Category: Articles

The “Gloom,Boom and Doom Report” editor says we are “oversold” in almost all areas…

Part 1: Very good value in corporate bond market

Part 2:

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After a very rough start, Wal-Mart (WMT) CEO Lee Scott is stepping down with his retailer again “the place to shop”…

Back in May of 2007 I said it was time for Scott to go. I said rather than concentrating on growth, he ought to cut back growth, buyback shares and invest in current locations. Less than a month later Wal-Mart announced they were cutting back expansion plans and planned a $15 billion share repurchase plan.

No, I do not think they were listening to me but it does show Scott was nimble enough to turn the tide of two decades of breakneck growth plans and change the company’s focus. For that he ought to get kudos…

It wasn’t too long ago we were hearing about how Target (TGT) was displacing Wal-Mart as the top retailer…….haven’t heard that for a while now..

Don’t think we will be either…

Disclosure (“none” means no position):Long WMT, TGT
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Recent complaints by Citi’s (C) Pandit and Bank of America’s (BAC) Lewis can only leave investors head shaking..

Today Vikrim Pandit said that “rumor mongering” was at the heart of the company’s stock slide and yesterday called in Gov’t officials to re-instate the short sale ban. It should be noted that this was tried earlier this fall, and , well, stocks fell anyway. Not sure what Pandit hopes to accomplish here. He also said the bank has plenty of liquidity and will not break itself up.

I can believe #1 but still do not understand #2 at this point. There has to be assets that can be sold to raise equity. They have $2 trillion of them. Something must be able to let go…

Now, watch Ken Lewis in Chicago Thusday..

Lewis blamed “lax regulation” for much of the problems today. Was he forced to loan money? Was he forced to pay billions for Countrywide (CFC) when he could have just stood still and watched it go into bankruptcy? Was he forced to overpay for Merrill Lynch? He bought it and paid what he did for “before someone else bought it”. Now, if we listen to what Lewis said above, then his reasoning behind buying it then was flawed. If that model can no longer survive, then had he waited, he could have bought it far cheaper and no, Ken, no one else wanted it.

Ever notice how little we hear from Kovacevich at Wells Fargo (WFC) and Dimon at JP Morgan (JPM)? It seem the only time we hear from them are when Dimon is bailing out another institution or Kovacevich is complaining about being force fed TARP funds he does not want.

Whining about short sellers has never entered into the conversation.

Lewis and Pandit are seeing their company’s in the positions they are in due to poor decisions. Lewis has no one to blame but himself with very poor acquisitions recently. Both the businesses he bought and the prices he paid should have never been attempted. Pandit can blame the mess he inherited on former CEO Chuck Prince but cannot excuse the near year of inaction he has since held rein over.

Don’t invest in companies who blame other for the stock and performance slide…

Disclosure (“none” means no position):Long WFC, none
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Berkshire Hathaway (BRK.A) and Fairfax Financial (FFH) are investing in USG (USG) convertibles.

USG Corporation (USG) , a leading building products company, reported today that it has entered into an agreement to sell a total of $400 million of 10 percent contingent convertible senior notes due 2018, $300 million to Berkshire Hathaway Inc. and $100 million to Fairfax Financial Holdings Limited. The notes will initially bear interest at a rate of 10 percent per annum. In accordance with New York Stock Exchange rules, USG will seek shareholder approval to allow conversion of the notes into shares of USG common stock. Assuming an affirmative vote of USG’s shareholders, the notes will become convertible into shares of USG common stock at a conversion price of $11.40 per share. If shareholder approval is not obtained prior to the 135th day after closing of the sale of the notes, the notes will bear interest at 20 percent per annum until after shareholder approval is obtained.
Berkshire Hathaway and Fairfax have agreed to vote all shares of the corporation’s common stock controlled by their affiliates over which they have voting control in favor of the proposal to permit conversion of the notes.

Completion of the sale of the notes is subject to customary closing conditions and is expected to occur within the next several business days.
“We are gratified by the expression of confidence in USG Corporation by two premier financial institutions,” said USG Corporation Chairman and CEO William C. Foote. “We consider these substantial investments by Berkshire Hathaway and Fairfax as validation of our business strategy and the company’s long-term prospects. This transaction provides USG with long-term capital that significantly improves our financial flexibility as we manage through the steep recession in our primary markets.”

USG intends to use the proceeds from the sale of the notes for general corporate purposes, including a partial repayment of the amounts outstanding under its unsecured credit agreement.

The company intends to hold a special shareholders meeting in the first quarter of 2009 to seek shareholder approval to allow conversion of the notes.
“We have taken numerous actions over the last 2 1/2 years to stay ahead of a declining market and optimize both our operations and our finances,” said Foote. “We know that one of the keys to future success is maintaining sufficient financial flexibility to manage through this downturn. The proceeds of the sale of the convertible notes significantly strengthen our capital position and greatly enhance our ability to navigate through this recession and position the company for an eventual market rebound.”

The notes will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This press release does not constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state, and is issued pursuant to Rule 135c under the Securities Act of 1933.

Disclosure (“none” means no position):none
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Thank you…

– A thank you for the mention and a recommendation. For those who do not read Abnormal Returns daily….do so. It is one of the, if not the best blog/msm daily linkfest out there.

Disclosure (“none” means no position):
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A whole lot of reading to get to the meat 2/3 of the way through and some thoughts at the end…

From the Release

In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

OK. So, if any of us has paid any attention to anything Nassim Taleb has said recently or read his book “Black Swan” (if you haven’t, do it), then we know any prediction past the next three months is essentially worthless. Great, so why the post then and why does that matter?

The prediction of negative GDP for the next 9 months then growth in the second half of 2009 will create a pessimistic environment. People will believe what the Fed predicts will happen. That is good for those thinking of buying stocks now.

A bad investing mood will expect bad news for the next 9 months. If the news is indeed bad, much or the downside from that news ought to be incorporated into stock prices, as Ben Graham would say “Mr. Market is depressed”. Bad news will be looked at in a “we expected that” prism. Equity prices reflect for the most part that future pessimism. Note…this does not mean we have bottomed by any means, just that current equity prices reflect the pessimism of the investing public in the future.

Any news that comes out that is good, will have surprise value. “What if things are not going to be that bad” Mr. Market will think. “If things are not that bad, prices are really cheap” he will lament to himself. He may buy a little and should more good news come out, he may rush into buying stocks causing prices to surge.

The point is, with the Dow (.DJI) at 8000, a recession and negative growth expected for the next 9 months, Ford (F) and GM (GM) teetering and banks desperate for cash, there isn’t much else that could happen that could really “shock” investors save a terrorist attack or another War breaking out. Another bank failure? Seen it. Bigger bailout? Yawn.

On the other hand, any good news of any kind would not be expected and could cause prices to rise…fast…

The point is that either is just as likely to happen based on the inability of economic predictions to be very accurate as we extend the time frame. If the Fed is right, we are there already with expectations. If they are wrong, current buyers could be very well rewarded.

PS. Please note the time frame….9 months. Let’s not expect this to turn by Christmas and be crushed if it doesn’t. Patience…

FULL MINUTES

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“Media Malpractice”, Rather, Eaton, TARP

– Like i said…..the media

– Does this just reek of hypocrisy or what?

–

– Who doesn’t have their hand out?

Disclosure (“none” means no position):
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I have been getting a bunch of email lately about commodities. This was emailed to me today..

From Roubini’s RGE Monitor

Today we turn our attention to commodities, which have been badly battered by the global financial crisis, deleveraging and a worsening economic outlook, with commodity indices having lost 50% of their value since the July peak. With the G10 in recession and many emerging economies slowing sharply, further demand destruction is likely, and it may continue to outpace production cuts. Once the price adjustment filters through to producers, they may account for another source of slower aggregate output.

Despite the steep price declines so far, commodities as a group have only fallen halfway to their 2001-02 trough, meaning they may have farther to fall. Among individual commodities, those that grew the most expensive in the shortest period of time have suffered the sharpest and fastest price drops. In fact, some investors are pricing in a temporary drop in the price of oil below $30 per barrel, far below marginal production costs.

Metals and energy led recent declines, after breaching nominal and inflation-adjusted highs earlier this year. Agricultural commodities took smaller hits as their price climbs were not as excessive – their peak prices this year remained 2-3x below their inflation-adjusted highs in the 1970s. Only newsprint has yielded positive returns this year as of November but its resilience seems unsustainable in the medium-term. Across the commodities group, inventory buildup and falling demand creates conditions ripe for a continuing current bear market despite the fact that some commodities, such as oil, seem to have fallen below production costs.

WTI crude oil futures have fallen from a peak of $147/barrel in mid July to around $55/barrel, well below the 2007 average price. U.S. government data suggest that demand for oil products is about 6-7% lower than last year, with the sharpest declines in jet fuel. Despite the fact that gas prices are now hovering at $2 a gallon and energy costs fell 18% nationwide in October, demand continues to fall. Forecasts from the EIA and OPEC suggest that 2009 might mark make the largest contraction in oil demand in decades, despite the recent price correction. EM oil demand will be insufficient to offset growing declines in the OECD countries. For now, financial market trends and macro fundamentals might point in the same direction, towards weaker energy prices.

Yet, output cuts are reducing supply, removing the surplus reached earlier this year, even as OPEC’s surplus capacity increases. Non-OPEC supplies continue to disappoint. Oil production has declined in Russia, the North Sea and Mexico while new production in Kazakhstan and Brazil has yet to come on stream. In the short-term, it might take a major supply shock – say one that cuts off Iran’s oil supply or major output from the GCC – to really boost prices. The Somali pirate hijacking of a Saudi tanker might raise transport costs as insurance premiums rise and routings increase, and reminds observers of the energy supply chain’s vulnerabilities, but it may not have a major affect on oil market fundamentals. OPEC’s willingness to comply with current (and future?) production cuts may be the most significant supply side factor. Yet the elevated cost of new oil supplies may lead to future supply crunches. Canada’s oil sands are woefully expensive at today’s prices and projects are being deferred if not canceled.

Lower global energy demand, in the face of increasing supply, is also affecting current and expected natural gas prices. EIA has noted that the Henry Hub natural gas spot price projection for 2009 has fallen from $8.17 per Mcf to $6.82. The front month contract price of natural gas on NYMEX has steadily declined and the futures curve has sloped downward. Demand for alternative energy tends to move inversely to fossil fuel prices, so the deep cuts in oil and coal prices could pose a headwind for alternative energy, unless counteracted by climate change mandates. Fortunately for producers, falling grain prices will help relieve the profit margin squeeze, even if the credit crunch impairs borrowing for expansion.

Oil (USO) was insane at $147 and may fall to equally insane levels on the lower end. Long term, the trend is definitely higher, but when it happens is another story. I think the food commodities will rally first as the demand for them will not fall nearly as much due to a global recession. Wheat, corn, soy beans should all continue to rise as demand does. Folks do not stop eating in a recession.

My feeling is the way to play this is the DBC (DBC). The DBC seeks to reflect the performance of the Deutsche Bank Liquid Commodity index. The fund will pursue its investment objective by investing in a portfolio of exchange-traded futures on the commodities comprising the index, or the index commodities. The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat.

I like it because all the components of the index are high demand items. I do not see how demand for any of them drops significantly for a prolonged time. That being said, supply of all is somewhat limited. There is only so much oil and land to grow corn and wheat. That bodes well for the fundamentals of it going forward.

Would I buy it now? Not yet. I think early next year might be the time to do it. There is a glut of items now and it will take time for production cuts to take the slack out of the system. That means short term price decreases..

Long terms the story stands….short term…not so much..

Disclosure (“none” means no position):none
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Back in October I wrote about what I thought was a positives of a deflationary period. Here is an article that does a nice job on it.

First, my post

Doug French Writes:

There is now world-wide worrying about price deflation again. After all, real estate prices have sunk, stock prices have hit the ditch, the price of oil has the sheiks concerned, and even Las Vegas hotel room rates have plunged. Sounds like all good news for those of us who buy things, at the same time being a bit of a bummer for heavily indebted sellers.

But Ex-Federal Reserve governor Rick Mishkin told an early morning CNBC audience that “inflation could be too low.” On the same program, James K. Galbraith, who teaches economics at the Lyndon Baines Johnson School at the University of Texas at Austin, chimed in that there has been “a huge deflationary shock” to the economy, and of course the government needs to step in and stabilize the markets and bail out businesses.

“The Fed did not allow the money base to expand, and we had a panic in the liquid markets,” supply-side guru Arthur Laffer told a Las Vegas audience last week, “which caused this financial panic, pure and simple.”

Across the pond, Ambrose Evans-Pritchard, writing for the Telegraph, warns “Abandon all hope once you enter deflation.” Fine wines and white truffles have dropped in price and these price drops could “spread through the broader economy, lodging like a virus in the British and global monetary systems.”

“The curse of deflation is that it increases the burden of debts,” frets Evans-Pritchard, who goes on to contend: “Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop.”

Yes, the current economics brain trust is worried that consumers will collectively show the good sense to delay purchases, pay down debt and increase their savings. After all, this liquidation of malinvestments will likely take awhile. The prudent thing to do in times of uncertainty is not to ramp up debt and spend money you don’t have.

But now all of a sudden saving is a dirty word. According to Evans-Pritchard, “It [savings] also redistributes wealth – the wrong way. Savings appreciate, which is nice for the ‘rentiers’ with capital. The effect is a large transfer of income from working people with mortgages to bondholders.”

Of course sounder thinking economists don’t see deflation as evil, as Jörg Guido Hülsmann points out in his just published Deflation & Liberty, “it fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation.”

And although Hülsmann’s definition of deflation is the proper one: a reduction in the quantity of base money, while what the main-stream blathers on about is a drop in prices, the point remains: “There is absolutely no reason to be concerned about the economic effects of deflation – unless one equates the welfare of the nation with the welfare of its false elites,” explains Hülsmann.

But to say governments and their friends are concerned about deflation is an understatement. Professor Peter Spencer from York University says the Bank of England has learned many hard lessons since its founding in 1694. And with no gold standard to get in the way, that central bank is “cutting rates very fast, and if necessary they too will to turn to the helicopters,” referring to Milton Friedman’s (or Ben Bernanke’s) idea that governments are capable of dropping bundles of banknotes from helicopters to stop deflation.

This printing of money “will keep the [deflation] wolf from the door,” according to Professor Spencer. But creating more money doesn’t create more goods and services. There is no wolf at society’s door. “From the standpoint of the commonly shared interests of all members of society, the quantity of money is irrelevant,” Hülsmann makes clear. And if the over indebted and the over lent go bankrupt, that’s fine. The fact is, these liquidations have no effect on the real wealth of a nation, and as Hülsmann stresses, “they do not prevent the successful continuation of production.”

Meanwhile the Bernanke Fed has gone on an unprecedented growth spurt, more than doubling its balance sheet – out of thin air – in an attempt to bail out the financial community. Formerly the asset side of the American central bank’s balance sheet was Treasury securities with a dash of gold. Now the Fed, despite being double the size, has fewer Treasury securities, with the rest being the toxic securities that has buckled the big Wall Street banks. It’s as if Bernanke is channeling John Law, the architect of France’s Mississippi Bubble back in 1720. Law couldn’t keep his bubble inflated and neither will Bernanke and his fellow central bankers.

While central bankers furiously try to re-inflate, cheered on by the mainstream financial media, monetary authorities should deflate the money supply, pulling in their horns like consumers are doing. Deflation is a “great liberating force,” writes Hülsmann, “because it destroys the economic basis of the social engineers, spin doctors, and brain washers.”

Original Post

Doug French is executive vice president of the Ludwig von Mises Institute and associate editor for Liberty Watch Magazine.

Disclosure (“none” means no position):
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