders into the electronic marketplace, taking out liquidity and capturing price improvement for you in small cap and mid cap names."

Dark Is Hot. But Is It Good? By Larry Tabb August 07, 2006
Dark pools are all the rage. Those opaque matching venues where large blocks meet seem to be on everyone's hit parade. Whether it is Liquidnet's valuation (which seems to have occurred eons ago), the preponderance of announced sell-side internal crossing engines, the development of dark algorithms, the buy side's desire to participate with hidden flow, or just the loss of NYSE market share causing firms to hunt more judiciously for an execution, dark is hot.

But while dark is hot, is dark good? External crossing networks now execute approximately 5 percent to 8 percent of buy-side flow, while the largest sell-side firms cross approximately 6 percent to 10 percent of their institutional flow. Are we getting to a point where we should be concerned that the dark liquidity pools are beginning to impact the price discovery process of traditional markets?

Certainly the exchanges think so. At the SIA Market Structure Conference a few months ago, Catherine Kinney, president of the NYSE, had a few not-so-nice words to say about crossing - particularly broker internal crossing networks. She posited that dark books impair price discovery, and that every share that is crossed in the dark is a share that doesn't assist the market in determining an accurate price. Now, Ms. Kinney certainly has a vested interest in keeping flow on the exchange, but she isn't completely off base.

At what point should the market be concerned that limited amounts of retail order flow could adversely impact the price of very large blocks? Even if institutions are happy with their price discovery, are we as an industry comfortable with retail flow being matched against sophisticated flow and never making it to the market for all to see?

While all is fair in love and war, and what goes on in a dark room between consenting institutions and hedge funds is fine with me, when it comes to retail fiduciary responsibility, we should act as an industry before the regulators step in and mandate something that everyone will hate. So while dark pools are great for finding liquidity, let's be sure that these dark pools are honest fair, and provide best execution. While I am all for dark pools, it's black eyes I'm against.

At least one financial website with a bit more paranoia conspiracy predisposition than Guambat (but only a bit)asks, and posits some tentative answers to, the question, "Don’t all these ‘dark vehicles’ greatly increase the risks in the market? "

Links to nothing much:
Dark liquidity

Optimizing Dark Pool Liquidity 2007 and 2008

Dark Pools of Liquidity

AND SINCE we started this post with a story about Lehman Bros. and Japanese stocks, we return to the theme to finish it off:

Japan Fraud Lawsuit: Should Lehman Have Known Better? (WSJ DealJournal)
A Tokyo court will hear opening remarks Wednesday in a high-profile lawsuit filed by New York investment bank Lehman Brothers Inc., which is seeking reimbursement for $350 million it says was swindled from it by employees of Japanese trading giant Marubeni Corp.

Lehman says a pair of Marubeni employees, as well as executives at two smaller companies, presented bogus documents, fake corporate seals and an impostor to convince Lehman officials that a partnership it was joining was a legitimate business. The purported partnership was supposed to provide short-term financing–at annualized rates as high as 25%–to hospitals buying sophisticated medical equipment through a one-time Marubeni subagent.

Lehman committed more than $300 million to the partnership, only to be told the enterprise was a fraud at a repayment deadline.

The apparent scam captured headlines in Japan, where people marveled that a sophisticated Wall Street firm could be duped and that a blue-chip member of Japan Inc. might be involved. Both companies have cooperated with police.

The trial will likely hinge on whether the court finds that Lehman was justified in believing the two Marubeni employees were in positions responsible enough to enter into the purported deal on the company’s behalf.

Marubeni will argue that Lehman failed to conduct thorough due diligence, according to a senior Marubeni executive familiar with the company’s legal case. The deal was so big, it would have required the approval of Marubeni’s board of directors, the executive said.

Guambat fears Lehman Bros. and others will have the dark pools pulled over their eyes, too. That Marubeni case just goes to show, as do many other anecdotes, that the big money hotshots may be the smartest guys in the room, but then again, they might'n't.

Wednesday, May 21, 2008

Guambat delivers commodity speculation cure

OK, so the headline title to this post is over the top. But so is all the recently arrived hyperventilation about speculation in the commodity pits.

Why, the uproar has grown so loud that even Jumpin' Joe Lieberman has chimed in: "speculative demand -- divorced from market realities -- is driving food and energy price inflation and causing a lot of human suffering" according to the LA Times piece, "Are commodity traders bidding up food, fuel prices?" According to this piece,
The link between soaring prices and the vast sums of money flowing through commodity markets is controversial and hard to quantify.

Economists, traders and regulators routinely dismiss the notion that excessive trading is the culprit instead of traditional market forces such as supply and demand. And they warn that increased regulation could interfere with trading programs used by airlines and others to blunt the negative effects of rising commodity prices.

Jeffrey Harris, chief economist at the Commodity Futures Trading Commission, told lawmakers Tuesday that the high prices reflected increased demand from emerging markets and decreased supply because of bad weather or geopolitical events.

Harris and others also pointed to broader economic factors such as the sinking value of the dollar, which has made commodities traded in the United States a relative bargain for foreign investors. Commodities also have recently offered more certain returns than the stock market.

"Together, these fundamental economic factors have formed a perfect storm that is causing significant upward pressure on futures prices across the board," Harris said.

Such explanations are less than soothing in the face of the unprecedented price hikes, which have alarmed consumers and politicians and yielded unusual alliances.

Fearing that Joe Lieberman is going where no NYT commentator has gone before, and demanding space on this bandwagon is the NY Times, borrowing a story from Bloomberg: Limits Weighed for Commodities Investors

The seminal Bloomberg story carries the outrageously populist pulp that,
"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can't afford it," said Lieberman, a Connecticut independent.

Guambat is feeling a bit of agro about these joey-come-latelies. After all, two years ago Guambat was posting about the abuses in the commodities exchanges by the new financial wizards in his post Can't cop it anymore.
Guambat has railed at the changes experienced in the various world markets with the invention of new "financial products" and the unleashing of the large funds and brokers to pursue them any where, any time, and any way, without (much) regulation or oversight (see, for instance, Risque business).

Now its the turn of the copper users industry to have a go.

COPPER users have threatened to turn their backs on the London Metal Exchange, alleging hedge funds are driving copper prices to speculative extremes that no longer reflect supply and demand.

In a letter to the LME and the Financial Services Authority, the International Wrought Copper Council said that its members faced severe difficulties financing deliveries.

"This market, where speculators can buy what does not exist, is doing serious damage to our industry and will bring into question whether the LME copper price should continue to be the recognised reference price," it said.

"This is a feeding frenzy driven by hedge fund speculation. This would not be happening if the price was left purely to industrial supply and demand. The market may be tight, but it is well-balanced.

"You have to take it with a pinch of salt when the LME claims it is managing this market on the basis of industrial demand," Mr Payton said. "I'm not sure their methods can detect whether wolf-pack speculators are manipulating the futures markets three months out."

Using basic supply and demand fundamentals to forecast commodities prices is still the norm to a large extent, but the spectacular price rallies of the past year beg the question of just how relevant fundamentals have become given the enormous amount of fund money flooding the markets, say Edwar Meir and Fred Demler of Man Financial.

OK, so, what's the cure?

Simply make commodity futures contracts deliverable only; no cash settlements. You wouldn't have to do that for long. After 6 - 12 months, the finance wizzies will have pissed off. The last thing they want in their pockets is filthy commodities.


ANN DAVIS has a report on May 23rd in the WSJ that notes these "anomalies", shall we say, in the commodity markets, where "commodity markets have been in the grips of a painful financial squeeze".
[L]arge, well-capitalized commodity merchants were taken by surprise when a number of agriculture contracts soared nearly simultaneously this spring.

Wheat hit a record high in late February, nearly tripling from last year; soybeans and cotton both saw big spikes March 3.

Orange juice "futures edged to new contract lows against a backdrop of bearish fundamentals and a weak technical trend. Speculative funds have been liquidating long trades..."

Even large, well-capitalized commodity merchants were taken by surprise when a number of agriculture contracts soared nearly simultaneously this spring.

Wheat hit a record high in late February, nearly tripling from last year; soybeans and cotton both saw big spikes March 3.

Oil's 15% rise this month has surprised even experienced players in the energy market. [M]arket players, particularly speculators who misjudged the top of the market, are being forced to buy oil futures to close out bad bets. [S]ome traders put big money into complex trades in the fall that fell apart when price relationships flip-flopped the last few days. The market is beset by talk that large producers "wanted to unwind their hedges, putting upward pressure on prices."


Feeling moody about malpractice

The role/duty/purpose of ratings agencies is to properly rate, not to guarantee, risk. So, if they've properly rated risk and risk happens, then, not their fault.

But what if they negligently bugger the rating?

Sam Jones doesn't raise the question, but does point out the possible factual situation in an FT article written in collaboration with Gillian Tett and Paul J Davies, "CPDOs expose ratings flaw at Moody’s" and then goes on to toot his horn in FT Alphaville (as you would):

FT Alphaville exclusive: Moody’s error gave top ratings to debt products

Credit ratings are hugely important within the financial system because many investors - such as pension funds, insurance companies and banks - use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.

Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models.... [A]fter a computer coding error was corrected, their ratings should have been up to four notches lower.

They just don't make inflation - or much else - the way they used to

A couple of MarketWatchers are reminiscing about the good old days.

David Weidner is looking back only a year ago.
The issues facing Wall Street last spring would be petty annoyances today. Just a year ago, mergers and acquisitions were at an all-time record, brokerage profits had rocketed into uncharted territory, the Dow Jones Industrial Average was floating in the rarefied air above the 13,500 level and was soon to move above 14,000. The Nasdaq Composite Index was creeping above 2,600. So much was going right, it seemed we had to make up our problems. Little did we know that soon our creations would be wiped away with chief executives and fallen banks.

Oil was at $65 a barrel. Analysts explained the rise by talking about political tension overseas, greater demand and a lack of refinery capacity. Almost no one mentioned the influx of speculators, mostly from hedge funds, who have since made $80-a-barrel oil seem like a bargain.

Today we predict $200-a-barrel oil and another $100 billion in credit write-downs at major banks. Home prices have further to fall. The buyout boom has slowed. Wall Street will lay off another 30,000, including 9,000 combined from Bear Stearns and Lehman Brothers Holdings Inc.

While Wiedner's recollections are almost wistful, the crotchety old Paul B. Farrell takes a broader view of history almost hysterically.
Be forewarned: No matter who's elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today's housing-credit crisis, dragging us deep into a recession and bear market for years.

[T]he lead character pulling back the curtain is none other than Kevin Phillips, a former Republican strategist for Nixon.... Phillips just published "Bad Money: Reckless Finance, Failed Politics & the Crisis of American Capitalism," everything you need to know about today's credit meltdown.

[T]he use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it really is. The corruption has tainted the very measures that most shape public perception of the economy," especially three key numbers, CPI, GDP and monthly unemployment statistics.

"Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9% and 12%; the inflation rate is as high as 7% or even 10%; economics growth since the recession of 2001 has been mediocre, despite the surge in wealth and incomes of the superrich, and we are falling back into recession."

The same can be said of any government report, every speech made by today's leaders: All hype, lies and propaganda intended to deceive us. Treasury Secretary Henry Paulson's clearly playing the game: Remember what the former Goldman Sachs CEO told Fortune last July as our credit meltdown was metastasizing into a worldwide contagion: "This is far and away the strongest global economy I've seen in my business lifetime." He has no credibility. He knew the truth.

The biggest of all lies is with inflation. Understating inflation "hangs over our heads like a guillotine," says Phillips.

"The rising cost of pensions, benefits, and interest payments -- all indexed or related to inflation -- could join the cost of financial bailouts to overwhelm the federal budget," says Phillips. But it's a heads-we-lose-tails-we-can't-win bet. "As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering"

So who really "profits from the low-growth U.S. economy hidden under statistical camouflage?" he asks rhetorically. Certainly not the masses: "Might it be Washington politicos and affluent elite, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?" Yes, yes, yes...
Guambat reckons things are none too rosy, but, really, how woe can you go?

No sex, please, we're conservative Republicans*

Mr. McCain may take a McCaning in November because Conservative Republicans are angry with Bush because the US Government is not spending enough US Taxpayer money to pay for mainly "faith based" organisations who want to run "abstinence training" programs for teen-agers.

The WSJ says a letter was sent to President Bush recently making this annoyance XXX-plicit.
It was signed by 50 Republican leaders representing a who's who of social conservatives.

An HHS spokesman said the administration "strongly supports abstinence education" but that winning grants for abstinence programs is an "extremely competitive" process. "We are only able to fund a small fraction of the applications" and have to turn down many, the spokesman said.

More broadly, White House spokesman Tony Fratto said that "movement conservatives have been overwhelmingly supportive of the president, and for good reason: He's been consistent in using his principles as a guide on everything from faith-based initiatives, to judges, to life issues."
Probably a case where they won't vote Democratic, just that they will run "abstinence training" programs with their own money when it comes to voting at all.

BY THE BYE: Guambat just noticed this is his 1,000th blog post. Cheers.


Tuesday, May 20, 2008

US corporate profits ex-inflation

Barry Ritholtz has been the drum major of the band of folks taking issue with the Fed's obsession with "core" inflation over any apparent concern with "ordinary" inflation. Barry calls "core" inflation "inflation ex-inflation".

Today he has given us a look at "core" profits, with an assist from Bloomberg.

The Bloomberg article tells us:
Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.
Trouble is,
The industry is getting less profit from a barrel of oil than at any time since 2005, just as the rest of the U.S. economy is sputtering. Still, energy shares posted the S&P 500's steepest gains in the past year, bloating their representation to 15 percent of the index.

[They have a profit margin] that's the smallest margin since September 2005 and about half the profit U.S. energy producers extracted from crude when it traded below $50 a barrel in January 2007.

A 37 percent decline in crude oil to $80 would have a bigger impact on the S&P 500's performance than five years ago, when oil and natural-gas companies only accounted for 5.8 percent of the index's value, according to Bloomberg data.

Half of the world's 10 biggest companies by market capitalization -- Exxon, Beijing-based PetroChina Co., Moscow- based OAO Gazprom, Rio de Janeiro-based Petroleo Brasileiro SA, and Royal Dutch Shell Plc, located in The Hague -- are now energy companies, at a time when the marginal cost of producing a barrel of oil is climbing.

"A lot of that margin which dropped to the bottom line, that's gone," Bank of America's Quinlan said. "The easy money is behind us, for both the oil companies and investors."

Barry has some mean-reverting feelings about this:
Consider what this means in terms of (non-energy) valuations. The trailing 12 month earnings of the S&P 500 is ~21, -- way above its 60-year average of ~16.

Saturday, May 17, 2008

California's getting to be such a drag

Reuters columnist James Saft is finding that the Golden State has lost its shine and Californians are gambling to fix a hole in their budget bucket. Some excerpts from his ruminations made whilst sittin' on the dock of The Bay:
The figures are pretty bad. The median home price has fallen by 29 percent in the year to March, according to the California Association of Realtors, and repossessions are surging. Unemployment has risen by 24 percent, to 6.2 percent, in the same period.

But most importantly, in the 10 months to the end of April sales tax receipts in California are actually down in absolute terms.

the picture is clear: Californians are tightening their belts.

And California matters. It accounts for 13 percent of U.S. GDP. It was also where more than a third of the non-mainstream home loans such as subprime and Alt-A were made in 2006 and 2007, making it very important to the health of the banking system.

"California is big enough that it is going to drag a lot of the nation down with it," said Christopher Thornberg of Beacon Economics consultancy in Los Angeles.

"You can't have collapsing consumer demand in California and not expect it to have an influence."

"People have racked up a phenomenal amount of debt, savings rates have been at zero and the piper has to be paid," Thornberg said.

Vallejo, in northern California, last week said it would file for bankruptcy, prompted by rising costs and falling tax receipts due to the housing slump.

And Governor Arnold Schwarzenegger is expected to unveil plans for $15 billion in bonds backed by lottery revenues to help plug a budget hole.

[In] Modesto, Stockton and Merced the unemployment rates are above 10 percent while more than 60 percent of loans are close to being underwater, or larger than the value of the underlying house. Serious delinquencies in those areas are above 18 percent, while the national average is 3.6 percent, according to Barclays.

"Savings rates should probably have to rise to five to six percent in the next year or two to get us back to a stable position," said Thornberg at Beacon Economics.

"If you have a five or six percent rise in the savings rates, it's functionally a five or six percent decrease in consumer spending.

"We've never seen that kind of drop in consumer spending in the U.S. economy."

The mascot of the University of California is the Golden Bear. Nomen est omen?

Friday, May 16, 2008

The actuarial face of disaster

Losses from China quake may top $20 billion by Alistair Barr
Catastrophe-modeling firm AIR Worldwide put total losses from the [China earthquake] disaster at more than $20 billion. Risk Management Solutions, a rival, forecast property losses of $10 billion to $15 billion. Damage to infrastructure and interruptions to economic activity will increase those losses, the firm added.

AIR Worldwide estimated that insured losses from the earthquake will be between $300 million and $1 billion, a fraction of the total cost. That's because insurance take-up rates are "minimal" for residential properties in this region of China and only marginally higher for commercial properties, the firm said.

LONDON, May 15 (Reuters) By Pratima Desai and Anna Stablum -
Aluminium jumped to a three-week high on Thursday as investors piled into the metal in expectation of supply shortfalls from China, while tin hit a record high.

Copper, taking its lead from aluminium, also rose more than 2 percent to $8,305, but analysts said an absence of Chinese buyers would cap prices.

Analysts said this week's earthquake in China's Sichuan province and disruption to hydro power supplies and possibly aluminium output had triggered the latest spurt of buying.

"There's quite strong investor interest in aluminium on the basis China might be about to suffer severe power shortages which could drive aluminium smelters offline," said John Kemp, an analyst at RBS Sempra Metals.

China is the world's largest aluminium producer with an annualised capacity of around 12.5 million tonnes.

However, analysts say Sichuan output represents only about 4 percent or about 500,000 tonnes of overall capacity and that the market is using the quake as an excuse to drive prices higher.

Wall Street's crude ways by David Weidner
This isn't complicated finance. The way traders push up prices is surprisingly simple. They buy in European futures markets, which don't have the limits that U.S. markets do. That drives up U.S. prices where they may already have positions. It's a move to think about next time one of these exchange chiefs talks about all of the benefits of "market globalization."

None of it would matter except that these markets are supposed to be driven by supply and demand. China and other rapidly growing countries may be using more, or will use more resources, but the reality is that demand and supply haven't changed enough to warrant the price of oil doubling in less than three years.

During a three-year span ending in 2006, ... investment in commodity index funds surged more than 500% to $80 billion.

Congress, the Federal Trade Commission and the Commodity Futures Trading Commission are all looking to rein in the trading. A House panel is investigating speculation and will hold hearings in May and June. A Senate bill sponsored by Michigan Sen. Carl Levin seeks to put limits on U.S. trades in overseas markets.

Levin, who as a member of House subcommittee on investigations, is a veteran of the Enron Corp. fallout, recognizes that Enron-era laws don't take into account foreign markets and how they can be manipulated. He's proposing what amounts to trading limits.

Waiter, there's a gun in my soup

Perdue signs law allowing guns in restaurants By JAMES SALZER, The Atlanta Journal-Constitution
Georgians with carry licenses can tote their concealed guns on public transportation, in restaurants that serve alcohol and in state parks under legislation signed by Gov. Sonny Perdue Wednesday.

Perdue, who was endorsed by the National Rifle Association when he ran for re-election in 2006, said last week he expected the issue to wind up in court.

On Wednesday the governor did not release an explanatory statement, and he was unavailable for comment.

For two years, the bill prompted a collision of Republican constituencies, as lawmakers debated the rights of gun owners and the ability of landowners to control their property.

The General Assembly passed House Bill 89 in the final hours of the 2008 session. Until then, most of the debate on the measure had concerned a provision to permit employees to keep guns in vehicles parked on corporate parking lots.

Business interests, who had opposed the bill, say the legislation's language has been watered down to the point that the parking lots issue is no longer a concern.

But when HB 89 made its final appearance before both the House and Senate, language was added that expanded the list of public places where holders of concealed weapons permits could take their guns.

With Perdue's signature, restaurant patrons will be permitted to carry a firearm, but would be barred from drinking while doing so. Violations would be a misdemeanor. Concealed weapons will now be allowed in state and local parks. Guns in purses or under jackets will also be allowed on public transportation.

Supporters of the bill included the NRA and

"By signing this legislation, Gov. Perdue has expanded the rights of law-abiding Georgians who lawfully arm themselves to protect themselves and their loved ones," said Ed Stone, president of

Ain't that just peachy-keen.

So this militiaman walks into the Senate with a loaded gun...
28 Mar 2007 by Guambat Stew
Thompson apparently put the gun in his briefcase, forgot he had it, drove into DC, and was busted after walking through an X-ray machine at the entrance to the Russell Senate Office Building. Not for violation of any US federal security ...

DC's gun control law in Supreme Court's sights
20 Nov 2007 by Guambat Stew
Guambat mentioned this case when it was at the US Court of Appeal level.... Guambat's take was that shooting down the Individual's Right to Bear Arms crowd with this ...

Guns don't kill ....
16 Feb 2008 by Guambat Stew

The argument, submitted by US Solicitor General Paul Clement, essentially urges the Supremes to waffle on the issue and send the case back to the lower courts...

Wednesday, May 14, 2008

Vacation homes becoming more affordable?

It was back on December 26, 2005 that Realty Times reported rather sceptically on the growing affordability of homes in California. Some excerpts:
California Dreamin' by Blanche Evans

only 15 percent of Californians -- the ones who make $128,270 or more, can afford a median-priced home, priced at $543,980, as of November 2005

The housing market in California has seen double-digit increases for four years, which suggests to some that it's certainly booming and to others that it may be in a bubble.

To give you an idea of how popular it has become to live in California, in 1968 the median home cost $23,210. The median home in the U.S. cost $20,100.
Difference: 14.9 percent higher in CA than the US median

By 1999, the median California home was $217,510 while the median U.S. home was $133,300.
Difference: 63.2 percent higher

By 2004, the median California home had more than doubled to $450,990 while the U.S. median home had merely skyrocketed to $185,200.
Difference: 143.5 percent higher!

California has enough of a population that it spills into other states, especially when prices get out of reach for some homebuyers. Others want to cash in their housing chips and place their winnings in Las Vegas, Scottsdale, or other cities.

Leslie Appleton-Young, chief economist for the California Association of Realtors says that anecdotally speaking, one-third of relocating families going to Las Vegas are from California.

[California] is reporting double-digit appreciation of home prices for its 2006 forecast, yet, affordability in the state has hit new lows. If affordability is too low for most to be able to afford homes, why is California still booming?

Explains Broderick Perkins, ... first-time homebuyers usually drive any housing market, but the California market appears to defy gravity as first-time homebuyers dropped to below 30 percent of the market for the first time since 1979."

Higher prices forced first-timers to borrow 33 percent more money in their first mortgages than last year, or to take on a second mortgage actions which increased 36.4 in 2003 and 57.2 percent in 2004. Down payments dropped 27.6 percent to $18,450.

"What jumped out at me," says C.A.R.'s chief economist Leslie Appleton-Young, "was that the percentage of first-time buyers was low, 26 percent -- that's the lowest that number has ever been since 1979.

The last time affordability was so low, California housing lost value and took years to recover. According to Local Market Monitor, Los Angeles homes topped the market at $220,200 in 1990. By 1996, they were worth $176,300, a 20 percent loss, not counting what the houses would have been worth if they had kept pace with inflation. The homes would have lost more than 34 percent of their value, according to CNN journalist Les Christie's calculations.

However, prices in Los Angeles and across the state rebounded exponentially following the bust and as much as 103 percent in the last five years.

Appleton-Young agrees these figures look like a perfect real estate storm brewing, and what she calls the "substitution effect" as buyers look to buy where they can afford, even if that's inland or out of state.

Did affordability issues cause the housing bust in the '90s, and is it about to happen again? No, says Appleton-Young.

"The market peaked in 1989 and then for several years, it didn't plummet, but got relocated inland," she says. "Then we went into strengths in different areas, and then we had a recession. For six years, there was a decline in some areas, but some areas declined as little as five percent. I don't think housing will create a recessionary environment."

Fast Forward ....

Bloomberg reports,
U.S. Foreclosures Rise 65 Percent as Vacated Homes Add to Glut By Dan Levy

U.S. foreclosure filings climbed 65 percent and bank seizures more than doubled in April from a year earlier as rates on adjustable mortgages increased and vacated [the new vacation homes?] homes added to a glut of unsold homes, RealtyTrac Inc. said.

More than 243,300 properties, or one in every 519 households, were in some stage of foreclosure, the highest monthly total since RealtyTrac, a seller of default data, began statistics in January 2005. Nevada, California and Florida had the highest rates. Filings rose 4 percent from March.

Median prices for a single-family home fell 7.7 percent in the first quarter, the biggest drop in 29 years, the National Association of Realtors reported yesterday.

Banks will seize about 60,000 properties a month through December, when about 1 million U.S. homes, or a quarter of all homes for sale, may be bank-owned, Rick Sharga, RealtyTrac's executive vice president of marketing, said in an interview.

Nevada had the highest U.S. foreclosure rate for the 16th consecutive month. One of every 146 households was in some stage of foreclosure....

California had the second-highest rate, one for every 204 households, and the most filings for the 16th consecutive month at 64,683.

Arizona had the third-highest rate, one for every 224 households. Filings almost tripled from a year earlier to 11,620.

Florida had the second most filings at 35,264 and the fourth- highest rate, one for every 242 households. Foreclosures increased 146 percent from a year earlier and rose almost 17 percent from March.
A squidge of the population statistics shows roughly one out of every five Americans lives in one of those 4 states.

Guambat reckons that, what with all those vacating/vacation homes, affordability rates will soon be coming back down. And so will demand from those folks holding stronger currencies than the Greenback. Sort of like back in the oil crunch days of the late '70's when the fear was that Arabs were going to be buying up all the homes in Hollywood, paying with cash.

Tuesday, May 13, 2008

Avoid descent with decent dissent

Investment Committees Behaving Badly

Jason Zweig, who last year published Your Money And Your Brain, a book on neuro-finance, said there was evidence that dissent was physically painful. “It’s not just psychologically painfully. The discomfort when we dissent comes from the same part of the brain as extreme pain or fear. If one person in the room is being iconoclast, that isn’t just emotionally important for them, it seems to register in the brain. You need to protect people who are dissenting.”

Beyond the secret ballot on decisions, he suggested that even the earlier stages of decision-making needed to be anonymous. Investment ideas should be passed to the chair, anonymously, and the discussion should start from there. “You get a different discussion if people’s opinions aren’t attached to them.”

Monday, May 12, 2008

Maybe Telstra Ziggied when it should have zaggied?

For those not from Down Under, Telstra is the arrogant bastard born of the nearly-aborted privatization of Australia's once monopoly telecommunications monster. Actually, its abortion took place once for each trimester, in T's 1, 2 and 3. Long accustomed to sucking from its milked patrons, the government just couldn't seem to let it go, not even piecefully, until it just wasn't worth guarantying its worth.

Back in its heyday, it broke free of Australia to strut its stuff on the world stage. Mind you, it was so flippant, it did this in the face of the, telecom bust, without a lesson learned.

February 8, 2001
Telstra, PCCW Finalize Alliance

Telstra has completed its alliance with Hong Kong's Pacific Century CyberWorks (PCCW), after almost a year of negotiations and amendments to the deal.

Telstra and PCCW will establish three joint ventures as part of their relationship. These JVs are the IP backbone company Reach, which will merge international infrastructure assets and businesses of the partners

The Internet Data Centre Company is a greenfields venture that is intended to draw on partners' strengths, as it rolls out its data centre business model across the region. The venture will leverage the links between its own operations and the carrier hotel operations of Reach to build its business.

Telstra CEO Dr Ziggy Switkowski sees the alliance and the joint ventures as providing clear growth options for the telco through the Asia Pacific region.

"These businesses offer enormous potential by giving Telstra greater access to the growth markets of Asia and across the Pacific," said Switkowski.

RWC's principle asset is CSL, 60 per cent of which Telstra acquired from PCCW as part of the deal for around $3.05 billion. PCCW retains the other 40 per cent of CSL.

Telstra, PCCW give birth to junior telcos

The joint-venture companies have been valued at around $US15 billion dollars and comprise of the newly named Reach Limited, Regional Wireless Company and the Internet Data Centre Company.

Reach - which supplies submarine cables across a global network - will become the IP backbone company.

Telstra chief executive Ziggy Switkowski said the deal would provide Telstra with clear growth options for the future.

This report was archived in July 2007 and was last updated in January 2005:
It contains several analyses by Paul Budde relating to the Telstra/PCCW joint venture, from its inception to early 2005. This includes Paul’s original disquiet at the nature, cost and desirability of the deal, up to the realisation of those concerns. With continuing financial disasters for PCCW, its only viable asset is the old Hong Kong Telecom. With the collapse of the original PCCW concept, the Internet company basically doesn’t exist anymore and the mobile business remains a big question mark. The Reach deal has also been written off. Telstra has bought itself a big lemon and we haven’t seen the end of it yet.

May 10, 2008

Another Lesson in Value Destruction: PCCW Loses Blue-Chip Status
On Friday, the compilers of Hong Kong’s blue-chip Hang Seng Index announced a reshuffle that has finally kicked off the once proud, but long-suffering stock known as PCCW Ltd.

PCCW is Hong Kong’s main telecom provider. It’s also a potent symbol of value destruction, a reminder –- like the “AOL” since dropped from Time Warner’s name –- of what can happen when asset values get inflated and companies use them to do deals.

Back in 1999 and 2000, a Hong Kong-listed company with no actual operating business called Pacific Century CyberWorks was riding the global tech boom by snapping up stakes in Internet start-ups. The value of its shares soared along with that of the company’s holdings. Boosting PCCW’s perceived value was the family background of its chairman, Richard Li, son of Li Ka-shing, one of Asia’s wealthiest and most powerful men.

With its soaring share price, PCCW was able to make a successful play for the Hong Kong-listed subsidiary of Cable & Wireless PLC, known as Hongkong Telecom. Beating back a rival offer from Singapore Telecom, Li sealed a deal in March 2000 for cash and shares valued at around $28.5 billion at the time the deal closed. It was a landmark M&A deal for Asia.

Once, Hongkong Telecom was the bluest of Hong Kong’s blue chips: a must-hold stock for foreign fund managers.

Eight years later, the buzz has long worn off. The stock price cratered more than 90%

Mother's Day Mother Dazed

Or she would be if she were still alive today, according to plain talk in the Plain Dealer:

By John Horton

Anna Jarvis mothered Mother's Day a century ago. She fought tenaciously until her death to shield Mother's Day from "the hordes of money-schemers" that were hawking flowers, cards and candy.

Jarvis "is probably spinning in her grave," said Katharine Antolini, a board member and historian for the International Mother's Day Shrine, the church in Grafton, W.Va. "What we have today," said Antolini, who grew up in Cuyahoga Falls, "is not what Anna wanted."

Not even close.

Jarvis envisioned a day marked by hymns and prayers. She called for intimate family gatherings to "revive the dormant love and filial gratitude we owe to those who gave us birth." She wanted the focus and attention on a mother's devotion and sacrifice.

It didn't take long, however, before some merchant got the idea of tossing up a SALE sign.


But, hard as she tried, she could not stop the cash registers from ringing . . . and ringing . . . and ringing. Jarvis - who never had a child of her own - died bitter and destitute in 1948, her last days spent in a sanitarium.

Mother's Day spending on the 100th anniversary of the holiday is expected to reach $15.8 billion in the United States, according to the National Retail Federation. Consumers will spend an average of $138.63 doting on dear old mom during her special day.

Legend has it that florists, forever thankful for what Jarvis created, paid for her care.

Sunday, May 11, 2008

Stand Stearn against taxpayer bailout of homeowners in foreclosure

As amazing as it is, Guambat has to agree with the White House in opposing legislation for taxpayer funding to "help" mortgage holders facing foreclosure. “Taxpayers shouldn’t be taking on the risk of foreclosure,” said Tony Fratto, a White House spokesman.

Whilst greater blame lies with the finance industry in the so-called subprime meltdown, homeowners have not been entirely innocent, or so Guambat reckons.

Therefore, Guambat reckons the Fed ought to require JPMorgan to bail them all out.

There is precedent, after all.
Paulson defends Bear Stearns bailout

What Taxpayers Get From the Bear Stearns 'Bailout'

Pathetic Bear Stearns Bailout: Who to Blame

Spinning inflation yarn Down Under

Oi, G'day, mate.
Yeah, g'day. Mate.

Howzit goin', mate?
Awright. Mate.

Howz the missus, mate?
Yeah, good, mate.

Think its gunna rain, mate?
Umm, dunno. Mate.

Seen the prices on rice, mate?
Yeah, mate.


Milk, bread, chooks, eggs, mate?
Too right, mate.

Oi, mate.

Reckon we need a raise, mate?
Naw, mate. It'd only hurt the economy, mate.
Don'tcha read the economists, mate?
The consensus is in, mate. Things will get worse before they get better. Mate.

"Cut demand and inflation will ease" by Ross Gittins, the SMH's Economic Editor.
slowing demand will impose pain without getting inflation down, we're told.

But, as the Reserve sought to demonstrate in yesterday's statement on monetary policy, this analysis of the source of our inflation problem is mistaken. It contains some truth, but only some.

[The] the 18.9 per cent rise in petrol prices[?] Petrol has a weight of just one-22nd of the consumer price basket.

[The] the 5.7 per cent rise in the price of food. Included in this are rises in the prices of vegetables (9.7 per cent), milk (11.6 per cent), bread (9 per cent), chicken (11.6 per cent) and eggs (5.9 per cent)[?] [They] have a combined weight of just one-30th of the consumer price basket. {NB: Barry Ritholtz' take on inflation ex-inflation ex-inflation.}

so let's have no more misleading talk of cost-push inflation pressure.

We are having to pay more for our imported oil and some foodstuffs, but that's more than compensated for [mate] by the higher prices we're getting [mate; yar, youse and me] for our exports of coal and iron ore (and wheat if the improved weather lasts).

Our terms of trade have improved [mate], which makes us richer [ yar, mate, youse and me] with more money to spend. [What? ya thinks you don't have more money, mate?] That's why we're enjoying a positive demand shock, not a negative supply shock. [Mate.]

Rest assured [mate]: if we succeed in reducing demand pressure, we will get the inflation rate down. And applying the brakes is the only way to get it down.

"Sustained high inflation a danger" by Alan Wood, The Australian's Economics Editor.
The Australian economy is a powder keg of rising prices, rising inflation expectations and accelerating wage demands.

inflation runs at 4.5 per cent (4 per cent underlying rate) in the six months to December this year and then only declines gradually to 2.75 per cent in the half year to December 2010.

This means that inflation will remain at dangerously elevated levels for the next two years, presenting the Reserve Bank with a serious policy challenge: how does it keep inflation expectations under control for such a long period?

It is inflation expectations that really matter, because once they start to rise it becomes much harder and much more painful -- politically, in terms of jobs, profits and growth, and socially as unemployment rises -- to get inflation back under control.

Inflation expectations are starting to rise. The RBA's survey of market economists shows that their expectations of inflation in the year to June 2009 have risen from 2.6 per cent last November to 3 per cent this month. More worrying, the expectations of union officials have jumped form 3 per cent to 4 per cent over the same period. The various wage measures cited by the bank, such as the wage price index, show wage rises stepping up to match rising inflation.

Equally worrying, these are averages and many workers are seeing their wages falling behind inflation, causing growing union agitation for bigger wage rises. In both the private and public sectors, there have been recent settlements of 5 per cent.

The message of the forecasts is that this is no time to be seeking higher wages.
Ya see, mate, there are different kinds of bubbles.

First ya gotcher asset bubbles.

Now, mate, asset bubbles are good and Alan Greenspan, the Greatest Economist of All Time, mate, old Greenspan reckons it's no good at all to try to prick one of them kind of bubbles, mate. Can't go round having economists acting like regulators and gettin in the way of all that money being made off'n high asset prices.

Let 'em run as far as they can, and when they pop, well, mate, old Greenspan says every economist knows how to pick up the pieces. Ya just turn on the guvmint's printin' machine, mate. Ya bail 'em out, mate. Easy peezy.

That David Uren, Murdoch's Economics correspondent sez, mate, "While conceding that world financial markets were still "fragile", [mate], the central bank's overview highlighted how much they had improved since the bailout of Bear Stearns in March.

But wage bubbles, mate. Now that's another story, mate. Gotta pop that bubble, mate, before its formed, mate. Muster every ministry to keep wages down mate, if ya knows what's good for youse.

Yeah, mate, all you gotta do is keep yer confidence up and yer wages down and she'll be right, mate. Good as rain.

Yar, too right, mate.