MrArbitrage on Wall Street & Intel: "This one goes to eleven"
Marketwatch featured a column today regarding the fall of Intel’s stock price in spite of beating the consensus in a strong quarter. The concern is that although Intel is executing perfectly, they may be “peaking” and there are signs that margins are eroding.
http://www.marketwatch.com/story/wall-street-cheers-intels-profit-jump-2010-01-15
The column is full of statements like “analysts had expected…” “analysts currently project…”
There’s the problem right there. Although I’ve been in this industry of “Wall Street” for a long time, it got me thinking - why even have analysts when all of these companies provide such guidance? Who knows better of what to anticipate than the people running the company? And the executives seem to be held to more scrutiny than the analysts. How many Wall Street analysts do you see going away in handcuffs versus CEOs? I laugh when I see the numbers analysts “expect” versus the company guidance because it’s usually within a few cents. I would LOVE to see how FAR OFF Wall Street analysts would be if they were not given guidance from these companies. I would love to see their raw due diligence and how they came to their numbers (I’m smirking).
It’s a farce. I mean, we all know the companies like to under-promise and over-deliver so they can “beat expectations” – but I think we are smart enough to figure that out and just round up a few cents to come up with our own expectations.
It reminds me of a scene from the cult classic film “This is Spinal Tap” where "Nigel", the metal guitarist is showing off his custom Marshall amplifier to the interviewer (played by Rob Reiner). In this scene, Nigel boasts about how most amplifiers only go to 10, while -his- "goes to 11". Reiner asks “Nigel” the question “why not just make 10 louder and make 10 be the top number?” Perplexed, Nigel pauses and answers “but this one goes to 11”. (Here’s the scene if you haven’t seen it.
This scenario is analogous to Wall Street analysis. Why not make the template adjustment to the corporate guidance yourself instead of paying an overpriced analyst’s salary? The answer to this rhetorical question is that they create an illusion of complexity that helps sell their services.
One of the quoted analysts wrote "Although we believe Intel is executing flawlessly, we are seeing several signs of a peak in the stock in terms of gross margins and earnings,.
I wrote a piece eight years ago on Intel that is relevant to this situation:
DATE: 1/16/2002 TITLE: “To the Pollyanalysts” http://boards.fool.com/Message.asp?mid=16476018 (time-stamped verification)
"Letter to the Analysts":
It's a tragedy that people still listen to you charlatans. Do earnings mean anything to you?
Does market cap mean anything to you?
When a company like Intel has its earnings drop 80% and it is still priced not for perfection as some like to say, but rather for stupidity, what do you do? You stick to your guns in order to save face and declare it a strong buy! It is typical of human nature to mitigate as you do in order to save face; however, it is disgraceful when your saving face is at the expense of millions of people. With INTC currently near its 52 week high and a market cap of about $240 BILLION DOLLARS, Intel will need to reach a market cap of about $1 trillion dollars in order to live up to the premium by which it now trades.
If Intel's near term future was so rosy, they would be increasing capital spending - not decreasing it. They should also be pumping up R&D spending because they are going to need to open new industries if they are going to reach the new highs from here which you predict. The actions of Intel don't seem to match the zeal priced into the stock, after all, as I have been challenged over the past several months for propounding the notion that the nature and history of technology is attrition in profits and margins despite the improvement of technology, the contention was that Intel would spend money fervently in order to create new markets. That was the justification I was given for such an extraordinary premium for diminutive earnings.
It will be absolutely necessary for Intel to re-invent itself to warrant this price because during their glory years, most people didn't yet own computers so naturally sales would be quite strong. It was the same way with automobiles, radios, televisions, VCR's etc.
The Calculator business was once a highly profitable growth industry. Now that so many people already own computers, there needs to be a pretty compelling quantum leap in technology for most people to keep that extraordinary growth rate of the 1990's going.
There is no such incentive at this time. Unfortunately, Intel is priced at the 50% EPS growth rate at this time while growth rates have actually been receding by the double digits! The price doesn't make sense.
I'm not saying that Intel is a bad company. There is nothing wrong with Intel. There is something wrong with Intel's price. I might add that it is through no fault of their own, unless Arthur Andersen is doing their accounting. The current egregious error in Intel's price in my opinion is directly attributable to the charlatanism of the Wall Street analysts coupled with the excessive credulity of the investors and fund managers. I believe we have a castle in the air my friends. Remember $240 BILLION Dollars is a lot of money, even in this day and age. In order to be willing to pay $240 bills for this company, one has to believe that Intel is heading to at least a half of a trillion dollars in market cap while jobs continue to be obliterated...
As I predicted in December, the new wave of cuts are coming after the major new cuts in automotive firings. We are in recession. Unemployment is going to the double digits and there is no compelling technology out there to start a massive wave of upgrades in tech spending.
So, all of you pseudo-analysts out there, sit back and have another hit of the old peace pipe."
In retrospect, not only did people scoff at my Intel price target, they also ridiculed my double digit unemployment prediction.
Contact: mrarbitrage@tableofwisdom.com
July 28, 2009
The intellectual indolence of those who attack speculators
by MrArbitrage
The big story this week: regulators considering setting limits on Wall Street speculators
Forget additional position limits. Ceding that kind of authority to elected scoundrels is probably just as bad if not worse than the actual disease. It is a slippery slope, like allowing these buffoons to determine salaries. I think I would prefer to see the leverage abated. I have heard compelling arguments on the “pro” side of changing margin requirements but not too many “cons”. I don’t think that controlling copious quantities of commodities which are essential to human sustenance -with 10 cents on the dollar- is some kind of inherent right derived from natural law.
As I wrote back on June 20th 2008 in my piece called “Speculation: Good for America but Manipulative Analysis = Crime against Humanity”(below) – the problem is fallaciously being attributed to “speculators” by intellectually lazy people like Bill O’Reilly. The demonization of “speculators” in the generic sense is quite dangerous to our free markets. If the mere presence of speculators CAUSED the vexing bubble in oil that we recently experienced, how do you explain the MAJORITY of time throughout the 20th century when there was relative equilibrium in prices? We had speculators THEN. This begs the question -WHY- was there stability during most of those years despite the presence of speculators?
The key to this imbalance (according to me) is the presence of two extreme variables that were NOT the norm for most of the past century and a quarter:
1. It is not normal to have a powerful company like Goldman Sachs permeating every level of state and federal government. Historically we have seen powerful industries with deep pocketed lobbyists (which I’m personally ok with). However, this parasitic company not only has access to legislators and presidential appointees – they have actually BECOME the most powerful people in our government. One might say that we the people are the “host”. The Goldman conspiracy is an interesting topic but what does that have to do with anything? In my aforementioned piece from June 2008, I elucidated on how I believe that Goldman may bear a substantial amount of responsibility for the pain the world suffered last year and which may have been the proverbial straw that broke the camel's back.
What the simple minded media overlooks in their critique is that WHILE Goldman was apparently making a fortune trading oil last year, their ANALYSTS were ubiquitous throughout every form of media talking up the price of oil while their trading division reaped a fortune at the expense of their fellow countrymen. As people in some parts of the world suffered starvation and Americans went broke from gas prices and a bursting real estate bubble – Goldman analysts threw gasoline on the fire as they daily inveighed on the direction of oil. These “analysts” never proffered any due diligence with quantifiable numbers to support their suspiciously timed and arbitrary price targets for “$200 per barrel within a year”. The sophistication of their due diligence, at least that which proliferated the media was as prosaic as “China is growing rapidly”; therefore we were to believe that there could be no ceiling to oil prices. No price was too high! If they were able to drive oil to $200 per barrel, I have little doubt these cheerleaders would have called for $300 and so on.
When the fundamentals clearly contradicted their propaganda, they began to advance the most absurd “catalysts” to keep it going. I had envisioned them unwinding their positions while publicly trying to convince us that stories like the Somali Pirates would keep oil prices going ever higher. I cynically imagined them praying for a hurricane to hammer the gulf of Mexico because once the public built an immunity to the China story, that’s all we heard about were Pirates and their hurricane fear mongering about what COULD happen IF…
How that ties in with the “Goldman conspiracy” is simple. I believe that Goldman is so firmly entrenched within our governments, federal and state, that arguable crimes against humanity have been tolerated in a way that never would have been if it were not for their control and influence within the most powerful governmental circles. That is not to say that they could have convinced their colleagues in government to act in collusion. It could all transpire without impunity by simply having the power to manipulate the markets with “analysis” that was a direct- conflict of interest – while having their colleagues in government turn a blind eye. I fully expect nothing to happen to Goldman aside from a possible tongue lashing as certain gutless politicians posture before the cameras in hope of a nice sound bite making its way to their constituents while knowing they will not do anything of substance in the end.
2. The other extreme variable that has played a part in fomenting the oil bubble is the Federal Reserve keeping interest rates at unnatural lows. Every time they have done it, they have created new bubbles. That combined with manipulative analysis created a perfect storm. As we ran through bubbles in the other major asset classes, this potential energy created by the Fed was easily converted to kinetic energy with the guiding hands of the unscrupulous. As an aside, the bubble they are about to create next will be in junk bonds.
Again, there is nothing wrong with speculation – absent manipulation. I feel embarrassed for people like O'Reilly and Obama when I hear them ignorantly (or deviously in Obama's case) blaming this on speculators. Yes, speculators carried it out but they would not have been induced into it if it were not for Goldman, J.P. Morgan and the Federal Reserve who essentially spiked their drink with an overdose of ecstasy. Absent those two variables, speculation would never have gotten out of control the way it did. The hearings held by the Commodity Futures Trading Commission this week need to stop attacking capitalism and focus on the conflict of interest and manipulation by these firms. It was no different than the way the wire houses like Merril had their analysts knowingly pumping garbage stocks while raking in investment banking fees. Henry Blodgett went to jail for that and the only people hurt were those who chose to speculate on their bad information. In the case of the commodities, the people who were hurt, even killed in riots globally were NOT those who chose to dabble in script. These victims were just trying to eat or fill their gas tanks. THAT is what makes THIS a “crime against humanity. It is nothing short of treachery and people need to be investigated at these firms to see what kind of communication may have gone on between analysts, traders and fund managers at these firms.
There is nothing wrong with self-interest when the people have the morality essential to self government, liberty and capitalism, without which we can have none (according to our founders). The golden rule is the only rule that will preserve our nation and our economy.
Contact: mrarbitrage@tableofwisdom.com
May 18, 2009
The New York Times: First to be Nationalized or sold for Scrap?
by MrArbitrage
The Wall Street Journal just featured a column speculating that control of the troubled New York Times may be acquired within the next couple of years.
That’s it! Abuse your shareholders by running those assets into the ground then sell off what’s left for scrap. Like most of the major media companies, they ran the company not to increase shareholder equity but rather to increase DNC equity. The New York Times is more of a 527 organization than a news organization. The scoundrels running the NY Times should be in a prison cell with John Rigas of Adelphia Communications for abuse of shareholder assets and a long lasting breach of fiduciary responsibilities.
Nevertheless, I expect that it is only a matter of time before companies like The New York Times, Gannet, GE’s NBC and Time Warner’s CNN become the recipients of billions of our tax dollars. A cunning Marxist like our Hussein would not dare miss an opportunity to nationalize the news media. It will have to be done in a somewhat furtive manner but I have no doubt Obama will make it seem quite palatable to the average voting android.
Never mind the fact that these companies were losing their subscribers and bleeding red, long before the recession began. Never mind the companies that are flourishing and actually profitable because they practice legitimate journalism. I can already hear the mindless pabulum about how Obama is “saving democracy”. He will be single handedly “saving the free-press”, so essential to our Republic – by “temporarily” nationalizing it.
Frustrated viewers tired of the liberal agenda inculcated by these organizations have generally felt the only thing that could be done was to “boycott” them or complain to sponsors. Those tactics have rarely shown results. The public has little understanding of the fact that these companies have been “hi-jacked” and those running them are essentially plundering investors.
Shareholders need to take action against these crooks who are abusing these assets with no regard for the owners. Institutions need to unite in order to push these parasites off of the boards and out of leadership. I have felt like a lone voice in the wilderness on this issue of shareholder abuse by companies like GE, Viacom, Time-Warner and others. However, it seems as though it is starting to become recognized for what it is.
As I wrote five years ago regarding “Fiduciary responsibility” http://boards.fool.com/Message.asp?mid=20257729&sort=postdate and “the arrogance of the entertainment industry, more specifically the executives who run these companies as if they are mere tools that exist only for the purpose of furthering their own liberal agenda…. It's about time these charlatans be held accountable for their decisions as they ignore what consumers clearly want instead of what they can get them to tolerate. The vast polling data cited in the aforementioned post show that these executives are NOT providing that for which the majority of consumers want and are in essence negligent in fiduciary responsibilities to increase shareholder equity at the maximum level… It's time to get fired up. It's time to start putting our feet down.”
Contact: mrarbitrage@TableOfWisdom.com
April 22, 2009
The Diabolical Genius of TARP
by MrArbitrage
David Weidner of www.Markewatch.com wrote a column regarding the issue of banks hoarding the TARP money and not passing it on to consumers in the form of loans. The title of Weidner’s column is “Your credit is no good here”, in which he makes the case of why banks need to pull back from lending.
In his column Weidner points out a strange dichotomy in the position of Bank of America CEO Ken Lewis who has been talking publicly about how they are lending as if the good times never ended. Yet on a recent conference call Lewis said “credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve.” Also on that conference call Lewis described a “deep recession that's going to be here for months.”
Unfortunately it may be here for YEARS thanks to our government prolonging the agony instead of letting nature run its course. It’s funny how much these kooks supposedly believe in “nature” when it comes to their desire of not interfering with the eco-system. If only they could make the correlation between their tampering with the laws of economic nature and realize it is very much analogous to the former.
Weidner wrote that “six months later, it's fair to say TARP has helped prop up some banks, but it hasn't flowed into the consumer credit markets the way the framers intended.”
That’s because those “framers” are blithering idiots at best, otherwise complete scoundrels. Just watch and listen to Chris Dodd and Barney Frank; enough said.
THANK GOD it hasn’t flowed through “the way the framers intended”. It stands to reason that credit would dramatically abate. It’s called going back to generally accepted underwriting procedures. The way these elected swindlers designed TARP was apparently not to fix the problem but rather to keep the Ponzi going until they are dead and gone.
While pondering the question of whether or not banks should open the proverbial spigot, just ask yourself this question: Would I personally make these loans from my own savings account? It’s a great question because under “Obamunism” - if the loans are bad – you are making them.
That’s the diabolical genius of Obama and little Timmy’s (picture Dr’ Evil’s “Mimi-me”) scheme to convert the Preferred Bank Shares to Common stock. It would appear that if they could take control of the management of these institutions by gaining control of the Boards and a large percentage of voting shares, they would essentially be able to engage in the type of reckless spending i.e. wealth re-distribution without having to bother with Congressional approval. It would be a minor technicality that they would be calling the redistribution “loans” instead of “spending”. This new spending could essentially be viewed by the recipients as “forgivable loans”. That’s chicanery at its finest! It would be a lousy deal for shareholders because any profits from the -good loans- made by the bank would be wiped out by all of the bad loans. If these preferred shares do get converted to common, don’t look for much in the way of dividends if you are a shareholder because any “profits” will end up in the hands of organizations favored by the administration that is controlling the Treasury Department. Looked at from this perspective, this would undoubtedly be the biggest bank heist in the history of the world. Instead of the tax-payers getting paid back with the present high yielding Preferred dividends, we will own equity positions in banks that will never pay dividends again as they become a piggy bank for governmental pet projects and corruption.
If you want to see the disingenuous motivation behind their proposal to convert the Preferreds to Common, let’s require that the conversion only take place if 100% of the Common is placed in -private- Social Security accounts for “Generation X” to be systematically divested over the next eight years with all voting rights diluted by the individual recipients of these accounts. (I chose Gen-X because they have paid into SS for decades, will continue to do so to fund the Boomers retirements – but will never receive anything close to what they’ve paid in.) That would take away the true motivation, which is control.
Subsequently, I’ve never heard of anyone converting Preferred stock to Common stock –without- the “convertible” feature being in the Indenture or Prospectus upon issuance. If these shares were indeed convertible, WHY was this considered NEWS as it was a few days ago when the trial balloon was floated?
In his conclusion Mr. Weidner wrote that “taxpayers fuming about the banks' unwillingness to loan government money into the system might reconsider, given that the banks are actually being prudent with taxpayer cash.”
That is absolutely correct; however, one cannot help but wonder what might have been if these prodigals had just returned the capital, all of these trillions of dollars, to its rightful owners, the people who created it. That would have been too radical, too “unfair”. So grab your popcorn, sit back and enjoy the deliberate destruction of western civilization. Don’t forget to thank your treasonous scoundrel in DC and your indoctrinated grandchildren for electing our Hussein.
Contact: mrarbitrage@tableofwisdom.com
March 19, 2009
Gold is the antithesis of a "Bubble"
by MrArbitrage
It surprises me that it surprises anyone - that Gold and other commodities would rally in this environment. Some are even calling this rise in gold a bubble.
In each of the bubbles of the past 12 years, gullible investors essentially had to make the case that the fundamental laws of economics would cease to apply to the present situation. During the tech bubble “it was a new paradigm…” During the real estate bubble, the excessive appreciation beyond historical average returns were justified because “the baby boom generation is retiring" (increasing demand in Florida, Arizona, Nevada…). During the commodities bubble ANY price was justified by “growth in China…”
It may appear that I’m about to assert that the rise in gold is a bubble. That would be wrong to say. The rise in gold is certainly not a bubble. The world currencies, including the dollar - is the latest asset class to experience a bubble. These currencies go up and down against one another all the time but zoom out and you will see they are like a teeter totter on the deck of the Titanic. On any given day one might be “strong” compared to the other but in reality we are comparing the value of turds.
In a traditional bubble, an asset class will rapidly appreciate together as a group. These fiat currencies are a little different in that the expectation that they should maintain their value is the actual bubble. The common characteristic among the masses is that those who are surprised to see gold rising must expect that “it’s different this time!” (just like it was different during the stock and real estate bubbles.) THIS TIME – they believe the federal government can spend more money than we could ever afford to pay back without consequence. THIS TIME they can print trillions of dollars out of thin air without it affecting the purchasing power of the currency. THIS TIME (once again) the laws of economics will cease to exist because the Messiah is going to talk us into a new millennium of prosperity – right from his teleprompter.
Even oil has reason to rise in this environment, although not because of an improving economy and not because of increased demand or a decrease in supply. Oil should go higher as people realize that by next year the freaking metal barrel in which the crude is contained is going to be worth 40 of those deflated Obama/Geithner dollars.
Thanks for reading. If you are on the Nobel Economic Committee, contact MrArbitrage at mrarbitrage@tableofwisdom.com
February 13, 2008
China's Accounting: The Next Debacle?
by MrArbitrage
Speaking of China, I’m going to tell you now, long before all the media experts tell you that - THEY – “told you so first”. China is a ticking ACCOUNTING time bomb. You think we’ve had accounting scandals, wait till you get a load of China.
Within the next few months to a year, sagacious media “experts” will be telling you about how the warning signs were on the wall well in advance - as we saw how these Chinese companies were all to willing to sell our children toys with toxic paint in order to make a few extra bucks. They will bring up the thousands of houses in the USA that are now vacant as they were found to have toxic Chinese paint all over the walls, making their former inhabitants ill.
The “experts” will tell you how that was a portent of things to come. After all, if they are willing to sell you toxic toys and house paint - why should you trust the integrity of their balance sheets and income statements???
The Chinese government is either ignorant or complicit; either way common sense says that something isn’t right. I find it difficult to believe that the chi-com government doesn’t regulate enough.
Remember the 90’s? How did the mafia make fortunes pumping bogus stocks? They knew from the beginning that their companies they pumped and dumped were bogus. They knew their schemes couldn’t last forever. They knew they would suck so much money out of people that it wouldn’t matter by the time everyone caught on. They would be set for life. I’m talking about a brutal regime that as recently as in 1996 was selling the organs of their political prisoners to finance the Red Army. I don’t think they would have any qualms about doing the largest pump and dump in history to suck the money out of their old buddies the USA.
The communist Chinese government is not our friend and they never will be. We have been duped. We have financed their regime and the joke is on us. By the way, is it still legal for me to say negative things about communists in the USA?
I just thought I’d share this with you now in case you are long Chinese securities. If you read TableOfWisdom.com, you get these kinds of tid bits at a time when the analysis is actually useful or “actionable” as opposed to reading the many journalists who ruminate on them after all hell has broken loose and it is too late.
I don’t know if China will be the NEXT financial debacle – because our government and their cronies are doing a fine job creating so many here – but I believe China will a fairly near term disaster.
Contact: Mrarbitrage@TableOfWisdom.com
January 16, 2008
The Market isn't Broken; WE ARE BROKEN
by MrArbitrage
A Q&A appeared in today’s edition of Marketwatch. The author, Lew Sichelman was answering questions from readers. The first question was from a reader who was wondering if they should “walk away” from her Mother-in-law's mortgage since the realtor indicated the house is probably worth $80,000 while she owes $96,000. (Her husband has power of attorney.)
by MrArbitrage
The heading of the column is "There are alternatives when you owe more on your home than it's worth".
I would say yes there are, like honoring your covenant. When she got the loan, was there something in the contract about being guaranteed the absolute right to a profit on the home from day one?
The fact that columns like this are so prevalent, which treat the question with legitimacy is a sign that we have become a nation of dishonorable deadbeats. I personally know a single man who has $600,000 in cash but is in the process of walking away from a home on which he is about $30,000-$50,000 in the negative. This is becoming an epidemic. He doesn’t care about his credit because he “doesn’t need it”.
I know I was born in the wrong era. There used to be a time in this country when "a man's word was his bond" and people did business on the proverbial "handshake".
I think that was basically the first 190 years of this nation's history. We certainly have changed. The Baby boom marked the end.
It is one thing if something happened and you are trying to make your payments but end up being foreclosed upon. It is quite another to be so cavalier and to openly ponder the question of whether it's a legitimate financial strategy to just walk away because 2 years have gone by and YOU didn't make a profit on your investment - leaving the TAXPAYER to foot the bill.
I keep coming back to the copious warnings by our founding fathers such as Adams, who said "we have no government armed with the power capable of contending with human passions, unbridled by morality and true religion. Our constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other."
The same is true for capitalism. Capitalism like democracy is a system dependant on integrity, trust and self government. Capitalism is a beautiful thing when the people participating in it share that belief that they are more than animals, that they have a Maker to Whom they are accountable in the hereafter, when they believe in eternal rewards and punishment.
Capitalism is a brutal thing when the participants believe they are cosmic accidents, animals that live by the law of Darwinism, the strong survive, "it's a jungle here" and he who dies with the most toys wins.
The latter system was tried during the last major "enlightenment". Thanks to the tenacious liberals with their right hand, the ACLU, their left hand public "education" and their "head" the news media, this country has been turned into another France (late 18th Century).
The market isn’t broken; WE ARE BROKEN and until we fix ourselves, the free-markets will not function properly. We are at a crossroads where we have the opportunity to admit our guilt, take responsibility, honor our obligations and become a strong nation through our suffering.
The other road, the road we seem to be taking is to blame everyone else for our failings, to play the victim and to walk away from our responsibilities and obligations. The latter is the destruction of our democracy and capitalism. Based upon the responses I have seen from the voters age 30 years and under, it seems that our nation's future is in the hands of a group that has been absolutely indoctrinated from the Kindergarten through college.
When capitalism and democracy fail, despotism fills the void. As in France, it led to a great deal of horror and bloodshed. I don't know if Obama is our Napoleon but one thing seems inevitable, if we continue in this direction we will have our own Napoleon either bread from within or he will come from the outside to conquer us while we are preoccupied with our debauchery.
Making such warnings used to be considered radical. Some of us have warned for years about what is coming economically but were generally dismissed. That is because the past few generations have been spoiled. Most of us have never seen suffering in this country and we have felt that we are invincible.
The same is true of our democratic republic. We have taken it for granted. We are not invincible. Unless we have a Road to Damascus conversion - soon - we will see things we never dreamed possible. Ponder that warning from Adams. It is prophetic. As long as we are wrapped up in our hedonistic ways, we are vulnerable. There truly isn't much time.
Contact: mrarbitrage@tableofwisdom.com
November 21, 2008
"Positive Wealth Effect" versus "Negative Wealth Effect"
by MrArbitrage
Much of the market meltdown is a panic attack, feeding on itself as it grows larger and larger by the day. Make no mistake about it, there is a problem and consequences cannot be avoided. We have seen the extreme on the upside during the bull market of the 90’s where the paper stock gains created what was called “the positive wealth effect”. That fed upon itself in a positive way (if you want to call millions of people going out and buying things on credit a “positive”). Regardless of your perspective on that, the positive wealth effect stimulated further consumer purchases, which caused further revenue and EPS growth, which caused even higher stock prices, which caused even more purchasing and so it went - until the bubble broke as all bubbles do. Then the Fed lowered rates to the same extreme that precipitated the tech bubble, which led to the real estate bubble.
Much of the market meltdown is a panic attack, feeding on itself as it grows larger and larger by the day. Make no mistake about it, there is a problem and consequences cannot be avoided. We have seen the extreme on the upside during the bull market of the 90’s where the paper stock gains created what was called “the positive wealth effect”. That fed upon itself in a positive way (if you want to call millions of people going out and buying things on credit a “positive”). Regardless of your perspective on that, the positive wealth effect stimulated further consumer purchases, which caused further revenue and EPS growth, which caused even higher stock prices, which caused even more purchasing and so it went - until the bubble broke as all bubbles do.
Then the Fed lowered rates to the same extreme that precipitated the tech bubble, which led to the real estate bubble.
Now we find ourselves in a situation where we are out of participants who could help us to defer the inevitable BECAUSE – there are not enough people left to suck into a new bubble that could cause ANOTHER wave of “positive wealth effect” spending to stimulate the economy. It’s very similar to what inevitably causes the implosion of a Ponzi scheme – there are no NEW participants to keep it going.
This thing is GLOBAL – so unless we find some aliens on another planet that will buy our stuff and provide us with the EPS GROWTH to which we are accustomed – there MUST be a recession – best case scenario. However, the extreme to which we take it is somewhat dependant upon us. There certainly is some truth to the old FDR quote “the only thing we have to fear is fear itself”. I wouldn’t go so far as saying the ONLY thing we have to fear is fear itself because government stupidity is certainly a formidable foe, but just as we saw extreme reactions (excessive spending) during the bull market that could have been avoided had people been more rational, I believe we could avoid some of the extreme reactions on the downside.
A “negative wealth effect” is partially psychological and it could make a Depression self-fulfilling. The “fear itself” that we have to fear is that which is not rational. People who are deeply in debt and perhaps now unemployed cannot do much right now to stop a “depression”. They need to stop discretionary spending and most have no choice. The people who are not heavily in debt and do have employment (as well as the wealthy) – need to avoid the knee-jerk reaction of tightening up. If they are in that auspicious situation it is because they are responsible; so if they continue doing what they normally do and spend how they have always spent, they will be fine. If everyone panics and hoards their money the negative wealth effect will lead to the polar opposite extreme that the positive wealth effect once created. That would translate to Great Depression.
There is some reason for hope. Just think of these lower oil prices as a sizable, across the board tax-cut. Even though the decline of oil is attributed to decreased global demand in a sluggish economy, much of the rise was due to a speculative bubble; so despite the economy being the downward catalyst, even if the economy were to recover somewhat – that doesn’t mean that oil would be entitled to the old premium brought upon by manipulative analysis by companies like Goldman whose analysts called for $200 a barrel. In that sense, this decline in oil, despite the given reasons for it - can be a “gift horse” to the economy as consumers have that much more money in their pockets.
Contact: mrarbitrage@tableofwisdom.com
November 19, 2008
Gold: Nothing like the real thing
by MrArbitrage
I read an interesting column in Marketwatch about how “demand for gold hits a record even as institutions head for exits” as the column put it.
Over my years of watching the "institutions" in action, I would not put my money behind the advice of these people. Just a couple months ago they were all over the media telling us that the days of $2.00 gasoline are over and that we would NEVER see that price again..." Have the institutions been a beacon of competence???
It used to be that you were viewed as some kind of extremist kook if you were buying tangible gold to protect yourself. People dismissed us a few years ago as we warned about the "D" word (depression). These are different times. Now all of the warnings about the inevitable consequences of a debt ridden economy and poor monetary policy that were previously dismissed as “doom & gloom” are today’s daily headlines. The worst case scenarios predicted perhaps pre-maturely are today’s reality. Now they think that inflation only happens when “too many dollars are chasing too few goods.” The REAL inflation will happen as the government creates more fake money then anytime in history to bail out their “corporate sponsors” and the millions of people whose votes they bought this past election.
These parasites don’t care if the government is going to devastatingly dilute the life savings of those who didn’t gamble in the real estate bubble. Those people have nothing to lose and everything to gain because they worked for nothing, risked nothing and now they will be the recipients of at least half of the fruits of your life’s labor.
It’s legalized theft. If you are sitting in cash or debt instruments like Treasuries or CD’s - Government can literally STEAL half of your money by printing more of it – giving it to people who voted them in – and you will have NO RECOURSE – because technically – they are guaranteeing the NUMBER – not the VALUE.
That explains why “paper gold” is going DOWN while real gold is going up. You have seen how quickly the government moved in banning SHORT SALES on a whim? They didn’t care about how many people lost money on the short side when they made that impetuous move. If they see too many people dumping their dollars and debt, seeking refuge in paper traded gold – what is to stop them from banning GLD the way they did shorting financials? It won’t do them any good but that doesn’t matter to elected idiots. It’s all about posturing to the financial illiterates who elect them in the first place. Most of what they do never works the way they purport to intend but that doesn’t stop them.
I'm an equities guy to the end. Unless the end literally is coming (and it could be), I see some historic buying opportunities right now for those who have the money to buy. I recommend 15% in tangible gold not necessarily to get rich but rather for protection from predatory government officials.
I also do not dissuade responsible people from having a nice cache of 2nd Amendment pieces to protect that gold from the Jacobincrats when they come to plunder those who were responsible and took precautions because "it isn't fair that they are not suffering with us...."
Contact: MrArbitrage@tableofwisdom.com
November 5, 2008
The Ultimate "Sucking Sound"
by MrArbitrage
I just read a column by JOHN DVORAK of Maretwatch.com titled: “How to Obama-proof your portfolio: One approach, apparently, is not to invest in America.”
I agree with the title but his objective was geared more toward speculating on which sectors to buy and which to avoid.
But the title made me think:
Perot spoke about a “giant sucking sound” resulting from NAFTA. As an investor, you may want to prepare yourself for the ultimate “sucking sound” as the money leaves the US markets and goes to the Cayman Islands and elsewhere. As a financial professional, I have seen first hand, wealth being wired out of Venezuela as those who have money realized what is going on with Chavez.
The financial world is rightfully getting the picture as they hear the laudations emanating from Castro and Chavez in regard to our vote for “change”. It’s like it just hit them - "Something's wrong with this picture; these are not good guys." Liberals would have you believe they are but there’s nothing new about that.
See Hanoi Jane Fonda.
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These people used to be harmless “Kook fringe” but while we were sleeping the past 30 years, they became Congressmen, Senators, Supreme Court Justices and Professors.
Thank your children and grand-children for “rocking our vote”. Thank them for listening to our communists in Hollywood, in academia as well as our pseudo-intelligentsia Barbara Walters, David Gregory, Brian Williams, Chris Matthews, Andrea Mitchell, Keith Olberman and Tom Brokaw.
Thank you for “investing” in their Marxist educations throughout our universities nationwide. You will soon feel the effect on your nest egg of paying people like Professor Bill Ayers to indoctrinate them into the religion of a place to which we used to refer as "the evil empire".
Oh, by the way, just thought you should know, that long haired guy proudly displayed on your kid's tee shirt; that's not some old character played by Brad Pitt or Al Pacino - that's Marxist guerrilla leader Ernesto "Che" Guevara (pictured below).
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"Che" Guevara: Benevolent Marxist Killer "Google" "Che Guevara" and you will find over 7 MILLION "results"! This is serious folks. The barbarians are not just at the gate, they have come in through a Trojan
Horse called Academia, "News Media"and entertainment. Demand the cable company get the M-TV,
VH-1, Bravo & Lifetime the hell out of your cable "package".
Yank the funding from your children or grandchildren's college if the state insists upon inculcating your offspring with left wing propaganda. Find a good private college deserving of the money
We have deluded ourselves long enough waiting for politicians to win this war. This is OUR ground game now.
Contact: mrarbitrage@tableofwisdom.com
October 24, 2008
Liberal Media withering on the Vine
by MrArbitrage
The MARKETWATCH Headline reads:
"Gannett adds to the industry's misery
Commentary: Newspaper companies keep slipping
That's the sound of the newspaper industry's water torture. It seems that bad news of some sort invariably accompanies every newspaper company's earnings report. There doesn't seem to be an end in sight, given the breakdown in the global economy and the worldwide stock markets. "
Here's a newsflash for the executives in charge. The global economy and stock market isn’t the reason why these companies are hurting. These companies will wither on the vine and their Boards as well as their CEO’s should be ousted for breach of fiduciary responsibility. Their subscribers and/or television ratings have fallen precipitously as they have allowed their editors to routinely abuse the assets of shareholders by converting what were once objective news organizations into untrustworthy, left winged propaganda machines that should be forced to reorganize as 527s. If they had not undermined their credibility to this extent, their ratings would be higher and they would not be losing so much money.
These people should be sent to prison just like John J. Rigas, who built the Adelphia Communications Corporation into the country's sixth-largest cable company, who was sentenced in 2005 to 15 years in prison for looting hundreds of millions of dollars from the company's coffer. These people have done the same thing. They arrogantly treat these companies as though the shares were 100% privately held by the DNC.
Contact: mrarbitrage@tableofwisdom.com
September 23, 2008
I'm Not Your Sugar Daddy
by MrArbitrage
Everybody’s looking for a bailout. Now these companies are demonstrating a sense of entitlement. I believe that we the tax-payers should come out ahead if we are going to foot the bill.
If we should be the lender of last resort we should make terms that will help these companies survive - but not to our detriment.
The elderly have been the most powerful lobby group in the past because they are the people who have historically voted. The elderly have benefited greatly from entitlement programs for many decades as many have taken out far more than they ever put in.
Now the Baby Boomers are becoming the elderly and they are beginning to collect Social Security. Because the system is a Ponzi-scheme and Congress has relentlessly raided the ‘trust fund” over the years, they are counting on my generation, generation-X to keep those payments coming.
My generation as well as those who follow Gen-X are faced with the knowledge that in order to support the Baby Boomers on Social Security and Medicare, we have to face the fact that we have been working for the past 20 years, paying into this system and will receive nothing in return. Not only that, they are demanding that we continue to work and pay even MORE into it while we KNOW that we are getting the old shaft. That’s supposed to be our civic duty.
A great deal of concern has been expressed about the government taking over companies like AIG. The government owning the dominant players in various industries brings about fears of Socialism or Communism. With the AIG proposed bailout, the government would own 80% of the company. The stock has consequently fallen headlong to reflect such a dilution.
My thought on the matter is that the government should not retain ownership but rather the new equity for all “bailed out” companies should be placed in “privatized” retirement accounts in custody for generations following the Baby Boom who have been paying into Social Security for a specific number of years. These can be special class B, dividend paying shares with less voting power, leaving the control and operation to the private sector.
If companies like GM, Ford & Chrysler need to come to us for a “bail out”; they should be subject to the same terms. Nobody would force them to go to the tax payer. If they hadn’t run their companies imprudently, they wouldn’t have to agree to such terms. This system would keep the government out of the operation of these companies, save jobs and avert a meltdown while helping to solve an enormous problem we are going to be facing in the coming years with Social Security. Any other plan will likely result in the government turning around and selling off valuable assets to Goldman Sachs for pennies on the dollar while the tax-payer gets left with the garbage. This way the only people who lose will be the people who purchased the stocks of these companies, which is fair since that is the inherent risk one takes when investing in equities. That is why we diversify.
The same goes for the mortgage bailout. The assumptions are perhaps overly pessimistic as to the number of expected “toxic mortgages”. If the tax-payers are expected to assume the bad mortgages, our elected charlatans need to see to it that the good mortgages in the bunch end up in the custodial accounts as well.
These custodial accounts need to be “tamper proof”, meaning that under no circumstance can politicians raid them for their prodigal spending. I expect resistance to such a proposal for the same reason why they resisted “privatizing” Social Security in the first place: In such custodial accounts, Congress cannot plunder them and replace stock with IOU’s.
Their specious rhetoric about how “risky” this would be wouldn’t be as effectual because we are already agreeing to take the risk due to the alternative risk of allowing these companies to fail. They couldn’t claim that this is a conspiracy to drive up stock prices through excessive buying because the stocks are falling as a result of share dilution. The beneficiaries would be the people who are going to become the victims after all the Baby Boomers are receiving their Social Security checks.
We could use this “rescue plan” as an opportunity to deal with two problems at one time and set in motion a plan for the gradual phasing out of Social Security starting with Generation X. Eventually these companies will come back and command market caps in the hundreds of billions of dollars. Once that happens, the positions in such accounts could be gradually unloaded into the marketplace and replaced with low cost index funds that have historically returned over 10% per year long term without having each beneficiary day trading their accounts, a preposterous notion the opponents of privatization have often propounded in order to maintain the status quo of their unabated plunder.
Contact: mrarbitrage@tableofwisdom.com
September 17, 2008
It’s the Morality Stupid
by MrArbitrage
The title of this column of course refers to the Clinton campaign's famous slogan in the 1992 election. I don't mean to call anyone “stupid” but as that phrase was deemed so integral for that particular time, I think that the emphasis now more than ever should be diverted to the consequence of our materialism. It is not my intent to undermine what is often referred to as the “American way”. I think prosperity is a positive and it is not for government to be our conscience. It is up to us to properly align our collective conscience and for government to reflect it. Judging from the disappointing actions of many representatives in Congress, it looks like they are indeed doing so.
Watching the financial news networks and reading most of the popular publications has brought me to the conclusion that most if not all of them are missing the point. The big government liberals want to blame our woes on “corporate greed” and the Bush administration for the onslaught of financial losses.
It's not just "corporate greed" that is to blame. Immorality has permeated our entire country. Adams warned that "our form of government was intended for a moral people" and that it is entirely "inadequate for the government of any other." Self government doesn't work for a people incapable of governing themselves. The same is true for capitalism.
Capitalism is a beautiful thing when the people “love their neighbors as themselves” and “do onto others” as they would have others do onto themselves. A country of hedonists and narcissists will destroy each other without hesitation. These are the fruits of Darwinism. It is survival of the fittest. Why shouldn’t I plunder you for everything you have? So what if YOU are going to be destitute; just think how happy my wife and kids will be while we enjoy your money. It equals out right? “If I didn’t take the suckers money, someone else would have.” If there is no system of eternal reward or punishment why should I care? Oh, it’s wrong because YOU say so? Well it “feels right” to me so what gives you the right to impose your morality on me?
We are reaping the harvest that comes as a result of moral relativism. Today’s corporations are run by generations who have been taught by public schools and Ivy League universities that they are accidents which emanated from cosmic goo (Carl Sagan). They believe that man determines right from wrong and there is no higher authority. This is the same disastrous belief that failed the so-called “enlightenment” in France a concomitant of the French Revolution. Ivy League universities like Princeton think they are being savvy by adding courses on corporate ethics to their curriculum but when people are taught that they are accidents and there is no morality beyond what “reason” can bring us – it is all empty rhetoric.
You cannot believe anyone anymore. How do you trust anyone's reported numbers? How do you know you can trust anyone's analysis? Stronger government oversight and regulation will safeguard us from corporate greed? Dream on folks. That has been tried for the last 100+ years. First of all, immoral people will always find away to get around the new laws and regulations. Secondly, the government and their regulators are no more than a sample taken from the same pool of immoral people that are ostensibly being regulated. Look how many of our representatives took sweet heart deals from Fannie Mae. They are just as corrupt as those running many corporations. These are the same spoiled brats who we saw smoking their dope, dropping their acid and protesting our country at Woodstock. You’re going to take solace in the notion that these reprobates are going to fix the problem? They ARE the problem. They reject the very foundation that made this country the most prosperous nation on earth.
We are overly self righteous in that we all point the finger at corporate America for being corrupt and insatiably greedy as though we ourselves are immune. When I listen to the Obama campaign it makes me nauseous to hear them blame the banks and mortgage industry for making “bad loans”. There is culpability across the board from the mortgage lenders, realtors, developers, property appraisers to the actual borrowers themselves. It is time for America to grow up and start taking responsibility. The elected idiots are telling people what they want to hear. You never hear about “predatory BORROWERS” in their populist rhetoric. You don’t hear about the millions of prodigals who knowingly borrowed more than they KNEW they could afford for a house or houses they knew they couldn’t afford. As I warned these people myself that when the bottom drops out they will not be able to make their payments once their ARM adjusts. They just replied that they were going to “flip” the home before that ever happened. Well the music stopped and all of the sudden they are playing the victim and are calling for a “new deal” from their enablers the Democrats.
We as a nation CAN become stronger from our suffering if we stop acting like insolent children, take responsibility for our own actions and once again become a people worthy of self government. Just as gold is refined by fire as the fire burns out all of the impurities, we can use this time to become a better people. If we as a nation do not return to our heritage, which first requires that we learn what those roots are (thanks to the juggernaut of public education), we will witness a tyrannical ending to our freedoms. The writing is on the wall. People find it cute these days in using the phrase about having a “come to Jesus moment”. I am not being flippant in saying that is exactly what we need.
"Where is the security for property, for reputation, for life, if the sense of religious obligation desert the oaths, which are the instruments of investigation in Courts of Justice?" – George Washington/Alexander Hamilton (Farewell Address)
Contact: mrarbitrage@tableofwisdom.com
August 7, 2008
Predatory Government is at it again (or “things are not always as they seem”)
By MrArbitrage
Today’s Headlines read:
"Today's settlement sends a resounding message to the entire auction-rate securities industry," said New York Attorney General Andrew Cuomo in a statement. "This type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors.
"Our goal is simple: to get investors back their money, and that's exactly what this deal does."
http://www.marketwatch.com/news/story/citi-settle-charges-auction-rate-securities/story.aspx?guid=%7B465758DC%2DD98F%2D4E93%2D86A0%2DFBA1EA3A234C%7D
Spoken like a true trial lawyer. This in itself is a deceptive practice by government “regulators”. It’s great that Citigroup has agreed to reimburse retail investors who sold their Auction-Rate Securities at a discount and that they have agreed to reimburse refinancing fees to any New York municipal issuer that issued auction-rate securities through Citigroup since Aug. 1, 2007. I have no problem with that aspect.
The devil is in the details. The part of the settlement with which I take issue is in the subtle statement "Citi will pay a $50 million fine to the state of New York and a $50 million fine to the other state regulatory agencies," (the bank said).
This is where the government predators are fleecing one group of investors to placate another. I don’t care what benevolent schemes that Cuomo and friends have in mind for that $100 million dollar fine. Citigroup (symbol C) is a publicly traded company the MAJORITY of which is owned by INSTITUTIONS. 60% of the shares are institutionally owned! What that means is that while guys like Cuomo are championed as heroes for the common man – they are essentially robbing the common man who indirectly own stock in Citi through their retirement plan’s mutual funds and pension funds.
Take a look at Citigroup’s stock; it’s down about 6% today as a result. I am writing this because I am tired of seeing this repeatedly reported as something done out of the benignity of ambitious politicians. Cuomo is also suing UBS, another globally owned public company. The same thing was done to the tobacco companies, largely institutionally owned. And now they want to rob the common man through a “windfall profits tax” on companies like ExxonMobil, 53% of which is owned by institutions and Exxon’s only “crime” was to make an 8% profit margin.
I am all for giving back the spread between discount at which they sold the Auction Rate Securities and par as many were told they would get out at par - but reporters need to look a little deeper because things are not always as they seem. Hold ambitious politicians like Cuomo and his disgraced colleague Elliot Spitzer accountable.
Do what is right for both the ARS investors AND the little guy who doesn’t KNOW that he owns Citigroup and UBS. If any fines are levied, the money should be divided among the pension plans which have no culpability in these matters and pay them a one time “dividend”.
Contact: mrarbitrage@tableofwisdom.com
August 4, 2008
Dow 20,000 & Trillion Dollar Market Caps
by MrArbitrage
Raw material prices are up, producer prices are up, retail prices are up and wages will go up. There will be some downward pressure on wages as most of the employed are too fearful of losing their jobs to demand higher salaries. However, unless the USA ceases to exist, wages will eventually go up.
Wages have already started to go up among the elite entertainers, a profession that has historically been recession proof. When you read seemingly ridiculous news stories about people like Hannah Montana or the “Olson Twins” being BILLIONAIRES, it isn't because they have crossed some unprecedented threshold; it's because of inflation. Stories like theirs and those of athletes making record salaries or Rush Limbaugh's $400 million contract a few weeks ago are often misinterpreted. Not to take away from their success but it isn't that these people are outdoing mega-stars from the 1970’s, 80's and 90's. These are the portents of inflation. In real dollars these highly successful entertainers are keeping pace.
The average income will follow when the economy turns around. Congress has already helped to push along the wage inflation by raising the minimum wage. This move may actually accelerate unemployment in the short term but will buttress inflation in wages in the long run. Very few people earn minimum wage but it is a new “water mark” against which skilled workers and white collar employees gauge their earnings. For their expertise, they demand a spread between their wage and the minimum wage – so when the minimum goes up – their wages go up.
We will first see higher unemployment before things begin to stabilize but the new stock market highs will either come just before the rise in wages in anticipation of higher wages and a better employment picture – or- right after that time as investors see corporate earnings go higher as a result of the better employment picture.
The duration of unemployment will depend on the result of the November elections. If we have an administration that punishes corporations, raises taxes and keeps oil high by undermining supply; we will likely see a long period of unemployment and economic attrition. If we have an administration that allows the cycle to run it’s course by cutting taxes, cuts wasteful spending and increases oil supply, this period will be much shorter (recession at worst).
One of the last pieces of the inflation cycle will be the inevitable rise in market caps. This may seem like a strange time to claim that the market is going to be hitting all time highs but it will. Doom & gloomers like to verbally assault the market in times like this but the market has always been the best investment of any asset class over the long term and the #1 hedge against inflation. Most people don’t want to embrace that fact and that is why most people cannot build wealth. The best time to own equities is usually counter-intuitive.
The caveat is that in order for this whole scenario to work, SOMEONE will have to hold the bag for everyone else to deal in the new larger numbers. The people who will pick up the tab will be those who hold debt, because of course, the debt is not inflation adjusted. This will help those who are in the debt as they are earning larger dollars (that have the same old purchasing power) yet are still paying the older, more diminutive balances. This "benefit" also applies to the US Government as they receive larger amounts of tax revenue resulting from higher consumer prices, wages and capital gains, while they pay down the national debt that remained the same.
In the short term the inverse volatility will remain between oil and the stock market until the oil bubble bursts. However, the longer term trend will be higher stock prices when oil finds equilibrium around $50-$70 per barrel.
We will adjust our perception of prices, wages, securities and stock valuations as we get used to TRILLION dollar market caps and as the 99 cent stores change their signs to “$1.99 - Adjusted for Inflation” stores. In the end, after a time of fear and suffering for some, everything will feel the same for most of us.
The moral of the story is: Don't get punked. Own equities, own some assets like gold but don't own debt, at least not YET.
Contact: MrArbitrage@TableOfWisdom.com
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