Wednesday, October 31, 2007

What's The Market Telling Us?

Today oil is up over $3 a barrel, the largest single day move in a long time. And, Newmont Mining, my favorite gold proxy is up nearly 10%. This on a day when the Federal Reserve is set to announce actions to affect the environment unfolding before us. Is this massive speculation tied to the dollar or otherwise? Or is it just something to be expected? Do we know the source of all investors pushing assets in global markets with the seamy world of unregulated capital? Could it even be money from sovereign funds attempting to destabilize the U.S.? Is it simply the market telling Bernanke to think before he acts? It could be many issues or none of the issues.

Ironically, Bloomberg had a timely video interview with Robert "beefy dollar" Rubin as I have called him in the past. I am not shy about extolling my admiration for someone I believe is one of the most brilliant people of integrity in the world today. Now, Hank Paulson might be a capable CEO and Treasury Secretary but we should listen when someone like Robert Rubin has something to say. As an aside, there is an article from Global Finance written over a decade ago that asks if Rubin is the greatest Secretary of the Treasury since Hamilton. It's an interesting read.

Regardless of short term policy or global dynamics, I believe we might be witnessing a massive speculative push against the dollar just as we have seen massive speculation in many markets this cycle. This happened to the dollar a quarter century ago as well so it is not unprecedented. It isn't helped by a "do nothing but give lip service" to a strong dollar policy by nearly every politician in Washington.

Regardless of what politicians decide to do or not do, I don't expect the dollar to break but it appears nearly everyone else does. It's interesting to note that one of the few people whom I respect on Wall Street, Marc Faber, has started espousing this view as well. (Although I respectfully disagree with him on many conclusions he is drawing otherwise. We shall see.) I do expect the dollar to strengthen comparative to other currencies as many macro events unfold. There is nothing I have seen to change that perspective. Now, given I don't stare at the dollar every day, that could happen tomorrow or next month or the month thereafter. My position is driven more by fundamentals than day to day gyrations.
posted by TimingLogic at 1:08 PM links to this post

Tuesday, October 30, 2007

Merrill's Shareholders Are Holding The Bag

"Commerical banks have dominated capital allocation and liquidity but more and more in country after country, the capital markets are playing that intermediary role. This is good news for Merrill Lynch because this is exactly what we do.........We have to continue to ensure proper controls, good risk management and adequate liqudity. And we are doing that"
CEO O'Neal of Merrill Lynch before their $8 billion quarterly loss

"The bottom line is we got it wrong by being overexposed to subprime.......no one is more disappointed than I am. We remain confident in our business capabilities and risk management practices."
CEO O'Neal of Merrill Lynch after their $8 billion quarterly loss

The CEO of Merrill Lynch retired today. As the New York Times reported on Saturday, he will take at least $159 million with his retirement. That's on top of the $160 million he received over the last five years for running Merrill into the dirt. Yet, it appears this morning Merrill is sensitive to this fact by saying O'Neal will not be getting anything more than any other employee would get. If there are any Merrill shareholders that read this blog, I would encourage you to identify the major shareholders of Merrill, probably CALPERS amongst other institutions, and write to encourage them to seek removal of Merrill's board of directors as well. I plan to find out the top shareholder and contact them this weekend. It is time that shareholders get serious about boards being more than country club parties beholden to CEOs. People make mistakes. O'Neal made a mistake. That's fine. Paying an individual $300 odd million to run a PUBLIC company into the ground in five years is pathetic. Allowing a supposedly independent board of directors who silently watched as this took place is inexcusable. Losing $8 billion and counting was avoidable. If I was capable of not making such a mistake on subprime and the other messes we'll likely hear about in the future, I am quite confident there is a qualified executive capable of running Merrill who would not have made this mistake. Now, I believe in fair pay for CEOs with clearly defined performance-based compensation but these pay packages are a result of improper and lax board involvement and it is an epidemic. Involvement that is likely for personal gain. Therefore, the board failed its fiduciary responsibility to the shareholders to the tune of $9 billion and counting. The board is apparently unqualified to move Merrill forward and should find a new country club. This activist approach is the only way we as shareholders will get the governance we deserve.

UPDATE: I thought that I should disclose that I do not own shares in Merrill. After being so dour on the finance industry and the mess they have created, I would not touch Merrill. But, I am an advocate of shareholder rights and governance reform. That is the reason I plan to write CalPERS or whomever I identify.
posted by TimingLogic at 9:49 AM links to this post

Monday, October 29, 2007

More Volatility

Volatility, including the last post, is a repeated theme on here. If you are an investor, the most succinct point to remember is that volatility in the S&P has fallen to the lowest levels in over a decade as discussed in August. Most specifically 13 years or over 3141 trading days. I've been on a typing binge lately and it's time for a minor reprieve. There probably won't be alot of posting this week due to other priorities but I wanted to make a few notes of two television programs dealing with global volatility. One I've watched and the other that I expect to be quite worthwhile. First is the multi-hour Planet In Peril on CNN hosted by Anderson Cooper, biologist Jeff Corwin and doctor Sanjay Gupta. You'll have to go to CNN.com to get the upcoming schedule or download option. Anderson Cooper is the real deal and in a bit of trivia is the son of the infamous Gloria Vanderbilt. He is a passionate journalist of integrity who has done some great work. As an aside, wait till you see the Body Burden testing he has done on himself. I've often wondered what the impact of chemical "goo" has on our health. I still believe some time in the distant future we could very well find out that chocolate chip cookies and barbeque ribs were the least of our worries.

The main reason for this post is a special to be shown on the National Geographic Channel on Thursday at 10PM eastern in the U.S. It is a documentary about the sun and its impact on the planet. While I haven't had time to write about it, I believe the sun plays a very significant role in global volatility cycles and human behavior. This statement might sound extremely odd but hopefully this special will address some of the scientific rationale because there is substantial empirical evidence to support it. I'm not sure how much they will delve into esoteric data points so I don't want to oversell the program but if this topic interests you, it may be something to watch.
posted by TimingLogic at 9:53 AM links to this post

Friday, October 26, 2007

The War...........And Peace

First off, I want to make a statement about this post. This post has absolutely nothing to do with current global politics. This is not a political blog. This is a post about volatility and an environment we are entering that has historically led to global economic turmoil, stock market volatility and even conflict. On to the post.

"Of the tyrant, spies and informers are the principal instruments. War is his favorite occupation for the sake of engrossing the attention of the people and making himself necessary to them as their leader"
--Aristotle, over 2000 years ago

The title of this post is about the incredible documentary, The War, that has been showing on PBS over the past handful of weeks. And, a reminder that nationalism is on the rise as we have discussed quite often. As Tolstoy has told us patriotism is the political incarnation of nationalism used by leadership to manipulate their citizens. Hence the title of War and Peace for the post. ( Of course, it was also Jefferson, Madison, Einstein and many others throughout history who wrote often about this fact.)

The War is a documentary of World War II from the eyes of many American families of nearly every cultural background. Since it is a view from so many vantage points, there are many truths beyond World War II that, for the first time, are discussed. It truly is a great piece of journalism in my estimation. I'm not sure how long it will be airing but the local viewing schedules can be seen at the link above. Its airing gives me an opportunity to weave in an ancillary topic that should be very important to everyone; human rights and human dignity. A topic that indeed does have everything to do with shaping the successes or failures of economies, businesses and societies since the beginning of humankind.

I am a firm believer that, in many regards, history teaches us much more than we could ever learn through life's experiences or from a classroom. Especially when learning from historical genius. It may seem to some that I am overly critical of many country's political leadership on this blog. Or as has been commented, that maybe other cultures are just different. Now, I surely do agree that all cultures are unique but never confuse culture or people with political leadership not originating from self rule. Freedom and culture are universal truths. The thought that maybe they are just different is not a truth at all. Those believing the global democracies should appease anti-democratic leaders or anti-democratic ideals have extremely short memories.

The War not only deals with the sickness, tragedy and pathetic waste of war, man's most evil invention, but also the cultural strife of American society during World War II. With that said, I truly believe the melting pot culture of America is a primary key to its greatness and longevity. With diversity comes strife that leads to liberalization of freedoms and ground breaking rights for all peoples. With diversity comes eventual acceptance, understanding and a dynamism of culture, creativity, alternative thought processes and innovation across the entire economic and social spectrum. Or, put in simple terms the whole is worth more than the sum of the parts. In an odd way, I believe an argument can be made that as society becomes even more diverse, its potential becomes even stronger by strengthening the desire for opportunity for all. It hasn't always been that way and still isn't for everyone but self rule is the closest thing to a guarantee of eventual equal rights for all people as we see in democracies across the globe. And, with respect, acceptance and diversity, it becomes difficult for power mongers to heap hatred and unjust war upon a free society. Another reason to push for human rights and freedom for all. For, as free citizens, we embrace free thought. We are representative of every culture, have relatives of every culture, have friendships of every culture and have family roots across the globe. Or as I like to say of Americans, as a diverse family it is our God given right to argue with one another incessantly, but that is not to be confused with lack of solidarity or a crumbling of a culture. But, rather the constant transformation of society for the long term benefit of all. Some around the globe indeed do confuse what is seen on television with reality. Though imperfect, our freedom is our solidarity as is the case in every democracy.

I am passionate about human rights and civil rights for all peoples. All of humanity has a right to basic freedoms, dignities and a right to self determination. Self rule is the only way those rights and dignities can be guaranteed over the long term. Anything other than self rule is a crisis in waiting and determination left to the altruistic whim of those typically seeking to dominate their fellow man. That is a paradox indeed. The War reminds us that governments of anti-democratic ideals killed nearly 60 million of their own citizens in the twentieth century while committing countless atrocities on many others. And, killed many more than that through wars. For that, are we less vigilant for human rights and democratic reforms in repressive political structures? In our own societies? Do we believe political structures espousing anti-democratic ideals are somehow different than prior incarnations? That The War is simply a documentary from a time gone by that can never be repeated? Has humanity achieved enlightenment and eradicated the evil of war? Have power seekers some how become do-gooders? To the contrary. We see tremendous global conflict and anti-democratic ideals being forwarded on every continent today. We all hope for freedom and peace but if we are to learn from history we must be dubious.

One of the most powerfully succinct writings I have ever come across as it pertains to human rights was uttered by Martin Niemoller around the end of World War II. This is a variation on a message that has been repeated by many great leaders of freedom. His quote is generally accepted to be:
First they came for the Communists,
and I didn’t speak up,
because I wasn’t a Communist.
Then they came for the Jews,
and I didn’t speak up,
because I wasn’t a Jew.
Then they came for the Catholics,
and I didn’t speak up,
because I was a Protestant.
Then they came for me,
and by that time there was no one
left to speak up for me.
In other words, if one doesn't stand up to be accounted for in the rights of everyone everywhere, some day your rights will be taken from you as history has taught us since the beginning of time. That includes the rights of people we may disagree with or worse.

That is why The War and other great works of historical journalism are so important. We must never forget the past. We must never forget what those seeking unjust and repressive power are capable of without oversight, governance and accountability to the people. To become as wolves as Thomas Jefferson has told us. And, that without self rule, political structures are never to be trusted. Now, I believe in peaceful activism except where ruthless barbarians are committing heinous crimes against humanity as in Africa, unlike our founding fathers who were anything but peaceful. But, regardless we should all make every positive attempt at ensuring every opportunity for humanity's freedom. The War is a reminder of what happens when human dignity, human rights and self rule are sacrificed for whatever reason, or overlooked by free societies or even ripped from the people. Or when the world turns a blind eye to said virtues. When we have done so, the world has paid with the blood of all nations. That is why I have complete disdain for communism, fascism, kings, queens, ruling families and any self appointed leaders of any peoples. And, if for no other reason, for your personal freedoms, you should too.
posted by TimingLogic at 1:27 PM links to this post

Wednesday, October 24, 2007

Reality? Here's Reality

A very prescient comment from a reader and business owner. It deserves to be moved to the front of the blog for those who don't sift through the millions of comments I receive on here:

I have owned a small business for 12 years that buys excess inventories and sells to discount retailers across the country. We just did our 3rd quarter review and our sales are down 52%. My staff calls on manufacturers all over the country in search for product. The most amazing thing we have found over the last 9 months is the number of companies that are out of business. We are very close with many of our competitors nationwide and their demeanor is extremely negative. Layoffs, warehouses closing, companies closing. Consumers are not even shopping at the discounters.

Now what are the global implications for this statement? Can you star burst this into some form of future outcomes? Don't rely on Wall Street's baloney. Think for yourself. Think of the global economy as a chess game. Look at the chess board. Each action causes a reaction and so on and so on. Take some time and think it through in your mind. If you get an idea, write it down and expand upon it. Think of more ideas and do the same. What ideas are not readily apparent from this statement that you can come up with? How far can you take your ideas beyond the obvious? Then tie them all together into a strategy. Can you see through to the end move? What is it? Oh, and you don't need to tell me. These millions of comments on here are just overwhelming. So, keep the ideas for your own benefit.

posted by TimingLogic at 11:16 AM links to this post

Tuesday, October 23, 2007

Retail & Transportation And More Rantings About The Wall Street Mess

"The current freight environment continues as one of the most challenging we have ever seen. For the second consecutive year, we have experienced virtually no fall peak shipping season."
--USA Truck

American consumers sure do love high oil prices. I heard some professional money manager say that because oil was priced in dollars, it wasn't affecting global consumers. Huh? And, that it would take some astronomical price to impact American consumers. I believe he mentioned $140 a barrel. We've really got a crew of Einsteins working Wall Street. After thirty years of bull markets, we now have so much bloat on Wall Street that the janitor is running mutual funds. Let me take that back. I believe the janitor would probably make better investment decisions as he'd know what it actually meant to work for a living and that savings were precious. What do you think it's like buying oil in China on less than $2 of income a day? Oh, that's right. They don't. Or, if you are rich, on $20,000 a year? The U.S., Japan and Europe still disproportionately consume the world's oil and all three are slowing rapidly. If anyone has any doubts oil is a bubble, that perspective should be gone by now. Demand in the U.S. is negative, we have a supply glut, Wall Street's participation in the energy futures markets is incredibly almost 50% now and the narrowing of what "works" in U.S. investments has caused a concentration of buying in energy futures by Wall Street firms. I said last year Wall Street wouldn't quit ramming oil prices until they killed the economy. If you learn to think like them, they are so predictable. Unfortunately, this recent oil move looks very bearish from the futures profile. Just at a time when many large Wall Street institutions are levered as much or more than little ole Long Term Capital Management was in 1998. (Go buy the just published Portfolio magazine and read the reprehensible article about Goldman Sachs and others.)

Some may disagree with my position but I am quite confident the facts speak for themselves; as I have said time and again this is the biggest bubble the world has ever seen. What truly worries me is that the size of the bubble has grown so much incrementally larger over the last seventeen months alone that it now threatens a chance of intermediate term recovery. What might have been a manageable outcome seventeen months ago has now become a global nuclear bomb. The world will literally shudder and shake when this cycle ends. And, China is at incredibly high risk of an economic disaster with the potential to dwarf the U.S. industrialization bubble ending in 1929. Talk about macro volatility developing. Risk is at levels not seen since 1929 as measured by many metrics. Some are even more heightened than 1929. Now, this will all pass and the sun will shine again but not before tremendous problems present themselves. I still believe the biggest problem will likely be China but that in no way minimizes the other major issues facing global economies. To top it off, if you are concerned about global rhetoric by political leaders now, wait for the interactions that will likely develop when things start hitting the fan. That's nothing new as we've talked about these concerns for quite a long time.

USA Truck was one of the top performing stocks this cycle up 600% from its low in 2000. USA Truck outperformed the S&P by five times this cycle. Is this a poorly run company? A problem with USA Truck? I know the answer but I'll let you be the judge. (By the way the USA Truck Chairman is something like 900 years old so when they say a long time, they mean a long time.) So, how much does the American consumer love high oil prices? I'd say a little less than is generally believed on insular Wall Street. The plumber or entrepreneur or farmer who needs a pickup truck and must drive forty miles to work each day is getting killed with high oil prices. This is a difficult economic environment for many regardless of the employment rate. These seers who divine the future of the stock market are the same crew who charges us massive management fees so that they can buy Ferraris while underperforming the market indices as over 80% of fund managers do. That would include hedge fund managers as well. I actually received a notice recently telling investors not to try to time the markets because of the redemptions a fund organization was seeing. Is this another potential problem? A run on mutual funds as Paul Farrell writes about? Now, don't try to time the markets or I won't be able to make my Ferrari payment or buy that third house in the Hamptons. They are so removed from reality that it is truly amazing we put up with their fee structure and shenanigans for sub par performance. And, according to Paul Farrell's article link above, quite a bit of seamy behavior. But, we knew that. It is a prime driver for a lack of confidence in American consumer polls. Confidence is eroding very quickly and the cumulative consciousness of society isn't "fixed" with fractional rate cuts. More likely, not fixed by any rate cut. Just a small point missed by monetarists. Can you say deflation? Especially with Paulson's confidence eroding scheme as I wrote about last week. But many keep on believing the Fed is omnipotent as they incessantly ramble on that stocks are cheap. Here's an off topic remark to think about. If long term rates in the U.S. were half of one percent as they are in Japan and you applied the Fed valuation model, what would the fair value of the S&P be at current earnings? These people are so foolishly incompetent.

Most retailers get 40-70% of their profits in the back to school and Christmas season. Most specifically Christmas. The mix and amount depends on the category. Obviously a food retailer is not a good example. But, discretionary categories are: department stores, specialty apparel, home goods, electronics, etc.

And retailers ship to the stores by truck. Now, some without regional distribution might be piggybacking trucks on trains for long distance replenishment given fuel prices but retail is tied to trucking. Even with so many retail goods coming from Asia. Some goods may be coming from LA or the west coast to distribution centers in train cargo containers but the merchandise is shipped to stores via truck. And most fashion clothing retailers ship from offshore factories by large cargo jets given fashion has a limited shelf life. Again, to the stores by truck.

So, how might I ask is the Christmas season going to be great if trucking companies are not seeing any seasonal load improvements? How might I ask is the consumer continuing to spend as I hear? Have you ever had a wish sandwich? We talked about some of the retail sales data points being the worst in modern history earlier in the year. Most talking heads said it was an anomaly or the weather or changes to Easter or all three. Well, we can all wish for happy times but it doesn't help deal with what is going on in the real world. I've spent fifteen years working with retail clients. Not talking about them on television but working with them as a consulting partner who understands their business. Some people I've talked to and many others I respect greatly with decades in the retail business haven't witnessed anything like this environment. What makes this environment worse is that it is happening at peak profit cycle for retailers. And, that means projects are being kiboshed, new store openings are being delayed, inventories will have to be discounted or written down and capital spending is coming under the knife. Retail CFOs are likely the most ruthless of any industry on costs. They will take no prisoners or get left holding the bag as financial company CFOs have. And, yet the pumpers are telling you to buy retailers because that is what you do when the Fed cuts interest rates. I guess their chart of "If the Fed does this, you invest in that" needs a little revisioning because it's not happening. Or we can pray for a miracle. Since when does investing involve prayers?

By the way, it's ironic a top stock stock in the Nasdaq 100 on Monday was retailer Sears Holdings. Traders love this stock. That is a dead company waiting for burial. It might have been a good trade while Lampert was imitating Gordon Gecko and raiding the company of wealth to sell commercial properties during the real estate boom but now it's just a poorly run, has-been retailer with poor retail locations and negative brand equity. Sears still has some life in it but K-mart is dead. I believe it's reasonable to conclude Wal-mart could be the next K-mart from an investment perspective because of a change in trend and their failure to react to it constructively. Not that Wal-mart is going out of business for a long time, if ever, but Wal-mart has a tremendous amount of problems that are not easily fixed. Especially when they are not even acknowledged. Remember, K-mart once was just as invincible as Wal-mart is perceived to be today. But, that's for another post.
posted by TimingLogic at 12:30 PM links to this post

Sunday, October 21, 2007

I WISH THE MEDIA WOULD GIVE THIS SUBPRIME EXCUSE A REST!

I just took a look at the Japanese market and it is getting slaughtered on Monday morning. What a surprise. How many of you know that foreign traders drive alot of the action on the Nikkei? I think I mentioned foreign volume numbers for the Nikkie on here a long time ago. The roving marauders have been pounding every global market for a long time.

The late night press in the U.S. is blaming it on subprime issues. Can we get a break? You're wearing this theme out. This is one of the most ridiculous myths perpetrated on the general public as I wrote in the last post. Now, I like to worry about subprime as much as the next person but I could give a top 41 reasons why the markets are acting wildly and none of them have to do with subprime. Could we get the media to hire someone who understands Wall Street, finance and economics? Hey, I love to write, I'm a frustrated journalist and I can type over one hundred words per minute. If nothing else, I can answer the phones, type your monotonous subprime articles and make a great cup of joe. I'm in if I am able to work at home in my pajamas. Seriously, come on! Let's see some great journalism.
posted by TimingLogic at 8:47 PM links to this post

Friday, October 19, 2007

General Consensus Amongst Many Market Pros And The Media

Today is a good day to take stock of the general consensus amongst Wall Street and their brainwashed talking heads, the media, with my top 41 untruths perpetrated by Wall Street. Sort of my take on top 40 songs but I prefer 41 as it is a prime number. Well, and because it's sum can be found by adding Fibonacci numbers in a little bout of superstition. I have presented a counter position on all of these beliefs. Some as an argument that they aren't forgone conclusions and most that I believe (can prove) are completely untrue.

Top 41 Untruths Perpetrated by Wall Street
  1. We will get a healthy and much needed 10% correction and restart the second phase of a multi-year bull market
  2. Buy this dip because because earnings were great
  3. There is too much global liquidity for the markets to go down
  4. Interest rates must go up to kill the commodity run, inflation and the global equity markets
  5. China is an economic miracle
  6. The 21st century is the Asian century
  7. The U.S. (and I guess by implication all democracies) has lost its economic leadership
  8. The stock market is cheap
  9. Risk management.....Well, need I say more
  10. Continued globalization is a foregone conclusion
  11. Emerging markets and (Brazil, Russia, India, China) are a safe havens while the U.S. economy and dollar craters
  12. American manufacturers cannot compete and offshoring or doom is inevitable
  13. The dollar is doomed because America is a land of spend happy dunces
  14. Capital equipment spending will rise from the ashes and drive us to a new bull run
  15. The Federal Reserve will save the economy and by implication the stock market when they cut rates
  16. Financials are defensive stocks because they pay a dividend
  17. Defensive stocks are a great investment in any coming market decline
  18. Inflation is out of control and interest rates must go higher
  19. This has been the best global growth story ever and it's unstoppable
  20. The American consumer and the housing market are the major concerns behind a recession. (They are symptoms.)
  21. Oil is at a permanently high plateau
  22. Commodities are in a twenty year bull market (Maybe many years of yo-yo action)
  23. The rest of the world will pull the global economy through US weakness
  24. Global companies get more than half of their earnings overseas and that makes them a great investment
  25. There is always a bull market somewhere. (Yeah, and it will likely be in the U.S. dollar comparatively)
  26. Sentiment is too bearish for the market to sell off
  27. The U.S. doesn't drive the global economy any more
  28. Markets must exhibit mania and blow off to have a peak (That's double speak for people who don't know what's going on and they need a sign from God to see a market topping)
  29. The Federal Reserve is printing money (Total baloney)
  30. Alan Greenspan caused all of this (Although he didn't help)
  31. Goldman Sachs is a great investment
  32. This can't be a top because Goldman is levered to the hilt
  33. Wall Street is smart money
  34. It is different this time
  35. The real estate slow down will be contained
  36. The US is a service economy and manufacturing doesn't matter anymore
  37. The consumer loves high gasoline prices (or more eloquently spoken by Wall Street as high oil prices haven't hurt the consumer)
  38. Unemployment is at 4.5% and by implication the economy is great
  39. Apple and Google are the next great thing and deserve their stratospheric valuations (As I said before, I'd rather own all of the equities in Thailand than Google for the same sum of money.)
  40. The Fed equity valuation model tells us the market is very undervalued
  41. This final one is for emphasis and has actually been discussed above: the dollar will crater if the Fed cuts rates.
posted by TimingLogic at 11:48 AM links to this post

Thursday, October 18, 2007

Let's Look At Google Before Earnings


I've made it clear I absolutely abhor Google as an investment. If you are a trader or gambler, well then this stock was made for you. Let's have a little fun and make a prediction here before earnings are announced for Google. Google has been a momentum trader's dream this cycle. Buy at support and sell at resistance. Momentum is up and the idiots are feeling frisky so there is no reason to believe any meaningful fall for the stock will happen until it reaches an ultimate peak. I haven't looked at options or done any analysis so this is simply a seat of the pants look before the close. But, if I would provide an estimate, the upside from Google's 2005's perch is about $380 or a target of about $690-ish. From there I would expect significant weakness or even the ultimate top this cycle. No guts, no glory. Let's see if I can embarrass myself.
posted by TimingLogic at 3:55 PM links to this post

Wednesday, October 17, 2007

Paulson Is A Day Late And A Dollar Short

Treasury Secretary Paulson and the White House have repeatedly tried to instill confidence into the markets over the past few months. When the entire White House economic team shows up for an impromptu interview on CNBC to do nothing other than tell us how great the global economy is, something is seriously wrong and they know it. That subtlety was lost on many but it shouldn't have been because it was followed up with repeated attempts of confidence by even the President. What does any leader do in a time of perceived or real crisis? They attempt to provide a beacon. A calming voice of confidence in the storm. Just as Moses did standing before the masses as he parted the Red Sea. One flaw with that perspective. Paulson isn't Moses. And we need a miracle greater than parting the Red Sea to save the global economy from a major reset. That said, this has been one of the best cycles ever for professional investors participating in the right themes. Especially if one used leverage, derivatives or futures as Paulson's former employer did in spades. At his behest.

Now, Paulson is attempting to pull another confidence coup by publicly proclaiming regulators will look at off balance sheet games in the banking industry.

If this isn't incredibly silly, then I don't know what is. But as silly as it is, I hope by some form of miracle, attempts to mitigate many outcomes are successful. I'm not holding my breath. Central planning doesn't work be it the five year plan of the Communist politburo or central banking attempts to steer the economy. Where were regulators five or ten years ago when we needed them? Paulson might as well send the regulators to the beach now. The damage is done. To the contrary, now it's time to send in The Cleaner. All of this taken from a broad perspective seems eerily similar to comments by public officials and bankers during the 1929 mess and I must say that worries me greatly. Not primarily because of macro factors but more importantly because of eroding confidence. Wait till that erosion spreads to global markets. It will. And, this at a time when a bevy of Wall Street bullish sentiment data points are off of the chart. Wall Street out of touch with reality? That is why we have had such significant financial messes on a regular basis since the inception of Wall Street two hundred plus years ago.

In a bit of irony, Paulson should have thought about these types of outcomes when he was running Goldman and helping to create the mess we are now facing. Goldman's current business strategy was surely dreamed up during Paulson's tenure. Strategies that are pervasive across the global financial industry. Strategies of which he benefited to the tune of hundred of millions of dollars. Strategies that likely involved lobbying public officials for favorable regulation or lack thereof. Now I don't fault any entrepreneur or business owner for sitting sideways on their wallet. But, then he is not an entrepreneur or business owner either. He was a hired steward of a publicly owned company. While Goldman shareholders might be jumping for joy today, as we discussed earlier, I'm extremely dubious of that being the case on a go forward basis. Manias involving Goldman has been a harbinger of doom in its two prior incarnations of 1929 and 2000. This will likely be no different. Forget the use of likely. This will be no different. Now, Wall Street and banks perform an invaluable service so I'm not trashing financial capitalism but I am trashing the lack of regulation/enforcement and complete disregard for risk in this industry. An environment Paulson likely helped create. Of course, there is always the possibility that Paulson was pleading with Goldman and other financial companies that their methods would ultimately create madness. Uh, okay, I haven't been to fantasy land in a while and it was a fleeting thought.

I feel like I'm watching a Royal Bank of Scotland commercial. Here's the problem. The Confidence Game, ipso facto, is not about more talk as Wall Street and politicians have attempted to make it over the last decade. This instills less confidence. It's about less talk and more action. It's about doing what is right. It's about policies that encourage confidence. It's about policies that encourage strong governance and oversight. It's about policies that show true concern for citizens. It's about honesty and integrity. It's not about bailouts and shenanigans. It's not about lax SEC enforcement for a myriad of seamy reasons. It's not about deregulating the banking system because of political payback or campaign contributions. It's not about Hank Paulson's babbling and the general baloney perpetrated on society that we are witnessing today.

If Paulson wants to restore confidence, he should announce regulation of hedge funds, modernize banking regulation, re-institute Glass-Steagall, forbid any off balance sheet accounting by money center banks, put some teeth back in SEC enforcement, go after rampant insider trading by hedge funds, increase shareholder transparency, step up to a strong dollar policy and on and on. Otherwise, personally I believe Paulson should refrain from incoherent public ramblings until he has an announcement involving beneficial policy as he isn't helping matters. People realize his actions are an attempt at pacifying markets because of flawed policy based initially on greed and now based on fear. That will make matters of confidence even worse. Frankly, I'm surprised a former CEO of Goldman doesn't seem to understand this.
posted by TimingLogic at 7:32 AM links to this post

Monday, October 15, 2007

Credit Agencies Awaken From Coma And Citigroup Drops Another Bomb

It looks like the credit agencies awoke to the realization that they should make it look like they are doing something meaningful after contributing to the toxic waste created by financial institutions. Fitch has downgraded Yum Brands' credit rating due to its plan to use debt in an announced share repurchase plan. I see the senior management at Yum has the same PhD in risk management that is so pervasive this cycle. A PhD that Fitch seems to have received as well. That would be a vaunted PhD from the Bozo the Clown School of Risk. Does this mean we can expect to see a retroactive downgrade to all of the other clowns who are using huge amounts of debt to repurchase stock? Including IBM, the second most expensive Dow component that I have highlighted as such, who is taking on over $11 billion in debt to buy back shares? Because their finance executives believe the company is underleveraged? Is the once fiscally conservative IBM falling prey to Wall Street shenanigans? This practice of using debt for buybacks has become so common it's almost a standard part of doing business thanks to the Wall Street version of capitalism so pervasive in the world. How great is that? Is this really any different than taking out a second mortgage on your home to buy stocks? Are you under leveraged? Need a few more credit cards? Follow the lead of corporate America and Europe and lever it up.

Of course, the flip side is that the companies who actually were conservative in their use of corporate funds were the targets of hedge funds and private equity attempting to raid the corporate coffers for cash as discussed in the private equity post.

Those darn banks just can't get out of the headlines. Now we see Citigroup is suspending its stock buy back to rebuild its capital levels. Ya think? Of course, at the same time they want to be a lender of last resort in a new scheme to fix the off balance sheet commercial paper market they probably shouldn't have been involved in in the first place. At least shouldn't have been involved in its current structure. How might they be the lender of last resort when there are reasonable probabilities the lender of last resort will have to save some of the banks who want to be lenders of last resort before this cycle is complete?! Is that confusing enough? A little bit of attempting to save their own butts given Citi's exposure to that market. These won't be the last announcements from major banks on any of these topics. In fact, it's more likely the first. Nor will this likely stop at share buy backs but will also likely spread to dividend cuts. Banks will be lucky to stop the bleeding at dividend cuts.
posted by TimingLogic at 2:23 PM links to this post

Friday, October 12, 2007

Right On Time. Google Loses A Massive Deal.

Ironically, just hours after my Google post, Time, Inc. awarded a $100 million contract to a Google competitor with a superior capability. A capability Google is trying to copycat. I'm sure this is only the beginning as I can envision tremendous capabilities well beyond the rudimentary offerings of Google's technology as it exists today. Do the technology illiterates on Wall Street tell you those risks when they are pumping bubble stocks? How clairvoyant was that last post? No, I don't work for Quigo. The timing was dumb luck but the point I am making is not. I have written about Google's vulnerabilities for a year now. It was simply a matter of time. The opportunity to build a better mouse trap is too lucrative not to expect someone would out innovate Google. It doesn't mean the end of Google by any means. But, it does highlight the risk of owning a bubble stock. Just like owning VMWare, Apple, RIMM and Baidu; the other horsemen of the coming price apocalypse.
posted by TimingLogic at 12:51 AM links to this post

Thursday, October 11, 2007

Google Is A Bubble

I don't generally pay close attention to most financial journalism any more because of the incompetence it has come to represent. In the dance between business and journalists, business has clearly achieved the upper hand. Critical journalism would leave journalists without access to the inner crowd and a job, so instead we get mindless chatter, entertainment passed off as journalism and incompetence. There are very few Woodwards and Bernsteins out there.

I do peruse commentary every once in a while to get timely ideas to write about. Contrary ideas. When we have personalities proven to be contrary indicators falling all over themselves to up the price ante on Google, it's time to pony up a short commentary again regarding Google. Why? Because these are the same personalities who issued bullish reports to buy stocks at the market peak in 2000, stocks that eventually fell 90% or went bust. In other words, proven incompetents whose judgement should be questioned when a stock is as overvalued as Google is.

As the pumpers recommend Google and the hedge funds and bubble traders drive it stratospheric simply because they can, let me make a few statements of fact as opposed to gut feel based on irrational exuberance. Valuation has nothing to do with price. I don't care if Google is trading for $5 a share. It's valuation is astronomical. Comparing Google to Yahoo and using Yahoo's inability to catch Google as a rationale for its valuation is a completely false truth and ridiculous sense of security. That may provide temporary support for the stock but Yahoo is dead money and has been one of the worst run technology companies on earth. Those expecting Yahoo to rise from the ashes is senseless. Yahoo can't beat their way out of a paper bag. Yahoo has to prove an ability to transition to a business management team capable of actually running a generally legacy business. Clearly incompetent executives, if you determine competence by market execution and operational talent, have cashed out billions of dollars in shareholder value while running the company into the dirt. Could new Yahoo leadership get the company back on track to viability? Sure. But, don't look for Yahoo to be the Google killer.

Google's dominance will not be challenged by last decade's innovator; Yahoo. Copycats seldom win in the technology business. Just as Google attempting to copycat Microsoft with free desktop applications is completely ridiculous. It doesn't matter if Google now hosts the applications or if one thinks free is more appealing. Microsoft has had that technology for years as they also have had free desktop productivity applications that ship with every PC. It's a distraction from execution in Google's core business and adds little, if any value. Sun has been trying to crack this Microsoft space with Star Office for ages. Is it ironic that Google's CEO is a legacy Sun executive who obviously still harbors the vision of slaying the Microsoft beast? How much money will companies waste by trying to compete with a monopoly as a "me too"? (Sun has smartly given up and buried the hatchet as much as competitors can.)

A proper perspective on a go forward basis is to look at what scientists, engineers or entrepreneurs will develop as a disruptive replacement to Google's business model. And when. A model that has serious risk. Risk that others recognize and will attack. In addition, from a peak earnings perspective, would someone care to tell me what industry spends the most in online advertising? And which industry will be under severe profit pressure for some time? And, how will that affect Google? How will an economic slow down affect Google? Forget about the ridiculous comments made by one of the Google founders that they made the company to be recession proof. That is hilarious. The first company ever created to be so. $5 billion alters one's perspective of reality just a tad. Those are post facto statements of hubris. I have great respect for the founder's capabilities but I know the real story and that's a little like me almost getting a shot to play in the NBA. (I did. I promise.) And as I asked before, how might you tell me Google is going to participate in the next wave of connectivity in the form of portable or mobile access to the net? Are consumers going to put up with ads on their cell phone, handheld device, car or voice recognition system? How does Google make money in Japan as a purveyor of future financial results in mobile access? Not very well might I say. The chance that a few thousand technical minds within the walls of Google will develop the next big thing when there are six billion minds outside of Google is really quite preposterous. Google may remain relevant by purchasing technology or businesses and may actually flourish, but at that point, they would likely remain in a leadership position because of girth. The same reason GM and Ford remained relevant for so long.

Google's management is exhibiting severe hubris with many of their recent business decisions as well as their willingness to diworsify their business model into unproven businesses, areas dominated by other businesses, areas dominated by Google customers, areas where they have no core competency and areas with unproven returns. Sounds alot like GM buying EDS and Hughes in an effort to diversify. New business models are seldom created by existing companies attempting to diversify as diversification is almost always an exhibition of hubris and failure.

Now for valuation. An ability to manufacture money and leverage to drive a stock or stocks higher is not a sign that "the market knows something you don't know". That is complete and utter nonsense perpetrated by people with competencies in basket weaving. That is what they want you to think. Remember the Galbraith quote in the last post. The greatest investor of all time, Ben Graham, would probably commit seppuku before buying Google at its current valuation. Financial journalists and commentariat have a clear track record of buffoonery when it comes to pumping stocks. Google is trading at astronomical levels compared the the average company valuation given to equities in the great bubble of 1929. Bargain it is not.

Google is a great company today. That statement might last for a long time. But, this isn't about being a great company. It is about bubbles and irrational expectations. Bubbles can last for months or years. If you can shut off your brain and ride the wave adeptly, that is great. But, in no way does it mean Google is cheap or something that people should buy as an investment with hard earned money.
posted by TimingLogic at 3:17 PM links to this post

Monday, October 08, 2007

The Myth of Private Equity Brilliance And Their Contribution To "The Mess"

One of the things you must understand is the danger in attributing intelligence to the simple fact that people are associated with large sums of money or large financial operations. We don't ask whether they're intelligent. We say, they're associated with all this money, so they must be intelligent. We attribute intelligence to association with financial operations. And only afterwards do we discover that error and that the people involved can be extremely successful in gulling themselves. That they can be in effect, and I use the word advisedly, marvelously stupid.
--John Kenneth Galbraith

I've used this Galbraith quote before but it is so prescient across many themes this cycle that a reminder is in order as I fear this private equity cycle is going to end badly. In fact, I believe a contributing factor (not primary) to the recent equity market rally, albeit narrow, is because banks need time to clear the massive amount of private equity related garbage off of their books. (The vast majority of 130-odd subsectors are underperforming this rally and as I wrote last Friday, stocks are significantly underperforming the weighted averages.) How are banks to do that without painting the appearance that fundamentals are back to normal which they clearly are not. Remember, distribution to weak hands from strong hands happens at market peaks. That includes not only equities but also debt accumulated in various financial instruments and deals. This cycle, the weak hands are comprised of major non U.S. investors as much of the mess is packaged in such a way that individuals aren't able to eat it as they did with technology stocks in 2000. That is, except through pension funds and retirement plans buying Wall Street's toxic waste. As part of the me-first generation, I find it heart warming that anti-democratic sovereign funds from Russia, China and the Middle East are willing to step up and eat the dog food. A little quid pro quo for the tainted dog food they've been shipping us. (Some misplaced humor.) My point is Wall Street is going to do everything possible not to be left "holding the bag".

As recently as a few months ago many Wall Street personalities were rabidly chasing equities based on their takeover potential. No one was more involved than Goldman Sachs and other big financial firms pumping takeover candidate lists for equity investors. I'd be surprised if these institutional trading arms weren't benefiting from said pumps. I am quite confident Benjamin Graham is turning over in his grave at this latest of foolish behavior. And that list of foolishness is longer than it has ever been in my life time. Much longer than in 2000. The equity markets have truly achieved gaming status. All while underlying fundamentals have been very weak for quite some time. But, this time rather than it being the public that has been duped, it is the market professional who is manic. Don't think a little market weakness over one month fixes the excesses built up over a generation. Not even close. Gambler's Anonymous anyone?

First let me say that private equity has many forms and has many functions. Some incarnations are beneficial but many are not in my estimation. In other words, I am quite dubious as to much of the praise heaped upon private equity and we are going to talk about why that is. It was nearly impossible for private equity not to make money in acquisitions in the 1980s and 1990s. Here's why. The entire equity universe saw valuation expansion over that twenty year period. As an example, let's take the S&P 500 which went from a PE of about 7 in 1982 to over 40 in 2000. Therefore, as investors bid up stock valuations, it was nearly impossible not to print money by taking a company private and then public again in a three to five year period. Even if the company's fundamentals and profit picture didn't improve one iota. The voracious hunger for stocks at any price made billions for private equity regardless of whether any fundamental value was actually created by their investment. Additionally, we have been in an environment of sustained inflation over the last few decades. So, if nothing else, again taking a company private and then public a few years later guaranteed that asset rose in value from inflation alone. For those two reasons, anyone with access to capital was nearly assured of making a tremendous amount of money playing this game. The genius of private equity or the sheer luck of being in the right market at the right time?

Today's markets are very, very different. I have written repeatedly about the devil being deflation and not inflation. My views have remained consistent because of what I believe is coming to pass in the global economy. None of the current crop of private equity crew or their bankers have any experience in this environment. An environment that will likely be one for the text books. Therefore, private equity investments are going to be tested like never before and we'll truly find out about the genius of private equity.

The core competency of private equity is more about salesmanship and the ability to raise capital versus operational management expertise, understanding the macro dynamics under which they operate or the implications of those dynamics. Private equity built up a nearly invincible reputation over thirty years and I would argue that fundamentals discussed above were the largest contributor to that reputation as opposed to actually adding intrinsic value to businesses they bought. These fundamentals no longer exist. We have likely reached a point where what worked last year or last decade will not work on a go forward basis in many regards.

As someone who has done a fair share of return on investment analyses for major projects and investments, I believe the financial dynamics of these private equity deals look incredibly foolish from an outsider's perspective. Potential problems include deflation, tighter credit, peak earnings and major debt loads working in tandem to create ongoing headwinds for debt laden private equity deals done over this business cycle. This isn't rocket science. Of course, we are finding out bankers and financiers aren't to be confused with rocket scientists either. If you can balance your check book, you can understand what private equity has been doing. As a generalization, the dynamics driving the private equity market can be summed up in one sentence; Long term borrowing rates were cheaper than the earnings yield on stocks. That's it. Sounds really simple? That's because it is. As long as I can borrow money at very attractive terms/rates and earnings yields are great, these deals are possible. It's the exact same dynamics as the housing mania applied to stocks. Long term borrowing rates were cheaper than the yield on a real estate flip. That is, until the real estate markets were priced beyond what fundamentals could support. Wasn't it exactly at this time that everyone piled into the game? Homebuilder CEOs became CNBC rock stars, (thank you CNBC for your insightful journalism) record numbers of real estate agents, record people flipping houses, record companies building condos, record mortgage businesses with loose terms, magazine covers and on and on. Still dubious of the skyscraper indicator? Who needs an industrial economy, we'll all flip homes for a living. What does any of this have to do with fundamentals? The same can be said about private equity. Too much stupid money chasing alot of really bad decisions.

The majority of these M&A and private equity deals were done with debt. Lot's of debt. Record debt with minimal equity. Much more debt that anything unfolding in the subprime housing markets. By the way, private equity has scooped up its share of subprime investments even though the global real estate situation is still worsening. Another foolish move? Every person who understands basic finance will tell you that deals done using higher debt ratios should involve more stringent litmus tests such as a higher hurdle rate. There is higher risk and a higher cost. But, I am confident there are no such discussions being undertaken when these firms are seeing massive deal takeouts adding significantly to their personal wealth. It's more like let's get the deals done before someone wakes up to reality. Banks were falling all over themselves to loan money to private equity with ridiculous terms. Here's the insanely idiotic problem with these deals. Because earnings were awful in the stock market rout of 2001, 2002 and early 2003, these deals weren't possible at that time even though companies could have been bought for 30, 50 or 80% less. So, although these deals could have been done with 30, 50 or 80% less debt than deals done over the last few years, the lending dynamics weren't conducive to doing deals. Instead these deals are being done at peak earnings cycles with peak debt and premium valuations not seen at any time in history. What does this sound like? That's right. Again, it's the real estate situation or the 2000 technology bubble redux. Private equity is smart money? Many of these deals have so much debt that they should be called public debt and not private equity. Guess where private equity is getting the debt to do these deals? Your friendly banker has been throwing money at private equity. That would be your deposits. Your money. The same banker who is supposed to be held to regulatory standards because your savings are parked there. What a surprise. Still think the problem is the American consumer? Uhhuh. A consumer led recession? Hardly. The world's consumers will indeed bear the consequences but not the blame for this cycle of madness. All while the instigators walk away with billions.

Here's another problem that will compound the private equity mania. Private equity has traditionally not been a source of operational talent able to actually manage businesses. Adding insult to injury many of the executives of the acquired companies cash out as they are effectively bought in order to agree to the deals in the first place. That leaves large leadership vacuums at many of these private equity deals. As Larry Bossidy, one of the best operational CEOs of our time, has said, "Private equity is good at raising money. Not good at running businesses.". Ironically, private equity has hired Bossidy as well as other retired CEOs as consultants. Yet, I can assure you, that does not mean Bossidy is running daily operations. Most of these hired consultants are enjoying lucrative retirements. It's sort of like Lehman who just hired President Bush's brother. It's more about putting lipstick on a pig to sell the package to politicians and bankers. As an aside, this schtick of taking companies private to alleviate the pressure of being public is a complete farce. Look, if you don't have a long term strategy and cannot manage a company to that long term strategy while showing progressive improvement to your plan in the intermediate term, you are likely one of the 80% of CEOs that shouldn't be a CEO. And, you aren't going to be more successful by implementing the same plan as a private company. Arguably without shareholder and board oversight, the opposite could be true. There are very little, if any, tangible benefits to being private. If there were, why aren't all companies private? As Alan Mulally the CEO of Ford recently said, "Chrysler has no advantage by being private in a turnaround effort.". Of course we already knew that since both Toyota and Honda are both public companies as are the majority of the world's best run organizations.

Let me share some factoids of a deal I'm familiar with. A big private equity deal was done some time ago and I knew one of the sales executives at the company being bought. The CEO of that company cashed out and retired with the massive cash he was given as part of the deal. Immediate management vacuum. In addition, I'm quite sure that cash out was simply added to the company's debt. Debt that reduces the company's cash flow and might ironically lead to needing access to more capital in the future. That means this company is more reliant on what? That's right. The roiling credit markets that will likely remain tight or worse for years. The private equity firm immediately instituted unproven and destructive changes to the sales compensation process and created an unwieldy bureaucracy which made it difficult for the sales organization to be successful. Mind you, this was a company that was a leader in its field. These contributing factors have led to a drop in business results. My contact has since left the company and the turnover in the sales team has ballooned to around 50% due to dissatisfaction with the new management style. Another management vacuum. This is a business where individual sales are tens of millions of dollars, extremely complex, involving up to dozens of consultants and very competitive. Therefore, the sales team is a life blood to this organization. Finding qualified people in an organization with highly sophisticated, complex multi-million dollar deals is difficult in itself. The profile for sales executives in this type of organization is one of overachievers, complex thinkers and self-motivated business executives in their own right. Disruptions in the sales force can literally decimate business results as client trust and relationships are built over a period of years if not decades. It sounds cliche, but the workers truly are the primary asset of any successful company. Dealing with the loss of intellectual capital associated with a high powered sales team can and likely will create a death spiral. How will this grand experiment end? It's not looking good and I seriously doubt this is an isolated example.

Isn't it just like humankind to take tremendous risk just as a trend has changed? Can you say 1929 and 2000 in the U.S. & European equity markets and similar experiences at different times in Japan and now China? Are bankers and private equity really any different than the masses or are they susceptible to the same behavior as the rest of us? In fact, they are the rest of us. That is why I have long argued bankers need oversight to protect us from those that would be fools without said oversight. Effectively, we need to be protected from ourselves when it comes to our monetary system. Failures can be constructive and a positive part of any free market system except when it comes to the monetary system. If private equity were truly private, they wouldn't need oversight. But, private equity has become public money. I don't work in the private equity industry so I'm not privy to what the dinner table conversations are but I suspect many old timers knew very well this cycle was going to end badly yet it didn't stop anyone from doing deals. If you are paid to make deals happen and the dynamics that allow you to take advantage of a once in a life opportunity is, what do you do? As most anyone would do in a bubble, you likely feel invincible and take incredible risk as you see deals minting tens or hundreds of millions of dollars of personal gain. Can we really blame private equity for doing what the system is allowing them to do? No more than we can blame investors participating in any mania. Today's version of capitalism still reeks of greed from the 2000 equity bubble, 2005 housing bubble, 2007 commodities bubble, 2007 hedge fund bubble, 2007 equities bubble and 2007 private equity bubble. Anyone who believes sentiment after a minor correction lasting a few weeks somehow points to the start of a new bull market are themselves consumed by bubble mentality and not thinking rationally.

Capitalism was not always nor will it always be this way. Will there always be greed? Sure. And that isn't bad on a certain level. But there will also be a return to rolling up our sleeves and creating a legacy of success by building businesses to be proud of while creating value in doing so. We are closer than many believe to returning to that point. And, it will likely be a forced march. In other words, not initially by choice. Societal values change over time and the mentality of the masses is reflected by a change in those beliefs. We are at the end of a very long cycle where we have been bombarded by social messages to believe today's behavior is normal and acceptable. Partially so that those who are able to take as much as possible can actually do so. But as I wrote last year, "Never have so many relied upon so few.". If for no other reason than that fact alone, we are seeing a major sentiment shift. And, those at the top are always the last to realize something has changed in their insular view of reality. In the mean time, someone is going to eat a dirt sandwich on many of these deals. That someone will likely be global shareholders, pension funds, consumers and the general public.

The aura of private equity is indeed a myth.
posted by TimingLogic at 12:14 PM links to this post

Friday, October 05, 2007

Deep Thoughts By Jack Handey

Today we ponder deep thoughts by Jack Handey. The cheerleaders are out today telling me the world is great with the Dow and S&P back at old highs. And, from a purely selfish perspective I truly wish the world economy was great. I have a simple question. I'm just wondering how odd it might be that only one of the thirty Dow stocks is making a new cycle high today let alone the half-ish of them that have actually exceeded the 2000 high? Anyone want to tell me how many times that has happened in the last one hundred years? Or maybe that less than twenty of five hundred S&P stocks are making new cycle highs? Just curious. Remember, peaks are formed by a process of distributing assets from strong hands to weak hands over some period of time. Heavy selling, step aside, let the weak hands rally the market, heavy selling, step aside.......and on and on until the party is over. In order for that to happen, weak hands need to be convinced the world is marvelous. Do you believe the world is marvelous? Jack Handey does.
posted by TimingLogic at 1:40 PM links to this post

Wednesday, October 03, 2007

Platinum's Insanity Is Ending

Platinum has been one of the strongest assets this cycle rising to astronomical levels of about $1400 an ounce. Over the past few months researchers have been leaking advances in automobile catalytic converter technology which consumes about 40% of the world's platinum output. (Discretionary consumer goods consumes another large chunk of its output.) Recently Mazda announced an even larger breakthrough with up to a 90% reduction in required platinum content for catalytic converters. As with other announcements, expect this to be rolled into production within the next year.

Now what? How many hedge funds are left holding the bag with major investments in platinum? A consistent problem with Wall Street has been its inability to foresee innovation and technology thrusts that ultimately invalidate their cursory understanding of an existing business model as we discussed with Apple and Google. In other words economic substitution and innovation are constants. Or simply put, don't invest in what you don't understand or be willing to time markets when your thesis has been invalidated. And more importantly, be able to recognize when this shift takes place. I wrote the same thing about uranium and thorium substitution in nuclear reactors some time ago. The granddaddy of this concept is petroleum. Alternative energy and green innovation is happening at a feverish pace never before seen. It will pay off in a huge way. One of the biggest business coups in the last decade was GE's recent divestiture (at a ridiculously high price.) of its plastics business to Saudi Arabia. Petroleum based plastics are going the way of the dodo bird.

One more thing as I think about it. People are talking about bottled water plastic containers creating a massive amount of waste. The issue isn't to quit drinking water or to worry about recycling waste, it is to do away with it with efficient biodegradable packaging. Do you think any entrepreneurs recognize this problem with plastic water bottles? Just a thought. Ultimately, what if your biodegradable packaging and waste was then broken down and used to fuel your home in a home-based system capable of generating power from said waste? Hmmm.....

posted by TimingLogic at 1:20 PM links to this post

Tuesday, October 02, 2007

Gold And XAU Update


We've talked about gold needing to rise or oil needing to fall or both as well as Newmont Mining being at strong support in the last few months. Both have obliged as both gold and Newmont have risen in the last few months. The XAU found support at one at a longer term trend line and the mid 120s and Newmont at its longer term support around $38-42.

If you believe gold is telling you inflation is rearing its ugly head, the Fed is printing money, the Fed is going to print its way out of today's circumstances or any of the other generally accepted notions, you had better get a new set of glasses because I believe almost everyone is likely in the dark with respect to what is going on. I expect gold to break when the equity markets break but we are about to find out if gold has any real legs under it as the Gold & Silver Index, the XAU, is as the top end of its channel while also challenging its old highs. Should gold related investments rise substantially from here, it might be time to buy that bomb shelter you've been contemplating. That's a joke. Although this really is not an appropriate time to joke. What else is one to do with the messes building around the globe?

Gold is most likely telling us one of two things. First, that the rate cut has no place to go except into the existing bubbles fueled by your friendly banker and his band of brothers; the investment firms and hedge funds who rely on banks for levered capital and are trading in the stocks and commodities markets or second to expect a very serious credit crunch and its big brother; deflation. Or a little of both. And, what have we talked about incessantly? The lack of demand for capital aka supercharged fuel for Wall Street ramming assets, banks trading in global asset markets, the financial industry bubble, banking hazards and deflation. They go together like peanut butter and chocolate. Or maybe more appropriately like foxes and the hen house.

Isn't it ironic Alan Greenspan has just given us his perspective over the last few weeks that we should fear inflation in the coming years? Deflation is the Satan of economics. I've been hunting him for years. He is very insidious and deceitful. The commodities boom has convinced nearly everyone that he is no where to be found. He has convinced economists and central bankers who worship at the alter of monetarists that he cannot make an appearance on the grand stage. That he can always be defeated. A view reinforced by a general consensus that the Fed drives the economy. He has been lurking for more than a decade with little fanfare or detection. Is he here to take his rightful place in the global economic throne while every central banker, economist and Wall Street prognosticator chatters about inflation and moral hazards associated with a Fed rate cut? The time for concern of moral hazards is long over. We missed that boat eons ago. Now it's time to watch for the mark of the beast. By the way, this is a little economics allegory-ish post. I'm not really expecting Satan to appear. Since some don't share my sardonic writing style, I thought I should clarify myself.
posted by TimingLogic at 8:54 AM links to this post