Monday, March 31, 2008

Hank's Credibility Is Waining Fast

"One of the things you must understand about 1929 and the antecedent years, as about any speculative episode, 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.

I used to be quite an optimist... I thought that by keeping the memory of the 1929 crash alive we would have a warning against the kind of feckless, fatuous optimism which caused people to get in and shove up the markets and shove it up more and get carried away by the illusion of ever-increasing wealth. I've given up on that hope because we've had it happen too often again since."


-- John Kenneth Galbraith

I thought it was time to throw this quote up one more time. I'm going to show this quote so often, readers will have it memorized. I've been marginally critical of Secretary Paulson and his involvement in creating this financial Frankenstein as the former CEO of Goldman Sachs and his lack of substance as Treasury Secretary. But, I'm always hopeful that in the interests of society, he will rise to the occasion as Treasury Secretary.

It appears Hank is still getting his sea legs because all we continue to see is more talk. Today the yammering press reports that Secretary Hank Paulson recommends sweeping reform of Wall Street. But, what we find out might be a little different. It appears much of this outline, as opposed to an actionable plan, was devised before Washington or Wall Street even realized they had cooperatively created a financial crisis. Were he and his buddies working on a gift for his Wall Street cronies? A gift that was intended to be part of a long term policy change that now is being passed off as reform?

After going on a six month Happy Hank whirlwind tour to convince everyone that markets are fine and the economy is wonderful, we now get more talk. A presentation of a 200+ page report of recommendations to be implemented at some time in the distant future in a far, far away galaxy. There are reports of reports of reports that have never seen the light of day in Washington. Including reports on ways to make sure we didn't have some of these crises in the first place. Reports that were shelved. Most likely because of lobbyists. Where are the substantive and immediate actions to increase transparency? This crisis will be much worse without a complete comeuppance and full accounting by banks. Not that this is going to keep society from taking its medicine. It is simply necessary to avoid possible loss of all confidence and potential collapse.

Hank, my man, can we count on you to actually get something done? This is the championship game and there are no second chances. Maybe you should ramble on over to the Congress and work jointly with the people who actually write the laws to come up with some type of actionable plan that increases transparency and restores confidence. Pronto!

It appears Professor Greenberger believes Hank's recommendations were lobbied for by Wall Street. That is a frightening but likely thought. And Mike Mandel over at BusinessWeek believes Hank's pep talk is dead on arrival.
posted by TimingLogic at 3:30 PM links to this post

Good Marketing

posted by TimingLogic at 11:40 AM links to this post

Ford Finally Sells Jaguar and Land Rover

And, I couldn't be happier for them. Hubris led to the acquisition of these brands and now Ford sells them with its proverbial tail between its legs. Ford's management of these premiere brands was nothing short of utter incompetence. As was the lack of due diligence before the acquisition in the first place. Maybe Tata's management will be less brain dead than that of Ford. I think Tata's management is in over its head but I'm willing to give them a chance. These brands don't have to be relegated to constant losses and staid designs. I really liked the mid-sized Jaguar that was build on a Ford Taurus platform. That was a real winner. If Ford could have only foreseen the mess before us and sold Volvo at the height of the merger mania in 2006 and 2007.

Of course, this is nothing compared to the egotistical $38 billion acquisition that Daimler made of Chrysler. Mercedes decided it wanted to increase its brand awareness and build brand value by making K-cars. Only to turn around and effectively pay Cerberus to take Chrysler off of its hands a decade later. Brilliant. Simply brilliant. Both moves were encouraged by Wall Street's pumping investment banks that made enormous fees. And, we all hailed the brilliance of automotive consolidation and 'bigger is better'. Daimler and Chrysler were going to share engineering and purchasing to reduce costs. Just like Ford and Jaguar. In other words, Daimler was going to use a $12,000 car's platform as the foundation for its S-Class cars and put Mercedes door handles on a $9,000 economy car. Nice!

And, what did Daimler chairman Schrempp get for that brilliant move? One hell of a great retirement package. In fact, don't quote me but I believe he actually received significant compensation under the give away of Chrysler to Cerberus. (Isn't it great that a company can pay $38 billion for another company and screw it up so badly that they effectively give it away? Of course, they'd never tell us that.) And, what did Wall Street get? Massive bonuses and fees for putting the deals together. And, what did shareholders get? Ten years of pain. And, what did employees get? Mass layoffs due to incompetent management.

Ah, but life is good. It's all good.
posted by TimingLogic at 9:52 AM links to this post

Friday, March 28, 2008

If Only I Could Get the Fed's Help When I'm Bad

Great commentary by Ann Woolner at Bloomberg. I've thought about this alot and here's what I think the government should do. I think all people associated with upcoming messes should be required to forfeit their personal compensation in full from the past five years. That money should be put into a public trust that is used to help any homeowner or misplaced worker that has been impacted by predatory practices. How's that for stoking the fires of populism?
posted by TimingLogic at 2:31 PM links to this post

Eat Like A King For Less Than $10

How about a lite Friday post. In today's world of massive price distortions in many food products, there are still amazing values to be had. In fact, I have seen alot of significant price drops at grocery stores in the last month. I would assume many food distributors, processors and manufacturers are more interested in maintaining sales and shelf space than margins in this environment.

I'm always on the look out for great food at local establishments. One such place is Tofu Village on Western Avenue in Gardena, California. For less than $10, you get some of the best Korean tofu stew, soondubu, anywhere. In addition, the side dishes, panchan, of Korean specialties included with the meal are fresh and of the highest quality ingredients. That includes crispy purple rice.

Below is a picture of the seafood soondubu along with all of the side dishes that comes with the meal for $9.99. Unbelievably, the kimchee soodubu is even cheaper and has a deeper flavor that I think is better. The restaurant is starting to open additional locations around LA as well. I'd highly recommend it. The quality of the tofu, kimchee and pickles are the best I've ever had. And, in uncertain times it's nice to enjoy a great meal on the cheap.

posted by TimingLogic at 8:15 AM links to this post

Tuesday, March 25, 2008

Excellent Interview With Jim Grant On Bloomberg

I'd highly encourage everyone to listen to a thought provoking interview with Jim Grant. Grant's general conclusions are the unexampled incompetence of Wall Street and government officials hath brought doom upon our society. What a surprise that I agree. Okay, that's an understatement. A few comments. Grant seems to believe the underlying economy is sound. I know that is not the case. That's not an opinion. That's a fact. He's also concerned about inflation. Inflation is dead. I first wrote that nearly four years ago and nothing has changed in my models. For the record, the commodities market is telling us we are going to see deflation. Put that one in your pipe and smoke it.
posted by TimingLogic at 8:47 PM links to this post

Is The Bear Market Over?

I've spent alot of time studying markets over my life. Now, that doesn't mean I know everything there is to know but there is no such person. But, I do believe that qualifies me as an expert. At least as much of an expert as many telling us there was such a thing as Goldilocks and within the last week that she is making a reappearance. I realized long ago that Wall Street never knew what it was talking about. Specific people in the industry could rise above the madness but they were typically beaten down and left quietly. There's little room for transparency and honesty in an industry that is seeking more and more investor money for their ongoing fee-based money management business. To be bearish means the spigot of new money could be shut off.

As Wall Street has continued to grow in its size and influence on the real economy, the average talent level has dropped. It's that good old demand & supply equation. Positions were filled with marginal talent. Therefore, the average ability of the industry has diminished greatly. And, as we have quoted Gustave LeBon, the herd takes on the intelligence of the least among itself.

In the last week, a bevy of Wall Street types have come out and made buy recommendations and some prognosticators have even gone so far as to tell us this may be the end of the bear market. But, before the bear market is determined to be over, wouldn't it be nice if we could at least get a rally? A real rally? Any rally? Not a day or two. Sentiment, put/call ratios and all of the other supporting gibberish is telling us a rally must develop here with odds greater than 90% according to many.

I pulled this after the market closed today so it is current. And, not only have buyers not returned to this market but it looks like they are still leaving. In fact, we haven't had any significant buyers since the first half of 2007. Could that change? Sure. It might change tomorrow or next week or next month or next year or in ten years. But, if I've learned one thing over the years, it is to dismiss anyone who calls a bear market bottom on a specific day. Especially because of exuberance associated with the Fed saving what could have been a chain reacting collapse of Wall Street.

Update re a comment: The below chart is a proprietary measure of buyers and sellers. Above zero means buyers are in control. Below zero means sellers are in control. The black horizontal line is the zero line.

posted by TimingLogic at 4:25 PM links to this post

Monday, March 24, 2008

SpaceWeather.com Triple Flyby Alert

A friend of mine is close friends with the founders of Spaceweather.com. He just sent me the alert below. For anyone who is in North America, this is an opportunity to witness a rare event. Depending on where you are located, the date and times might be different. Click on the link provided for your location. Hopefully, we'll have a clear sky. For those of you outside of North America, you'll have an opportunity in the future to participate in satellite flyby events as they increase their coverage map to the rest of the world.

Space Weather News for March 24, 2008
http://spaceweather.com/

TRIPLE FLYBY ALERT: Space shuttle Endeavour has undocked from the
International Space Station and the two spaceships are now orbiting Earth in
tandem. This sets the stage for a series of rare *triple* flybys, which
many sky watchers will be able to observe on Tuesday, March 25th. It's a
triple because three spacecraft are involved. First to appear is the
European Space Agency's Jules Verne cargo carrier flying 2000 kilometers
ahead of the ISS-Endeavour combo. Jules Verne is about as bright as a 1st
magnitude star. Four minutes later, and even brighter, the space shuttle
and space station follow Jules Verne across the starry sky--a spectacular
sight!

US and Canadian readers can find out when to look using our new Simple
Satellite Flybys tool: http://spaceweather.com/flybys. (Note: We haven't
forgotten about the rest of the world. Work is underway to expand our
simple flyby predictions beyond North America to all parts of the globe.
Stay tuned.)
posted by TimingLogic at 10:26 PM links to this post

Stop The Stimulus Package

Finally, someone with experience in government affairs is speaking out on this senseless, pandering stimulus package. As we wrote before, money has ground to a halt in the economy and the vast majority of these stimulus checks are going to end up being used to pay bills or saved and therefore are really more bank welfare. Since then a few surveys have confirmed the majority of this money will either be saved or used to pay bills.

Today, a former government policy advisor's Op-Ed in the New York Times takes a position that this money should instead be used for targeted efforts in the housing space. Wouldn't most people rather see this stimulus money spent to help people who might have lost their job, have children and may be seeing their mortgage foreclosed upon? Or other more creative efforts to bring banks and mortgage holders together in a solution where both may be able to find constructive resolution? We are already seeing legislation being formulated in Congress for just such an effort anyway. The reality is we aren't going to spend our way to prosperity or resolution of the current issues and we don't have unlimited funds. So, wouldn't it be refreshing to see some type of logical use of the citizen's money instead of more shotgun spending? Is there a politician in Washington who will stand up and stop the pandering stimulus package? Will anyone stand to account? Anyone? Bueller? Bueller?
posted by TimingLogic at 10:32 AM links to this post

Sunday, March 23, 2008

An Interview With A Living Legend

Charlie Rose Interviews Paul Volcker On The State Of Current Affairs.
posted by TimingLogic at 11:40 PM links to this post

Friday, March 21, 2008

Is There A Goldman Sachs' Curse? Quantitative Finance And Newton's Third Law.



S&P has been in a stupor for years. That stupor contributed to quite a mess. Now, as they awaken from the stupor, it appears they will continue to contribute to the mess. This time by actually doing what they should have been doing in the first place to keep this mess from happening. Today S&P downgraded Goldman Sachs and Lehman's credit outlook to negative.

Wasn't it just a few months ago when Goldman was the poster child for skirting this crisis? On the cover of magazines and cover articles on leading financial sites for their brilliance? And, what have we been saying in numerous posts? Not!

I wrote in early 2007 that Goldman Sachs was a great proxy for this cycle. An out take from that post -- 'If ever there was a proxy for this bull market, it would be Goldman Sachs. Basically anything to do with a liquidity induced economic rebound is in Goldman's portfolio of capabilities. Goldman is a money making machine. Commodity trading; mergers & acquisitions; private equity; services to hedge funds, trading groups and mutual funds, etc. Buying into Goldman's stock gives someone access to all of the assets and sectors that are booming this cycle. Goldman's stock itself is almost the perfect asset allocation model for this cycle.'

If you didn't read that post, I would encourage you to click on the text above and read it for the historical economic events and eery Goldman parallels. I obviously don't believe there is a curse per se but there is a history of doom associated with peaks in Goldman's perceived brilliance. From the outside looking in, Goldman Sachs appears to be a special company. One where creativity and individuality are encouraged. Where new ideas and innovation are embraced. There is alot of brainpower within the walls of the company. And? The world is littered with failures associated with brilliant people and brilliant talent. It's the same fallacy the Google supporters are so quick to point out. Before that it was Microsoft. Before that it was IBM.

Goldman management seems to have forgotten the basic concept of entropy. Or maybe their leadership didn't take science classes. Maybe they should have before they hired all of those science majors to create Frankenstein finance. Entropy tells us randomness is always increasing. Therefore markets simply cannot be tamed. Applying significant leverage to this truth is completely invalid. It will lead to ultimate failure. Always. No matter how many smart people a company hires. No matter how great the company is. Financial leverage is a scourge of Wall Street. It may work for years but ultimately the fundamentals will not support their assumptions. Outliers will develop. That is where we are today. We've had leverage for decades. And, that in itself may be manageable under many situations. The problem is when the underlying fundamentals inharmoniously merge with leverage to create a storm.

Here's what I find most interesting about the prognosticators this cycle. Each time we hear of a new problem everyone scurries to do research on what the actual product is and what the impact will be. And, if this means it is now time to back up the truck and buy stocks hand over fist. CDOs, CLOs, SIVs, SPVs, BFDs, auction-rate securities, mark-to-market accounting, other derivatives or what not. I have a new one for you. It's the most important one. It's called 'IDM'. IT DOESN'T MATTER. I don't understand any of these products any better than the people who came up with the ideas for them in the first place. Yet, I have been able to write about the coming train wreck well in advance of it happening. Wall Street still doesn't get it. Their industry is peaking and as we have said they are in a bubble. When that bubble pops, so will their industry. And, so will the employment and business models within that industry. As we have said many on Wall Street will assimilate back into society to become productive assets as employees, new companies, new entrepreneurs, maybe new industries, drivers of new capital formation and the like. Now, it's time to put the economy back together again. But, not yet. Not until all of the elitists recognize what a mess they've made. The majority of the population already understands in their own way.

Back to Goldman. Major cracks are showing in Goldman's stock. For many reasons I believe the May 2006 market top was the true economic top. Into early 2007 we saw a massive volume bubble that completed a blow off in the American equity markets. I'll share my thoughts behind that in another post some time soon. In any event, I expect Goldman's stock to go lower. Much lower. How low? Likely into the mid 80's before this bear market is over. Maybe significantly lower than that. We will just have to see how outcomes unfold.

It will be interesting to see the outcome of this cycle as it pertains to Goldman. Will it be similar to 1929 when they abandoned Goldman Sachs Trading Corporation and returned to their core business in order to survive and restore their reputation? Will their quantitative genius be exposed as faulty science as we have argued? Will Wall Street be forced to abandon much of their proprietary trading and quantitative methods of madness that have contributed to massive profits? And to a massive mess. Obviously, not because they want to but because the market will force them to. In a bout of significant irony, Wall Street is imploding because it achieved exactly what it wanted. The environment they sought to create with lack of transparency and oversight will ultimately lead to an outcome associated with Newton's Third Law: for every action, there is an equal but opposite reaction. In this case, the reaction to lack of oversight and transparency fought so hard to achieve will likely be self destruction.

This gives me a chance to put up one of my favorite commercials again. The Orwellian Apple ad from 1984. In the ad, Wall Street is the mind bending Thought Police on the screen, society is represented by the brainwashed drones in the audience and the economy is represented by the woman throwing the hammer. The grand Orwellian experiment is over. The Age of Enlightenment begins.





posted by TimingLogic at 10:59 AM links to this post

Wednesday, March 19, 2008

posted by TimingLogic at 11:24 AM links to this post

Monday, March 17, 2008

Bear Stearns: A Venerable Institution Gone Forever.

I don't have any time for postings over the next handful of days but I'll take a few minutes to beat a dead horse re Bear Stearns. It's obvious Bear is insolvent. But, to be fair, that doesn't mean worthless. Just close to worthless. An inability to meet obligations might mean Bear only has a liquidity problem. Only is relative. Hundreds of banks may only have a liquidity problem. This is obviously the Fed's perspective with their remarks about potentially making a profit on this deal. We shall see.

People believe the Fed has a limitless ability to absorb these type of losses but that isn't so. They are shooting alot of bullets right now and that is very disconcerting. I used to shake my head when I'd hear the argument that the Fed should raise rates in order to have more bullets to fight a downturn. Are many of these high paid people really that clueless? Any brainiacs who still believe this won't spread needs an appointment for a frontal lobotomy. The reason we have a banking crisis fundamentally isn't because of banks. As I've said before, this concept of the crisis spreading to other parts of the economy is based on an invalid argument. It is the other way around. Problems in the economy are seeping into the banking system. And those problems aren't housing either. I wrote before, Wall Street has taken incredible risks when fundamentals never supported their hubris. Of course, that doesn't mean the U.S. is going to be vanquished from existence either. The general global sentiment against the U.S. is heavier than a Guinness. I don't use this as any kind of investment data but I will repeat one of my major themes on here. Those betting emerging market currencies or economies are safe are playing a fool's game. Right now, the speculation on that front is gargantuan. Remember, it's the same people betting against the dollar and in favor of commodities and emerging markets that told us we were in a Goldilocks environment.

Other than that, what is there to say? Not much beyond we've said this was coming for years. I'm sure more insightful transparency into what happened will leak out over coming weeks and months. One of the most venerable institutions in American history is gone. A firm that survived the Great Depression. This is really very unfortunate and I feel very sorry for Bear Stearns' shareholders and employees. $2 for a stock that was $170 a year ago is hard to fathom.

Update: I was asked a question about the remark that the Fed has limited abilities. Of course, the Fed can do anything they want to do with support of the government. But, if they get beyond their traditional tools or balance sheet, methods are unproven, highly suspect and likely would have unintended consequences of being destructive in my estimation. As I have written repeatedly, central planning does not work. Let's hope we never have to find out.
posted by TimingLogic at 6:13 PM links to this post

Sunday, March 16, 2008

Less Talk. Treasury Secretary Paulson's Thursday Speech

'I'm not in a position right now to make specific recommendations but I think that in a way that has not been the case to date, the focus of policy has to be on causing there to be more capital for more credit worthiness and more ability to lend in major financial institutions and I'm not sure we are going to get there simply through exhortation.'
--Larry Summers, March 14 2008

What is Summers saying? Less talk, more action. There are many issues facing the U.S. and the global economy right now. Most are not even being talked about. Instead everyone is focusing on the outcomes. As an example of two different problems, the credit or banking crisis is separate from the housing crisis. The impacts of each are therefore different regardless of whether they are interrelated.

Let's forget about everything else except the banking mess for discussion purposes. We've said on here that the Fed is primarily focusing on saving the banking system. Industry leaders and government officials-regulators and politicians-need to jointly come up with solutions to this banking crisis in order to restore confidence to the banking system. Mostly government officials as financial institutions are going to chafe at changes they've spent so much money and so many years attempting to skirt. If this doesn't happen, our problems are going to be exponentially worse. I do mean exponentially. Letting the banking system chips fall where they may isn't a strategy. It's a hope that when the dust settles, we'll have something left that doesn't lead to an economic apocalypse similar to the movie 10,000 B.C. I want balance restored to the economy but I'm not ready to don my saber-toothed kitty cat underwear.

Many are worried bailouts will entice this mess to be recreated or create moral hazards. Indeed there is such a possibility but there is also a possibility it won't. That these messes will cause Wall Street to retrench and refocus on what they should be focusing on. That is supporting the underlying economy's growth as opposed to trying to create their own 'supra-economy'. And understanding their worship to false gods of foolish risk management practices, levered quantitative models and other shenanigans were abject failures that have no place in our banks. In any event, it is imperative the Fed not allow a banking crisis to spread out of control. Since no one knows where that tipping point is, the Fed will likely not allow large institutions to fail. That means more corporate welfare whether any of us like it. Now, if we had not allowed such monopolistic institutions to be created in the first place, the system could have more effectively cleansed itself without intervention. An individual failure might not create a systemic crisis. But, those are yesterdays sins of reducing the action of free markets that I wrote about long ago.

On Thursday Secretary Paulson announced a general outline of recommended changes to oversight of financial markets. The focus point of the media seems to be mortgage lending practices. There is no doubt mortgage lending practices need more oversight but I think we can worry about that one in five or ten years. If there is anything we can expend energy on later it is fixing mortgage lending practices. The few buyers of real estate aren't speculators looking for a short term gain. Plus, many are already facing tighter lending practices instituted by unhealthy banks. Focusing on this issue literally accomplishes nothing in rebuilding confidence and transparency in the financial system. Paulson's speech seemed long on talk and less on substantive and specific actions. Now, if I had a nickel for every person I've ever met in a leadership position that was a great talker I'd personally bail out the banking system.

I am leery of leadership with little operational ability. Poor operational skills are probably the most lacking ability of ineffective CEOs and leadership in general. What are operational skills? The one sentence definition is quite simply the art, discipline and know-how of how to get things done. In other words, an ability to take complex, chronic or seemingly insurmountable issues associated with running a business and breaking them down into identifiable and specific actions that translate into specific resolution. Then being able to lead an organization or group to actually execute on said plan. Sounds silly doesn't it? It's really not. It's an art. I've spent alot of my career building specific operational plans for executives searching for solutions to their problems. That is basically what management consultants do.

In this case, the world expects substantive and specific action plans that are to be taken to restore confidence, transparency and liquidity so that the markets regain an ability to function. We can talk about general outlines of general recommendations all day long. That is what Summers is referring to above. Exhortation isn't going to solve problems. I'm an investor and I have no confidence politicians or leaders of any type have any specific plan given the state of markets and speeches by politicos this past week. Quite frankly, I'm not yet convinced many of them are past the deer in the headlights phenomenon. If I don't have confidence, do the world's financial leaders? Do the world's investors? Do business leaders? Do consumers?

As an aside, I found it interesting that on The NewsHour with Jim Lehrer this past week, Ray Suarez pointed a question to Mark Zandi and Alan Binder about Paulson being part of the Wall Street leadership that has chafed against oversight and transparency for decades. So, is Paulson's recent verbal embrace of banking reforms and increased oversight of the monster he helped create a change of heart? An admission of failure? That oversight is a necessary evil? A lesser evil than Wall Street run amuck?

It's time for a short off topic rant. Did anyone see the recent 60 Minutes interview with Carl Icahn? Icahn is a very polarizing figure for many. Mostly because alot of corporate management does not like shareholders watching over them to ensure they actually know what they are doing. Personally, I believe his type of shareholder activism is a significant positive on corporate governance. Something that is also in need of more transparency and reform to enable further shareholder rights. Icahn isn't altruistic in any sense of the word. He runs his business for personal gain as he should. If a corporate management team has a sound strategy and strong execution plan they are working diligently, they need not worry about the likes of Icahn. If you are Ed Zander at Motorola, as an example, who seemingly had no control over the operational aspects of the company but was a great talker, then as a shareholder I want an activist or cumulative activism to force change. Zander was representative of a fraternity president re Icahn. Is Paulson a fraternity president or the real deal? Time will tell. Watch this clip of the Icahn video and to see what I am talking about.

My favorite clip of the Icahn interview is describing some of his experiences with management incompetence. I realize no one is perfect and we all make mistakes. That we are all human and prone to moments of stupidity is a given. This is not my point. I make these types of remarks because I want people to release this aura associated with unquestionable brilliance or unquestionable loyalty associated with leadership. That somehow they should not be questioned or held to account as everyone else is. An example? Executives making an average of 550 times the average American's salary. It was about 35 times just twenty five years ago. That shareholders and society have let this happen while average wages have made little progress versus inflation was accomplished by another art. The art of bamboozling reinforced by media and leadership. Bamboozling that is allowing the creation of uber rich CEOs and senior management while the average American's wages have been relatively stagnant in real dollar terms for decades. And while overall shareholder returns over the last ten years have been anything but good.

None of this has anything to do with a concern that someone is making too much money as is often used to incite class warfare. CEOs are hired stewards. Professional managers. If they want to be paid like an entrepreneur and have the freedom from oversight of an entrepreneur, they should go start their own companies and take the associated financial and career risks. Risks that the Google founders took. Or Steve Jobs took when starting Apple. Or Bill Gates. Or Warren Buffett. I hope all entrepreneurs make billions of dollars. Taking risk should be rewarded handsomely as entrepreneurs are the job creators and constructive change agents of our society. But, hired stewards have a fiduciary responsibility to the company owners. That means they need to be managed just as other employees are managed to the benefit of shareholders and to the long term value of the company. And please don't tell me CEO pay is where it is because it is what the market will bear. Compensation packages are typically negotiated by compensation firms with conflicts of interest and it is done outside of the transparency of free markets or unbeknownst to company shareholders until after the fact when these massive payout packages are being handed out.

What are CEO's worth? Who knows. But, if we have a transparent process of monitoring their results and the compensation process that allows company owners and free markets to participate, we'll find out. Today that isn't happening.
posted by TimingLogic at 8:20 AM links to this post

Friday, March 14, 2008

Bear Stearns First To Admit They Are Likely Close To Insolvency By Seeking Liquidity Injections


Chart courtesy of the marvelous Stockcharts.com

One of the main themes since starting this blog is that the banking system in the U.S. is unstable. There will come a time when the banking system has stabilized and the sector will represent a buying opportunity. With rapidly deteriorating credit & economic conditions, I don't believe we are remotely close to that point. Hopefully, no one reading this blog has been lured by the nimrods and dimwits carted onto the comedy channels that have been telling us to buy banking stocks because they represented great value. But, that is each person's own decision. I will say there is a clown born every minute and all of them can't wait to share their act on the big stage. The price of admission to that act is our life savings.

Today Bear Stearns announced they are in serious trouble with injections by the Federal Reserve and JP Morgan. What's new? I mean really. Is this a surprise? I actually commented a few weeks ago on another blog that I expected Bear to go bankrupt. For all I know they are insolvent. They still deny it but last time I checked, one doesn't get capital infusions if life is good. No one knows what is going on because there is little shareholder transparency on Wall Street. You remember shareholders? The ones that own the companies?

Here's something to think about. Isn't it ironic that Wall Street has done everything they could over the past few decades to skirt transparency and oversight and now that very fact will lead to their demise? Isn't it ironic that one of the main reasons international investors were willing to invest in U.S. financial markets was because of the transparency and oversight that highly paid Wall Street lobbyists have worked so diligently against? What's that old saying? Be careful what you wish for.

Mid-day Update: Here's a link to Reuters overview of the Bear Stearns mid-day conference call. Bear CEO says liquidity is strong? Sure it is. That's why your stock has dropped 80+% in the last year. Anything other pronouncements you'd like to make? How about this: You have an immediate external audit done of your financial position. You disclose all of your off balance sheet obligations and exposures to risk for shareholders. Including risk you cannot quantify. Then you share that with shareholders. Transparency is the first step in curing Wall Street's disease.
posted by TimingLogic at 10:04 AM links to this post

Thursday, March 13, 2008

Media Deja Vu, The Federal Reserve And The Stock Market Rally

On Friday before the market opened, I wrote 'It also coincides with with what could be a very short term low either today or Monday. So, if we do get a minor rally, we'll get t0 read journalists say it was because of the Fed in their usual correlation equals causation reporting.' Lo and behold, the media followed through with their usual headlines. The reality is this rally was set in motion before the Fed ever woke up on Tuesday. The Fed announcement may have added more exuberance but we had a retest of the January lows, astronomical put/call ratios & TRIN readings and an alignment of bearishness readings across a few other proprietary short term oversold data points. All of those issues begged for a rally. In fact, I don't think we've been so short term oversold by so many measurements this cycle. That said, it was a very atypical attempted rally and as many other very oversold rallies, appears to be very short.

I'm rather surprised at the amount of indignation I read surrounding the Fed's actions earlier this week and in general. We've talked on here that the Fed doesn't control and can't save the economy but that doesn't mean they have no impact. My perspective is we should encourage experimental solutions that may make positive impacts on the economy. Allowing banks to raise capital is one such positive impact. Even though I disagree with how many are doing so including ramming commodities and other nontransparent methods. It's too late to fret over corporate welfare policies and mistakes that were made. On some level, we must put these issues aside in the hopes these institutions regain some level of health. There will be plenty of post mortems on mistakes and how not to repeat them as happens in every crisis. Right now solutions are what should be in focus. That means looking at the big picture. No one wants the world to end in disaster or personal financial ruin simply to make sure bankers get their comeuppance. In other words, our banking system isn't really based on the concept of free markets and expecting the market to solve all of the problems could be expecting too much. A washout in the banking system without ultimate intervention if things roll off of a cliff might cleanse excesses but it could also lead to economic devastation.

We will have enough problems to deal with as this cycle ends and if the Fed or anyone has creative ideas or methods of helping banks regain some measure of health, why would we not want them attempted? Even if it only delays the inevitable. Delaying the inevitable might allow consumers to raise cash to weather a downturn more effectively, corporations of all types to do the same, policy meant to assist with social, economic and transparency issues to be formulated and the economy to work off some imbalances all while maintaining a higher level of employment. Are those not all good things? There is always a chance some of these issues can be partially mitigated or that the financial system can work through some of its issues before the world economy hits the wall. And, if the U.S. can improve its economic situation before that happens, it is better for everyone everywhere. Because whether anyone likes it or not, the world is overly reliant on the U.S. Quite frankly, because most of the world won't undertake their own economic and political reforms as it's too easy to mooch off of the U.S. In other words, the coming emerging markets bust will be of their own making. But, then we beat this drum like a rented mule.

One person or a small group of bureaucrats can't control an economy with trillions of moving parts but so far the Fed has managed to help avert total disaster. Although there is growing evidence we are very close to the edge. They have done so in part by letting the dollar slide. I am quite confident this action is deliberate because I've listened to some of Bernanke's public speeches and testimony. He has talked about the U.S. refocusing its efforts on exports. The implication to me is in lieu of consumption. In fact, I believe the Fed is taking queues from prior economic disasters and letting the dollar slide in an effort to mitigate negative outcomes. Yes, the Treasury is responsible for dollar policy but there is no doubt cooperation on strategy. While it may seem bizarre to say so at this time, I firmly believe there is ample evidence the U.S. has high odds of coming out of this cycle in the best economic position comparative to most as I have written numerous times. One thing I am sure of is the U.S. has not lost its comparative economic leadership. Not even close. Not because of some silly notion that I live here either. This doesn't mean I'm predicting a return of Goldilocks. Far from it as I wrote in my market projection post last week. There are large problems to be dealt with but they are not impossible. And, they are drastically less significant than those facing other major economic powers. And, our economic, social and political system allows us to more effectively deal with problems. Or more importantly, forces us to deal with problems when they become a crisis.

Even though I believe macro events are still setting up for a lengthy dollar rally, a weak dollar has kept many American industries humming alot longer than I anticipated--possibly less because our goods are cheaper and more because it has stoked the emerging market bubbles--and employment higher than expected as well. (On a shorter term note, I'm still not convinced this Euro breakout isn't a false one.) Many of the Bernanke detractors likely don't understand half of what he is doing anyway. Mostly because I read their commentary and realize they don't know what they are talking about. Not that anyone has all of the answers. I surely don't. But, not knowing the answers doesn't mean I can't spot many senseless remarks. You may dislike the Federal Reserve, you may believe we should have a different money policy, you may have many legitimate concerns with the current system. But, for now, it is what it is. And most don't understand the implications of changing it. Put another way using a metaphor I was reminded of as a young sales person; "We have oranges to sell so your job is to sell oranges.". The Federal Reserve and current monetary system is what we've got so our goal should be to make it work as best it can under the current circumstances. That being the case, to date, Ben Bernanke gets high marks in a nearly impossible environment. I wouldn't say the same for the Treasury and the repeated public gaffes by Paulson. But, now it appears Paulson is gaining some recognition of the economic severity as well as some political legs underneath him. Then again, the President still seems to be in denial. At least in public. I wrote about this in the fall of last year. Do we want straight talk from leadership or happy talk? In a transparent society where officials are the appointed stewards of its citizens, we deserve straight talk. It is our government and those said stewards that work for us not above us. Americans are smart enough to know something serious is going on whether they understand CDOs or not. We cannot address solutions to the issues without honest appraisals and acknowledgement of said issues. Failure to honestly assess the issues will ultimately lead to greater crisis.
posted by TimingLogic at 7:59 AM links to this post

Tuesday, March 11, 2008

Nobody Left To Buy Commodities But Me?

Re the last post, I find it interesting that I received an urgent voice message today from a brokerage firm trading in metals, gold and energy. I cringe when I listen to these telephone sales pitches. It conjures up images of the movie Glengarry Glen Ross. If you haven't seen this movie, I highly recommend it. More because of the nature of the movie rather than its entertainment quotient. Personally, I wasn't able to enjoy the movie for the great acting in it. Of course, I'll throw in a caveat. The profanity is extreme.

When the cold calling team has gotten far enough down the call list to get me to invest in commodities, they have likely found all of the money they are going to find and the trade is very lopsided. It's anecdotal but mysteriously timely.
posted by TimingLogic at 11:53 AM links to this post

Monday, March 10, 2008

The Speculative Run Of Hedge Funds. Ist Commodities Kaput?

I want to start out by pointing to an article a few months ago in the greatest magazine ever sold, The New Yorker, highlights the blow up of Victor Niederhoffer's hedge funds again. It is a very interesting read for those who are students of trading markets. Frankly, it's just plain interesting regardless. Niederhoffer is an incredibly brilliant man who just so happens to be one of the greatest and worst traders of our generation. A true walking paradox as are many of the world's greatest minds. After reading the article, I suspect the "worst trader" moniker has more to do with inner demons of self destruction than any inability. The paradoxical yin and yang or necessary opposites of humankind.

So, is Niederhoffer's blowup a sign of things to come for the hedge fund industry? We've already seen some major blow ups. Amaranth in natural gas. Goldman's main hedge fund looks to have ended last year down about sixty percent. Morgan Stanley's quantitative trading group lost almost four hundred million dollars in a single day. Then there was Bear Stearns' hedge fund debacle starting off the sub prime mess. The list is surely much larger than is being publicly acknowledged right now with rumors of massive losses running high and many funds likely hiding losses to continue to collect fees as long as possible. Of course, they can do that because of lack of regulation and oversight. Rumors even abound that some major financial institutions have hidden losses in hedge funds. We really don't know exactly what the state of the industry is because it has fought to remain opaque and to skirt investor and government oversight. Now we see creative attempts by attorneys to force transparency into the hedge fund community. Involuntary bankruptcy being one such method that would conceivably unlock transparency into the secret world of unregulated money. This brings up an important point. I read some remarks this weekend that lack of regulation or enforcement of regulation has not played a major role in this mess. That is about the most preposterous thing I have read this cycle. That's not really surprising as very few people really understand how the financial systems operate at their core. Most simply point to something like M3 money supply and say the Fed is printing money. This is such a crowded thought that is completely inaccurate.

The asset markets are setting up for a state that I would compare to an overburdened computer system. A term used to describe this state is aptly called thrashing. In layman's terms, this state can be reached when too many tasks are trying to access too few resources or the same resources. Ultimately the system implodes. Applied to global asset markets, we see fewer and fewer trades working and these trades are drawing larger and larger sums of money that ultimately leads to greater and greater distortions in these markets. Distortions that lead to an inability of resource markets to respond normally. Distortions that will ultimately lead to some level of implosion. Some commodities have seen ten year price runs in a month. Literally. Even though fundamentals are deteriorating or even cratering in some instances. Gasoline supplies, which I touched on a few months ago, are exploding. Gasoline supplies, long argued by Wall Stret personalities and traders as a reason why prices were so high, are now higher in the U.S. than when oil was at $10 a barrel. Oil supplies have been this high for quite some time as we have discussed. Of course, in bubbles we always see disconnects from fundamentals. That is, until the bubbles implode.

Platinum, as an example, has gone well beyond parabolic to something I have never seen; nearly straight up in the last month. Those who argue this is supported by fundamentals are living on Mars. I wrote late last year that platinum's primary driver, catalytic converters, was being reduced substantially by economic substitution in that market. Since then an American partner company of NASA has actually developed a catalytic converter that is thirty percent more efficient than any available today and apparently uses no platinum or other noble metals. It has already received some testing approval from California, the strictest emissions standards in the U.S. In other words, it's not in the idea phase. It's likely coming to market relatively soon. If there is anything positive about the industrial commodities bubble it is that we shall see tremendous innovation in the areas of economic substitution and efficiency. And, likely as the world ramps up massive new online supplies for these products.

Most of the investors in commodities likely have no idea of the economics or dynamics of these markets. These violent distortions in pricing are a very unhealthy sign we have reached a level of massive speculation. The only global assets that are now flying higher are these inflationary investments. And, they are very crowded on the long side of the trade. This enthusiasm is driven by massive inflationary bubbles in China, India, the Middle East, Russia and elsewhere where central bankers long ago lost control of their economies. In fact, there is a fair amount of evidence some of them never had control of their economies. American and European speculators are ramming the dollar to drive more and more inflation into dollar pegged economies to benefit from their trades in commodities. And, it appears the U.S. is more than happy to oblige a weaker dollar in an attempt to shake the international trade cheats and to help offset the domestic economy with export growth. But, that too is slowing because as we have written repeatedly since starting this blog, the global supply chain build out is reliant on the American consumer. Don't ever, ever, ever believe in this concept of the global economy disconnecting from the U.S. I read this perspective that the world has disconnected again just a week ago from a top commodities investor. This at a time when many of these commodity trades are likely the most overbought from a sentiment standpoint in modern history. The global economy is more reliant on the U.S. than at any time in my life in both economic and financial terms. As I have said before, these industrial commodity moves have nothing to do with inflationary concerns in the U.S. as we are told. It's about the quickening inflation in emerging markets that hot money is riding as the developed world starts to crumble. Inflation that I have repeatedly said will eventually lead to deflationary busts.

As each day passes, there is more evidence supporting a position we are putting in an ultimate peak for many, if not all, commodities as I wrote earlier this year. I'm most comfortable with this statement as it pertains to industrial commodities. Investors are discounting ten, twenty or more years worth of fundamentals in these valuations. The commodity supercycle that Wall Street has been telling us is a foregone conclusion is going to be severely tested. Wall Street never stops the pump until they wake up and realize their thesis was totally disconnected from underlying fundamentals. Given the economy drives Wall Street and not the other way around, why would we ever really expect most people in this insulated 'group think' industry to ever be right on substantive macro issues?

Is a large commodities correction now starting? Well, when everyone is engaged in the same activity the outcomes are never constructive. When leverage is involved, the outcomes can be disasterous as we are finding out in other Wall Street messes. When traders exit large positions in the parabolic markets they are creating, it will be impossible to do so without inflicting damage to everyone engaging in these markets. And, in the futures markets where leverage is involved........... This has already happened in the wheat market where one trader lost $140 million a week or so ago. I expect many of these funds that are making significant paper gains in narrow markets right now to overstay their welcome. In parabolic markets, everyone is on the same side of the trade. Someone has to be left holding the bag. It therefore must be funds that were printing money on the way up.

So, here's a question. How upset would Americans be if they knew it was their own banks and unregulated financial firms that were driving up their cost of food and energy to levels that were causing significant pain and economic hardship while these firms were making billions at their expense? Is this really any different than the housing mess where bank schemes minted massive profits while driving prices higher while Americans are left in the aftermath holding assets that are imploding in value? I'm not saying global demand doesn't play a role in the rise of commodities but would that have been 50%? 100% rise? Even 200%? Instead of the 1,000% we are seeing across many of these assets? The Wall Street media machine encourages us to believe it's global growth driving prices. Of course. Otherwise, we'd regulate their involvement in commodity markets. The claim made by many that financial firms and hedge funds add liquidity to these markets and that fact is constructive. These markets were set up for buyers and sellers of commerce. Not for financial traders to overwhelm some of the smaller markets and add significant price distortions to the larger markets. In this environment the potential exists for pension funds and retirement funds, encouraged to invest in commodities by these same financial firms, to lose substantial monies. A significant number of retirement funds are already underfunded and losses in the commodities space could present greater burdens on the financial system. But, this is just another outcome of the same lack of oversight and regulation in financial markets we have written about repeatedly.

In closing, if anyone is interested, I uploaded a report by the Senate Subcommittee on Investigations titled The Role of Market Speculation on Rising Oil and Gas Prices: A Need to put the Cop Back on the Beat. This was written before the commodities trade widened out to other areas beyond metals and energy but it applies to all commodities. I would encourage you to read it. Of course, like everything other form of oversight and regulation, it was shelved or plowed by Wall Street lobbyists.
posted by TimingLogic at 6:54 AM links to this post

Saturday, March 08, 2008

Lawrence Summers Speech On Economic Risks

Lawrence Summers has an excellent speech on Bloomberg video about the unfolding economic contagion. It it probably about thirty minutes so it's rather lengthy but it is worth the time. Summers is a quite capable political leader, economist and educator. He speaks in greater detail, honesty and scope than any other speech I have seen on the current state of the financial markets. It's not a pleasant speech but we have to be honest in order to address any issues.

He also talks about formulating policy to solve problems. Now. This raises a good point. We can't start to address any messes until Wall Street and Washington acknowledge they exist. I am quite confident this particular issue has been understood at some political level for at least a year and longer within Wall Street circles. And, that potential insolvency and bank failures has been known for at least nine months. The continuous happy talk we've gotten out of politicians afraid to admit problems exist in an election year is driving death spikes into the economy for prospects of political gain. Personally, I believe it's time for some very public substantive policy moves, publicly announced regulation enforcement and publicly announced efforts at getting to immediate financial market transparency in order to start to instill confidence in markets. In other words, a prime time television address by the President with a well thought out plan approved by economic advisors and business leaders aimed at doing just that. Anyone in Washington who believes this is a secret needs to wake up. You are always the last to know what is going on! Do politicians need to be kicked in the ass to actually get something done? The world needs to know the Boss is aware of the issues, is addressing them and that we have a plan. And make it yesterday or before the system blows up!

Email your political representatives at House.gov, Senate.gov and WhiteHouse.gov to demand it. Even if they accomplish nothing substantive, it accomplishes some of what is most important. That is confidence. You don't need to write a book. Simply tell them that getting transparency and confidence back into the financial markets and addressing the housing issue should be their top priority. And that the President ought to be addressing this issue publicly.
posted by TimingLogic at 9:26 AM links to this post

Friday, March 07, 2008

Federal Reserve Makes Emergency Moves....Again.

As I have repeatedly said on here, the general Wall Street type simply doesn't understand the scope of what we are looking at here. And we see that by the fact that funds loaded up on banks in the fourth quarter. The credit markets are again choking on their own vomit over the last week. (Sorry about the graphic. But Wall Street bankers have really created one hell of a mess. They get an 'A' for effort.) As I said before, this is not a subprime problem. Subprime simply is the first symptom of other problems. If someone has shoulder pain and has suffered a massive coronary, giving them an aspirin is not solving the problem. The Fed is giving the patient aspirin. The press is reporting the shoulder pain. As I've said before, the Fed right now is trying to save the banking system. And, we should all hope for their success. I ultimately expect much more creativity in solving many issues but those will likely occur only if we have a near disaster in the economy, the banking system or both. Instead, today we hear about moral hazard. Well, we've heard this before in history. When we've had implosions, being high and mighty on the virtue scale goes out the window. People seem to forget the tangled web of the economy. Those who did nothing wrong will pay as dearly as those who did if this virus goes unchecked. If people want an opportunity for employment and to keep their livelihood in some form, we are likely to ultimately see solutions that burden the whole of the population.

Today the Fed has made another emergency move. Here's a link to the announcement. It looks like more of the same; short term loans to distressed banks. It also coincides with with what could be a very short term low either today or Monday. So, if we do get a minor rally, we'll get t0 read journalists say it was because of the Fed in their usual correlation equals causation reporting.
posted by TimingLogic at 9:26 AM links to this post

Thursday, March 06, 2008

S&P 500 Targets For Next Market Correction

As I wrote a few weeks ago, I expected another leg down in equity prices in as little as the next two weeks. Well, that time is upon us. If we do get another leg down, we'll again hear many telling us it is a bottom and how great of an opportunity it will be to buy stocks. More of the same chatter from those telling us the market was cheap at near 1600 on the S&P. And even cheaper here. That banks were a great dividend paying investment this cycle. That utilities are defensive. That small caps represent great value. That banks were a great buy when they were down 10%, 20%, 30%, 40%, 50%, etc. As I've said repeatedly, this will likely go down as the largest global bubble in history and this is an ungodly expensive market.

Maybe we'll finally get a bottom worth trading if we get another down draft but we shall have to see. If a downdraft does come, I suspect we will end up in the 1100-1150 range on the S&P. There are three main reasons I believe we are headed to this level. First is that it is a 61% retracement of this bull market's gains. In other words, this level will have erased 61% of the gains had since the bottom in 2003 as show by the horizontal line in the chart below. That is famous conjugate of the Golden Ratio made so famous by Fibonacci traders. Second, is because the economic top in the equity market was very likely May of 2006 and because of that fact there is little price support above 1150. (More on this in another post.) And, third, it is where the largest supporting volume resides over the last eleven years as show on the chart below. This chart shows volume at the varying price levels over the last fifteen years. We discussed this concept back in 2006 in posts on 'volume at price'. You can search the site with Google for these posts using the box to the right side of the blog if you are interested in more information.

Ultimately, where do I believe we are headed before this bear market is complete? That's an interesting question. And, the answer is far from a scientific fact. The messes created beyond the May 2006 top add significantly to my concern and, therefore, the depth of any correction. I would say we have a reasonable chance at the 1994 pivot low shown on the chart. I'm not stating that is my position but that it would be within the realm of possibility. It would also support the position that I have repeatedly made that Wall Street, as an industry, is putting in a major top.

From much of my work, 400-450 would represent reasonable equity valuations for a capitulation low. Another option would be a retest of the 2003 lows. Thinking out loud, that may be less of a possibility given the time factor associated with the additional move from what I believe was the economic peak in May of 2006 to the ultimate S&P peak in September of 2007. That move came because of the size of the global imbalances that will ultimately lead to further downward pressure in a correction. Of course, no one on Wall Street is calling for anything similar. In fact, most are calling for a pick up in the market and the economy in the second half of the year. That's just a few months away. I see nothing to support this perspective other than wishful thinking. I wish for that too but the odds are extremely low at this point in time. So, that being the case, I could envision an upcoming selloff followed by a failed rally by the bottom pickers into the second half of this year to fulfill the general belief that the economy will pick back up. But, that's simply based on anticipated market behavior rather than anything else.

In closing, isn't it interesting that 400-450 on the S&P is where we find the strongest volume support over the last fifteen years? Even with an explosion of trading volume in this cycle. Let's see if prices gravitate towards volume.

posted by TimingLogic at 9:01 PM links to this post

Tuesday, March 04, 2008

Worst Job Losses Since The Great Depression?

Today we have the primary elections in Ohio amongst other states. I'm sure by no coincidence we have a recently released study by MBG Information Services. MBG's study is specifically focused on Ohio's manufacturing sector and its apparent devastation over the last seven years.

If you would like to read additional information about the report and its conclusions, an IndustryWeek article discussing some of the trade dynamics contributing to this situation can be read here.

As I've written on here before, America is still a dominant global manufacturer. In fact, over the last ten years, the U.S. percentage of global manufacturing has increased ever so slightly. Mostly at the expense of Japan. Far and away, the U.S. is still the world's manufacturing leader. That said, the U.S. has lost a significant amount of manufacturing jobs above and beyond the typical losses associated with productivity. We are generally led to believe we outsource what is not competitive by media and those in a position of leadership. That's really less of a truth and generally what those with something to gain may want us to believe. I can speak with some authority on this topic as I've been involved in selling outsourcing and offshoring. In fact, I've walked from opportunities that would have benefited me quite handsomely because of not believing in this strategy. Regardless, many positions on nearly any topic can be counter argued to the point of incessant babbling. As an example, a loss in manufacturing jobs may lead to a gain in logistics jobs. Or, a loss in manufacturing jobs in one sector may lead to global demand for manufactured output in other domestic industries. The picture is never really one that is truly clear as those with differing views debate this topic in the public spotlight. One thing is clear. Offshoring and outsourcing cost/benefit analysis is seldom truly understood by those making the decisions. I would argue the contributing factor to this fact is poor management. What I would generally term as financial management that really doesn't understand the business of business. In fact, of the many instances I've been involved in, I am only confident one company clearly understood how to effectively analyze the cost/benefit equation. And, they weren't in the business of outsourcing or offshoring. They were considering its impact on their organization. The rest generally relied on consultants with a bias or incomplete analysis that was driven by biased management. That is one reason why many companies eventually insource again as promised costs/benefits are never achieved. Or new management has a different philosophy or belief they can more positively impact business that is insourced. Somehow executives are convinced that outsourcing their problems and failures makes them go away. (Maybe a little like packaging up toxic debt instruments and selling them to someone else and now believing they are not your problem.) In other words, offshoring is not a panacea for failed leadership and failed execution. Instead, now one is left with failed execution within an organization that they no longer can impact directly or as quickly as their own. Now the organization is left with a bigger failure. Obviously, there are reasons to create virtual organizations and many are for positive and compelling reasons. But, the MBG focus of trade policy isn't typically one of them. In the end, the MBG report is a hard hitting look into a topic that is starting to gain significant amount of traction with political leadership.

That the Chinese government wishes to compete globally by punishing its workers through artificially low labor rates is their accord. It's not a plan that leads to economic vitality but moving up the value chain is always a possibility. And, such an approach simply weakens their industry's ability to compete when changes evolve in markets. In any event, this strategy won't last. Something must change as we've written before. Either jobs will be pushed to inland China where labor rates are lower as it appears is an attempted strategy by the Chinese government (but transportation costs are higher) or less developed countries will be targeted by the global labor arbitrageurs or American politicians will create incentives or penalties for companies regarding their manufacturing decisions or the advancement of productivity enhancing innovations will shift certain manufacturing into developed economies to tighten the supply chain or we shall see trade wars over higher unemployment in developed economies or short-sighted corporate executives will realize much of manufacturing and labor are competitive advantages and a condition of long term viability or we shall see a resurgence in collective bargaining as a check against corporate hegemony or some combination of the above or or or. The only question is when and how.

I can assure you that political leaders across the U.S. in local, state and national government are well aware of these statistics in some form. They are far from limited to the focus state of this study. And, given the U.S. economy is the best example of a self-correcting economy, we shall see imbalances resolved in some manner be it through market forces or intervention. I did a series of posts about the industrial economy quite some time ago. And, how I ultimately expect its resurgence. Absolutely nothing has changed my perspective on this topic. In fact, I see many momentum builders continuing to develop in this direction. Some market based and some not. That doesn't necessarily mean lost jobs are coming back. It may mean innovation will drive re-employment into new areas of production growth. But, one thing is certain. Any time in history we have seen such a drastic reduction in manufacturing employment, the system has corrected itself in some manner. There is no reason to believe this time will be any different.
posted by TimingLogic at 7:37 AM links to this post

Sunday, March 02, 2008

The Volatility Pincer Movement. You Ain't Seen Nothin Yet.


I've written repeatedly on here about the concept of volatility. And, that market volatility is really a function of fundamentals. And, that volatility is destined to return to the markets. Quite a while ago I showed a measure of market volatility and that it had fallen to the lowest level since the start of the massive equity market run beginning in 1995.

As volatile as equity markets appears to have become, I expect them to become significantly more volatile. Frankly, because as we've discussed repeatedly, my work supports a position that this is the biggest global asset, and by inference, economic bubble the world has ever seen.

Learning to measure and take advantage of market volatility would have allowed one to recognize the stock market blow upwards from 1995-2000 and the oil bull from 1999-2007 as two examples. In both instances we saw a similar tightening of volatility before their respective moves. With no other knowledge, one would have known these outcomes were likely to develop by properly measuring market volatility. Oil's direction was easy to determine given it was $12 a barrel. The only way to go was up given years of underinvestment in an industry that has always had boom and bust cycles. Of course, I never would have guessed $103 a barrel oil in 1999. But, then it doesn't surprise me now that it is here. Wall Street's financial engineering has created so many massive messes that I never should have expected anything less than a similarly massive mess in commodities. Using volatility alone the direction of the stock market move that developed in 1995 wasn't as obvious to predict given stocks were already fairly valued at the time. But, once the move started, it was obvious the move was going to continue higher.

On that note, the above graphic is a volatility band measurement of equity market volatility. Volatility bands tighten as volatility decreases. And, even though market volatility may seem extreme in today's environment with 100 point Dow swings the norm so far this year, the bands are still tightening. What does this mean? If history is to repeat itself, the market is storing up a massive sum of energy as the pincers tighten. If history is any guide we are going to see a large move. How large? Very large. And, I mean very large. Possibly as large or larger than the moves following 1995 and 2000 in equities. That means economic volatility is likely to be well beyond what anyone is imagining. Will that be constructive economic volatility or destructive economic volatility? Well, that's for you to decide. But, I will note that the bands are tightening exactly as Wall Street traders have rammed commodities to stratospheric levels in anticipation of continued global growth and continued global inflation. Something I have repeatedly said will likely end as the world joins the U.S. in a global deflation. In other words, I expect economic growth around the world to slow substantially or worse. From my perspective the only question is how long the global supply chain takes to feel the effects of receding liquidity and receding fundamentals.

Of course, you may hold a perspective that the next move be even higher as the U.S. economy weakens. That premise argues the dollar is going to continue to drop and commodities will continue to rise. And, that we are in a period of hyper-inflation. And that the government is printing money. And we will see something of what has been talked of time and again recently in the media; stagflation. All of these are very common themes we read or hear about every day in the press. And, I believe they are all wrong. The outcome is simply a matter of when we see investor and economic exhaustion. I believe that time is very near. Which also supports a major premise I have repeated quite often. That is, that Wall Street as an industry is peaking.
posted by TimingLogic at 11:17 PM links to this post