MattZN

Why Warren Buffett Loves Wells Fargo

I've been bullish on Wells the entire year (and own a good chunk of it to back that up). But even though I am bullish on their long-term future the explosive rise and amazing resiliency of its stock price has gotten a bit spooky. Even though I am bullish over the long-term prospects of Wells I keep looking for some sort of short-term (or even medium-term) pullback. None has materialized.

In many respects the lack of a pullback in the market can be traced to the falling dollar. We see this meteoric rise (The Dow over 10K again?!?!) and kinda scratch our heads. But if you look at the US market from, say, a European perspective, it looks very different.

In anycase, the #1 enemy for a bank like Wells is inflation. Well, that is really the ONLY enemy for a bank like Wells now. They've dealt with all the other enemies. So it all comes down to how well the Fed handles ye old greenback.

Even though the Fed has stated that they would try to continue keeping interest rates low for the next few years, and even though we know that a weak dollar is about the only thing capable of jump-starting our exports (and thus our manufacturing), at the same time they also know they can't let the dollar fall too far. I doubt the Fed will allow the Euro to break $2 (we're at around $1.50 as of this writing).

There is also China. China's currency is locked to the dollar and the falling dollar is causing China's economy to become red-hot. Their hand might be forced too. Even if they don't unlock their currency they may change the conversion ratio. As *THE* major trading partner with the US as well as holders of $2T in US debt, China is the 10-ton gorilla in the room. If China is forced to adjust the ratio it will (obviously) cause prices in the US to go up even if China decided not to sell a single penny of the US debt they hold.

So at some point down the line someones hand is going to be forced it we'll just have to see how well the Fed manages inflation when that time comes.

-Matt

Banning Derivatives and Other Such Foolishness

Interesting article but I couldn't stop laughing when you tried to paint Buffet as a leftist. I don't think Buffet is into social engineering the way you seem to think he is. He would just rather see investors... well, actually invest in companies instead of just being bystanders in a betting ring.

-Matt

Time for the U.S. Economy to Reindustrialize

Come on, nobody wants to see a Chinese model in the US. China has enormous pollution problems due to their lack of regulation. You could try that here and the very instant one child falls ill from Lead poisoning due to Lead paint or one factory worker dies due to a missing safety device or one person dies from bad food is the very moment your model will fail.

People scream about government regulation but then someone dies and those very same people scream that the government didn't protect them. It's idiotic. There is a cost to having human rights and only a fool would think that it isn't worth paying.

The US model tends towards requiring a more highly-skilled workforce. It doesn't really matter whether jobs are off-shored or not, business segments which require large numbers of unskilled workers will be built by foreign companies anyway and leave a US company that doesn't do it dead in the water. A highly automated industrial base is certainly feasible but industries which depend on an unskilled workforce have been a dying breed for decades in the US and nothing we do will change that.

The falling dollar will certainly improve our exports and will build up our industrial base somewhat, after a lag of a few years (if the dollar stays low), but that's about the only driver. There is really nothing government can do about it short of trying to keep the dollar weak. A country like ours cannot improve its standard of living without improving efficiency, and improving efficiency basically means having a more highly-skilled workforce in a more highly automated environment.

-Matt

Dividend Grouping for Dividend Income

Dividend growth is a big deal in the Energy MLP space (of which KMP is a part), as it reflects good CapEx planning and debt management on new projects. The wrench thrown into the works by the crash temporarily made div growth second fiddle to simple survival, but it has now become important again. 12% is a bit excessive, you will not see that very often, but even small amounts of div growth lead to impressive long-term results.

-Matt

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

Well, I suppose its fun to imagine the U.S. government going bankrupt but the only part of the above analysis that actually makes any sense is the part describing the double-bottom in the dollar, since that could very well be driven by a reversal of the carry trade.

Things like comparing large-cap against small-cap are meaningless in the face of a large dollar move simply by virtue of the massive difference in international exposure large-caps have vs small-caps.

Debt servicing loads are not really related to current interest rates, other then the debtor potentially being able to refinance the debt at a lower rate. Credit card debt and home equity lines of credit are the primary short term debt instruments (neither of which is even remotely close to 0.25%. Try 7%+). Everything else will be long-term mortgages (~6%), long-term municipal debt (~4%), and mid and long-term government debt (3-6% I think). Just off the top of my head, I'm sure someone can pull the real numbers out.

For U.S. government debt it is easiest to view it by splitting it into two pieces: The piece held by U.S. citizens and the piece held by foreign countries and non-U.S. citizens. The piece held by U.S. citizens is just a transfer of wealth inside our boundaries which gets recycled back into the economy anyway. The piece held outside the U.S. is the bit that can really impact the nation's wealth. I don't have the breakdown handy.

Municipal debt is almost universally held within our borders so it just cycles within the economy.

A more telling issue is how the debt effects the middle class. As a country we do not want to wind up the situation where 99% of the wealth is held by 1% of the population and the middle class evaporates. We lost a lot of ground during the bush years (and I'm speaking as a person who benefited greatly tax-wise during those years when at the same time my brother paid the government gobs of money in taxes despite making 1/10 what I make). The rich got far, far richer during those years. Our strength as a country is our ability to support a large middle class so that is what I look at when I'm thinking about the health (or lack of) of the country.

-Matt

The Fed's 'Extended Period' - How Long Is Long?

The Fed's hand will probably be forced long before the dates mentioned above. For example, if unemployment began to reverse, or if treasury prices break downward. A break in treasury prices is the most likely scenario. Any inflationary precursor that pokes its head out of the ground will cause the Fed to immediately start raising interest rates.

-Matt

The Unsustainable Lie of Inflation

If you don't like the dollar then invest in something else. Every single person in the U.S. with some free cash after living expenses has the ability to invest in things which are not pegged to the dollar, and simply sell them into dollars to fund their every-day expenses. It is utterly trivial to do.

There is absolutely no reason under the sun to leave your money in a bank savings or checking account when you can trivially set up an investment account and set up an automatic transfer from the investment account to the checking account to handle monthly expenses. Anyone with half a brain can do that.

But, you know, I think you will be disappointed by the results (of trying not to hold dollars in any significant quantity).

If you don't have any free cash then inflation is meaningless. You may think it is meaningful when you see prices rise but all that means is your wages will eventually rise too. Wages bounce around actual living expenses, both on the negative AND the positive side. Inflation is not the cause of that, the economy and job picture is. With so many people out of work now the glut of workers is depressing wages. In good economic times the lack of workers cause wages to go up.

Excessive inflation is an enemy. A small amount of inflation is certainly not. Everything has wiggle room and a small amount of inflation is just one of many knobs which turn. Inflation is better than deflation simply because the world has a lot more experience dealing with inflation than deflation. There is nothing magical about deflation or steady state that makes it better then a small amount of inflation (or vise-versa). It doesn't mean you will be paid higher wages, for example (and if you think it does you are plain and simply WRONG). there is this expectation in our society that wages should always go up, but that only exists due to inflation. Without inflation wages will go flat but you will still see them bounce around based on the jobs picture, negative and positive. So you won't be in a better place.

If our currency had no inflation or deflation the wiggling would occur in other parts of the economy. It's that simple.

With regards to quantitative easing... why don't you try to guess what would have happened if the government hadn't done that. What I see is the government trying to prevent unemployment from throwing us into another great depression and they are willing to devalue the dollar to do it. At least then we know what the 10-ton gorilla in the room is. Without the easing the economic mess would take other forms. Do you think it would just disappear? That things would magically get back to normal? I'll tell you what I think. I think that if that action hadn't been taken we would be sitting at 15%+ unemployment right *NOW* and heading into another great depression. That's what I think. The government has very little real control over the economy. All they can do when it goes bad is try to steer where that badness ends up and moderate it rather than let it meander around wildly as an unknown quantity destroying everything in its path.

-Matt

The Global Oil Scam: 50 Times Bigger than Madoff

It's an interesting thesis but you are basically blaming the entire rise in the price of oil on speculation and that seems rather unlikely. The cost of getting the stuff out of the ground alone baselines at around $35/barrel and that doesn't count transport, storage, or processing. The cheapest oil comes from the mideast. Oil from other sources having varying costs, some quite expensive.

When the price of oil goes up or down it creates a cascading effect which impacts the higher-cost producers. In otherwords, there is no free lunch. Just looking at the global capacity doesn't tell you jack about whether it is actually cost effective to utilize that entire capacity.

The real winners are not the investment houses but the oil and gas producers themselves, because they can sell those future contracts against resources that they can just leave in the ground until the contract date comes up. In otherwords, futures markets represent the ultimate form of resource storage (leaving it in the ground), and the ability for producers to utilize that futures market is based on the transport volumes they can achieve for the commodity in question.

The type of speculation we see by investment houses tends to be counteracted by above-ground inventory which has its limits. The investment houses and speculators are not lining up inventory but buyers of the actual commodity have to. Once the inventory becomes full (as it is becoming today), speculative bubbles tend to collapse.

But if you are looking for prices to drop back to $35 you are in for a rude awakening. I really, really doubt prices will drop below $50 and frankly as long as the dollar is as weak as it is verses other world currencies commodities prices are likely to remain high and get higher, even without taking speculation into account.

-Matt

Large Caps Outperform While Small Caps Stumble

This is just due to the falling dollar. Large caps have far more international exposure then small caps so the falling dollar is giving them a much larger boost than other stocks.

-Matt

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

Yah, people in general don't like the idea of throwing money into a savings account paying only 1% (and money markets aren't doing much better). On the flip side, with the dollar this low holding cash (note 1) could reap dividends in the future. If/when the Fed raises interest rates both equities and bond funds will pull back, the dollar will strengthen vs other currencies, and the guy holding the cash will be the guy able to buy into them at a lower price.

note(1): Meaning in a money market, not stuffed into your mattress or sitting in an untrustworthy bank.

-Matt

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

I think the Fed has to start raising interest rates, even if only by small amounts. I think they should have started already. At the very least raising interest rates a little will give everyone critically needed feedback to better characterize what the hell is going on. If it creates volatility then so be it... it has to happen sometime, and it will only get worse the longer we wait.

-Matt

Market Rally: Why So Much Pessimism?

I certainly agree with your assessment of the market when viewed through the lens of other major currencies. We aren't in a bull market from their point of view.

Basically this is the cost of the Fed holding interest rates artificially low. This is also why Energy and other commodity stocks have been so insanely hot for the last 12 months, and why large-cap stocks (which tend to have significant international exposure) have outperformed. IBM being an example of the latter.

How low is the Fed willing to let the dollar go before they are forced to begin raising interest rates? That's the question now. Honestly, I don't know why people are pushing into bonds, they are just as dangerous as equities (if not more so) right now.

-Matt

Rally as Expected, Another Gold All-Time High

I like the first graph, the VIX is certainly highly correlative with turns in the market but from the looks of it the information cannot really be used to make investment decisions. If it says anything at all it is simply that more investors get interested when the market drops. Gee, I couldn't have figured that out (insert massive irony here)!

Please stop with the nonsense of using single derivative charting concepts on the VIX. They are completely and utterly meaningless. The VIX is not a single derivative chart and cannot be treated like one. The concept of 'support levels' for something like the VIX just doesn't exist.

-Matt

Divining the Next Crisis: All Eyes on the Dollar

I like the analysis though I don't agree with your 'most likely' scenario. I think the government is clearly putting a priority on jobs even if that means running up the debt. With the easing coming to an end the result has to be inflation. Even though Bernanke isn't saying it I'm guessing that he is expecting inflation too and is trying to figure out how best to limit its scope. If the government can keep inflation under 7% then we win (or, at least, we do not lose). Over 7% and it turns into another crisis.

Another reason I believe inflation is in the cards is that it is one of the few things that allows the treasury to deal with all those devalued mortgage backed securities they bought up. Inflation == increasing home prices. Even though in a normal world it also means decreasing loan value due to the lower interest rates on the long-term MBSs an improvement in home prices will trump that.

So the treasury is going to steer us towards moderate inflation to get out of this mess. When it happens remember this posting and don't blame the current government for it, there really isn't much else they can do. The time to deal with the crisis was 5+ years ago, before it became a crisis.

I'm not sure what is going to happen to the dollar but inflation will mitigate any strengthening. That is, we could see significant strengthening offset by significant inflation and wind up with big fat net-zero from the point of view of the rest of the world.

-Matt

The Fed: Sending Investors to the Slaughter?

Dalry... I dunno about that rule but people who leave their cash in savings accounts (vs money markets) aren't investors and will have no effect on the stock market.

-Matt