FinancialRx

Blue Light Special

noreply@blogger.com (FRx) — Fri, 17 Nov 2006 16:52:00 +0000

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

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

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

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

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

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

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

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

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

Don't Believe Everything You Read

noreply@blogger.com (FRx) — Mon, 23 Oct 2006 03:47:00 +0000

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

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

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

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

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

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

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

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

Looking a Little Ragged

noreply@blogger.com (FRx) — Mon, 23 Oct 2006 03:10:00 +0000

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

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

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

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

Achilles Heel

noreply@blogger.com (FRx) — Fri, 20 Oct 2006 03:57:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

Revergence to the mean.

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

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

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

Until you do the math.

Tilting At Windmills

noreply@blogger.com (FRx) — Mon, 16 Oct 2006 04:16:00 +0000

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

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

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

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

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

Chart of the Day

noreply@blogger.com (FRx) — Fri, 13 Oct 2006 03:52:00 +0000

Something for everyone from Chart of the Day...

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

Bank of America Offers Free Online Trading

noreply@blogger.com (FRx) — Thu, 12 Oct 2006 15:16:00 +0000

First Citiwide Change Bank

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

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

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

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

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

Narrator: "Correct Change"

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

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

Bank Representative: That's what we do.

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

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

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

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

North Korea May Have Conducted Another Nuclear Test

noreply@blogger.com (FRx) — Tue, 10 Oct 2006 23:59:00 +0000

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

Per Reuters:

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

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

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

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

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

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

Dow 36,000? Nope, Dow One Billion.

noreply@blogger.com (FRx) — Tue, 10 Oct 2006 21:20:00 +0000

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

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

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

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

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

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

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

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

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

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

Bottom line: Dow One Billion by 2010.

Naturally, certain naysayers will raise questions:

Inverted Yield Curve? Don't make me tired.

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

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

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

noreply@blogger.com (FRx) — Sun, 08 Oct 2006 03:37:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

Who Wants to Be a Millionaire?

noreply@blogger.com (FRx) — Sun, 08 Oct 2006 03:00:00 +0000

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

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

Hello Friend.

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

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

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

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

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

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

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

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

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

Bernanke Speech

noreply@blogger.com (FRx) — Thu, 05 Oct 2006 03:12:00 +0000

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

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

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

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

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

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

Death and Taxes

noreply@blogger.com (FRx) — Tue, 03 Oct 2006 05:16:00 +0000

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

Boggles the mind.

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

An Informed Peek Behind the Curtain

noreply@blogger.com (FRx) — Tue, 03 Oct 2006 04:41:00 +0000

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

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

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

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

H-P: Comedy or Tragedy?

noreply@blogger.com (FRx) — Fri, 29 Sep 2006 18:00:00 +0000

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

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

Witness:

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

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

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

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

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

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

Credit Default Swaps Now Total $283 Trillion

noreply@blogger.com (FRx) — Fri, 29 Sep 2006 01:25:00 +0000

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

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

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

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

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

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

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

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

A Watched Pot Never Boils

noreply@blogger.com (FRx) — Thu, 28 Sep 2006 16:42:00 +0000

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

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

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

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

Dumb and Dumber

noreply@blogger.com (FRx) — Thu, 28 Sep 2006 04:09:00 +0000

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

Dumb and Dumber, from the movie.

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

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

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

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

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

I'm having ALL TIME HIGHS for Lunch!

noreply@blogger.com (FRx) — Wed, 27 Sep 2006 13:14:00 +0000

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

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

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

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

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

Conundrum... on Steroids?

noreply@blogger.com (FRx) — Tue, 26 Sep 2006 10:26:00 +0000

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

Bill Gross weighs in with a breezy AMEN!

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

Pual Volker is not so sure.

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

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

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

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

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

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

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

A New Bullish Thesis

noreply@blogger.com (FRx) — Sat, 23 Sep 2006 03:08:00 +0000

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

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

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

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

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

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

Synopsis:

The Developing World Reaches Maturity
by Jim Griffin, Economic Advisor

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

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

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

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

H-P's CEO Mark Hurd Live Webcast

noreply@blogger.com (FRx) — Fri, 22 Sep 2006 20:25:00 +0000

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

CEO Mark Hurd:

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

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

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

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

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

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

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

noreply@blogger.com (FRx) — Fri, 22 Sep 2006 13:24:00 +0000

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

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

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

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

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

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

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

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

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

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

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

A Butterfly Flapping it's Wings in Thailand?

noreply@blogger.com (FRx) — Wed, 20 Sep 2006 15:17:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

Three Charts

noreply@blogger.com (FRx) — Tue, 19 Sep 2006 01:21:00 +0000

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

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

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