Tuesday, June 30, 2009
1) The always unbiased NY Post brings us: Don't get that college degree... This is an overly simplistic look at the finances behind attending college. Their argument is that an 18 yr-old that enters the workforce and diligently saves for the next 15 years while their colleagues are paying off student loans, is going to end up ahead of the person who attends college. This is the sort of thing that only works on paper. Unfortunately, all people under the age of 30 seem to have a distaste for saving - college educated or not. The example also falls for the old "stocks return 8% a year" joke. Those were the days my friends.... Anyway deep down in the article there is an argument for changing our system of higher education because it's broken right now.
"Students want jobs and respect. Degrees bring both. Employers, meanwhile, want smart, capable workers. A degree is a decent enough proxy for intelligence, but we want it to be more than that. We want degrees to mean that students have learned the foundations of human knowledge: literature, chemistry, physics, composition, metaphysics, psychology, economics and so on. If we didn't, we'd replace degrees with inexpensive vocational exams.
In 2005, the Department of Education created a commission to study the college system and recommend reforms. A year later, the Spellings Commission (named for then-Secretary of Education Margaret Spellings) reported a long list of shortcomings, including "a remarkable absence of accountability mechanisms to ensure that colleges succeed in educating students." It found "disturbing signs" that degree earners "have not actually mastered the reading, writing and thinking skills we expect of college graduates." Literacy levels among college graduates, the commission noted, fell sharply over the 12 years ending in 2003.
I hate to be the old guy that remembers the good old days, but when I see 75% of a high school class on the Honor Roll something is wrong. My high school graduating class had 5-10% of the students on the Honor Roll (with a class size of 27 you can guess that usually meant me and one other student). Today, my alma mater has north of 80% of it's students on the honor roll in every grade. This is not limited to my alma mater, just about every high school in the North Country puts about 60-80% of their kids on the honor roll.
2) This WSJ story isn't really about educational matters, but rather the failure of the YALE model of endowment management. This pleases me to no end. A couple of years ago you couldn't find a soul that would question the Yale methodology which allowed
"Yale University to profit from pioneering moves away from U.S stocks into often illiquid alternative investments, such as private equity, commodities and timber."
I always found this to be a strange methodology and I feared that as more endowments followed the same model, the groupthink of endowments across the US might lead to substantial losses. I was interviewing in 2007 for a position with an Ivy league endowment that shall remain nameless (sounds a bit like the maker of Spam :)) and I remember how the interview turned confrontational when I challenged their mindless following of another endowment's model. Needless to say, I didn't take the job.
Separately, how about the fact that Cooper Union doesn't charge tuition? I'm already filling out applications for freshmen class of 2018.
3) Finally, I caught a replay of Andrew Ross Sorkin's interview with Elliot Spitzer - yes, that Elliot Spitzer - and I was struck by the fact that he offered a fresh view on higher education. Mr. Spitzer mentioned a model of higher education that would turn the current model on its head. Tuition, not as a flat payment, but rather as a percentage of future earnings. The University would suddenly have a vested interest not in keeping you on campus for 7 years, but rather getting the student prepared to enter the workforce ASAP. The student could feel free to pursue a real passion as a career instead of chaining themselves to a desk (or spend weekends with a sleazy former Governor --- ooops, that's low) to repay $85k in student loans for their Art history degree from Tuscan University. Make more, pay more in "tuition". I don't know how we'd ever get the universities off the tuition model, but boy that sounds like an innovative approach.
Anyone with deep pockets want to launch this as a start-up? Set up online universities that are tuition free (have you seen how fast online universities like University of Phoenix are growing? Up 24% in this down economy) but require 10% of future earnings for the next 10 years. I see holes in this idea, but it has it's merits.
About 5 months ago in the midst of the crisis and when Wall Street bonuses were a hot topic, I predicted this trend. Instead of paying a bankster $500k base salary and $2 million in year-end bonuses, the banks will shift to a model of $2.5 million in base pay to "retain talent". Everyone wins!! The banks and the "talent" get to keep acting as if it's business as usual. The only potential losers might be the taxpayer and consumers, but no real news there.
Monday, June 29, 2009
"China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.
"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.
"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share
the central and/or local governments ultimately will be willing or able to bear."
Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".
The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".
Unfortunately, 40pc of the "real economy" consists of exports, mostly to the US and Europe, the consequence of a mercantilist export model that has crashed and burned. Chinese exports were down 26pc in May.
World trade may be stabilizing at last after contracting at faster rate than during the early Great Depression. But it will not rebound fast in a world where the US savings rate has risen to a 15-year high of 6.9pc. A trade policy based on the assumption that debtors in the Anglosphere and Europe's Club Med can ruin themselves for ever is absurd.
Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.
Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.
Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.
Reformers know what must be done to boost consumption. China needs a welfare revolution. But creating a social security net takes time, and right now Beijing is facing a social crisis as 20m jobless workers retreat to the rural hinterland.
So the regime is resorting to hazardous methods to keep excess factories humming: issuing a "Buy China" decree: using a plethora of export subsidies; holding down the price of coke, bauxite, zinc and other resources to lower production costs (prompting a complaint from America and Europe); and suppressing the yuan, again.
Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its "Smoot-Hawley moment", repeating the US tariff blunder of 1930 that brought the world crashing down on Washington's head.
Two facts stand out about China's green shoots. While the Shanghai composite index is up 70pc since November, Chinese imports are down 25pc from a year ago. China is still draining real stimulus from the global economy.
If the world's biggest surplus state ($400bn) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump."
Interesting thoughts from the Federal Reserve Bank of San Francisco -
"Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario."
The only segments of the economy that I see demonstrating any strength in hiring are tied to the Federal government - census hiring, veteran's affairs, etc, etc. I think the prospects of a jobless recovery is strong, but that implies that we eventually have a recovery ;)
This picture pretty much sums up the disposable nature of everything these days. I love the fact that the building didn't collapse, it just sort of fell over.
In fairness, it was likely due to a flood that eroded dirt around the foundation, but it's more fun to think that they are building disposable condos in China :)
Sunday, June 28, 2009
So, when a member of my household tested positive last week it kind of brought the story full circle.
1) The flu itself isn't as bad as the seasonal flu. High temp, sluggishness and some coughing. If the seasonal flu is a 6.5 on the 1-10 pain scale, the H1N1 would probably be a 3.
2) This sickness has been all over the North Country for the past 3 weeks and everyone kept sending their kids to school because the recovery is so fast (you feel back to normal in about 48 hours).
3) Roche Pharma made a killing off my family's Tamiflu prescriptions.
4) If we ever get a dangerous pandemic we will have a real problem because I feel like I was the only person that actually followed any of the CDC's recommendations (although I drew the line at wearing surgical masks around the house).
If you're a casual reader of the blog you might not understand where my natural distrust of all things Goldman Sachs comes from. Rolling Stone - don't laugh, some of the best investigative reporting comes out of Rolling Stone - did a long, detailed report on the home of the original Banksters and their move to create the next great bubble.
I'm not gifted enough in the ways of ipaper to post the article so I'll link to the Big Picture's post here.
Michigan is experiencing a severe state budget crisis as a result of the reshaping of the auto industry. This description of their State Police pension policy seems shocking. Does anyone know if NY's state police are on a similar model?
"Troopers start getting a portion of their pension while still working and simultaneously collecting their regular salary. The amount of pension they can collect is 30 percent the first year, 50 percent the second, and then increases 10 percent each year until eventually they are getting full pension and full pay before they have retired. The money is not paid out to them immediately but is deposited into an interest-bearing retirement account they get when they really retire."
Sounds like a pretty sweet deal if you could avoid the whole getting shot at thing....
Thursday, June 25, 2009
Consider this Barron's article on the subject.....
"With some fine-tuning, you can almost recreate the instant-messaging network that traders at hedge funds and investment banks use to communicate with each other."
Quote of the day - "Stocks are not associated with underlying fundamentals anymore, they are just 3 and 4 letter symbols to be traded in video game manner by institutional computers and retail home gamers."
Boy if that's not the truth. The power of daytraders is unreal right now.
What I'm reading.....
Lear Corp, the second largest auto seat manufacturer is preparing for bankruptcy.
800 BA workers to work for free
Googlevoice is coming
Genzyme plant closure causing drug rationing
Wednesday, June 24, 2009
Here was today's latest and greatest: US Durable Good Unexpectedly Jumped in May.
"The 1.8 percent gain in bookings for items meant to last several years matched the previous month’s increase, the Commerce Department said today in Washington. Economists projected orders would drop 0.9 percent, according to the median of 75 forecasts in a Bloomberg News survey.
The range of estimates of economists surveyed ran from a decline of 3.9 percent to a gain of 1 percent. Commerce revised the April gain from a previously reported 1.9 percent increase. "
The last sentence is very telling. There were 75 forecasts and no one was within was even close to getting it right. How can that be? Well, that means something must have moved the data or the economists are really bad at their job (probably a little of both).
After looking at the raw data we can see that new orders jumped about $2.8 billion in May, but when you dig a little deeper you see one number really jumps off the page. A 68% monthly increase in non-defense aircraft parts for $2.7 billion. While this looks like a strong move, consider that the number is still down over 70% from a year ago. I suppose airlines can only avoid repairs for so long and then they have to start buying parts to keep their planes in the sky. Again, this one volatile category (plane parts) accounted for almost all of the gain in new orders. It's not a very strong green shoot to hang your hat on.
From The Bond Buyer via Infectious Greed:
Unless lawmakers act quickly to solve the state’s budget and cash crises, California is eight days away from issuing IOUs to many of its creditors, state Controller John Chiang announced this morning.
Without such action, Chiang said his office will begin issuing registered warrants on July 2 to private businesses, local governments, and owners of unclaimed property owed money by the state government, as well as taxpayers due income tax refunds.
Monday, June 22, 2009
* The markets have essentially been flat for the past 7 weeks.
* Over the past 3 months the markets are up just over 10%.
* There was a 25%+ jump in the markets in mid-March over a three week span. If you missed that move (and many did) you've probably recovered a bit, but it probably seems like a small move compared to last year's moves.
After today's move to the downside we are back within striking distance of major technical support levels. IF these prices are breached on the downside the risk of a serious retracement of recent gains is high. I'll watch the 880 level on the S&P 500 closely. I'll reiterate that I think that the idea of buying or selling a stock based on it's chart is like investing by star chart, but the market is being mauled by day traders and hedge funds running large technical programs. Fundamental analysis is taking the brunt of traders jokes these days. It's a tough time to be a CFA :)
A couple of items seemed to spoke investors today:
1) Insiders selling at the fastest pace in 2 years..... Hmmm, if a corporate executive truly believes that the market is forecasting a turnaround wouldn't they hold onto their equity and await further appreciation? Perhaps not if they see the fundamentals of their businesses deteriorating while the stock soars.
"Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”
2) The World Bank cut it's forecast for global growth today and that somehow came as a shock to the market....
"The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.
The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said."
Maybe fundamentals do matter :)
Sunday, June 21, 2009
Congress hopes that this bill will stimulate 500,000 new car purchases (down from an original estimate of 1-2 million). While possible, auto industry analysts indicate that 250,000 purchases would be more likely.
According to the Edmunds.com CEO - "A program intended to stimulate new car sales should target people in the market for a car, but the program does not. The only people who qualify are those willing to take no more than $4,500 for their current car and immediately buy a new one — quite a narrow profile."
I completely agree - you have to be the owner of an old gas guzzler that is practically worthless AND have the financial capacity to buy a new car quickly. There very, very few people in this category.
Obviously, if your car worth more than $4,500 the cash for clunkers deal is not for you. If you want to buy a car you'd be better served by doing a traditional trade or selling it yourself.
One of the areas of this program that is ripe for fraud is what happens to my old gas guzzler. I give the keys to the Dealer X. Dealer X gets his check from the government for $3,500 to $4,500 when a local junkyard validates that my car has been crushed. Maybe it's the cynic in me, but I suspect junkyard owners and car dealers might see an opportunity to "crush" phantom cars while shipping the real cars overseas. Someone might look at my old gas guzzler and think "Well, it's still running. Why should I crush this car?". I hope that I'm wrong, but this seems like a loophole big enough to drive a Suburban through.
Thursday, June 18, 2009
However, as with most data I think there is more to the story.
"Fewer people are receiving jobless aid largely because more of them have exhausted their standard unemployment benefits, which typically last 26 weeks. Government figures, in fact, show the proportion of recipients who used up their jobless benefits in May topped 49 percent, a monthly record."
Wow, 49% of recipients used up their benefits in May and the continuing claims number only dipped slightly? There are two take-aways from this info -- 1) Anyone looking to spin the declining number of continuing claims is going to have a field day because claims are going to continue to fall. 2) This could be another major problem for the banks and US consumers as because the unemployed that were just keeping their heads above water will now be without any income stream as their benefits expire.
While we've enjoyed a staggering rally off the lows in our domestic markets (up 25% to 39% depending on the index) some of the global rallies have been legendary.
The Russian market is up 137% from the January low. I'm sure a big portion of your 401k has exposure to the Russian market, right? Now, much of the gain can be attributed to rising global commodity prices and their market might fall just as fast if oil retreats.
Or how about the 90% jump in the Indian market since the March lows? Truly stunning.
The markets have basically been treading water now for a month - the key question is are we pausing before we head higher or preparing for a pullback? Time will tell.
"How much further could home prices tumble in the New York City metro area? Deutsche Bank predicts a decline of 40.6% from the first quarter of 2009.
That’s a slight improvement over the 47.4% decline that the bank’s analysts had forecast in March, and it reflects in part the fact that prices have dropped since then. Still, prices would have to drop another 32% from the first quarter of 2009.
Median prices in the first quarter of 2009 dropped to $446,000 in New York, down 19% from the peak of $552,000 set in the second quarter of 2007. Deutsche Bank forecasts a total peak-to-trough decline of 52.1%."
That would translate into a median home price in the NY metro area (southern NY State, NJ, CT, Long Island) of just $265,000 if their forecast proves right. Think of the implications of a decline in home values of this magnitude - assessments have to be adjusted, tax rates will soar, the percentage of owners underwater will soar, etc. I tend to think that this forecast is a bit overly pessimistic, but the housing crisis that has crushed California, Arizona, and the sunbelt seems to finally knocking on our southern front.
While on the subject of housing I thought it would make sense to go back and add some color to the surprising housing start info that was released earlier in the week.
Again the monthly gains for May housing starts were 17.2% and permits were +4% which surpassed expectations by a pretty wide margin. However, it should be noted that this data set has seen an average revision downward of about 14% in recent months, but the bigger story lies in a subset of the data.
The government estimated that there was a 62% jump in multifamily dwellings (apartments) in May. I'd argue that this is not only not a positive sign for the housing market but is, in fact, a negative indicator for housing. Builders seem to be forecasting with their actions that they think more people are going to lose their homes and so they are shifting their focus to apartment building from single family building. Again, one month doesn't make a trend, I'll have to see what happens in the next few months, but it is worth watching.
Tuesday, June 16, 2009
"U.S. builders broke ground on more houses than forecast in May, offering a sign that the industry’s slump, now in its fourth year, may be approaching an end.
The 17 percent increase in overall starts to an annual rate of 532,000 followed a 454,000 pace the prior month, the Commerce Department said today in Washington. Building permits, an indicator of future construction, also rose more than forecast."
Now some of this is playing with the data. Starts "jumped" from the prior month, but are still down sharply year over year....
"The increase in starts was led by a 29 percent jump in the West and a 17 percent increase in the South. They rose 11 percent in the Midwest and 2 percent in the Northeast.
Home starts have still plunged 45 percent from a year earlier, today’s report showed, and are down from a peak annual rate of 2.27 million in January 2006, which capped the biggest housing boom in six decades."
Does anyone think we need MORE homes right now? There is a substantial glut of homes across the country and builders are breaking ground to build more while unemployment soars? That would be like taking over GM and cranking out more cars to fill the lots while demand plummets, oh wait, nevermind.......
Monday, June 15, 2009
Railcars provide an interesting insight into the inner workings of the economy. Goods have to ship before they reach manufacturing facilities or retail sites. In the past, we've seen NY Airbrake's commercial railcar business has been a pretty good indicator of rail traffic patterns.
Consider the following chart from railfax report......
If those charts don't tell a story I don't know what chart can. All of the charts show that, yes, we've stopped falling off a cliff, but we're still tumbling down the side of the mountain.
While on the subject of railcars consider this article:
"The economic slump has idled about 70,000 Union Pacific railcars, now sidetracked wherever space can be found, said Zoe Richmond, a Union Pacific spokeswoman in Roseville, Calif. The railroad has also furloughed 5,000 of its 48,000 workers.
Back to back, Union Pacific's idled railcars would reach from Seattle to Albuquerque, N.M.
"We don't have 2,000 miles of track anywhere in our system to put them," Richmond said.
If you have a good 5 minutes I recommend reading the latest posting by Andy Xie. He offers a clear, concise set of opinions on a variety of subjects from Treasury yields, market action and green shoots.
This quote in particular speaks to the bullish bias of the stock market's many participants and the many "experts" you see on TV every day.
"While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.
This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride."
My better half is in Switzerland for meetings (I think it may be a cover to get a closer look at Mark Cavendish or Fabian Cancellara in the Tour of Switzerland :) ) so postings may be light this week.
----------Sorry for the formatting errors -------- all of the photos and links confuse with google's format settings. It's too late for me to try fixing it :)
Sunday, June 14, 2009
Consider Verizon's Connect package which allows unlimited messaging, calls and data via mobile web. That plan comes in at a tidy $69.99/mth with a 2 year contract you'll pay $1,680 over two years.
Now let's look at the new entry from tracfone called StraightTalk. For $30 a month you'll get 1,000 minutes, 1,000 texts (33/day) and 40 mb of web data. Over two years you'll spend $720, or $960 less than the Verizon alternative.
Of course, if you are a power user that uses over 1,000 minutes/month this plan isn't for you. Also, if you just have to have the latest phone - move along - tracfone's phones are dated and you'll actually have to buy one for $20-$100 instead of getting a "free" phone at Verizon. Finally, customer service is notoriously bad at tracfone (as a Net10 user, a tracfone subsidiary, I can attest to exactly how painful it can be calling their customer service dept).
But for nearly grand in savings, I'll put up with some inconveniences.
According to this article it looks like we might have to prepare ourselves for higher food prices this fall. I don't think it's worthwhile to get into a climate change debate, but it is valid to note that:
"In Canada and northern America summer planting of corn and soybeans has been way behind schedule, with the prospect of reduced yields and lower quality. Grain stocks are predicted to be down 15 per cent next year."
Falling supply will drive up prices and that will attract traders which will drive up prices further until you're paying $6.50 a box for your Corn Flakes this fall.
Thursday, June 11, 2009
"The Internal Revenue Service proposed employers assign 25% of an employee's annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax."
You would be able to avoid the tax if you could prove that you have a separate cell phone for personal use. Holy-complicated-tax-return batman!!!
BUY A $315,000 house for just $98 a month!!! Sounds like a late night infomercial right? Not if you were in the market for an interest only adjustable rate mortgage in 2007, according to Bloomberg.
"Shirley Breitmaier, a 73 yr old widow, took out a $315,000 option ARM to refinance a previous loan on her house.
Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed."
Think about that for a moment. She'll start paying principal and interest when the loan reaches 145% of the original loan amount or $457,000. How is a 73 yr old widow going to pay off a 30 year mortgage on a house that's falling in value but has almost $140k more debt associated with the property than it did when she refinanced?
There's plenty of blame to share in this scenario - the borrower for thinking a $98/mth payment and 0.375% interest was reasonable, the lender for making this kind of aggressive loan and the investors that had an insatiable appetite for these loans just a couple of years ago.
The markets have broken through a technical barrier here and if they can sustain these gains it could mean higher prices ahead, but I remain very skeptical as business activity is showing very few signs of life.
Also, the puppet masters at the government's labor department continue to play games with the unemployment data. The estimate for this week's initial claims was 615k so the number comes in conveniently enough at a better than expected 601k. This is like your doctor looking at your blood pressure reading of 165/120 and say "well, it's better than I expected". You're still on death's door, but hey, it's better than expected!!
Also, the Labor department quietly revised what had been a decline of 15,000 people on the continuing claims rolls to an INCREASE of 8,000 people. A net increase of 23,000 people more than offsetting the "better than expected" data on initial claims, but it doesn't matter to the market today.
Facts be damned, unicorns and leprechauns have replaced the bulls and bears on Wall Street.
Wednesday, June 10, 2009
"Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil."
This article in the NY Times tonight skirts around the issues and talks about the bubble in commodity prices that is building. These bubbles can continue to grow beyond sustainable levels as traders pile in behind stockpiling nations. Oil is north of $70 while gas is screaming toward $3/gallon again. Maybe it's time for a little green shoot stir fry?
There appears to be almost no end to the lengths the Congress will go to get you break out your checkbook. After some modest success with the $8,000 1st time home buyer credit (that has hit numerous potholes because of all of the qualifying factors), a bill was introduced today in the Senate that will increase the tax credit to $15,000, include multifamily units and eliminate income restrictions.
This is real money, particularly in an area like upstate NY where the median home price is in the low $120's. It's like putting a big 10% off sign on every house. Unfortunately, it's just another transfer of funds in an effort to stabilize a failed enterprise. Housing needs to correct and placing artificial price supports under these housing market is not a way to help the market heal itself. When home prices return to levels that appeal to investors, cash will flow to that asset class.
Unfortunately, all of the credits in the world won't make up for the fact that US Treasuries seem to be in trouble and that's forced a 10% + jump in mortgage rates in a week to their highest levels in 6 months. The move in mortgage rates is going to cool the heals of any housing rebound in most normal markets (certain distressed markets - CA, AZ, FL - may continue to see activity).
Oh, and it sounds like they are going to push through the $4,500 gas guzzler credit. I half expect a check in my mailbox tomorrow for $100 because I used less than my Federal allotment of oxygen yesterday :)
Tuesday, June 09, 2009
Today they came out with their third quarter hiring survey and despite expectations that things might be picking up, companies continue to sit on their hands when it comes to hiring.
"U.S. employers’ hiring plans for the third quarter held at a record low, signaling fired workers will have to wait many more months to find a job, a survey showed.
Manpower Inc., the world’s second-largest provider of temporary workers, said its employment gauge for July through September was minus 2 after adjusting for seasonal variations, matching the second quarter’s reading as the lowest since data began in 1989."
Surprisingly, construction hiring showed signs of life while "the biggest deterioration in the outlook occurred in education and health services and at government agencies."
Education, health and government have been the only pockets of strength in the US employment as of late. These sectors should lag the private market as budgets are constrained in the coming years.
Oakland, CA is at least considering a bankruptcy filing. This is going to be a trend ---
"We have asked the (bankruptcy) question because we wanted to know the impact," said District 5 council member Ignacio De La Fuente. "In closed session, the question has been asked, and an answer was given." He would not elaborate.
"It's a possibility," he acknowledged. "Things are that bad."
"Out of next year's general fund of approximately $415 million, police costs are estimated at $212 million, fire protection service $103 million and $41 million in debt service payments. That leaves about $60 million to pay for everything else, from library services to recreation centers to public works."
Tax rolls are shrinking as home ownership declines and assessments are falling along with house values. Declining local revenues mean some things can happen:
* Taxes can go up (boo!)
* Cities can cut benefits, pay, and employees
* Cities can contemplate bankruptcy
It would be a fun time to be in local politics!!
If rates continue to climb much higher (another 1% or so), we'd have the highest mortgage rates in nearly 8 years.
You can see a chart of the 6 month chart of NYS mortgage rates here....
Facebook, Youtube, Twitter....... They're everywhere from Oprah to the Whitehouse. But here's the $15 billion question - what if they can never make any money? What's their worth if they are perpetual loss-making enterprises?
1) Facebook - Facebook recently took $200 million of Russian money which valued the company at about $10 billion. The private company will somehow generate around $500 million in revenue this year, but still manage to lose money. Maybe they'll be lining up for a "Social Networking Bailout" in 2010. Facebook gets a huge valuation for it's growth, the perception that it's users are more upscale than Myspace and the number of unique visitors that hit the site. However, in my own personal experience I think the data disguises a reality of Facebook that no one wants to admit. About 10% of users are power users - visiting 5x a day and sharing every little detail of their lives. Another 50% of users check in once a day and the balance signed up and forgot about the site just as quickly. A number of feeds make Facebook users appear more active than they are on the site (for example my blog and twitter accounts feed into Facebook. I might not visit Facebook for a week but it looks like I'm on there all the time) and I wonder how advertisers account for users like myself.
2) Youtube - There is a new story out today that indicates that youtube might be streaming up to 1 billion videos per day. Roughly one video for every person on the internet every day. If any business should be able to be successful it should be one that is used daily by everyone in the world, right? Wrong. Youtube suffers from mixed messages and advertisers fears of being associated with the wrong type of content. There is talk that Youtube could be losing up to $300 million/year. YouTube's problem is an easy fix in my opinion. Stop looking at the users or advertisers for revenue and look at your suppliers (the video uploaders). A small micropayment for every video uploaded could go a long way to creating a real revenue stream that would make youtube a viable enterprise.
3) Twitter - Twitter quitters might be the phrase of the year by the end of 2009. The vast majority of twitter users have fewer than 10 followers. Twitter is being overrun by spam and I don't see a ton of long-term value in their business model. Here's how I use twitter -
twitter search: Search for terms (look for your company, a competitors name, a brand that you use, a stock you like, etc). Follow that stream and you'll gain some interesting insights....
Accessories: I use stocktwits and I find it interesting (but like other tools it's being overrun by pump and dump daytraders). I can see a model for other services that use the twitter format (but I'll keep them to myself in case I want to hire a techie to build them for me), but there is a difference between building a useful website and building a profitable business. Right now some twitter tools can be useful, but I don't see them becoming sustainable businesses.
I think youtube has a 50/50 shot at survival (particularly if they can buy or create a hulu like service). I don't see how Facebook and Twitter survive another 10 years without developing some sort of sustainable revenue stream.
Monday, June 08, 2009
1) The "Put the house on the market and start shopping for an apartment in Beijing Plan" --- If we continue with current spending patterns without additional taxes, we are looking at trillion dollar deficits for a decade. After a couple of years, we'd be bumping up again 100% of debt to GDP which is considered by many to be the point of no return. If we cross these thresholds, prepare for much higher interest rates, dollar devaluation and fairly substantial inflation.
It's worth noting that many of the current estimates under this scenario include 3% economic growth, low unemployment, low inflation and massive savings from health care reform. I'm not sure any of those things will play out, so if we chose to go down this path we may have just 2-3 years before the world says enough is enough.
2) The "buy us some time plan" - We continue along the current spending pattern but utilize new taxes to offset the costs. This is the harder course to chose (particularly for politicians on both sides of the aisle that have shown no ability to make any hard decisions) because it opens up the "tax and spend" debate. However, this is the only option that can maintain the fiscal stability of the US in the long run.
The new push for health care reform is coming this summer. There will be lots of rhetoric on both sides and most of it will be white noise. The Dems need to get this bill passed in 2009, because the 2010 elections could narrow the margin in the House. The way to pay for this bill will be through a VAT tax and taxes on health benefits. They probably won't be called "taxes" but that is what this will be, a tax on the middle class to deliver health care benefits for all. I don't really have an opinion either way, but I think we have to be honest during the discussion. We can say that "savings" will pay for the program and we can't continue on a path with millions of uninsured Americans.
Unfortunately, all of the forecasts about future health care spending ignore two 800 lb (literally and figuratively) gorillas in the room. The Baby boomers and the babies. It's difficult to characterize an entire generation (particularly when there are 60 year olds still out there kicking my behind in triathlons) but it's safe to say that the numerical and physical size of the boomers might be our undoing. Social security and Medicare are set to get whacked by the coming wave of boomers retiring. We can offer a temporary fix by delaying benefits or extending the retirement age ---- I'll pause for a moment while my mother pulls herself up off the floor ---- but again, no one has the intestinal fortitude to try that in today's political environment. The second wave of pain is much further down the road, but the childhood obesity epidemic is going to put incredible strain on our health care system in 20 to 30 years. I don't have a good answer to that problem but I think revising our school lunch programs would be a good place to start........
Which path will we chose?
This typically means that we lag the rest of the economy during boom and bust times. I think that the NNY economy continued to grow (relative to many areas that were contracting faster) through much of 2008 and 2009 because of the belief that our regional economy is somewhat more stable.
Consider this article from AP
An AP analysis of economic data from around the country shows that economic pain in a county decreases as the percentage of government workers in its work force rises. Facts and figures about some of the counties around the country enjoying relative prosperity because of heavy concentrations of government jobs:
Leon County, Fla. — Home to the state capital, Tallahassee. Population 264,000. Percentage of government workers 20. 6.2 percent March unemployment and an AP Stress Index Score of 7.26 (4th lowest in Florida).
Champaign County, Illinois — Location of the University of Illinois. Population 193,600. Percentage of government workers 18.5. 7.1 percent unemployment in March and an AP Stress Index Score of 7.87 (ninth lowest in Illinois).
Johnson County, Iowa — Location of the University of Iowa. Population 128,000. Percentage of government workers 25.6. 3.6 percent March unemployment and an AP Stress Index Score of 3.89 (lowest in Iowa).
Riley County, Kansas — Home to U.S. Army's Fort Riley and Kansas State University. Population: 71,000. Percentage of government workers 17.4. 3.4 percent March unemployment and an AP Stress Index Score of 3.71 (12th lowest in Kansas).
Washtenaw County, Mich. — Home to the University of Michigan. Population 347,000. Percentage of government workers 19.1. 7.4 percent March unemployment and an AP Stress Index Score of 9.25 (second lowest in Michigan).
Albany County, N.Y. — Has both the state capital in Albany and a State University of New York campus. Population 298,000. Percentage of government workers 22.6. 7 percent March unemployment and an AP Stress Index Score of 8.4 (seventh lowest in New York).
Orange County, N.C. — University of North Carolina located here. Population 126,000. Percentage of government workers 26.2. 6.5 percent March unemployment and an AP Stress Index Score of 7.13 (lowest in North Carolina).
Dane County, Wisc. — Both University of Wisconsin and the state capital, Madison, are here. Population 482,000. Percentage of government workers 16.3. 5.5 percent unemployment in March and an AP Stress Index Score of 6.34 (lowest in Wisconsin).
So, the takeaway from data like this is that our local economy should be relative stable right now. However, there are important changes going on at the state level and I expect Federal and State employment to shrink over the next 5-10 years (at least I hope it shrinks). If this happens we could see a scenario where the private sector of the economy rebounds, but our local economy lags behind as state and federal spending is cut.
It should be interesting to watch.
Friday, June 05, 2009
It's important to watch the jobs blossom in NY, TX, AZ, and California throughout the bubble years (2004-2006). Then watch how the rest of the country slows in 2007, but NY keeps going because of the financial markets. Then when the crisis hits full steam in 2008-2009, the entire country goes red. Fascinating stuff.
However, as expected the Bureau of Labor Statistics found that this robust economy has inspired enough small businesses to "CREATE" 220,000 NEW JOBS in May that are out there somewhere, we just can't find them yet.....
This number remains a joke. These jobs never existed during the boom times and they certainly aren't being created in this environment.
Oh, and the unemployment rate jumped to 9.4% in May. Remember those stress tests on the banks? They assumed that the absolute worst case would be 10% unemployment by the end of 2010. We might be there by July.
Also, I always watch an obscure number called U-6. It's a combination of unemployment, but underemployed (a heart surgeon working as a Walmart greeter) and part-timers that want to work full-time. It's a better measure of the economy in my opinion. We crossed 16% in May -- that's a disturbing number.
Markets will likely soar initially on this news but watch for a Friday "sell the news" reaction late in the day (however, there could be lots of support for a further rally).
Ultimately, this fits with my thesis that the recession will slowdown in its severity throughout the second half of 2009 before taking another leg down in 2010.
Thursday, June 04, 2009
We'll get the jobs report tomorrow and given the recent trend in data I can forecast the headlines with some accuracy. May's numbers will be bad, but probably "not as bad as expected". April will get a massive revision down, but no one will notice. Unemployment is probably heading toward 9% by the start of the summer and should be in double digits by the end of 2009.
Again, we'll have to watch the games they'll play with the Birth/Death model and look at total unemployment and underemployment (U-6).
The market is either being driven by a very patient trader or someone at JP Morgan really likes hitting the enter button over and over (there's more talk that JP Morgan is buying the market consistently in small but sustained amounts all day and trades particularly heavy at the end of the day - if they were shorting the market this way, Congress would be charging their offices with pitchforks).
This is one of the more interesting ideas I've read recently - despite all of the talk of innovation in the US, in fact, the lack of real innovation was a contributing factor to the current economic downturn.
"With the hindsight of a decade, one thing is abundantly clear: The commercial impact of most of those breakthroughs fell far short of expectations—not just in the U.S. but around the world. No gene therapy has yet been approved for sale in the U.S. Rural dwellers can get satellite Internet, but it's far slower, with longer lag times, than the ambitious satellite services that were being developed a decade ago. The economics of alternative energy haven't changed much. And while the biotech industry has continued to grow and produce important drugs—such as Avastin and Gleevec, which are used to fight cancer—the gains in health as a whole have been disappointing, given the enormous sums invested in research. As Gary P. Pisano, a Harvard Business School expert on the biotech business, observes: "It was a much harder road commercially than anyone believed."
If the reality of innovation was less than the perception, that helps explain why America's apparent boom was built on borrowing. The information technology revolution is worth cheering about, but it isn't sufficient by itself to sustain strong growth—especially since much of the actual production of tech gear shifted to Asia. With far fewer breakthrough products than expected, Americans had little new to sell to the rest of the world. Exports stagnated, stuck at around 11% of gross domestic product until 2006, while imports soared. That forced the U.S. to borrow trillions of dollars from overseas. The same surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year. While Wall Street's mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad."
More of the article here....
Wednesday, June 03, 2009
You can see a larger version of this map at this website. As many of our local best and brightest get ready to leave their high schools behind and head off to college I found this chart pretty enlightening. It appears that in the Northeast our students get burdened with a disproportionate amount of debt due in part to the schools in the Northeast having more history and higher tuition rates.
How about Sarah Lawrence at $53k/year? I think I'd rather give my daughters $212k to go start their own plumbing business.
Tuesday, June 02, 2009
In perhaps the least surprising bit of news of the day: "Congress Helped Banks Defang Key Rule".
"Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.
Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter."
Not surprising - banks pay lobbyists to convince lawmakers that confusing financial rules need to be tweaked. The lawmakers can barely grasp the concept of debits and credits let alone the intricacies of mark-to-market accounting, so they take the lobbyist's word for it. I'm sure that will end well.
"Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."
Finally, auto sales for May came out today. They were generally quite miserable, but there were some interesting data points in there.....
1) GM & Ford actually outperformed many of the big foreign firms.
Toyota plunged 41%
Honda down 42%
Nissan lost 33%
BMW fell 27.7%
Volkswagen fell 12.4%
Mercedes-Benz down 33%
Porsche Sales Down 29%
Hyundai lost 15%
General Motors fell 30%
Ford Motor 24%
Chrysler dropped 47%
Again, sales falling 25-30% is nothing to write home about but somehow Ford and GM seemed to post slightly better numbers than Honda and Toyota. There could be some seasonal truck buying in there (Chevy/Ford still dominate that segment) and that could have led to their relative outperformance. Also, all of the talk about the difficulties facing the domestic brands might have driven more foot traffic to the showrooms as people sought deals.
2) Despite the slight improvement in auto sales in May, the total domestic US Auto sales are now projected to come in at just 9.2 million units. This would be the worst year since the mid 70's when our population was 2/3rds of what it is today. Staggering.
3) Finally, I remain concerned that GM and Ford's performance indicates that they are pulling forward demand. 2010 and 2011 may prove to be increasingly difficult for the domestic carmakers if they pull their limited demand into 2009.
Quote of the day: "Dumb is the new smart on Wall Street". That's priceless.
Having said that, this race to replace Rep. John McHugh will likely lead to a surge in direct mail in my mailbox and robocalls pelting me from every angle until the election.
Here's a question for the local political blogs: Could an independent ever win in Upstate NY? I sense that most of my neighbors are probably lean more independent than either Republican or Democratic, despite what their voter registration may say. Perhaps I'm wrong and my view of the 23rd congressional district may be skewed by my proximity to Watertown and the river, but I'd love to see a well-funded, independent thinker give it a shot -- just don't call my house between 6pm and 9pm :).