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THE DOT-COM REVIVAL BEGINS
Some of the Midwest’s finest Internet survivors tried their hand at a full-on dot-com revival during a conference here. The Dot-Com Boomerang event, organized by ePrairie.com, gave close to fifteen companies five minutes each to explain how they made it through the darkest part of the cave and out into the light. While the tales proved some things have changed, especially with respect to start-ups’ non-interest in venture capital, they mostly showed that the dot-com message is the same as ever. The Internet is a religion.
Try as they might to bridle their enthusiasm, these self-proclaimed entrepreneurs could not refrain from slipping back into the dot-com sludge those in Silicon Valley know all too well. Sure, there is the need for a technology celebration every now and then, but that does not make talking about “teamwork”, “focus” and “positive mistakes” OK. Your business survived because you actually sold something -- not because you harnessed the mystical side of the Internet ethos. The revival may have started, but it is still in desperate need of a strong voice and a clue.Link here.
THE JAPANESE BUBBLE ECONOMY
Business cycles and bubbles differ from one another, but the technical similarities between the Japanese and U.S. bubbles are striking. The Japanese bubble began in the early 1970s, the U.S. bubble started in the early 1980s. Both stock markets grew rapidly for thirteen years and then went parabolic to form bubbles, which peaked in Japan at the end of 1989, and in the U.S. during early 2000. Both stock markets lost about a third of their value eighteen months after their peaks. The Nikkei Stock Index has since lost as much as three quarters of its peak value, while the Dow Jones Industrial Average has been down 40% and the NASDAQ Index 75% of its peak value. The real estate bubble continued in Japan for some time after the stock market began its meltdown and, likewise, real estate -- particularly housing -- has remained in a bubble since the initial breakdown of the U.S. stock market in 2000.
The surprising thing is that in the U.S. the lessons of the Japanese bubble seem to have gone almost unnoticed. Japan has experienced fourteen years of economic stagnation since its bubble popped. The U.S. is now in the fourth year of economic malaise. Most troubling, the U.S. not only failed to heed the warnings of the Japanese bubble, they have thus far mimicked Japan’s failed attempts to stimulate its economy with extremely low interest rates and large government budget deficits. Both countries have opted for a slow, agonizing “recovery”, rather than a sharp correction of past errors that would quickly reallocate resources. Experts tell us that the Japanese and their economy are very different from the U.S., and that their bubble and policy response to its crash were likewise different, but while there certainly are many important differences between the U.S. and Japan, the technical features and new-age thinking are strikingly similar in both bubbles.Link here.
INDIA UPSIDE DOWN
Sonia Ghandi just won an election for her party in India. Slated to be the next prime minister, she had been talking about opting out of various globalist schemes. Then she stopped talking about that and said she would not take the post of prime minister. And oh yes. Just after she won the election (and before she gave up her new role as prime minister), the stock market in India went through the floor.
Now Sonia brings in Manmohan Singh (former finance minister) as the next prime minister. Credited with having bailed India out of bankruptcy by “accepting structural reforms” in the past, Singh will surely get back into the globalist club. The stock market rebounds very nicely. That is how the game is played. Note: Sonia’s husband was assassinated some years back.Link here.
MOSCOW HAS MORE BILLIONAIRES THAN ANY CITY IN THE WORLD
The signs of immense wealth and wretched excess are everywhere now: The gaudy new villas, the thousand-dollar dinner tabs, the convoys of armor-plated limousines, the exclusive Euro-boutiques downtown and the heavily Botoxed women who shop at them. The Russian capital is home to 33 billionaires, more than any other city in the world, according to a new ranking by the Russian edition of Forbes magazine. More than Riyadh, Tokyo or London. More than poor old New York, which is home to just 31 billionaires.
Two-thirds of Russia’s billionaires are involved in tapping the country’s natural resources -- oil, gas, timber, metals, minerals -- but they tend to send and keep large parts of their fortunes outside Russia. They are buying gated estates on Sardinia, Marbella and in the south of France. They keep townhouses in London and New York. They commission their mega-yachts to be built in Amsterdam. They school their kids in Switzerland, and they vacation in Bali, Provence and along the Italian Riviera. They tend to defect to England and Israel, but like to launder their money in Cyprus, Latvia or the Isle of Man.Link here.
MACAU SET TO BOOM WITH LAS VEGAS TOUCH
Manuel Joaquim das Neves, Macau’s Gaming Control Board director, is struggling with numbers. He has a four-page list of new gambling rules that need to be passed and a stack of plans for as many as 24 new casinos. Then there are 3.75 million tourists, more than half from China, who visited in the first quarter -- a 25% increase over last year. “Macau can grow revenue 25% a year over the next five years,” said Marc Falcone, managing director at Deutsche Bank Securities in New York.
Gaming was the main attraction for the record 11.9 million tourists who visited last year. The 26 sq km territory with a population of 440,000 is the closest place for the 1.3 billion people of greater China -- including Taiwan and Hong Kong -- to gamble legally in casinos. The boom follows Macau’s decision not to renew a 42-year gambling monopoly for Hong Kong-born Stanley Ho when his concession expired in 2001. China last year freed up travel to Macau and Hong Kong. Mr. Ho’s 12 Macau casinos earned $412 million last year, 50% more than in 2002.
Macau has room to make money for the gaming companies, said Mr. Falcone, who has visited twice. “It’s undercapitalized, under-invested in, with smoke-filled rooms and gamblers five deep to a table,” he said. “It’s a culture shock for those who haven’t been. It’s a very intense gaming market.” The average casino win per table per day is $22,000, Mr. Falcone said. In New Jersey’s Atlantic City, the No 2 US gambling destination, the average is $2,600. In Las Vegas it is $2,200. Wynn Resorts, which is awaiting approval to begin construction on Wynn Macau this year, has seen its stock rise 34% this year.Links here and here.
Ten years ago Missouri rolled the dice.
Ten years ago, Missouri joined the modern era of riverboat gambling. Then, gamblers stood in line to pay an admission fee to board one of the state’s two riverboat casinos in St. Louis. Kansas City joined the party June 22, 1994, when the Argosy Riverside Casino opened for business. Much has changed since then, including the public's wariness of an industry founded in Las Vegas by organized crime figures.
If the jury is still out on the social effects of casino gambling, its economic impact is clear. Gambling has become a cash cow for state and local governments. When the Missouri General Assembly was first considering riverboat gambling in 1991, a legislative research office estimated that the proposed gambling taxes “could exceed $27 million”. Indeed they did. In 2003, the state’s 11 casinos paid a combined $363.3 million in state and local gambling taxes based on gamblers’ combined losses of $1.3 billion. This year, the boats are on pace for $1.4 billion in revenue and $384 million in taxes paid -- solidifying their place as the state's fifth-largest tax source, behind income taxes and various sales and gasoline taxes.Link here.
Isle of Man luring e-gamers.
Good progress is being made in the government’s efforts to attract the cream of the world’s e-gaming businesses to the Island, according to the Department of Trade and Industry. In the past year the DTI has worked closely with other government bodies and with the private sector to make the Island more attractive as a location for e-gaming businesses. “The recent reduction in our licensing fee together with revisions that allow peer-to-peer gaming and pooled jackpots have removed significant barriers to e-gaming business,” said DTI Minister Alex Downie.Link here.
THE FED AND PAVLOV’S SHEEP
In Pavlov’s research, he discovered that if he gave the sheep a mild electric shock, it would bother them very little and their life would go on pretty much as if nothing had happened, as long as the shocks were random. Warning the sheep in advance of a shock by ringing a bell, however, affected their behavior and it changed radically. The sheep were just smart enough to know that if they heard the bell, the shock was coming. After repeating this exercise a few times, the poor sheep crapped all over the place; after a few more warning bells, the sheep started dying of heart attacks.
What is unfortunate for the Fed and what any old stock market pro knows -- and what Alan Greenspan should absolutely know -- is that mass retail stock investors act just like sheep. Indeed, for the major market participants, retail investors are there to get “sheared at market tops”. Somebody has to buy when the smart money wants to sell. Moreover, to keep the herd of retail investing sheep grazing on financial investments, there has to be a steady stream of “feel good” press. Therefore, the market is always fed happy stories by the Federal Reserve Governors, the Secretary of the Treasury, and, of course, stock analysts, telling the sheep all kinds of “horse hockey” that everything is all right with the markets and there has never been a better time to invest!
So, what has the Fed done? In a relatively short period of time, they went from saying “considerable period” to “patient” to “measured”. They have not even given the investing sheep the first 0.25% mild shock. By ringing the little bell twice, the Fed got the 10-year note to sell off 7 points; NASDAQ to sell off 12%; the Dollar to strengthen 10%; gold, silver, and emerging market debt to “cave in”; and, every carry trader and hedge fund in the reflation trade to cower in a corner, whimpering in fear, that the Fed will start ringing more bells and actually begin administering mild interest rate shocks. Worse yet, the market participants that have been running like lemmings for the edge of the cliff are the market professionals!
What will the behavior be of the retail investing sheep as the Fed moves forward and starts to set the following regular pattern: Ring a Bell; Raise the Funds Rate; Ring a Bell; Raise the Funds Rate. A neutral Fed Funds rate is 3% to 4%, so there are a lot of little shocks yet to come.Link here.
A GROTESQUE MISNOMER
Economic growth now depends crucially on the strength of wealth and profit creation. Mr. Greenspan and the bullish consensus economists claim that America is enjoying its highest rate of wealth creation in history -- through rising asset prices. Fed members are claiming that this is a perfectly normal transmission mechanism of monetary policy. This is an outright lie. Never before have inflating asset prices been a key driver of real economic activity. Asset prices have always risen in the early stages of a cyclical economic recovery in response to monetary easing, but such increases do little or nothing to boost economic growth.
In past recoveries, price rises were generally very limited in size, particularly for housing; and there was no way to convert the asset inflation into cash, because the reckless lenders of today did not exist. Besides, Americans of the past would have been too proud to practice inflated-asset liquidation and too intelligent to mistake it for wealth creation. There is no precedent for such profligate behavior of private households.
Asset-price inflation is not wealth at all. True wealth creation that generations before us have experienced and that generations of economists have regarded as the one and only way to greater, lasting prosperity, comes from investment spending on income-creating buildings, plant and equipment. Debts incurred in connection with this wealth creation are self-liquidating via the income generated by the investment. And what really happens to incomes and debts in the case of so-called wealth creation through appreciating asset prices? Nothing at all. The striking key feature of so-called wealth creation through asset bubbles in favor of the consumer is, first of all, the associated record production of debt, set against the total absence of income creation. To maintain demand creation through this kind of wealth creation, ever more debt creation is needed -- first, to keep the asset prices inflating; and second, to fund the spending on consumption.
Thinking it over, one realizes that “wealth creation” is really a grotesque misnomer for asset prices that are rising out of proportion to current income. The economic reality is not wealth creation, but impoverishment. We repeatedly hear from Americans that they are living in houses or apartments they cannot afford to buy with their present incomes. But many years ago, with incomes and prices as they were at the time, they could afford the houses. That says it all.
Credit excess -- always due to artificially low interest rates -- implicitly means spending excess. But the problem is that these spending excesses tend to distribute very unevenly across the economy. Given the enormity of these credit and spending excesses, it goes without saying that they have involved tremendous distortions in the economy’s whole structure, being typically located in three areas: misdirected output; distorted relative prices, costs and profits; and strained balance sheets.
It used to be true among policymakers and economists that for an economy ailing from such structural distortions, a return to sustained growth is only possible after these have been significantly moderated, if not removed. Mr. Greenspan has plainly opted for the diametrically opposite strategy of fighting economic weakness, regardless of existing maladjustments, through more and more credit excess.Link here.
AN INVESTMENT GUIDE COURTESY OF FORBES
The secret is looking for offbeat places to put your money. Benjamin Graham and David Dodd, in their 1934 classic Security Analysis, offered this partially tongue-in-cheek take: “Investment is successful speculation.” Our spring Investment Guide gives you a mother lode of investing ideas that you will not find elsewhere.
Conventional wisdom tells us that, with rates rising, fixed-income securities are as appealing as a vacation in Fallujah. But we sketch out how to prosper in this important segment, which should remain a part of everyone’s portfolio. We show how you can get good yields in relatively safe places and how to ride rate increases with floating-rate loans. How do you do well in a so-so stock market? Go beyond junk bonds to invest in the junk issuers’ stock. Listen to the guys who beat Warren Buffett at his own game. Take a flier on emerging markets like Turkey’s. Buy new mutual funds, stocks with century-long track records and value names sporting nice dividends. And we describe a stock-picking method based on an oddball blend of value, growth and momentum.
Google may tempt you back into the new-issues market; if you venture there, know which underwriters have done best for investors. Another idea: Purchase a condo in a hotel and get the benefits of ownership and a concierge. Aside from studying and test prep, your kids can get into a good college if you take a few savvy steps. Should you depend on your employer’s disability insurance? Nope. We show smart ways to deduct losses on your taxes. Ever want to invest in the sport of kings? Here is how to buy a racehorse.Link here.
The Berkshire Hathaway annual meeting takes over Omaha every spring with the force of a Hell’s Angels rally. The cheapest tickets cost $3,000, the price of a Berkshire Hathaway B share. This year’s hoopla drew 19,500 shareholders eager to glean advice from the investment sage. Alas, Buffett’s musings are philosophical and historical; he does not give stock tips.
That doesn’t stop Buffett fans from trying to imitate him. They may ape his stock purchases once Berkshire’s holdings become public. Or they may apply his style of value management to the selection of other stocks. But nobody else’s stock-picking record comes close to Buffett’s in both cumulative percentage gain and dollar magnitude. Berkshire shares were worth $15 apiece when he took over the company 39 years ago; now they go for $85,500, and the company’s market value is $131 billion. In recent years, however, the performance engine has lost some steam, and some imitation Buffetts are doing better than the real thing.Link here.
Jordan Kimmel’s stock-picking formula looks at both value and growth ... rapid growth.
Stock pickers come in three broad varieties: those who prefer growth, value, or momentum. Investors, however, typically come in one configuration: profit-seeking. In the quest for substance over style, they just want their investments to appreciate. Jordan Kimmel, a Randolph, N.J. author and money manager, looks for stocks that are attractive to all three types of investor. He likens his approach to that of a football team. “Offense, defense, special teams,” he says; a winning squad does not have to be the best in each category, but it does have to be “not terrible” in any of them.
With $100 million under management Kimmel says he earned about 20% after fees for his investors last year. That followed three years of losses in the wake of the stock market bubble and the Sept. 11 terrorist attacks, but his investors more than tripled their money in 1999. He scores stocks on a mix of value, momentum and growth criteria, but increasing sales count the most. As you might expect, a relatively small number of companies do well when ranked according to criteria for the three investing styles, which are almost mutually exclusive. Kimmel says that out of 16,000 firms he looks at, only 20 or 30 at a time are sufficiently unterrible in enough categories to be interesting buys.
Inevitably this kind of analysis leads Kimmel to smallish companies with market values of $1 billion or less. As a rule of thumb the less well known the company, the more likely its stock is to be undervalued. Unlike deep-value managers, who can wait three or four years for their ideas to bear fruit, Kimmel does not want to hang around awaiting market recognition of an idea that is right but so obscure that nobody has ever heard of it. Thus one of Kimmel’s aims is to find stocks with some institutional ownership, but not too much. Kimmel’s model emphasizes pricing power and widening margins, which currently put energy companies like Williams Cos. at the top of the heap.Link here.
USED-CAR PRICES AND INFLATION MEASURES
Used-car prices cannot go up. This is a known fact. The supply is too great. Consumers are too knowledgeable. The government says so. But wait: Used-car prices have gone up. At the wholesale level they are up by 5.1% over the past 12 months. To skip to the bottom line, the bond market is in trouble because supposedly impossible things continue to happen. Number one among these unimaginable occurrences is a rising inflation rate, including rising prices on used cars and trucks.
Between November 2001 and December 2003 the so-called core inflation rate (the CPI stripped of food and energy) dropped by 1.6 percentage points. This decline was what inspired a certain Fed chairman to declare that deflation was nigh. It was no such thing, as a matter of fact. Deflation is the destruction of credit. In consequence of this monetary event prices broadly fall. But there was no such destruction, and there was no such fall. Falling prices absent a collapse in credit are called “falling prices”, pure and simple. Wal-Mart has built a nice little business on them. Low interest rates (and the federally subsidized push for home ownership) served to depress residential rents, thus flattening the largest component of the CPI. And pervasive sales incentives at the retail level served to depress used-car prices.
Is that a bad thing for consumers? On the contrary. Is it “deflationary”? If so, bring on deflation. But wait: If falling interest rates have depressed rents and used-car prices, rising interest rates will serve to support them. In which case the Fed will be chasing its own tail again, just as it did a year ago. The bond market could be in for a long, hot summer.Link here.
THE STOCK MARKET CAN WITHSTAND SERIOUS SURGES IN THE CPI, STRAIGHT BONDS CANNOT
This will shock you, if you subscribe to the conventional wisdom, but the place to be when prices are rising is the stock market. It is also the place to be when prices are falling. As Edgar Smith showed in his classic Common Stocks as Long Term Investments (1924), stocks outperform bonds in times of both rising and falling prices. Updates of Smith’s work produced the same pattern through the 1960s, and more recent periods of rapidly rising prices vindicate Smith’s findings, at least if you step back a bit and look beyond short-term effects. Stocks got killed in 1973-74, during a sudden upturn in the inflation rate. But over time they more than made up those losses. In the next inflationary bout (1977 through 1981) the CPI increased at an annual 10% rate and stocks at only 8.1%. Someone holding long Treasury bonds during that five-year period sustained an annualized return of negative 1%.
It is unexpected inflation that damages stocks. Once inflation ebbs, or even plateaus to a constant annual rate, stocks romp. That was the case in the 1982-2000 bull market. This is true even in nations suffering from hyperinflation. Over the past 40 years the currencies of Brazil and Argentina have depreciated to a sliver of their original worth, yet their stock indexes have more than made up the currency shrinkage. Inflation will, in contrast, destroy any bond portfolio.
Some kinds of stocks are best avoided as inflation picks up its pace. Growth stocks are vulnerable because higher interest rates make their distantly future earnings -- the earnings they trade on -- less appealing. That is why the NASDAQ is sick. Domestic property-casualty stocks are another sector to be wary of as claims payouts escalate and portfolios of bonds used to fund those payouts decline in value. Energy stocks should benefit from rising prices. Consumer stocks, especially those that have their cost of goods under control, should also do well. The same goes for health care stocks, including pharmaceuticals.Link here.
IN MEMORY OF BUGSY: A DEBATE IN LAS VEGAS
The argument was about the important long-term trends affecting the stock market today. Bill Bonner and Addison Wiggin, as argued at length in their book Financial Reckoning Day, believe America is destined to follow Japan’s economy into a deflationary spiral, where bankruptcy, falling prices and a decline in business activity have gone on for nearly 14 years. I have been warning of exactly the opposite: rising prices would soon trigger a move towards much higher interest rates. And, unexpectedly, surging interest rates could cause the stock market to swoon. Alex Green (investment director of the Oxford Club) contends that forecasting macroeconomics and trying to time the market cannot be done reliably, and therefore should not be part of any investor’s toolbox, thus you should simply buy good companies at reasonable prices and be done with it.
While I agree with Alex Green’s approach 90% of the time, when the market reaches extremes it is critical to pay attention to the bigger macro trends. You cannot exist safely on the wrong side of a runaway train, even if you own very good stocks at reasonable prices. You will get killed anyway. I believe we are at such a moment in time. My argument is based on the fact that interest rates have been far too low, for far too long. Sooner or later (probably sooner) this will result in runaway inflation, akin to what we last saw in the 1970s.
One of the interesting facts about the dormant inflation we have right now is that by increasing the money supply and lowering interest rates, the Fed has produced an environment that, measured by the CPI, looks like “no-to-low” inflation. That is because financing costs are a major component of prices. Most of that apparent decrease in CPI was caused by falling rents and falling used car prices. These decreases came about directly because of much cheaper than normal financing for new homes and new cars. New cars are not really cheaper, and new homes certainly are not, either. Only the money got cheaper. And thus, more of it was borrowed than ever before.
Now we have begun to see this inflation in the money supply hit the PPI (the producer’s price index) and components of the CPI (look at energy prices). Soon, probably sometime this year, the Fed will have to act to put the brakes on money supply growth to contain these rapidly rising prices. And, when that happens... be ready for a big surprise. As the cost of money increases, so will the cost of almost everything in our economy -- housing, transportation, food and energy. The inflation that is now dormant because of low interest rates will move to the surface, allowing businesses to raise prices for the first time in over ten years. The economy will be great. Earnings growth will be spectacular. Employment will remain robust. But stocks will take a beating, as long-term interest rates go above 7%. This is the case I made for the group in Vegas.Link here (scroll down to piece by Porter Stansberry). [Note: Also see the two articles immediately above.]
A NANOTECHNOLOGY TURNAROUND?
I have written some pessimistic columns on nanotechnology lately. In essence, my concern was that the nanotechnology industry was pursuing an ostrich-like strategy, trying to deny the potential risks posed by nanotechnology in the hope that nobody would notice. The industry was even going so far as to alienate a lot of its natural supporters, as it tried to argue that the kinds of advanced nanotechnology that might spur popular fears were impossible, and that those who felt otherwise were (despite being pioneers in the field) some sort of kooks. My fear was that the industry would find itself in several kinds of trouble: scissored between environmentalists and Luddites on one side, and more visionary technology types on the other, with its credibility extremely low as the result of receiving fire from both directions. Fortunately, the industry seems to have caught on.
Most of the shorter-term threats posed by nanotechnology appear to be quite manageable. More advanced threats, of the sort raised in Michael Crichton’s novel (and, soon, movie) Prey, are likely to prove either bogus or manageable. What is important is that the industry take a role in helping people in general distinguish between the real and the fictional, and in helping them to understand the upsides of nanotechnology, both near-term and advanced. It looks to me as if the industry has avoided a serious mistake, and that it has done so before its earlier approach led to disaster.Link here.
Too much, too soon with nanotech?
A billion dollars of VC money, shining-star investors, and the potential to change the world. So where is the exit for nanotechnology, if public markets are not quite ready for a slew of new nanotech listings?Link here.
SOCIAL MOOD, SITCOMS, & THE STOCK MARKET
The New York Times reported that “Amid the hoopla of last week’s presentations to advertisers of the broadcast networks’ prime-time lineups for the fall, it became strikingly clear that the network situation comedy was in as bad a state as it has been in more than 20 years.” The Times claims that sitcoms “are being squeezed out by the surge in reality programs, which this fall will command network hours as never before.”
Whatever “reality programs” are, comedy it ain’t: Most participants lose. Along the way they are ridiculed, degraded, and made to join in activities that usually bring out the worst in people. Bull market psychology dominated the 1950s, and the decade produced lighthearted classic sitcoms -- I Love Lucy, The Honeymooners. The same psychology prevailed through most of the ‘60s, with such cheerful fare as The Beverly Hillbillies and Bewitched. The psychology changed during the 1970s, whether you look at a price chart of the Dow or at sitcoms themselves; the “Golden Age” of TV had passed. Two of the most successful sitcoms were All In the Family (1971) and M*A*S*H (1972), both of which were full of personal strife and political commentary. After the 1974 stock market lows, some lighter sitcoms took hold: Laverne & Shirley (1976), and Mork & Mindy (1978).Link here.
THE IDES OF MARCH CAME IN APRIL THIS YEAR
Even though April’s economic news could hardly be called a home run for the dollar, one would have thought that the problems fermenting for 30 years had been solved in just three weeks judging by the market reaction. Gold broke through $390/oz. (down $40+/oz), Silver bounced below $6/oz. (down $2.50+/oz.), Platinum fell to $800/oz. (down $100+/oz.). These corrections undoubtedly left many people wondering if the precious metals were entering another sustained bear market, similar to the one we experienced from 1980-2000.
Keeping the proper perspective is very important! Rest assured, the economic problems facing us today are much more severe than they were in 1980 when gold hit $850/oz., silver hit $50/oz., and platinum hit $1,050/oz., all-time highs for each. Precious metal “core holdings” are long-term financial insurance. They are not meant to trade, but are held as a protection against a possible economic emergency. There will be twists and turns on this economic road we travel, but the road map we are following is built on sound economic principals.Link here.
INSIDERS ARE SELLING LIKE IT’S 1999
Across corporate America, executives have been selling company stock as if it were 1999. Even amid this resurgence of insider selling, however, a few dozen executives stood out for having unloaded supersized portions of their personal stakes in their company’s future. At Wendy’s International, Qualcomm, Occidental Petroleum, Boston Scientific and Comverse Technology, one or more executives sold at least half their holdings, according to a SundayBusiness analysis of hundreds of big companies.
The magnitude of insider selling, many governance experts say, suggests that even after more than two years of scrutiny, corporate America has yet to figure out how to link pay and performance. No matter what happens to profits or stock prices over the next year, some executives have already locked in multimillion-dollar paydays. Even if their corporate strategies fail in coming years, they could still retire with bank accounts fit for a king.
The dollar value of insider sales gets plenty of attention, but the portion of company stock and exercisable stock options an executive sells -- the amount of stock sold as a fraction of what they could sell -- is easy for investors to miss. Of course, corporate executives are entitled, and often advised by financial planners, to sell some of their holdings. The surge of selling also suggests that many executives realized that stocks remain decidedly expensive. Insider sales have slowed in recent weeks as the market has fallen, but the amount of money made this year remains impressive. And few executives have increased their holdings over the last year by buying shares with their own money, as opposed to receiving new grants from their boards.Link here.
DOLLAR-LINKED COUNTRIES URGED TO UNPEG CURRENCY
It may be time for some countries to stop pegging their currencies to the dollar, which is likely to remain weak and volatile for years to come, an internationally renowned currency strategist said in Bahrain. BNP Paribas foreign exchange strategy global head Hans Redeker said that the US’s ballooning budget deficit and current account deficit would keep the currency weak. Recent strength in the US dollar is due to cyclical factors such as rising interest rates and is not expected to be sustainable. However, the currency is likely to fall further against the Japanese yen than it is against the Euro, predicts Mr. Redeker.
He added that the US dollar’s volatility may make some central banks reconsider pegging their currency to it. “We believe that China may be the next country to unpeg their currency and others may follow suit,” he said.Link here.
HEDGE FUNDS HEADING FOR THE EXITS STIR MARKETS
A dynasty returns to power in India and the stock market falls out of bed. Latin-American bonds sell off. Currencies Down Under take a tumble. What does one market have to do with the others? They are all part of a flood of borrowed money now unwinding its way around the globe. Hedge funds, leveraged up and crowding into the same markets, are behind much of the selling.
Known as the dollar carry trade, it works like this: A new hedge fund raises money, say $100 million, in U.S. dollars. To juice returns, brokers will lend the hedge fund as much as ten times the initial investment. As long as interest rates are low, there is an incentive to leverage as much as possible. And as long as the dollar is falling, as it has for the last two years, there is an incentive to invest overseas. Much of the $170 billion in profits and new money raised that flowed into hedge funds last year, plus the billions they borrowed, poured into Brazilian debt, high-yield bonds and commodities.
These trades made money, so hedge funds and trading desks at Wall Street firms all piled in. But, as with any highly leveraged deal, even a small change in direction can set off a chain reaction. A few weeks ago, the U.S. Federal Reserve Bank indicated that interest rates would rise sooner rather than later, and bond prices started to fall. Hedge funds started getting collateral calls from their brokers demanding more cash ... and the selling began.
Commodities and commodity-linked currencies -- a favorite of hedge funds -- were some of the first to fall. Russian corporate debt plunged along with other emerging debt markets, even though Russia’s economy has not looked this good in years. Trading froze in many of these debt markets as everyone headed for the exits at the same time. Hedge funds and investment banks “built up these positions over the last year or two, and then everyone decided they wanted out on the same day at three o’clock,” says Stuart Gulliver, co-head of HSBC Holding’s investment bank in London.
For emerging-market investors caught out by this month’s volatility, the worst may be over already. But beware of two new trades drawing the hot money crowd, who are buying oil and shorting U.S. Treasurys. There may be sound reasons to invest in oil and sell Treasurys -- just as the fundamentals have favored investing in Indian equities -- but “crowded trades have a habit of unwinding nastily, especially given the lupine tendencies of absolute return investors to hunt in packs,” warned a strategist.Link here.
GUESS WHO SAID IT
See if you can spot the unspoken but glaring assumption in this remark: “It has become increasingly difficult to deny that something profoundly different from the typical postwar business cycle has emerged in recent years. Not only has the expansion reached record length, but it has done so with far stronger-than-expected economic growth.” Need a hint? The time was April 5, 2000; the occasion was “The White House Conference on the New Economy”. As for “who”, this quote from the same speech is a dead giveaway: “The process of capital reallocation across the economy has been assisted by a significant unbundling of risks in capital markets made possible by the development of innovative financial products. ... There are few, if any, indications in the marketplace that the reallocation process, pushed forward by financial markets, is slowing.”
Yes, that was Alan Greenspan. The “expansion” had “reached record length”. Linear thinking assumed, therefore, that it would continue: Fedspeak is not clear prose, but you and I both know what he meant by “few” “indications” of “slowing”.
Another example: “A generation from now, Japan will almost certainly have created its own mechanism for advancing the technological frontiers in a range of domains. Now the continuing pace of productivity increase suggests that Japan may indeed be on a growth trajectory different from that of the United States. As Japan ascends, America frets about its decline.” Time: 1989. Place: A book titled The Real Story of Why Japan Works, co-authored by Ms. Laura D’Andrea Tyson -- an economist who soon became Chairman of the White House Council of Economic Advisors. Context: Japan’s Nikkei stock index had been in a 40-year bull market, and the Japanese economy was the envy of the world. Linear thinking assumed, therefore, that the Japanese bull market would continue, and that its economy would continue to “ascend”.
Of course, the Nikkei peaked in 1989, and began a 14-year bear market, its worst ever; Japan’s economy also entered a similarly long period of poor performance. Ideas matter, and so do the assumptions that flow from them. You can go bankrupt listening to forecasters who make linear projections in our dynamic world.Link here.
Dispense with the rumors, let the facts speak...
Crude oil has been the recent bogeyman that stock market investors either “fear” or “shrug off”, or so says the news I read. But think back about three weeks, when an even bigger bogeyman was rampaging -- THE FED, and its dreaded potential for raising the Fed funds rate. Fears grew worse, and by mid-month (May 17), a major financial daily said: “U.S. stocks took another beating, hit by ... continuing expectations that interest rates at home are set to rise. In the face of all that bad news, even many optimists simply stopped buying.” Indeed, “fear of what the Fed will do” was rumored to be the cause of the drought in Idaho, spreading premature hair loss, and lethargic behavior among zoo animals at feeding time. With the rumors out of the way, let us address a few facts.
Allow me to repeat a previous point: Linear thinking makes it impossible to anticipate changes in the trend. It will put you in lockstep with the crowd. Yes, being part of a crowd can be comforting, but comfort of that sort does not do much to ease the pain of a missed opportunity.Link here.
ARE WE OUT OF GAS?
Each and every headline you have seen about “record” gasoline and oil prices is false, when prices are adjusted for inflation. Yet there is no denying the sharp increase over the last several years. Are we really just experiencing a short-term spike due to voluntary production cutbacks, political unrest in places like Iraq and Venezuela, and a huge decline in the value of the dollar? Or are current prices indicating that reality is finally beginning to catch up to the Cassandras’ predictions?Link here.
Terrorists are now targeting Saudi Arabia’s oil infrastructure. How bad could things get?
Not so long ago, a certain well-known international figure penned a heart-felt speech he called his “Letter to the American People”. In it, he said:“qYou steal our wealth and oil at paltry prices because of your international influence and military threats. This theft is indeed the biggest theft ever witnessed by mankind in the history of the world.” The author was Osama bin Laden. The impact of those chilling words is still being felt in today’s chaotic energy markets. Oil traders report that fears of terrorist attacks that might disrupt Middle-Eastern oil exports may account for as much as $8 of the current per-barrel price. But how well-founded are these fears?
A witch’s brew of soaring oil demand, private-sector destocking and lack of investment in new production capacity by OPEC has left the world with an extraordinarily tight oil market today. There is less spare capacity than at almost any point in the past 30 years. As Edward Morse, an energy expert, puts it: “The world has been living off surplus capacity built a generation ago, and thought it could get by. It turns out not to be the case.” Building a new surplus will inevitably take a long time. Until then, the potential instability of Saudi Arabia’s oil supply will remain a strategic weakness for the world economy.Link here.
The Great Oil Debate
It was a little over 30 years ago when the world was hit by the first oil shock -- an OPEC embargo on the West that led to a quadrupling of the price of crude petroleum in late 1973 and early 1974. A second shock hit during the Iranian Revolution of 1979 that resulted in a near tripling of oil prices. Both of these shocks led to rapid inflation and severe recessions in the global economy. A less dramatic shock in 1990 prior to the Gulf War led to a similar outcome. Over this 30-year period, there has been a very tight relationship between the ups and downs of the oil and business cycles.
Today, with geopolitical risks mounting and energy markets once again sending ominous signals, oil has once again emerged as a macro wildcard. Despite our all-too-frequent experiences in having to cope with several oil shocks since the early 1970s, economists and policy makers remain sharply divided in assessing the impacts of these disruptive episodes. Arguably, today’s “shock” is the by-product of strong global demand running into limited energy supply. The price increases that result from this interplay might have very different consequences than those arising out of the true supply shocks of yesteryear. Or will they? We recently debated several aspects of this rapidly developing macro risk factor. Highlights of the give-and-take follow.Link here.
THE CUPBOARD IS BARE
The bear market rally of the U.S. dollar has the talking heads employed by Wall Street declaring that the two-year bull market in commodities is a dead man walking. All the talk in the world is not going to make the slightest bit of difference, as these pundits-for-hire are proven wrong once again. The U.S. dollar is in a secular downtrend. Typically, currency trends, once in motion, tend to stay in motion for a decade or more -- and as the dollar falls, commodities rise.
But, as you will read in this article, there is much more to the current rally in commodities than just a weakening dollar, and it increasingly reminds me of the 1970s. For those of you whose only memory of the 1970s is bell-bottom pants, it was also a time of spiraling interest rates, out-of-control inflation and a powerful bull market in commodities, driven by monetary factors and supply and demand. I remember the time with great fondness because I made a lot of money on mining stocks, ultimately selling them to the masses who, as usual, came late to the party.
All the commodities peaked, more or less together, in 1980, and remained in a secular bear market until about 2001 -- notwithstanding several wild cyclical rallies (82-83, 85-87, and 93-96). During the twenty-year bear market, and especially the last five years, large segments of the mining industry have been mothballed. Gold and silver became laughing stock investments among brokers. Oil exploration ground to a halt. So what? The copper, steel, aluminum, and nickel industries are on their back. Who cares? Well, soon the great masses will care, a lot.
Back in the 1970s, commodities boomed partially as a reaction to the go-go stock market days of the 1960s when they were largely ignored. Inflation simultaneously drove people out of stocks and bonds and into commodities. Now older and, if not wiser, at least more cynical, I try not to be quite so dogmatic about these things. But when I look even a little way over the horizon, I still find myself tempted to use phrases like “sure thing” and “can’t miss” when it comes to forecasting a persistent raw material supply shortage caused by three things: 1) under-investment in the commodity businesses, 2) the booming demand coming out of places like China and India, and 3) a monetary environment that is likely to be worse than that of the 1970s.
From a speculator’s (as opposed to a consumer’s) perspective, the good news is that this is not a problem that will be resolved in the short term, even if prices go much higher. Any inventory and capacity overhang from the nineties has been worked off, and the cupboard is bare. I say these things within the context of one who, for the long run, is super-bearish on the commodities. But for quite some time you should expect -- cyclically -- much higher prices across the board. And we should not have to wait long.
The bubble top is, in my view, probably still several years away. If you have not yet taken your positions, then now is the time to climb on board. What are the risks? My biggest concern is a collapse of what has become a financial bubble in fast-growing economies such as China and India -- accompanied by a rapid drop in commodity usage and relatively lower prices. But that would still be just a cyclical downturn in a demand-driven, secular bull market. And the other factors behind the bull would remain intact.Link here (scroll down to piece by Doug Casey).
BUT IT’S ONLY 30 OR 40 BASIS POINTS!
I have been consistently bearish on the stock market. I still am. In early 2000, I not only thought the equity market had entered what would be a vicious bear phase, I also believed it would be something secular in duration. And what did/does that mean? I have examined in some detail the 1965 through 1982 experience, opining the possibility the current episode could wind up resembling it. I have not changed my mind! The rally from the July/October 2002 lows through this year’s highs was wonderful (and predictable), but I think the months ahead will go on to show it was a cyclical bull inside a secular bear.
I spent many of my 37 years in the financial business as a money manager, first managing equity portfolios, then debt. If I could do it over and had a choice, I would surely do it in reverse. There simply is no question, at least in my mind, that a solid understanding of interest rates and the bond market makes one a far better stock manager. And you can witness this in the present environment in some important ways. Something clearly raining on the stock bulls’ parade this year to date has been the “sharp” rise in open-market interest rates across the Treasury yield curve. I have emphasized “sharp” for a reason I will return to momentarily.
What are the culprits behind the “rain”? In big-picture terms, I would identify three possessing a good deal of synergy. They are: Iraq, energy prices, and open-market interest rates. At the May 2003 meeting of the Federal Open Market Committee, Greenspan and associates dropped the deflation bomb. I was convinced then, and I am more convinced now, that this was a ruse. Greenspan wanted another rate cut he simply could not have at the time, so in essence, the Fed got it a different way. By hinting at the dreaded “D” word, open-market interest rates went into a tailspin, albeit one that would not last too long. However, the sharp decline in rates did last long enough to trigger a massive mortgage refi binge, which was just great with Mr. G. And helping the process along in a major way were all the hedge funds -- many if not most with orientations that were equity driven -- that came for the first time to play in a new sandbox -- the bond market!
Well, as the saying goes, the Lord giveth, the Lord taketh away! The mania to buy long-dated, fixed-rate obligations unleashed one helluva rally, but one that vanished quickly and with a vengeance, leaving some deep wounds to be licked by the stock-turned-bond crowd. After all, many of the participants were leveraged players, who watched their leveraged gains turn into leveraged losses. What the episode did accomplish, at least so far, was to put a price top on the secular bull market in bonds. June 13, 2003, a Friday to boot, marked the trough in yields triggered by the Greenspan bacchanal. A table of what has happened to Treasury yields since is not a pretty picture.
Whenever interest rates are going up or are likely to, stock bulls purposeful minimize what a 30 or 40 basis-point rise in yields really means. Much of this minimization comes from sheer ignorance -- something I hope this article will help redress. But some of the minimization also comes from Wall Street’s efforts to always put the best spin possible on items that might adversely affect the stock market. If you bought the 5.375’s of 2031 at the end of last year and computed your return as of yesterday’s close, you might feel differently. If you are a money manager who can get away in a client meeting without discussing total return, I guess you are okay. When I managed fixed-income portfolios, I was never fortunate to have clients nearly this gullible!Link here.
BUSH PROLONGS THE GREENSPAN AGONY
People often look back and wonder what JFK would have done in Vietnam had he been around to direct the war he got the country into. It will be almost as interesting to see how Fed Chairman Alan Greenspan handles the credit bust that is the likely consequence of the easy-money policies he has implemented as head of the nation’s central bank. There is a very high chance that the 78-year-old Greenspan will be around to deal with his own mess, after President Bush renominated him as Fed chairman May 19. Because of some Fed rules, Greenspan probably will not be able to serve out a full four-year term. But he will be in charge of U.S. monetary policy until January 2006. Will the economy really fall into the debt trap Greenspan has built within the next 18 months? You bet.
Though he created the monetary conditions for the late-1990s stock market bubble and its subsequent bust, Greenspan is still viewed as an intellectual giant the world over. But he could easily spend the last days at the Fed explaining away the credit collapse he has been setting the country up for over the past four years with absurdly low interest rates.
One could argue that a decision by Greenspan to stay till 2006 is bullish because it shows that he is confident there will not be a credit bust. After all, why would he stick around if he thought financial Armageddon were around the corner? It may be that he sincerely believes his public insistences that households are not overleveraged. “Pride cometh before the fall,” says Paul Kasriel, chief economist at Northern Trust. “I guess Greenspan believes his own press.” There is some chatter that Bush will find a way to keep Greenspan in his post beyond early 2006. Seeing as the credit bust will be well under way by then, it would be tempting to want Greenspan to stick around to clear up the mess. But looking back at the last 10 years of Sir Printsalot’s reign, the quicker he goes, the better.Link here.
SITTING ON BAYONETTES
Dynamism is said to be the salvation of the U.S. economy. Yes, Americans owe too much to too many people. Yes, they spend too much. Yes, Asians will do their jobs cheaper. Yes, their stocks and real estate are very high. Yes, their incomes are going down. Yes, they have leveraged the entire country at artificially low interest rates... and yes, millions of them will go bankrupt when interest rates rise. But no, there is nothing to worry about, because America has such a “dynamic” economy.
The burden of today’s little essay is that not only will dynamism not save the U.S. economy ... it will destroy it. “You can do anything with bayonets ... except sit on them,” was how Napoleon’s foreign minister Talleyrand explained that seizing a city was a very different matter from holding it. For the latter, you needed at least a minimum of cooperation from the citizens. You had to sit down with them and make a kind of peace. And you could not sit on bayonets.
Then again, Napoleon never ordered a bombing of a wedding on pretext that enemy soldiers were in attendance... certainly not based on dubious intelligence available. Talleyrand would have declared, “Sire, worse than a crime, you have committed an error.”
George W. Bush and Alan Greenspan are the dynamic men for their time. America needs to be taken down a notch, and they are just the men to do it. George W. Bush’s contributions to America’s destruction are right out in the open: clumsy wars... and wanton new spending programs.
Alan Greenspans’s crimes are less obvious. But following the collapse of the Nasdaq in 2000, and the recession of 2001, Mr. Greenspan did not sit idly by. He and his crew fixed bayonets and charged. But in lowering its key interest rate below the inflation rate, and holding it there for longer than ever, the Greenspan Fed has committed a grave error. It has enticed the consumer deeper into debt. It kept alive marginal business and investment projects (by making it easy for them to refinance old loans)...and encouraged new ones. And it fueled huge new bubbles at home and abroad.
Mr. Greenspan hoped his E-Z credit would lead to a rise in hiring and wages. He got the increases he was looking for but not where he was looking for them. The new factories were built in China, not America... and Chinese workers gained the extra income. China develops more competitive capacity every day. This too, is what Alan Greenspan’s low rates have wrought.Link here.
LOOK OUT BELOW, LENDERS: THE END OF THE MORTGAGE BOOM IS NIGH
In most markets -- be it stocks, bonds, or commodities -- most participants never realize the market has topped until it is too late. But for banks and the rest of the nation’s mortgage lenders, the signals are as clear as can be. It is becoming painfully evident that the current surge in housing activity probably represents the blow-off to a four-year party. The latest evidence: The Commerce Department’s May 26 report that sales of new single-family homes fell 11.8% -- the biggest monthly drop in a decade. Already, refinancing activity is down more than half from 2003’s record pace.
Tally everything up, and it may not be a pretty sight for the financial sector. Richard X. Bove, bank analyst for Hoefer & Arnett Inc., a San Francisco brokerage, expects bank and thrift profits to grow by as little as 6% this year and a mere 5% in 2005, after years of 20%-plus growth. Two new forces are likely to play havoc with bank profits: a margin squeeze as the Federal Reserve raises short-term funding costs and the rise in mortgage delinquencies and defaults among borrowers -- many of them with weak credit -- who have opted for adjustable-rate mortgages. Says Bove: “At the risk of a little hyperbole, 2005 is going to be a bloodbath.”
Just how much pain will an industry contraction cause? Plenty, for the simple reason that the nation’s banks and thrifts have increasingly staked their loan portfolios on the mortgage and home-equity businesses. Now it looks likely that banks and thrifts will have to drastically pare back on the extra workers they added. For the moment, though, most mortgage lenders are straining to keep the music playing as long as possible -- by cutting closing fees and, some contend, loosening credit standards. The 1980s housing boom had an ugly ending. Will lenders emerge in better shape this time? The amounts involved are much higher today, so let us hope so. Either way, there is a bumpy ride ahead.Link here.
Fed’s chief spoilsport becomes Mr. Accommodation.
When Americans happily bid up stocks and home prices and the government helps them out with tax cuts, it is Alan Greenspan’s job to say “whoa”. Now, at 78 and with a growing, inflation-free economy as the legacy of his 17 years as Fed chairman, Greenspan has turned strangely accommodative. Reminiscent of his failure in the late 1990s to raise interest rates enough to curb the stock market frenzy, today he is content to keep them at 40-year lows even though the economy is spurting, the prices of many goods and services are rising and the housing market is out of control. Greenspan says there is no hurry to boost rates because there is little danger that the Fed’s easy money policy will increase the rate of inflation.
Thousands of Americans buying houses these days can be forgiven if they think the statistics that say inflation is low are faulty. (The cost of housing in the CPI is based on a concept known as imputed rent.) In April, the median price of a new U.S. home was a record $221,200, up 8.8% in a month. Yet people keep buying as the low mortgage rates sanctioned by Greenspan keep monthly payments relatively low. The average mortgage rate on a 30-year loan this week was 6.32%, and home buyers could have opted for an adjustable-rate loan that charged just 3.87% during the first year. Psychologically, folks think they must buy because home prices will rise forever or because they see real estate as the investment of choice.
The Fed’s failure to rein in the housing boom will lead to a misallocation of capital similar to that caused by its failure to curb the stock market bubble. Investors poured too much money into stocks, and companies in turn -- see the telecommunications industry -- spent too much on expansion. Now, people are taking money better put into savings and buying houses with it. In the end, many will lose their homes, and homebuilders will get stuck with excess inventory. Mortgage rates of 7 to 8 percent would stop risky buying without killing the market for those who can afford homes.
Greenspan has been equally permissive with excessive government. If he wants to keep his place in history, he should reassume the tough guy role and give us a dose of higher interest rates.Link here.
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