The Big Picture

From Bear to Bull By Sector

Michael Panzner — Fri, 20 Nov 2009 19:02:38 +0000

Most investors know that the S&P 500 hit a record high in October 2007 and a (the?) low in March of this year. But when you break it down by sector, things are a bit more complicated.

Otherwise, for those who are wondering whether there is more upside ahead, the fact that four groups — telecom services, financials, energy, and utilities — have not seen new highs this month while the S&P 500 has might be a cause for concern.

Site of the Day: Innumeracy.com

Barry Ritholtz — Fri, 20 Nov 2009 18:30:43 +0000

Some good learnin’ here:

This web site stems from a personal interest in critical thinking and is a collection of links to articles and sites pertaining to numeracy and critical thinking. Links should be good for at least the date posted. After the posting date, link reliability depends on the policy of the linked sites. Some sites may require registration before allowing access.

The ‘Greatest Trade’: How to Make $20 Billion

Barry Ritholtz — Fri, 20 Nov 2009 15:30:22 +0000

The WSJ’s Greg Zuckerman has a new book out titled, The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.

Here is an excerpt from his recent WSJ column on lessons on the subject:

1 Don’t Rely on the Experts

Many investors lost big in 2007 and 2008 as housing crumbled and the stock market tumbled. But no one lost more than commercial and investment banks caught with toxic mortgage-related securities. These bankers were the very same ones who created these investments, and Wall Street’s top analysts had vouched for their safety, even as Mr. Paulson and others bet against the investments.

Lesson: When Wall Street is wheeling out its latest can’t-miss product, be skeptical.

2 Bubble Trouble

Some academics argue that financial markets have become more efficient. But a rash of financial bubbles in recent years — including housing, energy, technology and Asian currencies — suggests that markets are becoming harder to navigate, and are more prone to overshooting. Today, investors of all sizes read the same articles, watch the same business-television programs and chase the same hot tips. They invariably head for the exits at the same time.

Lesson: Have an exit strategy — and cash to cushion any tumble.

3 Focus on Debt Markets

Most investors track the ups and downs of the stock market but have only a vague sense of moves in debt markets. That’s a mistake. Early signs of trouble were seen in sophisticated markets that don’t get much limelight, like the subprime-mortgage bond market. These problems eventually felled the housing and stock markets, and the overall economy, a set of falling dominos that Mr. Paulson and his team correctly anticipated.

Lesson: Debt markets can do a better job predicting problems than stock markets.

4 Master New Investments

Mr. Paulson scored huge profits by buying credit-default swaps, a derivative investment that serves as insurance on debt. When risky mortgage bonds tumbled in value, Mr. Paulson’s insurance soared. But many experts were flummoxed by CDS contracts or shied away from educating themselves about these relatively new investments.

Mr. Paulson and his team had no experience with CDS contracts. But they put the time into learning about them.

Lesson: Educate yourself about the range of exchange-traded funds being introduced, some of which can play a valuable role in a portfolio.

5 Insurance Pays

A number of investors worried about a bursting of the housing market, but few did much about it, even though insurance, such as CDS contracts, at the time were selling at dirt-cheap prices. Out-of-the-money put contracts — options that pay off only if the market tumbles — also were trading at reasonable levels. As cheap as this insurance was, many pros ignored it.

Lesson: Don’t underestimate the value of a safety net, such as put options.

6 Experience Counts

Some of the biggest winners in the meltdown were middle-aged investors dismissed by some as past their prime. But they had experienced past market downturns, while some of the bankers and analysts caught flat-footed knew only good times.

Lesson: A historical perspective can be a valuable tool.

7 Don’t Fall in Love

With an Investment

In early 2009, Mr. Paulson became more bullish about the banks and financial companies that he had wagered against in 2008, after determining that these companies had improved their balance sheets. The moves resulted in profits this year.

Lesson: Even the greatest trade doesn’t last forever.

8 Luck Helps

In early 2006, Mr. Paulson determined that housing was in trouble and set out to profit from the impending fall. But some housing experts already had determined that real estate was overpriced; others had wagered against housing but could no longer stomach their losses. Just months after Mr. Paulson placed his historic trade, U.S. housing prices began to fall.

Lesson: Don’t risk too much in any one trade, even one that seems like a sure thing.

Good stuff, Greg.

Best of luck with the book promotion slog ahead of you!

Source:
‘Greatest Trade’: How You Can Make $20 Billion
GREGORY ZUCKERMAN
WSJ, NOVEMBER 15, 2009
http://online.wsj.com/article/SB125823321386948789.html

Deflationary Trend (Temporarily) Masked by Free Lunches

Barry Ritholtz — Fri, 20 Nov 2009 15:30:18 +0000

The Quote of the Day comes to us via Bloomberg’s Alice Schroeder:

“We’re in the midst of a deflationary trend that is temporarily being masked by inventory restocking and free lunches like Cash for Clunkers. Consumers are done with borrowing. They’ll keep refueling the deflation by going through their attics and garages to find stuff they can sell on Ebay to raise cash.”

-Gold Tells You U.S. Bubble Hasn’t Popped Yet

It’s All About Supply, Not Demand

James Bianco — Fri, 20 Nov 2009 15:00:15 +0000

Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

~~~

It’s All About Supply, Not Demand

Barron’s – A Foolish View of America’s Debt
America’s dependence on foreign capital to fund its fiscal and external deficits is anything but a joke. And as the dollar has declined steadily — not just in the past eight months but over the past eight-plus years — global investors’ willingness to continue to acquire and hold dollar assets has been open to question. But the latest Treasury International Capital data show that, notwithstanding growing criticism of American fiscal and monetary policies from abroad, foreign demand for long-term U.S. financial assets remains robust. And that’s after deducting a steady exodus of American investors’ money for foreign securities…While the Post cartoon expresses the popular view of America’s status as debtor, the real question isn’t whether the U.S. will pay back what it’s borrowed from abroad. In essence, can foreign purchases of Treasuries keep up with the widening deficit? That’s the question posed by Greg Blaha and Ryan K. Malo of Bianco Research in a note to clients. Back in September 2007, foreign purchases of Treasuries equaled 270% of new issuance, they note, as they sucked up the available supply of U.S. government securities in sight. That was before the budget deficit exploded last year owing to the economic collapse and the cost of the federal bailouts. By September 2009, foreign investors were taking down only 16% of Treasury issuance. Over the 12 months ended September, China’s net purchases of Treasuries totaled a hefty $101 billion. While that’s a record, “it pales in comparison to the U.S. deficit,” Blaha and Malo observe. China holds nearly $800 billion in Treasuries, but the $1.4 trillion deficit could expand by another $400 billion before abating, they add. Foreign investors are unlikely to absorb that extra supply, they conclude.

Comment

These quotes came from our TIC Update yesterday. Below is a quick recap:

The chart below shows weekly gross issuance of Treasury bills, notes and bonds since 1980. Issuance began to spike higher towards the end of 2007, peaking at $302 billion during the week ending September 26, 2008.

As the next chart shows, this increased issuance has not been met by more demand from foreigners. The blue bars show the monthly net purchases of Treasury securities by All Foreigners as a percentage of that month’s Treasury issuance. The red line shows China’s net purchases of Treasury securities as a percentage of issuance. Note that, in many cases, foreigners would buy more than 100% of all Treasury securities issued throughout the quarter. This series is measuring the monthly TIC number against issuance, not the actual percentage of the Treasury auctions foreigners are buying. Foreigners bought the equivalent of 270% of all Treasury issuance in September 2007, but this measure has since decreased to only 16% as of September 2009.

China’s Treasury purchases, shown below, totaled only totaled $101.11 billion in the year ending September 2009 (red bars, bottom panel). While this is a record annual amount of net purchases, it pales in comparison to the U.S. deficit. Some estimates of the budget deficit call for increases of another $400 billion before any signs of abating, and with China already being the largest holder of U.S. Treasury securities at $798.9 billion, it is highly unlikely they are going to be able to ramp up their Treasury purchases enough to cover this shortfall.

As the budget deficit widens and the U.S. government borrows more, the U.S. taxpayer will likely end up shouldering this burden. While this may not come as a shocking revelation, the sheer size of these numbers might. After comparing the budget deficit to probable increases in Treasury issuance to foreign purchases of bills, notes and bonds, it should be evident that foreigners are unlikely to be able to soak up all the new supply in the pipeline. For those who always hoped for a day in which the U.S. was not at the mercy of foreign purchases of U.S. securities, be careful what you wish for.

US$ rally continues

Peter Boockvar — Fri, 20 Nov 2009 13:11:00 +0000

Asian currencies continue to sell off vs the $ on the heels of the news yesterday that South Korea said they will look into hot money inflows stemming from the $ carry trade and the Bank of Indonesia said they are looking into the foreign buying of bills. This follows the news a few weeks ago that Taiwan was limiting foreign deposit holdings and Brazil was taxing foreign inflow transactions. As I mentioned yesterday, we may have reached a short term pain threshold in terms of $ weakness and foreign countries are fighting back as they certainly won’t wait for the Fed to act. The $ is also at a 2 1/2 week high vs the euro helped out by political infighting in the Ukraine that is holding up the 4th tranche of an IMF loan. Comments from PBOChina Gov gave no indication that they plan to alter the band of their peg to the US$ anytime soon. With 6 wks left in the yr and investors holding their nose, $ action alone will exaggerate equity moves.

Gold: Getting Fuzzy?

Michael Panzner — Thu, 19 Nov 2009 23:30:57 +0000

OK, it’s not quite the “magazine cover indicator”…

…but surely this must be telling us something about the gold market (lol)?

Hat tip LOLFed

Source:
Cats for Gold
http://www.catsforgold.com/

Microsoft Store “Spontaneously” Erupts in Synchronized Clapping

Barry Ritholtz — Thu, 19 Nov 2009 23:15:40 +0000

There are so many thing here that require an ass whupping I just don’t know where to begin:

• Why is there even such a thing as a Microsoft Store?
• Is this an example of their innovation?
• Why is the staff being forced to clap rhythmically — did they all do something wrong? Is this how they get punished?
• What is with the tonnage? Is there a free Cinnabon store next door? They seem to average 260+.

Look, I am not an Apple fanboy (though this is being written on a MacBook Pro and I hate to be just be a Mister Softee hater, but damn if this isn’t some bizarre combination of Lame X 10 and hysterical.

What was wrong with having a insanely profitable, widely reviled monopoly? Don’t go getting all warm and fuzzy on us — you are supposed to just mint money.

Instead, you have given the world a new formula for Humor: Microsoft + Attempts to be Hip = Comedy Gold!

Economy of Losers

Marion Maneker — Thu, 19 Nov 2009 20:00:51 +0000

Evan Newmark writes a regular column on the WSJ’s Deal Journal. His stock in trade is contrarian takes on the markets and politics. To the extent that he represents an extreme version of the Wall Street world view, he’s a bellwether.

Yesterday, he may have run the bell a bit too hard. In a post explaining why Goldman Sachs has nothing to apologize for–a completely legitimate position that can be debated with great nuance from both sides–Newmark insists on rolling this M-80 under the chairs of his readers:

In an economy full of losers, everyone is fixated on hating the winner.

He’s right about the world fixating on a winner. Goldman has made itself a lightning rod for the nation’s frustrations by being particularly ham-handed in their handling of their compensation. But that isn’t the issue here.

Where does Newmark get off describing the US as an economy full of losers? Does he not recognize that the vast majority of workers at all salary, skill and social levels who are out of work right now have lost their jobs due to the miscalculations and mismanagement of others?

The decisions that led to their dire financial situations certainly were not theirs. The loss of their jobs didn’t come because they were incompetent or made lousy products. You could blame them if those problems appeared over time as with the automakers but this is a collapse, an exogenous event in their working lives.

It’s bad enough that the world economy was mismanaged to a level that created a disruption that will fall disproportionately on persons who had no role in creating the bubble or reaping its rewards. That may be unfortunate and unavoidable. But do they really deserve to have Marie Antoinette Newmark call them “losers?”

Later, Newmark sums up with a thought that applies equally (in reverse) to himself:

It’s much easier for the public to point the finger at the great Goldman conspiracy than to point it at itself.

Source:
Don’t Apologize for Anything, Goldman Sachs
EVAN NEWMARK
Deal Journal/Wall Street Journal ; Nov. 19, 2009
http://blogs.wsj.com/deals/2009/11/18/mean-street-dont-apologize-for-anything-goldman-sachs/?mod=djemDeal

Squanderville v Thriftville

Barry Ritholtz — Thu, 19 Nov 2009 19:30:01 +0000

Squanderville versus Thriftville (Warren Buffet) in Fortune