The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Just like that, the US$ has given back all of last week’s modest gains and then some and gold is rising to another fresh record high in response. Assuming an 1100 open in the SPX and a gold price of 1165, the S&P 500 is down more than 7% this year in gold terms. Any belief that Bernanke’s comments last Monday on the US$ engendered some Fed concern (implying a change of stance to alter the trend) with its weakness was somewhat reversed with comments from Fed Pres Bullard yesterday who said he wants to continue buying MBS past the March expiration of the program. Also in an FT interview, Fed Pres Evans said the Fed may not raise rates until “late 2010, perhaps later in terms of 2011.” Thus, the belief of lower rates for longer remains. Russia’s central bank said they raised its gold holdings in Oct by 500k to 19.5mm ounces. Also helping the euro was the Nov Euro Zone composite manufacturing and services index rising to a 2 yr high.

Ahhh, its good to be back in the USSA (United States Socialists of America), where profits are private but all the risks are socialized!

I am settling back into my routine, but a few final thoughts from Berlin (my overview from the trip is here).

The general impression I got in Europe was that the USA is a confusing and bizarre place. From afar, the various debates in the USSA — there’s trillions of dollars for banks, but no re-regulation; the more aggressive battle is over nationalized Health Care — are both perplexing and somewhat laughable to the Europeans.

The US remains a source of great interest. Popular culture, from music to TV to films is enormously influenced by what is generated in America. Obama is wildly popular over here — much more so than in the US. They seem to appreciate a US President who engages in diplomacy and interacts with various leaders. In case you were unaware, George W. Bush was not particularly liked worldwide.

There is sort of an interesting perspective, kinda “Hmmm, let’s see what sort of whacky trouble those Americans will get into next” attitude. On the one hand, the USA is still the wild west, a fast growing, grand experiment in economic freedoms. On that front, it is a shining example to the rest of the world. But it was allowed to go off the rails, with seemingly little repercussions to the various CEOs, politicos and bankers responsible. That is totally mystifying to people over there.

In European’s eyes, the US populace seems terribly uninformed about most political matters — and vote accordingly. Europeans seem to be able to debate an issue without the vitriol and rancor that accompanies the rabid partisanship in the US. (One German $1+ Billion dollar fund manager privately remarked that Rupert Murdoch would be prosecuted in much of Europe). The two party system of the US is thought to be utterly corrupt, and is a joke in Parliamentary countries. Europeans recognize the United States as a “Corporatocracy” — government for and by Corporations.

The Economy here isn’t all that bad, and people remain somewhat optimistic.

Back to the usual banter a bit later . . .

Source: John Sherffius

St. Louis Fed member Bullard said over the weekend that he favors extending the Fed’s program of purchasing mortgage-backed securities beyond the 1st Q next year.

This adds many more months to the low rates for an ‘extended period of time.’ His comments have pummeled the US Greenback, and as the dollar fell, stock futures soared. Gold hit fresh record highs.

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Source: Bloomberg

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Source: The Chart Store

(CCN ­ Englewood Cliffs NJ)

With The Dow at new highs of 10440, CNBC¹s resident revisionist historian Jim Cramer encouraged what remains of his audience To “Buy! Buy! Buy!” recommending the purchase of Williams Sonoma (WSM $22) who sells over-priced culinary gadgets that few actually need.  “People LOVE over­paying for things!” he exclaimed.

The Carnival Barker host of CNBC’s “Mad Money,” Mr. Cramer’s assertion has a solid basis in truth for those who listened to him. His most notable “Buy” recommendations have been Sears Holdings (SHLD) at $197 ­down 60%, Google (GOOG) at $700 ­ down 20% and the almost daily reiteration to “Buy” natural gas stocks like Chesapeake Energy (CHK) at $43, which currently
trades for half that at $21. “Hey!” he told a befuddled caller “If you liked the stock at $43, you’ve got to be just nuts about it at $21!”

Coincidentally, Nielsen reports that his viewership has moved in lock-step with his recommendations, and is also down 50%.

Cramer remains his own biggest fan despite studies which show his picks have actually underperformed the markets and are no better than those chosen randomly by a chimpanzee.

Cramer’s most notable calls have been the “Buy!” recommendation of Bear Stearns at $65 which fell to $30 and then $2 the following week, before rebounding to $10. His call of the “market bottom,” which records show he made at 13,000, 12,500, 11,800, 10,000, and 9,000 before advising viewers to get out of the markets at 7900.  His revisionist claim that he called the actual bottom at 6500 cannot be verified in print or on tape, and a $15,000 reward posted by a former follower for just such evidence remains unclaimed.

Apparently feeling better than a few weeks ago when he advised viewers to exit the market at 9100, Cramer extolled “I feel really good about the market here” as the Dow peaked for the day.

There is a small cadre of Economists — original thinkers, contrarians, out of the box theorists — whom  I respect a great deal. It is a modest list ranging from Richard Thaler to David Rosenberg to Robert Shiller, with lots of smart econ wonks in between.

This morning, however, I find myself somewhat disagreeing with one of the smarter of the economists, Professor Bob Shiller in his NYT column. For those of you who may be unaware, the Sunday Times Business section (now that Ben Stein is gone) is a veritable Murderers’ Row, a 1927 Yankees of economic thought and insight. It is one high percentage power hitter after another, with very little weakness in the line up. And Shiller is one of the star batters in that powerhouse line up.

Hence, it is with trepidation that I point out the flaws in Shiller’s discussion about the recovery, (titled “What if a Recovery Is All in Your Head?“). It is a thought provoking but unpersuasive argument, as we shall soon see. To be fair, he uses the column to incite a debate, rather than defend the position that the recovery is “mostly mental.”

I find numerous things worth challenging in the column. Let’s start with the basic premise:

“Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.

Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

The notion isn’t as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.”

Not exactly. Let me offer 10 items that challenge that basic premise:

1. Time: The typical post-war Recession lasts 8 months, not “a couple of years”; We are now in month 23. If people started to spend because they sensed it was “late in the recession” or somehow intuited that it was time for the contraction to end, well then, based upon history, that would have been somewhere around August 2008.

2. Not Totally Irrational: One of my complaints about economics is it over-emphasizes people as rational, unemotional actors. However, when it comes to sentiment, economics seems to make the same mistake in the opposite direction — it assumes that people are foolish, unthinking creatures unable to engage in ANY rational thought whatsoever. All sentiment, no rationality at all.

The reality is quite different: Sometimes, people behave the way they do because they have figured out a problem and are responding to it intelligently.

Home Economicus does not really exist — but then again, neither does Homo Idiotus.

3. Healthy Fear of Job Loss: Employed people began to spend their money more carefully when they saw coworkers getting laid off in increasing numbers. That is a rational act in the face of an increasing possibility of a loss of income. This is unlikely to change in the near future, so long as large public layoffs remain a news item. Is this a Sentiment factor — or a rational response to changing conditions?

4. Asset Deflation: Consumers cut back their spending when they saw their biggest assets (Homes, Stocks) lose a significant value. Again, a rational response to a change in personal financial conditions, or bad sentiment?

5. False Belief System: Earlier this year, the Dow had dropped over 5,000 points in 6 months. One of the collective fallacies our culture operates under is the delusion that the market is some kind of astute forecasting machine. It is not — it represents the collective wisdom of 10 million panicked monkeys. That millions of slightly clever, pants wearing primates can combine their collective ignorance, their intellectual foibles, biases and false beliefs somehow into something resembling intelligence was one of the false beliefs of the era. Unfortunately, this is a condition the monkeys are prone towards (Witch burning, bloodletting, organized religion, etc.).

Note however that this does not reflect collective negative sentiment, but is actually the result of what happens when a faulty belief system dominates a society.

6. Doom Warnings Began Making Sense: Many of the doomsayers have been warning of the coming apocalypse for years. Pick a Cassandra: Jeremy Grantham, James Grant, Steve Roach, Nouriel Roubini, Robert Prechter, David Rosenberg, Mark Faber (as well as your own humble blogger).

Why did this group suddenly gain traction in 2008? Maybe it was because  the population is not nearly so stupid as the politicians believe. The masses saw with their own two eyes the decay in the economy. Suddenly, the warnings were not as far fetched as they previously seemed.

7. Reacting to Flat Income: Families have recognized their incomes have remained flat to negative over the past decade, while their expenses have increased. What should be the rational reaction to this realization? (Hint: a new car, a bigger house, a new vacation are not on the list of options).8. Time to Exit the Bunkers: Ten months ago, people were betting the economic world was coming to an end. The economy was in freefall, consumers froze, dramatically reduced spending. But the freefall is now over, and while its arguable whether the recession is over (by some measures it is, others not) most of us will agree that the Great Recession ended sometime in Spring of ’09.

The US consumer is no longer frozen like deer in headlights. Is that sentiment, of just the reality of the situation — what happens when the ice melted?

9. The Cheerleaders Now Look Like Fools: At the onset of a recession, we often see cheerleaders, OpEd writers, and money losing fund managers make the argument that there is no economic slowdown — that the weakness is only in people’s minds. I call these people the Pervasive Pollyannas of Prosperity. (Think Phil Gramm, Amity Shlaes, Don Luskin). Some are partisans, others are dumb, others still merely incompetent — a few are all three. Yet despite their best efforts of the cheerleaders, the economy still went into freefall.  Perhaps the public has learned (a teeny bit) who to listen to and who to ignore.

10. Deleveraging: We know why this recession was so deep and long — the wanton use of leverage by people and financial institutions. The deleveraging that is taking place is a long slow process. It is rational, it is intelligent, and it will be how families will restore their balance sheets — the paradox of thrift be damned . . .

I appreciate that Professor Shiller was not arguing in favor of “its all mental.” He sought to spark a debate; I hope this response rose to the challenge . . .

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Source:
What if a Recovery Is All in Your Head?
ROBERT J. SHILLER
NYT, November 21, 2009

http://www.nytimes.com/2009/11/22/business/economy/22view.html

Sometime later this week, you will come to the realization that you are either travelling to or hosting a *Thanksgiving dinner. As these tend to be large family affairs, there may be some tensions, arguments and other social problems.

My advice to you is to start drinking heavily.

I suggest lubricating these affairs with copious quantities of alcohol, but in the guise of the various fine wines found on this page. Of course, drinking will not solve any of your problems, but they will make your fill-in-the-blank (Parents, Brother-in-Law, Cousin’s wife, step-sister, etc.) that much easier to tolerate.

Oh, and stick to sports and weather. Avoid politics, health care and Bush vs Obama discussions. And keep popping those bottles open.

Here’s the WSJ’s tasting column:

Au Bon Climat 2007
(Santa Barbara County). $22.99.
Great minerals, some pepper and real stuffing, all with a kind of cranberry fruit that, obviously, is perfect for the meal. Complex and interesting. People will talk about this.

Domaine Serene ‘Evenstad Reserve’ 2006
(Willamette Valley). $56.
Beautiful color, with a rich, sensuous nose. The taste is almost majestic, very serious, with minerals, earth and great Pinot fruit. The 2006 is the one you are more likely to see, but if you happen to run across the 2005, it’s even better—elegant, silky, confident and simply beautiful.

Robert Mondavi Winery 2007
(Carneros). $23.
Worth the price just for the color (vibrant and fiery) and the smell (rich and filled with berries). The taste is just as good: classy, well-balanced and not afraid of some varietal funk. Nicely intense. Interesting from start to finish.

Erath Winery 2007
(Oregon). $18.99.
Light, pleasant and earthy, with a bit of a bite at the end that’s interesting and fun. Happy, with a hint of strawberry fruit. Everyone would love this.

La Crema 2007
(Sonoma Coast). $22.99.
Rich fruit with some pepper, what John called “ripe spiciness.” Nice velvety texture, with a pleasant earthiness on the finish. Round, comfortable and seamless. Nothing edgy, just pleasurable.

WillaKenzie Estate ‘Estate Cuvée’ 2007
(Willamette Valley). $25.99.
Light but complete. Good Pinot flavors in a very drinkable package. Bright fruit and light enough to complement everything on the table without adding yet another big taste. This really tastes like the fruit of the harvest—something that grew in the earth, under the sun—and therefore is quite appropriate to a Thanksgiving meal.

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Source:
A Wine for Giving Thanks
DOROTHY J. GAITER AND JOHN BRECHER
WSJ, NOVEMBER 14, 2009

http://online.wsj.com/article/SB20001424052748704013004574515393608263928.html

* Those of you in the US, anyway.

Fascinating visualization of unemployment in the United States as it progresses over time, from January 2007 to Present.

The animation is monthly by counties:

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click for animation

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Hat tip Paul!

UPDATE: Now on YouTube!

Words from the (investment) wise for the week that was (November 16 – 22, 2009)

Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar – the catalyst of many recent moves – stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).

The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted that the Fed was “attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.” These comments spurred some buying interest.

Bill King (The King Report) summarized the situation as follows: “For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?”

Source: Ed Stein, Comics.com, November 20, 2009.

The past week’s performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium and copper reach fresh peaks for the year.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.

As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the ten economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming,

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, Nasdaq Composite Index 36.1% and Russell 2000 Index 17.1%.

Click here or on the table below for a larger image.

Top performers among stock markets this week were Bangladesh (+21.3%), Latvia (+4.5%), Kazakhstan (+4.3%), Qatar (+4.1%) and China (+3.8%. At the bottom end of the performance rankings, countries included Ecuador (‑9.3%), Egypt (-7.6%), Greece (-7.1%), Turkey (-7.0%) and Macedonia (‑6.3%).

Of the 98 stock markets I keep on my radar screen, 39% recorded gains (last week 66%), 58% (31%) showed losses and 3% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Read the rest of this entry »

I’m a longtime fanboy of Google, an early beta tester of their search product, and one of the few on Wall Street who was allowed to speak about their IPO, as my firm was not an underwriter (I said it was “well worth buying at the IPO price”).

Color me unimpressed with their latest variant of “Don’t Be Evil.” (Google Does Non-Evil Thing).  While much of the blogosphere is agog over Google’s effort to clean out the scammers and hucksters so prevalent in the online ad world.  The search and online ad giant is banning ad companies that involve “online scams and frauds:”

“Google will begin to notify advertisers that they have been permanently banned. They will receive an email with details of this ban and the email will explain how to appeal the ban. I am told that banned advertisers can reply to the email to start the “appeals process.” Every reply should get a response from a dedicated Google representative.”

Don’t get me wrong, its a step in the right direction.

But if Google really wants to get serious about this, they would go after the many sites that host these crap ads: Cut & paste blogs, splogs, and scrapper sites. They exist solely to host all those ad scams Google is so concerned about.

Despite the many positive things I have written over the years about Google, they are unusually lackadaisical about copyright issues and unauthorized reproduction of content.  If they were to find some religion about these sites, they would kill two birds with one stone.

Let’s look at how and where they can stamp out the hosts of ad scammers and bogus advertisements now spreading over the intertubes.

Here’s a whacky idea: How about we start with Blogger, a Google property? It seems to attract an unusual number of splogs (Spam Blogs) and content scrapers. These primarily Chinese and Russian spammers then use Google AdSense to capture income on their stolen content, regardless of ad quality. Get rid of the splogs, and you also dramatically reduce demand for the junk ads.

Despite sending DMCA notices, these scraper sites persist in hanging around for a long time. They change blogger domains like most people change their underwear. Google seems to do very little proactively to hunt down these weasels.  My experience has been they do a  s l o w  job responding to DMCA takedown notices. I’ve done the DMCA fax/mail thing repeatedly, and for weeks, (and sometimes months) nothing seems to happens.

DMCA does not require an email notification — but that sure as heck would allow Google to be more proactive.

We all know Google is filled with very smart mathematicians, programmers, and deep thinkers. How hard is it to come up with an algo to scan and verify the scraper/splogs stealing content and hosting bogus adsense adverts? They should be proactively weeding out these bad elements — even if it costs them a few bucks in ad dollars.

Or, maybe they can’t do it; perhaps the vaunted Google brain trust is more PR than IQ.

Is it Don’t be evil? or “Don’t bother us . . .?”

“Our conclusion is that if small firms aren’t captured well in the advance GDP data, the economy may be growing less quickly than suggested by the recent official data.”

-Jan Hatzius, Goldman Sachs economist

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This certainly comes as no surprise to us:

“The U.S. government is having a tough time guesstimating how many small businesses failed in this recession, casting doubt on the reliability of vital data on employment and economic growth.

The formula the U.S. Labor Department designed to help it deliver timely, thorough monthly employment reports broke down in the heat of the financial crisis, miscounting the number of jobs by an estimated 824,000 in the year through March.

The most likely culprit is the so-called “birth-death” model, which the Labor Department uses to estimate how many companies were created or destroyed.

That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought when President Barack Obama took office in January. More recent figures may still be underestimating job losses now, but it will be many months before the Labor Department is certain . . .

Government data has difficulty gauging the health of smaller firms because there are simply too many of them, leaving officials to rely on surveys and models that are hit and miss.”

Let’s put some numbers to this: In 2008, 43,546 businesses filed for bankruptcy; Even more are filing in 2009 — Q2 of 2009, the most recent data available, saw 16,014  bankruptcy filings — on pace to run 33% more than the prior year.

BLS simply does not catch all of these failures in the monthly NFP reports.

The next BLS B/D adjustment will be in February 2010, when they qill like add another 800,000 to a million lost jobs to the prior years . . .

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Source:
Recession shows shortcomings in U.S. economic data
Thu Nov 19, 2009
Emily Kaiser and Nancy Waitz
Reuters

http://www.reuters.com/article/GCA-Economy/idUSTRE5AI56420091119