Monday, November 28, 2011

The Fed's $7.77 Trillion Secret Funding Plan

As the ECB considers stepping up to the plate and acting as the lender of last resort, yesterday's blockbuster Bloomberg article on the US Fed's secret funding program (forced out in the open via a Bloomberg lawsuit) could not be more timely.

Here are a few excerpts:

"The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day..."

"The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year..."

"The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak..."

"TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says..."

"On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds..."

To read the full story, click here

Friday, November 25, 2011

Quotable Quotes: "You Did Not Persuade Me!"

To those who believe the current economic risks are all about the Eurozone and that the stock market decline is in nothing more than a bull market correction and to all of us who have been convinced otherwise, I offer the following quote from "The Last King of Scotland" with us as Nicolas and those as Idi Amin:

Idi Amin: I want you to tell me what to do.
Nicholas Garrigan: You want ME to tell YOU what to do?
Idi Amin: Yes, you are my advisor. You are the only one I can trust in here. You should have told me not to throw the Asians out, in the first place.
Nicholas Garrigan: I DID!
Idi Amin: But you did not persuade me, Nicholas. You did not persuade me!

Friday, November 11, 2011

Bloomberg: "China Credit Squeeze Prompts Suicides"

Heard enough about China's "growth" miracle, with its Louis XIV-style corporate palaces and its ghost cities? No? Well, then I am sure you will enjoy this neat little story from Bloomberg about the unregulated loan-shark-rates lending that many (most?) non state controlled businesses are forced (choose?) to rely on and what happens when their ability to pay is impacted by difficult economic and credit conditions:

"Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands.

They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors.

“If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them.

Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said.."

To read the finger licking good tale, click here

Thursday, November 10, 2011

What China Is Doing With Its Money

A few weeks back, I provided the video of an Australian investigative program on the ghost cities of China. If that wasn't enough to concern investors about China's "growth" miracle, perhaps this will. Here are a few (yes, there's more here and here*) photos of the corporate headquarters recently built for state owned Harbin Pharmaceutical.

And these are the guys whom investors are relying on to provide capital for the Eurozone and save the world economy with middle class demand. Ghost cities and corporate palaces. Good luck with that.

*Note: For some reason, this second link no longer works.

Wednesday, November 9, 2011

Motion Is Not Movement: Risk Appetite Still Unchecked

Despite sporting an above large cap P/E (19.1 times versus 12.6, estimated for 2011) and despite having an exceptionally optimistic consensus earnings estimate for 2012 (27.3% versus 9.3%) and despite facing the heightened risk of an era of diminished US consumer demand (which is the primary business space small companies operate in), the emboldened bottom up crowd (see yesterday's comment re the bottom up idol, Warren Buffett) joined by the who-cares-what-direction-the-market-moves-just-as-long-as-the-market-moves momos remain fairly sanguine as they have yet to show any meaningful and sustained reduction in their risk appetite. To see this clearly, just look at the accompanying chart illustrating the performance of the small caps (IJR) versus the large (SPX) and mega caps (OEF) over the past 2 years.

While there have been relatively brief periods of reduced risk appetite (when small caps underperform their larger cap brethren (bottom portion of the accompanying chart), the cumulative result still remains fairly rosy.

Investment Strategy Implications

Today's big market move is yet another example of a point I have made on numerous previous occasions: large moves within trading ranges mean nothing. It is only when the current first wave of the bear (my view) or the bull market correction (bulls view) resolves itself with a clear downside or upside break AND is accompanied by confirming action from other indices that the true trend will be exposed.

One early sign would be if there is or is not a change in the risk appetite investors and their momo cohorts. And that would reveal itself in the relative performance of the small caps. Telescoping that performance into today's action: OEF -2.11%, IJR -2.62%. Applying the point made re the range bound market to todays' performance: motion is not movement. Unless and until this changes on a sustained basis, the risk appetite remains unchecked.

Motion is not movement. In fact, motion often resembles commotion.

Note: Accounts managed by Blue Marble Research presently hold a long/short position in the above mentioned issues and their inverse comparables.

Tuesday, November 8, 2011

The Italian Opera

First, the Greek tragedy. Now, the Italian opera.

As the global deleveraging crisis continues to wreck havoc on the Eurozone and interest rates for one of its largest economies hits record levels (see chart), it is advisable to understand the multiple dimensions of this financial and economic opera.

In his blog posting yesterday, Nobel Laureate Paul Krugman notes, “…Italy is not a shadow bank; its debt has on average a roughly 7-year maturity, so high interest rates take time to filter into higher debt service. As a matter of arithmetic, this could go on for a while, maybe even a couple of years, without necessarily pushing the country into default.”

However, as Mr. K also notes, “...rates can go even higher; banks can come under pressure; and bank depositors can vote with their feet.” And therein lies the real trouble – a run on the bank, in this case, a sovereign. As the FT noted recently, “The biggest US money market funds cut their exposure to European banks to another record low last month, amid continuing uncertainty over the fate of the region’s debt crisis.”

As money flows away from risky areas and into safe havens like the US dollar denominated assets, stress fractures in the global financial and economic fabric continue to break apart thereby producing a cascading effect upon all and an obsessive focus on who’s next.

Bottom line: This opera won't end until the fat lady sings. Unfortunately, I don't hear her even warming up.

And don’t think the Chinese are so dumb nor so economically secure (you can’t built ghost cities forever) that they will send boatloads of bailout cash to sinking ships around the world. Turandot falls in love only once.

But, hey, none of this really matters to the bottom up boys and girls who are no doubt emboldened by the actions of their leader, Warren Buffet, who went on a spending spree in the third quarter.

Wednesday, November 2, 2011


Here is The Economist cover image that I referenced in yesterday's interview: the Eurozone leaders being lowered into a sea of trouble (mostly of their own doing) with a pasta colander serving as their boat.

One of the points made in yesterday's interview was the near certainty that a recession is on its way (if it's not already there) for the Eurozone. Today's Eurozone manufacturing data only reinforces that view. What is more ominous, however, is the prospect that the best case scenario for the Eurozone appears to be recession. The worst case? Don't ask.

Tuesday, November 1, 2011 appearance

To view the segment, click here.

Talking Head Alert: Today

Okay, so I look prescient (at least for 3 days) after last Thursday's appearance on Bloomberg radio's "Talking Stock with Pimm Fox and Courtney Donohoe" some 60 S&P 500 points ago. Now what?

Today's talking head appearance affords me another opportunity to describe my emerging bear call and can be viewed at (not on cable) at 1 PM (eastern) today.

In addition to my submitted suggested talking points (below, sent yesterday), I hope to explain why
1 - Big market moves within defined trading ranges mean nothing.
2 - On its own, moves above and below the 200 day average also mean nothing.

Plus the emerging bull market in Komboloi (see accompanying image).

Suggested talking points:

Commentary: Blind Faith

* Bottom up type of investors - those that make investment decisions based primarily (many exclusively) on earnings - have helped drive stocks to current levels.
* Following their lead is a very dangerous practice for investors, as bottom up investors have an investment method that is fraught with danger.
* Last Thursday's stock market rally illustrated just how dangerous their approach to investing is: driving stocks higher on the news of the Eurozone deal without full knowledge of the deal's consequences.
* Their method - earnings matter above all else - is anchored in the belief that what's good for business is good for the economy. To believe this is to believe in laissez-faire economics, that unfettered markets work best, that government that governs least governs best.
* One would think that the recent experience (2007 - 2009) would have put this thinking to bed. But old ideas based on an ideology (dogma) die hard.

Market Assessment

* There is neither a fundamental nor a technical analysis reason to change my early bear call.
* My proprietary Mega Trend is still strongly in the bear category.
* Earnings are on the verge of a serious decline into 2012 (and beyond) as the Eurozone slips into recession.
* At best, stocks should sell at a low double digit P/E, not the current average (15 times) P/E.

Actionable Items

* Resist the siren call of the bottom up bulls. Keep a low equity exposure (50 to 60%).
* Put on mega cap, small cap hedges (long mega cap OEF, long the inverse small cap RWM).
* Be prepared to drop the equity exposure below 50% when the second wave of the bear emerges.

To view the segment live, click here.