Archives for May 2014

Why is a raven like a writing desk?

Why is a raven like a writing desk?

By Ilene

In her new book, The Mad Hatter: The Role of Mercury in the Life of Lewis Carroll, my friend Mary Hammond explores Lewis Carroll and the origin of his Alice in Wonderland character, the Hatter.

The secret of using mercury in felt hat manufacture came to England in the late 1700s, causing hatters to suffer the toxic effects of long term mercury exposure. Because we now know that mercury poisoning caused hatters to become emotionally and mentally disturbed, when we think of Lewis Carroll’s hatter, we often assume that Carroll’s hatter was intended to be suffering from mercury poisoning. This assumption has become so deeply rooted in our culture that when Johnny Depp acted out his hatter role in the latest Alice in Wonderland movie, he suggested that the character be portrayed as orange, a homage to one of the early names for use of mercury in hat making, “carrotage.”

But evidence suggests that the academic classes had no understanding that hat makers were suffering from mercury poisoning. And if Carroll's hatter was not intended to be suffering from mercury poisoning, why was he so crazy?  Well, to start with, it wasn’t only hatters who were exposed to toxic amounts of mercury in the 1800s. Mercury was extremely prevalent. It was even used in after dinner pills to stave off indigestion.

Could it be that Lewis Carroll’s Mad Hatter was based on himself? Mary presents evidence that the Hatter reflects Carroll's insight into his own psyche. Mary also solves the riddle:

Why is a raven like a writing desk?  Because a raven is nevar backwards and a writing desk is always for words.

The Mad Hatter: The Role of Mercury in the Life of Lewis Carroll is available for FREE on kindle for the next four days. It makes for fascinating weekend reading.

 

Why is a raven like a writing desk?

Why is a raven like a writing desk?

379px-MadlHatterByTenniel.svgBy Ilene

In her new book, The Mad Hatter: The Role of Mercury in the Life of Lewis Carroll, my friend Mary Hammond explores Lewis Carroll and the origin of his Alice in Wonderland character, the Hatter.

The secret of using mercury in felt hat manufacture came to England in the late 1700s, causing hatters to suffer the toxic effects of long term mercury exposure. Because we now know that mercury poisoning caused hatters to become emotionally and mentally disturbed, when we think of Lewis Carroll’s hatter, we often assume that Carroll’s hatter was intended to be suffering from mercury poisoning. This assumption has become so deeply rooted in our culture that when Johnny Depp acted out his hatter role in the latest Alice in Wonderland movie, he suggested that the character be portrayed as orange, a homage to one of the early names for use of mercury in hat making, “carrotage.”

But evidence suggests that the academic classes had no understanding that hat makers were suffering from mercury poisoning. And if Carroll’s hatter was not intended to be suffering from mercury poisoning, why was he so crazy?  Well, to start with, it wasn’t only hatters who were exposed to toxic amounts of mercury in the 1800s. Mercury was extremely prevalent. It was even used in after dinner pills to stave off indigestion.

Could it be that Lewis Carroll’s Mad Hatter was based on himself? Mary presents evidence that the Hatter reflects Carroll’s insight into his own psyche. Mary also solves the riddle:

Why is a raven like a writing desk?  Because a raven is nevar backwards and a writing desk is always for words.

The Mad Hatter: The Role of Mercury in the Life of Lewis Carroll is available for FREE on kindle for the next four days. It makes for fascinating weekend reading.

IFrame

The United States Of Secrets (Part 2)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

On the heels of this week's mainstream US media interview with Edward Snowden, it appears the general public is growing increasingly aware of the US surveillance leviathan's reach. In the following (part 2 of a 2-part series, part 1 here), PBS' FrontLine reveals the dramatic inside story of how the U.S. government came to monitor and collect the communications of millions of people around the world – and the lengths they went to trying to hide the massive surveillance program from the public. From 9/11 to Edward Snowden and on to NSA reform – what must be done… a must-watch for all US citizens.

Part 1 Here

Part 2:

Here Comes QE In Financial Drag: Draghi’s New ABCP Monetization Ploy

Courtesy of David Stockman via Contra Corner

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) – the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again  thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year.

What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!

And that gets to the heart of monetary central planning. It doesn’t matter what the central bank buys with the digital credits it transfers to sellers. Purchasing government debt, Fannie Mae securities, IBM bonds or corporate equities, as has been done by the BOJ and Bank Of Israel under the new Fed Vice-Chairman, has a common effect.  That is, it raises the price of the purchased “assets” relative to what would obtain in the unfettered market, and injects fiat liquidity into the financial system in a manner that promotes speculation and excessive risk-taking.

Thus, if some clever Wall Street operators could figure out how to bundle sea shells and securitize them, central bank purchase of the resulting ABCP would be no different than purchase of treasury notes or Fannie Mae paper.

Unfortunately, the German keepers of the flame of financial orthodoxy have been too narrow in their focus on central bank “monetization” of government debt. To be sure, they are correct in maintaining that central bank purchase of sovereign debt inexorably promotes fiscal profligacy among the politicians. The fact that the debt of nearly ever DM government has soared to 100% of GDP and beyond since the era of monetary central planning got going in the 1990s is undeniable evidence.

But the true economic sin lies in the fiat credit generated by central banks monetization, not the particular type of “asset” purchase by which it is accomplished. Stated differently, debt which is priced at honest market rates and is funded by new savings from businesses or households is economically healthy; it involves a deferral of current consumption in order to finance a longer-lived project or productive asset that promises a return in excess of the funding cost.

By contrast, central bank balance sheet expansion – that is, monetization of government debt or asset-backed sea shells – results in borrowing without saving; investment without honest hurdle rates; and the re-rating of existing asset prices based on carry trades, not an elevation of expected economic returns.

So in clearing the way to “monetization” of ABCP, the ECB is simply heading down the path of Bernanke/Yellen style quantitative easing though a transparent gimmick that may or may not bamboozle the Germans. But it most certainly will succeed in snookering the financial press as the post below from the ever gullible Brian Blackstone of the WSJ clearly conveys.

But here’s the thing. The ABCP market is not a place where hard-pressed business borrowers or consumer’s can find a new source of credit outside the banking system. Instead, it is a financial engineering arena in which banks will have a chance to mint phony overnight profits through an accounting expedient known as “gain-on-sale”.

What that means is that when credit card receivables or small business loans are “bundled” by their commercial bank issuers and sold into an off-balance conduit which issues ABCP against these “assets”, the life-time profits of these loans can be booked instantly. Indeed, modern technology allows the credit card swipe to be booked as a profit nearly the same nanosecond as it happens, and accounting convention allows the profits from a 7-year car loan issued at 110% of the vehicle’s value to be recorded virtually at the time it rolls off the dealer lot.

The smoking gun with respect to the current ECB ploy is contained in the graph below for the US ABCP market. As is evident, it went parabolic in the run-up to the 2008 meltdown, but has virtually vanished since. In fact, current outstandings of about $250 billion are 80% below the July 2007 peak.

But there is nary a word in the financial press about credit card or auto loans being too “tight” in the US for a simple reason. Banks are more than happy to issue new loans to credit-worthy business and consumer borrowers and hold them to maturity on their own balance sheets. After all, with $2.7 trillion of “excess reserves” parked at the New York Fed, “funding” is not an issue. Moreover, the whole point of the Fed’s interest rate repression regime is to create an artificially large profit spread on bank loan books in order to revive dodgy balance sheets.

So we get back to the same old ritual of Keynesian central banking: namely, if you only have a hammer, everything looks like a nail. In truth, the only tool that central banks actually have is monetization of existing assets and sea shells. Accordingly, they invent excuses for more of the same, and devise clever stratagems to disguise what they are doing.

In the present instant, the ECB and its acolytes have been gumming for several months now about “low-flation”. But that is ridiculous—if the claim is viewed in any context except the run-rate of the last few hours or quarters.

Yes, during the last 12 months, euro area inflation has come in near what used to be viewed as salutary price stability at 0.8%. But in the three years before that it averaged about 1.9% or about as close to the ECB’s so-called inflation target as your can get. Indeed, moderate inflation is endemic in the European economies. It has averaged 1.8% since the eve of the 2008 crisis and essentially the same since 1997.

Europe has more than enough inflation and doesn’t need a revived ABCP market to generate loans for the un-creditworthy. Today’s announcement is just part of Draghi’s desperate attempt to deliver QE next week in a manner which will not elicit a loud “nein!” from his German overseers.

Dallas Fed lays an important Foundation for Fisher Effect

 

Dallas Fed lays an important Foundation for Fisher Effect

Courtesy of Edward Lambert, Angry Bear

There is a movement taking place to understand the Fisher Effect. What is the Fisher Effect? Basically the idea is that low and stable nominal interest rates from the central banks leads to low and stable inflation.

I have been writing here on Angry Bear that the Fisher Effect is made stronger when the nominal rates are projected to be stable years into the future. And we are seeing now that central banks are projecting abnormally low nominal rates for years to come.

J. Scott Davis, Adrienne Mack and Mark A. Wynne from the Dallas Fed have presented an important foundation for the Fisher Effect we are seeing. They wrote an article, Central Bank Transparency Anchors Inflation Expectations. In this article they describe how the transparency of central banks have risen over the years. And they also write how inflation expectations have become increasingly anchored over time, not only in the US but other advanced countries. They write…

“Among advanced countries, a review shows a strong relationship between an index of central bank transparency and one measuring the anchoring of inflation expectations.”

How do transparency and a stronger anchoring of inflation expectations make the Fisher Effect stronger?

The Fisher Effect is slippery like a fish. You need to have the right economic conditions for it to appear. Here are 4 conditions.

  1. Productive capacity in relation to Effective demand. When productive capacity is low and effective demand is high, like after a war, there are forces to generate higher inflation. These forces overpower the Fisher Effect of low nominal rates to keep inflation low. On the other hand, we currently have a situation where productive capacity is high in relation to effective demand. The current situation supports low inflation.
  2. Past stability of nominal rates. For 5 years, the nominal rates from many central banks have changed very little. Most are stuck at the zero lower bound. Thus, nominal rates have had little impact to actively influence inflation expectations. So inflation expectations have had to react to broader economic conditions, which in themselves are based on a stable nominal rates, high productive capacity and low effective demand.
  3. Projected stability of nominal rates. When there is more certainty that nominal rates will stay low within a narrow range even in the face of future economic growth, it is safer for firms to embed lower price levels in contracts and business plans. The goal is to maximize returns and profits for investors and firms alike. So they arrive at a balanced relationship. Low nominal rates make it safer for borrowing firms to embed lower prices, because there is less of a need to hedge against possibly rising nominal rates. Likewise, it is safer for lending firms to accept lower price inflation.
  4. Strongly anchored inflation expectations. When the monetary policy coming from a central bank is more transparent and stable, it is even easier for firms to embed stable inflation expectations. If there was more uncertainty, we would see firms hedging more by embedding the possibility of higher prices just in case nominal rates rose. A greater uncertainty over future nominal rates can lead to greater embedded possibilities of higher inflation.

Now the authors of the Dallas Fed article give evidence for the 4th point to support the Fisher effect. There has been an increasingly greater transparency of monetary policy from central banks. The intent was to create greater credibility. They have achieved that. Yet, at the same time, probably without realizing it, they have created a trap for low inflation alongside their reasoning for low nominal interest rates.

One might assume that the Fisher Effect leads to only one solution for low inflation. That is to raise nominal rates. However, that solution creates a disinflationary effect in the short term. Well, there is another solution. Central banks could create more uncertainty in their monetary message wthout actually raising nominal rates. The uncertainty can form cracks in the Fisher Effect, which allow for higher embedded inflation hedging in business plans.

Central banks are being too credible, too transparent, too stable with their low nominal rates, too certain, too narrow… They are also being too stubborn in their thinking that ever lower nominal rates will eventually make inflation rise. Their stubbornness may lead to an underlying unstable uncertainty about the future, which could generate uncontrollable effects on inflation.

The best practical solution for low inflation is for central banks to allow the possibility of higher nominal rates in the future and not lock themselves into a narrow range of abnormally low projected nominal rates.

 

Wine Country Conference II Videos: Stephanie Pomboy “Confessions of Ben Bernanke”, Mebane Faber “Global Stock Valuations”

Courtesy of Mish.

A second set of Wine Country Conference Speaker Presentation videos is now available.

This set features Stephanie Pomboy on the “Confessions of Ben Bernanke“, Mebane Faber on “Global Stock Valuations“, and panel a discussion with John Hussman, Mebane Faber, Stephanie Pomboy. The final set will be out next week.

This Year’s Charity

As with last year, Wine Country Conference II was for charity. This year’s cause was Autism. Many of the speakers donated all or part of their expense honorarium to the cause. I did as well, losing money, to put this event on.

Once again, John Hussman and the Hussman Foundation was amazingly generous. The foundation will match donations dollar for dollar, up to $50,000!

If you enjoy the videos (or even if you don’t) please Make a Donation to the Autism Society.

Stephanie Pomboy “Confessions of Ben Bernanke”

Mebane Faber “Global Stock Valuations”

John Hussman, Mebane Faber, Stephanie Pomboy Panel Discussion

Continue Here

All The “Dislocation, Dislocation, Dislocation” Charts You Can Eat

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

US stocks continue to breach record levels while highly rated government bond yields slide – – all with the prospect of continued support from the world’s central banks.

Indeed, expectations that the European Central Bank would unveil a package of supportive policy measures when it meets next week were bolstered by the release of select weak eurozone stats. It must be noted that all this cheap money is finding its way into various asset classes, most notably equities and debt products. Hence, record levels for Wall Street alongside historically low sovereign bond yields.

This wild euphoria is supported somewhat by signs of an improving economic environment, notably in the US, but remains way ahead of market fundamentals. U.S. government bonds are heading for a fifth monthly gain, the longest since 2006, as growth — but not rapid growth — underlined an appetite for long-term debt of all stripes. The new ranking of global competitiveness has just been released and underscores some of the key themes in these pages. The US leads, Europe struggles to recover, and big emerging markets grapple with some new realities.

Given the ever tighter spreads and the relentless march of markets, some, including the European Central Bank, have warned that investors' wild pursuit of higher returns could be creating new price bubbles, sounding the alarm as financial markets chase quick gains. In a strongly worded message they clearly underscored concerns that have been penned in these pages as well, There may be an ugly downside to runaway market enthusiasm. The ECB cautioned that the dash for higher returns could suddenly unravel, sending the investor herd charging in the opposite direction.

Easy money and the timing of the Fed’s policy shift continue to dominate across the globe. Recovery is widely assumed for the next two years. But deep-seated weaknesses have also become more evident.

 

 

Very obvious financial vulnerabilities, repercussions from various political stalemates and serious geopolitical concerns are aggravating the problems of clearly insufficient growth in the world economy. And let’s not forget that many of the challenges cannot be resolved easily…

Full Abe Gulkowitz The PunchLine letter below…

TPL May 29 14

Bottoms Up or Top Down

Bottoms Up or Top Down

Insider Action: Still Positive Despite New Highs

By Dr. Paul Price of Market Shadows

I put more faith in actual transactions with money on the line than sentiment surveys where people can say one thing while doing something else. The Thomson Reuters Insider Sell-Buy ratio has proven to be especially prescient in term of calling short-term (weeks to months) action in the broad market.

Open market corporate officer action that registers bullishly often coincides with buying opportunities. Seeing the indicator along with the corresponding movements in the S&P 500 confirms this.

Insider Sell-Buy   as of May 30, 2014

 

Company officials understand their own firms intimately and welcome chances to buy low and sell high. Individual investors often go the other way by chasing momentum stocks that have already risen sharply.

The latest filings show insider buys in mostly lesser-known names.

 

Insider Buys week of May 26, 2014

The recent insider sell list was almost all in big name stocks.

Insider sells    May 26, 2014

Logic and history say it is better to invest ‘bottoms up’ based on valuation than ‘top down’ based on macro-economic factors. Even if you knew world event in advance the stock market action is often contrary to what might be expected.

Had you been privy to last week’s negative Q1 GDP announcement ahead of schedule would you have looked for bullish action?

Bottoms Up or Top Down

Sell in May, Keep Profits Away

Sell in May, Keep Profits Away

By Dr. Paul Price of Market Shadows

Cliches are fine to listen to but often become expensive when followed blindly.  All the major indices rallied in May and finished the month positive year to date. The DJIA is now the laggard, up just 0.85% since Dec. 31, 2013. The Standard & Poors 500 is the clear winner so far at plus 4.07% YTD.

The Nasdaq Composite’s weekly gain of 1.36% made up 86% of its total return in 2014.

YTD returns as of May 30, 2104

 

Market Shadows is ahead by 7.9% YTD and + 50.6% since we got our Virtual Value Portfolio rolling on Oct. 26, 2012.

VVP as of May 30, 2014

The other old adage, “Cash is king” has become meaningless in a ZIRP world. The only reason to hold cash today is for paying bills and taxes or as temporary parking between long-term investments.

Accelerating money creation by the world’s central banks makes the risk of being ‘in the market’ pale compared with the gradual destruction of buying power being engineered by the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.

In the ‘new normal’ Zero Interest Rate Policy [ZIRP] environment, fiscal prudence and deferred gratification are no longer rewarded. Instead, savers are penalized as public policies encourage immediate consumption. Wealth confiscation has been become a worldwide phenomenon as Central Banks hold interest rates down and rush to devalue their currencies.

Sovereign debt auctions have also been distorted. For example, Greece, Spain and Puerto Rico will not be able to pay back principal on their debts without rolling the debts over. But central banks and other shill buyers artificially prop up the demand side. Further, countries such as Iceland, Poland and Cyprus have blatantly stolen private wealth ‘for the good of the state.’ Other countries may follow these disturbing precedents.

 

In addition to cash being devalued and the risk of cash being outright stolen, government statistics (e.g. the CPI and GDP), which people rely on in making financial decisions, cannot be trusted. For example, the Q1 2008 GDP number was just revised dramatically lower six years after the fact. And newly adopted accounting gimmicks, such as counting R&D spending and earnings from drug dealers and prostitution in the GDP, are designed to bolster GDP numbers and allow for even more government borrowing.

Forget the Fed’s ‘taper talk.’ With over $17 trillion in national debt, plus some multiple of that in unfunded pension, social security and medical care liabilities, the Federal Reserve won’t voluntarily raise interest rates significantly. Higher rates would break the U.S. government’s budget. It could no longer bear debt service expenses at ‘old normal’ rates.

Fiat-based currency offers the least chance for holding onto true wealth. Stocks are the best alternative because they are liquid and can be marked-up as paper money is marked-down.

We are in uncharted economic territory and past the point of no return.

Enjoy the fruits of your labor while you can. Invest wisely and hope the day of reckoning comes later, rather than sooner.

 

Other People's Luck

 

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

The following section was added after initial publication:

When currencies hyper-inflate, stocks tend to go wild to the upside. Current examples: Venezuela & Argentina.

Official inflation numbers may not reflect real life experiences.

Inflation Rates of Venezuela & Argentina

Venezuelan & Argentine Stock Market Returns   May 31, 2014

Has The Next Recession Already Begun For America’s Middle Class?

Courtesy of Michael Snyder of The Economic Collapse

Has the next major economic downturn already started? The way that you'd answer that question might depend on where you live. If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not. In those areas, the economy is doing great and prices for high end homes are still booming. 

But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class. Major retailers had an absolutely dreadful start to 2014 and home sales are declining just as they did back in 2007 before the last financial crisis. Meanwhile, the U.S. economy continues to lose more good jobs and 20 percent of all U.S. families do not have a single member that is employed at this point. 2014 is turning out to be eerily similar to 2007 in many ways, but most people are not paying attention.

During the first quarter of 2014, earnings by major U.S. retailers missed estimates by the biggest margin in 13 years. The "retail apocalypse" continues to escalate, and the biggest reason for this is the fact that middle class consumers in the U.S. are tapped out. And this is not just happening to a few retailers – this is something that is happening across the board. The following is a summary of how major U.S. retailers performed in the first quarter of 2014 that was put together by Jim Quinn:

Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%

Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%

Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%

JC Penney Thrilled With Loss of Only $358 Million For the Quarter

Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%

Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%

Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores

Gap Income Drops 22% as Same Store Sales Fall

American Eagle Profits Tumble 86%, Will Close 150 Stores

Aeropostale Losses $77 Million as Sales Collapse by 12%

Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%

Macy’s Profit Flat as Comparable Store Sales decline by 1.4%

Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%

Urban Outfitters Earnings Collapse by 20% as Sales Stagnate

McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%

Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster

TJX Misses Earnings Expectations as Sales & Earnings Flat

Dick’s Misses Earnings Expectations as Golf Store Sales Plummet

Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%

Lowes Misses Earnings Expectations as Customer Traffic was Flat

Plummeting retail sales are not the only sign that the U.S. middle class is really struggling right now. Home sales have also been disappointing for quite a few months. This is how Wolf Richter described what we have been witnessing…

This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.

Then it spread to new-home sales: in April, they dropped 4.7% from a year ago, after March's year-over-year decline of 4.9%, and February's 2.8%. Not a good sign: the April hit was worse than February's, when it was the weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).

We have already seen that in some markets, in California for example, sales have collapsed at the lower two-thirds of the price range, with the upper third thriving. People who earn median incomes are increasingly priced out of the market, and many potential first-time buyers have little chance of getting in. In San Diego, for example, sales of homes below $200,000 plunged 46% while the upper end is doing just fine.

As Richter noted, sales of upper end homes are still doing fine in many areas.

But how long will that be able to continue if things continue to get even worse for the poor and the middle class? Traditionally, the U.S. economy has greatly depended upon consumer spending by the middle class. If that continues to dry up, how long can we avoid falling into a recession?  For even more numbers that seem to indicate economic trouble for the middle class, please see my previous article entitled "27 Huge Red Flags For The U.S. Economy".

Other analysts are expressing similar concerns. For example, John Williams of shadowstats.com said, during a recent interview:

We’re turning down anew. The first quarter should revise into negative territory… and I believe the second quarter will report negative as well.

That will all happen by July 30 when you have the annual revisions to the GDP. In reality the economy is much weaker than that. Economic growth is overstated with the GDP because they understate inflation, which is used in deflating the number…

What we’re seeing now is just… we’ve been barely stagnant and bottomed out… but we’re turning down again.

The reason for this is that the consumer is strapped… doesn’t have the liquidity to fuel the growth in consumption.

Income… the median household income, net of inflation, is as low as it was in 1967. The average guy is not staying ahead of inflation…

This has been a problem now for decades… You were able to buy consumption from the future by borrowing more money, expanding your debt. Greenspan saw the problem was income, so he encouraged debt expansion.

That all blew apart in 2007/2008… the income problems have continued, but now you don’t have the ability to borrow money the way you used to. Without that and the income problems remaining, there’s no way that consumption can grow faster than inflation if income isn’t.

As a result – personal consumption is more than two thirds of the economy – there’s no way you can have positive sustainable growth in the U.S. economy without the consumer being healthy.

The key to the health of the middle class is having plenty of good jobs. But the U.S. economy continues to lose good paying jobs. For example, Hewlett-Packard has just announced that it plans to eliminate 16,000 more jobs in addition to the 34,000 job cuts that have already been announced.

Today, there are 27 million more working age Americans that do not have a job than there were in 2000, and the quality of our jobs continues to decline. This is destroying the middle class. Unless the employment situation in this country starts to turn around, there is little hope that the middle class will recover any time soon.

Meanwhile, there are emerging signs of trouble for the wealthy as well.

For instance, just like we witnessed back in 2007, things are starting to look a bit shaky at the "too big to fail" banks. The following is an excerpt from a recent CNBC report

Citigroup has joined the ranks of those with trading troubles, as a high-ranking official told the Deutsche Bank 2014 Global Financial Services Investor Conference Tuesday that adjusted trading revenue probably will decline 20 percent to 25 percent in the second quarter on an annualized basis.

"People are uncertain," Chief Financial Officer John Gerspach said of investor behavior, according to an account from the Wall Street Journal. "There just isn't a lot of movement."

In recent weeks, officials at JPMorgan Chase and Barclays also both reported likely drops in trading revenue. JPMorgan said it expected a decline of 20 percent of the quarter, while Barclays anticipates a 41 percent drop, prompting it to announce mass layoffs that will pare 19,000 jobs by the end of 2016.

Remember, very few people expected a recession the last time around. In fact, Federal Reserve Chairman Ben Bernanke repeatedly promised us that we would not have a recession and then we went on to experience the worst economic downturn since the Great Depression.

It will be the same this time. We will continue to get an endless supply of "hopetimism" from our politicians and the mainstream media, and they will continue to fill our heads with visions of rainbows, unicorns and economic prosperity. But then the next recession will strike and most Americans will be completely blindsided by it.

Insider Trading Bombshell: FBI/SEC Investigating Carl Icahn & Phil Mickelson

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Did you hear the one about the Vegas gambler, the Pro golfer, and the Wall Street insider?

Straight off the pages of some Hollywood script, the Wall Street Journal reports that Federal investigators are pursuing a major insider-trading probe involving finance, gambling and sports, examining the trading of investor Carl Icahn, golfer Phil Mickelson and Las Vegas bettor William "Billy" Walters. All three men have denied any investigations or "no comment"-ed about "well timed" stock trades in Clorox in 2011 – around the time Icahn made a $10.2bn bid for the company.

Mr. Walters and Mr. Mickelson, 43, play golf together; and rather comedically, Mr. Icahn said he didn't know who Mr. Mickelson was…?

 

 

Via The Wall Street Journal,

The Federal Bureau of Investigation and the Securities and Exchange Commission are examining whether Mr. Mickelson and Mr. Walters traded illicitly on nonpublic information from Mr. Icahn about his investments in public companies, people briefed on the probe said.

Investigators are examining whether over the past three years Mr. Icahn tipped Mr. Walters—famous in Las Vegas for his sports-betting acumen—about potentially market-moving investments by Mr. Icahn's company.

The FBI and SEC are examining whether Mr. Walters on at least one occasion passed a tip on to Mr. Mickelson, these people said, and are studying the two men's trading patterns.

The denials were quick to come…

"We do not know of any investigation," Mr. Icahn said on Friday. "We are always very careful to observe all legal requirements in all of our activities." The suggestion that he was involved in improper trading, he said, was "inflammatory and speculative."

"Phil is not the target of any investigation. Period," said a lawyer for Mr. Mickelson,

When asked to comment about the investigation, Mr. Walters, reached by phone on Friday, said, "I don't have any comment about anything," and then hung up.

They kinda sorta know each other… kinda…

Mr. Icahn met Mr. Walters, 67, through a mutual acquaintance when Mr. Icahn's company owned the Stratosphere Hotel in Las Vegas. Mr. Icahn bought the Stratosphere in 1998 and sold it along with several other properties for $1.2 billion in 2008.

The two struck up a friendship. Mr. Icahn was once an avid poker player and enjoys betting on football games. The two have spoken about stocks.

Mr. Walters and Mr. Mickelson, 43, play golf together, said people familiar with their relationship. Sometimes Mr. Walters has suggested stocks for Mr. Mickelson to consider buying, one of the people said.

Mr. Mickelson, who has one of the most loyal followings of top professional golfers, has won the prestigious Masters three times.

Mr. Icahn said he didn't know who Mr. Mickelson was.

It seems the trades in question are focused on Clorox in 2011… (and also Dean Foods)

The government investigation began three years ago after Mr. Icahn accumulated a 9.1% stake in Clorox in February 2011, said the people briefed on the probe. On July 15, 2011, he made a $10.2 billion offer for Clorox that caused the stock to jump.

Well-timed trading around the time of his bid caught the attention of investigators, who began digging into the suspicious trading in Clorox stock, the people familiar with the probe said.

 

The investigators expanded their probe to look at trading patterns by Mr. Walters and Mr. Mickelson relating to Dean Foods Co. , said the people briefed on the probe. The FBI, following its approach to Mr. Mickelson on Thursday, expressed an interest in his trading in Dean Foods, a person familiar with the situation said.

We are sure somewhere Bill Ackman is laughing his ass off…

Cue CNBC defense… and Icahn's twitter feed seems awkwardly quiet on the matter.

 

The Rise of Africa… and How To Play It

 

The Rise of Africa… and How To Play It

By Adam J. Crawford at Casey Research

Sub-Saharan Africa (SSA).

Say the words and most people think of poverty… famine… epidemics… political strife… sectarian violence. Yet, just recently, Microsoft announced a new investment on the continent, calling Africa a “game changer in the global economy.” So what gives?

Game Changer?

For starters, we concede SSA faces challenges… relatively low per-capita GDP, relatively low life expectancy, and more than its fair share of military conflict. Nevertheless, considerable progress is being made.

Politically, things have changed dramatically over the last two decades. In a recent report from financial advisory service firm KPMG titled “African Emergence—The Rise of the Phoenix,” researchers explained why…

The end of the Cold War more than two decades ago brought new freedom to Africa. People started to demand political representation and called on governments to be more transparent. Democratic features were introduced and a vibrant civil society emerged.

Influenced by this political renaissance, governments began to act more responsibly. Several ended hostilities with neighboring countries.

With political change came economic change.

Beginning in the 1990s, fledgling African democracies increasingly accommodated private enterprise by reducing trade barriers, cutting corporate taxes, and privatizing state-run industries. By the time the 2000s rolled around, these reforms started to gain traction. In 2000, GDP for all of SSA was a meager $331 billion. By 2012, it had quadrupled to $1.3 trillion.

As far as the future is concerned, with more stable political and economic environments and the unleashing of market forces, SSA will reap the benefits of two megatrends:

1) growing demand for natural resources;

2) increasing consumer spending by an expanding middle class.

Let me explain…

As the world’s population grows and per-capita consumption rises in emerging economies, the demand for natural resources will increase… and SSA has plenty of natural resources, such as gold, oil, chromium, and platinum. But as important as natural resource exports will be, they aren’t the region’s only engine for economic growth.

Consumerism is also a powerful factor, and it’s being driven by an emerging middle class. More and more SSA citizens are moving from subsistence farming to higher-paying urban jobs. In 2000, about 59 million African households were earning discretionary income; by 2020, discretionary income will be available to 128 million households.

All of this points to the expectation of continued economic growth. Economists at the International Monetary Fund estimate that by 2018, GDP for SSA will reach $1.9 trillion. That amounts to a compounded annual growth rate of 7%, which compares favorably with estimates for Latin America and developing Asia of 4.7% and 8.1% respectively.

Leapfrogging to the Tech Frontier

Microsoft is not the only big tech company betting on growth opportunities in SSA. Intel, Google, Hewlett-Packard, and IBM have also invested heavily in the region. But are these companies a little early? Won’t the benefits to tech come after the buildup of roads, power grids, and healthcare systems?

Not really.

Whereas in developed countries, high tech has been “bolted onto” existing infrastructures years after they have been created, in developing regions high tech can be integrated in as the infrastructure is constructed. For example, as the US struggles to mesh electronic health records with the healthcare system and smart-grid technology with the power grid, developing economies can build these features right into their nascent systems at the outset. In the words of John Kelly, head of research at IBM, Africa “can leapfrog straight to the tech frontier, without worrying about adapting old systems…”

In addition, the Cloud is adaptable to and quite useful in the early stages of an economy’s development. According to The Economist, “The ability to use software, computing power, and storage online ‘as a service,’ paying only for what you need and only when you need it, may put the cost of information technology within the budget of many small African businesses.”

The point is: the time for tech in SSA is now… not a decade from now. That’s why so many big tech firms are setting up shop in the region. Research firm IDC predicts that IT spending across Africa will increase from $30 billion in 2012 to $40 billion in 2016, and if telecom is included, spending will increase from $103 billion in 2012 to $130 billion by 2016.

But here’s the thing: Africa won’t significantly move the revenue needle for the global tech giants, so investors should look elsewhere for opportunities. Our advice? An African telecom.

The Gains Down in Africa

As mentioned before, over the next few years, millions of SSA households will be acquiring discretionary income for the first time. That means millions more in the region will have more money to purchase necessities, and they’ll begin to purchase things like mobile phones and mobile services.

According to GSMA, a global trade organization for mobile phone operators, there will be 250 million mobile phone connections in Africa over the next five years. That bodes well for African telecoms. But it’s a hotly contested space. So which telecom is the best bet?

We like MTN Group Limited (MTNOY). The company is on solid financial ground. It pays a dividend. Its network is superior to the competition’s, which is why MTNOY is the market share leader in SSA. Oh, and the stock is cheap—even after the 12% run the stock has gone on since we recommended it in the December issue of BIG TECH.

For access to our comprehensive report on MTNOY as well as access to our other buy recommendations, sign up for a risk-free trial of BIG TECH.

The article The Rise of Africa… and How To Play It was originally published at caseyresearch.com.

What Else Has Steve Ballmer Overpaid For?

 

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

As reported yesterday, Former Microsoft CEO Steve Ballmer appears set to be the new owner of the LA Clippers, or Clippys as they are now known, paying the record-shattering price for a basketball team of $2 billion. This is the second largest price ever paid for a US team, second only to the $2.1 billion paid for the Dodgers.

Considering that recently Forbes estimated the value of the Clippers at $575 million, Ballmer appears set to overpay massively, with a premium that matches any of the ridiculous social networking deals we have seen in months. But is this the first time that Ballmer, either as an individual or as a CEO, has overbid? Hell no. In fact, as the following list by WSJ's Paul Vigna shows, the only question when analyzing Ballmer's horrendous track record at estimating fair value of underperforming assets is "where does one begin"?

From the WSJ, here is a sampler of the most grotesque examples:

Let’s take a look at some of the more notable deals of the Ballmer era:

aQuantive. In August 2007, Microsoft acquired aQuantive, a online ad agency, for $6.3 billion cash, and 85% premium. At the time, it was Microsoft’s largest deal. “This deal takes our advertising business to a new level,” the company’s COO, Kevin Johnson, said at the time. How’d it work out? Microsoft took a $6.2 billion write-off on the business in 2012. “The acquisition did not accelerate growth to the degree anticipated,” the company said.

Skype. In May 2011, Microsoft acquired Skype for $8.5 billion in an unsolicited bid “even though there were no signs of other serious bidders,” as we wrote at the time. The price tag was three times what the company had gone for just 18 months prior, as the company was scrambling to catch up in the mobile and Internet markets. How’d it work out? Microsoft doesn’t break out Skype revenue, so it’s hard to know. But the service is popular, and they just unveiled a gee-whiz “Star Trek” like universal translator service.

Nokia. In September 2013, Microsoft acquired Nokia’s handset business, for $7.2 billion in cash. “It’s a bold step into the future – a win-win for employees, shareholders and consumers,” Mr. Ballmer said at the time. How’d it work out? You could argue, if you like, that it’s too soon to say; the deal closed only in April. But Microsoft controls less than 4% of the U.S. smartphone market. Moreover, whether it’s a win-win for employees, shareholders, and consumers, it was a definite loser for Mr. Ballmer: the Nokia deal was apparently the deal-breaker for him, and the internal fight over it led to his ouster.

Yahoo. Of all the deals Microsoft did do, it’s the one that it didn’t do that may be the most instructive. In February 2008, Microsoft offered $44.6 billion for Yahoo, a 62% premium to the company’s stock, in an attempt to merge two struggling search businesses. It was a huge deal in the high-tech world, and it was a huge, public, messy battle that Microsoft eventually lost in one way, and won in another. Yahoo ultimately rejected the deal, although angry shareholders would later boot founder Jerry Yang over it. Yahoo’s stock, which was in the $30 range when the deal was announced, would soon sink into the single digits, and would languish in the teens for years after.

Not exactly a sterling record, no pun intended, and we didn’t even mention Microsoft’s stock, which went from $58 when Mr. Ballmer took over in 2000 to $40 and change today.

CEO Confidence Tumbles To 2014 Lows

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Q1 GDP growth in the US was simply abysmal – its worst in 3 years – but that does not matter as hope springs eternal that Spring is sprung and it's all green shoots from here. However… that's not what we are seeing in personal spending data (biggest miss in over 4 years in April) and now Bloomberg's Orange Book which implicitly tracks CEO Confidence via their comments has dropped back to the year's lows – not what we are being told by the talking-heads who promulgate the hockey-stick faith in our central planners.

 

 

Perhaps Campbell's Soup CEO summed it up best:

Campbell Soup [CPB] Earnings Call 5/19/14: “I’m disappointed that we failed to deliver the sales growth that we anticipated in the third quarter.

We believe this is in part a reflection of the persistence of an exceptionally challenging consumer environment.

As many others in the industry have noted, consumers are suffering from continuing underemployment, reductions in the SNAP program and rising home, fuel and healthcare costs. In combination, these factors are significantly affecting purchasing behavior, pressuring the performance of a number of our key customers and constraining growth across the industry, particularly in center store categories.”

Balancing the Budget and the Trade Deficit is Easy: Return to Gold Standard

Courtesy of Mish.

The Daily Ticker's Lauren Lyster conducted an interesting interview today with British Member of Parliament Kwasi Kwarteng on gold and balancing the budget.

To play the video, click here.

Kwarteng is author of War and Gold, a Five-Hundred-Year History of Empires, Adventures, and Debt.

Kwarteng notes the historic stability under gold standards, specifically citing the 2008 financial crisis and national debt level as problems related to the Fed and printing paper money.

"The credit crunch, the credit bubble that preceded it, and the huge amounts of debt and deficits that we have are related to paper money," says Kwarteng.

Laruen asked "After the Fed has printed trillions of dollars, just to look at the past several years of expanding the money supply, how do you put the genie back in the bottle?"

"If the Chinese unilaterally declared that the renminbi would be pegged to gold it would essentially recreate the gold standard," responds Kwarteng.

Yet, Kwarteng admits that China's export policy likely precludes that from happening.

Missing the Boat on Trade

My one disagreement in an otherwise excellent discussion is that Kwarteng misses the boat on trade in a major way. He maintains that the UK cannot go back to the gold standard because of trade deficits. His take is governments need to balance budgets and increase exports first.

Continue Here

 

Apple Stock Rises iPhone 6 Rumors

Apple Stock Rises iPhone 6 Rumors

By Business Insider

People are slowly realizing that Apple's new iPhone 6, expected in the fall, is going to be so much more massive than iPhone 5, iPhone 5S, and iPhone 5C were — and it's showing in the stock. Apple stock is nearly at $640 this morning. It started the year at $553 and hit a humbling low of $499 in January 2013 when people began to suggest that maybe Apple was losing its mojo:

apple aapl

Yahoo Finance

Since then, it has become clear that iPhone 6, with its rumored bigger screen, is likely to drive a massive number of phone upgrades.

For years, Samsung has creamed off smartphone customers with its Galaxy S and Note models, which offer a nice big screen. Apple has been smiling through gritted teeth as its users have had to make do with a small-in-hindsight 4-inch screen. Apple has known its sales have been hurt by its small screens for years, and even produced some internal documents fretting over the issue.

We showed you this chart yesterday, which says that 80% or more of current iPhone users are due for a new phone because they're using old iPhones that are near the end of their useful lives:

Apple AAPL UBS

UBS

Continue reading: Apple Stock Rises iPhone 6 Rumors – Business Insider.

Market Tranquility is Sowing the Seeds of its Own Demise

Gillian Tett (Financial Times) and Joshua Brown (The Reformed Broker) discuss the lack of volatility in the financial markets in this CNBC video clip:

"Historically you are not rewarded for putting in new buying orders in risk assets when there's zero volatility. Historically you're rewarded when you buy during volatility. So I don't think this complacency is healthy and I don't think it goes on forever." ~ Josh Brown

For other video clips of the conversation and other views, go to The Reformed Broker. Zero Hedge presents its thoughts below. 

Market Tranquility Is Sowing The Seeds Of Its Own Demise

Courtesy of ZeroHedge.

(View original post here.)

The mainstream media is latching on to the idea that all is not well in the world of 'markets'. The FT's Gillian Tett notes that, as we have vociferously explained, almost every measure of volatility has tumbled to unusual low levels, "this is bizarre," she notes, "financial history suggests that at this point in an economic cycle, volatility normally jumps." But investors are acting as if they were living in a calm and predictable universe,"[Investors in] the options markets are not pricing in any big macro risks. This is very unusual."

In reality, as Hyman Minsky notes, market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash. Tett concludes, that pattern played out back in 2007… and there are good reasons to suspect it will recur.

No matter what asset clas you espy, volatility levels are at or near record low levels (record high levels of complacency)…

 

 

In case you needed one more warning – the period from initial crash in vol to melt-up in vol was around 15 months in 2007, the current period since April 2013's crash in vol and the sustained low vol period is 13 months…

But as The FT's Gillian Tett notes,

This is bizarre. Financial history suggests that at this point in an economic cycle, volatility normally jumps; when interest rate and growth expectations rise, asset prices typically swing (not least because traders start betting on the next cyclical downturn). And aside from economics, there are plenty of geopolitical issues right now that should make investors jumpy.

But investors are acting as if they were living in a calm and predictable universe…

“There is no demand for protection [against turbulence],” observes Mandy Xu, an equity derivatives strategist at Credit Suisse. "[Investors in] the options markets are not pricing in any big macro risks. This is very unusual.”

Why?

If you want to be optimistic, one possible explanation is that the economic outlook has turned benign.

But there is a second, less benign possible reason for low volatility: markets have been so distorted by heavy government interference since 2008 that investors are frozen. One issue that may account for the pattern, for example, is that tougher regulations have prompted banks to stop trading some assets. Another is that ultra-low interest rates have made investors reluctant to deploy their cash in public, liquid markets.

And there could be a more subtle issue at work too: investors are so unsure what to make of this level of government interference that they are unwilling to take any big bets. Far from being a sign of sunny confidence in the future, ultra-low volatility may show that investors have lost faith that markets work.

In reality, nobody knows which of these explanations holds true; I suspect that government meddling and low interest rates are the key factors here…

And that is a problem… as Tett concludes…

while ultra-low volatility might sound like good news in some respects (say, if you are a company trying to plan for the future), there is a stumbling block: as the economist Hyman Minksy observed, when conditions are calm, investors become complacent, assume too much leverage and create asset-price bubbles that eventually burst. Market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash.

That pattern played out back in 2007. There are good reasons to suspect it will recur, if this pattern continues, particularly given the scale of bubbles now emerging in some asset classes. Unless you believe that western central banks will be able to bend the markets to their will indefinitely. And that would be a dangerous bet indeed.

In the meantime, BTFWTF!!

SEC Chair Mary Jo White Earns the Wrath of the Media for Refusing to Acknowledge High Frequency Trading Perks as a Crime

Courtesy of Pam Martens.

America Is Having Buyer's Remorse With SEC Chair Mary Jo White

SEC Chair Mary Jo White’s untenable position that “markets are not rigged” is bringing unwelcome attention to the SEC’s dismal record on ensuring that stock exchanges operating in the U.S. are fair.

Since bestselling author, Michael Lewis, went on 60 Minutes on March 30 to detail, step by step, how the stock market is rigged – there has been a slow, but steady, realization that the woman President Obama sold to the American people as the white knight who would rein in abuses on Wall Street has failed miserably in that role.

Under the Securities Exchange Act of 1934, codified at 15 U.S. Code § 78f, the Securities and Exchange Commission is statutorily mandated to ensure that the rules of the stock exchanges are designed “to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade…to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; …”

In addition, the legislation requires that the exchanges’ rules cannot “permit unfair discrimination between customers, issuers, brokers, or dealers…”

Despite that very precise and clear language mandating a “free and open market” devoid of “discrimination between customers,” the SEC has not just sat idly by and watched the stock exchanges rig the market, it has played an involved and instrumental role in the process.

Continue Here

Still Think The Fed Isn’t Fueling Inflation?

Courtesy of Charles Hugh-Smith of OfTwoMinds blog,

Just as we can't eat iPods, we can't subsist on official reassurances that the Fed and inflation are both benign.

There is a great divergence between the conventional financial media and the public who goes to the supermarket: the financial media swallows whole the official artifice that inflation is near-zero while J.Q. Public sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.
 
Many observers finger the Federal Reserve as the villain in the inflation story: it's all well and good to conjure up a few trillion dollars to pass out to your banker buddies, but there are always costs, recognized or not, to every action, and the Fed's credit creation and numerous quantitative easing operations have greatly expanded money supply.
 
All else being equal, a massive expansion of money typically causes inflation, as the flood of new money starts chasing goods and services that haven't expanded at the same high rate as money supply.
 
One camp reckons the reason why inflation is muted is that the Fed largesse has flowed into asset bubbles rather than goods and services, and proponents of this view make a good point: since little of the Fed largesse has trickled down to the to bottom 99.5%, it can't exerting much pressure on consumer prices. In effect, the price pressure is all in equities and rentier assets such as real estate rather than in goods and services.
 
But demand from consumers flush with cash is only one facet of inflation, as this chart of oil and Fed operations from Fine Charts (courtesy of Petr Fiala) reveals. Recall the charts I posted a few days ago showed a tight correlation between the price of oil and food: Why Are Food Prices so High? Because We're Eating Oil.
 
In other words, if the price of oil goes up, so does the price of food, and everything else that must be transported or that consumes oil in its manufacture.
 
Now examine this chart of Fed operations and the price of oil: when the Fed is actively expanding credit/money, oil goes up in price.
 
 
If little of the Fed's largesse is ending up in consumer's wallets, why should oil go up as the Fed shovels money into financiers' accounts? The answer is somewhat speculative, but there are two avenues of price pressure other than consumer demand:
 
1. Financial speculation in oil futures contracts, which fuels non-consumer demand
 
2. Fed credit/money creation weakens the U.S. dollar (USD), pushing the cost of oil priced in USD higher.
 
This is how the Fed fuels inflation, even when little of its largesse ends up in consumers' wallets. Recall that the price of tradable commodities such as grains and oil are set on the global marketplace. That means that grain harvested in the U.S. and oil extracted in the U.S. is not priced solely by domestic demand: as the Fed has weakened our currency with its various manipulations to favor financiers and bankers, oil and everything that uses oil rises in price in the U.S.
 
Sellers of grain and oil have a fiduciary obligation to get the best price they can, and in a Fed-engineered weak-dollar environment, the best price is not in domestic markets but in overseas markets.

This chart shows the Fed is indeed fueling inflation by driving oil higher. Official denials are to be expected, as are ginned-up inflation statistics; but just as we can't eat iPods, we also can't subsist on official reassurances that the Fed and inflation are both benign.

Debt Rattle May 30 2014: The Pretty Girl and the US Economy

Courtesy of The Automatic Earth.


Dorothea Lange Broke, baby sick, car trouble, Missouri family, Highway 99, CA February 1937

There’s a persistent story that says (though I don’t think I can confirm it) that a pretty girl prefers to surround herself with less pretty girls – all in the eye of the beholder – in order to look prettier. After seeing yesterday’s -1% (-2% if you include Obamacare) US GDP ungrowth number, a fair segment of the financial press and punditry took a page out of the pretty girl playbook and ran with it. What should really be a deeply disturbing number in a 5 year old recovery (which is about 100 years in human terms) that has cost Americans trillions upon trillions in stimulus measures, is easily turned, without batting an eye, into a solid positive. The awful Q1 print, we are now told, serves to make Q2 look that much better.

I can tell you the problem with that notion with the same ease that these folk invent it. The chunk of the population that is increasingly moving towards becoming the Great American Unwashed has spent a lot of their money on winter heating and on health care costs. But the “experts” still see – since they were told to in school – huge amounts of pent-up demand – snow, don’t you know -, but it just ain’t so. The great unwashed have spent their money, and then some too. They’re not coming back for extra’s because they can’t afford any. The rosy stories about companies ‘slowing the pace of inventory accumulation’ in Q1, only to turn around and rebuilding inventories in Q2, are empty and void.

Companies didn’t leave their shelves empty because baby it was cold outside, but because they had no confidence inventory could be sold. And why would that change? US retail numbers are so bad they rival Japan’s. They missed expectations by the most in 13 years (so there hasn’t been any snow since 2001?). There’s no pent-up demand for housing either, and maybe that should be a wake-up call. In the 7th consecutive month of declining YoY sales, these are now down 9.4% YoY. Which won’t keep the industry from talking about more pent-up demand, mind you, but it’s still ugly for those who didn’t see it coming. Guys, on the ground, America is getting much poorer. That’s all there’s to it. Of course sales are still great for the 1%, but you can’t run a housing market or an economy on that.

One more number from yesterday’s GDP report that I think stands out – or should – is “Corporate profits fell at a 9.8% annual rate, the biggest decline since the 2007-09 recession”. Perhaps the pundits should try and justify that away instead of pretending they’re all such pretty girls. I mean, if you want to make the point that the US economy is in a recovery, and Q1 was just a black blimp, how do you explain that companies lost 10% of their profits since Q1 2013, the biggest loss in 5 years? Or try this on for size, hidden inside BusinessWeek’s cheerleading article: “Adding to growth was health-care spending, which, boosted by the Affordable Care Act, grew at a 9.1% pace.”

How is that growth? The average American spent 9.1% more on health care than they did last year, and that’s growth, that’s a positive? It could only be seen as that, and even then with a tome full of doubts, if those Americans had lots of cash on the side just waiting to be spent in pent-up demand, if after taking care of drugs and surgery they’d get into their newly bought vehicles, drive to the mall and see a real estate broker on the way there. Not even kids with a steadfast belief in the Easter bunny would buy it. And on top of that, heating costs went up significantly. Which is why people stayed home, and will continue to stay home, because their money’s all gone. I just, as I’m writing this, see a Bloomberg headline coming in that says “Consumer Spending in U.S. Unexpectedly Declines as Incomes Slow”. Given the above, how can that be unexpected? What do we call that, pent-up demand or job-related delusions? You got far more unemployed and underemployed Americans than official numbers tell you, you know they paid much more on healthcare and heating, and you’re surprised consumer spending is falling? Isn’t that a bit rich – or poor?

Here’s another reality checking sign, from CNBC of all places. Not something the financial press in general will be eager to confirm anytime soon, but no less timely:

Why The Days Of Booming World Trade May Be Over

The drivers that underpinned years of booming global trade, once the engine of the world’s economic growth, may be fading. In the past few decades, trade has played an increasingly important role in the growth of the global economy. But more than three years into one of the weakest recoveries in decades, slack demand from consumers in the U.S. and Europe is weighing on exports in the developing world. “Typically we would want to see trade growing at a few percentage points above growth in gross domestic product,” said Sara Johnson, an IHS Global Insight economist. “The fact that trade is so sluggish just reflects the weak nature of the global economic expansion.” But the days of rapid globalization—and the surge in trade flows it produced—are apparently gone.

Merchandise trade – the total import and exports of goods – rose steadily through the 2000s to make up nearly 53% of the world’s economy in 2008, before plunging the following year as the Great Recession went global, according to the World Bank. Massive government stimulus in the developed world helped revive growth, but as those programs wound down, global trade began declining again in 2011. With the European Union mired in a recession and the United States hit hard by a series of nasty winter storms, that slowdown picked up markedly in the first quarter of this year, according to data released this week by the OECD. On Thursday, a separate report showed that U.S. gross domestic product dropped by 1%, on an annual basis, much worse than economists expected. The U.S. economic reversal was led by a 6% drop in exports year over year, until recently hailed as a key driver of the U.S. recovery, and which had risen 9.5% in the last three months of 2013.

Deathknell, anyone? US corporate profits fell at a 9.8% annual rate, exports dropped at a 6% annual rate, and GDP is down -2%. But there’s nary an expert to be found who doesn’t claim the fundamentals are so strong that 2014 growth will be 3-3.5%. In other words, 5% or so for the rest of the year, just to make up for Q1. In sort of like the same vein, the IMF today stated that the Bank of Japan ‘may need to keep up its stimulus drive for an “extended period”‘. That’s not going to happen, though, because Abenomics has already run so far off track that consumer spending is down, consumer prices are way up, and industrial production is cratering. Not even the likes of Goldman and Barclays see the IMF’s wishes come true anytime soon. So, no, Japan doesn’t look that pretty either. That would make the US economy the ugly girl who fools herself into thinking she’s pretty because her ‘friends’ look even worse. But look into that mirror mirror on the wall, ask the question, and the answer won’t be anywhere near as rosy as the one provided by the punditry.

Closing June Option Early, Adding New Name

One In, One Closed-Out 

By Dr. Paul Price of Market Shadows

We made some trades in Market Shadows’s Virtual Put Writing Portfolio today.

We closed out our 5 contracts of EZCORP June 21, 2014, $12.50 puts @ 55-cents per share. These had been sold last Dec. 3 for $1.95 per share when EZPW was trading for $11.24.

At 10:30 this morning, we bought to close (BTC) at the puts’ asking price of $0.55; the stock was trading at $12.42.

EZPW  put close out

The net profit was $700 ($1.95 – $0.55 times 500 shares). I decided not to risk waiting the last three weeks until expiration as the stock has been pretty volatile recently. We pocketed a net of $1.40 per share. That was slightly better than the share’s actual move up of only $1.18 from the trade inception date.

The trade is now reflected on our closed-out list.

Our net profit on all fully completed option trades is $17,169 since the portfolio inception in January of 2013.

We have two other June expirations coming up: short puts on HollyFrontier (HFC) and Aegion (AEGN). Both look safe to simply leave alone to expire worthless. The HFC puts were recently adjusted to a $38.50 strike price due to a 50-cent per share ex-dividend on a special payment. At about noon today HFC was quoted at $49.36.

We stand to make $310 on the single contract HFC expiration.

The 6 shorted AEGN June $20 puts also appear unlikely to require attention as the stock was $24.20 a few minutes ago. Market shadows received $1.50 per share ($900 in total) for the entire lot. We’ll only count these gains once they are official after June 20, 2014.

New Name In

Our newest trade involved the sale of four contracts of the Steiner Leisure (STNR) January, 2015, $40 puts for $4.00 per share.

You may have dealt with Steiner Leisure (STNR) without even knowing it.

STNR is a leading provider of spa services on cruise ships, hotels and premium urban day spas. It operates under a number of different monikers depending on venue. As of Feb. 1, 2014, Steiner was the sole beauty and wellness operator on 156 ships representing 18 different lines which ranged from high-end Crystal, Seaborne and Silversea to the more plebeian Carnival and Royal Caribbean lines.

The company has a decent balance sheet and has been building up book value significantly. From year-end 2005 through Dec. 31, 2013, book value more than tripled, rising from $9.17 per share to $28.17.

STNR  3-years (weekly)

Our commitment in selling the puts obligates us to be ready to purchase 400 shares of STNR at a net cost of $36.00 ($40 strike – $4 put premium). That would be just 2-cents above the lowest trade price since mid-2010.

Maximum profit would be realized if STNR closes at $40 or above on Jan. 16, 2015. In that event, we’ll keep 100% of the $1,600 put premium received without needing to buy 400 shares of the stock.

STNR quote with Jan. 2015 put

STNR shares rarely linger below $40 and have typically topped out between $53 and $60. Steiner hit $51.68 as far back as 2007 when EPS came in at $2.63 and book value was only 40% as high as it is today.

Management thinks the stock is a bargain. They recently announced a major share buyback authorization for up to 20% of the entire float. I thank subscriber Leilei Y. for alerting me to this company.

The STNR put sale is now reflected as an open trade in our Virtual Put Writing Portfolio.

To subscribe, enter your email at the top left of the page as shown below:

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Clash of Generations – Boomers vs. Millennials: Attitude Change Will Disrupt Wall Street and Corporate America

Courtesy of Mish.

As boomers and gen-Xers hand over the economic reins to millennials, a once in a multi-generational attitude shift comes with it.

Unlike boomers and gen-Xers focused whose primary focus was on money and “getting ahead” lifestyles, millennials have more of a depression-era survival mentality coupled with a completely different set of values.

The ensuing attitude change has profound implications, and that is the focus of the Brookings study:  How Millennials Could Upend Wall Street and Corporate America.

Let’s start with a couple of demographic definitions then a look at the study.

  • Boomers: Born 1946-1964
  • Generation X: Born 1965-1981 
  • Millennials: Born 1982-2003

Brookings Study Excerpts

Millennial Dominance

Millennial Values

By 2020, Millennials will comprise more than one of three adult Americans. It is estimated that by 2025 they will make up as much as 75 percent of the workforce. Given their numbers, they will dominate the nation’s workplaces and permeate its corporate culture. Thus, understanding the generation’s values offers a window into the future of corporate America.

In the future, most Americans, taking their cue from Millennials, will demonstrate a greater desire to advance the welfare of the group and be less concerned with individual success. They will be less worried about being guided in their daily decisions by software and more intrigued by the opportunities it offers. Even without any major environmental disaster, they will display a greater reverence for the environment and less interest in the acquisition of things as opposed to experiences.

It will be a world that is radically different than the one those who wield power today have grown accustomed to leading. The Baby Boom generation, born between 1946 and 1964, has made confrontation the touchstone of its existence. In their youth, Boomers protested the Vietnam War, or fought against those who did. As they aged, both conservative and liberal Boomers polarized America’s politics, making compromise morally unacceptable. Throughout their lives, Boomers have honed conflict and competition to a fine art.

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The Underpants Gnomes

Things That Make You Go Hmmm: The Underpants Gnomes

By Grant Williams

This week’s TTMYGH will be a little shorter than usual (“Thank heavens!” I hear you cry) owing to my presence at the Strategic Investment Conference 2014 this past week and the travel time to and fro.

Due to the hectic schedule and the fact that there were so many interesting people in attendance, I had planned to spend my week dragging as much knowledge as I possibly could out of those who made the trip to San Diego rather than committing finger to keyboard; but a chance encounter with a delightful young lady initiated an engaging conversation which, in turn, led to my discovery of the Underpants Gnomes.

Those of you who have ever attended an event such as the SIC know full well how such conversations arise. Those of you who haven’t will likely think I’ve taken another step towards the light (and will wonder just what sort of a dialogue we engaged in), but allow me to elaborate.

I will spare the name of the young lady in question to protect her modesty, but if she happens to be reading this back home in Bath, my thanks for the inspiration — even though I find myself awake at 3 AM rather worriedly thinking about underpants.

On December 16th, 1998, Comedy Central broadcast the seventeenth episode of the second season of South Park. In the episode, written by Trey Parker and Matt Stone, Harbucks (a franchise coffee shop chain with no similarity to any real-life company) planned to enter the South Park coffee market, thus threatening the local business owners.

Through a rather convoluted series of developments, the boys (Stan, Kenny, Kyle, and Cartman), are tasked with writing a school report on the threat that corporatism poses to small businesses. The report mobilizes the South Park community to take action against the insurgent corporate behemoth.

In true South Park style, what starts off as an attack on the culture of greed surrounding corporate interests ends up taking a pot-shot at the work ethic and merchandise quality of the small business owner.

Somewhat surprisingly, the TV critic (and sometime Austrian economist) Paul Cantor referred to this particular episode as “the most fully developed defense of capitalism ever” — which simultaneously speaks volumes regarding both the South Park writers and all those who have at one point or another defended capitalism.

(If you’d like to watch the full episode, you can find it HERE. Ain’t the internet grand?)

So… those Underpants Gnomes.

In the middle of the episode, Stan, Kyle, Kenny, and Cartman finally manage to lay eyes upon a pack of mysterious gnomes and ask them if they know anything about business. The gnomes assure the boys that they do and lead them into the cave where the gnomes stash their contraband underpants.

Once there, the gnomes lay out their business plan… a thing of beauty and simplicity that has been emulated by many companies in the age of the Internet of Things (a phrase whose constant occurrence in recent years has never failed to get my hackles up, but one that has, amazingly, been in existence since the early 1990s).

Surprisingly enough, many investors seem to have bought into things that even Eric Cartman could see through. Ah well, there’s no helping some folks.

Behold, the Underpants Gnomes’ business plan in all its majesty:

 

Now, in the real world, during the first internet boom (which peaked the year after this episode of South Park aired), the business model of the Underpants Gnomes was commonplace, as scores of companies flooded the marketplace, sustained purely by the promise of future profits that would somehow magically appear.

It was the corporate embodiment of George Costanza’s “yada, yada, yada”: “First we build a company… yada, yada, yada… we make billions.”

Of course, most of these companies went the way of the dodo; but remarkably, a mere 14 years after the bursting of the original internet bubble, there are signs of what Yogi Berra so beautifully referred to as “déjà vu all over again” — signs which some real heavyweight financial minds have recently highlighted:

(Seattle Times): Venture capital rising to levels not seen since 2001. Companies with no profits going public. Billions of dollars being paid for startups.

These and other signs that the tech boom may be taking an irrational turn are leading some notable investors to utter the dreaded word “bubble,” waking up the ghosts of an era many in Silicon Valley would prefer to keep buried.

Has Silicon Valley once again lost its collective mind?

Hedge-fund manager David Einhorn thinks so.

“There is a clear consensus that we are witnessing our second tech bubble in 15 years,” he warned in a note to his clients in late April. “What is uncertain is how much further the bubble can expand, and what might pop it.”

Of course, as we saw in 1998/9, there are plenty of people who believe in fairy tales, and they are happy to explain why THIS time is different:

Venture capitalists and entrepreneurs insist the Silicon Valley tech economy is not in bubble territory. Yes, they misjudged just how fast the Internet would change the world a decade ago and let things get a little bit out of hand.

But this time, they say, the revolution of mobile and cloud services justifies big, bold bets. And most of the companies going public are profitable, with real businesses that are transforming the way we live.

To some tech insiders, the region’s economy is in a “Goldilocks” moment. Not too hot. Not too cold. Enough of a boom to be just right.

Seriously?… Goldilocks? Again with that?

As you can see from the chart above, the Social Media ETF (SOCL) has fallen in almost a straight line since it peaked on Feb 19, 2014. Quite coincidentally, that was the day when $19 billion was paid for Whatsapp’s 450 million users.

The day that rationality returns to investing in technology stocks will be the day that we see some high-flyers (which had previously been given a pass on their poor performance because the promise of a bright tomorrow was just SO compelling) fall to earth in a hurry.

However, so as not to call out any specific companies, I am going to take the South Park approach and lay out a hypothetical fable about one such giant, high-flying corporate darling which has been embraced for its willingness to follow the Underpants Gnomes’ ingenious business plan.

The company has designs on becoming absolutely essential to all of mankind; and at that point, it has promised, it will figure out how to make a profit from the massive turnover that comes with ubiquity.

Let’s call this company… Spamazon.

(I should point out that Spamazon is an entirely fictional company. I offer no recommendation whatsoever, implied or otherwise, to either buy or sell the imaginary shares of this completely made-up entity.)

Spamazon was founded in 1994 in the mythical town of Beattle by an ex-investment banker and Harvard graduate named Jim Beeswax, a man with a passion and talent for engineering who had seen the internet wave swelling and wanted to ride it to the shore, where riches and fame awaited.

Supposedly, his first big idea was selling $100 bills on the internet for $99, but he was dissuaded from pursuing that plan by a friend who told him that while he would very likely build a HUGE business, it would be extremely difficult for the company to turn a profit. Also, the relative scarcity of hundred dollar bills at the time was an impediment to his strategy. Had Beeswax waited for the onset of QE, of course, he would have had more of a fighting chance, as the number of $100 bills in existence took a turn for the plentiful:

2259.png 

Ultimately, by the time Beeswax launched Spamazon, he had refined his thinking into what turned out to be a very simple business model — one the Underpants Gnomes would have been proud of.

Initially, the company would sell books online on the basis that there are millions of titles in print and they have a relatively low price point. From there it would expand by selling a ton of other stuff and, eventually, become the biggest company in the world.

Profits? Yeah… sure, profits too. Someday.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

Illinois Has Worst Pension Crisis, Needs Boldest Reforms, Not More Tax Hikes

Courtesy of Mish.

Governor Pat Quinn passed Illinois’ largest tax hike on record immediately after he was elected. That tax hike was supposed to be temporary. It won’t be, if governor Quinn and House Speaker Michael Madigan get their way.

Madigan, Quinn, and other Illinois politicians are attempting the same worn-out, taxpayer-unfriendly, method of threatening massive cuts in services if taxes are not permanently hiked. And it will not stop there.

It should not have to be that way, says Ted Dabrowski at the Illinois Policy Institute. Via email, Ted writes …

Illinois politicians such as Chicago Mayor Rahm Emanuel and Cook County Board President Toni Preckwinkle are offering city and county residents the following choice when it comes to government pension reform: either pay higher property taxes or watch core government services get cut.

But that’s a false choice.

There’s no question that Chicago, Cook County and the state of Illinois desperately need pension reform. But instead of threatening service cuts and property tax hikes, Illinois should take a cue from states such as Oklahoma that are passing real reform.

These states are embracing self-managed plans, such as 401(k)-style accounts, to increase retirement security for their workers and to bring back certainty to state and local budgets.

This week, Oklahoma’s House of Representatives passed a bill that moves some new state workers into 401(k)-style plans.

The bill now moves to the state Senate, and Gov. Mary Fallin is expected to sign the reform into law.

Once signed, Oklahoma will join Michigan and Alaska in requiring new employees to participate in defined contribution, or DC, plans.

Michigan made the move in 1996; Alaska followed suit in 2005.

Six other states already offer optional DC plans for some of their employees. Employees in Florida, Montana, South Carolina, North Dakota, Ohio and Colorado can choose between staying in the traditional defined benefit, or DB, plan or moving to a 401(k)-style plan….

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