DrBenway

Meredith Whitney vs. John Paulson on BofA: They're Both Wrong

I don't think analysts are complete idiots. It is just an easy way to make a name for himself by issuing a head-line grabbing recommendation and hope you will get lucky. Since everybody got used to the idea that analysts are often wrong, they get little punished for being off-base, but handsomely rewarded for getting it right. Just think of an analyst price target as free call-option on the truth.

Some of you may recall how Henry Blodget's career was launched out of obscurity into mega-stardom when he set price target for Amazon at $400 and it became a self-fulfilling prophecy.

Between Paulson and Whitney, I would put money on John since he votes with his money and Meredith votes with her mouth. Whitney already staked her reputation on banks going broke next year, so anything she says now should be taken with a gran of salt.

On Nov 26 10:19 AM andyb1979 wrote:

> I'm not going to comment on the above Paulson vs Whitney article,
> but I do believe that often analyst predictions are "weighted" in
> the interests of the analyst.
>
> Remember Goldmans "Oil to $200!" call in Summer 2008?
>
> What about Goldmans "Oil to $17!" call in December 2008?
>
> I can't possibly believe Goldmans are financial idiots, as they so
> adeptly navigate the markets. Perhaps another hypothesis is the upgrade/downgrade
> statements are released at strategically important times to offload
> (or accumulate) stock at a certain price?
>
> Just a thought ...

Arianna Huffington wonders if unemployment will be President Obama's Katrina: "His economic team's resistance to a second round of stimulus, lukewarm reaction to congressional jobs legislation, and prioritization of deficit reduction over job creation certainly has the feel of a 'taking in the damage from 2,500 feet' flyover moment."

It's depressing how liberals never abandon their ideals, even when confronted with the hard facts that these ideals are false.

Let's recap a brief stimulus history:

Roosevelt miserably failed for over 10 years to get America out of depression with all goverment spending, price support programs and regulations, Nixon caused stagflation after declaring "we are all Keynesian now" and printing money, Japan racked up a huge debt (over 200% GDP) and its economy is still contracting 30 years after the bust. I cannot think of a single instance where a goverment spending actually worked, unless you consider an asset bubble in China a success this year.

I read about village doctors in 19th century Russia prescribing the same placebo-like medicine to the majority of patients. Since most patient got better on their own, the doctors seemed to be "curing" them.

The same idea is behind stimulus spending. When economy recovers (and it usually does), the politicians want to point to something they did, helpful or not, to take credit.

Two Takes on the Financial Crisis: 'Too Big to Fail' by Andrew Ross Sorkin and 'How Markets Fail' by John Cassidy

I am half done with Sorkin's book. His book does not seem to contain any author's opinion on who is at fault or what should have been done. It is simply a narrative of what happened with a bit of fiction added for entertainment value.

So far Paulson come out looking more-or-less good (selfless guy who worked his ass off), Bernanke so-so (detached and always behind the curve), and Geithner a hard-ass.

Dick Fuld looks like a delusional and inept egomaniac, unable to face the truth. Ken Lewis as an idiot with a chip on his shoulder, small time boy angling for a country club. John Mack, Lloyd Blankefein and John Thain as decent people doing their jobs.

Is Japan the Catalyst for a Stronger Dollar?

I am wondering if the dollar bashing by everyone here if by itself a strong bullish signal -:)

As bad as the US economy is, the Japanese one is infinitely worse. The US population is still growing and immigrants are still coming. The Japanese population is shrinking and rapidly aging. So the GDP will not be growing enough to cover its debt payment. Fewer people will be paying more and more debt.

Baring a dramatic demographic reversion (encouraging immigration?), the Japan is almost certain to either depreciate its currency or default on its debt. The majority of the debt is held by the the Japanese population and Japan is net exporter. Therefore, I do not see other countries interested in baling Japanese out as its downfall will have limited effect on other economies.

Long-term Yen is a great short play against just about anything else. Don't be fooled by this dead-cat bounce from unwinding carry-trades.

The continual rally on declining volume speaks to a "frightened" mood that is bullish for stocks, says Potomac Research's John Mendelson. He's among analysts that see low volume as pessimistic and a contrarian indicator.

Good point HJ. Low volume is nether bullish nor bearish by itself and risk aversion is likely at play here.

I am worried about that how much "prospect theory" it at play here though. A losing investor is likely to double his bet (initial rally in March), once he gets back to even, he will become risk-averse and cash out. We may be past "doubling-down" phase and just before the "cash-out" phase. Hence, the declining volume while still rallying.

Marc Faber Clarifies Gold Outlook

Dr. Faber at his best: make two contradictory statements, wait until you know which one turns out right, clarify that the other statement was "misinterpreted".

Or even better, make a statement that is guaranteed to be true:
"if the gold really rises in price, it will be more expensive; if it really falls a lot, it will be cheaper".

Here's his brilliant insight on what will happen in 2009, right off CNBC:

"We may still have a rally until about the end of April and then probably a total collapse in the second half of the year when it becomes clear that the economy is a total disaster."

He has about 5 weeks left to be right, but I am not holding my breath.

China Nixes Obama's Balanced Trade Rhetoric

I have to strongly disagree with all of the posters above. China is forced to keep purchasing US treasuries to keep yuan pegged to a dollar and is unable to raise interest rates by definition.

If the dollar falls too much, China stands to lose both part of its main $800B investment (as of last month) kept in US treasuries and part of its trade surplus. Just on this particular issue US holds all the cards, not China. Also, remember that the US treasuries holdings is a diversification hedge if something goes wrong in China.

It made me chuckle when Chinese finance minister hypocritically complained about low US rates causing an asset bubble in China. Who forced China to peg its currency to USD?

Ironically, it still holds true that China needs US more than US needs China. Should China unpeg its currency and let it appreciate, the manufacturing will shift to Vietnam, Indonesia, and Thailand. Should China keep its peg, its monetary policy will stay defined by US Fed.

Now that the first-time homebuyer tax credit is sticking around (and isn't even just for first-time buyers anymore), NAR economist Lawrence Yun expects home prices to rise 15% next year with "the fear factor" no longer at play. Unemployment won't deter people with jobs from making purchase decisions, he says.

NAR "Economist" = ROFL

More GM-Magna Fallout: What Russia Will Have to Learn

I had a misfortune of driving Opel on my recent trip to Europe. What a POS of a car! I doubt that Opel can be profitable: you can buy slightly better cheap junk from WV or get a real car from BMW or Mercedes.

There are few sympathetic parties in the whole deal. GM has not learned its lesson and still wants to keep the scarps of its decaying and bankrupt empire. (I would take my words back if it manages to sell Opel to some other sucker.) Germany wants to protect its overpaid union jobs at the expense of its other less-politically connected taxpayers. Putin just wants a part of GM to please his ego and stick it to the hated Yankees (which seems the primary obsessions of an average Russian of late.)

And who the f*** is Magna? Is it another Penske that bailed on Saturn at the last second?

All I can say when Opel dies, humanity and progress as a whole wins!

Fidelity researcher Ren Cheng says last year's meltdown proves the laughableness of modern market theory, including portfolio diversification. "Aren't we in a global equity environment where everything is mashed together?" he asks. And adds: "Something with less chance of happening than 50-times the age of the universe happened three days in a row - or maybe there is a better explanation? Your theory sucks."

Spot on! And it is not just MPT, but also Continuous Time Finance, EMT, and other academic nonsense.

Most financial models were developed by mathematicians, economists, and physicists who never bought and sold a share of stock in their entire lives. This is how we ended up with "random walk", "Brownian motion", and "risk = STDV" paradigms that are supposed to be accepted at face value just to get their equations to work.

Perhaps the stock prices have not been properly notified that they are supposed to obey normal distribution and behave like small particles suspended in water.

MPT is OK as a demonstration tool to show that diversification can help to reduce risk, but I am sure "don't put all your eggs in one basket" precedes it by several hundred years.

Industrial Production Is Growing but Where Are All the Products Going?

Excellent analysis. Very long-term China may be a great story (or may not - just think of the demographics problem in 20 years from now).

Short-term, it is certainly in a nasty asset/inventory bubble and is due for a major shake-out any time now, unless the rest of the world does a V-shape recovery. The good thing that China overcapacity will hold inflation in check at least for a while.

On China's 8.9% GDP Growth

James,

I am wondering if you have any GDP growth numbers from reputable sources (hint: domain name does not end in ".cn").

Seriously, are these reported GDP numbers worth anything since we do not know where Communist propaganda ends and statistics begins? I was in China in April and May this year and most Chinese in street markets, hotels, bars complained how things were slow compared to last year. I stayed in 4.5-star hotel in Shanghai for about $90 a night and it looked half-empty.

Hardly looked like a growth story to me.

'China Up / U.S. Down' Theme Checkup

No offense but what's truly amazing is that having lived through two recent bubbles, most people still fail to recognize an obvious one forming in China. The internal demand cannot organically jump 56% in one year and without inflation.

I can just hear again "it is not a bubble, it's different this time, old Macro-economics does not apply". All evidence point to the fact that China is running some mega-cash-for-clunkers like goverment program gambling that exports will miraculously rebound and will take care of inflated inventories. This gamble is not likely to end well unless you believe in V-shape US and Europe recovery.

I think I will coin a term "new common sense" as opposed to old obsolete common sense.

On Nov 02 03:16 PM Tony Daltorio wrote:

> Forget exports.....It's amazing how you can completely ignore internal
> demand - the Chinese consumer and the millions of people that have
> been completed unaffected by the global crisis in most of China -
> see the recent article in the Financial Times about the latest Nielsen
> consumer survey in China.

'China Up / U.S. Down' Theme Checkup

All I can coclude from the numbers above that China is a nasty bubble:

Negative PPI and CPI indicate deflation in China for 9 months (slight positive for September) while GDP grows at 7-8%. Assuming these numbers are more or less correct, this can only implies huge overcapacity. You can't have growing economy and falling prices unless your production is propped up by goverment spending. I also find 33% fixed asset growth in just 9 months very disturbing.

Chinese exports are down yoy by some 16-20% and 60-70% of the Chinese output is exported (this number is available from many other sources), so doing a bith of math on GDP equation (I assume imports stayed flat) would suggest that China domestic spending and investment has grown:

0.65 (exported) * 0.82 (18% fall in exports) + 0.35 * x (domestic spending increase: investment, consumer and goverment) = 1.08 (GDP 8% growth) = > x = 156% or 56% increase in just 9 month (!?).

So all I can conclude Chinese GDP "growth" is just a result of the stimulus that resulted in asset and inventory bubble.

I invite comments but I can't just see any other conclusion can be drawn from these numbers and it's a matter of time before Chinese economy blows up in a grand way.

To Heck with Fundamentals: Dow 11,000 Is Up Next

You called bull market in February. So your call was wrong.

Now you are more careful and just call DOW 11,000 "on the next stop" (tomorrow?, a month from now?, 10 years from now?). You should go read "DOW 36,000" book, its author still claims he was right since he didn't say it will hit 36,000 either.

On a positive side of things, it is your probably kind that creates an opportunity for "alpha" for decent money managers.

I agree with many posters here. When the dumb money is irrationally exuberant, it is probably time to sell.