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

David R. Kotok
Chairman and Chief Investment Officer
May 27, 2010

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“Any and all injury, loss, destruction and damage arising out of or related to the above described casualty event was not caused or contributed to by any fault, negligence or lack of due care on the part of Petitioners…”

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This was excerpted from the May 13, 2010 motion filed by Transocean in the Federal District Court of Texas, in which they are trying to limit their liability in claims against them to $27mm (to be exact, the number is $26,764,083.00), by invoking an 1851 maritime law. We have the full document posted on our website. See: http://www.cumber.com/content/Special/Triton051310.pdf .

This is chutzpah.

Chutzpah is a term that is often used in parts of the United States and originates in European Yiddish. It means brazenness, temerity in a pejorative way, engaging in an effrontery.

Here’s an example of chutzpah: a 15-year-old kid murders his mother and father and then asks the court for mercy because he is an orphan. That‘s chutzpah.

Here’s another example: Lehman Brothers’ lawyer takes a cab to the bankruptcy court. The cabbie says the fare is $27. The lawyer says, “Come inside and join the unsecured creditors.” That’s also chutzpah. You get my drift.

Legal process requires that Transocean’s lawyers admit no wrongdoing. We shall find out more about that when the allegations of negligence get the clarity of trials, depositions, interrogatories, witnesses, etc. So let’s just look at some facts.

Transocean is trying to avoid payment of claims by arguing they are under the rules of admiralty (law applied to the sea) and they are invoking the “Shipowner’s Limitation of Liability Act of 1851.” That’s right, 1851. The same Transocean that has collected over $400 million from its insurers is trying to avoid paying the claims of the injured and dead that resulted from the blowout of their drilling rig. This is also the same Transocean that valued the rig at $650 million before the blowout but now is using the $27 million figure because it is the remaining salvage value of this “vessel.”

By getting the case into admiralty court, Transocean may be able to delay the proceedings and may have the ability to limit exposure to a jury trial. They may be able to combine all the claims. They will claim that all they owe the injured and the families of the dead is $27mm. That, too, is chutzpah.

We are just starting to enter the legal proceeding stage of the BP-Transocean saga. This is where the figure will reach into the tens of billions if the Top Kill attempt to seal the well is successful and permanent. Tens of billions in claims are coming. More billions in clean up costs lie ahead. Over 130 lawsuits are already filed. Thousands will be involved before this is over.

New estimates are that the oil spewing rate is somewhere around 20,000 barrels a day; that’s nearly 1 million gallons a day. This is now deemed to be the largest and most serious oil catastrophe in US history. And the same politicians who didn’t impose strict rules and didn’t supervise and didn’t do what they were supposed to do, from either the White House or the Congress, are now claiming they have been busily concerning themselves with this event every day. That, too, is chutzpah.

By the way, Transocean says they filed the maritime limiting motion “at the instruction of our insurers” and in order to preserve coverage. Again, pure chutzpah.

The fight now is who pays whom and how much and when. The battles will be between lawyers. Stay tuned as we observe what is about to be one of the biggest legal battles in history. We continue to suggest that these liabilities are going to be huge and cannot be presently estimated. We would avoid these stocks. Some are recommending them over other energy companies. That, too, may come to be seen as chutzpah.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

As mentioned Friday, we are going to do an Open House in our NYC offices. We have decided on the week of June 7 to 10. Details are below.

We are setting up a series of small group discussions, along with individual meetings. At the group discussions, Kevin Lane and I will be discussing the following:

• Why we went to Cash on May 5th, 2010 in our Long/Short Accounts
• Where we see the stock and bond markets going in 2010-11
• What is in store for the economy, housing, jobs and commercial real estate

For those of you who are interested in our asset management approach, we are setting up individual meetings ($500k min).

This is the first time we have ever done this in the NY office, and if it works out as well as it has in LA, Dallas and Miami, then we will try to do it more than once a year. Given my wacky travel/speaking schedule, this looks to be the only meeting for the NYC area for 2010.

We are filling these slots quickly, so if you are interested in discussing your investments, please email Fitzy at  JFitzgerald AT Fusioninvest dot com. Or, you can call him at 212-661-2022, extension 7101

The FT is reporting that Goldie is on the verge of 9 figure settlement with the SEC:

“Goldman Sachs is hoping to avoid the Securities and Exchange Commission’s charge of fraud by reaching a settlement on a lesser offence and agreeing to a fine of hundreds of millions of dollars, according to people familiar with the bank’s negotiating position.

Goldman, which has been accused of civil fraud over a complex mortgage-related security called Abacus, is trying to focus settlement talks with the SEC on the less serious charge of omitting or mis-stating material facts to investors . . . Goldman might pay a fine of $250m and compensate investors by buying out their exposure to the Abacus deal at a cost of $370m”

Forget the settlement, I want to know this: Who was the dipshit lawyer that advised Goldman Sachs to fight this tooth and nail? Was it some executive who simply charged ahead, Dick Fuld style? I’d like to know who totally failed to anticipate the political climate, the public reaction, the prosecutors attitude, and myriad factors that has turned this into a giant disaster. Even if GS were to prevail in court, they have already lost. The reputational damage is already measured in $ billions, and will last years if not decades.

There had to be some decision-making in response to the SEC Wells notice nearly a year ago. The question investors should be asking is: Who is to blame? Who said no to a small settlement and minimal publicity? Who turned an otherwise routine SEC investigation into a giant clusterfuck?

I want names people, names!

And I also want to know: When does that stupid sonuvabitch get fired?

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Source:
Goldman seeks settlement with SEC
John Gapper and Francesco Guerrera
FT, May 28 2010 00:11
http://www.ft.com/cms/s/0/3cfc666e-69e3-11df-a978-00144feab49a.html

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Those are some pretty serious numbers above.  The Nazz up nearly 4%; The Global Dow up over 6%.

Is this merely a deeply oversold snapback, or the start of something more lasting? Might as well open up the floor for whatever thoughts, comments and ideas you have about this crazed & crazy market.

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What say ye?

iPad + Velcro from Jesse Rosten on Vimeo.

Hat tip kottke

Although I suspect BR is at least as much of a gadget lover as I am, if not more, I’ll just preface the post by saying it’s Invictus.  (My history here has demonstrated that most readers don’t check the byline.)  That said:

I’ve been an early adopter my whole life.  Can’t help myself; it’s in my blood.  Probably my biggest miscalculation was a Sony Digital Audio Tape deck — and a Walkman to accompany it.  I’ve often wondered if I was the only person in the States who bought that technology.

Anyway, fast-forward (pun intended) to late 2007/early 2008 and the introduction of the Dash Express GPS, which I could not wait to get my hands on.  (Here is my first GPS device, circa mid-90s, and I thought I’d died and gone to Heaven.)

The beauty of the Dash was its always-on two-way internet connectivity and the features that sprung from it:

• Local Yahoo! search
• Real-time, crowd-sourced traffic updates via other Dash users on the network, often suggesting re-routes well before hitting heavy traffic
• Send2Car — to which I became addicted, allowed me to simply send an address to the unit over any internet connected device, which it would receive and provide a route to

Although it was not without its bugs, customer service was great.  Dash had some active forums, and its open source technology allowed users to develop all sorts of useful and interesting applications for it.  It developed a loyal (but apparently small) cult-like following.  I make no bones about loving my Dash — always have, always will.  It was a device ahead of its time.

Premiering in the early months of the recession and not doing a very good job marketing their product, Amazon (initially the sole vendor) slashed the price 25% in no time flat.  Things were not looking good.  But everyone soldiered on.

In little more than one year (June 2009), with the company apparently faltering, they were snatched up by RIMM, presumably for their software, and probably for a song.

And now, finally, comes this:

We will be discontinuing service and support of the Dash Express product effective June 30, 2010, no new month to month subscriptions will be sold after today (May 24, 2010). Your loyalty to our product for the last few years is truly valued and appreciated.

We will issue prorated refunds to customers with an outstanding balance on their remaining pre-paid subscription. Our month-to-month subscribers will simply see their service expire automatically on June 30, 2010.

In order for us to process your refund, we will need you to verify/enter your mailing address here

We thank you for your support of the Dash Express product.

I’d hoped and prayed for Dash to make it.  Although I’ll readily admit it was a bulkier device than I would have liked, I found its feature set superior to any of its competitors.

But such is life in the dog-eat-dog world of high tech.  As I’ll be in the market for a replacement device, feel free to drop some comments on what’s caught your fancy in the PND space.

Source: Visual Economics

I was just discussing this with a friend in California . . .

Tax Policy Center:

It is not news that state tax revenues have been absolutely hammered in the current economic downturn. But you may be surprised to learn that one local tax has held up relatively well. It is, of all things, the property tax. How can that be, you ask, if so much of the economic mess was caused by a collapse of a housing bubble?

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Source:
The Property Tax: Unsung Hero
Kim Rueben
Tax Policy Center, Wed 26 May 2010
http://taxvox.taxpolicycenter.org/blog/_archives/2010/5/26/4538181.html

Another Dave Singer annotated special:

David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff, with a focus on providing a top-down perspective to the Firm’s investment process. Mr. Rosenberg has earned both Bachelor of Arts and Master of Arts degrees in Economics from the University of Toronto. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York and prior thereto, he was a Senior Economist at BMO Nesbitt Burns and Bank of Nova Scotia. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.

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After an 18-month period of unprecedented fiscal, monetary and bailout stimulus, it is completely legitimate to pose the question: why is the yield on the 5-year T-note sitting below 2%? (Not to mention a record low 0.769% two-year note yield at yesterday’s auction.) Is that consistent with a V-shaped reflationary recovery? And, wasn’t the Fed so convinced just a few months ago that the recovery was going to be entrenched enough to allow the central bank to start to shrink its pregnant balance sheet? If so, then why is it that since March, the Fed’s balance sheet has expanded a further $50 billion, and all with extra mortgage backed securities?

Maybe, just maybe, the recovery is more fragile than many believe — though we must admit that the minutes from the last FOMC meeting were filled with talk of downside risks to the economic outlook. The vagaries of life in a post-bubble credit collapse.

We know that there are many pundits talking about how great the U.S. consumer has been doing (funded by a renewed but unsustainable decline in the savings rate) and how employment has begun to improve. Dude — as the credit crunch was just getting started in the fall of 2007, the three-month trend in retail sales was running at a 6% annual rate and payrolls were still rising at around a 100k monthly pace. What good does it do to focus on numbers that look through the rear-view mirror — focus on the credit markets, which drive looking through the front window. They tend to lead.

Finally, it is amazing and disturbing at the same time to see mortgage applications for new purchases decline 3.3% during the May 21 week, this is on top of the massive 27.1% slide the week before. So far in May, this proxy for new housing demand has absolutely cratered at a 99.96% annual rate (yes, that’s correct) even though mortgage rates have come down by nearly 25bps. And, as we highlight below, homebuying intentions are moribund despite all the government efforts to turn the residential real estate sector around. It has become abundantly clear that consumer attitudes towards homeownership and indebtedness have been semi-permanently ruptured in the aftermath of the horrible deflation and default experience of the past two years.

Mortgage Applications for new purchases at a 13-year low

Shaded region represent periods of U.S. recession.
Source: Haver Analytics, Gluskin Sheff

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