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28 August 2009

While we are away

Thoughts

Model Portfolio Value As of 28 August 2009

$ 572,461

26 August 2009

Asian markets were higher with China up almost 2%. European markets are lower at midday and U.S. markets are flat as the trading day begins.
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Investors’ Intelligence had 51% bulls and 20% bears in its latest report.
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Stocks were down until new home sales (plus 10%) were announced and then a mini rally back to even ensued.
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WSJ: New-home sales climbed more than anticipated in July, staging their fourth straight month of strong gains. Sales of single-family homes increased 9.6% to a seasonally adjusted annual rate of 433,000, compared with the prior month. That was the highest number sold since September 2008. Sales in June and May were revised higher.

Earlier, the Commerce Department reported that manufacturers' orders for durable goods jumped 4.9% in July to a seasonally adjusted $168.43 billion. That was the largest increase since 5.4% in July 2007. Orders for June were revised up.
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WSJ: Federal judge Jed S. Rakoff fired a new shot in his challenge to a $33 million settlement by Bank of America Corp. over investor disclosures, saying the government's justification for letting individual executives off the hook is "at war with common sense." The Securities and Exchange Commission reached the settlement with the bank last month. The agency charged that a Bank of America proxy statement in November misled investors about bonuses for employees at Merrill Lynch, which was about to be acquired by the bank.

The SEC has said it couldn't investigate individual executives' culpability because they said they relied on lawyers' advice. Unless the executives waived their right to keep the advice private, the SEC said it would face "substantial obstacles" to building a case.

Judge Rakoff, who must approve any settlement, criticized that reasoning. If that were the regulator's policy, "it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel." He said if the company insists on attorney-client privilege, there is no way to test the assertion and determine whether executives or their lawyers were culpable.
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Toyota announced that it is cutting output while GM and Ford are ramping up output. Interesting.
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US Air is raising the bag fee for the first bag to $20. Southwest is offering flights for $59. The discounts – $59 each way on some routes – aren't quite as aggressive as a sale in July, in which some flights on shorter routes sold for $30 each way. Pretty soon it will cost more to fly bags than people.
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European markets ended lower, as mining, oil and gas shares came under pressure.
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Stocks closed flat on Wednesday in desultory trading.
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27 August 2009

Asian markets were mildly lower and so are European markets at midday. Gold is $946 and Oil has a $71 handle in early trading.
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New jobless claims 570,000.
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Preliminary second quarter GDP reading showed an annualized decline of 1.0%, better than the 1.5% decline that was expected. That was unchanged from the advance second quarter reading. Personal consumption during the second quarter fell 1.0%. Economists, on average, had expected personal consumption to fall 1.3%. The advance reading had been negative 1.2%. There are two more redigs before final is announced and we are on tenterhooks awaiting that final number.
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Boeing is up $3 per share today on its news that it will fly the new plastic plane by the end of 2009. Good Luck. The new schedule, Boeing said in statement, will give the company time to fix a structural flaw where the wings join the fuselage. The test flight was initially expected at the end of 2007 with the first deliveries in May 2008.
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Only Goldman Sachs is allowed to know:

The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot.

The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs must be made public by Aug. 31. The central bank wants Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.

“The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”
*****

The new home and existing home sales numbers have been positive this month. Supposedly the inventory of homes available for sale is at a 17 year low. Of course that number doesn’t include over 1 million homes that are in foreclosure that are not counted. Also the average price of new homes sold is at $210,000. We the taxpayers are giving first time home buyers an $8000 credit and so we are providing all the equity on homes that require 3% down payments.
*****

Shares of Citigroup rose Thursday on a report that closely watched hedge-fund manager John Paulson has been quietly buying the stock in recent weeks.

The share price of AIG jumped 30% this morning. Reuters reported that Robert Benmosche, the firm's new chief executive, has been reaching out to ex-CEO Maurice "Hank" Greenberg. The talks could lead to reconciliation between AIG and Greenberg, who was ousted from the company, according to Reuters. Separately, The Wall Street Journal reported Thursday that so-called pay czar Kenneth Feinberg is expected to formally approve Benmosche's $10.5 million pay package as early as next week.
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Boeing is up $4 and is skewing the DJIA which is down 10 points while the S&P 500 is down 0.5%.
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WSJ: The Federal Deposit Insurance Corp.'s fund that protects more than $4.5 trillion in U.S. bank deposits fell to just $10.4 billion at the end of June, as the banking industry continues to struggle with souring loans and regulators brace for pain in trying to clean up the mess.

The level of the FDIC's fund, the lowest since the savings and loan crisis, almost guarantees that the government will have to hit the banking industry with another special fee to recapitalize its reserves. The agency said it had 416 banks on its "problem" list at the end of the second quarter, up from 305 at the end of March.
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AIG traded 150 million shares today. It only has 135 million shares outstanding with a float of 115 million shares. The interim CEO Liddy received $1 total for all the grief he took. The new CEO Benmosche who is still on vacation is being paid about $5 million a year plus he received $3 million in stock that is now worth $10 million and he hasn’t been to the office yet. And AIG is still into the U.S. for $185 billion and counting.

The WSJ has a post on its website suggesting that the new CEO has put the swagger back in AIG and the he isn’t going to cower before U.S. Congress. Benmosche tells employees, according to Bloomberg. “It’s time the people in Congress stopped talking about you as the problem, because you’re the solution. It’s not your fault, it’s their fault, it’s the regulators’ fault.”

We suppose he means that if the regulators had done their job AIG employees wouldn’t have made the dumb bets they did. How about if the executives at AIG who are still there and were and are being bonused had done their jobs..... We guess that kind of thinking is not allowed in the new capitalism where failure is the governments fault for letting them do it and success means big bonuses all around and complaints about onerous taxes on those bonuses.
*****

European shares lost ground, as auto-sector weakness and losses for drinks maker Diageo offset gains from Credit Agricole and utilities.
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Oil ended at $72.50, Gold at $950.
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The major stock measures closed mildly better on the day. Breadth was flat.
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28 August 2009

Last night after the close Dell reported much lower but better than earnings and revenues; and this morning Intel raised its revenues and margin estimate. Tech stocks are smoking higher on the news.

Citi raised J Crew to a buy (the shares are at $34 after trading as low as $8 in March). And Goldman raised Williams Sonoma (wonder if they told the huddle folks first) which has the same story as JCG. We left a good chunk of change on the table but both those stocks are priced at 30 times 2010 earnings which is pretty rich.
*****

Asia was lower overnight- but Intel had not yet spoken- and Europe is higher at midday. Oil has a $73 handle and Gold is higher.
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Consumer spending in the U.S. rose in July as households took advantage of the government’s “cash for clunkers” program to buy new cars.

The 0.2 percent gain in purchases was in line with forecasts and followed a 0.6 percent increase in June, the Commerce Department said today in Washington. Incomes were unchanged, causing the savings rate to decrease.
*****

Incomes were unchanged in July after dropping 1.1 percent in the prior month. The decrease in income in June reflected the fading boost from government stimulus-related tax cuts and transfers.
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Bloomberg: Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007. Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks Inc., which left the business last year, is “reaching out to clients” to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation. “I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said. Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of Aug. 12, up 75 percent from May 6. The increase suggests money is being used for riskier home- loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn’t available.
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The banks are getting money at 0 to 0.5% interest cost from savers and lending it at 3% on up to speculators. And they are leveraging that lending 10/1 which means they are earning 30% and more on every savings dollar they acquire at 0.5% and less.

It is obscene that savers are being used by the Fed to rescue the banks. Where are the Republicans who caterwaul about increased taxes? The artificially low interest rates are the cruelest tax of all because the low rates punish ordinary folks who have been prudent while rewarding the speculators.
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An interesting story on the debacle known as auction rate securities:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0kvXdQtvCWw
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WP: J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
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We didn’t know that Senator Kennedy had proposed the same solution to the health care crisis as we did the other day. As the writer below says it is elegant in it simplicity:

http://www.govtrack.us/congress/bill.xpd?bill=s110-1218

http://www.govtrack.us/congress/bill.xpd?bill=s109-2229

The reasons this needs to be a big part of the public debate:

- This was Kennedy's last piece of unfinished life work. All those reporters who claim to know what Kennedy wanted are doing a disservice by not citing Kennedy's own legislation on the matter.

- Kennedy himself was personally pushing for a public option in the form of Medicare for All (this negates any claim that Kennedy would have not supported a public option).

- This is an example of what he would have wanted to pass (he reintroduced the bill, so it wasn't just some one-time idea of his).

- The bill was amazing in its simplicity, countering arguments that all health reform components are by nature arcane and indecipherable: every 5 years (every 2 years in another version) the eligibility for Medicare would be lowered by 10 years (and raised from below by 10 years), with those under 65 being asked to check a box on their taxes if they signed up for Medicare (to be charged for it). It's a simple model for the public option and hard(er) to lie about.

- I believe David Waldman at Daily Kos was correct when he pointed out that it would make sense for the public option to be the "Kennedy plan"; irrespective of the politics, it would make sense because Kennedy's own bill was a public option bill, not a comprehensive reform package with 100 moving parts.

This is an idea whose time has come, and there ought to be robust public discussion about it
*****

The action is more important than the news. The major measures opened higher on the bullish Intel and Dell news but now are in negative territory. The overnight heroes are holding their gains but trading below opening prices. This action is giving the bears a sliver, a very small sliver of hope while the bulls are attributing the action to the fact that it is the last Friday in August and many are or will be on vacation till after Labor Day.
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For those who say there are no bulls left below and the headlines for four market opinions featured on Bloomberg today:

Biggs Says World Stocks Will Gain as Economies Grow

Boockvar `More Optimistic' on Stock Markets Outside U.S.

Faber Says Japanese Stocks Could Rise on Election

Sanford C. Bernstein's Moffett Likes Time Warner Cable
*****

Gold ended the week up $10 at $957 and Oil gained pennies to $72.85. Europe closed higher.
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The Agriculture Department said it expects net farm income -- a widely followed measure of profitability -- to drop to $54 billion in 2009, down $33.2 billion from last year's estimated net farm income of $87.2 billion, which was nearly a record high.
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Farms with at least 1,000 cows are losing $30,000 to $40,000 a month reports day. Revenue from dairy products may fall 34 percent this year to $23 billion, while the value of meat animals will drop 11 percent, according to the USDA. "
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The major measures closed mildly lower on the day but were up for the week and of course are on their highs for the year.
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For your weekend reading enjoyment:

Helene Meisler, realmoney.com: The Investors Intelligence readings came out today, and they were so fascinating I figured we had to take a closer look at them. The bulls came in at 51.6%, which is a high for this cycle (that is, they haven't been this high since the market made its highs in October 2007). Bears were at 19.8%, which is also quite low, as I wrote about two weeks ago. Readings under 20% do not come along very often, even in bull markets.

So let's begin with a chart of Bulls plus Corrections. Investors Intelligence categorizes correction-minded folks as mainly bulls who are looking for a short-term pullback, so I like to lump them together with the bulls. When we put these two together, we rarely get a reading over 80%. This week's reading chimes in at 80.2%.


Going back to 2003 for the bulls out there, the first time we got a reading over 80% was mid-June. For those who were there, you might recall that we went into a six- or eight-week correction right after that. The charts are not lined up by date; I have circled the time frame we are looking at on both charts -- June through August.

My point here is that even in bull markets, a reading over 80% Bulls plus Corrections means sentiment has reached an extreme.
*****

Doug Kass, realmoney.com:

Kass: Market Has Likely Topped

By Doug Kass

8/26/2009 8:41 AM EDT

This blog post originally appeared on RealMoney Silver on Aug. 26 at 8:11 a.m. EDT.

Back in early March, there were signs of a second derivative U.S. economic recovery, the PMI in China had recorded two consecutive months of advances, domestic retail sales had stabilized, housing affordability was hitting multi-decade highs (with the cost of home ownership vs. renting returning back to 2000 levels), valuations were stretched to the downside and sentiment was negative to the extreme. These factors were ignored, however, and the S&P 500 sank to below 700.

To most investors, back in early March, the fear of being out was eclipsed by the fear of being in. Despite the developing less worse factors listed above, bulls were scarce to nonexistent in the face of persistent erosion in equity and credit prices.

It was at this point in time, on RealMoney Silver, in an appearance on CNBC's "Fast Money," on "Mad Money" and in multiple appearances on "The Kudlow Report," I confidently forecast the likelihood that a generational low had been reached.

I went on to audaciously predict that the S&P would rise to 1,050, a gain of nearly 400 points from the S&P low of 666 during the first week of March, by late summer/early fall. I even sketched a precision-like SPDRs (SPY) expectation chart that would reach approximately the 105 level (a 1,050 S&P equivalent) within about six months.

Yesterday the SPDRs peaked at 104.20, within spitting range of my intrepid March forecast of 105, and the S&P nearly touched 1040 in Tuesday's early morning trading.

Arguably, today investors face the polar opposite of conditions that existed only a few months ago, with economic optimism, improving valuations and positive sentiment.

To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices.

As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons.

Stated simply, in the current bull market in complacency, optimism and a boisterous enthusiasm reigns.

As I have written on these pages, the investment debate has morphed in a dramatic fashion from concerns as to whether U.S. economy was entering The Great Depression II to whether the current domestic recovery will be self-sustaining.

The primary question to be asked is, Will the earnings cycle dominate the investment landscape and cause investors to overlook the chronic and secular challenges facing the world's economies, particularly as the public sector stimulus is eventually withdrawn and paid for and the economic consequences of the massive public sector intervention manifest themselves in the form of higher interest rates and marginal tax rates?

Most now have accepted the notion that due to the replenishment of historically low inventories, extraordinary fiscal/monetary stimulation and the productivity gains from draconian corporate cost-cutting, the earnings cycle is so strong that it will trump the consequences of policy. More accurately, most believe that they can get out of the market before the full effects of policy are felt.

I am less confident as a decade of hocus-pocus borrowing and lending and 35-to-1 leverage at almost every level in both private and public sectors cannot likely be relieved in the great debt unwind over the course of only12 months.

It is important to emphasize that when I made my variant March call, I expected many of the conditions that now exist -- namely, a resurgence of economic and investment optimism during the summer to be followed by a multiyear period of weak investment returns. Specifically, I expected a mini production boom and an asset allocation away from bonds and into stocks to be embraced and heralded by investors, who would only be disappointed again in the fall as it becomes clear that a self-sustaining economic recovery is unlikely to develop.

My view remains that it is different this time. Again (now for emphasis), the typical self-sustaining economic recovery of the past will not be repeated in the immediate future for 10 important reasons that will weigh on the economy and markets like the governor that controlled the speed of the Good Humor truck I drove when I was in my teens during the summer:

  1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.
  2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
  3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
  4. The credit aftershock will continue to haunt the economy.
  5. The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.
  6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
  7. Commercial real estate has only begun to enter a cyclical downturn.
  8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
  9. Municipalities have historically provided economic stability -- no more.
  10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

Just as I looked over the valley in March 2009 toward the positive effects of massive monetary/fiscal stimulation within the framework of a downside overshoot in valuations and remarkably negative sentiment, I now suggest another contrarian view is appropriate as I look over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed.

Yesterday, the OMB/CBO provided an exclamation point to the secular challenges that the domestic economy faces in forecasting an accumulated deficit of $9 trillion over the next decade (up $2 trillion from the previous forecast just two months ago), and public debt as a percentage of GDP is projected at an alarming 68% by 2019 (as compared to 54% today and only 33% in 2001). Thus far, the drop in the U.S. dollar (influenced, in part, by the mushrooming deficit) has been viewed favorably by the markets, but we must now be alert to a downside probe that becomes a threatening market factor. In other words, what has been viewed positively could shortly become negatively viewed.

A double-dip outcome in 2010 represents my baseline expectation. When the stimulus provided by the public sector is finally abandoned, it seems unlikely to be replaced by meaningful strength or participation by any specific component of the private sector, and the burgeoning deficit (described above) will ultimately require a reversal of policy, leading to higher interest rates, rising marginal tax rates and a lower U.S. dollar. My forecast assumes that the market's focus will shortly shift from the productivity gains that have been yielding better-than-expected bottom-line results toward these chronic and secular worries.

Even more important, my forecast of a 2010 market peak reflects that the aforementioned nontraditional influences (and the untoward policy ramifications) will, at the very least, yield a broad set of uncertain economic outcomes that (in consequence and in probability) tilt away from a self-sustaining economic scenario sometime in the following 12 months.

Stocks bottom during times of fear. With the benefit of hindsight, the March 2009 lows represented a dramatic overshoot to the downside.

Markets top during times of enthusiasm. I believe that the markets are now overshooting to the upside and that the U.S. stock market has likely peaked for the year.
*****

john.crudele@nypost.com

AMERICANS should boycott the stock market.

No, I'm not kidding. And this isn't going to be one of those funny columns.

In fact, I'm deadly serious that investors shouldn't risk any more of their money until there are promises of a thorough investigation of Goldman Sachs.

Over the past few years I've looked into the much-too-cozy relationship between Goldman and Washington.

I've suspected that this Wall Street firm has been acting, in essence, as an arm of the government. And I am also pretty sure that if Goldman and Washington have something secret going on, the investment firm isn't doing it for altruistic reasons. There's money to be made.

In 2007 I reported in this column that Treasury Secretary Hank Paulson let the cat out of the bag when he confessed on a cable TV show that it was "my job to talk regularly to market participants . . ."

Paulson had been the chairman of Goldman right before taking the job as head of Treasury.

So, if he felt it was his "job" to talk with people on Wall Street then who else would he speak with if not his old friends at Goldman?

The head of the US Treasury would, of course, know lots of secrets. In the olden days, this would be called "inside information."

And despite Paulson's contention it would be entirely inappropriate for him to discuss sensitive matters with people who could profit from the information. It is, in fact, illegal. And the penalty could be jail time.

What has been of particular interest to me is whether Paulson contacted his friends at Goldman after a lunch with Federal Reserve Chairman Ben Bernanke on Thurs., Aug. 16, 2007.

That day Wall Street seemed to get wind of the idea that the Fed was planning to do something big, and stock prices rallied strongly at the very end of that trading session.

The very next morning Bernanke cut interest rates, the first of many such moves.

This was the start of the Goldman suspicions.

Lately, a media posse has been in hot pursuit of the firm. Finally!

A comprehensive, though somewhat antiquated, article ran in Rolling Stone magazine last month that laid out Goldman's manipulation of various markets.

Then The New York Times got hold of Paulson's phone records for Sept. 2008, which detailed loads of calls between him and Goldman right before the government's decision to bail out AIG, a huge insurance company.

AIG had taken large trading risks including many with Goldman on the other side of the transaction.

The Treasury said there was nothing wrong with the phone calls. Next the Wall Street Journal reported two things.

First, the paper said that Goldman has a habit of tipping off its big clients like hedge funds to market-moving calls that its analysts were about to make public.

The Securities and Exchange Commission and the Financial Regulatory Authority are looking into that. And regulators in Massachusetts are supposedly now investigating that.

And, in an interview with the Journal, Tim Geithner claimed the government never did anything to benefit Goldman.

But then he also admitted that Washington had been "forced to do extraordinary things and, frankly, offensive things to help save the economy."

Nobody bothered to ask about those "offensive" things and whether they had anything to do with Goldman.

The most intriguing recent mention of Goldman occurred back in July when a former employee of that company named Sergey Aleynikov was arrested for stealing proprietary computer codes.

The Justice Department snapped right to it, saying in court: "The bank (Goldman) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate the market in unfair ways."

Is that what Goldman was doing with the program? Was it manipulating the market in unfair ways? Why else would it have had such abilities?

Goldman briefly converted itself into a commercial bank last year so it could get taxpayer bailout money.

Yet even as it had our money in its pocket, Goldman continued high-risk trading that earned it a huge profit.

Even Goldman customers, I'm told, are annoyed about so-called "high velocity trading," in which Goldman's computers allow the firm to jump in front of trades coming from inside its own system.

Enough!

Both investors and other firms on Wall Street need to know what's going on, or the financial markets will never be considered fair again.

Some ambitious politician like Andrew Cuomo, New York State's Attorney General, might be up to giving Goldman a full investigation.

But this is really a job that Washington should do.

Either the Congressional Oversight Committee or the Justice Department should start doing their job. And if any investigator gets grief from the Treasury, then we will automatically know that there has been wrongdoing.

Meanwhile, investors should know they could be walking into the third act of a major drama.

And with the stock market in a mini-bubble since March, even without justification in economic fundamentals, be prepared if the curtain suddenly drops.
*****

Free advice? Is worth what you pay for it

Bloomberg: In June 2005, Milan’s city council voted to hire four banks to arrange Europe’s biggest-ever municipal bond sale at a fee of just 0.01 percent. That minuscule cost puzzled one councilman.

“I had a hunch something was wrong,” says Basilio Rizzo, one of 14 politicians on the 60-member council who tried to change the deal after becoming suspicious of the banks’ motives. “Banks can’t do things for free.”

Rizzo was onto something. Depfa Bank Plc, now a unit of Hypo Real Estate Holding AG; Deutsche Bank AG; JPMorgan Chase & Co.; and UBS AG charged Milan 168,532 euros ($239,189) to find investors for 1.69 billion euros of bonds -- the promised 0.01 percent. That wasn’t all.

As part of the deal, the same four banks were hired by the city to advise it on how to use the new bonds to restructure its existing debt in a way that would cut costs.

The banks had two pieces of advice for Milan: First, the city could save money by buying interest-rate swaps, which are derivatives designed to keep monthly payments low as rates change. Second, the institutions best prepared to sell them those swaps were none other than the banks themselves.

The four banks thus play four roles -- as underwriters, advisers, swap dealers and counterparties in the derivative contracts.

Undisclosed Fees

The group of banks wrote in a June 3, 2005, letter that the bond issue would save Milan about 55 million euros over the 30- year life of the bonds.

The firms never said what their fees on the swaps would be, public records show. Today, Milan faces so-called mark-to-market losses of 231 million euros on its swaps, according to council member Davide Corritore.

In all, the city’s losses include at least 101 million euros in hidden fees, according to Milan prosecutor Alfredo Robledo, who’s investigating the swap deals. The fees were buried because they were built into swap interest rates without any written explanation, the prosecutor says.

That 101 million euro price tag for Milan’s dealings with the four banks was 599 times the original figure of 0.01 percent for selling bonds and providing advice.

Without seeking competitive bids, the city agreed on June 16, 2005, to let the four banks sell them swap contracts. Neither the new swap rates nor the costs associated with them had been part of the original vote by the city council.

Seeking Indictment

Robledo said in July he would ask Milan judges to indict Depfa, Deutsche Bank, JPMorgan, UBS and 14 individuals, including two city officials, on fraud charges in connection with the swap deals.
*****

Reverse mortgage fraud WSJ: there are a lot of charlatans about.

In the wake of the mortgage meltdown, regulators and law-enforcement officials are sounding alarms about the potential for yet another type of mortgage fraud—this time, in the small but fast-growing reverse-mortgage market. Such fraud, though still rare, "is occurring in every region of the United States and reverse-mortgage schemes have the potential to increase substantially," according to a recent publication issued by the Federal Bureau of Investigation and the Office of Inspector General at the U.S. Department of Housing and Urban Development, which oversees the federally insured loans that account for some 99% of the reverse-mortgage market.

Available to people 62 and older, reverse mortgages allow homeowners to convert their home equity into cash. Instead of writing a check to the bank each month, the bank pays the homeowner, who can elect to receive a lump sum, a line of credit or monthly payments. The loan is repaid, with interest, when the borrower dies, moves, sells the house, or fails to pay property taxes or homeowner's insurance.

Reverse-mortgage fraud, typically committed by homeowners' relatives, caretakers or financial advisers, has also been cropping up recently in schemes to unload distressed real estate. Regulators cite cases in which real-estate speculators bought properties on the cheap and then sold them, using inflated appraisals, to senior citizens willing to take out reverse mortgages.

Lenders and administrators of the HUD program say reverse mortgages, for the most part, are still working well. "There are little scams around the edges," says Meg Burns, director of Single Family Program Development for the Federal Housing Administration, the HUD division that administers the reverse-mortgage program. But she dismisses talk of widespread abuse as "unsubstantiated."
*****

$5 million in campaign donations for the mayor of Bolingbrook, Illinois.

Chgo Trib: He tools around town in a Jaguar. He jets off to China, the Bahamas, Philippines or to California golf resorts. He dines at swanky restaurants. And for entertainment, he's taken people to a Bears playoff game.

He is the boss of Bolingbrook, Roger Claar, who has brought a big-city style of money, power and influence to serving as mayor of a mid-size suburb.

The high life is not funded by Claar's $129,000 salary. Instead, the money comes from his campaign -- flush with cash from donors, many of whom have gotten millions in village contracts.

Since 1999, Claar has taken in more than $5 million in donations, according to records reviewed by the Tribune. His campaign had a balance of more than $1 million in cash and investments, in the latest reporting period.

Nearly half of his donations came from companies and individuals who have done business with Bolingbrook. Those contributors received more than $300 million in village work -- nearly 60 percent of the money that Bolingbrook spent on vendors over the last decade, the Tribune analysis shows.
*****

 

25 August 2009

Events and comments continue while we are away and so we will be commenting haphazardly the next two weeks.

Thoughts

Model Portfolio Value As of 25 August 2009

$ 572,461

24 August:

Asian and Europe were both higher overnight.
*****

Nokia was dropped to neutral from buy by Deutsch Bank.
*****

The WSJ had a front page article reporting that Goldman Sachs gave stock tips to favored clients and its own traders before making that info know to all its clients. We aren’t surprised.
*****

European shares ended higher amid continued hopes for an improving economy, with gains from miners helping the advance.
*****

Only in the United States:

From http://www.ksdk.com/news/local/story.aspx?storyid=183294

Jim Lynch Hummer in Chesterfield has some new inventory. It includes tactical rifles, handguns, shotguns, and ammunition. Lynch says he began realizing about two years ago he was going to have to sell something besides, or in addition to, Hummers.

"It slowly started going down," said Lynch. "And then with the fuel prices, sales really took a big dip. And again with the economic crisis."

So Lynch was looking for a product that would mix well with his Hummers. He opted for the sportsman's angle.

"Well a lot of our Hummer owners were gun owners, already," said Lynch. "So we had a very favorable response. Didn't have enough business to keep this big, beautiful building going with the decline, so we decided we needed to do something else. And the guns fit in with our customer base... a lot of sportsman, a lot of outdoorsmen, and they've loved it."

Lynch said he had to get a license from the Bureau of Alcohol, Tobacco, and Firearms in order to sell weapons. He turned to his current staff to make those sales.

"We were lucky enough we had some people that had been in the gun business, before. We had a retired police officer who worked in the parts department that had been a gun dealer and had been a competitive shooter. We hired one gentleman that had been with Glock for eleven years as a regional rep. He retired from Glock, came to work for us."

Lynch's customers seemed to agree that guns and hummers go together.


Graham Hill said, "I think it's pretty awesome, to be honest. I think he's got a lot of interesting pieces and some guns I've not seen anywhere else."

Jim Prichard was asked if he was there for guns or Hummers.

"Guns," said Prichard. "I am a gun enthusiast, and their prices are comparable to other shops in the area."

Russell Henderson admired Lynch's supply of ammunition.

"They've got a great selection. Got a great selection of ammo I haven't been able to find in other places," said Henderson. "More common ammo, the 9mm, it's getting harder to find. The 38-special is hard to find, just because it's getting more popular. And they have a good selection of it here."

Lynch's website is gunsandhummers.com.
*****

A must read from: http://trueslant.com/matttaibbi/2009/08/21/aigs-new-chief-is-a-raging-dickhead/#more-702

Ladies and Gentlemen, AIG’s New Chief!

Benmosche told staff he was working to get Kenneth Feinberg, the Obama administration’s so-called special master for executive pay, to “buy into” a new compensation plan for all employees expected within months. Benmosche will get $7 million in salary and as much as $3.5 million a year in long- term incentive awards, AIG said.

“I want to make sure we all get paid competitively,” he said. “If you shoot the lights out in a given year, we should have enough flexibility to give you a big increase.”

This is via friend Eric Salzman over at Monkey Business Blog, who sent it to me under the subject line, “Low hanging fruit.”

The recently-crowned head of international financial embarrassment AIG, Robert Benmosche, has launched a campaign to “restore morale” to his beleaguered employees, who are apparently a) cracking under the strain of public anger and b) having performance anxiety that may be linked to a fear that they will never again be allowed to make obscene and undeserved bonuses, so long as the taxpayer is writing their checks.

This is very sad, no doubt, and must be a terrible burden for anyone working on Wall Street to have to bear. So into the breach steps Benmosche, who became CEO of the firm last month. His new public mantra is that what happened to AIG isn’t the fault of AIG, but rather the fault of the government regulators who allowed AIG to destroy itself and iceberg the hull of the American economy. This is how he put it:

“It’s time the people in Congress stopped talking about you as the problem, because you’re the solution,” he said. “It’s not your fault, it’s their fault, it’s the regulators’ fault.”

In reporting this story Bloomberg, following this quote, did not immediately add a phrase like, “Benmosche after uttering this appalling horseshit quickly stepped sideways so as to avoid the lightning bolt that rained down from the heavens, frying to a crisp two senior executives and the company’s communications chief, Christine Pretto.” Instead, Bloomberg saw fit to bolster Benmosche’s insane argument by writing this:

The Office of Thrift Supervision “fell short” in its oversight of AIG’s credit-default swaps, Scott Polakoff, a former acting director of the regulator told lawmakers at a hearing in March.

This is all part of a kind of new legend AIG is trying to sell to the public, which is that AIG was actually a very good, sound company that happened to be undone by a lone madman named Joe Cassano, whose tiny AIG Financial Products division destroyed the firm with its toxic CDS portfolio. According to this legend, the OTS should have caught wind of what Cassano was doing and put a stop to it, since it is clearly the job of the regulators, not senior management, to prevent the mismanagement of hundred-billion-dollar portfolios by corporate underlings. Because the government shirked those responsibilities, the more than 100,000 good employees of AIG ended up suffering when in fact they and AIG senior management was innocent of all wrongdoing.

Two things about this. One, let’s not forget that AIG went out of its way to cherry-pick the weak and understaffed OTS as its primary regulator by chartering an S&L called the AIG Federal Savings Bank in Wilmington, Delaware back in 1999. By this little maneuver AIG got itself declared a thrift holding company, which made the OTS, which only had one insurance expert on its staff, the primary regulator for the world’s largest insurance company.

Two, the notion that AIGFP was AIG’s only problem is bananas. It may not even have been AIG’s biggest problem. This legend obscures the fact that playing a nearly equal role in the demise of AIG was AIG’s securities-lending business, headed by yet another bombastic narcissist (AIG must lead the world in the hiring of these to senior management) named Win Neuger. Neuger back in the earlier part of this decade issued a clarion call to his subordinates, announcing a plan he called “10 cubed” — securing 1000 million (i.e. $1 billion) dollars a year in profits. Back in 2005 he told his staff that anyone who wasn’t on board with the plan to make a billion in profits a year could hit the road, literally, saying, “If you do not want to be on this bus, it’s a good time to step off.”

But how does one make a billion in annual profits in the normally staid, risk-averse securities lending business? By taking the collateral from the securities you lend out and investing it not in low-risk or risk-free instruments like treasuries, but in residential mortgage backed securities!

Neuger’s insane decision to bet billions in AIG collateral on the residential housing market was the other half of the story of AIG’s death spiral. Fully $43.7 billion of the bailout monies paid to AIG’s counterparties via the Maiden Lane facilities were tied not to Joe Cassano and AIGFP, but to the sec-lending operation. So is it plausible that AIG’s senior management could have simply not understood where all those billions in revenues from AIGFP were really coming from all those years? I don’t think so, but I know one thing for sure: it’s definitely not plausible that AIG’s senior management could have been unaware where the money was coming from both Cassano’s and Neuger’s operations.

This was a company that was tired of the boring, safe insurance business and decided not only to take its assets and bet them on the residential housing market, but to borrow massively and double and triple down on those bets. This was a systemic, company-wide insanity. So for Benmosche to blame all of this on the OTS is… well, it’s characteristic of what these people are like. On some level they really believe that if the government is not kicking their doors in and wrapping them all up in hoods and zip-ties, then whatever they are doing is not only okay but good business.

Moreover, there’s this about Benmosche’s comments. It wasn’t the OTS that kept Joe Cassano on the payroll for a million bucks a month for seven whole months after it was revealed that he had incurred tens of billions in losses via his CDS portfolio, among other things by steering independent auditors away from his books, and after he had twice declared publicly that he could not foresee even “one dollar” of losses. That would be AIG that did that (they didn’t stop the payments until a month after the bailout).

And it wasn’t the OTS that decided to keep Win Neuger around as the Chairman and CEO of AIG Investments to the present day. Hell, Neuger is still an Executive Vice President of AIG. We the taxpayer are probably going to be giving this guy a nice bonus this year, because AIG couldn’t see fit to fire the man who single-handedly inspired $43 billion in bailout payments. It is for the right to increase compensation to valuable retained personnel like Neuger that Benmosche is now going to the mattresses with Kenneth Feinberg, Obama’s special master in charge of executive pay.

It gets better. Benmosche’s Knute Rockne address to the troops included a vote of reassurance to all those subordinates who might worry that the company’s status as the ward of a bunch of pissed-off, pitchfork-ready taxpayers should not deter any man jack of them from passing up any ethically-dicey chance to make money. Are you worried about what he regulators might think? Well, Benmosche says, don’t worry! Just put the ol’ nose to the grindstone and keep cranking out that “creativity”!

Benmosche told employees not to be immobilized by concern that they will upset regulators.

“My fear is that you’ll say, ‘I don’t know if Treasury wants it, I don’t know if the Fed wants it, I don’t know if the lawyers want it, I don’t know whatever,’” he said. “If you sit there every day not making the right decisions to take us to the next level, we’ll miss an opportunity.”

The Benmosche interview proves what most of us have long suspected, that the trip these Wall Street dickwads all took to the financial woodshed last year has taught them absolutely nothing. They believe implicitly in their divine right to make gigantic gobs of money, even if that money has to be borrowed from all of us, even if it means the entire financial services industry has to be backstopped by government guarantees. And the sad thing is that even a brief sojourn in the desert of fiscal modesty might help not only politically, but help them not suck at their jobs so much — but they don’t want to hear it.  They just don’t get that it’s exactly that hunger for big individual compensation that turns ordinary sane people into Joe Cassanos and Win Neugers. I mean, the clock hasn’t even struck a year on AIG’s bailout yet, and this clown is already whining in public that the government isn’t letting him pay out giant bonuses. The level of cluelessness necessary for a move like that is off the charts, like Stephon Marbury-level insane.

I agree with Salzman, this is an easy call for Tim Geithner. Or, it would be, if Tim Geithner had balls between his legs, instead of a pair of Ford Foundation cufflinks his Daddy bought him as a present for his graduation from Dartmouth. This guy Benmosche should not only be fired immediately, he should be doused in barbecue sauce and dropped in a pool full of mako sharks. At the very least as a signal to the public that someone is paying attention, this guy has to go.

But would you bet money on that happening? I wouldn’t.
*****

Stocks jumped higher in early trading but finished the day flat.
*****

25 August

Obama reappointed Bernanke for another term as Fed Chairman.
*****

Asian and European markets were and are lower. China was down 2.6%. Oil has a $74 handle and Oil is at $945.
*****

After thirty minutes of trading Fannie Mae ahs trade 300 million shares, yesterday it traded 1 billion shares or half the outstanding shares. The average daily volume for the past month has been 110 million shares. The low priced speculators are back.
*****

The Consumer Confidence Index for August came in at 54.1, which is above the 47.9 that was widely expected and marks a sharp improvement from the upwardly revised July reading of 47.4.
*****

One of President Obama's golfing buddies Monday was a top donor to his campaign and the president of a bank at the center of a U.S. investigation into illegal tax shelters.

Robert Wolf, the president of UBS Americas, a Swiss-based bank, joined Obama at the elite, and difficult, Farm Neck Golf Club in Oak Bluffs. Deputy press secretary Bill Burton described the two men as "friends."
*****

Is Obama the next LBJ:

“I think it is serious and it is deteriorating,” Admiral Mullen said Sunday on CNN’s “State of the Union” program. “The Taliban insurgency has gotten better, more sophisticated, in their tactics.” He added that General McChrystal was still completing his review and had not yet requested additional troops on top of the those added by Mr. Obama.
*****

Two stories from http://digbysblog.blogspot.com/

Look at this, a media organization bothered to interview some of the people suffering the most under the current health care system!

Such scaremongering has dismayed and infuriated Sharon Lee, the doctor who now treats Manley in Kansas City. "I'm very angry, very angry," she says. "Many of the people I treat have already been in front of a death panel and have lost – a death panel controlled by insurance companies. I see people dying at least monthly because we have been unable to get them what they needed."

Lee's clinic, Family Health Care, is a refuge of last resort. It picks up the pieces of lives left shattered by a health system that has failed them, and tries to glue them back together. It exists largely outside the parameters of formal health provision, raising funds through donations and paying all its 50 staff – Lee included – a flat rate of just $12 an hour [...]

Beth Gabaree, who came in to see Lee for the first time this morning, has experiences that sound extreme but are in fact quite typical. She has diabetes and a heart condition. Until two years ago they were controlled through ongoing treatment paid for by her husband's work-based health insurance. But he was in a motorbike crash that pulverized his right leg and put him out of work.

That Catch 22 again: no work, no insurance, no treatment. Except in this case it was Beth who went without treatment, in order to put her husband's dire needs first. He receives ongoing specialist care that costs them $500 a go, leaving nothing for her. So she stopped seeing a doctor, and effectively began self-medicating. She cut down from two different insulin drugs to regulate her diabetes to one, and restricted her heart drugs. "I do what I think I need to do to keep four steps out of hospital. I know that's not the right thing, but I can't justify seeing the doctor when my family's already in money trouble."

The problem is that she hasn't kept herself four steps out of hospital. Her health deteriorated and earlier this year she became bedridden. Even then, it took her family several days to persuade her to go to the emergency room because she didn't want to incur the hospital costs. "It was hard enough without that," she says.

After an initial consultation, Lee has now booked Gabaree for a new round of tests for her diabetes and is arranging for free medication. "It's wonderful," Gabaree says. "I'm so blessed. I didn't know you could get this sort of help."

That she sees basic healthcare as a blessing, not as a right, speaks volumes about attitudes among the mass of the working poor. Also revealing is the fact that Gabaree has absolutely no idea about the debate raging across America. She hasn't even heard of Obama's push for health reform, nor the Republican efforts to prevent it. "I don't watch much television," she says.

There are 47 million voiceless people who have no access to the health care debate itself, let alone access to participate in it. They would be the biggest beneficiaries of reform, and yet they lack information about what is being attempted, and they certainly lack the wherewithal to do anything meaningful about it. At least this one news organization has offered a small voice to those suffering through the horrors of the lifestyle of the permanent underclass in America.

One thing though.

This story will never be read in an American newspaper. It comes from The UK Guardian.

Hey, at least the Brits are getting the full range of debate...

And the other story:

Well, bowl me over with a feather. The mainstream media finally looks at how the health care debate has unfolded and who is benefiting:

Lashed by liberals and threatened with more government regulation, the insurance industry nevertheless rallied its lobbying and grass-roots resources so successfully in the early stages of the healthcare overhaul deliberations that it is poised to reap a financial windfall.

The half-dozen leading overhaul proposals circulating in Congress would require all citizens to have health insurance, which would guarantee insurers tens of millions of new customers -- many of whom would get government subsidies to help pay the companies' premiums.

"It's a bonanza," said Robert Laszewski, a health insurance executive for 20 years who now tracks reform legislation as president of the consulting firm Health Policy and Strategy Associates Inc.

Some insurance company leaders continue to profess concern about the unpredictable course of President Obama's massive healthcare initiative, and they vigorously oppose elements of his agenda. But Laszewski said the industry's reaction to early negotiations boiled down to a single word: "Hallelujah!"

Hallelujah indeed.

Too bad they buried the lead:

One of the Democratic proposals that most concerns insurers is the creation of a "public option" insurance plan. The industry launched a campaign on Capitol Hill against it, grounded in a study published by the Lewin Group, a health policy consulting firm that is owned by UnitedHealth Group. The lobbyists contended that a government-run plan, which would have favorable tax and regulatory treatment, would undermine private insurers.

Opposition increased this month when boisterous critics mobilized at town hall meetings held by members of Congress home for the August recess.

The attacks, supplemented by conservative critics on talk radio and other forums, drew national attention.

Leading insurers, including UnitedHealth, urged their employees around the country to speak out. Company "advocacy hot line" operations and sample letters and statements were made available to an army of insurance industry employees in nearly every congressional district.

Some insurers supplemented the effort with local advertising, often designed to put pressure on specific members of Congress. Late in the spring, Blue Cross Blue Shield of North Carolina -- the home state of several conservative Blue Dog Democrats -- prepared ads attacking the public option.

You'd think that would be a big story in itself, but I suppose if people made their way to the end, they'd get the picture.

They conclude:

Leading Democrats have fought back, with House Speaker Nancy Pelosi (D-San Francisco) last month calling the industry "immoral" for its past treatment of customers and suggesting insurers were "the villains" in the healthcare debate.

Still, recent support for the public option has declined, and the stock prices of health insurance firms have been rising.

Yes, funny how that happens.

Eric Boehlert pegged this correctly: it's the Swift Boat technique and it continues to work like a charm. Someday, maybe the media will find some interest in that as it's actually happening, but I doubt it. The political establishment certainly doesn't seem to care about it in the least since they keep reliving it over and over again like it's some kind of sacred hazing ritual.
*****

The end of excess?

NYDN: Even in death, Marilyn Monroe is still snagging millionaires. An unidentified deep-pocketed fan who clearly prefers blonds placed the winning $4.6 million bid Monday in an eBay auction for the crypt directly above the sexy screen icon's grave. Beverly Hills widow Elsie Poncher put her husband's strategically positioned crypt on the auction block with a starting price of $500,000. Bidding soared to $4.5 million three days later. "Here is a once in a lifetime and into eternity opportunity to spend your eternal days directly above Marilyn Monroe," the eBay auction description boasted.
*****

Who would have thunk it. If you bought Intel in 1998 you would still have a 10% loss on your purchase.
*****

Bloomberg: Societe Generale SA, France's second-largest bank by market value, plans to expand its commodities team about 35 percent by the end of next year, seeking to double the size of the business. Bank of America Corp., Barclays Plc and Morgan Stanley are also expanding their commodity businesses as a doubling in copper and 66 percent gain in crude oil.

Timing is everything and the easy money may have been made and what else is new? When was the Crash and layoffs? Oh that is last year’s news although the real sell off was only 5 months ago. How quickly they forget when someone else’s dime saved them.
*****

European shares edged higher, notching a fresh annual high in the process, as gains for telecom stocks offset losses for miners.
*****

From http://alegrescorner.soapblox.net/

Open Thread: Why Didn't We Try Single Payer?

Tue Aug 25, 2009 at 09:14:59 AM EDT


*****

Crude oil fell more than $3 a barrel after prices failed to rise above a technical resistance level at $75 a barrel. Oil dropped as much as 4.4 percent in its first decline in six days. Earlier, it touched $75 following a report from the Conference Board that confidence among U.S. consumers increased in August as people became less worried about the outlook for the labor market.
*****

Stocks ended better on Tuesday with breadth 3/1 positive.
*****

 

21 August 2009

We are taking the next two weeks off and will return the day after Labor Day September 8. Since we will be making no trades and the Feds have lowered rates so much that no interest is being earned the value of the Model on September 8 will be the value today.

Thoughts

Model Portfolio Value As of 21 August 2009

$ 572,461

Asia was mixed overnight and Europe is higher. Oil has a $73 handle and Gold is $945.
*****

From Wikipedia:

Occam's razor or Ockham's razorhttp://en.wikipedia.org/wiki/Occam%27s_razor - cite_note-0 is the principle that "entities should not be multiplied unnecessarily" or, popularly applied, "when you have two competing theories that make exactly the same predictions, the simpler one is the better." It is apocryphally attributed to 14th-century English logician and Franciscan friar, William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory. The principle is often expressed in Latin as the lex parsimoniae ("law of parsimony", "law of economy", or "law of succinctness"): entia non sunt multiplicanda praeter necessitate, roughly translated as "entities must not be multiplied beyond necessity." An alternative version Pluralitas non est ponenda sine necessitate translates "plurality should not be posited without necessity."

When competing hypotheses are equal in other respects, the principle recommends selection of the hypothesis that introduces the fewest assumptions and postulates the fewest entities while still sufficiently answering the question. It is in this sense that Occam's razor is usually understood. To quote Isaac Newton: "We are to admit no more causes of natural things than such as are both true and sufficient to explain their appearances. Therefore, to the same natural effects we must, so far as possible, assign the same causes."

To summarize the common understanding of the principle, "Of several acceptable explanations for a phenomenon, the simplest is preferable, provided that it takes all circumstances into account."

Originally a tenet of the reductionist philosophy of nominalism, it is more often taken today as a heuristic maxim (rule of thumb) that advises economy, parsimony, or simplicity, often or especially in scientific theories. Here the same caveat applies to confounding topicality with mere simplicity. A superficially simple phenomenon may have a complex mechanism behind it. A simple explanation would be simplistic if it failed to capture all the essential and relevant parts. Instead, one should choose the simplest explanation that explains the most data.

The word "razor" in this sense is not derived from shaving razor, rather both terms derive from the verb to raze, the "cutting away of extraneous material".
*****

Forget 1100 pages of health care reform and extend Medicare to all on a gradual scale (lower eligibility to buy in to 60 this year, 58 next year etc.) and require those under 65 to pay 5% of their adjusted gross income if they wish to participate.
*****

KKR has filed to make a public offering of Dollar General shares in the next few weeks. KKR took Dollar General private in 2007 for the price of $8 billion. Underwriters are going to price the new shares to reflect a value about 50% higher that the take out price. In the last quarter Dollar General earned $80 million. Multiply by 4 and that gives earnings of $320 million on a $12 billion or more valuation. That’s nuts but them it will be a new name in the retail space and there are institutions that have to own new names. And KKR will pay itself and it investors $200 million of the $750 million raised on the offering as a dividend. Pricing Dollar General at $12 billion means that it is one of the few retailers to be worth more in 2009 than it was in 2007.

The game is on again.
*****

According to the July existing home sales report, annualized sales hit 5.2 million. Economists, on average, were expecting a sales rate closer to 5.0 million following the rate of 4.9 million that was originally registered in June. Based on the data, July existing home sales increased 7.2% month-over-month, which was better than the 2.1% monthly increase that was widely expected.
*****

Dick Arms, realmoney.com: After the sharp drop of last Friday and Monday, the subsequent rally has gone further than would normally be expected, but that does not seem to change the basic situation. It is reflecting a high level of resiliency, and probably a great deal of short-covering on the part of traders who were disappointed that the decline found support so quickly.

But it still appears that the up move that began in March, and then accelerated in July, ran into very tough overhead supply, moved in a big lateral move for two weeks, and then gave an unmistakable sign of weakness with the penetration of the bottom of the consolidation.

It has been particularly noticeable that the total market volume on recent down days has been heavier than on the up days. That implies money leaving the marketplace and points to further weakness ahead.
*****

CNBC is running pictures of all the Fed folks in Montana at Jackson Hole enjoying the weekend as they conference with economists and CEOs and Bankers and Brokers. From the pictures of the luxury where the conference is being held one wouldn’t know that millions of common folk are losing their homes and millions of savers are receiving 0 interest on their savings in order that the folks at the conference can keep their jobs.
*****

WSJ: A survey found that one in eight U.S. households with mortgages was in foreclosure or behind on its mortgage payments during the second quarter, putting added pressure on programs aimed at preventing foreclosures.
*****

Take with several grains of salt:

August 21, 2009 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from a recession after “aggressive” action by central banks and governments. “After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said today in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.

And here was Fed Chairman Ben Bernanke on June 8, 2008: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
*****

From Wikipedia: grain of salt is a literal translation of a Latin phrase, (cum) grano salis.

In common parlance, if something is to be taken with a grain of salt, it means that a copious measure of skepticism should be applied regarding a claim; that it should not be blindly accepted and believed without any doubt or reservation. According to the Oxford English Dictionary "to take 'it' with a grain of salt" means "to accept a thing less than fully". It dates this usage back to 1647. According to The New Dictionary of Cultural Literacy, the phrase also means to "view a statement with a skeptical attitude."

The phrase comes from Pliny the Elder's Naturalis Historia, regarding the discovery of a recipe for an antidote to a poison. In the antidote, one of the ingredients was a grain of salt. Threats involving the poison were thus to be taken "with a grain of salt" and therefore less seriously. An alternative account says that the Roman general believed he could make himself immune to poison by ingesting small amounts of various poisons, and he took this treatment with a grain of salt to help him swallow the poison. In this version, the salt is not the antidote; it was taken merely to assist in swallowing the poison.
*****

European shares ended the week on a strong note, after data fed hopes that the European economy is improving. The big three were up 2% and more.
*****

Caveat emptor:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a2YZUQ.RazXw  has the story of mom and pop saver who bought CIT and GMAC and Lehman bonds last year because they needed income and the bonds were rated investment grade and the nice folks at InCapital were happy to sell them to the innocents. The SEC and FINRA are looking into the sales practices. Grandma and grandpa shouldn’t hold their breath waiting for the regulatory authorities to act.
*****

From Wikipedia: Under the doctrine of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects. The modern trend in the US, however, is one of the Implied Warranty of Fitness that applies only to the sale of new residential housing by a builder-seller and the rule of Caveat Emptor applies to all other sale situations (i.e. homeowner to buyer). Many other jurisdictions have provisions similar to this.

Before statutory law, the buyer had no warranty of the quality of goods. In many jurisdictions, the law now requires that goods must be of "merchantable quality". However, this implied warranty can be difficult to enforce, and may not apply to all products. Hence, buyers are still advised to be cautious.

In addition to the quality of the merchandise, this phrase also applies to the return policy. In most jurisdictions, there is no legal requirement for the vendor to provide a refund or exchange. In many cases, the vendor will not provide a refund but will provide a credit. In the case of software, movies and other copyrighted material many vendors will only do a direct exchange for another copy of the exact same title. Most stores require proof of purchase and impose time limits on exchanges or refunds. However, some larger chain stores will do exchanges or refunds at any time with or without proof of purchase- although they usually require a form of picture ID and place quantity or dollar limitations on such returns.

Laidlaw v. Organ[3], a decision written in 1817 by Chief Justice John Marshall, is believed by scholars to have been the first U.S. Supreme Court case which laid down the rule of caveat emptor in U.S. law.]

In the UK, consumer law has moved away from the caveat emptor model, with laws passed that have enhanced consumer rights and allow greater leeway to return goods that do not meet legal standards of acceptance.] Many companies operating in the UK, as well as most consumer based economies, will allow customers to return goods within a specified period for a full refund, even if there is no problem with the product.
*****

We have a fire in the fireplace today in august but:

From http://www.theleftcoaster.com/

Our warming world.

As NOAA reports, July 2009 was the 5th warmest July on record since 1880 when measuring the global land and sea surface temperatures and higher than the average for the 20th century. Yet at the same time, the North American temperature was cooler than average.

And meanwhile, the thinning of the northern hemisphere's sea ice continues apace.

Just goes to show that local changes aren't necessarily the whole story. Global climate change is entrenched and we need to mitigate the worse and start planning for the next phase which is on its way.
*****

Oil closed at $74.03. Gold gained $13 to $954.
*****

U.S. oil consumption is 20 million barrels of oil per day. Since January the price of oil is up $30 per barrel. That works out to $900 million more per day or $27 billion more per month or $324 billion per year which is more than the consumer part of the stimulus package.
*****

All the major stock measures closed on their highs for the year with the DJIA up 150 at 9500. The S&P 500 gained 20 to 1027 and the NAZZ jumped 30 to 2020.

Breadth was 4/1 positive and volume was light.

It will be a happy weekend for the bulls.

We’ll be back after Labor Day.
*****

 

20 August 2009

Thoughts

Model Portfolio Value As of 20 August 2009

$ 572,461

Stocks were higher pre-opening following on gains in Asia and Europe overnight until the jobless claims report. There was an increase of 15,000 to 576,000 in the latest week and that moved the major measures back to neutral. Oil and Gold are flat in early morning trade.
*****

China was up 4.5% overnight after being down 20% in the last 8 trading days.
*****

Bloomberg: Sears share price fell 13 percent in early U.S. trading after reporting an unexpected second-quarter loss. Excluding some items, the loss was 17 cents a share. Analysts had projected profit of 35 cents, the average of six estimates compiled by Bloomberg. Sales at U.S. Sears stores open at least 12 months declined 13 percent as consumers bought fewer washers, dryers and refrigerators and clothing. Same-store sales at Kmart fell 3.9 percent.
*****

Yahoo: The Conference Board’s Index of leading economic indicators showed a 0.6% increase in July. Leading indicators were expected to show a 0.7% increase following the 0.7% increase that was initially registered in June. June's data was recently revised to show a 0.8% increase. Meanwhile, the Philadelphia Fed Index came in at 4.2, which is considerably better than the -0.2 that was expected and up sharply from the -7.5 that was registered in July.
*****

AP: More than 13 percent of American homeowners with a mortgage are either behind on their payments or in foreclosure as the recession throws more people out of work, the Mortgage Bankers Association said Thursday. The record-high numbers in the report are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis. As of June, more than 4 percent of all borrowers were in foreclosure and about 9 percent had missed at least one payment. One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures.

The worst of the trouble is still concentrated in California, Nevada, Arizona and Florida, which accounted for 44 percent of new foreclosures in the country. Nearly 12 percent of all loans in Florida were in foreclosure, the highest in the country, followed by Nevada at 9 percent.
*****

Chgo SunTimes: More than 30 percent of single-family homes in the Chicago metropolitan area had mortgages that were greater than the value of the home at the end of June, according to a report from First American CoreLogic. That's 550,572 Chicago area homes with negative equity. Statewide, 29.4 percent -- 650,720 properties -- had negative equity, also known as having an "underwater" or "upside down" mortgage. The state and metropolitan area fared slightly better than the nation, which had 32.2 percent of properties with negative equity, the report said. It showed a bit of improvement from the end of March, when 32.5 percent of homes had negative equity nationally. The states with the greatest percentage of underwater mortgages: Nevada, 65.6 percent; Arizona, 51 percent; Florida, 49.4 percent; Michigan, 47.9 percent, and California at 42 percent.
*****

European shares ended higher, as shares of oil producers and miners got a boost from higher commodity prices.
*****

Oil was up 10 pennies at $72.24 and Gold lost 3 to $942.
*****

Stocks closed higher with the DJIA up 70 at 9350. The S&P 500 gained 10 to 1008 and the NAZZ jumped 20 to 1990.

Breadth was 2/1 positive and volume was expiration moderate.

The bulls are smiling all the away to the bank.
*****

 

19 August 2009

Thoughts

Model Portfolio Value As of 19 August 2009

$ 572,461

Everyone needs a vacation:

Audrey Steele, 82, from New Bedford, said she does not want the government to get involved with health care because "they just make a mess of everything," referring to the $700 billion bailout of financial institutions that was used to pay for lavish conferences and hefty executive compensation.
*****

We read that quote in the Wisconsin State Journal referring to a town hall meeting conducted by Barney Frank in Massachusetts. The obvious of course is that Audrey is being supported by and cared for by the two government programs which proves that the government can do things better. And the bailout was the result of private enterprise run amok. But if we point that out, we are considered latte-drinking, sushi-eating, Volvo-driving liberals. Which we are.
*****

Asian markets were lower overnight with China down 4% and 9% so far this week on top of a 10% drop last week. European bourse indexes are lower and Oil has a $68 handle wilt Gold is $3 lower.
*****

Investors’ Intelligence has 48% bulls and 23% bears.
*****

AOL: According to an analysis by the New York Times and David Cay Johnston for Tax Notes (subscription only), the last IRS report on the top 400 taxpayers showed that they made a little more than a penny of each dollar of total income in America, but paid income taxes at a 17.2 percent rate. Add in payroll taxes and the figure still rounds to 17.2 percent. Those top 400 paid a tax rate roughly half that of a family making $75,000 a year -- which was 37 percent -- 25 percent for the income tax rate and 12 percent for payroll tax.
*****

WSJ: Hewlett-Packard's fiscal third-quarter profit dropped 19% to $1.64 billion as revenue fell 2.1% to $27.45 billion. The PC and printer maker reported lower international sales and falling margins, and said profit at most of its segments also slowed. Results, though, beat the company's own targets issued in May, and H-P gave a fourth-quarter earnings forecast above expectations. The company said it saw improvements in its consumer PC business. In its press release, Chief Executive Mark Hurd said, "business is stabilizing, and we are confident that H-P will be an early beneficiary of an economic turnaround."

The markets didn’t like the results and the shares are trading $1 lower in the pre-market.
*****

Deere posted a 27% drop in fiscal third-quarter profit amid weak global demand for farm equipment and lowered its sales forecast for the full year.
*****

European stocks ended mostly lower for a second straight session as investors moved to lock in profits, particularly in the banking, technology and auto sectors.
*****

Oil gained $3 to $72 on lower inventory numbers. Gold was also higher at the close up $5 to $945.
*****

The DJIA gained 65 to 9280. The S&P 500 was up 7 to 996 and the NAZZ jumped 14 to 1970.

Breadth was positive and volume was moderate.

The bulls are back in control.
*****

 

18 August 2009

Thoughts

Model Portfolio Value As of 18 August 2009

$ 572,461

Well, will it be Turnaround Tuesday or Tortuous Tuesday –as our granddaughter the Princess Abby suggests. Asian markets and European bourses were and are mildly higher overnight and at midday and U.S. futures suggest a higher opening. Then the fun will begin. The bears desperately want another win today while the bulls would like to regain the serve.
*****

Home Depot and Target earnings were lower but the outlook was hopeful and the markets are giving them the benefit of the doubt with both trading higher in the pre-opening.
*****

And the beat goes on.

WSJ: The majority of companies that improperly backdated stock options never were caught by regulators or confessed to the practice, according to a new academic study. Researchers at the University of Houston's C.T. Bauer College of Business used a sophisticated statistical test to sift through more than 4,000 publicly traded companies for those with patterns of granting options at abnormally favorable times, often at low points for their share prices.

The study identified 141 companies with such advantageous options-granting practices that the researchers concluded they were highly likely to have been involved in backdating. Ninety-two of those companies never were publicly linked to investigations or announced earnings restatements related to backdating.
*****

Bonds –even low quality bonds- are rallying (dropping in yield) and the talking heads are suggesting the rally is a sign of better times to come. That may be so but our take is that bonds are rallying because mom and pop saver are desperately looking for income from their savings that used to sit safely in bank C/Ds which no longer yield anything because the Fed has adopted the long dismissed tactic of the Japanese Central Bank of keeping interest rates at zero so profligate bankers can rebuild their depleted capital at the expense of the ordinary saver.

If and when the economy recovers those folks buying bond funds for yield are going to be sorry-again. When interest rates rise, bond funds drop in price more than the income received can offset.
*****

Yahoo/Finance: Producer Price Index for July had a month-over-month decrease of 0.9%. That was short of the 0.3% decline that had been expected and was down from the 1.8% increase registered in June. Excluding food and energy, which are often more volatile, producer prices decreased 0.1%. They were expected to increase 0.1% following the 0.5% increase in June. Separately, housing starts hit an annualized rate of 581,000 in July. That was short of the annualized rate of 599,000 that had been widely expected. Housing starts for June were revised modestly higher to reflect an annualized rate of 587,000. Meanwhile, building permits for July hit a rate of 560,000. They were expected to come in at a rate of 577,000 after the previous month's figure was revised upward to 570,000.
*****

A public option in health care won’t work. The Dems should admit defeat and pull the plan. Whatever is passed after all the garbage that has been added to the bill with subsidies and agreements not to negotiate drug prices etc. makes the proposed program more expensive that what currently exists.

The Dems then should introduce a bill to extend Medicare to all by initially lowering the Medicare edibility age to 50 the first year and then lower by 3 years every year until all are covered. To pay for this they should tax the folks receiving the new benefits (at 5% of income until they reach 65) if they are in the program. Most folks are paying much more than 5% of income currently for healthcare.

The Medicare program already exists, doesn’t have to be set up and those folks who don’t want to enter it and still want to pay for private insurance can. We know that is too simple a plan and also supposedly politically unfeasible but that is the only way reform will work and the plan is easy to explain. If it is rejected, so be it.
*****

Bloomberg: Manhattan office (building) sales came to a near standstill in the first half, with less than one-tenth the average number of transactions seen during the same period in the previous five years, CB Richard Ellis Group said. Three office buildings valued at more than $30 million sold from January to June, down from an average of 32 in the first six months of the prior five years, said the Los Angeles-based firm, the largest publicly traded commercial real estate broker.
*****

Oil was up $2 at $69.10 and Gold gained $4 to $940.oepan markets closed higher.
*****

The DJIA regained 70 points to end at 9210. The S&P 500 was up 8 at 988 and the NAZZ recovers 20 to 1950.

Breadth was 3/1 to the good.

The bulls are back in control after two days of teasing the bears.
*****

 

From http://trueslant.com/ryansager/2009/08/17/the-mathematics-of-marriage/

 

The Mathematics of Marriage

Following up on the mathematics of a zombie attack, here’s some analysis of the mathematics of choosing a mate, toward the end of this article on gambling. Leave it to mathematicians to be this romantic:

Suppose you are told you must marry, and that you must choose your spouse out of 100 applicants. You may interview each applicant once. After each interview you must decide whether to marry that person. If you decline, you lose the opportunity forever. If you work your way through 99 applicants without choosing one, you must marry the 100th. You may think you have 1 in 100 chance of marrying your ideal partner, but the truth is that you can do a lot better than that.

 

If you interview half the potential partners then stop at the next best one – that is, the first one better than the best person you’ve already interviewed – you will marry the very best candidate about 25 per cent of the time. Once again, probability explains why. A quarter of the time, the second best partner will be in the first 50 people and the very best in the second. So 25 per cent of the time, the rule “stop at the next best one” will see you marrying the best candidate. Much of the rest of the time, you will end up marrying the 100th person, who has a 1 in 100 chance of being the worst, but hey, this is probability, not certainty.

 

You can do even better than 25 per cent, however. John Gilbert and Frederick Mosteller of Harvard University proved that you could raise your odds to 37 per cent by interviewing 37 people then stopping at the next best. The number 37 comes from dividing 100 by e, the base of the natural logarithms, which is roughly equal to 2.72. Gilbert and Mosteller’s law works no matter how many candidates there are – you simply divide the number of options by e.

 

So, got that? Figure out your potential pool of mates (X). Divide X by 2.72. Then marry the next best one, after you’ve dated X/2.72 people. Let’s say you determine your mate pool is 500. Date 184 people. Then marry the first person who is better than the 184+ people you’ve interviewed.

Is this advice in any way practical? The first thing that might strike most people as impractical is the idea of determining your mate pool. There are billions of people in the world, hundreds of millions in America, millions in many cities in America. How the hell would you determine your mate pool? I guess

 

I’d go about it as follows…

How many single people did you meet last year, people you can recall, who could be considered plausible mates? People, that is, it’s reasonable to imagine might have dated you — be honest, you can’t count that 10 at your office if you’re a 4 — and that you might have possibly wanted to marry yourself. Take that number, take the years since you were 18 until the last year you’d want to get married — say, hypothetically, 18-34, 16 years — and multiply. Are you picky? Say the number of potential mates you meet in a year is 5. Multiply 16 X 5. You’ve got 8o potential mates you’re likely to meet between the ages of 18-34. (This works whether you’re 19 or 33 at the time you’re making the calculation — you’ve presumably already dated some number of potential mates.)

 

While it may sound limiting, the fact is that despite how large the world is, we tend to meet very few people in our routine lives — unless we engage in aggressive singles activities, online dating, etc. And even with aggressive dating, I think most people would still be limited to, at best, low double digits as to people they could actually marry and might actually marry them.

 

So, I think defining the universe of potential mates — at least in a back-of-the-envelope sense — is quite doable.

 

What’s harder? Actually pulling the trigger based on the idea that you’re statistically likely or not to do better. Say you’re in that universe of 80 potential mates. Under the model, you’re supposed to date 29 people, then choose the best one after that. First of all, it would take a pretty cold person to toss guy or gal #27 because you haven’t gotten to #29 yet. And what exactly as you supposed to think during “interviews” #1-#29? That you’re dating someone with no chance of marrying them, just to set up a baseline for your statistical model? Obviously, this is silly.

 

Furthermore, probably the biggest thing that influences a lot of people’s decisions to marry is sunk costs. You’ve been with someone X number of years. The higher X is, the harder it is to make the calculation to toss aside those years and start over. Humans are notoriously loss averse — and that’s a big loss to take. What’s more, women at least see their mate choices getting worse as the years go by (the “all the good ones are taken or gay” effect). Yet another finger on the scale urging someone in a relationship to pull the marriage trigger.

 

It strikes me that the limited usefulness of this exercise is a fairly depressing one: helping people calculate when it’s reasonable to settle. You’re a 33-year-old woman. You figure you’ve dated 30 of your 80 potential mates. You’re starting to feel anxious about all the usual reproductive stresses women feel at such an age. This lets you know that it’s reasonable to assume, if guy #35 is better than the rest of the ones you’ve dated, that — statistically — you’re taking a pretty safe bet that it makes sense to settle down with him, rather than “interview” the other 45 candidates.

It could hardly be used scientifically. But perhaps it provides a useful exercise to rationally evaluate your options.

*****

 

17 August 2009

Thoughts

Model Portfolio Value As of 17 August 2009

$ 572,461

Markets around the world were losers overnight. U.S. futures are down 1.5% pre opening following a large sell off in Asia. China lost 5% overnight on top of its 6% drop last week. The Chinese index still remains over 60% higher on the year so there will be no tag day for that market yet.
*****

Lowe’s missed and is 10% lower.  Today was not a good day to miss numbers. Last week at this time a miss may have been greeted by a 10% higher opening.

Oil has a $65 handle in the early going and Gold is down $12.
*****

Bloomberg posted this news over the weekend:

Wall Street firms are again recruiting commodities traders with promises of $1 million bonuses as prices of raw materials from oil to copper double.

Less than a year after oil tumbled a record 54 percent and the Reuters/Jefferies CRB Index was suffering its biggest drop ever, Bank of America Corp. plans to boost commodity headcount by 25 percent. London-based Barclays Plc will increase staff about 6 percent. Morgan Stanley is recruiting traders in shipping. The banks declined to comment on compensation.

Some things never change. The banks seem to have perfected the sell low buy high way of doing business. Unfortunately they are doing it on the U.S. taxpayer dime now.
*****

From Marketwatch:

Business improved for manufacturers in New York in August, according to the Empire State index released by the New York Federal Reserve Bank. The index rose to 12.1 from negative 0.6 in July. It's the first positive reading since April 2008 and the highest since November 2007. Readings over zero mean most firms said business was improving compared with the prior month. Two key components of the index -- new orders and shipments -- rose to their highest levels in more than a year.

Capital One Financial in a filing Monday said the annualized net charge-off rate at its U.S. credit-card business rose to 9.83% in July from 9.73% the previous month. The company said 30-day delinquencies rose to 4.83% from 4.77% in June as borrowers struggle to keep up with their payments in the recession.
*****

Southeast regional bank BB&T Corp, which on Friday agreed to buy assets of lender Colonial Bank, said it commenced an offering of $750 million of its common stock. BB&T said the proceeds will boost its equity capital and will be used for general corporate purposes. Last week, the Federal Deposit Insurance Corp said BB&T will buy about $22 billion of Colonial's assets. The FDIC and BB&T agreed to share losses on about $15 billion of those assets. The bank had deposits of about $20 billion as of June 30.

Deutsch Bank and Credit Suisse are running the books on the sale. Today is not the best day to be selling stock. Oh well, the FDIC is backstopping BB&T so the taxpayers on the hook for this one too.
*****

WSJ: For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 34%. That is sharply higher than the 24% rate between 1989 and 1995, when 747 financial institutions were closed by regulators ... At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the FDIC to be about 50% of their assets.
*****

Lots of mellow folks downwind:

LAT: A fire that has burned more than 75,000 acres in Santa Barbara County over the last week was started in an illegal marijuana growing area operated by a Mexican drug organization, authorities said. Authorities said they confirmed that the blaze, which is burning out of control, started in a cooking area of the pot farm. They believe those responsible are still in the forest area and are trying to leave the forest by foot.
*****

If you traded a clunker for this car the Feds would write you a check for $500:

GM is targeting the emerging ultra-low-cost car market with plans for a compact for around $4,000, possibly producing it in Asia.
*****

An interesting discussion of stock buybacks and insider options:

http://ultimibarbarorum.com
*****

Terry Savage, Chicago SunTimes: ... Americans are rolling nearly $1 trillion in card balances from month to month. And nearly half of those cardholders are making only the minimum monthly payments. As you might imagine, those accounts are very profitable to the credit card issuers -- until the cardholders default or file for bankruptcy. Then those write-offs add to the costs that must be borne by the remaining card users. Individual bankruptcies are up 36 percent for the first half of this year, compared with last year. And that translates into more defaults on card balances. Bank of America, the largest bank in the country, reported its default rate jumped to 13.8 percent in June from 12.5 percent in May. Other issuers such as JPMorgan Chase, Citigroup, Capitol One, Discover and American Express have reported default rates around the 10 percent level.
*****

The Reader’s Digest Association today said it has reached an agreement in principle with a majority of its senior secured lenders on terms of a restructuring plan to reduce the company’s debt from $2.2 billion to $550 million. As part of the agreement, RDA expects to implement the restructuring under a voluntary pre-packaged Chapter 11 filing in U.S. bankruptcy court.
*****

What would the Pilgrims say?

... But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called "Save to Win." Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

Takisha Turner, 33 years old, is a dispatcher for the valet-parking department at Greektown Casino in Detroit. Ms. Turner doesn't gamble, but she has always struggled to save. She had only about $10 in her savings account at Communicating Arts Credit Union when she walked in a few weeks ago and heard about Save to Win.

"The teller said somebody else she told about it won," says Ms. Turner, "so I said, 'Well, you must be good luck then.' I thought it was a good idea, because earning interest means you win anyway. So I put down the minimum, $25." This past week, Ms. Turner won $400. She plowed the $400 back into her Save to Win account, getting a second shot at winning the $100,000 grand prize.
*****

This article explains how the low interest rate policy of the Fed is helping Ponzi promoters who promise 8% interest rates to investors. There is no free lunch except for Goldman and friends.

http://mortgagedfuture.com/the-feds-contribution-to-ponzi-schemes/
*****

European markets ended sharply lower, with banks and miners leading the declines. Germany and France were down 2% and London lost 0.8%.
*****

Oil ended at $66.75 and gold was $936.
*****

Stocks traded lower at the start and the rallies were feeble during the day. At the close the DJIA was down 170 at 9150. The S&P 500 dropped 25 to 980 and the NAZZ lost 55 to 1930.

Breadth was 7/1 negative and volume was moderate.

The bears and bulls are wondering about tomorrow. Will it be Turnaround Tuesday or the beginning of searching for lower levels.
*****

 

14 August 2009

Thoughts

Model Portfolio Value As of 14 August 2009

$ 572,461

European bourse indexes are higher at midday and Asian markets closed mostly higher except China which was down 3%. Gold is at $958 and Oil has a $71 handle.
*****

July CPI unchanged with core up 0.1%. Year over year CPI is lower.
*****

So banks, whose purpose used to be to lend money and collect deposits need to add more folks to commodities units so that they can make money from trading. Isn’t that how banks got in trouble?

Bloomberg: While Bank of America, based in Charlotte, North Carolina, cut 46,150 jobs since credit markets began to freeze two years ago, the company needs to add staff to profit from trading commodities, which rose 32 percent since March. Commodity assets under management in mutual funds, indexes and exchange-traded products rose about 19 percent to $209 billion in the second quarter, according to Barclays Plc, which plans to hire about 20 commodity traders in the next year.
*****

More giveaways to large trading firms:

http://www.latimes.com
*****

Consumer sentiment declined in August and after that report caused the major measures sold 1% on a very slow trading day.
*****

From http://www.huffingtonpost.com

Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers "truly amazing."

Though income inequality has been growing for some time, the paper paints a stark, disturbing portrait of wealth distribution in America. Saez calculates that in 2007 the top .001 percent of American earners took home 6 percent of total U.S. wages, a figure that has nearly doubled since 2000.

As of 2007, the top 10% of American earners, Saez writes, pulled in 49.7 percent of total wages, a level that's "higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the 'roaring" 1920s.'"

Beginning in the economic expansion of the early 1990s, Saez argues, the economy began to favor the top tiers American earners, but much of the country missed was left behind. "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007," Saez writes.

Despite a rising stock market, largely growing employment and an historic housing boom things were not nearly so rosy for the rest of U.S. workers. This trend, according to Saez, only accelerated during the George W. Bush's tenure as President:

"...while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993-2000, these incomes grew only 1.3 percent per year from 2002-2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
*****

From http://www.slate.com:

The controversy surrounding the bonus promised to Andrew Hall, the phenomenally successful energy trader at Phibro, a unit of Citi, is coming to a head. Hall's contract entitles him to a $100 million bonus. But in order to make good on the deal, Citi, which is now hugely supported and partially owned by taxpayers, must get the blessing of Kenneth Feinberg, the Solomonic attorney who administered the 9/11 Victim Compensation Fund and is now the Obama administration's Wall Street pay czar. Feinberg will have to consider whether it is proper for an institution that, without substantial taxpayer support, couldn't pay $100 bonuses to pay a $100 million one...

Citi CEO Vikram Pandit, of all people, should know that committing huge sums of shareholders' capital to retain the services of a hot trader doesn't always pay off. In the spring of 2007, Citi spent close to $800 million to acquire the hedge fund Old Lane. Essentially, Citi was paying for the privilege of employing its founders, who had racked up impressive results. A year later, after the fund suffered losses, Citi basically folded it. One of the co-founders of the hedge fund was Vikram Pandit.
*****

Banks shouldn’t be running hedge funds. And if the Phibro unit is as profitable as Citi says it is, Citi should be able to sell it for a sizable gain.
*****

In the savings and loan real estate crisis of the early 1990s land values in the area where we live dropped from $1500 per acre to $300 per acre even as the stock markets were recovering from the 1990s sell off.

Current land values are down from $3500 per acre to $3000 per acre. ???
*****

European shares turned lower Friday afternoon, with losses from Volkswagen and other auto makers exerting pressure after an unexpectedly weak reading on consumer sentiment out of the U.S.
*****

The major measures dropped more easily today than they have in four weeks. We don’t know whether that is a function of the thin August markets or the beginning of a change in trend. Stay tuned.

The major measures rallied a bit in the last hour but still closed lower on the day.

The DJIA lost 77 to 9321. The S&P 500 dropped 8 to 1004 and the NAZZ was off 25 to 1985.

Gold was down $10 to $950 and Oil dropped $3 to $57.50.

The bears are licking their wounds and hoping.
*****

 

13 August 2009

Thoughts

Model Portfolio Value As of 13 August 2009

$ 572,461

Europe is 1% higher at midday and Asian market closed higher overnight.
*****

Jobless claims were 554,000 and retail sales for July were down 0.1% when a positive 0.8% was expected. But, stocks look to open higher with the 1007 on the S&P remaining as closing resistance.
*****

And so it begins again:

From realmoney.com: Private banks in Europe are "wrapping ETFs into complex structured products," according to a report in the Financial Times. Low-cost ETFs are competition for the banks, but the creation of bundled ETFs leads to higher margins, as much as 1.5% to 1.8% on top of the fees charged by ETF issuers. Not all banks were offering the products, however. UBS Wealth Management UK said it would accept the lower margins associated with unbundled products to keep clients satisfied.

Last year's financial tumult marked the beginning of a long and difficult period for banks. No doubt a few of these products will be worthwhile, but wrapping ETFs with derivatives and leverage -- the strategies that led to the financial crisis in the first place -- makes little sense.
*****

WSJ: In Andrew Price's first year on the job, airlines lost his luggage seven times. That would be bad enough if he were the average continent-hopping businessman, but Mr. Price is the man the airlines rely on to help them stop losing bags.... Baggage is one of the aviation industry's great unsolved problems. Engineers have built jets that can soar at twice the speed of sound, carry almost 900 people and stay aloft for nearly 24 hours. But the industry has yet to ensure a piece of luggage reaches its destination along with its owner. Last year, more than 31 million bags -- around 1.4% of all checked luggage -- arrived late, industry officials say. Roughly 1.8 million bags never arrived. Some take unexplained detours.
*****

Wal-Mart’s second-quarter earnings came in above analysts' expectations, but same-store-sales fell. The world's largest retailer also provided its first update for consumer buying since the spring, and the figure was weaker than it expected.

Same-store sales dropped 1.2%, when the retailer had projected sales to be flat to up 3%. The figures reinforce the fact that retailers aren't recovering as quickly as other areas of the economy. Wal-Mart is also adopting a conservative outlook for the third quarter, seeing same-store-sales flat to up 2%.

Second-quarter same-store-sales at Wal-Mart's U.S. stores came in below expectations while Sam's Club outlets met the company's projections, Chief Executive Mike Duke said in a conference call after the retailer released its second-quarter results Thursday.
*****

What recession, what losses?

GMAC Financial Services Inc. is proposing that its 25 highest-paid employees in 2008 get $73 million this year, or an average of slightly less than $3 million each. Bank of America Corp. is proposing average compensation of about $7 million per executive, while Citigroup's proposal is for an average of about $10 million apiece.
*****

Emperor’s clothes:

From Bloomberg: Fair value accounting and bank capital: http://www.bloomberg.com/apps/news?pid=20601039&sid=a04oVutXQybk

If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.

Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly. The problem with relying on management’s intentions is that they may be even less reliable.

At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them.
*****

The Total Notional Value of OTC Derivatives Outstanding dropped from some $683 Trillion as of June, 2008 to $592 Trillion as of December, 2008. If those contracts are mispriced by ½ of 1% the difference is $3 trillion.
*****

European bourse indexes closed higher on the day. Oil ended at $71.02 and God leas up $10.
*****

The S&P 500 closed above 1007 at 1012. We don’t know whether that is enough to change 1007 from resistance to support but the bulls will take heart for that close. The DJIA gained 30 to 9390. The NAZZ jumped 10 to 2010.

Breadth was positive and volume was moderate.

The bulls remain in charge.
*****

While we were away.

11 August

When we turned on CNBC Tuesday morning a talking head was marveling that Productivity was up 6.4% in the second quarter. Of course it was, companies have been firing folks right and left.
*****

From http://market-ticker.denninger.net/

A nasty statistic:

Banks make $38 billion a year from overdraft fees.

Now let's look at the internals on that statistic:

3/4 of all accounts have not had an overdraft in the last 12 months. This means that one quarter of all accounts are responsible for basically all of this.

Of the remaining quarter, half of those account for nearly all (90th percentile plus) of the overdrafts.  This means that roughly 12.5% of consumers are bearing the entire brunt of these fees.

70% of the overdrafts happen at a POS terminal or ATM, not by writing a check.

The last statistic is the clear one: There is no reason whatsoever for anyone to take such a hit.  The bank knows before they approve the transaction that the money isn't there in the account.

This is not the same thing as a check, which the bank has no way to warn you about before you write it, as there is no "connection" between your checkbook and their computer.

IF we had honest regulators it would be strictly unlawful for a bank to intentionally approve a debit transaction which it knew you did not have the funds to settle unless you had an established overdraft line of credit (at a reasonable APR.)

In fact, it was not all that long ago, in the 1980s and early 1990s, when this was the case: If you went to the ATM and tried to withdraw $100, but didn't HAVE $100, the transaction would be declined.

Every time.

But then the banks came to realize that if they let the transaction go through they could make an unregulated loan for that $100 to you, charging you $30 or more for the privilege - an annualized interest rate of thousands of percent!

This is clearly-predatory behavior.  Nobody with half a brain would knowingly sign up for a "service" that would cover a POS or ATM withdrawal at 5,000% interest, yet that is exactly what nearly every bank in the land will currently do by default when you open a new account.  They bury the "disclosure" in their terms and conditions, but nowhere do they state these "fees" in equivalent annual percentage rate terms.

It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit them largest-amount-first, because the fee is assessed per item. An example:

$1,000 in your account.

You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee?

THREE - every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, and thereby generating three overdraft charges. If they processed the transactions "largest item LAST" you'd generate one overdraft fee - on the $1,000 check.

It gets better.

You have $1,000 in your account.

It is after 2:00 PM, the cut-off for a business day.

You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets.

The next morning a $1,000 check hits your account.

The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!

This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resource to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike.

This sort of practice should be absolutely outlawed, and if we had anything approaching an honest Congress and Federal Reserve it would have been years ago.

But then, it’s only $40 billion dollar.
*****

Asia was lower overnight Monday and European bourses also closed lower. Gold and Oil didn’t do much in Tuesday’s trade.
*****

The Federal Reserve Bank of New York is aggressively hiring traders as its seeks to manage its burgeoning securities holdings, making the central bank one of Wall Street's most active recruiters of financial talent. The New York Fed - the arm of the US central bank that implements its monetary policy - plans to increase the staff in its markets group to 400 by the end of the year - up from 240 at the end of 2007.
*****

Area these folks in line for bonuses? And if there are no bonuses what kind of traders are they since the current wisdom is that only good traders get large bonuses. Goldman must be licking its chops.
*****

Judge Questions Merrill Bonuses (NYT)

"A week after the Securities and Exchange Commission announced that it had settled the matter, Judge Jed S. Rakoff questioned whether the $33 million agreement with Bank of America was adequate. He refused to approve the deal, saying too many questions remained unanswered, including who knew what and when about the controversial payouts."
*****

Shares of bank stocks were pressured on Tuesday, after Rochdale Securities analyst Richard Bove issued a bearish note on the sector, saying that "fundamentals have not improved as yet" in the group.

"We expect a short-term pullback in prices," he added, though he maintained his long-term view that the industry was attractive.

"The issue as I see it is that bank earnings will not improve in the third or even fourth quarter this year," Bove wrote to clients. "Many of these companies will show losses. The rational investor would step away from psychology at this point and take some profits."
*****

Stocks closed lower on Tuesday with no late hour rally.
*****

12 August

China was down 4% overnight while Hong Kong dropped 3%. European stocks were higher on the day.
*****

China is up 70 % on the year while having dropped 10% since August 1. That is not a market for weak hearts or us.
*****

Investors’ Intelligence has bulls at 49% versus 47% the prior week and bears at 21% versus 25%.
*****

The major measures are up 1.5% ahead of the Fed statement at 1:15pm. Do the big boys and girls know something we don’t?
*****

No change by the Fed, Goldman and friends can still borrow money for nothing and lend at 20%. We remember when folks made fun of the Japanese Central bank keeping rates at 0% back in the early 1990s. What goes around....?
*****

Oil inventories were 2.5 million barrels higher on the week but Oil is rallying with stocks and now has a $70 handle again.
*****

The DJIA closed up 120 at 9360 below its high for the day (had been up 180) and the S&P 500 ended at 1006 below 1007 resistance.
*****

12 August 2009

Model Portfolio Update

Model Portfolio Value As of 12 August 2009

$ 572,461

11 August 2009

Model Portfolio Update

Model Portfolio Value As of 11 August 2009

$ 572,461

10 August 2009

The Prince and Princess have been with us for a year as they were home schooled and they are leaving on Thursday to return to academia in Kentucky. We are taking the next two days off to spend with them. Next post is on Thursday August 13.

Thoughts

Model Portfolio Value As of 10 August 2009

$ 572,461

Major stock measures opened lower on Monday except Financials. Every day during the present rally that the markets have opened lower with financials higher there has been a rally to positive by day’s end.

Asian markets were mostly higher overnight and European bourses are lower at midday. Gold is at $956 and Oil has a $79 handle as the trading day begins.
*****

As an example of how markets have passed us by as we gently age, CNBC now has a slot at the top of its screen - for those with ADD who try to do three things at once - which show changes in the VIX. We have no idea what the VIX is and we also have no interest in learning what it is. We also noticed that the folks who rang the bell today to begin trading at the NYSE were not celebrating the listing of their company’s shares. Rather they were celebrating the listing of another ETF (Exchange traded fund).
*****

Paul Krugman has another interesting column:

http://www.nytimes.com/2009/08/10/opinion/10krugman.html
*****

As with the lottery overdraft fees prey on the poor.

From FT: US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s, according to research. The fees are nearly double those reported in 2000.
*****

They were probably trying to set up a golf date:

During the week of the A.I.G. bailout alone, Mr. Paulson, Treasury Secretary and former CEO of Goldman Sachs, and Mr. Blankfein, CEO of Goldman Sachs, spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

http://www.zerohedge.com

http://trueslant.com/matttaibbi/
*****

http://www.youtube.com/
*****

Stocks are moving higher because earnings are beating expectations even though earnings and in many cases sales are down 25% or more than last year’s comparable news.

Since many companies no longer provide guidance- at least publicly- the earnings beats that are declared by the analysts and are causing analysts to raise their price targets are the earnings that these same analysts incorrectly predicted.
*****

How to raise the third quarter earnings outlook:

Marshall & Ilsley Corp. on Monday said it would revise its second-quarter loss after selling a pool of mostly sour mortgages. The bank said it sold about 800 residential loans with an unpaid principal balance of $297 million, most of which were first mortgages. About two-thirds of the loans were located in Arizona, one of the states hardest hit by the mortgage crisis.

The bank did not say how much it received for the loan pool.

The sale resulted in Marshall & Ilsley writing off another $151 million in unpaid loans, on top of the $452.6 million reported when the company posted second-quarter results last month. That brings net charge-offs for the period ended June 30 to $603.3 million.

The sale also increased the bank's provision for loan losses, or money set aside to cover bad loans, to $619 million, from the $468.2 million previously reported.

The adjustments resulted in a loss to common shareholders of 83 cents per share, compared with the 50-cents per share loss reported in July.

The bank said the sale means its loan-loss provision and net charge-offs for the third quarter will be "significantly less" than those reported in July. Early third-quarter results show nonperforming loans, or those considered seriously past due, are stabilizing.
*****

From minyanville.com:

Since the downfall of Lehman Brothers, many of the biggest Wall Street banks have moved in lock step with one another, as if to assume there is safety in numbers. Everyone took the bailout money at the same time (not that they had much choice), and now everyone wants to pay it back.

But now that the worst is behind the banking industry, or so many of them hope, at least one bank is finding reason to zig when everyone else zags. JPMorgan (JPM) is taking the unusual step of auctioning off the warrants held by the US government, instead of buying them back for a price negotiated privately with Treasury officials, according to the New York Post. The auction will be held in the open market and conducted by the Treasury department.

It's different. It's transparent. It's fair.

It's also suspicious.

Here's how it works: When the banks took bailout money from the government's TARP program, they gave the government warrants. Those warrants give the owner, in this case the US Treasury, the right to buy shares of the banks' stock at a later date for a discounted price. In returning the bailout money to the US Treasury, the banks are also buying back those warrants. So far, the deals with other big banks like Goldman Sachs (GS) and Morgan Stanley (MS) have been struck behind closed doors, with the banks buying back warrants for prices determined in closed negotiations.

One finance professor who spoke to the Post likened it to selling your house back to the person who sold it to you. Maybe you'd have gotten a better price if you put it on the open market.

Since this is the taxpayers money, critics argued, those negotiations should be out in the open. How are we to know that Morgan Stanley's warrants, which it bought back from the government for $0.68 on the dollar, were sold for the right price? Maybe someone else was willing to pay more for those warrants, giving more money back to the taxpayers' coffer. We'll never know.

Elizabeth Warren, the Harvard professor charged with public oversight of the troubled TARP program, estimates that taxpayers have lost about $2.7 billion on it so far.

Enter JPMorgan's Jamie Dimon, with the idea of letting the market determine the price of the warrants instead of striking a deal with Washington officials in a shroud of secrecy. Sure, JP Morgan may very well end up paying more to redeem those warrants than we would if we bought them back ourselves, but it's so much more fair than the way Goldman Sachs, Morgan Stanley, American Express (AXP), and the others did it.

You can just imagine the talks around the boardroom. "Hey, I've got an idea! Let's potentially lose money by letting the public bid on our warrants instead of just lowballing the Treasury like everyone else did. It would be so much more fair to Americans."

Forgive the cynicism, but fairness has never been a driving factor in dealmaking before, so it's tough to see why now is the time for it to start. It's also difficult to imagine how the bank officials expect to get a better deal from the auction than they would by spending an afternoon with Treasury officials.

Perhaps JP Morgan executives believe in karma, hoping that the goodwill accumulated by this stunning public relations coup will translate into more checking accounts and customer loans. Perhaps it's all part of a bigger effort to give Americans a warm and fuzzy feeling when they see the Chase sign down the street.

And perhaps they're right to do so. After all, how many $33 overdraft fees does it take to make up for the potential losses from a fair and open warrant sale?
*****

Some folks are just lucky:

Bloomberg Aug 10: Pequot Capital Management Inc., once the world’s biggest hedge-fund manager, was cited in at least 44 private reports from exchange watchdogs in the past four years alerting U.S. regulators to potential insider trading, market manipulation or other misconduct, government documents show.

Trades linked to Google , Cox Communication, International Securities Holdings, Premcor and dozens of other companies prompted surveillance units policing U.S. exchanges to make the referrals to the Securities and Exchange Commission, according to agency records obtained by Bloomberg News. Thirty-six reports flagged possible insider trading. Four indicated possible manipulation and four were labeled “other.”

“The numbers would indicate they had trading that closely preceded 36 material events” said Bradley Bennett, a partner at Baker Botts in Washington and a former SEC investigator who focused on insider-trading cases. “Referrals are very strong at identifying accounts that are worth additional scrutiny,” he said. “Not all referrals result in enforcement actions.”

Pequot founder Arthur Samberg, 68, told investors in a May letter that he planned to liquidate his main hedge funds after a federal insider-trading investigation “cast a cloud over the firm.” People familiar with the inquiry said in January it stemmed from bets Samberg’s company, now based in Wilton, Connecticut, made on Microsoft Corp. in 2001. Neither Samberg nor Pequot has been accused of any wrongdoing by the SEC.

From thedeal.com May 28,2009: http://www.thedeal.com : News that hedge fund Pequot Capital Management Inc. would shut down because of a government probe is likely to resurrect the controversy that led to the firing of SEC lawyer Gary Aguirre.

Aguirre had been investigating allegations of insider trading at Pequot, which led him to request an interview with John Mack, who is now the head of Wall Street investment bank Morgan Stanley.

Aguirre was investigating allegation that in 2001 Mack, then an executive at Credit Suisse Group, had informed Pequot about a pending deal between General Electric and Heller Financial. The probe was abruptly halted in 2005, and Aguirre was fired. Aguirre contended that he was dismissed for pursuing the powerful Wall Street figures.

The SEC then tried to cover up its reasons for firing him, he claimed. A recent investigation by David Kotz, the SEC's inspector general, found that Aguirre's version of events was spot on and the SEC faulted.

The issue seemed to disappear, until Samberg's letter to investors announcing he was shuttering the $3 billion fund because "public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction."

The case Pequot is currently being investigated for was closed in 2006 and focused on a former Microsoft Corp. (NYSE:MSFT) employee, David Zilkha, who briefly joined Pequot in April 2001 and left in November of that year. The case was reopened after new information came to light during Zilkha's divorce proceedings in Connecticut.
*****

Gold dropped $15 and Oil closed at $70.85 down 5 pennies. European bourses were lower.
*****

From realmoney.com

The Municipal Market Data group's 2-year Muni AAA GO yield is 0.68%. The 2-year Treasury is 1.23% for a ratio of 55%. The 30-year is 4.66% vs. a Treasury rate of 4.52%, for 103%. So it doesn't look to me like front-end Treasury yields are too low. It looks like muni yields are too low.

This appears to be a result of retail investors piling into the front end of the muni yield curve, leaving the long-end relatively cheap.
*****

Folks buying either 30 year Treasuries or Tax Free bonds to hold at these yields may be very sorry in the years to come.
*****

The $5 trillion and more in money funds and savings and bank NOW accounts is earning less than 1% interest when it was earning 3% more last year. That amounts to $150 billion in lost income to careful investors.
*****

The DJIA lost 35 to 9335. These days stocks go up more easily than they go down. The S&P 500 dropped 4 to 1006 and the NAZZ lost 10 to 19990.

Breadth was slightly negative and volume was light.

The bulls remain in control.
*****

 

7 August 2009

Model Portfolio Update

Model Portfolio Value As of 7 August 2009

$ 572,461

6 August 2009

We are taking tomorrow off. Next post will be August 10.

Thoughts

Model Portfolio Value As of 6 August 2009

$ 572,461

Initial jobless claims were 550,000 versus 580,000 as the guess. The stock markets are slightly higher on that news. Retailers are also higher as analysts now say it is not the sales but the margins that matter and so even though same store sales are down across the board there will be profits of some sort or lower losses as stores are closed, inventories slashed and sales associates fired.
*****

Asian markets were mixed up or down 1% and more. European bourses are higher at midday and Oil and Gold are about unchanged as the trading day begins.
*****

Cisco Systems reported net income for its fiscal fourth quarter dropped 46% to $1.1 billion on flat margins and a tax charge, and revenue fell 18% to $8.54 billion. Results, though, topped Wall Street's expectations, and shares rose in after-hours trading.
*****

AIG trade at $29 this morning up from its $22 close last night and $12 close the night before. Some shorts must be in real pain. Yesterday miyanville.com had a story giving this reason for the pop in financials:

For those wondering the reasons big rip in the big banks and PMI players, it's because of the comments Radian Group (RDN) made on its conference call this morning. The company said it saw a significant decrease in early default activity in its 2009 vintage mortgage business because of improved underwriting. Improved underwriting... imagine that! The company also said its 2008 book is showing a turn (a.k.a. not having to pay out as much insurance for foreclosures). This shouldn’t be too much of a surprise because its worst exposure was in 2005 through early 2008 subprime. That has already been flushed down the toilet. Hence it's benefiting from improved underwriting. The extrapolation by the market is that the banks and other mortgage players with big mortgage exposure are not going to suffer as much in losses as have been modeled in. Given that back in 2007 RDN and its brethren had perhaps the most whistling past the graveyard, rose colored goggle wearing, Kool-Aid drinking attitude of any group of companies I have ever seen... I can’t help but express a little skepticism about its comments translating into blue skies for housing loss mitigation. Maybe the company has finally found religion... who knows.
*****

Retailers reported declining sales in July as consumers continued to spend sparingly amid a recession, though results largely beat Wall Street's depressed expectations. Discount stores, which have largely held up during the tough economic climate, reported largely lower results. Costco sales fell 2%, excluding gasoline, at U.S. stores open at least a year. Target delivered a worse-than-expected 6.5% decline. Department stores suffered again. Macy's 11% drop and J.C. Penney's 12% drop missed analysts' targets. Penney boosted its fiscal second-quarter outlook.

Mall-based chains were hit hard: Abercrombie & Fitch posted a 28% drop. Buckle, which saw an end to its 22-month streak of double-digit growth last month, reported a 2.8% increase. But that was well below analysts' expectations for a 10% jump.
*****

European markets advanced, as investors welcomed better-than-expected earnings and the BOE's surprise move to expand its asset-purchase program.
*****

For those who say stocks can’t go lower: Proctor & Gamble is down $5 per share (8%) in two days.
*****

We have to attend a meeting this afternoon and so with two hours of trading left and the DJIA down 50 points we are taking off. Tomorrow brings the monthly employment report which will set the tone for Friday’s trading. We’ll be back on Monday.
*****

 

5 August 2009

Thoughts

Model Portfolio Value As of 5 August 2009

$ 572,461

Asian markets were lower overnight and European bourses are mixed at midday. Oil has a $71 handle and Gold is down $1 in the early going.
*****

The ADP monthly jobs number reported 371,000 job losses versus 350,000 expected. This is a meaningless number since it is often at variance with the Government number reported this Friday but it gives traders a number to trade against for the day, and that is the game these days.
*****

Investors’ Intelligence had 47% bulls and 25% bears in its latest report.
*****

Sept crude opened modestly lower this morning in pit trading, but just before 10:00ET, crude began to fall sharply, hitting pre-inventory data lows of $70.14. In recent trading, crude has bounced off those lows ahead of today's inventory data. Following the data, which showed a build of 1.67 mln barrels (consensus was a build of 600K), crude did not see an immediate reaction, but fell to new lows of $69.71 shortly after. Currently, crude is currently down 2.4% at $69.74 per barrel.
*****

Analysts at Bank of America Merrill Lynch raised their 2009 and 2010 price forecasts for aluminum, copper, nickel and zinc. The broker said prices have risen faster than it expected due to anticipation that the global economy will recover. It added stocks of the metals have not built up significantly, so there is only a small buffer from which to service rising demand.
*****

Procter & Gamble reported Wednesday that its fiscal fourth-quarter profit fell 18% to $2.47 billion, or 80 cents a share, from $3 billion, or 92 cents a share, but maintained its full-year forecast. Sales fell 11% to $18.7 billion. Analysts had expected the firm would earn 79 cents a share on sales of $19.3 billion. The company said it expects full-year organic-sales growth of 1% to 3% and earnings from continuing operations of $3.65 to $3.80 a share.
*****

U.S. service industries unexpectedly contracted at a faster pace in July as concern over rising unemployment gripped consumers.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 46.4 from 47 in June, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction.
*****

From Bloomberg (our bold and italics for emphasis):

Goldman Sachs made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months.

Trading losses occurred on two days during the months of April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days during the quarter, or 89 percent of the time.

Goldman Sachs, which was the biggest U.S. securities firm before converting to a bank last year, posted the biggest profit in its history during the second quarter as revenue from trading and equity underwriting reached all-time highs. The company, which has returned $10 billion to the U.S. Treasury and paid $1.42 billion in dividends and to cancel warrants, also made its largest market bets during the period.

“It’s very counterintuitive to think that they’d be able to generate this much profit and this much revenue in the middle of an ongoing recession,” said William Cohan, a former banker at JPMorgan Chase & Co. and Lazard Ltd. and author of “House of Cards” about the collapse of Bear Stearns Cos. “But the fact that so many of their competitors are out of business or severely wounded has put them in a very strong position.”

Trading Days

In fiscal year 2008, the firm had 90 days in which traders made more than $100 million, compared with 88 in 2007. In fiscal 2006, the figure was 49 days, up from 18 in 2005 and 14 in 2004. Goldman Sachs changed its fiscal year in 2009 to end in December instead of November.

Goldman Sachs’s trading results reflected the firm’s willingness to take on more risk during the period. Value-at- risk, an estimate of how much the firm could lose in any given day, rose to an average of $245 million in the second quarter from $240 million in the first quarter and $184 million in the second quarter of 2008. Most of the increase in the second quarter came from bets on equities, the company said.

“They take risks for their clients and for themselves and they’ve figured out a way in this market, with less competition bidding for these things, to make money,” Cohan said.

Trading and principal investments accounted for 78 percent of the bank’s revenue in the second quarter of 2009, up from 59 percent in the second quarter of 2008. Net interest income, the difference between the interest the firm pays and what it charges, climbed 60 percent from the second quarter of 2008 as the company’s interest expense dropped 83 percent.

Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.

Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 1.70 percent in June from 2.14 percent in March and from 3.37 percent in November.
*****

Trumping Trump:

Entertainment Resorts Inc. bondholders plan to reject Donald Trump’s attempt to take control of the bankrupt casino company because it would leave their securities worthless.

Bondholders, who are owed $1.25 billion, say Trump’s deal undervalues the company. Trump and an affiliate of Beal Bank Nevada agreed on Aug. 3 to invest $100 million in the company. Beal would extend the maturity on a $486 million loan until December 2020 from 2012.

“The plan proposed by Beal Bank and Donald Trump is not capable of confirmation for many reasons,” said Kristopher Hansen, co-head of the financial restructuring practice at Stroock & Stroock & Lavan LLP in New York, who is representing bondholders. “The stories of Mr. Trump’s regaining control of the debtors are simply inaccurate,” Hansen said in an e-mailed statement.

Trump is attempting to retake control of the company he founded after the three casinos it owns in Atlantic City, New Jersey, wound up in bankruptcy protection a third time.
*****

General Electric was accused by the Securities and Exchange Commission of misleading investors in 2002 and 2003 by reporting "materially false and misleading results in its financial statements."  GE has agreed to pay a $50 million penalty, without admitting or denying the accusations, to settle the SEC’s civil suit.

“GE bent the accounting rules beyond the breaking point,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

“Overly aggressive accounting can distort a company’s true financial condition and mislead investors.” David P. Bergers, Director of the SEC’s Boston Regional Office, added. “Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective. GE misapplied the accounting rules to cast its financial results in a better light.”

The SEC found that GE's policies for accounting for hedging commercial paper and transactions at its rail unit were intentional violations of anti-fraud provisions of securities law.
*****

What recession?

Eli Manning has agreed to a new seven-year, $106.9 million contract that he is expected to sign later Wednesday, according to a source familiar with the negotiations. Though it's not the largest deal in NFL history, the average of $15.27 million per year is a new NFL high.
*****

European stocks turned around to finish in the red after disappointing U.S. jobs data reignited concerns about the strength of the recovery.
*****

Citigroup is going into the S&P 500 tonight and supposedly the street must buy 650 million shares to rebalance S&P tracking portfolios. Citi has already traded 1.2 billion shares today with an hour of trading to go.
*****

Oil was up 34 pennies at $71.76 and Gold was flat at $969.
*****

AIG is up 60 % today ($13 to $22) as those short are taken out and shot.

From Reuters: The shares of battered insurer American International Group Inc (AIG.N) rose strongly on Wednesday ahead of the release of second-quarter earnings, which are expected to stabilize for the first time in five quarters.

The shares surged about 57 percent in afternoon trading on the New York Stock Exchange, ahead of AIG's next quarterly earnings report on Friday and as a new CEO prepares to take up the company's reins on Monday.

Short sellers were scrambling to cover positions, helping to fuel the rally in AIG's share price, said William Lefkowitz, option strategist at brokerage firm vFinance Investments in New York.

"With the potential of good news looming in AIG, investors who are short AIG are being forced to cover their positions today. That has created a short-covering rally," he said.

Hope springs eternal the bulls’ hearts. Hopefully the Treasury didn’t sell the 78% of AIG it owns to Goldman Sachs yesterday.
*****

Blowhard Charlie Gasparino is on CNBC this afternoon August 5 presenting as news that BankAmerica hired Sanaz Zaima, a partner at Goldman Sachs, for the sum of $15 million a year.

We checked the web and this report was posted on July 14 at http://www.iranian.com/main/news/2009/07/14/bofa-rumoured-have-paid-enormous-guarantee-sanaz-zaimi :

After negative coverage highlighting the outpouring of Merrill Lynch talent from BofA, it must have been with no little pleasure that BofA/Merrill Lynch announced that it had poached Goldman partner Sanaz Zaimi last week. But how much did Zaimi cost? Rumour has it she didn't come cheap. Headhunters say Merrill paid up to $17m a year for Zaimi over a two year period. BofA didn’t immediately return a request for comment, but banks rarely comment on pay issues anyway. The allegedly expensive acquisition of Zaimi follows claims that Merrill bankers are getting twitchy about their bonus prospects this year.
*****

Financials were strong all day with it looking like the shorts were being fleeced.

The DJIA was down 40 at 9280. The S&P 500 lost 3 to 1002 and the NAZZ lost 20 to 1990.

Breadth was negative and volume was active with Citi trading a mere 1.9 billion shares.

The bulls are holding on.
*****

 

4 August 2009

Thoughts

Model Portfolio Value As of 4 August 2009

$ 572,461

Oil ended yesterday at $72.50 but is off $1.25 in early trading today. Asian markets were mixed overnight as are European markets at midday. U.S. stocks look to open slightly lower.
*****

Once again Donald Trump triumphs as ordinary bond and stock investors lose. Look for Trump to sell this entity or refinance with debt again a few years out with the major brokerages selling the debt to gullible individuals and unwary institutional investors as he has done before. There ought to be a law.

Trump Entertainment Resorts / said late Monday that businessman Donald Trump and BNAC, an affiliate of Beal Bank Nevada, will invest $100 million cash to buy the reorganized company. Beal Bank and Beal Bank Nevada will separately restructure about $486 million of the casino operator's debt. The plan has to be approved by a bankruptcy court. Trump Entertainment filed for Chapter 11 bankruptcy protection in February.
*****

Personal incomes fall 1.3% in June, reversing May's stimulus gain. Stocks moved lower.

Pending home sales for June climbed 3.6% month-over-month. That exceeded the 0.7% increase that was widely expected and was also the fifth straight monthly increase. Stocks moved higher.

Obviously this is a traders only market.
*****

UBS Securities is a major wealth management broker. They advertise their expertise in managing customer funds. UBS just announced its third straight quarterly loss. The loss this quarter was in excess of $1 billion. UBS has plenty of company in the loss department among wealth management brokers and banks.
*****

Loan modification lags foreclosure risk by a mile:

http://www.responsiblelending.org/mortgage-lending/research-analysis/mortgage-repairs-lag-far-behind-foreclosures.html
*****

Bank of America  and Wells Fargo  were the worst performers among the biggest U.S. banks in modifying loans for struggling homeowners, according to a Treasury Department report. Bank of America began 27,985 trial loan modifications, or 4 percent of its eligible loans, under the government’s Making Home Affordable program started in March, the report today shows. Wells Fargo had a 6 percent rate, trailing JPMorgan Chase’s pace of 20 percent, and Citigroup’s 15 percent.
*****

European markets retreated, with banks and mineral extractors among the worst performers in a broad-based but mild decline.
*****

$12 billion Citadel Investment Group LLC said it will return $250 million on Oct. 1 to investors who asked to withdraw money, after its main funds jumped about 44 percent in the first seven months of this year. Chicago-based Citadel said it will make a “similar distribution” to clients at the end of the year, according to a letter sent to its investors today. Citadel suspended redemptions in its Wellington and Kensington funds last year after they tumbled 55 percent and clients had sought to redeem $1.2 billion. Down 55% and up 44% still leaves the funds down 36%.
*****

A gap from the close of Nov. 4, 2008 at 1005.75 has just been filled in the S&P500 cash index. This may have some significance to traders and algorithmic trading programs. Some have expressed this area as a resistance point if fulfilled.
*****

Four of the top five cars replacing Clunkers have Japanese nameplates: Toyota's Corolla and Honda's Civic, Camry and Prius. Only Ford's Focus is an American nameplate.
*****

The second quarter of 2009 saw leasing and sales conditions across the U.S. office market plummet at a rate unforeseen in previous analysis by CoStar Group, Inc. In particular, CoStar confirmed that the value of Class A office buildings has declined by 57% compared with prices paid at the peak of the market in 2007.

In addition, office-leasing activity is off 39% from year-ago levels and all but three U.S. office markets posted negative net absorption over the first two quarters of 2009. Retail vacancies are at 7.5%.
*****

Oil lost $0.25 to $71.25. Gold was up $7 to $966.
*****

The DJIA was up 30 to 9315. The S&P 500 gained 2 to 1005 and the NAZZ up 1 to 2009.

Breadth was positive and volume was light.

The bulls continue to control.
*****

 

3 August 2009

Thoughts

Model Portfolio Value As of 3 August 2009

$ 572,461

Asian markets were higher overnight and European bourse indexes are higher at midday. U.S. stocks are to open 1% higher as the bull run continues. Since the thinking is that economies are improving around the world Traders are moving oil with the price crossing $70 in early trade. Gold is also up $6.
*****

Greenspan and Geithner and Summers were on the talk shows yesterday predicating the bottom in the economic down turn has been seen.
*****

An hour into the trading day the S&P 500 is over 1000.
*****

Greenspeak:

“I’m short-term optimistic, but with many caveats,” the former Fed chairman said. Housing markets have “stabilized temporarily” though it is “possible” the economy might relapse if there is a further slide in home prices of more than about 5 percent.

“I don’t think it’s going to happen, but I do think it is possible that we could get a second wave down,” Greenspan said. “But the important issue is that if we don’t, and I think the probability is that we won’t, that we are close to stabilization.”
*****

The SEC charged BankAmerica with fraud and BankAmerica settled, without admitting guilt of course, for $33 million. So BAC borrows from the Treasury and pays the SEC.
*****

European shares rose, with banks among the strongest performers as investors welcomed earnings reports from HSBC Holdings and Barclays.
*****

We are heading out early with 45 minutes of trading left and the major measures all up over 1% and near their highs for the day. The S&P 500 is at 1002 which is the first day it has been over 1000 since November.
*****

While we were away

29 July:

Fed Beige Book:

Most parts of the U.S. see signs that the recession is easing, but labor and real estate markets remain weak and credit conditions still are tight, according to the Fed's latest beige book report. Most of the 12 Fed district banks "indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level," said the Fed's survey of regional activity.
*****

European shares rose, led higher by chemical producers and auto makers while ignoring losses on Wall Street.
*****

Crude-oil futures trade below $63 a barrel as data indicate plentiful U.S. stockpiles
*****

Microsoft and Yahoo struck a long-awaited deal on Internet search in which Microsoft (MSFT) will power Yahoo's search tool while Yahoo (YHOO) will become the exclusive sales force for both firms' premium search advertisers. Terms are for 10 years, in which Microsoft will license Yahoo's core search technologies, and Microsoft's Bing will become the exclusive algorithmic search and paid search platform for Yahoo sites. Yahoo sees the deal lifting annual operating income by around $500 million.
*****

A selloff in Chinese stocks Wednesday, in part on fears that loan growth could be braking, sent a jolt through other regional markets from Mumbai to Sydney. The Shanghai Composite Index fell as much as 7.7% before ending down 5% at 3266.43, erasing most of the gains of the past five sessions. The decline is the biggest percentage drop at market close since Nov. 18, when the index declined 6.3%. Hong Kong's Hang Seng Index dropped 2.4% to 20135.50, Mumbai's Sensitive Index fell 1% to 15173.46, and Australia's S&P/ASX 200 declined 0.6% to 4142.80. The Australian dollar also fell sharply. Japanese shares managed to edge up 0.3%.
*****

DJIA down 25; S&P 500 down 4; NAZZ down 7.
*****

30 July:

Goldman raises GE to buy with a $15 price target. GE is up $1 at $13.30 in morning trade.
*****

Stocks open higher in first half hour with S&P 500 bursting through 980 resistances up 2% to 995.
*****

Motorola reports revenues down 40%  but reports $20 million in earnings and shore price jumps 15%.
*****

In the week ending July 25, the advance figure for seasonally adjusted initial claims was 584,000, an increase of 25,000 from the previous week's revised figure of 559,000. The 4-week moving average was 559,000, a decrease of 8,250 from the previous week's revised average of 567,250.
*****

The person said there are currently three players bidding for Volvo, including a group led by China's Geely Holding Group Co., as well as Beijing Automotive Industry Holding Co. and a Europe-based group of investors, which the person wouldn't identify. Those three possible buyers were supposed to submit final bids for Volvo in mid-July, and Ford had intended to choose a buyer relatively quickly.... Ford is "looking for the best buyer and most socially acceptable buyer possible for Volvo," the person said.

China?
*****

Illinois will deny the financial aid applications of an estimated 130,000 students -- the most in Illinois history. They were denied because they applied for state aid after May 15, a cutoff months earlier than in years past, thanks to Springfield's budget woes. What's more, under the state budget compromise reached earlier this month, which slashed funding for the state's Monetary Award Program in half, no student at any Illinois school will receive aid for the second half of the 2009-2010 school year. If lawmakers don't provide more funding, "that would be horrendous,'' said Andy Davis, director of the Illinois Student Assistance Commission, which runs MAP.
*****

We get mail:

Mini-vacation;

Sure. You lost your xxx at the casino and blew our savings and now you're in hiding.

We respond:

We are considering taking all our money to the casino since we earned a 50% return in one day playing Blackjack. Annualized, as Goldman did when reporting the return the Treasury received on its money, that works out to 18250% on a yearly basis. Not bad.
*****

Stocks closed higher o the day but the S&P 500 and DJIA lost half their gains for the day in the last hour of trading. The bulls would have liked to close on the high and the pullback in the last hour gave the bears a small sliver of hope.
*****

July 31:

Advance GDP (the first of four numbers) for the second Quarter was announced at down 1.1%. The markets were muted by that news.
*****

The S&P 500 opened down and traded at support at 980 before rebounding higher.
*****

We have tried to trade various short ETFs in the last few months and all of them have not acted as we thought they would. Luckily we have not lost much trading them. We are no longer going to trade them. We will remain in cash when we don’t like the markets. The long ETFs buy actual stocks and so they will give us the tracking we desire.
*****

From eschaton.com:

YAY! GREEN SHOOTS!

Gross domestic product, the broadest measure of economic activity, fell at a 1 percent annual rate in the April through June quarter, the Commerce Department said.

Oh, wait...

That compares with a 6.4 percent pace of decline in the first quarter, a revision from an earlier estimate of a 5.5 percent rate of decline.

I'm always fascinated by the fact that nobody cares about the revisions. Yes, in the most recent quarter for which we have data the rate of economic contraction was "only" one percent annualized. But the previous quarter was... much worse than previously thought!
*****

An interesting story:

http://blogs.reuters.com/felix-salmon/2009/07/31/capco-wtf/
*****

The economies of the world are deemed safe for the week end at least and so the Oil Jockeys pump oil $2 higher today. Gold gained; Europe was lower; and Asia was higher.
*****

The major measures limped into the close but still managed to end the day and week and month higher.
*****

 

 

 

 

 



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