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Mark Bern, CFA

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  • Japan: It's the Supply Side, Stupid! [View article]
    I expect higher inflation, but not simply because of the growth in the money supply as so many have predicted. Inflation, after all, is only connected to money supply in the sense that more plentiful dollars are supposed to be chasing limited resources. But when supply exceeds demand, it means that the money is not doing any chasing. Rather, it is staying home or paying down debt. Velocity of money is relatively low, too, so money isn't procreating like it was during the times of higher and higher leverage. No, it's not the money supply that will bring on inflation directly. It's the indirect effect of loose fiscal policy combined with a sustained easing of the monetary policy that will drive down the value of the dollar. Lower dollar = higher cost for commodities such as oil, copper, iron ore, etc. A lower dollar will also translate into higher imports of finished goods.

    A lower dollar should help with increasing exports but that won't be enough to sustain a recovery for an economy that is 70% dependent upon consumers. A lower dollar also won't make continued investing in U.S. debt very profitable either. How long can we expect our foreign trading partners to buy Treasuries that will eventually go down in value while yielding extremely low rates? Once the $US hits bottom and begins to rise again, it will start to attract more foreign investment and increase demand for our currency, strengthening the dollar more.

    There are those who believe that a strong $US dollar is always in the best interests of the nation. They may be right. There are also those who believe that a weaker $US dollar will help us regain a competitive edge in manufacturing and bring jobs back to the US. They could be right. But I'm a pragmatist at heart. I think that what is best for the $US may be something a little different at different times depending upon conditions around the global economy. For those who are unable or unwilling to think or reconsider anything this concept will not go down well. And I know there are a lot of such folks on each side of the issue. So I realize that I'm bound to lose a lot of points for stating my mind.

    But consider for a moment, the natural ebbs and flows of the global economy. We rarely have a global recession that strikes nearly all countries at the same time. When we do, it is natural to expect a concerted effort similar to what we are now experiencing where fiscal stimulus spending rises dramatically. There may be two sides to the currency strength issues. One side is that a nation retaining a strong currency relative to other nations can take advantage of the situation by investing in assets of other nations at comparative bargain prices. But if their currency always maintains its strength relative to other currencies, the investments do not increase by virtue of changes in FX over time.

    Looking from the other side of the coin, if a nation's currency is weak during a similar global recession, it will appear to have attractively priced assets, thereby attracting foreign investment when it is needed most to resuscitate the economy. Now, if the weak currency policy was only temporarily applied during a weak economy, a rising currency value would make those investments pay off more over the long term. On the other hand, if the weak currency policy was maintained over a longer time period, the attractiveness of that countries assets is greatly diminished.

    Think of all the different scenarios in which a temporary change in monetary policy could be beneficial within differing global economic conditions and you will find many. However, the reverse is also true. A policy that makes sense in one situation may be detrimental in another. And holding onto a single policy through all circumstances may require a nation to accept deeper and longer recessions than would otherwise be necessary. It can also lead to bubbles that eventually burst. Sound familiar?

    The point is that having the right monetary policy in place for the global and domestic economic conditions is required to smooth out the business cycle and take greater advantage of whatever opportunities are out there. I don't think we have had that sort of thinking at the helm of our nation's monetary policy for quite some time. If we want to retain our advantages of controlling the world's reserve currency, we'd better get back to the basics and have a better plan that can sustain us for the longer term rather than focusing on the next quarter or two.
    Sep 20 10:28 PM | 2 Likes Like |Link to Comment
  • 10 Notes on Current Market Risks [View article]
    "9) The same is true for high yield. When does the rally end? Now? Typically near a market peak, there is confusion, and a diminution in volume. I think we are close to the end, but as I usually say, honor the momentum. If it is still going up, hold it."

    Perhaps I am overly cautious, but I like to sell into the rise, taking a portion of profits on good up days when I have met my target for a particular trade or when I sense that the market is losing steam. I prefer to sell on the way up as opposed to one the way down. I feel there is less risk in this approach. Waiting for the top, IMO, increases risk exposure. Maybe I am not greedy enough, but I sleep well.
    Sep 20 05:18 PM | 11 Likes Like |Link to Comment
  • The Dollar: A Strong Buy [View article]
    I wonder over what time period the author is expecting a rebound in the $US. The short-term (0 - 6 mos) trend appears to be down. In the longer term (2+ years) the expectation is for further pressure on the $US for the reasons stated early in the article accompanied by inflation and rising interest rates. From what I can deduce from the article, the author expects a rebound in the $US sometime in the intermediate time frame.

    I can't say for sure, one way or the other with any accuracy and I doubt that the author or anyone else without tens of billions of dollars available to invest could either. The author's argument is exactly that: an argument. It is one of several opinions based upon a portion of the data. But when all of the data is taken together, as the author points out in the third paragraph, it is hard to make a strong case for a sustained rise in the $US.
    Sep 20 05:04 PM | 12 Likes Like |Link to Comment
  • The Great Wall of Worry [View article]
    There are four things on the near horizon that make me cautious and skeptical of the sustainability of the market strength in the current environment. There are, of course, a whole slew of other concerns I have, but the following are those that I believe could most likely derail the recovery and the market over the next four to six months.

    First, geopolitical tension seems to be mounting. One of the major tipping points that made the Great Depression so devastating was a wave of isolationism and protectionism that swept the globe in the 1930s. We are seeing hints of that boiling beneath the surface in Asia, Europe and the U.S. Also, the timing of the UN deadline imposed upon Iran is coming next week. My concern here is what Israel's response will be. If they take unilateral actions (as they have said they would if the UN does nothing, which it will) and bomb Iran's nuclear facilities, we could witness a powder keg igniting in the Middle East, cutting off supplies of oil. A dramatic rise in oil prices could push the global ecnomy back into recession. It is far too fragile to withstand the added burden of significantly higher energy costs right now.

    2) Holiday retail sales, with unemployment continuing to rise and home values still in the tank, could very well disappoint this year. I mean, if fewer people are working, more people who did have full-time pay with benefits have been forced to work part-time, and without home equity to draw from, who really feels better this year than they did at this time last year (besides the executive at insurance companies and banks with their bonuses)? Some people will spend more this year because they have survived this far and their confidence has risen that they will survive for the longer term. But that is probably a relatively small number of consumers compared to those who are still concerned for their jobs and those who have less available to spend now that before. Remember, credit cards and lines of credit have been reduced significantly by banks over the past year.

    3) Commercial Real Estate values have plummeted along with residential real estate, albeit at a lagging pace. However, of those few remaining bastions that have retained most of their value throughout the crisis, even New York City is showing some cracks and values/rents are receding. If the holiday season is worse than expected, I think we can expect to see another round of store closing and more bankruptcies in the retail sector early in 2010. That won't help the CRE sector maintain rents and value, nor will it provide lenders with much incentive to refinance the $2.5 billion in loans due this year or the $3 billion coming due in 2010. Remember: consumers are demanding bargains like never before and those retailers that are planning of less inventory and less price cutting to lure customers may find too many lookers and too few buyers.

    4) FASB regulations are changing again. In January, a new accounting change takes effect that will require all bank assets to be reported on their balance sheets. Several of the big banks, especially Wells Fargo and Citi, have huge asset balances that are held off balance sheet and will be forced to consolidate them for reporting purposes. The reason banks hold assets off balance sheet is to get around capital reserve requirements. WFC, it has been reported, has more assets off balance sheet than on and will need to raise capital to remain in federal compliance. They will be forced to either sell more stock, diluting current shareholders, or sell off some prize assets, reducing their earnings power. Either way, earnings per share are very likely to take a big hit in 2010 and beyond from current estimates. Also, FASB is reconsidering its accounting change made last spring regarding the mark-to-market rules. They have a new version out for comment now and expect any changes to be incorporated and the ruling to take effect by as early as March 2010. They want more transparency! I can't blame them, either. So do I. But, if the accounting industry gets its way banks earnings will suffer once again and write-downs would be required similar to those taken in 2008. The banks were not finished writing down assets when they were let off the hook and many of those assets have continued to decline further in value. The CRE losses were not as staggering then as they are today.

    There is still far too much fragility in our economy for me to get irrationally exuberant. I have gone mostly to cash at this point and am more concerned with capital preservation that squeaking out a few more points of profits. I expect better opportunities with much lower risks to avail themselves once again in the next few months or years.
    Sep 18 03:49 PM | 12 Likes Like |Link to Comment
  • 'Buy American' Clause Both Helping and Hurting U.S. Companies [View article]
    Hopefully, in the end we won't cow-tow to trading partners like China which screamed bloody murder when the "Buy American" clause was first made public. Isn't it interesting that China requires all materials and labor for Chinese stimulus spending to be from Chinese companies? The EU isn't exactly an open market either, nor Japan. The rest of the world talks a good game, but very few countries have markets as open as the U.S.

    Now, I am all for global open trade. But I really do wish the playing field were more level.
    Sep 17 06:14 PM | Likes Like |Link to Comment
  • 'Recession Is Over': Positive Economic Data Abounds [View article]
    "Fed Chief Ben Bernanke said Tuesday that indeed the recession of the past year is over." Actually, Mr. Bernanke said that it was very possible (or probable - I don't recall which, but not definitely) that the recession could (he didn't say it was over with certainty) be over. He used several words that allowed him room to recant in the future should things worsen. He also said (in the previous sentence) that there appeared to a consensus by several economists (not all) that the recession was probably (not certainly) over.

    CautiousInvestor - Good list of the facts.

    I will admit that we may be on the verge of a government-aided recovery that could not sustain itself without additional government spending. I also admit that the government has every intention to continue spending and even increase its spending as the 2010 election draws nearer. What I won't admit is that our economy could sustain growth without further government intervention. When we do reach that point, I will happily agree that the recession is over. But, as long as the economy continues to be dependent upon government aid and cannot grow otherwise, I cannot buy into the concept that we are in recovery.

    For the moment, the recovery being over it is still just an opinion, not fact. I respect opinions and everyone's right to have one. I just don't happen to share the opinion proposed by the author at this time.
    Sep 17 05:26 PM | 1 Like Like |Link to Comment
  • 'Improved' Housing Starts May Impede Recovery [View article]
    There is probably nothing conclusive to be derived from small changes in housing starts. Housing starts do serve as an indication of growth in spending by construction firms, which does add something to the economy. However, the data points that really matter and can provide some insight as to the direction of the economy, and specifically the housing industry, are sales of new homes, sales of existing homes, inventory of new homes, and inventory of preexisting homes.

    Unfortunately, many "analysts" (and I use that phrase or title very loosely here) make claims based upon small changes in one or two measurements of those data. This is also a fallacy, since if sales of new homes rises while existing home sales fall there is no real benefit overall. If inventory falls but is not accompanied by an even larger rise in inventory, it may only mean that as listings expire the sellers have given up or that other potential sellers are holding their properties off of the market for a stronger market.

    Another problem I see is that too many pundits are ready to proclaim a recovery in housing after two or three months of rising sales figures occurring during the spring/summer months accompanied by government subsidies to drive sales higher. They also don't look at already depressed 2008 summer sales for comparison, which reduces the seasonality bias. If sales for the same month a year ago are higher than they are this year, then sales are still trending lower.

    People are trying to make statistical data say things that, if interpreted correctly, it would not indicate. People with agendas should be allowed to publish data interpretation, IMHO.

    BTW, I own close to 100 investment properties I need to sell and would like more than anything to see housing prices rise again. However, I am not blind to my desires.
    Sep 17 02:10 PM | 1 Like Like |Link to Comment
  • Capacity's Comeback Strongly Indicates Recession's End [View article]
    There are possibly to flaws I see to the author's argument (other than what has already to expressed in prior comments).

    1) Seasonality. Holiday orders are already in process. They may be less robust this year than in previous years, but they still account for a huge increase in production activity.

    2) Inventories are very low. Yes, just-in-time manufacturing (JIT) and supply chain management have help reduce the need to hold inventory over previous decades. But I was studying the impacts these improvements and how they had already brought inventories down significantly during the early 1990s. It isn't such a recent adoption as some would imply. Inventories are just being brought back up to normal levels.

    As we enter the holiday season, capacity utilization should increase just to bring inventories up to normal levels and preparations for the holidays should increase capacity further. Add to that the impact that the CARS program had on utilization and it becomes very obvious that this has absolutely nothing to do with end demand (i.e., recovery). This is just business as usual, only starting from a much lower level.

    It would be much more informative if the author were to show us a chart measuring the same data plotted and identified monthly. Then we could compare what has actually happened in the similar period of prior years. Then we could see how seasonality plays into the picture. It would also be helpful to see inventory levels charted over time on the same basis so we could see how low inventories are relative to "normal" and how capacity levels respond to extremely low levels of inventory, especially just in front of the holiday season.

    Think about the seasonal cycle for just a moment: retailers order in July-August, manufacturers begin building inventories August through October, Shipping to retailer distribution centers begins in earnest in late September/October, distribution to stores occurs in late October and early November, product displays are set up by mid-November, and the season starts full bore around Thanksgiving. Production doesn't tail off until the selling season has already started as retailers will need to replenish stocks, so we should see some more improvement over the next couple of months.

    It's not the recovery, it's just seasonality. I expect capacity to find lower levels than in June by January. I'm sorry if the truth hurts and i don't like any more than anyone else. I know the economy will recover eventually, but this just isn't the indicator the author makes it out to be, IMHO.
    Sep 17 10:08 AM | 5 Likes Like |Link to Comment
  • Rise in Impaired Assets at Australian Banks Slows in 3Q09 [View article]
    Australian banks are not as bad off as U.S. banks. Well, that's not surprising, really. Banks that stick to their knitting, more or less, are doing better than those that don't. Wouldn't it interesting to know just how bad off the U.S. banks really are? With accounting rules changes favoring bank asset mispricing here in the U.S. we really have no idea what should be written off compared to what actually is being written down.
    Sep 17 09:18 AM | 3 Likes Like |Link to Comment
  • Metal News [View instapost]
    I believe the cost of extraction varies from one mine to another based upon how difficult it is to extract (depth of ore, surrounding formations, etc.) But the cost have definitely risen from what I was aware of earlier in life. I guess things change.
    Sep 16 04:56 PM | 3 Likes Like |Link to Comment
  • Two Extremes, One Economy [View article]
    I would suggest we watch what happens to the domestic auto market post-CARS program to get a sense of how well the real estate market will fare when the stimulus wears out. Did we pull sales from the future into the present? Or did we ignite new sales and interest? I suspect the former to be the case but will hold judgment until we see actual data from auto sales in October sans Clunkers.

    The other end of the spectrum holds another story. Yes. there are plenty of applications for mortgages, but how many are being approved and funded? I thought that there were plenty of applications a month ago as well. If so, then why did we experience the dip in sales? Sure people want to buy homes now that prices have made them more affordable. But how many of those who want to buy have adequate credit scores to do so?

    Nearly 20% of the households that were experiencing the fruits of full employment are dealing with something less.
    They weren't all hamburger flippers. McDonalds is still open last I looked. How do we get to growth in demand with 20% fewer household in the mix? Also, how many household are struggling under piles of credit card debt? I doubt that they can get that mortgage in today's environment.

    Just saying...
    Sep 16 04:48 PM | 4 Likes Like |Link to Comment
  • ING Delivers a Big Alt-A Surprise [View article]
    Please don't even mention the fact that we are not part of the EU. Our Administration seems to want into that club so badly. I'd rather not give them ideas.

    I am not yet certain, but I suspect that the deals our Fed is putting together in buying up toxic assets is, in the end, far better than the deal ING got.
    Sep 16 02:40 AM | 3 Likes Like |Link to Comment
  • Wednesday Outlook: Commodities, Global Markets [View article]
    As usual, a very good overview of the global markets and sectors. The market does seem unstoppable, however, as you point out, these are the times when markets can be upended. I'm not making a prediction, either. I do think the market needs a catalyst of some consequence to change its direction at this point. After all, there really doesn't seem to be much of a connection to fundamentals any more. This seems to be a good time to be a technical trader. If you understand what HAL is most likely to do you just need to stay one step ahead of the program.

    Well, duh! I suppose that is your point for taking profits, isn't it? Thanks once again for the comprehensive summary of the day's action.
    Sep 15 11:22 PM | 11 Likes Like |Link to Comment
  • Jaguar Mining's Unexplored Territory [View article]
    Maya - You're getting my interest peeked on this one! I do need a little more of an inflation hedge in my portfolio and I wouldn't mined (I couldn't help it) one with some strong potential upside even if gold goes nowhere.

    On Sep 13 08:13 PM Mayascribe wrote:

    > A quick expansion to this article taken right from Jaguar's annual
    > reports is that they have expanded production from 70,000 ounces
    > of gold in 2007, to 115,000 ounces in 2008, and expects to be producing
    > 700,000 ounces in 2014. A ten fold increase in seven years.
    Sep 15 10:32 PM | 1 Like Like |Link to Comment
  • The Fed is likely to stay the course in its $1.45T program to buy mortgage-backed securities and GSE debt, despite resistance from some regional presidents. Heidi Moore thinks that's a terrible idea: "If you thought U.S. banks holding all those sketchy mortgages was a bad idea, wait until you see what happens when the center of our country's money supply is saddled with bad debt."  [View news story]
    Not only can the Fed print more money, but they can sell the assets at a loss and then use that money to buy more. If they started with a budget of $1.45 Trillion how much many assets could they run through the rinse cycle? Let's see, buy $1.45 Trillion worth and sell for, say $.50 on the dollar. Now they have another $725 Billion to spend. They sell that batch, again at $.50 on the dollar. Now they have another $362.5 Billion that they can use. Sell that batch at $.50 would give them another $181.25 Billion to spend. Sell that and buy another $90 Billion worth, then $45 Billion more, then $22.5 Billion more, then $11.25 Billion, and so on. If you add it all up they could run about $2.9 Trillion through their laundromat.

    Now, imagine for a minute, if you will, that you are Citi and you have maybe $1 Trillion worth of toxic assets you need to unload. How do you fix your balance sheet? Just call you good buddy, Ben, and you'll see just how smart the old codger is. Ben says, "Just sell me your toxic assets for par value and buy them back at $.50 on the dollar. Wow, says you as you suddenly realize that you just made $500 Billion dollars! And it appears to be all legal, too.

    When the original $1.45 Trillion is all gone the favored banks will all be healthy again. If not, then the Fed can just print more money and start all over again.

    Now, I realize that this is an over-simplification of what really happens. I don't have any idea if the Fed actually could do something like this. On the other hand, how do any of us know when all the Fed dealings and all their assets are hidden behind the one-way mirror? I want an audit of the Fed, but I'm not sure I really want to know what will be found.
    Sep 15 10:09 PM | 7 Likes Like |Link to Comment