Tuesday, March 31, 2009

Stocks, Bonds, Pensions and Guarantees

On Monday the Boston Globe had an article, "Pension insurer shifted to stocks" that reminded me of my reaction when the Pension Benefit Guaranty Corp. announced the policy shift in February 2008:

Yikes! In Policy Shift, PBGC Turns to Stock Market

Hey, what could possibly go wrong?
Ya know how retail investment types always point to Ibbotson and say something to the effect "There's never been a ten year period...blah, blah blah"? Ask 'em about the Cowles extension and the longest period the index value showed a net decline (I seem to remember 42 years, I'll dig out the book). When they come back at you that you aren't including reinvested dividends, throw a right, left, right combination:

1) What was the average dividend yield in Cowles 1871-1937?

2) What was the payout ratio?

3) What was the equity risk premium?

I usually get the cow eyes.
Even simpler is to ask the question Zvi Bodie did, back in the '90's:
(he seems to have overcome his MIT doctorate)

"If the risk of negative returns decreases over time, why does the cost of long term puts increase?"
(now I know the arguments against Bodie's implication, here's a decent one, here's a counter to the counter, we've got links, baby.)

What I'm wondering is if an entity like the PBGC, with its implicit call on the U.S. Treasury, should be increasing its exposure to equities. Especially when you consider that most busted pensions got that way through a combination of underfunding and lousy investments....
I forgot to post the Boston.com piece but it worked out because Pension Pulse picked up on it and used it in a post that touched on equity vs. fixed income returns, including a chart I had seen in another context (and forgot) and tying it all together:
A Giant Experiment?

(Click on chart to enlarge)

Toward the end of the post he uses the Globe piece to pivot to this:

...And the article above brings me to another excellent post by Ian Williams that appeared on the Barricade blog over the weekend, Who Killed U.S. Public Pension System?

Ian was kind enough to email me and share his insights with me. The charts above are from his post and I quote the following:

Professor and Nobel Laureate Paul Samuelson in late 1998 was quoted as saying, a bit sadly, “I have students of mine - PhDs - going around the country telling people it’s a sure thing to be 100% invested in equities, if only you will sit out the temporary declines. It makes me cringe.”

When someone tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their homework. At best, they are parroting bad research that makes their case, or they are simply trying to sell you something.

Which leads nicely into our 2nd bullet point - politically connected pension systems promising benefits and COLA’s assuming and I am likely being conservative a 7.5% investment return assumption on their portfolio which is now skewed heavily into stocks over bonds..MORE
Very good stuff and helpful in estimating returns going forward.

Climate and energy Mark up of federal legislation out - Waxman/ Markey

The folks at Kansas' own (sorry 'bout the Jayhawks) Climate + Energy Project have a combo post on a couple aspects of the House Climate+Energy bill:

For those of you following the progress of energy policy on the federal level, two representatives have released their combined vision for what that might look like.

A summary of the contents (graciously provided by a member of an online energy news group I’m on):

Title 1: Clean Energy
• Many provisions based on Markey bills
• RES: 25% by 2025
◦ Can be reduced to 20% if energy efficiency standards are met
• Stand alone energy efficiency provisions
◦ 15% by 2020
◦ Natural gas 10% by 2020...MORE
The second part of the post is political analysis from E&E News (sub. req.), worth a look.
Here are two of today's other posts:

"No gold imports by India for second month"

Regular readers know we have faith in the judgement* of Indian women when it comes to valuation metrics.
From Reuters India:
India imported no gold for the second month in a row in March as high prices dented consumer demand in the world's biggest market for the metal, the head of a trade body said on Tuesday. "Our records are showing zero so far," Suresh Hundia, president of the Bombay Bullion Association (BBA) told Reuters. "Scrap sales have reduced, but demand is not there either.">>>MORE
Here's another story via Reuters India:
Asia Gold-Discounts narrow, slow wedding season in India

...In India, the world's largest consumer, dealers complained about poor sales during the normally busy wedding as consumers waited for a price correction, but sales of scrap had subsided.

"There is still no buying. We feel at above $880 an ounce nothing will happen. If it falls below $850, there will be good demand," said Ketan Shroff, director of Pushpak Bullions Pvt Ltd, referring to levels last seen in January....MORE

*From "EU Emission Caps, Kyoto and Three Ancient Civilizations"

...As a side note, in December 1979, as silver was making its historic run, an old Jewish trader told me he was lightening up on Ag.

When I asked why he said "I hear the Indian ladies are taking their bracelets off and they've been trading it longer than I have".

Solar: And Now, The Rest of the Story (LDK; TSL; YGE)

Today's earliest solar post "A Bifurcated Market in Solar Stocks (ENER; FSLR; LDK; SPWRA; TSL; YGE)" commented on the divergence between Chinese and American solar stocks.
The next post, from Tech Trader Daily, pointed to the negative JPMorgan note on First Solar as one source of the opposite movements. Now TTD relays:

Solar: Piper Sees $30B China Green Stimulus Program

The solar stocks are having another big day, thanks to bullish note from Piper Jaffray’s Jesse Pichel on the prospects for a big Chinese subsidy program for renewable energy.

“While we can confirm that recent news about new solar subsidies from the [Chinese] Department of Construction is too premature to quantify, our checks indicate where there is smoke there is fire,” he writes. “Recent announcements are just the tip of the iceberg.” He writes that contacts at the National Development and Reform Commission say the country is planning a $30 billion, four-year green stimulus program. According to Pichel, the Chinese government at this point has not decided how to allocate the funds. He contends the program is a positive for solar stocks long-term, but that it is too early to quantify the impact on the solar sector, and that it will be “more of a 2010/2011 story.”

Pichel says the $30 billion would be about 5% of the country’s overall stimulus program, and would include projects that involve clean tech, renewables and environmental protection, and that increase energy efficiency and decrease energy consumption. All of the cash would be spent by late 2012 or early 2013....MORE

I know that you can scan TTD on your own but I try to spare you the mind-and-soul numbing parade of horrors coming out of the tech sector (FSI revenues down 60%!? Vitesse lays off 12% of workforce!?).

Cap-and-Trade: This is Real Money Folks

The WSJ's Environmental Capital blog has a couple posts of their initial thoughts on the House of Representatives' 648 page (PDF) contribution to the general confusion. They are both solid reporting/analysis/opinion (it's a BLOG). First up:

ACES High: The Waxman, Markey Bill and Cap-and-Trade

The 600-page draft House bill on energy and climate aims to tackle a myriad of challenges, including the establishment of a U.S. plan to cap and reduce greenhouse-gas emissions. The cap-and-trade part of the bill promises to be the most contentious....MORE
Forty-five minutes later they came back with:

Cushions and Crutches: How Would the Cap-and-Trade Bill Protect Vulnerable Industries?

Any climate and energy bill coming out of the U.S. Congress has to walk a fine line, protecting jobs and business at home but also extending an olive branch to developing countries to help them curb their emissions. The House draft bill on energy and climate tackles that job with gusto–for business, at least.

For instance, the bill identifies several sectors that are energy-intensive or heavily exposed to global trade, such as steel, cement, paper, chemicals, and the like. Those sectors would get a government handout in the form of rebates to cushion the higher energy bills brought about by climate legislation. This would help keep their products globally competitive.
The problem is figuring out just how much those rebates would be. The bill’s relationship with English breaks down a little here when it says the cash rebates will be “equal to the sum of the covered entity’s direct compliance factor and the covered entity’s indirect carbon factor.”>>>MORE
That last bit reminds me of a story [what else is new? -ed] that I told at Environmental Capital:
...During a mis-spent youth I had occasion to read the Internal Revenue Code and got stuck, big time.

I asked a learned Professor of Taxation what a particular section meant. He glanced at the § and said “Oh, that’s incomprehensible” and went back to his paperwork....

To Senator Reid Cap-and-Trade is Just a Tax; But With the Advantages of Being Deceitful and Expensive

To a politician, the best tax is a disguised tax, apparently levied by someone other than yourself, some of whose proceeds you can kick back to your campaign contributors, in this case Wall Street.
First, we had this via the WSJ on March 17:
White House Official Boosts Cap and Trade Revenue Estimate

A top White House economic adviser told Senate staff a proposed cap and trade system could raise "two-to-three times" the administration's existing $646 billion revenue estimate, according to five people at the meeting.

This could mean the cap and trade system could actually generate between roughly $1.3 trillion and $1.9 trillion between fiscal years 2012 and 2019.

Jason Furman, deputy director of the National Economic Council, offered the estimate at a Feb. 26 meeting on Capitol Hill with a bipartisan group of staffers, most of whom are attached to the Senate Finance Committee, according to five Senate aides who attended the meeting. They spoke on condition they wouldn't be identified by name....MORE

Last week we started hearing that the middle class tax cuts were so much hot air:

From the AP:
Obama mum on proposal to scrap tax cut
From ABC:
Obama Budget Chief on Hill Dems Plan to Scrap Middle Class Tax Cut: "We have two years to figure this out"

Then a couple days later, from Bloomberg:
...Senate Majority Leader Harry Reid said he is open to financing an overhaul of the U.S. health-care system with revenue generated from efforts to rein in greenhouse gas emissions. Reid, a Nevada Democrat, told reporters yesterday Democrats are determined to finance the cost of any expansion of health care with savings found elsewhere in the government’s budget in order to avoid widening the federal deficit.

“I don’t think we should take anything off the table as to what we’re going to do with health care, what we’re going to do with this carbon that’s killing our country with global warming,” said Reid. “But the one thing that in our budget that’s very clear: We pay for everything."...

Pretty slick. First we lowball the size of the tax while offering to give the taxpayers a fraction of their money back. Then we admit that, well, the tax will be triple what we said because, well, we need the money. Then we yank the original sweetener!

The only thing left to do is pay the 20% vigorish to the Wall Street firms, the carbon traders, accountants, lawyers, lobbyists, project developers, verifiers etc., etc.

Then you tell the folks back home about the green jobs you created!

Meet the new boss, same as the old boss. All politicians are liars.

First Solar: J.P. Morgan Cuts Ests; Advises Taking Profits (FSLR)

In "A Bifurcated Market in Solar Stocks (ENER; FSLR; LDK; SPWRA; TSL; YGE)" we pointed out the difference in today's price moves in the American vs. Chinese solar stocks.
The American companies, which had been in the red are now modestly green while the Chinese, which had been modestly green are now up double digit percentages. Here's one factor weighing on the American group, from Tech Trader Daily:

First Solar (FSLR) may not make its solar cells from polysilicon, but the company is nonetheless feeling the heat from the rapidly crumbling prices for silicon-based solar products.

J.P. Morgan analyst Christopher Blansett this morning slashed his estimates on the company for precisely that reason. “We believe the Street is underestimating the scope of the problems that the solar energy industry and First Solar are facing this year with significantly higher commercial lending rates and lower overall global subsidization driving down demand,” he writes. “We are now thinking of the solar energy sector in terms of a growth cyclical perspective and believe it will take 2-3 quarters to burn off excess inventory.”>>>MORE

When Mr. Savitz reports something that might be construed as negative the comments lean toward the "You're a sister-humpin' S.O.B...." variety. It can be hilarious to observe.

A Bifurcated Market in Solar Stocks (ENER; FSLR; LDK; SPWRA; TSL; YGE)

The American solar stocks are not doing well: Energy Conversion up 1/2%, First Solar down 3%, Sunpower down 3%. In contrast the Chinese solar's are showing a bit more green: LDK up 2%, Trina up 1%, Yingli up 1%.

earth2tech asks "Is It a Solar Bottom? Analysts Say No".
This weekend in a major piece, Barron's said:

Nightfall Comes to Solar Land
A glut of silicon threatens First Solar -- and other low-cost panel makers.

A YEAR AGO, REFINED silicon for solar cells cost 450 bucks a kilo on the spot market. You can have it today for closer to 100 and if you wait a month it may be cheaper still. Thanks to the workings of international capitalism, the 90% margins available in last year's market spurred silicon-factory expansions around the planet. But the new supply arrived just as end-market demand for solar panels got eclipsed by faltering government incentives, lower oil prices and the world financial freeze.

Cheaper solar silicon is of course a great thing for the planet's living creatures. But solar companies and investors who planned for silicon that was scarce and high-priced must adjust their business models for a glut that looms larger than most anyone expected. New government subsidies will help in the U.S. and in China, which energized solar stocks last week with a plan to help China's struggling photovoltaic industry. Lower prices will also stimulate sales volumes as solar panels become cost-competitive with fossil-fueled power. The question is whether solar energy's volume producers will end up resembling the high-margined Intel or the profitless memory-chip makers. "An industry with 30 suppliers would be a nightmare," says analyst Dan Ries of the brokerage firm Collins Stewart. The "flash-memory market managed to be a nightmare with just 2½ suppliers.">>>MORE

Meanwhile Scientific American had a piece last week:

Stimulus Appears to Be Sparking Alt-Energy Revival

Why the difference? First off, companies can do well as stocks languish. You knew that. And SciAm doesn't employ many analysts. Second is a misperception of the stimulus' effect on solar: It's not going to be as big a many had dreamed. These are rent-seeking businesses, if government largesse is directed at job creation, it is not directed at profit maximization. I had a comment at Environmental Capital back in December to make the point:

The key to greencollar jobs is inefficiency. The more labor intensive the energy production the more people you will employ.

Doing a reductio ad absurdum, you would construct a human powered generator.
At a spacing of one meter, a 950 mile diameter wheel would employ five million people.
At 1/10 horsepower per person you would generate 3 million kWh/day.
Of course paying even the minimum wage gets your cost up to the $90.00 kWh range (i.e $80,000/month for the average home’s usage) but you’ve put 5mm folks to work.

This is an extreme example but the concept is pretty well fleshed out in the literature.

Comment by Climateer - December 10, 2008 at 11:49 am

Third, it is no longer a homogeneous, run with the pack, industry. The Chinese solar's will be favored by the Chinese government. And catch a break from the decline in silicon costs. Investors are going to have to know what differentiates these companies, it's not 2007 and never will be again.

Your Climateer Early Warning System: Markets

A little more of the self-reverential and I'll get back to news.
I first used that headline in a follow up for one of our better calls:

Back on May 9 we posted "Shop for Property/Casualty Insurance Savings NOW! Then Short Their Stocks With the Savings":

I don't have time to go into a lot of detail right now, maybe next week. The current overcapacity in P&C, which has led to a bit of a price war, will be ending soon, maybe three to six weeks.
A back of the envelope calculation says insurers would be mis-pricing weather risk vs. "average" conditions.

The recent flip of the Pacific Decadal Oscillation to it's cold phase will, if past history repeats, lead to higher insured losses in everything from hail damage to landfalling hurricanes.

I really should develop this further, unfortunately there is time enough to do anything, not enough to do everything.
That was a month before the June 12 Iowa floods.
Since then we've had these headlines (all from Bloomberg):

July 22
Natural Disasters In U.S. Cost Insurers $6 Billion In Quarter...
Yesterday we posted "Getting Ready for the Wednesday/Thursday Market Pop" at around 1:10 EDT. Today the headlines at MarketWatch were...gratifying:
U.S. stock futures up on final day of first quarter
Paul Farrell: Six reasons for calling a bottom

Just as interesting (to me) was this:

because it ties in to what we were talking about in "If I Were Manipulating the Dow Jones Industrial Average".

Keep an eye on Big Blue, not because it's a bell cow but because it isn't.
If, in a few weeks, it is holding up (and thus holding up the DJIA, by virtue of it's weighting in the index) while the lower price members of the index weaken, look for a quick decline when the trap is pulled.
Now back to our regulary scheduled programming

Banks May Shrink Balance Sheets By $2 Trillion More

In a September 2008 post, "The Great Deleveraging (and what it means)", I tried to put it as succinctly as I could:
Deleveraging is Deflationary. Ignore the talk of any immediate Inflationary effect. That comes later. Anyone telling you to buy gold now is a fool, a liar, a knave or a nut. The time for AU will come but it is most assuredly not now....
Today we see the process continues. From DealBook:

The largest 15 global banks are expected to further shrink their balance sheet by about $2 trillion in 2009 and longer-term return on equity will remain subdued for the next two years, Reuters said, citing a joint report from Morgan Stanley and Oliver Wyman.

The balance sheet shrinkage will continue to have a huge impact on liquidity and provision of capital, hence it is critical confidence is restored soon, in particular to help real money investors buy credit assets, the analysts from both the firms wrote in a note to clients.

A rebound in profit before provisions and markdowns is expected in 2009 and will be led by rates, foreign exchange, flow credit and commodities, even though the industry was likely to see “material” write-downs, the analysts said.

Post markdowns, the analysts expect 2009 net revenue to be around the levels seen in 2003-2004, but said they were concerned that further to 2010 the revenue rebuild in 2009 is unlikely to have real momentum....MORE

Continuing the self-referential [-reverential? -ed] schtick is a line from October '08:

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.

Getting the macro stuff right frees you to screw up the micro.

Cramer calls a bottom (again)

From FT Alphaville:

By our count this is the outspoken CNBC host’s third bottom call in the past 15 months — at the very least.

- January 10, 2008 - Financials have hit rock bottom.

- August 12, 2008 - The bear market is dead.

- October 15, 2008 - This is the beginning of the end of the crisis.

And numerous other questionable forecasts which haven’t exactly, err, come to fruition.

Here, in any case, is Jim Cramer’s latest bottom call, made Monday. Via Clusterstock.

At the beginning of Mad Money, Cramer expressed bewilderment at today’s selloff and said it was already time to buy banks again. At worst, he says, the market has another 3%-5% to fall....MORE

Monday, March 30, 2009

Demographically Driven Inflation and Deflation

Political Calculations is quirky. On the one hand they link to Prof. Shiller's merged Cowles/S&P data (first rate scholarship/database). On the other they do a "On the Moneyed Midways" linkfest that seems aimed at a totally different target audience. Here's an example of the former:
There are two questions that we'll seek to answer in this post:
  1. How might the change in a nation's population over time affect its rate of inflation?
  2. Are U.S. baby boomers the most inherently evil generation ever in economic history?

Before we go any further though, for the sake of eliminating the suspense involved, here are the answers to both questions:

  1. Predictably.
  2. Yes.

We are being a bit facetious with our second question, but let's see if you don't draw a similar conclusion after we work through the first question.

That question arises as we've recently been looking to develop a model for anticipating the future rate of inflation in the United States, which we could then incorporate into the kind of tools we develop and make available to everybody in the world here at Political Calculations. In doing that, we began with a July 2006 paper by Ivan Kitov, a geophysicist whose work in economics we first became familiar with back in 2005 (via one of David Smith's discussion forums, whose archives unfortunately appear to only go back four years), which has intrigued us for some time: Exact Prediction of Inflation in the USA.

In the paper, Kitov presents his findings of a remarkable correlation between the measured rate of inflation observed in the U.S. and the change of the size of the U.S. workforce over the years from 1965 through 2002, which is observable in the figure we've excerpted from the paper. In this chart, we see that inflation, as measured by the GDP deflator, closely follows the trajectory determined by the change in the size of the U.S. labor force (dLF) with respect to the total labor force (LF) some two years earlier. In simpler terms, changes in the rate of inflation in the U.S lag the change in the relative size of the U.S. labor force by a two year period.

How That Might Work

How might changes in the size of the US. workforce drive changes in the U.S. inflation rate? We suspect that the answer to that question lies in the change in consumption patterns driven by those entering and exiting the U.S. labor force....MORE, including some interesting charts.

Getting Ready for the Wednesday/Thursday Market Pop

UPDATE: I was typing too fast and plugged in Nasdaq numbers rather than S&P, The 500 was around 786 down 30. Sorry.
Original post:
As I said in the post immediately below, reality has attempted to intrude on the blogging.
I won't get all Fibonacci or 50-day on you, this decline has an odd feel to it. We might be setting up a nice mid-week run. The DJIA is currently down 307 at 7468 and the S & P is down 53.81 at 1491.

Okay I will get a little Fibbo on ya, the 38.2% retracement of the up-move on the DJIA is 7368, the 50% is 7236.
The corresponding S&P levels are 773 and 754.
The end of the quarter on Tuesday may account for the odd feeling.
Oh heck, here's the S&P 50-day chart, from Bespoke Investment Group
(I don't think breaking through it matters though):

...With the selloff of the last two days, the percentage of stocks above their 50-day moving averages has now gone from over 70% to below 50% (49.2%), which is a step in the right direction in terms of alleviating the overbought levels we hit last week.

SPX 033009

SPX Intraday033009

Tea prices to soar after droughts

Sorry about the light posting today, reality has attempted to intrude on the blogging. Here's one for my English friends, from the Financial Times:

Tea prices are set to jump to a record high after damage to production in the main exporting countries from simultaneous droughts, the United Nations’ Food and Agriculture Organisation and industry executives have forecast.

Kaison Chang, a tea specialist at the FAO in Rome, said dry weather had led to low yields in India, Kenya and Sri Lanka. “Prices should go up,” he said....MORE

Black is back for California drivers (actually, it never left)

You saw the stories last week? Faux outrage over faux Big Brother? Me too. We didn't post on it.
I'm more concerned about real Big Brother, there is some very creepy stuff coming down the line. I'll get to it some day, in the meantime we'll probably be hearing a lot of "Aux barricades!"*
From the Los Angeles Times' Up to Speed blog:

The California Air Resources Board said Friday that it has no plans “at this time” to regulate car paint as part of a plan to reduce greenhouse gas emissions — and never intended to outlaw black cars in the first place.

“We are by no means interested in banning or restricting car colors,” CARB spokesman Stanley Young said.

Reports that regulators were planning to banish black cars from the Golden State in an effort to reduce air pollution created a global uproar, perhaps best expressed in this headline from Rush Limbaugh’s website: “Tyrants Want to Ban Black Cars.”

The purported black car ban was said to be part of the “cool cars” initiative being cooked up by the air board, which is looking for ways to follow the legislature’s mandate to reduce greenhouse gas emissions in California. Greenhouse gases are a cause of global warming, and automotive tailpipe emissions are a major source.

One solution: lower the temperature inside parked cars, thereby reducing the amount of air conditioning — and engine power and gasoline — needed to keep the occupants cool and comfortable....

...So, did the bureaucrats really intend to ban black cars, only to be foiled by an outraged citizenry? That’s hard to say. Young notes that it’s not unusual for CARB to get an earful over its proposed regs, and in this case, “it wasn’t exactly opposition” that killed the paint initiative. “It was an appraisal that the technology was not yet mature enough to deliver what we hoped to achieve.”

Moreover, the CARB PowerPoint presentation that got everyone’s fan belt in a twist never actually recommends that black cars be banned. It merely — “sinisterly,” Rush might say — notes that “jet black remains an issue.”

Still, the timing is interesting. Although the workshop at which the paint plan was discussed was held on March 12, the decision to drop the idea wasn’t made until this week, according to Young — the very same week, sinisterly enough, that Limbaugh referred to the CARB rule makers as tyrants.

Coincidence? We report, you decide.

*The cry of the 1848 Revolution:

Here's a picture from the 1830 Revolution, they had better artwork;

Artprint of  La liberté guidant le peuple
The French, they are revolting.

Super-natural gas

From FT Alphaville:

There have been some strange goings-on in the US natgas market, according to Stephen Schork of the Schork Report. Note the charts below.

Nymex Natural Gas futures - 10 days

NG Nymex Means - Stephen Schork

That’s certainly a somewhat sudden and swift correction downwards in the price of natural gas futures on the Nymex exchange, following an equally swift and sudden move upwards on March 19th . All of which leads Stephen Schork to speculate on Monday as follows...MORE

Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes

Boss, that trade just became an investment.
-Old, old trader's joke.
As a followup to last week's "Banks to Write-UP Assets?" we have this from Bloomberg:
Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. “I’d say there was a pretty close cause and effect.”>>>MORE

HT: The Columbia Journalism Review, who write:

...It’s funny, you never heard much complaining about mark-to-market when prices were increasing.

The problem that’s arisen is what happens when there’s no market. That’s part of the problem with the complex securities that the banks underwrote and that are weighing them down—they’re illiquid, meaning they don’t trade much. Since the crash, few have traded at all, so there’s no real price to mark to.

The banks say this is why they shouldn’t have to mark-to-market. After all, they say, they’re not trying to sell these things now, so why should they have to mark them down. They say they want to hold them to maturity and the underlying cashflows imply a value much higher than what the marks would suggest.

Which brings back around to my oft-repeated point that we need to know more about what exactly is on the books. What loans are in these securities? How much cash are they throwing off? I’ve yet to see anyone take a real good look at that. I’m waiting....

Energy Department Maps Efficiency Money

From the U.S. Department of Energy:

State and Local Grant Allocations

Interactive map of the US delineating the various states including Alaska and Hawaii. A mouse over identifies the state and clicking on any state will open a new window giving detailed information on state total, city and county allocations in an excel file format.

Map of the United States.
Montana Washington Oregon California Idaho Nevada Wyoming Utah Arizona Colorado New Mexico Texas Oklahoma Kansas Nebraska South Dakota North Dakota Alaska Hawaii Minnesota Iowa Missouri Arkansas Louisiana Wisconsin Illinois Michigan Indiana Ohio Kentucky Tennessee Mississippi Alabama Florida Georgia South Carolina North Carolina Virginia West Virgina District of Columbia Maryland Delaware New Jersey Pennsylvania New York Connecticut Rhode Island Massachusetts Vermont New Hampshire Maine

HT: the NYT's Green Inc. blog whose headline I swiped.

Saturday, March 28, 2009

Populism: " Will there be blood?"

From The Economist:

The revival of American populism is partly synthetic, but mostly real
A WEEK or so ago America was seized by a spasm of fury over the bonuses paid to executives at AIG, a troubled insurance company. Across the country Americans were enraged that people who had helped to cause the financial meltdown were being rewarded for their incompetence. And Washington responded in kind....

...Was the fuss over AIG a sign of a new populist mood in America? Or was it just a storm in a teacup? It is hard to answer this question in a country in which anger is a form of entertainment and where the political parties have turned partisanship into a fine art. Television personalities such as Bill O’Reilly are always angry about something or other. Many of the politicians who proclaimed their outrage at the “malefactors of great wealth” are delighted to take campaign contributions from the very same malefactors.

But, for all that, there are good reasons for taking the resurgence of populism seriously. One is the breadth of the discontent in the country. Left-wingers complain that Mr Obama is selling out his supporters in order to rescue irresponsible financial institutions. Right-wingers worry that he is using taxpayers’ money to save people from the consequences of their own profligacy. This fear has plenty of resonance outside the world of political enthusiasts: a recent Harris poll shows that 85% of Americans believe that big companies have too much influence on politicians and policymakers....MORE

From The Economist Intelligence Unit:

Manning the barricades

Who's at risk as deepening economic distress foments social unrest?

Protesters in Argentina Banks, busts and batons
The economic upheaval that began with the collapse of the US subprime mortgage market has already evolved into one of the fastest global slowdowns in history, and threatens to become a full-blown depression. Political tensions, already rising, may foment bloody protest that brings down governments.

PDF Download the special report Manning the barricades [PDF 1,344 KB].

From page 5 of the 34 page PDF:

After the crunch
If things feel bad now, how much worse could they get?
In line with our previous risk reports (Heading for the Rocks and Shooting the Rapids), we have identified three macroeconomic scenarios for the evolution of the crisis that began in the US sub-prime mortgage market and is now reverberating throughout the world economy.

Scenario 1: Our central forecast (60% probability)
Government stimulus stabilises the global financial system and restores economic growth in leading developed markets during 2010, albeit at lower levels than in recent years. This scenario underpins our regular analysis and is not the subject of this report.

Scenario 2: The main risk scenario (30% probability)
Stimulus fails, leading to continued asset price deflation and sustained contraction in the leading economies a depression persisting for some years.
The stubborn decline in global economic activity is punctuated by occasional rallies that are taken as signs of recovery, but these quickly fade as the underlying downward trend reasserts itself. The prominent role of governments in propping up banks and reviving domestic demand leads to strong political pressure for protectionism, effectively putting the process of globalisation into reverse.

Scenario 3: The alternative risk scenario (10% probability)
Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless. Economic upheaval sharply raises the risk of social unrest and violent protest. A Political Instability Index covering 165 countries, developed for this report, highlights the countries particularly vulnerable to political instability as a result of economic distress. The results of the index are displayed in map form and in a ranking table in the centre pages, along with a brief methodology. The political implications of the economic downturn, informed by the results of the Social and Political Unrest Index, are discussed at length in the second half of the report.

The full report, in both PDF and HTML format, is available online at
www.eiu.com/special. The microsite includes a full methodology for the Political Instability Index, a complete ranking of results including a comparison with the results for 2007, and a large-format version of the map....MUCH MORE

Friday, March 27, 2009

The Week in Solar: Claymore/MAC Global Solar Index (TAN, TSL)

Remember, these charts are dynamic. If you are looking at them after March 29, 2009 and they don't make any sense, it's not you, it's me.

Chart for Claymore/MAC Global Solar Energy (TAN)

via Yahoo

Even more outlandish, Trina Solar, one of yesterday's big movers and one of the names that was up again today (see also JASO, STP, YGE):

Pssst: Wanna Buy Some Toxics?

From the Wall Street Journal:

Fund Firms Look to Offer a Toxic Taste

Toxic assets nearly sank U.S. banks, until taxpayers bailed them out. Soon, some taxpayers can buy some of those toxic assets themselves.

At least three mutual-fund providers are aiming to launch closed-end funds to take advantage of various parts of the Obama administration's toxic-asset program -- BlackRock Inc., Allianz SE's Pacific Investment Management Co. and Legg Mason Inc.

Individual investors, whose portfolios took a beating in the financial crisis and whose tax dollars propped up 512 banks, would be able to get in on the action by buying shares in the planned closed-end funds. The closed-ends, which would likely be limited to wealthy investors, could potentially purchase assets including the banks' soured loans and mortgage-backed securities.

"What's really going on here is that taxpayers are underwriting risk," says John Baker, a lawyer with Stradley Ronon Stevens & Young LLP in Washington, who is advising fund firms on the government programs. "If these assets are mostly good assets, the federal government and the investor will do fine."

Call It the 'Toxic Asset Fund'

  • The Fund. Lets individual or "retail" investors buy toxic assets from banks.
  • Investment Objective. Make money from the loans and securities now poisoning financial institutions.
  • Leverage. Oodles of it for some, just like what got the banks in trouble to begin with.
  • Risk Factors. The bad assets could keep getting worse.

There is political utility in enlisting Main Street investors. It could quell criticism that the government is giving a gift to hedge funds and other Wall Street titans, which helped spawn the financial crisis in the first place and which are now being tapped by Washington to help buy toxic assets....MORE

HT: DealBreaker who end their comment with:

...This looks quite a bit more like an opportunity for funds deeply under their high watermarks to extract some management fees from the public. Like the reason California managed to raise anything near (much less over) their $4 billion target. Like we are going door to door asking people to buy war bonds.

Call us cynics.

And from The Big Picture:

Dilbert, 2 days in a row:


Scott Adams' Dilbert.com blog

Zeitgeist: London Protesters Threaten Bankers, Evoke Executions

From Bloomberg:
Mark Barrett, a professional tour guide, spent last Saturday painting Barack Obama’s election catchphrase “yes we can” on a banner that protesters will carry as they try to occupy London’s financial district April 1....

...Beheading Charles I

Class War, an anarchist newspaper, has produced a special edition to promote the protest with an image of former Royal Bank of Scotland Group Plc CEO Fred Goodwin, whose house was vandalized this week, on a guillotine under the headline “Ready to Riot.” Another shows people dancing around a fire with the slogan “How to keep warm in the credit crunch -- Burn a Banker!” Public anger erupted at Goodwin’s 703,000 pounds annual pension after RBS was bailed out by the government.

The English Revolution culminated with the beheading of Charles I in 1649, ending the so-called divine right of kings in England. Today’s protesters say they draw inspiration from 17th century radicalism....MORE

I don't think it will come to necklacing bankers à la Soweto but if it does, we should remember this, from 1999:

... television networks around the world carried pictures of a Johannesburg inventor's solution to the carjacking crisis: a chassis-mounted flamethrower that roasts anyone within three feet of the car. A police superintendent bought one....

From This is the City:

Only The Brave Or The 'Stupid' Admit To Being A Banker These Days

This has been building for a while. We first posted

"...Here's the rondo from Mozart's Horn Concerto No. 2.
Music to hunt bankers by. "
over a year ago:

And joked about the pecuniary potential of angry populism in October's "Go Long Pitchforks: How To Profit From The Coming Populist Backlash.".

La Nina Update March 26, 2009

From AccuWeather:

...Based on current information, the ENSO is weakening toward the borderline of neutral.

Here is the latest ENSO plume forecast from several different models. As you can see, a clear majority of the forecast models continue to trend the ENSO toward neutral by the summer. The notable exception is the NASA GMAO model which is predicting a strong El Nino (unusual warming of the sea surface temperatures in the equatorial Pacific) by the end of the summer. Clearly, this model is the outlier and probably should be thrown out on this particular run....MORE, including probabiistic forecast

We'll follow up next week with the implications for hurricane development and landfalls, crop yields and June weddings.

New ETF Tries to Replicate Hedge Funds. And: Momentum-Based Commodities ETF

The creativity of Wall Street marketing folks is amazing. From ETF Trends:
After getting the go-ahead from the Securities and Exchange Commission (SEC), IndexIQ is moving forward with an innovative new exchange traded fund (ETF).

The IQ Hedge Multi-Strategy Tracker (QAI) began trading today. IndexIQ analyzes publicly available hedge-fund performance data, then tries to match returns using ETFs and other liquid trading vehicles. The fund won’t invest in hedge funds. It has an expense ratio of 0.75%, says Joseph Checkler for Dow Jones Newswires.

IndexIQ has had luck with other hedge fund replication products, including the IQ Alpha Hedge Strategy Fund, a mutual fund that was down just 4.1% for the year, compared to an 18.2% loss in the S&P 500....MORE

And from IndexUniverse:

Claymore Securities has filed papers for a new ETF tracking the Standard & Poor's Commodity Trends Indicator, a momentum-based commodities index that aims to outperform the broader commodities market.

The index tracks 16 commodities futures contracts divided into six sectors: Energy, Industrial Metals, Precious Metals, Livestock, Grains and Softs. Rather than simply taking a long position in each commodity, however, the index takes either a long/short or long/flat approach based on momentum trends in each sector. The index will short all sectors except for Energy; if momentum is trending against Energy, the index will simply exclude the sector altogether.

Academic theory suggests that momentum trends are persistent in the commodities market, and that a simple momentum-based index can exploit those trends.

The Elements platform already has an ETN tracking this index. The Elements S&P CTI Index ETN (NYSEArca: LSC) has more than $50 million in assets and has been trading since June 2008. Since that time, it has been by far the best-performing broad-based commodity product on the market....MORE

HT: Abnormal Returns

California’s nightmare (12-15% Unemployment)

We are adamant that the rest of the country not use California as a model for energy. The purported growth of the state's economy was a fantasy. There has got to be a better way, this way lies disaster.
From FT Alphaville:

Things are already extremely rotten in the state of California, and are likely to worsen, according to forecasts by two teams of homegrown economists.

SignonSanDiego.com reports, (emphasis FT Alphaville’s):

California’s unemployment rate will soar to between 12 percent and 15 percent by next spring and remain in the double digits until at least the beginning of 2012, according to forecasts released by two teams of University of California economists....

...The University of California economists are not optimistic about the outlook for either housing or non-residential real estate, SignOnSanDiego said:

UCLA projected that office markets will remain sluggish through 2010 in San Francisco and Los Angeles, 2011 in Silicon Valley and 2012 or later in San Diego County and other areas of the state.

UCSB projects double-digit declines in California home prices in 2009 and 2010.

But while UCLA believes the “continuing downturn in residential construction is leading to a shortage of housing that could help the market stabilise as early as the end of this year”, the team as UCSB expects continued forclosures.

As Dan Hamilton, director of the UCSB forecast, rather colourfully put it:

…government programs designed to help people stay in their homes are like “putting a very loose-fitting bandage over a festering sore.”

Our post "Californians Eye Carbon Revenues" (And So Do the Public Employee Unions)" links to some of our thinking on California, Cali's energy usage and CalPERS.

New York museum opens exhibit on credit crisis

So that's that. On to the next crisis. From Reuters:
The global economic crisis wears on, but the Museum of American Finance is already documenting its history in an exhibit that opened on Wednesday.

"Tracking the Credit Crisis" provides a timeline of the events that led to the current recession and translates the catchphrases of the economic downturn such as "securitization," "liquidity," and "derivative" for the average person.

"We're now entering what may well be the most challenging man-made calamity in modern experience, a global financial crisis of unprecedented size, speed, interconnectedness and complexity," said Lee Kjelleren, the chief executive of the museum, who said he hoped the exhibit would help the public understand events as they unfold....MORE

HT: Slog via the World Bank's Private Sector Development Blog

Guard Against Solar Cell Burns (FSLR; JASO; LDK; SOLF; STP; TSL; YGE)

The post immediately below "Solar Stocks: Debating China’s Subsidy Program" links to three of Barron's Tech Trader Daily's posts on the action in the Chinese solar stocks. In another part of the Dow Jones empire the WSJ sounds a cautionary note:

Getting too close to the sun can singe your wings, investors in the solar-panel sector are sure to learn.

Beijing's pledge to subsidize up to half of the cost of installing solar panels raised euphoria in the sector to a new pitch this week. On Thursday, New York-listed shares of Chinese solar-cell companies surged. On Friday those gains continued in shares of solar-panel makers from Mumbai to Tokyo.

This short-term excitement belies some key long-term risks. Namely, the rush of companies entering panel production is reminiscent of the now oversupplied flat-panel and semiconductor markets. Companies in those sectors are losing money faster than they can raise it....

...News of China's subsidy trumped all this. Solarfun's shares rose nearly 42%, and Suntech's 43%. Elsewhere, Webel rose 11%, and Hong Kong's Solargiga Energy jumped 21%.

But this sensitivity to subsidies can also bite. In Japan, nearly 90% of demand is for residential use and extremely sensitive to installation costs. When photovoltaic subsidies ended there in 2006, sales nose-dived 27% the next year, Macquarie says.

This is one investment best made with a thick layer of protection.

HT to a third part of the imperium: Environmental Capital

Now if MarketWatch should weigh in; Oh wait, here's "Analysts are cautious on the solar stock rally"

I'll go check some of the other services offered by the behemoth. Back in a bit.

Solar Stocks: Debating China’s Subsidy Program

Barron's Eric Savitz has been all over the pop in the solar sector. Yesterday we linked to "Chinese Solar Stocks Rocket Higher On Stimulus Hopes". He followed up with "Update: Solar Stocks Rally On China Subsidy Plan" and this morning with the headline post:

So, care to guess the direction of solar stocks in Friday’s session? The stocks had a huge run on Thursday after China unveiled a program to subdize certain solar installations by 20 RMB/watt, or just under $3 a watt. The China-based solar stocks in particular had aammoth rally, with a few stocks up more than 40%. While the program is clearly intriguing, and has the potential to accelerate solar adoption in China, there are so far few details available on just how big the program will be, and whether there will be a cap on how much the country is willing to spend. There also seems to be some debate about what type of installations will be eligible for the subsidy; what is clear is that it is targeted at commercial installations of at least 50 KW, but not residential or utility projects.

The Street’s reaction to the news is decidedly mixed. While the broad outlines are promising, the lack of details leaves some observers cautious. And the huge move on Thursday makes some think the stocks have over-reacted. Here’s a quick rundown on some of the early commentary on the situation:

  • Deutsche Bank’s Steve O’Rourke asserts that the stocks have over-reacted to the news, and says his near-term outlook for the industry remains “negatively biased as credit issues drive prices down and inventories up.” He adds that on the China subsidy, “the devil is in the details, and we await them.”>>>Six more analysts weigh in.

Thursday, March 26, 2009

Chinese Solar Stocks Rocket Higher On Stimulus Hopes

Compare with this morning's "How Likely Is A Big Rally For Alt Energy Stocks?".
From Tech Trader Daily:

The Chinese solar stocks have skyrocketed this morning, apparently on hopes for support from the industry from both the U.S. stimulus package and from China’s government.

There doesn’t seem to be any single reason for the massive rally, but there are some bullish tidbits floating around that bode well for the sector....

...Meanwhile, DigiTimes reports that China’s government “intends to take a firm attitude to support the local development of solar energy in China,” although it has yet to design an incentive program to subsidize solar projects, and has not set a time table for designing a program since “costs of power generation are still too high.”

Almost all of the solar stocks are posting big gains this morning, with the China-based players showing particular strength....MORE
I am sick. I saw the word "rocket" and this is what I thought of:

Sick, sick sick.

US Lawmakers, Fearing CO2 Market Crisis, Drafting Tough Rules

From Dow Jones via CNN Money:
Fearing another financial meltdown under a proposed multi-trillion-dollar greenhouse gas trading program, U.S. lawmakers are drafting legislation for strict regulation of the nascent market.

Wall Street banks, hedge funds and institutional investors are under a rain of public indignation and regulatory scrutiny for their role in the current financial crisis. Many legislators are concerned that creating a carbon market may simply give the same players a new opportunity for manipulation and hazardous trading.

"This is a disaster in the making," warned Rep. Greg Walden, R-Ore., ranking member of the House energy subcommittee on oversight and investigations. "If you like the bubbles of the technology market and the housing market, I predict you'll love the bubble that will come from the cap-and-trade market."

Lawmakers blame lax federal oversight of financial markets - particularly subprime loans and the derivatives markets - that allowed institutional investors to engage in highly risky strategies as a fundamental cause of the economic meltdown. Record-high energy prices last year helped to exacerbate the crisis, kicking an ailing economy on its way down.

A consensus has emerged that at least part of the reason for oil's rocket to near $150 a barrel and subsequent plunge stems from speculative investors plowing cash into the futures market and then dumping assets to raise cash.

Now the federal government is creating a new, multi-trillion-dollar market.

Democratic leaders, including President Barack Obama, are pushing legislation that would cap greenhouse gas emissions thought to cause global warming. Emission allowances would then be allocated to emitters or auctioned off to the highest bidder, which the administration estimates could raise $650 billion to $ 2 trillion in "climate revenues" over the next decade.

A cap-and-trade law would create a market - including for derivatives of emission allowances - for carbon emissions and would multiply trading opportunities for emitters, traders, brokers and investors.

Cutting A Fat Hog

"I attended a recent meeting of an organization interested in [climate change legislation], and guess who it was," Rep. John Dingell, D-Mich., said at an energy forum last week. "It was a bunch of good-hearted Wall-Streeters ... getting ready to cut a fat hog.">>>MORE

German Power Market to Shrink; First Time Since Enron

From Bloomberg:
The power market in Germany, Europe’s biggest, probably will shrink for the first time since Enron Corp. failed in 2001 as utilities reduce risks and fewer banks trade energy, raising concerns about exaggerated prices.

E.ON AG, the nation’s biggest utility, has one financial company among its top trading partners, down from four a year ago, after Lehman Brothers Holdings Inc. collapsed in September and UBS AG exited the commodities business in October. Stockholm-based Vattenfall AB, the Nordic region’s largest utility, cut its list to three banks from six.

German power trading may contract 17 percent this year from 2008’s record, forecasts Kai Seela, head of power and emissions at Vattenfall. The decline may reduce competition among traders, meaning energy users from ThyssenKrupp AG to Daimler AG may struggle to get the best offers and lowest power costs, even after wholesale prices fell 45 percent from July’s peak....MORE

"Sex is main cause of population growth"

That's the headline at the Optimum Population Trust's blog. Here are some of the OPT's press releases:

Earth “heading for 5 billion overpopulation” Conference debates sustainable population levels OPT News release 16 March 2009
Big green gains from smaller families Stop at Two pledge launched – study shows benefits OPT News release 16 February 2009
Call for Government population inquiry New OPT briefing and letter to immigration minister OPT News release 5 January 2009
UK future at risk from rising numbers Figures show 388,000 increase OPT News release 21 August 2008
No “unlimited” right to have children OPT Population Day report OPT News release 11 July 2008
Eco-towns irrelevant to housing and environment OPT evidence to Government OPT News release 30 June 2008

Russia calls for currency conference; Soros Says G20 "Make or Break" and "I'm Having a Very Good crisis"

From the Financial Times:

Russia wants to convene an international conference at government envoy level to discuss the creation of a new global currency, RIA news agency on Thursday quoted Andrei Denisov, first deputy foreign minister as saying.

”This proposal is aimed at a practical realisation of the idea about a new global accounting unit or a new global currency. It is a question which should be discussed to create a consensus,” said Mr Denisov, according to the RIA news agency....

...The comments from Russia on Thursday had little effect on the dollar.

You have my word as a hedge fund manager....

[George Soros]

From Reuters:

Soros: G20 a "make or break" event for markets

The Group of 20 nations meeting next week is a "make or break event" for the global markets, investor George Soros said on Wednesday.

"Unless it comes up with practical measures to support the countries at the periphery of the global financial system, markets are going to suffer another sinking spell just as they did on February 10, 2009, when the authorities failed to produce practical measures to recapitalize the United States banking system," Soros said in testimony to the Senate Foreign Relations Committee.

Soros said President Barack Obama could help make the G20 meeting a success by raising a possible solution that would involve increasing the amount that developing countries -- from Eastern Europe to Africa -- can effectively borrow from the International Monetary Fund....MORE

[the picture and the comment above it were not part of this story, just a little editorializing on Climateer's part -ed]

I wouldn't trust these guys if they told me the time of day.

[and a little more. Are you done? Catharted? -ed]

From the Daily Mail:

'I'm having a very good crisis,' says Soros as hedge fund managers make billions off recession

A hedge fund manager who predicted the global credit crunch has said the financial crisis has been 'stimulating' and the culmination of his life's work.

George Soros, who predicted the global financial crisis twice before, was one of the few people to anticipate and prepare for the current economic collapse....MORE