noblepaladin

U.S. Job Losses Demystified

We are doing too much treat the symptoms, ignore the disease. Lowered consumer spending is a symptom, of a bad economy, but increasing it isn't the cure (consumers must actually be making money to spend, not borrowing to spend). Unemployment is a symptom of a sick economy, but simply creating jobs isn't the solution either - the jobs must be sustainable, the government can pay people to make useless widgets, at the end of the day no value is created and we are more in debt (example: Cash for Clunkers, paying the automakers to make cars that people don't need, and paying the consumers to buy them and destroy their existing function cars. In the end the taxpayer owes a lot more money and no real value was created). The government is tossing stimulus at all the symptoms (housing, jobs, consumer spending, etc), but things are not getting better. A good side effect of this "treatment" is that the stock market goes up though, I have made good money on the stock market despite my bearishness on the economy. But increasing stock market doesn't mean better living conditions for everybody, just the people who are invested. Might as well take advantage.

Cramer Does It Again with CIT Call

Cramer has to make comments about popular stocks whether he knows a lot about them or not. There are some things that he does research carefully. For example, if "Mobile Internet Tsunami" that he keeps talking about has been doing extremely well if you got in when during the first two weeks that he has been talking about it. He also talks about high quality, dividend paying stocks like Procter and Gamble over and over again. However, amateurs end up going after the high risk stocks that Cramer casually mentions along with the 1000 other stocks that he talks about only once, wanting to get rich quick. They don't do their own due diligence - Cramer even says to not take his advice over your own research. Cramer didn't lose people money, people lose their own money.

Why Apple Is Worth $80

There is a reason why Buffett says it is impossible to valuate a tech company. At one point, Apple was a dying name. Then Apple came out with the iPod. Then it came out with the iPhone. Five years from today, they will be doing another business. It is hard to apply any model that uses previous earnings or future earnings because it is near impossible to predict what Apple will be doing more than 3 years from now.

Who knows where Apple will be in 10 years? Many of these models need these inputs. At one point, AOL was one of the best companies in the world, they had what seemed to have a wide moat. But that moat literally vanished overnight as technology changed. Dell was in a similar situation, they were a great company, but their business model also deteriorated and turned stagnant. I am not saying that Apple will be an AOL or Dell, but tech companies change fast. An innovative product (ex: iPhone) will cause the stock to skyrocket over the new few years, but a lack of innovation will cause the stock to tank. Things changes very quickly in tech.

'Almost All Assets Appear to Be Overvalued' - Bill Gross

There are good securities in every asset class. I loaded up on "too big to fail" bank bonds and preferred and other various corporate bonds during the March lows because I felt that they were less risky than equities. I got some pretty amazing returns, the stuff I brought at the low returned as much as 200-400% (too bad I can't time it perfectly, averaged all the way down and up). Unless we have massive, double digit inflation coming up within the next year or two, there are some great bond buys, last month I picked up some great corporate bonds yielding 13% that I think has very low default risk.

On average, however, I think the SP500 is starting to get to the overvalued side and the Treasury bonds and average corporate bond yields are not taking into account the threat of a dollar collapse or massive inflation down the road. But there are select securities within the asset classes that are very attractive.

Case-Shiller's Recent Strength: It's Not Just Seasonality

Government pushing down interest rate, Government giving tax credit, Government forcing banks to delay foreclosures, and the fact that higher quality prime homes (rather than cheap subprime, below $200k homes) are being dumped on the market because of unemployment is the reason why average home prices are going up.

If the banks continue their foreclosures or if interest rates rise, the housing market will come crashing down in flames again. We have too many houses, the problem will solve itself over time, when population grows and more households are created. I don't think we had substantial population growth and household formation in the last few months, unless a lot of 13 year olds decided to create families.

FHA: Next in the Bailout Line?

The FHA bailout is a sure thing in my opinion. Home prices are continuing to plummet as the government desperately tries to prop it up. The average home price is "up" because prime houses (which tend to be more expensive) are being dumped onto the market because prime mortgages are defaulting due to high unemployment.

Now the question is, how do you play the FHA bailout?

Lehman's Collapse, Revisited

There is an argument that the banks should have been orderly wound down, and not allowed to abruptly fail like Lehman to prevent mass panic, electronic runs on the bank, and massive naked short selling (even good banks can't keep their capital ratios up with large amounts of naked short sellers). But I agree that many of the banks should have failed. If the government were to intervene, the shareholders should be wiped out and the bondholders crammed down. But of course, that did not happen, as Peter Schiff predicted. I made quite a bit of money on bank/financial bonds, including AIG bonds which made me more than +400%, as I made a bet that the government would bail out all creditors and they would come out whole. On principle, I hate the bailouts, but I might as well make some money off it if I know it is going to happen. The government certainly didn't need to give the creditors 100%, most of them would have been very willing to accept 50 cents on the dollar - they were dumping the bonds for as low as 10-30 cents on the dollar during the March lows.

A legislator cannot create value with a stroke of a pen. Houses, cars, food, oil, etc does not magically appear. When all those creditors were made whole, that money had to come from someone else's pocket.

Is Buffett Backing Away from Stocks?

Buffett is not buying US Government bonds, he is buying foreign government bonds, which pays in a foreign currency, which is consistent with his stance on a weakening dollar.


On Sep 09 07:04 AM chap08 wrote:

> "excellent opportunities in government and corporate bonds"
>
> You've gotta be kidding. There are some good investments in corporate
> bonds, yes, but in general, this is not a good long term place to
> be. If Buffett is buying government debt, I would bet that he is
> only buying short term debt and he is only doing it because he needs
> a large liquid market to park some funds. If you want a clue as to
> his real thoughts on government debt, read between the lines of his
> recent published thoughts on inflation risks.

Buffett's Latest NYT Op-Ed: The Greenback Effect

In the short run, we'll have what seems like deflation. In trader terms, when you borrow money and you buy stuff, you are basically "shorting" the dollar. And what happens when everybody in the country is borrowing aka "shorting" the dollar is a massive short squeeze when people need to pay back their loans or "cover". But make no mistake, the money isn't contracting it is expanding. Just because AIG, Freddie, and Fannie stock had huge spikes in stock price, that doesn't mean they have fundamental value behind them - they're simply out of the money calls that somehow all the debt holders and the government will be paid back.. The same with the dollar, more and more is being created and fundamentally that is inflationary. But in the short term, we won't see it yet as consumers are desperately trying to get their hands on dollars to repay loans and de-leverage.

China and other foreign countries have been acting as an inflation buffer. While the government has been printing money for a long time, China has been soaking it all up and hording it, so we don't see that money in circulation. One of these days, the Chinese will want to buy something with their money. They are not going to horde IOUs forever. When that time comes, all that printed money will flood the system at the same time.

Reality Is at Odds with Policymakers' Optimism

The government and the general public is too obsessed with models and indicators. Yes, better unemployment is an indicator that there is a recovery. Yes, a better GDP number is an indicator that the economy is improving.

However, using basic common sense - how is an economy where we borrow money to consume depreciating assets sustainable? Just because we make the GDP number go up, politicians and the masses of financially ignorant public think we are doing well. Instead of manipulating the model (GDP is going up because we are increasing government spending, unemployment is going down because people have run out of unemployment benefits, they stopped looking for jobs, etc), we should return to common sense. We can't con the Chinese to pay us (buy our treasuries), to work for us (for $1/day making our our clothes, toys, gadgets, etc), and to ship all their goods to us. They are giving up all their wealth for American IOUs - US Treasuries.

The Chinese has been obsessed with these models too, they are getting growth by working for the US, they are improving their unemployment by working for the US, and they are increases their balance sheet buy adding more US Treasuries. By the models, they are doing extremely well, however many of their citizens are still poor. Someday they will wake up to common sense and decide that these models that measure how well a country is doing is flawed and that simply keeping the goods they produce is better than giving it to the Americans.

A lot of people say, the Chinese has to keep buying US Treasuries, because who will they sell their goods to? Think about this a little bit... what do they get by selling stuff to the US? Nothing! Some IOU piece of paper. Sure their "growth" will slow if they don't prop us up, but the "growth" model is flawed. China isn't better off holding all these IOUs, their people certainly do not feel richer, some number in the books is just bigger, and that number will never be converted to real value.

Cramer Needs to Apologize

The problem with Cramer is not that he is dumb. He must give about 25 stock picks every single weekday. That is a lot of picks, nobody can do that many. CNBC would have you believing that if you didn't buy during the March lows, you lost 50%. No, that is not how investing works. Every day there are millions of possible bets you can make, and the odds keep changing (aka stock prices) from day to day. You just have to be patient until you can find one that you understand and the odds are lopsided in your favor before you buy. I miss millions of stock moves every day, there is no way I can watch everything. I look at some stocks each day, and eventually I catch an easy 20-30% or even more. If I can make 4-5 catches per year (as diversification, you don't want to go all in each time), you'll beat the index.

That's basically how Buffett did it when he first started, except that he was much more obsessive than any of us and he would catch a lot more - he wasn't the long term buy a business with a durable competitive advantage guy until he got so much money that his positions basically became illiquid. People think he didn't sell Coca Cola a few years back when it was vastly overvalued because he owns so much that he cannot get out, the moment he moves everybody follows him and the stock dies. The same thing is happening with his Moody's position, the moat is breaking down as the ratings agencies have been exposed and Buffett can't get out.

I think Cramer tries his best to to do 25 stock calls per day. However, that is ridiculous. Investors make most of their money in two or three picks a year (note that is easily over 100 companies in a lifetime!). Cramer has some good ideas, but it gets diluted by his 2nd best, 3rd best, 4th best, ..., 25th best idea. People don't make money on their 25th best idea. If Cramer could only make a couple of stock calls each year, he would probably say buy the "mobile internet tsunami", he has been saying that for a long time now and it has proven to be a great idea. Cramer is a smart man, but I don't want to go with idea #100, I want to only go with the best. Keep that in mind. He's an entertaining guy and he explains some companies that I wouldn't have found myself, but do your own research and buy your top 3 or 4 best ideas, not Cramer's 100th best idea.

Buffett's Betrayal

Buffett has always been about making money. Activists complained when he invested in PetroChina because PetroChina had some connections to genocide, Buffett didn't care, it was vastly undervalued when he brought and he sold when he felt it was overvalued. As CEO, it is his responsibility to protect and increase shareholder value. Buffett was and is a supporter of the bailouts, but he didn't cause them to happen.

If Buffett knew the bailouts were going to happen, I'd fully expect him to take advantage of it. I wouldn't invest with a money manager who does not. Take a look at Ken Lewis, he "did the right thing" by saving Merrill Lynch to stabilize the financial system and destroyed a lot of shareholder value at the same time. If you are a BAC shareholder who brought at $50, how would you feel? If Ken Lewis goes up to your doorstep and says "I destroyed 70% of your retirement to help stabilize the economy", you'd beat the crap out of him. I don't see a lot of people cheering on Ken Lewis. You do not put your morals ahead of someone else's money if you manage money.

PIMCO (Economic Pessimist) vs. Barclays (Economic Optimist)

They both could be right. People make the mistake of believing that the economy and the stock market is strongly correlated. In reality, they are weakly correlated. Is today really 40% better than the March lows three months ago? The economy was starting to fall apart starting in 2007 (people didn't figure it out yet), but we were at DOW 14000.

A lot of people say that people like Roubini is a perma-bear who got it wrong and missed out on this stock rally. No. He is an economist and so far everything he said about the economy has been dead on. He made no claims about the stock market. The economy is continuing to deteriorate, but it doesn't mean the stock market cannot rally +50% - this is happening right now. The economy and stock market is not strongly correlated.

Has the Housing Market Hit Bottom?

Home sales could possibly have bottomed. After government programs to stabilize banks and government tax rebates and other stimulative measures to get people to buy houses, we might not see the lows when all the banks were under the threat of nationalization and hording money.

Home prices have not really bottomed. Most of the toxic subprime loans have defaulted already, that part of the crisis has mostly passed. What many people do not understand is that subprime homeowners tend to own low quality, cheap, houses. All those cheap houses are on the market right now. Prime houses tend to be bigger and higher quality, so they are more expensive. Now prime mortgages, alt-a, etc all are starting to default because people are losing their jobs and cannot pay mortgages. When you have a market full of crappy houses, and then you add a lot of nice houses into the mix, the average price rises. However, on average, homeowners are seeing the prices of their homes go down.

What is happening now is that there are a lot of crappy homes which used to belong to subprime owners on the market. Higher quality homes belonging to prime owners are now being dumped onto the market. Average price looks higher, but this is artificial. As a class, the low quality homes are going down in price and the high quality homes are going down in price. Price discovery in the housing market is complicated because not all houses are for sale - the average price is also affected by what is on the market. Right now out of the total number of houses on the market, the lower quality homes are making up a lower percentage because the number of higher quality homes on the market are increasing. However, things are still too expensive and the market is not clearing. When the banks decide to foreclose more homes (they have been delaying the process, hoping the government will bail out the homeowners, the banks don't want more houses) or when the next wave of default comes, home prices will have to go down because the current supply is not clearing and there are a lot more homes queued up ready to enter the market.

Case Shiller Index Has First Monthly Increase Since 2006

Prime mortgages are defaulting because a lot of people are unemployed and cannot pay their mortgage. The sub-prime crisis has mostly passed, but sub-prime people own crappy houses. Depending on where you live, you might find that most of the houses on the market are very old dumps. When the higher quality homes are put on the market, the median price goes up. This is going to be one hell of a head fake that will catch a lot of people off guard.

The past few quarters, the market was saturated with crappy sub-prime houses selling at low prices. Now that prime real estate is defaulting, these high quality homes bring up the median price, but the prices of low quality homes as a class is going down and the prices of high quality homes as a class is also going down. The ratio of low quality homes to high quality homes for sale has went down.