Sunday, December 28, 2008

O Canada! Currency Update, Eh?

In my November 6th post ("Obama Rally and Market Strategy"), I concluded with the following:

I'm also keeping an eye on the currencies. I sold our yen exposure back on the 24th when it spiked, leaving us with exposure to only the Chinese renminbi. I should have rolled the Yen exposure into the Canadian dollar at the time, but I missed it. The long-term fundamentals of the U.S. do not support its recent strength. The strong move in the dollar has been largely due to short-term technical reasons as well as a knee-jerk flight-to-safety. I am very negative on the dollar (long-term) at these levels and will likely be buying the Canadian dollar if it weakens much further.
Since early December, the long-term fundamentals of the dollar have once again been catching up with it. The chart above shows the dollar's performance relative to a basket of currencies that include the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. The dollar experienced a strong rally beginning in mid-July, as a flight to "quality" swept the globe. Since early December, the dollar has given up a good portion of its gains. The Canadian dollar, however, has not been a beneficiary so far and is actually slightly lower over this period. I don't expect this situation to persist over time. Just prior to the Fed's latest rate cut, I finally initiated a long position in the Canadian dollar.

The weakness in the Canadian dollar can largely be attributed to two factors: political turmoil and the country's heavy reliance on the natural resource industry. Canada's Prime Minister recently suspended Parliament until January 26th in an effort to forestall a bid by the opposition to oust him. The markets don't much care for uncertainty, so the loonie (the nickname given to the Canadian one dollar coin) has come back under pressure.
I don't know how long this political turmoil will persist, but in time it is certain to pass, and the political uncertainty discount currently being pinned to the loonie will evaporate.

The other burden impacting the loonie is Canada's heavy exposure to free-falling commodity prices. Although beer, hockey equipment, and cross-border pharmaceutical sales may be sustained, they won't be able to offset the weakness from the country's natural resource sector. Canada will certainly be impacted near-term by the dramatic fall in natural resource prices, but those lower prices are already leading to less exploration and development and are sowing the seeds of the next commodity bull market.

Not surprisingly, Canada's economy has been weakening, but its problems seem almost quaint in comparison to ours. Until just the past few months, Canada had run a budget surplus for 8 years and even managed to pay down some of its national debt -- a debt that stands at roughly 32% of GDP versus a level close to 75% for the U.S. Canada's economy is only 10% the size of ours. While we're likely to run a deficit in 2009 somewhere in the $1 trillion range, the liberals and conservatives in Canada have been busy bickering over whether to run a deficit of $10-20 billion (we just "gave" that much to GM and Chrysler). While we're launching a full-scale offensive on our dollar, the Canadians are having a playful pillow fight with theirs.

Put simply, the fundamentals of Canada are more robust than those of the U.S. Political uncertainty will be resolved, and the foundation of the next bull commodity cycle is currently being established. In the meantime, some comfort can be taken in knowing that Canadian legislators (despite current politiking) are acting in a far more fiscally prudent manner than our government officials.

Our currency exposure now includes gold, the Chinese renminbi, and the Canadian dollar. We sold our yen exposure (FXY) back on October 24th at prices between $106-107. Although FXY has continued to move higher and currently stands at $111, we rolled our yen proceeds into Chinese stocks (FXI) on the same day at prices between $21-22, and that ETF now stands at $28.

The renminbi has been quiet this year, making it a strong outperformer relative to most assets. I continue to like this currency for the long-term given China's strong reserves position and, more importantly, the country's strong growth prospects in the coming years. My near-term expectations for the currency are very modest given conflicting pressure officials face to both lower and raise the exchange rate. However, the longer-term fundamentals of China and the current account imbalances that exist between China and much of the developed world will continue to exert upward pressure on the renminbi over time.

Finally, we've been long gold for some time, and I continue to feel very good about its prospects. Supply remains constrained while global fiat currency debasement accelerates. Were it not for mass forced de-leveraging, I suspect that gold would already be at new highs. We added to GDX in mid-October, and we recently added a new junior gold position. Gold has had a nice move of late, but each rally since September has subsequently failed. Gold is likely consolidating and moving into stronger longer-term hands. If so, at some point I would expect it to push through to new highs. In the meantime, I continue to opportunistically add to the metal and the mining equities on pullbacks.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Tuesday, December 23, 2008

Suing The SEC Over Madoff

In my Madoff post of one-week ago, I concluded with the following:

As for the regulators, they clearly and spectacularly failed -- again. Unfortunately, this will lead to calls for broader and deeper regulation. Regulation fails? Then we must need more! I imagine a number of Madoff investors took some comfort in knowing that the SEC had investigated Madoff and signed off. Perhaps if the SEC didn't exist, investors would have spent a little more effort themselves looking into his operation. Alas, the SEC is likely to benefit from its amazing failure by being given even greater funding. Perhaps the defrauded investors will sue the SEC for negligence.
Perhaps Phyllis Molchatsky is a Rubbernecker reader. From the WSJ:

A New York woman who lost nearly $2 million investing with Bernard Madoff has filed a claim against the Securities and Exchange Commission alleging the agency was negligent in failing to detect an alleged decades-long fraud.

The administrative claim for relief was filed with the SEC on Monday and is believed to be the first attempt by an investor to recover lost money from regulators. Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, N.Y., is seeking $1.7 million in damages from the agency.

The SEC's "statutory purpose is to protect the public interest. We feel they fell down on the job in this instance," said Howard Elisofon, the lawyer representing Ms. Molchatsky and a former SEC enforcement attorney.

The SEC declined to comment.

What a wonderful deal for the U.S. taxpayer. We pay $1 billion a year to fund the SEC which somehow manages to miss a $50 billion fraud that it was warned about. Then we're potentially on the hook for the losses from said fraud. We'll probably be rewarding this SEC incompetence with a doubling of its budget - another $1 billion of taxpayer money down the drain. It's hard to figure out just who the biggest crook is these days.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Monday, December 22, 2008

Government Revenue Creep

I concluded my November 25th post ("Who Doesn't Enjoy A Good Spending Spree?") with the following comment: "This has been the enduring failure of Keynesian economics. Everyone loves a good spending spree. No one ever wants to take away the punch bowl."

The following graph (courtesy of Greg Mankiw) does a wonderful job of illustrating this. The rapid increase in government revenue relative to GDP in the early 1940's was due to World War II. The more interesting observation, though, is that this temporary increase in the size and scope of government was never reined in following the war. Instead, the government's share of economic activity has continued to grow over the past 60 years.

It would be naive to think that our government will ever proactively address the growing deficit and debt (on and off balance sheet) problem that we face. As has typically been the case, our leaders won't act until forced to, at which time we may be faced with a serious decline in the value of the dollar and/or the arrival of hyperinflation. Some combination of less government expenditure, higher taxes, lower entitlement spending, higher inflation, reduced entitlement benefits, and a weaker dollar are what ultimately await us. What we don't know are the exact contents of this poisonous cocktail or the timing of its arrival.

As for the investment ramifications of this, I would expect dollar weakness and gold strength. Assuming reasonable global growth, I would expect many commodities to perform well, and select international equity markets with better growth prospects and better fiscal restraint should handily outperform the U.S. (assuming reasonable valuation). Much of the U.S. fixed income market would be destroyed, although TIPS would certainly benefit.

Not coincidentally, many of our core long-term positions would benefit from such a scenario. Also consistent with this thesis, I recently added a long Canadian dollar and short U.S. Treasury (20+years) position. I'll spend a little more time on each of these later this week.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Sunday, December 21, 2008

Quote Of The Day

Janet Yellen, the president of the San Francisco Fed, referring to consumer and bank balance sheets:

"Nothing on the left is left and nothing on the right is right."

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Tuesday, December 16, 2008

Bernie Made-off And The Blame Game

Bernie Madoff "lost" $50 billion. $50 billion. $50 billion. With all of the federal bailouts that have been flying, it took me a minute to remember that $50 billion is still a huge sum. You have to wonder if Bernie was hoping that a mere $50 billion would get lost in the noise of the serial federal bailouts and the impending auto industry Christmas present.

To briefly recap, Madoff was (until a few days ago) a very respected Wall Street investor who, among other things, was investing billions of dollars for institutions and the (once) well-to-do. Unable to meet requests for redemptions, Bernie was finally forced to admit that his asset management operation was a fraud and that the losses totaled something in the $50 billion neighborhood. It appears to be your classic Ponzi scheme, in which Bernie used new money to cover distribution requests.

There are plenty of questions. How could he have done this alone? How did the SEC miss this? Where did the money go? How charming is this guy? Should we bring back stoning? The most interesting question to me is what happened with the due diligence efforts of the regulators, professional investors, and institutions that invested with Bernie. Pass the buck time has arrived.

There are a few hedge funds that recognized that Bernie's operation didn't pass the smell test, and they're deservedly getting some good press recently. They'll probably be getting more assets to manage as well. As for the regulators and professional investors who were duped, they don't look so good.

From the New York Times:

Jeffrey Tucker, a Fairfield co-founder and former federal regulator, said in a statement posted on the firm’s Web site: “We have worked with Madoff for nearly 20 years, investing alongside our clients. We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme.”

Fairfield boasted about its investigative skills. On its Web site, the firm claimed to investigate hedge fund managers for 6 to 12 months before investing. As part of the process, a team of examiners conducted personal background checks, audited brokerage records and trading reports and interviewed hedge fund executives and compliance officials.
From BBC News:

Nicola Horlick, boss of Bramdean investments, said US regulators had "fallen down on the job".

Mrs Horlick told the BBC: "I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they haven fallen down in the job."

In a statement, Bramdean said: "It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith.
It's easy to Monday-morning quarterback, but it seems that there were plenty of red flags that any reasonable level of due diligence would have discovered. Take Madoff's accounting firm, for instance. From Bloomberg:

Friehling & Horowitz included one partner in his late 70s who lives in Florida, a secretary, and one active accountant, Aksia said.

...The firm operates from a storefront office in the Georgetown Office Plaza in New City, New York, sandwiched between a pediatrician’s office and another medical office.

Leslie Cousar, who works in a nearby office, said on Dec. 12 that the man who comes to the auditor’s office does so for 10-to- 15 minute periods and leaves. She said he drives a Lexus and doesn’t dress in business attire.

What about Madoff's investment performance? I haven't seen the numbers, but from what I've read he apparently claimed to consistently earn 1.0-1.5% every month, year in and year out regardless of market returns and with only a few down months. I couldn't even type that with a straight face. A few down months with a strategy that generates low double digit annual returns? In the short-term, sure. Bernie, however, apparently claimed to be doing this for a long time. At some point, this simply becomes statistically impossible.

The institutions and fund-of-funds investing with Madoff had to do some level of due diligence before handing over their money. Perhaps they were willing to overlook Madoff's vague description of his investment style and his use of some hole-in-the-wall company as his accounting firm, but if they were presented with the type of long-term returns presented above, they should have teared up from laughing too hard.

Some professionals did see the improbability of Madoff's results. Those who didn't, can and will try to cover their backsides by arguing that they were duped by an incredibly sophisticated con man and that there was nothing else they could have done. Regardless, they will justifiably be sued by their investors. Those, like Fairfield, that made a point of stressing their investigative skills seem particularly vulnerable (if they have any money left).

As for the regulators, they clearly and spectacularly failed -- again. Unfortunately, this will lead to calls for broader and deeper regulation. Regulation fails? Then we must need more! I imagine a number of Madoff investors took some comfort in knowing that the SEC had investigated Madoff and signed off. Perhaps if the SEC didn't exist, investors would have spent a little more effort themselves looking into his operation. Alas, the SEC is likely to benefit from its amazing failure by being given even greater funding. Perhaps the defrauded investors will sue the SEC for negligence.

Disclosure: The Rubbernecker is long the "smell test," and short the SEC and statistical impossibilities.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Monday, December 15, 2008

Seymour: 1927-1933 Pompous Prognosticators

1927-1933 Chart of Pompous Prognosticators

It's easy to cherry pick quotes to suit your purpose, but this is still a good reminder of the difficulty in predicting where the market is going. The entire piece by Colin Seymour as well as the associated 20 quotes can be found here.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Say What You Will, Bush Has Good Reflexes

All those slippery years of flip-flopping and ducking the issues must have had the President really pumped up. Will the secret service get the boot for being such loafers and leaving it to the other journalists to sock the guy?

Link to Reuters video

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Friday, December 12, 2008

Auto Industry Bailout - Nyet Comrade!

Kudos to the Senate for standing strong on the auto bailout, and shame on the UAW for not agreeing to cut compensation next year to the hardly unreasonable level of their Japanese competitors. I guess unions feels they need all the money they can get their hands on in order to keep buying political appointments (ok, low blow). This is clearly (well, clearly to me) an instance of the UAW giving the finger to the American taxpayer. The UAW is calling Congress's bluff. Unfortunately, with weak-kneed politicians as their opponent, they're likely to win (link to "Special Loan Financing" post).

The autos are in trouble for a number of reasons, one of which is the cost of their labor force. It's difficult to have too much sympathy for overpaid union workers who aren't willing to step up and share the pain. Unfortunately, it's hard to imagine that some form of congressional compromise, executive action, or Fed intervention still won't occur to bail out the auto industry.

I've had a number of questions about what I think should happen with the autos. I have my idealistic answer and then my slightly more realistic answer. Ideally, the government would just step out of the way, and let the market choose the winners and losers. GM and Chrysler would likely fail and be liquidated (in a perfect world). People would still buy cars, but now there would be more business to be spread among the survivors, including Ford. This would help accelerate the shift of industry capacity to the new reality of demand. (It's critical to understand that the level of demand for autos can only support an auto industry of a certain size, and at the moment, the auto industry has more plants, workers, and debt than demand can support.) It's likely that the surviving auto firms would even have to hire some of the ex-GM and Chrysler workers and buy some of their facilities, especially once the economy begins to improve. This is capitalism. The weak are destroyed, and the strong benefit. The industry as a whole would be stronger.

Of course, we don't live in a capitalist society, and this isn't going to happen. In light of that, I think the best likely solution would be for the government to provide debtor-in-possession (DIP) financing to whichever of the (shrinking) Big 3 file for bankruptcy. This would enable them to continue operating, their equity holders would be wiped out, and the firms would be able to more quickly slash operating costs, reduce debt, rationalize capacity, and renegotiate absurd labor contracts. The government would be providing the bailout, but at least we would be first in line with our claim on assets when they eventually fail.

If you really want the U.S. auto industry to have any chance of surviving and prospering then capacity needs to be reduced further and labor wages and benefits should be reduced to levels below those paid by the Japanese automakers to their U.S. auto workers. The debt needs to be eliminated or substantially reduced. The unions should be abolished, corporate jets sold, and executive cash bonuses eliminated. We should not have a bureaucratic "Car Czar" overseeing the industry. A prepackaged bankruptcy with the government providing DIP financing is the only realistic means to effect these changes. Ideally, a consortium of private banks would step up and provide the DIP financing, but that's not likely in this environment.

Of course, none of these actions would guarantee success -- they are necessary but not sufficient. The auto companies would still need to produce products that people want to buy and that can compete with the Japanese. However, without drastic changes to cost structure and the balance sheet, the autos stand little chance of surviving.

Unfortunately, the government is still likely to approve a bailout without demanding the drastic measures really needed. The tune will be familiar. We start with the modest mid-teen billion dollar "loan." Next year, Obama's administration will spearhead a much larger bailout package. Later in the year, once it becomes apparent that more is still needed, more will be provided.

It would be far cheaper to have these companies declare bankruptcy today with the government providing DIP financing than to keep approving serial bailouts. Besides, if after 100 years, an industry hasn't figured out how to make money, is it really worthy of taxpayer dollars (link to my post on GM from this summer)? The Rubbernecker says "Nyet, comrade."

[As I'm getting ready to send this I see that GM has gone from -40% in the pre-market to down only 4% as talk escalates of the White House bypassing Congress and tapping the TARP funds to provide the first leg of this bailout. Hardly surprising.]

Disclosure: The Rubbernecker is long liquidation and short overpaid, out-of-touch, selfish union "leaders" and short-sighted politicians.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Thursday, December 11, 2008

Bear Rally Chatter and Strategy Update

This market continues to favor traders and thrill seekers. I've talked about fading this market a number of times in the past few months, and, at the margin, that's what I've been doing. The basic rule has been simple: when my wife has had to talk me off the railing of our one-story deck, its time to buy, and when I start doing Schwarzenegger impressions, it's time to short. Recently, I've been doing Schwarzenegger impressions on the deck railing.

In mid-late November, I added positions in UWM and QLD as the market was again rolling over and the VIX (fear) index was once more spiking towards record levels. Since that time the number of market professionals looking for a bear market rally seems to have grown by the day. I've read quite a few of them just this week talking about a rally into early next year, even those who are very bearish. I'm a bit surprised by the timing of these calls considering that the market has already rallied 20% from its intraday low on November 21st. There's nothing like a good rally to bring out a bunch of predictions for...a rally. The lemmings that went over the cliff are climbing back up for the next jump.

Bear market rallies much greater than 20% aren't exactly common. That certainly doesn't mean that the current rebound can't go significantly higher. Recall, we had a 50% rally during the Great Depression, so there is precedent for very powerful upward moves during bear markets, but these types of moves are very unusual.

In fact, some of the strongest short-term market rallies tend to come during bear markets. It's easy to understand why: fear and greed. On the one hand, the market tends to get oversold in the short-term as fear of a job loss, insolvency, plague, and children who may never leave home grips the masses, and wholesale selling ensues. At the same time, investors who've lost a lot of money are eager to jump on any potential rally that may help them recoup some of their losses in order to help their child with the security deposit on their first apartment. And you never know, the next rally could be the beginning of the next bull market. Who wants to be the idiot who sold at the bottom and kept waiting forever for another chance to buy at those levels?

Back to the present. With a 20% rally already in hand, I have to believe that the easy money from this leg up has been made. That doesn't mean that the market can't go higher, but I'm back at what I call "an inflection point moment." I can't bring myself to add more general market exposure given the move we've already had (though I'm always scouting for individual company opportunities), yet the move up isn't so overdone that there's a clear signal to sell. Unfortunately, I'm just not smart/foolish/prescient/daffy enough to try and call market tops or bottoms, particularly those of a short-term nature. As a result, in this type of environment I tend to build marginal market long and short exposure as the strength or weakness of the market accelerates.

In keeping with that, I haven't yet sold the QLD or UWM positions, but they will be jettisoned should the market rally much further. In the meantime, I'm willing to give them a little more time as the market has finally been responding well to bad news. I have, however, recently added some modest new short exposure in the real estate area. This is partly due to the fact that this sector has had one of the smartest rebounds during this latest market rally. With the market up 20% from its lows, many real estate ETFs are up closer to 50%. This is a logical pool for bottom fishing given the degree of damage we've already seen, but I'm of the opinion that this sector will see further downside, particularly commercial real estate. The current short position is modest, and my intent is to increase the short side of the portfolio (and reduce longs) should the market rally continue.

This particular rally has been gratifying in that many of our core positions in the commodity, mining, industrial, and precious metal sectors have had nice moves. The recent decline in the U.S. dollar from ridiculous levels hasn't hurt. Many of the names/positions in these sectors are trading at very attractive valuation levels for those willing to look beyond the next few days. I've been gradually adding to this space during the downturn and expect to be very pleased with their performance over the next 5-10 years. In the near term, however, they won't be immune to the next sell-off in the market (at which time I'll be adding to them).

Disclosure: The Rubbernecker is long, short, and inflecting.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Wednesday, December 10, 2008

And I Thought The Fed Was Saving The World

[Oops. Looks like my video embedding skills leave a bit to be desired.]

I love British Parliamentary debate. It's a shame we haven't incorporated this into our political system. The major networks might air it after Oprah, and our populace might actually start paying attention to what our government does (and says).

Link to Reuters Video of Debate

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Tuesday, December 9, 2008

Gov. "Prod" Blagojevich - Sitting It Out

[I was just in the process of sending this post out when news crossed the screen that the Illinois governor has been arrested on federal charges. More at the end of the post.]

You may have heard about the laid-off factory workers in Chicago who are staging a sit-in. I don't know all of the details about the claims of the workers or the circumstances surrounding the closing of the company, but the latest twist is disturbing. Illinois governor Rod Blagojevich has ordered all state agencies to stop doing business with Bank of America due to the shuttering of this business and the resulting sit-in.

According to news reports, the workers are simply asking for severance and the vacation pay they're owed. The governor's action, however, seems to have a "loftier" goal. Governor Prod made a cameo appearance at the plant and said, "We hope that this kind of leverage and pressure will encourage Bank of America to do the right thing for this business. Take some of that federal tax money that they've received and invest it by providing the necessary credit to this company so these workers can keep their jobs."

Nobody has claimed that Bank of America did anything wrong or illegal. They apparently canceled their financing of the company, but that's hardly surprising in the current environment. Let's keep in mind here what this company does (did). The name of the company is Republic Windows and Doors. They make windows and doors! Is anybody really surprised that this company didn't make it? We're in the midst of a national housing bear market, new and existing home sales are plummeting, residential construction is grinding to a halt, and foreclosures are skyrocketing. I'm impressed that the company stayed afloat this long.

Now the governor is threatening Bank of America with the loss of state business in order to try and force the bank to lend to a door and window company during the worst housing crisis since the Great Depression. You can't make this stuff up. Furthermore, he claims that the bank should use the Federal bailout money, which is another way of saying that the bank should use funding from all Americans throughout the country to keep this clearly defunct business on life support so its 200 employees can keep their jobs in Illinois.

This is a shameless publicity stunt on the part of the governor. The workers aren't asking for a loan for the company. They just want severance and vacation pay. Let's hope that Bank of America doesn't bite. The last thing we need are politicians throughout the country threatening banks with lost business (or other sanctions) for failing to lend to failing businesses. Good viable businesses will hopefully soon have more ready access to reasonably priced funding. Failing businesses should be allowed to fail.

In light of the governor's actions in the above instance, I can't say I'm shocked at the following news that just crossed the tape. Another "reformer" bites the dust. From USA Today:

Illinois Gov. Rod Blagojevich was arrested Tuesday on charges of conspiring to get financial benefits through his authority to appoint a U.S. senator to fill the vacancy left by Barack Obama's election as president.

According to a federal criminal complaint, Blagojevich also was charged with illegally threatening to withhold state assistance to Tribune Co., the owner of the Chicago Tribune, in the sale of Wrigley Field. In return for state assistance, Blagojevich allegedly wanted members of the paper's editorial board who had been critical of him fired.

Blagojevich also was charged with using his authority as governor in an attempt to squeeze out campaign contributions.

Blagojevich's chief of staff, John Harris, also was arrested.

Federal agents were in Blagojevich's office in the Thompson Center in downtown Chicago on Tuesday morning.

Corruption in the Blagojevich administration has been the focus of a federal Operation Board Games involving an alleged $7 million scheme aimed at squeezing kickbacks out of companies seeking business from the state. Federal prosecutors have acknowledged they're also investigating "serious allegations of endemic hiring fraud" under Blagojevich.

The Chicago Tribune reported Tuesday morning that the federal investigation had spread to Blagojevich's efforts to fill the U.S. Senate vacancy left by the election of Barack Obama as president.

Political fundraiser Antoin "Tony" Rezko who raised money for the campaigns of both Blagojevich and Obama is awaiting sentencing after being convicted of fraud and other charges. Blagojevich's chief fundraiser, Christopher G. Kelly, is due to stand trial early next year on charges of obstructing the Internal Revenue Service.

Blagojevich, a Democrat, took the chief executive's office in 2003 as a reformer promising to clean up former Gov. George Ryan's mess.

Ryan, a Republican, is serving a 6-year prison sentence after being convicted on racketeering and fraud charges. The decade-long investigation began with the sale of driver's licenses for bribes and led to the conviction of dozens of people who worked for Ryan when he was secretary of state and governor.

Disclosure: The Rubbernecker is long comeuppance and just deserts.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Pucker Up...Or Maybe You Shouldn't

Isn't it bad enough that we have to deal with the worst bear market and recession since the Great Depression? Jobs are disappearing. Retirement is being pushed out. Business are going under. Banks aren't lending. Homes are being lost. Now this?

From the BBC:

A young Chinese woman was left partially deaf following a passionate kiss from her boyfriend.

The 20-something from Khuhai in Guangdong province arrived at hospital having completely lost the hearing in her left ear, said local reports.

The incident prompted a series of articles in the local media warning of the dangers of excessive kissing.

"While kissing is normally very safe, doctors advise people to proceed with caution," wrote the China Daily.

The doctor who treated the girl in hospital was quoted in the paper explaining what had happened.

"The kiss reduced the pressure in the mouth, pulled the eardrum out and caused the breakdown of the ear."

The chorus of warnings was echoed by the Shanghai Daily, which wrote: "A strong kiss may cause an imbalance in the air pressure between two inner ears and lead to a broken ear drum."

The young woman is expected to regain her full hearing within about two months.

Disclosure: The Rubbernecker is long passionate kissing but short necking with a plunger.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Monday, December 8, 2008

Thain's Inflated Sense Of Self-Worth

He's not going to get it, but I can't get over the fact that Merrill Lynch chief John Thain actually thought he deserved a $10 million bonus for the year. Apparently, a few months ago it was suggested to the compensation committee that Thain's bonus be north of $30 million. From Thain's perspective, he must have felt he was making quite a sacrifice by only asking for $10 million.

To accurately evaluate Thain's request of $10 million we need to look at his accomplishments during the year. For starters, Merrill Lynch stock has fallen 71% this year. In addition, Merrill has reported losses of over $12 billion year-to-date. According to my trusty abacus, Thain apparently thinks he's worth $1 million for every 7% decline in the stock and every $1.2 billion in net loss. I don't want to brag, but I would have been willing to generate half those losses for a mere $5 million bonus.

According to people at the firm, Mr. Thain says he deserved the bonus "because he helped avert what could have been a much larger crisis at the firm." I find that simply incredible. He's basically saying, "Look guys. Sure the stock is down 71% due largely to a lot of poor risk management and decision-making under my watch, but if I hadn't acted boldly in selling the firm to Bank of America, we might have ended up in bankruptcy! Clearly, I deserve $10 million for only losing $61 billion of market value." It's kind of like a kidnapper demanding freedom for not having murdered.

Asking for a $10 million bonus in light of the facts demonstrates either a massive ego or a complete detachment from reality (the two often go hand in hand). And it doesn't matter that he only joined Merrill in late 2007. He came to the firm with a fresh set of eyes and had every opportunity to examine the firm's balance sheet, risk exposures, and risk management practices. This guy is lucky to still have a job (as is the rest of senior management though I'm sure many of them will soon be "leaving" following the merger).

Let's also not forget that Thain is pulling down a base salary of $750,000. He might not be happy with that, but I can think of about 533,000 recently unemployed folks who would kill for a piece of that.

Disclosure: The Rubbernecker is short overpaid company-killers.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Cramer Nailed It (sarcasm)

I just couldn't resist. The following are quotes from Jim Cramer on his July 29th show. Keep in mind that this came one day after he said, "There is no relief in sight."

“It smells to me like something, in fact many things,” he said, “have at last changed for the better.”

“I am indeed sticking my neck out right here, right now,” Cramer continued, “declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15. and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside.”

“Stop waiting,” he said, and “buy the next dip because I think it might be the last big one.”

“My bottom call isn’t gutsy,” Cramer said. “I think it’s just a smart call that all the evidence points toward.”

“Bye, bye bear market,” he said. “Say hello to the bull and don’t let the door hit you on the way out.”

The S&P 500 closed July 15th at 1200. It ended yesterday at 876. That's a decline of 27%. If we measure from July 15th to the most recent bottom on November 20th, we get a 37% decline. Defenders of Cramer (who by now must be down to his wife, mother, and shrink) will be quick to point out that Jim changed his view of the market before the recent lows.

In fact, on October 6th he appeared on the "Today" show and practically begged people to pull any money out of the money that they needed in the next 5 years while encouraging others with more "flexibility" to ride it out. I suppose he's covered either way with that call. If the market falls, he told you to pull money out. If it rises, he told you to ride it out. Part of the problem with Cramer is that he hedges his views and flip-flops way too often to actually be helpful. He claims he wants to help people invest, but his recommendations are more suited to the masochistic, bipolar day trader.

Smart professionals don't try to call the bottom. They're humble enough to recognize the uniqueness of every bear market as well as the tremendous number of unknowns. For instance, the severity of the recession is unknown. The degree to which corporate earnings will decline is unknown. The trough valuation that will be applied to those earnings is unknown. The degree to which fear and investor psychology will influence prices is unknown. The amount of deleveraging still to come is unknown. The magnitude of the positive or negative impacts of Fed and government action is unknown. In light of such uncertainty, no one could possibly know where the bottom is. It's one thing to say that the market has become more attractive, but it's another altogether to try and call a bottom. Of course, if you call the bottom often enough, you'll eventually be right.

One of my favorite Cramerisms came on November 8th of 2007. On that day's show, Jim stated, "You should be buying things and accept that they're overvalued, but accept that they're going to keep going higher. I know that sound irresponsible, but that's how you make the money."

Jim was partly right. That is irresponsible. That isn't investing. It's gambling. It's relying on a greater fool to come along and pay an even more ridiculous (stupider) price for your asset than you did. It was precisely this mentality of greed and lack of concern about risk and valuation that contributed to the housing and credit bubbles.

Many positives (as well as some huge negatives) will come from this downturn. Private-sector leverage (debt) will be reduced, savings will increase, lending standards will rise, capacity will be rationalized, and the valuation of many risky assets will once again be attractive, to name just a few. A discontinuation of Cramer's "Mad Money" program would be the cherry on top.

As Cramer is fond of saying, "There's always a bull market somewhere." Jim has been marketing his bull for far too long now.

Disclosure: The Rubbernecker would much rather be long dart-throwing monkeys than Jim Cramer.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Tuesday, December 2, 2008

"Hall"f Baked

I have nothing against Glenn Hall of personally. I know nothing about him. I'm sure he's a nice guy, but I can't believe some of what he writes. I'm starting to think that doesn't have an editing staff.

Glenn writes a piece for that he calls "Today's Outrage." As you can probably surmise, Glenn proceeds in each article to rant, complain, or disgrunt about his topic-du-jour. My turn. I recently read a couple of his pieces that made my jaw hit the floor.

The first one is from today's article entitled "Today's Outrage: Sears Isn't Worth $4 Billion." Glenn writes:
How can Sears be worth $31.84 a share? Target fetches only $29.54, and JC Penney is down to $16.55.

At the other end of the retail spectrum, investors are only paying $6.41 for Macy's, and at the low end, Family Dollar Stores are only trading at $26.

Wal-Mart is one of the few higher-valued competitors, with its shares at $53.

So I have to ask: Who thinks Sears is better than Target or even JC Penney for that matter?

The outrageous spread between Sears' share price and better-positioned retailers may be due for a correction after investors digest today's earnings report from Sears. The company reported a loss of $146 million for its third quarter, which ended Nov. 1, and said sales fell at both its Kmart and Sears chains in the U.S.
This is scary. We're talking Stock Investing 101. Trying to compare the value of different companies by looking at only their stock prices is beyond absurd. Price alone is irrelevant. If you're going to compare equity values of different companies you need to consider how many shares of stock are outstanding. Sears isn't "worth" $31.84 a share. Sears is worth $4 billion (market value). Sears trades at $31.84 a share because Sears has a market value of $4 billion, and the company has 126.4 million shares outstanding.

What would happen if Sears did a 2-for-1 stock split tomorrow? The share count would double to 252.8 million shares, and the price of the stock would decrease by 50% to just under $16. I suppose that this would satisfy Mr. Hall since SHLD would then have a lower stock price than Target, JC Penney, and Family Dollar Stores. Nothing fundamental would change, however. Sears would still have a market value of $4 billion, but for some reason Mr. Hall would be more satisfied with the "spread" between the various share prices. This is the kind of mistake someone completely unfamiliar with stocks might make.

For the record, the following are the market values of the companies mentioned by Glenn:
  • Target: $21.7 billion
  • JC Penney: $3.6 billion
  • Family Dollar Stores: $3.6 billion
  • Macy's: $2.7 billion
  • Wal-Mart: $208 billion
The second piece by Hall that caught my attention is entitled "Today's Outrage: Google-O-Meter Signals Doom." Glenn writes:
The true sign of how bad it's going to get comes from Google, which is throwing its contract workers to the wolves.

The Internet search giant and ultimate barometer of consumer behavior says it will significantly reduce the number of its roughly 10,000 contractors in anticipation of a worsening economy.

No problem here. Clearly, this is yet another anecdotal sign of a weakening global economy. At the same time, good for Google. One of the knocks on the company has been its free-spending ways. If business is slowing, costs need to be cut, and reducing contract workers strikes me as a logical and reasonable place to slice. Glenn continues:

It may be the right thing to do from a fiduciary perspective, but the folks at Google don't seem to realize how damaging it is to the psyche of consumers and investors alike to see the ultimate growth machine scaling back.

He should have quit after "perspective." It's most certainly the right thing to do from a fiduciary perspective. Why in the world should Google be worried about the damage "to the psyche of consumers and investors?" This is investment analysis that only Dr. Phil and Karl Marx could like.

Is Google owned by shareholders, or is it a federal agency? Why is it up to Google to single-handedly repair investor psychology? Maybe Glenn would like Google to ramp up spending and hiring to the point at which net income will be wiped out and the stock completely destroyed (more so than it has already). I wonder what that would do to investor psyche?

I had bought some Google just before their last earnings report and sold it shortly thereafter, so I have no current position in Google. I do, however, applaud the company for getting serious about the cost side of its income statement. This will certainly help them to sustain strong free cash flow generation during the downturn. The day Google or any company starts basing its decisions on "investor and consumer psyche" is the day I short that stock.

Disclosure: The Rubbernecker is long simple math and short Dr. Phil.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Monday, December 1, 2008

It's "Officially" A Recession

Well, I was off by a month. The organization responsible for dating economic recessions, the National Bureau of Economic Research (NBER), has finally come out and declared that we've been in a recession since December of 2007. It only took 11 months of deteriorating economic data, the collapse of some of our largest financial institutions, the shuttering of the credit markets, a housing bear market, and a 50% decline in the stock market to confirm this.

The same press release confirmed that Obama won the election, Santa Claus is not real, the earth revolves around the sun, and Elvis is most likely dead. I can see why this is a nonprofit organization.

Disclosure: The Rubbernecker is long Elvis and short most economists.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.