Friday, October 30, 2009

Emerging markets hit a BRIC wall?

Emerging-Market Rally Spurs Unease
Cash has poured into emerging markets this year. Through September, investors stashed $52.6 billion into emerging-markets funds. That is close to the record level for all of 2007, according to Emerging Portfolio Fund Research Inc.

But the emerging-market run-up is starting to produce unease, and dips like the Shanghai Composite's 2.3% decline Thursday may be a portent.

Doubts are growing that emerging markets' spectacular ascent this year will continue.

The MSCI Emerging Markets Index, which had climbed 63% this year in U.S. currency terms as of Thursday, has slid over the past two weeks. After muscular performances from the Chinese, Indian and Brazilian exchanges, they have suffered downdrafts lately.

Only posted this for the headline rewrite. Never let a Guambat get bored.


Across the universe

Words are flowing out like endless rain into a paper cup,
They slither while they pass they slip away across the universe.
Pools of sorrow, waves of joy are drifting through my open mind,
Possessing and caressing me.
Jai guru deva om.

Nothing's gonna change my world,

-- Rufus Wainwright, sung by The Beatles, Fiona Apple, etc.

Greeting, Earthling.

Lawyerese Goes Galactic as Contracts Try to Master the Universe
Anne Harrison and the other women in her Bulgarian folk-singing group were lined up to try out for NBC's "America's Got Talent" TV show when they noticed peculiar wording in the release papers they were asked to sign.

Any of their actions that day last February, the contract said, could be "edited, in all media, throughout the universe, in perpetuity."

Then, like thousands of other contestants, they signed their names.

Experts in contract drafting say lawyers are trying to ensure that with the proliferation of new outlets -- including mobile-phone screens, Twitter, online video sites and the like -- they cover all possible venues from which their clients can derive income, even those in outer space.

The terms of use listed on, where people can post to message boards among other things, tell users that they give up the rights to any content submissions "throughout the universe....

n a May 15, 2008, "expedition agreement" between JWM Productions LLC, a film-production company, and Odyssey Marine Exploration Inc., a shipwreck-exploration outfit, JWM seeks the rights to footage from an Odyssey expedition. The contract covers rights "in any media, whether now known or hereafter devised, or in any form whether now known or hereafter devised, an unlimited number of times throughout the universe and forever...."

A 189-word sentence in a September agreement between Denver-based Spicy Pickle Franchising Inc. and investment bank Midtown Partners & Co. -- which has helped raise capital for the sandwich and pickle shops dotted across the region -- unconditionally releases Spicy Pickle from all claims "from the beginning of time"....

The article is full of other amusing and instructive instances, including this caveat:
"But, to be honest with you, we have had very few cases of people trying to exploit rights on other planets," says Lynne Hale, a Lucasfilm spokeswoman.


A GDP twofer

US Stocks Continue Rising On GDP Excitement
U.S. stocks continued moving higher Thursday morning as news of the U.S. economy expanding in the third quarter for the first time in a year, and by a bigger-than-expected amount, gave investors a jolt of confidence.

If the Dow is able to remain higher through the close, it would snap its recent losing streak, which had the Dow posting three triple-digit losses in four sessions.

At the same time, the dollar had been moving higher against the euro for much of the week.
So, it was the strong GDP that got pinned with the credit of boosting the US market. Well, that's a twofer for ya.

You see, the market was making rare strides earlier in September and October on the back of cash pouring in from the government clunker sales and housing credits. And what does the increase in GDP reported today reflect? Those same sales. So the market is up because the market is up?

Don’t Break Out the Champagne Yet: Cause for Concern in GDP
A very large chunk of that [3.4% GDP increase] came from car sales, which accounted for a full percentage point of the overall increase in GDP for the quarter. Home building didn’t just rise; it jumped 23.4%, which contributed another half percentage point to GDP growth.
Mr. Market gets two market boosts -- two, count 'em, two! -- for the price of one.

Guambat reckons this is a technical thing and the proof of the fundamentals vs technical rally will show in the days to come. For Guambat, the key is that last attribution for the rally: the strength in the US dollar.

One of the tips to that was the plundering of the Australian market over the last few days, correlated very strongly with a drop in the Aussie/US dollar rate from around 93 cents to just under 90 over the same period. Indeed, the fall continued in Australia's today in the face of positive US futures numbers all day.

That divergence between the Aussie market and US futures is unusual if not rare, and indicated a bit of fix was on for the US market rally today US time. For Guambat, the US market rally is more technical than fundamental in the sense that it was a great set up for a bear squeeze; so Guambat is calling this rally just a pause in the game, a classic short squeeze on those who tend to get ahead of the pack.

And it has to be pointed out that anyone who has ever followed any Guambat call has rued the day. That is one reason Guambat holes up on a small island in the middle of the Pacific.

Meanwhile, how did that cash for clunkers and housing credit work out in real terms? has determined that
Cash for Clunkers cost taxpayers $24,000 per vehicle sold.

Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as CARS, but analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the existence of the program.

And the bloggers at The BaseLine Scenario come to a similar conclusion about the housing credit:
The home-buyer tax credit: Throwing good money after bad

Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending). By contrast, we could take the same cash and hire more teachers, police officers or soldiers to fight in Afghanistan. We would get more economic activity, and the government would get something for its money.

But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high.

What happens when you artificially prop up housing prices? Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values.

Congress and the administration seem likely to extend the first-time-home-buyer tax credit. Senate Majority Leader Harry M. Reid wants to extend it through December 2010 but phase out the amount over time; Republican Senator Johnny Isakson, a former real estate agent, wants to extend it through June but double the income limit and make it available to all home buyers.

This is a bad idea.


Wednesday, October 28, 2009

Houston, what do you mean WE have a problem?





Going Back to Houston -- Dean Martin

City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General)
Executive Summary

The City of Houston is financially broke and it appears that the mayor who takes office in January 2010 may have to captain the City through bankruptcy procedures.

Hattip, FT Alphaville


Efficient market feces

OCTOBER 28, 2009, Asian Shares End Lower; Shipping Stocks Take Big Hit (WSJ)
Most Asian share markets ended lower Wednesday as shipping stocks and shipbuilders fell on worries about the strength of the global economic recovery.

Shipping stocks and shipbuilders were sharply lower, amid recent downbeat earnings for the sector, which has taken a hammering from the global downturn. The Baltic Dry Index, a measure of the demand for dry bulk goods, fell 1% Tuesday.

Sunday, October 18, 2009 Ships arriving high in the water

October 9, 2009 Shipwrecks, then and now

Wednesday, September 30, 2009 October in the Baltics

Tuesday, September 15, 2009 Santa's sleigh sighted off Singapore

Thursday, October 16, 2008 This is not helping to give October a better name


The Lehman arms race

Regulators Prepare for the Next 'Big One' (WSJ -- may need a ticket to read)
Global economic policy makers are just beginning to grapple with a key issue rising out of last year's bankruptcy of Lehman Brothers Holdings: how to react if -- or when -- the next big global bank spins out of control.

The bank, which collapsed in September 2008, had 2,985 legal entities in 50 countries, according to the Basel Committee of regulators and central bankers. When Lehman imploded, authorities around the world didn't know which assets they could sell in a hurry, and markets panicked over worries about which institutions were exposed.

To avoid a repeat, the Basel Committee said in a report last month that banks should provide regulators with updated information on organizational structures, lists of counterparties, asset inventories for each legal entity and country, groupwide contingency funding plans and information needed to quickly settle financial contracts. Such plans have come to be known as "living wills."

"This issue has been understood for a very long time," Mr. Green said. "But every time this issue has been looked at, it's been put back into the 'too difficult to handle' box."
Lehman investors lost 2,985 arms and the leg they had left to stand on.


Back to front

Guambat reckons that MarketWatch, probably with a bit of Sillycon Valley and Redmond help, got this story back to front:
PC sales expected to benefit from Windows 7 release

One, of many, tips to the spin:
Analysts who follow Microsoft said that the reaction to Windows 7 signals particular strength among consumers and highlights the importance of such sales heading into the end-of-the-year holiday shopping season.

That's not the story from the prior post.


Wall and Main go separate ways, again

While bonuses and champagne flowed in September and October, with Mr. Market beating the usual seasonality softness to rally highs as rare as rare earth, down on Main Street, things were, well, down on Main Street.

Consumer Confidence in U.S. Unexpectedly Decreases (Update2)
Oct. 27 (Bloomberg) -- Confidence among U.S. consumers unexpectedly fell in October for a second month as Americans fretted about a lack of jobs.

The Conference Board’s confidence index dropped to 47.7 from a revised 53.4 in September, a report from the New York- based private research group showed today. A measure of employment availability deteriorated to a 26-year low.

The share of consumers who said jobs are plentiful dropped to 3.4 percent from 3.6 percent. The proportion of people who said jobs are hard to get increased to 49.6 percent, the highest level since May 1983, from 47 percent.

The proportion of people who expect their incomes to rise over the next six months decreased to 10.3 percent from 11.2 percent. The share expecting more jobs fell to 16.3 percent from 18 percent.

Mounting unemployment threatens to restrain consumer spending entering the Christmas-holiday shopping season.

Buying plans for automobiles, homes and major appliances within the next six months all decreased this month, today’s report showed.
Well of course they did. Those who could took the stimulus hand-outs to upgrade clunkers and homes while the gettin' was good.

Meanwhile, Mr. Market today is clawing back its momentary reversal of fortune when that news came out, allegedly on the back of allegedly "improving" home sales.
An earlier report today showed home prices in 20 U.S. cities rose in August for a third straight month. The S&P/Case- Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis, after a 1.2 percent increase in July. Compared with a year earlier, prices were down 11.3 percent, less than the median forecast of economists surveyed.
Again, no surprise there. As mentioned just the other day, the Australian experience, corroborated by Goldman Sach's observations of the US experience, is that all the housing credit stimulus did was raise prices that were already unaffordable to most (whether because they didn't have the wherewithal or the credit to get in), not raise new roofs over new heads.


Guambat has borrowed so many pages from the WSJ that it is only fair that it is now running a story that parallels this post. Okay, maybe not so exactly as parallels, but Guambat never misses an opportunity to stroke his own ego.
Home Prices Rise, Yet Confidence Fades

Real-estate prices increased for the fourth consecutive month, but consumers are feeling more glum, a disconnect that shows how rising unemployment continues to weigh on households even as the economy improves.

Analysts warn that prices are being propped up by the government and may resume falling in the coming months as that support fades away.

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Monday, October 26, 2009

The Loony world of sub-prime mortgages

Why Canada's Housing Bubble Will Burst
The facts are that over 90 per cent of existing mortgages in Canada are "securitized."

The Canadian-issued securitizations are called National Housing Act, Mortgage-Backed Securities. Unlike the failed U.S. pools, says Lepoidevin, "In order to find buyers for securitized mortgage pools, the Government of Canada has put guarantees on them" by directing CMHC to guarantee all Canadian mortgages.

in 2007 the Harper government allowed the CMHC to dramatically change its rules: it dropped the down payment requirement to zero per cent and extended the amortization period to 40 years. In light of the mortgage meltdown in the U.S., Finance Minister Flaherty moderated those rules in August 2008 (it's now five per cent down and 35 years).

In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.

According to CMHC numbers in the two years from the beginning of 2007 to January 2009, Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent. Fully 90.5 per cent of all growth in total Canadian mortgage credit outstanding since 2007 has been accounted for by Mortgage Backed Securities. Of course, the banks have no interest in saying no if you have qualified for a securitized CMHC loan -- because they bear no risk if you default.

The largest sub-prime lender in the world is now the Canadian government.

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Another stair is born


Friday, October 23, 2009

Housing tax credit: the Australian experience

There has been a big fuss over the US housing tax credit, now that the sun is about to set on the scheme.

The $8,000 tax credit, which will expire at the end of November, has boosted home sales in recent months.

The Housing Tax Credit: Maintaining a Market on the Brink
Make no mistake, similar to the cash for clunkers program in August, the housing market has been kept active with a cocktail of government programs. Like most others, we agree that the outlook has been getting better and some progress is being made, but there is still a lot of work to be done. And, even though I generally oppose spending taxpayer money, now is no time to pull the plug on the lifelines.

Nevertheless, the tax credit is not dead in the water, as legislators are indeed mulling an extension and, perhaps, even an expansion to include buyers making more than $75,000 per year and people who are not first time buyers.

unless inventory is kept under control there will continue to be downward pressure on prices. As it stands, even with the tax credit sales are barely outrunning additional supply. In fact, the last reading on inventories from August showed that August inventory of existing homes is essentially flat with January

In the end, without the tax credit extension and/or other programs to keep housing on its feet, the pace of supply of foreclosed homes soon to land on the market seriously risks surpassing the rate of demand and causing another drop in prices.

Senate Moving to Expand $8000 First-Time Homebuyer Credit to All Homebuyers
A group of Senators, including Senate Banking Committee Chairman Chris Dodd, are moving to extend the $8,000 first-time homebuyers tax credit and extend it to all homebuyers.

Sen. Johnny Isakson (R-GA) who had previously owned a real estate company before being elected as Georgia’s junior Senator, told the Senate banking committee on Wednesday that the real estate market would likely remain depresses for five years or longer if the government doesn’t step in to encourage slow home sales and make additional moves to decrease unemployment.

Isakson recommended to the committee that Congress extends and expands the credit by increasing the eligibility limit to $300,000 to bring more buyers into the housing market.

Chairman Dodd is hoping to stimulate homebuyers that are “moving on up” by encouraging people to upgrade from their first-home to a more expensive one. Dodd said, with first-timers, “You’re living on a futon in a…bare bones deal, because you — you got that house…and you’re trying to make ends meet,” Dodd continued, “It’s that move-up market, where you start to get what I call sort of a ripple effect, that is always so important in housing.”

The Australian government has for many years noted that housing affordability is at the high end of international norms. Back in 2000, ostensibly to offset the introduction of a new goods and services tax, it began offering First Home Buyers a grant (see, e.g., this). A free chicken in every pot sort of political fare.

It proved such a great idea, politically, ever since then the "scheme" has been tinkered with, increasing and decreasing it as political, and sometimes (coincidentally) economic, tides turned. The most recent Federal government had a "Boost" scheme that doubled most anything seen before.

And what has been the result there? Are the taxpayers better off? Has it actually increased the lot of the wannabee buyers? It is a nuanced answer, but it appears the main effect has been to simply increase housing prices, putting more money into the hands of those with stuff to sell, not really putting more owned shelter over people's heads.

Farewell and good riddance to the first home owners' boost
A friend asked me the other night whether he should wait until after the first home owners' boost expires to buy his first property. I didn't think twice. "Yes," I replied.

Usually, I’m a bit more circumspect with my financial advice, but on this point, the evidence is clear.

Wannabe first home buyers should be sitting back and breathing a huge collective sigh of relief when the Rudd government’s boost begins to be phased out two weeks from today.

You see, it was designed with their baby boomer parents’ interests at hearts, not theirs.

Let me explain.
You should really read her explanation, but her conclusion is,
Boosting the grant was a very deliberate ploy to lure more first home buyers into the market, using government money to pay more than they otherwise would have for a house and helping to stave off any fall in house prices, which would have spooked existing owners (who make up about two thirds of the population). [And constitute a huge block of constituent voting power.]

And it worked, spectacularly.

Trouble for new home owners in 2010
the boost may have created a dangerous market bubble for first homeowners, TD Securities economist Annette Beacher said.

"It's very politically welcome to help people into their first home," Ms Beacher said.

"The boost has obviously worked, because we've seen a pick up in housing finance, a pick up building approvals.

"From an economic perspective it's done what it meant to do."

But she said that first home buyers were actually worse off because the boost had inflated house prices.

"The boost has been capitalised into the price, the average home loan for a first home buyer is now about $23,000 more than last year," Ms Beacher said.

"There's also a strong possibility that there will not be any aspiring first home owners left by next year.

"So all this has done is brought forward building activity and there's a risk of considerable weakness to (building activity) on the other side.

Time to rethink the First Home Owners Grant
Most importantly, we must get the balance between home purchase and rental assistance right. Housing stress is overwhelmingly concentrated in the private rental market, yet our policy settings have for too long been skewed towards home purchasers, owners and investors through home purchase assistance, Capital Gains Tax concessions and Negative Gearing.

The Government has taken some decisive action to improve the policy balance, with a massive investment in affordable rental housing through its $6.2 billion 'social housing' stimulus funding and more than $600 million for the National Rental Affordability Scheme.

Substantial as this recent investment is, there is no denying the extent of housing need in Australia. There are 180,000 people on public housing waiting lists (with many more in need, but ineligible) and 100,000 people are homeless on any given night. Sadly, these figures are only going to increase as the economic downturn takes its toll.

Continuing substantial investment in affordable rental housing and increased financial assistance will be needed over the coming years to relieve the pressure on struggling renters.

Targeted home purchase assistance programs have a role to play in assisting low to moderate income purchasers into the market (and keeping them there where possible), but should receive a smaller proportion of the housing pie than assistance to struggling renters.


And this supports the Aussie experience that all that tax credit did was raise prices for the sellers, not make it more affordable for the buyers:
Goldman says US gov’t boosted home prices by 5%


Thursday, October 22, 2009

Questioning government authority

BusinessWeek is making the claim that, "In a striking display of government authority, pay czar Kenneth Feinberg is taking a knife to the pay packages of certain companies receiving U.S. funds."

Hmmmm. Government authority? Doesn't the government actually own the largest share if not the majority interests in those companies? It seems to own GM at the very least: "The U.S. Treasury is the biggest shareholder in the closely held automaker." This government action is not touching any company that it still doesn't have any TARP "investment" in, so is not investing in wholly private companies.

As the NYT puts it, "The pay restrictions illustrate the humbling downfall of the once-proud giants, now wards of the state whose leaders’ compensation is being set by a Washington paymaster." It says nothing about other companies.

This is not government inter-meddling in private business, regardless of what Charles Elson, head of the Weinberg Center for Corporate Governance at University of Delaware's business school, had to say: "The goals may be admirable, but the approach is atrocious because of the meddling".

This is exactly the same kind of governance that allowed Richard Grasso to cream off an exorbitantly obscene pay package from the NYSE. Although many on Wall Street might have thought that package a bit dear, none took significant issue with the manner in which it came about, and he has been able to walk away from the whole controversy with his hands and his money very much in his pockets.

It is, in short, governance by the owners.

It is the same sort of governance, arranged by antiseptically clean "compensation committees" and other such nudge-nudge, wink-wink consultants who have set the monstrous executive pay packages for years, albeit this time under a bit more scrutiny coming, as it does, from the government.

Indeed, considering the way big business generally has handled compensation its own way, the whole current "controversy" makes a complete mockery of this comment by Espen Eckbo, founding director of the Center for Corporate Governance at Dartmouth University's Tuck School of Busines. "I think we need to create some sort of trust that the board setting of compensation is efficient and non-conflicted."

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Wednesday, October 21, 2009

Is Fox still Schiff-less?

Fox turns to hounding, and gets a pounding.


Brit Banks hit the Glass-Steagall ceiling?

In what may become a king-hit on the TBTF Brit banks, the Governor of the Bank of England is talking tough. Of course, talkin' ain't walkin'.

Bank regulation plan 'a delusion'
The Bank of England governor has hinted that plans to reform UK banking through regulation alone may not be enough.

Mervyn King said it was a "delusion" that tightening regulation could stop banks' most risky activities from failing and leading to huge losses.

In his starkest warning yet, he said banks may have to separate their day-to-day business from more speculative practices if they are to get state aid.

"The sheer scale of support to the banking sector is breathtaking.

"Never has so much money been owed by so few to so many. And, one might add, so far with little real reform."

But he added: "It is hard to see how the existence of institutions that are 'too important to fail' is consistent with their being in the private sector.

"Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk."

He said that those banks which continued to get public money to prop them up and aid their recovery should not be encouraged to try and earn profits to get out of government support "by resuming the very activities that got them into trouble in the first place".

Larry Summers ain't walkin' yet, either, with his big talkin'.

Summers Says Financial System That Causes One Crisis Every Three Years Demands Reforms
“There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system,” he said. “This has direct relevance on the changing nature of the social compact between the financial sector and the broader economy.”

"The time has come for fundamental change in the financial sector of our economy," he says, "both in how financial institutions conduct their business and how they are regulated."

Guambat doesn't know King's record for follow-through, but is dubious that Summers will have met and defeated his Gramm-Leach-Bliley Waterloo.

From Wikipedia:
Summers hailed the Gramm-Leach-Bliley Act in 1999, which lifted more than six decades of restrictions against banks offering commercial banking, insurance, and investment services (by repealing key provisions in the 1933 Glass-Steagall Act): "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," Summers said. "This historic legislation will better enable American companies to compete in the new economy."

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Tuesday, October 20, 2009


Guambat has mentioned before that John Hussman is a very good read, but only on occasion; too much is a bit like watching paint dry.

So it is that Guambat had not checked in on him in a few weeks, but was nudged into it by a "Quick Read" headline tip from Barry.

Good tip, too.

Hussman, in this week's letter, points out "we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly."

Continuing, he says
Indeed, only one instance comes close, which is November 28, 1980.

Now, if that date doesn't ring a bell, I have to admit that it didn't resonate with me either at first. On that date, the stock market was just a few months into a fresh economic recovery following the 1980 recession, employment conditions were just beginning to improve, capacity utilization was picking up, the Purchasing Managers Index had just moved back over 50, and stocks were certainly not overvalued on the basis of normalized earnings or cash flows. Indeed, the P/E multiple of the S&P 500 was just over 9, on the basis of both trailing and normalized earnings. Advisory sentiment was not strenuously bullish either, so there was little to identify it as a date to remember.

As it happened, however, November 28, 1980 was the peak of the furious advance in S&P 500 driven by enthusiasm over "less bad" economic news, though with little proven economic strength. It was the last day of the 1980 bull market. The economy later proved to have been in a short lull within a double-dip recession, taking stocks to their final lows in 1982.
That low took almost 2 years to get to, wiping out almost 30% of the peak value of the S&P.
One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out, just like the fast and furious advances that clear oversold conditions tend to occur too quickly to capture unless one has already established a position. As for the present, we have rarely seen 90% of stocks suspended above their 50- and 200-day moving averages for as sustained a period as we have now observed.

This concern extends beyond intermediate-term technical conditions. ... [I]t is already at or below the level at which every bull market since the Great Depression has ended, save for the bubble period between 1995 and 2007 (which has produced disappointing overall returns for the S&P 500), and one other instance – January 1937, which was followed by a brutal one-year loss of more than 50%.

That said, investors clearly are approaching the current market with every belief that the extreme valuations of 2007 represent the sustainable norm to which stocks should return.

The anchoring of investor expectations to a period of rich valuations and unusually wide profit margins may not be reasonable, but it prevents any ability to “forecast” a significant near term decline, much less a sustained downtrend. At the same time, we do have sufficient evidence to indicate that market risk is not worth taking on the basis of average outcomes from the combination of valuation and market action we currently observe.

The foregoing should not be interpreted as a "call" or forecast about sustained market direction. Rather, it outlines some of the factors are behind our defensive stance. As always, we align our investment position with the prevailing Market Climate, which does not require large or extended forecasts. I would be less than forthright, however, if I didn't admit that I suspect the current overbought condition may be cleared somewhat violently.
If the reasonable, prudent man was really a pants-wearing homo sapiens, it would be John Hussman.

And if you want to know more detail why we're no where near out of the foreclosure woods and why he reckons "
the U.S. banking system is quietly going insolvent", you'll want to read the whole of his report.

Meanwhile, sigh, in this morning's news,
NEW YORK (Dow Jones)--U.S. stock futures pared their earlier gains Tuesday morning following a larger-than-forecast monthly decline in the producer price index, a smaller-than-expected rise in housing starts and an unexpected drop in building permits, though they remained in the black thanks to strong third-quarter earnings reports.


Sunday, October 18, 2009

Ships arriving high in the water

Guambat was amused at the "cause du jour" cited last week by newsbites to "explain" the purely technical drive to the 10k round number (see chart here). On that occasion, Oct 14th, the newsbite was that, while consumer spending was still speeding to a stop, it was speeding slower than expected, therefore time to buy, buy, buy. E.g.:

WRAPUP 2-U.S. retail sales hint consumer demand improving

Sales at U.S. retailers fell in September as car-buying incentives expired, but excluding autos they were up a second straight month, raising cautious optimism consumer spending could support economic recovery.

Retail sales fell 1.5 percent last month, the biggest decline since December, after surging by a revised 2.2 percent in August, the Commerce Department said.

Sales excluding motor vehicles rose by a bigger-than-expected 0.5 percent, building on a 1 percent increase in August and beating economists' expectations for a 0.2 percent gain.

The increase cemented the view that consumer spending recovered and the economy started growing in the third quarter after the worst U.S. recession since the 1930s.

'There's solidity, or new strength, in all discretionary spending categories,' said Pierre Ellis, senior economist at Decision Economics in New York. 'We evidently have hit the bedrock level of consumer spending and can even see a little bit of normalcy going forward.'
Yadda, yadda, etc., and so on.

The consumer was also being resuscitated by falling energy costs, according to some cheerleaders:
Lower Energy Costs Point to U.S. Consumer Rebound: Chart of Day Oct. 14 (Bloomberg) -- Falling energy costs may trigger a U.S. consumer-spending revival that’s faster and stronger than most people anticipate, according to James W. Paulsen, chief investment strategist at Wells Capital Management.

The ratio [percentage of disposable income spent on energy] dropped to 4.4 percent in this year’s second quarter from a peak of 6.3 percent in the third quarter of 2008. The latter reading was the highest since 1985....
Of course, in 1985 the unemployment rate was almost 3 points lower, at 7% and trending downward from its decade high of 10.8% in 1982. (Look at this "misery" index chart of unemployment for the last six decades.) With unemployment trending up, it is hard to get excited about a fall in energy costs as a boost to consumer spending.

A more sober assessment of the state of the consumer was presented by, albeit a few days before that "unexpected" -- and questionable -- slowing of decline in spending:
The U.S. trade balance deficit tightened by $1.2 billion to $30.7 billion in August. The drop in the deficit was unexpected as the consensus forecast the deficit to rise to $33.0 billion.

The drop in the deficit was not necessarily good news for the U.S. economy as it shows the U.S. consumer is still holding back on increasing their spending.

The depreciation of the dollar against all major currencies was expected to help U.S. export growth. We saw evidence confirming that a low dollar value would boost exports in 2007 Q4 and 2008 Q2.

Unfortunately, global demand for U.S. goods remains extremely weak and the relative price gain for U.S. importers was not enough to spur an increase in purchases.

As a result, exports remained virtually flat in August. The entire tightening in the trade balance was due to a decline in import demand.

The drop in imports was unexpected.
Corroborating the drop in imports is the high-riding movement of the goods transporters on the high seas, a sea-faring theme Guambat has alluded to frequently in recent weeks.
Imports dive at ports of Los Angeles and Long Beach

In another sign of how deep the global recession has become, the ports of Los Angeles and Long Beach on Friday [Oct. 16th] reported their worst combined import statistics for September in nine years.

September is often the busiest month at the nation's biggest port complex, making it one of the best barometers of the health of the economy and international trade.

The port of Los Angeles received 309,078 containers packed with imported goods in September, representing a decline of 16% from the same month last year and 27% from September 2006, L.A.'s best month ever for imports. Long Beach received 224,924 import containers in September, a drop of 19% from a year earlier and 32% from September 2007, the port's best September ever.

For the first nine months of the year, imports, exports and empty containers through the port of Los Angeles were down 16% at just under 5 million containers while the Long Beach port saw a decline of nearly 25% at just under 3.7 million containers, compared with the same period last year.

As dismal as those figures are for the two ports, which rank first and second in the U.S. in container volume and together rank fifth in the world, a greater worry goes beyond the immediate and substantial loss of local trade-related jobs: Some of the ports' most important tenants were so poorly positioned for the downturn that they might sink completely in a sea of billions of dollars of red ink, experts say.

"Without a doubt, the Southern California ports should be worried," said Neil Dekker, an analyst at Drewry Shipping Consultants in London who produces container industry forecasts. "Companies will go bust; freight rates may take years to recover."

The rest of the story is just as, if not more, gloomy as the part excerpted.

Anyone looking to a Santa sleigh recovery this year is sledding on thin ice.

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Tuesday, October 13, 2009

New Democrats are Bush league

Barry Ritholtz has been putting up some terribly revealing (revealing terrible things, that is) posts of late, linking the New Democrats and the Too Big To Fail financial institutions, their lobbying efforts (which, he reckons, yielded a 258,500 PER CENT return), and how those links and efforts are holding back financial reform.

It would do you well (but maybe not 258,500 per cent better), to have a read; won't take long:

Why Financial Reform Died: “Banks Run Congress”

Derivatives Lobby Corrupts Congress

Single Best Investment in History = 258,449%

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Monday, October 12, 2009

Boy, that Hertz

Hertz hurts. Why don't they change their name to Hartz?

As portrayed by Felix Salmon, they certainly aren't all hearts.

Corporate bully of the day: Hertz

on September 16, Audit Integrity released a report, based on new and proprietary analysis, listing 20 large public companies with the highest probability of declaring bankruptcy in the next twelve months. One of those companies was Hertz

Hertz wasn’t happy with the Audit Integrity report, and sent the company a rather silly letter

The really nasty bit of the letter, however, was where Hertz’s general counsel not only threatened to sue Audit Integrity over the report, but also copied the general counsels of all the other companies on Audit Integrity’s list, encouraging them to do likewise.

Audit Integrity has raised the issue with the US SEC.

Wrong. They should go to the US Dept. of Health and Human Service.

You say bully, they say bula.


Sunday, October 11, 2009

Tort reform is coasting along

Someone here is fudging the facts, but who?

The Washington Post has this story:
Tort Reform Could Save $54 Billion, CBO Says

-- 10 times more than previously estimated.

The CBO report lends credence to Republican arguments that substantive limits on malpractice lawsuits will reduce health-care costs.

New research shows that legal reforms would not only lower malpractice insurance premiums for medical providers, but also would spur providers to save money by ordering fewer tests and procedures aimed primarily at defending their decisions in court, Douglas W. Elmendorf, director of the nonpartisan Congressional Budget Office, wrote in a letter to Sen. Orrin G. Hatch (R-Utah).

While over on the other coast, the Los Angeles Times has this one:
Medical malpractice reform savings would be small, report says

-- far lower than advocates have estimated.

Enacting a cap on pain-and-suffering and punitive damages, changing liability laws and tightening the statute of limitations on malpractice claims would lower total healthcare spending by about one-half of 1% each year -- $11 billion at the current level -- according to an estimate by the nonpartisan agency.

The agency found that reducing those measures through malpractice reform would lower healthcare spending by three-tenths of 1%.

The figure is far lower than previous estimates by groups backing malpractice reform. On Sunday, Sen. Jon Kyl (R-Ariz.) blasted Democrats for blocking attempts to reform malpractice laws. "Almost everybody agrees that we can save between $100 billion and $200 billion if we had effective medical malpractice reform," he said.


Saturday, October 10, 2009

The battle of Bull Runs and Bear Runs

Click on chart to enlarge; right click it to enlarge in a separate window (Firefox).

While putting that thousand word picture together, Guambat recalled a paper he wrote back in 2002, addressed to no one in particular and never published or distributed to more than a couple of friends at the time. He found it buried away in the cyber-burrow.

Guambat has blown the cobwebs and burrow dust off the paper, which he then titled "That was then, this is now", and posted it online at

Its interesting. Some excerpts of what Guambat wrote:
I’ve seen so many pundits comparing our market now with the major declines of the last century that I decided to look back to the times of the prior major bear markets of the 20th Century, with the help of a used book I just bought, which is a newspaper-style account called Chronicle of the 20th Century (Chronicle Publications, Mount Kisco, N.Y. (1987). This edition only goes back as far as 1986.

... putting it in its most simplistic terms, the period from 1918 to 1942 was basically a diamond shaped consolidation to break the Dow 100 mark, and the period 1965 to 1982 was basically a rectangular consolidation to break Dow 1,000.

The point of this study paper is to say, simply, that that was then and this is now and we can draw nothing of predictive value from either of those times to infer what action the market may take in the context of trying to mount Dow 10,000. We can only note that the market did need time to consolidate at those particular levels, that the declines experienced in those times were severe, and that the market recovered to go on to higher levels.

Indeed, the market moves up and down within the patterns of those consolidations served as ideal entry and exit points to trade the market profitably during those trying times (which is not to say that anyone could have picked the exact turning points each time, but to say that an astute trader would have had a pretty good guide to know to accumulate stock below the mid-range of the pattern and distribute above the mid-range, until the break-out.)

The contrast between the conditions in the world prevailing during that period [the 29 Crash era] and the present period could hardly be more stark. Geo-politically, that period witnessed the international version of the musical chairs game that became the beginning of the end of the great colonial powers. Revolutionary instability came right up to America’s southern underbelly. By being the last hold-out in the all-consuming WWI, the US was able to amass and husband extraordinary wealth, and to emerge as the last man standing. As I see it, that is the critical factor that gave rise to both the Roaring ‘20's and the Crash of ‘29.

The thing about the ‘65-‘81 bear market was its stealth. It was the bear market you have when you’re not having a bear market. It was undramatic. It was unheralded. It was a silent, patient, relentless, grinding down weariness that finished off the last of the bulls before the market finally found the strength to mount Dow 1,000. While the worst of it was seen in 1974, the strength to bust 1,000 did not gather until 1982. On five occasions, from 1965 to 1981, it tried to bust that barrier, only comprehensively achieving that goal on its last attempt.

Internationally, the world was a much more stable environment than it was in the period of the ‘29 crash. Colonization was replaced with self-determination, with the attendant many “flash fires” but not any major conflagration; many old fires continued to burn, such as Northern Ireland and the Mid-East. The “great powers” were reduced to 2 for all intents and purposes. Fear of nuclear annihilation kept the Cold War pretty much on ice. So US national expansionism was really not on the agenda, although the aggrandizement of global corporate expansionism, led mainly by the US but not restricted to it (see, e.g., Nestle, Toyota, Unilever, HSBC, News Corp) was a nascent private colonial movement not much talked about.

At home, there was a major cultural challenge to the old social orders as Blacks and other ethnic minorities, and then young people and women generally, demanded and obtained a place at the table. Community order, composition, values and structure were rearranged, right down to the fundamental make-up of the family.

Curiously the “Chronicles” don’t reveal that much about Wall Street and the market during this whole period. It was, as I said, an unremarkable, stealthy bear.

The ‘74 low on the DJIA was 577, 43% off the 1,000 mark and about 45% below its high, and the S&P lost almost 48%; probably not much worse than now, considering the damage done to the Nasdaq and S&P. Other than the oil hostage situation, the world did not have that flavor of flying apart at the center as did the period of the ‘29 crash. While wage and price inflation may have been a problem in either event, the “external” shock of the oil embargo seemed to be the straw that broke the bull’s back this time. Unlike ‘29 and now [at least in the US], inflation was the villain. It is too simple to say that the oil embargo caused the ‘74 Bear, but at least it was a blatantly obvious contributor. Over-valuation was an unmistakable aspect of ‘29, but not so obvious in ‘74.

Like ‘29, over-valuation was critical to the Millennium Melt Down [the "Dot-Com Bust"]. Unlike ‘29 or ‘74, there were no obvious causes of the Millennium Melt Down other than valuation issues (though there is a large body of doomsayers who believe we are on the verge of a credit binge induced deflationary period of gigantic proportion).

My own theory of the cause of the MMD is based on the commercial exploitation of “virtual property”. For the first time in history, a company that owned and made nothing of any tangible value became the richest corporation in the world, placing 3 of its owners in the 5 most wealthy individuals on the globe list. It is a company that didn’t exist until the beginning of the ‘82 Bull Run. Microsoft epitomizes the virtual property business. The discovery of virtual property ignited the business world in the same way that California was built overnight by the gold discovery in the mid-1800's.

And the virtual property boom was not restricted to (nor necessarily discovered by) the dot-com world of the internet. The exploitation of intellectual property has its roots way back in common law days of copyright and patent. But it wasn’t until recent times that whole industries have rallied to the protection of intellectual property across the globe in the pursuit of the riches that come from licensing property as a business model distinct from the more traditional model of alienating property for profit.

The commercial control of ideas rather than things has never before been so commercially valuable, or temporally precious. It has engendered the rally, “content is King”; it has sent the world’s largest companies with the world’s most expensive lobbyists and lawyers chasing after kids in garages running Napster or otherwise sharing their oldies but goodies music over the internet, and after back-alley pirates in way-off third world countries trying to make a few bucks with CD duplicating machines and fake designer labels. It has replaced the traditional business model of discreet sales, [with] the model of the toll taking gatekeeper. And it has meant that one good idea may beget another that trumps the former and leaves it a goner just as fast as the notion takes hold in the noggin (so long as the latter has not trespassed on the virtual property rights of the former).

And there is another form of virtual property that has perhaps contributed even more to the explosion of the wealth from ideas than that form discussed above. This form takes its inspiration from the efficient and rich geniuses who developed the Chicago stock yards to such a state of perfection that when they were through with a cow, there was nothing left but the moo. This virtual property is the domain of the rocket scientists of the big financial institutions, who have been able to so completely tear apart and repackage traditional debt, capital and currency instruments and on-sell them in so many derivative forms that they rival the number of stars in the sky. Today literally untold trillions of dollars worth of these instruments are traded daily across the globe, in streaming electronic hints of matter and meaning. They have the weight of wealth to make or break whole countries in a blink of the eye. And not even the world’s central bankers combined seem to have any real sense of the size or scope of this business.

My theory is that the major impetus to the rise and fall of the ‘82 Bull Run has been the discovery of this new world of virtual property, of legally protectable good ideas and bad, and of the inexactitude of the methods available for valuing this newly found, and sometimes fleetingly held, form of property. In this context, it is absolutely no wonder at all that valuations have outstripped traditional analysis. Who is to say when these ideas are over or under valued?

Well, the market is. That has always been the market’s job; to put a price on something. That does not mean that the market is always, or even often, right. It overshoots, it undershoots, and it carries on like a madman sometimes, but it is simply trying to do its job of pricing the products it trades in the best way it knows how.

You might want to have a look at the paper.

Then, again, probably not.


Friday, October 09, 2009

The Third-World way of asset allocation

David Malpass posits some interesting comments about the relation between a weak currency, particularly in this case the US dollar, and the prosperity of a nation in a WSJ column today.

Malpass was formerly the Chief Global Economist for Bear Stearns, who has done stints in both Reagan's and Bush I's administrations. In short, he's someone with much greater knowledge and experience in these matters than Guambat by lightyears.

Says he,
The Weak-Dollar Threat to Prosperity.

On the surface, the weak dollar may not look so bad, especially for Wall Street. Gold, oil, the euro and equities are all rising as much as the dollar declines. They stay even in value terms and create lots of trading volume. And high unemployment keeps the Fed on hold, so anyone with extra dollars or the connections to borrow dollars wins by buying nondollar assets.

Investors have been playing this weak-dollar trade for years, diverting more and more dollars into commodities, foreign currencies and foreign stock markets. This is the Third-World way of asset allocation.

Corporations play this game for bigger stakes, borrowing billions in dollars to expand their foreign businesses. As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad.

If stocks double but the dollar loses half its value, who beyond Wall Street are the winners and losers? There's been a clear demonstration this decade. The S&P nearly doubled from 2003 through 2007. Those who borrowed to buy won big-time. Rich people got richer, seeing their equity bottom line double. At the same time, the dollar's value was cut nearly in half versus the euro and other stable measures. Capital fled, undercutting job growth. Rent, gasoline and food prices rose more than wages.

Equity gains provide cold comfort when currencies crash.

A better approach would start with President Barack Obama rejecting the Bush administration's weak-dollar policy.

Guambat was intrigued by the analysis, mainly because Guambat is easily impressed, but more so because it had escaped Guambat's attention that Bush even had a weak dollar policy. All Guambat recalled was Hank Paulson's insistence on a strong dollar policy.

But, then, sure enough, right back there in the start of that 2003 through 2007 period Malpass mentioned, there is Bruce Bartlett in the National Review warning of just such a calamity:
Bush and the Buck, December 8, 2003

One of the reasons why presidential administrations fail is that they often fall victim to the law of unintended consequences.

Unfortunately, the Bush administration is in danger of making the same mistake with respect to the dollar. Having become obsessed with the trade deficit, it is looking for other ways to reduce imports and raise exports. One way of doing this is to reduce the value of the dollar on foreign exchange markets. A lower dollar makes imports more expensive and exports cheaper in terms of foreign currencies.

The problem is that this process is not taking place on its own, nor is it cost-free. The Treasury Department has been signaling for some time that it would not be displeased if the dollar fell. This sort of "benign neglect" can be as effective as direct action in foreign currency markets, such as having the Treasury sell dollars. When currency traders know that we won't defend our currency, they take advantage of it by selling dollars against other currencies. That is a key reason why the dollar has fallen sharply against the euro and is now at a record low.

Another effect of this weak-dollar policy became evident in recent days when the OPEC oil cartel indicated that it might raise prices to compensate for the falling dollar.

Although the signs are nascent, they indicate that inflation is starting to show its ugly head again, the result of an extremely easy Fed policy over the last three years. Sensitive commodity prices like gold are up, the dollar is down, and OPEC is again complaining about lost purchasing power. It's like déjà vu all over again.
All interesting, but Guambat's hind leg is furiously scratching his head trying to remember any rampant inflation since 2003. Apart from stocks and real estate and commodities, there was no particular inflation, leastwise, of the sort the CPI measures.

Was there something else, then, that led to the rich getting richer and wages not keeping pace with goods, as Malpass pointed out? Is a weak dollar the cause or coincidence of that condition, or nothing more than a furhpy?

Maybe; just maybe. This is what Malpass had to say (also in the National Review) back at the start of that period, 2003, when things just started going out of control according to his current write.
Tax-Cut Scorecard, It’s not all Bush asked for, but it will add materially to economic growth, May 23, 2003

President Bush met with House and Senate leaders on Monday and urged them to finish the tax cut this week. Final negotiations took place Wednesday with Vice President Cheney. The tax-cut bill should be signed into law by the president around Memorial Day.

So how does it stack up? The final bill is not all that Bush asked for, but it will add materially to economic growth and equity values.

Important growth provisions include the acceleration of the already-scheduled income-tax cuts, a cut in the long-term capital gains tax rate to 15 percent, a cut in the dividend tax rate to 15 percent, and an expansion of the expensing of business-equipment purchases.

Unlike the president's original proposal, the final deal reduces dividend taxes to 15 percent rather than zero percent and does not include the "deemed dividend" concept or basis step-up. As a result, it won't be as beneficial to share values or the U.S. corporate capital structure as the president's original proposal.

A rough estimate is that the tax cut will add at least $600 billion (or 5%) to U.S. equity market capitalization.
Guambat notes the DJIA peaked in November 2007 at just over 14,000 from a low in March 2003 (coincidentally anticipating the tax cuts in May mentioned by Malpass?) of just under 7500. A bit more than a mere 5% addition to the equity market capitalization, shall we say? Either that estimate was made by someone purposefully low-balling for political purposes, or incompetent.

Malpass, today, blames it all on a weak dollar policy. The Third World way of asset allocation, he says.

Guambat sort of suspects it is all the result of a First World way of asset allocation, by way of wealth distribution through taxation of ordinary incomes while alleviating taxation of gains from capital assets. Asset allocation is one thing, but the prosperity of a nation is another.

FOLLOW-UP: Reading some of the past blog comments about Malpass, Guambat noticed that he has regularly been pilloried for his views, such as this from Barry Ritholtz a few years back, as well as this : "I really don't like to single out any one firm or strategist for excessive criticism -- hey, we're all wrong on quite a regular basis. But, goddamn, if Bear Stearn's David Malpass hasn't been on the wrong side of more than a few major issues facing the economy over the past few years."

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Shipwrecks, then and now

The WSJ has a couple of stories today about shipwrecks.

First, is a story about efforts being taken to try to prevent further damage to the archaeologically significant old wrecks in the English Channel: Saving the Wrecks of the Channel

The second, along a theme Guambat has mentioned before, talks about the economically significant new wrecks in the container ship market: Rough Seas Slow to Calm for Container Shippers
Rates have risen for other kinds of shipping, such as tankers, but are expected to stay depressed for container-shipping companies for at least the next year.

Container-shipping rates even dropped to zero in January on the Asia-to-Europe route as brokers waived fees and charged only for fuel costs.

That crimps the companies' ability to make payments on ships they ordered when shipping rates were high. At the same time, the value of the ships they already own has fallen.

Both factors make it harder for companies such as CMA CGM and Hapag-Lloyd AG to keep debt covenants with banks. Last week, CMA CGM, the world's third-largest container-shipping company by capacity, said it was in talks to restructure its $5.2 billion in debt. The German government has extended €1.2 billion ($1.76 billion) in state-loan guarantees to Hapag-Lloyd.

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Hilton suffers W-shaped recovery

Hilton, like the rest of the hotel industry, is struggling with declining room rates and revenue. The company also labors under a $20 billion debt load from Blackstone's 2007 buyout.

A federal grand jury is investigating whether Hilton Worldwide and several of its former executives should face criminal charges for allegedly stealing tens of thousands of pages of confidential documents from rival Starwood Hotels & Resorts, according to people familiar with the situation.

The grand jury is part of a six-month-old Justice Department probe into allegations that Hilton, which is owned by private-equity firm Blackstone Group, used trade secrets taken by former Starwood executives, who defected to Hilton last year, to develop its own luxury brand to compete with Starwood's successful W chain.
Hotel Feud Prompts Grand Jury Into Probe

Guambat has mentioned before that many of his posts are simply done to write better headlines for stories he reads.


Tuesday, October 06, 2009

Guam's tancho return

Most Statesiders are familiar with the story of how the arrival of the first swallow to Capistrano heralds a new spring.

Guamanians, being many times closer to Hokkaido than California, tend just as readily to think in terms of the tancho returning to Japan's northern islands, as a sign of a new beginning.

Now that the first gushes of the water are beginning to burst forth from the re-plumbing of Guam's infrastructure in readiness for the biggest change to hit the small island since Magellan, the cranes are returning to Guam, as Guambat noticed looking down from his burrow overlooking Tumon Bay this past weekend:


Two stories in search of a train wreck

The WSJ posted two stories today that just seemed to Guambat to be somehow incongruous.

First, in the pump and dump meme, was:
Stocks with Rising Dividends Are Fewer, but Worth the Hunt

Investors seeking income growth with less risk than that posed by the broad stock market have long bought shares of companies that regularly boost dividends.

Many such funds posted returns of minus 25% or worse for 2008. Although that wasn't quite as bad as last year's almost 40% drop in the Standard & Poor's 500-stock index, the poor performance of such funds stunned shareholders who thought they had chosen a fairly conservative investment approach.

But if you are thinking about throwing in the towel on dividends and dividend-focused funds, there may be reasons to reconsider.

And so on.

But, whether mere coincidence, Reg D, or simply mischievousness, there was this:
Borrowing for Dividends Raises Worries

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets [now there's a chicken and egg question], investors have been driven to take on more risk.

In any event, neither story referenced the other.


Saturday, October 03, 2009

Information arbitrage?

Chicago PMI Stirs Market; Distribution Raises Fairness Issue
The latest Chicago PMI data took a big toll on U.S. financial markets early Wednesday - nearly three minutes before the numbers were officially released.

The results of the Chicago Business Barometer, more commonly referred to as PMI, are made available to paying customers, including journalists, at 9:42 a.m. ET on the last business day each month. News media outlets are prohibited from publishing the data until 9:45, while traders can act on the information immediately.

If you don't have a WSJ ticket to read the article, you may be able to access the MarketBeat blog which tipped the story.

The not-so-subtle management of markets
All things considered, Wall Street was taking the latest payroll figures in its stride on Friday. For both the Dow and the S&P 500 at the opening, cash markets were showing roughly half the losses predicted earlier by their respective futures.

There was a good reason for that: the payroll figures actually came out on Thursday.

It makes sense for the authorities to work at managing tricky news flow in this way, as long as they don’t start to think they can do it regularly or with any real precision.

And they’d better be subtle about it.

Of course, to suggest that someone from up-on-high tipped off Goldman Sachs would be absurd - and an insult to Mr Hatzius directly.

But, my word, you can see why the conspiracy theories fly…


How does your unemployment rate?

Stocks pared early losses to trade modestly lower Friday after the September nonfarm payrolls report came in well below Wall Street expectations.

Nonfarm payrolls declined by 263,000 in September, the Labor Department said Friday, noting that the largest job losses were in construction, manufacturing, retail trade and government. Economists surveyed by Dow Jones Newswires survey had expected a 175,000 decrease.

U.S. Unemployment Probably Higher Than Reported, Silvia Says
Unemployment in the U.S. is probably higher than September’s [26 year high] 9.8 percent rate reported by the Labor Department today because the number of people looking for work is declining, economist John Silvia said.

“People are just disappearing,” Silvia, 61, chief economist at Wells Fargo Securities in Charlotte, North Carolina, said today in a Bloomberg radio interview. “Discouraged workers go up. Marginal workers go up.”

The 263,000 jobs lost last month brought the total since the recession began in December 2007 to 7.2 million -- the most since the Great Depression.

The so-called participation rate, which represents the proportion of the population the workforce, declined to 65.2 percent in September, the lowest level since May 1986, from 65.5 percent in August.

“The reason the unemployment rate is not going up faster is because you have a lot off people dropping out,” said Silvia, a former congressional economist.

The government’s broader measure, known as the “U-6″ for its data classification, hit 17% in September, 0.2 percentage points higher than August. The comprehensive measure of labor underutilization accounts for people who have stopped looking for work or who can’t find full-time jobs.

Details of the report were almost universally dismal, with the number of unemployed people rising by 214,000 to 15.1 million.

But wait, there's more:

Jobs for March 2009 will likely be revised downward by about 824,000 or 0.6%, according to a preliminary estimate the department released Friday.

Back to the drawing board: Make that, uhh, 15.924 million.


Thursday, October 01, 2009

Wall Street can ADD; it just can't subtract

Attention Deficit Disorder: ADD

Wall Street is brilliant in it's ability to add 2+2 to get 5, or 6, or whatever. It just can't subtract fees from brokers.

Wall Street Wizardry Reworks Mortgages (Gotta ticket to read?)
Wall Street firms, buoyed by surging markets, are seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis.

The popular deals are known as "re-remic," which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

Wall Street analysts said activity in re-remics has ramped up this year, from a trickle in January to several billion dollars from March to June, with a big increase in volume in July, partly thanks to reviving credit markets.

Estimates of volume this year range from $30 billion to more than $90 billion. The transactions are typically done as private placements and aren't disclosed publicly.