Archives for September 2012

What If I Am Wrong About Europe?

Courtesy of Mish.

I have long stated the eurozone will breakup. Historically speaking, no currency union has ever survived in the absence of a political union.

Moreover, in It’s Just Impossible I noted

  1. The Bundesbank said there should be no banking union until there is a fiscal union.
  2. Angela Merkel said that there should be no fiscal union until there is political union.
  3. François Hollande said that there should be no political union until there is a banking union.
  4. The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum.

Mathematically Speaking

Mathematically speaking, I also fail to see how the eurozone can stay intact.

Specifically, please consider point number nine of Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions

9. Disruptive European Politics

European politics will become much more difficult and disruptive. The historical precedents are clear. During a debt crisis the political system becomes fragmented and contentious. If the major parties don’t become radicalized, smaller radical parties will take away their votes.

Remember that the process of adjustment is a political one. We all know someone has to pay for the massive adjustment countries like Spain must make. The only interesting question is about who will be forced to take the brunt of the payment – workers in the form of unemployment, the middle classes in the form of confiscated savings, small businesses in the form of taxes, large businesses in the form of taxes and nationalization, foreigners, or creditors.

Deciding who pays is a political process, and because the stakes are so high it will be a very bitter process. This means, among other things, that politics will degenerate quickly, and of course if Europe doesn’t arrive at fiscal union in the next year or two, it probably never will. This conclusion is also the reason for my next prediction.

That prediction was made by Michael Pettis, and I am in complete agreement.

But what if I am wrong?

Can Politics Triumph Over Math and History?

Continue Here

At Some Point the Hat Runs out of Rabbits

At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

Courtesy of Mish.

Calls for the splintering of Spain have picked up steam. Euskal Herria Bildu (EHB, a left-wing, Basque nationalist party) has called for "A Great National Act" in Favor of Independence according to El Pais.

EH Bildu has called "a great national political act" in favor of the independence of the Basque Country for the next October 13 in the BEC Barakaldo (Bizkaia), announced its candidate for lehendakari, Laura Mintegi in an appearance before the media at EA headquarters in Bilbao.

Mintegi explained that the purpose of the meeting is to claim a free Basque state in Europe. The nationalist left has led in recent times to BEC, in a space with a capacity for 15,000 people, some of his most important acts to demonstrate their ability to mobilize. force.

The sovereignist coalition vindicate independence there to say "clearly and directly" to those "who do not want to hear, who kidnap our rights in the name of the Constitution imposed on us" you want "a free state in Europe."

Mintegi has defended "the pressing need to build a framework sovereign" in the Basque country that allows this community to have the tools to address their own economic, social and employment. "Only from the sovereignty we orient our policies towards true social justice," said the candidate.

In his view, "it is truly reckless remain at the expense of a corrupt system like Spanish, you're sacrificing the rights and freedoms of all the people to ensure the interests of a political and economic elite." With the "corrupt system" called on "break ties".

El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

According to El Economists, Catalan Separatists Not Quite at Absolute Majority.

About the option of independence for Catalonia, El País published a survey in which, in case of a referendum, 43% would vote for secession, compared with 41% who would decide against.

The complete data interpretation contrasted with other numbers registered in June, when only 21% of respondents said anti-secession and another 21% abstained. The current difference can be understood as a translation of abstention towards not to Catalan independence, which in June this survey enjoyed the favor of 51%.

Various surveys seem to be fluctuating wildly so I am not sure any of the are accurate at the moment. That said, it is clear anger over austerity measures is picking up steam. Protests in numerous countries is proof enough.

At Some Point the Hat Runs out of Rabbits

I am sticking to my long held belief that "Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected."

Yields have come down since my July 24, appearance on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure so it appears there was another rabbit left at the time.

Continue Here

China Manufacturing Disappoints Expansion Expectation, Contracts for Second Month

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Following HSBC's PMI data, China's official Manufacturing PMI just printed well below economists' expectations and is now signaling contraction for the second month in a row. Critically the expectation was for a return to expansion at 50.1 but the data came at 49.8 – still marginally higher MoM. Most sub-indices improved modestly from August but of most interest was the fifth month-in-a-row that the employment index dropped. For all the iron-ore-recovery believers, the Inventories of Raw Materials index also jumped by its most in three months as Input Prices also surged for the second month in a row. So contraction confirmed, a CCP in 'leadership' turmoil, and a PBOC stymied by inflationary concerns and the need to push through structural reform.


QE Winners and Losers

QE Winners and Losers

Courtesy of  Springheel Jack

What effect has QE had on various investment classes in the past? Presumably, though not necessarily, we may see similar moves this time.

The chart below shows the losers from QE1 and QE2 charted against the SPX chart. Equities were a big winner both times. The losers were the US Dollar (USD) and bonds, represented on the chart by the $USD index and TLT (iShares Barclays 20+ Year Treas Bond), respectively.

I’ll focus on QE2 as a model. Like QE3, QE2 was implemented in a bull market, and equities had been rising. USD had been declining into the QE2 announcement. Bonds were also declining into the announcement, but turned around mid-QE and began a large bull run to a high in July 2012:

(click on charts to enlarge)


The next chart shows the winners from QE1 and QE2 charted on the SPX chart. In addition to equities, gold was a big winner. Both equities and gold were rising strongly into the QE2 announcement. QE2, like QE3 (aka QE-Infinity), was heavily trailed into the announcement. Both retraced somewhat after the announcement.

Oil and copper both did well during QE2. Both retraced slightly after the announcement and then rose strongly to the midpoint of QE2, and then topped out there. There were substantial declines after QE2 ended in equities, copper and oil. Gold continued to rise after the end and made a major top two months later:



During QE3, I think equities and gold will perform well again, with the best bullish setup being for gold. We may also see gains in copper and oil, but both have stronger ties to the real economy, which can pose significant risk and limit potential gains.

I’m expecting more downside on USD and bonds, but we may see both rally further before the declines get going. Problems in the Eurozone – which are unlikely to be fixed – are supportive of a strong US Dollar.

There is a large 68% bullish falling wedge on TLT that is warning of a possible retest of the 2012 highs in the next few weeks.

My retracement target on SPX, in the 1415 area, has not yet been hit. That target is at the support trendline of the perfect rising channel from the June low and the 50 day moving average:



Will the open-ended nature of QE3 change its effect on equities, commodities, the Dollar, gold or bonds – preventing a sell off at the end of the program?  There’s no way to know, but as Zero Hedge pointed out, there was a substantial run up before the announcement. If David Rosenberg’s calculation holds (every $40 billion of QE added to the Fed’s balance sheet adds ~20 points to the S&P 500), it is possible that not only has too much front-running occurred already, but the power of QE3 has largely been spent.

Case for a Nasdaq Decline

Case for a Nasdaq Decline

Courtesy of Allan of Allan Trends

Weekend Market Analysis

My prior life was that of an attorney and early in my legal career I learned that basic elements that apply to just about any legal case:

  1. Facts.
  2. Issue.
  3. Law.
  4. Reasoning.
  5. Judgment.

From this basic outline flows the judicial framework that makes us a nation ruled by law and not anarchy. [Theoretically…]

I shall now make the case for an imminent decline in Nasdaq and the for the chosen vehicle to exploit such a decline.


[click on charts to enlarge]

(a) Nasdaq Daily Trend Model


(b) Nasdaq Elliott Wave Model


(c) Nasdaq Trend Regression Channels



What is the Intermediate trend of Nasdaq?



An object in motion tends to remain in motion until acted upon by an external force. Newton, Isaac, Philosophiæ Naturalis Principia Mathematica, 1687.



(a) The Nasdaq Daily Trend Model reversed SHORT this past week. As seen on the chart above, the Nasdaq has been true to its trend model for almost a year.

(b) We can now count a completed 5 waves UP from the rally that began last November. Although Elliott Waves are weighted less than our Daily Trend Models, we cannot ignore such a picture perfect five waves UP. After all, Elliott Wave analysis is trend analysis when you strip it of all of those pesky numbers and letters. A trend is a trend, no matter how you determine it.

(c) The Nasdaq has been moving within its trend regression channels for the past year, using the breaks of the channels to signal new directional trends. Price is sitting right on its lower trend channel this weekend and it will take but one close lower to break the channel to the downside.



The aforementioned facts and arguments make a compelling case that the Nasdaq Intermediate Term Trend is in the early stages of turning down.

Although it will take a break of the trend regression channel that rises up from the lows of June to confirm the reversal down, it is the Nasdaq Daily Trend Model that has dominated intermediate direction since the Fall of 2011. That is, by rule of law (here at AllanTrends), determinative of the direction of trends.

The Elliott Wave count and imminent break of the regression trend channel are supportive of the Daily Trend Model, but as this Court has ruled before, such ancillary considerations must always defer to the precedent set by the Daily Trend Models.


Action to be Taken

We have many tools at our disposal to enforce the judgment of the court. Below is by decree the means for implementation of the Order of the Court.

QID Daily Trend Model


We see imposed on the chart of QID the elements set out above that have made such a compelling case that Nasdaq has turned down. QID, being the inverse of Nasdaq, sports the same patterns, trends and wave counts, in reverse, as the three Nasdaq charts above. QID was trading in the mid-40′s at the beginning Nasdaq’s intermediate trend up from November of last year.

It is the judgment of this Court that the rally up from November is likely to be retraced by at least half, if not in its entirely, resulting in gains of between 50% and 100% in QID in the weeks and months ahead. Therefore, a Long position in QID is warranted.

SO ORDERED, this 29th day of September, 2012.

The Weekend Update is Adjourned.


Weekly Trend Models

September 28, 2012


Allan Trends provides trading ideas based on Technical Analysis and signals that follow the trends. Allan covers about 30 stocks, indexes and ETF’s, including Hourly Models in SPX and QQQQ for shorter-term analysis.  Most trades last for weeks to months. Learn more here. 

Click this link for a risk-free trial to Allan’s standard service.

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Importance of Patience and Persistence in Trading

Importance of Patience and Persistence in Trading 

View the lesson learned from a dramatic sell-off in the E-Mini S&P 500 in this educational video clip by Elliott Wave International.

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Britain’s Labour leader vows to break up banks

Britain's Labour leader vows to break up banks (via AFP)

Britain's opposition Labour leader Ed Miliband vowed on Sunday to break up the country's biggest banks if his party comes to power at the next general election. Miliband, whose party enjoys a 10-point lead in the latest polls, told the Observer newspaper that Labour would force banks to split their…

[Read more…]

Britain's Labour leader vows to break up banks

Britain's Labour leader vows to break up banks (via AFP)

Britain's opposition Labour leader Ed Miliband vowed on Sunday to break up the country's biggest banks if his party comes to power at the next general election. Miliband, whose party enjoys a 10-point lead in the latest polls, told the Observer newspaper that Labour would force banks to split their…

[Read more…]

Massive Microbial Population Colonized Land 2.75 Billion Years Ago

Massive Microbial Population Colonized Land 2.75 Billion Years Ago (via Planetsave)

New research from the University of Washington is suggesting that the earliest land microbes were probably much more widespread than previously thought, creating oxygen and weathering pyrite, which is an iron sulfide mineral that releases sulfur and molybdenum into the oceans when ‘weathered.’…

[Read more…]

Rent or own? The new sharing economy values access over ownership

Rent or own? The new sharing economy values access over ownership (via The Christian Science Monitor)

Lisa Gansky likes to share, and usually with strangers. A typical day for her looks something like this: •She leaves her house in Napa, Calif., at 7:30 a.m. and drives to the ferry, parks her Mini Cooper, and takes the 60-minute ride across the bay to San Francisco. •If it's raining, she'll pull…

[Read more…]

Thousands on Paris streets to denounce EU ‘austerity’ pact

Thousands on Paris streets to denounce EU 'austerity' pact (via AFP)

Thousands of left-wing protesters took to the streets of Paris on Sunday to denounce the European Union fiscal pact forcing governments to stick to tough deficit limits. Chanting "Resistance!", protesters marched through central Paris in a rally organisers said was aimed at fighting EU-imposed austerity…

[Read more…]

Thousands on Paris streets to denounce EU 'austerity' pact

Thousands on Paris streets to denounce EU 'austerity' pact (via AFP)

Thousands of left-wing protesters took to the streets of Paris on Sunday to denounce the European Union fiscal pact forcing governments to stick to tough deficit limits. Chanting "Resistance!", protesters marched through central Paris in a rally organisers said was aimed at fighting EU-imposed austerity…

[Read more…]

Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

Courtesy of Mish.

Following protests in Portugal, Spain, and Greece, a wave of Leftists march in Paris against austerity.

Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU’s new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis.

The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday.

The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

Jean-Luc Mélenchon, the Left Front leader, said austerity policies were “dangerous for all the people of Europe”. Demanding a vote on the treaty, he added: “Democracy is sicker than we thought.”

analysts worry that the recent upsurge in political unrest in Portugal, Spain and Greece – where the neo-Nazi Golden Dawn party has risen to third in national surveys – could be a sign of more trouble ahead as repeated rounds of austerity bite even further into daily lives.

“The cracks are showing in Spain’s social and economic fabric,” said Nicholas Spiro, a London-based sovereign risk consultant. “The risk is that in seeking to retain as much domestic ownership of the terms attached to any [EU rescue] programme, the government [of prime minister Mariano Rajoy] overdoes it and sparks an even more intense social and political backlash.”

In Portugal, tens of thousands of trade unionists turned out in Lisbon’s central square for a peaceful protest against terms of the country’s €78bn EU-IMF bailout.

Greek unions have also vowed to hold big protests if the government moves forward with a new €13.5bn austerity programme agreed last week by the coalition government.

The recent upheavals in Portugal – where there had been widespread bipartisan support for the bailout since it was launched 16 months ago – has come as a particular shock to eurozone leaders, forcing Lisbon to reverse a rise in social security taxes designed to hit mandated budget targets.

Hollande Reneges on Campaign Promise

Recall that Hollande ran on a platform to rework the Merkozy Treaty.

Continue Here

With central banks flooding the world with cash, how can Treasuries and stocks sell off? Professional Edition

Courtesy of Lee Adler of the Wall Street Examiner

Here are a few of the key bullet points from this week’s report.

• The Fed’s purchases of $85 billion this month in MBS and net Treasury purchases from Primary Dealers under Operation Twist will be enough to fund almost 100% of new Treasury supply.

• The one chink in this picture is that Primary Dealers aren’t cooperating. They’ve been sellers of Treasuries since June, while everyone else has been buying. That suggests that a turn is coming. The issue is timing, as always.

• Foreign Central banks have shown signs of returning to being big buyers after a year of holding back. A strengthening US economy may be increasing the recycling of dollars by China, OPEC, Japan and other nations who export to the US, who also are motivated to weaken their currencies against the dollar

• US commercial banks have not been big buyers of Treasuries and Agencies lately, but they are no longer sellers as they were for the better part of a year. Even modest levels of buying by the banks adds to market liquidity

• Bond fund inflows have been strong, reaching the highest level since April in the latest reported week. They remain a bullish factor for the bond market.

• Excess liquidity will flood the markets for as long as the Fed provides enough cash to the Primary Dealers to absorb virtually all new Treasury supply while FCBs, banks and the public remain net buyers. Under those conditions, there’s probably not much chance of a big selloff in Treasuries or stocks. Those who believe that a market cataclysm is likely under these conditions are probably engaging in wishful thinking. If Primary Dealers are flipping their Treasury inventory, it means that they will have plenty of cash to deploy elsewhere. A concerted effort by the world’s central banks to rig the markets is likely to be successful until something happens (like a commodities bubble) which forces them to change course.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Uncertainty And Risk In The Suicide Pool

Uncertainty And Risk In The Suicide Pool

dark pool

tonic_witch at via business insider 

Courtesy of John Mauldin, Thoughts from the Frontline 

“By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever.”

-John Maynard Keynes, The General Theory of Employment, 1937

“… there are known knowns; there are things we know that we know. There are known unknowns; that is to say there are things that, we now know we don't know. But there are also unknown unknowns – there are things we do not know we don't know.”

-Donald Rumsfeld, Secretary of Defense, 2002

“There are four types of men:

1. One who knows and knows that he knows… His horse of wisdom will reach the skies.
2. One who knows, but doesn't know that he knows… He is fast asleep, so you should wake him up!
3. One who doesn't know, but knows that he doesn't know… His limping mule will eventually get him home.
4. One who doesn't know and doesn't know that he doesn't know… He will be eternally lost in his hopeless oblivion!”

-Ibn Yami, 13th-century PersianTajik poet

For the past 80 years, we have created ever more sophisticated models of risk in the economic and investment worlds. With each new tool we create to measure risk, we seem to think we have somehow gained more control over our future. Paradoxically, we appear to believe that the more we understand risk, the more we can somehow control our exposure to it. The more we build elaborate models and see correlations between events and the performance of our investments and the economy, the more confident we become.

And if by some ill fortune we encounter a period of lengthy stability in our models and portfolio performance, we are likely to imbibe a cocktail of collective hubris: we actually think we understand some things in a quantifiable way. We thereupon seek to take on more risk at precisely the time when additional risk is the most disastrous. This week we explore the difference between risk and uncertainty. Perhaps we can even tie all this into our understanding of secular bull and bear markets.

But first, for those who missed this week’s announcements about new activities at Mauldin Economics, let me very briefly summarize. Beginning next week, Thoughts from the Frontline will be written on Sunday afternoon/evening and hopefully arrive in your inbox early Monday morning. Outside the Box will now come to you on Friday for your weekend reading pleasure.

The reason for this change is, frankly, that it is taking me longer and longer to write TFTF. I jokingly suggest to friends it may be because I have quit drinking and lost the inspiration of wine and scotch. But for the most part, it’s the sheer amount of material I consult while writing, coupled with the complexity of our world. As a consequence, I find myself walking and thinking about what I write more than ever.

Plus, the alcohol might have been a way of self-medicating my ADD. Or maybe I'm just getting older, and the policemen who stop me at night on my walks around the neighborhood are right to think I am somewhat confused.

Whatever the reason, Friday afternoons in the early years became Friday evenings and then morphed into Saturday mornings. Which means my weekend was shot, taking away some of the pleasure I get from writing. Regardless, I think the new schedule will improve the letter, as well as give me some more time to think about the events of the week just past, and the week ahead.

Finally, regular readers of Outside the Box are familiar with Grant Williams, who writes the wickedly brilliant Things That Make You Go Hmmm…. Grant has very graciously agreed to allow Mauldin Economics to become the publisher of his letter, and it will become a regular part of our offerings to you. Grant is an addictive essayist, and I think you will soon agree with me that he is the best “new” writer to come along in a very long time.

We have also announced a new publication, called Bull’s Eye Investor, a monthly newsletter that Grant will also write. Grant manages $250 million in a hedge fund in Singapore, with a total global mandate. We are philosophically very close in how we approach investing and the markets, and I’m excited that he will be writing what will become our flagship publication, bringing the same global perspective to his specific recommendations. You can click here to learn more. Now, since the above amounted to mostly known knowns, let’s embark on a trek into the world of uncertainty.

Jumping into the Suicide Pool

My oldest son Henry and my son-in-law Allen Porter are both in their late 20s, perfect gentleman, appropriately humble, engaging, and thoughtful young men. Unless you are talking about sports, when they become opinionated, overly self-confident, and quite willing to share their intimate knowledge of the subtleties and nuances of sports in general but football in particular. For the last few seasons, my friend Barry Habib has enticed the three of us to participate in what is known as a Suicide Pool.

A Suicide Pool is a betting pool – with a twist. Starting with the second game of the season, participants simply have to pick one winner out of all the games that are played that week. There are no point spreads involved and no handicaps. All you have to do is predict just one team that will win that week. Every week, if you like, you can pick the team that is the most heavily favored to win. There are no restrictions on your choices.

At the beginning of the season you “invest” $100 into the pool. And you stay in the pool as long as the team you pick wins. If more than one person survives to the end of the season, the winner is decided by cumulative point spreads. If you go out the first week, you are allowed to buy back in for $50 plus a point-spread penalty.

Notice the word if. Having done this for a few years, I have noted that the survival rate is actually quite small. The trick is not to pick close games but just to survive. But even if you are trying to choose the safest picks, every now and then there is a secular bear market among the top teams.

So, I bought spots for Henry, Allen, and myself. Since I know absolutely nothing about what teams to pick, Henry and Allen chose them for me. My only instructions were to choose the safest pick and never to choose the Cowboys. It is bad enough to have the home team lose without losing your money as well. After 50 years, I’ve had too many heartbreaks watching the Cowboys to want to bet on them.

I figured the Suicide Pool would give us guys something to talk about and share a few laughs over, at least for a few months. But as US football fans know, in the past few weeks there has been the equivalent of a market crash rivaled only by the NASDAQ in 2000-2001.

This year has been a disaster for us Suicide Poolers. We started with 148 in the pool. We lost 78 football “experts” (!) in the first week, but 57 of those (including your humble analyst) had enough hubris to buy back in to the pool. (The winner would get $17,600 – enough to keep you fully invested.) After a second straight week of major upsets, there were only 21 people still standing, or about 14% of the original 148. Even worse, only eight (about 5%) were able to pick two winning teams in a row.

Note that my brain trust picked two prohibitive favorites, the least risky choices available. They agreed with my plan to avoid risk and also agreed on the teams we should all choose, rather than diversifying our risk. I went with my experts. We chose the New England Patriots the first week and the Pittsburgh Steelers the next. And we were not part of the elite 5%. No family-time discussions and debates, just commiseration and licking our wounds. I was hoping that at least one if not more of our chances would carry us a few months into the season, providing us with some good times, making game time a little more interesting – the whole thing seemed like a good investment at the time.

(Clearly, my choice of investment advisers this year has not been optimal. Wait till next year. Only, next year I’m going with the real sports authority in the family, my daughter Abbi.)

Probability Theory and Retirement Portfolios

While this is a cute story, there is, sadly, an investment implication. While no one would call betting on football an investment (except a bookie, and he is really investing in human frailty and probabilities and not, strictly speaking, football), all too often investors approach the markets in a fashion distressingly similar to my approach to betting on football. You either think you are an expert on the stock market, or you hire someone whom you think is. And while we are a great deal more serious about our investments, here too we try to pick safe investments that will last us for the long run. We use models to outline the probability of success or failure, and all too often we ignore the low probabilities that would be absolutely disastrous if they came about.

In most places and in most times, withdrawing 5% a year from a retirement portfolio is a reasonable approach. But not in all places and certainly not at all times. Your retirement plan should not be the investment equivalent of the Suicide Pool.

Many investors are told that it is safe to take 5% of their savings each year to spend on retirement. And the history of the last 110 years suggests that on average this is true. But every now and then people retire at the beginning of a secular bear market. Taking out 5% at such times is about as safe as betting on football.

My friend Ed Easterling at Crestmont Research did some very basic research which shows that if you retire and decide to keep your retirement savings 100% in stocks, then if you begin to invest your savings at a 5% withdrawal rate during a period when stocks are in the highest 25% of the historical average of valuation (P/E ratios), about 5% of the time you will be out of money within 23 years. 

And this outcome has a probability that we can model. Of course, we can’t tell you what your actual experience will be, but we can demonstrate that you are involved in risky behavior! Typically, investors are comfortable taking such a risk, because at the end of a secular bull market stocks have been performing well for a very long time. All the models show the bull will continue – or at least the ones you get to see. (You can read Ed’s full report at

Obsessing on Risk, Ignoring Uncertainty

Investors in the stock market, especially professionals, are obsessed with risk, your humble analyst included. We try to measure risk in any number of ways, looking for an edge to improve our returns. Not only do we try to determine probable outcomes, we also look for the “fat tail” events, those things that can happen which are low in probability but will have a large impact on our returns.

I have found that it was the surprises that were not in my model that were the true drivers of portfolio performance. We like it when surprises produce a positive result, and we often find a way to congratulate ourselves for our wise choices. No one in 1982 thought that price-to-earnings ratios would rise by five times in the next 18 years. Yet that simple driver accounted for 60% of the last bull market (20% was inflation and only 20% was actual increased earnings). And while a few people began to invest in technology in the early ’80s, many of those early technology stocks ended up being disasters. (Remember Wang? Osborne? Sorry, I know, you were trying to forget.)

“In 1910 the British journalist Norman Angell published a book called ‘The Great Illusion’. Its thesis was that the integration of the European economy, and by implication the global economy too, had become so all-embracing and irreversible that future wars were all but impossible. The book perfectly captured the zeitgeist of its time and fast became a best seller.

“In some respects, the early 20th century was a period much like our own – one of previously unparalleled global trade and exchange between nations. Human beings appeared largely to have outgrown their propensity to mass slaughter, and everyone could look forward to to a world of ever increasing prosperity. War, Angell compellingly argued, was economically harmful to all, victors and defeated alike. Self interest alone could be expected to prevent it happening again.” (Jeremy Warner writing in The London Telegraph)

On the eve of World War I, bond markets throughout Europe were not pricing in a conflict. Everyone “knew” there would not be a war. It was all bluff and bluster. And then the world got a surprise. Archduke Ferdinand was assassinated and armies began to march. And while no one expects a war today in Europe, there are certainly plenty of tensions.

An Uncertain Spain

The Spanish government announced this week a rather severe austerity budget. They promise they will hold their budget deficits to 6.3% while slashing spending almost 9% and raising taxes. And of course there will be no wage increases for government workers. They also assume that growth will only fall to -0.5% in the face of that austerity, which most observers think is woefully optimistic.

Even though the ECB has committed to buying Spanish bonds, they have made it clear that they will do so only as long as Spain is committed to bringing its deficit under control.

European Central Bank Executive Board member Joerg Asmussen said on Friday that he would only support purchasing the bonds of struggling euro zone countries if pressure on them to reform their economies remained high. ‘Only under strict conditionality and only if there is continued pressure to reform,’ Asmussen said of the bond purchase plan announced by ECB President Mario Draghi earlier this month.” (Reuters)

And if things were not already difficult enough for Spanish Prime Minister Rajoy, one of my favorite regions of Spain, Catalonia, which includes the beautiful city of Barcelona, is seriously talking about seceding from Spain. As much as 20% of the population (1.5 million) turned out for a march supporting independence last week.

Prime Minister Rajoy met with Catalonia’s president and flatly rejected any autonomy or more money. Catalonians are not happy that they send a great deal of money to Madrid, which goes to other regions as they deal with their own crises. So much for “all for one and one for all.”

The situation is complicated by the fact that the Basque region of Spain has been given a great deal of autonomy in its budget. If Spain were to compromise and give Catalonia the same deal, it would cost the Spanish government a great deal of money and enlarge the already gaping hole in their budget.

“Separately, the parliament of Spain’s most economically important region, Catalonia, approved holding a referendum on independence. Ms Saenz de Santamaria threw down the gauntlet to Spain’s most economically important region, arguing that Madrid could use a constitutional measure to block any attempt at a separatist vote. ‘Not only do instruments exist to prevent [a referendum], there is a government here that is willing to use them,’ she said.” (The Financial Times)

Casually browsing news on the Catalonian crisis, I came across an article on previous referenda concerning independence, held on a city-by-city basis in Catalonia. Independence was favored in nearly all cities by margins of 90% or more. This was rather surprising to me, as I am not certain I could get 90% of my neighbors to agree on the time of day.

In addition to the Basque and Catalonian regions, there are two other northern Spanish regions that send net revenues further south. If you give Catalonia budgetary autonomy, let alone political autonomy, then what do you do for the other two?

Which brings up the uncertainty in the entire euro project. It is one thing to create a common market in which goods and services can freely trade. It is another to impose monetary and fiscal authority on a sovereign nation. If economic tensions within the regions of Spain begin to move voters to push for independence from central control, how much more inclined will voters in the various eurozone nations be to do so?

Germany is just now entering a recession that has the real potential to get much worse. If Germany is asked to write checks and send them to other countries when they are in the midst of their own financial crisis, how will that play in Bavaria?

The only thing I can be certain about regarding Europe is that Europe is an uncertain mess. But the markets go on treating all these pressures as if they were not real. And, indeed, perhaps the mess will all get sorted out.

It is my belief that we focus on risk because it is something that we can model. The economics profession has physics envy. Economists like to think of themselves as scientists, but I must say that I am not convinced. Economics has a great deal to teach us, but it cannot tell us much about certainty. It can’t even help us all that much to avoid risk.

I fear we don’t pay enough attention to uncertainty because we cannot reduce it to an equation. How did you price in the risk of Catalonia succeeding from Spain, even two months ago? The answer is that no one did.

The US market seems to be focused on the “fiscal cliff” that will inevitably create a recession unless Congress does something. The fact that doing nothing will clearly create a recession gives me some confidence that even Congress will figure out a way to avoid doing nothing. What has not been priced in is what Congress will do about the deficit. Depending on what they do, what we get will be hugely positive or negative. But we remain totally uncertain as to what they will actually do. And so for years we have ignored the looming train wreck that is unfunded liabilities.

It is the fact that the results of inaction on the deficit are uncertain that allows Congress to keep postponing the inevitable.

“About these matters there is no scientific basis on which to form any calculable probability whatever.”

We live in most uncertain times.

Orlando, Portland, Atlanta, and South America

I am in New York tonight, writing as I look down on Times Square. Starting Sunday afternoon I’m booked solid with meetings until I get on a plane to Orlando on Tuesday afternoon. Monday night Tom Romero and I will host a dinner for a few friends. What started out as a small dinner has grown into a small crowd. There will be between 20 and 25 of us seated around a square table so that we can see and talk with each other. I have decided to give everybody a yellow flag they can throw at any time to comment on another participant’s musings. Only one flag per night per person, but that should make it interesting. Too many names to mention, so let’s just say, the usual suspects. Okay, two names. My Dr. Richard Roizen is coming, and he is bringing someone called Mehmet Oz.

I will be at the UBS conference with my partners from Altegris and will also spend an evening with my good friend Pat Cox, who writes Breakthrough Technology Alert. I am sure we will talk about the latest technologies and especially those that may help both of us fight off the ravages of growing older. Pat has the prototype of a new “toy” that he is raving about. I have been able to procure a prototype as well, and if it works even half as well as the study results out of Stanford suggest, I will let you know. Just think of me as your friendly neighborhood guinea pig.

I will go to Portland the following week to speak for Common Sense Investments, and they have invited me to stay the next day and go pheasant hunting. I have never been pheasant hunting, let alone hunting at all. These are brave people who will hand me a shotgun and walk with me into the field. I will try not to do a Dick Cheney. And for all of you animal lovers, let me note that any bird I shoot at has a high probability of being missed. And that means I’ll also be taking them out of range from anyone else who could actually shoot them.

Care to join me election night, November 6 … in Argentina?  From October 28 to November 8 I'll be in Brazil, Uruguay, and Argentina, speaking to regional chapters of the CFA Society. As part of the trip, I'm stopping by for the season-opening celebration, November 5-10, of friend and partner Doug Casey's lifestyle and sporting estate, La Estancia de Cafayate, where I'll host the group at a café on the scenic town plaza and watch the election results roll in.  If you'd like to join me and a group of interesting folks from around the world in what promises to be a unique experience, drop Dave Norden a note at David Galland has promised nonalcoholic beers for me for the evening. The recent polls suggest I might want something stronger, but I think I can hold out.

My oldest son, Henry, was having some problems as I left on this trip to Atlanta. Sitting on the plane, I got a message that they were testing his appendix, and that evening as I landed I learned they were taking it out. Oddly, I was relieved, as the symptoms he was having were making Dad nervous, given that he has early-onset diabetes. He is doing fine. But an event like this does bring the health-care debate up close and personal. On October 17 I am in Atlanta once again for Hedge Funds Care.

I fly back home on Wednesday, where I will watch the first Presidential debate with my youngest son, whose teacher has assigned him that task. The next morning I turn 63. I hope my new toy helps – I need all the help I can get. I’ve also added a few new supplements that are just appearing on the radar screen. As I said, I am just a living guinea pig. If I notice anything, I will let you know.

It is time to hit the send button on what will be our last Friday night/Saturday morning newsletter. I stop here knowing that I will get to write next Sunday, rather than all night Friday, and I really believe I’ll be more efficient. We’ll see! Have a great week, and you might check out early voting – I already have.

Your going to sleep till the crack of noon analyst,

John Mauldin

Second picture (Spain) credit: The Washington Post's 19-image slideshow Violence Erupts in Spanish Strikes

Third picture credit: Clock at Wikipedia

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Electronic Arts – Revenge of the Nerd

Courtesy of Vitaliy Katsenelson.

I wrote article for Institutional Investor Magazine article about Electronic Arts in May 2012.  My monthly column limits me to 800 words (you can read it here), but here is a longer, unabridged version (I forgot to post it here).  I had the pleasure to present EA at the FAME conference in San Francisco in late April, and here is a link to the presentation (we obviously have a position in EA).

Electronic Arts – Revenge of the Nerd

Electronic Arts stock is scratching 52-week lows.  It is unloved, but for some good reasons: its sales have stagnated for years; its earnings, though rising, are still below the 2003 level; and finally, industry-wide sales of packaged video games were down an apocalyptic 25% in March, and they’ve declined four months in a row.  On the surface there are plenty of reasons to hate this stock, but once you start unpiling all the negativity you discover that EA is a compelling growth company trading at a significant discount to its fair value.

EA’s past is ridden with brilliant successes that lead to subsequent arrogance.  It was the largest video-game maker in the world in the 2000s; and, like many successful companies, it started to treat its success as an entitlement, not as a hard-earned victory.  In the mid-2000s it started to make too many games, and the quality of its games drastically declined.  To make things worse, Nintendo came out with Wii, less powerful then Sony’s or Microsoft’s high-definition system, but instead of a joystick it came with motion control.  Since Wii was underpowered, EA did not expect it to be a success and did not develop many titles for it.  When Wii became an overnight success, EA had to catch up.

Over last few years EA regained its focus and cut down the number of games introduced every year from 52 to a dozen.  The quality of EA games improved dramatically.  On the surface it looks like EA’s sales have stagnated for years, but they have not.  EA has been winding down the distribution of games made by other publishers, and so low-margin distribution revenues declined from over $600 million a few years ago to about $200 million today, masking healthy growth in EA’s core games business.

A four-month decline in packaged games sales sends shivers through investors, but it should not.  The bulk of the decline is happening in handheld devices (Nintendo DS software sales were down 78%) that have been losing market share to smartphones (more on that later). Also, Nintendo Wii sales were down 47% – its standard-definition console has been losing market share at a very fast pace to Microsoft’s Xbox.  Xbox has a much more powerful processor, more advanced graphics, and its Kinect camera reads gestures – no need to wave around the bulky Wii remote (finally Microsoft is ahead of the game in something).  Of course these statistics only cover packaged games and don’t count digitally distributed games, which are growing by leaps and bounds.

There are two growth themes that attracted us to Electronic Arts: increasing revenues and expanding profit margins.


Imagine this situation:  You are sitting in the dental office, waiting for your turn in the chair, and across from you is a woman in her mid-thirties or early forties, playing a video game on a handheld device (a Gameboy or Sony PlayStation Portable).  This image doesn’t fit well with our societal norms – adults are not supposed to play video games, at least not in public.  But the iPhone and subsequently other smartphones have changed that – the social stigma is gone, and playing games in public is not exclusive to rotten kids, not anymore.  Plus, nobody knows whether you playing a game, texting, or emailing.

Adults are a perfect demographic for games: we take public transportation, go to doctors who value their own time more than ours, drive kids to practices (more waiting); in other words we have a lot of idle time, and since the high-IQ (smart) phone is always with us, we kill time playing games.  For the price of Starbuck’s super-duper Frappuccino and a scone, we can buy a few hours of entertainment.  In addition, adults are the perfect demographic because we have money (at least more money than kids).  The smartphone gaming industry is still in its infancy (for instance, smartphone market share in the US is about 35% ); and as prices drop and the price gap between dumb and smartphones narrows, smartphone market share has the potential to double, which will lead to more gamers globally.

And then there is Facebook.  Facebook is arguably the best time-wasting website known to man (and woman).  It presents another opportunity for game makers, opening up a new timeslot that was previously unavailable to most adults: playing games at work (while you are supposed to be working).  This market was virtually nonexistent heretofore: installing games on one’s employer’s computer was not done, because it left evidence of mischief.  But Web-based Facebook-type games are not graphics- and time-intensive and don’t require a big time commitment.

So the question comes to mind, can EA capitalize on smartphones and Facebook?

EA is no Zynga when it comes to social-network games (nor does it trade at 30x 2013 EPS, or 5.8x revenues); but it has an impressive slate of brands, from sports brands for PCs and consoles (Madden NFL, FIFA, Tiger Woods…) to shootem-up games (Battlefield, Mass Effect) to a lot of casual games that are easy to scale to the social platform (Sims, Monopoly, Tetris, Trivia Pursuit…).  EA brought Sims to Facebook, and it was a learning experience to put it lightly.  Initially it was a great success, but EA stumbled and did not follow through with updates.  But EA bought Playfish and PopCap, which have expertise in social and casual games and have had plenty of hits of their own, and now they are taking EA’s rich portfolio to smartphones and Facebook.

Will smartphone and Facebook games cannibalize existing business?

For the most part the answer is no.  Facebook games are usually social or casual games played during a new timeslot.  Hardcore gamers that play PC or console games are unlikely the ones playing Facebook games.  Smartphones are somewhat different.  Some games sold on smartphones definitely come at the expense of games for handhelds (Nintendo DS, PSP, or Gameboy).  Smartphones are a very serious and formidable competitor to handhelds, but though they have cannibalized the younger-player market, they have also unlocked a new, previously nonexistent market: shameless adults playing in public.

Investors have also been spooked about EA’s Star Wars Old Republic (SWOR), a massively multiplayer online (MMO) game, a competitor to the most successful game in this class, World of Warcraft, developed by ActiVision.  SWOR had been in development for several years, was released in December 2011, and we’ve seen speculation that it cost EA over $100 million to make it.  Investors were rightfully worried about the success of such a significant undertaking.  So far SWOR has been a great success.  It has 1.7 million players, and feedback has been overwhelmingly positive.  SWOR will be incredibly profitable for EA.  In addition to paying $60 to buy the game, a player pays $150-180 a year to keep playing it – a great recurring-revenue engine.  At 1.7 million paying users, SWOR generates $300-400 million of high-margin revenue to EA.


So far we’ve discussed revenue growth for EA, but there is another part to the story that is no less important – profit margins.  Traditionally, graphics-rich/intensive games (think Mass Effect, Medal of Honor…) made for consoles (Xbox, Sony PlayStation) have been sold through retailers.  However, instant gratification is as American as baseball, and the internet is a perfect and (almost instant) vehicle for the distribution of games.

With constantly rising broadband speeds, downloading large games is becoming less of an undertaking.  However, the transition to digital downloads will be gradual.  Downloading games to consoles is still constrained by the size of the console’s hard drive (for instance, a low-end version of Xbox comes with only a four-gigabyte hard drive, not enough to install graphics-rich games).  Also, Microsoft and Sony have been hesitant to allow new game releases to be made available on their consoles in digital form right away, as they need retailers to peddle their low-margin gaming hardware.  This will likely change with the release of new hardware in a year or two – digital downloads are the future, and Microsoft and Sony can try to postpone it but won’t be able to change it.  In the meantime EA has been selling digital expansion packs (additional maps) to their games on consoles.

On the other hand, PCs, a quarter of EA’s revenue, are primed for digital distribution – their hard drives are big enough to handle large downloads.  Considering music, video, and game piracy, consumers have plenty of experience downloading digital content.  EA’s full-game downloads doubled over the last year.

As more and more games are sold digitally, bypassing the traditional retail network of GameStop, Best Buy, and Wal-Mart, EA will see an increase in its profit margins.  EA won’t have pay to produce a packaged  good and discount its games for retailers and wholesalers.  In other words, instead of receiving $40 for a $60 game, EA will be receiving $60.

There is significant digitization of games taking place within EA.  Digital games come with much higher margins (a 10%-25% higher EBITDA margin than packaged games) and are growing at a much faster rate than packaged games.  Today they represent about 25% of EA’s sales.  In a few years it should approach 50%.  Margin expansion opportunity is significant and very real.  ActiVision – a company of similar sales size – has operating margins of 30%, while EA’s margins are 12%.  The explanation for the divergence in margins is simple: digital content!  ActiVision’s World of Warcraft is about a quarter of its sales, digital sales are about 40% of its total sales, and digital sales come with higher margins.  If EA achieves two-thirds of ActiVision margins, it will have earnings power north of $2 a share.  EA has $4 of net cash per share, thus today we are given an opportunity to buy EA for 4.5 times earnings.

P.S.  (May 15, 2012)

EA reported decent numbers earlier this week.  Sales were flat if you exclude the decline in its distribution business.  The entire decline in the packaged goods business – the one that makes headlines like  “Double-Digit Decline in Video Games Sales” was offset by an increase in digital games – up 58%.  But that didn’t matter; the stock declined because EA announced that the number of Star Wars Old Republic (SWOR) subscribers had dropped from 1.7 million to 1.3 million in a few months.  EA management said that a lot of casual (non-core massive-multiplayer) gamers dropped off.  However, the user base goes through a natural seasoning – after all SWOR was just launched in December 2011.

Though for a while the stock may trade purely on SWOR subscriber numbers, I am not concerned about success or failure of SWOR, for two reasons: first, though it is important, it is still just one of five dozen of EA franchises.  Its development costs have been fully expensed and thus will not break the company, though a complete failure would cause me to revise my upside target.

Second, and more important, I believe SWOR is a good game.  How do I know?  Let’s compare SWOR to the massive-multiplayer gold standard, The World of War Craft.  According to Gamespot SWOR receivedan 85 rating out of 100 from Metacritic (professional reviewers) and 8.4 out of 10 from 2,397 users.  The World of War Craft received 90 from Metacritic and 8.0 from 2,336 users.  SWOR is thus rated on a par with the gold standard of this genre.  The World of War Craft has been out for a while and has over 10 million users worldwide, and there is no reason why SWOR cannot reach a third of that number over the next few years.

Musical Note: Not until I started to include musical notes with my emails and started to write and think about it did I realize what an important role music plays in my life.  Sometimes certain musical pieces almost serve as a bookmark for an event or color an entire time period.  In the late ’80s, when I was still in Russia, my father and I watched the Carmen Suite ballet, with Maya Plisetskaya, on TV.  Plisetskya is considered to be one of the best ballet dancers in the world – think of her as the Maria Callas or Luciano Pavarotti of ballet.

As we watched, my father told me the story of the music for this ballet. Plisetskaya’s husband, the composer Rodion Shchedrin, arranged music from the opera Carmen and other works by Bizet for her. Though this story is true, I recently discovered a sub-story that is a bit more interesting. It was Plisetskaya who wanted to do the ballet, and she first asked Dmitriy Shostakovich.  When he declined, she went to another Russian/Armenian composer, Armen Khatchaturian, who said, “You have a composer at home, ask him.”  You can read the full story here.  This story reminds me a of lot marriages – anyone other than your spouse is a true expert.

The Carmen Suite has another memory associated with it.  In 1991, a few months before we left Russia, I was on vacation, visiting my uncle and aunt in Saratov.  One morning I woke up and discovered that the government had changed.  Gorbachev and Yeltsin were no longer running the country, and a new, temporary government had been installed. Gorbachev was under house arrest, but we did not know that, because all news was cut off.

From today’s perch it looks like what happened over those few days in 1991 was pretty much a non-event – in three days the status quo was restored, without any blood being spilled.  But at the time everyone feared the worst: Russia falling back into dictatorship.  My uncle told me not to leave the house until things cleared.  I had nothing to do but to read.  Those were probably the best days of that summer – I sat on the balcony and read books from early morning till night and listened to the Carmen Suite.  My favorite part is “Scene” (starts part 1, at 9:45 and part 2, 15:28)

So here is Carmen Suite – part 1 and part 2

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here or read his articles here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado.  Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.

Durable Goods Orders Really Did Stink, But Does It Matter?

Courtesy of Lee Adler of the Wall Street Examiner

Real Durable Goods Orders Chart- Click to enlarge

Real Durable Goods Orders Chart- Click to enlarge

9/27/12 August Real Durable Goods Orders, adjusted for inflation and not seasonally manipulated, dropped 8.3% year over year. That compares with a 5% year to year gain in July. It was the first drop since March, and the biggest decline since December 2009.

Note: In adjusting for inflation, this measure attempts to represents actual unit volume of orders. Also, the use of actual, not seasonally adjusted (NSA), versus seasonally adjusted (SA) data allows an accurate view of the trend. With SA data, this may not be the case, since SA data can overstate or understate the real underlying change by attempting to fit the data to a standardized curve. There are no such issues when using the actual data (see Why Seasonal Adjustment Sucks).

Overall new orders volume remains well below the 2004 through 2007 levels, and the August data is a reversal from the slow uptrend that followed the dramatic rebound of 2009-10.

The month to month decline was 1.4%. This is another piece of bad news, since August is virtually always an up month. The August gain was 13.5% in 2011 and 10.3% in 2012. The average August change over the previous 10 years was a gain of 12.9%. This year’s change was much worse than both the last two years and the 10 year average. It more than reverses a stronger than typical performance in July. It also follows the pattern of weaker withholding tax collections in August that probably suppressed big ticket sales. However, withholding has recovered in September to near the highest levels of the year, so it will be interesting to see if durable goods orders recover in September.

The data is quite volatile month to month but on the chart you can see that this month’s data represents a clear weakening and possible trend reversal. Another year to year decline next month would be a nail in the coffin.

The headline number was a 13.2% drop month to month, seasonally adjusted (SA). That was much worse than ‘conomists consensus of a decline of 5%. As usual, they were looking at the wrong data. The real time withholding tax data showed the economy softening in August which was a tipoff that August data would be worse than expected. As I wrote here last month, “Responding to the numbers coming in stronger than they had expected, Wall Street  ’conomists raised their forecasts for August, but the August withholding data suggests that the quacks will get whipsawed yet again.”

With September withholding roaring back to the highest level of the year, resulting int very strong year over year gains, no doubt come next month the September durable goods release will beat the consensus. If it actually turns positive year over year, then this month’s downtick will have been a false alarm, and the US manufacturing economy would still be limping along in a flat trend.

The stock market has shown that it can go on its merry way higher under those conditions for several years. There have been a few false alarms in this indicator in the past. Durable goods manufacturing makes up only 5% of the US economy. So it’s a good idea not to get hung up on durable goods orders as a stock market indicator. The stock market is always its own best indicator, but if you are looking for economic data that correlates well with stock prices, there are other series that come closer to the mark than durables. For now, I would view the August data as a cautionary signal. Another down month would probably be a nail in the coffin however.


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Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

JPMorgan, Bank of America Forgive Debts that No Longer Exist

JPMorgan, Bank of America Forgive Debts that No Longer Exist; Wonderful News! But For Whom?

Courtesy of Mish.

In February, five of the nation’s largest banks agreed on a $25 billion settlement over widespread, systemic mortgage fraud and related issues.

The $25 Billion Deal, announced with huge fanfare, was supposed to help up to a million struggling homeowners, primarily via debt forgiveness.

Let’s flash forward a few months to see how debt forgiveness is working out in practice.

Today, the New York Times notes Banks Forgive Debt That Isn’t There.

GREETINGS, unhappy homeowners! Here’s some wonderful news: “We are canceling the remaining amount you owe Chase!” says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. “You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America.

Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.

Are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

But Chase appears to be claiming to release a lien on Ms. Esposito’s property that it does not hold. And under the mortgage settlement, it could receive a credit.

As for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.

Chase won’t help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.

Wonderful News! But For Whom?

If these events are happening on a broad scale, and I suspect they are, that $25 billion settlement will end up costing peanuts….

Continue Here

BBC and NPR’s Marketplace Now Officially Part of the Problem

Courtesy of Jaime Falcon.

Another whitewash of the causes of the crisis. I give this show a 3 out of 10. It is so disappointing to have NPR and BBC do such pathetic work.

If the BBC and NPR were were serious about getting to the core of the issue, they would have Bill Black on the panel. Period.

The Panel: John Taft, Eliot Spitzer, Bethany MacLean, Ed Conard. Hosted By Kai Ryssdal and Justin Rowlatt.

Bethany MacLean is an apologist for the financial sector. It does not help that she came from Goldman Sachs .

John Taft: “The financial sector should be about stewardship.” But Barack Obama already told us that the age of irresponsibility is behind us.

Ed Conard surprisingly comes the closest to calling out the fraud. At least he accepts that sophisticated investors knew what they were getting into.

If any of these people was an uncompromised analyst, they would be asking why banks did away with underwriting. Why would banks be giving out liars’ loans (the banks’ own terminology)? There is no honest reason to do away with underwriting standards. Without answering that question, you cannot answer why we ended up in a giant credit bubble and a subsequent collapse. If you want an answer to that question, read this.

If you want to waste an hour of your life learning very little about what caused our crisis, and nothing about what we can realistically do to make appropriate reforms, listen to this:


By the way, here is an appropriate panel for addressing this kind of issue: Bill Black, Barry Ritholtz, Chris Whalen, and Joseph Stiglitz. And there are many others.

BBC and NPR's Marketplace Now Officially Part of the Problem

Courtesy of Jaime Falcon.

Another whitewash of the causes of the crisis. I give this show a 3 out of 10. It is so disappointing to have NPR and BBC do such pathetic work.

If the BBC and NPR were were serious about getting to the core of the issue, they would have Bill Black on the panel. Period.

The Panel: John Taft, Eliot Spitzer, Bethany MacLean, Ed Conard. Hosted By Kai Ryssdal and Justin Rowlatt.

Bethany MacLean is an apologist for the financial sector. It does not help that she came from Goldman Sachs .

John Taft: “The financial sector should be about stewardship.” But Barack Obama already told us that the age of irresponsibility is behind us.

Ed Conard surprisingly comes the closest to calling out the fraud. At least he accepts that sophisticated investors knew what they were getting into.

If any of these people was an uncompromised analyst, they would be asking why banks did away with underwriting. Why would banks be giving out liars’ loans (the banks’ own terminology)? There is no honest reason to do away with underwriting standards. Without answering that question, you cannot answer why we ended up in a giant credit bubble and a subsequent collapse. If you want an answer to that question, read this.

If you want to waste an hour of your life learning very little about what caused our crisis, and nothing about what we can realistically do to make appropriate reforms, listen to this:


By the way, here is an appropriate panel for addressing this kind of issue: Bill Black, Barry Ritholtz, Chris Whalen, and Joseph Stiglitz. And there are many others.

A Financial Coup d'Etat, the Credibility Trap, and What Must Be Done

A Financial Coup d'Etat, the Credibility Trap, and What Must Be Done

Courtesy of Jesse's Cafe Americain

These two statements on the credibility trap and reform are from the bottom of my blog, and a permanent fixture to the layout of the site.

I wanted to take a moment to remind you of them, because they can be so easily overlooked. And they often are.

What I say in quite a few words, Chris Hedges says in a fairly pithy manner in the video below. And I think he is right. And this applies as much to Europe and the UK and the Mideast, including Israel, as it does to the US and the rest of the Americas.  Of course one could name many other countries, such as Russia and China, but unfortunately they cannot fall from freedom, because despite the changes in names and slogans and the self-serving advertising campaigns of nationless corporate predators, they already have little or none.

The progressive movement lacks a spine for the moment, and is badly divided over a number of difficult issues which diffuse them, instilling hatred and fear in their hearts, driving out love, and leaving room only for a destructive pride and selfishness.  And the timid thinkers, the so-called intelligentsia, hide in their studies and in their cellars, and in their work, waiting for someone else to do something.

Eventually progressive people will come together or, as Edmund Burke observed, "…they will fall, one by one, an unpitied sacrifice in a contemptible struggle." 

To those who say to hell with it, to hell with thinking, to hell with complexity, to hell with others, I say, be careful of the madness which you seek to unleash, because it will come back to consume you and your children, as it has done so many times before, and will do so inevitably again.

This is what I believe is happening now based on a careful reading of history.  

This is not a prediction.  This is a warning for a generation that is being prepared to accept the unthinkable on a much wider scale than they might imagine in their worst nightmares: torture, murder, ethnic cleansing, and repression.  And what is most frightening of all is that they think they are immune to it, because they are so different, so special, so exceptional.  And so they become willfully blind, and in their blindness, may become beasts.

A credibility trap is when the regulatory, political and/or informational functions of a society have been compromised by a corrupting influence and a fraud, so that they cannot address the situation without implicating, at least incidentally, a broad swath of the power structure including themselves. 

The status quo has at least tolerated the corruption and the fraud, if not profited directly from it, and most likely continues to do so. The power brokers have become susceptible to various forms of blackmail. And so a failed policy can become almost self-sustaining long after it is seen to have failed, and even become counterproductive, because admitting failure is not an option for those in power.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.


Judges to Review Constitutionality of NDAA Military Detention Legislation

Judges to Review Constitutionality of NDAA Military Detention Legislation

Courtesy of Naked Capitalism

Chris Hedges, whose column is published Mondays on Truthdig, spent nearly two decades as a foreign correspondent in Central America, the Middle East, Africa and the Balkans. His book War Is a Force That Gives Us Meaning (2003) was a finalist for the National Book Critics Circle Award for Nonfiction. Here he’s interviewed by Paul Jay of the Real News Network.

A note on what we still classify as legalities. From the transcript:

[HEDGES: I]n September, Judge Forrest ruled that Section 1021 [of the NDAA] was in fact unconstitutional, and she issued a permanent injunction. During the trial, she had issued a temporary injunction against that law while it was being challenged in court.

The Obama, which had appealed the temporary injunction, filed an emergency appeal against the permanent injunction. ….

I think this has to do with internal dissent. I think that, you know, both the lawyers and myself feel that because they issued an emergency appeal, they reacted so aggressively once Judge Forrest declared this section unconstitutional, they are probably already using the NDAA. This is supposition, but probably they are holding dual Pakistan-U.S. nationals in military facilities like Bagram, because if they weren’t using it, they could have just filed an appeal.

The problem is that once the judge declared the law unconstitutional, if they continue to hold American citizens and deny them access to due process, then they would be in contempt of court. And so the rapid response, the—and it was interesting that it was the Pentagon lawyers that filed this emergency appeal. And the issuance of an emergency stay or temporary stay until the appeal is heard I think essentially is to cover them legally for already putting the NDAA into use. Internally, I really think it has less to do with Iran and a lot more to do with controlling the American public.

It’s hard to for me to see how the “lesser evil” crowd can sleep at night. The NDAA is an enabling act. What Obama’s doing with it is far worse than anything Bush ever did (granted, that we know of).

How Bad Was The Great Depression?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

To properly understand the events of the time (and to put them in today's context), we believe, like the FEE, that it is factually appropriate to view the Great Depression as not one, but four consecutive downturns rolled into one. These four “phases” are: I. Monetary Policy and the Business Cycle; II. The Disintegration of the World Economy; III. The New Deal; IV. The Wagner Act. The first phase covers why the crash of 1929 happened in the first place; the other three show how government intervention worsened it and kept the economy in a stupor for over a decade. The following brief clip and article shine a light on how bad things were and what was done in the name of 'helping' – there are many shocking analogies for current government-inspired acts from taxation to protectionism to money-supply 'tricks'.

Everyone has heard the sage observation of philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.” It’s a warning we should not fail to heed.

Great Myths 2011 Final Web

Will Markets Go Overnight From ‘Don’t Fight the Fed’ to ‘Pushing on a String’?

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

“Things do not happen. Things are made to happen.” ~ John F. Kennedy

Ultimately the markets will need to see improvements in economic fundamentals from QE3.  Fed president Charles Plosser says the economy is immune to Fed stimulus. At this stage, I predict that the real economy will experience more maladjustments and inflation from QE.    Divergences are already showing up between durable goods orders (a measure of economic activity) and the markets (as shown in Chart 1 below). Therefore, one of these will have to revert.  Market participants apparently think that because of QE the economy will revert back up to where the stock market is priced.  I suggest the market will revert to and follow the economy down.

Similar divergences are showing up in forward earnings and the SPX index (Chart 3).  That was also how the TNT (tech) bubble in 1999-2000 played out,  as did the housing extraction bubble of 2006-2007. The central bank/government bubble of 2011-2012 should be no different.

Citi’s chart 2 shows risk aversion measurements during previous bubbles.  The Low Risk Aversion levels now seen are rare,  don’t last long and aren’t likely to be long rolling tops.  With the pixie dust sprinkled, and the hook in, the markets almost overnight are poised to pivot from “Don’t fight the Fed!” to “the Fed is pushing on a string!” In the past as shown on the chart, when extremely low-risk aversion occurs, a reversal unfolds fairly rapidly.

This time around, both barrels are loaded because not only is risk aversion at an extreme low but economic fundamentals are diverging sharply lower from stock prices. This will  precipitate both a normalization of risk aversion and a catch up to the deteriorating fundamentals resulting in a nasty downturn.






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