Saturday, May 16, 2009

May 19 California Ballot Measures Are Scam

As a former mayor of Los Angeles wrote in LA Times back in March, if you think Bernard Madoff is the swindler of the year, think again. The Terminator governor and the California Legislature are coming down your way with disingenuously worded ballot measures due for vote on Tuesday May 19.


(California voter information guide)
Increases size of state “rainy day” fund from 5% to 12.5% of the General Fund.
Requires additional revenue above historic trends to be deposited into state “rainy day” fund, limiting spending.

Prop 1A combines a 4-year tax hike of about $16 billion with a state spending cap

Spending cap is a sop. The main purpose is the tax hike to the tune of $16 billion.


(California vig)
Requires supplemental payments to local school districts and community colleges to address recent budget cuts.
Annual payments begin in 2011–12.

Modification of California Proposition 98 (1998) (which requires a minimum percentage of the state budget to be spent on K-14 education) to free up money for state's budget overruns.

On the first look, IB seems a good thing, more money for schools. The key here is that the payment won't begin till 2011. Until that time, the state can continue to raid the money meant for public schools.


(California vig)
Allows the state lottery to be modernized to improve its performance with increased payouts, improved marketing, and effective management.
Protects funding levels for schools currently provided by lottery revenues.
Allows $5 billion of borrowing from future lottery profits to help balance the 2009–10 state budget.

Sell rights to future lottery proceeds as a way of raising some cash now for state budget.

So they want to improve marketing to sell more lottery tickets (buyers tend to be low-income working class people) and borrow against the future cash flow.


(California vig)
Provides more than $600 million to protect children’s programs in difficult economic times.
Redirects existing tobacco tax money to protect health and human services for children, including services for at-risk families, services for children with disabilities, and services for foster children.

Asks voters to approve taking money from Prop 10 in 1998 (to establish early childhood development and smoking prevention programs) for purposes not allowed in that 1998 vote.

The whole point is redirection of tobacco tax money into the state's General Fund and say they want to "protect health and human services for children". They can say whatever they want to say. Money is fungible. The money thus redirected doesn't have any special characteristics that differentiates it from the money from lottery proceed, once it gets dumped into the General Fund.


(California vig)
Amends Mental Health Services Act (Proposition 63 of 2004) to transfer funds, for a two-year period, from mental health programs under that act to pay for mental health services for children and young adults.

Asks voters to take money from Prop 63 for purposes not allowed in that 2004 vote.

The same ploy as 1D. Redirects money from the specific programs approved by the voters to the state coffer and presents it as if it is furthering the program. Again, money is fungible.


(California vig)
Encourages balanced state budgets by preventing elected Members of the Legislature and statewide constitutional officers, including the Governor, from receiving pay raises in years when the state is running a deficit.

No pay raises for state legislators in years when there is a state budget deficit.

It seems about the only one that may be worth voting yes. (I remain suspicious of any hidden message here.) However, I am sure, if passed, state legislators will find a way to circumvent it. Doubling per diem expense (currently at $170, which they receive in addition to their salaries), for example?

Polls indicate that the more voters know about the ballot, the more they are inclined to vote no to 5 out of 6 ballots. (Not very hard to guess which ones.) It will be interesting to see how many of the more informed voters show up on Tuesday.

Friday, May 15, 2009

Week 1 of Mercury Retrograde Market Performance Report

I was hoping against hope that this Mercury Retrograde would be different from the recent ones for a change, that the market could be just as confused but in confusion it might go up instead of down. Hope is certainly is not a good stock market strategy. Mercury Retrograde did its regular job on the market this week.

Dow Jones and S&P 500 are basically back to the beginning of last week, though they managed to end higher than the last week's open. Nasdaq gapped down on the weekly basis, and ended lower than the last week's open.

FDIC's Bair says bank CEOs will be replaced

Here comes. According to Reuters,

"Federal Deposit Insurance Corp chairman Sheila Bair said some U.S. bank chief executives will be replaced in the next couple of months as regulators assess lenders' financial strength, Bloomberg News said on Friday, citing a television interview to be broadcast this weekend.

""Have they been doing a good job? Are there people who can do a better job," Bair said. Asked about chief executives being replaced, Bair replied, "Yes," according to the report."

"A good job", "a better job", defined by who? By her? By someone else at the administration?

The stock market has been heading heading south in a grinding manner. No cheer, no panic that I can sense. Just quietly selling off for the good 3 hours, and the selling seems to be accelerating into the final hour of trading.

FBI probes possible insider trading by SEC lawyers

From AP article [emphasis mine]:

"Federal prosecutors and the FBI have been investigating possible illegal insider trading by two Securities and Exchange Commission enforcement attorneys who were in a position to receive sensitive information about agency probes of public companies.

"The SEC's inspector general, David Kotz, found that the frequent stock trades over a two-year period by the pair raised suspicions of insider trading. Earlier this year, he referred the matter to the Fraud and Public Corruption Section of the U.S. attorney's office in Washington.

"The SEC enforcement attorneys, one male and one female, each earn more than $160,000 annually and had stock portfolios estimated to be worth more than that, according to Kotz's report. They often e-mailed each other about stocks and their trades, it said. The attorneys and the companies whose stock they were said to have traded weren't named.

"... they both traded in the stock of a large financial company after being told by a colleague about investigations of the company, a violation of SEC rules, according to the report.

"Two months before an SEC investigation of a large health care company was opened, according to Kotz's report, the female attorney sold all her shares in the company. She traded stocks 247 times between in 2006 and 2007, the report said."

247 times. That would have earned her the gold-level pricing on my brokerage account...

"Both attorneys "inexplicably" testified to investigators that they failed to see how sending e-mails to the male attorney's brother and sister-in-law from his SEC account could create the appearance that he was improperly sharing nonpublic information with someone outside the SEC, the report says."

Create the appearance? That's an understatement. But SEC has this to say:

""We take seriously even the suggestion that any SEC employee would engage in insider trading," according to a statement from the agency. "We note that the (inspector general's) report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place.""

As long as you don't openly say it, it's OK. No one has done anything wrong.

Remember the recent headline on another insider-trading/conflict of interest case? Proverbial tip of the iceberg that no one cares, because "we are moving forward not backward"?

New York Fed Chairman's Ties to Goldman Raise Questions
and 3 days later;
New York Fed Chairman Resigns

U.S. pressures BofA on board revamp

according to report by Wall Street Journal, says Reuters, via Yahoo Finance News:

"U.S. officials have urged Bank of America Corp (BAC - News) to revamp its board and bring in directors with more banking experience, the Wall Street Journal said.

"The bank has been criticized for having a dearth of directors with banking experience, and last week said it set up a committee including Massey [new Chairman of the Board] and four other directors to find new board members to plug that gap.

"It is unusual for the government to be directly involved in bank management when it does not have a direct common stock ownership stake."

Here's the list of Bank of Amerca's Board of Directors (source: Bank of America website):

Walter E. Massey, (70)Chairman of the Board, Bank of America Corporation
William Barnet III, (66)Chairman, President and Chief Executive Officer, The Barnet Company
Frank P. Bramble, Sr. (60)Former Executive Officer, MBNA Corporation
Virgis W. Colbert, (69)Senior Advisor, MillerCoors Company
John T. Collins, (62)Chief Executive Officer, The Collins Group, Inc.
Gary L. Countryman, (69)Chairman Emeritus and Director, Liberty Mutual Group
Tommy R. Franks, (63)Retired General, United States Army
Charles K. Gifford, (66)Former Chairman, Bank of America Corporation
Kenneth D. Lewis, (61)Chief Executive Officer and President, Bank of America Corporation
Monica C. Lozano, (52)Publisher and Chief Executive Officer, La Opinion
Thomas J. May , (61)Chairman, President and Chief Executive Officer, NSTAR
Patricia E. Mitchell, (66)President and Chief Executive Officer, The Paley Center for Media
Joseph W. Prueher, (66)Retired Admiral, United States Navy
Charles O. Rossotti, (68)Senior Advisor, The Carlyle Group
Thomas M. Ryan, (56)Chairman, President and Chief Executive Officer, CVS/Caremark Corporation
O. Temple Sloan Jr., (70)Chief Executive Officer, General Parts International
Robert L. Tillman, (65)Former Chairman and CEO Emeritus, Lowe's Companies, Inc.
Jackie M. Ward, (70)Retired Chairman and Chief Executive Officer, Computer Generation, Inc.

Two military veterans (Tommy Franks, Joseph Prueher), Spanish-language newspaper publisher, utility company, pharmacy, real estate investment firm, local (NC) auto parts supplier, the Carlyle Group. Nothing wrong with the board with directors with diverse backgrounds. It may actually be better NOT to have board members with a lot of banking industry experience; directors may actually ask questions as a business person, not as a banker.

The government officials seem to want to remove Ken Lewis, BofA CEO, and they don't like the board's continued support of him. Wonder why. Haven't heard anything about their displeasure at other TARP banks CEOs.

Thursday, May 14, 2009

Federal Reserve and Transparency Don't Go Together

Forbes has an article titled "The Federal Reserve Needs To Be Boring Again" by Thomas F. Cooley. The purpose of the article must be to counter the growing call for transparency of the Federal Reserve, whether it is from Bloomberg, Fox News (suing Treasury), Representative Ron Paul (his bill now has 162 co-sponsors), or Senator Bernie Sanders.

"... let's focus on why it is important to have an independent central bank. The answer is quite obvious. An independent central bank can focus on monetary policies for the long term--that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy."

Obvious? Policy targeting low and stable inflation? Then why has US dollar lost 94% of its purchasing power since 1933? 76 years is a long time and the Fed has been in existence the whole period and more, but according to the professor short-term-thinking politicians are to blame.

What does he mean by "independence" anyway? "Being unaccountable"?

Commenting on the bills currently in the Congress that call for transparency, he says with unmasked sarcasm:

"Great! Obviously, monetary policy is so falling-off-a-log simple that your elected representatives can insert themselves via the demand for transparency into decisions of true complexity and subtlety. Why am I not feeling reassured?"

That's a good one. We have left the monetary policy to the "independent", competent Fed who supposedly knows the true complexity and subtlety, and look what has taken us.

Professor Cooley is basically saying "Trust us, like you trusted us for the past 90-plus years. You don't know anything but we do".

I've lost the will to summarize the article any longer. If you want to see the article for some reason, please follow the link at the top of the post. If you do, please make sure to read the comment section. Many of the comments are much more intelligent, informative, and erudite than the article itself.

According to Forbes, Professor Cooley is "the Paganelli-Bull professor of economics and Richard R. West dean of the NYU Stern School of Business, writes a weekly column for Forbes". He is also a member of the Council of Foreign Relations and serves on the Board of Thornburg Mortgage, which filed for bankruptcy on May 1. He is also responsible for bringing about MBA/MS in Mathematics in Finance degree program at NYU, to breed the next generation of "super quant" managers for the Wall Street. He is also a consultant to the Federal Reserve Banks of New York and Minneapolis.

Caribbean Banking Centers and Treasuries

According to Treasury's February TIC data that details foreign holdings of US Treasuries, Caribbean Banking Centers (including Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama) are the 3rd largest holder of US Treasuries in the world, behind mainland China and Japan.

Notice the large increase between July and October 08. That's 74% increase. Just what kind of interest do these island banking centers have in accumulating US Treasuries?

The top two holders, China and Japan, are the large net exporters to the US. In fact, top 10 holders are mostly countries that have something to sell to the US, with the exception of United Kingdom (No.7, but it includes its offshore banking centers Channel Island and Isle of Man) and Luxembourg (No.8, money center in continental Europe).

Some people have suspected that the Caribbean Banking Centers act as conduit to the central banks, including the US Federal Reserve, Bank of England, and Bank of Japan, that they have been purchasing the US Treasuries and sovereign debts on behalf of these central banks: covert monetization of the debts. (Or you could say money laundering by central banks, I suppose.)

Now listen to this BBC interview on May 12, in which journalist David Cay Johnston talks about the Caribbean Banking Centers in relation to the Obama administration's avowed crack down on "tax havens". (Fast-forward to about 3 minutes. And his invasion remark is around 6 minutes.)

  • "The US government should invade Cayman Islands [a British territory], seize all of their records, and prosecute every single tax cheat!"

    Invade? Is he serious? Or is he stupid? Or is he ignorant? (Or all of the above?)
  • "What benefit do the taxpayers of the US, UK, anywhere in the world, get, by having these banking centers?"

    Benefit, like having their national debts purchased by them so that their governments can keep on spending and wasting?

TIC data for March will be released tomorrow.

Peter Schiff: Allow Recession to Run Its Course

from New Brunswick Business Journal.

""What we should do is let the recession unfold and allow businesses to fail and asset prices to fall," he said during his keynote speech to the New Brunswick Securities Commission Fullsail Summit.

""We don't need more stimulus," he said. "We need to come down from this artificial high and rebuild our economy. And that isn't something that can be combated with monetary fiscal policy."

""It means allowing the recession," he added. "That is the cure and we simply need to allow it to run its course.""

The way out of the recession is to let the recession run its course, and that's unfortunately the very last thing that the government wants to do.

He also cautioned Canadians NOT to follow the US footsteps:

""I think Canada should not have slashed interest rates to the degree that they did," he said. "If they hadn't the Canadian dollar would have risen and a strong currency is a good thing. It means you're wealthy and you can buy more stuff."

"In addition, he said Canada shouldn't be following the misguided footsteps of the United States and offer auto companies bailouts.

"He cautioned that the cash for government stimulus projects will likely come from governments printing more money, which means that even if taxes aren't hiked taxpayers will pay because of inflation and less valuable paychecks."


""A lot of Canadians will end up with second homes down in Miami," he said. "The weather gets pretty cold up here so it will be nice for you to have vacation homes down there.""

That's already happening. (And they are paying CASH.)

Paulson Told Bankers They Had No Choice, Really.

Long before the current contingent arrived from Chicago, Washington D.C. was already a gangsta land. Or it sure seems that way. According to article, "Paulson Told Bankers to Take U.S. Taxpayer Aid or Be 'Exposed'",

"Former Treasury Secretary Henry Paulson, saying nine U.S. banks were “central to any solution” of the credit crisis, told their leaders to take government aid or be forced to by regulators, according to a memo prepared for an October meeting."

That October meeting took place on Monday October 13, 2008. The memo was obtained by Judicial Watch, a nonprofit research group in Washington that obtained the documents under a Freedom of Information Act request.

The stock market went off the cliff on Wednesday October 1, the very day that Senate passed the Emergency Economic Stabilization Act of 2008, a.k.a. Bailout of Financial Institutions. It kept falling, and on Friday October 10 the market hit the then-bottom of 7,883 on Dow Jones Industrial Average.

In that panic situation, Paulson told the bankers:

"“If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance,” Paulson’s one-page list of talking points for the session with the banks’ chief executives said. “We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.”

"Three and a half hours after the meeting was scheduled to begin, Paulson had obtained the bankers’ signatures on half-page forms along with the handwritten amount of the federal government’s investment, according to the documents. He announced the actions publicly the next day."

I read before that Paulson on that day told the bankers they wouldn't be able to leave the room until they sign the form. I always wondered why none of them took up an offer, so to speak, and stayed on. Wells Fargo CEO was reported to be vehemently opposing the idea, saying his bank did not want any government money.

Now I know. Even if they said no, Treasury would force-feed them anyway. Head I win, tail you lose.

Wednesday, May 13, 2009

Puttin' on the Ritz

US Commerce Department released the April retail numbers that were worse than economists had expected, and the market is in deep red.

Men's Warehouse (MW) is up 8%. I don't know any news about the company that's contributing to the surge in a terrible tape, but whatever it is, the price action is impressive (see my post here (it will open in a new window), and check out the link at the bottom of the post).

If we are in a severe recession, or worse, depression as some already call it, men gotta dress sharp like in 1930s. Or like him...

Broad Pay Reform for Financial Industry By Obama Administration

is being contemplated, according to New York Times article.

"Obama administration officials are contemplating a major overhaul of the compensation practices in the financial services industry, moving beyond banks to include more loosely regulated hedge funds and private equity firms."

Question No.1: Why should a government "overhaul" the compensation practices in a private industry? Or are they saying that financial industry will cease to be a private industry?

"Federal policymakers have been discussing ways to ensure that pay is more closely linked to performance."

Question No.2: "Performance" measured by who? Who is going to define "performance"? The government officials? (and who is going to define and measure THEIR performance?)

"...the new rules could apply to financial firms like hedge funds or private equity firms that never accepted money from the Troubled Asset Relief Program, or TARP."

Question No.3: Why? Give me a reason other than "Because we can".

"Administration officials have been contemplating broad-based pay reforms since early this year... But the effort was apparently put off after the furor over bonuses at the insurance giant American International Group in March."

Well-orchestrated furor, in retrospect, which effectively obscured the more important news that AIG was used as a conduit to funnel money to the top national banks and foreign banks.

"Bank executives have been pressing for more clarity on the pay issue, fearful that talented managers and traders might flee their companies for overseas institutions and boutique firms. But President Obama and lawmakers on both parties have been looking for ways to rein in excessive pay packages and make sure that compensation does not encourage them to take more risk."

Question No.4: Bankers took more risk because they wanted to get a fatter bonus? That could indeed be part of it, but the greatest incentive for them to take more risk was super-easy, super-loose monetary policy that flooded the market with liquidity.

"Treasury officials have said new executive compensation rules could be released shortly, with some bankers and lawmakers expecting them to be formally released before the Memorial Day recess."

... Now, Mercury Retrograde seems to be exerting its influence steadily but surely.

As of 10:02 AM Pacific Standard Time, Dow Jones Industrial Index is down 176 points to 8291, S&P 500 Index down 22 points to 886, Nasdaq is down -43 points to 1672.

Tuesday, May 12, 2009

"The latest casualty of the economic crisis is the rule of law."

... is the opening sentence of a piece in Vanity Fair by Edward Jay Epstein ("The Czar's Rules Apply at Chrysler"). (Hmmmm, even Vanity Fair writes about this topic...)

"Consider the sad case of Chrysler. Its troubles became manifest in 2007, when it was owned by the German auto giant, Daimler, and it was unable to come to terms with the United Auto Workers labor union (UAW). Rather than suffer more losses from an unfavorable union contract, Daimler decided to rid itself of Chrysler by handing over 80 percent of its ownership to Cerberus Capital Management....

"Chrysler then borrowed $10 billion from a banking syndicate, led by J.P. Morgan Chase, Citigroup, and Goldman Sachs, to fund its operations. The loan was secured by mortgages on Chrysler’s real estate, manufacturing plants, patents, and highly profitable brand licensing rights. (Jeep alone earned $250 million a year licensing its name to toys, clothes, and other products.)

"The lenders assumed (incorrectly, as it turned out) that their secured loan, which was senior to any other Chrysler debt, would be protected even if Chrysler went bankrupt, since the iron rule of bankruptcy held that secured loans get fully paid before unsecured loans. Without this rule, financiers would be reluctant to lend money to corporations on their assets."

WRONG! (That was before this administration came in. We are in a new era now.)

"... the creditors were confronted with a take-it-or-else offer of 29 cents on the dollar, substantially less than the unsecured creditors would receive. (The UAW’s fund, for example, would receive an implied 55 cents on the dollar.) The “or else” turned out to be what President Obama described as a “surgical bankruptcy” for Chrysler in a pre-selected U.S. bankruptcy court."

Fiat is the clear winner, who is not putting any money and getting 20% stake. The next in line is UAW, with UNSECURED claims (pension fund) and still ending up with 55% stake

"But the consequences of upending the rule of law, even if it was done with the best of intentions, may prove far more serious than whatever befalls Chrysler in the Rustbelt. For one thing, it will undoubtedly become far more difficult for an American corporation to borrow money on its assets, since even a senior secured lender can no longer be sure his claim will take priority over those of labor unions and other unsecured creditors.

"As one savvy investment banker told me, “Now that we live in a banana republic, secured lending is anything but secure.”"

Money will flee.

By the way, according to Zero Hedge, none of the Chrysler's senior debt holders (non-TARP lenders, mind you) has CDS on their debts. They thought, as this article points out, they were protected by the bankruptcy law.

"Fiat" is such an appropriate term for this sorry saga. It means in original Latin "Let it be". In modern usage, it means "an arbitrary order or decree".

Attention To Detail Or Micro-Management?

Just a matter of perspective? You be the judge.

Obama Admin Cuts Chrysler's Ad Budget By Half
AP Source: Chrysler to cut 800 dealers on Thursday

General Mills:
FDA Blasts General Mills Over Cheerios Claim

(good) small businesses vs (evil) big businesses:
Obama Encourages Antitrust Complaints; Expect Nightmare of Litigation

To pay for enormous health care legislation:
Soda Tax Weighed to Pay for Health Care
(not just soda pops, by the way: soda, fruit drinks, sports drinks, energy drinks, ready-to-drink teas.. Geez..)

Commander of Afghanistan theater:
Afghanistan commander McKiernan fired as Afghan war grows more complex

Obama Admin Cuts Chrysler's Ad Budget By Half

The sorry saga of Chrysler continues.

The administration's Auto Task Force, headed by investment banker Steve Rattner, reportedly cut the Chrysler's advertisement budget by 50%.

According to the article posted on,

"Chrysler is nearly two weeks into its bankruptcy, and the Auburn Hills, Michigan-based automaker is already getting an idea of just how engaged the Obama administration plans to be in the process. Chrysler planned to spend $134 million dollars on advertising during its supposed nine weeks of bankruptcy, but the Auto Task Force has reportedly cut the figure in half. Judge Arthur Gonzalez wasn't even sure 50% spending was necessary, saying "idle plants, why market?" "

I suspected as much, but the administration is really going to micro-manage the operation of Chrysler, with Auto Task Force headed by a person with zero auto industry experience. All I can say to Chrysler is: You should have gotten your house in order, a lot sooner.

Monday, May 11, 2009

1-Month Gold Lease Rate Is Negative

I've never seen anything like this. The chart is from, showing gold lease rates for various duration since May 2008 to present. 1-Month lease rate is negative. So the entity that lend gold (usually a central bank, in the case of the US it is Federal Reserve) effectively gives you money so that you borrow gold from them and sell it in the open market. Borrowers are bullion banks (including Goldman Sachs, JP Morgan Chase, Deutsche Bank), large mining companies, and jewelry manufacturers. The latter two do this as a hedging operation, and the bullion banks claim they are also doing it as a hedging operation. (Gold bugs are always suspicious of their claim, though.)

These bullion banks and other firms borrow gold at a very low lease rate and sell it in the open market (= short gold), and invest the proceed in securities that yield higher returns. Sound familiar? It should; this is a carry trade. Lease rates have never been high, but now the shortest duration lease rate is negative. What does that mean? I don't know. Anyone know? Any guess?

Here's my guess: Federal Reserve, by charging negative lease rate for 1-month lease of gold, seems to want to encourage gold shorting. They want the physical gold price down. So they can sell short-term Treasuries at a higher price? From the chart, 1-month lease rate went below zero around mid March. Looking at the gold chart, it seems to have been successful in driving down the price of gold until mid April. Since then, gold is slowly edging up again.

I also read the rumor that Goldman Sachs and JP Morgan Chase are accumulating call option positions on gold and silver futures contracts. Hedge against their short position? Now I'm really confused...

**More on the topic, I found this article by James Turk, founder of
A Short History of the Gold Cartel

Obama Proposes New Taxes on Traders, Life Insurance

according to article.

"President Barack Obama proposed raising money to pay for his health-care overhaul by imposing $58 billion in new taxes on securities dealers, life insurance products and Americans with valuable estates. "

"The eight new proposals, outlined in budget documents released today, are in addition to more than $1 trillion in tax increases over the next decade the president wants to impose beginning in 2011. Those would include higher rates for top earners and restrictions on tax-avoidance techniques commonly used by U.S.-based multinational corporations.

"Obama also would raise $24.2 billion over the decade by adjusting rules for valuing assets in estate planning.

"The documents released today didn’t explain in detail how the tax increases on securities dealers and life insurance companies would work. They would raise $4.2 billion and $12.7 billion, respectively, through 2019. "

The economy hasn't shown a sign of recovery, profits are hard to come by for the companies, and people are trying to cut back on expenses and paying down debts. And the government wants to raise taxes even more. Make sense, in this upside-down, inside-out world.

Oil Prices Back to $100 a Barrel?

Not Likely, Many Traders Believe, according to

"Since the low of $33.55 in February, US light, sweet crude has followed stocks in rallying on hopes of economic recovery. The price retreated a bit on Monday, but on Friday traded up $1.92 to settle at $58.63 a barrel, another high for the year.

"Even so, traders don't see oil rising much beyond $70 a barrel. They argue that with the economy posting only tepid signs of recovery, the dollar holding fairly strong and demand remaining relatively low, there seems to be little impetus for a rise back towards last summer's record-breaking highs."

They believe oil price of $60-65 per barrel is attainable even if the economic fundamentals are weak, but not likely above $70, and decidedly not like last summer when...

"Speculators who were running from the stock market and chasing a falling dollar and surging demand during peak driving season helped push oil to its $147 record ..."

If I recall last summer, traders and analysts were talking about "fundamental" reasons why oil was $147 and set to go even higher. So now it was the speculators who caused the spike?

It's worth keeping in mind that some of these same people also said last year oil would never fall below $70.

Anyone willing to bet against the majority? (Have you heard about "inflation"?)

Sunday, May 10, 2009

Green Shoots? Not So Quick, Because...

"Real Recovery Will Hinge on Capital Spending", according to James Cooper of Business Week.

"Companies are still chopping costs aggressively in an effort to limit the recession's hit to their profits, and there's no indication they are ready to put away their axes. Capital spending, a crucial part of the economy's growth engine, remains especially vulnerable.

"Falling outlays for everything from computers to forklifts to office space accounted for 4.7 percentage points of the 6.1% decline in first-quarter real gross domestic product. In fact, the 16.8% drop in capital spending since the third quarter of last year is the largest since the 1930s."

"The major weight on capital spending right now is the recession. Businesses don't make decisions to shell out money based on cautious optimism. They have to see actual improvement in demand and profits."

Right now, both demand and profits are not there to justify capital spending. What about external financing, such as bank loans? Not there, either. Borrowing cost remains high.

"In the credit markets, borrowing rates for any company less than investment grade are in double digits, and those for many higher-quality borrowers are still more than 8%. These rates remain extremely high in relation to both inflation and riskless Treasury notes.

"At banks, senior loan officers said they continued to tighten lending standards in April for all types of business loans, although the pace did slow compared with January. Their reasons: an unfavorable economic outlook, less tolerance for risk, and a worsening of problems in some key industries."

"Perhaps the biggest factor working against a capital spending recovery is that U.S. businesses have a growing glut of production capacity—they can go a long time before needing to expand. "

Conclusion: Until the excess capacity that had built up during the bubbly years of cheap credit gets purged from the system, the real recovery will not come.

The businesses are doing what needs to be done - cutting the excess and trying to reallocate the resource to where it's needed. The danger is cutting short this process by forcing the money be allocated to the sectors/companies that are trying to remove excess. All that will do will be to re-inflate a bubble yet again. With all the stimulus money and government-led projects, I'm afraid that's what is going to happen, whether we like it or not.

How Would GM Bond Holders Fare in Bankruptcy?

This from AP: Experts say GM bankruptcy almost inevitable

"For General Motors Corp., the task at hand is so difficult that experts say a Chapter 11 bankruptcy filing is all but inevitable.

"To remake itself outside of court, GM must persuade bondholders to swap $27 billion in debt for 10 percent of its risky stock. On top of that, the automaker must work out deals with its union, announce factory closures, cut or sell brands and force hundreds of dealers out of business -- all in three weeks." [emphasis mine]

So just like Chrysler, GM is basically being driven to bankruptcy. Yes yes, you could say for both auto makers that they have had all the time to do something but now they're out of money and option, it's their fault. GM's CEO Fritz Henderson, who replaced Rick Wagoner on March 29 (Mr. Wagoner resigned at the express request from the White House), pledged last week that:

""If we need to pursue bankruptcy, we will make sure that we do it in an expeditious fashion...""

However, the problem will be those "unpatriotic" bond holders again.

"The biggest obstacle to GM restructuring out of court appears to be its bondholders, who have been reluctant to sign on to the stock swap when the government and United Auto Workers union would get far more stock in exchange for debts owed by GM."

Sound familiar? Chrysler was just a prelude, a warm-up. The government successfully bullied the secure, 1st-lien senior bond holders into accepting less than 30 cents on a dollar (see my post here). And..

"GM has proposed issuing 62 billion new shares, 100 times more than the 611 million now offered publicly."

Under the restructuring plan being pushed by the government's Auto Task Force,

  • 50% stake goes to the government, in exchange for writing off half the amount of loan ($27 billion total this year). Result: 50% stake for $13.5 billion.
  • 39% stake goes to UAW, for swapping $20 billion GM's obligation for retiree health care payments and receiving $10 billion cash. Result: 39% stake for $10 billion.
  • 10% state goes to bond holders, who hold $27 billion GM debt. Result: 10% stake for $27 billion.
  • 1% stake goes to the current common share holders.

If Chrysler's case is any indication, GM's restructuring will be pushed through as the government wants. What will that portend, for the future relationship between the private investors and the government?

Here's the transcript of the interview of Thomas Lauria, who represented the Chrysler's "dissident" lenders. It aired on May 8 on PBS's Nightly Business Report.

" I think the bigger question though is will the auto industry or any other troubled industry that may have important political issues associated with it be able to attract private financing on a (INAUDIBLE) basis? Certainly a lender who looks at what is happening to the lenders in the Chrysler case might have second thoughts. And we know there are other industries that are going to need rescue financing, the airline industry, GM coming up. Will the government be the only source of that financing? Certainly the administration says that they're hopeful that the private sector will participate, but I'm not sure that this is much of an inducement for that. " [emphasis mine]

I am not sure either.

SKF and Ultrashort ETFs - Are They That Bad?

It's been a fun month since this blog was started, and I thought it appropriate to look at the namesake of the blog, SKF. SKF is Ultrashort Financial ETF, designed to replicate twice the inverse of the daily performance of the underlying index, Dow Jones US financials index. (Mark the key word: DAILY.)It has been quite popular with investors particularly since last October, although it's been somewhat overshadowed by a triple short financial ETF, FAZ, in the past few months.

Jim Cramer of CNBC Mad Money intensely hates this ETF, calling it an ETF of mass destruction. He doesn't seem to grasp how this ETF works, though, and his anger seems misdirected. He is mad because he thinks the ETF shorts both good banks and bad banks. (Oh boy...)

Here's a better argument against ultrashort (double short and triple short) ETFs from Volatility Decay: A New Kind of Risk, by James Anderson:

"The danger in holding double and triple ETFs has already been discussed in Minyanville, but these horses are nowhere near dead - they definitely need to be beaten again.

"I’ll call ETFs that are leveraged 2 or 3 times in either direction, long or short, LTFs. LTFs have an intrinsic feature never seen before in anything traded on exchanges. I call it “Volatility Decay” which if you do a Google search, it pretty much doesn’t exist, so I think it hasn’t sunk into very many people on The Street. Time decay in stock options is logical and intuitive. Volatility Decay is not and it needs to be fully explained before too many investors get hurt."

He puts up a table of hypothetical double short and triple short ETFs with non-leveraged ETF, and concludes:

"The point is that any and all volatility in any LTF will eventually cause these LTFs to trend to zero. It doesn’t matter whether they're long or short - they'll all go to zero in the long run.

"So, is there a play here? Well, obviously shorting these LTFs is a long-term play, but can you handle the volatility in the short term? As John Maynard Keynes said, “ The market can remain irrational longer than you can remain solvent."

"I'm not advocating any long-term position in any LTF, but the real message is to avoid any LTF position for more than a day or 2. Volatility Decay is a new concept; please be aware of the risk."

As a holder of double and triple short ETFs, I've come to understand "Volatility Decay" concept very well from my own experience. But I don't necessarily agree with his conclusion that you should avoid any such ETF position for more than a day or 2. I held SKF, SDS, FAZ anywhere from 2 weeks to 6 weeks, and I closed them for a tidy profit. The key here, is not so much of a daily volatility but sustained, increasing volatility over time. The reason I got lucky then is because of the time period I was holding these ultrashort ETFs - a sustained down-market with heightened volatility, from October 08 to March 09.

On my other blog (trade blog) I have some charts of these ultrashort ETFs including SKF since last September. Take a look.