just.a.guy

American Booksellers Association asks the Department of Justice to investigate this week's price war between Amazon.com (AMZN), Wal-Mart (WMT) and Target (TGT), claiming it constitutes illegal predatory pricing that is damaging to the book industry and harmful to consumers.

Next stop: American Booksellers Association pushes for "Anti-dog-eat-dog Rule"

This all sounds familiar...

A Consumer Reports survey notes a wave of "Buy American" sentiment among car shoppers, with 81% likely to consider domestic cars vs. 47% for Asian cars and 46% European. So why did Asia rake in the bulk of the clunker cash?

Defining whether a car is American or foreign is much more nuanced than simply looking at the flag flying over the corporate headquarters of its maker, due to the global nature of the supply chains in the industry, not to mention the global nature of the shareholders and bondholders in these enterprises.

There are Toyotas that by most reasonable definitions (% of parts content, % of labor content) are more American than some "American" cars.

The political / country flags over the HQ's these days really are more representative of the system of management / corporate culture than anything else as a result.

Instead of taking a more nuanced view, when most people say "buy American cars" what they REALLY mean is "buy a car assembled by a UAW worker in a legacy midwest plant with an American corporation's logo on the side" -- simplistic and wrong.

Four Reasons We're Headed Even Higher

When considering the government's "investments" in C, BAC, AIG, et al, you have to include the value of loan guarantees lower in the capital structure that are propping the whole edifice up.

What good is a few billion on the top of the captial structure in equity warrants and dividends when tens and tens of billions just might be leaking out the bottom?

Until the government has FULLY exited these financial positions, and it is made very clear that they won't intervene this way again, then none of the bailed-out financials' valuations (equity or debt) can really be trusted, because they have printing press value built into them.

It astonishes me how many commentators (including the author) miss this fundamental point.

Switzerland's largest private bank is making its inflation bets - Pictet & Cie., with $378B in total assets and $60B in fixed-income, is buying U.S. TIPS on dips: "It doesn’t matter if they stop the plan. The current policy will lead to inflation."

Said a spokeman for Pictet, "Because we believe policies of the US government will lead to inflation, we are buying securities which offer protection from the inevitable inflation, as defined by..."

"...ummmm..."

"...the US government."

With the S&P at 1,028, does a strategists' consensus year-end target of 1,022 mean they're bearish now? Or will they raise targets (especially Morgan Stanley, at 900) to keep up with the bulls?

If targets are raised, the rationales given should be curious if not downright hilarious. Something along the lines of "the year-end economic rebound, which we forecasted just a few months ago, will be even sharper than previously believed, even though initial signs of that rebound have yet to be seen and present economic indicators remain negative."

Credit Card Delinquency Wave Reaching Tidal Force

Another story to watch for as this unfolds will be a wave of fraud tied to credit cards (involving both lenders and borrowers).

The FBI last year received 65,000 cases of mortgage fraud, and was staffed with only 150 agents to deal with them. This is per an interview with William K. Black (here: www.ritholtz.com/blog/.../). And those cases are only against the 20% of mortgage originators above the waterline who were regulated. That was on the borrower side. On the lender side we had Countrywide et al.

We have seen the same thing in hedge funds with the collapse of Madoff, Stanford, and a few others.

Every credit bubble reveals massive fraud when it deflates, in a very predictable pattern (see: Kindleberger's classic book on the subject).

I doubt credit cards will be any different. Place your bets!

The new American dream: renting. Sociology professor Thomas Sugrue says it's time to accept that home ownership is not a realistic goal for many people, and to curtail the enormous government programs fueling this ambition.

The home mortgage interest deduction is a ridiculous piece of tax law that needs to be removed, given that it only distorts the market and artificially supports asset values (by changing the cash flows, which is how properties are fundamentally valued). The problem is that it will be virtually impossible to get rid of since it's popular among homeowners (who don't realize it doesn't provide them net benefit at all), and even if we COULD get rid of it it would be a one-time transfer of wealth from sellers of properties bought when the deduction was in place to buyers after its removal.

Monetizing the Debt: Open Market Operations and Statistics

> Honestly, this article was way over my head.
> Correct me if I'm wrong, but the bottom line is that the
> Treasury is selling bonds at auction week after week at an
> unprecedented rate, and the demand for this debt is weak,
> forcing the Fed or its proxies to buy it, in effect, allowing the
> Treasury to take in money being electronically created by the Fed.

This is correct. In case the other comments haven't made it clear, the transaction is akin to a proxy purchase like you mentioned. The implication of the article are that the mechanics go like this: The Fed, knowing that an auction of treasury securities is about to go badly, approaches a direct dealer and gives the wink and the nod of "hey, you buy this and hold onto it for a week or two, and I'll promise to repurchase it from you afterwards for the same price [or a fraction of a point higher]." The reason they'd do this is that a failed auction, or one in which the Fed directly purchased a lot of treasuries would set off many alarm bells.

It would be exactly like a single bidder bidding on a disturbingly high number of pieces of art at a Sotheby's auction. Perception would rightly be that the auction was failing, and that there wasn't really broad and deep demand, so maybe the asset prices weren't exactly accurate. Instead, Sotheby's and the bidder would be in cahoots, with the single bidder approach several other art dealers in the room and saying "hey bid $10 million on Painting X and I will buy it from you in the back alley for $10.1 million next week."

What you would see if you looked at the auction data is lots of broad demand among the "primary dealers" (here, art dealers). But if you looked at everyone's warehouse you'd see a disproportionate of the paintings all winding up in one warehouse -- that of the single bidder. Or in this case, the balance sheet of the Fed.

The practice isn't illegal per se, but it looks bad when the single big bidder (Fed) tells everyone "we aren't buying all the treasuries and monetizing the debt, the auctions are going fine" when in fact the auctions are clearly turning into a sham like the above example.

Except in this case the Fed is basically printing money along the way (like a single art auction bidder using counterfeit money that he launders into the art market via the after-auction back alley purchases outlined above).

The net effect in the above example is that $10.1 million of money is created by the Fed, of which $10 million winds up at the Treasury (and for which the American taxpayer is ultimately liable, plus interest), and the middleman art dealer winds up with $100K ($10.1 - 10.0 million) as a thank you for his participation in the scam.

The net result of this should be that credible third party buyers (i.e. the Chinese) start to drop out of the market, or another possibility is that it's a response to the fact that they've dropped out already.

The NY Fed has a model that uses the spread between 10-year and 3-month Treasury rates to predict recessions. And it says the chance of recession in 12 months is zero.

I have a model that uses the spread between Tim Geithner's lips to predict recoveries. The secret is that the two are inversely correlated.

With Jack Welch at the helm, General Electric (GE) used to be a shining star of business. What's inside the company now, in the wake of its $50M SEC settlement over charges of book-cooking? Floyd Norris says maybe a little bit of Enron.

If it's in fact true as the article states that accounting irregularities at GE had stooped to outright fraud and fake sales in some cases, then who is doing the perp walk for the crime? Isn't this what Sarbanes-Oxley was specifically designed to deal with?

If one of the nation's largest companies, its supposed shining light upon the hill, is let off with a tiny slap on the wrist for violating a law specifically designed to punish fraudulent financial reporting -- then who the hell will be stupid enough to comply with it now? Smaller companies? Those who don't make large enough campaign contributions?

Personal Income and Savings: The Double Whammy

The other piece of news that you won't see reported as a headline anywhere is that the "double whammy" combination of higher personal savings rates to payoff existing debts, coupled with lower personal incomes -- is also known as a reduction in the American standard of living.

According to DigiTimes, demand for netbooks is so high that Intel (INTC) has almost run out of its Atom Z chip and has stopped taking orders. Which may not be great news for a company still trying to figure out how to prevent cannibalization of its chips for full-fledged notebooks.

If increasing netbook demand is news for Intel, it's worse news still for Microsoft.

CNBC Viewership Down 28%

CNBC is a circus, but I am glad to see The Big Idea's ratings going up. I wonder whether it is because of increasing awareness of the program (good) or a genuine uptick in interest in entrepreneurship (better)?

As for the broader ratings, they could just be cyclically negative (or have lost their one-time doomsday pop), since the equity markets have been up so sharply lately. Sort of like how the Weather Channel loves a good hurricane?

Leveraged ETF Ban Spreading Like the Flu

It all boils down to this:

Leveraged ETFs re-lever every day, and so will have a natural drift away from the underlying based on its volatility

Volatility isn't the only concern, it's also the sequence in which it's achieved -- leveraged ETFs have a high degree of path-dependence.

Those two things make leveraged ETFs like nitroglycerine for the types of buy-and-hold fee-generating cattle that the big brokerages like to corral.

Therefore, they are unsurprisingly banning them.

Here's a good read on the details of levered ETFs and their path dependent option value: www.scribd.com/doc/144...

Zubin Jelveh says Paul Wilmott's logic on high-frequency trading is off - not every trading strategy is as disastrous as portfolio insurance. "The algo is acting like the middle-men we're all quite familiar with. It seems to me that it's now up to institutional investors to be as inventive as the sell-side algos and figure out a way not to get gamed."

"It seems to me that it's now up to institutional investors to be as inventive as the sell-side algos and figure out a way not to get gamed."

This is akin to saying it is now up to cheated marks in a rigged poker game to be as inventive as the crooked host who marked the playing cards and figure out a way not to get gamed (while continuing to play with the same marked deck).