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2009-05-13

Investment News Briefs: US Home Prices Plunge, Citigroup, US Trade Deficit

Home Prices Record Plunge; U.S. Trade Gap Grows; Social Security Funds Running Out Early; Citigroup Lends Most TARP Money; Big Shipper Maersk Posts Loss; EU To Do Bank Stress Tests

  • U.S. home prices posted their biggest drop on record during the first quarter, with the median price falling 14% to $169,000 from a year earlier, the National Association of Realtors said. Prices fell in 134 of 152 metropolitan areas, with values plunging the most in Florida and California.
  • The U.S. trade deficit grew 5.5% to a smaller-than- forecast $27.6 billion, dropping for the first time in eight months.  The gap widened as exports slumped to a two-year low, overwhelming shrinking imports, reflecting reduced American demand for goods made abroad. The report buoyed hopes that a record contraction in global trade flows may be easing. “It’s one more indicator that things are getting worse at a lot slower pace than before,” said John Ryding, chief economist at RDQ Economics LLC in New York, Bloomberg reported.
  • The Social Security trust fund will run out of assets in 2037, four years sooner than previously thought, a report by the fund’s trustees said yesterday (Tuesday).  The same report said spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014.  Payroll tax contributions to Social Security and Medicare, the two main safety nets for American retirees and the elderly, are declining due to the recession just as the baby-boom generation begins to retire, Bloomberg reported.
  • Citigroup Inc (C: 3.55 -0.11 -3.01%) is using almost all of the $45 billion in U.S. taxpayers’ money it received from the TARP program to make new loans.  A committee at the bank, appointed to oversee the use of the money it received from TARP, approved $44.75 billion in lending initiatives as of March 31, according to an AP story, which appeared on the New York Times website.
  • A.P. Moller-Maersk, the owner of the world’s biggest container shipping business, swung to a bigger net loss than expected in the first quarter and warned that the full year might end up that way too.  The company posted a net loss of $390 million for the first three months, as the dive in global trade and freight rates hit shipping and low oil prices hit its oil business even harder than expected, Reuters reported.
  • Bank regulators in all 27 countries of the European Union will conduct confidential stress tests by September, stepping up scrutiny of risks after lenders absorbed more than $1 trillion of losses and writedowns in the global financial crisis, Bloomberg reported.  Finance ministers and the EU’s executive agency will get private reports and industry data from regulators.  Results for individual banks such as Spain’s Banco de Santander S.A. (STD: 9.38 -0.49 -4.96%) or Barclays Plc (BCS: 14.7786 -1.4414 -8.89%) won’t be released.

Forex Trading: British Pound Getting Hit Hard Across The Board

The GBP continues to get hammered across the board following some very cautious statements from the BoE’s King and an Inflation Report noting slow UK recovery.  The GBP/USD has hit a fresh session low of 1.5159 as the pair is moving down to the 100 Hour Moving Average.

BoE’s King: UK in worse position than many other countries

- Economy needs a period of healing
- Output decrease reflects decline in confidence
- Adjustments taking place in an uncoordinated fashion
- UK savings rate will need to rise
BOE QUARTERLY INFLATION REPORT: SEES RELATIVELY SLOW RECOVERY, CPI BELOW 2% UNTIL 2012
- Economy aided by stimulus plan and weaker GBP
- Uk economy still vulnerable to further shocks

gbpusd1

 

Non-U.S. Banks - Opportunities And Weaknesses

In general, we believe it is still a bit early to get involved with non-US bank stocks as the fundamental outlook remains weak - asset quality will continue to deteriorate as individuals and companies default on loans, and revenues should continue to fall as loan growth falters and investment banking faces a dearth of new business in the face of economic slowing.

Consumer job losses and sluggish business conditions are increasing worldwide, which will tend to dampen demand for credit, even assuming banks are capable of lending more. Moreover, these factors will also hurt asset quality and increase losses on the existing “good” loan portfolios, even apart from considerations of toxic assets. Combined with top-line pressure due to weakening economic conditions, non-US banks face a daunting outlook.

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren’t as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 (^GSPC: 892.01 -16.34 -1.80%) year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU: 13.32 -0.74 -5.26%) in Brazil, Banco Santander Santiago (SAN: 37.32 -0.78 -2.05%) in Chile, and HDFC Bank Limited (HDB: 76.00 -2.80 -3.55%) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS: 11.62 -1.76 -13.15%) and Lloyds Banking Group plc (LYG: 5.18 -0.33 -5.99%) in Britain and Allied Irish Banks (AIB: 2.48 -0.39 -13.59%) and The Governor and Company of the Bank of Ireland (IRE: 5.30 -0.83 -13.54%).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV: 11.22 -0.65 -5.48%) and Banco Santander Central Hispano, S.A. (STD: 9.38 -0.49 -4.96%), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain’s unemployment rate was 17.4% at the end of March, more than double the level a year ago.

India Stock Market: Sensex Down 138.38 Points On Wednesday

Sensex down 138.38 points on Wednesday (May 13, 2009)
-investors cautious ahead of exit polls

Sensex (^BSESN: 12019.65 -138.38 -1.14%) fell 138.38 points or 1.1% to 12019.65.
Nifty (^NSEI: 3635.25 -45.85 -1.25%) fell 45.85 points or 1.3% to 3635.25.
Mid Cap index fell 0.1%. Small Cap dipped 0.5%.
BSE 500 was down 0.8%. Sensex losers: 23
All 13 BSE Sectoral indices, 12 posted losses.
Advancers: 1142, Decliners: 1346, Unchanged: 92
Decliners outpaced advancers by a ratio: 5:4.

Sensex Day’s Range: 12256.43 - 11934.44
Nifty Days Range: 3709.60 - 3610.20
52-Week Range: 17497.36 - 7697.39
52-week % change: -31.30

Sensex losers included Tata Steel -3.8%, Sterlite Ind -3.3%, Maruti -3.2%, JP Associates -3.2%, Mahindra & Mahindra -3%, ONGC -2.9% and State Bank -2.6%.

Sensex gainers were ACC +2.9%, HDFC +2.6%, Grasim +1.7%, Ranbaxy Labs +1.1%, Tata Motors +0.6%, Reliance Infra +0.2% and Hindalco +0.1%.

Metal index fell 2.1% led by Tata Steel -3.7%, Sterlite Ind -3.5%, ONGC -3.4%, JP Associates -2.9%, Maruti -2.7% and State Bank -2.6%.

IT index dipped 1.6% helped by NIIT -6.1%, HCL Tech -3.9%, NIIT Tech -3.7%, Financial Tech -3.4%, Aptech -2.9% and TCS -2.4%.

FMCG index tanked 1.5% aided by United Breweries -3.8%, Tata Tea -2.4%, Nestle -2.2%, ITC -1.9% and HUL -1.5%.

PSU index slipped 1.5% assisted by STC India -5.3%, Neyveli Lignite -5%, ONGC -3.4%, UCO Bank -3%, Hind Copper -3%, SAIL -3% and NMDC -2.7%.

Other sectoral losers were: Oil & Gas -1.4%, Bankex -1.1%, Power -1%, Realty -1%, Teck -0.9%, Capital Goods -0.6%, Auto -0.5% and Healtcare -0.5%.

Consumer Durables was the only sector, which rose 0.1%.

Volume Shockers on the BSE:
DLF 179.85 million shares, Unitech 22.26 mln shares, Suzlon 21.71 mln and Rel Natural 13.69 mln shares

Buzzers:
Take Solutions +20% at Rs 26.40, Hitech Plast +18.9% at Rs 53.80, Elecon Engg +14.1% at Rs 55.50, KEC International +13.4% at Rs 305 and GMR Ferro Alloys +11.1% at Rs 28.90.

Heavy Losers:
Savera Hotels -11.1% at Rs 23.50, EPIC Energy -9.9% at Rs 27.25, Venus Ventures -9.8% at Rs 27.95, IST Ltd -9% at Rs 66, Parle Software -9% at Rs 59 and Polaris Soft -7.5% at Rs 78.05.

Blue Star Info surges 12 pct:
The shares of Blue Star Info surged over 12 per cent to Rs 72.85 on announcement of good results. The company posted an EPS of Rs 15.6 on a small equity of Rs 10 crore and declared a dividend of 50 per cent.

Suzlon promoters sell 2 pct equity:
The Tulsi Tanti family, promoters of wind turbine company Suzlon Energy, raised about Rs 230 crore by selling about 2% of their stake in the wind turbine company, according to sources close to the development. The family which after the stake sale owns about 64% in Suzlon, said in a statement on Wednesday that it sold the 30 million shares.

Piramal Lifesciences hits upper circuit of 5 pct:
Shares of Piramal Lifesciences hit the upper circuit limit Wednesday following the company’s announcement that it has received regulatory approval by the Drug Controller General of India to conduct two Phase I/II combination studies for its cancer molecule P276 for pancreatic and head and neck cancer. The share surged 5 per cent to Rs 51.50 on the BSE.

HDFC up after upgrading:
Housing Development Finance Corp rose 2.6 percent to Rs 1,897.10 rupees after Morgan Stanley upgraded the stock to “overweight” from “equalweight” and raised its price target to Rs 2,150 from Rs 1,600.

Inflation expectation:
India’s annual inflation rate is expected to have fallen back towards zero at the start of May after rising in the previous three weeks, a Reuters poll of analysts showed on Wednesday.
The median forecast of 11 analysts was for 0.3 percent rise in the wholesale price index in the 12 months to May 2, compared with a 0.7 percent rise the previous week.
Crude:
An unexpected drop in US crude inventories propelled oil prices to near $60 on Wednesday on indications that demand may be picking up.

China factory output growth slows, retail sales surge:
China’s factory output growth slowed in April, providing fresh evidence a day after poor export data that recovery in the world’s third-largest economy is not yet on a rock-solid footing.

However, the pace of retail sales growth surprisingly accelerated, offering encouragement to policymakers that consumers, who bought cars last month at a record clip, are helping to compensate for weakness in the industrial sector.

Asian Markets:
Straits Times was up 1.2% and Jakarta Composite gained 2.09%. Shanghai Composite and Hang Seng went up 0.65% each. Nikkei, Kospi and Taiwan Weighted rose 0.3% each.

European Markets:
European markets were ruling mixed; FTSE -1.1%, DAX -2.2% and CAC -1.1%.

Concern:
A weak coalition could emerge just as the country battles an economic slowdown

Are Those “Green Shoots” Growing?

Now that the equity market seems to be on teeter totter as it ponders its next move, I recently wrote that:

Now that prevailing sentiment has moved from “Armageddon is around the corner” to “green shoots”, the next turning point will likely occur when the fast money ponders the question of what happens next, now that we seem to have stabilized.

The next test
Certainly the macro picture is improving. There are sporadic signs of green shoots here and there. In addition to the US data, Brad Setser reports that there are also tentative signs of recovery in East Asia as the Korean data, which is the most timely, is pointing to recovery. After the close, we saw Intel, which is an economically sensitive semiconductor company, making positive noises about its 2Q outlook.

On the other hand, the Pragmatic Capitalist indicates that there is no sign of recovery in US rail traffic data. Moreover, Obama’s tax proposals could significantly diminish investors’ risk appetite (but then, someone has to pay for those enormous deficits).

The market has a way of saying “what have you done for me lately?” Now that a recovery is getting built into investor expectations, these negative fundamentals could prove to be a nasty surprise in the near term.

Watch out for the downside.

China Imports Record Amounts Of Copper And Iron Ore, But Exports Drop On Slack Global Demand

China imported record amounts of copper and iron ore in April as its mammoth stimulus program stoked its foundries and mills.  But the nation’s exports remained weak, leaving some to wonder how much longer the country can keep its economic fires lit without an increase in global consumption.

China’s voracious appetite for commodities drove the second-biggest monthly haul of crude oil and tripled aluminum imports, but very little steel, aluminum and coal went the other way.

“Industrial production is coming online and demand is rising. But sentiment may be tempered by the view that some of the material is being stockpiled and… consumption hasn’t risen as quickly as imports,” Ben Westmore, commodities economist at National Australia Bank, told Reuters.

Copper imports jumped 6.6% from March to April, to 399,833 tons; iron ore imports soared 9.4% to 57 million tons, and crude oil imports hit 3.93 million barrels per day, a 2% rise, customs data showed.

But China’s exports fell more sharply than most analysts had expected in April. The value of goods and services leaving the country was down 22.6% compared to last year, whereas economists had expected an 18% drop.

The drop in exports is leading some experts to speculate that China’s economy is being sustained solely by the $585 billion stimulus package the government is quickly deploying throughout the country. The stimulus program is heavily laden with infrastructure projects, explaining in part China’s huge demand for raw materials.

But some of that spending is spilling over into sales of construction equipment, much of it imported from the United States. Caterpillar Inc. (CAT: 35.93 -2.13 -5.60%), the world’s largest maker of bulldozers and excavators, is among several companies already pointing an improvement in sales to China.

“March and April were pretty strong months for sales in China,” Caterpillar Chief Executive Officer James Owens said on an April 21 conference call with analysts.  Owens contends China’s stimulus spending for public works projects is working more quickly than in the U.S.

When they say ’shovel ready,’ they mean nine weeks, not nine months,” he said.

Still, the drop in exports could put a chill on China’s imports of raw materials and construction products if consumption doesn’t pick up in the West.

Although the downward trend is in line with our expectations the fall in exports is steeper than we anticipated,” Wang Xiaohui, an analyst at Sinolink Securities in Shaghai told Forbes. “Exports are likely to drop further in the near term as economic indicators in the United States and Europe, such as industrial output and retail sales, are not looking up.”

The U.S. trade gap with China increased to $15.6 billion from $14.2 billion from March to April. The gain in imports from China overshadowed an increase in Chinese demand for American-made goods that pushed U.S. exports to the highest level since October.

But the recent stock market surge and other economic data lead Wang to conclude that the lull in U.S. demand for China’s exports will be short-lived.

“In terms of exports, we’re looking at a better second half than first half, with the U.S economy stabilizing, which will provide support to China,” Wang said.

All Eyes are on the HUI Gold Bugs Index

The HUI index is poised to break out above 350.  The importance of this breakout is evident in the following chart.

Featured is the daily HUI index of gold and silver stocks.
     In the event of a breakout at the green arrow (which now appears to be underway), the result will be a very strong ‘up-move’ as all that pent-up demand below 350 becomes unstuck.

The pattern is an inverted ‘head and shoulders’ formation with the neckline at 350.

 The RSI and MACD are positive (green lines). 
    Assuming the breakout succeeds - the target is 550!

On the fundamental side, we have a US government deficit that is clearly out of control.
In the words of William Black, associate professor of Economics at the University of Missouri:  “We have ‘failed bankers’ giving advice to ’failed regulators’ on how to deal with ‘failed assets’”. 

   The US Budget Office estimates the 2009 budget deficit at 1.8 trillion dollars or four times the 2008 record deficit.  We’re talking ‘monetary inflation in spades’!  While it can be said that it takes time for monetary inflation to turn into price inflation, you can be sure that more and more investors are going to anticipate whopping price inflation.
Such price inflation will result in increased demand for gold and silver, and the stock of companies that produce gold and silver.

Even at 1.8 trillion dollars, the US Budget Office is making certain assumptions regarding tax receipts. 
It is the ‘nature of the beast’ that during a recession, not only do tax receipts decline, but the demands on government on the part of unemployed persons increase dramatically.
Think of the letter “Y”, with the tops of the Y rising steadily.  One side is less revenue and the other side is increased demands.  ‘Never the twain shall meet.’

In my last article I lamented the fact that Mr. Obama made it a priority to sign legislation that exports abortion to foreign countries at American taxpayer expense.
I pointed this out to show that the President is not a compassionate individual.  After all he chose death over life!  He has voted for abortions right up to the 9th month after conception.  Abortion is the scourge of a society.  It eliminates the very people who will be needed to support the aging population.  Honestly now do you really wish that your mother had decided to abort you? 

   Historically, when the birthrate falls below 2.5 children per couple, that society is slowly doomed to extinction, except for immigration!
The current US rate is about 2.1 children per couple, with some sources claiming a rate even lower than that.  The reason 2.1 children per couple is not sufficient is because a certain number of children die before marriage, and others never marry.  Therefore the number soon drops below the magic ‘2’.
   As an aside, the Muslim clergymen understand this principle and they encourage a high birth rate, while forbidding abortions. 

I received a lot of E-mails as a result of my observation.  Most of them agreed with my position, but a few did not.  Among the people who disagreed, were some who are worried that we are becoming overpopulated.
It is for these people that I present the following facts:
All of the human beings alive today can stand up in the city of Detroit!
All of the human beings alive today, grouped into fours can have a townhouse in Texas!
All of the human beings alive today, grouped by four can have a home with an acre of land in Australia!

Some of you are worried we will run out of resources.
In the mid 19th century, people were worried that the world was running out of whale oil.  Then in 1858 someone in Oil Springs Ontario Canada, dug the first commercial oil well, to be followed a year later by the oil discovery at Titusville, PA.
The world is not likely to ever run out of resources.  Even crude oil, which is today being used up 5 times faster than new discoveries are made, is actually a constantly renewing resource.  No doubt we will have to switch from one resource to another, but that is what makes life exciting, and it creates opportunities for entrepreneurs.

Fascist Star Trek Federation Vs Free Market Aliens

Several years ago, I remember reading an historical analysis of alien movies and other popular media, with an interesting conclusion that went something like this: With a few notable exceptions, during times of war, widespread geopolitical strife or general oppression or misery, E.T. is generally depicted in popular media as a benevolent visitor, yet in times of peace or general prosperity, E.T. is instead portrayed as a merciless invader.

The study tracked several cycles back and forth from aliens being good guys and bad guys, saviors or slavers. I suppose Orwell might have a thing or two to say about that, as would any political skeptic: the masses must have an enemy (even if it is imaginary and lives beyond the stars) in order to keep them "united for the common good" and their attentions diverted from the sleight-of-hand (or "mouth" as it were).

In fact, there is some pretty credible evidence that the entire sci-fi domain (at least insofar as films are concerned) is nothing if not a gentle, alluring introduction to the monstrous tenets of Karl Marx and his deplorable Communism. Take Star Trek, for instance (since a new movie is coming soon – Here I give my apologies in advance to Star Trek fans. My intent is not to taint or diminish your enjoyment of those productions, but rather to leverage certain facts to make what I believe is an interesting conclusion).

By most accounts, very entertaining films, but the undercurrent is this: Mankind has found the workers’ paradise, the mythical Utopia. There are no wars, at least not with each other, but only with villainous sub-species who are thinly veiled metaphors for those ugly creatures who would reject Marxist and Neo-Marxist ideologies of the politburo-esque ("vanguard of the people"), The Federation. There are no possessions either because the proletariat dance in their magical gardens of abundance whether they work or not. This is all due to the technological discoveries of free energy and energy-to-matter conversions. Basically, resources are infinite, so there is no want or need or strife.

We’ve all laughed at the quote that "if the government managed the deserts, there’d be a sand shortage within a decade," but interestingly, in order to successfully operate a communist state (or any statist form or government), one actually must have infinite resources to squander because no finite amount can be enough for the waste and corruption that ensues. Thus, I do suppose that futuristic, high science fiction with infinite resources is indeed the proper platform for Marx’s cultist filth.

Oh yeah, and there’s also no money in Star Trek, which brings me to the point of this note. Yep, this is where I tie it all together, gold, Star Trek, E.T., productivity, and dark ages, all in a single piece, with a common thread and some semblance of coherence. And it’s rather interesting, too, because I’m about to tell you something you’ve never heard before. I’m going to answer, with great authority, the mystery that biologist, astrophysicists, cosmologists, average Joe’s and sci-fi writers of all stripes have pondered to no avail for many years. I’m going to tell you, a priori, what E.T. is really, really like, and absolutely, unequivocally whether E.T. will be friend or foe, and that’s not a jest. I can do so with inductive reasoning constructed from eternal truths of the universe, whereas the pros try to use deductive reasoning (or whim) that is virtually certain to produce incorrect solutions. Moreover, they are all looking in the wrong places for their deductions, because the answer to this mystery starts with the seemingly benign concept in Star Trek, mirroring the petulant tantrums of Lenin, in which money no longer exists.

First, I can tell you, unequivocally, that E.Ts., unlike captains of the Enterprise, have money, and they use it every day for almost every transaction, and they make a lot of transactions. Further, the money will almost certainly be a rare, metallic element, such as gold or silver, or an indestructible, painstakingly created alloy.

I know this because the full spectrum of investigation into the matter does not end with Hubble, the patentably absurd Drake equation, or the wisecracking goof, Carl Sagan. Rather, it is rational figures from Aristotle to Adam Smith who have guaranteed this aspect will be evident.

For example, [I paraphrase from a John Lee economics article] Aristotle discovered, formulated, and analyzed the problem of commensurability (how to compensate another and therefore make a fair transaction). He wondered how ratios for a fair exchange of heterogeneous things could be set. He searched for a principle that makes it possible to equate what is apparently unequal and non-comparable. E.g., how does one compare apples to oranges? Or decide whether the go to school or to work? Well, it’s all but impossible (or I should say quite inefficient and uncertain) without money.

Aristotle claimed that money, as a common measure of everything, makes things commensurable and makes it possible to equalize (or relatively value) them. He states that it is in the form of money, a substance that has a telos (purpose), that individuals have devised a unit that supplies a measure on the basis of which just exchange can take place. Aristotle thus maintained that everything can be expressed in the universal equivalent of money. He explained that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way.

Most people take money for granted, like air, and very few truly stop to think about the importance of money for society. It is more important than the invention of the wheel, and even more important than a written language. For example, without money, what we know of today as trade, but really any imaginable transaction between individuals (whether human or alien), would be quite nearly prohibitively expensive, whether buying things, going to work, or getting married and raising children. Of course, Adam Smith (a great villain to communists), revolutionized the world with an economic framework that accounted for true productivity and rise from poverty with what he described as division of labor, today termed as comparative advantage. In effect, if you are good at growing grain, while your neighbor is good at mending appliances, you can leverage the optimal skills of both through trade. This comparative advantage results in revolutionary amplification of productivity on a grand scale, and it is what prosperity is all about. We can all master every field of endeavor, merely by devoting ourselves to one field and trading for the skills, labor, and talent of others.

Of course, comparative advantage cannot exist for long without a sound, honest currency. In a word: money. Accordingly, without money, the human race would never, no matter how long one observes, evolve even to hunter-gatherer state, much less to agrarian society. The same applies to E.T., and last time I checked, it would take a highly advanced, productive, and wealthy society to conceive and accomplish a flight of light-years through empty space to visit our blue planet. Yet, without money, there is no such thing as an advanced, productive, and wealthy society, and probably not really even a "society" at all.

Hence, E.T. must have money, which appears to be an immutable requirement. Furthermore, the money must be "honest" such as gold or silver, rather than irredeemable fiat promises to pay or any form of debt-based money. Our own history is rife with examples of the failures of paper money going back to 600AD. They all collapse, and with them the underlying society or civilization. Civilizations that turn to paper money simply do not last long enough: on average a mere 39 years, which is not long enough for a civilization to develop the technological and productive wherewithal to start exploring space. And with each collapse, they must rebuild anew, sometimes from scratch, like our own Dark Ages circa 500AD to 1500AD. A THOUSAND YEARS to recover just to the standard of living that previously existed before Rome debased its currency and imploded thereafter, while Constantinople stood throughout with the rock-solid, honest, gold Bezant.

So I can practically guarantee that when E.T. does land in the UFO, he/she/it will have silver coins in its pockets with a lovely profile of some antennae beauty, and further, being a refined diplomat and all, will display great tact to avoid laughing out loud at our demonstrably ignoramus notions of paper money. I can also tell you that E.T. will decidedly NOT say "take me to your leader."

You see, that phrase is the tyrant’s vision, not the hallmark of a free society, where individuals decide their own course and are not the property of the state, the government, or "the leader." Moreover, it takes a free society to have peace, prosperity, and liberty – you know, the ideals behind the Declaration of Independence and the U.S. Constitution. Only a free society, with the notions of individual liberty, free markets, and limited government will ever, ever, ever rise to the level of space exploration and beyond. With very few exceptions, government does not ever produce anything of worth, much less innovate great technological advances. That is all done in a free market by private individuals and entrepreneurs, unhampered by government regulation. Government does, however, destroy these things, most times quite effectively with high taxation, heavy regulation, and bribes to the politically well-connected; or as Mises famously stated, "Government is essentially the negation of liberty" which means the negation of prosperity, the negation of peace, and the negation of great civilizations and accomplishments.

No, our E.T. friend will not come from a "Federation" or some government-sponsored entity, but will be a trader or explorer with great curiosity, and also great kindness and benevolence, having been reared by a free, prosperous, and peaceful society that disdains intervention and coercion. If any of those elements are not present in E.T.’s host civilization: freedom (which is a prerequisite for), prosperity, and peace, E.T. will never, not ever get off the ground to find us across the vastness of space. We certainly have nothing to fear from belligerent, totalitarian races out there (e.g., the Borg). They will never get off their own planet, not alive anyway, even if they do evolve to something higher than an ant colony.

2009-05-11

Investment Grade Bond Market Improving

I use the Fidelity Investment Grade Bond Fund (FBNDX: 6.51 +0.01 +0.15%) as a window into the corporate bond market. It has roughly 13% invested in US Treasury Securities. Recently Treasuries have been selling off; the weakness in the treasury market has not hurt this fund. It has continued to move higher. As the bond market starts to show further improvement, it’s likely that we could see stocks continue to rally.

I’ll be looking for signs of weakness in this market as a precursor to an equity correction. The S&P 500 (^GSPC: 929.23 0.00 0.00%) has now had 9 winning weeks in a row. We are overdue for a pullback.

GAAP Energy Earnings Are Worthless

One of my biggest pet peeves every time energy earnings come around is how addicted the media is to the shock value that is associated with GAAP accounting standards in relation to the earnings release.  I understand that the media has to make headlines that make your eyes jump out of your head in order to stay in business, but I find this type of reporting to only use select facts to make the case of the author.

Obviously this is very prevalent in the financial journalism industry and I myself am sure that I have done this on a multitude of occasions but I’d like to think that I rarely try to use these facts to make a situation seem more dire than it is in actuality.  A great example of this is what happened to Chesapeake Energy (CHK: 23.84 0.00 0.00%) this past week after their earnings release after hours on Monday, May 4th.

Taking a look at Chesapeake’s earnings, you can see exactly how the situation could be easily manipulated.  Chesapeake’s “earnings” came in at a loss of $5.75B dollars, or a loss of $9.63 per share if you use GAAP accounting metrics.  These GAAP accounting metrics were used to add roughly $6B dollars in losses to Chesapeake’s quarter directly from the value of their unproduced reserves dropping due to the front month spot price of natural gas falling over the course of the quarter.  This makes absolutely no sense in my mind, and it seems that the market is catching on that these funny accounting metrics don’t work for energy companies (as well as a number of other sectors but that is a completely different story for another day).  By the current GAAP accounting rules, exploration and production companies are taking write downs for reserves that may or may not be produced for another 10 years or longer, marking these reserves to the current spot market prices for commodities.  The most important point is that these losses are non-cash losses and do not have and effect on the continuing operations of these exploration and production companies. Chesapeake’s “real” operating results came in at $0.46 per diluted share when analysts were looking for $0.49 per diluted share, still a $0.03 miss but not a fictitious $10.12 miss from analyst estimates.

Chesapeake has and will remain a very volatile stock, but taking a look at what happened over the course of this week is laughable.  Chesapeake closed last week at $20.89.  Monday it shot up 9.24% to $22.82 in anticipation of the companies earnings release after the bell that day.  After the “$10.12 miss” Chesapeake plummeted 10.60% on Tuesday all the way down to $20.40.  From Tuesday’s close to the close on Friday Chesapeake moved all the way back to $23.84 for a gain of 16.86% from the bottom of the week on Tuesday and a gain of 14.12% overall on the week.  This doesn’t sound like the normal pattern for a company who just “lost $6B” for the first quarter.

Seems to me as if the market was fooled for one day, but quickly realized that the press got the tone of the earnings release entirely wrong.

I have two main ideas for how the market can deal with this problem.  Firstly, they can considering not using GAAP accounting standards when it comes to the reserves of these exploration and production companies to avoid this huge misconception.  This will be something to keep an eye on when energy prices do rise again and these exploration and production companies are reporting “gains” on their reserve values inflating their real earnings numbers.  The other solution would be to make the GAAP accounting reserves pro-rated at the current spot market curve for the commodity.

For example, instead of listing all of the natural gas reserves at $4.00 per Mcfe (thousand cubic feet equivalent), why not list this months production at that spot price and the following months production at the respective spot rates going into the future, which will generally be higher than the current front month contract.  This method would be a much more accurate reflection of the reserves real value, but I still believe even this would be sub par because commodity spot prices are too volatile to use when valuing reserves.

The key is to not believe everything you read and to make sure you are getting the real numbers when gathering your financial news.

Forex Trading: Weekly Analysis Of USD/JPY

USD/JPY Daily Chart

USD/JPY (a daily chart of which is shown) consolidated under strong resistance in the 99.55-99.75 price region for the entire past week. The fact that price reached for and was rejected at this price zone on several different occasions in the past week attests to its strength as an effective resistance barrier.

For the upcoming week of May 11-15, the key support/resistance levels remain constant from the prior week, although the directional bias this time is leaning decidedly towards the downside. The major support target to watch for continues to be the 96.00 region, which has served so effectively in the past as a key pivotal level.

Strong upside resistance continues to reside slightly below 100.00, with further upside resistance in the 101.43 region, the level of the last major swing high. If price indeed succeeds in making a bonafide turn down from below 100.00 during the upcoming week, and actually succeeds in re-testing 96.00, USD/JPY may potentially be in the process of forming a rough, intermediate head-and-shoulders top.

What Is The Problem With EBITDA (Earnings Before Interest, Taxes, Depreciation And Amortisation)?

Charlie Munger is a fairly raw character and has a way of getting to the point in a sometimes abrupt manner.  Charlie did just this when he referred to EBITDA as “bullsh*t earnings” at the Berkshire Hathaway (BRK-A: 95295.00 0.00 0.00%) meetings in 2003.

EBITDA = Earnings before interest taxes depreciation, and amortisation

What is the Problem with EBITDA?

Well let me give an example:

  • Company A earns $1M and pays $.75M in interest, taxes, & depreciation
  • Company B earns $.5M and pays $.1M in interest, taxes, & depreciation

Which company would you want to own? Right, that is the problem with EBITDA. EBITDA hides reality by concealing normal expenses a company will encounter and gives a false sense of the profit potential of a business.

Valid Users of EBITDA

EBITDA exists in a world of fantasy where there are no taxes or other inclining of reality.  The only way to make this measure useful then is to either change reality to be closer to this fiction, or to find a way not to care about taxes and depreciation.

There are only two groups who are capable of this feat: Select and flexible Business Buyers, and Lenders. If an industrious individual is willing to buy the company and has the capacity to refinance some of the debit, and possibly move the company to a another region with a better tax plan they may be able to unlock more of the earnings. The other group who can use EBITDA is lenders who can garner some use for this number as they can access earnings before taxes are paid out, and certainly before depreciated machines are replaced so for them these aspects of reality are moot.

EBITDA and stock holders

Common stock holders should not ever, ever, look to EBITDA as an indication of the strength of a company.  How this non GAAP measurement crept in to the investing world is a mystery.  It is often espoused by companies that aren’t making money and needed a way to convince investors to look at them due to potential earnings.

Munger hates EDITDA. I cringe whenever I see EBITDA in financial statements. I hope you will too!

Hot Stocks To Watch This Week - Verisign, Yahoo

Chart courtesy of stockcharts ( click to enlarge )

Since the Nov ‘08 low was reached, Yahoo (YHOO: 15.15 0.00 0.00%) has been trading within a 6-month uptrend channel. This week, the stock price finally crossed the 200 day moving average, indicating a buy. From a technical perspective, a buy is signaled when the stock’s closing price crosses above the moving average from below after a downtrend. As long as the stock price is above the MA the trend is defined as bullish. The technical side of the stock does look pretty good as indicators such as MACD, OBV and RSI all indicates continuous trend of strength. Previous high last October is now the current resistance at 17.20.

Chart courtesy of stockcharts ( click to enlarge )

Verisign (VRSN: 24.26 0.00 0.00%) broke out of a bullish horizontal channel pattern Friday on a large increase in volume to 13.8m shares compared to its daily avg of less than 4m. Bullish channel breakout suggests more medium term upside. Although the MACD suggests that the medium term uptrend momentum is still intact which favors a stable and sustainable recovery, there could still be a near-term pullback as the RSI has reached the overbought region. As such, there could be a retest of the breakout area which would serve as confirmation. But for now, the stock looks like a nice potential play for an aggressive trader. After the recent positive break out above its 50-day MA and 200-day MA, the stock could see more upside potential in the weeks ahead. The next resistance line is at 25.83.

10 Dividend-Yielding ETFs

Dividend-paying stocks are an investor favorite, and many of the dividend focused exchange traded funds (ETFs) give investors better coverage with less risk than found in single stocks.

Some of the dividend-focused ETFs are so diversified that they could stand in as core holdings for a portfolio, remarks Paul Justice for Morningstar. When considering a dividend paying stock or ETF, the objective is to think growth over the long-term. Dividend investing is all about finding solid dividend stocks that are reasonably priced and are expected to continue raising their dividends in the future, explains Dividends4Life on iStock Analyst.

Do not confuse dividend investing with searching for high-yielding stocks to generate a high income. A majority of the time, the quality ones will not have outrageous yields, however the growing dividends over time could compensate.

Here is a small sample of dividend-paying ETFs. Note that this is not all-inclusive, and there are may other worthy ETFs delivering dividends to choose from:

  • Vanguard Financials (VFH: 26.173 0.00 0.00%): yields 5.9%; down 5.2% year-to-date
  • PowerShares International Dividend Achievers (PID: 11.28 0.00 0.00%): yields 6.2%; up 3.4% year-to-date
  • SPDR S&P Dividend ETF (SDY: 41.34 0.00 0.00%): yields 6.4%; down 1.1% year-to-date
  • SPDRS (SPY: 92.98 0.00 0.00%): yields 3.3%; up 1.4% year-to-date
  • WisdomTree LargeCap Dividend (DLN: 35.26 0.00 0.00%): yields 4.8%; down 4.5% year-to-date
  • Industrial Select Sector SPDR (XLI: 23.51 0.00 0.00%): yields 4%; down 2.3% year-to-date
  • Diamonds Trust, Series 1 (DIA: 85.72 0.00 0.00%): yields 3.9%; up 2.8% year-to-date
  • iShares S&P 100 (OEF: 43.12 0.00 0.00%): yields 3.7%; down 0.9% year-to-date
  • iShares NYSE 100 (NY: 47.62 0.00 0.00%): yields 3.8%; down 2.9% year-to-date
  • Rydex Russell Top 50 (XLG: 70.966 0.00 0.00%): yields 3.6%; down 1.6% year-to-date