Wednesday, April 28, 2010

Debt Deflation in Europe Bullish for Gold, Less so for Treasuries

Spain has been in the doldrums economically since their property bubble burst a few years ago, followed by the Great Global Financial Crisis. Deflation has taken hold there, and the downgrade of the creditworthiness of the Spanish government will raise external borrowing costs and therefore help create more deflation. Meanwhile, the need for certain over-leveraged economies that in some cases have citizens who hate to pay taxes to increase taxes or cut benefits while in general consuming less will subtract from world growth. Remember that Western Europe is aging and thus intrinsically slow-growing.

The U. S. is not really a safe haven. It just is quiescent. And, one never knows about a true bombshell coming out of somewhere (such as SIGTARP's investigations) or nowhere. This blog last year darkly summoned up the ghost of Watergate, a low-level burglary. It left the newspapers for quite some time and then-- poof!-- revelations started appearing and a President was gone, and a stock market low was made. The current probes are not at the Presidential level, but an action against Mr. Geithner would be quite disconcerting.

Thinking truly safe haven, one has to think gold mining stocks, even though their difficulties in producing enough gold are helping to power the bullion bull. Barrick was ahead of the curve years ago in hedging its output. Though late to the party, it is now unhedged. Today it reported fine earnings and great control of costs. It won't take much for it to have a truly strong chart; right now it is not as strong as gold bullion's chart. For those who think through to a true U. S. train wreck and recall the 1930s, gold mining shares were not affected though bullion was confiscated. So the gold in the ground story may start working again.

Gold is playing its contrarian role again, as it did through most of the 2007-8 crisis. If we come to a climactic liquidation phase of assets as occurred in the fall of 2008, all financial assets including gold will be involved, and gold stocks will almost certainly fare worse than the metal, but the markets are not acting that way at all.

The gold bull market looks to be stronger than the aging Treasury bull market.

Copyright (C) Long Lake LLC 2010

Tuesday, April 27, 2010

Domestic Ramifications of the Greek Tragedy

Gold but not silver up. Treasuries and the dollar up. But there will be no speculative attacks against gold, though there may be a squeeze on unallocated gold a la Hunt Bros circa 3 decades ago. Treasuries, though, are vulnerable, as the U. S. has moved to limit interest expense by going very, very short term on its debt issuance. It would only be fitting for the crisis that was made in America to end here.

Gold has moved above the technical barrier of $1160/ounce. It far outperformed the gold miners (GDX). This is more evidence of a move to safety.

This period now resembles the rolling crises of 1997-8. Ultimately the U. S. benefited from importing the Asian deflation (or so it seemed in 1999), but the average stock peaked then even though the averages had much farther to go.

This same dynamic may already have occurred. DuPont had a strong earnings report but succumbed to Greece et al. Steady Eddies such as WMT and MCD did fine.

The next days and weeks should be quite interesting and dangerous. Leveraged late-to-the-party stock bulls might be at risk.

Copyright (C) Long Lake LLC 2010

Monday, April 26, 2010

Evans-Pritchard Opines

The columnist Ambrose Evans-Pritchard banged the gong often last year about dangers to Europe from the periphery of the European Monetary Union. Rising asset prices and staving off of a reply of the rapid downward spiral seen in the early 1930's led him to look like an alarmist. The rapid downward spiral seen in Greece this year, with worsening even today, makes him look better. His latest piece is titled Maastricht madhouse fuels EMU-wide contagion from Greece

His points are several and varied. The article is bite-sized and worth a read in its entirety and thus will not be excerpted here.

Gold is well into record price territory in Euro and British pound terms. Reflexively the USD relative strength has prevented that here. And if America were pursuing sound money policies, that currency strength would be well-deserved. Yet such is not the case. Wheels are turning.

Copyright (C) Long Lake LLC 2010

Bloomberg Having no Trouble Finding Bulls. What a Difference a Year Makes!

In a piece of financial pornography masquerading as news rather than opinion, "reports" U.S. Stocks Cheapest Since 1990 on Analyst Estimates. It begins:

Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.

It ends:

“The earnings story is very supportive of the market even after the rally over the last year,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion in client assets from San Francisco. “The recovery is real, it’s V-shaped and it’s got legs.”

(But what happens when the record combined monetary/fiscal stimuli end or merely diminish?)

In between one gets amazing sections as follows:

Concerns Are Past

“We’re in a time period where the concerns we had in 2007 and 2008 have been taken care of or are past,” Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California, said in a April 20 Bloomberg Television interview. “If you’re waiting for a market pullback or individual stock pullbacks, you could be waiting a long time.”

Or you get this straw man argument:

“The stock market is incredibly inexpensive,” said Kevin Rendino, who manages $11 billion in Plainsboro, New Jersey, for BlackRock, the world’s largest asset manager. “I don’t know how the bears can argue against how well corporations are doing.”

Obviously if Mr. Rendino manages the same assets and their market price simply rises 20%, his pay will rise even though the main driver is the traditional one - - price inflation.

There is a brief nod or two to what the reader is supposed to recognize as a blind bear, with no quote nearly as bearish as the rip-snortingly bullish comments scattered throughout. A reductio ad absurdum of the bullish tone is that it implies that anyone who is decreasing allocation stocks who does not need cash is obviously misquided.

I may have missed it in the article, which is not worth many rereads, but it emphasizes rapid earning gains. The fact that accounting changes for Big Finance plus multi-trillion dollar Fed and governmental support for said banks is responsible for most of said profit change is not mentioned. That Dr. Bernanke and a number of other Fed officials are less bullish than "V" advocate Ms. Sonders may be worth considering. Also not mentioned are the repeated findings from otherwise upbeat reports such as are emanating from the Empire State Manufacturing Survey that businesses are seeing input costs rise a good deal more noticeably than are selling prices; thus profit margins are being squeezed as oil and the like rise in price.

In another piece cut from the same cloth, Bloomberg announces the obvious in Big Banks Are Back as JPMorgan, Citigroup Turn Corner on Crisis. An example of the cheerleading and general idiocy of the piece comes in the third paragraph:

“This quarter is confirmation that credit has turned a corner,” said Charles Peabody, an analyst at New York-based Portales Partners LLC who assigns “buy” ratings to Bank of America and JPMorgan, and a “hold” to Citigroup. Peabody doesn’t cover Wells Fargo. “You’ve heard every CEO say credit has turned, and there is nothing to be gained for them by being overly optimistic.”

Well, no. There is much to be gained by CEOs gaming the system. What about rising stock prices as something to be gained? What about the strategy to have tapped-out consumers draw down savings once again? Etc.

The very title is laughable. There is a survivorship bias here. The banks that are "back" are not "back". They never left. They have been the recipients of unbelievable gifts from the authorities at the expense of massive money-printing, unfairly low rates paid to savers (who have issued no stocks to be pumped up by the Street), immense governmental deficits, etc.

Instead the article ascribes the business cycle to this success and minimizes the ongoing crisis in banks that didn't receive this sort of help and in fact were penalized by FDIC assessments:

While smaller U.S. lenders keep failing, pushing the Federal Deposit Insurance Corp.’s list of “problem” banks to a 17-year high, the largest are getting a lift from economic growth that’s helping consumers and businesses stay current on loan payments.

Whoop-de-doo! They are staying current. Well, sort of. Actually the numbers defaulting have stopped growing. Defaults are still plentiful. But you already see companies such as Wells and Goldman Sachs trading well above book value despite having unknown amounts of dodgy assets on their books as Level 3 assets.

The article ends with the same rah-rah quote with which the other article ends:

“A year ago we were in the middle of a financial panic, but these banks are looking forward,” said Gary Townsend, president of Hill-Townsend Capital, a Chevy Chase, Maryland- based investment firm with $50 million of holdings in financial companies. “The improvement is becoming quite pronounced.”

The powers that be should be discussing openly how the epidemic of mortgage and other fraud in the 1980s that brought down the S&L's worsened after a healing phase in the 1990s. By 2001 the FBI was already investigating this epidemic, but its priorities changed after 9/11. It probably was much more the alt-A ("liar's loans) modality that fueled the real estate boom, which became self-sustaining after a while and then needed the explosion of subprime lending to push the boom into the bubble phase.

As small investors see theis sort of headlines, it will be time for the smart money that has been accumulating or holding stocks while the individual investor has been gobbling up bond funds to start the distribution process.

Right now all financial instruments are expensive.

I continue to believe that a winning contrarian view is a healthy skepticism about the cheerleading while being in alignment with the Fed or the tape.

Two asset classes that remain in unbroken well-defined uptrends over the intermediate term are gold (and almost silver and platinum) and Treasuries. The latter looks extended and has massive supply; but as per Japan, who knows?

Gold's chart remains impeccable, and the more the Establishment flogs stocks and how wonderful and resilient the U. S. economy is even though there was a stock "panic", the more we are farther from all the Depression-era food line pictures of late 2008 and into a go-go time.

Caveat (and holder) emptor. They are feeding the quacking ducks with thin gruel. As the business cycle moves along toward the next peak, companies and industries with real assets and real staying power that have not been the recipients of extraordinary aid may be the best. Chubb (CB) is on the verge of a technical breakout, has 20% or so upside per conservative valuators of stocks, and yields almost 3% while retiring lots of stock and reporting rising book value; other insurers and reinsurers suffered no more than collateral damage during the downturn and represent some of the little reamaining fundamentally inexpensive stock groups remaining in this market that according to Andrew Smithers' version of q trades at a near-record high valuation.

Copyright (C) Long Lake LLC 2010

Sunday, April 25, 2010

Marc Faber Accuses the Obama Administration of Anti-Semitism

In an interview with Kitco News titled Gold Run Not Over, the Swiss economist Marc Faber (whose business base is, I believe, Hong Kong) states about the Goldman Sachs case in specific and Barack Obama in general that politics rules the roost now in a very substantial way:

Faber does not think the SEC charges against Goldman Sachs will have a very significant impact on the markets since the accusations are “purely politically motivated.”

“Obama has lost the trust of the people; his approval rating is worse than Bush at this stage in the presidency. When people are dissatisfied in a democracy - you go after a minority to target – in the case of America you go after Goldman Sachs because it is the symbol of Wall Street and excessive money creation and there is also a tone of anti-Semitism there.”

He implicitly compares the president to Hugo Chavez or a corrupt ruler of old:

“Mr. Obama will do everything he can to get re-elected and that may involve some very bad decisions. He is like a roman emperor; he just gives out bread to the mob and produces games and circuses.”

Faber has made some great calls. These include being bearish before the bursting of the Japan and NASDAQ bubble peaks, and the 2007-8 collapse; being bullish on gold for quite some time, and near the bottom of the bear market in 2008-9 for a substantial stock market rally within the confines of a longer-term bear market.
He remains bearish on paper currencies. He is contemptuous of the Fed:

Faber said that "as far as the eye can see, interest rates under Bernanke will stay at zero and below." He noted that the current Vice Chairman of the Fed , "Janet Yellen, another totally, ignorant economist, removed from any reality, said herself six months ago, ‘if I could implement interest rates below zero, I would do it.’ So now you know what the policy in the US will be,” Faber said.

Finally, he points out that as in FDR's administration, ownership of gold may not get an individual anywhere:

He also said that if gold prices substantially rise one day, there could be expropriation. “The Americans could force the Europeans to do the same – once they have all the gold in the world they would re-value it at $10,000 an ounce," Faber said.

It took about four decades after FDR stole the people's gold and defaulted on the U. S. government's WW I gold bonds for gold ownership to become legal in the U. S. (Ownership of numismatic gold coins and gold-related stocks remained legal.)

There's a lot to think about in this interview.

Copyright (C) Long Lake LLC 2010

Saturday, April 24, 2010

Snow Business

Deep in Fantasyland: White House touts GM loan repayment:

. . . the White House is trumpeting the news. Here's a blog post by chief White House economic adviser Larry Summers:

What a difference a year makes. Just about a year ago, the American auto industry was on the brink of collapse. Today, General Motors announced that it has repaid its $6.7 billion loan to the U.S. government in full five years ahead of schedule . . .

However, a more independent opinion comes from the man the Democrats appointed to oversee TARP, Neil Barofsky. A Google search of the topic brought me to Grassley Slams GM, Administration Over Loans Repaid With Bailout Money. Leaving the politics out of it, here is the meat:

But Barofsky told Fox News that while it's "somewhat good news," there's a big catch.

"I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. ... It's actually from another pool of TARP money that they've already received," he said Wednesday. "I don't think we should exaggerate it too much. Remember that the source of this money is just other TARP money."

Barofsky told the Senate Finance Committee the same thing Tuesday, and said the main way for the federal government to earn money out of GM would be through "a liquidation of its ownership interest."

A financial adviser named Nick Massey has a long, more thorough shredding of the Summers point of view in Don’t believe the hype on GM’s loan. repayment.

As with the heroic takeover of the alleged "city" of Marja, Afghanistan (really a collection of mud compounds), the shell game with Fannie/Freddie losses magically being transmuted like lead into gold of economic recovery, and the almost uncountable number of false statements made attendant to health care "reform", so with GM. As Hitler sings in "The Producers", with this administration (and a number of predecessors):

All you need to know is,
Everything is show biz

But to paraphrase an even greater American than Melvin Kaminsky (AKA Mel Brooks), you can't snow all of the people all of the time.

After the disgraceful misdeeds and non-deeds of the Bush administration and the Fed attendant to the Great Financial Crisis, the public expected that the sober-sounding Barack Obama would immediately institute sound financial policies and make the perps pay. Instead we got the Bushbama Continuity of bailouts and money-printing and over a year after inauguration, a speculative stock market fueled by zero interest rates to savers, the return of leverage and omigosh, a sop to the peasants- a civil action against the whipping boy du jour by the Sex and Exchange Commission. Said civil action coincidentally announced on an options expiration Friday at the same time the news that the SEC under Presidents Clinton and Bush had ignored the Allen Stanford matter until post-Madoff it could ignore it no longer.

Don't believe anything anymore unless you read it in an independent blog.

Copyright (C) Long Lake LLC 2010

Thursday, April 22, 2010

Beware! Greeks Are not Alone

From Eurointelligence today, THE CRISIS IS SPREADING TO PORTUGAL:

Investors are beginning to doubt whether the Greek rescue will be sufficient, according to the Financial Times, amid doubts that another package stands any political chance, given the uproar in Germany over the current package. The paper quotes Thomas Mayer of Deutsche Bank as saying: “I hope that I am wrong, but I fear that by the end of the year, they will find out that Greece needs a lot more money for 2011 and 2012, and that we will have serious problems getting another package through.”

These and similar fears were reflected on the financial markets yesterday, where Greek 10 year bond yields exceeded 8%, which makes a trigger of the EU/IMF package imminent.

In the meantime, the crisis is starting to spread to Portugal, the next weakest part of the eurozone’s house of cards. The finance minister, George Papaconstantinou, said yesterday that the formal request for aid might occur even before the end of negotiations with the EU/IMF delegation, which began yesterday, and is expect to take two weeks.

Portguese bond yields have been coming under additional pressure, with 10 year yields up to 4.77%, about 1.7pp high than Germany’s. El Pais picks on the IMF’s latest forecasts, in the Global Economic Outlook (more below) for Portugal, which show a strong downward revision for 2010 (to 0.3%). The report also mentioned that Portugal will miss the targets set out in its stability report. At the end of this year, the IMF calculated, Portugal will have a deficit-to-GDP ratio of 8.7%, while the deficit reduction will then proceed only at snail’s pace. In other words, the IMF believes that the stability programme of PM Jose Sokrates is a joke. (The Commission believes the same, and has recently asked Sokrates to make bigger efforts).

Media Conspiracies

Incidently, the Portguese business press, is full of stories this morning telling us that this contagion is not justified, citing anybody who defends up Portugal (Commerzbank for example, which says that contagion has no fundamental justification), while severely criticising those who say a negative word about their country. We observed the same phenomenon in the early stages of the Greek crisis, which was regarded initially as some foreign, or rather anglo-saxon plot against the country.

This is sounding like 1997-98, with rolling currency/debt crises. Then, the NATO countries were impregnable and imported deflation, helping to keep the boom alive. The same is happening now in the U. S., but then we were running governmental cash surpluses and had just won the Cold War and the Iraq War.

Yesterday in the markets, it appeared as if it were that era as well. The average stock per the Value Line Index peaked in 1997-8; a narrowing group of favored stocks led the averages higher into the 2000 ultimate peak. The same thing may be happening now; retailers were strong, drugs and financials weak. Gold rose along with the dollar and the long Treasury. This is getting interesting.

Meanwhile, the first stock I chose to re-enter the stock market with in spring 2009, McDonald's, traded horribly for months, basically tracking the long bond. Now, however, it looks like a star. It is by my count the only Dow Industrial at an all-time high. It beat earnings and sales expectations in reporting Q1 yesterday. It is neither cheap nor expensive, has enough skepticism to convert lots of non-holders to be stockholders, and appears to be gaining share in its market segment, which itself has been pressured the past 2 years and thus may see its own rebound.

The pattern is that MCD, DLTR, TJX and ROST are market leaders with strong but not overextended charts and rising earnings estimates. They are subject to bouts of profit-taking at any time, but every stockholder is happy and will tend either to dump high-flyers or underperformers during feared or ongoing market corrections rather than what for now are good actors reading from an upbeat script.

Bigger picture: What is different between the policies of the Greek government from that of the U. S.? And thus why does not the U. S. end up like Greece?

Thus we have the Scylla of the Japan scenario and the Charybdis of the Greek scenario. It's all about mise-en-scene.

This reality show bears watching.

Copyright (C) Long Lake LLC 2010

Wednesday, April 21, 2010

Don't Cry for Me, A-Me-Ri-Ca

Richard Rahn is questioning, Could the U.S. become Argentina?

Well, literally, not really. That name is taken.

But please read the article anyway. Please read it in conjunction with Mish's post today devoted to Wm Black's testimony to Congress, Geithner and the NY Fed Accused of Willfully Ignoring Fraud and Covering Up Lehman's Bad Assets by Senior Regulator During the S&L Crisis.

A take-home message for me in the Mish post, enhanced by reading the entire Black testimony (linked to in the post), is that the Lehman fraud began in the late 1990s. It began well before any price bubble had occurred in housing and long before subprime mortgages were consequential in number. Thus if one were aware of that problem, one would have looked more and more askance at the boom of the 2000s.

What early warning for the next bust do we have?

The obvious culprit is cascading Federal debt and other promises as the U. S. morphs more and more into a command and control economy. The Federal assumption of Fannie and Freddie liabilities and the general increase in the stated deficit is now done with absolutely no pretense that this debt will ever be paid down. The question is rollover capability.

This is not promising, as the Obama administration continues to go very short term in debt issuance.

There is no way to know what inflation and deflation outcomes there will be, however, but if one invested in Argentine debt during upturns in the economy, one still ended up with an unserious borrower. The same goes for Greece.

If Argentina can survive and issue more debt while stiffing its creditors and ruining its savers with massive devaluation(s), why would a far more powerful country such as the U. S. not ultimately take those same actions?

Copyright (C) Long Lake LLC 2010

Tuesday, April 20, 2010

SIGTARP on Housing: Exposing the "One-Off" Shell Game

The special inspector general for TARP, appointed by Democrats, is reported in "The Hill" as saying:

The administration program, "risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals, and meager results," the report said.

Last month, "The Hill" also reported that Mr. Barofsky said:

The Obama administration's $75 billion program to help homeowners risks failure by, "merely spreading out the foreclosure crisis," a top government watchdog said Tuesday.

The profits and economic recovery is happening in part simply from the government bailouts of Fannie and Freddie, abetted to an unmeasurable degree by people walking away from debts in favor of spending money elsewhere. Just as corporations claim "one-time" non-recurring expenses that nonetheless hit the assets statement, the government wants us to believe that these socialized housing expenses are one-off expenses, but the private sector's performance is the real deal. A "sustainable" recovery is the MSM's current buzzword. Believe all this one-time stuff if it you will. I don't.

Copyright (C) Long Lake LLC 2010

Prices Surging in Britain Likely Foreshadow the Same in the U. S. reports that U.K. March Inflation Accelerates More Than Forecast. Here are some details:

Consumer prices climbed 3.4 percent from a year earlier, compared with a 3 percent increase in February, the Office for National Statistics said in London today. . . On the month, prices increased 0.6 percent. . .

“We have upward pressures from commodity prices and we have yet to see full impact of past weakness of sterling filtering through,” Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official, said in a telephone interview. “We’re going to see above target inflation persisting in coming months and our base case is for the Bank of England to raise its rate in August.” . . .

Inflation accelerated due to higher prices for gas, fuel, air transport and food, the statistics office said. Transport costs rose 11.3 percent in March from a year earlier, the most since the series began in 1997. Overall inflation has exceeded the central bank’s 2 percent target for the last four months. . .

Core inflation, which excludes costs of energy, food, alcohol and tobacco, unexpectedly accelerated to 3 percent in March from 2.9 percent in February.

The U. S. has been following the same policies following the same sort of housing-centric financial bust as the U. K. The U. S. leading economic indicators were reported yesterday to be at a record, and up more than anticipated. Fed and Federal economic policies remain pro-growth. Why should we not expect the same sort of price increases here that Britain is now seeing?

To that end, gold is rebounding on schedule from its options expiration swan dive two trading days ago. Growth precious metals such as silver and platinum are up more than gold on a percentage basis. Over a full boom-bust cycle, structurally gold is signaling that it will end up stronger than those metals, which are already up much more from their 2008 lows than is gold. Short-to-intermediate term, however, gold:silver and gold:platinum ratios on a 5-10 years trading basis favor silver and gold.

In the 2009 book "Animal Spirits" by Akerlof and Shiller (Democrats), these noted economists continue to promote the benefits of price illusion in keeping the proletariat content. In other words, a wage increase of 2% with general price increases of 4% is supposed to be better accepted by the great unwashed than a wage decrease of 1% and a general price increase of 1%.

This is of course absolutely true for debtors when the principal is unadjusted for inflation. The problem of course is the floating interest rate and the general need of U. S. debtors to stay in debt; thus in effect the principal tends to float as well.

The main point though is that government policy is favoring inflation from a variety of directions. Interest rate increases are coming. The longer they are delayed, the more the precious metals have a tailwind.

Copyright (C) Long Lake LLC 2010

Monday, April 19, 2010


Look at the one and two year charts that are chosen as examples of companies that at first appear to have similar charts but that are truly different, wherein the longer-term chart shows which company is doing well and which is merely snapping back after a multi-year decline (not shown). Ignore the moving averages lines. Not so different, correct?

Consider the same charts on a 2-year basis, and you will see where money has been attracted. I suspect that this trend is your friend.
The market likes TJX, which has rising sales and earnings in this difficult economic time. The market does not like Pfizer (PFE), which is seeing declining earnings estimates, cut the dividend it pumped up a few years earlier and needed a large acquisition of Wyeth to keep earnings as high as they are (by stripping massive operating costs from the WYE operations).
PFE was down last week. TJX was up. Even the politics favors TJX. Tax and transfer payment policy in the US favors its value-conscious customer. Pfizer got in bed with Team Obama re healthcare reform, but does anyone think brand drug companies are going to be beloved by the powers that be for long?
When looking at stocks, look at charts of various duration. Reasonably valued companies with strong chart patterns make sense most of the time. After massive trending moves as occurred by late 2008/early 2009, whipsaws do occur. Most of the time, bodies in motion tend to stay in motion in the same direction.
Copyright (C) Long Lake LLC 2010

Sunday, April 18, 2010

Why Are We in Afghanistan?

Ninety-Four Percent of Kandaharis Want Peace Talks, Not War is the title of a piece that makes a strong case that Barack Obama is a deliberate war-monger in Afghanistan. Even only polling non-Taliban-controlled areas proved a few months ago that the people prefer the Taliban to the Karzai government, and they likely prefer the Karzai crowd to us. So much for the Peace Prize.

The U. S. have lived for years in a world with a lot of enemies and even more "bad guys". But until now, we haven't gone after them. The latest Iraq war at least had the virtue of overthrowing a hated leader who had engaged in an unprovoked war several years earlier on some of our allies. So far as we can tell, though, the Taliban are now an indigenous force in Afghanistan. It looks as though the "foreigners" are in Pakistan.

Sometimes you just have to suck it up. Let's rebuild Detroit rather than destroy and then rebuild Kandahar or bring "progress" to Marja--such as roads and electricity.

When you have no one in the country you are fighting for, either you have little reason to engage in a protracted war or you have to plan to take control for a long time. Mr. Obama perhaps believes that his popularity in certain parts of the world is enough to make the Afghans turn against the Taliban and toward us and our favored group. Quite a gamble. And meanwhile the deficits keep mounting.

Copyright (C) Long Lake 2010

Too Much Debt, Too Much Trading

Transitory matters such as an SEC wrist-slap civil action against a bank or a volcanic explosion in Iceland can lead to reflection on larger matters. The Goldman Sachs complaint by the SEC involves a credit default swap (CDS) on mortgage-related products. As Paul Volcker has opined, this sort of "innovation" or "technology" may be useless.

I am thinking that we would all be better off with the financial products equivalent of the FDA. Let a product be demonstrated to be both safe and effective before being marketed interstate or internationally. The simplest solution is to ban CDS and let insurance companies prepare such a product as an insurance product per se, with identical regulation and reserve requirements as any other insurance product.

Other, older "innovations" are harmful. Most oil should be marketed under long-term fixed-price contracts, though shipping costs would be subject to the free market, and of course inflation/deflation clauses could be involved. After all, pumping costs of discovered oil fields are known and stable. Instead we saw in 2008 the price of oil soaring to $145 per bbl and in half a year plunging below $35. How can it be a good thing that this could occur? How is it even possible, absent supply disruptions such as from war that would send the price skyrocketing? There was no force majeure, though. Year after year, the oil traders in essence take a vigorish that belongs in the pockets of producers and consumers alike.

Who has benefited from the debt explosion the past decades? The first and greatest beneficiaries are the purveyors and traders/repackagers of the debt. Thus Japan keeps selling more and more government bonds, beyond any comprehension given that doing so has not led to any obvious benefit for their economy. Yet it keeps doing so. The US public is suggested that it does so to "fight deflation". As if lower prices are not good things for a trading country.

In the US post-Civil War, the advent of industrial processes applied to farming and manufacturing, plus cheap rail access to the mineral and other wealth of the West, deflation was the order of the day, as was a general trend toward much higher living standards.

As went Japan, so went the US and the UK. It is the bankers who benefit from all the government debt. And if the debt ultimately needs restructuring, they benefit from that as well. Those who purchase the debt may or may not benefit. If the purchaser is an insurance company, it purchases the debt simply so that it can sell an insurance product at a spread profit. If the purchaser is a central bank, then the purchase may well be for political reasons. But those who sell and endlessly resell the swelling amount of debt-- whether it be on houses (mortgages) or direct claims on the Treasury-- continue to benefit from the Bushbama Continuity on bailouts and the like.

We need more equity and less debt in society. Ultimately, traders' pricing and mispricing of securities notwithstanding, investors should be in honest situations where those who price securities actually own them for real rather than acting as middlemen or, even worse, "analysts" who cleverly are forced to disclose they have no ownership of what they recommend. Far better that a bullish analyst own the security recommended and be prohibited from selling for the time frame of the recommendation. And the opposite for a bear.

Fundamentally, the allure of alternative investments ranging from precious metals to lumber is that they are what they are. You don't need an analyst to evaluate whether Oracle is going to make money from the Sun Microsystems purchase. Thus the sell-off in gold on Friday concomitant with the Goldman news appears misplaced. Was the Friday announcement on options expiration day part of market manipulation on the SEC's part, the same SEC that is now known to have sat on the Allen Stanford scam for many, many years? (Not to mention Madoff.) Considering that the pros very recently added numerous short positions in gold futures recently, one has to take this possibility seriously. It is becoming less and less of a fringe position, I believe, considering the growing evidence of governmental involvement in the bubble and cover-up.

Copyright (C) Long Lake LLC 2010

Saturday, April 17, 2010

Mortgage-Backed Securites Continue to Underperform

One would think that 5 years after the housing stocks peaked, it is past time for objective trends in mortgages to be well into the healing phase. Not so. "Default Servicing News" = has an article out today titled Moody's Downgrades $42.2 Billion of Subprime RMBS. Here are quotes from the article:

The performance of subprime loans made during the real estate boom continues to worsen, putting investors on an even bigger hook. This week, Moody’s Investors Service downgraded its ratings on a total of $42.2 billion of residential mortgage-backed securities (RMBS) made up of subprime home loans.

The agency said the downgrades are a result of “continued performance deterioration in subprime pools,” which is likely to worsen further as still-falling home prices and high unemployment trigger more defaults. The ratings actions reflect Moody’s updated loss expectations on subprime securities issued between 2005 and 2007. . .

Moody’s also alerted investors this week that it has downgraded $7 billion of RMBS backed by Alt-A residential mortgage loans made in 2005, again citing “rapid performance deterioration.” Alt-A is considered to be mid-grade risk, falling somewhere in between prime and subprime. . .

Last week, the New-York based ratings agency said it is also looking at possible downgrades on $50 billion in subprime RMBS issued before 2005, which would represent more than 80 percent of all subprime residential mortgage bonds from pre-2005 vintages.

Moody’s has also put $48 billion in Alt-A RMBS and $43 billion in prime jumbo RMBS issued before 2005 on watch for possible downgrade, signaling that deterioration among earlier loans has spread beyond risky subprimes.

I guess Moody's doesn't read the stock quotes.

The truth is that if the stock market were a real leading indicator, VerticalNet never would have been a hot stock, BofA stock would never have hit $3 only about a year ago, and Ambac and Fannie Mae would never have been priced to drop 99% or so in a short time from prices that had limited upside.

So despite a strong recent rally in Markit's listing of many commercial real estate-backed securities, Moody's comments on the much larger residential mortgage-backed securities bear watching.

How much longer will the Fed print money (if at all anymore) or the Feds borrow money to bail out bad residential loans? How much are the apparent yet worsening losses already reserved for by financial institutions? Why does David Rosenberg think that financials have the worst value to price rating of the industry groups he monitors?

After a huge rally in the stocks of the companies that caused the bubble, caution remains advised. Many are now trading well above tangible book value, which itself may be greatly overstated due to the extend and pretend status of their accounting.

Copyright (C) Long Lake LLC 2010

Friday, April 16, 2010

Goldman and Gold

It can hardly be a coincidence that the news of a civil (NOT criminal) SEC action against GS broke on an options expiration day and that precious metals were taken down more than stocks as a whole. The whole thing stinks.

If we see some more of this sort of stuff that will likely lead to GS paying back the government with our own money but that generates good headlines, then we will have the fake downleg of the bear market a la 2002: a post-recession down-move that allows the Fed to stay easy for longer and that provides the volatility that GS and its confreres thrive on.

The S&P 500 VIX is only 18 and should exceed 20 to even classify as a minor correction.

The strongest stocks to hold are in my opinion those that retain the strongest support today and are in a short-term uptrend despite any down-moves today. Think MCD, IBM and ORCL. Traders who don't own "enough" GLD or the like may want to be brave and buy on the close. The rumor is that "they" are taking the precious metals down because Paulson & Co., GS' counterparty on the short side for the toxic CDOs Goldman sold, is long lots of GLD. I doubt this has legs, and to the extent that the SEC action shines a new light on old shady deals, it may remind people of the house of cards that comprises so much of our financial system and thus may draw them anew to gold. On a trading basis, GLD is down much more than the smaller Canadian ETFs (stock symbols) GTU and PHYS, even though they now trade rich, at about 8% premiums to net asset value.

Copyright (C) Long Lake LLC 2010

Thursday, April 15, 2010

Inflation on the March

Markit's CMBX indices of commercial real estate securitized values has been soaring recently. Reflation is, more and more, here. Not to mention inflation. The NY Fed's Empire State Mfg Survey was out today, showing much more cost of goods price increases over selling price increases. Barring a big change in trend, the next step is business raising their selling prices to keep their margins up. Cash is, more and more, trash, but where it should be deployed is a very difficult decision.

For now, in addition to passive savers, the current losers are small businesses and much of labor.

Copyright (C) Long Lake LLC 2010

Wednesday, April 14, 2010

More Downbeat Consumer Economic Polling Data as Stocks Soar

ABC's Consumer Comfort weekly poll (but based on a rolling 4 week average) is back to -47, a 5 week low and a level never seen from the poll's inception at the beginning of 2002 until May 2008.

Gallup's consumer polling shows a tad more personal optimism (feeling cheerful) but spending and hiring/not hiring statistics remain dismal.

So far, I suspect that the U. S. profit gains from domestic sources are mainly due to price increases and job cuts.

If oil prices do not go crazy on the upside, we are however likely in the past of the financial and economic cycle where all the money printing will go into sales increases due to volume as well as price increase. The ECRI has probably nailed it in predicting a yet lower baseline level of growth.

The country--and most of the world--simply needs to pay down debt.

Instead what is happening is that governmental deficits are being transmuted into private profit gains. It's a shell game that is leading to overall overvaluation of the private enterprises that are currently benefiting from this wealth transfer, and it is difficult to see why this existing trend will not continue tomorrow and then the next day. China bursting? Oil? War? Dirty nuke somewhere important?

And so this body of a stock market continues in motion while real people continue to experience depression-like circumstances.

Copyright (C) Long Lake LLC 2010

Pedal to the Metal in the Merry Merry Land of US

Per Zero Hedge, economists Robert Shiller and Mark Zandi believe that perhaps up to $100 B yearly is spent by consumers who have stopped paying their mortgages, or who pay much less than they owe due to modification programs. That may be 1% of consumer spending ultimately paid for by the taxpayer due to such programs as the Fannie/Freddie/Fed MBS two-step. Basically it's monetization.

Meanwhile the stock market remembers Marty Zweig's admonition and is not fighting the Fed or the tape.

Not only is this an extend and pretend rally and then some, but based on antiquated measures such as the Greenspan Fed model, the stock market can be said to be grievously undervalued. But . . . but . . . the rationalist splutters-- it's a contrivance. Treasury rates are low because the economy is so weak, not strong, and thus price-earnings ratios must account for normalized Treasury or corporate bond rates.

And the rationalist is right--someday.

Living in the immaterial world, as the (former?) Kabbala-ist known as Madonna has done, stocks are just numbers on a computer screen.

Probably the worst thing heard today was that a talking head on CNBC asserted that GOOG stock is undervalued because Baidu trades at 100 times earnings. 1999, anyone?

But as in 1999, babies were thrown out while bathwater was being promoted as perfume (or something like that!). On its own merits, the reinsurer Everest Re ("RE") trades at a big discount to tangible book value. In the early 2000s, it did so and then went wild, quickly trading at a big premium to (rising) tangible book. This sort of stuff happened like mad in 1999 and 2000. So there are both trading and buy-and-hold opportunities in the stock market, with a lot of fluff.

Re cash, a poll of economists in early 1982 showed an overwhelming preference for cash. Looking out over the next year or two, by far the worst investment class was cash, as rates plummeted. Stocks and bonds, disliked by those experts, did far better. By analogy, cash is hated and disdained, but one of these days if the economy in fact is/becomes strong, rates on cash will rise. Stocks and bonds may both fall in price and cash will then be the appreciating asset. Watch for it. Not today or tomorrow, but investors should watch for that situation.

Copyright (C) Long Lake LLC 2010

Tuesday, April 13, 2010

$55 Per Pakistani Civilian Death a Bargain Compared to Bailouts at Home

The AP is reporting on deaths in the drone and bomber strikes in the rugged remote tribal areas in Pakistan. Reports of militant deaths from the air and in ground battles have come from the U. S. and Pakistani sides without independent press verification. In fact, there have been so many reported militant deaths that I have wondered how many people are left to kill. Here is information from AP that raises the question of how many deaths have in fact been civilians, from Pakistani Airstrike Kills Many Civilians: Official:

Dilla Baz Khan was pulling a woman from the rubble of an air raid when Pakistani jets screamed back into the valley for a second bombing run, killing scores of people in a village locals say had been supportive of army offensives against militants along the Afghan border.

Khan and other survivors said Tuesday at least 68 villagers were killed in the weekend airstrikes, sharply contradicting initial army accounts that the dead were Islamist militants. A local administration official said $125,000 had been paid in compensation to victims. . .

The Pakistani military regularly claims to kill many militants in airstrikes, shelling and ground operations in the northwest, but rarely mentions civilian deaths. It is unclear whether that is because such deaths do not occur, or simply because the army does not report them.

Independent accounts of army operations in the tribal regions are extremely rare. The area is largely out of bounds for reporters and highly dangerous to visit because of the likelihood of being abducted by militants, who still control much of the area. . .

They said most families in the village have sons in the security forces and it had a history of cooperating with the army. He said the owner of the house that was bombed initially, Hamid Khan, has two sons serving in the paramilitary Frontier Corps.

"This house was bombed on absolutely wrong information," said Khanan Gul Khan, a Sara Walla resident who was visiting a relative in the hospital. "This area has nothing to do with militants." . . .

He said an official from the Khyber administration visited him Monday and gave him $220 to compensate for the loss of four relatives, including his brother. "He said, 'We are sorry for this, and we pray for your early recovery,'" he said.

Pakistan has no money for any of this. They are basically doing what they are doing on IMF funds. Thus the U. S. and its IMF poodle are paying $55 per corpse. Somehow one wonders what any semi-educated Pakistani thinks of this, assuming he/she knows at least a little about the bailouts following the global financial crisis.

Does this person think that America has its priorities straight?

America is busily killing Muslims in one of the most strictly Muslim parts of the world, and there is not even any oil there. Any "victory" will be temporary, because they hate us there as infidels and occupiers. Perhaps we will get Mr. bin Laden, assuming he is still alive. Short of that, it is difficult to see the long-term upside from all the resource expenditure there.

Meanwhile, the NFIB report on small business in March continues to show no real improvement. The big guys traded on the stock market are gaining market share from the little guys. Big whoop. The money-printing continues to largely be wasted on current consumption at home and one-use bombs etc. in Asia.

Copyright (C) Long Lake LLC 2010

Monday, April 12, 2010

Where Financial Matters Stand Today

Breakfast with Dave (Rosenberg) today reminds the reader that strategic defaults on mortgages are freeing up between $120 B and $190 B for people to spend. Call it 1% of GDP. What is happening just in that specific area is the modern inflationary process at work. One way or the other, through Fannie/Freddie and the like, or through FDIC bailouts of smaller banks, the losses on those defaulted mortgages are passed on to the taxpayer and are monetized through what we call money printing.

Absent direct welfare-type payments such as extended unemployment insurance, food stamps and the like, personal income would be (it is said) only 80% of what it is reported to be.

The Gallup polling shows absolutely no uptick in discretionary spending.

All this explains why NBER is still unwilling to state unequivocally that the Great Recession has ended.

The basic problem of the economy relates to debt and its related phenomena, the various swaps and repos. There is such a confusing web of cross-obligations that the system can suddenly fall apart, or it can stagnate even if mild deleveraging could occur. This sort of mess requires simplification. Whether the modern industrial and post-industrial economy are even profitable after accounting for environmental and other external costs is not so clear. After all, taking care of one's elderly parents is not a traditional profit center; it is a cost of living, an obligation, but it does not yield savings or return on investment as defined by traditional economics. You cannot trade the result of a high-quality retirement and associated medical and other care to a Brazilian factory worker who is helping to produce a commuter airplane.

As the West ages and provides disincentives to its young people to reproduce above the replacement level, there exists a headwind against economic growth.

This is what the Economic Cycle Research Institute is predicting longer-term: a declining level of real economic growth. Thus mild perturbations to growth occur closer to the zero-growth line and will more easily produce recessions--often mild ones but ones that are not in the Obama/CBO multi-year financial projections.

Physical precious metals, like them or not, represent a popular and governmentally-approved method of signifying a claim on society's wealth. They are purer than debt instruments as ownership of physical metal comes with a storage cost and pays the owner no interest. In a free market, they may be traded in the future for real goods and services, with the intermediary being perhaps an electronic credit on a computer or a colored piece of paper called money.

Until the Europeans solve the Greek crisis and related ones without more debt, the expectation that the U. S. solution to the economy-- monetize the housing bust-- will occur one day in Euroland.

Whether the solution is pure money (gold) or a tangible useful asset (oil etc.), investors are increasingly inclined to hedge their ownership of paper/electronic "money". These matters are unpredictable and political. This is a time of change, a la the late 1970s pre-Volcker when the unthinkable was happening.

Diversified high-quality assets with an overweight in gold continue to make sense for many people.

Copyright (C) Long Lake LLC 2010

Saturday, April 10, 2010

"They" Are Still Spinning

Asset inflation continued apace last week in the financial markets, most notably on Friday, when prices of stocks, government bonds and precious metals all went up. Huh?

One of the theoretical underpinnings of the rise in stocks is that prices to earnings are reasonable to cheap, and hey all other yields stink anyway, so who needs dividends?

The problem that is summarized in, an almost infinite number of P/E ratios exist.

In a more specific mode, Oracle "earned" 38 cents in the February quarter just reported. But wait! Under
generally accepted accounting principles, ORCL earned only 23 cents the same quarter. What's up with that?

From Oracle's press release:

GAAP operating income was down 5% to $1.8 billion, and GAAP operating margin was 29%. Non-GAAP operating income was up 13% to $2.9 billion, and non-GAAP operating margin was 45%. GAAP net income was down 10% to $1.2 billion, while non-GAAP net income was up 9% to $1.9 billion. GAAP earnings per share were $0.23, down 11% compared to last year while non-GAAP earnings per share were up 9% to $0.38.

Double huh. Try to make sense of that! No further explanation was given by the company. Basically, Oracle "earned" a fictitious number but its accountants said it actually earned about 2/3 of what it wanted to tell you it "earned". It returned a nickel a share in dividends, for an annualized yield of less than 1%.

In the old days, such as 1929, investors would have walked away from a mature, large company that disdained sharing the wealth with shareholders. Now, in financial Fantasyland, earnings mean whatever the company wants them to mean, and the SEC cares not a whit.

It is reasons such as the macro example given first and the micro example of ORCL (which also applies to other darlings such as TEVA) that it is important to also consider asset values such as tangible book value or the Tobin "q" value, such as the Smithers version of such referred to many times herein.

On that score, stocks are richly valued, and only the low level of interest rates (due to economic weakness) makes the whole olio acceptable.

Assuming that the economic optimists are correct, much higher interest rates are coming and along with that one day will come much lower stock valuations, if the past is any guide at all.

Meanwhile, while not transactional money, gold continues to boringly just sit there, and unlike the stock averages even with dividends reinvested, gold almost uniquely among major US asset classes has broken out to all-time highs and continues to act well.

When GLD got to $119 in early December, this site "called" a top and suggested a $110 +/- $3 trading range would follow. This happened with one break below that level. The price is now challenging/breaking out from the top of that range. Based on patterns of other financial asset such as TJX and ROST, sooner rather than it makes sense that with debt piled upon debt, those with paper wealth in stocks will continue to transfer it to precious metals, gold shorts will cover, and the same melt-up that has occurred in stocks will occur with no overhead supply in the gold market. Gold has had a strong surge very recently, but given all the chicanery in stocks and, increasingly, the proof that short-term money rates are below any reasonable estimate of consumer inflation, we are back to the 1970s as well as 2007-8 where the Fed is just simply behind the curve.

For now, the DoctoRx approach is: marry gold (with no-fault divorce available), rent the best stocks including asset-backed ETFs, flee cash.

Copyright (C) Long Lake LLC 2010

Thursday, April 8, 2010

China Said to Be on Treadmill to Hell rather than Stairway to Heaven reports briefly on the gloomy, contrarian view of China in China on ‘Treadmill to Hell’ Amid Bubble, Chanos Says. Here are some excerpts:

China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said . . .

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market.

Chinese state and local governments are among the most leveraged to property-related borrowings and the nation will “ultimately” have to nationalize a lot of the bad loans that will arise from the end of the bubble, Chanos said. . .

Chanos was one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp. The investor said he is short-selling Chinese developers as well as companies supplying building-related materials to the country . . .

That Mr. Chanos is joined by Ph. D.'s with real interest in bubbles such as Drs. Rogoff and Faber reminds me of the disclosure several months ago that George Soros, John Paulson, Paul Tudor Jones and David Einhorn all had turned bullish on physical gold. The further good news on that gold front was that Mr. Paulson was reported to have had little success in finding investors for his gold-oriented fund, even though he had substantial personal funds in it. This lack of investor interest proves that the gold market, while not guaranteed to move in any special direction, is nothing like the NASDAQ circa 1999. It may be at a bull market peak, but it is NOT in the late stages of that rare event called a bubble. Similarly, while Mr. Chanos is not predicting the national bankruptcy of China, he appears to be predicting a temporary major decline in the global market for certain raw materials such as copper.

If this scenario unfolds, it would be a deflationary event for the U. S. The effects on the price of the gold would be unclear, but given the bull market in gold since the credit crunch hit the U. S. in 2007, there is no evidence that this event would ultimately do anything other than weaken faith in governments and debt. It therefore would strengthen the fundamental case for gold even as it weakens certain commodities prices.

Long Lake LLC 2010

Wednesday, April 7, 2010

Mini-Double Dip?

An organization that tracks online consumer purchases to get an advance look at upcoming GDP trends reports a consumer downturn is in progress. Consumer Metrics Institute reports evidence that a downturn is brewing, with a suggestion of a negative GDP number this quarter. See the related graphs.
This is based on realtime shopping data, not projections based on historical patterns. This data comports with Gallup's polling data. It also is consistent with various small business surveys and Discover's (R) March consumer data. Discover's consumer spending data is down modestly the past 6 months in aggregate.
It just may be that Reinhart and Rogoff nailed it. A credit crisis occurs because of overuse and abuse of the credit mechanism. These crises are typically long-lasting and do not resolve soon or smoothly. ECRI is calling for the death of buy and hold stock investing due to their belief that the underlying growth rate of the U. S. economy continues to slow, and thus it won't take much perturbation of a growth trend to cause a recession. So we may have a U. S. consumer recession or growth recession this quarter if indeed a slowdown has been underway for months as described in the mor complex chart, even if exports and business-to-business trends prevent a negative GDP number.
After the run-up in stocks, it's increasingly looking like time for gold to play catch-up.
Copyright (C) Long Lake LLC 2010

Tuesday, April 6, 2010

Small Business Not Feeling the Love in March Either

Discover(R) is discovering that small business confidence declined in March, from 84.9 to 75.7, in Economic Confidence Tumbles in March. Here are some lowlights:

The March results were marked by a surge in the number of small business owners who say economic conditions for their own businesses are deteriorating:53 percent of them say the climate will get worse in the next six months, compared to only 37 percent who answered that way in February. Of the remaining respondents, 20 percent said things are getting better, 20 percent said things are the same, and 6 percent are unsure.

When asked about their intentions to invest in their businesses, 52 percent said they would decrease spending, up from 43 percent in February, while 27 percent said they would make no changes, and 18 percent said they plan to increase spending.

Much of the profits gain that is powering the stock market higher is from nothing other than large companies with ultra-high gross profit margins laying workers off. Small business works with thinner margins and also has less access to cheap capital.

Evidence is accumulating to support the concept that this economic "recovery" is hollow. Might it take real economic innovation, or a massive change in taxing/spending governmental priorities, to reverse this trend?

Copyright (C) Long Lake LLC 2010

Why Are We Helping Brandee Chambers?

The AP reports: Gov't aims to help more "underwater" homeowners. Here's the essence:

The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale -- known as a short sale -- or agree to turn over the deed of the property to the lender. It's designed for homeowners who are in financial trouble but don't qualify for the administration's $75 billion mortgage modification program.

Here's a beneficiary:

A short sale appears to be the only way out for Brandee Chambers, 36, of Las Vegas. She got into trouble during the housing boom by taking out a risky loan against her home and using the money to buy two investment properties in Phoenix.

She later lost those two properties to foreclosure, and now she is trying to sell the home she lives in for $209,000, but the mortgage balance is $350,000.

Chambers, who owns two hair salons, says she would rather stay in her home, where she lives with her 14-year old son. But she had no luck getting help with her loan. She said she's resigned to scaling back her lifestyle and renting out an apartment.

"I've had to accept a lot in the last year," she says.

Brandee, you're not alone in your financial misfortune. But it appears that your health is good and that you have an ongoing business. You may well have a high income. Why should taxpayers kick in on your behalf?

There is little rhyme or reason in this administration's actions. Ms. Chambers can likely take $3000 out of her business.

From corporate welfare for Big Finance to harsh treatment for GM's creditors, from imposing high Obamacare costs on the young and healthy to simple cash giveaways to seniors just simply for being old, the President has taken a "Great Recession" and used it as the springboard for a massive expansion of Federal power, almost all of it using printed or borrowed funds.

Unlike in 1994, when balanced budgets began to be imposed on the Clinton administration, there is no Ross Perot who had two years earlier received one-fifth of the vote for President because of the budget deficit issue. Tea Parties are much smaller than the Perot movement. Thus a Republican victory in November, should it occur, is likely to have less force than it did in 1994.

Chronic and large deficits as far as the imagination can envision? Could be. What would this mean for investors? Not clear.

Copyright (C) Long Lake LLC 2010

Stocks for the Long Yawn

From the beginning of 1994, when the economic recovery from the 1990 recession was more or less complete and the Fed began hiking rates, till now, the stock market as judged by the S&P 500 has risen from 446 to 1187.

Value Line maintains a different index, in which all stocks are weighted equally, so that a small company counts the same as IBM. This reflects the fact that for a small investor, $1000 or $10,000 can just as well go into a small cap as a mega-cap. Institutions of course lack that freedom.

In the same time period, the overall Value Line Index ("Geometric") is unchanged. I also suspect that dividend payouts were higher from the '500', given the greater maturity of those companies.

The Value Line Industrials are actually down a bit, as are the Utilities (though with much higher yields); only the Rails are up (6 times!).

In these past 16 years, the country has been out of recession all but about 2 1/2 years. Thus overall the climate for small companies and their stocks could have been good. It is difficult to explain this observation. Large-cap stocks had been moving up substantially since the 1982 bottom, so they were not "depressed". Did smaller companies' stocks suffer from chronic overpricing?

I suspect that was and remains so. This flies in the face of the standard line that research shows that since 1927, small caps have noticeably outperformed large caps.

Most investors who choose their own individual stocks are best off ignoring market cap and focus on financial strength, track record of the company and the stock, presence or absence of dividends or dividend-paying ability, and other fundamental and also technical factors. When in doubt, financial strength and the absence of a stretched valuation vis-a-vis the underlying assets of the company take away much of the downside risk to a stock.

In the here and now, stocks are either cheap or expensive, depending to whom one listens. Monetary and fiscal stimulus, AKA easy money, are working their magic. Overcapacity is allowing ultra-low short-term rates to persist. Small investors who have patiently held stocks but not bought more over the last few years are increasingly reaching the break-even point. As their perceptions of the overall economy remain downbeat, many will wish to get out even. I for one am sticking either with fundamentally cheap stocks that are going nowhere fast-- RE, RNR, CB; or stocks that are either already at all-time highs or multi-year highs such as TJX, DLTR, MCD and WPI. All the above have P/E's lower than the market and have substantial free cash flows.

Nonetheless, overall yours truly remains of the view that stocks are fundamentally overpriced as a whole and that the current cyclical upturn in the economy is so unbalanced that we need to fear the next cyclical downturn, when investor psychology will allow stocks to return to a valuation which offers a more attractive entry point for the market as a whole.

Copyright (C) Long Lake LLC 2010

Sunday, April 4, 2010

Tax Increases for Americans to Pay Taliban in Marja

In Hurting U. S. Efforts to Win Minds, Taliban Disrupt Pay, the NYT reports a world gone mad:

MARJA, Afghanistan — Since their offensive here in February, the Marines have flooded Marja with hundreds of thousands of dollars a week. The tactic aims to win over wary residents by paying them compensation for property damage or putting to work men who would otherwise look to the Taliban for support.

The approach helped turn the tide of insurgency in Iraq. But in Marja, where the Taliban seem to know everything — and most of the time it is impossible to even tell who they are — they have already found ways to thwart the strategy in many places, including killing or beating some who take the Marines’ money, or pocketing it themselves.

Just a few weeks since the start of the operation here, the Taliban have “reseized control and the momentum in a lot of ways” in northern Marja, Maj. James Coffman, civil affairs leader for the Third Battalion, Sixth Marines, said in an interview in late March. “We have to change tactics to get the locals back on our side.”

Back on our side? Is this man sentient?

Col. Ghulam Sakhi, an Afghan National Police commander here, says his informants have told him that at least 30 Taliban have come to one Marine outpost here to take money from the Marines as compensation for property damage or family members killed during the operation in February.

“You shake hands with them, but you don’t know they are Taliban,” Colonel Sakhi said. “They have the same clothes, and the same style. And they are using the money against the Marines. They are buying I.E.D.’s and buying ammunition, everything.”

One tribal elder from northern Marja, who spoke on condition of anonymity for fear of being killed, said in an interview on Saturday that the killing and intimidation continued to worsen. “Every day we are hearing that they kill people, and we are finding their dead bodies,” he said. “The Taliban are everywhere.”

Translation: Marja was a failure. Will apparent success in tribal regions of Afghanistan be a material aid to the early and subsequent efforts in Kandahar?

What's going on in Marja is a disgrace, worse because the operation was initially widely reported to be in the city/village of Marja, as if it were Falluja or the like. This was a military-induced media lie. Marja is just an opium hub. It's of no other importance. And NATO/U. S. hasn't a clue as to what's really going on there.

Here it is: Everybody hates us in Afghanistan. Those who don't are on our payroll. They may simply despise us.

Copyright (C) Long Lake LLC 2010

Saturday, April 3, 2010

Financial Crisis Was Predictable and Leaves Poor Investment Choices

Steve Keen's has a post that contains a remarkable history of predictions of the housing bubble-induced economic crisis. Reading it makes it clear that the permabulls made no sense. It was in the run-up to the crisis that Dr. Keen registered the URL "". Even as a non-economist, it was obvious to me by summer 2007 that housing was in a depression, autos were in a severe recession, and therefore the domestic economy was in or going into at least a mild recession already, with only exports keeping things afloat. Given how high stocks were, it was an easy decision to sell all I could.

After being long stocks since August 1982 on, the first exit I made was throughout 2000. It was back in but only halfway in spring 2003.

Where now?

The averages: no.

Individual issues in selected asset classes: yes.

The economy will grow until it does not, but stock prices in the aggregate are too high for one year of improved earnings to affect their fundamental overvaluation. Right now, technical and sentiment factors argue for a "correction". Will "they" squeeze some remaining shorts and goose things higher?

Could be. But the S&P 500 could be halved to merely bring its dividend yield equal to the level of the 10-year Treasury. It was only about15 months ago that this equivalence occurred (briefly). The prior time was about 1960.

I anticipate this equivalence to return, but when and at what yield levels are unknowable. Right now one can find stocks with a 6-7% free cash flow "yield" that would be available for dividend payouts. DLTR, ROST, WPI, TEVA and CB are among many issues with that "value" characteristic. In overvalued times, Graham and Dodd just don't work anymore. One day their much more stringent criteria may be useful. For now, free cash flow yield or discount to tangible book value for profitable companies are the best the market offers.

Copyright (C) Long Lake LLC 2010

Friday, April 2, 2010

An Unholy Trio of News Items

When one clicks on an NYT article on wage garnishment, one is led to a resonant trio of articles. In the garnishment article, we learn that many people can fall prey to a vicious cycle of huge interest payments, so they become debt zombies, unable to pay off the loan in full given (say) 28% interest rates. We also learn that judicial review of the garnishment procedure is not the norm.

At the bottom of the page of this article, the Times asks you to click on another article. This one is about a multiyear record number of personal bankruptcies for March 2010. This is of course the worst outcome for a lender. It is obvious why a reader looking at the garnishment article would want to click on a personal bankruptcy update.

What was the next suggested article to read?

How strong the stock market was last week!

Says it all . . .

Copyright (C) Long Lake LLC 2010

Thursday, April 1, 2010

Discover(R)-ing March Worse than February for Small Business Owners

On behalf of Discover(R), Rasmussen Reports finds that Economic Confidence Tumbles in March.

The Discover Small Business Watch plunged to 75.7, down a whopping 9.2 points from February.

Let's call it a spotty "recovery" at best. Here are some highlights (? lowlights):

The March results were marked by a surge in the number of small business owners who say economic conditions for their own businesses are deteriorating: 53 percent of them say the climate will get worse in the next six months, compared to only 37 percent who answered that way in February. Of the remaining respondents, 20 percent said things are getting better, 20 percent said things are the same, and 6 percent are unsure.

When asked about their intentions to invest in their businesses, 52 percent said they would decrease spending, up from 43 percent in February, while 27 percent said they would make no changes, and 18 percent said they plan to increase spending.

Little faith was expressed for the direction of the larger economy, as 58 percent said it is getting worse, up from 44 percent in February; while 22 percent think it is getting better, down from 31 percent the prior month; and 16 percent said it's staying the same, versus 24 percent last month.

This data comports with the information I receive from two non-blighted areas, one on the east coast and one on the west coast.

Life may be good for now for senior execs in dominant companies with very high gross margins and no need for financing, but it is not that way in the "real world".

Copyright (C) Long Lake LLC 2010

Gold Traders Bored While Stock Investors Enthused

As yours truly has been busily moving some assets from discount retail stocks and some other stocks into Gold-Trust (GTU)this past trading week, it is good to see that Trader's Narrative reports that gold sentiment is not very good; for the full blog post from March 30, click HERE.

Here is the money quote from his piece that makes me especially comfortable with a ramped-up allocation to physical gold:

While that reduction in exuberance may appear bullish at first glance, looking at the historical pattern of gold corrections in the past few years shows us that sentiment needs to get a lot lower. For example, during the low one year ago, the HGNSI (Ed.: Hulbert Gold Newsletter Sentiment Index) fell to -17%; implying that gold timers were actually short gold.

I can't tell if the "low one year ago" is the April 2009 low or the panic lows of fall 2008. In either case, the idea that sentiment "needs" to get a lot lower is unsupported. And in any case, the idea that with financial asset inflation on the march and money market reserves yielding nothing, even if we are some months from the next bull move in gold, dead money is not so terrible.

The same blog pointed out yesterday that the estimable Ned Davis' crowd sentiment index shows extreme optimism and therefore is flashing a short-term top signal; for that post, click HERE.

Gold outperformed stocks in the U. S. from late August till early December. Since then, it has been the opposite case. Perhaps it's time for a change once again.

Copyright (C) Long Lake LLC 2010

The Fed Begins to Reveal the Extent of Its Malfeasance in re Bear Stearns

Bloomberg. com is running Fed Releases Details on Bear Stearns, AIG Portfolios. The key part of the article is:

“No one should have been surprised that it looks like the Bear and AIG portfolios are junk,” said Robert Eisenbeis, a former Atlanta Fed research director who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.

What was suspected is now known. And the key man in the NY Fed purchase of this junk is quoted today as saying that it is "deeply unfair" that some financial institutions are coming out of this mess in such better shape as many individuals. Thanks, Tim. You've got quite the conscience.

Wall Street and government jointly engineered a housing and general credit boom/bubble, extended it with the subprime shenanigans and securitization thereof and wild and crazy corporate takeover action, and then per Michael Lewis' "The End" helped end the saga. Knowing all this, the former Nixon operative Henry "Hank" Paulson, was "persuaded" to accept the position of Secretary of the Treasury. The President then had plausible deniability. From this position Mr. Paulson worked hand in hand with supposedly independent Ben Bernanke and Timother Geithner to hand JPMorgan Chase the trophy of Bear Stearns on a platter. He also presumably worked hand in hand with the chiefs of Big Finance. Later, shortly after Barney Frank assured everyone that Fannie and Freddie were sound and an alleged housing fix legislation was passed in summer 2008, and Fannie and Freddie sold debt worldwide, all of a sudden they had to go into conservatorship. By not shutting them down, they became unending sources of commissions for stockbrokers. The same is true for AIG and even Citigroup.

The next phase of the looting involves the "surprise" failure Lehman. It was something out of a bestseller from the 1960's: "The Magus". At the end, the anti-hero realizes there is no god. He's on his own. So briefly, stockholders were panicked by the collapse of Lehman. The Fed God had stepped away! Goldman Sachs and the offspring of J. P. Morgan & Co., Morgan Stanley, became the only 2 survivors of the Big 5 investment banks, as the Fed bypassed normal procedure and converted them to bank holding companies on the spot. AIG was used a conduit to pass more newly-printed money to enrich various Big Finance institutions including foreign ones. And so on. All this of course was with the approval of candidate and then President-elect Obama. Thus the Geithner nomination despite the tax-fiddling revelations.

In a carefully planned set of operations, the favored large Big Finance traditional banks were each allowed (or commanded) to swallow one failing competitor. Wells Fargo got Wachovia; JPM got WaMu; BofA (in)famously got Merrill Lynch.

We learned that even money in the bank is of dubious value in a crisis, as the FDIC would have needed a bailout had Congress not pledged to do whatever it took to support it.

(We also learned once again that when pictures of the Depression make the front pages of Newsweek, it's getting near the bottom of the stock market.)

Anyway, unprecedented money-printed ensued. We are now reading about surging stock markets as economic growth accelerates. Since for every buyer there is a seller at the same price, all the indicators such as sentiment are of only mild value. Ultimately stocks and bonds are financial assets that have an unknowable value. How does an investor decide what to do in a world such as the above where the powers that be are in such control of macro matters and have so much more knowledge about what's really going on than you or I?

We always knew that Wall Street was never interested in anything but its own well-being, but we never knew how much on its side the Feds and the Fed were. Most Americans are effectively renters in their own homes and have minimal savings. Corporations and their chieftains are prospering in another "jobless recovery".

The debt:GDP ratio continues to climb even as households are tapped out, with government expanding its balance sheet to more than make up the difference.

With a left-of-center government, liberal economists rule the roost. Robert Shiller is calling for yet more government support for housing. The administration is doing more in that regard--at what cost?

The cost of government borrowing is at rock-bottom rates. An expanding state requires more taxes. We should look forward to a combination of rising business and personal taxes along with the effects of all the money-printing showing up as rising prices as the coincident economic indicators catch up with the forward-looking indicators that continue to be stable to rising. Yet as employment income and interest income lag, discount and deep discount stores look to stay strong. DLTR has sharply rising earning estimates and trades at about 14X current-year earnings.

Watson Pharma (WPI) has broken out to a multi-year stock price, has record earnings and a lowish valuation; as credit money flows more freely, takeover activity will pick up and unlike Teva, WPI is a bite-sized acquisition for many companies.

MCD fits the theme of financially strong companies with rising earnings estimates. Its dividend yield exceeds that of a 7-year Treasury and likely will rise substantially by 7 years from now. So it's a classic growth and income play.

Financial strategists who have gotten this bull move right, namely Barry Ritholtz and David Kotok, are on similar pages. They are thinking that most of the good news is out now and that S&P 500 1250-1300 represents an important target. It is 1169 now. Another 7% upward move will put Andrew Smithers' estimate of fair value as judged both by q and cyclically-adjusted P/E (CAPE) at around 60% above fair value. Going back to 1900, this was perhaps seen in 1929. It was only seen in about 1997 and then through 2001 and then not again according to his chart, though CAPE hung around the 60% overvalued mark through much of the aughties, q was a bit lower.

Putting the two themes together, the public has no idea of what anything is really worth or what it will do. We can say that we are already close to 1929 levels of stock overvaluation, which was only exceeded in the past 110 years by the millenial, post-Cold War fervor of the late 1990s. An economy cannot function on rising asset prices. Eventually we can hope for, or even expect, new technologies such as economical green energy-related ones to help improve our lives fundamentally. But those companies that will implement that will likely be ones you have never heard of and that will eat the lunch of some seemingly safe big names that are now in the indices.

There is no easy solution. Remembering the lessons of the historical record and the recent past are not certain to be useful in predicting the future, but at the least they are certain to be useful in understanding it as history unfolds.

As the Fed apparently moves toward a world in which depository institutions need NO reserves, there is every reason to think that the yang to that yin, gold, will at least retain its current relative value to other financial assets. The thing about gold is that one has to earn it, or at least steal it. It's either present or it is not. Whereas, electronically-created "money" with a corrupt Federal Reserve Bank of New York in charge of said creation and distribution, acting on behalf of its corporate owners such as JPM, is not a glittering example of responsible wealth creation or accumulation.

The speculation here is that gold prices will fall less than stocks if stocks fall and that they will more or less match or exceed the performance of stocks in a renewed up-move for stocks.

Copyright (C) Long Lake LLC 2010