Wednesday, June 30, 2010

Cross-Currents in the Markets; Over-Pessimism Extant?

As was stated here after the rebound after the early May flash crash, it has been time to sell the rallies. Stock charts look horrible, many superb fundamentalists believe stocks are 20-50% overvalued, and worries over a new recession abound.

Yet the deflationists appear to me to have overstated their case. Which reader is actually seeing price declines in what they pay for? Gasoline on trend, week to week fluctuations notwithstanding? Government fees and taxes? Food?

When one can only get a total of $29.50 or so in aggregate interest over 10 years by loaning $100 to the Feds, one has to wonder if it's worth it.

More to the point for traders, rates have plummeted recently. The 5-year Treasury note is below current CPI; the economy is currently expanding; the smoothed (3-month average) Chicago Fed National Activity Index is at a level associated with durable expansions after both mild and major recessions, and pessimism is high.

With a superb technical analyst, Carter Worth of Oppenheimer, who turned very bearish in the spring on 2008 and again near the reaction high this spring, calling for a bottom to this down move around S&P 980, it may be well to be ready to scale into high quality stocks and other assets that move opposite to Treasury prices. Amongst these may be silver.

As a long-term holder and trader of silver ETFs, I was pleased to see its relative strength today when the general stock market took a late-day hit. Silver is breaking to an all-time high in its 150 day moving average, having done so for the 40 week (200 day) sma already. While silver has not gone through its 2008 high (unlike gold), both are up a similar amount from their early decade lows.

Gold is a core holding. Watch silver.

Copyright (C) Long Lake LLC 2010

"The Fed Is Slowly Losing Its Marbles"

Marvelous post out by Ambrose E-P titled Time to shut down the US Federal Reserve?.

It's a concise must-read; it begins with the title of this post.

Copyright (C) Long Lake LLC 2010

Tuesday, June 29, 2010

In Equity, Veritas

This blog was begun late in 2008 with the motto as titled above. It is nice to see a somewhat mainstream economist speak out in favor of lest debt and more equity. Here is an excerpt from Andrew Smithers in We need to turn to equity financing:

We are surely running up against the limits of debt, not only in the private but also in the public sector. . . We must therefore turn to other ways. One of the two possibilities is to rely on more equity and less debt for financing investment. The other is to transfer wealth from debt owners to equity owners through inflation.

People say default in some sort, such as through inflation or more overtly, is inevitable for the U. S. Federal Government. Yet the application of common sense, the cessation of market-distorting activities by the government at the implicit point of a gun and the restoration of an economy designed to serve the people rather than their masters in Washington will allow their government to get back to where it once belonged.

Smithers' article is very much on the right track. There is little time to lose.

Copyright (C) Long Lake LLC 2010

Too Much Optimism!

Fundamentally, one thing that drives portfolio managers and their algorithms to buy stocks is a rise in earnings estimates. (Of course, some contrarian strategies sell at a certain point after estimates rise too much.) In that vein, a fundamentally important factoid is pointed out today by the folks at Chart of the Day in the article Record Optimism Precedes U.S. Earnings Season:

As the CHART OF THE DAY shows, profit estimates have climbed 5.1 percentage points for companies in the Standard & Poor’s 500 Index since the current quarter started, according to data compiled by Bloomberg. The increase is the steepest for any quarter since at least 2004, when the weekly data begin.

The latest projection calls for S&P 500 earnings to rise 33.7 percent, up from 28.6 percent at the end of March. These figures are based on so-called bottom-up estimates, made for individual companies rather than the overall index.

This is all a bit too far too fast, coming as we are barely one year after the end of the "Great Recession" (maybe). Whether or not George Soros' Theory of Reflexivity is a true philosophic breakthrough as he would like it to be hailed, the principle that markets make their own reality has clear validity. It takes bears, or even better scared bulls, to make bear markets or major corrections, and all it will take is some combination of a decisive break below current levels of the SPY and some disappointment in earnings for the stock market to plunge.

Meanwhile, I think it is better for anyone but a pro to trade as little as possible and hold the highest-quality assets possible. In a world where official government policy is "extend and pretend", and where new money is not being overtly printed in the U. S. for now, the wheat is being separated from the chaff. Just look at the 2-year chart on JPM vs. BAC or C.

An increasingly desperate financial community wants your commissions. They can best do this by moving prices up and down, creating chart patterns that induce those who do not have supercomputers and access to the latest information (or, often, "information") to trade in response to said patterns or facts; but all that was so 2007 if you know what I mean. It's both a new era and simultaneously there is nothing new under the sun. If one understands who has been reaping large to giant cash profits the last several years and understands that strength on the charts indicates where those profits have been going (think gold and strong stocks), one may be better prepared to allocate assets intelligently as the crisis continues to play out.

We have to stay alert and watch for evidence or proof that an asset we thought was high quality is no longer that (or never was). AIG while imploding, Fannie/Freddie well before the implosion, and BP as soon as it cut the dividend are/were examples of that. Treasury securities may be that as well, and this panic into Treasuries may, especially if it grows, be a marvelous opportunity to sell if one has gotten with the program and bought.

Copyright (C) Long Lake LLC 2010

Bearishness Inflating Treasury Mini-Bubble

John Hussman has a truly interesting weekly piece out titled Recession Warning. While I share his views that stocks are fundamentally overvalued, I find it curious that he projects a double dip recession by in part utilizing the Economic Cycle Research Institute's Weekly Leading Indicator as a proxy for another indicator (ISM less than 54), even though ECRI went on record last week that the sharp drop in the WLI did not presage a new recession. ECRI's reasoning was that its non-disclosed Long Leading Indicators look OK. Right now my working assumption is for a growth slowdown.

The Hussman piece is a fine read with many superb observations. He is forecasting a deflationary bust followed by high inflation. He therefore warns gold owners of a likely down-move ahead. We shall see. If he's wrong, and all we have is a growth slowdown or a mild recession as in 2001, money-printing will likely save the day and all that would happen to gold would be another buying opportunity.

The Consumer Metrics Institute composite index, and especially the retail index, have bounced a bit in the past week, and the bear side of matters has gotten a reasonable amount of play. Also, when so many stock charts look heavy, one wants to look for the snapback/short covering rallies. In other words, I am moving from a zero stock allocation except for Apple to something above zero. With Wal-Mart collapsed under $50 again, the bear case on retailing is well known. Perhaps some high quality GARP (growth at a reasonable price) stocks such as TJX, which I bought today, and which have huge cash flow, dividends above a 2-year Treasury yield, and high safety/low price earnings ratio, ultimately can outperform the alternatives. That is at least what Jeremy Grantham believes, who gives U. S. high quality (not large cap or small cap) stocks his top ranking for total return on his famous 7-year horizon in his last, recent update.

Regular readers know that I have repeatedly described buying Treasuries and have pointed out how unpopular they were and thus were a contrarian play. Price appreciation changes matters.
The U. S. has miserable and deteriorating public finances and lies about Fannie and Freddie being off-budget; and may well not even pass a budget for next fiscal year on the risible excuse that a deficit commission is going to report in December.

Gold is not in a bubble, but Treasuries are close. 0.6% yield yearly for 2 years? With the CPI at a minimum of 1-2%, and much more if you go with John Williams' analysis? A lot of scared money may have fled Europe for Treasuries, and can leave as quickly as it arrived. The 10-year at 3% in an expansion is a lot less attractive than it was in 2008 at over 4% with a depression on the way.

Copyright (C) Long Lake LLC 2010

Sunday, June 27, 2010

More Mistruths Over Afghanistan

The Obama administration is trying to pretend that no one foresaw that its series of "surges" in Afghanistan was based on overly optimistic assumptions. Per Jake Tapper of ABC News:

In an EXCLUSIVE interview on “This Week,” CIA Director Leon Panetta said that making progress in Afghanistan is both “harder” and going more slowly than anticipated.

“There are some serious problems” in Afghanistan, Panetta said. “We’re dealing with tribal societies. We’re dealing with a country that has problems with governance, problems with corruption, problems with narcotics trafficking, problems with a Taliban insurgency,” he said.

But, the CIA director said, the U.S. is making progress in Afghanistan. “It’s harder, it’s slower than I think anyone anticipated. But at the same time, we are seeing increasing violence,” he told host Jake Tapper.

Wrong. Your humble blogger, sitting at home in the United States and referring to nothing other than public information on the Web, was one of a number of voices pointing out all the factors that Mr. Panetta references above. And of course he was being discreet when he talks about "governance" issues. Of course he means "corruption". But what we call corruption is the way politics is done there. All of which means that the U. S./NATO is/are fighting for one group of what we consider crooks over the Taliban.

Is it worth borrowing money (and taking deaths and injuries, of course) for a long slow slog for the Karzai gang?

Copyright (C) Long Lake LLC 2010

"Austerity" the New Big Lie

In G-20 Moves Toward Deficit-Tackling Targets, With Flexibility, perpetuates the lie that the giant continued deficits of numerous countries have anything to do with belt-tightening. From the article:

“It is draconian, a little difficult, a little exaggerated,” said Brazilian Finance Minister Guido Mantega. “Some countries would not be able to do it. It is clear that a cut is needed, but at what velocity? It can’t be too fast.”

The officials said the G-20 statement today will echo an agreement reached by finance chiefs in Busan, South Korea, earlier this month.

The agreement would effectively endorse the austerity plan set out by the U.K., . . .

Here is the Financial Times going along with the Big Lie in Osborne gambles on pain to survive the pain:

Where does all this austerity leave Britain compared with other countries? If the establishment is right and the economy recovers smartly, Britain is now projected to enjoy less than half the level of borrowing in 2014-15 of other advanced economies in the Group of 20.

Its accumulated gross debt would also be lower. The International Monetary Fund recently estimated that advanced G20 countries would hit 2015 with gross public debt rising to almost 120 per cent of national income. The equivalent figures in the Budget show Britain’s gross debt burden peaking at 86 per cent in 2012-13 and then falling well below the G20 average.

This austerity plan projected large national deficits year after year, only falling to 2% of GDP 5-6 years from now.

None of this has anything to do with austerity. The IMF has frequently imposed real austerity on countries. This involves running governmental surpluses. All that is being talked about here is that unprecedented peacetime deficits will be run next year, the only larger peacetime deficit being run currently.

There is no secret as to the incessant media use and acceptance of the politicians promotion that these policies are austere. It is of a piece of the even more damaging Big Lie coming out of the financial crisis that the governments were forced to run these big deficits to save the system or save the economy. Of course, the bailouts were in essence transfers of wealth from society at large to stakeholders of (mostly giant) financial institutions: employees, stockholders and bondholders.

The non-governmental beneficiaries, namely Big Finance and its acolytes, continue to benefit from deficits. Larger deficits mean more business selling and repackaging government debt, with the important side benefit that much of said debt goes to supporting existing debt that can then be traded. More complexity means more experts to analyze said complexity, and so on.

And then when Greece or Spain gets in trouble, that means yet more business for Team Finance.

Sometimes debt is necessary. Examples would be a war for national survival or major capital spending to create durable future benefits, such as a major dam or bridge. Examples where debt is the wrong approach involve spending for predictable long-term social situations such as an aging population. It's fine if society agrees to expend more effort on the health of retirees. Because there is a negative multiplier effect from such effort, this effort simply should be paid for out of current income (or liquidation of accumulated assets if that is really desired), but for highly indebted countries such as the U. S. and the U. K. to continue to borrow for social benefits has nothing to do with austerity.

We are in a Wonderland world where words mean what the Big Finance/governmental alliance mean whatever they want them to mean.

Copyright (C) Long Lake LLC 2010

Friday, June 25, 2010

A Growth Slowdown Is not a Recession; Effect on Silver

As the ECRI's economic momentum tool drops to an over one-year low, consumer sentiment improves in classic fashion. Here is ECRI:

A measure of future U.S.economic growth rose slightly in the latest week, but its annualized growth rate continued to fall, indicating the economy is about to slow, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 122.9 in the week ended June 18, up from 122.4 the prior week, originally reported as 122.5.

The index's annualized growth rate fell to minus 6.9 percent from a revised minus 5.8 percent, originally reported as minus 5.7 percent. That was its lowest level since May 22, 2009, when it stood at minus 8.7 percent. "After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown," said Lakshman Achuthan, managing director of ECRI.

Not so hot. Yet Reuters reports that its survey with the U. of Michigan of consumer sentiment is relatively toppy:

Consumer sentiment rose in June to its highest since January 2008 while reports of job losses were down sharply from a year ago, a survey showed on Friday.

A gauge of current economic conditions also rose to its highest since January 2008, according to the Thomson Reuters/University of Michigan's Surveys of Consumers. . .

While Dr. Achuthan has recently said that ECRI's proprietary Long Leading Indicators are showing there will be no new (double-dip) recession beginning this year, it is unclear if the stock market and public mood are anticipating a significant slowdown in growth, perhaps all the way to the 1% level, which only matches population growth.

Meanwhile, gold is quietly approaching its all-time highs, and silver is poised to set an all-time high on its 150 day smoothed moving average, and is already at an all-time price high for the 200 day sma.

Silver, which is less than 20 times more common in the earth's crust than gold, sells at 65X its price (or so). This is the upper end of its range. Longer-term, silver may be have the better risk-reward ratio, and if the projected growth slowdown does not turn into an actual recession, silver prices can rise in what might be a bit of a stagflationary environment.

Copyright (C) Long Lake LLC 2010

Thursday, June 24, 2010

Financials Breaking Down

The default rush to Treasuries despite more than abundant supply is a bad sign. The well-regarded but fundamentally pricy regional financial services/bank company with the symbol UMBF has hit a 12-month low today. Northern Trust has broken down. GS and JPM have been in classic bear configurations for some time. BAC is close to a technical breakdown, as well.

As the financials broke down well before the stock market topped in 2007, it is feared that the breakdown of these companies' stocks may presage a general "correction". Given national and global economic situations objectively, without judging the future, it is hard to see that the stock market should not trade at fair value, which observers I find credible peg at anywhere from 20-25% below current prices.

Investors must learn the investing lesson of Japan. This is that persistent ultra-low government borrowing rates that are associated with a sluggish economy eventually lead to stock prices reflecting said sluggishness rather than the growth expectations that are priced in. Thus, investors should ignore the current relative attractiveness of 2-3% dividend yielders except to the extent that said dividends derive from globally attractive markets, such as India and Brazil.

EBR feels that given the chimeric Japanecian (Grecianese) risk our government's finances bear (also called fat tailed possibilities), caution is appropriate. AAPPL and gold, as stated here recently, are both flat to up as of this post while stock averages are down. This reflects relative and absolute performance over various longer time periods, and while no bells are rung during trend changes, I see no valuation or other reasons for said trends to change.

Cash may be "trash", but sometimes it's less trashy than other assets.

Copyright (C) Long Lake LLC 2010

Wednesday, June 23, 2010

Housing Sales Lousy Due to Government Failures

The Census Bureau has reported that 28,000 new homes were sold in May this year. It also lowered its previously-reported March and April sales numbers. After seasonal adjustment, the sales rate is the lowest since 1981. Adjustment for population (and further adjustment for age and family creation) were not performed.

The financial structure of the United States is bizarre. Treasury bond prices rose on the news of poor home sales, though this data reflects a worsening economy and therefore is consistent with worsening Federal finances.

The government is (supposed to be) us, and if we don't want to engage in growthy economic activities, we have every right to so do (or not do). The Krugmans of the world want us to be Stakhanovites compared not only to Greeks but also to Germans. If U. S. workers simply worked at a French or German pace, mathematically there would be very little un- or under-employment.

Rather than printing and borrowing more money to "stimulate", the government and the Fed may want to adopt the principle that less is more. Less government stimulation will allow the "patient" to recover naturally.

Eventually, should the population keep growing, the current pace of new home sales will prove to be amazingly low. This will happen even if government moves out of the mortgage business.
With sales so low, now would be a good time for it to do so, and continue the phase-out of the mortgage tax deduction begun by a Democratic Congress when Bush I was president. People do want to own their own home, but renting allows societal and work flexibility and so the U. S. could do well to emulate Canada and let the basic economics and preferences of owning vs. renting occur in the absence of tax subsidies for owning.

The same media that tell us that Social Security and Medicare are budget untouchables are now devoted to making us think that a VAT is inevitable to pay for an enlarged government. There actually are pro-freedom ways for government revenue to enlarge without instituting a whole new tax.

The real financial crisis began with Fannie and Freddie's collapse. Immediately after that, the stock market started falling at a rapid pace. The rotten financial structure surrounding housing has caused the worst boom-bust cycle imaginable. The failure of the authorities to even publicly address solutions is among their worst failings of the past few years.

Copyright (C) Long Lake LLC 2010

Tuesday, June 22, 2010

Obama to Kick McC's Ass? But Problems Are Deeper and Broader

Is Rolling Stone happy that even before the official publication of its scoop about General Stanly McChrystal and his team of trash talkers, said General has resigned or is close to so doing? Talk about an impactful story . . .

In any case, the U. S. and NATO body counts are rising rapidly in Afghanistan, the Marja invasion has been a fiasco, the planned takeover of Kandahar is now in good measure a sweet-talking tea-sipping make-nice operation, and at best a growth slowdown in the economy appears baked in the cake. You know things are difficult at home when Walgreen's misses earnings estimates by a mile.

The 90 and 180 day year on year average growth rates as measured by Consumer Metrics Institute ( are in the single digit of all percentile year on year growth rates per BEA data going back over 60 years. The new government in Britain has announced austerity, complaining that 1 of every 4 pounds of gov't expenditure are borrowed. In Congress, however, where at least 1 of 3 dollars spent by the Feds are borrowed (printed), the powers that be are planning no budget at all for the upcoming fiscal year beginning in the fall. The excuse that they are waiting for the deficit commission (which needs more money than anticipated to complete its work!) to report in December is beyond lame. Said commission will either be ignored or say things that could be said by any poli-sci or econ college major. Spend less/tax more.
Duh . . .

Speaking of spending less, the President needs to reconsider his one-year surge in Afghanistan. It's one thing to print money to keep Medicaid clinics alive. It's another to kill Afghans. And while he's in a kick-ass mode, let him consider kicking the derriere of a certain senior economic adviser who used to be president of Harvard and whose pro-deficit, pro-Wall Street policies are failing the country even more than Stanley McChrystal, whose frustrations may have been uber-legitimate but were shared too openly.

The stock market responded well to the austerity package proposed by Team Cameron in the U. K.

If Barack Obama were to kick some Keynesian ass, the same would happen here. Maybe Paul Krugman would dump all his stocks, but the market would survive that blow.

It's time for more major mid-course changes we can believe in. But don't hold your breath.

Three assets continue to act well, two of which have good fundamentals: Gold, Apple Inc. stock, and Treasuries. Guess which of them lacks fundamental support (hint: supply is rising rapidly)?

Thus guess which one EBR views as a trading vehicle rather than (for now) a buy-and-hold asset?

Further hint: it's the asset the downside of ownership involves the U. S. going Grecian rather than Japanese.

Japanecian (or Grecianese) is the flavor of the day.

Copyright (C) Long Lake LLC 2010

Smithers the Bear

Regular readers of this blog know that I frequently refer to valuation measures that are updated quarterly by British economist Andrew Smithers, who bravely published a book in 2000 warnings that stocks were vastly overvalued. Bloomberg now reports that he has more negative views to share:

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory
firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

The article goes on to mention that he calculates corporate profits margins to be at a record since such data began to be collected in 1947 and concludes:

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.

The decline in margins will lead to profits falling “well short of expectations,” he wrote. Analysts foresee earnings at companies in the Standard & Poor’s 500 Index rising 34 percent this year and 18 percent next year, according to data compiled by Bloomberg.

This view appears consistent with ECRI's growing caution on the economy. Even a growth slowdown of moderate severity is likely not baked in the analysts' cakes.

Copyright (C) Long Lake LLC 2010

Monday, June 21, 2010

How Can Stefan Spicer Help Investors?

A recent piece by Zeal, PM Summer Doldrums 2, demonstrates cyclical tendencies for gold and silver prices to trend flat to down from Memorial Day to Labor Day. Given the runs both metals have had recently, such action would be no surprise and consistent with ongoing bull trends in each metal.

Investors who want exposure to the metals have an edge if they look at the three funds run by Mr. Stefan Spicer. His father founded the venerable Central Fund of Canada, which owns gold and silver in currently about a 60/40 proportion by value. Recently, single-metal funds of similar quality were formed, Gold-Trust and Silver Bullion Trust.

As of the close of business Friday, Central Fund (CEF) traded at about an 8% premium to Net Asset Value (NAV), while the Gold-Trust (GTU) was at a 3% premium and Silver Bullion Trust (SVRZF on the pink sheets or SBT_U in Toronto) was at a 2% premium.

Thus one can synthetically own CEF at a significant savings. Over time, there is no reason why GTU + SVRZF should not trade in line with CEF. Recently, for example, GTU was at a 10% premium to NAV. It sold off when it announced a secondary offering, even though this offering is anti-dilutive to existing shareholders and slightly decreases the expense ratio in the future. GTU is now trading only 3% above is March 2009 peak price, while gold is up over 30% from the same period. GTU is below its early December 2009 price, whereas gold and its trading proxy GLD are up several per cent.

Dr. Achuthan of the ECRI has been giving interviews that there will be no new recession this year and that while it is not calling for one in 2011, his base case is for perhaps 3 recessions over the next decade. He believes that policy-makers are facing price deflation issues and intimated that he believes that more "money-printing"/government spending is on the horizon. In other words, he is putting forth the Japanese experience as what may await.

If this is ECRI's base case, and gold has been rising in price along with rising Federal debt levels, then until and unless that relationship ceases, it is hard to see a reason not to be long significant amounts of gold within a diversified portfolio. The case for silver is more difficult, but silver is 17 times more common than gold and rather than the current gold:silver price ratio of over 60:1, eventually this ratio can easily normalize to anywhere from 20:1 to 55:1.

Thus the case for buying GTU and SVRZF/SBT_U and not selling unless their premiums to NAV reach peak levels appears to be a good one.

Copyright (C) Long Lake LLC 2010

Saturday, June 19, 2010

Too Much Complacency on Treasuries?

Barron's may be ringing a bell of sorts with Randall Forsyth's piece titled Fed to Touch Extension Chord:

FED WATCHERS MAY as well take next Wednesday off. Even though the Federal Open Market Committee will wrap up its two-day policy meeting that day, they aren't likely to have much new to scrutinize. So, they can take in a round of golf or a matinee and not be missed. . .

As result, the forecast for interest rates has moved to lower, longer. For instance, the Royal Bank of Scotland made a large, downward revision in its outlook for U.S. rates -- even with continuing economic recovery. . .

In the current investment environment, there are lots of things to worry about. Higher U.S. inflation and Treasury yields aren't among them.

Mr. Forsyth is wrong. Worry away.

Zero maturity and one-year Treasury yields are below current inflation as measured by the CPI, and coincident indicators continue to rise. The war effort in Pak-ghanistan is inflationary, and the drilling moratorium imposed by the administration can only push oil prices higher.

Higher Treasury yields are justified both by the continued abuse of savers at the expense of borrowers and bankers on the short end, and almost insane projections for continuing massive deficits with resulting exponential growth of interest expense making the long end unattractive as well.

Fears of double dip recession or some further noise out of Europe that would push prices of Treasuries yet higher would offer attractive exit points. The second half of this year smells like a great time for this to occur.

Copyright (C) Long Lake LLC 2010

Friday, June 18, 2010

Doing Go(l)d(man)'s Work to Prevent Going Japanecian

With a growth slowdown at least baked in the cake, ECRI is now admitting the possibility of a double dip. The "stimulus" has not stimulated. Worthy though keeping Medicaid going is, and humanitarian it may be to have extended unemployment benefits, those parts of ARRA (the "stimulus" bill) have no obvious multiplier effect. Paving roads and the like is also of no lasting economic benefit unless said roads were in such bad repair as to have been preventing important commerce from occurring - but that was not the case.

So what are the Krugmanites (and bloggers such as Dr. Mark Thoma and Calculated Risk himself) doing when they talk about job stimulation?

It is past time to talk aggregate demand and other failed Keynesian terms and describe with specificity what it is that people should be doing with their spare (unemployed) time.

I am on record as favoring heavy investment in green technologies of the future for which America has a current competitive advantage, such as biotech.

Certainly to the extent that needed infrastructure has not been kept in good repair, efforts to improve and maintain that should be done; but the heavy pace of municipal finance at least suggests a reasonable ongoing effort in that regard.

Consider again that the average American works perhaps 20+% more hours weekly than the average French worker, and perhaps for more years as well. Perhaps the fact is that most needed work is actually occurring, and the country might be better off if no more aggregate hours were worked in employment than are currently worked.

Printing money is good for Goldman and gold. Deflationary depressions end up creating more work for Goldman but not gold. The U. S. could go Japanese with endless "stimulus" that doesn't stimulate, financed with more and more debt at increasingly impossibly low interest rates. Or, we could go Grecian, wherein the rest of world will not lend except at very high rates, given how close we are already to a debt trap, where money is being borrowed to pay principal and interest to prior lenders.

Avoiding going Japanecian (Grecianese?) is the order of the day.

Copyright (C) Long Lake LLC 2010

Thursday, June 17, 2010

Liquidity Provided

Whether it is the Fed directly printing money or leveraged players in the financial community, today was (if memory serves) the second recent day in which prices rose for stocks, Treasuries and gold. The sleuths who actually watch this sort of thing can probably tell us.

In any case, at least one of these asset classes is likely wrong.

Even if the March 2009 stock market bottom holds, analogies to other major bear market bottoms such as December 1974 or August 1982 suggests that a churning phase is appropriate.

Yours truly feels that the economy is so weak and the administration reappointed Gentle Ben with the promise that, just as Volcker did with the Reagan administration, he will play ball, all the talk of a true double dip recession is probably overblown. More relevant is that industrial production is at the absolute level of a decade ago despite a 10% or so larger population, and basic measures such as retail sales remain below 2007 levels without even a per capita adjustment. In other words, it is not clear that in any real sense, the Great Recession (depression) has ended.

Meanwhile, there is real strength in the silver chart, which several weeks ago went to a post-1980 high for the simple 200 day moving average. If the price holds near current levels, perhaps by the end of the month we will see a new 150 day sma high, with the possibility soon enough for a 50 day sma high. None of this has happened, but if so, this would both further "confirm" the gold strength and if it happens quietly re the spot silver price as happened with gold last summer, this could provide an attractive entry into silver-related investments as was the case with gold last year.

In that regard, the funds CEF (gold 60%/silver 40%) and GTU (100% gold) trade at much greater premiums than SVRZF (pink sheets) and SBT_U (Toronto exchange), which is 100% silver and is run by the same Central Fund of Canada (CEF) folks.

I hope it's not a contrary indicator that yours truly has been buying more of the above silver vehicles on both exchanges as well as more GTU given that it is trading at about a 5% premium to NAV and below the $48.90 offer price given the ongoing secondary offering.

People who look for bubbles round every corner are better advised to think Treasuries rather than precious metals. Precious metals are following the NASDAQ 1990s script. They are not even close to important technical or fundamental levels of overvaluation relative to alternative financial choices.

Copyright (C) Long Lake LLC 2010

Wednesday, June 16, 2010

Lyndon Jimmy Obama

From AFPAK Channel today:

e Pentagon is reportedly concerned that correspondents embedding only in the south of Afghanistan, where fighting is fiercest, is causing too much "downbeat" coverage of the war and "undercutting public sentiment before President Barack Obama's strategy even has a chance to work" (Reuters).

Welcome to Vietnam.

Meanwhile, I was surprised to read in David Rosenberg's Breakfast with Dave today that his firm, Gluskin Sheff, has been receiving predominantly bullish Emails from clients who want to buy the recent stock sell-off. He is more overtly bearish, though.

So the administration wants people to hear more happy talk about a floundering "surge", and David Rosenberg is hearing "buy the dip" from clients who have internalized happy thinking.

Hmmm . . .

Non-mainstream data such as that generated by the Consumer Metrics Institute shows that the American consumer is far from "back". This CMI data indicates that a growth slowdown began last year and has lasted longer even than their measurement of the 2008 disaster.

Let us not discuss the Deepwater spill, where somehow "they" keep "discovering" that the spill rate was greater than thought. How many people believe all these "discoveries" rather than that we were lied to all along?

Dare we say the word "malaise"? (And for younger readers, this blog title refers to a well-known speech of President Carter on the energy crisis in 1979.)

All this on the backdrop of updated calculations from Smithers & Co. using the latest Fed data that continue to show approximately a 50% level of overvaluation of stocks based both on analysis of net worth and cyclically-adjusted earnings.

Once the credit osos (bears) finish chewing on Spain, when will they turn their sights on larger prey? Grizzlies on the loose . . .

The Asian contagion crisis that began in 1997 ended with the unanticipated bankruptcy of a very large country, Russia. Credit default swaps on the United States are at risk of rising to record levels sooner rather than later.

This can occur in the absence of another recession. There was no recession during Jimmy Carter's presidency, but the U. S. was forced to issue "Carter bonds" denominated in other than U. S. dollars. What's past may be prologue.

Stay tuned.

Copyright (C) Long Lake LLC 2010

Tuesday, June 15, 2010

Inflationary Pressures Building

The NY Fed has released its latest Empire State Manufacturing Survey. Here are the portions of greatest interest to me:

In response to a series of supplementary questions on prices, manufacturers estimated that the prices they paid for inputs rose by a little less than 6 percent, on average, over the past twelve months, while the median increase was a more subdued 3.0 percent (see Supplemental Reports tab). (The median and average increases differed so sharply because a few respondents reported price increases of 25 percent or more; these large increases boosted the average but had no effect on the median.) The median increase anticipated for the next twelve months was 4.0 percent, while the average expected rise was 4.6 percent. In assessing past changes in their selling prices, firms reported an average price increase of 2.9 percent and a median increase of 2.0 percent. Looking ahead to the next twelve months, firms predicted a 2.9 percent average increase in selling prices and a 3.0 percent median increase. Most of the price increases reported in this month’s survey were moderately higher than those reported in an identical survey conducted in May 2009. . .

Pricing pressures continued in May. The prices paid index inched up 3 points from last month’s elevated level, reaching 44.7, with 46 percent of respondents reporting that prices had risen over the month, and 1 percent reporting that prices had fallen. The prices received index, at 5.3, remained near the levels of the past several months

As has been the case for quite some time, margin pressures on manufacturers have been intensifying. Stagflation is here. Meanwhile the U. S. government is spending vastly more than its income. This is creating a false sense of prosperity. If borrowing rates were to go to 5%, which is less than the average rise in input costs seen by the manufacturers in the above survey, what would happen to Federal debt service? How far are the Feds from the debt trap in which borrowing exists merely to service the debt?

Trying to put a "correct" price-earnings ratio on a stock market with this sort of existential threat to a government in what are more or less ordinary times -- no major war, plague, widespread drought, etc. -- is impossible. It is also necessary to look at real assets minus liabilities and then consider that AIG went under (more or less) despite a robust balance sheet. Neither the stock market nor the pricing of Federal securities has a margin of safety. The prices may rise but are speculative.

At least if one owns gold and silver, one owns durable assets that historically have always had a value, which has not been the case for paper "money".

Copyright (C) Long Lake LLC 2010

Monday, June 14, 2010

Americans Being Kicked in the Fannie Once Again reports on the apologists for fiscal insanity surrounding the Fannie/Freddie bailouts in Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case:

“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.

‘Safest Place’

With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative -- cutting the federal lifeline and letting the companies default on their debts -- would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values.

“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”

To Dr. Holtz-Eakin, my response is that there is a way around it. It's called leadership and avoidance of money-printing. To Dr. Shiller, I would point out that any investor who is not yet aware that Fannie/Freddie obligations are not full faith and credit obligations of the Federal Government deserve losses. No, taxpayers don't have to "stand up" for these badly-run behemoths.

It's all about the inflation game (or, anti-deflation, which eventually amounts to something very similar though probably not identical). Dr. Shiller, who actually praises the money illusion in the book he co-authored titled "Animal Spirits", believes that rising prices and rising wages are good things for psychological reasons. So the U. S. government (with the Fed's assistance) writes off/monetizes the losses, thus eradicating the debt and converting debt-based finance into helicoptering money onto the people.

Until the debt is canceled or monetized, it is not inflationary. By "standing up" for Fannie and Freddie, bad debts all through the chain can be cancelled or written down, but the credit money issued by banks, such as to mortgagees, has been spent, and more is on the way to justify current prices.

It is a cynical game in which Republicrats and Demopublicans work hand in glove with the financial/building interests to put people into houses they cannot afford, that produce no foreign exchange revenue, that cost money to maintain, and that are backed by the misperception that the U. S. is a safe place to invest. No matter that over the past 25 years, the U. S. may have had more bank failures than any country anywhere, that the U. S. is the obvious home of global Ponzi finance, and that the housing scheme is at the root of it all.

What makes the U. S. "safe"? Broad oceans, militarily unaggressive neighbors, and its global military presence. Fundamentally, the Fannie/Freddie/AIG/Lehman month late August to beginning of October 2008 has never had official explanation or serious action at reform.

With Establishment stalwarts such as Drs. Holtz-Eakin and Shiller banging the gong loudly for ongoing Fannie/Freddie bailouts, you can expect more of the same-old same-old going forward.

Copyright (C) Long Lake LLC 2010

Rationale for AFghanistan War Looking Dumber

From AFPAK Channel:

After a particularly unconvincing March 8 intelligence briefing at NATO headquarters in Kabul that U.S. officers had hoped would persuade Karzai to remove his influential half-brother Ahmed Wali Karzai from power in Kandahar, Gen. McChrystal directed his subordinates to "stop saying bad stuff about AWK" and work with him instead (Wash Post). AWK, who reportedly reads all his press clippings, allegedly met now-captured Taliban no. 2 Mullah Baradar twice in January in the border town of Spin Boldak (NYT). The U.S. military's intelligence network, initially designed for tracking insurgents, is now focusing more on identifying Afghanistan's pervasive corruption (NYT).

Is it worth printing money for this?

And from the same issue, in follow-up re the revelation about mineral wealth in Afghanistan, the military is part of the deal:

Although there are "a lot of ifs," according to Gen. David Petraeus, "there is stunning potential here."

I thought the military was for war-fighting, not prospecting.

Now we know part of what German president Koeler was referring to before he recently resigned:

Koehler said May 22 upon his return from a trip to Afghanistan that "in emergencies, military intervention is necessary to uphold our interests, like for example free trade routes, for example to prevent regional instabilities which could have a negative impact on our chances in terms of trade, jobs and income."

The more the U. S./NATO effort in Pak-ghanistan appears to be an old-fashioned imperialist war for control of mineral and opium resources, the more the effort will breed opposition. It won't matter how many "militants" are killed by Predators.

Meanwhile the 100,000 American soldiers in Afghanistan could be doing useful things at home for the same expense and without all the death and disability they are suffering.

Killing "foreigners" (al-Qaeda) with drones is inexpensive and internationally defensible. The rest of this effort is looking dicier by the day.

Copyright (C) Long Lake LLC 2010

Afghanistan Full of "Stuff", But It's Their Stuff: Time to Leave

U.S. Identifies Vast Riches of Minerals in Afghanistan (New York Times).

Another reason to leave.

The Muslim world is already assuming ulterior motives for the U. S. surge in Afghanistan and invasion of Iraq.

They're their minerals. We can compete for the development. The tattered U. S. reputation all over the world will decline more if we now are perceived as "surging" for the lithium etc. in one of the poorest countries in the world.

Copyright (C) Long Lake LLC 2010

Sunday, June 13, 2010

New York Pension Deal May Deserve One or Two Cheers

The blogosphere and some of the MSM have been up in arms about the scheme described in the New York Times in State Plan Makes Fund Both Borrower and Lender. Here are the basics, from that article:

Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

This maneuver is being portrayed as a Ponzi and idiotic. Actually, it could have been worse. The state could have tried to borrow through a general obligation municipal offering to fund its payment.

Perhaps what we are actually seeing deserves a cheer or two. The pension fund may be acknowledging that the state cannot afford at this time to make its contribution, so with the fig leaf of the above circular financing, the pension fund is allowing the state to "pass" this year and hope for better times.

Now, if this were the Federal government with a compliant central bank, the temptation to print/borrow money to fund the shortfall would have been much greater.

New York State's "operating funds budget" is around $80 B annually, which based on a population of about 20 million comes to state spending of about $4000 per person annually. Thus the state spends $16,000 for each family of four people.

Ultimately each State is going to have to rationalize its flow of resources. Just as labor can flow between states if one state taxes too heavily, so eventually even the United States will have to continue to make itself attractive to its own people and to the foreigners it has been taking in for decades, both the highly educated and the manual laborers alike.

It may just be that the powers that be in New York State have kicked the can down the road in what in essence is a "not so bad" deal, odd though it looks at first glance. Taxes do not rise and neither do net borrowing costs.

This may foreshadow similar issues nationally, such as with Treasury bonds held by the Social Security Administration.

This does not smell like a one-off situation.

Copyright (C) Long Lake LLC 2010

Good to See the MSM Dissing Gold Investors

The New York Times continues to demonstrate that we are not close to a 1999-type blow-off top in the gold bull market in Uncertainty Restores Glitter to an Old Refuge, Gold. Any article that says the following reflects skepticism or something stronger:

Since ancient times, gold has been deemed intrinsically valuable, holding its worth even as governments fell and currencies collapsed, while seemingly casting a spell on its owners. . .

True believers note that gold has risen in each of the last nine years, and that while the Standard & Poor’s 500-stock index is down 13 percent since 2001, gold is now worth nearly five times what it was then.

For all its newfound respectability, gold still manages to bring out the inner survivalist in its adherents. Gold bugs like Peter Schiff of the investment firm Euro Pacific Capital in Westport, Conn., envision a black market arising in the United States, with merchants refusing paper money and insisting on gold instead, while Mr. Hathaway, the gold fund manager, says the credit system has entered “the end game.”

“People probably still think I’m nuts,” Mr. Hathaway said. “But I’m not talking to myself in an isolation chamber anymore. We’ve got company now.”

Casting a spell? The message is that investors in gold or Moonies or wiccans.

The inner survivalist?

The Hathaway quote is almost certainly out of context; as written, it makes him appear to be saying that he has a few nuts who now agree with him rather than that doubts about the orderly functioning of all the assets and liabilities floating around are widespread.

The worst of the article relates to the following quote:

To be sure, gold buyers have always been motivated by fear. . .

Since ancient times, gold has been deemed intrinsically valuable . . .

This is just plain wrong.

Since ancient times, gold has been money. Diamonds and other gemstones have been "deemed intrinsically valuable"; gold has been the medium of exchange. Not only has gold always been money until the modern age, but the IMF and the U. S. Government continue to treat it as intrinsically valuable.

Owners of gold are motivated by the desire to retain purchasing power. What emotion(s) drive that desire is (are) not so simple as the author of the article alleges.

Governments like electronic money even more than paper money, as the margins on electronic money are essentially 100%. To say that people who want to own gold are the fearful is like saying that people who own umbrellas are afraid it might rain.

Actually, it does rain, and governments do inflate and default.

Gold is a financial umbrella. Many people just don't want to stay home without it.

Copyright (C) Long Lake LLC 2010

Friday, June 11, 2010

ECRI Allies With Barron's and Issues Its Latest, Downbeat, Report

The Economic Cycle Research Institute, which has been getting more mention these days, is now tighter with its data release and has left Reuters to join Rupert Murdoch's media empire by releasing its updates through Barron's. And today's report stinks, as summed up by the title "WLI Drops, But No Double-Dip Yet".

Recently, Brazil has had a failed gov't bond auction; Germany has had a failed auction or two (I forget the duration of the securities); and China announced its third failure of bills auctioned.

In May, the United States government spent approximately twice as much as its revenues. Boy, all those investors who are passing on higher-yielding securities of other countries must really espy hidden value in U. S. bills yielding approximately nothing.

All the predictions of big increases in U. S. Federal debt are predicated on good economic growth. Even a growth slowdown is going to further challenge Federal finances. And as consumer spending is more and more dependent on Federal money, it is getting harder and harder to see a happy next few years. When the Japanese bubble began to burst, interest rates collapsed. The opposite has been happening in Greece. Will the U. S. have a reverse Japanese, or Grecian moment? Tentative times, and investors in Federal debt must ask themselves why they want low yields locked in for many years in the future.

If the government would suddenly shrink, we might well see some economic dynamism following the withdrawal process. Breaking addictions is difficult, but the method that works best is cold turkey. Unfortunately what we are seeing is much more like the frog that got boiled so slowly it didn't notice till it was too late.

Copyright (C) Long Lake LLC 2010

Thursday, June 10, 2010

Roubini Wants More Money Printing to Solve the Problem of Too Much Debt He Foresaw

Because it has led to surging employment and GDP growth in the U. S. (not), Nouriel Roubini is advocating the same for the European Central Bank:

The European Central Bank should reduce its benchmark interest rate to zero and expand government bond purchases to offset the recessionary effects of euro-area austerity measures, New York University economist Nouriel Roubini said.

“That has to be the policy mix: tight fiscal, but much more easy money, looser monetary policy, more quantitative easing and also a weakening of the euro,” said Roubini, who predicted the financial crisis, in an interview in Rome today. . .

“Going to zero alone is not going to be enough, it’s 100 basis points,” Roubini said. “They need to go to zero, they need to do more quantitative easing, they need to support dysfunctional markets, they need to signal that they are actually not uncomfortable with a weaker euro as long as that is a gradual and orderly process.”

Yet Roubini professes to believe in Austrian economics.

Sounds like the enabler of an alcoholic who "believes" in AA, but just not now.

In the meantime, has anyone noticed that the euro came out at $1.18 and is right around there now? Maybe all this gyration vs. the USD has accomplished little except siphoning real resources into the pockets of financial intermediaries.

Less debt, more equity, fewer side bets (various swaps), less ad hoc government intervention with the economy and much less porno viewing in government regulatory agencies, and then markets and the economy can mend. Penalizing savers as Dr. Roubini recommends does not help matters. He got things right prognostically a few years ago. But sometimes the doctor who makes a brilliant diagnosis gets the treatment wrong.

Copyright (C) Long Lake LLC 2010

Britain Reports on Its Afghan Failures; When Will U. S. Do the Same?

The London Times is out with Officers’ mess: military chiefs blamed for blundering into Helmand with ‘eyes shut and fingers crossed’ , which begins:

Military chiefs and civil servants ignored warnings that Britain was ill prepared to send troops to Helmand and signed off a deeply flawed plan, a succession of senior figures have told The Times.

Even those in charge of the deployment admit that the decision to go to southern Afghanistan in 2006, which has cost the lives of nearly 300 servicemen and women, was a gamble and that mistakes were made because of poor intelligence. They insist, however, that the operation was justified to revitalise the Nato mission, combat the Taleban and reassert Britain’s military prowess after setbacks in Iraq.

But a two-month investigation by The Times, which includes interviews with 32 senior military, political and Civil Service figures, reveals that there was deep disquiet over the handling of the mission from the start.

Top ranks within the Ministry of Defence and other Whitehall departments are accused of:

* grossly underestimating the threat from the Taleban;

* ignoring warnings that planned troop numbers were inadequate;

* offering only the military advice they thought ministers wanted to hear;

* signing off on a confused command- and-control structure.

When will the American press take the gloves off and demand the same sort of accountability from the administration on the U. S. failures in Afghanistan (both under the Bush and Obama presidencies)?

When will the death counts begin, as with the Iraq War?

Now that the healthcare bill is law, it is increasingly difficult to see much difference between the Bush and Obama administrations. The ability to print money is allowing the administration to kick the war can down the road and avoid the hard choices. Are Americans getting their money's worth from fighting Taliban (not al-Qaeda) on their home turf?

This questions leads one to reconsider the advantages of a metal-based currency. If the choice were an immediate tax hike, reduction in other Federal spending, or immediate rise in the price of goods and services (another version of a tax hike), what would the public favor?

I suspect it would favor a low-cost drone war on al-Qaeda in Pak-ghanistan but not almost 200,000 boots on the ground (and rising) in Afghanistan.

Copyright (C) Long Lake LLC 2010

Wednesday, June 9, 2010

Mr. Geithner's Report on Federal Debt and the Golden Rule

Click HERE to link to the current Treasury report on the public debt. (This link was ultimately obtained using an intervening link beginning on Zero Hedge.)

During the last two fiscal years, Federal receipts have falled over 18%, and outlays have risen over 27% (pp. 2-3 of the report).

Click HERE for TreasuryDirect's listing of total Federal debt for each completed fiscal year, totaling almost $12 T as of the end of the last fiscal year.

Because of asset purchases such as those via TARP, the first document linked to above mentions that while debt is up, so are assets.

That introductory section was not matched by a parallel statement that the Fannie/Freddie liabilities are not included. And forget about the true present value of Social Security liabilities, which are clearly owed, as opposed to Medicare unfunded liabilities, which are changeable.

An interesting fact(oid) I came across over the weekend is that the total value of all physical gold outstanding is 6% of the value of all financial assets, but was 20% in the mid-1930's and 22% in 1980 (see "The Golden Mean-Interview with John Hathaway"/

And Gallup's hiring/not hiring metric is becalmed in the +8 range. At the end of September 2008, this number was twice as high, and unemployment was rising. After the orgy of firing that followed the financial collapse, we should have seen very high hiring/not hiring numbers under any reasonably healthy economic recovery, but this has not happened.

Gold has been rising in price against all important fiat currencies because governments and their central banks have chosen a financial, debt-based solution to a problem involving too much underlying financial complexity. It's not subtle, unexpected or bubbly.

It's the debt (, stupid).

If and when government stops enriching the financial interests by issuing more and more debt and a simpler system emerges that focuses on real needs of real people, the financial interests will want to make you believe that the world is ending and will mark down the value of financial assets. At such a time of rationality, fiat money may cease depreciating against gold. Till then, the golden rule is in force. Don't borrow money collectively that you wouldn't borrow individually.

Copyright (C) Long Lake LLC 2010

Bending China: Eating Sweets, Not Bitters

Courtesy of a link on Credit Writedowns, there are some important insights into China's evolution as a manufacturing power in an article by Andy Xie titled Dismantling Factories in a Dreamweaver Nation. What I take as the most important core message is described in the article as follows:

An even more important factor is labor management. What I observed during my visit 10 years ago was actually the key to economies of scale. To put it bluntly, the key competence of a successful OEM in China is to squeeze labor to the maximum extent possible. That skill is developed within an organization. When a company employs hundreds of thousands from all over China, it needs a massive machine that involves recruiting, housing, training, and worker management on the factory floor.

For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers. . .

In early 1990s, when I was working in Latin America, I became bullish on China's future. I saw Chinese workers would go much farther than elsewhere to earn a little money for two reasons: a cultural acceptance of "eating bitterness" in life; and familial obligations. . .

Today's young adults are less willing to eat bitterness. They are the first generation to grow up during prosperity, without worrying about food and shelter.

Big changes are coming. If the cost of fuel continues its multi-decade ascent in real terms and if manufacturing labor wage rates continue to equalize across nations, an increasing amount of manufacturing is going to be performed near the consumer.

Copyright (C) Long Lake LLC 2010

Tuesday, June 8, 2010

Talking Trash but Leaving the Country Leaderless

What has happened to this country when in an obviously scripted and almost certainly poll-tested maneuver, the President of the United States concludes a response to a TV interview question by stating that he seeks "ass" to "kick"?

My view in 2008 was that he was the most unqualified Presidential victor in over 100 years, if not of all time, as he lacked essentially any executive experience and almost any legislative experience. Now it's also clear that he lacks class. This was pandering, pure and simple, as a response to criticism of his handling of the oil spill.

This is not how they are supposed to talk at Harvard Law.

We found out in the campaign that he has a good outside jump shot. But neither that fact talking trash doesn't change the fact that he predicted a 7% unemployment rate if Congress passed ARRA ("stimulus"). He got 10%. Response: blame Bush. And even though the public still blames Bush, it's not clear that this is helping the current President much.

Now he has an apparent growth slowdown. And somehow Rasmussen is reporting a 9 point generic edge for Republicans in the generic Congressional ballot.

Speaking in a crude vernacular is not what is required to win re-election, help his Party, or get employers to hire again.

And when the currency vigilantes turn their sights to the U. S., they won't give two figs for tough talk. The only thing that matters are the country's finances, and the world's confidence in the country's abilities to pay its bills.

This is where aggressive leadership, using the King's English, is required.

The regular new highs in gold prices show that this leadership has been lacking.

The President needs to elevate his game, not use the language of mean streets from which he did not in fact come to try to overcome his perceived executive failings.

Copyright (C) Long Lake LLC 2010

Monday, June 7, 2010

Afghan News Courtesy of Pakistani Newspaper

From The Nation, likely the leading English-language Pakistani on-line news journal, a piece running now, titled US drone or spy plane shot down in Marjah:

Mujahideen shot down a US invaders' unmanned aerial vehicle (UAV) or pilotless spy plane which fell onto the ground in Marjah , the wreckage of which is still lying scattered across the area. In another news form Helmand, Mujahideen, in two separate encounters with the combined invaders and their minions in Marjah, killed five NATO invaders with two of their local puppets and wounded 7 more NATO invaders in the late afternoon hours of the Sunday. (Taliban website)
More news:
9 NATO invaders killed in Kandahar
Qari Yousuf Ahmadi
A planted mine tore through a group of NATO troops Monday noon , killing or wounding more than 9 cowardly invaders, who were on attack mission against Mujahiddin in Arghandab district of Helmand. (Taliban website)
Mujahideen kill three NATO invaders in Badgish
Mujahideen killed three NATO soldiers with wounding another in an encounter in Atash Sang district of Badghis on Sunday. (Taliban website)
3 US invaders killed, 5 injured in Wardag
About 3 American invaders got killed with 5 more seriously hurt on Sunday as two of their tanks were hit by Mujahideen through RPGs in Sayedabad district of Wardag. (Taliban website)
Four US troops killed in Baghlan
Zabihullah Mujahid
At least four American invading troops were killed on Sunday as their military tank got hit by destroyed in Mujahideen's mortar rounds in Central Baghlan district, Baghlan province. (Taliban website)
Mujahideen kill four American terrorists in Ningarhar
Zabihullah Mujahid
During countrywide operation al-Fath, Mujahideen killed four American cowardly invaders with their tank destroyed in a face-to-face fighting in Khgianu district of Ningarhar on Sunday. (Taliban website)
Two tanks of NATO invaders eliminated in Helmand
Qari Yousuf Ahmadi
Two of tanks of the NATO cowardly forces got hit and destroyed in Mujahideen planted mine blast yesterday afternoon (June 06) killing almost all the invaders in the tanks. (Taliban website)

How much overlap between the different reports there is, and how much truth there is, of course I can't begin to comment. It is clear, however, that there is a certain-- how may we say it-- unpopularity of the U. S. and NATO presence in Afghanistan in the editors of this English-language journal.

Here is a recent AP review of some of the above events.

All this so that the Karzai gang can control the narcotics trade?

Copyright (C) Long Lake LLC 2010

Gold'n Apple

Barry Ritholtz is out with a blog post with the respected technician Dick Arms pointing out that the extreme selling on Friday June 4 correlated with market bottoms in the past.

Only a similar amount of selling near the market peak in 2007.

And a similar amount of selling was seen Dec. 1 2008. But at that time the SPY was more than 30% below its 200 day moving average (smoothed). Now we are in the early stages of a market breakdown, so early that the 50 day sma is above the 200 day sma. We are not even in a bear market; there is little real fear that is the bottom-of-the-market/world-is-ending-type fear seen in late 2008/early 2009.

This was brought home this weekend in various small group encounters. Gold? It was as if I was from outer space, or a subversive.

The fact that gold is money according to the U. S. Government, IMF, China and Russia was not in people's minds.

Yet everyone I asked recently reports business down year on year. And last year, business was down vs. 2008.

The longer-term charts of gold and Apple both suggest that the current upswings in price have much more upside before they replicate growth surges off of prior intermediate highs. Apple could be selling for perhaps 10X 2012 earnings. That would be an earnings yield of 10%. Or you could get less than 1% yearly in a 2-year T-note. And gold is in a well-established bull market. Quite some time ago, Louise Yamada established a $1350/ounce intermediate price target for gold. Her longer-term targets start at $2000/ounce. In a liquidation panic a la October/November 2008, all babies get thrown out with bathwater, but the healthy ones rebound first.

Today's market action may have been telling. Gold approached another all-time high, yet only one current headline on mentions gold. Stocks get multiple mentions, as does the following that looks as though it comes from a ten-year old headline: Tech Lifts S.F. Prices as Ocean View Gets 26 Bids.

Here is the gold mention; it is being sold, not bought: Glencore may put gold assets on market, mulls IPO.

The subliminal message from the above is that gold is toppy, as the savvy Glencore looks to cash in on investor enthusiasm. And who knows? But this sort of action would be early, perhaps equivalent to NASDAQ 1000-1500 in the second half of the 1990s, not late 1999 when turkeys flew.

More sensible may be that of Rothschilds Bank; see Why Rothschilds is piling into gold, which begins:

Rothschild's Private Banking & Trust's head of investments Dirk Wiedmann has increased the firm's overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.

Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.

'The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,' Wiedmann said.
. .

Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level - particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.

For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.

Apple: secular, organic growth at a very cheap price/growth ratio and gilt-edged finances. Gold: The opposite, but public is not engaged and remains of the mindset that the thing to do is to own tiny minority shares of companies run by insiders for their own benefit, collectively comprising the "stock market". You can forget TRINS and sentiment indicators. What counts is what is happening in the real world. An overpriced group of mostly aging companies in league with poorly run governments are seeking price levels that take into account more risks than investors have been used to seeing come to fruition for quite some time.

Caveat emptor.

Copyright (C) Long Lake LLC 2010

Sunday, June 6, 2010

Medicare, Freedom and the Road to Financial Hell

If anything is the opposite of an unexpected event, it is the aging process. Yet our government continues to ignore the obvious solution for its fiscal ills: freedom. Here is the NYT editorializing in The Doctor Payment Follies:

The formula that is used to pay doctors who treat Medicare patients is producing increasingly absurd results. If it were to be followed this year, doctors would face a 21 percent cut in payments for the tests, procedures, office visits and other services they provide to elderly Americans.

That would be a disaster, driving many doctors to stop accepting Medicare patients. Luckily, nobody is seriously contemplating that. As it has done repeatedly in recent years, Congress is readying a short-term fix that would provide a modest increase in physician fees for the next 19 months.

Please consider reading the entire, brief editorial, though that is not necessary to understand my points.

Let us pick a nit. Why does the Times use the word "luckily"?

Of course this is not a chance decision as implied by "luck". The entire Obamacare premise involved false accounting, in this case that the "doc fix" would actually occur. But of course the "fix" was "in". So, billions of unfunded dollars later, the government comes to the rescue of doctors and patients. But what about the interests of the $10/hour 40 year old clerk at Wal-Mart? Why is government always picking winners?

The answer is truly simple. The government can cut its payments 21% and doctors can regain the freedom to charge fairly for their services. All the government has to do is eliminate the fee controls. What will happen is that doctors will accept as full payment the lower fee schedule for those patients who can not afford to see them at the higher rates. The better-off patients will pay more out of pocket.

And the Wal-Mart clerk will then also be treated fairly. And the government will be serving notice that it is finally going to get its own financial house in order.

Till that happens (don't hold your breath), more downside economic "surprises" are likely.

Copyright (C) Long Lake LLC 2010

Friday, June 4, 2010

Bad News from ECRI

In WLI Growth Drops Again, the Economic Cycle Research Institute states today that:

A measure of future U.S. economic growth fell to a 43-week low in the latest week, indicating that the pace of economic growth is about to slow, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 124.1 for the week ended May 28, down from 125.6 in the prior week. The index's annualized growth rate slid to a 50-week low of 0.4 percent from 5.1 percent a week ago.

As evidence that stagflation will have to wait and little pricing increase, ECRI also reports today in U.S. Inflation Gauge Falls To Five-Month Low that:

A monthly measure of U.S. inflation pressures fell to a five-month low in May as commodity price pressures ebbed, said a research group on Friday.

The Economic Cycle Research Institute's U.S. Future Inflation Gauge (USFIG), designed to anticipate cyclical swings in the rate of inflation, fell to 98.9 in May from a revised 101.8 in April. The original number reported in April was 100.8.

"With the USFIG falling to a five-month low, underlying inflation pressures appear to be ebbing," said ECRI Managing Director Lakshman Achuthan said in a statement.

The May USFIG annualized growth rate, which smooths out monthly fluctuations, fell to 12.5 percent from a revised 23.4 percent. The April figure was originally reported at 21.2 percent.

One can ignore cheerleading from the White House, as reported in Obama stresses positives in jobs report:

President Obama preferred to accentuate the positive today, citing last month's increase of 431,000 jobs but also acknowledging that the vast majority of them were temporary jobs dealing with the U.S. Census.

"This report is a sign that our economy is getting stronger by the day," Obama said during a visit to a trucking firm in suburban Maryland.

As tar balls wash up on Pensacola Beach, destroying the summer tourist season on the Gulf Coast, the economy is not getting stronger by the day. Statements like that show that this president is out of touch. Sound familiar?

We could be looking at an historic change election. More and more, the financial markets are looking like a rerun of 2008. As we enter summer fire season, we all need to remember Smokey's adage of safety first.

And to remember that Smokey was a bear . . . not a bull.

Copyright (C) Long Lake LLC 2010

Weak Jobs Report Has a Larger Context

As the markets take on a nastier tone, relative strength has been telling the tale. The non-Wal-Mart discount retailing stocks are holding up fine. I suspect that all the good news is out for them, though. Price cuts at Wal-Mart, Target and elsewhere cannot be resisted. For example, our local Wal-Mart (very large though not a supercenter) is adjacent to a Dollar Tree (very small). How can DLTR sustain its high margins when WMT and TGT are in a price war?

Even more problematic are vendors of non-necessities. Consider Verizon (VZ). Yes, telephony is a near-necessity. But premium calling and texting plans and other elective services are not. And many people continue to have both wired and wireless service. The VZ stock chart stinks. The market is saying that its high yield is in jeapordy. As with so many other industries that were growth industries in their time, VZ is now a "value" play. But VZ has a market cap of $77 B and a tangible book value of negative $60 B.

All stocks are vulnerable, especially those of companies that are doing the same old-same old, unlike Apple or Intuitive Surgical that have breakthrough products. CAT looked a bit high when it more than doubled off its 2009 to $49. It is now off its highs but still in the high $50s. Deere (DE) has a yet weaker 2 year chart. Increasingly it appears that China's property market has peaked, though the headlines warn that such may occur.

Meanwhile gold is holding even today while silver and the platinum group metals are falling hard, and AAPL is up on the week while the general indices are down a couple of percent (so far).
In a liquidation phase, no prisoners are taken, but for today at least, the dour view of the economy that has been propounded here incessantly is in gear with the markets. The U. S. is continuing to live off the seed corn that grew out of the major 20th century world war victories (I, II and the Cold War) and thus for now is the tallest midget. Ultimately in what may be almost a Manichean showdown, the USD and gold may well enter the finals as the pretender/contender (currencies) of the occupied countries of Japan and Germany (for example) drop away.

The USD won over gold in the Volcker/Reagan era and the aftermath of the Cold War victory. Governmental corruption in league with financial interests is more blatant now, however, and markets are all about trust. Trust has been harmed for quite some time. Businesspeople and investors are well advised to take reasonable precautions for adverse scenarios that could both cause and go beyond new stock market lows.

Copyright (C) Long Lake LLC 2010

Thursday, June 3, 2010

The Apple of Corporate America's Eye?

Changewave Research (Emailed communication) reports that various Apple products are catching on in IT departments in corporations faster than mainstream analysts are projecting:

Apple. Planned corporate Mac buying has hit a new all time high, with 12% saying their company will be buying Mac laptops and 7% desktops in the 3rd quarter. . .

Surging Corporate iPad Demand. A total of 4% of respondents say their company has already purchased Apple iPad tablets – a very impressive number for a product less than two months on the market. Even more impressive, going forward 6% say their company plans on purchasing iPads in the next 90 days.
Also, every year, people who grew up recognizing the advantages of the Mac family and enjoying the iPod gain corporate market share, as it were, over the old-timers who are used to Wintel.
The kernel of the Mac family's operating system is intrinsically impervious to viruses. So the multiyear total cost of ownership can be less than for Wintel computers, and simpler.
No one knows, especially in a very dangerous global economy, but it would appear that with the so-far resounding success of the iPad, and with very clean finances, Apple Inc. is one of the few large companies with significant growth baked in the cake.
For what it's worth, AAPL and gold are seeing profit-taking today. It would be interesting if they start trading in a correlated fashion.
Copyright (C) Long Lake LLC 2010

Wednesday, June 2, 2010

Treasury Bull May Be Recrudescent

In the accompanying 2-year graph of the price of the ETF that tracks the price of the long Treasury bond (TLT) and thus moves inversely to interest rates, the red line shows the 200 day and the green line shows the 50 day smoothed moving average.

Shorter time frames show that the 200 day sma is actually pointing upward, and thus has reversed its downtrend that began last spring.

The general pattern is one of a modest uptrend in the TLT price. The recent breakout is steeper/stronger than any since the post-Lehman wild surge up in price. This move up in price reflects the bull market downward in interest rates on Treasuries that has been in force since Volcker eased for good in 1982.

Unless we see a quick major surge in rates, we are going to see a golden cross soon on this and on the equivalent ETF that closely tracks the 10-year note (IEF). That this golden cross would occur with an upsloping 200 day sma strikes me as bullish (for bonds).

Today's action is interesting. Stock averages are up but Treasury rates are flat to marginally down on the 10- and 30-year. Thus the reflexive moves in divergent directions that characterized the 2009 stock rally off the bottom may be ending. Cumberland Advisors is positing that the financial troubles in Europe will help keep rates low here and thus act as a growth stimulus here.

I'm skeptical of that viewpoint. If all the passengers on a ship that is taking on water rush to one side of the ship, it is true that the other side of the ship will rise farther off the water. But it's all one ship. To really accept that view, I'd have to see a situation a la the 1997-8 financial crisis, where it was all about "over there", the U. S. was booming and benefitted from importing the deflation in the troubled countries, and not the current situation where the troubles began here.
So what if scared money rushes here? It would appear to be too little, too late.

A few months ago, this blog offered a suggestion that Treasury rates were peaking. Investors who bought and hold then received income and now have unrealized capital gains. For whatever reasons, the charts and capital flows suggest lower yields ahead in the 10 year and 30 year U. S. Treasury bonds. If this occurs, will this be the last gasp for this wheezing bull market? Sure, but I believe that the longest interest rate bull market in the U. S. lasted 36 years. We are at 28. And given that we are at record lows on the short end, who is to say that we don't have at least another 8 years to go on this bull?

It may make absolutely no sense, but markets are often designed (or just happen to come to be structured) to fool the greatest number of the public so that insiders can be properly positioned for the big moves.

Copyright (C) Long Lake LLC 2010

Yes, But . . .

It's getting a bit boring to report the same old stuff, but here we go again.

Discover(R) says that Small Business Confidence Continues to Rise in May. Really, it's another case of bad but less bad. So a better headline would be, "Small Business Continues Its Misery". An ugly fact from this survey (conducted by Rasmussen Reports):

35 percent of small businesses surveyed said they believe the economy is getting better, up from 31 percent in April; 51 percent say the economy is getting worse, down a point from the previous month; and 12 percent see the economy as the same, down from 14 percent in April.

The percentage of small business owners rating the current economy as good or excellent was 12 percent in May, compared to 13 percent in April. The April and May ratings on the current state of the economy are the highest since June 2008. Thirty-two percent rate the economy as fair in May, while 56 percent still think it's poor. . .

28 percent of small business owners say economic conditions for their businesses are getting better, down from 30 percent in April; 44 percent said conditions are getting worse in May, down from 48 percent in April; and 24 percent said things are staying the same, up from 19 percent in April.

25 percent of small business owners indicated they were increasing business spending in May, up from 23 percent in April, while 46 percent said they were reducing spending this month, compared with 43 percent in April, and 31 percent said they are spending the same, up from 25 percent in May.

If you have absorbed the above, you would find a different headline than Discover found.

No wonder stocks are going down. Abu Dhabi's problems gave way to the problem's of the larger country north of it (Greece), which are giving way in the headlines to the problems of a much more substantial economy (Spain), and if you think it ends at Spain, you are an optimist. And at home, small business continues to be the canary that eternally "dies" warning of poison gases inside the mine. Just as Greece's problems are not new as of 6 months ago, America's economic non-recovery absent governmental and Fed machinations is not new.

The bear market that accelerated so rapidly to the downside in late August 2008 when Fannie and Freddie went into conservatorship and then imploded with the Lehman/AIG/Sunday evening announcements/etc. is back. That's the meaning of the topping out around the "Lehman gap". The drip-drip downtrend that was happening off the fall 2007 top was hidden by the huge moves down and up.

It's back. Yes, there was a true bull move in a secular bear market; but, till proven otherwise, it was nothing more than that. Small business doesn't lie.

Copyright (C) Long Lake LLC 2010

As With Gold, So With Apple: Too Many Skeptics

Reihan Salam at The Daily Beast has just put out an article in which he says that he really likes Apple's products but is upset about income inequality in America (which has something to do with his point, he believes) and concludes by saying:

Apple won't be able to defy gravity forever. Short it now.

Now I don't know if Mr. Salam is a registered investment adviser; if he is not, he may be better advised to avoid direct instructions of the above sort.

The core point above is correct: nothing defies gravity forever. That was made clear much more persuasively by Marilyn in Diamonds Are a Girl's Best Friend:

"But square cut or pear shaped,
These rocks don't lose their shape . . .

Time rolls on and youth is gone
And you can't straighten up when you bend

But so what? We, and our descendants, are all going to die. So there, Mr. Salam! Neither my point nor yours hits the mark.

The only point is whether AAPL is headed higher (given its lack of dividends). That's all. Social justice go bragh or not, Apple is probably running at an earnings rate of $15/share as I write. (Who knows outside of its top brass?) Earnings the past 5 years have almost doubled yearly. Given the recent accounting change, earnings this fiscal year are going to be more than double that of last year. And Uncle Sam isn't subsidizing its sales.

The only thing I can see is that it's the best I can find of a sorry lot of stocks. The technicals and fundamentals are in gear. The iPad is white hot.

Maybe one shouldn't own AAPL. If Mr. Jobs has a health issue, look out below. And the stock market is rolling over. But there's one in every crowd. In bull markets, perhaps 10% of stocks go down. And except for catastrophes such as in late 2008, some stocks go up in bears. To pay interest to a broker to borrow money to sell AAPL while it's in a historic growth phase while the rest of the consumer electronics sector struggles is extreme.

Right now, there's only one commodity with solid fundamentals and technicals I know. That's gold, of course, because it is not a commodity but a store of value that mostly does NOT get consumed as commodities do.

And amongst companies that make things, without getting into small-company world or very high P/E equities such as Intuitive Surgical, the equivalent of gold is AAPL. The stock is around $260. I have no way of guessing how much market share the iMac family is gaining, but soon enough we may be at or at least looking at $20/share of cash flow, and the "Value Line" for intrinsic fair value is now at 22X cash flow. Do the math.

Hint: Value Line's 2014 price target for AAPL was about $440, but that was before the blowout March quarter earnings were reported and before the iPad was on the market more than a week or so.

Short the stock? Huh?

Copyright (C) Long Lake LLC 2010

Tuesday, June 1, 2010

Golden Lies in Barron's Strengthen the Bull Case

From a Credit Writedowns post today, quoting someone named Richard Wiggins from this past weekend's Barron's:

Only 15% of gold is used as a monetary metal; the rest of it is used as a commercial metal, and that use, particularly as a corrosion-resistant electrical conductor for semiconductors, is declining. Regrettably, it is a soft, semi-useless metal with very few industrial applications.

Of course, the above is BS. Gold's use is as a store of wealth. The largest gold importing country, India, primarily bends gold a bit and people wear it as "jewelry"--but it is basically a wearable form of bullion.

Gold's use as a monetary metal is intrinsically part and parcel of its limited industrial uses. Thus, its pricing is insulated from economic cycles and is determined by the perceived usefulness or debasement of paper/base metal "money".

Mr. Wiggins' use of the term "regrettably" gives his game away.

More likely his major regret is that personally, he didn't get long gold when the getting was good.

The more I see this sort of low-quality attack on gold, the more I am inclined to overlook for now the growth in gold-dispensing ATMs for the trading part of my precious metals portfolio and go with the major trend.

Gold has more industrial usefulness than Federal Reserve notes or the alloys that we use as coins, all of which are more useful than the electronic entries we accept as money.

Copyright (C) Long Lake LLC 2010