Archives for November 2013

Record Number of French Corporate Bankruptcies; Socialist Theory vs. Practice; What Went Wrong?

Courtesy of Mish.

The number of French business bankruptcies hit a record in the third quarter of 2013 and the yearly total is on a pace that will come close to the total reached in the dark days of the great financial collapse in 2009.

Via translation here are a few articles from Le Monde.

Corporate Liquidations Reaching New Heights in France

The newspaper L’Autre Journal has filed for bankruptcy.

Michel Butel, the former boss of the newspaper does not admit defeat so far, and promises new adventures. But under another name …

In the last twelve months, 43,981 companies were liquidated after having filed for bankruptcy, according to the records of the credit insurer Coface. This is a record number of third quarter bankruptcies.

Mory Ducros, Largest Bankruptcy in France for a Year

With 5,200 jobs at stake, the bankruptcy of transport company Mory Ducros is in social terms the heaviest recorded bankruptcy this year. The previous failure of this magnitude was Neo Security, the second largest French security firm, which was declared insolvent in April 2012. At the time, it employed him as more than 5,000 people.

Some 62,500 company s should file for bankruptcy this year, almost as much as during the dark year of 2009, according to credit insurer Coface. The number of bankruptcies may be slightly lower in 2014.

Ayrault Wants to “Save as Many Transport Jobs” as Possible

Transport company Mory Ducros, which employs 5,200 people in France, announced during a special Works Council (EWC) on Friday its request for receivership with the Commercial Court of Pontoise and the appointment of a temporary administrator.

Unions of the company are very pessimistic. “It is feared between 2,000 and 3,000 job cuts,” said Fabian Tosolini, national secretary of the Federation of Transport of the French Democratic Confederation of Labour (CFDT). This is one of the biggest bankruptcy filings since the start of François Hollande term, and one of the largest ever happened to France since the collapse of Moulinex in 2001.

Following the bankruptcy announcement, Prime Minister Jean-Marc Ayrault commented “We are looking for all solutions, site by site, with the social partners, of course. Where we can find the buyers, everything will be done to save the maximum number of jobs. This is a very difficult job.”

Arnaud Montebourg, the Minister of Industrial Renewal, is “mobilized” on this issue. Potential buyers have expressed interest but no proposal has been expressed.

Frédéric Cuvillier, Minister of State Transport added “Everything will be studied: first how to consolidate the rescue at least 2,000 jobs, and then look at how we can ensure the recovery or offer jobs to those who are victims of this plan.” The Minister announced that he wanted “to meet as soon as possible” with management and the unions.

The prime minister, the minister of industrial renewal, and the minister of state transport are all mobilized. How comforting….

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Most Signs Point To A Significant Market Decline Ahead

Courtesy of Comstock Partners Inc.

We would ignore all of the talk on Wall Street and in the media about whether the stock market is in a bubble.  After all, that’s just a matter of semantics, and whatever we call it, the market is overvalued, overbought, and overly bullish at a time when the economy is slogging along at an inadequate pace, and depends almost solely on the prospect of continuing Quantitative Easing (QE) to continue its upward move.

The market doesn’t have to be in a bubble in order for it to be on the precipice of a significant decline.  Of all the cyclical market peaks since 1929, only the tops in 2000 and 2007 were looked back on as being bubbles. Most of the other market peaks occurred with the P/E ratio ranging between 18 and 21 times reported cyclically-smoothed GAAP earnings, compared to a norm of 15 times and bear market lows between 7 and 10 times. At today’s market close the P/E ratio is 20.6 times earnings.  That’s high enough to be a potential market top, especially given existing fundamental and technical conditions.

The market has been moving like a yo-yo in response to the minute-to-minute perception of the prospect for Fed tapering. Yesterday, the market tanked after the release of the Fed minutes indicated that a number of Fed members thought that tapering should begin before a definitive improvement in the economy became apparent.  The specific paragraph that got the market’s attention stated, “….participants also considered scenarios under which it might at some stage be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was underway.”  Until this statement, most investors assumed that winding down QE would only take place in a robust economy, and, therefore, would actually be positive.  The idea that tapering could begin in the absence of real economic improvement was too much for investors, at least in the short-term. 

Today, however, when the Philadelphia Fed Survey released results that were much weaker than expected, the 10-year bond yield abruptly dropped, and stocks soared on the grounds that maybe the start of tapering would be delayed after all.  Such is the state of the current market. Everything hinges on QE, and little else seems to matter.  The similarity between now and 2000 or 2007 is not necessarily that we are in a bubble, but that the reason for market strength rests on such dubious grounds.

In our view, the market is not supported by strong fundamentals.  The so-called strength in the economy is based on forecasts, rather than on current conditions.  But forecasts have now been overly optimistic for the last three years, and we see no change in the period ahead.  GDP has been growing at a 1.6% rate over the past year.  Similarly, real consumer spending has been rising at a 1.8% rate, and real disposable income at 1.6%—-and this with a powerful dose of QE.  With the rise in mortgage rates, housing has also become a weak spot. October existing home sales were down 3%, while the pending sales index, which leads existing sales, indicate more declines ahead.

Technical conditions also point to a vulnerable market.  Breadth has been narrowing and did not confirm new highs in the averages.  Daily new stock highs peaked in May and recently have been trending lower.  The Russell 2000 has been lagging the large-cap averages.  Some speculative high-P/E momentum stocks have recently been hit hard.  Tesla is down 37%, Cree 27%, Fleetmatics 26%, Facebook 15%, and Linkedin 14%. Investors Intelligence bulls have averaged a historically high 54% and bears 16% over the past four weeks, numbers indicative of market extremes. According to Vanguard, investors, as a group, have a 57% allocation to equities, an amount exceeded only twice in the last 20 years—-the late 1990s and prior to 2007-2009. All of these numbers belie the belief that most investors are still too pessimistic. 

All in all, we believe that the market is facing significant headwinds, and that a major decline is not far off.   

Wal-Mart: Fairly Valued Retail Powerhouse

Courtesy of

This Bentonville, AR based mega-retailer perennially ranks amongst the top of the Fortune 500 list and likely needs no introduction. In lieu of a business summary, we thought it might be interesting to highlight some prominent statistics. For instance, every week more than 245 million customers visit Wal-Mart’s (WMT) 11,000 stores under 69 banners in 27 different countries. Last year alone the company had sales of about $466 billion while employing 2.2 million associates.

To put some of those numbers in context, Wal-Mart employs more people than the entire population of New Mexico; which makes sense given that Wal-Mart is the top employer in 25 of the United States. Each week nearly a third of the U.S. population visits one of Wal-Mart’s 4,786 U.S. stores. With sales over $450 billion Wal-Mart by itself would rank as the world’s 26th largest economy, just behind Norway. Or perhaps you might even be interested to know that Wal-Mart parking lots collectively take up roughly the size of Tampa, FL.

Just think: all of this massive scale began with a single store and a 44-year-old entrepreneur.  But this article isn’t about swaying one’s opinion about Wal-Mart. Instead, it’s an update on the current prospects of the business.

Directly to the point of recent company news, Wal-Mart just announced the election of a new CEO, Doug McMillon.  Doug, 47, will succeed current CEO Mike Duke on February 1st of 2014. Interestingly, Mr. McMillon began his career as a summer associate in 1984 – working his way up to eventually lead the international unit of the business.  If the future is anything like the past operating results of Wal-Mart, then the business will be just fine.

In respect to returning value to shareholders, Wal-Mart has demonstrated a continued propensity to deploy cash via dividends and share repurchases. For instance, Wal-Mart has not only paid but also increased its dividend for 39 straight years. In addition, these increases have come in at a rate of about 18% per year over the last decade, while the company still only pays out about a third of its earnings. With regard to Wal-Mart’s share repurchase program the company has been especially proactive by decreasing common shares outstanding from about 4.45 billion in 1999 to today’s number closer to 3.27 billion. Further, the company recently authorized a new $15 billion share repurchase program that mirrors the $14 billion in completed purchases over the last 2 years.

Yet none of this is to suggest that the company is without risks. For instance, perhaps some might believe that Wal-Mart will fall short in fighting off e-commerce rival Amazon (AMZN). Conceivably, same-store sales might continue to decline as a result of a weakened consumer. And of course there’s always litigation risk with such a large company being involved in so many operating facets. In fact, the company listed 14 separate risk factors in its most recent 10-K.  With the above being stated, let’s take a look at the company through the lens of fundamental analyzer software tool, F.A.S.T. Graphs™.  

Wal-Mart has grown earnings (orange line) at a compound rate of 11.8% since 1999, resulting in a $260+ billion dollar market cap. In addition, Wal-Mart Stores’ earnings have risen from $1.28 per share in 1999, to today’s forecasted earnings per share of approximately $5.21 for 2013.  Further, as described, Wal-Mart has not only paid a dividend (pink line) but also increased it for 39 straight years.

For a look at how the market has historically valued Wal-Mart, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.

Here we see that Wal-Mart’s market price previously began to deviate from its justified earnings growth; being consistently overvalued in 1999 and taking a full 8 years to come back to fair value around 2007. Today, Wal-Mart appears to be in-value in relation to both its historical earnings and relative valuation.

In tandem with the strong earnings growth, Wal-Mart shareholders have enjoyed a compound annual return of 5.6%. Note that this outcome greatly trails the business results of the company due to the high initial valuation. A hypothetical $10,000 investment in Wal-Mart Stores on 12/31/1998 would have grown to a total value of $22,650.36, without reinvesting dividends. Said differently, Wal-Mart shareholders have enjoyed total returns that were roughly 1.3 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received approximately 1.1 times the amount of dividend income as the index as well.  This isn’t a spectacular result, but it is notable given that Wal-Mart shares began the period trading at about 43 times earnings.

But of course – as the saying goes – past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.

In the opening paragraphs potential catalysts and risks were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus.  Yet it is still useful to determine whether or not your predictions seem reasonable. 

Twenty-eight leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return growth rate for Wal-Mart of 9%. In addition, Wal-Mart is currently trading at a P/E of 15.5, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Wal-Mart’s valuation would be around $121 at the end of 2018, which would be a 10.6% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

It’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Wal-Mart to an equal investment in a 10-year treasury bond, illustrates that Wal-Mart’s expected earnings would be 3.8 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.

Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of Wal-Mart we have learned that it appears to be a strong company with solid upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.

Disclosure:  Long WMT at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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The Official Video from the Federal Reserve on How It Creates Electronic Money

Courtesy of Pam Martens.

Official Graphic From the Federal Reserve Showing How It Creates Money

Unless you’ve been lost at sea since 2008, you’ve likely heard time and again that the Federal Reserve is creating money out of thin air. Type the words “Federal Reserve creates money AND thin air” into the Google search engine and you’ll find about 2.4 million people weighing in on the subject, including folks at PBS.

There’s no reason for the debate. The Federal Reserve has put out its very own video explaining how it creates money. It prefers the phrase “newly created electronic funds” to the colloquial “out of thin air.”

The video is narrated by Steve Meyer, a Senior Advisor to the Federal Reserve Board of Governors, who explains how the Fed has been paying for those trillions in bond purchases since the 2008 crash. Meyer says on the video:

“You may wonder how the Federal Reserve pays for the securities it buys. The Fed does not pay with paper money. Instead, the Fed pays the seller’s bank using newly created electronic funds; and the bank adds those funds to the seller’s account. The seller can spend the funds, or, can simply leave them in the bank. If the funds stay in the bank, then the bank can increase its lending, purchase more assets, or build up the reserves it holds on deposit at the Fed. More broadly, the Fed’s securities purchases increase the total amount of reserves that the banking system keeps at the Fed.”

The Fed has even included a cute little graphic, included above, to educate the public on how this all works.

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Industry Insiders Provide 2014 Outlook

Courtesy of Larry Doyle.

As we navigate even further into uncharted waters, many who visit this site are likely wondering what lurks on the horizon for our markets and economy in 2014.

The markets may be typically quiet today and tomorrow with sloppy weather in many parts of our nation and preparation underway for our traditional feast of Thanksgiving.

Let’s take a little extra time to feast on some widely divergent economic and market viewpoints on display in a recent Research Magazine roundtable discussion with respected industry insiders Rob Arnott, John Buckingham, Ken Fisher, and one of my favorites Bob Rodriguez.

What’s the current state of the economy?

Fisher: Great, much better than people think.

Buckingham: Even though things haven’t been great, when you’re expecting miserable, good is good enough.

Rodriguez: We’re going through Future Shock. The Future Shocks of today are quantitative easing and ad hoc governmental intrusion into the system.

Arnott: Still a sputtering, sluggish economy. It leads to companies and individuals setting money aside rather than investing. The fiscal and monetary stimulus is like an open fire hydrant draining water pressure from the neighborhood. But those who have buckets closest to the hydrant, providing goods and services, do just fine while the private macro economy does not.

What’s the current state of the stock market?

Rodriguez: Still a function of risk-on, risk-off and the nature of quantitative easing. Since February 2012, it’s been driven primarily by P/E expansion, not robust earnings growth.

Arnott: A bull market built on a foundation of hope and a printing press. That’s not healthy.

Fisher: We’re in a long bull market, with a little volatility throughout the year.

Buckingham: It’s performed very well. But people are still scared and sitting on the sidelines. Yes, stocks are trading at the higher end of their historical range in terms of P/E ratios; but you have to look at where else you can put your money in building a diversified portfolio.

Your forecast for the economy in 2014?

Arnott: As long as we’re willing to run the printing press as an enabler of bad behavior in the form of deficit spending, this game can keep going on for a while. But eventually, it breaks. The longer we put off the day of reckoning, the worse that break is. We’re setting the stage for very serious macroeconomic damage and very serious market shocks in the years ahead.

Fisher: I hope that next year will be the end of quantitative easing. That’s the most bullish thing we can do. Everybody has quantitative easing backwards: It’s not a stimulus; it’s depressive. We’re doing well not because of it but despite it. It flattens the yield curve and slows things down. Historically, the steeper that slope, the more bullish for the economy ahead.

Rodriguez: Economic growth will be weaker than expected, and governmental chaos will be a key factor. I don’t see any reasons why we should grow at a more historical 3% or 3½%. All the Federal Reserve forecasts have been consistently overly optimistic. That will be the case again next year. We face a period of higher volatility in terms of economic trends, and then you layer on new regulations.

Your outlook for the stock market next year?

Buckingham: Returns in line with the historical 10% to 12% average are not unreasonable, though equity market participants should be happy even with modest returns—given the [awful] yields on competing investments.

Fisher: We’re in a long bull market because we’re not past the part where people are fighting the past; they’re still skeptical.

Arnott: Returns are going to be pretty anemic in mainstream stocks.

Rodriguez: We do not find this an attractively valued environment. Valuations are being driven by non-sustainable policy, both monetary and fiscal. I would want a higher margin of safety: a lower valuation to risk capital.

What’s the likelihood of a market crash next year?

Fisher: Remote.

Arnott: A repeat of ‘08-‘09 is very unlikely. But a correction, an ordinary bear market, is very likely in the next 12 to 18 months.

Rodriguez: It’s impossible to forecast a crash, but the course we’re on cannot be sustained. It’s very much like blowing up a balloon. You blow it up and—Ahh, it hasn’t popped. You blow it up some more—Ahh, still hasn’t popped. Then you finally hit that moment—Bang! That’s how financial crises typically happen. When we face the next one, liquidity will be very limited; and price reactions will be quite sharper.

Biggest threat to the market next year?

Fisher: The biggest single likelihood is that it comes from stupid government policy.

Buckingham: A major economic slowdown in China or a significant spike in interest rates that negatively impacts the housing market and consumer confidence.

Rodriguez: Governmental surprises.

Arnott: The poisonous environment in Washington and constant meddling is the No. 1 stress to the market after high valuations levels. Washington seems incapable of according any respect to capitalism and free markets. Constantly changing rules and regulatory landscape leaves investors and business managers in a quandary. [Companies] hoarding money creates an illusion of massively higher profits, and that’s an unhealthy foundation for current valuation levels.

What about corporate earnings next year?

Fisher: They’ll be fine.

Buckingham: We’re optimistic but want to see some topline growth.

Rodriguez: The odds of earnings disappointments next year are a reasonably high probability. We’re already at eye-popping profit margins.

Arnott: Being at an all-time peak in earnings relative to GDP is a pretty dangerous space for further profit growth. Can profits go much higher? Not without risk of a major political backlash—a risk of Occupy Wall Street’s suddenly becoming a mainstream movement.

Your predictions for bonds?

Rodriguez: They don’t provide a safe haven. With interest rates and long-term yields at these levels, it’s a fool’s paradise. We continue to stay short in our bond portfolios—approximately two years. And that has been successful. We could go back to lower yield levels if the Fed accelerates quantitative easing, which is a reasonable possibility: Rather than taper, they buy for a longer period. That might lead to somewhat of a bond market rally. But with each year that we continue to expand the debt or liabilities and keep interest rates down, the odds of unintended negative consequences rise.

Buckingham: Investors have had an eight-year love affair with bonds, but the red ink this year will finally lead to a rotation into equities.

Arnott: The run-up in bond yields paired with a relatively bleak economic outlook suggests that bonds could surprise to the upside. I would not be a seller of bonds at the moment. I’m a very mild bond bull.

What will happen, then, with interest rates?

Buckingham: The Fed will very likely remain accommodative throughout 2014. We saw that even a modest uptick can cause fickle bond fund investors to head for the hills.

Fisher: Assuming quantitative easing ends, long rates go up and short rates stay low; and the spread between short and long rates rises.

Rodriguez: Interest rates are being massively manipulated by the Fed. When you drive rates to zero, almost anything qualifies as an investment; and people are running away from liquidity. Keeping interest rates down for a progressively longer period only blows up the bubble larger and larger—and it will pop.

Thoughts on Federal Reserve Vice Chairwoman Janet Yellen’s nomination as Fed head?

Buckingham: Ben Bernanke has done a terrific job of bringing the financial systems and economy back from the brink. You need to let the existing regime finish what they started.

Arnott: The Fed is currently run by academics who have never run a business or a bank—and that’s very dangerous. At some point they must taper and stop this nonsense of buying government bonds in what is ostensibly a recovery. Why should there be monetary stimulus in an economy they claim is growing? They have a failed policy, painted themselves into a corner and don’t know how to get out. It’s a very scary situation.

Rodriguez: The Federal Reserve is a temple with divine entities. But given that we’ve had the two biggest bubbles in the last 15 years and the Fed didn’t appear to be aware of either one, doesn’t give me a lot of confidence! [Yellen] will have to bring in a wider array of economic speed limits. But will that improve Fed policy outcome? I doubt it.

Fisher: Fed chairs’ activities before they head the Fed have not been terribly predictive of what they’ll do—though Mr. Bernanke remembered some of the things he knew before, and what he knew was wrong! The best thing the Fed head can do is remember: First do no harm.

Expectations for the SEC chaired by Mary Jo White?

Rodriguez: More regulatory changes. But have any that occurred over the last 42 years I’ve been in the business really helped? No. The captain of the ship, whether the Fed chairman or regulatory heads, were off the bridge when the new S.S. Titanic hit the iceberg in ’07. I give the last two administrations—which covered most of the two greatest bubbles—an “F,” as in failure.

Buckingham: A renewed focus on transparency and little patience with technical glitches with investing exchanges. Flash crashes and flash freezes matter psychologically: Investors are already soured on the financial markets. I’d like to see money spent on having a redundant system. It’s necessary.

Fisher: Mary Jo White will be more of what you could view as anti-financial services than recent SEC heads. But I don’t think that will change anything very much.

And your outlook for international investing?

Fisher: The U.S. stock market has done better than the world. As we move through the rest of this bull market, that begins to equalize. Emerging markets are beaten up pretty badly and will probably get a bounce-back. European stocks are starting to play catch-up.

Arnott: I like diversification into emerging markets stocks and bonds because more and more of these economies are becoming less dependent on the developed world, less dependent on the U.S. than they’ve ever been. There’s blood in the streets in some of these emerging economies. That’s why they’re cheap. But does anyone really think their growth can be slower than U.S. growth? Faster growth and cheaper markets are a great combination.

Buckingham: We see opportunities in Europe, with names in the integrated oil space, including Eni, Royal Dutch and Total.

Any other prognostications for next year?

Rodriguez: Volatility in bonds is very high; volatility in stocks will be very high over the next several years. All the economic flows add volatility to investor expectations. When volatility rises, confidence tends to fall. If you’re not prepared for [all] that, you’re going to be in for a rude awakening.

Arnott: There’s tension between deflationary pressures and inflationary pressures. My betting is that inflation wins. With inflation, mainstream bonds are very dangerous and mainstream stocks are moderately dangerous. That’s not to say that very dangerous portfolio won’t perform well on a short-term basis. Next year might be OK, but at some stage it’s likely to be very disappointing.

Buckingham: We expect a gradual tapering. That is, there will be plenty of support from the Fed and thus no reason to think that the adage, “Don’t fight the Fed!” will be anything but a tailwind for equity investors.

Which of these insiders do you think is most accurate in their outlook? I would welcome hearing what readers think on any of these questions.

Navigate accordingly.

Jobs vs. Employment Analysis Suggests Huge Obamacare Impact (And Way Less Job Growth than Anyone Thinks)

Courtesy of Mish.

Every month (on average), for about a year, there has been a startling discrepancy between employment as measured by the household survey and jobs as reported by the establishment survey.

I believe the discrepancy is yet another Obamacare artifact.

Jobs vs. Employment Discussion

Before diving into the details, it is important to understand limits on data, and how the BLS measures jobs in the establishment survey vs. employment in the household survey.

Establishment Survey: If you work one hour that counts as a job. There is no difference between one hour and 50 hours.
Establishment Survey: If you work multiple jobs you are counted twice. The BLS does not weed out duplicate social security numbers.

Household Survey: If you work one hour or 80 you are employed.
Household Survey: If you work a total of 35 hours you are considered a full time employee. If you work 25 hours at one job and 10 hours at another, you are a fulltime employee.

Recall that the definition of fulltime under Obamacare is 30 hours, but fulltime to the BLS is 35 hours.

Next, consider what happens under Obamacare if someone working 34 hours is cut back to 25 hours, then picks up another parttime job.

Obamacare Effect

Prior to Obamacare
34 hours worked = 1 parttime job household survey…

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Investors love Obamacare

Courtesy of

Some of the most unpopular policies often create tremendous opportunities. Take the Affordable Care Act for example. While the public is complaining bitterly about this legislation, some investors will be (or already have been) profiting handsomely. Venture capital firms for example are expected to rake it in by funding companies that provide healthcare-related software services (see story). At the same time, the equity markets have been bidding up the whole sector with the view that Obamacare will make healthcare firms more profitable. More subscribers and more people receiving care means higher revenues and outperformance for healthcare shares.

Blue: healthcare index ETF, red: S&P500 ETF

By the way, is it time to take profits?


Why Fed’s taper is essential to stabilize agency MBS liquidity

Courtesy of

While we've discussed some of the economic implications of the Fed's current policy, let's now take a quick look at the impact of QE on the overall mortgage bond market.

Here is a simple fact: the amount of mortgage-related securities in the US has been declining since 2008 – after reaching just over $9 trillion at the peak.

Source: SIFMA

The reason is simple. With a large portion of all mortgages funded via the bond markets, the ongoing decline in total mortgages outstanding results in smaller MBS balances. Of course as the population grows and more homes are built (albeit very slowly) this trend should reverse.

And now with these market dynamics as the backdrop, put the Fed into the mix. At it's current pace the Fed is taking about half a trillion of MBS securities out of the market. In fact the Fed is now removing more than 100% of the paper that is being issued. The supply of agency (Fannie and Freddie) MBS securities in the market is declining sharply as the Fed reduces the total "tradable float".  According to Credit Suisse, without the Fed's anticipated taper in Q1, the demand for agency paper could outstrip the supply by $340bn in 2014, creating a liquidity problem.

CS: – Liquidity in the MBS market could come under pressure in the coming months due to Fed’s settled purchases exceeding 100% of gross issuance of non-specified conventional 30-year pools. Tradable float in conventional 30-year MBS should decline between 6% and 30% during the year, increasing the risk of a potential liquidity disruption in the market under longer taper delay scenarios.

As a result some of the private participants, particularly banks, have been reducing their agency MBS holdings. The chart below shows the year-over-year changes in MBS holdings by commercial banks.

Here is what the conventional 30-year agency MBS float will look like under the taper vs. no-taper scenarios (chart below). Without the taper, the float in these bonds will decline by 30% from the October levels. These are dangerously low levels for what used to be one of the largest bond markets in the world.

Source: Credit Suisse

Taper therefore becomes essential in order for liquidity to stabilize and for more private market participants to begin returning to this market.


October Pending Home Sales Not As Bad As Reported, Actually Pretty Decent

Courtesy of Lee Adler of the Wall Street Examiner

Contract volume for sales of existing homes in October were actually much better than media reports suggested. This video gives the details so that you can form an opinion on the basis of the actual data.

The chart below was featured in the video.

US Housing Prices and Volume - Click to enlarge

US Housing Prices and Volume – Click to enlarge


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Confusing Fear Bubbles with Stock Bubbles

Courtesy of Wade of Investing Caffeine

Bubbles 2 SXC

With the Dow Jones Industrial Average approaching and now breaking the 16,000 level, there has been a lot of discussion about whether the stock market is an inflating bubble about to burst due to excessive price appreciation? The reality is a fear bubble exists…not a valuation bubble. This fear phenomenon became abundantly clear from 2008 – 2012 when $100s of billions flowed out of stocks into bonds and trillions in cash got stuffed under the mattress earning near 0% (seeTake Me Out to the Stock Game). The tide has modestly turned in 2013 but as I’ve written over the last six months, investor skepticism has reigned supreme (see Most Hated Bull Market Ever & Investors Snore).

Volatility in stocks will always exist, but standard ups-and-downs don’t equate to a bubble. The fact of the matter is if you are reading about bubble headlines in prominent newspapers and magazines, or listening to bubble talk on the TV or radio, then those particular bubbles likely do not exist. Or as strategist and investor Jim Stack has stated, “Bubbles, for the most part, are invisible to those trapped inside the bubble.”

All the recent bubble talk scattered over all the media outlets only bolsters my fear case more. If we actually were in a stock bubble, you wouldn’t be reading headlines like these:

Bubble3 Pics

Bubble Talk 11-23-13_Page_2

From 1,300 Bubble to 5,000

If you think identifying financial bubbles is easy, then you should buy former Federal Reserve Chairman Alan Greenspan a drink and ask him how easy it is? During his chairmanship in late-1996, he successfully managed to identify the existence of an expanding technology bubble when he delivered his infamous “irrational exuberance” speech. The only problem was he failed miserably on his timing. From the timing of his alarming speech to the ultimate pricking of the bubble in 2000, the NASDAQ index proceeded to more than triple in value (from about 1,300 to over 5,000).

Current Fed Chairman Ben Bernanke was no better in identifying the housing bubble. In his remarks made before the Federal Reserve Board of Chicago in May 2007, Bernanke had this to say:

“…We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”

If the most powerful people in finance are horrible at timing financial market bubbles, then perhaps you shouldn’t stake your life’s savings on that endeavor either.

Bubbles History 101

Each bubble is unique in its own way, but analyzing previous historic bubbles can help understand future ones (see Sleeping Through Bubbles):

•  Dutch Tulip-Mania: About 400 years ago in the 1630s, rather than buying a new house, Dutch natives were paying over $60,000 for tulip bulbs.
•  British Railroad Mania: The overbuilding of railways in Britain during the 1840s.
•  Roaring 20s: Preceding the Wall Street Crash of 1929 (-90% plunge in the Dow Jones Industrial average) and Great Depression, the U.S. economy experienced an extraordinary boom during the 1920s.
•  Nifty Fifty: During the early 1970s, investors and traders piled into a set of glamour stocks or “Blue Chips” that eventually came crashing down about -90%.
•  Japan’s Nikkei: The value of the Nikkei index increased over 450% in the eight years leading up to the peak of 38,957 in December 1989. Today, almost 25 years later, the index stands at about 15,382.
•  Tech Bubble: Near the peak of the technology bubble in 2000, stocks like JDS Uniphase Corp (JDSU) and Yahoo! Inc (YHOO) traded for over 600x’s earnings. Needless to say, things ended pretty badly once the bubble burst.

As long as humans breathe, and fear and greed exist (i.e., forever), then we will continue to encounter bubbles. Unfortunately, we are unlikely to be notified of future bubbles in mainstream headlines. The objective way to unearth true economic bubbles is by focusing on excessive valuations. While stock prices are nowhere near the towering valuations of the technology and Japanese bubbles of the late 20th century, the bubble of fear originating from the 2008-2009 financial crisis has pushed many long-term bond prices to ridiculously high levels. As a result, these and other bonds are particularly vulnerable to spikes in interest rates (seeConfessions of a Bond Hater).

Rather than chasing bubbles and nervously fretting over sensationalistic headlines, you will be better served by devoting your attention to the creation of a globally diversified investment portfolio. Own a portfolio that integrates a wide range of asset classes, and steers clear of popularly overpriced investments that the masses are talking about. When fear disappears and everyone is clamoring to buy stocks, you can be confident the stock bubble is ready to burst.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in TWTR, JDSU, YHOO or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Encrypt Everything, Store Nothing, Leave No Trace! (Dissolving Messages, Wickr, Snapchat)

Courtesy of Mish.

US corporations like Google, Facebook, and Microsoft benefit from “safe harbor” treaties with the US that allow those companies exemption from European privacy rules.

Then the NSA and FBI came along and forced those companies to put in “back doors” so that nothing is private. 

In the latest 100% believable accusation, EU accuses US of improperly trawling citizens’ online data. In response, Europe is threatening to end the safe harbor laws.

Brussels is to warn Washington that US tech companies risk losing their exemption from privacy rules unless the US changes the way it treats EU citizens’ online data.

A European Commission review of the “safe harbour” pact that allows US technology groups such as Google, Facebook and Microsoft to operate in Europe without EU oversight will conclude that Washington has improperly forced US companies to hand over European customers’ data. It also says that breaches of the data deal have given US tech companies a competitive advantage over European rivals. 

Although the review, which will be unveiled on Wednesday, stops short of calling for the safe harbour agreement to be scrapped, its wording signals that the EU will move in that direction unless the US changes the way that it uses data held by companies on EU citizens.

A scrapping of the safe harbour deal is one of the most formidable weapons the EU has in its arsenal to punish the Obama administration after claims of snooping on Europeans by the National Security Agency.

Such a move would wreak havoc for any US tech company doing business in Europe – especially Google, Facebook and Microsoft, which rely on the agreement to transfer customers’ data seamlessly between countries.

Ending safe harbour and subjecting US companies to European privacy laws would put them in a legal bind over NSA requests for information about European citizens. Under US law they would still be forced to hand over the information, provided the request was backed by an order from the secret foreign intelligence surveillance court but doing so would breach their extra responsibilities in Europe.

Internet companies say the conflict would force them to ringfence EU operations and hold data about the bloc’s citizens in new legal entities there, creating separate islands of data that would lessen the efficiency of their operations and risk balkanizing the internet into separate regional networks.

You’ve Got “Unsecure” Mail

In an attempt to circumvent NSA spying, a fast growing Russian internet company, Mail.Ru seeks US expansion.

Russia’s largest internet company is expanding into the US, trying to lure customers by keeping the data from its services offshore., which has more monthly users than any other Russian website, is targeting the US with a suite of mail and messaging apps under the brand as it tries to crack what its chief executive Dmitry Grishin calls “the most competitive and most difficult market that has ever existed”. …

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Goldman: Hedge Fund Short Positions

You might be surprised at what crazy, overvalued stocks you're dying to short that you don't find on this list…

GOLDMAN: Here Are 25 Stocks That Hedge Funds Are Shorting Like Crazy

man suit shorts

REUTERS/Jessica Rinaldi

The S&P 500 closed at an all-time high of 1,804 on Friday, and Wall Street's short sellers with the resources to ride out the high have been salivating waiting for the market to crumble.

Goldman Sachs' new Hedge Fund Monitor report, which looks at 783 funds with nearly $2 trillion in gross equity positions, lists the 50 favorite short positions among the world's largest hedge fund managers.

"More than half of the 50 key short positions have outperformed the S&P 500 YTD, and five have returned over 100%," noted Goldman's Amanda Schneider.

Perhaps the stock that have outperformed during the rally will underperform during the collapse.

We ranked the top 25 stocks on the list based on the dollar value of short interest.

Keep reading Goldman: Hedge Fund Short Positions – Business Insider.

Things Investors Should Read. Things Investors Should Avoid.

Things Investors Should Read. Things Investors Should Avoid.

By Morgan Housel at The Motley Fool
Originally posted on June 11, 2013 

YouTube, CBSNewsOnline.

This is Warren Buffett's office at Berkshire Hathaway (NYSE: BRK-B  ) headquarters in Omaha, Nebraska.

The portrait behind Buffett's right arm is his father. The file bin at the end of the desk reads "TOO HARD." There are some magazines, a pile of newspapers, and a phone.

But notice what you don't see. There are no stock tickers. No Bloomberg terminals. No charting software. No Twitter feeds. No pundits spouting forecasts. No computer monitors, and maybe not even a calculator. Buffett has created more than a quarter-trillion dollars of value for Berkshire shareholders from this desk over the last 50 years. And he did it while rejecting most of the "tools" investors utilize. We can all learn something from that.

We have more information than ever before. Are we better investors because of it? I don't know of any evidence that we are. In her book Bull!, Maggie Mahar writes: "The problem is that much of the information that investors want — and think they need — is just that, 'information,' not knowledge."

Good investors read a tremendous amount of information, of course. They're just more selective with what they read and pay attention to.

Here are few ways to become more selective.

Avoid explanations of random events. Pay more attention to historical context.
People can't stand the idea that events are random and unexplainable, so they try to attach meaning. You'll see things like, "Stocks fall 0.5% as investors react to manufacturing data" rather than the more honest, "Stocks fall 0.5% because they just do that sometimes."

Keep reading Things Investors Should Read. Things Investors Should Avoid.

All Bulled Up With No Place To Go

All Bulled Up With No Place To Go

By James Howard Kunstler

     The financial wires and pod-waves are all lit up these days like it was happy hour at the Lottery Winner’s Lounge.  It appears that the American economy — capital management division — has found the long-wished-for magic alternative energy source: horseshit. It is fueling the conversation all View postover the Web and over the senile mainstream media megaphones. One technical analyst, celebrity Tweeter Ralph Acampora of Altaira Wealth Management, actually said this week that the USA would be “energy independent by 2016.” That’s rich. We’d only have to come up with 8.5 million new barrels of oil a day, or give up driving cars altogether.

     Apparently, the Federal Reserve is not just hosing down the markets with liquidity (i.e. money for nothing), but has also turned its headquarters in lower Manhattan into the world’s biggest stationary crack pipe. Meanwhile, more than a few professional observers of the financial scene say there can’t be any bubble because that’s the only thing everybody talks about and bubbles only form when nobody notices them.

     That’s just not true. Plenty of people were hollering and finger-pointing about the housing bubble years before it blew up the banking system, including yours truly in a book published in 2005 (The Long Emergency). The reason there is so much anxious chatter about the current bubble is because the bubble is there for all to see, and when it pops it is sure to leave a lot more rubble on the ground than the last time — for instance, the wreckage of trust in all paper investments, which would be quite an historic financial innovation. Since the interventions and manipulations of markets and interest rates are perfectly obvious, one would have to conclude from the current sentiment that faith in the crookedness of finance has completely solidified. The markets have now discounted their own dishonesty.

     The story making the rounds these days is that the USA’s industrial economy is on the rise again; that the housing market has “recovered;” that (according to Meredith Whitney) the “central corridor” of the nation (Texas to Minnesota) is the second coming of Japan in the 1960s; that we have more oil than we know what to do with; that the nation has bred a super-race of intrepid entrepreneurial risk-takers like unto no other society in history; and finally that whatever else we are or are not, America is the cleanest shirt in the laundry basket of Mother Earth.

     This is all horseshit of course, being smoked in the New York Fed’s crack pipe.

     Here’s what’s actually going on. The Federal Reserve can only pretend to have any option besides force-feeding “money” into Wall Street as if it were a Strasbourg Goose with Crohn’s disease. What passes through goose is a vile toxic substance called malinvestment, which turns the energies of society into activities that produce nothing of value, like hedge fund employee bonuses, NSA operations, Tesla car promotion, Frank Gehry condo towers, drone strikes against Afghani wedding parties, Obama photo ops, inflated auction prices of oil paintings, and Barney’s new Jay-Z holiday fashion collection.

     The Fed makes regular noises about ending the force-feeding program (a.k.a. “quantitative easing” or “bond purchases”) issued in the recorded minutes of its Open Market Committee (FOMC). The propaganda is called “forward guidance” to give it the appearance of seriousness and rectitude, but its actual nature is more like what goes on in a Jerry Lewis movie of the 1960s — a kind of antic mugging. Lately it’s referred to as “taper talk” in reference to the threat of tapering the Fed’s purchases of US Treasury bonds and other debt paper, which runs at around $85 billion a month. Sometime soon, the Fed may announce a tiny taper of say $10 billion a month. This head-fake taper will cause the interest rates on the ten-year-bond to shoot up north of 3 percent and threaten to bankrupt the government — which is too broke to pay interest that high on the loans it takes. The markets will have a whack attack over the tiny taper. The Fed will freak out at the odor of deflationary depression and go back to full-tilt force-feeding of the sick goose.

     The outcome will be some combination of a complete loss of faith in paper currency and the “assets” denominated in it, a complete loss of trust between banks that they are solvent enough to do business with each other, and a conclusive implosion of Wall Street and all the institutions in and around it, extending to the executive branch of the federal government. The sorry little appendage to all that, US economy, will be left in the cold and dark, whimpering for its mommy.

Majority in U.S. Say Healthcare Not Government’s Responsibility

Courtesy of Mish.

By a 56 to 42 margin, Gallup reports Majority in U.S. Say Healthcare Not Government Responsibility.

Question: Do you think it is the responsibility of the federal government to make sure all Americans have healthcare coverage, or is that not the responsibility of the federal government?

No Responsibility by Political Party

Percentage Point Change Since 2000

  • Since 2000, the share of republicans who say healthcare is not the responsibility has increased from 53% to 86%, a rise of 33 percentage points.
  • Since 2000, the share of independents who say healthcare is not the responsibility has increased from 27% to 55%, a rise of 28 percentage points.
  • Since 2000, the share of democrats who say healthcare is not the responsibility has increased from 19% to 30%, a rise of 11 percentage points.

Percentage Point Change Since 2006

  • Since 2006, the share of republicans who say healthcare is not the responsibility has increased from 57% to 86%, a rise of 29 percentage points.
  • Since 2006, the share of independents who say healthcare is not the responsibility has increased from 25% to 55%, a rise of 30 percentage points.
  • Since 2006, the share of democrats who say healthcare is not the responsibility has increased from 10% to 30%, a rise of 20 percentage points.

In 2006, the overall share was 69% to 28% in favor of the view that healthcare was the responsibility! Now it is 56% to 46% against.

This is a startling change in sentiment in 7 years, especially among independents.

Gallp comments “It is possible that this sharp change has been caused by a politicization of the issue as it became a major part of Obama’s campaign platform, and as he and other Democratic leaders pressed for and passed the ACA, sometimes called Obamacare, in 2010.“…

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French Tax Revolts

French Tax Revolts

Courtesy of 

They're Not Taking It Anymore

France's socialist president Francois Hollande, the 'welfare State incarnate' (h/t Gaspard Koenig), is in trouble. Not only has he has become the president with one of the lowest ever recorded approval ratings at a mere 15%, he apparently even feels it necessary to dispatch jackbooted goons to oppress those who are expressing their disapproval of him publicly. Incredibly, if one demands Hollande's resignation, one seems to be guilty of the crime of insulting the president as Mish reports.

Nevertheless, the French have never been known to take any unpopular policies dished out by their politicians lying down. Few people are as quick as the French to take to the streets to make their displeasure known. This is both a blessing and a curse, as it sometimes stands in the way of unpopular, but necessary reforms.

However, this time, the French are demonstrating over an issue that is well worth their displeasure: namely the relentless increase in regulations and taxes Hollande's government has subjected them to. According to a recent Bloomberg report, farmers are but the latest group to rise up in protest:

“French farmers snarled traffic into Paris as they drove tractors onto highways to protest against taxes and new regulations.

A total of seven roadblocks were up in the Paris region, according to the website of DiRiF, which runs the area’s road network, and which advised commuters to take public rail transport. Television news channels showed long lines of blocked traffic under rainy skies and near-freezing temperatures.

“I don’t think this is the right way to express one’s views,” Agriculture Minister Stephane Le Foll said in an interview in Le Figaro newspaper. “We are always open to dialogue.”

The action is the latest in tax revolts in France, which in recent weeks has seen horse-riding clubs, truckers and small retail outlets protesting against increased levies by President Francois Hollande’s government. Hollande, who’s seeking to narrow the government’s budget gap, has become the least popular French leader since 1958.

Today’s protest was called by farming associations in the Paris region. In addition to nationwide issues such as a proposed trucking levy and a higher value-added tax on fertilizer, the farmers are angry about anti-pollution laws that would limit tractor use on certain days. They’re also opposing changes to the European Union’s Common Agricultural Policy that will increase spending on livestock to the detriment of cereal farms, which predominate in the Paris basin.”

To this it should be added though that farmers in the EU are among the most heavily subsidized groups, with France the most vocal supporter of the EU's giant and wasteful agricultural subsidization schemes.

What is demonstrated here are two things: on the one hand, there is a limit what those who draw the short stick in terms of onerous taxation are willing to endure – see the fact that tax revolts have now become a widespread phenomenon, while the rich as well as many of the most productive citizens are simply fleeing the country.

On the other hand, the government is a captive of having bought off voters for decades with handouts that can now no longer be financed. If Hollande tried to cut spending, he would face protests as well. Once people become used to government handouts, they no longer are willing to do without them. Since the tax payers are by now probably a far smaller group than the tax receivers, he has decided to rather tussle with the former.

Squeezed Government

Bloomberg continues:

“Hollande is squeezed between pressure from the EU to cut the budget deficit and an electorate facing one of the world’s highest tax burdens.

Prime Minister Jean-Marc Ayrault this week said that while the government won’t back down on the VAT set to take effect in 2014, it will consider overhauling the tax system.

The French government collects 46 percent of gross domestic product in taxes. Standard & Poor’s estimates that government revenue amounts to 53 percent of GDP, once fines, dividends and other income are included — more than any country outside Scandinavia. French state spending totals more than 56 percent of GDP, the highest in the euro area, it says.”

One problem is that France seems long past the point on the 'Laffer curve' where raising taxes any further makes sense even from the government's perspective. As French budget minister Bernard Cazeneuve was recently forced to admit, tax revenues  came in € 5.5 billion lower than expected in 2013, due to a surprise decline in corporate tax receipts.

In times past, the government could simply rely on a mixture of debt issuance and debt monetization and currency debasement on the part of the central bank to keep up appearances. Under the euro regime and the associated treaty obligations regarding the permitted maximum of the public debt-to-GDP ratio, this is no longer possible. Or let us rather say: it is not at easy as it once used to be, as the French National Bank can no longer independently impose an 'inflation tax' on the citizenry´or keep up the pretense that the government can 'never default' on its debt due to the printing press (a comforting fiction upheld in all countries that have their own central bank).

The Maastricht criteria (or the new, even more stringent 'fiscal compact' criteria that are supposed to replace them) are unenforceable anyway, but every large scale sovereign debtor in the euro area probably lives in mortal fear of the markets since 2011 at the latest.


France's debt-to-GDP ratio remains more than 50% above the maximum of 60% permitted by the European treaties – click to enlarge.


Government spending is back at a record high, even while tax revenues come in below expectations – click to enlarge.

Charts by: Tradingeconomics

FTC Investigates Questcor: Serious Jeopardy for Synacthen Deal

FTC Investigates Questcor: Serious Jeopardy for Synacthen Deal

Courtesy of Citron Reports 
Stock Chart
Gadgets powered by Google

Analysts Comments tell you Everything You (and FTC investigators) Need to Know

On June 11, Questcor (NASDAQ:QCOR) surprised the investment community with news that it had acquired rights to Synacthen for the United States and up to 40 countries from Novartis.  Within weeks the stock had doubled on that news, adding 1.75 billion in market cap.  Why?

Simple.  Synacthen is a synthetic version of ACTH, the sole labeled active ingredient in Acthar, which is Questcor’s only source of revenue.  Synacthen has been prescribed in Europe for well over a decade for the same general spectrum of indications that Acthar is labeled for in the US – but at 1/1000th the price. 

So when Questcor, which previously had no pipeline, no investigational efforts, and no significant double-blind studies proving efficacy of Acthar vs Synacthen, acquired these rights, the analyst community  went all giddy –  fawning all over how this move protected Questcor’s barrier to competition with regard to the pricing of Acthar.  Questcor postured the deal as if they bought Synacthen just because they wanted to acquire a new drug, but anyone with half a brain knew that was bullshit.   

And thank God the FTC has more than half a brain … sorry, Questcor.

For the full story you won't find anywhere else, click here. 


New York Fed’s Strange New Role: Big Bank Equity Analyst

Courtesy of Pam Martens.

For more than two decades, financial columnist John Crudele has been hypothesizing on whether the Federal Reserve has its fingers in the stock market – directly or indirectly. Tampering with stocks is off limits to the Federal Reserve, as far as the public is aware. Its stated function is to serve as the central bank of the United States, focusing on achieving monetary policy through its open market activities in the bond markets and foreign exchange area.

But the New York Fed itself is helping to fuel suspicions about what’s going on within its cloistered walls at 33 Liberty Street in lower Manhattan. Of the 12 regional Federal Reserve Banks, the New York Fed is the only institution with a trading floor and highly sophisticated trading platforms. But despite multiple requests, the New York Fed will not provide a photo of the full trading area. Photos of its gold vault and currency vault are on line, but photos of the trading area is off limits, for unspecified reasons.

The resume of Kathleen Margaret (Katie) Kolchin is also noteworthy. On Saturday, September 17, 2011, Kolchin spoke at the annual Lehigh University Financial Services Forum. According to the handout given to participants, she works for the Federal Reserve Bank of New York, “performing equity research on the large cap US and European banks. Throughout her career as an Equity Research Analyst, Katie has covered various sectors, including Global Consumer Products, Global Real Estate, and Metals and Mining, at UBS Securities and also at a boutique investment bank.”

Even more curious is the resume Kolchin has posted at LinkedIn. The resume states that the New York Fed has an “internal equity research team,” of which she is the Senior Analyst. The team’s coverage includes Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, UBS, and Wells Fargo.

Kolchin more curiously states that she has “Developed a sell-side style research platform, including work product branding, distribution strategy, and internal client marketing presentations…” Kolchin adds that she uses her “capital markets experience and contacts” to garner insights into the market’s reaction to “stock and bond prices.”

“Branding”? “Distribution”? “Marketing”? Stock prices? What’s going on here. There are famous, long-tenured bank analysts all over Wall Street. It’s their job to deliver unbiased reports on the prospects for the stock performance (equity) of the big banks so that investors can make appropriate buy, sell and hold decisions. How is this the job of the New York Fed?

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Will ‘Too Big to Fail’ Banks Charge for Deposits?

Courtesy of Larry Doyle.

$82 billion.

What does that figure represent? The subsidy (aka competitive advantage) that accrues to our major banking institutions from favorable borrowing rates given their status as ‘too big to fail.’

Those tens of billions of dollars truly represent a nice, big head start for a handful of banks, and a withering assault on the precepts of free market capitalism for the rest of us.

As if $82 billion were not enough of a subsidy, let’s not forget that these banks pay you, as a depositor, virtually zero interest for the ‘privilege’ of holding your money there. Well, that may be changing. How so? How would you like to actually pay interest to the banks in order to keep your money in their institutions? Really? No way?

Yes way. 

Although you might think paying banks to hold your deposits is a scenario straight from The Twilight Zone, I would view it as more the price of protection imposed by those seen at work in the all time classic, The Godfather. Let’s navigate as the Financial Times sheds light onto a practice that smells like extortion:

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.

Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.

So while the Federal Reserve knows that it needs to begin tapering its printing press of $85 billion a month in its quantitative easing program, it is trying to figure out a means of further supporting the economy. The Fed hopes that lowering the rate it pays banks on their reserves would motivate the banks to put that money to work in the economy and generate a degree of velocity in the money supply from the current anemic levels.

The banks’ response that they would simply pass this lowering of rates along to depositors is indicative of the fact that our major banks are nothing more than an oligopoly that possess enormous pricing power.

As if an $82 billion subsidy and an ongoing wealth transfer from savers into the banks were not enough, the prospect that depositors might actually have to pay banks to hold their funds strikes me as being all too similar to the costs borne by many a small business that buy ‘protection’ imposed upon them from those running rackets.

And all this from an industry that the American taxpayer bailed out a mere five years ago.

With friends like these, who needs enemies?

Navigate accordingly.

Hussman’s Open Letter to the Fed; The Problem with Bubbles; Textbook Pre-Crash Bubble; Reflections on Not Chasing Bubbles; Integrity vs. Respect

Courtesy of Mish.

John Hussman’s last three weekly emails have been outstanding. Let’s take a look at a couple short snips from the first two articles and then a longer snip from his letter to the Fed.

Textbook Pre-Crash Bubble

November 11: Textbook Pre-Crash Bubble by John Hussman

Hussman: “The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak.

This is exactly how I have felt for two years running. It reminds me of 1999-2000 when tech stocks put on that last big rally. Avoiding a bubble is incredibly hard to do, and this one has been exceptional.

Here is a of chart from the article with Hussman’s comments.

Though I don’t believe that markets follow math, it’s striking how closely market action in recent years has followed a “log-periodic bubble” as described by Didier Sornette (see Increasingly Immediate Impulses to Buy the Dip).

A log periodic pattern is essentially one where troughs occur at increasingly frequent and increasingly shallow intervals. Frankly, I thought that this pattern was nearly exhausted in April or May of this year. But here we are. What’s important here is that the only way to extend that finite-time singularity is for the advance to become even more vertical and for periodic fluctuations to become even more closely spaced. That’s exactly what has happened, and the fidelity to the log-periodic pattern is almost creepy. At this point, the only way to extend the singularity beyond the present date is to envision a nearly vertical pre-crash blowoff.

At this horizon, even “buy-and-hold” strategies in stocks are inappropriate except for a small fraction of assets. In general, the appropriate rule for setting investment exposure for passive investors is to align the duration of the asset portfolio with the duration of expected liabilities. At a 2% dividend yield on the S&P 500, equities are effectively instruments with 50-year duration. That means that even stock holdings amounting to 10% of assets exhaust a 5-year duration. For most investors, a material exposure to equities requires a very long investment horizon and a wholly passive view about market prospects.

Hugh Hendry Throws In Towel

On November 22, InvestmentWeek reported long-time bear Hugh Hendry threw in the towel. ‘I can’t look at myself in the mirror’: Hendry reveals why he has turned bullish

Speaking at Harrington Cooper’s 2013 conference, Hendry said he is no longer fighting the “two-way feedback loop” which is continuing to boost risk assets.

“I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out. I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.”

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Inflation is Raging – If You Know Where to Look

Courtesy of John Rubino.

Most people – certainly most governments and economists – define inflation as a general rise in prices. But this is wrong. Inflation is an increase in the money supply, of which a rising general price level is just one possible result – and not the most common one.

More often, excessive money creation shows up as asset bubbles, where the new money, instead of flowing equally to all the products that are for sale at a given time, flow disproportionately into the ‘hottest’ asset classes. Readers who were paying attention in the 1990s might recall that the consumer price index was well-behaved while huge amounts of money flowed into financial assets, producing the dot-com bubble.

The same thing happened in the 2000s, when excess currency flowed into housing and equities. In each case, mainstream economists and government officials pointed to modest consumer price inflation as a sign that things were fine. And in each case they were simply looking in the wrong place and completely missing the destabilizing effects of an inflating money supply.

Now we’re at it again, with economists, legislators and central bankers using low consumer price inflation as a rationale for even easier money, while ignoring epic bubbles in sovereign bonds, equities, high-end real estate and collectibles around the world. These bubbles are the true evidence of inflation, and since they’re growing progressively larger, it’s accurate to say that inflation is high and accelerating. Let’s take some exotic examples, first from the art world:

Art prices painting a disturbing picture of inflation

The Francis Bacon painting “Three Studies of Lucian Freud” was sold for a whopping $142.4 million as part of a $691.6 million Christie’s sale on Tuesday night, making it the most expensive work of art ever sold at auction.

Some argue that the sale is giving us a message about inflation that investors aren’t getting from the action in gold, the Dollar Index, or the government’s official consumer price index data.

“Asset inflation took another leg higher last night,” wrote Peter Boockvar in a Wednesday morning note. “Thank you Federal Reserve, and thank you Bureau of Labor Statistics for not including art in the consumer price index.”

And this from…would you call it the jewelry world?:

Most expensive diamond ever sold goes for $83.2M

Sotheby’s just dropped the hammer on the most expensive diamond ever sold. The stone, a 59.6-carat flawless pink diamond called the “Pink Star,” was auctioned for $83.2 million, according to Sotheby’s. That made it the most expensive jewel or diamond ever sold at auction.

The previous record for a diamond sold at auction was $46 million, for a 24.68-carat pink diamond bought by Laurence Graff in 2010. The auction follows yesterday’s Christie’s sale of the largest fancy-vivid orange diamond known to exist, a 14.82-carat stone that sold for $36 million—the highest price-per-carat ever paid at auction.

Now, if the super-rich are going to covert their paper currency into tangible things – at a time when governments around the world are contemplating wealth taxes – they need safe, confidential storage. And the market is responding:

Über-warehouses for the ultra-rich

PASSENGERS at Findel airport in Luxembourg may have noticed a cluster of cranes a few hundred yards from the runway. The structure being erected looks fairly unremarkable (though it will eventually be topped with striking hexagonal skylights). Along its side is a line of loading bays, suggesting it could be intended as a spillover site for the brimming cargo terminal nearby. This new addition to one of Europe’s busiest air-freight hubs will not hold any old goods, however. It will soon be home to billions of dollars’ worth of fine art and other treasures, much of which will have been whisked straight from collectors’ private jets along a dedicated road linking the runway to the warehouse.

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Parallel fiscal universe
Freeports are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes. This benefit may have been originally intended as temporary, while goods were in transit, but for much of the stored wealth it is, in effect, permanent, as there is no time limit: a painting can be flown in from another country and stored for decades without attracting a levy. Better still, sales of goods in freeports generally incur no value-added or capital-gains taxes. These are (technically) payable in the destination country when an item leaves this parallel fiscal universe, but by then it may have changed hands several times.

Some thoughts
Clearly, inflation is raging. But because so much of society’s wealth is flowing to the top 1% — who after all can only drive one car at a time and tend to eat no more than the rest of us – inflation isn’t showing up in food, suburban houses or other mass-market products. Instead, trillions of disposable dollars are pouring into real assets that are then hoarded in mansions and high-end storage facilities. This is a truly startling asset grab when you think about it.

The one unique thing about this episode is that past migrations of capital from financial to tangible assets have included precious metals, which tend to be in demand when paper currencies are being mismanaged. That gold and silver aren’t participating is the strongest proof yet that they’re being manipulated to hide the impact of rising debt and excessive currency creation. After all, if you’re going to spend $100 million on art, your financial adviser will almost certainly tell you to diversify into farmland, oil wells and gold bars.

That this hasn’t happened doesn’t mean it won’t. Picture a chart tracking the tangible asset classes of the super-rich: art, jewelry, high-end London and Manhattan apartments, beachfront property, gold bullion, etc., things that exist in limited supply and will be prized no matter what the S&P 500 or 10-year Treasuries are doing. Virtually all the lines on that chart would would be looking parabolic right about now – except precious metals. A billionaire, trying to figure out where to move his next hundred mil would look at this chart and see one outlier, one thing that hasn’t yet gone through the roof, and make the obvious choice. That day is coming.

But looked at another way – in terms of the amount of paper currency being used to buy them – you could say that gold and silver are by far the most popular tangible assets in the world. China, India, and Russia between them have snapped up about 4,000 tons of gold this year, worth about $153 billion at the current price. That’s a lot more than was spent on art. It’s just that these purchases, massive though they are, aren’t moving the price.

But they are moving something: the gold reserves of the western central banks that are sending their gold eastward. Those reserves are falling, at an unsustainable rate. So Western central banks face a tough choice: keep sending their gold to Asia until it’s gone, or let the super-rich bid it into the stratosphere in line with art and diamonds. Sooner or later, the central banks will have to choose door number two.

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How Elite Overproduction Brings Disorder

Late weekend reading–this will last all week. Fascinating subject. 

How Elite Overproduction Brings Disorder

Courtesy of  at the Social Evolution Forum

Today published my opinion piece in which I analyze the connection between economic inequality and political instability. It starts:

Complex human societies, including our own, are fragile. They are held together by an invisible web of mutual trust and social cooperation. This web can fray easily, resulting in a wave of political instability, internal conflict and, sometimes, outright social collapse.

Analysis of past societies shows that these destabilizing historical trends develop slowly, last many decades, and are slow to subside. The Roman Empire, Imperial China and medieval and early-modern England and France suffered such cycles, to cite a few examples. In the U.S., the last long period of instability began in the 1850s and lasted through the Gilded Age and the “violent 1910s.”

We now see the same forces in the contemporary U.S. Of about 30 detailed indicators I developed for tracing these historical cycles (reflecting popular well-being, inequality, social cooperation and its inverse, polarization and conflict), almost all have been moving in the wrong direction in the last three decades.

Read the rest of the article on

As usual, when writing for popular outlets, one must sacrifice detail for readability. For those readers who are interested in exploring these issues in more detail I collected together the relevant blogs, under three headings. The first is on the relationship between inequality, elite overproduction, and cooperation (or, rather, failure of cooperation). The second series of blogs asks why inequality started growing during the late 1970s. And the third argues that the recent wave of shooting rampages is actually a surface indicator of deep structural-demographic pressures that have been growing in the last 30-40 years.

As always, comments are welcome. But don’t blame me for the title that slapped on my commentary! As all writers know, we have no control over the titles…

Elite Overproduction, Inequality, and Discord

The Double Helix of Inequality and Well-Being

The Strange Disappearance of Cooperation in America

The Strange Disappearance of Cooperation in America II

The Road to Disunion

Below the Surface: the Structural-Demographic Roots of the Current Political Crisis

Bimodal Lawyers: How Extreme Competition Breeds Extreme Inequality

Why Real Wages Stopped Growing

The End of Prosperity: Why Did Real Wages Stop Growing in the 1970s?

Cutting through the Thicket of Economic Forces (Why Real Wages Stopped Growing II)

A Proxy for Non-Market Forces (Why Real Wages Stopped Growing III)

Putting It All Together (Why Real Wages Stopped Growing IV)

More on Labor Supply (Why Real Wages Stopped Growing V)

Indiscriminate Mass Murder as a Form of Political Violence

Canaries in a Coal Mine

Canaries in a Coal Mine II. “We too are asking why”

Canaries in a Coal Mine III. Is the Trend Real?

Bryan Vila: A Criminologist Comments on ‘Canaries in a Coal Mine’

Canaries in a Coal Mine IV: Alternative Explanations

(Peter Turchin is vice president of the Evolution Institute and professor of biology and anthropology at the University of Connecticut. He is the author of “War and Peace and War: The Rise and Fall of Empires.” His blog, Social Evolution Forum, and a February 2013 articlein Aeon magazine, “Return of the Oppressed,” discuss many issues addressed in this article.)

Greece’s “Meaningless” Debt; Puppies Beg for Treats; Euro Debate Greece Isn’t Having; Sisyphean Tasks

Courtesy of Mish.

Greece’s “Meaningless” Debt

The Debt-to-GDP ratio in Greece is now at 175% and rising. Recall Troika statements said anything over 120% was unsustainable.

Yet each quarter debt and debt service ratios rise. Now, a new argument has arisen: Greece does not need debt relief because its maturities and payback time are large.

Charles Wyplosz, a professor of economics at the Graduate Institute of International and Development Studies in Geneva, takes issue with that belief in a Bloomberg article The Anti-Debt-Relief Crowd Is Wrong on Greece.

Since Chancellor Angela Merkel’s impressive victory at the polls, however, a push-back has begun, most recently from Klaus Regling, the managing director of Europe’s bailout fund, the European Stability Mechanism. He argued in an interview last week that by now the maturities on Greek debt are so long and the interest rate it pays so low that the scale of the debt pile itself has become “meaningless.”

This is a new and more sophisticated twist to the usual argument against debt relief, which is that forgiveness risks encouraging chronically undisciplined countries to again run up their budget deficits, safe in the knowledge that whenever debts get out of control they won’t have to pay. Both the old and the new arguments are wrong and fraught with risk.
Greek Depression

The expectation that debt relief should follow the German elections was based on a number of immovable facts. The first is that Greece is in the grip of an economic depression that has lasted six years, wiping out 30 percent of its gross domestic product — the same contraction the U.S. suffered during the Great Depression. Greece is bleeding profusely. The second fact is that after four years of austerity measures designed to reduce Greece’s public debt, it has instead continued to grow to 175 percent of GDP. This is despite the 2012 restructuring of bonds held by the private investors, which shaved 30 percent of GDP worth of debt from what Greece owes.

Regling said in his interview that Greece already enjoys concessional interest rates and long maturities on its debt that amount to a form of relief — and this is true. Last year, the average maturity of Greek debt was extended from about six years to 16 years, as a combined result of the private sector restructuring and new loans from the ESM. The annual interest rate that Greece has to pay on these new loans is low, about 3 percent.

Yet whether Greece can pay the interest on its loans for now is not the issue. Until Greece’s nominal GDP growth, currently sharply negative, rises above the interest rate it pays on its debts, these will go on increasing as a proportion of the economy. This is simple arithmetic: Debt service costs add to the debt, the numerator, faster than GDP, the denominator, rises.

It is true that debt relief could prove contagious, but the answer to this objection is: “Yes, and so it should.” Greece is not the only euro area economy saddled by an unsustainable public debt.

Greece needs a debt relief package soon or its only option will be inflation, which means leaving the euro area. Even if this is a pessimistic view, it is a very real risk. Merkel must now weigh that risk against the political cost of reversing herself.

Puppies Beg for Treats

Continue Here

Now what?

Now what?

Courtesy of 

I try not to make market or economic predictions because they will mostly be wrong. Everyone else is mostly wrong too but most won’t admit it. I will, whatever.

While I admit to have no ability to forecast markets, I am a pretty good predictor of what people will do with their investments –  I’ve discussed it here in case you’re interested in why I think that. I jokingly call myself America’s foremost authority on investor fads and trends but , as they say, there’s a kernel of truth in every joke. The truth is that this is actually my obsession and I chronicle it seven days a week (my annual graphic here).

Anyway, here’s Bloomberg Friday:

Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen ifinterest rates keep rising.

Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. (MORN) estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.

The move marks a reversal from the four years through 2012, when investors put $1 trillion into fixed income as the financial crisis drove many to redeem from stocks and miss out as the Standard & Poor’s 500 Index almost tripled from its low. Rare losses this year in core bond portfolios, coupled with a 25 percent gain in the S&P 500, spurred the switch back to equities that some professionals call risky performance chasing.

This shift’s having happened is the culmination of virtually all of the work I have done at this blog since the fall of 2012. I could post hundreds of links below or you could take my word for it. Fine, maybe just this one: 22 Times, You Poor, Dumb Bastards (October 2012). I know I may have alienated a few readers over the last year but I really felt it was more important to say what I felt and to speak forcefully at times.

And now that this has all played out, I’m not exactly sure how to feel. I got this sea change in attitudes mostly right but, unfortunately, I don’t have the slightest idea as to what might happen next. We’ve swung back to equilibrium in both valuation and sentiment pretty quickly this past year – from abject stock hatred to a low-simmering boil of bullishness. Maybe this goes all the way to Dow 20,000 or maybe we get that 30% pullback that everyone’s so desperate for first.

I don’t know what will happen.

But I’ll try my best to make sense of what I see – specifically through the prism of investor mood and behavior – just like always.

Read Also:

My Edge and the Crossroads (TRB)

Investment Fads and Themes by Year, 1996-2012 (TRB)

Aggressively Toe-Dipping, LOL (TRB)

I don’t care, I love it! (TRB)

Lo Siento (TRB)