Archive for August, 2008

August 30th:

Forget an introduction, I’ll just get right into it:

Now that some of the confusion has begun to settle as to why McCain picked the governor of Alaska as his running mate, the strategy behind his move is becoming clearer. That’s not to say it will work, in fact I think it will fail due to some false presumptions he is making about the American people. Even conservative media like FOX cannot help but point out the flaws in this decision.

She’s not Hilary Clinton: She’s against abortion, and is uncharismatic in my opinion (maybe its that Minnesota-like accent which is putting me off). It’s also pretty discouraging that McCain feels the need to differentiate himself by taking someone as his VP, who on her own, would not be prepared to run this country should he die in office (not an unlikely scenario at his age).

Finally, I think a big reason he chose Palin, is that it will be easier for McCain to fulfill his agenda of offshore drilling in Alaska with the face of the target state in his cabinet.

Both candidates have opted to forgo taking a VP of true qualification, only to pick someone who they think achieves a better public image from a marketing standpoint. And that is what this election has come to. They are marketing themselves to the lowest common denominator, operating under the assumption that the majority of Americans would be too stupid to acknowledge a good candidate if they saw one. Maybe if McCain & Obama weren’t under a microscope for the past 2 years, they wouldn’t have to sacrifice a more viable ticket to cover their weaknesses which have become much too clear. It’s as if each of them has had to select their “better halves”, because neither of them is qualified to run this country on their own.

For a Nation that places such emphasis on talent, we sure seem pretty short of it in government.


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August 29th:

Wonder where we are now?

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August 28th:

Besides the fact that these numbers are almost always revised, we are seeing asymmetric analysis via Jim Cramer and Barry Ritholz:

First, the quote from the much more trustworthy, Barry Ritholz:

GDP is out, ticking higher to 3.3% rather than 2.7%

And if you believe that data, I also have a bridge for sale in Brooklyn.

Why the beat on the headline figure? Aside from the usual inflation nonsense, there were two other factors: Exports, which rose to 13.2% (versus earlier reported 9.2%) and Inventories, which also played a part in the apparent strength.

Now for Cramer, concerning the impact of the numbers on trading today:

And the markup will be made easy today, because you can interpret the GDP number as growth without inflation — ideal for buying financials and techs!

Cramer’s nonsense doesn’t even bother me anymore, because he lost credibility in my book a long time ago (specifically, when he recommended selling First Solar, when it was trading at $60 a share last spring. It traded around $300 for most of the summer). Secondly, he just affirmed my belief that he’s on crack in saying now is “ideal for buying financials.”

Our government could not discount inflation on a GDP reading, especially since they use core-inflation (which excludes food and energy, two of the most important/expensive things we as consumers spend our money on). If that doesn’t do it for you, think of it in very basic terms: You are a bread distributor. Because of increasing costs of wheat and the like, you now have to spend more money on inputs, including the heat for the bread oven, which results in the need to raise your price to maintain your profit margin. If you think it stops there, it doesn’t. Then the guy at the deli, who buys his Kaiser rolls from you, isn’t going to take the loss, so he also has to raise his prices to account for the increase in costs.

In accounting terms, however, we see growth due to increased consumer spending, not inflation.

Long story short, all of that is just my way of saying that Jim Cramer is an a**hole.

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August 27th:

That’s a quote from Rounders (before they get beat up by a bunch of cops at a card game), and whenever I think of it in terms of the markets for the past week, I can’t help but laugh. There has been light volume on the major indexes, and people are either waiting for Hurricane Gustav to materialize, or for Fannie & Freddie to be nationalized. Also, Downgrade season for the banks seems to be over, so now when we get news of a management restructuring over at Fannie Mae, it calls for a celebration in after hours trading! (It’s not like this move matters…it doesn’t change the fact that they’re through as a private company).

Sorry for the lack of material lately, but the markets haven’t been as entertaining as things like this:

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August 24th:

*Actual results may differ.

Chris, your noble Economic Equity…ist .. has asked me if I’d care to write something in his stead – a kindness to which I am not unresponsive. However I no longer teach Economics: I’m a fully-fledged Health Economist again, in another country, and I take no responsibility for knowing what I’m talking about. I’ll probably also only do this in one draft.

Specifically, he asked what I thought of the new strength of the of the US dollar, given my ongoing classroom criticism of the US dollar, and my predictions of it’s decline. So here’re a couple of pictures worth a quick couple of thousand words (Chris can fix the formatting):

What’s our narrative? Besides poetic justice to ‘the speculators’ and a reminder that money, invariably, passes from the hands of the speculators, the dilettantes, the under-prepared managers of their own life’s savings, the managers of public pension schemes … into the hands of investors.

Don’t believe me? Go to vegas, sit down at the table of unsmiling heavy-set gentlemen who look like they’ve lived there their whole lives. See how you get on.

The real question is, is the US economy storming back? Will Bush turn out to have been right all along? Will Bernanke and Paulson turn out to have been the best type of idiots of all: the idiots savant?

No. Of course the answer is no. Nobody wastes their time with rhetorical devices.

This resurgent dollar story is, sad to say (with sincerity), a story not of the new strength or resilience of the US economy, but the wobbly legs and knees of the UK and Europe (if you’ll forgive my dichotomising them). It is the story of the UK and European economies catching up to the US in the doldrums, as they surely would.

I stress the surety of their joining you because, typically, another narrative is out there: one in which the red, white and blue greenback can’t be given a black eye. The Financial Times, in fact, managed to cover nearly every base in their reporting of 8 August, this year:

The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak.

“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”.

Traders said the violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US.

“Mr Trichet was unable to convince the public that the ECB had not been surprised by the Eurozone’s economic downturn,” said Ulrich Leuchtmann at Commerzbank. “Therefore, the last remaining rate hike expectations were taken off the table.”

UK economic data has shown increasing weakness this week; officials in Japan warned that the economy was headed for a recession; and the Reserve Bank of Australia said it was planning to start cutting interest rates to head off an impending economic slowdown.

You can look, yourself, for others. I don’t have the inclination to do harm to my own psyche. I will say, however, that this is not a knock on the US or US media: you’ll find it all over.

First, the weakness of the dollar has been driving up commodities, not the other way around. Now, if one invests not according to fundamentals but according to an eye for increasing prices (even on stocks or goods that are overpriced already) then one is basically watching, always, for the realisation of that gain – not to mention the first sign of a peak. So (i) the big ‘other’ economies falter, (ii) their future GDP looks weak relative to yesterday’s comparison with US GDP, (iii) returns on your investment won’t be so high, therefore (iv) it is time to move your investment.

Why, one might ask, did this not simply push commodities higher still? If people fled the US dollar for oil and gold, why would other people not flee the Pound and the Euro similarly? Partly because the gains were already made, mostly because – I suspect – we’re not talking about speculators, we’re talking about investors, who buy and make capital gains (remember those types?) and people who need to hedge in currency.

It’s also, as any first-year student and reader of the Economist magazine’s Big Mac Index can tell you, the simple, clean and ruthless crunch of Purchasing Power Parity, Interest Rate Parity (which had been behind the initial decline in the value of the greenback. We’ll return to this) or any other kind of parity you like. International currency arbitrage is a force to be reckoned with, and it enforces equilibria faster, possibly, than anything else.

When the UK and Eurozone economies stop being bigger, better, stronger than the US economy, so do their currencies. It’s that simple. The US dollar did not appreciate because the US economy is doing well. A sinking tide lowers all boats, too.

So. Having bashed up the US enough to secure a by-line at the Exile, let us return to economics.

We know – let us assume – that, in the event of declining economic activity and macroeconomic contraction, monetary policy responds by lowering interest rates. Lower the official rate of interest: increase borrowing, increase investment, increase consumption, increase jobs; problem solved.

However, interest rates – broadly speaking, now – are not just the cost of borrowing, they are the returns on lending. So if you’re an investor (say, Warren Buffet, or China), you’ll think twice about leaving your money in that economy. You’ll look at another economy.

This is the cause of the declining value of the US dollar, way back when. The US economy, rightly, faltered first – and how. With no fiscal policy upon which to draw, Bernanke got it all with not even a blindfold to keep him company. Rates were slashed, time and again. Meanwhile, the UK, Europe and any number of other economies were (i) not faltering, yet, but as importantly (ii) more concerned with inflation which, while still measured dodgily and with political expedience in mind, is nevertheless still measured more accurately, and taken more seriously, everywhere better than in or by the US.

As of recently, however, such is not the case. Despite the best of intentions, my copy of the FT Weekend loudly declares the UK economy to be at a standstill (“UK economy shudders to a halt”, I believe, is the phrase employed). The Eurozone economy (if you want to kill some time, narrow it down: look up Italy, or Germany) likewise.

The FT’s quote above had Trichet being caught unawares. As the author of this august blog can tell you, I’ve yet to buy into the argument that such people truly can be caught unawares (seriously, give me a break). However, if ‘the market’ is anticipating an interest-rate hike and, instead, gets talk that sounds more like rates will be held or, maybe, lowered, it’s time for that Interest Rate Parity to take hold.

Thus my argument. The US dollar is not appreciating in value because it is normalising upward: it is appreciating because the rest of us are normalising downwards, and don’t let anybody tell you otherwise.

So what does this mean for us? Most likely it means that there’s a decent chance that the US economy will lead us out of these same doldrums. There’s also a decent chance that it won’t: the problems began in the US and the ability to re-start half-intelligent regulation is hindered more in the US. But the US is the OECD’s dynamo.

This is only another bear market rally: play it only if you have the time, the nouse and the willingness to lose your pants by making a wrong bet. It doesn’t mean one shouldn’t look out for the real recovery, though. Look out for it. Buy the dollar, if you like gambling, then sit tight for a couple of months and buy the Pound/Euro when it reverse the process currently underway. Then send me my cut.

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August 13th:

I’ll be starting class again soon, so I’m not sure how much blogging I’ll do going forward (barring anything fun to write about).

This will be one of my last posts before school, and I think this is a good time to write what I’ve been feeling about the markets for a while.

Well, the Olympics have begun and oil is down 22% from its all time high. (The timing of my prediction was right, but my reasoning was incorrect…I guess its better to be lucky than good)

As one would expect, this was welcomed with open arms (the consumer may be saved from demand destruction, the Fed can keep rates at 2%). The rotation out of all things pertaining to commodities (oil, agriculture, metals) have provided an interesting situation: there is now nowhere left to hide, and there is nothing which is untouchable from the downward trend of the broader market. In other words, there are no bullish “momentum” stocks to park your money in, as all of those have gone into free fall at one point or another, and have since stabilized at a lower price. At the same time however, because of the fall in oil, there have been some unfounded gains in certain places (chiefly anything financial), until today!

If you notice from the chart, financials have sort of, drifted higher recently. The rally which occurred after the bottom on July 15th was sustained because of the simultaneous drop in oil…The only thing is that, some day oil will also stop falling, and will stabilize. Many say that will happen at $110/barrel. I think that is a sound prediction, but believe that it can be around $85-$95 through the winter. Winter is 4 months away though, and once oil stabilizes, the hot money has to go somewhere. More importantly, there won’t be anything fueling the rally in financial services, because they are still in horrendous shape.

Finally, the prediction….

I think the saying “markets do not repeat themselves, but they rhyme.” applies to our current situation. In case you have repressed this information (I did, until today) the last sell off in financials was sparked by none other than a series of downgrades…on Tuesday, we had another round of downgrades and cuts in earnings estimates (Goldman, JP Morgan, Morgan Stanley).

While we do not have as negative a catalyst such as rising oil prices, we do have, what I believe to be a drying pipeline for good news now that commodities have dropped big. This also means that Financials are in the spotlight because they can no longer share the blame of a bad environment with high oil prices. TO TOP IT OFF, a more severe catalyst for financial services can emerge, and that is the deterioration of banks like JP Morgan, which have been virtually unscathed…until Tuesday. If they were believed to be the fortress from this whole mess, and they come out in bad shape through 2009 (which was picked up by their press release, hence the biggest drop in 6 years) we can see a serious sell off.

Finally, by now we must know that the news of Merrill Lynch selling their CDO’s was a bad sign, not good, and John Thain might go down as one of the worst CEO’s in finance history because of it. Not only did he sell the pre-2006/2007 CDO’s – which represent the better quality basket simply because debt from that time frame is more likely to get paid back – but the good CDO’s within that tranche were undoubtedly cherry-picked by the guys who bought them. (Honestly: if you were spending billions of dollars on such a toxic investment, wouldn’t you make sure you got the best ones?)

The inevitable realization of losses in Level-3 assets/off balance sheet assets, coupled with instability amongst the bulge bracket banks, will result in another sell off, and another bottom (no one can really say if it will be worse than the last one, and I surely won’t begin to speculate)

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August 5th:

Rates are kept at 2%, all sectors but oil and commodities rally, and the dollar gets stronger. *did I read the wrong headline, because based on that information I thought rates would be at 2.25%*

CNBC was rather amusing, as the crew was trying to diagnose the market’s behavior: they concluded that the traders didn’t buy the Fed’s “hawkish” tone towards inflation, which means that they could possibly be overplaying the prospect of inflation, and will be able to keep rates where they are. What’s also of note, is that news from the Fed, good only on a relative basis, always impacts the markets. Despite my complaining, I think that this boost was needed. Nothing goes in only one direction, we can extrapolate what we want from the data, it all depends on the mood of the market.

I wouldn’t be surprised to see this behavior continue for another month or so (people seemed pretty cheery on television), simply because oil doesn’t have any buyers right now; the short term prospects of inflation are evaporating. Oil goes down when there’s a hurricane (which must mean that a catastrophic disruption was priced in), and the latest thing is “demand destruction”, which holds some credence, but now has gotten to the point where it is contradicting the fundamentals of most companies in the sector. There are companies which have actually reported real, tangible earnings in this environment (believe it or not), including almost any energy company or miner of basic materials.

The market, however, is tired of the story. It’s like a little kid who has a short attention span. People love the newest thing, but eventually it gets old or boring. This, I suppose, is a part of the cyclical nature of markets…if it weren’t, when would we have such buying opportunities? Take Brazil as an example: people couldn’t get enough of their prospects going into the summer, but now that people have become more risk averse, they think back 10 years and relate it to crises such as Russia’s default, times of hyperinflation, and a volatile currency (the last characteristic is still true). As a result, some of the best stocks are down 25%-30%.

My take on all of this, is that while this is a nice sigh of relief, its an even nicer time to establish a short position in financial services.

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