ValuePlays

Here is the line most are looking for:

Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.

This goes to our expectations. The decline moderates or perhaps stop and then we just slog around for a while.

Read the last section on pricing. This is the first reports we have seen of steady or increasing prices in certain areas. Now, that those increases are coming in food and fuel are concerning because people cannot do without either. This bears close watching…

Fed Beige Book 6-2009

Disclosure (“none” means no position):

Grant is great. A nice reasoned opinion. If I am being honest I was getting more that a little frustrated at the CNBC crew interrupting him incessantly. New Rule: If you ask more than a 1 word answer question, please allow for it to be answered.

Not for nothing but Carlos there letting us know how many Google hits “inflation” gets vs “deflation” has to just about be the most useless bit of information ever expelled from any orifice on air. Really Carlos, you have Jim Grant sitting there and you are doing a Google search?

Anyway, here it is…

Disclosure (“none” means no position):

Classic line….. from Berkowitz on what stocks to buy, “You want a company where your idiot nephew can make money”

Covered: Sears (SHLD), Leucadia (LUK), Berkshire (BRK.A) Pfizer (PFE)

Berkowitz Marsico and Weitz

Disclosure (“none” means no position):Long SHLD, none

I have been playing around with SkyGrid for a while now. It is in beta and is currently offered to people by invitation only. I think this has the possibility to replace much of what I currently use Google Reader for as it enable me to group stories by topic, ticker, portfolio, etc… enabling far more efficient information gathering.

It is also Twitter connected making it easy to share items with your Twitter folks.

There are only a limited number of invites so follow this link to get your invitation if you are interested

Disclosure (“none” means no position):

Taxes, Krugman, SCOTUS,

– For anyone who has ever run a small business, this plan is disastrous. It will cause booking costs to explode and it essentially places the burden on tax collection from the IRS to the payer of services, not the payee. If we just went to a straight consumption tax, we could rid ourselves of all of this

– Paul needs to make up his mind….it was just recently he said 2009 was lost. Now he expects us to recover? Still can’t figure out why anyone listens to him..really, i can’t.

– Place your bets on Sotomayor. Personally I find racism of ANY kind distasteful and she ought to be eliminated. Has anyone asked her why “Lady Justice” is blindfolded? Because color/race/gender are not supposed to come into the mix. Just ask the all lily white court that ruled in Brown v Board of Education.

– Vitaliy is right. The best thing for everyone now is to see stock values rising. 401K’s look better, investment accounts gains value and people feel safer.

Disclosure (“none” means no position):

OK, so I am not a fan of the current adminstrations policies, I agree we have spent too much, we do have too much retail and the consumer will retrench for a while. BUT, using terms like “forever” & “never” just cannot be done.

We know we cannot predict more than 6 months into the future economically without any real accuracy (some would say far less than that), so for Davidowitz to say we will “never see the same standard of lining again” is just irrational and irresponsible.

I’ll give him that things are going to change short term as consumers save more (that is a really good thing) but to say what he does is just not honest. He is smart enough to know he cannot predict 10 years from now, why make bombastic statements alluding to his ability to do so?

Howard should know this. In Feb. 2005 he said that the Sears/Kmart brands would “likely no longer exist in 3-6 years”…….so unless Sears folds up shop in the next 18 months, wrong Howard. Based on the last quarter Sears turned in, not likely.

This is not to say Howard doesn’t know his stuff…..it is just that no one can predict years down the road confidently.

If the Great Depression did not alter people’s behavior permanently, this little recession won’t…

I guess is does make for a good interview…

Disclosure (“none” means no position):

Was emailed this over the weekend and read it. Fans of “Reminensec of a Stock Operator”, this is a quick, wonderful read.

There is a great line in the book:

“When in doubt, do nothing. Don’t enter the market on half convictions; wait till the convictions are fully matured.”

Anyone know of other titles from the publisher?

Dickson G Watts-Speculation as a Fine Art and Thoughts on Life-En

Disclosure (“none” means no position):

Debt, Treasury, Health Care, Lobby

– Real-Time US government and consumer debt clock…..frightening

– Of all the actions currently being undertaken, this is the worst. The argument for those in favor of compensation pay is that “US bank execs are paid more than those in Europe” and that limiting their compensation will not hinder the acquisition of talent. WRONG. Banks compete with SWF’s, Hedge Funds, Mutual Funds and PE for talent. This is where they will and are losing talented people too.

– This logic is the same logic used by people who go and buy $800 worth of clothes that are 50% off and claim they “saved money”

– Sometimes the “little guy” isn’t so little after all

Disclosure (“none” means no position):

So, the jobs number last week was better than expected…

Was it?

David Rosenberg nails it when he says (bold emphasis mine):

All this excitement over a 345,000 payroll decline tells us that we have been in a recession for so long now that we have all forgotten what an economic expansion looks like. A 345,000 job slide is double what we were experiencing before the Lehman collapse and is worse than the worst months in each of the last two recessions.

Admittedly, with the help of a 220,000 boost from the Birth-Death model (compared with 174,000 in May 2007 — at the peak of the cycle), the nonfarm data was better than consensus estimates and not nearly as bad as what we had been seeing through most of this year when the declines were hovering around 700,000 per month. Then again, the economy is no longer contracting at a 6% annual rate, so why should anyone really be expecting detonating job losses any more? The fact that the employment data are “less bad” than a depression-style experience misses the point.

So what is this birth/death thing?

From the BLS:

In 2008, the CES sample includes about 150,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 390,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.

There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.

Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births.

This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.

The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years.

The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.

Note that the net birth/death figures are not seasonally adjusted, and are applied to the not seasonally adjusted monthly employment estimates to derive the final CES employment estimates.

Here is the last year in chart form:

What I have a very hard time believing is that we are creating more new business jobs now in such restricted credit environment that we were last April before the recession hit. I could under stand a flat number as opposed to a negative one and even have it explained away as “so many business have closed doors that more of what is left are the stronger business models”. That may or may not be true but at least we could look at that and find it within the realm of reality.

I cannot see how we are creating hundreds of thousand of more new businesses jobs than we are losing each month right now given what everyone is seeing out there. We are they coming from? Unemployment ranks are still climbing, initial claims climb each week and people are spending more time on unemployment. Credit markets for established businesses are difficult much less those for new business. The typical avenue for starting new business, tapping home equity, has all but evaporated so, where is the money coming from for all these news businesses?

In order for 200k plus news business jobs to be created IN EXCESS of those closing, the businesses being created are not housewives making cookies in their kitchens to sell over the internet (nothing wrong with that, just not going to move this particular needle). These are moderate sized endevours.

Anyone have any empirical evidence of one?

The big tell here is what happens going forward. April and May are seasonably better and the birth/death numbers are not seasonably adjusted. So, if the non-farm number remain about 350k each month and birth/death returns to the typical essentially flat summer numbers, that means we should see losses back into the 500k range in a month or so.

If the birth/death does not experience a dramatic summer/fall decline like it has every year this decade, then we’ll really have to start to wonder if this information is beginning to be massaged for lack of a better word..

Birth/death historical information

Disclosure (“none” means no position):

This will not be for everyone but, that does not mean it is exceptionally risky, it just has more than the usual number of moving parts.

Natural gas/the US dollar. The general thesis here is that gas prices are going up and the US dollar is going to decrease in value due to the unprecedented actions by the Fed and Treasury. So, if that is what we think, how do we play it in a single trade?

Canada…..

If we go to the Toronto stock exchange we find the CLAYMORE NATURAL GAS COMMODITY ETF (GAS: TSX) and HOR BTPR NYMX NAT GAS CL A UNT ETF (HNU: TSX).

Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU) seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, to correspond to two times (200%) the daily performance of the New York Mercantile Exchange (NYMEX) natural gas futures contract for the next delivery month. The Fund is managed by BetaPro Management Inc.

Their US counterparts are the UNG and DXO. DXO is the 2X oil (USO) ETF and as their is no US 2X natual gas etf, is is the closest cousin to HNU. The HNU is not a currency play because we do not want to hold double ETF for a long period as they decay (2% down day loss > a 2% up day gain). We would use it simply for a trade because there is no US version of it.

GAS simply tracks NYMEX natural gas on the Toronto exchange.

Why would we use GAS rather than its US counterpart UNG? Currency.

Natural gas like all other commodities are priced in US dollars. Inflation, or the devaluation of those dollars causes the price of those commodities to rise (or not fall as much) irrespective of supply/demand/production/use variables.

When we buy GAS on the Toronto exchange, our dollars are converted to Canadian currency to make the purchase. Now, IF the US dollar continues it devaluation trend, when we convert the Canadian currency back to dollars after we sell, those Canadian dollars buy more US dollars and we get an additional bump in our trade.

Well, how has that worked out so far this year? For the past three months the Canadian Dollar/ US Dollar exchange has gone from $.79 to $.89. Essentially that means that if we had done this trade in March, every $.79 cents we invested would have bought us a dollar worth of Canadian assets. If we exited the position today, then each dollar of Canadian assets would be converted into $.89 cents of US dollars. That is a 13% return on just he currency part of the trade, any underlying commodity move excluded.

As for the commodity, the ETF fell roughly 22% during that time span. BUT, with currency buffer, your loss would only have been 9%. So, if you think you are buying natural gas at/near a bottom at these prices and if you think inflation is inevitable, then rather than buffering losses in the ETF, the currency changes with provide additional returns…

Here is the chart:

Now the obvious risk is that the US dollar begins to regain value and the trade works in the opposite direction, meaning upon conversion, each Canadian dollars then buys LESS US dollars. I think, however that risk is minimal. The US government is dead set on stopping deflation and the only way to do that is to create inflationary forces. If history tells us anything about government actions in financial matters, it is that they tend to overstep their efforts. In his case that means that we ought to expect deflation to stop and then strong inflationary trends to begin. This is one swoop devalues to dollar and causes commodity prices to rise, a double win for our trade.

Now, for those of you who look to jump in and out in a day or so, there is no point to doing this trade for the currency reason. Currencies are not going to jump that far that fast to make the trade overly beneficial for exchange reasons. But, if you are doing this for a longer time frame, I think it may work out very well for you.

Things to check

1- What fees does you broker charge you for foreign markets?
2- Any additional requirenments

Like I said at the beginning, this is not for everyone but I am leaning towards it for me…

Disclosure (“none” means no position):Long UNG, none