Pedge Fund Performance 200910

Historical performance since October 2008 are available here.

Summary:
Pedge Fund USD
October performance: +13,02% (gross, approx)
Year to Date performance: +34,37% (gross, approx)

US GDP growth or how to pull out a rabbit from the hat

As I said just a few days ago regarding the probable US GDP growth in Q3 2009:

[...] it just means that the US administration managed to pull out a rabbit from the hat and that wouldn't surprise me but I wouldn't believe a second the numbers neither.

[Update: apparently, the consensus is 3.0% of annualized GDP growth of Q3. What sound like ridiculously irrealistic might actually happen in Obama's and Bernanke's Crookery Wonderland.]

Of course, this was nothing but a relief rally, that would have happened whatever the GDP figures were and was kind of expected after 4 days of pretty decent correction. The news was so good that the USD collapsed that day as well after 3 days of pretty good raise:


Also, I won't spend time analysing the report, since there are trusted sources who have done a very good job at that already:

• MacroMan: Treat....or Trick?
• Mish: Market Cheers over ugly GDP report

Real Estate prices in France - pt2

The deflation of worldwide real estate bubble has still a long to go and prices will keep on falling for several years, even in France — despite any logic some would say! Prices cannot go down in France, and especially in Paris, the capital of the world, if not of the universe!

Of course, summer time is normally the time when people buy new houses and hence the seasonality of the real estate market is probably masking a deeper more profound issue at this point.

The charts speak for themselves.

Previous releated posts:

• Real Estate prices in France
• In France, when real estate prices go down, they stop publishing price indices

Great Depressions bear rallies vs current Greater Depression bear rally

The greater the crash, the greater the fear, and the greater the rebound, rationalization and hence bear market rally.

Hussman has published several of these already (check below for related posts) and today's chart of the day is yet another example:

Related posts:

• What kind of recovery is the market pricing pt2
• Dead cat bounce
• What kind of recovery is the market pricing pt1

You can subscribe to the chart of the day for free by following the previous link.

Voice of Wisdom: Jeremy Grantham - pt3

Precisely 3 months ago, I made the second post about Jeremy Grantham and I think we'll make it a quarterly post, after each of this quarterly investment outlook letter.

Note: Jeremy Grantham is one of the very few Keynesians who can still think straight in many areas (along with Roubini and Stiglitz when it comes to spotting the problems). He even is against bailouts and stimulus packages to the extent where one might ask : why is Keynes his hero?

Here are some more words of wisdom from his Q3 newsletter:

Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just refl ected the unusual
strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque fi nancial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefi ts to society, he was reappointed!

Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless fi nancial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks.
[...]
The more misguided or reckless the borrowers, the more determined the efforts to help them out, it appears, although it must be admitted these efforts had limited effect. In comparison, those who showed restraint and either under housed themselves or rented received not even a hint of help. Quite the reverse: the money the more prudent potential buyers held back from housing received an artificially low rate. In effect, the prudent are subsidizing the very same banks that insisted on dancing off the cliff [...]
we have decided to encourage even more home building by giving new house buyers $8,000 each. This cash comes partly from the pockets of prudent renters once again.
[...]
To celebrate the overwhelming consensus among economists that U.S. individuals have been dangerously overconsuming for the last 15 years, we have decided to encourage consumption and penalize savers.
[...]
Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860.
[...]
I believe we are well on the way to my “emerging emergingbubble” described 18 months ago (1Q 2008 Quarterly Letter). I would recommend to institutional investors, including my colleagues, to give emerging equities the benefi t of value doubts when you can.
[...]
I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well informed
guess, I hope) that before next year is out, the market will drop painfully from current levels. “Painfully” is arbitrarily deemed by me to start at -15%. My guess,
though, is that the U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19).

And much much more. Please have a read at the full letter, it's definitely worth it.

Bill Gross had been a megaloniac ever since his thirties

I've discovered in his latest "Investment Outlook" newletter, that Bill Gross had been a megaloniac ever since his thirties:

In my thirties, I recall standing in front of a mirror in my physical prime and instructing my image that I would never grow old, that I somehow would live forever, that I, the me, the ego, would be eternal. Now when I face the glass my eyes avoid the unmistakable conclusion: I am everyman – everyone that ever was and ever will be.

But nevertheless, he is very clever and manages to draw some fairly acceptable conclusions :

• [...] in a New Normal economy almost all assets appear to be overvalued on a long-term basis.
• Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

Bank Charge Offs Surpasses those during the Great Depression

ZeroHedge published research information from Moody's about the rate of charge offs by US banks:

Moody's has released an analysis which shows that the most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

Isn't that logical, since we are in the Greater Depression?
Click on images for bigger picture

The Reverse Brain Drain

I found a few articles about the reverse brain drain from the US back to India and China. They seem to have been going around for the past 3-4 years, but I am not doubting that the trend has picked up quite substancially in the past 18 months. The same apply to the UK, where not only Indian and Chinese leave the sinking vessel, but also the French (big part of the highly-skilled working in the financial industry), the Spanish, Italian, etc.

Here are quotes from two articles, by Vivek Wadhwa. The first one is at TechCrunch and the second at NewAmericaMedia:

Large numbers of the Valley’s top young guns (and some older bulls, as well) are seeing opportunities in other countries and are returning home. It isn’t just the Indians. Ask any VC who does business in China, and they’ll tell you about the tens of thousands who have already returned to cities like Shanghai and Beijing. The VC’s are following the talent. And this is bringing a new vitality to R&D in China and India.

[...] the average age of the Indian returnees was 30 and the Chinese was 33. They were really well educated: 51% of the Chinese held masters degrees and 41% had PhDs. Among Indians, 66% held a masters and 12% had PhDs. These degrees were mostly in management, technology, and science. Clearly these returnees are in the U.S. population’s educational top tier—precisely the kind of people who can make the greatest contribution to an economy’s innovation and growth. And it isn’t just new immigrants who are returning home, we learned. Some 27% of the Indians and 34% of the Chinese had permanent resident status or were U.S. citizens. That’s right—it’s not just about green cards.

What propelled them to return home? Some 84% of the Chinese and 69% of the Indians cited professional opportunities.
[...]

About 10% of the Indians polled had held senior management jobs in the U.S. That number rose to 44% after they returned home. Among the Chinese, the number rose from 9% in the U.S. to 36% in China.
[...]
These were a self-selected group, people who had already left. But what about the future, the immigrants presently studying at U.S. institutions of higher learning? We surveyed 1,224 foreign students from dozens of nations who are currently studying at U.S. universities or who graduated in 2008. The majority told us that they didn’t think that the U.S. was the best place for their professional careers and they planned to return home. Only 6 percent of Indian, 10 percent of Chinese, and 15 percent of European students planned to settle in the U.S.
[...]
Based on the economic downturn, my prediction is that 100,000 skilled workers will return, both to India and to China, over the next five years or so. I call this a reverse brain drain.
[...]
The other part of it is, as the Citi banks and JP Morgan's and all these large companies start laying off employees in the United States, they are returning back home. The economy recovers. If these banks can hire the same people who were working for them over there, for a fifth of the price that they can in the United States, why would they hire them in the U.S.? What's going to happen is outsourcing is likely to gain tremendous momentum over the next couple of years, because a lot of skilled talent is now available there, much more cheaply there.

Will we have an "unexpected" GDP decline in the US as well?

The Philadelphia Fed state coincident index release for September is out, and it's ugly:

In the past month, the indexes increased in nine states (Idaho, Indiana, Louisiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 39, and remained unchanged in two (North Carolina and Nebraska) for a one-month diffusion index of -60. Over the past three months, the indexes increased in seven states (Indiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 41, and remained unchanged in two (Nebraska and South Carolina) for a three-month diffusion index of -68.

Here's what it looks like:
CalculatedRisk has a nice chart worth taking a look at.

Seems like the US is about to go the same path as the UK : an unexpected GDP decline in 3rd quarter. If not, it just means that the US administration managed to pull out a rabbit from the hat and that wouldn't surprise me but I wouldn't believe a second the numbers neither.

[Update: apparently, the consensus is 3.0% of annualized GDP growth of Q3. What sound like ridiculously irrealistic might actually happen in Obama's and Bernanke's Crookery Wonderland.]

"It’s going to go crashing down, in an ugly way.", says Roubini

Nouriel Roubini has been one of the Keynesian Fools to see the problem well in advance, and even if he has no solutions to the problem except the usual Keynesian stimulus and deficit spending, he is good nonetheless at spotting the problems. He thinks more regulation is required where the solution is just turning off the tap of limitless flowing dollars (End the Fed!).

Here are some excerpts from his the latest interview with Index Universe.com with which I do happen to agree:

In my view, rising commodity prices are not justified by the fundamentals.

There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets: commodities, equities, credit. We’re creating a bigger bubble than before.

It’s going to go crashing down, in an ugly way. That’s the basics of the argument.

[...]

I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.

[...] So there’s no inflation, and there’s not going to be for the time being. Yeah, it [Gold] can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

U.K. Economy Shrinks in Longest Slump

I hope you didn't think that debasing the GBP by 30% , bailing out all insolvent banks in order to try re-inflate the credit bubble and adding the burden of this multi-trillion wealth transfer from the people to the banks would save UK's bubble economy...

Even government agencies didn't manage to cook the books enough to create even a technical, job-less recovery as the other countries managed to do:

Oct. 23 (Bloomberg) -- U.K. gross domestic product unexpectedly dropped in the third quarter as enduring slumps in services, manufacturing and construction kept the economy mired in its longest recession on record. The pound tumbled.

Gross domestic product dropped 0.4 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a 0.2 percent increase, according to the median of 33 forecasts in a Bloomberg News survey. None forecast a contraction. The economy has now shrunk over six quarters, the most since records began in 1955.

It is time to remember Bob Farrell's 8th market rule: When all the experts and forecasts agree – something else is going to happen...

[Update:] Here's the result on the GBP - who said the markets were efficient in forecasting the economy?

(Click for bigger view)

Germany amends constitution to limit fiscal deficit to 0.35% of the GDP

This is absolutely unexpected but such a positive news for all the Germans (and also for all the €-barers). Germany has introduced back in September (how come I missed that?) an amendment to its constitution which limits the government deficit to 0.35% of GDP and forces the landers (equivalent to the states in the USA) to balance their budgets.

There's a post on the Public Financial Manangement Blog of the IMF (Audit the Fed, then End it, then do the same with the IMF and the World Bank!):

The new constitutional fiscal rule limits the structural deficit of the Federation at 0.35 percent of GDP and requires structurally balanced budgets for the regions (Lander). The annual maximum permissible net borrowing is calculated every year by adding this structural component the expected balance of financial transactions and a cyclical component based on the output gap used as hypothesis for the preparation of the budget. Structural deviations from the allowed limit at the execution stage will be recorded in a control account and will have to be compensated by reductions of the net borrowing in the following years. Exceptions are only allowed in two cases (natural catastrophes and extraordinary emergencies necessitating special financing needs) and debt accumulated under these exceptions will have to be redeemed through a binding amortization plan. The rule will be fully applicable after a transition period until 2015 for the federation and 2019 for the Lander.

My only complain is: why 2015 and 2019? The sooner the better! One thing is almost certain, with such a massive constrain and so much time ahead of them, I'm pretty sure the Federal State and the Landers will load up with debt before the deadline...

David Einhorn on why to hold onto gold

As usual, David Einhorn public speeches are quite rare and quite worth listening to. The good news is that the transcript of the latest speech from David Einhorn at the Value Investing Conference has been published (read here in PDF format).

[...] Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.
[...]
For years, the discussion has been that our deficit spending will pass the costs onto “our grandchildren.” I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency. The recent economic crisis and our response has brought forward the eventual reconciliation into a window that is near enough that it makes sense for investors to buy some insurance to protect themselves from a possible systemic event. To slightly modify Alexis de Tocqueville: Events can move from the impossible to the inevitable without ever stopping at the probable.

The Brewing Lehman-Barclays Scandal

ZeroHedge posts a very interesting report and shows potential fraud and collusion amouting to more than $5 billion disappearing from the pockets of the Lehman Brothers Holdings in favor of Barclays. In a second part, they point that the Fed accepted, among other very risky (some worthless) securities, 5,136 shares of bankrupt retailer Shaper Image as collateral (Audit the Fed then End it!).

Here are some relevant quotes:

[...]
It is becoming increasingly likely that Barclays will have to pay a cool $5 billion (at least) in additional consideration to the Lehman estate, after the Official Committee of Unsecured Creditors came out yesterday with a hefty joinder piece to the debtor's motion that Barclays materially misrepresented and, in essence, stole $5 billion or more from under the noses of both Lehman Brothers Holdings and its Creditors
[...]
Unbeknownst to the Court or the Committee, early in the negotiations, Barclays and the Lehman Sellers agreed to give Barclays a $5 billion discount from the transferred assets' book value. Indeed, evidence suggests the $70 billion figure contained in the Asset Purchase Agreement ("APA") was not the value on the Lehman Sellers' books at all. Instead, it was a "negotiated" number with an embedded $5 billion discount. This discount was not disclosed in any of the transaction documents given to the Court.
[...]
he Fed Repurchase Agreement contained an approximately $4.4 to $5 billion cushion or haircut in valuing the assets in relation to the liabilities. Barclays agreed to provide $45.0 billion in funding, which LBI would secure with assets worth at least $50 billion. After executing and filing the APA, the parties ultimately decided to transform the Barclays-LBI Repurchase Agreement into an asset sale, with Barclays keeping all of the collateral pledged under the Fed Repurchase Agreement (the "Fed Portfolio") — which contained not less than $5 billion additional collateral beyond the $45.0 billion that Barclays was required to advance, i.e., the haircut.
[...]
The evidence also reveals that Lehman and Barclays intentionally overstated the Cure and Compensation Liabilities to foster the impression that Barclays was assuming greater liabilities. The APA Scheduled these amounts at $2.25 billion and $2.0 billion respectively. In reality, the estimates of the liabilities were only approximately $1.3-$1.7 billion.
[...]
The Lehman Sellers' teams negotiating on behalf of the estates were steeped in personal conflicts of interest. Several of the negotiators for the Lehman Sellers either negotiated their employment agreements in the midst of the Sale Transaction negotiations or at least knew that they would be transferred to Barclays.
[...]
The transfer of these eight individuals to Barclays apparently became a condition of the Sale Transaction closing -- a fact disclosed during the Sale Hearing. McDade also worked for Barclays after the sale transaction. However, the significant bonuses paid to these employees after the Sale Transaction closed was not disclosed to the Court. As Alex Kirk explained, "[s]everal of my colleagues. . . who had signed employment agreements were resigning from [Barclays] and receiving large payouts upon their leaving the firm."

Black Monday

Just a quick post about the Black Monday 1987, because Monday is going to be the 19th of October 2009, so it's the 22nd anniversary of the crash.

In finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%).

By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover. (Wikipedia)

Where Wikipedia gets it wrong:

A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event. Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.

It was actually not a black swan event at all, since Marc Faber successfully and accurately predicted it several months before it actually occurred.

Now I am wondering if it is possible that we assist to the same kind of event since we have reached such an extreme level of overvaluation and so much complacency in the markets...

Where does CitiGroup profit come from?

While all the bank are now marking their books to their fantasies and most of the announced profits are just going to vanish in the coming months/years (Zombie banks...), CitiGroup is taking it a step further as points out this post on ZeroHedge:

Yet what caught our attention is the FV action at the big 4 banks: Citi, BofA, Wells and JPM. What is most notable is that while the three firms ex Citi have taken a decent haircut to their Book-to-FV margin, Citi is now down to a mere 0.2% difference between loan Carrying Value at Q2 ($602.6 billion) and loan Fair Value ($601.3 billion). What is more notable is that on average the margin has increased over the past 2 quarters: while the average FV-to-Book spread was 3.2% at year end 2008 for the non-Citi banks, it grew by 1.5% to 4.7% at Q2 (non weighted). And in this environment where banks have been getting more cautious and applying an increasing discount to their loan book values, Citi has collapsed the differential from 2.8% to 0.2%!

Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision.

If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount. [...]

And as usual the SEC is completely out of yet another regulatory picture. What is very frightening if Ritter is the correct one of all bank execs: if a 25% discount to the combined carrying loan value at just the Big 4 banks is truly appropriate, it would mean that the nearly $3 trillion in loans on the "asset" side of the big banks deserves a whopping $734 billion haircut!

Why no other country has defaulted yet

I was trying to figure out why we still hadn't any country collapse or currency crisis with the massive debt deflation and defaults of all the over-leveraged individuals, companies, economies, states. I then thought the IMF must have been intervening, to postpone the collapses (it cannot prevent it, as their intervention just allows the same wealth and value destructive policies to be pursued even longer than they would have). For example, following the collapse of Iceland, one would have expected many easter countries to follow.

Unfortunately, finding the information is not simple. I spent quite some time on the IMF.org web site and on Google without being able to find a simple yet exhaustive list of the IMF bailouts since 2007.

Nonetheless, Reuters has published an interesting article back in March 2009 that I have completed with my own research. I am discarding loans that are in the $10 million range otherwise I would have had to list all the small islands of the world and the African countries.

Here are the results:
BELARUS $3.52b financial rescue package for Belarus on Jan. 12, 2009 - GDP: $60 billion
BOSNIA $1.57b (600 percent of the country’s quota) - GDP: $18 billion
COLOMBIA $10.5b - GDP: $240 billion
EL SALVADOR $0.8b loan - GDP: $22 billion
HAITI $1.2b (debt relief, with World Bank) - GDP: $7 billion
HUNGARY $28.1b economic rescue package (The arrangement entails exceptional access to IMF resources, amounting to 1,015% of Hungary's quota.) - GDP: $156 billion
ICELAND $2.1b loan for Iceland (The IMF deal was complemented by more than $3 billion in loans from Nordic countries, Russia and Poland as well as close to $5 billion or more by Britain, the Netherlands and Germany, making the whole package worth about $10b) - GDP: $16 billion
LATVIA $9.43b IMF-led rescue loan in 2008. The 7.5 billion euro package included financing from the EU, Nordic countries, the Czech Republic, Poland, fellow Baltic state Estonia and the World Bank. The IMF share was 1.68 billion euro. - GDP: $34 billion
MALAWI $0.077b - GDP: $4 billion
MEXICO $47b - GDP: $1100 billion
PAKISTAN $11.3b - GDP: $165 billion
POLAND $20.58b (1,000% of quota) - GDP: $527 billion
ROMANIA $9.665b (sept 2009) + $17.1 billion (TBC) (1,111% of Romania’s quota) - GDP: $200 billion
SERBIA $4b (560% of quota or close to 10% of its GDP.) - GDP: $50 billion
SEYCHELLES $0.026b rescue package - GDP: $0.82 billion
SRI LANKA $1.9b - GDP: $39 billion
TURKEY Markets expected a deal around $25 billion - GDP: $730 billion
UKRAINE $16.5b loan package - GDP: $180 billion

World's most expensive public transport to get a lot more expensive

While the UK is having the worst economic crisis for at least a century, after the biggest credit binge in history and the British Sterling Pound worth now less than a Potato Pound at any supermarket, prices are still going up.

I have reported many times that this is the worst possible scenario. High unemployment, sinking currency, and Keynesian Fools trying to lift of the prices as if it would make things any better.

While some say that Britain is the worst place to live in Europe, London having the world's most expensive public transport already back in 2007 has gotten a lot more expensive in 2008 and 2009 and is ready to get yet another hike price, and not a tiny one:

Oct. 15 (Bloomberg) -- London Underground’s fares will rise by an average of 3.9 percent in January, while the cost of riding the city’s buses will increase by 12.7 percent, Mayor Boris Johnson said. A seven-day bus pass will rise to 16.60 pounds from 13.80 pounds.

The city’s traffic-congestion charge also will be increased next year, to 9 pounds from 8 pounds, the mayor said. London will introduce a new automated system for collecting the congestion charge. The fee will increase to 10 pounds for drivers who don’t use the new payment method, Johnson said.

Revenue on the city-owned London Underground is falling as passenger traffic declines because of higher unemployment and the economic slowdown. The railway carries around 3 million passengers each weekday.

[...]

London Underground’s cash fares are already among the world’s highest. A single ride in central London is 4 pounds ($6.44), compared with New York City’s $2.25. The cheapest single fares with a pre-paid Oyster card in central London range from 1.60 pounds to 2.20 pounds.[...]

Fares rose by 6 percent on average this year. [...]

33 TARP Recipients Miss Dividend Payments

CalculatedRisk quotes a Reuters blog post about the financial institutions which did take TARP money but now failed on the dividend payment that came with it:

Thirty-three TARP recipients missed a scheduled dividend payment to taxpayers last month, according to the Treasury Department, including 18 banks that missed a payment for the first time.
...
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.

Obama gets Nobel Peace Price 2009

As unbelievable as it may sound, Barack 'change-you-can-still-believe-in' Obama won the Nobel Peace Price.

Why? Maybe because he sent more troops to Iraq? more troops to Afghanistan? Wants to legalize Guantanamo? And I'm not even getting started with the culture of corruption and wealth transfer from the people to the corporatocracy he's following in Washington.

My conclusion is that the Nobel committee is either corrupt or incompetent or both.

FHA bailout on the way

After Fannie Mae, Freddie Mac and to some extent Ginnie Mae, it is now the FHA's turn to get a government bailout. Please consider:

Oct. 8 (Bloomberg) -- The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because it has $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.
[My comment: when could wonder why private lenders and insurers have pulled back. Probably because mortgage rates at artificially low level do not reflect the current risk they would be willing to take to lend?]

Representative Maxine Waters, a California Democrat, said at the hearing it is a “myth” the FHA is the “next subprime.” West Virginia Republican Shelley Moore Capito touted the agency’s role in serving first-time buyers as it backs a third of loans for home purchases. She also said more consideration should be given to anti-fraud efforts and whether some consumers should pay more.
[My comment: Yes, right. Let's see what happens in the next few months...]

Falling prices will push the FHA’s single-family fund’s reserves below a 2 percent cushion above projected losses required by Congress, Stevens said last month. The shortfall will be cured in two to three years, he said today.

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method means its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business.
[My comment: this is such a ridiculous statement that it removes all credibility from Stevens...]

Note that FHA is yet another example of unintended consequences and government interventions hazards.

Allowing people borrow a lot more than what they could in a normal market simply creates a financing bubble and is the source of rising home prices, that doesn't serve any buyer but only helps sellers. Thus defeating the very purpose of the FHA. This is exactly what happened with Fannie, Freddy, Ginnie and the housing bubble, in case anybody forgot that, now that the recession is over and the S&P back at in the thousands points.

Of course, when you only require to put in a 3% downpayment maximum (down to 0% if you include the $8,000 tax credit for home priced at less than about $260k-280k), you simply create a moral hazard since there's a huge incentive for borrowers to walk away as soon as they mortgage becomes 'underwater'.

From Wikipedia:

The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. The goals of this organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to stabilize the mortgage market.
[...]
Following the Subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became the source of much of the United States mortgage financing. The share of FHA mortgages went from 2 percent to over one-third of mortgages in the country. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses. Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion
[...]
A borrowers downpayment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity.
[...]

Even Keynesians call it "Irrational Exeburance"

There are a few Keynesian fools who saw the problems — even though they are suggesting the wrong cure. Among them, Roubini, Stiglitz and Soros. Not sure many others did.

Interestingly, the 3 of them are quoted in this Bloomberg report.

Oct. 6 (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said U.S. unemployment will keep rising and should be the focus for policy makers, and gains in the stock market show investors have been “irrationally exuberant” about a recovery.

“There’s a lot of risk going ahead of some big bumps,” he said yesterday in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.”

His comments echo New York University Professor Nouriel Roubini’s view that “markets have gone up too much, too soon, too fast,” and billionaire George Soros, who warned yesterday that America’s economic recovery will be “very slow.”
[...]
It’s “pretty clear that the situation will continue to get worse,” Stiglitz said
[...]
Roubini, who accurately predicted the financial crisis, warned in an Oct. 3 interview in Istanbul of “the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped.”

Ron Paul and Alan Grayson question whether "Bernanke is fit to serve" and ask Senate to postpone his confirmation

Oddly enough, this news has not been reported by any major channel or media yet. The Huffington Post has published a report.

The letter goes by:

Dear Chairman Dodd and members of the Banking Committee,

We are writing to ask you to postpone the confirmation of Ben Bernanke until the Federal Reserve releases documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf. Without such an understanding, it is impossible to know whether Chairman Bernanke is fit to serve another term [...]

Ron Paul and Alan Grayson

The 3-page letter is definitely worth reading (available from the Huffington Post link).

Related posts:
2009-08-25 Judge orders the Fed to disclose reports on emergency loans
2009-08-27 End the Fed
2009-09-16 Audit the Fed bill obtains 2/3 majority and is now guaranteed to pass
2009-09-26 C-SPAN has posted the HR 1207 hearing in its entirety

Earnings season begins with S&P PER at 140

For three months in a row now, the PER of the S&P 500 has been hovering about 140, levels never seen before in history.

And for three months in a row, unemployment has been rising, credit defaults as well, consumer credit has been contracting and deflation biting the debtors.

This evening Alcoa kick started the earnings season, and announced a profit ($77 million or $0.08 per share) where analysts were expecting a loss of $0.09 per share. And the profits are due to cost cutting (I haven't read the earnings report, but I'm guessing: accounting gimmicks).

Alcoa shares are up 8% in the after market, at $15.00. So even if those earnings were real, and sustained for 4 quarters, you would have an EPS of $0.32, which means that Alcoa would be valued 47 times its earnings...

Click for bigger view

Previous related posts.

Demise of the dollar or total incompetence?

The Independent published a report yesterday that spilled a lot of ink and e-ink about a secret meeting intending to end the dollar pricing of oil by middle eastern countries:

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

[...]

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

This report clearly shows that the reporter has no clue about what his talking about, and same goes for the Chinese banker.

As long as the USD is traded live against every other currency almost 24/7, and hence there is an exchange rate between any currency and the USD. So the fact that oil is currently priced in USD doesn't mean anything. It is priced at the same time in EUR, GBP, SGD and any other currency on the planet.

The current problem (which is a real problem) for the countries mentioned in the report is that they keep their USD in their account as 'reserve currency'. And by doing so, they hurt themselves (since its value declined so much in the past many years), hurt the US citizens (since they prevent the USD from falling a lot faster and hence allow the US Government to pursue their destructive policies) and more generally, then hurt the whole planet (think about how a strong USD helps the US to finance their wars, the US Empire, etc.).

It would be very simple for each country to solve their USD problem: they only need to start selling their USD (to buy gold and silver and other precious metals, no paper currency) and also hedge their income in USD by selling forward those USD or by buying futures contracts on the commodity exchanges.

So technically, they do not need to hold any dollars, any time. They can sell those dollars even before they hit their accounts. And no need to hold secret meetings to do that.

Mish also posted about this.

LSE buys MillenniumIT, moves to Linux/Solaris

This is yet another episode of the Microsoft (Accenture) fiasco on TradeElect, the system designed for the LSE.

The following IBSPublishing report also confirms that Accenture was a big part of the issue:

The question of whether London Stock Exchange (LSE) will replace its £40 million ($65 million) TradElect platform, supplied by Accenture, has finally been answered: yes, it will. This hardly comes as a surprise – the issue of the platform’s speed and efficiency as well as Accenture’s support has been a hot topic for the market in the last couple of months. [...] the stock exchange went down the route of purchasing a vendor and utilising its technology to replace TradElect, Infolect and other applications.

[My comment: Accenture's support? What about Accenture's design and implementation?]

Compared to the bill of $65 million for TradElect, MillenniumIT, a Sri Lankan developer, is a bargain at $30 million. LSE gains a 100 per cent shareholding in the company, an offshore development centre (located near Colombo) with 451 specialists (around 300 in the software division) and the technology, which boasts high productivity, flexibility, robustness and considerably lower costs than TradElect. LSE predicts annual cost savings of at least £10 million ($14.7 million) from 2011/12. ‘The new technology is a lot lighter, nimbler and easier to install,’ says David Lester, director of information and technology at LSE. It will also enable faster releases, he adds. The current wait is three to six months.

[My comment: Yes, sure. I wouldn't bet too much on that neither. I hope they succeed, but I will follow this story, as the outcome is not so clear to me. Also, my experience is that it's very difficult to work with non-collocated teams. So if you add the time difference, culture clash, take over issues to the distance, the outcome is less than clear.]

This acquisition represents a major shift in LSE’s strategy regarding its technology – from outsourcing as much as possible (over 95 per cent, says Lester) to bringing it all back in-house. ‘The world has changed a lot since TradElect’s design in 2003 [the system was deployed in 2007], and it continues to change. We need to invest in R&D and control our destiny in terms of software development,’ he explains. And with the stated aim of becoming one of the top three global exchanges by market capitalisation in the next few years (although Lester admits that at the moment LSE is far off) the pressure is ever-mounting.

[My comment: the world hasn't changed that much actually, but it's always good to be able to admit our own mistakes and turn the page to look for a solution.]

The new platform will be based on Linux and Solaris, while TradElect is based on Microsoft’s .Net technology. The choice of the latter, which has raised quite a few eyebrows in the market, is defended by Lester. He claims that LSE is coming off TradElect not because of the .Net technology itself (although its trading speed is 2.7 milliseconds compared to Linux-based Chi-X’s 0.4 milliseconds), but ‘for more control, less costs, and the ability to build and innovate’. Furthermore, he describes LSE’s experience with .Net as ‘very positive’. With LSE and its Italian subsidiary, Borsa Italiana, converting to Linux, Microsoft’s .Net offering is left with virtually no takers – the only remaining one being Johannesburg Stock Exchange (JSE). ‘JSE has been aware for some time that the LSE has been considering its trading technology options,’ says Leanne Parsons, JSE’s chief operating officer. The South African exchange ‘will be holding discussions’ with its UK counterpart regarding the latter’s technology replacement project. However, it is ‘a bit too early in the process’ to go into any detail, she adds.

A Norwegian exchange, Oslo Børs, which was supposed to start using TradElect in February 2010 (as a result of a service provider agreement signed by Oslo Børs and LSE in March 2009), will now also migrate to MillenniumIT’s offering.

[My comment: the message is clear and you barely need to read between the lines]

Related posts:
Quick follow-up on the LSE - Microsoft fiasco
LSE-Microsoft: what was ment to happen happened

What kind of recovery is the market pricing -or- just how much is the market overvalued? pt2

Just two months ago, I published a post quoting Hussman's interesting work about the recovery currently priced in the market's valuation. A couple of weeks ago, they published yet another impressive chart which is still worth to have a look at.

Well, this week, William Hester is publishing yet another set of very informative (and worrying) charts, some of which I am pasting below.

As you can see, not only has there been no recovery at all in any indicator (job losses are still happening at a scary rate, defaults on mortgages and loans as well, commercial real estate is collapsing, along with prime mortgages), but the market is pricing in the sharpest recovery in history, along with profit margins getting back to historical levels within a sluggish but positive GDP growth.

Pedge Fund Performance 200909

Historical performance since October 2008 are available here.

Summary:
Pedge Fund USD
September performance: +13,02% (gross, approx)
Year to Date performance: +18,89% (gross, approx)

Farewell Ken Lewis

Finally, Ken Lewis is let go. It's probably cleaner and easier for him to resign (or retire) now than wait for the prosecutions to finish or the collapse of the bank to happen.

His stupid acquisition of Merrill Lynch (shotgun wedding organized by Ben Bernanke and Hank Paulson) is the reason of his leaving. But let's not forget that he also acquired one of the most corrupt companies in the US, and one of those making the biggest losses: Countrywide Financial.

His epitaph at BofA should probably be what he said on the 15th of September 2008:

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

Here's a quote from the Bloomberg report:

Lewis, 62, said yesterday he will resign as chief executive officer at the end of the year, leaving his successor to capitalize on, or salvage, the acquisitions that led to his downfall. The bank didn’t name a replacement.

The CEO has become a distraction, pilloried by regulators and lawmakers since he engineered the $29 billion takeover of Merrill Lynch & Co. in January and bought subprime home lender Countrywide Financial Corp. in 2008, said CreditSights Inc. analyst David Hendler.

You can also read my previous posts about Ken Lewis.