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

Some interesting reads for your reading pleasure:

• Bruce Bartlett: Are Taxes High or Low? A Further Look (Economix)
• Around the world in 25 megabanks (FT)
• The biggest market you’ve never heard of (Gigaom)
• Voters Want Obama to Put Winning the Present First: Albert Hunt (Bloomberg)
• All Work and No Pay: The Great Speedup (MoJo)
• Nanoparticles hit tumours with one-two punch (Nature News)
• New Math in HIV Fight (WSJ)
• InTrade + Jon Huntsman: Why Media’s Faith in Internet Betting Is Foolish (New Republic)
• Sentimental Value: Shopping for Human Stories on eBay (Brain Pickings)
• Clarence Clemons Tribute  (Wolfgangs Vault)

What are you reading?

Do the Apple Store Dance with Trevor Moran 6/14/2011 10:30:33 PM
When Trevor Moran walks into his local Apple store in Temecula, Calif., the 12-year-old isn’t there to shop. He’s there to dance – and then post it online. And he’s not the only one. WSJ’s Yukari Iwatani Kane reports on the Apple Store Dance phenom.

May Existing Home Sales at 4.81mm annualized were about in line with expectations and down from a revised 5mm in April (5.05mm initial report). It’s the lowest sales volume since Nov with both single family and condo/co-op sales falling. Even though the absolute number of homes for sale fell by 39k, the sluggish sales pace had months supply rising to 9.3 from 9.0, the most since Nov. Regionally, the area with the most foreclosures, the West, saw sales unchanged but the Northeast, Midwest and South all saw declines. Distressed sales totaled 31% of sales, down from 37% in April. The median home price fell 4.6% y/o/y from the tax credit induced jump last year, thus those that bought then are now underwater today. Oh the unintended consequences of not letting a market clear. The NAR is still citing continued tightness in lending standards in holding back a recovery, in addition of course to a still very sluggish economic environment. With mortgage rates averaging a very low 4.59% in May, it’s clearly not the cost of money that is the factor, it is the access to it.

Last week, I fielded a wide range of questions (@Ritholtz) from the StockTwits community, touching on Bailout Nation, indicators I watch, investment ideas, thoughts on social media, and my borderline inappropriate relationship with Josh @reformedbroker Brown.

No questions were off limits

Here are my answers, with spelling and typos mostly cleaned up, links included:

Enjoy….

*****************************

@StockTwits: Welcome to the StockTwits Midday Q&A with @ritholtz. Barry, thanks for taking questions from our Community.

@ppearlman: Does the market close higher or lower from here at year’s end?

@Ritholtz: How on earth do I know? LOL. But its a telling question, and the fuller more appropriate response is here: http://bit.ly/jozgqU

@harmongreg: how many blog posts do you do per day? And do you have a ghost poster?

@Ritholtz: I do a long post early AM, then linkfest, and chart later on. If you look at the site, Think Tank tab is where guests post.

@ZorTrades: we worked at the same place years ago coleman/investec-ernst/maxim, how long do you think the transactional model will last?

@Ritholtz: Rapidly consolidating on Institutional side, slowly dying on the retail side. (But I thought Retail BD was dead 10 years ago!)

@StockSage1: Does the euro-zone accelerate their progress towards a federal/super-sovereign fiscal authority or continue wasting time? And does the ECB give in after the markets call their bluff? i.e. Monetize and continue to hold defaulted Greek paper as collateral?

@Ritholtz: Dunno about ECB — Like ours, their Bailouts encourage more bad economic behavior. Better off with pre-packaged bankruptcy.

@ctringham: What is the ‘normal’ correction size after a 100% rally like the one we had over the past 2 years?

@Ritholtz: Only 2 prior examples: 1933 and 1938 (100% rally following 50% or more selloff) Each time, nearly all the gains were lost!

@reformedbroker: What are we doing for lunch today?

@Ritholtz: Tradional Carbo loading ala Lindzon!

@harmongreg: when do you think (approx) we will see a bottom in housing?

@Ritholtz: Housing remains 8-10% overvalued; Question is will it revert to mean or careen past? Depends on UE and next recession.

@ivanhoff: does fusionIQ trade solely on an algorithmic basis and how often your does personal intuition override your system’s signals?

@Ritholtz: Fusion IQ is the tool we develop + use; Trading depends upon some additional factors, but goal is always Safe Alpha generation.

@enni82: What do you think of the future of solar power?

@Ritholtz: It is limited because the sun will burn out in 6 billion years. But if you can work with that time limitation. . .

@zerobeta: Does @ReformedBroker really write all his blog posts while listening to Sarah McLachlan?

@Ritholtz: He is actually a huge Indigo Girls fan, I am constantly telling him to turn that crap down!

@ajb_2010: Who’s your favorite actor from the Doctor Who series?

@Ritholtz: I’ve warmed up to the new doctor (Matt Smith) but adore David Tennant.

@gvwolf3: Suggestions on how to get into investment management industry? Equity research?

@Ritholtz: Fall assbackwards into it like I did!

@dominicrivera: who’s the better blogger? You or @thereformedbroker?

@Ritholtz: One day the student shall surpass the master.

@ReformedBroker: dude, cmon….

@ivanhoff: what was the biggest drawdown in your investment career?

@Ritholtz: With Options, 100% loss. With equities, nearly as bad early on. I swore that would never happen again, and consider it tuition.

@chicagosean: When your book Bailout Nation came out, you must’ve made some enemies in high places. Any good stories?

@Ritholtz: More nuanced than you would imagine. Less overt, more subtle. Life is too short to deal with jerks and creeps, so I ban commenters and block Tweeters with Extreme Prejudice.

@chicagosean: Any plans to write “Bailout Union” for our European friends?

@Ritholtz: None whatsoever; let the Europeans write their own damned books! Next book I write will be on using RISK/REWARD equation to obtain better results. Not market timing, but Opportunity Management.

@ivanhoff: what are the major elements of your favorite investment setup. 52wk high, 52wk lows, volume expansion, range expansion…?

@Ritholtz: 6 factors: Upward price, High Short interest relative to float, Expanding volume, Low Institutional Ownership, disliked by Analysts, and way off highs.

@stinkystank: in your response to @ivanhoff, you said Low Institutional Ownership. Can you expand on this?

@Ritholtz: Low Institutional Ownership relative to historic means — it suggests big potential buyers previously sold, and may rebuy.

@ivanhoff: what do you think is the best background for a good investor – lawyer, philosopher, comedian, engineer…?

@Ritholtz: Hanging curve ball: http://bit.ly/kvP553

@weissben: as a trend setter in the financial blogosphere, where do you source the bulk of your material? How are you using social media?

@Ritholtz: A combination of MSM, other bloggers, a few intelligent curators, and the voices in my head (they never shut up!).

@StockTiger: Gold metal has not come back to touch its 60-week EMA in two years – when is it coming?

@Ritholtz: I don’t know how to value gold, so I lose an important component of my methodology. Its about finding a greater fool to me.

@howardlindzon: who was a mentor in the biz?

@Ritholtz: Oooh, good question. Too many for 140 characters — it should really be a post.

@ivanhoff: how do u think social media is changing the way people trade/invest? Is it for better or for worse?

@Ritholtz: It depends upon the Venue. Yahoo Message Boards became a cesspool and were worthless; Filtering/Policing here on StockTwits add huge value. Truth is a key factor in Investing; and self-delusion rampant amongst Traders. Collective process gets to Truth = better results.

@weissben: which bloggers/curators do u read?

@Ritholtz: http://www.ritholtz.com/blog/blog-roll/

@CO_Trader: I’m young and interested in markets/trading but don’t work on The Street or have connections there? What’s my first step?

@Ritholtz: Start reading: See this http://bit.ly/lelWg9 and this http://bit.ly/dEtu1x for good books to begin with.

@ivanhoff: how often are you wrong in your investment/trading decisions?

@Ritholtz: Wrong about half the time. Its part of investing — Secret is to max out when you are correct / minimize damage when wrong. One of my favorite things I’ve written was this (from 2005): “Expect to Be Wrong in the Stock Market”

@Ritholtz: Last thing on wrong: Call it “Strong Opinions, Weakly Held.” Trust your process, but be willing to reverse http://bit.ly/k0BvZd

@allstarcharts: what are a couple of your favorite leading indicators for the US Equities Market that you are currently watching?

@Ritholtz: LEIs, Retail Sales, SPX ECRI Index.

@Ritholtz: The Collective YOU. You are the most dangerous person to yourself! YOU listened eejits, put on Trade, made decision, lost $$

~~~

@Ritholtz: Hey guys, thanks for all your questions — hope I answered them! 140 characters is tough to answer nuanced queries . . .

- Compiled by Sean McLaughlin: Editor, StockTwits (@chicagosean)

Latest space telescope picture combines images from multiple wavelengths to shed light on galaxy 11m light years from Earth. New Hubble space telescope image of Centaurus A, a relatively close neighbor of our galaxy, the Milky Way.

Source: Hubble photograph of Centaurus A reveals bright jewel behind dust (The Guardian, June 19, 2011)

Hubble photo via Guardian

Source: Hubblesite.org

Economic & Copper Advisory Services: Economic Report – June 2011
By John Mauldin
June 19, 2011

~~~

This week’s Outside the Box is from one of the more interesting thinkers and observers of the markets I know, Simon Hunt. When we get together in London, conversations are lively, as we don’t always see eye to eye; but we can always discuss, in a very civil manner, the affairs of the world. This particular piece is wide-ranging and thought-provoking. Simon is always ready to apply actual times to his predictions, and he has held steady on them for years.

It is late here in Geneva and I have to get up early for a speech. A big thanks to Hervig von Hove of Notz Stucki for hosting one of the more stimulating dinners with 16 people I have enjoyed in a long time, at his home out in the country, on a perfect night. I will probably make the discussion there the topic of this week’s letter. Charles Gave was in rare form. The Swiss gnomes were so very fascinating, and we had such an international table. These are the nights I wish my 1 million closest friends (a few of whom were there) could listen in on. More to come on Friday!

Your living for these moments analyst,

John Mauldin, Editor
Outside the Box

JohnMauldin@2000wave.com

Steve Randy Waldman writes about finance and economics at the website Interfluidity.

~~~

In a party-line, 5 to 4 split, the Supreme Court last week severely curtailed investors’ practical ability to hold financial intermediaries accountable for fraud. The case, Janus Capital Group, Inc. v. First Derivative Traders, seems arcane. But for perpetrators of fraudulent securitizations, it is a jubilee. The Supreme Court has eliminated the danger of their being investigated and sued by the people whom they fleeced.

The decision limits the reach of Rule 10b-5:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

• To employ any device, scheme, or artifice to defraud,
• To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
• To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

The case concerned a mutual fund whose prospectus was alleged to contain misleading statements that harmed investors. The question before the Supreme Court was not whether the statements were in fact misleading, but who should be construed as having made the statements. The answer, the Court determined, is perhaps nobody at all. Misleading statements were made, but literally no one can be held accountable.

When an ordinary firm issues securities, the firm itself is the “person” who makes the statements that appear in prospectuses and other disclosures. But with dedicated investment vehicles, things are more complicated. Investment vehicles — mutual funds and ETFs, but also securitizations like RMBS and CDOs — segregate the management and operation of the fund from the legal entity whose securities investors hold. If you “own” a Janus mutual fund, the securities you hold are likely claims against an entity called Janus Investment Fund. But Janus Investment Fund exists mostly on paper. Another company, Janus Capital Management, actually does everything. The human beings who make day-to-day investment decisions, as well as the offices they work in and the equipment they work on, are provided by Janus Capital Management. Communications and legal formalities, including prospectuses, are drafted by employees of Janus Capital Management.

The Supreme Court held is that, even though employees of Janus Capital Management company actually wrote any misleading statements, even though they managed nearly every substantive aspect of the operation of the fund, they cannot be held responsible because they did not “make” the statements. The “person” under law who made the statements was the entity on whose behalf the offending prospectus was issued, the investment fund, which has no capital other than the money it invests for shareholders. Under Janus, the management company is beyond the reach of aggrieved investors.

Then can the fund be meaningfully held accountable? The fund does have an “independent” board of directors, who in theory work for shareholders and “negotiate” the terms of the management contract. In practice, the management company typically organizes the fund and selects its directors. Still, if the investment fund “made the statement”, then surely those directors would be accountable, right? No. The investment fund’s directors supervise the fund at a very high level. In a large “fund family”, the same directors may be responsible for tens or hundreds of different portfolios. They may not have understood that statements in some prospectus were misleading. A violation under Rule 10b-5 must be knowing or reckless to be actionable. So the fund’s directors may prove beyond reach. Outright lies may be told, yet investors may find they have no practical means of holding anyone accountable. Justice Breyer, who dissents from the Court’s decision, writes

The possibility of guilty management and innocent board is the 13th stroke of the new rule’s clock. What is to happen when guilty management writes a prospectus (for the board) containing materially false statements and fools both board and public into believing they are true?

Plausible deniability is the order of the day. Managers can be as nasty as they wanna be. As long as their misbehavior is obscure enough that fund directors can plead ignorance, nobody gets in trouble. (If directors could be held liable, then the management company might be in jeopardy as well, under Section 20(a) of the Securities Exchange Act. But if the directors are innocent, then so are the managers.)

The really high-stakes fraud lately has been in the securitization business. The Janus decision gives CDO arrangers a huge get-out-of-lawsuits-free card. Each asset-backed security or CDOs is its own little investment company, a “special purpose vehicle” with its own notional directors or trustees, often incorporated in the Cayman Islands. Under the reasoning of Janus, any misleading statements in the offering documents for a securitization were made by the SPV, not the investment bank that put together the documents or arranged the deal. The SEC relied in part on Rule 10b-5 in prosecuting Goldman Sachs for its failure to disclose material facts regarding the ABACUS deal. Under Janus, that would no longer be possible. Investors in securitizations can hold literally no one accountable for lies or misstatements in the offering documents. (The directors and trustees of an SPV have little substantive role in managing its operations or controlling its communications, so they would almost certainly be “innocent”.)

In theory, Rule 10b-5 is not investors’ only redress against securities fraud. Mutual fund operators and arrangers of securitizations are underwriters as well as managers. Underwriting is fraught with conflicts of interest, so Sections 11 and 12 of the Securities Act of 1933 give investors the right to sue when misleading statements come to light. These sections offer powerful tools to investors in public offerings of ordinary shares. But they are not so useful to buyers of mutual funds or securitization deals.

When material mistruths about an ordinary firm are exposed, its share price typically drops. This provides a measure of the loss “caused” by the misstatement. The value of mutual fund shares, however, is computed according to the NAV of the fund’s assets, and so is not usually affected by a revelation. Sections 11 and 12 of the Securities Act specify that investors are to recover losses “resulting from” the misstatement. Showing that any losses are due to some other cause is an affirmative defense. So mutual fund managers argue, often successfully, that the proximate cause of investor losses are declines in the value of portfolio assets, declines which are unrelated to any misstatement on their part. Rule 10b-5, on the other hand, doesn’t provide for such a defense. In Rule 10b-5 actions, courts can take into account “transaction causation” (“but for the lie, I wouldn’t have invested!”) and consider investor losses more flexibly.

Read the rest of this entry »

While there are no “4 more years” chants in Greece, we all hope that George Papandreou gets a thumbs up tonight within the Greek government to continue on with the budget cuts that must be followed in order for the country to avoid an outright default by receiving the next round of money from the EU and IMF. As the Irish can specifically speak to, the populace will pay for the recklessness of the bondholders. Assuming the PM wins, the parliament will then vote next Tuesday on the budget. The market is saying Papandreou will be victorious as 5 yr CDS is down 400 bps, back below 2000 and yields are lower. Greece did sell 3 and 6 mo paper successfully but it’s mostly just their banks that are rolling over maturing debt. The economic confidence of the Germans has changed for the worse due to everything that is going on, including the possibility of slowdown in Asia as the June ZEW fell to -9.0 from +3.1 and was 6 pts below expectations and lowest since Jan ’09. Current Conditions held in though, falling just 4 pts from last month’s record high.

The fear of a brief melt up in response to the eventual Greek rescue is why we covered shorts yesterday.

Ahead of the confidence vote in Greece tonight, the euro and European markets are bouncing higher off of three-month lows. Asian stocks are also in the green.

I am running off to speak to Fund Allocators from Europe at a Citywire event — but I will be back later.

Kiron Sarkar lives in London and Ireland where he works as a money manager. He occasionally attends the Scarsdales Equity idea lunches when he comes to New York, which is where I met him.

~~~

The Chinese National Bureau of Statistics reports that home prices declined in 23 cities in May (out of 70), more than the 16 cities which experienced a decline in April. Rising, but still suggests that the property bubble is continuing in the majority of the main Chinese cities. The outlook for Chinese property developers was cut to negative from stable by S&P a few days ago – they added that price declines of 10%+ were certainly a possibility in the next 12 months.

The property price bubble extends to Hong Kong. The Financial Secretary, Mr Tsang continued to warn against the recent exuberance, stating that prices were “quite frightening”. S&P warns of a “sharp correction”;

The Chinese equity market declined to a 9 month low today – some 14% since mid April indeed. Just thought I’d remind those of you who remain bullish. For full disclosure purposes, I am short China, through the US listed ETF (ticker FXI);

Chinese stockpiling of rare earths (they produce approx 90% of Global

production) has resulted in prices doubling in the last 3 weeks. Last year, China reduced exports by 40%. China is clearly trying to manipulate the market, but at these prices, will there be any commercial buyers (source FT);

There are increasing signs that the Indian RBI is concerned about slowing growth. The market has priced a further 75bps of tightening this year – this may prove to be too aggressive.

The Indian Sensex declined to a 4 month low today – one reason for today’s sell of was due to a report that suggested that investments routed through Mauritius (most Indian focused funds are based in

Mauritius) would not be tax exempt;

The Turkish Central Bank is trying to curb consumer lending.

Basically, they have increased costs for banks that exceed a new limit for consumer lending. If consumer loans exceed 20% of total loans, a bank must increase its general provision to 4%, from the 1% current rate. Turkey has a massive current account deficit and wants to curb consumer spending;

Russian President Mr Medvedev suggests that he will not stand against Mr Putin in the next Presidential elections. A whole series of rambling comments – very Russian – can someone translate please;

Well had to go back to Greece. The Euro Zone Finance Ministers decided to delay a decision (to July) to provide Greece with the additional E12bn, until Greece passed the necessary legislation to cut the State’s budget deficit and implement the privatisation scheme. The Greek PM is to face a confidence vote tomorrow – silly chap called for one. The EU Heads of State meet on 23/24th June. In addition, representatives of the EU/ECB/IMF are back in Athens to check the books – the opportunity for the Greeks to fiddle the accounts has gone.

Personally, I believe the decision to delay providing more financing is sensible – Greece just has not delivered on its commitments.

However, I still believe (just) that the further tranche of E12bn of bail out funds will be provided to Greece.

Euro Zone Finance Ministers still bleat on about a “voluntary participation” by the private sector ie sign up to an extension of maturities on Greek loans or we will force you to drink retsina/ouzo for the rest of your life, whilst listening to Greek politicians make yet more promises. Where are the relevant papers – quick !!!!

The Greek opposition stated today that they had agreed to be part of an unity Government last week, though the PM subsequently withdrew the offer !!!!!;

The FT reports further protests by the Spanish against austerity measures. Protests and civil disorder will rise. You really need to introduce some growth measures. These “hair shirt” austerity measures just wont work economically, politically, financially or for the people, particularly in the more volatile Southern Europe.

Spanish banks are relying on ECB funding much more – ECB funding rose to E53bn in May, up from E42bn in April. A recently introduced scheme in Spain penalises Spanish banks from paying excessive amounts to gain deposits. The Result, more demand for ECB funding. Good luck Mr Trichet;

Italian April industrial orders slumped by -6.4% in April, the largest decline since August 2009. Wow – not good news, though maybe Japanese disaster related;

Better news from Germany – the Bundesbank state that German GDP growth will be 3.1% this year (expect a higher number). However, the 2012 forecast is 1.8%;

Fitch reports that Euro Zone Finance Ministers are to back a plan, supported by the ECB, dubbed “Vienna plus”. Basically, holders of Greek debt, maturing within the next 3 years will not only be “encouraged” to continue to hold these bonds, but, in addition, to buy new longer term bonds. Fitch adds that it would lower Greece’s sovereign credit rating to “restricted default” under such a plan.

Essentially, such a scheme will allow the ECB to continue to accept Greek bonds as collateral. Complete mickey mouse stuff;

Consumer credit is expected to rise by a third this year. The current lending boom is resulting (what a surprise) in rapidly rising bad debts – currently 6.1% and expected to rise to 8.0% by year end. At 250% per annum, what do you expect !!!!;

Some great points from Mr Andy Lees of UBS (a must read daily note) today, I summarise.

Even after a 5th year of a record corn harvest, production will not meet demand. Chinese consumption exceeds Brazil’s entire production (I remain particularly bullish on the agricultural sector) Average income in the UK has declined by the most since 1870, as inflation is much higher than wage increases The Chinese are warning that the growth of imports will slow and that export prospects are not optimistic. Retail sales are below GDP growth. Expect more Fixed asset capex coming through again ie another stimulus programme;

A number of people trade Sovereign CDS’s – I do not. There are serious issues as to whether CDS’s will actually pay out – beware;

Summary

Asian markets generally down, yet again (ex Japan which was flat).

Europe is down again, following the delay in providing the Greeks with more money. US markets have opened lower.

Oil (Brent) has declined to a 4 month low of US$111.60 at present.

However, supply/demand data suggests to me that Oil will not decline back to the mid 80′s expected by most analysts. Whatever, I certainly wont short.

US, UK and German Government bonds continue to rise. Should have followed my own advice. Ho hum.

Euro is looking weaker, even against Sterling. May bounce back following an EU deal on Greece, but thereafter, I remain of the view that it will weaken further.

Must say, I had thought that there would be a bounce in the markets, assuming a resolution re Greece. However, given today’s news, no such luck. I should stick to my positions, rather than trying to trade.

However, the markets are not that badly off at present.

Best

Kiron