The Nielson Company provides valuable market research (demographic breakdowns of an audience, socio-economic factors) for any consumer driven company. Here’s an excerpt from their report on YTD 2009 Advertisment Spending:

U.S. ad spending fell 15.4% in the first half of 2009, according to data released today by The Nielsen Company. A total of $56.9 billion was spent on advertising in the first six months of the year, more than $10.3 billion less than the same time period in 2008.

The automotive industry was the top spender ($3.68 billion), despite a 31% cut over last year. Local auto dealerships – also a perennial top-10 spending category – cut its ad budget 26% through June this year.

ad-spend_4 Via Infectious Greed

A 31% drop in spending by the autos shouldn’t be surprising, but that’s brutal.

Finally, here are the type of Ads we can look forward to watching this football season:


One has to wonder if businesses are moving away from TV advertising altogether, and relying on the “clicks” of Google to bolster business.

Here’s the full report.

The Economist has an interesting commentary about the relationship between countries with high GDP growth and the returns for shareholders. Since corporate profitability is a central driver for economic growth in the first place, one would expect that high GDP growth should be a prerequisite in determining the viability of an investment.

This was not the case when considering 2 testing strategies for 17 countries:

  1. There was a negative correlation between investment returns and growth in GDP per capita
  2. In sorting the economies by growth rate into quintiles (highest to lowest), the fastest growing countries yielded an average 6% return, while the slowest yielded 12%.

The obvious problem with these statistics lie in the year of the study (2005) since the US was still achieving 4-5% GDP growth, and would be considered apart of the “slowest growing quintile”. Perhaps Thailand and North Korea were in the top quintile, but for obvious reasons (political instability, risky currencies) they weren’t great investments.

I do agree with this logic, however:

Why might this be? One likely explanation is that growth countries are like growth stocks; their potential is recognised and the price of their equities is bid up to stratospheric levels. The second is that a stockmarket does not precisely represent a country’s economy – it excludes unquoted companies and includes the foreign subsidiaries of domestic businesses.

Yes; the first is an issue of valuation (when is it unsustainable for China to have a higher P/E multiple than the US?) while the second is an issue of internal vs. external business growth; would we rather own a US run company with 30% of its exports to emerging markets, or a foreign company with 100% of its sales to consumers in its own country?

IBM, for example, is an American run multinational company which contributes to the GDP growth of many countries overseas – however the tangible returns are realized by the shareholders (who are probably from the US), which explains why the “slowest growing” GDP statistic isn’t very relevant for investing, since the geographical scope of most businesses is very wide.

Back in Action

I hadn’t been paying enough attention to the markets this summer to write anything meaningful until last week – it figures that as soon as I start writing, the markets begin to tank…

The Good:

My first move is to add “Credit Writedowns” to my blogroll. I can’t believe I’ve missed this for so long, since its probably one of the best sites I’ve ever seen. There’s more categorization and sub-articles (including a credit crisis timeline, which includes an archive of every major event in the past 3 years) than I’d ever care to read through, but that goes hand in hand with the extensive nature of the website.

The Bad:

Secondly, I’d say that The Big Picture is hanging on by a thread in the class of venerable blogs. The content has been lacking over the past 3 months – mostly since the author has been promoting his book at every turn – and his pursuits of investigative journalism have been mostly overridden by efforts to stir controversy. That said, Barry Ritholtz has been adding value with his “link fests” (which must be taking viewers away from the guy at Abnormal Returns).

The Ugly:

Thirdly, I think that this article from Reuters paints a very clear picture about the remaining problems concerning real-estate loans: Many of them haven’t been marked down from values at origination.

Emergency bailout facilities allow banks that otherwise would have failed under the weight of bad loans to hold those loans to maturity — pretending the bad ones will be paid off in full over time.

In reality, many loans will default and banks will bleed capital for years. Take commercial real estate. As the Congressional Oversight Panel has reported, few CRE loans that were originated at the peak will qualify for refinancing when they mature. Banks can pretend they will, carrying the loans at values far above what will ever be paid back. (emphasis added)

Then there’s this table — originated from SEC filings — which shows losses based on a loans marked at Fair Market Value (not the carrying value) as a percentage of Tangible Common Equity (TCE):


This suggests that if property values stay depressed at these levels through the lives of these loans, the losses will be understated at maturity. In other words, if the mortgages in JP Morgan’s loan portfolio had expired in June, the losses would wipe out about 17% of their equity (which is remarkable, since the difference between the Fair Model assumptions and the actual carrying value is only 3%).

More on this to come…


In an effort to avoid compliance issues as a summer analyst, I’ve decided to stop posting until my rotation is over on August 7th.

EMH Readings

The Efficient Market Hypothesis is a topic getting ripped apart these days…I thought I’d share the archive of readings I’ve saved over the past year to add to the fun.

and of course,

  • The Black Swan: The Impact of the Highly Improbable (Nassim Nicholas Taleb)

Here’s a chart of the economy’s flow of funds, from Option ARMageddon: (This chart was also stolen here and here)


Mortgage payments are still responsible for a substantial portion of the US Debt, but Government borrowing has grown YoY(and will grow more in 2010). This is the phenomenon of crowding out, whereby government spending increases interest rates for the private sector, resulting in a decrease in borrowing (in today’s case, the treasury is competing with the private sector for buyers). Meanwhile, the FED’s statistics likely understate the Treasury’s liabilites:

The Fed only includes publicly held debt when calculating total federal government borrowings, $6.7 trillion at the end of Q1.  This excludes over $4 trillion owed to the Social Security “trust fund.”  More importantly, it excludes $60 trillion of unfunded future liabilities for Medicare and Social Security.

David Rosenberg, the former chief economist at Merrill Lynch (who recently jumped ship) had a follow up interview on CNBC about his bearish observations of the past month. Here are some points from Zero Hedge‘s thorough summary:

On the technicals, Rosie sees a possible break through all the way to 1,200: “That is an observation, not a forecast, by the way. Back when we hit that level last fall, it was a glass-half-empty feeling of being down 20% from the highs; this time around it is a cause for celebrating an 80% move off the lows!”

In the fund flow camp, he points out that after the sideways action for the past three weeks, the break out was precipitated by only the second net 2009 inflow in mutual funds of $12 billion. “The initial source of buying power in March was the dramatic short-covering and pension fund rebalancing.” Now, it is the retail investor keeping the rally alive, as he is transfixed by the cheerleading puppets on CNBC. The vicious cycle would pressure the predominantly bearish fund managers (60% seeing the move off the lows as a bear market rally, and 5% buying into the V-shaped recovery concept) to chase performance, implying high “odds of a further melt-up.”

Indeed, the market technicals make this chart of the S&P 500 look unstoppable:

S&P 500 6-2

The upswings since March have been on high volume (with the declines on relatively lower volume), and the index recently broke through the 200-day moving average, which has been a source of resistance since December 2007.

The market’s valuation on the other hand, is very overbought:

In a nutshell, David doesn’t see the S&P $75 earnings, based on a bond implied 12.5x multiple, as achievable until 2013 at the earliest. And he concludes “Look at this way — we are going to be hard-pressed to see operating EPS much better than $43 this year. A ‘normal’ first-year earnings bounce is 20%, and again this is being generous, but that would leave us with $52 EPS for 2010. We give that prospect very little chance of occurring, and we have some difficulty with the stock market going ahead and pricing in an earnings profile that is likely four or more years away from occurring.

Rationalizing the move upward is almost impossible, since this rally is founded on sentiment derived from the fear of being left behind…By institutional investors! From Minyanville:

Portfolio managers are evaluated based on their performance relative to their benchmark. Most institutional managers are still overweight cash and underweight equities…Perhaps even more importantly, virtually everybody that has cash right now is underperforming on a year-to-date basis. Remember that the S&P 500 started the year at 903…Most of these managers aren’t bullish on the market, but at this point, it doesn’t matter what they think. Getting long equities is a matter of job preservation.

That’s very well put…if they cashed out near the bottom, they have no choice but to chase the rally up. He goes on to point out that institutional fund managers (mutual funds, hedge funds, or general financial advisors) handle a great deal of money, and therefore cannot simply buy or sell all at once – it takes much longer to establish/unwind positions, making their operation less liquid. In essence, the shift in allocation from bonds to equities is moving the market due to the magnitude of the cash flow.

Finally, the long-term fundamentals illustrate a more precarious conviction, since the broader economy doesn’t point to the “green shoots” sprouting too quickly:

The much more ominous questions of unemployment and consumer savings are still on the table, and painting a much bleaker economic bleaker picture. In Rosie’s words: “The really big story is that the fiscal stimulus is assisting in the household balance sheet repair process, but is not really doing much to spur consumer spending — highlighted by the rise in the personal savings rate to a 15-year high of 5.7% from 4.5% in March and zero a year ago — never before has the savings rate risen so far over a 12-month span. Note that the post-WWII high in the savings rate is 14.6% and that is where I believe we are heading. Despite the conventional wisdom, this is highly deflationary.” As for unemployment: “Nothing is as important to the inflation backdrop as the labor market — wages/salaries/benefits are seven times more powerful in determining the corporate pricing structure.” And the labor market, at least until the latest batch of however adjusted data, is not showing any relief whatsoever.

A tug of war between market barometers indeed…