December 2009

Ok, in % terms, no big deal really, except for the surge in volume. Significant? I guess we’ll find out. I’ve been wary of the overall market for a little while now.

Looks as if on a technical basis, Green Mountain is off to the races to $100/share. This might be the end-of-the road, but I’ll look at the fundamentals again before taking any action. This is going to be my short of 2010

There have been numerous predictions round blogoland and the mainstream media, we just love trying to predict the future. Of course, this is entirely necessary, as without speculation, human industry would likely grind to a halt.

Inflation, or the expansion of money + credit, will continue. This we know as senior government officials have informed us of this fact. The latest, although not yet law, is HR 4173 which will authorise a further $4 Trillion.


In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, upon the written determination, pursuant to section 1109 of the Financial Stability Improvement Act of 2009, of the Financial Stability Oversight Council, that a liquidity event exists that could destabilize the financial system …. and with the written consent of the Secretary of the Treasury (after certification by the President that an emergency exists), may authorize any Federal reserve bank, ….

Upon making any determination under this paragraph, with the consent of the Secretary of the Treasury, the Financial Stability Oversight Council shall promptly submit a notice of such determination to the Congress. The amounts made available under this subsection shall not exceed $4,000,000,000,000.

Tim Geithner has also gone on record essentially stating that the system will not be allowed to fail. Thus we can with some certainity state that inflation remains the policy of choice.

Fixed Prices
One of the consequences of this inflationary policy is/was the fixing of prices. The price that has been fixed is [a] the Fed Funds Rate [b] the mortgage interest rate. The mortgage interest rate was fixed via the purchase of $1.25 Trillion in MBS paper. The result of fixing an artificially high price, is surplus supply.

If the price is released [mortgage rate] then we should see prices adjust via the market mechanism, viz. higher interest rates [mortgages] Higher rates lower capital values [the object of the price fixing was to maintain capital values, and hence collateral values] which places pressure on balance sheets via collateral values. This will further inhibit any bank lending, pushing prices lower [no bids]

Employment also sufferes from the fixed [artificially high] price, which creates restriction and an increased supply of labour. There have been some indications that employers are seeing the light, and are willing to fight to push through lower wages, however, there are far more Unions gearing up for a fight. This will create a further inflationary pressure via the Cost-Push inflationary mechanism that was so prevalent during the 1970’s. I first highlighted this back in 2008 and was obviously far too early, it looks to be potentially warming-up for 2010

The slow pace of hiring will force Congress and the Obama administration in 2010 to spend as much as $70 billion to extend jobless aid for the long-term unemployed, or else let benefits — which were extended several times in 2009 — expire for millions of people.

“Fewer people are getting fired, but nobody is finding a job,” said Dan Greenhaus, chief economic strategist at Miller Tabak.

Thursday’s report illustrates the two different trends: first-time jobless claims are falling as layoffs ease, but the total number of people collecting unemployment checks is still rising.

More than 10.1 million people collected jobless benefits in the week of Dec. 12, the latest data available. That’s up by about 200,000 compared with the previous week.

That figure includes 5.3 million people receiving the 26 weeks of aid customarily provided by the states, and 4.8 million people that have shifted to the extended benefit programs enacted by Congress over the past two years and paid for by the federal government. Unemployment insurance averages about $300 per week.

But the extensions are set to expire in February. That could mean as many as 1 million people would run out of unemployment aid in March, according to the National Employment Law Project, a nonprofit group.

The total number of people who at one point collected benefits in 2009 — roughly 20.7 million — is also a record.

The second insiduous consequence of maintaining artificially high wages via minimum wages and Union activity, is the export of capital. Capital flows to where the DMVP of labour earns a higher return for capital. The policy of minimum wages has therefore directly caused the flow of capital and the US manufacturing capability, abroad to China, India, Korea, Taiwan, etc.

The popular belief that predominates government is that exports must be encouraged, via a weak currency, while imports are discouraged via tariffs, which supposedly protect [protectionism] the local, or national producer. Of course, not everyone can increase exports and decrease imports concurrently, not if they wish to maintain their standard of living that is. This simple fact, trade is beneficial to both parties, otherwise you wouldn’t trade, seems to have escaped the politicians.

The U.S. International Trade Commission sided with U.S. steelmakers in a case over Chinese steel Wednesday, voting that U.S. industry has been damaged by a flood of imports of subsidized steel from China

The ruling, which will likely result in duties on future imports of Chinese steel pipes, adds more tension to the U.S.-China trade relationship. Ties between Washington and Beijing are already frayed by the Obama administration’s imposition of duties on Chinese tire imports and China’s criticism of U.S. moves as protectionist

The US Commerce Department said on Tuesday that it has set preliminary anti-dumping duties (AD) on imports of steel grating from China, a move that might escalate trade disputes between the two countries

The Commerce Department said it set a preliminary anti-dumping duty of 14.36 percent on four Chinese producers or exporters in the steel grating investigations.

All other Chinese exporters or producers received an anti-dumping duty rate of 145.18 percent, the Commerce Department said.

Increasing trade [exports] to China, a vast new market, will probably not be best served by such policy. Thus tariffs restrict trade and create higher costs for consumers, who, have to purchase more expensive goods directly due to the imposed tariffs. This causes a contraction in disposable income that could have been directed elsewhere, increasing employment, capital investment and consumer satisfactions.

What does all this mean for the stockmarket?

Essentially the market is looking for an increase in earnings. There will likely be a nominal increase, after all the inflationary stimulus, it would be surprising if there wasn’t, consumption, in various areas has to continue. The real earnings however are not so easy to see, and there is a very good chance many businesses will consume capital, damaging them further in the longer term.

Sectors that produce the higher pure interest returns, should continue to outperform, although this might mean falling less in a bear market. Areas such as Tech, Healthcare and Energy are the three highest returns of pure interest. They are consumer non-durables.

The goods sector, as evidenced via DJIA stalwarts: WMT 22%, XOM 37.9% [petrol] IBM 35.5% JNJ 22%

The service sector, in contradistinction to the goods sector, has less demand, thus the lower pure interest return is lower, as bourne out through my research. Some examples from the DJIA: VZ 7.0%, GE 2.5% [think financial sevices] JPM 0.55%.

These sectors are already in play, and will likely remain in play, certainly if the stockmarket rally continues. Should the rally not peter out, there is money currently sitting in low interest money market funds.

Whether that has already flown into the market is I suppose debateable, however much will depend on the direction of short-term interest rates, governed by Bernanke et al.

We have already seen that QE is winding down. This as noted, supplied huge support to mortgage rates, and hence the balance sheets of financial firms. A new fall in housing prices might see new support added to the market [Bond market] thus bringing down interest rates, which is bullish for stocks.

Rising interest rates, is however bearish for stocks. Increasing deficits, viz. $2.55 Trillion in new government paper, is decidedly bullish for interest rates [rise] which, is bad for stocks.

Gold, Silver & Commodities

Should the government [as it will need to] resort to printing money, to pay for the expanding deficits, gold will be a likely beneficiary, rising above it’s recent highs, possibly touching the previously unimaginable $2000/oz, which in real terms, is the 1980 high.

In summary, booms, are created via credit expansion, they can only be maintained via continued credit expansion. The bust, is the recovery. Malinvestments are allowed to liquidate, capital is reallocated to the most profitable uses. The government has intervened to prevent the bust, they are committed to reigniting the boom via government deficit spending [credit expansion]

We can therefore state categorically, the bad-times are nowhere near over. All the economic metrics that matter will at somepoint worsen, as the government can only inflate [expand credit so far] to a point before being called.

That every government in the world is currently embarked on the same journey, implies that the destination will be reached sooner, rather than later.

Barry Ritholtz likes this from Stiglitz,

Economics Nobel laureate and Columbia University professor Joseph E. Stiglitz has what very well be the best year end piece I have seen to date;

“The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity – costs that were unnecessarily high given that we should already have learned them.”

What were those 6 “harsh” lessons?

I don’t really care for them at all.

1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.

Incorrect. First he does not distinguish between a free market and a non-free market. A free market will self-correct, a hampered market will not. Our market is most definitely not free.

2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses. .

Stiglitz, immediately contradicts his previous statement, and describes some of the ways in which the markets have been hampered.

3. When information is imperfect, markets often do not work well – and information imperfections are central in finance.

Basically just nonsense. Essentially he is claiming that everyone can, or should know everything, all-the-time. Not a realistic proposition.

4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster

Quite unbelievable. That an economist still is that stupid. Stimulus being inflation. Since when is expropriation by government, of the taxpayer, a successful policy response.

5. There is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.

What exactly is an asset bubble? Is it perchance an expansion of credit? Is that not an inflation? Does that not mean you are trying to solve the original problem, by reinstigating the same problem?

6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation.

Total dribble. What he is actually talking about, but doesn’t clearly state, is financial innovation. MBS, CDO, etc. This is all smoke on the water. Fractional Reserve lending of demand deposits, creating fiat currency massivly in excess of real capital is the culprit. The banks, legally licensed to steal, by the government, is the real reason.

In summary, either Stiglitz is simply a liar, and is shilling for the government, or or he is an imbecile, which is not quite clear, he is though, one or the other.

The market is still in a short-term [bounce] uptrend, but the angle of ascent is still flattening. This bodes ill and could be the resumption of the secular bear market from 2000. Of course during the Christmas to New Year period, volume is significantly absent, thus, it could mean nothing at all. The charts might though, just be sending a subtle warning that it’s time to leave. Taking profits now, still leaves a very definite re-entry point [support level] should the market break out to the upside.

The fundamentals however are also starting to paint the same picture with the government needing to float $2.55 Trillon in Treasury paper this coming year, Option ARM resets tied to LIBOR rates, government support in the MBS market drawing to a close, Unemployment benefits still increasing, the entire world inflating and the list just goes on.

flippe-floppe’s recent excursion into GMCR and subsequent exit highlighted the element of luck in the stockmarket. Green Mountain Coffee has horrible fundamentals as detailed in a number of posts, yet, it is of late, definitely one of the hot-stocks. At some point, Green Mountain Coffee will be an excellent short-sale. The intrinsic value for this stock is circa $8.50/share

CROX another past fad stock highlights the difficulties in trading these pocket rockets.

How do we arrive at the point of successful entreprenuers, who have a successful cashflow idea in search of further capital?

Initially, we have the pool of all potential entrepreneurs, who have either an original idea, a modification of an original idea, who feel that consumer satisfactions will be serviced, or better serviced by their product/service. They will invest some of their capital to initially get the project off the ground and provide the land/labour component in addition.

Simply, prices received multiplied by units sold will generate their gross revenues, which serve as the basis from which they calculate their P&L. If they have a product/service that better services consumer satisfactions, they will show a profit, if not, a loss, which will in all likelihood eventuate their leaving the class of entreprenuer.

Prices therefore signal consumer preferences and thus drive the allocation of scarce capital to the goods and services most valued by the consumer. This capital allocation system is important, because unlike ideas and entrepreneurs, capital is scarce.

Capital when defined as a product, or commodity money, is by definition scarce, thus, capital is scarce. The situation dramatically changes however when we start talking about capital defined as fiat currency. Fiat currency is essentially costless to produce, thus has virtually no restraints apart from hyper-inflation to restrain it’s abuses when endorsed by government via a Central Bank.

Mr Gint is confusing real capital, with capital defined as fiat capital:

By far, intellectual innovation is the more scarce resource. Capital is available in abundance, and in most cases very little capital is required in order to get an idea to a “value state.”

I am in the business of seeking value, and let me tell you — no let me promise you — that the world is awash in capital seeking value additive ideas. Literally awash — desperate even.

I take 20 calls a week from buyers seeking sellers. If I were to wait at my office for calls to come in from valuable companies seeking to sell (or valuable entreprenurial ideas to appear at my door), I would starve.

Capitalism is 95% intellectual property. Even the simple stuff.

Herein lies the problem. Fiat capital is advanced to the marginal projects that under free market pricing, would not earn a return. This can be done simply because in a world awash with paper, the interest rate [market] can be lowered so far as to make these projects appear nominally profitable. When calculated in real terms, they actually consume scarce resources that could have become real capital, thus impoverish the economy.

In summary, capital is always, relative to ideas and entrepreneurs, the scarce and limiting resource. The world, through accelerating inflation, is consuming capital, thus, living standards will be lowered.

I see Marc Faber is calling for higher stock prices based on continued/increasing inflation. I’m more of the thinking that common stock dividend yields track bond yields, at least until a true recovery, then we’re off to the races.

If that is the case, we’ve another leg-down in stocks, creating a low P/E environment that has in the past signalled compelling valuations and attractive yields.

Stocktwits have released their top 100 tickers. StockCharts also have this same system. Essentially you get to see where a crowd might be gathering. I find it more constructive to compare the ticker clouds to the New 52 week highs. It can filter out some of the more marginal stocks.

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