Tuesday, September 29, 2009

Why Ford CEO’s 'U.S. Car Market in a V-shaped Recovery' Thesis is Wrong

In a recent interview Ford CEO Alan Mulally sounded the V-shaped recovery gong, for the U.S. car industry. According to him U.S. car sales, after reaching a multi-year rock bottom in 2009, will begin to stage a rapid recovery growing by 38% by 2011. In this report we examine why his thesis is plain WRONG.

Thursday, September 24, 2009

Goldman Sachs the World’s Greatest Innovator - They Never Let us Down!

The World’s greatest investment bank Goldman Sachs, where supposedly only the finest brains find employment, has done it again! After having done a brilliant job milking the U.S. tax payer out of billions, they find themselves salivating over an estimated $16 billion bonus pool. Given that Goldman’s market cap is about $93 billion, a bonus pool that is 17% of their market cap, now that’s a tax payer and shareholder rip off only Goldman can pull!
So pray what could be these brainiacs new headache? Divvying up the booty in a way that is least offensive to the tax payer and shareholders of course!
In case you just had a mild panic attack fearing how they will live without their billions, worry not coz our heroes have found a solution (although convoluted, so please keep up).
You see, as The New York Post reports, Why not pay everyone a ton of ‘long-term’ stock and then use the $16 billion to buy back GS shares? Hah hah, problem solved and everyone goes home happy. Who needs true patriots when we have our self-centered Goldmanites?
Of course no one will question the real wisdom of not paying the bonuses and keeping the $16 billion on their balance sheet as reserves in case they screw up again? Why do that when the Fed stands ready to lend a helping hand.
They make Sugar Daddies Bernanke and Geithner so Proud! Sniff…

Wednesday, September 23, 2009

Once Bitten, Twice Shy, No?

Today The New York Post is reporting that ex-Lehman President Bart McDade is teaming up with a former Lehman trader Alex Kirk to launch a new fund River Brich Capital. According to the Post:
River Birch could aim to purchase distressed assets and other fixed-income debt, including high-yield securities -- areas in which Kirk has expertise. One source said some of the billions in mortgages and other esoteric securities still owned by the defunct Lehman might be on the radar.
Well, we say Bart McDade definitely should know those mortgages. Afterall he helped Lehman buy them in the first place! As the WSJ had reported earlier, "Bart McDade was one of a team of executives who oversaw Lehman's push into the mortgage business, a move that created billions of dollars in losses and eventually pushed the firm to the brink. On Sept. 15, Lehman filed for bankruptcy protection from its creditors".
Surely the well-meaning River Birch investors are thinking: dosen't everyone deserves a second chance? Especially after they bring down the world's financial system?
Logically speaking...Heck No!

Bill Fleckenstein: Equity Upcycle to Continue Until the Dollar or the Bond Market Cracks

"The willingness to use the printing press is going to be the ultimate undoing of the current equity upcycle. At some point there will be too much inflation and the bond market (U.S. Treasuries) will crack or because we are printing too many green pieces of paper, the dollar will crack (rapid decline as investors dump dollar), and then the bond market will crack. Regardless, at some point in the future we will  be stopped from trying to print our way out of prosperity, because it just cannot be done".
- Bill Fleckenstein, author of the excellent book Greenspan's Bubbles, in an interview on King World News.

India’s Foreign Minister Says U.S. War in Afghanistan Ineffective

As President Obama assesses sending more troops to Afghanistan, the WSJ is quoting the Indian Foreign Minister as Saying “No Military Solution for Afghanistan”.
India, believes there is no military solution to the conflict in that country and that NATO combat operations should give way to a political settlement with the Taliban, according to Indian Foreign Minister S.M. Krishna.
"India doesn't believe that war can solve any problem and that applies to Afghanistan also," Mr. Krishna said in an interview with the above Wall Street Journal on the sidelines of the U.N. General Assembly in New York. "I think there could be a political settlement. I think we should strive towards that."
The statement is hugely pertinent coming from the world’s biggest democracy, which has faced repeated Taliban and Pakistani militant insurgency for the past 20 year. So they speak from experience.
Fighting the Afghan war requires a large army of foot soldiers who can go from village to village clearing out the Taliban. This however is mission impossible, because the lines of demarcation between militia and civilians are blurred. The Taliban for the most part is not an organized army but a bevy of poor and uneducated village recruits. Joining the Taliban is often the only job in town. In a country with roving militia gangs and rampant corruption, most villagers are sympathetic to the Taliban, as they are often the only folks looking out for them.
In such a situation how do you fight these civilian blended and geographically dissipated armies? How many people can you kill after all? Will killing all the Taliban militants in a given village solve the problem? No, because there will be several other people willing to take their place.
Yes, the U.S. military should certainly take out the leaders of the Taliban and their lieutenants, but beyond that the battle is ineffective unless the economic and political landscape of Afghanistan is transformed to provide people with a viable alternative.
That is why we would urge President Obama to live up to his election promise and bring American troops home by encouraging a political and economic solution in Afghanistan.

Tuesday, September 22, 2009

David Tice: S&P to Decline Below 400 in 18 Months

Noted Bear David Tice was on Bloomberg today. According to him "The entire financial system is operating through the good graces of government intervention". Therefore he expects the current rally to last no longer than 6 months after which he expects the S&P to trend significantly lower reaching 400 in 18 months.

Monday, September 21, 2009

Small Businesses Not Smoking Green Shoots - Why this “Recovery” is Fake and How the Bailout Money has Gone to Financial Speculators

Although the media and the sky-rocketing stock market have been smoking the V-shaped recovery green shoots, folks on the ground see this recovery talk for what it is - Fake. Case in point being this Sunday’s CEO panel on Fox News comprised of Office Depot CEO Steve Odland, FedEx CEO Fred Smith and Cisco’s John Chambers. While we don’t give much credence to anything that John Chambers has to say, the other two CEOs whose businesses have been front and center in bearing the brunt of economic collapse make some very interesting points. We lightly paraphrase here from their interview:

Are you seeing a turnaround?

Steve Odland (Office Depot): Office Depot's customers are small businesses and so the Company is a good barometer of the health of the U.S. economy. What we've seen is that the small business customers have been hurt disproportionately in this downturn. Traditionally, housing has been an important source of liquidity for these people. They start their businesses with a second mortgage and they fund them with home equity lines of credit. As that credit has dried up these businesses have not been able to recover.
Last year the economy went off the shelf, and right now we're rocking around at the bottom but we're not seeing a meaningful recovery at this point. And I'm worried that we're not going to see a meaningful recovery until the liquidity returns to the small businesses.

Have the Obama policies, the Fed’s actions and the Stimulus eased the credit crunch?

Steve Odland (Office Depot): The stimulus money has not gone to small businesses. This is an unusual recession in that it has been banking led and housing led. As these sources of cash have dried up for small businesses, they haven't been replaced by stimulus money or any other money. The issue here is that every modern recession is led out by small businesses as they create jobs. All net job creation happens in small business. We are not going to see jobs rebound until we see small businesses get more access to liquidity.

Fred Smith (FedEx): Although the Obama policies are not hurting the economy, I am not sure they get to the heart of the fundamental problem. The economy got way too invested in finance and housing. And it did so because the tax policies of the United States favor debt and speculation in the financial services sector as opposed to investment in the industrial sector. So if you want to improve the earnings power of blue collar folks you've got to stimulate the industrial sector. And our tax policies just don't do that at the present time. So there are two things that need to happen: One, the tax rate in the United States at the corporate level is 38%. Other than Japan it's the highest in the industrialized world. Secondarily interest is completely deductible. So if you borrow money to speculate on Wall Street, the government is basically helping you with that speculation. Whereas an industrial companies like FedEx that buys a new 777 and employs people all over the country in building the plane; we get that airplane and put it in service and we have to depreciate that airplane. In other words the capital investment on that equipment is taxed at a much greater rate than speculation in the financial sector. So expensing capital investment would be huge stimulus to the industrial sector.

Where do you see the economy headed?

Steve Odland (Office Depot): The economy started to go off two years ago and has come down dramatically. In order to create jobs we need to get liquidity to small businesses, and if we do that we will have a slow steady recovery in 2010. However, I think it's going to take 2 to 3 years to get back to where we were 2 years ago, so this is going to be a long haul.

Fred Smith (FedEx): I think in the fourth quarter this year the economy's going to grow over 4% sequentially. Next year our forecast is between 2.5% to 3%. But remember that's off of a lower base which has come down because of the tremendous economic contraction we have had.

Tuesday, September 15, 2009

Stiglitz: The Fed is in Deep Trouble

Joseph Stiglitz the Nobel prize winning Columbia University economist was on Bloomberg today talking about how the Banks Problems are Bigger Today Than Pre-Lehman. In his interview he made a couple of very interesting points which we paraphrase here:
Is the worst over for the global economy? If we were to define recovery as walking back from the precipice we faced a year ago, then yes the worst is over. If we define recession as two consecutive quarters of negative growth, then the recession may be over temporarily. However if we are to ask the question: will the economy return to a robust enough growth to negate the effects of unemployment? Then the answer is No. We are definitely not out of the woods.
Unemployment will continue to go up. American’s wealth which was largely tied up in their houses has been devastated. The deeply indebted American consumer will focus on saving to repair their household balance sheets. But this will be negative for the world economy since U.S. consumption was the engine for world economic growth.
So what will be the growth engine now? We are going into an extended period economic malaise. The U.S. economy will grow but not fast enough to offset the increase in unemployment, population and productivity. In order to just breakeven on the jobs front, the U.S. economy needs to grow at 3% or more. The labor market picture does not look good and if workers don’t have income, the economy cannot generate demand.
Many transitions will take place but not smoothly. Americans will save more and consume less while the Chinese will consume more and save less, however the two won’t move in tandem. Chinese consumption will not increase fast enough to offset decline in American consumption.
The Fed is in deep trouble as it has little room left to maneuver. The Fed is currently caught in a quandary between trying to provide enough stimulus/credit to generate a sustained economic recovery and preventing long term rates from rising.
On the fiscal side, there is chance of additional stimulus however it could stoke inflation fears and cause long term rates to rise, choking a weak recovery. On the monetary side, the Federal Reserve has already absorbed $1.7 trillion of U.S. debt issuance through quantitative easing. So far the Fed has stated that it will not engage in further quantitative easing, but then the question becomes: Who will absorb the trillions of dollars of U.S. debt issuances going forward? Many outsiders are already balking at purchasing U.S. debt due to the extremely low interest rates which do not adequately compensate them for future inflation risk.
So to prevent long term rates from rising will the Fed backtrack and restart quantitative easing next year? They could, but doing so would seriously damage the credibility of the Fed. It will only serve to showcase that the Fed has consistently misestimated where the economy is headed.
What are the chances that G-20 leaders will rein in the banks? Progress will be slow on this front especially in the U.S. because the administration is not seen as an honest broker. For example the Obama administration has proposed that the Fed be the new systemic regulator, when they were the ones who messed up in the first place. Similarly on bank bonuses the Obama administration has been dragging its feet due to strong lobbying by banks.

Saturday, September 12, 2009

Treasury Girds for Debt-Ceiling Fight

Today the WSJ is reporting that as the Treasury Girds for Debt-Ceiling Fight, Obama administration officials are exploring ways to fund the government if Congress balks.
The Obama administration, concerned about the possibility of a big political fight over the national debt, is looking at how it can continue funding the government in the event that Congress hinders its ability to borrow money.

Treasury Department officials are examining tools employed by previous administrations, including disinvesting government retirement funds and suspending interest payments to federal accounts, according to people familiar with the matter. They are also looking at what to do in the unlikely event of a government shutdown. At issue is the debt ceiling, a dollar limit controlled by Congress that dictates how much the U.S. can borrow. Treasury Secretary Timothy Geithner told the Senate in a letter last month that the $12.1 trillion ceiling could be hit as early as mid-October, and said it needs to be increased so the U.S. can continue funding operations and making debt payments. Mr. Geithner didn't indicate the increase he was seeking.

With the U.S. borrowing about $30 billion a week, some economists say the Treasury will need an increase of as much as $1.5 trillion if it wants to avoid another request before the 2010 midterm elections. The U.S. could default on its debt if Congress doesn't raise the debt ceiling, but it is a remote scenario.

Well we say that the Obama administration need not worry. The U.S. Congress has long ago abdicated its duty for watching out for the American public. So after a much televised public brawl where they will pretend to berate Geithner and Obama, Congress will of course raise the debt ceiling.
In any event the U.S. Congress no longer controls the government purse. It signed away that responsibility in 1913 over to the Federal Reserve. While Congress quibbles over raising the debt ceiling by another $1.5-2 trillion, Bernanke & Co. who require no Congressional approval (since the Fed is independent and has emergency powers) have already raided the taxpayer purse by $23.7 trillion.
And as for Neil Barofsky of SIGTARP who revealed the $23.7 trillion raid, is his independence safe? Hell no! OMB Watch reports, Bernanke and his partner-in-destruction, the U.S. Treasury tried to lasso in SIGTARP, but luckily failed in their attempt. But who’s to say they won’t try again?

Dicky Boy…Whatcha Up To?

On the 1 year anniversary of Lehman’s spectacular collapse, we were wondering what our buddy Dicky Boy (aka Dick Fuld) was up to. Looks like he has opened up a new advisory practice Matrix Advisors LLC in NYC.
Our heartiest congratulations to you Boy! And …um just one more thing…go easy on the secretarial staff. We have heard through the receptionist grapevine that our buddy Dicky Boy was such a DIVA! He was not your typical “I drink water from the water cooler” CEO. Hell No! Every single day, Dicky Boy had his water served to him in a crystal glass balanced on a tray by his oh so nervous staff. No drinking water out of Aquafina bottles too, mind you.
And even though his office was a mere 30 seconds walk from the floor elevator, our DIVA would not be caught dead waiting for one. He was busy you see…engineering Lehman’s collapse. So before he went anywhere, his secretary would alert the floor receptionist that Dicky Boy was on his way to the elevator banks. The poor receptionist would then nervously press a special button under her desk, which would then zoom up one of 8 elevators to Dicky Boy’s floor! And one more thing…apparently she had to peer in the cameras to make sure the elevator was empty.
Funny eh...Of course not so funny when you are a bottom of the ladder analyst balancing a 3 ton set of pitch books waiting for the elevator to carry you up from the production room to your nervous associate/VP…only to watch it zoom away!!

Wednesday, September 9, 2009

Madoff's NYC Penthouse - Bidding Is On!

Friends, it is time to take out your checkbooks, for the bidding starts on Madoff's NYC penthouse...that is if you don't mind a U.S. Marshall as a real estate broker showing you around the apartment. But be prepared to set aside a little bundle for a home remodel, coz for all the money he embezzled his taste in furnishings appears pretty tacky.

Tuesday, September 8, 2009

Record Insider Selling Continues

Insider selling in the months of August and September is hitting record highs particularly in the consumer discretionary arena. Case in point being Dick's Sporting Goods  (Ticker: DKS) where the company management has been selling stock after raising earnings guidance. In a story titled Analyst Sees 'Disconnect' in Words, Deeds at Dick's, the Wall Street Journal outlines the disconnect:

Dick's Sporting Goods Inc.'s chief executive and vice chairman had been buying the Pittsburgh company's stock last year. Lately, they have been sellers. Chief Executive Edward W. Stack and Vice Chairman William J. Colombo were joined last week by director Lawrence J. Schorr in selling a combined 120,000 shares at prices ranging from $22.25 to $22.81 a share. This after Messrs. Stack and Colombo, starting May 27, 2008, and concluding in November, bought 177,000 shares. Mr. Colombo, in particular, was a timely buyer then, paying nearly $950,000 to get 71,000 shares at an average price of $13.37 each.
"It's a little odd, especially coming from a CEO, to see buys and sells within a short period of time," says Ben Silverman, director of research at InsiderScore.com, a Web site that tracks and rates insider transactions. "The way I look at it, it's a red flag. It's a negative sentiment indicator."
The shares got a boost last week when the company raised its earnings forecast. Mr. Silverman said the insider sales contrast with the company's rosier view for earnings. "There's a disconnect between what the insiders are doing in terms of their stock and what the company is saying in terms of guidance," Mr. Silverman said.

Monday, September 7, 2009

PIMCO's El-Erian: HFT is a Head-Fake

WOW! No less that the majestic PIMCO is now admitting that High Frequency Trading (HFT) is causing distortions in the equity markets. And when PIMCO talks, we certainly perk up and take a listen, even though we believe that a lot of their talk is self-serving at best. However, given their sheer size and deep political connections it is hard to dismiss their views. And since their portfolio is so much more valuable to BFF Bernanke vs. ours, we for all practical purposes view PIMCO as a market insider.
So attached below is El-Erian’s interview with the wildly optimistic but sadly uninformed CNBC host Joe Kernen. Move over to 2:47 min mark to hear El-Erian tell Joe "The High Frequency data has acted as a head fake for many in the market...equity markets are on a Sugar High".
And er... before we go we have one piece of advice for the financially illiterate Joe Kernen: “Before you go off berating our insider boy El-Erian on not having a grasp of the buoyant equity markets, we would like you to spend a few hours on a bond trading desk. You Joe will realize that bond investors often have a better grasp of equity markets, since equity is the cushion underneath their bonds. So they make SURE they understand the equity markets very well thank you. And yes we at The Firecracker Report have been there done that, which is why we are telling you Mr. Joe to go to bondholder boot camp”.

S&P Futures/ETFs Being Used to Ramp up Equity Markets - Market Manipulation Evidence from Intraday Trading Profiles

As any day-trader (still left with money to trade) would tell you, these days there is some extremely suspicious activity going on in the equity markets. For the last few months, on several occasions the equity markets have ramped up in a matter of minutes, on no news whatsoever and on extremely low volume. Talking bubbleheads, would like us to believe that buoyed by the prospects of a V-shaped recovery, money that has been on the side-lines is moving back in, causing the market to ramp up.
We however would like to challenge this thesis by presenting evidence to the contrary from intraday trading profiles, which support our belief that S&P futures are being used to pump up the equity markets.

S&P Futures/ETFs Being Used to Ramp up Equity Markets - Market Manipulation Evidence from Intraday Trading ...