There is no doubt that the crisis in Spain is getting worse, threatening to drag down the rest of Europe, and ultimately the US, with it. Over the weekend, Standard and Poor?s downgraded the debt of 11 Spanish banks, after downgrading the country?s sovereign debt weeks earlier. Further downgrades are a given so expect them in your regular Monday morning headlines. Expect more deposit flight from banks and spiking of sovereign bond interest rates.
The country is now officially in recession, as are seven other countries, including Great Britain. Spain?s unemployment rate is now at 24%, the peak seen in the US during the great depression, and is 50% for those under 25. It all adds up to more deposit flight from banks and spiking of Spanish sovereign bond interest rates.
It was easy to dismiss the long, tortuous descent into the Greek bond default as irrelevant and just a favorite topic of a few journalists, as it only accounted for 1.3% of European?s $16.7 trillion GDP. That makes Greece as about as important to the continent?s total fiscal health as the bankrupt cities of Vallejo, CA, Harrisburg, PA, Central Falls, RI, and Birmingham, GA, combined, are to the US.
Spain is another kettle of fish, with the fourth largest economy accounting for 6% GDP. Spain is an even larger portion of the European financial system, with bank assets at $3.7 trillion.
Don?t expect an improvement in the Spanish economy any time soon. It just passed one of the most austere budgets in European history, attempting to roll back decades of over spending and under taxing in one shot. While austerity is great for balancing the budget for the short term, it also triggers recessions which create longer term structural problems, as it has already done in Great Britain and Greece.
The only possible growth strategy for Europe is for the private sector to ramp up spending while the governments are cutting back. In Europe, that means getting rich countries like Germany to spend more to create end demand for poor countries. However, in reality, companies run the opposite direction, hunkering down during times of economic uncertainty.
There is also an additional internal conflict afflicting Europe in that the debt heavy counties of south need inflation to devalue their debt, but deflation to restore their international competitiveness and growth. It all means that the Spanish downturn will be longer and weaker than previously thought.
In December there was a big splash when the ?500 billion LTRO was announced to take distressed sovereign debt off the hands of the banks at extremely generous prices. That has since fizzled. Now hedge funds are betting that the other shoe will fall. A second LTRO is a given, but how long will it take them to realize this and how far will bond prices plummet until we get there?
Don?t count on any US bailouts to ease Spanish pain, especially during an election year. Treasury Secretary, Tim Geithner, personally told me last week that Europe was a rich continent and had adequate resources to solve its own problems. Translation: no cash for the beleaguered continent.
It all makes my short position in the Euro through the (FXE) look pretty interesting. Some of the weaknesses mentioned above are already well known and priced into the currency markets, but not all of them. And the Europeans have a seemingly endless talent for discovering new structural problems as time goes on. Those unintended consequences can be a bitch.
With eight governments having fallen since the crisis began, and a ninth in France certain to go this weekend, who will be next is anyone?s guess. We have all become Spanish bond traders, whether we want to or not. Watch those screens.
Austerity?s Unintended Consequences
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/4778306118_53d2cba3bb.jpg400300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-30 23:04:042012-04-30 23:04:04Enduring the Pain in Spain
This certainly promises to be an interesting week for the markets. On Thursday, we get the Department of Labor?s weekly jobless claims at 8:30 AM EST. If we clock a fourth consecutive week over 380,000, or go even higher, then an exact repeat for last year?s summer slowdown will be in play. So will the 25% drop in equity markets that followed.
This will be confirmed by an April nonfarm payroll of less than 100,000, the result of hiring being pulled forward into January and February by the warm winter, and then puffed up by the seasonal adjustment process.
This will bolster the relentless torrent of negative economic data that has been rapidly deteriorating for the last two months, which no one seems to be noticing but me. Here is the latest batch:
April 30 - Chicago Purchasing Managers Index down from 62.2 in March to 56.2 in April
April 30 - Personal Spending fell from 0.9% in February to 0.3% in March
April 27 - The real shocker was that Q1, 2012 GDP fell out of the bottom at 2.2%, compared to an earlier prediction of 2.5%, and a 3.0% rate before that. The current quarter is now expected to fall to the 1% handle.
April 26 - Weekly jobless claims stayed at a high 388,000.
April 25? - March durable goods fell -4.2%, in part due to a decline in domestic aircraft orders.
The corporate Q1 earnings reports are winding down, and look like they will come in bang on my 5% prediction. This is down substantially from last year?s 15% rate. When these reports finish, where is the next upside surprise coming from? In almost every case, each announcement generated a lot of selling on the news.
Permabulls beware: Rising multiples against falling earnings growth doesn?t go on for very long. Please note also that Treasury bond yields have given up all their gains this year and are poised to break to the low end of their one year range. This usually heralds a major ?RISK OFF? move bad for asset prices everywhere.
In case you didn?t have enough to worry about, on Sunday we get the French presidential election, where Socialist Fran?ois Hollande is leading conservative Nicolas Sarkozy by an impressive eight points. A much bigger borrowing and spending government in France could trigger the next wave of the European sovereign debt crisis, and lots of those riots that stock traders despise. Better take your significant other out to a French restaurant on Saturday night because it may not be there on Sunday.
It is possible that the data suddenly turn on a dime and return to an improving trend. But it is also possible that pigs fly. As for me, I?ve already got my weekend reservations at San Francisco?s Gary Danko?s. Frogs, hang on to your legs!
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/425AirportFlyingPigs.jpg400383DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-30 23:03:322012-04-30 23:03:32The Bombshells Headed Our Way
Dilbert cartoonist Scott Adams argues that you should invest in companies you hate, because only the most unprincipled and rapacious firms make the greatest profits.
Moral bankruptcy is a great leading indicator of success, and the best ones can get you to balance your wallet on the end of your nose and bark like a seal, as you buy products that you utterly despise. Companies with the work ethic of a serial killer, like British Petroleum (BP) come to mind, but you can also add other firms to the list, like Goldman Sachs (GS), Citicorp (C), Pfizer (PFE), and Altria (MO).
Adams initially started investing in companies he loved, like Enron, WorldCom, and Webvan, and absolutely lost his shirt. His advice to (BP) is not to waste money on artificial, sincere, maudlin ad campaigns apologizing, but get us to hate them more. Bring on more dead bird pictures!
Who is Adams about to hate next? Apple (AAPL), because he irrationally craves their products, resents their emotional control over his entire family, can?t get iTunes to work, and is appalled by those aloof black turtlenecks that Steve Jobs wore. For my own recent piece about this incredible company, please click here for ?Apple?s Next Stop: $1,000? a
Hand Me a &*%@* Buy Ticket!
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/shout.jpg212320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-30 23:02:042012-04-30 23:02:04Only Buy Companies You Hate
?The investor in America sits at the bottom of the food chain,? said John C. Bogle, founder of the Vanguard Group of index funds.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/LION.jpg301320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-30 23:01:302012-04-30 23:01:30May 1, 2012 - Quote of the Day
Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Scottsdale, Arizona on Thursday, May 3, 2012. A three course lunch will be followed by a PowerPoint presentation and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be tossing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $235.
I?ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at a Scottsdale Hotel the details of which will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store at www.madhedgefundtrader.com and click on the ?LUNCHEONS? tab.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/02/fetch.jpg300300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-29 23:06:512012-04-29 23:06:51SOLD OUT! Last Chance to Sign up for the May 3, 2012 Scottsdale Strategy Luncheon
I knew that Treasury Secretary Tim Geithner was early for our meeting at the San Francisco Mark Hopkins Hotel, as the line of silver Secret Service GM Suburbans was illegally occupying some of the most prime parking places on Nob Hill. I?m glad they changed the color. I was getting tired of the perpetual black. Perhaps it?s an unknown leading economic indicator?
As the agent pawed through my briefcase, I asked if death threats against the president were still up 400%. He said there was a big jump when Obama first came into office, but threats have since petered out, although they are still running much higher than the George W. Bush days. ?People dislike change,? he said. ?So true,? I replied.
The 50-year-old Geithner was fit and trim as always, and probably could still squeeze into his old high school graduation suit if he still had it, a goal that has so far eluded me. That?s what jogging every day of the year gets you, no matter how crushing the schedule or how crucial the priorities. The two Secret Service agents who accompanied him this morning on his run from the Oakland Bay Bridge to the Marina Green and back are also probably up to an Olympic standard of fitness. But he had also noticeably greyed since our last meeting.
I always catch Tim when he stops in San Francisco on his way to China. I knew him in Tokyo during the late eighties when he was the young, up and coming, hotshot economic attach? at the embassy there. I spoke to him briefly in Japanese just to see if he was still up to snuff. He was. He also speaks Chinese, which I imagine will be a requirement for every future Treasury Secretary, as they own $1 trillion of our national debt.
Without any prompting he launched straight into his canned campaign stump speech. When Obama came into office the economy was shrinking at a -9% annualized rate and shedding 600,000 jobs a month. Today it is growing at 2% and adding jobs. Exports are up 34% since 2009, and private investment is rapidly increasing. Real estate is still tough, but is showing signs of life.
We moved on to Europe, and I asked him if the Treasury had any plans to participate in a Spanish bailout, where the real estate and construction collapse has been far worse than our own. He pointed out that Europe was a rich continent and had plenty of resources to solve its own problems. He then backed up a bit and wryly said, ?Let me evade that question differently.?
The Federal Reserve was intervening where it could in the most cost effective way, such as through the provision of $400 billion in swap lines which are guaranteed by the European Central Bank. That will create a safety cushion between Europe and the rest of the world. A precipitous move towards austerity will only prolong the length and depth of their recession.
I asked how he personally felt when he first stepped in to oversee a financial system that was in complete collapse, with classic bank runs and frozen financial markets. Instead of sitting back and ordering a raft of study groups or waiting for recalcitrant Republicans to join him, Obama took immediate, decisive action, pushing through the stimulus bill and bailing out AIG and General Motors. He confided in me that he was not at all confident that the emergency rescue plan would work, but told the president that it was certainly better than all the other alternatives.
The bailouts were very controversial, highly divisive, but a necessary evil. The passage of the TARP in 2008 was in fact the last bipartisan bill to pass congress. Although the initial estimate of the cost ran into the trillions of dollars, the government will end up making a $20 billion profit from all of the programs. Geithner wants to unload the remaining holdings as soon as possible, while still maximizing taxpayer value. ?We didn?t save the banks for the benefit of the banks, we saved them for ourselves,? he asserted.
Geithner didn?t believe the repeal of Glass-Steagle in 1998 caused the financial crisis, which separated the banking and securities industries. The real trigger was a huge off balance sheet financial system that grew up outside the established regulatory framework and eventually accounted for half of all the credit in the US. It also didn?t help that many existing banking regulations were not enforced by a hands-off Bush administration. The end result was vastly excessive leverage understood by few.
The reforms enacted by Dodd-Frank are intended to force a reduction in leverage so that any future mistakes the banks make do not pose a systemic threat to the financial system. Instead of future bailouts there will be orderly liquidations. If you need proof of the effectiveness of the new rules, look no further than the immense resources the financial industry is pouring into having them overturned.
He said we were right to be concerned about the upcoming ?fiscal cliff,? the tax increases and spending cuts that automatically kick in at year end, which Geithner believes could shave a massive 3.5% off of GDP. He thinks that some sort of agreement around the Simpson-Bowles framework will be reached, similar to the deal that was almost done last summer. Back then, the two sides were much closer than people realize.
While the administration was laying some foundations behind the scenes, congress was not yet ready to clinch an agreement. ?We don?t need to solve all of America?s problems for the next 100 years in six weeks, but we can create a framework for progress,? he averred. While the deficits in Medicare and Medicaid were unsustainable, that was no excuse to drastically cut education and infrastructure spending today.
We spent a lot of time talking about China, which we have both been studying for decades. His goals there were to level the playing field for US companies and help the country move towards a more domestically oriented, less export dependent economy. Since 2009, US exports to the Middle Kingdom have doubled. Its trade surplus has fallen from 8% of GDP to 3%. Currency pressure has eased with a 13% appreciation of the Yuan against the US dollar. But major issues remain in intellectual property rights and tariffs. American consumer goods cost double in Shanghai than they do at home.
The Treasury has undertaken 36 anti-dumping complaints against China, such as in tires, solar, and wind power, compared to none by the previous administration. If China wants to participate in the global trade system they have to play by the rules.
Much of The Middle Kingdom?s strength is not as strong as it seems. A huge demographic headwind will hit the country soon, thanks to the 30-year-old ?one child? policy. China?s productivity is a tiny fraction of America?s.
Geithner has already made known his intention to leave after the end of Obama?s current term. It?s hard to say what he?ll do next. I don?t see him soiling his hands by joining a major bank board, as past Treasury Secretaries have done. My guess is that he will end up on the board of Apple or Google.
As the Secretary scurried out the door to his next appointment, I asked if he would ever consider making a run for public office. ?Not a chance,? he shot back. ?Not even the president of Dartmouth College?? I persisted. ?No way,? he affirmed. I suspect there is an unhappy and undeserved grade of C- hidden somewhere in his distant past.
On my way out the Secret Service agent told me that when he did my background check, he found that I had been in their system since the Ford administration in 1976, well before he was born. I said ?Yes, that Alexander Hamilton was a hell of a guy, a real party animal,? referring to our nation?s first Treasury Secretary. He thanked me for my service and shook my hand. It was the nicest thing anyone said to me all day.
With that, I disappeared out the door and jumped on a moving cable car down nearly vertical California Street on my way home. I knew I would have to backpack three hours up a steep mountain to digest the implications of what Geithner had said.
Such my life has become.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/tim-geithner.jpg240320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-29 23:02:182012-04-29 23:02:18Coffee With the Treasury Secretary
?At some point in 2011, knuckles are going to be turning white, and we'll see whatever rabbits Ben Bernanke is going to have to pull out of his hat,? said David Rosenberg of Gluskin, Sheff & Associates
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/roller.jpg408400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-29 23:01:082012-04-29 23:01:08April 30, 2012 - Quote of the Day
That was the judgment of the markets in the wake of the Federal Reserve?s latest economic forecast released today for at least two minutes. The asset classes most dependent on further monetary easing, like gold (GLD), silver (SLV), the Euro (FXE), and the yen (FXY), saw dramatic, sudden selloffs, and then recovered losses almost as fast. Blinked and you missed all the action. The big head turner was in gold, which should have been down $50 yesterday with Bernanke cutting the fundamental argument for owning the yellow metal off at the knees.
The belief in the Bernanke put is now so overwhelming that it overrides all other considerations. It flies in the face of a torrent of economic data that has turned overwhelmingly negative for the past month. Just yesterday, March durables showed a shocking 4.2% decline, in part driven by a 48% fall in domestic aircraft deliveries. So what does the market do? It takes Boeing (BA) up 5%.
This morning, weekly jobless claims posted their third week over 385,000, a hugely negative leading indicator for the economy. So the Dow rallies 100 points. The data show that the winter real estate bounce clearly ground to a halt in March, but Pulte Homes (PHM), the weakest of the homebuilders, runs 22% into indifferent earnings.
April has been a frustrating month for me of correctly predicting what is going to happen and then the relevant stock or asset class doing the exact opposite to what they should. Excess liquidity trumps everything. I think what is happing is that stocks are popping, regardless of the actual earnings for the mere fact that the report is out of the way, not because of any great improvement in business. I read the Boeing earnings report three times to see what the big deal was. All I found was a 2% increase in annual forecast earnings per share thanks to a reduction in reserves for litigation costs. That hardly justifies the price action.
There is one thing in common with most of these earnings reports. Companies reduce their guidance so far that they become impossible not to beat. Then the report comes out as a big upside surprise, which enthrall the shills in the media. What gets lost in the jumble is that the YOY gains in earnings are minimal at best and are often created by special accounting provisions. They are a shadow of the real YOY improvements we saw last year.
The end result of this shell came is a market with falling earnings, rising multiples, and trading volumes that are down a lot from just a year ago. Warning: this does not last forever. When the market disintegrates into hedge funds, high frequency traders, and day traders buying and selling to each other, nobody makes any money over time.
I believe in the Bernanke put. Ben Bernanke is playing the market like a fiddle, quite successfully so. But it only kicks in with the S&P 500 at 1,100, or down some 20% from here. That?s where he exercised it last September, when markets were in meltdown mode and posing a real threat to the economy.
That means investors at these levels are willing to risk 20% in the indexes, or 40% in individual names, before the Fed rides to the rescue. Only institutions with the longest possible time frames, like long only index funds and pension funds can afford to take such a view.
Risk markets are a constant tug of war between fact and belief, and right now belief is winning. But that is all part of show business. I am so incensed that I am going to complain to Treasury Secretary Tim Geithner in person. I have a private meeting with him in downtown San Francisco in two hours. I?ll let you know what he says on Monday. Oops, gotta go.
?Oops, Time to Mention QE3 Again
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/bernanke-time-is-up.jpg299399DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-26 23:03:512012-04-26 23:03:51No More QE3
When anyone starts lecturing you that the US has the highest tax rate in the industrialized world, just turn around, walk away, and pretend you never heard of them. This person is either ignorant about this country's taxation system, or is deliberately trying to deceive or mislead you.
According to a report released by the Internal Revenue Service, America's tax collection agency, the top 400 individual tax returns filed in 2009 reported an average gross income of $358 million each. The average amount of tax paid by these individuals came to under 17%, less than half the maximum Federal rate of 35%, which kicks in on annual income over $372,950 (click here for the 2009 tax tables). This explains why Warren Buffet pays a much lower tax rate than his secretary. It really is true that in America, only the poor people pay taxes.
Look at any international comparison of taxes to GDP, and one can always find the United States at the bottom of the table. Low American taxes is one of the main reasons why I moved my company here from England 18 years ago. Take a look at the Fortune 500, where one third of the largest companies pay no tax at all, and many that dominate the top of the list, like the oil majors, pay only token amounts. However, if any politician wants to pander to voters during election time on a tax cutting platform he will only bluster on about ?tax rates?, not actual taxes paid.
What the US has that other countries lack is the 100,000 pages of the Internal Revenue Code. It is a 99 year accumulation of deductions, accelerated depreciation rates, tax credits, and other tax breaks that are the end product of intensive lobbying efforts and bribes by special interest groups, corporations, unions, and even religious groups.
Take a look at the oil industry again. The oil depletion allowance permits drillers to deduct a substantial portion of the cost of a new well in the first year (click here for its fascinating history). When I first got into the oil and gas business a decade ago, after reading the relevant sections of the tax code, I couldn't understand why everyone wasn't drilling for Texas tea. The total value of this one tax break to the industry is estimated at $55 billion a year. This explains why we have had three presidents from Texas in the last 50 years. Some of this money ends up in campaign donations.
I have a very simple solution to the country's budget deficit problem. Hit the reset button. Eliminate the Internal Revenue Code. Just set it on fire or send it to the recycling bin. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions. And I mean everything; deductions for dependents, home mortgage interest, medical expenses, the works. The oil depletion allowance other corporate loopholes are worth at least $150 billion a year in lost federal revenues. There are no sacred cows. My revised Form 1040 would be a postcard that would have only five lines on it:
Name
Social Security number
Income
Tax Rate
Tax Due
The budget deficit would disappear overnight. Government spending would shrink dramatically, because you could ditch most of the 100,000 who work for the IRS. Some 1.3 million auditors, CPA's, tax attorneys, and bookkeepers would have to hit the road in search of new work too. The amount of money that is wasted on tax collection in this country is truly staggering. This is not some pie in the sky concept. This is how taxation already works in most countries, and they seem to get along just fine.
In fact, the whole scheme might even pay for itself.
I Don't See Any Jobs For Former IRS Agents, Do You?
?This year is going to be about chasing pennies and nickels in the bond market. Volatility is going to be very low. I expect the ten year bond to end up at a 2% yield,? said Mike Pond, co-head of US interest rate policy at Barclays Bank.
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