May 29th, 2012

by Dan Ariely

We like to believe that a few bad apples spoil the vir­tu­ous bunch. But research shows that every­one cheats a little—right up to the point where they lose their sense of integrity.

Not too long ago, one of my stu­dents, named Peter, told me a story that cap­tures rather nicely our society’s mis­guided efforts to deal with dis­hon­esty. One day, Peter locked him­self out of his house. After a spell, the lock­smith pulled up in his truck and picked the lock in about a minute.

“I was amazed at how quickly and eas­ily this guy was able to open the door,” Peter said. The lock­smith told him that locks are on doors only to keep hon­est peo­ple hon­est. One per­cent of peo­ple will always be hon­est and never steal. Another 1% will always be dis­hon­est and always try to pick your lock and steal your tele­vi­sion; locks won’t do much to pro­tect you from the hard­ened thieves, who can get into your house if they really want to. The pur­pose of locks, the lock­smith said, is to pro­tect you from the 98% of mostly hon­est peo­ple who might be tempted to try your door if it had no lock.

We tend to think that peo­ple are either hon­est or dis­hon­est. In the age of Bernie Mad­off and Mark McG­wire, James Frey and John Edwards, we like to believe that most peo­ple are vir­tu­ous, but a few bad apples spoil the bunch. If this were true, soci­ety might eas­ily rem­edy its prob­lems with cheat­ing and dis­hon­esty. Human-resources depart­ments could screen for cheaters when hir­ing. Dis­hon­est finan­cial advis­ers or build­ing con­trac­tors could be flagged quickly and shunned. Cheaters in sports and other are­nas would be easy to spot before they rose to the tops of their professions.

But that is not how dis­hon­esty works. Over the past decade or so, my col­leagues and I have taken a close look at why peo­ple cheat, using a vari­ety of exper­i­ments and look­ing at a panoply of unique data sets—from insur­ance claims to employ­ment his­to­ries to the treat­ment records of doc­tors and den­tists. What we have found, in a nut­shell: Every­body has the capac­ity to be dis­hon­est, and almost every­body cheats—just by a lit­tle. Except for a few out­liers at the top and bot­tom, the behav­ior of almost every­one is dri­ven by two oppos­ing moti­va­tions. On the one hand, we want to ben­e­fit from cheat­ing and get as much money and glory as pos­si­ble; on the other hand, we want to view our­selves as hon­est, hon­or­able peo­ple. Sadly, it is this kind of small-scale mass cheat­ing, not the high-profile cases, that is most cor­ro­sive to society…..

For the rest of the arti­cle, please see the WSJ

Copy­right © Dan Ariely

Tags: Arenas, Bad Apples, Bernie Madoff, Building Contractors, Cheaters, Dentists, Dishonesty, Employment Histories, Financial Advisers, Human Resources Departments, Insurance Claims, James Frey, John Edwards, Locks, Locksmith, Mark Mcgwire, Panoply, Professions, Thieves, True Society
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May 29th, 2012

by Peter Tchir, TF Mar­ket Advisors

Stocks are ris­ing in spite of a lack of cheer­lead­ing. Europe did very lit­tle last week at the sum­mit and this time it seems most pun­dits took the time to notice that. The Bankia “res­cue” is high­light­ing how bad the Span­ish bank­ing sys­tem is how much the coun­try is going to need to spend on that. The cri­sis at the regional level in Spain has hit a point where all the debts will get passed up to the coun­try level and the myth that guar­an­tees don’t mat­ter has been shat­tered. No one is claim­ing this is a good thing, yet futures are up.

Greece, I am told, is likely to leave the Euro, yet the con­se­quences to Greece and the EU will be dev­as­tat­ing. I can­not remem­ber another case where the out­come is uni­ver­sally held as dis­as­trous for all par­ties, yet the out­come is deemed a fore­gone con­clu­sion. Our own analy­sis projects that the risk to the EU from a Grexit is very high, but we believe that the risks are so obvi­ous and real, that some agree­ment will be reached to buy enough time to untan­gle the mess a lit­tle before the actual exit.

Even good old JPMor­gan can’t seem to do any­thing right. After weeks of being pounded on about the whale trade they are now being chas­tised about the unwind. A Reuters arti­cle seems to sug­gest that it is bad that it is sell­ing the avail­able for sale bonds held by the CIO office to off­set the losses. Did they not read the tran­script of the con­fer­ence call? That AFS book is part of the CIO’s office, and was part of the rea­son JPM ini­tially entered into “hedge” trades. Expect JPM to unwind that book as they unwind the whale trade because the last thing they want is to have no “hedges” and a $200 bil­lion book in the CIO office. Some of the abuse JPM has been tak­ing has been deserved, but much has been over the top and sug­gest­ing that some­how it is almost nefar­i­ous that JPM is book­ing big prof­its as it unwinds this leg of the CIO’s posi­tion shows just how far the pen­du­lum has swung against the big banks.

Is there a lot to be excited about? No. Will we have a U.S. come in fade? Prob­a­bly. Should you be short this mar­ket? Not just yet. The com­plete lack of cheer­lead­ing is a cause for con­cern for being short. Stocks were up last week, yet the com­men­tary was bear­ish across the board and from the tone of most of what I hear and read, you would have thought it was another down week.

Eco­nomic data remains soft, but away from Europe not hor­ri­ble, and even in Europe it is becom­ing a bit unclear just how much is priced in. Talks of stim­u­lus in Asia helped that mar­ket. The ECB has done noth­ing so far this week, but I wouldn’t rule them out, and the Fed has plenty of oppor­tu­nity to try and talk up the mar­ket here with weak eco­nomic data, no signs of infla­tion (at least in the data the Fed focuses on) and with real pres­sure on bank credit spreads.

So I remain bull­ish here. Again, the May 11^th prices are my tar­get as I feel that every­one got too bear­ish after the JPM announce­ment on the 10th. Mere calm may be enough to get us there, but I can see eas­ing and JPM as cat­a­lysts higher. Europe is a mess, but it has been for awhile, and if they can keep Bankia out of the head­lines, that too might help enough. Also, being over­looked in the past two weeks is lim­ited evi­dence that retail is pulling out of risky fixed income mar­kets. Pro’s may be sell­ing high yield bonds, but at this stage, retail does not seem to be join­ing the flight, very dif­fer­ent than 2011.

Copy­right © TF Mar­ket Advisors

Tags: Analysis Projects, Banking System, Bonds, Cheerleaders, Cheerleading, Conference Call, Debts, Foregone Conclusion, Futures, Hedges, Jpm, Jpmorgan, Myth, Nbsp, Pundits, Regional Level, Reuters Article, Spite, Tf, Whale Trade
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May 29th, 2012

U.S. investors return from the long week­end to find futures up and shell games con­tin­u­ing across the pond.   What has been inter­est­ing dur­ing almost the entire month of May is despite a mar­ket that has stunk dur­ing nor­mal hours, a lot of buy­ing by 'some­one' has been hap­pen­ing in the thinly trad­ing futures mar­ket.  This has led to a lot of frus­tra­tion for those seek­ing a bot­tom who wish to find a 'wash out morn­ing' which can never hap­pen with that per­sis­tent bid.   Any­how, look­ing back at a chart I posted late last week not much changed Thurs­day and Fri­day, nor will today bar­ring a mas­sive rally.

The S&P 500 has yet to claim even a 38.2% retrace­ment (Fibonacci talk) of the drop from recent peaks, which would be near 1340.  This appears to be an area those of a bear­ish bent are wait­ing to make their stand.   So the chart is a few days old but the roadmap is not any dif­fer­ent.  Until (if and when) we get nearer to 1340 we remain in the white noise area, wait­ing for more inter­est­ing lev­els to sur­face.  Very over­sold con­di­tions are being worked off, and a 'bear flag' appears to be form­ing.   The longer the mar­ket stays under this 1340–1350 level the more bear­ish it would appear to be.  That said, mas­sive cen­tral bank inter­ven­tion – which can be announced at any sec­ond of any day – makes all charts moot points.

Over in Europe some of the news is get­ting down­right silly.  Greece is recap­i­tal­iz­ing their banks with … what money?  Spain is try­ing to get around col­lat­eral rules by propos­ing a shell game that would have made a major Las Vegas magi­cian act proud.

• Spain may recap­i­tal­ize Bankia with Span­ish gov­ern­ment bonds in return for shares in the bank which last week asked for res­cue fund­ing of 19 bil­lion euros ($24 bil­lion), a gov­ern­ment source said on Sun­day.  Bankia could use the sov­er­eign paper as col­lat­eral to get cash from the Euro­pean Cen­tral Bank, forc­ing the ECB to get involved with restruc­tur­ing Spain's bank­ing sector.
• "The biggest prob­lem here is that the ECB could object. That's a legal issue, but tech­ni­cally it is pos­si­ble," said Jose Car­los Diez, econ­o­mist at Inter­money Valores.

What­ever the shell game, the key is Span­ish yields are approach­ing mid 6%s, which means the mar­ket is not buy­ing the shells.  So why are futures up? Who knows – fatigue, hopes for inter­ven­tion, tech­ni­cal rea­sons, QE3 announce­ment in 3 weeks, Chi­nese eas­ing sooner rather than later, etc etc.  We are not see­ing any glee in the U.S. bond mar­ket or cur­rency which are the more impor­tant tells.  One could argue the U.S. dol­lar has indeed become par­a­bolic – which is a bit scary.

Back in the U.S. some eco­nomic news will pro­vide a "respite" from Europe – mainly Thurs­day and Fri­day with the ADP employ­ment data/Chicago PMI (Thu) and monthly jobs data/ISM man­u­fac­tur­ing (Fri).  Chi­nese PMI also will be released, but at this point one does not know whether to root for bad (more inter­ven­tion!) or good.

Bot­tom line, keep an eye on the bond and cur­ren­cies mar­ket – the equity mar­kets seem a sideshow for now as we play out the lat­est iter­a­tion of "wait­ing for inter­ven­tion".   That said, a reminder than any +1.7% move on sub­stan­tial vol­ume this week would trig­ger an IBD "Fol­low Through Day" as it would come in the 4 to 10 day win­dow from last Monday's "Day 1" of a rally attempt.

Tags: Banking Sector, Bear Flag, Central Bank Intervention, Collateral, ECB, Few Days, Frustration, Futures Market, Government Bonds, Government Source, Magician, Massive Rally, Restructuring, Roadmap, Shell Game, Shell Games, Spanish Government, Trading Futures, Welcome Back Kotter, White Noise
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May 29th, 2012

by Andrew Balls, PIMCO
This arti­cle was orig­i­nally pub­lished in thetimes.co.uk on May 28, 2012.

Amid great uncer­tainty and huge chal­lenges in Europe, it can be help­ful to cut through all the detail and map out what we know and what we don’t know. This is at best depress­ing and, at worst, terrifying.

What are the known knowns?

First, Greece is spi­ralling out of con­trol. No good out­comes appear pos­si­ble for Greece or the euro­zone. They face only bad out­comes that will be cho­sen or forced. Argu­ments over the eco­nom­ics of Greece’s pro­gramme and cred­i­tor coun­try demand for adher­ence to what looks like an impos­si­ble task have run into polit­i­cal and social rejec­tion in Greece. The country’s polit­i­cal sys­tem is frag­ment­ing and social unrest is sure to per­sist. While there may be a way for Greece to remain in the euro­zone, an exit looks far more likely.

Sec­ond, this is not merely a Greek or a euro­zone chal­lenge. Across the world, rich coun­tries are try­ing to de-lever in a con­trolled way while main­tain­ing growth and jobs. The eurozone’s insti­tu­tional chal­lenges make this dif­fi­cult task far worse. Indi­vid­ual euro­zone coun­tries are like emerg­ing mar­kets, bor­row­ing in for­eign cur­rency in their sus­cep­ti­bil­ity to a run on the sov­er­eign. Dur­ing a cri­sis, investors will go to the safety of the strongest bal­ance sheet, which in the eurozone’s case is Ger­many. Italy and Spain are not insol­vent coun­tries, but nor can they main­tain sta­ble debt dynam­ics with nom­i­nal yields well above their nom­i­nal growth rates owing to the absence of a pre­dictable cen­tral bank lender of last resort.

Third, the eurozone’s mon­e­tary and fis­cal inter­ven­tions to date have not suc­ceeded in sta­bil­is­ing its sov­er­eign debt mar­kets and crowd­ing investors in, in part because they have been reac­tive and insuf­fi­cient and also because of the pub­lic slang­ing matches between Euro­pean lead­ers and with and between cen­tral bankers. Rather, these inter­ven­tions have financed the exit of banks and other investors retreat­ing back within their bor­ders and the exit of for­eign investors. Bank deposit with­drawals now threaten to accel­er­ate the process.
Fourth, it is a known known that the eurozone’s most impor­tant chal­lenges are polit­i­cal, rather than eco­nomic. Mea­sured by debt and deficit lev­els, the euro­zone is no worse off than the United States or Britain. The chal­lenges are of co-ordination among coun­tries and regional legit­i­macy, as gov­ern­ments try to over­come dis­agree­ments over how to mutu­alise the risks within the euro­zone and on the proper role of the cen­tral bank.
Finally, it is clear that the euro­zone sta­tus quo is not sus­tain­able. A risk of a Greek exit and/or bank runs across the euro­zone threat­ens to press fast for­ward on the crisis.

Turn­ing to the known unknowns, it is unclear if the eurozone’s gov­ern­ments have the tech­ni­cal capac­ity to admin­is­ter what will be a dif­fi­cult process of man­ag­ing the cri­sis in the short term and of inte­grat­ing the euro­zone over the medium term. It will require some com­bi­na­tion of: pol­icy and polit­i­cal coör­di­na­tion; mea­sures to reduce the vul­ner­a­bil­ity of the bank­ing sys­tem; the Euro­pean Cen­tral Bank act­ing as a cred­i­ble, com­mit­ted lender of last resort for sov­er­eigns to pre­vent self-fulfilling runs; closer fis­cal union involv­ing the mutu­al­i­sa­tion of debt in the form of guar­an­tees or com­mon eurobond issuance and a pool­ing of fis­cal sov­er­eignty; a more sus­tain­able bal­ance between the need for growth and the need for fis­cal retrench­ment; and, most likely, sup­port to facil­i­tate a man­aged Greek exit and limit the run on the euro­zone as a whole. Indeed, the sig­nal from a Greek exit that this is not an irrev­o­ca­ble cur­rency union but a fixed but adjustable exchange rate could unleash a re-pricing of cur­rency risk across the eurozone’s pri­vate mar­kets, not only the gov­ern­ment bond mar­ket, height­en­ing the risk that the tech­ni­cal capac­ity to respond is over­whelmed.
This dif­fi­cult prog­no­sis is com­pounded by the huge known unknown over whether the eurozone’s lead­ers have the abil­ity to over­come their co-ordination chal­lenge and lay out an imme­di­ate plan to deal with a Greek exit, to defeat spi­ralling con­ta­gion risk in the short term and to build a more sta­ble euro­zone in the medium term.

Per­haps hard­est of all, there is the known unknown of whether Euro­pean pop­u­la­tions will sup­port or at least acqui­esce in the face of mis­er­able eco­nomic con­di­tions, the pool­ing of sov­er­eignty and greater trans­fers across borders.

Tak­ing together the known knowns and the known unknowns, it seems likely that the eurozone’s big four — Ger­many, France, Italy and Spain — as well as other Ger­man satel­lite coun­tries will find a way to hang together in a smaller cur­rency union backed by stronger regional co-ordination and financ­ing mechanisms.

But it will be dif­fi­cult and costly and the tail risk of fail­ure is very fat, indeed.

For investors, the bal­ance of risks sug­gests prepar­ing for the worst, even if, as cit­i­zens, we hope for the best. This would include lim­it­ing expo­sure to real con­fis­ca­tion risk in the euro­zone and focus­ing instead on bet­ter global alter­na­tives avail­able in coun­tries with stronger bal­ance sheets, expo­sure to bet­ter growth prospects and less intractable gov­er­nance challenges.

Copy­right © PIMCO

Tags: Adherence, Balance Sheet, Balls, Bank Lender, Creditor, Debt Markets, Emerging Markets, European Leaders, Eurozone Countries, Foreign Currency, Impossible Task, Institutional Challenges, Interventions, Lender Of Last Resort, PIMCO, Rich Countries, Social Rejection, Social Unrest, Sovereign Debt, Susceptibility, Uncertainty
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May 29th, 2012

While mar­ket volatil­ity now looks closer to fair value than it did in early May, I still believe that investors should remain defen­sive. Stocks remain very much exposed to a poten­tial dis­or­derly Greek exit (“Grexit”) from the euro and any accom­pa­ny­ing contagion.

One defen­sive play I par­tic­u­larly like: div­i­dend pay­ing stock funds, includ­ing those con­sist­ing of equi­ties in tra­di­tion­ally volatile emerg­ing markets.

As I write in my new Mar­ket Update piece, div­i­dend stocks gen­er­ally have been less volatile than the broader mar­ket, which can make them a good defen­sive choice.

Since 1992, the beta (a mea­sure of the ten­dency of secu­ri­ties to move with the mar­ket at large) of the Dow Jones Select Div­i­dend Index to the S&P 500 has been around 0.8. That means that for every 1% the mar­ket moves this index typ­i­cally moves around 80 basis points (see how I cal­cu­lated the beta in the chart below).

In the case of the Morn­ingstar Div­i­dend Yield Focus Index, the beta has his­tor­i­cally been even lower, at around 0.7.

This his­tor­i­cal pat­tern has con­tin­ued dur­ing the most recent down­turn. As of Thursday’s mar­ket close, the S&P 500 was off approx­i­mately 6% from its May peak, while the Dow Jones Select Div­i­dend Index and the Morn­ingstar Div­i­dend Yield Focus Index were down 3% and 2% respectively.

Even in emerg­ing mar­kets, typ­i­cally a more volatile sec­tor of the mar­ket, div­i­dend stocks tend to cush­ion the down­side. For instance, the Dow Jones Emerg­ing Mar­kets Select Div­i­dend Index has a beta of roughly 0.80 to the broader MSCI Emerg­ing Mar­ket Index.

Given the ongo­ing uncer­tainty sur­round­ing Greece and the over­all Euro­pean Union, near-term mar­ket volatil­ity is likely to remain high and I con­tinue to advo­cate that investors have a high allo­ca­tion to high div­i­dend equity funds. In par­tic­u­lar, I like the iShares High Div­i­dend Equity Fund (NYSEARCA: HDV), given its low beta and qual­ity screen, and the iShares Emerg­ing Mar­kets Div­i­dend Index Fund (NYSEARCA: DVYE). Another poten­tial solu­tion focus­ing on US equi­ties is the iShares Dow Jones Select Div­i­dend Index Fund (NYSEARCA: DVY).

Russ Koes­terich, CFA is the iShares Global Chief Invest­ment Strate­gist and a reg­u­lar con­trib­u­tor to the iShares Blog.  You can find more of his posts here.

Source: Bloomberg

The author is long HDV

Tags: Defensive Stocks, Dividend Funds, Dividend Paying Stock, Dividend Stocks, Dividend Yield, Dow Jones, Equity Fund, Equity Funds, Focus Index, High Dividend, Index Fund, Ishares, Market Volatility, Morningstar, Msci Emerging Market, Msci Emerging Market Index, Quality Screen, S Market, Stock Funds, Volatile Sector
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May 29th, 2012

Via Mark J. Grant, Author of Out of the Box,

“We are on strike against the moral­ity of cannibals.”

                                               –Ayn Rand

Slowly, surely the largest investors in the world are no longer buy­ing the debt of Europe. Recently the Chi­nese sov­er­eign wealth fund, China Invest­ment Corp., said that they were done and would no longer be buy­ing Euro­pean debt. The insti­tu­tional read­ers of “Out of the Box” num­ber some­what more than 5,000 money man­agers and I can report that one after another they are either seri­ously pair­ing back on their hold­ings or exit­ing Europe. The risks are just too great and the way Europe does busi­ness is also hav­ing a seri­ous effect. You see, Europe does not count any con­tin­gent lia­bil­i­ties, sov­er­eign guar­an­teed debt, deriv­a­tives, bank guar­an­teed debt, regional guar­an­teed debt or promises to pay for var­i­ous enti­ties as part of their cal­cu­la­tion for their debt to GDP ratios. The CEO, CFO and the Board of Direc­tors of an Amer­i­can cor­po­ra­tion would go to jail for Fraud for oper­at­ing in this man­ner but this is the devised scheme in Europe. This is also why it sets my teeth on edge each and every time I see some coun­try bran­dish­ing their debt to GDP ratio in the press; it is just fac­tu­ally inac­cu­rate or to be more succinct—it is a lie.

Let us con­sider what is hap­pen­ing with Bankia in Spain. The Span­ish government’s bank fund has $7.40 bil­lion left in its cof­fers accord­ing to the gov­ern­ment. Bankia will require about $23 bil­lion in recap­i­tal­iza­tion. Spain is float­ing the idea of guar­an­tee­ing Bankia’s debt so that Bankia can then pledge it to the ECB and get cash and since it is a guar­an­tee and not a direct issuance of sov­er­eign debt then Spain is wav­ing the ban­ner, and proudly, that it will not affect their debt to GDP ratio. There is a cer­tain kind of mad­ness about all of this and it is tak­ing place in Spain, Por­tu­gal, Ire­land, Italy, Greece, Bel­gium et al. What can clearly be said then is that the num­bers we are given, the data that is flouted day in and day out as accu­rate is noth­ing short of a con game built on a Ponzi scheme that rests on the back of a finan­cial sys­tem that has been pur­pose­fully designed to dis­tort the truth.

Regard­less of your opin­ion about all of this there are con­se­quences to this type of manip­u­la­tion that are in the process of becom­ing real­ized. Even­tu­ally, when hopes and prayers give way to real­ity, losses are taken and I sub­mit that we are just at the begin­ning, just at the start, of see­ing real­ized losses begin to hit bal­ance sheets. A case in point would be Credit Agri­cole who reported that they had suf­fered a $3.4 bil­lion loss because of their expo­sure to Greece, elim­i­nated their div­i­dend and watched the price of their stock sink to an all-time low which is down 72% on the year. Then with the new Euro­pean bank scheme where reg­u­la­tors, not the judi­cial sys­tem, will decide just who will get what in the case of any bank impair­ment you can be sure, 100% pos­i­tive, that the reg­u­la­tors will decide for the ben­e­fit of the State and the investor can go hang. While it is cer­tainly true that many Euro­pean insti­tu­tions are coerced, forced may be more accu­rate, to buy the sov­er­eign debt of their coun­try or other Euro­pean coun­tries the sugar rush from the LTRO is wan­ing while the rest of the non-coerced world is flee­ing from Euro­pean sov­er­eign and bank debt like Florid­i­ans from a hur­ri­cane.  To be sure mar­kets have been gamed before but this is one bub­ble that will make the Amer­i­can finan­cial cri­sis or the dot.com débâ­cle seem insignif­i­cant in size when the moment comes that it is pushed past the point of redemp­tion. The Euro­pean nations and banks have per­formed a neat new trick, nail­ing them­selves to the Cross, and it is now only for Pon­tius Pilate to pick up the spear and begin.

“He who cre­ated us with­out our help will not save us with­out our consent.”

                                –St. Augustine

Copy­right © Mark Grant

Tags: Ayn Rand, Bankia, Cannibals, Cfo, China Investment, Coffers, Contingent Liabilities, Debt Derivatives, ECB, Exiting, Gdp Ratio, Ireland Italy, Italy Greece, J Grant, Kind Of Madness, Money Managers, Recapitalization, Sovereign Debt, Spain Portugal, Spanish Government
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May 29th, 2012

by John Huss­man, Huss­man Funds

For nearly two years, the mas­sive inter­ven­tions of cen­tral banks have repeat­edly pulled a fun­da­men­tally weak and debt-burdened global econ­omy from the brink of resumed reces­sion. The Fed­eral Reserve's bal­ance sheet is now lever­aged 52-to-1, with assets hav­ing an aver­age dura­tion of over 5 years, sug­gest­ing that if those assets were marked-to-market, an inter­est rate increase of less than 50 basis points would wipe out the Fed's entire cap­i­tal base. Of course, the Fed takes no marks on its assets when it reports its bal­ance sheet, though it does occa­sion­ally take down the value of the secu­ri­ties in the Maiden Lane shell com­pa­nies that it ille­gally set up to bail out Bear Stearns and other enti­ties (in vio­la­tion of Sec­tion 13(3) of the Fed­eral Reserve Act, which Con­gress had to amend and spell out like a See-Spot-Run book as a result).

At a 10-year Trea­sury yield of 1.7%, inter­est on reserves of 0.25%, and a mon­e­tary base now at about 18 cents per dol­lar of nom­i­nal GDP (see Run, Don't Walk), fur­ther pur­chases of long-term Trea­sury secu­ri­ties by the Fed would pro­duce net losses for the Fed in any sce­nario where yields rise more than about 20 basis points a year, or the Fed ever has to unwind any por­tion of its already mas­sive posi­tions. So fur­ther QE by the Fed would effec­tively amount to fis­cal pol­icy. More­over, the ben­e­fits of cen­tral bank inter­ven­tions are becom­ing pro­gres­sively smaller and short-lived (nearly log-periodic in fact, to bor­row a term from crash dynam­ics). None of this restricts the Fed from embark­ing on fur­ther inter­ven­tions. It just empha­sizes how far the Fed has already descended into the deep.

To the extent that our mea­sures of mar­ket action improve on some pos­si­ble future inter­ven­tion, and until the point where the mar­ket reestab­lishes an over­val­ued, over­bought, over­bull­ish pro­file, we might have some lat­i­tude to take some spec­u­la­tive expo­sure in the event of another round of QE. But with­out sub­stan­tially greater improve­ment in val­u­a­tions here, there would be no invest­ment basis for that expo­sure, so our lat­i­tude wouldn't be very broad (we esti­mate the prospec­tive 10-year total nom­i­nal return for the S&P 500 to be back down to about 5% on the basis of our stan­dard methodology).

Remem­ber that these bouts of QE, LTRO oper­a­tions, and other inter­ven­tions have essen­tially had their effect by squeez­ing inter­est rates to lev­els that are so low that investors feel forced to seek higher risk secu­ri­ties in a search for yield. What Bernanke views as a "wealth effect" is sim­ply the richer val­u­a­tion of exist­ing cash flows that goes hand in hand with lower prospec­tive returns in the future. This is not wealth cre­ation, but sim­ply a dis­tor­tion of the time pro­file of returns that now leaves investors fac­ing dis­mal future prospects for invest­ment returns. The eco­nomic impact of QE has been restricted to short bursts of pent-up demand, but lit­tle more.

QE1 had a very strong effect, par­tic­u­larly on stocks, because they were priced at the time to achieve 10-year prospec­tive returns of over 10% annu­ally by our esti­mates, and also because the Fed focused its pur­chases on the mortgage-backed secu­ri­ties of Fan­nie Mae and Fred­die Mac, which relieved much of the con­cern about mort­gage debt. At the same time, the FASB tossed out the need for banks to mark the value of their assets to mar­ket prices, which bypassed the need for reg­u­la­tors to step in to restruc­ture major finan­cials. In my view, mak­ing the finan­cial sys­tem more opaque is no way to respond to legit­i­mate credit prob­lems, but that's what they did, and there's no deny­ing that the finan­cial mar­kets were relieved, in the same way that one would be relieved by look­ing away from a grue­some crime scene.

Both QE2 and the "Twist" fol­lowed sig­nif­i­cant mar­ket declines, began from higher inter­est rates and lower stock mar­ket val­u­a­tions, and attended global eco­nomic con­di­tions that were tip­ping toward reces­sion, but were less hos­tile than we observe at present. Each of these inter­ven­tions was clearly wel­comed by the finan­cial mar­kets, and any fur­ther inter­ven­tion would pre­dictably be wel­comed for some period of time. But the head­winds are stronger, cen­tral bank bal­ance sheets are more heav­ily bur­dened, stock val­u­a­tions are richer, and inter­est rates are already so depressed that incre­men­tally lower rates won't mat­ter much. If you put a bal­loon on the table and blow on it, that bal­loon will move for­ward. But that really only works pro­vided that there is not a hur­ri­cane blow­ing in the oppo­site direc­tion. With regard to the global eco­nomic sit­u­a­tion, my impres­sion con­tin­ues to be that there is a hur­ri­cane coming.

Oncom­ing eco­nomic weak­ness was already evi­dent in a broad range of lead­ing indi­ca­tors late last sum­mer, but it was clearly fore­stalled by the coör­di­nated inter­ven­tion of cen­tral banks, cou­pled with the "final" res­o­lu­tion of the Greek debt sit­u­a­tion. While we observed a burst of eco­nomic activ­ity early this year as a result, that burst was tran­sient. Mean­while, the evi­dence from a broad ensem­ble of lead­ing indi­ca­tors (includ­ing what we inferred from unob­served com­po­nents mod­els) remained weak, as did year-over-year eco­nomic mea­sures that were less sen­si­tive to high-frequency fluc­tu­a­tions and sea­sonal adjustment.

The uni­form dete­ri­o­ra­tion in global GDP growth was already evi­dent even as 2012 began. The chart below presents nor­mal­ized growth rates (mean zero, unit vari­ance), which shows the co-movement across economies more clearly. It's notable that across the world, nor­mal­ized year-over-year GDP growth rates — even at the start of 2012 — were already jointly at lev­els worse than at the start of the pre­vi­ous two global downturns.

The chart below illus­trates how con­di­tions have pro­gressed in the past few months. Note that the lat­est read­ing on the Euro­zone PMI has dropped to fresh lows, break­ing below the lev­els that accom­pa­nied the 2011 mar­ket swoon.

The dete­ri­o­ra­tion across Europe is not sim­ply restricted to periph­eral coun­tries. The steep decline in France is notable, while the Ger­man PMI has now dropped below 50 as well, reflect­ing the sharpest drop in man­u­fac­tur­ing out­put in three years. Mean­while, Lloyds TSB noted last week that the major­ity of regions in the UK reported their "weak­est out­put per­for­mance in 2012 to date."

Of course, the argu­ment from Wall Street is that despite clear evi­dence of reces­sion across Europe, and sig­nif­i­cant slow­down or reces­sion else­where in the world, the United States will some­how "decou­ple" and avoid reces­sion. Real­ity hates to inter­fere, but the chart below presents the cor­re­la­tion between the GDP growth of sev­eral major nations (par­tic­u­larly in Europe) and U.S. GDP growth. The cor­re­la­tion with U.S. GDP — par­tic­u­larly in Euro-zone coun­tries — is gen­er­ally in the range of 70–90%.

For Europe, of course, the prob­lem is not only reces­sion risk but the high level of debt to GDP, and ris­ing fund­ing costs and default risk reflected in Euro­pean gov­ern­ment bonds (out­side of Ger­many, which is seen as the safe haven). The devel­op­ing global down­turn is likely to have a dis­pro­por­tion­ate effect on debt-to-GDP ratios across Europe. To illus­trate this, the scat­ter below presents the change of debt-to-GDP ratios against year-over-year changes in GDP.

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May 28th, 2012

Face­book Aside, Every­one Who Thinks IPO "Pops" Are Good Has Been Brainwashed

Guest post by Henry Blodget, The Business Insider

Last Friday, after Facebook stock started trading at $42, most observers immediately pronounced the IPO a flop.

Why?

Because the IPO had been priced at $38, which meant that the IPO "pop" was only about 10% above the IPO price.

Facebook stockholders who had bought the IPO the night before had instantly made 10% overnight--a spectacular return. String together a few months of daily returns like that, and you would quickly be one of the most successful investors in history.

But some Facebook speculators had expected to make much more free money overnight--perhaps as much as speculators in LinkedIn and other hot IPOs had made.

So they felt disappointed and ripped off.

And the media, who have been carefully trained by Wall Street and short-term speculators to view IPOs with big pops as "successful" and IPOs with small or no pops as "flops" immediately dissed Facebook as a flop.

Now, there were two serious issues with the Facebook IPO that complicate any discussion focused on this IPO in particular: The NASDAQ screwup that borked at least a day's worth of trading, and the "selec­tive dis­clo­sure" scan­dal, in which the under­writ­ers told their big clients that Facebook's sec­ond quar­ter was weak but did not tell their small clients this.

Both of those issues may well have affected Facebook's first day of trad­ing and con­tributed to the sub­se­quent price decline. And both of those issues are legit­i­mate sources of frus­tra­tion, for investors and the com­pany alike. (So please don't bother rais­ing these issues in the com­ments below: They're sep­a­rate and apart from the point of this dis­cus­sion, which is about first-day "pops.")

Accord­ing to a source very close to the sit­u­a­tion, all other issues aside, Face­book was aim­ing for a 10% pop. Not a 25% pop. Not a 50% pop. A 10% pop. And for most of the first day of trad­ing, that's exactly what Face­book got. In other words, Face­book did exactly what it was hop­ing to do.

Face­book knew well how this 10% pop would be per­ceived by the media: As a disappointment.

But Face­book under­stood what most com­pa­nies that go pub­lic don't:

• Any press grum­bling about "dis­ap­point­ments" and "small pops" will be quickly forgotten.
• The only investors who ben­e­fit from "pops" are short-term flip­pers who won't help the com­pany long term and don't deserve free money
• "Pops" cost the com­pany and its exist­ing share­hold­ers hun­dreds of mil­ions of dol­lars (in Facebook's case, billions)
• "Pops pro­vide no advan­tage to the com­pany other than a bit of extremely expen­sive and ephemeral excite­ment and PR
• Pric­ing the IPO high enough to have only a small pop meant rais­ing mil­lions or bil­lions more dol­lars that would sub­se­quently be worth mil­ions or bil­lions of dol­lars to the company

Specif­i­cally, in Facebook's case, if Face­book had priced the IPO at, say, $30, instead of $38, it would have raised ~$12.5 bil­lion in the IPO instead of $16 billion.

In exchange for a big­ger "pop," hap­pier spec­u­la­tors, and a more enthu­si­as­tic press recep­tion, in other words, Face­book and its sell­ing share­hold­ers would have sac­ri­ficed $3.5 bil­lion that they can now use to cre­ate real value for the com­pany and its share­hold­ers (includ­ing its new shareholders).

$3.5 bil­lion is real money.

AP/Android Police

Another CEO who under­stands the truth about IPO pops.

Blow­ing $3.5 bil­lion on mak­ing spec­u­la­tors and finan­cial reporters hap­pier would have been the height of short-term think­ing. And, like other great com­pa­nies, Face­book doesn't make deci­sions aimed at cre­at­ing short-term value. It makes deci­sions designed to cre­ate long-term value.

The extra $3.5 bil­lion Face­book raised by aim­ing for 10% pop will cre­ate at least $3.45 bil­lion more value for Face­book over the long term than a big­ger "pop" would have. (The short-term press hyper­ven­ti­la­tion and spec­u­la­tor eupho­ria may cre­ate some value for a com­pany, but not much. And it may even be harm­ful to the com­pany by mak­ing every­thing after the IPO seem like an anti-climax.)

But, but, but!

What about the IPO investors?

Shouldn't Face­book and other IPO com­pa­nies want to make investors happy?

Shouldn't they be less greedy and give investors a reward for tak­ing a chance on them?

Yes.

IPOs should not be priced "at mar­ket value." They should be priced just below mar­ket value This rewards ini­tial investors for tak­ing the chance on the IPO pric­ing (which is always risky–no one knows exactly what "mar­ket value" will be). And it gives the investors an incen­tive nec­es­sary to do the research on the com­pany before it goes pub­lic. With­out that, the investors might just wait to see where the stock traded and do the research then.

But any investor who thinks they need more than a 5%-10% overnight return as a reward for plac­ing an order on the IPO is unbe­liev­ably greedy.

Again, a 10% return overnight is a spec­tac­u­lar return.

A 10%-20% return, which is what early-stage IPOs should aim for, is an even more spec­tac­u­lar return.

So any investor who thinks they deserve more than that is just greedy.

But What About "Bro­ken IPOs" — They're Ter­ri­ble, Right? [No]

What if the "mar­ket value" for a com­pany on the first day of trad­ing is higher than a con­ser­v­a­tive mar­ket value that a con­ser­v­a­tive investor would place on it? What if the stock drops below the IPO price after the first cou­ple days of trad­ing? What if the com­pany has a "bro­ken IPO?"

Yes, what about that.

This is where Wall Street's brain­wash­ing of clients and the media about IPOs has been most insid­i­ous and effective.

So, really, what if a com­pany has a "bro­ken IPO?" Isn't that a huge disaster?

No.

In fact, it's hardly worth mentioning.

What it means is that investors who placed orders for the IPO at cer­tain prices and were intend­ing to hold the stock for more than the first day of trad­ing and were unwill­ing to tol­er­ate a drop below the IPO price were too aggres­sive in their bids.

www.naismithhome.com

You're sell­ing your house. Should you sell it at 25% or off just to cre­ate a "pop"? Of course not!

That's the investors' fault, not the company's fault. And the result­ing dis­ap­point­ment and dis­gruntle­ment is called "buy­ers' remorse." And it hap­pens all the time, in almost every indus­try and type of trans­ac­tion on the planet.

Let's use a real-estate analogy.

Tags: Business Insider, Exac, Facebook, Faceplant, Free Money, Henry Blodget, Ipo Price, Ipos, Last Friday, Legitimate Sources, Nasdaq, Price Decline, Return String, Screwup, Selective Disclosure, Sources Of Frustration, Spectacular Return, Speculators, Stockholders, Underwriters
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May 28th, 2012

Tags: Amp, Barclays, Barclays Capital, Bonds, Bps, capitalism, Coupon Payments, Credit Index, Current, Dividends, Fixed Income, Government Credit, Sectors, Stocks
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May 28th, 2012

SF Gate details:

Con­sumer bor­row­ing in the U.S. surged in March by the most in more than a decade on grow­ing demand for edu­ca­tional financ­ing and autos.

Credit rose by $21.4 bil­lion, the biggest gain since Novem­ber 2001, to $2.54 tril­lion, Fed­eral Reserve fig­ures showed today in Wash­ing­ton. The advance was paced by a $16.2 bil­lion jump in non-revolving debt, includ­ing stu­dent and car loans.

Amer­i­cans may have been try­ing to get school financ­ing before a pos­si­ble increase in inter­est rates takes place on July 1. Ris­ing con­sumer con­fi­dence also means that house­holds are more will­ing to take on debt to boost spend­ing, which accounts for about 70 per­cent of the economy.

I've been show­ing the below chart for some time. It shows the year-over-year change in revolv­ing con­sumer credit, non-revolving con­sumer (exclud­ing stu­dent loans), and stu­dent loans. Head­line con­sumer credit has been grow­ing since early last year, but this had been solely due to stu­dent loans (not nec­es­sar­ily a bad invest­ment, but it doesn't reflect con­sumers re-leveraging for goods and services).

Well, as the chart shows, after a strong March where revolv­ing con­sumer credit (i.e. credit cards) jumped 7.8% month over month and non-revolving (exclud­ing stu­dent loans) posted a pos­i­tive print... the day has arrived in which the con­sumer is no longer delever­ag­ing in nom­i­nal terms (impor­tant for all that nom­i­nal debt out there).

We'll see if this con­tin­ues, but the con­sumer looks like they may be back.

Source: Fed­eral Reserve

Tags: Autos, Car Loans, Consumer Confidence, Consumer Credit, Consumer Loans, Consumers, Credit Cards, Credit Loans, Debt Loans, Decade, Economy, Federal Reserve, Households, interest rates, July 1, Loans Student, Revolving Debt, Sf Gate, Student Loans, Trillion
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May 28th, 2012

Tags: Amln, Aol, Arena Pharma, Arna, Best Performing Stocks, Elli, Ellie Mae, Leading The Way, Market Cap, Notables, Sears, Shld, Stock Index, Us Airways, Vertex Pharma, Vivus Vvus, Weighted Index
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May 28th, 2012

Via Addicted2Success, here are a few awe­some invest­ment quotes by a few of the worlds great­est investors:
Insight­ful Invest­ment Quotes
War­ren Buf­fett (Net Worth $39 Bil­lion) – “‘Price is what you pay; value is what you get.’ Whether we’re talk­ing about socks or stocks, I like buy­ing qual­ity mer­chan­dise when it is marked down.”

George Soros (Net Worth $22 Bil­lion) — ”I’m only rich because I know when I’m wrong…I basi­cally have sur­vived by rec­og­niz­ing my mistakes.”

David Ruben­stein (Net Worth $2.8 Bil­lion) – “Per­sist – don’t take no for an answer. If you’re happy to sit at your desk and not take any risk, you’ll be sit­ting at your desk for the next 20 years.”

Ray Dalio (Net Worth $6.5 Bil­lion) – “More than any­thing else, what dif­fer­en­ti­ates peo­ple who live up to their poten­tial from those who don’t is a will­ing­ness to look at them­selves and oth­ers objectively.”

Eddie Lam­pert (Net Worth $3 Bil­lion) – “This idea of antic­i­pa­tion is key to invest­ing and to busi­ness gen­er­ally. You can’t wait for an oppor­tu­nity to become obvi­ous. You have to think, “Here’s what other peo­ple and com­pa­nies have done under cer­tain cir­cum­stances. Now, under these new cir­cum­stances, how is this man­age­ment likely to behave?”

T. Boone Pick­ens (Net Worth $1.4 Bil­lion) — “The older I get, the more I see a straight path where I want to go. If you’re going to hunt ele­phants, don’t get off the trail for a rabbit.”

Char­lie Munger (Net Worth $1 Bil­lion) – “If you took our top fif­teen deci­sions out, we’d have a pretty aver­age record. It wasn’t hyper­ac­tiv­ity, but a hell of a lot of patience. You stuck to your prin­ci­ples and when oppor­tu­ni­ties came along, you pounced on them with vigor.”

David Tep­per (Net Worth $5 Bil­lion) – “This com­pany looks cheap, that com­pany looks cheap, but the over­all econ­omy could com­pletely screw it up. The key is to wait. Some­times the hard­est thing to do is to do nothing.”

Ben­jamin Gra­ham – “The indi­vid­ual investor should act con­sis­tently as an investor and not as a spec­u­la­tor. This means that he should be able to jus­tify every pur­chase he makes and each price he pays by imper­sonal, objec­tive rea­son­ing that sat­is­fies him that he is get­ting more than his money’s worth for his purchase.”

Louis Bacon (Net Worth $1.4 Bil­lion) – “As a spec­u­la­tor you must embrace dis­or­der and chaos.”

Paul Tudor Jones (Net Worth $3.2 Bil­lion) - “Were you want to be is always in con­trol, never wish­ing, always trad­ing, and always, first and fore­most pro­tect­ing your butt. After a while size means noth­ing. It gets back to whether you’re mak­ing 100% rate of return on $10,000 or $100 mil­lion dol­lars. It doesn’t make any difference.”

Bruce Kovner (Net Worth $4.3 Bil­lion) - ” My expe­ri­ence with novice traders is that they trade three to five times too big. They are tak­ing 5 to 10 per­cent risks on a trade when they should be tak­ing 1 to 2 per­cent risks. The emo­tional bur­den of trad­ing is sub­stan­tial; on any given day, I could lose mil­lions of dol­lars. If you per­son­al­ize these losses, you can’t trade.”

Rene Rivkin (Net Worth $346 Mil­lion) — “When buy­ing shares, ask your­self, would you buy the whole company?”

Peter Lynch (Net Worth $352 Mil­lion) – “I think you have to learn that there’s a com­pany behind every stock, and that there’s only one real rea­son why stocks go up. Com­pa­nies go from doing poorly to doing well or small com­pa­nies grow to large companies.”

John Tem­ple­ton (Net Worth $20 Bil­lion)- “The time of max­i­mum pes­simism is the best time to buy and the time of max­i­mum opti­mism is the best time to sell.”

John (Jack) Bogle (Net Worth $4 Bil­lion) - “If you have trou­ble imag­in­ing a 20% loss in the stock mar­ket, you shouldn’t be in stocks.”

Tags: 1 Billion, Anticipation, Charlie Munger, David Rubenstein, David Tepper, Eddie Lampert, Elephants, George Soros, Harde, Hyperactivity, Patience, Quality Merchandise, Rabbit, Ray Dalio, Socks, Straight Path, T Boone Pickens, Vigor, Warren Buffett, Willingness
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May 28th, 2012

While every­one is focused and wor­ried about the news flow from Europe, I am less con­cerned about the prospects for Greece and the euro­zone. As I wrote in my last post (see Draghi, the last domino, falls), Ger­many is becom­ing increas­ingly iso­lated and expect her to start to bend on the issue of eurobonds. While they may not be eurobonds in the strictest sense, we are likely to see some sort of typ­i­cal Euro­pean com­pro­mise on Pan-European infra­struc­ture bonds.

I am more con­cerned about the news flow out of China, which is likely to dete­ri­o­rate over the next few months — and none of the neg­a­tive news has been dis­counted by the market.

The con­sen­sus on China
Cur­rently, the con­sen­sus view on China is that while the econ­omy is weak­en­ing, the author­i­ties are aware of the prob­lem and they are tak­ing steps to rem­edy the sit­u­a­tion. Indeed, Bloomberg reported that Pre­mier Wen Jaibao made some remarks on May 20 sug­gest­ing that more stim­u­lus was on the way:

Chi­nese Pre­mier Wen Jiabao said the gov­ern­ment will focus more on bol­ster­ing eco­nomic growth, indi­cat­ing poli­cies may be loos­ened fur­ther as infla­tion moderates.

“The coun­try should prop­erly han­dle the rela­tion­ship between main­tain­ing growth, adjust­ing eco­nomic struc­tures and man­ag­ing infla­tion­ary expec­ta­tions,” Wen said dur­ing a tour of Wuhan, the cap­i­tal of China’s Hubei province, from Fri­day to Sunday.

“We should con­tinue to imple­ment a proac­tive fis­cal pol­icy and a pru­dent mon­e­tary pol­icy, while giv­ing more pri­or­ity to main­tain­ing growth,” Wen said.

The mar­ket inter­preted his com­ments as being growth friendly:

Wen’s remarks cited in the report, which didn’t men­tion con­cern about infla­tion, indi­cate the gov­ern­ment might take more aggres­sive steps to sup­port the econ­omy after April data showed the slow­down may be sharper than expected. The cen­tral bank this month cut banks’ reserve require­ment ratio for the third time since Novem­ber to boost liquidity.

Take a look at the Shang­hai Com­pos­ite, which reflects this ambi­gu­ity about China's near-term growth out­look. The index is cur­rently test­ing the down­side of an unre­solved wedge for­ma­tion, which indi­cates inde­ci­sion. A break­out to the upside of the wedge would be inter­preted bull­ishly while a down­side break­down would be bear­ish.

Tur­moil beneath the sur­face
While the pic­ture of the Shang­hai Com­pos­ite reflects this con­sen­sus view, a tour of sec­ondary mar­ket indi­ca­tors sug­gest that not all is well with the Chi­nese econ­omy. First of all, the flash PMI release showed contraction.

Signs of eco­nomic weak­ness are every­where, this analy­sis shows a a tight cor­re­la­tion between Macau gam­ing rev­enues and Chi­nese growth — and gam­ing rev­enues are falling.

Next door in Hong Kong, the Hang Seng Index is not behav­ing quite as well as the Shang­hai Com­pos­ite. The index ral­lied in Feb­ru­ary to fill the down­side gap that occurred in August 2011, but the rally couldn't over­come resis­tance. The index has now vio­lated an impor­tant sup­port zone and weak­en­ing rapidly.

Fur­ther north from Hong Kong, South Korea is an econ­omy that is highly sen­si­tive to global eco­nomic cycle. In par­tic­u­lar, the South Kore­ans export a lot of cap­i­tal equip­ment and other goods to China. That country's stock mar­ket isn't behav­ing well either. In fact, it's cra­ter­ing.

China has been an enor­mous con­sumer of com­modi­ties. Com­mod­ity prices have also been weak­en­ing as the CRB Index is in a down­trend and has vio­lated an impor­tant sup­port level.

Aus­tralia is not only a major com­mod­ity exporter, it is highly sen­si­tive to Chi­nese com­mod­ity demand because of its geog­ra­phy. The AUDUSD exchange rate is falling rapidly.

Just to show how bad things are, the Cana­dian econ­omy is sim­i­lar in char­ac­ter­is­tic to Australia's. Both are indus­tri­al­ized coun­tries that are large com­mod­ity exporters. The only dif­fer­ence is that Aus­tralia is more lev­ered to China, whereas

Canada is more sen­si­tive to US growth. Take a look at the AUDCAD cross rate as a mea­sure of the for­ward expec­ta­tions between the level of change in Chi­nese and Amer­i­can growth.

Is the shadow bank­ing sys­tem unrav­el­ing?
The story that I have out­lined so far is the story of eco­nomic decel­er­a­tion in China. There is another risk that the mar­ket doesn't seem to be focus­ing on — the risk of a Lehman-like cat­a­stro­phe in China's finan­cial sys­tem. Patrick Chovanec, a pro­fes­sor at Tsinghua University's School of Eco­nom­ics and Man­age­ment in Bei­jing, writes:

There really are two related but dis­tinct things peo­ple have in mind when they talk about a “hard land­ing” for China. The first is a rapid decel­er­a­tion of GDP growth – below, say, 7%. The sec­ond is some kind of finan­cial cri­sis. I think we’re already see­ing some signs of the first, and the sec­ond is a big­ger risk than most peo­ple appreciate.

He went on to detail an inci­dent of how the shadow bank­ing sys­tem is unrav­el­ing in China:

In early April, Caixin mag­a­zine ran an arti­cle titled “Fool’s Gold Behind Bei­jing Loan Guar­an­tees”, which doc­u­mented the silent implo­sion of Zhong­dan Invest­ment Credit Guar­an­tee Co. Ltd., based in China’s cap­i­tal. “What’s a credit guar­an­tee com­pany?” you might ask — and ask you should, because these com­pa­nies and the risks they poten­tially pose are one of the least under­stood aspects of China’s “shadow bank­ing” sys­tem. If the risky trust prod­ucts and wealth funds that Caixin doc­u­mented last July are China’s equiv­a­lent to CDOs, then credit guar­an­tee com­pa­nies are China’s ver­sion of AIG.

As I under­stand it, credit guar­an­tee com­pa­nies were orig­i­nally cre­ated to help Small and Medium Enter­prises (SMEs) get access to bank loans. State-run banks are often reluc­tant to lend to pri­vate com­pa­nies that do not have the hard assets (such as land) or implicit gov­ern­ment back­ing that State-Owned Enter­prises (SOEs) enjoy. Local gov­ern­ments encour­aged the for­ma­tion of a new kind of finan­cial entity, which would charge prospec­tive bor­row­ers a fee and, in exchange, serve as a guar­an­tor to the bank, pledg­ing to pay for any losses in the event of a default. Hav­ing trans­ferred the risk onto some­one else’s shoul­ders, the bank could rest easy and issue the loan (which it oth­er­wise would have been reluc­tant to make). In effect, the “credit guar­an­tee” com­pany had sold insur­ance — oth­er­wise known as a credit default swap (CDS) — to the bank for a risky loan, with the bor­rower fork­ing over the premium.

OK, so China has a bunch of lit­tle AIGs. The story gets bet­ter, you have lever­age on top of lever­age [empha­sis added]:

Zhong­dan, the com­pany in the Caixin arti­cle, took these risks one step fur­ther. It per­suaded bor­row­ers to take out bank loans based on guar­an­tees from Zhong­dan, and then hand some or all of that money back to Zhong­dan to invest in Zhongdan’s own “wealth man­age­ment” prod­ucts:

Under the arrange­ment, a par­tic­i­pat­ing com­pany would take out a bank loan and give some of the money to Zhong­dan for invest­ing in high interest-paying wealth man­age­ment prod­ucts for a month or more.

The firm then appar­ently put those funds to work by buy­ing stakes in small com­pa­nies such as pawn­shops and invest­ment con­sult­ing firms, accord­ing to the sources. Some of the funds went toward a U.S. con­sul­tancy that later failed.

When excesses occurred in the US with sub­prime lend­ing and "liar loans", rules were skirted. It's no dif­fer­ent in China.

Since this use of funds com­pletely vio­lated bank­ing rules, Zhong­dan forged doc­u­ments indi­cat­ing the money was being bor­rowed to pay fic­ti­tious suppliers:

 

To nail one loan, [an exec­u­tive for a build­ing mate­ri­als man­u­fac­turer] said, Zhong­dan formed a shell build­ing mate­ri­als sup­plier and wrote a fake con­tract between the sup­plier and his com­pany. The doc­u­ment was pre­sented to the bank, which approved the loan. Zhong­dan later de-registered the phony supplier.

It all unrav­eled in the end.

The whole thing started to unravel in Jan­u­ary when banks “reacted to rumors of a liq­uid­ity crunch” at Zhongdan:

At that point, reg­u­la­tors stepped in and told every­body to freeze — and to keep all the assets as “good” on everyone’s bal­ance sheets while they fig­ured out what to do next. Zhong­dan had over 300 clients, and guar­an­teed RMB 3.3 bil­lion (US$ 521 mil­lion) in loans from at least 18 banks. The only liq­uid assets that the guar­an­tee com­pany appears to have avail­able to pay banks is RMB 210 mil­lion (US$ 33 mil­lion) in mar­gin accounts deposited with the banks them­selves. Good luck find­ing the rest:

Sev­eral banks that coop­er­ated with Zhong­dan smelled trou­ble and started call­ing loans they had issued to com­pa­nies backed by the firm … The next domino fell when the cred­i­tor com­pa­nies, seek­ing to appease the banks, turned to Zhong­dan for help repay­ing the called loans. But Zhong­dan exec­u­tives balked, and the domino effect accel­er­ated as com­pa­nies teetered under bank pres­sure and the city’s busi­ness com­mu­nity shud­dered with credit freeze fears.

When I hear sto­ries like this, I think of the cock­roach the­ory. If you see one cock­roach, there are sure to be more.

Reuters recently reported a story that Chi­nese buy­ers were default­ing on coal and iron ore ship­ments. While this story may be an indi­ca­tion of a slow­ing econ­omy in China and slack­en­ing com­mod­ity demand, it might have stopped there. But the story gets worse as it exposes the cracks in the shadow bank­ing sys­tem. It turns out that Chi­nese buy­ers have been buy­ing com­modi­ties and using them as col­lat­eral to obtain financ­ing. When the econ­omy and com­mod­ity prices turned down, they were caught. This type of financ­ing is highly preva­lent in the cop­per mar­ket, as Reuters reported that Chi­nese ware­house were so full that cop­per inven­tory was the red metal was being stored in car parks.

Watch­ing the shadow bank­ing sys­tem
I have no idea what all this means. China's econ­omy is highly opaque and we have no reli­able sta­tis­tics. How big is the shadow bank­ing sys­tem and how much lever­age is involved? We know that there are prob­lems, but I have no way of quan­ti­fy­ing it.

Could this result in a crash land­ing, i.e. neg­a­tive GDP growth, in China? I have no idea. Cer­tainly, the unrav­el­ing of exces­sive lever­age has seen that kind of result before.

Here is one off­beat way that I am watch­ing for signs of stress in China's shadow bank­ing sys­tem. I am watch­ing the share price of HSBC. While HSBC is a global bank, it has deep roots in Hong Kong and Asia. For new­bies, HSBC stands for Hongkong Shang­hai Bank­ing Com­pany. It is a bank that was firmly estab­lished in Hong Kong. As a child, I can remem­ber dri­ving by the bank's head­quar­ters in down­town Hong Kong in the 1960's.

Stresses in the Chi­nese finan­cial sys­tem is likely to show up in the share price of major finan­cials that have expo­sure to China and Asia, like HSBC. The stock has been falling rapidly in the past cou­ple of weeks, which is not a good sign.

To put the stock per­for­mance into con­text, I charted the per­for­mance of the stock rel­a­tive to the BKX, or the index of US bank stocks. HSBC has been in a rel­a­tive down­trend, but the lows of 2009 have not been vio­lated. I inter­pret this as the mar­ket sig­nal­ing that while there may be signs of trou­ble, it is not panicking.

Chi­nese élite los­ing con­fi­dence
To add to China's trou­bles, the Chi­nese busi­ness élite is start­ing to lose con­fi­dence in China's long-term out­look. FT Alphav­ille high­lighted a sur­vey by the Com­mit­tee of 100, an inter­na­tional, non-profit, non-partisan mem­ber­ship orga­ni­za­tion that brings a Chi­nese Amer­i­can per­spec­tive to issues con­cern­ing Asian Amer­i­cans and U.S.-China rela­tions. The results of this key ques­tion asks Amer­i­can and Chi­nese busi­ness lead­ers their out­look for China. While Amer­i­cans believe that

Chi­nese growth will con­tinue long into the future, the Chi­nese are far less opti­mistic and their out­look has dete­ri­o­rated rapidly since 2007.

China's out­look in 20 years

Putting it all together, we have signs of a weak­en­ing econ­omy, a shadow bank­ing sys­tem that is tee­ter­ing and a loss of con­fi­dence by China's busi­ness élite. While the gov­ern­ment is tak­ing steps to address the prob­lems, none of these risks have been dis­counted by the market.

While I expect the news flow from Europe to improve in the days to come, which is bull­ish, I also expect fur­ther sto­ries of dete­ri­o­ra­tion out of China, which has the poten­tial to be extremely bear­ish. All this points to fur­ther chop­pi­ness in stocks and risky assets with a down­ward bias.

Cam Hui is a port­fo­lio man­ager at Qwest Invest­ment Fund Man­age­ment Ltd. ("Qwest"). This arti­cle is pre­pared by Mr. Hui as an out­side busi­ness activ­ity. As such, Qwest does not review or approve mate­ri­als pre­sented herein. The opin­ions and any rec­om­men­da­tions expressed in this blog are those of the author and do not reflect the opin­ions or rec­om­men­da­tions of Qwest.

None of the infor­ma­tion or opin­ions expressed in this blog con­sti­tutes a solic­i­ta­tion for the pur­chase or sale of any secu­rity or other instru­ment. Noth­ing in this arti­cle con­sti­tutes invest­ment advice and any rec­om­men­da­tions that may be con­tained herein have not been based upon a con­sid­er­a­tion of the invest­ment objec­tives, finan­cial sit­u­a­tion or par­tic­u­lar needs of any spe­cific recip­i­ent. Any pur­chase or sale activ­ity in any secu­ri­ties or other instru­ment should be based upon your own analy­sis and con­clu­sions. Past per­for­mance is not indica­tive of future results. Either Qwest or Mr. Hui may hold or con­trol long or short posi­tions in the secu­ri­ties or instru­ments mentioned.

Tags: Aggressive Steps, Capital Of China, Chinese Premier Wen Jiabao, Compos, Consensus View, Economic Structures, Eurobonds, Eurozone, Fiscal Policy, Friday To Sunday, Hubei Province, Inflationary Expectations, Infrastructure Bonds, Last Domino, Negative News, Pan European, Premier Wen Jiabao, Slowdown, Stimulus, Taking Steps
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May 28th, 2012

by James Hamil­ton, Econ­browser

In my pre­vi­ous post I described a new research paper with Uni­ver­sity of Chicago Pro­fes­sor Cyn­thia Wu on the Effects of Index-Fund Invest­ing on Com­mod­ity Futures Prices. Pre­vi­ously I dis­cussed what we found for the prices of agri­cul­tural com­modi­ties. Here I review our find­ings about oil prices.

Part of the inter­est in a pos­si­ble effect of commodity-index funds on oil prices comes from tes­ti­mony before the U.S. Sen­ate by hedge fund man­ager Michael Mas­ters, in which he pro­duced a provoca­tive graph of oil prices against an esti­mate of the num­ber of crude oil futures con­tracts held by commodity-index funds. We repro­duced his method­ol­ogy to update his graph below. The fig­ure cer­tainly seems to sug­gest a strong con­nec­tion between these two series, par­tic­u­larly dur­ing 2008 and 2009.

Price of near crude oil con­tract (left scale) and num­ber of crude oil con­tracts held by index traders as imputed by Mas­ters' method (right scale). Source: Hamil­ton and Wu (2012).

The CFTC does not release a direct esti­mate of index-fund hold­ings of crude oil con­tracts at the weekly fre­quency of data plot­ted above. Mas­ters there­fore used an indi­rect method based on CFTC-reported hold­ings by commodity-index funds of 3 par­tic­u­lar agri­cul­tural com­modi­ties to con­struct the green line in the graph above. His rea­son­ing was that most index funds fol­low one of two pop­u­lar strate­gies, try­ing to track either the S&P-Goldman Sachs Com­mod­ity Index or the Dow Jones-UBS (for­merly Dow Jones-AIG) Com­mod­ity Index. He noted that soy­bean oil, one of the 12 agri­cul­tural com­modi­ties for which CFTC does report a weekly esti­mate of index-fund posi­tions, is included in the Dow Jones but not the Gold­man strat­egy. Mas­ters' pro­posal was that, by using the CFTC esti­mate of hold­ings of soy­bean oil by index funds, and from the known weights that the Dow Jones strat­egy calls for hold­ing soy­bean oil rel­a­tive to crude oil, one could infer how many crude oil con­tracts were being held by funds fol­low­ing the Dow Jones strat­egy. Sim­i­larly, the Gold­man strat­egy includes Kansas City wheat and feeder cat­tle, whereas the Dow Jones index does not, so either of these com­modi­ties (Mas­ters used the aver­age) could gen­er­ate an implied hold­ing of crude oil con­tracts by those try­ing to repli­cate the Gold­man Sachs Com­mod­ity Index. Sum­ming these two esti­mates pro­duced the green line in the fig­ure above. Thus this esti­mate of crude oil hold­ings is actu­ally based on reported hold­ings in soy­bean oil, Kansas City wheat, and feeder cat­tle contracts.

This approach of imput­ing crude oil hold­ings from a few agri­cul­tural com­modi­ties has been sharply crit­i­cized by Irwin and Sanders (2011), who note that the implied esti­mates using Kansas City wheat often dif­fer sig­nif­i­cantly from those based on feeder cat­tle. They also doc­u­ment that, for dates for which we have sep­a­rate rea­son­able esti­mates of crude oil con­tracts held by commodity-index funds, the actual hold­ings dif­fer sub­stan­tially from the series plot­ted in the green line above. (See my dis­cus­sion of Irwin and Sanders' paper in Econ­browser last August).

In my new paper with Cyn­thia Wu, we demon­strate that Mas­ters' idea for imput­ing crude oil hold­ings from agri­cul­tural mea­sures does not require find­ing a com­mod­ity that appears in one index but not the other. Alge­braically, the method can be thought of as sim­ply solv­ing a sys­tem of two equa­tions to deter­mine two unknowns. In fact under Mas­ters' assump­tion, it would be pos­si­ble to infer crude oil hold­ings from almost any two arbi­trary agri­cul­tural com­modi­ties. The graph below shows what those infer­ences look like if one uses soy­bean oil plus any one of the indi­cated sec­ond com­modi­ties. The inferred series for crude oil hold­ings is quite sen­si­tive to which agri­cul­tural series one uses. The fig­ure also plots a regres­sion method that we devel­oped that makes use of all 12 com­modi­ties together, which can be viewed as a gen­er­al­iza­tion of Mas­ters' aver­ag­ing idea.

Hold­ings of crude oil con­tracts held by commodity-index traders imputed by (a) soy­bean oil and one other agri­cul­tural com­mod­ity; (b) Mas­ters' method; © regres­sion method. Source: Hamil­ton and Wu (2012).

A recent paper by Stan­ford Pro­fes­sor Ken Sin­gle­ton found that the 13-week change in Mas­ters' esti­mates of crude oil hold­ings can help fore­cast returns on crude oil futures con­tracts. Cyn­thia and I were able to repro­duce this find­ing, though the level and 1-week change of the Mas­ters series don't have any pre­dic­tive power.

Return­ing to the first fig­ure above, the strik­ing fea­ture of the Mas­ters series is that it col­lapses as the reces­sion wors­ened in 2008 but began to rebound sharply before the recov­ery began, fea­tures that help give it appar­ent pre­dic­tive power over the sam­ple period that Sin­gle­ton orig­i­nally stud­ied. Since Singleton's paper was writ­ten, we now have 2 more years of data with which to see if the rela­tion has true pre­dic­tive power. We esti­mated the fore­cast­ing regres­sion using a sam­ple that ended at the same date as Singleton's orig­i­nal analy­sis (Jan­u­ary 12, 2010), and then used those regres­sion esti­mates to try to fore­cast crude oil futures prices over Jan­u­ary 17, 2010 to Jan­u­ary 3, 2012. We found that in this out-of-sample exer­cise, the regres­sion actu­ally did 22% worse than one would have done if one sim­ply used the naïve fore­cast that futures prices would never change.

Inter­est­ingly, we found that Mas­ters' mea­sure not only appeared to fore­cast changes in crude oil prices over the 2006–2009 period, but would equally appear to have been able to pre­dict changes in the S&P500 stock price index over that period. How­ever, this rela­tion, too, turns out to per­form worse out-of-sample than the naïve pre­dic­tion that stock prices will never change.

Our con­clu­sion is that the cor­re­la­tion between 13-week changes in commodity-index hold­ings of agri­cul­tural futures con­tracts over 2006–2009 and other series such as changes in crude oil or stock prices is likely to just be a coin­ci­dence. Over­all, we find very lit­tle sup­port in the data for the claim that index buy­ing exerted sig­nif­i­cant effect on com­mod­ity futures prices.

James D. Hamil­ton is Pro­fes­sor of Eco­nom­ics at the Uni­ver­sity of Cal­i­for­nia, San Diego

Tags: Agricultural commodities, Aig Commodity Index, Cftc, Commodity Futures Prices, Commodity Index Funds, Commodity Indices, Crude Oil Futures, Dow Jones, Dow Jones Aig Commodity Index, Econbrowser, Fund Positions, Futures Contracts, Goldman Sachs, Goldman Sachs Commodity Index, Hedge Fund Manager, Michael Masters, Oil Contracts, Scale Source, Soybean Oil, U S Senate
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May 28th, 2012

by Guy Lerner, The Tech­ni­cal Take

Equity investor sen­ti­ment remains mixed.  The Rydex mar­ket timers (i.e., dumb money) remain exces­sively bull­ish, and this is a bear sig­nal.  On the other hand, com­pany insid­ers (i.e., smart money) are becom­ing more bull­ish, but the value is not yet extreme, which would be a bull sig­nal.  The “dumb money” indi­ca­tor is neu­tral.  I have been of the opin­ion that this is a mar­ket top.  If prices were to move higher from this junc­ture, sell­ing would likely ensue once the mar­ket became over bought.  A bet­ter, more durable bot­tom lead­ing to a sus­tain­able price would more likely be seen if investor sen­ti­ment became more bear­ish.  And what is the best way to bring out the bears?  Why of course, lower prices and breaks of sup­port lev­els and widely fol­lowed mov­ing aver­ages.  With investor sen­ti­ment essen­tially mixed we are nowhere and with­out an edge.  Lower prices would be great.  Higher prices will only delay the inevitable.

The “Dumb Money” indi­ca­tor (see fig­ure 1) looks for extremes in the data from 4 dif­fer­ent groups of investors who his­tor­i­cally have been wrong on the mar­ket: 1) Investors Intel­li­gence; 2) Mar­ket­Vane; 3) Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors; and 4) the put call ratio. This indi­ca­tor is  neutral.

Fig­ure 1. “Dumb Money”/ weekly

Fig­ure 2 is a weekly chart of the SP500 with the Insid­er­Score “entire mar­ket” value in the lower panel. From the Insid­er­Score weekly report: “A market-wide Indus­try Buy Inflec­tion was trig­gered on May 18th, the first since August 9, 2011. Buy Inflec­tions are our strongest quan­ti­ta­tive indi­ca­tor of pos­i­tive macro sen­ti­ment are trig­gered when buy­ing reaches extreme lev­els. Presently, insider buy­ing lev­els (as mea­sured by the num­ber of insid­ers buy­ing, the num­ber of com­pa­nies with insider buy­ing, the dol­lar value of pur­chases, etc.) is higher than nor­mal, how­ever, insider sell­ing lev­els are nor­mal. Typ­i­cally we see insider sell­ing lev­els fell to well below nor­mal when there’s higher than nor­mal insider buy­ing lev­els. Buy­ing is wide­spread, led by small– and mid-caps, though the big caps began show­ing a stronger buy sig­nal as the week went on. “

Fig­ure 2. Insid­er­Score “Entire Mar­ket” value/ weekly

Fig­ure 3 is a weekly chart of the SP500. The indi­ca­tor in the lower panel mea­sures all the assets in the Rydex bull­ish ori­ented equity funds divided by the sum of assets in the bull­ish ori­ented equity funds plus the assets in the bear­ish ori­ented equity funds. When the indi­ca­tor is green, the value is low and there is fear in the mar­ket; this is where mar­ket bot­toms are forged. When the indi­ca­tor is red, there is com­pla­cency in the mar­ket. There are too many bulls and this is when mar­ket advances stall. Cur­rently, the value of the indi­ca­tor is 69.07%. Val­ues less than 50% are asso­ci­ated with mar­ket bot­toms. Val­ues greater than 58% are asso­ci­ated with mar­ket tops. It should be noted that the mar­ket topped out in 2011 with this indi­ca­tor between 70% and 71%.

Fig­ure 3. Rydex Total Bull v. Total Bear/ weekly

Copy­right © The Tech­ni­cal Take

Tags: American Association Of Individual Investors, Company Insiders, Dollar Value, Dumb Money, Durable Bottom, Equity Investor, Extreme Levels, Figure 1, Guy Lerner, Inflection, Inflections, Investor Sentiment, Juncture, Market 1, Market Timers, Marketvane, Moving Averages, Put Call Ratio, S&P500, Smart Money
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May 27th, 2012

There's No Place Like America

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

A con­fer­ence with CEOs from around the globe this week brought me to Europe—the cen­ter of West­ern Civ­i­liza­tion, the cra­dle of democ­racy, inno­va­tion and cre­ativ­ity, and the crux of today’s debt cri­sis. In Siena, I came across a medieval reminder of the effects of good and bad gov­ern­ment inside the Palazzo Pub­blico among the beau­ti­fully painted frescoes.

One mural, “The Alle­gory of Good Gov­ern­ment,” per­son­i­fies the virtues of jus­tice, peace, virtue and wis­dom, empha­siz­ing the impor­tance of a sta­ble gov­ern­ment. Two more fres­cos flank this paint­ing, one depict­ing the effects of good gov­ern­ment and another show­ing the effects of bad government.

Sur­rounded by his­toric beauty, it’s sad to see the dis­il­lu­sioned faces on the streets of Europe. If a pic­ture is worth a thou­sand words, the one below might be more mon­u­men­tal than that. Busi­ness Insider fea­tured this chart show­ing the ris­ing unem­ploy­ment rate among the youth through­out Europe. Since the 2009 global cri­sis through April 2012, youth unem­ploy­ment has sky­rock­eted in Spain, Greece, Por­tu­gal, Italy and Ireland.

Ian McAv­ity recently shared some words of wis­dom related to Europe’s colos­sal chal­lenges: “When times get tough, eco­nomic nation­al­ism and pro­tec­tion­ism tends to rise because it is always eas­ier to blame some­one else for self-inflicted problems.”

The con­trast of his­toric beauty against tragedy is one for Shake­speare. Back in the U.S., I am thank­ful for the entre­pre­neur­ial heart that beats through­out Amer­ica. As the elec­tion grows closer, I’m con­fi­dent it’ll beat louder to per­suade the U.S. gov­ern­ment to pur­sue thought­ful poli­cies that embody essen­tial Amer­i­can principles.

One should not under­es­ti­mate what it means to be Amer­i­can; you don’t find a feel­ing quite like it out­side the nation. In fact, emerg­ing coun­tries such as Sin­ga­pore and China are now striv­ing to repli­cate what my friend Alexan­der Green calls “Amer­i­can exceptionalism.”

He says the U.S. is the world’s eco­nomic super­power today not only because of geog­ra­phy, but, more impor­tantly, the fact that entre­pre­neurs were free to inno­vate and cre­ate. Alex writes, “Amer­ica cul­ti­vates, cel­e­brates and rewards the habits that make men and women suc­cess­ful. It promises that any­one with ambi­tion and grit can move up the eco­nomic lad­der, that every­one has a chance to bet­ter his or her lot, regard­less of circumstances.”

This feel­ing of empow­er­ment has cre­ated a national group of well-informed and very engaged indi­vid­u­als. On the Organ­i­sa­tion for Eco­nomic Coöper­a­tion and Devel­op­ment (OECD) “Your Bet­ter Life Index” based on 11 diverse mea­sures of well-being, the U.S. is highly ranked. Each ele­ment mea­sures a feel­ing of sat­is­fac­tion with life, includ­ing health, edu­ca­tion, envi­ron­ment, per­sonal secu­rity, life sat­is­fac­tion, and work-life bal­ance. Here are a few of the high­lights from OECD’s sum­mary of the U.S.:

• The aver­age income in the U.S. is nearly $38,000 a year, con­sid­er­ably more than the OECD aver­age income of about $22,000.
• Almost 90 per­cent of adults in the U.S. have a high-school degree (or equiv­a­lent); the OECD aver­age is 74 percent.
• Amer­i­cans have a strong sense of com­mu­nity, as 92 per­cent know some­one they could rely on in a time of need. The OECD aver­age is 91 percent.
• Voter turnout was sig­nif­i­cantly higher than the world aver­age: 90 per­cent of those reg­is­tered par­tic­i­pate in the U.S. polit­i­cal process, com­pared to 73 per­cent for the rest of the world.
• Amer­i­can house­holds spend an aver­age of only 20 per­cent of net dis­pos­able income on rent/home loans, gas, elec­tric­ity, water, fur­nish­ings or repairs. The OECD aver­age is 22 percent.

While a 2 per­cent dif­fer­ence in house­hold spend­ing isn’t strik­ing, pen­nies add up. In a Deutsche Bank sur­vey of how much a vari­ety of goods cost around the world, the research firm found that New York “was found to be sig­nif­i­cantly cheaper than other major finan­cial hubs even after account­ing for taxes and other addi­tional charges.”

Accord­ing to its study, if I wanted to buy Apple’s iPhone in Europe, it would’ve cost me $845; fill­ing a car with a liter of petrol would cost over $1 more than it does in the U.S. A pair of Levis is nearly dou­ble the price than the same pair in New York City. On mul­ti­ple mea­sures, New York City offers more for your money com­pared to Paris, Sao Paolo or Tokyo.

Nonethe­less, con­sumers on the other side of the world will­ingly line up to pur­chase American-made goods, even at a pre­mium price.

Afford­abil­ity is par­tially why 60 mil­lion inter­na­tional tourists choose to immerse them­selves in Amer­i­can cul­ture each year. While Canada and Mex­ico make up the major­ity of these vis­i­tors, tourists from Brazil and China have been vis­it­ing in record num­bers, accord­ing to data from the U.S. Inter­na­tional Trade Admin­is­tra­tion. In 2011, vis­i­tors from Brazil increased 26 per­cent to 1.5 mil­lion peo­ple. About 1 mil­lion Chi­nese vis­ited the U.S. in 2011, which was an increase of 36 per­cent over the pre­vi­ous year.

As the ris­ing mid­dle class in emerg­ing mar­kets gain more dis­pos­able income, they desire the same finan­cial and social mobil­ity that Amer­i­cans take for granted. For that mobil­ity, each vis­i­tor spends about $4,000 on travel, clothes, food and attractions.

Invest in Amer­ica
In his arti­cle, Alex Green describes the traits that a typ­i­cal Amer­i­can embod­ies: “an opti­mistic atti­tude, a can-do spirit, and an enthu­si­as­tic endorse­ment of the pur­suit of hap­pi­ness through indi­vid­ual ini­tia­tive and self-reliance.”

Investors aren’t endors­ing U.S. equi­ties today. With all the pos­i­tive aspects men­tioned above, today’s low par­tic­i­pa­tion in the U.S. stock mar­ket is per­plex­ing. Here are two more rea­sons to invest today: 1) About 620 com­pa­nies in the S&P 1500 Index are grow­ing their rev­enues at more than 10 per­cent; and 2) 428 stocks in the index have an annu­al­ized div­i­dend yield higher than the 10-year Treasury.

Happy Memo­r­ial Day!

What­ever you hap­pen to be doing this weekend—shopping the sales, sight­see­ing in the city or bar­be­quing in your backyard—take time to honor the men and women who died serv­ing our coun­try. We owe the free­dom of our “Bet­ter Life” we lead today to the men and women who self­lessly gave their lives fight­ing for America.

Tags: Allegory Of Good Government, American Principles, Business Insider, Chief Investment Officer, Debt Crisis, Economic Nationalism, Frank Holmes, Frien, Global Crisis, Ian Mcavity, Justice Peace, Palazzo Pubblico, Stable Government, Streets Of Europe, U S Global Investors, Unemployment Rate, Western Civilization, What It Means To Be American, Words Of Wisdom, Youth Unemployment
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May 27th, 2012

U.S. Equity Mar­ket Radar (May 28, 2012)
The S&P 500 Index bounced back this week, ris­ing 1.74 per­cent. The mate­ri­als, con­sumer dis­cre­tionary and indus­tri­als sec­tors led the way, all ris­ing by more than 2 per­cent. The defen­sive areas that have recently out­per­formed were the lag­gards this week as telecom­mu­ni­ca­tion ser­vices, health care and util­i­ties all rose less than one percent.

Strengths

• The mate­ri­als sec­tor was led by strong broad based gains in the chem­i­cal sec­tor. Stand­out per­form­ers in Sherwin-Williams, East­man Chem­i­cal and FMC Corp. While company-specific news was a dri­ver, the larger pos­i­tive trend in chem­i­cals was the declin­ing feed­stock cost as oil moves lower and nat­ural gas prices remained depressed.
• Within the con­sumer dis­cre­tionary sec­tor, online travel com­pa­nies and home­builders stand out. Expe­dia and Tri­pad­vi­sor were among the best per­form­ers on opti­mism regard­ing Europe. Home builders Pulte Group and Lennar were strong on the back of better-than-expected new home sales data.
• The best indi­vid­ual stock per­former this week was Cooper Indus­tries which rose 27.5 per­cent as it agreed to be acquired by Eaton Corp.

Weak­nesses

• All S&P 500 sec­tors were higher this week but the rel­a­tive lag­gard was telecom­mu­ni­ca­tion ser­vices which saw AT&T and Ver­i­zon post small declines after recent outperformance.

• At the indus­try level, com­puter stor­age and periph­er­als was the worst per­former as NetApp fell by more than 13 per­cent on dis­ap­point­ing sales outlook.
• Dell was the worst per­former in the S&P 500 this week, falling by more than 15 per­cent on dis­ap­point­ing quar­terly results.

Oppor­tu­nity

• As men­tioned last week, air­lines and gold stocks con­tin­ued their pos­i­tive tra­jec­tory and were among the best per­form­ers again this week. Euro­pean con­cerns and lower oil prices were the pri­mary drivers.

Threat

• The U.S. remains a bright spot in the global econ­omy and exter­nal shocks from Europe or Asia can’t be ruled out.

Tags: Chemical Sector, Company Specific News, Computer Storage, Consumer Discretionary Sector, Cooper Industries, Eastman Chemical, Eaton Corp, European Concerns, External Shocks, Feedstock, Fmc Corp, Global Economy, gold stocks, Lennar, Level Computer, Market Radar, Materials Sector, Natural Gas Prices, Outperformance, Sherwin Williams, Telecommunication Services
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May 27th, 2012

The Econ­omy and Bond Mar­ket Radar (May 28, 2012)

Trea­sury yields were lit­tle changed as mixed eco­nomic data here in the U.S. and lots of back and forth spec­u­la­tion in Europe led to an over­all muted reac­tion. New home sales were a bright spot and as can be seen in the chart below, have been steadily trend­ing high since last sum­mer. A sim­i­lar pat­tern is tak­ing place in the exist­ing home mar­ket and real mar­ket recov­ery appears to be underway.

Strengths

• The Uni­ver­sity of Michi­gan Con­fi­dence Index hit the high­est level since Octo­ber 2007, cit­ing lower gaso­line prices.
• April new home sales rose 3.3 per­cent, beat­ing expectations.
• Exist­ing home sales grew 3.4 per­cent in April and the median priced jumped 7.6 percent.

Weak­nesses

• Durable goods orders in April were weak, with “core” cap­i­tal goods orders falling 1.9 per­cent, the third decline in four months.

• HSBC’s flash Pur­chas­ing Man­agers’ Index (PMI) for China fell to 48.7 in May and dis­ap­pointed hopes for a rebound.

• Markit’s euro­zone PMI told a sim­i­lar story as this indi­ca­tor fell to the low­est level in nearly three years.

Oppor­tu­nity

• Bonds con­tinue to grind higher and appear to be fore­cast­ing benign infla­tion and slow growth.
• The Fed­eral Reserve appears will­ing to increase mon­e­tary accom­mo­da­tion if nec­es­sary, which would be a boost to the bond market.

Threat

• China’s econ­omy is slow­ing faster than expected and gov­ern­ment pol­icy mak­ers appear com­fort­able with this dynamic.
• Europe remains a wild­card with aus­ter­ity pro­grams under pres­sure, cre­at­ing sig­nif­i­cant uncertainty.

Tags: Austerity Programs, Bond Market, Capital Goods, China Economy, Confidence Index, Core Capital, Durable Goods Orders, Economic Data, Eurozone, Existing Home Sales, Federal Reserve, Four Months, Gasoline Prices, Government Policy Makers, Market Radar, Pmi, Purchasing Managers Index, Rebound, Treasury Yields, University Of Michigan Confidence, Wildcard
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May 27th, 2012

Gold Mar­ket Radar (May 28, 2012)

For the week, spot gold closed at $1,573.03 down $19.96 per ounce, or 1.3 per­cent.  Gold stocks, as mea­sured by the NYSE Arca Gold Min­ers Index, surged 7.88 per­cent. The U.S. Trade-Weighted Dol­lar Index gained 1.37 per­cent for the week.

Strengths

• Gold stocks strongly out­per­formed gold bul­lion this week.  As we have high­lighted in the past there has been a sig­nif­i­cant dis­con­nect between the price of gold and equity share prices.  The lat­est Canac­cord Genu­ity Junior Min­ing Weekly high­lights that one year ago, bul­lion was mak­ing new highs week-over-week with the price of gold ris­ing up to $1,508 per ounce.  Based on Canaccord’s in-situ gold data­base, the mar­ket was valu­ing gold held by non-producers at about $129 per ounce.  One year later, while the price of gold is trad­ing higher at $1,590 (5.4 per­cent higher than one year ago); the aver­age in-situ value per ounce has dropped to $62 (52 per­cent lower than one year ago).  The junior min­ers have been put in the penalty box as cap­i­tal mar­kets have tem­porar­ily shut off the financ­ing life­line to these companies.
• With the S&P 500 now giv­ing up more than half its gains for the year, much of the surge in gold stock buy­ing over the past week came from gen­er­al­ist funds that may be diver­si­fy­ing in an uncer­tain mar­ket.  Another fac­tor dri­ving this buy­ing may have been insider buy­ing at the gold min­ing com­pa­nies, which has recently soared accord­ing to the Mar­ket Ink Report.  The Mar­ket Ink Report notes that the stars may indeed be align­ing for gold stocks as the euro­zone faces the prospect of a full-blown bank­ing cri­sis poten­tially tak­ing hold over the next few weeks.  That would force the Euro­pean Cen­tral Bank to pro­vide fur­ther mon­e­tary easing.
• Despite gold being down this week it did get a lift in value as the Inter­na­tional Mon­e­tary Fund (IMF) reported that cen­tral bank buy­ing in gold was still pro­ceed­ing at a brisk pace in April.  Turkey raised its reserves by 29.7 tons and Ukraine, Mex­ico and Kaza­khstan also increased their hold­ings.  The Philip­pines, whose pur­chases actu­ally date back to March but were slow in being reported to the IMF, reported gold pur­chases amount­ing to 32 tons of bullion–the biggest vol­ume since Mex­ico bought around 78 tons a lit­tle over a year ago.

Weak­nesses

• Feed­back from the recent Bank of Amer­ica Mer­rill Lynch 29th Global Met­als, Min­ing and Steel con­fer­ence in Miami showed there was very lit­tle inter­est in attend­ing a gold com­pany pre­sen­ta­tion, which could in itself, be inter­preted as a buy sig­nal.  Michael Jalo­nen, of BofA/ML noted he came to the con­fer­ence with high hopes for news flow on capex reduc­tion and a focus on cap­i­tal returns but ulti­mately left feel­ing a lit­tle disappointed.
• Before a min­ing com­pany has even applied for a per­mit for the Peb­ble Project Assess­ment in Alaska, the EPA stepped in and released its own report.  The EPA issued a heavy three-volume report on the pos­si­ble impact of min­ing projects on the Bris­tol Bay water­shed sys­tem but the agency insisted, “the draft study in no way pre­judges future con­sid­er­a­tion of pro­posed min­ing activ­i­ties.”  The U.S. Corps of Engi­neers is the pri­mary per­mit­ting author­ity for dredg­ing and fil­ing per­mits for min­ing projects.  How­ever, Sen­ate Energy and Resources Com­mit­tee Mem­ber Lisa Murkowski, R-Alaska, and oth­ers noted the EPA is deter­mined to wres­tle the min­ing per­mit­ting author­ity for itself, using the power it believes was granted by the Clean Water Act.
• Indian retail gold demand has been poor as the rupee has fallen sig­nif­i­cantly in value due to infla­tion and this has made gold more expen­sive in local cur­rency terms.

Oppor­tu­ni­ties

• Ray Dalio was inter­viewed by Barron’s recently.  Dalio is one of the most suc­cess­ful hedge fund man­agers in the world, over­see­ing $120 bil­lion in assets.  Dalio was asked if he is still a fan of gold.  Dalio noted it could be a bumpy ride tem­porar­ily because Euro­peans will have to sell gold in order to raise funds because they are squeezed but rec­om­mended that most peo­ple should have in the vicin­ity of 10 per­cent of their assets in gold, not only because he thinks it will be a good invest­ment longer term, but because he thinks it is a very effec­tive diver­si­fier against the other 90 per­cent.  He also explained that he is view­ing gold as an alter­na­tive cur­rency.  “The big issue is debtor-developed coun­tries, the U.S., Europe and Japan, all have a lot of debt and will have to print money or they will have credit prob­lems.  I don’t want to have all of my money in those currencies.”
• Tech­ni­cal stud­ies by Insti­tu­tional Advi­sors show that the Philadel­phia Stock Exchange Gold and Sil­ver Index (XAU)/Gold Ratio has hit an extreme read­ing of less than 25 and such lows have only been seen around the impor­tant lows of September-October 2008, October-November 1948, the dou­ble bot­tom of March and Octo­ber 1942 and June 1924.  Their work indi­cates these types of read­ings have his­tor­i­cally marked turn­ing points in the rel­a­tive per­for­mance of gold ver­sus the gold stocks and the cur­rent read­ings sup­port stronger gold stock prices.
• Chris Wood, in his lat­est Fear and Greed report, said that gold has been act­ing like a risky asset lately, and it is only a mat­ter of time before it resumes its safe haven sta­tus.  In the near term, so long as there are investors who own gold on lever­age via ETFs or futures, there is always the risk of gold cor­rect­ing fur­ther in a clas­sic delever­ag­ing trade.  But in the long run, gold is the only real hedge against both defla­tion and hyper­in­fla­tion.  The ongo­ing exper­i­ment in unortho­dox mon­e­tary pol­icy from West­ern cen­tral banks will not end well.  While ris­ing energy costs have hurt gold com­pa­nies’ profit mar­kets, CLSA says that with U.S. crude oil inven­to­ries ris­ing, ris­ing gold and falling oil prices are “a per­fect ‘combo’ for gold-mining shares.”

Threats

• Don Coxe noted there is essen­tially a back­room polit­i­cal ban on invest­ing in com­pa­nies deemed impure by envi­ron­men­tal NGOs and this is unfairly depress­ing the prices of some of the lead­ing gold min­ing stocks, and hurt­ing pen­sion funds.  Coxe says pen­sion funds are suc­cumb­ing to polit­i­cal pres­sure, result­ing in “more and more cor­po­rate pen­sion funds…being impaled on their own fund­ing swords due to inad­e­quate invest­ment returns.”  Coxe sug­gests that com­mod­ity stocks are “vic­tims of a new form of per­se­cu­tion from two groups–those with con­tempt for cap­i­tal­ism, along with those who resent what min­ing and oil and gas com­pa­nies do for a living.”
• To stop the devel­op­ment of sev­eral new mines that are being con­tem­plated in Min­nesota, a cou­ple of NGOs recently went on the offen­sive to high­light that sul­fide min­ing presents many more risks to their envi­ron­ment than tra­di­tional iron ore min­ing that has taken place in their state and the cit­i­zens need a broad con­ver­sa­tion about this issue.
• The Cana­dian min­ing indus­try is see­ing a cou­ple of head­line risks this week with the Team­sters strike, which shut down Cana­dian Pacific Rail­way freight lines early Wednes­day with no end in sight.  This leaves min­ing and other resource com­pa­nies in Canada faced with sup­ply and fuel dis­rup­tions.  Also, for­est fires in Canada have sur­faced as a prob­lem as some power lines to the mines have been dam­aged while other areas are shut­ting in to make sure air qual­ity under­ground is free of smoke.

Tags: Banking Crisis, Brisk Pace, Dollar Index, Equity Share, Eurozone, Gold Bullion, Gold Database, Gold Equities, Gold Market, Gold Miners, Gold Mining Companies, Gold Stock, gold stocks, International Monetary Fund, International Monetary Fund Imf, Market Radar, New Highs, Nyse Arca, Penalty Box, Price Of Gold, Spot Gold
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May 27th, 2012

Energy and Nat­ural Resources Mar­ket Radar (May 28, 2012)

Strengths

• Global min­ing equi­ties recov­ered from last week’s sell off with an aver­age gain of 6.5 per­cent in the NYSE Arca Gold BUGS (HUI) and S&P/TSX Met­als & Min­ing indices.
• The global LNG mar­ket has tight­ened con­sid­er­ably since Japan’s nuclear indus­try was shut down in 2011 after a seri­ous nuclear power acci­dent.  Japan’s LNG imports grew 14.9 per­cent to 6.91 mil­lion tons in April from a year ear­lier accord­ing to the finance ministry.

Will Truck­ers Ditch Diesel?

Weak­nesses

• Nat­ural gas futures closed lower this week after a 6-week rally.  Weekly inven­tory data from the Depart­ment of Energy knocked down prompt futures by about 18 cents per mmbtu from the prior week to close under $2.58 per mmbtu.
• Steel out­put in China declined in April from a record as buy­ers sought to defer imports of raw mate­ri­als such as iron ore and cok­ing coal, Bloomberg reported. China’s crude-steel pro­duc­tion declined 1.6 per­cent to 60.57 mil­lion met­ric tons after soar­ing to a record 61.58 mil­lion tons in March, the World Steel Asso­ci­a­tion said.

Oppor­tu­ni­ties

• The shale gas boom in the U.S. has led to a big drop in the country’s car­bon emis­sions, as power gen­er­a­tors switch from coal to cheap gas.  Accord­ing to the Inter­na­tional Energy Agency, U.S. energy-related emis­sions of car­bon diox­ide, the main green­house gas fell by 450 mil­lion tons over the past five years.
• The Finan­cial Times reported that China is mov­ing to accel­er­ate invest­ment in major infra­struc­ture projects. The offi­cial China Secu­ri­ties Jour­nal said that the gov­ern­ment was step­ping up approvals for infra­struc­ture projects. “Some projects that were to have started in the sec­ond half of the year are being shifted to the first half, with the allo­ca­tion of cen­tral gov­ern­ment fund­ing being brought for­ward,” the news­pa­per quoted a “related per­son” as say­ing. “There is a clear accel­er­a­tion of the allo­ca­tion of invest­ment from the gov­ern­ment bud­get this year com­pared with the last two years,” it said.
• Xstrata expects cop­per demand in China to recover in the sec­ond half of 2012 as it takes steps to boost its econ­omy, Bloomberg reports. “The com­men­tary from China that they’re going to look to re-stimulate the econ­omy in some areas is pos­i­tive,” Bloomberg reported cit­ing Char­lie Sar­tain, CEO of the company’s cop­per unit. Demand for white goods and house­hold appli­ances, as well as con­tin­u­ing year-over-year growth in China’s power gen­er­a­tion sec­tor, will ben­e­fit from China’s stim­u­lus efforts, Sar­tain said. “We see those parts of the econ­omy in China as still pretty robust,” he said. “This decade we are going to see gen­er­ally tight con­di­tions in the cop­per mar­ket” he said, adding that higher costs related to new sources of pro­duc­tion will help to keep cop­per prices at his­tor­i­cally ele­vated lev­els in the future.

Threats

• U.S. man­u­fac­tur­ers have attacked JP Mor­gan Chase’s plans to launch an exchange traded fund backed by phys­i­cal cop­per, argu­ing that the ETF would drive up the cost of the metal and be detri­men­tal to the global economy.
• China stain­less steel demand growth this year will prob­a­bly be the slow­est since 2001, said Lu Ping, assis­tant gen­eral man­ager of Baos­teel Stain­less Steel. Demand in China may only rise 3 per­cent to 5 per­cent to about 10 mil­lion met­ric tons as a result of the slow­down in eco­nomic growth, Lu said. Out­put of stain­less steel in China is likely to grow 3 per­cent to 5 per­cent to 12 mil­lion to 12.5 mil­lion tons.

Tags: Carbon Emissions, China Securities, Coking Coal, Crude Steel Production, Gas Boom, Gold Bugs, Greenhouse Gas, Infrastructure Projects, International Energy Agency, Lng Market, Market Radar, Million Metric Tons, Natural Gas Futures, Nuclear Power Accident, Nyse Arca, Power Generators, Steel Association, Steel Output, U S Energy, World Steel
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