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Philip Davis
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  • Threatening Thursday – Grantham Goes Marxist!

    "Capitalism threatens our existence."

    That's the message today from legendary investor Jeremy Grantham, who's GMO Capital manages $97Bn and, like Buffett, writes an annual letter to his investors. Part one of the letter has some great general investing advice but part two gets very interesting as Grantham titles it "Your Grandchildren Have No Value (And Other Deficiencies of Capitalism)" exposing what he considers the "two or three main flaws" of Capitalism that are "potentially fatal and have gone largely unaddressed."

    A sustainable economic system, for instance, can't be based on ever-increasing debt, corporations can't be allowed to run governments and loot treasuries, and "growth at any cost" is a recipe for planetary suicide.

    Grantham points out that a company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners. So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress. And the issues they most influence are precisely the ones that matter most, the ones that are most important to society's long-term wellbeing, indeed its very existence.

    Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising. And one of the first victims in this campaign has been the truth. If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation. It's now getting to be an old and obvious story, but because their propaganda is good and despite the solidness of the data, half of the people believe the problem is a government run wild, mad to control everything.

    Here are some of Grantham's finer points:

    • Capitalism too heavily discounts the future value of cash flows as it seeks to raise debts: "Your grandchildren have no value."
    • "For example, let us say that a firm's current actions are going to cost society at large a billion dollars' worth of harm in 50 years. Further, let us agree that all of the costs will definitely be imposed on the company. The company would feel that pain today as equivalent to only a mere $1 million hit to earnings. Why should they care?"
    • Companies foolishly reward executives for taking on debt: "Total remuneration … for

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    Mar 01 9:20 AM | Link | 12 Comments
  • Wednesday – Will Another $712Bn Buy Us Another Day At 13,000?


    That's how much the ECB dished out to 800 lenders this morning - close to $1Bn per bank of cheap, 3-year loans in the hopes that they, in turn, will turn around and lend them out to people and businesses throughout the EU at less-than-cheap rates so the EU banks can make a nice profit and back-fill the gaping holes in their balance sheets that have been devastated by defaults and currently are being ignored by the mutually assured distraction that allows everyone's assets to be marked to fantasy.

    As we saw yesterday, US foreclosures in Q4 were jumping at a rate of 100,000 per month - and that was before the settlement. There is a backlog of 4M homes in foreclosure in the US and Case-Shiller's Home Price Index have hit record lows on the 20-city Composite Index. So it's not just the $400Bn worth of losses on homes in foreclosure (4% of all homes) that have not been taken by the banks but the impuned damage of another $10Tn of asset devaluation on the other 96M homes that is being ignored by US banks.

    Europe has more people and more homes and more unemployment than the US. While there is no convenient Case-Shiller report in the EU, we can reasonably expect that EU banks are at least as screwed as US banks and we're not even discussing their Trillions of questionably-valued bond holdings

    So, when you watch the markets today and wonder how it's possible that a $712Bn injection of capital widely distributed throughout the European Banking System (exact details a guarded secret, of course) doesn't do anything to boost the markets - that's why.

    I read the news today oh boy

    Four thousand holes in Blackburn, Lancashire

    And though the holes were rather small

    They had to count them all

    Now they know how many holes it takes to fill the Albert Hall.

    Until we do an actual reconciliation of all the holes in all the banks around the World, we'll never have…
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    Feb 29 9:18 AM | Link | Comment!
  • Tempting Tuesday – Dow 13,000 Or Bust!

    I want to be bullish.

    Really I do. Being bullish is much more fun than being bearish. According to Bloomerg: In the midst of the Great Depression, people who bet on stock-market declines were considered unpleasant, unwanted, un-American, un-something. Yet as a New York Times writer noted in February 1932, "The bearish speculator is not often reviled in healthy markets; it is when prices are declining that opprobrium is heaped upon him."

    That's not what's happening now. It has become so out of vogue to be bearish now that many fund managers I talk to are insulted that I should question their bullish positions. Being bullish has become the new religion whose Gods are Ben Bernanke, China, the BOJ and the ECB - beings of supreme power who can move the markets with a word and will never, ever let them go down again - all you have to do is BELIEVE!

    There are still some heretics out there as put contracts against Europe are at their highest level since the July/August collapse. The iShares MSCI EAFE Index Fund (NYSEARCA:EFA) is matching its highest levels in the last six months, but a huge put spread dominated its option activity Friday. Options to protect against a 10% drop in the EFA cost 71% more than contracts betting on a 10% gain, according to data compiled by Bloomberg. Put volume jumped to a record on Feb. 24. The ETF has gained 16% since global equities bottomed last year on Oct. 4th.

    The May $52/43 bear put spread is the hot trade on EFA (over 100,000 contracts at net $1.14) at the moment although EFA hasn't been at $43 since April 2009. It's an $11M bet that Europe is going down but maybe it's just a hedge on $100M worth of bullish positions - it's hard to tell with these things…

    There's still plenty of bad news out there, most notably today that the S&P finally realized Greece has defaulted on it's debt by forcing bondholders to accept 53% less than they were owed (I know - SHOCKING!). What's actually shocking is the reaction this caused by the ECB, who have now "temporarily," but immediately "suspended the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations."

    So now…
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    Feb 28 8:30 AM | Link | Comment!
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