Monday, February 08, 2010

Long Bonds at the Crossroads


TLT, the long-term Treasury bond ETF, is giving the short-term downtrend a run for its money. The longer-term trend is solidly bullish so this should be interesting to watch.

Full disclosure: Long TLT

Radio Interview - "Live the Rich Life"

I was Bill Valentine's guest on 1110 KBND's radio show, "Live the Rich Life," this weekend. Bill and I discussed everything from why I've been short stocks over the past few months to deep value plays to the problems with ETFs.

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Stewart and O'Reilly: Mano-a-Mano!

Surprisingly good discussion here - great back and forth between two of today's most popular talking heads:



Hat tip, Ritholtz

While you were watching the Super Bowl...

...I was busy putting the final touches on the February issue of "The Felder Report" because I'm so excited and passionate about this new venture.

Not to toot our own horn but the January issue of "The Felder Report" was keenly prescient. Our short stocks and short Euro trades were right on the money.

The digital ink is drying on the latest issue of "The Felder Report" and I thought I'd let you know what we covered in February. 

Here are a few highlights:

      -"We believe that at least 90% of the investment industry should be taken out and shot."
      -"Nowhere is 'caveat emptor' more important than with variable annuities" and "ETFs might be the second most important vehicle for investors to practice 'buyer beware.'"
      -"The investment industry is one example where 'you get what you pay for' is a lie... the industry has merely learned to expertly play upon the fears of investors to sell them a false sense of security."

We have also updated some of the trading recommendations that worked so well last month. SUBSCRIBE HERE if you would like to read the report in its entirety.

I would personally love to welcome you as a subscriber to the report - hell, you're the reason I created it!

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H1N1 Advertising Fail

Sunday, February 07, 2010

Discouraged Workers

Friday, February 05, 2010

Why Today's Jobs Number Is Dangerous

Trimtabs figures the BLS is full of BS and here's why:

The BLS has seriously underreported job losses for the past two years due to their flawed methodology.  TrimTabs has identified the following four problems:

1.      The BLS employment estimate is based on a survey, and not on an actual count of employees.  While the BLS survey is large and supposedly designed to capture the complex nature of the employment market, it is still a survey and therefore subject to error.  TrimTabs believes that rapid changes in an employment cycle cannot be captured by surveys.

2.      Several times a year, the BLS applies enormous seasonal adjustments to their survey results to account for seasonal fluctuations in the job market.  For example, this January, the BLS added 1.92 million jobs to their survey results to report a job loss of 20,000 to account for the layoff of retail holiday workers.  In our opinion, the sheer magnitude of the seasonal adjustment which dwarfs the monthly result renders this month’s job loss estimate meaningless.

3.      At the time of the first release, only 40% to 60% of the BLS survey is complete and is subject to large revisions over the next two months.

4.      The BLS applies a mysterious “birth/death” adjustment to their survey results to account for business openings and closings.  While the payroll data was adjusted substantially, the “birth/death” adjustments were left unchanged.  In 2008 and 2009, the BLS’ “birth/death” adjustment added 904,000 and 882,000 jobs, respectively, for a total of 1.79 million.  By way of comparison, in 2006 and 2007, the BLS’ “birth/death” adjustment added 964,000 and 1.13 million jobs, respectively.   We find it highly unlikely that in 2008 and 2009, during the worst recession since the 1930’s, more businesses opened than closed netting 1.79 million jobs.

 

In our opinion, flawed BLS survey results, month-after-month, do the public a huge disservice.  While its results point to a slowly recovering economy, TrimTabs’ results point to a dangerously weak economy.


This is dangerous because if politicians and the Fed believe that the economy is stronger than it really is they will pursue more hawkish policies that could plunge the economy right back into recession if not depression.

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Taleb's Rhetoric Makes For Good Headlines And Bad Trade Ideas

Nassim Nicholas Taleb, author of "The Black Swan," made headlines yesterday for saying, "every single human being" should sell short U.S. long-term Treasury bonds. He called the trade a "no brainer."
Obviously, Taleb is worried about the country's financial issues including the federal deficit, national debt, massive entitlement liabilities, the nationalization of Fannie and Freddie whose default ratios continue to grow, accelerating bank failures and insolvency at the FDIC, the impotence and potential insolvency of the Fed, and more.
However, Felix Salmon yesterday questioned the efficacy of such a trade and the sincerity in which it was recommended:
This is Taleb at his most quotable and least helpful. Of course most human beings shouldn’t get involved in shorting anything. What’s more, Larry Summers actually put on that trade — that long-term interest rates would rise — while he was at Harvard, with disastrous consequences. Even no-brainers can lose you billions.

In fact, Dr. Brett Steenbarger discussed how such "no-brainers" are bad trade ideas in a post yesterday titled, "The Salience Principle:"
Here is a little nugget of trading wisdom: the market systematically punishes salience. Show me a strategy that makes use of highly salient information (i.e., information that is likely to stick in the mind at first, casual exposure) and I'll show you a strategy that underperforms. Market technician Joe Granville famously asserted that if it's obvious, it's obviously wrong. That's the salience principle, and it's why impulsive trades so often are losers.

In my experience "no-brainers" are some of the most dangerous trade ideas. Buying internet stocks became a "no-brainer" in the late 1990's; buying real estate in the mid 2000's was another example of people acting on "no-brainers." As a rule, I try to stick to "brainers" only.
Salmon continues his analysis of Taleb's "impulsive" recommendation writing,
If 90% of your assets are in safe Treasury bills [as Taleb recommends in his book] and a large chunk of the other 10% is being put to use shorting Treasury bonds, essentially what you’re doing is putting on a curve steepener — at a point in time when the curve is already as steep as it’s been in some time. What’s more, unless you’re extremely leveraged, you’re never going to get rich shorting Treasuries. And I’m sure that Nassim would never recommend that kind of leverage.

So Taleb's message has to be taken more as rhetoric than specific advice, more a comment on the state of the U.S. economy than an actual trade idea. His concerns are valid; his trade idea probably isn't.
In contrast to Taleb's trade, Zero Hedge today reveals an interesting statistic in the market for long-term Treasury bonds that suggests they may be poised for a, "string of positive years." In 2009, the long bond lost 11%. Over the past 80 years of data, however, the long bond has usually rallied the year after a losing year. Only 2 periods during this time (1955-56 and 1958-59) saw this pattern broken and on both occasions the loss was less than 3%.
Most traders will also remember the adage, "the trend is your friend," and I don't know if I've seen a more solid trend this one:

Disclosure: long TLT
For more on this topic download your free copy of "The Felder Report"

Top Marginal Tax Rate Through History

Despite conservative propaganda to the contrary, the top marginal tax rate under Obama's plan is actually far below its peak all-time peak:

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The Only Jobs Chart You Need to See

That doesn't quite look like a "v" to me:

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Thursday, February 04, 2010

Is the Carry Trade Beginning to Unwind?

Last week I wrote that the financials had broken down but the break might turn out to be a head fake. Stocks did rally afterwards but have since broken down once again, this time in a more convincing fashion. That's a big, red candle on the chart today. Considering the financials have led the the broader stock market for some time now, this is not a good sign.


Another chart I'd like to revisit is the Dow Transportation Average. In mid January I noted that the index was flirting with resistance at the 61.8% retracement level within what looked like a broadening top pattern. The index has since made a hard turn South.


This might have something to do with the weakness in the Baltic Dry Index, a measure of the cost to ship raw materials around the world and a key leading economic indicator. The Baltic never recovered to the same degree that the stock market did and failed over the past few months to surmount its November highs. Persistent weakness in this index contradicts the predictions of a strong recovery.


Finally, the dollar continues to rally signaling that the carry trade may be unwinding with a myriad of potential consequences for the financial markets none of which are benign.


Nouriel Roubini outlined what the unwinding of the carry trade might look like in an article for the Financial Times last year:

If factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

The current dollar rally/equity and commodity selloff may turn out to be the beginning of just such a scenario. All in all, it looks like a time for caution.

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Why We Will Lose Nearly a Million Jobs Tomorrow

Mark Twain Awesomeness

I was always a fan of Mark Twain. After reading the following letter, I'm now officially a fanboy:




Transcript
Nov. 20. 1905
J. H. Todd 
1212 Webster St.
San Francisco, Cal.
Dear Sir,
Your letter is an insoluble puzzle to me. The handwriting is good and exhibits considerable character, and there are even traces of intelligence in what you say, yet the letter and the accompanying advertisements profess to be the work of the same hand. The person who wrote the advertisements is without doubt the most ignorant person now alive on the planet; also without doubt he is an idiot, an idiot of the 33rd degree, and scion of an ancestral procession of idiots stretching back to the Missing Link. It puzzles me to make out how the same hand could have constructed your letter and your advertisements. Puzzles fret me, puzzles annoy me, puzzles exasperate me; and always, for a moment, they arouse in me an unkind state of mind toward the person who has puzzled me. A few moments from now my resentment will have faded and passed and I shall probably even be praying for you; but while there is yet time I hasten to wish that you may take a dose of your own poison by mistake, and enter swiftly into the damnation which you and all other patent medicine assassins have so remorselessly earned and do so richly deserve.
Adieu, adieu, adieu!
Mark Twain

Toyota: How to Kill One of the Most Powerful Brands in the World

Michael Hiltzik, an LA Times columnist and victim of Toyota mechanical problems, recently penned an enlightening article on Toyota that argues the company's mechanical problems are exacerbated by a problematic corporate culture. Hiltzik submits that Toyota has been aware of the potentially fatal acceleration issue for at least nine years. Rather than addressing it then in the most aggressive and effective way possible, the company pursued a familiar policy of, 'denying the problem exists, implying motorist error and simply hoping the issue will go away.'

This is in stark contrast to the way Johnson & Johnson famously handled a very similar situation that was lethal for its customers, the Chicago Tylenol murders. Despite the fact that  the tampered Tylenol was relegated to only the Chicago area, as soon as the company discovered the problem it removed all of the inventory from every shelf in the nation, 31 million bottles in total. Unlike Toyota, Johnson & Johnson was looking out for its customers first, at its own great expense. It caused the company pain in the short run but inspired unwavering customer loyalty in the long run.

Toyota seems much more myopic than Johnson & Johnson. As Hiltzik writes, "what's most disturbing about Toyota's handling of a potentially lethal flaw in its engineering is that it seems focused on avoiding a PR problem more than addressing its operational problem." The bottom line is Toyota acts like it couldn't care less about its customers' safety and this is exactly how you kill one of the most powerful brands in the world.


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Advertising FAIL

Wednesday, February 03, 2010

JaMarcus Russell: A Financial Advisor's Worst Nightmare

Is it any wonder 78% of NFL players are bankrupt within 2 years of retirement?

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Paul Volcker: The Ghost of Future Crises

You gotta love this quote from Paul Volcker to the Senate Banking Committee recently:

I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free reign to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.

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Bud Light "Clothing Drive" Commercial

Another funny spot from Bud:

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What Politics Really Boils Down To: 'The Pot Calling the Kettle Black'

Mohamed El-Erian Discusses the Current "Irrational Exuberance"

Mohamed El-Erian is the CEO and co-CIO of Pimco, the firm that manages the largest mutual fund in the world. In an editorial for Bloomberg today he expresses his serious concerns for the US financial markets and economy, concerns he believes are not currently "priced in" the asset markets. The following is an excerpt:

Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S. If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes, including stocks.

I am not a political expert but I respect and listen to the insights of many who are. Their messages are eerily consistent, and quite concerning.

The political atmosphere in Washington is tense and increasingly polarized. Bipartisan backing for measures is harder. With the political center shrinking, the ability to “manage to the middle” is growing more elusive while the more partisan wings don’t command sufficient broad-based support.

The situation isn’t helped by the diminished trust in key institutions, both public and private. Policy decisions, past and present, are second-guessed. Banks’ standing in society is severely shaken. The regulatory framework is in flux, with agencies fighting for turf. And the divide between large and small firms is as big as I have ever seen it, as is the disparity between the rich and the less-fortunate segments of the population.

All this comes at a time of great economic fluidity and challenge. The global financial crisis has undermined growth and job creation; it has clogged many of the pipes that allocate funds to productive uses; and it has rapidly taken public debt and the budget deficit to worrisome levels.

I am particularly concerned about the surge in joblessness. In the absence of bold structural measures, most of which face political headwinds, we are looking at a period of persistently high unemployment that will disproportionately affect the young. We risk significant welfare losses and skill erosion, lower labor-market flexibility, and yet another burden on the country’s stretched public finances.

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Bend's Burgeoning Defaults Betray the Bottom-Callers

I spotted this chart over at my friend, Tim Iacono's blog, "The Mess That Greenspan Made." From the looks of it, Bend's real estate decline is still well underway. Defaults and foreclosures are a major force pushing prices lower and it seems to me that we won't see a bottom until measures like this one begin to improve some.

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"Dude... check out this new Olympic event..."

Tuesday, February 02, 2010

The Real Reason Traders Need So Many Screens

This guy (just left of the talking head) spends a full 30 secs. taking in "the view."

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Ben Bernanke, aka "Party Boy"

What the Retest of the March Lows Will Look Like

Interesting chart here from David Singer on the potential future path of the Russell 2000 Index:

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Consumer Deleveraging in Pictures

The Federal Reserve Board recently released its "January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices" (hat tip, TBI) which shows some interesting developments particularly in the consumer credit marketplace.

As the attached chart shows, banks are no longer tightening consumer credit standards and they are increasingly willing to lend. However, demand for credit continues to fall as Consumer deleveraging is in full effect.

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Monday, February 01, 2010

Obama's 2011 Budget

Methinks Steve Jobs Doth Protest Too Much


Leading up to Apple's recent earnings release and now infamous introduction of the iPad, I wrote a couple of blog posts ("Why Apple's Going to the Dark Side" and "Jobs & Co. Scrambling to Hold Off Android") suggesting the company is starting to recognize just how dangerous the Android threat is to its business. I got a fair amount offlack from Apple fans at the time.

However, after Steve Jobs finished the iPad presentation he gave reporters a piece of his mind on the subject of Google and Android. Wired reports:

On Google: We did not enter the search business, Jobs said. They entered the phone business. Make no mistake they want to kill the iPhone. We won’t let them, he says. Someone else asks something on a different topic, but there’s no getting Jobs off this rant. I want to go back to that other question first and say one more thing, he says. This don’t be evil mantra: “It’s bullshit.” Audience roars.

Methinks, "the lady doth protest too much!" Is it just me or does Jobs seem more than a bit perturbed with Google moving in on his territory? Not to toot my own horn but it looks like my earlier blog posts couldn't have been more prescient.

It's easy to understand why Jobs is pissed; the iPhone is responsible for a huge chunk of Apple's profits. The WSJ reports:

In Apple's fiscal 2010 first quarter, ended Dec. 26, iPhone and related product revenues were $5.578 billion, 36% of Apple's total, compared with $4.45 billion for computers and $3.39 billion for iPods. The iPhone is largely responsible for doubling Apple's sales over three years. While computer sales are up, iPod sales are roughly flat over the period. What's more, Apple's gross margin has risen to 40.8% from 31% in that period, courtesy of the iPhone. The device's gross margin was about 60% in the quarter, estimates Sanford C. Bernstein, helping lift the overall number. So it should be no surprise that Apple's cash from operations has skyrocketed to $5.8 billion in the latest quarter from $1.8 billion three years earlier.

I would also argue that the popularity of the iPhone has helped Apple's entire product line acting as a trojan horse for the company that has converted people from "pc's" to "macs." As a result, the company has become very heavily dependent on the one product as a flagship for its brand and for a very large chunk of its profits and Google, via Android, is taking square aim at it.


In this battle, Google has a few key advantages: in stark contrast to the iPhone, Android phones (and Chrome OS devices) are based on a open platform. Developers are not subject to the will, the devices and software of the parent corporation; they are free to create what they want using the hardware and software they prefer and let the marketplace decide whether they are successful. Google does not control the distribution of media, either, the way that Apple does with iTunes. Finally, Android devices make use of standard ports and such whereas the iPhone does not; Apple forces you to buy proprietary accessories.


I believe that the "open" philosophy is key to winning mind share and is already helping Android to rapidly gain market share at the expense of the iPhone. In its last earnings release iPhone sales missed expectations by 5%. It's no coincidence that during the same quarter Android devices grew their market share by 200%. Steve Jobs has very good reason to be worried, it seems.