Tuesday, July 29, 2008

"Foreclosure Phil" Gramm's "New Deal" Economics

I've kept politics out of this blog and that will always be the case. Yet, there are often times politics passes through economics on such topics as regulation. I want to comment on a recent gaffe by a politician as it is tied to what will likely be judged by history as one of the largest economic blunders ever.

Phil Gramm was Presidential candidate John McCain's economic advisor until a few days ago. If you have been with me since the start of this blog, you are well aware of my disdain of deregulation of our financial markets including the overturning of the Glass-Steagall Act. If you listened to the Michael Greenberger interview I posted on here a few months ago, you also heard reference to the overturning of Glass-Steagall and the Gramm-Leach-Bliley Act. That Gramm would be Phil Gramm. It was never my intent to post any follow up detailed posts but now Gramm, an economist, has shown his terrible understanding of economics so I'm going to. But mostly I'm going to because this is an example of everything that is currently wrong with Washington: lobbyists, corporate personhood, dismantling effective government, destruction of the will of the sovereign at the expense of corporations, revolving doors of politicians and business, lack of regulation in markets and business, elitists deciding what is best for citizens based on pedaled influence, corporate welfare and on and on and on.

What recently got Gramm in trouble were the following comments in an interview with the Washington Times:

"You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet."

"We have sort of become a nation of whiners," he said. "You just hear this constant whining, complaining about a loss of competitiveness, America in decline" despite a major export boom that is the primary reason that growth continues in the economy, he said.

"We've never been more dominant; we've never had more natural advantages than we have today," he said. "We have benefited greatly" from the globalization of the economy in the last 30 years.

"Misery sells newspapers," Mr. Gramm said. "Thank God the economy is not as bad as you read in the newspaper every day."

You'd never know Gramm had a PhD in economics because he is apparently clueless to the realities unfolding. Realities Gramm helped create. Realities that will make what we are witnessing subjects of history books. While Gramm is generally accurate in his statement about American business competitiveness, that is a completely separate data point than society's economic benefit in the most recent incarnation of globalization. Yet Gramm attempts to make them one and the same. They aren't even close.

I've commented on the following before but this is a very important concept that is is clearly not understood by mainstream prognosticators. Under our marriage of democratic self-rule and economic capitalism, the long term benefactor to economic vitality must first and foremost be the sovereign and not capital. It is when capital trumps labor over the long term that free markets are turned upside down. Yet, this is pointed to as an economic boon by most current 'free marketeers' and 'free traders'. I am very much a free marketeer and free trader but I know a ruse perpetrated by personal gain, ignorance or deceit when I see it. The broad generational acceptance of this myth has many forms and is a major source of what ails the global economy today. Since Gramm and other elitists embrace this myth, whether for personal gain or through ignorance, the current round of free trade agreements were negotiated under the significant influence of purveyors of capital and not the sovereign. What a surprise that the 'regulations' or rules surrounding these agreements benefit capital or as Gramm notes, corporations.

Ironically, it is just such an environment where socialism and government involvement in the broader economy always has heightened potential to bloom. In other words, much of the current beliefs of many economists, all of Wall Street and many dogmatic politicians are a self-fulfilling prophecy of exactly the opposite outcome than is desired. Maybe I am being naive. Maybe what I should say is what should be desired in a democracy. Or, as I recently told a friend who is a supporter of this current economic fallacy, his misplaced beliefs actually lead to the creation of the nanny state he very much despises. What does that mean? Many of those with the position that the government shouldn't be bailing out private enterprise are complicit in creating an environment where bailouts are necessary. You are seeing the proof of all of this today as we see the new "New Deal" socialized state unfold right before our very eyes. History is littered with this very fact and is one reason I remain so confident economic and social volatility is going to increase substantially - especially in emerging markets. It's not a wonder a vast majority of economists can't forecast. They don't even understand the topic for which they are forecasting. Gramm is a poster child for this economic genocide so pervasive in American leadership today. But, as does everything else, so too shall this mindset pass.

Gramm tells us that we're all whiners. Get real buddy. I have never heard anyone whine about a future of uncertainty. I'm sure the millions of people from all walks of life facing economic uncertainty, be it in the U.S. or elsewhere, are very concerned or even severely distraught.

Maybe Phil Gramm would like to be on the losing side of the capital equation and live in a shelter for six months after losing his personal belongings. Or, be dumped on the street without a job and burdened with the financial responsibility of caring for young children. While our egos would have us believe otherwise, there is a large dose of luck and uncontrollable factors in everyone's economic standing. And, success can surely be fleeting. A little sensitivity to the difficulties of life and the human condition surely would be more than appropriate for the chief economic advisor to a potential President of the United States. On that note, in another outcome of capital trumping the sovereign, I am so tired of listening to this bullshit of personal responsibility for citizens in distress while predatory schemes, unsavory antics and lack of law, or enforcement of law, protecting citizens created much of this mess. And, those who are complicit are generally given a free pass while those often taken advantage of are left to slide down the shit hole of Wall Street greed. Hey, that's free markets. If you think it enough, I'm sure you'll believe it.

Of course wise men before us were alert to the fact that politicians and elitists often used words in a consciously dishonest way. As a result, generations are often conditioned to accept phrases such as "free trade" or "free markets" as a synonym for whatever the elitists are peddling at that particular moment. Funny but I don't hear those favorite of Wall Street terms coming out of New York anymore. Now, it's that we need to save the crown jewels of our economy, Wall Street, using my money. First of all, the crown jewels of our economy do not reside in New York and secondly, I think all of these executives and those complicit need to give back all of their pay for the last ten years because I'm going to have to bail them out. Of course, I would prefer to let them rot like everyone else but all that will do is guarantee my own demise by nearly guaranteeing economic collapse.

If you want to read a brutal appraisal of Foreclosure Phil's involvement in this mess, I'd highly recommend you read award-winning journalist David Corn's article in the most recent Mother Jones titled 'Foreclosure Phil'. You'll get your award after reading his story. Your award will be insanity.

The only thing worse than Corn's article or Greenberger's prior interviews is the following video. It appears Phil Gramm's support of policies set to destroy the U.S. financial system goes back many decades either directly or through family ties. Keith Olbermann is one journalist that has picked up on this fact and has recently reported it. Some may view Olbermann as partisan but the facts of the story aren't really open to interpretation. And, this story has been reported time and again from nearly every news outlet. It's rather ironic that Gramm's wife somehow was appointed to a government position that involved regulation of the financial markets while Gramm held powerful positions of financial oversight in Congress. I guess we should be grateful the 'free markets' determined that Gramm and his wife were the two most qualified people in the whole of the U.S. of A. to head these government roles. That she was on regulatory watch while the Enron mess unfolded and then went to work for Enron is surely a coincidence. That is, unless you believe there is some truth to Olbermann's reporting. Similarly, I'm sure it is equally a coincidence that Phil Gramm headed powerful finance positions in Congress then after retiring, somehow landed as a lobbyist at UBS - the poster child for financial stupidity. Of course, I'm sure Gramm posted his resume on Monster.com and was selected based on his qualifications against other similarly qualified candidates. Aren't 'free markets' grand? Am I saying it enough for you to believe it yet?

Very worthwhile Olbermann report on Enron & Gramm



If all of this isn't enough and you want to hear more about Gramm's involvement in other messes as well as his involvement in the unregulated Credit Default Swaps mess, then you can listen to an excellent interview with David Corn on Democracy Now! Also taking part in this video interview is a former investment banker who adds some very relevant commentary.

I seriously doubt McCain's release of Gramm was only because of the recent insensitive statements. More likely it had to do with the implosion in financial markets and the increasing awareness that McCain's chief economic advisor seemingly is significantly complicit in creating it. With major news sources starting to bring this to light, McCain's team surely knew Gramm would be a major liability when the general election hit full stride. How would McCain have responded in a publicly televised debate to a broadside on this topic? And, just weeks ago Gramm was considered an insider's bet for the next Treasury Secretary should McCain win the Presidential election. Just like our current Treasury Secretary that headed a major Wall Street firm while said industry was busy dismantling the American economy. Most assuredly this recent gaffe was a convenient means of foreclosing on Foreclosure Phil.

In closing, this post has no motivation in politics. But then if anyone is reading this and can only think about is some partisan perspective, they are so lost as to reality that nothing else matters anyway. This should be viewed as an educational editorial as what is going on in financial markets and how banks created their own demise with the help of politicians from both parties.

Dogmatic political views are quite silly anyway. The reality is fundamentals determine actions of politicians. Regardless of whether Obama or McCain is elected, the President will be faced with the same fundamentals. And, therefore, the market will demand the same of both men. They will either respond as the markets require or they will be voted out of office. Fundamentals contribute mightily to the greatness of Presidents be that through change demanded by the electorate or crisis that creates a demand for leadership . This crisis has major contributors in both political parties. Most Americans realize this given the polling shows a disdain for all politicians that are refusing the enforce the will of the sovereign. That said, this crisis involves our complicity as well.

Just as has happened time and again, trends never last forever. And, the party of king capital trumping labor is over and so too is the prevailing mindset that supports such an environment. It's simply that the purveyors of this scheme don't realize it yet. They will when markets dismantle Wall Street's current incarnation. It doesn't matter who is elected President, this fact isn't going to change and neither are the market demands due to this fact. And, this is a very, very powerful seed for long-term economic prospects in the U.S. Not so good for emerging markets. More on that in my next post.
posted by TimingLogic at 5:15 AM links to this post

Sunday, July 27, 2008

The Intelligent Investor On Bank Stocks

If I didn't know better, I'd say someone read my blog post a few days ago and used my remarks about why Ben Graham would not buy financials here to develop a nice article. Seems ironically timely but then Zweig has been writing of Graham for a long time and I have long embraced the ideals made famous by Graham. So, such a coincidence is far from impossible and even more than likely. Zweig has reinforced a key point I wrote about in that post - buying banks here is pure gambling. The market quickly reinforced that fact by putting in the worst day for financial stocks in eight years after that post. Oh, and after Barron's and most everyone who could get a microphone said to buy banks. This isn't rocket science folks. But then we already know Wall Street could never be confused with any rocket scientist with the trillions of dollars in messes they have created.

It would actually be very interesting to hear Graham, The Intelligent Investor, remark on a multitude of topics were he alive today. I am quite confident he would be aghast at what Wall Street has become. Not necessarily surprised but aghast at the Frankenstein before us. I am also confident he would not own any of the stocks or other investments Wall Street has been pumping over the last few years. They've created a massive bubble and as I've written, much of what Wall Street is or has been pumping is likely making twenty or thirty year peaks in price. In other words, it's very likely we won't see prices return to this level for many of Wall Street's favorite investments till most of the people reading this are retired or dead, if at all. You will never, ever hear any of this out of Wall Street. Whether this is a case of the majority having no idea what they are doing or outright deceit or both, Wall Street will suffer the consequences as the markets adjust to reality from their fault-stricken perspective of fantasy.

Anyhow, I'm a big fan of any writings or content regarding Ben Graham and Jason Zweig is one of the best espousing such ideals. His is a very good article you might want to read if you are tempted to believe the great beast.
posted by TimingLogic at 6:58 AM links to this post

Friday, July 25, 2008

Value Of Daimler Stake In Chrysler Drops 81 Percent In Seven Months

posted by TimingLogic at 11:18 AM links to this post

Thursday, July 24, 2008

CFTC Says Speculators Not Impacting Commodities

The New York Times is reporting the Commodities Futures Trading Commission has released a report that concludes speculators are not impacting oil prices and other commodities.

"As farmers confront mounting costs and riots erupt from Haiti to Egypt over food, Garry Niemeyer is paying the price for Wall Street's speculation in grain markets. Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29% in the past year... Niemeyer, who farms 2,200 acres in Auburn, Illinois, won't use futures to protect the value of the crop he will harvest in October...he says the contracts are too costly and risky... 'It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers,' said Niemeyer... 'The demand for futures exceeds the demand for cash grains."

Now, isn't that ironic? Because the former head of the CFTC, Michael Greenberger, has laid out how markets are being impacted by speculators. (July 12th and earlier posts) So, how can the former head of the CFTC be at odds with the CFTC in his analysis? You get to figure that one out.
posted by TimingLogic at 9:21 AM links to this post

Wednesday, July 23, 2008

Update on the S&P 500

I'm not going to spend a lot of time on this post because I've already exceeded my limit for the week but I wanted to put up an interesting chart. Well, maybe more appropriately an ominous chart.

Below is a chart of the S&P with a trend line going back to the Great Depression. Notice how in late 2003 through 2005 the S&P gravitated towards that trend line first acting as resistance and then support. We have now fallen all of the way back to that trend line since first touching it in 2003. Here is where short covering and the associated buying effect of doing so started within the last few weeks. The second chart shows short covering or buying (same thing) first started to develop around July 9th when buying pressure went positive.

There is a compelling position to be had that markets often first bounce off of support or resistance trend lines and then after a failed counter trend move eventually move through the trend line. So, we might expect a failed attempt to move higher followed by a push through this trend line. Then another failed retesting of the trend line after it has fallen through then another push lower. Whether these counter trend moves last days, weeks or months is speculative. But, I am dubious of any claims to divine these moves but those better at talking than trading.

One such popular prognosticator boldly proclaimed today this rally was the real deal and initiated a long position in the banks this morning. That's interesting because he did so as we are now as short term overbought as at any time in the last six months. Therefore, we have some reason to believe next week we will start a downward journey of retesting the lows set in the S&P last week. Then we shall see how much higher buyers want to bid this market. Secondarily, I'm quite confident the economic peak for the S&P was the May/June of 2006 top. Maybe I'll post more on that statement and what I mean by that in the future as I think the topic is very interesting. But, if that is the case, we really haven't even started a significant correction. How far are we from the mid-year 2006 high?

In other words, many true tests for this market are likely yet to come.


posted by TimingLogic at 12:59 PM links to this post

SEC Protects Primary Dealers From Naked Short Selling - Update

It's funny how many came to the defense of short sellers when the SEC reported it was attempting to limit naked short selling in primary dealers - enforcing an existing law. My initial and subsequent conclusions appear to be accurate based on a Reuters' story late last night. And, against all of the ridicule by many, it appears the SEC had a legitimate concern as to whether there were illegal activities involved in the trading of these stocks.

Naked short selling in order to drive prices down is against the law. The Reuters story reports short selling on Freddie and Fannie fell 90% and on the other primary dealers fell 70% after the SEC made their announcement. Given this data what other conclusion can one draw other than professional traders and Wall Street firms were illegally shorting these institutions? Of course, I welcome other perspectives to enlighten me but if one wasn't doing something wrong, why did such a massive drop in shorting volume occur?

This doesn't take away from the fact that banks are in serious trouble but it does add to a position that the SEC has lost control of its mandate. Markets don't need regulated? I think we've put that position to rest long ago.
posted by TimingLogic at 9:52 AM links to this post

Tuesday, July 22, 2008

Wachovia Joins Elite Club Of The Most Stupid. Cuts Dividend 90%.

Just as we are told banking stocks have bottomed, American Express and Wachovia report results that take their shares down significantly. At some point the market will be right to assume bank stocks are bottoming but I see nothing other than hope at this point as a motivator for that position. If something is needed to crack one between the eyes to wake up to the ongoing risks, all one needs to see is Wachovia cut its dividend nearly 90%. The Wachovia executives are surely not convincing me the business model they created has any future sustainability.

Wachovia reports nearly $9 billion in losses and the statement from the company is, "These bottom-line results are disappointing and unacceptable," said Chairman Lanty L. Smith. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."

Industry headwinds? Industry headwinds that banking CEOs created. Disappointing and unacceptable to whom? How much were the senior executives paid by the owners of this company to destroy it? Those who are disappointed are the main street investors who owned Wachovia in their savings and retirement plans.. To the employees whose lives are going to be upset significantly by layoffs. The senior executives get to go home and relax with their cozy salary.

If we don't come out of this cycle with an overhaul of corporate governance, I'm moving to China and embracing communism.
posted by TimingLogic at 9:32 AM links to this post

Don't Believe This Market Move Is Driven By A Short Squeeze Or That We Will See A Sustainable Rally

I might as well chime in as everyone else has about this two day rally and a common opinion that it was driven by a short squeeze. Obviously markets don't go to zero in a month but in this case, banks came pretty close. Has anyone ever seen such enthusiasm for a two day rally? Two days folks! That's it. Now we have every Tom, Dick and Harry on Wall Street and Barron's writing to buy banks. In addition, this supposition of a short squeeze also has no scientific merit at this point.

Let's take a different view than what is being reported in the media and by almost all of Wall Street that banks have bottomed and/or we are headed for a tradable rally.

The reality is this move likely has less to do with a short squeeze than options expiration and the market pulling the premium out of bearish options positions on banks. We have mentioned this before as a a counter-trend move that is common during options expiration week. Especially in a fast moving market. In this case bears load up with puts (most options expire worthless) in the heat of a decline and options writers have every reason under the sun to take that money back with a counter-trend move before expiration. Additionally, the SEC announcement that shorting primary dealers should actually be done legally also is probably playing a role in strength within these particular shares. ie, Given the massive volume, as an example, in the XLF, many of the short positions were assuredly initiated without access to the underlying shares or when settlement came the shares weren't there. (It could have also caused those skirting this rule to cover shorts in other banking stocks as well. No one is foolish enough to taunt the SEC.) Then there is psychology at play. As I wrote on here a handful of days ago, the demarcation line of shorting primary dealers was drawn in the sand and that government stance could very well have been interpreted as a position that the Fed will not allow any primary dealers to fail. It follow that a line of thinking with many value investors that there is minimal risk owning these companies after they have fallen 70, 80 or 90%.

Now onto this short squeeze issue. A short squeeze assumes there are substantial buyers willing to bid the market. There is no proof of any such position at this time. The debt markets are still roiling and anyone with half a brain is watching that fact before investing large positions in banks. Additionally, if one looks at how the market leaders including energy, technology and commodities are now falling, that does not portend well for an argument that buyers re-entering the markets and squeezing shorts.

Here is more likely a closer reality. Almost every Wall Street professional within shouting distance of a microphone has said they have covered their short positions. Wall Street being so synchronized is a contributor to this mess so I don't see any such potential "group think" as generally bullish. In other words, they were all being foolish on the way up, why would it be any different on the way down? If one firm covers, you can be assured that information is going to be passed through the hallways of every firm if for no other reason than an attempt for everyone to make money. Such a broad action of short covering would explain the large bid placed under financials as opposed to any significant buyers being the root cause.

The short covering was likely also fueled by many anecdotal data points that selling was getting really extreme by those who believe God grants rallies just because he is gracious. Many of the data points I've seen mentioned include oversold price momentum oscillators such as MACD, over 1,000 new stock lows on the NYSE, bearish sentiment surveys, a pickup in volume on the last down day and a host of other data points used by many knife catchers to anticipate a tradable bottom. If you are in front of a terminal all day long, initiating a speculative long position when the market sees over 1,000 new lows might be a decent day or two trade. If you are an investor, it's not that easy. As I wrote before, using technical data from the last bear market or bull market is fraught with risk due to changing fundamentals. Trading is a game for professionals. And, even at that, most professionals learn the hard way and trade way too often. The tortoise wins the investing game. There is plenty of time to be a hero.

Another point one needs to think about is that banks have literally crashed. Many of these stocks are at twenty or thirty year lows or all time lows since coming public. There is surely a certain profile of investor looking for an entry point at these prices. That could be based on nothing more than they dropped alot so I'm buying.

Many risks are still not being acknowledged by Wall Street prognosticators so there is no reason to believe these risks have been discounted in the shares of banks. Remember, no one with access to a microphone on Wall Street was alerting anyone to the major risks in banks two or three years ago. And, I do mean no one. Even those that have been right since this crisis hit were eating all of the dog food their bretheren could dish out. There were surely many smart people who knew there were risks but they weren't mainstream Wall Street types posing for glamour shots on CNBC. So, to believe that they now fully grasp a situation that they didn't see coming is hardly believable. In fact, it's more appropriately laughable.

So, the banking short trade might lose momentum for a while but buying here is pure gambling. That also means many buyers here are also likely poor long term accumulators of capital. We are seeing many false prophets issuing so many buy and sell recommendations on sectors and stocks over the last year that it makes my head spin. Buy this month. Sell next month. Many of these people were minting money in the 1990s when even monkeys with dart boards could get double digit returns. Ironically, what we are finding out now is that, indeed, many are monkeys. I wonder how much Warren Buffett wagers at the track? Wanna bet nary a single nickel? And, I can assure you the greatest investor of all time, Ben Graham, would not be buying this current version of Russian roulette because he couldn't do an accurate analysis on any of these companies.

The point to this post is markets move in mysterious ways. Much of that mystery is due to lack of understanding. And, no single person understands all of the forces working in markets where millions of participants are involved so the mystery will always remain. But, weeks ahead will be telling as to whether large buyers will actually step in to save this market or whether this is an explainable reaction to explainable events that have absolutely nothing to do with investor enthusiasm to re-enter this market.
posted by TimingLogic at 6:54 AM links to this post

Sunday, July 20, 2008

A Contrarian Take On Jim Grant's Wall Street Journal Article - Why No Outrage On The Banking Crisis?

I've linked to Jim Grant on here before. He's a decent and honest fellow. Yesterday a friend stopped by and dropped off Grant's front section article in the Wall Street Journal. The article is free at WSJ.com. Here's the link. Grant's article is an emotional outcry and conclusion that Americans are disengaged in this crisis as defined by the article's title 'Why No Outrage?'.

Well, most of us live in the real world. A world where the human condition is something that we all deal with on a daily basis. Not the fairy tales perpetuated by Wall Street and mindlessy regurgitated by media. So, Jim I can assure you that people who generally have no care or concern with Wall Street are well aware of the crisis before us. They are living it. The kitchen conversations in American households are about topics seldom, if ever, discussed. They are very engaging and serious discussions. In fact, I've never seen Americans so engaged in my lifetime. The American people clearly get it. I'm just surprised that Grant doesn't see it - it's not a coincidence nearly every poll on every economic or political topic imaginable is reading at the lowest levels in poll history.

I chalk some of Grant's dismay to a generational issue. A generational issue of the mind. Revolution or transformation of ideals and values are always driven by youth. Idealism is often well gone by the time someone gets to life's extended years. Or as I believe is generally true, older people live in fear of change and young people embrace it. The older one is, the greater change may have a negative impact in their life. There may be people of Grant's generation that embrace the change of youth but a major reason why Grant doesn't see it is likely that he's out of touch - much like Wall Street and Washington is. In no way is this more obvious than the Presidential campaign. One candidate has embraced the net as a medium to rally voters, raise substantial sums of money and deliver his message. The other candidate, in an interview, said he doesn't use a computer and he is so technically illiterate his wife has to help him even check his email. It is no coincidence one candidate is nearly thirty years older than the other. Again, this is a generalization but it has definitely held true. Even those donating to political campaigns on the net are demographically very young.

So, Jim, rest assured there is tremendous outrage. And the article statement that "Wall Street is off the political agenda in 2008 for reasons we may only guess about." really surprises me. In fact, it is the very front and center issue in 2008. Every economic issue in every major poll that American citizens are concerned about has been opposed for decades by Wall Street's media and lobby machine.

So, while I think Jim's article is a worthwhile read to reinforce the stupidity that banks have caused, he is missing the movement before his very eyes. The American people are on the case.
posted by TimingLogic at 2:31 PM links to this post

Saturday, July 19, 2008

Wall Street Shows Great Empathy For Main Street's Struggle With Expensive Oil

It's obvious now that my critical positions of Wall Street have been completely wrong. Yesterday in the New York Times it was reported that Wall Street is so concerned about gasoline and energy prices that they have mounted a full-blown lobbying effort to educate Congress on the crisis that regulation of futures markets and associated derivatives will create. And, in a great act of altruism they are doing so before Congress makes a serious mistake and passes a bill to limit speculation in the energy markets.

There is no doubt that Wall Street is paying lobbyists enormous sums of money to manipulate Congress because they are very concerned about the economy, the average American citizen and all of the world's poor unable to feed their children because of high food and energy prices. What a great act of selfless nobility and altruism.

Chiming in on behalf of his favorite lobbyists and Wall Street firms, Senator McConnell enlightens us with knowledge for the ages that “No reputable economist thinks speculators alone are the reason for the spike in gas prices.”. Now, that is most assuredly a prescient fact that was also applicable to the technology bubble in 2000. Oh great and humble Bodhisattva I feel so fortunate for achieving a new level of enlightenment.

Signing off from planet Mars...............
posted by TimingLogic at 9:17 AM links to this post

Friday, July 18, 2008

Merrill Reports A Total Of $41 Billion In Losses. What Does The Future Hold For Merrill And Wall Street?

To date, Merrill Lynch's losses have been massive. Before this mess Merrill was reporting about $4 billion in annual revenue. That is ten times annual revenue in losses. And, today they are reporting negative revenue. Only in the OPM (other people's money) or banking business could a company lose ten times revenue and still be in business. Were GM to lose ten times revenue, they would be reporting $2 trillion in losses. Think they'd be in business? At least GM's business model is sustainable.

The New York Times reports today, "The magnitude of the problems seems to have caught Mr. Thain (CEO) by surprise. Just a few months ago he assured investors that Merrill did not need to raise more capital. “We’re very confident that we have the capital base now that we need to go forward in 2008,” he said in January."

This company has completely lost its way. Charles Merrill was one of few on Wall Street who warned his clients of impending doom well before the 1929 crash. Can you imagine that happening today? A time when banks and financial firms make hundreds of billions annually by telling us to hold through crises so they can collect their money management fees. The fox is guarding your hen house. Charles Merrill built a business on customer satisfaction. What is at the heart of customer satisfaction? Trust. The main street American investor is what built Merrill. Where is the main street investor in Merrill's current incarnation? Well, I have an opinion but I will just say that most banks and financial firms figured out how to make money without doing a whole lot of worrying about their clients. Merrill and others now use client investments to trade against its most cherished assets (clients) in the markets. Clients taking it on the chin by high oil prices? Who cares. Wall Street is minting money trading oil as it rises into the stratosphere.

How is Merrill going to make money on a forward basis? What is its sustainable business model? Why is no one asking this question? It is the primary question facing all of Wall Street. I'll tell you why no one is asking. First, the OPM business is not highly populated with people that actually know how to manage a business. If that is the case, what's the chance they even realize there is a problem with their business model? Instead Wall Street is more highly populated with people that know how to raise money. That is their business. It is an important business when it comes to playing a support role for the economy. In every other incarnation other than supporting the economy, this business model is completely expendable and is at risk of being destroyed by market forces. I really think people need to think about this.

As long as Wall Street is raising capital, the fees are good and business is good. Now that a problem exists with raising capital, Wall Street is left to fix its business problems. Yet, there is a valid perspective that isn't something Wall Street is actually qualified to do. That is, unless they can figure out how to start raising substantial sums of capital on a sustainable basis. Then they'll be fine with the status quo. Uh, who am I kidding. So, what am I saying? They will learn how to fix their businesses because the market is going to make them. And, that is going to be a painful process. Merrill's new CEO seemingly believes future riches lie in today's business model. Merrill's business model is broken and so is Wall Street. Yet nary a person utters said fact.

Fixing Merrill requires a very different set of skills than dressing up the NYSE to bring it public. I don't see any experience in Thain's background that qualifies him for the task at hand. And, mind you, he is being paid at a level of being one of the top CEOs on the planet. Merrill shareholders ought to feel good about this fact. Lack of experience doesn't mean he won't be successful but Thain is going to have to take very large risks on decisions he has little experience with in order to return Merrill to long term viability. He is likely going to have to shut down many of the engines of profit growth Merrill relied on in the last ten years or more and he is going to have to find new engines of profit at the same time. If he doesn't do it, there's a very good chance the market will do it for him. The difference is simple. Is it easier to deal with change when it is voluntarily and on your own terms by embracing it or when it is forced upon you? The answer is right in front of us. Wall Street is being grudgingly forced to change as I write this. How painful has it been and will it yet become? In a great bout of irony, Wall Street has ruthlessly extracted change in the American economy that is now leading to its very demise. Wall Street is imploding due to self-inflicted causes.

CEOs put their pants on one leg at a time just like you do. There is no magical CEO bullets in business. It's common sense, hard work and luck. Businesses face the same issues of balancing their checkbooks as we do. Merrill Lynch needs to find a way to balance its check book and to create enough positive income in the future to sustain its itself or risk the same demise as everyone else in this economy.
posted by TimingLogic at 10:59 AM links to this post

Thursday, July 17, 2008

Military Dispatched To Quell Protest At Karachi Exchange

We've discussed on here numerous times that market volatility is simply a reflection of social and economic volatility. And, we have talked ad nauseam about the tremendous risks in emerging market economies.

Today, Pakistan called in the military to stop a near riot by a gathering of investors at their stock exchange.

These are very likely the warm-ups before the main event. More on the main event in a huge post next week. Huge in both girth and content.
posted by TimingLogic at 1:13 PM links to this post

SEC Protects Primary Dealers From Naked Short Selling

I find it ironic that the SEC has issued restrictions on short selling of primary dealers yet oversight on naked short selling has been nonexistent over this past cycle. Are there any nuggets of knowledge to take away from this?

To me, this is quite possibly where the Fed has drawn the line in the sand. I view this as the potential "protected" list that will be guaranteed a bailout if needed. In other words, if a financial institution isn't on this list, the Fed could very well not be willing to save it. Bank failures will increase and the demarcation line must be drawn somewhere. So, it's plausible to hypothesize that bank failures not on this list will be subject to FDIC insurance protection in the event of a failure.

On this general topic, you might find it interesting that the XLF banking exchange traded fund did 351 million shares yesterday. You read that right. The average daily volume for the XLF before this crisis started was between 2-5 million shares a day. Just a small volume increase of tens of thousands of percent. Volume on the ETF has picked up substantially as large trading desks are surely using this as a broad market shorting vehicle for banks but 351 million is still magnitudes above the current average volume.

So, why was volume so high yesterday? There were probably a few contributing factors but one major one could be that many large trading firms were using naked short selling to drive down financial shares. The large volume bump could have been those firms covering their shorts. In other words, what they were doing wasn't legal and firms didn't want to be caught under the SEC's renewed interest in enforcing the law. Isn't deregulation grand?
posted by TimingLogic at 6:54 AM links to this post

Fannie Mae & Freddie Mac Spent $200M To Buy Influence

posted by TimingLogic at 5:31 AM links to this post

Wednesday, July 16, 2008

Countrywide's VIP Program Is Much More Serious Than Originally Reported

posted by TimingLogic at 11:58 PM links to this post

Satan Lives

I have somewhat of a different view of the world than most. Of course, my work isn't based on emotions or what is reported in the press or what I hear from Wall Street. (By the way, emotions, media and Wall Street are different measurements of the same data, that being opinion.) My work is based on measurable models.

I've written on here that we should wish for inflation and frankly, although it has been a killer on the wallet, rising commodity prices have been a barometer of good news for the global economy up until recently. I wrote a long time ago that traders would drive oil and commodities until they killed the global economy and that is exactly what is happening. It's not the only factor but it is a major factor. I just expected we'd break well before oil hit $150. When commodities start to crack and crack significantly, bulls will likely rush back in the market believing lower commodity prices will mean a recovery in economic activity due to less stress on consumers. This argument is based on the same fallacy that I wrote in the last post - that this is a consumer-led recession. The reality is when commodities crack, it will be a harbinger of Satan's return. (see below)

I have cited the Merrill Lynch Fund Manager's Survey on here before as a contrarian data point. Something that has worked quite well given Wall Street has been completely wrong on every major macro call. Before too much time passes, I want to get a recent survey up. In May the Merrill survey showed only 18 percent of respondents thought we had entered a recession, a 250% increase in the number of respondents expecting higher inflation, 80% expecting long term rates to be higher in a year and a large jump in the number of managers overweight oil. In hindsight, we know they are wrong on the recession call and there is no reason to believe they will be right on any of the other calls either.

It may be of anecdotal interest to note there are 267,596 instances of inflation in a search of blog posts over the last thirty days. There are 4,390 instances of deflation. Need I even comment that most bloggers are simply regurgitating media and Wall Street hype and are surely not accurate predictors of future economic trends?

If you believe future risks are inflationary, I've got some land to sell you. It's in Manhattan. You'll make a killing. As I've written, deflation is the Satan of economics. It is cunning, manipulative and deceitful. And, nearly everyone in the investment community and media has been lured into his den through the false prophet of inflation. Being lured into a trap, they now need to pray to save their souls. Why? Because being on the wrong side of the trade, that being inflation, is going to cost them trillions and trillions and trillions of dollars.
posted by TimingLogic at 11:10 AM links to this post

Tuesday, July 15, 2008

General Ramblings On The Economy And Markets

I want to make a few comments about the economy and financial markets including a few reminders. Much of my core model work is based on risk. When the risk passes, I'll be cautiously optimistic again. I'm am confident but surely not arrogant that I know what needs to happen for the markets to recover. We see what happens to arrogance. Wall Street is imploding. To anticipate a date when this crisis will pass would only be guessing. It's an interesting undertaking but the reality is time elements are very difficult to divine. Many factors determine recovery. One, as an example, is the work the Federal Reserve is doing. That takes some amount of pressure off the markets for a period of time and, therefore, potentially stretches the time element of outcomes. The Fed's policies are actually working on some level but additionally it also has an effect on psychology. We saw how many market participants were enthused when the Fed started cutting rates. That means many may have been buying at that juncture instead of selling. There are just too many market forces including many that aren't understood at all. We are often told financial markets are discounting the future. A true statement. But so far the market isn't even close to discounting all of the risks likely to manifest themselves.

When I wrote on here the S&P could see a test of the 2003 lows or even 400-450, the general consensus was still very bullish. Too many still believe such moves are completely impossible. Yet, today, we already see many banking stocks falling well below their 1995 lows - the last time the S&P was at 400-450.

There are many market forces at work but as I wrote, 400-450 provides a reasonable valuation level. I don't know how many times I can say this market is extremely expensive but it is. And, if you have any doubt, simply look at financial stocks that have erased twenty years of gains in one year. Is anyone really thinking about what this means because the market is telling us something. Well, one way to look at it is the economic activity in the banking sector over the last twenty years is now being discounted. The market is taking it back. Or put more ominously, that growth wasn't necessarily reflective of fundamentals or wasn't sustainable and the market now realizes that fact. That everything we read over the last five or ten years about growth and Goldilocks was entirely false and the market finally realizes that fact. That is a very unsettling perspective. But, even though these are extremely unsettling times, this is all very bullish for the long term. Unfortunately, the intermediate term is not a good place to be for any of us.

Very few understand the risks facing the global economy. Ironically, Wall Street has been in the dark for many years while their world is now literally crumbling around them. Mind you, the world as they see it isn't coming back either. The American people clearly see the risks. Those risks are manifested in negative confidence surveys on a broad range of topics. That fact has led many to believe the market is a buy. This is a very dangerous belief for it is the American people that drive the economy and not Wall Street. And, in no way am I referencing the fact that 70% of the economy is the consumer. I'm talking about the American people driving the economy's production. A very popular myth is this concept of a consumer-led recession. I can assure you, anyone that understands economics - and that doesn't include most economists talking about a consumer-led recession - realizes that is a complete fallacy. There is no such thing as a consumer-led recession. What does this mean? It means everyone pointing to housing as the driver of this crisis are completely wrong.

Because this mess became larger and larger, the outcome has become messier and messier. Extending the bull markets by a single year adds many trillions of dollars, euros, pounds, yuan, etc. of very high-risk activities into the global economy.

Shorter term too many people think a rally is in the cards. Nearly every market technician in the world is showing oversold data of some sort that has led to a rally at nearly every point in the last fifteen years. There is little validity to such an analysis. We are seeing how the most brilliant minds in the world built quantitative models that are failing left and right. That is because few of these quantitative model builders (and technical analysts ) understand fundamentals - something Paul Volcker has talked about. I would add traditional intelligence measurements don't necessarily translate into emotional intelligence and awareness. A lack of those traits are surely at work in this monster we call Frankenstein finance.

I wrote the following comments some time ago but I am going to write the same thing again because for some reason it fails the investment community to understand this fact- technical analysis is a function of fundamentals. As fundamentals change so does the outcomes of technical analysis. Put another way, technical analysis is a self-fulfilling prophecy of underlying fundamentals. Therefore, what happened in the last five years is often irrelevant. What happened the last twenty years is completely irrelevant today. When in the last twenty years have you seen every major bank fall 60-95% in nine months? When in the last twenty years have you seen oil increase 1500%? Fundamentals are substantially different today. Quantitative finance today is different than it was at any time in the last twenty years - of course we already know that because most anything quantitative using leverage is imploding. I can assure you, on a go forward basis, technical analysis will produce results different than it did even two years ago. People looking for a repeat of the 2000-2003 market decline where we experienced very clearly defined and tradable rallies are using a completely inaccurate premise for their analysis. Fundamentals today have absolutely nothing in common with that environment. This market might not be able to rally. Let me use one fundamentals-based data point as an example to support that statement. There simply may be too much supply of shares to be able to mount a significant rally. Supply from deleveraging, supply from companies needing to raise capital, supply from spooked individual investors, supply from bearish money managers, supply from bankruptcies and on and on and on.

There almost seems to be a mentality amongst those that are bullish that it is a fact of life that rallies occur. We have had many declines over lengthy periods of time where markets did not rally any substantial amount. Maybe they paused for months but so far we have seen nothing like the rallies in the 2000-2003 decline in the broad markets. Right now we are seeing the type of market conditions that have often led to crashes. The general lack of respect for markets is not a good sign. Markets may improve next week or next month or next year. Or, they may not. Anticipating a cure to this crisis has already caused many long-time money managers to show the greatest losses in their career. Even greater than the last bear market.
posted by TimingLogic at 10:03 AM links to this post

Monday, July 14, 2008

National City Update & The Financial Sector Crash

Today National City, one of the nation's largest banks, has fallen to $3 and change. Its lowest level in decades. From 2007's peak to 2008's trough, National City has fallen 92%. It's down approximately 70% since we criticized Morgan Stanley for upgrading the stock. If anyone bought National City in 2007, they would need an approximately 1,000% return to get back to break-even. Using a strategy of buy & hold, which is really a hapless approach that benefits the wallet of generally underperforming money managers, and using the S&P 500 as an investment, it could take fifty years or longer to get their investment back. Taking into account the time value of money, one would likely never get their money back.

Before this most recent correction started I wrote that we could see another mini-crash develop and that is indeed what has happened. Many financials are down 50+% since this correction started. Most banking and finance-related stocks are down 60-95% since last year. The crash in financial stocks has been substantially worse than the 1987 market crash and worse than anything seen since the Great Depression.

posted by TimingLogic at 11:42 AM links to this post

Sunday, July 13, 2008

After Much Rumor The Fed & Treasury Support Fannie & Freddie

Over the last few days there have been misreports and rumors about the government's backing of Fannie Mae and Freddie Mac, the two quasi-government financial institutions more formally referred to as GSEs. There has generally been an implied Federal government support for these corporations and their assets since their inception. In that vein, today the Treasury and Federal Reserve finally stepped in to provide the first level of formal support - something nearly everyone has anticipated.

Many 'free market' advocates, fiscal conservatives, responsible citizens and others outraged by this crisis support a position of letting Freddie and Fannie fail. Of letting anything and everything fail. Those are noble yet naive positions based on a very simplistic view of the world. The last thing anyone should want is the global financial system to shudder with such force that entire economies simply collapse. There is little other than theory as to what would happen including if, how and when economies would recover. This isn't Alice in Wonderland and as such, no one should ever want to find out how deep the rabbit hole is.

Frankly, the government should have done something like this long ago. It's a matter of confidence and we shouldn't be waiting until the wheels are falling off to enforce confidence in our financial system and its institutions. Yet, government and regulators are making mistake after mistake by failing to deal with transparency issues. Of course, lack of transparency is exactly how we got here. So, it seems highly lost upon regulators and financial institutions that this is imperative. The very lack of transparency should have been dealt with much more forcefully across any and all areas of potential concern in the financial system. The fact that it hasn't foolishly reinforces an even further erosion of confidence.

We can all debate the merits of the current system but not in the middle of a crisis. First we must attempt to stabilize the financial system. And, while it sounds rote, the faster we get to transparency in all of these financial crises the better. That includes ones that are festering but haven't yet blown up. It appears we are headed for full-blown disasters before true change is embraced. What's new?
posted by TimingLogic at 9:04 PM links to this post

Saturday, July 12, 2008

Michael Greenberger On the Commodities Mess - Part Deux

As follow up to the Michael Greenberger interview link, here are two of his testimonials before Congress. In a prior post someone had posited my position that market price aberrations caused by financial firms could not be accurate. (my interpretation) A valid remark. In order to understand the question, you have to understand how the futures market works which I'm not going to get into because it's not relevant to this post. But, I responded that financial firms had inserted themselves into the supply chain and were taking delivery. And, that is one reason why stockpiles of many commodities are so low. Low stockpiles are often used by those bamboozled by financial firms telling us that demand from emerging markets is the reason for price spikes not seen at any time in history.

The general media discussion on market price aberrations is currently focused on the index funds buying and rolling contracts. That may be true but that's not express manipulation. It's simply a function of misguided regulation and oversight allowing unrestricted participation in commodity markets by law abiding investors.

Now we have the very qualified Michael Greenberger telling us exactly what I wrote. That is, financial firms are manipulating markets by inserting themselves into the supply chain. Remember, Greenberger used to be head of the government's commodities regulatory division so no one is more qualified to deliver fact-based testimony before Congress. The truth is quite different than what is perpetrated. And, so will be the outcome. I would encourage you to watch both videos as they are somewhat complementary and very educational to even a lay person. But, if you only watch one, I'd recommend the most recent where Greenberger spills the beans about financial firms inserting themselves into the commodity supply chain. I realize it may be a revelation but I sometimes do base my analysis on fact.


June 2008 Testimony



December 2007 Testimony

posted by TimingLogic at 8:49 AM links to this post

Friday, July 11, 2008

First Solar Powered Car

After a post a few weeks ago about the potential for solar energy playing a role in vehicle locomotion, Solar Electrical Vehicles was brought to my attention. They produce a solar-assist with a battery pack that claims to allow the car to run up to 20 miles per day on solar power.

I might be misreading their literature because the calculations don't seem to add up. I suspect this involves very specific circumstances that aren't generally achievable in normal driving patterns but regardless of claims, the reality is advances in solar technology and energy storage will most surely support this type of capability in normal driving patterns at some point in the future.

It's interesting to note Toyota will incorporate solar panels into the next generation Prius to offload some of the power requirements for the electrical system. While that won't directly improve engine efficiency, it does reduce the alternator load and that will improve mileage efficiency by some amount.
posted by TimingLogic at 12:15 PM links to this post

Let's take a break from the monotony of bad news and watch a short video from the BBC's Blue Planet that is completely wonderful, majestic and spiritual.

Is it ironic that man holds dominion over nature yet in this time we often grope to find nobility in our leadership but always find nobility in nature?

David Attenborough reminds us of how much we have yet to learn. I would add to that with a quote from an incredible human being, Albert Schweitzer - "Until he extends the circle of his compassion to all living things, man will not himself find peace."

posted by TimingLogic at 6:42 AM links to this post

Thursday, July 10, 2008

Toyota Cutting Truck Production For Three Months

It was generally assumed by those permanently bearish on U.S. auto manufacturers that Toyota would steamroll the Big Three when they announced their full-size pickup truck. In reality Toyota's full-size pickup has cannibalized much of the prior generation of mid-sized Toyota pickups as opposed to significantly denting American manufacturers. My perspective is that the Ford, GM and Toyota offerings are all very capable and virtually indistinguishable except for perceived manufacturing quality standards and strong brand loyalty in this segment. And, with Chrysler's new and substantially upgraded pickup, we can add them to the same level of capability as well. These are all world-class products.

It's a different day than the 1970s when Toyota pounded the Big Three with fuel efficient autos and the only response was basically the Pinto and Chevette. Toyota is still selling small cars at a good clip but it is now feeling the pain of an expanded product mix. For the first time in the company's history, they are exposed to the economic risks of a full-line product manufacturer. As such, today Toyota announced it is shutting down production of it's full-size pickup truck for three months due to weak demand.

The very week Toyota's stock peaked this cycle, when Toyota was crowned king by most in the investment community, the post on here was amongst other comments, "While many are advocating a buy of Toyota or Honda stock here and now, I couldn't disagree more.". One of the reasons I posted that remark was an overly exuberant analysis of Toyota I had read at that time by a long-time Wall Street professional. The stock is now down nearly 50 points and it is going lower. Very likely much lower.

Toyota is still a mighty and great company but now it's a great company that has to deal with new risks. Those risks are yet to be fully recognized and the consequences to earnings are unknown. That means if there is a long term shift in the market, they will have virtually no advantage over other full-line product manufacturers in adjusting to changing trends except in those allowed for in business process efficiency such as time to market. Those gaps are closing rapidly as well and in many measurable benchmarks have completely vanished.
posted by TimingLogic at 10:55 AM links to this post

Wednesday, July 09, 2008

Retailer Steve & Barry's Joins Other Gaffes At Retailers Boston Market And Krispy Kreme

It seems every so often the world becomes enamored with a new retailing concept. The most recent was Steve & Barry's. Enthusiasm for Steve & Barry's was overly optimistic as much of the profits weren't coming from operations but instead were coming from payments made by real estate owners enthusiastic to lure the discount fashion chain. Do we ever learn? Might a real estate owner actually wish to see an income statement before paying someone to sign a lease? Paying someone to sign a lease in this environment? Steve & Barry's has declared bankruptcy. This reminds me of the same sort of foolishness that duped investors in the retailers Boston Market and Krispy Kreme. Both chains made more money generating fees associated with opening new stores than they did from selling goods.

I really don't think we can classify this as an economic calamity. To the contrary, discount apparel and fashion should be doing well comparatively in this environment. I suspect they have a sustainable business model on some level given the chain has been around for over twenty years. Discount retailing is a business for only the most prudent as margins are incredibly thin. Management likely took their eye off of the ball. It's time to hire someone that actually knows how to manage cash flow.
posted by TimingLogic at 4:32 PM links to this post

Monday, July 07, 2008

Rally Central. Bottom Callers Out Again.

It seems every so often we go through these periods where everyone wants to proudly call a stock market bottom or anticipate one. But, real money is not made by frittering away capital on false signals or by being the first hero to buy into a decline. It shows a lack of risk management and leads to draw downs in capital. What one should really be looking for is a tradable trend. There are many ways to look for such an occurrence if one understands what characteristics an algorithm should capture.

Above is a trend-seeking algorithm that works with futures or cash vehicles that have deep liquidity. The algorithm is overlaid on the S&P but it could just as easily be oil, gold, oil ETFs or even Google or Apple. It works quite accurately in any time frame including on an intraday, daily and weekly basis. It's most effective for longer term trends using a weekly time frame. Might I add its weekly reading isn't pretty. What I look for from a daily perspective with this algorithm is nothing more than a high probability development of a tradable trend off of a correction of 7% or more. The only thing one should focus on in the graphic above are the readings immediately after a correction. Readings other than that are often erratic as buyers become less involved in a rally the further it progresses. That said, it clearly telegraphed the rally into June of 2007 was likely to lead to a failure.

I can adjust the sensitivity to provide faster response but find in this type of market the chop is too severe and one gets more false signals. The goal is to avoid false signals which result in draw downs. There are a handful of rules I use with this widget. These only apply after we have seen a correction and are looking for a new rally.

-When the red line rises above the green line, there are short term buyers in the market.
-When the red line rises above zero there are substantial short term buyers in the market.
-When the green line rises above zero a trend of many months or longer has potential.

Of course, I never use this in a vacuum nor do I use it to initiate any positions. It's just a 'nice to know'. We are looking at it now as being nice to know.

In the last ten years, the lowest reading on the algorithm is -500. This oversold reading does not imply a tradable bottom. It may simply mean the market may rally a few percentage points to work off an oversold condition before declining further. We are currently at -300 and falling. There is nothing to prevent a reading of well below -500. While the current level of oversold has led to the market stabilizing over the past few years as shown on the chart, often throughout history's brutal declines, we may see an oversold readings become more oversold and reprieves followed by even more selling. The only thing one can infer from today's readings are that there is no way one should be buying here. That is, unless you are a hero. Then I applaud your bravery because over time your wallet is going to shrink substantially. Did you see the movie Jaws? How many want to be the first one back in the water?

To say that the risks of this market are the highest of any in my adult life is a fact. We could see a bounce or we could easily drop another ten or twenty percent before a reprieve or we could crash. No one really knows how far a decline will go so it is best not to be a hero. I wrote that 1100-1150 on the S&P was a probable next stop but that's also a guess. Somewhat of an educated one but a guess nonetheless. What isn't a guess is that my widget tells me I should not be in this market.
posted by TimingLogic at 1:15 PM links to this post

Sunday, July 06, 2008

80 MPG Ford Fiesta Set To Go On Sale


I follow the auto industry quite closely as one probably realizes given the number of posts on the topic. I worked at GM early in my life and have a fairly detailed knowledge of the industry. As someone who has run a large business and is maniacal about business best practices, I see the American automakers for what they have been for decades but are becoming less of : insular, arrogant oligopolies resistant to change.

Recently it seems a chorus of auto makers have started whining about the new mileage standards in the U.S. Even Toyota has joined the fray. That's not really a surprise given Toyota's risks with a product line full of gas guzzling vehicles. BMW is the latest to join the chorus of whining. The general argument is that the standards are too aggressive and some even say they aren't achievable. That seems quite ironic given Japan and Europe already have stringent mileage standards similar to what the U.S. will adopt over the coming decade. We won't see any more Crown Victorias or other monstrosities but automakers will find a way to produce vehicles larger than tin cans.

There are two points of view in this debate. One is that the market should determine what automakers produce. A more valid perspective today but one that was completely invalid decades ago when American oligopolies 'fed' Americans whatever they wanted. That included some of the worst garbage passed off as vehicles one could imagine. The other is that efficiency is a national security issue and if the government had adopted such aggressive standards some time ago, Americans would not be suffering with $4 gasoline. And, automakers wouldn't be looking at possible bankruptcy or bailouts because they would be producing vehicles consumers now want. We might not also be losing trillions of dollars to a war in the Middle East as well. In fact, we might not even have $4 gasoline. So which is it?

The government already sets minimum efficiency ratings in many markets other than vehicles yet no one is complaining. But then those markets don't have enormous and vocal lobbying efforts either. Do you want a mandated government policy or do you want automakers to decide? I don't care because we'll probably get to the same end state regardless. That said, we've let "the markets" attempt to deal with vehicle efficiency for the last thirty plus years and it has generally been a complete failure. I wrote some time ago the Chevette in 1975 and 1985 got better EPA validated mileage than most any car sold in the U.S. today. Most of the efficient vehicles sold in North America today originate from markets where government has forced higher efficiency standards. Forcing efficiency without involvement in the production of these markets is an acceptable government policy from my perspective.

The reality is the new mileage standards are easily achievable. Courtesy of Auto Express, Ford is now releasing a Fiesta in Europe that will get nearly 80 miles per gallon on the highway and 62 miles per gallon combined. The noxious emissions footprint is also extremely low. Nothing sold in the U.S. comes close. It's not a hybrid either. Ford would be selling these like hotcakes were they available in the U.S. Well, get ready because some version of this car is coming here. Maybe not the diesel version in the first iteration but automaker business plans are changing rapidly so one can never say never.

Some Americans might need to cut back on their caloric intake to get into smaller cars but, hey, how is that bad? An unintended consequence might be smaller derrieres.
posted by TimingLogic at 9:46 AM links to this post

Friday, July 04, 2008

Pro Publica Restores Nobility To Journalism

On the 4th of July, a day set aside in the United States to celebrate our freedom, I find this a noteworthy post. It's no secret I have been very critical of the state of most American journalism. There are a multitude of reasons for the demise of long held journalistic ideals but I believe the fundamental driver is profits. There was once a time in this country when news was considered a civic duty. And, that making money from the news was not a primary driver. Often times not a driver at all. Indeed idealistic. Idealism is something we could use a lot more of. From my perspective independence in news outlets should somehow be written into law. In other words, major defense contractors and lobbyists in Washington should not be allowed to own one of the largest media outlets in the U.S. as is the case today. Today much of what we witness is Orwellian Newspeak. The potential for conflicts of interest and journalistic integrity are beyond words.

I am constantly searching for what I believe are viable news sources. And, those willing to report the news as the American people deserve it. News with substance on issues that matter. I have added many news links to this blog. One I find very compelling is Pro Publica - a nonprofit news organization. Pro Publica is headed by some very accomplished individuals with tremendous credentials of journalistic integrity. That includes a long time managing editor of the Wall Street Journal.

I have taken the liberty of including some of the text from their 'About Us' page which reinforces the crisis in journalism we now face. I would encourage you to bookmark their site or use the link on my link list to their site.

Pro Publica was made possible by Herbert Sandler and other philanthropists. This is a great act of nobility by those who realize the importance of independent journalism to the future of a free society.

ProPublica is an independent, non-profit newsroom that will produce investigative journalism in the public interest. Our work will focus exclusively on truly important stories, stories with “moral force.” We will do this by producing journalism that shines a light on exploitation of the weak by the strong and on the failures of those with power to vindicate the trust placed in them.

Investigative journalism is at risk. Many news organizations have increasingly come to
see it as a luxury. Today’s investigative reporters lack resources: Time and budget constraints are curbing the ability of journalists not specifically designated “investigative” to do this kind of reporting in addition to their regular beats. This is therefore a moment when new models are necessary to carry forward some of the great work of journalism in the public interest that is such an integral part of self-government, and thus an important bulwark of our democracy.

It is true that the number and variety of publishing platforms is exploding in the Internet age. But very few of these entities are engaged in original reporting. In short, we face a situation in which sources of opinion are proliferating, but sources of facts on which those opinions are based are shrinking. The former phenomenon is almost certainly, on balance, a societal good; the latter is surely a problem. (In other words, a perpetuation of erroneous information is often being reported as fact and many stories aren't even being reported at all. - my words not theirs.)

Investigative journalism, in particular, is at risk. That is because, more than any other journalistic form, investigative journalism can require a great deal of time and labor to do well—and because the “prospecting” necessary for such stories inevitably yields a substantial number of “dry holes,” i.e. stories that seem promising at first, but ultimately prove either less interesting or important than first thought, or even simply untrue and thus unpublishable.

Given these realities, many news organizations have increasingly come to see investigative journalism as a luxury that can be put aside in tough economic times. Thus, a 2005 survey by Arizona State University of the 100 largest U.S. daily newspapers showed that 37% had no full-time investigative reporters, a majority had two or fewer such reporters, and only 10% had four or more. Television networks and national magazines have similarly been shedding or shrinking investigative units. Moreover, at many media institutions, time and budget constraints are curbing the once significant ability of journalists not specifically designated “investigative” to do this kind of reporting in addition to handling their regular beats.

posted by TimingLogic at 5:51 AM links to this post

Thursday, July 03, 2008

Merrill Lynch Downgrades GM from Outperform To Sell. More Importantly, Merrill Cut By Oppenheimer


The chart says it all. Need I say more? Can Merrill get out of its own way these days? GM has dropped 75% since 2007 and now we get a sell rating? If I were a speculator, I would be looking to start accumulating GM between $8-10. GM was around $11 at the time of the downgrade. What was Merrill thinking when pickup truck sales were tanking and we were writing about it back in the fall of 2006? Isn't the idea to buy low and sell high? To not see this coming is to not understand the basic fact that GM gets disproportionate profits from home financing and pickup truck sales. It is utterly ridiculous to be downgrading GM now. A monkey throwing darts at a board could have more effectively managed recommendations on GM's shares and outlook.

For a speculator, there is some measurable reason to believe GM will not go bankrupt. Merrill states GM may need another $15 billion. Given their call on the stock, I have no confidence anyone at Merrill understands anything about what is going on at GM. More appropriately, I have no confidence anyone at Merrill knows what's going on inside of Merrill.

The financial system is so weak right now that GM creditors may not be able to absorb a GM bankruptcy let alone the impact to the economy. I am confident GM would clearly articulate their intent to file well in advance, giving Washington, private investors or creditors a chance to respond. I am even more confident many eyes of government oversight are focused on GM. A GM bankruptcy could very well have as significant of an impact on the financial system as a major bank failure. Especially given Ford and GM are two of the largest names in the wild and woolly CDO markets. For these reasons speculators have some reasonable rationale to soon start accumulating shares while Merrill is now issuing a sell signal.

While today's management at GM cannot be blamed for mistakes made fifteen or thirty years ago, there is no doubt that GM is still an insular culture that is just now awakening to the reality that it must finally change. This cycle will likely cement that change and cultural shift as crisis dramatically assists in change. GM management has focused on the rank and file as the problem when the reality is it has been exclusively a GM management issue. In a great act of the student teaching the master, Toyota's management and methods have been used at GM's Fremont plant for decades to produce world class products using GM employees. Work rules and unions are simply market-based responses to situations where employees have no voice and corporate management abuses its authority. After decades of blaming everyone but themselves, GM management finally seems to generally get it. As I wrote in one of my early GM posts, they just weren't getting it fast enough but I am confident they now get it 'fast enough'.

Many signs out of GM are very positive yet some remain negative. A few negatives were its foray into financial services beyond vehicle financing and management's current perspective that emerging markets will help offset underperformance in North America. The first one has been addressed. GM jettisoned half of that business to Chrysler's owner Cerberus, although there remains substantial liability. I have little doubt GM will ultimately jettison all of that business sans auto financing. On the topic of emerging markets, they will most assuredly be wrong. Growth in emerging markets has allowed them to be far too lazy in responding to market demands in North America. For that they have been paying a serious price. Ultimately, the burden of past mistakes is now what most immediately threatens GM.

Isn't it ironic that many American prognosticators like to consider our markets more responsive yet GM and Ford's global operations are substantially more customer focused and innovative? Most likely because they are far removed from the gargantuan beast of bureaucracy residing in Detroit. The same reason NUMMI is more responsive. Both cultures are finally moving rapidly to take advantage of their international operations by adopting some of the world's finest automotive designs into the North American market. Ford has announced they are accelerating that program with at least four high volume, fuel efficient products slated for introduction here. Doing so will very likely offset SUV and pickup truck sales losses by a wide margin. Although, profits per vehicle will also be less.

My point is that GM and Ford have been transforming their businesses over the past handful of years and those predicting their death are missing that very fact. Those people are still living through the past mistakes so chronically prevalent at these companies. I am not making light of the current situation but we are seeing a resurgence in competitiveness and focus at these companies regardless of their stock prices or weak fundamentals.
posted by TimingLogic at 11:17 AM links to this post

Wednesday, July 02, 2008

Manhattan Real State Continues Its March Toward Implosion

I fully expect before this cycle completes, we shall see Manhattan real estate suffer some of the greatest and most sustained losses in the U.S. I wrote anecdotally a few months ago of the mad rush to the Hamptons and how talk of a new highway feeding the weekend party spot for Wall Street elites was ominously similar to 1929. A time when traffic jams also lined the roads to the Hamptons.

Today Bloomberg announces more cracks forming in the Manhattan real estate market. I believe these cracks will turn out to be permanent. In other words, as I wrote about some time ago, Wall Street is headed for a major and sustained downsizing. But, I have said those people leaving Wall Street - including the bubble within a bubble of MBAs and CFAs who entered the financial bubble over the last decade - will become fuel for sustainable development by becoming productive assets in the real economy. Not because they want to but because the market will force them to. (I would not be surprised to see the number of CFAs drop by at least 50% across the country just as will happen with another career favorite of the financial bubble - real estate agents.) Because necessity is the mother of invention, I consider this a long-term bullish development for the economy. Very bullish. Again the operative words are 'long-term'.

An interesting aside to this is that MBA candidates could very well drop substantially and MBA programs will have to re-jigger their curriculums from pushing around money to something else. Might you imagine what that new focus will be? I'll give you a hint. It won't be finance.
posted by TimingLogic at 1:09 PM links to this post

Tuesday, July 01, 2008

Car Sales Down. Scooter Interest Up.

Just released Consumer Reports research shows consumers are interested in purchasing scooters and motorcycles, often at the expense of a car. A local motorcycle shop told me business has never been better when I went in to choke down $11 for a quart of transmission fluid. A rate of nearly $2,000 a barrel. (I bought the cheap stuff.)

I get 55 miles per gallon on a 1000cc motorcycle. I believe many smaller scooters get well over 100 mpg. Additionally, Piaggio, better known as the maker of Vespa to many of us, has developed a 170 mpg hybrid scooter. For the average daily work commute in America, that equates to about a gallon of gas a week.

Live in a climate where the cost-benefit analysis pays off? Liberate yourself and get a scooter.
posted by TimingLogic at 6:50 PM links to this post

Chrysler On Death Watch - Update

GM & Ford are not going out of business. They are two of the three largest auto makers on earth, they have sustainable business models, they are two of the greatest sources of private intellectual capital on earth, they are design leaders outside of the U.S., they are technology powerhouses, they are leaders in manufacturing best practices and they have strong global brands. The only thing they have suffered from is poor management. Both are rectifying that problem as the market demands change.

One or the other may suffer bankruptcy at some point but we first wrote of that possibility three years ago. The auto industry problems didn't start a month ago and they won't be fixed a month from now. I'm not even sure bankruptcy has any substantial bearing on their long term viability. It would be short-term devastating economically but they've been ravaged economically for decades. Chrysler could not only go bankrupt but may fail to survive for reasons we've highlighted in a handful of posts. Possible white knights could be an Asian or European automaker looking for greater market penetration or brand recognition in North America. Hyundai, Fiat, Renault or Peugeot come to mind but surely those are all guesses. Some or all may have no interest at all. Chinese automakers would have a significant interest but the politics involved are very serious and I don't believe any such action would be allowed given China's restrictive policy toward investment in its auto industry.

Today, Chrysler reports nearly unbelievable sales figures - car sales down 49%. In an industry where fixed costs are incredibly high Chrysler must continue hacking away at its cost structure while spending freely on new product development. The problem? There is likely little fat to hack before they start hacking away at muscle. In other words, cuts become a self-fulfilling spiral toward death. Chrysler is in serious crisis and relevant new product is years away courtesy of the terrible management at Daimler.

Just released sales numbers:
-36% decline in June U.S. sales to 117,457 vehicles from 183,347 in June 2007
-Car sales fell 49% to 29,858 vehicles
-Truck sales fell 30% to 87,599
posted by TimingLogic at 3:55 PM links to this post