Wednesday, November 26, 2008

The Coming Volatility In China

Quick remark before the post. This is the last post for a week give or take. Between work and the holiday, I prolly won't be able to spend any time on da blog.

"China must maintain stable and relatively fast growth to create jobs and safeguard social stability." - Chinese communist party premiere Wen Jiabao, November 1, 2008

Two of the major themes we embraced since the inception of this blog has been the anticipation of expanding global volatility and a coming crisis in China. Neither have disappointed. To date China has delivered with a total collapse of its equity markets and we are witnessing the greatest global volatility since World War II. But, I'm going to continue to beat the drum because we are going to see an every expanding environment of volatility for quite some time. In other words, we are not just witnessing an unwinding of financial assets. Something we said would happen before it actually happened. Now that the Wall Street crowd has finally mastered the obvious in hindsight and at the expense of their clients, many of these rear-view seers are now telling us there will be an end to the unwinding. How clairvoyant. But, what many fail to realize is this is much more than an unwinding by financial firms. It is an unwinding by individuals, nonfinancial firms and countries. The financial markets are simply a microcosm of the world around us. Financial markets are giving us a glimpse at future global instability. At social and economic volatility.

Now that we have seen the implosion of Chinese equities, the headlines out of China over the past few months are of reassurance. From news that the Chinese banking system is safe (As we highlighted when the world was infatuated with China, China possibly has the most unsafe banking system on earth.) to policy decisions meant to stimulate the economy, the communist leadership's message remains upbeat. Or, that is what they want outsiders to believe. We have a hard time getting political honesty out of a democracy so what else would one expect from a communist propaganda machine? When did anyone ever hear of trouble inside of the Soviet Union or other police states? That is, until they collapsed and the lies and deceit of the state were exposed for all to see. China has missed its opportunity due to the complete incompetence of the communist party. It will suffer the greatest of economic crises because of it. If there is anything to learn from this cycle, it is that government can offer limited assurances to anyone. Especially when their policies are not directed at benefiting the sovereign. A communist or police state therefore has absolutely no ability to oblige.

Even though we have highlighted this paradox before, I find it interesting that no one is talking about the poster child for central planning, China, attempting to stimulate its economy when we are told by official ministry of propaganda statistics that its GDP is still growing at nine percent. Isn't that a little nonsensical? Chinese officials have been cutting interest rates as aggressively as anyone recently and just passed a $586 billion stimulus package. I do believe this is the largest stimulus package of any major nation since World War II. It is somewhere around 15-20% of GDP. Comparatively, the U.S. would have to pass a $3 trillion package. If one really compares the underlying trade in the U.S. economy, a U.S. stimulus plan would comparatively be near $7 trillion. Reality is more likely that China's real GDP has been contracting significantly for some time. First as inflation ravaged growth at a frenetic pace. Then as the economy started to collapse. Wealth in China will continue to be destroyed at a rapid clip. Regardless of state statistics, China has already lost substantially more wealth than the $586 billion it plans to spend in stimulus. This massive attempt at saving their own economy is exactly what we wrote would happen as they draw down their accumulated reserves. And, it helps cement the process whereby we have said China will eventually be in no position to keep buying U.S. Treasuries. Globalization is finished. And, for practical purposes we can say forever. That may be thirty years or one hundred years. But, re-ignition of any globalization is so far off that it's completely irrelevant and so are any attempts to save it.

How many steel mills or countless other pet projects were built in China because the local communist party official's brother wanted one for his community? Why did he want one? Because he could. And, unlike a market economy where a business decision is generally made via reasonably rigorous market-based metrics, and capital is typically raised in a transparent bond market demanding a profitable business plan, in China financing was undertaken with loans from the increasingly insolvent banks with nary a thought as to business viability. Or whether the loans could ever be paid back. Not that the brilliance of U.S. mega banks has been anything different in the last twenty years. But, then free markets have never described Wall Street and, therefore, the financialization of the U.S. economy has put the market-based economy under siege here as well. With undue influence by lobbyists it's not surprising the trade agreement between the U.S. and China was heavily influenced by financial interests in the U.S. In other words, many of the same dynamics in China are shared around the world. What would one expect with a globally woven economy equally benefiting the Wall Street elite and China's communist party?

China's often ridiculing tone towards the U.S. has clearly changed for now. It's new position now appears based in fear. In fact, the tone has now been replaced with a call for peace and harmony to solve the international crisis. One should not underestimate the reasons for this change in tone. There is absolutely no altruism in their position. It is based purely on attempts at self-preservation.

It seems many prognosticators are starting to foretell of an end to this environment and a return to economic normalcy in the second half of 2009. Couple this with the announcement of China's massive stimulus package and now is as good a time as any to crank up our rhetoric. In other words, to again take a counter view. With that said, let's put some scope to our voluminous discussions on China and its potential for collapse. This paragraph is going to appear insane before you are finished reading it. But then so have some of the other outcomes we anticipated. Who else in the world was discussing a credit crunch and an environment when banks weren't going to lend as the stock market was making new highs? The modern world hadn't even heard of a credit crunch or thought an environment could exist where banks would not lend. That is, until it happened. Now even the local talk at the barbershop revolves around these topics. Who else was talking about impending doom in China as its economy roared forward with great growth? So........ It is not inconceivable that China's industrial output could drop by 50-70% as we hit the economic impacts of this cycle. Don't blink. You read that right. And, no I didn't make that number up. What did we write on here long ago? Well, it's funny you ask. We wrote that the U.S. outsourced much of the supply chain shocks associated with severe economic calamities. Guess where they were outsourced? Uh, China? The potential impact of China's industrial contraction could lead to a 30-50% drop in its GDP. And, how will you decipher reality if the communists are really manipulating data? Because you will see other outcomes we talked about when world leaders were dancing with glee - nationalism, extreme social unrest or the potential for revolution in China. The two most obvious outcomes to economic calamity are successful revolution with some unknown future state or failed revolution with a return to a hard line communist government in China and a repudiation of their experiment with capitalism.

Now we come to a more interesting topic, as if a potential collapse in China isn't interesting enough. How will the communists attempt to channel any social unrest for fear of losing power? Or even losing their heads? (Literally) Funny you would ask another interesting question. Of course, it is very conceivable they will stoke nationalism while blaming their economic ills on fabricated enemies outside of their borders. Rising nationalism across the globe is also a topic we have discussed in anticipation of this cycle's outcomes. Who might be a prime candidate for blame? Why, of course, that would be the good ole U.S. of A.

Should we see an economic environment anything remotely comparable to what we have been anticipating, it would be plausible that the Yuan would become a worthless currency much to the chagrin of every prognosticator who could grab a microphone to tell us it was or is undervalued. These voices have been everywhere. Not a single voice anywhere has said the Yuan is overvalued. And, what does that do for the global economy? Well, if social stability holds in China and trade continues relatively uninterrupted, a massive bout of deflation coming out of China. It matters not whether China sees inflation or deflation in its own economy. The global impact will be the same. A flood of worthless products on the international markets. Worthless, that is, if the Yuan breaks its dollar peg. And, it likely will because Chinese authorities will very likely devalue their currency be it consciously or through self-fulfilling policy. More of that race to the bottom of the barrel we wrote about. Don't you just love a good race?

Guess what will likely become the hottest commodity in the active Chinese black market in coming years? Counterfeit Nike shoes? Counterfeit Sony Playstations? Counterfeit Viagra pills? How about genuine American dollars as restive Chinese spurn the currency of the communists?

And, what political, economic and social ramifications arise where devalued goods flood out of China? The effects on global volatility of this environment are potentially recursive and its end state is completely unpredictable. If social and even political instability develops around the globe, what happens to the massive investments in emerging markets and China made by international firms and global financial concerns? Well, we've talked about this one as well. No one loved the Nazis more than good European and American capitalists. That is, until global volatility developed. So, might I ask a simple question? How does one quantify intrinsic value and risk of investments with so much global volatility? How does one quantify the risk associated with international firms that may not only lose sales in emerging markets but may lose their entire investments in a worst case outcome? As an example, were China to take a hard line approach and close off foreign investment? Or even nationalize existing foreign investment? No one can accurately quantify risk in this environment.

You might consider the historical context for this type of volatility. That would be an environment where seeds of conflict are planted. I am not stating there will be global conflict. We could see nothing or we could see regional conflicts around the globe as corrupt states attempt to maintain their powers over the sovereign or we could see something much worse. The seeds of volatility have been sewn and now we have no other choice than to reap the harvest.

While every bull and bear was telling us to invest in China, we were warning of the tremendous risks again and again. Bulls loved China for the never ending growth associated with the world's largest population. Pax Globalia. The Asian Century. Bears loved China because they viewed it as a safe haven from the U.S. dollar and from the inevitable collapse of the U.S. Perfect examples are Rogers and Schiff, two well known bears that love the China story. They have been wrong on every investment call since this bear market started. Well, except for gold. So far.

Eerily, everything we have talked about is still coming together quite nicely. The greatest risks in the world have yet to reveal themselves. Grab something to hold on to. The world is very likely to hit a serious bout of turbulence for some time to come.

Now is a good time to end with a remark we made on here as the global stock markets were making their all-time highs. A time when the intelligentsia was telling us how bright the future was. In fact, never brighter according to Treasury Secretary Paulson as an example. "As I have said time and again this is the biggest bubble the world has ever seen. What truly worries me is that the size of the bubble has grown so much incrementally larger over the last seventeen months alone that it now threatens a chance of intermediate term recovery. What might have been a manageable outcome seventeen months ago has now become a global nuclear bomb. The world will literally shudder and shake when this cycle ends." Even the handful of prescient U.S. economists who anticipated a slow down were focused on the housing problem. We accurately wrote and still hold the truth-based perspective that neither housing nor the consumer can cause a recession let alone what we are witnessing today. I guess the economics community didn't attend class the day this fact was discussed. And, for that, this crisis has been and will continue to be underestimated.
posted by TimingLogic at 6:26 AM links to this post

Tuesday, November 25, 2008

Wachovia Executives To Get $98 Million For Trashing The Company?

posted by TimingLogic at 2:22 PM links to this post

Bounce The Bozo Bankers At Citi. After That Bounce The Government Bozos Bailing Out The Citi Bozos.

I used to live in New York. Each morning I would arrive at work. 7:00am sharp. I still have fond memories of seeing Dennis Shea there with his cup of coffee reading the New York Post - the timeless rag of New York City. Dennis was an early riser. Then by 2:00 Dennis would be at his desk sleeping. His head bobbing fore and aft. Usually aft. You could put a piece of paper on his forehead and it would stay there because of the perfect parallel nature of his head to the earth. Sometimes he would even snore. What a riot. Dennis was one of the greatest people I have ever had the good fortune of meeting. Leave it to his Post to put out the story of Bozos.

Off with their heads? I couldn't agree more. Mind you there are many more bozos at Citi than the crew listed here. Do we get their salary over the last ten years because we now have to bail them out for decisions made over that time? Click on the graphic for a bigger view of the bozos.

posted by TimingLogic at 9:42 AM links to this post

Monday, November 24, 2008

Goldman Sachs Again Makes Millions By Marketing New Jersey Bonds Then Tells Other Clients To Bet Against Them

The consistent stream of stories about disturbing behavior at Goldman Sachs is unbelievable to say the least. Is this the type of society we wish to embrace? One where financial elites can do whatever they want regardless of the impact to society? And, in a great bout of irony, use our money to create bets that cost us more money? Where is our government? Oh, I forgot. They created the legislative environment that allowed this mess to develop into disaster.

After making millions selling New Jersey bonds to investors, Wall Street giant Goldman Sachs told other wealthy clients they could profit by betting the Garden State may not be able to pay off its bonds as scheduled, according to a confidential presentation made two months ago.

The advice would cost state taxpayers if investors believe New Jersey bonds appear riskier than they actually are -- and force the state to pay higher interest rates on future bonds.

While not illegal, it is troubling Goldman Sachs almost simultaneously marketed New Jersey bonds to one set of investors, while suggesting to others they would be smart to buy insurance from the investment bank because those bonds may not be repaid, according to Geoffrey M. Heal, professor of public policy and business responsibility at Columbia University.

"That's not a good way to do business," he said. "They've got a conflict of interest and they're acting against the interest of their customers.

posted by TimingLogic at 6:50 PM links to this post

German Business Confidence Implodes

posted by TimingLogic at 5:26 PM links to this post

Geithner - The Consumate Crony?

In this environment I completely reject the status quo. I am looking for some semblance of leadership to emerge in the United States. We can each do our part but I would like to see transformative change embraced in our elected leadership. But, rather than stratagem I want to see quantifiable actions.

I'm sure Tim Geithner is a fine person. But, he is an immersed bureaucrat. His achievements appear to be solely based on relationships with the power elite rather than through intelligent judgement. Were there even some middle ground, I could be more optimistic. Geithner is part of the problem. His resume is littered with the who's who of cronyism rather than any meritorious accomplishment. You remember merit? It's how a free market is supposed to work.

The President of the New York Federal Reserve is charged with regulatory oversight of Wall Street. Geithner presided over the biggest regulatory failure in history. In any industry. And, he did not say or do a thing until the seeds were already sewn and the disaster was upon us. Then in fine bureaucratic form he delivered speech after speech on the need for regulatory reform. Is this the sign of intelligent judgement? Of a person who should lead the U.S. Treasury for the next four years?

Why did the market rally with Geithner's appointment? Well, it may have more to do with witching week than Geithner but another reality is that Geithner has been Wall Street's lackey. Someone they can manipulate and control. Don't take it from me. Read the very forthright article on Geithner over at Portfolio. In the article Geithner is labeled as "perma-establishment". As having his path always created by a well-connected mentor. I couldn't agree more. Is this the type of critical thinker the U.S. needs in the role of Treasury in a crisis of confidence and the largest financial crisis in this country's history? Do we need a Treasury secretary who himself embodies the crisis we now see?
posted by TimingLogic at 11:10 AM links to this post

posted by TimingLogic at 5:47 AM links to this post

Sunday, November 23, 2008

Ford Thumps Competition With Most Efficient Hybrid

Ford has announced a newly designed hybrid system with the newly announced Ford Fusion. It offers the highest mileage of any midsized car sold in the U.S. by a substantial margin. And, the Fusion has one of the highest product quality ratings of any car sold in the U.S.. There is substantial trouble in Detroit, most of their own making, but it seems that someone forgot to tell Ford they couldn't build cars.

posted by TimingLogic at 7:47 AM links to this post

Saturday, November 22, 2008

Louise Yamada Speaks And We Should Listen.

There are different competencies of quantitative analysis. It is my personal opinion that Louise Yamada is probably the most brilliant mind on Wall Street for her area of competency. I tend to focus less on charts and more on data than Yamada. And, I tend to view quantitative analysis as a window into fundamental analysis. That is why I am able to share much of the output to my work using fundamentals or practical commentary. ie, Anticipating the credit crunch, the banking mess, the China implosion, emerging markets crises, etc. That Yamada draws similar conclusions to mine with complementary analysis is an anecdotal data point I value substantially. There may be five people in the entire quantitative analysis community I would make such a statement about. Globally. In other words, I can't overstate my respect for her abilities.

On a shorter term basis Yamada notes 600 as a potential next stop for the S&P. In some of the comments on here three or four weeks ago I highlighted that the supposed early October lows showed no signs of a sustainable bottom and that 600-724 on the S&P would represent a potential interim low. Anticipating shorter term moves is so esoteric that it's more of an art than a science. In other words, anticipating short term moves can often be akin to gambling - not at the top of my hobby list. From a risk management standpoint, a decline to 600 on the S&P is 40% lower than the upper end of the October 2008 trading range. So those buying in October will be decimated even more than those holding through the October 2007 to October 2008 decline should we drop to 600.

Here is Yamada's interview on Bloomberg video.
posted by TimingLogic at 6:31 AM links to this post

Friday, November 21, 2008

President-Elect Picks New York Federal Reserve President Geithner, A Primary Wall Street Regulator Asleep At The Switch, As Treasury Secretary

I can't wait. Will we give the already opaque Federal Reserve even more regulatory powers to hose up the economy as one of its alumni is now heading the chief financial job in the White House? There were so many very qualified names out there with substantially more credibility. This seems like a terrible gaffe during a crisis of confidence. We don't really know a lot about Geithner's views on economics so maybe he'll redeem himself. I guess we're going to find out regardless.
posted by TimingLogic at 6:06 PM links to this post

Update On China's Melamine Spiking

If there is one thing that is clear, it is that massive corruption exists in China. We have posted numerous data points of this corruption over the years including many schemes that have killed untold thousands of people around the globe. The devastating and lasting impact within China is simply not quantifiable on every level.

A few months ago we highlighted a story that has received little press in the U.S., the practice in China of consciously spiking food with the poison melamine. Now Asia Times is reporting many of the shocking realities behind the melamine spiking. Basically, that human life has no value.

I've got a unique post on the unsustainable economics of these corruptions that I wrote some time ago. One thing led to another and I never got it posted. I'll refresh it and post it before the end of the year.
posted by TimingLogic at 7:26 AM links to this post

Thursday, November 20, 2008

The Street Runs Red With The Blood Of Banks Again. Citigroup Continues Its Assault On Zero

Not long after Eddie Lampert, the massive hedge fund operator, was loading up on Citigroup near its peak price, a few of my friends and I were talking amongst ourselves that Citi could reach $5 a share. (Eddie, I'm available for consultation.) Today the stock plunged right past $5 to close at $4 and change.

Last month Citi received $25 billion from the Treasury. Today, Citi's market capitalization reached that of the government bailout - $25 billion. Do we conclude without the Treasury injection that Citi's market capitalization would be zero? Not directly. But maybe. Citi's market capitalization equaling the dollar amount of the Treasury bailout has a fair amount of irony to it.

We have watched professional prognosticators line up one right after another time and again to take a bullet in the head by recommending or investing in banks. As I've said before, I model bank liquidity and there is nothing I see that points to anything other than more trouble. And, since the last time wrote that last sentence, Citi has dropped another 75%. It appears some learn lessons the hard way. Mostly by losing other people's money.

We have highlighted the 1995 pivot as a *potential bottom* for the S&P and as of today Citi itself has officially reached its 1995 price point. At this point do we have any reason to believe the S&P will not eventually follow?
posted by TimingLogic at 6:04 PM links to this post

Goldman Sachs' Stock Continues Its Implosion

We have highlighted Goldman Sachs on here quite a few times. Amongst other posts, at its equity price peak we wrote that Goldman's perceived brilliance has been a perfect harbinger of doom from a historical perspective. And, when everyone was telling us Goldman had missed the crisis because they had bet against subprime, we said not so fast. That their time of trouble would come. We also said Goldman Sachs stock was the perfect diversified investment for this cycle because they were a leader in every booming business - mergers, hedge funds, hedge fund services, proprietary trading, commodities, investments in emerging markets, private equity, investment banking and whatnot. Come to find out Goldman Sachs appears to have been a leader in every single unsustainable strategy imaginable. How brilliant is that? I think it's becoming quite obvious Goldman would not be in business were it not for the Federal Reserve and Warren Buffett. That said, I do hope the institution survives. I would just like Goldman executives including Hank Paulson to give back all of their bonuses over the last ten years in exchange for their bailout.

On a go forward basis, society might want to remember one particular point. When the most hyped segment of the economy is banking, when banking is drawing in all of the MBAs and talent from the economy, when bankers are highlighted for their brilliance on the cover of business magazines, when bankers are at the top of the wealthiest persons lists, when the Treasury Secretary speaks publicly about the crown jewels of our economy being Wall Street, and when Wall Street pinheads publicly proclaim we should outsource all of our industry to China and we will be the world's banksters, it's time to run for the hills.

When the dull, rote business of banking and finance is transformed into the most exciting profession in the economy, the banksters are doing very, very, very bad things with our money. And, they have only done so with the complicity of the state.
posted by TimingLogic at 8:53 AM links to this post

Don't Look Now But The Great Satan Of Economics Is Rearing His Ugly Head

We've had one position on this blog as it pertains to inflation. While everyone else was squawking about the Federal Reserve printing money over this cycle (they weren't), we were writing that everyone should wish for inflation. A rather bizarre but very rational perspective for the Fed has been trying to re-ignite inflation. Mind you, we should all want them to be successful. To answer your next thought, food and energy price increases this cycle were signaling deflation not inflation, something else we talked about.

We even ventured into the greatest of blasphemes - the Federal Reserve could print a reasonable amount of money to deal with this crisis.

Our position is and always has been that we are in a deflationary world. Many point to the Federal Reserve's recent actions as inflationary. Or that we are in an asset liquidation and the disinflation associated with such an action should not be confused with deflation. I couldn't disagree more on both counts. Time will tell but the data was and continues to be deflationary. There is no data substantiating an inflationary future.

On that note, yesterday it was reported that consumer prices dropped the most on record. I believe we are witnessing the early stages of a confirmation on our position that high food and energy prices were indeed signaling deflation.
posted by TimingLogic at 6:38 AM links to this post

Wednesday, November 19, 2008

Idiots Dole Out Free Advice To Auto Executives

It's almost hilarious if it weren't so sad. We have some of the worst CEOs in modern times telling the American auto industry how to fix their business after they managed to muck up their own companies.

Can someone make Carly Fiorina disappear? I thought she would wonder off to spend her bailout lifted from HP after she shoved her foot down her throat by proclaiming in a nationally televised interview that Obama and McCain didn't have the skills to run a company.
posted by TimingLogic at 5:38 PM links to this post

The Crisis Of Confidence Is No More. It Has Metastasized Into A Crisis Of Conscience Caused By A Crisis Of Leadership.

As I briefly tuned into Treasury Secretary Paulson's testimony before Congress yesterday, I was reminded how much trouble we are in. And, how Paulson is deeply complicit. Yet Paulson doesn't seem to understand his complicity. And, indeed that is the fundamental paradox.

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

We wrote this as the global equity markets were making new highs. When there was still time left to restore some modicum of confidence. Since then what exactly has any leadership anywhere done to instill confidence of any kind? In fact, the issue of confidence has eroded even further. We have taxpayer funded bailouts for the people that created this environment. These same crooks are paying themselves handsome bonuses while receiving government handouts. All asset markets are collapsing. Government is seemingly unable to develop any type of workable plan for anything. We still have no idea what is going on in our financial system because government refuses to enforce transparency and we have people being booted into the street around the globe. The world is literally coming undone.

It is hard to grasp in the blink of an eye that the entire world has changed so rapidly. I can assure you that no one reading this sentence will ever see a return to the environment that existed just a year or so ago. I mean that literally. Ever. In many respects this environment is worse than the onset of the Great Depression. Firms that have weathered the most diverse of economic environments are failing or are teetering on the precipice.

Leadership is such an uncommon commodity that there is seemingly none available as the global financial system and global economy careens off the road. Where are our leaders of government? Of business? Of society? Where is the leadership publicly explaining this crisis, its potential impact, what is being done to address it and what is being done to restore trust? Not the abbreviated fear-based public pronouncements or the yammering of misinformation or the Neville Chamberlain proclamations. But, the considerate and compassionate explanation and exhortation of a nation. Any nation.

I had a post back in June that said we are experiencing a systemic crisis in leadership. Even then many likely didn't understand the full impact of that statement. But, now more and more in society are starting to appreciate the depths of a world void of leadership. This systemic crisis in leadership didn't start with the current political leaders. Nor is it a political party issue. Frankly, neither is it an American issue. It is a global one.

If anyone believes this crisis of confidence is confined to the banking system or financial system, you might want to reconsider the gravity of this situation. This crisis of confidence is because of a generational crisis in leadership.

The majority of today's leaders don't even understand the traits of great leadership. How can one therefore become what one doesn't understand? How can Secretary Paulson provide leadership when he apparently doesn't recognize its qualities? When it comes right down to it, this is not a crisis of confidence in capital or liquidity or Wall Street or banks or markets or any of the other causes being bandied about. In an odd bout of irony, the systemic crisis in leadership is exactly the reason why we have this environment in the first place. In other words, in many regards it could not have been any other way. And, it has now metastasized into something very dark. A systemic crisis of conscience. Not of society's conscience but of society's recognition of the lack of conscience of those in which we have placed our trust. In those we have elevated to a protectorate position. Those we have entrusted to protect our society, our wealth and our ideals.

Given this development, an expectation that we would see leadership arise from the status quo during this environment would be completely illogical and unexpected. The generational ability is apparently lacking. It's officially time to pass the torch. Leadership will come from the next generation as it always does in times such as this. Leadership will come from the next generation because the market is going to demand it of them not because they are ready to take the mantle. They will be America's next Greatest Generation. Why? Because they have to be. Just as it was with the Greatest Generation.

At some point in the future, someone is going to have to deliver the Fireside Chat with the American people explaining what is going on, how new leadership is doing to deal with this and what the people can expect from its leadership. And, in a great bout of irony, that is as exactly as history would have it.
posted by TimingLogic at 7:14 AM links to this post

Tuesday, November 18, 2008

Is Toyota In Serious Trouble?

I have tremendous admiration and respect for the culture and management at Toyota. They represent true operational management genius. And, the linchpin of their success is investment in their greatest asset - their associates. In a world of disposable employees, they represent great corporate dignity and honor.

That said, with all of the talk of American auto industry trouble, it is naively assumed by many that foreign auto makers are without trouble. No capital-intensive industry is in sound financial shape when global sales plummet to current levels. As we have discussed often, the cash burn rate is astronomical in this industry when output no longer supports the cash flow requirements to maintain the massive fixed cost apparatus. I really don't think most people truly appreciate the capital required to run these companies. I know Cerberus didn't.

We first highlighted our dislike of Toyota's stock at its very peak. As I type this its stock is down about sixty percent and shows no signs of bottoming. Now, credit rating agencies are warning they may downgrade Toyota's credit rating. As we wrote before, auto sales in Japan are at thirty year lows. Now with Toyota sales crashing in the U.S., uncertainty around the impact of potential American supplier failures, a completely dysfunctional global credit market and the crash in emerging markets, Toyota could be facing the greatest challenges in its history.

While bankruptcy is a remote possibility at this point, economic storms of this magnitude are nearly impossible to plan for. Great management aside, Toyota has a substantial debt load and could easily see its cash burn rate increase well beyond anything ever seen. A protracted global downturn or significant economic crisis has the potential to sew seeds never before imagined.

posted by TimingLogic at 9:24 AM links to this post

Monday, November 17, 2008

Wall Street Is Not The Creator Of Wealth Or The Nerve Center Of Capitalism.

“When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place.” -- Phil Gramm in 2000

We wrote a very lengthy post on Phil Gramm's ideology back in July. Ideology espoused by those with his belief system contributed greatly to the corporate socialism we are now witnessing. If you didn't read it, the link is here.

Today in the New York Times, we have a new article about Gramm titled Day of Reckoning - A Deregulator Looks Back, Unswayed.

Anyone who believes American capitalism is defined by Wall Street is deluded. When working as it should Wall Street should simply be a transparent central clearinghouse where businesses or prospective businesses from around the country or globe are married with potential investors. That's it. Wall Street should have no legal authority to be pissing away society's wealth with any of the schemes we see today. And, politicians like Phil Gramm gave that power to Wall Street.

Over the last thirty years Wall Street increasingly tried to become the economy rather than playing its niche support role of financial clearinghouse for the economy. That could only be accomplished in partnership with politicians from both parties.

Sustainable wealth is not and never has been created on Wall Street. Wealth is created in the underlying economy. Wealth is created by the farmer, by the small business owner, by the inventor or by the corporation that adds economic value. Wealth is created by allowing the human mind to function of its own free will and its own free thought. Whether that human mind seeks investors via Wall Street is irrelevant. The only difference between Wall Street and the small town bank where the local farmer goes to buy a new tractor is that Wall Street operates as a central clearinghouse where larger capital requirements are more easily accomplished.

This may be a surprise to many people but we don't even need a Wall Street in its current form. In fact, the economy would be substantially better off without it. A better model that would develop if the free markets were allowed to work would be a distributed exchange where there was less concentration of power, less corruption, less distortion of free markets and less collusion. And, most importantly, no financial intermediaries extracting unnecessary fees and expenses simply because they have anti-competitive control over distribution of capital. Does a potential investor need a banker to intermediate their interest in a new company for some unnecessary or inflated fee? Just because they are forced to? Absolutely not. This anti-competitive racket actually distorts markets, disincents business and takes capital out of the real economy that would be better spent by those able to create wealth. Investors might need advice from a subject matter expert in energy or biotechnology or may need other services but most of these prospective services aren't the role of Wall Street or a banker. Many of the ancillary financial businesses that have grown up around Wall Street are more distortions of the same scheme.

A distributed solution to marry investors and business is becoming more viable as technology develops. Wall Street is becoming a dinosaur of sorts. Were capital allowed to flow freely in the economy as opposed to restricting it, as is now the case, Wall Street would not exist. It's simply a matter of when the technology completes this transformation to a superior economic model. If markets develop naturally, we will actually get to this point in some future. If cronyism and lobbying by power elites prevent a free market from developing, Wall Street will survive in some lesser form. Regardless, Wall Street will likely never again regain the glory achieved this cycle. Because by the time they are able to regain their glory decades from now, technology will have made much of their business obsolete. Remember, never is a long time. Frankly, if I had the capital to do so, I would be building a new medium to replace Wall Street's anti-competitive practices. But, at some point many with the capital will start picking off their businesses with more efficient models.
posted by TimingLogic at 9:20 AM links to this post

Sunday, November 16, 2008

In A Great Act Of Nobility Seven Top Goldman Executives Will Not Receive Bonuses

Story here. It rings completely hollow and totally insincere given it took public outrage to change their minds. Now that seven executives aren't receiving bonuses, what might we expect for the other $11 billion set aside for thousands of other executives at Goldman? Can we expect those bonuses to be cut as well? Can society and shareholders get the last ten years of bonuses back? There's a substantial argument those should be given back.
posted by TimingLogic at 7:12 PM links to this post

Ecuador The Latest Emerging Market To Teeter On Default

posted by TimingLogic at 4:02 PM links to this post

Saturday, November 15, 2008

G20 Leaders Vow To Tackle Economic Crisis. It's Good To Be The King.

Today was a very good day for the state. They had much good food served by their manservants and maidservants, many noted orations worthy of leaders in suits and had enough time to issue statements showing their grasp of the obvious. Yes indeed. Today was a very good day for the state.

Below are some very important video highlights of today's G20 economic summit activities. It's good to be the king.

posted by TimingLogic at 11:07 PM links to this post

Today G20 Heads Of State Meet For A Photo Op - Will Currency And Global Regulation Be Brought To The Table?

I'm not sure what exactly is going to be accomplished today other than an opportunity for some nice photos. The G7 met some time ago to solve the world's problems. How's that working? What exactly are meetings between states going to accomplish at this point in time? Is China going to create jobs in the U.S. and Europe going to create jobs in China? What will come out of this is that we pledge to remain united. Hollow words.

There is a role for government in this mess but this meeting is for the benefit of the state. For that we should be suspicious. There is likely no one at these meetings who is looking out for our best interests. The state and government are not one and the same. Not even close. The state seeks definition at the expense of the sovereign. The government seeks definition by representing the sovereign.

Many in the world will likely attempt to use today's meeting as a starting point for global regulation and to formulate a new mechanism for foreign exchange in the form of a global currency, a replacement for the dollar or some other action I believe everyone should be suspicious of. The impetus behind such moves is a power grab by states - many with competing interests. There is seldom altruistic motive in the best interests of the peoples when it comes to actions of the state. Would global trade really be better off if we had some pan-global regulatory state-based organization headquartered in Switzerland? That's a rhetorical question for anyone eager to embrace such a frightening thought. Wait a few years and ask the European Union citizens how much better off they are with their latest pan European regulatory edifice - the European Central Bank. Or, the people of Darfur how much better off their life is with the United Nations. The UN adds definition and validity to the state. Not to government. Half of the member states in the UN don't even have a government.

This meeting is about potential meddling by officials who generally know nothing about what ails the global economy or how to fix it. Hell, they created it. But, they do know much about enhancing the power of the state at the expense of the sovereign. I see little good that can ever come from these types of meetings. Their outcomes often border on what I believe are unconstitutional decrees of elitists. Attacks on our liberties. What's that old saying? Idle time is the devil's playground? Can someone give these heads of state a coloring book and a few crayons? We need something other than this crisis to occupy their time.

In closing, upsetting the foreign exchange apple cart has great potential to drive the stake deeper into the heart of this crisis. In other words, countries like China, India and Russia have benefited greatly from the current rules to the game. But, now it has exposed systemic problems of their own creation. The same systemic problems that kept their economies as "emerging" for the last one hundred years. Many want to blame their current crises on the U.S. Absolutely nothing could be further from the truth. The U.S. caused its own problems but the world benefited greatly from it. We ignited a seed of opportunity in emerging economies that they will vanquish quite nicely on their own.

In the end, we really don't have any idea what future states will eventually determine as it pertains to currencies. Prognosticators talking of a single global currency are generally of a tone of conspiracy or religious prophecy. I see no chance of that happening. But, one thing is certain. Were the dollar to ever be replaced or augmented as the world's reserve currency, it would be long term bullish for the U.S. economy and very negative for globalization. Those seeking power grabs should be careful what they wish for.

Smile for the camera.
posted by TimingLogic at 9:48 AM links to this post

Friday, November 14, 2008

Citigroup Gets Massive Taxpayer Funded Bailout Then Reneges on Promises By Raising Credit Card Rates On Taxpayers

posted by TimingLogic at 12:31 PM links to this post

CIA World Factbook Updated

posted by TimingLogic at 10:56 AM links to this post

Professor Siegel Is At It Again

In his Yahoo article from a week or so ago, Siegel tells us stocks are dirt cheap. Let's put Siegel's remarks into perspective. We first discussed Siegel's new math irregularities in a lengthy post just months before the stock market peaked. In that post we highlighted this remark.

"Yet I believe the opposite is true and think that the current valuation of the stock market is very favorable for investors" -- Dr. Jeremy Siegel, Professor of Economics at the University of Pennyslvania (Wharton) April 30, 2007

Siegel used a rather arcane rationalization as to why stocks were cheap in the article I cited for that post. Since then global markets have had their most rapid collapse in history. Siegel top ticked global equities with his remarks. And, likely did so for a period of ten to twenty years. Siegel's most recent analysis highlights a statement I made on here last week in the Crocs post. Income statement analysis embraced by most on Wall Street, and used by Siegel in this article, is a fallacy.

How much does an MBA at Wharton cost? $60,000 - $80,000 a year including living expenses? More? No wonder Wall Street is a mess. What are they teaching at our top institutions of financial learning?
posted by TimingLogic at 7:03 AM links to this post

Thursday, November 13, 2008

Congressional Leader Finally Demands Accountability From Treasury And Fed

I'm not going to repeat myself with a lengthy post here. But, we talked about the necessary requirement of intellectual discourse and peer review to identify the best course of actions to work our way through this crisis. And, Paulson's beer hall putsch so commonly used by those who would circumvent our democratic process to get this $700 billion plan extorted through Congress. Money we now see pissed away in bank dividends and executive bonuses. In other words, massive sums of money completely wasted without an ounce of accountability by Congress or the Goldman Sachs boys running the Treasury program. As of yesterday Paulson told us he was just kidding and now wants to try something different. Even though a month ago he stated categorically that his plan was the only plan. That's really nice. In other words, you didn't know what you were talking about yet would not allow the input necessary to develop a useful strategy. Needless to say, the entire world can basically say I told you so. This was fun. Let's do it again some time.

Finally, Congressional leader John Boehner has taken a leadership position (Notice how leader and leadership were used in the same sentence, thereby tying together actions with title. That hasn't happened too often in recent years.) by demanding transparency into the Federal Reserve's program. I suspect Boehner and others feel betrayed as money has been frittered away with no accountability. How should the American people feel for burdening us with hundreds of billions in future obligations so Wall Street could buy more Ferraris? It's about time. Let the war of accountability begin. Maybe next time we'll get something more useful out of a more thoughtful process.
posted by TimingLogic at 8:58 AM links to this post

Strategy: The Delta Between Ford And GM/Chrysler

We obviously don't know the internal machinations of these three companies but it has become apparent from what is available for public consumption that Ford has a leader and strategy capable of turning around the company. (Story here.) On the other hand, we are left with more serious doubts as to the approaches at GM and Chrysler. GM has been close for years but unable to pull together the final pieces necessary to turn the corner in its North American operations. The endless arguments blaming this on unions or overburdening retirement responsibilities that are now bubbling up again are ridiculous. And, if unions are intolerant of change, it is because management has continually made promises that were never kept and it has continuously and negatively impacted the company and the rank and file. How many times does someone need to mislead you before you become difficult to deal with? It is and always has been poor management. That said, everyone will fall in line when it comes to survival.

Now GM has joined Chrysler in what appears to be delayed product development to conserve cash. We wrote about this self-fulfilling prophecy at Chrysler some time ago. So, here we are. Were the government to hand GM and Chrysler money, what would the stipulations be? There will likely be many. From the outside looking in, the most obvious is an imcomplete road map and cohesive business plan at GM and Chrysler. That implies new operational management is necessary to run these organizations. Or, in the case of Chrysler, Cerberus needs to assure the government that they will back away and led the current Chrysler management execute on a strategy aimed at a turnaround as they have really not been given that opportunity to date.

It was inevitable that many in Detroit would wish to return to the status quo by arguing that falling gas prices means they can return to making the same product they made before as highlighted in the article link above. A point missed on the falling gas price debate is the cost of acquisition and ownership. With real wages falling for decades in the U.S., Americans are going to be buying cheaper cars in a tight credit environment. This environment is likely to exist for years to come. When credit does become more readily available, it is not going to be allocated to consumer spending. It will be allocated to production. Those continually wanting to prime the consumer pump are wasting valuable time and effort that should be spent revitalizing what can be primed. GM and Chrysler are not only saddled with cars people don't want but with cars people are unable to afford in this new economic environment. But, then again, so is Toyota, Nissan, BMW, Mercedes, Audi and others. This extends to well beyond working class families to aspirational consumers that have historically leaned towards luxury or demi-luxury brands as noted before.
posted by TimingLogic at 7:53 AM links to this post

Japanese Auto Makers Face Great Risks With Potential Bankruptcy Of The Big Three

Here is the link to the story at the best automotive news source on the net. This doesn't even speak to the risks in other markets where international auto companies share suppliers such as Europe, Asia and South America. Needless to say, the government is not going to abandon the American auto makers. The only question is if they should be allowed to reorganize after bankruptcy or to try to keep them out of bankruptcy. There are arguments on behalf of both positions. I've already made my position. I believe they should be allowed to fail and then reorganize. These companies must wipe some of their debt clean, rid themselves of legacy management and/or be forced to institute strategic change. And government ought not to be involved in any more of this gambling in the credit default market. That includes for the auto makers. Unwind these transactions at a cost to those who made the bets.

There is no free lunch as current helter skelter government policy seems to be advocating. But, either way, government intervention is inevitable. For those who argue we should let the free markets work, I'll be posting some remarks in a handful of posts. The first will be this weekend or early next week. I'll be combining it with a post on Greespan's mea culpa.

posted by TimingLogic at 6:28 AM links to this post

Wednesday, November 12, 2008

Nomi Prins On The Stench Emanating From Wall Street - Bonuses For All!

Nomi Prins is a dying breed - a thoughtful journalist. Let me qualify that statement with the fact that most media doesn't want their journalists to actually report anything of substance or they would not have slashed investigative journalists into near extinction. I believe we need a Constitutional Amendment to the Constitutional Amendment protecting the press. One that protects the independence of the press from the ravages of the corporatacracy.

Prins' background is highly unusual for a journalist. She is a reformed Wall Streeter. Prins used to be a managing director at Goldman Sachs and an executive at Bear Stearns. I say reformed half jokingly because I know most people on Wall Street are decent people. But, I don't believe that to be true as it pertains to many executives and the sales organizations. To put it mildly that system has been broken for ages. Prins' background gives her unique insight and it shows in her excellent work. Her most recent article is Wall Street Fat Cats Are Trying to Pocket Billions in Bailout Cash.

If you somehow buy the partisan ideology that George Bush created this mess and all of the injustices in the world were vanquished with the arrival of Solon, you might appreciate her Field Guide to the Loan Sharks and Politicos Who Got Us into this Predatory Lending Mess. Politicians of both parties have been working diligently for decades to destroy the economy. Of course, in conjunction with your friendly neighborhood Wall Street lobbyist.

Will the President-elect or the new Congress succumb to the system or will they actually lead as populists/humanists and enforce some type of accountability with this bailout package being whored out as executive bonuses while Americans rot in the unemployment line because of Wall Street. Washington has generally been very quiet on this topic sans a few leaders. Were it not for a few journalists getting their sea legs, this likely wouldn't be understood at all. Change will not come from Wall Street or Washington, it will only come from us.
posted by TimingLogic at 8:37 AM links to this post

Tuesday, November 11, 2008

Goldman Sachs Urged Bets Against Its Client - The State Of California

posted by TimingLogic at 6:24 PM links to this post

Breaking News: Pigs Fly......And Citigroup Will Not Use Taxpayer Money For Executive Bonuses.

A timely and excellent Michael Lewis commentary on Bloomberg. Ironically, Citi's 2008 bonuses are scheduled to be larger than 2007 even though the company is bleeding losses beyond imagination and most surely would not be here without government intervention via the Federal Reserve and Treasury.

I'm not sure how the Citi spokesperson cited in the article can categorically deny the Treasury bailout money won't be used for executive bonuses when the company is arguably insolvent. I'd feel more comfortable with Citi's statement if it was made by an external auditor. Speak of which, let's get some external auditors working on our behalf inside of these companies we are all bailing out.
posted by TimingLogic at 2:32 PM links to this post

And, So It Goes. Russia Is Effectively Bankrupt. China Is Next.

The G20 meeting on the financial crisis is this Friday. One should hold no confidence that this will accomplish anything. Why? The state has created this crisis. They aren't going to fix it. We will fix it. We being the cumulative minds and efforts of individuals. And, since most countries do not embrace the cumulative minds of individuals, their chance of recovery is nearly impossible. Not the collectivist state working together with the peer creators of this crisis.

Don't believe in the current united front put forth by global central planners and politicians either. That position will clearly erode over time as sovereign interests begin to outweigh positions of harmony and cooperation. The current myth perpetrated by the media that coordinated efforts to save the global economy are unprecedented is another fallacy. We have seen these coordinated efforts before. And, when the going gets tough the tough turned to self-interest and policies of statism. In other words, expect volatility between the states to increase substantially.

Russian stocks imploded today on news that the government will likely trash its currency. Why? Because it has no money. The great race to the bottom of the barrel is entering a new phase. Oh, and when might you ask was the last time this happened. Funny you would ask. That would be 1929. Globalization is dead. But, then we said this would happen.
posted by TimingLogic at 9:19 AM links to this post

A Dark Side Of Globalization

"The attitude of the state towards capital would be comparatively simple and clear. Its only object would be to make sure capital remained subservient to the state."
--Adolph Hitler in support of capitalism

There have been numerous reports of the incredible destruction of China's ecosystem in recent years. This really isn't surprising given where we have come to in the global economy. Capital is more highly valued than people, something we have highlighted often. Not a very proud moment for humanity.

This 60 Minutes investigative report shows the environmental chain of destruction might often lead back to the United States. These are simply unimaginable heinous acts against humanity. This could not exist without state endorsement. It's really not overly dramatic to consider this as a greatest of state crimes against people.

posted by TimingLogic at 9:16 AM links to this post

Monday, November 10, 2008

Bloomberg News Sues The Government For Transparency

There is no doubt that lack of transparency has contributed greatly to this crisis. That extends to government, lobbying efforts, bank solvency, derivatives and a host of other examples that are really concentrated in the banking system and corporatacracy. I have a post that delves into transparency that will be up before the end of the year so I'll keep this brief.

Finally we get a news source interested in the truth. Bloomberg is suing the government for access to information on what institutions are accessing the Federal Reserve's lending facilities. It is quite unbelievable that this information is not being shared but it's really symptomatic of the environment we are in. The Fed misguidely believes transparency could create bank runs so they want to hide the fact the banking system is insolvent. Yet, we already know that. Lack of accountability and deceit is a driver for this problem. Perpetuating this environment does nothing to resolve it. If the government would force transparency into the banking system, we could identify the risks and start to deal with them as a society. Ideas would come forth to solve this if we could define the issue.

Let's hope Bloomberg succeeds in their efforts. Part of fixing this crisis is again making government work for the people and not for special interests.
posted by TimingLogic at 9:10 AM links to this post

Sunday, November 09, 2008

Chile - The Perfect Proxy For Globalization. Good Times To Return? You Be The Judge.

My first foray into the futures market happened when I was right out of college and involved copper. More specifically Codelco, the massive Chilean copper producer. Codelco workers were striking and it was my opportunity to become a millionaire due to supply disruptions. Instead I got my head handed to me. An introduction to the art of the game. And, to the reality that what we call investing can easily be confused with gambling. I've seen a few top traders remark that they can't go on vacation unless they are close to a casino. It's quite obvious that many attracted to the game are in it for the thrill.

By the way, do you know what personality profile makes the best trader? High-functioning sociopaths. Very true. Complete detachment from emotion and the normal operation of our inherent ability to process and even withdraw from danger and risk. Ability. Yes, ability - it's a mental competence. Competence reinforced through processing two hundred thousands years of risk. Might be something to think about when one considers Wall Street's demise and their seemingly shameless behavior. Wall Street is a natural magnet for personality disorders as are casinos and other forms of gambling. So is the corporate ladder or any other position of power. Saddam Hussein? Kim Jong-il? Adolph Hitler? Joseph Stalin? Pol Pot? So people are supposed to trust leadership because they were smart enough to make it to a position of power? No, intelligence is not a motivation for power. Intelligence is a motivator for knowledge or enlightenment. Ego and control are motivations for power. Most people have generally healthy egos but it is not our enlightened self that seeks power. This is part of the human condition we all suffer from. Our yin and yang.

Have you ever looked at the profile for a sociopath and compared it to the mess we are in with corporate governance and the implosion of Wall Street? How else does one so elegantly explain Wall Street's behavior? Seriously? And we would let government overturn regulation of our money were even a small percentage of Wall Street traders and executives to fit this profile? Could you imagine testimony before Congress arguing regulation because our leaders have a higher probability of being crazy? Yet, that is exactly why we have so many checks and balances in our government. Because whether they overtly acknowledged it or not, our founding fathers realized those seeking power and dominion over others are never, ever to be trusted. There are very few enlightened absolutists. It's an interesting perspective not discussed in the mainstream media.

Back to Chile. Some months ago Codelco experienced significant labor unrest and strikes. But as copper output decreased prices were weakening as opposed to what they are "supposed" to do. The game has worked until it no longer worked.

Chile mines approximately 35% of the global copper. With copper prices at levels never even remotely approached from a historical perspective, the Chilean government has been anxious to get its grubby little fingers on as much of that money as possible. To understand this, one must realize Codelco is nationalized. During the boom years of this cycle the Chilean government commissioned a study to look into the rise in copper prices. That study came to a conclusion that some percentage of the rise in copper was sustainable and permanent. I remember reading that and thinking only two bureaucracies could ever commission such a study with such blatantly fallacious conclusions. One is Wall Street and the other is the state. Now, why would the Chilean government undertake this effort? Why, of course, to be able to enhance the power of the state. And, how do they do that? By spending more of Codelco's profits. Five years ago the Chilean government spent 10% of Codelco's profits and today they spend 50%. You read that right. And, Codelco's revenue is about ten percent of Chile's GDP.

Secondary and tertiary employment and economic impact ties Chile's prosperity substantially to the price or demand for copper. What happens to the Chilean economy when prices return to their fifty year average or revert to the mean? Remember, it costs about 7 cents a pound to pull this stuff out of the ground. $4 a pound for copper at its peak? You must be kidding. At the height of this irrationality, I remember reading a report that said we were at peak commodities not just peak oil. And, of course, I am Buddha. Both are convenient lies.

For those who hold out hope that the global economy will re-ignite, the best metric on earth to determine the state of globalization is the Chilean economy. The Chilean stock market and the price of copper are both shown on the chart above. Copper pricing is in black and Chilean stocks in red. Storm clouds are clearly ahead.
posted by TimingLogic at 6:53 AM links to this post

Saturday, November 08, 2008

Yahoo - The Worst Managed Major Internet Brand On Earth?

I've remarked on here before that Yahoo is a terribly managed organization. The internal resentment over poor leadership and the festering of internal politics points to a company in very serious trouble. A company with very poor leadership. And, a company where good talent has been draining at a rapid pace. We've seen leaked internal memos criticizing management and we've seen the CEO walk off with hundreds of millions of dollars while their core business was ravaged by Google. In fact, we still see senior executives being compensated richly without any seeming regard the business results. All while what was once the premiere brand on the Internet disintegrates before our very eyes.

We saw Jerry Yang, its founder and current leader, embrace the outsourcing of their primary product to their biggest competitor rather than embrace an incredibly rich offer by Microsoft. An offer that has no grounding in reality or in the fundamental valuation of the company using reasonable metrics such as cash flow. After management rebuffed Microsoft's very rich offer, it appeared shareholders were ready to revolt in an attempt to sack the board of directors. It's too bad we don't see more of this activism. Shareholder transparency and rights are most likely to increase significantly in coming years. As is the transparency of board level activity, if not outright board accountability. We have a generational dilemma in this country - competent management capable of running business operations has been replaced with a circus.

Now Jerry Yang is feeling the heat after Google walked away from this latest drama. He has told Microsoft to make him an offer. Huh? You had an offer for nearly $40 a share and now your stock is close to $10. Microsoft is now in the driver's seat. If nothing, Yahoo's share price is likely to continue its implosion and there is always a possibility Microsoft could pick up the pieces in bankruptcy. Frankly, with financing risky deals falling off of a cliff and private equity headed for the scrap heap, Microsoft has the luxury of playing a game of Chicken. I believe Microsoft should steer clear of Yahoo but egos may prevail. The only Yahoo property worth any value to Microsoft is the brand itself. Microsoft is likely to get this at a very significant discount to even today's price if it is willing to walk. And, it appears they are. Yang is desperate because he has no plan to save his creation. Now he has substantially diminishing opportunity to "dump" the business. Yahoo is in serious trouble.
posted by TimingLogic at 9:59 AM links to this post

Friday, November 07, 2008

Commercial & Rental Real Estate - A Problem Yet To Resolve Itself To The Downside

I mentioned this chart some weeks ago in one of the comments I made so the chart was pulled a month ago but given it is a thirty+ year chart, a month doesn't really change the character.

I saw a recent interview with Sam Zell. And, this is my tribute to the billionaire real estate developer. After that interview I have to question how Zell made all of that money. Oh, that's right. He rode the inflation trade. Zell recently remarked his approval of commercial and rental real estate. We shall see. Below is a long term chart of Washington REIT. Nothing will get the attention of Washington politicians and lobbyists faster than their Georgetown real estate falling in value.

posted by TimingLogic at 10:18 AM links to this post

Crocs Days Of Glory Are Gone Forever

I have talked of Crocs a few times on here. This is my last post on the company given it is now being marginalized in the market place. Nothing could be more representative of this cycle than the speculation in this shoe company. We wrote of how overvalued Crocs was on the way up. In fact, we wrote it was more overvalued than 99% of all stocks. And, the fall has been a brutal one - from $75 to $1 and some nickels. (It's back to $2 today.) From those who argue stocks are now undervalued, is Crocs, as an example, undervalued? Is the market acting irrationally? Frankly, the stock valuation is right about where it should be given the dynamics at the company.

This brings up a good point. Most analysts put out for public consumption have never been good at balance sheet analysis. Crocs is a prime example of this fact. I am reminded of this fact every day with most of the investment community falling all over themselves to tell us how cheap stocks are. Really? I am sure they are right since many of the same voices were telling us how cheap stocks were when the S&P was near 1600. Comparatively our position at the time was that this was the largest financial bubble and global stock market bubble in history. Contrary to popular belief, gambling and investing are not remotely similar. If you are serious about investing in equities, you really need to become a disciple of Ben Graham and turn off Jim Cramer.

Let's end this post with a point to ponder. If we make it to 400 on the S&P as we said could happen, the drop from here would be sixty percent. That means the drop we have seen so far would be dwarfed by what could be yet to come.

posted by TimingLogic at 6:56 AM links to this post

Thursday, November 06, 2008

Harley-Davidson Is Getting Pounded And It's Going To Get Worse

Harley-Davidson was nearly destroyed under the mismanagement of conglomerate AMF during its ownership stint in the 1970s. (I guess there wasn't a lot in common with making motorcycles and bowling balls.) Harley-Davidson has become legendary again with its transformation over the last twenty years after a management buyout. They dominate the large bike segment in the United States and their motorcycles remain in very high demand around the globe. Harley has shown signs of deterioration for some time. The first signs of trouble were in its financing unit. Now it reports unit sales in the U.S. are down 16%. The stock is now down approximately 75% and has a negative return over the past ten years. In other words, anyone buying the stock since 1998 has lost money.

From Harley's recent SEC filings - The 30-day delinquency rate for managed retail motorcycle loans at September 28, 2008 increased to 5.59% from 4.91% at September 30, 2007. Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. The increase in losses was primarily due to a higher incidence of loss resulting from an increase in delinquent accounts. The Company expects that HDFS (Harley-Davidson Financial Services) will continue to experience higher delinquencies and credit losses as a percentage of managed retail motorcycle loans in 2008 as compared to 2007.

Harley's financial group recently reported its chargeoffs increased over 300% in the past quarter. Could Harley's financial group become a drain on the parent company? Well, it's funny you would ask.

In 2009, HDFS expects to utilize a combination of funding sources........ ..........HDFS has developed contingency plans which would only be implemented in the event that conditions in the capital markets limit HDFS’ funding sources. These contingencies include but are not limited to utilizing cash from the Motorcycles Segment

There are many who would tell anyone who would listen that this company and many others are a great buy. This is a little like the bottom calls in banks that were blown out time and time again. Calls not based on balance sheet or detailed company analysis but instead based on the tenuous position that something has dropped by a large amount so it must be a buy. Some day this will be the case. But, it will not be based on the significantly worthless position that a company has dropped a lot so it is a buy but because the economy has started to reach a steady-state. Tomorrow, I'll give you another perfect example of how buying the dips rewarded gamblers with a once hot company that has dropped from $75 to $1.

posted by TimingLogic at 10:04 AM links to this post

Ford Considers Bringing Ka To United States

Alan Mulally, Ford's CEO, tells us that Ford is considering a "micro" for the U.S. market. Mulally has since pinpointed that micro car as the Ka sold today in Europe.

I've thought for years that there is a large and developing market for micro cars in the U.S. And, it has less to do with fuel efficiency and more to do with developing fundamentals. ie, Deflation. So, regardless of whether gasoline is $4 or $1 a gallon, there will likely be a niche for inexpensive, efficient cars.
posted by TimingLogic at 5:33 AM links to this post

Wednesday, November 05, 2008

What Impact Would An Auto Company Failure Have On The American Economy?

A third party perspective on how a failure of an American auto firm would impact the economy. Pretty much in line with what I would expect. That being devastating. Click on the graphic to watch the video. (Btw, Phil, the multiplier is substantially larger than five.)

posted by TimingLogic at 6:11 PM links to this post

Obama Wins. Change. That's Wassup.

Lost jobs, lost homes, a war in Iraq, no healthcare, savings plummeting and Katrina. A dark-humored re-shoot of the original Budweiser ad. If you didn't see the original, this doesn't have a point of reference. So, here is the link to the original Anheuser Busch commercial.
posted by TimingLogic at 6:23 AM links to this post

Carl Icahn On CEO Compensation And Failed Corporate Governance

Big changes can be accomplished by the cumulative small actions of many. The world is changing rapidly. Do you want to be an agent for change or protect the status quo? Which side of the trade do you want to be on? I would encourage you to consider joining Icahn's campaign for improved corporate governance that would include board and CEO accountability. And, to read his most recent blog entry on the state of CEO pay and incompetence.

Click on the graphic below to listen to Carl's stimulating discussion on CEO compensation run amok.

posted by TimingLogic at 5:43 AM links to this post

Tuesday, November 04, 2008

Be The Leader This Country's Founders Wanted You To Be. VOTE!

posted by TimingLogic at 5:59 AM links to this post

Government Rejects GM & Cerberus Lobbying To Finance Merger Of Two Wrongs

I can't say any of this is positive news but at least GM will now, if only temporarily, need to refocus on doing what they should be doing instead of trying to create this merger - make products people want. That is, unless somehow another option for this merger bubbles up. GM is a tremendous source of wealth and much of its business has been rationalized but now it needs leadership that actually knows how to put the pieces together and make it work. It is more than obvious Rick Wagoner isn't the leader to take GM out of this as I wrote on here three years ago. GM just reported sales down 45%. GM's sales loss is exacerbated by a policy that seems to include an end to all vehicle leasing and stricter lending standards. .

GM needs operational talent in the corner office that we have highlighted as lacking in corporate America. (The financialization of GM management has probably been the single greatest contributor to its lengthy demise. What the hell does a money changer know about making a car?) It was rumored that GM was headed to Nagoya to meet with God himself in a plea for assistance but that is now being denied. Toyota has offered GM help time and again so such an effort would be pointless anyway. The answers to GM's problems are self-evident. What GM should do is raid Toyota or Honda's executive team for a new CEO. Although finding an executive who would dishonor one of these two firms to take a post at GM is highly improbable. An alternative is to do what Ford has done. They hired an engineer steeped in strong business process methods and Toyota's quality programs who had proven operational management experience.

It's ironic that GM & Cerberus have asked for $10 billion and were turned down by the Treasury. Comparatively, financial firms have received nearly $3 trillion in government aid to date. While I am adamantly opposed to a merger of GM and Chrysler, I am not opposed to providing guaranteed loans should the industry first take the steps necessary to right their businesses. An auto industry willing to rationalize its production, produce vehicles consumers want and rationalize its product mix would likely need access to one percent of the capital being thrown at the financial economy to weather this storm.

Let me digress here for a minute. The auto makers have sustainable and sound business models. They are reeling from poor management that has been perpetuated by government meddling. This isn't a case where a financial institution has built an unsustainable business model using leveraged loans and derivatives. If GM, Chrysler and Ford were allowed to fail as some financial pinheads are advocating, the world would most assuredly see a total and sustained economic collapse. There are literally five to ten million jobs in the U.S. reliant on GM, Ford and Chrysler. Jobs that are significantly more valuable to the long term health of the economy than those of financial pinheads pushing around money made by workers employed by GM, Ford and Chrysler. Jobs that won't be replaced for decades. And, the fingers of economic consequence would be astronomical and include loss of employment by the very financial pinheads advocating such a position.

For God's sake, if we haven't learned its time to re-invest in the real economy and quit listening to these financial idiots, then we will surely witness the end of the world.
posted by TimingLogic at 5:49 AM links to this post

Monday, November 03, 2008

Emerging Market Risks Are Rising Rapidly - S&P Downgrades Many Middle Eastern Country Banks

We wrote about great risks in the oil-intensive economies of the Middle East during this cycle's boom. And, the casino-like behavior in many of their markets. And, we highlighted that many firms such as Goldman Sachs and Morgan Stanley were making large bets, or investments in these markets. Yesterday it has been reported that S&P has started downgrading banks in this region. It was just last week that Kuwait had to step in to save its second largest bank.

It is fair to assume many of these bets will go bust and the oil-intensive states of the Middle East will have unprecedented economic crises in the coming years.

A difficult to quantify risk we shall see develop in some form is that of investment or bets by largely mature and comparatively stable economies and global corporations into emerging markets and what consequences unfold if these bets go bad on a large scale. One generalization we can make is that were these substantial risks to come to pass, foreign investment in these markets would dry up for a life time or longer thus extending economic malaise and volatility in emerging markets. This would obviously be compounded by the lack of global capital we shall see for some extended period of time. Another might be that mature economies and/or their global corporations could selectively default on obligations to emerging markets in response to such an outcome. Especially if emerging markets are unable to somehow help recoup these investments through action or reform. That may sound historically unusual but then we aren't dealing with a usual business cycle and neither are we dealing with usual outcomes. And, for that we see most still do not factor global risk into their analysis.

We were more focused on emerging market risks than any blogger, news source, financial firm or economist while Goldilocks was discounting her Utopian future. For, failure to do so is failure to understand that investment returns are risk-adjusted - something that we can clearly quantify as not well understood by this generation of investors or leaders. And, we highlighted the similarities between many emerging markets today and pre-war Germany in the sense that global corporations embraced both. They did so because corporations naturally gravitate towards any market, free or otherwise, that embraces capital, not because corporations were intelligently assigning risk. In today's world many emerging markets are very similar to pre-war Germany in the sense that capital is king as long as it is subservient to the interests of the state. And, so it goes.
posted by TimingLogic at 6:01 AM links to this post

Sunday, November 02, 2008

Weeks After Italy Guarantees All Banks, The Markets Respond By Signaling Italy's Rising Risk Of Default.

Back on October 12th we highlighted the public proclamation of Italian Prime Minister Berlusconi that no Italian banks would fail. Politicians can say what they will but often their words are hollow promises. One must remember that politicians are in the same game as Wall Street - the "other people's money" business. Of course, they plan to save the day with your money just as Wall Street planned its Brave New World with your money.

The reality is only transparency and public accountability of government and politicians well in advance of this crisis could have made an impact. Now that they have sewn the seeds, their proclamations ring hollow to the markets.

Weeks later the Wall Street Journal reports the markets are signaling that political guarantees from the graduates of the Stalin School of Economics, including Berlusconi, are increasing the risks of sovereign debt default. In the best of times no country can make the promises being made today. Especially many of the promises coming out of European countries. The European Central Bank is facing a mountain of challenges well beyond its charter ==>> And therefore, so is the Euro.
posted by TimingLogic at 9:14 AM links to this post