Friday, July 31, 2009

'Cash for Clunkers' Extension a Disgrace

Flush with success in losing lots of money in the auto business so far, the House of Representatives wants to borrow $2 B more from whomever wants to lend the government the money so that, in a parody of the "broken window" parable of Bastiat (scroll down to section 1.6 after clicking on the link) that debunks the idea that destroying property to stimulate economic activity is a good thing, useable cars get physically destroyed so that more expensive new ones get sold.

If the government wants fuel efficiency and some degree of fiscal rectitude, it should simply raise the gasoline tax. Period. That will reduce miles driven by "clunkers" while providing both an ecologic benefit and some much-needed revenue. But some people can use a "clunker" as a second or third family car for limited use without harming the environment much. Taking cars that would otherwise stay in use to be scrapped before their time is as wrong as FDR's policy of raising prices for the flesh of dead animals by killing the baby animals was in the Depression. Though cars presumably feel no pain when squeezed to their final end or when a poison is put into their engine.

Copyright (C) Long Lake LLC 2009

Is Larry Kudlow a Contrary Indicator?

This spring and a number of NASDAQ and S&P points lower, EBR pointed to a Ben Stein opinion piece in the New York Times that was ridiculously bearish and suggested that based on Dr. Stein's track record in recent years, this was probably an actionable buy signal (and yours truly started buying stocks). Unfortunately, another prognosticator of a different type-- a permabull, is back-- and he's snorting more than I have seen him. Dr. Lawrence Kudlow writes in It's a New Bull Market: resilient capitalism pushes back against Obama:

Let’s call this what it is: A new bull market in stocks has emerged from the ashes of the financial meltdown and the deep recession that followed. And it’s signaling the onset of economic recovery. Free-market capitalism is more durable, resilient, and self-correcting than its detractors would have us believe.

This is not just a summer rally — although a 12 percent market rise since July 10 is absolutely splendid. There’s a lot more going on here. Over the last five months, since March 9, the broad-based S&P 500 is up 46 percent. If I’m not mistaken, a 20 percent rally that is not quickly reversed constitutes a bull market. We are more than double that, and there will be no total reversal.

He goes on to snort as a snorting bull should. Another snorter is the Economic Cycle Research Institute (ECRI), which was brave in calling a recession but was clueless as to how bad it would be just as it was getting horrible. For example, on August 29, 2008, the face of ECRI, Dr. Achuthan, gave an interview to the BBC which was titled Mild Recession Despite Positive GDP and in which he explained "that even with more than 3% growth the U.S. is in a mild recession".

And the ECRI is good at forecasting, far better than Dr. Kudlow has been lately!

The S&P 500 was in fact priced for a mild recession that would, it was expected, give rise to another expansion. It was 1t 1300. It is now a little under 1000. It would be cut virtually in half within only 6+ months from the date of that interviewer. Here is the ECRI today:

The index's annualized growth rate continued to soar, reaching a new five-year high of 8.8 percent from 7.7 percent the prior week. . .

ECRI Managing Director Lakshman Achuthan has said the recession is already beginning to wane, and that increased stimulus from Washington is not necessary for economic growth.

"Not only is the U.S. recession set to end this summer, but the recovery is apt to be stronger than many expect."

The weekly index rose in the latest week due to firmer housing activity, said Achuthan.

Now, how could $23.7 trillion worth of support to the financial system, with specific massive support to the housing industry, not fail to produce "firmer" housing activity given that new home construction fell to its lowest level since the 1940s? But so what? You may have seen a Seinfeld episode about whether certain prominent features on a young woman were natural and if so, you will recall that they were real. But this housing firmness feels fake.

The depression that is probably ending is the longest since the Great D and the most severe in many ways since then, as well. The NASDAQ rally is fundamentally and technically suspect. Treasury bonds are acting better. ECRI's bullishness is long in the tooth. The snorting and chortling by Dr. Kudlow could be the sign of at least an intermediate top.

Copyright (C) Long Lake LLC 2009

The Dow-Gold Ratio and the Economy


From the Chart of the Day: a long-term perspective.
This chart is misleading in that it does not include dividend income from stocks. The outperformance of stocks vs. gold from 1980-2000 was greater than shown.
I would also quarrel with the downturn trendline. I believe that too much of the past year's ratio is shown outside the major downtrend.
Given the greater than usual lack of interest in policymakers in sound money these days, I would think that the general downtrend in the Dow/Gold ratio will tend to remain in force, though it would not be surprising to see the ratio move up a bit longer as the economy is tipped to be transitioning to the classic low-inflation, healing phase following a major econonic downturn.
Absent fundamental reform of the financial system, the primacy of the bankster-gamblers that was codified by the Clinton Administration with the effective repeal of Glass-Steagall a decade ago--which correlates with the peaking of the Dow/Gold rato--continues and therefore the existing trends are likely to remain in force.
A new silver ETF, symbol SIVR, is now available. Yours truly is an owner of it. The numbers of the silver bars it owns are published daily on the Net. And sophisticated gold buyers may want to own the Canadian version of GLD, symbol GTU. Perhaps it has a bit more certainty that the gold it says it physically owns is actually there than does GLD.
Note that the GDP number released today had worse than expected consumer numbers, but the overall number was less bad than predicted because of greater government spending. But remember that GDP was actually UP in Q2 2008.
The economy has been given the equivalent of blood count booster shots that dialysis patients, who suffer from chronic anemia, receive. Neither is a sign of good health. The economy remains in poor health, cyclical changes notwithstanding.
Copyright (C) Long Lake LLC 2009

Thursday, July 30, 2009

Presidental Popularity on the Economy Down as the Stock Market Parties as if a Boom was Booming




It used to be the case that the public's view of how the President was doing on the economy was a referendum on the economy.
With the economic activism of the Obama administration, perhaps to some degree the public is actually commenting on the policies of the government to a greater degree than usual, but I take the above data from a Pew Research poll to largely relate to the traditional view: this is a coincident indicator of the economy wrapped in the guise of a Presidential poll.
No green shoots are seen by the public as we enter the second half year of the 8 this President was elected to serve.
How long the stock market can rise as the public increasingly is upset with the President's handling of the economy is unclear. Certainly the more than tripling of the stock market in FDR's first term correlated quickly with improvement in the Depression.
For me, the above numbers are one more reason not to trust the stock rally; and to the extent that the public is concerned about the deficit despite massive underemployment, another prop to the bond market is strengthened.
Copyright (C) Long Lake LLC 2009

Is This Bull Market in Stocks Secular or Structural?

For those interested in whether a "structural" bull market is off and running, please click here to read a brief post on The Big Picture blog about the estimable Ned Davis.

FYI The Chinese stock market is trading at about 37 times earnings. And I don't even trust the earnings.

Copyright (C) Long Lake LLC 2009

Might Treasuries Have Another Rally Left in Them? And Why It's OK to Own Them Even if They Don't




Please look at the chart of the yield on the 10-year Treasury bond for the past 2 years. The red line shows the 50 day (10 week) moving average of the yield, and the green line shows the 200 day (40 week) moving average. The other chart shows a multi-decade look at the rise and fall of 10-year yields. Who is to say that the wild and crazy peak of the yield in 1980 is not equivalent to the wild and crazy fall in yield in December 2009, and that an even wilder and crazier low in yields is coming relatively soon just as a higher high in yields came in 1982?

While history does not repeat, it has been said to rhyme.

One year ago, the recession either was not accepted to have occurred or was expected by most seers such as the ECRI to be a mild one. In expectation of such, the bond went into enough of a bear market that a "golden cross" of the 50 day ma above the 200 day ma occurred.

Now, the MSM has told us that the recession is over. Yet the yield on the 10 year is just where it was one year ago. The yield is also exactly where the 200 day ma was a year ago. The 200 day ma is now horizontal at around 3.1%. Those with a long memory and an interest in numerology will recall that the 10 year yield bottomed in the last Treasury bull market (2000-3) at 3.1%.

The DoctoRx system of chart analysis also gives weight to the fact that it took only about 2 months for the yield to collapse from about 3.7% to about 2.1%, whereas it took half a year to rise to that level. When the sharp move is in the same direction as the major trend toward lower Treasury rates that has been in force for nearly 3 decades, and price deflation and asset, real estate and labor under-utilization is pronounced, the conservative investor who has been directed toward the stock market takes heed of the chart.

Gary Shilling, an economist who has been bullish on lower Treasury yields for many, many years continues to be bullish. He stated recently that he expects chronic deflationary pressures in the U.S. and lower Treasury yields. He also stated in this Yahoo.com interview that people don't buy long-term Treasuries for income.

I disagree with Dr. Shilling on this last point. Receiving 4% income now with a reasonable certainty of getting the (nominal) principal back later beats 1% from a bank now with no greater security of principal return. Do the math. Receiving 1% a year for 2 years turns $100 into $102. At that point, one would have to receive 5% a year for the next 8 years to simply equal what one would have gotten by taking 4% a year for 10 years.

After the first period of Treasury yields well over 10% during the Civil War, yields bottomed, but it took a lifetime till about 1941 to do so. So maybe yields have bottomed, but maybe they will stay low or go lower for longer than the herd expects.

In the meantime, at the bottom of the post-World War II stock market when "everyone" feared another Great Depression, the Dow yielded 7% in dividends (and then there were retained earnings) and both long and short term Treasury rates were around 2%. Companies that 10 years ago had low dividend yields and were viewed as growth stocks, namely Eli Lilly and Bristol-Myers Squibb, now have 10X or lower prospective P/E's and about 6% dividend yields. Perhaps by 2020, Microsoft and Intel will be so viewed.

So for technical and fundamental reasons, direct ownership of intermediate to long-term Treasury bonds probably makes sense for a great many investors who are afraid of the "risk" but are happy to own "blue chip" stocks such as Walt Disney or Oracle that yield 1% dividends and can be purchased from insiders in the companies at prices far above what the companies are worth under generally accepted accounting principles.

Copyright (C) Long Lake LLC 2009


Why "Fixing" Health Care Is So Difficult

The New York Times has an article today on the contentious health care reform effort that ends as follows:

In one finding, 75 percent of respondents said they were concerned that the cost of their own health care would eventually go up if the government did not create a system of providing health care for all Americans. But in another finding, 77 percent said they were concerned that the cost of health care would go up if the government did create such a system.

As I've said about the economy, if you're not confused about health reform, it appears that you're not alone.

Copyright (C) Long Lake LLC 2009

Charts



The DoctoRx method of longer-term technical analysis is simple. It requires no computers, no protractors, no expenses. It even sometimes appears to work!
The Capital One (COF) chart shows a long-term convex upward uptrend through about 2006. In the bubble era beginning around 1998, you can see that it got a little out of phase upward, and then in the second dip of the 2000-2003 bear market, that "out-of-phaseness" had a mirror extra downward movement. But upward momentum was waning. The stock's relative momentum vs. the market peaked around 2006.
This company did not take the risks of a Fannie or Freddie, or an AIG, but it needed rescuing by the $23.7 Trillion intervention by the Fed and the Feds. The chart shows a stock in long-term trouble, with the convex downward trend unbroken despite a tripling of the stock price since the (? temporary) bottom this winter.
This stock is a "Don't buy! Don't buy!"both in Cramerica and in DoctoRx-land.
On the other hand, Econblog Review has praised Ross Stores (ROST), also shown above. The chart is completely different from COF. Even at the bottom last fall, the stock had not broken down on the long-term charts. It is not up as much from the bottom as COF, but it is now trading at its all-time high. No short-term or long-term holder of ROST has lost a penny.
Other stocks praised by EBR for similar chart patterns and other positive corporate attributes are National Presto (NPK), Teva Pharmaceuticals (TEVA) and McDonald's.
Nothing is guaranteed, but strength begets strength in part because corporate cultures tend to have a continuity. Thus in my field of pharmaceuticals, J&J and Teva go from strength to strength, while lesser companies falter. In addition, industries may have a life cycle, such as autos or steel, but even within challenged industries, look how the prior chart strength of Honda (HMC) and Toyota vs. GM years ago presaged the current situation.
All the above stated, ROST and Teva are well above their 200 day moving averages. I have taken my profits in them and am waiting for buying opportunities where it takes more guts to buy than now, when the charts look so strong.
Two final notes. One is that this site does not provide investment advice. The other is that a long-term look at the S&P 500 (a nearly 60-year chart) does not look so hot right now. Gold and the 10-30 T-bond complex look better; while yours truly is long them both, cash equivalents continue to look mighty fine. Hard to lose there!
Copyright (C) Long Lake LLC 2009

F As In Fat

Please click HERE to read the article listed in this post's title.

Comment: Less is more. This goes for food once malnutrition is taken care of. It also can go for things such as availability of capital. If less were available, more care would be taken with it.

Copyright (C) Long Lake LLC 2009

Wednesday, July 29, 2009

Talking One's Book

On the Street, it's called talking one's book; a typical example is coming on CNBC and explaining why a stock one owns is undervalued. Now, it's Goldman Sachs saying to the authorities that all this speculation, such as in oil is good for society. As reported in Bloomberg.com's Goldman Sachs Says Curbing Speculators Could Disrupt Markets:

Goldman Sachs Group Inc., the fifth- biggest U.S. bank by assets, said attempts to curb speculation may be “disruptive” to markets.

“The role that is played by non-traditional participants such as index investors and other financial participants often has been mischaracterized,” Don Casturo, a Goldman Sachs managing director, said in prepared remarks today for hearings at the Commodity Futures Trading Commission in Washington.

The testimony to CFTC Chairman Gary Gensler, a former Goldman Sachs employee, is part of the second day of hearings at the agency on ways to address excessive market speculation. Gensler, who said yesterday that speculators contributed to a commodity “asset bubble,” is considering new position limits in energy markets after crude oil futures rose to a record $147.27 a barrel in 2008 on the New York Mercantile Exchange.

Gensler said at yesterday’s hearing that the agency should “seriously consider” setting strict federal position limits to curb speculation. . .

Gensler worked at Goldman Sachs for 18 years, leaving the New York-based company after becoming co-head of finance. In 1997, He joined the U.S. Treasury Department under Robert Rubin, another former Goldman Sachs employee. . .

Casturo said increased participation in commodity markets by financial investors has helped liquidity and improved price discovery.

He probably means the discovery that a barrel of the world's most major internationally traded commodity, crude oil, could go in price from about $145 to about $35 in about 6 months. All that volatility, one should realize, ended up enriching traders from commissions, bid-ask spreads, etc.

This blog questioned months ago why oil should be traded on exchanges much at all, much less manically. Once a field is discovered, lifting costs are fixed. Demand can be predicted, especially if prices are stable. Oil is perfect for long-term contracts. This differs from the original reason the futures markets were established, which was that crop yields were highly variable from year to year, and most of the crop would go bad if it was not consumed promptly. Oil meets none of those characteristics.

What is happening at the CFTC is likely part of an orchestrated show. Whether the President and Congress have agreed on final matters is not known to us. What is certain is that as of now, the traders and financiers remain in control. Because they have done such a great job for the average person the past decade.

Past performance is no guarantee of future performance, but it's the best one has to go by.

Expect more volatility; don't think you know more than the markets. The markets know nothing. They primarily exist in today's worlds to enrich the insiders.

Copyright (C) Long Lake LLC 2009

Tuesday, July 28, 2009

Goldman Sachs and Financial Reform

New York magazine has published Tenacious G about Goldman Sachs, which contains a great deal in it, including the following section dealing with the aftermath of the bailout of AIG's counterparties following the collapse of Lehman last fall:

Somehow not recognizing (or perhaps not caring about) the brewing backlash, (Treasury Secretary) Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system.

The appearance of a government of Goldman enablers didn’t improve when Stephen Friedman, serving as both a board member at Goldman Sachs and chairman of the Federal Reserve Bank of New York, bought 52,600 shares of Goldman stock while he was supposed to be responsible for the firm’s oversight. Friedman had a temporary waiver saying he could still act as a Goldman board member, but it was hard to shake the impression that Friedman had sidestepped the rules, particularly since the subsequent rise in Goldman’s share price made him $3 million richer. (In May, he resigned from the Fed over the alleged conflict of interest.)


The company was earning its nickname: “Government Sachs.” Dating back to Sidney Weinberg, the firm’s legendary chairman who served on the War Production Board in the forties, the natural course of power for a Goldmanite has been to make money at the firm and then make a name for himself in government.

None of the above means that anything improper was done. That said, appearances are important, and if the theoretical Martian were to look at all this, he would wonder about the influence of so many people from the same company in this mess. Furthermore, the entire situation over the past decade, starting with the ridiculous euphoria over things like the fourth online pet supplies store and culminating in the worst lending practices ever engaged in by a country owning the world's reserve currency, indicts Big Finance. These guys were great in their time, but they fed on meat that like Caesar made them great.

Big Finance needs to get smaller. Ultimately even the financiers would benefit from that change. Until that time, how can anyone believe that any price of any security or commodity represents reality? And thus the public's (and my personal) preference for cash or cash-like securities. If traders run the show and need volatility to goose up their profits, then volatility we will get. That helps them but hurts the rest of us. President Obama ran promising change. So far we have a "Bushbama Continuity" re a "Big Finance Uber Alles" policy. The public would love a true reform agenda out of the new President. So far, he has disappointed many of my most prominent fellow bloggers who had high hopes for his Administration in that regard.

It's time for a change of course, Mr. President. Please don't be fooled by the typical cyclical upturn in the economy. We can't risk another 2008. There's no time to waste.

Coyright (C) Long Lake LLC 2009

More Chips Join More House for the Same Number of Dollars

Courtesy of Minyanville, here's a link to a Salt Lake Tribune titled:

Your bag of chips got bigger but price stays the same.

(Ignore the ungrammatical mixing of the past tense and present tense; this is what passes for editing despite or perhaps because of "aids" such as Spellcheck and the like.)

Just in case you want to see examples of deflation at work: unit price declines in action.

This is being posted having spent a couple of hours touring a local, partly built-out housing development undergoing major price cuts.

If it's in the interest of the Government and the Fed (close to one and the same thing nowadays) to have interest rates stay low (and it is in their interest, I believe), then that means low inflation. Don't fight the Fed(s).

Copyright (C) Long Lake LLC 2009

Somehow, Chain Stores' Customers Still Haven't Heard About Green Shoots

This is getting monotonous. In what gets no media attention, probably because it is proprietary, the Johnson Redbook survey of chain retail stores are reported by David Rosenberg of Gluskin Sheff to have disappointed yet again. Per Dr. Rosenberg:

" . . . today's news that chain store sales, as per the Redbook survey, is (SIC) running at -5.6% YoY (versus -5.0% expected) and -1.6% on a MoM basis (-0.9% expected) through the first three weeks of July is certainly cause for pause. These spending numbers are going to have to turn around if the widely anticipated 3Q inventory bounce is to go down as anything more than a one-quarter wonder."

We are almost 5 months since the (in)famous green shoots comment by Dr. Bernanke. This comment, and the 60 Minutes interview, was part of a so-far successful campaign to recapitalize the busted banking system. Things are going according to plan. The $23.7 Trillion expenditure of cash and guarantees by the Fed and the Feds is having its effect. However, one thing that is inessential is an especially high level of stock prices. If they are high enough to attract buyers for newly-issued shares, then the authorities are satisfied.

Wells Fargo Advisors reports that as of the end of last week, over 90% of NASDAQ stocks and well over 80% of S&P 500 stocks were selling above their 200 day moving average, and that the yield on the S&P was 2.5% . If you bought shares and have even a 10% gain in a short time, you have received the equivalent of several year's interest on a CD or Treasury security. How many of these recent buyers will want to lock in profits, whether or not Q3 GDP is up?

Let's put it another way. The stock averages are in nominal terms where they were 6 years ago, when the country was emerging from a prolonged recession or period of slow growth. If the average investor had been told that the entire expansion would be built on the sand of manic and largely hidden leverage, with oil hitting $145/barrel and the world entering in only 4 years an economic collapse so bad that several major central banks would lower short-term rates to zero, and Sweden would lower retail savings rates to a negative level, how many investors would have felt that their expectations would have been met?

Actually, adjusted for the inflation of the past 6 years, the Dow around 9000 is about equal to its low of the prior cycle. And this after a wild rally fueled by unprecedented money-printing, moral suasion, bail-outs of badly-run but important industries. I hope I'm wrong, but structurally it still appears to be the opposite of the break-out of the markets in the 1980s and 1990s, when the surprises were generally to the upside and stock prices had short sharp breaks back to a rising trendline a la the scares of 1987 and 1990-91 recession.

Copyright (C) Long Lake LLC 2009

Monday, July 27, 2009

Bloomberg Joins Barron's in Promoting the Bullish Case

Econblog Review's proprietary Bloomberg.com video indicator is back to flashing orange-red, as these are the 4 videos currently featured on the web page:

Herrmann Says U.S. Economy Coiling for `Big Expansion';
Quinlan Sees U.S. Stocks Up 10-15% on Global Rebound;
Rogers Sees Growth in China Infrastructure, Agriculture;
U.S. Stocks Rise as New-Home Sales Gain; Treasuries Fall

In addition, Portfolio Matters features Ken Fisher seeing "Overseas Economies Driving U.S. Growth".

Furthermore, other recently archived videos pound home the same theme: Happy Days Are Here Again.

Copyright (C) Long Lake LLC 2009

Newsweek Announces the End of the Banana

The Recession is Over, Newsweek declares.

Newsweek is supposed to be a reporter of the news. NBER dates the onset and end of recessions ("bananas"). There was denial from many economists that a recession was on all throughout the first half of 2008. Newsweek may well be correct, but on the other hand, the headline may be literally false. Thus EBR takes this headline more in the contrarian spirit than in the "Glad you told me, guys" vein.

In any case, it hardly matters to most people. The Merchants of Debt retain their primacy in the structure of the economy. That's at least one strike against long-term economic health. Yet it need not be fatal. We will not know tomorrow; it takes a lot longer than that to have a better sense from the perspective of the future where you really are now.

In the meantime, Wall Street is selling newly-created stocks and bonds at a rapid pace as corporate insiders fail to buy the stocks of their own companies. A strange time with many cross-currents . . .

Copyright (C) Long Lake LLC 2009

Sunday, July 26, 2009

Fantasyland for the Financials

Yours truly was so upset with what happened to the WSJ after Mr. Murdoch took it over that he canceled his subscription of many years and makes does with the free stuff available on the Net. Here are two teaser intros from the WSJ available online which do not paint a pretty picture about the Large Complex Financial Institutions (LCFIs, "banks"). First:

Banks Profit From U.S. Guarantee: Lenders' Earnings Reap the Benefit of FDIC Backing on Company Debt.

It is the gift that keeps on giving.

The government's guarantee since November on new debt issued by financial firms such as Citigroup Inc. and General Electric Co. will save those companies about $24 billion in borrowing costs during the next three years, according to an analysis by The Wall Street Journal.

In the second quarter alone, the eight largest issuers of corporate debt under the Federal Deposit Insurance Corp.'s Term Liquidity Guarantee Program cut their interest costs by about $2.2 billion, increasing their profits and delivering an extra jolt to the stock market's two-week rally.

Second:

Loans Shrink as Fear Lingers.

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

Despite this massive help from the government and newly conservative lending practices, many banks have been both playing games with their earnings and simultaneously seeing the analysts (their friends) nonetheless lower earnings estimates for late 2009 and for 2010. David Reilly had a post Friday at Bloomberg.com demonstrating aggressive (lowered) loan-loss reserves by a number of banks during Q2, in Bankers Bet Jobs on a Roaring V-Shaped Recovery: David Reilly:

The country’s biggest banks are doubling down on a bet that the economy will improve in the latter half of the year. If they’re wrong, and borrowers don’t pull out of a tailspin, bankers and their investors will take a beating.

That’s because banks will have to rebuild diminishing reserves that they set aside for soured loans, which results in charges that lower profit. . .

It's a good read, especially in what has become a manic bull market. A few months ago, it was going to be Great D II, now it's Dow 36,000 after all.

Here are some facts. Despite all the accounting changes and other help for the LFCIs, Yahoo/Finance can be clicked on to provide changing consensus earnings estimates, in this case for BofA. Scroll down to "EPS Trends". All of a sudden, BofA ("BAC") is tipped to report losses this quarter and next. EPS estimates for 2010 have plunged in one week from 98 to 90 cents, and in the past 90 days from $1.32 to the aforementioned 90 cents. What has the brilliant stock market done for BAC the past 90 days? Up about 35%. Pretty good. If you buy the stock now, what yield do you get based on the current dividend? 0.3%. Hmmm . . . I got to get me some of that, you must be thinking. Sinking earnings, no real dividend, uncertain asset quality-- all this in the setting of unprecedented assistance from the Fed and the Feds. A steal!

Now move on to other LFCIs by typing in the stock symbol in the top right box labeled "Get Analyst Estimates for" and click go. Try WFC (Wells Fargo), STI (SunTrust), ZION and PNC. Even worse, try a truly strong bank, Northern Trust (NTRS), which is based in Chicago and helped young Barack Obama with the purchase of his home and therefore may have some special political clout despite not even needing to be a "stress test" bank. Earnings estimates for NTRS have recently come down for Q4 2009 and for 2010. If I were to own a larger bank, it would be NTRS. But it sells for more than twice book value, only yields 1.9%, and should be showing growth in earnings estimates this far into a major stock rally and this far into a Fed easing cycle.

In the meantime, WMT has been such a laggard that it (almost) has to move up if the stock rally is to prove durable, but now that McDonald's stock has "collapsed" despite good news and RISING earnings estimates (same page as above, type in MCD), much is making little sense in the financial world.

The S&P 500 yields 2.5%, the NASDAQ yields almost nothing, dividends are not rising, and over the sweep of financial history stock dividends yielded more than high-grade bonds. One of the few stocks mentioned favorably here this year, Ross Stores (ROST), has rising earnings, rising earning estimates and a record stock price is way above its 200 day moving average and may be a good long-term hold but is vulnerable to profit-taking at best and declines in earnings estimates at worst if the end of the downturn means that people trade up to Wal-Mart and even Macy's.

At the very bottom of the stock market and top of the panic move down in Treasuries last fall and winter, this relationship briefly reasserted itself. It may do so again: Real Yields Highest Since ‘94 Aid Treasury $115 Billion Auction (a great year to buy bonds after yields surged).

We are entering the two weakest consecutive months of the year for stocks and seasonally strong times for bonds. The end of the Great Recession is fully priced into the stock and bond markets. This should be interesting. Watch bank earnings and their expectations.

Copyright (C) Long Lake LLC 2009

Sunday Olio

This post is a potpourri of links to interesting articles and reports I have seen in the past two days.

FIRST, a data-rich summary of the economy, "Rail Time Indicators", is worth a read for anyone who would like a relatively straight review of the economy in graphic form, drawn from a variety of sources. Scroll down beyond railroad data to general data. Anyone who would like to see why the current (just ended?) economic downturn is a depression (or Volcker's euphemism, the "Great Recession"), will see the amazingly deep nature of this downturn. The fact that this has not become as bad as the 1929-32 and beyond Great Depression experience does not change the fact of the severity of the current economic banana. When you read this, you will see why yours truly does not care if the recession is over in valuing stocks and bonds. When things fall as far as they have, even 3 years of 20% growth would still leave the real economy below where it was on certain important metrics. So, big whoop.

NEXT, it's not clear what the correlation of Presidential popularity is with the economy, but there certainly is a general correlation that helped Presidents Reagan, Clinton and Bush II win re-election. Here is a graph showing what percent of likely voters have strong feelings about the President. This is NOT a general approval rating, but Real Clear Politics shows that Mr. Obama's positive minus negative approval spread has diminished from 45 points from his inauguration to 13 points, and I would think that the Gates/Cambridge police controversy will shave a few more points from that ratio. If you go to Gallup.com, you will find that
respondents just don't see their companies hiring, they are not personally spending more money, and they can't feel the enthusiasm for the economy that traders of corporate stocks and bonds have felt for several months yet. I suspect that the falling ratings of the President reflect the problems in the real economy, and that Wall Street is at best ahead of matters if not completely out of touch.


THIRD, EBR recommends a fascinating though somewhat unfocused article about the new leader and strategy of the Taliban in Afghanistan, America's New Nightmare from Newsweek. EBR believes that if the U. S. can cut a "Peace with Honor" deal in the Af-Pak region and get out, we will enjoy a prolonged, non-inflationary period of economic growth. Reading this article left me fearing another Viet Nam but also realizing that the Taliban has its own internal problems.

FOURTH, if you have any doubt that media sentiment has moved wildly pro-stocks, go to http://www.barrons.com/. Look at the headlines of the feature articles. On second thought, if you haven't clicked through, don't bother. Here are the topics:

1. Lead article: Bullish on California muni bonds
2. The Four Cheapest Plays in Emerging Markets; choosing the right emerging market
3. Bullish on the apartment REIT AvalonBay
4. Bullish on Mastercard's stock
5. Hello, 9000! The Dow's Run Is Far From Over
6. Bullish on Plantronics (it's going to play a role in the office of the future, it would appear)
7. Bullish on OSI, a biotech
8. Bullish on cyclical stocks
9. Bullish on Citigroup stock
10. A money manager few have heard of, who has a "system" for consistent stock gains with limited risk
11. Last but definitely not least: "Cambodia calls"; checking out Cambodia's nascent economy.

How can you curb your enthusiasm about becoming an expert on emerging markets? All within reach simply by paying Barron's a pittance to share all this information! Quelle bargain . . . NOT!

(There is one bear article on a retailer called hhgregg and an apparently neutral article on Netflix.)

FINALLY, the New York Times ran on op-ed today under the imprimatur of Joe Biden, who as usual makes some questionable statements. The first is the title, "What You Might Not Know About the Recovery". Actually, the op-ed does not claim that the economy is actually in recovery yet; the topic is actually a defense of the American Recovery and Reinvestment Act of 2009 ("ARRA", "stimulus" bill; "Recovery Act"). The second relates to the following sentence fragment:

Projects are being chosen without earmarks or political consideration . . .

The idea that a White House that represents Chicago East has borrowed hundreds of billions of dollars for local construction projects has no interest in the politics of who gets what part of this honeypot is one that strikes this author as unlikely.

OK! Open-book quiz to follow . . .

Copyright (C) Long Lake LLC 2009

Friday, July 24, 2009

Energy Glut?

Just as I hear from Nashville, TN and Madison, WI that they are having the coolest summer in over a century, the media report evidence of oil over-supply and decreases in energy demand.

1. From the WSJ today: OPEC Braces for Decline in Crude Prices

The Organization of Petroleum Exporting Countries is bracing for a sharp drop in crude prices in coming weeks, as huge reserves of oil-based fuels continue to pile up and the space to store them runs out.

Stockpiles of fuels such as diesel and heating oil are at a 24-year high in the U.S. because of tepid demand from industries and consumers hammered by the global economic downturn. . .

The enormous supplies are pushing available storage capacity to its limit, with some traders reportedly resorting to barges and tankers at sea.

"Inventories are at just ridiculously high levels," said Kevin Rooney, chief executive of the Oil Heat Institute of Long Island, a trade group for heating-oil wholesalers. "I would imagine that just about every available barrel of storage is full."

2. From Bloomberg.com, July 16: Verleger Sees $20 Oil This Year on 'Devastating' Glut

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

3. Mish had an interesting post yesterday titled Electrical Demand Plunges in Ontario, Canada; US Demand Expected to Drop 2%.

You will likely find it illuminating.

GENERAL COMMENTS:

The 2-year chart of Exxon Mobil Corp. stock is shown. There is no hint of rampant strength. With this price decline and regular dividend increases, the yield is only 2.4%.

Of course, who's to know, but as this blog has documented, economic weakness continues whether or not the "Great Recession" has finally ended.

Forget oil in the twenties: if prices were to merely break
forty on the downside, I would expect XOM's price to fall a good deal more and Treasury prices to move strongly upward (that is, yields would drop in that scenario).

Food for thought.

Copyright (C) Long Lake LLC 2009

More on the President and Doctors Who Allegedly Perform Unnecessary Surgeries to Make More Money

Last night, EBR presented President Obama's allegation that doctors recommend unnecessary surgery for financial reasons. Of course, every doctor in America aware of his comments immediately dusted off their lawyer jokes. See It's Time for Lawyer Jokes for our brief post. Here's a follow-up from the ear-nose-throat doctors' organization AAO (American Academy of Otolaryngology):

“We, too, are in favor of evidence-based medicine that supports quality patient care. President Obama’s statement highlights the complexity of medical decisions like this. However, the AAO-HNS is disappointed by the President's portrayal of the decision making processes by the physicians who perform these surgeries. In many cases, tonsillectomy may be a more effective treatment, and less costly, than prolonged or repeated treatments for an infected throat.
“For the past several years, the Academy has been developing clinical guidelines based on evidence and outcomes research, including ‘Quality of Life after Tonsillectomy,’ a January 2008 supplement to the journal Otolaryngology—Head and Neck Surgery. We are in agreement with the President’s statement that physicians, patients, and hospitals should make the decisions, based on the evidence, about what’s best for patient care.”


Perhaps the President should stay away from commenting on medical details and review why healthcare "reform" to him and his Party never ever means doing something about the medical malpractice lottery that, I can attest, drives some part of health care spending in America.


Copyright (C) Long Lake LLC 2009

Thursday Night Market Update: How Long Can Wage Weakness Be Ignored?


Per TrimTabs (subscription) tonight (July 23), the Treasury Department of the United States-- hardly a "bear" reporter--reports a worsening of a marvelous proxy for wages, namely wage withholdings. Click on picture to enlarge.

This is consistent with UPS, which said Thursday that July's business was not improved over June's. This after two full years of Fed easing!

Starting with Volcker's easing in 1980 (to elect his patron Jimmy Carter) and then in 1982 (after keeping tight money long enough to ruin Reagan in the 1982 midterm election), the macro financial game of leverage was easy. All the authorities had to do was just keep money flowing as long-term rates dropped and the underlying real economy weakened out of sight of the populace. This game began to end after the 2001 recession and has changed this cycle. Sweden has gone to negative interest rates for savers. The true lack of economic vigor--the "hollowing out of America"--is plain for all to see. Thus the increasingly jobless recoveries after the 1990-91 and then the 2001 recessions, and the horrible jobs performance in this decade's expansion and then the current economic downturn.

The sea of liquidity has pushed "investors" into all sorts of speculative "investments". The idea that Ford Motor Co. ("F") has a stock market value of $20 Billion with a tangible net worth of
negative $18 B, no prospect of operating profits any time soon, intense competition from the government-sponsored GM and Chrysler as well as the non-unionized Japanese and other transplants and imports, is ridiculous.

The flailing and failing "evil empire" known as Microsoft has collapsing sales and earnings, yet the stock has soared in the low-quality rally of the past several months. MSFT has about $210 billion of stock "value" embedded in its price over and above its cash and other tangible book value. It sells for more than 4X sales per share, 10X tangible book, and is in decline. Rather than paying a nominal dividend, it should rather be paying out 7%; should spin off its money-losing new ventures for whatever value the market will give it, and go into a semi-run-off mode.
But that would not suit management's interests, so it will not do that.

Meanwhile, Rasmussenreports.com and Gallup.com each document a sustained increase in "wrong track" sentiment from the populace, increasing fear of rising Federal deficits, some worsening in the views of the economy: these in the face of a stock market that has put the bears on the run.

Probably the worse stock news is that "sensible" consumer-oriented stocks that pay rising dividends, have rising earnings and reasonable P/E's and will certainly be around 10 years from now, MCD and WMT, and that were last year's only 2 Dow winners, are acting very poorly. Anyone who believes in the general stock market because of the "golden cross" of the 50 day moving average above the 200 day ma should look at the chart of MCD in that regard: so far, the golden cross has been a sell signal, not a buy signal; this despite a far better financial performance than the stock market's constituent companies.

Meanwhile, Bloomberg has reported that Swiss gold vaults are full to overflowing; gold may be over-owned, at least temporarily. Yours truly monetizes his "GLD" gold holdings by selling covered calls and is short puts. Income first, prospective capital gains last is the watchword for the future, so EBR believes.

On a global basis, the US economy and stock market are laggards this year. Let's see how our market responds should the gamblers who are gunning the Chinese stock market take a breather. Assuming TrimTabs is presenting the Treasury facts accurately, the risks are to the downside, as Nouriel Roubini has been saying. "Green shoots" may already have withered.

A gambler in the US might just want to buy "TLT", which is an ETF that provides ownership of the long T-bond. Talk about an out-of-favor asset, down 25% in price since December 2008!

Copyright (C) Long Lake LLC 2009

Thursday, July 23, 2009

AmEx Misleads Investors about Ongoing Earnings in Its Press Release

American Express Company (Amex, AXP) stated that earnings from continuing operations in Q2 ending last month were $342 after taxes. Buried deep in the press release, however, is the following, the last section of Amex's "divisions":

Corporate and Other reported a second-quarter net income of $171 million, compared with net loss of $2 million a year ago. The second quarter 2009 results reflected the recognition of $220 million ($136 million after-tax) for the previously announced MasterCard and Visa settlements compared to $70 million ($43 million after-tax) in the year-ago period related to Visa. Results also included the ICBC gain discussed previously, partially offset by reengineering charges incurred during the quarter.

Anybody who thinks that the MasterCard and Visa settlement represents core ongoing earnings is incorrect. Ignoring small adjustments, truer basic earnings were $206 M. There are 1.2 billion shares outstanding. Thus, truer ongoing earnings were about 17 cents per share. The dividend is 18 cents per share.

Book value is $11.28/share.

AmEx is borderline earning its dividend. It has $13.4 billion in book value but loans and credit balances of $65 billion. Thus, a 20% error in overvaluing how good its loans and credit advances are would completely wipe out its book value.

Furthermore, never has the Federal Reserve done so much for so few finance companies. What will happen to these companies when, inevitably, "money" grows tight again?

AXP as a stock has tripled since it bottomed under $10/share this winter. Yours truly sold his AXP puts ($10 strike) at a profit right at the bottom and now sees an overvalued stock selling at 40% above its downsloping 200 day moving average. Can the ever-present "they" keep this stock up with such weak results and so much profit embedded in this stock?

Anyone who likes Amex as an ongoing business and wants to buy into it may think that a share price under $20 represents a much fairer deal that the current price in the high twenties.

Copyright (C) Long Lake LLC 2009

UPS and Irrational Exuberance

The fundamental good news today is that new unemployment claims, both with and without seasonal adjustment, are trending down--though they are at high levels, and the very low workweek suggests another 'jobless recovery' could well await us.

The bad news from a stock standpoint is that UPS had an in-line (and poor) quarterly earnings report and guided down for Q3- yet the stock is surging with the market. First, from Calculated Risk re the conference call:

UPS executives went on to say (paraphrasing) that 1) trends in July have shown no improvement to date, 2) don’t have any confidence that trends or volumes will improve materially in Q3, 3) economy sitting here at this bottom. (Emph. added)

Second, from Reuters:

The company anticipates third-quarter earnings per share of 45 cents to 55 cents, versus the analyst view of 59 cents.

"Declines in both our domestic and international businesses appear to be stabilizing, but volumes will remain significantly below last year's levels," Chief Financial Officer Kurt Kuehn said in a statement.

Why is this stock up? What "long" institutional investor truly is happy about such a "down" guidance?

On the other hand, one of EBR's favorites, McDonald's, reported an in-line quarter, showed growth everywhere worldwide, lowered no estimates, and is down 4% today. MCD now sells for under 15 times 2009 estimated earnings, yields a bit over 3.5%, and sells for about 14 times next year's estimated earnings. UPS now sells for about 23 X this year's prior earnings estimate--which P/E will rise given the guidance down for the current quarter. Who could even guess about 2010 earnings for UPS. UPS yields a bit under MCD's yield.

Click HERE for the McDonald's earnings release.

My conclusion: McDonald's is a better buy than it was yesterday. The stock market as a whole, however, is a worse buy. Cyclicals like Eaton and UPS keep going up even as they guide earnings lower and see no imminent business upturn, whereas "good guys" far away from credit bubbles such as MCD, Wal-Mart and Northern Trust can't get out of their own way.

This is a very speculative stock market. It would be a better sign of economic vigor if the speculation were occurring years into an economic up-cycle.

Copyright (C) Long Lake LLC 2009

Copyright (C) Long Lake LLC

It's Time for Lawyer Jokes

The President of the United States had the following to say to help promote health reform at his press conference tonight:

Right now, doctors a lot of times are forced to make decisions based on the fee payment schedule that's out there. So if they're looking and you come in and you've got a bad sore throat or your child has a bad sore throat or has repeated sore throats, the doctor may look at the reimbursement system and say to himself, "You know what? I make a lot more money if I take this kid's tonsils out."

And when a town has only one lawyer, he/she starves, but when a second moves in, they each get rich.

Eventually, Cheetum Cummin & Goin gets formed to handle all the business.


Copyright (C) Long Lake LLC 2009

Wednesday, July 22, 2009

Barack Obama: Differences of Opinion Between Those He Governs and Those He Does Not Govern

Bloomberg.com reports: Obama Approval at 87% Outside U.S.; 49% at Home Among Investors.

Here are some excerpts:

President Barack Obama has rock-star appeal among the investing class -- except in his own country. . .

In Europe and Asia, more than four of five poll respondents choose Obama over Bush as the president offering better economic leadership. In the U.S., investors pick Bush, 43 percent to 41 percent. . .

Here's a classic set of quotes from an Italian and an American. First, the Italian:

Obama’s policies for handling of the crises in the financial and auto markets, is praised by Italian poll respondent Mario Di Marcantonio, a 32-year-old portfolio manager for Eurizon Capital SGR in Milan.

“Companies like Goldman and Morgan Stanley have been able to survive this crisis and do business as usual, and people working at GM will continue to have their jobs,” he says. “I don’t think they can solve the problems of the world overnight, but at least they’re starting to fix it.”

The American has a different opinion:

The views of Chris Gurkovic, a 36-year-old strategist for First Brokers Securities LLC in Jersey City, are typical of many U.S. respondents. He says bailouts of the auto and financial industries and Obama’s health-care proposals are making Americans like him nervous about the government’s role in the economy, and rates the president “very unfavorably” in the survey
. . .

I'm more with Chris on this one.

Re the effective tie between Bush and Obama amongst American investors, a plague on both their Establishments. I'm waiting for the One who will teach America to shun the Merchants of Debt. Since He is not imminent, the Change is going to have to come from the people themselves. Spread the Word.

Please!

Copyright (C) Long Lake LLC 2009

Some New Data Not Colored Green as in Green Shoots



Data points we are noting:


1. From TrimTabs July 21:


The disconnection between perception and reality about the U.S. economy is stunning. As Wall Street gains confidence that the economy is recovering, declines in wages keep accelerating. Adjusting for the “Making Work Pay” tax credit, income tax withholdings plunged 9.6% y-o-y in the past week and two days (Friday, July 10 through Monday, July 20) and 6.8% y-o-y in the past three weeks and two days (Friday, June 26 through Monday, July 20). These declines are much steeper than the drop of 5.3% y-o-y in the past three months. Both we and our favorite official Washington economist are unaware of any calendar quirks skewing the data.



July 22 (Bloomberg) -- Standard & Poor’s again boosted its projections for losses from U.S. subprime mortgages backing securities, reflecting increasing delinquencies and defaults amid slumping home prices and growing unemployment.

Losses on loans backing 2006 securities will reach an average of about 32 percent of the original balances, while losses for similar 2007 bonds will total about 40 percent, the New York-based ratings firm said in a statement today. In February, S&P said the losses would total an average of 25 percent for 2006 bonds and 31 percent for 2007 securities.


3. Gallup has a nice graph reflecting polling on how people see their companies: Hiring, laying off, or neither.

I am unable to cut and paste it; click HERE to view it. Per the Gallup.com home page, 4% fewer respondents reported that their employer was hiring on the last survey. A look at the graph (first link) shows stability between percent of employers expanding/hiring vs. shrinking their workforces/firing, from December 2008 till now. Of course, during this time unemployment has been soaring. I'm not loving this trend, especially given the reality of a work force that is growing steadily and thus requires net hiring to keep the unemployment rate from rising, and the "New Normal" that older people are deferring retirement. I know of one local MD in his 70s who had to go back into practice due to investment losses. I'm sure he's not the only professional in that situation.


4. Larry Summers gave some downbeat comments within the past few days, suggesting that he was uncertain as to the pace of the expected economic upturn.


5. From a technical basis, here's a 3-month chart of GE, with the red line representing the 50 day simple moving average and the green line the 200 day sma. Bad news:
GE has moved below its 50 day ma, which has begun to descend. It never reached its 200 day sma. Concurrently, Yahoo reports that analyst estimates for GE's 2010 earnings have also begun to descend, from 95 cents 3 months ago, to 94 cents 7 days ago, to 92 cents currently. BofA ("BAC") has a stronger pattern but is not all that different, and perhaps ominously, 2010 earnings estimates for BAC keep dropping; click HERE to view them and scroll down to view EPS trends, "Next year/Dec.-10".
Meanwhile, CNBC may now be reporting that something like 200% of all reporting companies have beaten "estimates" from the group of deep thinkers laughingly called "analysts". No matter that IBM had to somehow lower its SG&A an astounding 19% to wow these seers on the bottom line while missing shrunken revenue estimates. (Note: DoctoRx is no longer long IBM, having sold it on strength this week.) Someone should tell someone else that a company can't starve itself and yet win either an endurance running race or a strength contest.
Nonetheless, what we also somewhat laughingly refer to as "money" has to go somewhere if one has investable funds. People who can afford the risk probably should have some money apportioned into dividend-paying stocks with strong short-term and long-term charts and a history of being shareholder friendly.
EBR will discuss its favorites over coming days: in its estimation, these are among the best of a mangy lot of pre-owned "in"-securities.
Copyright (C) Long Lake LLC 2009



More Frothy Signs in Stocks as Pushers Get Desperate

How the mood has changed from the despair of this winter and last fall!

Perusing the headlines of Barron's online makes one think it's 1999, not 2009. Forget the bull noises about Apple (breathlessly reported is that it has $31 B in cash (which it does not)). The truth is that Apple has never paid a dividend, may never pay a dividend, and sells for about $110 billion dollars more than it is worth under generally accepted accounting principles. A mere 5 years ago, AAPL sold for one-tenth its current share price. Are you sure that the iPod won't become a commodity item, the iPhone the same, and the computer business won't get overwhelmed by the next new things? And that Steve Jobs can continue to work?


Also ignore that a bull market winner, Family Dollar (FDO) has a CEO who just unloaded $7 M worth of stock. You, the little guy, should buy and hold. (And FDO is one of the "good guy" companies in EBR's book.)

Ignore that Barron's is leading off with a pitch for Siemens, one of the most corrupt companies around ("Bribery was Siemens's business model," said Uwe Dolata, the spokesman for the association of federal criminal investigators in Germany---from PBS.org).

Here's the first scary thing:

Leaving U.S. Stocks for Foreign Opportunities
Subscriber Content Read Preview
Financial adviser Dawn Bennett has dumped domestic equities for emerging markets such as Peru and China.


When Barron's expects you to pay money to get "subscriber content" so you can read about some kid who is long Peru when you can buy Eli Lilly or BMS for 8-10 times earnings and a secure 6% yield, IBM for 11 times earnings, and P&G on a down year for 15 times earnings, you should realize that things are frothy. (This comment is NOT a market timing tool; remember "irrational exuberance" was correct but 3 years early--December 1996.)

Here's the second scary thing:

Hot Research PM
AMD Ready to Advance
Subscriber Content Read Preview
FBR Capital Markets upgraded the chip maker to Outperform

Per the Yahoo/Finance AMD chart, the stock has gone down for the last 26 years. It has a negative tangible net worth. It is down about 10% after hours due to results so poor that even most of Wall Street's paid optimists want to dump it. Yet Barron's, once a bastion of reality-based investing, chooses to highlight perhaps the one shop
that upgrades this over-promising, under-delivering company.

AMD has never paid a dividend. If you had bought the stock 26 years ago, you would be down by half. If you had done something really risky and invested in and rolled over 1-year FDIC-insured CD's, you would have approximately quadrupled your money. Yet, only a few years ago, AMD was about 10 times higher than it is now. (I hope that's not a cautionary predictor for Apple Inc., but that's why I mention both companies in the same post.)

The truth as seen here at EBR is that this is probably the most confusing time for an investor in an investing lifetime. Perhaps the closest is the 1973-5 upsetting of the then-orthodoxy that recession and high inflation were incompatible. But $23.7 TRILLION of government intervention down the road for such little economic results, and promises from a campaigning-for-renomination Ben Bernanke that small savers will continue to be forced to subsidize JPMorgan Chase et al for a "considerable" length of time, make all predictions chancy.

But when you take it one day at a time, you can't help but worry when stocks such as Eaton shoot up- aided by Jim Cramer's hype- just as their sales and earnings collapse, and Barron's wants to charge you money to be exposed to such bull---- market idiocy as getting rich off of Peruvian stocks or by buying one of the worst-performing large tech companies known to man.


Copyright (C) Long Lake LLC 2009

DC Dems to California: Drop Dead; State's Federal Representatives and Media Take it Lying Down


In a narrative you might not have believed if you read it in a novel, an Administration headed by a Democrat has blithely handed out tens of billions of dollars to Goldman Sachs, Deutsche Bank and other large financial companies (via the AIG conduit) but has left California to financially cut off many working people and the needy and weaken one of the once-great public education systems in the nation. The Democrats who controlled Congress since 2007 were thrilled to give George Bush and Hank Paulson (and their successors, who they expected to be a Democrat) $750 B of TARP money to use with few questions asked, but even California's Democratic Senators appear to have been unaggressive in requesting just a few billion bucks please from Barack Obama and/or their fellow Congresspeople. What's a reliable 55 electoral votes anyway?

Further along the amazement road is the lack of complaint from the major news organizations in the state. Apparently if a Democratic President disses their state, it's OK. Every night lately I have checked in on the LA Times online, and often the SF Chronicle. The LA Times appears to care more about sports and Hollywood goings-on that about this financial crisis. It does feature an amazingly lame interoperable calculator that offers the reader a chance to "fix" the crisis by choosing which cuts to make. For some reason, another news organization headed by an Aussie has some interest in California's plight.

Consider the following from the (non-California-based) Wall Street Journal:

State's Cities Brace for More Sacrifice:

California cities and counties, already reeling from their own fiscal problems, are about to take a new hit: Gov. Arnold Schwarzenegger and legislative leaders plan to take more than $5 billion from them over the next two years under the state's tentative budget deal.

If California's legislature approves the compromise reached Monday, the state will take as much as $1.7 billion out of local gasoline-tax funds, another $2 billion from local property-tax receipts and $1.7 billion in redevelopment funds that now go to cities and counties in a move to close an estimated $26 billion budget shortfall.

Local officials up and down the state were scrambling Tuesday to plan how to further cut their budgets to account for the state's rare move. Meanwhile, some cities and counties began laying the groundwork for possible lawsuits against the state.

The city of El Monte in Los Angeles County just closed a $9.5 million budget deficit for the fiscal year that began July 1 by action including furloughing most of its 375 employees, laying off 17 police officers and shutting down its aquatics center during all but four months of the year. Now the city faces an estimated additional $2 million loss in gasoline taxes and an as-yet-undetermined amount more being taken by the state. "It's devastating," said Jim Mussenden, city manager of the community of 125,000. "We've already worked very hard to reduce our budget, and now we will have to look at more cuts."

The state's cut into local funds, economists said, could have an outsized effect in delaying California's recovery.

Los Angeles city officials in said they expect to lose about 2,300 construction jobs because of a proposal in the budget agreement to take $72 million of its funds for redevelopment projects. . .


Further amazing is that the WSJ is running not one but two articles on this topic, leading with Budget Agreement Deepens California's Pain, which begins with the following:

The budget deal struck by California Gov. Arnold Schwarzenegger and statehouse leaders is expected to hurt a broad band of state residents and crimp the state's recovery from the current, deep recession.

Fiscal experts said the negative effects of the budget plan, crafted in an attempt to keep the state solvent, will offset much of the intended beneficial effects of President Barack Obama's federal stimulus package.

California's economic decline, economists predicted, will last longer than downturns in other states. They said the proposed cuts in the budget deal will compound the continuing impact from other recessionary blows, including an 11.6% state unemployment rate, widespread foreclosures on homes and depressed real-estate values.

Mr. Schwarzenegger and legislative leaders Monday evening agreed to close the budget shortfall by slashing $15.6 billion in spending. The major cuts include $6 billion from kindergartens and community colleges, $2.8 billion from other higher education, $1.3 billion saved through state-worker furloughs, $1.3 billion cut from a state health-care plan and $1.2 billion trimmed from prison spending.

Another New York paper has taken note with two articles. The Times writes in Denied Tax Revenues, Local Officials in California Are Fuming that (among other points):

. . . the budget would cost 4,000 jobs in public works departments statewide. In suburban Contra Costa County east of Oakland, the public works director, Julia R. Bueren, said her department would lay off more than a third of its staff by the end of August. . .

That situation may be worse in rural areas like Calaveras County, a sprawling triangle that runs from the foothills of the Sierra Nevada to higher elevations. Tom Garcia, the county’s newly appointed public works director, said he was bracing for a loss of about 20 percent of his budget, meaning many snow-packed mountain roads could go unplowed this winter.


“In order to get anywhere in our county, its all on local roads,“ said Mr. Garcia, adding that resorts in the Sierra region could take a hit as well. “If they can’t get to the services in this county because the roads aren’t open, we’ve lost our winter income.”

The Times is also running a news analysis titled Pinch of Reality Threatens the California Dream which is pedestrian. Why are New York papers more interested in California than its own major press organs?

California chronically sends more money to Washington than it receives. Now it's amongst the needy states. It's time for the Feds to help it and other needy states. From a national policy standpoint, money sent to California will help the country more than the same money sent to Michigan (a state I was once a resident of and bear no animus against). Sorry, Michigan, but California routinely changes the world through technology innovations, moving pictures, etc.; Michigan is just too chronically depressed. And it's too cold in winter! A thriving California will help revive America and the world.

Just imagine the outcry if this happened when a Bush was President. This news is breaking the very same week that Neil Barofsky, Inspector General for Congress in overseeing TARP ("SIGTARP") reported that direct and guaranteed expenditures for the financial "system" totaled $23.7 TRILLION dollars. That's TRILLION as in TRILLION. Does the Administration really believe that with all the "stimulus" money not yet spent that it could not allocate more to directly assist states in their time of need?

Of course, California overspent. (But it did not under-tax.) California did not, however, cause the current economic financial crisis. New York-based financial companies, Washington politicians and the Fed, and the big North Carolina banks caused it, with an assist from scamsters and speculators in California, Florida and elsewhere involved in the real estate bubble (amongst other causes).

In my humble opinion, it borders on lunacy to be sending tens of thousands of additional soldiers to one of the most horrid places on Earth and to have sent tens of billions of dollars to non-needy large complex financial companies while simultaneously not assisting a temporarily needy populace of the single most important State in the Union, as well as continuing to back-end a "stimulus", when there are so many needy people throughout this country who have been harmed and at times driven to tent cities because of cheats and speculators linked to the same Big Finance that Barack Obama has aided with the people's money: money that the people now need back.

In addition to being terrible policy, it is bad politics.

Copyright (C) Long Lake LLC 2009

Tuesday, July 21, 2009

In Which Ben Bernanke Moves Toward Becoming the First Jew Ever Canonized for His Many Miracles

Bloomberg shows the investment community gaga for Gentle Ben in Bernanke Gets Top Marks as Investors Say Economy Is Past Worst:

Global investors give Federal Reserve Chairman Ben S. Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend.

Sixty-one percent of investors surveyed in the first Quarterly Bloomberg Global Poll say the world economy is stable or improving and almost 75 percent take a favorable view of the 55-year-old chairman. By almost a three-to-one margin, they say Bernanke has earned another four-year term when his current one expires in January. . .

“The U.S. economy may be ailing,” said Selzer. “But these financial leaders agree the man at the helm of the economy is the right guy for the job, for now and for another term.”

Absent from any discussion in the article is the faint possibility that BB bears most of the blame for the financial meltdown. When he took over as Fed Chairman, the economy was strong. Strong regulatory action and pressure on Congress and the President/Sec'y of Treasury (overt and behind-the-scenes) could have led to actions that would likely have averted the whole disaster.

This article looks ridiculous on its face. It is a disgrace. The doctor had a healthy patient with risk factors for a heart attack when he took over the patient's care. He prescribed no statin, did not treat the diabetes, did not counsel weight reduction or smoking cessation, and then when the patient had warning symptoms of a myocardial infarction, he said it was only heartburn and did not have the necessary angiogram done. Ben Bernanke is a doctor who is guilty of serial malpractice and bears primary responsibility for the worst economic and financial collapse since the Great Depression.

This is what happens when an academic economist who is not a banker gets in over his head. Bring back William McChesney Martin!

Copyright (C) Long Lake LLC 2009

Just in Case You Believe(d) in 'Change You Can Believe In'

In one of the most perhaps unintentionally hilarious starts to an article ever, the non-partisan insider publication "The Hill" has an article today titled Obama is Good for K Street Lobbyists. Just as if it were a summary of a corporate quarterly earnings report, here's the start to the article:

Sweeping proposals to reform the energy, healthcare and financial-services sectors helped K Street shake off a slow start to the year, although corporate belt-tightening continued to be a drag on revenues at some lobbying firms, a preliminary analysis of midyear lobbying revenue totals shows.

Although several firms rebounded during the second quarter, midyear figures still appeared to be down from where they were a year ago. Lobbyists attributed the decline to the problems of the broader economy.

No comment!

Copyright (C) Long Lake LLC 2009

More Evidence of Lots of Optimism Embedded in Stock Prices












Eaton Corp. is an old-line, well-regarded manufacturer of stuff for the transportation and other industries.

Last October it sold for the current share price of about $48. For most of this year it traded between $30 and $45. Now that it has lowered guidance substantially for all of 2009, the stock has surged. Consider the AP report from yesterday of ETN's quarterly earnings:


"The company beat Wall Street earnings expectations when one-time items are excluded, but it cut its full-year forecast for the third time.

Wall Street applauded the performance in a tough environment: Eaton shares rose $3.99, or 8.9 percent, to close at $48.94 Monday. . .


As we survey our end markets, the year is shaping up to be considerably weaker than we had forecast in April," said Chairman and CEO Alexander Cutler.

"We now anticipate our overall end markets will decline by between 21 and 22 percent versus our earlier forecast of a decline between 15 and 16 percent. We see our U.S. markets declining by 25 percent, while our non-U.S. markets are expected to decline by 19 percent." . . .

For the full year, Eaton lowered its earnings forecast to between $1.65 and $1.85 per share, down from a February projection of $3.60 to $4.20 per share. Before that, the company forecast 2009 income of $3.80 to $4.80 per share.


Analysts had been looking for earnings of $1.90 a share for the year, on average, according to Thomson Reuters.





Here's perhaps the scariest part of this, a link on Yahoo/Finance from this morning:


[$$] Eaton's a Sign the Bulls Are in Charge
at RealMoney by TheStreet.com (Tue 6:21am)

Also, for those who care about such things, the company has a negative net worth under generally accepted accounting principles.

When stocks go up on major earnings disappointments- and a halving of earnings projections is meaningful, even long-term investors who "believe in" the company (whatever that means) should be wary, and speculators on the long side should stay away.

Copyright (C) Long Lake LLC 2009

I Used to Think that the Distance from the Earth to the Sun Was a Large Number . . .


From the report to Congress of TARP's Special Inspector General (SIGTARP) (Adapted from Zero Hedge post).

This is an incomprehensible number.

Is is any wonder that housing is bottoming and the Wall Street winners are winning big?

But such small benefits for such large numbers . . .

Copyright (C) Long Lake LLC

Rich Bernstein on the U. S. as Japan Theme

In one of EBR's early posts, the theme was propounded that we were becoming Japan (Land of the Setting Sun, Jan. 6, 2009). An update of that theme is elegantly written by Rich Bernstein, who along with David Rosenberg were a dynamic and skeptical duo at Merrill Lynch, but were apparently persona non grata with Merrill's new masters in North Carolina/Washington after BofA took it over; each found other employ. Here is the link to Mr. Bernstein's Financial Times piece America is for now still blowing bubbles (subscription required), along with the first part and then the final paragraph:

Although many market and economic observers quarrel over whether the Obama administration’s involvement in the private sector upholds the American principals of contract law, private investment and capitalism, this discussion misses the most important point for investors. The question is not whether there is a battle between socialism and capitalism, but whether the US economy is on a path to mimic Japan’s.

Financial history shows that bubbles create capacity, which is no longer needed once they deflate. An inevitable and intense period of consolidation follows. For example, the internet bubble gave rise to hundreds of publicly traded dot-com companies, many of which either merged with other technology companies or went out of business once the bubble deflated. Similarly, the gold rush of the 1800s led to construction of outposts that subsequently became ghost towns after that bubble subsided.

The global economy has experienced during this decade the biggest credit bubble in our lifetimes, and virtually every industry in every country benefited. In fact, all the growth stories of the past decade (such as China, emerging market infrastructure, residential housing, hedge funds, private equity and commodities) are capital intensive investments that benefited from easy access to cheap capital. The global credit bubble seems to have created a global economic bubble.

History would suggest, therefore, that there should now be massive overcapacity in the global economy. That is indeed the case. Global capacity utilisation was recently at generational lows.

Ignoring this history, the goal of Washington’s policies has been to stymie the inevitable consolidation, keeping companies operating – and employing voters – rather than managing the consolidation to maximise the economic benefit. History says that Washington’s is an unwise and ultimately fruitless strategy. Certainly, there may be short-term gains in an economy by keeping a bubble’s unnecessary capacity alive (this may explain the recent improvement in economic statistics), but the continued misallocation of capital significantly hinders longer-term growth. . .

Mr Bernstein concludes:

A California roll is an American version of a maki, a type of sushi. It is based on Japanese tradition, but has a decided American flavour. Similarly, the actions of the US’s public and private sectors seem to mimic Japan’s. Although the markets’ short-term reactions might correctly be positive, investors should be wary that the US will be an American version of Japan’s moribund economy.

America was very good at lecturing Japan in the 1990s but not up to the task of taking its own advice when the crisis hit here beginning in 2007.

Copyright (C) Long Lake LLC 2009

Health Care Bill Less Likely to Pass Soon: Investment Considerations

In the New York Times article Democrats May Limit Tax Increases for Health Care Plan, the real news is the likely acceptance by the President that this priority of his is going to involve a longer time line than he wishes:

But rather than repeating his demand that each chamber of Congress pass a health care bill before the August break, Mr. Obama emphasized the need to reach a final agreement by the end of the year. “So let’s fight our way through the politics of the moment,” he said. “Let’s pass reform by the end of this year.”

Despite White House insistence to the contrary, the end-of-year deadline suggested that Mr. Obama was backing away slightly from his timetable; previously he had called on Congress to send him legislation to sign by mid-October.

Given EBR's focus on generating income with one's capital (or else owning gold to profit from or at least keep up with inflation), it brings the reader's attention to Eli Lilly, which yields 5.9%, sells for 8 times this year's estimated earnings and has rising earnings estimates both for this year and next year. In addition, while its market cap is close to $40 B, a small number of super-giant pharma companies could acquire it. The long-term chart of LLY happens to stink, but yours truly owns it. The stock is back where it was a dozen years ago. A previously-miserably run company that appears to have stabilized is Bristol-Myers Squibb ("BMY"), which yields 6.2%.

This spring, EBR mentioned a small number of stocks with strong fundamentals and strong long-term and short-term charts. Amongst them was Teva ("TEVA"). Teva recently hit an all-time high, has a long-term growth rate in the high teens, yields as much as cash in the bank (1.2%), and sells at 12 times estimated next year's earnings. This has been a beautifully-run (Israeli) company that has delivered for shareholders while being uninvolved in the various shenanigans afflicting so much of American industry.

None of LLY, BMY or TEVA play the stock buyback game to a significant extent. Teva can win regardless of the fate of health care reform. It is felt at EBR that valuations on LLY and BMY are low enough that P/E risk is low even if "Obamacare" passes, and that if it fails, P/E and dividend yield could allow for substantial long-term returns to shareholders.

Note: The author of this post owns TEVA and LLY and may sell either without notice. None of the commentary herein constitutes advice to anyone to buy or sell any security.

Copyright (C) Long Lake LLC 2009

Share and Share Alike?

As the highly correlated global stock markets and higher yield debt markets levitate on a flood of central bank and governmental "money", observers and investors are left to wonder what it's all about, and what comes next in the short and intermediate term.

In some ways, it's even easier to purchase common stocks than to deposit money in the bank, because the bank needs to meet its depositors in person, whereas E*Trade et al could care less about such matters. Since common stocks are what are easy to buy and what the media focus on, investors should be doubly careful about them. On the other hand, Treasuries are not so easy to buy and I don't know any investors other than my sainted parents who care about owning them. Let's compare.

Take IBM, a recent hero for a beat and raise quarter (ignoring coming in under Street revenue estimates; in a bull market, all sins are forgiven). If you give a current IBM shareholder $116 to own a share of IBM, you can expect to receive a 1.9% yield until the dividend is, presumably, raised. Let's say that IBM raises its dividend every year by 7%, tracking its possible growth in sales. After 10 years, the dividend yield at the current stock price will be 3.8%. Your average return will be about 2.8%. Where the stock will then trade is completely unpredictable. The stock has gone absolutely nowhere for 10 years. If the U. S. is like Japan, just 10 years out of phase, IBM will likely be lower in price in another 10 years. Or, it could triple or better.

Now, consider the much-despised or ignored 10-year Treasury bond. Depending on the market's mood, you will receive 3.6% every year. Not only will you have an average cash return nicely above that from IBM, you have a more certain higher return in the first years. In ten years, you can start over with your Treasury bond. You can buy gold. If rates are higher, you can invest in cash, more bonds, etc. If you own IBM, you have no exit point. Worse, you are likely to get over-optimistic and hold IBM when you should sell it, and you will tend to get pessimistic when the news is going to improve.

If you like corporations and hate the low yield of Treasuries, there are higher yields in the debt of IBM and other, weaker companies.

The lesson of Japan, Europe, many countries with stagnant stock market averages for many years, and the U. S. for the past 12 or more years is that yield and safety of principal matter. If you "make" 14% a year in a non-dividend-yielder for 5 years and then the stock takes a 50% dive-- common now and then even for IBM-- you have nothing to show for your loyalty.

In the case where bonds turn to trash due to massive inflation, forget IBM. Buy gold, gold, more gold and some other "stuff".

The people who run IBM make sure to get paid in cash. For them, stock options are a fillip. Least amongst their concerns are their loyal shareholders. That is why 2/3 of their free cash flow goes to purchase stock from the least loyal shareholders, and only 1/3 goes to dividends. Matters are worse at Cisco, which despite its giant size pretends it is a youthful grower and thus refuses to pay out a penny in dividends. Meanwhile, not only do the insiders take large cash salaries, but simply the normal volatility of the common stock guarantees that from time to time, they will be granted stock options when the stock is low, and they can cash out when it is high. Thus the stock can go nowhere for a decade but the insiders cannot lose and are guaranteed to win big on a portion of their options.

Just like the famous law firm Cheetum, Cummin and Goin.

Copyright (C) Long Lake LLC 2009

Monday, July 20, 2009

What Are We Doing in Afghanistan? (And How Will the Answer Affect Your Investments?)

The increasingly expensive effort in Afghanistan could spin into a Vietnam-style mess, which is why a financial web site is paying attention to it. History suggests that if the U. S. stays at peace, the economy will trend upwards without inflation. A little war will be insignificant to the giant U. S. economy, but another Iraq-style war will be meaningful. It will distort production to armaments and raise the inflation level while crowding out important spending, such as on health care. Consider U. S. increasing counter-narcotics efforts in Afghanistan from the L. A. Times, which begins:

The U.S. government is deploying dozens of Drug Enforcement Administration agents to Afghanistan in a new kind of "surge," targeting trafficking networks that officials say are increasingly fueling the Taliban insurgency and corrupting the Afghan government.

The move to dramatically expand a second front is seen as the latest acknowledgment in Washington that security in Afghanistan cannot be won with military force alone. . .

The Obama Administration should directly inform the American people what its strategy and objectives are in Afghanistan. What would prevent an escalation from mimicking LBJ's in 1965, though he posed as the peace candidate in the 1964 election? It's a large leap from preventing another 9/11 - the original reason to send troops to Afghanistan in 2001 or capturing UBL- from intervening in the drug trade in one of the poorest countries in Asia. We need to know the exit strategy, what an acceptable result is, what the U. S. does if the pitiful Kabul "government" does not step up to the plate, and the like.

The future of your investments will turn on matters that are not now on the front page. Everyone and his/her brother/sister "knows" that the "recession" has either ended (Merrill Lynch and others) or is ending soon (ECRI and almost everyone else) or soon enough (Roubini). You cannot make a dime investing thusly. If you believe that all these guys are wrong and the economy will keep shrinking well into next year, you can make a fortune shorting stocks and not getting jerked out of your bear positions on the up-move(s). I propose that a less risky way to conserve and increase your net worth is to follow the issues that are not on the front burner.
Watch the Af-Pak region. The more it looks like a quagmire into which the U. S. gets sucked, the more you should sell all Treasury securities other than shot-term bills and instead buy gold, oil and the other stuff that worked when Viet Nam and Iraq were hot enough to matter. If things go our way, then tend to invest in the opposite direction.

Copyright (C) Long Lake LLC 2009