Note: To enlarge picture, double-click inside of it.
Wednesday, May 05, 2010
Primer on How Goldman Sachs Used Credit Default Swaps
Note: To enlarge picture, double-click inside of it.
Monday, April 26, 2010
Caterpillar Swings to Profit; Where are the Revenues?
Caterpillar swung to a profit in the 2010 first quarter, citing improved economic conditions, particularly in emerging markets. But wait, revenues fell 11%. Remember, the first quarter of 2009 was the depth of the recession, the so-called bottom. Everything has to be better when compared to the first quarter of 2009. Profits are up; but, wait a minute, revenues are down. (I thought we were in a robust macro-economic recovery as the New York Times tell it.) How can that be? Oh, Caterpillar improved its profit due to firing huge numbers of people. Now, I clearly see what has happened. And, it does not portend well for a turn-around in construction equipment sales, nor for a sustainable economic recovery.
Friday, April 23, 2010
Cash for Tanners: A New Subsidy for Vacations
Have Europeans lost their minds or what? According to European Commissioner Antonio Tajani, visiting foreign countries is a "right." Yes, vacations are no longer a privilege but a right of all. The EU has a new "Social Tourism" project that advocates subsidized holidays for the underprivileged. Cash for tanners is also being touted as good economic policy. Has anyone in Europe taken a basic economics course? If not, they should enroll in one of my economic courses! (Once again, I am just not that creative to make this stuff up.)
This project targets the disabled, poor families, senior citizens and, youth. (By the way, in Europe a youth includes an individual up to 30 years of age.) At an EU meeting last week, Spanish Tourism Minister Miguel Sebastian said tourism "should be an asset all citizens can enjoy, in particular those with physical disabilities or financially disadvantaged." Now, I know why Spain is in that category of countries referred as "PIIGS."
Currently, "Social Tourism" is being touted only in Europe. However, I am confident that "Cash for Tanners" will soon find its way to our shores. If I were you, I would be getting vacation brochures from your local travel agencies. I know, I am.
This project targets the disabled, poor families, senior citizens and, youth. (By the way, in Europe a youth includes an individual up to 30 years of age.) At an EU meeting last week, Spanish Tourism Minister Miguel Sebastian said tourism "should be an asset all citizens can enjoy, in particular those with physical disabilities or financially disadvantaged." Now, I know why Spain is in that category of countries referred as "PIIGS."
Currently, "Social Tourism" is being touted only in Europe. However, I am confident that "Cash for Tanners" will soon find its way to our shores. If I were you, I would be getting vacation brochures from your local travel agencies. I know, I am.
Tuesday, April 20, 2010
Pay People for not Working, More People will not Work!
Who made the following three statements? You just might be surprised when you find out!
"To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment."
"Government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it."
"Government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer."
ANSWER
"To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment."
"Government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it."
"Government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer."
ANSWER
Friday, April 16, 2010
Vancouver Real Estate Bubble
And, I thought that our sub-prime real estate debacle was bad. Wait until you see what a $1 million will buy in Vancouver.
Thursday, April 15, 2010
VAT Lessons from Europe
In today's (Thursday, April 15) "Opinion Page" of the Wall Street Journal is an excellent that explains the European experience with the "Value Added Tax (VAT)."
A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is approximately 17.2%. (See the following table.) In the U.S., the VAT would undoubtedly be levied on top of federal, state and local sales taxes that range as high as 10%.
Selective excerpts of the article are as follows:
"One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%."
"The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%."
"Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe."
"The very efficiency of the VAT means that it throws off huge amounts of revenue that politicians eagerly spend. The VAT thus becomes an engine of even greater public spending. In Europe, average government spending was about 30.2% of GDP when VATs began to spread in the late 1960s. Today, those governments are more than 50% larger, with spending of 47.1% of GDP on average. By contrast, U.S. government spending (federal and state) rose to 35.3% from 28.3% as a share of GDP in the same period."
"It is precisely this revenue-generating ability that makes the VAT so appealing to politicians. Even liberals understand that at some point high income tax rates stop yielding much more revenue as the rich change their behavior or exploit loopholes. The middle-class is where the real money is, and the only way to get more of it with the least political pain is through a broad-based consumption tax such as a VAT."
"In Europe, VAT has also meant lower levels of income growth and job creation. From 1982 to 2007, the U.S. created 45 million new jobs, compared to fewer than 10 million in Europe."
I believe the above facts speak for themselves. Once again, you have been forewarned.
A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is approximately 17.2%. (See the following table.) In the U.S., the VAT would undoubtedly be levied on top of federal, state and local sales taxes that range as high as 10%.
Selective excerpts of the article are as follows:
"One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%."
"The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%."
"Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe."
"The very efficiency of the VAT means that it throws off huge amounts of revenue that politicians eagerly spend. The VAT thus becomes an engine of even greater public spending. In Europe, average government spending was about 30.2% of GDP when VATs began to spread in the late 1960s. Today, those governments are more than 50% larger, with spending of 47.1% of GDP on average. By contrast, U.S. government spending (federal and state) rose to 35.3% from 28.3% as a share of GDP in the same period."
"It is precisely this revenue-generating ability that makes the VAT so appealing to politicians. Even liberals understand that at some point high income tax rates stop yielding much more revenue as the rich change their behavior or exploit loopholes. The middle-class is where the real money is, and the only way to get more of it with the least political pain is through a broad-based consumption tax such as a VAT."
"In Europe, VAT has also meant lower levels of income growth and job creation. From 1982 to 2007, the U.S. created 45 million new jobs, compared to fewer than 10 million in Europe."
I believe the above facts speak for themselves. Once again, you have been forewarned.
Monday, April 12, 2010
Why The Coming Wall Street Movie Really Does Portend Another Crash
Some things just never change. We will soon find out!
Saturday, April 10, 2010
Repo 105
Great video that explains how Lehman deceived the investment public through an accounting technique referred to as "Repo 105." For example, if Lehman owned a bond that was worth $105, it would sell it on the repo market for $100. (Technically, the seller of the repo agrees to purchase it back, say within day to a week.) The "105" in Repo refers to the fact the bond is worth at least 105% of what the seller (Lehman) was receiving for them. Since Lehman was only receiving $100 for $105 worth of collateral, Lehman could record it as a sell of securities and not a loan. However, for all practically purposes, it was a loan.
Why did Lehman institute Repo 105? By instituting Repo 105, it made its financial position look a whole lot better than what it really was. Let's assume that Lehman had assets of $105 and liabilities $100 and equity of $5. Therefore, Assets = Liabilities + Equity. Given these financial numbers, Lehman's "Equity Multiplier (Assets/Equity)" is 21x, which would indicate that Lehman is highly leveraged. Not good! Enter Repo 105. Lehman sells $50 worth of securities through the use of Repo 105. (Keep-in-mind that it does not have to record this financial transaction as a loan because of the Repo 105 rule.) It immediately takes the $50 and pays off $50 of its debt, which is reduced to $50. Now, the equity multiplier is only 5.5x, which is a drastic improvement from 21x. The equity multiplier of 5.5 is what gets reported to investors and everyone else. Once the reporting dates pass, Lehman has to reverse everything and the equity multiplier is back to 21x.
Lehman did not disclose its use of Repo 105 to the rating agencies, SEC, investors, or to its own Board of Directors. Doesn't anyone remember Enron, especially its auditors during this time?
I thought these types of accounting gimmicks ended with Enron. Where are the auditors? I know, everything was done within the standard framework of guidance promulgated by the GAAP. But, something is terribly wrong with such standard guidance.
Why did Lehman institute Repo 105? By instituting Repo 105, it made its financial position look a whole lot better than what it really was. Let's assume that Lehman had assets of $105 and liabilities $100 and equity of $5. Therefore, Assets = Liabilities + Equity. Given these financial numbers, Lehman's "Equity Multiplier (Assets/Equity)" is 21x, which would indicate that Lehman is highly leveraged. Not good! Enter Repo 105. Lehman sells $50 worth of securities through the use of Repo 105. (Keep-in-mind that it does not have to record this financial transaction as a loan because of the Repo 105 rule.) It immediately takes the $50 and pays off $50 of its debt, which is reduced to $50. Now, the equity multiplier is only 5.5x, which is a drastic improvement from 21x. The equity multiplier of 5.5 is what gets reported to investors and everyone else. Once the reporting dates pass, Lehman has to reverse everything and the equity multiplier is back to 21x.
Lehman did not disclose its use of Repo 105 to the rating agencies, SEC, investors, or to its own Board of Directors. Doesn't anyone remember Enron, especially its auditors during this time?
Repo 105 from Marketplace on Vimeo.
I thought these types of accounting gimmicks ended with Enron. Where are the auditors? I know, everything was done within the standard framework of guidance promulgated by the GAAP. But, something is terribly wrong with such standard guidance.
Friday, April 02, 2010
Weekly Update: Exponential Moving Average (EMA) Strategy for the S&P 500
Note: To enlarge the chart, double-click inside of it.What will the market do going forward? I don't know. I can give you a thousand reasons why this market can not go higher. However, I have learned one thing during my career following the stock market. That is, the market trend is your friend. And, that is why I am a trend follower. As long as the 15-week EMA > 40-week EMA, the trend is bullish (buy stocks). When the 15-week EMA < 40-week EMA, the trend is bearish (sell stocks). It really is that simple. It all comes down to the KISS concept.
Friday, March 26, 2010
Deleverage, Deflation, and the Federal Reserve
Thanks to "Contrary Investor," the following chart further confirms my believe that the deflation through deleveraging will continue throughout 2010. The long-term average from 1980 indicates an average "House Debt as a % of GDP" of 66.4%. Currently, that percentage is approximately 95%. Reversion to the mean, anyone? I, for one, do believe that the reversion will take place, which means that deleveraging still has a long way to go.
Now, what does this mean for Fed monetary policy for the remainder of 2010? Take a look at following table.
Over the last year, the FED has purchased approximately $1.25 trillion of U.S. Treasuries, Mortgage Back Securities (MBS), and Government Agency Securities out of thin air. What is interesting about the FED purchasing $1.25 trillion of "questionable, quality assets, is that the money supply (M2) hardly increased, something like less than $50 billion. What happened? Well, deleveraging occurred. See, when deleveraging occurs, the money supply decreases; because individuals are paying off their debts. When you pay off debt, you write a check; and the money supply decreases by the amount of the check. Or, when banks write off defaulted commercial and consumer loans, money supply also declines. That is why inflation has not been a real problem because of deleveraging. The deflationary factors of deleveraging have exerted a greater influence that the FED's inflationary forces of injecting $1.25 trillion into the economy.
I firmly believe that the FED will provide another mega dose of liquidity into the economy as it tries to reflate the economy this year. The last thing that the FED wants to occur is an outright decrease in the money supply. As long as the FED provides liquidity in its attempt to stem the tide of those deflationary forces, financial assets, especially the stock market, should benefit directly as it did in 2009. The reason being is the liquidity has to go somewhere, because banks are not making loans.
Now, what does this mean for Fed monetary policy for the remainder of 2010? Take a look at following table.
Over the last year, the FED has purchased approximately $1.25 trillion of U.S. Treasuries, Mortgage Back Securities (MBS), and Government Agency Securities out of thin air. What is interesting about the FED purchasing $1.25 trillion of "questionable, quality assets, is that the money supply (M2) hardly increased, something like less than $50 billion. What happened? Well, deleveraging occurred. See, when deleveraging occurs, the money supply decreases; because individuals are paying off their debts. When you pay off debt, you write a check; and the money supply decreases by the amount of the check. Or, when banks write off defaulted commercial and consumer loans, money supply also declines. That is why inflation has not been a real problem because of deleveraging. The deflationary factors of deleveraging have exerted a greater influence that the FED's inflationary forces of injecting $1.25 trillion into the economy.
I firmly believe that the FED will provide another mega dose of liquidity into the economy as it tries to reflate the economy this year. The last thing that the FED wants to occur is an outright decrease in the money supply. As long as the FED provides liquidity in its attempt to stem the tide of those deflationary forces, financial assets, especially the stock market, should benefit directly as it did in 2009. The reason being is the liquidity has to go somewhere, because banks are not making loans.
Thursday, March 25, 2010
Bubbles, Bubbles, and More Bubbles
Source: Market Ticker. Note: To enlarge the chart, double-click inside of it.All financial bubbles, such as the dot.com bubble of 2000, real estate bubble of 2007, and the current stock market bubble, are in fact credit bubbles at their core. That is just another way of saying induced by credit expansion by the Federal Reserve System, which is what the above chart depicts. And, that is exactly what the Fed has done since 2008 in its attempt to re-inflate the bubble. Notice the parabolic rise in debt, which can not be sustained. Something has to give, and it will not be pretty. History tells us that all credit-induced bubbles fail. This time will be no different.
Ok, what is an equity investor suppose to do in such a bubble environment? My recommendation is to follow my exponential moving average strategy. See my post from Monday, March 22, 2010, entitled, "S&P 500 Weekly Update."
Unions Want to Take Over Your 401(k)
Gene J. Koprowski over at MoneyNews.Com reports the following news item: "One of the nation's largest labor unions, the Service Employees International Union (SEIU), is promoting a plan that will centralize all retirement plans for American workers, including private 401(k) plans, under one new "retirement system" for the United States. In effect, government pensions for everyone, not unlike the European system and regardless of personal choice."
Perfectly logical to me. Isn't it? We now have national health-care insurance. Why not nationalize all defined-benefit plans (pensions) and defined-contribution plans. What's next? Nationalized religion? I think we have that, and it is referred to as the Federal Government.
Perfectly logical to me. Isn't it? We now have national health-care insurance. Why not nationalize all defined-benefit plans (pensions) and defined-contribution plans. What's next? Nationalized religion? I think we have that, and it is referred to as the Federal Government.
Wednesday, March 24, 2010
Monday, March 22, 2010
20 Promises for $2,500: All Americans Now Await Lower Premiums Promised by Obama
Breitbart.tv » 20 Promises for $2,500: All Americans Now Await Lower Premiums Promised by Obama
Let me know when you get your $2,500 premium reduction. I am in the process of making a list on a "Post-it Note" of everyone that receives this premium reduction.
Let me know when you get your $2,500 premium reduction. I am in the process of making a list on a "Post-it Note" of everyone that receives this premium reduction.
U.S. Treasury Pays More Than Buffett as U.S. Risks AAA Rating Status
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yielded "3.5 basis points" less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Co. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
This is a major concern that has not drawn a lot of attention in the main-stream media. I can not remember a time when interest rates on private debt was ever lower than on Treasury debt. This is extremely alarming! The bond market is saying that, in terms of credit risk, some private companies are safer that the U.S. Government. Why? Because our government continues its way of deficit spending, especially with this "new" health bill.
This is a major concern that has not drawn a lot of attention in the main-stream media. I can not remember a time when interest rates on private debt was ever lower than on Treasury debt. This is extremely alarming! The bond market is saying that, in terms of credit risk, some private companies are safer that the U.S. Government. Why? Because our government continues its way of deficit spending, especially with this "new" health bill.
Thursday, March 11, 2010
From Bad to Worst and Nobody Seems to Care
Last month the U.S. posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion. That means we only funded 32% of all federal government expenditures. Of the $328 billion that was spent, $164 billion went for entitlements. You know, like Social Security, Medicare, Medicaid, etc. Now, this is the scary part. If we eliminate the $164 billion of entitlements, which leaves us with $164 billion for other expenditures, we still don't have enough revenue to pay for it. Because we only took in $107 billion. Folks, this can not and will not continue that much longer. We can not continue to spend our way to prosperity without the revenue to match it. I know there are those out there, especially in Washington, that believe that as long as we have checks, it must be ok to use them.
Given the theme of this post, I believe it is a good time to revisit the U.S. Debt Clock.
Given the theme of this post, I believe it is a good time to revisit the U.S. Debt Clock.
Thursday, March 04, 2010
Productivity Up Sharply, Labor Costs Drop in Fourth Quarter 2009
What is the true meaning to the title? Answer: (1) Work harder and get more done. (2) Get paid less. and (3) Suck it up, don't complain, or you're fired. Oh, reduced labor cost (reduced pay per unit of work) simply means "deflation."
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