Sunday, December 30, 2012

Do you feel lucky? Well, do you punk?

As predicted both parties have dragged out the "fiscal cliff" drama to the VERY end of the year.  The news around this will swirl mightily tomorrow and is likely to whipsaw the markets (more on that later), but first a review.

It's important to remember that the premise behind the "fiscal cliff" is merely some of the same type austerity measures imposed in Europe over the past couple of years.  A combination of two things - spending cuts and eliminating temporary tax cuts - was designed to get our fiscal house in order.

These changes would ultimately lower our ratio of debt to GDP back to around 50% by 2035 and we could, at least in theory, begin running a primary budget surplus by 2015. 

I can hear you asking yourself this -- "Wait, those sound like good things?? What's the drama about?".  Well, you see those are good things for the country as a whole, but if you are Congressman elected from a district that has been carved to keep you in power, your base is not going to like much of this "cliff" business.  Either your constituents are dependent on the government spending that will be cut (think defense contractors, doctors accepting Medicare, or even Ft. Drum for example) or your constituents have grown used to those temporary tax cuts and they don't like the idea of paying higher rates. 

So, because Congress is beholden to their constituents and they can't work together for the greater good, we've seen this fiscal cliff become the bogeyman of 2012.

Ultimately, we have to have this conversation like adults.  To get our fiscal house in order tax receipts need to increase and spending needs to decline.  However, no one wants to have that conversation, so what we will be left with is some type of lame "Cliff Avoidance" plan that does raises taxes on a few, patches the AMT, extends unemployment benefits and ultimately doesn't do very much to help our economy. 

The current sticking points seem to be CPI indexing of some benefits, how to tax high income earners (as I originally predicted $400-$500k is likely to be the new threshold for high income), and how to handle estate taxes.  These are big issues that are unlikely to get hammered out in the next 24 hours so I'll stick with a prediction that a "deal" will be announced but it will be very limited in its scope. My concern is that this is some sort of mock run for the real showdown coming in January over the debt ceiling.  If you talk to global business leaders they have very little concern about the future of the US economy but what does concern them is the lack of our leaders to lead.  The true cliff we are up against is our position as a leader of the global economy and if we can't demonstrate an ability to make hard, smart choices that position our country for growth 10-20-30 years down the road, then we might as well yell "Cowabunga" and jump today.

So what will this mean for the markets?  This is tricky mainly because of the date.  On a normal date, I would expect the announcement of a deal to ramp stocks 2-3% and that may very well be the initial reaction.  However, as details emerge I expect people will be less than impressed and we may sell-off.  However, there is the matter of 12/31 to be dealt with.  Many equity managers have to beat an index from 1/1 to 12/31 which means if the index is 100 on 1/1 and goes to 110 on 12/31 then they should return 10% or more to earn their keep.  Well, imagine if your a mutual fund manager and you've locked in all of your 2012 gains and you're sitting on the sidelines until this fiscal cliff is cleared up.  Well, what if the market you were supposed to beat jumps from 100 to 103 on 12/31.  Now in 2013 you have go from your assumed 100 to 113 or more because the base number on 1/1 will be higher.  As I type this I know it's not making sense, but let's just say it is in the money manager's best interest for a big bonus in 2013 to have lower starting point at the end of 2012.  For that reason stocks might end flat or down after a deal is announced.  It should be entertaining either way.

Happy New Year!

Brian

Monday, December 10, 2012

The Fiscal Speed Bump

There was a great deal of breathless commentary on the Sunday talk show circuit about the pending doom that will befall us all unless we solve the fiscal cliff ASAP.  Somehow they managed to squeeze in Fiscal Cliff commentary in between analysis of a Clinton vs. Christie or Clinton vs. Jeb Bush Presidential Race in 2016.  I think I made myself a little sick to my stomach when I typed that because we're still in 2012.

As you can see in this Google Trends chart, interest in the Fiscal Cliff has gone parabolic so you can expect lots of Cliff talk along with your Christmas goose this year.

Since everyone is going to start making predictions soon, I'm going to throw out my expectation of what will happen.

There will be a great deal of posturing and maneuvering as we enter the final week of December, but I expect we'll actually not have a deal as of 1/1/13 and we will in a sense fall off the cliff as of that date.

However, I expect the Treasury Secretary to use his power to delay IRS actions and give the White House and Congress time to hammer out a deal.

So now it will be early January and in theory tax rates will be up for everyone as the payroll tax break expires and the Bush/Obama tax cuts expire.  However, no one will actually be paying these higher rates because of Geithner's actions, but let's not let facts get in the way.

So, now a GRAND COMPROMISE will be announced which will -

* Extend a payroll tax break AGAIN (like I've said before once you take a hit off the tax break pipe it's hard to give it up).

* A tax hike for those earning $500k and above.  However, here's the kicker on this deal.  I expect that the new rate might be 37% - higher than the 35% current rate and lower than the 39% that rates are scheduled to move to if the Bush/Obama tax cuts expire.  Now, the Republicans can say "Hey, we didn't raise ANY tax rates and we CUT your taxes from 39% to 37%!!!  Hastag Winning!" and the Democrats can say "Yes! We raised taxes on those wealthy Americans to make them pay their fair share."

Both statements are technically true but neither is completely honest.

So that leaves us with two big issues still outstanding - spending cuts and the debt ceiling.

1) On spending - I don't think anyone has the guts to do anything here.  Just look at the September Food Stamp data that came out today - over 600k new recipients in September alone!  Can you find anyone willing to support a 10-15% reduction in military spending?  I suspect we'll get an agreement on fluffy, hard to identify cuts (reducing fraud & waste in Medicaid/Medicare, etc) and someone will throw out a huge number that will never be verifiable.

2) The debt ceiling debate is much tougher but I think the Republicans will be able to identify 15-20 safe Republican seats that can vote for a hike in the ceiling.  Thus, the majority of the party can still claim to be against raising the debt ceiling but they don't risk further jeopardizing our credit rating.

Well, there you have it.  Now you can turn it off the TV talking heads until January 8th when all of this is behind us and we can focus on more important things like who is leading in fundraising in Iowa for 2016 :(

Cheers!



Friday, November 30, 2012

Arrrghhh! MSM please dig a little deeper

So I was going to let it go, but they just keep hitting me over the head with bad data so I have to say something.  Last week the National Retail Federation put out a laughable estimate of $423/shopper  for Black Friday spending.  Most media outlets have blindly repeated this ESTIMATE without questioning how it was calculated.

I thought I'd give you their sophisticated statistical formula that was used to calculate this number. 

Step 1) Ask a customer what they spent last year on Christmas.

Step 2) Ask them if they plan to spend more or less this year.

Step 3) Estimate that 40% of all sales occur on Black Friday and you get your "estimate"

Think about that for a second - we're not talking about transaction data, we're talking about using consumer estimates and the one thing that has been proven time and again is that consumers wildly overestimate what they are going to spend. 

I suspect that the National Retail Federation reports these "estimates" in order to create a bit of a shopping "frenzy" among the public.  The more times someone hears that the average shopper spent $423 on Black Friday, the more likely they are to feel like they are behind and they'll feel a need to get caught up.

Until we get some real data can we at least refer to this as a forecast or an estimate from a retail trade group?

Sunday, November 25, 2012

Was Black Friday a Boom or a Bust?

My old nemesis the National Retail Federation is out trumpeting the boom that retailers saw this past weekend with record sales everywhere.  However, the real data that's been collected so far is much less flattering.

Do you remember how the National Association of Realtors constantly preached the value of housing throughout the housing boom and bust?  Well, that is what trade groups do best.  They spin the data to make it look great and lazy media outlets sometimes take the bait hook, line and sinker.

At least according to the National Retail Federation, Americans spent an average of $423 PER PERSON for total Black Friday WEEKEND sales of $59 billion.  Here are the problems with this number ---
1) Black Friday sales tend to be a negative indicator even though no one ever mentions this.  People don't maul one another for $4 DVD's and $50 prepaid cell phones when they are feeling "confident" about their economic situation.  If we believe the NRF's numbers I'd argue they are just pulling forward sales that would normally occur in the weekend after Black Friday.

2) Comparing 2011 to 2012 is really not possible b/c so many more major retailers moved their opening times from 6am Friday to 8pm Thursday.  This really changed the amount of shopping hours available in 2012 and again altered the total sales figures.

I'd offer my own anecdotal evidence from spending much of Black Friday weekend in the mall at www.nnymath.com -- traffic was up but the number of people carrying packages was very small.  Also, because they stretched Black Friday into a weekend event I think many casual shoppers just bailed on the whole concept. 

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Quick market update - the markets have gone into hyperdrive in the past week on rumors of progress being made on the fiscal cliff.  Again, this fiscal cliff stuff is mostly made up media nonsense, but the pending debt ceiling debate could really screw up the markets like it did in 2011.  The rumored progress seems to be very difficult to pinpoint (a couple of Republicans have hinted at accepting some tax increases and a couple of democrats have hinted at entitlement cuts) and I'm hearing that behind closed doors the "progress" have been negligible.

I'm also a bit worried that everyone seems to be on one side of this trade.  Everyone is all in on the long side that stocks are going up and we'll get a grand deal by 12/15.  Remember my number one lesson of investing - when everyone thinks X, you should be looking at Y.

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Just a final note of thanks to the many loyal readers that continue to listen to my ramblings.  I am also very thankful for the customers that have taken a chance on my new venture - NNY Math.  Enjoy the rest of 2012 and keep checking back for updates as news breaks.

Friday, November 16, 2012

I swear I had no inside info :)

However, it only took about 12 hours since my last post for many of the guesses that I put forth to start hitting the wires.  Here's the my summary - I believe Wall St. has told the White House and Congress that all of this "fiscal cliff" talk is freaking people out and that is why the market has tumbled for a week.  This is not the case, in my opinion, but then again why let facts get in the way of a good story.  

So, instead of working hard to get a deal struck in the next few weeks, the White House and Congress are in talks to take the easier path and (oh, goodness we'll get tired of hearing this phrase in about 48 hours) "kick the can down the road".

The markets have reacted positively to this rumor so far (remember the markets want the status quo - easy money and no spending cuts or tax hikes - good for their immediate bonus outlook, but bad for the future of the US).

Here's what the WSJ is reporting....

"White House officials are in advanced internal discussions about a plan to replace the sweeping spending cuts set to begin in January with a smaller, separate package of targeted spending cuts and tax increases."

By postponing the sequester cuts, Washington would essentially push off a number of large deficit-reduction decisions into mid-2013. This would include a long-term plan to replace the remaining sequester cuts, a plan to overhaul the tax code, and separate decisions about how to restructure Medicare and Medicaid.

 The plan that has been discussed by White House officials is similar in many ways to what lawmakers have discussed. It would terminate the spending cuts for a period of six to 12 months, and replace the cuts with more targeted reductions and revenue increases. House Republicans have proposed a similar model, though they have called for terminating the cuts to defense programs only and haven't accepted a deal to include tax increases as part of any package."

Remember that this will be sold to you as some sort of grand compromise when all it really is is a deferral of the deadline to make some hard choices.

Thursday, November 15, 2012

What's going on?

The market really can't get out of it's own way right now.  Given Apple's overwhelming dominance of the stock market we can't overlook the $150 Billion (yes, that's billion with a B) drop in the market value of Apple in the past 2 months.  Apple is now being thumped over the head with two old fashioned market rules "reversion to the mean" and "all stocks eventually discover gravity". 

The talking heads remain obsessed with the fiscal cliff talk and it is a convenient boogie man for a down market.

Let's review what we're talking about when we talk about the worst cast scenario:

Spending cuts (less than 1% of GDP)
* $87 billion in across the board cuts
* $35 billion - expiration of extended unemployment benefits
* $15 billion - reduced Medicare Dr. payments

New taxes (about 3% of GDP)
* $24 billion new taxes
* $87 billion other taxes that expire
* $127 billion payroll tax holidays
* $295 billion tax rates return to 2001 levels and AMT

As a reminder the impact of fiscal cliff would be a short-term negative and a long-term positive.  If we do nothing our ratio of debt held by the public to GDP will rise from it's current 67% to 90% by 2022.  In contrast, if the fiscal cliff changes are implemented the CBO projects that our debt to GDP would actually FALL to 58% by 2022!!  However, the impact on growth in the near-term would be meaningful and would likely take us back into recession in 2013.

Having said all of that ,look at those cuts and taxes again -- which ones can you see Congress having the guts to defend? 

I suspect we'll see something around $20 billion of unspecified "spending cuts" vs the original $137 billion estimate.  On the tax side I expect another extension of the payroll tax holiday, a deal on AMT and no change in rates for people earning $1 million or less.  So, instead of $500 billion in new taxes collected, I'm going to estimate that roughly $50-$75 billion in new taxes will make it's way to the treasury.

Net/net, our long-term fiscal problems will get worse and we will have created a great deal of uncertainty fretting over this issue.

Cheers!

Monday, November 12, 2012

Fiscal Cliff HYPE coming to a theater near you

Yes, there is a real deadline coming that should force some compromise in Washington.  I'll give you my best guess of how it plays out but first let's separate hype from reality.

What is this cliff the talking heads are all talking about so breathlessly?  Well, the Budget Control act of 2011 instituted a combination of forced spending cuts and the forced expiration of temporary tax cuts which could cut up to $500 billion from our projected deficit in 2013.  That's the good news (I guess) that we'd only have about a $500 billion deficit left to deal with.  The bad news is that these moves (primarily the spending cuts) will likely lead to a contraction in our economy and in all likelihood a slide back into recession. 

The worst case scenario would be no compromise and a complete implementation of the BCA's  cuts.  However, I think this is an unlikely scenario.  The much more likely scenario is that we hit a fiscal "speed bump" and a compromise is reached to maintain the status quo.

Here's my 50,000 foot view of what I think will happen:

* taxes on dividends and capital gains are going up (this raises revenues but allows the Grover Norquist's of the world to say "See he/she didn't raise marginal tax rates) the only question is how high the rates will go.

* The payroll tax cut will probably be extended again.  This is an easy giveaway that is popular on both sides of the aisle.

* Special tax benefits - like accelerated depreciation for companies and the sacred mortgage interest deduction are in the cross hairs.  I never thought Congress would really touch the mortgage interest deduction but if you think about it where would the effect of this be the most pronounced?  Where property values are the highest and guess where property values are the highest?  Those blue coasts on both sides of the US (NY, NJ, MA, CT, CA, WA) and the impact on someone with a $85k home in Montana will be less pronounced.  I hate to see politics driving economic policy but it could play a role here.

* Military spending - this will probably be the most difficult negotiation and I don't know how it will end.  I suspect there will be some cuts in civilian staffing but I do not think we'll come close to cutting $100 billion from defense.  If I were President Obama I'd call up Gov. Romney and ask if he'd like to head up a special project.  The US defense department would be the perfect private equity target - valuable assets, workforce issues, an industry that technology could change - and Mr. Romney would be the perfect person to head a commission on streamlining the military.  I'm only half-joking on this idea.

So hopefully, at this point you can see that the fiscal cliff is likely to be a little more than a road bump.  It is unlike the debt ceiling debate which nearly crippled the economy in 2011 (unfortunately, we'll probably have another one of those debates in the next 3 months).

However, this won't stop the media from reporting on the fiscal cliff like it is the second coming of Superstorm Sandy.  Look at the google search index for the term fiscal cliff in the past 2 weeks.

Every time the market dips expect people to jump to the "It's the uncertainty caused by the fiscal cliff!!!" line.  However, the bigger factors are Asia's slowdown, Europe's slowdown and weakness of our export data.

Cheers!

Wednesday, November 07, 2012

Well, two out of three ain't bad

Well, the results are in and as predicted ....

"Scenario 4 - President Obama wins both the electoral college and popular vote. Again, I think the market's would welcome this news because it would remove some uncertainty but then the focus would shift to the House to see what sort of political capital the President would have earned."

It appears as though the President did win both the popular vote and the electoral college which was an outside of the box concept on Monday.  However, the market's reaction has been anything but positive.

My expectation was that the market would look at the election maintaining the status quo - President Obama, Ben Bernanke, Democratic Senate and Republican House - and expect much of the same for the next four years.  The market may still come to that realization but the early results seem to be "sell, sell, sell".

But, why?  Well, we can look at the obstructionist comments from the House leadership last night which will make it very hard to deliver meaningful legislation needed to avoid the fiscal cliff.

Or maybe it's just Apple breaking down as a stock. It's hard to say that a stock that is up $160 billion in mkt cap or 40% in the past 12 mths is breaking down, but since the iphone 5 flop.... I mean launch way, way back 6 weeks ago, the stock has lost a staggering $140 billion in market cap and has broken through many technical levels.  One of the 10 greatest risks to the stock market is our reliance on Apple as a stock.

Finally, people could just be suffering from President Obama fatigue and they are voting with their wallets. 

I suspect the major drivers of the market in the next 2 months will be ---
* Europe's economy
* The war drumbeat with Iran
* Sandy's impact on the Northeast economy
* and finally, that fiscal cliff.......

It should be interesting.

Thanks for voting!

PS - look for the NNY Math commercial on various cable channels in the North Country.  You can also check it out on our website.  www.nnymath.com  Thanks! 

Monday, November 05, 2012

Is anything happening tomorrow?

Finally, we get to move beyond the "Local TV Reinvestment and Recovery Act of 2012" aka, the election season, tomorrow.

I won't offer any endorsements or advice because politics remain the third rail of the blogosphere, but I will encourage everyone to vote.  I will, however, give some thoughts on the national campaign and its potential impact on the markets.

The consensus right now is moving toward an ugly, ugly forecast.  Many pundits predict that Romney wins the popular vote by 1 - 1.5 million but loses the electoral college by 15 votes or so.  This is roughly the same scenario as 2000 (when Gore won the popular vote by 500k or so) but the implications in today's increasingly partisan world are scary.  The likelihood of this happening has increased as a result of the East Coast superstorm which will suppress voting in the Northeast.  It doesn't put any of these traditional democratic states in play but it will likely lower the overall vote totals for President Obama.

Scenario 1 - If the electoral victory for Obama is clear I think the initial reaction by the markets would probably be positive, but concerns over the pending fiscal cliff and resistance to compromise from both parties would like dampen any enthusiasm.

Scenario 2 - The same as #1 but what happens if the victory is not clear?  I've heard that the parties have plans in place to demand Florida-style recounts in up to 5 states.  This is a nightmare scenario for the markets as they struggle with the uncertainty this would create.

Scenario 3 - Romney wins both the popular vote and the electoral college.  I think the markets would welcome this news because it would remove uncertainty.  However, the Senate should remain in Democratic hands and that would still cause some concern about Governor Romney's ability to craft a plan to avoid the fiscal cliff.

Scenario 4 - President Obama wins both the electoral college and popular vote.  Again, I think the market's would welcome this news because it would remove some uncertainty but then the focus would shift to the House to see what sort of political capital the President would have earned.

Last week, I was leaning toward Scenario 1 as being the most likely but I'm uncomfortable being part of the consensus.  When everyone is expecting A, B usually happens.  In this case, the market seems to be focused on a President Obama electoral victory (betting odds are running around 75%-80%) but more and more people are coming around to the idea of a Romney popular vote victory.

I usually like to be a contrarian so I'll switch my leanings toward scenario #4.  I suspect that the trend we've seen in polling in recent years will continue ie; missing the under 25 crowd.  Pollsters are really, really bad at getting in touch with the under 25 crowd despite their best efforts because this group of voters either doesn't have a landline or ignores the pollsters when they call on their cell phones.

This leads to an even bigger question when it comes to the validity of polls.  Recently, a Pew Research paper indicated that for every 100 homes contacted only 9 actually answer their polls.  I wonder what the response rate was like 1952 or 1972?

However, it turns out make sure to have your voice heard and get out and vote!

Tuesday, October 30, 2012

A couple of observations

For the most part, I've sat in stunned silence at the utter devastation that has occurred in the tri-state region.  This will be a post of many of the best photos that made their way onto twitter and that brings me to a second point.

The value of twitter is unbelievable in a time of crisis.  Real-time information is unbelievably powerful.  By watching the twitter stream I knew that my brother's street was nearly flooded in Massachusetts and that there was an arcing wire at the end of my sister-in-law's street in NJ.  I also had all of the big stories - the crane, the ConEd explosion, the flooding of the different tunnels, etc., roughly 20-30 minutes in front of the traditional media outlets.  The downside is that there is no editorial filter so when a GOP operative went off the deep end last night and started posting some irresponsible rumors they are often retweeted before anyone can verify the information.

Within 5 years someone will have a twitter-like news channel that will replace CNN/Fox/MSNBC/Drudge as the future of news. My bet is on Henry Blodgett to take on the role as the Ted Turner of the next generation. You heard it hear first....








Enjoy the electricity and heat flowing through your home!

Wednesday, October 24, 2012

Fed day and a Modemgate update!

The markets wanted to rebound sharply today on the heels of lots of rumors coming out Europe but alas today is a Fed day and that means no real movement until after 2:15pm.

Steve Jobs once said there was no use for a 7" ipad.  Thus, a year after his passing, Apple introduced the ipad mini (aka, Ipod XL) at a higher than expected price point - most thought it would be about $249, instead it came in at $329 - and the market yawned.  I think Coke and Pepsi could learn a thing about marketing from Apple.  Instead of "cutting the size of their 2 litter bottles" to 1.5 liters and now 1.25 liters, they should just called them the Pepsi mini and the Pepsi mini XL.  People would line up around the corner for them :)

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Attempting to be politically agnostic in an election year is difficult, but this chart is about as apolitical as you can get.
via azizonomics.com
 
This shows one of the greatest flaws with our economy.  Nearly 6% of our workforce is now "disabled" which is up 50% + since President Clinton left office.  I'll let you draw your own conclusions as to why this number has jumped (poor hiring prospects, obesity, wars in Iraq/Afghanistan) but it is important to note that when you hear about the challenges facing social security, disability payments are an increasingly factor.
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Just a follow-up to the post on buying your own modem for Time Warner --- be aware that it might be a good idea to pay 1 month of rental fees before switching.  There is some work that has to be done at Time Warner customer service when you switch and EVERYONE in New York City is trying to switch right now before 11/1, so I've heard that wait times for customer service are obscene.  I'll buy a new modem and switch in November.
To those that are concerned about not being able to buy a modem b/c they have bundled phone/internet, I'd say dump time warner for a better VOIP provider.  I pay about $8/mth for an adequate voip service, but you can find a good provider for $15/mth if you are a little tech savy.
BTW - Thanks to all of the blog readers that have stopped by www.nnymath.com at the mall.  It's been a pleasure to meet some readers face to face.  NNY Math --- Math, science, fun at the mall!
Cheers!

Sunday, October 21, 2012

Did you get a Time Warner postcard this week?

Oh, Time Warner it's not enough that you stick us with slow download speeds, constant rate hikes and reductions in service, now we get the pleasure of forking over another $3.95 a month for the privilege of leasing their Internet modem which many of us have been using (lease free) for the past decade or so. 

I assume many users will just grumble a bit and say, "Well, I need the Internet what am I going to do?".  Thankfully, Time Warner gave us an option and I think my audience is a little smarter than the average bear so I hope you'll seize this opportunity.

If you visit this website, you'll see list of approved modems for our area.

If you are a turbo/extreme user (ie, overpaying for service but that's another story) you can get the
MotorolaSB6141

at Amazon for about $130.  Given that the rental fee is going to cost about $50/year (assuming it never goes up) it would take about 2 - 3 years before you're in the the black.  You can find refurbished models for around $100 on eBay, so that might be an option.

However, I presume that the vast majority of users are on a basic/standard plan which can be served quite well by the

MotorolaSB5101

which goes for $65 on Amazon.  However, it might be even better to buy the more advanced SB5101U for a very reasonable $55.

At that price you will be in the black in roughly 14 months.  So, you can agree to hand over $4/mth for the rest of your life to Time Warner for the right to "lease" their modem or you can declare a little cable independence by buying your own modem for about $55.

Let me know if you decide to move buy your own in the comments!

Cheers!

PS - thanks to all of the readers that have stopped by my new venture in the mall - www.nnymath.com.  Classes are filling up but we're always making room for new students.  Stop by or send me note with any questions.

Quotes from students this past weekend:

"I told my Mom we were working with Sodium Hydrogen Carbonate at NNY Math."

"I extinguished a candle with CO2 and everyone thought it was a magic trick!"

Thursday, October 11, 2012

Houston do we have a problem?

Here's the issue as I see it - the stock market clamored all summer for more Fed easing.  So, despite the fact that all of the major indexes were near record highs and the fact that the jobs data seemed to be improving, the Fed caved on QE3 and promised more easing.  That calmed the markets and they are now patiently awaiting word on QE4 (I'm only half joking, some are already talking about the next round of easing before this round has kicked in).

However, if the Fed's goal is to suppress interest rates to punish savers.... I mean spur investment and jump start the economy how do we explain the last week?  Unemployment is now under 8% and today new jobs claims tumbled SHARPLY to a level not seen in years.  If the economy has turned the corner then surely the Fed won't be buying up all of those mortgages?  And if that's the case, interest rates will rise and the stock market will fall (despite an improving economy).

Here is the situation we find ourselves in today.  The market can only go up for extended periods based on hope and fairy dust from the Fed.  The real economy has little bearing on the market.  To that end, consider this stat I read over the weekend from the founder of a leading market data firm who said that "99.9% of all quotes in the market today are high frequency trading related".  Think about that for a moment.  If a stock has 1,000 bid/asks only 1 is from a human!! The rest are computers just waiting for the human to slip up.  Hence, my decision to hang up the my trading jacket though I do remain active with several longer term positions.

It's worth it take a look at the increase in high frequency activity in the markets over the past 5 years by visiting the NANEX site.  It takes a little while for the GIF to run but it's worth the effort to see the change in the markets.

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I won't get into the whole host of conspiracy theories out there re: the dip in the unemployment rate from last week.  The rate dipped but I expect it will rebound a bit in October (or hold steady with a revision to the September data).  The big story remains the low participation rate, but I'm not a believer that participation is low because the economy is weak but rather it is the baby boom generation which was decided they like early retirement.  The traditional retirement age of 65-70 has been replaced with a huge segment of our population that is retiring at 60-62.  This trend is going to continue for a long-time until someone in Washington decides to change it (very unlikely).

Cheers!

Thursday, September 27, 2012

Scratch South Africa from my vacation list

Not much to add here other than to point out that the Ocearch Global Shark Tracker is one of the cooler websites I've seen lately.

This site tracks great white sharks that have been tagged with satellite tracking technology and where they have pinged on the world map recently.  As of today, there was one near Nantucket and about 4 off the coast of South Africa.  To be fair, almost all of the sharks were tagged around South Africa but still, I think I'll stick to swimming in the mighty St. Lawrence.

Cheers!

PS - Thank you for all of the kind words of support you've passed along re: NNY Math.  So far, I'm cautiously optimistic about our prospects and given that I'm the guy that normally thinks the glass is half empty and leaking, that's saying something.

I'll continue the soft open over the weekend so if you're in the area stop by the mall to say hello.

Brian

How the Fed almost killed the NFL

How is that headline for an attention getting plea for eyeballs?  This will take a second to explain but there is some truth that mock headline.

First, the Fed has been aggressively easing for going on 4 years now (and I think you could argue it goes back to the post 9/11 era as well).  This easing, coupled with active purchases of mortgage backed securities has kept interest rates at near historic lows.  This is great for borrowers as it reduces their cost of borrowing, however, for savers the pain is felt every time you open up your statement and see that your earned $0.14 last year in interest.

Well, of course, but how does that impact the NFL you might ask?  Now that the contract has been settled (about a week too late for Green Bay fans) it is clear that one of the big sticking points was reforming the pension system for officials.  I don't have all of the details in front of me but I believe the new plan will keep the existing officials in a traditional "Defined benefit plan" through 2016 when they will switch new officials hired after that date to a "Defined contribution plan" (ie, 401k). 

So why was this such a contentious issue? Well, for one employees love the security of a defined benefit (I get $x/mth for y months) and those plans were relatively easy to manage from 1950-2001 for 2 reasons - 1) You could park 50% of your assets in US Treasuries and earn 5%  all day long and 2) You could use the other 50% of your money to buy dividend paying stocks that might yield 3% via a dividend and give you upside if the market went up.

Well, thanks to the Fed's efforts pension plans can no longer assume they will get a 5% free pass from Treasuries.  More likely they are looking at a blended return of 2-2.5%.  Since most pension plans assume an unrealistic 8-8.5% return every year the plans have to reach for return in the stock market. Some years that works out and some years it doesn't.  Business owners, in this case the NFL owners, hate that kind of uncertainty.  You are seeing it across the country as pension plans continue to underperform, the primary driver isn't poor investments as much as it is the lack of return achieved on government debt which is being suppressed by the Fed.

However, if I were on the debate team I would counter this concern of the NFL owners by saying the Fed actions have allowed them to build massive stadiums with debt borrowed at record low rates which have dramatically increased their net worth (Jerry Jones for example).

So in a nutshell, the NFL did severe damage to it's brand over the pension issue because the return on their investments have not kept pace with plan assumptions due to the Fed policy which strives to maintain a low interest rate environment -- and there you have it, how the Fed almost killed the NFL :)

Just don't tell Ron Paul or he'll want to audit the Fed's betting record to see if they bet Seattle straight up to win last week.

Cheers!

Monday, September 24, 2012

Can I get an iPhone6 or QE93 rumor?

So, Apple managed to sell 5 million + over the weekend and people are freaking out a bit because there were rumors that Apple might sell 10 million.  However, the market buys every dip in that stock so I wouldn't worry too much (yet).

There is always a sub-segment of the population that always has to have the latest (if not greatest) product in a market, so it's not surprising that people were clamoring to save the weight of 4 quarters off their latest phone.  Apple has legions of fans but I think the biggest question for them and their future is "Would this iPhone have been launched under Steve Jobs?".  It's not a question that we can answer but I think the marginal improvement in the phone and the cluster*(#! that is their mapping system should raise some eyebrows.

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This video will probably be everywhere by the end of the day but when I saw it yesterday I couldn't believe it.  It's a terrible truck vs. truck collision but miraculously everyone was okay.  However, watch the guy in the Where's Waldo shirt FALL OUT OF THE WINDSHIELD and WALK AWAY!

Crazy stuff.
 
 
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Finally, thanks to everyone that stopped in this weekend to check out NNY Math at the Mall this weekend.  I'm cautiously optimistic that we are onto something based on the response we got this weekend.  Again you can reach me at brian at nnymath.com if you have any questions.

Cheers!

Thursday, September 20, 2012

But wait, if you call in the next 20 minutes we'll DOUBLE the offer....

Hopefully, this won't be as painful as an infomercial or any of the countless used car ads running in a continuous loop on my TV.

So, if you haven't figured out yet, the side project that I've alluded to over the past few months is indeed - NNY Math.  So, please excuse this shameless plug for my new venture.

In the past, I've sought out different ways of impacting the education of children in NNY.  Whether it was my time on the board of a non-profit preschool, my years with the PTO or my current role as a school board member, I've tried to give back to the area that made such a difference in my life as a youngster. 

Frankly, like many in my industry, I've just grown tired of the markets.  There is no edge anymore.  The computers and policymakers run the markets and a simple "buy and forget it" policy has worked well this year.  I think there will be trading opportunities in 2013 but I've grown bored of watching the same stocks move in unison every day.

So, when looking at ways to serve the community, start a new business to help our local economy and ultimately improve the lives of my customers I arrived at the concept for NNY Math.

First, I'll say the name is a little misleading because we are equal parts math and science, but it was the shortest URL I could find for a reasonable price.  In the future, I have some other names in mind, but for now it's NNY Math.

The concept is simple -- kids don't hate math, they hate not being good at something.  So, I'll help them sharpen their skills in our computerized math lab.  Kids will spend the first 20 minutes of every class doing work at their own customized level on Khan Academy.  The power of Sal Khan's videos and practice pages are evident to me and I think it will work wonders for our clients.

From there kids will typically spend the next 15-20 minutes "playing" logic and math games.  Games like Math dice, Math war, Rush Hour, etc., will teach kids a great deal about problem solving while they think they are just playing a game.

Finally, we'll wrap up each class with an interactive science experiment geared toward their age group.  The science will be fun but educational and best of all messy (think Steve Spangler science, if you are familiar with his work). 

Classes will be 1 hour long and will be grouped based on grade level - grades 2-3, grades 4-5, grades 6-8.  My initial plan is to offer classes on Mondays, Wednesdays, Thursdays (3:30-7:30) and Saturday (9-1), however that is really subject to demand.  If we have more interest, we'll open more sessions.  It may also skew toward the weekend if that is when people are free. 

There are two points of differentiation for our model - 1) We are math and science.  There are lots of math chains (Kumon and Mathnasium, for example) and science chains (like Mad Science) but few combine the two offerings.  2) Our price point will be $65/month per student.  This is well below the industry average but it will keep it on par with prices for dance, gymnastics, soccer leagues, piano, etc., in the North Country.  There is also a $35 registration fee to cover materials, but we are cutting $10 off the registration fee to anyone using the code "GRINDSTONE" through the end of October.

I tend to have a fairly bright, informed readership of the blog so I imagine that you have many family members, friends, or neighbors that could be potential customers.  I've really appreciated your feedback over the years and hopefully, I've cleared the muddy waters of finance and economics just a bit.  If you have any questions don't hesitate to email me at brian at nnymath.com or stop by the new location at the mall (we're next to Sears).  During this "soft opening" phase hours will be a little sporadic but I plan to be in the mall much of the day on Saturday.

Thank you again and this isn't the end of Grindstone Financial.  I'll keep writing, but the posts may be spread out a bit.  As we near the election and as our next battle over the debt ceiling looms there will be plenty of clutter and inaccuracies to sift through.

Cheers!

Wednesday, September 19, 2012

I wonder what this is all about...

A new space seems to have popped up in the mall....


Sounds interesting.

Tuesday, September 11, 2012

My Facebook ad experience...

So Mark Zuckerberg emerge from self-imposed exile today to wow the tech crowd with hints about future products and offerings.  There wasn't any mention of the 83 million fake Facebook accounts, because today was a straight lovefest of Facebook tech.

Well, I've had a chance to test out Facebook's tech in the past couple of weeks and a couple of things are clear. 

1) They know way too much information about you.

Let's say I want to market to just college educated mom's of kids 5-18 with an interest in soccer living within 10 miles of zip code 13601.  Yep, there's an app for that.

You can drill down to an incredible level of understanding and that is what seems appealing to marketers.  Why blanket  the whole North Country with TV ads when the 300 Soccer mom's on Facebook can see my ad all day long? 

2) Does it work?

Here's where Facebook hits a brick wall like every other ad model.  The problem is two-fold --- 1) the same 20% of the Facebook population stays on the site all day, while the other 80% never seem to visit and 2) those that do see your ad never click it.

So, while there could be a case for building brand awareness even if people don't click your ad the reality is that in my case, my ads were seen by 150,000 users over a 2 day period and 6 people not related to me actually clicked the ad. 6!  Back out the mistaken clicks and you probably have 2 or 3 real clicks.  That's awful.

I'm sure Facebook will build a phone or search engine or game console or some other time suck that we can't live without but the ad business can not be the future for that company.

Cheers!

Sunday, September 09, 2012

What business/service is missing from Watertown?

This is kind of an open ended but I'm curious to see if there are businesses or services that people wish would come to Watertown.  We have our Ulta, Chipotle and Five Below now.  We're maxed out on pharmacies, convenience stores and Starbucks.

So, I ask you - given unlimited resources, what business do you see being successful? 

I think I've asked this question before, but I wonder if the answers has changed in the past few years.

Thanks!

Quick review/preview

Last week included lots of important data hit our screens thought it might make sense to review some of it and preview the upcoming week.

* Jobs report - Overall, this was a weak report.  Private jobs came in below expectations, prior months were revised down, average hourly earnings dipped,

As I mentioned last week, people have suddenly discovered that the falling participation rate is the primary driver in moving the unemployment rate lower. 

This chart from calculated risk shows a longer trend line for the participation rate and as expected if you go back into the 50's/60's you see that the participation rate was far lower than it is today as the baby boomers had not yet entered the workforce.


Auto sales continue to trend above expectations.  I suspect that loosening credit standards and the fact that we are three years past cash for clunkers (3yrs seems to be the sweet spot for many frequent buyer/traders of cars) contributed to this spike.

Finally, August rail traffic was a mixed and doesn't give us any real guidance on the health of the economy.

For the upcoming week we have a couple of things to watch:

* 9/11 anniversary - No museum, but 1 WTC is finally making some progress. 

* 9/12-9/13 - This could be the day that the Fed finally announces the long anticipated asset purchases.  Look for key phrases like open ended and mortgage backed securities.  How will the market react?  Sell the news or buy on confirmation that QE3 is FINALLY here?

Cheers!

Friday, September 07, 2012

Well, I'm doing my part :)

By now, the jobs report has been sliced and diced six ways to Sunday.  Everyone knows that the number of jobs were light but the unemployment rate ticked down as the participation rate continued it's steady decline.

Here's where I differ a bit from the consensus.  The majority of the talking heads are spinning the decline in participation on "people who stopped looking for work".  While some of this may be true, I think that this is part of a larger demographic trend.  The last time the participation rate was lower than this level was the early 1970's.  Well, participation rates climbed through the 70's even as the economy sputtered - why was that?  The easy answer is that the heart of the baby boomers entered the job market.  The peak of the baby boom was in the late 1950's and that means that the peak of the baby boom entered the job market in 1976-1981. 

Fast forward 30 years and it's 2006 and the boomers have survived one dotcom crash and they remain very weary of the market and its impact on their retirements.  When the 2008 meltdown hits the peak of the boomers are already thinking about retirement when they decide to start exiting the job market. 


There is no way to delineate retirements from "left the workforce" but I believe we've seen a rash of early retirements which when coupled with those truly discouraged workers has pummelled the participation rate.  I'd expect this trend to continue through at least 2024 but I expect the rate of decline will not be as steep in the future.

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Here's your first look at my efforts to grow the NNY economy and inspire the next generation of math and science rock stars.  To paraphrase a commercial I saw in NJ "I'm a geek today, but I'll be your boss tomorrow!"

 
 
Cheers!
 

Thursday, September 06, 2012

Oh, by the way the stock market hit a 12 year high today...

**** Sorry for the long radio silence.  I've hinted at some major changes that could be coming and I hope to reveal more on that subject in the next week. 


Back to the markets - seriously, that isn't a joke.  The NASDAQ is at it's highest levels since October 2000. 

* That's a year before 9/11
* That's 6 weeks before Florida's hanging chads would give us GW Bush's first term.
* The number one song in the country was "Music" by Madonna
* The average cost of a gallon of gas was a laughable $1.51 (side note: while looking up that stat I saw a story that said "Gas Prices Soar: Smashing the $2 mark")

So what gives?  All we hear is gloom and doom about how terrible things are yet the markets are partying like is the middle of the dotbomb era.  Turn on any talking head it's "$16 trillion in debt, 47 million on food stamps, buy your 25 year supply of freeze dried calf livers for $188.25, blah, blah, blah."

Well, this isn't an easy question to answer.  First, the US stock market is largely comprised of global firms doing business around the world and frankly many of their profit levels are near record levels.  Historically, high profit levels have filtered down to employees as companies have shared their success.  Higher profits have also historically led to expansions which further primes the pump of the economy.  However, in today's world companies hold onto every precious penny like it's a gold ring in a Peter Jackson movie. 

Second, Apple rules the world.  Apple represents about 13% of the stock market.  The stock has been on a complete tear this summer - adding $55 billion in market value (more than Facebook's total value) in just the last month!!  The expectations that millions of people are going to fall all over themselves to get the new iphone next week has been driving this stock and because it has an unreal impact on the stock market that has pushed up the market.

Third, hope rules the day.  There is a great deal of fear that the global economies are slipping back into recession.  This fear has caused governments to consider intervening in the markets as they did in 2008.  If you remember in 2007 and 2008 as the economies started to falter, the stock markets were near their 2000 levels again on the HOPE that we were going to get a kick save from the governments.  However, we all know what happened 6 months later.

I've said multiple times that 2012 has a very 2008 feel to it but I might be a year early and maybe we're actually in a 2007 pattern.

Hit me up with any questions because there has been a great deal of activity over the past couple of months.

Again, apologies for the slow posting but I have some good news coming and I hope my loyal readers will be the first to spread the word :)

Sunday, July 15, 2012

Stuffed - America's obsession with junk

Stat of the day: US children represent just 3% of the world's total population of children the US accounts for 40% of all toys sold in the world.

I can't take credit for clever title.  That belongs to a friend who coined the phrase after watching every house in our small town explode with children's toys and piles of clothing during the recent village-wide yard sales.

I recently lugged a pile of clothing and miscellaneous cast-offs dutifully to the local charity in the hopes that someone nearby might be able to make use of our "stuff".  Silly, silly me thinking that things still worked that way.  After a little digging around the web it became clear that the days of handing in a donation of clothing that will be sold to someone as clothing are practically gone.

Here's how I understand the process as it happens in large donation areas - 1) Clothes are sorted and the best clothing may be held for resale or shipped to a regional distribution site for resale.  2) Most of the clothing does not fall into the "best of the best" category and their fate is less pleasant.  These clothes are baled in 1/2 ton blocks of used Gap, Old Navy and Target clothes.  One fairly busy collection center in NYC recently stated that they collect 18 tons of clothes in the average 3 day period.

These bales are then sent to textile "recyclers" that pull apart the 1,000 pound monuments to excess and sort them again.  They hope to find good (name brands or quality materials) products but almost 1/2 of the bales on average (roughly 500lbs) turns out to be unusable.  The unusable clothes end up being shipped off to rag vendors for their final act.

The remaining clothes (generally, the good, not great) are sorted at this point and if they are wearable they are then sold again to overseas vendors.  By some estimates used clothing is among the leading products that the US exports today.   I'd love to see someone do a Food, Inc., style documentary following the life of a t-shirt donated to one of the major charities.

I know this is the way the system has evolved as profit motive has invaded the world of charity, but I have two questions:

1) Shouldn't we be taking a hard look at the charitable deductions list at Salv****n A**y stores?  If I donate a shirt and take a $3 tax deduction for that contribution it's not fair to the US taxpayers if they sell it 2 days later for $0.02.  I'm taking what I believe to be the "fair market value" as my deduction but it is clear the true market value is some tiny fraction of that number.  The value of the tax deduction to me could be $1 or so, but the value to the charity was just a couple of pennies so something is off.

2) In the wake of the great recession we have record numbers of people on food stamps.  It seems like there are more and more local people hurting every day and yet our largest charities are still shipping the majority of their donations overseas?  That seems like misplaced priorities.

Sorry for the rant.  Anyone want to start a local charity serving local people?  I'd fully support that effort.

Monday, July 09, 2012

To ease or not to ease

The jobs data produced a weak headline number again this month but I agree with those that have pointed out that this might just be bad math.  We had artificially strong job numbers in the winter and we appear to be getting artificially bad jobs numbers now.  The problem is with the number of seasonal employees that are no longer being hired by companies.  Since the BLS has worked long and hard to try to smooth out the effects of these seasonal hires the fact that they are no longer occurring seems to be throwing off the data.  If this trend continues watch for the numbers to magically improve in October and November which will cause the conspiracy nut jobs to claim the President is controlling the number to improve his odds in the polls (which is not true, this is a matter of statistics not matching with the real world).

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When I first saw this stat I had a hard time believing it was true, but after researching it a bit it appears to be accurate.

"High Tech stocks in Canada have gone from representing 41% of their stock market index to just 1.8% in the twelve years since 2000."  That is simply staggering.  Imagine if our tech heavy indexes collapsed to the same degree.  Thankfully, for Canada there has been a huge commodity boom around the globe and everyone wants Canadian oil, lumber and gold.  If not for those resource rich regions, Canada might look a lot more like Spain.

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Ok, it's homework time.  I read this article over the weekend and I don't know what to make of it.  It really calls American parents out for being overindulgent and for doing WAY too much for our children.  I saw myself in many examples cited in this story and while it feels like we're doing the right thing for our kids at the time I wonder about the longer term damage we are doing if our entire culture is coddling our kids.

Check out this intro and see if it draws your interest.....

"In 2004, Carolina Izquierdo, an anthropologist at the University of California, Los Angeles, spent several months with the Matsigenka, a tribe of about twelve thousand people who live in the Peruvian Amazon. The Matsigenka hunt for monkeys and parrots, grow yucca and bananas, and build houses that they roof with the leaves of a particular kind of palm tree, known as a kapashi. At one point, Izquierdo decided to accompany a local family on a leaf-gathering expedition down the Urubamba River.

A member of another family, Yanira, asked if she could come along. Izquierdo and the others spent five days on the river. Although Yanira had no clear role in the group, she quickly found ways to make herself useful. Twice a day, she swept the sand off the sleeping mats, and she helped stack the kapashi leaves for transport back to the village. In the evening, she fished for crustaceans, which she cleaned, boiled, and served to the others. Calm and self-possessed, Yanira “asked for nothing,” Izquierdo later recalled. The girl’s behavior made a strong impression on the anthropologist because at the time of the trip Yanira was just six years old."

The entire article is worth a read (here's the link) and I'd be interested in your feedback.  While I don't expect my children to collect and clean crawdads for dinner perhaps they could handle their own breakfasts and lunches during the summer?

Drop me a note in the comment section, shoot me an email at blantier2 at gmail.com or share this article with your friends on Facebook like the kids used to do back in the good old days of 2009.

Thanks!

Friday, June 29, 2012

For the 38th time Europe is Saved!!!

Well, after the buzz of the EuroCup semifinals wore off, the major players decided to go all in on their proposed bailout of one another.  The details are sparse but all the markets needed to hear was "we'll be buying everything you are selling" which is exactly what the market has grown to demand.  Complete government support of the markets at all times or else the banks threaten to crash the markets.

The timing of this is very convenient because it is causing a 1.5-3% jump in stock prices right at the end of the quarter.  If the market would have ended flat today it would have been unchanged for the year 6/30/11 to 6/30/12.  That would have meant meaningful underperformance by many large pension funds that price their assets on 6/30.  Today's "insta-rally in a can" will ensure at least a positive return for the year and lessen the blow for these funds.

This also begs the question: who knew what and when about this deal?  The US markets soared about 100 pts in the blink of an eye yesterday on no news.  Well, we now know what the news was but it wasn't public at the time of the rally so someone had insights that the rest of us only wish we had (hint, hint for the SEC - it was probably the same person that bought 50,000 E-mini S&P 500 futures).

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To quote my favorite t-shirt - Stand back: I'm going to try Science!


The US Army has developed a laser that can be used to direct lightning bolts at a target.  So now miltants won't have to just worry about insect sized drones but attacks from killer lightning bolts as well. 
Who sits around in a room saying "You know what we need?  A way to control lightning so we could point it a target."?  I think I need that job.
Finally, a little Friday fun - cracking an egg under 60 feet of water, just because we can. 



Cheers!


Monday, June 25, 2012

This will be big news by tomorrow...

This will likely seem like old news by the time you get to read the story on my blog but the story that has come out tonight on the Wall Street Journal's website regarding Apple users and Orbitz is going to be a big story.

"Orbitz executives confirmed that the company is experimenting with showing different hotel offers to Mac and PC visitors, but said the company isn't showing the same room to different users at different prices. They also pointed out that users can opt to rank results by price.

Orbitz found Mac users on average spend $20 to $30 more a night on hotels than their PC counterparts, a significant margin given the site's average nightly hotel booking is around $100, chief scientist Wai Gen Yee said. Mac users are 40% more likely to book a four- or five-star hotel than PC users, Mr. Yee said, and when Mac and PC users book the same hotel, Mac users tend to stay in more expensive rooms.

"We had the intuition, and we were able to confirm it based on the data," Orbitz Chief Technology Officer Roger Liew said."

So, to translate if you surf to Orbitz from an Apple product, Orbitz believes you are more brand conscious and less price sensitive so you should see a different set of rooms and some times a different price.  For a little offline perspective that's like checking a woman's purse before she pays and saying "Oh, I see you're carrying Chanel today.  That $89 chair is on sale today for you at just $119."

There will be two quick impacts: 1) Orbitz will have to abandon this plan in my opinion and 2) Apple is going to have to do some fast damage control to convince their legions of followers that they are not going to get overcharged at Amazon or any other etailer.

Companies are just beginning to grasp the power of the data you are sharing with them.  This is the future of commerce with individualized pricing.  Yikes.

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Well, the market has shown signs of life at times in the past week or so, but every step forward is met with multiple steps backward.  Europe remains a trouble spot (Moody's downgrade of Spanish banks certainly won't help matters) but the focus on a slowdown in North America has become a hot button issue as well. 

There are a couple of catalysts in the near-term that could help the markets:

1) The Facebook quiet period is about the end which means lots of banks that sold stock to the public at $38 are going to have to formulate an opinion with the stock trading at $32.  Hmmm, if they thought you should buy the IPO at $38 what do you think they'll say with the stock at $32?  If you guessed "buy, buy, buy....." you'd be in the right ballpark (again, that's not my opinion, but that will likely be the banker's opinion).

2) The quarter end is upon us.  Last year as people realigned their portfolios at the end of June stocks surged nearly 5% on little news in 3-4 days.  There are many major pension funds that are sitting on flat 2011-2012 performance right now.  A little 5% run would soften the blow of those "dear pension plan participant" letters.

Cheers!

Monday, June 11, 2012

Well, what now?

So Spain got their bailout and as I hinted in the morning, the markets were concerned about the validity of the bailout.  Well, those concerns seemed to build throughout the day and when the Apple developer conference turned out to be a yawner (although $999 Macbook Air's are going to FLY off the shelves) the markets sold off hard.

So once again, the rumor of a bailout proves to be more advantageous than the actual bailout.  Well, that model should bode well for the markets (tongue in cheek commentary here) because Italy should be back in the news in short order.  There are also rumblings of trouble in France again.  If Spain was the "The Big ONE", France would be the L'enorme un, but I'm getting ahead of myself.

Other news of note:

* India warned that they could be the first of the BRIC countries to lose their investment grade status. 

* Further evidence of a Chinese hard landing.

* Spain's private sector is still struggling despite today's news and without private sector reform.

Despite all of this gloom in the world there are many reasons to expect things to perk up for the rest of the month.

I'll try to touch on a few items in coming weeks.

Sunday, June 10, 2012

And you get a bailout, and you get a bailout....

Some times the markets are a little slow on the uptake.  If you remember WAY back on June 1st when the weak jobs number hit the tape I said "I wouldn't be surprised to hear the "QE3 is coming, QE3 is coming" chant by the end of the day."

Well, it didn't quite happen on that Friday but by midweek the talk of easing was on everyone's lips.  More liquidity from Central Banks (namely the Fed and China) lit a fire under the markets and resulted in the best week for the markets this year.

By Friday, it was becoming clear that there may not be a great deal of appetite in the US for further easing but never fear, in the Friday Rumor Round-up we heard that Spain might be in line for a handou... ooops, I mean bailou.... ooops, I mean "credit line".

Remember for the past two months Spain has been pounding the table "WE ARE NOT GREECE", but the Spanish bonds were telling a different story and it was clear that smart money was betting that Spain was in fact, a really big version of Greece.  Over the weekend we've received confirmation that Spain has gone hat in hand to the EU in search of 100 billion Euro bailout fund.

The immediate market reaction has been a huge relief rally around the globe (roughly 1% for the US futures right now) but there are many variables that need to be ironed out.

* What happens to existing Spanish bonds?
* Will the German Parliament be on board with this plan (I think there is 30% chance that they push back).
* Well, who's next?  Italy?

It should be an interesting week.

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Just when you think NYS has the market cornered on crazy sales tax rules consider the variables hidden inside Maine's snack tax rules...

"Today, the purchase of five bakery doughnuts can be subject to sales tax; six are tax free. A small container of milk is tax free at the convenience store but taxed at a sandwich shop. Ham and cheese are tax free when bought at the deli counter, but a deli platter of ham and cheese at the same place is taxed."

Cheers!




Thursday, June 07, 2012

Overreaction of the Day

This story is priceless. 

"Police had responded Friday to a report of a young cougar in the yard near a wooded area. The animal moved on without threatening anyone.

A state wildlife biologist reviewed photos of the cat and determined Monday it was not a cougar. It's a domesticated cat."

Manic Markets

The day after the worst day for the markets of 2012, the markets staged their best day of the year on....

* news of further ECB easing?  No, while this was rumored it never came to pass.

* news of Eurobond issuance? Nope, again just a rumor. *** UPDATE: this morning Merkel of Germany said that Germany could support Euro-area instruments.  Wow.  I think she may want to check with the people of Germany but this is the sort of news the market wanted to hear.

* Rumor of a rumor that more free money will be available?  That sounds about right.

Last night after the markets closed in the US, a Federal Reserve Board member hinted at possible further actions by the Fed (which begs the question: who knew what she was going to say and when?).  This was the first public admission that I've seen that the banks are going to get their wish and the Fed is going to bend over backwards to save the stock market (again!). 

Today China joined the easing train, cutting their benchmark bank lending rate.  All of these stories have turned the tide in the markets from "Europe is falling apart" to (in my best Oprah voice) "and you get free money, and you get free money and you get free money!".

Business Insider pulled together a ton of charts today from various websites and most of them are old news but if you want to understand why the banks want this current model to continue consider the following:

When we bailed out the banks in 2008 it was with the understanding that without a bailout, the banks would stop lending and that would lead the economy to seize up.  Well, the inconvenient truth is that banks took the bailout and reduced lending anyways (some of the decline was due to lower loan demand).  So what did the banks do with the money?  Well, according to Chart 1 it appears that they bought about $700 billion worth of government debt. 

So take a moment to wrap your head around that circular logic - The government borrowed money from China, pensions, and US citizens to save the banks.  The banks then took that money and lent it back to the government by purchasing government debt.  I'll pause to allow your head to explode.


Also during the 2008 recession the Fed announced a plan to help the banks by paying them interest on "excess reserves".  Well, if you are a bank and you can borrow from the government for basically 0% and you can earn 3% from the government (see above) and 0.25% on excess reserves guess what happens... well, Chart 2 shows that pretty clearly.


As the stock market held its own earlier this year and the economy appeared to be picking up a little steam, the banks could see the writing on the wall.  Their free money gravy train was coming to an end.  If we've learned anything over the past 5 years it is that the banks will not be denied and thus, we had a May sell-off which has prompted a tremendous amount of chatter of FURTHER easing (read QE3, TWIST2 or whatever).  That is what has goosed the markets sharply in the past 24 hours.

Cheers!

Tuesday, June 05, 2012

The market really wants a rumor

Yesterday afternoon, the markets perked up meaningful as rumors began circulating that something was brewing.  Maybe a coordinated central bank statement or maybe something from G-7? Goldman said they think the Fed will begin another round of asset purchases financed through balance sheet expansion (this fits with my thinking, but the size and breadth of the purchases will be important). 

Late last night Spain - after months of saying "We're not Greece! We're not Greece!" - decided that might like a little of that bailout juice themselves.  Credit markets have been telling me for months that things are getting increasingly difficult for Spain, but there is a culture of "deny and pretend" that is pervasive in politics today so the Spanish government stuck their head in the sand and hoped things would improve.  There are likely to be plenty of "emergency" discussions regarding Spain (and probably Italy) in the coming weeks which will all provide fodder for the rumormongers.

That brings us to today's latest round of rumors which were centered on the G-7 meetings.  A coordinated message was expected to calm the global markets, but what we got was effectively an agreement to keep on watching things and no joint statement will be issued.

So, obviously the markets decided to ramp higher on this news (which should on the surface be bad for the markets) because a new rumor has emerged that while the G-7 said there would be no joint statement, the market still thinks one could be released.  This is sheer madness.

Finally, there will be three Fed governors speaking this afternoon so if this market wants to find a hint of further Fed easing it will have a chance during those speeches.

Cheers! 

Sunday, June 03, 2012

Please make it stop

Nothing quite makes my head hurt like the Sunday morning talk show circuit.  Even the good reporters get lost talking about subjects like the economy, budgets and taxes.  The weak jobs report on Friday gave the media plenty to talk about this weekend but frankly most of it was recycled bullet points instead of reasonable analysis.

To review: the jobs number was weak and this is starting to feel like the same old story as 2011.  Strong winter data that fades as we enter the summer.  However, digging a little deeper we find that:

* Labor Force Participation Rate, which has been the focus of many people (including myself) in recent months, actually increased to 63.8% in May. This is encouraging and it is one of the strange issues with the employment data - as more people re-enter the workforce or start looking again it will actually cause the unemployment rate to increase.  Despite this increase the number of still way below the historical average.

* Also, it's worth noting that the employment/pop ratio increased to 58.6% in May.

* Government jobs continue to decline but there appears to be some moderation of the decline among state and local governments.  The one qualifier I'd add is that pension costs could crop up again in 2012-2013.  Governments received a small reprieve from the relentless increase in pension costs in 2011-12 because of the strong performance of the stock market from 6/2010-6/2011.  However, right now we're about a month away from having 1 year with no change in the markets.  If this is the case, governments will be forced to increase contributions to their pensions and this could impact employment in 2012-13. 

* Those looking for a positive spin on the employment data could point to the 420k+ increase in the household survey data.  However, this tends to be a very volatile data set and it is not a terribly great predictor of future job reports.

Other items to keep in mind from last week:

* Initial Jobless Claims jumped to 383k
* Pending Home Sales fell 5.5%
* Refinancings and purchase applications fell even with record low interest rates.
* European unemployment  was unchanged.
* India’s GDP grew at only 5.3% (however, I think in the US we'd be very happy 5.3%) and that was the slowest growth in a decade.
It should be another interesting week with lots of European news, questions as to whether the Fed start to hint at QE3 and potential unrest in the Middle East.

Cheers!



Friday, June 01, 2012

Jobs report + 69k

Well, it wasn't a complete disaster but this was a pretty big miss relative to a 150k estimate and my 120k guess.  The number for April was also revised downward substantially.   I'll go through the details but the birth death model which added 204k jobs to the BLS magic block box formula (we don't know how many "jobs" this adds, but it clearly didn't make the number smaller) will draw lots of attention.

However, the key may be this quote from an award winning economist 2 minutes after the release "Terrible numbers, increases the likelihood of QE3" and that will be all the markets hear. 

Right now, European markets are taking it on the chin (down 1.3-2.8%), but give the spinmasters some time and I wouldn't be surprised to hear the "QE3 is coming, QE3 is coming" chant by the end of the day.

Should be a wild day.

Jobs report - preview

We'll hear lots of interesting commentary around the May Jobs report that is due out in the next hour.  The consensus is for around +150k but there are lots of qualifiers.  The warmer winter may have pulled forward some jobs that are not going to show up now and there is a great deal of concern about the impact overseas uncertainty could have on the number.

My best guesstimate is that the number will be slightly below expectations (120k sounds about right) but there is an outside shot at a really poor number.  The markets are clamouring for more central bank intervention and a "slightly weaker" number will not be enough to get the central bankers moving.  If the May jobs number came in at +30k to +50k and the unemployment rate moved up we could see some serious chatter about more easing.

Stay tuned...

Tuesday, May 29, 2012

Do youI feel lucky? Well, do you punk?

I tend not to focus on individual companies because there are so many variables surrounding each company that influence the share price.  For me, it's much easier to spot long-term trends that influence all asset prices (including stocks and bonds).

That being said, Facebook remains on everyone's screen since the bank's decided to give up defending the $38 IPO price.  It wouldn't surprise me if the stock was $45 or $20 in a week because Facebook is going to be a stock driven by emotions.  People paid a huge premium at the IPO for the chance that Facebook will earn a great deal of money 5 years from now. 

What's particularly scary is that this was supposed to be the stock that brought the "little guy" back into the stock market.  The business isn't complicated like Cisco or ExxonMobil so it has broad retail appeal.  Many investors use Facebook and that makes them think they are instant equity analysts when it comes to the stock.  However, when some bad quotes crossed my screen on the morning of the IPO (some German quotes of 50,000 Euros valued the company at more than all of the economies of the world combined) I knew that the little guy was going to have a tough time with this IPO.

The stock as cracked it's IPO price and it literally can't catch it's breath now (down another 9.6% just today).  At some point in the low-mid 20's there will be buyers of the stock and eventually they may outweigh the sellers, but we have not reached that point yet.  More disconcerting for me would be the fact that 80 days close to a billion shares of that are currently subject to lock-up will become freely tradeable and if you are an insider at Facebook and you've seen the company fall in value 25% in a week maybe you'll try to diversify by selling a little more Facebook.

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So, what's up with the markets?  They've jumped about 3% in the past 3 days on relatively bad news around the globe.  I have a theory -

The major money managers have nowhere else to go.  Europe is a trainwreck, China is slowing, India is in freefall, etc, etc.  So what is the big money manager to do?  Invest in Japan (good luck) or the US.  As money flows into the same, "safe" investments (big funds in names like Apple are at an all time high) it will drive these names higher.  There is a great deal of risk in this scenario if the global backdrop changes and everyone heads for the exits at once, but I think this is at least partially driving the action in the US today.

Cheers!

Thursday, May 17, 2012

How Facebook is destroying the US economy!

Okay, I'll admit it.  I'm trolling for eyes on the eve of the big Facebook IPO but this is an idea I've been toying with for some time.  Can we blame Facebook for the dreadfully slow pace of the economic recovery?

Now, I'm not talking about the normal sort of Facebook destruction - marriages, friendships, etc - or even the way it destroys the productivity of its users.  I'm proposing that Facebook and all forms of electronic social networks, are changing the world in a way that no one has thought of before.

I'm not a sociologist or anthropologist or even an economist, but here's what I do know :  one of the key drivers of the US economic growth story over the past century was our incredible level of labor mobility.   Increased levels of labor mobility have enabled the country to evolve from a nation of farmers to a nation of east coast cities to a nation with a strong industrial midwest to nation which could harness our energy resources in the Gulf Coast, etc, etc.

In short, when times got tough people move where the jobs are.  This was hard and painful for many families and friends that were separated by vast distances but you went where the work was because there were no other options.  I also think we're experiencing a similar phenomena in the education world - thirty years ago, people went "away" to college but today many students feel the need to stay local to stay connect. 

Here's my theory and I'll reiterate that this is just a theory --

Facebook and the other social apps do not allow people to cut the apron strings of home anymore.

1) Consider the college student that is struggling to fit in at her new school in North Carolina.  In the past this student would stick it out, eventually find a couple of life long friends and treasure her time at college.  Today, it's easier to log onto Facebook and feel like she never left home in Northern New Jersey.  She connects with her old friends and longs to go to the Tick-Tock Dinner on Friday night.  This nostalgia draws her back and prevents her from experiencing new opportunities in North Carolina.  After graduation (or worse, before graduating) she returns to her hometown because the grass is always greener.

2) Consider the family that is struggling to make ends meet in a western PA town.  Dad can easily find work in North Dakota or Idaho so he packs up the family and heads west.  However, after a year of living in a Facebook bubble, the kids still consider their PA friends, their best friends and the family returns to face brutal job prospects but because they couldn't cut the apron strings the kids will be "happier".

Now expand this thinking to a global scale and you'll see that increasingly people that were VERY prone to migration (Indians, Chinese, etc) are now feeling the same draws to stay local as a result of their Facebook networks.  When my father-in-law immigrated to the US from India in 1973 his connection to his homeland was a monthly call home and an occasional letter.  Thus, he became immersed in the culture of NYC and he became part of the great NY metro melting pot.  However, imagine if he'd had Facebook where he could talk to his buddy from his old village every hour or hear about a wedding going on two towns over this weekend.  The draw to give up when things got tough in a new country would be very strong and I suspect this is at least a partial reason why the US is experience reverse immigration as people are returning to their homelands in droves.

Facebook users have virtual friends which in theory should make people more mobile, but I believe that the fact that users are constantly bombarded with info from their circle of friends is making our world less mobile.  Can the US thrive in a world with families unwilling to move and where people of overseas are unwilling to leave their homelands?  Well, right now the US looks pretty good compared to Europe and Asia but in the long run you need a flexible labor force to be successful.

So, while it's a stretch to put all of this at the foot of Facebook it is my opinion that they are playing a part in the reduced labor force mobility in the US. 

Cheers!

PS - My expectation is the IPO will price at about $42 and trade up to $55 or so before settling around $52 but that's just a guess.  The value of the company in my opinion is far, far below those levels, though.

Wednesday, May 16, 2012

What's the story of the week - Greece or Facebook?

So far Greece seems to be winning out as concerns remain high that Greece could seriously be pondering an exit from the Euro.  Humor me for a moment while I review the implications of this -

* I think talk of a Greek exit form the Euro in the next month are premature but I think it is possible by September.

* The major impact of this move would be massive outflows of funds from the "next in line" countries like Italy and Spain.

We've seen this play out on a smaller scale in Greece where nearly 1/3rd of their deposits left the country over the last 2 1/2 years.  The fear for large investors in countries like Spain and Italy is that their Euros get converted into a local currency.  As more money flows out of a country the greater the likelihood the country will need a bailout, thus this becomes a self-fulfilling prophecy.  The markets are really oversold now and due for a bounce, but the news flow won't let the markets come up for air.

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Okay, Facebook.  So, last week we heard demand was weak and the deal was faltering.  Now this week they've upped the price and increased the size of the deal.  What's the truth?  My hunch, having worked on various IPOs, is that they are both true.  I suspect large institutional demand (from mutual funds, pension funds) is weak.  However, I imagine that retail demand is off the charts and that is why they are increasing the size and price.  A higher proportion of retail investors tends to cause more volatility in the stock and will make this very interesting to watch.  Retail investors tend to buy what they know and they know they like Facebook.

My 2 cents - The company understands it's end users but it can't figure out how to sell to them.  GM pulling their Facebook campaign today is indicative of this problem.  At the end of the day people should view facebook as a media company like Viacom because that's what they do - sell ads.  Does that warrant being a hundred billion company overnight?  Maybe, but I'm most concerned with my own anecdotal observations - fewer and fewer people 18-40 are active on facebook.  It's become a haven for tweens and twetirees (my term for those boomers aged 50-60, not quite retired but counting the days).  I don't have any nationwide evidence to back me up but I've heard from many people that they are wary of Facebook and prefer to text because they have a (false) sense of privacy in the the texting world.  This is the kind of watershed event that can shift market sentiment overnight so we'll have to watch this IPO very carefully.