Wednesday, October 28, 2009

Stay safe my friends ...

Administrative note: Returning from holiday on November 12th, posting will continue to be limited until then.

From a micro-view, personally and professionally, and from a macro-view, politically and economically, it feels like the Buddha is in the middle of the road with a flak jacket on and fork extended.

To be mindful is a discontinuous process, our senses allow us a glimpse at the perfect form (truth) but that view can often be distorted by the flickering fire of perception that illuminates the shapes we perceive to believe.

In my life have always rallied against the tyranny of petty knowledge and authority, holding hard to the belief that knowledge is just an acquired thing, requiring no special skills outside of heart and guts and desire.

If you can dream it you can be it. Why? Because you can.

Lately, though dreams have offered little solace, as this bloggers' respite has increasingly been interrupted by coincidences that suggest there are dots and there are lines, and folks in the know have their pencils out.

Did you know that Germany most probably foiled a terrorist strike planned for October 11th? The warnings from the terrorist B-team, that within two weeks of the German election on a Sunday there would be a strike bigger than 9/11 ... had Germany security knocking down doors throughout the country, rounding up the usual suspects and busting up a 10 person cell in the bosom of where the 9/11 attacks were planned.

Sunday October 11th had symbolic significance because 70 years ago on that date a German physicist alerted the Americans as to the possibility of atomic weaponry.

Our October 11th is fast approaching. November 1, 2009 or 11/01/09, is a hyper-symbolic date for our adversaries.

Did you know that of the recent 'terrorist' plots uncovered in the US, and publicized, NPR reports that officials are saying the suspects have dozens of contacts stateside that may be complicit? The Federales, are purportedly,'watching' them.

With that premise in mind, the shapes illuminated on my cave wall are not for family viewing.

My trade? Sell Armageddon and buy an extended Disney vacation with the kids.

Looking forward to returning to the Great City on the Lake. Fervently hope it will be exactly in the same condition as left.

MABUS is USAM B? As in Usama Bin Laden? Has Abu Valentine marked the time?

Let's get through this weekend.

The next terror date is 9/01/11, two days after Ramadan, roughly 70 years after a fellow named Mark Oliphant made an urgent journey in an unheated plane to the States and successfully convinced the Americans to move forward with their atomic project.

Oh and the panic low of 667 on the S&P? ... coincidentally that is exactly the number of days between 11/01/09 and 09/01/11? What the $%@#$?

Time and space/price and form ...oh my!

Stay safe my friends.

(Add-on : the last date of concern, at least for awhile, is 11/09. -AM)

Saturday, October 24, 2009

Does it include a gold-plated toaster?

The above bankster pictured is Dana J. Dykhouse. President and CEO. of First Premier

It has been reported that many banks are raising their credit card interest rates before new federal regulations come into effect as part of the Credit Card Act of 2009, but First Premier Bankcard of Sioux Falls, SD, took it to the next level and is now offering some of their customers credit cards at interest rates as high as 79.9% APR.

The story first broke when San Diego’s NBC affiliate received a report from a viewer that he had received a pre-approved credit card offer from First Premier Bankcard, LLC at with a 79.9% APR.

Although the interest rate that First Premier Bankcard offered Hageman is extraordinarily high, it’s perfectly legal. Credit card interest rates are regulated on a state-by-state basis and South Dakota removed the ceiling on the interest rates that credit card companies can charge in hopes of attracting national banks to the state.

(This bankster is a classic .. here is an earlier complaint with minor corrections... -AM)

In the year 2001 First Premier bank solicited my home with a credit card offer for an unsecured Gold Mastercard with a credit limit of $250.00. I declined their offer each and every time they contacted my home in a 2 month period. I had even tried to block their company telephone telemarketer from calling my home.

I was unable to block this business from contacting my home because the phone call was generated by an unknown source. They then began to call my home 3-4 times a day. They explained that I would only have to pay an annual fee of $49.00 and I would not have to send any money... the $49.00 annual fee would be applied toward the card.

I received the credit card with $250.00 as the credit limit. I received the first billing statement 3 weeks later.I thought they made a billing error because I had a balance owed of $234.00.

I contacted the billing department at 1-800-987-5521 and spoke with a customer services rep. She told me it was not a billing error and it was my responsibility to pay the minimum monthly payment of $20.00 or I could issue First Premier bank a payment in the amount of $234.00 to avoid being reported to the credit bureau.

I asked if I could close the account she stated she could but she would need me to make the full payment of the outstanding balance owed.

It has now been 13 months and I have made $50.00 in payments above the minimum payments due and know I don't have any credit on this card nor have I used this card. In February 2003 I contacted the billing department again and spoke with Sharon the supervisor.

I told her I don't owe them any money and that I am demanding that Mr.Dana Dykhouse-CEO of First Premier bank refund all of my money.

Tacoma, Washington

The thrill of history and the agony of the facts

By John Mehaffey
LONDON (Reuters) -

Many prehistoric Australian aboriginals could have outrun world 100 and 200 meters record holder Usain Bolt in modern conditions.

Any Neanderthal woman could have beaten former bodybuilder and current California governor Arnold Schwarzenegger in an arm wrestle.

These and other eye-catching claims are detailed in a book by Australian anthropologist Peter McAllister entitled "Manthropology" and provocatively sub-titled "The Science of the Inadequate Modern Male."

McAllister sets out his stall in the opening sentence of the prologue.

"If you're reading this then you -- or the male you have bought it for -- are the worst man in history.

"No ifs, no buts -- the worst man, period...As a class we are in fact the sorriest cohort of masculine Homo sapiens to ever walk the planet.

Delving into a wide range of source material McAllister finds evidence he believes proves that modern man is inferior to his predecessors in, among other fields, the basic Olympic athletics disciplines of running and jumping.

McAllister said a Neanderthal woman had 10 percent more muscle bulk than modern European man. Trained to capacity she would have reached 90 percent of Schwarzenegger's bulk at his peak in the 1970s.

"But because of the quirk of her physiology, with a much shorter lower arm, she would slam him to the table without a problem," he said.

Manthropology abounds with other examples:

* Roman legions completed more than one-and-a-half marathons a day carrying more than half their body weight in equipment.

* Athens employed 30,000 rowers who could all exceed the achievements of modern oarsmen.

* Australian aboriginals threw a hardwood spear 110 meters or more (the current world javelin record is 98.48).

McAllister said it was difficult to equate the ancient spear with the modern javelin but added: "Given other evidence of Aboriginal man's superb athleticism you'd have to wonder whether they couldn't have taken out every modern javelin event they entered."

Why the decline?

"We are so inactive these days and have been since the industrial revolution really kicked into gear," McAllister replied. "These people were much more robust than we were.

The long finger of instability from the Hand or how I learned to stop worrying and love the {blank}

The markets may go either up or down and far be it for this humble blogger to suppose he has the keys to the near-term direction.

We talk of mania and bubbles and no one is bearish, few believe we've fundamentally recovered whilst we're not at Rosie's mania levels yet.

Perhaps that is to come.

They really should wheel Rumsfeld out in a Dr. Strangeglove moment one of these days, for the solution to the 'What Just Happened?' Crisis in the form of the "I Can't Believe it is not Capitalism' plan was right out of Dandy Don's playbook.

How do you solve a problem? Make it a bigger problem.

The JV Hedge fund between the Treasury and the FED has successfully run the carry trade using the sovereign scrip as the funding currency.

The public balance sheet is now the toxic asset.

We live in a Fleck universe starring the battle of unarmed combatants (currencies) where the U.S. is the dealer (reserve), at least for the near term.

Lots of folks have jumped on this Nancy Capitalist train.

It didn't have to be this way but it is what it is.

Armageddon may have been cancelled but the stage has not been taken down.

The banks can shift marks, oh it is so difficult to value don't you know, in their derivatives to create fantasy gains against the few losses they have to admit.

We can take a step past manufacturing govmint statistics through creativity and give away the rentenmarks free and easy, but that doesn't mean GDP growth is much more than the same old chimera of currency debacement that masquerades America's wealth exporting machine and is promulgated by our leaders as an exceptional example of America's resiliency.

But there are also unknown unknowns. These are things we do not know we don’t know.

What we do not know we don't know is what the long finger of instability from the Hand will ultimately do to the markets and the economy that are still the home of the brave but alas are now a different land.

What we do not know that we don't know is how the continuing liquidation of Main Street and bifurcation of America will interact with the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self interests and are trying to do it again.

Or as Rummy would say,

There are a lot of people who lie and get away with it, and that's just a fact.

Friday, October 16, 2009

The bifurcation of America ... Benny bettin', Main Street gettin'

When year-end squaring ensues, secondary takedowns, and possible stock buy-backs at top o' da market, subside, the pain of the drain might and most probably will, in vengeance, resurface.

If reality again becomes the tail-risk in the mind of the MSM oscillations can occur at any time.

That view need be balanced by Mr. Dunham seemingly deferring to every 3% move down on the S&P with a whisper campaign of a new non-stimulus plan stimulation so the Nancy Capitalists can be assured of pudding forever.

Political and bankster interests align when green markets help midterm elections.

The market as measured by Main Street is posed to 'go down' more ,that seems assured, however having learned all the appropriate lessons from history the Federales seem determined to solve a crisis brought about not only by debt but also wealth inequality by exacerbating the same.

This time it is different we will just bypass the consumer balance sheet.

Famous last words.

The next balance sheet to go down is the last balance sheet ... the Federales unless the American consumer ultimately bails everyone out.

Yet, the system seems determined to trash the consumer .. animal spirits focused on driving the markets to the point where J6P becomes the greater fool.

Or perhaps as recently gasped by the WSJ and Bubblevision the markets, that are from a Euro perspective so debased that they are dirt cheap, will get the whole damn world to be the greater fool.

I had a dream. That a progressive intellectual liberal from Chicago would institute proper reform.

We had an opportunity. There was no need to insert the long finger of instability into the 'free' markets and exacerbate the status quo.

For insolvent banksters, we could have wiped out the commons and preferred and then gone up the capital structure and equitized until future equity participants either saw economies of scale or saw the need to break up the entity into smaller pieces. Perhaps the government could have taken a convertible debenture position, or equity participant notes , warrants etc.. as in previous bailouts so that there would in some situations be a return on the government's investments as the entity is put into some form of run-off. The process would be transparent in that taxpayers would know how their money was being spent, as in previous crises.

Instead we have no idea who got what for what and we have translated insolvent companies reimbursing a small part of our total largesse as proof they are vibrant concerns that can make tons of money in FICC when the money is easy and free.

And the new burgermeisters, just like the old...

The secret sauce of 'enhanced government productivity reporting mixed with overinflated GDP and underreported inflation' has spiced the witches brew of currency debacement that masquerades America's wealth exporting machine and is promulgated by our leaders as an exceptional example of America's resiliency.

It's not just that no country in the history of civilization has transformed its' way to greatness by debasing its' currency folks...

What you need to focus on is that when they destroy the currency THEY ARE DESTROYING YOUR STANDARD OF LIVING.

The reversal day in Sept on the Fed minutes was notable for the hawkish read ... the latest Fed minutes notable for dovishness.

In this humble bloggers' opinion would look to how easily it is for non Stimulus 2.0 stimulus to be deployed in the near term for clues on market direction.

When folks are trading based on the knowledge that it is just a confidence game and that the the fundamentals don't matter, any small crack in confidence can start de-risking, i.e., reducing the 'custodes premium' - that they will use the dollar carry trade to jack asset values into the skies.

The Federales are the well from which all confidence doth currently spring.

The models that they have built show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that they can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.

These models and the besotted following are both trading without respect to fundamentals.

Inflation expectations were well anchored in the Great Depression.

You're not as miserable as you think you are. Doubt it? Rocky watch me pull some statistics out of this hat. Hey now, who are you going to believe? Me? .. or your lying eyes?

This time around it is only a Great Depression if they say it is.

The bifurcation of America.

They cut you in half while you're smiling ear-to-ear.

Tuesday, October 13, 2009

A happy ending?

By Karen DeYoung and Walter Pincus
Washington Post
Wednesday, September 30, 2009

U.S. and international intelligence officials say that improved recruitment of spies inside the al-Qaeda network, along with increased use of targeted airstrikes and enhanced assistance from cooperative governments, has significantly reduced the terrorist organization's effectiveness.

A U.S. counterterrorism official said that the combined advances have led to the deaths of more than a dozen senior figures in al-Qaeda and allied groups in Pakistan and elsewhere over the past year, most of them in 2009. Officials described Osama bin Laden and his main lieutenants as isolated and unable to coordinate high-profile attacks.

The most important new weapon in the Western arsenal is said to be the recruitment of spies inside al-Qaeda and affiliated organizations, a long-sought objective. "Human sources have begun to produce results," Richard Barrett, head of the United Nations' al-Qaeda and Taliban monitoring group, said Tuesday. Barrett is the former chief of Britain's overseas counterterrorism operations.

Current and former senior U.S. officials, who spoke about intelligence matters on the condition of anonymity, confirmed what one former CIA official called "our penetration of al-Qaeda." A senior administration official said that success had come "because of, first of all, very good intelligence capabilities . . . to locate and identify individuals who are part of the al-Qaeda organization."

Director of National Intelligence Dennis C. Blair referred obliquely in an interview with reporters earlier this month to the use of spies, saying that "the primary way" that U.S. intelligence determines which terrorist organizations pose direct threats is "to penetrate them and learn whether they're talking about making attacks against the United States."

Barrett, in a speech Tuesday to the Washington Institute for Near East Policy, said that al-Qaeda is "losing credibility" among potential supporters and recruits because its recent efforts "have not awed people" and are "not up to the standard of 9/11."

As the years have passed since the 2001 attacks, he said, al-Qaeda "hasn't really made a connection to a new generation" of young Muslims who have little recollection of the events and are less interested in religion.

In terms of Western efforts, he said, the threat has diminished because "our technical collection," such as intercepts and overhead surveillance, "is much better. We have better human intelligence, [and] they have fewer competent people."

If a man dwells on the past, then he robs the present. But if a man ignores the past, he may rob the future.

The roots of chaos theory date back to about 1900, in the studies of Henri Poincaré on the problem of the motion of three objects in mutual gravitational attraction, the so-called three-body problem. Poincaré found that there can be orbits which are nonperiodic, and yet not forever increasing nor approaching a fixed point.

(The three-body problem is solved by considering that given two massive bodies in circular orbits around a common center of mass there are five positions in space where a third body, of comparatively negligible mass, could be placed which would then maintain its position relative to the two massive bodies. These are called Lagrangarian points and are marked in green above. -AM)

Chaos theory progressed more rapidly after mid-century, when it first became evident for some scientists that linear theory, the prevailing system theory at that time, simply could not explain the observed behavior of certain experiments like that of the logistic map.

(Wiki:A rough description of chaos is that chaotic systems exhibit a great sensitivity to initial conditions. . A common source of such sensitivity to initial conditions is represented on a logistic map as a repeated folding and stretching of the space on which it is defined.

This stretching-and-folding does not just produce a gradual divergence, but an exponential divergence. In fact, exponential divergence explains the connection between chaos and unpredictability:

a small error in the supposed initial state of the system will tend to correspond to a large error later in its evolution.

Hence, predictions about future states become progressively {indeed, exponentially} worse when there are even very small errors in our knowledge of the initial state. -AM

An early pioneer of the theory was Edward Lorenz whose interest in chaos came about accidentally through his work on weather prediction in 1961. Lorenz was using a basic computer, a Royal McBee LGP-30, to run his weather simulation. He wanted to see a sequence of data again and to save time he started the simulation in the middle of its course. He was able to do this by entering a printout of the data corresponding to conditions in the middle of his simulation which he had calculated last time.

To his surprise the weather that the machine began to predict was completely different to the weather calculated before. Lorenz tracked this down to the computer printout. The printout rounded variables off to a 3-digit number, but the computer worked with 6-digit numbers. This difference is tiny and the consensus at the time would have been that it should have had practically no effect.

However Lorenz had discovered that small changes in initial conditions produced large changes in the long-term outcome.

October 8, 2009

Speaking with PBS's Charlie Rose on Monday, Mrs. Pelosi mused publicly about the rising possibility of enacting a value-added tax, or VAT, as part of broader tax reform. "Somewhere along the way, a value-added tax plays into this," she said. "Of course, we want to take down the health-care cost, that's one part of it. But in the scheme of things, I think it's fair to look at a value-added tax as well."

The allure of a VAT for politicians is that it applies to every level of production or service, rakes in piles of money, and is largely hidden from those who ultimately pay it—namely, consumers.

Nearly every European country that has passed national health care has also eventually imposed a VAT, and it's foolish to think the U.S. will be different.

Mrs. Pelosi is the second prominent Democrat to call for a VAT in recent weeks. John Podesta, an adviser to President Obama and president of the very liberal Center for American Progress, called in September for a "small and more progressive" VAT.

Of course, VATs always start "small" and get bigger. The Underwood-Simmons tariff legislation of 1913 included a graduated income tax provision. The income tax only affected 2% of the workforce, but established the fiscal tool long advocated by economic reformers and popularly supported. Rate progressivity was only part of the historic legacy of the 1913 revenue bill. “It is much safer to begin upon somewhat moderate lines” wrote Wilson.

Saturday Evening Post
by Benton McMillin
May 17, 1913

President Wilson is deeply interested in a thorough reform of our tax system. He has studied it carefully and has called an extra session of Congress to consider the whole question. He is keeping in close touch with the House and the Senate, and is urging remedial legislation. His past record demonstrates that he may be relied on to carry out party pledges and the platform on which he was elected. He has the courage of his convictions and is not afraid to act.

We may also judge, from both his declaration and his record, that he stands ready to initiate reform whenever and wherever the public weal demands it. It may be predicted with perfect confidence that, whatever other tax fails, the income tax will not fail. Wherever there is a revolution it will be against some other form of taxation instead of this.

It is founded on the rock- not the sand- and will stand against all storms.


In the most current Elliott Wave Theorist (published September 15, 2009), Bob Prechter presents the following close-up of the Dollar Index since that trend-turning bottom. (Above.)

To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies. So it is something in which no one believes and to which no one objects.
Margaret Thatcher Blog
Oct 13, 2009: 10:41 AM CST
By Corey Rosenbloom, CMT

I wanted to share an excerpt from an article from Elliott Wave International and analyst Nico Issac who wrote, “Before You Mourn the Death of the Dollar, Check this Chart.”

Mr. Issac notes the following two factors in contributing to bearish sentiment on the US Dollar:

An alleged (and later denied) secret meeting among leaders of certain Arab States, China, Russia, and France which aimed for the immediate discontinuation of oil trading in U.S. dollars.

And, an open statement from one senior United Nations official that proposed the dollar be replaced as the world’s reserve currency.

He also notes a similar ‘chorus of negativity’ that occurred in early 2008.

Excerpted from the article:

“The U.S. dollar stood at an all-time record low against the euro after plunging more than 40% in value. And, according to the usual experts, the greenback was “dead”-set to meet its maker. On this, these news items from early 2008 say plenty:

“The dollar is a terribly flawed currency and its days are numbered.” (Wall Street Journal quote)

“It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the world’s reserve currency.” (George Soros at the World Economic Forum)

“Greenback is losing Global Appeal… the ‘Almighty’ Dollar is Gone.” (Associated Press)

YET — from its March 2008 bottom, the U.S. dollar came back to life with a vengeance, soaring in a one-year long winning streak to multi-year highs.

Nico concludes the article by saying:

“It’s crucial to understand that markets don’t necessarily respond to sentiment extremes immediately. But, such extremes do indicate exhaustion of the trend — which is usually the opposite of what the mainstream expects.”

Monday, October 12, 2009

Larry Bummers

(And the wizard says -

(Reuters)Major slack remains in the U.S. economy for the foreseeable future and he sees structural and cyclical concerns about the U.S. job market.

It is a confidence game. -AM)

A clear and present danger

(With Sunday October 11th, the 70 year anniversary of German physicist Einstein introducing the possibilities of an atomic bomb to America, passing quietly {thankfully ...verily 'tis all about da symbol}, it should be noted that this story, which is truly a clear and present danger to the United States, is getting little to no play in the MSM. An attack had been predicted on a Sunday within two weeks after the German elections. Authorities took it seriously and rounded up as many usual suspects as possible. -AM)

Eight years after 9/11, the city where the attack was planned is once more enjoying a sad reputation as a center for Islamic terrorism.

The German media reported earlier this week that German security officials are tracking in Hamburg a new, ten-man Islamic terrorist group.

Hamburg is the city that hosted Mohammed Atta and other key, 9/11 terrorists, while they planned their strike against the World Trade Center. Afterwards, history bestowed the city's name on Atta and his associates, who ever since have been collectively called the "Hamburg Cell."

According to an internal intelligence report composed by Hamburg's security agencies, ten Muslims from the northern German port city travelled to Pakistan's wild border region last March for training in an al Qaeda camp. Taking part in this "conspiratorial action", were two German converts.

"The individual group members dispose ...of a fundamental jihadist attitude and are numbered among the violent jihadist scene in Hamburg," the intelligence report stated.

Besides their depraved ideology, what the two generations of Islamic terrorists have most in common was their use of the same Hamburg mosque as a meeting place. Currently called the Taiba mosque, in Mohammad Atta's time it was known as Al Quds.

But what probably has remained the same is that, if asked, no one at the Taiba mosque would know anything about the latest terrorist cell meeting within its walls, just as earlier Atta's activities somehow escaped notice.

The German newspaper, Die Welt, reported that German security officials are very alarmed about Hamburg's second generation terrorists. Unlike the cell around Mohammad Atta that targeted America, Atta's successors are expected to launch a terrorist attack inside of Germany.

Already, authorities announced they believe the cell's two ethnic converts have returned to Germany, which has angered the German public.

Germans are, naturally, questioning how the two home-grown jihadists not only could leave the country unhindered for terrorist training, but also slip back into Germany.

Before the existence of the new Hamburg terrorist cell was revealed, Germans were already tense. Their country is on a high state of alert for terrorist attacks. Threatening videos, made in German by German jihadists in Pakistan and released in late September before the federal election, promised a terrorist attack on German soil within two weeks of election day if Germans did not vote to withdraw their troops from Afghanistan.

To their credit, the German electorate would not be intimidated and returned conservative Angela Merkel to the chancellor's office with a strengthened mandate. This act of defiance caused the German Islamists to release two more menacing videos, again in German, from their Waziristan hideout last weekend. The time frame to fulfill that promise to strike ends this Sunday. (And passed...a CBS article further below might help explain why. -AM)

The new Hamburg jihadists, however, are not the only al Qaeda-trained German terrorists the German public has to worry about. The Office for the Defense of the Federal Constitution (Germany's CIA) announced that an astonishing 180 Islamists from Germany had received terrorist training in al Qaeda and Islamic Jihad Union camps in Waziristan. Of these, a speaker for the intelligence agency said about 80 had returned to Germany, but would not say how many were under surveillance.

And it is not only al Qaeda-trained terrorists from Waziristan that are targeting Germany for its troop presence in Afghanistan. Days before September's federal election, authorities in five German states raided 19 apartments belonging to suspected Islamists.

The respected German newspaper, Die Frankfurter Allgemeine, reported that the raids targeted German converts who were recruiting for a Koran school in Yemen. The paper quoted sources from German security circles who maintained the school's operators are closely connected with al Qaeda and suspected the school also serves as a military training camp for "numerous converts from Europe and the United States."

Here is more detail from CBS news: -AM

10/09/09 (CBS News)

Amid the heightened security and nerves, German media reported earlier this week that security services had detected a 10-member terrorist cell in the port city of Hamburg — the same city where the 9/11 attacks were planned.

(There were reports in German papers of a co-ordinated raid involving 150 or more agents. -AM)

News of the cell emerged from a secret German intelligence report leaked to a television program and Die Welt newspaper.

"It is to be assumed that these persons are absolutely prepared to carry out suicide or other attacks at home or abroad," the report said, according to Die Welt and the German magazine news program.

"The members of the group have a basic commitment to jihad and belong to Hamburg's potentially violent pro-jihad scene."

According to the report, the cell was headed by a German man of Syrian origin identified only as Rami M. The group reportedly frequented the Taiba mosque, the same mosque where 9/11 lead hijacker Mohammed Atta and his key accomplices made their final will before leaving to the United States.

All 10 of the cell-members reportedly left Hamburg earlier this year to attend militant training camps in the volatile border region between Pakistan and Afghanistan. But, according to the German media, the report says two of them returned recently to Germany.

Abhu Talha "the German" is not alone. An increasing number of jihadi propaganda videos with German-speaking militants have surfaced online in recent months. They often show entire villages in the mountainous Afghan-Pakistan border region apparently populated by German-speakers.

Such was the case with an hour long video posted online earlier this week by the Islamic Movement of Uzbekistan (IMU), an Uzbek al Qaeda proxy group known for its association with German jihadists since the time of the Chechen war.

During a recent online meeting with his supporters, exiled British cleric Omar Bakri speculated that al Qaeda would hit hard against Germany, striking simultaneously in multiple locations. "As an expert in the field, I am telling you: they have to do it... they got their credibility hanging on the line," said Bakri, an open supporter of al Qaeda.

Back to

Threats to German security because of its Afghansitan role are also originating in non-Moslem countries. A Moroccan living in Canada, Said Namouh, was convicted last week in a Canadian court for planning to launch terrorist attacks in Germany and Austria to force them to withdraw from the NATO effort. The Canadian prosecutor said that, without a doubt, Namouh planned bomb attacks in the two countries and was "ready to die as a martyr."

While it may seem strange that a terrorist residing in Canada, a country that also has troops in Afghanistan, would target far-off Germany, it is no mystery to western intelligence services. Both German and American security authorities viewed Germany as a prime target for a terrorist attack this year due to September's federal elections. A successful terrorist attack, al Qaeda had hoped, would cause the German electorate to vote for troop withdrawal, much like the 2004 Madrid train bombings before Spain's election saw the Spanish military pulled out of Iraq.

According to polls, about 70 per cent of Germans would like their soldiers withdrawn from Afghanistan. This fact was also instrumental in their country becoming a major terrorist target this year. Due to their burden of history, war is unpopular with Germans, among whom now runs a strong, pacifistic streak that al Qaeda wants to exploit. It views Germany as the weak link among major NATO countries.

But unfortunately Hamburg and other German cities are destined to host more terrorist cells in the future. The best evidence of this appeared in a recently released al Qaeda video that proudly put the German terrorist colony in Waziristan on display. German viewers were disturbed to see the terrorists' children shooting assault rifles with several blond, European-looking children noticeable among them. The next generation of German-speaking terrorists is already in training.

(What strikes me as stunning is that if you do the google news search of you get the frontpagenews article, cbs news and a article ...

A happy ending? ... -AM)

12 October, 2009, 14:54

Whilst the images of 9/11 still haunt Western civilizations, many experts are of the view that Al Qaeda's appeal is sinking. As the doctrine of global jihad wavers, is the terrorist threat also diminishing?

Many specialists and students of Islamic terrorism are professing that there are signs that Al Qaeda's attractiveness in the Muslim world is gradually becoming discredited. Although those who are not experts of contemporary terrorism and who are mere 'consumers of the media' may find the proclamation that mass carnage produced by suicide bombers is on the wane hard to believe.

According to several surveys conducted by the Pew Global Attitudes Project, polling citizens’ opinions about terrorism in several Muslim countries, since 2002 the number of Muslims holding the view that extreme terrorism is “often or sometimes justified” has been significantly and consistently reduced. Further evidence the polls revealed was that support of Osama Bin Laden has dropped by more than half. According to a report from the Pew Global Attitudes Project:

“A large and growing number of Muslims in the Middle East and elsewhere [are] rejecting Islamic extremism.”

Brian Michael Jenkins, an advisor to the president of the US Rand Corporation think-tank, refers to today's terrorists as 'bungling home-grown plotters'. In Germany, a German-Turkish citizen suspected of preparing bombs and posting Islamic fundamentalism propaganda on the Internet was arrested. In the US, a Jordanian man was also apprehended after he attempted to blow up a skyscraper in Dallas. Federal Bureau Investigation agents have frantically been trying to solve the case of a shuttle driver at Denver airport accused of purchasing chemicals to make the explosives he had been trained to make in Pakistan. Whilst the latest acts of terrorism may substantiate Jenkins's “bungling home grown plotters” definition, the popular revelations that Al Qaeda is losing credibility throughout the Muslim world and subsequently lessening the threat of terrorism, is less definite.

Jenkins said on Adnorkronos International:

“Al Qaeda is no longer capable of carrying out a big attack. Its capability appears to have been degraded over the years. It has had great difficulty in sustaining a global campaign of terrorism.”

Thomas W. Lippman, specialist in Middle Eastern affairs, and Adjunct Senior Fellow for Middle East Studies, Council on Foreign Relations, talked exclusively to RT. Although Mr Lippman acknowledges that Al Qaeda is falling from popular favor and failing to attract recruits, disputing Jenkins statement, he says that this “wavering in popularity” is no reason to believe that terrorism is no longer a real threat.

“Its program is violence and opposition, but it offers nothing positive. It also has an unbroken record of failure. Yes, there have been tactical successes, such as 9/11, but no strategic successes. It has alienated people through brutality and excess, as we saw in Anbar,” said Lippman.

“But the threat of terrorism has not receded: the more desperate these people become, the more desperately they will act, as we saw in the attempted assassination of Prince Muhammad bin Nayef. But the ability of security forces to interdict them has increased greatly, in the US, in Europe, and in Saudi Arabia,” he continued.

(Sigh ... are you ready for some football? -AM)

Pay no attention to the marks behind the curtain

Oct. 12 (Bloomberg) -- The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings.

Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

Mortgage rates fell about 0.26 percentage point in the third quarter, according to Freddie Mac, and servicing costs are rising, meaning the four banks, which handle collections on more than $5.9 trillion of U.S. mortgages, may face writedowns.

“We’re very bearish on MSR valuations,” said Paul Miller, a banking analyst at FBR Capital Markets in Arlington, Virginia. “They are overvalued. There are higher costs associated with the servicing, and we’re very concerned about it.”

The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives.

Under U.S. accounting rules in place since 1995, banks are supposed to report the value of their mortgage-servicing rights on a fair-market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.

Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said.

“It’s an accounting game,” said Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida. “The deeper you get into the subject, the more items you find that are impossible to determine, and therefore it becomes a give up. Whatever they want to show, they show.”

(Pay no attention to the marks behind the curtain. -AM)

JPMorgan reports its third-quarter earnings on Oct. 14. Seven analysts surveyed by Bloomberg expect the bank to post a profit of $2 billion, down 27 percent from the second quarter. Citigroup, which reports the next day, is estimated by eight analysts to post a loss of $2.5 billion after recording a $4.3 billion profit in the second quarter when it sold a controlling stake in its Smith Barney brokerage.

Bank of America’s earnings are expected to drop 95 percent from the second quarter to about $165 million when the lender announces results on Oct. 16, according to the mean estimate of 10 analysts. Eight analysts estimate Wells Fargo will post net income of $2.1 billion on Oct. 21, down 34 percent from its record earnings the previous quarter.

(Just for the spectacle this blogger would pay big money to put Smells Fargo folks' under sodium pentathol on their conference call.

So... what is your name and weight?

By the way, The Wachovia deal that was promulgated in part due to Treasury's notice 2008-83, subsequently slapped down, that suspended the rule in Section 382 of the Internal Revenue Code of 1986 that disallows the use of a net unrealized built-in loss for financial much of Wachovia's 'top-of-the-market purchases of insolvent companies' turned losses were monetized into taxable income?

What are your commercial marks relative to the Moody's/REAL index, where are your residential marks relative to Case-Schiller?

Charge-offs rose to $4.4 billion from $3.3 billion in the first quarter. The bank increased reserves by only $700 million compared with a $1.2-billion buildup in the first quarter.

In the first quarter the bank's non-performing assets grew 40 percent and reserves increased 5 percent!

Pray tell, when the squints make you pony up for year end audit what will be the hit and what is the strategy to manufacture the fantasy offset? -AM

Whether the banks will take losses as a result of any MSR writedowns in the third and fourth quarters depends on the level of their hedging.

(If I could hedge against my mark it would be sunshine and rainbows everyday. -AM)

Bank of America, which lowered the value of its rights last year by $6.7 billion, still added $2 billion to its earnings as hedges outperformed the declines. JPMorgan’s hedges earned $1.5 billion more than the $6.8 billion it took in writedowns on its collection contracts in 2008.

Bank of America holds the largest amount of MSRs, with $18.5 billion as of June 30. JPMorgan had $14.6 billion, while Wells Fargo owned $15.7 billion and Citigroup $6.8 billion.

The four banks don’t own most of the mortgages they service.

Wells Fargo handles $270 billion of its own residential mortgages and $1.39 trillion of loans for others, according to company filings. Bank of America services $2.11 trillion of mortgages, $1.70 trillion of them for investors. Citigroup services $770 billion, including $579 billion of loans it doesn’t own. JPMorgan, which handles $1.4 trillion of mortgages, said it services $1.1 trillion of loans for other investors.

Spokesmen for the four banks declined to comment about how the rights are valued. The companies say in regulatory filings that the assets are volatile and marking them requires making assumptions about future conditions.

(Crickets chirping. -AM)

“The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable,” San Francisco-based Wells Fargo said in its second-quarter regulatory filing.

(The time has come to make a choice, Mr. Anderson. -AM)

Wells Fargo wrote up the value of its MSRs by $2.3 billion in the quarter, the result, it said, of model inputs and assumptions. The hedges it used to offset the movement of the servicing rights fell $1.3 billion, resulting in a net gain of $1 billion to its $3.2 billion second-quarter profit.

New York-based JPMorgan, which wrote up its MSRs by $3.83 billion in the quarter, reported a $3.75 billion loss on its hedges, leaving it with an $81 million profit. Bank of America based in Charlotte, North Carolina, gained $3.5 billion on the increase in value of its collection contracts. The bank didn’t disclose the performance of its hedges. Citigroup, which marked up the value of its rights by $1.3 billion, also didn’t disclose its hedges.

“Nobody wants to point out that the emperor has no clothes,” said FBR’s Miller. “They all took massive hedging losses over the last quarter, mainly coming out of May, when rates shot up 150 basis points, and mysteriously MSRs were written up to match those losses.” A basis point is 0.01 percentage point.

Banks say there is no liquid market for the securities, as the volatility of the rights has pushed some smaller firms out of the market and record delinquencies have led others to shun mortgage assets. The banks list the rights as Level 3 assets, an accounting term for securities whose value is unclear (Bwahahaha. -AM), and they rely on internal models to determine their value.

About 75 percent of residential MSR assets are owned by 10 firms, so when you’ve got that supply-demand dynamic that changes, there’s not going to be a whole lot of trading,” said Daniel Thomas, a managing director in asset sales at Mortgage Industry Advisory Corp. in New York. “When the market is dry like it is as far as trading volume, these guys have a lot of latitude for a Level 3 input valuation.”

(Its' a Federales bucket shop ain't it? Mr. Speaker we are the exchange. -AM)

Servicing rights provide a steady stream of income. The four banks collected about $4.1 billion from fees in the second quarter. Much of that revenue, about $3.2 billion, was already accounted for in the valuations of the rights.

Servicers face higher costs as delinquencies rose almost 80 percent in the last year and large banks move to implement President Barack Obama’s mortgage-modification program. Home loans 60 days or more past due climbed to 5.3 percent of loans through June 30, up from 4.8 percent on March 31 and 3 percent a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a Sept. 30 report.

Contacting and working with borrowers who fall behind on their mortgages is time consuming and costly. Loan-servicing employees can handle as few as one-tenth the number of delinquent loans as performing loans, said Steven Horne, the former director of servicing-risk strategy at Fannie Mae who now heads Wingspan Portfolio Advisors LLC, a specialist in distressed-loan collections in Carrollton, Texas.

First Tennessee Bank National Association, a subsidiary of First Horizon National Corp., saw its servicing costs rise to about $80 a year per loan from $60 a loan a year earlier as delinquencies and defaults rose, said David Miller, head of investor relations at the bank.

While higher servicing costs and falling mortgage rates lower the value of the rights, the weak economy can push them higher. Borrowers who owe more than their home is worth or who have lost their jobs are often unable to refinance, tempering the impact of lower rates on prepayments. Banks’ hedges also often benefit from lower rates.

In the U.S., 26 percent of borrowers owe more than their home is worth, said Karen Weaver, global head of securitization research for Deutsche Bank Securities in New York. In parts of California, Florida and Nevada, it’s as high as 75 percent.

Difficulties in refinancing mortgages during the worst recession since World War II are reflected in banks’ expectations of the life of the servicing rights. The assumed weighted average life of a servicing right tied to a fixed-rate mortgage jumped to 5.11 years as of June 30, Bank of America said in a regulatory filing.

That’s up from 3.26 years at the end of 2008, following a 0.28 percentage point rise in mortgage rates. The assumed weighted average life had fallen from 5.38 years on Sept. 30, 2008, after mortgage rates dropped 0.95 percentage point in the fourth quarter.

A change in prepayment rates that would cause a 0.48 year drop in the weighted-average life of the portfolio would result in an estimated $1.43 billion decline in the value of its servicing rights, the bank said.

“Either because people are underwater, which means it’s unlikely they are going to jump out of that mortgage, or they just aren’t moving around as much, those mortgages are going to last a lot longer, and that would help the valuations,” said Ray Pfeiffer, chairman of the accounting department at Texas Christian University’s Neeley School of Business.

(Another example of the banksters' long finger of instability as we clearly have a bifurcation into 'haves' and 'haves-not'. If reality is the tail risk oscillations may occur. -AM)

The volatility of the rights and the cost of hedging them have led First Tennessee Bank to cut more than half of its MSR holdings, which included contracts to service about $100 billion of mortgages at its peak in 2008.

(But my friend when the market is marked by 10 players that need to offset whatever the hedges are either you are the Hand or it is the back of same. -AM)

“The underlying cash flow of the servicing business is pretty good, the fees relative to the servicing costs are actually fairly attractive,” Miller said. “It’s a very difficult asset to hedge, and that’s one of the things that makes that business, in our mind, less attractive.”

(Only difficult if you ain't curtained behind the 'I Can't Believe it's not Capitalism' plan. -AM)

Sunday, October 11, 2009

Reality is the tail risk

I’m no idealist to believe firmly in the integrity of our economic system. That’s no ideal to me. That is a living, working reality!

Now I am confident that you gentlemen will review without passion the evidence that you have heard, come to a decision, and restore this market to its' fair value.

By Shobhana Chandra

Oct. 11 (Bloomberg) -- Retail sales in the U.S. probably fell in September as auto showrooms sat empty after the “cash for clunkers” program expired, economists said before a report this week.

Purchases dropped 2.1 percent, the biggest decrease this year, after rising 2.7 percent in August, according to the median forecast of 56 economists surveyed by Bloomberg News ahead of Commerce Department figures due Oct. 14. Other reports may show inflation and factory production cooled last month.

Plunging auto sales in September are a sign household spending may not be sustained without government incentives as long as unemployment keeps climbing. The financial health of consumers, whose purchases make up the biggest part of the economy, will go a long way in determining when Federal Reserve policy makers raise interest rates again.

“We’re not necessarily going to get huge growth from the consumer,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “Income growth is going to be restrained, and that’s going to translate into modest gains in spending.”

Excluding automobiles, sales probably rose 0.2 percent after a 1.1 percent increase the prior month, according to the Bloomberg survey.

Fed Chairman Ben S. Bernanke on Oct. 8 said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”

“As economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road,” Bernanke said in a speech in Washington.

(At no time will our hands leave our arms. -AM)

Industrial production expanded by 0.1 percent in September after increasing 0.8 percent the month before, reflecting the end of the clunkers program, according to the survey. The proportion of plant capacity in use, meanwhile, was probably little changed. These figures are due from the Fed on Oct. 16.

A day earlier, a pair of regional Fed reports may show New York area manufacturing slowed this month after growing in September at the fastest pace in almost two years, while a factory gauge for the Philadelphia region likely dropped from the highest reading since June 2007, economists said.

On Oct. 16, a report may show the Reuters/University of Michigan preliminary index of consumer confidence for October dipped from the highest level since January 2008. The index may slip further: economists surveyed by Bloomberg from Oct. 1 to Oct. 8 projected unemployment would exceed 10 percent in the first quarter of next year.

The Labor Department on Oct. 15 may report the cost of living in September rose 0.2 percent, half the pace of the prior month, according to the Bloomberg survey.

Economists estimate that prices of goods imported into the U.S., due a day earlier, climbed 0.1 percent last month after a 2 percent gain, indicating inflation remains in check.

(And the bear says ... if it isn't back of the Hand to the dollar then banks better blow out or markets go down. -AM)

Friday, October 9, 2009

Manufacture of content versus the motley fool

Rosie via ZH

“V” stands for Valuation, because every basis point of this 60% rally in the U.S. equity market from the lows has been due to an unprecedented expansion in P/E ratios. In fact, by some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.

There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Let’s look at the facts now that the September data are in.

On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x , which is three times the levels prevailing during the height of the tech bubble.

It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct).

It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn.

If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level!

But the point is well taken that if in fact we are at an inflection point, moving out of recession and into expansion, looking strictly at multiples on depressed trailing earnings could be misleading. So let’s take a look at what valuations looked like at previous turning points in the cycle. For example, when the recession ended in November 2001, the trailing multiple was 29.3x, much higher than today indeed, which may be a reason why the market did not bottom for nearly another year. It was too expensive.

At the end of the recession in March 1991, the trailing P/E multiple was 17.2x. In November 1982, it was 11.0x and in July 1980 it was 8.3x. When the recession ended in March 1975, the P/E ratio was 9.9x, and in November 1970, it was 17.0x. Now there is no doubt that the bulls would argue that the multiples troughed at unusually low levels because inflation was extremely high. Point taken.

But when we go back to the low-inflation periods of February 1961, the multiple at the recession trough was 20.5x, not 27.6x. At the April 1958 recession-end-point, the P/E was 14.8x, and in May 1954, it was 11.1x. The P/E was not 27.6x.

The next counterargument is that interest rates are lower today. Well, they aren’t really. Yes, government bill and bond yields are ultra-low, but since the P/E is a ‘real’ concept, it should be compared to a ‘real’ interest rate; and the appropriate interest rate for the stock market is the corporate interest rate. What we see is that real Baa corporate yield is north of 8.0% — normally, this real yield is closer to 2.5% when the economy makes its turn. And while Baa spreads have come in, at just below 300 basis points, they remain well above the traditional 230bp spread they are at when the economy is making the transition to a post-recession backdrop. (This is another way of saying that credit is still more appropriately priced than equities.)

Another argument for the run-up in the market today is that interest rates are low… well, they aren’t really. All that can really be said is that going back 60 years, there have only been 14 months when the trailing multiple was as high as it is today, and that covers 10 recessions. This implies that the market is in the top 2% expensive terrain historically, and those other times basically covered the tech mania of a decade ago.

For all the talk of how low interest rates are, look at the dividend yield. It is all the way back down to 2.0%! That is half of where it normally is when the recession is about to morph into expansion. In fact, only once, again in November 2001, has the dividend yield been this low to touch off a new bull market and business cycle.

Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which, of course, will never occur again. Fine, on a one-year forward (operating) earning estimates, the P/E ratio is now 16.2x, the highest it has been in nearly five years.

During the last cycle, at the peak of the S&P 500 — October 2007 — the forward P/E was 14.3x and the highest it ever got was 15.4x. So hello? In just six short months, we have managed to take the multiple above the peak of the last cycle when the economic expansion was five years old, not five weeks old (and we may be a tad charitable on that assessment). It is hard to believe, but the S&P 500 is actually trading at peak multiples.

Now, about forward multiples. The consensus is usually overly-optimistic, which is why so many analysts love to do their analysis on “forward” earnings since the market almost always looks “attractively priced” on that basis. The reality is that the forward P/E multiple is now at 16.2x after bottoming at 11.7x at the market lows. The multiple has not been this high since February 2005 when the economic expansion was already nearly four-years old! Today’s stock market, on this basis, is now being priced as if we are late in the cycle — forget this mid-cycle valuation stuff.

At the end of a given recession, the forward P/E multiple is closer to 14x or a good 15% lower than what we have on our hands today. As an aside, the forward multiple on the eve of the 1987 stock market collapse was 14x and one of the explanations for the steep correction was that equities were so overvalued and overbought that it was vulnerable to any shock (in that case, it came out of the U.S. dollar market). It certainly was not the economy because that sharp 30% slide took place even with an economy that was humming along at a 7.0% clip and corporate profits were rising at over a 50% YoY pace.

At the October 2007 market highs, the forward P/E multiple was 15x compared to 16.2x today, so you can understand why it is that:
1. We think investors are paying too high a price to participate, and;
2. We think that valuations are closer to levels more befitting an economy in its more mature stages of expansion than in its infancy.

As we said, trailing earnings per share (EPS) is criticized because it includes unsustainably depressed recession earnings and is not a barometer of the future but rather the past. Fine. But forward estimates are based on consensus earnings forecasts by analysts who are hardly ever correct, and for nearly four years now, the consensus has been way too optimistic on the one-year earnings outlook 100% of the time.

Maybe the consensus will get it right this time around but let’s just go back 12-months ago and see what it was suggesting:

The bottom-up consensus for operating EPS for the coming year back in October 2008 was $89.46 – and this was after Lehman collapsed and recession reality set in. What are we likely to see? Something closer to $50 or more than 40% below that projection.

On a forward basis, didn’t you know, equities were trading at only a 12x multiple a year ago and hence must have been viewed as a raving buy! Did you know back then that the market was really trading at a forward multiple — with perfect hindsight of course — of nearly 30x?

Valuation may not be the best timing device, but it still pays to know whether you are getting into the market at acceptable prices. If the S&P 500 was in a 700-750 range, de facto pricing in zero to 1% GDP growth, we would certainly be interested in boosting our allocations towards equities. But at 1,070 and over 4% GDP growth effectively being discounted, we will be spectators as opposed to participants, understanding that the key to success is to NOT buy at the peaks. So the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market. Remember, the reason why the tortoise won the race was because the hare got tired.

One more thing — when people look back at this period, they are very likely going to ask themselves why it was that they never paid attention to the volume data, which, like the bond and money market, never confirmed the veracity of this very flashy bear market rally. Keep in mind that Japan enjoyed four of these 50% power surges in the context of a market that is still down nearly 75% from its highs of two-decades ago. So remember, rallies in a bear market are to be rented; never owned.

The price-to-book ratio for the S&P 500 is currently at 2.4x, which is exactly in line with the average of the past four decades. However, at the end of recession, the market is normally trading closer to 1.5x book. Moreover, as the FT recently highlighted, a fair-value price for the S&P 500, based on ROEs, P/Es and price-to-book ratios, would place the “equilibrium” level for the S&P 500 right now at 867, which means we do have potential for a 20% correction here.

You can look at percent reversals if you like, or at the price action itself, but the reality is that never before have we bounced off any low at a time when the economy is losing nearly 3 million jobs.

This is the new paradigm — a job-shrinking bull market.

It may be true that nearly 50% of U.S. corporate revenues are being derived outside of the country; however, even outside the country, things have improved but are hardly booming; and the 50% that is local and mainly geared to the consumer is extremely vulnerable to this ongoing contraction in credit, wages and employment.

All we can say is that never before have we seen the S&P 500 rally 60% over an interval in which there were 2.7 million job losses as is now the case. What is normal is that we see more than 2 million jobs being created during a rally as large as this.

In fact, what’s normal is for the market to rally 20% from the trough to the time the recession ends. By the time we are up 60%, the economy is typically well into the third year of recovery; we aren’t usually engaged in a debate as to what month the recession ended. The ISM, for example, is close to 60 at this point, not 50; and consumer confidence is close to 100, not 53 as is now the case with the Conference Board survey. In other words, we are witnessing a market event that is outside the distribution curve.

(Mr. Speaker they own the microphone. -AM)

Some pundits will boil it down to abundant liquidity, a term they can seldom adequately define. But if it’s a case of an endless stream of cheap money, remember in Japan rates have been microscopic for years, and while the Nikkei certainly did enjoy no fewer than four 50% rallies and over 420,000 rally points, it is still more than 70% lower today than it was two decades ago. So, liquidity and technicals can certainly touch off whippy tradable rallies, but they don’t take you all the way to a sustainable bull market. Only positive economic and balance sheet fundamentals can do that.

Another way to look at the situation is that when you hear and read about “liquidity” driving the market, it is usually a catch-all phrase for “we have no clue” but it sounds good.

(Pay the man Shirley. -AM)

When we don’t have a reasonable explanation for what is driving prices, our strategy is to watch from the sidelines and express whatever positive views we have in the credit market and our other income and hedge fund strategies.

What do we know from 60 years of historical data? We know that the market typically faces serious valuation constraints once it breaches the 25x P/E multiple threshold. The average total return a year out for the S&P 500 is -0.3% and the median is -6.2%. The total return is negative a year later 60% of the time, so when we say that there is too much growth and too much risk embedded in the equity market right now, we like to think that we have history on our side.

Well let’s consider that from our lens, the S&P 500 is now priced for $83 in operating EPS (we come to that conclusion by backing out the earnings yield that would match the current inflation-adjusted Baa corporate bond yield). That earnings stream is nearly double from the most recent four-quarter trend — it normally takes around FIVE years for earnings to double from a recession low; it could be longer this time around given the lack of top-line pricing power in this deflationary cycle.

Indeed, according to S&P, revenues are set to decline 14.4% YoY in Q3 and that would represent an unprecedented fourth double-digit decline in a row!

From our lens, the S&P 500 is now priced for $83 earnings … nearly double the current four-quarter trend.

Not only that, but the top-down estimates on operating EPS for 2009 is $48, $53 for 2010, $63 for 2011, and $81 for 2012. The bottom-up consensus forecasts only go to 2010 and even for this usually bullish bunch, operating EPS is seen at $73, which means that $83 is likely a 2011 story. Either way, the market is basically discounting an earnings stream that even the consensus does not see for another two-to-three years. In other words, this is more than just a fully priced market at this point.

What about market sentiment? Well, here it is less clear. To be sure, bullish sentiment has risen sharply, to 52% as per the latest Market Vane barometer from 32% when the market was plumbing the depths at the lows last March. We are normally two years past the recession — not two weeks or two months — by the time these bullish readings cross above 50% on any sustained basis. That said, the levels would really cause us concern over a “bubble” forming if (when?) this metric hits 70%, which is right where it was when the “fun” began in October 2007.

As for liquidity, we hear this all time about the $3.5 trillion sitting in money market funds ready to be put to work in the stock market. But frankly, this is the same size as they were in October 2007, so we never find this statistic anything more than amusing. The Fed’s balance sheet has stopped expanding this year, and in fact, the money supply data are now contracting right across the board as credit in the private sector contracts and the banks deploy their record level of excess reserves into government bonds.

That said the big risk for those of us in the not-so-bullish camp is that the retail investor does begin to chase performance and switch into equities because since the lows, retail investors have plowed $200 billion into bond funds, hybrids and growth & income funds and just $17 billion into pure capital appreciation equity funds.

So far, it would appear that the “buying” has come more from program trading, short-covering and institutional portfolio managers putting cash to work. This is the big risk for the bears — what if Ma and Pa Kettle capitulate?

Of course, the second major risk is what happens if in fact we get a V-shaped earnings recovery because an $80 earnings stream, even on a more compressed 15x multiple, would inevitably take the market up to a new post-Lehman collapse high. It’s not our view, but a risk to our view.

(Federales manufacture of content versus the motley fool. -AM)

Wednesday, October 7, 2009

Potato crisis in Latvia

Latvian rubs lamp and finds genii.
Genii say, “What is three wishes?”
Latvian say, “I wish potato!”
Then, POOF! Potato! Latvian so happy!
“Oh! Is potato! Is potato!” say Latvian.
Genii ask, “What is next wish?”
Latvian say, “I wish you go away so I can enjoy potato!”
POOF! Too bad.
Was only lamp.

-Disgruntled Latvian
August 25th, 2009

Aside from timing "exit strategies" as the economy strengthens, what worries central bankers? According to one, a fear behind the scenes at Jackson Hole, Wyo., was the state of Eastern Europe. His view: A "very severe problem" there could drag down a large European bank, "becoming a problem for everyone."

Oct. 6 (Bloomberg) -- Latvia risks a rating downgrade as the Baltic state has yet to push through “painful” adjustments needed to reduce its budget deficit and comply with the terms of an international bailout, Fitch Ratings said.

“Failure to implement budget cuts and remain on track with the European Union, International Monetary Fund program could lead to a downgrade,” Fitch said in a note published today.

“A delay to the disbursement of international funds to Latvia would leave fiscal and external financing gaps, undermine confidence and put renewed pressure on the exchange rate,” Fitch said

October 7th (Marketwatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all. Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper.

Ian Traynor in Riga, Wednesday 7 October 2009 19.35 BST

The Latvian government was struggling to avert a financial meltdown today as ministers convened emergency talks with Scandinavian banks to discuss a bold and controversial plan to slash mortgage-holders' liabilities to lenders.

The scheme could mean billions in losses for the big Swedish banks most exposed by the small Baltic state's financial and economic crisis.

(That would be Stockholm-based Swedbank AB, SEB AB, Nordea Bank AB and a joint venture between Oslo-based DnB Nor ASA and Germany’s Nord/LB Norddeutsche Landesbank. Sweden on Tuesday put pressure on Latvia to fulfill required spending cuts, threatening to withhold payments from a 7.5 billion euro loan advanced by Nordic countries. About 90% of all Latvian loans are denominated in euros. -AM)

Banking sources in Riga warned that the radical proposal on mortgages, which could see borrowers repaying only a fraction of their loan, would backfire, deterring foreign investment, bringing already low bank lending to a complete standstill and wrecking international confidence in Latvia.

"Some balance has to be found between the interests of borrowers and the interests of lenders," the prime minister told the Guardian. "The real incomes of people are diminishing and it is getting more difficult to repay loans."

Dombrovskis has proposed new laws limiting liability in the case of mortgage default to the current market value of the property – meaning colossal potential losses for the banks, since most property borrowers are in negative equity.

"Mortgage borrowers can hand in the keys to the bank, and not be liable for anything," said Danske Bank, describing the scheme as "draconian". An economist at another Scandinavian bank in Riga said: "This would be economic suicide. The lending would stop overnight. You won't be able to rely on Latvian law. Foreign direct investment will go down."

The central bank promptly called for the scheme to be shelved. But the prime minister insisted his plan would encourage more responsible lending policies from the foreign banks, whose easy credit spawned an unprecedented consumer and property binge.

In the case of mortgage default at the moment, banks can repossess the property, take second properties if owned, and also recoup further debt from the future earnings of the borrower. The crisis in Latvia brought down Dombrovskis's predecessor's government earlier this year. He is seeking to avoid the same fate and has an election to fight next year. "There are very harsh measures taken already," he said. "Our fear is that massive tax rises will raise social tensions considerably."

"Patience with the Latvians is limited," said Anders Borg, the Swedish finance minister. "It's not reasonable that Latvia make a commitment in the early spring, and in autumn say they won't deliver.

Under the control of its strong central bank, Latvia's currency, the lat, is pegged to the euro, hindering the government's ability to depreciate its way out of crisis.

Analysts said the prime minister's scheme to limit debtors' liabilities to the banks could help him devalue, since it would also ease the pain of seeing euro loans becoming unaffordable.

But Dombrovskis insisted strongly he had no intention of breaking the peg to the euro. "My programme is based on the stability of the lat and budget deficit reduction," he said. "We are a very small and very open economy. Any competitive gain from devaluation would diminish immediately. Devaluation is not an option.

October 8, 2009

Neil Shearing, emerging-markets economist with Capital Economics in London, said speculation has been building over the past few days that Latvia's government is on the verge of giving up on a central tenet of its austerity program by allowing a devaluation. That could goose the economy by making exports more attractive, and it would eliminate the expensive process of buying lats to maintain the currency's peg against the euro.

Devaluation would have serious consequences. The Swedish banks that made euro-denominated mortgages would see a sharp jump in foreclosures as fewer borrowers would be able to make payments. Latvia also would likely lose any chance of being allowing into the euro zone in the near future.

"Basically, there's a lot of speculation that the ground is being prepared for a devaluation," Mr. Shearing said.

Mr. Shearing said Estonia and Lithuania could follow suit with devaluations if Latvia led the way

(They are all in double-digit recessions. -AM)

Hungary, Romania and Ukraine are also vulnerable to contagion, he said.

How far Latvia's troubles would spread if it devalues its currency is an open question. Worries about devaluation have persisted for months -- another bond auction failed this summer- and financial markets and banks have had time to prepare.

'If it comes to a choice between a bad scenario and an even worse scenario, where the bad scenario is the goal of these 500 million lats and the worse scenario is that this international programme is stopped... Of course we will go more for this bad scenario,' Prime Minister Valdis Dombrovskis told Latvian radio.

Stopping the loan programme would lead to sharp reactions in financial markets and even greater problems for the economy, which faces an 18 percent gross domestic product drop this year.

Dombrovskis was later quoted by Baltic news agency BNS as saying that the government would likely have to draw up further budget cut measures.

The worries prompted the central bank to issue a statement criticising the government for sending out mixed signals that were creating a lack of trust in Latvia.

RIGA, Oct 7 (Reuters)

The head of the European Commission office in Latvia said the Baltic state had to live up to its promises, made in June, when it concluded a revised loan deal.

'If you conclude an agreement, you take on commitments, it is important to keep to them and not change the conditions every two or three months,' Iveta Sulca said.

Dombrovskis leads an unwieldy five-party coalition and has had trouble getting the parties to go along with tough measures. In the 2009 budget, the government already slashed public sector wages by 40 percent and old age pensions by 10 percent.

Think outside the cave

A group of astonomers eager to map the vastness of space, were allotted time on the Hubble Space Telescope reported National Geographic several years ago, and they were stunned to develop pictures of what they thought were empty space.

I remember staring at the pictures the Hubble revealed to them of galaxy after galaxy and thinking ... reality doesn't look real.

Galaxies look like strange attractors, ironic since both represent reality's order flow.

And strange attractors, mathematical portraits of order within a chaotic environment, solution spaces that traces the behavior of a complex system over time, revealing how it is attracted to an ideal state - essentially revolving around it.... why strange attractors seem to be like the Forms articulated by Plato in the Allegory of the Cave.

History rhymes and in complex systems patterns repeat.

WIKI: 'Plato imagines a group of people who have lived chained in a cave all of their lives, facing a blank wall. The people watch shadows projected on the wall by things passing in front of a fire behind them, and begin to ascribe forms to these shadows. According to Plato, the shadows are as close as the prisoners get to seeing reality. He then explains how the philosopher is like a prisoner who is freed from the cave and comes to understand that the shadows on the wall are not constitutive of reality at all, as he can perceive the true form of reality rather than the mere shadows seen by the prisoners. The Allegory is related to Plato's Theory of Forms, wherein Plato asserts that "Forms" (or "Ideas"), and not the material world of change known to us through sensation, possess the highest and most fundamental kind of reality.'

And so Plato would opine the chair you sit in is just a representation of the perfect form of a chair.

Quantum physicists would opine that the perfect form is a probabilistic wave function and the chair you are sitting in as but one of all possible representations.

The first picture above is an updated version of 'the birth of a star' the second picture is a few galaxies hangin' out in close proximity and the last picture, which excuse my geekness... is totally cool... is described as:

Nat'l Geographic: 'Albert Einstein predicted that the gravity of massive objects could actually bend light, creating an optical illusion. Hubble's newly updated Advanced Camera for Surveys (ACS) captured a dramatic example of this phenomenon, known as "gravitational lensing.

In a set of four photographs released September 9, 2009, the massive galaxy cluster Abell 370 bends the light of galaxies behind it, creating funhouse mirror-like reflections in space.

One such effect, the "Dragon" (top left), is actually several reflections of a background galaxy overlapping one another, Hubble science oversight chair Bob O'Conner explained.'

The point of this posting is to reflect a moment on this third picture.

From his earlier relativity theory, Einstein had related mass and energy in the famous equation: -E = mc²

From this concept, he described the curvature or distortion of space-time as due to the total sum of mass-energy present within the region of distorted space. It is the curvature of space-time we call gravity. review of Einstein, The Real Story of the Man Behind the Theory: 'The year was 1907, and Einstein was about to challenge two centuries of scientific belief. According to the scientific mastermind, Sir Isaac Newton had it all wrong; gravity was not pulling us towards the Earth, but massive celestial bodies like the sun and the planets were constantly bending time and space, around us, pushing us towards the ground with every movement. But scientists weren't convinced, so in order to prove his theory Einstein surmised that we would need to take a photo of a solar eclipse. He theorized that light from a distant star, while traveling around the sun, would be bent by the sun's gravitational pull. In the aftermath of that announcement, astronomers across the globe raced to photograph an eclipse in order to verify or debunk Einstein's claim. But getting that photograph was no simple task, because in the years that followed war, weather, and mathematical mistakes undermined the astronomers' efforts at every turn. When the photo was finally taken in 1922, Einstein's theory was proven correct, elevating him to the status of global icon.'

The point being that one of the most fascinating aspects about Einstein is that he was generally shocked to discover that people did not think in shapes like he did.

Einstein rarely thought in words.

'I simply imagine it so, then go about to prove it', he said. 'Imagination is more important than knowledge. I rarely think in words at all. The words or the language, as they are written or spoken, do not seem to play any role in my mechanism of thought. The physical entities which seem to serve as elements in thought are certain signs and more-or-less clear images which can be `voluntarily' reproduced and combined.'

Time and space/price and form .... oh my!

Think outside the cave.