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

Aug New Home sales, a measure of contract signings now 4 months removed from the home buying tax credit, was 7k units below expectations at 288k annualized but the prior month was revised up by 12k to 288k. The level is just a touch off the May level of 282k which was the lowest since at least 1963. The absolute # of homes for sale fell by 3k to 206k, the lowest since 1968 but because sales remain anemic, months supply fell only to 8.6 from 8.7 and vs the long term average of 6.2. The West saw a 54% m/o/m rise in sales to the highest since April but in July it had fallen 58% from April. The tax credit wrecks havoc on any concept of long term business planning as its no more than a drug high followed by bad withdrawal. The median price fell 1.2% y/o/y to $204,700, the cheapest since Dec 2003.

Aug Durable Goods headline was slightly below expectations and fell by 1.3% (led by 40.2% drop in non defense aircraft) but ex transport orders were stronger than forecasted with a 2% gain vs consensus of 1% and the July figure was revised higher by a full % pt. Non defense capital goods ex aircraft rose 4.1% and July was revised higher. Vehicle/parts orders fell by 4.4% but were more than offset by gains in computers/electronics, electrical equipment, machinery, primary and fabricated metals. Because shipments fell by 1.5% and inventories rose by .4%, the inventory to sales ratio rose to 1.58 from 1.55. Bottom line, the better than expected data is great to see and hopefully an extension of businesses using healthier balance sheets to invest but the trend still has been lumpy as we haven’t seen 3 months in a row of core cap ex gains since early ’07. A permanent extension of R&D tax expensing if passed will definitely help.

Apropos of our earlier Volcker discussion, consider this classic an indictment of the Business Schools Tall Paul referenced:

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Via Amptoons

Hat tip Jay H

Insight on her appointment to the new consumer protection agency, with Elizabeth Warren, assistant to President Obama. She seems so reasonable, I cannot believe the Democrats lacked the cojones to run her thru the Senate

Note the assinine question Jack Welch asks. Either he knows better (and is full of crap) or he reveals himself to be a doddering old fool. (He was the most over-rated CEO in modern history).

Airtime: Thurs. Sept. 23 2010 | 7:35 AM ET

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See also:
No More ‘Fooling People’ For Credit Firms
Jeff Cox
CNBC.com, 23 Sep 2010
http://www.cnbc.com/id/39321854

I’ve been talking about the rise in commodity prices for a while now (CRB raw industrials sub index was up yesterday for the 8th day in the past 9 to less than 1% from record high) and some of it is definitely currency debasement but the emerging market thesis of a growing middle class remains the dominant theme as 85% of the world’s population is not in the developed world. Some think decoupling is not possible, especially after what was seen in ’08-’09 when it badly failed but look at the stock market closes overnight, the South Korean stock market closed at the highest level since May ’08, the Sensex at the highest since Jan ’08, the Thai index at the highest since ’96, Jakarta index at an all time record high, Singapore Straits at just shy of highest since June ’08 and the Philippine index closed just below a record high. The Euro is at a 5 month high notwithstanding continued weakness in PIG debt after Germany’s IFO confidence rose.

Peter T Treadway, PhD
Historical Analytics LLC
www.thedismaloptimist.com
September 23, 2010

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The legendary Muhammad Ali developed a style of boxing whereby he lay on the ropes and let his opponents swing away at him. The idea was to duck his opponents’ punches and let them tire themselves out. He called it the “rope-a-dope.”

The United States dollar plays an analogous role in the international monetary system. Which country is the “dope” in this process history will decide. But take the latest major event in the markets. Japan, a country running a strongly positive current account and with over a trillion dollars in foreign reserves, decided unilaterally last week to intervene in the foreign exchange markets and buy dollars and sell yen. The Japanese Prime Minister, having come close to being tossed out of office by his own party, decided the yen was getting too expensive for Japanese exporters.

And what does the United States do? Nothing. The United States does not intervene in the currency markets. It doesn’t “hit back.”

Think about it. Supposing the US decided the dollar was too expensive against the yen and went into the markets and sold dollars and bought yen. Maybe the US could have sold the dollars directly to the Japanese. Why not?

Of course if the US did that the international monetary system would quickly collapse into utter chaos. I am certainly not recommending this course of action. The dollar performs the role that gold used to in the international system. The dollar is the global reserve currency, although as an aside it is no longer convertible into gold and unfortunately not subject to supply constraints as was gold. The growth in the gold supply was constrained by how much gold could be mined each year. The growth of US dollar reserves is constrained by how much the Fed wants to print. And as its embrace of quantitative easing shows, there is no limit as to the Fed’s ability or willingness to create reserves.

But the point is, for better or for worse, the US is the world’s banker. It has to follow different rules of behavior than other countries. It cannot unilaterally intervene in the currency markets. If the US is opposed to another country “manipulating” its exchange rate, it must cajole, beg or bully that country to raise the value of its currency. That is what the US is trying to do with China right now. The Japanese, to use an American baseball expression which should be understandable in the land of the Tokyo Giants, came out of “left field” and surprised everyone. A gift to China for the moment. The Chinese can say that the Japanese are the bad guys. (Saying that of course will come easily to the Chinese.)

In 1985 the US convened the major trading nations of the world and the result what was called the Plaza Agreement. Those were the “good old days” when the US could get its way by bullying and persuasion. As the result of that meeting Japan agreed to allow the yen to strengthen against the dollar which it proceeded to do over 1985-90. Japan now cites that appreciation of the dollar as a major reason for its years of stagnation starting in 1990. The Chinese, not normally sympathetic to Japanese complaining, cite the Japanese experience as a reason not to revalue the renminbi.

Times have changed since 1985 with the major changes being the rise of a “not-so-easy-to-bully” China and with the US with its huge debt now viewed in some quarters, rightly or wrongly, as a global mendicant. Chinese Premier Wen Jiabao in a speech just given in the United States said that a rise of the renminbi of 20% would cause severe job losses and social instability. President Obama could have given the same speech, only saying that without a 20% rise of the renminbi and the other Asian currencies the US will experience further job losses and social instability. (And ensure that the Democrats lose the midterm elections.)

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“Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.”

-Former Federal Reserve Chairman Paul Volcker

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Real Time Economics reports that former Fed Chair Paul Volcker ditched his prepared remarks at a Federal Reserve of Chicago event yesterday. In its stead, he opened fire on all of the corruption in banking and Wall Street.

It was a “blistering, off-the-cuff critique leveled at nearly every corner of the the US financial system.”

Volcker unloaded on banks and CEOs; he trashed regulators and the inept business schools. He opened fire on the Fed, bombed money-market funds. And while he had good things to say about the financial overhaul law, the bottom line is the system remains at risk.

Rather than subject us to future “judgments” of regulators — all subject to capture by “relentless corporate lobbying by banks and politicians to soften the rules.”

Volcker made a plea for “structural changes in markets and market regulation.”

Real Time Economics noted the following:

Banking: Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”

Financial system: “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken…”

Business schools: I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.

Central banks and the Fed: “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities” [nonfeasance]

On procyclicality: “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult.

Risk management: “Markets that are prone to excesses in one direction or another are not simply managed under the assumption that we can assume that everybody follows a normal distribution curve.

Derivatives: “I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”

Money market funds: “Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage.

The Fed and Dodd-Frank: Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.”

Go read the entire write up, its outstanding.

If this guy was in charge of Fin Reg, the market would be appreciably healthier over the long run. Yet another great missed opportunity . . .

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Source:
Volcker Spares No One in Broad Critique
Damian Paletta
Real Time Economics, September 23, 2010 
http://blogs.wsj.com/economics/2010/09/23/volcker-spares-no-one-in-broad-critique/

The sickest thing you will watch this weekend:

Some years ago when I was on the sellside, I would occasionally got dragged into these banking meetings to discuss funding new and existing companies. I had a good understanding of Tech, and apparently lent gravitas (ha!). These sorts of meeting request went up after the media exposure increased.

I got into a bit of hot water at some of these for saying what I thought. I recall one of these meetings was with a group that had made a large previous investment into Blockbuster (I don’t recall if they bought via public or private equity).

Curious, I asked what the value was: This wasn’t a turnaround play, it was more of a sell off the whale oil and meat to recoup what was left from the carcass play.

“You describe this as if its a dying industry.”

Well, duh. “Isn’t it? Isn’t Netflix and internet delivery going to make driving to a store and renting plastic discs ancient history? You could no more turnaround a steam engine company once gasoline engines came around.”

The bankers were not happy with me, but I certainly saved them (or their investors) money, as Blockbuster just filed for Chapter 11, wiping out shareholders, and reducing their debt load 90% from nearly a billion dollars to about $100 million or so.

Somewhere between then and now, we rec’d shorting BBI, but it was a tough borrow, and a regular squeeze play.

CrowdQuery: Who is the next major company, business, or sector to go belly up?

Let’s consider 3 categories:

1) who goes down in 2010 or ’11

2) who is in danger between now and 2015.

3) Whose long term prospects are clouding up?

What say ye?

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video after the jump

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Thank you, Phil!

I set up a Twitter account centuries ago, promptly lost the password, and could never log on again. Plan B was to go with @BRitholtz, but I was never really comfy with that. It seems I am my last name, and the B before felt dirty.

Now, thanks to the heroic efforts of Stock Twits CEO Phil Pearlman, I have regained my handle.

I tweeted my first tweet from @Ritholtz, and it promptly crashed Facebook. Not just on my computer, but the entire facebook server farm went tits up.

Awesome.

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

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Terminology is important but often abused. Some employ it to obfuscate the truth. Others to legitimize something that oughtn’t be. I doubt this Pop Quiz will ever be given to MBA students but I reckon it’s worthy of a go….

Instructions: Choose the Word, Phrase or Answer that best describes its preceding passage:

1. It’s nearing the end of the fiscal quarter. The CFO is concerned that leverage ratios are too high. You’ve located some friendly (reasonably-rated) counterparties who’ve more cash than investment opportunities and who are happy to take the other side of temporary financing trades that will reduce ratios to levels that won;t offend analysts, provided you guarantee the counterparty they will make their spread and not lose money. This is termed:

(a) Balance Sheet Reporting Optimization
(b) Window-dressing
(c) Lipstick on a Pig
(d) Repo 105 (tnx WT!)
(f) Rather Illegal
(g) Bigger (unearned) Bonuses All-Around (Again)
(h) All the above

2. You are the senior manager of an Equity Trading desk at a large Investment Banking firm. Amongst your activities, you act as agency broker for customer flow, employing some algorithms that fill customer agency orders at the prevailing best bid or best offer. In addition, your high-frequency trading desk, using it’s co-located servers, market-maker status and memberships on multiple-venues and dark-pools, has tools that allow your desk (with a very high-degree of certitude) to execute inside the spread. Many of your customers give you discretion (assuming execution risk) yet, you always fill customer orders at the prevailing best-bid or offer – always keeping the spread achieved on internalization of orders for The House . This is termed:

(a) Advanced Customer Facilitation Algorithms
(b) A conflict of interest
(c) Great business (if you can get it)!!
(d) Stealing and Questionably ethical
(e) The funder of your coveted house in the Hamptons
(f) Within the letter of the law but not the spirit
(g) All of the Above

3. You started an FX bucket shop that offers an electronic trading platform and extremely high leverage to retail clients. The platform gives the impression you are executing their trades in a a large central and open marketplace. You use all manner of advertising to entice the punters in. Initially, of course, you did execute their trades in the marketplace in order to hedge your risk, but you found that the life expectancy of the average small-time retail FX punter to be measured not far beyond nano-seconds, and that they are, en masse, usually wrong. As a result, you’ve stopped “hedging” and now more or less take the other side of all their risk, despite little regulation, oversight or capital adequacy. This situation is termed:

(a) Optimal Use of Scarce Risk-Capital Resources
(b) Dead clever
(c) The logical thing to do
(d) “a Bonnie Situation” (*)
(e) Less than ethical
(f) An accident waiting to happen
(g) disingenuous for not adequately disclosing the credit risk of acting as principal
(h) Eponymously…The Sting
(i) All the above
(*=”Bonnie Situation” as seen in Pulp Fiction)

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