Friday, October 31, 2008

The truth about deflation

We haven't visited Eric Janszen in a while*, here's his latest (from iTulip, scroll down):

With all of this panicking into dollars we get asked a lot about deflation. "Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100." The reason is that we are 100% certain that dollar appreciation that we call "Ka" as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cost $2,000, although there will be plenty of cheap used cars for sale, and gold will not go to $100. Here's why.

The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.

This ain't deflation

We're not nit picking terminology here. We’ll show you what a real deflation spiral looks like: nothing whatsoever like the deflation we are seeing today that we have long forecast and call disinflation to distinguish it from the run-away deflations that occurred under the gold standard in the pre Bretton Woods era.

Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold standard to inflate the money supply to stop deflation, especially in times of war. If you are a government and need to inflate and there's no war to fight, then make something up–like an oil "shortage" in the 1970s....MORE
*Here's a good one: "Psst: Do You Want to Know the Future of Renewable Energy Investing?"

"Carbon army" hopes to grab slice of New Deal cash

That's Reuters' headline. I'm still looking for a name for the carbon insiders. Under consideration:
Carbon cartel?
or more obscurely (yeah right) the tetravalents.
Carbonari has already been taken. Hmmm...
From Reuters:
A growing "carbon army" of environmentalists, bankers and investors has seized on official backing last week for major public spending announced in Britain and the United States....MORE
Classic Baptists and Bootleggers (three page PDF by the man who coined the term)

Update: A reader emails that Carboñeros reminds her of the SUV Marge Simpson drove in the "Last Temptation of Krust" episode:

Does the market bottom in 1Q/2Q 2009?

From Humble Student of the Markets:
Did anyone sit out October?

I wrote in early October that Mebane Faber had done a study indicating that equities could see positive returns in November and December because of the horrible month that stocks saw in September. Faber followed up with a further study entitled What happens after two bad months that point to median gains of 7% for the rest of the year if history were to be any guide. VIX and more came to a similar conclusion on market direction by comparing the current period in the US to Japan:
Japan's "lost decade" does bear some resemblance to the problems in the U.S. Looking at the historical record with a global perspective, it is tempting to conclude that the current situation ripe for another volatility bounce of at least two months.

Waiting for the retest of the lows
Without a doubt, last week’s market was a bottom fishers’ paradise. In addition to running my recent screen of beaten up financials, I ran other deep value screens and found all sorts of companies that were worth more dead than alive. There were 14 stocks trading below net cash (cash – total debt) that were profitable and therefore in at low risk of bankruptcy. There were also 42 stocks trading below net-net working capital (current assets – all liabilities) and were profitable. These are all indications of extreme cheapness that bottom-up value investors are fond of.

However, my sources tell me that many hedge funds have moved to cash and called it quits for the rest of the year (SAC Capital is just one well-known example). Any rally that we may see in the stock market for November and December cannot be regarded as enduring until it can be confirmed in January when hedge funds return to the market.

What bothered me was that a lot of individual investors have been too eager to jump on this rally. I wrote that sentiment was too bullish for this to be a durable bottom. However, sentiment models are not great at timing markets in the very short term....MUCH MORE

Energy Conversion: Margin pothole in mid-2009; Initiate with Sell, $17 tgt - Citigroup (ENER)

ENER will report third quarter earnings November 10, the stock was recently trading at $32.44, down $0.37. This came out yesterday, the stock was up $2.06.
From Notable Calls:
Citigroup is initiating coverage of Energy Conversion (NASDAQ:ENER) with Sell and $17 target. While the stock is already well off its high, they think it can still go lower as they foresee a big margin "pothole" in mid-2009 against broad expectations of margin expansion. C2009 and C2010 EPS estimates are about 1/2 of the Street, and trading at 18x C2010 EPS estimate, if they are right, the stock still seems to have further downside. F2009 EPS $1.61 (consensus $1.65), F2010 EPS $1.35 (consensus $3.39). $17 target is based on 10x C2010 EPS of $1.71....MORE

Very Off-topic: Duplicating your keys without your knowledge

From Roland Piquepaille's Technology Trends:

Some clever computer scientists at UC San Diego (UCSD) have developed a software that can perform key duplication with just a picture of the key -- taken from up to 200 feet. One of the researchers said 'we built our key duplication software system to show people that their keys are not inherently secret.' He added that on sites like Flickr, you can find many photos of people's keys that can be used to easily make duplicates. Apparently, some people are blurring 'numbers on their credit cards and driver's licenses before putting those photos on-line,' but not their keys. This software project is quite interesting, but don't be too afraid. I don't think that many of you put a photo of their keys online -- with their addresses. But read more...

Silicon core of an optical fiber

HT: Futurismic Keys cloned from long-range photographs

A Great Little Chart via Howard Lindzon

I like this. It seems to verify an upside bias. Or something. Click the chart, then click again. From Howard Lindzon's blog:
Stop Being Bearish

...Take a look at this fantastic chart created by my friend Colin who runs internet research at Canaccord


Odds matter to me.

Betting on the end of the world at this point seems fun and exciting. COMFORTABLE even. Just not a bet for me anymore. You know where I stand…light, flexible and ‘too small to fail’.

Deflation vs. inflation- Commentary: Deflation is more likely than many assume

From MarketWatch:
Is the gold market sensing deflation?
It's important to ask this question, because something is most definitely bothering the gold market. Between Oct. 8 and Oct. 23 alone, for example, bullion dropped by some $225 per ounce. It dropped $15.50 per ounce on Thursday as well.
No doubt there are lots of factors that are conspiring to bid gold down. One that I mentioned in a column a couple of weeks ago is sentiment among gold timing newsletters. See Oct.16 column

I was prompted to consider deflation as another factor by recent developments in the Treasury market. That market is many orders of magnitude larger than the gold market, and its collective judgment cannot be dismissed lightly.
And right now, the Treasury market considers inflation to be a far lower threat than it was just a couple of months ago.

Consider the yields on regular nominal, Treasuries and those that prevail for the Treasury's Inflation Protected Securities, or TIPS. The primary difference between these two kinds of Treasuries is that TIPS' yields are protected against changes in the inflation rate. Theoretically, at least, this means that the difference in these yields will reflect the bond markets' expectation of future inflation....MORE

First Solar Target Raised from $103 to $105 at Goldman Sachs, Cramer Confused (FSLR)

FSLR was up 24.47% yesterday to $144.07. From
...First Solar (FSLR Quote - Cramer on FSLR - Stock Picks) price target raised at Goldman to $105 from $103 following strong Q3 results. Earnings were better than expected and management guidance included lower 2009 tax rates due to Malaysian tax holiday. Maintained Sell rating due to potential cuts to subsidies and oversupply issues in solar industry.
On October 6, 2008 Goldman downgraded First Solar from Buy to Conviction Sell and lowered their price target from $365 to $103. I, being a cynic, opined that Goldman and other insiders had completed their selling.
On Tech Trader Daily's post "First Solar: Q3 Beats; Signs $800M In Deals; Stk Shines" I commented:

Somewhere in the city,
an analyst just crapped his pants.

Comment by Climateer - October 29, 2008 at 6:22 pm

Jim Cramer went on record Oct 23:

Cramer's Solar Stock Sells: Is it time to sell solar stocks? On last Thursday's "Stop Trading!" segment, Cramer told viewers: "It's over! Duke Energy (DUK) had to cut back in solar." Cramer's Solar Stock Sells include First Solar (FSLR). Source
...He didn't have anything better to say about solar stocks. "It's over!" he said. "Duke Energy had to cut back in solar. SunPower(SPWRA Quote - Cramer on SPWRA - Stock Picks)? No thank you. " He didn't like Applied Materials(AMAT Quote - Cramer on AMAT - Stock Picks) on the basis of its solar division, either....

Wednesday, October 29, 2008

First Solar enters US residential market, shrs jump (FSLR)

First Solar will report third quarter numbers after the close today. The stock was recently trading at $123.27 up $9.18 or 8%. From Reuters:
First Solar (FSLR: Quote), maker of thin-film solar modules, said on Wednesday it had made its first entry into the U.S. residential market with a deal to supply 100 megawatts of modules to installer SolarCity.

First Solar, which produces the lowest cost solar cells in the industry, will also make a $25 million equity investment in SolarCity and receive a minority stake in the privately held company that installs the clean power systems in California, Arizona and Oregon.

Tempe, Arizona-based First Solar has focused on larger solar installations rather than the residential markets where installation costs tend to be higher. Germany, with its generous subsidies, has been its largest market....MORE

From the San Francisco Business Times:

SolarCity raises $30 million

Solar installer SolarCity raised $30 million in new funding, $25 million coming from the world’s largest thin film solar panel manufacturer First Solar.

The Foster City business has raised $56 million in venture capital and equity financing and is the largest residential installer in California. The money will help the company expand into other states in addition to Oregon and Arizona.

The relationship with Phoenix-based First Solar marks SolarCity’s first foray into thin film solar panels. The company has to this point installed silicon-based panels like those produced by Evergreen Solar (NASDAQ: ESLR), BP (NYSE: BP) and Kyocera (NYSE: KYO) and will add First Solar’s to the mix.

“Our company is on a fantastic trajectory with seeing really aggressive adoption (of solar) and there’s not one technology solution that fits for all customers,” said Lyndon Rive, CEO of SolarCity.

As part of the investment, First Solar will supply 100 megawatts of thin film panels to SolarCity over the next five years....MORE

Farm-Credit Squeeze May Cut Crops, Spur Food Crisis

Something to consider as we approach 2009. From Bloomberg:
The credit crunch is compounding a profit squeeze for farmers that may curb global harvests and worsen a food crisis for developing countries.

Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago, who has advised farmers, food companies and investors for 29 years. Harvests of corn and soybeans also are likely to fall, Basse said.

Smaller crops risk reviving prices of farm commodities that sank from records in 2008 after a six-year rally that spurred inflation and sparked riots from Asia to the Caribbean. Futures contracts on the Chicago Board of Trade show wheat will jump 16 percent by the end of 2009, corn will rise 15 percent and soybeans will gain 3 percent.

``The credit situation is worrying even the biggest and best farmers,'' said Brian Willot, 36, a former University of Missouri commodity analyst who now grows soybeans on 2,000 acres in Brazil. ``For the financially weak, credit has dried up completely. For the strong, credit has been delayed and interest rates are higher.''>>>MORE

Is buy-and-hold dead and gone?

I believe the difference comes down to whether your goal is to preserve wealth or make it. As a side-note, a few years ago both Merrill Lynch and Berkshire Hathaway bought annuities to satisfy their defined benefit pension liabilities. Now before you email, I know there are benefits from not having to comply with ERISA (tell me about it) but the interest rate on both annuities was around six percent.

What does that tell you about their respective market return expectations? For comparison, CalPERS is budgeted for 7.75% which may be a bit high considering the losses they've been booking. In CalPERS case they can always fall back on the taxing power of the state of California and the governmental subdivisions therein. Oh joy.
From Fortune:
That's about the craziest thing I've ever heard!" shouts Jeremy Siegel through the phone when I mention the headline of this story. "I mean, what's the rationale for anyone saying that?" I had called up the Wharton professor because he's one of the high priests of buy-and-hold investing. In his classic book, Stocks for the Long Run, Siegel analyzed 200 years' worth of U.S. market returns and concluded that patient, consistent investment in stocks over a long period is the most effective strategy for wealth creation among regular folks.

It's a message that makes a lot of sense to people under normal circumstances. But lately, of course, the market has been anything but normal.

As Siegel and I were speaking in mid-October, the Dow was down some 39% from its high a year earlier. Investors were taking their money out of equities by the billions. The S&P 500's ten-year return was -11% (with dividends included, it was up a measly 5%). Plenty of people had suddenly begun to ask themselves whether the idea of long-term investing was a sham....MORE

Auctioneers set to win when economy falters (RBA)

From the Financial Post:
Tough economic times are often boom times for auctioneers like Ritchie Bros. Inc., says Blackmont Capital Inc. analyst Avi Dalfen, who is expecting an 18% growth in the company’s auction revenue when it reports its third quarter results, offset by higher expenses for future growth.
“RBA is increasing its penetration of the global used equipment marekt, estimated at more than US$100-billion,” Mr. Dalfen says in a note to clients....MORE

So how many hedgies did Porsche really kill?

It was a classic corner. My first thought was Northern Pacific 1901 where the stock went from under $100 to $1000 during the squeeze. Although the VW squeeze was only half the magnitude it had the same effect, the speculators sell everything else as they desperately try to locate stock to cover. First up, the headline story from FT Alphaville:
Difficult to say, of course, but we’d be sellers of the €30bn figure being banded about by newspapers as they struggle to explain how speculators borrowed shares in Volkswagen, not knowing they belonged to Porsche, sold them, and then seemingly had to buy them back (from Porsche) at five times the price, before giving them to Porsche. (We won’t address the pref side of the trade!)>>>MORE
Next, some truly pathetic whining from the hedge funds via the Telegraph:

How Porsche took the wind out of the hedge funds' sails

Shortly after 3pm on Sunday, Porsche slipped out its bombshell – in German. So it took a while for hedge fund managers to comprehend the significance....
...With Porsche already owning 42.6pc of VW and Lower Saxony 20pc, this additional 31.5pc left little more than 5pc of shares free to cover short positions that amounted to nearly 13pc of the company's stock.

Porsche said it was letting the market know "to give short-sellers the opportunity to close their positions unhurriedly and without bigger risk''....

...As the losses have grown, so has the indignation. The hedge funds feel unfairly caught out. VW has been a popular "short"....

...Porsche's movement has sparked calls of foul play. "The regulator needs to investigate,'' Piers Hillier, head of European equities at WestLB Mellon Asset Management, told Bloomberg. "The bigger question has to be why they have not done so already. Porsche's stake-building process is at best obscure."

Porsche vehemently rejects the accusations. "The ones responsible are those that speculated with huge sums of money on a falling Volkswagen share price," said a spokesman...

Somebody running money at the fruit of the merger of Rheinische Girozentrale und Provinzialbank, Düsseldorf, and Landesbank für Westfalen Girozentrale, Münster (West Landesbank) should know the place that Porsche and VW hold in the German business universe contra the hedgies:

...German regulator Bafin has announced that it is looking at the VW share movement to see if any insider trading or market manipulation had taken place, but has not yet launched an official investigation.

Hedge funds are not holding out any hope. The German establishment has made little secret of its contempt for the high-rolling industry, with one senior politician referring to the sector as "locusts"....MORE

During the '01 squeeze a few lousy NP shares were rushed from London to New York to settle the short and they were the most valuable cargo on the ocean because the sellers are at the mercy of the folks to whom they sold the stock. The Morgan/Hill and Harriman/Rockefeller buyers let the sellers off the hook for $250 if memory serves. Porsche is going to do something similar. From the Wall Street Journal:

Porsche to Settle VW's Hedged Shares

Porsche Automobil Holding SE said Wednesday it is taking steps to smooth over volatility that saw Volkswagen AG shares soar more than four times in value in recent days, selling up to 5% of its own stock in the auto maker.

"Porsche SE intends -- depending on the state of the market -- to settle hedging transactions in the amount of up to 5% of the Volkswagen ordinary shares," the Stuttgart-based maker of the 911 said. "This may result in an increase in the liquidity of the Volkswagen ordinary shares."

Volkswagen's shares jumped 82% on Tuesday after a similar surge Monday. Speculation on the reason for the rise centered on a reduced number of shares available and hedge funds needing to unwind bad bets on the share's direction. The surge came amid reports that big investors had been forced to buy scarce shares to get out of mistaken bets the shares would fall. (See related article.)...MORE

I had a comment on MarketBeat's post "Bug Crushes Exxon":

Too funny.

On page 400 of Edwards and Magee’s “Technical Analysis of Stock Trends” 8th ed., is the line:
“Such situations as the famous 1901 corner in Northern Pacific are not likely to ever occur again under present regulations…”

Comment by Climateer - October 28, 2008 at 10:41 am

Tuesday, October 28, 2008

Climateer Line of the Day: 11% Up Division

From Commenter Paul on Marginal Revolution's post

Department of Whatever

Dow up 889.

I believe in the semi-strong efficient markets hypothesis. That is, around 2pm EDT today, something happened to make the fair value of equities 8% higher.

Even as Dow Soars 11%, Skeptics Lurk

From the New York Times:
A tug of war is in full swing on Wall Street and those pulling for stocks came out way ahead on Tuesday for the first time in a while.

After four mostly miserable weeks, a powerful afternoon rally left traders wondering if it was time to buy again. Shares, the bulls argued, have become too cheap to resist, despite signs of trouble in the economy. Many other investors, however, remained unpersuaded.

At about 2 p.m., the market exploded into one of its biggest rallies since World War II, with the Dow Jones industrial average closing up 889.35 points, or 10.9 percent, to 9,065.12. In the last 69 years, the Dow has gained that much on only one other day, and that was two weeks ago, on Oct. 13.

There was no single catalyst for the surge, and market specialists said investors seemed to be coming around to the idea that stocks were worth buying, given that the Dow had plunged 32 percent since the end of August....MORE

First Solar shares dip below $100 ahead of report (FSLR)

The big dog of U.S. solar companies is reporting tomorrow after the close. A lot of folks want to hear their guidance for Q4 and '09. From the AP via Yahoo Finance:
Shares of solar panel maker First Solar Inc. dipped below the $100 mark for the first time in more than a year Tuesday, a day before the company was to report third-quarter earnings.
First Solar fell to $95.32 Tuesday before recovering a bit to close up $6.18, or 5.7 percent, at $114.09.

The stock, which hit a high of $317 on May 14, last traded below $100 in September 2007.

UBS analyst Stephen Chin said solar's residential segment is suffering from a global recession and tight credit markets, but he considers First Solar a preferred pick in the industry.

"We favor First Solar given our view that the company will sustain the industry's lowest cost/watt and continued manufacturing production outperformance," Chin wrote in a client note.

Lazard Capital Markets analyst Sanjay Shrestha rates First Solar a "Buy" with a price target of $265. He said the company should be able to leverage the solar industry's long-term growth by continuing to reduce costs and improve efficiency....MORE

The conference call is expected to begin at 4:30 pm, Eastern. Here's the press release:

TEMPE, Ariz., Oct 20, 2008 (BUSINESS WIRE) -- First Solar, Inc. (NASDAQ: FSLR) will report financial results for the third quarter ended September 27, 2008, after market close on Wednesday, October 29, 2008. The Company will hold its quarterly conference call to discuss these results at 4:30 p.m. EDT. Investors may access a live web cast of this conference call on the Investors section of the Company's web site at

An audio replay of the conference call will also be available approximately two hours after the conclusion of the call. The audio replay will remain available until Friday, October 31, 2008, at 11:59 p.m. EDT and can be accessed by dialing 888-266-2081 if you are calling from within the United States or 703-925-2533 if you are calling from outside the United States and entering access code 1288925. A replay of the web cast will be available on the Investor section on the Company's web site approximately two hours after the conclusion of the call and remain available for 90 calendar days....

Dow Up 890 After Ten-Times Increase in Commercial Paper Sales

This is as good a reason as any, and better than most.
From naked capitalism:
US equity markers were already having a very good day, even by the standards of recent high market volatility, where big snapbacks have become normal after sharps declines. But the very good day turned into a stunner after the announcement today of record commercial paper sales yesterday. The Dow rose 890 points, with a near hyperbolic rise at the close, and the S&P 500 was up just over 7%.

From the Wall Street Journal. Note how cautious the article is, which has not been fully revised from its mid day version, when the Dow had been up as much as 600 points and an end of session retreat was still possible:...

...Note that highs on low volume, from a technical standpoint, say a rally is tenuous and subject to reversal. However, one positive sign was the the recent lows were seeing fewer and fewer new lows for individual stocks.

Bloomberg reports on the big improvement in the commercial paper market:
Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank's efforts toward unlocking the market may be working....MORE

Is surfing the Internet altering your brain?

From Reuters:
The Internet is not just changing the way people live but altering the way our brains work with a neuroscientist arguing this is an evolutionary change which will put the tech-savvy at the top of the new social order.

Gary Small, a neuroscientist at UCLA in California who specializes in brain function, has found through studies that Internet searching and text messaging has made brains more adept at filtering information and making snap decisions....MORE

Raising target on Apple to $13,000 (AAPL)

Sorry I left without warning, things started popping.
I saw that headline in a comment on a blog somewhere, I think it indicates enthusiasm. I'll be back in a bit.

UBS Turns Cautious On Solar; Sees Slowdown in Germany; Downgrades SPWRA, ESLR, ENER, SOLR

Okay, let me get this straight. I'll use the Claymore/MAC Global Solar Energy ETF as a proxy for the group. It began trading April 15. First tick was $25.84. As recently as August 29 it was trading above that price, closing that day at $26.28. Here's the chart (from Yahoo Finance):
Chart for Claymore/MAC Global Solar Energy (TAN)

The ETF just traded at $7.90. By my slide rule that's down 69.94% in the two months prior to the ratings changes. Here's the story from Tech Trader Daily:
UBS analyst Stephen Chin turned more cautious on the solar sector this morning, asserting that the industry is going to be significantly affected by the emerging global recession. He cut his estimate on 2008 solar demand to 4.4 GW from 5 GW; for 2008, he now sees 5 GW, down from 7.3 GW. In particular, he notes that the German market is likely to be just 1.5 GW in both 2008 and 2009, below his previous estimates of 2 GW this year and 3 GW next year. “Our industry research suggests the residential segment in most regions is becoming less elastic in a global recession with difficulty obtaining credit,” he writes....MORE
"Three score and ten percent ago our analyst set forth upon this industry a new rating, conceived in fantasy and dedicated to the proposition..."
Good grief.

Retail Carbon Trading is Here! ETF Securities to launch carbon futures Exchange Traded Commodty

"Gee Ma, with those losses in the 401K, maybe we should think like that Goldman Sachs feller and try to make it all back on this carbon stuff."
"Well, if you think so Pa."
From CityWire:
Investors will be able to access the rapidly growing carbon futures market later this week with the launch of the world’s first carbon exchange traded commodity (ETC) on the London Stock Exchange.

The ETF Securities Carbon ETC is designed to track the price of carbon emissions allowance futures and offer investors a total return – the return an investor can earn by holding a long only, fully collateralised position in commodity futures.

Each ETFS Carbon is initially equivalent to one emissions allowance, which bestows upon the holder the right to emit one tonne of CO2 or the equivalent. It will trade on the LSE in both Euros and British pence, and each will begin trading at about €18.37 (£14.74), ETFS said....MORE

MondoVisione has more details:
  • European first for listed access to carbon emissions
  • Simple and direct exposure on the London Stock Exchange
  • ETC to track the world's most liquid carbon emissions futures contract
  • European carbon emissions trading expands by 80% in 1H08 to EUR 30 billion

ETF Securities Limited (ETFS), the global pioneer in Exchange Traded Commodities (ETCs), will list the world's first Carbon ETC on the London Stock Exchange (LSE) in the dedicated ETC segment. ETFS Carbon offers investors, for the first time ever in Europe, the opportunity to gain simple and direct exposure to the carbon emissions allowance futures market. It is expected that the first day of trading will be Thursday 30th October.

ETFS Carbon (LSE Code: CARB) is designed to track the price of carbon emissions allowance futures and offers investors a total return*. CARB tracks the ICE ECX EUA Futures Contract traded in London on the ICE Futures Market - currently the most liquid exchange traded contract within the EU Emissions Trading Scheme ("EU ETS"). Each ETFS Carbon is initially equivalent to one emissions allowance; the holder of an emissions allowance owns the right to emit one tonne of carbon dioxide equivalent gas. On the LSE, ETFS Carbon will trade in both Euros (CARB) and also in British pence (CARP) on the London Stock Exchange. Each ETFS Carbon will begin trading at approximately EUR 18.37 (£14.74)...MORE

Is This the Real Reason for Today's Equity Market Gains?

From FT Alphaville:

From an email currently circulating the City of London:

Gut wrenching declines in US and global equity markets during October coupled with bond market outperformance will undoubtedly require MASSIVE monthly asset rebalancing by US pension funds –- rotating OUT of bonds and INTO stocks. This may have a profound “short-term” impact on performance of risk assets since the required rebalancing appears to eclipse even the large rotation after the 1987 stock market crash. As a very simple example, we asked our quant colleague (xxx) to analyze a balanced portfolio targeting 40% domestic bonds (SBBIG Index) and 60% equities.

We assumed that the equity portion is comprised of 75% domestic stocks (MXUS Index) and 25% EAFE international equities (MXEA Index). The attached rebalancing calculations based on closing levels last Friday (Oct 24) suggest that US pension funds would need to reduce bond holdings by a WHOPPING -4.1% while increasing equity allocations by a corresponding +4.1%, all by the close of business at month-end on Halloween Friday (Oct 31)....MORE

Here's the list of our recent CalPERS posts including "Pension Funds Drive Growth Of Alternative Assets. And: CalPERS Up 68% on Commodities; Down 31% on Real Estate. Action, Baby, Action!" and "Come on Lucky Seven: CalPERS Bets on Alternative Investments".

Phase III (or is it IV?): Europe on the brink of currency crisis meltdown

Ambrose Evans-Pritchard makes Nouriel Roubini look like a Chamber of Commerce booster. Here are some of our previous links to his writings. With the U.S. markets looking to trade up 4%, a lot of folks may be tempted to start a chorus of "Happy Days are Here Again". Not our A. E-P. From the Telegraph:

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits....MORE

Financial aspect to Google's environmental goals grows (GOOG)

From the International Herald Tribune:
Google, the Internet search and advertising giant, is increasingly looking to the energy sector as a potential business opportunity.

From its beginning, the company has invested millions of dollars in making its own power-hungry data centers more efficient. Its philanthropic arm has made small investments in clean energy technologies.

But in recent weeks, Eric Schmidt, Google's chief executive, has hinted at the company's broad interest in the energy business. He also joined Jeffrey Immelt, General Electric's chief executive, to announce that they would collaborate on policies and technologies aimed at improving the electricity grid. The effort could include offering tools for consumers.

Meanwhile, engineers at Google are hoping to unveil soon tools that could help consumers make better decisions about their energy use.

And while the company's philanthropic unit,, has invested in clean energy start-ups like one that uses kites to harness wind power, Google is now considering large investments in projects that generate electricity from renewable sources.

"We want to make money, and we want to have impact," said Dan Reicher, director for climate change and energy initiatives at

Corn, Soybeans Jump on Demand Outlook Before Revised U.S. Data

Yesterday's abbreviated report was the talk of the pits. Processors (packaged food, ethanol) should have no complaint about current input costs. Lower oil and commodity prices don't seem to be flowing through to the retail level yet so someones margins should be up. After we posted Teresa Lo's warning on General Mills Sept. 22, I lost track of the food companies. The stock was around $70.00, it closed at $63.71 yesterday.
I'm hearing that a lot of farmers are holding this years crop over the winter in hope of higher prices next spring. Here's the ag story from Bloomberg:
Corn and soybeans gained for a second day on speculation price drops to the lowest in a year may boost export demand and on concern that U.S. acreage forecasts may be revised down in a government report today.

Corn fell as low as $3.64 a bushel yesterday, the lowest since Oct. 25, 2007, and has tumbled 49 percent from a record in late June. Soybeans have fallen 42 percent from a record in early July, touching $8.38 on Oct. 16, the lowest since August 2007. The U.S. government will revise its October production data today.

``It's bargain hunting,'' Kaname Gokon, deputy manager of research at Okato Shoji Co., said by phone in Tokyo. With declining freight costs, the recent drops in corn and soybeans have boosted interest among overseas buyers, he said.

Corn for December delivery rose as much as 19.75 cents, or 5.1 percent, to $4.05 a bushel in electronic trading in Chicago and was at $4.0475 at 4:18 p.m. Singapore time. The price, which gained 3.4 percent yesterday, reached a record $7.9925 on June 27.

Soybeans for January delivery gained as much as 54.5 cents, or 6.1 percent, to $9.52 a bushel and stood at $9.485 by 4:19 p.m. Singapore time. Futures touched a record $16.3675 on July 3.

The National Agriculture Statistics Service, a unit of the USDA, will release a revised October crop-production report today with corrected acreage estimates. The USDA didn't provide further details about the report, which will be released at 8:30 a.m. in Washington. The original report was released Oct. 10....MORE

Monday, October 27, 2008

Is The Financial Crisis Making You Psychic?

Psychic or psycho?
From ClusterStock:
No. Of course it’s not. But it may be making you believe you are psychic.

Melissa Lafsky at Discover Magazine’s science blog points us toward this article in Newsweek, explaining how belief in the paranormal skyrockets when people feel like they’ve lost control of their lives. Here's how Lafksy explains it:
If you’ve picked up a newspaper, watched a TV, or checked your 401K in the past few months, there’s a near-perfect chance that you’ve experienced the full miasma of fear, anxiety, and helplessness that accompany loss of control. We hate that feeling—it’s a trait embedded in the human condition. And we’ll go to any lengths—including “developing” the ability to talk with the dead, see invisible patterns, and read the stars—in order to avoid it....
...Lafsky also points out a study in this month’s Science demonstrating that when people feel they lack of control in life, they experience sudden increases in “invisible pattern-seeing." "People primed with a sense of powerlessness saw more images in static, found more conspiracies in written stories, and imagined more patterns in financial markets than those who were left alone," Lafsky writes....MORE
That effect is something you must always be on guard against and not just in the markets. I get crabby when folks think they can read my mind. My thinking isn't that transparent. (is it?)
Last week MarketBeat posted "Written in the Stars" wherein somebody I've never heard of says the market would bottom today:
...Panic lows have historically occurred on day 27/28 of the 7th lunar cycle, which are this Sunday and Monday. The panics of 1857/1907/1929/1987/1997 all marked their lows on these days in October!”...
There is a long history of this stuff, everybody wants to know the future.
One of my favorite examples comes from a "American Experience" episode, "The crash of 1929"
(we linked to it in reference to Joe Kennedy's pool manipulation of RCA)*
1929 February: Astrologer Evangeline Adams, who counts Charlie Chaplin, Mary Pickford, and J. P. Morgan among her clients, predicts the market will rise in the coming months.
This is contradicted by her comment:
"In 1928 and 1929... it behooves everyone to be extremely cautious in investment and money matters, and be prepared for this threatening configuration of planets". The stock market crash occurred in October of 1929.
Or it may just be an earlier version of the Cramer technique.
Ms. Adams was reputed to call the crash later that year based on the horoscope of Mr. Morgan's son Henry Sturgis (founder of Morgan Stanley).

*Robert Kennedy Jr., Global Warming and Wall Street
...According to Wikipedia Robert Jr.'s grandfather bought the property in 1928. Already a wealthy man Joe Kennedy had another Wall Street trick up his sleeve, a classic pump-and dump. In 1929 he and some other rascals got together to run the .com of the day, Radio Corporation of America.

What a run it was! The pool picked up $5 million in ten days. My BLS inflation calculator says that's a bit over $60 million today (although the PBS special linked below says $100 million).

When the question arose as to who should manage the pool the answer was easy. Who better than the specialist in the stock, Michael J. Meehan! PBS did a good job on their show "The Crash of 1929", even interviewing Meehan's grandson. Here are some of my links, Senate Hearings (4 page PDF), 1948 SEC chief counsel memo on the Act of '33 (5 page PDF), Colliers story on the early SEC.

One of Joe Kennedy's most quoted comments:
"It's easy to make money in this market," said Kennedy, famously, to an associate. "We'd better get in before they pass a law against it."

It must run in the family "We got ours, now you, git..."

Oil Ready for a Rebound? And Poor T. Boone

December oil was recently trading at $64.89 up 74 cents after dipping below $62.00.
From MarketBeat:
The decline in energy-related commodities has been as swift as the latter stages of the historic run-up that occurred earlier in the year. But a look at companies in that sector suggests that the decline may be nearing its end, at least for now.

Bianco Research analyst Howard Simons notes that an index of exploration and production companies has displayed a bit of strength in the last several days even as the prices of crude oil and natural gas continue to sink. Such a judgment is built on shaky ground — it has taken place, after all, over just two weeks — but the rebound in these stocks “may be a sign the violent slide in the two major energy commodities is drawing to a close.”>>>MORE

MarketBeat has a related post on T. Boone Pickens:

The Bloom Is Off of T. Boone

In the latest sign of how the financial crisis and steep drop in commodity prices since July have blindsided some of the most prominent investors, energy crusader T. Boone Pickens said he and his BP Capital investment firm have lost some $2 billion since oil and natural-gas prices started tumbling in July.

The information, released on “60 Minutes,” is sharply higher than the most recent estimates of Mr. Pickens’ losses. His funds were previously thought to be down over $1 billion in 2008, with his personal losses pegged at more than $300 million....MORE

Wind: Nordex to Build $100 Million Plant, employ 700 in Arkansas

From the Fayetteville Morning News:
A wind turbine manufacturer announced Friday it will employ 700 people at a $100 million plant it plans to build in Jonesboro.

German-based Nordex USA Inc. said it plans to begin production in January 2010 on every component of a wind turbine except the tower.

Employees will earn an average of $17 an hour working in a new plant to be built on 187 acres in the Craighead Technology Park, the company said....MORE
If I recall correctly, major blade maker LM Glasfiber began operations in Arkansas last year amid accusations that the wages actually offered were lower than those promised when the deal was negotiated. I can't find the link but here's an Oct. 25 help-wanted ad:
LM Glasfiber is the world's leading manufacturer of rotor blades for wind turbines.



Starting at $12.13 per hour 12 Hours - Weekend Shift
The Nordex announcement follows the news (relayed by the Climate and Energy Project blog) of another European wind company setting up shop in Arkansas:

Additional 830 wind manufacturing jobs coming to Arkansas ( Quotable:

Polymarin Composites, an international wind turbine blade manufacturer, will locate a new North American factory at the old Levi’s plant in Little Rock. In addition, Wind Water Technology, a supplier to Polymarin, will locate in the same facility. All told, 830 jobs averaging $15 per hour will be hired over the next four years. The two companies will invest $20 million to upgrade the closed Levi’s facility.

Congressional renewal of a production tax credit for alternative energy as part of last week’s $700 billion federal economic rescue package was a factor for the decision to locate in the U.S. Little Rock is also the North American headquarters of another major wind turbine blade maker, LM Glasfiber.

How Bad Can it Get? The Lost Quarter-Century

The incredible growth of credit over the last thirty years must be unwound. It fueled a fantasy worldwide economy and as with most every aspect of human existence, when fantasy collides with reality, reality eventually wins.

If the truth of the above statement is accepted, it becomes a policy question as to how fast the deleveraging should proceed. If the U.S. follows the Japanese playbook it can be ugliness protracted.
From Bespoke Investment Group:

Japan in the 1990s was the original "lost decade," even though the current decade for the US is now considered the same. But now that the Nikkei 225 is currently trading at its lowest levels since October 1982, it really is the "lost quarter century" for Japan.


The Goldman Commodities U-turn, again

From FT Alphaville:
Goldman Sachs’ commodities team headed by Jeffrey Currie continues to use the unprecedented “financial crisis” as a get-out-clause for why crude prices will likely miss the team’s previously bullish end-of-year forecast of around $149 per barrel.

In fact, the team says that further downward revisions by GS economists for a number of emerging economies including Russia and India are leading them to reduce 2009 global oil demand estimates by 200 thousand b/d to 300 thousand b/d growth next year.

In their latest post-Opec note they write:

The 1.5 million b/d cut announced by OPEC clearly moves in the direction of tighter fundamentals, but the ongoing financial turmoil and its economic implications that are causing a generalized sell-off across assets will likely continue to put downward pressure on oil and commodities prices in the near term (see Exhibit 1).

But, the team adds, full implementation of Opec’s announced cut would bring production levels to those reached in mid-2007, and if achieved, could go a long way to rebalancing the market. Under normal credit conditions they would expect an 8-9 per cent front-to-back contango to materialise versus the more pronounced 15 per cent current figure. Essentially, that under normal circumstances Opec cuts would see the forward curve flaten due to tightening supplies at the front-end. However, the get-out-clause persists:

…if the current dislocation between the shape of the forward curve and inventories persists along with continued constrained credit conditions, the contango could worsen even further from current levels.

In the interim, Goldman states - quite obviously - that you can certainly expect a narrowing of heavy/light differentials (the spread between heavy sulphur crudes produced by Opec and the light sweet superior crudes mainly produced by non-Opec members).

Most interestingly though, the commodities team says it will be leaving its own trades open because volatility will likely provide a better exit opportunity....MORE

FPL Group net rises 45% on hedging gain

Utility firm cuts capital spending by $1.7 billion, including wind projects
From MarketWatch:
FPL Corp. on Monday reported third-quarter net income rose 45%, mostly on a gain from hedges, as the parent of Florida Power & Light Co. moved to cut capital spending by $1.7 billion and curb its profit outlook in the face of the economic slowdown....

FPL said in light of the current economic and credit environment, it'll reduce capital expenditures to $5.3 billion from $7 billion in 2009.
Of the $1.7 billion reduction, $1.3 billion involves deferring new-project development at FPL Energy, including wind energy projects.
FPL Energy had previously planned to add 1,500 megawatts in 2009; the revised plan is to build 1,100 megawatts.
In addition, FPL plans to reduce 2009 capital spending by $400 million for projects associated with system growth that is no longer expected.
"Current planning allows the flexibility to quickly ramp plans up or down as credit and market conditions change," FPL said...

Funding becoming harder to get for green startups

From Reuters via the Guardian:
Saving the planet is looking a lot less profitable than it was a few months ago, and investors once enamored with finding the next high-flying alternative energy startup are retrenching.

Venture capitalists poured a record number of dollars into alternative energy companies as oil prices peaked at $147 in the third quarter, but some say that investment has trailed off substantially as crude prices declined and the global economy has slipped toward recession.

Not only are venture firms demanding lower valuations for what they call "cleantech" companies, they are also shying away from those with riskier technologies and startups whose business plans will require large amounts of capital.
"Our standard of investment has always been high, but it's even higher now," said Bryant Tong, managing director with San Francisco-based Nth Power, a venture capital firm that invests in energy technology startups. "Investors are hesitant to make investments... so it is harder across the board to raise capital for these companies."

Alternative energy in the last few years has become a major focus for venture capitalists, who saw there was money to be made from investing in technology to create cheaper solar panels, clean transportation fuels and green building products at a time of increased concerns about global warming and soaring fossil fuel prices.
Venture investments in alternative energy companies reached a record $2.6 billion in North America, Europe, China and India in the third quarter, according to industry research firm The Cleantech Group, which expects a much different picture in the current economic climate.

"We expect fourth-quarter venture investment numbers to be down significantly from the third quarter," said Brian Fan, senior director of research with The Cleantech Group, who estimated that fourth-quarter venture investment in the sector would be somewhere between $1 billion and $1.5 billion.
"And we expect that to continue into next year as well," Fan added.

The most visible recent sign of venture capitalists' new found caution toward cleantech was Tesla Motors announcement last week that it would delay the launch of its battery-powered sedan and cut jobs because of a lack of funds....MORE

Carbon: Goldman Sachs Hooks Up with Blue Source

Update: Environmental Capital has the story as their first post of the day.
From EarthTimes:
The Goldman Sachs Group, Inc. (NYSE: GS) and Blue Source LLC today announced a strategic alliance that combines Goldmans global leadership in commodities trading and financial risk management with Blue Sources leading climate change portfolio. As part of the alliance, Goldman Sachs has purchased an equity stake in Blue Source LLC.

Goldman Sachs will off-take, structure and market a broad range of verified emissions reductions (VERs) resulting from certain greenhouse gas (GHG) reduction projects in Blue Sources portfolio, including those associated with methane management from coal mining, wastewater treatment, landfills and animal waste; energy efficiency; carbon capture and sequestration from fertilizer and natural gas production; and industrial gas destruction....MORE

While Lehman shut down its carbon trading operation last month (with $385 million in projects), the banks see this as a shot at replacing the revenue lost by the market's realization of the phoniness of the mortgage racket. And Goldman plans to be there. From our February 28 post: "Will carbon-trading happen? Goldman hopes so, backs APX":

The verifiers hold exactly the same position in the carbon world as appraisers do in the mortgage biz.

As we get into structured carbon finance (carbon notes, carbon backed securities) really slicing and dicing the cash flows, there will be room for all kinds of shenanigans. The key difference is that whereas Mortgage Backed Securities had real estate (even if overvalued) backing them, CBS's will be built on the absence of an invisible gas. Is it any wonder that GS is interested?

From VentureBeat:

APX, a Silicon Valley company that certifies carbon and emissions offset certificates, and which is well-placed to support carbon-trading markets when they emerge, has gotten backing from Goldman Sachs in a $14 million investment, VentureBeat has learned....

Sunday, October 26, 2008

Calpers Sells Stock Amid Rout to Raise Cash for Obligations

This is hedge fund behavior, selling your most liquid investments to prop up the illiquid.
From the Wall Street Journal:

The nation's largest public pension fund, known as Calpers, is unloading stocks in a falling market to make sure it has enough cash to meet its obligations.

The pressures come as the California Public Employees' Retirement System has had to raise cash to fulfill commitments to private-equity firms and real-estate partners. The giant fund's predicament is another sign of how the market selloff is tightening the screws on pension funds nationwide. Many other pension funds have similar partnerships and could also confront liquidity strains....

...Under normal conditions, pension funds count on some private-equity partners to distribute investment gains, while pensions owe some partners more capital. During the recent market selloff, however, distributions have dried up while capital calls continue. That's created a mismatch and a cash strain.

Since the credit markets have tightened up and real estate and alternative investments aren't very liquid, Calpers has been compelled to sell off stocks to raise large sums quickly. Those sales are turning paper losses into realized losses.

Calpers said it had $188.8 billion under management as of Wednesday, down 21% from the end of June. The fund, which said it had about 63% of its assets in global stocks at the end of August, has been punished severely by the stock-market selloff.

Critics say that some of Calpers's troubles are of its own making. The pension fund is the main investor in a partnership that is expected to lose much of its nearly $1 billion investment in LandSource, a venture that owns thousands of acres of undeveloped residential land north of downtown Los Angeles and that filed for bankruptcy protection in June....MORE

KGO-TV, San Francisco has another aspect of the story:

CalPERS may need bailout

...With stock market losses topping $50 billion since July 1st, CalPERS is on track to needing help in just two years if the nose dive continues on Wall Street.

Local government and state retirees are guaranteed a certain amount, so the money has to be there.

"What this really is, is compensation. It's part of an employee's compensation package," said Macht.

Taxpayer groups are upset that Californians have to foot the bill when many employers have moved away from pension plans.

"This is adding insult to injury. At the same time we're seeing our own 401k's get hit, we're on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk," said Jon Coupal, from the Howard Jarvis Taxpayers Association.

Cities and counties also use CalPERS. Many can barely afford to keep services going, let alone contribute more to retiree benefits....MORE

At the same time PrivateEquityRealEstate is reporting the pension behemoth has found a fund with really good projections:

CalPERS invests $400m in Sternlicht’s latest fund

The California pension has committed $400 million to Starwood’s $3bn Global Hospitality Fund II, which is targeting 20% IRRs. This summer, Sternlicht said he was rapidly expanding his latest hotel brand: the Baccarat, based on the famous crystals.

Starwood Capital has received a $400 million commitment to its latest global hotel fund from the $233 billion California Public Employees’ Retirement System.

CalPERS said at its recent investment committee meeting it would invest $400 million with Starwood Capital Global Hospitality II, which is believed to be targeting $3 billion.

Despite being overweighted to both real estate and private equity, CalPERS committed a total of $1.2 billion to the alternatives asset class at the meeting.

The pension fund’s target allocation to real estate and private equity is 10 percent, however the actual allocation, as of the end of August, stood at 10.1 percent for real estate and 10.8 percent for private equity. The value of each portfolio is $23.6 billion and $25.3 billion respectively....MORE

Small Arms vs. The Bankers

Our Chart of the Day is a comparison of last week's market performance of publicly held* small arms manufacturer Sturm Ruger (RGR) and the Kbw Bank Index (BKX) via Yahoo Finance:
Chart for Sturm, Ruger & Co. Inc. (RGR)

*Most of the small arms companies are privately held. The Beretta family has been doing their thing for five hundred years. The CEO of Mossberg is a Mossberg. Browning and Winchester are owned by The Herstal Group, Colt's Manufacturing Co. is owned by Zilkha & Co. and Remington Arms is owned by Cerberus Capital.

Saturday, October 25, 2008

The Mathematics of Losing Money

Here's a reminder of why you can't afford to let losses get away from you. A 10% loss means you need a bit more than an 11% gain to get back to even. At down 20% you need a 25% recovery, etc.
Look at some recent stats on various markets with that thought in mind. From the Los Angeles Times Money&Co. blog:

Many World Stock Markets Now Off 50% or More from Peaks

Here's a club no country wants to join, yet its ranks are swelling: The 50%-Off (Or Worse) Stock Market Club.

Today brought another huge wave of selling in equity markets worldwide, as investors, understandably, keep focusing on the long list of negatives -- including still-severe credit market woes, forced asset sales by hedge funds as their clients bail out, and the likelihood of a deep recession ahead that will slash corporate earnings.

The wealth destruction around the globe from falling stock prices now has reached massive proportions....

...Here’s a sampling (not meant to be all-inclusive):

Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).

Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%)....MORE

HT: Calculated Risk

A 70% decline requires a 233% up-move to break even. Using the Ibbotson 1926-2007 Large Company annualized return of 10.36%, it's going to take twelve years to get back to even. Unfortunately the 10.36% is the non-inflation adjusted number. The inflation adjusted average return is 6.7-6.8% meaning you'd have to compound at that 10.36% for over twenty years to get back to an equivalent buying power.

The only hope in this case is that the company underlying the stock is growing faster than the large company average. After its 89% fall 1929-32, the Dow Jones Industrial Average took until November 23, 1954 to regain its September 3, 1929 value of 381.17.

As you waited you would have collected dividends but they were more than offset by inflation, the buying power break-even wasn't until 1958. That is a grim reality, waiting half an adult lifetime to get back to where you were.

There are two bright spots though. After the current cyclical bear market decline has ended we get the secular bear market valuation contraction (i.e. broadly sideways as earnings growth doesn't goose prices), approximately eight years worth .

That's not the bright spot.

Following that, we can look forward to a 15-20 year secular bull market starting somewhere between 2015 and 2020. But, there will be opportunities all along the way.

Shorter term, the other bright spot is that returns coming out of these generational bottoms are some of the best the markets offer:

Best U.S. Stock Returns Born Out of Troubled Times
Three Best Periods to Enter the U.S. Stock Market Since 1926:

●Since 1926, the best five-year return in the U.S. stock
market began in May 1932—in the midst of the Great
Depression—when stocks rallied 367%.

●The next best five-year period (when the stock market
rose 267%) began in July 1982 amid an economy in the
midst of one of the worst recessions in the post-war
period, featuring double-digit levels of unemployment
and interest rates.

Number three, following the Most Dramatic Fed Tightening in Past 20 Years

Dec 1994 251%

Source: Fidelity
U.S. stock market returns represented by total return of S&P 500® Index.
Three dates determined by best five-year market return subsequent to the month shown.
Sources: Ibbotson, FMRCo (MARE) as of August 31, 2008.

Some Very Smart Thinking on Gold

Why have we had so many posts on gold? Two answers:

1) Everything is connected. It's one piece of the interest rates, currencies, equities, commodities, real estate blah blah blah, puzzle. Keeping an eye on these various moving parts can help you spot anomalies that seem almost harmonic as they flow across asset classes; one seemingly uncorrelated datapoint can act as an early warning for action in other areas of the economy and markets.

2) You can make money off it.

Here's a smart guy giving first-class insight into one thread of the tapestry.
From HardAssetsInvestor:

Jon Nadler, senior analyst for Kitco Bullion Dealers (Montreal), is known for a fresh, clear-eyed perspective on the gold markets ... one that neither tilts too far into the gold bugs camp nor ignores the positive attributes of gold as a store of value.

He spoke recently with the editors of about recent trading in gold and the outlook for gold, silver, platinum and palladium. (HAI): A lot of people are confused by the gold market right now. On the one hand, we have conditions that should be ideal for gold: the Federal Reserve printing money, tremendous turmoil in the market, etc. But gold is trading down sharply, and there is talk of deflationary forces in the market. What's going on?

Jon Nadler, senior analyst, Kitco Bullion Dealers - Montreal (Nadler): I think the first thing you have to do to answer that question is step back a bit and look at it from a broader perspective. There is hardly any historical precedent to evaluate gold's presumptive behavior in a deflationary cycle. The only example we have is 1929-1933, and we didn't have a floating gold price back then; it was fixed.

Gold did fall less than other assets back then, as the quest for cash became a question of survival. But it wasn't extraordinary.

From that perspective, I think that it's a decent possibility that gold will act as a reverse hedge here. It might fall, down to $600/ounce or even $500/ounce, but at the end of the day, it will likely fall less than other assets....MORE

Friday, October 24, 2008

World Leaders Search for End of Economic Crisis

Looking for the Bottom

Image lifted from Guy Fawkes' blog of Parliamentary plots, Rumors and Conspiracy.

How low are P/E ratios?

Commentary by Mark Hulbert. From MarketWatch:

Valuations are low only if you have short memory
I felt really old on Thursday.
The guest before me on a television talk show expressed astonishment that price/earnings ratios were so low currently. In fact, he pointed out incredulously, some stocks' P/Es had dropped so low that they were now even in the unheard of single digits.
To me, this just showed how little stock market history that this guest really knew. In fact, according to data collected by Yale University Prof. Robert Shiller, the stock market's P/E ratio has been below 10 in 17% of the months since 1871.
That's about one-sixth of the time.

Of course, most of those months came more than two decades ago. That's why those with short memories can get away with thinking that current P/E ratios are particularly low. The last time the market's P/E was below 10, for example, according to Shiller's data, was in 1984, some 24 years ago. Anyone younger than 45 or 46 was probably still in college at that time.

I was prompted by this talk show guest's incredulity to see how the stock market's current P/E ratio stacks up to long-term historical norms. I emerged from my analysis with incredulity, but of just the opposite variety: I was amazed at how high the stock market's current valuation is, even after the market's plunge over the past month....MORE

We had a related post yesterday:

Remember the "E" in P/E

MEMC Electronic shares jump on strong 3Q earnings (WFR)

WFR was recently up 10% at $19.50. Remember this was a $96.00 stock a year ago.
From the AP via Yahoo Finance:
Shares of silicon wafer supplier MEMC Electronic Materials Inc. surged Friday, a day after the company reported a 21-percent jump in third-quarter profit on higher product volume.
MEMC shares gained $1.57, or 8.8 percent, to $19.35 in midday trading on a day in which most stocks in the solar sector were falling along with the broader markets.

The St. Peters, Mo.-based company supplies silicon wafers used in making chips and solar cells.

Piper Jaffray analyst Jesse W. Pichel said MEMC is best positioned in the solar value chain to weather the financial crisis....MORE

Cramer on BloggingStocks: I won't get excited this time

From BloggingStocks:
The real deal is upon us. The October session that we always seem to get, the one that looks like we need intraday Fed meetings and lifelines to banks and a flood of liquidity and ... oops, we've already done that!

Yep. So often we have had the real hideous looks, only at the last minute to have the darned defeat we need to start over be defeated by some optimistic yahoos who come out of the woodwork and say, "buy, buy, buy!">>>MORE
Warning: Stream of consciousness ahead! (yahoos and hideous looks)
Yahoo Finance had a headline* that I misread (twice!) as "The End is Nigh"

Which just goes to show how right that great philosopher, The Rock Man, was:
"The Rock Man said, "Say, babe, there ain't nothing pointless about this gig. The thing is you see what you want to see and you hear what you want to hear. You dig? Did you ever see Paris?"


"Did you ever see New Deli?"


"Well, that's it. You see what you want to see and you hear what you want to hear." And with that the Rock Man fell soundly asleep...
-from Harry Nilsson's The Point!

Solar Stocks Shrivel On FX Hit, Credit Worries

From Tech Trader Daily:

If you think the Nasdaq is having a bad day, imagine how holders of solar stocks feel.

The solar sector is under assault this morning, with many shares down twice as much as the broad market. The stocks are suffering from a host of woes that I’ve written about repeatedly on the blog, including worries about the impact of a sharp appreciation in the dollar and the effects of a tightening credit market. There are a number of research notes on the sector that are worth mentioning; here’s a rundown on some of what you ought to know....

One example:

...Robert Stone, of Cowen, notes this morning that Suntech (STP) shares have completed a round-trip to its IPO price, hitting a new 52-week low yesterday. Stone says that the company told him that “in recent days a number of shareholders have called to apologize, because they are being forced to sell in order to raise cash.” He says action in the stock seems more driven by fund flows than fundamentals, and notes that Q4 production is sold out. Stone contends the company has adequate capital to execute planned growth through 2009. Stone repeats his Outperform rating on the stock....MUCH MORE

How to Recognize the Symptoms of a Stroke (and what to do)

Remember the acronym FAST:


Here's a three minute video on symptoms and first aid via WalletPop:
How do you know if someone is having a stroke? You could read pamphlets and books on it -- but that would be boring! Instead, watch this way too catchy music video (I frequently find myself dancing to it) and remember to ACT FAST.

MarketWatch: BOHICA

Okay, they didn't actually say "Bend Over, Here It Comes Again". Instead, here's their front page:
A global rout
Bears ready to administer another mauling

Oil Ink: OPEC Slashes Output, Crude Price Falls

From Environmental Capital:
OPEC did exactly what it promised in Vienna, slashing oil output by 1.5 million barrels a day, but the market shrugged off the cartel’s biggest production cut in nearly two years and crude futures fell to $63 in New York.

With global demand for oil retrenching in both developed and developing economies, OPEC’s output cut was seen as too little, too late to stanch the fall in prices, Bloomberg reports. “OPEC has offered the market all the ammunition they had,” said Robert Laughlin, senior broker at MF Global Ltd. in London. “With the bearish economic outlook and manufacturing in freefall this accord is not good enough. ”>>>MORE

Swap spreads turn negative

From the Financial Times:
The turmoil in the financial markets has taken hold of the strategically important trade in long-term interest rate derivatives, pushing rates to levels once thought to be a “mathematical impossibility”....

...On Thursday, the 30-year swap spread turned negative after briefly flirting with such levels earlier this month. This implies investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.

“Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio Tata, head of interest rate derivatives strategy at RBS Greenwich Capital Markets.

Traders and analysts believe this reflects aftershocks from the demise of Lehman Brothers and capital constraints at surviving banks rather than a loss of confidence in the US government....MORE

Well that's comforting. HT: naked capitalism, he's got a great link list today.