David Braunstein's Comments

Weekly Recap: Is the U.S. Going Bankrupt?

Mon, 16 Nov 2009 11:02:16 -0500

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Weekly Recap: Is the U.S. Going Bankrupt?

Mon, 16 Nov 2009 11:02:16 -0500

Not a Sucker's Rally - It's a New Bull Market

Thu, 22 Oct 2009 11:27:53 -0400

Since most of the cash still remains on the sidelines, the liquidity driving up the market argument falls flat. The market has been driven by a lack of liquidity and program trading. Lack of buyers will soon (in the next few weeks) begin to drive the market down slowly and not in a straight line over the next several months. Cash at zero is the best investment right now. Cash in a safe at home is even better.

On Oct 21 04:19 AM Faisal Humayun wrote:

> When you give billions to Dollars to major market participants and
> keep interest rates at near zero levels then a rally in the markets
> or for that matter many other asset classes is very likely...
>
> But one needs to see how much the Dow goes up in nominal terms and
> real terms...So the market rally is also associated with a sharp
> fall in the Dollar...
>
> Not always market rally is good news...The real economy is just too
> weak to absorb all the excess liquidity...Thus, the excess liquidity
> is getting absorbed by equities, commodities and other asset classes....

Best Available Risk Reward Proposition

Tue, 20 Oct 2009 13:06:00 -0400

I really don't buy the inflation theory. Even with the stimulus, the CPI is running a deflation of 2.2%. What happens as stimulus is withdrawn? How do you reconcile declining real estate prices with inflation? I agree that there is risk in long-term bonds as the economy may come back one day, but that day is not soon. In the meantime, I would be looking to buy long term bonds after the Fed stops its quantitative easing program. Then we will see the true rate of deflation surface.

Look at Earnings in Context Before Betting on Equities

Mon, 19 Oct 2009 10:54:17 -0400

Rakesh,

I don't believe the transfer of wealth from emerging countries to developed ones is on the verge of abruptly ending. Perhaps over time this thesis makes sense, but it will likely be a gradual process. Look at the China/U.S. relationship. China has effectively pegged its currency to the U.S. Dollar and other exporting countries are desparately trying to reflate the U.S. Dollar to help their exports.

Over time, I beleive in the next 30 to 40 years, power will transfer to the 3rd world countries as the United States baby boomers shift out of their peak spending years.

As far as the markets go, I agree, it's artifically propped up by stimulus. If the stimulus abruptly ends, it will cause a collapse of world markets and commodity markets. If stimulus continues too long, we will see bubbles in all the markets again followed by inevitable crashes.

The new generation has never lived through a prolonged bear market. They have learned that you get rewarded to take on too much risk. I beleive we are close to the breaking point where too much risk is being taken and the prolonged consequences of running huge deficits will emerge.

I am 100% in mutual funds with a vast majority of their holding are in U.S. Treasuries. I made 8% on my money during 2008 when others lost their shirt by heding my long positions using bear funds. I currently do not use the bear funds because I perceive that counter-party risks could interfere with their correct functioning during a crisis. This is similar to the 100% margin rules that were implemented on S&P 500 Index futures on October 19, 1987. Shorting futures didn't work on that day.

I do not expect a crash, but a slow drawn out bear market that should begin between now and the end of 2011. Patience is the order of the day!

BofA Headed Back Below $10?

Tue, 06 Oct 2009 10:10:20 -0400

Rakesh,

I have a question for you. I have been afraid to use ProFunds ultra bear or any other ETF/bear fund because I was convinced that the counter-party risk was too great. As you know the counter-parties are mostly the major banking and financial institutions. Do you think I am being too cautious? My second question concerns the price of oil. I have been thinking the price of oil should be around $30 to $35 per barrel. It appears I missed the reflation trade altogether. Or have I? Looking forward to your answers.

Why Stocks Scare Me Now

Fri, 25 Sep 2009 08:29:18 -0400

Good article. Playing with accounting rules is playing with investor confidence in the long run. Good analysts see the bad loans on the banks books and likely did not recommend bad banks. Therefore, if smart money likely did not buy them. Maybe you are right, could it be the Fed? Interesting idea.

If the Recession Is Over, What Now, Ben?

Fri, 18 Sep 2009 14:23:52 -0400

I strongly disagree with you Mr. Hui. Our experience with Japan shows that you can have zero interest rates and deflation at the same time as the currency falls. Much has been written about the cash for clunkers giving the economy an artifical lift. Bernanke indicated he will stop buying treasuries and agencies by the end of October. Manufacturing usually peaks in August to September leaving the next six months highly dependent on consumer spending. With high unemployment and low bonuses (except for the bankers who received TARP money of course), my bet is that consumer spending over the next six months will be weak. We now have high inventories of raw materials and finished goods going into a weak consumer period. Sounds like the perfect recipe for a downturn in commodities and the stock market while the dollar stays weak.

First Solar Sell-Off Is Overdone

Thu, 27 Aug 2009 16:42:19 -0400

FSLR is going down because the price of oil is going to fall to $30 or below by year-end and stay below $50 for an extended time. You see when you have $148 oil, lots of production comes on stream that doesn't turn off soon. A few years of cheap oil will kill the solar stocks.

Is It a Stock Market Rally or a Dollar Devaluation?

Mon, 24 Aug 2009 17:27:49 -0400

I don't know about stock prices, but certainly there is a strong inverse correlation between the US dollar and oil prices. Technically, the US dollar is at an inflection point. Odds favor a decline and a test of the 2008 lows when oil prices rose to $148 per barrel. Don't you think oil prices north of $100 would slam the brakes on economic growth?

U.S. Economy: Now Comes the Hard Part

Mon, 24 Aug 2009 16:05:18 -0400

I very muched liked your thesis that stated the private sector has succumed to dependence of the Federal Government as opposed to private spending. I wonder about small and intermediate sized business who have to rely on the private sector. How can they compete? Government dependence is a drug. Once addicted, its hard to wean off. My problem with your article is the happy ending. It's great to say you're a value investor and congratulations on having a few good months of performance. However, as you pointed out the earnings power of companies cannot expand much more if any without revenue growth. Unless the Government is going to continue to increase spending and crowd out even more of the private sector, revenue growth will not come. What's the value of the S&P 500 Index assuming operating earnings of $50 per share with no growth prospects for the next ten years? Arguably a 10 multiple would be fair. OK, some are placing earnings at $75. OK, then we are looking at a fair value of the S&P 500 Index of 500 to 750.

The fly in the oitment is monetary stimulous. As the Fed prints money and the money goes into financial institutions with Capital Markets, money magic happens. Some of the billions go into stock and bonds. Others go to fund traders and investment banking types that get even more government business bailing out the municipal bond market by helping states like California finance their huge spening programs. I can see the large banks with brokerage arms staying alive a little longer.

I liked your comments about the population and oil. With less cheap oil available, our country cannot grow. As our population ages, consumption will decline along with total incomes. This would have happened without the financial crisis. With the financial crisis, there are many investors who sold thier investments at the bottom last March and then recently reintered the market in late August only to be likely to lose what little they have left.

Dow Target 6,617, October 25, 2009: Here Is Why

Wed, 05 Aug 2009 08:24:43 -0400

I liked your article. I read the above comments, too. One comment about the economy being different and the conclusion that the market will have a different result may not be all that important. The market is more influenced by mass psycology than any other factor. That is why your article and the one I wrote in June simply must be taken seriously. If you haven't read my article, you will enjoy it: seekingalpha.com/artic...

Five Reasons the Market Could Crash This Fall

Tue, 04 Aug 2009 12:27:36 -0400

Dead wrong! Wall street firms and banks are the guarantors of derivatives contracts. They back those contracts by the financial insitution's credit rating. It is the customers of those brokerages and banks who are taking positions. It is a logical statement to say that all the customers of the financial institutions play a zero sum game, however, it is very posssible for one or more financial institutions to fail without another financial institution gaining anything.

On Aug 04 12:10 PM contracontrarian wrote:

> "If Wall Street did put $50 trillion at risk… and 10% of that money
> goes bad (quite a low estimate given defaults on regulated securities)
> that means $5 trillion in losses: an amount equal to HALF of the
> total US stock market."
>
> Any one particular Wall Street firm can lose everything they have
> or even more,but other Wall Street firms would earn the same amount
> at the same time,as they are on both sides of those derivative positions.
> Alltogether "Wall Street" can not lose money on their derivatives...

Five Reasons the Market Could Crash This Fall

Tue, 04 Aug 2009 10:58:50 -0400

I couldn't agree with you more. Great insights. Anyone long equities here is playing a game of Russian roulette. I'm amazed that computerized trading could be responsible for a 48% increase in this market without speculators coming back in. To me it reminds me of the market in 1997 to 1999 before the tech crash. A market driven by momentum investors. During that time growth stocks were king and value stocks trash. I often wonder if this market will be like that one given the tremendous amount of government stimulus in the economy. I don't disagree with your brilliant analysis, I just wonder if the crash will come this fall or the fall of 2011? Howver, no matter how you look at it, it looks to be a fool's rally and investors will likely be better off over the next several months holding high quality bonds or cash.

1929 All Over Again?

Sun, 02 Aug 2009 23:05:16 -0400

Good article. I especially liked the lack of convergence of reported and operating earnings. In case any of you readers missed my article comparing the current market to 1929:
seekingalpha.com/artic...
Maybe PE's have less to do with the stock market than crowd psycology. Maybe the pattern established in 1929 to 1932 repeating may be more likely than you think.

Inflation vs. Deflation: Pick Your Poison

Fri, 24 Jul 2009 11:19:30 -0400

I can't see inflation without getting the newly printed money to the people. In your island example, the reason you had inflation was that both pirates got the money. I wouldn't have changed a thing if there was tons of money on the island, but no one found it. The Fed expands the money supply by buying treasury securities in the open market with newly printed money. Big deal! I could also expand the money supply by pledging my treasruy to the bank for a loan. Inflation can only occur when the newly created money either by printing or expansion of debt gets into the consumers wallets. This can be done by creating new jobs, increasing pay of existing jobs, and giving government subsidies. But most likely the new money will find its way into the hands of corrupt politicans, obscene top management salaries and bonuses, and of course into the few lucky soles who work at Goldman Sachs. Money that only goes to a few privileged individuals instead of the masses equals deflation may friends.

Consider These Conditions When Using the Unemployment Rate as 'Any Kind' of Indicator

Fri, 10 Jul 2009 10:17:33 -0400

Very nice article. Good insights. I agree, too many people beleive that unemployment is a lagging indicator and dismiss it.

Global Trade: Bottoming but Not Rebounding

Tue, 16 Jun 2009 11:57:02 -0400

Again, a great article. My guess is that the market leaders are alone far ahead of the pack. I suspect inflation expectations are ahead of the facts, too. Money on the sidelines has likely come back into the stock and commodities markets for lack of other business opportunities. This reallocation of cash put temporary upward pressure on prices from extreemly depressed levels. The fuel behind these market moves will likely soon run out.

The reason that bankers are not lending is that there are no more real bankers. Banks started syndicating loans after the bank failures of the 1980's and followed syndication with securitization. All real bankers have left the industry during the early 1990's to be replaced with fancy salemen, relationship types. The underwriting of loans was transfered to the securitization syndicate where the analysts knew nothing about the local economy nor the intergrity of the person applying for the loan. Loans were also dependent on loan score software that proved to be easily gamed. Since there are no more real bankers, they do not know how to make loans that stay on their bank's balance sheets. No wonder there is a political upsurge of bring back the securitization market. We saved the banks, but we did not bring back bankers. Instead, we saved a bunch of aggressive salesman jobs wishing for a return to the good ole days.

After securitization comes back, we will likely see a modest uptick in inflation and economic activity. Unfortunately, the seeds of the next sub-prime meltdown are already being planted. Those that do not learn from histroy are doomed to repeat it!

Commodity Bulls' Seven Fat Cows Will Be Followed by Seven Skinny Ones

Tue, 16 Jun 2009 11:13:51 -0400

Dear Dr. O,

Tort reform is a mixed bag. I live in Texas where they passed tort reform a few years ago. My wife contracted meningicoccal septicimia and miraculously survived with only losing a few finger tips and the bottom of her feet. Unforturnately, because of misjudgement by one of the attending physiicians, she was taken off of anitbiotics and off of isolation too soon. She contracted psuedomonus septsis and again almost died. She lost both of her legs above the knee and had amputation of all of her fingers. I went to an attorney who told me that if I lived in any state except Texas that my wife's case would be a slam dunk multi-million dollar victory. Texas tort reform limits teaching hospitals to $100,000 in actual damages and no punitive damages. I think tort reform of that magnitude creates an enviroment where doctors, nurses and administrators can and do become careless.

I liked your comments to Cam Hui's excellent article.

On Jun 16 08:06 AM Dr. O wrote:

> >>Commodity inflation would inevitably be followed by a deflationary
> collapse caused by massive demand destruction.>>&g... inflation
> would inevitably be followed by a deflationary collapse caused by
> massive demand destruction.>>> massive demand destruction.>\<>
> Already happened: oil from $15 to $150 in ten years, followed by
> the 2008-2009 economic and financial collapse.

Cap-and-Trade Bill Moves Through Congress: Time to Sell Electric Utilities?

Tue, 09 Jun 2009 08:12:25 -0400

Yes, and it may also justify selling oil producers and oil service companies. I work for an oil producer and we calculated that from the Obama tax disincentives our taxes would rise about 50% even before Cap and Trade. The oil industry will not have any credits as they have a much smaller lobby group than the utilities. Also, with world wide weak energy demand, I believe the current prices are just too high.

Economic Ramifications of Skyrocketing Long-Term Unemployment

Mon, 08 Jun 2009 13:07:38 -0400

Great article! I believe that the Obama Administration will add many new government jobs directly and indirectly, but they will likely be lower paying jobs than before the economic crisis. We need retooling benefits to help those with long-term unemployment get trained for the new jobs primarily in "green" technology. Those "unforgivable" debts need to have the laws changed and soon. Loans need to be made to individuals based upon moral character that they will be paid back. If a person finds him/her self to become insolvent, then the loan needs to be restructured or forgiven by an impartial judge. A broad brush sweep that says judges can't renegotiate mortgages and student loans creates vastly unjust results as your article alludes. These is hope if our government can stand up to special interest groups and those profiting unjustly have to payback the debt they morally owe society.

Fundamentals Don't Support Oil at $55-60 a Barrel

Tue, 19 May 2009 16:09:44 -0400

You are dead right and you are about to make a fortune. My target is below $30 per barrel. If you look at a monthly technical chart, you will see that the recent run-up in price is simply part of a bearish flag marking the half-way point down. When large sell orders came in from $145, a broker had to buy them at $30-$40 and then resell them at $50-$60. It's about over and the next leg down will shock everyone. Technically, the target is $20 per barrel. I would like to join you, but I'm too old to take on that much risk. Options can wipe you out even if you're right on price, but wrong on timing. Good luck!!

Geithner's Doomed Bailout Plan

Mon, 23 Mar 2009 15:48:51 -0400

Although detail are to be forthcoming, I expect the "legacy assets" will be pooled into securities and sold to investors via a prospectus cheat sheet. In order for this plan to succeed, the Government must guarantee a minimum return to investors. For example, they could give investors a minimum guarantee of 85% of the purchase price of the pool. Investors then take 6% of their own equity and borrow the rest with a government backed loan to purchase the pool.

What's not to like. The banks will lend because they are taking no risk. Investors will buy the "legacy assets" because their only risk is making 2% over 10% before leverage. The deal will likely be sold as some type of closed or dutch auction. That way these troubled assets are sold for the highest price. The price sold will likely be more than the bank's written down value. The banks win because then they not only get the bad stuff off their books, but they also get a write-up in capital from the sale.

The government wins as it does not have to put up much capital initally. It will address problems in the future as they happen. Some of these loans are in excess of 20 years. There will not likely be an active secondary market and if there is one, it will be razor thin. Investors will have to hold their pool to maturity to prove up a loss to the government as the Fed's are not likely to pay up for a loss in the secondary market.

More problematic will the covenents on the loans defining default to the banks. When and how does the bank collect on the bad loan? Does the bank also have to wait until the security is completely worthless (in some cases more than 20 years) to get the government guarantee?

Eventually the tax payer takes the hit, but it will likely be our children who suffer. Also there is a moral delima. The government is using leverage to get us out of the same situation that too much leverage put us in. The government is talking about 10 times leverage. Is that a good thing?

U.S. Government Recreating Leverage, Offering New Trading Windows

Wed, 04 Mar 2009 22:06:28 -0500

How does a trillion dollar securitization of consumer loans help anything? Isn't that what got us into this mess to begin with? Insured AAA junk. Now it's gonna be government insured AAA junk. My guess is that one or two trillion is not going to be enough stimulous to jump start this stock market, even for trading rallies. Unless of course the government will offer another couple of trillion for margin accounts and new carry trades!

The Real Crisis: Collapsing Capital Accumulation Process

Tue, 10 Feb 2009 18:18:57 -0500

firstproman, I disagree that we are sowing the seeds of the next bubble excess. Those days are over for many years because everyone is overleveraged now: homeowners, businesses, hedgefunds, nations, municipalities. The era of low interest rates produced over pricing and stock and asset bubbles. The next ten years will be marked by delevering and no amount of government intervenion is likely to change that. The government has two choices: (1) do nothing and let our capital system restructure the system through bankruptcies and foreclosures, or (2) pump more money into the system by printing it. Of course there is a third choice which is a mixture of (1) and (2). Since printing money hurts older americans and those who are unemployed and underemployed, that option hurts the most people as inflation cuts them to the bone. Therefore, a mixture is most likely. There will be no inflation or deflation if the governemt gets it right. Some asset prices will deflate; some will inflate. There will be winners and losers. Stock prices are likely to remain stable after reaching an equalibrium which is somewhere between 600 and 700 on the S&P 500 Index. From there it will rise, but most likely by only 5% to 6% annually for many years to come. Long-term interest rates will peak at 3% for the same number of years. Capitalism will coexist with socialism.

On Feb 09 04:28 PM firstproman wrote:

> Thank you for the fair response Rakesh. I agree with this briefer
> assertion. Left leaning thinkers have commonly argued that “state
> capitalism” is the natural next step in development of economies
> post “private capitalism”. In the west we are too often completely
> blind to this school of thinkers.
> Talking about our markets:
> I agree with your article that the current market collapse (equities,
> commodities, real estate) is largely due to the leverage excesses
> caused by Greenspan’s monetary expansion i.e. the last boom. I differ
> with you on what will happen next. I believe we are currently witnesses
> the birth of the Bernanke expansion and eventual bubble. A major
> question for investors is “which asset class or classes will experience
> exaggerated price increases?” even if only “nominal dollar” price
> increases.
> The market is infatuated with “booms”. We have so much cash (private
> capital) sitting on the sidelines waiting for the next drunken “price
> party” that the next “recovery” will become a self fulfilling prophesy.
> The Obamaniks will ensure this happens.
> Talking about world development in general:
> Most of the world is now trying to consume more i.e. improve living
> standards (development). At Davos even Putin, after condemning the
> U.S. for the current global economic reversal rejected a return to
> completely controlled economies OR protectionism (yes, yes, yes,
> self serving) . The current contraction may indeed get worse before
> it gets better but our central banks and governments are already
> sowing the seeds for the next boom and eventual bust cycle. I’ll
> be very surprised if nominal prices of one or more of the “hard”
> asset classes (equities, commodities) aren’t surging higher before
> 2010 ends!

Financial Bailout Remains a Work-in-Progress, Chaos-in-Motion

Fri, 06 Feb 2009 10:59:22 -0500

How can anyone expect anything good to come out of a stimulus package that no one has read, not even the President. How can we imagine that if our lawmakers do not even read the stimulus bill that they could possible look at it critically? Yes, I beleive they have good intentions, but "the road to hell is paved with good intentions." Rakesh, imbedded in your comments is the real solution to our economic problems. Hard work, good intentions and rigorous analysis.

Emerging Markets: Beware of the 'Head-in-the-Sand' Strategy

Mon, 02 Feb 2009 10:25:15 -0500

Wonderfully written! I enjoy your posts. After you make your fortune shorting stocks, please give us your prescription for the current crisis. The world needs the likes of you to help us all.

Waiting for Financials' Other Shoe to Drop

Fri, 15 Aug 2008 09:51:43 -0400

You are right on! I'm avoiding financials too, and most retailers except liquor and beverages. The Fed is injecting massive liquidity into the system, but it's pushing on a string. No one want to make loans in this environment. Remember, housing and construction got us out of the tech bubble. With those pillars broken, I expect to see new lows in the markets below the 1999-2000 lows before we see the bottom. My guess is that we may see new highs in about 10 to 12 years. Oil prices will trade between $80-$120 during that time. The problem will be deflation, not inflation as the rest of the world lowers their interest rates while ours stays steady. The USD should rebound to 1.15 to the Euro over that time period. Many banks will likely fail. Unemployment could reach 7%. But in the end, the U.S. economy will eventually strenghen and recover. This is not Armagedden, but it will feel like it for quite a while.

Tracking Crack Spreads

Wed, 18 Jun 2008 11:30:12 -0400

Good article, but I don't see anything on the chart that suggests you can buy the refiners when the two margins tip over 5%. Is there any logical explaination for this?