Dec 25, 2012

Merry Christmas

Merry Christmas and Happy 2013 to you all! 

Dec 10, 2012

The Game Changer

Dec 10, 2012

OK, let's get away from all the political rhetoric for a while (at least a few paragraphs) and discuss business and investing, sans our crazy electorate.  Recently I have been looking at a technology which seems to have emerged over the past couple of years, now is on the verge of going mainstream, and which I feel can be a real game changer in its impact on a myriad of industries.  I'm referring to 3D Printing.  Most of you have probably heard of 3D Printing because security types were discussing the possibility of 3D generated plastic guns being smuggled on board aircraft a number of months ago.  While weapons are certainly a potential outgrowth of this technology, I feel that there are thousands of applications that have the potential to dislocate an infinite number of industries.

3D Printing is a printing process that lays down various materials such as plastic, rubber, powders, alloys, metals, thermoplastics, and other materials in layers.  The technology has been around since the mid-1980's, but recent technological advances have made the printers much more affordable, in the $2-$3K range (see picture below).  The printers have the capability of creating a limitless number of products generated from digital designs.

Why is this such a game changer?  Consider a retail concept where a small store front of a few hundred square feet has 1-2 printers and a handful of kiosks or iPads loaded with design apps.  The apps can be general 3D design software, or more specific software designed to make toys, tools, home decorations, safety equipment, automotive replacement parts, etc.  A consumer walks in, either designs his own device, possibly with the assistance of the clerk or an online representative/help program, and prints it on the spot.  The consumer could also design the product at home, and if they can't afford a 3D Printer, head to this store to print their design.  What if you don't want to design your own product?  You could buy pre-made designs (think app store purchases for $.99). 

What industries are impacted?  How about plastic and other material manufacturers?  After-market parts makers. Toy manufacturers. Retailers.  Software developers.  3D printer developers.  Consumer goods makers.  Tablet/phone manufacturers.  Tired of paying $18 for a phone case?  Make your own!  Don't like the frame for your eyeglasses, or want them in multiple colors?  Make your own!  Want to change the color of your plastic dishes for a backyard BBQ?  Make your own!  Want to redesign your coffee maker to fit in a tight space?  Make your own! 

This list is limitless, and I truly believe this can be a revolutionary product once the power of it is unleashed.  Watch for more at CES in January.

Short but sweet-looking forward to speaking with you soon. I'll have a note out soon discussing Hurricane Sandy, Q4 and 2013 GDP, and investing in general.

Have a great day


Nov 25, 2012

Collective Stupidity

November 25, 2012

First, my apologies for not getting on the writing stick sooner.  I've been collecting some thoughts since the elections, trying not to compose a knee-jerk reaction piece to what happened in my once flourishing homeland of California.  In case you're not familiar, there was once a time when California was the Golden State, the land of opportunity, a place where people across the country (and the world) aspired to move in an effort to forge a better life for themselves and their family.  Today California is but a shadow of its former self.  Yes, we still have amazing weather, natural beauty that rivals anyplace on earth, and of course an attitude that allows for a true melting pot of cultural backgrounds to harmoniously coexist.

Despite the mess in Sacramento, the people of California always seemed to have a common purpose of ruling for the greater good through our ballot initiative process.  The perfect example was Proposition 13.  As real estate prices were soaring, homeowners were being priced out of their homes by unaffordable property taxes.  The solution?  Cap those taxes.  Who capped them?  Not the imbeciles in Sacramento, but the people.  There have been countless initiatives passed in California over the years-some good, some bad, but many reflective of two realisms.  First, they benefited the State's overall well-being, bypassing the socialist-leaning state legislature.  Second, they were often well-intentioned, with a goal of fairness.  Consider the proposition that attempted to eliminate political influence in the redistricting process.  While it passed, and its intentions were clear, the ruling party in this state high jacked the process and tilted the playing field more in their favor. 

The national election of 2010 took an extreme, conservative tilt across the country as voters rebelled for the second consecutive election against the status quo incumbents.  In California the opposite happened, and this should have been a warning sign to all of us that something was amiss with the process, or even the people of our fine state.  You see, the country was heading not towards a conservative agenda, but instead looking for a balance that is now lacking amongst both parties, and found the only way to do so was to elect one extreme wing in the House to offset the other extreme wing in the White House.  This resulted in today's gridlock many are now bemoaning.

In California, one extreme wing tightened their grip on power in 2010, and in 2012 it became apparent that the inmates are now ruling the asylum.  In a state that is desperate for jobs, every initiative that burdens business with unnecessary regulations and taxation was passed by the populace.  Every initiative that penalizes financial success passed, yet there was nothing in those initiatives that addressed the real problem-runaway spending from Sacramento. It's now official, the brainwashing has worked.  The people of California are now convinced that the only path out of their doldrums is to take away from those who have achieved either business or financial success, give that money to Sacramento, and pray that somehow it ends up in their pockets.  I call this group think "Collective Stupidity."

We have put ourselves in this position by allowing the wrong people to decide school curriculum.  Why focus on STEM or economics when we need to make sure every student, including those at state sponsored universities, are taking the right humanities courses?  There are only two ways this many people could vote against job creation-ballot stuffing or a lack of understanding of basic economics.  It's probably the latter because in the state of California students are required to take just one semester of economics in their senior year of high school-one class in 13 years of education. That is shameful, and we are now asking these voters to make economic decisions via the ballot box that will impact our state for decades.  Do the politicians attempt to educate this part of the populace?  No.  Instead, those who support and run Big Government have engaged in the Big Lie, convincing voters that the success of others has come at their expense, and that government is the answer.  This is Collective Stupidity.  

Those of us who understand economics and business are also to blame.  We've allowed the leadership to run this ship off course without fighting back.  Now, as the realization occurs that the state is being set on a path to becoming a perpetual bankrupt state, we are in no position to enact changes because we've allowed ourselves to be villified.  The leaders have systematically under-educated the populace, and convinced them that anyone who runs a business is evil.  Instead of targeting government as the problem, the populace has targeted business, and along with it will destroy the middle class.  This is Collective Stupidty. 

I have met with numerous business owners, board members, and wealthy individuals since the election (remember, that's my job), and three themes were consistent.  First, many business owners who have delayed hiring until the uncertainty in Sacramento and Washington gets settled, are leaning towards moving their businesses, if possible, out of California.  That's a real job creator.  Second, many are moving the majority of their investment dollars from riskier assets into tax free municipal bonds to minimize the 60%+ incremental tax rate now faced by Californians (BTW-this didn't work very well in Europe, why are we trying it here?).  Finally, a number of business owners have discussed downsizing their businesses in an effort to pull capital out of the business because the reward no longer justifies the risk.  If I need to explain that risk/reward dynamic to you, my guess is you voted for many of these ridiculous initiatives.

What do we do now?  There are still investment opportunities out there, however, its time to be more selective.  Wait for another financial crisis in the state, which should occur in about two years, and then watch the dominoes fall.   Bumping tax rates and penalizing those who are willing to put capital at risk has NEVER resulted in sustainable higher tax receipts.  As businesses and earners adapt (or move) to the new tax regime, tax receipts decline as businesses relocate to states that are more business friendly.  Job creation declines, and an ever increasing percent of the population hungers for meaningful jobs.  The basics of supply demand tell us that when there is a surplus of labor, labor prices will decline.  In our state they'll decline to the level of minimum wage, which will be bumped due to voter dissatisfaction.  At this point even more businesses will flee and the cycle will repeat.  One thing is for sure-California now has more in common with Greece than just great weather and beautiful geographic features. 

There are still opportunities in this state, but the door is closing for those who haven't yet achieved success-which I believe is the opposite of what the voters intended.  Voters just wanted a better chance at success, and were convinced by those in power that taking from business was the best way to become successful.  Nothing could be further from the truth as we've seen in numerous communist and heavily socialist countries.  Remember, history doesn't repeat, but it often rhymes.  It pays to study the mistakes of others, and it appears that California is about to become a case study. 

Collective Stupidity

Nov 4, 2012

Capitalism vs. Socialism

Capitalism vs. Socialism
This is the week when Americans finally make their decision about who will be running this country for the next four years.  The decision is relatively easy, however, the media and the political machinery have muddied the issues.  In reality it boils down to a single decision-do you prefer a President who believes in free markets and capitalism, or do you prefer a President who feels that government should own the means to production and can solve all problems?  Personally I favor capitalism-it will be interesting to see how America casts its ballots.  Good luck to us all.
The equity markets were rained out for the first time since 1985, and were closed for both Monday and Tuesday, the first multi-day closure due to weather since 1887.  Good luck to all those impacted by the storm.  Damage estimates are closing in on $50 billion-and the devastation has been incredible.  
OK, someone finally said it.  QE-4 is now being discussed.  I thought that given the permanent nature of QE-3, we wouldn't hear the term “QE-4”, but I read about it over the weekend. QE-4, permanent QE-3-they are both frightening indictments on the state of the economyIt's even more frightening to think that if the US government approached their debt financing like a prudent manager of capital, and began locking in some of these low rates for the long term, that the deficit would soar by another $320 billion per year.  In other words, these artificially low rates are keeping the $1 trillion budget deficit from being worse by 30%!
What is the impact to US citizens of the Fed's easy money policy?  Ever hear of the Cantillon Effect?  The Cantillion Effect describes how the inequality in wealth surges because of “artificial and iniquitous re-distribution of wealth” caused by monetary debasement.  Artificially created money redistributes wealth towards those closest to it, to the detriment of those furthest away.  
What is the end result?  Those who benefit from the newly created money drive the price of goods higher.  Those who don't benefit from the new money suffer because they can't afford the desired goods.   Where better is this demonstrated than in the battle between the 99% and the 1%?  The 99% blame the 1%, the 1% blame the 47% not paying taxes, business blames government, government blames business, the old and young point fingers at each other, yet no one blames the source of the problem.  Who blames the Fed besides Ron Paul?  Why aren't they held to a higher standard?  It's frustrating, and hopefully we will take the steps to resolve this inequality on Tuesday. 

German legislators generally were positive about the European Central Bank's bond-buying program after ECB President Mario Draghi gave them a two-hour explanation of how it works. "His answers were very convincing, and so I think we can send the message to German citizens that the worries about inflation that have been expressed here and there are unfounded," said Norbert Barthle, a member of the Democratic Union.  Really?  

The Federal Reserve's Open Market Committee said it will continue stimulus efforts, saying the U.S. economic recovery is too weak to significantly reduce unemployment without help from the central bank. "The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the committee said.  Is anyone surprised by this?  This Fed thinks that low rates are the cure for all problems.  
Those currency manipulators, China, famous for “undervaluaing” their currency, may have some fodder to fight those accusations being made by a country (the US) so irresponsible with their own currency that they make a drunken sailor on shore leave look responsible.  The Yuan reached a 19 year high against the dollar last week, and has been rising steadily since QE-3 was launched.  Watch out for an impact on Chinese exporters.  
In a turn of events not unexpected, China has now replaced the US as the top desintation for foreign investment.  Direct foreigin investment of $59 billion for the first half of 2012 represeented a 3% decline in investments to the Red Giant. The US received $57 billion, down 39% over the same period.  Is anyone surprised that when your leadership makes a direct assault on free enterprise that investors will decide to direct their capital elsewhere?  If this trend continues, the US will have a difficult time funding their budget and trade deficits.  
Sales of new single-family homes last month reached their highest level in 2½ years, the U.S. Census Bureau said. Reversing a decline in August, sales increased 5.7% in September, to a seasonally adjusted annual rate of 389,000.
The Washington Post is reporting that nearly 1 million jobs have been lost in the US due to lay offs, delayed purchases, etc, due to the uncertainly around the fiscal cliff. The National Association of Manufacturers is estimating job losses of 6 million through 2014 and a jobless rate of 12% if the issue isn’t addressed rapidly.  

Here's another chart from my friend Bob Rezaee, who has been spitting them out like crazy lately.  The chart shows that last year we "sent" $60K to each of the 17 million households living under the poverty line.  Between direct payments, food assistance, welfare and other programs, we spent over $1 trillion to support these families.  My guess is most didn't receive anywhere near $60K, which not surprisingly means we are wasting quite a bit of money at the government level.
Let's talk football, after all, the season is almost over.  I went to the USC-Oregon game yesterday, against the advice of most of my friends (BTW-they were right).  It was the worst defensive performance I've ever seen.  All I can say is that Layne had better seriously consider firing his Daddy or he's going to find himself looking for another job.  Oh, and how about San Diego State pulling off an upset of Boise, in Boise?  Nice job Aztecs. 
I also heard a rumor the Bruins are now in first place in the Pac 12 South, sporting new uniforms that finally make them look and apparantly act like a football team.  Alabama squeaked past LSU, and Kansas State kept their title hopes alive.  
Have a great day

Oct 18, 2012

The Election Countdown

October 18, 2012

The final countdown to the election has begun, with less than three weeks and one debate to go until the official ballot casting. The town hall style debate on Tuesday night was memorable because of three items.  First, the moderator, Candy Crawley, was so blatantly biased that at one point she confirmed that the President had called the Libya terrorist event a "terrorist attack" just hours after it occurred, when in fact the actual transcript disagreed with her.  She had no control over the candidates, and the event resembled a Jerry Springer episode, with the President interrupting Mr. Romney 83 times (not my count) and Mr. Romney interrupting the President 22 times (again, not my count).  Second, true to his law professor and political background, Mr. Obama proved that he is much better at lecturing than dealing with direct confrontation as he so ineptly did in the first debate.  Finally, Mr. Romney showed that he is unable to leap through the door when Mr. Obama leaves it open by telling half truths and in some cases outright lies.  The race is tight, it should be entertaining, with the future of the United States hanging in the balance. 

Speaking of the election, while the candidates dicker and both the House and Senate are on break, the fiscal cliff looms ever closer.  This is a real issue that threatens any type of recovery.  After the 2010 election, during the lame duck session, the President did reverse course on the Bush tax cuts and extend them for two years in exchange for some increased social spending. Whether Obama wins or not, look for some type of action during the lame duck session and partial relief from the cliff.  The question is how large will that relief be and will it help?

How about some investing discussion (since this is a market blog)?  The S&P 500 continues to climb the wall of worry, and is now up almost 16% for the year and 19% for the past twelve months.  Those are great numbers and well above any reasonable estimates from the beginning of the year.  What's driving the market?  How about an extremely accommodative Fed, a slowing economy, low rates, and, let's face it, the best major economy on the planet.  If the economy doesn't fall into a recession next year, look for this run in equities to continue, albeit at a much slower pace as earnings growth has markedly slowed. 

What about 2013?  Remember, it is the first year of a Presidential cycle, historically the worst of the President's four year term for market returns.  The later years are typically better because the President has pulled out all of the fiscal stops that he possibly can to make sure the economy is roaring, or limping as it is this year, heading into the election.  By the time the first year of the cycle rolls around, the stimulus has run its course.  The biggest difference this cycle is we never experienced any true fiscal boost, but instead the markets have been fueled by Fed stimulus. 

We have discussed the possible exit of some of the southern European countries from the Eurozone.  Research firm Prognos estimates that a Greek departure would have little impact, but if it led to a chain reaction where Spain, Portugal, and Italy also left it would result in a plunge in global GDP of $22 trillion. I haven't seen the full study yet, but am skeptical of the conclusion.

China reported Q3 GDP of 7.4%, down from 7.6%% in Q2 and 8.1% in Q1.  This is the seventh consecutive quarter of declining growth.  Recent data points suggest Q4 may be stronger as housing seems to have stabilized (sound familiar?) and both retail sales and industrial production picked up in September.

Speaking of housing, US housing starts hit 872K in September, a 15% jump, the biggest since July 2008.   I've actually heard of a brewing shortage of construction workers as many have left the industry over the past four years to find other employment.  From a market standpoint, home-builder shares have been the best performers this year.

The Apple (AAPL) debate rages on.  Will the iPad mini take away from the company's successful iPad and crimp margins or will it expand the market for the devices?  When I look back at 2002/2003 when the company began  broadening its iPod line to include simpler, lower end models, investor concerns were comparable to those of the iPad mini today.  What was the end result of the iPod line extension?  A rapid uptick in penetration rates and complete dominance of the MP-3 market.  I'm not saying that history repeats itself, but it often rhymes. 

No one is more surprised than I am about the start for Notre Dame.  The Irish are now 6-0, ranked 5th in the country, and actually have a tough schedule this year.  I have always been critical of the Gold Domers because of their typically panzy schedule and the pollsters infatuation with them.  This year they are winning the close ones, and while I still expect them to end with two losses, I am more impressed with Chip Kelly's willingness to schedule a season of opponents worthy of the Notre Dame tradition. 

Have a great afternoon


Oct 8, 2012

Columbus Day

October 8, 2011

Four weeks until the election and the race has tightened somewhat.  Even the mainstream media has had to admit that Romney blew the doors off of Obama in the first debate.  How did the Ken Doll do it?  He actually showed some spirit, stated his case to the American public, and countered Obama whenever he made up facts about Romney's platform.  It has been easy sailing for the President until this point because, as I've often stated, Mr. Romney hasn't laid out his platform in a concise, understandable manner, and that has allowed Mr. Obama to define what Mr. Romney's positions are.  I'd expect the President to come out firing in round two, however, without a teleprompter and with no record of success in any of his lifetime endeavors to back him up, a draw will be viewed as a victory. 

Everyone is familiar with the Dodd-Frank Act, the legislation that is supposed to help stop the next banking collapse even though, despite its enormity, it wouldn't even have prevented the last downturn. The Act is enormous, cumbersome, contradictory, and a perfect example of a well-intentioned piece of legislation gone extremely bad because politicians and bureaucrats wrote the piece, without considering the practicality of implementation.  Now the courts are beginning to knock down specific pieces of the legislation, citing the inability to "enforce because of procedural defects." 

India's Nifty index of top stocks dropped by 16% on Friday because of a series of trading errors.  The problems from electronic trading are going to get worse before they get better. 

The unemployment rate fell last week, and was canon fodder for the media.  The media, not the blogosphere, was howling about a conspiracy theory in the calculation of the measure.  While it wouldn't surprise me that the number has been manipulated, I'd say that this number has been teased around more than just last week, but for a very long time.  The rate, now 7.8%, is now a tick lower than when the President took office.  There were 112K new jobs last month, hardly enough to drop the rate by 0.3%.  The chart below, courtesy of John Williams at, shows the adjusted unemployment rate, the U-6 underemployment rate, which is still north of 15%. 

I have cited a slowdown this quarter in both earnings and sales growth.  Strategas Research's Jason Trennert calculates that the negative to positive pronouncements is running at 4:1 this quarter, the worst rate since Q3 2001.  While he says that this often augers well for a strong market performance during earnings season, this time might be different given the strong market run since the Fed began signalling its intentions to extend quantitative easing. 

I have received some questions regarding my outlook for Q4 and 2013. My views haven't changed since late 2011-I anticipate a slowdown or possibly a recession for 2013.  As I've often stated, I don't anticipate a Bernanke led Fed to stop their QE programs until inflation is well upon us.  While I expect bond yields to remain low for the next 24-36 months as we continue to meander through this deleveraging process, I fully anticipate rates to explode after that as inflation hits hard.  In the interim, I'm looking for 10 year yields, now at 1.74%, to be under 1% before they blow past 3% and approach high single digits (or more).  The biggest risk will be in bonds as there are very few bond managers on the planet who have managed money in a rising interest rate environment.  It should be interesting.  

Need I say more than the picture below? 

Wow, three of the top five teams got beat this weekend!  My guess is this season will be a shootout.  The SEC is going to be a toss-up, although I'd be surprised if any of them ends the season undefeated (sorry Bama fans). 

Have a great day


Oct 1, 2012

At The Cusp of the 4th Quarter

October 1, 2012

Today is the first day of the fourth quarter after a robust first 3/4 of the year which has seen the S&P 500 rise by 14%.  The economy has been struggling, joblessness remains stubborn, Europe is in a recession, more people have joined the welfare rolls than payrolls over the past four years, taxes are rising, yet the market still has an excellent year.  What gives?  How about an exceptionally generous Fed who doesn't mind priming the pumps in an effort to create a wealth effect?  How about really low interest rates?  How about tame inflation (for now)?  How about no chance of an overheating economy that drives rates up?  While it may not feel good, the environment for stocks has been pretty good. 

Should we be concerned about the lack of volume often cited in this run-up?  Probably, however, usually volume from retail investors doesn't pick up until the very end of a bull market.  Remember 1999, when retail investors poured money into the markets after ignoring stocks since 1992?  How about today's bond market?  How many investors are now looking at bonds as the best place to put their money, nearly 30 years after a generational bull market in bonds began?  The bottom line is don't rely upon the retail investor to confirm trends.  Rely upon the retail investor to signal market tops and bottoms. 

What should we expect when Mr. Obama gets reelected next month?  I know, there is still five weeks left, but unless Romney does something really out of character in the debates and on the campaign trail, or if the softening economic news offsets the challengers oft cited gaffs, the President should keep his job for another four years.  I am anticipating more gridlock in DC as Obama continues his reign as the Great Divider of our nation.  I am guessing that all of the taxes from the Healthcare Act hit in January; some of the Bush tax cuts are extended; the payroll tax cut gets extended; emergency unemployment gets extended (it's now at a record 99 weeks); and that all of the $90 billion in spending cuts hit. 

While the entire exercise is ludicrous, the last one cracks me up.  Because of the sequestration last year, which in my view was the singular turning point in putting Obama in a more positive light and allowing him to get reelected, the US government is going to have to cut spending by $90 billion next year.  Listening to the politicians whine about that makes you think they've eliminated government spending completely. They are still running budget deficits of $1.4 trillion per year!!!  Remember, that isn't the size of the budget, just the deficit.  If they can't cut a measly $90 billion, how in the world are we ever going to eliminate the deficit? 

Speaking of Romney, does anyone else think the more interesting debate pairing would be Romney vs. Biden?  That would be a comedy fest of gaffs that would rival a Bush presentation on global warming.  How about Obama vs. Ryan?  I think Ryan would tear Obama apart, and only the Obama leaning press could save him in the aftermath by saying Ryan was setting a tone too that was too tough. 

In case you haven't been watching, Gold has started to rebound again after a pause.  The rebound in gold (and silver for that matter), has conincided with the resurgence in Fed and ECB action.  While gold may or may not be a great inflation hedge, what it is proving to be is a hedge for those concerned about the mistreatment of the world's reserve currency.  My thought is that the rise in gold is preceding the expected long term deterioration (or should I say continued deterioration) of the dollar. 

The global economy isn't all holes.  The emerging markets are still holding up relatively well.  The emergence of a middle class in many of those markets is driving consumer demand, especially for tech goods.  Reuters reported yesterday that exports should continue to rise as the middle class emerges and consumers progress from spending on basics such as energy and food (remember, according to our Fed those expenditures don't count anyway) to consumer discretionary goods such as electronics and autos.  This shift disproportionally benefits US based firms. 

Bloomberg is reporting this morning that unemployment in Europe is over 11%!!  I'm guessing the response in Europe will vary across the different countries.  In England the response will be something along the lines of "well, these chaps certainly aren't helping.  Let's get some tea."  While in Greece I'm expecting a response more similar to the Arab Spring.  Should be good TV. 

OK, on to college football. All I can say is what in the world happened to Arkansas?  Are you kidding?  They are now 1-4 after getting blown out by SEC newcomer Texas A&M, 58-10.  Arkansas was the preseason #7 ranked team.  Personally I'm glad they're taking a beating, because it takes some of the limelight off the struggles at USC, who was a preseason #1 but hasn't played well enough to even justify their #13 ranking. 

BTW, to my good friend Dave who didn't want me to tell him the Jets score yesterday because he had recorded the game and was going to watch it when he got home.  Was it worth all that effort? 

Have a great day


Sep 24, 2012

Why Businesses Won't Hire

 This is a re-post from yesterday, but includes the charts referenced.  Sorry and have a great day. 

 In between all of the President’s cannon fodder that keeps arriving each month when the employment report arrives, job growth has been weak.  When I speak to employers I hear two major complaints.  The first is that they can’t find qualified workers to fill their open spots.  This is an indictment on both our immigration and education systems.  If we aren’t educating our children properly to fill these spots, then we should allow qualified, educated immigrants to enter this country on work visas.  In California, we once had a community college system that was the envy of the nation.  A system of low priced educational institutions that offered students an opportunity to study in a specific area and then leave, with an AA, to obtain a job in the field as a qualified entry level employee.  Unfortunately the politicians have spent the past 30 years re-crafting the curriculum at these community colleges to mirror the general education requirements at the state universities.  This curriculum is now heavy on liberal arts, light on practical studies.  The end result?  Job openings that can’t be filled because an AA degree now leaves you under-qualified for most of today’s job openings.

The second complaint I hear from employers is the uncertainty being created in both Washington and, for California based businesses, Sacramento.  Politicians plan around the election and budget cycle.  Elections every two or four years, budgets every year.  The political budgeting process doesn’t require any forethought, and in the case of DC hasn’t even resulted in a budget for the past three years. The lack of business acumen amongst politicians, and especially the group occupying the White House today, creates a level of uncertainty for businesses that dissuades them from planning capital expenditures and future hiring.  Most businesses I know create hiring and capital plans at least three years in advance.  Of course they will alter them as circumstances arise, but in general that three year plan is standard.  By not passing budgets and leaving tax uncertainty to the last minute, governments leave businesses unable to plan, in which case capital budgeting and hiring just don’t occur.  The current group in DC doesn’t understand this.  They will run this tax uncertainty right into next year, make some changes in February that are retroactive to the beginning of the year, claim they “fixed” the problem, and then sit around in amazement when companies don’t respond by immediately hiring and spending. 
With Mr. Obama clearly ahead in the swing states, get ready for more of the same for the next half decade and beyond.  While I find many issues with Mr. Romney, I can’t fault his business sense and wish that Mr. Obama would bring in a cabinet in which at least 50% has held a private sector job.  Unfortunately, given Mr. Obama’s arrogance and self-righteousness, my guess is that he will view a victory in November as a mandate for more of the same as opposed to what it really is-Mr. Romney’s inability to formulate a coherent campaign message.
Apple (AAPL) launched their highly anticipated iPhone 5 to a rousing reception.  The phone is already sold out after selling 5 million units in three days.  Now there are concerns about shortages, which should soon pass.  Additionally, the company announced 22 million downloads of the new IOS 6.  I downloaded it on one of my iPads and, while basically there were no noticeable changes, there were a few items I have been disappointed with.  First, the attack by AAPL on Google (GOOG) is annoying.  AAPL substituted the GOOG Maps app for their own, which at this point is an inferior product.  Additionally, my YouTube (owned by GOOG) app disappeared, and I have been unable to find it in the App Store.  It’s OK to have a feud with a competitor, but don’t do it at the expense of your customers.  Maps and YouTube are two of the most popular apps on the iPhone and iPad, and changing/eliminating those without suitable replacements doesn’t benefit users. 
The economy in China continues to soften as foreign investment and domestic demand continue to wane.  Some growth forecasts are in the 6% range for the country, just over ½ of the average over the past decade.  I’ve discussed in the past that these numbers are likely overstated.  Given the long decline in the Shanghai, I am starting to sniff around some of the Chinese names for values. 
Argentina announced that GDP declined 0.8% from the first quarter to the second quarter, which was flat with Q211. 
I know this is old news now, but we haven’t discussed QE3 (since I was on my political/media rant last week). The Fed announced plans to extend their securities buying by an additional $40 billion per month, with no cap on what they’ll spend and no end date.  In other words, we just joined the Europeans in perpetual QE.  If you have been a reader for a long time you’ll know that we have been predicting that the Fed’s first interventions were just softening us up for their eventual plan for permanent QE.  Remember, for a man with a hammer, every problem looks like a nail. 
The two charts below, courtesy of my friend Bob Rezaee, show the how the tax burden is distributed in the US.  The first chart shows the share of tax liabilities by income quintile, comparing the top 20% of earners to the bottom 40%.  I realize it doesn’t show the mix of earnings (the bottom chart addresses that), but the top 20% is paying nearly 90% of all taxes while the bottom 40% not only doesn’t pay any taxes, they in fact are receiving money.  Part of this is certainly due to the recession and the fact that we have added more individuals to the disability and welfare rolls over the past three years than we have added new jobs.

This second chart shows the share of income earned by the bottom 20% of earners in 1979 and 2007, at the cusp of the recession.  It shows that the bottom 20% earned 1.4% less of national income in 2007 versus 1979.  While certainly not a positive trend, it is a far cry from the way this trend is portrayed in the mainstream media.  Note also that this group’s share of income tax liabilities has declined from 0% to receiving a benefit of 3%.

The college football season is in full swing.  There have been some great upsets and games so far.  I’m not sure I’ve ever seen a team fall from the rankings as fast as Arkansas.  I’m even throwing some kudos to Notre Dame, which for the first time in 15 years actually has a credible schedule. 
Have a great day
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Sep 16, 2012

The Problem with Mainstream Media

I know this is supposed to be a blog about investing, but our mainstream media has allowed another travesty to go under reported because of their political bias, and I feel I need to comment.  The tragedy this week in Libya and the violence in other countries was obviously preplanned, condoned attacks arising from the United States' failure to lead.  How did this come about?  First, we have abdicated our role as the global leader pushing for democracy and capitalism against a rising tide of socialism and terrorism.  We have sat by while Iran has become the dominate power in the Middle East, soon to be armed with nuclear weapons.  We have abandoned our long time ally Israel, leaving them to twist in the wind while they face threats from all sides.

And now the press is jumping all over a little known video that has been circulating on You Tube for months, citing it for creating "flash riots".  The reality is that those riots were planned well in advance to occur on September 11th.  Flash rioters don't show up armed to the teeth, months after the supposed catalyst, and destroy an embassy and kill its inhabitants.  These riots were well planned, coordinated events that are attacks on our sovereign land. 

How could an attack like this occur on the anniversary of 9/11, and our President and his cabinet not be more attuned to what was happening? That's easy given the President has missed 67% of his security briefings this year, presumably while he was out campaigning to retain his post.  So while he was out campaigning, our embassies have sat without vital information about danger lurking all around them because the President was too busy to attend the briefings. 

With all this occurring, you would think the mainstream media would be all over this Administration, looking for answers.  Instead they are jumping on the challenger, wondering why he felt compelled to speak before he had all the facts.  Are you kidding me?  At least he was man enough to get out there and defend America, in spite of the fact he has never been given access to the security briefings, a customary accommodation given to the challenging party's nominee during a presidential election.   But rest assured, our fearless leader has "warned" our enemies that they "will be brought to justice." These warnings, and lack of any action, are the reason we have become an easy target around the world.  All bark and no bite. 

The role of the press in this country used to be to challenge, investigate, and help ensure that our leaders performed their duties, and they used to do it in an unbiased manner.  Today's mainstream media is so biased that their information and investigative role is worthless and untrustworthy. 

I say shame on this media.  Do your jobs, don't give us your opinions.  Leave the opinions to bloggers like me. 

Oh, in business news the Fed announced plans to buy mortgages and other securities in limitless quantities forever, but we'll discuss that in another note.

Have a great week


Sep 6, 2012

Goodbye Summer, Hello Election Season

Sept 5, 2012

As the quiet of August and a summer of barbeques, vacations, and swimming fade, the election BS is in full swing as both the Donkeys and Elephants battle it out over who can sling it the highest. The Donkeys are offering free everything to everyone, while the Elephants are offering who knows what.  While the battle ground should be about policy and the economy, the focus has been on the really important items such as which candidate was born in Kenya, which candidate drives around with domestic animals on his car, and which candidate feels your pain more.  At the end of the day, in my view, it will come down to which candidate makes the American voters feel like he'll deliver more to their particular cause, and both will fail to address the key issues facing America today.  Mr. Obama would like us to look more like a bankrupt European country, and while it may not take another four years of his policies to get us there, he may get his wish-and I don't mean that in a good way.

Speaking of Europe, ECB President Mario Draghi missed the Fed confab in Jackson Hole last week saying he had "too much work."  This morning Mr. Draghi announced that the ECB wouldn't be changing their main interest rate, hodling it at 0.75%, and that they will engage in permanent and limitiless bond buying to achieve that goal.  The ECB has become the first central bank to officially adopt what has already become the unofficial policy of most central banks:  permanent and limitless quantitative easing.  Our Fed unofficially adopted this policy, and now that the ECB is on board it would seem that Vanguard's estimate of massive currency deflation beginning in 2016 is baked into the pie.

The equity markets will love this new ECB commitment, even though it has been anticipated for some time.  After we get the initial equity bounce on the news of this announcement, which could last as long as a couple of months, long term investors are going to need to consider where to put their capital for long term protection.  Unfortunately, when currencies grind down to nothing, financial assets don't offer the level of protection required to keep up with inflation.  Real estate, timber, agricultural land, and other hard assets that have the ability to generate inflation adjusted positive cash flows offer the greatest protection.  Additionally, gold and other stores of value also offer some protection. 

Our own Fed Chairman spoke last Friday from Jackson Hole, and offered more of the same.  Mr. Bernanke said  "The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."  Helicopter Ben-he still hasn't seen an economic problem that easy money couldn't solve. 

In spite of a middling economy and uncertainty in Europe, the S&P 500 has risen 12% so far YTD.  For investors who are confused as to how the market could be so strong in spite of a weak economy, consider that most bear markets and recessions have been started by Fed tightening action.  In this environment, a slow but not yet declining economy, the threat of Fed tightening is virtually zero.  Additionally, this Fed has repeatedly stated that they would be inclined to continually stimulate versus any other action.  With an economy that has minimal need for more easy money, the Fed's largess flows directly into the capital markets, creating a "wealth effect" that hopefully stimulates the economy.  In other words, while President Obama dismisses the concept of trickle down economics, Mr. Bernanke and the Fed rely upon it completely. 

It's finally here!!  College Football season has arrived!  I feel like Navin Johnson celebrating the arrival of the new phone books.  As always there have been a number of changes in coaches, players, league alignments, etc, from last season, but at the end of the day the product is the same.  Great Saturday entertainment.  While I think the Trojans have a tough road to get to the title game given their need to beat Oregon twice in a month and their lack of depth because of NCAA sanctions, I'm still picking them to make it to Miami!

Have a great day


Aug 26, 2012

Another Fed Lovefest

Just days before Chairman Bernanke takes the stage at his favorite Wyoming venue, he wrote a short love note to Congress informing them of his intentions to continue with his generous ways.  In the minds of Democrats the assistance couldn't come too soon as the economy continues to falter in advance of the elections.  Republicans have started to howl, to no avail, as the good Chairman has greater job security with the Obama Administration than with the Tea Party, who has called not only for his removal, but also the demolition of the entire Fed. So what if the Fed spends another trillion or so if it keeps the Chairman off of President Obama's ever growing role of unemployment recipients?  

The US government, never one for cutting spending, has actually started doing so in advance of the budget cuts from last year's budget negotiations.  The government has cancelled 14K contracts worth over $2 billion for the fiscal year that ends September 30th, with more to follow next year when the spending cuts really hit hard.  I guess we can look forward to more job creation from government programs that fund green energy programs to offset the job losses in the defense industry.  
One of the key discussion points of this election has been the President's desire to spread the wealth vs. Mr. Romney's goal of spreading the tax burden.  The chart below shows the last 95 years of tax rates for income, corporate and capital gains. 

 I constantly get questioned about how equities can continue to kick off good returns when the economy is so weak.  A look a the charts below (courtesy JP Morgan) show that slower economic growth has historically supported better equity returns.  Why?  Because the threat of inflation becomes muted during a soft economic period, keeping a hawkish Fed at bay.  The chart on the right shows that earnings growth from US corporations is handily outperforming the economy, and has done so at a faster clip than at anytime over the past 60 years. 
We have discussed China's slowdown over the past year, but the chart below show how bad the equity markets have been as well.  Believe it or not, the Shanghai is one of the few indexes that has almost round tripped its recovery from 2008.  A weak China is bad for global growth and commodity prices. 

Shell expects to overcome equipment problems that have put it behind schedule and begin drilling in Arctic waters off the coast of Alaska this summer, said Peter Slaiby, vice president in charge of operations in Alaska. He said that because of unexpected delays, the company is scaling back its plan to drill five wells this year and will probably begin work on one or two.
Aetna signed a $5.7 billion cash-and-stock deal to buy Coventry Health Care, making Aetna one of the biggest providers of government-financed health care in the U.S. Aetna agreed to pay $42.08 per Coventry share, a premium of more than 20% to last week's closing price
Finnish Foreign Minister Erkki Tuomioja said the nation is preparing for a breakup of the eurozone. "We have to face openly the possibility of a euro breakup," Tuomioja said. "It is not something that anybody, even the True Finns, are advocating in Finland, let alone the government. But we have to be prepared."  That's a scary proposition.
Best Buy (BBY), aka Amazon's showroom, missed earnings again, posting negative comps for the 9th quarter in a row.  The company continues to struggle with a lack of unique product offerings and heavy overhead.  When Circuit City (CC) filed bankruptcy in late 2008 I said that BBY would have a nice 24 month window to gain share before they began their invevitable decline.  They have lasted a bit longer than I expected. 
BBY’s woes aren’t good news for electronics manufacturers.  Part of BBY’s problem is a lack of interesting new products which drive consumers into stores.  The other problem is that electronic prodcuts have become commoditized-which means shrinking margins for manufacturers and limited opportunity for differentiation.  Remember the old adage “rent hardware stocks, own software stocks”.  With the exception of Apple (AAPL), there really isn’t a differentiated consumer electronics brand. 
Warren Buffett's Berkshire Hathaway is backing away from municipal bonds. The firm disclosed in a regulatory filing that it terminated credit default swaps covering $8.25 billion in municipal debt.  Mr. Buffet could be getting ahead of a tsunami of municipal defaults.  Investors are warned to tread carefully in the space-there are lots of high yielding securities, just be careful of weak municipalities.  My concern is that once a few bankruptcies occur, what if stronger munis decide to enter strategic bankruptcies even if their finances are robust?
With food production hurt by unfavorable weather in the U.S. and the Black Sea region, the world should prepare for higher prices in the next few months, the International Monetary Fund and the World Bank said. The U.N. Food and Agriculture Organization's food index climbed 6% in July, reaching a higher level than in 2008, when food and oil prices drove millions into poverty.  I guess its time to repeat the call for ending the ethanol subsidy, which consumes 1/3 of the US corn crop each year. 
A U.S. jury convicted Doug Whitman, founder of hedge fund Whitman Capital, of two counts of conspiracy involving insider trading and two counts of securities fraud. Prosecutors said Whitman made $900,000 from tips obtained from insiders at technology firms.
College football season is finally here!  High school (and Pop Warner) started this weekend, and I was able to catch a handful of games.  The college game kicks into full gear this coming weekend.

Have a great day


Aug 19, 2012

Jackson Hole-Bernake's Stage

Aug 17, 2012

Jackson Hole has been Charmain Bernanke's stage in recent years, the place where leading economists gather to hear each other blather on about theory, strategy, and government action.  The Charmain has established the venue as his own special pulpit, using the stage to announce Fed largess and stimulate moribund markets.  The market has been anticipating, no, actually expecting the chairman to extend his generosity as the retreat begins late this week.  If the good Chairman misses the opportunity to please the Street, look out for the fallout. 

I heard a great depiction of the President's economic stimulus plan:  Trickle Up Poverty.  It's the opposite of Trickle Down Economics, where allowing higher earners to keep more of their income leads to more spending and increased hiring.  Trickle Up Poverty is where the President continues to take more and more taxes from higher earners until they approach the poverty line like most of his supporters.  Should be an interesting next four years.

Has anyone else noticed how hot it's been?  Holy smokes!  It must be global warming, which is good for the economy.  Global warming, heat waves, and droughts cause increased spending on fertilizers to offset a lack of moisture for crops; higher fuel prices and therefore better retail comps for retailers such as Costco; better earnings for utilities due to higher air conditioning usage; and of course an increased focus on solar because of higher energy costs and, let's face it, more sunshine. 

A number of economists are focusing again on inflation of food and energy (remember the Fed doesn't count those even though they make up 21% of US consumer spending).  If we truly get a bout of inflation, combined with the weak economy we've had recently, we could get a 1970's style stagflation.  Given Chairman Bernanke makes Arthur Burns look like a spendthrift, any uptick in inflation or credit creation could result in soaring inflation.  Personally I still think we are a couple (+) years from inflation, but once that Genie's out of the bottle, look out! 

Did anyone notice that the Eurozone reported GDP at -0.2%?  Could this be the start of the long awaited European recession?  With GDP in Greece running -6% this quarter, and the rest of the continent (including the UK) grinding slower, its my view that they are already in a recession, and all we need is the official declaration. 

In the US economic indicators have ebbed and flowed, and after another weak summer, it appears indicators are picking back up a bit.  For those perma-bears, don't worry, you're still safe assuming a weak 2013.  Just be careful of the back half of 2012 as a slight acceleration in economic activity combined with more Fed/ECB action could be all it takes to send the market on a year end tear. 

The San Diego Padres sold for $800 million this past week to a group of investors that included some of  the O'Malley family, relatives of the former Dodger owners.  Compared to the Dodgers the Padres were a steal, as the LA team sold for $2.1 billion.  I was fortunate enough to have been given a look at the Padre book, however, it was a bit out of my price range. 

College football is coming, and the Trojans are the AP #1.  While they have a fine team, it appears that they will have to beat Oregon twice in four weeks to advance to the BCS Championship game.  That will be tough for a team with only 15 scholarships to give out. 

Have a great week.


Aug 12, 2012

Climbing the Wall of Worry

Both the market and President Obama are experiencing rebounds in their numbers despite poor fundamentals.  The market has held up with five consecutive weeks of gains despite the potential for a synchronized global recession with Europe, Japan, and the BRIC countries experiencing weakness.  Earnings season just ended, and while it was the weakest since 2009 in terms of the percentage of companies beating either sales or earnings estimates, earnings are still approaching the all time highs achieved just before the debt bubble blew. Why is the market holding up?  How about exceptionally low rates, a reasonable valuation, no real signs of inflation outside of food and fuel (remember, we don't really count those), and the probability of both the Fed and ECB stepping in to support the market, er, I mean save the economy.  It's a Goldilocks scenario for sure. 

The President's rebound is no less astounding.  His lead vs. Mr. Romney and new running mate Paul Ryan has widened.  The President is taking pages from LBJ and Harry Truman's playbooks.  From LBJ he has learned to utlizie friendlies with a big microphone, in this case Senate Majority Leader Harry Reid, to engage in knowingly making false statements.  Governor Romney has been on the defensive about his tax-compliance (does anyone else remember Tim Geithner, among other cabinet members, never paying taxes?).  After a supporter started rumors about his opponent "engaging in intercourse with farm animals", LBJ responded that "of course its not true, but let him prove it."  The page from Mr. Truman's book is of course run against a "do-nothing" Congress.  Mr. Obama has been successful with both strategies, taking the microscope off his failed policies which have added $5 trillion to the US debt burden and added more people to the disability rolls than to the employment roll.

The President stated last week that the auto bailouts were such a success (you remember, when they violated the rule of law and forced a cramdown on bondholders while giving equity to labor unions?) that they hope to do it in more industries going forward.  I view this as either encroaching socialism or bad policy from the people who gave us Solyndra.  Watch your pocketbook and remember, you didn't build your business, the government did. 

Just when it looked as though we would experience a summer with moderate gasoline prices, a fire in a California refinery combined with other outrages have conspired to push prices well north of $4 per gallon for regular.  The jump in prices far exceeds the moderate increase we have experienced in oil prices over the past two months.  The picture below is from filling my wife's SUV this past week, and yes, that is the price of regular.  

Speaking of California, the first phase of Governor Brown's unfunded $100 billion high speed rail project is expected to run through the Central Valley.  The general idea is to build an overpriced rail that would provide riders with a breakeven point between rail and driving from LA to San Francisco.  Evidently they have succeeded, assuming gasoline prices jump from $4 to $44 per gallon.  I'll be interested to see if they can actually get the thing built.  Besides the obviousl impossible funding hurdles, how are the environmentalists going to respond when the proposed route travels through the protected habitat of the endangered red-spotted jumping flea?  This would be fun if it wasn't so disgusting coming from a state that is already struggling with a debt problem so large that, according to Governor Brown (aka Engineer Fred) we must slash school spending in order to pay the overly generous pensions of state employees. 

The Olympics concluded, and even though the opening ceremonies were horrifically boring, the games overall were great.  I regularly found myself up at 1 AM watching the NBC coverage.  I thought the competition was superb across the board.  The only disappointment beyond the opening ceremony was the Women's Gymnastics team.  After winning the team overall and the individual overall, these young ladies engaged in a series of bloopers that caused NBC to pull their "Fab 5" advertisements and replace them with other medal winners.  I thought the women's track team was amazing as was the volleyball combo of Misty/Keri, woman's soccer, men's swimming, and a slew of great individual stories.  

After bottoming at under 1.4%, ten year treasury yields have backed up to 1.66%.  Junk bonds have been the surprise this year, returning 9.8% for the year.  Yields have dropped below the magical 7% hurdle which has signfied sell-offs in the past.  Interestingly, in spite of the weak economy, the default rate is 3.3% versus an historical average closer to 5%.  On the flip side, the risk premium for high yield over treasuries is at almost 600bps vs. an historical average of 5%.  With lower risk bonds yielding peanuts, the demand for high yield debt should remain robust unless there is a deterioration in the default rate.

Well, it looks as though all those political appointees in the Obama Administration have finally paid off for Goldman Sachs (GS).  In spite of what would seem to be overwhelming evidence of wrong-doing, the US Justice Department has decided not to prosecute GS for its deeds in the sub-prime fiasco known as Abacus.  GS notifed the SEC this week that the investigation had been dropped.

I have been avoiding talking about Greece, however, the recent unemployment numbers deserve comment.  For May the unemployment rate in Greece was 23%, nearly three times higher than the 9% rate in 2009. Among people younger than 25, the jobless rate is 55%.  Ouch! 

The Economist is reporting that the US economy, which expanded at a 1.5% rate in the second quarter, is growing slower than any other recovery in US history.  Output has increased 6.7% and employment 2.1% since the recession ended in June 2009.  By contrast the economy in the early 1980's showed an 18.5% increase in real output and an 11.1% increase in employment over the first three years. 

We haven't had a chance to discuss the Knight Trading fiasco, which cost the firm $440 million after a software glich generated buy orders for $7 billion worth of stocks.  The firm will apparantly survive after receiving a cash injection from a group of investors, but the damage to its credibility and that of the entire market have been badly damaged.

Forget about all my musings about the soaring student loan debt levels and rapidly rising default rates.  Fed Chairman Bernanke, speaking to a teacher's group, assured them that the $1 trillion in debt wouldn't jeoparize the US financial system because its backed by the US government.  Whew!  Now I feel better.  Can we restate the official government debt number to $16 trillion now?

OK-it's darn near college football time.  I'm looking forward to a great season and can hardly wait for the first game.  My youngest son and I have been watching replays of games we have taped or those appearing on the myriad of ESPN channels.  We've watched last year's Oklahoma State-Stanford game a number of times, but we're ready for some new action.

Have a great day


Jul 29, 2012

Promise of Help Drives Markets

We've been discussing the probability of a run-up in the equity markets when the Fed launches another round of quantitative easing.  Portfolio managers are so afraid of missing a rally that the mere mention of central bank intervention can send markets soaring.  The back half of last week experienced such a rush after ECB chief Mario Draghi vowed to support the Euro.  Markets viewed these comments as a guarantee of further easing.  In reality, everyone knows that Draghi and crew will support the Euro until the end, so this comment shouldn't have come as any surprise.  The market has been selling off and the negative sentiment is near levels where we have experienced market bounces over the past four years. In other words, the pump has been primed for a positive response to any bit of easing news. 

All eyes will be on the Fed this week, with expectations running high the committee will at least hint at future intervention.  We fully expect some type of Fed action before the election, and will use the resulting market surge to pull back on equity positions and play some defense heading into 2013.  My suggestion is not to hold on too long because I get the sense most of Wall Street has the same plan. 

One of the conundrums facing the Fed is how to get banks to lend more.  Some are suggesting eliminating the dividend on overnight balances, thus making it less profitable for bankers to hold cash.  Given the stumbling economy and weak jobs picture, I'm not sure encouraging banks to be more aggressive lenders is particularly sage advice right now. 

Speaking of banks, our old friend Ed Yardini was caught saying that "banks are the Achilles heel of capitalism."   Doesn't Ed know that we aren't supposed to state the obvious?

Almost lost in the week's craziness was the GDP report, which came in at 1.5% for the 2nd quarter.  Revisions have been downward since 2008, so expect the final number to be closer to 1.0%.  Remember that inflation is backed out of this measure, and given that the inflation rate has been understated, we could have just experienced a 0% growth rate in the 2nd quarter.

Second quarter earnings have also been limping in, with only 64% of companies beating EPS estimates and less than 50% beating sales estimates.  Sales growth has been punk, and actually running negative for the quarter.  This doesn't bode well for corporate hiring nor the employment picture.

Four years ago I wrote about the spectacular opening ceremonies for the Beijing Olympics. It is with great disappointment that I must write about the London Games' Opening Ceremonies.  With the exception of Mr. Bean farting, I have to say the production was the worst I can remember since the Soviet Union drove tanks down the middle of Moscow in the US boycotted 1980 games.  Yowsa!  That was a snoozer. 

Have a great day


Jul 22, 2012

Waiting for Ben

Big Ben, Gentle Ben, Uncle Ben, Helicopter Ben, the Bernanke Put.  Ben Bernanke has many nicknames, but after this week's Senate grilling, the chairman might be forever remembered as Benevolent Ben.  After Senators criticized him for not doing more to help the economy in spite of expanding the Fed's balance sheet to a record $2.7 trillion, the Chairman decided to take one for the team, exhorting the Senate to "do your job".  Ben is right-he has exhausted the Fed's ability to prop up anything, much less the economy, while the politicians have dithered away the time by arguing about trivial matters.  Meanwhile, Rome burns as the Fiscal Cliff looms large heading into 2013.  As I've written in the past the impact of the Obamacare tax increases, the expiration of the Bush tax cuts, the expiration of the payroll tax cut, and the spending cuts created by last summer's budget battle all hit while we are celebrating the entrance of 2013.  I've seen estimates of up to 2.5% of GDP, although most estimate the impact closer to 1.7%, still enough to cause a recession. 

What to expect as we head towards a recession?  How about a third quarter market rally?  Makes sense, right?  The market peaked in late 2007 right in front of the biggest recession of us remember.  Why not another spike up?  I'd say its almost a given that the Fed will make one more injection before the election in an effort to stimulate a wealth effect.  There will be howls of partisanship if  he does so, and watch out for his chances of getting renominated should he make a pre-election injection and Mr. Romney still wins the election. 

Speaking of the election, the national polls have it at a dead heat, with Mr. Obama carrying a slight, but statistically insignificant lead.  The President, who once adamantly admonished those who dared to engage in name smearing tactics, is now setting a record for spending on such messages.  Why the reversal?  The President really has nothing else to run on.  His economic record is horrible, and even worse his prescriptions for fixing the economy border on insanity (fortunately many of those have been blocked by Congress).  Just last week he showed his true nature by saying that if you started a successful business, you really weren't responsible for doing so, that government truly deserves the credit.  This is one scary individual, and while I'm not a huge Romney fan, my fear of another four years under Obama would allow me to vote for a sea slug if he were opposing the incumbent. 

I don't think it's a secret that the economy is ebbing and flowing-right now it's weak.  Retail sales, which if you recall were strong in the early part of the year due to better than expected weather, fell by 0.5% in June, the third straight month of declines.  Unemployment claims have also begun rising again, an ominous sign as we head into 2013. 

Yahoo (YHOO) announced their sixth CEO in the past five years as they lured Marissa Mayer from Google (GOOG).  YHOO reported a 4% drop in earnings the day after Ms. Mayer's hiring.  She definitely has her work cut out for her as YHOO continues to struggle monetizing their traffic. 

The country's largest pension fund, CALPERS, announced that their return for the fiscal year ended June 30 was a paltry 1%, a far cry from their stated goal of 7.5%.  Pension liabilities are at the crux of the latest slew of bankruptcies among California cities.  An independent analysis pegs the national pension crisis at a $4.7 trillion underfunding.  Ouch! 

Drought conditions continue in the Midwest during what some are calling the driest year in the US on record.  Corn and soybean prices are both hitting new highs as crops continue to wilt.  This should be a good year for the Global Warming crowd. 

Bond yields in Spain continue to rise as the economy, once thought to hold a 2% growth rate for 2013, is now expected to decline by 0.5%.  The country is now seeking assistance in making debt payments.  Should Spain fall, the fallout will be dramatic and much worse than the impact of Greece, whose economy is a fraction of the size of Spain's. 

Sorry for all the bad news.  Remember, if the Fed steps in this fall, ride the market for a bit and then get really defensive.  Without any government action to address the fiscal cliff, expect a truly poor market in 2013, with few places to hide. 

Have a great week


Jul 15, 2012

Visa, MasterCard Settle with Retailers

Visa (V) and MasterCard (MA) settled a long running lawsuit brought by retailers against the card giants which permits merchants to charge more to customers who pay with credit cards.  The net effect of the deal should allow retailers to charge more for products when consumers use credit cards for payment, raising prices and helping margins.  The prior agreement maintained a preferred pricing, whereby retailers were prohibited from raising prices on credit users, although they could discount for those paying with cash.  The deal requires up to $1.2 billion in fee relief plus an additional $6 billion in cash to settle the price-fixing charges.   Bank card issuers such as JP Morgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) will contribute to the settlement.  The suit has been ongoing for almost eight years.
The head of Perigrine Financial, Russell Wasendorf Sr., admitted to embezzling more than $100 million from clients over a 20 year period.  Wasendorf had attempted suicide last week, but survived.  In his suicide note he outlined his deception, which included doctoring statements and fooling regulators for two decades. 
Vallejo.  Stockton. Mammoth Lakes.  San Bernardino.  Stanton?  It appears that the tiny Orange County city of Stanton might be the next in an ever growing list of municipalities to file bankruptcy.  “It’s easy math.  We have a deficit of $2 million a year and there’s only $8 million left” said Terri Marsh, a city official.  The list of California cities with looming financial problems is growing, and with the assumption of Redevelopment Agency liabilities, more cities are beginning to teeter.  

One year later the market is in roughly the same spot as it was before beginning a 16% correction.  Economically the world is marginally different today than it was twelve months ago, with the biggest changes being Europe is now at the doorstep of a recession, China and the other BRIC countries are rapidly slowing, and another round of central bank easing has begun.  The US still faces monstrous fiscal problems with little chance officials will address them.  

Speaking of Central Banks, Helicopter Ben will be testifying to the Senate on Tuesday.  With the economy slowing, an election looming, and hawkish statements dominating the most recent Fed minutes, expect a ton of grandstanding from the committee members.  Typically the members will bombastically make statements, which they then try to contort into a question for the Chairman.  He has been adept at not falling into the elected officials’ feeble traps, but don’t expect that to keep them from spewing their typical vitriol. 

Five weeks to college football season.  Are you ready?

Have a great day