4 Rules For Successful Short Selling

4 Rules For Successful Short Selling

By Michael Shulman | 31 January 2009

Savvy short-side investors make big, quick profits from falling stocks in good times and bad markets.

Whether you're shorting a stock the traditional way, or doing it the smart way— i.e., buying put options— choosing a name to play to the downside should be just as well thought out as any long side play that you add to your portfolio. But how do you go about finding spectacular short side plays and, more importantly, profiting from them? I have four solid rules that shed some light on how to survive and thrive on the "dark side."

Rule No. 1: Take A Short Position Based On Fundamentals As Though It Were A Long Term Position. [[I thoroughly endorse this rule; individual stocks should ONLY be shorted on impeccable knowledge/research of WHY the company WILL tank shortly (NOT just 'probably') AND WHY they are not likely to be a) rescued at the last minute by some "white knight", or b) are not very likely to be able to get an "extension" from their creditors, or c) are not likely to be able to "pull a rabbit out of a hat", eg, by selling something or laying off half the workforce or ... It's why short sellers invariably do the best company research! : normxxx]]

I am a stock-picker at heart, meaning I study companies' business models, management, product lines and prospects instead of looking at just their charts. There are a lot of technical gurus out there who use past stock performance as prelude to where a stock "should" trade next. But just because a company appears to be doing OK does not mean that it can keep up its past performance, especially if it's starting to crumble from the inside.

Wall Street seems to want to believe the best in companies, and its pundits invariably initially pooh-pooh less-than-stellar stock performance as temporary. My tried-and-true method of making money on the short side is to get situated while everyone else is still rooting for a company's recovery. I'm not a day trader looking for a quick 3% to 5% gain and ready to head for the hills whether or not I get it. Rather, I do comprehensive analysis and put my money on the bets that stand the greatest chances of paying off... and paying off big.

Don't get sucked into "trade-only" plays. Even if a chart is lousy and a trade looks good, you should never go against fundamentals. Sure, you may miss something here or there, but the discipline you exercise with your long side investments is also vital on the short side. [[And, NEVER underestimate the power of company management to just 'muddle through' while keeping the shareholders suitably entertained.: normxxx]]

In the same vein, you may be tempted to head for the hills at any sign of good news for a shorted stock. BUT, if you've based your trade on well established crumbling fundamentals, you must tell yourself that "this, too, shall pass" when you see a bad stock caught in a temporary updraft. Sticking to fundamentals gives us confidence in the logic of a position and enables us to wait out market volatility [[and temporary 'positive' situations which have been invariably 'manufactured' for the express purpose of raising the stock price: normxxx]].

Rule No. 2: Look For Reasonably Priced Puts.

Just like stocks, options come in all shapes, sizes and prices. If you're going to be trading put options, why not take advantage of the inexpensive but tremendous leverage that they offer? Remember that one put option contract represents 100 shares of the underlying stock, and that option prices are quoted per share. So, if you see an option trading at $3, your investment would be $300 for a contract.

If that stock heads off a cliff and your put shoots up in value to $6, that's a sweet money-doubler. But if you buy an option at $2 and it goes up to $6, you've effectively tripled your money. And if you're going to go for gains, why not go for the biggest ones possible?

If a $4 put only goes to $5, it's a gain, of course. But if you're only in the market for 25% gains, you may be better off sticking with stocks. I have avoided some short side positions because the premiums on the puts were simply too expensive— and, therefore, the risk/reward ratio was unfavorable. The lower the put entry price, the more money you can make when it turns in your favor. Accordingly, if things don't go your way, then that's less money you've put at risk.

[ Normxxx Here:  I cannot write a primer on options here (google the internet), but Mike has only touched the tip of the iceberg here. In particular, he has NOT covered the 'Time Value Of Owning Options And When To Sell', 'Out Of The Money Options Versus In The Money Options And When To Buy One Or The Other', 'Option Strategies For Limiting Losses/Reducing Costs', 'The Mortal Dangers Of Selling Covered Calls' (Which No Broker Will Ever Tell You), etc. DO NOT, I repeat DO NOT, engage in Option trading until you are conversant with "Iron Condors" and the like... ]

Rule No. 3: Look For A Perfect Storm.

There are many reasons to short a stock. If you wouldn't be caught dead owning the shares, that's a pretty good indicator that it belongs in your short-side portfolio. But how do you go about picking the biggest [[and likeliest nearest failing: normxxx]] losers? As the saying goes, "It's what's on the inside that counts."

If a company, stock or sector is ugly on the inside, it's only a matter of time before the ugliness— e.g., broken business models, less-than-spectacular corporate leadership, loss of a competitive edge, etc.— shows on the outside. And then the stock goes down [[but hardly immediately, depending on how able the company management are to obfuscate the issues (a LOT harder in a bad bear market, which is why judicious shorting is a very viable strategy here… I made a lot of money shorting in the '72/'73 crash): normxxx]].

Finding a company that [[is in the early stages of being: normxxx]] hit by sector weakness is a great way to play the short side. [[Then look for a stock in the sector that has such poor fundamentals that it is not likely to recover even if the sector does a sudden turnaround: normxxx]]— and if the stock you are looking at is also a poorly managed company, which means that even if the company recognizes its flaws and problems, it couldn't execute a turnaround in its business model within a reasonable time frame. If the company you're shorting meets both of these conditions, then you've found a [reasonable] trade.

Rule No. 4: Close And/Or Roll Winning Positions.

Even if a stock continues to slide, I urge you to close a big win and then open another position with more leverage using only your original investment dollars. This is called "rolling" a position. It gives you the opportunity to raise some capital by closing a profitable position and "rolling" the original investment dollars into puts with a lower strike price and/or later expiration date. Another reason you may want to roll your options position is because options come with an expiration date. And you may need more time to ride a stock's slide as far as it can go. [[I would sell or "roll" about half-way through the life of the option— that way, you don't losse too much of the time value premium, if any is left (when an option drops deeply 'into the money', the premium tends to disappear).: normxxx]] For example, it could take a year or two for the bad news to fully play out of a stock, but you may only have nine months with your put option position.

So, whether you have a winner and need to preserve your profits, or if time is running out and you haven't yet gotten the results you expected, you can always buy more time to let the position play out. Rolling a position is similar to staying in a stock for as long as you want to be in it— with a little more active management and attention [[but, of course, it generally is NOT free: normxxx]].

And if just a little more work can yield a lot more profit, I can't think of a better reason why you can't afford NOT to continue investing on the short side!

[[I would add a Fifth Rule: Stay Away From Stocks With Huge Short And/Or Put Option Positions— they are candidates for a "short squeeze"!: normxxx]]

Michael Shulman is the editor of ChangeWave Shorts, an options trading advisory newsletter, and is a contributor to the OptionsZone Web site.

ߧ

Normxxx    
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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.

We're Back To 1931. Good News: It's Not 1933 Yet

Bad News: We're Back To 1931. Good News: It's Not 1933 Yet

By Ambrose Evans-Pritchard, Telegraph, Uk | 31 January 2009

Barack Obama inherits an economy already contracting at an annual rate of 6%, much like the mid-Depression year of 1931 (-6.4%).

This may beat Germany (-7%), Japan (-12%), and Korea (-22%) over the fourth quarter. But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis. The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have lost their jobs since the crunch began. Japan's exports fell 35% last month, year-on-year. The central bank is printing money furiously, buying bonds to prevent a relapse into deflation.

So yes, it is like early 1931. Citigroup and Bank of America have more or less disintegrated. JP Morgan's health is failing fast. General Motors and Chrysler survive only on life-support from the US taxpayer. But it is not yet like 1933. That second leg down was the result of "liquidation" policies by a Dickensian leadership blind to the dangers of debt deflation. By then the Gold Standard had degenerated into an instrument of torture. It forced the Fed to raise rates from 1.5% to 3.5% in October 1931 to stem gold loss [[to France, FWIW: normxxx]], with predictable results for shattered banks [[not to mention just about all other businesses: normxxx]].

It is worth glancing at the front page of New York Times on Monday March 6, 1933 to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper front page was splashed with the story that FDR had closed the US banking system— invoking the Trading with Enemies Act— and ordered the confiscation of private gold. From left to right, the headlines read: "Hitler Bloc Wins A Reich Majority, Rules Prussia"; "Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip To Replace Currency"; "President Takes Steps Under Sweeping Law of War Time"; "Prison For Gold Hoarders". President Obama faces a happier world.

The liberal economic order is still intact, if fraying at the edges. Capital and ships move freely[!?!] North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

But then the world still seemed benign enough in early 1931. It was the second phase of depression that did terrible things. Roosevelt took over a country where the economic machinery had completely broken down. The New York Stock Exchange and the Chicago Board of Trade had closed. Thirty-two states had shut their banks. Texas had restricted withdrawals to $10 a day.

Few states could borrow on the bond markets. Illinois and much of the South had stopped paying teachers. Schools closed for months. An army of 25,000 famished war veterans [[and their families, including children,: normxxx]] squatting in view of Congress had been charged by troopers of the 3rd US cavalry with drawn sabres— led by a Major George Patton [[and commanded overall by General Douglas MacArthur: normxxx]].

Armed farmers threatening revolution had laid siege to a string or Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota's governor was recruiting Communists only for the state militia. Lawyers attempting to enforce foreclosures were shot. More than 100,000 New Yorkers applied to go to the Soviet Union when Moscow advertised for 6,000 skilled workers.

We forget how close America came to open revolt. Eleanor Roosevelt feared the country was beyond saving. Her husband kept the faith. He channelled the anger against Wall Street, diffusing it. "The practices of the unscrupulous money-changers stand indicted in the court of public opinion," he began his presidency.

The Fed was an ideological deadweight. Bowing to pressure from Congress it began to purchase bonds in mid-1932 to boost the money supply, but then recoiled, before retreating into pitiful self-justification. A third of the rescue funds in Hoover's Reconstruction Finance Corporation had been embezzled.

Today there has been no such failure of US institutional imagination, even if, as George Soros argues, the Treasury's policies have been "haphazard and capricious". The twin blasts of fiscal and monetary stimulus have been massive. In short order the Fed has slashed rates to zero. It is now conjuring money out of thin air on an industrial scale, buying $600bn of mortgage bonds to force down the cost of home loans, and propping up the commercial paper market to avoid mass corporate default.

Ben Bernanke, a Depression junkie, is proceeding with a messianic sense of certainty. The wash of money should ensure that the next 18 months will not mimic the cascade of disasters from late 1931 to early 1933. It at least buys time. But it does not solve the deeper problem, which is that a West addicted to Ponzi credit has put off the day of reckoning with ever more extreme monetary policy with each downturn, stealing prosperity from the future.

It will be an extremely delicate task to right the ship again. Central banks will have to extricate themselves from their venture into the bond markets without setting off a bond debacle in 2010 or 2011. Governments will have to map out of a path of Puritan discipline for year after year.

This will be Barack Obama's grim test of statesmanship.

ߧ

Normxxx    
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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.

Homes For The Holidays

Homes For The Holidays
Click here for a link to complete article:

By ContraryInvestor.com | 28 January 2009

Homes For The Holidays… Unfortunately, yeah, and plenty of ‘em. It’s an understatement to suggest residential real estate was either directly or tangentially very important to both economic and financial market outcomes in 2008. It has been the cornerstone of solvency, or lack thereof, in so many quarters of the financial sector. And as such, has had profound influence on the character of the US and really global credit cycle.

It’s been a while since we’ve checked in and all of us know that residential RE will continue to be a key macro economic health watch point as we move into the New Year. The current reconciliatory cycle drag that is residential real estate affecting financial sector balance sheets, household balance sheets (and P&L's for that matter), etc. is not about to dissipate in importance to macro economic outcomes in 2009. You’ve seen what has happened recently as the Fed has gone into a good bit of hyper drive in terms of trying to financially engineer at least some type of stabilization in what continues to be a downhill journey for the asset class.

They’ve allocated $600 billion to essentially buy agency debt (Fannie and Freddie paper) in the hopes of getting and keeping US conventional mortgage rates down. And so far that has indeed happened as post the establishment of this new Fed investment endeavor, conventional 30 year fixed mortgage rates dropped a good 100 basis points, plus or minus, in a matter of weeks. We’ll spare you the graph, but in recent weeks we’ve seen new mortgage applications and refi apps spike meaningfully higher.

Mission accomplished by the Fed? We’ll see, as we need to remember that a lot of folks with rate-locked in-process loans could only have taken advantage of these new lower mortgage rates by canceling the prior loan and writing a new one, probably with another mortgage vendor, which naturally would count as a "new" mortgage or refi app in recent data. Hence, there may be a bit of anomalistic higher counts in recent weeks due specifically to getting around the prior rate lock issue, so we’ll need to continue watching the data in the months ahead. Lastly, and you may know this already, China and a few foreign friends have been big sellers of government agency paper since the summer of this year. The $600 billion the Fed has already so generously provided is in part simply offsetting current foreign selling of US agency paper.

Additionally, the Fed followed up the $600 billion down payment, if you will, in trying to spark housing price stabilization/reacceleration with an announcement that they would like to put a program together (through wonderful taxpayer sponsored Fannie and Freddie) to provide 4.5% 30 year conventional loans to new home buyers. After all, it is the season of giving, no?

Bottom line being, the Fed is starting to pull out all the stops to arrest home price contraction. Upping the ante in a big way relative to prior efforts. We expect the Obama regime to likewise address this issue, and perhaps forcefully. They’ve suggested rewriting existing mortgages, but that enters into the very dangerous and cornerstone area of contract law.

Key question for both our economic monitoring and investment decision-making ahead then becomes, can the US government decree/legislate/manipulate home prices higher, defying the natural laws of asset class supply and demand, as well as character and path of a generational credit cycle now in reconciliation? Defy? We doubt it. Temporarily arrest? The correct answer is, we’re going to find out. Important in that, as we all know, the locus of initial US credit cycle trauma was the mortgage securities markets.

Residential real estate was also the locus of consumer credit creation this decade [[to 2007: normxxx]] and a current key driver of household net worth decline, certainly along with equities, influencing household financial well-being. Lastly, we need to remember the importance of investor psychology and bear markets as this applies to housing. Any even temporary stabilization in residential real estate would echo in positive psychological influence to the financial markets. All part of the ebb and flow of cycles in both financial markets and investor psychology.

A few macro overview observations about just where we are in the cycle itself. Cutting to the bottom line, at least in our minds, inventory and price remain the two largest cyclically unresolved outstanding fundamental issues for residential real estate at the moment. Once inventories at least get in line with historical precedent and prices stabilize, then we can begin to anticipate a better tone to mortgage credit markets, the housing industry itself, consumer well being and hopefully the macro economy.

It’s when housing stabilizes that the unprecedented stimulus being force fed into the system by the Fed/Treasury/Administration may begin to bite and gain traction. Let’s get right to a few simple and self-explanatory views of life. The following is a four and one half decade view of median family home prices relative to median family income.

To get back to the average level for this ratio since 1963 (the red line in the chart), median home prices would need to drop roughly another 12% from current levels. And of course this assumes the cyclical correction stops at the historical average. Let’s face it; we’ve already lived through a lot of price correction. The problem clearly is that other factors are weighing on residential real estate prices at the current time. Weak labor and wage growth, a coordinated global economic downturn of historical significance, and a credit market contraction of very meaningful magnitude is colliding with a housing reconciliation cycle, arguing the relationship above being arrested at the average of the last four and one half decades may be wishful thinking.

Is the Fed essentially trying to speed up the reconciliatory process implied by the above relationship in manipulating the important plug factor in the real estate equation that is financing costs? Of course this is exactly what they are doing. Whether they will be successful is the unanswered question. And in good part that depends on the ability of inventory to clear as a result of the character of both price and financing costs.

Let’s move right on to the also important issue of inventories. In the past we’ve shown you a lot of raw numbers when looking at this data. Time to stop that. Below is a look at the number of homes listed strictly as "for sale" properties (in other words this does not include second homes, rentals homes, etc.) at the current time. This go around we compare these per unit of inventory for sale numbers to the total US population to get a sense of historical perspective.

We’ve heard "everybody’s gotta live somewhere" a million times by those trying to bull up the residential real estate markets over prior years. And since the population is ever growing, comparing current nominal inventories to past cycles is misleading because of the dynamic of population growth. Oh yeah? Well now we’re looking at the number of homes for sale relative to "everybody". Any questions?

As the chart tells us, when looking at per unit for sale residential homes on what is essentially a per capita basis, we’re looking at a current level that is just shy of twice the historical average of the last four-plus decades. Yes indeed, everybody needs a place to live. It’s just a good thing there are so many places to choose from at the moment relative to historical precedent, no?

The last chart characterizing current residential real estate inventories very much mirrors the directional pattern of what you see above. It’s very simply the number of vacant single-family homes relative to all single-family homes. Bottom line? We’ve never seen anything like current levels. Residential real estate as an asset class cannot begin to fundamentally recover until the inventory 'clears', and this is far from an "all clear" view of life. Seems a matter of relatively basic common sense, no?

House That Again? …Before concluding, a few last housing related anecdotes we hope are of some interest. As per the comments above, we know that fundamentally housing prices and current residential real estate inventories remain open question mark issues. And the home building industry is more than aware. This is a very good thing in terms of cycle reconciliation.

As of the latest data, housing starts rest near half century lows in nominal terms. Residential real estate construction has essentially collapsed. Existing inventories and price have been very strong drivers of this collapse in new activity. Years of demand were more than satiated in the prior mortgage credit cycle. The view of per unit starts is seen in the top clip of the following chart.

In the bottom half we look at starts again as a percentage of the total US population. A new record historical low at recent levels. Clearly existing inventory remains the issue for real estate, not new inventory. As existing inventory clears, the asset class will heal. That process is well underway. The Fed just wants to speed things up a little with a big bit of financial engineering. Of course financial engineering has worked so well for them in the past, right?

Finally a very simple update of macro US homeowner equity as a percentage of the market value of real estate. You already know this ratio has been plunging for many decades now, plumbing new depths at an accelerating rate with each passing quarter over the last two to three years. The Fed has been quite kind to recently manipulate credit market mortgage costs downward, but only the real economy and real world residential real estate cycle can change the trajectory of what you see below. And this is the key to credit market collateral values, a sense of household financial well being, access to real estate based consumer credit, etc. Important? Yeah, we'd say so.

As we look at the chart above and contemplate what may be to come ahead, we again come back to the macro issue of deleveraging, running through the domestic and global economy. How do homeowners act to turn the trajectory of the relationship you see above upward in an otherwise very tough pricing environment? Deleveraging. Paying down mortgage debt.

We're pretty convinced US financial sector deleveraging is well underway and more than discounted by the markets. Alternatively, we'd suggest household deleveraging is more just getting started in comparison and we believe has a long way to run. We expect this will be a major macro theme for 2009.

Have the markets completely discounted this thought? We're simply not sure at this point. Residential real estate was incredibly important to economic and financial market outcomes in 2008. We expect exactly the same in 2009.

The message of the data above is clear, price and inventory cycle reconciliation is not yet finished. What is also clear is that the Fed/Treasury/Administration are stepping up their efforts as we walk into 2009 to truncate unfinished cycle reconciliation at almost all costs. Although we'll save this for a future discussion, we're not only focused on the importance of residential real estate in our current economic and financial market circumstances and how it will influence the financial sector, credit cycle dynamics and the real economy, but place incredible weight on the assured unintended consequences of Fed/Treasury/Administration efforts to truncate the natural cycle. The markets know what the Fed/Treasury/Administration are doing and are discounting these actions known actions in financial market prices. But it's the "at almost all costs" unintended consequences of this truncation attempt that may indeed be most important to 2009 investment decision making.


  M O R E. . .


Normxxx    
______________

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.

Barron's: Big Oil's A Buy

Barron's Cover: Big Oil's A Buy

By Dimitra Defotis | 24 January 2009

Big oil stocks are likely to creep back up, along with the price of energy. But investors should stick with the best— such as ExxonMobil. In a very ugly 2008 for stocks, big-oil shares provided one relatively beautiful respite, rising smartly through midyear before losing ground as petroleum prices slid from the astounding peak around $147 a barrel that they hit in July.

Now, with crude more than $100 below that level, shares of the integrated oil giants— those that do everything from exploring to producing to refining and distributing— remain in a slump. Some now look tempting for long-term investors, but there's no need to rush. Big oil stocks could get even more tempting in coming weeks as the companies report earnings, issue subdued guidance for 2009 results and reduce the value of their reserves to reflect the latest realities of crude pricing.

The U.S. Energy Information Administration expects oil to average about $43 a barrel in 2009, while some Wall Street energy bulls consider $60 more likely. If either forecast is right, petro stocks will benefit later this year. If on the other hand, crude slides below its current level, as some Street bears expect, the shares could stumble further. Of course, few oil-price prognosticators have covered themselves in glory over the past year, and there's no reason to assume that their forecasting skills have improved. Especially since just where the price will go has much to do with another great unknown: how long the global recession lasts and how strong the subsequent recovery will be.

Short-term price forecasts vary greatly, but long term, the thrust is upward. But a recovery will come eventually, and higher oil prices almost surely will follow. The most enthusiastic bulls even see them returning to $100 within a few years. That's why, over the next few months, patient investors would do well to buy the stocks of the best-positioned companies with the strongest finances and best long-term outlooks. Among them: ExxonMobil, Total and BP. Also worth considering, although more speculative: Petrobras.

Of the top three, ExxonMobil (ticker: XOM) looks the priciest, but its mighty cash position makes it the No. 1 candidate for a dividend increase. The company, the world's largest non-government-owned energy outfit, is also a low-cost petroleum producer, as are France's Total (TOT) and the U.K.'s BP (BP), each of which also has impressive natural-gas holdings. Brazil's Petroleo Brasileiro, known as Petrobras (PBR), a smaller, production-heavy player, has made some intriguing energy discoveries, but some can't be exploited profitably at current petroleum prices.

The story is less positive for the other big players, whose shares are cheap for good reasons. Although it has a decent cash position and dividend, Royal Dutch Shell (RDSA) trades at a discount to its peers, in part because of its miserable history of writing down the size of its reserves. ConocoPhillips (COP) has a weaker balance sheet than most of its rivals, leaving it at a disadvantage in bidding for assets to replace its maturing reserves. And Chevron (CVX) looks downright expensive, especially in light of its high reserve-replacement costs.

The challenge for the publicly traded global giants is replacing their oil and natural-gas fields on a massive scale. National oil companies, chasing profits, now control about 80% of the world's oil. As energy prices rose, ExxonMobil and ConocoPhillips were among the companies booted from nationalized projects— most notably in Venezuela.

The political realities have forced the majors to do much of their exploration in difficult terrain, where finding-costs are high. The good news is that oil-rich countries seeking to fill growing budget holes are likely to offer more attractive terms to the majors, says Daniel Yergin, an energy expert and the author of The Prize, an oil-industry history. The inducements: the majors' access to capital and ability to execute projects and to marshal technology.

The major, independent energy companies still can thrive with oil prices down because they are "so big and diverse, they benefit in the chemical and refining areas from a drop in prices...," says Sean Bogda, a money manager at Global Currents, a unit of Legg Mason. One big bull on the sector is Tim Guinness, who runs the Guinness Atkinson Global Energy Fund (GAGEX). He contends that all the integrated oil stocks are a "screaming buy" with more than 50% upside, if you believe, as he does, that petroleum prices will average $60 in 2010 and $70 in 2011. The money manager's argument: The Organization of Petroleum Exporting Countries (OPEC) wants $70 oil and ultimately will take the actions necessary to obtain it, even if its members have an interest in "giving the world an economic break" with lower prices for now.

See FULL Table:

Big Break for Energy Investors

With the drop in oil prices, shares of some of the largest integrated oil companies, particularly ExxonMobil, Total and BP, look relatively inexpensive. They offer nice dividends, too.

	Rec ent	12-Mo	Rev	Reser —ves	Repl —ace	Cash	Div	P/E	EPS	EPS
Company/ Ticker	Price	Chg	'08E (bil)	'07 (bil)*	Cost '07**	(bil)  ***	Yld	'09	'09E	'08E	Comments
Exxon Mobil / XOM	$78.23	-6%	$457	$22.5	$8.00	$36.7	2.0%	14.2	$5.51	$8.46	Massive cash stash.
Royal Dutch Shell / RDSA	47.01	-33	453	11.7	17.65	7.8	6.6	6.9	6.82	9.56	Expanding LNG assets.
BP / BP	41.44	-33	399	17.6	9.50	6.1	8.0	7.8	5.28	8.85	Healthy payout ratio.
Chevron / CVX	69.95	-14	264	10.8	28.41	10.6	3.7	11.7	5.97	11.10	High reserve replacement costs.
ConocoPhillips / COP	48.09	-33	223	10.8	11.52	1.1	3.9	9.3	5.17	10.78	Cash position weak vs peers.
Total / TOT	46.75	-34	206	10.1	18.64	16.9	6.6	7.2	6.51	8.07	Decent cash position.
Petrobras/ PBR	24.29	-51	66	13.9	11.75	5.6	3.7	18.4	1.33	1.58	Offshore discoveries bode well.

*At year end, in barrels of oil equivalent; PBR figure is current.
**Worldwide reserve replacement cost, in barrels of oil equivalent.
***At end of third quarter.
E=Estimate.

Sources: Thomson Reuters, Boomberg; IHS Herold; company reports

Big Break For Energy Investors

One threat overhanging all of the oil companies is the possibility that the Democrat-controlled Congress will revive the windfall-profits tax of the 1980s. But just how deeply such a levy would bite into earnings and whether it really would be imposed are both unknowns at this point. Bears also fear that dividends will fall unless crude and natural-gas prices heat up. But, says Jeff Parsons, an energy analyst at Eaton Vance Management: "Integrated oil companies, even if they have a downturn in cash flows, rarely cut the dividend-they try to maintain or grow it. What they can do is reduce their capital expenditures." In fact, capex budgets are shrinking already, in line with oil prices.

Herewith, a look at the most attractive players, and some of their rivals:

ExxonMobil

This company is in a league of its own, not just for its girth and $37 billion cash stash, but for its low reserve-replacement costs— born of many accessible energy fields and superior technology— project-financing capability and a shrewd but conservative management team. Headed by CEO Rex Tillerson, Exxon's management gets consistent praise on Wall Street. This is why Exxon investors have long paid a premium multiple, which today stands near 14 times estimated 2009 earnings of $5.51. That's a roughly 10% premium to the integrated oil sector, but well below the 30% the stock boasted last year.

Exxon shares have been the most stable among those of the big energy firms, down only 6% over the past 12 months. In contrast, its 2% yield is the lowest among the integrated giants. But, given the company's powerful financial position, bulls argue that it's likely to boost its payout, after having emphasized repurchases in recent years.

Exxon spent $26.9 billion in 2008's first nine months, shaving its total of outstanding shares by 5.5%, to roughly five billion. The company has repurchased more than 2 billion shares over the past decade. If the buybacks were to continue apace, Deutsche Bank analyst Paul Sankey has quipped, ExxonMobil could be a private company by 2020.

ExxonMobil didn't respond to a request for comment. It noted in third-quarter filings, however, that dividends rose 13% per share in 2008's first nine months— largely the result of fewer outstanding shares. Recently, speculation has grown about whether ExxonMobil will make an acquisition. Among the rumored targets are Britain's BG Group (BG.U.K.) for its natural-gas assets. There has even been talk of a bid for all or part of Royal Dutch Shell, a deal that would face regulatory hurdles.

Total

This big French energy company's outlook is being brightened by the appeal of liquefied natural gas, especially outside the U.S. Standard & Poors expects the company's natural-gas reserves to be significantly bolstered by a recent agreement with Russia's Gazprom. Under it, Total obtained a 25% interest for 25 years in a Barents Sea gas field that the two will exploit together. Unexpected shutdowns in Africa and the North Sea cut production last year, but European refining margins were up 88% in the third quarter alone. With low-cost production in Africa (the source of 42% of Total's earnings before interest and taxes, according to S&P), and rapid expansion in the Middle East, Total should thrive if oil prices stay at current levels or rise. The French major had $17 billion in cash at the end of the third quarter. S&P has a 12-month target of $92 on the stock, double the current price.

BP

In recent years, BP has blitzed consumers with clean-energy ads and expanded its natural-gas operations, especially in the U.S., where last fall it agreed to pay $3.7 billion for some of Chesapeake Energy's shale assets. But oil still looms large in the company's fortunes, and its earnings are likely to be hurt in the near term by low crude prices in Russia, where a joint venture accounts for about a quarter of production. In addition, profits could be squeezed by the restructuring of BP's considerable refining operations, including its Texas City, Texas, operation, the third largest in the U.S. Chief Financial Officer Byron Grote has said that BP's $3.36-a-year dividend isn't endangered, assuming oil stays in the 40s. Investors obviously are skeptical, however; the company's shares are off about 11% this month.

Petrobras

This Brazilian energy concern's shares have fallen about 50% in the past 12 months. While considerably smaller and less diverse than some of the other integrated outfits, Petrobras has crashed the Big Oil party because of a huge discovery under salt deposits deep off the coast of Brazil. The costly project will take years to come to fruition, and some analysts contend that it might be viable only if oil fetches $60 a barrel; the company says the real figure is closer to $40.

The uncertainty over this important discovery makes Petrobras more of a gamble than ExxonMobil, Total or BP, especially since it sells at a higher valuation than any of them. In addition, the Brazilian government, which controls about a third of Petrobras shares, has encouraged the company to return more profits as dividends. Petrobras now yields 3.7%— a number that's likely to rise slightly this year. One possible drag: higher taxes on oil profits by the Brazilian government. As for Petrobras stock, Deutsche Bank cut its target to 35 in December. But that's still well above the recent 24.29.

Royal Dutch Shell

Natural gas has become a more attractive fuel because it burns relatively cleanly and can be transported easily in liquefied form. Royal Dutch plans to double its liquefied natural-gas capacity by 2010, according to S&P. That includes a large Russian LNG project to be completed this year. Offsetting this is that, if oil prices don't rise from current levels, profits will fall at Royal Dutch's high-cost Canadian oil sands operations. In January 2004, before Royal Dutch Petroleum and Shell were unified under one U.K. parent company (resulting in a confusing batch of tickers), Shell was forced to remove billions of barrels of "proven" reserves from its books, resulting in huge financial restatements.

Criminal investigations yielded nothing, and the whole mess is history, but its legacy endures in investors' skepticism about Royal Dutch's management. That might change a bit after the company's well-regarded chief financial officer, Peter Voser, takes over as CEO this year. Royal Dutch Shell's A shares, which underlie its most active American depositary receipts, carry the lowest multiple among the big oil stocks, even though the company has more than $8 billion in cash and offers a nearly 7% dividend yield.

Conocophillips

This company, whose stock could rally as its low multiple attracts investors, has the highest exposure among the super-majors to the North American natural-gas market. It also has one of the most capital-intensive portfolios among the U.S. integrated energy outfits. Unless natural-gas prices this year exceed $7.50 per million British thermal units, well above the current $4.70 or so, the stock has only modest potential upside this year, writes JPMorgan analyst Michael LaMotte, who has a 12-month price target of $53. The shares now are in the high 40s.

Chevron

Shares of this company, which acquired Unocal in 2005, held up relatively well in 2008; they're down 14% over the past 12 months. LaMotte upgraded the stock earlier this month to Overweight, saying that with a higher percentage of crude production, compared to Exxon or ConocoPhillips, Chevron "can move more than the peer group on crude-price movements." While it has far-flung exploration and production projects, from those on land in Saudi Arabia to deepwater Nigeria, it also is searching for oil in deep areas of the Gulf of Mexico, where hurricanes hurt production last year. LaMotte has a target price of $95 on the stock, for an upside of 36%.

Not everyone is a fan of this stock, however. After Chevron released an interim fourth-quarter report showing that refining margins were down, Credit Suisse lowered its earnings estimates, reiterated its Neutral rating and maintained its $68 price target. The shares were around 70 at midday Friday.

In sum, the long-term picture for Big Oil is generally bright. But, given the differences in the companies' strengths and prospects, investors will have to be picky to find the biggest winners. And winners there will be, because despite the hopes of environmentalists and foes of Big Oil, it will be years before conservation and alternative-energy sources can slake much of the world's thirst for petroleum.

ߧ

Normxxx    
______________

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.

Ten Things We're Still Buying

Ten Things We're Still Buying

By Lauren Sherman, Forbes | 25 January 2009

Consumer spending may be at all-time low, but there are plenty of things people can't seem to live with out. Hey, Big Spender, are you out there? You must be, since December 2008 sales amounted to $343.2 billion. What did you buy? Nothing impulsive or lavish, it would seem. Consumer confidence is at its lowest point in history and, according to a Jan. 14 report released by the Commerce Department, retail sales were down 2.7% in December 2008 from November 2008 and 9.8% from December 2007.

From Wal-Mart (nyse: WMT) to Saks Fifth Avenue (nyse: SKS), retailers are so desperate to rid themselves of inventory that they're marking down some merchandise by up to 90%. However, $343.2 billion is still something, not zero, meaning consumers still deem many items worthy of the original price tag, says Martin Lindstrom, a retail marketing expert and author of

Buyology: Truth and Lies about What We Buy

In Depth: 10 Things We're Still Buying

While retailers suffer from shoppers changing their behaviors during recessions (mainly by abandoning brand loyalty), says Lindstrom, "There are certain things people won't give up."

Keeping Up Appearances.
Personal care is one of them. That vast category includes everything from shaving cream to perfume to hairspray. From November 2007 to November 2008, U.S. sales of shampoo, acne treatments, skin care gift sets and grooming products increased by 18%, 14%, 11% and 15%, respectively, according to Karen Grant, senior beauty analyst at Port Washington, N.Y.-based market-research firm NPD Group. Consumers are even still spending beyond the necessities in the personal-care category, it seems. At Nelson Bach, a North Andover, Mass.-based natural remedy company, year-over-year sales of its Rescue® Pastilles have doubled, according to company president Cynthia Batterman.

She believes that in a tough economy, when 7.2% unemployment means an increase in those lacking health insurance, many turn to alternative therapies. Nelson Bach's gummy lozenges, made with flower essence of white chestnut, are said to offer natural stress relief. And at $7 a tin, they're a relatively inexpensive way to feel just a little bit better. "When people put off going to the doctor, they're more likely to try self-treatment," says Batterman.

Seeking An Escape.
Whether used for keeping up appearances or curing minor ailments, personal care is— ultimately— about feeling good. Sometimes, that means buying products to escape the reality of the recession. "Even if we can't afford to escape to Paris, we can still afford to buy perfume with 'Paris' on the label," says Lindstrom. But it's technology, not perfume, which many would say does the best job of providing a sense of escape. Arguably the most accessible form is the videogame, which has seen a 14% sales increase in 2008, according to San Diego, Calif.-based Electronic Entertainment Design and Research Group (EEDAR).

In the third quarter of 2008 alone, the two top-selling items— "Madden NFL '09" and "Wii Fit"— sold 5 million units combined, according to NPD. And since it was first released in 2005, Guitar Hero has sold 25 million copies, grossing $2 billion. Smart phones, another way to use videogames and other forms of escapist entertainment— like podcasts and television shows— are also in demand. NPD says that from November 2007 to November 2008, the number of smart phones purchased increased from 13 million to 24 million, which resulted in a sales increase of 53%, from $2.7 billion to $4.1 billion over the same period.

And while you can't do much more than surf the Internet and write (short) term papers on minute-memory netbooks, the reasonable price— about $300— made mini laptops a winner. Sales in the third quarter of 2008 increased by 160% compared with the third quarter of 2007, according to Austin, Texas-based market research firm Display Search.

Keeping Fit.
Don't let consumers' continued thirst for technology have you thinking everyone will be anchored to the couch through the remainder of the recession, however long it lasts. Gyms, considered by some to be an affordable luxury, aren't completely in the red, as people seem to want to stay healthy in both good and bad times. In fact, market researchers at St. Louis, Missouri-based firm Stifel Nicolaus say overall gym memberships will increase by 4% in 2009. And a nationwide survey conducted by Princeton, N.J.-based Opinion Research Corporation, and sponsored by gym chain Anytime Fitness, found that over 60% of the 1,090 (gym-going) participants planned on keeping their current membership plan, while another 23% planned on downgrading to a less expensive option.

Aside from bare necessities, the things consumers are still buying have one thing in common: They provide a break from reality. "We want to dream ourselves away," says Lindstrom. Maybe everything will be fine by the time we wake up.

ߧ

Normxxx    
______________

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.

Just How Bad Has It Been?

Just How Bad Has It Been?
Current Bear Market Has Been Less Less Severe Than The Dot-Com Bust

By Mark Hulbert, Marketwatch | 24 January 2009

ANNANDALE, Va. (MarketWatch)— Just how bad has it been in the stock market? Few are even bothering to answer this question, since it appears utterly obvious to almost everyone that what the stock market has been experiencing is unprecedented, at least in modern financial history. Don't we have to go back to the Great Depression to find anything remotely similar? Well, no.

These are the surprising implications of a fascinating study published Thursday by Ned Davis Research, the Venice, Fla.-based quantitative research firm. Pat Tschosik, a senior equity analyst at the firm, took a sober and data-driven look in comparing the popping of the financial sector's bubble over the last 18 months compares to the bust of the Internet bubble in 2000-2002. In several significant ways, believe it or not, the tech experience early this decade was even more traumatic than what has transpired since mid-2007.

Since its peak in 2007, for example, the financial stocks in the S&P 500 index (SPX) have dropped 78.7%— slightly less than the 82.5% by which the information technology stocks in that index dropped in the 2000-2002 bear market. Not so fast, you might object: Surely the financials in 2007 constituted a more important sector than technology did in 2000, right? Not necessarily.

According to Tschosik, the information technology sector represented about 35% of the S&P 500 at its March 2000 peak, in contrast to the 22% weight that the financials sector represented at its peak in 2007. As a result, a greater amount of total market capitalization was destroyed by the tech sector's decline in the 2000-2002 bear market ($3.6 trillion) than by the financial sector's decline since 2007 ($2.2 trillion). To be sure, these historical comparisons provide little solace to investors who have lost huge amounts over the last 18 months. But they do provide a reality check on excessive pessimism and despair.

Just as it's dangerous at the top of a bull market to think that "this time is different"— and that the old rules no longer apply— the same is true when we're at the depths of a bear market. Just as trees don't grow to the sky, as John Maynard Keynes famously once remarked, those trees' roots won't continue descending until they get to China either. The stock market did finally recover from the Internet bust, and so will the current bear market eventually give way to a new bull market. Trite as it may sound to say this, it is a helpful antidote to doomsday thinking.

What Kind Of Change Will Obama Bring

What Kind Of Change Will Obama Bring To The Stock Market?

From A Usually Reliable Source…

The good news is that my data points to a very positive outcome for stocks over the next four years.

But, before we go any further, I want to issue my standard "political content" disclaimer: What I am about to report is in no way based on my personal beliefs about how our great country should be run. This report is 100% driven by empirical, 'unbiased' data (at least, insofar as humanly possible!). Sure, there are always ways to make numbers fit a particular worldview or bias. But that isn’t my intent with this newsletter. My only aim is helping you make smarter investment decisions. Period. I don’t recommend throwing your money away on the altar of your beliefs, but rather on going with what the odds favor.

Look at international trade as financing has disappeared from the banking industry:

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

Now let’s look at the collapse in employment and incomes which come from private sector jobs: This is a reflection of the Wolf Wave as private sector companies lay off workers in order to maintain profitability and solvency. These pictures are of the United States but similar pictures are are mirrored throughout the G7.

Look at the average peak-to-trough employment losses associated with the banking crisis:

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

John Mauldin is reporting that recent reports of of 524,000 new unemployment claims masks the true number of 952,151 (he says it’s not a typo and I believe him). Think of it, almost a million jobs lost in one week and I believe this is just the beginning. He goes on to report that continuing claims rose to 5,832,746 and, if I recall correctly, that is double the number from a year ago. Unemployment is set to double again this year in the US and EUROPE.

Let’s now take a look at the outstanding borrowing and unfunded obligations which must be serviced by these declining incomes:

Wow, debt to GDP of 350%, almost 100% higher than when the Great Depression started. Now let’s look at the value of the assets by which this borrowing is underwritten in the United States (see left). As housing is set to decline another 20%, keep in mind my projections for the S&P 500. Keep in mind also that government debt is serviced through taxes and as incomes and asset values collapse so do government revenues.

Just for fun, let’s take a look at the UK, and see how it compares to US liabilities (from the http://www.Marketoracle.co.uk ):

Future borrowing and ultimately money printing to finance these obligations, or to repair the lenders’ balance sheets (American and European Banks), is set to SKYROCKET! Cumulatively the sum as of January 1, 2009 is already almost 5 trillion dollars and rapidly rising as the bank bailouts are woefully underfunded, as was demonstrated in last week’s bailout of Royal Bank of Scotland, Bank of America and Citigroup. Unrealized losses are piling up at record rates (see below, Europe is worse), the US Bank rescue has consumed $350 billion and the next 'tranche' is being detoured into rescuing new sectors at a rapid rate such as autos, credit cards, mortgage holders, commercial real estate and the list keeps on growing. Lobbyists are lining up like pigs at the trough to get in on the giveaways.

Meanwhile, unrealized bank losses just keep on piling up as this chart illustrates:

In December alone over $320 billion was vaporized from the balance sheets of the nation’s biggest banks! Only we haven’t been told yet… After almost a year of de-leveraging, nothing has been accomplished, as income and book value have shrunk faster than the money can be shoveled in. Europe is in the same boat or worse, depending on the country.

BKX-PHLX/KBW Banking Index
Throughout the US and Europe the biggest banks are toast and will have to be nationalized. You can expect this to happen in all ways but name, merely because the public only understands rescue language. 'Bankrupt' and 'insolvent' will never be used in a headline. Look no further than the 'rescues' of Fannie, Freddie, AIG, Citigroup, Bank of America, Royal Bank of Scotland and more. Shares of all of these companies are headed to Fannie Mae and AIG territory near 1 Dollar. Want to know where the financial sectors (BKX-PHLX/KBW banking index) are headed? Take a look at the weekly charts which are on a sell signal as they sink to ever new lows and plunge through the downside of the downtrend channel established two years ago:

Brand new sell signals on the weekly charts and the "falling out of the bottom" of the trend channel signal the potential for a crash: RSI declining, slow stochastics on new sell signal, MACD on new sell signal and the ADX trend gauge at a healthy 37 (rarely do trends change when ADX is at this level.)

The financial sector shareholders will be left with nothing as management has failed to protect shareholders and their clients alike, and shareholders have not exercised the proper oversight and kicked the bums out. The losses this year by the biggest banks in the EU and US project to over 2 trillion, and either the government recapitalizes the banks or the financial systems will cease to exist. I predict that most of the top 50 banks in the world will be rescued to the tune of at least another 2 trillion dollars in the coming year.

About my data: It covers the S&P 500 and goes back to 1928. While the 2008 numbers weren’t finalized as this issue went to press, I still chose to include the year’s data, using December 9 as the cutoff. That way, I’m working with a complete eight-decade history, encompassing 20 full Presidential terms (41 years of Republican leadership; 40 years of Democrats).

Five of the most interesting things I uncovered:

1. The first year of a Presidential term is generally the worst for stocks. On average, the "500" rose just 3.1%. However, the first year of a Democratic candidate produced a much better 8.9% gain vs. a 2.78% loss under a Republican (the only negative number in the party averages).

2. The third year of a Presidential term is typically the strongest for stocks, with an average annual gain of 14.12%. In a Democratic third year, the gain is an even stronger 17.7%.

3. Overall, stocks have done much better under Democratic Presidents, with an average increase of 10.1% vs. 3.1% under a Republican White House. This clearly runs contrary to conventional wisdom.

4. In terms of Democratic leadership, the second year is typically the weakest for stocks, producing a gain of 4.29%. A Republican’s second year was good for 3.81%.

5. Of President G.W. Bush’s eight years in office, five saw a double-digit move exceeding 13 percentage points.

Strictly going by the past, 2011 would be expected to post the strongest gain (but, of course, with the usual caveat that "past performance is not predictive of the future"). I find that extremely interesting, especially in light of what top economists are forecasting right now— a deepening recession/depression through 2009, and a housing bottom as late as 2010. In other words, based also on fundamental analysis, 2011 would seem to be the light at the end of the tunnel for the U.S. economy.

Typically, stocks 'anticipate' the beginning of an economic recovery. But given the psychological damage that has been done by this severe downturn, perhaps many investors will fail to jump in until the market has already made a substantial jump forward. In other words, 2011 could be the year that stocks really surge from latecomers and momentum players piling back in.

What about the time between then and now?

Based strictly on the Presidential cycles, 2009 will produce a below-average, but positive, return for stocks. Ditto for 2010. On the other hand, the current climate is hardly typical— so, based on the data with which I introduced this report, I would expect down markets in 2009 and 2010. Much will depend on how swiftly and effectively the new Administration handles its massive challenges. And, Obama has already announced his intention to launch the largest infrastructure initiative since Eisenhower developed the U.S. highway system about 50 years ago.

There’s no question our nation could use a facelift— just take a look at the bridges in your immediate area and I’m sure you’ll agree. But as always, the question is whether this money will really flow to the places where it’s most needed. Since we’re talking about the government here, I’m going to say "probably not." Regardless, the investment should be a nearterm positive for the economy (and stocks).

I also expect another stimulus package geared toward putting money directly into taxpayers’ pockets. Frankly, I’m not a fan of such efforts. We’re simply borrowing from our future selves to buy big-screen TVs today. Investing in infrastructure at least creates jobs and improves our daily lives for decades to come.

I believe Obama’s direct effect on Wall Street will be more positive than many expect. He talked tough on the campaign trail, but his recent appointments are all centrists who have been around the block before. While they don’t represent real change, they’re already up to speed and provide a high level of continuity. Once the crisis has been calmed, look for sweeping changes to oversight and regulation.

If the market doesn’t take off immediately, don’t be shocked. As past Presidential cycles demonstrate, it often takes a few years for an Administration (and companies) to see and profit from the benefits of new initiatives. The key is positioning yourself now rather than waiting until everyone else else catches on.

But now that the recession is official, anyways, let’s revisit the sectors. December, 2007 marked pretty much the top of the U.S. economy. As investors, the question we must ask is this— "What areas are best positioned to ride out the tough times ahead and all the other changes likely to happen in the new year?"

Let’s start with where we’ve been. In past recessions, consumer staples, healthcare, and utilities stocks typically outperformed. And they were predicted to be the strongest sectors in 2008. Three specific industries— all in the staples sector— that have outperformed in past recessions are tobacco, alcohol, and household products.

Based on data through the end of November, here’s how the sectors actually performed:

Consumer staples stocks were the top performers in 2008 by a wide margin. In fact, they did twice as well (relative term, I know) as the overall market. Health care and utilities were also up substantially better than the market. All of that is exactly in line with historical data. That’s good news since it means that past performance is still likely to provide a basis for what to expect going forward.

I continue to believe that staples and utilities should make up the bulk of your income portfolio for 2009. As recessionary conditions continue, the companies that provide necessary services will hold up best. Healthcare should play a slightly smaller role until it becomes clearer just how far the new Administration wants to shake things up. My preferred healthcare industry remains pharma.

On the other end of the spectrum is the financial sector. It was the worst place to be in 2008. While the credit crunch and all its challenges were already clear at the beginning of the year, hardly anyone thought we’d see as much additional downside and collapse as we did. In fact, I felt that the group had already been beaten pretty severely.

That didn’t stop the bad news from pouring in from Bear Stearns, Freddie, Fannie, AIG, Lehman and many more of the world’s biggest names in finance. The mounting failures and bailouts came with a swiftness that shocked the entire globe. Still, I maintain my belief that this is not the end of the U.S. financial system as we know it.

But the dividend cuts have been so bad, and the near-term uncertainty is so strong, that I don’t think financial names should play a large role in your portfolio for 2009. That doesn’t mean I won’t recommend the odd bargain or adding to existing positions. One sector that really interests me going into the New Year is another one of the underperformers from 2008— technology.

The best tech stocks are not only paying nice dividends but (so far) are also increasing their payments throughout this downturn. I think that’s a trend worth following, and it is why one of my new recommendations in this issue comes from the tech sector. Yes, I recognize that technology firms tend to get hammered during tough times— as businesses and consumers alike put off upgrades— but the cash-rich companies will come through the weakness just fine.

And Based On Recent Dividend Announcements, This Group Is Emerging As A New Area Of Leadership.
What about the other underperformers— materials and industrials? I think it’s too early to jump in aggressively. As global economies remain in a slump, these firms will likely experience severe business pressure and weak demand. That leaves three sectors uncovered— energy, telecom, and consumer discretionary.

Of the three, energy is far and away my favorite for 2009.

Reason: Lower oil and gas prices do not necessarily hurt major integrated oil & energy companies. Nor do they negatively affect pipeline operators or refiners. Plus, some companies— such as drillers— have been pushed down into value territory. That’s why the portfolio already contains two MLPs that give you strong income-producing positions in the sector. And that’s why I’m recommending you scoop up a solid, well positioned drilling company or two.

I am not ready to get bullish on consumer discretionary stocks. Because their products aren’t necessities, these companies will continue to suffer from tight credit and low consumer confidence. However, as I’ve argued before, some companies, like McDonald’s— despite being considered discretionary firms— do represent good values in this market. Expect select recommendations in this sector for 2009.

That leaves telecom. Competition is fierce in this space, and business prospects are extremely uncertain in this environment. I would continue avoiding this sector, with the exception of high-yield rural local exchange carriers. So, there you have it. While I will not refrain from recommending an attractive dividend stock from any sector, my general outlook for 2009 is as follows:

First, I recommend you overweight staples, utilities, and energy.

Second, I like select companies in healthcare, IT and consumer discretionary for diversification.

Third, I would underweight financials, telecom, materials, and industrials.

Some Great Quotes:

"It's time to start again. I know what's about to happen. I know what Wall Street is up to. I know what they're going to do," he said. "Everyone is way too leveraged. Dozens of the largest and best companies are going broke. The banks will need someone to take the assets off their hands. They'll give me fixed-rate convertible financing— and then inflation will soar. This is what always happens. But this time it will be five or 10 times bigger than the last time. Time for distressed asset funds? It's time to be incredibly cautious about any business that's leveraged— especially real estate investment trusts (REITs). One should list every large American REIT, organized by debt to equity ratio."

Commercial real estate fundamentals are breaking down rapidly. Major retailers are killing open deals. In commercial real estate, expect to see 'blood in the streets' by late this year if not sooner. That is good news for anyone with funds to purchase quality commercial properties at depressed prices. Over the past year, many commercial real estate investors have been trying to figure out how to purchase and profit from the glut of land, developed lots, fractured condo conversions, etc., but the banks have been unwilling to take a hit on these properties and have refused to deal. Now that the commercial market is breaking down, the interest in the former has waned and by the time that the banks are ready to deal, the losses for them will be far, far greater.

Nearly 16 million square feet is currently listed as available in large blocks (generally 100,000 square feet or more) in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is almost twice the number of blocks and total square footage listed as available a year ago. And Colliers says those numbers are headed up.

Subleases represented the biggest increase. At least 16 large Manhattan blocks are being marketed for subleasing, up from only three a year ago. In addition to higher vacancies, rents are also falling... in the neighborhood of 20% to 30% to around $80 a square foot in Midtown. Higher vacancies, lower rents, more problems in the future... may be time to short REITs.

Trying to avoid the vulture investors, a group of companies including American Electric Power (AEP), Textron, Home Depot, Honda, Dow Chemical, and Nissan is pushing the Fed to buy their paper, i.e. 'bail them out'. The coalition wants the Fed to go beyond top-rated paper and buy debt with the second-highest grade. AEP CEO Holly Koeppel said the group is looking to add more members.

Every time the government bails out another name business, the stock market craters. And more and more companies line up to be bailed out. Where will it end? Nothing scares me worse than this trend. It's what prolonged the Great Depression [[and the interminable Japanese deflation: normxxx]]— propping up 'zombie' corporations, "for the good of society". And we seem hell-bent on repeating all of those mistakes.

"It doesn't add up that they are letting GE and American Express become banks to get aid, but they won't save the car industry." Maybe everyone should become a bank. The Big Three auto companies haven't been truly profitable or competitive in two decades, or more. They have failed.

If we give them more money, they'll still fail. It will only take longer and cost more money and remain a constant drag on any economic restructuring. Meanwhile, if you don't allow the automakers to fail, you'll end up crowding out the better companies, who make better products and bring them to the public at a better price. If you never weed the garden, how can your flowers survive?

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

"You’ve heard of mental depression; this is a mental recession. We have sort of become a nation of whiners...We’ve never been more dominant; we’ve never had more natural advantages than we have today....Misery sells newspapers. Thank God the economy is not as bad as you read in the newspaper every day."— Phil Gramm.

The Parting Shot

The swindling of billions of investors’ capital by Bernard Madoff is sad. But the investors who lost everything with him were fools. They ignored the most basic rules of investing that would have protected them. Some thirty centuries ago King Solomon of Israel, one of history’s wisest men, warned

"Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land."

Always divide your capital by 7 or 8 ways! Never have all of your investment capital in one asset class, at a single brokerage company, or managed by a single fund, or in a single geopolitical region. As the Bible warned, this is just plain foolish because none of us knows what the future holds. Diversification is essential to protect you if one allocation fails totally for any reason. The Bible goes on to say,

"Plans fail for lack of counsel, but with many advisers they succeed."

Always seek multiple, independent wise counselors for any advice.

ߧ

Normxxx    
______________

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.

Treasuries Are The Key

Treasuries Are The Key In 2009
Click here for a link to complete article:

By Jordan Roy-Byrne | 10 January 2009

In 2008, the market that was the trigger for other markets was the currency market. The bottom in the dollar led to a peak in commodities and helped spur massive deleveraging and selling of various holdings. For certain, the increasing strength of the Yen also caused great damage to the global economy and global capital markets. There were only a handful of places to hide, free of volatility and immediate risk. Either you owned government bonds, the dollar or the yen. Gold advanced in 2008, though with extreme volatility compared to other safe-havens.

We believe that 2009 will be similar to 2008 in that a particular market will affect all other markets. As we showed in the Market Outlook, Treasuries are very likely to be the key market and that also includes foreign government bonds (of the largest nations). There is a reason and it's simple. In a deflationary environment money moves to the safety of government bonds. Governments swell in size (both literally and figuratively) to help the economy fight deflation, which cripples the private sector. A recovery ensues only after money begins exiting government bonds for more productive purposes.

In today's case money will move out of government bonds to seek a real safe haven and to maintain purchasing power and the value of savings. Keep in mind that the US in 1929 and Japan in 1990 maintained surpluses. Few nations today have a current account or budget surplus. Furthermore, exacerbating conditions will make it even more difficult for the 'creditor' nations to lend to the debtor nations [[think China and their problems! : normxxx]]. The decline in the US trade deficit, commodity prices and economic activity will simply lead to even tighter global liquidity, fewer creditor nations, and ultimately monetization. [[which has already begun in the US: normxxx]]. The crash in oil means that Russian and Arab Treasury purchases will decline drastically [[some projections have the Russians running through their reserves by March!: normxxx]].

The global recession will halt and/or limit Japanese and Chinese Treasury purchases. The massive decline in commodity prices will hurt the accounts of Brazil, Canada and Australia. Furthermore, why would one government lend to other governments in debt when they have their own economic problems to worry about?

In the wake of the crisis, the currencies of weaker nations were and will continue to be hammered. These nations don't have the borrowing power of the US or UK and their debts are often denominated in 'hard' foreign currencies, less likely to depreciate. [[The EU has no Eurobonds, a major weakness that could lead to the dissolution of the EU as rates all over Europe go wild. The spread beween German bunds and Greek bonds is close to 3%— an unimaginable breach.: normxxx]] Hence, printing money would cause immediate hyperinflation in their currencies. In 2009 the borrowing power of the stronger nations is going to run out. Creditor nations will have sharply reduced surpluses and thus a reduced capacity to borrow or lend.

Also, 'citizens' (ie, 'non-government' institutions) can only buy so many government bonds. This is how and when monetization will occur. Budget deficits will bleed red and government bonds will begin to plunge in price (leading to higher yields), reflecting the poor fundamentals and the diminishing capacity for international lending. The larger nations are going to have to monetize [[to keep long term yields down, as in the US, if for no other reason: normxxx]] and that is what will spark the real surge in Gold and Silver [[but probably not while deflation still rages: normxxx]]. Just take a look at these headlines from January 19.

Eurozone budget deficits to soar as economy shrinks
Gilts Tumble on Speculation U.K. Government Borrowing Will Rise
Spain Downgraded by S&P as Slump Swells Budget Gap

Keep in mind that we write with the full 2009 in view. Until government bonds and specifically US Treasuries roll over, deflation will be the order of the day. Be wary however, as the "whip-around" is likely to be quick and nasty. It will be difficult to determine when that turnaround occurs (except, as usual, in hindsight), though we will do our absolute best to spot it! Our thoughts on when this "whip-around" is likely to occur are included in our 2009 Market Outlook. All the best to everyone in 2009!

  M O R E. . .

Normxxx    
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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.

An Accident Waiting To Happen

The Bond Bubble Is An Accident Waiting To Happen

By Ambrose Evans-Pritchard, Telegraph,UK | 22 January 2009

The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe. Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so. Yields on 10-year US Treasuries have fallen to 2.4%— a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.

It is much the same story across the world. Yields are 1.3% in Japan, 3.02% in Germany, 3.13% in Britain, 3.26% in Chile, 3.47% in France, and 5.56% in Brazil. "Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week. It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.

These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse. Woe betide any investor who misjudges the consequences of this strategic shift.

Russia has lost 27% of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money— disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.

China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports. This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy— now in trouble. Even Japan has slipped into trade deficit.

Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year. Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.

James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate. That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25%, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18%.

Mr Montier said yields have averaged 4.5% over two centuries, with a real return of around 2%. By that benchmark, the market is now banking on a decade of deflation. Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.

"Today's yields are woefully short of the estimated fair value under normal conditions. There may be a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," he said. Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12% annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6% rate, and Britain shrank at 5%.

If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5%. Gordon Brown will be lucky to get off so lightly.

The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time. The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap.

So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far. The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5%. US mortgage rates have dropped 150 basis points in two months.

My tentative guess is that Bernanke's blitz will "work"— perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again. "The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.

ߧ

Normxxx    
______________

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.

Western World: Ongoing Collapse, Part I

The (Ongoing) Collapse of the Western World, Part I

UK Cannot Take Iceland's Soft Option
The Euro Is A Torture Instrument For Spain
Biblical Debt Jubilee May Be The Only Answer
Help Ireland Or It Will Exit Euro, Economist Warns
Monetary Union Has Left Half Of Europe Trapped In Depression
Shipping Rates Hit Zero As Trade Sinks

By Ambrose Evans-Pritchard | 21 January 2009

The British government faces an excruciating choice. It cannot let Royal Bank of Scotland and its fellow mega-banks go to the wall. Yet it risks being swamped by the massive foreign debts of these lenders if it takes on their dollar, euro and yen exposure by opting for full nationalisation.

Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion— or twice annual GDP— according to the Bank of England. The mismatch is perilous. It is why sterling has crashed 10 cents from $1.49 to $1.39 against the dollar in two days. The markets have given their verdict on Gordon Brown's latest effort to "save the world".

Credit default swaps (CDS) measuring risk on British debt have reached an all-time high of 125 basis points, just below Portugal. The yield spread on 10-year Gilts over German Bunds has doubled to 53 basis points since last week. Standard & Poor's has quashed rumours that it will soon strip Britain of its AAA credit rating— an indignity averted even after the International Monetary Fund bail-out in 1976. But there was a sting yesterday as it responded to the Treasury plan for the banks.

"Market confidence in the sector has eroded to such a degree that it is not clear whether these measures by themselves will bring about a material improvement," the IMF said. "As a result, full nationalisation of some banks remains a possibility in our view." Spain was [downgraded] from AAA to AA+ on Monday, and Spain's public debt is a much lower share of GDP.

"If Spain can get downgraded, then the risks for the UK are self-evident," said Graham Turner, of GFC Economics. "The increase in the UK gross public debt burden— 11.8 percentage points in just one year— is troubling. The market rightly fears the long-term fiscal costs of a collapsing banking system. Rising Gilt yields are the main impact of the botched move from the UK Treasury."

Mr Turner said the British Government had taken far too long to resort to quantitative easing— printing money— and had wasted months with fiscal frippery as debt deflation throttled the banks. The parallels with Iceland are disturbing. The country was ruined by the antics of its three big banks. They built up foreign liabilities equal to 900% of GDP. Operating as hedge funds, they borrowed in dollars, euros and pounds to speculate. However, the state lacked the foreign reserves to match this leverage.

But Iceland at least had the luxury of letting banks default— shifting losses on to the rest of the world. It [simply] refused to honour foreign debts. "They drew a line," said Jerry Rawclifffe, who tracks Iceland for Fitch Ratings. "They created new banks, parking the old losses in 'resolution committees'. It is not easy for other governments to walk away. They have a duty of care."

Indeed, if Britain walked away from UK banks' $4.4 trillion of foreign liabilities— worth eight times Lehman Brothers— it would destroy the credibility of the City and take the whole world into deeper depression. "The UK cannot go down that route because it would set off an asset price death spiral," said Marc Ostwald, a bond expert at Monument Securities. "The Western banking system is already on life support. That would turn it off altogether."

So whatever the temptations, and whatever the feelings of righteousness over the follies of the RBS leadership in its debt-driven campaign of Napoleonic expansion, the Treasury is wedded to the banks and all their sins. Chancellor Alistair Darling cannot copy Iceland. S&P's lead UK analyst, Trevor Cullinan, said the Government faces a "severe test" and will be judged by its actions, but he doubts whether matters will reach such a dangerous pass.

"The challenges to UK banks are significant amid a correction in property prices and a contraction of GDP. Nevertheless, the situation is very different from Iceland. The UK benefits from sterling, which is a major global funding currency. UK access to external funding is far more secure. In a worst-case scenario we estimate the cost of recapitalising the UK banking system to be in the region of £83bn (5.7% of GDP)," he said.

The Government can take out derivatives contracts on currency markets to hedge the foreign debt risk. Perhaps it already has. The banks have $4.4 trillion foreign assets to offset their liabilities, of course. But what is their real value in this climate? Britain is not alone in its current distress, although the fall in sterling speaks for itself. The sovereign debt of Russia, Ukraine, Greece, Italy, Belgium, Austria, The Netherlands, Ireland, Australia, New Zealand and Korea is all being tested by the markets. The core of countries deemed safe is shrinking by the day to a half dozen. Sadly, Britain is no longer one of them.

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The Euro Is A Torture Instrument For Spain
Ten Years Of Euro Membership Have Lured Spain Into A Terrible Trap.

By Ambrose Evans-Pritchard | 20 January 2009

Real interest rates of -2% set by Frankfurt for German needs led to a Spanish property bubble of fearsome scale. Construction rose to 16% of GDP, trumping the British and US bubble by large margins. Spanish companies tapped the euro capital markets as if there was no tomorrow. Reliance on foreign borrowing reached 10% of GDP, among the world's highest. Wages went up and up. The result is a current account deficit that is also 10% of GDP.

Now what? A country with full control over all levers of economic policy can claw its way out of such a hole. Spain can do almost nothing. A key reason why Standard & Poor's has stripped Spain of its AAA credit rating is that the country no longer sets its own interest rates and cannot devalue its currency to restore balance.

S&P did not say explicitly that EMU has become an instrument of debt-deflation torture for Spain. That would be breaking the great euro taboo. It insisted that EMU provides an anchor of stability. But that is pro-forma dressing. The sub-text is that Spain cannot recover until it breaks its chains.

It is true that Germany regained competitiveness by screwing down wages in the early part of this decade, but it did so when southern Europe was inflating merrily. Spain faces a much harder task. It has to claw back 20% to 30% in labour competitiveness against a stern Germany that will not inflate. Therefore, Spain must deflate. It must embark on a 1930s policy of draconian wage cuts.

It remains to be seen whether this will be tolerated by a democracy. Brussels expects Spanish unemployment to reach 19%— or 4.5m people— by late next year. That is a depression.

Workers are already rising up against the ruling socialists. An angry march by trade unions in Zaragoza on Sunday is the first shot across the bows. As yet, no Spanish heavyweight has questioned the orthodoxy of EMU membership. That may change, as it is changing in Ireland. The euro system is starting to inflict very grave hardship on ordinary people. This is exactly what critics always feared. In the end, it will breed conflict.

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Biblical Debt Jubilee May Be The Only Answer
Once Again, Britain Leads The World In The Macabre Speciality Of Saving Banks.

By Ambrose Evans-Pritchard | 19 January 2009

The Treasury's £200bn plan to soak up toxic debt will be followed within days by a US variant from the Obama team. Germany cannot be far behind. As one bail-out succeeds another at ever more inflated price tags, rescue fatigue is becoming palpable. People are bewildered, fearing that good money is being thrown after bad.

The doubts are understandable but there are tentative signs of a thaw in the global credit system. Libor lending rates in the US, Britain and Europe have fallen sharply. US mortgage rates have dropped from 6.5% to 4.88% since October. Companies can issue bonds again.

"It is easy to conclude that none of the Government's policies are working," said Professor Peter Spencer from York University. "We must not lose sight of the fact that they have prevented the collapse of the monetary system." This does not mean that recovery is imminent. Nothing can prevent a long purge as years of credit leverage give way to debt deflation.

It means only that the downward spiral— the "adverse [or negative] feedback loop" feared by central banks— has been arrested. The first three pillars of the global bail-out are in place. Government money is rebuilding the annihilated capital of banks. This has further to run.

Core lenders in the US, Europe and parts of Asia will be 'nationalised', but that is a detail at this point. It scarcely matters who owns the banks— unless you are a shareholder— so long as they lend. The Fed has cut rates to zero. It is buying mortgage securities on the open market, and eying Treasury debt next. Fellow central banks are exploring their own ways to print money.

The $3 trillion (£2 trillion) fiscal blitz by the US, China, Japan and Europe plugs an emergency gap. With luck, it will keep the world economy on life-support just long enough to stop recession and banking crises from feeding on each other with lethal effect, as they did in 1930-33. The latest plans to "ring-fence" bad debts into "septic tanks" puts in place the fourth pillar. The UK Treasury's version involves a state insurance scheme, letting banks shuffle off their crippling loans and escape mark-to-market torture.

The US version is a "bad bank" for mortgage debt. It is more or less the old "TARP" passed by Congress— before the funds were diverted into bank recapitalisations. This method worked after the Savings & Loan crisis in the 1980s. The market found a floor. The Treasury even made a profit.

German finance minister Peer Steinbrück said he "could not imagine" a bad bank in his country. Time will tell. Der Spiegel reports that Germany's top 20 banks have €300bn (£270bn) of bad debt, booked at "illusory" prices. They have written down just a quarter of their losses.

Taken together, the rescues may make the difference between global recession and a deeper slump that causes mass unemployment and social turmoil, perhaps destroying the open global order we take for granted. We can only guess. There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital.

Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets. In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Creditors are not going to like that.

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Help Ireland Or It Will Exit Euro, Economist Warns
A Leading Irish Economist Has Called On Dublin To Threaten Withdrawal From The Euro Unless Europe's Big Powers Do More To Rescue Ireland's Economy.

By Ambrose Evans-Pritchard | 19 January 2009

"This is war: countries have to defend themselves," said David McWilliams, a former official at the Irish central bank. "It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe," he told RTE radio.

"If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, then Italy and Greece," he said.

Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo. He has raised threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone's southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU's Lisbon Treaty.

"If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down," he said. Mr McWilliams cited the example of New York's threat to default in 1975. President Gerald Ford "blinked" at the 11th hour and backed a bail-out to prevent broader damage.

As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97% reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever's ex-chief Niall Fitzgerald.

"The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity," Mr Fitzgerald said. Mr McWilliams said EMU was preventing Irish recovery. "The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else's. But we, of course, have ruled this out by our euro membership.

"We are paying twice for the euro: once on the exchange rate and once more on the interest rate," he said. By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. "Is this the sort of strategy to win wars?" he asked.

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Monetary Union Has Left Half Of Europe Trapped In Depression

By Ambrose Evans-Pritchard, Telegraph, UK | 18 January 2009

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state. A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling even before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project— either in EMU or preparing to join— and each is trapped. As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker— a "prison of nations", to borrow from the Austro-Hungarian Empire. This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

"Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers, who called for the dissolution of parliament. In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.

These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts. The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26% of GDP. Riga property prices surpassed Berlin.

The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56% since mid-2007. The economy contracted 18% annualised over the last six months. Leaked documents reveal— despite a blizzard of lies by EU and Latvian officials— that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.

This was blocked by Brussels— purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project.

Latvians have company. Dublin expects Ireland's economy to contract 4% this year. The deficit will reach 12% of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach (Irish 'Prime Minister').

The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment. To cap it all, Dell is decamping to Poland with 4% of GDP. Irish wages crept too high during the heady years when Euroland interest rates of 2% so beguiled the nation.

Spain lost a million jobs in 2008. Madrid is bracing for 16% unemployment by year's end. Private economists fear 25% before it is over. Meanwhile, Spain's wage inflation has priced their workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.

Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste". Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 points last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis"— a new twist.

They mean that capital flight from Club Med could set off an unstoppable process. Mexico's "Tequila Crisis" drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.

Fixed exchange systems— and EMU is just a glorified version— rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.

Don't expect tremors before an earthquake— and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia. Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions. In other words, the ECB is already providing a stealth bail-out for Europe's governments— though secrecy veils all. An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?

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Shipping Rates Hit Zero As Trade Sinks
Freight Rates For Containers Shipped From Asia To Europe Have Fallen To Zero For The First Time Since Records Began, Underscoring The Dramatic Collapse In Trade Since The World Economy Buckled In October.

By Ambrose Evans-Pritchard, Telegraph, UK | 14 January 2009

The cost of shipping goods from Asia to Europe has tumbled

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster." Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs.

Container fees from North Asia have dropped $200, taking them below operating cost. Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96%. The BDI— though a useful early-warning index— is highly volatile and [often greatly] exaggerates ups and downs in trade. However, this latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets. Korea's exports fell 30% in January compared to a year earlier. Exports have slumped 42% in Taiwan and 27% in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18% year-on-year, a far more serious decline than anything seen in recent recessions. "This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes. It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data. Mr de Trenck predicts Asian trade to the US will fall 7% this year. To Europe he estimates a drop of 9%— possibly 12%. Trade flows grow 8% in an average year.

He said it was "illogical" for shippers to offer zero rates, but they do whatever they can to survive in a highly cyclical market. Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.

ߧ

Normxxx    
______________

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.

The Next Catastrophe

The Next Catastrophe
Think Fannie Mae And Freddie Mac Were A Politicized Financial Disaster? Just Wait Until 'Politically Correct' Pension Funds Implode.

By Jon Entine | 21 January 2009

Funds worth trillions of dollars start to plummet in value. Political pressure to be "socially responsible" distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protected wake up to a sinking feeling of uncertainty and gloom.

Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes another calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with "defined benefit" accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations. From January to October 2008, defined benefit funds— those promising a predetermined amount of retirement money to the payee— averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds.

The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.

If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll 'contributions'. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.

During melting markets, all pension funds come under siege. If you’re covered by a "defined contribution" plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.

The risk shifts to the employer under "defined benefit" plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.

The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing. Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans.

If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits. Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted. Yet the investment performances of their corporate pension funds, while dismal, are holding up better than the returns of many public and union defined benefit plans. Those funds are facing their own reckoning, but in this case a lot of the pain is self-created and exacerbated by politics.

Social Investing Shenanigans

There is about $3.5 trillion sloshing through the U.S. retirement system, scattered across more than 2,600 public pension funds and federal retirement accounts. Another $1 trillion or so covers union workers at corporate jobs in which the union has key management control of the fund. These public and union-based defined benefit plans cover 27 million people and represent more than 30 percent of the $15 trillion dollars held in U.S. retirement accounts.

Traditionally, public investments and union-based corporate pension funds were managed according to strict fiduciary principles designed to protect workers and taxpayers. For the most part they invested in safe government securities, such as bonds or U.S. Treasury bills. Professional managers oversaw the funds with little political interference.

But during the last 30 years, state pension funds began playing the market, putting their money into riskier and riskier securities— first stocks, corporate bonds, and foreign investments, then real estate, private equity firms, and hedge funds. Concurrently, baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. Investments designed for the long-term welfare of retirees began to evolve into a political hammer.

Some good occasionally came from the effort, as when companies were pushed to become more accountable in their practices. But advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects. Sometimes the money went to the very companies and financial instruments that, in the wake of the market meltdown, are now widely derided.

Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as "socially responsible investing," or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don’t make it through certain "sin screens." These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications of agriculture, many of which did well over the past decade.

Stocks of public companies deemed to have poor records on labor, environmental issues, women’s rights, and gay rights are also frequently screened out, as are corporations that do business with foreign regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions. Socially responsible investing now claims a market of more than $2 trillion, according to the Social Investment Forum, the trade group for social investors.

There are dozens of mutual funds and investment advisory companies that incorporate ideological screens. Most of them are liberal, although there are now a few conservative funds and some based on religious principles, such as Islamic law. Activist treasurers and pension fund managers in numerous states and municipalities, most notably in California, New York, and Connecticut, have incorporated social screens into their investment strategies.

Many of these funds prospered in the 1990s, when the basic material stocks that they frowned upon swooned, while the favored sectors— mostly technology and financial stocks, which were considered "clean investments"— did great. But the technology and communications bust of 2000–02 knocked out one of SRI’s pillars, and now the crash in financial stocks has destroyed the other. Despite much hype to the contrary, socially responsible stocks, as measured by major broad-based SRI stock funds, have significantly underperformed the market this decade, and some of the most aggressive pension funds that use "responsible" screens— such as the California Public Employees’ Retirement System— have taken some of the largest hits.

"Investing in socially responsible stocks just because they are socially responsible is not— underline not— a valid investment thesis," says Steven Pines, a senior investment consultant for Northern Trust. Many of the largest socially responsible mutual funds, including a leading benchmark, the Domini Social Index, have been laggards for years. The Sierra Club’s high-profile social fund, which had regularly trailed the benchmark S&P 500 index by about 6 percent a year, liquidated in December, a victim of its poor performance record. As recently as last November, 76 out of the 91 socially responsible stock funds were underperforming the Dow, according to the investment research company Morningstar.

"This crisis highlights the limitations of social research methods," says Dirk Matten, who holds the Hewlett-Packard chair in corporate social responsibility at York University’s Schulich School of Business. Although some socially responsible research models are more sophisticated than others, particularly ones that eschew simplistic screens, social investors have downplayed the actual business of a business, including whether it can create jobs and spread wealth, while overweighting what Matten believes are more symbolic concerns, such as 'announced' programs to combat climate change.

Sometimes corporate social responsibility can mask or come at the expense of responsibility to shareholders. Fannie Mae, for instance, was named the No. 1 corporate citizen in America from 2000–04, based on data compiled by the top U.S. social research firm, KLD Research and Analytics in Boston. Well, it does have a great diversity program.

As recently as mid-2008, three of the top eight holdings by the leading social investing organizations in the country were financial stocks: AIG, Bank of America, and Citigroup. AIG was praised for its retirement benefits and sexual diversity policies; Bank of America strove to reduce greenhouse gas emissions and promote diversity; and Citigroup donated money to schools and tied some of its loans to environmental guidelines. The stock prices of all three companies tanked in 2008.

From South Africa To The Shop Room Floor

The catalyzing event that changed pension funds from boring retirement pools to political operators was the international boycott of apartheid South Africa in the 1980s and the campaign to limit investments in companies that did business with Johannesburg. The success of the campaign energized baby boomers, now entering their prime earning years, who were committed to "making a difference" with their dollars. Taking a cue from these 'social investors', pension funds began dabbling in what came to be known as economically targeted investments— injecting money into communities or projects that addressed social ills, with healthy returns becoming a secondary concern.

The earliest pension fund social investing initiatives were often cobbled together during crises, with little appreciation for unintended consequences. In the 1980s, for example, the Alaska public employee and teacher retirement funds loaned $165 million— 35 percent of their total assets— for the purpose of making mortgages in Alaska. When oil prices fell in 1987, so did home prices in the nation’s most oil-dependent state. Forty percent of the pension fund loans became delinquent or resulted in foreclosures.

While unions and social investors often work together, their investment strategies are not always in sync. In 1989, under union pressure, the State of Connecticut Trust Funds invested $25 million in Colt’s Manufacturing Co. after the beleaguered gun maker— hardly a favorite of the SRI crowd— lobbied the state legislature to save jobs. Colt’s filed for bankruptcy just three years later, endangering the trust funds’ 47 percent stake.

In the late 1980s, the Kansas Public Employees Retirement System, then considered a model of activist social investing, placed $65 million in the Home Savings Association, after its lobbyists told top officials that this would help struggling segments of the state economy. That investment evaporated when federal regulators seized the thrift. All told, the Kansans wrote off upward of $200 million in economically targeted investments.

Olivia Mitchell, executive director of the Pension Research Council at the Wharton School, has reviewed the performance of 200 state and local pension plans from 1968 to 1986. She found that "public pension plans earn[ed] rates of return substantially below those of other pooled funds and often below leading market indexes." In a study of 50 state pension plans during the period 1985–89, the Yale legal scholar and economist Roberta Romano concluded that "public pension funds are subject to political pressures to tailor their investments to local needs, such as increasing state employment, and to engage in other 'socially desirable' investing." She noted that investment dollars were directed not just toward "social investing" but also toward companies with lobbying clout.

Because of poor returns, these early experiments in economically targeted investments lost their allure. Most states and municipalities steered clear of social investing for a time. That hesitancy eroded during the 1990s, partly as a result of a new strategy employed by organized labor.

With their membership falling, union leaders found it harder to influence companies or politics from the factory floor. The new approach was to ally with social investors and adopt one of their key tactics: lobbying through shareholder resolutions intended to pressure corporations. "The strengthening of shareholder democracy promises to further empower investors to address governance issues such as out-of-control executive pay as well as environmental and social issues such as climate change," Jay Falk— president of SRI World Group, which advises pension funds on social investing— said in 2007, as the tactic was gaining traction.

Union-led pension funds are also trying to rattle political cages, but they’re running closer to empty every day. Even before the sell-off, in the summer of 2008, while nearly 90 percent of nonunion funds met minimum safe funding thresholds— meaning they had adequate cash on hand to pay their benefits— 40 percent of union funds were at risk. "These are high risk numbers even in a steady economy," writes Diana Furchtgott-Roth, a pension fund specialist with the conservative Hudson Institute, in a recent study. Furchtgott-Roth notes that union fund management practices are opaque, costs are higher than at nonunion funds, and the plans have promised more than they can ever hope to deliver. "When workers entrust their retirement assets to an outside party, it is important that this party’s only interest be in achieving the best returns possible," she argues. "Unions clearly do not do this."

California Screamin’

The biggest comeback of socially responsible investing also took place in the 1990s, when elected officials in New York, Connecticut, Minnesota, and— most notably— California began to dabble in asset allocation decisions based on a growing list of 'social' concerns. CalPERS is the 800-pound gorilla among public pension funds. At its peak value in October 2007, CalPERS and its sister fund, CalSTRS (the state teachers’ pension system), held over $400 billion in assets. Their portfolios have more global influence than the entire economies of most sovereign nations. And during just three months last fall, more than 20 percent of the funds’ combined value evaporated— a horrendous performance for public investments designed to minimize risk and protect retirees. "We have ups and we have downs," said Pat Macht, CalPERS assistant executive officer, as the fall 2008 massacre unfolded.

CalPERS and CalSTRS began flexing their financial muscles by demanding corporate governance reform, publicly excoriating companies they deemed to be poorly managed. It was an aggressive, almost unprecedented demonstration of the growing corporate transparency and accountability movement. The state’s pension fund meddling went into high gear in 1998 with the election of Phil Angelides as California treasurer. If there is a face to pension fund activism, it’s Angelides’.

As political issues go, treasury and pension fund investments are not the sort of hot-button topics that ambitious California politicians usually ride to glory. But Angelides had a vision: to use retirement dollars as a way to change the world, and the state treasurer position became his tool. Under Angelides’ direction, CalPERS emerged as a leading voice on behalf of shareholder rights, at least as he defined them.

To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan. This social activism has acted as a model for public pension funds in other states. Laws directing funds to scrap investments in companies that invest in disfavored countries have passed or are being considered in 20 states, including Texas, Maine, Tennessee, New Jersey, Florida, and Idaho.

In 1999 Angelides’ funds committed $7 billion to a program called Smart Investments to support "environmentally responsible" growth patterns and invest in struggling communities. As in Alaska and Kansas in the 1980s, however, there were no accountability provisions to measure the impact of the venture, let alone to determine its financial consequences. Supported by labor unions and minority groups, Angelides argued that the state had too many billions stashed away in so-called emerging markets— Third World nations where democracy is weak and wages are low— and not enough invested at home creating jobs and housing.

So in March 2000, he rolled out an ambitious social investing program, dubbed the Double Bottom Line, which included dumping $800 million in tobacco stocks and persuading fund managers to shed investments in countries that Angelides thought had questionable environmental or governance practices. He claimed the initiatives would not sacrifice investment returns, saying at the time: "I feel strongly that we wouldn’t be living up to our fiduciary responsibility if we didn’t look at these broader social issues. I think shareholders need to start stepping up and asserting their rights as owners of corporations. And this includes states and their pension funds."

How has this social engineering worked out? Angelides left his job as state treasurer in 2006 for an unsuccessful run for governor, but his legacy of politicizing pension fund investing remains. In 2003 CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations— Thailand, Malaysia, India, and Sri Lanka— based on their alleged misdeeds. That was a costly decision, as their stock markets roared in the ensuing years. Another decision to shun investment in China, India, and Russia cost the fund some $400 million in forsaken gains, according to the fund’s own 2007 internal report.

Under sharp criticism and amid devastating declines, CalPERS last August finally repealed the screening policy, claiming victory in its reform efforts. "Year by year, scores [of countries and corporations that invest in them] are improving, and many countries have responded to our standards for investing," CalPERS President Rob Feckner said in a press release. CalPERS’ tobacco boycott was equally disastrous. With the float of most large cigarette companies so large, disgorging even a sizable fraction of one company’s shares has little impact on the stock price; it’s akin to taking a thimble full of water out of the deep end of a pool, only to have it dumped back in the shallow end when the buyer makes his purchase.

Since California sold its tobacco shares, the AMEX Tobacco Index has outperformed the S&P 500 by more than 250 percent and the NASDAQ by more than 500 percent. That one decision alone cost California pensioners more than $1 billion, according to a 2008 report by CalSTRS. Some of the most steadily performing sectors, through both good and bad times, have been the very "vice" stocks that are no-nos for most social investors.

When times get tough, the sinners get sinning. "Demand for drinking, smoking, and gambling remains pretty steady and actually increases during volatile times," says Tom Glavin, chief investment officer at Credit Suisse First Boston. Alcohol, tobacco, and gambling stocks rallied solidly during two of the last three major recessions, in 1990 and 1982. "Many of these industry groups tend to be beneficiaries of the flaws of human character," Glavin says.

So what stocks did the California funds buy instead? High on the list were financial stocks, which have been given a green bill of health by social investors. CalSTRS recently acknowledged it had lost hundreds of millions of dollars on Lehman Brothers, AIG, and other fallen icons that were recent favorites of social investors. But those losses may pale when the tab comes due for misplaced bets on the boom-to-bust California real estate market. According to a report released last April, CalPERS had 25 percent of its $20 billion real estate assets in the California market, which has declined faster than the real estate markets in most of the rest of the country.

In the summer of 2007, CalPERS was more than 100 percent funded. It’s now under 70 percent funded and falling, and that doesn’t fully factor in its plummeting real estate investments. Funding levels stand near a dismal 50 percent for Connecticut, where State Treasurer Denise Napier has been a vocal proponent of social investing. Both states are far below mandated minimum funding standards, and they pale in comparison to even the beleaguered ratios of corporate defined contribution plans, which have mostly avoided using social screens.

Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap. "This is adding insult to injury," says Jon Coupal of the Howard Jarvis Taxpayers Association. "At the same time we’re seeing our own 401(k)s get hit, we’re on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk."

When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.

Unsteady Future

Public and union pension funds will be increasingly important factors in financial markets for the foreseeable future. As part of their fiduciary mandate to maximize investment returns, their trustees certainly have a right and duty to lobby for changes in corporate behavior that could result in better returns for their pension holders. But judging by the words and actions of some pension activists, "shareholder value" has become synonymous with "cause-related investing," justifying a range of actions that may put at risk, directly or indirectly, pensioners’ retirement holdings. If the goals of pension managers and retirees are not the same— as is often the case— then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.

A few politicians have begun speaking out against risking pension funds on political causes, for fear of limiting returns in a difficult investment climate. New York state and New York City public funds prohibit investing in new tobacco stocks, a policy that has drawn the ire of Mayor Michael Bloomberg, even though he is a zealous opponent of smoking. "I don’t think we should be using the city’s investment policies…to advance social goals, no matter how admirable those goals are and no matter how much I believe in it," he has said.

Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.

Jon Entine is a columnist for Ethical Corporation, an adjunct fellow at the American Enterprise Institute, and a consultant on sustainability. His website is jonentine.com.

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Normxxx    
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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.

Europe: Long And Deep Recession Forecast

Long And Deep Recession Forecast In Europe
A Gloomy Forecast for Australian Economy in 2009

By The Associated Press | 20 January 2009

BRUSSELS, Belgium (AP)— The European Union said Monday it is facing a "deep and protracted recession" and slashed growth forecasts, while Britain announced its second massive bank bailout in just over three months in another wave of bad economic news in Europe. The economy in the 16 nations that use the euro will shrink by 1.9 percent in 2009, with the entire EU contracting 1.8 percent, the European Commission said. That is a drastic cut from its earlier forecasts of 0.1 percent for the euro zone and 0.2 percent for the EU.

The 27-member bloc said 3.5 million jobs will disappear in the EU in the year ahead as business and household spending falls and banks tighten lending. Government demand and investment will be the only source of growth— but that carries a heavy price tag. Government deficits will hit the highest level in 15 years as they borrow heavily to stoke growth to combat the world economic crisis that began with bank losses on securities backed by shaky U.S. mortgages.

The EU executive raised warning flags about credit conditions, saying European states may need to inject more than the euro300 billion ($398 billion) they have already put into banks "to avoid a sustained drag on bank lending." It said the economy would be faring much worse without current EU nations' plans to boost growth by spending 1 percent of gross domestic product this year, which should bring an additional 0.75 percent growth.

Britain— an EU member which has not joined the euro— said it would launch its second bank bailout in just over three months by offering banks a chance to guarantee bad securities for a fee in return for a requirment to increase lending to businesses and consumers. It also set aside 50 billion pounds ($74 billion) for the Bank of England to buy troubled assets from banks. Bank stocks plunged, with Royal Bank of Scotland shares falling 70 percent to only 10 pence after it announced the largest loss in British corporate history and the government raised the 58 percent stake it took as part of the first bailout to around 70 percent.

The EU said the downswing will be particularly marked in Britain and more protracted in Spain. It warned that the outlook was still exceptionally uncertain, describing the global economic crisis as the worst since the second world war. The EU predicted a moderate recovery in 2010, when the EU could grow 0.5 percent, with the first green shoots to come in the second half of 2009.

European Central Bank President Jean-Claude Trichet was more gloomy, saying this year would be "very difficult" and a rebound might only come in 2010. In a speech in Paris, he said officials had underestimated the risks facing the economy in the last two years and growth this year would be substantially lower than the ECB's last forecast that the euro area would contract by up to 1 percent this year. The EU warned that "the main issue is whether the recovery will be a lasting one."

In Europe, it cautioned that it could not rule out that "very weak economic sentiment may continue for some time as concerns about a long and deep recession spread, particularly with unemployment now on the rise." Falling exports will hit Germany hard. Europe's largest economy is also the world's biggest exporter and will likely shrink 2.3 percent this year, it said. German Finance Minister Peer Steinbrueck said this chimed with Berlin's own figures.

A sharp German slowdown will hit its nearest neighbors and trading partners. The EU says the British economy will also shrink, about 2.8 percent this year, as the financial sector contracts and a housing bubble deflates, while France will contract by 1.8 percent. Spain and Ireland will also suffer sharply as recent booms go bust and jobless queues lengthen— with nearly one in five Spanish workers without a job by 2010.

But the EU's top economy official, EU Economic and Monetary Affairs Commissioner Joaquin Almunia, dismissed speculation that either nation's soaring public debt would force them to quit the euro currency— which limits the power governments have over fiscal policy. Ratings agency Standard & Poors put euro nations Ireland and Portugal on negative watch last week and have downgraded Spain and Greece as they see more risk of default on public debt. "In the case of the euro area members, I don't think at all that the risks are high or are significant," Almunia told reporters.

He was more critical of Italy and Britain, which he said missed the chance to pay off debt during good times. Governments will see debt and deficits soar as they spend billions of euros (dollars) to speed up the economy and save banks while unemployment benefits increase and tax revenues fall. For euro nations, efforts to balance the books will be swept away as Ireland, Greece, Spain, France, Italy, Portugal and Slovenia will this year break a key EU budget rule to keep their deficits under 3 percent. Germany, Belgium, Austria and Slovakia could join them in 2010.

The EU forecast sees bank lending falling further this year and was supportive of banking bailouts to downsize lenders' balance sheets. However, it did not think much of some governments' rescue measures, particularly temporary cuts in corporate profit taxes and sales tax, saying these simply [postponed] problems for the future.

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A Gloomy Forecast For Australian Economy In 2009

By Meraiah Foley | 20 January 2009

SYDNEY, Australia— The Australian economy, once considered a relatively save haven, is headed for a steep downturn in 2009, in part because of slower-than-expected growth in China, a leading forecaster said Monday. In a starkly worded quarterly outlook report, the Australian research firm Access Economics warned that the mining-led economy "will unwind scarily fast" in 2009, sending the Australian dollar and interest rates crashing. "This is not just a recession," the report said. "This is the sharpest deceleration Australia’s economy has ever seen."

The report predicted that the central bank would be forced to cut interest rates to 2.5 percent, from 4.25 percent, to stimulate growth. About 300,000 jobs will be lost and corporate profits will be cut in half, it said. "China’s slowdown is Australia’s recession," the report said. "Many businesses will fail, as demand gains shrink."

It is the latest in a string of worsening predictions about the Australian economy, which has long regarded itself as relatively immune to the financial problems affecting the United States and Europe because of its dependence on commodities. Australian banks have so far avoided crippling exposure to bad mortgage-related debts in the United States, and many economists had believed that continued, though weaker, demand from China for Australian mineral resources would save the country from recession. In its last forecast in November, the International Monetary Fund predicted that China would continue to record strong growth and that Australia would be one of the few industrialized economies to grow in 2009, albeit at a modest 1.8 percent.

But the breakdown in financial markets last year shattered confidence around the world, leaving few corners of the world untouched. A sharper-than-expected fall in Chinese demand for resources exposed Australian vulnerability, the report said. Justin Smirk, an economist with Westpac Banking, one of the biggest Australian banks, said the report was "not far off consensus" among analysts, who are busy revising their forecasts downward as the global economy continues to sour.

"The bottom line is that I would be expecting the I.M.F. to be downgrading its outlook for Australia," Mr. Smirk said. Wayne Swan, the Australian treasurer, said the government, which has already thrown billions of dollars in stimulus money at the economy, was prepared to "take further decisive action" if necessary. But how much more leeway Mr. Swan will have is open to debate.

The Australian government has enjoyed steady budget surpluses and is under political pressure to keep deficit spending to a minimum. Access Economics predicted that falling commodities prices would drag company profits down, meaning fewer corporate taxes to fill federal coffers and inevitable budget deficits. "There’s no doubt that the slowing of the global economy— the impact on commodity prices— certainly has very significant ramifications for growth here," Mr. Swan told a national broadcaster Monday. "It will certainly impact upon the budget bottom line."

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Normxxx    
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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.

CRASH ALERT!!!

Things Are Getting Worse: ROYAL BK SCOTL GR (RBS.L) down 62% today!!!!!!!!! Best to be prepared over the next couple of weeks!

Special Alert from MMA To All MMA Subscribers

It is not often that I issue a special alert, but the technical formation of a weekly "Pat’s Combo Down" in all three U.S. stock markets we track necessitates such an alert, especially given the fact that the last SOS Report was issuing bullish signals at the time it was written. The high and low of the DJIA, SPH, and NDH were above their respective lows and highs of the prior week. And then all three closed below a proprietary support level. This is known as a "Pat’s Combo Down," and is usually an indication of a sharp decline to follow.

It is not a 100% indicator (nothing is), but I would guess it works 90% of the time. As an example of previous instances of this indicator on the weekly charts, observe the Nikkei cash index on the week ending September 26. The high of that week was 12,264. It closed at 11,893. That index then crashed, with a bottom not completed until the 6994 low of October 28, five weeks later. The opposite indicator, a "Pat’s Combo up," occurred in the Euro currency on the week ending December 5. The low of that week was 1.2548. Two weeks later it made a high at 1.4719.

Named after the late Patrick Shaughnessy of Scottsdale, AZ, with whom I had the pleasure of studying about 20 years ago, this is one of the most reliable indicators that I am aware of. As you can see from the examples above, the formation of such a set-up usually leads to a very sharp move that usually lasts 1-6 weeks. We must also keep in mind that such technical signals can occasionally be false signals in the current mixed market environment, so that is one factor that may lead to this being a false signal. But don’t discount it.

This is a powerful and quite reliable signature historically. If the market does crash down hard, it may last into our January 23 three-star [Bradley] critical reversal zone, or perhaps even into the next 'turn' date, which is February 5, the date of the next Employment and Payroll report. A retest of the November lows, or even lower, is possible if the recent 'crest' turns out to be the primary cycle crest. If it was only a 'half-primary' cycle crest, then this move could be completed with a 'half-primary' cycle trough by the January 23, +/— 3 trading days, critical reversal zone. In that case, a decline that only tests— but does not take out the November lows— could be a good buying point.

If long, traders and investors need to be very careful this coming week. If not long, aggressive traders could look to sell short. Once again, we may see huge price movements either way and/or both ways for the next two weeks— reminiscent of September and October. Once again, we may see great stress and strain in the efforts of our government and economic— and maybe even military— leaders to respond to demands for decisions before they have truly come to grips with what is occuring. Seeming gridlock in government and sharp polarity reversals in market positions may again result in a deteriorating lack of faith in ALL governments and leaders, still further roiling the financial markets.

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Normxxx    
______________

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.

Banks Slammed In London

Banks Slammed In London; RBS Shares Drop 67%

By Sarah Turner, Marketwatch | 19 January 2009

FTSE 100 Index Down 0.9%; Lloyds Banking Group, HSBC Holdings Slide

LONDON (MarketWatch)— The U.K. banking sector slumped on Monday, with shares of Royal Bank of Scotland falling nearly 67%, as a government plan to support the financial sector failed to reassure sector investors. Shares of Royal Bank of Scotland (UK:RBS) fell 66.7% to 12 pence in London's top index. On Monday the lender said that it could report a massive loss of up to 28 billion pounds ($41.6 billion) in 2008 while also announcing that it has restructured its recent rescue package, giving the government an even bigger stake. See full story.

The U.K. government plan to take a bigger stake in RBS came amid part of a package of broad measures to stabilize the U.K. financial sector, including a plan that will allow banks to buy insurance against future credit losses on portfolios of risky assets. See full story.

Although investors initially welcomed the measures, doubts soon set in. "I'm not convinced that it's the kind of policy that's actually going to achieve its stated aim of boosting lending because what the government is doing is guaranteeing mortgage debt which is a positive thing but it's not really forcing banks to take the junk off the balance sheet," said Peter Dixon, strategist at Commerzbank. "I think that what we've done today is postpone the inevitable and I think if I was an investor in banking stocks I would be very skeptical that this is 'the end of the line' for government intervention," he added.

Dixon also pointed out that the government scheme to support the mortgage market doesn't come into effect until April and said: "There's an awful lot of bad news that can happen between now and then." Elsewhere in the sector, shares of newly-created Lloyds Banking Group (LYG) (UK:LLOY) plunged 33.9%. The lender also updated on trading, saying that Lloyds TSB traded satisfactorily since November and that there hasn't been a significant change in the trading position of HBOS. Lloyds TSB and HBOS agreed to merge last year.

"Given that mortgage and business banking impairments were horrendous in the third quarter and the trend was getting much worse in October and November, we're not sure that is going to satisfy the market," said analysts at Davy Stockbrokers. Barclays (BCS) (UK:BARC) gave up early gains to close down 10.2%. Shares in the firm plunged 25% on Friday, the day a short-selling ban on financial stocks was lifted. Barclays said late Friday that it didn't know why its shares dropped and also stated that profit for 2008 will likely exceed most analyst forecasts.

Asia-focused banks trading in London weren't immune from losses, with HSBC Holdings (HBC) (UK:HSBA) down 6.5% and Standard Chartered (UK:STAN) down 8.1%.

FTSE 100 Lower

Overall, the U.K FTSE 100 index (UK:UKX) closed down 0.9% to 4,108.47.. Other European shares also fell. U.S. shares closed higher on Friday ahead of Martin Luther King Jr. day. See Europe Markets.

Away from banks, shares of building materials supplier Wolseley (UK:WOS) fell 9.1%. The Sunday Telegraph newspaper reported that the firm is in talks to raise between 200 million pounds and 400 million pounds in equity. "Any equity issue would be dilutive for existing equity holders. Fresh equity would probably be issued at a chunky discount to the current share value," said analysts at Davy Stockbrokers.

Still, Pearson (PSO) shares advanced 4.5%. The media group said it expects to report headline earnings growth of around 20% for 2008, which would be ahead of consensus expectations. It said trading conditions were more difficult in some markets for the fourth quarter, but all businesses "achieved or exceeded" 2008 guidance. Pearson also said the strength of the U.S. dollar against sterling and a lower tax rate helped.

ߧ

Normxxx    
______________

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.

Fight Fire With Fire!

Fight Fire With Fire!
Click here for a link to complete article:

By Bill Bonner | 16 January 2009
Provided as a courtesy of Agora Publishing & The Daily Reckoning

"Yes, one right at the back, red tie, just underneath the cabinet rack," said Ben Bernanke. The Fed chief was giving a speech at the London School of Economics on Tuesday. When time for questions came, our old friend, Terry Easton, wearing a red tie, raised his hand. "Aren't you just making the situation worse?" Terry wanted to know. "Isn't there a better alternative? The Austrian school, for example?"

Here at The Daily Reckoning, we are 'Austrians,' in the sense that we think Hayek was right and Keynes was wrong. We don't believe you can control the business cycle… nor improve on what the free market produces. Given our druthers, we would tell the feds to butt out… and let the 'invisible hand' of the free market sort out the current mess.

Ben Bernanke gave a central banker's reply. He spoke much and said little. In the end, he leaned on a sly metaphor:

"I think it's very important for us to try to put out the fire. I think it's good advice in general, that if there's a fire burning, you try to put it out first, and then you think about the fire code."

What if it's not a fire, but more like a hard rain? It may be disagreeable… but without the monsoon rains, crops won't grow. An economy can't function properly without an occasional downpour; somehow, mistakes have to be washed away. But Terry didn't get a chance to argue metaphors. The speech was soon over and the feds could get back to work— piling up dry tinder!

Every emergency triggers a response… and every response adds to the burden of regulation and debt. In the United States of America, we are still paying for fire-fighting equipment bought by our grandfathers in WWII. And we are still taking orders from bureaucracies set up by the Roosevelt Administration to solve problems that disappeared 50 years ago. [[Like reasonable banking regulation that kept us from imploding for over 60 years?: normxxx]]

Eventually the weight of all these saving graces crush the whole society. But for the moment… there's a fire to put out. Everyone agrees. Conservative, liberal, Episcopalian, Holy Roller… blue eyed, brown eyed… almost every silly joker on the planet thinks the feds need to do more to rescue the economy. Yesterday, the Dow fell another 248 points. Still no sign of the long-awaited Obama Bounce. Maybe it won't happen. (More on that below…)

Oil held steady yesterday and gold dropped $11. Gold looks like it is ready to slip below $800 again. The real question for an investor is one of faith. How much faith do you have in your top officials? Can they pull it off? Can they stop deflation?

There is now no doubt that the world economy has entered a significant correction. Most likely, it will be long and hard. Stephen Roach, in the Financial Times, says America may face a 'lost decade,' like Japan in the '90s. Actually, it looks to us that Japan has suffered two lost decades… it's almost the end of the '00s and its economy still hasn't recovered. And with the yen rising— investors are unwinding their yen-based carry trades— Japan's manufacturers are finding it more difficult to sell than ever.

All around the globe, the news is grim. U.S. retail sales— taking out autos— are the worst they've been in more than half a century. Chinese exports are collapsing. Tiffany's says holiday sales were bad; the rich are cutting back along with everyone else. Overall, U.S. retail sales posted their 6th consecutive month of decline in December.

Meanwhile, the banks are insolvent.

"Banks in need of even more bailout money," says a headline in the New York Times. Analysts say the banks need between $1 and $1.2 trillion more to stay in business. HSBC says it needs $30 billion in the near-term. Bank of America is asking for more too.

Oh my… oh my… what to do? Gotta fight this fire! But how? Fight fire with fire! All over the world people suffer from the mistakes they made in the go-go years. They spent too much. They borrowed too much. They paid too much. Now, all those bad debts, bad investments, and bad balance sheets are burning up— scorching fingers all over the planet.

So what do the feds do to try to fix this problem? Fight fire with fire! Throw some more tinder onto the blaze… get people to borrow, spend and speculate even more!

*** We're still waiting for the Obama Bounce. Hardly ever has there been such a major sell-off not followed by a major bounce. But we wouldn't want to bet too heavily on it. What to do? Our old friend Jim Davidson has an idea:

"The great lift to animal spirits that Obama will give the U.S. could well translate into a temporary stock 'boomlet'. How should you trade it, knowing that the fundamentals remain weak and deteriorating? I believe that the solution is to buy MITTS. Not catcher's mitts but Market Index Target-Term Securities, special purpose trading vehicles on the S&P 500 and the small-cap Russell 2000 Index. "MITTS allow you to profit if the market rallies while guaranteeing that you can't lose money on the downside. In other words, you can play the 'sucker's rally' of 2009 without being a sucker. How is such a miracle possible? "The concept is simple. MITTS are a combination of long-term options on stock indexes with zero coupon U.S. Treasury bonds that are guaranteed to return to their issue value of $10 a share of each MITT on the maturity date. A brainchild of Merrill Lynch, MITTS have been issued on many underlying products with different maturity dates. The two that I recommend to play the probable Obama bounce are ML S&P 500 MITTS (NYSE:MCP) (May 2009, recent price $9.72) and ML Russell2000 MITTS (NYSE:RRM) (March 2009, recent price $9.80). "You are guaranteed a return of 2.9% for holding the ML Russell2000 MITTS until March. This is higher than the return on Treasury notes over five years. You can buy the MITTS through any broker. They are one of the only instruments out there that allow you to make gains on of sucker's rally with virtually no downside risk."

*** It's a question of faith. Those with little faith in their public officials will agree with Stephen Roach; most likely, the world economy led by the United States, is entering a "lost decade" of recession, bear market and deflation. But here at The Daily Reckoning we give the devil his due; if the feds want to really want to destroy the dollar, we believe they'll be able to pull it off. Just give them time.

To that end, we are still rolling on the floor over the proposal to create a 'bad bank' that will buy up bad investments. We thought the banks already had plenty of bad investments of their own. This proposal is really just another backfire in what has become a worldwide blaze. The feds have already set several other back-fires— mostly 'cash for trash' programs designed to enrich Wall Street and the financial sector at the expense of the rest of the society.

And today's news tells us that the European Central Bank is falling in line with its counterparts in Britain and America by lowering rates. The United States central bank is already down to zero. The BOE and the ECB are on their way there. But the real key to the feds' game is neither bailing out the banks nor offering more credit.

Even if their balance sheets were repaired, it will be a long time— probably a generation— before bankers want to lend so recklessly again. And it will probably be at least a generation before people want to speculate on houses again. No, the real key is to undermine the dollar. As long as the dollar is going up against financial assets and consumer goods, people will neither borrow, lend nor spend. Instead, they're going to hold onto every buck as if it were their last.

That's why the bankers are experimenting with "qualitative easing" or "credit easing," as Bernanke called it this week. These are code words for printing money. Rather than recapitalize the bankers, the central banks buy debt directly from the government. This permits the government to finance its stimulus plans without putting pressure on the debt market.

It is as if an investor had entered the market with no resources but his credit… determined to buy up as much government paper as possible on his 'credit'… destroying his own credit in the process.

When central banks buy their own government's debt, they create money 'out of thin air' for the purchase. The money supply increases. If they do enough of this money creation, the quantity of money overwhelms the quantity of goods and services which it can buy. Result: inflation.

That is the feds' goal. So far, they are not succeeding. But we have faith; in the end, they'll get the hang of it.

Bill Bonner

  M O R E. . .

Normxxx    
______________

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.

Why India Won't Rebound Soon

Why India Won't Rebound Soon

By Ven Ram, Barron's | 9 January 2009

India's stock market may look attractive after its massive slide, but there's probably more pain to come. A host of economic and political challenges could keep a new bull market at bay for more than a year.

For those tempted to wade into the indian stock market with a view to making a quick killing after its massive slide, consider the advice that Punch magazine once gave a person who was about to marry: Don't. Although India's benchmark Sensex has fallen about 55% from its peak a year ago, the market is still not attractive as a short-term investment. November's terror attacks in Mumbai aren't even the half of it: The Indian economy, valuation issues and broad political uncertainty all argue for real caution.

Mumbai's Taj Hotel smolders after November's attacks. Reuters/Arko Datta

"Even as absolute valuations have corrected, India's relative valuations remain rich," says Ridham Desai, India Strategist at Morgan Stanley. The market's price-to-earnings multiple, based on expected earnings for the next 12 months, is 60% higher than that of emerging markets as a group. And its price-to-book ratio is a whopping 72% higher.

India fares no better on the dividend-yield front. The roughly 2% dividend yield on the Sensex pales in comparison to what is [now] available in some of the more advanced economies. The dividend yield for the Australian market, for example, is an eye-popping 6.5%, while most other regional markets offer yields well north of 5%.

Seshadri Sen, Associate Director, Research and India strategist at Macquarie Capital Securities, says that even though the Indian markets are trading at just nine times forward earnings, investors need to exercise caution in interpreting that multiple. "With all the earnings cuts that we have seen from companies, what appears cheap may not be so," he says. "We are seeing a fairly sharp slowdown in the economy, but it remains to be seen whether the markets have discounted all the bad news that is in store."

Just how far the indian market got ahead of itself in recent years is borne out by comparing the total market capitalization with gross domestic product. In May of 2007, India's market capitalization overtook its GDP; by January 2008, it had climbed to a frenzied 180% of GDP. In comparison, the ratio for the U.S. market at the height of the dot-com boom was 131%. The ratio for Japan at the peak of its market was 150%.

Those heady days for the Indian market seem distant now. In July the market-cap ratio dropped below 100%, indicating saner valuations. But the market's considerable fall since July doesn't make a persuasive case for a quick return of faith. Any investor betting that the market will go right back up in the short term is essentially saying that there will be an India equities bubble all over again.

While the Indian economy, whose output is now around $1 trillion, looks likely to do well over the next two decades or so, GDP would have to more than double for market capitalization to return to its past glory without valuations being caught in bubble territory. And a doubling of output would likely require at least 10 years of growth, assuming the economy keeps growing at a 7.2% clip.


Passage to Losses: The market fell some 55% in 2008.

It also pays to bear in mind that the Japanese equity markets have yet to recapture the orgiastic exuberance that once caused that country's market capitalization to outstrip GDP. Indeed, Japan's Nikkei index is now roughly at a fourth of the peak set nearly 20 years ago. One of the biggest reasons for the surge in the Indian equity markets was the inflow of funds from foreign institutional investors. But that luck hasn't held in the current bear market: Foreigners have pulled $20 billion from the market since the start of 2008, according to provisional data issued by the Bombay Stock Exchange.

In its 24 years, the Sensex, now at 9,647, has held above 7,000 only for the three-and-a-half years starting in June 2005. The index's mammoth 200% gains between 2005 and early 2008 are perhaps never to be repeated again. Even Warren Buffett would have trouble coming up with returns like that.

A new bull market, Morgan Stanley's Desai argues, is at least 15 months away. "Even if we assume that the market has hit its bottom, previous bear markets show that the market almost always tests the previous low before a new bull market gets underway," he says. "This process of retesting took between 15 and 24 months in the previous three bear markets."

He says the Sensex will probably end 2009 at 8,559, down 11% from now— and it could fall as much as 34%. In a bullish scenario, Morgan Stanley says, the market could climb about 30%. From an economic perspective, Citigroup contends that India is more vulnerable than many of its regional peers when it comes to external financing.

The country's current-account deficit and its debt repayments amount to a significant 18% of its foreign-exchange reserves, hurting the outlook for the currency, Citigroup says. An emaciated rupee— which has lost around 20% so far this year— leaves those Indian firms that have borrowed overseas more vulnerable to a downturn. Says Rajeev Malik, head of India and Association of Southeast Asian Nations, or Asean, economics at Macquarie:

"The [Indian] government has squandered a great opportunity in recent years to undertake reforms from a position of strength stemming from strong growth and increased interest in the country from global investors...India today is experiencing a crisis that is a milder version of what the rest of Asia experienced in 1997: an unanticipated and sudden reversal in the multi-year surge in global capital inflows that causes currency collapse and depresses domestic demand."

He expects India's GDP growth to slow to a seven-year low of 6% in 2009-10. Consequently, the rupee is likely to remain under pressure and weaken from around INR49 against the U.S. dollar now to INR52 by March, but recover thereafter, he says. There are also geopolitical reasons that don't favor an entry into the Indian market at the moment.

For one thing, the country goes to the polls before May to choose a federal government. Most political commentators agree that voters are disenchanted with the current Congress-led coalition, but the other major contender— the Bharatiya Janata Party— seems direly in need of a credible leader at the national level. What's more, Pakistan's current economic crisis, though largely unconnected to India, is likely to make fund managers jittery about the entire South Asian region.

So what do you do if you still want to get some exposure to the India growth story? Picking cheap individual American depositary receipts of Indian companies may be the way to go. Infosys (ticker: INFY), which has a reputation for being one of India's best-managed and most transparent companies, has an undemanding P/E of 11 and a dividend yield of almost 2%. The infotech consulting and software services firm has a cash balance of $1.9 billion, zero debt and a return on equity of 36%. And its cash is held in bank deposits, with absolutely no exposure to mutual funds.

Another stock that appears to offer a decent risk-reward proposition is ICICI Bank (IBN). The stock, which traded around $75 at the height of the India bubble, is now around $18. That is basically where it was trading in 2004, before the India fever caught on. At its current price, the stock is trading at a modest trailing P/E of 14 and an attractive dividend yield of 2.8%. Shares of the country's largest private-sector bank have taken a beating because of concerns about its international business. With 26% of its loan book coming from overseas, investors are rightly worried about problems that might creep up amid the current credit crisis.

The bank has slowed credit growth and is seeking to preserve capital, but worsening global credit-market sentiment might lead to larger-than-expected losses on its international investment book. If the bank can successfully cope with the crisis, its current share price should provide a good entry point for those with a long-term investment horizon, perhaps five years or longer. Right now, that's about the only way to look at any investment in India.

This Just In: Scandal in India. India Promises Action to Prevent Fraud After IT Industry Shaken by Scandal

The Bottom Line: A new bull market in India may be at least 15 months away, thanks to a host of economic and political challenges.

Normxxx    
______________

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.

Get Out Now!

Get Out Now!

By Andrew Bary, Barron's | 9 January 2009

The bubble in Treasuries looks ready to pop, sending prices on government debt sharply lower. But just about every other corner of the bond market beckons— and could provide competitive returns with stocks, even if the equity markets have a strong 2009. The biggest investment bubble today may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%.

Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13.

The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently.

Pimco runs the country's largest bond fund, Pimco Total Return (ticker: PTTRX). Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end.

The chief risk to the Treasury market stems from the potentially inflationary impact of both the Federal Reserve's super-accommodative monetary policy, which has dropped short rates close to zero, and the enormous looming fiscal stimulus from the federal government. It also may take higher yields to attract investors— particularly foreigners— as the Treasury seeks to fund an estimated deficit of $1 trillion or more in the coming year. One sign of trouble for treasuries is the resilient price of gold, which has risen $150 an ounce since late October, to $880 an ounce, despite weakness in most commodity prices.

Investors rightly see gold as an appealing alternative to low-yielding Treasuries and virtually nonexistent yields on short-term debt as the government cranks up its printing presses. Gold was up $45 an ounce last year, while oil was down 50%. Another worrisome indicator: The dollar has weakened recently, losing 10% of its value against the euro in the past month.

It is difficult for individuals to sell Treasuries short, but two exchange-traded funds, the Ultrashort Lehman 20+Year Treasury Proshares (TBT) and the smaller Ultrashort Lehman 7-10 Year Treasury Proshares (PST), offer a bearish bet on the Treasury market. Both these securities are designed to move at twice the inverse of the daily price movement in Treasury notes and bonds. Since the summer, the 20+Year Proshares has fallen almost 50% as Treasury prices have surged. If Treasury yields return to June levels, the ETF could double in price.

Another alternative for T-bond bears is to sell short the iShares Barclays 20+Year Treasury Bond Fund (TLT), an ETF that gives exposure to the long-term government-bond market. While Treasuries look rich, other parts of the bond market beckon, including municipals, corporate bonds, convertible securities, some mortgage securities and preferred stock. The average junk bond now yields 20%, compared with 9% at the start of 2008. Triple-A-rated munis with 30-year maturities are yielding about 5.25%, almost double the yield on 30-year Treasuries. The yield differential between the two markets is unprecedented. Until this year, munis almost always yielded less than Treasuries because of their tax benefits.

Long-term corporate bonds with investment-grade ratings of triple-B now yield an average of 8%, nearly 5.5 percentage points more than Treasuries of comparable maturity. They rarely have yielded more than four points above government debt. Preferred stock of financial companies such as Bank of America (BAC) and Morgan Stanley (MS) yields 9% or more, and many preferreds carry tax advantages because their dividends, like those on common shares, are subject to a 15% federal tax rather than rates on ordinary income.

"The only part of the bond market that you need to be bearish on is Treasuries," says Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "The other sectors are attractively priced." A bearish stance toward Treasuries and a bullish one toward the rest of the bond market represents the consensus view.

Most equity and bond analysts surveyed last month by Barron's projected the Treasury 10-year note would carry a yield of 3% or higher by the end of 2009 ("Out With the Old," Dec. 22). At the same time, it's hard to find bears on corporate bonds. It's nice to be contrary. Sometimes, however, the consensus view is right.

Lately corporate and municipal bonds have rallied, with Merrill Lynch's junk-bond index gaining more than 6% in December, the strongest monthly increase since 1991. Most yield disparities between corporate and municipal bonds and Treasuries still are off the charts relative to historical ranges. Perhaps more important, absolute yields on corporate and municipal debt look attractive relative to inflation, and even stocks.

It's tough to estimate the current price/earnings ratio on the Standard & Poor's 500 stock index because the profit outlook is so uncertain amid a recession. Assume $60 in S&P earnings for 2009 and the index, now about 925, trades for 15 times forward profits, not cheap by historical standards. Equity bulls are betting the $60 estimate proves conservative, and that corporate earnings grow sharply in 2010. The S&P likely earned about $72 in 2008, before massive write-offs.

The smart money is crowding into the corporate-bond market, including investment-grade debt, junk bonds and so-called leveraged loans, which are bank loans to debt-laden companies such as Neiman Marcus, Georgia-Pacific and First Data. Leveraged loans, which are senior to junk bonds, now trade for an average of about 70 cents on the dollar and carry yield to maturities of 10% to 15%. Many equity-oriented hedge funds and mutual funds have added to their corporate-bond holdings because of enticing yields.



"The argument is that the credit markets have to straighten themselves out before stocks rebound," says Marty Fridson, who heads Fridson Investment Advisors in New York. "Investors will rotate into the credit markets and then into stocks when they look more promising." Some investors argue the credit markets are discounting a grimmer economic and financial outlook than the stock market, and thus more opportunity lies in bonds.

There clearly is risk in corporate bonds. Junk-bond default rates, which ran at just 3.4% in the past 12 months, are certain to spike in 2009. Moody's Investors Service expects the U.S. junk-default rate to top 10% in the next year.

Yet, with a 20% average yield, junk bonds could provide nice returns, even in that scenario. "You're buying the market at a pretty steep discount," Fridson says. "You're getting compensated for a severe escalation in defaults."

The average junk issue trades for less than 60 cents on the dollar, and some bonds, like those issued by the bankrupt Tribune, have sunk to just pennies on the dollar. Defaults might have to run at a cumulative 50% rate in the next five years and recovery rates average just 30 cents on the dollar— versus a historical average of about 40 cents— for investors to get sub-par returns. The junk market declined about 27% in 2008, by far the worst showing in the past 20 years.

If history is any guide, 2009 should be better because down years like 1990 often have been followed by big gains. It wouldn't take a lot for junk to return 20% in 2009, given the elevated yields throughout the market. There are plenty of ways to play the junk sector, including ETFs like the iShares iBoxx $ High-Yield (HYG), open-end funds like Fidelity Capital and Income (FAGIX) and many closed-end funds, including some that trade at double-digit discounts to their net asset value.

A complete list of closed-end funds starts on page M45. The Loomis Sayles Bond fund (LSBRX), which owns a mix of U.S. and foreign government bonds, investment-grade corporates and junk debt, fell 22% last year. The fund, co-managed by bond veteran Dan Fuss, now has a current yield of around 11%.

Convertible securities, which were bashed in 2008 in part from forced selling by leveraged hedge funds, offer a nice combination of yield and equity kickers. Issuers include Citigroup (C), Chesapeake Energy (CHK), Vornado Realty Trust (VNO) and Transocean (RIG). Ford Motor 's 4.25% convertible bond due in 2036, trading for about 27 cents on the dollar for a 27% yield to an optional redemption date in 2016, is a good alternative to the common stock (F), which yields nothing. Vanguard, Fidelity and Putnam all have open-end convertible mutual funds, and there are many closed-end funds, including some trading at discounts to their net asset values.

The backdrop for municipal bonds is troubled because state and local governments are getting squeezed by lower tax revenue and sizable outlays for basic services and other needs. Investors are getting compensation via 5% to 6% yields on top-grade long-term securities and high single-digit to low-double-digit yields on Baa-rated bonds from a range of issuers, including hospitals and state-issued tobacco-revenue debt. Risk-averse investors should stick with state general-obligation bonds or essential-service revenue bonds, which rarely default.

The giant Vanguard Intermediate Tax-Exempt fund (VWITX) was unchanged in 2008, while many long-term funds were down 5% to 10%. There are numerous closed-end muni funds trading at double-digit percentage discounts to their NAVs. Closed-end funds carry more risk because of financial leverage. Their yields generally top 6%.

Low-grade munis were bashed in 2008, and no big fund was harder hit than the Oppenheimer Rochester National Municipals (ORNAX), which specializes in riskier securities. It fell almost 50% on the year, two to three times more than other large funds focused on high-yielding munis. It now carries a tempting current yield of 13%.

While the mortgage market was the root of much of Wall Street's troubles in '08, the country's largest mortgage fund, the Vanguard GNMA (VFIIX), turned in a good year, rising about 7%, by sticking with government-guaranteed Ginnie Maes and avoiding riskier investments.

The problem with Ginnie Maes now is that yields have fallen to about 4%, which will make it tough for investors to generate decent returns barring further rate declines. The better opportunities probably lie in riskier mortgage securities that lack a government backing, including battered issues secured by subprime loans and so-called Alt-A loans, which are a notch above subprime.

This area is a minefield, and difficult to play directly. It is probably best to stick with a mutual fund like the TCW Total Return Fund (TGMNX), a mortgage fund run by long-time specialists Jeff Gundlach and Phil Barach. About half its assets are in securities that lack Ginnie Mae, Freddie Mac or Fannie Mae backing. It was up about 1% last year.

For those seeking the safety of Treasuries, the best bet probably is TIPS, or Treasury Inflation Protected Securities. They provide much better yields than ordinary Treasuries unless inflation disappears. The 10-year TIPS yield 2.23%, versus 2.40% for the regular 10-year Treasury. The so-called breakeven annual inflation rate that would result in similar yields on the two securities is just 0.17% annually (2.40% minus 2.23%), versus a typical spread of more than two percentage points.

TIPS offer a nominal yield, plus principal indexed to inflation. If inflation is 3% annually in the next 10 years, in line with the historical average, TIPS will return 5.25% (the 2.25% nominal yield plus 3% for the inflation component). There are several ways to invest in TIPS, including through open-end mutual funds such as the Vanguard Inflation-Protected Securities fund (VIPSX), and an ETF, the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP).

Despite the risks in government bonds, there is a case for the sector. David Rosenberg, the Merrill Lynch economist who correctly called the housing bubble and resulting economic downturn, wrote in a recent client note titled "The Frugal Future" that the current recession resembles the vicious downturns prior to World War II more than the mild downturns since. The credit crisis and what Rosenberg calls "imploding" household net worth in the U.S. are apt to make it linger through 2009, when the economy could contract 3% in real terms, and perhaps into 2010.

Rosenberg thinks the yield on the 10-year Treasury note might bottom at 1.5%. "Sustained negative wealth effects from the slide in housing and equity prices will reinforce the uptrend in the personal saving rate, creating a highly deflationary environment as job losses mount and push the unemployment rate up toward 8.5% in the coming year," he wrote.

It may take such a grim scenario to support Treasuries, given their lofty prices and super-low yields. More likely, the combination of U.S. fiscal and monetary stimulus will lift the U.S. out of recession by the second half of next year [[oh, that infamous 'second half recovery' scenerio: normxxx]] and the global economy will expand in 2009, albeit at a slower pace than in 2008. Morgan Stanley economists see global growth of 0.9% in 2009, boosted by 3%[!?!] growth in the developing world. [[Oh, the Chinese and the mini-Tigers will save us! Has MS checked with China recently? Last I heard, they'd just about stopped importing stuff…: normxxx]]

If the more bullish economic and financial scenarios come to pass, interest rates— and Treasury yields— likely will rise [[and the price of Treasuries will likewise decline: normxxx]]. In any event, the Treasury would do well to take advantage of today's rock-bottom yields and significantly increase the issuance of 30-year bonds. One reason the 30-year yields so little is scarcity value.

Of the $874 billion of Treasury notes and bonds issued in 2008, just $35 billion was 30-year debt, according to analysts at Wrightson ICAP in New York. Given its huge borrowing needs, the government arguably ought to issue at least $100 billion of 30-year debt this year and perhaps as much as $200 billion. Treasury bills cost the government next to nothing now, and for better or worse, near-zero rates almost certainly won't last.

Idle Ports Signal 'Bleak' Years Ahead

Idle Ports Signal Two 'Bleak' Years Ahead In World Trade
Loss Of Financing Threatens Sector That Accounts For 25% Of World Economy

By Michael Janofsky and Mark Drajem, Bloomberg | 5 January 2009

Chris Lytle, chief operating officer of the port of Long Beach, Calif., took in a panorama of the slumping world economy from his rooftop observation deck one day this month. Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier. "You never see that," Lytle said. "It's quiet. Too quiet."

Port traffic is slowing around the world— everywhere from North America to Asia— as recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than two per cent next year, the most since the World Bank began measuring it in 1971. Idle ports are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

September and October are typically Long Beach's busiest months as U.S. retailers take deliveries for holiday sales. This year, September imports fell 15.8 per cent from a year earlier, October's dropped 9.5 per cent, and November's slid 13.6 per cent. "Everybody expected 2009 to be a bleak year," said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. "Now, it looks like 2010 is going to be just as bleak."

At the Mozambique port of Maputo in Africa, coal is piling up. Exports from the port in Singapore, the world's busiest for containers, fell 1.5 per cent in November from a year earlier, its first decline in seven years. And at the port of Rotterdam, Europe's largest, shipments are likely to remain stagnant this year compared with 2007, said Jan Westerhoud, chief executive officer of Europe Container Terminals BV.

"The problem is that people can't get financing, no matter what their credit situation," said Ed Rice, president of the Coalition for Employment through Exports, which represents companies such as Boeing Co., Caterpillar Inc., United Parcel Service Inc. and BNP Paribas SA. "Banks are cancelling credit lines even for creditworthy customers." The Baltic Dry Index, a measure of shipping costs for commodities, is down 93 per cent from its May record, a sign that traders expect export volumes to stay depressed.

Slowing trade is both a cause and an effect of the first simultaneous contraction in the world's largest economies since the Second World War. Throughout this decade, trade grew by an average 12 per cent a year, reaching $13.6 trillion in 2007 and propelling growth in nations including Germany, China and Chile. Now the evaporation of financing and collapse in demand threaten an activity that accounts for a quarter of the $54-trillion global economy.

"We are having this dramatic reversal," said Michael Finger, a trade economist in Geneva since the early 1970s. "I'm a long time in this business, but this is unique." Governments and international lenders are stepping in to fill the gap. China and the U.S. pledged $20 billion to aid their exporters.

The World Bank tripled funding, to $3 billion, for banks that help emerging-market companies to sell abroad. South Korea pledged $16 billion for its exporters after banks there couldn't secure international credit lines for them. In Germany, the world's top exporter, trade abroad slipped 0.5 per cent in October, the fourth drop in six months.

October also saw U.S. shipments fall 2.2 per cent to the lowest level in seven months. In China, the November decline of 2.2 per cent was the first decline in seven years, while in Japan, exports decreased a record 26.7 per cent that month. Exporters worldwide are short $25 billion in trade financing that either isn't available or costs too much, according to Pascal Lamy, the head of the World Trade Organization.

Trade credit insurance, which protects sellers against losses and typically covers as much as 40 per cent of trade in Europe and five per cent in the U.S., is also harder to get. Atradius NV, an Amsterdam-based insurer that covers about a third of global trade receivables, is raising prices by as much as 50 per cent and reducing coverage on thousands of companies. That includes 12,000 in the U.K. and all the suppliers to the biggest U.S. automakers— General Motors, Ford and Chrysler.

One 57-hectare tract at Long Beach is filled with more than 25,000 new Toyotas that dealers can't sell. Toyota, the world's second-largest automaker, recently [saw] its first operating loss in 71 years on weak demand. Nearby, scrap metal meant for export to Asia sits piled up and rusting behind a fence. From the observation deck, Lytle pointed to piles of empty containers stacked four high and numbering in the thousands.

Some of the dockside cranes "haven't turned a wheel in months," he said.

ߧ

Normxxx    
______________

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.

The Coming Great Depression

The Coming Great Depression: Leaving Fantasyland

By Charles Hugh Smith | Saturday, 29 November 2008

Wall Street Journal commentator Peggy Noonan is undoubtedly not alone is seeing no evidence of Depression in America— yet! Turbulence Ahead:

"One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months [[nearer 42% now: normxxx]]. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same. "Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone's still overweight. But the point is: Nothing looks different. "In the Depression people sold apples on the street. They sold pencils. Angels with dirty faces wore coats too thin and short and shivered in line at the government surplus warehouse" [[I know; I was one of them— though perhaps not exactly an angel…: normxxx]].

Peg would be well-served by reading up a bit on the Depression's timeline. As noted here last week, (The Coming Great Depression: Scapegoats and Exploitation) the Dow Jones Industrial Average actually recovered in early 1930 to early 1929 levels [[just a wee bit short of the 1929 peak: normxxx]]. (Look for the same this time around, too— DJIA 12,600 is in the cards a few months out, despite all the structural damage to the market and economy.)

Breadlines didn't form in November 1929— the structural damage took years to play out then and now— it will take many further years to play out to conclusion today. So don't rush things, Peggy— we'll get to a visible Depression soon enough.

Great Depression: (Wikipedia)

The Great Depression was hardly a sudden, total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, and who were chilled by the climate of gloom eminating from New York, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

[ Normxxx Here:  Moreover, the farm belt and other parts of the economy had been in recession from as early as 1926— the year of the 'Florida Land Bust'.  ]

Nevertheless, in early 1930, consumer credit was still ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. We can already anticipate "ample credit at low rates" in 2009, just as we can also anticipate wages holding steady for awhile even as sales fall. The wheels will fall off later in 2009 and deteriorate further in 2010, 2011 and 2012.

Here are the structural realities which have yet to play out:

1. You can't force households or businesses to borrow more money and spend it. Japan's central bank has flooded that nation with liquidity and low interest money for 19 years to little effect.

2. U.S. consumers and corporations are already burdened with staggering debt. Not only can't you force people to borrow more, you also can't force lenders to lend more money to already insolvent households and businesses.

3. Whatever money people get their hands on is going towards paying down debt and savings. Studies of the first "stimulus package" checks which went out to taxpayers in 2008 revealed that 2/3 of the money was not spent but used to service debt or saved. Future "stimulus checks" will also fail to boost spending; people already have more stuff than they know what to do with.

4. The FIRE economy is dead. Finance, Insurance and Real Estate (FIRE) all prospered for one reason: the velocity of transactions and debt instruments. With the volume of transactions off by 2/3 (real estate) or 99% (home equity loans), the FIRE economy is shrinking fast, with no barriers to further declines. With lending standards rising even as real estate values plummet, there is nothing to stop transaction and debt velocity from falling much further.

5. Governments and corporations alike are living with Fantasyland expectations of revenue. I recently pored over the 2009 fiscal year budget of my town of 120,000 people (general fund spending is $135 million, which doesn't include capital projects or bond-funded spending) and was dumbstruck by the insanely unrealistic revenue expectations.

SFO expects to reap the same amount of easy money from real estate transfer taxes (1% of any real estate transaction goes to the city) in 2009 as it did in 2007 and 2008: about $11 million. Huh? As transaction volumes decline by two-thirds and the sales prices plummet? How can they possibly expect to rake in the same transfer tax revenues?

The downtown shopping district was eerily quiet on Black Friday. Empty storefronts are everywhere— sales are falling even at the town's sales-tax heavyweights, the Toyota and Honda auto dealerships. Yet the city expects to haul in the same sales tax revenue as in 2008. Based on what sales?

The entire nation is in the grip of massive, total denial that revenues will drop in a recession. Companies are trimming travel costs, as are consumers; San Francisco International Airport was virtually empty on Wednesday, once one of the busiest travel days of the year. Airports almost empty— day before Thanksgiving!



"The dreaded Day before Thanksgiving was not so dreadful after all. Bay Area airports were eerily empty for much of what traditionally has been among the busiest travel days of the year. 'There's nobody here,' said Deborah Vainieri, who was waiting at San Francisco International Airport with her husband, Humberto, for a flight to Portland. In a plot to 'beat the crowds', the Vainieris had arrived at the airport four hours early. They walked right up to the check-in machine and were done in less than a minute."



6. If lenders make risky loans, they will go under— and most U.S. households and businesses are no longer creditworthy risks. So there you have it: This conflict cannot be resolved. Lenders who foolishly extend credit to over-indebted, risk-laden borrowers will be paid back with losses and insolvency, yet as lending standards tighten and assets plummet in value, the number of creditworthy borrowers in the U.S. has shrunk.

As noted here many times: many of those who qualify for loans are deadset against debt. That's why they're creditworthy— they've refused to take on huge debt for cultural or fiscal-prudence reasons. They have zero interest in taking on debt, even at zero interest.

You can't force people to borrow money, especially when they're already overloaded with debt, and you can't force prudent people to borrow when they have no need for more property, nor can you force people to buy real estate even as the values continue falling [[the 'bug-a-boo' of deflation: normxxx]].

7. The U.S. already has too much of everything: too many hotels, malls, office towers, homes, condos, strip-malls, lamps, furniture, CDs, TVs, clothing, etc. As 50 million storage lockers filled to capacity with consumer crap are emptied in a desperate move to reduce expenses and raise cash [[the garage sales should have terrific values: normxxx]], the value of literally everything ever manufactured will fall to near-zero.

8. As noted here many times before, the entire U.S. housing market was held aloft by two anomalies: speculators hoping to "flip" for huge profits, and a "one dwelling for every person" mentality that confused rising population with a rising number of households. We are already seeing how population can continue rising even as the number of households declines. It's called 'moving back home', 'doubling up', 'renting out a room', etc. There are at least 20 million surplus dwellings in the U.S. right now; there is no need for 700,000 more a year to be built, or even 7,000 more.

9. The FIRE economy based on transaction and debt volume/velocity: gone, over, toast. Housing market based on speculative flipping and one-person households: over, gone, toast. Loose lending by delusional lenders to risky, over-indebted borrowers: gone, over, toast. Borrowing based on rising real estate values: gone, over, toast. The notion that we "need" more of anything: gone, over, toast. The idea that you can force lenders to lend to uncreditworthy borrowers: gone, over, toast. The idea you can force people drowning in debt to borrow more: gone, over, toast.

ߧ

Normxxx    
______________

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.

Asia Needs To 'Wake Up'; US To Be 'Top Dog' in 2009; 'Smoot-Hawley' Redux?

'Buy USA' Push May See America Slip From Free Trade Church

By Ambrose Evans-Pritchard | 7 January 2009

The new wave of radical Democrats sweeping into Capitol Hill are insisting on a "Buy American" clause in the $750bn (£503bn) fiscal package being prepared by President-Elect Barack Obama. The $17bn bail-out of General Motors and Chrysler last month was already a step across the Rubicon towards a protectionist industrial policy, even if that was not the motive. The EU is exploring a World Trade Organisation complaint over "illegal state aid." But the latest 'Buy American' move is much more explicit.

"This is quite dangerous," said Peter Sutherland, chairman of Goldman Sachs International and a former director-general of the General Agreement on Tariffs and Trade (GATT). "The US is the key to keeping a one-world trading system. There is always the tendency to go for protectionism in a recession, and this is the worst one I've ever seen."

Hans Redeker, currency chief at BNP Paribas, says the US risks setting off a collapse in discipline across the world. "The US has a leading role, so this could set off a huge response in other countries," he said. "There is already talk of a €100bn (£91bn) fund in Germany to 'save its industry' from being sold off 'cheap'."

French president Nicolas Sarkozy has proposed a "strategic investment fund" to fend off "predators"— a euphemism for sovereign wealth funds from Asia and Russia— hoping to snap up France's crown jewels. "We will intervene massively whenever a strategic enterprise needs our money," he said. Nationalist measures are becoming ever more brazen in the emerging markets. Indonesia is resorting to special "licences" to choke off imports. Russia has reacted to the collapse in oil prices by imposing tariffs of 30% on cars and 15% on farm machinery. India and Vietnam have imposed duties on steel.

Pascal Lamy, the WTO chief, is so worried he has taken to displaying portraits of Willis C. Hawley and Reed Smoot at his Green Room in Geneva, evoking the arch-villains of the Smoot-Hawley Tariff Act that set off the trade wars of the Great Depression. The Act was forced upon a disgusted President Herbert Hoover in June 1930. This is the pattern in democracies. Lawmakers— with a constituency base— are the first to push for protection.

The question today is whether Mr Obama will try to stop it. His top advisers— Larry Summers, Tim Geithner, Peter Orszag— are free-traders with a global outlook. But Mr Obama himself dabbled in protectionism during the campaign. It is not clear how much political capital he will risk by threatening a trade veto within days of taking office. So far his team has been evasive, saying it is "reviewing the Buy American proposal".

"In the mind of Congress, almost anything that targets China is now considered fair game," said Professor Gary Hufbauer, from Washington's Institute of International Economics. Mr Obama shares the irritation with Beijing. "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for US firms and workers, not good for the world," he said in October.

China's actions since then seem designed to test his mettle. Beijing is holding down the yuan again, even though China now has a surplus of $40bn a month. "My guess is that there is a fierce debate within the Obama team," said Prof Hufbauer. "This could be very serious. The US can do what it wants under government procurement rules. Unfortunately the rest of the world is going to notice: they'll get their own lawyers to find ways of doing the same thing," he said.

"I am hopeful this move to protectionism will be slower to take hold than in the 1930s, but it is a race against time. If the sun doesn't start to come up on the economy and we're still grinding along in mid-2010, then I'll be worried," he said.

For the great exporters— China, Japan, Germany— a trade war would be a crippling blow to industry. For the great importers— the US, UK, Southern Europe— it could set off a bond meltdown as capital flows from Asia dry up. The two sides are bound together by imbalances. It is hard to see who can "win" if discipline breaks down.

.

US Will Emerge As Undisputed Top Dog In 2009

By Ambrose Evans-Pritchard | 7 January 2009

Interest rates near zero across the G10 bloc will prevent a replay of the Great Depression, but they will not pull us quickly out of the doldrums, writes Ambrose Evans-Pritchard, in a semi-serious look at 2009. America will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth.

Central banks will do whatever it takes to combat debt deflation. Even Frankfurt will join the rush to print money, buying every form of debt from mortgages to corporate bonds. The Fed will follow the Bank of Japan in propping up stock markets. Puritans will grumble, but the surprise will be how it long takes for this stimulus to gain traction. We will once more learn the term "pushing on a string".

Western societies will feel the first shivers of raw fear as people twig that the authorities are not in control. Iceland's winter will set an awful example. Job losses will reach 1m a month in the US at the point of peak pain. Economists know this is a late-cycle effect— darkest before dawn— but the public will see it otherwise. This will be the phase that shakes society.

The geopolitical landscape will look different. Cohesive states with a rule of law and old democracies— the Anglosphere, Holland, France, Scandies— will muddle through. They will start to enjoy a political premium in investor psychology, despite horrendous debts.

Obama's America will shine. The country will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth. As first into the crisis, it will be the first to hit bottom. Those expecting the dollar to collapse will have to wait.

The damage to core Europe will take longer, but run deeper. Belgium will face a break-up scare. Markets will test highdebt states as they try to roll over bonds— €200bn (£191bn) for Italy and €40bn for Greece. Spain's corporate debts will turn bad.

Germany's economy will contract by 3% as exports collapse, and the delayed effects of the strong euro and tight money feed through. Germany's Angela Merkel's Left-Right coalition will be haunted by its failure to tackle the crisis earlier. The neo-Marxist Linke party and the hard-Right will muscle in. The country will start to look ungovernable. This will at least divert attention from the Club Med mess, making a North-South split in the eurozone less likely. After sterling's sudden death, the euro will face slow death. The pair will rediscover their 'accustomed level'.

Authoritarian regimes will fare badly. Those that depend on perma-boom to hold power will fray. Repression will escalate in China as an inflammatory cocktail of migrant workers and jobless graduates vent their anger in riots. Massive fiscal spending will buy time.

The Kremlin will not have that option. Oil at $40 (£28) a barrel will expose the insolvency of the Russian state, forcing spending cuts. Anti-Kremlin marches will evolve into a simmering rebellion, setting off pitched battles with police.

Analysts will be shocked by the ferocity of the downturn across Asia, where the strategy of export-led growth will be called into question. It will become clearer that Asia's boom has been a leveraged play on the West, and leverage works both ways. Some Pacific tigers will try to resist the dénouement by holding down currencies. Such beggar-thy-neighbour policies will lead to tit for tat responses. The US and Europe will finally tire of holding the ring for free trade. The WTO will look ever more like the League of Nations.

By late 2009, the massive monetary and fiscal stimulus will feed through. Angst will start to switch from deflation back to the risk of incipient inflation. Equities, oil, and gold will rally. Bonds will falter, and then crash.

At that point it will become clear that reflation is just as dangerous as deflation in a world of debt. We will find that there is no way out. But that, perhaps, can wait until 2010.

.

Asia Needs To Fully Wake Up To The Scale Of The West's Economic Crisis
Asia Is Not Going To Rescue The World Economy.

By Ambrose Evans-Pritchard | 7 January 2009

The news from Japan, China, and the Pacific tigers has moved from awful to calamitous since the global industrial system snapped in October. A raw reality is being laid bare. The mercantilist export model of the East is proving dangerously geared to the debt-driven excesses of the West. As we go down, they go down too. Some are going down even harder.

Japan's industrial output contracted by 16.2% in November, year-on-year. "For an economy which lives from the prowess of its industrial exports, this is simply earthquake," said Edward Hugh from Japan Economy Watch. Japanese exports fell 26.7%. Real wages fell by 3.1%, the seventh monthly fall. Taken together, the figures are worse than anything during Japan's "Lost Decade". They have the ring of 1931.

The fall-out in Japan has already shattered the authority of premier Taro Aso. His approval rating has dropped to 21%. The cabinet is in revolt. The world's second biggest economy no longer has a functioning government.

Credit Suisse warns that Japan could slide into deflation of -2% by the autumn. Since interest rates are already near zero, which means that real interest rates will rise as the slump deepens— the surest path to a liquidity trap. Kyohei Morita from Barclays Capital estimates that Japan's GDP shrank at an annual rate of 12.2% in the fourth quarter. "It's shocking," he says.

Singapore has already reported. Fourth-quarter GDP contracted at an 12.5% annual rate. Taiwan's exports fell 28% in November. Shipments to China dropped 45%. Korea's exports dropped 18% in November and 17% in December. "We are looking right in the face of an unprecedented regional depression," said Frank Veneroso, the investment guru.

"If there is one part of the global disaster that is not reflected in today's massacred markets it is this Asian debacle. The source of the collapse appears to be above all a contraction in China." One has to careful with Chinese figures. When I covered Latin America in the 1980s, veteran analysts watched electricity use to gauge economic growth since they could not trust official data. But, it is striking that China's power output fell 7% in November.

Asia has clearly failed to use the 'fat' years to break its dependency on the West. It has stuck doggedly to its export strategy— by holding down currencies, or by subtle policy biases against consumption. In China's case it has let the wage share of GDP drop from 52% to 40% since 1999, according to the World Bank.

The defenders of this dead-end strategy are now coming up with astonishing proposals to put off the day of reckoning. Akio Mikuni, head of Japan's credit agency Mikuni, has called for a "Marshall Plan" to bail out America by cancelling $980bn of US Treasury bonds held by the Japanese state. This debt jubilee does have the merit of creative thinking, but it is entirely designed to keep the old game going.

"US households won't have access to credit they have enjoyed in the past. Their demand for all products, including imports, will suffer unless something is done," he said. Let me be clear. I make no moral judgment on the "neo-Confucian" model, nor— heaven forbid— do I defend the 'debt depravity' of the West.

A stale debate simmers over whether the Great Bubble was caused by Anglo-Saxon and Club Med hedonism, or by an Asian "Savings Glut" spilling into global bond markets and fuelling asset booms, as Washington claims. It was obviously a mix. Two cultural systems interacted through globalisation, locking each other into a funereal dance. The point is that this experiment has now blown up. Whether or not we slam straight into a global depression depends on how we— East, West, all of us— handle this.

The top sources of net global demand as measured by current account deficits over the last 12 months have been the US ($697bn), Spain ($166bn), Italy ($71bn), France ($57bn), Australia ($57bn), Greece (53bn), Turkey ($47bn), and Britain ($46bn).

Most are tightening their belts drastically, and in the case of Britain the shift has been so swift that the arch-sinner may soon be in surplus. If they are draining world demand, then world demand is going to collapse unless others step into the breach. The surplus states— China ($378bn), Germany ($266bn) Japan ($176bn)— have not yet done so, which is why the global economy went off a cliff in October, November, and December. Beijing is planning a $600bn fiscal blitz.

But how much of that blitz is an unfunded wish-list sent to local party bosses? And, in any event, it will not kick in until the middle of the year, an eternity away. For now, China is dabbling with protectionism to gain time— a risky move for the top surplus country. It has let the yuan fall to the bottom of its band. Vietnam has devalued. Thailand and Taiwan are buying dollars.

Watching uneasily, the Asian Development Bank has warned against moves to "depreciate domestic currencies". Yet, anger is mounting in the West. Alstom chief Philippe Mellier has called for a boycott of 'Chinese trains'. "The Chinese market is gradually shutting down to let the Chinese companies prosper. There's no reciprocity any more," he told the Financial Times. Optimists say the collapse in oil prices will give Asia a shot in the arm.

Asian governments are still flush, with ample scope for fiscal rescues. Their central banks are sitting on $4.1 trillion of reserves. They have the means, perhaps, but do they have the will to act in time? Or do Beijing, Tokyo, Taipei, Kuala Lumpur,— and indeed Berlin— still cling to their assumption that others will spend for them?

ߧ

Normxxx    
______________

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.

Homes For The Holidays

Homes For The Holidays

By ContraryInvestor.com | 5 January 2009

Homes For The Holidays… Unfortunately, yeah, and plenty of ‘em. It’s an understatement to suggest residential real estate was either directly or tangentially very important to both economic and financial market outcomes in 2008. It has been the cornerstone of solvency, or lack thereof, in so many quarters of the financial sector [[and in so many quarters of the globe: normxxx]]. And as such, has had profound influence on the character of the US and really global credit cycle.

It’s been a while since we’ve checked in [but] all of us know that residential RE will continue to be a key macro economic health watch point as we move into the New Year. The current reconciliation cycle drag that is residential real estate, affects financial sector balance sheets, household balance sheets (and P&L's for that matter), etc. [It's] not about to [diminish] in importance to [the] macro economic outcomes in 2009.

You’ve seen what has happened recently as the Fed has gone into a good bit of hyper drive in terms of trying to financially engineer some type of stabilization in what continues to be a downhill journey for the asset class. They’ve allocated $600 billion to 'buy' the agency debt (Fannie and Freddie paper) in the hopes of getting and keeping US conventional mortgage rates down. And so far that has indeed happened as post the establishment of this [latest] Fed investment endeavor, conventional 30 year fixed mortgage rates dropped a good 100 basis points, plus or minus, in a matter of weeks. We’ll spare you the graph, but in recent weeks we’ve seen new mortgage applications and refi apps spike meaningfully higher.

Mission accomplished by the Fed? We’ll see, as we need to remember that a lot of folks with 'rate-locked, in-process loans' could only have taken advantage of these new lower mortgage rates by first canceling the prior loan, then writing a new one, probably with another mortgage vendor. This would naturally count as a "new" mortgage or refi app in recent data.

Hence, there may be a bit of anomalistically higher counts in recent weeks due specifically to getting around the prior 'rate lock' issue. We’ll need to continue watching the data in the months ahead. Lastly, as you may already know, China and a few foreign friends have been big sellers of government agency paper since the summer of this year. The $600 billion the Fed has already so generously provided is in part simply offsetting current foreign selling of US agency paper.

Additionally, the Fed followed up on the $600 billion down payment, if you will, in trying to spark housing price stabilization/reacceleration. They 'announced' that they would like to put a program together (through wonderful taxpayer sponsored Fannie and Freddie) to provide 4.5% 30 year conventional loans to new home buyers. After all, it is the season of giving, no?

Bottom line being, the Fed is starting to pull out all the stops to arrest home price contraction. Upping the ante in a big way relative to prior efforts. We expect the Obama regime to likewise address this issue, and perhaps [at least equally] forcefully. They’ve suggested rewriting existing mortgages, but that enters into the very dangerous and cornerstone area of contract law.

Key question for both our economic monitoring and investment decision-making ahead then becomes, can the US government decree/legislate/manipulate home prices higher, defying the natural laws of asset class supply and demand, as well as character and path of a generational credit cycle now in reconciliation? Defy? We doubt it. Temporarily arrest? The correct answer is, we’re going to find out.

Important in that, as we all know, the locus of the initial US credit cycle trauma was the 'mortgage securities' markets. Residential real estate was also the locus of consumer credit creation this decade and a current key driver of household net worth [first of a huge increase and then the more recent] decline, certainly along with equities, influencing household financial well-being. Lastly, we need to remember the importance of investor psychology and bear markets as this applies to housing.

Even temporary stabilization in residential real estate would echo [throughout the economy, resulting] in positive psychological influence on the financial markets. All part of the ebb and flow of cycles in both financial markets and investor psychology. A few macro overview observations about just where we are in the cycle itself.

Cutting to the bottom line, at least in our minds, inventory and price remain the two largest outstanding fundamental issues for residential real estate, so far unresolved in this cycle. Once inventories get in line at least with historical precedent, and prices stabilize, then we can begin to anticipate a better tone to mortgage credit markets, the housing industry itself, consumer [feelings of] well being and, hopefully, the macro economy. It’s when housing stabilizes that the unprecedented stimulus being force fed into the system by the Fed/Treasury/Administration may begin to bite and gain traction.

Let’s get right to a few simple and self-explanatory views of life. The following is a four and one half decade view of median family home prices relative to median family income. To get back to the average level since 1963 for this ratio (the red line in the chart), median home prices would need to drop [merely] another 12% from current levels.

Of course this assumes the cyclical correction stops at the historical average. Let’s face it; we’ve already lived through a lot of price correction. The problem clearly is that other factors are currently weighing on residential real estate prices. Weak labor and wage growth, a coordinated global economic downturn of historical significance, and a credit market contraction of very meaningful magnitude is colliding with a housing reconciliation cycle. To argue that the above relationship will be arrested at the 'average' of the last four and one half decades [is probably] wishful thinking. [[This is especially so when we remember that the really low quality loans that helped drive housing prices upward in the last decade are probably no more— at least for another generation.: normxxx]]

Is the Fed essentially trying to speed up the reconciliatory process implied by the above relationship in manipulating the important plug factor in the real estate equation that is financing costs? Of course this is exactly what they are doing. Whether they will be successful is the unanswered question. And in good part that depends on the ability of inventory to clear as a result of the character of both price and financing costs.

Let’s move right on to the equally important issue of inventories. In the past we’ve shown you a lot of raw numbers when looking at this data. Time to stop that. Below is a look at the number of homes listed strictly as "for sale" properties (in other words this does not include second homes, rentals homes, etc.). This go around we compare these per unit of inventory for sale numbers to the total US population to get a better sense of historical perspective.

We’ve heard "everybody’s gotta live somewhere" a million times by those trying to bull up the residential real estate markets over prior years. And since the population is ever growing, comparing current nominal inventories to past cycles is misleading because of the dynamic of population growth. Oh yeah? Well now we’re looking at the number of homes for sale relative to "everybody". Any questions?

As the chart tells us, when looking at per unit for sale residential homes on what is essentially a per capita basis, we’re looking at a current level that is just shy of twice the historical average of the last four-plus decades. Yes indeed, everybody needs a place to live. It’s just a good thing there are so many places to choose from at the moment relative to historical precedent, no?

The last chart [illustrating] current residential real estate inventories very much mirrors the directional pattern of what you see above. It’s very simply the number of vacant single-family homes relative to all single-family homes. Bottom line? We’ve never seen anything like current levels. Residential real estate as an asset class cannot begin fundamentally to recover until inventory clears, and this is far from an "all clear" view of life. Seems a matter of relatively basic common sense, no?

House That Again? …Before concluding, a few last housing related anecdotes we hope are of interest. As per the comments above, we know that housing prices and current residential real estate inventories remain key, open question mark issues. And [of this] the home building industry is more than aware. This is a very good thing in terms of cycle reconciliation.

As of the latest data, housing starts rest near half century lows in nominal terms. Residential real estate construction has essentially collapsed. [[With, perhaps, a little assist from banks no longer extending credit to builders (but rather calling in loans when they can). : normxxx]] Existing inventories and price have been very strong drivers of this collapse in new activity. Years of demand [have been] more than satiated in the prior mortgage credit cycle.

The view of per unit starts is seen in the top clip of the following chart. In the bottom clip we look at starts as a percentage of the total US population. A new record historical low at recent levels. Clearly, existing inventory [[including the seemingly never ending wave of defaults/repossessions: normxxx]] remains the issue for real estate, not new inventory.

As existing inventory clears, the asset class will heal. That process is well underway. The Fed just wants to speed things up a little with a big bit of financial engineering. Of course financial engineering has worked so well for them in the past, right?

Finally a very simple update of macro US homeowner equity as a percentage of the [current] market value of real estate. You already know this ratio has been plunging for [several] decades now, plumbing new lows at an accelerating [pace] with each passing quarter over the last two to three years. The Fed has been kind enough to manipulate credit market mortgage costs downward, but only the real economy and real world residential real estate cycle can change the trajectory of what you see below. And this is key to credit market collateral values: a sense of household financial well being, [reasonable] access to real estate based consumer credit, etc. Important? Yeah, we'd say so.

As we look at the chart above and contemplate what may yet be to come, we come to the issue of deleveraging, coursing through the domestic and global economy. How must homeowners act in order to turn the trajectory of the relationship you see above upward in an otherwise very tough pricing environment? Deleveraging. Paying down mortgage debt. We're pretty convinced that financial sector deleveraging is well underway and has been more than discounted by the markets.

[On the other hand], we'd suggest that US household deleveraging is [barely] getting started in comparison and we believe has [still] a long way to run. We expect this will be a major macro theme for 2009. Have the markets completely discounted this thought? We're simply not sure at this point. Residential real estate was incredibly important to economic and financial market outcomes in 2008. We expect exactly the same in 2009.

The message of the data above is clear, price and inventory cycle reconciliation is not yet finished. What is also clear is that the Fed/Treasury/Administration are stepping up their efforts as we enter 2009, to truncate unfinished cycle reconciliation at almost all costs. Although we'll save this for a future discussion, we're not only focused on the importance of residential real estate in our current economic and financial market circumstances and how it will influence the financial sector, credit cycle dynamics and the real economy, but also place great weight on the [yet to be realized but sure to follow] unintended consequences of Fed/Treasury/Administration efforts to truncate the natural cycle.

The markets know what the Fed/Treasury/Administration are doing and are discounting these actions [and 'predictable' consequences] in financial market prices. But it's the "at almost all costs" 'unintended' consequences of this truncation attempt that may turn out to be most important to 2009 investment decision making.

.

California 2009 Economic And Housing Forecast:
Examining 5 Areas Showing California Will Have A Tougher Economic Year Than 2008.
Click here for a link to complete article:

By Dr. Housing Bubble | 2 January 2009

I won’t sugarcoat it for you. 2009 will be a much more difficult year for California than 2008. I am astonished that many pundits are now claiming how 2009 will be an up year for the markets even though the Dow Jones Industrial Average just faced a pounding unseen since 1931, during the Great Depression. They’ll point to examples like 1907 when the market fell 37 percent only to rebound by 46 percent in 1908. This is absurd since 1907 was much more isolated in terms of global reach.

And, in 1907, J.P. Morgan stepped in, putting up some of his own money to instill confidence. You tell me who is putting up their own money today? What we have is a bunch of beggars— mostly Wall Street and financial firms going to Washington for a piece of the bailout money parade— but no one seems eager to be left behind while Uncle Sap is dishing it out.

This time is significantly different. I have already given you 10 reasons why nationally this recession will be the worst since World War II. Those 10 reasons still stand as we enter the new year. Yet California will face pain on a more pronounced level because it has cast its lot with real estate and finance. The heart of the housing bubble darkness started here in sunny California.

Remember epic toxic mortgage dealers like New Century Financial out in Irvine California? Or who could forget the ultimate toxic mortgage factory Countrywide Financial which has miraculously disappeared into the belly of the Bank of America beast? Or what about the fact that the median home price in California flirted with $600,000 for a month in 2007? These examples have all vanished. New Century Financial is gone and so is Countrywide. That $600,000 median price is now $285,680 IAW the California Association of Realtors data.

Many people, including those once skeptical, now think that we have reached bottom because things became so sour in 2008. They will be shocked this year. Why? Just because things have fallen so quickly is not a good reason that things will now go right back up. This seems to be the argument of most mainstream pundits who believe 2009 will be a better year.

They use an iteration of the argument that goes something like, "2008 was such a brutal year, and things are now so cheap, that it is time to go 'bottom fishing'." Total non-sense. If you look at the data what you see is continued weakness in the markets— possibly for some time yet. And California still has many other issues to confront.

What I will discuss today is the 2009 forecast for California in terms of the economy and housing. You can dig through the hundreds of articles here if you want to see how accurate some of my past analyses have been. [[I'll save you the trouble. He has been way ahead of the curve.: normxxx]] The first problem we still have is much of our employment is still closely tied to real estate. That has not much changed.

Consumer psychology is much more fragile now. That is, many people now, finally, believe that no, real estate does not go up forever. This is probably irretrievable damage to the outlook for a generation, which should keep another real estate bubble from forming anytime soon. Housing prices are still tanking and believe it or not, many metro areas in California are still wildly overpriced. Another reason is that the state budget (and that of any number of cities and local communities) is in shambles. Do you think it is good that we are staring at bankruptcy in 2 months? Plus, the toxic Pay Option ARM reset tsunami will be hitting with full force this year.

Reason #1— Employment

As you can imagine, I look at tons of data. The only way you can determine future movements in this market is to glance at and absorb many, many data points, reference similar historical economic events, and try to forecast where things will move— but not by the 'straight line projection' method favored by the stupid and lazy. You need to be cognizant of history, understand economics, and know how mass psychology affects consumer behavior. With that, let us first look at the California employment situation:

The unemployment rate in January of 2008 for California was 5.9 percent. The latest data we have is for November of 2008 and the current unemployment rate is at 8.4 percent. A 2.5 percent total increase in less than a year is amazing— that's more than a 40% increase in the number of unemployed! Without a doubt, the California unemployment rate will be well above 10 percent by the end of the year. Why? Well take a look at some of the latest layoff announcements being made: [[Note: these do not include those layoff announcements of the last two weeks in December: And, they have been accelerating in size and number! : normxxx]]

What you should immediately notice is this is well beyond a real estate and finance problem. Sure, the bulk of layoffs came from industries closely tied to these fields but the above list now tells you this is spreading to pretty much every industry you can imagine. Looking at the raw numbers of unemployed persons according to the BLS, it looks like California added 478,000 people in 2008 alone. Nationwide 1.911 million people were added to the unemployment statistics. What this means is California was 25 percent of all unemployment net-additions.

What you then need to do is look at which industries employ the most Californians:

The layoff announcements should tell you that practically every area is feeling the crisis. The above chart should give you a snapshot of how the employment picture pans out. I’ve highlighted areas that will be most directly impacted by this crisis. This does not mean other areas will not also suffer, but only that these areas will feel the pain most immediately and most significantly.

Together with the sales and food related fields, these are the lower paying industries. Many of these workers will have a tough time finding other work, should they be laid off. California’s unemployment insurance is reaching the breaking point. Construction will face pain as well. Who is building any large projects right now?

Reasons #2— DRE Licensees And Consumer Psychology


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

For most of the 1990s, there were approximately 300,000 real estate licensees in the state active at any one time. We are currently at 535,000+ active licensees. What does this mean? People are still delusional regarding real estate. (I should point out that many DRE licenses last a few years so you may be seeing people still active on the rolls yet not likely to be renewing anytime soon.) Forecasting means looking at the future and we can already see that the real estate psychology is broken:

The above is stunning. In September of 2007 14,918 salesperson exams were administered. In September of 2008 only 1,590 exams were given! In October of 2008 only 1,480 were administered. Game over.

What this tells us is the allure of real estate has been broken. The once glamorous lifestyle portrayed on housing porn shows is now rapidly evaporating. Keep in mind this was another revenue (although tiny) stream of income into the state which will now be gone. How many people will stop renewing their licenses?

Reason #3— Case-Shiller Housing Prices


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

I want to spend sometime on this chart. I have constructed the above chart using the Case Shiller Index data for 3 largely followed metro areas in California. The data up until October 2008 is from the actual data set. I’ve also included the 'futures' data which is traded on the CME.

When I tell you that California will not hit a housing bottom until 2011, I am not the only one who believes this. These contracts are backed by fairly sharp money people not accustomed to losing. If you believe otherwise, go ahead and bet against them with your own money. Let us see how many pundits put up some serious cash here to back up their rosy predictions.

The principal thing that should come to your attention is all 3 major areas have further to fall. Los Angeles and San Diego have the biggest drops ahead, according to the futures data. Yet what should jump out at you as well is how the market will essentially stagnate well into 2013. The contracts for 2012 and 2013 are little traded but you already have people betting for a stagnant market for another 4 years. I tend to agree with them.

There is very little evidence to show us that somehow prices will be rebounding anytime soon. Short of skyrocketing wages and solid employment, why are we to believe the market will do well in 2009?

Reason #4— California Budget



How can anyone listen to politicians tell us we are weeks away from a statewide bankruptcy and, then, in almost the same sentence, say things will be better in the state for 2009? Look at the chart on the left. I have used this chart numerous times because it highlights the magnitude of the problem.

The two largest sources of revenue for the state are personal income tax and sales tax. With unemployment rising (see above) and personal spending falling, that means less personal income tax and sales tax. With property prices tanking, this is another revenue source which will be shattered.

Also, California is home to many millionaires and billionaires, the most of any state in the country. Many of these people have money in the stock market. When they go to do their taxes, guess what is going to happen. We just had the worst stock market since the Great Depression. You can rest assured that many of these people are going to claim large losses, meaning they will pay substantially less in state income taxes than in 2008.

There is only two ways to fix this problem. Raise taxes or cut the state payrioll. Both are bad yet that is what is left. Cutting jobs only adds to the unemployment lines and raising taxes in a bad economy is a further drag on business. Our current group of politicians has no backbone. Do some of both and get on with it. Yet be a bit more strategic about it. Don’t be idiotic like our federal government that is bailing out crony capitalism and is throwing trillions of dollars into an abyss.

Unfortunately, we are broke both as a state and at a federal level. Where will the money come from? The California budget is well over $100 billion so this isn’t going to be solved by telling people to stop using staplers.

Reason #5— Pay Option Arms

The final nail in the coffin is the number of pay option ARMs that will reset in the state in 2009. These incredibly toxic loans are going to reset at the worst possible time. I’ve seen a few argue that lower rates will help yet this is another misconception: lower market rates will do nothing for the pay option ARMs of California. And for the purposes of pay option ARMs, over 50 percent of the nominal value of these mortgages outstanding rest here in California.

Why is this problematic? As we pointed out above, the median home price in California has fallen roughly 50 percent from its peak. Many of the option ARMs have little equity from home buyers. That is, little of the homeowner's 'skin' was put into the game. Now that prices have tanked, many borrowers are running the numbers and are gearing up for a 'moonwalk' away from their mortgage in 2009.

You can ignore the drop in foreclosures towards the end of the year. This was because of SB 1137 and the Fannie Mae and Freddie Mac moratorium. Guess what? Holidays are now over and now back to reality. These pathetic measures were the equivalent of an ostrich sticking its head into the sand.

In addition, you cannot refinance an underwater mortgage! And, the vast majority of these California loans are so underwater, they are swimming in Jacque Cousteau territory. These loans never served any purpose except to delude prospective homeowners and garner all of those lenders' middlemen outrageous fees. We can only hope that with new federal regulations, we will have an outright ban on them.

Those are 5 reasons why California will have a challenging 2009. There are many other reasons as well, but these should suffice for now, since the year is young. Buckle up because it is going to be bumpy ride folks.

  M O R E. . .

Normxxx    
______________

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.





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Normxxx    
______________

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.

This Trade Will Make You A Fortune In 2009
Click here for a link to complete article:

By Porter Stansberry | 13 December 2008

As anyone who has read my monthly advisory (or this DailyWealth issue) knows, I believe the current financial mess will last much longer than anyone thinks. That's why I believe it's going to be an extraordinarily profitable time for people who are on the right side of several huge trends. One of the biggest trends you need to be positioned for is the collapse of poorly collateralized and highly indebted assets.

There are several obvious and large categories of these kinds of assets. The first is highly leveraged real estate investment trusts (REITs). These corporate structures are truly designed to fail. In order to qualify for their tax benefits (they aren't taxed at the corporate level), REITs must pay out 90% of their earnings.

Thus, to grow, they must either borrow heavily or sell additional equity. Selling equity isn't popular. It "dilutes" current shareholders. So many of these firms end up piling on debt.

If they happened to have made any large acquisitions in the last two years, they're cooked. They can't extend their debt maturities because they overpaid for the assets, which are no longer good collateral. And they can't repay the loans because they don't keep much cash.

Another sector chronically short of capital is airlines. Airlines are, generally speaking, perfectly hedged. They lose money in every market. When times are good, fuel costs kill them. When times are bad, they get killed because of empty seats. Meanwhile, the only way to make any money in such a capital-intensive business is to use lots of debt financing.

When I went looking for heavily indebted companies that can barely afford their debt service, I found a collection of commercial property firms, airlines, and casinos. A few of the highlights are in the table below. You'll find the amount of income these companies made from their operations in 2007 versus their interest costs, along with how much debt they owe in excess of their equity.

Name Symbol  Market Cap in Millions   Interest to Income    (2007) Debt to Equity Maguire MPG  $83 144% 43.8 JetBlue JBLU  $1,400 108% 2.4 Macerich MAC  $1,000 98% 4.3 Wendy's WEN  $2,000 94% 2.0 Post PPS  $730 76% 1.0 Cousins CUZ  $656 72% 1.7 SL Green SLG  $1,200 67% 1.5 Continental CAL  $1,500 51% 5.4 MGM MGM  $3,000 50% 13.2 UDR UDR  $179 47% 2.3 CB Rich. CBG  $800 24% 3.2

Take mall operator Macerich, for example. The stock is still worth $1 billion, even though the company has outstanding debts four times larger than the equity on its balance sheet and it spent 98% of what it earned in 2007 on interest. Imagine if you owed debts four times greater than your net worth and 98% of everything you earned had to be paid in interest on your mortgage. What kind of bank would lend you any more money?

This Is One Of The Great Buying Opportunities Of The Last 30 Years

I'm confident all of these companies will either go bankrupt or suffer an equivalent massive dilution in order to restructure their balance sheets. I don't think debt financing will be available in the next decade for firms with this much leverage. The debt-centric business model is, quite simply, dead.

Even though I'm sure all of these companies will see their shareholders wiped out, when it comes to shorting stocks, I prefer to have a huge margin of safety. I only want to short companies whose balance sheets and business models are so hopelessly bad that nothing, not even a Christmas miracle, could possibly save them. Why short companies with a 95% chance of going bust when you can short companies 100% certain to go bust?

One idea I encourage you investigate is the pending collapse of deeply indebted homebuilding stocks. If you look at Pulte, Centex, KB Home, D.R. Horton, and Toll Brothers, they all owe around $3 billion. They are unlikely to repay these loans. Already roughly one in 10 mortgage holders is in default. This number will continue to rise as unemployment grows and as more adjustable-rate mortgages reset.

Even if this mortgage crisis is somehow resolved, demand for housing is likely to be extremely depressed for a long time as people will be reluctant to lend or borrow large amounts. It's hard to believe there will be any profitable way to build new homes for at least the next two or three years— and perhaps longer. That means bankruptcy for some of the country's biggest homebuilders.

  M O R E. . .

Normxxx    
______________

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.

Ian Gordon: A Full-On Depression

This Forecaster Sees A Full-On Depression

By Hewitt Heiserman, Realmoney.Com Contributor | 3 January 2009

In the fall of 2007, Ian Gordon of Vancouver, B.C.-based Bolder Investment Partners published a 31-page article on the company's Web site explaining how an "explosion of debt" made possible by a "worldwide fiat monetary system" will decimate stocks and eventually the U.S. dollar. With the S&P 500 down 37% in the last year, Mr. Gordon's contrarian scenario is playing out as he expected. I recently spoke with Mr. Gordon, an expert on the Kondratieff wave, to hear his views on the U.S. economy, China and gold.

RealMoney: Please tell RealMoney readers about the Kondratieff cycle. How did you get interested in this theory?

Gordon: I love history, and that's what my degree is in. In 1983 I started a subscription to a monthly newsletter written by Donald Hoppe, which was called The Kondratieff Wave Analyst. It drew many parallels from previous Kondratieff cycles. Mr. Hoppe ceased publication in 1993, but I retained all the copies that I received and draw from them extensively in my interpretation of the Kondratieff cycle, which I periodically publicize on my Web site, The Longwave Analyst.

Nicolai Kondratieff [1892-1938], a Russian economist, theorized that economic cycles in a capitalist system last about 60 years. Capitalist economies grow in the first 30 years of the cycle, plateau in the next 15 years, and then collapse into a depression in the last 15 years.

Last year you said a Kondratieff winter "is now under way in earnest and nothing can stop it. The ensuing credit contraction will be devastating ... it will result in a destructive and frightening deflationary depression." What factor or factors told you we were "in winter"?

Spring in the present Kondratieff cycle started in 1949 and ended in 1966. Summer is when the economy achieves its fruition. Summer ended between 1980 and 1982. Autumn is the "feel good" period; it's when we have the biggest bull markets in stocks, bonds and real estate. Autumn ended in 2000 with the stock market peak in that year, just as the previous Kondratieff autumn ended with the Roaring Twenties stock market peak in September 1929. Winter is the season in which the economy dies, as debt is cleansed from the system.

Although winter began with the stock market peak in 2000, the first seven years were mild, because former Fed chair Alan Greenspan lowered interest rates to 1% and flooded the banks with money. All this money had to go somewhere; it went into real estate and back into stocks. And it added horrifically to the already enormous U.S. debt burden. Debt in the U.S. increased by 50% between 2000 and 2007.

I knew the jig was up after those Bear Stearns funds failed in July 2007, because they were invested in subprime debt, and this was a signal the Kondratieff winter had arrived, because it was the sign that the enormous debt bubble was bursting. This is what happens in the Kondratieff winter.

When you speak of a Kondratieff winter, does this apply to the U.S. only? Or is it a worldwide problem?

We're all in this together; no country can escape it. Countries that took on the most debt— whether government, corporate or individually— will be the hardest hit.

You see a parallel between China today and the U.S. in the 1920s?

China will not bail us out. In fact, China is the U.S. of the 1920s and 1930s. She will fall hard in this Kondratieff winter. No country is immune… The sheer size of worldwide debt this time around makes the aftermath of 1929 look insignificant. Then, it was mostly an American affair. Europe did not join our "Roaring Twenties" extravagance because they were already reeling from the destruction of World War I [[and, in particular, the UK had a much easier time in the Great Depression; largely escaping its consequences: normxxx]].

This time the world partied too hard and too long. Now, the piper must be paid; most of the debt must be washed out of the world economies. This deleveraging process will bring significant strife to creditors and debtors. The process is just beginning, and already we've witnessed government bank bailouts in many countries [[and general unrest and even riots in several countries: normxxx]].

The primary purpose of the Kondratieff winter is to "cleanse the economy of debt," you say. Just how bad is our debt situation?

Terrible! Total debt, which includes government, financial, corporate and consumer, is $53 trillion. Debt per GDP in the United States is currently 357%. In 1929, it was 163%, and even that amount caused a depression.

To prevent a slowdown in business activity, the Federal Reserve in the last year has lowered the fed funds rate to between zero to 25 basis points, from 4.25%. Meanwhile, the Fed's balance has increased 140%, to $2.1 trillion, to provide liquidity to banks. Can't we stimulate our way out of debt?

No. The Fed thinks the way to re-start the economy is to get people to borrow even more. But the people won't. Also, the banks have stopped lending.

The U.S. dollar is poised to fall hard as creditor nations sell greenbacks to stabilize their own economies and banks, you say. But the U.S. Dollar Futures Index (DXY) has rallied since last summer. Who is right?

The dollar rally is a short-term phenomenon. In the longer term, the dollar is toast, not only as the world's reserve currency but probably as a currency in its present form. There's just too much debt behind the dollar. And this debt is being added to on a massive scale as we speak.

Who in their right mind would buy U.S. debt? The only way it can ever be repaid is through inflation. Unfortunately, we are now in a huge debt deflation, which means U.S. debt and all debt for that matter becomes an even bigger burden. The dollar is the worst of all the fiat currencies out there. The end of the international fiat currency madness may be near. Maybe the world will be forced to return to an honest money system based on gold.

What steps must President Obama take to fix this mess? Can he fix it?

No. I had hoped the president-elect might be a force for change. But it's "business as usual," thanks to the bankers. He has surrounded himself with a coterie of washed-up financial advisers, whose only remedy for the catastrophe they and their ilk created is to throw more money— i.e., debt— at the problem. If Alan Greenspan had not interfered in the process of debt elimination following the stock market peak in 2000, we would have endured far less economic and financial pain.

The incoming president inherits a Kondratieff winter depression that is likely to be far worse than the 1930s. Because U.S. debt per GDP is 2.5 times greater than in 1929, Obama lacks the money that was available to President Roosevelt to try and remedy the situation. By the way, President Roosevelt's stimulus programs did not cure the Depression anyway; World War II halted the Depression.

[[By spending 6 times as much as was spent during the entire depression— then trashing all the materiel that was purchased with that money!: normxxx]]

The demand for gold will be "enormous," you predict. Why?

Demand is already enormous. As this crisis worsens, demand will get even bigger. In times of distress, people flee to gold. It is the money of last resort and is no one's liability.

The world produces just 80 million ounces of gold a year. This is so small when compared to the world's population. More importantly, it's a miniscule amount when compared to a much smaller population that can afford to buy gold. Theses people won't buy a few ounces; they'll buy thousands of ounces to protect themselves.

The Dow-gold ratio is 11 times [[now (2/20/2009) closer to 7.5 times : normxxx]], meaning the Dow at 8330 can buy 11 ounces of gold. How low does this ratio fall before stocks reach their bear market nadir and gold reaches its bull market zenith? This ratio peaked in July 1999 at almost 40 times. Since, the price of gold has outperformed paper (stocks). This trend will continue.

The ratio has never fallen under 1.0 times. But I think we'll reach 0.25 times, meaning it'll take just one-quarter of an ounce of gold to buy the DJIA, or as I like to say, "All it will take is one British sovereign." [First issued in 1489 for Henry VII of England, a British sovereign is a gold coin that weighs 0.235 troy ounces.]

My bear market target for the Dow Jones Industrials is 1000 points. Don't forget, the bear market bottom for the DJIA in 1932 was 90% below the peak. And this bear market will emulate the 1930s bear. My gold price target is $4,000.

What is your outlook for energy stocks?

I am very bearish on all commodities, including oil. This collapse in the debt bubble is deflationary, and the economy is sinking into a depression. The Fed can't reinvigorate the economy until debt liquidation has run its course. Anyone who is bullish on commodities has to be bullish on the economy. I am not.

Anything else we can do to protect ourselves?

Get out of debt and get out of investments in real estate and stocks. Instead, own cash, gold and gold equities. The share price of Homestake Mining increased by 600% between 1929 and 1936.

When do the robins start chirping again?

Spring arrives perhaps 10 or so years from now, when most of the debt is eradicated and savings are replenished. It arrives when the mood of the masses is one of despair.

Thanks, Mr. Gordon.

— — — — — — — — — — — — — — — — — — — —

Know What You Own: Exchange-traded funds that take a bearish view include the MacroShares Oil Down ETF (DOY), PowerShares DB Commodity Short (DDP), PowerShares DB U.S. Dollar Bearish Fund (UDN), ProShares Short Financials (SEF), ProShares MSCI Short Emerging Markets (EUM), ProShares Short Oil & Gas (DDG) and the ProShares MSCI Ultra Short Japan (EWV).

P.S. Profit From Doug Kass' Predictions
Nov. '07: Kass warns current market top is doomed to go into a death spiral. Oct. '08: he calls a market bottom but, amid the gloom, sees signs of intermediate recovery presenting investor opportunities. Get his forecasts first at RealMoney Silver.

ߧ

Normxxx    
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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.




  M O R E. . .

Normxxx    
______________

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.

California 2009 Economic And Housing Forecast

California 2009 Economic And Housing Forecast:
Examining 5 Areas Showing California Will Have A Tougher Economic Year Than 2008.
Click here for a link to complete article:

By Dr. Housing Bubble | 2 January 2009

I won’t sugarcoat it for you. 2009 will be a much more difficult year for California than 2008. I am astonished that many pundits are now claiming how 2009 will be an up year for the markets even though the Dow Jones Industrial Average just faced a pounding unseen since 1931, during the Great Depression. They’ll point to examples like 1907 when the market fell 37 percent only to rebound by 46 percent in 1908. This is absurd since 1907 was much more isolated in terms of global reach.

And, in 1907, J.P. Morgan stepped in, putting up some of his own money to instill confidence. You tell me who is putting up their own money today? What we have is a bunch of beggars— mostly Wall Street and financial firms going to Washington for a piece of the bailout money parade— but no one seems eager to be left behind while Uncle Sap is dishing it out.

This time is significantly different. I have already given you 10 reasons why nationally this recession will be the worst since World War II. Those 10 reasons still stand as we enter the new year. Yet California will face pain on a more pronounced level because it has cast its lot with real estate and finance. The heart of the housing bubble darkness started here in sunny California.

Remember epic toxic mortgage dealers like New Century Financial out in Irvine California? Or who could forget the ultimate toxic mortgage factory Countrywide Financial which has miraculously disappeared into the belly of the Bank of America beast? Or what about the fact that the median home price in California flirted with $600,000 for a month in 2007? These examples have all vanished. New Century Financial is gone and so is Countrywide. That $600,000 median price is now $285,680 IAW the California Association of Realtors data.

Many people, including those once skeptical, now think that we have reached bottom because things became so sour in 2008. They will be shocked this year. Why? Just because things have fallen so quickly is not a good reason that things will now go right back up. This seems to be the argument of most mainstream pundits who believe 2009 will be a better year.

They use an iteration of the argument that goes something like, "2008 was such a brutal year, and things are now so cheap, that it is time to go 'bottom fishing'." Total non-sense. If you look at the data what you see is continued weakness in the markets— possibly for some time yet. And California still has many other issues to confront.

What I will discuss today is the 2009 forecast for California in terms of the economy and housing. You can dig through the hundreds of articles here if you want to see how accurate some of my past analyses have been. [[I'll save you the trouble. He has been way ahead of the curve.: normxxx]] The first problem we still have is much of our employment is still closely tied to real estate. That has not much changed.

Consumer psychology is much more fragile now. That is, many people now, finally, believe that no, real estate does not go up forever. This is probably irretrievable damage to the outlook for a generation, which should keep another real estate bubble from forming anytime soon. Housing prices are still tanking and believe it or not, many metro areas in California are still wildly overpriced. Another reason is that the state budget (and that of any number of cities and local communities) is in shambles. Do you think it is good that we are staring at bankruptcy in 2 months? Plus, the toxic Pay Option ARM reset tsunami will be hitting with full force this year.

Reason #1— Employment

As you can imagine, I look at tons of data. The only way you can determine future movements in this market is to glance at and absorb many, many data points, reference similar historical economic events, and try to forecast where things will move— but not by the 'straight line projection' method favored by the stupid and lazy. You need to be cognizant of history, understand economics, and know how mass psychology affects consumer behavior. With that, let us first look at the California employment situation:

The unemployment rate in January of 2008 for California was 5.9 percent. The latest data we have is for November of 2008 and the current unemployment rate is at 8.4 percent. A 2.5 percent total increase in less than a year is amazing— that's more than a 40% increase in the number of unemployed! Without a doubt, the California unemployment rate will be well above 10 percent by the end of the year. Why? Well take a look at some of the latest layoff announcements being made:

What you should immediately notice is this is well beyond a real estate and finance problem. Sure, the bulk of layoffs came from industries closely tied to these fields but the above list now tells you this is spreading to pretty much every industry you can imagine. Looking at the raw numbers of unemployed persons according to the BLS, it looks like California added 478,000 people in 2008 alone. Nationwide 1.911 million people were added to the unemployment statistics. What this means is California was 25 percent of all unemployment net-additions.

What you then need to do is look at which industries employ the most Californians:

The layoff announcements should tell you that practically every area is feeling the crisis. The above chart should give you a snapshot of how the employment picture pans out. I’ve highlighted areas that will be most directly impacted by this crisis. This does not mean other areas will not also suffer, but only that these areas will feel the pain most immediately and most significantly.

Together with the sales and food related fields, these are the lower paying industries. Many of these workers will have a tough time finding other work, should they be laid off. California’s unemployment insurance is reaching the breaking point. Construction will face pain as well. Who is building any large projects right now?

Reasons #2— DRE Licensees And Consumer Psychology


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

For most of the 1990s, there were approximately 300,000 real estate licensees in the state active at any one time. We are currently at 535,000+ active licensees. What does this mean? People are still delusional regarding real estate. (I should point out that many DRE licenses last a few years so you may be seeing people still active on the rolls yet not likely to be renewing anytime soon.) Forecasting means looking at the future and we can already see that the real estate psychology is broken:

The above is stunning. In September of 2007 14,918 salesperson exams were administered. In September of 2008 only 1,590 exams were given! In October of 2008 only 1,480 were administered. Game over.

What this tells us is the allure of real estate has been broken. The once glamorous lifestyle portrayed on housing porn shows is now rapidly evaporating. Keep in mind this was another revenue (although tiny) stream of income into the state which will now be gone. How many people will stop renewing their licenses?

Reason #3— Case-Shiller Housing Prices


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

I want to spend sometime on this chart. I have constructed the above chart using the Case Shiller Index data for 3 largely followed metro areas in California. The data up until October 2008 is from the actual data set. I’ve also included the 'futures' data which is traded on the CME.

When I tell you that California will not hit a housing bottom until 2011, I am not the only one who believes this. These contracts are backed by fairly sharp money people not accustomed to losing. If you believe otherwise, go ahead and bet against them with your own money. Let us see how many pundits put up some serious cash here to back up their rosy predictions.

The principal thing that should come to your attention is all 3 major areas have further to fall. Los Angeles and San Diego have the biggest drops ahead, according to the futures data. Yet what should jump out at you as well is how the market will essentially stagnate well into 2013. The contracts for 2012 and 2013 are little traded but you already have people betting for a stagnant market for another 4 years. I tend to agree with them.

There is very little evidence to show us that somehow prices will be rebounding anytime soon. Short of skyrocketing wages and solid employment, why are we to believe the market will do well in 2009?

Reason #4— California Budget



How can anyone listen to politicians tell us we are weeks away from a statewide bankruptcy and, then, in almost the same sentence, say things will be better in the state for 2009? Look at the chart on the left. I have used this chart numerous times because it highlights the magnitude of the problem.

The two largest sources of revenue for the state are personal income tax and sales tax. With unemployment rising (see above) and personal spending falling, that means less personal income tax and sales tax. With property prices tanking, this is another revenue source which will be shattered.

Also, California is home to many millionaires and billionaires, the most of any state in the country. Many of these people have money in the stock market. When they go to do their taxes, guess what is going to happen. We just had the worst stock market since the Great Depression. You can rest assured that many of these people are going to claim large losses, meaning they will pay substantially less in state income taxes than in 2008.

There is only two ways to fix this problem. Raise taxes or cut the state payrioll. Both are bad yet that is what is left. Cutting jobs only adds to the unemployment lines and raising taxes in a bad economy is a further drag on business. Our current group of politicians has no backbone. Do some of both and get on with it. Yet be a bit more strategic about it. Don’t be idiotic like our federal government that is bailing out crony capitalism and is throwing trillions of dollars into an abyss.

Unfortunately, we are broke both as a state and at a federal level. Where will the money come from? The California budget is well over $100 billion so this isn’t going to be solved by telling people to stop using staplers.

Reason #5— Pay Option Arms

The final nail in the coffin is the number of pay option ARMs that will reset in the state in 2009. These incredibly toxic loans are going to reset at the worst possible time. I’ve seen a few argue that lower rates will help yet this is another misconception: lower market rates will do nothing for the pay option ARMs of California. And for the purposes of pay option ARMs, over 50 percent of the nominal value of these mortgages outstanding rest here in California.

Why is this problematic? As we pointed out above, the median home price in California has fallen roughly 50 percent from its peak. Many of the option ARMs have little equity from home buyers. That is, little of the homeowner's 'skin' was put into the game. Now that prices have tanked, many borrowers are running the numbers and are gearing up for a 'moonwalk' away from their mortgage in 2009.

You can ignore the drop in foreclosures towards the end of the year. This was because of SB 1137 and the Fannie Mae and Freddie Mac moratorium. Guess what? Holidays are now over and now back to reality. These pathetic measures were the equivalent of an ostrich sticking its head into the sand.

In addition, you cannot refinance an underwater mortgage! And, the vast majority of these California loans are so underwater, they are swimming in Jacque Cousteau territory. These loans never served any purpose except to delude prospective homeowners and garner all of those lenders' middlemen outrageous fees. We can only hope that with new federal regulations, we will have an outright ban on them.

Those are 5 reasons why California will have a challenging 2009. There are many other reasons as well, but these should suffice for now, since the year is young. Buckle up because it is going to be bumpy ride folks.

  M O R E. . .

Normxxx    
______________

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.

Biggest Casualty Of 2008

The Biggest Casualty Of 2008

By James West | 2 January 2009

There is a commodity not traded on any exchange, not measureable in dollars, immune to the effects of supply and demand, once present in many global markets, but now all but extinct. With the closing of 2008, the commodity with the grimmest prospects of recovery is trust. From the laughable devaluation of the U.S. dollar through hyper-printing to the destruction of all the post-1933 regulations designed to thwart unregulated and over-leveraged gambling and lending, even school children are expressing their absence of trust in the adult world. While mainstream media occupies itself with causes and solutions that are short-sighted and just plain wrong, we've got to focus on this profound tragedy and develop a game plan for its restoration. [[Hardly likely to be successful; it is to be found in the grave next to those of "Christian virtue" and "Communist virtue", which similarly died at their birth.: normxxx]]

Despite the anti-regulation rhetoric of the new Obama economic team, it would behoove the rest of us to understand categorically that the investment banking industry's sole interest is its own enrichment, and it will continue to act immorally and illegally (when it can get away with it) to achieve that goal. Underlying the destroyed trust and the confidence that naturally accompanies it in world economics is the absolute destruction of trust in the number one unit of trade throughout the world, the U.S. dollar. Debasing the integrity of the global 'reserve' currency through the unbridled and reckless expansion of it will cause its continuing decline in 2009, and demand for U.S. Treasuries and U.S. denominated assets will decline as we step into a hyper-inflationary future. [[It was also a role specifically designed for the dollar at Bretton Woods I & II, necessary for 'globalization' and "unrestricted" foreign trade, and now likely to disappear (like the 'preferred' role of sterling in the British commonwealth, prior to WW II): normxxx]]

China holds the largest position outside of the United States in U.S. T-bills, and is also a regular participant in the financings of major financial institutions such as the Fannie and the Freddie. They are caught in the unenviable position of being forced to prop up the value of the U.S. dollar or risk undermining the value of their own huge USD holdings by abandoning it. The United States, in a persistent commitment to feckless and immoral business relationships with its creditors, understands this and confidently continues to undermine its own currency. [[Of course, that's the same China who shamelessly manipulates its currency to ensure a large and growing trade surplus with us!: normxxx]]

[ Normxxx Here:  Of course, this begs the question that the rest of the world— most recently Japan and China, but the UK and Europe prior to that— prospered mightily on the strength of the U.S. dollar— pretty much since the end of WWII (Japan and China since the '70s debacle)— while U.S. manufacturers and exporters suffered, until all that is left of them is a hollow shell.  ]

The time is quickly approaching when a new global reserve currency will replace the U.S. dollar, and contrary to the flawed wisdom of mainstream economists, a gold-pegged currency is not only feasible, it is perfect. It is astounding how many of these academic economists think that a global gold standard means that the available money supply is limited by the amount of gold in central bank vaults.

[ Normxxx Here:  And, if the 'printing' of money were not constrained by the physical amount of gold, then what purpose would the gold serve!?!  ]

If gold were merely allowed to trade absent the manipulative influences of the futures market and gold leasing and hedging operations, it would act as a natural barometer of the health of currency because, in the simplest terms, how much gold you can buy with a given currency would be a direct reflection of that currency's purchasing power relative to others. [[And, "if" my grandmother had had wheels; she'd have been a trolley car! : normxxx]] It is this market differential (and this same force is the "free market" force espoused superficially in so many modern economic tomes) that acts as a gold standard.

[ Normxxx Here:  The above paean to the "gold" standard is utter crap; we had panics, recessions/depressions, and runaway inflation every few years under the "gold" standard! Two "Banks of the U.S." were forcibly terminated to end seemingly interminable, grinding deflation— the friend of bankers, lenders, and few else (think Scrooge, who was a money lender— before he went broke giving away his money). The only ones then (as now) who regularly prospered were the financieers (in all markets) and the speculators (if they had bet wisely). Then, as now, those who benefitted least from the booms, suffered worst in the busts.  ]

Unfortunately though, our nation's ability to trust any currency, government bond issue, blue-chip stock, mutual fund, bank bond, or ETF is severely impaired by the general destruction of trust caused by the actions of Mssrs. Bush, Paulson, Madoff, Lay and Skilling, Blagojevich, Hsu, Black and a seemingly endless supply of other "pillars" of our communities. Over Christmas, my nephew who seems to have evolved an abnormally keen interest in matters political for one so young (he's 6) has embarked on the line of reasoning whose franchise is concentrated on the question "why". Why did Bernie Madoff steal all those people's money? [[Why, indeed!?! He had to know he'd be caught in the end.: normxxx]] Why doesn't the government give all that money to the people instead of banks? Why don't the banks lend people money anymore? Why isn't George Bush arrested for lying repeatedly to the American people?

I listen to my brother explain things in a most diplomatic fashion designed to preserve the boy's natural faith in the goodness of people and the importance of acting honestly in dealings with others, then watch as the apparent contradictions register in mischievous expressions on the youngster's face. What else are you going to do?

Imagine, instead:

"Son... it's important that you understand that people who spend their lives making money as their primary occupation will generally lie and cheat and steal their way to their objective, and so you really must replace that charming yet naïve trust of yours with a healthy cynicism and mistrust that will better aid you in dealing with your fellow man."

The thought is sickening. Yet if truth be told in this day and age, that is precisely the approach one might be compelled to take.

The promise of Barack Obama appears to be diminishing rapidly as scandal follows blunder in his yet-to-be inaugurated administration. With the appointment of Summers, Rubin and Volcker to his economic advisory team, Obama sends a clear message that he will delegate the oversight of economics to a team of failed and corrupt academic yes men[!?!] With his invitation to tele-evengelist Rick Warren to deliver the invocation, he confirms a populist approach that demonstrates both a dearth of experience and a puppy's requirement for approval.

And most disappointingly, his commitment to spend "billions" of imaginary dollars on infrastructure projects to buy popularity and temporary jobs will compound the spiraling value of the dollar and add impetus for its demise as the reserve currency of the world. There are more scandals and acts of fraud and duplicity yet to be uncovered in the upcoming year, and trust will continue to erode in the hearts and minds of average citizens the world over. While 2008 was a year that most would rather forget, 2009 will be worse— more so for the loss of trust.

Normxxx    
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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.