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Blackstone Group (BX) Continues its Recovery; Beats Estimates by 10 Cents

2009-11-06T14:25:00.008-05:00

As mentioned this morning, we added back to our Blackstone Group (BX) exposure as the stock jumped back over a key moving average on the back of a solid earnings report. After 7 sessions of purgatory, the stock is in a better position today.

Unlike a "widget maker" type of company I will give analysts a lot more leeway for a firm such as this with so many moving parts... however, the difference in revenue between what analysts estimated ($450m) and actual ($603m) is astonishing. As long as markets hold up, it should allow Blackstone to continue to unload its prospects onto a world full of newly minted US dollars and nowhere to put them. [Oct 12, 2009: Blackstone Group Surges on Potential Listing of 8 Portfolio Companies, and Selling of 5 Others] Full (and lengthy) report here.

Some color on earnings:

Private equity firm Blackstone Group LP (NYSE:BX - News) posted a forecast-beating quarterly profit and said it is gearing up for more deals and IPOs as the lending and equity markets recover.
Blackstone's third-quarter earnings before income taxes, noncash charges for vesting equity-based compensation, and amortization of intangible assets -- a measure it calls "economic net income" (ENI) -- were $278.4 million, compared with a loss of $509.3 million a year earlier.
On an after-tax basis, ENI was 25 cents a share. Analysts expected, on average, 15 cents a share, according to Thomson Reuters I/B/E/S/.
Revenue fell to $603.8 million in the latest quarter from $833 million a year earlier, although it did rise on a sequential basis from the second-quarter total of $403.6 million.
The value of Blackstone's private equity portfolio rose by 5 percent in the third quarter, although the value of its real estate portfolio fell by 0.4 percent.
The company said it would pay its regular quarterly distribution of 30 cents a share to unitholders.
The company, which has immense real estate and private equity assets, has stepped up deal activity in the past few months, including buying Anheuser-Busch InBev's U.S. theme parks for up to $2.7 billion. It is also considering initial public offerings for a number of its companies.
"We see great opportunities to buy assets from motivated sellers," Blackstone Chief Operating Officer Tony James said on a conference call. He said Blackstone has $27 billion of "dry powder" -- capital available for investment.
Blackstone Chief Executive Stephen Schwarzman said in a press release that the worst is over, although a recovery in the economy could be "gradual and uneven."

For the sake of being complete, let me add this item - although in the stock market we live in a world of make believe (GAAP accounting does not count)

On a GAAP (generally accepted accounting principles) basis, Blackstone lost $176.2 million in the latest quarter, compared to $340.3 million a year ago. The latest GAAP results include $201 million in IPO- and acquisition-related charges, the company said, as well as other items.

Some analyst commentary:

JMP Securities reiterated its market perform rating on Blackstone shares following the report, calling the performance "a good, solid beat" with most of the upside coming from the company's real estate private equity and credit and marketable alternatives business.
The firm also noted advisory revenues, though down on a year-over-year basis, did well in the latest quarter, coming in at $97.3 million, well ahead of JMP's estimate of $80.5 million, and higher on a sequential basis. Blackstone's restructuring and reorganization advisory unit has done well with so many companies paring down in the past year.

[Oct 7, 2009: Sea World, Busch Gardens Now in Hands of Blackstone Group]
[Sep 10, 2009: Blackstone Group Rallies on Goldman Sachs Addition to Conviction Buy List]
[Aug 27, 2009: Blackstone Group Becomes Top "Fund of Fund" Player]
[Aug 6, 2009: Blackstone Group Beats, But Already Ran into Earnings]
[May 7, 2009: Blackstone Group Narrows Loss]
[Mar 31, 2009: Bookkeeping - Starting Blackstone Group]

Long Blackstone Group in fund; no personal position

Wells Fargo (WFC) Kicks the Can by Transofrming Option ARM Mortgages into Interest Only

2009-11-06T13:00:00.110-05:00

If you are not familiar with what an option ARM mortgage is, read this piece [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?]]. I too was unfamiliar with it, despite following markets closely, until I read a BusinessWeek article in October 2006. Interest only mortgages? Yep I knew about those. Alt A mortgages? Yep. [March 19, 2008: Alt A Mortgages Beginning to Break Down] But option ARMs? Wow - eye opening. In summary these loans are the type where your mortgage payment not only does not cover the interest (as with an interest only mortgage) but does not even cover all the principal. So each month your principal goes UP - this is the bestt kind of loan for day trading homes (as was all the rage in 05-07)... you put the least amount of money down, and hence your leverage is the highest. Once I read that article, it all began making sense to me... how people on $40K of income were buying $560K houses in California. And then I got very worried... but the bubble would not burst for 5-6 quarters after that reading.

As you should know by now our financial oligarchs are doing everything in their power to deny what sits on their balance sheet; much like the bank zombies did for a decade+ in Japan. Our government and central bank is complicit - we have changed accounting rules, we've changed rules for marking losses on commercial loans, we've.... well I won't rehash it. The reality is there is much bad out there that is swept under the rug in typical "kick the can" process... out of sight, out of mind. If we just change the accounting, all our problems go away.

Another technique of "make believe" is not foreclosing on homes; I've read stories (many) where people have been sitting in homes well over a year without making a payment and not being foreclosed on. Because the banks only want to admit to X many losses a quarter or else they might actually look weak. So we have this shadow inventory of defaulted homes that people are living in 'rent free!' as banks look the other way, waiting for miracle rebound I suppose. But to come full circle to paragraph one - a very interesting tactic by Wells Fargo in dealing with the most toxic of all mortgages (option ARM) they are "transitioning" people into the second most toxic (interest only). That's step 1. Step 2 is for Ben Bernanke to unleashes enough paper dollars into the global economy, so as to inflate home prices back to where the home owner could actually sell the house in 5-10 years. Or if that does not work, it will allow Wells to admit the loss in some far off year...

Obviously either of these loans are of the worst variety as they allow people with no "skin in the game" to transform from renters to "owners" but only on paper. [Jul 6, 2009: WSJ - No Money Down or Negative Equity Top Source of Foreclosures] And people with no skin in the game are most apt to simply walk away... while this conversion might forestall the eventuality, I doubt it will change it for most. But ... anything to keep the mirage going for now. [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] Heck even the Wall Street Journal now uses "kick the can".

Via WSJ

Wells Fargo & Co.'s strategy for modifying troubled Pick-A-Pay mortgages looks like a game of kick-the-can-down-the-road.
The fourth-largest U.S. bank by assets holds about $107 billion in debt tied to option adjustable-rate mortgages, a relic of the U.S. housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Many such borrowers now own homes worth far less than they owe in mortgage debt, and most can't afford a full monthly payment that pays down the loan's principal.
To solve that conundrum, Wells Fargo is taking a gamble: The San Francisco company is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the worst-hit regions of the U.S. and a rise in consumer income, will eventually cover the bank's underwater Pick-A-Pay debt.

Considering many of these people are not 3, 5, 7% underwater but 25-40%... that's quite a wager. Especially if we ever return to a normal market with mortgage rates around 6% and no free handouts for people to buy homes. That will drive prices down yet again. But again, it goes back to not admitting losses...

The move to shift Pick-A-Pay borrowers into interest-only loans helps Wells Fargo avoid hefty write-downs on Pick-A-Pay mortgages that would likely result from foreclosures. But the strategy will leave Wells Fargo holding billions of dollars in mortgage debt tied to distressed properties in battered markets, especially California and Florida.
Pick-A-Pay loans accounted for 10.8% of Wells Fargo's average total loans in the third quarter.
Wells Fargo has written $2 billion off Pick-A-Pay balances for borrowers, or nearly $46,000 per modified loan.

Note: Wells Fargo did not actually do option ARM loans themselves, but inherited these when they got a sweetheart deal to take over the 4th largest bank Wachovia, under duress in 2008. For which Wells got handed a massive amount of tax breaks by Hank Paulson that was snuck into "TARP" at the last minute -even the folks in Congress were outraged... once they bothered to read the bill a few weeks later. [Nov 13, 2008: Washington Post - A Quiet Windfall for US Banks]

Wachovia, on the other hand, was "Pick a Pay" central.

Wells Fargo risks tethering itself to what former Wall Street executive David Shulman calls "wasting assets," since borrowers facing years of negative home equity likely have little incentive to maintain or improve their homes.

So if Wells Fargo is being "good hearted" why not put these people in a fixed 30 year mortgage rather than interest only? Aha - devil in the details. Because these borrowers used option ARMs for a reason - they could not truly afford their home with a conventional mortgage. And they still cannot. Wells Fargo is writing down the principal by an amount that can get these borrowers qualified for "interest only" (i.e. the bare minimum) - and we'll just kick the can for another half decade+. Frankly, it's a disaster for the borrower to stay in these mortgages over the long run... they are just renting as not one iota of principal is being paid.

No position

Potential Fly in Bull Ointment: Early Stage Head and Shoulders Formation

2009-11-06T11:25:00.002-05:00

Many things we are seeing now on the charts are similar to what was happening mid summer. Many of us (hand raised) were excited about a potential "head and shoulders" formation that was in process of being created. (what the heck is a head and shoulders? see here) Literally we were a handful of S&P points away from this formation completing but on a fateful Monday Meredith Whitney upgraded Goldman Sachs (GS), the next day Intel (INTC) reported and bears were steam rolled as we went on a 3 month rally.

In the past week we've once again broken below that 50 day moving average, which *should* have been bearish... on top of that have been 5 (6?) intraday reversals which *should* have been bearish. But the "urgent buyer" reappeared this week [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team] [Jun 29, 2009: Larry Levin - the Visible and Invisible Hand is Everywhere]... he who buys ahead of Fed meetings with no qualms... he who buys ahead of labor reports with no qualms... he whose name I believe rhymes with US waxpayer (allegedly) has always been there to save the day. Hey at least in "transparent" China they admit it...[Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]

Either way we are at a similar crossroads now... it really is not "safe" to be a bull until we begin making new highs again north of S&P 1100. And it appears there is never a safe moment to be a bear as these +2% days come out of the blue at just about every technically important juncture. Here we thought the bears were back in business just a week ago to the day but 4 days of rallying took care of that issue.

As I look at this S&P 500 chart we have the "potential" for another head and shoulders formation similar to July forming, with the right shoulder in process. If that is the case, things should get ugly in the weeks to come. It's far too early to tell and the formation would not really complete until we break down 50 some S&P points. We'll take it day by day... but as we noted yesterday this very abnormal market is making a lot of veterans scratch their heads. Louise Yamada, a very highly rated technical analyst, a was on Fast Money last night and said as much...

So as we said entering the week, we'd be mostly on the sidelines since this is a tricky place where violent reactions to news events could be the order of the day. So far so good, but we still have very little clarity go forward until we break "out" or "down". There are weeks the market is relatively easy to figure, and weeks there are no clear advantages, and for now we are in the latter. A coin flip from here.

Bookkeeping: Making Some Long Purchases

2009-11-06T10:13:00.005-05:00

Now that the 2 big news events of the week are out of the way, and thus far the drop below the 50 day moving average looks just like it did in July 2009 - that is, a headfake I'll get back some longs. I am surprised it is just that easy... we had 5 intraday reversals in 9 sessions during this selloff; in the past that would mean very bad things. But its a new paradigm of easy money I guess.

All the below are stocks that broke back above key resistance areas or never broke down below during this selloff; therefore I can place tight stops and not take too much damage if this is just a head fake. Until that Russell 2000 resistance is broken, which represents the smaller and mid cap names rather than just the typical names people run up on every rally (Google, Apple, Goldman, blah blha), I'm still wary. For you technical folk this could be a "head and shoulders" set up on the S&P 500...(bearish) If so we are in the process of forming the right shoulder.

Example chart I am buying:

I added back to our current names:

1% exposure to Gafisa (GFA)
1% exposure to Blackstone Group (BX)
1.25% exposure to Atheros Communications (ATHR)
0.5% exposure to AsiaInfo Holdings (ASIA)

If the market rolls over and/or these stocks fall again below key moving averages, we'll be right back out. For now I hold my nose and buy a little. Still massive amounts of cash.

Long all names mentioned in fund; no personal position

Bookkeeping: Adding Some Index Longs on Morning Pullback

2009-11-06T09:49:00.004-05:00

Since we broke back north of the 20 day moving average yesterday on the S&P 500 I reluctantly must stash the bear costume and temporarily change course; I used this morning's selloff to cut one of my 2 hedges (I was short the TNA ETF) for about a 5% loss; we had about a 4% allocation coming into the morning. We still hold that long term insurance policy (January SPY puts) that we added early in the week, which already is looking like the Titanic. ;)

I've replaced the TNA short with a 5%ish allocation of TNA long and 5% exposure to SPY calls (November 106s) SWGKC which I will hold as long as 1060ish is held on the S&P 500.

Again, I am not really being facetious when I say "bad things" could actually be good news for the speculators of the US of A. More money printing, more stimulus, more handouts, more programs, more anything and everything. All these things hurt the dollar and until these relationships change and people begin to ask at what point does firing a great many of our consumers matter - I guess we "celebrate" by buying anything denominated in dollars.

If you are newer to the stock market, there is a reason a stock surges when mass layoffs are announced. Lower costs, higher profits. Effectively we are doing mass layoffs to the entire US economy - as we saw yesterday productivity is surging as fewer people do the same work. Since the government has effectively turned into "the consumer", employers don't really need the "people" to consumer organically. The people can just take money from government and spend... the corporation still gets the revenue and does not even have to have workers. We all win here. Ahem. That's basically where we are in America.

To repeat, a break of the 20 day moving average on the S&P 500 and I'll reverse course.

Let's keep an eye on the much broader Russell 2000 as well as it has been a laggard...massive resistance just ahead as both the 20 and 50 day moving averages converge. If "RUT" breaks over that level, it would be very bullish.

Long both names mentioned in fund; long TNA in personal account

Official Unemployment Rate Hits 10.2%; Reality is Far Higher

2009-11-06T09:15:00.002-05:00

I am not going to break down the full unemployment data because like much of our government reporting it is "garbage in, garbage out" and "you can't handle the truth" mixed together. If you are newer to the website please peruse these entries during spare time this weekend

[Oct 2, 2009: True September Unemployment in America Reaches Towards 14%; Our System is Broken].
[Apr 3, 2009: Real March Unemployment Rate Reaches 12.5%] <---last time I reviewed all the inaccuracies of the report
[Apr 2, 2008: The Underemployment Rate is Rising]
[Jan 27, 2008: Monthly Jobs Report & Birth Death Model]
[May 10, 2008: Finally Some Mainstream Reporters are Figuring Out the "Spin" from Government]

But I want to point out a few key metrics and conclusions. First, the politicos (both parties) have changed our metrics since the early 90s. You will hear today that the unemployment rate is the worse it has been in 26 years; that is inaccurate. As best as I can "retrofit" the measurement today, in an apples to apples comparison, if we measured unemployment as we did in the late 70s, early 80s we'd be somewhere in the mid teens. It's been roughly a 4% spread over the old ways we used, i.e. we've been understating by about 4%... so figure 14.2% unemployment.

Second, this data actually comes from two reports - the downright scary thing is the second survey (household) shows the workforce shrunk again. Recall, in America if you don't look for a job for 4 weeks you are no longer unemployed. What we have seen in the past many months (and again this month) is a shrinkage in the labor force. This has held DOWN the unemployment rate. When people actually begin to believe there are jobs to be had they will go out searching which will immediately move them from "nowhere to be found in America's statistics" back to "unemployed" pushing up the unemployment RATE. I thought this is what happened today as the rate jumped 0.4%. But lo and behold, the unemploymentr rate surged EVEN as the workforce shrunk. Again... scary.

Third, other key metrics... the work week is stuck at all time lows: 33 hours. Long term unemployed continues to surge and I have not looked for it but the "birth death model" surely has overstated the results by "creating" jobs in businesses too small to measure. Keep in mind, the government fessed up that through the 1 year ending March 2009 they overstated the "birth" of jobs by over 800K which is why acting like a lemming to any of these flawed government numbers is silly. I expect March 2010 they will come back and say "oops, we did it again" (with apologies to Brittney Spears)

Fourth, the 2 positives: (a) wages gained 0.3%, far better than we have seen in the past few months where it has been 0.0% to 0.1% most of the time (b) temporary workers gained by 34,000 - the first increase since December 2007. So point (a) is an actual green shoot and point (b) is something the market looks for as employers at first stage of recovery hire temp workers first.

We continue to add jobs in the 2 places that are in and of themselves massive Ponzi schemes - federal government and healthcare (which is pseudo government). These are 2 sectors that we don't actually have to pay the bills today, so we just increase their costs each and every year, and borrow to do it - therefore in theory as long as we can print or borrow more money the job growth in these 2 sectors can explode ever higher - and that's what's been happening for 2 decades. Not once in this recession, not even in the worst of it a year ago did we lose jobs in healthcare. It's a magical sector.

Conclusion: I am surprised the stock market is not up 5%+ in pre market. Remember, less employees is a "great thing". It means (a) better corporate profits and (b) easy money from our central bank for as long as the eye can see. Remember, the economy does not need you anymore [Sep 22, 2009: BusinessInsider - The Real Problem is the Economy Does Not Need you Anymore] - we have the Asians to do our work. Jobs only slow down Americans ability to shop. We can continue the Ponzi scheme economy where instead of getting wages for income, our government endlessly borrows money we don't have (or prints it) [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [Jul 30, 2009: Cash for Clunkers a Bit Hit, Government Asks "What Can we Buy You Next?"] Government helps buy us houses, cars... heck even lets us rent our own homes from ourselves if we cannot afford it. What's not to love?

So after an initial hit to the jaw, just as we saw a month ago as people are staggered that things are not improving... speculators should go back to joy within hours or by early next week as they realize - in their world - life is good. Main Street is an afterthought... the market should come to its senses shortly and realize everything is on "track".

Can you hear the next stimulus act being written as we speak? Shhh... listen... you can almost hear the money bring printed from here.

#1 Article on UK Telegraph Website: No Respect, No Morals, No Trust - Welcome to Modern Britain

2009-11-06T07:45:00.000-05:00

At first I was going to post this story from the UK Telegraph as an interesting piece... food for thought if you will... with the tag that this tangent has little to do with the financial world we deal with. But upon further reflection, as we've sat posting story upon story for multiple years about "hapless victims" and "don't blame me" and "bail me out", I see this piece has everything to do with finance. Because the reality is *this* mess, and our response to the mess (sacrifice the savers, hug the debtors / spenders) comes from a much deeper root cause; one that apparently is not being admitted in the Anglo Saxon world. (I'm excluding the Canadians who still seem like a polite people who do not toss each other under the bus)

I will let you read the whole post if interested here, but an excerpt below - if nothing else, it makes you think.

Litter is annoying, but in the grand scheme of a society that has traded personal responsibility for blame transfer, it is little more than a pointer to a deeper malaise: the corrosion of deference in our schools, the abandonment of manners on our streets and, yes, the death of respect for civility and integrity. We are close to the point where ethical behaviour is regarded as an affliction to be pitied, a loser's burden.

In a piercing summary of what has gone wrong, Britain's Chief Rabbi, Lord Sacks, concludes: "Concepts like duty, obligation, responsibility and honour have come to seem antiquated and irrelevant. Emotions like guilt, shame, contrition and remorse have been deleted from our vocabulary, for are we not all entitled to self-esteem? The still, small voice of conscience is rarely heard these days. Conscience has been outsourced, delegated away."

Indeed it has. Individual wrongdoings are, increasingly, an issue not for those concerned, but the state, which dishes out rights in return for unquestioning obeisance. In place of self-restraint, we have installed an all-embracing culture of grievance. Culprits have learnt to claim victim status.

Blue Coat Systems (BCSI) - More Global Labor Arbitrage

2009-11-05T14:55:00.007-05:00

We see in today's news something I believe has been happening for many years, and continues ... under the surface, slowly but surely. I call it erosion because it is not obvious or a "big bang" emergency but as we look around and ask where all the jobs went [Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?] while concurrently trying to create bubbles on 5 year cycles to create work, the truth can be seen in countless press releases.

Here is an example of some news today with a technology company we have owned in the past - Blue Cost Systems (BCSI). As I wrote this morning (and many times before) this increasingly flat world is great for capital, not so fun for labor. Especially labor in high cost countries...(we can argue its a net positive for labor in low cost countries). Speculators are correctly driving up the stock of Blue Coat (+14%) today as "costs are lowered" - sort of ironic because what is good for this company, if extrapolated over countless examples the past 2 decades and many more in the future - is harmful to the domestic society as a whole.

Blue Coat Systems (BCSI) this morning said it will cut about 10% of its staff under a new restructuring plan. The company currently has a little under 1,500 employees.
The company also said it will acquire S7 Software Solutions, a software R&D firm based in Bangalore, India, for about $5.25 million in cash. Blue Coat said it will shift some engineering positions from Sunnyvale (which is where the company is based and Austin, Texas to Bangalore and other locations. It is closing offices in Riga, Latvia; South Plainfield, New Jersey; and Zoetermeer, the Netherland. (sorry good people of Latvia - looks like even you are too expensive to pay)

Sunnyvale, Austin, South Plainfield, Zoetermeer, Riga: 0
Bangalore: 1

If similar to what happens in most companies, expect another victory in Bangalore in about 2-3 years as another tranche of technical jobs is moved out of Sunnyvale and Austin.

The question that needs to be asked is at what point can the government no longer borrow against future incomes to keep the balls juggled in the air. As people lose income one by one, government steps into the void, borrowing money we do not have to keep the Ponzi economy going. I suppose this can go on as long as we can print more money and hand it out in stimuli, and our generous lenders (many of which are taking the jobs) continue to hand us rope.

The gulf between the have and have nots continues to grow by the year, with the government furiously trying to bucket water out of the hull of the boat. While telling us this is just a cyclical issue... not structural. I've disagreed long ago. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] The effect on wages has been here for well over a decade now, and now that the bubble jobs have been destroyed you are seeing what is out there as the tide goes out. I will keep repeating it until I am blue in the face... deflation is necessary for the "average" American to be able to tread water. The cost of living needs to go down - period. [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold] Wages across countries are going to slowly but steadily move closer together - we can stay in denial as long as we want, but it is like fighting the immovable object. Fruitless. Using every government arm possible to try to inflate prices is just about the worst thing you can do to "the masses"... but that's the national policy / solution. Oh well ... I am sure I'll be repeating these themes in 2015 as the successor to Ben Bernanke will be trying to inflate us out of the next crash - because these policies that have failed repeatedly surely will work "the next time". For now, as long as fiat money creation makes the stock market go up - everything under the surface is dandy. (source: dogma)

I will repeat the questions I wrote in September as we are told this is healthy because the middle class of China (Asia) will soon create countless jobs in America by buying our goods (what goods exactly?) [Sep 14, 2009: Global Wage Arbitrade at the Micro Level: Marvell Technology]

How many years will take place between the displacement of workers "today" in America and the "middle class demanding things in China" from America?
What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (health care)?
What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)?
What exactly are Americans making today that the Chinese want and need to import excluding large scale industrial weapons / defense?
What exactly will Americans be making in "some day in the future" (5? 10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?
Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?

Yet Another "V" Shaped Bounce- Old Patterns Seem Useless

2009-11-05T14:30:00.003-05:00

I will say if someone gave me any sort of odds on a V shaped bounce today coming off a late day selloff yesterday that had pushed the S&P 500 to (if you use exponential) or below (if you use simple) the 50 day moving average, I would have taken the opposite side of that wager. I would have been wrong. In front of a market moving economic report premarket Friday, no less. I have been scratching my head at some of the things we've seen from an "action" point of view the past 4-5 months; I continue to scratch.

The market really does not act as it traditionally has... I am not the only one who sees this. If it's computers or "the invisible hand" or some combination of, I don't know. Some smattering of comments over at Realmoney.com

#1

The problem is that trusting that this is another V-shaped bounce just like those at the beginning of September and October is a very tough call, especially with the jobs report pending tomorrow.

Right now it looks like the exact same pattern that we have seen the last two months. We sell off sharply and look ready to gain downside momentum as the month starts, but the buyers make a stand and send us straight back up. As I've commented, that is not what you normally expect to see technically, but it has happened consistently in this market.

So the million-dollar question is whether the pattern of V-shaped bounces to start the month continues or whether we stall out as we run into overhead resistance. I have to stick with the charts and question how easily we can go straight back up, but this market has made those who stick with a disciplined approach look foolish. It could easily happen again.

The strange thing about this market is the lack of counteractive trading... Normally the dynamics of greed/fear will create selling when we pop up big and buying when we drop big.. The bigger the better which will create oscillations that a trader can play... This market tends to move up and go flat... Move down and go flat, so if a trader misses the big moves they are left with little to profit from.. Tough trading.

I agree with Ken and Rev's frustration with the unnatural shapes of patterns these days. I really can't reconcile my technically oriented market view with V-shaped price movement, which is permissible but rare in chart lore. I gave up trying to predict V bottoms and tops years ago, resigning myself to the fact they sometimes happen and, when they do, chances are I'll miss out on the opportunity,

Fannie Mae's New Deed for Lease Program - Rent your Home from the Government

2009-11-05T12:35:00.008-05:00

There are so many rescue programs going on, I am losing track. Thanks to reader Patrick for notifying me of this; I have been so busy staring at the mirror (while clicking heels 3x) slowly repeating "prosperity is back" I sometime forget how "prosperity" is being achieved.

So here is the latest... if you don't qualify for any of the current home owner rescue plans, which allow you to refinance even if you owe ~~105%~~ 125% of the value of your home, you now can qualify for this new Fannie Mae plan. Yes sir... step right up... the government (via Fannie) will allow you to stay in your home as they take over the deed, and offer you a rental option, at market prices. So did you overpay when you put nothing down on that option interest loan using a 48% income to payment ratio? [Sep 26, 2008 : 15% of Americans Spend 50%+ of Income for House Payments] 36% underwater on your home? No problem - we (the collective) are here to "fix it". Instead of that nasty $3200 mortgage you are facing, we sniffed around and renting in your area is more like $1600. So you get to stay in "your" home (yes the one you put nothing down on), for half the rate for 1 year... and then it will be month to month after that. And if month to month means you get to pay a market based rental fee rather than an actual mortgage for say 10 years, apparently that will be ok. Because that's one less hit for Fannie to admit to, as they suck up tax dollars on a quarterly basis. [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You] [Nov 14, 2008: Freddie Mac First to the Trough] [Jan 25, 2009: Freddie Mac Saddles Up for Another $35B] [Mar 12, 2009: Fredie Mac is Back for More of Your Grandkids Money - $30.8B] [May 8, 2009: Fannie Mae with Next $19 Billion Bailout] And we can talk up housing recoveries in the meantime as this shadow inventory of future foreclosures stays off the market... it's a win, win, win. (again) I guess letting people lease their homes is one way to stop walkaways [Nov 3, 2009: Nearly 600,000 Americans Walked Away from their Mortgages in 2008]

So let's review... buy a house way over your means, with nothing out of pocket. Use the most exotic loan possible so your payments on said house are say 40% of what they should be. If the house goes up in value, flip it! Or become a serial refinancer so you can live the good life, using home equity to buy cars, upgrade that kitchen, go on vacation et al.

Now if by some chance the home value goes down... then you cry to government about how the font on your mortgage was too small and you were "tricked". Or, no one told you that home prices could actually go down. You enjoy that house and deserve it after all - even though the down payment and closing cost was rolled into the mortgage and you could never afford it. (small details) So then White House Program #1 came out .... and you could still refinance up to 105% of the value of the home. [Mar 5, 2009: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners] But that didn't work for enough people who put nothing down on their home and quickly were 110-120%+ upside down as home prices fell nationally. So White House Program #2 came out to refinance everyone who is up to 125% upside down. But that also didn't work for enough people so now we have a cool new program where you can lease that house (that you deserve) for rates far below mortgage rates. So in the end, you win - you enjoy the house and the "responsible folk" just watch with jaws agape from afar. And let's remember, all these "housing rescues" do a great job.... of just kicking the problem down the down another year or two [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble]

The surreal life continues - even the name of this program causes chortles. "Dude! I can lease my own house ... to myself - that is so cool!"

Via WSJ:

Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and rent them for up to one year (for "up to one year" is not exactly true - as month to month extensions are available after the first year) as part of the latest effort to help troubled borrowers while keeping a glut of foreclosed properties from hitting the housing market.
The Deed for Lease Program, which Fannie plans to roll out on Thursday, will offer borrowers who fail to complete or don't qualify for a loan modification or other workout to deed their property to the lender in exchange for a lease. Borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments.
To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can't be more than 31 percent of their pretax income.

More...

The rental program will allow Fannie to hold inventory off of already saturated housing markets and makes a bet that the housing market will be stronger one year from now.

And that's really the important thing as we talk up housing recoveries ... don't mind the mirage folks. Move along.

Now remember, as with almost all these government programs - if yuo are trying to do the right thing you are punished. Formerly "on time payers" must first begin to "strategically" miss payments and then all the King's horses (and men) will come to save you. Moral of the story? Don't act like a responsible adult or government largess won't find you.

Borrowers who haven't missed any mortgage payments aren't eligible for the program, and the borrower's mortgage servicer would have to show that a borrower isn't eligible for a loan modification before the homeowner could apply for the Deed for Lease program.

And Freddie Mac will surely be next:

Freddie Mac says it is considering whether to extend longer-term leases to some troubled homeowners. "We're looking into our options because there are certain markets where there's just so much inventory on the market," said Ingrid Beckles, senior vice president of default asset management at Freddie Mac.

One of my screwball predictions in early 2008 was that we might very well reach a point the government buys homes outright; this is effectively where we are now in a synthetic fashion.

Oh well, all I know is anything that keeps people in homes (even ones they put nothing down on therefore the term "owner" is facetious at best, or serial refinanced their way to the point they had no equity) and causes the stock market go up .... is "good". So is there anyone left to bailout - we seem to have covered just about every demographic.

Oops, I forgot - 1 more group to go. [Jul 15, 2009: Reuters - Obama Mulls Rental Option for Homeowners, along with Paying Mortgages for Unemployed]

Bookkeeping: Closing Myriad Genetics (MYGN) as Earnings Fail to Provide a Charge

2009-11-05T10:45:00.019-05:00

We restarted a position in Myriad Genetics (MYGN) as a long term "growth at good value" play about 6 weeks ago, despite a horrid technical condition on the chart. Since then the stock has just sort of hung around and done nothing, trading in a very tight range. I was hoping this quarter's earnings report would provide some "oomph" but it appears we have nothing. No need to wait around at this point as the chart looks no better than it did 6 weeks ago and now our catalyst to change that condition has come and gone. At this moment, the stock is simply in a slow downturn and is a better catch for the bears than for bulls.

I am selling our 1% exposure in the $24.40s for about a 5% loss on the remaining batch we owned. We traded around this position in small pieces during the past month but any gains or losses were inconsequential.

This is just one of those names I am confused on; the market runs up broken companies with shrinking revenue in stagnant industries on hope they can turn around the business as the economy recovers... and is happy to hand them 50, 60, 70x PE ratios. Then a company like Myriad who has solid revenue growth (>20%) and profits up year over year is abandoned. While they did miss "expectations" that is just a Wall Street game - their core business shows solid growth metrics but apparently that means nothing if you don't beat analysts guestimates. And they re-invested in themselves with a large R&D surge, another no-no on Wall Street. Much better to forgo research and development costs so as to "beat the number" - short term thinking over long. Cramerica style.

A look at their earnings from Wednesday:

Molecular diagnostics company Myriad Genetics Inc. said its fiscal first-quarter profit doubled on higher revenue from cancer tests. Its molecular diagnostics business sells a range of tests aimed at assessing risks for breast, ovarian, colon, and skin cancer.
Revenue rose 22 percent to $85.1 million from $70 million.
The company earned $30.4 million, or 31 cents per share, in thew three months ended Sept. 30, up from $14.5 million, or 15 cents per share, a year ago. (that's a bit deceiving) The company's year-ago period included a loss of $10.1 million from discontinued operations of its former research and drug development businesses,
Analysts on average were expecting a profit of 34 cents a share, before items, on revenue of $88.1 million.
For the quarter, research and development expense jumped 30 percent, while operating expenses rose 19 percent, the company said.
"While the weak economic environment continued to restrain overall revenue growth compared to the prior year, the company has begun to see stronger demand return for its products during the latter half of September and continuing through October as a result of its ongoing increased sales and marketing efforts," the company said in a statement after the markets closed Tuesday.
Chief Executive Peter Meldrum said though Myriad's first-quarter revenue was affected by a weak economy, the company is still "comfortable" with analysts' consensus revenue and profit estimates for fiscal 2010.

No position

Groundhog Day - is it Wednesday or Thursday?

2009-11-05T10:09:00.008-05:00

Apparently I missed the "going out of business" sale on stocks announced this morning. So we sell off late yesterday (bearish), and today - everyone wants back in.... ahead of an important announcement. Just like they did yesterday morning? What day is it again - this all looks familiar. 2 day chart, intraday below - carbon copy so far

Who is so antsy to get into this market? Hmmm... count me boggled by this rush to own equity both morning's.

Well as "someone" pushes us right back to yesterday's highs we stare at the exact same resistance levels that we were staring at 24 hours ago.

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

We had a few economic reports this morning, quite a toxic mix for Main Street but fantastic for corporate America. Unit labor costs fell by over 5%... but productivity surged at a level I've never heard of before ... well over 9%.

The productivity of U.S. workers surged in the third quarter at the fastest pace in six years as companies squeezed more from remaining staff to boost profits.
The measure of employee output per hour jumped at a 9.5 percent annual rate, topping the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington.
Labor costs fell at a 5.2 percent rate, capping the biggest 12-month drop since records began in 1948.

In English this means companies are doing even more with less. And these are the laws of the economic jungle... limited amount of jobs and desperate people willing to work longer and harder to keep them, while competition standing outside the door is willing to take lower wages to snag them. [Sep 4, 2009: Job Seekers Across America Willing to Take Substantial Pay Cuts]

The productivity report also showed hours worked declined at a 5 percent pace, while output climbed at a 4 percent rate.

This actually all fits part and parcel with many of my long term predictions as the globe flattens. competition increases, and domestically countless "fake" jobs created by nothing more than previous bubbles do not come back to the US. Until Ben Bernanke creates the next bubble of course. I won't even bother to rehash how regressive a policy it is to use your central bank to try to reinflate prices in a country where wages are stagnating. It's pretty evil actually.

....the 12-month increase in hourly compensation at 0.5 percent was also the smallest on record.

The main hope as surely offered by financial entertainment TeeVee is there is some breaking point with the current workforce, and soon owners of said corporations will need to hire someone to help share the workload. It's a great time to own capital in this world as the global labor pool views for X amount of jobs.

Fuel Systems Solutions (FSYS) Rockets Over 20% on Huge Earnings Beat

2009-11-05T10:00:00.003-05:00

While happy to own Fuel Systems Solutions (FSYS) we took profits on this name after a long standing limit order hit [Oct 28: 2008: Bookkeeping - Limit Order Hit for Fuel Systems Solutions], and we experienced a spike in price the very next session [Oct 29, 2009: Bookkeeping - Selling Most Fuel Systems Solutions on Spike] , and are just sitting with a tiny 0.1% exposure. So correct assessment of a company, bad timing in terms of lacking exposure - we normally cut back ahead of earnings either way, but since the stock had broken below its 50 day moving average we were at our lowest possible exposure. Obviously technical analysis is moot around important news events. As I type the stock is up 23%...

Either way, very impressive results; 77 cents per share excluding "one time" items, 34 cents better than expectations on only 10% year over year revenue growth. Obviously they can now raise guidance for fiscal 2009 - which they have: $416-425M v $379M consensus. Gross margins target 30-32%; operating margins 14-16%.

Via Reuters:

Alternative fuel components maker Fuel Systems Solutions Inc (FSYS) posted a quarterly profit that beat market expectations helped by strong demand for alternative-fueled vehicles, especially in Italy, and raised its full-year revenue outlook.
Revenue rose 10 percent to $116.2 million.
For the third quarter, net income attributable to the company was $15.5 million, or 88 cents a share, compared with $11.9 million, or 75 cents a share, a year ago. During the quarter, the company recorded a gain of 11 cents a share related to an acquisition.
"While the soft global economy continues to impact the transportation aftermarket and industrial businesses, OEM/DOEM (delayed original equipment manufacturer) transportation demand has gained momentum during the second half of 2009," Chief Financial Officer Matthew Beale said in a statement.
Fuel Systems, which acquired Teleflex Inc's power systems business, said demand from Europe will continue.

Guidance:

For 2009, the company sees revenue of $415 million to $425 million, up from its prior view of $370 million to $380 million, driven by margin improvements and acquisitions.
In 2009, the company expects a gross margin of 30 percent to 32 percent, and operating margin of 14 percent to 16 percent. In August the company said it was targeting 2009 gross margin of 28 percent to 30 percent, and operating margin of 11 percent to 13 percent.

Full report here.

[Jul 2, 2008: Bookkeeping: Buying Fuel Systems Solutions for the 3rd Piece of my Alternative Energy Basket]

Long Fuel Systems Solutions in fund; no personal position

General Updates: Mutual Fund, Website, Misc.

2009-11-04T15:45:00.028-05:00

Next week we'll have an update on our performance metrics (as we do every 4 weeks) and I'll do a full update on pledges for launch, but I thought I'd take a moment to address some questions I often receive - especially from newer readers.

We have a lot of email readers so I want to stress that on the website itself there are tabs along the top where just about anything asked has been answered before. Performance & Portfolio is here, Mutual Fund Pledges and Frequently Asked Questions here, plus some of our history since August 2007 as we soon approach 5000 posts (ouch!) ... for example some of our calls on the economy, housing, etc from 07 and 08 are layered in this section. Understanding that new people show up every day, I tried to collect the main features across the top menu of the website so a new reader can jump in and get up to speed relatively soon.

That said, let's touch on a few topics.

1 - Pledges

This has been our best month of pledges ever, besting even our peak levels in summer 2008 when we were regularly getting $500-$700K a month. Things were going so well summer 08 in terms of pledges, the belief was we'd be up and running by spring 2009. Then of course the crash of Sept/Oct 08 happened, and basically we were wondering if we'd have an economic system to wake up to, not to mention a stock market. Then yet another crash in Jan/Feb 09 didn't help. While we are ambivalent on market direction per our strategy, I've found an upward rising market certainly helps spirits since 95%+ of all money in the market is skewed to the long side. Either way, it's been a long 14 months since August 2008 but we've not only passed our best monthly total in pledges at over $800K - both new pledges and past pledges who have increased their future investment - but we are also at the highest absolute level as well; closing in on 2/3rds of the way there. Full update a week from now.

2 - When will you launch the real thing?

This is the #1 question I get, and I always give the same answer. It is not up to me, it is up to the readers. Frankly some of my readers have much more patience than I do as this has been an "open ended" journey of 2+ years, with no firm end date. I'd have lost interest by now if I was on the other end of this website ;) We have roughly 150 pledged investors now, and some 40-50 of them have been around since we started taking pledges February 2008 - through both crashes ... and still kicking.

But as we get closer to the end goal let's look at some potential outcomes. I will consider this month of pledges as an outlier - but hope it is not. ("assume the worst, hope for the best" strategy) Considering a more normalized run rate of $250K / month, we are talking 6 months before getting near to $6M in pledges which is when we'd begin the actual filing with the SEC for fund approval. In the SEC hand's it could be 60, 75, 90+ days... impossible to determine, but from there it's "on" and we're live. The time for SEC approval should give us a couple more months to go from $6M to "close to" $7M - which is roughly where we want to be at launch. Obviously any pledge pace that surpasses the $250K / month to the upside means getting started sooner rather than later - and vice versa. But throughout the past summer $250K has been a consistent floor. In summary, this *will* happen - it's just a matter of when.

3 - Will you still have a "blogging" type website?

Of course - how could you live without me now? (don't answer that) I will still do a commentary type website with much more than you see elsewhere in the mutual fund world - in fact "transparency" was my original selling feature. Obviously performance in the long run is important as well... having a manager who is transparent but trails the market by 10% annualized is not going to help an investor very much. But the idea here was to provide a lot more information flow so less passive investors can be updated on what is going on with their money. I am sure there are countless people out there who are far better investors than I - who will never get an opportunity. And there are far poorer investment managers out there, who by reputation or inertia run billions of dollars. So we're here to fill a niche both in information flow and to a lesser degree - investment style. Our piece in Barron's last year sort of covered this from a 40,000 foot level. [A New Kind of Fund Manager]

Some caveats - the website won't be the same as it is now, since the SEC won't allow it. Essentially NOTHING stock or market specific can be forward looking, as per my understanding (made clear to me by advising lawyer). So, FMMF website is basically a look at my day to day thoughts on the markets / stocks, to show strategy ... process ... technique. Anyone who follows this site for a month can see the patterns and they are consistent. But the future website will be different in that it caters more to fund investors or people who want to know what is going on the financial world; but in terms of "stock stuff" it will be backwards looking in terms of what we did, NOT what we plan to do.

Unlike most mutual funds who throw up a top holdings list every quarter, with commentary that is 45 days after the last day of the quarter, our investors will have much more timely information. I expect to do quite substantial updates in terms of "this is what we hold, these were our main moves" every 2 weeks, or 26 times a year. Meaning about 7x as often as most funds, with far less lag time. On a daily basis I still expect to talk about the economic issues and highlight interesting financial stories - similar to what we do now. The frequency of posting each day will be a bit less than is done now, because I need to concentrate more on managing money and actually getting more than 4 hours of sleep a night. However as stated above, the core change will be with "stock talk", transactions, and the like.

One more thing, we'll be parting ways with this lovely website and moving on to other pastures. Destination unknown ... I would like to create a relatively clean and simple site similar to this (see here), with a 'commentary' section for the blogging. If any reader with super html programming skills HAPPENS to be available and has a spare 30 hours this spring - send me an email.

4 - Will the mutual fund be available in Fidelity, Schwab, Ameritrade, etc etc?

Short answer: no. I don't like that, but it is just the economics of the situation. Due to costs this has to be old school at the beginning where you download a form, fill it in, mail it and have a stand alone account. Fidelity and Schwab have excellent supermarkets but it's akin to the Russian mafia... huge costs to get in, and they take a huge amount of ongoing fees each year. If you are a $100M+ asset level fund it can make sense (maybe). But impossible for a smaller fund, without destroying your cost structure. As for the brokerage houses (i.e. Ameritrade) we'll eventually be on there but first you need some track record, and then pay some fees to be on a network. However, the fees are relatively manageable versus the duopoly that controls the mutual fund supermarkets.

5 - Will there be retirement accounts, will their be automatic monthly investment options, etc.

I listed 2 questions but there are about 10 related questions I receive often. The easiest way to answer is ANYTHING you can do in any other mutual fund, you will be able to do here. Other than the items pointed out in item 4. Simple as that.

6 - I need a name

We were originally going to go with Rising Tide Funds but I am not sure if I still want to go in that direction - maybe, maybe not. . If you can think of anything creative but won't scare off people still embedded in "The Matrix" feel free to email me.

7 - FAQ

Again, I covered a lot of questions that typically come up about a year and a half ago in this entry. [May 26: Frequently Asked Questions] I have not looked at it lately to update it, but I assume 90%+ of it holds true today.

To reinforce, outside of actual fund strategy everything I am doing is outsourced to 3rd party experts. I don't want to think about anything other than "buy stock, sell stock, short stock." All the mechanics, NAV information, back office blah blah will be done by this firm: Mutual Shareholder Services - who caters to 80+ mutual funds, of the smaller to medium sized ilk.

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

As always thanks for continued readership, pledges, donations, interest and it's been quite a journey - certainly we could not of started the website at a more incredible time in the country's financial (and otherwise) history. I expect the unexpected as we continue to move forward.

Any specific question not covered in FAQ, or above - feel free to email me as always.

Whitney Tilson T2 Partners October 2009 Investor Letter: Housing Market Still in Trouble

2009-11-04T14:00:00.007-05:00

As we await the the gods on Mount Federal Reservus to let the humans know their fate, we have an excellent presentation by Whitney Tilson of T2 Partners - embedded within his monthly investor letter. While others have done a better job of self promotion, Tilson actually made many prescient calls on the housing market the past 24 months (much like a certain blogger) - essentially he believes we are in the eye of the storm.

While a lengthy presentation, the housing market section is a great overview loaded with graphs, charts and for those of you old enough - similar to how Ross Perot tried to educate the masses about the federal budget circa 1992. It begins on page 9 and many pages are simply 1 chart or another - worth a look through.

He also has a large section of why the unemployment situation is awful; unfortunately he uses government data which we know is ~~a bald faced lie~~ open to serious debate. [Oct 2, 2009: True September Unemployment in America Reaches 14%] But the economic conclusions are similar to ours.

As always click "fullscreen" for an easier read (I believe email readers will need to come to the website)

Hat tip to Marketfolly

Whitney Tilson T2 Partners October09

Bookkeeping: Selling a Third of Silver (SLV) Position

2009-11-04T12:15:00.001-05:00

With our largest long position, Ultra Silver (AGQ) up by 15% in a session and a half, we're going to sell a third here around $62. I cannot see anything the Fed doing hurting gold or silver, but we've been buying on dips so I am just going to lock in some profits.

While gold has reached new nominal highs, silver has been lagging a bit of late - but it was surging ahead of gold much of the previous few months. Silver has use in industry unlike gold, so its more of a duopoly play on both "store of value" and "economic growth", while gold is simply the former. We've actually been overweight silver and underweight gold.

I am going to put another limit order to sell one third at $66 which is the current resistance to see if Ben Bernanke's reign of dollar destruction can give us a quick rally post 2:15 PM in the precious metals. If not, we'll just buy back on dips. A break over $67s would obviously be very bullish (please note - TA should be done on the underlying index - in this case SLV, not the 2x, 3x ETFs - just making use of this above chart to represent the logic)

Long Ultra Silver in fund; no personal position

Still Many Broken Charts Despite the Index Rallies; Russell 2000 Under Performing

2009-11-04T11:45:00.030-05:00

Something that has been apparent lately is the weakness in small and mid caps, masked by the relative strength in large caps. We can see this in the indexes - while we've corrected some in both NASDAQ and S&P 500 it is nothing like what I am seeing on individual stocks. I don't often post a chart of the Russell 2000 which is a much broader index, combining S&P 500 type of companies with a good selection of mid cap and the larger stocks in the small cap universe but you can see what I am talking about in a picture. We're not even close to the 50 day moving average in this index - unlike NASDAQ and S&P 500.

As I scan through names of names we own, or of interest I see the same pattern. Now of course in the "student body left" trading environment - all it takes is a bludgeoning of the US dollar, and we can rally every stock in the universe up in 1 huge correlation trade so this can change in a heartbeat. But thus far, it hasn't. In fact... with a tight stop... these are the type of charts I like to go short, rather than go long .(EJ and ATHR look very appealing)

Here are some example of what I am speaking of just from the portfolio holdings - many more in my watch lists all in exact same pattern. This shows me that breadth stinks and its a narrow rally led by the 'go to' names than institutions love to flood into to, along with oversold bounces in smaller names. The larger cap preference has been the case 2 weeks previous to today as well; only last week did the larger names finally get hit.

Instead of that sort of action, from the long side we'd much rather see this:

Market Jumps Back over 50 Day Moving Average as Investors Predict More Easy Money

2009-11-04T11:02:00.007-05:00

ISM Services came out this morning; unlike ISM Manufacturing on Monday which is just a fraction of our "new paradigm" economy (12%ish) - investors still seem to pay far less attention to services... as if we're in America 1964. Meanwhile, services is now the dominant part of the US economy so should be the focus. Again, taking *any* government data with huge grains of salt, ISM Services came in below expectation (yet still slightly expansionary) but the market could care less.

Service industries in the U.S. grew in October at a slower pace than anticipated, a sign growing joblessness may restrain consumer spending. The Institute for Supply Management’s index of non- manufacturing businesses fell to 50.6 from 50.9 in September. The index was projected to increase to 51.5, according to the median forecast of 77 economists surveyed by Bloomberg News.

3 key points under the headline number- new orders, employment, and prices paid.

(1) The ISM non-manufacturing gauge of new orders increased to 55.6, the highest level in two years, from 54.2 the prior month. (that's a positive) (2) The index of employment dropped to 41.1, the lowest level since May, from 44.3. (that's a negative, at least if you think jobs matter) (3) A measure of prices paid climbed to 53 from 48.8. (and that folks, is inflation and an offshoot of a weak dollar - bringing products into the country is getting expensive which will squeeze profits)
Mounting unemployment may mean consumer spending will only accelerate with government assistance, indicating the emerging recovery may lose momentum as stimulus fades.

I am now at the point I am wondering if the speculator class would prefer bad news or good - I think they might prefer bad. Why? Because bad news means more and more easy money for as far as the eye can see. Now that we've "stabilized", good news is no longer "good" ... it was "good" for a while because it showed that paper printing prosperity (P cubed) could take us back from the abyss. But now good news will mean the potential end of free money and an economy that has to somehow stand on its own. And what is America without free money? [Jun 3, 2009: A Country that Cannot Function Without Easy Money] We're years away from that point... if ever?

As for the market, we've jumped back over the 50 day moving average and the volatility continues - it remains too tricky for me, I'm basically sitting it out as the lemmings rush back and forth - hour by hour. I don't see what has changed from Monday other than greed to fear and back. While I expect nothing really to change from the Fed statement at 2:15 PM, and my assumption is the market will "love" that - who really knows. Well apparently one firm knows... and today they wanted the market up, so up it is.

The 20 day moving average has dropped severely the past few days and has now fallen from 1070 to 1062 very quickly - market is hovering right around that point. The kerosene is ready, all we need is Ben Bernanke's match. [Sep 12, 2009: Federal Reserve's Kohn: We Plan to Keep Throwing Kerosene on the Fire] If we are off to the races for the rest of the year this "break" of the 50 day will again be atypical, and similar to July 2009 when we stood below that level for 6 days only to begin an epic 3 month rally - crushing the bears soul. S&P 1080 and 1100 are the only real resistance levels to the upside once we clear this 20 day - it's really a market that can go either way from here.

I'll be glad when this week is over and news events don't dominate as much. Right now the time frames are really short; many stocks I own in small quantities have thus far simply rallied back to below key resistance - perhaps the fireworks display at 2:16 PM will set them afire and catapult them higher. We'll see, but I'm taking my cues more from individual stocks at this point, as to whether to increase long exposure. Most say "not yet".

Goldman Sachs (GS) Q3 Winning Percentage: 98.4%

2009-11-04T10:05:00.010-05:00

Well, here I thought it would be in Goldman Sachs' (GS) interest to "lose" a few days on purpose to make it look like the game is not quite so rigged, but the firm believed that the previous quarter's winning percentage could be bested [Aug 5, 2009: Goldman Sachs Q2 Winning Percentage - 97%] and they've gone ahead and done it. Q3 2009's winning percentage has come in at 98.4%; for you home gamers that means 1 losing day out of the entire quarter (64 sessions). If we put the last 6 months together, that is 3 losing days in half a year.

Via Seeking Alpha

Goldman Sachs' (GS) Q3 trading record: In 64 trading days, it lost money on just one, and made more than $100M/day on 36 days - down from 46 in Q2. On the quarter, equities commmissions fell to $930M from $1.2B a year ago, but trading profits soared to $1.8B from $354M.

Just remember, as with Bernie Madoff don't ask questions about how this is done (editor's note - not implying Goldman is a Ponzi); just understand he / they is / are smarter than you, and the black box they have is superior than anything else seen on the planet. It has nothing to do with former Goldman officials placed in major posts throughout our government, superior information flow, trading huddles [Aug 27, 2009: Goldman Sachs Trading Huddle] , high frequency trading dominance, and multiple items I am forgetting or won't ever know about. Access to information is not an advantage right Mr. Gekko?

The most valuable commodity I know of is information. - Gordon Gekko

Anyone who questions this is just jealous. It's all about "talent" (of the super human... or super computer kind), and as the first state sponsored ~~hedge fund~~ bank holding company, it is your job as taxpayer to stand behind Goldman Sachs (GS) if at any time in the future these bets go awry. Thankfully it appears we never have to worry about them making any mistakes.

Somewhere, Matt Taibbi just had a convulsion. [Jun 25, 2009: Rolling Stone - Goldman Sachs, The Wall Street Bubble Mafia]

ZeroHedge also weighs in

No position

STEC (STEC) Crashes 30% on EMC (EMC) Inventory Warnings

2009-11-04T09:19:00.005-05:00

As with sports, sometimes the best trades are the ones you never complete. [Sep 22, 2009: Missed STEC Purchase by 23 Cents] Former momentum darling STEC (STEC) [July 16, 2009: STEC - Keeps on Tickin', Never Quittin'] is down 30% premarket despite good earnings this past quarter. The culprit is guidance due to an inventory issue with EMC (EMC). STEC's wonder product is the Zeus Solid State Hard Drive, and EMC is 90% of that business, so effectively STEC is joined at the hip with any EMC decision. This massive selloff does provide a compelling valuation; however the gap down today and residual fleeing of momentum lemmings is going to take time to resolve. The bigger question is how much time does STEC have before competition begins to crowd into the space, and start to compress financial metrics.

In a larger macro picture it makes one wonder about the "technology is the one place company's are spending during the ~~recession~~ recovery" thesis.

Via Reuters:

Flash memory storage products maker Stec Inc's (STEC) shares shed a third of their value after the company warned that a key customer, EMC Corp (EMC), would carry 2009 inventory into 2010, putting Stec's first quarters results at risk.
The warning could indicate that the rate of replacing traditional hard drives with Stec's solid state drives (SSDs) in the enterprise storage and server market could be slower-than-anticipated. SSDs are viewed by many as the future of the disk drive industry as they are faster and, unlike hard disk drives, have no moving parts, making them sturdier.
EMC, which accounts for 90 percent of Stec's Zeus IOPS SSD business, had placed a $120 million order for the second half of 2009, of which $55 million has been delivered, Chief Executive Manouch Moshayedi said on a conference call. The rest of the order is expected to be shipped in the current quarter, Moshayedi added.
Zeus IOPS contributed $60.7 million to Stec's third quarter total revenue of $98.3 million. Third quarter profit rose to $24.5 million, or 47 cents a share, from $1.2 million, or 2 cents a share, a year ago. Excluding items, it earned 50 cents a share. Analysts were expecting earnings of 47 cents a share on revenue of $96.6 million.
Gross margins rose to 49.7 percent from 32.1 percent.
The company forecast fourth-quarter revenue of $101 million to $103 million, below analysts expectations of $106 million. Earnings excluding one-time items would range from 51 cents to 53 cents.
"We were taken by surprise that (the inventory issue) occurred in the September quarter. We were expecting it in the March quarter," Capstone Investments analyst Jeffrey Schreiner said by phone. "We see the inventory adjustments impacting Stec beyond the first quarter of 2010," Schreiner said, adding that he expects overall demand for SSDs to pick-up again in the second and third quarters of 2010.

Further comments via Barron's blog

He (CEO) also indicated on the call that sales of the Zeus line in the latest quarter were $60.7 million, below previous guidance of $67 million to $68 million. He also indicated on the call that sales of Zeus SSDs to IBM have also been disappointing; he said that “IBM has not found a way of going and implementing SSDs into the market yet.” He added that demand from Sun Microsystems also is “a little bit slow for us.”
Moshayedi also insisted that, contrary to some recent analyst comments, the company is not seeing any direct competition in the enterprise SSD market. “What I can tell you is there is absolutely no competition,” he said. “To this date, we have not seen, nor has our customer seen, a product that competes with Zeus|OPS…There is not one single competitor out there. If there were competitors coming in, we would estimate that they would come in somewhere around mid-2010…these reports that competition has come in are absolutely false. None of our customers are going with the competitors.”

That last comment is very interesting since analysts are already raising alarm flags about competition. Someone is distorting the truth. Seems like an overreaction but the type of "investor" in these type of high growth stocks does not allow for mistakes.

[Sep 18, 2009: Will STEC Fill its Gap?]

No position

Nouriel Roubini on CNBC: "Mother of all Carry Trades"

2009-11-04T08:50:00.002-05:00

While Nouriel Roubini has received some flack of late, and in my estimation his biggest mistake was turning into a "market guru" rather than sticking to his bread and butter, economics - the following video interview this morning on CNBC aligns quite well with my world view. The main difference is he believes stimulus will peter out in 2010 whereas I think our reckless leadership will continue sending stimulus after stimulus with no care to the ultimate costs on future generations. They have elections to win.

If you are unfamiliar with the term "carry trade" see this [Sep 18, 2009: US Dollar Replaces Japanese Yen as "Carry Trade" Currency]

(Email readers, you will have to come to the website to watch the video)

9 minute video

Via CNBC

The "mother of all carry trades" that Nouriel Roubini warned of recently is growing and threatening to cause a global implosion, the economist warned in a CNBC interview.

For the second time in as many weeks, Roubini cautioned that investors using cheap US dollars to embrace risk will quickly reverse course once the greenback strengthens.

But he intensified his prediction, saying that the likelihood of the Fed keeping interest rates low and thus weakening the dollar will prolong the carry trade and make it all the more painful when it starts to unwind. Roubini is an economist at New York University and chairman of RGE Monitor.

"Eventually there's going to be an end to this carry trade," he said in an interview. "When that snapback of the dollar is going occur it's not going to be 2 percent or 3 percent, it's going to be more like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they'll have to sell these risky assets across the world and you could have this huge asset bubble going into an asset bust."

With the Fed unlikely to change its monetary stance following the close of its Open Market Committee meeting today, the dollar carry trade will grow through next year and continue to boost the prices of commodities and global equities, he said.

"It's going to eventually occur but it's going to be six months from now, a year from now," Roubini said. "In the meanwhile the bubble's going to become bigger globally and the bigger the bubble the bigger is going to be the crash."

Another problem he cited was the market's pricing in of a V-shaped recovery, which would see the economy improve sharply without a significant additional decline.

Instead, Roubini predicted the bounceback will look more like a U-shaped move, with the expiration of the dollar carry trade and the subsequent popping of the asset bubble exacerbating the slowness.

"It's like a rush to the exits. When everybody tries to go at the same time there will be a stampede," he said. "Risky assets are going to collapse, the dollar's going to snap back. So the risk is that there's not an orderly way of doing it unless you more aggressively signal (a change in monetary policy). That's not what the Fed is telling us, that's not what the other central banks are telling us."

Yet Roubini conceded that at least part of the seven-month stocks rally has been based on fundamentals, but they're not strong enough to justify all of the growth.

"Part of that increase in price is fundamentals, but it's become so rapid and so perfectly correlated around the world," he said. "Price (to) earnings ratios are out of hand. So there's a signal of a bubble and that's what many policy makers in this country are worried out."

Central banks will be looking at the issue of asset bubbles more closely in the months to come, Roubini predicted. "It's not just Roubini's worried about it," he said. "Globally, people are starting to worry about it because it's getting out of control. That's the reality of it."

(editor's note - be careful when people start referring to themselves in the 3rd person)

Showdown at the Federal Reserve Corral

2009-11-03T16:12:00.004-05:00

With apologies to Shakespeare, in 22 hours we have our answer...

To give them endless more free punch OR to actually let the reckless teenagers of the market know that one day the central bank might actually act like an adult .... THAT is the question

The showdown between bulls and bears will commence at 2:15 PM tomorrow....

.... at which time we all act like lemmimgs herking and jerking the market around as if 2 words in a statement will change the destiny of the galaxy. (perhaps even the universe) We sit right below the 50 day moving average on the S&P 500 again. All it will take is Father Ben Bernanke to bless his minions with promises of endlessly more free money for "an extended period" of time and we can post more bear hides to the wall.

Then after acting in a mindless manner for 105 minutes Wednesday afternoon, we will forget about that "all important" decision by mid day Thursday and repeat the whole exercise premarket Friday at 8:30 AM. We will call this "investing".

Such is life in the computerized, HAL9000 driven ~~casino~~ stock market where long term means 8 minutes.

"I, Mark, do solemnly swear to follow PhD programmed algorithms in whatever direction they determine that 2 words in a Fed statement here or 28,000 jobs plus or minus there, shall deem us worthy to go. I shall then chant "the market knows all" and "as long as the market goes up, all is right with the economy" as my dogma handbook says, while smiling for CNBC."

Nearly 600,000 Americans Walked Away from their Mortgage in 2008

2009-11-03T14:15:00.007-05:00

Great news; I believe the number of mortgage "walk aways" is "better than expected" - now how do I buy stock on deadbeats? (DBDT?) Look there was no problem buying these assets when all they did was go up; even better when one could serial refinance to live the "life we deserve", but nowhere in the contract did it say the house could go down in price. Therefore, it's time (and our right) to walk away. In 2007 and early 2008 we said this would be a big issue as masses of home owners became upside down. In fact our prediction was eventually 1 in 4 homes would be underwater - we should be very close. [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater] [Mar 9, 2009: One in Five Houses Underwater] Frankly I have not checked lately because what's the problem? Let the taxpayer take care of it - if not through direct bailout of the banks [May 29, 2009: In 1 Year US Taxpayers on Hook for More than $55,000 per Household], then certainly through much higher fees. [May 29, 2009: USA Today - Banks Find Ways to Boost Fees]

Anything that it takes to get this conspicuous consumption economy going again (and stock market surging) is fine by me - even people who live "rent free" for a year in excellent housing accommodations... that they put nothing down in the first place to "own" before slipping away into the night - I'm all for it. All that money not "wasted" paying for mortgages simply means more moolah to spend on other items which will help us drive the market up on "green shoot" retail spending reports. Just consider it another form of stimulus - the Homeowner Self Stimulus Act of 2007-2011.

Via USA Today:

The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it's not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.
"I'm walking away from my house," says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. "The bank can have it." (that's six months of income to spend on shoes, jewelry, eating out, whatever is needed... multiply by a few million each year in some form of default... it soon adds up. Better than a tax cut!)
What Sakson did is called a strategic default, or a voluntary foreclosure, and it's fast becoming a major challenge to the government's $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years.
Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman.

Now as we said a few days ago, with the government's new fangled $6500 handout to "move up" buyers, we are giving America's "future walkaways" an excellent chance to play the rest of us for fools. If you can time it well, you can buy that new home for a price far below that underwater anchor around your ankle, collect $6500 at GO (smile for the camera), and then leave the anchor at the doorstep of your fellow taxpayer. You win! What's 100 points on a credit report if you were going to default in 6 months anyhow - you are in a shiny new home with a reasonable payment and your "mistake" is absorbed by the system, with $6500 fresh smackeroos to boot. I know, I know - that sounds almost fraudulent - it could never happen. [Oct 22, 2009: First Time Homebuyer Fraud Called Disturbing] Ahem.

While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson's predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.
Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.
Janet Speer, 51, isn't happy to be walking away from her 200-year-old home in Royersford, Pa., but she doesn't feel ashamed. Speer says she was paying about $1,400 a month for her home, which was appraised at about $155,000.
Speer stopped paying on her mortgage in September 2008. She is still living in the home and waiting to be foreclosed upon.

So Ms. Speer is on month 14 of living "rent free!" After all, the banks don't want these darn homes - they'd have to admit to actual losses; much better to "mark to myth" which was the rule change in March 2009 (right about when the stock market went on an epic rally) because banks are "in the clear." I am sure Ms Speer's mortgage is fully marked up on some banks balance sheet... no losses to be seen.

Do you think Ms. Speer is stressed? Nah, those pesky banks don't even bother her anymore. Heck she might be able to live there for another year or two... helping to contribute to the economy through spending on other items not called a "mortgage".

"I got letters and calls from the bank at first, but they stopped,"
I would never have chosen to do this, but it's going to work out."

More ...

"It's increasingly a more important factor driving the foreclosure crisis," says Mark Zandi, of Moody's Economy.com. "As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time."
Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida. From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.
The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they're able to pay the mortgage. "It's a very large number, and it's a very, very significant risk to the housing recovery," says Sanjiv Das, CEO of CitiMortgage....

Wow, that sounds awful... how could we ever bribe Americans not to walk away from their homes? Aha, solution located!

....adding that new government programs to curb strategic defaults may be needed. (more! more! give deadbeats more of my cash - please take all of it, the whole piggy bank)
"A better way to do it may be an incentive to stay current for a period, and after two years of being current, they get a principal reduction," says Das.

Hmmm... as with all these
government programs, that sure will go down well to all those who have been responsible and paying their bills. Oh I know.... I know... it's good for all of us, we "have to do it". I learned all that dogma about 8 stimuli/handout/bailouts ago. I can repeat it verbatim.

Even more troubling it is the people with decent FICO scores who are more than willing to walk away as a financial decision... so this isn't your subprime folk.

The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay.

And it's spreading like H1N1! Pssst... found a way to get out of that mortgage payment... wanna know how?

There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82% more likely to declare their intention to do so.

There used to be a time in this wonderful country where people took care of their debts, and it was shameful to walk away. Neighbors would "talk"... now neighbors appear to share strategies on defaulting instead. The more you see people doing it, the less the stigma and soon Bailout Nation melds with Deadbeat Nation. Everyone's doing it, it's cool!

"The most disturbing aspect of this is that it's becoming acceptable to do," says Joel Naroff, an economist with Naroff Economic Advisors. "What does that mean down the road for housing and the economy if people are happy to walk away and destroy their credit? They're saying, 'Why pay a high amount if they can get something, even a rental, for less?' "

Surely these people must suffer far more than simply a FICO score hit?

In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.
Short sales, in which lenders agree to the sale of a home for less than the balance of the mortgage, is an alternative to a strategic default. Many lenders are now encouraging them, but Zandi says that alternative may seem too time-consuming for borrowers who want to quickly get out from under their homes.

Who has time or wants the stress of a short sale? My gosh, all this non payment of bills is far too much work! Much easier to send jingle mail...

Expect a lot more walkaways in 2009. You get to live for free for apparently year(s), society doesn't frown on it, and banks don't even bother you anymore. Ehh... you take a hit on the credit score - oh well. I believe we call that a win-win-win. With all these non payers in the system we can only ask why retail sales are not shooting through the roof.

Apple's (AAPL) iPhone Only Sells 5000 Units in 1st Week of China Sales

2009-11-03T11:30:00.008-05:00

For those of you who took an economics course at some point in life, I am happy to report "price elasticity" is still alive and kicking. It appears the $1000 price point for Apple's (AAPL) iPhone is a bit of an issue for the "middle class" of China, and this is for a phone without a service contract!

The price tag for a 32GB iPhone 3GS in mainland China: 6,999 yuan, or $1,024, which doesn't include the service contract.

This data will surely strike at the hearts of those who use 1st grade logic... "1.3 billion Chinese x 2 iPhones per household = nirvana".

Via Bloomberg:

Apple's Chinese partner sold 5,000 iPhones in the country since last week’s debut, raising concern the handset’s price is undermining the U.S. company’s ability to gain customers in the world’s biggest phone market.
China Unicom (Hong Kong) Ltd. President Lu Yimin told reporters in Hong Kong today demand has been “quite good” since the Chinese carrier began selling the iPhone, stripped of broadband-Internet capability, in stores on Oct. 30.
Unicom’s iPhone plan “will be an interesting exercise in how to sell an inferior product at a higher price,” said Duncan Clark, chairman of BDA China, a Beijing-based consultant.
Apple, based in Cupertino, California, had been expected to sell about 500,000 iPhones initially in China via Unicom, Barclays Plc analyst Ben Reitzes wrote in a report today.
China had 719.8 million mobile-phone users at the end of September, after adding 9.3 million in the month, according to government data.
Unlike iPhones available outside of mainland China, Unicom sells the handsets without so-called Wi-fi capability.
“It is selling a ‘castrated’ version of iPhone at a higher-than-market price,” BOC International analyst Allan Ng, wrote in an Oct. 23 report. The carrier’s marketing was “incompetent,” according to Ng, who said demand was “lackluster.”
The number of units sold in China is disappointing compared with other markets, according to Paul Wuh, a Hong Kong-based analyst at Samsung Securities Co. By comparison, Apple said it sold 270,000 iPhones in the 30 hours after the first model went on sale in the U.S. back in 2007.

But there is always a way around issues such as this... the black market:

Chinese consumers may buy 1 million iPhones from unofficial distributors this year, according to BDA estimates. IPhones sold through these outlets will have Wi-fi and cost less than those distributed by Unicom, according BDA.