Wednesday, January 26, 2011

Clueless Leaders

I tell you somewhere Alicia Silverstone is smiling because if you back out all of the pomp, circumstance, rhetoric, and emotion from last night’s State Of The Union Address, what we have is basic governmental incompetence on how the economy really works.   

Between Obama's fear mongering over the deficit and Paul Ryan comparing us to Greece, we can confirm that our elected leaders are completely and heart breakingly clueless as the day is long. Both of these guys have zero idea of how the US monetary system and importantly the economy works.

Why in the world is Obama comparing the government with households is beyond me? The US Government is not revenue constrained. It never was and never will be. Consumers, State & Municipal governments are revenue constrained. Why is this? Simply, sovereign governments with a monopoly power over its supply of currency never ever needs to save or raise funds for spending. We can go all day long about the intricacies of Treasury auctions and the such and I will get into that in an upcoming post, but let’s be clear the government of the USA doesn't fund itself via Treasury auctions.

Lets recap:

Households have a revenue problem.
Municipalities have a revenue problem.
State governments have a revenue problem.
US Government has NO revenue problem

To this end Dick Cheney is correct when he said "deficits don't matter", but what they do portend is much higher borrowing costs for profligate spending. So far China, Japan, and most importantly the Fed, is buying Treasury debt and trying to keep rates down. Let’s be honest, I would rather have lower rates than higher ones to this end the cost of financing will rise if others believe you don't have a handle of your finances. Again, it’s a psychological situation we are dealing with here, its ultimately a confidence thing. That's all.

Obama also made this point:

"So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president."

Bam is the man! But is he serious here?

Does Obama know that Eisenhower presided over three recessions in his 8 years? How did he do it? Yes! He promoted two budget surpluses that immediately sent the country into recessions in the late 50's. This country can't afford austerity, because it needs to grow because there is far too much private sector debt on consumer and business balance sheets.

Now we get to Representative Paul Ryan.
He states in his retort....

“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody. Their day of reckoning has arrived. Ours is around the corner. That is why we must act now."

How many times do I have to say it. The USA is not Ireland or Greece! Ireland and Greece have no monetary sovereignty .They can't print up Euro's. The US can print up greenbacks.

Lets recap again.

Greece can't print up Euro's to fix their problems.
Surprise! Germany and France can't either.

The UK can print up British Pounds, but they for some reason are in fiscal austerity mode and soon will be driving off of a cliff because when you comingle huge debts and austerity the results are at the bottom of the Grand Canyon.

If Paul Ryan is the best that the GOP can do then the GOP is already dead.

Tuesday, January 25, 2011

Gee Really?

NY Times DealBook Is running this story this afternoon.

Merrill Lynch Settles S.E.C. Fraud Case

First of all, if there is a Chinese Wall between traders, bankers, and analysts on Wall Street then one must believe in the Easter Bunny and the Lochness Monster as well.

Take it form me. Coming from a former trader who used to work for three huge investment banks.

Wall Street investment houses and banks routinely front run client orders. This is not new and is quite honestly the cost of doing business on Wall Street. This is pure market making at its finest.

I find this one quote so fascinating and emblematic of the Wall Street culture.

"Merrill has since adopted “a number of policy changes,” Bill Halldin, a Bank of America spokesman, said in a statement. Mr. Halldin added that the policy changes, which include enhanced training and supervision, “address the S.E.C.’s concerns.”

You telling me that this wasn't a policy before?

Case Shiller Tells Us What We Already Know

The November SP Case Shiller 20 city home price index fell to the lowest level since March 2010. It fell 1.6% YOY, which was within expectations. Home prices now have fallen for five straight months. 

The biggest declines were in Atlanta, Chicago, and Detroit.
The biggest gainers were in SF, LA, San Diego, and DC.

Las Vegas which is the benchmark for housing excess saw prices drop 3.4% YOY.

Yada...Yada...Yada...Net. Net, the headline index is now just 3.5% above the April 2009 lows. This is after all that has been done via trying to stabilize housing. We are talking about housing tax credits, HAMP, and the MBS/toxic sludge buying program that the Fed instituted in 2009. What do we have? This shows the absolute horrible condition of housing finance in this country.

BTW...Housing prices as a whole are down 30% from July 2006 highs.

What this means is just more of the same government policies going forward. The Fed will look at the state of housing and keep stepping up the liquidity.

The lack of governmental involvement in housing has caused continued declines throughout much of the country. This is because the consumer is tapped out and the private sector is dead.

The tax credits have stopped. HAMP was a tool for Treasury to temporally stop foreclosures not for homeowners to refinance. Most importantly, the Fed is not bidding for MBS. The MBS purchasing plan ended on 4/1/2010, and we have seen what housing prices have done since then.

I still see some 5-10% further housing declines across the country, suite simply because housing is overvalued and employment has not picked up. If the economy weakens then all bets are off.

This is why the Fed will keep QE2 in place. This is why liquidity will continue to flow. This is why ZIRP will be the official monetary policy going forward. The Fed knows what happened to housing when they tried to disengage, they can't afford to disengage from the broader economy.

Quite simply the private sector is dead. It can't support a 14T economy. It never could. There is no free market. That is a myth. The private sector needs to deleverage just as much as consmers do. There is currently $8T of debt on corporate balance sheets, roughly $2T of cash. WOOPTI DAM DO!

The government is the economy. Better get used to it.

Got Stagflation?

Every economy's best friend is back. Yes! That is right. Our good old buddy from the 80's, Stagflation is back, at least in the UK it is. If you remember last week UK DEC CPI came in YOY of 3.6%, today the UK economy unexpectedly contracted by .5% Q to Q vs. an expected gain of .5%. So you have higher inflation and a contracting stock market. Which is perfect for the banking elite as monetary policy will be accommodative and fiscal policy constrained. The liquidity will flow like fine wine and the brutal austerity on the rest of the idiots that support the banking elite will continue for the foreseeable future. The Pound Sterling is dropping vs the USD like a stone this morning which is portending more money printing from Mr. Osborn. So what we have basically is more of the same.

The US economy which has been patched up by ludicrous spending, tax payer bailouts, and the Fed is showing much better resilience. The FOMC starts their central planning meeting today and we should hear from them tomorrow that they have the banking elite's back once again for the 75th straight month. What the FOMC should do is not to ignore the inflation pressures in food and energy, but then again why focus on these non core items?

The FOMC should lay out a plan to exit this monetary play land called ZIRP. They have to let the economy stand on its own two feet or even try to make an attempt. The US economy is getting better and recovering modestly, how much of that is directly attributed to the FED?  That was a trick question! What is clear is this, The FED has engineered an increase in asset prices directly via QE, we need to have a clue when this policy will end and we need help from Benny and the Ink Jets.

Thursday, January 20, 2011

It's All Good At Intel Except For The Stock Price

Intel started the tech earnings season with a serious bang, blowing away estimates last week. INTC reported revenue of $11.5B above estimates of $11.37B. They posted earnings of .59 cents per share vs the estimates of .53 cents per share. If you back out some $300MM in tax gains, INTC still beat the street. Like Apple, Intel gave stronger guidance going forward. They are now guiding revenue at $11.5B which is sequentially even with 4th Quarter, this is impressive as 4th quarter is seasonally very strong.

OK. NOW. One would expect INTC stock to rally on these results, and the stock did rally but very modestly the next day and the stock has since drifted lower over the last week or so.

The question is WHY?

Very simply, it cant get any better than this for the Semi King! Intel is already running at full capacity and is running on all cylinders - gross margin wise. This was the thought after Intel blew past estimates last quarter when many were pointing to a cyclical peak in gross margins. When you are at the peak or on top of Mount Everest the only way to go is down unless you are able to cut costs aggressively or sell more into your sales channel. Intel's growth story is in tact and that PC's are not going away anytime soon. The product pipeline is strong on the low and high end. They are seeing growth in emerging markets and the business refresh cycle will drive the PC business through 2011 and into 2012. Tablet, mobile computing, and smart phones will assist INTC as more and more servers will be needed to run cloud based computers.

I ask you again WHY can't the stock rally?

I think the big question is revolving around Intel's plan for capital spending for 2011. INTC announced significant increases in their capital spend through 2011, up to $9B from $5.1B in 2010, this will benefit Applied Materials, KLAC, Lam, and others but many are now worried about over spending and over capacity. Let me be clear. The semiconductor business is a boom bust business, where the down periods are brutal and typically the down periods are followed by periods of over capacity. When more and more fab plants are added to meet demand, once that demand starts to tapper off this industry has problems. Also a problem was the increase in inventory. The Days of Inventory increased from 83 to 94 days.

All an all Intel had a fine report but thoughts  and concerns of over capacity in the semiconductor industry have grounded the stock for the last few months.

Wednesday, January 19, 2011

Why Have Stock Research Analysts?

Apple Computer crushed earnings estimates last night. Was this ever in doubt? We all knew that Apple's numbers would be way above what the mutton head analysts on Wall Street had expected them to make. The estimates were for Apple to hit $5.38 on earnings and $24.3B in revenues. Apple safely beat those numbers and even beat the dreaded whisper numbers.

In short, Apple crushed it. They came in at $6.43 per share on revenues of $26.7B. If you remember last quarter, Apple gave very very conservative guidance of $23B and EPS of $4.80, and the stock sold off pretty nicely.

In the quarter, they sold:

4.13M MACS - up 23%
16.24M IPHONES - up 86%
19.45M IPODS - down 7%

They surprisingly gave better guidance for the upcoming quarter. They now see revenue of $22B vs expectations of $20.9B and eps of $4.90 vs expectations of $4.47. The stock which at one point was down to 326 or so in the morning, rocketed all the way to 357 or so in the after hours before settling in at around 345. Now! We all know that Apple at the rate they are executing will easily beat their own raised expectations, not unless the world blows up in the next few months, but do you actually think the minions on Wall Street will suddenly get it right on Apple? Absolutely not! You see its a game on Wall Street to keep the feed bag going. Understand that the high paid analysts who are tasked with following Apple on a day in and day out manner have a job to do. Their job is to keep the estimated low enough so that when Apple does beat them, they can go out and sell the hell out of it to their sales force. Now of course, every analyst will raise their estimated to where Apple's management has guided to, but not a penny more. You will have a few independent analysts who will aggressively model but by and large the big wire houses will model what management is forecasting. This is again because the wire houses need to keep their best clients which happen to be the biggest hedge and mutual funds in the world happy. Always under estimate and over deliver, or not do your job and rig the game in your favor. This is not shocking behavior and it shouldn't be shocking to anyone who has followed Wall Street for the last 25 years. The small retail investor believes the game is rigged and the Apple earnings announcement is no better example of the shenanigans that occur every day.

What typically happens is this. Apple management typically low balls analyst expectations. They do this for one simple reason. Pressure to perform! They low ball fully knowing that they will beat expectations comfortably. This keeps the analysts and shareholders inline. The analysts will always follow managements lead because after all why upset management by being the lone wolf? The analyst community needs to be in the good graces of management for any type of future investment banking fees. What is also important is that the analyst community is a bridge for Apple to their shareholder base which is every single large mutual and hedge fund in the world.  So what we have here is an analyst community that is incentivize to keep Apple moving in the right direction which is currently vertical. The incentive here is to under estimate so that management looks like they are hitting the ball out of the ball park. All the while the wire houses are collecting commissions from the same shareholder base.

What the Apple earnings announcement basically tells us that:

-The Shareholders are happy
-The Analyst community continues to add zero value to almost anything.

All you have to do is read the blogs to find out how Apple is doing. Why read MS, GS, or Citigroup's version? There is no better way to read an honest and reliable account of a company's worth then going to a random blog on the subject.

The only reason Wall Street research exists is to feed the supply chain.

Tuesday, January 4, 2011

Back Door Bailouts Continues & Confirmation

Yesterday Bank Of America settled numerous MBS push back claims with both Fannie and Freddie.

The travesty of the settlement has been my on going complaint that every single government program to help homeowners is really a back door bailout for the banks. The GSE's are front and center a continuous backdoor bailout mechanism for Wall Street's absurd toxic pipeline machine that fed the credit beast for the past 15 years.

What the settlement did for BOFA is basically settle all future claims from Freddie Mac for $1.28B. This settlement will cover some $127B in loans that Countrywide made and packaged to Freddie. Do the math. This comes out to exactly 1 penny on the dollar. Freddie Mac should be ashamed of themselves over this tax payer heist.

Fannie Mae settled for $1.52, but BOFA still has liability for future claims. What this shows is that Wall Street along with the government is 100% firmly entrenched in a permanent bailout mechanism with the tax payer as the sucker.

What do we have to look forward to with a GOP Congress in 2011? More of the same as Congressional Republicans are looking to roll back many parts of Dodd-Frank as inhumanly possible. Dodd-Frank was a joke to begin with, rolling it back only brings us back to the days of handing out mortgages to parrots and pets. Why not? When the sucker tax payer is on the hook.

Monday, January 3, 2011

The Only Graph That Matters

If we as a society don't attempt to figure out what is wrong with our society we will never come back to being a real society that puts people back to work. There has been far to much emphasis on re-liquefying the banking sector that the powers that be don't even realize the massive amounts of malinvestment that is inherent in our economy. 

Chart courtesy of Calculated Risk.

We have to prosecute fraud, I know that means putting half of the banking sector in jail but we at least can pretend that we have a legal system by at least indicting one person - Can't we?

Sunday, January 2, 2011

Broken Narratives - Happy New Year!

As Fridays trading day excruciatingly came to a close, the most incredible thing dawned on me. The market is completely dead. The trading in the month of December has been so boring compared to what was happening during the late spring and summer periods that watching the markets grind higher in December was like watching Jackson Pollack painting a canvas. There was no rhyme or reason for any of it. There was no starting place, no middle and no end. Even market participants were so clueless to the basic movements of the markets. They can only say its a low volume grind higher. That was the extent of the experts reasoning.

From a purely quantitative viewpoint, the trading in December has been so one sided that one has to make the case that January will be super volatile as the market will have to stand on its own two feet as there will be a two sided market in January. The sellers and offer side will be there and be there in more of a bigger role. Many market participants will have to come back and justify the December ramps ups. Will they continue to ramp up NFLX, GOOG, BIDU, AMZN, and the like?

It is quite obvious that no one was trading at all in the month of December. It was a free trade for the bulls to run up stocks, and they did just that. The sellers didn't force the action once in the whole month of December. What will happen in January is any ones guess, but one thing is for certain, what ever direction the market goes will be same direction that the machines and primary dealers want the market to go in. I heard this past week that it was a momentum market and we are just living in it. So be happy and shut up. This is clearly bullshit! This is so "NASDAQ 5000." So "SUBPRIME." So "you can buy a 1MM house with no money down."

The basic meme of the charlatans for the longest time has been:

Don't you know that the markets are rational?
That they are finely efficient?
That markets are always right?
That you can't fight the Fed.
Shorting America is unpatriotic?

This is a narrative to keep the public poor and stupid. The powers that be want more of the same business as usual to keep the power and profits flowing into their Swiss Bank Accounts. They want everyone to believe that markets are rational, efficient, and that markets without regulation and oversight are truly the way to go. Why break a good thing? The markets are up some 93% from the lows. Why screw it up now?  These charlatans in government, media, and industry will paint an economic picture that fits their busted narrative because its that busted and broken narrative that has made them so rich at the expense of the morons who actually believe in the broken narratives in the first place. Americans do not want to admit that their country has seen its best days. They do not want to admit that their are structural problem in credit, housing, and most importantly jobs. They will do what ever it takes not to take responsibility. Government seems to want to Blame China for all of the US economic problems and the electorate seems to want to blame Obama for everything else. No one wants to admit that America has lost its marbles. They seem to think that America is still an exceptional country, forget for a moment that you can't wake up in the morning and be exceptional. You actually have do exceptional things. Most think America is like a Super Model. Wake up and look the part. Its Morning in America like Reagan said.

America is long past the point of living of its looks. America used to look like Cindy Crawford. Even super models get old and gray. We may think we look like Cindy Crawford, but at what age? I prefer to say we are an aging super model trying to live off of our looks.

I believe that this is a machine led market that we are forced to live in. I keep hearing the same old broken sayings.

-Corporate profits and margins are at record levels. Well DUH! Of course when the government keeps printing money and handing it over to big business and the banks, what do you expect? Another big reason is that US Corporations get a huge chunk of their profits oversees and oversees is kicking on all cylinders. Again DUH!!!! When the Fed prints money we are in effect exporting asset price inflation oversees. Asian markets and economies have a huge inflation problem and many are in tightening cycles as we speak. The Chinese are furiously trying to curb the rampant real estate speculation and have increased bank reserves rates multiple times this year. The Chinese stock market was down 12% last year. Sooner or later the great Asian global revaluation/FED bubble trade will pop. You don't want to own equities in this scenario.

Again, the one thing I keep hearing is the same thing I kept hearing during the NASDAQ bubble and Credit Bubble years. It was....

You cant fight the Fed
Go with the trend.
Don't short a dull market.
Valuations don't matter.
The Internet will change everything.
Don't Sell America Short
The American Dream is Home Ownership
Free Markets
You cant beat em - Join em!

The only way to fight the power is to join the crowd. We all know its a giant money grab from the kleptocracy but its all good if we can join in and grab a little loot while there is some table scraps left on the counter. This is the new major narrative I have been hearing from the bullish charlatans. Forget whats right, wrong, or indifferent. How can I profit from the kleptocracy is the new meme. They have no other leg to stand on except it is what it is and its your right as an American to get yours by any means necessary.

Yes folks this is America in 2011. Happy New Year!