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I am a molecular biologist that has worked in the biotechnology and pharmaceutical industry for over 10 years. While considering buying a home in the year 2004, I started to get the feeling that something was very wrong. Since then I have studied economics and all things financial to educate... More
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Economic Disconnect
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  • The Gordon Gartrelle Replica Economy
    It is Thursday and I had no idea that I have Monday off from work for Martin Luther King Day! Good deal. I noticed today that the Sun was staying up higher in the sky for once as I drove home and not going lower. Spring is right around the corner!

    Reader Input
    Besides some very kind words from a commenter last night, I also received a request to offer my take on a question. I love questions and encourage all to ask anything in the comments and I will work on it the best I can.

    Loyal reader Watchtower asks:
    Do you think that in the future the government will negate the benefits of a tax deferred account by changing the tax rules (I'm talking about IRA's)?
    This question is actually multi faceted the more I thought about it.

    My first reaction is that the small amount able to go into an IRA ($5k/year) would not attract the attention of tax increases. Of course across the entire country across all the accounts this would add up, but allow me to offer another avenue that fits our governments stealth way of taking your money for their own use.

    If you have not seen this story from Jesse about 401k's and IRA's it is worth a look. My own take is a bit more sarcastic (of course!) so here goes:

    -Any type of tax changes to either 401k/IRA will get people upset and very interested in the issue, thus I do not see the tax status being changed at all. For some reason people fail to see almost everything right in front of them when it comes to finance but they do get bent out of shape about tax changes, especially from "none" to "some amount".

    What I envision in the near future instead is this kind of a letter you will get from your holding firm which will read something like this:
    Dear XXXXXXX,
    In accordance with the new regulations set forth by the Federal Reserve Act of Citizen Retirement Flexibility, 15% of your existing and future contributions will require settling in the Tax Deferred Retirement Protection Fund (TDRPF). This program has been established to offer long term protection for your retirement savings by providing automatic access to risk free financial instruments* at no cost to you. You do not have to do anything; no forms are required and no action is needed. The tax treatment of your investment has not changed. Thanks you for your attention.

    *-Denotes 2,7,10 year US Treasury Bonds, FHA/FRE/FNM bonds, and other instruments as needed.

    In this way the government would have access to plenty of cash to support debt sales and no tax increases would make the front page. As long as most people see "No tax changes" and more importantly "No action required" most will miss what junk 15% of their portfolio just got stuffed with.

    Just my 2 cents. Let me know what you think.

    The Gordon Gartrelle Replica Economy
    Now for this section to work you are going to have indulge for a minute!

    I was a big fan of "The Cosby Show" when I was younger. I was thinking about tonight's section for a while and I suddenly recalled a Cosby episode that summed up how I think about some things.

    The season one episode "A Shirt Story" is summed up on Wiki as such:
    Theo wants to impress a girl by wearing an expensive shirt by designer Gordon Gartrelle. Since Cliff and Clair will not pay for it, Denise offers to make a copy of the shirt for him. Guest appearance by Kadeem Hardison, who years later would portray Dwayne Wayne on the Cosby Show spinoff, A Different World.
    (NOTE: The real Gordon Gartrelle is a writer/producer for The Cosby Show.)
    That is the first part of the puzzle.

    The second comes from the end of the episode where Theo has to wear the horrible replica of the shirt in front of the girl he was trying to impress and instead of being horrified the girl loves the shirt (see 5:55 mark):
    video at:

    Faced with a ridiculous shirt, the peanut gallery simply says it's awesome and all is well.

    So what the heck does that episode have to do with anything? Great question.

    You may recall that last week same store retail sales came out and everyone was excited about the "proof" of a turnaround as the numbers looked pretty good. The real proof is in the final aggregate numbers though, and today the December retail sales number was -0.3% (that's NEGATIVE) instead of the +0.5 positive print expected. Another "unexpected" number.

    So what happened? Well it seems that in the spirit of the banks, who had never modelled serious home price depreciation as a possible event, it seems the old data points just are not applicable in a downturn like this one. The culprit here: same store sales were skewed by the huge number of store closings which boosted sales at the remaining stores, but there was no boost in aggregate purchases. Great take can be found here:
    Here's How The December Retail Data Turned Out To Be Such A Disaster

    To be even more frank, gasoline, due to higher prices, also made up most of any gains as can be seen on this EconomPic graph.

    Now of course the markets could not be bothered with such information, but that leads me to my point. I swear there is one!

    Just like the Gordon Gartrelle replica shirt was accepted by the character as "hot", data today is accepted as great no matter what with no care how it was made.

    We have seen this kind of over reaction to all kinds of data since the rally began and many times before then. Items include:
    -When mortgage brokers were closing doors by the hundreds, mortgage applications went up as people had to re-apply many places. The broken data point was cheered as a sign of housing recovery.
    -Initial Unemployment claims are trending down because really, who is left to fire? This is a far cry from job gains (excluding the census workers to come!) but this data point is heralded as the next bull market instigator.
    -Cash for Clunkers added car sales, who would have thought? As GM moved to ramp up production sales went right back to where they were. Another fake data point.

    There are many more.

    My point is that as long as some data point "beats expectations" or "is getting worse less quick" or "shows gains over last year" it is lauded. No attention is paid to the details. This is hardly a new game but the total reliance on funny numbers is a first.

    Data right now is a cheap knock off that was stitched together and passed off a genuine. At first I think this was done for the whole "confidence" thing we hear so much about. Now I believe that being allowed to get away with it has emboldened market participants (see the VIX lately?) to bank on gaming the system in perpetuity.

    Anytime players think they can place bets without losing something goes terribly wrong. One would think we would have learned something, anything, over the past 3 years but I guess that is a cheap knock off of an idea as well.

    For more on this try "Simulacra and Simulation".

    Have a good night.
    Jan 14 9:17 PM | Link | Comment!
  • Apologies Accepted in Advance
    Well it is Wednesday and I am over the hump for the first week back at work. Not as bad as I thought it was going to be! Maybe I like getting up early? Maybe it is playoff weekend?

    The Phantom Menace
    What is most difficult to consider right now is just how much is data being manipulated, if at all? Sometimes things take a while to became acknowledged. During the boom years of the housing bubble some writers (hello!) had issues with NAR reported stats but no one cared. Of course now the NAR is not even taken seriously, everybody always knew they were biased, right?

    So what to make of government data? Unfortunately government data moves markets yet never before has their been a time when the information will be second guessed as much as right now.

    Friday is going to be a litmus test for the bullish and bearish type. Today the ADP jobs number came in at -84k which was "in line" with expectations of -75k or something to that effect. This is unimportant because the markets are bubbling beneath the surface on the whisper that the Friday government BLS numbers are going to blow the roof off. Estimates vary from a slightly positive print (boring) to a jaw dropping positive print of over 300k! Now that would be a blockbuster. Zero Hedge has some numbers:
    A +316,000 NFP Print On Friday? The BLS Seasonal Fudge Factors Make It Very Likely

    The litmus test is:
    After a positive print, be it up slightly or up massively, you:
    -Feel better about things going forward in respect to job creation
    -Feel the numbers are so fabricated why not just print a positive 12 million jobs on Friday and get it over with already

    My take is that a positive print is not to be unexpected, but anything over 50k will not pass my laugh test unless proven by hard numbers, which never happen due to the birth/death model.

    You want more on data corruption? There is plenty to go around.

    Jesse had plotted the jobs numbers based on where they HAD TO BE rather than any line fitting stuff. It comes out really close to, um, reality?:
    December 2009 Non-Farm Payrolls Report Preview and Forecast
    Creepy, yes?

    Has the government bought 60-70 Billion a month on stock futures to pump a volume less market for the benefit of the circus audience? Quite possibly:
    Trim Tabs and the Plunge Protection Team via Tim Iacono
    I say yes.

    Apologies Accepted in Advance
    "Apology Accepted Captain Needa" - Darth Vader, The Empire Strikes Back

    I have written plenty of time about the serious dreaming going on amongst many major writers about the effect the FED MBS buying program has had on mortgage rates and mortgage availability. There are some that think the FED has only helped rates lower by about 35bps, which is absurd on its face. Even my favorite investor Bill Gross says "We Don't Know" how much rates were influenced. If the FED had such a small effect, then certainly the end of the program, slated for in or about March 2010, will be a non event in the annals of history. If that is the case, one may wonder why the talk has already started to renew the program as not to panic those long lines of investors just waiting to buy this stuff and not just sell it to the FED. Why indeed is a great question, but do not expect it to be asked this early in the game.

    My evidence, should it please the court:
    Zero Hedge offers:
    FOMC Minutes: More MBS Purchases Coming
    From the FED:
    The Committee emphasized that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate.

    It will deteriorate.

    Housing Wire offers:
    FOMC Eyes Extending Scope of MBS Purchases

    My favorite FED watcher, Calculated Risk, had a neat tidbit up tonight which brings to mind why I still like CR but feel he is out to lunch on some issues:
    New Research on Mortgage Modifications and Principal Reduction
    Story details that the only real way to keep a repeat foreclosure from happening is to lighten the load via a principle reduction and not just extend the term of the loan at a low rate for 100 years (kidding!).

    Of course nobody would expect banks to take these hits to their loan books, so the answer is right in front of you should you care to look. CR and Diana Olick miss the boat however:
    But the authors don't suggest who should pay for the reductions in principal. If this was a government program, it would be very expensive and unpopular.

    Diana Olick wrote today at CNBC: Are Principal Writedowns the Answer to Housing Crisis?
    "I would honestly rather see my home's value go down than see the guy next door ... who made a poor/negligent financial decision get a mulligan at my expense."

    I think that would be the overwhelming public reaction.

    Remember that game Connect Four? Allow me to put this into perspective:

    -Housing is seen as the number one item on the government agenda
    -FED MBS purchases will be extended
    -FNM/FRE caps removed even though they are no where near the old cap limit (yet!!)
    -Mortgage reduction is the only thing that works

    That's four. Did you connect them yet?

    I still could be wrong and would have to do a full blog post mea culpa if I am, but I am accepting apologies in advance right now for anyone that took the FED at their word about all this stuff.

    Added Bonus for tonight:
    Government intervention gone wild will know no end:
    GM: Hundreds of dealerships could be restored
    DETROIT (NYSE:AP) -- Hundreds of the 1,350 General Motors Co. dealers who lost their franchises last year could see them restored in a congressionally mandated arbitration process that begins later this month, the company's interim CEO said Wednesday...

    ...Whitacre said GM had a "pretty arbitrary cutoff point" for shedding dealers, and that it probably made mistakes in getting rid of some of them.

    When pressed, he said "hundreds of dealers" may be closer to 100 than a thousand, but it's a "substantial number."
    Now we know where all those jobs will come from!

    Have a good night.

    Disclosure: No Positions
    Jan 06 7:45 PM | Link | Comment!
  • Just Make All the Numbers Too Big
    Well today is all about Citigroup once again so I guess I will pick up on that line again. I have tomorrow off and only a two day week next week. Then it is January before I roll back into work. Nice!

    On a blogging note I will probably move to more festive posts because I do not like to be upset going into the holidays. Post fun ideas for content in the comments (no one has requested a Friday night song in 2 months!) and I should have time to put something together. If there is something financial you would like covered, by all means put that in as well.

    Just Make All the Numbers Too Big
    It seems today that the best way to mask problems or hide actions is to shroud everything with numbers that are just so huge no on can really grasp what they mean. I see this with the budget, deficits, cost expectation and so on. You want to fix the budget? How do you tackle a Trillion dollar mess? This works in reverse as well. You want to gripe about 100 million in the budget, that's too small to worry about. Amazing really.

    Tonight's post is inspired by the days MUST READ article written by Macro Man. After I read his piece this morning I could not think about anything else (financial, I had real work to do as well!) the rest of the day.

    Macro Man covers something that is right in front of all of us, but I can admit I never even saw the details. Here is the relevant sections, but the post has great graphs and great commentary so I would point you there before continuing on.
    Hidden Truths?
    As you can see below, the once-mighty C has seen its share price is down some 48% from the 2008 close, so it's badly underperformed the broad market. Or has it? [see link for graph]
    Sure, if you've been long since last year, you're rather out of pocket on your investment. But for the institution as a whole, it's been something of an annus mirabilis; thanks to its capital raising/share issuance, etc., C's market cap has nearly tripled this year. The company's now worth nearly $100 billion!
    Betcha didn't know that. Even more remarkable is fact that Wells Fargo's market cap is now at all time highs (at least at the close of the year.) Yes, this is the same institution that has both hands thrust deep in the stinking morass that is the California real estate market and that has employed every trick in the book to avoid fessing up.
    Readers are invited to judge for themselves what, if anything, this remarkable recovery in bank market caps means for 2010. It certainly suggests that something should be changing, and it doesn't take Sherlock Holmes to deduce where Macro Man's bias lies.....
    This is important.

    Macro Man's numbers work led me to do some work with numbers myself. All data is supplied by Yahoo Finance (under the key statistics label for stocks).

    Citigroup had 22.86 Billion shares outstanding. Does that mean anything? Is this important? Well, I don't know. I can put together some comparisons and make a guess though.

    Let's start with banks so we can compare apples to apples.

    A Citi sized bank is Bank of America (NYSE:BAC). What kind of shares are they floating?:

    BAC = 8.65 Billion shares

    Maybe they are an exception? How about Wells Fargo (NYSE:WFC)?

    WFC = 4.69 Billion shares

    Ok. What about some other players like Goldman Sachs (NYSE:GS)?

    GS = 514 Million shares. That's MILLION not Billion.

    Ok, so maybe Citi is just so big and amazing they have tons of shares out there. What about some big names?

    Microsoft (NASDAQ:MSFT) = 8.88 Billion shares
    Exxon Mobil (NYSE:XOM) = 4.75 Billion shares

    Every ones favorite Google (NASDAQ:GOOG) only has 317 Million shares out there.

    For the gold lovers high end estimates put all the gold ever mined at 10 Billion ounces.

    Again, is this important?

    The answer is it depends.

    On it's face this kind of crazy stock manipulation is insane. Think of it this way:
    -Today C is at $3.20 a share and has a market cap of around 75 Billion (depends how you count it I know; I am just using Yahoo closing quotes).
    -To return to the point at which Sovereign Wealth funds poured cash into Citi stock (back around say $30 a share) Citi market cap will have to be 750 Billion, or an entire TARP program!!
    -To return to the all time high of $55 a share Citi would sport a market cap of, are you sitting down, 1.29 Trillion!!

    In comparison:
    XOM market cap = 324 Billion
    MSFT market cap = 262 Billion
    BAC market cap = 128 Billion

    Now do not bother writing me and telling me about stock buy backs, warrant expiration's, etc. I get it. They still cannot account for these kinds of numbers. Besides, remember when companies (think 2007) were borrowing money to buy back stock? Good luck on that loan nowadays.

    And again, is this important? The answer is maybe.

    If anyone really wants their money back (or make money), then Citi is to be passed on no matter what. If however you want to play games and try and pretend all this works out, then by all means play C stock (50% of NYSE volume today!!) and ignore these numbers.

    This is a joke. Citi should be broken up and the best made of the outcome. Their future is a mathematical impossibility.

    This is just one on the run analysis. I think there are plenty of others out there like this one.

    I think I have identified the next bubble. The next bubble is wishful thinking. You already know how bubbles end.

    Have a good night.

    Disclosure: Long physical Gold
    Tags: C, BAC, XOM, WFC, MSFT
    Dec 17 8:44 PM | Link | Comment!
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