Sunday, August 30, 2009

Stocks and Bonds

Nice, calm post from Zero Hedge titled Are the Bonds Smarter?, comparing the 10-year Treasury bond against the stock market. Here is some accompanying commentary from the post:
When in doubt always go with the bond market. Spreads between riskier bonds and Treasuries begun to notably narrow since December. Even though they widened some by March, they did not widen as much as they did last year. At one point earlier in the year we had narrowing junk bond spreads (the junkier the better) and a falling stock market. This is one of the reasons I did not believe that last leg of the selloff in stocks, although those last 200 SPX points to the downside did come pretty fast. This is what happens when you have to sell and there are not buyers.

Right now the situation seems irrational in the other direction—not complaining, I know markets are irrational by definition—and I believe we are setting up for a nasty disappointment after the inventory rebound in the economy is over. The bonds seem to be suggesting that... I don't think you will be able to rationalize a sub-3% 10-year yield as a green shoot.
DoctoRx here. Things were looking up from the growth-is-here-and-now camp based on Gallup's polling until today's. Unfortunately, self-reported consumer spending has plummeted very recently to $59/day, which is almost the lowest of the entire recession/depression. That metric was close to $120/day in the spring of last year. In addition, there was a brief surge upward in people reporting that their employer was hiring; that has receded; here is the link to the chart. We are back in the hiring/firing range that was first hit in December 2008.
By the above metrics, the stock market may be ahead of itself.
Also, certain market timers ranging from Doug Kass and Robert Prechter have recently tried to ring the bell at the top of this move. These two may deserve some real consideration, as they both got out of the market before the crash and aggressively called to buy around the March low. Past performance is no guarantee of future performance, however. The Kass topping call is a good read and can be accessed by clicking here. Kass and Prechter have very different approaches, it would appear; that they call at least a trading top now is interesting.
What would cause stock prices to decline would be little other than reversion to the mean that the stock market should both have some security of principal and provide income to the owners of the companies the stocks of which are available for public trading. Currently, even a 5-year Treasury note outyields the average S&P 500 stock. The more I think about matters and ponder the disaster that befell owners of a low-yielding stock felt to be safe, AIG, the more I believe that dividendless large, highly profitable companies such as Amgen and Cisco are abominations from the common shareholders standpoint. They are too big to be taken over and instead of keeping all their earnings within their companies, they should go out of their way to share their cash-flow success with their owners. The concept of not rewarding shareholders with current income is a modern contrivance and exemplifies much of what is wrong with modern finance. If at some point Cisco has a bad couple of years, fraud is found, etc., its owners will have had a disastrous multi-year waste of capital, whereas the insiders will have made fortunes via salary, bonuses and cashed-in stock options. In fact, in a statistical success, such an outcome is likely; when is of course unknowable.
If you fear inflation a lot, common stocks are the wrong vehicle to protect purchasing power over a 5-year time horizon. The classic vehicle is gold. Meanwhile, if the stock market is heading down, even if it proves to be a common correction in a cycle of rising prices that accompanies even "False Recoveries", it would appear likely that Treasuries would continue to attract buyers and rise in price (fall in yield). That's at least the trend that is in place now.
Copyright (C) Long Lake LLC 2009

The NYT May Be Turning Against the President on Afghanistan

Sometimes small changes herald big ones. The New York Times politely but clearly is exploring a stand of skepticism about the President's policies on Afghanistan. In Seven Days That Shook Afghanistan found in the widely-read News of the Week in Review section of the Sunday edition, the heavyweight journalist Dexter Filkins reports on military problems but especially highlights the apparently widespread voting fraud in the recent first round of the election for President. The article concludes by quoting the leading contender to President Karzai, former Foreign Minister (and ophthalmologist) Abdullah Abdullah:

“If people decide that we could not give them anything through the democratic process, then the insurgency will be strengthened,” Mr. Abdullah said. “And then the United States will need to bring more troops and more resources here — and for what?”

That’s a question that President Obama, General McChrystal and, ultimately, the American people, will have to decide.

There is daylight between the Times and Barack Obama on Afghanistan.

The Times appears to have carefully begun to favor the Viet Nam analogy. The operative terminology is the Times' choice to highlight Abdullah's question: "And for what?"

There is no rush to change asset allocations, but investing in a guns and butter economy is very different from investing in a butter-only one.

Copyright (C) Long Lake LLC 2009

Saturday, August 29, 2009

Words to the Wise is running a lengthy piece on China and its stock market that is not a great read, but has a quote that leads the thoughtful observer to be wary of what's going on in the Great Reflation. From China Stocks Cheapest to Analyst Targets After Slump:

While banks can provide 300 billion yuan to 400 billion yuan of new loans a month, that “may not be enough for the market to be reassured that’s enough to keep pushing prices higher,” Green (an "analyst") said.

Scary. (Not to mention the title of the article, which in an almost insane manner justifies stock prices on the basis of what "analysts" project the stock to sell for in the future. Talk about self-fulfilling prophecies! This is NASDAQ 1999 stuff--the worst mispricing of securities I have ever heard of.)

We have seen a great orgy of both creation of new credit and government guarantees of existing credit. As with "cash for clunkers", this will pull consumption forward, but it creates no wealth. And the U. S. has explicitly gone the New Deal route of raising prices by destroying existing product; for every new car sold under "clunkers", one was destroyed; even the engine parts could have been reused.

Trying to re-blow a burst bubble is, as with chewing gum splattered over one's face, messy and difficult stuff.

Meanwhile, one week ago, EBR pointed out some interesting bullish historical technical patterns regarding the long Treasury bond and contrarian rationales for why it could be an asset poised for capital gains as well as income, focusing on a proxy for it, the ETF TLT. As if the gods of the market were reading this blog, TLT closed about 3 points up on the week (over a 3% gain). The 10-year is challenging resistance at 3.40-3.43%; no opinion about its chances of success, especially in the very slow week upcoming.

The ECRI Weekly Leading Index Growth Rate rose to its highest level since May 1971, attesting to the rationale for the massive stock rally since March. What happened then in the midst of that structural bear market for bonds? The stock market promptly fell 15% and was down adjusted for inflation one year later. The long bond was mostly stable to down in yield (up in price) for almost a year and half later (despite all the money printing, war action, etc.) Past could be prologue.

The frenzied interest and action in dividendless financial stocks such as AIG, C, Fannie/Freddie, Ambac, etc., and the poor action in high-quality dividend-paying companies such as MCD and Northern Trust (NTRS), is a divergence of which EBR disapproves. It correlates with the speculation going on in China and the quote at the top of this post explaining that speculation.

Longer term, quality will out, and uninformed speculation and excessive credit creation will reap what they have sown.

Copyright (C) Long Lake LLC 2009

Gold's Price Rise and Troubles in Afghanistan

With speculation having returned in a substantial way to the financial markets, ECRI bullish on the economy and now on housing prices, what can go wrong economically? EBR continues to follow the Pak-Ghanistan (Af-Pak) region, and takes as a troublesome sign that even an opponent of the Obama surge in Afghanistan, Sen. Feingold of Wisconsin, can't admit something obvious to Afghans. From the WSJ op-ed by the senator today, The Road Home From Afghanistan:

In light of their country's history with great powers, it should come as no surprise that Afghans are increasingly skeptical of our military presence. A 2007 poll (conducted by ABC News, the BBC and ARD German TV) showed most Afghans in the Southwest no longer support the presence of foreign troops, and a poll this year (conducted ABC News and the BBC) found that nationwide a plurality of Afghans want troop levels reduced, not increased. . .

Announcing a flexible timetable for when our massive military presence will end would be one of the best things we could do to advance our national security interests in Afghanistan. By doing so, we would undercut the misperception of the U.S. as an occupying force that has propped up a weak, corrupt and unpopular government, while at the same time removing a tremendous strain on our troops and our economy.

What's that about a misperception? From an Afghan and perhaps an "objective" perception (if such exists), is not the U. S. and its allies propping up a weak, corrupt and unpopular government? Are the large number of NATO troops not effectively occupying the country?

The economy will do much better, and inflation and interest rates will be much better behaved, if Afghanistan does not become Viet Nam 2. The more it smells like it, the more attractive gold becomes and then less attractive bonds become. It's too soon to draw conclusions, but it's high on my radar screen.

Copyright (C) Long Lake LLC 2009

Friday, August 28, 2009

Go-Go Not Gone

So much for the New Normal. Ring in the old:

Bloomberg has revealed a source of the improvement in the financial markets: leverage is back. Here are excerpts from Leverage Rising on Wall Street at Fastest Pace Since '07 Freeze:

Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.
Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks In., which left the business last year, is “reaching out to clients” to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.
“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

So the world is back to more economically unproductive activity, the creation of credit to purchase a loan.

“There is a lot of political pressure on banks to lend and this is one form,” said Ratul Roy, head of structured credit strategy at Citigroup in New York.

Got it. Hair of the dog.

And now an electrician/labor leader, Denis Hughes, is the chair of the New York Federal Reserve Bank and the deputy chair is a lawyer with special expertise in free speech issues and an extensive career heading major universities (currently Columbia), Lee C. Bollinger. What about the word "bank" in the title of the New York Fed? Shouldn't there be a banker or someone with long-term banking/financial markets experience running the show? Now of all times to have political appointees running the NY Fed sounds both strange and simply wrong. And of course the NY Fed is not just one of 12 regional Fed banks, but it is first amongst equals.

Washington is now in effect running the economy and the markets. The implications of that are unclear but suggest that we are a long, long way from anything approaching free-market capitalism. It was one thing when after the devastation of the Great Depression, Washington interfered in the economy; it's another now after the far milder current downturn.

Copyright (C) Long Lake LLC 2009

Thursday, August 27, 2009

25% Already Regret Turning in Their "Clunker"

In line with the Roubini-related post below this one, here's a highly interesting excerpt from David Rosenberg's "Toast With Dave" (courtesy Gluskin Sheff) today about the cash-for-clunkers program that this blog has panned more than once. The big picture implications are serious and feed my skepticism that Dr. Roubini et al. are correct in advocating large-scale, long-term "stimulation" of the economy. As a physician, I have had many alcoholics and other substance-abusers under my care. Including nicotine addicts, that was a very large number. There's no time to stop the addiction like the present.

Enough of me; here's Dr. Rosenberg:

Indeed, just have a look-see at what is about to happen now that the government's Cash-for-Clunkers blowout is finally over; the USA Today cites an study which shows that half as many people are researching a new car purchase on its website compared to the peak levels during the cash-for-clunkers survey. Apparently, traffic is off 10% from depressed June levels, when the subsidy program was barely a concept. Will the government reinstate the program when auto sales collapse in the fourth quarter? Can it possibly justify more than the $3 billion in taxpayer money that has already been committed to supporting auto consumption? This is what Mr. Market may not see just yet — a 2002Q4 style of GDP growth relapse in the final three months of the year.

What is interesting is that a CNW Research poll found that nearly 1 in 4 Cash-for-Clunkers beneficiaries now regret making the decision to buy a new car they had no intention of purchasing just yet — because now they are faced with a huge financial bill to pay. Think about it, nearly 700,000 sales with an average amount to finance of nearly $16,000 means that the government induced the household sector to take on more than $11 billion of new debt. It was an overextended consumer that got us into this financial mess to begin with, and now Uncle Sam just induced the household sector to expand its balance sheet by $11 billion instead of doing the prudent thing, even if at the expense of auto consumption over the near-term, and providing lessons on how to live within our means. This is all rather unbelievable, and the price we will now pay for an illusory positive print on third quarter GDP will be stagnation over the next several quarters.

Remember that it is the stock that is in essence a perpetual option, and a bond that is limited in duration and therefore allows a "do-over", trading stocks without believing in long-term ownership being a negative-sum game. Elsewhere in the "Toast With Dave", he reiterates that the risk-reward for exposure to businesses is better with corporate debt than equity.

Lots to think about in the waning dog days of August . . .

Roubini Cautions on Ultra-Large Government Deficits

In the current Forbes, Nouriel Roubini writes in The Spend-And-Borrow Economy that:

The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%--that's an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.

This is from the same piece, referring to the recent crisis actions:

This massive escalation of central government spending and borrowing was necessary.

This is a lengthy article. It ends with an extended back-and-forth about inflationary and deflationary risks and perceptions thereof. He brings back the caution about the 1937 economic downturn in arguing for "growth" and tilting toward inflationary risks. People of Dr. Roubini's big-government persuasion are forever bringing up that downturn, without mentioning that we have suffered no Great Depression and that by the time 1937 rolled around, there was not just the fear but the fact of rising inflation and a Dow Jones Industrial Average that was at its all-time high except for about a 1-year period in 1929-30. So the Fed and the Feds took away the punchbowl. Absent the Great Crash, no one would remember that downturn, just as no one talks about the 1921 Depression that was treated conservatively and from which strong growth occurred without government intervention.

The other best thing besides its thoughtfulness and completeness about this Roubini article is that it avoids predicting the path of the stock averages or interest rates.

Copyright (C) Long Lake LLC 2009

Big Finance to Shrink as Creative Destruction Moves Along?

There happen to be some very good reads today at two widely-read blogs.

At Naked Capitalism, Yves Smith comments on the possibility that there may be some hope for a relative shrinkage of the role of finance in the workings of the advanced economies; click here for the post.

Mish has a complex writeup with a number of links to his and other material with the theme and title of Creative Destruction.

Back at Naked Capitalism, Yves linked to a WSJ article I brought to her attention, click here for NC's links today; eighth link from the top. Because this is a subscription only WSJ article, I'd like to add a link to a more thorough abstraction from this, as published at the Planet Gore blog:

The Looming Biofuel Bust

The biofuels revolution that promised to reduce America's dependence on foreign oil is fizzling out.
Two-thirds of U.S. biodiesel production capacity now sits unused, reports the National Biodiesel Board. Biodiesel, a crucial part of government efforts to develop alternative fuels for trucks and factories, has been hit hard by the recession and falling oil prices.
The global credit crisis, a glut of capacity, lower oil prices and delayed government rules changes on fuel mixes are threatening the viability of two of the three main biofuel sectors — biodiesel and next-generation fuels derived from feedstocks other than food. . .

Producers and investors now are pushing for swift and aggressive government help. Biodiesel makers are lobbying to kick-start the delayed blending mandates immediately and extend biodiesel tax credits, which expire in December.
On Aug. 7 more than two dozen U.S. senators wrote to President Barack Obama to warn that "numerous bankruptcies loom" in the biodiesel sector. "If this situation is not addressed immediately, the domestic biodiesel industry expects to lose 29,000 jobs in 2009 alone," the senators wrote, using estimates by the National Biodiesel Board.
Mr. Obama, who supported biofuels throughout his campaign, is working to roll out grants and loan guarantees for bio-refineries and green fuel projects, said Heather Zichal, a White House energy adviser. The pace of the disbursements should speed up this fall, administration officials say.

I have not followed the biofuels stuff much at all, but with oil around $70 barrel, the idea that oil prices are so far below projections that this stuff is now uneconomic is loony. One wonders if this was just another corporate scam.

It's one thing when one group of people gain an advantage over another in the process of developing useful goods, services, capital investment and the like. From an overall standpoint, spending real resources to build irrelevant things is pure waste. In the Bible, the seven lean years probably came from locusts and weather problems. Nowadays it's more likely government-caused problems or too much in the way of "animal spirits" amongst businesspeople.

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GDP is More than a Gross Number

From Commerce Department's Q2 GDP report (second estimate):

Real exports of goods and services decreased 5.0 percent in the second quarter, compared with a
decrease of 29.9 percent in the first. Real imports of goods and services decreased 15.1 percent,
compared with a decrease of 36.4 percent.

Real federal government consumption expenditures and gross investment increased 11.0 percent
in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased
13.3 percent, in contrast to a decrease of 5.1 percent. Nondefense increased 6.2 percent, in contrast to a
decrease of 2.5 percent. Real state and local government consumption expenditures and gross
investment increased 3.6 percent, in contrast to a decrease of 1.5 percent.

The first paragraph above shows that because America's imports fell faster than exports, GDP improved (that's why it is gross domestic product). The second paragraph gets to the big problem. The ongoing wars in Asia are sucking up production (and lives); this is "unhealthy" GDP. And beyond military spending, government grew while revenues to private businesses and individuals shrank.

No free lunch . . .

Copyright (C) Long Lake LLC 2009

Comparing 2008's Banking Crisis to Prior Ones

In Banking Crisis Dwarfs Great Depression, John Lounsbury presents a number of facts and interrelationships in a way that is novel to me (link seen on Dr. Ed Harrison's Credit Writedowns). Since much of the reason to read this piece is in the charts, please click on the hyperlink to read it unfiltered by me.

Copyright (C) Long Lake LLC 2009

Wednesday Night Investment Update

As suggested here this past weekend, the long Treasury bond has surprised many with significant strength. The 30-year Treasury has dropped greatly- 20 basis points, down to 4.21%, corresponding to over a 3% upward move in price in the close ETF proxy, TLT. Some technicians are pointing to current interest levels as important; traders may want to lock in gains or place close stops. Given that Trimtabs Demand Index has just registered a sell signal on the stock market (was neutral) and given the fact that this move in Treasuries has occurred with no publicity and no obvious cause, I remain positive on direct ownership of zero-coupon intermediate to long Treasuries, though I'm no longer pounding the table for underinvested people to jump in here. Fundamentally, we all or almost all of us "know" that 4.2% a year for 30 years is a poor investment. Of course, if a Japanese purchased a 30-year Japan Government bond 20 years ago as the bubble was topping, he or she made a great investment.

I also remain positive on gold. Now that the Fed this weekend in Jackson Hole doubled down on its promise/threat to keep interest rates "too low, too long" in order to create inflation, I have changed my investment posture on gold from trading range-oriented with a bullish tilt, to buy and hold a significant core position, trading around it as desired. Physical gold and the two gold ETFs, GLD and GTU, all make sense.

Another reason for liking gold is the recent appointment of a labor leader with no legal, banking or economic credentials to head the New York Fed. Click here for the link, courtesy of Naked Capitalism. Click here for a link to his bio.

I also like cash. Yields vary greatly. If you trust the FDIC, it may be worthwhile to move money from bank to bank to grub extra yield.

Finally, at what should be roughly the nadir of the economic banana, there are probably solid long-term values in McDonald's. After the recent mini-sell-off, I also like FPL.

What is the theme to the above: high quality. Junk should have had its 5 months in the sun. Quality will out over the long run. Exactly when, those who lived through the late 1990s know that one never knows.

The Baltic Dry Index has come down sharply; link here for it on an ongoing basis. Chinese stocks look to be cracking, though it's not a market I know anything about. A growing number of pundits who both called the stock bear market and then the March low are very cautious to bearish, whereas other bears who stayed bearish have caved under the "don't fight the tape" theory. Yet all this is occurring during light end-of-summer trading, where the low-priced stuff such as Fannie Mae is dominating trading.

This game never ends, but when a mainstream outlet such as Bloomberg piles onto Dr. Roubini, a truly eminent academic, for no reason other than his first wrong (for now) call after what he says are five correct ones, I fear that that is a corroborating sign of too much complacency amongst the bulls.

Copyright (C) Long Lake LLC 2009

Wednesday, August 26, 2009

Bloomberg's Smear of Roubini Merely Hurts the Insulter may have sunk to a new and despicable low. The half-truths and unstated facts in its article, which was first posted under the following title:
Waiting for Economy Roubini Can Believe In Means Missing Rally and then, strangely, retitled in "Update 1" as Applying Roubini Wisdom to Stocks Means Missing Out. It would appear that while the original title was accurate though misleading, the revised title is factually wrong, as is easily demonstrated.

Why pick on Dr. Roubini? And how was his record? If you take Bloomberg's July 2006 as Roubini's "sell" date, the S&P 500 ("S&P) was around 1230. Now its around 1000. Buy and hold 3+ years later?

The article really gets bad when it touts a probably better-than-average stock-picker and market timer, Laszlo Birinyi, as follows:

He may have missed this year’s bull market because Roubini isn’t focused on stocks, according to Birinyi.

Roubini has “done a very good job on the economy,” Birinyi said in an interview Aug. 24. “Our approach is to try to understand the market and not try to do much more than that.” . . .

Birinyi, 65, who spent a decade on the trading desk at Salomon Brothers Inc. before founding Birinyi Associates in 1989, said on May 20 that the S&P 500 may reach 1,700 by 2011, shifting from his April 13 call that the market had risen too much “by almost every measure.” In October 2007, he told investors to avoid bank stocks, saying bad loans and lower revenue from underwriting would damp earnings. The S&P 500 Financials Index then plunged 82 percent through March 6, 2009.

“Both of them just have a pretty deep understanding of the history of economic and business cycles,” said Eric Teal, who oversees $5 billion as chief investment officer at First Citizens Bank in Raleigh, North Carolina. “Roubini has just had more of an academic background, whereas Birinyi has been much more in the spotlight managing money and working in capital markets.”

Perhaps Mr. Teal missed the following "brilliant" calls from the market professional Laszlo Birinyi from Business Week's What the Pros Are Saying from that marvelous month to buy stocks, December 2007:


A Wall Street veteran who landed his first job at a financial services firm, Auerbach, Pollack & Richardson, in 1972, Birinyi has seen many market crises. The current one doesn't faze him much: "Based on historical data, I articulated a principle some years ago that has been very profitable for me," he says. According to Birinyi's "Cyrano principle," "if the concerns of the market are as obvious as the nose on your face, the market and monetary policymakers will have an amazing ability to adapt and adjust." He believes the Fed will do what it takes to calm the credit crisis.

Birinyi thinks the bull market that started in 2002 is still very much intact. He expects the current economic expansion to continue, with 5% corporate earnings growth helping to propel the Dow to 15,000 by the end of 2008. The signs of a market top, which include speculative fervor and rising stock valuations, "really aren't present," he adds. At 15 to 18 times estimated earnings—the exact number depends on how you measure earnings—stock market values are neither cheap nor expensive. If the market were a traffic light, Birinyi says, it would be flashing a yellow signal now.

Birinyi sees "pockets of value." With risk aversion rising, he thinks investors will pay more for such predictable growth stocks as Google (GOOG) and Deere (DE). He expects commodity prices to keep rising "as the emerging markets continue to emerge." He also favors buying stocks which were "excessively punished" in the recent subprime-related meltdown. They include retailers Tiffany (TIF), Nordstrom (JWN), J. Crew (JCG), and financial giant American International Group (AIG).

Let's see: Roubini said to go to cash and stay there. He predicted in unbelievable detail how the overleveraged broker-dealers and complex financial institutions would drag the country and the world into the longest economic downturn in a long, long time. The very month the recession/depression is adjudged to have begun, Birinyi said to buy AIG. His Dow forecast for 2008 was on the money or close to conservative if it had a 1:2 reverse split.

Yes, it is true that Dr. Roubini's advice protected your capital. He had no idea that the stock market could surge so much when so many jobs were being lost throughout 2009. Is that cause for Bloomberg's kneecapping of him? For all we know, the current up-stock market in Asia as I write will be the last one for a month. I suspect that Dr. Roubini has learned the lesson that markets and economic facts can diverge sharply and for long periods of time.

I also suspect that over a longer period of time, perhaps years, the stock market will either have to offer retail investors a fairer deal--higher dividends and lower price-to-book value ratios-- or will continue to underperform gold and perhaps even Treasury bonds.

This article is a disgrace. What are the penalties in football for piling on and taunting?

Copyright (C) Long Lake LLC 2009

Who Are We Fighting For in Aghanistan?

An apparently objective journalist has filed a highly disturbing report about the recent election in Afghanistan. Titled How much are we expected to believe? and published in the journal Foreign Policy, it is not a long read and details the strong possibility of election fraud. You may wish to read it all; here is the gist of the report:

Consistent and credible reports from the south and the southeast have been coming in for days now: massive and blatant ballot stuffing; the removal or invalidation of votes for rival candidates; complete overhaul of ballot boxes; intimidation of witnesses and IEC staff; systematic removal of the publically displayed tally sheets. . .

While we have been busy with the number of incidents, the total turnout figure, and whether candidates and their supporters will decide to contest the outcome or not, there has been a major and systematic overhaul of the election outcome in the insecure parts of the country. If this is left unchecked the message will be unambiguous: there is no government, there is no law, and the internationals are fine with that. This means there is no real hope for improvement, which is a dangerous message to give in those areas.

Re the author: Martine van Bijlert is the co-director of the Afghanistan Analysts Network, where this post was originally published.

In the meantime, reports 2009 Now Deadliest Year of Afghan War:

August 25, 2009
Agence France-Presse

The number of foreign soldiers killed in Afghanistan this year surpassed that for all of 2008 on Tuesday with the deaths of four US military personnel in a bomb blast in the country's south.

The soldiers operating under NATO's International Security Assistance Force (ISAF) were killed by an improvised bomb, the Taliban's weapon of choice, in southern Afghanistan, the alliance force said.

The latest casualties bring to 63 the number of foreign soldiers who have died in Afghanistan this month and to 295 the death toll since January, making this the deadliest year for foreign troops since their 2001 arrival.

It's beginning to sound like Iraq-level casualty counts. We know that al Qaeda once had but now has no bases in Afghanistan. Who and what are we fighting for there?

If the answer is the same as in Viet Nam, the result is likely to be the same.

As predicted here many times, recessions/depressions/bananas end; this one may or may not have. On the other hand, wars may not end. The U. S. should emulate the fast growing countries of Brazil, India and China and get back to improving the lives of its people at home while abjuring foreign wars. At this point, the Afghan War is elective. Its winnability is increasing looking chancy while the financial and human costs look very dear.

After the markets closed last Friday, EBR posted The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen. From Friday's close till Tuesday's close, TLT (the proxy for the long T-bond discussed) is up 2.4% in price while the S&P 500 is up 0.1%. We shall see whether TLT, which could have been sold at the close today for over 6 month's worth of interest, has "legs"; what will destroy the long-term bull market in Treasuries, the end of which has been expected at the end of every economic cycle for years, is not prosperity. It is an expensive foreign war that the Government will then use to justify another ruinous inflation.

Copyright (C) Long Lake LLC 2009

Monday, August 24, 2009

Seeing It Coming

In "No-one saw this coming?" Balderdash!, the maverick Australian economist Steve Keen reviews the common thread amongst the few prominent economists who predicted the Great Financial Crisis of 2007-9, referring to research performed by the Dutch economist Dirk Bezemer.

Aside from Dr. Keen there are 11 economists, including Nouriel Roubini and Robert Shiller. While there is much more, the conclusion is easy reading.

Firstly, unlike a tsunami, this crisis was predictable by economists who take what Bezemer characterized as a “Flow-of-fund or accounting” approach. Secondly, a tsunami is actually caused by a huge shift in the planet’s tectonic plates, and the shift itself relieves the tension that caused the tsunami in the first place: in a sense, the tsunami resets the system to a tranquil state.

This financial tsunami was caused by the bursting of asset price bubbles driven by excessive levels of debt, but the bursting of those asset bubbles hasn’t eliminated the debt—far from it. Instead, economic performance for the next decade or more will be driven by the private sector’s attempts to reduce its debt levels, and this will depress economic activity for years. Unlike a tsunami, a debt crisis is a wave of destruction that keeps on rolling unless the debt is deliberately eliminated.

Everything that is being done by policy makers around the world is instead trying to restart private borrowing. A better analogy is therefore not a tsunami but a drug overdose—and our “neoclassical” economic doctors are attempting to bring the patient back to health by administering more of the same drug.

Econblog Review has several times referred to the strategy of the Fed and the Feds as an alcoholic's strategy of feeding more of the addicting substance to the addict. It did not work in Japan and is unlikely to work here.

One detail of the above post is incorrect. It is clearly not true that "everything" that policy makers in the U. S. are doing is directed to private borrowing. Actually, in true statist fashion, the Obama administration's "stimulus" program is heavy on Government borrowing and Government-directed investment into paving roads and high-speed rail projects. This strategy has a name: central planning.

Copyright (C) Long Lake LLC 2009

One is the Loneliest Number?

Anyone who has been in the financial markets a mere 10 years, when Treasury rates were around 6%, may wish to reflect on how incredible the quote below from a Michael Cheah is in context, from Bond Bears Dumping Two-Year Treasuries Defy History:

Bond investors that drove two-year Treasuries down on Aug. 21 by the most since early June after Federal Reserve Chairman Ben S. Bernanke said the economy is “beginning to emerge” from recession may find themselves wishing they had held onto the securities. . .

“It’s going to be very difficult for the Federal Reserve to raise rates simply because there’s no inflation,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “The two-year at a yield of 1 percent is an excellent yield,” said Cheah, who has been buying the securities.

In 2003, when the Fed manipulated the Fed funds rate to 1% because of its alleged fear of deflation, the bond markets went wild; that was the end of the bull market in bonds.

Now there is at least an open question about the value inherent in short money at about zero and 2-year money at 1%. The classic rock song went that one is the loneliest number. It had no friends in 2003. Now that even mild deflation is here and in some other countries, it has a few more friends. I'm keeping an open mind about the Japan scenario, which is that the next economic down-cycle, or a drawn-out weak economy as the recovery moves along, could see the 1% rate being called an "excellent yield" for, say, 5-year paper.

This will not happen if the Aghanistan War mirrors the Viet Nam war, however. Unfortunately, the New York Times reports today that: U.S. Military Says Its Force in Afghanistan Is Insufficient.

The drumbeat for a greatly expanded war in the Af-Pak region is not overwhelming, but it is getting louder.

What is going on in Afghanistan is local politics. It is different gangs of what we would call crooks fighting for the limited loot that horribly poor country can provide, such as whatever poppy seeds can provide. Perhaps it is time, or past time, to buy them all off with bits of colored paper we call Federal Reserve notes, declare victory, and leave. At least the Viet Nam War ramped up at a time of unparalleled prosperity. For the U. S. to afford another big war now would require major sacrifices that Barack Obama is hardly calling for.

He is going to have to fish or cut bait on the guns and/or butter issue, perhaps sooner than he would like.

The polls may be showing him that both paths are popular, but the wise leader has to see farther than the public does. His guns and butter policy failed LBJ and perhaps contributed to his death; a similar decision from Mr. Obama, who is younger than LBJ, would not kill him but could be equally harmful to him politically.

Copyright (C) Long Lake LLC 2009

Sunday, August 23, 2009

Are the Bulls in Charge, or What?

From MarketWatch today:

Data to drive stocks higher
Raft of reports in coming week expected to further encourage bulls, keep stocks on upward path.

This is getting ridiculous. Did we even see this sort of stuff in 1999?

Copyright (C) Long Lake LLC 2009

Saturday, August 22, 2009

Viet Nam War Errors Being Reprised in Afghanistan?

As national passions are rising in the usually slow summer re health care reform, or health insurance reform, or something, let us remember that the Obama strategy is to ramp up a land war in Asia while pushing for a major enlargement of the medical social safety net with the promise that it will cost little. Remembering what the drawn-out and costly loss in the war that LBJ escalated cost, let us update what's happening in the current escalating war in the Af-Pak region. From Foreign Policy, Saigon 2009:

For those who say that comparing the current war in Afghanistan to the Vietnam War is taking things too far, here's a reality check: It's not taking things far enough. From the origins of these North-South conflicts to the role of insurgents and the pointlessness of this week's Afghan presidential elections, it's impossible to ignore the similarities between these wars. The places and faces may have changed but the enemy is old and familiar. The sooner the United States recognizes this, the sooner it can stop making the same mistakes in Afghanistan. . .

Legitimacy in Afghanistan over the last thousand years has come exclusively from dynastic and religious sources. The fatal blunder of the United States in eliminating a ceremonial Afghan monarchy was Afghanistan's Diem Coup: afterwards, there was little possibility of establishing a legitimate, secular national government.

It doesn't matter who wins the August elections for president in Afghanistan: he will be illegitimate because he is elected. We have apparently learned nothing from Vietnam.

The New York Time reports in an article the title of which sort of says it all: U. S. Fights Taliban With Little Aid From Afghans.

Regardless of Pakistan knocking off a few Taliban, who they regard as country bumpkins and do not fear, the U. S. effort in Afghanistan is troubled.

With the Fed joining other central banks including that of Sweden (which has a negative interest rate for retail savers) in overtly wishing for inflation, a ramped-up war in Afghanistan will cause ruinous inflation, as was associated with the Viet Nam War. If so, this will be a major victory for al Qaeda, the plan of which was to topple the Towers in lower Manhattan as a metaphor for the toppling of the U. S. economy. So far, it's not clear that their plan was not brilliant.

Copyright (C) Long Lake LLC 2009

The Fed Is Blowing It Again

Reuters reports in Fed official: rates to be kept low past upturn that the Fed is addicted to short-term thinking, serial bubble-blowing and a continuing war on savers:

Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.

"I don't think markets have really digested what that means," St Louis Fed President James Bullard said in an interview.

The Fed's strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn't happened, Bullard said.

The Fed has learned nothing from keeping rates too low for too long after the 2001 recession. The result was a false boom, a recent depression in manufactured goods and housing, and the first deflationary cycle in decades.

Long rates are higher than in the later 1940s, when the Fed also manipulated long-term rates. Despite all the Fed's actions earlier in this decade, ultimately both short- and long-term rates collapsed to all-time lows and multi-cycle lows, respectively.

My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.

That it is a good thing to goose consumption by promising that inflation is coming is quite an amazing concept. Has the Fed learned nothing from the U. S. in the 1970s, from the most recent economic cycle, from Zimbabwe, or from Argentina, to name a small number of the many examples where cheapening the currency is a "bad thing"? The Fed should remember that for every indebted borrower there is a lender. It was the lender who earned the money and forewent the enjoyment of that money so that the borrower could use it either for enjoyment (e.g. homes, autos) or productively (business purpose). To deliberately and repeatedly favor the borrower when it was the lender who made the real sacrifice is both economically wrong and immoral.

As the greatest debtor perhaps in world history, the U. S. needs to start consuming less than it produces. That's defined as saving. The U. S. rose to economic leadership of the world that way. It cannot borrow and print money to prosperity anymore. At best, that would lead to more years of Japan-type stagnation or high inflation.

Perhaps the Fed should go back to such simple functions as assisting banks in money transfers, as well as to be a superbly-capitalized institution that can perform the Bagehotian function of providing liquidity to needy but viable banks at penalty rates to forestall runs on the bank.

We need to also consider removing the responsibility for full employment from being a co-equal goal of the Fed and go to a European approach of having it responsible for low or no inflation as its only policy mandate. Full employment is a political/social goal and truly belongs to Congress and the Executive to implement.

Meanwhile, Dr. Bernanke committed Fed malpractice from taking office in 2006 until the fall of 2008, when the patient had a preventable massive economic seizure/heart attack/stroke (take your pick). He is on the record as repeatedly having no idea of how pervasive and dangerous the credit bubble was in this country.

He has now embarked on an unprecdented PR effort to gain re-nomination. His patient was vigorous to respond to massive economic steroids, adrenaline and the like to the tune of $23.7 trillion dollars (per Neil Barofsky, who heads SIGTARP), but that does not change that he has been a disaster going back to the time when he helped persuade an aging Alan Greenspan at the Fed and the first MBA president to each sign on to the easy money, double-bubble policy that multiple observers correctly predicted would lead to the recent collapse.

It is hoped here that President Obama return to the tradition that a banker by training, not an economist, be the head of the world's most important bank. This would rule out Larry Summers, a brilliant economist but no banker. The Fed employs lots and lots of economists. But it is first and foremost a banking institution and it requires a prudent banker to get things back to a focus on restrained and prudent bank and non-bank lending in America

Copyright (C) Long Lake LLC 2009

Friday, August 21, 2009

The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen

The above is a chart of "TLT" since its inception. This ETF is a proxy for the long Treasury bond (20+ year duration bonds). Click on the chart for greater detail.
Please ignore the fact that few Americans consider direct ownership of Federal debt in their asset allocation.
Just consider TLT as you would any common stock (or ETF), such as GLD, Amgen or AIG. TLT came public in 2002.
The blue line is the stock price. The red line is the smoothed 50-day moving average (ma). The green line is the 200-day ma.
Currently, TLT's 50 day ma has turned up. Every year since 2003 except 2005, TLT has moved down and then turned up above an upsloping 50 day ma while the 200 day ma was moving down. In every case, buying TLT at a point such as today allowed for a meaningful winning trade. In every case, TLT moved up above the 200 day ma.
The absolute price (yield) of TLT is below levels reached in 2003, 2005, 2007 and 2008, and is far below last December's manic-depressive high of 123. So, while "everyone" "knows" that Treasury yields are "too low", "everyone knew" that fact throughout this decade and were . . . wrong. It was dividend yields on stocks that were "too low" and in my humble opinion, they remain too low. The 5-year Treasury note yields more than the average S&P 500 stock. (More on this topic in a subsequent post.)
TLT is liquid, with tiny bid-ask spreads.
Trading aside, TLT pays you the interest on the bonds it owns with very low costs of 0.15% yearly taken out for administrative costs.
There are many reasons to buy or "rent" long Treasuries, though I would not put all my funds in them. Reasons to own them include, in addition to the pattern highlighted above:

1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
2. Financial companies must buy and hold them to sell mortgages and life insurance;
3. Foreign countries are "locked in";
4. The Fed owns them and does not want to lose money on them;
5. Inflation typically declines after recessions end;
6. Everyone so knows the recession ended in Q2 or is ending;
7. Seasonal strength is beginning;
8. Deficit projections will shrink if the economy outperforms expectations;
9. The end of every post-war recession has been followed by new cycle lows in Treasury yields;
10. The U. S. has taken Japan's route in the quick fix of creating zombie banks following a burst bubble.
Copyright (C) Long Lake LLC 2009

On ECRI and the Stock and Other Markets

Dr. Achuthan of ECRI had an excellent video interview yesterday, found by clicking on the hyperlink below.

What's especially interesting is that he disclosed what is usually proprietary information, which is that ECRI's "Long Leading Indicators" are continuing to rise. He is increasingly confident in a significant recovery from the economic downturn. ECRI's weekly indicators continued their rise on today's release. No matter that the brilliant Ed Harrison's "Fake Recovery" thesis is intact; as he pointed out months ago, recessions and depressions always end even in oligarchies, even if only definitionally, and enjoy the good times. I believe that the U. S. as Japan thesis remains intact, with giant zombie financial institutions continuing to loot the rest of us. But where are they stashing their loot???

Back to Dr. Achuthan.

Happily, he ignored the stock market and focused on the economy.

He also highlighted industrial companies as recovering faster/stronger compared to ones tied to "the consumer". Nonetheless, he expects consumers to strengthen and participate in an economic recovery.

Increasingly this is looking like the opposite of what followed the 1974 bottom. There was a temporary respite from very high inflation, and oil prices stopped rising. The cyclical "V" down in the economy became a cyclical "V" upwards. Soon enough, the stock market topped in nominal terms. While it made its nominal low in 1974, it made a much lower low in 1982 when adjusted for inflation. And, inflation and interest rates had an amazing amount of upward move in time and place to go.

Of the few stocks highlighted here some time ago, two have surged to all-time highs: Ross Stores (ROST) and National Presto (NPK). ROST is now trading at almost 20X trailing earnings and is felt at Econblog Review to have moved "too far, too fast". It is reminiscent of Toll Brothers reaching a trailing P/E of nearly 20 as it peaked in 2005. ROST is at 14-15X earnings projected for the year ending Jan. 2011. (!)

Just as McMansions were about to go out of style after TOLL topped, so may Ross's low end niche, which has benefitted from people trading down from Wal-Mart and may see its ability to obtain bargains on inventory get cut, as retailers across the board have become stingy in ordering clothing in order to keep profit margins up. ROST stock underperforms when prosperity returns.

Another stock that bottomed in October, and made a higher low in November when the market hit a fresh bear market low, then made a yet higher low in March as the market hit what for now is its low, is FPL Group, the old Florida Power & Light. It yields about 3.3%, has a P/E of 12.5 or so on 2010 earnings, and has a large, profitable alternative energy subsidiary that makes it a sort of play on higher energy prices. Its base of Florida remains a growth state with far better state finances than California. The housing depression raging in Florida will in fact stimulate in-migration.

Teva (TEVA) has a similar though steadier chart and an even lower P/E than FPL.

No matter what has happened with the stock rebound, the Dow is where it was Oct. 7, 2008 and is down almost 4000 points from 2 years ago (about when yours truly exited the stock market more or less in toto). On a 2-year basis, the best performers I can find among stocks I follow other than ROST are, surprisingly, the laggards of late, namely the only 2 Dow stocks to be up for 2008, namely Wal-Mart and McDonald's, which have almost identical total returns over the last 24 months.

What beats those two stocks: gold, easily. Given that AIG truly did collapse having written insurance (CDS) contracts with no reserves, and given that there truly was a Ponzi scheme with mortgage fraud at its root, and given that the Federal deficit is equal to 2008 U. S. corporate profits, and given that 20% of personal income in the U. S. is now transfer payments (read "welfare"), then monetization is truly going on. Gold has mild seasonal weakness now. One of these days it could explode to the upside. Now that the economy is being goosed successfully (for now) globally, silver finally looks interesting as a more volatile companion to gold; but long-term, only gold is the real deal.

I will discuss the long Treasury in a separate post.

The above stocks or commodities are for the nonce personally owned by this blogger and family members. This may change without notice. I do NOT believe that the stock market is anywhere bargain levels.

Copyright (C) Long Lake LLC 2009

Thursday, August 20, 2009


Some brief links and comments:

1. Japan is engaged in unconventional monetary/fiscal policy. You must click on the link to see the pictorial aspect of the article. Click HERE.

2. Click HERE for a juicy article from the L. A. Times on the UBS tax scam. No sex, but you gotta read it to understand how sleazy the financial services field is. It's not just Uncle Bernie (Madoff, but don't forget Ebbers). It's not just AIG Financial Products. It's not just Henry Paulson bailing out his buddies with your money. The corruption appears to be widespread. This is likely different in degree from some years ago. When investment houses such as Goldman, Sachs were privately held, they were responsible, because top management was collectively the major shareholder, along with retirees. Greed is not good.

3. Click HERE for thought-provoking big-picture commentary from Andy Xie, whose thinking I have followed since the beginning of this year and find worthwhile. (Hat tip Zero Hedge/Yaser)

4. Asian markets are opening down, but more interesting to my eye is follow-through strength from today's U. S. trading in U. S. long Treasuries. The 30-year is at 4.2%. You don't really want to lend the U. S. Government money at 4.2% for the next 30 years, do you, even if you are young enough to expect to get your nominal principal back? Well, some companies are, and they were briefly willing to lend it money at well under 3% just 8 months ago.
In a world where the NASDAQ exceeded 5000, who knows where the long bond could go?

Copyright (C) Long Lake LLC 2009

Bigger Trouble for Healthcare Reform

Mr. Obama's healthcare efforts have come in for withering criticism today from unexpected sources. Here are the links and titles. They are both "must reads" for anyone interested in the topics.

First, from the L. A. Times:

Activists say poor nations' access to affordable drugs stymied:
The White House is accused of protecting pharmaceutical companies to win their support for healthcare reform.

Second, from the civil libertarian Nat Hentoff:

I Am Finally Scared of a White House Administration

This relates to rationing health care for the elderly.

In addition, a non-partisan poll shows that Floridians overwhelmingly disagree with the idea propounded by the Democrats that the town hall protests are "un-American".

Incredibly, the wheels may be coming off the health-care reform effort.

Everyone knows that many improvements are needed. A week or two ago, I E-mailed Yves Smith at Naked Capitalism a link to the breaking news that Big Pharma was "in bed" with Team Obama and would spend the amazing sum of $150 MM to promote the reform effort. Yves commented on her blog that this meant that (true) reform was now dead on arrival.

With opposition mounting from the libertarian left and the "cannot be criticized" groups of Oxfam and Doctors Without Borders, as well as with continued opposition from the Republicans, it is crunch time for an inexperienced White House and an unaccomplished Congress.

Copyright (C) Long Lake LLC 2009

Wednesday, August 19, 2009

Bullishness Rampant, But Not Necessarily Disastrously So

From MarketWatch:

Investor optimism over the global economy reached the highest level in nearly six years in August, as money continues to pour into equities, according to the Banc of America Securities-Merrill Lynch August survey of global money managers.

"Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March," said Michael Hartnett, chief equities global strategist at Banc of America Securities-Merrill Lynch Research, in the report which surveyed 204 fund managers who manage a total of $554 billion.

A net 75% of survey respondents believe the world economy will firm up in the next 12 months, the highest reading since November 2003, while confidence about corporate health is at the highest since January 2004. A net 70% of panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.

Meanwhile, average cash balances are at the lowest levels since July 2007, while equity allocations rose sharply between August and July -- from 7% to 34%. . .

Merrill Lynch's Risk and Liquidity Indicator, a measure of risk appetite, rose to 41, the highest in two years, with investors clearing preferring an overweight in emerging markets than any other region.

Some say of the above data that it takes bulls to make a bull market. Others say that this sort of data indicates that it's time for a trend change- whether short-term only impossible to say.

EBR would simply say for now that:

1. Stock market valuations appeared reasonable at the March lows, and appear high now;
2. Too many government gimmicks and media cheerleading must have led too many unserious stock buyers into the market;
3. The stock market peak in November 2003 was quickly followed by an over 10% decline in the averages, but was also followed by much higher prices one year earlier, to be followed by much lower prices 5 years later in November 2008. Take your pick.

Copyright (C) Long Lake LLC 2009

Health Care Has Been Getting Better All the Time

In a piece titled Americans Gained 73 Days to Live in 2007, facts rather than rhetoric are presented that may inform anyone interested in this subject. Here's the key early paragraph:

Life expectancy in the U.S. rose to a record 77.9 years, from 77.7 in 2006, according to preliminary data released today by the National Center for Health Statistics, a U.S. agency. The gain amounted to 10.4 weeks.
A continuing decline in mortality rates for the top two killers, heart disease and cancer, contributed to the change. So did a 10 percent drop in deaths from the AIDS virus, the steepest decline since 1998.

While the article makes a side comment to better diet, which cannot be spot on given the lack of progress in the obesity and overweight "epidemic", it is fact-based. This beats certain arguments swirling around the healthcare reform debate.

Benefits of this health improvement are spread broadly; for example:

The increase in black men’s life expectancy is “phenomenal,” said Peggye Dilworth-Anderson, professor of health policy and management at the University of North Carolina Gillings School of Global Public Health.

So far, so good. Any change in the system MUST continue the health trends described by the CDC. This will likely NOT occur by insuring more people but spending no more money.

There is no free breakfast. There is no free lunch. There is no free dinner.

We need more doctors, nurses and public health specialists. We do NOT need more insurance claims reviewers.

Bean counters, begone!

Copyright (C) Long Lake LLC 2009

Bears Still Bearish

From Nouriel Roubini's non-subscription Email, just in case you're wondering what he's emphasizing:

H2 2009 Pick-Up in GDP Growth a Temporary Phenomenon
Auto Sector Impact Overstated
A Smaller-than-Expected Boost from Inventories
Residential Investment to Disappoint
W-Shaped Impact of Fiscal Stimulus
No Signs of Consumption Revival
Weak Outlook for Private Investment
Consumer Retreat Will Be Structural
Higher Structural Unemployment
Less Credit in the Economy
Corporate Restructuring Will Hit Productive Investment
Public Sector Will Be a Drag on Growth
Rebalancing Growth

He forgot to put on his happy face yet another day!

And over at Breakfast with Dave today, Dr. Rosenberg continues to emphasize the deflationary current trends, though he's both short-term optimistic on Treasuries--thinking that a break below 3.40% on the 10-year could quickly bring on a move to 3%-- and bullish long-term on gold.

So the bears continue to stick to their guns as most of the world emphasizes growth.

Roubini has not really been proven incorrect yet in his economic forecast, though he erred in forecasting the current stock move as just another brief fake-out.

Meanwhile, amongst the defensive stocks, the yield-minded and the technically-minded may want to look at Bristol-Myers Squibb, BMY. Unlike most of the other big guys in its field, it bottomed in the fall, not March, and a quick look at the chart suggests upside to 24 (where I would take profits). Note this stock usually moves very sluggishly, and definitely has downside risk in a general sell-off. Not to mention political considerations as always.

Interesting times, with a sense that more pros are exiting this stock market.

Copyright (C) Long Lake LLC 2009

Tuesday, August 18, 2009

Geniuses Work on Wall Street, but not for You

Why you need to think for yourself.

From today's piece Taking Wall Street Advice in Rally Means Owing $6,000:

Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.

Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg. An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.

The recommendations didn’t work because companies with the worst earnings led the 45 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago. Securities firms that failed to foresee that the hardest-hit stocks last year would recover fastest steered investors to drug and energy producers, which have trailed the MSCI World Index by more than 22 percentage points, the data show

Is cash really trash compared with losing all your investment plus 60% in less than half a year?

Copyright (C) Long Lake LLC 2009

Expert Opinions on Upcoming Boom Diverging Sharply

David Rosenberg, chief economist and strategist for Canada's Gluskin Sheff takes on the Economic Cycle Research Institute and other mainstream economists full frontal today in Breakfast with Dave:

In the next economic recovery, whenever it comes — and it will not be determined by a one-quarter adjustment in auto assemblies, by the way — we are most likely going to be dealing with the idea that household credit ratios will undergo a secular, intentional and steep downtrend and that is where conventional interpretation on the business cycle is most likely to go awry. Just because the conventional economists are drinking the Kool-Aid doesn’t mean you have to.

We can understand that "leading" financial indicators seem to be pointing towards a recovery, but remember, they also priced in a "depression scenario" late last year and early in 2009 and that never came to fruition, so investors should be aware that we could be seeing a similar head-fake. Relying on the ECRI index, for example, could be folly since the index has done little more than a bungee jump from levels we had never seen before. So keep in mind that even with the bounce, the equity market is still just back to levels prevailing when the U.S. economy was "only" a year into recession. Corporate bonds spreads may have narrowed sharply, but are still at levels that represented peaks during several prior economic downturns. The fact that practically everyone is declaring the recession to be over, from a purely contrary standpoint, should be cause for pause as well because the herd mentality rarely proves to be the correct course.

Rosenberg and Roubini were both far more accurate in early August 2008 than was ECRI, which was still saying that the U. S. was in a mild recession and rang no warning bells about depression. Roubini and Rosenberg remain unswayed in their consistent prognosis for economic weakness.

For stock investors, you can go to to view dividend yields on all S&P 500 stocks. The average yield of all 500 stocks is about 2%. The average yield of all stocks not paying dividends is about 2.7%. Weighting by capitalization may or may not change matters for dividend yielders, given that XOM yields 2.5%, GE yields 2.9%, and JPM yields 0.5%.

What made me more fundamentally "down" on ECRI was an interview that Dr. Achuthan gave a couple of months ago in which he was so excited about the latest upturn in his indicators that he ended the interview by saying: "Buy stocks". Wrong comment. Let him buy stocks privately. Last fall, ECRI was pointing out that their indicators were the worst since ECRI was formed about 60 years ago, but not as bad as they would have been had they been applied to the Great Depression. If 8 months from now, his indicators have rolled out of bed, will he issue another stock call?

ECRI's stance and strength had been their independence. The moment they became just another media shill for the stock market, they lost something that, like virginity, they cannot regain. And thus they became even fairer game for pros such as Dr. Rosenberg. This continues to be an important and entertaining debate.

Copyright (C) Long Lake LLC 2009

What Does the 20th Century Outperformance of Stocks over Government Bonds Presage?

Found on Naked Capitalism today:

The average return for U.S. stocks has trailed government bonds by about 8.6 percentage points annually since 1999, after outperforming by 8.2 points last century, based on data compiled by the London Business School and Zurich-based Credit Suisse Group AG.

Sellers of stock will point to that statistic-- which ignores the transaction costs involved in trading stocks (remember that commissions were huge for most of the prior century) and say that it's time for stocks to resume their historic outperformance over Govvies.

I would say that one never knows, but perhaps a century from now, people will look back at the 1% 30-year government yields and chronic beneficial deflation due to massive productivity gains and look at stocks trading under tangible book value and say that Govvies are historically the way to go!

Today, brokers have a financial incentive to sell their customers almost anything except a long Government bond. Thus, only pros such as banks buy these bonds- and they rarely sell them. Thus, the current state of affairs in the pricing of Govvies has occurred without a sales effort to the public. The longer a near-zero interest-rate world continues on the short end, the more people will embrace yield. Just think if the investing public's investing tastes went from 1% allocation to Govvies, 13% CD's and demand deposits and 25% stocks to 5% Govvies and 2% less of each of the other categories named above. Couple that with cyclical improvement in the Federal deficit, and you could have the declining trend in the 10-year bond continue farther than almost anyone expects.

Just a thought . . .

Copyright (C) Long Lake LLC 2009

Monday Night Market Comments

Reader "OG" led me to review the performance of the stock market after the Weekly Index Growth Rate of the Economic Cycle Research Institute hit a post-recession or near-end recession recovery high. As noted in EBR's recent post titled ECRI Pounds the Table So Hard It May Break, strong growth is projected by this very good forecasting outfit, though with the caveat that this will not be apparent to casual observers until next year.

Looking at other periods where the growth rate of its forward-looking index has moved to a peak after being negative at the onset of and during recession, the stock market had reached important interim peaks in 1976, 1983 and 2002. Only in 1992 did the index's growth rate forecast a stable stock market for a few months but no important better buying opportunity.

In another vein, market observers know that the 2002 -3 S&P 500 bottom was around 800 and the recent top was around 1000. If the market has made an interim top by now, it's quite a coincidence that support at 800 in the beginning of the decade is now resistance, adjusted for about 25% inflation.

If the market has topped for now, this will be the best-advertised trend change since the March bottom.

At least for now, the strong dollar/strong Treasury bond play is working. For sure, that's a minority paradigm, which is why it's worth watching. A deflationary "boom" may be underway: this could be good for T-bonds and not so good for the average stock. Certainly Monday's stock action was consistent with a trend change: NASDAQ down more than the Dow, low-dividend stocks such as JPM and GS down more than utilities, and stocks such as Wal-Mart breaking through 50 and 200 day moving averages, following the pattern set by insurers such as RE and CB; possible to be followed by bond proxies such as TLT and IEI.

Certain stocks such as XOM and NOK have completely broken down; GE is less than a point away from breaking through its 50 and 200 day ma on the downside; and GTU, a gold bullion play, has also broken down.
GTU is of real interest in that it tracks bullion but swings from variable premium pricing to, occasionally, discounts. GLD is more liquid, but GTU incorporates the psychology and therefore offers buyers of the stock a double-barreled way to win by buying at a low gold price and at a discount to NAV.

Interesting times and for the nonce calmer than 11 months ago. But the first Atlantic hurricane of the season has been named . . .

Copyright (C) Long Lake LLC

Anybody Home at Medicare?

The New York Times has a scathing but gently titled expose of another problem in D. C., in Lack of Medicare Appointee Puzzles Congress. No one is in charge of 5% of GDP, the Centers for Medicare and Medicaid Services (CMMS):

President Obama has made health care his top priority. He says the cost of Medicare and Medicaid is “the biggest threat” to the nation’s fiscal future. But to the puzzlement of Congress and health care experts around the country, Mr. Obama has not named anyone to lead the agency that runs the two giant programs.

The agency, the Centers for Medicare and Medicaid Services, is the largest buyer of health care in the United States. . .

“The vacancy stands out like a sore thumb,” said Dr. Denis A. Cortese, president of the Mayo Clinic, often cited by the White House as a health care model.

The vacancy is not all the Administration's fault. It appears that some potential leaders love their health care stocks too much, as well as wanting real authority:

Some candidates have been reluctant to sell financial holdings in the health care industry. Some apparently wanted more authority than they could have in an administration where health policy is directed from the White House.

The wrong person is running Treasury, the wrong person is advising the President on economic matters within the White House, and no one is running the show at what may be the world's largest health insurer.

Copyright (C) Long Lake LLC 2009

Monday, August 17, 2009

What If We Don't Spend Enough on Health Care?

The WSJ has an informative opinion piece on health care, We Don't Spend Enough on Health Care, that contains the following:

The U.S. health-care economy should be viewed not as a burden but as an engine of growth. Medical and orthopedic equipment exports increased by 65.1% from 2004 through 2008. Pharmaceutical exports were up 74.6%. The unprecedented advances expected to come out of American stem cell, nanotechnology and human genome research—which other countries' constricted health sectors cannot support—will send these already impressive figures skyward.

It also quotes two prominent economists as saying:

"Viewed from every angle, our results support the proposition that both historical and future increases in the health spending share are desirable. . . . [W]e believe it likely that maximizing social welfare in the United States will require the development of institutions that are consistent with spending 30 percent or more of GDP on health by the middle of the century."

It's time to cast off the depression. Most people trust doctors more than financiers-- for good reason. Let's make the most of this knowledge-based "industry" - for our own health benefits, for the good of mankind in general, for the good of science and also for balance of trade reasons. We've suffered the depradations of a finance-based economy for far too long. It's time for real change we can believe in.

Copyright (C) Long Lake LLC 2009

New Hires and the Stock Market

From the Bureau of Labor Statistics, a chart showing new hires as a percentage of the employed population (from the Job Openings and Labor Turnover Survey).
(Click on chart for more detail.)
There is a correlation with the stock market up-move in early 2002 and then the final bottom for that cycle in early 2003. Again, the chart correlates well with the market top in late 2007. The fall from March 2009 in this ratio does not correlate with the strong stock market move up since March.
Will this relationship reassert itself, either by vigorous new hiring in excess of the stock market moving higher, or by the stock market moving down to catch up with the continuing deterioration in new hires, or by some of each?
For what little it's worth, I'm still hearing of layoffs for efficiency reasons, except for health care.
Copyright (C) Long Lake LLC 2009

Sunday, August 16, 2009

Another Reason Why Tim Geithner Should Leave His Job

The WSJ points out in Treasury Bailout's Limits on Lobbyists Still Haven't Taken Effect that:

A plan by Treasury Secretary Timothy Geithner to limit lobbyists' influence over the $700 billion bailout program has yet to get off the ground -- even as the program nears an end.

Just a few hours after being sworn in last January, Mr. Geithner promised to craft rules preventing external influence over bailout decisions. More than six months later -- and 100 days before the financial-industry bailout program is scheduled to stop taking applications for aid -- those rules have yet to be finalized.

Treasury whines that it has been busy, but the obvious conclusion is that it has not been trying very hard on this matter, as shown by the following:

When the Treasury announced its plans to curb bailout lobbying earlier this year, a spokeswoman said the department intended to publish weekly communication logs showing contact between public officials and external entities -- such as lobbyists -- discussing rescue plans for specific institutions. No such logs have been made available.

We have Government run by the allies of Big Finance for the benefit of Big Finance.

The Special Inspector General of the TARP bailout (SIGTARP) has reported that there have been $23.7 trillion or so dollars spent or backstopped to the financial sector within the past year. In contrast, a pittance has been spent on the people. The trio of actors: the Fed, the President/Treasury, and the Congress have all followed Sutton's law and have gone where the money is (was).

This is why the economic downturn has gone on so long and has been so severe. The guilty have been rewarded; the needy and innocent have had little help.

Copyright (C) Long Lake LLC 2009

Saturday, August 15, 2009

Equal Time for Roubini

Yesterday I gave space to the ECRI in the post, ECRI Pounds the Table So Hard It May Break. Giving equal time to a more bearish expert, I am linking to a recent Roubini Global Economics Monitor piece, Easing Job Losses Don’t Change Weak Prospects for U.S. Recovery.

In it, the following comment appears:

In a severe consumer-led recession like this one, labor market is a leading (rather than lagging) indicator of economic recovery and the consumer still drives the U.S. economy (private consumption still makes up over 70% of U.S. GDP). A slowdown of the pace of job losses from 650,000 to 250,000 is welcome but in no way offers comfort about a prompt comeback of the U.S. consumer. This raises concerns about the strength and sustainability of any economic recovery that most people are expecting in H2 2009 and beyond.

ECRI is looking at its predictors. It states that these predictors have worked based on a century or so of data. However, ECRI was only formed about 60 years ago. It would thus appear that these predictive algorithms have been formed to fit the prior data. Hmmm . . .

One potential difference between the Roubini approach and that of ECRI may be found in the above paragraph. If consumer wage (and interest) income is now a leading indicator, that might dramatically change the ECRI prediction.

The Roubini approach actually fits the 2000-2002-3 bear market in stocks better than the presence or absence of recession. The recession ended in the fall of 2001; the optimal time to buy the average stock was in late Q1 of 2003, 3 years after the stock market peak. The ECRI asserts that by next year, anyone will be able to look at the data and see a strong, broad economic recovery underway. Yet that was the general case in 2002.

Market action is mixed. The move out of a base by Wal-Mart after mediocre sales and earnings is technically encouraging, and goes along with the rotation one would want to see in a true bull market. On the other hand, McDonald's keeps eroding despite fine operating results; same for FPL. Other quality companies such as Northern Trust trade at unattractive valuations and have so-so charts. I only want to own companies that I expect I would want to own if the stock market closed for a year. MCD and FPL fit that bill. Probably GD and TEVA do as well. At cheaper valuations, ROST and NPK also qualify. All the above companies have strong long-term charts, rising dividends, reasonable to low P/E's, and strike me as generally shareholder-friendly. (No comments herein represent investment advice.)

Except perhaps for periods in the 1930s, there is probably no precedent in Angl0-American financial history in which the net deficit of the central government roughly equaled business profits, as I suspect is the case today. Talk about borrowing from Peter to pay Paul!

As Dr. Roubini punned some months ago, this all may be a "made-0ff" economy.

Caveat investor.

Copyright (C) Long Lake LLC 2009

Housing in America

The New American Dream: Renting in today's WSJ is today's "must read" for anyone interested in a concise summary of the growth of the U. S. housing market, along with international comparisons.

A companion news item of the day regarding British housing woes is found at:

And back in the U. S., Mish reveals that the FDIC is out of money as of now at:

He titles his piece that FDIC is "bankrupt". This may or may not be technically correct, as the FDIC has a specific Congressional backstop in place and beyond that is a full faith and credit agency of the Federal Government. Overwhelmingly, residential and commercial real estate are driving the losses at the banks.

Yesterday I reported (via CR) on a 20 year part-time student who is buying a house using a Federal tax credit.
Contrasting this with the history of housing in America in the WSJ article and with common sense leads me to continue to believe that matters are at a serious disequilibrium point. The Feds are borrowing vast amounts of money, and the Federal Reserve is putting on its balance sheet similarly vast amounts of securities, to prop up the housing market. The indebtedness of the U. S. Government is surging as a result.

There really is an argument for the government to encourage more renting, especially if the owners of the rental units do so via cash ownership and not via a highly leveraged situation. In our mobile society, having a ready supply of well-kept-up rental houses and apartments in most communities will enhance the ability of people to change jobs, have temporary second residences, retire without a final commitment to a community, etc. The system would run more smoothly in that all the costs involved in buying and selling homes would be minimized and be replaced by the far simpler process of a lease.

The tax deduction for mortgage interest should probably continue to be phased out, now that it has been revealed that the Feds have to borrow to sustain the housing market. Canada has no such tax law and has similar housing ownership rates as the U. S., so the tax deduction is certainly unnecessary to reach any particular ratio of home ownership.

At the current new home size of about 2600 square feet, America is overinvesting in housing relative to other goods and services, such as health and exports. Returning housing to its proper balance in the economy is a change that is both timely and overdue.

Copyright (C) Long Lake LLC 2009

Friday, August 14, 2009

ECRI Pounds the Table So Hard It May Break

A fascinating and increasingly bullish prediction from the Economic Cycle Research Institute this morning, presented in full. Should this come to pass, zero short term interest rates will quickly go away. Amazingly, should this come to pass, the talking heads will start talking--prematurely--of the next Fed tightening and the next recession. None of this would be overly surprising, given how much the Government has borrowed and the Fed has spent/invested/printed over this crisis, and given year on year drops of 10-30% on various large segments of the economy. Japan has gone through phases like this in its 2-decade-long post-bubble adventure, as did the U. S. economy in the 1930s. When you read the comparison to the 1980s, however, you must remember that then, Paul Volcker was suppressing growth ferociously, in part for political reasons, the U. S. total debt burden (government, corporate plus individual) was at its post-World War II low, tax rates were coming down along with uneconomic activity spurred by tax shelters, and the Baby Boomers had moved into their most productive and highest-spending years. The decline from record high interest rates further boosted stock and bond prices.

In other words, the prices of financial assets such as stocks and bonds may act differently now than they did in 1983, both in the short term and the intermediate term, for the identical degree of economic growth.

Here is the bullish news release from Reuters related to ECRI:

WLI Growth at 26-Year High
August 14, 2009

(Reuters) - A U.S. future economic growth gauge rose in the latest week, as its yearly growth rate surged to a 26-year high, suggesting that recovery will commence at the briskest pace in decades, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 47-week high of 123.9 in the week to Aug. 7 from a downwardly revised 121.7 the prior week, which was originally reported at 121.8.

Meanwhile, the index's annualized growth rate leapt to a 26-year high of 13.4 percent from last week's five-year high of 10.4 percent, which ECRI originally reported at 10.5 percent.

It was the index's highest yearly growth rate reading since the week to Aug. 26, 1983, when it stood at 13.9 percent.

"With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.

Achuthan recently told Reuters that the national recovery would be stronger than many expect, though signs of such strong growth will not be apparent until sometime next year.

"Next year, looking back you'll see that GDP, industrial production, sales, and even non-manufacturing jobs growth -- where 91 percent of Americans work -- began rising as recovery took hold," Achuthan said.

Copyright (C) Long Lake LLC 2009

Is There Pent-Up Demand for Housing?

Former Fed governor Laurence Meyer is quoted in a article as saying something ridiculous:

Meyer expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.

“The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.”

Here is an example of what's ridiculous in the above quote, from Calculated Risk's First-time Home Buyer Frenzy, itself quoting a Reuters article:

"I am willing to settle for something" to finish buying quickly, said 20-year old (Samantha) Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot "is speeding up the process," she said, adding that "$8,000 could help remodel the house, redo carpets and cabinets."

The Federal Government is wasting your tax money subsidizing home purchases by 20-year women who have not even finished school. This is hardly the pent-up demand that FDR meant when he referred to 1/3 of a nation being ill-housed.

Laurence Meyer is a better economist than yours truly, who has never been one, but anyone who can say with a straight face that there is pent-up demand for housing in the U. S. when every homebuilder around is shuttering communities despite the Fed purchasing unthinkable amounts of mortgage bonds to keep rates affordable is likely saying what he is saying because he is being paid a lot of money to say it.

In a more mature fashion, David Rosenberg points out that 1 in every 7 homes in the U. S. is . . . unoccupied.

Sounds just like the 1950s, when a growing population settled down to raising a lot of children in a country with a limited supply of small homes? Not quite . . .

There is no legitimate pent-up demand for housing. It was all satisfied, and then some, with the bull market of the past decade plus. There is lunacy and sadness. Like puppy dogs sitting forlornly by their dead masters waiting for them to come alive, "investors" always want to revisit the prior bubble land. Even now, a decade after the worst pump and dump stock bubble of which I am aware, the NASDAQ tech etc. bubble of the late 1990s, speculators want to play in NASDAQ stocks that will never pay a dividend until, as with Microsoft, they are so big that their growth prospects are gone.

Now, the Federal Government is very, very powerful. If it wills housing prices to rise for such reasons as to salvage the banks, then it can do so. What it has been doing is bailing out both banks and homeowners/homebuilders by subsidizing purchase of homes. The more it does so, the more it prevents prices and the ownership/rental choice from seeking a natural level, and the less it has to spend on other things such as health care reform, national defense, delivering the mail, and the infinite number of other arguably good causes that it could support.

Copyright (C) Long Lake LLC 2009