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BEN AND ALAN’S INFLATION
Bernanke should announce a gold price target. Too bad there is no chance of that.
At Starbucks the other day I was all set to buy one of the crumb cakes until I noticed that they were about half their usual size. Some of us are old enough to remember the 1960s and 1970s, when food companies shrank the size of candy bars, cakes and other products to avoid increasing nominal prices.
Broad-based inflation is happening again globally. The Russian government has “persuaded” food producers to keep prices of sensitive items stable until after upcoming parliamentary elections. Argentina has been imposing price controls on many products, and in China rising inflation is creating increasing anxiety.
The global inflation unleashed by Alan Greenspan and the Federal Reserve in 2004 [Ed: Not to mention since 1913] is now showing up more and more in traditional price indexes. The Fed and other whistlers-past-the-graveyard state that “core” inflation is not too bad. But core inflation leaves out “volatile” food and energy prices. Add these in and you get a much more alarming picture.
When a bad batch of numbers was released in the early 1970s, Herb Stein, head of President Richard Nixon’s Council of Economic Advisers, deadpanned that if you took out all the items in the CPI that had gone up, there would be no inflation. Amazingly, most reporters took this as a profound insight.
The Fed’s cheapening of the dollar put the already hot housing market on steroids, which led to the credit crisis that recently cost the CEOs of Merrill Lynch and Citigroup their heads and will claim many more executive-suite victims in coming months. Debasing the dollar has hurt investments here (see Current Events). If we do not deal with this now, it is going to damage us a whole lot more later. Poor Ben Bernanke does not know what to do. If he raises interest rates, that will roil the markets and perhaps rekindle last summer’s panic. If he eases, he will be creating more inflation and economic distortions of the kind that hit housing.
Alas, Bernanke has been taught to ignore the best gauge of monetary policy: the price of gold. If he were to announce that the Fed was no longer going to peg interest rates but was instead going to use gold as its guide (within a broad range), the markets would heave a sigh of relief, knowing we were going to defend the integrity of the dollar. Short-term interest rates would actually trend downward.
There is no chance Bernanke will see the light. Instead he will flounder about, sometimes doing things right but more often doing them wrong. Expect more stomach-turning turbulence ahead.Link here (scroll down).
FEED THE BEAST
What Wall Street lacks is not the brainpower to model risks, but the willpower to resist them.
Wall Street firms like Merrill Lynch, Citigroup and Bear Stearns spend tens of millions of dollars a year managing risk. They field departments full of smart analysts to assess market, credit, liquidity and operational risk. The process is marked by a formal governance structure and risk-tolerance limits.
That is what the banks tell investors, anyway. When it came to their exposure to the subprime mortgage market, none of this seemed to matter.
“Executives believe what they want to believe,” says Frederick Cannon, a bank analyst at Keefe, Bruyette & Woods. “They know [booms] are going to end, but they don’t know when. In the meantime, it’s a lot of fun to make money.”
What Merrill, Citigroup and other banks taking writedowns in the mortgage meltdown lack is not the brainpower to model risks but the willpower to resist them. By any risk manager’s measure, bonds backed by exotic subprime mortgages were a dubious bet. Since the bonds started trading only within the last decade, there was no historical record of how they would behave in a down market. Yet Wall Street sliced them into two dozen tranches and flogged them as if they would behave as predictably as your grandfather’s 30-year fixed mortgage.
As mortgages drove profits on Wall Street, Merrill and company ignored the torpedoes and cruised full steam ahead. Last September, at the peak of the subprime bubble, Merrill ponied up $1.3 billion to buy the First Franklin mortgage origination business to feed its appetite for paper it could securitize and sell. Merrill made money as middleman – by bundling mortgage bonds into so-called collateralized debt obligations (CDOs), then selling them. And, at least until defaults carved a hole in the business, it probably made good money just from sitting on the inventory. Unhedged junky securities, after all, yield more than the short-term borrowings used to fund them.
Merrill’s failure to fully hedge may or may not represent a conscious decision at the top to aim for speculative profits. One person familiar with Merrill’s risk-management operations confides to us that Merrill intended to package up the paper and shovel it out the door as fast as it could. Perhaps. But it sure took its time buying protection. In June the value of CDOs on Merrill’s balance sheet, net of hedging, hit $32 billion. That sum exceeded the total of the firm’s CDO underwritings in the first half of the year.
In good times mortgage securities coined money for Merrill, and it is hard to argue with someone who produces a nice bottom line. Recall Brian Hunter, a trader for Amaranth Advisors, who went from controlling a negligible fraction of Amaranth’s portfolio to 30% ... before his bets killed the firm.
Now that the market has turned, investors in Wall Street firms are paying a hefty price. Guys like Hunter, Merrill’s E. Stanley O’Neal and Citigroup’s Charles Prince, however, are doing pretty well. They typically do not have to refund bonuses and profit-sharing chalked up when their risky bets were making money.Link here.
Why financial engineering does not work.
The last quarter century has seen the explosion of a profession, financial engineering, that has provided innumerable lucrative opportunities for otherwise indigent mathematicians. Nevertheless the turbulence in the bond markets in the last couple of months, at a time when the world economy’s prospects seemed set fair, have exposed a guilty secret of the financial engineering profession: its methods do not work.
The first exposure of financial engineering’s failings came oddly enough in the area that had seemed most solid, that of liquidity. Theoretically, if financial engineers design ever fancier artificial securities and derivatives, but everybody uses the same mathematical models to value them, there is no reason why an active market should not operate in the securities, at whatever price the models direct.
In practice this only works in calm markets. In times of market turbulence, when doubts arise about either the mathematical models themselves or the underlying assets from which value is derived, the true value of these artificial assets becomes thoroughly unclear. Buyers assess their value at the lowest possible level, and refuse to increase their exposure to a sector that suddenly appears dangerous, while sellers attempt to get out of the business altogether.
That explains the sudden drying up in support for asset backed commercial paper in August. It also explains the precipitate drop in the prices of ABX credit default swaps on subprime mortgage backed securities in October. Overall the market in such swaps declined by no less than 25%, while AA-rated credit default swaps, supposedly among the finest credits available, were trading at less than 50% of principal amount by the end of the month. Either the rating agencies had gone horribly wrong in assessing the default risk of those AA credit default swaps, or the underlying pool of subprime mortgages was so rotten that more than half of a $1.5 trillion asset class would vaporize. The real problem for the market was that nobody knew which.
The problem was further compounded by Wall Street’s accounting methodology, which allowed assets to be valued based on the theoretical prices produced by the mathematical model. If as in this case reality had made already illiquid assets impossible to value, the mathematical model’s prices could become wildly out of line with reality, which was itself unknowable. Naturally, Wall Street institutions did not wish to take writedowns on the assets, so were unwilling to undertake transactions at prices which might call into question the valuation methodology of their portfolio. The effective market for the assets thus settled to something like 20 bid, 90 offered, killing the price discovery process and turning them into toxic waste on their owners’ balance sheets.
Banks and investment banks have adopted a number of approaches to the problem of their balance sheets’ subprime mortgage-related assets. Merrill Lynch wrote the assets down by $4.9 billion at the end of September, but then found itself obliged to write them down by a further $3.5 billion before releasing their Q3 figures in late October. Given the ABX price drop in October, a further writedown may now be needed. Goldman Sachs maintained a posture of carefreeness, claiming that the brilliance of their hedging had prevented any significant losses at all. (But were the hedges adequately liquid, or was their increased value simply the result of aggressive revaluation through mathematical models?)
Only Nomura Securities took a properly decisive approach, selling its entire $2.4 billion portfolio of mortgage based assets (thus worsening the problem for everybody else), firing the people involved, and taking a $700 million write-off, about 28% of its mortgage assets, and slightly more than 100% of its subprime portfolio. Writing off 105% of one’s holdings of a financial engineering product may be regarded as aggressive, but its cold realism is probably healthy in the long run.
The second problem with financial engineering products that the whizzes involved have failed to solve is their valuation. Even when the majority of market participants are using valuation models that produce similar answers, those models may bear little relationships to true market value. This problem is worsened when the characteristics of an asset class upon which its derivatives’ valuation is based come seriously into question. In the subprime mortgage case, for example, it had been assumed that mortgage defaults were essentially independent of each other. In reality, defaults on subprime mortgages are not independent events. A mortgage bubble such as that of 2004-06 causes a simultaneous slackening of underwriting standards, with even minimal control procedures being abandoned throughout the entire asset class, while a nationwide house price decline or interest rate rise causes the entire class of subprime mortgages to get into simultaneous difficulty.
Finally, some trading strategies are particularly attractive to market participants because they pull income up-front, enabling participants to recognize larger profits (and presumably receive larger bonuses) in the current year while deferring losses into future periods when they may have left the group.
Thus the valuation of a complex financial engineered product (1) may not be generally agreed among market participants, (2) may quite simply be wrong, (3) may be proved hopelessly flawed by new discoveries about the underlying asset class, or (4) may be affected by distorted incentives. These problems may lie dormant for a decade or more and then manifest themselves sharply in periods of market turbulence, causing confidence among market participants to vanish.
Finally the risk management models used by institutions to control the risks of their financially engineered holdings are themselves hopelessly flawed, particularly the Value-At-Risk system. As Goldman Sachs showed, in announcing a “25 standard deviation” event that should, under VAR assumptions, happen only once in the life of the universe, this is just plain wrong. It again rests on the flawed underlying postulate that market events are random, which has repeatedly been shown to be in many cases false.
VAR’s underestimation of risk is particularly severe for financially engineered products that have large numbers of embedded options, or that depend on an asset class such as subprime mortgages with extreme risk characteristics. The problem is exacerbated by the valuation uncertainty of such products, and by their tendency to become completely illiquid in times of market turbulence. Two balance sheets with an equal VAR may have a very different level of risk. The institution that has been more aggressive in its financial engineering activity is likely to be much riskier than the other,because it will have a higher concentration of aggressively engineered assets with numerous embedded options, flaky underlying assets and severe turbulent-market liquidity risk.
The profitability of financial engineering to its practitioners is unquestionable. Its profitability to the institutions that employ those practitioners may have been almost equally solid in the past, but could be undermined in the future by a period of market turbulence that produces gigantic write-offs – a house like Goldman Sachs could in principle suffer losses that wiped out all its financial engineering profits of the last quarter century.
Financial engineering’s benefit to the global economy is questionable at best and the increases it has produced in the financial services sector’s share of global output may have been mere successful rent seeking. In the long run, less opulent compensation for financial engineers, more aggressive audit and supervision policies for financial institutions’ engineered assets and a healthy cynicism about financial engineering in general may put this genie at least half way back into its bottle. That is likely to prove a positive development.Link here.
FANNIE IN HER OWN WORDS
Fannie Mae’s management has been through tough housing downturns before, they told the analyst community. Although increasing credit losses this quarter are an obvious concern, the management team is excited by opportunities presented by the difficult current environment. They assured everyone that they have a plan. More likely, they have been caught flat-footed by the nature of the unfolding credit crisis.
I would imagine that only during the past couple of weeks has management begun to recognize the looming disaster confronting the GSEs. Sure, Fannie Mae has struggled (at times unsuccessfully) through past downturns. But never has a financial institution entered a historic housing bust with a “book of business” of mortgages, mortgage-backed securities, and other credit guarantees of $2.716 trillion. This massive credit exposure is backed by a $39.9 billion sliver of shareholder’s equity.
The GSEs are the kings of “structured finance”. On its $840 billion balance sheet, Fannie holds $106 billion of “private-label” MBS, the majority subprime and Alt-A. “Advances to Lenders” almost doubled in nine months to about $11.7 billion. And they are today the “beneficiary” on $457 billion of mortgage insurance. Responding to a question regarding the viability of the mortgage insurance industry they so depend on, management stated that their internal analysis gave them confidence that the mortgage insurers had ample capital to survive the cycle.
We and the marketplace have serious doubts. In their management of huge interest-rate risk, they have accumulated notional derivative positions to the tune of $814 billion. Whether it is an unexpected (systemic) surge in credit losses or major move in rates, the GSEs have grown too large for their derivatives to protect them. A devastating housing bust will bankrupt the mortgage insurers, while the solvency of their derivatives counterparties going forward will be in doubt in any number of scenarios. The GSEs are now integrally linked to what I expect to be credit insurance’s and “structured finance’s” astonishing downfall.
Fannie Mae lost $1.39 billion during Q3. The company marked down its derivative hedging position by $2.24 billion, although this loss was supposedly offset by the rising value of its assets (chiefly mortgages) in a lower rate environment. More disconcerting was the rapid surge in credit costs. “Charge-offs, net of recoveries” jumped to $838 million during Q3, up 8-fold from the year ago $104 million. Fannie acquired 34,955 properties through foreclosure during the first nine months of the year, up 34% y-o-y. The “carrying value” of foreclosed properties during the nine months jumped 53% y-o-y to $2.913 billion. And while the Midwest has the highest serious delinquency rate (1.14%), it is worth noting that the West showed the most rapid deterioration over the past year (doubling to 0.33%). The West accounts for 23% of Fannie’s exposure, and I will stick with my forecast that California and the West Coast will bankrupt the GSEs.
CEO Daniel Mudd addressed deteriorating Credit conditions during the conference call: “Going forward, projecting a 4% national decline in home prices and a scenario where there is not a nationwide recession, we can see our credit loss ratio move into the range of 8 to 10 basis points next year.”
A “scenario where there is not a nationwide recession?” Steeper home prices declines and a deep recession appear at this point a much more probable scenario. Quarterly credit cost can be expected to grow to the multi-billions. Not surprisingly, Fannie is responding to deteriorating lending conditions as many typically do: Expanding new business aggressively to offset mounting credit losses and bet the ranch on growing your way out of trouble. Fannie’s and Freddie’s combined “books of business” had expanded at a 13.2% rate y-t-d ($430 billion) through September to $4.78 trillion, with a y-o-y rise of $516 billion (12.1%).
Spreads (vs. Treasuries) on GSE debt and their MBS widened markedly this week. These perceived safe and liquid “money-like” debt instruments have for some time been an instrument of choice for highly leveraged speculation. I have no idea to what extent these instruments have been part of the infamous “yen carry” trade. But I do know that the yen rallied strongly this week, further pressuring the leveraged players and significantly exacerbating the unfolding credit crisis. And the beloved technology stocks – the favored long equities trade of the leveraged speculating community – were hammered. Meanwhile, the CDO market came under further stress and even the “emerging” debt markets reversed course.
It is difficult for me to believe that the “sophisticated money” will not now attempt to be the first ones out of the hedge fund bubble. Meanwhile, a backbreaking credit crunch is about to strangle the U.S. bubble economy. “Structured finance” is a bust, while the major banks now recognize that this much more than a fleeting liquidity crisis. To survive, they will move aggressively to get their risk under control. If there were a more ominous scenario than the one developing, I have not thought of it.Link here (scroll down).
CREDIT IS THREE-DIMENSIONAL
The Fed has little influence on the curve, or credit spreads, and the concept of a national credit market is nonsense.
The very old saying that “Credit is suspicion asleep” provided the most succinct explanation of pressures in the financial markets that concluded in severe turmoil in August. In a world considered to be made almost perfect by policymakers this was shocking. “Goldilocks” was the prevailing condition, financial panic rapidly became the new paradigm, but these events are not so new. Neither have been the ideas that were floated as the early signs of trouble appeared that it was “isolated”, or could be “contained”. Despite such comforts promised by the establishment the transition showed, yet again, that risk appraisal was indeed asleep.
Going as far back as Roman times history records many collapses in financial markets, and while the names of the credit instruments may change, the pattern has remained the same. A boom, with great confidence and a sudden change from exuberance to dismay and panic, has usually been followed by a cyclical contraction. Even the response by policymakers is so reliable as to be predictable.
Through a number of panics and contractions in the mortgage markets the “genius” of the Emperor virtually created the New Deal in Old Rome, much as Roosevelt’s “Brain Trust” created the New Deal in the U.S. in the 1930s. It is ironic that the socialists who invented the New Deal were so ignorant of history that they did not know that their counterparts had invented the same nonsense almost 2,000 years earlier. There is a comment by Cicero that problems in the credit markets in one part of the Empire inevitably would spread to all trading ports in the Mediterranean.
Various agencies created in Rome’s long-running New Deal intended to help or bail out everyone from merchants to grain farmers to wine makers suggests that the hardships of a post-boom contraction hit virtually all classes in society. Particularly when out of a population of almost a million in the City almost half were on welfare.
Thus, the observation that credit markets are three-dimensional. One is that a credit contraction afflicts all classes of credit from low-grade to high-grade borrowers, as well as those who are wards of the state with no ability to borrow money to the state itself with the highest rating.
The next dimension is in time, whereby shorter-dated loans usually have a lower rate than longer-dated loans. Then in a boom the demand by speculators for near-term money increases short rates faster than long rates and the curve inverts. This is symptomatic of a boom but does not signal its demise. As with the experience in the summer, it is when the curve reverses to steepening that the most blatant speculations begin to fall apart. The Fed can briefly influence short-dated market rates of interest, but it cannot push long rates. The curve as it reverses to steepening then becomes a sophisticated and impartial indicator of diminishing speculative demand for funds.
The next dimension of credit is the spread between low-grade and high-grade bonds, which in the final phase of a boom becomes very narrow. In so many words, in an overabundance of confidence investors buy risk to obtain a slightly higher yield.
The other historical aspect of credit is the third dimension of geography. Where the foundation of manipulative economics rests upon personal fantasies about a national economy, the real world of credit has always been universal to wherever credit is used and created. A credit expansion is like a tide as it lifts all ships in all harbors – from the largest to the smallest. Contractions cannot be undenied and do quite the opposite.
At the bottom of contraction it is typically real and cautious money rather than the borrowed kind that accumulates very unpopular stocks, corporate bonds, and commodities. Then, at the top inspired confidence leverages up on established price trends and participants enjoy the high life. Bull markets, like civilizations are born Stoic and die Epicurean.
Cicero’s observations that financial distress in Tyre, with an unfavourable wind would inevitably be carried to Rome, has and will continue to be correct. Notions that credit markets are national will continue to be absurd.
These implacable forces have been cyclical. And the characteristics of change from contraction to expansion and back again have been methodical.
Of critical interest has been this year’s changes in the credit markets. Typically in the late phase of a boom the action runs for some 12 to 16 months against an inverted curve and while this indicates developing strains in the financial markets it is not the killer, nor is the attendant rise in short-dated market rates of interest, such as treasury bills. The problem is that when the curve reverses to steepening the most blatant speculations begin to fall, with many of them failing.
The curve had reversed to steepening by the end of May, and June was the 16th month since inversion started in February 2006. With this, our observation in July was that the contraction had started and that it would likely be the biggest train wreck in the history of credit markets.
The initial crisis came as a severe shock to market participants, policymakers and interventionist academics. Although the panic ran a brief course and ended later in August, the overall condition should not be considered as “fixable” or that the summer’s turmoil was enough to naturally clear market imbalances.
An era of wild asset inflations, including stock and metal markets, matured in the summer of 1873 and following the initial panic, The Economist (October 4, 1873), wisely observed, “The panic may be over, but the results of the panic are not over.” The initial bear market lasted for five years and the business contraction lasted one year longer. The writer at The Economist offered appropriate advice on any shocking panic, especially as signaled by changes in the credit markets that started in May of this year.
Over most of the past two years the mantra has been that the Fed had again provided “Goldilocks” conditions and that within this, “liquidity” was driving the markets up. In reality it was the usual leveraging up of all the hot games that provided the appearance of liquidity, and the health of the play depended upon rising prices. Of course, the threat to any impetuous boom is that any break in prices will bring the margin clerk on to the stage.
The job descriptions of the central banker and the margin clerk are very different. The central banker’s job is to get the accounts over-leveraged, and the latter is compelled to get and keep the accounts onside – no matter what! Seriously, it is ironic that the way it really works is that the world of policymaking has always fostered unsustainable speculation and then at the top hands the baton of power in the credit markets to Mr. Margin.
Conventional wisdom holds that interventionist policymakers will “fix” the problems. A thorough review of history suggests that policymaking with its chronic accommodation is a large part of the problem and the contraction could be severe enough to “fix” interventionist meddling.
In the 1600s Amsterdam was the commercial and financial center of the world, and some Dutch terms for finance have meaning today. The term “easy” money still has the same connotation, and soon so will its opposite – “diseased” money. The October 20th edition of The Economist cover story was “Central banks have worked miracles for 30 years. Don’t count on that continuing.” They got the last part right, but rather than calling the 30 years a miracle, the practical Dutch would have called it “easy” money, and also had the vocabulary for its consequence.
Dimensional Update: As part of rejuvenated markets the yield curve flattened. Also providing modest warning is that the BBB corporate bond spread, over treasuries, has widened from 129 bps to 137 bps. However, the event that provided an outstanding warning on the August panic was the initial signal as the BBB subprime mortgage bond turned down in June and the killer was when the AAA subprime bond plunged from 99½ to 91 in the first two weeks of July.
The rebound took the top-rated bond to 97½ in late August from where it declined to 96.25 on October 18. In the past 5 trading days it has slumped to 88¼ – taking out the low of August, which is a strident warning. Although we have been discussing price it should be emphasized that the plunge also reflects severely widening credit spreads and one chart shows the crash in the “A” subprime bond and the slump in the S&P. The other chart shows how the crash in the BBB subprime bond has afflicted the preferred shares of Royal Bank – Canada’s biggest.Link here.
MURPHY’S LAW BY MOUSE CLICK
In the old days, when a piece of news gave people the jitters, they would reach for the phone to place a sell order. They had a little time to ponder what they were doing. Nowadays they make the trade with a mouse click. The potential for buying and selling panics is much greater. Turbulence is now a function of Internet speed.
I am talking about trades that have zero to do with fundamentals or macroeconomics. Trading accidents, where someone places a big order he did not mean to, are increasing. On June 28, for example, traders erroneously entered purchase orders for AT&T, Jefferies Group and Wyeth stock at 50 to 100 times their normal volumes. Shares in the telecom company, the brokerage firm and the drugmaker were set to rocket before a New York Stock Exchange floor specialist – that is, an old-fashioned human being with observation and judgment skills – spotted the errors. Trading was halted on the trio for hours.
On August 1 a downtrending market had an abrupt 100-point rally in the closing minutes for no apparent reason. Why? I have been told that a large purchase order in an index option was entered for 5,000 contracts ($800 million face value) instead of 50. I can believe it.
On October 11 a Wall Street firm lowered its revenue forecast for Baidu.com. In a matter of minutes Apple traded down $15, around 10% of its value. What is the connection? They both have something to do with computers. But the relationship is tangential between a Chinese Internet company and the maker of iPods, iPhones and Macs.
These incidents have received scant news media attention. (The Financial Times did write a piece about the halt in AT&T, Jefferies and Wyeth.) Worse, the media’s well-known tendency to emphasize the negative often feeds market sentiment, pushing the emotionalism that results in boneheaded trades. If the stock market makes page one of the New York Times, it is almost invariably because it had a bad day. Comparably good days are relegated to the business section.
Small wonder that, in times of stress, the media turn to the bears and trumpet their acumen without providing perspective. In 2000 the economist Robert Shiller was congratulated for his bearish posture. Well, he had been playing that tune for some years. Those who had taken his advice to unload stocks in 1995 or 1996 missed a lot of appreciation and had nothing to sell five years later. In a debate at the Forbes CEO conference in the fall of 2002, near a market bottom, Shiller was still bearish.
Today’s speed-of-light derivatives, in the wrong hands, are accidents waiting to happen. Slicing subprime mortgages into various classes of risk and packaging them into bonds works well in the laboratory. In the real world, mortgages default, and mortgages of folks with shaky finances default the most.
Back in 1994 I purchased a put warrant on the Hong Kong index. That market went down 30%, and my put should have gone up. The instrument was badly constructed, though, and it dropped, too. Nowadays problems like that have multiplied.
We are not going back to paper trading tickets and leisurely perusings of Wall Street Journal stock tables. So my advice is, the next time the market as a whole or an individual stock moves suddenly, do not reflexively react. Use the information tools we have to try to find out what really has happened.
As always, figuring out the good stocks long term will serve you best. Let me put in a good word for Polo Ralph Lauren (NYSE: RL). It has slipped 35% from its June high. Expensive acquisitions and a general downdrift in retail stocks are to blame. But its brands, such as Polo and Chaps, have a special allure that make it a good stock to hold. I am also high on CVS Caremark (CVS), the well-run drugstore chain. If the economy is indeed slowing, then this showcase noncyclical should hold up well.Link here.
THE FUND THAT LOST ITS WAY
American Century Ultra’s struggles show the folly of straying from your mission.
American Century Ultra is struggling. During the go-go 1990s, the flagship fund of American Century Investments was synonymous with stellar growth stocks. Ultra, along with companions Select and Growth, ran up annual returns of 20% to 40% by owning hot stocks like MCI WorldCom and Lucent Technologies. Then came the end of the tech/dot-com bubble. Ultra, like most funds chasing big growth stocks, crashed.
There are two things that a money management firm can do when it finds itself in this predicament. One is to stick to its strategy, inevitably losing assets as customers desert it near the bottom but at least positioning itself to participate in the rebound. The other is to panic and change direction. Ultra panicked. After riding tech stocks down, the fund sold them and switched to things that looked safer. Stocks in cement, insurance and restaurants replaced former tech highfliers.
Do we need to tell you what happened to the portfolio in the bull market that began five years ago? It lagged badly. Ultra’s 10.7% average annual return in the five years through September compares with 15.5% for the S&P 500 and 14.1% for Ultra’s peer funds of large-cap growth stocks. If Ultra, one of the half-dozen best-performing funds of the 1990s with assets of more than $10 billion, is still a growth portfolio, it sure has not acted like one. In the latest Forbes ratings, it gets a mere D in up markets. The rest, all growth funds, scored an A or an A+ (see table).
Investors have yanked an estimated $11.6 billion from Ultra – and $16 billion overall from American Century stock and bond funds – since the beginning of 2006. Ultra’s three comanagers have left, along with the fund firm’s chief executive and a spate of other high officials. Ultra is under new managers, trying hard for a comeback, but their task is not easy.
The most telling admission that Ultra and its fund family have lost their way is the recent decision to impose sales charges of up to 5.75% on another 12 of American Century’s 84 funds, including Ultra, bringing the total number of its load funds to 39. (Current no-load customers are grandfathered in.) Since Ultra’s record does not attract investors, perhaps stockbrokers can be bribed to do the work. Even that will not be an easy sell, since financial advisers compensated by sales fees (loads and 12b-1s) have better fund families to choose from.
No one should have any illusion that it is possible to enjoy the performance of a high-risk growth fund in a bull market without suffering some pain in the bear market that follows. Funds that get A or A+ grades from Forbes for bull markets tend to deliver an F in bear markets. But hang on for a long time, through bull- and bear-market cycles, and you can do well with a risky fund.
Seligman Communications & Information is a good example of the breed. We give this high-tech portfolio an A+ for up-market performance and an F for down markets. Over the past 15 years it has averaged a 16.9% return, beating the S&P 500’s 11%.
Last year Bruce Wimberly, who had comanaged Ultra for 10 years, departed, ostensibly because he wanted to run private investments and spend more time with his family. Later Gerard Sullivan, comanager since 2001, and Wade Slome, comanager since 2002, left Ultra as well, although Sullivan is still with American Century. In came Thomas Telford in June 2006. Previously Telford, 40, a strapping fellow who coaches kid’q flag football and soccer, ran New Opportunities II, an American Century small-cap growth fund with a decent record. Another manager, Stephen Lurito, American Century’s new chief investment officer for U.S. growth equity, joined Ultra this past August.
This year’s return of 16.7% is 2.6 points above a rejuvenating large-cap growth category. But Morningstar analyst Christopher Davis remains unconvinced. Telford’s initial showing is too short to be meaningful, he believes. He also worries about an “experience drain,” with all the talent leaving. Davis says he would not recommend any of American Century’s large growth funds now.
Telford has a quarter of assets in manufacturing, energy and materials, not too far behind info tech and telecom, at 35%. Un-WorldCom-like names such as Emerson Electric, PepsiCo and United Technologies are now prominent among Ultra’s holdings. While these have decent earnings growth rates, they are hardly explosive.
Turnover has increased to 80%, from 33% in 2005 under Wimberly. Telford says a growth stock has a finite life, and he looks to get it at the sweet spot in its cycle. Telford bought Network Appliance in May at $38 and, after it disappointed, sold at $29 in August. He sold Ultra’s Amazon position after the fund held it for many years (Amazon’s price has since increased threefold) and greatly trimmed Ebay.
Telford has made some good calls, too. Gamemaker Nintendo has more than doubled since he began buying last December 2006. Apple, Ultra’s 3rd-largest holding (2.8% of the portfolio), is ahead 120% in 2007, while GPS-maker Garmin is up 116%. Research In Motion, a new addition in May at $53, is now at $121.
American Century last year hired cyclist Lance Armstrong as a pitchman, part of a multimillion-dollar brand-building campaign. If the fund vendor cannot deliver endurance in its performance records, it can at least offer up a guy who has.Link here.
FIXED INCOME OPPORTUNITIES
The beloved, elusive 5% muni.
Most investors have magic numbers on which they rely. Some are looking for a certain threshold price/earnings ratio, dividend yield, interest coverage or percentage yield over Treasurys. Municipal bond investors perceive their magic yield as 5%.
That sterling number is hard to find. Until recently, and briefly, it had been five years since long-term munis yielded 5%. We reached that level for a few days in August during the bond market meltdown. Even though municipalities (governments, that is, as opposed to entities borrowing against a nontax revenue stream) are more reliable as borrowers than the average corporation, the selloff hit munis, too. At the height of the selling tumult, 25- to 30-year long-term municipal bonds yielded 5% – more than the yield on long-term Treasurys. That muni yield translated to a taxable equivalent of 7.7% for those in the highest federal tax bracket.
If you blinked, though, the opportunity vanished. Now saner minds prevail, prices are back up and yields are down to the neighborhood of 4.5%. No longer is earning 5% on a long-term muni possible. Exception for zero coupon bonds, which do not pay you your interest until maturity, so they have more rate risk built into them. In return, issuers need to entice buyers with slightly higher interest rates.
These bonds are sold at a discount, the interest accumulates beyond your reach during the bond’s life, and they are redeemed at face value. Since they are munis, you are not taxed for the “imputed” interest that is building up in the interim, which is the fate of investors owning taxable zeros. The rate risk, it must be confessed, works against you. If rates shoot up, you are stuck with a low yield for many years. If rates collapse and the bond is callable, the issuer can cancel the deal by calling it in early – typically at only a modest premium to its accreted value.
Given that you might not see cash out of the bond for 20 or 30 years, you should lend only to borrowers you trust. Insist that the issuer have at least a single-A rating on its own, apart from any credit enhancement coming from an insurance company. Steer away from special-purpose bonds for things like stadiums and airport terminals. Water and sewer pipes provide essential services and can be trusted.
Comparison shop. If you buy bonds in the secondary market, refer to the Securities Industry & Financial Markets Association Web site. Another help is investinginbonds.com, for recent prices on municipal and corporate bonds. You would never buy a stock without getting a quote beforehand. So when buying municipals, ask for the CUSIP number that identifies a bond. Pop the number into the space provided in the Web site and see where the bonds previously traded. You will see both retail and institutional trades, giving you a good idea of the best purchase or sale price. It is not perfect transparency, but it shows you the transactions that have taken place.
Ignorance can be costly. In early September one investor did not check the Web site for previous trades. If he had, he would have known not to sell his $50,000 Illinois State, AA-rated general obligation bonds due in 2016 at 98 through a brokerage firm. Two days earlier they had traded at 108.Link here.
Peace of mind provided by state tobacco bonds.
Once in a lifetime you need to do something improbable and difficult. For me this meant a nine-day trek in western Mongolia in late summer. We were off the grid, with no phone, no BlackBerry and no Bloomberg. My trip happened to be during one of the market’s most tumultuous spells ever. And I had no idea what was going on.
We walked and walked across empty and spectacular countryside, the air perfumed with wild sage. We never took a shower, and we slept inside pup tents every night. Temperatures ranged from 10 to 80 degrees Fahrenheit. This was risky. Should you break an ankle or get appendicitis, you would have a big problem.
The financial risk I was running did not worry me. As we trudged along, my son asked me, “What will you do if the market crashes?” I told him that we had plenty of cash equivalents – my personal portfolio when we left was 40% in Treasury bills and 60% in equities. So when we returned I would buy stocks that had previously been too expensive. If the bond market sold off seriously because the Federal Reserve’s easing had reignited inflationary fears, I would buy bonds.
When I returned and heard about all the mayhem, I was alert for opportunities. The best and cheapest have turned out to be state tobacco bonds, which I have liked for a long time. These issues are backed by revenue from the 1998 settlement in which tobacco companies agreed to raise prices and hand over the incremental revenue, with states and tort lawyers dividing the loot. Not content to let the money flow in slowly, the states borrowed against the future by issuing revenue bonds. These tax-free bonds yield around 6%, almost two points more than a bond used to finance a more respectable activity, like building a school.
2007 has seen a raft of new issues combined with buyers of tobacco bonds.Meanwhile, the traditional buyers of tobacco bonds, the high-yield muni funds, have suffered panic-related withdrawals and lack the room to add new issues to their portfolios. The supply/demand imbalance has driven down prices.
There is some risk to these bonds, since they are backed only by the revenue from the tobacco payout, as opposed to the taxing power of the state. Two things for investors to worry about are that antismoking campaigns may have their intended effect, reducing the flow of tobacco penance money; or upstart manufacturers may find a way to sell cigarettes without chipping into the tort settlement funds.
The best tobacco bonds for my money have what is known as a “turbo” feature, as in “turbocharged”. These bonds have sinking funds that are used to pay off the bonds early, in 20 years or so, instead of the customary 40. The bonds without a sinking fund yield a little more, but not enough to make them more attractive, given the risk.
The next time I go to Mongolia and sit in a nomad’s tent, drinking fermented mare’s milk and eating yak cheese, I will be clipping my tax-exempt coupon and my mind will be at ease.Link here.
BEAUTY AND THE BEAST? GISELE VS. BETTE
With all eyes now squinting at the fast-vanishing U.S. currency, it was only ever a question of “when” – not “if” – the bold and the beautiful would start rejecting the misshapen dollar. The imperial greenback is just sooooo 20th century, darling!
“We don’t know what will happen to the dollar,” as Patricia Bundchen, sister and manager of Gisele, the statuesque and shapely Brazilian supermodel, puts it. “Contracts starting now are more attractive in euros.”
Not so fast, counters her agent at IMG Models in New York. “Gisele does have contracts in dollars, [but] when she works in Europe, she gets paid in euros. When she works in the U.S., she gets paid in dollars ... when she works in Brazil, she gets paid in reals.” Whatever hair-pulling and hissing is going on among her people behind the catwalk, Gisele has now asked for euros, not dollars, in payment for promoting Dolce & Gabbana’s new perfume, The One.
Being based in Legnano, Italy, D&G no doubt had plenty of euros on hand. But Procter & Gamble? According to Veja – Brazil’s best-selling weekly magazine – Gisele has now demanded euros instead of dollars in her new contract to promote P&G’s Pantene shampoos and conditioners. And who can blame her? In the year up to June, Gisele made an income worth $30 million to defend. If she kept that sum in dollars, then this Beauty would have already lost 8.3% of her money – in four short months – to the lumbering Beast.
Rejecting the dollar is not a new gambit for headline-hungry celebrities. The last time the U.S. dollar sank beneath the weight of low-yielding Treasury bonds, soaring oil prices and a looming recession, Bette Midler – the comedienne and singer – famously demanded that her $600,000 fee for a European tour in 1978 be paid in South African gold coins. Smart move! 18 months later, that little mountain of Krugerrands would have been worth $2.1 million. But did Ms. Midler show more brains, if not beauty, than today’s ex-dollar superstar?
Gisele Bundchen actually seems keen to quit the U.S. altogether. She cut the asking price of her New York penthouse just last weekend. Now her West Village apartment, with views of the Hudson thrown in for free, is on the market for $9.2 million – down from $10.9 million previously – according to the New York Post.
“In Tribeca,” the rag goes on, “Russian supermodel Natalia Vodianova has discounted her alluring 5,000-square-foot penthouse from $11 million to $9.9 million.” Are the beautiful people turning bearish en masse on both the greenback and U.S. real estate? They might want to show the brains of Bette Midler, instead of the tanned midriff of Gisele, if so.
Since the dollar reached parity with the euro, for instance, exactly five years ago this week, gold priced in euros has risen by nearly 70%. Yes, that pales next to the gold price in dollars – now more than 140% higher from this time in 2002.
“Gold is the most reliable performer as a hedge against dollar movements,” Rhona O’Connell found in a research report for the World Gold Council last month. She compared the performance of various commodities – everything from zinc, cattle, heating oil and palladium to sugar – with the dollar’s changing fortunes on the currency market.
O’Connell’s yardstick for the U.S. dollar was an index of the world’s next five most important currencies. Gold bullion mirrored the changes in this dollar index more closely than any other physical commodity from January 2005-July 2007. But gold is delivering much more than simply a dollar hedge. Given the political and economic barriers to raising interest rates anywhere in the world right now, you might wonder if it is going to keep on giving, too.
Gold, so far in November, has also broken out against a whole series of other major currencies besides the U.S. dollar. Gold priced in euros just broke the top of May 2006, equal to €562 per ounce. The Japanese yen is trading at a 23-year low in terms of bullion. The Australian dollar – caught between being a “commodity currency” and a debt-fuelled Anglo-Saxon basket case – has just sunk to new record lows against gold. And for British investors, gold has never been so valuable.
What to make of it? Gold itself makes no promises, remember. Paying no yield or interest – and with little-to-no industrial usage, compared with silver or platinum – gold really does not have very much to recommend it. Not besides the verdict of history.
The ultimate store of value and wealth for more than 3,000 years, gold is now drawing in a flood of investment cash from private individuals across the world. The proof? It is moving fast against ALL of the world’s major currencies, not just the dollar.
We blame central bankers. And government wonks. And those investment banks that created a flood of “near money” assets at a record clip when they spied the mark of low-income homebuyers with no hope of ever repaying a mortgage.
“(Bank of England governor) Mervyn King’s effective guarantee of the liabilities of the British banking system is much more significant than declining South African gold production,” as John Hathaway of Tocqueville Asset Management puts it. We would add the Bernanke put, too ... plus the Bank of Japan’s zero-rate madness ... the Swiss National Bank’s sub-3% rates ... and the eurozone’s basic political fault lines.
If you want to join Gisele, then buy euros. Thrown in for free, you will get the yawning gaps between Germany’s economy and the overspent, over-indebted economies of Italy, Greece, Spain, Ireland and Portugal.
If you do not trust central bankers or government paper, on the other hand, then make like Bette Midler. Just do not pay the extortionary dealing charges and insurance fees that buying a pile of Krugerrands will cost you.Link here.
GOLDEN ANALYSIS ABOUT GOLD
Elliott Wave International analysts say gold will correct to below $500.
When the price of gold dropped on Monday – its largest percentage decline since October 2006 – it reminded us all that gold’s price does not always go straight up. In fact, our forecast calls for gold to drop below $500. How can that be? Read these questions and answers with Steven Hochberg, our chief market analyst at Elliott Wave International, to get a sense of what our wave analysis reveals in gold’s future.
Q: How does gold’s current rise make sense in the context of the Elliott Wave Principle, when your forecast six months ago presented a completely different scenario?
A: R.N. Elliott chronicled 11 separate corrective patterns and/or combination of patterns. Most unfold as A-B-C waves to correct an overall up trend. The first leg down is wave A, an intervening rally then develops as wave B, followed by a final leg down which is C. The C leg often draws prices beneath the A leg.
In gold’s case, the A leg bottomed in either June or October 2006, and since then the B leg has been under way. Depending upon the pattern, the B leg can either top beneath the origin of the A leg, or modestly past it prior to the start of the C leg down. Gold’s B leg has pushed past the start of the A leg (May 2006), which is a pattern that Elliott called an “irregular top”. In turn, the C leg down should fall below the end of the A leg, and complete all three legs of the A-B-C correction.
Frost and Prechter, in Elliott Wave Principle, described B waves as “phonies”, “sucker plays”, “bull traps” and “speculators’ paradise”. They are often “unconfirmed” by other averages and “are virtually always doomed to complete retracement by wave C.”
With this in mind, we see three pieces of evidence that support the B leg interpretation of gold’s upward push since June-October 2006:
The evidence best supports the view that the next significant move in gold will be a C leg that falls beneath the A leg low. If this evidence changes, we will tell our subscribers immediately.
Q: In our last interview, you noted that “a big mistake pundits make is to assume there is a fixed correlation between the dollar index and gold.” Nearly everyone seems to think this is what is happening now as the dollar continues to drop and gold rises almost in lockstep. How is it possible that so many fairly astute observers could be missing the point?
A: I often ask myself this because most of these people are exceptionally smart. But many of them also believe in a fixed correlation between the U.S. trade deficit and the U.S. Dollar. That is, as the trade deficit grows, the dollar must go down. Yet if one simply takes the time to plot a chart of the U.S. Dollar Index over the U.S. Trade Balance, the absence of a fixed correlation is so obvious that it jumps right off the page at you! There are times when the U.S. Dollar and gold trend in the same direction. There are times when they trend in opposite directions. If one wants to argue that there is a consistent negative correlation between the dollar and gold then, by definition, this negative relationship must hold true through all market cycles. If it does not, then the argument for a consistent negative correlation becomes moot.
Q: If the value of the dollar does not correlate with the price of gold, then what is the biggest driver of the precious metals market?
A: The single biggest driver of precious metal prices is the same thing that drives every other financial market, namely human psychology. The aggregate swings from abject pessimism to sheer ebullience and back explain why supply rises or falls to meet demand. It is why demand increases and decreases. This is the true fundamental for all freely traded markets. We study the Wave Principle so intently because it catalogues the patterns that mass psychology trace out, as it moves from one extreme to the other and back.Link here.
MAJOR SILVER RALLY IS JUST BEGINNING
And junior mining companies are the way to play it.
Many of the top investors in the world have said again and again that it is important to diversify your portfolio. This holds especially true in times of economic downswings.
As we see the dollar fall further every day, we have to think about how to protect ourselves from what some call an inevitable collapse of the dollar. Now, we could recommend buying other currencies or foreign stocks, but that will not do it. Every other currency has been falling, too.
After thinking long and hard about it, there is only one way to go ... precious metals. But we are not going to tell you to invest in gold and silver bullion (although it is not a bad idea). A much more lucrative way to make serious money, while protecting yourself from the dollar debacle, is junior mining companies. Quite often, Wall Street dismisses juniors for being “too risky” and “unstable”. But we are used to that. They always say that about small-caps. To be fair, many [most?] juniors fizzle out without bringing investors the big money they promise.
We first have to discuss why silver is the best investment. For thousands of years, silver has been the currency of choice everywhere from Ancient Greece to the Spanish colonies in South America. Today, money no longer has silver in it (excluding certain Mexican peso denominations). It is common to think of gold as an investment, but not so with silver – because there are hundreds of different purposes for silver outside of investment. The majority of all silver produced makes up everything from silverware and jewelry to photography and other industrial applications. Take a look at this breakdown. As you can see, investments only account for a small amount of demand. Gold is another story. Governments, investment houses, and even private investors hoard gold.
However, this changes during recessions and market downturns. Most investors flee the stock market by holding a large portion of cash. When the dollar also falls, they flee to precious metals, including not just gold, but silver as well. You can see this happening here.
This trend is just beginning. As James Turk, founder of GoldMoney, was quoted last week, “Silver needs to break above $14.85 to confirm that both precious metals have resumed their major uptrend.” It was only a matter of hours after he said that for silver to break its previous 26-year high of $14.85. Over the next 24 hours after breaking this mark, silver shot up over $16 an ounce.
While it has corrected a bit since then, this just marks the start to an enormous rally in the precious metals market. Experts are falling all over themselves to be the one who predicts how high it will go. But the truth is, no one knows. The important thing is that it will go much higher from here.
We will just keep our eyes’ peeled here for the best way to play it ...Link here.
OIL, GOLD, BATMAN AND LEO TOLSTOY
My colleague, Kevin Kerr, and I both expect to see a price increase to $150 for a barrel of oil, and even $200 oil would not shock us. Expect to pay $5 or more for a gallon of gasoline within 18 months, as well. It is part of the Peak Oil future, and that future is now. Darn, we were hoping to have more time. We also expect to see gold at $850 per ounce in the not-too-distant future. Then $900 and $1,000 within 18 months, if not sooner.
We regret having to say all of this because it means that the U.S. dollar will be losing value in a precipitous drop during 2008. It will not be a pretty sight. Just imagine the loss of purchasing power and the associated destruction of capital that our society collectively will experience as this occurs. Imagine a scenario of asset deflation and price inflation. What can you do?
No less noble a character than Batman once inquired, as he looked over a room full of devices that he was considering adding to his battle rattle, “Does this come in black?” Ask yourself: Are the prices of oil and gold rising for simple reasons? Are the upward price trends merely tactical events in the daily battle space of the market place? Or are oil and gold now subject to certain inexorable forces of history, no longer governed by the old rules of a political and monetary world that is now obsolescent, if not obsolete? We have to wonder. These are hard questions.
Will the political leadership and monetary authorities interpret the fast-rising prices of oil and gold as warning signals of imminent and profound trouble? What about those who hold positions of trust and responsibility within the media, business, academia, and even religion? Will this nominal and – we regret to say, somnolent – leadership cadre ignore these key signals, while they waste time counting their retirement points and dismiss these glaring thundering signals of rising prices as mere “trading activity”, or worse?
A few weeks ago, while I was in Houston for the conference of the Association for the Study of Peak Oil & Gas, I had a conversation with a retired employee of the CIA. Our conversation drifted to the question of whether or not the global political construct of the world post-World War II was finally coming to an end. After 60 years of running on the formerly immense momentum of that victorious war, is it all finally grinding to a halt as the U.S. literally runs out of oil and its currency disintegrates in relation to gold? The former Soviet Union encountered severe oil shortages, ran out of money, and all but imploded within a matter of months. Is there some law of nature that declares that something similar could not happen to the dramatically overstretched U.S.?
Look at the basics. Clearly, the prices for oil and gold are rising. That is the easy observation. But are we witnessing a fundamental transformation in the alignment of all mankind, similar in a way to that observed and described by the Russian novelist Leo Tolstoy? Are the prices of these two critical commodities, oil and gold, reflective of the broader themes of war and peace, mankind’s ability to both hate and love, the artificial and the natural, the erotic and the sublime? Where will it all end, and how will it play out?
In a Peak Oil world, you might not be able to buy your way out of trouble. Not even if you are rich. That is the bad news, and it is very bad. And if you move all of your investments to foreign currencies, along the lines of what our old friend Jim Rogers has announced he is doing, you may still suffer the effects of the declining value of the dollar. If the U.S. economy is, as the analogy goes, the world’s economic locomotive, then this train is about to derail. Think of the looming Citigroup disaster as the financial warm-up act for the last great concert of the Woodstock generation.
Take long-term monetary mismanagement by the Federal Reserve, plus fiscal decadence at home by the U.S. Congress, and an unaffordable war abroad, and you have the ingredients for economic disaster. Stand by for a domestic recession, as the value of the U.S. dollar drifts downward. There will be pockets of prosperity, in export-related fields, such as some high-tech and large capital goods like commercial aircraft (thanks, Boeing). But if you do not earn a living building Dreamliners, we suggest that you get out of debt fast, and out of dollars faster.
We think that some protective moves include owning gold or shares in gold miners. Or you could invest in one or more of the foreign currency or commodity-backed FDIC-insured certificates of deposit (CDs) that our friends at EverBank offer. Check them out.Link here.
ENOUGH TO MAKE AN OILMAN JEALOUS
Grab your hard hats and lace up your steel-toed boots, because today we are going back out to the drilling rigs and construction sheds in search of a remarkable investment opportunity. But we are not drilling for oil or natural gas. Instead we are talking about one of the cleanest, most abundant sources of energy on the planet.
What makes an energy source useful and valuable? One way to answer that question is to think in terms of thermodynamics and to look at how the potential energy of any substance is converted to heat energy. Ask yourself, for example, what is coal? First and foremost, coal is the carbonized remnants of ancient plant matter, stored up in the geologic column. Why is coal useful? It is, as the old saying goes, “the rock that burns.” One coal miner of my acquaintance calls coal a “portable climate”. Among other things, it offers the user the ability to release stored-up heat energy, and thus bring rapid warmth into a cold world. Yes, and so much more.
Consider what happens when you are driving a car and burning gasoline. What is it that you really want from your fuel supply? Do you care that gasoline comes from refined crude oil? Or are you more concerned with the fact that the gasoline combusts in the cylinders of your engine, via rapid, explosive release of heat when the gasoline is sparked? You probably learned in drivers’ education class that the basic 4-stroke internal-combustion engine follows a cycle of intake, compression, power stroke, and exhaust.
When the gasoline combusts and explodes, it releases heat energy, which causes combustion gases to expand and push the power stroke. The power stroke, in connection with the well-timed power strokes of the other cylinders, turns the crankshaft. This is what allows you and your vehicle to move along. So gasoline is also, in essence, a form of stored heat.
Or consider nuclear power. What is the basic principle behind this particular energy source? Radioactive rods in a nuclear pile decay and give off heat, which in turn is used to raise the temperature of water or some other substance in a liquid phase. When the liquid phase gets hot enough, it vaporizes and its expansion turns a turbine. The turbine generates electricity. This is the case for almost all nuclear power plants in the world, whether on land or inside the confined hull of a submarine.
The bottom line is that when we are looking for energy sources, we are basically looking for ways of obtaining heat energy in some form or another.
Geothermal energy – the new way to invest in heat.
Geothermal energy is heat derived from the Earth. It is the energy contained in the hot rocks, and the hot fluids that fill the fractures and pores within the rocks, of the Earth’s crust. Under the right conditions, geothermal energy can be utilized to generate electricity. This is why we are interested.
According to thermodynamic calculations performed by many bleary-eyed graduate students over the decades, if the Earth had simply “cooled” from a molten state, it would have become a completely solid mass of iron and rock within a few hundred million years of its formation. But the Earth has been an active, dynamic planet for nearly 4.5 billion years, so something must be going on deep inside to keep the planet hot. The current belief is that the source of heat energy within the Earth is long-term radioactive decay occurring within the crust and mantle.
The uses to which these geothermal resources can be put are controlled by temperature. The highest-temperature resources are generally used only for electric power generation. Current U.S. geothermal electric power generation totals approximately 2,800 megawatts (MW), or about the same as five large nuclear power plants. Uses for low- and moderate- temperature resources can be divided into two categories, direct use and ground-source heat pumps. Geothermal heat sources within the Earth are immense, and a well-managed program has the potential to be operational for many decades, if not centuries.
Now let us examine the business and policy side of things. First, understand that extracting the Earth’s heat and selling geothermal power is subject to the same regulatory structures as almost all other energy-generation and transmission entities in the country. Also, geothermal energy is capital-intensive. Hence, it takes time to pay off any major investment. At the same time, geothermal power competes against the rest of the electrical grid. This means that the cost basis for a geothermal power plant has to be competitive against plants that produce electricity by burning coal, natural gas, or even oil, as well as the recently growing solar thermal energy industry.
Once a plant is up and running, geothermal power is quite reliable. Geothermal plants offer a continuously available (24/7) power source, with historic reliabilities in excess of 90%, which is comparable to the reliability of many nuclear plants. Compare this with wind-generated power at 25-40% reliability (the wind does not always blow when you need it), or solar-generated power at 22-35% reliability (the sun sets each night, among other drawbacks). Reliability is a critical issue in terms of operations, because plant owners usually bear the risk of getting charged back by utility customers for what is called shortfall energy. This means the power that a utility purchases on the market if the main source is not operating up to capacity.
Geothermal energy does not deplete like a hydrocarbon deposit. Many hot springs of the world have been bubbling warm water or steam since prehistoric times. So geothermal power is considered a renewable form of energy production, and it benefits from the renewable energy “production tax credit”. The production tax credit, plus 5-year depreciation schedules, means that there is an effective U.S. government subsidy of over 63% of the capital cost of renewable energy projects. (Think of it as spending dollars that cost only 37 cents.) So right away, renewable energy projects, and geothermal projects in particular, are beneficiaries of significant investment tax breaks that would make any oilman jealous.
If you scan the market, you will be hard pressed to find pure-play geothermal companies. But as the technology takes hold, more and more of the companies will pop up on your radar screen.Link here.
The answer my friend, is blowin’ in the wind.
The answer is blowin’ in the wind. ~~ Bob Dylan
Ever since Colonel Drake tapped the first commercially viable oil well in Titusville, Pennsylvania back in 1849, oil has reined the undisputed king of the energy industry. But this long reign, as with all others, will come to an end. The questions lie not in the “if”, but in the “how” and the “when”. Crude oil will abdicate its throne to an oligarchy of “alternative energy” sources like wind, solar, geothermal and liquefied coal.
In Scotland, the winds of change are already blowing. Earlier this year, Talisman Energy (UK), in conjunction with Scottish and Southern Energy (SSE), announced that its Beatrice Wind Farm Project, located off the coast of Aberdeen in the northeastern U.K., was online and operational. The project takes advantage of some of the highest wind speeds on the planet, winds that will be around long after the last drop of crude is extracted from the North Sea’s rich oil beds. The demonstration deepwater offshore project is the largest of its kind in operation today.
At a towering 85-meteres (278 feet), the mammoth 5MW wind turbine will be powering the nearby Beatrice Oil Platform, some 25 kilometers off the eastern coast of Scotland. At first glance, it may seem relatively meaningless – or at least ironic – to use wind energy to power an oil platform. If you take a closer look at those funding the project, however, you begin to appreciate the importance of this landmark event for countries all across Europe. Aside from Talisman and SSE, enthusiastic contributions also came from the European Community, the Scottish Executive, and the U.K. Department for Trade and Industry.
Throughout the 1990s, incentives in the U.K. fostered a slow, but steady development of the wind power industry. In 2002 things really started to take off. The government’s Renewables Obligation (RO) aims to see the U.K. pass the 10% mark for energy derived from renewable sources. This chart plots the near-exponential growth of the wind industry since the introduction of the RO. And this is just the beginning. The British Wind and Energy Association (BWEA) has set lofty targets, hoping to capitalize on growing public interest in, and support for, renewable energies.
For all the benefits of onshore wind farms, the typical problems still arise. Aside from governmental red tape, there is always a string of placard waving NIMBYs to contend with. But NIMBYs don’t swim. The Beatrice project is part of a larger, collective effort known as the DOWNViND Project (Distant Offshore Wind Farms No Visual Impact in Deepwater) that includes 18 organizations from six European countries. It represents a shift in focus away from the more conventional onshore wind farms and highlights the possibilities for rapid offshore growth. According to the European Wind Energy Association, offshore wind could provide up to 150GW if its full potential were harnessed – about the same amount of energy produced by 150 nuclear plants.
The UK’s current offshore wind capacity is 300MW, second only to Denmark (400MW), and in front of the Netherlands (140MW). Along with growth in biofuels, solar and wave projects, a hefty part of the growth in alternative power sources in the UK will reside in offshore wind projects. Alongside the U.K., Denmark and the Netherlands, projects are also in development for offshore turbines in Germany, Sweden and France. In Spain, the current leader in onshore operations, some 31 projects are awaiting authorization mainly in the Galicia and Andalucía regions. New regulation is expected to simplify the authorization process and should see the Spaniards getting in on the action pretty soon too.
So how does Big Oil respond to the emerging alternative energy oligarchy? By joining the family. British Petroleum has purchased both Greenlight Energy and Orion Energy, while also forming a strategic alliance with Clipper Windpower. All three of these companies operate in the wind power industry. With two farms in the Netherlands and five projects at various stages of development in the U.S. this year, BP’s land bank of development projects now has the potential to generate some 15,000 MW of power.
Similarly, Royal Dutch Shell has used its offshore oil and gas expertise to establish a formidable presence in the wind market. Their Egmond aan Zee Offshore Wind Farm in the North Sea supplies some hundred thousand homes in the Netherlands with electricity, eliminating an estimated 140k tons of CO2 emissions a year.
There is little doubt that Big Oil will rein king for a while to come. With their support, so will the alternatives.Link here.
CHINESE DESERTS AND WATER STOCKS
Chinese deserts are on the move ... Each year, the Gobi Desert devours 2,460 square miles of Chinese soil, an area roughly the size of Delaware. Violent sandstorms threaten to conquer Beijing. Dunes now tower just 43 miles from the ancient capital – firmly marching south, like Sherman through the soft Georgia pines, at a brisk 12-15 mile per year clip.
It is a process scientists call desertification. Basically, China’s rapid economic growth comes at a great price, as the fast-approaching desert threatens to blanket Beijing before the Summer Olympics in 2008.
The solution? The “Green Wall”. Beijing officials set aside $8 billion to construct a natural wall of trees spanning more than 2,000 miles. But they are no match. Trees need water. And air pollution inhibits precipitation. Researchers from Israel’s Hebrew University of Jerusalem and the Chinese Academy of Meteorological Sciences found that on hazy days, precipitation from the top of Mount Hua in China’s northwestern Shaanxi province is cut by up to 50%. Consequently, one quarter of China currently finds itself buried beneath sand.
China’s immediate need for water remains paramount. Two out of every three major Chinese cities have less water than they need. Cities in northeast China have roughly five to seven years left before they completely run dry. Beijing knows the stakes. It has spent $60 billion diverting river water to address this problem. That commitment represents the largest civil engineering project since the Great Wall.
Regardless, it may be too late. But those lucky enough to fill their pipes have another problem: 90% of China’s city aquifers are deemed polluted, and 700 million Chinese drink water contaminated with either animal or human waste. In most cases, their murky glasses contain both.
Water, in essence, is a commodity. Westerners take water for granted. We simply turn on the tap and it flows. But that is certainly not the case the world over. Arid landscapes, low rainfall and fast-depleting underground water tables make fresh water one of the most pressing issues facing countries like India and China today. Roughly 50% of the world’s population resides in this region of the world. They are the economies experiencing the most dynamic growth. They now churn out 43% of the world’s exports and hold 70% of the world’s foreign exchange reserves. Going forward, sustainable growth will require sustainable supplies of fresh water.
Solutions vary. Some have proposed towing icebergs. Despite being highly inefficient, we are not assured the icebergs will even be there to tow. Others argue for heavy investment in desalination. We see two potential problems here. First, desalination requires massive amounts of energy, as well as specialized, expensive infrastructure. Saltwater conversion also produces a byproduct of concentrated seawater, which some scientists claim contributes to marine pollution.
We also like to point out that desalination takes place at sea level. For flat regions like the Middle East, where desalination plants account for a majority of total world capacity, that is not too much of a problem. But what about countries with steep terrain? Pumping water to higher altitudes presents a significant challenge both economically and physically. And finally, for the most part, countries use desalinated water for washing, filling swimming pools and watering golf courses – they rarely use it for drinking.
We firmly believe as does World Bank water resources manager John Hayward: “One way or another, water will be moved around the world as oil is now.” There are companies very attuned to this trend. They are in the midst of buying water rights in the same way wildcatters used to buy oil rights. Which companies? [Ed: A look through Stock Gumshoe indicates the promoted stock is probably value crowd favorite PICO Holdings (PICO).]Link here.
25 STANDARD DEVIATIONS IN A BLUE MOON
What is going wrong in the financial sector is not so unusual after all.
One of the funniest moments in the great credit crunch of 2007 came in the summer. “We are seeing things that were 25-standard deviation events, several days in a row,” said David Viniar, CFO of the smartest financial firm in the world, Goldman Sachs. That Viniar. What a comic.
According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening then that were only supposed to happen about once in every 100,000 years. Either that ... or Goldman’s models were wrong.
We recall looking out our window. Outside, we saw a summer day much like any other. And inside, what we saw in the news was also rather typical – a credit crunch. No, credit crunches do not come along every day. But nor do 100,000 years separate one from another. In the U.S., recently, we have had the crash of the dot-coms, the crash of Long Term Capital in 1998 and the crash of ‘87. Outside of the U.S., there have been a number of credit crunches, in Japan, Russia, Mexico and various Asian countries.
When you make loans to people who cannot pay the money back, trouble is only a couple standard deviations away. So far, during the first eight months of 2007, some 1.7 million houses have been caught up in foreclosure proceedings in the United States. That is just the beginning. According to Congressional estimates, up to 2 million families are expected to lose their homes over the next two years.
The individual amounts of money were not very large, not by Wall Street standards. But when the money did not show up, it had an alarming effect. Estimates of total losses of over $13 billion at Citi have been announced. Morgan Stanley is said to be facing $8 billion in losses. Merrill Lynch set records with estimated losses of $18 billion. The cat still has Goldman Sachs’s tongue. But when the losses are toted up, they will probably be spectacular. Altogether, there is more than $1 trillion in subprime debt outstanding. Much of it will go bad. Already heads have begun to roll.
What went wrong? The business model seemed so pure and simple. You simply bought up subprime loans from the knaves who made them. Then, you cut them up, slicing and dicing them into a kind of mortgage spam. You got the rating agencies to bless them. And then you sold them off to naïve investors. The idea was to earn huge fees upfront, while laying the risk onto the fools who bought the stuff.
When the going was good, it looked as though no business could be better. You were providing a valuable public service, helping people buy houses by redistributing the risk from the people who incurred it to people who had no idea it was there. And in the process, you earned such large fees you would get your picture in the paper, build a huge mansion in Greenwich and acquire some abominable paintings to put on the walls.
But wrong it did go. The Financial Times provides more detail on what happened at Citigroup: “The bank reported that, at the end of September, it had around $2.7 billion of unsold collateralized debt obligations – pools of debt securities that are repackaged and distributed to other investors. ... But it also had $4.2 billion of subprime loans it had bought in the past six months, and about $4.8 billion of loans to customers which were secured by subprime collateral. In addition, the bank had $43 billion of exposure to the most highly rated tranches of CDOs based on subprime mortgage assets.”
It turns out Citi was fool and knave at the same time. It sold dubious subprime debt to its customers. But it bought it too – and took it as collateral. Gary Crittenden, Citi’s chief financial officer, claimed that the firm was simply a victim of unforeseen events. The losses were, “driven by some events that have happened during the month of October,” he said, referring to downgrades by rating agencies. No mention was made of the previous five years, when Citi was busily consolidating mortgage debt from people who were not going to repay, pronouncing it “investment grade”, mongering it to its clients, and stuffing it into its own portfolio – all while paying itself billions in fees and bonuses.
No, according to the masters of the universe, downgrades by Moody’s and Fitch’s were completely unexpected – like the eruption of Vesuvius. Even the gods were caught napping. Apparently, as of September 30th, Citigroup’s subprime portfolio was worth every penny of the $55 billion Citi’s models said it was worth. Then, whoa, in came one of those 25-sigma events. Citi was whacked by a once-in-a-blue moon fat tail.
Who could have seen that coming?Link here (scroll down).
LEARN TO RECOGNIZE AND ANTICIPATE FEAR
It is hard enough to resist greed and fear when you are all alone and no one is watching. Heaven help the man in a crowd who tries to stand as an individual, once that crowd begins to act on its collective emotion.
This is why “discipline” is usually the first word out of the mouths of consistently successful investors and traders when they are asked how they managed to succeed. They know that while the market is a formidable foe, undisciplined investors face a far more lethal enemy – namely their own emotions, and the emotional impulse to follow others.
Decades of stock market history prove this to be true. Long-term peaks bring in the greatest number of people, even as long-term lows bring in the fewest. They buy high and sell low ... again, and again, and again.
Mountains of hard evidence notwithstanding, it is still common to see some academic get good press for conducting a “groundbreaking experiment” in crowd behavior. To wit, the 2006 segment on the ABC News’ Primetime show, which demonstrated the test results of a professor of psychiatry at a prestigious university in Atlanta.
Here is the short version. A group of people takes a test together, with each person privately writing the answers. Then, the same group takes a similar test, but this time each person reads their answers aloud to the group. The outcome? Hearing the answers of others “profoundly altered” the test results. Many individuals would get high scores on the written test, only to get low scores on the verbal test after hearing the answers of others.
Each person in the group was also hooked up to a machine that measures brain activity. The one interesting – if not surprising – revelation was the brain activity of people whose verbal test scores were not influenced by the answers of others. Their brains “lit up” in the amygdala, which is “the fear center” of the brain. Going against the group raised the fear level in these individuals, but they were disciplined enough to make independent (and rational) decisions. This one test in an artificial environment is a weak echo of what real-world markets have long proven.
Elliott wave analysis cannot infuse discipline, but it can help you recognize patterns in the market – particularly the highs, lows, and dominant trends that reveal the collective emotions of others. It can be the first step toward recognizing those emotions, instead of participating in them.Link here.
Bad news does not matter?
On November 13, Bank of America revealed that it would have to write off $3 billion worth of bad debts and warned that its losses could grow. That very day their stock opened with an upward gap and closed 5.2% higher.
Yes, I know: “Shares rose as investors gained confidence that the bank and its rivals could withstand further turmoil,” the losses were “manageable,” etc. (Reuters) And let us not forget the DJIA’s 300-point rally that same day. Rising tide lifts all boats, as they say.
But all those arguments amount to nothing but rationalizations. We could come up with a dozen more “reasons” to explain the move, but anyone with a sense of logic understands that on 11-13 BoA did the opposite of what it should have. That is all there is to it.
Even if we could come up with a good explanation, one question would still remain – the most important question, really: The next time a company whose stock you own reveals something terrible, should you be concerned? When another bank announces its subprime-related losses (I will bet you it won’t be long), what do you do with its stock: buy, sell or hold?
Based on the BoA incident, I would not know, either. Markets behave illogically more often than the talking heads on financial TV will admit. If you have been watching markets long enough, you know it as well as I do. So what do we, investors, do?
Did you notice that the media’s main reason explaining BoA’s surprising rally was that investors suddenly “gained confidence”? Interesting. Usually, you hear that it is the market that controls investor confidence. A rally boosts it, while a sell-off drags the confidence down. But it was “investor confidence” that sent BoA’s shares higher in the face of a devastating report. It is almost as if investor confidence got temporarily disconnected from reality.
If you are familiar with the Elliott Wave Principle, you know what I am getting at. Investor sentiment has a profound influence on the markets. In investing, there are very few blanket answers. As Bob Prechter once put it, investing is not physics. The “if, then” approach does not apply here. More often than not, the emotional aspect of investing completely takes over the rational one – and then we see stocks that should be crashing rally instead, and vice versa.
So what do we do with these irrational markets? We believe that while markets can be irrational, they still have structure. Investors’ collective emotions come together to paint patterns in market charts. We call them Elliott wave patterns. And it is those patterns that make the stock and other markets predictable.Link here.
THE WORLD IS COMING TO AN END!
A day of reckoning so long delayed, so many times interrupted, is at hand.
[Ed: This commentary is courtesy of Alan Abelson, former editor of Barron’s and writer of that publication’s “Up and Down Wall Street” since 1966.]
And if by some chance we are mistaken and it is only giving a great imitation, we would just as soon be enjoying some pleasant distraction, like a visit to our drill-happy dentist, when the real thing comes along.
Pat Robertson’s embrace of Rudy Giuliani to lead the GOP’s charge in next year’s battle for the presidency and Rudy’s enthusiastic response would be enough to make us fear the end is nigh. Since Pat is willing to overlook Rudy’s mundane heresies, he clearly believes it is time to lay aside earthly quibbles, to forgive and forget, because something very big is brewing.
We must confess that we have not checked this out with Pat or even Rudy, let alone a still-higher authority, but, in any case, there are less celestial reasons for our existential concerns, and you need not look beyond the global trading pits to spot them. The stock market is suffering one deep bout of vertigo after another. Crude has serious designs on $100 a barrel. Gold has roared through $800 an ounce as if the metal were going out of style. The dollar is changing with breakneck speed from the world’s reserve currency into the world’s disaster currency.
And those mammoth marvels of imprudence – otherwise known as banks (and brokerage houses playing at being banks) – are in a frantic scramble to see which gets the tin medal for the biggest write-down (that is bankers’ euphemism for “loss”) on loans gone sour. Friday’s resumption of the long, bumpy ride down in the stock market got fresh impetus from the disclosure that Wachovia will take a $1.1 billion whack to its loan portfolio just to cover the damage in October, and rumors of kindred woes at Barclays.
But whether these are the end-days or merely the beginning-of-the-end days, don’t anyone tell Mr. Bernanke; it might disturb him. For he convincingly demonstrated in his testimony last week before Congress that it is possible to be chairman of the most important central bank on the planet and seemingly not have a clue about what is happening to the economy, let alone what, if anything, to do about it. At one point or another, he ventured that the economy would soldier on, if somewhat slowly for the next few quarters, unless, he cautioned at another point, it did not. Inflation was a threat, but not a reality, at least not yet. And the economy was perking along, nicely negotiating the shocks of the housing collapse, even as evidence to the contrary – plunging consumer confidence, weak retail sales, dragging auto demand and all the grisly et ceteras – mounted as he spoke.
Understand, if you will, we do not expect the Fed chairman to be omniscient or clairvoyant. But we do expect him, even if he does not know what is going to happen, at the very least to know what is going on. Nor are we demanding a foolish consistency. Stuff happens, things change. All we ask is that if your opinions are firm, as Mr. Bernanke obviously feels they are, that they be fast as well, at least for as long as it takes to befuddle a bunch of slack-jawed congressmen.
All things considered, a Clueless Ben, we suppose, is preferable to an Easy Al, but incorrigible optimist that we are, we had hoped for something better. It is always possible, to be sure, that Mr. Bernanke knows more than he lets on. Certainly, the way the Fed has been opening the monetary spigot suggests that he may entertain greater anxiety than he is willing to exhibit publicly. Which may be effective in keeping the natives from getting restive, but it does not exactly enhance his credibility.
For sure, this is not the time for bromides. One need not conjure up a doomsday scenario to realize that the economy and the stock market are on very thin ice. The Fed has plenty of company, both in Washington and Wall Street, in not fully grasping what a precarious condition we are in. A generation of living dangerously, often way beyond our means, as individuals and collectively, confusing credit with cash and leverage with assets, has brought us to this most unpretty pass.
The great boom in credit, a heck a lot of it shaky, has finally gone bust, and many of the remarkable creations it engendered, such as monster global bull markets in equities and housing, are suddenly on shifting sands. It is becoming apparent that a day of reckoning so long delayed, so many times interrupted, is at hand.
Obviously, we do not think, even in a figurative sense and except possibly for the financial elite who run hedge funds and private-equity money, the world is coming to an end. But our conviction is strong that we are entering a New Era. And not, regrettably, the kind of New Era that sent investors’ pulses racing and fed their gaudiest dreams of avarice when that phrase was last a byword – and, even more, a buy word – on Wall Street. Ah, those were the days.
Gisele Bundchen is a much-in-demand Brazilian who commands a king’s ransom to do her modeling thing. We admit that Gisele was completely unknown to us until her highly publicized pronouncement that henceforth the king would have to pay his ransom in euros, not dollars, for her services.
This prompted a number of observers, including MacroMavens’ Stephanie Pomboy, to speculate as to whether Gisele’s disdain for the dollar meant that the greenback’s plight was so widely recognized as to signal a bottom. Stephanie, in her usual deft fashion, dismissed this possibility (as did Peter Schiff in a recent commentary, noting “the only notable bottom here belongs to Gisele herself”).
We have never really bought the condescending notion that when Main Street knows it, it is no longer worth knowing. And in the case of the dollar, we doubt if there is a sentient being anywhere who is unaware of its horribly reduced status. And since the decline and fall of the dollar apes the woes besetting the economy at large and the financial system in particular and we see no immediate relief in sight for either. Gisele, we submit, is right on the money.
A recent analysis by Bob Janjuah, the Royal Bank of Scotland’s chief credit strategist, powerfully supports our forebodings for the credit markets and, by extension, the economy, the stock market and the not-so-almighty dollar. Before the dust clears (and the bodies are all carried out), he reckons that credit losses will run between $250 billion and as high as $500 billion. More specifically, Janjuah predicts that U.S. banks and securities firms are looking at perhaps $100 billion of write-downs on so-called Level 3 assets, as the new Financial Accounting Standards Board rule 157, slated to go into effect this week, takes it inevitable toll.
FASB dicta call for Level 1 assets to be marked to market. No big deal, since these are instruments that are traded in a familiar market and consequently are easy to get a quote on. Level 2 assets are not very actively traded, and hence it is not a cinch to get a reliable price. However, they consist of parts for which pricing information is available and which permit a reasonably reliable estimate of the asset’s value. An interest-rate swap has been cited as an example.
That brings us to the tens of billions of Level 3 assets. Typically, these are packages of stuff like mortgages, credit-card receivables, leveraged loans and various and sundry other things – a bit of the lending kitchen sink, in other words. Market pricing is pretty much nonexistent, and such assets are valued at more or less what management says they are worth. In Janjuah’s sardonic phrase, Level 3 assets are “marked to make-believe.”
The new rule mandating far more stringent means of figuring their value, or else. And the or-else could translate into writing them down. Reason enough why no one seems in a particular rush to buy such assets.
According to Janjuah’s calculations, Morgan Stanley has 251% of its equity in Level 3 assets. At Goldman Sachs, the Level 3 commitments run 185% of equity. At Lehman, such assets are the equivalent of 159% of equity. At Bear Stearns, 154%. Citigroup, which owns up to something like an $11 billion hit from subprime and other bum loans, a dismal total that occasioned the exit of its top man, has Level 3 assets equal to 105% of its equity.
Rather ironically, Merrill Lynch, which is upward of $8 billion poorer after taking its bitter medicine to purge itself of overvalued subprime and assorted other loans, and whose CEO also was shown the door, has Level 3 loans equal to 38% of its equity. That makes it the least vulnerable of the major lenders.
We are not suggesting, need we say, that every Level 3 security on a bank’s books is at risk or will have to be written down. But in total, they represent one massive pile of uncertainty, of which the lenders and the credit markets already have more than a surfeit, thank you.Link here.
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