Monday, March 31, 2008

Oh crap!


Okay, the assclowns in charge of the country are apparently too freaking shameless to have the sense to change policies. There is no way any sane person could think we are "winning" in Iraq (whatever that means) and that the economy here is great and yet the Morons in Chief continue to tell us everything is fine. Here's the real score:

The economy is screwed. Big time. Up the ass with a broomstick. This is the worst financial circumstance in 80 years. You are all going to suffer hideously from the collapsing labor market, the failure of banks, the collapse of local governments, the loss of savings in bank failures, the unimagined social upheaval of food riots, the pillaging of America, and the loss of yours truly to a farm in Costa Rica.

I'll take my gold and my land and some family members, and join the ex-pat and native community in providing healthy, nutritious local foods and low impact power to the place where we can live in harmony while the US burns. Sorry, y'all, but a second Bush term basically proved that you don't deserve a way out from the madness.

Enjoy a hedge fund manager burger for me and have a nice life. America has been gang raped to death by the Bush administration.

Wednesday, March 26, 2008

The deal with China and all that debt


It would be easy to argue that a successful democratic government requires an educated and informed electorate. Such may still exist in America, though the popularity of Fox News sometimes leads me to think otherwise.

Here for your education is one of the best and most layman friendly explanations of the relationship between the US and China over trade and debt. It is used here with attribution, though not explicit permission from the January/February 2008 issue of The Atlantic, and was written by James Fallows.

Here's a tidbit:

The $1.4 Trillion Question

The voyage of a dollar
Let’s say you buy an Oral-B electric toothbrush for $30 at a CVS in the United States. I choose this example because I’ve seen a factory in China that probably made the toothbrush. Most of that $30 stays in America, with CVS, the distributors, and Oral-B itself. Eventually $3 or so—an average percentage for small consumer goods—makes its way back to southern China.

When the factory originally placed its bid for Oral-B’s business, it stated the price in dollars: X million toothbrushes for Y dollars each. But the Chinese manufacturer can’t use the dollars directly. It needs RMB—to pay the workers their 1,200-RMB ($160) monthly salary, to buy supplies from other factories in China, to pay its taxes. So it takes the dollars to the local commercial bank—let’s say the Shenzhen Development Bank. After showing receipts or waybills to prove that it earned the dollars in genuine trade, not as speculative inflow, the factory trades them for RMB.

This is where the first controls kick in. In other major countries, the counterparts to the Shenzhen Development Bank can decide for themselves what to do with the dollars they take in. Trade them for euros or yen on the foreign-exchange market? Invest them directly in America? Issue dollar loans? Whatever they think will bring the highest return. But under China’s “surrender requirements,” Chinese banks can’t do those things. They must treat the dollars, in effect, as contraband, and turn most or all of them (instructions vary from time to time) over to China’s equivalent of the Federal Reserve Bank, the People’s Bank of China, for RMB at whatever is the official rate of exchange.

With thousands of transactions per day, the dollars pile up like crazy at the PBOC. More precisely, by more than a billion dollars per day. They pile up even faster than the trade surplus with America would indicate, because customers in many other countries settle their accounts in dollars, too.

The PBOC must do something with that money, and current Chinese doctrine allows it only one option: to give the dollars to another arm of the central government, the State Administration for Foreign Exchange. It is then SAFE’s job to figure out where to park the dollars for the best return: so much in U.S. stocks, so much shifted to euros, and the great majority left in the boring safety of U.S. Treasury notes.

And thus our dollar comes back home. Spent at CVS, passed to Oral-B, paid to the factory in southern China, traded for RMB at the Shenzhen bank, “surrendered” to the PBOC, passed to SAFE for investment, and then bid at auction for Treasury notes, it is ready to be reinjected into the U.S. money supply and spent again—ideally on Chinese-made goods.

At no point did an ordinary Chinese person decide to send so much money to America. In fact, at no point was most of this money at his or her disposal at all. These are in effect enforced savings, which are the result of the two huge and fundamental choices made by the central government.

[snip] Very interesting, no? Read the rest here. It is very worth the time, and will make you more interesting on the bar/cocktail circuit.

Sunday, March 23, 2008

From www.galmarley.com

Sorry, folks, but this is probably spot on.



*** DEAD CATS and LIVE RABBITS ***

ONE DAY THERE will be an uncontained financial accident. Within
hours credit facilities will be withdrawn, and there will be forced
derivative position liquidations at organizations around the world.

Modern derivatives will be the brokers’ loans of 1929, resulting
in margin calls, liquidations, the evaporation of confidence,
spectacular losses, a credit squeeze and financial chaos. The
liquidations of assorted off-balance sheet positions will cause
the realization of big losses in many highly geared positions. This
will in turn cause dramatic re-ratings of the creditworthiness of
many borrowers.

The crisis will develop rapidly in the international bond markets
– where corporations and western governments have borrowed
cash consistently and cheaply. Borrowers whose worst excesses are
currently hidden off balance sheet in the derivatives markets will
find themselves insolvent, and their bonds and shares will plummet
in line with their credit ratings. Oversupply of bonds from hurried
sellers will drain the markets of cash and the selling of further
bonds into the market will become impossible - even at distress
prices for good bonds.

The bondholders – pension funds, deposit takers and other
collectors of the public’s surplus cash – will be drawn in, and
will see that they are in no position to pay back their depositors.

Insurance companies will watch as the portfolios which back their
obligations are destroyed. Their capital will be inadequate and
they will suspend paying their annuity holders. Property secured
lenders and banks will be standing in-line, having lent widely in
the mortgage, debt and derivatives markets. Of the £600,000,000,000
of gross sterling deposits in the UK much is on relatively short
periods (e.g. 30-day deposit accounts) and lent long term as
mortgages on overpriced assets. Not the tiniest fraction of this
amount of money can possibly be delivered by the banks in cash back
to their depositors.

In 'normal' times it does not matter if a bank's withdrawals exceed
immediately available cash resources, because the bank can gather
up some cash in bond and money markets. But in a credit crunch they
cannot do this. There will be queues at the bank but the doors will
be shut, Argentina style.

Houses will appear on the market, as the equity rich seek to secure
the cash which they regarded as their savings. But no-one will have
the cash or the finance to buy them, and house prices will slump in
search of a few brave buyers. Mortgage lenders will go hunting cash
to stay afloat - they'll suspend new lending. The banks and building
societies will increase borrowing rates, without increasing deposit
rates, and they will suspend withdrawals. Industrial businesses
will face a slump in demand like they have never seen. Unemployment
will explode.

Only the debt free who have invested in super-cautious organizations
and instruments will emerge with liquid assets.

Like most predictions these particularly wild ones are almost
certainly wrong. But they show a possibility which many savers are
simply not aware of. Most readers – even those who broadly agree
that the future could get that bad – will smile inwardly in the
confidence that they are shrewd enough and fast enough on their
feet to get out at the first sign of trouble, before the storm
really hits.

Maybe they are in that tiny number who will achieve it, but it is
unlikely. Not only is there simply not enough cash to pay out more
than 1 or 2 per cent of savers there are other great difficulties.

In times of crisis the marketplace makes it very difficult to act. At
every stage of an implosion it introduces elements which obscure
the ultimately successful line of action. Prices, for example, do
not descend in an orderly straight line. Almost all the sharpest
rises in the markets occur directly after the steepest falls.

Market professionals have a black humor expression for these
rallies. They call them "the dead cat bounce", because even a dead
cat will bounce a few minutes or a few hours after the slump.

[He's wrong here. Dead cat bounce refers to the idea that if you throw a dead cat from the roof of a 50 story building, after hitting the ground, it will bounce. This should not be mistaken for its' rising back to the roof, it merely bounced. When stocks fall hard, and then briefly rally, it's a dead cat bounce. -ed.]

People who lose 10% of their portfolio value on Monday morning,
when the market phone isn't being answered, and then gain 8%
on Monday afternoon, will choose to do nothing on Tuesday. While
they're dithering the market will encourage inaction by greatly
increasing the trading spread between buying and selling prices –
leaving investors with the feeling that to trade is to be fleeced
by the professionals. They will decide to hold on rather than lose
another 10% of their money by selling while the prices are wide
and the markets illiquid; and every time the prices narrow again
they will wrongly think the worst is over and will still do nothing.

Of the few investors with a trader's mentality, almost all will
be over-affected by the repeated market swings. Sucked out on the
falls they will buy back in on the rally – on consistently wide
spreads. Meanwhile any assets which offer protection to savers will
boom in price, just to the point where they are uncomfortably –
even dangerously expensive to buy.

This should be understood by all investors – but it isn't and it
never will be. The market doesn't wait conveniently showing the point
at which we should get out. It hangs between greed and fear. When it
falls it tempts us to hold on with the prospect of recoveries which
don't happen, yet it punishes us repeatedly if we start selling,
with bounces which would have saved us from our loss. Bit by bit
it turns the shrewdest market operator into a rabbit.

The significant majority of the tiny number who eventually succeed
in such chaotic market circumstances will be those who acted before
the storm broke. By the end they will have been through the mill,
having endured countless hours of anguished doubt. But aided by the
initial profits they make as the storm breaks they will have been
able to ignore strong but temporary market movements against them,
provided of course they have the fundamental confidence in their
own judgment of the process of economic unwinding.

But even then only a handful will exit their wealth preservation
strategy and go back into productive businesses within 20% of the
bottom. This is what it is like to be a successful investor. Even
in the good times it is painful to sell well, and painful to buy
well. But during times of crisis the pain is amplified by extreme
volatility, wide pricing, and thousands upon thousands of column
inches of popular newspaper analysis recommending entirely the
wrong action.

"Perhaps never before or since have so many people taken the
measure of economic prospects and found them so favorable as in
the two days following the Thursday [24th October 1929] disaster,"
writes J.K.Galbraith in 'The Great Crash 1929'. However, "on Monday
the real disaster began."

The disaster of 1929 was to continue – first down, then up;
horror, then hope, then horror, for 6 months. It sunk the bulls,
the speculators, the bottom fishers, the momentum trackers, the
chartists, the value investors...everyone.

Virtually no-one who had ever been involved in the markets came
out of the other side with any money at all. So perhaps the last
word should be left to someone who did.

"The complexity of this era of credit liquidation is far too great
for the mob mind to grasp," said Robert L. Smitley, writing in his
usual style and with his normal regard for the intelligence of the
average investor in his hugely entertaining book 'Popular Financial
Delusions' – published in 1933.

"It is hardly possible for them to see the picture wherein about
700 billion dollars of physical and intangible wealth is attempting
to be turned into about 5 billion dollars of money."

Saturday, March 22, 2008

3 nails, John McCain and a cross. What's missing?


Why haven't they piled on to John McCain? He was "proud and honored" to be endorsed by the Reverend John Hagee. Here are a few tidbits from the good Pastor (with thanks to MediaMatters):

On the September 18, 2006, edition of National Public Radio's Fresh Air, host Terry Gross said to Hagee, "You said after Hurricane Katrina that it was an act of God, and you said 'when you violate God's will long enough, the judgment of God comes to you. Katrina is an act of God for a society that is becoming Sodom and Gomorrah reborn.' " She then asked, "Do you still think that Katrina is punishment from God for a society that's becoming like Sodom and Gomorrah?" Hagee responded:

HAGEE: All hurricanes are acts of God, because God controls the heavens. I believe that New Orleans had a level of sin that was offensive to God, and they are -- were recipients of the judgment of God for that. The newspaper carried the story in our local area that was not carried nationally that there was to be a homosexual parade there on the Monday that the Katrina came. And the promise of that parade was that it was going to reach a level of sexuality never demonstrated before in any of the other Gay Pride parades. So I believe that the judgment of God is a very real thing. I know that there are people who demur from that, but I believe that the Bible teaches that when you violate the law of God, that God brings punishment sometimes before the day of judgment. And I believe that the Hurricane Katrina was, in fact, the judgment of God against the city of New Orleans.

Earlier in the program, Gross asked if Hagee believed that "all Muslims have a mandate to kill Christians and Jews," to which Hagee replied, "Well, the Quran teaches that. Yes, it teaches that very clearly."

A March 7, 1996, article (accessed via the Nexis database) in the San Antonio Express-News reported that Hagee was going to "meet with black religious leaders privately at an unspecified future date to discuss comments he made in his newsletter about a 'slave sale,' an East Side minister said Wednesday." The Express-News reported:

Hagee, pastor of the 16,000-member Cornerstone Church, last week had announced a "slave sale" to raise funds for high school seniors in his church bulletin, "The Cluster."

The item was introduced with the sentence "Slavery in America is returning to Cornerstone" and ended with "Make plans to come and go home with a slave."

Thursday, March 20, 2008

Crucifying Obama


Well, the Republicans have finally found a way to go after Obama in a high tech lynching without having to actually use the word "nigger". The Reverend Jeremiah Wright does it for them. They have to be LOVING this.

The bigger problem is that I don't see what's wrong with what he said. Is America now or has it ever been racist? Hell yes. Did we use a nuclear bomb on two cities full of civilians without a second thought? Hell yes. Has Hilliary Clinton ever been called "nigger"? Hell no. As a black man, could Obama get shot just going to the gas station? Hell yes.

They just love being able to gin this crap up, and label telling truth to power as somehow anti-American. We stopped importing slaves to this country from Africa almost 200 years ago, so some of the longest standing Americans would be African-Americans. How can an American be anti-American? It makes no sense. All the Irish and Italians and Asians who got here less than 200 years ago are newcomers compared to the Reverend and his folk, so shut up and listen to some people whose forebears had it WAY worse than yours, and are still pissed about it.

Anti-American to oppose bad policies of the United States? I present the Republicans during the Clinton presidency as exhibit one for the Right Wing being as anti-American as anyone in history.

Monday, March 17, 2008

St Patty's Day Crash of '08

Maybe they'll call it Green Monday? Whatever it gets named, today will see some amazing developments- Gold prices through the roof, hammered financial stocks and a plummeting dollar. I believe Bush & Co. have been setting this up as a booby trapped economy for the next (Democratic) Presidential administration.

Looks like Georgie got short fused.

You heard it here first.

Alan Greenspan- "Financial crisis worst since World War II." March 17, 2008

Sunday, March 16, 2008

Privatized profits, socialized losses


So the morons at Bear, Stearns were making tons of dough when things were looking up, and the idea of taxing them was anathema. Now that they've lost it all, what happens? Do they cough up personal wealth?

No. The taxpayer does. We basically give the morons $200,000,000,000 that we borrow from the Chinese so your grandkids can pay for it. What about personal responsibility? We are told about personal responsibility as the reason social programs need to be cut. The poor are poor because they didn't help themselves.

Why use the money to bail out the under taxed, obviously irresponsible wealthy traders?

Blinding hypocrisy.

The worst part is that they’ll still go under, they just bought a week or two.

Saturday, March 15, 2008

Why leverage matters


This is reprinted with full attribution from the excellent blog oftwominds by Charles Hugh Smith:

The Wonders -- and Risks -- of Extreme Leverage


March 14, 2008


With highly leveraged funds blowing up left and right (Carlyle Capital in Default, on Brink of Collapse (link courtesy of correspondent Azvitt), it's timely to look at an illustration of how leverage can be exploited in a rising market.
We turn once again to frequent contributor Harun I. for an explanation--and insights into how quickly the profits gained by such extreme leverage can not just vanish but turn into stupendous losses. Harun has also kindly provided a chart of the soybean commodity contract, which illustrates how leveraged wealth can turn into losses in one day.



Here is Harun's example:

One of the trading strategies in some of the commodity trading courses on the markets is what is called inverted pyramiding. It works like this:
Let's assume that a contract of soybeans is trading at 5.50 cents per bushel and that the performance bond (margin) to control this contract is $1800 dollars.

So I buy one contract. Since every one cent change in price equates to a $50 dollar change in value of the contract, in order to purchase another contract price has to move 36 cents in my favor (36 x 50 = 1800). If I want to continue to add contracts this way it would look something like this:

#Contracts Price Profit
1 5.50 0.00
1 5.86 1800.00
2 6.22 3600.00
4 6.58 7200.00
8 6.94 14400.00
16 7.30 28800.00
32 7.66 57600.00
64 8.02 115200.00
128 8.38 230400.00
256 8.74 460800.00
512 9.10 921600.00
Let's stop here. So far it seem like a ton of fun. Almost $1 million in paper profits with only $1800 invested in about a years worth of time. (emphasis added-CHS)

But let's look at the reality of this situation. Leverage cuts both ways.

Let's say the market opens locked limit down (50 cents); what are my losses?

Well 1 cent = $50 so (50 x 50) x 512 (number of contracts) = $1.28 million - $921,600.00 = $(358,400)

Obviously this is reckless and yet this is the type of problem being faced by banks and hedge funds today.

This is why your projection of 4% of the housing market wreaking havoc with the whole economy was spot on.

This is why the Fed, the Treasury, and the banks are in abject panic.

Now that we have seen the beast (leverage) has claws and fangs, this does not necessarily mean we should go screaming into the night. We must respect it and protect ourselves to the greatest degree possible.

Thank you, Harun, for illustrating how leverage can be extended, and what the consequences can be.

Friday, March 14, 2008

Bear, Stearns down- the Big Boys fall





Well, good timing on my "the feces begins to hit the oscillator" call the other day. Freaking Bear Freaking Sterns teetering on the edge of collapse. Boys and girls, this is not as if K-Mart (finally) went under, this is Freaking Bear Freaking Sterns!

Remember folks- bankruptcy and/or collapse have nothing to do with your net assets, your wealth or God knows your credit score. It's all about having the cash on hand to pay what needs to be paid. As we speak, the major financial institutions of the world (but especially the US) have run out of oxygen and are holding their breaths, hoping to God that the other guys pass out first.

It continues to get ugly.

Thursday, March 13, 2008

Back in the first world


Just back from a week in the lower ninth ward in New Orleans, trying to help clear a little rubble with the awesome folks at lowernine.org. There were no hot spots, viable businesses, beer retail locations or anything else for that matter, so blogging has been impossible. I love my iPhone, and it’s great for email and almost everything much, but an entire rant would take a weekend. If either of my readers’ feathers were in any way ruffled, I apologize.

So this one is too good to take a pass on, but maybe it’s been overplayed in the blogosphere already.

Seven new deadly sins? Without even being specific, how the hell do you call something unchangeable and perfect and then change it? So, were indulgences a good idea or not? The Spanish Inquisition? How about the Crusades? Supporting Hitler and Mussolini? I mean honestly, this stuff just writes itself. Please imagine that I have as well.

Monday, March 3, 2008

The feces begins to hit the oscillator


When I was a high school boy, I lived in Pennsylvania. My parents were teachers, and though education was valued, times were tight. Most of my education was financed by work and loans from PHEAA (Pennsylvania Higher Education Assistance Agency). It was a just and true and fine relationship, and I was able to get an excellent education alongside Kennedies, Fricks, Clays, Morgans, Fords, Rothschilds and a lot of other ilk I would otherwise never been able to mingle among.

Last week, PHEAA stopped making student loans. There's no money available. Sorry. No college. No boost out of the hood.

How long does it take before some high acheiving, low income kid from the projects who's denied a shot at college and the American Dream comes out with an attitude and an AK-47? For what it's worth, under those circumstances, I'd fund him or her. And their friends. And neighbors.

This is exactly where the US loses what precious little prestige and influence the AssClown President Bush hasn't managed to lose yet. It was bad enough when we lost all the manufacturing jobs that let high school grads achieve middle-class lifestyles, now the idiots are trying to squeeze the rest of y'all out of the college route to the middle class.

This will be ugly and it's coming soon. God have mercy on our souls.

Saturday, March 1, 2008

The Market Sucks, An Expert Speaks



The brilliant commentary of DeForest McDuff. He writes:

The bleak outlook for the U.S. stock market
March 1, 2008

Preview

In this issue, I examine the long-term performance of the U.S. stock market since 1870. Using data made publicly available by Robert Shiller, Yale economist and author of Irrational Exuberance, I identify the major market turning points in history and discuss the outcome of having been invested in each time period.

Except for the peak of the Internet Bubble, today's stock market has the worst overall outlook in the last 60 years. The S&P 500 stock market index has the unfortunate characteristic of being at earnings and price peaks at the same time. In the next 5-10 years, investors can expect single digit returns at best and substantial long-term losses at worst.

Overall, I expect the market to return somewhere between -5% and 5% annually for the next 5-10 years, which is pretty lousy considering that headline inflation is currently 4.3% and rising. And given the real possibility of significant losses, long-term investors would be wise to avoid the U.S. stock market at this time.

All analyses below are my own, but I am heavily influenced by the work of Robert Shiller, John Hussman, and Eric Janszen, as well as a similar piece that I wrote in 2006.

A brief history of the U.S. stock market

The conventional wisdom is that stock market returns have averaged something like 8% over the long-term. From 1885 to 1980, the S&P 500 index returned 8.7% annually including reinvested dividends (returns drop to 6.2% after adjusting for inflation). But what most people don't realize is that the majority of stock market returns occur over segmented 10-20 year time intervals. Adjusting for inflation, it is not uncommon for the stock market to spend decades with near-zero or negative returns.

I calculate long-term returns from 1885 to 1980 because both years correspond to long-term market bottoms. Including the last few decades distort long-term returns because we have not yet completed a full stock market cycle.

The following table identifies the major bull and bear markets in the last 140 years and displays the outcomes of having been invested in each:


The highlighted bull market rows show when investors would do well being in the market. The alternating white rows show the bear markets which have always produced returns less than inflation. Right now, we are in a long-term bear market with no reason to think we are near the end.

I identify the major bull and bear markets by the 10-year lagged price to earnings ratio, that is, today's stock market price divided by the average earnings in the last 10 years. Major market bottoms occur at P/E ratios of 7-12, whereas major market tops occur at P/E ratios well above 20. Today's stock market has a 10-year lagged P/E ratio of 27.5, which is higher than any other time in U.S. history excluding the 1929 and 1999 peaks.

Bear markets typically fall into one of two categories. In the first, the stock market actually declines in dollar value. The only long-term market that the S&P 500 has had a negative dollar return is from 1929-1942, during the Great Depression. In the other bear markets, the stock market return is 0-5% per year, but inflation produces a negative real return. The classic example is the 1970s, where the stock market returned 4.6% over 14 years while inflation averaged 6.8% over the same interval.

In addition, notice the high dividends (5-9%) at stock market lows and low dividends (1-4%) at stock market highs. Today's stock market dividend is a meager 1.2%.

So far, today's bear market resembles the 1970s, and I fully expect it to last another 10 years with little or no real return.

The following chart shows just how overvalued today's stock market is relative to history:


Click on the image above for a sharper version
Adjusted for inflation, the long-term price and earnings growth of the U.S. stock market is around 1.5%, with dividends providing the majority of total returns. Notice the recent divergence of the U.S. stock market relative to corporate earnings and the 100-year price trend. In my view, the stock market is still extremely overvalued, and investors would be wise not to participate at this time.

Long-term earnings growth

The common argument for today's high price-to-earnings multiples is that the Information revolution beginning in the late 90s has dramatically increased U.S. productivity. At least in terms of corporate earnings, this assertion is not supported by the data.

Going all the way back to 1870, corporate earnings adjusted for inflation have increased roughly 1.5% annually (after dividends. The chart below illustrates just how consistent this growth has been over time:


Click on the image above for a sharper version
Although corporate earnings grow steadily over time, stock market prices are much more volatile and cause the long-term peaks and valleys that divide the bull and bear markets. Fundamentally, long-term stock market returns will be determined by the growth rate of corporate profits. But short-term returns will be largely influenced by whether the stock market is cheap or expensive in terms of price:


Click on the image above for a sharper version
Even though stock market prices have declined from their 1999-2000 market peaks, they are still very expensive relative to historical norms. And given how consistent long-run earnings growth has been, there is no reason to think that we are in a new era.

Predicting future returns

Future stock market returns can be estimated by two main components:

Future earnings
Future price-to-earnings multiple
For future earnings, John Hussman points out that corporate earnings have remained steadily within a 6.2% growth channel for the last half-century:


Click on the image above for a sharper version

Click on the image above for a sharper version
Conclusion


Please e-mail thoughts and comments to defomcduff@gmail.com
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