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

Some Friday afternoon fun (hat tip Fitz!)

Via Mint, timely for those of us in Northern climes, for the rest of you, be quiet and enjoy your weather!

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from Classic Driver

Strategy Change in ETF Accounts
David Kotok
January 28, 2011
www.cumber.com
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We have a strategy change.

We have raised cash in US stock accounts, international stock accounts and global multi-asset class accounts. This is the first time we have done so since becoming fully invested in early 2009. Our selling strategy emphasized exiting small cap positions.

We are worried about the developing geopolitical risk in the Middle East and North Africa. We do not know where it will spread nor do we know how it will run its course. We also do not know what direction these regimes will take if there is over throw of the existing system in any of these countries. We do know that we see turmoil in Egypt, Tunisia and Yemen.

As everyone can see by following the news flow, this is not confined to any single country. Therefore, a contagion risk exists. The risk is that it spreads elsewhere in the Arab world. Modern technology allows turmoil to be exported quickly from place to place. We are seeing it daily.

We do not know how long we will stay positioned with a cash reserve. Moreover, we may redeploy quickly or slowly. For now, we go into the weekend with the highest cash reserve since the 2008, post-Lehman-AIG period.

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David R. Kotok, Chairman and Chief Investment Officer

Today seems to be the first day the major indices have fallen, and are unable to muster a rally.

It is still early — its only noon EST as I type this — but I don’t get a feel for the market’s ability to come charging back.  That’s no surprise, given the over-extended over bought condition we find ourselves in.

Note that the Nasdaq (QQQQ) and the Russell 2000 (IWM) are leading tot he downside.

Hence, the news flow may amount to little more than an opportunity to pullback, consolidate, and work off some excesses of recent weeks. We will have a better sense as the correction unfolds if this is a minor (8-12%) pullback, something less, or something more.

Stay tuned . . .

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Help! We’ve fallen and we can’t get up!

click for updated chart

In Davos, JP Morgan Chase’s Chairman and CEO says that even his own company could and should be dissolved if it failed.

(1:33)8:53pm

We discussed this last year (10 Reasons I Am Thinking About Japan), but its nice to see the big boys catching up:

Jonathan Weil has a bizarrely headlined column titled “Wall Street’s Collapse to Be Mystery Forever.”

Balderdash!

That is a euphemism; what I really want to write would get this post blocked from Goldman Sachs, thanks to their new email nanny. Suffice it to say my linguistical first choice is a sensible investment thesis, given the recent rise in Ag products and farmland.

You need only read the FCIC report’s executive summary (here, pages 15-28) to see that they got the broad strokes right, and blamed the right people, institutions and policies.

What Weil gets right is that there were serious flaws in the design of the FCIC as a bi-partisan commission:

“To examine the causes of the financial crisis, Congress created a bipartisan panel of 10 political appointees led by Democrat Phil Angelides, a former California state treasurer. What was needed was a nonpartisan investigation directed by seasoned prosecutors (like Pecora was) who know how to cross-examine witnesses and get answers.

Whereas Pecora had no fixed deadline, Congress gave the crisis commission until December 2010 to complete its inquiry. Witnesses who didn’t want to cooperate fully could simply milk the clock. The panel got a budget of less than $10 million to investigate all the causes of the financial crisis. Lehman’s bankruptcy examiner got $42 million to produce a 2,200-page report on the failure of a single company.”

Blame Obama for not being more forceful in the creation of a Pecora-like commission. But Weil is dead on with that assessment. He adds:

“The report’s conclusions were obvious: The financial crisis was man-made and avoidable. Regulators and credit-rating companies blew it. Banks and homeowners borrowed too much. Companies such as AIG and Lehman Brothers had horrible governance. Ethics and accountability broke down. The government panicked when the crisis hit in 2008. And so forth.”

Well, that much was obvious to me, and perhaps to him and others. But many people did not understand that prior to the FCIC.

Was the report a “predictable failure” ? I don’t think so. It put the official imprimatur of what happened into black and white. Further, knowledgeable observers with a familiarity of what caused the crisis can now look at the partisans who tried to submarine the commission from the outset for the hard core ideological extremists they are, clinging to a disproven world view regardless of consequences.

Shame on them.

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Previously:
10 Questions for GOP Members of Financial Crisis Inquiry (December 16th, 2010)

Source:
Wall Street’s Collapse to Be Mystery Forever
Jonathan Weil
Bloomberg, January 28 2011

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ayZQBEkgQmK8

The New York Times has always had a slightly odd relationship to the book trade. The joke in the publishing industry was that it took 800 jobs lost in a steel plant to make the front page of the paper of record but only 8 editors at Random House. One might easily assume that the editors of the paper, all of whom wrote and published book before ascending to the pilot’s chair, considered publishing to be something more than just a way to distribute stories.

At least, that’s the best way to view today’s editorial on the book business entitle Read On. (One looks twice at the headline before realizing there is indeed no exclamation point.) Although the short piece contains some bizarre howlers like this:

Books, as a cultural product, face important pressures. The pursuit of blockbusters by big publishers and retailers means that potential readers are exposed to a narrower set of titles.

It would appear that the New York Times is ignorant of the geometric explosion in the number of book titles published over the last decade and the increased number of distribution channels. Blockbuster sales are a product of more efficient distribution, not myopic gatekeepers or declining standards.

Once past that bit of priggishness, the editorial is a somewhat defiant claiming that books have fared better than music which, it notes, saw sales cut nearly in half in the last decade.

The resilience of the book business may be because of demographics. Like jazz, which is less prone to illicit downloads than hip-hop, books cater to older, less Internet-savvy customers. Publishers also avoided the recording industry’s mistake of wasting precious time suing customers and have rightly focused on promoting cheap and easy ways for them to download books legally.

That paragraph may be nonsensical but it does support a valid conclusion. Publishers have done a better job than record labels. The little-noted feature of the Kindle is the way that cloud publishing protects the rights of the publisher. Instead of sending copies of the book to the reader’s computer, the Kindle keeps the ebook within a secure environment.

That’s not the only bulwark defending books. Publishers deserve a lot of credit for standing toe-to-toe with Amazon over their predatory pricing scheme. Books ought to be cheaper because of the reduced cost of distribution. But Amazon has consistently promoted unrealistically low prices.

By introducing the agency model, publishers defended their ability to price their own product. Unfortunately, we’re only at the beginning of publishing’s descent into digital distribution. As Publisher’s Marketplace noted today, the Digital Book World Conference saw two financial analysts–Goldman Sachs analyst Matt Fassler and Susquehanna Financial Group’s Marianne Wold.–discussing the dominant book business:

Fassler believes that physical bookselling retail will continue to exist, albeit in downsized fashion. (But even in the height of the superstore era, he feels it was a better economic proposition for the customers than the operators.)

Wolk believes that Amazon makes little to no profit from ebooks as they try to maintain dominant market share, and doesn’t even think it’s a corporate goal to make much money from the sale of ebooks. She noted that “the consensus among Amazon watchers is that they assume Amazon will run roughshod over brick and mortar retailers” in the book business.

So, while e-books may have a promising future and the publishing industry defended itself against price deflation, the fate of the bookstore itself, is most likely going to be very different in a few years from what it is today.

Let’s make a bold prediction and say that independent bookstores will re-emerge as the center of the print book business. Barnes & Noble and Borders having long since gone out of business. print books will be sold at big box retailers for the hits and in small specialty shops for everything else. Selling books won’t be any easier as a business and we’ll never see the several thousand bookstores that once dotted the land again.

The US economy grew 3.2% in Q4 in real terms vs expectations of 3.5%. Nominal GDP was well below forecasts, rising just 3.5% vs expectations of 5.1% as the price deflator was up only .3% vs an expected 1.6% rise. Personal consumption was up 4.4%, .4% better than estimated. Trade also added to growth as exports rose while imports fell. Inventories were a drag, taking out almost 4% pts out of GDP and Gov’t spending was also a drag, by a modest .6%. Real final sales, which take out the influence of inventories, rose a solid 7.1% but in part because of a much less than expected inflation rate which will likely change in 2011. Spending on equipment and software rose by 5.8%, the slowest in 5 Q’s but the past 4 were up sharply. Residential construction rose 3.4%, the 1st up Q since Q3 ’09. Bottom line, the market likes the Real final sales figure but the price deflator was well below estimates where Nominal GDP was mediocre.

To highlight the contribution of a much less than expected price deflator to the GDP report, if it came in as expected at up 1.6% (instead of actual .3%), REAL GDP would have been reported at 1.9%.