FinancialRx

Blue Light Special

2006-11-17T11:52:00.000-05:00

Today's Heard on the Street column tells you everything you need to know about the current market.

Sears Holdings may be struggling as a department-store operator, but it is proving an astute hedge fund under billionaire investor Edward S. Lampert.

The retailer, controlled by Mr. Lampert, earned more than half its net income in the fiscal third quarter ended Oct. 28 from investments in exotic derivatives designed to mirror the performance of company stocks. Those investments helped triple net income, to $196 million, or $1.27 a share, despite weak sales at its Sears and Kmart stores....

The company turned an investment in derivatives in other companies' shares into a $101 million after-tax profit during the quarter. A spokesman for the Hoffman Estates, Ill., retailer declined to disclose the company or companies whose shares were represented by the derivatives.

In a statement, the company said the investments involve "substantial risks," adding that future results "may be positively or negatively materially affected based on the timing, magnitude and performance of these investments."

The financial derivatives used by Sears, known as "total-return swaps," are agreements that take on the big risks of highly leveraged investments in equities or other assets without actually buying them or assuming debt to purchase them, said David Krein, president of New York structured-investment adviser DTB Capital Group. Total-return swaps also can boost the liquidity of an investment, carry tax benefits, and have the advantage of gains that can be recorded as profit on a balance sheet, whether realized or unrealized.

Note the analysts falling all over themselves to praise the "strategy". But if Lampert loses the formula, and suddenly the whole thing goes gunnybag, those same analysts will be the ones Tsk-Tsking from their front row seats, rationalizing their sugar coated strong buy ratings (of course if it gets really ugly they'll just change firms).

By the way, our nearby Kmart is one of the old style versions... and just a horrid shopping experience. A retail ghost town. For the 4 or 5 people shopping there it is a last resort, like when you just need to whip in there real quick to buy a toothbrush or some batteries.

Beats circling around and around Wal-Mart or Target hoping to find a parking space.

Don't Believe Everything You Read

2006-10-22T22:47:00.000-05:00

I'm probably the only person in the world with such peculiar pet peeves, so just a short comment on this recent article: Retail investors missed most of recent rally.

As equity markets rise, individuals are lured into buying more shares or adding extra dollars to mutual funds invested in stocks. By the time they've invested, the smart money -- corporations with insight into the health of their own businesses -- has usually stopped buying equities and gone elsewhere...

With the Dow Jones Industrial Average breaching 12,000 points for the first time ever Wednesday, this unhappy cycle may have begun again...

Retail investors "are starting to participate, but they didn't begin until nine days ago,"...

Not to pick on this reporter, nor the fella quoted above, but does anybody really believe individual investors suddenly woke from a coma only nine days ago?

Do you know how many $Trillions "retail" folks have parked in equity mutual funds, hedge funds, and ETF's (not to mention indirectly through pensions)?

A few Billion going to and fro in any given month is just noise.

In contrast, if memory serves, back in 2002, we saw $65 Billion exiting funds for several months in a row... and about the same amount pouring into bonds. Now that was a sentiment indicator.

Looking a Little Ragged

2006-10-22T22:10:00.000-05:00

I've had a running commentary for a few weeks now about the market's persistent strength. During this recent leg of the rally we have seen selling pressure pre-market, and/or in the early going, overrun by strength all the way into the close. It's only one factor, and it is certainly simplistic, yet it is still an important gauge of the underlying bid.

In contrast, markets that are topping out will typically start with a gap higher and then fade through the rest of the session as the true believers continue to hope they've caught the bottom.

Last week (charts below) we still saw persistent buying in the Dow and S&P (think esp about Friday's rebound following the CAT imposion), but the Nazz definitely looked tired. And the closely watched Semi's threw up a caution flag.

It will be interesting to see the reaction to this week's news.

Achilles Heel

2006-10-19T22:57:00.000-05:00

This may be hard to believe, but during the 70's, 80's, and into the early 90's, WalMart's stock was a juggernaut.

It was automatic. You bought it high, bought more on dips, and dollar cost averaged the rest of the time. An honest to goodness no brainer. This was a stock you could confidently recommend to Grandma; a rock solid core holding for every client. No questions asked.

In early '93 I was watching Paul Kangas on the Nightly Business Report. He was doing one of those interviews with a money manager who would come back to the show from time to time. In his previous appearance the money manager mentioned they liked WalMart. Paul pointed out it had done well since his last visit, and asked if investors should still be buying.

"No. We've sold our entire position."

I spewed whatever it was I was drinking all over the living room. The cameraman fainted. Paul Kangas looked at the guy as if he just cussed in church.

You don't SELL WalMart... you BUY WalMart!

Mr. Kangas is a consummate professional, thus he quickly regained his composure and asked his guest to explain.

"Paul, WalMart has been growing an average of 25% per year since the company went public. Their sales are quickly approaching $100 billion. We did the math and found if WalMart continues to grow at 25%, their sales will equal the GDP of the United States of America by the year 2000. Frankly, we just don't think that's gonna happen."

It was one of those rare moments that offer crystal clear clarity. Anyone watching instantly knew he was right.

A few weeks later WalMart came out with a warning that same-store sales would fall dramatically. More warnings would follow. Of course the stock was priced for perfection- and owned by everyone and their grandmother, so the sickening slide was an absolute house of pain for several years.

I was reminded of that story today while listening to a very bullish market strategist. He not only expects double digit profit growth in 07, but found no reason we couldn't continue at the same clip for the forseeable future (if you're uber bullish for 07 you can't allow for a slower rate of growth in 08 because we all know the market is a discounting mechanism).

The Achilles Heel of this market, ironically, is the simple law of large numbers.

Revergence to the mean.

The US economy is somewhere in the neighborhood of $13 Trillion, and has been growing about 3% per year during the recovery. Meanwhile, profits are up double digits umpteen quarters in a row.

We currently enjoy full employment, relatively low interest rates, high productivity, and historic corporate profit margins that are the envy of the world. The US economy has also benefitted from a staggering amount of deficit spending since the recession that followed the popping of the bubble.

It sounds great because it is great. In fact, it is phenomenal.

Until you do the math.

Tilting At Windmills

2006-10-15T23:16:00.001-05:00

Notice how many bears are shaking their fist at this market? Notice how many bulls are expecting a selloff? (They think a haircut would be healthy, setting the stage for a strong 4th quarter rally: the proverbial pause that refreshes.)

Among the bears, a lot of smart folks think this move is nothing more than a "head fake", or "sucker's bet", fueled by a "short squeeze".

If you peruse the following charts you'll notice they all have something in common: a weak opening followed by a strong finish. With the exception of last Wednesday (when the media went nuts over a plane flying into a NY highrise), this market has absorbed the initial wave of selling and then continued its march higher.

cursor:hand;" src="http://photos1.blogger.com/blogger/2154/3588/320/rut.png" border="0" alt="" />

If this is a headfake or short squeeze we'll get a hint of trouble to come once we see that pattern reversed: exhuberant buying at the open followed by distribution.

Maybe then we'll begin to see the bulls shaking their hoof at the market.

Chart of the Day

2006-10-12T22:52:00.000-05:00

Something for everyone from Chart of the Day...

The Dow made another record high today. So how does the current stock market rally rank? To answer this question and to provide some perspective, all major market rallies of the last 106 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow. So what does this chart show? As it stands right now, the current Dow rally would be classified as long in duration (1010 trading days) but slightly weak in magnitude (64%). Stay tuned...

Bank of America Offers Free Online Trading

2006-10-12T10:16:00.000-05:00

First Citiwide Change Bank

Narrator: "When you do only one thing, you do it better"

Customer #1: I needed to take the bus, but all I had was a five-dollar
bill. I stopped by First Citiwide, and they were able to give me four
singles and four quarters.

Narrator: "At First Citiwide Change Bank, We just make change"

Bank Representative: We will work with the customer to give that
customer the change that he or she needs. If you come to us with a
twenty-dollar bill, we can give you two tens, we can give you four
fives - we can give you a ten and two fives. We will work with you.

Customer #2: I went to my First Citiwide branch to change a fifty. I
guess I was in kind of a hurry, and I asked for a twenty, a ten, and
two fives. Their computers picked up my mistake right away, and I got
the correct change.

Narrator: "Correct Change"

Bank Representative: We have been in this business a long time. With
our experience, we're gonna have ideas for change combinations that
probably haven't occurred to you. If you have a fifty-dollar bill, we
can give you fifty singles. [Narrator: "We can give you fifty singles"]
We can give you forty-nine singles and ten dimes. We can give you
twenty-five twos. Come talk to us. [Narrator: "We can give you
twenty-five twos"] We are not going to give you change that you don't
want. If you come to us with a hundred-dollar bill, we're not going to
give you two-thousand nickels.. [Narrator: "We're not going to give you
two thousand nickels"] - unless that meets your particular change
needs. We will give you.. the change.. equal to.. the amount of
money.. that you want change for!

Narrator: "At First Citiwide Change Bank, Our business is making change"

Bank Representative: That's what we do.

But seriously folks, Bank of America's strategy is an astute move on several levels. Most importantly: they can build their brokerage organically (for which they hope to cross sell other services) a lot cheaper than spending $Billions for an existing platform (which has been done over and over again with lousy results).

As an aside, I found it amusing to see the online trading firms react in the same exact fashion as my industry did back when those same online trading barbarians were at the gate.

"I don't see pricing as the battleground. I see functionality as the battleground," says Jarrett Lilien, president of New York-based E*Trade Financial. He considers the industry's prices already low, so brokerages must compete by providing better services, such as advanced order types that automatically sell stocks at predetermined price points.

For its part, Charles Schwab said it had no plans "at this time" to change its price structure. "Knowing there is no free lunch, consumers look carefully at the whole picture— rates on their cash, trading costs, quality of services and investment advice, etc.," founder and CEO Charles R. Schwab said in a statement on Oct. 11.

North Korea May Have Conducted Another Nuclear Test

2006-10-10T18:59:00.000-05:00

Update: 8:21PM
Should have mentioned I got that wire story (below) via Drudge. The latest: Japan's announcement of a second test was apparently triggered by a 6.0 earthquake. [Earthquake sets off Nuke Alarms? Sounds like the plot for a movie.]

Per Reuters:

N.Korea may have conducted another nuclear test: NHKTue Oct 10, 2006 7:42 PM ET

TOKYO (Reuters) - North Korea appears to have conducted another nuclear test, Japanese national broadcaster NHK said on Wednesday.

Japanese government sources had information that there was a tremor in North Korea this morning and they were checking on the possibility of a nuclear test, NHK said.

Defying warnings from its neighbors, the United States and the U.N. Security Council, North Korea announced on Monday that it had conducted its first-ever nuclear test. Pyongyang had earlier said a U.S. "threat of nuclear war and sanctions" had forced its hand.

Not that this has anything to do with the financial markets (since none seem to care), but it sure seems like NK's Kim wants to get some attention.

PS Wish I had saved the piece, but I read somewhere after the first test, which apparently registered as a relatively small explosion, that it may have been small due to it's design to sit atop a rocket. I believe it was the folks at Stratfor wondering if it was a test of a "weapon" vs. "device". A weapon would have to be smaller and more rugged, while a device can be any size required to get the hoped for test result (big bang). The implication that they have successfully tested a "weapon" would seem serious in my non-expert opinion.

Dow 36,000? Nope, Dow One Billion.

2006-10-10T16:20:00.000-05:00

By now everyone is familiar with the parallels between the charts of the Nikkei and the US markets after the "Y2K Bubble" popped (as you shall see, we're using quotes for good reason). For quite some time it appeared we were bound to follow Japan into our own deflationary ring of hell. But as our markets refused to roll over, at some point it became clear, no matter how we adjusted the timelines, that the whole thesis was invalid.

More recently, this chart from Birinyi Associates (via Captain Kirk) has gained currency among investors, as it would happily suggest we are merely in the middle innings of a great bull run.

However, sadly, we must reject this comforting image due to a variety of technical factors which we uncovered during our own computer runs of the data.

In fact, you might be surprised to find Birinyi Associates understated the outcome by a factor of 80,000!

It is those technical factors that led FinancialRx to what we believe may prove to be the most significant development in finance since the invention of compound interest.

Ironically, this simple model has resided under our noses for 10 years now.

Witness: The next two charts compares the Dow Jones Industrial Average with the cumulative earnings of Tiger Woods since he turned Pro. (Second chart courtesy Golf Digest Magazine.)

As you can clearly see both bear an uncanny resemblence, right down to the 2000-2002 dip in the Dow, which of course encompasses Tiger's adoption of a new swing. Other mini-corrections correlate to Tiger falling in love, Tiger changing caddies (which we have previously mistaken for the "Asia Crisis" and then the "LTCM Debacle"), and so on.

With the help of the supercomputers and staff at the Bureau of Labor Statistics, we have backtested, adjusted the model to smooth for seasonality, added birth/death adjustments, tweaked the confidence interval, and rounded up all numbers in each sequence, in order to obtain the perception that our projections are correct.

Other than normal future revisions and changes in calculation methodologies, the only thing that could possibly derail such an obvious outcome would be... well... Tiger Woods.

Bottom line: Dow One Billion by 2010.

Naturally, certain naysayers will raise questions:

Inverted Yield Curve? Don't make me tired.

Korean peninsula hanging over Japan like a Nuclear Sword of Damocles? Mixed metaphors are not an investing strategy.

Runaway twin deficits in an asset based economy? Makes me bullish just thinking about it.

Sevin Rosen Scraps Fund: VC Business All Risk and No Return

2006-10-07T22:37:00.000-05:00

There was a time when a fool and his money were soon parted, but now it happens to everybody. - Adlai Stevenson

This weekend's NY Times reports Venture Capital firm Sevin Rosen is offering a refund.

“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.

Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.

“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.

Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.

But excess of capital is only part of the problem, the firm said. In its letter, it bemoaned what it described as “a terribly weak exit environment,” a reference to the dearth of initial public offerings and to a market for acquisitions at valuations that it considers too low to deliver the kind of returns that venture investors expect.

At a time when young companies like YouTube and Facebook are said to be entertaining acquisition offers in the $1 billion neighborhood, that pronouncement may seem surprising. But Mr. Dow said those “megadeals” were rare and were not enough to sustain an entire industry.

“While good returns from any given firm’s portfolio is certainly a possibility, the statistics have clearly shifted in an unfavorable direction,” the firm wrote. “The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”

VC funds, PE funds, Hedge Funds. Sevin Rosen is telling us the world is afloat in liquidity. But it's not really an issue of doing an IPO at the back end. It's the inflated price too many investors are willing to pay on the front end.

If you can't get a good entry point, figuring out a good exit point becomes moot.

Gone are the days when VC's got in on the ground floor. There's been a Katrina-like surge lifting the big boats, small boats, flotsam, jetsam and rubber duckies. So much so we find ourselves reading Google might buy YouTube for $1.6 Billion (of course they're using Google Monopoly Money).

The markets have a lot of smart folks scratching their heads these days. In the future we'll look back and wonder, "What we're they thinking?!"

Who Wants to Be a Millionaire?

2006-10-07T22:00:00.000-05:00

Received the email below recently. This is probably the 10th iteration of this sort of scam I've received over the past 5-6 years. I'm assuming people fall for this sort of thing if they keep sending these(??).

Barrister & Solicitors,
Coles Chambers,
Suite 6, 3rd Floor,
118 Lord Lurgard Street, Lagos Island.
P.O.Box 75519,
Victoria Island, Lagos, Nigeria.

Hello Friend.

Before I start, I must first apologize for this unsolicited mail to you.I am aware that this is certainly an unconventional approach to establishing a relationship, but you will realize the reason for my action after going through this email.

I am Barrister Thomas Cole, a solicitor at law. I am the personal attorney to Late Richard Burson. I got your impressive information after a Conscious search for a reliable and matured mind that has all it takes to execute this project. I was elated when I saw your address, and I picked a keen interest with confidence to solicit for your help in executing this opportunity. However, I was moved to contact you based on the present situation of this opportunity, which I may say, is a God given offer.

There was a foreigner who lived here in NIGERIA some time ago; he is called Richard Burson by name, until his death. I was his Personal Attorney, unfortunately Richard Burson died with his wife and their two kids in a Local Plane Crash at Kano State, which enroute from sokoto to Abuja (the capital city of Nigeria), all occupants in the Plane lost their lives, unfortunately on this same flight were other dignitaries like the former Nigeria Sports Minister and a host of others.
The following websites could be referenced: Please go through the website.

http://www.usafricaonline.com/ngrkanocrash.html
http://news.bbc.co.uk/1/hi/world/africa/1968616.stm

Owing to his death, his bank called on me for a meeting as regards his Account Balance with the bank, being h is attorney till the time of his death, I was told to come up with any of his relatives to come and claim the money, I tried all I could to trace his family, but all my efforts proved abortive.

Since January this year till date, the bank has been asking me to look for his family because they realize that a lot of people have been trying to claim the money as his next of kin, but after verification, It is found out that those people are not really his next of kin, because they cannot provide any legal evidence to prove that they are his relative.Hence, I have decided to use you as his next of kin to claim the money as it happens that none of his relatives will ever appear to claim the funds, besides I have all his documented memo in my possession, which will back you up before the bank as his next of kin .

I have the logistics to make your name to be that you are the rightful next of kin to the deceased and as well as the beneficiary of the funds. The amount involved is $US28.5Million Dollars. As regards to that, I will like you to furnish me with the following information, which I will use to secure the legal documents.
(1). FULL NAMES
(2). COMPLETE CONTACT ADDRESS
(3). CONTACT PHONE NUMBER
(4). FAX NUMBER
(5). OCCUPATION
(6). AGE
(7). Sex

As soon as I receive your information, I will forward an application for account closures to which you will submit to the concerned bank as his next of kin. Be rest assured that, there is no risk involved as I have rerfected and made the necessary arrangements to back you up in claiming the funds. I will want you to regard this deal as being highly confidential because this busines as transaction demands a high level of secrecy as the bank does not know that I am involved in the deal.if interested in the transaction and to enable me feed you with more information, then do all you can to furnish me with all the needed informations stated above.

Thanks for your anticipated co-operation as I await your reply. Reply
through my alternative email thomascole4@XXXX.com
Best Regards,
Thomas Cole Esq.

Bernanke Speech

2006-10-04T22:12:00.000-05:00

Fed Chairman Bernanke's speech today, "The Coming Demographic Transition: Will We Treat Future Generations Fairly?" was essentially ignored by the media, as they hyperventilated over comments about housing during the Q&A that followed.

More importantly, nobody, including Bernanke, seem to be terribly bothered by the central question: "Will We Treat Future Generations Fairly?"

"At the heart of the choices our elected representatives will have to make regarding the distribution of these costs across generations will be an issue of fairness: What responsibility do we, who are alive today, have to future generations? What will constitute ethical and fair treatment of those generations, who are not present today to speak for themselves?"

What in the wide, wide, world of sports is going on here? Our various deficits and unfunded liabilities are so huge, we are now engaging in a narcissistic debate as to whether or not the current generation should even chip in to stop the bleeding.

Are we unable to solve this because the concept is too complicated for voters to understand?

Then think about it this way: why stop with making our grandkids pay our bills? Let's pass a law that the baby boomers get free oil changes. Oh, and we should be able to fly for free. Hey, why stop there? Let's make the future generations wipe our ass too.

Death and Taxes

2006-10-03T00:16:00.000-05:00

While doing some reading tonight, I stumbled upon this graphic of "the 2007 Federal Discretionary Budget in all its complex and overwhelming glory."

Boggles the mind.

Note we are approaching $3 Trillion in Federal spending, including over $650 Billion in Defense/Homeland Security. Those amounts do not include special appropriations for "off budget" items, like, say, Iraq.

An Informed Peek Behind the Curtain

2006-10-02T23:41:00.000-05:00

John Hussman's wide-ranging discussion is, as usual, well worth the time.

In addition to his reflections on the recent rally, Dr. Hussman nails one of my pet peeves about the mythology surrounding the Fed (my experience has taught me the Fed follows the market, not the other way around).

The dog might bark when the mailman walks by, but nobody thinks that the barking is what brought the mail. Likewise, it's important to recognize that Fed actions can be correlated with economic events without causing them. If you want to argue causation, you've got to articulate the actual mechanism between cause and effect; otherwise you're just being superstitious. As I noted in our latest Annual Report, the Fed is a lot like a little boy who waves his arms whenever he hears music playing, so people come to believe he's actually conducting the band.

Keep this piece handy the next time everyone and his brother is on Fed Watch.

H-P: Comedy or Tragedy?

2006-09-29T13:00:00.000-05:00

"I think I did something for the worst possible reason -- just because I could. I think that's the most , just about the most morally indefensible reason that anybody could have for doing anything. When you do something just because you could ... I've thought about it a lot. And there are lots of more sophisticated explanations, more complicated psychological explanations. But none of them are an excuse ..." - Bill Clinton

From what I've read and heard this week most folks were generally annoyed with the media soaking up bandwidth over the H-P soap opera. But I'm deeply troubled after listening to Dunn and Hurd. In my humble opinion there appear to be a row of giant pink elephants in the room that somehow remain unobserved.

Witness:

H-P employed some of the finest business and legal minds our country can produce, yet after each one testified that, indeed, the whole thing was obviously immoral and wrong, they complained Congress needs to enact laws to make pretexting clearly illegal. Clearly immoral or clearly wrong apparently aren't enough.

Dunn and a growing list of executives have resigned- not for shame... hey, they did nothing clearly illegal!- but because they will be working 24/7 on their legal defense. Dunn unintentionally provided the best knee-slapper of the day when she said she thought the phone records were accessed through sources in the public domain. She's positioning herself as the Ken Lay of H-P.

In contrast, Hurd is positioning himself as the antidote to H-P's diseased board. By God, he's going to push hard to get to the bottom of the whole thing! But he also repeated his mantra, being careful to use the future tense, that he takes "full responsibility"... a clever way to reasssure Wall Street by forecasting his continued reign, while he disarms critics (though without any tangible consequences).

In all the coverage so far nobody seems curious why Tom Perkins was the only one to resign in protest (before it became fashionable to do so).

In one of many ironies, before the sordid details about the investigation were leaked (yes, there was a leak about a leak investigation), the Board considered the secret investigation a success. After all, despite the methods used to obtain the information, when they learned which board member was doing the leaking he was confronted and forced out. Only now, with copious amounts of sunshine disinfecting the boardroom, they offer apologies all around.

Bottom line, here's what we learned this week: a) as long as the stock price is up 50 cents, the media give you a get out of jail free card; b) The H-P Way is now a joke (watch for that one to be quietly dropped); and c) the public now sees what H-P insiders have complained about for years: a culture of backstabbing by petty tyrants refined to an art form.

Credit Default Swaps Now Total $283 Trillion

2006-09-28T20:25:00.000-05:00

"Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another." - Warren Buffet

Mike Panzner has an eye-popping chart comparing the notional value of Credit Default Swaps outstanding to various other recent bubbles.

Conveniently enough, the online Journal's MORNING BRIEF provides a primer on the subject. I've included the passage in full.

Treating Derivatives As a Transnational Risk
By JOSEPH SCHUMAN
THE WALL STREET JOURNAL ONLINE

Senior officials at the Federal Reserve, the Securities and Exchange Commission and its British counterpart today issued an unusual joint warning that the financial risks of an increasingly global and mushrooming derivatives market are too big for any one country to oversee.

But first, a look at just how big that market is getting: Last week the International Swaps and Derivatives Association said that at the end of June, the outstanding nominal value of swaps and derivatives was $283.2 trillion. As the New York Times pointed out over the weekend, that's a lot of money, vastly superior to the combined gross domestic products of the U.S., European Union, Canada and China -- a paltry $34 trillion -- or the value of all U.S. homes, which is about the same amount. "To be sure, notional value is an exaggerated term as it greatly overstates the amount at risk in many contracts," the Times noted. "But the growth rate is real, and in the fastest-growing area of swaps -- credit default swaps -- notional value is closer to the amount at risk, because such swaps promise to make up the losses if a borrower defaults on the notional amount."

Today, New York Fed chief Timothy Geithner, SEC Commissioner Annette Nazareth and Sir Callum McCarthy, chairman of the U.K.'s Financial Services Authority, write in the Financial Times that the financial innovation fueling the creation of derivatives transactions often drives the market faster than the pace of improvement in market infrastructure. "In a more integrated global market, we will increasingly find ourselves compelled to pursue borderless solutions," they argue. "In the case of derivatives, a local or national solution would have been insufficient to protect domestic financial markets from the risks posed by market practices." Their comments follow a meeting hosted by the New York Fed yesterday where 16 leading global investment banks, institutional investors and international regulators discussed ways to upgrade back-office systems for derivatives trading. That meeting followed a similar gathering last year, where delays in the processing of derivatives were judged so serious they could create systemic problems if not addressed, the FT reports.

The participants in yesterday's meetings reported significant progress in cutting those backlogs -- something the regulatory trio calls "encouraging" -- but said the industry still has a serious problem with the backlogs in the equity-derivatives market. "Often it takes a crisis to generate the will and energy needed to solve a problem," the regulatory trio says, and "here, the industry deserves credit for acting in advance of a crisis." But more action seems to be needed by a financial industry that will closely watch their comments, as the FT reports. While U.S. and European regulators have cooperated extensively under the radar, until now national agencies have handled problems in their own markets. For example, the meltdown of Long Term Capital Management in 1998 was led by the New York Fed with the help of Wall Street. But with hedge funds among the biggest traders of derivatives, the potential cross-border vulnerability to market problems has increased. Earlier this month, the U.S. hedge fund Amaranth's big loss in the American gas markets set off a massive sale of its loans in London.

A Watched Pot Never Boils

2006-09-28T11:42:00.000-05:00

How painful is this week's CNBC spiral of confusion as they feed the beast that is television?

From this morning's tortured interviews with folks on the floor searching for the meaning of life (that HAD to be a Monty Python parody- right?), to C-SPANesque silence as a parade of loser H-P geeks took the 5th (one of whom apparently overslept and showed up wearing what looked like wrinkled pajamas), only to be followed by cymbals crashing as we abruptly shifted to the Four Seasons Hotel for a Power Lunch infomercial with another ex-con, Martha Stewart.

The apparent shift change in CNBC's control room, right in the middle of the testimony of H-P's former Chair, once again swung the blinding TV lights on what is quite possibly the stupidest group of Television interns in the Free World.

How else do you explain such a basic lack of understanding or context?

Dumb and Dumber

2006-09-27T23:09:00.000-05:00

Nicholas Andre: Where's all the money?
Lloyd: That's as good as money, sir. Those are IOUs. Go ahead and add it up, every cents accounted for. Look, see this, that's a car, 275 thou- might want to hang on to that one.

Dumb and Dumber, from the movie.

Mr. Jacobs says she explained that the group needed people with good credit ratings to be used for real-estate investments that would be made as a group, not individually. Mr. Jacobs, who was living with his mother at the time and says he couldn't afford to buy a home of his own, says he understood that he wouldn't have to make any payments or assume any financial obligations but would receive payments for letting the group use his credit record.

"It sounded pretty good," Mr. Jacobs says. "Everything I asked them, they had an answer for.

Mr. Jacobs and others who joined the group say they were rushed into signing documents without being given time to read them. Within weeks of signing those papers, Mr. Jacobs says, he received two payments, totaling $7,000, from the Penns. After a few more months, however, he began to get calls from Countrywide representatives demanding mortgage payments. Mr. Jacobs says it turned out that two loans, totaling more than $200,000, had been taken out in his name and that he owned two houses. He says he now thinks the houses might be worth only around $40,000 apiece.

Others who signed up for the group say their credit ratings have been so devastated that they can no longer buy anything on credit. "My dad brought me up to pay my bills before I eat," says Nancy Muse, who heard about the group from a friend who used Ms. Penn as a hairdresser. Months later, Ms. Muse found out she was in trouble when she inquired about buying a modular home for herself. A representative of the home-building company checked her credit and told her she already owned four homes."

Dumb and Dumber, from Page One of today's Wall Street Journal: Town's Residents Say They Were Targets of Big Mortgage Fraud.

I'm having ALL TIME HIGHS for Lunch!

2006-09-27T08:14:00.000-05:00

For two months now we have been told weak housing, poor job numbers, lousy wages, CPI/PPI rolling over (because nobody has pricing power), awful Philly Fed numbers, declining demand for all sorts of energy, and so forth, are good for the market because the Fed will have to cut rates.

(Frankly, I was starting to think what we really needed to smash those stubborn all time highs was a good old fashioned natural disaster. Better yet, some sort of Biblical cataclysm!)

Now we have futures rolling over because of weak durable goods. WTF?! Nobody gives a $#&! about that stupid number! Who's the moron selling on that? That's BAD news you idiot!

Wait... Never mind. Art Hogan just predicted new highs by lunch.

Can you imagine the frustration over at CNBC HQ if we stop within 50 points and roll over? Do you realize how much time and money has been put into the special music and graphics and *whoosh* noises?

Conundrum... on Steroids?

2006-09-26T05:26:00.000-05:00

In a previous post I wondered if we were at a Fork in the Road, given the ramp in equities, despite a sharp drop in yields. Since then the broader market has flirted with 5-year highs, while the long end of the yield curve has plummeted (a drop of 75 bips in 3 months is absolutley huge). In a nutshell, the stock market is pricing in better than expected growth, yet the bond market is pricing in a sharp slowdown or even recession, not to mention a bold projection that the Fed will have to cut rates in the next year or so.

Bill Gross weighs in with a breezy AMEN!

Currently, PIMCO’s best 60/40 bet is a cyclical one that proposes that the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving towards a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates... The U.S. bond bull market, which began almost two months ago, remains in its infancy but the best way to play it is via durations above index and concentrated in the front-end of the curve.

Pual Volker is not so sure.

``I am a little bit more worried about inflation'' ...While the inflation rate isn't ``high'' or ``running away,'' Volcker said, ``it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word -- psychological pressure, political pressure -- there is not to do anything about it.''

``A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that that nothing very startling will happen in terms of restraint'' on inflationary pressures, said Volcker. ``That is reflected in attitudes pretty broadly. But once people are convinced that that's the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.''

Dallas Federal Reserve President Richard Fisher is on the same page.

Several surveys of business executives have been released in the past week, all of which underscore the slower growth beginning to prevail. This includes recent surveys of the manufacturing sectors of the megastate of Texas by the Dallas Fed; the survey of the smaller but nonetheless meaningful production of eastern Pennsylvania, southern New Jersey and Delaware by the Philadelphia Fed; the National Federation of Independent Business; the Business Roundtable; and Duke University’s Global CFO Survey.

Lumping it all together, I am reminded of Mark Twain’s oft-quoted quip: “Wagner’s music is better than it sounds.” The outlook for economic growth may well be better than it sounds. At the same time, the inflation dynamic may be worse than it sounds.

As I sit at the FOMC table, I continue to fret more about inflation than I do about growth. While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation.

Markets are known to enjoy uncanny predictive powers, with some suggesting lead times of as much as 12 months. But right now the stock and bond markets are more like nervous needles on data dependent gauges. Thus the stock market sees healthy business conditions for the current quarter, at the same time the bond market sees inflation "leveling off". It is unlikely that tug of war will remain in such perfect balance indefinitely.

A New Bullish Thesis

2006-09-22T22:08:00.000-05:00

Lots and lots of chatter out there about the inverted yield curve (you can do a google search and find more than you can ever read, and/or you can check out this very good interactive chart for a quick refresher).

Conventional wisdom tells us the structure of our current yield curve- in addition to a number of other variables- puts a material probability on a recession.

Meanwhile, there's a considerable number of economists and strategists that say just the opposite.

RealMoney contributor and ING Guru Jim Griffin is one of them.

Mr. Griffin has written an excellent "executive summary" of a more comprehensive piece in The Economist. Frankly, I'm surprised this hasn't received more attention this week.

Bulls, Bears, and fence-sitters alike, will find both worthwhile reading.

Synopsis:

The Developing World Reaches Maturity
by Jim Griffin, Economic Advisor

If you would like a concise but comprehensive big picture of the economic backdrop for many of the concerns that get priced on a daily basis in financial markets, the current edition of The Economist includes a survey of the world economy that provides just such a synthesis. If you tend to get buried in the details of your daily grind, I recommend it to you.

Its primary point is that while the developed and emerging parts of the global economy are now in rough balance in terms of contribution to total global output, they are at a tipping point in terms of their relative importance going forward. If, like me, you have tended to think of the developed world as the global engine and the emerging markets as the caboose, a not unreasonable orientation given 19th and 20th century history, it is now time to consider swapping ends on that arrangement.

Much of what is written in this survey will not be new to you. What is different, intriguingly so, is the conclusion drawn: that the emerging world may be nearly ready to fly on its own. It may soon be ready to drive its own growth and development, with less dependence on rich world assistance in the forms of capital and technology transfer or demand propulsion. It may also, before too long, reverse the polarity of cause and effect in global economics: That old image of the United States sneezing and the rest of the world catching cold may once have been appropriate but in the years ahead the causation may run the other way between the developed and developing parts of
the world.

Unlike the parade of 30-second sound bites we're used to, this bullish thesis deserves thoughtful consideration. However, I should point out it is also possible the US could have a recession while the rest of the world plods along without us (think: Japan in the 1990's).

H-P's CEO Mark Hurd Live Webcast

2006-09-22T15:25:00.000-05:00

HP's CEO is on CNBC, live, as I type. For those without access, or looking for info after the fact, here are my notes, literally taken on the fly...

CEO Mark Hurd:

"I'm going to start by blaming this whole debacle on those people stealing strawberries... [unintelligible voice of HP lawyer]... er... leaking confidential info. We don't allow leaks... unless of course it was a part of the Board's strategy. So I must say I was shocked- SHOCKED!- to discover there have been non-Board-strategy leaks going on here."

"Today I will cover the details of our investigation in vague generalities. We intend to use the same long drawn out strategy we always use, say, when rolling out new products... or designing our packaging... or even deciding which types of that sticky tape stuff we should put on those things that keep the plastic bags closed on our products. We have been in a series of meetings, will continue to attend meetings, and have already scheduled additional meetings. However, so far we don't know anything, because our meetings have been primarily about the upcoming meetings. Also, naturally, we've reorganized the investigation team twice. All this to say, you can rest assured we will make this as complicated as humanly possible in the finest traditions of H-P."

"Yes I attended a meeting where I voted for it before I voted against it. I also may have left the meeting to use the bathroom during any criminal activity that is likely to be revealed in the future. I DID score on some KONA 1, but I didn't read it, and I didn't like it. Most importantly, I_DID_NOT_GET_TRACER_TECHNOLOGY_FROM_THAT_WOMAN, MS. PATRICIA."

"I apologize to all H-P employees that we were caught. As our employees know, H-P has designed incredibly invasive systems that leave digital tracks all over the place. I mean, Hello!, it's not like the days when David Packard could just reach over and run something through a shredder! But no excuses, the fine people of our company deserve better than this, and Chairman Dunn has resigned as a result of not taking the proper steps to ensure plausible deniability."

"Speaking of our employees, I'd appreciate it if you'd get back to work. Please stop emailing and talking endlessly on the phone with each other about this mess- trust me, we know who you're talking to, and [unintelligible voice of H-P attorney]... well, I think you know what I mean [muffled laughter]."

"In conclusion, let me share several buzz words: integrity, hard work, The H-P Way, blah blah blah, yadda H-P Way yadda yadda."

"...Black Gold, Texas Tea..."

2006-09-22T08:24:00.000-05:00

RealMoney's Christopher Edmonds always has a well balanced view of the energy sector. In his latest review of oil and gas (available on TheStreet.com's free site) he says this recent selloff is more of a seasonal issue- not a sign of a serious change in trend. Thus a buying opportunity for the long term.

High prices in the oil patch may slump temporarily, but demand for crude oil and products remains robust.

In fact, demand continues to creep higher from a base of 84 million barrels per day.

Without additional supply in the coming years, this trend will push the current limits of global production, now in the range of 85 to 86 million barrels per day.

Some have argued that gasoline demand dropped as a result of high prices in recent months. In fact, the data indicate otherwise.

When gas prices rose from $2 to $3 a gallon in the U.S., consumer demand remained surprisingly strong. Recent declines in demand are the result of typical seasonal patterns, namely a slowdown in driving as the summer-vacation season winds to a close.

Demand for crude, both domestically and globally, remains firm and should stay brisk for the foreseeable future.

More importantly, he names names for those wanting to take a shot at what he thinks will be strong earnings (and presumably healthy guidance).

As an aside, the best argument I've seen from the Bulls for persistent strength in energy is actually the same one used by the energy/oil price bears: deepwater discoveries (that link leads to an article- with a Peak Oil bias- about the challenges of Chevron's newest development).

The bears say these new discoveries prove technology will solve our problems. I'm no energy/oil expert, but I look at reaching almost a mile and a half down to the floor of the Gulf of Mexico, then drilling another four or five miles, into a pile of rocks, right in the middle of hurricane alley, and says to myself, "Self, if the supply of oil isn't a problem then who in their right mind needs to go there":

We've come a long way from the day when a guy could find the sticky stuff while out shootin for some food, and up from the ground would come a bubblin crude.

A Butterfly Flapping it's Wings in Thailand?

2006-09-20T10:17:00.000-05:00

During the summer of 1997 an "ex-Pat" client kept trying to tell me there was a very serious crisis unfolding in Asia. She was "involved" on the ground, so to speak, and convinced it would spread globally. I kept responding "Nobody here cares about Asia" (pointing out our market was doing great, and Americans are famously uninterested in world affairs). At one point she shared with me how and where the dominoes were falling, which had started with the currency implosion in Thailand. Somewhat embarrassed, I once again explained nobody cared about Asia- worse yet, there's maybe 10 people in this country that can even find Thailand on a map.

By summers end I became a believer, and of course it turned out she was right. Emerging markets were shellacked, and eventually the US experienced a fairly ugly selloff.

However, that big ugly Asian Contagion correction was a distant memory very quickly, as the US was preoccupied with the design/engineering of the largest bubble in the history of the world.

In fact, a year later, when the Russians defaulted on their bonds, Americans were completely unaware, or had no idea what it meant. The correction that came following the LTCM debacle was so brief, most dip buyers were up big before their trades settled.

Investors had been trained like pavlovian dogs to buy every single selloff with both hands and feet. The more severe the crisis the bigger the reward for stepping up to the plate.

Someone called it the Greenspan Put, which at some point got twisted into a slogan on Wall Street, as the public was reassured at any and every turn: "Greenspan won't let the baby boomers get hurt."

Of course the Y2K bubble got so big even the Fed reached a point where they decided it would be prudent to step back and let the markets clear. And when it became an absolute rout, and they started cutting rates, all the King's horses and all the King's men couldn't put Humpty together again.

It turned out serious problems suddenly mattered. And there was no quick fix. As John Kenneth Galbraith observed, "recessions catch what the auditors missed." Not only did the auditors miss a heck of a lot, but we learned a bunch of them were up to their ears in the financial engineering, too.

Fast forward to our current moment in time and we find the senior indexes in the neighborhood of those old highs. Our clients are generally happy, business is good. Buying on the dip, say, if there's a bombing in London, remains a sure-fire winning strategy.

Fact is, from what I see, investors want more risk. There may be a bunch of them crowding into puts or double short Q's, looking to score in October, but that's just a trade- they don't actually think anything bad is going to happen!

We need to remember that at the bottom of this increasingly complex system there are... regular people. They will once again reach a point where the pile gets too high. Or something bad will happen- and this time it will matter for some odd reason. There will still be business cycles, rising unemployment, painful recessions, stock market crashes.

And some of those gunning for new all time highs on the Dow- even if the market keeps going for a while- are liable to find themselves hitching their wagon for a round trip.

P.S. I hear a hedge fund lost $5 Billion in one week... wonder if we should be long gas?!

Three Charts

2006-09-18T20:21:00.000-05:00

First two charts lifted off Mike Panzer's site- always interesting to stop by and see where his imagination leads.

Third chart lifted off Sentimentrader.com via the Kirk Report (Charles Kirk says he's a speed reader- I believe it).

Jeff, the "OldProf", over at the Dash of Insight blog has some first rate analysis that questions the data sources for two of the above charts. This is a good example why I'm becoming a regular reader over there.

Dr Hussman Gets Technical

2006-09-17T22:48:00.000-05:00

Dr. John Hussman's weekly market commentary is always time well spent. This week he points out some interesting divergences.

The NYSE registered 193 new highs on Friday. This was fewer daily new highs than we observed two weeks ago, and less than half the number registered in early May. Weekly new highs also fell far short of the April-May period. Despite the recent advance in the major indices, the Dow, S&P 500, Nasdaq and Russell 2000 all remain below their April-May highs. Since early April, when our measures of market action shifted from neutral to unfavorable, the S&P 500 has delivered a total return about equal to the return on risk-free Treasury bills (within a fraction of 1%). This simply is not a market that is “running away,” but rather one that is range-bound and now strenuously overbought.

Trading volume has also been dropping off substantially. While the link between trading volume and subsequent market action is not reliable as a single indicator, trading volume has a very useful role in either confirming or diverging from the indications given by prices, breadth, and other internals.

Even outside of our own measures of market action, the weakness in investor sponsorship here can be seen in generally followed indicators. Lowry's, for example, observes that trading volume has fallen off substantially as the recent rally has progressed, while the apparently strong breadth of the NYSE has been driven mostly by interest-sensitive stocks.

Dr. Hussman also points out the divergence in the quality of the market breadth.

The next chart depicts market breadth on two measures. The violet line shows the overall NYSE advance-decline line. The blue line is the NYSE advance-decline line restricted to common stocks (excluding preferred stocks, which behave essentially like bonds). Notice that in recent weeks, the recovery in common stocks has been very muted. This is also evident in the advance-decline profile of other exchanges.

Turns Out We Have Less Than a Year

2006-09-17T13:57:00.000-05:00

You can ignore each of my previous reports on two predictions that we have about a year before the market crashes. As you can see, from the graphic display of the economic cycle, we're at the top now.

As usual, John Mauldin's weekly letter is a worthwhile read.

I won't parse the thing here since Barry Ritholtz already beat me to it, via a very good discussion in his comments section (scroll down once you link to his page).

Put This on Your Radar

2006-09-17T11:27:00.000-05:00

In my previous post I made light of Hedge Fund King Steven Cohen's prediction that the market has about a year before everything goes gunnybag.

He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

The Cunning Realist complains Charles Krauthammer agrees, though not for the same reasons.

The signal [from President Bush's press conference last week] is unmistakable. An aerial attack on Iran's nuclear facilities lies just beyond the horizon of diplomacy. With the crisis advancing and the moment of truth approaching, it is important to begin looking now with unflinching honesty at the military option...

Then, without flinching, Krauthammer bravely addresses the costs of military action:

Economic. An attack on Iran is likely to send oil prices overnight to $100 or even to $150 a barrel. That will cause a worldwide recession perhaps as deep as the one triggered by the Iranian revolution of 1979...

Military. Iran will activate its proxies in Iraq, most notably, Moqtada al-Sadr's Mahdi Army... Among the lesser military dangers, Iran might activate terrorist cells around the world...

Diplomatic. There will be massive criticism of America from around the world.

These are the costs. There is no denying them. However, equally undeniable is the cost of doing nothing...

One might wonder why anyone would knowingly walk into another mideast cesspool. Krauthammer answers.

Against millenarian fanaticism glorying in a cult of death, deterrence is a mere wish. Is the West prepared to wager its cities with their millions of inhabitants on that feeble gamble?

These are the questions. These are the calculations. The decision is no more than a year away.

Whether you agree with any of these dire predictions- and I've only used two examples- is really not the point here. What matters is whether the political and/or financial media's echo chambers begin to pierce investor consciousness, which could create a self-fulfilling prophecy. And having gone for so long without so much as a 10% correction in the senior averages, complacency is certainly reaching uncomfortable levels. (Not to mention oil is tumbling partly due to a complete flip of conventional wisdom about Iran supposedly making concessions at the negotiating table.)

Mr. Krauthammer predicts IF we attack Iran, then we'll wreak ecomic havoc. Mr. Cohen predicts IF hedge funds, crowded into the same trades, get jammed in the exits, then we'll see a market meltdown.

I'm saying, IF we simply see consensus build for either one of those sorts of events, then we'll discount the hell out of it before the first shot is fired.

Put another way, John Maynard Keynes once said figuring out the stock market is like trying to predict the winner of a beauty contest: beauty may be in the eye of the beholder, but you have to bet on the contestant everyone else will consider the most beautiful. (Or in this case, the most ugly.)

Most of us prefer to focus on the strength of the economy, inverted yield curves, corporate earnings, and other variables in our comfort zone. However, especially in the case of future Nuclear Power Iran, considering the sort of increasingly militant rhetoric the Cunning Realist has railed against (here, here, and here, for example), we need to put this on the radar.

The Hedge-Fund King Is Getting Nervous

2006-09-15T21:34:00.000-05:00

The Weekend Journal has a rambling piece about Steven Cohen, the SAC Capital Hedge Fund founder and trading guru. It's mostly a fluff piece, but still a fascinating story all the same.

The author received rare access to Mr. Cohen's business (Cohen sits in the center of a giant room full of traders), and home ("name dropping" every major painter that ever lived- and how much he paid for each).

More importantly, Mr. Cohen opens up about the crowded hedge fund trading, and what that probably means in the not too distant future.

[Cohen's] success has inspired a generation of scrappy Wall Streeters -- some of them with no experience whatsoever handling other people's money -- to open their own hedge funds.

That quick-trading game is now over, says Mr. Cohen. With about 7,000 hedge funds competing for investment ideas, good stock investments are getting more scarce. "It's hard to find ideas that aren't picked over, and harder to get real returns and differentiate yourself," he says. "We're entering a new environment. The days of big returns are gone."

To make matters worse, the stock market, he says, is no longer as forgiving for investors. The tailwind of low interest rates, low inflation and strong corporate profits, he says, has been lost. There are no more easy pickings, he says...

The throng of rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries that some of his largest holdings are also favored by other hedge funds. A rush for the exit could spell trouble. He says he expects that eventually there will be a sudden and sharp reversal in the stock market -- but he's not worried about that happening this year. "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts.

"Hedge funds are bigger than they used to be. Their positions are bigger," he says. "I worry that if everyone were to sell, could we get out?"...

As is typically the case with a "Rags to $3 Billion in Riches" story, the whole thing is a good inspirational read. But I also thought it was interesting the way the author came full circle in the final paragraphs.

Mr. Cohen concedes that holding investments longer and betting bigger could lead to lower returns. A year ago, SAC told investors the fund was aiming to return between 10% and 15% a year, people familiar with the matter say.

That isn't the only risk. These days, many of Mr. Cohen's big bets are popular with other hedge-funds. SAC's top holding in August, Time Warner Inc., is held by 79 other hedge funds, according to Goldman Sachs Group Inc. Atlanta-based energy company Mirant Corp., another big holding, is held by 97 hedge funds. If the funds tried to bail out of these stocks en masse, share prices would likely tumble.

Mr. Cohen says he worries about whether SAC's investments are beginning to look like those of any other hedge fund. What's worked for SAC in recent years, he says, may not work going forward.

On June 9, around midday, Mr. Cohen walked off SAC's trading floor and slumped into a chair. The markets had been choppy all week. He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

"The hedge-fund run is not over," he said. "I think the game is changing, and if it is, I have to react. We won't go off the ledge with everyone else."

I've got good news and bad news.

The bad news is the market is going to hell when all these hedge funds realize they're the ones that have run the whole thing up in the first place. The good news is you've got about a year. (Seriously, regardless whether it takes a week, month, or year, I've got a feeling Cohen comes in to work everyday and keeps one hand on the panic button.)

Whose Ox is Being Gored?

2006-09-15T17:48:00.000-05:00

Bloomberg's Caroline Baum has a fantastic assessment of the current US monetary policy. Some of it gets a little wonky, but it is well thought out.

The main point is how long the Fed has been inclined to strip out "volatile" food and energy.

Recently some soft but solid voices have started to challenge the Fed's choice of a core index, in part because oil prices have been ``volatile'' in one direction -- up -- for most of the last three years.

But there was also this passage that struck me a certain way:

U.S. policy makers have long defended the practice of using a core inflation measure as a check on how they're doing. The public, of course, sees this as just another gimmick the government uses to pull the wool over its eyes.

The concept of stripping out historically volatile food and energy prices from inflation indexes is ``an issue of trying to forecast more effectively the overall inflation rate,'' Federal Reserve Chairman Ben Bernanke explained in the Q&A following an Aug. 31 speech in Greenville, South Carolina.

A second reason for targeting core inflation ``has to do with policy making,'' he said. In order to offset the immediate effect of an increase in energy prices, the Fed would have to ``force down wages and other prices quite dramatically to keep the overall price level from rising,'' he said. The alternative is to allow ``first-round effects to pass through'' and try to ensure that the energy-price spike doesn't pass through to other prices and wages.

Stop and think about that for a moment. Out of 300MM Americans and/or 6 Bln inhabitants of planet Earth, a handful of politically appointed economists get to decide who has pricing power, not to mention what a complex $12 Trillion economy can handle in the way of full employment, cost of funds, and so forth, as well as all that flows from said targets.

Where is it they say the road leads that is paved with good intentions?

GM and Ford Follow Up

2006-09-15T12:41:00.000-05:00

I've been wary about GM and Ford for years now, really even before their absurd $10/share earnings guidance that they continued to reaffirm until it had become a gigantic joke (remember, the company said over and over again they'd hit those numbers this year, 2007 at the latest).

Today's reaction- esp with Ford- reminds us there are a lot of folks renting these names only as long as they have momentum.

And as Scott Moritz reminds us, "[Ford] warned that it doesn't expect to turn a full-year profit on its core North American car operations till 2009."

Meanwhile, "GM has also been grappling with significant turnaround challenges. The No. 1 U.S. automaker reported a second-quarter loss of $3.2 billion, or $5.62 a share, due to huge restructuring charges."

"Conventional wisdom is that you can't turn a ship as big as GM around quickly," General Motors said at the time. "We aim to prove that conventional wisdom wrong."

Look, that's just crazy talk. It might be encouraging if we all just got off a time machine and got handed the current mess. The fact is both companies have known about the liabilities, the slide in market share, and on and on, for years and years. This is an example where "conventional wisdom" merely requires the skill of observation.

Of course both companies are finally getting more serious, the unions so far seem to be persuaded that they need to bring something to the table (although my sense is the rank and file have not yet caught up to the union leadership on this), but face it: these guys are in a hole and have yet to stop digging.

What's worse, if a company is not currently making an obscene amount of money considering the supposed strength of the economy, historically low interest rates, productivity, yadda yadda, then why in the world should anyone think they'll survive the next recession (by that I mean the common stock)?

And don't confuse this with the current debate about whether or not we are actually headed into a recession even as I type. Instead, just ask yourself this: "Would you agree we'll have a recession at some point in the future?... What are the chances it could arrive before 2009 (when Ford hopes to be profitable)? And while Ford and GM are restructuring for the umpteenth time, who really believes Toyota, et al, are going to rest on their laurels?"

Lots of Interest in Short Interest

2006-09-14T23:32:00.000-05:00

Most of us that have been through a few market cycles keep short interest on our radar. I don't have a level that tells me anything in particular, more of a rough gauge of how many folks have crowded into the bearish trade.

But in recent years I've seen a fair amount of commentary that indicates record high short interest- followed by even higher records- is not what it seems. That's because there are increasingly complicated program trades and derivative-type hedges that use shorts, puts, calls, and other sorts of exotica, in an effort to target a particular niche or strategy.

For example, over on Minyanville, John Succo provides one of the most clear explanations I've seen of how this can actually work.

My fund is a very large short seller of stock and we represent a decent percentage of total short interest out there. But the reason we are short stock is because people sell calls. I have described these funds that buy stock and sell calls and deem it "income" for their investors. In reality, these funds can be very dangerous and risky if the market begins to decline. I can almost guarantee you that if the market drops enough, the risk will force these managers to sell stock to protect that "income."

So as these trades occur, funds buying stock and selling calls (which is a net bullish strategy), I take the other side on a ratio to create a volatility trade. I will never be forced to cover my short stock as it rises and in fact will short more. So instead of the comment "a rising market will force short sellers to cover" being accurate, in fact, as the market rises I will actually sell more shares short to hedge my exposure to the long call option.

Change of subject: while you're there, check out Kevin Depew's Five Things You Need to Know. Mr. Depew somehow manages to distill each day's market buzz into a very funny and easy to read column. Seriously good stuff.

You Don't See This Everyday

2006-09-14T20:35:00.000-05:00

Bloomberg reports a Federated Investors mutual fund manager is predicting a big decline in the market. And he's doing something about it.

Steven Lehman, whose $3 billion Federated Market Opportunity Fund has beaten more than 90 percent of its peers during the past five years, is more bearish than any time since stock markets peaked in 2000.

The 49-year-old manager more than doubled the fund's cash holdings in the past year to 36 percent and put 34.5 percent in bonds. He has another 5 percent in options that rise in value when equity prices fall. Lehman has just 12 percent of the Federated fund's assets in stocks, the least since the fund opened six years ago. The rest is in preferred shares and convertible bonds.

``I've positioned the portfolio for what I think will be a very difficult bottom here in the U.S. market and I'm waiting,'' Lehman said in an interview from his office in Pittsburgh. Falling home prices and weaker consumer spending will slow economic growth and hamper gains in corporate earnings, he said.

No commentary required. Be interesting to watch this fund and see what happens.

How Low Will Home Prices Go?

2006-09-14T12:59:00.000-05:00

Over the past few years a standard single family home around here would be on the market for approximately 4 hours. Never even got the realtor sign in the ground. When we were looking three years ago I had a real estate manager friend call me before the houses would even hit the MLS system. It was so competitive we just wanted a shot at it before everyone and his brother hit the same driveway. Turned out my tipster didn't even help because the homeowner selling, and all their neighbors, had already tipped off a few dozen others before I ever received a call.

Lately everything has changed. Totally.

For example, a neighbor has been trying to sell for 6 months, has lowered the price a little, did a bunch of work on the house, yadda yadda, but there hasn't been any takers. But they don't think prices have dropped- just too many other houses for sale this summer.

Terry Cullen's article in today's WSJ is a great story about what so many people are seeing in their own real world experiences since the market turned.

Terri and Her Sister Tour Open Houses To Gauge the Local Real-Estate Market

...our neck of the woods has seen some of the steepest home-price increases in the nation over the last several years. In the second quarter of 2006, the median price for a single-family home in our region was $393,600, more than double the median of $188,200 in 2000, according to the National Association of Realtors...

[But] recently she's seen reasons for hope: Far more homes were showing up in their price range, and others she'd seen a year ago were being relisted at reduced asking prices. Melissa decided it was time to look around again, and last weekend she asked me to come along on a tour of open houses in her price range. My sister had a list of homes she'd found online, but I suggested we tour as many open houses as we could to get a feel for the market...

What we saw was bleak news for sellers in our region, but good news for buyers like Melissa and Joe: block after block of open-house signs. In fact, we were hard-pressed to find a street that didn't have at least one home for sale -- and many had more than one. What's more, most of the 20 or so homes we visited were vacant -- a sign that homeowners have moved on and are motivated to sell, or that speculators are looking to unload properties before prices go any lower. (Asked why one home was vacant, one agent said frankly: "This was a 'flip' that flopped.")...

After our exhausting open-house blitz, Melissa asked for my thoughts. Though I'm too young to have experienced the 1980s real-estate market implosion, something told me that things are going to get a lot worse for sellers before they get better. To get an expert's take, I asked Robert J. Shiller, a Yale economics professor, for his insight on where the East Coast real-estate market may be headed...

"We don't know exactly what's going to happen because we've just experienced the biggest housing boom this country has ever seen," he says. In addition to homeowners struggling to sell existing homes, construction is at near-record levels: The last time this much inventory entered the market was 1950, when builders were building suburban homes for soldiers returning from war, he says...

Despite evidence of a cooling real-estate market, Melissa and Joe decided they weren't quite ready to wade back in: They'll take the market's temperature again in the spring.

So we've got lots of sellers that can't fathom a drop in price along with buyers that are learning it pays to be patient. That's a huge spread between the bid/ask.

Peak Oil: Don't Worry, Be Happy

2006-09-13T23:09:00.000-05:00

In Thursday's Wall Street Journal (sub required) we learn once and for all this whole Peak Oil thing is a bunch of nonsense.

Producers Move to Debunk Gloomy 'Peak Oil' Forecasts

Leading players in the petroleum industry, including Saudi Arabia and Exxon Mobil Corp., are aggressively arguing that plenty of crude oil remains for world consumption, in an effort to counter critics who contend crude output is about to plateau...

Yesterday, Abdallah S. Jum'ah, chief executive of Saudi Arabian state-owned Saudi Aramco, the world's largest oil company by production, argued during a speech in Vienna that the world has more than a century's worth of crude left at current production rates. His talk followed similar remarks by a senior Exxon executive this week. Spokesmen for Exxon and Aramco said they aren't coordinating their remarks...

At an OPEC seminar yesterday, Mr. Jum'ah of Aramco said the world had produced only about one trillion barrels, or about 18%, of the earth's producible potential of 5.7 trillion barrels of oil. "That fact alone should discredit the argument that peak oil is imminent, and put our minds at ease concerning future petroleum supplies," he said. The remaining 4.7 trillion barrels should be enough to last more than 140 years at current output rates, he said...

Mr. Jum'ah's speech came two days after Exxon's Australia chief, Mark Nolan, told an industry conference in Adelaide, Australia, that "the end of oil is nowhere in sight." Mr. Nolan cited a U.S. Geological Survey estimate of more than three trillion barrels of conventional recoverable oil resources, of which one trillion barrels has been produced. Conservative estimates of heavy-oil and shale-oil resources push the total to four trillion barrels, while a 10% increase in recoverability will deliver an extra 800 billion barrels, Mr. Nolan said.

A cynical person might think this news, coming from companies whose very existence depends on the sticky stuff, is an effort to keep oil prices from rising too far, too fast, thus accelerating the adoption of alternatives.

For example, this fella apparently don't appreciate all the hard work these oil companies are doing to lower prices on the products said oil companies sell:

Saudi Arabia, with a quarter of the world's proven crude reserves, has an interest in countering developments that would reduce demand. "If you are sitting on the world's biggest oil deposits, you would want to prevent the premature development of alternatives to oil," said Herman Franssen, president of International Energy Associates, a consulting firm in Bethesda, Md.

Ah, but Abdallah Jum'ah knew he would say that.

In an interview, Mr. Jum'ah said the Saudis "don't mind the development of alternatives to oil," because increasing energy demand means the world needs supplemental energy sources. But he objected to government subsidies and other supports that lead people to believe that alternatives like ethanol are a "panacea" that is "around the corner," he said.

Got that? Government subsidies, like, say, this one given to Chevron, are just wrong. And leading people to believe some panacea is around the corner is, like, oh I don't know, saying technology will solve the problems we're currently having getting oil and refined products to consumers.

Whatever. Either way I'm not going to worry about it, since I don't have to conserve energy and technology will bail me out.

What I'm Watching

2006-09-13T13:12:00.000-05:00

Commodities. Especially oil and copper. (link to chart over at Chairman Mao)

Mid-term elections. Get the latest rundown from the Wall Street Journal's Morning Briefing (sub required). Bush and Rove are working hard to regain momentum. Most experts agree it's hard to see the Democrats turning over very many seats, as both parties enjoy extremely high re-election rates among incumbents anyway. But I still think the mood is shifting.

Advance/Decline line.

Short Interest still very high.

Gaps faded. I'll get more concerned when I see the pre-market/market open higher, only to close lower. That pattern is frequently a tip that momentum and individual traders are anxious to get in early, while the smart money lightens up through the rest of the day. There have been times in the past where this pattern persisted for some time before the market rolled over ugly.

Sentiment surveys still bearish (although this week should change that). Businessweek explains.

Hedge Funds closing in on Fiscal Year End. This Heard on the Street column mentions some of the most expensive money market funds available to wealthy investors.

Some of the most hallowed names in the hedge-fund world are producing very human returns this year.

They've been dogged by confusion about where interest rates, stocks and commodity prices are heading, and poor bets on emerging markets and housing-related shares...

Overall, hedge-fund returns are in line with markets. Merrill Lynch's hedge-fund index is up about 4% through Aug. 28, compared with a 7.2% gain for the DJ World Index, a rise of 4.3% for the Standard & Poor's 500-stock index, and a gain of 2% for the Lehman Brothers bond index. But hedge funds that focus on stock picking -- so-called long-short managers who buy some stocks and bet against others -- are up a meager 1.4% so far this year, according to the Dow Jones Equity Long/Short (U.S.) Index.

Jubak: I'd like to see more articles like this. And fewer like this. (No offense, Mr. Jubak.)

Yahoo Adds Seeking Alpha; CNBC doth Protest Too Much

2006-09-12T08:45:00.000-05:00

Update: As usual, I see Barry Ritholtz over at the Big Picture beat me to the punch. Interesting to see a number of very smart folks with the same reaction to the interview noted below.

This morning I looked up and noticed Yahoo Finance Manager, Peggy White, getting grilled by TV tough guys Joe Kernan and Charles Gasparino. Ms. White was announcing the addition of content from Seeking Alpha to the news feed at Yahoo Finance.

Beginning today, consumers researching specific stocks on Yahoo! Finance will find Seeking Alpha stock market content on the stock quote pages of the web site. The agreement brings users access to a new breed of financial analysis, opinion and commentary from money managers, finance professionals and industry experts.

"Financial blogs play an increasingly important role in covering today's global investment markets, and the addition of Seeking Alpha content to Yahoo! Finance brings a new collection of viewpoints to millions of investors," said David Jackson, chief executive officer of Seeking Alpha. "Working with Yahoo! Finance allows us to provide a new audience with a wide range of well-argued opinions and analysis that complements the financial news already provided by traditional media outlets."

In response to a series of rude questions, Ms. White explained a team of editors would review the content for accuracy.

Mr. Kernan laughed at that, due to his grave concerns that bloggers, which he compared to the Wild Wild West of Yahoo's bulletin boards, would be able to just throw out anything and everything.

Charlie Gasparino taunted: "will the editing process be better than the Wall Street Journal?!"

This sort of paternal instinct, especially coming from unindicted co-conspirator CNBC, is a little hard to swallow by anyone with a memory of the $Trillions vaporized after the Y2K bubble popped.

And don't get me wrong, I appreciate Mr. Kernan's vigilance over the rest of the country- nay, the world!- although I don't remember a trace of CNBC editorial concern until well after stock market implosion damage was done.

All this as that Pulitzer Prize winning piece seriously examining the behavior of CNBC "Bubbleheads" still collects dust on the shelves over at the Wall Street Journal (What? Oh yeah. I forgot... they're partners).

Regardless, as Peggy White chuckled out a "Thank you for having me", she must have been thinking of CNBC's abysmal ratings compared to the "viewership" over at her corner of the media jungle (as in, "Well that interview sucked... but then again, nobody's watching.").

[Note: Using Hewlett-Packard (symbol HPQ), since they're in the news today, here's an example of the integration of Seeking Alpha into the news thread found on Yahoo Finance. Nice. The more diversity the better.]

OK, enough about that.

Update: I've submitted this piece to the editors over at CNBC and The Wall Street Journal... but, so far, no response.

Let me wrap this up with a massively bold and forward looking prediction: Joe Kernan will have his spurs on when CNBC discovers the Wild Wild West that is the internet...

...because NBC is testing a new website for CNBC even as I type.

NBC is testing a new website for CNBC. The site will charge subscriptions for access to all interviews and features run on the cable channel, as well as real-time charts and a search engine.

The site, which will take advantage of the fact CNBC’s content is digital and easily transferable to the internet, will launch in the US at the end of the year and be rolled out internationally.

So they've apparently gotten rid of all those VHS machines at CNBC HQ, and now- Hey, this is cool!- can take advantage of CNBC's digital content. Very clever they.

Cramer: What Traders Learned from 9/11

2006-09-11T20:39:00.000-05:00

Jim Cramer's reflections upon 9/11 are an odd play-by-play of those first moments- when we still thought it was just a plane crash.

But Cramer inadvertantly reveals a rare- and much more important- view of what traders are doing in our markets every day. I've cut and pasted Cramer's build up to my larger point (my emphasis added).

At the very moment we first saw the smoke -- not even the flames -- on television, I was online with a bunch of traders and at the risk of sounding callous, I want to tell you what went through our heads. Maybe enough time has passed that you won't judge me harshly for what we were thinking, maybe enough time has passed that you can recall the moments between the "accidental fire" catching our attention and the discovery that we were under attack, that there was no accident and that the world as we knew it was changing.

At first we all asked, "How bad?" I must have gotten six or seven "How bad(s)?" via instant messenger in the first two minutes. Given that we didn't know it was a terrorist act, I shot back the same IM to everyone: "?????" Others came back with everything from "seems weird" to "time to buy." No one said sell, not one of my friends. More importantly, no one said, "This is it, the big one." No one was thinking that way. And no one was thinking that anybody was going to die, least of all people we knew.

One grizzled trader -- I will keep them all nameless -- IM'd me: "Futures down big, bringing in short." Many brokerages make active markets in everything every morning; this morning was no different, and you could trade millions of dollars worth of stuff freely -- as almost everyone I knew did. I came back with: "Wise, don't take short off all at once." That wasn't reflecting any knowledge whatsoever about what was happening at the WTC, it was simply about discipline.

Another trader IM'd, "Stocks indicated down big, buying right here." I asked, "Know anything?" He answered quickly, "Doesn't matter, can't be that bad, gotta bring em in, gotta buy something, too much for sale." Had to bounce, I thought, had to.

You must remember the unimaginable was happening, but it is the trader's job to imagine. All of these IMs were about imagining. You have to trade. You can't not trade. Everyone was trading. They were trading, in retrospect, with no knowledge at all.

There is an enormous percentage of the population- including a lot of folks in the financial media- that assume the big guns are firing off trades with an edge that they hold over the market.

Todd Harrison frequently refers to this curious habit as "a bunch of gunfighters standing in a circle shooting at each other."

Just once I'd like to turn up the volume on CNBC and hear someone say, "the market spiked higher before anyone had time to read the Fed Minutes... then sold off a few minutes later before anyone stopped to think about the fact that the Fed keeps telling us they have crossed into the Twilight Zone, and they don't have the foggiest idea what they're doing anymore! Therefore, with the blind leading the blind today, the market closed up a hundred points.... and when we come back, more blind people will talk about what they'd do if they were qualified to sit on the Fed."

If a Forest Falls on a Tree Does it Make a Sound?

2006-09-10T14:26:00.000-05:00

"Everybody's Doing It"

Sunday's New York Times has a review of 3 internet services that offer to write term papers for college students. Since this was among the most emailed stories in the NY Times this weekend I thought I'd find a scathing rebuke from the author, for what is obviously cheating, or at least some attempt at humor ("kids these days!"). Instead, in sterile prose, he simply fussed about the lack of quality relative to the cost, wondered oh-so-carefully if they were written in the same country that answers Dell Computer's phones (wink, wink- if you know what I mean), and then generally concentrated on the only question bothering every college student in America emailing this story back and forth over the weekend: WILL I GET CAUGHT?!

“Damn!” a little comic-strip balloon says. “I’ll have to cancel my Saturday night date to finish my term paper before the Monday deadline.” [Can't make this stuff up: check out the comic strip banner.]

Well, no, she won’t — not if she’s enterprising enough to enlist Term Paper Relief to write it for her. For $9.95 a page she can obtain an “A-grade” paper that is fashioned to order and “completely non-plagiarized.” This last detail is important. Thanks to search engines like Google, college instructors have become adept at spotting those shop-worn, downloadable papers that circulate freely on the Web, and can even finger passages that have been ripped off from standard texts and reference works.

A grade-conscious student these days seems to need a custom job, and to judge from the number of services on the Internet, there must be virtual mills somewhere employing armies of diligent scholars who grind away so that credit-card-equipped undergrads can enjoy more carefree time together.

Remarkably, in what is obviously a related story, the Wall Street Journal notices Ivy League Schools are bending over backwards to attract the retarded children of the rich/famous and/or powerful. Why? Because rich/famous and/or powerful people suddenly want to give loads of money to said institutions that demonstrate they're open minded about the subtle artistic strengths of certain progeny.

What makes Duke and Brown, among other institutions, stand out, is the way in which they ramped up and systematized their pursuit: rejecting stronger candidates to admit children of the rich or famous, regardless of their ties to the university.

In the world of higher education, children of the rich and famous are known as "development cases," pursued by presidents and fund-raisers often to the dismay of admissions staffs. Duke landed the children of fashion mogul Ralph Lauren and other corporate titans. Some of them became major donors, helping boost Duke's endowment from 25th in 1980 ($135 million) to 16th in 2005 ($3.8 billion).

Brown raised its profile by enrolling children or stepchildren of politicians and celebrities, including two presidents, three Democratic presidential nominees, two Beatles and seven Academy Award winners. A particularly controversial case was the son of Hollywood superagent Michael Ovitz, whose application sparked a debate within Brown.

This success, however, carries a cost. As the number of applicants has soared in recent years, premier schools admit as few as one in 10 students, a far more selective rate compared with a generation ago. To make room for an academically borderline development case, a top college typically rejects nine other applicants, many of whom might have greater intellectual potential.

Meanwhile, H-P Spying on it's Own Board Members, as well as numerous reporters, has been met with a yawn by the markets (H-P Shareholders Appear Unfazed), and whatever is less than a yawn by the current CEO (See Hurd's email to H-P employees).

Tom Dresslar, a spokesman for the California Attorney General Bill Lockyer's office, said that H-P has been "fully cooperating" with the state's investigation and that prosecutors hadn't yet issued any subpoenas in the matter.

The attorney general did, however, obtain a warrant last week to obtain from a telecom-service provider the phone records of a person or persons involved in the investigation, according to Dresslar.

"We believe crimes have been committed," he said. "We'll go where the investigation leads us and bring charges based on the evidence."
Pretexting is a growing problem, and the state of California is investigating a number of so-called data brokers concerning the practice, Dresslar added. Read more on pretexting (Stealing Phone Records Has a Long History).

Based on California laws that were passed during the late 1980s, it is illegal to obtain or use an individual's private information using unauthorized means, the Lockyer spokesman said. Beyond any possible criminal violations, H-P board members who approved the investigation may be liable for civil penalties. [Do we really need a panel of lawyers? How 'bout this: was it fair? Was it honest? How would you really feel if they tapped your phone?]

Speaking of "wiretapping", Newsweek's story of former GOP Congressman Dick Armey's disbelief in the Bush Administration's rush to invade Iraq adds to the pile of elected government officials that should have known better... and should have said something. Note the article's focus is on Armey, but unintentionally discloses the weak Democratic role due to the then-quickly approaching 2002 mid-term elections- providing a more thorough explanation of so many votes "in favor of the Iraq War before they voted against it", so to speak. Note also the extraordinary sense of being there, during a profound example of group think, that only comes once someone inside the room breaks their silence. Regardless of our own personal bias, there's enough clear information emerging now to shame both sides of the political aisle.

The president’s message was direct. There was no time to wait. The showdown with Saddam Hussein, the dictator of Iraq, had to start right away...

Listening to the president, Senator Majority Leader Tom Daschle felt trapped. House and Senate members were gearing up for the final stretch of the campaign—with control of the Senate up for grabs. Bush was informing them that the national debate would now focus on Iraq...

Daschle was thinking of one man: Karl Rove. The previous January, Rove, Bush's master strategist, had telegraphed his intention to use terrorism and national security issues to hammer Democrats in the fall campaign. “We can go to the country on this issue,” Rove had proclaimed at a Republican gathering, because the American people "trust the Republican Party to do a better job of strengthening America’s military might and thereby protecting America.”...

... in the Cabinet Room , watching Bush pressure his congressional colleagues, Armey realized that Bush was serious, that he seemed committed to launching a war and overthrowing Saddam. He thought of another president from Texas, Lyndon Johnson, and what a reckless war had done to his administration. Armey, who had not said anything else about Iraq after his Iowa outburst [where he said Saddam was not a threat, just a blowhard], decided this was the moment to speak his mind directly to Bush. "Mr. President," he said, "if you go in there, you're likely to be stuck in a quagmire that will endanger your domestic agenda for the rest of your presidency."

...When Armey finished, Cheney spoke. It would be a good idea, the vice president said curtly, if Armey would not dissent from the president’s position in public. Frankly, Armey replied, I didn’t realize there was a specific White House position yet. Then Bush, according to Armey, "asked me if I would withhold any public comments until I had all the briefings. So I could understand how necessary this was." The president was saying, wait until you've seen the intelligence. That would prove why urgent action—maybe even a war—was required.[Thereafter, Armey remained unconvinced, yet quiet.]

Upon exiting the meeting, the congressional leaders stood on the White House driveway and issued brief remarks for the assembled reporters. Senator John McCain said Bush had made a “convincing case” for action. House Speaker Dennis Hastert commented that he expected Congress would vote on a resolution before the elections. House minority leader Dick Gephardt, who during the meeting had indicated he was willing to work with Bush to convince Americans that Saddam's WMDs were a real danger, said that Bush had to demonstrate to the public that “this is something that we need to do and to take seriously.” Daschle, more guarded, repeated the concerns he had raised inside: “What new information exists? What has changed in recent months or years?” He added that he was “hoping for more information and greater clarity” in the weeks ahead. Armey walked by the TV cameras, saying nothing. But he still had his questions. Why a war? Why now?

A few weeks ago The San Francisco Chronicle brought us up to speed on the options scandal in a piece titled, Options scandal? Ho-hum. In it the author explained the backdating brouhaha seemed to be much ado about nothing.

...as more companies get pulled into the fray -- the number of firms under scrutiny has passed 100 and grows larger by the day -- the shock seems to be wearing off.

"If enough companies are implicated, it's seen as systematic risk, like exposure to rising oil prices," says Todd Fermandez, a senior research analyst at Glass Lewis & Co., which researches investment risk for large investors. [Hey! I was just thinking that!]

Of course any good journalist with two hands will always include the obligatory naysayer- you know, just in case the story blows up (or the market goes down).

Steve Sidener, an attorney who represents shareholders (though none in backdating suits so far) says that stocks trade mainly off revenue and that backdating has no impact on revenue, past or future. But, he says, it would be a mistake to conclude that backdating doesn't matter.

"It goes to honesty and or trustworthiness. If you are backdating options, you also might be cutting corners and cooking books in other areas," he says.

Frankly, I could continue... but you get the gist.

Bloomberg: H-P Chair Might Resign

2006-09-08T16:13:00.000-05:00

I contacted H-P to get the details on this Pre-text Messaging stuff. I'll update this post once they write me back.

Thank you for contacting HP. For your convenience, a copy of your message is listed below.

Comments:
I've used HP Pavillion machines in my money management firm for several years. A day or two ago I caught the tail end of a report on CNBC that HP was offering "Pretext Messaging"(not sure I got the correct terminology..???). Was "PM" pre-installed on our machines, or is this like AOL/Yahoo's "IM" that needs to be downloaded. I called technical support but I had a hard time understanding the person- or maybe I'm using the wrong terminology and just confused both of us. Anyhoo, they directed me to use this part of the H-P site, and said I'd be contacted by email (if this is the wrong department please forward to the correct person!).

Thanks!

P.S. love HP stock too! So glad you're kicking Michael Dell's butt!!

Update: So far this is all I've got.

Thank you for taking the time to send us your feedback regarding privacy at HP. HP is committed to protecting our customers' privacy and your feedback is very important to us...

This information will only be used to reply to your feedback. HP will not sell, rent, or lease your personal information to others. Please see our online privacy statement for more information.

[On a personal note, I can't begin to tell you how nice it is to do business with a company that has such a well-defined Privacy Policy... lots of companies think they're the CIA or something!]

Charter Communications

2006-09-08T10:25:00.000-05:00

Wonder what's brewing over at Charter (CHTR). I'm not involved, but I notice it's one of the best performing stocks on the planet for the past few months. What really caught my eye was that sharp reversal, after a rather ugly day that saw something on the order of 80MM shares traded. The only "news" I see is their debt swap in August, but it seems like they do one of these every 6 months or so. Anyhoo, might be nothing... but it certainly makes you wonder, no?

Dollar vs Gold

2006-09-08T08:53:00.000-05:00

I'm neither a forex expert nor a gold bug, but I've been around long enough to know why there are times when both are important. Bill Cara has forgotten more about the two than I'll ever know, and today's post on the subject is an interesting read. I would just add two cents- if it's even worth that much- I think there a quite few more factors that impact the Dollar and Gold, and there have been many times both traded together for periods of time. Having said that, no argument that's a very interesting chart.

A Sample of What I'm Watching

2006-09-07T09:17:00.000-05:00

The market is a little wobbly lately, after a classic summer rally. A lot of smart folks don't trust that low volume bounce off the June lows. Makes sense. But I think it helps to "zoom out" sometimes and look at a long term chart. This is especially true of the Semi ETF (symbol SMH). The 5 year chart shows we are simply near the bottom of a range, and reminds me how many times we've heard tech is poised to re-establish its leadership position. On the other hand, if this bounce fails and we break below, say, 30, I think the rest is obvious. Whether you're Bull or Bear this could be a very important tell.

James "RevShark" DePorre, who blogs on the premium RealMoney site has a piece available for free on TheStreet.com. He has always amazed me with his sixth sense for the market. I also like the way he blends technical analysis with common sense.

The recent low-volume rally created what is known as a "bearish wedge" pattern in the major indices. This is simply an uptrend on light volume with no consolidation along the way. It is vulnerable to sharp selloffs because the market players who are accumulating gains along the way are likely to sell quickly and aggressively to lock in profits once things start to slip. This selling has a tendency to gain momentum and feed on itself because no one wants to see their recent gains suddenly turn into losses.

Most polls agree the Republicans are struggling right now. This is a good article among a few hundred on the subject I found with a simple search. But I don't need the media to tell me the GOP is in trouble. Frankly, I have been shocked by the number of friends- some of whom are lifelong Republicans- that have told me they will flat out "protest vote" for Democrats across the board in November. At first I took it as an idle threat. Now that I've heard the same intense frustration a dozen times it makes me wonder if voters are going to get out the broom.
The investing part of this issue is important too. During the time my party has been spending like a bunch of drunken sailors, which has included a massive increase in defense spending, the defense contractors have had a huge run. No surprise there. But I noticed a few months ago, Boeing, for example, stopped going up, despite what has been continuously good news flow (note Boeing's weakness continued during the recent rally). It's possible this is an example of the market looking over the horizon, because it's pretty clear the enormous rate of change in defense spending after 911 has hit a plateau. In addition, if the economy is indeed slowing, cyclical stocks will certainly struggle. [Note: I'm NOT making a political statement here. Any observer of history will remember these war time surges in spending have normally been followed by 1) inflation, and 2) a public backlash that leads to cuts in defense. This is a brief glimpse of my post-war/post-Bush thesis that I need to address more fully. The key point here concerns a potential sea change in the public's mood toward the deficit stimulus that has no doubt been a contributor to the overall liquidity sloshing around in the system.]

Short interest continues to set new records. Explains some of the distrust of the recent rally, since short covering tends to be artificial. See MarketThoughts for an interesting summary of recent market stats such as these. Also makes me wonder how far and fast we can go down when there are that many hedge funds crowded over on one side of the boat.

Ten year yield (and inverted yield curve). As I said in a previous post: market going up, bond yields down a lot... someone is very wrong here. Or if we paraphrase one of my all time favorite Greenspan quotes: "Rising [risks] have been advertised for so long, and in so many places, that anyone who has not appropriately hedged his position by now, obviously, is desirous of losing money." Or maybe that explains the record short interest?

Top 20 Financial Blogs

2006-09-06T21:29:00.000-05:00

Found this excellent review of the 24/7 Wall St.'s Top 20 Financial Blogs (via Rodger Nusbaum ).

I was a little surprised to see who was not included: Barry Ritholtz's Big Picture and Bill Cara's site.

Still, found a few new sites that look excellent, and was reminded of a few I haven't visited for a while.

I continue to be impressed with the level of quality on a number of financial blogs. It doesn't seem that long ago our "independent research" was limited to a Value Line report and a 3 month old summary from Standard & Poor's.

GM and Ford

2006-09-06T09:10:00.000-05:00

Lots in the news about these two companies lately- much of it happy talk, after a long period of negative news flow. (I'm not going to get into it now, but it tangentially touches on one of my biggest pet peeves with the media: Stock going down? We see dead people; Stock going up? We see sunshine; Stock flat? We see "volatility"- never has a word been more misunderstood, yet used more often, in the history of the world. I said I'm not going to get into it- and I'm not- but I love it when they show a 5 minute chart and say how volatile the stock is trading... apparenlty not noticing the scale on the chart reflects a total range of 13 cents.)

Anyhoo, if you boil it down, there are three camps on Ford and GM: 1) will they file, or 2) won't they file, and 3) will they or won't they hire my firm for investment banking/consulting services?

Investors should be verrrry careful with both names. I would not rely on certain TV stations and major financial publications for guidance here. Nor the conflicted experts quoted in said venues. And the only source worse than the above are the CEO's of each.

It's not only the stock that folks should be worried about. The common is just the tip of the iceberg, because there are literally hundreds of billions of dollars of bonds and preferreds. In other words, in terms of total dollar values, the exposure to the stocks is dwarfed by the current value of bonds and preferreds.

My guess is a huge percent of individual investors have no clue how much exposure they have to these two names (via mutual funds), nor the fact that the whole thing is essentially a massive "junk" yard.

More importantly, the primary question of bankruptcy is academic at this point. Both are already bankrupt. (Technically, "insolvent"- a non-judicial version of "bankruptcy"). Right now the only difference between the two terms is that the institutional stockholders still have a seat at the table (along with bondholders and unions).

But these rolling restructuring plans ride on a wave of shrinking production and market share even as they give away vehicles and try to "make it up on volume" (through their finance arms, to be exact). That is a profoundly complicated business plan.

I'm a contrarian, and normally would be attracted to a stock trading below cash. But so far all I see is a rearranging of the deck chairs.

And what if they find the formula, and years from now the stocks are trading higher?

So what? So what.

There are tens of thousands of stocks that go up- and down- every day, month, year. Just because the media obsesses over a story doesn't mean I need to be there. I'm content to leave those crowded trades to those higher up the food chain.

Update: Over at Mish's Econ Blog, in his latest post, What is Ford Worth, he has laid out a colorful and very easy to follow analysis of Ford's balance sheet. Boggles the mind.

The Cheap Revolution

2006-09-04T22:55:00.000-05:00

Several years ago I read an article in Motley Fool which quoted Warren Buffet's views of the internet. He and Charlie Munger both said (paraphrasing) the internet will become the ultimate margin killer.

"For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits. It is way more likely to make American businesses less profitable than more profitable." Charlie Munger agreed, saying, "This is perfectly obvious, but very little understood."

The argument is very simple and compelling. By allowing buyers to search quickly and easily for the best prices worldwide, or to create competitive bidding situations via auctions and the like, the Internet will remove pricing inefficiencies and force overall margins down.

By now most everybody uses the net to find the best price for everything under the sun. For example, if you've bought or sold a home in the past few years you've no doubt at least become familiar with the discount/flat fee brokers putting more and more pressure on the 6% commissions paid real estate agents. (By the way, the most emailed article this weekend: The Last Stand for the 6 Percenters?.)

But as Warren Buffett and Charlie Munger understood early on in this revolution, it's not just transactions getting commoditized. The internet as a platform itself, along with the ocean of information available to everyone, is most likely what they were thinking about.

With that in mind, the current issue of Forbes sends a shot across the bow of some of the most widely held companies in America. The New Barbarians is a fascinating look at the extraordinary ways companies like Microsoft, Sun, IBM and Oracle are losing to the likes of Linux and Google, per Bill Coleman, former co-founder of BEA Systems ("the B is for Bill"), and now founder of Cassatt, a company created to exploit the "Cheap Revolution".

"We are going into a period of unbelievable disruption," he says. "We're about to see a huge tectonic shift, more dramatic than anything in the past. This is the next boom, the next big storm. Things are going to get really wild."

They already are. Coleman is one of dozens of new barbarians plotting the Cheap Revolution, the wholesale shift by corporate customers and techmakers to cheap chips and open-source (often free) software such as Linux. They are embracing simplicity, unlocking prodigious new power and cutting tech costs by up to 90%, threatening the Silicon Valley plutocracy: the proprietary gear, "closed" software, redundant backup systems and fat profit margins of incumbents like Microsoft, IBM, Oracle, Cisco, EMC and other blue-chip nameplates.

Speaking of disruption, in case you're like me and can't stand to mess with registration- even if it's free- I discovered you can google "Forbes The New Barbarians", and the first link takes you right in.

John Mauldins Weekly e-Letters

2006-09-04T11:43:00.000-05:00

John Mauldin does two weekly e-Letters: Thoughts from the Frontline, and Outside the Box. "Thoughts" are his own musings largely based on the avalanche of material he's been reading during the past week. "Outside the Box" (my fave) is a guest forum providing what is frequently a provacative viewpoint.

You can sign up to receive both for free by simply entering your email address and following the steps here. I have been receiving both for several years without additional spam or or any other hassle.

This week both are worthwhile reading.

In this week's Thoughts, he ponders the similarities between the current market and what we saw around Labor Day back in 2000.

In September of 2000, economists and bullish money managers were telling us that "This time it is different." They specifically pointed to the fact that the market was close to making new highs. We were heading for a soft landing. Not one of the Blue Chip economists at the time was predicting a recession. As an aside, we now know the economy was slowing dramatically and would be in recession by March of 2001, two quarters before the normal four quarters the Fed study suggested.

The Fed would be cutting rates less than five months later, but as we know, a recession came anyway. I distinctly remember Jim Cramer writing (pounding the table in his own unique style) that when the Fed started cutting in January you HAD to buy the market. He cited data that the market was up 12 months after the Fed started a rate-cutting cycle. He was a tad early about getting back into the market.

You'll also find a few interesting charts that, among other things, remind us we have a stubbornly inverted yield curve- and why that has proven significant in the past.

This weeks Outside the Box features the latest musings from Bill Gross, which I found to be an interesting long term view of our fiscal problems, from the unique vantage point of a Pre-Boomer (Gross was born before the baby boom kicked into high gear).

Too late to have babies, too politically sensitive to import more workers, too daft to recognize that the boomer winter is rapidly approaching and that our assets will not fund our liabilities. Too, too. Too, too. Too, too. What does a government do that is too absorbed in the moment and fails to alert its citizens to the perils ahead?... It devalues its currency, it reflates/inflates its economy, and because that doesn't create real wealth, it recites the mythology of a bygone era, of a "shining city on a hill," so that its citizens believe they've never had it so good. Well, as I acknowledged at the start of this Outlook, some of us never have had it so good, but the demographic season is changing and a rebalancing, more equitable distribution of our rather meager stockpile of nuts lies ahead. Corporate profits, nearing a record percentage of GDP will ultimately be taxed at higher levels in order to assuage a populist ballot-box revolt. And U.S. stocks, the present value of which represents the future value of private sector wealth creation, will stutter, perhaps stagger, as investors understand that much future wealth has been spoken for, if not already digested, by a boomer generation acting as consumers of first and last resort.

There are a lot of folks out there that immediately dismiss anything Bill Gross says because, as one commentator put it, he reminds them of the story of The Boy That Cried Wolf. No comfort there, when you consider the wolf eats the kid while his baby boomer mother ignores his pounding on the door (couldn't resist that one).

Inverted yield curves, housing problems, black fiscal holes in the universe obviously have nothing to do with what the market is going to do tomorrow (when we all return to the Church of What's Happening Now). But still, I do have to wonder what Senator Julio is thinking these days.

Risky Business

2006-09-02T21:46:00.000-05:00

The new issue of Businessweek features an article regarding Nightmare Mortgages, more commonly referred to as Option ARM's.

While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket... The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance... What's more, steep penalties prevent them from refinancing.

Ouchie Momma.

Stop and think about this for a moment. The vast majority of home buyers do not have the experience to walk in and choose an Option ARM (chances are they never heard of it).

The truth is, they were sold the product.

But why would experienced professional mortgage brokers push Option Arms when rates were scraping along at 45 year lows in 2004? Turns out there's more grease in it.

There was plenty more going on behind the scenes [the borrowers] didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

Those guys at Businessweek sure are cynical. When there are that many fingers in the pie we call it synergy.

To get the deals done, banks have turned increasingly to unregulated mortgage brokers, who now account for 80% of all mortgage originations, double what it was 10 years ago, according to the National Association of Mortgage Brokers. In 2004 banks began offering fatter sales commissions on option ARMs to encourage brokers to push them, says Gail McKenzie, assistant U.S. attorney in Atlanta, who is investigating mortgage brokers for improper practices. [Rut Roh.]

The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It's easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.

Well, OK... you got a point there.

Unfortunately, this article leaves one hanging, wondering what can these poor people do? How big of a problem is it? Are there any shares available to short?

Prediction: if this turns out to be as widespread as the article implies, two things are going to happen: 1) a lot of these folks are going to "throw the keys at the bank"; and 2) the tobacco lawyers are going to drop what their doing, round up a few million people, and sue somebody (conveniently enough, their job is made easier by that ridiculous paper trail generated every time you close a loan).

(Hat Tip: Seeking Alpha, which has a veritable cornucopia of housing related articles for anyone looking for some weekend reading.)

Peak Oil- Ready for $200/bbl?

2006-09-01T16:50:00.000-05:00

I'm not a scientist, nor a petroleum engineer. Like most of you I read what other experts say about complicated issues and try to make sense of it. Also, like most of you, I try to think through the consequences.

I have no clue whether or not oil is going to $200/bbl anytime soon... but I do know we'd discover the straw that broke the stock market's back long before we ever get there (in other words, whatever shocking price arrives would be academic at some point).

Yesterday my wheels started turning when I stumbled upon this attention grabbing headline over on Bloomberg: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude

Before you blow a gasket, let me point out, despite the headline, the author actually balances out the debate between the two camps. There's something for everyone here: "Peaksters", Cynics, or even Agnostics like me.

But really, what interests me is the psychology of the issue.

...the peaksters are drowning out everyone else, Cranberg says. ``You can't turn around without seeing or hearing these ideas,'' he says. ``I think they are gaining.''
You don't have to be a geologist to understand why. The price of
crude has tripled since 2000. In the U.S., $3-a-gallon gasoline has sapped consumers' confidence. Nearly half of Americans believe the economy is doing poorly...``If oil was still at $20, no one would be talking about peak oil,'' says Manouchehr Takin, senior petroleum upstream analyst at the Centre for Global Energy Studies, a London-based consulting firm.

The first time I heard about peak oil was a looooong time ago, during a debate about IF, or when, US production had started to decline. At that time there were lots of folks who questioned the accuracy of such a claim. Frankly, it sounded unpatriotic.

By the late 1990's, when the price of oil was in the low teens- despite the then obvious decline in US Production- the concept of "Peak Oil" was a joke. Only a few fringe types and pointy headed professors bothered talking about it. And with wholesale gas around a dollar per gallon, the public- and thus, politicians- could not have cared less. Nobody knew or cared where it came from, nor about rising Chinese consumption, blah, blah, blah.

Next, please.

Since then everybody has been wrong about oil. Wall Street analysts, industry experts, government experts. Oil prices have gone higher than anybody imagined.

Take a long look at that chart again. Rising oil prices are no longer described as transient while keeping a straight face. Instead, I see the same folks blaming Hedge Funds, or Iran, or [insert your own ideas]. And those market strategists that claim $25/bbl of the price is Hedge Funds/Iran- why would anybody listen to them? They were still using $28 oil targets when oil was trading at $60.

Having said that, there's no doubt, in the short and intermediate term, oil prices are no different than the way inflation expectations work their way through an economy.

Therefore, if a majority of Americans wake up one morning and decide we have a Peak Oil crisis on our hands, then it will become a self-fulfilling prophecy.

How likely is that? No idea. But I sense American public opinion has been following the rest of the world on a number of big issues such as this one.

Global Warming comes to mind.

How the heck did we get on Global Warming?!

Bear with me here.

Up until recently the majority of Americans sniffed at the idea of global warming, let alone the notion it is becoming a crisis. Yet after one hell of a hot summer, global warming has become accepted by a wide margin of Americans. More importantly, a majority now say we need to do something about it.

And just 6 months ago Al Gore was material for late night comedians every time there was a snowstorm somewhere in the Northern Hemisphere.

Meanwhile, the rest of the world is now shaking their head thinking "it's about time you people woke up!" They have believed deeply that global warming is an end-of-the-world-as-we-know-it crisis for years.

And they are way ahead of Americans on Peak Oil, too.

The question is whether Peak Oil will suddenly get traction in the US the way we've seen sentiment shift massively on Global Warming in 2006.

If so, oil prices in 2007 might be an even bigger surprise.

Truth is, a lot of really smart people will be arguing about all this- the facts, that is- for years. But with the economy already slowing, we need to pay close attention to the psychology of big stories such as this, because the market will have already sniffed this stuff out when the competing experts are still arguing over the shape of the table for their next conference.

Finally, what do I think about Peak Oil/oil prices? Do I believe we'll see $200/bbl for oil? The contrarian in me sees that headline and smiles at the thought of oil plummeting from here. But then again, a year ago I would not have guessed anybody in this country would ever believe global warming. Frankly, it doesn't matter what I think- I'm watching the psychology on this one instead.

Chart of the Day

2006-09-01T13:31:00.000-05:00

Chart of the Day reminds us September can be a cruel month.

Today's chart illustrates the Dow's average performance for each
calendar month since 1950 (blue columns) and 1980 (gray columns). What does the chart show? While the strongest upward bias in stocks has historically occurred during the November-January time frame, September has proven to be the most difficult month for stocks. It is interesting to note how the 1980-present average gain for September has remained negative despite the fact that most of this period included a strong bull market. Stay tuned...

Fork in the Road, Reprised

2006-08-31T14:49:00.000-05:00

On a quiet Friday afternoon about a week ago I tossed out a humble observation I referred to as a fork in the road.

The NY Times has picked up the same theme and expanded on it. But A Forecast for a Fork in the Road is much more important than my rather vague feelings, for that author thought to check in with the very smart folks over at ECRI.

For those of you that are bullish- and tired of hearing all these nattering naybobs- I would still encourage you to keep an eye on what the people at ECRI have to say. Not just because ECRI's crystal ball seems to be of higher quality (which I think it is), but because anyone loaded for bear still needs to keep an eye out for the market's elephants (which just happen to be ECRI's clients).

MEGO numbers (My Eyes Glaze Over)

2006-08-30T17:39:00.000-05:00

Years ago I volunteered to teach classes for Junior Achievement, where they send business people into the classroom to teach kids about finance and the economy. About that time the national debt had been in the news and the teacher asked me to explain it to her class.

Back then it was a staggering $4.5 Trillion.

Don't know why, but I thought it would be fun to write it on the board in big letters.

$4,500,000,000,000

Took up the whole wall... but all I got were blank stares.

So I wrote the amount each of them owed.

$16,000

For the first time those kids were sitting straight up in their chairs, arms and hands reaching for the ceiling, pleading, "pick me! pick me!" Nothing we'd covered, including the popular stock market game, ever got that sort of response.

Meanwhile, Julio sat on the front row with his arms crossed staring at the board the entire time. Julio was in deep serious thought.

As my time ran out I asked if anyone else had any questions.

Up goes Julio's hand.

"So you're sayin' America owes all this money?"

"That's right."

"And you're sayin' each of us have to pay $16,000, or you sayin' my mom and dad have to pay that?"

"That is the amount all of us owe right now. $16,000 is yours, mine, your mom's and your dad's. We don't have to pay it right now, but..."

"You're saying I owe $16,000?"

"Yes, that's your share."

"Sheee-it. I ain't payin that!"

The school bell rang, but was drowned out by the bell ringing in my head. I drove back to the office stunned. I knew at that moment that some day that kid will be United States Senator Julio. And some day Senator Julio is going to introduce a bill. And when he and his classmates get together, Social Security and Medicare will no longer be the "third rail of politics".

I was reminded of that story recently when David Walker, Comptroller General of the US, gave a speech explaining that we still don't get it. In fact, we aren't even using the right numbers.

What used to be $4.5T... is now $8.5T. But that is just the national debt on the books.

Terry Savage's article in TheStreet.com (where I shamelessly stole that great headline) quotes a study done for the St. Louis Fed:

...economist Lawrence Kotlikoff pointed out that the U.S. is responsible for $80 trillion in future entitlement promises -- a figure about six times larger than the U.S. economy. To make good on those promises, future workers would have to pay tax rates ranging from 55% to 80% of their incomes!

The same week that Kotlikoff's study ran in the Federal Reserve Bank of St. Louis bulletin, the comptroller general of the U.S. said, "Current fiscal policy is not sustainable, and hard choices must be made ... we're mortgaging the future of our children and grandchildren and creating a shameful legacy."

Using those numbers Senator Julio now owes $156,000.

Memo to CNBC

2006-08-30T14:09:00.000-05:00

This morning I broke one of my longstanding rules and turned the volume on to check out Squawk Box and Morning Call. As usual, actually listening to what they're saying on CNBC proved to be a complete waste of time.

Memo to CNBC

Mark: drop the phony enthusiasm. We liked you better when you were providing some
adult supervision and/or making cynical faces at the camera. If you are required to pretend to be happy with a fractured hour from the floor of the exchange you should just quit.

Ladies (you know who you are): the Dow Jones Industrial Average is an 11,000+/- point index composed of 30 individual stocks whose prices change every second. A change in the index from minus 9 to plus 6 is not a reaction to anything. A move of .1% in the first hour of trading is also known as flat. A rounding error. More importantly, a 30 point change off the flat line is not a "surge". In other words, going from 1/10 of 1% to 1/4 of 1% is just noise on a quiet summer day.

Joe: a stock that is bid 23 cents below yesterday's close in the premarket is not reacting to [insert news]. It is still not reacting to [insert same news] when the market opens and the stock is up 11 cents. That is especially true for a $90 stock. But you already know that, right? So we have someone feeding the teleprompter that does not?

Bob: you seem like a nice guy... but it would be good if you could bring something to the table. More than anyone, anywhere, you have unfettered access to specialists on the front lines. Yet we get nothing except the same exact cliches day after day after day ("Traders I've talked to are watching oil... Traders say pay attention to interest rates..."). Bob, you aren't really talking to traders are you? C'mon, just between us. Those bullies picking on you again? Do me a favor. Just as an experiment. Grab one of those guys walking by (trying to avoid eye contact) and ask him what's really up. "How's the tape feel today?" "What's really new out there that nobody's talking about?" "Hey, explain to our viewers what it is you guys are doing jammed into that post over there!" If you're telling me you can't do anything like that, then you're just using the exchange floor for wallpaper.

Rick: you are a god. Not because you provide more information in 45 seconds than the
entire cast manages in an hour, but because you so diplomatically deflect their lack of understanding when they throw it to you. We know why you're always smiling with all the crap you have to listen to before it's your turn. By the way, please talk to the traders on the NYSE floor and ask them to be nice to Bob.

CNBC: your website is awful. Literally worthless. You are a wholly owned subsidiary of one of the most valuable companies on the planet. Yet I can't watch an interview with a guy from last Friday (worse yet, according to your search function, there is no record this regular guest exists). Both confirmed by a painful phone call with a robot in viewer services (by the way, I had to help her find the site first). Ever heard of YouTube? Check it out. See what I mean? Why is it I can watch the I Love Lucy Show from 1957 but can't watch an interview from last Friday?

Actually, the Glass is Full

2006-08-28T18:33:00.000-05:00

Over at the Big Picture, Barry Ritholtz has been all over the important story of rising corporate earnings vs. compensation for as long as I've been visiting his blog it seems, so I'm going to direct your attention to two related posts, here and here (I had saved both articles as a draft for further comment this morning, but as usual I found he'd beat me to the punch).

That chart is hard to see because I copied it from Barry's site. The original, along with a few pages full of other informative charts is available at the St Louis Fed's website (see esp Productivity and Profits).

Obviously US corporatons have achieved peak earnings in this cycle in no small part due to impressive gains in productivity, even as total compensation has dwindled. Which raises a profoundly important question: what do you do for an encore?

Look closely at that chart. People are not going to work for free.

And even if you think it's different this time , and we have reached a new plateau of prosperity, the stock market wants more. Record gross margins and cash flow soon become next years challenging comparisons.

Those of us concerned about the housing market serving as a canary in the broader economic mine consider Exhibit A to be the homebuilder stocks themselves. None of those companies are losing money. None of them are anywhere near bankruptcy. They were NOT expensive stocks a year ago, when trading at 11 times earnings.

Yet the sector has suffered a 50% haircut in the past 12 months.

Most Emailed Articles At a Glance

2006-08-28T18:16:00.000-05:00

The NY Times (free registration required) has a feature I use constantly when surfing the web looking for something good to read. The Top 25 Most Emailed Articles has proven to be a terrific source of all sorts of interesting articles that a bunch of people found good enough to take the time to email to someone else. Chances are you'll find something worthwhile, no matter what mood you're in.

In addition, the Wall Street Journal (sub required) has a similar feature, At A Glance, which is organized by topic.

All Real Estate is... Global?

2006-08-28T16:10:00.000-05:00

Real Money contributor and ING Resident-Guru Jim Griffin wonders if all the talk of a housing implosion might be blown way out of proportion.

There has been quite a lot of concern about the housing outlook lately and its likely negative effect on the broader economy... But much of the argumentation strikes me as what-goes-up-must-come-down determinism; narrow in focus, divorced from context, and moralistic in tone.

More importantly, he reasons, the housing bears could be missing what might be a global phenomenom that kicked in around 1990.

It’s almost as if something changed back around 1990, and something surely did: a list might include the collapse of the Soviet Union and a Cold War peace dividend in the form of a shrinking federal budget deficit [Note: as a percentage of GDP], the missteps of Japanese economic policy, and the Teutonic austerity in Europe as it strove for monetary union. The emergence of China and other newly capitalist economies might also be penciled in.

And if that is the case, then the economic bears might be missing out on what could be a longer economic cycle.

If we were to want to spin the analysis in a positive direction, we could make a case that the business cycle – a new more fully globalized version and not the closed-economy shorthand model – has reached the self-sustaining phase that in past cycles caused the monetary authority to withdraw accommodation and strive for neutrality. If the case has merit, it implies a much longer expansion phase – it took a long time to get out of first gear – with the further implication that today’s worries about a 2007 recession are overdone. I don’t want to pound the table on that argument because there hasn’t yet been a full cycle, both up and down, within the globalized economy yet and I’d like to have a bit of real world experience before getting too cocky.

There's a subtext worth careful consideration whether you agree with Mr. Griffin's thesis or not: there are indeed aspects of this cycle that have confounded a great many thoughtful people. Well, what if the market keeps going up even as the doomsday drums get louder and louder? How many of us are hardwired to admit we were wrong?

More importantly, to paraphrase a constant theme voiced by Rodger Nusbaum, what if you totally believe the market will crash and you go 100% cash- or you sell your beautiful home and rent an apartment- and it turns out... you're wrong? Then what?

Hussman's Weekly Commentary

2006-08-27T22:07:00.000-05:00

John Hussman raises his target for the Dow to 15,000.

Just kidding.

As usual, John Hussman's commentary is a worthwhile read.

With recession signals increasing (though not yet enough to predict a recession with a high probability), it's useful to remember that stocks generally turn lower before the economy, with a lead-time of about 6 months. That may very well be the window we've entered here.

On the economy, the most recent data on housing starts continues to confirm a downturn in housing, which was also evident in the 4.10% drop in new home sales last month. That gives us a new point on our housing starts oscillator, which is already at a level consistent with potential recession.

One of the things I like about John Hussman is his knack for maintaining objectivity. He's been cautious for quite some time, yet he tends to express it in unemotional terms. For instance, he doesn't suggest everybody sell and head for the hills- but he minces no words either:

The major indices remain extended in an overbought condition, which in unfavorable Market Climates tends to give the markets a downside bias. Still, it's important to remember that even unfavorable Market Climates allow for short-term advances – it's just that the average return/risk profile in such Climates tends to be unfavorable.

NY Times: Whispers of Mergers Set Off Suspicious Trading

2006-08-26T21:09:00.000-05:00

I recently observed the interesting coincidence in the sharp rise in ISSX leading up to a cash offer from IBM.

Now comes a lengthy report, from Gretchen Morgenson, and a crack team of investigators, who were apparently shocked- SHOCKED!- that after all these years, and despite all the publicity from so many scandals, people still trade off inside information.

The public must be wondering why we can put an unmanned robot on Mars yet we need a private investigation by the NY Times to finger insider trading.

The truth is the Feds deal with insider trading the same way the IRS deals with people cheating on their taxes: nail a few high profile cases once in a while, stick a few people in jail every so often, and hope the fear of prosecution will keep a lid on it.

Oldies But Goodies

2006-08-26T20:52:00.000-05:00

I went back and found two articles that have stuck with me over the years.

The first was the earliest very public warning of recession after the Y2K bubble popped. Re-reading this piece in light of the current price at the pump is sobering to say the least.

The economy's humming along, no more interest-rate hikes are in sight, and the markets are starting to feel comfortable again after the inflation scare... Why worry?

I'll tell you why. The fact is, throughout the last 50 years, there has never been a spike in oil-price inflation of this magnitude without a subsequent recession. That's right -- never. And a spike in oil-price inflation preceded almost every recession.

Call it the Oil Recession
Anirvan Banerji

On a brighter note, the second article is a stunning interview with Sheikh Ahmed Zaki Yamani, the former chief of OPEC credited with being the architect of the painful oil shocks of the 1970's. The good news: Sheikh Yamani predicts oil prices will crash; the bad news: he said that back in 2000.

OPEC has a very short memory. It will pay a heavy price for not acting in 1999 to control oil prices. Now it is too late.

The Stone Age came to an end not for a lack of stones and the oil age will end, but not for a lack of oil.

Yamani says OPEC accelerating end of the oil era
Reuters (via planetark)

By the way, I think they're both right... and if we get a really big spike in oil the Sheikh will look prophetic in the future.

Fork in the Road

2006-08-25T16:33:00.000-05:00

Every once in a while we reach an economic point that gives me a profound sense of standing at the proverbial "fork in the road".

I remember talking to clients back in early 2003 of having that same feeling. According to the Fed, and a lot of other very smart folks, we were standing at the edge of a deflationary abyss (certainly not a good thing for stocks). Yet the market had taken off and put in a higher low, gold and other commodities (inflationary red flags) were moving up, and so on. Meanwhile, interest rates had plunged to 45 year lows.

As I summed it up at the time: SOMEBODY is very wrong here.

Turned out to be the Fed and all those smart bond traders: after about a 20 year bull market in bonds we reversed course and yields moved sharply higher; and after 50-80% declines in the stockmarket, between 2000 and the end of 2002, we enjoyed a ferocious rally.

As summer winds down I get a similar feeling.

On the one hand the Fed is telling us inflation won't be a problem- because the economy is slowing (certainly not a good thing for stocks). The bond market has bought into that line of thinking across the inverted yield curve.

Yet the stockmarket has been hanging tough, climbing that wall of worry, and commodities are still very high- including oil, which has one eyeball on Iran and now the other on Tropical Storm Ernesto.

Not to mention all the handwringing over the housing market (and what impact that might have on the broader economy if we lose that leg of the stool).

Seems everyone has a full plate of scared, right?

Not really. The volatility indexes hit the snooze button this summer and rolled back over. And to my surprise I've seen a half dozen charts that measure various forms of fear that look the same.

Honestly, I think everyone, including the Fed, is idling at said fork wondering what to do next. We're watching for hints about 3rd quarter earnings, waiting for the next set of inflation numbers, talking to our friends and family about the housing market, and worrying about plenty. But nobody wants to go first.

But no matter your bias... SOMEBODY is very wrong.

Update (Aug 26): Bill Cara ponders the fork in the road, or as he calls them, "crosscurrents", in his detailed week in review. Interesting to consider the relationship between the stock and bond market over the past few months.

Worried about real estate in this country?

2006-08-25T12:54:00.000-05:00

There has been an explosion of commentary in the blogosphere on the housing situation, in addition to what is showing up in local newspapers all over the country.

There are numerous blogs out there devoting all their energy to the subject (one such blog has entry after entry after entry of links to scary articles).

But for those interested in what this may mean for the broader economy I'd recommend perusing the Big Picture. Scroll down and/or check the archives and you'll find a ton. Call it a macro view.

And for those looking for more practical information... say, you're selling your own home... check out multiple articles and links found on Larry Nusbaum's site.

Good stuff.

Junk Bond Bubble

2006-08-23T13:09:00.000-05:00

There has been quite a bit of research and analysis done on what has been called "rolling asset bubbles" (search the phrase and you'll find more than you can read on the subject).

I'm intentionally avoiding the various debates about whether or not this or that asset class is technically sporting a bubble, because the point here is to offer a heads up about the next disaster in the wings.

Most agree the "Y2k bubble" got the ball rolling. As the air came out there was a lot of money that went looking for a home:

Commodities
Real Estate
Emerging Markets
High Yield (Junk Bonds)

Each asset class has its own peculiar characteristics, and each has a history of cycles-- some more severe than others.

The stock market bubble popped (ie, the Nasdaq declined 80%), the Fed threw real estate under the bus, certain emerging markets have been hammered this year... but what gives with the junk bond market?

Credit spreads remain razor thin.

Frankly, there are a dozen great explanations out there as to why junk bond yields remain so close to risk free alternatives. But wading through all of that is a waste of time.

Using common sense will work just fine in this case. I'll illustrate what I mean using two examples:

The DooWop High Yield Fund (not going to use the real name of the fund here), with an average maturity of 10 years, currently yeilds 5.8%. Meanwhile, the ten year US Treasury yield is 4.82%. That means you're getting one lousy extra percent for a basket of high risk bonds issued by companies with low credit ratings.

Here's the problem: as recently as 4 years ago credit spreads traded 5-10% ABOVE treasuries (depends on which index you use). There have been extreme cases where those spreads spiked even higher. Thus, it is possible for junk bond prices to plunge even if the yield curve remained static.

This leads me to an anecdotal example. I have recently succeeded on a large account for an elderly couple well into their 80's. One of them has been in a nursing home for the past few years and unable to make even the most basic decisions for himself.

Long story, short: their financial advisor had loaded the boat on junk bonds.

Even if you were to explain all this to them they would not understand. Frankly, credit spreads, interest rate risk, and so forth, are just too complicated.

But that is only the most egregious example. I am not only seeing prospective clients with too much junk, but I know advisors that are still making a case for "overweighting" (using that term to be kind).

The reality is these folks are not leavening a portfolio due to an asset allocation model that argues for X% in a high yield basket. These are real world people simply reaching for yield aided by aggressive advisors selecting the funds from the best performing asset classes (using 1,3, and 5 year returns).

And you can take this entire discussion and apply it to preferreds (think about all the Ford preferreds floating around out there), REIT's, and any number of other creations that offer a higher yield through a basket of something that is much more complicated than nearly every retail client will honestly understand.

When the tide goes out again- which it certainly will- there will be an avalanche of supply coming from investors that had no clue about what they owned in the first place.

IBM (IBM) buys Internet Security Systems (ISSX)

2006-08-23T11:32:00.000-05:00

There's a service out there that captures unusual option activity for a given day and produces a top ten list of sorts. I seem to recall ISSX popping up a week or so ago due to active call buying. Didn't give it much thought at the time because I'm not involved. But when the news broke this morning I got curious about that amazing coincidence.

By the way, message boards are the last place on earth you want to look for research and analysis... but interesting to peruse a few this morning that provided some uncanny details just last week.

They say a picture's worth a thousand words, so I'll just direct your attention to that huge reversal on the right hand side of that one year chart.

Options Scandal, Part II

2006-08-22T10:41:00.000-05:00

Bloomberg has a story out about United Health's CEO and Board of Directors accumulating $2 Billion (I've rounded down) in stock, mostly due to stock options:

UnitedHealth Group Inc. Chairman William McGuire sparked outrage among some stockholders over his $1.8 billion in potential stock-option gains. Turns out, the board of directors that granted those options got a share of the wealth, too. UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy.

A company spokesman tried to put those numbers in context. For example, a big part of the size and scope of those holdings reflect the fact that the stock has been a fabulous investment (up 7,000% during the CEO's tenure). Also, the folks with the largest positions accumulated their stock over a long period of time.

I've got no problem with that. If you invested or were granted a sum commensurate with the job- or maybe you just got lucky, being in the right place at the right time- and now the stock has gone up in a meteoric fashion, hey, that's the American dream...

... uh, wait... hold on... it might turn out to be more than luck.

Once again, the more you read the more complicated it gets:

UnitedHealth yesterday said it delayed its second-quarter earnings report while it determines whether it will have to restate results because of inappropriate options accounting. A board committee is reviewing 45,000 separate option grants made to 15,000 people over 13 years, the company said in a statement.

UnitedHealth shares fell $1.65, or 3.4 percent, to $47.33 at 4 p.m. in New York Stock Exchange composite trading, bringing their decline this year to 24 percent. Standard & Poor's Ratings Services revised its outlook for UnitedHealth to ``negative'' from ``stable,'' and A.G. Edwards & Sons Inc. downgraded the stock to ``hold'' from ``buy,'' citing the filing delay.

The step ``is significant evidence that there are real problems with United Healthcare's stock-option accounting,'' said analyst J. Paul Newsome in St. Louis in a note to day. ``It also increases, in our view, the likelihood that its well-regarded CEO will be pressured to leave.''

And as I've said before, it's not just bookkeeping errors... we now find they gave the CEO the equivalent of a blank check each time options were awarded:

Critics cite one board policy: McGuire was formerly allowed to pick his own option-grant dates. His Oct. 13, 1999, employment contract says: ``The annual options shall be granted on such date or dates as executive requests by oral notification to the chair of the compensation and human resources committee.''

So now investigations have spawned more investigations, as well as an internal probe. And this time the big shareholders are filing lawsuits.

Meanwhile, despite the company's vigorous defense of the program, they are cutting and/or dumping a long list of benefits:

After the revelations in April about McGuire's options, the board revised its own pay policies on May 1, reducing its compensation by 40 percent. That came on top of a 20 percent reduction in the number of options they could get after the shares were split, in May of last year. The board also discontinued equity grants to McGuire and other executives, capped supplemental retirement benefits for the executives, eliminated perks like life-insurance premium payments and set the annual meeting as the grant date for all options for existing employees.

This raises the same questions all over again: was it fair and responsible? Does anyone expect the internal probe to turn up "bookkeeping errors" that favored the shareholders?

Does the Bond Market Have it All Wrong?

2006-08-21T14:27:00.000-05:00

Over at one of my faves, the Big Picture Blog, Barry Ritholtz asks: Does the Bond Market Have it All Wrong?.

I have been fond of saying that the equity traders are the hormonal teenagers of the capital markets (traders think of markets as a daily version of Hot or Not?).

In our metaphor, the Bond market is the so-called adult supervision. Bond vigilantes have long been thought of as applying much needed pressure to the Feds to keep inflation under control, and rein in the deficit spending habits of the Federal government.

Implicit in this discussion: "Dose the Federal Reserve have it all wrong?"

Of course nobody knows the answer yet, but we don't have to travel very far to find an example of when both were very wrong:

That's a chart of the yield on the Ten Year US Treasury. Not only do you see a dramatic spike from 3.80 to 5 1/4% (about a 40% jump in rates), but what you don't see is the previous dip to the neighborhood of 3% back in 2003.

Three years ago the Fed was warning of DE-flation and reassuring the markets that they had plenty of tools available to avoid Japan's policy mistakes (what some have called Japan's economic depression).

A year ago certain members of the Fed were confidently predicting oil and other commodities would decline, and that inflation was well under control.

Keep in mind as you look at that chart the dollar value of the treasury bond market is absolutely enormous. Thus, relatively small changes in yield translate into very large gains/losses. In addition, there are countless loans and other instruments pegged to various yields along the curve.

In other words, a whole lot more at stake than just what it costs the government to get a loan.

Thus, the more cerebral types (think: Bill Gross) inhabit the bond market trenches, and as an extension, the bond market get it's reputation for being the more reliable leading indicator.

The truth is the bond market can be every bit as volatile as the stock market, and some would argue the Fed's crystal ball has been in the shop for quite a long time now.

Things that make you go "Hmmmm"....

2006-08-19T22:57:00.000-05:00

After such a nice run (since June/July lows), I've seen a stack of articles and reports predicting:

Fourth quarter rally (they vary from the "run of the mill" to the "blast off" variety)
New all time highs for the major indexes
Rebound in home sales/home prices
Double digit earnings growth for 2007
Leadership in large caps leading us higher
Resurgence in small caps leading us higher
Price to Earnings ratios "will expand from current 15X's to 16.9X's"...

...you get the idea.

Let's look at the foundation this future rally might be built upon:

17 consecutive quarters of double digit earnings growth
Record Fed/State/Local tax receipts (considered a good measure of the total economy)
Risk premia and credit spreads razor thin; volatility indexes at multi-year lows
Unemployment at 4.8%
Home ownership rates (a measure of economic health) highest in history
High rates of productivity keeping inflation and interest rates relatively low

Considering that's just a representative list, I'd have to say the bulls have a very strong foundation.

But you know... there's one question that keeps nagging at me:

If everything is so fantastic, then why are we still deficit spending in this country like a bunch of drunk sailors?

Not just the Federal government, but individually as well?

Think about it: I'm not asking why we can't seem to "get ahead"... I'm asking why we can't even slow down!

More importantly, if we can't keep up with our spending during the best economic conditions in the history of the planet, then when will we ever be able to pay off our debt?

Note: I'm not even touching the "offbudget" Iraq/Afghanistan/Katrina spending, nor the Social Security/Medicare/Pension unfunded liabilities.

Options Scandal

2006-08-17T12:34:00.000-05:00

The more you read about the Options Scandal the more complicated it gets. So let's try breaking it down with the help of Network Appliance CEO, Daniel Warmenhoven, using this interview with Businessweek's Peter Burrows.

I think the government is looking to... publicly hang people... That's fine. But where does it stop? I'm not saying the past practices were all good. But I thought the SEC's role was to build investor confidence. What they're doing right now is destroying it, and I don't see the purpose. They're penalizing today's shareholders for events that occurred five years ago. But who is this protecting, exactly? With Enron, every shareholder in the company lost money. The same with Qwest, and with MCI-Worldcom. But I don't know who the injured party is here.

Mmmm Hmmm....

Probably for sake of brevity, Peter Burrows doesn't point out it's actually the CEO/Board of Directors who are responsible for investor confidence. Instead, he just kindly explains that investors didn't get the same sort of special deal available to insiders. Then he lets loose an open-ender, wondering why are so many companies in so much trouble?

This is going to sound weird, but what difference did it make [if the options expense was recorded on company's official financial records using generally accepted accounting principles, or GAAP]? It was going to be removed for the pro forma reports anyway, and that's all the investment community cared about. And there was no rigor around the enforcement of this [by the SEC]. I'm not trying to defend the practice. But [properly disclosing and expensing in-the-money options] just wasn't viewed as a high priority by anyone. It generally wasn't even audited by the audit firms. The view was that close enough is close enough, which is why some people crossed over the line.

Alrighty then.

As you know, you have to be really smart to get a job with Businessweek, and Peter is a good example of that. So he ain't done with this fella by a longshot. Later in the interview he tricks Mr. Warmenhoven, wondering what a CEO could do to protect shareholders.

There was a lot more focus on the number of shares we granted than on the price.The number of shares is what creates dilution, and we manage the number of shares being granted every year within a dilution cap. Every year, I talked to my big shareholders and asked for their support [for the year's options program], and explained to them in great detail what the options will be used for...

Yyyyyeah...

OK, so probably not the best person to explain the industry's perspective afterall (by the way, in case you don't have time to read the whole interview, he continues by describing the ways regular people like us are speeding and nobody does anything to stop that either).

All kidding aside, this scandal rubs people the wrong way because the whole point is simple fairness and responsibility.

And this is not a question about what the market will bear. You'll never see me complain that Cisco's John Chambers gets $149,000 per day from his totally legal and publicly disclosed options contracts... even though the stock has gone nowhere for 8 years. (I should point out it's not a real market when you and a few of your golfing buddies sit around the table and just make stuff up.)

But honestly, the real reason for this rant is not about the options scandal, per se. The big revelation here can be found if you direct your attention to the humongous investors Mr. Warmenhoven checks with for legal and accounting advice.

Turns out you've apparently got the blind leading the blind, because those institutions are a bunch of morons.

Witness: while a lot of these big institutional shareholders have been keeping track of those "dilution caps", with a wink and a nod, their option-happy CEO's have been shoveling the company's cash into stock buybacks. (Note: Cisco apparently had a different approach: they are spending some $40 Billion after years and years of dilution.)

At the same time those CEO's and other insiders have been selling stock all the way down (that's the beauty of options awards: it's all relative. If a stock goes south, from, oh I don't know, say, $150/share to $5... before getting back to $32 and change, you just keep getting new awards with lower and lower strikes-- a good deal whether or not there's a "look back").

Having said all that, here's why I don't get too upset about such things: eventually the other investors in those aforementioned BIG INSTITUTIONAL FUNDS will take their money away, and in turn Adam Smith's invisible hand sweeps away the greedy CEO and their lazy Board of Directors.

UPDATE (AUG 21):

An editorial in Sunday's tech friendly San Jose Mercury News, Reality of stock-option drama is most errors were unintended, picks up on the theme that the options scandal is not much more than bookkeeping errors.

Yet still missing from very nearly every piece of analysis is the issue of favorable treatment granted to insiders vs the existing owners of the company.

Put another way, even if it's technically legal, was it fair and responsible?

Before you answer, think about this: can you imagine the shelf life of a systemic, industry-wide bookkeeping error that screwed executives and/or new hires of said companies?

The Stock Market is Going Up... uh, Right?- Part 2

2006-08-17T06:33:00.000-05:00

I mentioned previously the importance of critical thinking. Today we have Exhibit A from one of the very best newspapers in the known universe.

In this morning's Heard on the Street column, Gregory Zuckerman lays out a case for higher stock prices based on a recent "borrowing binge" by US corporations.

...the [increased borrowing] could help the stock market deal with an expected slowdown in profit gains later this year as the economy contracts. That is because both higher dividends, and buybacks that raise earnings per share by reducing the number of outstanding shares, could help offset any decline in profit growth.

The rate of increase in debt is certainly a concern, and the use of those funds by some companies trying to goose their stock prices is troubling, but to jump to a conclusion that as a result the stock market will go up is... ludicrous. The total market cap here in the US is enormous compared to even the most generous projections of new debt being issued- even if we were to assume that every new dollar of debt was dumped into the market.

Analysts and investors are compiling lists of companies with relatively clean balance sheets and steady cash flows that could find themselves attractive as leveraged-buyout candidates, which depend on adding debt to a target's balance sheet.

The author also stumbles into a sorta semi-related point that has received a fair amount of attention recently: the surge in private equity funds taking public companies private. Several potential targets are named, and several experts are cited adding fuel to the fire.

But like any journalist with two good hands ("on the other hand..."), we are reminded none of this may happen.

The rosy debt scenario is predicated on an economy that doesn't weaken significantly, and on interest rates not climbing much higher, both of which would make the increased debts more of a burden. It all comes at a time when individuals and the U.S. government are dealing with their own heavy borrowing, making it more important for U.S. companies to successfully handle their added debt.

It's fun to ramble on about takeover candidates, and if you throw enough examples out there you're liable to look smart when one of them gets taken out. But what of the giant pink elephant in the room totally ignored in this piece?

The "wave of leveraged buyouts" is mostly due to the easy credit (razor thin credit spreads) sloshing around the system, much of which is making its way to PE funds and the like. And why are they so interested in buying up everything in sight when everybody and his brother seems to realize the economy is slowing down? Well, that is largely due to their understanding that the credit spigot will be shut off if the current trends in the economy persist-- especially if those unwelcome trends accelerate.

Finally, what does this say about today's investors, and the companies they invest in, when there is apparently "pressure from shareholders for larger dividends and share buybacks", without a care in the world about the consequences?

JonBenet Ramsey

2006-08-16T22:46:00.000-05:00

What does JonBenet have to do with investing?

Absolutely nothing.

But the story has everything to do with what's wrong with the mainstream media.

Tonight I checked each cable news channel and every single one of them was wall to wall "JonBenet"- including CNBC, which had two guys yelling over each other.

There's a more important illustration here that sticks out like a sore thumb: with the way the financial media covers news you feel like you're on a pogo stick on a treadmill.

Worse yet, like the bozo's yelling over each other on CNBC tonight, there's plenty of wild speculation about something none of them can predict and that none of them appear to truly understand (the handling of the jobs numbers come to mind).

And this doesn't even begin to address the Jim Cramer circus.

Finally... WHAT'S UP WITH THAT BOUNCY FLOATING CAMERA THAT FOLLOWS BOB PISANI AROUND THE FLOOR OF THE EXCHANGE??!!

The Stock Market is Going Up... uh, Right?

2006-08-15T18:07:00.000-05:00

You should always try to find good bullish AND bearish analysis. You're better off giving weight to something rigorous, but it's also interesting to examine the process used to support the conclusion. In the grand scheme of things the former may be a mere data point; but the latter is important in order to develop critical thinking.

Then again, every once in a while you'll stumble upon an author's analysis that reaches a definite conclusion that... well, leaves you scratching your head.

Recession has once again taken a place in market chatter. The market’s mood, the slide into slump by the housing sector, the yield curve’s on-again, off-again flirtation with inversion, the Fed’s campaign (unpunctuated until last week) to reel in the monetary line it had previously played out – all make good talking points for the recession case. Nevertheless, I don’t find them convincing.

RealMoney Contributor and ING Resident-Guru, Jim Griffin, in his weekly piece, is clearly bullish. But if you read his analysis with a little history in mind it makes you think he must have accidentally merged two different articles.

Mr. Griffin has unintentionally revealed some scary parallels to the markets of the late 60's and mid 80's.

To be specific, he soothingly strolls through a few numbers and charts-- essentially saying, "Hey, the damage is already done!"-- but upon reflection he's picked two historical points (and a really ugly chart) that will make you spew your morning coffee.

As a reminder, investors piling in during the late 1960's didn't get their money back for 14 years; those investing at the bottom of that "mid-1980's" divot got beat up in the 1987 crash about the the time their trades settled.

By the way, let me say right here, right now: I LOVE Jim's stuff; he's always got that cool breeze view of the world that comes with a lot of experience during a lot of ups and downs. And it's not just a great writing style; he also has a gift for looking through a lot of market noise.

So not picking on Mr. Griffin. The main point is to illustrate the complexity involved in making long range forecasts using what may appear to be historical parallels. Put another way, a lot of smart folks could rewrite his essay using the same numbers and charts and offer a valid conclusion that is completely opposite.

Reference:
Encouraging Echoes of Cycles Past, by Jim Griffin
http://weekly.inginvestment.com/e_article000636127.cfm?x=b11,0,w