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Madison, WI 53703
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30 May 2008


The PCE core Deflator (Inflation measure) was up 2.1% year over year according to the government. Including essentials like food and energy the measure was up 3.1% year over year.

Stocks are mixed out of the gate this morning. Oil has a $125 handle and Gold is up $2 after dripping $20 yesterday. Treasuries are flat. Asian markets were mostly higher small overnight and so are European bourse indexes at midday.

Dell beat big-time last night and is up $2 in the early going. Win some lose some.

J Crew disappointed and is down 20%. We have had good luck trading JCG from the $37 level and so we are going to buy a few shares in our larger/aggressive accounts.

We agree with most of what Marcin says below. And it is summer and we are lazy so we will let him say it. From realmoney.com by Robert Marcin:

I have to disagree with the bull case for financial services stocks put forth here recently by many market observers. I get the desire to bottom fish, it's in my DNA. Buying this past January and March against all advice demonstrates that.

But I like to buy stock declines with solid fundamentals not awful ones. Buying into imploding fundamentals for the sake of trying to find a bottom is harmful to ones portfolio. I believe that's what buying into the housing/financial sectors represents.

There has been a 30 year bull market in debt creation. It has taken household debt to unprecedented levels. The 2005-2006 periods represented the bubble phase of leverage. It cannot or will not be unwound with 6 quarters of write-offs and declining stocks and housing prices. The reliquification process will probably last closer to 6 years than 6 quarters.

Over that period, consumers will retrench, save money from income, and lose many aspects of conspicuous consumption. This activity will have a profound impact on the economy and financial markets. This impact is underappreciated by many market commentators who believe that we have just a normal cyclical downturn in the US consumer. We don't.

Combining the fading of the US consumer with the emergence of the global one will shape commodity prices, income statements, and shareholder returns for the next five years. Here is where one wants fundamental exposure over that period, even if only on a relative basis.

For the US consumer the worst is not behind, but rather ahead. And ditto for the financial companies that financed his debt/consumption binge. The economic Armageddon types will dust the Great Depression as an example, but I believe that's too dire. Our own version of the Japanese debt/real estate/stock market bubble in the 1990's might be more appropriate.

I am not looking for an economic implosion, only a prolonged period of subpar domestic growth as the Great Unwind really starts to gain traction. It's just beginning. There will clearly be tradable bounces in many stocks serving the domestic consumer, but treat them as such. But remember to be careful investing in companies that are/have been levered to the Golden Age of Debt.

We are trading J Crew as a best of breed retailer that has dropped $10 in share price today. That is a pretty good one day mark down sale. We sold the other retailers because, while we think they represent value, we finally realized that value stocks are not in favor and that is better to be on the sidelines watching when we don’t know how long or how severe the contraction in credit is going to be.

As long as banks are raising dividends instead of cutting them when they then go out and borrow money at 9%, and as long as the Fed and FDIC allow the banks to do that we think there is danger in the market place. As we said some weeks ago, we bought Fifth Third because they raised their dividend. Our thinking was that the FDIC and Fed would not let them raise their dividend if they still had funny stuff on their books and were going to the marketplace to borrow money.  We were wrong and immediately sold FITB when they announced their borrowings. In effect banks are borrowing money to pay their dividends. That is stupid.

We are long past the point where we would think management would not do dumb stuff like raise a dividend and borrow money. After all the present management and boards of directors of these banks are the same well paid folks who allowed the mess to develop.

Kirk Kerkorian is moving ahead with plans to increase his already big bet that Ford can be turned around, despite a recent plunge in the auto maker's stock. Kerkorian investment vehicle Tracinda Corp. said it will continue to tender for 20 million shares of Ford stock at $8.50 each, closing a previously established escape hatch that allowed him to back out if Ford shares fell 10% or more. What’s $20 million to a billionaire?

We didn’t buy many shares of JCG and so we traded out of it for a $1 per share profit and will look to establish positions in more accounts at lower prices in the days ahead. It is going to be a long summer.

European shares on Friday ended the last trading day of the month on an upbeat note, as airlines took off and banks advanced, offsetting some weakness for oil producers and miners.

Gold gained $9 to $886 and Oil tacked on $.93 to finish the month at $127.55. Treasuries were down in price/up in yield for the month with the two-year at 2.64% and the ten-year at 4.04%. The yen was 105 to the dollar and it took $1.55 to buy a euro today.

Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month. In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Company of America said. Mortgage insurers pay lenders when homeowners default and foreclosures fail to cover costs. Foreclosure filings surged 65 percent and bank seizures more than doubled in April compared with a year earlier as rates on adjustable mortgages increased, according to RealtyTrac Inc. Lawmakers and Federal Reserve officials are trying to ease the worst U.S. housing slump since the Great Depression through tax rebates, expanded federal mortgage insurance and other programs.

Look here http://www.bloomberg.com for an interesting article on auction rate securities and the fact that Pimco, the largest Treasury bond manager is mixed up in the mess. Also late in the article there is a mention that Eaton Vance is trying to get the SEC to allow money funds to buy a type of auction rate preferred stock. That is nuts and is like using alcohol to put out a gasoline fire. Money funds now own securities that they can’t redeem and that are worth much less than the value at which they carry the securities. But the SEC has turned a blind eye to the problem in the hopes that time will cure the mess.

The DJIA lost 10 points to end the month at 12638. The S&P 500 was up 2 points at 1400 and the NAZZ gained 15 to 2522.

Breadth was 5/4 positive and volume was light.

There were 70 new highs and 65 new lows on the NYSE and the numbers were reversed on the NAZZ.

The bulls won the day the week and the month but ……… and we are happily all cash.


29 May 2008


GDP for the first quarter was revised (the first release was called Advance GDP) and the release of Preliminary GDP for the first quarter of 2008 changed GDP from up 0.6% to up 0.9%. There are two more GDP revisions before final GDP. So the recession will been delayed if it ever occurs. In the GDP data consumer spending was down 1% while exports were up 2% and imports down 3%. Inventories were also lower.

Asian markets were mixed to higher overnight and European bourse indexes are also mixed to higher. Treasuries are again lower on the GDP news which suggests that the Fed has room to tighten. Oil has a $129 label while Gold is down $5.

The WSJ reports today that: The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue. Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.

There are several reasons behind the net-export decline. Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. At the same time, aging fields and sluggish investments have caused exports to drop significantly in Mexico, Norway and, most recently, Russia. The Organization of Petroleum Exporting Countries also cut production early last year and didn't move to boost supplies again until last fall.

European shares ended a volatile session in the green Thursday as a strong performance from oil producers offset losses from British mortgage lenders HBOS and Lloyds TSB and German chipmaker Infineon Technologies.

Oil closed down $4.40 at $126.70 and Gold lost $23 to $878. Treasuries also dropped with the two-year at 2.68% and the ten-year remaining over 4% at 4.08%. It takes 105 yen to buy a dollar and one euro equals $1.55.

As oil dropped today the DJIA rallied to up 130 points three hours into the trading day. But the rally faded in the last two hours of trading although the major measures all closed higher on the day.

At the bell the DJIA was up 50 at 12646. The S&P 500 gained 7 to 1398 and the NAZZ gained 22 to 2510.

Breadth was 5/4 positive and volume was light.

There were 65 new highs and 75 new lows.

The bulls held serve again today.


28 May 2008


Today is beginning as a glass half full day as was yesterday. Traders are taking the tack that events are not as bad as the media is conjuring.

Ralph Lauren reported better profits and is up 10% as traders race to cover shorts. That plus a continuing drop in the price of oil to $127 and Gold down another $15 to $891 suggests that the commodity traders are taking profits.

Asian markets were mixed overnight with China up 2% and European bourse indexes are mixed at midday. Treasuries are weak with the two-year at 2.55% and the ten-year at 3.95%.

The DJIA opened 50 points higher but has slipped into negative territory 45 minutes into the trading session.

Key Corp. a large Ohio bank is taking more write downs and is off $2 (10%). Financials did not participate in the mini rally this morning and their heaviness is weighing on the markets. The three part series the WSJ is running on the demise of Bear Stearns has added note of reality to a story that has not yet been fully appreciated. One day Bear Stearns was solvent and the next it wasn’t. To traders and folks on Wall Street the one week dismembering of a Wall Street icon is sobering.

AIG has dropped under the $35 at which price they raised billions in new equity capital a few weeks ago.

Dow Chemical said on Wednesday it would hike prices for all its products by up to 20 percent next month. And so it begins.

Today traders want retailers and so we were able to sell our one remaining stock Talbot’s and we are now all cash in accounts.

European bourse indexes closed higher on the day.

Oil reversed its early morning dip and closed $1.89 higher on the day at $130.73. Gold lost $8 to $900. Treasuries tanked with the two-year jumping to 2.60% and the ten-year moving to 4.01%. It takes $1.57 to buy a euro today and one dollar will fetch 103 yen.

Stocks traded around even most of the day and finished with a little rally in the last hour to close higher on the day.

The DJIA gained 50 points to 12600. The S&P 500 rose 5 points to 1390 and the NAZZ was up 5 at 2485.

Breadth was 5/4 positive on the NYSE and the reverse on the NAZZ and volume was light.

There were 90 new lows and 45 new highs on the NYSE.

The bulls held serve.


27 May 2008


Asian and European markets were mixed overnight as they were on Monday. Gold is down $7 and Oil is back under $130 as the shortened trading week begins.

We spent the weekend deciding whether to go all to cash. We really don’t understand what is occurring in the economy. By any measure the price of gas should be a real hindrance to economic and social activity.

Our rule of investing and preserving capital is that when we are uncertain, cash is our best friend; and so this morning we used the rally to eliminate GM and American Eagle and Chico’s. There isn’t enough volume in Talbots to allow us to sell it at this time.

GM is ridiculously cheap but it will probably get very ridiculously cheap before the correction/bear market is over.

We sold American Eagle and Chico’s ahead of tomorrow’s earnings for both.

Consumer confidence weakened for the fifth straight month in May. The Conference Board, a private research group, said that its index of consumer confidence for May fell to 57.2, down from a slightly revised 62.8 in April and compared with economists' expectations for a reading of 60.0 in May. The Index now stands at a 16-year low.

European bourse indexes closed lower on the day. Oil lost $3.75 to $128.45 and Gold dropped $17 to $909. It takes $1.57 to by a euro today and 103 yen to do the same. Treasuries were lower with the two-year at 2.50% and the ten-year at 3.93%.

The DJIA was up 70 points in the early going and then dropped to down 60 points at midday. When oil completed the day over $3 lower traders rallied the DJIA in the final hour.

At the bell the DJIA was up 70 points at 12550. The S&P 500 gained 10 points to 1385 which was formerly support and is now resistance and the NAZZ jumped 37 points to 2482.

Breadth was 2/1 positive at the close and volume was light.

There were 35 new highs and 75 new lows on the NYSE.

The bulls stuck their finger in the dike for a day


21 May 2008

We are going to take the next few days off from commenting on the markets and begin the Holiday weekend early. Our next post will be Tuesday May 27.


Stocks are lower this morning as yesterdays’ turndwonaround continues. The support level of 1405 is just below the 1409 at which the S&P 50 is trading an hour and one half into the trading day.

Gold is up $6 and Oil has a $131 handle. Treasuries are slightly better this morning. European bourse markets are lower at midday while Asian markets closed 2% higher overnight.

Talbot’s earned a few pennies for the quarter even after taking write downs and we are encouraged. It is the only up stock on our screen as the bears cover their shorts. We are going to let them and look to buy more if the overall market sell-off continues the next few days. Once the shorts have covered some of their shorts we would guess the shares will join the general market trend lower.

Hewlett Packard announced better than earnings and traded higher in the after hour’s session last night but is $1 lower this morning. That action tells the tenor of today’s trading.

The minutes of the last Fed meeting were released at 1:15pm and according to the banner on CNBC the Fed sees a bleak outlook for the economy, higher unemployment and higher inflation. AND DOWN GO THE MARKETS

Oil closed up $4.53 at $133.51. At this rate is will be $150 a barrel when we return on Tuesday if we can make it back since the price of gasoline will probably be $5 per gallon. Gold gained $12 to $932. Treasuries were higher in yield with the two-year at 2.39% and the ten-year at 3.81%.

European stocks closed lower as did Mexico and Brazil.

With an hour to go in the trading day the S&P 500 is at 1395 well below the 1405 support level and approaching the 1385 line in the sand. It needs to hold that level or… The question of the moment is whether the bulls have any energy left for a last hour stomping of the bears with program buying. As the moment it doesn’t seem they do.

The petroleum industry talking heads are saying that the price rise is due to demand. Where are the gas lines? The $133 price per barrel that everyone is quoting is arrived at not by actual buying of barrels of oil but by speculators in the futures markets buying the July contract. No one can take delivery of that July oil. The contract must be closed out or rolled forward to a future month. And for every buyer of a futures contract there is a seller and the game is a zero sum game which means that for every winner someone loses the same amount.

The DJIA closed down 226 points at 12603. The S&P 500 dropped 22 points to 1390 and the NAZZ lost 45 pints points to 2450.

Breadth was 2/1 negative and volume was moderate.

There were 130 new highs and 80 new lows on the NYSE and the NAZZ was the reverse. The NYSE new high figures suggest that this sell off has more to go.

The bears are in the honey.


20 May 2008


Producer prices were up 0.2% for April and up 6.5% year over year. The core rate was up 0.4% and 3% year over year.

There is a story in today’s WSJ about overcapacity in manufacturing facilities at auto manufacturers in the U.S. Auto manufacturing accounts for 7% of U.S. GDP and affects over 3 million workers directly. And auto jobs are among the highest paid manufacturing jobs even with all the give backs of recent years by the union workers.

The story reports that there are three new manufacturing facilities coming on line that will be able to produce up to a million cars. Unfortunately a million more cars are not what the doctor has ordered.

The three factories have been built by foreign companies. According to lore foreign manufactures are supposed to be the smart guys. We mention this because we never read in the press about the fact that two year as ago Toyota introduced the Tundra, the monstrous pickup truck that was supposed to be a huge profit producer for Toyota. NOT. Wrong time and wrong vehicle for rising gas prices.

There is also a story in the WSJ about banks that take out life insurance policies on the life of their employees and then collect when the employees die. (What a nice idea. According to the WSJ over 700 banks have billions of premium money invested this way. Or rather they did have billions of premium money invested this way.) The banks get a deduction for the premiums they pay and take the death benefit into earnings tax free. Until the folks die the banks invest the premiums for the life insurance in ‘safe’ investments.

And Citibank had just the hedge fund for them to invest in. why would a bank with its own trust department managing billions for individuals and institutions give the premium money to another bank to invest for them? We have no idea, we certainly don’t let anyone else invest our money for us.

Unfortunately,( ha ha), Wachovia and Fifth Third managed to lose a huge chunk of their built up Life insurance reserves ($ 700 million for Wachovia down the tubes and $450 million for Fifth Third) by investing them in a hedge fund run by Citibank that lost 75% of its value in the last year.

These banks and brokers that have also experienced huge losses of their own capital like Merrill Lynch and Morgan Stanley and Lehman are the entities who spend millions advertising their perspicacity and ask that folks give them money to invest since they are the experts and will invest the funds wisely. The money that these banks and brokers lost was supposedly invested in non risky investments. What kind of judgment do these folks have?

The ultimate irony is that we taxpayers are paying for this folly with the necessary Fed rescue operation and the folks who made the stupid decisions have moved off stage with wonderful retirement packages.

And so goes the American way of capitalism.

Asian markets were down big time overnight with Hong Kong losing 2% and Shanghai down 4.5%.

Reportedly Chinese stocks dropped as the effect on companies in the earthquake area became apparent. What took so long? The NYT wrote last week about the fact that most of China’s nuclear weapons manufacturing is in that earthquake zone and no one knows if it was affected. The NYT quotes scientists as saying that the Chinese are very smart and so they presume nothing bad occurred. Say what!

European indexes are 1% lower at midday. Treasuries are weak as the trading day begins in NYC and Gold is $1 higher with Oil having a $127 handle. Stocks are going to open lower.

United Foods beat by a penny and confirmed forward expectations and is trading higher. Win some and lose some.

Home Depot reported lousy sales and earnings but beat estimates. the shares are trading $1 lower in the early going.

Yesterday’s trading action on the S&P 500 was a move above the 200 day moving average and then a reversal and close below which places that measure in a bearish posture. The break back below the 200 dma suggests a move back down to 1390 according to the market guru we like.

An hour and one half into today’s session the DJIA is down 190 points. It is truly Turnaround Tuesday.

At noon the DJIA is down 200 points and the S&P 500 is down 12 points. The momentum stocks like Google and Apple and Mosaic and First Solar are higher. Oil is trading over $129.

European bourse indexes closed over 1% lower arcos the continent as did Mexico and Brazil.

Marketwatch.com reports:

Pension funds and other institutional investors are driving commodity prices to the moon by allocating massive amounts of money to energy and agricultural investments and sidestepping regulatory limits on big speculative bets, according to research expected to be presented to Congress on Tuesday.

The research is the result of an investigation by Mark Lapolla, founding partner of investment-strategy firm Sixth Man Research; and by Mike Masters, portfolio manager of Atlanta hedge fund Masters Capital Management, who will be questioned by a Senate panel.

Lapolla said that he and Masters collaborated on research showing that the decision by pension funds to put a certain amount of money into commodities -- often carried out by what's known as passive-index trades -- has correlated with the spike in commodities prices, and also has circumvented regulatory limits on large speculative bets.

Indexed trading refers to investments linked to a benchmark commodities index such as the Dow Jones-AIG Commodity Index.

"The result [passive indexing] is having on the market is enormous because of its size, because it’s unidirectional and because it's indiscriminate on price," Lapolla said Monday. "The argument that’s equally ridiculous, according to Lapolla, is the idea that lawmakers or regulators can figure out exactly how much of an impact these index traders are having on prices.

But that's exactly what the Senate Committee on Homeland Security and Governmental Affairs will try to do when it questions Masters, along with the chief economist of the Commodities Futures Trading Commission and the president of the National Farmers Union. The panel is asking whether institutional investors and hedge funds are contributing to food- and energy-price inflation.

A fund that wants to buy a huge position in a commodity can enter into a so-called swaps contract with an investment bank, which can then buy futures. These swap arrangements skirt the limits that the fund, as a speculative or noncommercial trader, would typically face on buying futures. The investment bank can use an exemption from such limits because it's hedging these swaps.

The swaps loophole has allowed funds to allocate billions of dollars to a particular commodity, regardless of weekly or monthly fluctuations in price, according to Lapolla.

Tuesday's testimony could lend support to congressional efforts to curb such speculation.

The hearing in Washington follows a 30% gain in crude prices this year and surging grains prices, which have contributed to a more than 50% gain in global food prices in the past 12 months.

Responding to domestic disgruntlement over rising grocery and gasoline prices, as well as anger from some key U.S. allies over the country's role in global food inflation, some lawmakers have proposed increasing the margin requirements for hedge funds and other financial speculators. Such a requirement, which is favored by commercial traders of commodities, would increase the amount of cash funds need to ante up to trade in the futures markets.

Lehman Brothers just completed a study and found that the level of investment demand in commodities has soared to $215 billion from $70 billion a mere two years ago.

But there's far from a consensus on whether financial speculators are driving the rally or just exacerbating a boom triggered by tight supply and demand fundamentals.

The Commodities Futures Trading Commission, the chief U.S. regulator of futures trading, said at a public hearing in April that its analysis of indexed trading and agricultural-commodities prices showed no correlation between increased index trading and price spikes.

The CFTC is a joke. They don’t want to regulate. But the fact that $250 billion is being poured into an area that only had $70 billion invested a few year ago is the reason for the rise. It is simple demand in the futures markets (not the actual market for oil) that is overwhelming supply (the lack of supply is because traders don’t want to risk shorting futures in a market screaming with buyer cash).

Gold gained $14 to $920 and Oil rose $2.02 to $129.08. Treasuries were better with the two-year at 2.38% and the ten-year at 3.72%.

The agriculture, steel and oil stocks all closed higher today.

The major market measures closed above their lows of the day yet off substantially with the DJIA down 200 points to 12830. The S&P 500 dropped 14 points to 1414 and the NAZZ gave up 25 points to 2490.

Breadth was 2/1 negative and volume was light.

There were 85 new highs and 70 new lows on the NYSE.

The bears are back.


19 May 2008


Asian markets were mostly higher overnight as are European markets as the trading day begins in NYC. Gold is at $910 and Oil has a $126 handle. Treasuries are flat.

This week is the lead up to the Memorial Day Holiday weekend and today’s trading should wrap up any hangover form last Friday’s Triple Witching.

Microsoft is like a chocoholic and is back again to take a bite of Yahoo. The soap opera resumes as MSFT now says it is interested in a hook-up that is not a merger. Stay tuned.

Microsoft says:

“In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Microsoft announces that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. "There of course can be no assurance that any transaction will result from these discussions."

Yahoo responds:

"Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time. Yahoo! and its Board of Directors continue to consider a number of value maximizing strategic alternatives for Yahoo!, and we remain open to pursuing any transaction which is in the best interest of our stockholders. Yahoo!'s Board of Directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value."

GM is resuming full production as the American Axle strike was settled over the weekend.

We sold our Whole Foods for a scratch loss. The trade didn’t work and we don’t want to turn it into an investment. We expected a pop and didn’t get it.

The Supreme Court has upheld longstanding state-tax exemptions for municipal bonds. In a 7-2 ruling Monday in a case from Kentucky, the justices permitted states to exempt interest on their own bonds from taxation while taxing residents for interest on bonds issued by other states.

Remembering the good old days of twenty years ago:


Our recent trades in GE have been positive and we are buying shares in accounts today at $32.50 which is down about $1 from the last price at which we sold. GE goes ex dividend in a few days with a 3.9% yield and the bad news of the earnings miss last quarter is in the share price. The $32.50 level has been a good bounce level over the past year.

European markets closed 1% and higher across the continent.

Treasuries closed slightly better with the two-year at 2.40% and the ten-year at 3.83%. Oil gained to end at $127.41 and Gold jumped $7 to $907. Mexico and Brazil were higher.

The DJIA was up 130 points as midday but then the major measures faded through the rest of the day but closed to the plus side.

The DJIA was up 40 points at 13030. The S&P 500 gained 2 points to 1428 and the NAZZ dropped 12 points to 2618.

Breadth was 2/1 positive for most of the day but ended the day with the NYSE flat and the NAZZ 5/4 negative. Volume continues to be light which is a worry for the bulls.

There were 165 new highs and 60 new lows on the NYSE. The NAZZ difference has narrowed to 11 more lows than highs.

The bulls remain - just barely - at the helm.


16 May 2008


After we departed early yesterday the markets rallied into the close with the DJIA gaining over 90 points. Since yesterday and today are part of Triple Witching the jury is out on the rebound of the last few days until Tuesday of next week.

Asian markets were mixed small overnight and European bourse indexes are mostly higher by 1% or more at midday. Oil is up a couple of dollars again this morning with a $126 handle as Goldman Sachs says prices are going to $141. Gold has gained $5 to $885 in early trading and Treasuries are flat.

Construction of U.S. single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded.  Builders broke ground on 692,000 single-family homes at an annual rate, down 1.7 percent from March and the fewest since January 1991, the Commerce Department said today in Washington. Total starts jumped 8.2 percent to a 1.032 million pace that was higher than forecast as construction of multi-family units increased 36 percent following a 35 percent drop in March. Lower prices and bigger incentives have yet to revive demand for houses, indicating builders will need to come up with even more discounts to attract buyers. Stricter lending rules, job losses and growing pessimism about the economy signal sales will not rebound quickly.

``Buyers are asking: `why buy now when I can buy six months from now at a lower price?''' Avery Shenfeld, a senior economist at CIBC World Markets in Toronto, said before the report.

``There's still a clearing out of inventory of unsold homes that needs some further months to run.'' Building permits, a sign of future construction, rose 4.9 percent to a 978,000 pace, reflecting gains in both single- and multi-family units. Home construction turned up unexpectedly in April and showed surprising vigor, making the biggest increase in two years. However, the increase was driven by a surge in multi-family housing, while single-family starts dropped.

Housing starts increased 8.2% to a seasonally adjusted 1.032 million annual rate, driven higher by a surge in apartment building construction, the Commerce Department said Friday. Starts plunged 13.8% in March to 954,000, the data showed; Commerce initially estimated March starts down 11.9% to 947,000.

Starts increased in three of four regions, led by a 24 percent jump in the Midwest. Construction rose 19 percent in the West and 3.6 percent in the South. Starts dropped 13 percent in the Northeast. Residential construction has subtracted from economic growth since the first three months of 2006, culminating in a 27 percent drop at an annual rate in the first quarter. That was the biggest decline since 1981. Home construction and property values ``seem likely to decline well into 2009,'' Federal Reserve Bank of San Francisco President Janet Yellen said May 13. She also said the risks around her forecasts are ``unusually large because of uncertainty'' about financial markets, housing and commodity prices.

The economy expanded at a 0.6 percent annual pace in the first quarter, according to Commerce Department data. Economists surveyed by Bloomberg forecast growth from April through June would slow to a 0.1 percent pace and consumer spending would advance at a 0.5 percent rate, the smallest increase in 17 years.

Builders' confidence continues to flag. The National Association of Home Builders/Wells Fargo sentiment index fell one point to 19 this month, the group said yesterday. All three components of the gauge fell, with the reading on current sales of single-family homes reaching a record low, indicating stricter lending rules are hurting the market. Toll Brothers Inc., the largest U.S. luxury-home builder, said May 13 that revenue declined for an eighth straight quarter and that most housing markets remain depressed. The number of potential buyers at its developments was the ``worst we've ever seen,'' Chief Executive Officer Robert Toll said on a conference call. A jump in foreclosures, as values fall and adjustable-rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65 percent and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week by RealtyTrac Inc.

CNBC is doing a story that 50% of folks over 45 years of age don’t have over $50,000 in retirement savings. And Charles Schwab is on the tube saying folks have to figure out how to save more. Duh!

TV and print ads constantly bombard folks with the idea that all folks have to do is pick a target kind of life style in retirement and then the financial advisor will show the investments needed to reach that goal.

In a time with 5% and more real inflation coupled with falling home prices such ads and stories are insults to the intelligence of most folks.

We are happy to have recovered to a reasonable level on our assets after the drop earlier this year. The market may be bottoming but we do detect more greed than fear in the markets and the media. The markets don’t owe folks anything.

We have kept a small position in beaten down stocks but we are under no illusion and of course even the stocks we own will go lower if the markets. We have just limited our downside risk by limiting our exposure to stocks and we think the stocks we own have a 50% downside with a triple upside from present levels when the economy recovers. We have no idea when the when will be.

U.S. consumer sentiment at lowest level since 1980 as the University of Michigan Confidence Survey was 59.

From a floor trader: Lotsa chatter about may payroll figure of -20,000 will be revised to -120,000….based on release from  BLS Regional & State figures that suggest a much lower figure…market has a bid since and will be expecting revision when June Employment report hits on 6/6/08.

Oil closed at $126.55 and Gold topped $900 at the close of business in NYC up $22. Treasuries rallied a bit on the revision rumor which was then rescinded and bonds closed flat to lower on the day with the two-year ended at 2.45% and the ten-year at 3.85%. European bourse indexes were fractionally higher and Mexico and Brazil gained.

Do you think the same people are buying U.S. Steel at $180 per share who bought it at $18 per share a few years back? We sure missed that one although we probably would have sold it at $50 and received nothing but grief as it moved higher.

The Saudis say they will not increase production because their customers are not demanding more oil. And then the WSJ in its story says that according to economists oil prices are increasing because of increased demand. Who do we believe?

WSJ story: "What they're saying to us is... Saudi Arabia does not have customers that are making requests for oil that they are not able to satisfy," Stephen Hadley said. …The Saudi government indicated that it is willing to put on the market whatever oil is necessary to meet the demand of its customers, Mr. Hadley said. But even then, he said, Saudi leaders say increased production would not dramatically reduce pump prices in the U.S.

The Saudis are investing in ways to increase oil production over time. Officials told Mr. Bush they are doing "everything they can do" for now to address a complicated market. Mr. Hadley said the Bush administration will take the explanation back to its own experts and "see it if conforms."

When Mr. Bush and King Abdullah met in the kingdom in mid-January, the president also sought more Saudi output but got a chilly response to that plea. Saudi Arabia said it would increase production only when the market justified it and that production levels appeared normal.

Mr. Bush acknowledges that raising output is difficult because the demand for oil -- particularly from China and India -- is stretching supplies. Also, economists say prices are being driven up by increased demand, not slowed production.

The DJIA closed down 5 points at 12985. The S&P 500 was up 1 point at 1425 and the NAZZ dropped 5 points to 2528.

Breadth was flat and volume was light.

There were 170 new highs and 65 new lows on the NYSE.

The bulls won the day and the week.


15 May 2008


Asian markets were mixed overnight with India up 2% and China fractionally lower. European bourse indexes are also mixed small at midday. Treasuries are flat and Oil has a bid with a $125 handle. Gold is also unchanged as the trading day begins.

GE is going to sell its appliance division and hopes to realize $8 billion in cash. And the sale of course will allow the company to treat the division as a discontinued subsidiary and not include its lagging results in earnings from continuing operations. Also the sale will probably create an accounting profit to offset additional write-downs in the finance subsidiary. It’s all about managing earnings.

Former Federal Reserve Chairman Paul Volcker said the Fed's independence could be hurt by the wide variety of assets it has taken onto its balance sheet to combat the credit crunch.

Since the credit crisis began last August, the Fed has expanded the volume and types of loans it is willing to make to banks and securities dealers -- loans that are backed by a wide variety of collateral from subprime mortgages to student loans. It has so far not directly purchased such debt. It did, however, make an unprecedented loan of $29 billion to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co.

Mr. Volcker, testifying on responses to the credit crisis at the Joint Economic Committee of Congress Wednesday, said such activity "has not been the tradition of the central bank and I think that is an issue for the long run for the independence of the central bank. If it is going to be looked to as the rescuer or supporter of a particular section of the market, that is not strictly a monetary function in the way it's been interpreted in the past."

Mr. Volcker is credited with reining in surging inflation while Fed chairman from 1979 to 1987. He has since held a variety of private-sector and nonprofit posts and in recent months has been vocal about the need to re-examine the system of financial regulation in the wake of the credit crisis.

Mr. Volcker said giving the Fed sweeping powers to oversee financial markets doesn't obviously justify its high degree of political independence. The Fed was given that independence based on the view that politicians shouldn't have the power to print money.

The former Fed chairman said Congress should consider creating a new position within the Fed, requiring Senate confirmation, "that is the chief supervisory regulator. It could be the vice chairman." He also said the Fed needs more and better paid staff to supervise banks.

Mr. Volcker laid part of the blame for the current crisis at the feet of banking regulators, including the Fed. "Why were [the banks] permitted to set up those off-balance-sheet entities that may or may not have had some formal relationship with the bank? They were not regulated and [banks] didn't hold an adequate amount of capital against them. Why did that happen after the experience of Enron?"

After Enron's use of off-balance-sheet entities to obscure its debt load led to the firm's collapse in 2001, accounting standards were toughened to require companies to consolidate more such entities onto their balance sheet. Banks used such entities to hold assets backed by loans and securities such as mortgages. The entities financed themselves by issuing short-term IOUs called commercial paper.

In 2003 and 2004, the Fed and other regulators ruled that the new accounting standards wouldn't compel banks to hold additional capital for such entities. But when investors refused to refinance the entities' commercial paper last year, some banks were forced to take the entities back onto their own balance sheets.

Mr. Volcker was more conciliatory on the wisdom of the Fed's decision to lend money to keep Bear Stearns from failing than he was in a speech last month when he said the Fed went to the "very edge of its lawful and implied powers." On Wednesday, he said, "I can understand why they felt they had to act. I can imagine they were faced with a problem and a very short time frame and worried about the contagion and loss of Bear Stearns."

Jobless claims were 371,000 which was expected.

Uncle Ben Speaks: http://www.federalreserve.gov/

To summarize, the turmoil in credit markets underscores some important principles for bank risk management, including the value of proper risk identification and measurement, the need for robust and objective valuation methods, the importance of preparing for liquidity disruptions, and the critical role of strong oversight by senior managers. With renewed attention to these principles and the restoration of strong incentives for sound risk management, institutions should be able to overcome the difficulties we have seen in the recent application of the originate-to-distribute model and begin to use it successfully again. Equally important, improvements in banks' risk management will provide a more-stable financial system by making firms more resilient to shocks. Supervisors must insist on effective risk management and provide as much support as possible for the implementation of needed changes.

Recent events have also demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets. I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital from diverse sources.  Importantly, capital raising and balance sheet repair allow for the extension of new credit, which supports economic expansion. I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.

We are going to head out early because it is such a nice day. As we leave at 1:45pm the DJIA is up 50 points and the S&P 500 is up 8 points at 1416. The NAZZ is best of breed up 24 points at 2520.

Breadth is 2/1 positive. Oil is at $1.24 and Gold finished at $880 up $14. Treasuries were flat.


14 May 2008


And we have a bridge we would like to sell you.

U.S. consumer prices were under wraps last month, a government report showed, evidence that the economic slowdown is easing some of the inflationary effect of recent sharp gains in food and energy prices. The consumer price index increased 0.2% in April; excluding food and energy, CPI advanced 0.1%. Wall Street economists had expected a 0.2% rise in both the headline and core indexes, according to a Dow Jones Newswires survey.

In that report the government said that gasoline prices were down 2% in April.

Investors Intelligence reported an increase to 46% bulls and a decrease to 29% bears in their survey last week. It is a truism that as the markets rise so does bullish sentiment.

Deere missed by penny and is down $8 per share and Applied Materials also had a less than report.

Whole Foods disappointed and dropped $4 per share in overnight trading. We actually found the report to be better than we expected.

This is the conference call transcript:


We remain interested in WFMI as a long term investment but for now we are buying shares in our large/aggressive accounts for a trade.

Asian markets were mostly higher overnight.

The new trading mantra is that the earthquake is a good thing for the world economy because of the rebuilding that will need resources from around the world. That is called trading on graves and is a staple of raw capitalism. Sometimes it seems like we are all ants.

European bourse indexes are mildly mixed at midday and U.S. futures are going to open higher on the tame CPI data which of course is a sham but worth trading on for a few hours.

Gold is down $6 and Oil has a $125 handle. Treasuries are flat as the trading day begins.

Toll Bros builders said the following on their conference call:

Second-quarter 2008 homebuilding results:

  • revenue of $817.9 million;
  • backlog of $2.08 billion vs. $41.5 billion a year ago and $2.4 billion at the end of the first quarter;
  • gross contracts of $730.5 million vs. $1.44 billion a year ago;
  • 1,237 homes under contract vs. 2,031 a year ago;
  • 308 cancellations during the quarter, down from 384 a year ago;
  • ASP was $590,000 vs. $711,000 a year ago and $634,000 in the first quarter;
  • loan-to-value dropped to 62.5% from 67% sequentially; and
  • the average credit score was 747.

Toll Brothers continues to reduce land option exposure. At the end of the quarter, the company had 51,800 lots owned and under option vs. a peak of 91,200 at the end of second quarter 2006. The company is now operating 300 selling communities vs. 315 at the end of first quarter 2008 and the peak of 325 at second quarter 2007. By the end of fiscal 2008, Toll Brothers is expected to be selling from approximately 290 communities.

Overnight we were thinking about our investments philosophy as it has evolved over the years. As we have aged we have become more risk averse and have been quick to move to cash when we perceived risk in the marketplace. That philosophy did well for us in the bear market of 2000 to 2003 and hurt our performance in the years from 2003 to 2007. Nevertheless even now after our recent misadventures our accounts are up 50% or more in the last ten years while the S&P 500 is basically unchanged.

In reviewing our trading we realized that when we go for ‘singles’ as opposed to all in ‘home runs’ we do a lot better. And when we decide that we know more than the markets and vary our investment/trading style we tend to suffer. That is what occurred when we loaded up in September and October of last year and were double whammied by the drop in November 2007 and then again by the flop in January-March 2008. Luckily we survived and are back to mostly even (plus or minus 2%) in ours and our managed accounts with a large cash holding.

We are going to stick singles production. Home runs are for market collapses not market corrections.

The following article is what sharpened our focus.

Buffett Veers off His Investment Path

Doug Kass

05/13/08 - 11:59 AM EDT

This post originally appeared on RealMoney Silver on May 13 at 8:05 a.m. EDT.

"Risk comes from not knowing what you're doing."

-- Warren Buffett

Since February, the shares of Berkshire Hathaway BRK.A have consistently fallen. And despite the recent market rally, the company's common shares hit a new 2008 low yesterday.

"You can observe a lot by just watching."

-- Yogi Berra

I believe the principle reason is Warren Buffet's investment style drift, which was reflected in a large derivative loss in first quarter 2008.

Let me explain.

As a dedicated short seller I often take a variant view of a company's prospects through logic of argument and analytical dissection, mocking conventional wisdom and the associated popularity surrounding certain investments that, in my view, created an unwarranted degree of optimism in the marketplace.

Indeed, some of my best investment shorts -- including Ron Perlman's Marvel Entertainment MRVL in the early 1990s, after which it filed bankruptcy; America Online, coincident with its 2001 acquisition of Time Warner TWX; homebuilding companies, a favorite of the momentum crowd in 2004; or private mortgage and credit insurers in 2006 -- initially triggered ridicule by many market participants as my targeted stock market icons (and shorts) were typically seen as Teflon.

If one reads some of the great investment books that chronicles legendary traders/investors successes -- such as Jack Schwager's Market Wizards: Interviews with Top Traders -- there is common thread to the successes of Soros Fund Management's George Soros, Duquesne's Stanley Druckenmiller, Fidelity's Peter Lynch, Capital Growth Management's Ken Heebner, Omega Advisors' Leon Cooperman, SAC's Steve Cohen and Steinhardt Partners' Michael Steinhardt: They consistently stick to their knitting and avoid style drift.

Not surprisingly, when I initially explained the rationale behind shorting Berkshire Hathaway in March 2008, I received a lot of criticism, particularly from some of my hedge fund heavyweight friends who I respect immensely. Frankly, it was hard for me to write that piece as I have worshipped at the altar of Warren Buffett over the years.

Nevertheless, I stood by my analysis and initiated a short, and I even shorted more Berkshire several weeks later.

The night before Buffett's Woodstock of Capitalism, Berkshire Hathaway reported horrible first-quarter 2008 results, weighed down by derivative losses and disappointing results in the company's insurance operations.

There was little coverage of Berkshire's weak first-quarter performance, though Citigroup's research analyst downgraded the stock a week or so later, as it occurred on the eve of the company's Annual Meeting (and pilgrimage to Omaha) -- a much ballyhooed event, which was covered widely by most business news networks.

"Even Napoleon had his Watergate."

-- Yogi Berra

There was even less coverage of Buffett's recent foray into derivatives. Berkshire's exposure to derivatives increased by $16 billion, to $40 billion, in the last year.

"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

-- Warren Buffett

Over the past five years, Buffett frequently called derivatives "financial weapons of mass destruction", comparing derivates to "hell...easy to enter and almost impossible to exit." Yet, he has, very much out of character, immersed himself in a large and, thus far, unprofitable derivative transaction. His investment successes have not been in speculating in the market (something he has been critical of) but rather by purchasing easily understandable companies with dependable cash flows that sometimes seem imperiled by an exogenous event and are available on the cheap.

It immediately occurred to me after gazing at Buffett's style drift (manifested in Berkshire Hathaway's large first quarter derivate losses) that he might be increasingly viewed as the New Millennium's Ben Franklin, a man who wrote "early to bed and early to rise" but spent many of his evenings in France, whoring all night and showing up to work after noon (to the massive frustration of John Adams). I concluded that Warren Buffett was getting a free pass and had drifted away from an investment process that had rewarded both him and Berkshire's shareholders so dramatically over the years.

"He hits from both sides of the plate. He's amphibious."

-- Yogi Berra

I also recently highlighted why I thought that Buffett was not only a great investor but, in recent years, he had become an even better marketer, with the benefit of his image accruing to Berkshire. For example, he has cultivated an image of someone who started with nothing, even though he was the son of a well-to-do stockbroker who became a U.S. Congressman. Everyone thinks of him as America's Business Grandpa, but remember, he grabbed control of a textile firm and promised not to change anything. He did make changes, though, eventually using the textile company's cash flow for acquisitions, shutting down the factory over time.

In essence, Buffett has sold himself as a savior, or investor of last (or often first!) resort. As such, he has positioned himself to prosper in the form of getting beneficial terms in acquisitions, a positive but still a "marketing" technique. As an example, Berkshire contributed over $4 billion of subordinated debt in the recent Mars deal. But what didn't get much press -- and it should have! -- was that on top of the debt, Berkshire invested over $2 billion of equity in the Wrigley WWY/Mars transaction at a "discount" to the price that Mars eventually will pay for Wrigley's common shares.

I am staying short Berkshire Hathaway.

"The future isn't what it used to be."

-- Yogi Berra

Enough said.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.

We sold Evergreen Solar for a scratch profit.

At midday the major measures are 1% higher on decent volume. New highs are expanding. All is good except that it is an expiration week with Triple Witching on Thursday/Friday so the gains of today may be ephemeral- or may be real. We’ll know next week if not before.

Gold ended the day down $4 at $866 and Oil finished at $124.13. Treasuries gave ground with the two-year at 2.45% and the ten-year at 3.90%. The euro was $1.54 and it takes 105 yen to buy a dollar.

European bourse indexes closed higher as did Mexico and Brazil.

This discussion from realmoney.com of Deere’s earnings demonstrates the Catch 22 that may apply to other international companies re materials costs and the dollar:

Deere missed the quarter during one of the great agriculture booms of our generation, stunning the Street and sending the stock down 8% this morning. EPS of $1.75 missed by a penny, and sales of $7.47 billion came up short of the $7.61 billion consensus.

These numbers do reflect a strong quarter:

Sales are up 19%, driven by a 30% production increase in ag equipment.

Management raised growth guidance for the balance of the year, noting equipment sales should grow 20% this year on production growth of 17% vs. previous expectations of 17% equipment sales growth on 15% production growth.

But profit guidance is unchanged.

Deere management is being surprised (and is surprising investors) by soaring material costs. This encompasses all aspects of production (steel prices, fuel for transportation, etc.). For a company whose business is booming due to commodity inflation, it is sweet irony to be nipped by it as well. Management is struggling to grasp the expected cost increases and is offering a wide range of an increase of $400 million to $500 million of incremental costs this year, most coming in the third quarter. This guidance is double its previous expectation for cost increases.

Here is the crux of Deere's problem: backlog. Normally, Wall Street loves the visibility provided by a large backlog, but, in this case, Deere is not able to raise prices to offset material price increases, resulting in pinched margins. The company is only seeing 2% "price realizations," far below the inflation rate on the production side. The good news is that this situation will reverse in 2009, as orders being taken now for next year are being priced higher. Management is not yet offering 2009 guidance, but analysts should figure that margins could soar in 2009.

Before investors get overly enthusiastic, though, they should also figure in the risk from currency movement. Deere is a huge beneficiary of the weak dollar, which contributed nearly one-third of the growth in equipment sales, and is expected to contribute 4 points to the growth rate next quarter. Beware a falling dollar, which would hurt the company's foreign exchange translations, but also its end markets, which are booming due to commodity price inflation.

The Major measures surrendered half their gains in the final hour but still closed higher on the day.

The DJIA gained 65 points to close at 12898. The S&P 500 regained ground above 1405 and rose 6 points to close at 1408. And the NAZZ had been up 15 points but selling in the last fifteen minutes caused it to only gain 1 point to 2497.

Breadth was 3/2 positive on the NYSE and flat on the NAZZ but volume was light.

There were 150 new highs and 60 new lows on the NYSE.

The bulls won the day.

This is an interesting discussion of a Congressional plan for resolving the mortgage crisis.

The Barney Frank and Chris Dodd proposal for an effective 'nationalization' of a good part of the distressed mortgages is the only sensible proposal that would start to tackle the vicious circle of falling home prices, rising defaults and foreclosures and growing mortgage losses for financial institutions.  

It does indeed represents a “nationalization of mortgages as the financial institutions that would be willing to reduce the face value of their mortgages by 15% of the current (lower) market value of the home property and let home owners refinance at this lower debt level at a more affordable mortgage rate (effectively converting variable rate mortgages into fixed rate mortgage) would have the new mortgage balance guaranteed by the FHA (or some other government agency). It is nationalization because it is equivalent to a plan where the government buys these mortgages outright at the same discount of the current market value of the property and then refinances home owners into a mortgage of lower principal value and with a more affordable fixed rate interest rate. 

Why is this effective nationalization of mortgages necessary and desirable to start resolving the severe mortgage crisis? Let us discuss in more detail the logic of this proposal… 

While the idea of nationalizing a good part of the now private mortgage market may seem radical it is the only sensible policy available and that makes sense: in this plan borrowers and lenders and the fiscal authorities are all better off than the alternative of a disorderly market outcome where a tsunami of foreclosures leads to bigger losses for all the relevant parties.  

Lenders are better off as a government buying or guaranteeing at a discount mortgages puts a floor on the losses faced by such lenders. Suppose home prices for a property have already fallen 10% and the government buys or guarantees the mortgage at 15% discount relative to the lower current value of the property (to cover the additional expected fall in the home value until home prices bottom out): then the lender loses 25% of the original value of the mortgage; this is the haircut faced by the lender. The haircut is steep but the alternative of the property going into default and the lender pushing for foreclosure would cause the lender a much larger loss of the order of 50%: in addition to the 25% expected fall in the home value you need to add the lost interest on the defaulted mortgage until the property is sold, the legal cost of foreclosure and the cost of the property being dilapidated if not vandalized while being in the foreclosure process. So while a 25% haircut is steep the alternative of a 50% loss on the mortgage is much worse. Thus, it is no wonder that Bank of America and many other Wall Street institutions have presented proposals similar to the Frank-Dodd one or supported this proposal. Wall Street realizes that such a proposal puts a floor to their expected losses and that the alternative of a disorderly workout is much worse for them. 

Borrowers are also better off as distressed borrowers who are into negative equity territory and/or unable to service their mortgages but willing to stay in their homes et a debt reduction: they can avoid the costs of default and foreclosure and be able to remain as homeowners in their homes. The reduction in the face value of their mortgage and the conversion of variable rate mortgages allows them to continue servicing their mortgages rather than face a foreclosure that hurts not only them individually but also the communities in which they live when a surge of foreclosures lead to negative social effects (falling value of homes in areas with large foreclosures, loss of tax revenues for local government and the negative “so goes the neighborhood” effects). 

The government is also better off with this plan. First, the plan does not necessarily represent a bailout of lenders as the government buys or guarantees the mortgages only after lenders have accepted a pretty steep haircut relative to the already depressed market value of the asset. Ideally if the government buys the mortgages at a discount that represents the true value of the asset after home prices have bottomed out, the ensuing reduction in the face value of the mortgage for the borrowers ensures that most borrowers will be able to service the lower debt and thus, in this ideal situation, the fiscal costs for the government of such as plan are zero. So, in principle, such a plan could have little or no fiscal cost for the government.  

Second, the fiscal costs of the alternative market-based disorderly workout of debts is much more costly to the government. The exposure of US large banks to real estate is about 47% of their assets and this percentage is 67% for smaller banks. If a tsunami of foreclosures in the disorderly workout implies that bank would lose 50 cents on the dollar (after the price fall and all the other foreclosure costs are included) rather than 25 cents on the dollar (if they accept the Frank-Dodd haircut) many banks would go belly up (estimated losses range between $500 and $1000 billion depending on how many households end up in foreclosures and/or walk away from their homes) and then, given deposit insurance, the FDIC would have to bailout the depositors of these banks. Fiscal costs of a bailout after such as systemic banking crisis could be as high as $1 trillion and certainly at least several hundreds billion dollar.  

Third, instead even in the worst scenario the fiscal losses in the Frank-Dodd proposal would be much smaller. Suppose for example that the government buys mortgages from the banks at 85 cents on the dollar rather than the 75 cents on the dollar that represents the true final value of the home and the true ability of the borrower to pay (the government may do that because some banks would go belly up even in a 25% haircut scenario and/or because the political economy of such a program would imply an effective subsidy to the lenders relative to the true market value of the asset). Then, in order to avoid massive defaults on the refinanced homes the government would have to reduce further the mortgage principal from 85 to 75 cents on the dollar. That difference 10% represents a subsidy to the lender as the haircut is lower than the true value of the asset. But even in this extreme case the total fiscal cost is only $30 billion if $300 billion of mortgages are purchased by the government (as per the Frank-Dodd proposal). Even in the likely case that the initial $300 billion becomes a $1 trillion program (as at least that many mortgages need to be purchased and refinanced to avoid massive defaults and foreclosures) the total fiscal cost of such a bailout is only $100 billion (or 0.7% of GDP), i.e. much less than the fiscal cost of the bailout of the S&L’s during the 1990s. 

In conclusion, compared to a disorderly market workout a Frank-Dodd resolution of the mortgage problem makes all parties better off: the borrowers, the lender and the government. The losses for all parties are much lower than the alternative. How is that possible? The answer is simple: debt theory suggests that when a debtor is unable to pay (insolvent) an orderly restructuring of the debt including a debt reduction make both the debtor and its creditors better off as the alternative of liquidation –as opposed to debt reduction – implies social costs in the form of liquidation costs (in this case foreclosure costs).  

Debt reduction for mortgages of home owners who are willing and able to continue servicing their mortgages if the face value is reduced and made affordable are the equivalent of a chapter 11 restructuring that dominates the liquidation equilibrium (foreclosure for mortgages, chapter 7 liquidation for corporate distress). If the continuation value of the asset (of the firm) as an ongoing concern is larger than its liquidation value debt reduction (i.e. chapter 11 debt restructuring for firms) dominates the liquidation, i.e. foreclosure equilibrium (chapter 7 liquidation for firms) as the liquidation costs and the ensuing destruction of social value is avoided. Thus, the Frank-Dodd proposal is a way to achieve a socially superior “Chapter 11” restructuring that makes borrowers, lenders and the fiscal authorities better off compared to a “Chapter 7” liquidation equilibrium where the lender ends up with a bigger haircut than under restructuring, the borrower loses its home, the nearby neighborhood (including local tax authorities) suffers from the blight and negative externalities of massive foreclosures and the government losses are larger as the fiscal bailout of a bankrupt banking system become massive. 

This is why in my March 19th blog “The Worst Financial Crisis Since the Great Depression is Getting Worse…and the Need for Radical Policy Solutions to the Crisis” I supported this debt reduction resolution to the mortgage crisis. As I put it then:  

“This government intervention would not be aimed to prevent the necessary adjustment of asset prices; it would be aimed at ensuring that the necessary adjustment is not disorderly. 

Such radical policy action includes a government plan to purchase – at a significant discount to minimize its fiscal cost – hundreds of billions of dollars – possibly trillions – of mortgages, effectively a nationalization of mortgages. Once purchased by the governments at a significantly discounted price these mortgages could be restructured to reduce their face value, reduce the interest rate on the mortgage and allow distressed but solvent borrowers to avoid foreclosure. To limit borrowers’ moral hazard only truly distressed borrowers would qualify: i.e. no condo flippers, no second home borrowers, no early default borrowers; only borrowers that were likely to be subject to deceptive and/or predatory lending practices. Only this formal nationalization of mortgages will start to stop the foreclosure disaster and jingle mail tsunami ahead of us. The fiscal costs and lenders’ moral hazard risks of such a plan can be significantly reduced if action is taken early and if the price at which the government buys mortgages from lenders is low enough.  

Of course the price adjustment in overpriced asset prices should not and cannot be avoided: home prices will have to fall at least 30%; equities will need to sharply correct in a bear market; risk spreads will have to widen sharply; many institutions will go bankrupt as they should. But what we risk today is a systemic financial meltdown where negative feedback loops lead asset prices to collapse much more than justified even by the much lower fundamental value of such assets.

So government intervention is necessary not to avoid the unavoidable massive losses and bankruptcies and the unavoidable fundamental adjustment in asset prices. It is rather necessary to avoid a financial meltdown where asset prices fall much more than justified by economic fundamentals and the credit crunch and de-leveraging of the financial system is much more severe than the necessary one that will occur regardless of any public intervention.  

Alternative solutions that allow a private sector restructuring of mortgages and rely on greater market mechanism should not be ruled out but they will be complementary to government action rather than replacing it altogether: changing bankruptcy rules to allow judges to cram-down a reduction in the face value of the mortgage is useful and empirical evidence suggest that this change will not significantly affect mortgage rates (in the same way that introducing collective action clauses in sovereign bonds did not affect at all sovereign bond spreads). Also, using negative equity certificates for banks that accept a reduction in the face value of mortgages so that they get option value of a potential long term increase in the value of the underlying home is a sensible idea.  

These and other proposals that are “market-oriented” can complement government action but – for a variety of reasons – they cannot fully replace it: the collapse in the mortgage market, even the agency one is severe; there is no large deep-pocketed private sector agent that can buy and restructure such large amount of mortgages and reliquify the frozen mortgage and MBS markets; delays in restructuring will only further impair the value of the assets and lead to bigger deadweight losses (such as socially wasteful foreclosures costs) down the line; risk of litigation in case servicers restructure mortgages and collective action problems among the final investors holding the claims on such mortgages (different tranches of CDOs creditors) may slow down or block the necessary debt restructuring; and other collective action problems and externalities are likely to slow down any private solution.” 

As I pointed out in this March piece market solutions – i.e. lenders voluntarily reducing the mortgages to a level that borrowers can afford – do not work because of the collective action problems (coordinate the interest of different and dispersed claimants – say holders of different tranches of CDOs - who have different seniority levels relative to the mortgages and thus different willingness to accept debt reduction) and because of the destructive delays that any market process – or even a legal bankruptcy procedure with cram-downs – would entail. 

In this regard it is important to note that timely passage of the Frank-Dodd proposal is crucial. If such a proposal does not become legislation before July then Congress goes into recess, then presidential elections do not occur until November, then the President (whoever he or she may be) is not installed until January 2009 and Congress returns to business only in February 2009. Thus, not passing this legislation now means that another year in wasted before this reasonable resolution of the mortgage crisis is adopted. And a year makes a whole difference because a year from now average national home prices will be 25% lower than their peak (rather than the current 15%) and a year from now millions of households will be forced into foreclosure and/or will walk away from their homes with massive losses for all, including most of all the lenders.  

This recognition that a public resolution to the mortgage crisis is necessary – and indeed all financial crises in the past in the US and other countries have been resolved with some form of government intervention – and beneficial to all is behind the growing support from many quarters of this proposal. Initially a few months ago only Congressional Democrats were supporting it; but last week the House passed this proposal with the support of a number of Republican congress-folks. Also, many Wall Street firms have supported this or similar proposal under the recognition that the significant losses and haircuts for financial institutions under this proposal would be much lower than those under a disorderly foreclosure workout that may lead to a systemic banking crisis. Moreover, even the Fed has been somewhat sympathetic to this proposal as Chairman Bernanke – and other Fed governors - recognized early on that banks should start accepting the fact that freezing of mortgage interest resets would now be enough and that bank should start recognizing that mortgage debt reduction was necessary to avoid massive foreclosures (and the Fed has provided some technical advice to Frank while not formally supporting the proposal). And until recently even the US Treasury appeared open to such a proposal as Secretary Paulson suggested that he would be open to more radical approaches to the mortgage crisis (an indirect nod to the Frank-Dodd proposal).  

So with the support of Democrats in Congress, of some Republicans, of the distressed borrowers, of a good part of Wall Street, implicitly of the Fed and with the potential openness of Treasury to this idea why has the White House threatened to veto this proposal? The best case scenario is that the White House (and now Treasury) is now posturing as a bargaining position for eventually supporting a slightly modified version of this proposal. The worst case interpretation is that an ideological White House (and some similarly ideological Senate Republicans) mean business when they threatened a veto (and they have sidelined the more flexible and pragmatic Paulson).  

And since the Frank-Dodd proposal did not pass the House with a veto-proof majority an actual veto may doom this sensible resolution of the mortgage crisis and would certainly lead to a disorderly workout as a similar proposal could be then reconsidered and passed by Congress only in the middle of 2009. And a proposal like this passed a year from now rather than now would be the difference between making a disorderly outcome likely with all the ensuing consequences for the real economy and the financial markets or rather ensuring an early more orderly workout of excessive debts.  

Indeed, one of the reasons why credit markets and mortgages market have somehow recovered from their extreme lows in mid-March was the recognition that, after a variety of useless gimmicks such as the Hope Plan and the Project Lifeline, a serious proposal to address the mortgage crisis had a chance to be passed early on and thus provide a needed and beneficial backstop to the mortgage market. But if this proposal were to be vetoed and doomed the ongoing disorderly adjustment of the housing and markets will continue: the free fall in home prices will get worse as many more home owners default, walk away or end up in foreclosure; a realistic floor on the losses on mortgages faced by financial institutions would not be achieved and ongoing downward spiral of price falls, negative equity, delinquencies and foreclosures would accelerate with disastrous effects for borrowers, lenders and, ultimately, a government that would have to fiscalize the bailout cost of a systemic banking crisis.  

So, to avoid having to nationalize a good chunk of the banking system we will have to accept that the best solution to this crisis is an effective nationalization of a good part of existing mortgage. As it is the mortgage market is mostly public as about half of all mortgages are insured or securitized by Fannie and Freddie that are now effectively public rather than private institutions that are being used for public policy purposes (as the increase in their portfolio limits, the reduction in their capital requirements and the increase in the limit for conforming loans implies that they are being used – in spite of their mounting losses and risk – for public policy goals).  

So after the Fed has been used to reliquify $500 billion of illiquid MBS and ABS, after the Federal Home Loan Bank system has been used to provide hundreds of billions of liquidity to illiquid and/or insolvent mortgage lenders, after Fannie and Freddie have been already effectively nationalized by being used to prop the mortgage market (so much for the decade long farce of pretending to minimize the moral hazard perception of an implicit government guarantee of these “private” institutions), after the Fed has cut the Fed Funds rates by 325bps, has provided a $29 billion bailout to the creditors of Bear Stearns and created a whole host of new facilities (TAF, TSLF, PDCF) that vastly extend the lender of last resort support role of the Fed to non banks, after the FHA has extended its support of mortgages, after government-induced market solutions such as the Hope Plan and the Project Lifeline have been tried, after all these actions the mortgage crisis remains as severe as ever.  

It is as severe or even worse because all the previous public policy actions have not addressed the simple and basic problem of this crisis: this is not just a liquidity crisis; it is mostly a credit or insolvency crisis as millions of households cannot afford servicing their mortgage debts and need debt reduction rather than just freezing of mortgage rates or restretching of their mortgage terms or similar cosmetic band aid gimmicks. The Frank-Dodd proposal is the only one that starts addressing the core problem of this crisis, the insolvency issue and the need for an orderly debt reduction. Thus, it is pathetic that while almost everyone agrees that this is a right and essential step in the true resolution of this crisis the White House is holding again to its stubborn free market fundamentalism ideology that is at the root cause of this crisis in the first place. A White House veto of the Frank-Dodd proposal would ensure that this most severe mortgage crisis spiral into a disorderly workout that would make all the relevant players - borrowers, lenders and the government – worse off. In the presence of negative externalities and coordination failures appropriate public policy solutions can prevent avoidable deadweight losses to society deriving from crises triggered by serious market failures. In this situation threatening a veto to prevent these socially beneficial resolutions of crises is adding insult to injury and further massive injury to already large losses.


13 May 2008


Hewlett Packard is going to acquire EDS for $12.8 billion in cash and that has traders talking mergers in the large cap tech area. Coincidentally with announcing the acquisition HPQ announced preliminary earnings for the quarter.  HPQ said net income on a preliminary basis rose for the quarter ended April 30 to 80 cents a share from 65 cents, with earnings excluding acquisition costs raising to 87 cents a share from 70 cents a share. Revenue rose 11% to $28.3 billion. The company, which was slated to release its quarterly results Thursday but pushed the release date to next Tuesday, had projected earnings between 83 cents and 84 cents on revenue of $27.7 billion to $27.9 billion.

And now HPQ can take special charges for the next year to manage earnings from continuing operations. CEO Hurd learned for Jack Welch of GE.

Retail sales ex autos were also better than for the month of April.

AIG, the large insurance company raised $7.5 billion by selling a bunch of common stock at $34. The shares closed yesterday at $39 yesterday. The analysts think the sale is good deal for the company. Why does that CEO still have his job and when he leaves why does he deserve any bonus package.

Asian markets were 1% or higher overnight and European bourse indexes are mixed at midday. Gold is down $14 and Oil has a $123 handle.

Treasuries are mixed as Uncle Ben made comments overnight that he is still worried about the financial markets. That was another reason for the weakness this morning until WMT and HPQ made things better.

Here is an analysis of what Bernanke said:

Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. While market conditions have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''

     Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take ``some time'' for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.

     The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs.

     Bernanke said the Fed's efforts have yielded ``some improvement,'' while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.

     The central bank's extension of the federal safety net raised questions about whether the government should now use taxpayer money to stem mortgage foreclosures, the primary cause of market distress.

                          `Moral Hazard'

     ``A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard,'' Bernanke said. The belief that the Fed is always standing by would give ``financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks.''

     Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee last month cut its benchmark rate by a quarter point to 2 percent and signaled it's ready for a pause after seven reductions.

     Cleveland Fed President Sandra Pianalto said in a speech in Paris today that consumer prices are rising faster than she'd like and that inflation is a ``key risk'' to the economic outlook. Pianalto is a voter on the FOMC this year.

      The Fed chairman said federal banking agencies are trying to address moral hazard through a review of ``policies and guidance regarding liquidity risk management to determine what improvements can be made.''

                          Raise Capital

     ``Future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing,'' Bernanke said. ``Ultimately, market participants themselves must address the fundamental sources of financial strains -- through deleveraging, raising new capital, and improving risk management.''

     That process will take time, he added, noting that ``once financial conditions become more normal, the extraordinary provision by the Federal Reserve will no longer be needed.''

     The Fed announced May 2 that it would boost the Term Auction Facility, or TAF, to $150 billion per month from $100 billion, the third increase since the program began in December.

     Premiums in term dollar funding markets still ``remain abnormally high,'' Bernanke said. ``Funding pressures have also been evident in the strong participation at recent TAF auctions even after the recent expansion in auction sizes.''

     The gap between three-month Treasury bill yields and three-month dollar-denominated loans in London narrowed to 89 basis points yesterday, the least since Feb. 20. A basis point is 0.01 percentage point.

                        Boosting Auctions

     On March 11, the Fed announced the Term Securities Lending Facility, which allows primary dealers to swap up to $200 billion of AAA rated commercial and residential mortgage-backed

securities and other collateral for the Fed's holding of Treasury securities for up to 28 days. The facility was aimed at helping dealers finance mortgage bonds.

     The FOMC expanded the facility May 2 to include AAA rated asset-backed securities. The decision followed two separate requests by groups of Senate and House members that the Fed accept debt backed by student loans under the program.

     ``The Federal Reserve has had to innovate in large part to achieve what other central banks have been able to effect through existing tools,'' Bernanke said.

     Bernanke also repeated his defense of the Fed's rescue of Bear Stearns Cos. in March. The central bank invoked emergency authority on March 16 to start direct lending to government bond dealers, and arranged $30 billion in financing to facilitate the Bear Stearns takeover by JPMorgan Chase & Co.

                          Bear Stearns

     ``A bankruptcy filing would have forced Bear's secured creditors and counterparties to liquidate the underlying collateral,'' Bernanke said in his speech. ``Given the illiquidity of markets, those creditors and counterparties might have sustained losses.''

     The Bear Stearns loan has been criticized by some former officials and Fed watchers, who said the central bank shouldn't substitute its own loans for fleeing creditors when institutions become insolvent.

     Vincent Reinhart, former director of the Fed Board's Division of Monetary Affairs, called the Bear rescue the ``worst policy decision in a generation.''

     Creditors also now perceive a wide safety net under investment banks, which the Fed doesn't supervise.

     The cost of default protection on Merrill Lynch & Co. debt fell to 1.58 percentage point yesterday from 3.3 percentage points March 14, CMA Datavision's credit-default swap prices show.

     Kansas City Fed President Thomas Hoenig said May 6 the central bank's decisions are ``likely to weaken market discipline.''

AIG opened at $38 having sold ten days trading volume overnight at $34. Who is buying?

Hewlett Packard opened $2 lower.

The price of oil jumped to $126 about noon and then backed off as the Senate approved a plan to halt purchases for the strategic oil reserve. Check the dopes ought to be selling that oil at this price. Whatever. Stocks are trying to rally with a few hours remaining in the trading day. It is nice to not have a horse in the race for a while.

European stocks closed mixed. Gold finished off $15 at $870 and Oil was $125.61 at the end of NYC trading. Treasuries gave ground with the two-year at 2.45% and the ten-year at 3.89%. The euro was $1.54 and the yen 104 to the dollar.

The $15 billion RV industry has been among the less-heralded casualties of the mortgage and housing crises, say manufacturers, dealers and others. But the impact has been severe. RV sales peaked in 2006 at about 390,000 vehicles, according to the Recreational Vehicle Industry Association. After a 12% drop in 2007, the trade group expects sales to tumble 14% to about 305,000 vehicles this year, the lowest level since 2001.

Industry watchers say couples in or nearing their 50s are the core market for motor homes and travel trailers. These couples are delaying their purchases of RVs, largely because they would typically have financed them by selling or borrowing against their homes. That has become more difficult as home values have plunged nationwide.

The DJIA lost 44 to 12832. The S&P 500 was down 1 point at 1403 and the NAZZ gained 6 points to 2495.

Breadth was flat and volume was light.

There were 120 new highs and 75 new lows on the NYSE.

Today was a tie between the bulls and bears.


12 May 2008

Happy 8th birthday to the Princess in Kentucky


Stocks are higher after an hour of trading this morning with the DJIA up 68 points. We are using the rally to continue raising cash having sold United Foods, Gap, JDSU and Motorola holdings this morning as well as half of our TLAB and another half of our Chico’s holdings.

Asian markets were higher overnight as are European markets past midday. Gold is $3 lower and the dollar has rallied a bit with the euro at $1.54. Treasures are flat and Oil has a $125 handle.

After the close Friday, FedEx cut its fiscal 2008 forecast saying it now expects to earn between $1.45 and $1.50 per share for the quarter ending May 31, down from prior estimates of $1.60 to $1.80 per share.

An interesting story: http://www.nytimes.com

From the WSJ: Wachovia confirmed that its Wachovia Securities LLC and other affiliates received inquiries and subpoenas from the Securities and Exchange Commission and several state regulators regarding auction-rate securities. The financial services firm said the regulators are seeking information concerning the underwriting, sale and subsequent auctions of municipal auction-rate securities and auction-rate preferred securities. "Further review and inquiry is anticipated by the regulatory authorities and Wachovia will cooperate fully," the company said in its quarterly report with the SEC. Also, Wachovia and Wachovia Securities were named in a lawsuit in New York. The lawsuit seeks class-action status for customers who bought and continue to hold auction-rate securities based upon alleged misrepresentations made with respect to the quality, risk and characteristics of the securities. The bond market for auction-rate securities has recently experienced significant difficulties caused by decreased demand, failed auctions, unusual interest rates and other challenges. Auction-rate debt carries yields similar to long-term debt but acts like short-term investments because investors can sell at weekly or monthly auctions, when rates reset. The $330 billion market was used a lot by municipalities to borrow money, but it collapsed earlier this year. New York's attorney general and securities regulators in several states are conducting a broad investigation of the auction-rate securities and the role played by Wall Street firms in promoting and marketing these to investors.

Oil closed down $2.05 at $123.91. Gold dropped $4 to $884. Treasuries were unchanged with the two-year at 2.27% and the ten-year at 2.75%. The yen was 103.5 to the dollar and the one euro equaled $1.55 at day’s end.

European bourse indexes finished mildly higher as did Brazil and Mexico were higher.

The DJIA rose 135 points to 12880. The S&P 500 regained 15 points to 1405 resistance and the NAZZ jumped 43 points to 2488.

Breadth was 2/1 positive and volume was summer light.

There were 60 new highs and 76 new lows on the NYSE.

The bulls won the day but the low volume and negative new high/ne low are a worry for them.


9 May 2008


The major measures are going to open over 1% lower on news that AIG, the large insurance conglomerate lost $8 billion in the latest quarter on bad investments and is going to raise $12 billion in equity capital. And the fools raised the dividend.

The CEO of AIG sad the following: "While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations." That this fellow keeps his job is an outrage to capitalism. There is no accountability in the welfare capitalism that exists in the U. S.

On CNBC, the business channel, the talking heads are playing poker. Are we worried?

Asian markets were 1$ and more lower and the same holds true in Europe at midday. Oil has a $125 handle and Gold is up at $888. Treasuries are better on the negative financial news.

Citi says it is going to sell $500 billion in assets. To whom and at what price are the major questions facing traders this morning.

The U.S. trade deficit narrowed more than forecast in March as imports dropped by the most in more than six years, reflecting the economic slowdown. The gap shrank to $58.2 billion, the lowest this year, from a revised $61.7 billion in February, the Commerce Department said today in Washington. The shortfall with China was the smallest in two years.

We sold the balance of the Chico’s we needed to sell to reduce positions by one half. We also sold the Sprint we bought yesterday for a 5% profit as the shares gained today on short covering ahead to the weekend. We also reduced positions in American Eagle.

After we wrote about AIG raising their dividend while also raising capital we thought of Fifth Third Bank which we own doing the same. We then read some recent news on Fifth Third and saw that FITB paid its CEO $10 million last year which was $3 million more than he received the year before. That’s nuts. We have lost a chunk of money on FITB this year. Ugh.

Whole Foods earnings come next week and we are taking a loss to view it from the outside when that occurs. We were hoping to sell it higher but given market conditions we think cash is a good place to be. We have spread our selling out and that has cost us a few pennies but it could have gone the other way.

Oil closed at $126.10 as speculators continue to make a mockery of an orderly market. Gold gained to finish at $888 and European bourse indexes closed lower. Treasuries were lower in yield higher in price with the two-year at 2.17% and the ten-year at 3.75%.

The major measures ended the week on a sour note with the DJIA down 120 points at 12345. The S&P 500 dropped 10 points to 1388 and the NAZZ surrendered 6 to 2445.

Breadth was 3/2 negative and volume continued light.

There were 75 new highs and 85 new lows on the NYSE.

The bears are back in control.


8 May 2008


Asian markets were mostly lower overnight although China was up 2%. European bourse indexes are mostly fractionally lower. Gold is up $6 and Oil has a $123 handle in the early going. Treasuries are flat.

A client recently informed us that he was moving his account to a financial planner who promised to hedge any uncertainties in the market place by diversifying investments into gold and oil and real estate and bonds and stocks. The financial planner was from Merrill Lynch (you can substitute Citi, Wachovia, Morgan Stanley etc.). We wished the client well but asked the question why would a person trust Merrill’s advice when Merrill had just announced the loss of $10 billion of its own monies from investments that weren’t properly hedged.

In that same vein of folks placing trust in ‘professionals’ who know the talk but maybe not the walk we found the following story interesting.

State Street Corp., the largest money manager for institutions, may have to pay more than 12 times the $625 million it set aside for damages from lawsuits over losses from subprime-mortgage investments made for pension funds. Prudential Financial Inc., the second-largest U.S. life insurer, is suing the Boston-based company on behalf of more than 200 retirement plans, alleging that State Street inappropriately invested their money in risky securities. Three other companies filed similar actions.

Neither side has disclosed potential losses, though State Street has reported that the value of assets ``adversely affected'' by the collapse in subprime mortgages fell 56 percent to $6.1 billion at the end of 2007 from $13.9 billion on June 30. That $7.8 billion decline represents the money manager's maximum legal exposure, according to Marcia Wagner, 45, a partner at Boston-based Wagner Law Group, which specializes in retirement fund and employee-benefit law.

The cumulative loss in value serves as a ``ceiling'' in these cases, and the $625 million reserve State Street put aside in December is the company's ``floor,'' or minimum liability, Wagner said.

The reserve is a ``lowball,'' Wagner said. ``We are talking very large in terms of damages,'' though they're unlikely to reach as high as the ceiling. ``To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,'' said Wagner, who isn't representing the investment manager or plaintiffs. ``It's sue or be sued.''

``They allowed bad investments, so they should be attempting to make the plans whole,'' Wagner said. ``State Street is quite exposed, especially if one of its affiliates rendered advice or marketed the funds to be something they were not.''

State Street will probably have to pay a minimum of $1 billion, according to William Fredericks, 46, attorney for plaintiff Unisystems Inc., a closely held New York publisher.``Based on public disclosures to date, damages should certainly be in the 10 figures,'' said the lawyer from Bernstein Litowitz Berger & Grossmann in New York.State Street's reserve is ``currently adequate to satisfy our legal exposure,'' spokeswoman Arlene Roberts said. A sum of $1 billion would represent 80 percent of the company's 2007 net income.

Three corporate retirement and welfare funds have asked the U.S. District Court in Manhattan to consider granting class-action status, which allows others with similar claims to join a case.

We have the same stores sales reports below on the four retailers we own. We think the short term will be difficult for them but we own them because when we arrive at the other side of the recession we are hoping that two or three of the four will provide above average returnees.

American Eagle Outfitters announced that total sales for the four weeks ended May 3, 2008 increased 15% to $197.7 million, compared to $171.9 million for the four weeks ended May 5, 2007. Comparable store sales increased 2% for the month, compared to a 10% decrease for the same period last year.

Gap said on Thursday that sales at stores open at least a year fell a bigger-than-expected 6 percent in April, but the clothing retailer affirmed its full-year earnings outlook. By division, same-store sales were flat at North American Gap and Banana Republic stores and off 12 percent at Old Navy stores. At stores overseas, same-store sales fell 7 percent.

For the company's fiscal first quarter, which also ended on May 3, net sales fell 5 percent to $3.38 billion while same-store sales fell 11 percent. Gap said it expects to post first-quarter earnings of 30 cents to 32 cents per share, including a $15 million benefit related to lower interest expense accruals.

For the full year Gap reaffirmed its outlook for profit in the range of $1.20 to $1.27 per share, but cited a tough retail environment.

The Talbots on Thursday said its merchandise gross margin is improving, offsetting weak first-quarter sales, and reaffirmed its fiscal 2008 guidance. The company continues to expect earnings from continuing operations to be between 47 cents to 52 cents per share excluding costs from exiting its kids, men and U.K. businesses. It expects a net loss between 17 cents and 7 cents per share. Analysts polled by Thomson Financial, on average, expect a profit of 35 cents per share, with estimates ranging between 8 cents and 50 cents per share. Such estimates typically exclude one-time items. Talbots also said it is discussing increasing its working capital line of credit with financial institutions. It expects to be in compliance with all covenants of its acquisition term loan agreement for the first quarter of fiscal 2008.

Women's apparel retailer Chico's FAS said Thursday its same-store sales slid 15.5 percent in April, missing Wall Street's expectations.Analysts polled by Thomson Financial predicted a same-store sales decline of 12 percent. The company said a shift in the timing of the Easter holiday helped April same-store sales by about 2 percent to 2.5 percent. Total monthly sales dropped 4.5 percent to $142 million from $148.7 million a year earlier. Same-store sales for the 13 weeks ended May 3 fell 17.5 percent, while total sales slipped 9.6 percent to $409.6 million. Chico's runs 611 Chico's front-line stores, 38 Chico's outlet stores, 318 White House Black Market front-line stores, 19 White House Black Market outlet stores, 70 Soma Intimates front-line stores and 1 Soma Intimates outlet store.

We are buying Sprint back in small amounts in our larger accounts. It has backed off $1 per share from its short covering run of the last two days. The recent news on the company has revived positive discussion of its value.

Gold ended at $882 up $12. Oil closed at $124.45 up 92 pennies. Treasuries were better with the two-year at 2.22% and the ten-year at 3.80%. A euro buys $1.53 and the dollar equals 103 yen.

European bourse indexes were mostly lower while Mexico and Brazil were higher.

The DJIA gained 50 points to close at 12865. The S&P 500 was up 5 points to 1398 and the NAZZ gained 12 to 2450.

Breadth was 5/4 positive on the NYSE and the reverse on the NAZZ and volume was light.

There were 75 new highs and 90 new lows on the NYSE.

The bulls and bears tied today.


7 May 2008


Investors’ Intelligence reports 44% bulls and 32% bears for the latest week. Asian markets were mostly lower overnight with China down 4%, Hong Kong down 2% and Japan up fractionally. European bourse indexes are higher at midday. Gold is down $7 and Oil has a $121 handle. Treasuries are a bit higher in yield.

Labor costs for the first quarter of 2008 were up 2.2% and Non-Farm productivity was up 2.6%. The first was lower than and the second higher than. And mortgage applications rose 15% in the latest reporting period.

Cisco and Disney both had better than earnings but after trading higher on the initial news Cisco backed off to down a few pennies when Chambers was cautious going forward.

Vallejo, California, officials voted to file for bankruptcy because the San Francisco suburb isn't able pay its bills after costs for police and firefighters soared and the housing market's slide cut into tax revenue.

The city council's unanimous decision last night will make Vallejo the largest California city to file for bankruptcy and the first in the state to seek protection from creditors because it ran out of money to pay for basic services. The decision came after it failed to win salary concessions from labor unions.

Standard & Poor's today lowered the rating on Vallejo's certificates of participation, a type of bond backed by its share of the state's vehicle license fees, to B from A, given the uncertainty of how the revenue source would be dealt with under bankruptcy, the rating company said in a statement. The city sold $16.8 million of the debt in 1999.

Just like with sub-prime, S&P was a day late and millions of dollars short in changing the rating.

Oil ended at $123.50 a new record. Gold lost $5 to $872. Treasuries were firm at the close with the two-year at 2.32% and the ten-year at 3.86%. European bourse indexes closed higher as the big drop in U.S. stocks didn’t occur until after those foreign markets closed.

At the bell the DJIA was on its lows for the day down 210 points at 12810. The S&P 500 closed down 26 points at 1392 and well below 1405 support now resistance and the NAZZ lost 50 points to 2435.

Breadth was negative all day and ended 2.5/1 negative on the NYSE and NAZZ. Volume was light.

There were 100 new highs and 70 new lows on the NYSE and the reverse again today on the NAZZ.

The bears are back. Same store retail sales come in the morning.


6 May 2008


Fannie Mae cabashed Turnaround Tuesday for the bulls by announcing a larger than expected large loss and cutting its dividend (expected) and saying it would seek to raise $6 billion in equity capital. Actually the fact that the stock measures are only small fractions lower suggests how inured the markets have become to expected negative financial news.

Asian markets were mostly higher overnight while European bourse indexes are large fractions to over 1% lower. Gold is up $6 to $880 in the early going in NYC and Oil has a $119 handle. Treasuries are flat.

Cisco announces earnings after the close and that news may keep a cap on today’s trading and will certainly influence tomorrow morning’s trading.

Fannie Mae opened $2 lower and is now trading positive after one hour of trading. Yahoo opened $6 lower yesterday and then recovered $3 by day’s end. That action suggests that bargain hunters/ buy side speculators are still in the markets.

Oil ended at $121.82 up $1.85. Gold finished at $877 and European bourse indexes were lower at the close. Treasuries gained a bit on the short end with the two-year at 2.37% and lost a bit on the long end with the ten-year at 3.89%. Brazil was down and Mexico up.

The DJIA gained 55 points to close at 13025. The S&P 500 rose 11 points to 1418 and the NAZZ was up 20 points at 2483.

Breadth was 3/2 positive on the NYSE and NAZZ but volume was again light.

There were 105 new highs on 70 new lows on the NYSE and the numbers were reversed on the NAZZ.

The bulls won the day.


5 May 2008

Cinco   de   Mayo (see below) 2008 Thoughts

Microsoft walked away from its Yahoo bid and YHOO shares are trading down $6 in the early going. We are happy to have exited the soap opera with a scratch profit.

The WSJ is reporting that Deutsch Telekom is considering a bid for Sprint. You read it here first about three months ago. Unfortunately the timing of our prescience was early and higher and we don’t own Sprint now and have no interest in revisiting that tragedy for our balance sheet. Deutsch Telekom remains interesting to us but not at this time.

Asian markets closed mixed overnight and European bourse indexes are small fractions lower. U.S. futures are lower on the Yahoo/Microsoft blowup and stocks may be in need of a rest. Gold is a few dollars higher and Oil has a $116 handle. And the hummingbirds returned to the land of milk and honey this morning.

European bourse indexes closed mixed. Brazil and Mexico were up 1%. Gold gained $16 to $874 and Oil jumped $3.25 to $119.50. Treasuries were firm with the two-year at 2.40% and the ten-year at 2.84%.

We sold part of the Chico’s in our larger accounts. It is an outsized position after our recent sales and while it is always fun to take profits it is also necessary to take losses when reducing the percentage in stocks. We will be selling more shares tomorrow as market conditions allow.

The DJIA closed down 90 points at 12970. The S&P 500 dropped 7 points to 1407 and the NAZZ was down 14 points at 2463.

Breadth was 3/2 negative and volume was light.

There were 50 new highs and 60 new lows on the NYSE.

The bears are still in the ball game unless the S&P 500 breaks strongly to the upside above 1430.

Cinco   de   Mayo

The holiday of Cinco de Mayo, The 5th Of May, commemorates the victory of the Mexican militia over the French army at The Battle of Puebla in 1862. It is primarily a regional holiday celebrated in the Mexican state capital city of Puebla and throughout the state of Puebla, with some limited recognition in other parts of Mexico, and especially in U.S. cities with a significant Mexican population. It is not, as many people think, Mexico's Independence Day, which is actually September 16.

Setting the Stage

The battle at Puebla in 1862 happened at a violent and chaotic time in Mexico's history. Mexico had finally gained independence from Spain in 1821 after a difficult and bloody struggle, and a number of internal political takeovers and wars, including the Mexican-American War (1846-1848) and the Mexican Civil War of 1858, had ruined the national economy.

During this period of struggle Mexico had accumulated heavy debts to several nations, including Spain, England and France, who were demanding repayment. Similar debt to the U.S. was previously settled after the Mexican-American War. France was eager to expand its empire at that time, and used the debt issue to move forward with goals of establishing its own leadership in Mexico. Realizing France's intent of empire expansion, Spain and England withdrew their support. When Mexico finally stopped making any loan payments, France took action on its own to install Napoleon III's relative, Archduke Maximilian of Austria, as ruler of Mexico.

Mexico Confronts the Invasion

France invaded at the gulf coast of Mexico along the state of Veracruz (see map) and began to march toward Mexico City, a distance today of less than 600 miles. Although American President Abraham Lincoln was sympathetic to Mexico's cause, and for which he is honored in Mexico, the U.S. was involved in its own Civil War at the time and was unable to provide any direct assistance.

Marching on toward Mexico City, the French army encountered strong resistance near Puebla at the Mexican forts of Loreto and Guadalupe. Lead by Mexican General Ignacio Zaragoza Seguin, a smaller, poorly armed militia estimated at 4,500 men was able to stop and defeat a well outfitted French army of 6,500 soldiers, which stopped the invasion of the country. The victory was a glorious moment for Mexican patriots, which at the time helped to develop a needed sense of national unity, and is the cause for the historical date's celebration.

Unfortunately, the victory was short lived. Upon hearing the bad news, Napoleon III had found an excuse to send more troops overseas to try and invade Mexico again, even against the wishes of the French populace. 30,000 more troops and a full year later, the French were eventually able to depose the Mexican army, take over Mexico City and install Maximilian as the ruler of Mexico.

Maximilian's rule of Mexico was also short lived, from 1864 to 1867. With the American Civil War now over, the U.S. began to provide more political and military assistance to Mexico to expel the French, after which Maximilian was executed by the Mexicans - his bullet riddled shirt is kept at the museum at Chapultepec Castle in Mexico City. So despite the eventual French invasion of Mexico City, Cinco de Mayo honors the bravery and victory of General Zaragoza's smaller, outnumbered militia at the Battle of Puebla in 1862.

Today's Celebration

For the most part, the holiday of Cinco de Mayo is more of a regional holiday in Mexico, celebrated most vigorously in the state of Puebla. There is some limited recognition of the holiday throughout the country with different levels of enthusiasm, but it's nothing like that found in Puebla.

Celebrating Cinco de Mayo has become increasingly popular along the U.S.-Mexico border and in parts of the U.S. that have a high population of people with a Mexican heritage. In these areas the holiday is a celebration of Mexican culture, of food, music, beverage and customs unique to Mexico.

Commercial interests in the United States and Mexico have also had a hand in promoting the holiday, with products and services focused on Mexican food, beverages and festivities, with music playing a more visible role as well. Several cities throughout the U.S. hold parades and concerts during the week following up to May 5th, so that Cinco de Mayo has become a bigger holiday north of the border than it is to the south, and being adopted into the holiday calendar of more and more people every year.


2 May 2008


The April Employment number said 20,000 jobs were lost. Since the markets were expecting a job loss number of about 85,000 the stock measures rallied almost 1% on the news with the S&P 500 moving through the 1405-1410 resistance area to the upside. Stocks are overbought according to the technical analysts but that condition can remain for a while without dire consequences.

The important fact at this juncture is to remember how we all felt two months ago and not to think that nirvana has arrived in the U.S. economy. The talking/writing heads now realize the problems and are discussing them ad nauseum and their acknowledgement and Washington’s action is at least the first step to resolution.

We will be selling the rally today since our accounts are back to even or above for the year. It is May after all.

Asian market are higher by 1% as are European bourses and Gold has recovered $5 to $855 while Oil has a $114 handle in the early going. The dollar is rallying and Treasuries’ yields are rising with the two-year at 2.50%.

Microsoft is rumored to be going to make a hostile bid for Yahoo this week-end.



Bank of America, which in January said it would buy Countrywide Financial, said there was no assurance any of the mortgage lender's outstanding debt would be redeemed, assumed or guaranteed, according to a regulatory filing. Bank of America said Countrywide had outstanding debt of about $97.23 billion as of Dec 31, including Federal Home Loan Bank advances to Countrywide Bank of about $47.68 billion, which it expects will remain outstanding until repaid by Countrywide Bank, in the filing with the U.S. Securities and Exchange Commission.

In the “it ain’t over till it’s over” Department” the Fed increased its lending facility today which suggests that some bank or banks have a continuing problem?

`Central banks have continued to work together and to consult regularly on liquidity conditions in financial markets. In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing an expansion of their liquidity measures.

Federal Reserve Actions

     The Federal Reserve announced today an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, beginning with the auction on May 5. This increase will bring the amounts outstanding under the TAF to $150 billion. In conjunction with the increase in the size of the TAF, the Federal Open Market Committee has authorized further increases in its existing temporary reciprocal currency arrangements with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the ECB and the SNB, respectively, representing increases of $20 billion and $6 billion. The FOMC extended the term of these reciprocal currency arrangements through January 30, 2009. In addition, the Federal Open Market Committee authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations, beginning with the Schedule 2 TSLF auction to be announced on May 7, 2008 and to settle on May 9, 2008. The wider pool of collateral should promote improved financing conditions in a broader range of financial markets. Treasury securities, agency securities, and agency mortgage-backed securities continue to be eligible as collateral in Schedule 1 TSLF auctions.''

We sold Microsoft, GE, CBS, Cisco, Liz, Intel, Symantec, EMC, and Cabelas for gains. We sold Dell for a loss.

We have to leave early for a graduation party. At 12 noon the Major measures had surrendered all of their gains of the morning and were negative. There may be a rally this afternoon which would set the markets up for another gain Monday. If not, who knows?

We have raised a good deal of cash and will continue to do so next week if the rally continues.


1 May 2008

May Day (see end of post) 2008 Thoughts

You can’t run a middle-class democracy with a multimillionaire press corps.

Workers of the world have united close markets to celebrate May Day. Japan was open overnight and closed lower and in Europe only London is trading and it is higher. Gold is down $2 and oil has a $113 handle. Treasuries are flat as the trading day begins.

Starbucks had a dismal report last night but having signaled the report last week the shares are trading flat.

Microsoft has signaled it is willing to go to $33 but the folks at Yahoo are supposedly suggesting that above $35 is needed for a deal. Of course if the deal falls through YHOO’s share price will drop by three times the difference in price.

Symantec reported revenue of $1.5 billion up 13 percent over the comparable period a year ago. For the fiscal year revenue was $5.8 billion. 2008 fiscal year revenue grew 13 percent compared to 2007. Earnings beat analysts’ estimates and the company gave a positive outlook going forward. The share price is up $2 to $19. We think the shares will move into the mid $20s on this news.

Timberland beats by $0.14 reporting earnings of $0.31 per share, excluding non-recurring items, $0.14 better than the First Call consensus of $0.17; revenues rose 1.2% year/year to $340.4 million vs. the $316.3 million consensus.  The shares jumped $2 on the news and we took our profit.

Starbucks said Wednesday its fiscal second-quarter profit sank 28 percent. The coffee purveyor slashed 30 additional store openings from its already-scaled-back plan for 2008 and said it will open fewer than 400 stores per year in 2009 through 2011. International openings will increase at a far faster clip, though, with 975 this year and a projected 1,300 in 2011. Starbucks expects to have 21,500 stores worldwide by the end of fiscal 2011.

The company forecast earnings of 90 cents to $1 per share in 2009, $1.10 to $1.20 per share in 2010, and $1.35 to $1.50 in 2011, predicated on a 20 percent average rise in sales each year internationally but just 6 percent growth in the U.S.

We sold the shares we bought two days ago for a $1 gain.

We bought JDS Uniphase at $11.88 in accounts that own Motorola. Shares of JDS Uniphase Corp. dropped $2.30 per share this morning after JDSU said it expected fiscal fourth-quarter sales below Wall Street estimates and an analyst lowered his rating. The stock shed $2.02, or 14.1 percent, to $12.29 after the opening bell.

To refresh memories JDSU was the Apple of the tech boom of the late 1990s.

JDS Uniphase provides communications test and measurement solutions, and optical products. The company operates in four segments: Optical Communications, Communications Test and Measurement, Advanced Optical Technologies, and Commercial Lasers. The Optical Communications segment provides components, modules, and subsystems used by communications equipment providers for telecommunications and enterprise data communications. Its products include transmitters, receivers, amplifiers, ROADMS, optical transceivers, multiplexers and demultiplexers, switches, optical performance monitors and couplers, splitters, and circulators. The Communications Test and Measurement segment provides a portfolio of instruments, systems, and services to enable the design, deployment, and maintenance of communication equipment and networks. It offers test tools and platforms for optical transport networks, digital subscriber line services, data networks, cable networks, digital video broadcast, and fiber characterization services. The Advanced Optical Technologies segment provides optical solutions for security and decorative applications, and thin-film coatings for a range of public and private sector markets. Its product applications include computer-driven projectors, intelligent lighting systems, photocopiers, facsimile machines, scanners, security products, and decorative surface treatments. The Commercial Lasers segment provides industrial diode lasers, fiber lasers, gas lasers, solid-state lasers, and photonic power delivery systems. The company markets its products primarily to service and cable providers, network equipment manufacturers, original equipment manufacturers, distributors, and strategic partners in North America, Europe, and the Asia-Pacific. It has a strategic alliance with SICPA for its light interference pigments, which are used to provide security features in currency.

The MSFT/Yahoo soap opera is more than we wish to risk now that the accounts are back to year end values. The upside/downside in Yahoo is tilted towards the downside and so we sold Yahoo for a $1 gain. We will hold MSFT because we think that either way the shares are attractive.

We reduced United Foods in many accounts realizing a $1 to over $2 profit on the trade.

Hain Foods which is also a natural foods company announces earnings on Monday and those earnings are projected to be disappointing. HAIN share price is down from $34 to $25 which is exactly the action that occurred in UNFI before its last quarter report. When UNFI reported the shares dropped another $7 and we bought. We may use the money realized from the UNFI to initiate a position in HAIN if it sells off further on any bad news.

We sold Saks for a $1 gain to reduce our exposure to retail. The basic attraction of SKS is as a takeover target and we would rather concentrate on CHS and AEO.

Raising cash as the S&P 500 ticks at 1405 which is major resistance is a prudent action. Most accounts are back above year end values which represents a 15% gain from the nadir in January  and we are willing to forego some gain to relax a bit after the last few months.

Oil settled at $112.25 down $1.25 and Gold surrendered another $14 to finish at $850. Treasuries weakened with the two-year at 2.36% and the ten-year at 3.76%. The yen was 103 to the dollar and it takes $154 to buy a euro today.

The DJIA closed up 190 points at 13010. The S&P 500 rose 25 points to 1410 and the NAZZ jumped 70 points to 2480.

Breadth was only 2/1 positive and volume was better but not enough with the NAZZ at only 2.2 billion and the NYSE a tad under 4 billion share.

New highs were 70 and new lows 80 on the NYSE.

The bears won the day. The monthly Employment Report comes tomorrow morning and that will be the focus of trading for at least the first few hours.

May Day 1886

May 1, 1886, became historic. On that day thousands of workers in the larger industrial cities poured into the streets, demanding eight hours. About 340,000 took part in demonstrations in Chicago, Milwaukee, Detroit, Cincinnati, St. Louis, Baltimore, Washington, New York, Philadelphia, Boston and other places. Of these nearly 200,000 actually went out on strike. About 42,000 won the eight-hour day. Another 150,000 got a shorter day than they had had before.

Chicago workers supported the movement most vigorously. To combat labor organization and activity, Chicago employers organized and acted. Pinkerton detectives and special deputies were in evidence. Policemen were swinging billies and breading up knots of workers on street corners.

At the factory gates of McCormick Harvester Co., where a strike meeting was being held on May 3, policemen swung their clubs and then fired into the running strikers....The speaker at the meeting was August Spies, a member of the Central Labor Union, which had supported the May First strike. He was also a member of a militant labor group that was at the time influential in the Chicago Labor movement. Six workers were killed that day and many wounded.

Anger ran high through the Chicago labor movement. About 3,000 attended a protest meeting the next day at Haymarket Square....The Chicago press reported the speeches were less "inflammatory" than usual. Mayor Carter H. Harrison who was present testified later that the meeting was "peaceable." But as it was about to adjourn, policement swooped down and ordered the audience to disperse. Then some unknown person threw a bomb. It exploded, killing a police sergeant and knocking several core to the ground. The police opened fire. At the end of the day, seven policemen and four workers lay dead.

At once several Chicago labor leaders were rounded up and thrown in jail. Eight of these finally came to trial--Albert Parsons, August Spies, Louis Lingg, George Engel, Michael Schwab, Samuel Fieldon, Adolph Fischer and Oscar Neebe. The presiding judge helped pick the jury which was strongly anti-labor and hostile to the defendants. The trial lasted 63 days. All of the men were declared guilty of murder. All were given death sentences, except Neebe who got a 15-year prison sentence.

A nationwide defense campaign won wide popular favor...At the last moment, as a result of widespread protests, the Governor of Illinois communted to life imprisonment the sentences of Fieldon and Schwab. It was reported that Lingg "committed suicide" in his cell.

On November 11, Albert Parsons, August Spies, Adolph Fischer and George Engel were hanged. On the gallows Spies cried, "There will be a time when our silence will be more powerful than the voices you strangle today." Straightway the defense movement, now led by Albert Parsons' widow, Lucy Parsons, turned to efforts to have the remaining three men freed. Fieldon, Schwab and Neebe were finally pardoned by Governor Altgeld in 1893. He was fully convinced, he said, of the innocence of all the eight men.

Out of the eight-hour struggle which culminated in the strike of May 1, 1886, and its aftermath, the Haymarket tragedy, came international May Day. In Paris, France, on July 14, 1889, leaders from organized proletarian movements in many countries came together to form once more an international association of workers....At the first congress of the Second International, delegates listened to the story related by the United States representatives, considered a request from the American Federation of Labor for support of their eight-hour fight, and voted to make May 1, 1890, a day for an international eight-hour day demonstration.

Demand for the eight-hour day became the main slogan of the international May Day celebrations. At a later congress, the International extended the purpose of the day to include wider labor demands and world peace.





Origins of May Day from Wikipedia:

The earliest May Day celebrations appeared in pre-Christian Europe, as in the Celtic celebration of Beltane, and the Walpurgis Night of the Germanic countries. Many pre-Christian indigenous celebrations were eventually banned or Christianized during the process of Christianization in Europe. As a result, a more secular version of the holiday continued to be observed in the schools and churches of Europe well into the 20th century. In this form, May Day may be best known for its tradition of dancing the Maypole and crowning of the Queen of the May. Today various Neopagan groups celebrate reconstructed (to varying degrees) versions of these customs on 1 May.

The day was a traditional summer holiday in many pre-Christian European pagan cultures. While February 1 was the first day of Spring, May 1 was the first day of summer; hence, the summer solstice on June 25 (now June 21) was Midsummer. In the Roman Catholic tradition, May is observed as Mary's month, and in these circles May Day is usually a celebration of the Blessed Virgin Mary. In this connection, in works of art, school skits, and so forth, Mary's head will often be adorned with flowers.

International Workers Day

May Day can refer to various labour celebrations conducted on May 1 that commemorate the fight for the eight hour day. May Day in this regard is called International Workers' Day, or Labour Day. The choice of May 1st was a commemoration by the Second International for the people involved in the 1886 Haymarket affair in Chicago, Illinois. As the culmination of three days of labor unrest in the United States, the Haymarket incident was a source of outrage and admiration from people around the globe. In countries other than the United States and Canada, residents sought to make May Day an official holiday and their efforts largely succeeded.

For this reason, in most of the world today, May Day has become an international celebration of the social and economic achievements of the labour movement. Although May Day received its inspiration from the United States, the U.S. Congress designated May 1 as Loyalty Day in 1958 due to the day's appropriation by the Soviet Union.[3] Alternatively, Labor Day traditionally occurs sometime in September in the United States. Some view this as an effort to isolate American workers from the worldwide community.[4] Although certain countries do not celebrate May Day, many people from around the globe continue to use May Day parades as an opportunity to show disapproval with the government or to protest cuts in social programs.


May Day marks the end of the uncomfortable winter half of the year in the Northern hemisphere, and it has traditionally been an occasion for popular and often raucous celebrations, regardless of the locally prevalent political or religious establishment.

As Europe became Christianized, the pagan holidays lost their religious character and either morphed into popular secular celebrations, as with May Day, or were replaced by new Christian holidays, as with Christmas, Easter, and All Saint's Day. Beginning in the 21st. century, many neopagans began reconstructing the old traditions and celebrating May Day as a pagan religious festival once more.

Law Day was created in the late 1950s, by the American Bar Association to draw attention to both the principles and practice of law and justice, and to distract attention from International Workers Day. President Dwight D. Eisenhower established Law Day by proclamation in 1958. It is defined in 36 U.S.C. § 113[1]. May 1, which is also International Workers' Day, was chosen as Law Day. Law Day has been resurrected by President George W. Bush.































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