Sunday, January 31, 2010

Structure of the Stock Market: Focus on Nucor and Dollar Tree

Within the overall setting of the reckless financial structure of Team USA, individual listed American stocks are providing interesting opportunities for analysis. Since all one can do in unsettled, overvalued times is try to get the odds on one's side, one can be grateful for technical and fundamental analysis agreeing from time to time.
The Nucor (NUE) chart shows it hitting a ceiling several times since the rally began last year, in a setting of a major failure to even challenge its peak pre-crash price. This price action is now supplemented by rapidly deteriorating 2010 and 2011 earnings estimates. Nucor is a marvelous company, at least from a shareholder's standpoint, but I would stand clear of it on a timing basis. The technicals and fundamentals have deteriorated together; more detailed charts show that spike bottoms notwithstanding, $30 was a rough support level during the bear market and easily could be challenged or breached again during a serious market correction.
On the other hard, the short-term and long-term charts of Dollar Tree show support at a high level, moving averages at all-time highs, and a move from under $4/share when it came public in 1994 to the current level.
It is consolidating above its 2000 price high, has rising earnings estimates, trades for about 13X year-ahead estimates, has all its moving averages moving upward and trades above all of them. In other words, DLTR looks a lot like gold as it was preparing to move from the sub-$1000 range last summer to its breakout to new price highs. DLTR has a very high financial strength from Value Line, as do others in its peer group which I also like and own, such as ROST and TJX. (How odd is it that the deep discounter retailers are so financially strong as companies when their clientele is financially the opposite?)
I personally do not short stocks much, especially those of great companies such as Nucor, but a simpler paired concept is as follows: of one's money allocated to stocks, own those with improving fundamentals and strong charts such as DLTR and ROST; and put aside funds for other great companies such as Nucor. That way one does not have to be tormented by deciding when to sell the former because there is a perceived better risk-reward by switching into NUE at the bottom. For all we know, DLTR may be entering a multi-year tear in which earnings double and the P/E increases.
For what little it's worth, I think that DLTR can justifiably trade this year at 15-16X $4/share earnings estimates (which assumes modest beats on earnings), which would yield a price of $60-64, or about a 20-25% return on this dividendless stock. Downside risk is, of course, 100%.
Copyright (C) Long Lake LLC 2010

Saturday, January 30, 2010

Markets Not Loving the Growth or Declining Economic Freedom

The Economic Cycle Research Institute (ECRI) publishes its Weekly Leading Index on Fridays. The absolute level of the index is around 131. Unlike the Conference Board's better-known but arguably less sophisticated Leading Economic Indicators, which is in record territory, the WLI is about 12 points off its 2007 high of 143.
That index peaked in the May-July time frame in 2007, which was the precise period in which Bear Stearns disclosed problems in two of its managed hedge funds. The annualized growth rate of the WLI turned negative later in the summer and except for one somewhat manic move to new highs in the stock indices in the fall, stocks have trended downward since.

ECRI points to a V-shaped economic recovery in its latest press release, U.S. Business Cycle Recovery To Keep Going:

"With the WLI staying near the previous week's 83-week high, the U.S. business cycle recovery is set to keep going in the months ahead," Achuthan said.

He also pointed to government data released earlier on Friday showing that the U.S. economy grew at a
faster-than-expected pace for the fourth quarter.

"With GDP growth rebounding 12 percentage points in just three quarters, the V-shaped recovery foreseen last summer by the WLI is coming into focus."

Somehow the economic and financial climate continues to feel more like Japan post-bubble than Springtime in America. Indeed, this blog has reported that ECRI is now forecasting more frequent recessions than in the 1983-2007 period. This will be good for its business but probably not so good for the country or for investors.

Remembering that many stocks peaked not in 2007 (financials) or much earlier (homebuilders, spring 2005) but in 2008, and that others have gone on to all-time highs, stocks of companies with ongoing record profits, upward earnings revisions, below-market P/E's, that are self-financing, and preferably have strong charts (whether or not they have had profit-taking at some point in the past few months) can be owned in what may well be an economic cycle that is pointing flat to down from a growth momentum (second derivative) standpoint.

While JPM and GS may well be due for kickback rallies, they have broken down on the charts. It appears to this blogger that the same phenomenon that applied to the techs post-bubble is happening to the financials. Their reflex rally is over, and as a group they are dead money until the next economic/market cycle bottoms.

Treasuries may be OK from an intermediate-term standpoint, given the political dynamics that have forced the administration to talk of increasing taxes (on Big Finance) and decreased rate of spending growth.
If the current economic cycle is like the prior one, Treasury rates will move irregularly upward as Fed tightening (or decreased loosening) competes with slower growth. There is a very real possibility that the next economic downturn will involve a decline in the 10-year Treasury to the 2-3% rate.

Meanwhile, absolute levels of return on low investment grade bonds (Moody's Baa) are "too low" at just over 6%. Call me irresponsible, but I just made a modest investment on Greek 5-year Euro-denominated bonds at a 6.5% yield to maturity. Between the country that helped create the modern world and an anonymous company with uncertain finances and an uncertain fate, I'll take Greece.

The U. S. has now been downgraded by the Heritage Foundation to being "mostly free" economically rather than "free". Its drop of 2.7 points (on a scale ranging to 100) and a rating of 78.0 brought us to eighth place, below seventh-ranked Canada (80.4) and far below Hong Kong and Singapore, numbers one and two respectively, which had scores of 89.7 and 86.1.

Considering that Australia and New Zealand were third and fourth and are physically and economically closer to Asia than anywhere else, it is fair to say that the East may not be red any longer, but it increasingly is economically free.

There are many other measures of economic success and growth prospects than freedom per se, especially as defined by a group with the agenda of the Heritage Foundation; Brazil, India and China were ranked 113, 124 and 140 respectively, and the numerical ratings for all of them declined last year even as their economies grew.

The financial world is changing rapidly. Barack Obama had a real chance to pull an FDR, get a Pecora Commission-type show going and promote the major financial system reforms that would provide a platform for a new, better economic structure. Regardless of how the current cycle plays out and whether or not he wins re-election, he has failed us. We are now doomed not to 23 but 27 years of Greenspan-Bernanke. Yuccch!

Copyright (C) Long Lake LLC 2010

Friday, January 29, 2010

Gold: Comments on Price and Relationship to Stocks

The accompanying chart is an about 22-year chart showing long channels of first, gold outperformace v. stocks, then the opposite, then back to gold. Gold was price-controlled for much of the 20th century; we saw long periods of a 5:1 ratio in the pre-FDR days, and at the depths of the Depression after gold was raised to about $35 per ounce, we say 2 or 3 to 1 as the ratio, rising at the maximum pre-WW II to 5 to 1.
From a sentiment standpoint, the only free sentiment data I can follow daily comes from the premium of Gold-Trust's NAV to the value of its gold holdings. That premium has been about 2.5% the past 2 days, and is about 2.1% as I write this.
Having followed GTU for the past year or so, I can say this is about as low a premium as it has carried.
At gold's peak price in early December, that premium surged to about 9%.
Similarly, the much larger and much better known Central Fund of Canada (CEF) is down to a 3.9% premium over NAV. This fund, which owns both gold and silver, has often traded at a double-digit premium to NAV. CEF and GTU are run by the same organization;;
(In case you are wondering, there are various reasons to value precious metals held in these ETFs over those held by the much larger GLD and SLV ETFs; at least many people believe so, which accounts for their premia.)
I take the above to be encouraging signs that the hot money is leaving or has left the precious metals market.
Structurally, gold but not silver is in a confirmed bull market. Similarly, platinum (PPLT) is in a moderately bullish long-term configuration but has not taken out its high of prior years as gold did late last year. Palladium (PALL) is nowhere long-term; its recent strength vs. gold has been a source of concern as it is the most speculative of the bunch.
Currently, gold is holding at the same price, roughly, as the S&P 500. For them to perform equally, gold would have to go up 2% to account for dividends from stocks. Based on the above, definitely fallible indicator, and considering various measures of investor optimism re stocks, outperformance in the months and year ahead for gold is my guess.
Copyright (C) Long Lake LLC 2010

Paul Krugman and Tired Old Thinking

In today's NYT column March of the Peacocks, Paul Krugman lays out the progressive/liberal view that government is the ultimate actor in the economy:

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

This view is open to dispute. The 1929 downturn became a "great" depression during the unprecedented activism of President Hoover, and involved post-WW I debt repayments imposed on Germany as a unique complicating factor. In another sense, the Great D involved a series of events that comprised a perfect storm.
Think of it as a Hurricane Katrina which before the levees gave way, first made a direct hit on New Orleans and devastated it; and then the levees broke. A truly "perfect" storm.

And re the Great D, also remember that candidate FDR harshly criticized Hoover's Federal deficits, and pledged to bring the budget back into balance.

There is no replaying history. No one can disprove the concept that had FDR kept his pledge, the economy would not have recovered just as it recovered from the severe depression of 1920-21 or the Panic of 1873.

All we know is that in the 1930s, the government had a balance sheet that was a fortress founded both on gold and on untapped taxing and borrowing power.

This situation is quite different today, thanks to generations of Krugman-praised policies. The consolidated balance sheet of the Federal Government shows, let us say, $60 T of debt against $2 T of income. That's a 30 to one leverage ratio, and only includes the present value of Social Security and Medicare obligations. It excludes other obligations such as the financial backstops for FDIC and the like, and other implicit obligations.

Why a solution that was tried in the 1930s is the same solution that should be tried after decades of increasing debt and chronic price inflation is unclear. Something about Einstein's definition of insanity being doing the same thing and expecting a different result.

Moving to the recent past, there is no evidence that the disorderly bankruptcy of Lehman Brothers was going to lead to anything worse than we got.

Going farther, remember that one year ago, Mr. Obama's advisers were forecasting 8.5% peak unemployment in the absence of a massive deficit-spending "stimulus" bill.

Were these top-tier economists off by, say, an additional 15-20% unemployment points (these numbers are all U-3 for consistency)?

Could it be that all the activist government--cap and trade and then healthcare reform, for example--inhibited animal spirits amongst small business owners?

Yours truly has an only-partially tongue-in-cheek solution. Let us say that there is, net, 20% unemployment/underemployment (U-6 and then some). The average American with a job works 2000 hours per year. All one has to do is shorten the work week to 4 days, and poof, everyone has a job.

This solution is as obvious as simply taxing fossil fuel use directly rather than going to the sham of cap and trade.

In other words, go more European in work effort. Now, this can be spun in various ways: shorter work days, earlier retirement, etc.

In fact, the more leisure time people have, the more time they can spend consuming (not that consumption is the goal of life in richer countries). For sure, less work means more play.

Now, this is partly satirical, but only partly. America produces about 3000 calories of food a day for a population that needs, on average, only 2000. Our current solution is to stuff people with this overproduction, and the result is an obesity epidemic.

Less food production (less GDP) would be a good thing for our health, economy and environment. One can go down the list. Driving to work 4 days a week would save lots of gas, wear and tear on autos and roadways, and thus have positive aspects. In fact, working 4 ten-hour days a week would create savings over 5 eight-hour days.

In the real world where resources are finite, we need to think creatively and humanistically about practical approaches, not reflexively take Dr. Krugman's approach and turn to Leviathan for fixes.

Dr. Krugman is oriented toward government. In Europe, he would likely be a member of a Social Democrat-type party. Fine, legitimate point of view. But the key is to avoid imbalances such as massive deficits other than in wartime. A Great Recession caused by hot money, mortgage fraud and imprudent borrowing/lending simply does not get "solved" by repaving roads.

Two macro economic solutions are: Win a world war and thus dominate the global economy (the way out of the Great D); or deleverage at all levels (the post-WW II solution until leverage got excessive in the past decade).

Since a world war is not desired, the solution is to simplify our accounts, and as the world turns, commit ourselves to replacing debt with equity.

I would suggest starting with Citigroup.

The disagreement between Dr. Krugman and President Obama is one between similar thinkers. Both advocate government increasing its leverage to a greater extent than the rest of the economy is simultaneous decreasing its own.

There is no current cleared, trodden path away from this roadway, and until there is, I believe that the fundamental case for gold is strong and that new gold buyers can and will easily be found.

Remember: 30 to 1 leverage is a conservative measure of current Federal leverage. Sounds like Bear and Lehman to me. Paul Krugman thinks that raising this to 31 to 1 is the solution for 2010. Barack Obama perhaps prefers 30.8 to 1. I favor bringing it down an order of magnitude to, say, 3 to 1, and then going below that, and rethinking all current economic dogma built on the alleged virtues of an ever-expanding gross domestic product.

Copyright (C) Long Lake LLC 2010

Thursday, January 28, 2010

Administration Hypocrisy Watch (Financial Version)

"The Hill" titles a must-read piece as follows:

After Obama rips lobbyists, K St. insiders get private briefings.

Here are excerpts:

A day after bashing lobbyists, President Barack Obama’s administration has invited K Street insiders to join private briefings on a range of topics addressed in Wednesday’s State of the Union.

The Treasury Department on Thursday morning invited selected individuals to “a series of conference calls with senior Obama administration officials to discuss key aspects of the State of the Union address." . . . .

A handful of lobbyists told The Hill on Thursday morning that they received the invitations and were planning to call in.

Some lobbyists say they are extremely frustrated with the White House for criticizing them and then seeking their feedback. Others note that Democrats on Capitol Hill constantly urge them to make political donations.

One lobbyist said, “Bash lobbyists, then reach out to us. Bash lobbyists [while] I have received four Democratic invitations for fundraisers.”

In his State of the Union on Wednesday, Obama once again targeted K Street: “We face a deficit of trust — deep and corrosive doubts about how Washington works that have been growing for years. To close that credibility gap, we have to take action on both ends of Pennsylvania Avenue — to end the outsized influence of lobbyists; to do our work openly; to give our people the government they deserve.”

Hypocrisy we can believe in?

Moral to the president: People who run as a saint/Messiah are held to at least ordinary standards of consistency. "The Hill" mightn't bash you with such a pointed title and text had you not posed as other than a Chi-town pol, which is how you have been behaving.

Copyright (C) Long Lake LLC 2010

The U. S. Dollar "Rally" Is Phony

What US dollar rally? (Data through Jan. 20)
Basically the Euro is tres weak now due to Greece and other troubled members of the EU, and the yen ain't so hot fundamentally either.
Copyright Long Lake LLC 2010

It's Official: East Anglia Climategate Involved Both Illegal Behavior and a Catch-22

From the Times Online: Scientists in stolen e-mail scandal hid climate data:

The University of East Anglia breached the Freedom of Information Act by refusing to comply with requests for data concerning claims by its scientists that man-made emissions were causing global warming. . .

In a statement, Graham Smith, Deputy Commissioner at the ICO, said: “The e-mails which are now public reveal that Mr Holland’s
(who requested the information) requests under the Freedom of Information Act were not dealt with as they should have been under the legislation. Section 77 of the Act makes it an offence for public authorities to act so as to prevent intentionally the disclosure of requested information.”

He added: “The ICO is gathering evidence from this and other time-barred cases to support the case for a change in the law. We will be advising the university about the importance of effective records management and their legal obligations in respect of future requests for information.”

Mr Holland said: “There is an apparent Catch-22 here. The prosecution has to be initiated within six months but you have to exhaust the university’s complaints procedure before the commission will look at your complaint. That process can take longer than six months.”

The above issue has been dubbed "Climategate".

If the case that serious warming of the planet is occurring and can be remedied by restricting putting more carbon dioxide into the atmosphere is such a solid one, why are we learning about this sort of behavior and the Himalaya "Glaciergate" scandal?

Increasingly, the cap-and-trade solution to this "crisis" is looking like a scam to benefit favored business interests.

There is a much simpler solution, one proposed by Bill Clinton in 1993. Tax sales of petroleum products.

There is also a supply-side solution. Shrink global production of oil and coal. The resultant price increase will make "green" technology price-advantaged without the need for government to pick winners and losers or spend money on subsidies.

Climate change aside, depleting irreplaceable resources is a bad idea. It's time to ditch cap and trade and create an energy policy that is green, diminishes reliance on imported oil, leads to creation of major new domestic industries, and helps the Federal deficit.

A policy of sunshine and not stonewalling. That would be change in which we could believe.

Copyright (C) Long Lake LLC 2010

This Time It's Still Not Different Enough to Really Be Different

Please read Drs. Reinhard and Rogoff's op-ed today from the Financial Times titled:
Why we should expect low growth amid debt.

Here are the intro and the conclusion:

As government debt levels explode in the aftermath of the financial crisis, there is  growing uncertainty about how quickly to exit from today’s extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis. . .

Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different.

Ms Reinhart is professor of economics, University of Maryland, and Mr Rogoff is professor of economics, Harvard University. They are co-authors of ‘This Time is Different: Eight Centuries of Financial Folly’ (Princeton)

There is a reason why one-month T-bills are trading around 0.00% interest. Much smart, conservative money doesn't trust much else.

Copyright (C) Long Lake LLC 2010

Treasuries vs. All the Others

Mish has a post upon which I would like to expand, titled State of Wisconsin Goes Insane With Leverage; Corporate Bond Mad Rush Is On.

Please read it with an eye toward the charts.

Note that the California municipal bond ETF (symbol CXA) has outperformed the Treasury bond market in price appreciation over the last 2 years. Shown here is the ETF for the long Treasury bond; the equivalent for the intermediate bond, IEF, has a very similar 5-year chart pattern. This seems a bit backward. California can only print scrip; Treasuries can do what Japan has done for years in the context of a bull market in its Government debt and print unlimited amounts of it.

Other bond funds have surged to all-time record price highs (low in yield).

Mish makes the point that there is an overabundance of enthusiasm for these bonds. On an absolute return basis, the lowest investment grade bond, the Moody's Baa corporate bond, is trading around its multi-decade low in yield, just over 6%, about as low as its yield got at the most frenzied part of the recent credit bubble.

Consistent with the observation that too much money is chasing these subpar credits, others have reported that the amount of money flowing into bond funds is at bubble levels: 3 standard deviations above the mean (excuse me for not having the precise reference handy).

Compared to all this, Treasuries look like the only bond one wants to own if one wants to own bonds. (Or, foreign sovereigns but be careful of overpriced Mexican, Indonesian and Russian sovereign debt.) At least the Feds can both print money and tax the corporations. Meanwhile, measures of economic activity remain at levels of several years ago, so much growth must occur just to get back to prior peak (2008) levels of economic activity. While most of us hope for good things, it would appear that the public is late to the bond party.

All this makes the sloppy behavior of gold and Treasuries more understandable.

Now that the Fed has proclaimed "recovery", I am reminded of Alan Greenspan's quip of about 10 years ago that just because the Fed, with the greatest number of economists in the world, had an incorrect quarterly economic forecast for (say) the last 16 quarters, there was no reason not to think that it might just be correct the 17th quarter.

If you want to own corporate bonds or munis, please at these prices own the bonds directly. An ETF or mutual fund is perpetual. There is no expiration date. It is possible for you to receive a 5% interest yield every year but the market price (net asset value) of the ETF or fund to decline 7% yearly, simply as a consequence of rising rates even with no defaults in the portfolio. At least when you own the bond directly, it pays off at maturity and even if you regret buying at a 5% yield when rates go quickly to 8%, at least you get your 5% assuming no default.

There are structural bull markets currently off their peaks but no bubbles in gold, Treasuries, and a variety of individual stocks, almost all of them high quality. Meanwhile individual stock issues keep blowing up, the latest being the high-quality one Qualcomm. High-P/E stocks such as QCOM are problematic. I would much rather own the common stock of Ross Stores (ROST) at about an 8% free cash flow earnings yield than its debt, given that Ross is trading at about 12 times estimated year-ahead earnings. Similarly, the highly secure Chubb (CB) is trading at about 9 times estimated earnings, a 3% dividend yield, and a much higher free cash flow yield.

The larger point I am making is that some markets have moved out of proportion to the known changes in the real economy. There is finally the opportunity for commonsensical analysis to beat the market, simply by avoiding the above-mentioned California muni fund CXA and other risky bond funds and sticking to relatively undervalued quality.

For new readers, though, please understand that in this blogger's humble opinion, virtually all financial assets are overvalued relative to labor's wage rates. The overgrowth of the finanical markets is the largest disequilibrium out there, and threatens our society with more chaos more quickly than climate change or Iran's possible nuclear arsenal.

What are our leaders doing about it?

Fighting to grant health insurers the mandate to collect feeds from every American (party in power), thus further increasing the power of the financial interests; and the two parties are engaged in tastes great/less filling argument over whether to increase the Federal deficit via more spending (party in power) or via fewer taxes (wannabe in power party).

The American people are in front of their elected officials. Will another Ross Perot emerge?

Until then, it's hard to see gold entering a secular bear market, periods of price weakness notwithstanding. As far as Treasuries, they could rally hard on a flight to safety or on an economic boom in which issuance declines drastically.

Time will tell.

Copyright (C) Long Lake LLC 2010

Tuesday, January 26, 2010

Evidence of Slowing Growth Momentum has 3 articles on its front page pointing in the same direction of decline in the rate of growth, which is generally not good for stock prices:

U.S. Trade Deals Falter as Unemployment, Democrats Mute Obama;

Credit-Default Swaps Rising to Five-Week High ;

Stocks, Commodities Fall as China Curbs Lending; Dollar Rises.

Then you have what has become the typical incoherence out of Washington with the following two offsetting headlines:

Senate Democrats Said to Consider $80 Billion Jobs Legislation

Obama to Call for Three-Year Freeze on Some Federal Spending.

In addition, BB reports a marginal GDP change in Britain for Q4 last year:

Jan. 26 (Bloomberg) -- The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent
. . .

“It’s clearly disappointing,” Simon Hayes, chief U.K. economist at Barclays Capital and a former Bank of England official, said in a telephone interview. “The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.” . . .

The recession, which lasted for six consecutive quarters, has shaved 6 percent off GDP, the statistics office said. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949, officials said.

The economy contracted 3.2 percent from a year earlier in the fourth quarter, compared with a median decline of 3 percent forecast in a Bloomberg News survey of 30 economists.

The evidence is growing that in the developed countries, we have reach a period where simply fiddling with the cost and quantity of borrowed funds is not enough to have a big effect on the economy. It now takes special giveaways such as were embodied in cash-for-clunkers and a first-time home buyers credit to goose sales; but these largely simply bring demand forward.

I do not believe that the credit crisis is finished.

Those who cheerlead for Ben Bernanke should consider the following analogy.

Dr. Bernanke committed malpractice by not treating the risk factors for an economic heart attack, instead encouraging the patient to smoke and eat rich, sugary foods. He did not order an angiogram when angioplasty or a bypass might have prevented a heart attack. When the heart attack arrived, he was part of a team that threw everything modern medicine had, and the patient suffered a cardiac arrest as part of the event but survived. The patient is now engaged in a prolonged recovery with uncertain prospects and has resumed his bad lifestyle habits, having resumed smoking and eating the wrong foods, without the doctor's opposition. The doctor is continuing intravenous therapy long after the event, which is a sign of weakness in the patient's condition.

Meanwhile, on CNBC today, the commentators were dismissive of the opposition to the doctor staying on the case. "Fringe" was Joe Kernan's characterization of the opposition.

It's time for a change at the Fed. It's also time for a true Straight Talk Express to advise the American people that an equity culture trumps a credit-based one. The focus needs to be on a truly sustainable economy.

As the above Bloomberg headlines demonstrate, monetary policy cuts both ways. It in fact may be in the government's interest for stocks to fall so that people get scared and rush to the "safety" of Federal debt so that the massive deficits can continue to be financed cheaply, a la Japan (which is on its way to be rated not much above California if above it at all).

These are truly unprecedented times, with the over 400-year old Bank of England having its lowest borrowing rates in its entire history (see EBR's 1694 and all that from one year ago).

Thus the past is an uncertain guide to the future. As with a frail patient, even a small gust of wind can cause a fall.

Thus the emphasis at EBR on high-quality assets.

Copyright (C) Long Lake LLC 2010

Monday, January 25, 2010

How the Christmas Day Bomber Might Imperil Financial Reform

The conservative commentator Byron York is out with an opinion piece about the Christmas Day bomber, drawing upon a recent Associated Press analysis of the timeline starting with him going into custody (see the article for the link to AP).

Apparently he was interrogated by the FBI for all of 50 minutes before he was Mirandized and clammed up.

The opinion piece concludes with what is likely an informed prediction:

A few days ago, Republicans on the Senate Judiciary Committee and Homeland Security Committee asked questions that led to the disclosure that key national security officials were not consulted in the decision to treat Abdulmutallab as a civilian criminal, rather than as an enemy combatant, which would have allowed officials to interrogate him extensively without any assertion that Abdulmutallab had the right to remain silent. In light of these new revelations, it is likely that the GOP will step up its questions for Attorney General Eric Holder -- and for the president himself -- about why that decision was made.

Probably never has an unsuccessful terrorist attempt caused such trouble for an administration.

If the facts of the case put the president in a bad light, then his general prestige will likely further diminish.
Financial reforms will be that much tougher to accomplish, Tall Paul notwithstanding.

Yes, we are seeing how there can be gridlock with one-party rule.

It's looking less likely that controversial changes regarding financial regulation and assessment of fees will get through Congress as Barack Obama confronts the limits to his ambition for perhaps the first time.

If those issues were the sole cause of last week's sell-off, then stocks are a buy. Conventional wisdom says that is the case, as zero interest rates drive continued, resurgent speculation.

Copyright (C) Long Lake LLC 2010

Shalom Also Means Goodbye

Dr. Steve Keen of Australia, one of the few economists who predicted the financial crisis, has a concise post out titled The Economic Case Against Bernanke. Mish has also posted on this. Please read this, as it is not lengthy. The focus is debt levels; Dr. Keen correlates the 1920s and Great Depression to the recent past and current situation.

In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.

They did not leave because they had successfully played the stock market rally in 2009!

Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.

It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.

Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.

One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.

At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.

Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.

I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.

Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.

Copyright (C) Long Lake LLC 2010

Sunday, January 24, 2010

JPM and the Market: Downside Risk Increasing

A few weeks ago, I suggested the JPM would be an important stock to watch as a bellwether for the averages. The 2 year technical chart and the 5 year charts shown here suggest real danger. After that post of early this year, JPM moved up but to a lower high. It has now broken its 50 and 200 day moving averages (smoothed = sma) to the downside for the first time since 2008. Fundamentally, its 2010 estimated EPS have begun to erode.
Goldman Sachs also has a similar chart; its EPS are almost irrelevant as it manufactured 2009 Q4 earnings by shrinking bonuses severely. BAC, which had a weaker rebound than GS or JPM relative to its 2008 high stock price (though a larger bounce off the bottom), is close to the same sort of technical breakdown.
On the 5 year chart, $40 has been an important support level for JPM, with $30 the next level.
That the above is happening with the yield spread at extremely high (favorable) levels is an unequivocally bad sign. None of this is determinative or permanent, of course, but the bear case is concisely and well made lately; see Comstock Partner's latest, Banks Are Not the Only Problem, and involves both sentiment and fundamentals.
Short-term, the apparent salvaging of the Bernanke nomination is going to lead to short-covering and buying tomorrow, one would think, but insiders know he has been a disaster for the economy and the markets. He is like the doctor who kept treating Michael Jackson's addiction. Who knows how many times the doctor bailed MJ out of trouble? Eventually MJ met the fate of so many addicts. Gentle Ben may be well-meaning, but dropping debt "money" out of helicopters is running out of potency.
Debt and credit are just promises, promises; air; words; intangibles. Neither the borrower nor lender has a secure position.
Only through a true ownership culture (forget the bogus Bush version built on mortgage fraud as we have now learned) and one of thrift and prudent lending on straightforward terms, a society in which finance plays a small and non-dominant role, can a healthy economy and truly attractive financial markets come to pass.
Currently finance is in a permanent world in which one has to suspect disbelief in order to make an investment. Thus short money is at zero.
We are in a financial Bizarro world. But charts are factual. The Fed can't spin them.
Ignoring a chart breakdown of JPM as well as of GS, is quite a gamble.
Copyright (C) Long Lake LLC 2010

Glaciergate: The Plot Thickens and Smells Worse

Those who have an open mind about the global warming/climate change story and who have the time and interest to follow it will want to consider reading the (London) Telegraph's
Pachauri: the real story behind the Glaciergate scandal
Dr Pachauri has rapidly distanced himself from the IPCC's baseless claim about vanishing glaciers. But the scientist who made the claim now works for Pachauri, writes Christopher Booker.

Here are excerpts:

I can report a further dramatic twist to what has inevitably been dubbed "Glaciergate" – the international row surrounding the revelation that the latest report on global warming by the UN's Intergovernmental Panel on Climate Change (IPCC) contained a wildly alarmist, unfounded claim about the melting of Himalayan glaciers. Last week, the IPCC, led by its increasingly controversial chairman, Dr Rajendra Pachauri, was forced to issue an unprecedented admission: the statement in its 2007 report that Himalayan glaciers could disappear by 2035 had no scientific basis, and its inclusion in the report reflected a "poor application" of IPCC procedures. . .

To understand why the future of Himalayan glaciers should arouse such peculiar passion, one must recall why they have long been a central icon in global warming campaigners' propaganda. Everything that polar bears have been to the West, the ice of the Himalayas has been – and more – to the East. This is because, as Mr Gore emphasised in his Oscar-winning film An Inconvenient Truth, the vast Himalayan ice sheet feeds seven of the world's major river systems, thus helping to provide water to 40 per cent of the world's population.

The IPCC's shock prediction in its 2007 report that the likelihood of the glaciers "disappearing by the year 2035 and perhaps sooner is very high" thus had huge impact in India and other Asian countries, and it is precisely this statement that the IPCC has now been forced to disown.

There is a lengthy but blockbuster ending to this report:

Last November, however, Dr Raina, the country's most senior glaciologist, published a report for the Indian government showing that the rate of retreat of Himalayan glaciers had not increased in the past 50 years and that the IPCC's predictions were recklessly alarmist. This provoked the furious reaction from Dr Pachauri that tarred Dr Raina's report as "arrogant" and "voodoo science". Only weeks later came the devastating revelation that the IPCC's own prediction had no scientific foundation.

Dr Pachauri's first response to these revelations was to claim that he had "absolutely no responsibility" for the blunder, that it was "the work of independent authors – they're responsible". But the IPCC's error was so blatant that last week Pachauri and other senior officials had to put out their remarkable statement, admitting that it had been due to a serious system failure.

Even more damaging now, however, will be the revelation that the source of that offending prediction was the man whom Dr Pachauri himself has been employing for two years as the head of his glaciology unit at TERI – and that TERI has won a share in two major research contracts based on a scare over the melting of Himalayan glaciers prominently promoted by the IPCC, using words drawn directly from Dr Hasnain.

This is by no means the first time that the procedures used by the IPCC to compile its 2007 report – the most alarmist so far – have been subjected to trenchant questioning. But no one, it seems, is more embarrassed by "Glaciergate" than Dr Pachauri himself, whose expanding worldwide business connections since he became chairman of the IPCC have recently been the subject of articles in these pages by Dr North and myself.

In view of the IPCC's statement last week, the very evident anger of the Indian government at his dismissal of its expert's report and now the revelation of the part played in this fiasco by a senior member of his own TERI staff, it appears that what we may soon be looking at here is not just "Glaciergate" but "Pachaurigate".

In other words, the head of the IPCC itself may be about to have a Nixonian set of moments. Coming hard on the heels of the revelations about the academic hardball tactics in a university in East Anglia, U. K. wherein dissidents from the prevailing orthodoxy were discriminated against by scientists with an agenda, there appears to be trouble brewing in the powers that be in the global warming industry.

Buy coal stocks?

Copyright (C) Long Lake LLC 2010

Political Markets

On the one hand, the drop in stocks and commodities- with platinum off 6% in 3 days--associated with a rise in the VIX volatility index to above 25 (and therefore contrarianly somewhat bullish) appears to be a buying opportunity. After all, the various pronouncements and "sort of" plans by the administration coincided with the upcoming (bank tax proposal) and actual (Volcker Plan) Senate loss in Massachusetts and were therefore political more than serious proposals for which the President would fight.

On the other hand, the President's defenders are saying silly things, witness the first paragraph of Frank Rich's column in today's NYT, After the Massachusetts Massacre:

It was not a referendum on Barack Obama, who in every poll remains one of the most popular politicians in America. It was not a rejection of universal health care, which Massachusetts mandated (with Scott Brown’s State Senate vote) in 2006. It was not a harbinger of a resurgent G.O.P., whose numbers remain in the toilet.

Wrong on all 3 counts. Clearly, polls and focus groups show that voters were consciously treating the election as a nationalized vote. Second, and a more subtle issue, polls show that healthcare "reform" was front and center in the vote, and that Mass. voters are similar to the rest of the country's in opposing "Obamacare". Of course, their opposition includes double-payment because Mass. gets the stick but no carrot unlike Neb. or La.; and Mass. has a huge biotech and medical tech industry that stand to suffer from Obamacare. Third, only a few people can deny that the GOP has surged more than the economy. If a devastating win in Virginia despite real efforts from the President in that race, and then decisive wins in the deep blue states of NJ and Mass. are not persuasive, then the finding from Rasmussen Reports might be a shocker: Republicans Post Eight-Point Lead in Generic Ballot (from Jan. 19).

On the other side of the political spectrum, the points are more fact-based and the point of view of the writer has clearly gained ground since one-party rule began one year ago. You may consider Rich Lowry's The New Catechism.

In other words, the administration is on defense and the quarterback is scrambling. Meanwhile bulls such as David Kotok of Cumberland Advisors point to zero interest rates as cause for a further rise in the stock averages (but Dr. Kotok believes we are in a secular bear market and his bullish call is tactical); but the obvious paradox is that zero interest rates only can be sustained at a time of gigantic Federal deficits and horrible state and local finances by a combination of a weak underlying economy and gigantic unrealized bank losses. The mortgage market is a phony, caused by Fed money-printing.

To paraphrase Yeats, the center is not holding. A resurgence of an unreformed Republican party is unappealing. A liberal majority that can hold Frank Rich's view is insane, expects us to be idiots, or is otherwise playing some strange PR game.

Given the unprecedented times, fundamental come into play. Please consider two more resources, one a simply chart and one an analysis of Treasury's funding needs. The first demonstrates on 2 measures that the stock market is fundamentally overvalued; see: For the Zero Hedge article, see:

Meanwhile, Citi's Tobias Lefkovich points out that bond buying by the public is in a bubble.

And continues to show no hiring going on, consistent with the Govt's JOLTS survey and the recent stagnation of new unemployment claims at an unsatisfactory level.

If the best argument for stocks is gridlock due to an administration that is debating a mid-course adjustment and aggressive money-printing by the Fed, it's a weak argument. Please remember that as late as Oct. 1, 2008 Bank of America traded at $38 per share. By early March, it was at $3. This occurred with the Fed already in easing mode for quite some time. Why had it been at $38? In large part, the SEC had eliminated short selling in the stock.

When the Government can borrow for one year at 0.27% and at 3 months for essentially nothing, something is very wrong. One cannot look at a stock with a 1% dividend and say it's a bargain. If you buy the S&P 500 for a 5-year planned period, you can expect to receive at most $15 in dividends, about as much as for a 5-year Treasury. If you agree with the current bull Dr. Kotok that this is a secular bear market in stocks, then you do not want to own stocks: not enough return.

This is the opposite of the early 1980s and much more like Japan, which coddled its banks until it finally let some fail. And re Japan, Mr. Smithers' site points out that it turned bearish on fundamental grounds on Japan at Nikkei about 12,000 about 2years ago, well before the Great Financial Crisis drove it back into recession. This was almost 20 years after the peak of the Japanese bubble and Nikkei 39,000. So anyone who thinks that the S&P 500 being about where it was a decade ago means that it is cheap or undervalued has another think coming.

The screenwriter William Goldman famously said about Hollywood that no one knows anything. This is now true about Wall Street, given the politicization of markets. What you think you know may be what you do not know (think of the geniuses at LTCM circa summer 1998). Since everybody who knows anything knows the above, buying surges and selling surges of any security can occur based on fear that the unknown trend is changing.

Direct ownership of a diversified portfolio of high-quality securities for those who can afford such a thing thus makes sense. Those with fewer financial assets may be best off simply keeping money in the bank or a bank-like equivalent and focus on job, friend and family.

Copyright (C) Long Lake LLC 2010

Friday, January 22, 2010

The Debt Monster May Threaten Governments More Than Corporations (free subscription) writes:

Investors (Ed.: have) more trust in companies than governments

CDS prices suggest that investors have less trust in government bonds than in corporate bonds, writes Der Standard. The iTraxx Europe index for 125 European companies is at 77.80bp, that is it costs $77800 to insure $10m in corporate bonds. By contrast, the respective European SovX Index for government bonds reached 83.90bp. This suggests that investors consider it more likely that euro area goverments go bust than European companies. The Greek CDS is currently at 350bp, Austria’s at 85.26bp.

Another writeup from Eurointelligence today explains:

FT Deutschland has an article according to which a growing number of market observers believe that the Greek government is very likely to run into financial difficulties. It quotes analysts as saying that the Greek government needs to raise new capital in the next three or four weeks merely to repay old debts. If this is not happening, the nervousness in financial markets is likely to increase proportionately. If the government announces a capital increases, but failed to raise the necessary funds, the situation would deteriorate dramatically, leading to default, or bailout.
(Note: this story only reflects views among analysts, but these views, correct or not, now seem to dominate market sentiment.)

In brief, the above is the reason why despite numerous misgivings, I have money in the stock market. Many companies are self-financing due to positive cash flow, and few governments are. And if one thinks of it, most of what modern Western governments do is transfer income from one pocket to another to allow the beneficiary of the transfer to purchase services from the private sector or in some cases from non-profits such as private universities. If government (at all levels) limited itself to providing for the national defense, public schools, a system of courts, public roads and other basic matters, it too could easily be self-financing through various user fees and tariffs. This was in fact the situation on the Federal level in the U. S. throughout significant parts of the 19th century. As late as about 1916, the total Federal debt was so small that John D. Rockefeller is said to have been able to have paid it off in full.

The major beneficiary of all the debt in society is the financial sector, that makes fees all over the place selling the debt and then endlessly creating line extensions either selling the debt or selling products based on the debt or the ability of the government to print money and therefore take on more and more debt.

Sometimes enough is simply enough, and we are at the "too much" point re debt. From a big picture systemic standpoint, the inmates are running the asylum.

Trying to stay sane in an insane world is a difficult challenge.

Copyright (C) Long Lake LLC 2010

Thursday, January 21, 2010

On Massachusetts Senate Race, New York Times Leaves Earth, Aims for DS10

Out of the many commentaries I have seen on the Massachusetts Senate upset and the national political scene, the one that is the most newsworthy is the Times' editorial today, The Massachusetts Election. Read it and wonder:

There are many theories about the import of Scott Brown’s upset victory in the race for Edward Kennedy’s former Senate seat. To our minds, it is not remotely a verdict on Mr. Obama’s presidency, nor does it amount to a national referendum on health care reform . . .

You can stop reading there. Not remotely??? Not just a bit? While the Times bans cigarettes, maybe they are smoking more potent stuff there. Does the Times not even know that Brown signed his name "Brown 41", meaning that he would be the 41st Republican vote in the Senate?

If you read on, you will find irrelevancies and inaccurate statements such as:

Mr. Obama has done many important things on the environment, and in foreign affairs, and in preventing the nation’s banking system from collapsing in the face of a financial crisis he inherited. . .

Mr. Obama was right to press for health care reform. But he spent too much time talking to reluctant Democrats and Republicans who never had the slightest intention of supporting him.

Scott Brown did not run against Martha Obama Coakley on the environment. He did run against Barack Obama on waterboarding (Brown is for) and treating the Pantybomber as a terrorist rather than a criminal suspect, thus nationalizing that aspect of foreign affairs/national security. Brown also argued against the president's recently-proposed bank tax. As an aside, the bulk of the bank bailouts occurred before the inauguration, so the Times has it wrong when it credits this president for saving the system.

Re the second paragraph, given that there are 58 Democrats in the Senate plus one socialist and one independent, how can the Times argue that he spent too much time talking with reluctant Democrats? The truth is that major social legislation traditionally passes with bipartisan support and generally with heavy majorities.

In other words, the Times is aiming for an outpost beyond Deep Space Nine.

A much better comparison than the Times' head-in-sand delusional conclusion is that Ronald Reagan just beat Walter Mondale again in Massachusetts. Reagan won Massachusetts by 3% in 1984; Brown by 5% Tuesday. It is indeed winter in America for the Democrats after this loss. The idiocy of the Times in ignoring numerous voter interviews and polls that the swing voters wanted to send a message to Washington bodes poorly both for its future and for the ability of the Democrats to quickly and decisively get real.

Unfortunately, an unreformed Republican party that is licking its chops at big gains due primarily to the incompetence of the Democrats is bad for the country.

Will the country take up tea drinking and get some real reform such as shrinking the debt culture? We have driven cigarette smoking down. We can do the same with credit expansion. Not that the Times would understand that the tea partiers are descendents of the Perot movement. For them it's all liberalism all the time, infused with a New York/Big Finance tilt.

With the death of the Kennedy seat, one of the last liberal bastions to fall is likely to be the New York Times. As a Yankee TV announcer would say, going, going, gone. Perhaps sooner rather than later. Not to the point of losing the name, but the Times is moving quickly toward irrelevancy. Deep Space Nine is long off the air. Its moving toward Deep Space 10, which will not be a surprise hit, from the looks of this editorial.

Copyright (C) Long Lake LLC 2010

Bad Things Happening; Better Things Coming?

Barack Obama has been punched in the face several times lately. His poll numbers are following the labor force participation rate downward, as everyone living in the real world knows that the real national economy is poor, whether or not inventory restocking and other pro-cyclical forces mean that the depression aka Great Recession is technically over. He has overpromised and underdelivered. If he were a stock, he might be a contrarian "buy", at least for a bounce. The truth is that his poll numbers are tracking the economy and are their path is roughly superimposable over the track that Ronald Reagan's poll numbers took during his first year, when the economy also truly stank. It's the economy, stupid and all that.

The good news is that the president is signaling flexibility given the national mood. Even better is the following, as reported by in Obama to Propose New Rules on Banks’ Size, Trading:

President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said.

Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading, the official said yesterday on the condition of anonymity.

It would be great news if (it would appear) that Mr. Volcker has growing influence within the White House.

Up Volcker means down Summers/Geithner.

We shall see whether the Bushbama Continuity on favoring Big Finance over the people is, at least at the margins, evolving away from the extreme pro-Big Finance stand that the Establishment imposed on the country and that has strangled the real economy for about the past 2 years.

A return to more centrist politics and toward sensible regulation of the financial parasites--which will free them to get back to where they once belonged (facilitators of the real economy rather than pretenders)--will have short-term benefits to the national mood and the economy.

In that context, yesterday's sell-off in stocks means little. The downside action in precious metals relates to a more fundamental problem, which is the possible cooling off of the wild economic action in China, and thus a possible correction in commodities such as platinum and copper. This correction would, however, be good for many companies that EBR has commented favorably on. Two-way markets can be fun in normal or quasi-normal times.

The pubic is depressed over the economy and is spending minimally per numerous polls; there are numerous fundamental negatives in the economy. Ten years ago the public was ebullient; there were no obvious negatives in the economy. No one can time it, and I think we remain in a secular bear market for stocks and the economy, but if this secular bear (if that is indeed what it is) is similar to the inflationary bear of the 1970s, then we must remember that there were huge investment opportunities for those who went with the trend for periods of time but did not buy and hold. The classic time to truly beware of owning risky assets is when times are too good for too long and the Fed is making money tighter. Times are dangerous now and there is lots of downside risk all over the place. But one precondition of good investment returns is present: the fundamentals appear to stink. What is lacking is low prices. Whether these low prices occur in nominal terms or in real terms (adjusted for price inflation that may or may not be coming soon) is one of the key questions of the day.

This remains one of the few times in my 30 years in the investment field when my best idea is diversification across many asset classes. Quality is the watchword.

Copyright (C) Long Lake LLC 2010

Nouriel Roubini Should Stick to Economics, not Market Forecasting

In Roubini Says Global Stocks May Correct as Growth Disappoints, continues to publicize the market views of a top-tier economist who has built a large consulting business. The article begins:

A global rally in stocks may end in the second half of the year amid a muted recovery in the world’s largest economies and as deflationary pressures limit gains in corporate earnings, Nouriel Roubini said.

Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may also cause an “unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth,” Roubini, the Harvard- schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today.

At this point, the Roubini outlook as expressed in the article are quite mainstream.

Because they are mainstream, it is unclear whether even if events occur as he predicts whether markets are discounting this and will look forward even as a growth slowdown occurs.

What is most important in looking at markets is spying relative over- and under-valuation. A classic example involves March 2000. The NASDAQ peaked around 5100, having doubled in 1999 and gone up a bit farther in the new year. Fundamental measures of market overvaluation were at record levels, surpassing those of 1929.

Yet there were a great many industry groups that bottomed exactly when the averages popped. These groups were diverse and included homebuilders, HMOs, basic industry, and other out of favor groups. By mid-2002, if memory serves me well, the Russell 2000 was hitting record levels even as the averages were floundering. By the time the market his its double bottom in early 2003, many stocks had moved a great deal.

Toll Brothers, for example, bottomed in March 2000 around 4 and hit 15 little over 2 years later, ending 2003 at 20 (about where it trades today).

What had really happened was that the average stock, rather than the large cap stocks and the tech sector, topped out during the Asian contagion that began in 1997 and rolled on through 1998; it is those stocks that kept bleeding support and got grossly undervalued relative to the popular stuff.

It appears to me that a milder version of that has now occurred. One can look through Value Line and find company after company that is way off its lows, has a poor long-term chart, relatively weak financial strength, no dividend payment and none on the way, and a fundamentally rich valuation. One can also find strong companies with fundamental reasonable valuation, rising and record dividends, rising and record sales and earnings, and no reason not to have a reasonable expectation at least mid-to-high single digit returns to shareholders over a 5-10 year history. Relative to the market, they have underperformed the past year, but on a 2-year or 5-year basis, these companies have outperformed the stuff that I believe has moved too much.

These companies have been highlighted many times here. The list does not change much. Some, such as National Presto, have moved a great deal and are no longer cheap. Others, such as Teva, have not moved much. Everest Re, trading around book value, was up yesterday despite the general sell-off.

There are a series of poor investment choices available due to the general inflation of financial assets that Bill Gross wrote about in his December Pimco letter. This will cycle, but living in the present, we know that cash is being trashed but all bonds are increasingly risky given the explosion of debt combined with stagnant incomes.

The warnings of seers such as Nouriel Roubini are part of the chatter, no matter how right they are. Where they are most valuable is when they identify an evolving bubble or a seriously undervalued situation. Right now, the major imbalances - governmental deficits and money-printing are well known (don't sell gold). Unsexy stocks such as Chubb, Everest Re selling at single-digit P/E's and yielding over 2%; discount retailers with low double-digit P/E's and huge free cash flows; Teva and other special situations; and others provide inflation protection yet can do well in a no-growth economy. Over time these financially strong companies that have proven themselves winners over many years tend to continue to be winners.

Nothing in Nouriel Roubini's outlook have any special relevance to my willingness to hold all the above as part of a diversified portfolio. Until he develops more market experience, he would be well advised to stick to getting the economics correct and letting his clients adjust their market expectations accordingly.

Copyright (C) Long Lake LLC 2010

Wednesday, January 20, 2010

From Hyannis Port: “Ted Kennedy never voted to help small business.’’

In Rebellious Air Sweeps Even Kennedy Turf, the Boston Globe reports today on how the election played out on the home turf of the Kennedys, Hyannis Port. It is quite a read, representing local reporting at its best. (If there were more of this sort of reporting, and local newspapers would not be in quite the same trouble as they are.) Here are some excerpts:

In this quiet seaside village where his family was rooted, Senator Edward M. Kennedy was a familiar figure, known by many residents as a friend and neighbor. But yesterday, Ted Kennedy’s hometown did not look or sound like a place deeply attached to the senator’s liberal legacy, with blue-and-red Scott Brown signs propped in shop windows and driveways, and many voters voicing an appetite for change. . .

Five months after the summer day when hundreds lined the streets to pay tribute to Kennedy, and a bagpiper played at foot of the Sagamore Bridge to mark his final journey off the Cape, the election day mood in Hyannis was anything but sentimental. Main Street business owners plastered Brown signs in their windows, passing pickup trucks boasting oversize Brown stickers, and many voters cited opposition to the federal health care plan - which Kennedy spent decades helping to build - as the key to their support for Brown. . .

In downtown Hyannis, where he had managed to find room for two Brown signs on his compact storefront, La Petite France Cafe owner Ian Parent railed against the notion that the Kennedy legacy should have any hold on the Senate seat.

“It’s the people’s seat, it’s not Ted Kennedy’s seat, and people have lost sight of that,’’ he said, standing by a rack stacked with loaves of fresh-baked bread. “Ted Kennedy never voted to help small business.’’

Most of the response to his signs had been positive, he said, but yesterday morning a customer called and told him she would never come into the cafe again. She hung up on him before he could respond, said Parent.
Two doors down from the cafe, another Brown sign hung in the window of Jack’s Drum Shop. Manager Stewart Johnston said Brown’s pledge to block the federal health care plan was most important to him.

Sandwiched between the two Brown supporters, scrimshaw artist and Black Whale Gallery owner Nancy Lyon said she was laying low, while quietly hoping for a Coakley win.

Just imagine. In the home turf of the Kennedys, a loyal Democratic voter "was laying low".

After too much power for too long and too many problems in Iraq, the Democratic tide in the 2006 elections was no surprise. After the financial meltdown in summer/fall 2008, the additional Democratic tide was also no surprise. But America can surprise. The foundering, floundering healthcare effort, which the president promised would be done by August, energized a state that had already provided for its uninsured. As the Boston Globe reports in another article today, Voter anger caught fire in final days, the Brown campaign benefitted from $12 M raised over the Internet and a growing amount of out-of-staters coming to Massachusetts to assist the effort.

Scott Brown appears to be no radical right member, but he did support waterboarding. As the title of this post suggests, his victory is a sign that one bulwark of our society, small business, feels that it has largely been left out of the Democratic agenda and wants in. That inclusiveness will likely be good for the economy and good for the country.

The technical breakout of the stock market that was commented on here around yearend from the giant dome that was being traced from the March rally now has another psychological support. Investors should not get carried away, however. The balance of Federal power has not changed much, but for now, the sense is that even in Hyannis Port, many people want balanced change.

Copyright (C) Long Lake LLC 2010

Tuesday, January 19, 2010

Helluva Job, Brownie

The checking and balancing of American electoral politics has occurred in a manner too fanciful for Hollywood. A triathlete, military-trained, former model turned attorney has, only 14 months after Barack Obama's sweeping victory, become the first Republican elected to the Kennedy seat in Massachusetts since 1946.

Small business sentiment will likely improve with the knowledge that at least if the Republican party is unified, then one-party rule in the Senate has ended. The market had a bit of a celebration today and may well do so tomorrow. We should consider the possibility that the 2010 election could be similar to the 1994 election that brought gridlock to Washington and that catalyzed the stock bubble and economic boom of the second half of the 1990s.

The big picture is, however, muddled and schizophrenic. Fannie and Freddie are losing hundreds of billions of dollars, and those losses are income of a sort for the public or corporate America. How are Fannie and Freddie losing this money? By Fed money-printing to buy mortgages.

Large, international companies may well represent good "value" in a generally overvalued market. Domestic companies are chancier. I continue to like dollar stores. (Reluctantly)

The arguments for gold remain unchanged. Gold and other precious metals are in bull markets that are not bubbles by conventional analyses. For gold ETF buyers, the Canadian ETF "GTU" has had enough underperformance lately vs. "GLD" to be, in my humble opinion, a "buy".

In any case, Mr. Brown has relatively single-handed run on opposition to the Obama healthcare "reform" effort. The political and investment worlds have changed. In that one-party rule has been diminished, this represents a return toward normalcy and therefore will be taken well by the investment community.

Copyright (C) Long Lake LLC 2010

Bank of England Mistaken on Short Term Interest Rates

The wizards of money are already between a rock and a hard place in Britain, and that squeezed feeling may well be hitting Ben Bernanke soon as well. reports in U.K. Inflation Jump Won’t Speed Rate Increase, Scots Funds Say that:

British consumer prices climbed 2.9 percent in December from a year earlier, 1 percentage point more than in November, as oil prices advanced and after a cut to retail-sales taxes a year before, the Office for National Statistics said today.

The article also reports that:

Standard Life Investments still predicts the Bank of England will wait until toward the end of the year before increasing interest rates . . .

“This is not the start of an upward trend that’s going to bring the Bank of England to make changes to interest rates,” said Douglas Roberts, an economist at Standard Life. “I couldn’t say it wasn’t a disappointing number.” . . .

“The path we’re on is not an inexorable run of inflation but I can’t deny it’s coming in a bit higher than expected,” said Roberts. “The monetary authorities are in a very difficult position. To exit from the present policies is going to require wisdom and luck,” he said.

The Big Lie is that low borrowing rates (0.5% benchmark rate in Britain) are a benefit to the economy in an economy that is already highly leveraged. Low borrowing rates have a flip side, which is low returns to savers. This is a zero-sum situation. What is really going on is that borrowers such as banks are being systematically aided on the backs of savers. But it is saving that is virtuous, as it means being more productive than one needs. It is saving that it the essence of capitalism. The war on savers that has gone on most of the past decade is a disastrous war on the most productive, frugal members of society. The borrower gets to use the saver's capital and if he/she does not pay it back, well, debtor's prisons have been abolished. Default is not fun, but the saver lost the use of his/her money; at least the borrower had the use of it.

As lenders, the banks make a nice spread, and if they don't want to lend, they can book current profits by simply buying higher-yielding Treasuries, financing these purchases with cheap short-term money. Borrow short, lend long. Hmmm . . . How innovative is that? NOT . . .

Perhaps the central banks of Britain and the U. S. are praying for an economic boom.

Unfortunately, stagnating real wages, massive shrinkage of the work force at the end of 2009, technical near-insolvencies in 3 of our largest states, and growth in large part due to inventory changes provide no evidence that a true sustained boom will occur in the U. S. The Economic Cycle Research Institute, which called for the end of the recession to occur in the third quarter of 2009, is already looking forward to a relatively short cyclical upturn and a return to the cyclicality that was common in, say, the 1920s and 1950s.

The financial markets and economic boom of the late 1990s was said to be the first in U. S. history in which the average financial strength of corporate America actually declined. In other words, the IPO boom aside, corporate America was leveraging up along with households, while the Federal government was running modest cash surpluses (but accruing deficits due to social programs). This worsening financial status continued through the quasi-boom of the mid-aughties, but came to a head in 2008 with the great, global financial crisis.

The solution of the powers-that-be was to leverage further, and the U. S. now is widely reported to have a record amount of debt relative to GDP when all governmental levels are consolidated with households and companies. This increased leverage is likely to be unstable, as inflation of even 2.5% and borrowing costs near zero will lead to inflationary growth and, at some point, tightening and yet more pain of defaults.

This is why the bailouts were misguided. The corporate failures or near-failures were a standard result of over-leverage. Now that some of them are essentially on the sovereign's balance sheet, the can has been kicked down the road, but the stakes are greater. Corporations have no nerve endings. Restructurings as occur in bankruptcies are not truly painful except psychologically.

Governmental bankruptcies are different.

Governments and central banks need to stop suppressing short-term interest rates and deal with the consequences. The longer they wait, the worse the problem.

Copyright (C) Long Lake LLC 2010

Sunday, January 17, 2010

More Evidence that the Global Warming Movement Is Intellectually Dishonest and Is Part of the Elite's Push for Increased Power

The (London) Times Online hurls a hard one at cap and trade advocates in World misled over Himalayan glacier meltdown:. I am going to begin with the most important news, which was buried deep inside the article:

Some scientists have questioned how the IPCC could have allowed such a mistake into print. Perhaps the most likely reason was lack of expertise. Lal himself admits he knows little about glaciers. "I am not an expert on glaciers.and I have not visited the region so I have to rely on credible published research. The comments in the WWF (Note: "WWF" is not defined in the article, and may be the World Wildlife Fund) report were made by a respected Indian scientist and it was reasonable to assume he knew what he was talking about," he said.

Rajendra Pachauri, the IPCC chairman, has previously dismissed criticism of the Himalayas claim as "voodoo science".

What is this all about? Here are the article's intro and excerpts. Please read it all by clicking on the above hyperlink.

A WARNING that climate change will melt most of the Himalayan glaciers by 2035 is likely to be retracted after a series of scientific blunders by the United Nations body that issued it.

Two years ago the Intergovernmental Panel on Climate Change (IPCC) issued a benchmark report that was claimed to incorporate the latest and most detailed research into the impact of global warming. A central claim was the world's glaciers were melting so fast that those in the Himalayas could vanish by 2035.

In the past few days the scientists behind the warning have admitted that it was based on a news story in the New Scientist, a popular science journal, published eight years before the IPCC's 2007 report.

It has also emerged that the New Scientist report was itself based on a short telephone interview with Syed Hasnain, a little-known Indian scientist then based at Jawaharlal Nehru University in Delhi. . .

When finally published, the IPCC report did give its source as the WWF study but went further, suggesting the likelihood of the glaciers melting was "very high". The IPCC defines this as having a probability of greater than 90%.

The report read: "Glaciers in the Himalaya are receding faster than in any other part of the world and, if the present rate continues, the likelihood of them disappearing by the year 2035 and perhaps sooner is very high if the Earth keeps warming at the current rate."

However, glaciologists find such figures inherently ludicrous, pointing out that most Himalayan glaciers are hundreds of feet thick and could not melt fast enough to vanish by 2035 unless there was a huge global temperature rise. The maximum rate of decline in thickness seen in glaciers at the moment is 2-3 feet a year and most are far lower.

Professor Julian Dowdeswell, director of the Scott Polar Research Institute at Cambridge University, said: "Even a small glacier such as the Dokriani glacier is up to 120 metres [394ft] thick. A big one would be several hundred metres thick and tens of kilometres long. The average is 300 metres thick so to melt one even at 5 metres a year would take 60 years. That is a lot faster than anything we are seeing now so the idea of losing it all by 2035 is unrealistically high.”

Some scientists have questioned how the IPCC could have allowed such a mistake into print. Perhaps the most likely reason was lack of expertise. Lal himself admits he knows little about glaciers. "I am not an expert on glaciers.and I have not visited the region so I have to rely on credible published research. The comments in the WWF report were made by a respected Indian scientist and it was reasonable to assume he knew what he was talking about," he said.

If you believe that comment, you may want to put in a bid for a bridge between Brooklyn and Manhattan.

Voodoo science?


Etymologists will be aware that the English word "thug" has its roots in India (Wikipedia)

The English word "thug" comes from the Hindi word "thug", meaning "conman".

Coming on top of the revelations out of East Anglia and older scientific fraud to benefit the global warming moement such as the "hockey stick" lie to describe the last 1000 years of temperatures or Dr. Hansen's fudged NASA data, it is increasingly looking as though the high priests of global warming/climate change are intellectual thugs.

There are enough thoroughly legitimate, non-controversial aspects of natural resource utilization to point to without committing fraud. The obvious question is:
Why are these people doing this?

In view of the scam of financial system bailouts to benefit those who caused the meltdown and the current solution of the elites to benefit Big Finance with cap and trade rather than simply impose a straightforward tax on carbon use, the conclusion beckons that the answer is: to benefit Big Finance. Nothing else explains everything.

In this winter of discontent, the Coakley collapse in Massachusetts is of a piece with the recurrent revelations about the global warming activists, and of those who claim that healthcare "reform" is needed now even though few "benefits" will accrue for 3-4 years. The people "get it". They see that Barack Obama was a typical lying politician who was no more interesting in shaking up the status quo or governmental transparency than George W. Bush. At this point the public trusts its eyes and ears and little else. It sees a harsh winter and a series of gimmicks on what really matters to people-- the economy-- and so it increasingly perceives that the entire program of the liberal wing of the Establishment is designed for the powerful, not the people.

While from the standpoint of the 2010 midterm elections, which candidate prevails in Tuesday's special election in Massachusetts is not determinative, a victory by the insurgent Republican might just have a mini-effect on the markets similar to that which occurred when the Republicans scored big in 1994. Given that CNN is reporting that the White House is preparing the ground for a Coakley loss, one might want to take a flyer on a long position on SPY calls on Tuesday.

Interesting times, for sure.

Copyright (C) Long Lake LLC 2010

Saturday, January 16, 2010

The Culture of Corruption Is Causing the Coakley Collapse

You know the Establishment is out of ideas when the anointed successor to Edward Moore Kennedy has to bring in Bill Clinton to try to pull out a win in the only state that didn't go for Richard Nixon in 1972 (but that did go for Reagan in 1984) and he actually says "You have to decide whether you want to be a tomorrow country or a yesterday country". Click HERE for the WaPo article.

Actually, yesterday all my troubles seemed so far away. But that matters not. All that is happening in 3 days is a vote for one of 100 Senators, not a vote for a silly term such as a tomorrow or yesterday country, whatever that means (time's arrow moves in one direction even for reactionaries).

This blog is a good-government advocate. Good ideas can come from anywhere, but they will be useless if they are misused in the modern way that funnels the wealth of the country to the insiders. Partisan politics in the United States has devolved into the Depublicans sharing the riches with the Remocrats, periodically alternating into the Republicrats splitting the riches amongst themselves, with some fringy people such as Bernard Sanders and Ron Paul and somewhat less fringy people such as Richard Shelby and Russ Feingold being ignored by the MSM during disgraces such as the enactment of TARP. The subtext of the astonishing surge by an obscure Republican state senator to what appears to be parity with Martha Coakley is found in the WaPo article:

"Right now, it's broken here in Beacon Hill," Brown said Friday at a campaign event beside former New York mayor Rudolph W. Giuliani, summoned to commend Brown's anti-terrorism credentials and to slam Coakley. "There's one-party rule that's contributing to three speakers being indicted, three senators resigned in disgrace. One's in jail right now."

"In Washington, there's no debate," Brown continued. "Everything's being done in the back rooms. The health-care bill, we've lost faith, and we need to send it back to start over."

Three consecutive speakers indicted; three state senators resigned.

In other words, it's the corruption, stupid. The arrogance of power and all that.

When I was advised a decade ago by a Washington insider that bipartisan corruption in the Federal Government had reached highs not seen by all three generations of his family in their lifetimes, I knew something was rotten. Eventually rotting things stink, and the electorate smells it. Given all the gifts from taxpayers to international Big Finance over the past 15 or so months, which continues under the ruse of an anti-deflationary zero interest-rate policy and other Fed and Federal programs, it is obvious that the looting continues. Even Massachusett((e)s voters may have decided that between two bad choices, gridlock is a lesser evil than one-party rule.

If Martha Coakley, who was elected Attorney General in 2006 with (merely) 73% of the vote, joins Jon Corzine and Creigh Deeds on the list of Democratic unpersons, the main message may well be that the public is mad as hell at the p0wers that be that have given us bread, circuses and misery while enriching and entrenching themselves in over-the-top style. They know well that an unreformed Republican Party is not the answer, but they are hoping, perhaps against hope, that the country can return to the days of FDR when the Government appeared to actually work for the people rather than the powerful (not that it was as simple as that narrative), or of Eisenhower when a vicuna overcoat and oriental rug were given to Ike's powerful Chief of Staff Sherman Adams--who was fired in less than one day by Eisenhower when he learned of the apparent bribe.

Even loyal Democrats and other Obama voters are disheartened by the realization that candidate Obama was another liar, just like so many of his predecessors, but one who they actually believed was different. Now it's a fool me once, shame on you, fool me twice, shame on me story. This realization has led to the following observation in Massachusetts, also from the WaPo article:

There was no shortage of dismay on the ballroom floor. "I'm from the Cape. There's Scott Brown signs everywhere," said Pam Alden of Sagamore. "What I don't know is if there's enough time. There's $3 million being poured in. Are we already tired? Will we listen?"

Scott Brown signs all over the Cape where John Kerry began to lose the campaign while windsurfing so skillfully? Heavens forfend!

If the upset actually happens (and Brown's camp is trying to curb its enthusiasm), Hollywood couldn't have scripted it better.

Mr. Brown goes to Washington?

Win or lose, heckuva job, Brownie.

Even if you're no James Stewart, if you are elected it will be to channel Jefferson Smith.

Copyright (C) Long Lake LLC 2010

SocGen: Out of India?

Societe Generale (SocGen) is in the news with an unflattering title that actually understates matters. is reporting that Societe Generale Ordered to Stop Derivatives Trading in India. Here is the lead:

Societe Generale SA’s Indian unit was ordered to stop selling or trading offshore derivatives by the nation’s capital markets regulator, which said the bank failed to provide fair and complete information about its trades. . .

The Paris-based company is the second overseas bank to be suspended from trading derivatives by the regulator in just over a month. Barclays Plc suspended sales of its exchange- traded notes linked to Indian stocks following a Dec. 9 order. Both banks gave incorrect details on the sale of so-called participatory notes, the regulator said.

“Societe Generale completely failed in obtaining correct and complete information from the counterparties it deals with,” the regulator’s statement said. “Societe Generale is required to show cause as to why appropriate proceedings including cancellation of its certificate of registration as a foreign institutional investor should not be initiated.”

Forget "Out of Africa". To be kicked out of India is a truly big deal.

Here is a link to the statement of the Indian regulator, SEBI, and one excerpt from page 6, point 13 and then point 17. It appears that SocGen (allegedly) lied to SEBI about the entity Hythe being the ultimate purchaser of the notes rather than what it often acted as, which was merely as a broker.

Thus, for these PNs (Participatory Notes), reporting Hythe as the end beneficiary is not true. Further, Regulation 15A of the FII (Foreign Institutional Investor) Regulations lays emphasis on the fact that an FII or sub account can issue ODIs (Offshore Derivative Instruments)/PNs to regulated entities only after compliance with ‘know your client’ norms. As described above, SG has failed to adhere to this norm as it has little or no relevant knowledge of the ultimate beneficiary of the ODIs issued by it. . .

From the above response, it is evident that SG has failed to satisfy the basic tenet of “know your client” compliance when it issued ODIs.

Taking a walk down Memory Lane, we come to the following article from last March, SocGen defends payments from AIG, which begins:

France's third biggest (bank) by market value said on Monday it had acted within its rights to call on AIG for cash. "Societe Generale acted in this matter in full conformity with our counterparty agreements with AIG," it said in a statement.

"Societe Generale issued collateral calls to AIG in accordance with the terms of those agreements as a result of specified credit events at AIG," it said.

"The collateral posted by AIG, and the amounts paid, were fully consistent with the terms of those agreements."

Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche Bank AG received $11.8 billion and the UK's Barclays Plc was paid $8.5 billion.

This is an old issue, not a new regulation that has blindsided Big Finance. From IFRAsia last month in SEBI cracks down on Barclays over derivative trades:

This is not the first time that Sebi has issued a derivatives ban against an FII, citing disclosure issues. In May 2005 Sebi suspended UBS for a year from issuing participatory notes following a stock market crash in May 2004. As part of the investigations into the crash, Sebi required UBS to disclose end-beneficiaries on certain transactions. . .

Reporting requirements governing the distribution of Indian equity-linked products by FIIs are strict and extensive. The regulator does not want Indian investors or institutions parking money offshore and reinvesting in India via FIIs and thus bypassing reporting regulations.

And as a coda, for what it may or may not be worth, UBS was involved as a counterparty in the allegedly misrepresented Barclays/SEBI action.

Now SocGen and Barclays which together received $20.4 billion from the people of the United States, are alleged to have committed fraud in the Raj. As the old TV show went, who(m) do you trust? SEBI or Barclays?

Perhaps out there in some parts of BRIC-land, there are some regulatory authorities who just won't stand being played for fools. We shall see.

Copyright (C) Long Lake LLC 2010