Traderbill's Financial Markets Weblog

Bloomberg Quote of the Day: “Defeat isn’t bitter, if you don’t swallow it.” – Clarence Darrow

TB Saiz: “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet it.” …or as Aesop would say “Slow and steady wins the race.” …still it takes a lot of guts to bet on the tortoise….especially for Americans who expect instant gratification.

…but it didn’t smell like a rose or have any of its other characteristics. Well, it’s another day of TB doing God’s work…because by God if Lloyd Blankfein (wonder what the blank stands for…expletive?) is doing it TB must be doing much more because he isn’t being compensated for it. But it is money that it is all about…pure and simple, nothing more. Hello? If this is such a strong market why is there no IPO market? Huh? Because regardless of what Warren Buffett says, the credit crisis is not over although the crowd he associates with…and Blanfein…and Diman because none of their friends, save the ones that spent the weekend at Bernie’s, has felt any pain! What recession?

Let’s see 9 is an odd number so it must have been an ‘up’ day. Today is even so who knows. As we have seen on more than a few occasions lately all asset classes (the dollar is a currency not an asset class) were up: stocks were up, commodities were up, bonds were up…that isn’t how it is supposed to play…but we are in unstable times (unless you pay attention to volatility in which case you are ‘all in.’ But it is just that complacency that should have you worried…ok there goes perma-bear TB again. Well, he is in good company…not only some well-known investors but Da Fed! They are finding it hard to understand or wish that the correlation of all asset classes is 0.7 – it doesn’t get much better than that…or worse if you are concerned about asset inflation! Where is the balance? You know, bonds go up and stocks go down and never the twain shall meet.

But mind you, while inflation, be it cost-push, or demand-pull is out of the question. Cost-push? How can you have that with slack demand…even if it is commodities prices being driven higher so long as businesses are not willing to restock inventories; and why would they do that if they can’t raise prices and there is a scant increase in demand? But the key element of demand-pull inflation is rapidly rising wages and with the true unemployment rate 17.2%, employers can hire without raising wages as for most of us there is no place to ‘jump’ to…the Diman family and others in the financial sector  excepted and expected. The only ‘ism’ for me: nepotism!

TB wrote the above and then read the following Bloomberg top stories below:

*Tighter Bank Lending Standards Reinforce Fed’s Decision to Keep Rates Low

*European Finance Ministers Commit to Start Cutting Budget Deficits by 2011

Here is the time line…the Fed can (and must) keep rates low because the banks aren’t lending (except Buffett says they are…and those with money agree with him, not those who need to borrow it), most people TB talks to think by summer the Fed will tighten (the economy willing), and now the European finance ministers complete the tri-fecta. But there is one more step in the equation: IF the stock market is 6-9 months ahead of the economy…that may be a pipedream this time…then stocks should be fully priced now and begin selling off early next year or even sooner.

Y’see…if asset prices – in the investment classes – are rising – they divert money from other uses…savings (at 1%?) to frivolous things like stocks, bonds, and oh yes, gold. That has to worry the Fed lest we continue to drive prices higher and the financial sector resumes it’s wrongful place of 25% of the stock market.

But look at those earnings, you say?…while TB says look at those bottom line earnings while the top line stagnates. Remember they were from that blow-out quarter in GDP and thus productivity gains, which were in turn fueled by lay-off’s and lower hours worked. Productivity is static: in other words, it doesn’t matter how many widgets you actually make but the time and labor that went into making one widget. So while it looks good on the surface we are manufacturing 50 or 60 widgets when we were making 100…that does not translate to the bottom line…except when you first do it…businesses grow thru revenue not one time below the line cost savings…do you still think 22x earnings is the right level? If you love the S&P 500 you must because that is exactly where it is. Now ask your self if you are paying 22 times the earnings of something where is your break even, let alone where it becomes profitable.

The best of these was Berkshire Hathaway which is buying Burlington Northern for just 20 times earnings…and a PEG rate (p/e to long-term growth of 1.78x). That is like pushing on a string, and this for a railroad that faces enormous expenditures (rolling stock, track expansion, etc.). Not to mention assuming another $14 billion in debt meaning he is actually paying about 30x earnings.

But wait…Berkshire had blowout earnings…yep, that is exactly what they were! What is Berkshire? A conglomerate? No, because despite See’s Candy and all those other fun toys of Warren’s they are still a casualty insurer and a casualty insurer that has benefitted by no bad hurricanes or disasters this year…which offset lower investment gains…except mark-to- market on the huge stock market options plays and a revaluing of distressed financial assets like credit default swaps etc. Try spending that! …oops, forgot, we did that last time around!

After writing all this, TB read this by Pimco’s Paul McCulley in John Mauldin’t Outside the Box:

“How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a U-shaped recovery as the base case, with a W-shaped outcome the dominant risk case?”

There is also a third possibility McCulley doesn’t mention: the ‘U’ may have a very broad bottom or could be a lazy ‘L’ or even saucer-shaped. This means the ‘V’ is highly optimistic…irrationally so?…some of the patterns look like nothing other than the Great Depression….but what they heck…borrow and buy – if you can get a loan!

There are no answers to the above…you have to decide…your financial future is at risk. But consider this: how was the stock market up 2% yesterday…REITS, a riskier broad asset class +5%…on volume of just 1.23B shares…an hour before the close it was 730M?

For the first time EVER…TB’s portfolios and the portfolios he manages for clients were not only up well over 1% but there were only 5 stocks in them that were down – none more than 10 cents! If that doesn’t sound like a feeding-frenzy TB doesn’t have a clue what would qualify as one….and not only on low volume but the money that is now coming out of money market funds…at a very slow pace…is going to bonds or European stocks – not U.S. So you make the call…does it pass the smell test? Roses or rotting garbage?

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TB believes that even Goldilocks would be hysterical watching how we ‘experts’ are investing for tomorrow in this wacky environment. There is no transparency…Madoff (although his methods were extreme) was no fluke as we now have Galleon, that not only roped in the usual suspects (Wall Street and hedgies), but executives of some of the major companies and even McKinsey & Co (there is a fraud investigation into Petrobras (PBR) and the CEO is scheduled to testify today following 22 execs and vendors that have already been subpoenaed…but since the investigation was announced the stock is up 15% per Bloomberg). Banks are paying record bonuses with OUR money…and worse they are lobbying against any significant financial reform with OUR money. Our politicians are bought and paid for or at least will be until the next elections as each party claims victory over the scum of the other…when we and they know it is the voters who are mad as hell.

At least three banks failed on an FDIC decision to shorten audits by 20% at the ‘safest’ banks…it turns out the investigators thought it was a cost-cutting move, rather than to do a thorough exam and then and only then if the bank was pristine cut future exams by 20%. Once again regulation failed us…and once again we have to stop the madness and go back to the sound financial policies that kept the banking system clean for 50 years, until Reagan decided Continental Illinois was too big to fail and that one case became policy eventually leading to the dismantling of Glass-Steagall. Wunderbar!

To those of you in the U.S. enjoy your day off tomorrow but remember why we have it off. That may be hard for most people who never served the country in any capacity let lone put their life on the line. A bit strong? TB is merely doing God’s work…right, Lloyd? You jerk! May that quote come back to haunt you and Goldman in spades!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © November 10, 2009.