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

This is what I read to prep for the Bloomberg guest hosting gig today:

• 140 top Twitter(ers) to follow (Time)

• What hedge fund managers know about making money (Marketwatch)
Meet five powerful players who move the global investment markets

• Stocks Shining as Bonds Lose Luster (WSJ)

• UK House prices down in most regions but London higher, says Land Registry (BBC)  See also Mortgage Servicers Resist But Cut Debts (WSJ)

• Tsunami Wall of Water Risk Well Known to Engineers, Regulators (Bloomberg)

• Eminem Lawsuit May Raise Pay for Older Artists (NYT)

• Patent Overhaul Gets Close, Draws Opposition (WSJ)

• New website: Lemonade: Detroit (“If not cars, then what?”) Exploring the “then what.”

That’s what has been coloring my morning . . .

Following Fed voting member Plosser’s perceived hawkish speech on Friday where he said what to do when the time arrives (whenever that will be) to proceed with an exit strategy, non voting member Bullard on Saturday said “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” as he thinks “the economy is looking pretty good.” It’s highly unlikely the Fed does stop before June 30th but either way, there is only 3 months left in the program. Treasuries are lower and the DXY higher in response but the $ continues lower vs the commodity currencies as the AUD is at a new record high and CAD is near the highest since ’07. We will get a rate hike from the ECB next week, likely 25 bps and one of the few voices in the UK that has voted to raise interest rates, BoE member Sentance, reiterated his desire for rates to go higher “sooner rather than later” as he discussed again the risk of having rates too low for too long. As Portugal’s government continues to twist in the wind, yields are making new highs as an expected bailout is doing nothing to ebb the rise in funding costs.

I have previously mentioned key levels to watch on various markets. I have been especially watching the S&P500 levels at 1310-15 — and we are right there.

Today’s trading is going to be crucial . . .

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If you are anywhere near a radio this mornings, I will be the guest hosting “Bloomberg Surveillance” with Tom Keene from 7:00 – 10 am.

I will be playing the role of Ken Prewitt !

You can catch it live, or via podcast at Bloomberg or at iTunes.

Should be fun . . .

Muni Defaults: Whitney and Roubini
David R. Kotok
March 26, 2011

http://www.cumber.com/

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“The rule on staying alive as a forecaster is to give ‘em a number or give ‘em a date, but never give ‘em both at once.”

–Jane Bryant Quinn, Reader’s Digest, 1 Dec. 1980

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Meredith Whitney broke the rule.  This now haunts her to the point that she declined to appear before a Congressional committee that wanted to discuss Muni default issues.  Nouriel Roubini is a skilled economist.  He knows this rule.  He, therefore, used modifiers to adhere to it.

Let’s talk about Whitney’s forecast first.  With great media fanfare, she predicted “50 to 100” sizeable muni defaults, totaling about $100 billion, in 2011.  That is correct: she said this year.  The year in which the economy is in some sort of recovery and when the interest rate is held near zero by the Fed.

Meredith did not know about any oil shock when she made this forecast.  While the current MENA turmoil is a serious new development, the resulting oil price shock will not help her be right in her forecast.  In our view, there is nearly zero chance that there will be 50 to 100 sizeable Muni defaults amounting to $100 billion in the calendar year of 2011.

Nouriel Roubini suggested that there may be “close to $100 billion of defaults over five years, but typical 80% recoveries are far higher than on corporate bonds.”  Nouriel outlined his view of trouble in the Muni world and attempted to measure the exposure in a very thoughtful way.  He noted that most of the bonds he expected to default were in the high-yield or junk-bond category.  His base-case estimate of defaults over five years for the investment-grade sector was under $30 billion, with “ultimate recovery” of nearly all the losses.  Nouriel reminds us that “governments cannot be liquidated” like corporations.

Bloomberg’s Joe Mysak observed the following about Roubini:

“And so noted doomsayer Nouriel Roubini joins the numerous commentators who have opined about the municipal bond market, the most famous, of course, being Meredith Whitney, who in December on the CBS show ‘60 Minutes’’ blurted out the prediction that there would be ‘hundreds of billions’’ of municipal bond defaults in 2011. That $100 billion estimate from the Roubini firm isn’t in the same league as the Whitney call. What’s more, it may not be so outrageous, depending upon how you count defaults. The record year for municipal bond defaults was 2008, when 167 issues totaling $8.5 billion went bust, according to the Distressed Debt Securities Newsletter. In 2009, more municipal bonds defaulted, 207, on a lower dollar amount, $7.3 billion. In 2010, 82 deals failed to pay on $2.7 billion in bonds. The $100 billion over the next five years isn’t outside the realm of possibility. How are you counting? The people at Distressed Debt Securities, who have been doing it for decades now and who are the only ones with a historical database over that time, and who use a consistent methodology in their approach, count new defaults only in their calculations, which I think is the correct way to do it. Some analysts, scanning the daily material event notices at the Municipal Securities Rulemaking Board’s EMMA web site, count all notices of default that are posted by issuers. And by doing it that way, by counting bonds that are already in default, you can come up with many more billions of dollars in defaulted municipals every year. That’s because it takes years to cure some of these things. In the case of so-called dirt-bonds, used to finance infrastructure improvements to real estate developments, for example, bondholders have to wait until the real estate is foreclosed upon and sold before they see any end to their money woes. Dirt bonds are the overwhelming majority of those that have defaulted over the past few years. The same long wait is true for bonds used to build speculative projects like toll roads, or de-inking mills, or aquariums, or any of the other various quixotic stuff that has been financed in the municipal market. Actual municipalities, that is, cities and counties, rarely default on their obligations. When they do, they usually cure them in pretty short order, in months if not weeks. Jefferson County, Alabama, which defaulted on almost $4 billion in sewer debt several years ago, is an outlier. If history is a guide, it probably will remain so. So, $100 billion over five years? That’s the headline number. It’s not impossible, especially if you count continuing defaults. Still, that’s quite a crystal ball.”

We believe it is important for readers to understand the term default. Here is the official definition from the Municipal Securities Rulemaking Board (MSRB).  Remember, bondholders are concerned about monetary defaults.  Non-monetary defaults are important because they tell you about the management of the organization or its political structure.  These non-monetary defaults actually can provide a bond buyer with opportunity for a bargain if he is willing to do the homework.

“DEFAULT–A failure to pay principal of or interest on a bond when due or a failure to comply with any other covenant, promise or duty imposed by the bond contract.  The most serious event of default, sometimes referred to as a ‘monetary’ default, occurs when the issuer fails to pay principal, interest, or both, when due.  Other defaults, sometimes referred to as ‘technical’ defaults, result when specifically defined events of default occur, such as failure to maintain covenants.  Technical defaults may include failing to charge rates sufficient to meet rate covenants, failing to maintain insurance on the project or failing to fund various reserves.  If the issuer defaults in the payment of principal, interest, or both, or if a technical default is not cured within a specified period of time, the bondholders or trustee may exercise legally available rights and remedies for enforcement of the bond contract.”

MSRB reported a Fact Book on the hundreds of thousands of items and on the 10.5 million muni trades for 2010.  There were 371 disclosures of a principal & interest delinquency;  these involved 1951 securities.  The overwhelming majority of them were in project-specific or otherwise non-rated or “junk” bonds.  So if you count them on the default list, the list gets bigger.

Does that mean you have to buy any of these bonds?  Certainly not.  Does delinquency mean an actual monetary default will occur?  Maybe yes, maybe no.  Each case is different.

When it comes to actual defaults in 2011, the statistics, so far, are improving.  “Municipal-bond defaults in the first two months of 2011 are down 50 percent from the same period last year, Standard & Poor’s said.  Eight bond deals totaling about $222 million have entered default this year, compared with 16 totaling more than $329 million during the same period of 2010,” said J.R. Rieger, vice-president of fixed-income indexes for S&P in New York (Bloomberg, March 4).

The media has been filled with talk about municipal bankruptcy.  This is a serious subject, of course.  But it, too, has been overblown.  Evidence from the 2008 Vallejo, California bankruptcy demonstrated how costly this is for a city or county.  Vallejo has spent nearly $10 million so far and has nothing to show for it.  The Bond Buyer, a trade publication, reports that “Vallejo bonds backed by non-general fund revenues amount to $62 million of debt. They have been paid in full and on time throughout the bankruptcy proceeding. They include securities with dedicated income streams including water revenue bonds, tax allocation bonds, and assessment and improvement district bonds.”

So far, in 2011, there has been just one Chapter 9 filing.  Bloomberg reported it:

“Boise County, Idaho, with a population of about 7,450, filed for bankruptcy, making it the first U.S. municipality to file Chapter 9 this year.  The county sought protection after a federal jury in December found the county violated federal fair housing law in its conduct related to a developer’s plan to build a 72-bed residential treatment facility for teenagers, the Idaho Statesman reported. The jury awarded a $4 million judgment to a developer, which hasn’t been paid. The county’s budget this year is $9.3 million. The county estimated its liabilities at less than $10 million, according to a March 1 filing in U.S. Bankruptcy Court in Boise. Alamar Ranch LLC, the developer, was the largest unsecured creditor with the $4 million claim. Idaho is one of 26 U.S. states that authorize municipal bankruptcy. Like Chapter 11 under the federal bankruptcy code, municipalities allows debtor to adjust debt. Unlike corporate bankruptcies, creditors can’t force municipalities into liquidation and the bankruptcy court has little oversight of municipal operations. Six municipal entities filed for Chapter 9 last year, most of them small utility or sewer districts. The capital of Idaho, Boise, is in adjoining Ada County.”

Whitney’s report does not delve deeply into the recovery history of Munis and into the technical details of default.  Nor does she examine the complexities of Chapter 9 bankruptcy..  That is a shame, since she does deserve credit for publicizing the important issue of budget stress in Muniland.

Roubini does examine recovery.  He offers estimates and methodologies.  And he thoroughly describes the issues involving Chapter 9. His conclusion is that Muni recovery is much higher than markets seem to be pricing and that the widespread use of Chapter 9 is unlikely.

We believe the Roubini report is straightforward and worthy of respect.  It is serious research work.  It examines nearly two centuries of development in state and local government debt in the United States. It explains the methodology that it used to reach conclusions and estimates. We are less respectful of the Whitney report.

Roubini also attempts to estimate the price adjustment needed in the market in order to normalize the Muni-treasury spread.  He notes that the financial crisis sell-off brought Munis to “absurd panic levels.”  He reminds readers that, while things are improved since these wide spreads, the Muni market is still under “extreme strain.”

Cumberland agrees with Roubini’s conclusion that the “ratio of Muni yields to Treasuries remains elevated.”  We continue to be buyers of well-structured, high-grade, tax-free municipal bonds and of corresponding taxable municipal debt.  They remain cheap, and spreads still have a ways to go before normalcy in pricing is attained.

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David R. Kotok, Chairman and Chief Investment Officer

Hey, I almost forgot these Chart Store specials:

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Cool graphic from tomorrow’s NYT:

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Source:
Is It a New Tech Bubble? Let’s See if It Pops
EVELYN M. RUSLI and VERNE G. KOPYTOFF
NYT, March 27, 2011
http://www.nytimes.com/2011/03/28/technology/28bubble.html

Originally published June 2005

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The Folly of Forecasting
Barry Ritholtz
The Street.com
06/07/05 – 01:05 PM EDT

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As a chartered member of the chattering class, I am all too familiar with the “perils of predictions.” Anyone who works in the financial field and speaks to the press eventually gets tagged for a market forecast gone awry. It’s an occupational hazard.

Unfortunately, investors all too often give these “predictions” in print or on TV far more weight than they should. It’s very easy for a confident-sounding analyst, fund manager or professor to say something on TV that can throw off the best laid plans of investors.

I wish an SEC-mandated disclosure accompanied all pundit forecasts: “The undersigned states that he has no idea what’s going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation.”

Don’t hold your breath waiting for that to happen.

The bottom line is that I’ve yet to find anyone who can accurately and consistently forecast the market behavior with any degree of accuracy, beyond short-term trend following. That inconvenient factoid never seems to dissuade the prophets — or the press — from their fortune-telling ways.

There are a few things that investors should keep in mind when encountering these speculations. Whenever you find yourself reading (or watching) someone who tells you where a stock or the markets are going, consider these factors:

“Bloomberg Game Changers” profiles Twitter co-founders Jack Dorsey, Evan Williams and Biz Stone.

This program features interviews with Twitter Chairman Jack Dorsey; Mike Maples, founder and managing partner of venture capital firm Floodgate; Tim O’Reilly, founder and chief executive officer of O’Reilly Media; Om Malik, founder of GigaOM; Meg Hourihan, co-founder of Blogger.com; Ryan Singel, writer for Wired.com; and Lou Kerner, vice president of Equity Research covering social media and e-commerce, Wedbush Securities. (Source: Bloomberg)

video after the jump

Read the rest of this entry »

Washington’s Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor.

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Just as with the Gulf oil spill – where BP, government spokesmen and mainstream talking heads spewed happy talk about how “benign” the dispersants were and how all the oil had disappeared – there is now an avalanche of statements that the radiation is at “safe” doses for everyone outside of the immediate vicinity of Fukushima.

For example, Japanese government call-in advice lines are telling people to simply rinse off any produce covered with radioactive dust.

Ann Coulter claims that radiation is good for you

It is not very confidence-inspiring that:

EPA officials, however, refused to answer questions or make staff members available to explain the exact location and number of monitors, or the levels of radiation, if any, being recorded at existing monitors in California.

Or that the EPA has pulled 8 of its 18 radiation monitors in California, Oregon and Washington because (by implication) they are giving readings which seem too high.

What Levels of Radiation Are Being Released?

So what levels of radiation are being released at Fukushima?

New Scientist reports that the radioactive fallout from Japan is approaching Chernobyl levels:

Japan’s damaged nuclear plant in Fukushima has been emitting radioactive iodine and caesium at levels approaching those seen in the aftermath of the Chernobyl accident in 1986. Austrian researchers have used a worldwide network of radiation detectors – designed to spot clandestine nuclear bomb tests – to show that iodine-131 is being released at daily levels 73 per cent of those seen after the 1986 disaster. The daily amount of caesium-137 released from Fukushima Daiichi is around 60 per cent of the amount released from Chernobyl.

Tyler Durden points out that – when you consider the fact that the amount of Caesium-137 released at Fukushima in the first 3-4 days of the crisis amounted to 50% that released by Chernobyl over 10 days – the real run rate of the radiation released at Fukushima is now about 120-150% the figure released by the Chernobyl explosion.

There are other signs of high levels radiation. See this and this. And it is important to remember that the amount of radioactive fuel at Fukushima dwarfs Chernobyl.

This Could Continue for a While

Many experts say that it could take months to contain Fukushima. See this and this. And therefore, high radiation levels might continue to be released for some time.

Evidence for the fact that a quick fix is unlikely is widespread. For example, reactors 1, 2, 3 and 4 were all leaking steam yesterday.

There was some indication that reactors 5 and 6 are leaking as well. As Kyodo News reports:

The firm [Tokyo Electric Power Company] also said it found both iodine-131 and cesium-137 in a sample taken from near the drain outlets of the plant’s No. 5 and No. 6 reactors that stabilized Sunday in so-called ”cold shutdown.”

CNN notes today:

Authorities in Japan raised the prospect Friday of a likely breach in the all-important containment vessel of the No. 3 reactor at the stricken Fukushima Daiichi nuclear power plant, a potentially ominous development in the race to prevent a large-scale release of radiation.

The New York Times reports:

A senior nuclear executive who insisted on anonymity but has broad contacts in Japan said that there was a long vertical crack running down the side of the reactor vessel itself. The crack runs down below the water level in the reactor and has been leaking fluids and gases, he said.***

“There is a definite, definite crack in the vessel — it’s up and down and it’s large,” he said. “The problem with cracks is they do not get smaller.”

The cores of reactors 1 and 3 appear to be leaking as well.

This is not to say that there will be a full meltdown which sends radioactive plumes high into the stratosphere. I am assuming that will not happen. But the release of radioactivity is severe and ongoing.

But Low Doses of Radiation Are Safe … Aren’t They?

While most would dismiss as crackpot ramblings Coulter’s claim that radiation is good for you, what about the pervasive claims that the amount of radiation which has been released is so low that it is “safe” for people outside of the immediate vicinity of Fukushima?

Physicians for Social Responsibility notes:

According to the National Academy of Sciences, there are no safe doses of radiation. Decades of research show clearly that any dose of radiation increases an individual’s risk for the development of cancer.

“There is no safe level of radionuclide exposure, whether from food, water or other sources. Period,” said Jeff Patterson, DO, immediate past president of Physicians for Social Responsibility. “Exposure to radionuclides, such as iodine-131 and cesium-137, increases the incidence of cancer. For this reason, every effort must be taken to minimize the radionuclide content in food and water.”

“Consuming food containing radionuclides is particularly dangerous. If an individual ingests or inhales a radioactive particle, it continues to irradiate the body as long as it remains radioactive and stays in the body,”said Alan H. Lockwood, MD, a member of the Board of Physicians for Social Responsibility.

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Radiation can be concentrated many times in the food chain and any consumption adds to the cumulative risk of cancer and other diseases.

John LaForge notes:

The National Council on Radiation Protection says, “… every increment of radiation exposure produces an incremen­tal increase in the risk of cancer.” The Environmental Protection Agency says, “… any exposure to radiation poses some risk, i.e. there is no level below which we can say an exposure poses no risk.” The Department of Energy says about “low levels of radiation” that “… the major effect is a very slight increase in cancer risk.” The Nuclear Regulatory Commission says, “any amount of radiation may pose some risk for causing cancer … any increase in dose, no matter how small, results in an incremental increase in risk.” The National Academy of Sciences, in its “Biological Effects of Ionizing Radiation VII,” says, “… it is unlikely that a threshold exists for the induction of cancers ….”

Long story short, “One can no longer speak of a ‘safe’ dose level,” as Dr. Ian Fairlie and Dr. Marvin Resnikoff said in their report “No dose too low,” in the Bulletin of the Atomic Scientists.

And Brian Moench, MD, writes:

Administration spokespeople continuously claim “no threat” from the radiation reaching the US from Japan, just as they did with oil hemorrhaging into the Gulf. Perhaps we should all whistle “Don’t worry, be happy” in unison. A thorough review of the science, however, begs a second opinion.

That the radiation is being released 5,000 miles away isn’t as comforting as it seems…. Every day, the jet stream carries pollution from Asian smoke stacks and dust from the Gobi Desert to our West Coast, contributing 10 to 60 percent of the total pollution breathed by Californians, depending on the time of year. Mercury is probably the second most toxic substance known after plutonium. Half the mercury in the atmosphere over the entire US originates in China. It, too, is 5,000 miles away. A week after a nuclear weapons test in China, iodine 131 could be detected in the thyroid glands of deer in Colorado, although it could not be detected in the air or in nearby vegetation.
The idea that a threshold exists or there is a safe level of radiation for human exposure began unraveling in the 1950s when research showed one pelvic x-ray in a pregnant woman could double the rate of childhood leukemia in an exposed baby. Furthermore, the risk was ten times higher if it occurred in the first three months of pregnancy than near the end. This became the stepping-stone to the understanding that the timing of exposure was even more critical than the dose. The earlier in embryonic development it occurred, the greater the risk.

A new medical concept has emerged, increasingly supported by the latest research, called “fetal origins of disease,” that centers on the evidence that a multitude of chronic diseases, including cancer, often have their origins in the first few weeks after conception by environmental insults disturbing normal embryonic development. It is now established medical advice that pregnant women should avoid any exposure to x-rays, medicines or chemicals when not absolutely necessary, no matter how small the dose, especially in the first three months.

“Epigenetics” is a term integral to fetal origins of disease, referring to chemical attachments to genes that turn them on or off inappropriately and have impacts functionally similar to broken genetic bonds. Epigenetic changes can be caused by unimaginably small doses – parts per trillion – be it chemicals, air pollution, cigarette smoke or radiation. Furthermore, these epigenetic changes can occur within minutes after exposure and may be passed on to subsequent generations.

The Endocrine Society, 14,000 researchers and medical specialists in more than 100 countries, warned that “even infinitesimally low levels of exposure to endocrine-disrupting chemicals, indeed, any level of exposure at all, may cause endocrine or reproductive abnormalities, particularly if exposure occurs during a critical developmental window. Surprisingly, low doses may even exert more potent effects than higher doses.” If hormone-mimicking chemicals at any level are not safe for a fetus, then the concept is likely to be equally true of the even more intensely toxic radioactive elements drifting over from Japan, some of which may also act as endocrine disruptors.

Many epidemiologic studies show that extremely low doses of radiation increase the incidence of childhood cancers, low birth-weight babies, premature births, infant mortality, birth defects and even diminished intelligence. Just two abdominal x-rays delivered to a male can slightly increase the chance of his future children developing leukemia. By damaging proteins anywhere in a living cell, radiation can accelerate the aging process and diminish the function of any organ. Cells can repair themselves, but the rapidly growing cells in a fetus may divide before repair can occur, negating the body’s defense mechanism and replicating the damage.

Comforting statements about the safety of low radiation are not even accurate for adults. Small increases in risk per individual have immense consequences in the aggregate. When low risk is accepted for billions of people, there will still be millions of victims. New research on risks of x-rays illustrate the point.

Radiation from CT coronary scans is considered low, but, statistically, it causes cancer in one of every 270 40-year-old women who receive the scan. Twenty year olds will have double that rate. Annually, 29,000 cancers are caused by the 70 million CT scans done in the US. Common, low-dose dental x-rays more than double the rate of thyroid cancer. Those exposed to repeated dental x-rays have an even higher risk of thyroid cancer.

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Beginning with Madam Curie, the story of nuclear power is one where key players have consistently miscalculated or misrepresented the risks of radiation. The victims include many of those who worked on the original Manhattan Project, the 200,000 soldiers who were assigned to eye witness our nuclear tests, the residents of the Western US who absorbed the lion’s share of fallout from our nuclear testing in Nevada, the thousands of forgotten victims of Three Mile Island or the likely hundreds of thousands of casualties of Chernobyl. This could be the latest chapter in that long and tragic story when, once again, we were told not to worry.

Note: People who rationally discuss the hazards from nuclear accidents are dismissed as “anti-nuclear”. However, that is like saying that people who are against pilots drinking tequila during flights are anti-flying. As Bloomberg points out, the operator of the Fukushima reactors faked safety tests and results and cut every corner in the books for decades, just as BP cut every safety corner prior to the Gulf oil spill. Moreover, the Fukushima reactors were not designed to withstand an earthquake or a tsunami, and their peculiar design makes the spent fuel rods an even greater danger than the reactors themselves.

Demanding a safer design – e.g. thorium reactors – and ongoing maintenance and safety tests doesn’t mean one is anti-nuclear.