Turkey Day Week

Good Morning. I hope you had a chance to hear Charlie Gasparino of CNBC on the “Stocks and Jocks” show last week. If you did not, you can listen to the archived show at www.StocksAndJocks.net. Charlie has a new book called Sellout and is one of our favorite feisty financial editors. Read about his interview with us here.

Well, this week has turned out to be a bit more hectic than planned. Friday (Options Expiration) was busier than usual and with a shortened holiday week, I thought I’d open up the forum to you, the readers (and hopefully, listeners) to submit your ideas for show topics, guests, or just general market and sports questions you would like me to blog about or for Dr. J and I to cover on our show. Here are two more questions: 1) Is the turkey pardoning by the President still relevant in 2009 and 2) will you be spending more, less or the same this year on holiday gifts?

Send in your feedback, ideas and comments to me at StocksAndJocks@Live.com. I will try and get in a blog post a little later this week, assuming there is a calming lull before the holiday storm. It will be interesting to see how retail sales fare for the upcoming “biggest shopping day of the year”.

 

OK, Here’s the Situation…

Good Morning. Another strong week for the major averages, with the SPY closing at 109.62. That is up 2.3% from last Friday’s close of 107.13, and now up a full 63% from the low of last March. The VIX was down 3% on the week, from 24.19 to 23.36. A lot of the rally seems driven, and is for sure being credited for the advance, by the continuing weakness of the dollar. It goes something like this. Dollar drops, which we all know is favorable for precious metals and oil, and is favorable for those multinational companies that do significant business overseas. So the rally starts with raw material and gold stocks and carries over into the likes of CAT, UTX, IBM, etc. It is a difficult rally to trade, because a lot of the gain is in roughly 50 of the largest stocks benefiting directly (or thought to benefit) from this unusual situation. Those stocks appear stretched, and are therefore a tough buy, and any attempt to buy other stocks that seem a relatively better buy seem to not participate as well.

The current economic situation, and the various governmental responses to the problem (coupled with economic numbers that have become less reliable on purpose over time), make for a situation unique to anything I have seen or heard of in my study of economic history. In one sense it is similar to the Japanese situation of the last 20 years, where the Japanese government maintained a virtually zero interest rate for a long period of time in an effort to shore up zombie banks (sound familiar). That created a situation where investors around the world borrowed money in Japan at cheap rates and invested elsewhere, the so-called “carry” trade. That policy has been credited with being a contributing factor to both the Asian monetary crisis of 1997 and the rise of the sub-prime and other CDO issues in the US and elsewhere. There is no question that the current virtual zero interest rate policy by the Fed is creating a new “carry” trade where people are borrowing in the US and investing elsewhere (and some here). We also have recent history, in 2000 and 2007, that “extra” money finds its way into the stock market, driving it to unsustainable levels. The problem obviously is that the US is bigger than Japan by a huge magnitude, and that really no one would opine that this policy benefited Japan while it surely contributed to problems elsewhere. I also would not think that a U.S. “carry” trade lasts the ten plus years the Japan one did.

A second issue is the amazing growth of the money supply versus the performance of the underlying economy. Since June of 2008, roughly the last seven quarters, the GDP (using the actual governmental economic releases with all their tricks to minimize the real situation) has contracted by roughly a full 2% (taking an average of the annualized quarterly numbers). The Fed has increased the money supply (M2) a total of 8.8% over that same period. That is an amazing gap of 10.8% between money supply growth and economic growth; a spread very few would say is healthy or proper. Again (and I have said this many times in the past) the economic reason for the Great Depression was that the then Fed allowed (questionable if they had the tools to do much else) the money supply to contract roughly 24% in a short period of time. So every junior economist knows not to make that mistake again, but what is the proper number? The business cycle has not been eradicated, and an attempt to throw too much money at an economy that is in some structural contraction (for instance the stagflation of 1974-1981) seems to be fraught with peril. Yet we are hell bent on pursuing this policy to an extreme that seems to benefit only a few. Every notch down in the dollar, brought upon by too many dollars, increases the price of raw materials like gold, copper, and oil. Those of us who use those commodities are hurt by those increases, in addition to the fact that every notch down decreases the net worth on a world basis of anyone holding dollars, pawns like you and me.

The third piece of this puzzle is the debt load of the US Government, as well as states and the various local governments. The October deficit of the US was a worse than expected $176.4 billion for the month. Mind you October is the first month of the new fiscal year, and the deficit for the just completed 2009 came in at a hearty $1.42 trillion. Dig deeper and it gets even worse (how could it?). That deficit of $176.4 represents the gap between total revenue of $135.3 billion and expenditures of $311.7 billion. That is an amazing gap, and the interest cost for the month came in at $22.8 billion, or almost 17% of revenue. That is with interest rates on federal obligations at almost record lows, what happens when those rates go up? These numbers should be catching someone’s eye other than mine. Current estimates are for this year’s deficit to exceed $1.5 trillion. That is $26,300 in debt for every household in just two years, or a quarter of the gross income of the average household over that same two years. We are way past any kind of comparison about how if we ran our business or private finances like the government we would be in trouble. These people (and somehow the supposed beneficiaries seem the same under Obama as Bush) are taking some very narrow view of how much the rest of us need to pay to save the few, with some added fixation on mid-term elections thrown in. It is almost like a poker game where the government just went all in with our money. Those benefiting will, in my opinion, be long gone from this country when this debt comes due for the rest of us.

The other night my significant other (real estate owner and sales lady) was telling me how she felt the new latest plan that not only gives $8,500 to first time buyers but $6,500 to just regular people trading from one house to the next would really help sales next year. I, of course, asked if she could think of any sane reason why I (or anyone else) should send a $6,500 check to someone who does not need the money just because they decided they needed new digs. I like the fact that it will be good for her, but it is insanity for a government in the fiscal shape outlined above. You can surely make the argument that it will be good for realtors, mortgage brokers, maybe even Home Depot, but at what cost? It was always true that if you sent someone somebody else’s money, he or she would spend it, and the places it was spent would benefit. Where is the genius there? The fact is it is going on the tab of other people, and borders on outright insanity. At least make it even, I am a renter, where is my check? I promise to spend it, I can be real good at spending, and would get better with more practice. You know what is even worse? In the last two weeks I have been accused of being a Republican twice. Twice! I don’t really know what that means, I think numbers should add up the same way on both sides of the aisle, and I think they do for the right people. Some are really going to benefit by these absurd policies, and the rest have a problem.

So how do we trade it? Even more important, how does someone like me whose research indicates we might be creating a house of cards stay with this strong advance? It is very difficult; for reasons other than just concern for the rally itself. The rally is steep but it is also relatively narrow. The rally a couple of years ago made it possible to identify stocks that were relative laggards, and even a late investment in those stocks allowed the investor to catch up. This time, that has not worked nearly as well. Financial stocks, where a lot of the money is going, have not participated. Infrastructure stocks, like FWLT, CBI, JOYG, FLR, and IR, have all lagged tremendously, even though they were the first to be recommended after the new stimulus package was passed. Hard to figure how a stock with a 7.4 P/E like Foster Wheeler, actually targeted by the stimulus, is dragging, while a stock like AMZN is gunning towards a 75 P/E on the strength of some wild idea of infinite global growth. Like I said last week, I think you have to be a little long to participate in an undeniably strong market, but stay protected in light of the narrowness and seeming peculiarities of the reasons for the rally. It is hard to do both, for sure. Towards that goal a lot of you have seen me putting on long positions in the SPY in addition to the basic PIP Strategy, and I will continue to try and stay ahead and participate somewhat. Keep in mind that the SPY is still down 23% from this date two years ago, while the PIP is down only around 5% from the same date, without virtually any of the volatility. The trick now is to participate in any further rally while not giving much back if the market turns. I am confident we can walk that fine line.

The New Taxation

Good morning. It was a very strong week for the market last week, with the SPY making up most of the previous week’s sell-off. The SPY closed at 107.13, up 3.4% from the previous week’s close of 103.56 and almost equal to the 108.08 close of the week before. Even more of interest is the dramatic drop in the VIX last week, down to 24.19 from the last Friday close of 30.69, or a whopping 27%. Not only is the market advancing, but also the collective “worry” about market risk is plummeting. In fact, the volatility, or so-called “worry” levels, is approaching a level where we may consider some long premium positions. As to why the market is hanging in here, and in fact approaching the top tick of the S&P future of 1099 a couple of weeks ago, it is some combination of stimulus having some effect, dollar going down (and the new dynamic that a falling dollar and rising raw material prices are somehow good for the market), and the growing realization that a lot of companies have serious pricing power even in bad economic times (both in pricing of products and control over labor costs).

We heard a lot last week, even with the employment numbers coming in worse than expected, about increasing labor efficiency driving the market and ultimately the recovery. I guess if your world only revolves around the health of the 200 or so largest companies that would be a good thing. Add to that the idea that in this situation we should not only let, but also encourage, mergers among competitors to increase this concentrated power even more (such as the Stanley Tool/Black and Decker merger last week costing an estimated 5,000 jobs). Funny, but when I learned about labor efficiency labor was a co-beneficiary, not a victim. In this new world we love it when companies combine to increase market power, lay off people, and squeeze more out of the remaining employees. As long as it is not one of us, those people are always the “fat,” and everyone knows it is good to trim the “fat.” I wonder what percentage of people that go to work every day (except maybe governmental workers), do something when they get there, actually maybe stress about doing a good job, consider themselves part of the “fat.” More about that maybe next week.

What I really wanted to talk about this week, before getting sidetracked by the new dichotomy between perceived market health vs. economic health, is taxation policy vs. the current public policy. The center example of this “new taxation” is the behavior of the large banks over the last several weeks, especially in light of the recent passage of the Credit Card Act. For those who do not remember, the Credit Card Act was signed into law by our illustrious President on May 22, 2009. The bill banned certain practices, and after intense lobbying extending the date, gave credit card holders until Feb. 1 of next year to implement all the changes. It is of note, however, that none of these changes was an out and out usury law prohibiting outrageous interest rates, mostly it dealt with notifications and rules on how the “mostly banks” could go about their incredible gouging. As most of the cynical among us might have predicted, the credit card holders have been in a furious rush to do exactly what the bill prohibits before next Feb, to the point where Congress is attempting to step in again. In other words, the bill will end up being almost worthless, as anyone who has had his or her rates recently raised without reason can attest.

Okay, what is the point? The point is that how many governmental agendas are presently competing with each other. Maybe, just maybe, there are some members of Congress who care about their constituency enough to not want to see the relentless gouging of those caught with credit card debt. If you are Tim Geithner or some companion architect of the absurd bail-out of companies with taxpayer money, all you care about is whether these companies can pay back in a timely manner so your correction policy will look like the New Deal and you like Roosevelt (and most of the shallow thinkers will forget your roles in causing the mess in the first place). In addition, we have a President who must be acutely aware (or has advisors to tell him) that the government is beyond broke and raising taxes into the mid term elections would be suicidal to his future political agenda and place in history. So how can we get around this little mess in a way where we can all be heroes? Let’s redefine taxation in light of the fact that we are now owners of some places large enough to steal money on a scale that can only be defined as taxation.

What am I talking about? Have I finally gone mad trying to keep up with the absurd leadership we have on all levels? Or are they really smarter than we give them credit for, but in a sneaky and unscrupulous manner? A few statistics (just a few). The average household in this country makes roughly $50,000, and I am going to assume that the household we are talking about has four people (you remember, husband, smiling wife, well behaved son and daughter). Despite tremendous complaints about the “official” federal tax levy (not including Social Security and Medicare, and surely not including the absurd State tax amounts) the actual federal tax levy is roughly $966 for this average household. That’s right, even though all the taxes paid by this hypothetical family probably approach $20,000 (property, sales, etc.), the actual Federal Income Tax after all deductions is probably less than $1,000. That same family (78% of American households) probably has a credit card or cards. The average credit card debt per household at the end of 2008 was $10,679, ($8,329 if you count all households). If you “allow” your partners (big Banks given government bailouts) to increase their rates an average of 23% (the number cited by a Pew Charitable Trust study for increases between Dec. 2008 and July 2009) you essentially increase their “tax” on those same households significantly (plus whatever you can steal in increased fees and whatever). Since credit card rates were probably 18% to start with for many, the 23% increase means an additional charge of 4-5%, or close to $500 per year. Is this anything else but a tax increase through our governments new “partners”, at least until the debt is paid off? If it works, and it looks like it could, everyone in the administration is a hero, bail out to save the world, everyone paid back, bonuses to the sleaze bags who caused the problem and make political contributions, and no “real” tax increase. Can we be collectively that stupid? Of course, if anyone mentioned a Federal tax increase in the range of 50% he or she would never be elected to rodent control, but this little end run, genius. Even the bankers, who will bear the brunt of some public and Congressional heat, can suck it up for the money they are making.

So, what about the market, and how do we profit? I think you need to lean a little long, while keeping the downside protection. The S&P level of 1100 (1099 reached a couple of weeks ago) is still intact, but maybe with another test coming soon. I still have an issue with the falling dollar/rising stock model taken to an extreme, and am beginning to feel that a trading range might be the scenario for a while. The falling VIX certainly means that we should be looking for some long premium positions, and maybe an expiration back spread if we have the nerve. I still have a problem, given the size of the stimulus and the inevitable give back someday; in judging whether the feeble recovery we are seeing is “good enough” or “large enough” given the size of the push. My instinct tells me it is not anywhere near what we should be seeing, but the market (or the amount of money heading for the market for various reasons) seems to be disagreeing with me, at least for the moment. I will certainly try to stay ahead of it.

So, What Happened?

Good morning. Despite a solid advance of 2.1% last Thursday on first estimates of third quarter GDP, the week showed a fairly large decline in the SPY of 4.64, or 4%. The close Friday in the SPY of 103.56 represents a 6.1% decline from the 110.31 high set on 10/21. Last Friday was particularly troublesome in that the market more than gave away a solid advance on Thursday, an advance based on a strong economic number. The preliminary GDP number of Thursday morning of plus 3.5% annual growth exceeded both the consensus estimate of 3.2% and the Goldman estimate of 2.7%. Even taking out the auto piece, heavily influenced by Cash for Clunkers, the GDP advance was estimated to be 1.9%, “officially” ending a recession that had seen GDP drop for four consecutive quarters and five out of the last six.

So what happened? For one, the market has seen a very strong advance since the March lows. The gain from the low of 67.10 on March 6 to the “so far” high of 110.31 on October 21 is over 64%. That sort of rally, in effect, assumes a lot of good things happening in the economy, and has priced in some strong economic numbers. The problem then becomes judging exactly how much “good” has been priced in and when some “disappointment” might occur. Clearly the number on last Thursday was a good one, and probably did “surprise” the consensus market estimates, hence the solid rally. Friday, however, brought the economic news that consumer spending in the month of September was down. In fact, the whole report indicated that personal income was almost exactly flat (not exactly a good indicator for a supposedly now growing economy), savings was up .5%, and spending was down .5%. So the numbers say quite plainly (for the month) that income is not going up and people are still retrenching a little. What you would have liked to see is that August was a little better than July and September a little better than August. What we probably did see was a good July and August due to cash for clunkers and maybe some tax holidays for back to school, then September slowing down again. Obviously, the government has many programs designed to jump start the economy, and everyone is very keen on observing whether the program “works” by creating increased activity (like cash for clunkers and the tax credit for first time home buyers) only to have the numbers plummet again at the completion of the incentive program. The idea is for the incentive to create something that will become sustainable on its own, otherwise you just shift production and demand around at great cost to other people. What is even more ominous is that the total cost of the various incentive plans is becoming unsustainable in itself, meaning that if the programs do not work there might not be the ability for another attempt.

I, for one (and have many clients feeling the same way), am getting pretty nervous about this whole direction we are heading. In full disclosure I voted for the current administration, and still am hanging to some hope for them to do a good job, but am getting less confident by the day (maybe hour). The fact is these programs are costly, and generally end up costing way more then preliminary estimates, and the last time I checked we do not have any money to be wasting. Take, for instance, the cash for clunkers, which is now causing a big war of words between the White House and the Edmunds.com website (Edmunds??). The White House has taken huge credit for the jump-start in automobile sales in July and August, citing the up to $4,500 cash the government paid to people trading in old and inefficient cars for new and more fuel efficient models. The government, of course, took credit for every car sold that received the $4,500 rebate. Edmunds, on the other hand, did an analysis more like I would do (I was a financial analyst in a previous life, and rumored to be a pretty good one). They estimated, by the normal ratios of non-qualifying cars to those qualifying, how many qualifying cars would have been sold anyway during the time period. They then took the total amount of qualifying cars sold and subtracted those that probably would have been sold anyway, coming up with a number of 125,000 cars sold in excess of what you would normally expect. Dividing that 125,000 number into the total program cost of $3 Billion, and you get a number of $24,000 per car, not $4,500. Essentially all you did was give $4,500 to over 500,000 people who would have bought anyway, and maybe people that just happened to have a qualifying car around to trade, quite possibly people who did not need any of our help to buy a car. I would hope that the White House would look at a simple (but powerful) analysis like this and consider, in reflection, whether the program was worth the cost, instead of lashing out in defense. I am going to agree with Edmunds and say the program was too costly for what it did, not to vilify, it may have been a nice idea and nice try, but it did not work out efficiently. You (yes, you, Mr. President) need to learn by his. I suspect the same thing is going on in the tax credit for first time homebuyers program (along with massive amounts of fraud), and it would not surprise me at all that when it is over and someone logically figures out how many would have bought anyway the program will be way more expensive than advertised, and we will have given money to millionaires who paid cash for a second home and got away with it.

I think what Washington is missing, and missing big time, is that regular people are tired of fraud on every level. In addition, their definition of “fraud” is different from the absurd attitude towards fraud present in government and many corporations. They do not want, in times of stress on all levels, a large bank to get other people’s money and pay it to the hacks who work there instead of lend it. They also do not want their neighbor to get a check for buying a car he would have bought anyway, or a tax dodge for buying a second house in his wife or child’s name as an investment. Is the IRS even looking at the beneficiaries of this program? Our President wants to take credit for every car and house sold under these programs, whether legit or not. I say start using your head and thinking straight (I suppose talking straight might be too much to ask). Otherwise we are in for an even bigger mess, with mid-term elections swinging the other way, even more finger pointing, and another whole new group of people with no clue. That condo on the Isle on Man is looking better and better, maybe I could get used to the sideways rain while golfing (my game is awful anyway).

What about the market, and how do we benefit? For one, I think we have a chance that  the market is overextended. It is currently priced at about 20 times current earnings, a historically high number. However, the market does not price for the present, it prices (or should price) for the future. The trick is to figure out what the world will look like next March or April and judge the market versus those numbers. It looks to me, even with the relatively strong GDP numbers of last Thursday, that the recovery is sputtering a little, and that the market has priced in a much smoother recovery. Again, I want to protect against a double dip but still participate if we advance, a tough assignment in any market. It is even harder now because the returns to any extra cash are close to zero (not helping at all) and because the market has been in a funk for so long. A lot of retired people that have looked at their retirement accounts see a lot of stagnation, and really little ability to draw out the amount they need to live on (the reason for the account in the first place). The current deal of not much income on any level (forget the part about the big rally for six months this year, we are still are only even with last year with several traumatic events in the meantime) is clearly not what people were promised. The collective “we” were promised 7-10% in the market any 5-6% risk free by legions of talking heads, and the “we’s” are nowhere close to that. Those in the Protected Index Program (PIP) for the last 10 years have not seen the catastrophes that have befallen the majority of investors, and have maintained a 5%+ average over that time, but I will be the first to admit we have had to work real hard to provide that return. All of us could really use a few years of markets up 1% a month, new job creation, a raise once in a while over cost of living increases, etc. I just don’t see it anytime soon.

Last Chance

Good morning. Being a bit busy today, I would just like to announce that today is the last chance to register for tomorrow’s free Protected Index Program® Teleconference, hosted by my brother Dan Haugh. This 90-minute teleconference will take place from 6:00pm – 7:30pm and all you need to participate is a PC and a phone – the PC to view the presentation (sent to you as a link) and a phone to call in the designated number to hear Dan (you will also be able to ask questions). PTI is billed for all connections, but you MUST REGISTER at www.PTISecurities.com/Education.htm - enjoy!

The Sherman Act

Good morning. A positive week for the market last week, even with a down Friday due to a couple of rocky earnings reports. The SPY closed at 108.89, up 1.5% for the week, bringing the total rally in the SPY from the March low to 62.3%. Friday there was positive earnings from Google, but not so positive from IBM, GE, and Bank of America. In fact, BAC still seems to be writing off some loans in the consumer sector and will continue to have some problems in that area for a while. The question is, how much of even a positive earnings announcement is already anticipated in the price? For example, IBM had net profit growth of 14% on revenue declines of 6.9% as they continued to concentrate on cutting costs. In fact their gross profit margin increased to 45.1%, resulting from a combination of cost cutting and greater relative growth in their high margin Services and Software segments. On this news the stock fell $6.34 (or 5%) on Friday, sort of begging the question of why? It might have something to do with the fact that the stock had already rallied 84% from its 11/21/08 $69.50 low, and 22% from the $99.50 level on 7/9/09. Sometimes the good (or bad) news is already in the price.

It is interesting that those firms continuing to do well in this environment, like IBM, INTC, and Google, continue to do so by having continuing pricing power in fairly non-competitive areas. Gross margins like Google reported, 62.8%, in an economic time when workers have little or no competitive advantage and the company has few competitors should be watched carefully from an anti-trust standpoint. I am certainly not in the camp that says profit is a bad thing, but any attempt by a would-be monopolist like Google or INTC to gain further market share through acquisition should be (and I know in this world I am probably trying to swim against a rushing stream) strongly discouraged. In fact, there was a time when the market share (81% of fourth quarter microprocessor revenue) of INTC in computer chips would be looked at with an eye towards a break up.

Unfortunately, we continue to stay (and will for an extended period of time) locked into a very strong political overtone to both business and the market. As reported this weekend in various sources the Obama administration is both shocked and concerned with the incredible opposition by the very financial firms (banks and others) that were bailed out to any new regulatory rules that would affect their business. Why are they so shocked? The hubris of these people (I am talking the Goldman’s and JPM’s of the world) has been shown to know no bounds. There are basically two sorts of economic systems (with a lot of iterations in the middle). One says that we are better off in a competitive system where individual people have a huge buffet of economic choices, and that the competition for these people’s business will drive innovation and quality in the private sector in a way not possible by a huge bureaucracy of rules and regulations and people trying to anticipate needs and wants. The second is just that, a hugely inefficient group trying to determine needs, wants, and trends and trying to determine what and how much is produced, and how it is priced. I am not trying to do Economics 101 in one paragraph, but that is basically the choice.

I do not think that there is much doubt that System A (with some inherent flaws) in more efficient than System B by a huge amount. To a large extent the predominance of a competitive system is what has created the economic miracle that is the U.S economy. We seem, however, to be morphing into some sort of third system. It is not new, really, that some have tried to “corner” an industry to the extent that they have pricing power far in excess of what a competitive system will allow. Clearly the Rockefellers and Carnegies figured this out long before me, that if you can control the normal competitive response to a high margin industry (namely, people will see the potential and enter the industry), either through laws you force through or by buying out the competition you will do better than you should. The real sweet spot is to somehow be a monopolist or oligarch in a supposed competitive economic system without the normal rules and oversight inherent in a socialistic type system. Like I said, this is not new, and the response to this type of thing were anti-trust laws, namely the Sherman and Clayton Acts.

It is a simple economic fact that virtually any business (given the degree of concentration in the space) is worth more to a competitor than to a third party. Take the simple case of a small town with two restaurants that currently compete. Restaurant B is not worth as much to me, assuming continued competition with A, as it would be to the owners of restaurant A, who might be able to nudge prices up without a competitive response if they owned both. Imagine how much more they would be worth if the combined owners could somehow talk the town governors into no new restaurants or liquor licenses for the next ten years. The Sherman Act was very clear, as Sec. 2 says “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce …. shall be deemed guilty of a felony.” They were not kidding, a felony. That is because they knew how valuable these less than competitive industries would be.

Why are we so stunned? I, for one, have been astounded by the lack of anticipation of how incredibly economically powerful the remaining four large Commercial Banks and few Investment Banks (especially now that they can do both) will be. I also know that they would want to be totally unfettered to use this power, and will use whatever means at their disposal (legal or other) to maintain this position. The Obama Administration is in a very serious fight, and even if they are waging it properly (which I doubt) they are probably outgunned. I can only imagine the lobbying interests and the promise of jobs and other stuff to staffers that will guarantee the status quo, even for a while. The general population senses something wrong, mainly because these people get paid too much, but really have no idea of how important going forward this fight is. Even the least astute among us does not believe that the average employee at Goldman or wherever would do as well if the competition was a little more robust. I think all would agree that the mergers in banks leaving the top four Banks with 64% of the credit card business in 2008 is probably not good for card holders, or maybe the economy as a whole. I am surely not shocked rates and fees are up, and these Banks are resisting any attempt to regulate them or make the industry more competitive.

Other than being a concerned citizen, why should you or I care? How does it affect our portfolios? It means that we have to be on the news and the potential political interaction between companies and pending legislation or rules way more that we had to historically. When we see Morgan Stanley buying out their warrants from the government early, and on seemingly favorable terms, we need to at least think about others getting a break on terms on their deals with the government. One problem with that is that the government has been very inconsistent in its dealings with the individual firms, obviously treating GS and AIG a lot different than Bear or Lehman. The quick out given MS might not apply to Citi, maybe because of mood or public sentiment at the time. Maybe AIG will get a chance to renegotiate the terms yet again, of a few years from now make a quiet deal when all if forgotten, maybe not. Makes trading tough. I really do feel that the industry has the Obama group on the defensive, it would seem inconsistent (although probably proper) to give massive amounts of money to a group to save them, then regulate them to the point where they cannot pay you back. The point may be that they actually need the returns normally associated with a monopoly to have even a chance to pay you back, causing a real conundrum. Do you now allow these Banks to stick it to the population to “make” the money needed to pay back the population whose money you just gave away? Tough problem.

I know I mentioned this last week, but I think, and some of you have seen the proof in your accounts, that we need to be long this financial group (not huge, but some). I think the Obama group loses this regulatory battle, unfortunately, and we need to be on the winning side (much as we hate it). Other than that, I continue to try and resist taking huge long positions in the market in the new world of falling dollar, rising market. I will stay a little long, I do want to participate if the rally continues, but I am worried. All these earnings numbers appear to be good only because they have been talked down so much, and are coming in the face of stock prices that have already inflated in anticipation. I am also continuing to look for a way to get most of us long, or longer, in the oil complex, but right now the volatility is increasing going out, and I will not initiate a trade with the volatility edge against us. Maybe we will get a chance this week.

FREE PROTECTED INDEX PROGRAM TELECONFERENCE - Tuesday, October 27th, 2009 from 6:00pm – 7:30pm Central Time – PLEASE REGISTER HERE.

 

Learn why, over a decade, the Protected Index Program® (PIP) has beaten the S&P 500 and resulted in consistent returns in hedged client portfolios. PTI Securities President, Daniel Haugh, presents these sessions and answers your questions. Join these informational LIVE 90-minute sessions from the comfort of your home or office. All you need is a computer and a phone; view the presentation on your computer while listening to the live presenter by phone. You will be able to hear and ask questions of a live expert at no cost to you. Registrants receive participant instructions by e-mail 24 hours prior to the teleconference. Call Sarah at 800.821.4968 with any questions you may have. Participants are not be charged long-distance. PTI is billed for all connections.

Traditionalists Ask “Why?”

Happy Columbus Day. Remember to feed the meters even though all public employees are enjoying a paid Holiday. More on that later. The market had a huge rebound week last week, and we are on the verge of totally forgetting that nasty, and ultimately forgettable to some, sell-off of the last two years. The SPY rallied from 102.49 to 107.26, a very large weekly move of 4.7%. The VIX was pummeled, starting the week at 28.68 and finishing 19% lower at 23.12. So we are to believe that not only is the market going straight up, and your investment in the market worth more, the insurance on the now higher value should be less. I thought the market was supposed to be rational? To give you an example of what I mean, last March when the SPY was under 70 (admittedly a tough time), the December 70 puts of 2011 were roughly 19.50 (we should have sold them). That means you would not even break even on your puts until the SPY was under 50, an additional downward move of over 28% (and the world in financial chaos). A level of 50 would also be a level not visited since September 1958. Now the SPY is 107.26, and the December 2011 110 puts are 17.70, which means the break even is roughly 90, a move of only 16%, and a level we were trading only 90 days ago. Who says markets are rational? Maybe that is why it is possible to make money.

I would certainly say that the market has had a tremendous rally off the March lows, really without any real fixes to the basic problems that brought us to that abyss. It seems that the very action of the market going up, with the accompanying increase in wealth and the buying power that it gives, is being judged a fix in itself. The market is going up, so something must be better, and I better get on board or I will miss it. Who cares if I actually felt nervous about investing at 70, this 107 looks good now. What do we know for sure? I think we know that the financial system is in better shape than in March, and appears to be in no danger of falling apart in the near term. That “stability” has been “bought” by an incredible (if you don’t believe the word incredible applies, tell me what a trillion or so dollars means to you) shift of financial system problems to government debt (meaning our debt). That is coming at the expense of dwindling dollar value, meaning our net worth is actually declining in world terms, and massive future tax liabilities (even some dopey neocon knows you essentially have to pay for something eventually). Right now this is being cheered, since U.S. multi-nationals benefit by the weaker dollar (to a point). The idea is that since the U.S. investor that happens to own some stock in one of those companies benefits some, that somehow we all are ok. Nice try!

The interesting thing this time (and there was a last time, the Resolution Trust era of the early 80’s) is that a lot of the “taxes” we will pay will not be labeled as such. Instead of us having our taxes raised by the Federal Government (we will see that soon) we are re-floating the banking system internally so they can pay back the government in lieu of taxes. A large and non-competitive banking system is being allowed to suck the financial life out of the citizenry and add nothing to any real economic solution (like creation of capital for small business). How else can you explain virtually no interest on demand or savings deposits, yet relatively high rates and stiff conditions on any sort of loans? Don’t even think about the poor nitwit (and I do not mean to insult) who may have $200,000 in a Citi 90-day CD IRA at 2.2%, while carrying a $15,000 credit card balance at the same bank at 21% . That leaves him or her receiving $4,400 on $200,000 while paying $3,150 on the $15,000, and don’t be late with a payment. Happy retirement. Also, don’t say you have an entrepreneurial idea. They will not help.

In my lifetime we have had a massive bailout of the financial system once before, the Resolution Trust. Briefly, the Federal Reserve (although they would never admit to it) threw an inordinate amount of money at an economy with severe structural problems. Instead of that money causing an increase in real growth (sound familiar) it caused a spike (helped along by increases in oil prices from OPEC) in inflation. That inflation caused financial institutions to pay high interest rates to attract deposits, sometimes as much as 10-12%. Those rates created a disaster in institutions (mostly Savings and Loans) that were using those short-term deposits to fund longer-term mortgages in the 5-6% range. Anyway, the system virtually collapsed and was replaced by the packaged mortgage system (collateralized debt obligations) that blew up this time. How was that  trade in systems work out?

The point here is that we (meaning you and I) end up paying dearly for these fiascos. For a long period of time in the 80’s Banks had over 50% of their assets in Government obligations, meaning that they were being allowed to re-float their balance sheets by gathering relatively low cost deposits and short-term governmental loans and invest longer-term in governmental paper, meaning they were essentially scalping governmental paper instead of giving loans. That meant that Banks were not lending to people and businesses, there were an awful lot of good ideas that were unable to find capital, a lot of jobs that did not get created, a lot of entrepreneurs that should have been and never were. Growth in the 80’s should have been much more robust if it were not for the combined financial system/government combined disaster and recovery. Here we are again, bigger to the almost unimaginable degree, but the dumb solutions remain the same. In fact it is worse, banks are bigger and more concentrated. The idiots that run them are paid more, and they are into the average American with credit cards and other loans to a much greater extent than the 80’s. Plus the housing stock has had an equity collapse that did not happen in the 80’s. Yet somehow a rally in the market will fix all this, or cause us to ignore everything that remains to be done. I hope so, but it sure seems like a lot to ask.

Yet, can something be different this time? Maybe. It might very well be possible for some of the concentrated industries that have pricing power (banks, some chip makers, multi-national construction, etc) to leave the rest of society at the gate, at least for a while. Maybe the 10% unemployment and general malaise of a large chunk of the population will not affect them, especially if the rest of the world starts to rebound. I do know that the financial press, and way more of the elected officials than I would like, seem to be controlled by the “wealth” class rather than the “working” class. It certainly is possible (has happened before) for the banking industry to do very well while not spreading that wealth around. I do think it might be possible for some segments of the market to keep going up while a lot of us traditionalists look around and ask “Why?” The nagging feeling that growth will be severely retarded going forward due to the necessity of a financially wounded population having to recap some while having restrictions on access to capital is just something I am going to have to fight in this potentially “new” world.

As for the market, it sure is tough to fade. We have been successful in the PIP in putting an additional spread on top of the market in an attempt to stay long during this steep advance, and may have to continue to do some imaginative things to stay at least somewhat long. If the puts continue to go down in value (VIX keeps falling) we may actually commit some of the extra cash some of you have in your accounts, and may in fact buy some extra puts in the process. I still am not a long term believer in this dollar goes to zero while market goes to the sky philosophy. If it does I certainly will have to send out a few letters to people that have written Economics textbooks and advise they revise a few chapters.

For those who watch the financial news and somehow feel that everyone should be rich with the recent rally, be reminded that in the last 16 months the SPY is still down 20%. By being hedged those in the PIP Program (depending on when you started) are down some fraction of that amount, and were spared the nightmares of being down almost 50% last March. We certainly have not changed our view that we need to be protected given the recent rate of run-up, but will continue to adjust the positions in an effort to participate should the run-up continue.

FREE PROTECTED INDEX PROGRAM TELECONFERENCE - Tuesday, October 27th, 2009 from 6:00pm – 7:30pm Central Time – PLEASE REGISTER HERE.

 

Learn why, over a decade, the Protected Index Program® (PIP) has beaten the S&P 500 and resulted in consistent returns in hedged client portfolios. PTI Securities President, Daniel Haugh, presents these sessions and answers your questions. Join these informational LIVE 90-minute sessions from the comfort of your home or office. All you need is a computer and a phone; view the presentation on your computer while listening to the live presenter by phone. You will be able to hear and ask questions of a live expert at no cost to you. Registrants receive participant instructions by e-mail 24 hours prior to the teleconference. Call Sarah at 800.821.4968 with any questions you may have. Participants are not be charged long-distance. PTI is billed for all connections.

Striking a Balance

Good morning. Last week the market had its second down week in a row, with the SPY down 1.96 to close at 102.49. That represents a decline of 1.9%, and is 5.2% off the high of 108.06 reached of 9/17. Is it a healthy pause or is the rally over? To be determined, but clearly the “buy every dip” mentality evident in the long run-up has cooled some. Economic numbers in the last couple of weeks have shown uneven progress in the recovery, and those most recent actually seem to indicate that the recovery is stalling in the face of huge governmental stimulus. For instance, the Cash for Clunkers Program increased the pace of car buying to a 14+ million annual rate, only to fall back to a 9+ number at the programs conclusion. The somewhat meager increases in housing prices and sales, with the governmental credit of $8,500 for first time buyers, certainly causes some negative thoughts for that market when that program ends on Nov. 30. Maybe the most troubling was the employment negative surprise last Friday, showing higher than expected job losses, higher unemployment rate, lower hours worked, and lower weekly wage. Even government lost jobs, not a good report.

What is the problem? Of course that, in itself, is a fairly uneducated and ill-informed question. It assumes that there is only one problem, and that the right sound bite solution by the right glib politician will magically put us back on the yellow brick road in a matter of one or two standard attention spans (maybe a few days). The fact is that a sound and growing free market is something that is the result of countless decisions by millions of people to invest, train, produce, see opportunity, etc. It is helped along by entrepreneurial thought, serious energy, education, access to capital, the right rules of the game (regulation), and some failures that only encourage the right people to try again. When running properly it is hard to even keep track of the countless people seeing little cracks of opportunity and moving to fill that void for a profit. That movement, moved along by access to capital (capital being in its own search for ideas enabling it to profit at higher levels), causes the hiring of people and demands for new inputs necessary to create a finished product that others are willing to purchase for a profit. When it works it is a beautiful thing, when it does not, as now, it is very difficult to put your finger on how to get things started at all, let alone efficiently. It is even more difficult when the task is given to elected officials in a seemingly halfway corrupt governmental system.

Is every politician a crook? Of course not. Then why am I so down on their ability to help this economy? There are several reasons, the first being that the same set of skills and motivations that enable a politician to get elected are not necessarily the same that understand the variables that allow a successful economy to operate. It is not that there are no elected officials with a solid business background, in the Senate for sure there are many, there just do not seem to be enough that seem to understand the balance of what makes a strong economy. The inclination is to provide sweeping programs and make government the solution, maybe the right choice sometimes, maybe not. What certainly does happen is to have the Programs for sure benefit certain people who can gain access to government, maybe not at all the people that have been most hurt. In the current case we have spent hundreds of billions on a few institutions to help with a housing problem, but very little on the actual people with the house they now cannot afford. Instead of giving $500 billion (or so) to non-efficient banks with corrupt Boards and greedy CEO’s, we could have sent a $5,000 check to the roughly 100 million households we have with the requirement that they either use it to pay down $5,000 of their mortgage or use it for a down payment on a new house. The money would get to the Bank just the same, but at least the homeowner would have some relief on his or her balance sheet as well.

The second inclination of the political mind is to protect the governmental workers. We have seen over a long period of time that the wages of governmental employees have been increasing relative to private sector employees. I have read recently the numbers are approaching $70,000 government vs. $50,000 private, not sustainable in my mind at all. It is not a question of whether the governmental employees deserve the current structure; it is a question of whether the rest of society can pay for it. How many workers at Wal-Mart does it take to pay for the pension of one hack Chicago alderman? The third dangerous mind set is that everything government does must continue. We have seen outrageous failures in regulation, governmental response to calamity, tax enforcement, you name it, yet the debate is not whether the tasks are even possible, but how much more should they be given to do more of whatever it was did not work before.

What is the danger? The danger is that before the market essentially fixes itself the government will raise taxes and fees, provide onerous and useless regulation to the not guilty, and have the populace so deep in debt that recovery is not possible. When I was a relative ute (Did he say ute? From Fred Gwynn) I was able to finance a fledgling condo remodel business on my credit card for around 8-9%. Last Friday I received a notice from Citi raising my interest rate to 25.4% on a card I have never been late on or carried a balance. These are the guys I am shoveling cash to? What does that do to the guy who may have any sort of an entrepreneurial thought, but is carrying a balance? The population is buried by these people in debt, and in many cases is paralyzed by it. We talk about all the positives of the current situation vs. the Great Depression; we do not mention the negative that this time the average household is carrying a tremendous amount of debt. In addition, we have made the political decision that the refinancing and return to absurd oligopoly returns of the large banks is more important (or at least a higher priority) than the return to health of the average citizen. I think we will regret that decision.

As for the market, I think the furious rally is done for a while. I do not have a real quibble with the level of the market, like “We are trading 102 on the SPY, it should be 92.” I do feel that the solid V shape recovery in the market averages has not and will not match the recovery in the economy, which evidence suggests will not be V shaped. As last Friday’s job report indicated the recovery is very slow and fragile, and experts are pushing the recovery out by quarters and years on an almost daily basis. The recovery seems to be U shaped at best, and I feel the stock market will, at some point, reflect that. Most of you noted a bullish spread put on in your account of Friday in the XLF. I do think that this area will continue to either stay steady or move up, and I feel (not approvingly) that as time goes by the government will relax the terms to the large institutions they have lent money to. After all, you should get something for all that lobby money, and they seem to always benefit. In other words, I really believe that all the supposed pounds of flesh the taxpayers were supposed to receive for the billions in bail out cash will prove illusionary, and we, as investors,  should benefit by that somewhat. I also feel that we might be ready to invest a little more in the oil sector in the coming weeks. Other than that, we will continue to try and benefit by the relatively high call prices and make money selling calls as the market slows.

Be sure and tune in to the show from 11-12 AM Central Time. We have been going for about 3 weeks now, and are getting a solid group of guests in place for a wide range of opinions on the market and what is affecting the market. The show is available on www.stocksandjocks.net for you to listen live, listen on demand right on your computer, or to download to your MP3 player to go. I am also now on Facebook, so visit www.StocksAndJocks.net to send me a friend request. Be part of my network, I post some interesting questions to get a feel for what YOU think. If you have questions, call during the live show at 888-76-JOCKS or e-mail us anytime at StocksAndJocks@Live.com. Tune in, call in, write in, let’s make some money and exchange ideas together.

Shameless Self Promotion

Good morning! I am back from Dallas and, unfortunately, am detained by business this morning (the time we waste working for our daily bread. Ha!) I will take this opportunity to ask that if you listen to the “Stocks And Jocks“ show via iTunes, please take a moment to rate our show. Simply go to our podcast on iTunes and click on “Rate this Podcast”. You will have a chance to leave your comments. The more ratings we have, the better our visibility in iTunes and that means we will be able to make improvements to the show, expand our guest expert outreach, as well as ensure that the show is amped up with the bells and whistles you want.

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In the upcoming days you will have the opportunity to hear a whole myriad of fantastic guest experts that we will have on the show. And remember, ask all the questions you want about the markets and economy by calling 1-888-76-JOCKS during the live show or by e-mailing us at stocksandjocks@live.com!

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