Reasonably Thinking

I haven’t put a Schiff article on here in a while, so I assure you, this one is worthy.

“[government] interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending. Accordingly, they have prevented the rebalancing necessary for long-term health.

…based on the false economic signals of the ‘stimulus,’ we continue to build houses for which no legitimate demand exists.  The same is true for cars. Because of stimulus money, Americans are buying cars that they otherwise would not have. In a free market, the money would have been used for a more constructive purpose.”

http://europac.net/externalframeset.asp?from=home&id=17544&type=schiff

Bisnow Conference 20091028

I attended a conference this morning:  “Is K Street the New Wall Street?”, hosted by Bisnow.

The gist of the event was to qualitatively gauge Washington’s intrusive role in the economy.  Given the topic and list of speakers, I had low expectations.  I figured, since we were in Washington, there would be some chest-beating rants on how government is saving the day.  To my delightful surprise, there was more focus on economic realities than I imagined, and I walked away mildly impressed.    Here is my take on this morning’s speakers.

Jerry Jasinowski, former CEO of National Association of Manufacturers

The first speaker on the docket had me scribbling the following in my notes:

“Old guy telling me what I know”

And then a few moments later…

“Old guy telling me what he doesn’t know”

To be fair, Jasinowski had some good content, and it was well-organized.  However, it lacked the amplification of driving home the main point.  I kept hearing phrases alluding to “we’re now in recovery,” but the implication was unclear—are we in the clear or is there danger ahead?  This was evidenced by the moderator’s first question, “Are we in a bubble?”  Jasinowski’s answer was finally a clear, “Yes.”

Jasinowski hit on a few main points that echo my last major article, The Next Recession.  Among them, there will be an uptick in 3Q GDP driven by zero interest rates, fiscal money, inventory reduction, cash for clunkers, and the housing tax credit incentive.  Weak consumer spending and 10% unemployment will remain for some time (years) attributable to consumer deleveraging.  A weak consumer also slows business investment.  I feel like a broken record typing this, but the DC crowd just doesn’t get it.

Earl Devaney, Federal Stimulus Tsar

I am a zero fan of the $787 billion stimulus, so my expectations were about as high as the leather on my shoes.  Yet, I learned a few things.  The stimulus money is divided into three buckets of similar size:  tax benefits, entitlements, and grants/loans/contracts.  Only 6% of the grants/loans/contracts has been spent, and only 25% of the total funds has been spent (70% of the total should be spent by the end of 2010).  So, to hear the media/politicos trumpet the stimulus’ success is misleading since most of the money will be spent next year…  And no one has even mentioned the crowding out effect, which is the number of private jobs that are lost because of government jobs created.  And even if the little 6% stimulus is working wonders, imagine Peter Pan, how wonderful will things be when Tinkerbell sprinkles the other 94%??  A stimulus recovery is a fairytale.  Nevertheless, I thought Devaney gave a fair, unbiased presentation.

Michael Chertoff, former Secretary of Homeland Security

Chertoff had some interesting commentary.  The one thing that struck me is that his biggest Homeland concern is a biological attack.  The biological investment plays right now (in my mind) are H1N1 (Novartis), human genome (Illumina/Affymetrix/Sequenom), and maybe cancer (Abraxis).  I don’t know how the everyday person can benefit from his insight, but it’s intriuging nonetheless.

Panel:  Eric Trump (The Trump Organization), Bill Farmer (Lazard), Ed Mathias (Carlysle Group)

Trump focused his discussion on the difficulty to obtain financing, and those that hold cash can strike good deals.  While I don’t totally agree with him, I won’t disagree—he knows commercial real estate much better than I do.  After all, his parting shot was “stick to your core competencies.”  I’ll abide and take a pass on the criticism.

Lazard hammered away that the smaller, nimbler, quicker firms that focus in cyber security and IT will be the most successful in that field.  He also mentioned continued consolidation in aerospace and defense.  Most of what he said didn’t apply to me, but given the government contractor presence in DC, they had to put a guy like that on the panel.

Mathias was the best!  Dear DC, the markets don’t like the uncertainty you cause when you take over the banking industry, the auto industry, the energy sector, and soon to be healthcare.  “We are going the wrong direction… not healthy for our economy… government action permeates everything we do.”  Mathias alluded that inflation was a long-term problem (beyond 6-12 months) implying that the government would be unable to wean itself away from the easy money monetary and fiscal policies (and he is very likely correct).  His parting advice was diversify investments, invest globally, and protect against inflation/higher taxes/higher interest rates.  I agree.

Since I haven’t opined in a while, it is time for some updates… I have been working on three trades over the past few weeks and have been unable to pull the trigger on any of them. Some I already started the blog write-up in anticipation of the trade going through, but my limit orders have just missed on back to back trading days (insert mild frustration). I will wait patiently as there are no immediate concerns…

So I’m driving home from work today, and I hear that housing sales unexpectedly fell last month. Seriously? This particular radio program generally gives unbiased information, so how was this unexpected? Home prices can’t stay artificially inflated forever, can they? Politicians can continue to prop up prices, but there are waaaaaaay to many delinquencies-soon-to-be-foreclosures: too much oncoming supply with diminishing demand is a recipe for lower prices. And home prices fell. Six months from now, they will be even lower. My ITB trade is working nicely here (I may cover some <$10). Housing is just not an appetizing investment. And if you believe the hype that the house you live is an investment, you probably neglected the various costs of repairs, taxes, interest payments, etc (relative to renting). Here is a nice Real Estate 101 video posted yesterday (about 9 minutes in length).

This week’s Hussman article was okay, but not as stunning as his previous winners.  Nonetheless, here is an interesting thought:

“…it is beyond reason to believe that homeowners would voluntarily modify Option-ARMs before the reset date, when those mortgages currently allow them to arbitrarily choose their payments or pay interest only until that date arrives. According to Fitch, nearly 90% of of Option-ARMs have yet to reset, and of those, about 94% of them have used the minimum monthly payments to allow the loans to “negatively amortize.””

http://www.hussmanfunds.com/wmc/wmc091026.htm

Here is a decent, simple, short article by Kudlow:

“But the falling dollar is bad news for consumers. It will ultimately cause higher inflation, as signaled by the rising price of gold.

There are also future tax hikes looming out there, as well as the enormous explosion of government spending and debt. All of this is why it’s hard for me to be a long-term bull.”

http://www.realclearmarkets.com/articles/2009/10/15/dow_hits_10000_as_storm_clouds_gather__97453.html#

I’ve read a lot of doom and gloom in my day, but this one truly frightens me.  This is a must read.

“But coupling state-by-state delinquency rates and foreclosure starts (as reported by the Mortgage Bankers Association) with other data, the CRL projects that for most states, foreclosure totals will more than triple over the coming 4 years, for a total of 8.1 million foreclosures…  Most likely, what we’ve witnessed in recent months is little more than the combination of a lull in the reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.

My impression of the U.S. banking system is that it is quietly going insolvent…”

http://www.hussmanfunds.com/wmc/wmc091019.htm

Here’s a nice tidbit from Annaly that I came across today:

“For example, we addressed the Cash for Clunkers in our last commentary—a perfect microcosm of government market intervention. One month after its expiration, the program is now available for a post-mortem. Vehicle sales, after popping to an annualized rate of 11.25 million and 14.09 million in July and August, respectively, fell back to 9.20 million in September.

The conclusion? It was a one-off trade of current consumption at the expense of future consumption. While it may provide a bump to third quarter GDP, Cash for Clunkers had virtually zero long-term benefit and will likely hurt future car sales…” 

http://www.annaly.com/mc/AnnalyCommentary1009.pdf

Hello!  I’ve been working on the following article for the past few weeks, mainly just trying to organize my thoughts.  I have structured the article with three main arguments, each with its own catalyst, then some counterarguments and a subsequent refutation.  Feel free to throw me some feedback.

Also, I’m working on two potential upcoming trades:  one involves shorting a small east coast bank, the other is a long/short currency trade.  So, please bookmark this site or utilize the RSS feed.  Enjoy!

>>>

The Next Recession
October 12, 2009

The past two years has played host to some of the most eye-popping events in financial history. Wall Street titans and financial powerhouses that endured generations of battles have bitten the dust in this struggle for survival. Consumers that borrowed their way toward wealth are facing the reality of paying for the excesses of having lived outside their means. Elected officials and government entities that also borrowed from the future are finally making needed yet unpopular decisions, and they are still likely to come up short. Indeed, to study the rewards and consequences of actions made preceding to and throughout this paradigm shift have been fascinating. Yet, many look forward to the breath of fresh air in the form of an economic rebound. Politicians, newscasters, and financial experts all trumpet the good things ahead, celebrate less bad news as turning a corner, and extrapolate trivial items as proof of a recovery.

And they are wrong. Some are motivated to sell good news; others are simply misinformed or not informed enough.  Everyone seems to look at recent good news and accept as fact that good news breeds good news.  This is surely not the case.  The road ahead is filled with hazards, none of which have been addressed by the cheerful folks on TV.  The economic pitfalls in front of us… (Continue reading)

In this week’s Forbes issue, cover story Forbes 400, Steve Forbes column is fabulous!  Read it! 

Previously, I was jotting notes for a page on this site to be titled, “In Defence of Capitalism.”  However, Mr. Forbes has beaten me to the punch, and done so with superior quality.   His article, “Capitalism: A True Love Story,” highlights some basic tenets of capitalism, such as how it creates wealth and brings better things to the broadest possible public.  Forbes rightfully dispels the myth that the government can create wealth (it merely distributes or destroys it), and he gives erudite examples of how poor government actions caused the Great Depression (Smoot-Hawley Tariff Act) and inflation in the 1970s (excessive money printing by the Fed).

Overall, a great read.

http://www.forbes.com/forbes/2009/1019/opinions-steve-forbes-capitalism-true-love-story.html

Hussman’s article is good. It’s more of the same if you’ve been following him for a while, but it is great for a first time audience.  Here’s a taste:

“…if indeed the economy is in recovery, we have already entered the “show me” phase. The jobs report was dismal on that front, with even overtime hours and temporary workers declining. Those are the first measures that should advance, well before we can expect any turn in headline employment.”
http://www.hussmanfunds.com/wmc/wmc091005.htm

Hester’s article is phenomenal.  It is written in a convincing manner for an audience that is beyond the novice level.  I read this piece and am reaffirmed in my current belief that the market is either overvalued or inflation will soon roar or both.

http://www.hussmanfunds.com/rsi/forwardearningsmargins.htm