Fund My Mutual Fund

A Look Ahead at Earnings Early Next Week; and a Blue Lobster Sighting

2009-07-10T13:30:00.003-04:00

So far it's relatively quiet out there on the indexes as bulls and bears battle over S&P 875 (line in the sand) and 880 (200 day simple moving average, falling by the day). With volume so light it should be easy to 'mark this market' up into the close after that "close call" earlier in the day and keep us from breaking down. No volume followed the close call, hence I don't see any more damage being done. Never short a dull market as they say. I continue in the hands off treatment that has served well the past few weeks - there are times to be aggressive and times to just let the market do its thing; until the market makes a decisive move no reason to be aggressive.

************

Let's take a quick look ahead at earnings at some companies of note coming early next week - remember, the game plan is the same as last quarter when we saw many "awful, but better than expected results". Chop as many Americans as possible from the payroll, cut back benefits, cut back all sorts of expenses and try to sell as much to China. Have a poor revenue number (which can't be lied about unless you are Enron), and lowball analysts with earnings guidance(which is easily "played with" in American accounting) then "beat it" mostly with the above mentioned expense cuts ... and we all sing green shoots. At the beginning of the earnings season come many of our multinationals so the weaker dollar in the past quarter should also help them spike the earnings bowl.

With all the favors done to the banks and since we now don't care about balance sheets (old loans) since we've politicized FASB (the accounting board), we only care about current profits. Which again, Sally the 4 year old can now make at any bank as they borrow from the Fed at nearly zero and lend to American consumers at numbers far higher than zero. Plus the bevy of fees now being added to those who bailed them out. We're all winners here.

p.s. Goldman Sachs just upgraded a slew of technology names today; which basically means the rally in technology is just about over as they get their clients out into the "upgrade" - or at least thats the cynic's view ;)

Monday

CSX (CSX) - we always like looking at the railroads as economic indicators; companies like this are far better than faulty government reports.

Posco (PKX) - South Korean steel; the hope is for some uptick in the steel market in the "reflation / weak dollar" thesis area. Posco is the first major global steel maker to report.

Tuesday

Goldman Sachs (GS) - what more can be said, Goldman has basically cleared the path to prosperity for another generation or two. All major competitors have been destroyed or weakened measurably... transplants live throughout national government... the world is their oyster. All they need to worry about is insiders apparently taking some of their HAL9000 code and trying to get rich off it.

This could be an epic quarter for Goldman - record breaking issuance of stocks - especially financials, in Q2; massive issuance of bonds as credit markets re-opened; massive dominance of weekly program trading. They are everywhere and as less competitors remains their spreads (fancy word for profit margins) widened. I expect a monster beat; it is just a matter of "if it's in the stock".

HDFC Bank (HDB) - I like the chart as a short here; we own a tiny long position ... but with earnings coming out I don't like being involved heavily in anything so I'll wait. Major gap to fill in low $80s, and this stock is PRICEY.

Intel (INTC) - I've long since caring about Intel but it still moves the markets and "semiconductors" are the playbook for 'early recovery' so it will impact.

Johnson & Johnson (JNJ) - not my cup of tea but one of those stocks you can actually buy and then come back in 10 years and not worry it's out of business.

Yum Brands (YUM) - it's all about China. My only hope is our culture invades China to the point they become more like us, then we can get back our prominence. Go KFC! (Trojan Horse)

*****

And for something totally unrelated may I present to you a blue lobster

Visit msnbc.com for Breaking News, World News, and News about the Economy

Potash (POT) Steamrolled

2009-07-10T11:35:00.005-04:00

Ouch - while the stock bounced yesterday and was as high as $95 this morning a nasty reversal has occured and as I type it, Potash (POT) is below $86. Wow. I covered in the $92s hoping to reshort around $97 after the "dead cat bounce" (which happened) - but just missed re-entry. This is some strange action - almost feels like a hedge fund liquidating again.

As for the market, S&P 875 is here again and being tested, we are slightly below it - but I'd like to see us a bit lower to get aggressively short. Las Vegas Sands (LVS) short is working out well thus far, already in $6.90s from $7.50 initiation.

Right now this market feels very dangerous to me, things could turn very badly here soon if bulls don't wake up and / or that Goldman Sachs quantitative program is not restored quickly. ;)

Short Las Vegas Sands in fund; no personal position

Trade Deficit Improves but for All the Wrong Reasons

2009-07-10T11:25:00.000-04:00

I have not delved into the intricacies of this trade report since its not one of the more important things I follow - for so long it's just been a huge number that we shrug off as status quo. We buy much more from people outside the country than they buy from us - that's the new and innovative economy we've build. Hence I don't know all the 'seasonal adjustments' or what not that may or may not be done with it, but I would assume there is not much to fudge in this report. Some sum of goods is valued as going out of the US, and some sum of goods is valued as coming in. The difference between the two is either your deficit or your surplus. We've run huge trade deficits for as long as the eye can see - essentially absorbing far more than we export out. This has been part of our structural problems in the country.

First the green shoots - this deficit has shrunk dramatically the past year. Now for the brown manure - it's for all the wrong reasons. We'd want exports surging (meaning people want stuff we make) to be the primary driver of this shrinking trade deficit. Instead, a massive falloff in imports is the reason... which speaks to the absolute weakness in both the business and consumer economies. An eye opening drop in demand for things outside the country as businesses "make less" and consumers "shop less". Imports are down 35% versus 1 year ago... that is just incomprehensible for an economy of this size.

Now remember, almost every country in the world depends on the US consumer to "shop like there is no tomorrow" for part (or in some cases, much) of their growth. So this has implications not just for us, but the entire world. The whole thesis of export led growth by China, Germany, and a host of other countries seems implausible until you get to work people. By work, I mean get to the mall and "do your thing".

The U.S. trade deficit fell to the lowest level in more than nine years in May as exports posted a small gain while the weak American economy pushed imports down for a 10th straight month. The Commerce Department said Friday the deficit narrowed to $26 billion, a drop of 9.8 percent from April and the lowest level since November 1999. Economists expected the deficit to widen to $30.2 billion in May.
So far this year, the deficit is running at an annual rate of $350 billion, about half of the $695.9 billion deficit for all of 2008. Economists believe that trend will continue as weakness in the U.S. depresses demand for imported goods.
The big improvement reflects the prolonged U.S. recession, which has sharply reduced American demand for imported goods. U.S. exports also are down from last year's peaks, hurting American manufacturers, but those declines have been smaller than the plunge in imports.
America's deficit with Canada, its largest trading partner, dropped to $628 million, the smallest monthly imbalance in 15 years. The deficit with Japan shrank to $1.9 billion, the lowest deficit with that country in more than two decades.

Now again, we have to thank our lucky starts that (a) we have so much fertile agricultural land and (b) we have not found a way to export said farmland to other countries where wages are far lower - because if they could, they would. Thus far they have not thought of a way, so we still benefit from the farm products - one of the last great exports we can count on. That said, our exports are still down 25% from a year ago, so only partially balancing the 35% drop in imports. All in all, global trade has really shriveled.

Exports of goods and services rose 1.6 percent to $123.3 billion in May, reflecting increased sales of soybeans, corn and other farm products, along with higher exports of industrial machinery, generators and computers. But even with the May increase, U.S. exports are 25 percent below the record-high set in July 2008.
Imports edged down 0.6 percent to $123.3 billion, the 10th consecutive monthly decline. Imports are 34.9 percent below the all-time high set last July.

WSJ: Detroit's Food Banks Strain to Serve Middle Class

2009-07-10T10:28:00.003-04:00

The one state depression carries on. To put this article in perspective if you have to rate cities from 1 to 10, with 1 being destitute worthy of the best 3rd world country [see the video in this piece May 15: One City Block in Detroit] and 10 being blue blood old money, the cities of Rochester Hills and Plymouth would be 8s. The former is where many Chrysler executives, top level engineers, and the like would (or do) live - the latter is where many top tier C level executives live, along with some of our pro hockey players. That's how far up the chain we're seeing the pain. But not to worry, as I tell everyone.... as globalization creeps across the Earth the middle class of China and India will flourish and jobs will surge in America as we serve the Asian middle class. Just give it 30 more years. What? You can't wait 2 generations? Until then, our government is working on hatching the 4th bubble in the past 12 years to create "prosperity" for us.

Again, let me repeat - the LONG TERM unemployment claims will eventually level off or heck "improve". We saw a record yesterday at nearly 6.9 million Americans. When this does improve the cheerleaders will be on CNBC in tow - of course some of the long term unemployed will have finally found jobs but a great many will simply fall off the map as they extinguished all their extensions (some going on 1.5 years). We're already starting to see the incipient stages of this as our welfare rolls begin to experience green shoots. [Jun 22, 2009: WSJ - Numbers on Welfare See Sharp Increase]

Battered by massive layoffs, home foreclosures and nearly a decade of economic decline, more residents of Detroit's middle-class suburbs are having a tough time putting food on the table.
State agencies and nonprofit groups that serve the poor in southeast Michigan say they are seeing an unprecedented rise in demand for food assistance across the region. They point to a pronounced increase in those seeking aid for the first time, often families unaccustomed to depending on food-aid programs. And they expect the numbers to grow as Michigan's jobs picture worsens.
"We are even hearing from many people that, a year or two ago, used to be financial donors to the pantry."
... the spread of financial hardship has been jarring for a region where the manufacturing-based economy once provided for high wages and comfortable middle-class lifestyles.

Just remember, this can't happen to you. It only happens to lazy, overpaid union workers (dogma). Or those who don't work hard enough and are trying to live off the system. If they worked harder all their problems would be solved. . (source - FOX News)

Jeff Holler said he broke down in tears when he and his wife, Velina, stepped into the Lighthouse food pantry near their home in affluent Oakland County in late May. Mr. Holler, an environmental engineer with a master's degree, had lost his $75,000-a-year job at a technology company a month earlier.

Not to worry - service jobs aplenty at $11-$13 / hour. Well not in Michigan but I am sure somewhere.

"It was hard to take," recalls Mr. Holler, 52 years old, who says he spotted a longtime friend at the same center and tried to avoid being seen. "I've never had to do anything like this in my life."
The problem is likely to get markedly worse in the coming months. Michigan, where the 14.1% unemployment rate is the highest in the nation, faces still more layoffs in its principal industries: auto manufacturing, which is in the midst of a sweeping restructuring, and the health-care business, which is reeling from the auto makers' benefit cuts.

To my point earlier about the "green shoots" you will hear by Dennis Kneale and friends once those long term unemployment rolls finally begin to flatten out or decrease...

Moreover, state officials warn of a surge in the number of long-term unemployed workers who will exhaust the extended jobless benefits that until now helped them afford necessities like food.
By the end of the year, roughly 100,000 residents will have lost their benefits, according to the state's unemployment insurance agency.

Those 100,000 no longer will be part of unemployed government statistics and hence "green shoots!" Now extrapolate to your state, and see how the national numbers will "improve" throughout 2010 when those who lost jobs in 2007 and early 2008 begin to lose their safety net. Mmm, Kool Aid. It's going to be a kick to watch the stock market roar on these 'improved' numbers.

In May, the caseload for Michigan's Food Assistance Program, which administers the USDA's food-stamp aid for the state, rose to 718,277 households, up 3.1% from April and nearly triple what it was at the start of the decade. (I believe we call this long term prosperity... trickle down economics working at its best as the highest concentration of wealth since the 1920s does its magic)
Meanwhile, local food banks are straining to serve the expanding need. These privately run distribution sites, which depend on private and government food donations and serve families who might not qualify for government aid, are typically the first line of defense for families at risk of skipping meals or going without entirely.
"Some of the areas where we're seeing some of the strongest need is where we don't have a network of agencies," says Gleaners's Mr. Wells. Until recently, he says, there was little demand for food aid in those neighborhoods.
In Plymouth, a western suburb of Detroit that is home to a large community of auto industry employees, Trinity Presbyterian Church began distributing food to needy families late last year, says Mr. Wells, whose group supplied the food. The church had expected to serve about 200 families a month, but has seen more than three times that number show up in recent months. "What a crisis like this points out is that this can happen to anyone," says Mr. Wells.

Now these next cities are actually squarely "middle class" (4s, and 5s on the scale I listed above) unlike Rochester Hills or Plymouth

In Dearborn Heights, a suburban neighborhood near Ford Motor Co.'s headquarters, one mother of two says she made her first visit to a food pantry last month, after her husband lost his job as a mechanic making between $50,000 and $60,000 a year, causing the family's finances to unravel.
"I remember sitting there in the parking lot going, 'I can't believe this,'" says the woman, who asked not to be identified. She said she didn't initially tell her husband that she had gone to a food bank for help, and that the rest of her family still doesn't know. They are scraping by on income from her part-time job, which pays less than $12,000 a year, and her husband's $360 a month in unemployment benefits.
Fish & Loaves, a food pantry in the working-class suburb of Taylor, drew in Amy Marsh, a stay-at-home mother of three young children whose husband lost his retail job in mid-May. He had earned $2,200 a month at a local Best Buy. "It's like absolute failure," Ms. Marsh said of the experience. "I don't anticipate getting comfortable doing this at any point. It's just not in my blood."

The green energy bubble can't get here soon enough.

As always as you read my "yellow weeds" keep in mind I am extremely biased based on locale. [Jun 25, 2008: I have Michigan Economic Bias] I am sure things are much more pleasant everywhere else and I am simply blind to green shoots sprouting throughout the land.

Keep CIT Group (CIT) On Radar

2009-07-10T10:11:00.004-04:00

This morning CIT Group (CIT) is crumbling as the FDIC refuses to backstop their loans due to deteriorating quality. If the US wanted to pretend it still believes in free market capitalism they should let this "not too big to fail" financial fall into the ether. Then we can at least pretend we are not propping up zombie financial institutions all over the map. (anyone claiming free market capitalism exists in the US is now banished to FOX News channel permanently in a state of delusion) People seem to forget almost all the major banks now have the implicit backstop of the US government (much like Fannie Mae, and Freddie Mac had for decades) behind them now so when they beat their chest (as Citigroup did) when it can raise money without federal backstop, it's all really a farce.

If you wanted to see the free market truly in play you would have to have the US say, we will not firewall the largest US financial institutions... and we'd be right back to talking nationalization across the board in almost every major US financial company in America. Which is why it is so funny when we hear about the health of the banking industry or "how it's healed itself". So a tip of the hat to our US readers, whose taxes are the only reason we are not repeating the 1930s. Other than that ... green shoots.

CIT Group Inc (NYSE:CIT - News), a commercial U.S. lender struggling to finance its business, is pressing U.S. regulators to allow it to issue government-backed bonds to allay concerns over its financial health, the Financial Times reported on its website late on Wednesday.
CIT converted to a bank holding company in the fourth quarter of 2008 to qualify for U.S. government funds, but it has been unable to issue government-backed debt as the Federal Deposit Insurance Corp (FDIC) has yet to approve its application.
The FT cited people close to the situation as saying CIT, which has about $75 billion in assets, had already drastically cut lending, but warned that without the FDIC's assistance the company might be forced to ask the Treasury and the Federal Reserve for help.
A former government official familiar with the situation told the paper CIT and the regulators were meeting almost every week but it was not clear why the FDIC had not yet approved the application.
Fitch Ratings cut the lender's debt rating further into junk territory on Wednesday. Reuters had reported late Thursday that CIT may seek a debt exchange or asset sale if access to the government-supported lending program wasn't successful.

CIT Group Inc. operates as the holding company for CIT bank that provides commercial financing and leasing products, and management advisory services to the small and middle market companies worldwide. Its products principally include asset based loans; secured lines of credit; operating, capital, and leveraged leases; vendor finance programs; import and export financing; debtor-in-possession/turnaround financing; acquisition and expansion financing; letters of credit/trade acceptances structuring; and small business loans.

No positions

Bookkeeping: Short Las Vegas Sands (LVS)

2009-07-09T15:45:00.007-04:00

There are so many stocks that are just below where I want to short them; we have about 8 stop limit orders and all were within spitting range at the peak today but none hit - so I am going to make a reach here with Las Vegas Sands (LVS)

I've had a limit short order for peer Wynn Resorts (WYNN) sitting here just over $34 but it's not biting; intraday high of $33.40.

Instead I'll try LVS - I'd prefer to short $7.70 but that just missed too, intraday high $7.67; I'm shorting just under $7.50 with close to a 3% stake. I will stop out at $8.02.

There is much joy and happiness because of "2nd derivative improvement" in the gaming sector. Just as with retailers people are focusing on revenue and same store sales and not realizing the discounts going on; hotel rooms in Las Vegas are basically being handed out. Eventually we have to price companies on "profits" again, don't we? Not just on staying alive?

Shares of casino stocks rose on Thursday after the Nevada Gaming Control Board released gaming revenues for May that showed a moderating decline. In a report posted to its Website, the state entity said Nevada gaming revenues were down 8.34 percent in May and off 13.71 percent for the year to date. Revenue on the Las Vegas Strip was down 6.36 percent for the month and down 15.31 percent for the year to date.
The May result compared with a statewide gaming revenue decline of 14.07 percent that was reported for April 2009.
Jeffrey Logsdon of BMO Capital Markets said in a client note that the statewide results were "clearly a less worse scenario" than the 13.7 percent decline seen in the year-to-date period.
"Our channel checks continue to confirm that Memorial Day weekend was full, albeit at promotional room pricing," Logsdon said.

This type of stuff below from analysts is almost funny.... if not for the fact they get paid to put out these missives.

Logsdon also noted that the Strip's dropoff was "a sentimental victory at least" when compared with the 15.3 percent year-to-date decline.

Sorry, let me dab my eye as my heart sighs in emotion at the uplifting story of a casino and it's puppy. What's the PE ratio for a Golden Retriever? Sorry, it is hard to google such information in between the tears streaming down my cheek. Cmon are we serious Mr. Logsdon? Sentimental victories? Talk about stretching for green shoots.

Again, things are terrible year over year but not as terrible as last month. Despite massive discounts. Buy stocks.

"I think there are some expectations out there that this is potentially the beginning of a recovery for the industry," he added.

I have only tiny individual short exposure right now, so I'll replace the Potash short with LVS for now as I hope for another up day tomorrow to get some of these other shorts to lock in. In case the market sinks I at least have something going on the short side.

Further, a slew of commercial REITs have fallen over (many we were obliterated shorting in April) and as we noted a week or so ago, insurance companies look awful. It's starting to feel all February 2009 again - except for the banks which the government says won't be allowed to fail (cue music from "We're Not Japan" here). Can't be long before the Fed rides to the rescue with Program # 218,105. One day they will figure out that despite all the national treasure they wasted prices will go where they will go. Nah, they'll never figure it out.

Short Las Vegas Sands in fund; no personal position

All 3 Positions Stopped Out of Yesterday Reversed Over Key Technical Level

2009-07-09T15:00:00.002-04:00

I wrote yesterday in [Bookkeeping: Stopped Out of some Quality Systems (QSII) and Priceline.com (PCLN)]

I have a feel all these positions might reverse themselves back up if the market cooperates.

And so it has come today; all 3 had breached the 50 day moving average and now all quickly jumped back over. Note, QSII did not close below the 50 day - only on an intraday basis.

That said, I am not very anxious to jump into this market right now on the long side - while this "oversold bounce" was relatively easy to see coming, I am not sure if there is enough juice to get us back to anything higher than S&P 910. Frankly I thought the bounce would be stronger than this, which thus far is pretty limp. I suppose a case could be made for moving a whole lot of forces over to the long side for the potential of 25 S&P points (if and when) but effectively anything over S&P 900 I'd want to begin shorting as I think the intermediate term move is down. All we are seeing is a lot of oversold bounces thus far.

I still have some short limit orders out but none are hitting - we need 1 more bounce day it appears to get my "greedy" orders in (these shorts would be just below a key moving average so if I am wrong I can stop out very quickly) Otherwise I'll lock them in on the next drop below S&P 875.

Either way, I have to tell you this market has been acting far more rational since that Russian guy got caught with Goldman Sachs (GS) stolen code ... maybe complete happenstance but the past 2 weeks is more like the market I can recall the previous 10 years. Not because the market is down but you don't see these 5 point S&P moves in 45 seconds anymore. Or those massive premarket future surges.

I am sure it is not connected at all ;)

Long all names except Goldman Sachs in fund; no personal positions

Allegiant Travel (ALGT) Continues to Post Solid Numbers: June

2009-07-09T14:00:00.002-04:00

Allegiant Travel (ALGT), being an airline - unfortunately is painted with the same brush as the rest of the industry. Oil up = sell airlines. Consumer weak = sell airlines. All they do is continue to execute. When I compare the data they are pushing out versus the legacy airlines it seems like 2 completely different sectors. While it is hard to own a name that trades outside of its fundamentals, I suppose that is becoming the case more and more in the market. Allegiant posted its June / Q2 traffic figures earlier this week and it continues to stand head and shoulders above its peers. Heck, with oil down dramatically the stock might even be given a chance to go up based on its own metrics.

Allegiant Air said Tuesday its June traffic leaped 25.6 percent, a stark contrast to its bigger competitors, helped by its focus on leisure travelers in smaller cities. Excluding the company's charter service, Allegiant said traffic jumped 34.1 percent.
Allegiant, a unit of Allegiant Travel Co., said paying passengers flew 468.8 million miles in June, compared with 373.2 million a year earlier.
Its capacity jumped 29 percent to 527.3 million available seat miles.
The percentage of seats filled, or load factor, fell by 2.4 percentage points to 88.9 percent.

The last factor is the one slight negative but again compared to what you see coming out of a Continental or Delta... it's a bit of a farce this stock is put in the same category.

Excluding the charter service here are the metrics, year over year for June (Q2 can be found in the link I posed above, very similar data to June)

Passengers: +32.2%
Revenue passenger miles: +34.1%
Available seat miles: +37.8%
Load factor: -2.5%
Average stage length: +1.7%

So despite adding a lot of capacity these are not longer flights and hence not more fuel per flight. Just more routes of similar length and they are generally, despite a horrific economy for consumers, filling very well.

Anyhow, none of that matters - back to squiggly line analysis.

[May 5, 2009: Allegiant Travel Surging April Traffic and 2.3M Share Offering]
[Apr 20, 2009: Allegiant Travel Continues to Impress]
[Feb 19, 2009: Allegiant Travel in Wall Street Journal]
[Feb 4, 2009: Allegiant Travel Position Started]
[Jan 27, 2009: Allegiant Travel Continues to Execute; Buyback Announced]
[Jan 7, 2009: Allegiant Travel December Traffic]
[Jan 5, 2009: Beginning Allegiant Travel] (old portfolio)

Long Allegiant Travel in fund; no personal position

Nouriel Roubini: Brown Manure, Not Green Shoots

2009-07-09T13:24:00.010-04:00

It's been a long while since we last looked at Nouriel Roubini's thoughts. Wall Street is quite quick to dismiss those with "negative" (realistic) points of view as long as the "all knowing, Oracle like in nature" stock market is going up. As long as the market is up, everything must be fine, or will soon be. We experienced that in latter 2007 and multiple times in 2008. We just went through another episode and there will be more in the future. Ironically, many of those who cling to the cult of the "all knowing market" have been incredibly wrong on almost everything the past 2 years, while the few who got it right - they just cannot wait to impugn on any bear market rallies. [Apr 10, 2009: Nouriel Roubini Calls Jim Cramer a "Buffoon"] Just keep in mind for 95% of Wall Street the job is to "sell, sell, sell" and you need to spin positive to attract new money to the glorious home of riches and glory.

Meanwhile reality in the non Wall Street economy churns on oblivious to the green shootery of "better than expected"...

....let's check in on the latest missive from Nouriel via Forbes; due to quality of content let me bring the whole thing over - it really summarizes a multitude of our own posts into 1 (keep in mind with all his numbers - especially of the employment kid, he is using some faulty government statistics - but he shares the same critical view of the ugly "inside" the data) [Jul 3, 2009: US Workers Pay Continues to Suffer - First 0.0% Monthly Wage "Growth" I Can Remember] Obviously he concurs in our "jobless recovery" stance... and whispers of double dip as we do.

[As an aside, the "all knowing market" is bouncing as expected from a relatively heavy drop, led by oversold commodities - expect the "see, we told you" crowd to be out imminently with pom poms in hand]

p.s. I was going with yellow weeds myself, but if we have to go all manure - fine

The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10% by later this summer--around August or September--and will be closer to 10.5%, if not 11%, by year-end. I expect the unemployment rate is going to peak at around 11% at some point in 2010, well above historical standards for even severe recessions.

It's clear that even if the recession were to be over anytime soon--and it's not going to be over before the end of the year--job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over.

The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we're looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours and average hourly wages--and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone.

The details also suggest that other aspects of the labor markets are worsening. If you include discouraged workers and partially employed workers, the unemployment rate is already above 16%. If you consider also that temporary jobs are falling now quite sharply, labor market conditions are becoming worse and the average duration of unemployment now is at an all-time high. So people not only are losing jobs, but they're finding it harder to find new jobs. So every element of the labor market is worsening.

The unemployment rate rose only marginally from 9.4% to 9.5%, but that's because so many people are discouraged that they exited the labor force voluntarily and therefore are not counted in the official unemployment rate.

The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model--that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that's distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it's more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.

These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We've also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms.

This suggests that most of the tax rebates are being saved rather than consumed. The same thing happened last year: With a $100 billion tax rebate, only thirty cents on the dollar were spent while seventy cents were saved. Last year, people expected the tax rebate to stimulate consumption through September. Instead, there was an increase in April, May and June, with the increase fizzling out by July.

This year it's even worse. We have another $100 billion in tax rebates in the pipeline. But the numbers suggest that in April, real consumption fell. And in May it was practically flat. So this year households are even more worried than they were last year about jobs, income, credit cards and mortgages. Most likely only around 20 cents on the dollar--rather than 30 cents last year--of that increase in income is going to be spent. In any case, that increase in income is just temporary and is going to fizzle out by the summer. So you can expect a significant further reduction in consumption in the fall after the effects of the tax rebates fade.

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11% next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11% in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans and commercial loans--much bigger numbers than what the stress tests projected.

In the stress tests, the average unemployment rate next year was assumed to be 10.3% in the most adverse scenario. We'll be already at 10.3% by the fall or the winter of this year, and certainly well above that and close to 11% at some point next year.

So these very weak conditions in the labor market suggest problems for the U.S. consumer, but also increasing problems for the banking system as these sharp increases in job losses lead to further delinquencies on loans and securities and lower than expected recovery rates.

The latest figures on mortgage delinquencies and foreclosures suggest a spike not only in subprime and near-prime delinquencies, but now also on prime mortgages. So the problems of the economy are significantly affecting the banking system. Even if for a couple of other quarters banks are going to use the new Financial Accounting Standards Board (FASB) rules and under-provisioning for loan losses to report better-than-expected results, by Q4, with unemployment rates above 10%, that short-term accounting fudge will have a significant impact on reported earnings. And this will show the underlying weakness in the economy. So banks may fudge it for a couple of other quarters, but eventually the effects of very sharp unemployment rates and still sharply falling home prices are going to drag down earnings and have a sharp effect on losses and capital needs of the banks and the entire financial system.

Essentially, the results today suggested that there are not as many green shoots. These green shoots, as I've argued, are mostly yellow weeds that may even turn into brown manure if a double-dip, W-shaped recession occurs in 2010-11. And it's not just the employment situation. Real consumption and retail sales remain weak. Industrial production remains weak. The housing market, in terms of price adjustment, remains weak, even if the quantities--demand and supply--may be closer to bottoming out. Indeed, the inventory of unsold new homes is so large that you could stop producing new homes for almost a year to get rid of that inventory. Moreover, about 50% of existing home sales are distressed sales (short sales and foreclosed homes).

The labor market conditions may have a significant effect on how long it takes for the housing market to bottom out. It's already estimated that by the end of this year, there will be about 8.4 million people with a mortgage who have lost jobs, and therefore have little income. Therefore, the number of people who will have difficulties servicing their mortgages is going to rise very sharply.

Home prices have already fallen from their peak by about 30%. Based on my analysis, they are going to fall by at least 40% from their peak, and more likely 45%, before they bottom out. They are still falling at an annualized rate of over 18%. That fall of at least 40%-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage--about 25 million of the 51 million that have mortgages--are going to be underwater with negative equity and will have a significant incentive to walk away from their homes.

The job market report is essentially the tip of the iceberg. It's a significant signal of the weaknesses in the economy. It affects consumer confidence. It affects labor income. It affects consumption. It affects the willingness of firms to start increasing production. It has significant consequences of the housing market. And it has significant consequences, of course, on the banking system.

Overall, it's an extremely weak report and suggests that weakness in the labor markets is going to continue, and that the recession is more likely to continue through the end of the year and the beginning of next year. It also suggests that recovery will be anemic, subpar, below trend. We are still estimating that U.S. growth next year is going to be 1% above the 2009 level, well below a potential growth rate of 3%. This is because there is little deleveraging of households, corporate firms and financial institutions while there is a massive re-leveraging of the public sector with sharply rising deficits and debts as many of the private losses have been socialized.

There are also signs that there may be forces leading to a double-dip recession sometime toward the second half of next year or toward 2011. If oil prices rise too much, too fast, too soon, that's going to have a negative effect on trade and real disposable income in oil-importing countries (U.S., Europe, Japan, China, etc.).

Also, concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation--after three years of deflationary pressures--that's going to push interest rates even higher.

For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead--toward the end of next year and in 2011--to an increase in expected inflation that may lead to a further increase in 10-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up by this wall of liquidity rather than fundamentals alone, this could be the double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.

So the outlook for the U.S. and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse-than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.

[Mar 26, 2009: Bloomberg - Roubini Says Stocks Will Drop as Banks Go Belly Up]
[Mar 3, 2009: Nouriel Roubini Lollapalooza]
[Feb 6, 2009: What Would Roubini Do?]
[Jan 28, 2009: Roubini & Soros on Bad Bank]
[Dec 25, 2008: Nouriel Roubini Wishes You a Merry Christmas]
[Sep 30, 2008: Roubini on the Bailout - Thumbs Down]
[Sep 15, 2008: Nouriel Roubini with a Series of Videos on Yahoo Tech Ticker]
[Aug 20, 2008: Nouriel Roubini: "Told you So"]
[Mar 13, 2008: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses]

WSJ: Latest Picks and Pans from George Soros and John Paulson

2009-07-09T11:15:00.000-04:00

Two names we like to keep our eyes on are George Soros and John Paulson (both of hedge fund world). Ironically the last piece I did on either, was a combined piece as well. [May 16, 2009: John Paulson Continues to Pile into Gold; George Soros Sells some Petrobras and Potash] If you are not familiar with their histories we've outlined them in posts linked at the bottom of this entry. The Wall Street Journal has a piece on some of their latest thoughts and positions, and there is also a 2 part video on this link specifically for any Soros fans.

There are 2 other fellows (I am not familiar with) who did well during this epic period in history so I put some of their comments at the very bottom.

As the historic market collapse felled many investors, a handful set themselves apart by scoring big profits. Now, several of these money managers expect more bad times ahead, including struggles for consumers, limp earnings and a possible surge of inflation. They also see pockets of opportunity.

SOROS

George Soros is bullish on China, India and Brazil.
"Maybe we're making the same mistake again by thinking that China and India will decouple from the developed world," Mr. Soros says. But "China is the major beneficiary of the collapse of the financial system. For them it was an external shock," he says. "Because China is in a position to stimulate its economy, it will be a motor for the global economy," partially replacing the U.S. consumer.
As for Brazil, Mr. Soros likes state-owned Brazilian oil giant Petroleo Brasileiro SA, for example. But the firm trimmed some of its position earlier this year in the company, known as Petrobras, which has seen a run-up in the share price.
The renowned 78-year-old investor and philanthropist calls the current terrain a "trading market," saying in a recent interview that investors should take profits when shares surge, even if they look promising long term.
"I'm not bearish but I don't see how we can have the kind of growth in profits that we had during the superbubble," says Mr. Soros, who these days leaves most day-to-day trading decisions at his $24 billion fund to Keith Anderson, a former BlackRock portfolio manager.
The fund scored gains of 32% for 2007, 8% in 2008 and 17% so far in 2009. "He's the player, I'm the coach," Mr. Soros says. (translation: I'm the player and the coach) ;)

PAULSON

John Paulson is investing in distressed debt, residential mortgages, even companies in bankruptcy proceedings.
Mr. Paulson, who scored collective profits of more than $17 billion in 2007 and 2008 by betting against subprime mortgages and financial shares, sat a huge pile of cash at the outset of 2009 -- some $19 billion of his hedge funds' $30 billion, his investors say. (again, displaying cash is an asset class, not trash as is popular in the mutual fund world)
But as Mr. Paulson and his team spent weeks combing through the rubble of the credit markets, they concluded that beaten-down prices assumed a rash of defaults that were unlikely to materialize. "We completely shifted our focus on the credit markets from one which had a short bias starting in 2006 to one that is aggressively long," Mr. Paulson said in a recent interview.
The posture has its risks, especially if credit woes spread among better borrowers. But over the past four months, Mr. Paulson bought top-rated residential mortgage-backed bonds, commercial mortgage-backed securities, distressed debt and leveraged loans. Mr. Paulson even purchased shares of some big banks and financial companies, the kinds of companies he wagered against in 2008.
As the market rebounded, Mr. Paulson's funds scored gains of between 4% and 15% for the year, through the end of May, investors say.

Here is an interesting one...

Now, Mr. Paulson is buying shares of financial companies like Capital One Financial Corp. and J.P. Morgan Chase & Co., as well as commercial real estate broker CB Richard Ellis Group Inc. and oil producer Petro-Canada, according to public filings

I'm still not a fan of Capital One (COF) at these levels, although we now own a small stake in somewhat competitor Discover Financial (DFS). Discover and American Express (AXP) at least have "transaction network fees" to fall back on, as opposed to pure plays on "transactions" (all 3 of course have credit risk). JPMorgan (JPM) is now "America's bank" so no surprise there. CB Richard Ellis Group (CBG) is the one that really caught my eye... this is basically the "Century 21" of commercial real estate. This name was absolutely obliterated but it is one way to be bullish on commercial real estate without having the exposure to the actual firms (and their increasing vacancy rates, with dropping rental rates) I sniffed around that name a month ago but did not pull the trigger. I'll need to revisit this one and do more homework.

"While we don't believe bank stocks in general are undervalued, we do believe many represent compelling investment opportunities over the cycle," he says.
His team is buying selectively, as they fear lower growth ahead as consumers struggle. And Mr. Paulson is concerned that all the money that the U.S. and other governments are shoveling at various problems eventually will lead to a surge in inflation. (we can tell that by his massive forays into gold) The stance is controversial—others say it will be years before inflation becomes a problem. But Mr. Paulson is buying protection now; more than 10% of his holdings are in gold, his investors say.

Earlier Paulson pieces

[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]
[Nov 18, 2008: Paulson Buying Mortgage Backed Securities]

Earlier Soros pieces

[Apr 7, 2009: George Soros on Yahoo Tech Ticker]
[Mar 31, 2009: UK Times: George Soros Sees Global Meltdown]
[Feb 23, 2009: George Soros - This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union]
[Feb 18, 2009: George Soros Increases Stakes in Potash & Petrobas]
[Jan 28, 2009: Roubini & Soros on Bad Bank]
[Apr 9, 2008: Soros Believes Global Subprime Costs to Reach $1 Trillion]
[Jan 22, 2008: Soros Says World Faces Worst Financial Crisis Since World War II]

***************************

FOURNIER & MELCHER

Alan Fournier, a lesser-known investor with a strong track record, likes some health-care shares, while James Melcher, also successful lately, likes corporate bonds.
We're trying to make hay while the sun's still shining," says Mr. Fournier, who runs $2.8 billion Pennant Capital. "Maybe we can rally through the summer, perhaps for another year, but there are a lot of difficult issues that we're going to have to deal with."
Like Mr. Paulson, Mr. Fournier was among the first investors to turn gloomy on housing. Mr. Fournier, who once worked for prominent hedge-fund manager David Tepper, operates under the radar in suburban New Jersey. His hedge fund, Pennant Capital, is up about 9% this year, thanks to gains from commercial and residential mortgages.
Now he is bullish on an area that others are beginning to warm to: health care. Mr. Fournier argues that WellPoint Inc., the big managed-care company, is a bargain. Though some are concerned that President Obama's health-care plan will put a lid on earnings of WellPoint and other health-care firms, policy changes "won't be as much of a threat to public HMOs as people fear," says Mr. Fournier, who regularly consults with lobbyists working in the Capitol. (that's one way to find out the 4-1-1; lobbyists make the rules so what better source? We've come a long way since the Peter Lynch method of finding good investments - instead of looking around at what you know, now you should have lobbyists on your speed dial. That pretty much sums up a lot of what is wrong in the country)
"WellPoint is a very cheap stock," he says, and can generate the cash flow to buy back as much as 40% of its outstanding shares, he estimates. He likes the stock even though it has outpaced the market in recent months.
Mr. Fournier also likes coal and utility stocks, such as Foundation Coal Holdings Inc. He recently succeeded in helping to push out chief executive and chairman at mortgage and fleet-management company PHH Corp., where he sees big upside.
The danger: These companies get caught in a downdraft that Mr. Fournier is sure is down the line. "I just don't know if the market can sustain itself past this brief window, when the stimulus impacts the economy," Mr. Fournier says. "It's only a matter of time before stimulus effects fade, the economy rolls over, deficits hurt bond yields and the dollar gets hurt." (regular readers will realize these words have been echoed on these virtual blog pages many times)
Mr. Melcher's team at Balestra Capital is finding even fewer ripe investments. Balestra is relatively small -- just under $1 billion -- but the hedge fund has racked up stellar returns for several years, including gains of 199% in 2007, 46% last year, and 7% so far in 2009, according to investors. It owns top-rated corporate bonds with yields of about 6.5%, investments that found popularity in recent weeks.
But Mr. Melcher has become increasingly concerned that the stock market is beginning to look expensive again, and that investors are overlooking problems. "The economy is still deteriorating, job losses are still huge, I really don't see where earnings will come from to drive valuations," Mr. Melcher says. "Just because things are getting worse at a slower pace doesn't mean they're getting much better." (again, these exact quotes could of been ripped off the pages of FMMF)
To profit from coming problems in rash of countries, Balestra has been loading up on derivatives, known as credit-default swaps, that insure the debt of Latvia, Bulgaria and Romania, his investors say. The firm also has taken positions against the debt of Sweden, Ireland and Greece. Behind the trade: It can cost less than $5,000 annually to insure $1 million of this debt, making it a low-risk but potentially high-paying bet, the Balestra team has argued.

******************
So you can see the themes here, all of these gentlemen are trying to "thread the needle" - recognizing some money can be made while we artifically create prosperity (I call it PPP = paper printing prosperity) while duress continues under the surface. All are worried about what happens when we exit this government created "eye" of the storm.

As the market continued ever upward and we heard the dogma (once again) of "the market knows all" (even though it knew nothing in October 2007, or January 2000) I felt like the crazy guy sitting on the park bench mumbling to himself. As I read the investors above, and see some quotes taken almost verbatim from our website - I feel a little less crazy, or make more crazy like a fox....

Account Balance Tracking

2009-07-09T10:31:00.003-04:00

Just a bookkeeping note - on my performance / portfolio tab I have a link to "total portfolio balance" which any reader can go and check to confirm what I am saying my performance is, actually is true - as this is data is held by a 3rd party (Investopedia.com)

The website has been making some changes in its Simulator, some cosmetic and some otherwise and that link that used to allow people to look at the balance has been disabled by these recent changes. (I just noticed this myself Monday) I emailed their website support team and they are going to be adding some functionality in the "relatively" near future (within a month they think) to allow non Investopedia members to view this data set. What I had been displaying since January was a "work around" link which was not an intended feature so we were sort of getting around the inability for non members to view account balances through a back door link. The upgrades they have been doing has closed that door, but now they appear to be planning to allow what I was doing, but have yet to design that feature.

So in the interim, readers will just have to rely on the updates I do every 4 weeks and when these features come back online - I will let you know. I do update my positions each weekend of course; the only thing missing for now will be a "anytime" update of my balance (with 20 minute delay during market hours) that we've been able to show the past 7 months.

Obviously I've had my record out in the open for nearly 2 years now, and transparency is one of my selling points ...so it not an issue in the big picture - but just wanted to let anyone who was asking what happened to the link, know what has changed.

Indonesia's Star Continues to Rise On Back of Yudhoyono's Re-election

2009-07-09T09:15:00.002-04:00

President Yudhoyono appears to be on the way to a striking victory in Indonesia's election and this not very well followed country continues to attract some fans. With the caveat that if Western markets take another plunge this summer, that emerging markets most likely will follow - this country continues to intrigue me over the longer run. Thus far in this correction, the major ETFs for Indonesia have held support well.

The two main ways to play were outlined in [May 22, 2009: Indonesia: A Must Own Emerging Market] and Morgan Stanley jumped on the bandwagon a few weeks later [Jun 15, 2009: Morgan Stanley - Add Indonesia to BRIC]

From Bloomberg this morning:

President Susilo Bambang Yudhoyono swept toward a second five-year term, receiving a strong mandate from Indonesia’s 176 million voters to take the country’s economy to new heights of growth. Yudhoyono, better known as ‘SBY,’ won 61 percent of votes in yesterday’s election, according to a sampling of nationwide ballots by the Indonesian Survey Institute, which correctly predicted previous contests.
Leveraging that victory into achieving his goal of growth rates on par with China and India will hinge on the ability to build roads, ports and power plants and lure foreign investment. To do so, he’ll have to overcome a bureaucracy where power is decentralized down to the district level across 17,500 islands.
“I would say a ‘definite yes’ in maintaining very solid economic growth, a ‘maybe yes’ to become the 9 percent superstar,” said Milan Zavadjil, Indonesia country head for the International Monetary Fund. “To go to the China level you need to take care of some issues, like major improvements in infrastructure, the investment climate and the legal system.”
Yudhoyono has pledged to double infrastructure spending to as much as $140 billion during a second term to achieve annual growth rates of 7 percent. The president will also need to tame the rupiah, Asia’s most volatile currency, to reduce investment risk. It has both plunged 40 percent and gained 19 percent within the past 12 months. “Somebody has to eliminate the foreign-currency risk,” said James Castle, president of business advisory services company CastelAsia, who has lived in Indonesia for more than three decades. “Until they do, I don’t see a real rapid growth in infrastructure.”
Fixing Indonesia’s congested roads, neglected ports and aging power plants needs to be among Yudhoyono’s top priorities, according to nine of 11 chief executive officers contacted in the past month by Bloomberg News. He also needs to improve transparency in the legal system and reduce corruption to attract global investors, the survey found.
Indonesia ranked 86th out of 133 economies in terms of infrastructure quality in the World Economic Forum’s 2008 Global Competitive Index. That was lower than Pakistan, which faces almost daily attacks by terrorists, and Sri Lanka.
While Indonesia received a record $8.3 billion in foreign direct investment last year, it lagged behind the $92 billion haul for China and $33 billion in India.
Almost 33 million Indonesians, or 14.2 percent of the population, live on less than $0.65 per day, down from 16.7 percent when Yudhoyono was elected in 2004. He had targeted cutting the poverty rate to 5.5 percent this year.
The Jakarta Composite index has climbed 54 percent this year, third best in Asia behind benchmarks in Shanghai and Sri Lanka.
“Our target is to put another ‘I’ into BRIC,” said Emil Salim, a presidential adviser and former cabinet minister. “Achieving that in five years is possible.”

Bloomberg earlier this week

Indonesia’s $433 billion economy has skirted recession unlike many Asian neighbors that rely more on exports. Gross domestic product expanded 4.4 percent in the first quarter from a year earlier, compared with a 6.2 percent contraction for Malaysia and Thailand’s 7.1 percent slump.
Per capita income doubled in Yudhoyono’s first term to $2,237 last year, according to the International Monetary Fund. Cash handouts to 18.5 million households helped sustain his approval rating above 60 percent even as he cut fuel subsidies that strained government finances.
The budget deficit will be about 2.5 percent of GDP this year, Finance Minister Sri Mulyani Indrawati said on June 30, compared with 7.6 percent in Malaysia.
Yudhoyono has reduced the debt-to-GDP ratio to an estimated 33 percent from 57 percent in 2004, according to the Finance Ministry.
The country’s 17,500 islands span an area wider than the continental U.S., creating transport bottlenecks that have restrained growth.
Still, Indonesia’s unemployment rate of 8.4 percent is the highest in Asia. About 32 million people live on less than 70 cents a day, according to the government.
The nation’s ranking in Transparency International’s corruption-perception index remains lower than Nigeria and Costa Rica.
With natural resources like palm oil, coal and nickel, Indonesia benefited from a China-driven commodities boom...Indonesia is the world’s largest palm oil producer and the biggest exporter of power-station coal.

And an in depth story on Yudhoyono here in the Wall Street Journal

Indonesia is re-emerging as one of the world's hottest developing economies, a remarkable turnaround for a country that was once widely viewed as a basket case.
Much of the credit goes to Indonesia's president Susilo Bambang Yudhoyono, a former army general who is widely expected to win re-election after five years in power. Under his watch, the government has stamped out Islamic terrorism and ended its civil war in the resource-rich province of Aceh. He has brought state spending under control and launched a popular anti-corruption drive, landing a number of senior politicians and central bank officials, including one whose daughter is married to Mr. Yudhoyono's son, in jail.
Mr. Yudhoyono said that if he's re-elected, he will fill his next cabinet with technocrats, rather than hand out positions to a wide range of under-qualified leaders from rival political parties, as he did to placate opponents in his first term. He acknowledged that in the past his government has included businessmen with conflicts of interest that made it harder for him to rein in corruption and push reform -- a practice that he pledged to end in a second term.

No positions

American Express (AXP) CEO: "Way Too Early to Call for Recovery"

2009-07-08T15:35:00.001-04:00

This seems like a reasonable point of view - a good 12 minute interview with Kenneth Chenault, the CEO of a stock we've had some battles with: American Express (AXP). Certain companies provide good overviews of what the US economy has become - the Fedex's, the railroads, the credit card companies... hence, I'd rather listen to a reality check from this sort of perspective rather than panting over oil surges, or Baltic Dry Index changes which seemingly are dominated by (a) speculators or (b) the Chinese choosing or not choosing to make a purchase of commodity ABC that week.

Bookkeeping: Covering Remaining Potash (POT) Short

2009-07-08T15:13:00.004-04:00

I am covering the remaining portion of my Potash (POT) short from the mid $95s here in the $88s. [Jul 2, 2009: Bookkeeping - Closing Potash, Mosaic - Selling Short Potash] I am expecting a substantial countertrend bounce in all the 'reflation' trade names in the next few days. (stated that earlier but yet to come to fruition) Instead of going long Potash here (which is a way to play any bounce) I will try to catch the dead cat bounce with a sector ETF instead; again - just keep your eye on Freeport McMoran (FCX). When she goes, they all go. This group has been absolutely destroyed of late.

I will be interested in reshorting commodities on a rebound; but it's getting 'piggish' to short them after such a short term spanking. Let's revisit Potash in the upper $90s ($97/$98) perhaps (if and when)

No position

Green Shoots at Family Dollar (FDO)

2009-07-08T15:00:00.001-04:00

No slowdown in dollar stores as Americans on Main Street are wrecked by the Great Recession. Family Dollar (FDO) just reported a very nice set of numbers - obviously the Street was under the impression the recession is over judging from the stock the past 2 months. Actually broke down below the 200 day moving average as of the last week.

Despite Wall Street's protestations (and Dennis Kneale's), Americans remain stuck in the Walmart section of retail, not Target [Dec 26 2007: Target Shoppers Turning into Walmart Shoppers] Remember, since I've started this blog not 2 years ago the % of Americans on food stamps has jumped from 1 in 11, to 1 in 9. [Jun 8, 2009: 1 in 9 Americans on Food Stamps] This appears to be helping Family Dollar which unlike most "dollar stores" has food items as well.

The gross margin expansion is mighty impressive - especially for a retailer; the same store sales growth in this retail environment is simply a damning indictment of how bad off more and more Americans are becoming. I continue to conclude "The Street" does not get what is going on out there in everyday America.

Via CBSMarketwatch

Discount retailer Family Dollar Stores Inc. said Wednesday that its fiscal third-quarter profit rose a better-than-expected 36%, aided by budget-conscious consumers seeking bargains on food and other consumables and improved home goods and apparel discretionary sales.
Net income rose to $87.7 million, or 62 cents a share, from $64.7 million, or 46 cents, a year earlier. Analysts, on average, estimated the company would earn 59 cents a share, according to FactSet.
Sales in the quarter ended May 30 rose 8.3% to $1.84 billion, the 6,600-store chain said. Comparable-store sales climbed 6.2%, helped by increased customer traffic and the higher amount customers spent per transaction.
Family Dollar forecast sales for the fourth quarter to rise between 4% and 6% with comparable sales increasing as much as 4%. Per-share profit is expected to rise to 39 cents to 43 cents a share from 38 cents a year earlier. Analysts surveyed by FactSet expected profit of 39 cents a share.
Family Dollar's gross margin, or percentage of sales after minus the cost of goods sold, widened to 36.2% from 34.6% partly after the company lowered freight expenses and cut inventory loss or theft. Analyst Michael Baker of Deutsche Bank said the increase was the company's biggest since 1991.
Chief Executive Howard Levine is updating the company's technology chain-wide to allow it to accept credit cards and food stamps, which he said were increasingly used by U.S. households. He also has expanded the retailer's food assortment as consumers focused more on basic items. The number of households who rely on food stamps to supplement their income grew to an estimated 15 million households as of March, compared with approximately 19% a year earlier, he said.
To help the company keep the new middle-income shoppers it has attracted in the economic downturn, Family Dollar also is adding signs in stores and making other improvements to make shopping at its stores a better experience, he said.

[Feb 6, 2009: Another General Shot: Dollar Tree (DLTR)]
[Jan 8, 2009: Family Dollar Continues to Strengthen on "Pooring of America"]

No position

Bookkeeping: Stopped out of some Quality Systems (QSII) and Priceline.com (PCLN)

2009-07-08T13:35:00.006-04:00

Getting stopped out of many things today; the HDFC Bank (HDB) I tried to buy this morning, was stopped out very quickly. But it is already back over $90 and HDB generally does not have a ton of volume, so can be moved in large % by not that many dollars.

I was stopped out of a good portion of my Quality Systems (QSII) as it broke the 50 day moving average intraday - we kept a 0.7% stake. Still like this chart if it can quickly reverse but I'd like to see it north of $53.

I was stopped out of Priceline.com (PCLN) as it broke the 50 day moving average intraday - leaving us a 0.2% stake. I am more worried about this set up - it just looks more of a rollover candidate in the intermediate term.

I have a feel all these positions might reverse themselves back up if the market cooperates.

These are all mechanical trades, meaning I put the stop loss level in below a key resistance, and away it goes. Sentiment wise I feel more bullish in the very near term as a whole slew of stop losses have been washed out today as the S&P broke 880 and 875. If you look at a lot of individual stocks intraday you can see they swoon down when the S&P broke both those levels. Which shows you again, what you own means very little nowadays - we're all hostage to machines and the program trades swoop out of everything at the same time in parallel with the overall indexes. It really is such a sea change from even 3 years ago - this is why I keep repeating it.

How today ends will dictate the next few sessions I believe; recapturing S&P 880 by the close would be a huge win for the bulls. A close below 875, bears will be happy. I'm trying to get short term bullish here and throw off my yellow weed persona but the market is not cooperating and for every purchase I make, I get stopped out of something else.

Long all names mentioned in fund; no personal positions

Bookkeeping: Adding to Riverbed Technology (RVBD)

2009-07-08T11:40:00.003-04:00

Everything I said 2 posts earlier about HDFC Bank (HDB) applies to Riverbed Technology (RVBD).

We have a latent gap much earlier in the chart; if the market implodes buying anything long will be stupid; I am trying to thread the needle for an oversold bounce. Rinse. Wash. Repeat.

I was stopped out of RVDB last Thursday @ $21.90; the stock is not much lower now but just above its 50 day moving average... so I'm going to purchase here at $20.80. $20.50 is the 50 day moving average so I'll stop out below $20 in this case to give me some room. I'm taking RVBD back up to a 2% type of stake from 0.2%.

The gap? Just over $15... if $20 is breached I'll probably be short this name assuming that gap fills. On a side note Research in Motion (RIMM) continues to be weak. "Technology is safe" thesis is being hit now, as we predicted.

As always it is quite amazing how fear turns to greed and vice versa - very quickly. We're at S&P 875 which many are looking at as the line in the sand (I was using 880). Now we will see if reader Guy is correct in that a swipe below support to draw in the bears, before reversing up is the master plan. Or if we begin a free fall of panic selling.

Of course it 'feels' terrible to be buying anything right here since the propensity for the beginning of a "waterfall" type selloff could be right around the corner. So we'll see.

p.s. I said earlier I'd stop out of HDB at $91, not true thus far as the stock trades at $90.75. In Investopedia you cannot sell a stock for 20 minutes after you purchase it. Hence I could not enter a stop loss until 20 minutes after. I am now just getting around to putting the stop loss order in, and the stock is already $90.75. So I'm going to give it leeway to $89.90 instead; if that hits - I'll be back out of the shares I bought this AM. (EDIT 12:05 PM - the $89.90 hit and I'm stopped out of HDB purchase of the morning; volume is low but they got me on price)

Long Riverbed Technology, HDFC Bank in fund; no personal position

Obama Does not Heart CME Group (CME) or IntercontinentalExchange (ICE)

2009-07-08T11:00:00.000-04:00

Looks like the regulatory noose tightening we've been speaking of on speculators in the commodities markets, specifically that of the energy kind, are really spanking the 2 large trading pits - CME Group (CME) and IntercontinentalExchange (ICE)

Via Reuters

The top regulator of U.S. futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.
William Blair and Co said in a research note that the stocks sank on fears of CFTC imposing restrictions on futures trading, noting that energy futures comprised up to a quarter of revenue for each of the exchanges.

Interesting side note

Also on the CFTC's radar was commodity ETFs such as the United States Oil Funds(USO) and the United States Natural Gas Fund (UNG). Those ETFs have become so big that at one point USO held more than 20% of Nymex's front-month oil futures contracts.

As we've been stating over and over, we've created Frankensteins in our "financially innovative" system - ETFs are dominating physical markets, and the stock market as a whole I'd argue. What you own means less and less; what ETFs own the stocks you own on the other hand mean more and more... program trades and the vehicles they invest in have changed the game.

Passive investors increased their crude-oil holdings to the equivalent of more than 600 million barrels in June, up more than 30% from the end of last year, a MarketWatch analysis of Commodity Futures Trading Commission data and the most popular commodities indexes shows. See detailed description of MarketWatch's findings.

No positions

Bookkeeping: Adding to HDFC Bank (HDB)

2009-07-08T10:47:00.002-04:00

Indian stocks have been very weak the past 3-5 days as India announces an increasing deficit to stimulate their economy. HDFC Bank (HDB) has pulled back to its 50 day moving average where I am going to purchase some shares and take this up to about a 1.9% stake (up from under 0.1%) I am buying just over $93 and will stop out at $91 if I am wrong for a very low risk entry.

I actually was considering this name as a short at the end of last week as it is one of those "gap fillers" and did not pull the trigger, unfortunately as it has dropped 10% very quickly. I still want to short it - but at higher levels (closer to $100). Or on a break of the 50 day moving average - either/or. The "gap" is down around $81 and I think it fills within 6 weeks.

In the meantime I am going to try to thread the needle (going long temporarily) anticipating an oversold bounce both in US and emerging market indexes, while also awaiting one in the "reflation" trade. I expect the bounce to be short lived if it does come. But I'd like some more long exposure if indeed it comes to fruition. Again, if wrong I am sacrificing under 2% in this trade - my upside target is high $90s.

Long HDFC Bank in fund; no personal position

Bookkeeping: Beginning Perfect World (PWRD) Position

2009-07-08T10:15:00.003-04:00

I had an outstanding Perfect World (PWRD) buy order at "the gap" in the chart ($27) which executed this morning, so I've locked in about a 2.2% position to begin with. That said, obviously the market is at danger of a larger correction and former high fliers won't be immune. But in the larger scope of things we have a sub 30% long exposure with core individual holdings so I'm ok with taking a flier here on a company I like fundamentally which was in the mid $30s not 2 weeks ago. That said, buying a pullback like this is best done in upward trending markets, not what we are in so this one could go badly.

I will place a stop loss below $24 (50 day moving average) - if it breaks below that, it could swoon much farther.

[Jun 19, 2009: Perfect World Raises Guidance]
[Nov 10, 2008: Earnings for Perfect World Solid]
[Oct 15, 2008: Perfect World Announces Share Buyback Program]
[Aug 18, 2008: Perfect World Earnings Mostly Inline]
[May 20, 2008: Motley Fool on Chinese Gaming]

Long Perfect World in fund; no personal position

FT.com: Hugh Hendry -Thon

2009-07-08T10:07:00.002-04:00

Looks like Hugh Hendry is emerging from his "quiet period" - below are a series of videos with FT.com about 15 minutes in total - I can't embed the videos on the blog since it's not an available option

Video #1 - Deflation remains the major risk to economic growth
Video #2 - Politics is Stopping the Fed from taking the necessary steps
Video #3 - Bearish on China & Gold: China too dependent on US consumption for real recovery

[Jun 30, 2008: Print More Money to Avoid Bigger Slump]
[Jun 18, 2009: Hugh Hendry Eclectica Fund Letter to Investors]
[Apr 28, 2009: The Latest Hugh Hendry]
[Apr 16, 2009: Hugh Hendry, Citiwire Interview]
[Mar 20, 2009: Hugh Hendry of Eclectica Asset Management is Wickedly Good]

NYT: France's Stimulus Projects, Unlike in U.S., Were "Shovel Ready"

2009-07-08T07:00:00.003-04:00

There go those "socialists" again, somehow implementing programs faster than the capitalists - how dare they be efficient. They really better be careful over there or I'm going to have to rewrite some of the dogma talking points! Cmon folks, we're getting out stimulated by the French! No one makes the US look bad like this and gets away with it.

What to do??? Collectively we are going to put down our hotdogs, stamp our feet, take to the streets (ok skip that last part...that would require actual effort) and you know what happens next. We're going to incite change by relabeling foodstuffs! Freedom Fries - here we come.

Via NYT

French workers normally take off much of the summer, but this month, there is something of a revolution going on here at this former royal chateau roughly 30 miles southeast of Paris. The throngs of tourists will be jostling alongside stonemasons, restoration experts and other artisans paid by the French government’s $37 billion economic stimulus program.
Besides Fontainebleau, about 50 French chateaus are to receive a facelift, including the palace of Versailles. Also receiving funds are some 75 cathedrals like Notre Dame in Paris.
All told, Paris has set aside 100 million euros in stimulus funds earmarked for what the French like to call their cultural patrimony. It is a French twist on how to overcome the global downturn, spending borrowed money avidly to beautify the nation even as it also races ahead of the United States in more classic Keynesian ways: fixing potholes, upgrading railroads and pursuing other “shovel ready” projects. (oh, how can I show my face in Paris ever again after this....)
“America is six months behind; it has wasted a lot of time,” said Patrick Devedjian, the minister in charge of the French relance, or stimulus. By the time Washington gets around to doling out most of its money, Mr. Devedjian sniffed, “the crisis could be over.” (I love the light prejudice even in our liberal 'rags' - the frenchman "sniffed") (and don't worry about us being behind Mr. Devedjian - we'll keep doing it until we get it right... $180B from Bush, $780B from Obama v1.0, and just wait until the next one coming next year - we might be late, but we come big! and often - so take your so called Palace of Versailles and let me raise you a ladybug preservation farm. Checkmate.)
Gallic pride aside, Mr. Devedjian has a point. While he plans to spend 75 percent of France’s stimulus money this year, the White House is giving itself until fall 2010 to lay out that big a share of the American expenditure. “All projects must start in 2009,” Mr. Devedjian said. “We want rapid results.”
As it turns out, France’s more centralized, state-directed economy — so often criticized in good times for smothering entrepreneurship and holding back growth — is proving remarkably effective at deploying funds quickly and efficiently in bad times. (sort of like the Chinese I suppose)
The Organization for Economic Cooperation and Development expects France’s gross domestic product to drop 4 percent from the peak of the economic cycle, far less than the 7.4 percent plunge expected in Germany, the nation’s economic rival. The economic decline and loss of jobs are also likely to be significantly milder than in Spain, Belgium and Britain, according to the group, a Paris-based intergovernmental research and policy advisory agency for the world’s industrialized countries. (hold on, let me go get my dogma bullet points.... how do I counteract this. Ah yes - right here, chapter 46: "Look France, when your economy grows as slow as one of those fancy snails you eat in your restaurants, of course it doesn't fall as much.... so take your swarmy attitude i.e. sniffing - and 6 weeks of vacation and take that!" There, now I feel better)

One of my favorite pet projects - comparing benefits across countries and how other countries differ from our "Reverse Robin Hood" policies adopted since the early 80s.

Under French job regulations, unemployed workers are guaranteed up to 67 percent of their former salary and can collect as much as 70,000 euros ($98,000) annually in benefits for two years.

And that French folks is why your economy will never thrive like ours - which simply needs bubbles every 4-6 years along with now trillions of stimulus to show GDP growth. Nevermind the amassed liabilities; that is "off the balance sheet" and our economy is strong and the best in the world.... and we don't need no stinkin' manufacturing no more either!

“There’s a growing possibility that (French) G.D.P. could grow in the third or fourth quarter,” said Eric Dubois, head of the short-term analysis department of Insee, the National Institute of Statistics and Economic Studies.

Doh!

So what about the criticism that Europe is not being as aggressive as the United States in combating the global slowdown, with only tepid stimulus packages? That’s not the way the French see it.
“You lost time with changing a president and no decisions were made in the last three months of 2008,” Mr. Devedjian jibed. “Nothing happened in January 2009, and in February, there was just a speech.” “The country that is behind is the U.S.,” he said, “not France.”

Freedom Fries!

*******************

Meanwhile stateside, long time readers will know I made a prediction last year after the BUSH stimulus a new stimulus would be coming after the election - I thought $500 Billion in size. They showed me! I thought I was being aggressive; not so much.

Readers will also know I said the moment that stimulus was announced there would be another. Lo and behold, even though >50% of the stimulus money won't even be spent until 2010, my prediction is becoming more possible by the day. Boo Yah, our pockets are endless and our unborn grandchildren bountiful. NEXT!

Some economists are pressing the White House to enact a second round of stimulus spending or find some other way to avert a prolonged job and wage slump. But the White House is in a tough spot. Officials want to give the $787 billion stimulus package passed in February time to work -- only 10% of the spending is out the door so far -- and there is little appetite in Congress, particularly among Republicans, for spending more money at a time of record deficits.
White House economists are discussing whether a second round of stimulus is needed, but a decision isn't expected until at least the fall. "Any discussion of a second stimulus is premature at this point."

"Premature" will turn into "necessary" by next winter - count on it. Plus it's an election year. Maybe the fact Obama handed this program to Congressional Democrats as a "thank you" instead of crafting it to do actual benefit might be part of the problem. But not to worry - there is always the next stimulus to "get it right".

S&P 880 is Here, With Bells On

2009-07-07T17:00:00.002-04:00

S&P 880 is here - that's the line in the sand we've been discussing. I don't want to make too much of one day, and I'd expect some defense of this area even if there is a sustained period downward following but this was the spot we refused to break below in May.

And while one day does not make for a "break" (see the action two weeks ago) we again broke the 200 day simple moving average. We quickly reversed out of that condition about 12 sessions ago, but you might be noticing these post 3:30 PM "mark ups" are farther in between and weaker in sustainability.

Where are all the "golden cross" (50 day moving average cross over the 200 day) fans of late? [remember that happened with a downward sloping 200 day moving average, unlike 2003's upward sloping - and it only happened in the simple moving averages. 2 strikes for "golden cross" fans]

And our leadership market, NASDAQ (read: technology) has under performed again... and broke key support today on the close.

As reader Guy says, in the near term it would be fitting for the market to break key support levels, draw in the bears (who have been bloodied since March) before reversing up and breaking bears hearts (albeit temporarily), but as I stated last week and in this weekend's summary the place to short with longer term plans in mind will be (a) a break below these key levels (875-885) or (b) on the next oversold bounce. I do believe the trend has now changed, but as I wrote in the weekly summary I would be expecting a mid week bounce after a test of S&P 880. Halfway correct so far.

***************

Now we need to study our Fibonnaci and decipher how much of the move from 666 to 950 (I'm rounding to keep it simple) on the S&P is supposed to be given back. That's 284 points of bull glory and bear pain.

38.2% retrace = 108 points. S&P 950 - 108 = low S&P 840s
50% retrace = 142 points. S&P 950 - 142 = low S&P 800s
61.8% retrace = 175 points. S&P 950 - 175 = mid S&P 770s

The latter of the 3 would do a good job of getting people to give up on the stock market (duped again!), after being fooled by the green shoots (and CNBC pundits for the upteemth time), while creating a (wait for it) longer term reverse head and shoulders bottom (which is bullish). The latter of the 3 scenarios would also work great with my call for a return to S&P 750 (close enough for government work). As I've been saying a convenient 10% sell off, so "all those who missed the first rally could jump on board" just seems too convenient. 10% down from 950 is just over S&P 850 so I could still be proven wrong on that point. I don't see any technical reason for "just over S&P 850" to be a place bulls make a stand either.

If all that above is gobligook to your ears, don't worry about it - it's basically just part of the now dominant "squiggly line analysis" that program traders of the HAL9000 variety use to tell us where the stock market should go. Remember computer trading is approaching 50% of all trades as of last week. Fundamentals are so 1990s.

If it all seems Greek to you (or Italian) just keep reading along and we'll update you along the way.

Leonardo of Pisa (c. 1170 – c. 1250), also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci, or, most commonly, simply Fibonacci, was an Italian mathematician, considered by some "the most talented mathematician of the Middle Ages".^[1]

Gary Shilling: Recovery a Year Away

2009-07-07T13:45:00.000-04:00

It's been a few months since we last checked in with Gary Shilling [May 14, 2009: Gary Shilling's Latest Thoughts] so with all the green shootery going around, I thought it would be interesting to see if he is swaying. Much like myself, it seems "not so much".

Among economists, Gary Shilling owns one of the most prescient forecasting records, having accurately predicted the credit crisis and the performance of key asset classes over the last several years. Now, he says, the chances that the current wave of “green shoots” will be the finale to the recession are “pretty low.” Shilling delivered his latest forecasts when he spoke at the Forbes Advisor Conference last week.
Of the 11 post-World War II recessions, eight of them had at least one quarter of GDP growth. “Recessions are not a straight down affair,” Shilling said. “They go back and forth.” Stocks follow the same pattern as the economy, he said, and bear market rallies are the norm, not the exception.
Excess housing inventories will hinder recovery for at least a year. Due to the long period of overbuilding, housing inventories are approximately 2 million higher than normal. “Excess inventories are the mortal enemy of prices,” Shilling said. He predicted that more home equity will be wiped out, causing additional walk-aways and further problems for mortgage lenders. “If nothing happens to get rid of housing inventories, it will be the end of 2010 before inventories are worked down,” he said.

Sounds about right, remember housing started to crumble in 2006; our model for "regional" housing downturns is on average 6 years. 2006, 2007, 2008, 2009, 2010 gives us 5... so our national disaster in housing should be finishing up around 2011. I also believe that is the peak year for option ARMs to reset but by then we should be through at least 3 more rounds of banking handouts and home buyer incentive plans. And gearing up for Palin-Obama 2012!

Although he suggested, in an op-ed piece in The Wall Street Journal, that excess inventories be sold to immigrants with H1 visas in return for permanent resident status, he conceded that anti-immigration sentiment would not allow it. Time is the only catalyst to reduce housing inventories.
Housing prices are down 32% from their peak; Shilling forecasts a 37% decline but warned that it could overshoot. “This is very debilitating and a strong depressant of consumer spending,” he said.

Shilling said "shoot"! wait... not a green one, but an over one. Darn - thought we had converted him to snorting bull. Don't worry readers - I am looking for any 2nd derivative improvement in his wording; you know secretly all of us are bulls inside.

Indeed, consumer retrenchment will impede economic recovery. Shilling recalled how consumers reduced their savings rates in the 1980s and 1990s, using their equity portfolios as a source of wealth, and then seamlessly shifted to borrowing against residential real estate. Now, the average individual with a mortgage and 50% equity at the market peak has seen his equity dwindle to 22% -- with a decline to the mid-teens likely to come.
Consumers today have no alternative but to save, Shilling said, and as a result will spend less for goods and services.

That last point should sound VERY familiar to long time readers - those were exact words we were saying long ago... Americans won't WANT to change their behavior. They will be FORCED into savings. It has come to pass.

Production cutbacks will result, causing layoffs and wage cuts, which in turn will lead to further cuts in spending. “This is a vicious cycle that must be broken before we get out of this mess,” Shilling said.

On to the stimulus aka Pelosi's Plan

Fiscal stimuli are the logical solution, but Shilling is not satisfied with the efforts so far. In the first $787 billion package passed by Congress, he said, only $200 billion went toward true stimulus spending – infrastructure projects, increases in unemployment benefits, or tax cuts.
The remainder went toward the Obama administration’s social agenda, and will not lead to increased consumer spending.

Nailed that one on the head. But again, let's not worry - if we fail on Stimulus 1 (Bush), Stimulus 2 (Obama) there is always Stimulus 3.

Now for some of the more controversial items as the deflation v inflation debate rages on in economic circles (I admit to being a flip flopper on this one!)

A byproduct of reduced spending will be deflation, which has been a consistent theme in Shilling’s forecasts for the last decade. Declining commodity prices – led by decreases in the price of oil – and excess inventories will be the main drivers of deflation. Shilling said that, for the first time since the 1930s, employers have responded to the recession with wage cuts and shorter employee hours – instead of layoffs – and this, too, will fuel deflation.

So Shilling is in the Hugh Hendry camp here.

How do you invest in that world?

Successful investing will hinge on positioning portfolios to defend against deflation. Traditionally, nominal bonds perform well in deflation, but Shilling warned that the rally in Treasury bonds is over.
Instead, Shilling recommended focusing on sectors of the equity markets. Technology will be an “interesting play,” he said, especially among companies offering products to improve productivity. “In deflation, companies cannot raise prices to increase profits, so they must reduce costs,” he said, and productivity enhancing hardware and software does that.
Another area Shilling recommended was consumer staples. “If prices are coming down, consumers may cut or delay discretionary purchases like autos, cruises, appliances, and airline travel,” he said. But staples must be purchased regardless of price.
Shilling said to avoid companies with a lot of debt, as it will be more costly to service in a deflationary scenario. Consumers are already treating monthly payments on their own debt as discretionary, and Shilling advised against investing in the consumer finance industry.
The U.S. dollar and Treasury bonds will retain their value and status as a safe haven, mostly because they are the “best of a bad lot,” Shilling said. The sell-off of Treasury bonds since March, when many who believed the recession was over increased their appetite for risk, was “temporary.” The dollar will recover, he said.

That last point is very unconventional to say the least - but Shilling had the same theory in the 1st half of 2008 when inflation was the raging thesis, and was proven incredibly correct in 2nd half 2008. If this happens again (dollar strong, Treasuries strong) it would go hand in hand with a very dark stock market in my view.

Shilling warned that “commodity currencies” – those of New Zealand, Australia, and Canada – will be weak as dampened worldwide consumption levels will depress commodity prices. “China is not going to buy up all the commodities in the world,” he said.

Another completely unconvential view at this point versus the masses.

The British pound will suffer because of the UK’s oversized financial sector (15% of its economy, as opposed to 5% of the US economy). And the Euro “has its own problems because of its one-size-fits-all structure,” he said. Individual countries – especially Spain, Portugal, Ireland and Italy – cannot cut interest rates to deal with economic weakness. As a result, they must take on more debt, increasing the likelihood of ratings downgrades and that they will drop out of the ECU and go back to their own currencies.

On to China

Investors should not worry about if or when China will stop buying U.S. Treasury debt; it will not happen, Shilling said, because “the Chinese are not suicidal.”
If the Chinese moved away from investing in dollar-denominated assets, the U.S. currency would collapse and trigger a global Depression. The Chinese, whose economy is utterly dependent on exports, would be the big losers.

I agree with this... for now, as outlined in posts throughout 2008. A decade from now; different story.

Now the Chinese want to export, but the U.S. does not want to import – and the U.S. wants to export as well.

Oh, a conundrum of the highest order.

If everyone wants to export, the logical result will be protectionism. “This will be very unfortunate and will lead to slower growth in the long run,” Shilling said. “Protectionism is a very real threat.”

I agree here; one could postulate the US wants a weaker dollar (while talking up the "strong dollar" charade) because it sees its consumers are dead on arrival. So it needs exports, and weaker currency makes your goods cheaper to outside interests. One way to have a weak dollar is borrow like a drunken sailor (we've nailed that one) The problem is WHO IS GOING TO BUY everyone's exports. I guess the thesis is China will take all of Japan's, Europe's, and America's exports.

Shilling expects the federal government to play a bigger, “chronic” role in preventing high unemployment, because politically it cannot afford to have the jobless rate rise year after year. He did not say what measures this chronic intervention would take.

Agree.

The recession’s shape will be more like an L, Shilling said, with slow recovery and muted growth. “I see nothing steep enough to suggest anything like a V-shaped recovery,” he said.

Agree.

Much of this will be familiar to FMMF readers - the only huge "hinge" play in all this remains deflation v inflation. I think both can occur in different parts of the economy. We are not in a vacuum, and global competition for commodities (a long term structural change) will continue to pressure prices upward, over time. With Americans weakening purchasing power, and wage increases - that's just another tough pill to swallow.

The dollar, and US bond strength is also very much an outlier - it will be interesting to see if Shilling was correct on this (again) if 2nd half 2009 bears any resemblance to 2nd half 2010.

Bookkeeping: Closing Research in Motion (RIMM)

2009-07-07T12:29:00.003-04:00

This is another tiny position that we cleared out of ahead of earnings - I have less than a 0.1% position sitting around as a holding stake. At this point, I don't want to be a buyer of Research in Motion (RIMM) until it shows the strength to get over $72 (50 day moving average) and stay there or... at much lower prices. I still like the company in the long run - it's just not in an enviable spot on the chart, and prone for a potentially large drop. If I'm wrong on the "drop" it will rebound over the 50 day and provide a safer, if a bit more expensive, entry point. It is no man's land now and not at a place I'd be buying - so no reason to hold.

The chart is in the previous entry.

No position