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

Cassandra Does Tokyo is a former hedge fund manager and ex NY Trader, who is now living abroad.

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ETFs clearly can provide some advantages for obtaining otherwise-expensive-to-obtain exposures for thematically-oriented investors. More noteworthy perhaps is the way that such vehicles have captured the imagination of Promoters and Managers as a salvation for otherwise stagnant revenue growth. This has lead to a proliferation of ever-more-focused ETFs to cater to the evolving fancies of investors looking for errrr… umm… something, indeed anything different. I would like to add my two-cents worth here and now, so BlackRock, take note: Here are some candidates for your marketing machine to focus on for the next decade:

Rent-Seeking ETF – While the maxim “Death and Taxes” is known to all, few realize that the original phrase was “Death, Taxes and Corruption”. Indeed Companies that purchase influence, contracts, and favorable legislation/regulation are worthy of investor attention (not because they are more dynamic, which they aren’t) but because they have a definable edge – something many others cannot boast about. Of course, ETF marketers would need to sanitize the pursuit into something like “Government Partnership Focused ETF” or

Gilded-Age ETF – Anyone who does their own shopping cannot ignore the the increasing gulf between winners and losers. As the a large portion of the former middle class sinks lower, a smaller but not reasonably-sized segment is promoted higher. This phenomena has meaningful effects ETF marketers can exploit as those companies focused upon the top-layer and growing underclass relatively prosper as the expense of the middle market. This ETF might have Whole Foods (WFMI) and Coach (COH) alongside pawnshops, check-cashing firms, pay-day loan enterprises and dollar discount stores.

Sin-City ETF – Booze, Cigarettes, Recre-ceuticals, Trans-Fats-In-A-Bag-To-Go, Espionage and surveillance equipment, Gambling, Porn, all in a neat little exchange-traded bundle. Reasonably recession-proof. High-profitability. Growing (except tobacco). Need I say more…?

Follow-The-Insider ETF – Alpha is getting harder to achieve these days. Covert insider-trading is getting riskier (just ask Raj!). But we know from some of the recent academic research that there is information contained in selective but systematically definable insider purchases and sales that yields abnormal excess returns. This is an easy one to flog, and panders to the twin pillar retail beliefs that “the market is rigged” and “it is nearly impossible for Average Joe to beat the market.

New Age ETF – Even tree-huggers have money to invest and would benefit from a convenient vehicle. And their numbers along with greater public awareness of what is environmentally good an bad, healthy or unhealthy, kharmically or spiritually desirable will make this a winner. The allure of this ETF is that it has many degrees of freedom in which to invest – from alternative energy, to agriculture and food science, from any company with sustainable approach to yoga-mat and acupuncture needle manufacturers. Build it (and advertise it convincingly) and they will come…

Bugger-The-Shorts ETF – This ETF, which will concentrate highly-shorted and crowded short stocks, may appeal to several classes of investor. First there are those that philosophically dislike the short side of the market – whether for moral or philosophical reasons. But there are also those devilish mischievous investors who can smell easy prey, and get sadistic pleasure out of squeezing weak (or system-driven) shorts out of their positions for fun and/or profit. This could potentially be popular with hedge funds as a way of quickly reversing exposure when they’ve been plunging themselves and find their positions on the wrong side of vicious pops so characteristic of bear-market rallies.

Activists Choice ETF – An ETF focusing on trumpted or reported positions disclosed by so-called activist investors are a so-called lay-up for ETF promoters. Primarily because activists themselves are such wonderful self-promoters, and quite adept at talking their own books. But also because they can tout “a hedge-fund strategy and performance without hedge fund fees” – always a winning slogan in the aggregation of retail funds.

Orlov’s ETF – With an increasing number of doomsdayers crawling out from all crevices, under the svengali-like piping of Glenn Beck, subscribing to Dimitry Orlov-like visions of the future, perhaps an ETF focused on a belief in the coming unravelling would sell well. Manufacturers of home generators, self-sufficiency tools, small arms and ammo, micro-water-purification systems, drought-resistant seeds, land-mines and barbed-wire, as well as gold-miners, and private prison and security services all could have a place in this portfolio. The only draw back is the non-sequitir if investors peer too far into the future where property rights and the financial system dissolve into complete chaos…

The “US Healthcare System Is The Best” ETF – Americans have a peculiar love affair with their Health Care system, irrespective of how completely buggered it is in comparison to the rest of the civilized (and much of the recently civilizing) world for the insured (as well as the uninsured, and financiers of both). ETF promoters can exploit this inexplicably visceral love-affair by helping them put their money where their mouth is, and creating the market-traded basket that invests a portfolio of companies prospering from a continuation of US Healthcare haplessness.

Greying Demographics ETF – Another obvious marketing target with many degrees of investment freedom, that are increasingly visible to investors. Motorized buggies, time-shares, home-health monitoring, nutraceuticals, senior-assisted living, bingo and slot-machine manufacturers, all in a single portfolio.

The Two-Cent Nickel ETF – Americans can rarely resist a bargain. As America slides closer to Japanification, ETF marketers might take a page from the Japanese Investment Trust playbook which for years has sported The Hidden Asset Trust or similar fund focusing upon companies with net substantial real assets well below market values, particularly where such assets are not reflected on the books of the company at current market values. Some of these assets are land, subsidiaries, other securities that provide seductive teasers to bargain-hunting investors. Of course, they must be careful not to rely too heavily upon Japanese experience for performance comparisons.

Fund of Fund of Hedge Funds ETF - The Coup de Grace offering must be the Fund of Hedge Fund-of-Funds to give the punter access to the broadest participation of hedge funds, something the small-punter has arguably had difficulty in obtaining. And in an exchange traded vehicle where they can dump their exposure at the first sign of distress. The remarkable attribute of this ETF (from the industry’s perspective) must be the multiple fee dollops that are removed from investors’ investments on a monthly basis. This is truly the ETF Triple Dip straight from the in the Wall Street’s finest creamery! But even better for the true skeptics, I know that you are thinking more like John Paulson, so if only someone (Hello GS!) can create for us a synthetic version of this that we can short, we too might find a good way to participate in the fee bonanza.

Of course, this is by no means an exhaustive list, as I am certain to have left some other crumbs on the table, so please feel free to submit your own additions.

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Originally published at Cassandra Does Tokyo

Permuto:

Second only to Christmas, back to school is the most important indicator of the annual retail climate, revealing whether or not the industry has some solid footing. The following graphic is a comprehensive look at the back to school economy for 2010 which shows slow but steady growth since last year’s dismal numbers.

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click for larger graphic

via Permuto

As mentioned earlier this morning, courtesy of Ned Davis Research are these two updated charts, as of the end of Q2. (Click thru thumbnails for PDFs).

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Median Income vs Median Home Price

click thru for larger graphics

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CPI Rent vs Homes

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PDFs

NDR: Median New Home Prices vs Median Household Income

Home Price Appreciation vs CPI for Rent

The Sept NY mfr’g survey was 4.1, below expectations of 8.0, down from 7.1 in Aug and at the lowest since July ’09 when it was -.8. The components however were not as soft as the headline reading seems. New Orders rose to 4.3 from -2.7 and Backlogs were -6.0, up 4 pts from Aug. Also, the Employment component rose a touch to 14.9 from 14.3, the best since May. Inventories moderated a touch to 1.5 from 2.9 but Shipments, which follow orders, were -.3 from -11.5. Prices Paid rose 2.4 pts and Prices Received rose by 4.4 pts. The General Business Condition 6 month outlook did fall 4 pts to 31.3, the lowest since July ’09 and unfortunately reflects a complete lack of visibility with business trends. Bottom line, lackluster remains the adjective for describing our recovery and the inventory boost to mfr’g is key to watch if its petering out. Today is the 1st Sept industrial # out and we need to see more to reach any definitive conclusions.

I’ve spilled so many pixels on Lehman Brothers, I have almost nothing new left to add.

For those of you newer to the site, however, here are a few of the Big Picture’s “Greatest Hits” regarding Lehman:

• 2 years ago today, we wrote: The Terrible Lessons of Bear Stearns (as applied to LEH)

•  Dick Fuld’s Fantastic Revisionism ! (September 2nd, 2010)

• 2008 Bailout Counter-Factual (August 17th, 2010)

• Charlie Gasparino Owes David Einhorn (and me) an Apology (March 12th, 2010)   (Video here)

• Financial Sector: Beware LEH, CIT (June 3rd, 2008)

• There’s lots of Lehman related analysis in Bailout Nation, published May 2009 (reviews here).

• Causation Analysis: What “But Fors” Caused the Crisis ? (February 3rd, 2010)

• Bailout Skyline (February 2nd, 2010)

• Who Bears the Costs of Post-Crisis Recovery ? (January 20th, 2010)

• Wages of Failure: Exec Comp at Bear, Lehman 2000-08 (January 11th, 2010)

• Bear Stearns, Lehman Execs Kept Billions . . . (November 23rd, 2009)

Anyone interested in an exhaustive review can see every bailout post — all 1,534 of them — by clicking here

I love this Hoodie with a huge open palm on the front with a zipper running between the middle and ring finger — unzip it, and . . . Live long & prosper.

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via Fashonably Geek

What’s the best quote to describe Japan’s decision to intervene in the FX market to weaken the Yen, “Desperate times calls for desperate measures” (who knows who said it) or is it “doing the same thing over and over again and expecting different results” is the definition of insanity said by Albert Einstein. The last time the BoJ intervened to weaken the Yen was from Jan ’03 thru Mar ’04 where they spent 35T Yen (about $320b). During that time however, the Yen RALLIED by about 13%. Just recently the Swiss National Bank spent about $200b over the past year buying Euro to weaken the Swiss Franc and in that time the Swiss Franc RALLIED 15%. Unconfirmed reports say the BoJ spent about 100b Yen and an official has said that 82 vs the US$ is their line in the sand. For perspective, the FX market trades $4T per day and thus the BoJ is again spitting in the wind outside of the short term impact.

At the same time the WSJ reports that the Fed is still mulling when and if to embark on another round of money printing to lower interest rates even more, evidence mounts that the economy is not responding to historically low interest rates, outside of corporate refi’s, as the MBA said mortgage apps for refi’s fell 10.8% on the week and are now at a 5 week low even with historically low interest rates. Purchases fell .4% after 3 weeks of gains. ABC confidence was unchanged at -43, holding at a the highest since early July. Portugal sold 12 month bills at a yield of 3.37%, up from 2.76% in a 12 month auction just two weeks ago. II: Bulls 36.7 v 33.3 Bears 31.1 v 32.2

Developing World Catches a Fresh IT Wave
Andy Xie
09.07.2010

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An IT-fueled shift to low-cost communications is revamping the services sector, to the benefit of developing economies

As cloud computing, optical fiber lines and mobile devices combine to form a much more powerful and accessible IT network, information and communication costs are falling to as low as zero. Some analysts consider this a third wave for the IT revolution, following the IBM mainframe of the 1980s and the advent of personal computers alongside the Internet in the 1990s.

This new wave has profound implications for how economic activities are organized. It’s destroying and rearranging economic structures in far-reaching ways. In particular, it strips away the need for multiple levels of white collar intermediaries whose services are at the core of a modern, developed economy. And it’s giving developing countries new avenues for growth.

The overall IT revolution has benefited developing economies enormously in recent decades by making possible an original equipment manufacturing model that’s powered trade growth. The revolution’s next stage may bring even greater benefits by decreasing costs for domestic demand growth.

Why? Because developing economies centered on blue collar-driven manufacturing now have a chance to develop services sectors around the latest technology and, hence, benefit from higher productivity without painful disruptions in existing structures. Higher productivity lowers prices, which lets developing economies transit from blue collar manufacturing to a white collar service economy earlier than they might otherwise.

IT has already reshaped the world’s economy by facilitating globalized manufacturing. Without IT, it would be hard to imagine a multinational company sourcing parts from so many countries for assembly in one country and sale in another. This is a major reason why trade has been growing twice as fast as the global economy. Developing countries have benefited enormously from this trend, employing surplus workers for export production. China is by far the biggest beneficiary.

Manufacturing services have been globalized to some extent. For example, logistics can be done far from a point of sale. When a product is picked up at a port and shipped to a shop, the documentation can be handled in a different country. In theory, only the truck driver and shop clerk must be local in the country where a sale happens. Manufacturing may be one-fifth of the global economy, but manufacturing services may be another one-tenth.

Some low-end services have been globalized. Call centers have been set up in India to provide product-after-sale services. For example, when a customer has trouble using a mobile phone, he can call tech support in India. Hotel booking and credit card services can be based in countries far from customers.

Alongside IT, globalization and aging are shaping the global economy. The first two forces enlarge the pie but change the way incomes are distributed among people, industries and countries. Aging makes the pie smaller. Eventually the pie may be bigger as the new IT revolution changes economies, even though the process will be quite painful.

Yet of all technologies, IT remains the most powerful force influencing the global economy. Green energy survives on government subsidies. We will not see a day when it will be more than a niche phenomenon. Biotech is constrained by a long gestation period for product development. The IT revolution, on the other hand, races forward at lightning speed.

Cloud computing is viewed by many experts as revolutionary. I agree because I see how it’s changing the real economy: It’s destroying some sectors, creating new ones, and reallocating incomes among people with different skill levels and across nations. Its effects will severely limit and change the impact of the macroeconomic stimulus plans that most economists are advocating to cope with the ongoing double-dip.

So far, IT has facilitated outsourcing. Jobs have become mobile and can be relocated in low-cost countries. The next IT wave may eliminate numerous jobs outright, change the nature of jobs that remain and create entirely new jobs. Thus, its power to destroy and create may be greater than previous IT revolutions.

Inefficiency Eraser

Services in a developed economy can involve shop clerks, restaurant waiters and bus drivers. But these jobs are not tied to “value-added” creation. High value-added services are found in the high-rise offices of administrators, bankers, lawyers, accountants and the like. What these people do is process information: They obtain information, process it, and pass a different form of the information to someone else. The information flows from one to another until someone acts on it. That someone could be a CEO or a truck driver.

A large organization with mainly white collar professionals is highly inefficient. An oft-quoted rule says 20 percent of the people do 80 percent of the work. This inefficiency arises from price mechanisms that don’t work properly during information processing; There is no end product to price.

One might tell which employees are more efficient than others, since these may be more likely to be promoted and receive raises. But that’s not always so. Where price mechanism stops, politics begins. A superior doesn’t always prefer the most efficient employee because she or he might threaten to take that superior’s job. Such complexities decrease incentives for employees to perform. Hence, large service providers are by nature inefficient.

Why do large service organizations exist? The main reason is precisely that one cannot price its product instantly. The quality of the product may take years to prove. A large organization provides the confidence to buyers through the reputation effect. If its previous customers are happy, it has incentives to protect its reputation. Hence, new customers also should buy from it with confidence.

A hospital, for example, fits this description well. A reputable hospital can charge a premium for its services, using revenues to purchase good equipment and hire good doctors. This sustains its reputation. A hospital with a reputation for bad quality, however, faces the opposite issue. Thus, unless one is willing to invest a lot to build a good reputation, it’s stuck in a vicious cycle.

Every city has this good hospital-bad hospital phenomenon. But even good hospitals experience the 20-80 phenomenon. This same, inherent inefficiency can be found throughout large, white-collar service organizations.

Progress in IT cuts two channels for decreasing white collar inefficiency. First, output measurement becomes possible. For example, the progress of a doctor’s patients can be tracked at little cost. Data on every doctor’s efficiency and effectiveness could be available to each patient and hospital. Other professionals such as accountants, lawyers and bankers could be subjected to the same measurements.

Efficient output measurement leads to widening the price dispersion in compensation for white collar professionals and reducing the number of administrators needed to control them. Maybe the 20-80 phenomenon will remain, but 20 percent of the productive staff will be paid 80 percent of the total compensation while their bosses – the administrators – will get far less. In that way, the 20-80 phenomenon would not lead to inefficiency.

These changes may endanger the paradigm of a rich, developed economy with a middle class core. Inefficiencies in a service economy may even out income distribution, so that everyone earns about the same. But if output is measured accurately, the distribution gap may widen dramatically. The pie may get bigger, but many will be taking home less.

Second, collapsing communication costs can eliminate many layers of a supply chain. The travel industry, for example, is full of intermediaries. Ultimate suppliers are businesses that provide transportation, lodging and catering. With travelers so numerous and the supply side dispersed, it can be costly for service providers and consumers to find each other directly, so big travel businesses are often intermediaries. Even global hotel chains are management companies overseeing other people’s hotels.

The Internet moved some intermediation to online brokers who could operate more efficiently. The next step, I’m afraid, is to eliminate online intermediaries. Communication costs are becoming so low that small service providers can reach the world at almost zero cost, while any consumer can reach any small provider at zero cost. Airlines, for example, can now reach customers easily through mobile devices, offering perfect price discrimination in relation to buying times and locations. No intermediary could be so efficient.

Financial services providers are intermediaries by definition. They match buyers and sellers of stocks, bonds, commodities and other financial products. They fit perfectly the definition of information broker. They can still make a living by brokering among institutional investors who are, by definition, few.

But institutional investors are intermediaries, too. Why should savers give them money to manage? Not for superior performance: More than 90 percent of institutional investors underperform market indexes. The main justification is that they bring down costs of information acquisition and processing, as well as transactions. This justification looks shakier by the day. Any individual can have access to as much information as a fund manager at virtually no cost. I’m afraid the financial services industry is likely to decline structurally.

As financial services industry loses value-added to customers and the real economy, it is increasingly dependent on gaming the system and profiting from customer ignorance. This makes the industry and financial market more volatile and bubble-prone. In the last financial crisis, the financial sector survived by holding the real economy hostage.

Unless policymakers understand that the financial industry isn’t necessary for the real economy anymore, and that it should scale down dramatically, the sector will remain a gigantic parasite on top of the real economy.

Moreover, policymakers have wrongly responded to economic weaknesses tied to structural factors by releasing stimulus. That’s led to one bubble after another. Only smart investors profit by understanding the market implications of interactions between structural forces and policy mistakes.

Meanwhile, cloud computing, optical fiber lines and mobile devices are putting everyone in touch with everyone else at close to zero cost, destroying economic fundamentals for intermediary economies of scale. We are seeing the front end of a shock wave to established, white collar economies. This is a turbocharged version of Schumpeterian creative destruction.

This force will prolong the employment crisis. Globalization of manufacturing is the most important driver for a blue collar employment crisis in the West. The bubble covered up employment implications by creating bubble jobs. The crisis has exposed the employment crisis that should have been around a decade ago.

The destructive power of the ongoing IT revolution on the white collar labor force will make it extremely difficult for developed economies to decrease unemployment in the foreseeable future. The destabilizing force of the IT revolution could be similar to the fossil fuel revolution a century ago. Western countries may be entering a decade of instability.

Meanwhile, the developing world that’s benefited enormously from the PC and Internet could see its domestic demand development accelerate in the next IT wave. Lower intermediation costs could help the developing world enter domestic service demand-led growth earlier than otherwise.

Because developing countries do not yet have an intermediation economy for services, they can maximize the benefits derived from new technologies by making services and goods cheaper for domestic consumer demand, thus improving local consumption as a growth driver. And it could be coming just in time, as an employment crisis hurts overseas demand for manufactured exports.

The global economy has bifurcated into the weak developed world and the booming developing world. The contrast is partly due to liquidity from the former to the latter. When the current liquidity bubble bursts, the developing world may suffer a growth slowdown. But its cost advantages will sustain it with stronger growth performance.

The third wave of the IT revolution could amplify this outperformance. And if the world remains at peace, a convergence between what are now two worlds may occur this century.

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Developing World Catches a Fresh IT Wave
Andy Xie
Caing.com,
09.07.2010
http://english.caing.com/2010-09-07/100177858.html

Thee is a long and detailed piece in Bloomberg today — U.S. Home Prices Face Three-Year Drop as Inventory Surge Looms — looking at the current state of the Housing market, especially the excess inventory. (I have a quote on the futility of HAMP).

Excerpt:

“The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.

Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.”

Here is my quote, which regular readers will recognize (from what I have written here previously) :

“If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up “on the backend,” said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.

The Obama administration’s effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department.

‘Day of Reckoning’

“The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize,” said Ritholtz, author of “Bailout Nation.” “We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom.”

I’ll see if I can the updated version of the Ned Davis Research charts showing fair value relative to median income and renting postedlater today . . .

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Source:
U.S. Home Prices Face Three-Year Drop as Inventory Surge Looms
John Gittelsohn and Kathleen M. Howley
Bloomberg, Sept. 15 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aWoxk0NV0Ahg

The price of gold hit a record high. Should you invest?