Tuesday, April 28, 2009

Should We Be Worried About This Swine Flu Outbreak ?

What is this swine flu outbreak?

Technically, what we're calling swine flu is not a swine flu at all. It's an influenza virus that does not appear to be infecting pigs; it's infecting humans. The virus is a brand new strain, a subtype of Influenza A/H1N1 that has never been detected before in swine or humans.

It appears to be a combination of human, swine and bird flu viruses. It contains the DNA of: North American swine influenza; a swine influenza virus typically found in Asia and Europe; human influenza A; and a North American avian influenza. The U.S. Centers for Disease Control's Dr. Anne Schuchat calls it "an unusually mongrelized mix of genetic sequences."

Why are we calling this outbreak 'swine flu'?

The CDC was the first to use the term "swine flu" to describe this virus after initial analysis suggested the virus had many of the characteristics of a swine flu. Further tests revealed it also contained genetic material from a human flu virus and avian flu virus. Now that the name is being used by media outlets and governments everywhere, it is likely the "swine flu" name is going to stick.

How far has this virus spread?

What makes this new virus worrisome is how easily it appears to be able to pass from person to person. With cases popping up across the globe every day, it might be around the globe already. How far this virus has spread will become clearer in coming days.

How did this new strain develop?

No one yet knows. That investigation could took a long time and the answer might never be found. Even though this new strain of influenza A H1N1 contains some elements of swine influenza virus, it may not have started in pigs. It could as well have been bred in birds or even another mammal.

Why is a new strain worrisome?

If an influenza virus changes and becomes a new strain against which people have little or no immunity -- and if this new strain can easily spread from person to person and cause severe illness in a high percentage of people that it infects -- the seeds would be sown for a pandemic that could sicken and kill many people around the world.

Epidemiologists have been warning for years that it's just a matter of time before a new strain of the flu emerges that has the potential to kill millions. Flu pandemics have historically occurred about three times per century and the world hasn't seen one in more than 40 years.

The World Health Organization estimates that in the best case scenario, the next pandemic could kill two to seven million people and send tens of millions to hospital.

Do we have a pandemic strain of influenza virus here?

We're not yet sure. It's clear the virus can spread easily from person to person. In Mexico, it also appears to be causing severe illness in people who should be in the prime of health - young and middle-aged people. But its virulence is still being debated.

The good news is that so far, the number of deaths from this virus is relatively low. In countries where the virus is just being found, such as Canada, it's causing such mild illness, it's running its course in two to three days, in some cases without treatment.

Is there a vaccine?

There is no vaccine as the genetic makeup of this virus is still being analyzed. The CDC has not announced that they're developing a vaccine. But if they do, it would likely take weeks if not months before it were widely available.

For swine influenzas that affect pigs, there is a vaccine available that can be given to pigs; there is no vaccine to protect humans from swine flu.

I got the flu shot this year. Am I protected?

Not likely. This is a virus that has never been seen before; therefore, vaccines for human flu would not provide adequate protection from the swine flu material contained in this virus. It may offer some protection though against the human flu genetic elements.

Can people catch swine flu from eating pork?

No. Swine influenza viruses are not transmitted by food; you cannot get swine influenza from eating pork or pork products.

What are the symptoms of swine flu in humans?

Symptoms of swine flu are similar to those of our regular flu, with sudden onset of:

fever, lethargy, lack of appetite, coughing

Some people with swine flu have also reported:

runny nose, sore throat, nausea, vomiting and diarrhea.

How is the virus transmitted?

Human-to-human transmission of swine flu is believed to occur the same way as seasonal flu, mainly through coughing or sneezing of people infected with the influenza virus. People also can become infected by touching something with flu viruses on it and then touching their mouth or nose.

How can I protect myself from this virus?

Since influenza spreads through spit and spray as well as contact with contaminated surfaces, the usual good personal hygiene habits are the best defence. Wash your hands repeatedly through the day with soap and water or with alcohol-based hand sanitizers. Avoid touching you mouth, nose or eyes with your hands unless they've been washed.

When coughing, cough into a tissue and throw it in the garbage. If you cough into your hand, wash your hands immediately. Sanitize surfaces that may have come into contact with the virus. With human flu, the virus is most contagious between the second and third days after infection, but the virus is still contagious for about 10 days.

Can we treat swine flu in humans?

Yes. Most of the infections have been treated successfully, though there have been deaths in Mexico. In most cases, patients with this swine flu have recovered on their own. In those who have had to be hospitalized, this virus has been treated with antiviral medications. The virus appears to be resistant to amantadine and rimantadine but has been susceptible to zanamivir and oseltamivir (Tamiflu).

What about pigs? Are they at risk?

Because pigs are not monitored for illness as closely as humans are, we're not yet sure if pigs are being infected with this new strain. What is known is that pigs, like humans, can get the flu. They develop a sudden fever, a barking cough, sneezing, lethargy and typically lose their appetite. The Canadian Food Inspection Agency is asking producers, veterinarians and labs to increase their vigilance in monitoring for and reporting swine disease.

Humans can also catch a swine flu directly from a pig -- historically, there's such a case every year or two in the U.S. - but what they catch is a flu virus inherent to pigs, not this new strain that appears to combine animal and human viruses.

Have there been swine flu outbreaks before?

Yes. Most famously, there was an outbreak in 1976 at Fort Dix, N.J., among military recruits that grabbed big headlines at the time. Worried that they had the beginning of a pandemic on their hands, U.S. officials ordered the manufacture of swine flu vaccine and the country launched a mass immunization program that saw about 40 million people vaccinated. But the outbreak didn't turn into a pandemic and went away as mysteriously as it appeared.

Saturday, April 25, 2009

Raising Bill Gates ...

SEATTLE -- Spend time with the family of Bill Gates, and eventually someone will mention the water incident. The future software mogul was a headstrong 12-year-old and was having a particularly nasty argument with his mother at the dinner table. Fed up, his father threw a glass of cold water in the boy's face.

Thanks for the shower," the young Mr. Gates snapped. The incident lives in Gates family lore not just for its drama but also because it was a rare time that Bill Gates Sr., father of his famous namesake, lost his cool. The argument presaged a turning point in the life of a tempestuous boy that would set him on course to become the Bill Gates whom the public knows as co-founder of Microsoft Corp. and the world's richest man.

Behind the Bill Gates success story is the other William Gates. The senior Mr. Gates balanced a family thrown off kilter by a boy who appeared to gain the intellect of an adult almost overnight. He served as a quiet counsel as his son jumped into and thrived in the cutthroat business world. When huge wealth put new pressure on the son, the elder Gates stepped in to start what is now the world's largest private philanthropy.

Bill Gates Sr., 83 years old, is now co-chair of his son's $30 billion philanthropy, the Bill & Melinda Gates Foundation. He has avoided the spotlight. The public details of his life include little beyond his official biography at the foundation, which says he was a Seattle lawyer, World War II veteran, nonprofit volunteer and father of three. He has compiled his thoughts on life in a short book to be published next week.

In interviews with The Wall Street Journal, Bill Gates Sr., Bill Gates and their family shared many details of the family's story for the first time, including Bill Gates Jr.'s experience in counseling and how his early interest in computers came about partly as a result of a family crisis. The sometimes colliding forces of discipline and freedom within the clan shaped the entrepreneur's character.

The relationship between father and son entered a new phase when the software mogul began working full-time seven months ago at the Gates Foundation. For the past 13 years, the father has been the sole Gates family member with a daily presence at the foundation, starting it from the basement of his home and minding it while his son finished up his final decade running Microsoft. They now work directly together for the first time.

At six-foot-six, Bill Gates Sr. is nearly a full head taller than his son. He's known to be more social than the younger Bill Gates, but they share a sharp intellect and a bluntness that can come across to some as curt. He isn't prone to introspection and he plays down his role in his son's life.

"As a father, I never imagined that the argumentative, young boy who grew up in my house, eating my food and using my name would be my future employer," Mr. Gates Sr. told a group of nonprofit leaders in a 2005 speech. "But that's what happened."

The first stage -- argumentative young boy -- "started about the time he was 11," Mr. Gates Sr. says in one of a series of interviews. That's about when young Bill became an adult, says Bill Sr., and an increasing headache for the family.

Until that time, the Gates home had been peaceful. Bill Sr. and his wife, Mary, had three children: Kristi; then Bill, born in 1955; and Libby. It was a close family that thrived on competitions -- board games, cards, ping-pong. And on rituals: Sunday dinners at the same time every week, and at Christmas, matching pajamas for every family member.

While very involved in his kids' lives, Mr. Gates Sr. was somewhat distant emotionally, which his children say probably reflects his generation. His stature, combined with a lawyerly bent for carefully choosing his words, also made him intimidating at times. "He'd come home and he'd sit in a chair and eat dinner, but there was never any kind of warm, give-me-a-hug kind of thing," says Kristi Blake, his oldest daughter.

Mr. Gates Sr. left much of the day-to-day parenting to his wife while he was building his career at a Seattle law firm. Daughter of a Seattle banker, Ms. Gates had been an athlete and top student in high school and college, where she met Bill Sr. She became a full-time volunteer and served on corporate boards.

Ms. Gates encouraged her kids to study hard, play sports and take music lessons. (Bill Gates tried the trombone with little success.) And she imparted a discipline that reflected her upbringing in a well-to-do family. She expected her kids to dress neatly, be punctual and socialize with the many adults who visited their home. For the most part, young Bill dutifully abided.

"She was the most engaged parent and she had high expectations of all of us," says Libby Armintrout, Bill's younger sister. "Not just grades and that sort of thing, but how we behaved in public, how we would be socially."

A Battle of Wills

Bill Gates at an early age became a diligent learner. He read the World Book Encyclopedia series start to finish. His parents encouraged his appetite for reading by paying for any book he wanted. Still, they worried that he seemed to prefer books to people. They tried to temper that streak by forcing him to be a greeter at their parties and a waiter at his father's professional functions.

Then, at age 11, Bill Sr. says, the son blossomed intellectually, peppering his parents with questions about international affairs, business and the nature of life. "It was interesting and I thought it was great," Mr. Gates Sr. says. "Now, I will say to you, his mother did not appreciate it. It bothered her."

The son pushed against his mother's instinct to control him, sparking a battle of wills. All those things that she had expected of him -- a clean room, being at the dinner table on time, not biting his pencils -- suddenly turned into a big source of friction. The two fell into explosive arguments.

"He was nasty," Ms. Armintrout says of her brother. Mr. Gates Sr. played the role of peacemaker. "He'd sort of break them apart and calm things down," says Ms. Blake, the eldest sibling.

The battles reached a climax at dinner one night when Bill Gates was around 12. Over the table, he shouted at his mother, in what today he describes as "utter, total sarcastic, smart-ass kid rudeness." That's when Mr. Gates Sr., in a rare blast of temper, threw the glass of water in his son's face.

He and Mary brought their son to a therapist. "I'm at war with my parents over who is in control," Bill Gates recalls telling the counselor. Reporting back, the counselor told his parents that their son would ultimately win the battle for independence, and their best course of action was to ease up on him.

Mr. Gates Sr. understood that counsel because of his own childhood, an hour's ferry ride from Seattle in the working-class town of Bremerton. "There wasn't a lot of structure to my growing up," he says. "I had an awful lot of discretion about where I went, what I did, who I did it with."

His mother was doting and easygoing. His sister, his only sibling, was seven years older. And his father was a workaholic who sacrificed child-rearing to work at a furniture store he owned with a partner. "His complete focus was on the store," Bill Sr. says. Mr. Gates Sr. early on built a life outside of his home. Next door, the Braman family had two boys for him to play with and a father who would become his most important role model.

That man, Dorm Braman, had built his business and would later become a Naval officer, mayor of Seattle and a U.S. assistant secretary of transportation. In the late 1930s, Mr. Braman brought Bill Sr. on family road trips across the country. He was scoutmaster of Bill Sr.'s Boy Scout troop, leading the boys on hikes through the Olympic Mountains and driving them in a beat-up bus to Yellowstone and Glacier National Parks. The troop spent two years building a log house from Douglas firs they felled themselves. Mr. Braman had "no sense of personal limitations whatsoever," says Mr. Gates Sr.

Bill Sr. and Mary ultimately took a page from that upbringing: They backed off. They enrolled their son in a school that they thought would give him more freedom. That was the private Lakeside School, now known as the place where Bill Gates discovered computers. Mr. Gates says he began to realize, "'Hey, I don't have to prove my position relative to my parents. I just have to figure out what I'm doing relative to the world.'"

A Rare Independence

From age 13, he was given rare independence. He took off some nights to enjoy free use of the computers at the University of Washington. He spent chunks of time away from home -- much as his dad had done as a kid. He lived for a time in Olympia, where he was a page in the state legislature, and in Washington, D.C. as a Congressional page. During his senior year, he took a break from school to work as a programmer at a power plant in southern Washington. And in what would become his first major collaboration with Paul Allen, his future Microsoft cofounder, Mr. Gates designed the "Traf-O-Data", a device for counting cars traveling over a section of road.

His parents played supporting roles. They acquiesced when Bill quit Harvard and then moved to Albuquerque, New Mexico, to start Microsoft. It was a tough decision to back. "Mary and I were both concerned about it -- I think she a bit more than I," Bill Sr. says. "Her expectations and mine were very ordinary expectations of people who have kids in college -- that they get a degree."

The family support was one reason Mr. Gates decided to move Microsoft to Seattle, where he settled into a house not far from his parents. Ms. Gates arranged to have a maid clean her son's house, and made sure he had clean shirts for his big meetings. She also insisted he kept observing the family traditions, including the weekly Sunday dinner at his parents' house.

The family support was one reason Mr. Gates decided to move Microsoft to Seattle, where he settled into a house not far from his parents. Ms. Gates arranged to have a maid clean her son's house, and made sure he had clean shirts for his big meetings. She also insisted he kept observing the family traditions, including the weekly Sunday dinner at his parents' house.

Bill Sr. eased his son's worries about taking Microsoft public when Bill fretted that it would be a distraction for employees. The offering would turn Bill Gates into a billionaire. It also spawned the next challenge for the family.

The Philanthropy Push

After the windfall, Ms. Gates pressed her son to get into philanthropy. At his father's law office late one night, someone present recalls, Bill quarreled with his mother as she urged him to give money away. "I'm just trying to run my company!" he snapped, says the person in the office at the time. Mr. Gates says that at the time he wasn't opposed to philanthropic work, he just didn't want to be distracted from his duties at Microsoft.

Eventually, she got her son to start a program at Microsoft to raise money for the United Way. He also followed his mother onto the national United Way board in the 1980s. But as Bill Gates's wealth grew, letters from Seattle-area nonprofits asking for donations piled up. He says he planned to get serious about philanthropy after retiring from Microsoft, or at about 60 years old. That plan would be fast-tracked after Ms. Gates was diagnosed with a rare form of breast cancer. As she battled the disease, she continued to urge her son to do more philanthropy. Ms. Gates passed away in June 1994.

The day of her funeral, the Gates family had dinner at home. Bill Sr. told his children not to worry about him, saying that he had about 10 good years left in him. He was 70 at the time. Still, after his wife died he was listless. About six months later, standing in a line for a movie with his son and daughter-in-law, Melinda, the elder Mr. Gates again broached the idea of philanthropy. He suggested he could start sifting through the requests for money and give some out.

A week later, the software mogul set aside about $100 million to create a foundation that his father could run. Bill Gates Sr. later sat at his kitchen table and wrote the first check, $80,000 to a local cancer program.

In the early days, Mr. Gates Sr., who soon remarried, would scribble a few notes on the most-promising requests for donations. He would then put them in a cardboard wine box that he periodically sent to his son's house. The box would come back with Bill Jr.'s responses. Mr. Gates Sr. would then reply to all the grant seekers, sometimes including a $1 million check with little more than a single-page letter of congratulations.

Bill Sr. and a former Microsoft executive managed the foundation, doling out money, overseeing a staff of hundreds and expanding its purview to areas like education and vaccines. Mr. Gates Sr. says he hasn't lost sight of the fact that he was playing the role of caretaker until his son and daughter-in-law took the helm. And after 53 years, he knows to give his son space. "He has very fixed ideas of some things," says Mr. Gates Sr. "The dynamic of the family is that you don't cross him on those things, because it's a waste of time."

Wednesday, April 22, 2009

Oil at $50/bbl: Where to from Here?

I think oil has more chances of going down than up from here. My main reasons for oil corrections are the following:

1) Marginal cost of production: In the long run, supply curve is determined by production costs of a marginal supplier. The key feature of the oil supply curve is that for the majority of oil demand, supply can be provided at roughly a $10-20/bbl level (mainly Middle Eastern countries). For Russia, it's probably higher and is in the range of $30-35/bbl.

Any extra demand would be met by producers with much higher cost levels of $60-70/bbl. In the first half of 2008, it was assumed that marginal producer would be Canadian oil sands with a $80/bbl cost structure.

Speculators were expecting that it would take too long before Canadian oil sands producers start supplying oil to the market and, thus, further production was needed which was expected to come from even more expensive sources (mainly offshore with over $100/bbl cost levels). This assumption clearly did not work out given the drop in global oil demand.

2) In extreme scenarios, oil supply curve turns negative (meaning downward slope) because of OPEC cheating members. With financial markets still half frozen, developing countries have strong incentives to substitute unavailable external borrowings with extra oil supply. Thus, current OPEC discipline cannot be expected to last long.

3) A significant number of oil projects were coming on stream in Q1 2009 and at the same time a lot of refiners were shutting down for maintenance in spring 2009. This should lead to an over-supply situation, the evidence of which is ever growing oil stocks in the US.

4) It's still a deflationary environment and so production costs are expected to continue to fall, bringing down the supply curve.

5) Technically, the oil forward curve (made of futures prices at different settlement dates) still has a steep rising shape which points to future price correction. This steepness was created by unavailable funding to buy oil on the spot market and sell in the future and also by too high storage fees. But it seems that a few banks (including Morgan Stanley) hired tankers and bought oil for storage a couple of months ago and soon this oil will be coming to markets causing further downward pressure.

So, why is oil not at $30/bbl or below? Because the general mood is that the economy is bottoming out, we will soon see recovery and then, due to point one, oil will jump to above $60 levels. Another reason is inflation expectations given the amount of financial stimulus announced around the world (oil as inflation hedge-thesis). I personally disagree with the first point. I also think the second point would be relevant at the end of 2009 or 2010 (US stimulus is comparable to the amount of capital loss of US banks; besides, with banks still not functioning properly, credit is not flowing and money is not created through credit).

Nevertheless, it does not mean oil cannot grow further from here. I would definitely short it at $60 if you see it at these levels in the near future. If you can wait a few months, shorting it even at these levels should probably work as well.

Monday, April 20, 2009

The Worst Isn't Over Yet.

The stock market has had a great rally since March 9. As someone who has a large pile of cash, I’ve was wondering if I missed a buying opportunity, but on the other hand, my large pile of mutual funds (such as my VFIAX) has come back to levels of early February — only 15% below Election Day and 33% below the end of August.

Still, I’ve stayed out because this felt like a sucker rally. (Peter Cooper at Seeking Alpha agrees). Perhaps the market was oversold: I’m not a technician, nor do I play one on TV. The rally could also be due to a change in sentiment, and I’m no expert on mass market psychology.

But as a young investor, I recall Charles Schwab’s advice to look for economic signs in your daily live to guide your investment decisions. (iPhones among Silicon Valley housewives might seem like such an indicator, but first I’d like to see their counterparts in Des Moines and Birmingham).

The indicators that I’m seeing suggest that firms have lost their pricing power, and are scrambling to cut prices (or pretend to cut prices) to gain sales, sometimes at any cost. This will depress the bottom line and probably the top line as well.

Of course, everyone knows auto sales are down and bankruptcy-prone GM and Chrysler are doing anything they can to attract sales. Here in California, car sales (and other big ticket items) will be down for months, because legislators raised the sales tax this month by 1% as part of an ugly end to an uglier budget mess. Buyers will also be postponing purchase of other big ticket items, whether HDTVs or Caterpillar (CAT) earthmovers.

Beyond this, home improvement stores are also aggressively trying to attract business. Conventional wisdom is that in a down economy (or when financing is tight), homeowners remodel in place rather than buy a new McMansion, but that doesn’t seem to be happening right now.

Here we have three main stores — Home Depot (HD), Lowe’s (LOW) and OSH Hardware — and all three are promoting more aggressively than any time in the 6.5 years I’ve lived in the Bay Area. Perhaps they are quietly cutting corners on the quality, such as by pressuring suppliers to ship shoddier Chinese-made tools, or lowering the grade of building materials — but it still seems as though their earnings will be depressed for the rest of 2009.

The NYT wrote Monday about how the home improvement and other retailers are aggressively repositioning themselves as value havens during the down economy.

Another area that’s supposed to do well in downturn is fast food, and indeed McDonald’s (MCD) has held its market value compared to the broader market. However, in the overall fast food/quick serve market, the last 3 months has seen a dramatic increase in the emphasis on bargain menus — items in the $1-1.50 range.

Locally, it started with our sub shops (Subway, Togo’s, Quiznos) which are at the high end of the fast food/quick serve price bracket, but now it's hit all of the FF/QS market. (Some of these are phony price cuts based on reduced portion sizes). All of these depressed profits will not help stocks. Falling revenues and profits (into losses) would also bring more layoffs, and layoffs will reducing pruchasing power and consumer confience.

This morning, the Merc published a SVLG survey of SV CEOs about their expectations for the economy, which are expecting more job cuts this year.Finally, economists at UCLA’s Anderson Graduate School of Management are predicting real GDP declines through September, and unemployment peaking in 2010 — at above 10% for the US and nearly 12% for California.

Even ignoring Anderson’s good forecasting record, I don’t see how a recession this strong will turn around substantially in 2009. So my expectation is for ugly corporate earnings for several quarters. Banks may be off their firesale prices, but it’s hard to see much upside for the overall economy for the next 6-9 months.

Article from Seeking Alpha.com

Saturday, April 18, 2009

Note to Nassim Taleb: You Can't Kill Off Black Swans

Finally self-styled investment prophet Nassim Taleb is hearing some criticism from various corners. He recently wrote an opinion piece for the Financial Times entitled Ten Principles for a Black Swan-Proof World.

A few folks responded, including Felix Salmon, Connor Clarke and, most notably Charles Davi, who laments The Unbearable Lightness of Nassim Taleb.

While we enjoyed Taleb's original book, Fooled by Randomness, in which he discussed the illusion of causality and aptly invoked "black swans," did he really need to put out another book to expound on those black swans? Of course, by the time the second book became an option, black swans had become fashionable in the world of finance, so why not ring the register one more time?

One doesn't need to read Taleb's Ten Principles for a Black-Swan Proof World to wonder how in the world one can black-swan proof anything by following a list. After all, black swans are not literally little black animals swimming on lakes.

They are unpredictable, out-of-the-ordinary events, or what the former defense secretary might call "unknown unknowns." To have the father of the black swan theory essentially say that we can do away with black swans by following a recipe flies in the face of everything he has asserted about black swans. His recipe destroys the credibility of his entire previous train of thought.

(Not) to pile on, we observe that Taleb the investment manager appeared to be advocating losing a bit of money in your investments in normal times, presumably by buying out-of-the-money put options and the like. Then the "black swan" would come and you would make a killing -- or certainly enough to retire to a tropical island and to never be seen on the talk show circuit again.

Unfortunately, there have been a few sightings of Taleb the investment manager here, here, here, here, here, here and here (no, those are not tropical islands). If he is not tanning in the Caribbean following the biggest black swan since the Great Depression, then what kind of black swan will it take? Or are we simply dealing with another author whose 15 minutes of fame have been stretched a bit too far?

Article from Seeking Alpha.com

Wednesday, April 15, 2009

Sucker's Rally Approaching an End

Whatever the technical reason for the 25 percent rise in the S&P over the past five weeks, or a more modest eight percent bounce in GCC regional stock prices, the absurdness of this sucker’s rally ought to be obvious to all.

Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating with total bad debts unknown except that we know they must be getting worse. Global trade fell off a cliff in the first quarter of the year. Even Mercedes car sales to the oil rich of the GCC fell 23 per cent. The collapse of the world’s second largest economy, Japan, has been unprecedented.

Bad news coming

Nor do you have to look hard to see what the bad news to come might be: US banks will have to reveal all in government stress tests to be published at the end of this month; the bankruptcy of Chrysler and General Motors (GM) loom, two companies of vast importance to Main Street USA with a million jobs in jeopardy and huge borrowings to be written off by the banks.

The stock market pattern in 2008-9 has so far been a mirror image of the crash of 1929-30 with a halving of prices from the autumn followed by a 25 per cent rally from March lows. In April 1930 stocks moved sideways and then they crashed another 50 per cent into the summer.
What possible reason is there for optimism to believe that history will not repeat itself?

Government stimulus packages have more than likely been too small and too late to prevent another down leg in stocks, and will take time to revive the real economy, if indeed they can do so. They might just stop the worst possible scenario but are they going to prevent the plunge downwards? Governments have not managed it so far.

Consumers and unemployment

At the commonsense level you have to ask why should an economy show signs of recovery as it lays off hundreds of thousands of people: the unemployed are not big consumers, and it frightens the hell out of people left in work who stop spending and save.

Consumer demand is the most important fundamental in modern economies and the confidence of consumers is being blown to pieces. It will take more than weasel words from US bankers and ‘green shoots’ in the waffle of President Obama to put things right.

Eventually global stock markets will reach a bottom but they are not close to having visited it just yet. Wall Street and its friends are playing investors as suckers but they are in danger of overdoing it. For once these guys are impoverished where will the next bunch of fools come from? Goldman Sachs' (GS) results this week might well mark the top of the rally, beyond that the only way is down.

Article from Seeking Alpha.com

Monday, April 13, 2009

Profit-Taking Correction On Bursa Looms

Penny stocks such as E&O, Muhibbah, Ranhill, Zelan, BJCorp, Johan and Pelikan are expected to out-perform the broader market with huge percentage gains. Positive vibes from a strong performance on the New York Stock Exchange spilled over to the local market last week and helped the benchmark index break the year's high of 936 points. The positive tone came despite continued contraction in Malaysian exports and industrial production and the ruling coalition's inability to wrestle back the state and parliamentary seats from the opposition in Peninsular Malaysia.

The local stock market staged a breakout rally on Good Friday, with the blue-chip benchmark Kuala Lumpur Composite Index (KLCI) staging a decisive bullish breakout above the year high of 936 on strong buying momentum, copying sharp rallies in the region.

The KLCI soared 34.37 points, or 3.8 per cent, last week to close at a year high of 941.38, with daily trading volume and value ballooning to 832.8 million shares worth RM1.15 billion respectively, compared with the 579.4 million shares and RM840 million in the previous week. The daily average was the highest since November last year. The index's gain last week was driven mainly by plantation stocks with Sime Darby, IOI Corporation and KL Kepong taking the lead to contribute one third of the expansion.

Last week's positive trading momentum may continue in the early part of this week before a profit-taking correction sets in later on grossly overbought conditions. External factors will continue to be drivers. In the US, some major banks like Goldman Sachs, Citigroup and JPMorgan are expected to release their quarterly results this week and market expectations are for them to beat the consensus numbers with a relaxation in mark-to-market rules.

News that Goldman Sachs is planning a cash call to repay the US$10 billion (RM36.2 billion) that it received under the Troubled Asset Relief Program is an indication of improving earnings that could trigger similar moves from other industry players. Successful issuance of new shares to raise capital adequacy at a time when prices have recovered considerably will help some banks to pass the government stress tests at the 19 biggest US banks which will be concluded by the end of April. Nonetheless, this could evolve into concerns about earnings dilution and drag the market lower as what happened to Maybank and the local market before the recent rise.

As indicated previously, high-beta stocks had a good run-up in this current up-cycle that started on March 12. While plantation stocks ran up by an average 18 per cent with Sime Darby leading the pack with a 21.5 per cent surge, there are two notable laggards in the sector, Kulim and Hap Seng Consolidated, that are worth considering as both these stocks are trading at huge 50 per cent discount to their price-to-book (P/Bk) of 0.5x compared to the bigger boys which are trading at 1.8x to 3.4x. Even Boustead Holdings, another smaller player in the sector, has gone up by 19.4 per cent and trading at a P/Bk multiple of 0.8x.

They are also some other laggards among the index-linked big-cap but low-beta stocks like Berjaya Sports Toto, DiGi.com, Tanjung plc and PLUS that are worth investing in. Meanwhile, expect the positive sentiment to spill over into small cap and penny stocks this week as rotational plays take place.

Technical outlook

Bursa Malaysia shares extended their rally for a fifth straight trading day on Monday, lifted by strong regional gains on hopes government bailouts worldwide will revive global economic growth. However, stocks staged profit-taking dips in the next two days after a prominent analyst in the US warned of rising loan losses in banks due to excessive risk taking, while well-respected market gurus George Soros and Marc Faber predicted that the rebound in equities would falter as the market braced for a seventh straight quarter of falling profits.

Nonetheless, the local market reversed losses on Thursday, encouraged by sharp rallies in the region after overnight US stocks staged strong comeback from a two-day sell-off led by life insurers which rallied on strong prospects for a government bailout. On Friday, stocks staged breakout rallies as record high profits of US$3 billion at Wells Fargo for first quarter of this year and speculation that other banks will pass stress tests despite a deepening global recession boosted sentiment with bulls returning to pick up heavily sold down lower liners ahead of the weekend.

The KLCI bounced up from intra-week low of 907.87 on Wednesday's close to the week's high of 942.4 late Friday, prior to a strong closing ahead of the weekend. Week-on-week, the FBM-EMAS Index rallied 243.8 points, or 4.1 per cent, to close at 6,192.58, while the FBM-Small Cap Index (SCI) soared 393.9 points, or 6 per cent, to 6,979.37.

The daily slow stochastics indicator for the KLCI re-hooked upwards at the overbought zone with potential to trigger another buy signal (Chart 1), while the weekly indicator has risen towards the overbought zone. The 14-day Relative Strength Index (RSI) flashed an initial overbought reading above 70, but the 14-week RSI has improved with a bullish reading above 50.

However, trend indicators such as the daily and weekly Moving Average Convergence Divergence (MACD) expanded higher to suggest an emerging bullish trend. The bullish trend is confirmed by the expanding -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator, with the ADX line rising above the 25-point mark for a reading of 28.9 last Friday, which reinforced an outlook for a developing bull market.


While the increasingly short-term overbought momentum on the KLCI suggests profit-taking correction potential for this week, stronger trend indicators implied that this initial bear market rally could morph into a bull market rally. Moreover, last Friday's bullish breakout was supported by strong buying momentum in excess of one billion shares, which is the hallmark of a developing bull market if the strong daily trading volumes sustain for an extended period.

Nonetheless, investors should note significant KLCI resistance levels at 963, the September 18 2008 pivot low and the 200-day SMA at 969, which must be taken out convincingly to promote an extended rally towards more formidable resistance firstly at 983, the 50 per cent Fibonacci Retracement of the downfall from 1,164 pivot high of July 31 2008 to the 801 pivot low of October 28 2008, and then 994, the which is the 38.2 per cent FR of the sell-down from 1,305 pivot high of April 29 last year. A stronger ceiling this week is anticipated at the 1,000 psychological level.

Meantime, immediate support is revised higher to the January 7 pivot high of 936, then 926 and next at 920, the 23.6 per cent FR from the 1,305 pivot high. Stock-wise, expect plantation stocks such as IOI Corp, KLK and Sime Darby to surge further given the strong rally in CPO prices towards the RM2,300 a tonne mark, while penny stocks such as E&O, Muhibbah, Ranhill, Zelan, BJCorp, Johan and Pelikan should out-perform the broader market with huge percentage gains.

Article from Business Times.com

Saturday, April 11, 2009

Technicals: Where Is the Pullback? What Pullback?

After a 25% rally in the past 40 days, is the market set to undo its 45% loss from the S&P500 all time highs? Many bulls are now claiming that now all is back to normal, and that despite the loss of the securitization product, the government will be happy to releverage consumers and companies to historic credit levels following the bail out mantra "take out debt now, spend tomorrow, save... oh, at some point."

In the meantime, the question of whether the slowdown in the macro economic collapse is an indication of a recovery or just, as David Rosenberg states, a "slowing down in the collapse." Regardless, the market's greed and optimism seem to be back, ignoring all bad news (WMT up on a big miss in comp store sales, BRK downgrade) and rushing higher on anything remotely perceived as good. So while the fundamentals (or at least the positive side thereof) point higher, what do technicals imply?

Thomas Lee of JP Morgan is skeptical that the exuberant rally is sustainable, purely on empirical technical data. From JP Morgan:

What happens after a 20%-plus rally (3/6 to 4/3)? Since 1900, a 7% pullback, implying an S&P 500 of 780 or so . . . .
The question on our mind (and many investors’) is whether this rally is a Bear trap or the start of a Bull. For either camp (bull or bear), a market correction/ pullback would be helpful, allowing short sellers to cover and providing an entry point for real money buyers. But this market has been frustrating, as equities have shown an “underlying bid” and not provided the correction/pullback many are seeking.

We believe an 8%-10% pullback will be seen in coming weeks and supported by the historical pattern following a 20%-plus gain (in 40 days or less).
Since 1900, the Dow (as a proxy for equities) has risen 20% or more within 2 months, 24 times. In the month following this gain, the Index has on average fallen 7% from a peak (see Figure 3). Using the S&P 500 recent closing high of 842 implies 783.

We still see a Final Low in the 750-775 range in the coming months . . . . We believe the data support our notion that US equities are in “proximity to the bottom.” Our view is based on the notion that risk appetite naturally improves as the economy recovers, which implicitly assumes the US economy troughs midyear with a return to growth in 2H, consistent with J.P. Morgan Economics.

It is also supported by the idea that breaching a 12-year low in the S&P 500 in early March signaled we were at an important juncture in this Bear. In our idealized view, we believe a final low is ahead of us in the coming months, with an S&P 500 close in the 750-775 range as the signal for us to make a big move into equities. In other words, absent incrementally negative news, a close in the 750-775 range is probably the level we see this Bear market ending.

Another interesting data point presented by JPM is the shift in sector leaders year to date: on an extended basis Technology and Telecom have been by far the best performers for the year (the NASDAQ is now solidly in positive YTD territory on expectations that it will be the first sector to recover, tech earnings next week will be interesting), while over the past month, the leadership has been concentrated in the most shorted sectors: financials and discretionary, leading one to argue yet again that the major move in March has been forced by the covering action after the S&P failed to break the 666 low.

So as Wells preannounces and takes the market ever higher in the context of accelerating California home foreclosures, increasing credit card rates and delinquencies, record unemployment, tight consumer credit, mortgage rates that had fallen and are since almost back to levels pre the QE announcement, an 80% increase in S&P earnings back to 70 in 2009 and collapsing trade flows (but, come on, these are all lagging indicators), the market continues its exercises in anticipating where the next good news will come from in a market in which the bulk of companies have now pulled all guidance, and are praying to have some good preannouncements to push their stocks higher by 50% in one day.

Article from Seeking Alpha.com

Thursday, April 9, 2009

Battle For Broadband Heats Up ...

Article from The Edge Daily.com

WITH the market for fixed and cellular services seen to be near saturation — the Malaysian Communications and Multimedia Commission (MCMC) reported cellular penetration rate at 96.8% at end-2008 — telco players are looking to the broadband space for future growth.

Malaysia's household broadband penetration rate is lagging far behind that in neighbouring countries — estimated at just over 21% (or roughly 1.3 million subscribers) compared to over 100% in, say, Singapore. Clearly, the potential market is vast and remains largely untapped.

Lack of options, until now

The relatively low broadband penetration rate is very likely due, at least in part, to the limited options in terms of service providers. Currently, the only mass-market broadband service provider is Streamyx, a unit of Telekom Malaysia — primarily because of its near-monopoly in the fixed telephony market. The majority of high-speed Internet access is now delivered via copper telephone lines to homes.

This last-mile connection is a huge cost advantage and high barrier to entry for any new player. Until now. New technologies such as Worldwide Inter-operability for Microwave Access (WiMAX) and the third-generation of mobile communications technology (3G) offer customers a cost-effective alternative — wireless broadband. Access no longer needs to be tethered to traditional copper telephone lines — it can be delivered to homes wirelessly (fixed broadband) and portable (mobile broadband) via a Universal Serial Bus (USB) dongle.

We believe there is substantial pent-up demand for affordable and quality broadband service. The Internet is becoming an increasingly integral part of life — be it for work, communications, banking, buying and selling, gaming, entertainment, social networking or just staying abreast of global current affairs. We foresee that demand can only pick up pace over the next few years.

P1 well positioned to tap fixed broadband market

And we believe WiMAX licensee P1 (the service provider arm of Green Packet) is well positioned to capture a slice of this potentially lucrative market. The company is the first of the four WiMAX licensees to launch its broadband services in the country, in August 2008, under the brand name P1 W1MAX.

In particular, we see P1 as the primary competitor to Streamyx in the fixed broadband market segment. WiMAX is ideal for the growing number of homes that have no fixed telephone lines. Customers only require a WiMAX modem — signal is transmitted wirelessly from a nearby base station — which can be hooked up directly to a personal computer (PC) or multiple PCs/laptops via a regular router.

P1's rollout gathering steam

After some teething problems last year, P1 has ramped up its rollout programme. The first phase — under a turnkey contract to Alcatel-Lucent — is now slated for completion by 1H09 with the deployment of roughly 600 sites.

Last week, the company signed on a second equipment vendor, China's ZTE Corp, for the next phase of its rollout. P1 estimates it will have up to 700 sites by the end of this year and more than 1,000 sites by end-2010, at which time it will be providing 45% population coverage nationwide.

Subscriber acquisition has been growing at strong double-digit pace since the beginning of this year as more sites are commissioned. In particular, sign-up for the P1 Lite package has surpassed expectations — with a high take-up rate by existing dial-up customers upgrading to higher bandwidth. This underscores our belief that there is big pent-up demand for quality broadband in the country. At the current pace, P1 expects to sign up 250,000 subscribers by end-2009.

Convergence of voice and data

We may also be seeing the start of a trend where voice and data services coalesce.Celcom recently introduced its broadband wireless gateway, an all-in-one mobile router that allows subscribers broadband Internet access as well as voice telephony services. The difference is its telephony services are based on Voice over Internet Protocol (VoIP) and are thus, price competitive. Celcom offers 30 sen per minute voice calls nationwide under its two wireless gateway packages.

P1 will also be launching its own data plus voice bundled packages in the next few months. The second generation of WiMAX modems will have in-built Wi-Fi router and can be connected directly to a telephone. P1 already has inter-connect agreements with all the major telcos.

Merging fixed and mobile broadband

Additionally, P1 plans to launch its mobile broadband service in 2Q09. This will pitch the company in direct competition with telcos Maxis, DiGi and Celcom.Instead of a WiMAX modem in the house, customers will be able to access the Internet anywhere using a USB dongle. This setup is similar to the mobile broadband services currently offered by all three major telcos on their 3G networks.

Celcom is currently the largest mobile broadband player with the widest coverage, which the company estimates at over 71% of Malaysia's populated areas, while DiGi was the latest to enter the foray after launching its wireless broadband services last week. Still, P1 may have an edge. WiMAX is faster and, arguably, the more efficient technology for high bandwidth Internet access compared to 3G, which is primarily a voice platform with the capability to offer mobile broadband.

The WiMAX network is also relatively cheaper to rollout since it is based on open standards and non-proprietary. P1 estimates capital expenditure to total roughly RM450 million to achieve the 45% coverage target by 2010. By comparison, DiGi acquired its 3G spectrum from Time dotCom last year for nearly RM700 million. It plans to spend some RM400 million in rollout costs this year alone.

Quality likely to be the key

DiGi does not expect meaningful revenue contribution until 2010 when it has better coverage. The telco intends to control its subscriber numbers in step with rollout progress — to preserve the quality of service. It may yet be the winning strategy.

Anecdotal evidence suggests that most existing broadband subscribers are dissatisfied with their actual connection speed, which is currently offered on a best-effort basis and often falling well below advertised headline speed. Hence, a service provider that can offer quality service will have a formidable edge in the battle for not only new broadband customers but existing ones as well.

Monday, April 6, 2009

4 Possible Market Scenarios

When you come to a fork in the road .... Take it

(Yogi Berra) Where are we going? Or, more to the point, where is the US economy going? Todd Harrison of Minyanville.com thinks that we have two possible outcomes: hyperinflation or deflation and depression.

I think that there are more possibilities and they are more nuanced. It's more like a real fork in that we have four scenarios. They are listed below in reverse order of probability, estimated by me. As usual, I retain the right to be wrong and anybody is free to disagree with me. Short note about money mass.

People are talking (I'd say shouting) about the huge amount of money issued by the Fed and how it can cause high inflation. But they completely ignore the even bigger amount of money destroyed in the crisis (credit contraction = money destruction) and sharply reduced money velocity. They also ignore the carry trade and the role it can play in the crisis.

Inflation and stagnation = stagflation

First of all, I should say that I don't believe that hyperinflation is possible in the US in the near future. There are several different definitions, but the lowest defines hyperinflation as 100% or more in three years, the highest as 50% a month. I lived through 30% a month inflation and it's not pretty. But you need high wage inflation to get hyperinflation, and US companies don't raise wages and salaries now. They are more likely to cut them.

High inflation (up to 15% a year) might be possible. There are two possible sources of such inflation: wage inflation and commodity inflation. Wage inflation is off the table, commodity inflation needs a growing economy, which is not here. However, a combination of excessive money supply and commodity shortages, real or perceived, can create high inflation. The Fed, in such a case, will be forced to raise rates and maybe reserve requirements, killing any possibility of recovery for a while.

We don't have any inflation to speak of. In Q4 2008 we had significant deflation. Inflation in the first two months of 2009 is very low. People are cutting expenses, prices are falling on many goods.

Probability: less than 10%

Japanese disease (Zero growth with zero inflation or low deflation)

This is much more dangerous. Japan fell into this trap in 1989 and still can't get out. There was hope, triggered by increased trade with China, but it was killed by the current crisis. This is probably the longest depression in modern times in one country. This year we are 'celebrating' 20 years since it started.

We started in 2007 almost like Japan: real estate market crash, total inaction of the government and Federal Reserve, multiple claims by the powers that be that the "crisis is contained". Which led me to believe that we are going the same way, and I wrote an entry which predicted that by 2009 interest rates will be below 1% (here). But the latest developments show that the US is not Japan. Companies are laying off workers, banks don't pretend that everything is OK, bankruptcies are on the rise, so there is a normal reaction of economic subjects to the crisis

It's still a possibility, especially if there is a lack of political will. The biggest unknown is the interaction between inflation and the carry trade. In the case of Japan, the carry trade consumed most of the money issued by the Central Bank. The Fed's declaration of quantitative easing is a very good development; in Japan it took the government and the Bank of Japan more than 10 years to start it.

Probability: around 15%

Great Depression 2.0

I've written about this possibility many times. This article explains my views on the problem and has links to my other articles. I'm starting to believe that we have a fighting chance to avoid this scenario. Ben "Helicopter" Bernanke is doing his job. The only problem I have with it is that he is late every time.

ConclusionI'm changing my stance because the facts have changed. I was thinking Great Depression 2.0 scenario for more than a year. Now I think that we can get away with Great Recession.From an investment point of view, this is a change from bear market behavior to bull market behavior. In a bear market, you sell the rips. In a bull market, you buy the dips.I am going to put more money to work in April and May. Mostly in tech, because there are a lot of tech companies which are swimming in money and don't need credit. But also in financials, because they are beaten almost to death and government is clear that they won't be allowed to fail.

Probability: around 30%.

Great Recession

I think it was Melissa Lee from CNBC who coined this definition first. Maybe I'm wrong. In this scenario, decisive actions of the government and Fed prevent the US economy from falling into scenarios 2 and 3 and lead to relatively quick, also painful, recovery in the beginning of 2010 or even at the end of 2009. This scenario seems to be more and more likely to me lately. The government and the Fed are not kidding, measures adopted are radical and decisive.

Do they have enough political will? It looks like the Fed is fighting to increase money mass with all the tools available (well, I'd like to see temporary reduction of reserve requirements, which would increase money mass and also improve the situation of many banks, making them liquid immediately). It's a little bit scary, because the Fed might be forced by some information we don't know yet, so I'm waiting for the minutes of the last meeting with impatience.

The best proof of this scenario would be if the current stock rally continues for some time. If the Dow Jones can keep running over its 13 days moving average and bring it over the 50 days MA, it will be a huge success. But even if this rally is another bear market rally, even if we get new lows in summer or fall, things aren't looking as bad as they did at the beginning of March. Bonds are improving, and those are more important than the stock market. Historically, bonds recovered first during recessions. If we don't get any unpleasant surprises, stocks should be up from now to the end of the year.

Probability: 45%.


I'm changing my stance because the facts have changed. I was thinking Great Depression 2.0 scenario for more than a year. Now I think that we can get away with Great Recession. From an investment point of view, this is a change from bear market behavior to bull market behavior. In a bear market, you sell the rips. In a bull market, you buy the dips.

I am going to put more money to work in April and May. Mostly in tech, because there are a lot of tech companies which are swimming in money and don't need credit. But also in financials, because they are beaten almost to death and government is clear that they won't be allowed to fail.

Friday, April 3, 2009

6 Reasons I'm Calling A Bottom And A New Bulls

Forget Roubini: I'm the new Dr. Boom, ahead of Dr. Doom (again!)

ARROYO GRANDE, Calif. (MarketWatch) -- OK, so you're one of millions of investors impatiently waiting on the sidelines, sitting with $2.5 trillion cash under your mattress, waiting for the right moment, that signal screaming: "Bottom's in, start buying!" Yes, it'll go down again, but the bottom's in, thanks to a great March, possibly the third best month since 1950, so it's time to jump back in and buy, buy, buy!

You heard me, I'm calling the bottom, beating Dr. Doom to the punch again (yes, again). Last time we were predicting the recession. This time we're calling the market bottom and a new bull.

Dr. Doom? Of course I'm referring to you-know-who, Nouriel Roubini, the notorious "party-boy economist," as Portfolio magazine calls him, the ubiquitous New York University professor with his well-oiled PR hype machine (and bon vivant lifestyle) that's made him the "go-to" media darling with endless economic predictions.

Portfolio pinpoints Roubini's claim to fame in his February 2008 blog, "The Rising Risk of Systemic Financial Meltdown: The 12 Steps," where he announced the recession actually started in December 2007. We also covered it as a 12-act Shakespearean tragedy.

But today Roubini's got a huge problem, one that'll hurt his fans, investors and credibility. Last December, Newsweek reported Roubini was predicting "the recession will last until the end of 2009," about nine more months.

He also boasted that "eventually, when we get out of this crisis, I'll be the first one to call the recovery ... Then maybe I'll be called Dr. Boom." He made the same boast in Portfolio.

Roubini is a great showman. A century ago he would have outdone P.T. Barnum with his incredible boast, a prediction rivaling historic ones made by other well-known New Yorkers: Babe Ruth's famous home run in the 1932 World Series after pointing his bat into the center field bleachers and Joe Namath's prediction of an upset win over the heavily favored Colts in the 1969 Super Bowl.

Warning: Here are 6 reasons why Roubini can never fulfill his promise ... why he may go down in history, as Portfolio suggests, as the designated "one-hit wonder" ... but worse, any investor waiting for a Roubini "call" is playing Russian roulette, a loser's game ... you will miss the market's real turning point:

1. The stock market turns before the economy bottoms

Regardless of what Dr. Doom or any economist boasts, the stock market has a mind of its own, it's a leading indicator. Stocks historically kick into action earlier than the economy recovers, often six months ahead of the economy's bottom. Witness March.

So while economists' predictions pinpointing a recession may appear earlier than bear market predictions by the notoriously optimistic Wall Street pundits, the cycles work the other way in a recovery: A stock market bottom and new bull may occur six months before the economists call the ending of a recession and an economic recovery. So Dr. Doom's "call" will naturally come months after the stock market in fact turns.

2. Stocks make big money fast then go to sleep

Back in January, Wall Street Journal columnist Jason Zweig reported on some fascinating research: "History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss -- and promptly lapses back into its usual stupor."

And the numbers back it up: "Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900." He "found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market's 10 worst days, you would have tripled the actual return of the Dow."

3. No one can predict the next big move

Unfortunately, markets are notoriously unpredictable, ruled by mobs of irrational investors who are all bad guessers, No one can predict in advance when those "10 worst" or "10 best" days will actually occur. Not on Main Street. Certainly not on Wall Street.

Why? In his classic, "Stocks for the Long Run," Wharton economics Prof. Jeremy Siegel studied all the big market moves between 1801 and 2001. Two centuries of data. Siegel concluded that 75% of the time there was no rational explanation for big moves up in stock prices or big moves down. Lesson: Market timing is a loser's game.

4. Famous media-darling pundits inevitably flameout

A month ago Newsweek's science columnist and former Wall Street Journal legend Sharon Begley wrote a fascinating piece, "Why Pundits Get Things Wrong." Her opening: "Pointing out how often pundits' predictions are not only wrong but egregiously wrong -- a 36,000 Dow! euphoric Iraqis welcoming American soldiers with flowers! -- is like shooting fish in a barrel, except in this case the fish refuse to die. No matter how often they miss the mark, pundits just won't shut up."

Think of all the media darlings you know as Begley reviews the data: And "the fact that being chronically, 180-degrees wrong does not disqualify pundits is in large part the media's fault: cable news, talk radio and the blogosphere need all the punditry they can rustle up, track records be damned."

The data comes from Philip Tetlock, a research psychologist at Stanford University: "Tetlock's ongoing study of 82,361 predictions by 284 pundits" concludes that their accuracy has nothing to do with credentials such as a doctorate in economics or political science, or on "policy experience, access to classified information, or being a realist or neocon, liberal or conservative."

What matters? "The best predictor, in a backward sort of way, was fame: the more feted by the media, the worse a pundit's accuracy. ... The media's preferred pundits are forceful, confident and decisive, not tentative and balanced. ... Bold, decisive assertions make better sound bites; bombast, swagger and certainty make for better TV."

They can be totally wrong, so long as they're assertive and entertaining. "The marketplace of ideas does not punish poor punditry. Few of us even remember who got what wrong. We are instead impressed by credentials, affiliation, fame and even looks -- traits that have no bearing on a pundit's accuracy."

5. Even the best economists make huge errors

Go back a decade to that classic article in BusinessWeek, "What Do You Call an Economist With a Prediction? Wrong." Four years later in "So I Was Off by a Trillion," BusinessWeek punctuated the message, reporting on Michael Boskin's classic error. Boskin, a Stanford economist and former chairman of the Council of Economic Advisers under Bush 41, "circulated a startling paper to fellow economists.

In it, he argued that the future tax payments on withdrawals from tax-deferred retirement accounts ... were being drastically undercounted. That meant federal budget revenues could potentially be in for a huge, unforeseen windfall ... of almost $12 trillion."

That also meant a political boost for Bush 43: "Larger than the sum of the 75-year actuarial deficits in Social Security and Medicare plus the national debt." Later, however, Boskin checked his numbers and "concluded that he had made a serious mistake: A key term had been left out ... possibly wiping out most of the estimated $12 trillion in savings." No surprise: Political ideologies often motivate "objective" economists.

6. Will the real Dr. Doom please stand up?

Roubini actually shares the Dr. Doom title with many others, including Hong Kong economist Marc Faber who publishes the "Gloom Boom Doom Report;" legendary Salomon Bros. strategist Henry Kaufman; and Houston billionaire Richard Rainwater, whom Fortune mentioned as Dr. Doom.

In addition, in one of our columns last summer, we reported on many others whose predictions of a coming recession predated Roubini's claim, though not called "Dr. Doom." They include: Pete Peterson, a Blackstone Group founder; Pimco's Bill Gross; Harvard financial historian Niall Ferguson; Warren Buffett; former SEC chairman Arthur Levitt; Jeremy Grantham whose GMO firm manages $100 billion; "Black Swan" author Nassim Nicholas Taleb; and long-time Forbes columnist, economist Gary Shilling.

Noteworthy, way back in 2004 Shilling specifically warned: "Subprime loans are probably the greatest financial problem facing the nation in the years ahead." And later in June 2007 Shilling said: "Just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end, if history is any guide.

Some astute pioneers, including Richard Bookstaber, who designed various derivative-laden strategies over the years, now fear that financial derivatives and hedge funds -- focal points of today's huge leverage -- will trigger financial meltdown." Then in a November 2007 column, "17 Reasons America needs a recession," Gross predicted a bailout of "Rooseveltian proportions" ahead. Yes, we were warned. In fact, seems everyone knew. But our denial was too powerful, hidden under our new culture of infectious greed.

The examples go on and on ... strongly suggesting that the "Roubini Hype Machine" may well be the "one-hit wonder" Portfolio calls him. He was not ahead of the competition with his December 2007 recession call. So if you're one of America's 95 million investors waiting for Roubini to call a bottom before getting back in the market, you'll miss the real turning point.

One final, crucial warning: This next bull will be short. First, it will suck money out of the mattresses of investors who are sitting on cash. Then Wall Street will recreate the insanity of the '90's dot-coms and the recent subprime-credit mania.

Wednesday, April 1, 2009

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turn keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever."

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out: A month ago, ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not aligned with market bid/offers

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course, ISDA made it seem that it was doing a favor to industry participants, very likely dictating under the gun.

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily.

In essence, ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.