I really wish I had discovered Grant years ago…From a FT interview.
Part 1
Part 2
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I Thought Inflation Was The Problem?
Is it just me or did we not just spend 10 months worrying about inflation? Why, then am I seeing stories like this?
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
Here is the problem with the latest panic. If prices, due to the surge in commodities have risen above trend, then some “deflation” would be preferable as it would cause those artificially high prices to come back to normalized levels.
Look no further than housing. Note the following graph:
Can anyone argue some “deflation” in the housing market would not be a good thing? You could place up a graph of oil, wheat, corn, copper or almost any other commodity that goes into either making our food or the items we use and see the same graph.
When prices surge like they have, the best things is for them to then fall back to a historical norm. That, is deflation. Is anyone going to argue the deflation at the gas pump we have seen is not good for consumers?
Does this mean the process is simple and easy? No. It is quite often painful, especially for those who bought houses at the top of the market. But, it is good for the long run. Berkshire’s Warren Buffett (BRK.A) has called inflation the “silent tax”. It decreases the spending power of the consumer with little notice. If that is true (it is) then deflation must be a “silent tax break” as it accomplishes the opposite.
Warren says, “if does not matter how many dollars I have, what matter is how many cheeseburgers I can buy with those dollars”. In other words Buffett argue to value of the dollar, in relation to what it can buy is more important than how many of them are out there. From this, we can then say Buffett think inflation, rather than deflation is more of a concern, especially to investors.
Now again, everything in moderation. Price collapses are just as bad a price spikes. The reason is that the market needs to adjust to either trend and sudden movements eliminate that ability. Housing is the current example of that. Gas, and its slow steady decline is the other. One hurt, one helps….
Those of you who follow Rep. Ron Paul know he is a supported of the “Austrian School of Economics”. Here is their take on the deflation argument.
We are in “crisis” mode now. The MSM is simply walking around looking for the next one..
Disclosure (“none” means no position):None
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Taleb Cashes in On Market Turmoil
The “Black Swan” author made a killing in October…
To execute its strategy, Universa buys far-out-of-the-money “put” options on stocks and stock indexes. These are bets that the market will see a sharp, sudden downturn. They become extremely valuable in a market decline of 20% or more in a one-month period.
When times are good, such options are cheap and Universa gobbles them up, taking small losses along the way. When the market makes a quick, steep turn south, as it has recently, Universa’s positions gain value as investors scramble to protect themselves in the downturn by buying puts. The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility.
Here’s an example of a trade the fund made recently. In late September, when the Standard & Poor’s 500-stock index (.INX) was trading around 1200, Universa purchased put options that would pay off if the index fell to 850 by late October. Since such a plunge was considered highly unlikely, such options cost only 90 cents. On Oct. 10, those options cost $60 as the S&P 500 tumbled sharply. Universa sold most of its position in the high-$50 range.
Universa also purchased a number of puts on financial stocks, such as Goldman Sachs Group Inc. In late July, it paid $1.29 apiece for options on American International Group Inc., the insurance giant that by September was on the brink of bankruptcy. The puts were priced to pay off if AIG dipped below $25 a share by September. Universa eventually sold them for about $21 apiece.
Recently Taleb tried to make a point to an economist. You’ll notice his frustration?
The Book:
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Monday’s Links
Buffett, Sync, Shorts, Sprint
– Warren the dividend investor
– This is pretty cool
– It isn’t always profitable
– Come on…get it together
Disclosure (“none” means no position):
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Paul Volker on Charlie Rose
Best Fed Chairman we have had to date….bears listening to.
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Weekend Reading via Felix Salmon
Felix, should you moronically (on their part) “be allowed to seek other opportunities” from Portfolio, feel free to contact me. I can’t offer a salary, benefits or nearly as much exposure…BUT, I can offer you the title of your choice and my gratitude, you can’t put a price on that??!!>>
On the Virtue of Hiring Bloggers:
Thanks very much to Tyler and Brad for the kind words; I hope to be here for a while yet. But Tyler also makes an interesting point about blogonomics:
Media, like new library books, are being hurt by the downturn and the slowing of advertising dollars. I fear that the non-independent blogosphere may be in for a bit of a financial bloodbath. So often the bloggers were an “investment in long-term name and image” rather than a profit center.
There’s no doubt that ad dollars are going to be harder to come by in the coming quarters. Websites are getting better and more popular, but that also means inventory is rising faster than ad budgets. And with financial-services advertising providing the backbone of many websites, the consolidation and budget cuts in that industry will hit us content providers very hard.
It’s also true that if you put a blogger on payroll, it’s not going to be easy for a startup site to cover that payroll from selling ads against the blogger’s pageviews alone — especially now that bloggers make just as much money as regular journalists, and a good ad sales person costs much more still.
But if you are going to invest in your own editorial content, bloggers are often a very smart way to go. They’re lean, since they need very little editing and often work from home. They build a reliable readership: in a world where loyal readers are defined as those who visit five times a month or more, blogs often get readers coming back more than once a day, especially if and when the comments streams get lively. And, yes, they’re cheap, compared to any other original content. On a dollars-per-word or even on a dollars-per-pageview basis, it’s hard for other forms of editorial content to compete with bloggers.
If you’re a monthly magazine like, say, the Atlantic, and you want people to visit your website, you need something to draw them in. You can buy traffic, of course — but unless those bought visitors come back, that’s going to get very expensive very quickly. It’s generally preferable to build something great instead, so that people want to visit regularly. And one relatively easy way of doing that is to hire some good bloggers. (When I say “relatively easy”, I mean that it’s easier than most of the alternatives, not that it’s easy.)
On the other hand, there’s no law which says that every major magazine has to have a hugely popular website if it is to be a success. Yes, you have to have some kind of web presence. But elaborate websites don’t come cheap, and if you’re in a cutting-back mode and websites aren’t your core competency, then those websites — bloggers and all — can quite find themselves on the chopping block much more quickly than they ever anticipated.
ORIGINAL POST
From the site:
“At Wayzata Investment Partners, our experience in the alternative investment market is reflected in the structure of our investment vehicles: a family of long-term funds. A private equity and hedge fund strategy serve as the cornerstones of our investment activities.
Focusing on opportunities in undervalued debt, equity and assets, our team has brought success to institutional investors for more than 15 years. Today total assets under management are over $5 billion.”
Wayzata now owns 17 million shares or 13.5% of Owens corning (OC) up from 7 million in the June SEC Filing. It is the fund’s largest holding.
Why OC? Here are some thoughts
Disclosure (“none” means no position):Long OC
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Ok, first the Op-Ed by the NY Times resident (or heads) socialist, then a response..
First the Op-Ed:
The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.
So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.
It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.
Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.
Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.
I’ll bet you can guess what’s coming next.
For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.
The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.
The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
Where to start. First the gov’t spending argument. How does gov’t get the money Mr. Krugman wants to so merrily spend? Right, from either us or our employers. In the article he claims to reduction in consumer spending is the cause of the current condition we are in. He even goes as far as to say that further reductions in it will cause even more pain as it further will reduce economic activity.
So, how then will the gov’t get this money to spend? Increased taxes. But wait, Paul. Didn’t you just say that us consumers need to spend more in order to avoid further economic deterioration? How will taking more of our money in taxes accomplish that? What about our employers? How will taxing them at a higher rate cause them to hire more of us so we can then spend more?
Do you have a plan for the gov’t to go to Sears (SHLD) to buy washers and dryers or Wal-Mart (WMT) for cleaning supplies?
Now, we all know that 2/3 of all economic activity involves you and me spending the money our employers pay us (or we make ourselves). If one wants to stimulate the economy, doesn’t it make common sense to stimulate the largest portion of it?
Why would we want to stimulate the largest, slowest and most inefficient portion of the economy? If we want the largest effect from any effort, it doesn’t seem like increasing taxes or increasing the deficit is the best way to go.
The problem here is that there is no easy, quick fix. If that is true, then let’s do what we know works.
Capital gains taxes. The only tax action I am aware of that has a 100% effect is the lowering or increasing of the capital gains tax. Lowering it has always lead to increased tax revenue (more profits) and raising them has always lead to a decrease (lower profits). Even those sitting on large losses in stocks this year only get to write off $3k of those losses against gains. The result of this is that if an investor who had a $10k gain earlier in the year but has lost $20k in the last couple months can only write off $3k against income, meaning $7k in income will still be taxed even though there was a loss in excess of it.
Let losses be losses and gains be gains…
Raise the write-off limit to $10k or more and let them lower their taxable income, increase the returns they get next spring. Lower the tax rate on them from 15% to 5% (and have both candidates ensure it stays there) and stop the slide in stocks that is happening as investors fear it will almost double next year.
Lower it and money floods back into stocks, raising values, 401K balances, IRA balances etc. A consumer that sees their retirement savings increasing will be less prone to hoard more money for it and far more prone to spend it.
Gov’t cannot spend us out of this. Gov’t spending in inherently wasteful and inefficient and comes at a cost to other, more efficient forms.
Do I agree that more stimulus checks are a waste? Yes. Gov’t needs to just stop….stop. This problem was years in the making and cannot, no matter what is attempted be solved quickly….it just can’t.
Now, Krugman does not specifically say a tax increase is needed. He is smart enough to stop short of saying that. But, if anyone can find me an example of when he embraced tax cuts, lets me know because I have not seen it.
Just my two cents…….
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Home prices have fallen every month since Jan. 2007…
So, what does it mean? Housing will NOT rebound until late next year at the earliest. If you are thinking about buying home builders like Centex (CTX), KB Homes (KB) or Toll Brothers (TOL), I would think twice as the fundamentals of their industry do not look to improve anytime soon. With 20% of the market effectively sidelined, it does not bode well for those hoping to sell them new homes.
Disclosure (“none” means no position):None
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Harley Davidson Shipment Details ($hog)
Harley Davidson (HOG) files it 10-Q and in it are shipment details that show an interesting story
Here is the applicable portion.
Now, the bad news is obviously sales have fallen. The good news is that the two areas the company is targeting for growth, international and sport are doing just that, growing.
While it won’t cure what ails the company now, it does mean that the strategy for the future is indeed working. When the US does recover, and it eventually will, HOG will be that much further ahead that where it was when this all started.
FULL 10-Q FILING
Disclosure (“none” means no position):Long HOG
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VW Shorts: Who Goes Under? ($vow)
The FT has an article on the carnage from Volkswagon (VOW).
From the Article:
After Porsche declared it held sway, directly or indirectly, over more than 74 per cent of VW’s shares this week, fund managers have been struggling to buy back shares to cover their short positions, pushing the carmaker’s share price ever higher.
There is widespread speculation that the losses nursed by some hedge funds may be enough to force them under.
One hedge fund manager said: “Being long of VW preference shares and short of the ordinary shares was a very common trade and there may have been more than 100 managers doing it”.
Funds including Greenlight Capital, headed by David Einhorn, and Odey Asset Management have recently told clients that they had big short positions in VW.
Other managers, including Highbridge Capital Management, have sought to refute reports of big losses in VW.
Marshall Wace said its losses on VW trades “were immaterial”.
Citadel Investments, one of world’s biggest funds cited to have lost money on VW, said: “We have suffered no losses of substance on Volkswagen whatsoever.”
The losses have been exaggerated, argues Andrew Baker, deputy chief executive of the Alternative Investment Management Association.
He points out that the cost of selling VW short had become prohibitively expensive for many funds. What is more, the trade had become so “crowded” – that is, so many managers were doing the same thing – it would have warned managers of the high risks involved and “managers have become more risk averse”.
Einhorn’s silence is concerning. It is so for a couple reasons. First, other managers have spoken out in regard to their losses and second, Einhorn has been uncharacteristically silent. In the past he has been very forthcoming on a range of subjects and investors must be concerned about his notable silence now.
Shorting has been hugely profitable the past year but an episode like this underscored the risk involved in it. When you “go long” and buy a stock your loss is limited to 100%, the amount you invested. When you “short”, your loss in unlimited. If you short at $10 and it goes to $30, your loss is 200%. In severe short squeezes, it can do so in hours or minutes.
I think many shorts have started to operate as though things will just keep going down, no different than those who bought things assuming the price would just keep going up.
FULL FT ARTICLE
Disclosure (“none” means no position):None
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Friday’s Links
Marx, Portfolio, Foreclosure, Military
– Uh……But he doesn’t want to “redistribute”?
– This sucks….one of the few business mags that always has something unique to offer
– Not everyone is losing a home
– Thank goodness we need guns..
Disclosure (“none” means no position):
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Want to know what the Wells Fargo (WFC) / Wachobia (WB) combination will look like?
9 Months Totals:
Assets = $1.4 Trillion
Total Deposits = $774 billion
Net Interest Income = $22 billion
Non-Interest Income = $21 billion
Net Income = $4.3 billion
Diluted EPS = $1.17
Dividends Per Share = $.96
Remember, these are only 9 month totals and not year end figures. The new entity is going to be a behemoth.
Disclosure (“none” means no position):Long WFC
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Target Responds to Ackman’s Proposal
So here is Target’s (TGT) response ti Bill Ackman’s proposal yesterday.
Oct. 29, 2008–Target Corporation (NYSE:TGT) confirmed today that Pershing Square has asked the company to consider the spin-off of a separate publicly-traded real estate investment trust (REIT) that would own substantially all of the land currently owned by Target. Pershing Square’s views of the consequences of executing this proposed transaction were publicly disclosed in a meeting hosted by Pershing Square earlier today. As previously indicated, Target has been evaluating similar ideas proposed by Pershing Square, with the assistance of Target’s outside advisors, including Goldman Sachs since May 2008.
While the company has not yet reached a conclusion regarding the merits of these ideas, its analysis raises serious concerns on a number of important issues, including:
— The validity of assumptions supporting Pershing Square’s
market valuation of Target and the separate REIT entity,
— The reduction in Target’s financial flexibility due to the
conveyance of valuable assets to the REIT and the large
expense obligation created by the proposed lease payments,
which are subject to annual increase,
— The adverse impact that the company believes the proposed
structure would have on Target’s debt ratings, borrowing costs
and liquidity, exacerbated by current market conditions,
— The frictional costs and operational risks, including tax
implications, of executing Pershing Square’s ideas, and
— The risk of diverting management’s focus away from core
business operations over an extended time period to execute
such a complex transaction, particularly in the current
environment.
Target will continue to evaluate the most recent assumptions and ideas provided by Pershing Square in today’s public presentation and will provide updated perspective, as appropriate, in the near future.
Target remains firmly committed to creating value for its shareholders, as evidenced by its long-term financial performance, extensive record of strong corporate governance practices and a number of recent actions authorized by its Board of Directors and executed by management. For example,
— For the 10-year period through September, 2008, total return
to Target Corporation shareholders averaged 11 percent
annually, well in excess of the 3 percent average annual
return on the S&P 500 Index and the 7 percent average annual
return on the S&P Retail Index for the same period.
— In May 2008, Target announced the sale of a 47 percent
interest in its credit card receivables to JPMorgan Chase.
This agreement provided Target with sufficient liquidity to
implement its business plans, including previously announced
capital investment and share repurchase activity for 2008.
— In November 2007, Target announced that its Board of Directors
authorized a new $10 billion share repurchase program,
replacing the previous authorization. Since the inception of
this share repurchase program through September 2008, Target
has repurchased a total of 93.3 million shares of its common
stock for a total cash investment of $4,826 million ($51.70
per share).
Target Corporation’s retail segment includes large general merchandise and food discount stores and Target.com, a fully integrated on-line business. In addition, the company operates a credit card segment that offers branded proprietary and Visa credit card products. The company currently operates 1,684 Target stores in 48 states.
Target Corporation news releases are available at www.target.com.
CONTACT: Target Corporation
John Hulbert, 612-761-6627
or
Susan Kahn, 612-761-6735
or
Lena Michaud, 612-761-6796
FULL RELEASE
Disclosure (“none” means no position):NONE
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Gasparino Drinks / Smokes His Lunch….
What the hell is this? Charlie was there to talk about Morgan (MS), Citi (C), Merrill (MER) or Bank of America (BAC) or something and either drank or smoked his lunch…
Disclosure (“none” means no position):
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