Friday, October 31, 2008

Why Didn't Gold Soar?

Why Didn't Gold Soar?

By Dr. Steve Sjuggerud | 31 October 2008

"If gold didn't soar in the last year, then when will it?" A few weeks ago, Jack Crooks asked a crowd of currency speculators why gold had fallen from over $900 to $725 in less than a month. What a great question! The crowd— a room full of gold bugs— didn't know what to think. They hadn't considered this yet.

They knew Financial Armageddon was here. Many of them had been waiting for it for decades. And they knew the only possible outcome: a soaring gold price and a crash in the dollar. Well, they got the crisis right. But they were wrong on the way to profit. The price of gold has fallen by over 25% from its highs earlier this year. And as Jack predicted back in July, the dollar has soared.

It all started because of credit, of course. Many large investors (like hedge funds) borrowed a mountain of money to speculate. But the banks called in those loans. So these funds were forced to sell their investments.

Investors who held these funds got scared and asked to get their money back. So funds got hit with a double whammy— redemption requests and the need to pay back borrowings. The funds were forced to sell, at any price. Prices of everything— including gold and gold stocks— spiraled lower.

Investors around the world, in turn, sold everything to get out of the way of falling prices. U.S. Treasuries were the one "safe" place everyone flocked to, which supported the U.S. dollar. Jack believes the dollar will continue to rise, as money comes out of assets like gold and into the world's most liquid investment... the U.S. dollar.

Jack expects the U.S. will fare far better than most of the rest of the world. This is contrary to most forecasters, who expect the U.S. economy to weaken dramatically. Jack expects the emerging markets that export heavily will get hit the worst, as the credit problems are unwound and consumer demand in America declines. Europe's recession will be much more severe than in the U.S., according to Jack, as European banks are much more exposed than the U.S. to emerging markets [[plus, remarkably, they were far more highly leveraged: AIG was "rescued" at the explicit request of the ECB, which feared a total collapse of several Eurobanks, otherwise.: normxxx]].

In the end, Jack believes "the U.S. will maintain its vast capital market advantage and will emerge from this crisis in much better shape than its competitors as a result." I've known Jack for many years. We used to sit close to each other at an investment firm, hashing out ideas. Jack is as honest as they come, and he thinks for himself. His thoughts on the dollar were right on. I don't know anyone else who thought this way.

Jack believes this trend of a higher U.S. dollar and lower gold prices will continue for longer than anyone thinks. While the Great Deleveraging continues, I believe Jack will be right about the dollar. And I believe that, once the Great Deleveraging is over, the Great Inflation will come. Gold should soar then. So I'm not selling my gold just yet.

Either way, you can always count on Jack for a different view. But think about this... if you follow the average path, you'll have average returns, at best. Extraordinary thinking can lead you to extraordinary returns.

Good investing,


Contagion Spreads To… Gulf States

Contagion Spreads To Hallowed Halls Of Oil Rich Gulf States

By Dr Joe Duarte | 27 October 2008

Nowhere To Hide As Petrodollar Insurance Fades

The regions of the world thought to be immune to the subprime crisis are finding that in a global economy, there is no where to hide when the brown stuff hits the fan. The folks, who via their sovereign funds, were supposed to save us all from the nasty subprime meltdown are having one of their own. According to The Wall Street Journal:
"The global financial storm rolled across the Persian Gulf on Sunday, as Kuwait's central bank guaranteed bank deposits and cobbled together a hasty bailout for one of the country's largest banks."

No kidding? Imagine that, economies financed by the price of crude oil, which have recycled their petrodollars into so called "diversified" global investments, such as stocks, bonds, and real estate, are now in the same boat as the rest of the paper dependent world. According to the Journal, even the most immune of places, Saudi Arabia and Dubai, is having trouble. The Journal reported:
"Saudi Arabia, in an apparent bid to ease the fallout of the global credit crisis on its citizens, said it would funnel some $2.3 billion in loans to low-income borrowers. And in Dubai, real-estate brokers in the Mideast boomtown said they are seeing signs of price weakness for the first time in years, as financing dries up and speculators bow out of the once red-hot market."

There are now signs that the real estate bubble in Dubai is starting to show cracks, as Property investors "are not finding buyers,"' leading to a scenario in which "government finances" could get into trouble and basically stop the whole "debt-fueled expansion" of the world's most Go-Go property market and playground for the rich and the merely 'hoping to some day be rich'. And as usual, the problems began with excessive speculation. According to the Journal, most of Kuwait's problems began when petrodollar laden investors began to speculate in real estate and the currency markets. The local rally, also brought international money into the Gulf.

Yet, when the international money pulled out, earlier this year, Kuwait's banks were left in a bad position. Still, the Journal reports it was the currency trades that caused Kuwait the most trouble as "defaults by counterparties on bad euro-dollar derivatives contracts" took their toll.

Wall Streeters Head To Greener Pastures

Some of Wall Street's best talent is going elsewhere, with the beneficiaries being smaller firms and even those in other countries.

According to AP:
"Bankers and brokers looking to escape the financial meltdown are scrambling to relocate their families, possessions and rarified talent far from Wall Street to places such as Florida, Chicago, Milwaukee, Virginia and Asia."

The wire service added:
"Corporate headhunters say Wall Street's malaise will lead to a permanent talent loss for New York. It could help small boutique firms become bigger players with employees they would never have been able to lure from the city long-regarded as the world's financial capital."

So how dramatic is the situation? Some smaller boutique firms around the country are now seeing 20% of their resume's come from big investment bank talent looking for a new home. This is up from 1% of their potential workers in past years.

More important, for the firms, and for the communities where top talent relocates, are the repercussions of the new employees. According to AP:
"Former Wall Streeters also tend to bring clients with larger net worth— another potential long-term blow to firms trying to recover from the meltdown— so boutiques and middle market firms stand to reap the profits. In turn they deliver something that's currently elusive on Wall Street: stability. Jobs in the financial sector can pay anywhere from $100,000 to well into the seven-figure range depending on location, experience and the size of a firm, said Kimberly Bishop, vice chairman of Slayton Search partners, a Chicago-based headhunting firm."

Talk about "spreading the wealth" around.


The stock market continues to fall because the dominoes keep falling. The fact that petrodollars are no longer the insurance policy of all insurance policies, and that Wall Street talent is moving to areas of the country and the world that it wouldn't have given the time of day to in the past are signs of this crisis being a life changer for people. The question for investors, though, is whether this is that "blood in the streets" moment, or just another episode in a movie that seems to get new sequels on a daily basis. If you'd have asked us two weeks ago, we'd have gone for the latter as the answer. Today, though, we're just not sure.

That means that our current posture of being mostly in cash, while making a shopping list remains a good way to have it both ways but avoid pain and suffering. The next thing to watch for is what happens in Venezuela and Iran. If Kuwait and Dubai are having trouble, it seems likely that the left wing, 20th Century neanderthal, no real economy players in OPEC are in even worse trouble.

Oh yeah. Maybe they can do like Argentina wants to do and take over their population's life savings in order to preserve their hold on power. What the mainstream media is failing to address is that the current global economic crisis is now starting to center around the currency markets. That, in our opinion is a very bad sign.

Valero Energy (NYSE: VLO) Points To Even Lower Oil Prices

The refinery stocks, such as Valero Energy (NYSE: VLO) are weakening on a daily basis, suggesting that even lower crude oil prices lie ahead.

Chart Courtesy of

If petrodollar countries are starting to feel the economic pinch, it stands to reason that U.S. refiners are likely to have a difficult time as the global economy slows. To be sure, slowing demand for gasoline was not too evident this weekend, as regular unleaded in the Dallas metroplex was selling below 2.40 per gallon in many places. But the facts are fairly straight, with regard to refiners. At these prices, profits will only come if they start to decrease the amount of product on the market, which is why they're likely to buy less crude.

Refiners make money when they can pass on large amounts of their costs to consumers. But, they can't gouge consumers, either, so they walk a tightrope, looking for the "just right" set of pricing circumstances, which at this point are elusive. Yet, as a value play, Valero is hard to resist, with a P/E ratio below 4 and a 3.76% dividend yield.

The company, though, had 1.6 billion dollars in cash and 7 billion of accounts receivables at the end of the last quarter, with 12 billion of debt. This means that if it collected every penny that it is owed, which is hard to fathom in this credit cycle, it would still need to sell assets if there was a run on its interests. In other words, Valero may be vulnerable in a worsening scenario, which is why despite a low P/E, there are very few takers on the shares right now.

Wednesday, October 29, 2008

75% Returns From A 'Dividend Squeeze'

How To Get 75% Returns From A 'Dividend Squeeze'

By Tom Dyson | 29 October 2008

My professor placed his marker's cap against the whiteboard and pressed it so hard with the butt of his eraser, the cap fired into the ceiling… "This is what happens to share prices," he told the class, "when dividends rise and yields fall at the same time."

I used to work for Salomon Smith Barney, in the London office. I calculated the profits for a group of traders on a bond trading desk. After I'd calculated the daily profit and got each trader to sign off on my numbers, I reported the daily results to management.

Then at the end of every month, we'd tie all the results together and build them into the financial statements for the London office. A sloppy job would catch the attention of regulators. A cohort of auditors thumbing through paperwork on the trading floor was the last thing Salomon was looking for.

So Salomon wanted us all to be experts in accounting. The company sent us to accountancy school three nights a week. Everyone in my class came from major investment banks, hedge funds, and British industrial companies. We all worked 10-hour days for our firms and then took the Tube across London to spend another three hours discussing financial reporting standards in front of an overhead projector.

It was hell to stay awake. And the teachers knew it. So they'd make extra effort to keep our attention. One teacher, Professor Howard, loved to use physical demonstrations to explain things. One time, he passed money around the classroom to explain credits and debits… Another time, he made us act out a corporate board meeting to see if a merger was going to work. To show what happens when a stock's dividend payment rises while its dividend yield falls, he fired his pen's cap into the ceiling.

The Master Limited Partnership (MLP) Sector Is A Perfect Illustration Of Howard's Point

Right now, the Alerian MLP Index trades at 205 and pays $21.6 in dividends per year… for an annual dividend yield of 10.5%. The MLP Index has paid larger and larger distributions each year since 1996. This year, the sector is booming. Distributions from MLPs have risen almost 20% in the last 12 months. I think the boom in MLPs will continue, but to be prudent, let's assume dividends grow at only 10% per year for the next three years.

What about the dividend yield? Since 1996, the dividend yield on the MLP Index has fluctuated between 5% in times of optimism and 13% in times of pessimism. Right now, it's at 10.5%… indicating investors are fairly pessimistic toward the MLP sector.

[ Normxxx Here:  WARNING: The reason that MLPs have taken such a hit is that many are in hock at fairly high interest rates for expansion projects that are no longer likely to be profitable any time soon. Also, many MLPs have oil and gas contracts which commit them to accept oil and NG at far higher than current market prices. So, assume payouts will suffer.  ]

Dividend yields swing like pendulums. They swing from overvaluation to undervaluation and back to overvaluation in multiyear cycles. In the end, they always revert back to normal levels. Sooner or later, the MLP Index's dividend yield will revert back to normal levels... say, around 8%.

So let's assume this recession blows over, investors stop panicking, and dividend yields in the MLP sector return to 8% in three years. With 10% annual dividend growth, annual dividends on the MLP Index will increase to $29 per year. A dividend payment of $29 and a dividend yield of 8% together mean the MLP Index will reach 362… an increase of 77% from today's level.

Now that was a lot of numbers, but the idea is simple: When dividend payments increase (as they will in the MLP sector) while dividend yields fall back to "normal" This phenomenon works with any security that raises dividends every year for many years in a row. To make huge gains, buy when the dividend yield is near the top of its historical range and wait for it to decline to average levels.

If you can find a company or an industry headed for a dividend squeeze, you need to jump in with both feet. The squeeze should send your stock through the ceiling.

Good investing,


P.S. To calculate a stock's historical dividend-yield range, divide historical share prices by the historical dividend using data from Yahoo Finance.

Our view on Afghanistan: Talk to the Taliban!?!
Negotiations might help as part of broad strategy to defeat al-Qaeda.
[[Is McCain now way to the right of 'w'!?!: normxxx]]

A new, once preposterous, idea seems to be gaining ground in Washington: Negotiate with the Taliban. Yes, that's right— the fundamentalist Islamic extremists who once ruled Afghanistan, who harbored 9/11 masterminds Osama bin Laden and Ayman al-Zawahri and their terrorist training camps before the U.S. invaded Afghanistan, and who continue to be al-Qaeda's allies and protectors.

After the invasion,Taliban and al-Qaeda leaders fled to Pakistan's wild northwest region, where they launch attacks on U.S. and NATO forces in Afghanistan. U.S. intelligence agencies say any new attack on the U.S. would likely originate in the Taliban/al-Qaeda training camps in Pakistan. Yet opening communications with the Taliban is an option being considered by a range of leaders and experts, including the former U.S. commander in Iraq, Gen. David Petraeus, who's now in charge of Iraq and Afghanistan as head of Central Command.

As naive as the idea might sound, it is evidence of hard-learned pragmatism. If the Iraq and Afghanistan wars have taught anything, it's that they cannot be won by military might alone. This year's surge of U.S. troops into Iraq succeeded because it was part of a broader strategy that included working with, and paying, Sunni tribal leaders to turn against al-Qaeda in Iraq— the same leaders who had just recently been at the heart of the insurgency killing U.S. troops.

Assuming the Taliban would respond similarly is a stretch. Unlike the Iraqi Sunnis, the Taliban shares much of al-Qaeda's rigidly brutal, medieval brand of Islam. That said, a new strategy is needed for Afghanistan. In fact, Petraeus is preparing one to be ready for the new president in February. John McCain and Barack Obama both favor increasing troop levels, but neither has defined a strategy to match the one in Iraq. Nor has President Bush, even though the Afghan war is deteriorating so fast that pessimism is widespread.

Talking to the Taliban might be a long shot, but perhaps not quite as long as some suspect if the goal is simply to get its leaders to betray al-Qaeda. On Tuesday, Pakistani and Afghan political and tribal leaders agreed to establish contacts with the Taliban. Saudi Arabia has already facilitated informal talks.

Further, the Taliban is not monolithic. Reports out of Afghanistan reflect a splintering among Taliban leaders, with some offering to take part in a democratic system and allow girls to go to school. It's not unimaginable that they might, with the right pressure or incentives, help deliver al-Qaeda leaders. The point is that no options are possible unless explored.

Talking with some Taliban representatives would not be a substitute for more troops. Agreements are best forged from a position of strength, and that is not the current reality. The U.S. also would need to be clear in its priorities. Three things are non-negotiable: the capture or killing of bin Laden and Zawahri; the shutting down of camps in Pakistan; and ultimately the destruction of al-Qaeda. A full-fledged Afghan democracy, while desirable, might not be possible.

The U.S. badly needs a winning strategy in Afghanistan— one that does not cripple the U.S. economy and military for many more years in pursuit of the unattainable. Talking to the Taliban? Time to hold our noses and at least be open to the idea.

Tuesday, October 28, 2008

Time For A Reality Check

Time For A Reality Check On The Financial Markets
Click here for a link to complete article:

By John Crudele | 28 October 2008

Reality may bite and some times it even barks. But it has to be checked anyway. If you've been reading the newspapers lately you already know that today begins another of those all-important two-day meetings of the Federal Reserve's Open Market Committee. So I figured there's no better time for a reality check.

Here's the lowdown on the depressing state of affairs in the financial markets, and why stocks and bonds may not yet be down enough.

1. The truth: Today's Fed meeting really isn't all that important.

While it's true that the Fed may drop its so-called federal funds rate to 1 percent from 1.5 percent, the move is really not very important to you and me. The interest rate at which you and I would borrow— if we were so inclined— is controlled by the financial markets, not the Fed. And our borrowing costs are likely to rise until investors get less scared about the world's finances.

2. The discount rate could also be cut. This is what the Fed charges banks for overnight loans.

The importance of a discount rate reduction at this week's gathering has also been muted because the Fed is already making money available to any financial institution that needs it, for just about any length of time. The price of that money— or the discount rate— isn't really important. It's like a soup line from the 1930s. Banks are lining up and the Fed isn't really asking any questions, except, "How much?"

3. Even if the Fed cut rates and [ALL] borrowing costs drop— which, as I said, isn't likely to happen— that still doesn't mean people will seek out loans.

When consumers were borrowing and spending like mad in the 1990s into this decade, the experts lamented that Americans weren't saving enough. Now that Americans are cutting back and this crisis may turn them into savers, the experts are complaining that they aren't borrowing enough. You just can't please everyone.

4. If the Fed cuts interest rates today, instead of tomorrow, it will be more meaningful for Wall Street and might even result in a nice-size stock rally.

Ben Bernanke's Fed surprised investors with the first in a series of rate cuts last August, but since then he's been very predictable. If he wants to shake things up, a cut one day earlier than anticipated might do it.

5. But then will come the backlash.

If Bernanke were to order up a rate reduction even 24 hours ahead of schedule, the financial markets— after initially rising— would start worrying that the economic situation might be so dire that the Fed couldn't even wait the additional day. The Fed is not only damned if it does and damned if it doesn't, it's also cursed if it does or doesn't when it should or shouldn't.

6. A coordinated rate cut with Europe and Asia would be preferable to us going it alone. And European Central Bank President Jean-Claude Trichet said yesterday that he might cut rates again at a meeting next week.

That would be nice, but the dilemma still remains: Investors will worry that if all central banks are cutting rates together, and so rapidly, then regulators must know something everyone else doesn't. So investors are liable to push rates higher because Bernanke and Trichet want them lower.

7. The same goes for interest-rate cuts that are larger than expected.

Let's say, for instance, that the Fed cuts the federal funds rate by a full point instead of the half— point that is expected. The financial markets will not worry only that the central bank is panicking but also that it is running out of room for more cuts. Technically speaking, rates can't go below zero. But in today's Brave New Financial World, I suppose the government could pay you— rather than charge you— for accepting loans. What if there's no rate cut this week? You don't want to know.

8. The economy really is sick.

Washington will report its initial third-quarter GDP figure later in the week and it'll likely show that the US economy contracted. There will be a lot of chatter about recessions, which most people still think is defined by two straight quarters of negative GDP. But that's really not the definition of a recession. A recession exists when the 'non-partisan' National Bureau of Economic Research declares one.

9. There are no good signs yet in the economy.

Everyone was cheering yesterday when the Commerce Department announced sales of new one-family homes had increased an unexpected 2.7 percent in September. But that number is really a lie. Sales on a seasonally adjusted basis increased. But if you look at the 'raw' data without the guesstimating, the Commerce Department says sales dropped 5.3 percent— from 38,000 in August to 36,000 in September. And even that number is suspicious, since the survey that the government conducts is so small that it has a margin of error of plus-or-minus 12 percent, so the 'true' raw sales figure is actually within a range of -17.3% to +6.7%!

10. Last, but not least, let's discuss the stock market.

Everyone is looking for stocks— down about 40 percent so far this year— to suddenly reach the bottom of their decline and then spring right back. It's the trampoline theory of investing. That's why so many people I'm speaking with are deciding to wait out the current market 'volatility'. But what happens if stocks hit bottom and stay there— perhaps for years? That's exactly what could happen if investors get shell-shocked enough.

Pin The Tail On The Bull

Pin The Tail On The Bull
Click here for a link to complete article:

By Dan Denning | 28 October 2008

Has this brutal bear market finally ended? Has a new bull market arrived? …Only Warren Buffett knows for sure… The rest of us have to guess. But before guessing, let’s stick our index fingers in the air and try to gauge the direction of recent financial trends

The good news is that the credit market is unfreezing. The bad news is that no one in the stock market seems to care. All the hot money being pumped out by central banks is finally starting to de-thaw the inter-bank lending market. You probably now know more about the inter-bank lending market than you ever expected or wanted to know. But the decline in the rate banks charge each other to borrow overnight (LIBOR) really just means that banks have slightly more trust in each other this week than they did last week.

Yet on Wall Street, the Dow merely convulses. The S&P 500 is down 39% year-to-date and 43% from its high last October. You’d think the de-icing of the credit market would have produced a little more joy in the stock market. But investors have other worries on their just minds now. Earnings, for one. In the bigger picture, they are wondering just how big and how deep this global recession [already conceded] is going to be. How many more layoffs will there be? How bad will it get? Judging by current stock prices, around the world, pretty bad.

Oil has slumped to less than $70. Gold to nearly $700. These are not the signs of economic vitality. Copper and aluminium are also falling by dreadful amounts. If you look at the action in these market, investors are pricing in a shocking 2009, not just a run-of-the-mill recession. Are the slumping prices of commodities an indication that inflation poses no threat?

"History shows that recessions solve inflation problems, so, much of the world is about to have their inflation problems solved— and pretty rapidly," an interest rate analyst opined recently. Maybe this analyst is correct, but OTHER history shows you can have rising prices AND a recession. That’s the good old stagflation of the 1970s.

But maybe we’re overly worried about inflation. After all, most central banks target or tolerate annual official inflation of 2% and call it "price stability." And Jeremy Grantham, who’s been bearish on stocks since at least 2003, seems to think that value will be destroyed in financial asset markets faster than new lending and credit can reflate it into a new bubble. [Grantham is the insightful founder of the investment management firm, Grantham, Mayo, Van Otterloo, and a generally acknowledged stock market seer.]

"Don’t worry at all about inflation," wrote Grantham in a note to investors. "We can all save up our worries [about that] for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows."

Grantham is dipping his toe into equity waters anyway. "At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so. History warns, though, that new lows are more likely than not."

The S&P 500 made its bear market low in October of 2002 at 776. That’s 13.3% below yesterday’s close of 896. And should it decline to that level, it would be exactly 50% below its all time intra-day high of 1,552 (set on October 31st of last year).

By any historical standard, that’s a whopper of a bear market. So Grantham dipping a toe in now is an assumption that this bear market is roughly consistent with similar bear markets of the last 137 years. Take a look below and you’ll see what we mean.

The bear market of 2008 already ranks up there among the all time greats. The only question now is whether the bear market in stocks triggers a big enough recession in the economy that it leads to an even greater fall in stocks in the coming years. So is it 1929 [[or 1980: normxxx]]; or 1974 [[or 2002: normxxx]]?

It’s tempting to call the massed selling of stocks 'irrational'. But this is based on some investors looking at stock valuations and finding them cheap on a [history of] earnings basis, or looking at the cash on the balance sheet. But what we have right now are extremely motivated sellers. We call these sellers, "hedge fund managers." They HAVE to sell… for many different reasons. They have to sell because almost all of their leveraged bets on stocks, bonds and commodities are blowing up… which means they MUST de-lever to meet margin calls. At the same time, these guys are receiving tens of billions of dollars worth of redemption notices. So that means they have to sell even more to raise the cash to send to their investors. This is not a pleasant situation.

Normally, when a seller has to sell is a very good time to be a buyer, hence Buffett’s chest-thumping op-ed piece. But you don’t want to be a buyer just yet if there’s [substantially] more forced selling in the pipeline [[Buffet can afford to ignore another downmove of 10%, or even substantially more…: normxxx]] And that is now the key question in the market. How much leverage is left to be unwound?

Well, before the crisis hit, 'hedge' funds controlled US$2.4 trillion in investor funds. They would have used that capital to secure trillions more dollars worth of borrowings (with leverage ratios of 20-1, 50-1, and on up to 100-1). But now, all those assets purchased by 'hedge' funds with borrowed money are being liquidated. And those 'hedge' funds that were not hedged at all (long-only, but with the most massive leverage) are not long for this earth. Who are they going to take with them?

"In a fairly Darwinian manner, many hedge funds will simply disappear," Emmanuel Roman, co-chief executive officer of GLG Partners Inc., told investors at a hedge fund conference in London. "This will go down in the history books as one of the greatest fiascos of banking in 100 years."

True that.

Governments now want to regulate hedge funds. [[They want, finally, to close the 'barn door'.: normxxx]] They’ve already begun to do so by preventing them from shorting. But remember, if a hedge fund can’t short, it can’t really hedge. Performance suffers. Investor redemptions increase. The more hedge fund investors want their money back, the more that the funds must sell. In fact, only the "lock-ups" that hedge funds impose to prevent investors from getting their money back immediately are preventing an even greater pace of redemptions. So it’s easy to see how a new low in the markets is entirely possible.

Our prediction? Stock markets are going to get a hefty global bounce in November. There are at least three events on the horizon that could provide the boost. First, even if Obama is elected, you have the end of uncertainty about the U.S. election (and some highly irrational optimism that things will now indeed be different, better, and nicer). Second, you’ll get a new stimulus plan from the Democratic Congress in the U.S., which should give stocks a bit of a kick. And third, the big G20 meeting in Washington. Something that 'looks and feels good' should come from that.

Those three factors should conspire [or just provide the excuse] to produce a convincing-looking bear-market rally into Christmas. That would be like the sucker’s rally of 1929 - 1930 that preceded the stock market’s epic collapse over the ensuing two years. Or, we could be dead wrong and deleveraging may simply overwhelm everything else and take the market down to much lower lows right now, right here, without much of a bounce at all.

Stocks are very cheap. That makes them a buy. Unfortunately, they might get cheaper; much cheaper. That makes them a sell. And so we defer to the seasoned wisdom of Jeremy Grantham, an investor who is BEGINNING to buy, but fully expecting prices to fall even lower. [[Or, John Hussman, who is simply 'scaling in' as risk reduces and stock valuations go up.: normxxx]]

  M O R E. . .

Monday, October 27, 2008

The Third Mouse Market!?!

Investment Strategy: "the Third Mouse Market?!"

By Jeffrey Saut | 27 October 2008

Ever since the House of Representatives failed to pass the 'Paulson Plan', we have suggested that the main theme for investors was "survival." Accompanying that theme has been our mantra of trying to be the second mouse that gets the cheese because the first mouse often gets caught in the trap. To be sure, over the last four weeks most participants who have attempted to be the "first mouse," and pick the bottom, have lost money; so given last week’s wilt, we have decided a "third mouse" is what’s needed!

Since the original Dow Theory "sell signal" of September 2001, our strategy has been to manage the risk by not letting ANYTHING go more than 15% - 20% against us. This is the constant message from none other than Warren Buffett. Buffet says it wasn’t his best ideas that gave him his tremendous track record. It was having a smaller number of bad ideas that resulted in a permanent loss of capital. "We haven’t taken two steps forward and one step back. We’ve taken two steps forward and a fraction of a step back. Avoiding the catastrophes is really important."

Avoiding, and/or managing for, the catastrophes is one of the biggest secrets on Wall Street, still very few pundits ever discuss it. Anyone in the real world, however, knows that you have to manage for the "risks!" Apple producers know they are going to lose 5 or 6 apples out of every 100 to spoilage and they manage for it. Light bulb manufacturers know they will lose 2 or 3 light bulbs out of every 100 to breakage and they manage for it.

Still, in the investment business, there are very few of us that often discuss managing risk on a continuous basis. Even some of the best operators on Wall Street have recently failed to adhere to this most basic rule of investing. Indeed, for years we have idolized Ken Heebner of CGM Focus Fund fame (CGMFX/$27.40), as well as Marty Whitman who captains the Third Avenue Value Fund (TAVFX/$31.44). Both of these brilliant investors’ track records are legend; but this year, both of them are down over 45%.

Speaking to this "managing the risks" point, I read this most insightful paragraph from author, investor, and psychologist Brett Steenbager, PhD:

"In times of stress, we tend to anchor our thinking in the most salient pieces of information; behavioral scientists refer to this as the availability bias. When volatile markets rise, we hear talk of ‘the worst is behind us;’ when they fall, we hear of repeats of the 1930s. Worse still, financial planning— even among supposed professional financial planners— becomes simplistic: either hold on and wait for the turnaround or bail out of everything and rescue what capital you can.

"Little wonder that so many investors are uncertain, not knowing whether to stay the course or jump ship. Prudent investment planning, however, suggests that neither extreme is necessary. The important consideration is identifying which assets (stocks, bonds, etc.) are likely to outperform the general markets during any period of extended weakness and ground investment in those. Then, hedge your bets. If you think that some companies that offer value to consumers— or that offer necessities— will outperform those that do not, you can be long the attractive names and short the unattractive ones.

"Or you can be long the attractive names and short the broad stock market. You hedge your bet by reducing your exposure to overall market risk. Your investment becomes a relative value play, rather than an outright directional one. I almost never hear financial planners talk about that, and I almost never hear of such strategies from the general investment public."

Yet, it is not just professional investors who have failed to manage the risk for as noted in last Thursday’s Wall Street Journal article titled "The Less Wealthy CEO," many of the country’s wealthiest CEOs are less wealthy now that their company’s share price has collapsed. Even more alarming is the number of CEOs, and corporate officers, that have been forced to sell their own company’s stock due to "margin calls," which was punctuated by Chesapeake Energy’s CEO being forced to sell 94% of his personal shares. The point of this diatribe is that asset prices are deflating worldwide! Ladies and gentlemen, these types of sequences are typical of "capitulation events" rarely seen in the scheme of things. Indeed, the stock market "low" of October 10, 2008 registered a Downside Capitulation reading not seen since 1966. As Bob Hoye wrote on 10-23-08:

Once Capitulation has registered the bottoming process could take up to three weeks. Also, ChartWorks noted that the market could decline by some 5% to 8% below the level that generated the Capitulation. Using a couple of counts, this phase of forced selling could complete by next week (read: this week). The initial rebound could be quick and signaled by the first day with a higher high. Then comes the test whereby most of the great crashes have completed in the latter part of October and tested in November, before moving to a few months rally in the first quarter.

Regrettably, capitulation selling begets more selling, and that is precisely what happened last week as the S&P 500 (SPX/876.77) shed another 6.78%, bringing its year-to-date loss to 40.3%. It was a democratic decline with all of the indices we follow lower for the week. In fact, the only "things" we saw higher on the week were the U.S. Dollar Index (+4.89%) and the Japanese Yen (+7.65%). The quid pro quo was that last Wednesday the British Pound suffered its worse one-day loss since Black Wednesday (September 16, 1992), when George Soros broke the Bank of England; and, the pound ended 8.45% lower last week.

Then came Friday with the preopening S&P futures locked down limit while the media trumpeted the "Bonfires of the Inanities" was coming on "no news". However, late Thursday the Federal Reserve reduced the value of Bear Stearns’ asset pool by some $2.7 billion, AIG had to increase its loan from the Fed by $7.4 billion and stated that the $122.8 billion loan may not be enough, WaMu’s Credit Default Swap portfolio settled for less than anticipated, GE said it would "tap" the Fed’s commercial paper facility, for the first time in history the 30-year "swap rate" traveled below the yield on the 30-year Treasury Bond (that should be impossible), and rumors swirled about major hedge funds in trouble.

Accordingly, the markets gapped lower early Friday morning, leaving the SPX trading more than 25% below its 50-day moving average (DMA) for the third time this month.
As the good folks at the invaluable Bespoke Investment Group noted,
"Since 1928, there have only been five other periods where it (SPX) has been more than 25% below its 50-DMA. In the nearby charts we show the SPX during each of these periods. For each period we also calculated the maximum rally the SPX had in the 50-trading day period following the first occurrence. As noted in the charts, the minimum rally in these periods was 14% (1937), while the maximum gain was 66% (1932)."

Clearly, the equity markets are geared for some kind of rally; and if we could ever get the typical Monday/Tuesday downside washout, we would once again try committing some trading capital. Interestingly, as Doug Cass notes,
"When all else fails, look to astrology. Panic lows have historically occurred on day 27 or 28 of the seventh lunar cycle, which are this Sunday and Monday (today). The panics of 1857, 1907, 1929, 1987, and 1997 all marked their lows on these days in October."

As for the investment account, in the current environment companies that have low debt, high free cash flow, stable revenue growth, strong cash reserves on the balance sheet, and dividend yields, should fare the best. As Richard Russell observed,
"In a bear market, stocks that pay no dividends are at the complete mercy of the downtrend. As a dividend-paying stock declines, the yield on that stock increases, and if the dividend holds, the stock becomes more valuable. This is a critical point to understand if you are going to invest. Strong, dividend-paying stocks are better values as the stock declines. The corollary is that there is no more desirable stock than a stock that boasts a long record of increasing its dividend year after year. Studies show that dividends contributed as much as 50% of the total return on the S&P since WW II. The almost magical power of compounding can only be seen by holding stocks and reinvesting the dividends over the years."

10 great dividend-paying stocks

7 dynamic dividend-paying stocks

What to look for in Dividend Paying Stocks

High Dividend Stocks Counter Tough Market

Dividend Growth Investor (blog)

The call for this week: Despite all of last week’s carnage, the SPX still couldn’t take out the "capitulation low" reading of 839.80 that occurred on October 10, 2008, although today it looks like it might be broken. If not, last week’s low was at 852.85 and could be construed as a test of the October 10 low. As Walter Deemer wrote last week, "Even in 1929, the worst stock market crash of all time, the market managed to make a final low nine trading days after the 11.7% [capitulation low] record-volume decline and low of Tuesday, October 29" (see chart). Last Thursday was the ninth trading day after the recent October 10th record-volume decline and "capitulation low" reading. And then there is this Mannie Friedman quote, "When the market wants to bet that the world is coming to an end, the safe bet is to take the other side and bet the world won’t come to an end. After all, what have you got to lose?" Indeed, the "third mouse market!"

Stocks mentioned: Chesapeake Energy (CHK/$20.40/Strong Buy); American International Group (AIG/$1.70); Washington Mutual (WM/$0.06); General Electric (GE/$17.83)

Click Here, or on the image, to see a larger, undistorted image.

First Steps

By Jeffrey Saut | 20 October 2008

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market. Credit markets will take some time to unfreeze…"

"…Inflation has been elevated recently, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms of their higher costs of production. However, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased, and prices of imports now appear to be decelerating. These developments, together with the recent declines in prices of oil and other commodities as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability."

According to Merrill Lynch’s David Rosenberg, the passages above are the most important 'quips' from Ben Bernanke’s recent speech. Mr. Rosenberg concludes by noting:

"His view on the economy and on inflation can only lead us to one conclusion— these guys are not done cutting rates, and there’s still 150 basis points separating the current funds rate from where it ultimately went in Japan. Quantitative easing comes after that if financial conditions fail to improve. We’re not sure how many more rabbits policymakers have left in their hats outside of the Fed taking rates to zero and buying Treasuries outright."

As readers of these missives know, we have always thought the credit markets are smarter than the equity markets and therefore have been watching various credit spreads intently. The credit markets, ladies and gentlemen, will be the first "tell" as to when things will stabilize; and Mr. Bernanke is correct, "stabilization of the financial markets is a critical first step." Late last week looked to provide the "first steps" to some kind of stabilization.

For example, the November Eurodollar contract was sharply lower on Friday, as was the 3-month LIBOR interest rate. Rumors swirled that a major bank was lending heavily in the inter-bank market and the credit markets took a baby step toward thawing. We are hopeful that notion will spill over into the equity markets this week because the set-up for at least a trading bottom looks promising.

Indeed, as mentioned in previous missives, the equity markets are massively oversold and our downside day-count sequence is VERY long of tooth. Moreover, the Friday plunge of October 10th had all of the characteristics of a panic "low." If so, what typically occurs is a 1½ to 3-session sharp rally off of those "panic lows" and then the averages go right back down over the ensuing three to five sessions.

Roughly 60% of the time the averages hold above the previous low. The other 40% of the time they make lower lows, but not by much and the bottom is completed. Obviously, last Monday’s 936-point "Dow Wow" was a sharp rally that lifted the senior index some 1500-points above the previous Friday’s nadir (7882).

That strength spilled over into Tuesday morning, thus completing the perfunctory 1½-day throwback rally. From there the DJIA went straight back down into Thursday’s panic low of 8198 in what may have been a three-session slide that retested the lows of 10/10/08. If I could script it perfectly the downside retest sequence would have "timed" out into the first part of this week, but they don’t run the stock market for my benefit.

Accordingly, ever since that ill-fated Monday (9/29/08), when the House of Representatives turned down the Paulson Plan, we have told participants that the main theme is "survival." We have also suggested to "be the second mouse that gets the cheese" because the first mouse usually gets caught in the trap. Plainly, most folks who have attempted to pick the bottom over the last three weeks have lost money.

We think the odds of a bottom have increased. From a technical perspective that view is reinforced by the bottoming sequence already discussed. However, there are more fundamental factors at work.

Firstly, there is the noticeable improvement in the credit spreads. Secondly, the Fed is printing money at an unprecedented rate and money is the "oil" that makes the economic engine run. Thirdly, European leaders have taken the reins into their hands and crafted a rescue plan that makes much more sense than our ill-conceived [initial] reactive plans [[fortunately, we seem to have since shifted over to the 'European' plan: normxxx]].

Finally, there is tomorrow’s settlement for the recent Lehman credit-derivatives auction, which at nine cents on the dollar was a total bust [[settlement went off without a hitch; but hardly anyone seemed to have noticed: normxxx]] However, if tomorrow’s settlement goes off without a hitch it could soothe the markets and provide the "spark" that ignites a decent rally [[needless to say; it didn't.: normxxx]]

That said, even though the equity markets may stabilize and rally, as Mr. Bernanke notes, "even if they stabilize as we hope they will, broader economic recovery will not happen right away." Manifestly, the falloff in the economic data has been dramatic. Consumer confidence has plunged to 57.5 this month from 70.3 in September for the largest decline in the history of the data. Meanwhile, retail sales tagged a three-year low and single-family housing starts slid 12% in September to a 26-year low.

Not to be outdone, building permits skidded 8.3% on the month for a reading not seen since November of 1981; and industrial production, as well as the Philly Fed index, have come in well below forecasts. The good news comes on the commodity front, where prices have crashed. That commodity crash has ameliorated some of the inflation concerns and should allow the Fed to continue to expand its balance sheet and begin to act like a loan clearing house for many of the credit-derivatives awash in the system.

Interestingly, in theory the Federal Reserve can expand its balance sheet exponentially since it is a central bank with a sovereign currency that is NOT convertible into anything other than itself, a point Mr. Bernanke so eloquently made in his now famous "Helicopter Ben" speech of November 2002. We actual find this reassuring given the "toxic waste" that has infiltrated the country’s economic system.

In conclusion, we received a plethora of questions regarding the quote we used last week from The Wall Street Journal1 (WSJ) that there are currently one in ten listed companies trading for less than the value of the cash and marketable securities on their balance sheets. To proof test this statement we ran a similar screen and found more companies than the WSJ did. Of course the screen they must have used was similar to ours in that "net debt" on the balance sheet was excluded. When we included "net debt" we come away with a much smaller number.

Still, this exercise goes to show that "things" are overdone on the downside and people like Warren Buffett are taking notice. Verily, when investors en masse attempt to adjust their portfolios toward more conservative investments, there is a negative feedback loop that leads to a decline in the price of less liquid assets, which in turn begets even more selling pressure, causing an overshoot on the downside. And that, ladies and gentlemen, is where we are currently.

The call for today: While we have not seen a crash, what we have seen is a series of crashetts that have left us with as good a chance for a bottom as we have seen since 55 B.C., which is why we told accounts in last Tuesday’s comments that the short-term lows were "in" and they could begin a buying program in the investment account. We reiterated that stance on Friday, repeating that a bottoming sequence was at work and participants should act accordingly. Consequently, we’ll leave you with this thought from Cicero in 55 B.C.,
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

1"Strikingly, today’s conditions bear quite a close resemblance to what Graham described in the abyss of the Great Depression. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it’s hard to avoid stepping on them.

Out of 9,194 stocks tracked by Standard & Poor’s Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year— or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash— an even greater proportion than Graham found in 1932." (The WSJ the week of October 6, 2008.)

Twenty-Year Annual Average from 1900 thru 1997

Twenty-Year Annual Average from 1900 thru 1997

by normxxx

[ Normxxx Here:  
    20 Year Annual Average from 1900 thru 1997

There is an important statistic that should be noted. The graph at left shows the
Real Stock Market Average Return for every 20-year period ending from 1900 through 1997. Note the incredible symmetry of the pattern. All the peaks and bottoms were approximately 30 years apart. For instance, peaks occurred in 1910, 1940, and 1969 whereas bottoms occurred in 1920, 1950 and 1980. The last real (average annual) return peak occurred in 2000, right on cue, and the next bottom is due around 2010. Thus, the peak in 2000 was slated to usher in a '10 year time of trouble'. (This is just what happened after the three prior peaks, i.e. 1910-1920, 1940-1950 and 1969-1980.) Importantly, note that the twenty year return bottomed near zero in each case. In other words, at each prior bottom, you earned zero real return over the prior twenty years. So, by 2010, expect the real Dow return to be around zero for the preceding 20 years, i.e., back to 1990! Since this is approximately coincidental with the low in P/Es, expect the P/E ratio to decline until around 2010 and then start up again.  ]



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Where To Go From Here

Deflationary Depression? Where To Go From Here

By John Lee, CFA | 24 October 2008

In September two significant events happened that will mark the month as the most financially significant in US history by far:

1. Fannie Mae and Freddie Mac were nationalized; this was no surprise as I predicted in November 2007.

"If left to their own devices by the government, Fannie and Freddie are doomed. At this juncture, the Fed has no choice but to redeem any and all mortgages at near face value directly, through GSEs, or offshore vehicles."

2. Lehman Brothers went under. While I have said all major US banks (including Citibank, and JPMorgan), brokerages (including Goldman Sachs), and big finance companies (AIG, GE, GM, etc) are insolvent, I didn't expect that Lehman would be allowed to go under.

Paulson clearly didn't understand Lehman's involvement. Lehman is a leveraged brokerage shop that was the counterparty to trades sized in the $hundreds of billions, including interest rate swaps, commodity futures, corporate bonds, international equities and real estate loans, currency swaps, and private equities. The counterparty risk created fear and triggered domino selling [[AIG almost went under immediately and was only saved by the $85 billion 'loan' from the Fed.: normxxx]] Banks refused to lend to one another fearing the other end to be infested with Lehman's positions. Insiders claim that it could take over a decade to fully unwind Lehman's positions.

What's more, Lehman was one of the largest prime brokers to international hedge funds. Lehman's bankruptcy immediately caused wholesale panic within the hedge fund industry as funds tried to close/transfer/pull their money out of their Lehman custodian. Today over $60 billion is still locked up in Lehman's London brokerage unit. Given the leveraging nature of hedge funds, the effect on global equity markets was catastrophic as trillions of dollars were wiped off global equity markets. [[Indeed, the entire current World panic and credit market unravelling can be laid at the feet of Hank Paulson and his decision to let Lehman go BK! Up until then, it really looked as if the CBs had managed to contain things.: normxxx]]

Global Equity And Commodity Correction

With $hundreds of billions-worth of positions that need to be closed fast, we witnessed the most dramatic equity downturn outside of 1930 and 1987. Russian markets went down 70% and Nikkei, the world's second-largest equity index, is down 30% since September 1. Given that consumer spending accounts for 50% - 70% of GDP across various countries, the equity downturn caused spending pullback and thus global recession talk abounds. I believe this sudden downturn had more to do with Lehman's derivative positions and hedge funds having locked up than it did with fundamentals.

For example, demand for Oil and Copper had never slacked yet Oil and Copper prices were cut by half in 4 months. Inventory levels remained near historic lows and there was no projected slowdown in commodity demand from China, the world's largest consumer, up until then. In the financial arena, Chinese, Asian, Middle Eastern, and Latin American banks had minimal exposure to US subprime debt or to the collapse of US banks. The debt level of the Asian consumer, the key driver to the next phase of global growth, remains low.

Junior Sector And Resource Funds

The S&P TSX Ventures Index, a proxy to the junior resource sector, is down 70% to 900, from a high of 3,000 in 2008.

In September and October, 2 prominent resource funds closed: Ospraie and RAB. Both combined controlled over $3 billion in the resource junior sector. They literally owned 10% - 20% of the market and positions had to be sold. We saw classic margin-call selling. Prices of stocks were down 10% on consecutive days with small breaks in between and no rebounds. Many companies soon traded 10%, then 20%, then up to 50% below their bank cash balances. The situation clearly became irrational. Premier gold and silver producers were down 50% - 70% in 2 months.

Where To Go From Here

As of October 20, the junior market looks to have stabilized and I am convinced the correction for quality companies will not last long (i.e. maybe 6 months, less than one year for sure). This is much like the Nasdaq in 2001. Bad companies will go under, while good companies will survive and flourish.

With central banks recently pledging over $2 trillion to solve the crisis, a $750 billion bailout, more consumer stimulus, a federal deficit set to blow over $1 trillion, a continued US trade imbalance, a gigantic $10 trillion foreign reserve that is mostly yet to be diversified, and the central banks' inability to raise rates to combat inflationary pressure, I am more bullish on gold and gold equities than ever. Severe shortages of physical gold and silver at the retail level across the globe validate my belief that the supply of precious metals is dwindling fast at current prices. Reports from top Swiss vaults state they have "topped up" their metal storage space with no more capacity to spare.

There is talk of a deflationary depression, but my view strongly differs. Firstly, the money supply is exploding so prices will trend up after a brief scare. Secondly, on a global scale, the modernization of Asia and the Middle East is far from over with US $4 trillion at their disposal. Regardless of the long term picture on gold, when things are selling at 50 cents on the dollar, as some stocks are, even a brief rebound should see a recovery back to at least cash value. Whenever there is a crisis there is opportunity.

Friday, October 24, 2008

Can We Avoid A 1930s Replay?

Do Our Rulers Know Enough To Avoid A 1930s Replay?
Events Are Moving With Lightning Speed As The Global Credit Freeze Evolves Into Something Awfully Like A Classic Trade-Depression.

By Ambrose Evans-Pritchard | 26 October 2008

The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation. The Baltic Dry Index (BDI) freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95% since May [[almost 5% a day last week: normxxx]], hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2% at the US Port of Long Beach last month, but that is a lagging indicator. From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931.

"The crisis is now in full swing across the entire world," said Giulio Tremonti, Italy’s finance minister. "It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere," he said. Italy’s industrial output has fallen 11% in the last year. Foreign orders have dropped 13%. But we are all in much the same boat. Europe’s car sales fell 9% in September (32% in Spain). US housing starts fell to a 45-year low in September.

Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again). Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.

The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage— Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk)— are lining up for state bail-outs from a $50bn rescue fund. Brazil is in free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.

China says 53% of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. "The end is near. They’ve been keeping this house of cards going for a long time with bank support," he said. Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. "There is no chance of a 1929-33 depression. We know how to stop it happening again," he said.

I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites:

a) Understand what happened in the 1930s— on that score I suspect that few, other than the Fed’s Ben Bernanke [[who seems, nevertheless, to be taking his cues from Hank Paulson, who seems to be playing it by ear: normxxx]], have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count).

b) That central banks will now jettison the dogma of 'inflation-targeting' that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?

c) Understand that non-US banks— especially Europeans— have used the 'shadow banking system' to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away.

Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks doing much better? The Europeans [[read: ECB President Jean-Claude Trichet: normxxx]] fell into the trap of equating this year’s oil and food spike with the events of the early 1970s.

As readers know, I view European Central Bank’s decision to raise rates to 4.25% in July— when Spain’s property market was already crashing, and Germany and Italy were already in recession— as replay of the 1930s ideological madness.

You could say the ECB also acted under the constraints of the age: its rigid inflation mandate. But I suspect that Bundesbank chief Axel Weber and German finance minister Peer Steinbruck were quite simply too arrogant to listen to anybody. Mr Steinbruck insisted that "German banks are far less vulnerable than US banks" just days before the collapse of Hypo Real with €400bn (£311bn) of liabilities. Had he not read the IMF reports showing that German and European lenders have an even thinner Tier 1 capital base than American banks?

One can only guess what French President Nicolas Sarkozy has been saying to ECB chief Jean-Claude Trichet, but he must have warned in blunt terms that Europe’s leaders would exercise their Maastricht powers to bring the bank to heel unless it slashed rates. Democracies cannot subcontract monetary policy (with all its foreign policy implications) to committees of economists in a fast-moving crisis. Those accountable to their electorates have to take charge.

Whatever occurred behind closed doors, the ECB is now tamed. It has cut rates to 3.75%, and will cut again soon, perhaps drastically. The risk is that rates have come down too late in Europe and Britain to stop a nasty dénouement, given the 18-month lag in monetary policy.

We should be thankful that President Sarkozy and Gordon Brown took action in the nick of time to save our banking systems. Their statesmanship should at least spare us mass bankruptcy and unemployment. But it will not spare us a decade-long toil of pitiful growth— or none at all— as we purge debt. The world stole prosperity from the future for year after year, with the full collusion of governments, regulators, and central banks. Now the future has arrived.

Heavy Industry: Hurting The Real Economy
The Impact Of The Financial Crisis On Some Of The Most Basic Industries

By Economist.Com | 17 October 2008

It is about as far as you can get from the woes of Wall Street: the mucky business of digging ore out of the ground, shipping it across the oceans and turning it into steel, the feedstock of industry. So the recent slump in raw-material prices and the decline in shipping costs indicate just how far-reaching the consequences of the global financial crisis will be for the real economy. Since the early summer the price of steel has fallen by 20-70% and the key rate for bulk shipping of commodities is down by more than four-fifths.

There are even stories of grain cargoes piling up in ports in the Americas. Their buyers’ letters of credit have not been honoured, because of a lack of confidence in the banks that underwrite them. At least one Australian producer has had the same problem with iron ore shipments to China. And shipowners are having trouble raising finance for new vessels.

The most spectacular reflection of falling activity has been the Baltic Dry Index (BDI), which traces prices for shipping bulk cargoes such as iron ore from producers such as Brazil and Australia to markets in America, Europe and China. The index has plunged by 85% after hitting a record high of 11,793 points in late May. It is a leading indicator of international trade and, by extension, of economic activity.

In the past couple of years the index has been driven up by the boom in China, as that economy sucks in raw materials in bulk-carrying ships and pumps out finished products, which are exported in vessels. The weakness is because of the slowing of world demand and the arrival of new capacity following the recent boom in shipbuilding. There are also signs of slowing demand for the container ships that take China’s manufactured goods to Western markets. The latest forecasts show growth in container demand falling from 15% a year to barely 5%.

Steel prices have also been falling fast from record highs. In America the price of coil steel, used to make cars and white goods, has fallen by 20% since May. The price of steel billets, which are traded on the London Metal Exchange, has tumbled by 70% since May. Steelmakers, including ArcelorMittal, the industry leader, and Russian and Chinese firms, are moving to cut production.

Although China’s iron ore imports in the first nine months of the year were up by 22% on 2007, there are fears among Australian mining firms that the cuts in Chinese steel production could presage a pause in China’s boom. Mount Gibson, an Australian producer, has given warning that stockpiles of ore are piling up in China. Iron-ore prices on the spot market have fallen by roughly half this year, to $100 a tonne or less. The prices of copper, nickel and zinc have also fallen by half or more this year, and aluminium is down by a third.

Those drops, in turn, have battered the share prices of mining companies. BHP Billiton and Rio Tinto, two giants that are big exporters of iron ore from Australia to China, say that they will not be too badly hit by falling demand. They do expect rivals with higher costs to rein in their output. To some extent, that is already happening. Ferrexpo, a Ukrainian iron-ore producer, has said it will postpone a decision about whether to expand. Rio Tinto itself has reduced output at one Chinese aluminium mill.

Alcoa, a big American aluminium firm which reported a sharp fall in profits this month, has shut a smelter in America and says it will halve its planned investments next year. Other firms have scrapped planned nickel and zinc mines. Nonetheless, the bigger mining firms are far from despair. Alberto Calderon of BHP points out that the Baltic Dry Index is extremely volatile; in his view, it is not a good indicator of the long-term prospects of the mining industry.

He expects the Chinese economy to keep growing by 6-9% a year for the next five years. Rio Tinto is even more sanguine: it does not foresee China’s growth falling below 8%. Tom Albanese, its boss, says the Chinese economy is merely "pausing for breath". Both firms point out that some metals, such as copper, are still in short supply, and that the credit crunch will only make it harder to finance new mines. By delaying expansions and squeezing marginal producers, it might actually sow the seeds for a recovery in metals prices sooner than most analysts expect. At any rate, BHP is still keen to buy Rio Tinto— an indication, presumably, that it still thinks raw materials is a good business to be in.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Thursday, October 23, 2008

As Everyone Exits, Insiders Arrive

As Everyone Exits, Insiders Arrive
Click here for a link to complete article:

By Dimitra Defotis, Barron's | 23 October 2008

Among the casualties of today's market rout are some prominent executives who sold shares to meet margin calls. Among the potential beneficiaries? Insiders at other companies who scooped up stock at hugely depressed valuations.Table: Shopping Spree

Some of the world's wealthiest men, including Mexican investor Carlos Slim Helú and Microsoft's (ticker: MSFT) Bill Gates, also opened their wallets, taking bigger stakes in the past month in companies they already own. So did hedge-fund manager Eddie Lampert, whose ESL Investments bought $27.6 million of AutoZone (AZO) as the stock hit a two-year low. Lampert, who controls 38% of the company, has been buying since April.

Insiders Sell Shares For Many Reasons. But They Buy For Primarily One: A Belief The Stock Is Going Up.

Both fresh purchases and the absolute level of insider ownership send a clear message, says one New York hedge-fund manager. "I love to know that it's people putting their own money at risk," he says. "It's a bullish sign if I am trying to build an investment case" for a stock.

Four weeks ago, the ratio of insider buyers to sellers was nearly even, according to InsiderScore. In the week ended Oct. 14, however, buyers trumped sellers by three to one, with much of the buying concentrated in shares of smaller companies. Insider buying was strong in shares of small regional banks and energy-exploration and pipeline concerns.

Retailers also attracted insiders, notwithstanding fears that the coming holiday season may be the worst in years for the industry. In early October, in one of the market's worst weeks on record, the CEO of discount shoe seller DSW (ticker: DSW), Jay L. Schottenstein, shoveled more than $15 million into his company's stock, paying an average of less than $12 a share; the stock now trades for $11.50. Schottenstein's confidence says something, given his retail background. He's the former CEO of American Eagle Outfitters (AEO), and sits on the boards of American Eagle and Retail Ventures (RVI), parent of Filene's Basement.

Another apparent retail fan is Slim, who invested in industrial and financial businesses during Mexico's 1980s debt crisis. In early October, a Slim-controlled trust bought nearly $11 million of Saks (SKS) stock, boosting his already significant stake in the parent of tony Saks Fifth Avenue. Saks has fallen more than 70% in the past year, to around $5 a share. Slim paid about $7 a share.

Gates continued to boost his stake in Republic Services (RSG), the waste hauler. From Aug. 5 to Sept. 29, he invested $256.7 million in Republic, at an average price near $33. Today, the stock is around $22. Waste Management (WMI) recently dropped its bid for Republic.

When a gaggle of high-ranking officers buys, that's also noteworthy. At AAR (AIR), a Chicago-area aviation and aircraft-leasing concern, the CEO and five directors picked up more than $461,000 of stock at an average of $11.86 a share, just below today's price. Insiders at many pipeline master limited partnerships were buyers in recent days (See "How to Energize Your Portfolio," Oct. 13). Robust Profit Pipelines

The Bottom Line:

During one of the market's worst periods ever, insider buyers trumped sellers by three to one. Executives are snapping up retailers, energy outfits and even small financials. Financials aren't without fans, either. Five insiders bought shares of MetLife (MET) recently, reversing a multi-year trend of planned sales. At credit-card issuer Discover Financial Services (DFS), the CEO, CFO and chief operating officer bought shares in early October at an average of $11.55 a share; the stock now trades around $10.

Buying on insiders' heels isn't a foolproof path to profits. But tracking the so-called smart money often leads to bargains.

  M O R E. . .


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