Tuesday, May 31, 2011

Major Hedge Fund SAC Gets Redemption Request From Big Investor

The days of SAC's 3 and 50 fee structure appear to be rapidly coming to a close (as well as possibly the front doors). In what is certainly a harbinger of capital flows from (instead of to for the first time in decades) the legendary and now infamous hedge fund, Institution Investor reports that "at least one well known investor in hedge funds has confirmed that he has requested to redeem his investment in SAC in light of recent reports of probes into the Greenwich, Connecticut-based firm. The investor, who requested anonymity, does emphasize that SAC “has the number one compliance department in the industry.” Nonetheless, recent reports swirling around the firm have led him to request to pull out his clients’ money. “We don’t want to be fickle,” says the manager. “We hate doing this. But, the government seems so intent now in getting them and there are additional SAC-related characters tainted. Some dealt with the same stocks at SAC."

From II:

Over the years, investors in SAC have dismissed allegations and rumors related to SAC as a witch hunt against one of the most successful investors of all-time and deemed them to be not credible. And although the investors have no evidence—or reason to believe—current allegations are true, it does appear they are starting to get nervous.

“I don’t blame them [for redeeming],” says a hedge fund manager who does not have money with SAC. “This is a hot topic.”
But, again, one firm redeeming does not make a trend.

And a big portion of SAC’s nearly $14 billion in assets is internal money, which obviously is not leaving. Also, sources say the firm has brought in about $1.5 billion in new money since mid-2000 while very little left the firm.

“They will probably get redemptions,” says another SAC investor. “But, we will sit tight until there is a real reason to do anything. It is all noise.”

To their credit, in recent months hedge fund investors in general have displayed a new concern for, and reluctance to invest with, firms that have been the focus of government investigations.

Just last week, FrontPoint Partners announced it would shut down most of its funds by the end of the month after acknowledging it had received a rash of redemptions from investors.

The firm has had to defend its reputation since late last year when published leaks linked portfolio manager Joseph Skowron to the arrest of a French doctor who was accused of disclosing insider information about a clinical drug trial. Frontpoint put Skowron on leave and got rid of his entire health care team. Alas, in April the government arrested and charged him with insider-trading.

Late last year, two other hedge funds — Level Global Investors and Loch Capital — closed down after they were raided by federal agents investigating the widening insider trading scandal on Wall Street.

In February, it was reported a third hedge fund firm raided — Diamondback Capital Management LLC — received redemption requests equaling nearly 10 percent of its capital. Last week, Bloomberg reported that former Diamondback portfolio manager Anthony Scolaro, pleaded guilty to insider-trading charges back in November, citing a plea agreement unsealed earlier this month in Manhattan federal court.

Kim, It's Never Too Early To Get Some Christmas Shopping Done.....

Thursday, May 26, 2011


In a likely response to more economic ambiguity, the yield on the 10-year U.S. note is at a new low, 3.07%.

PEP and the rest of the consumer nondurables have started to roll over a bit.

Why AIG when one can buy LNC?

After all, while AIG trades at about 60% of book value with a return on equity of only 6% to 7%, a smaller Lincoln National (with a somewhat similar business profile) trades at only 70% of book but has a return on equity of nearly 10%. Moreover, Lincoln National is buying back shares and doesn't have the supply overhang (as the U.S. government still owns a large percentage of AIG).

Be sure to check out Knowledge@Wharton's piece on the effect of speculators on volatility.

A Decent Bounce, But Very Possibly Window Dressing.....

Once again, the bulls couldn't quite manage the strong close, but they did put together a pretty good bounce in afternoon trading after flopping around most of the morning. There just wasn't any rush to add long exposure.

For the second day in a row, the S&P 500 topped out almost exactly at the 50-day simple moving average. That is a very obvious overhead resistance level and it served as a selling catalyst once again.

It's always a relief when the market bounces back after a technical breakdown, but many folks are too quick to sound the "all clear." There is nothing in this action to indicate that we are done correcting. In fact, the lackluster nature of the bounce suggests just the opposite.

To make things even more challenging, we should have very thin trading tomorrow in front of Memorial Day weekend. If someone big wants to push things around a bit, they will have the chance to do so tomorrow.

Kim Jong Il, Expert Wallpaper Examiner....

Wednesday, May 25, 2011


Sad Goodbyes

Today's a sad day as it became known that one of my favorite Royals, Paul Splittorf, has died and also that Mark Haines of CNBC died Tuesday night.

Durable goods were horrific and so was the housing data (especially prices), extending the economic ambiguity.

Many formerly strong emerging stock markets are, at best, lifeless (see China's 10% drop).

I continue to see, as I have for months, an inconsistent and uneven economic recovery -- difficult for corporate managers and investment managers to navigate. Tail risk, greater earnings volatility and corporate margin and profit challenges are the headwinds I see above and beyond the nontraditional issues of fiscal imbalances, higher marginal tax rates and elevated structural unemployment caused by globalization, technological advances and temporary employment as a permanent fixture to the jobs market.

And I see a U.S. consumer, who has been victimized by screwflation, as particularly vulnerable and exposed. Money freed up from nonpayment of mortgages and recession fatigue have likely temporarily buoyed retail sales, but that slope is slippery and provides the sustainability of growth with a weak foundation.

Cisco's sounding the alarm.

From Cisco's (CSCO) 10Q, just released -- a slight tweak lower in its fiscal fourth-quarter forecast (the company had been looking for flat to up 2% sales growth):

"In light of all of the factors described above, we expect that our revenue for the fourth quarter of fiscal 2011 will be relatively flat compared to the prior year period, which represents lower revenue levels than we had previously anticipated at the beginning of fiscal 2011. We also expect our total gross margin, excluding the effects of restructuring activities, for the fourth quarter of fiscal 2011 to be slightly lower than what we experienced in the third quarter of fiscal 2011. In addition, as many of our headcount-related investments were based on projections of higher revenue than we now expect to achieve, and it will take time for the cost savings from our announced restructuring activities and voluntary early retirement program to take effect, we expect that operating expenses as a percentage of revenue will increase on a year-over-year basis. We also expect that operating income, net income, and earnings per share for the fourth quarter of fiscal 2011 will likely continue to decline on a year-over-year basis."

Still, I'm of the belief the market knew this was coming. My position remains that it will be difficult to lose $$ in CSCO long-term buying in the 16 to 18 range...

Weak Bounce

Although the bulls were unable to take us out at the highs, we did manage a somewhat weak, in my opinion, oversold bounce. Of course, whether or not this is a return to rationality or a sign that the market is on track to trade up again remains to be seen; the techies out there are warning the technical picture still looks quite precarious.

The S&P 500 is still below its 50-day simple moving average and there is nothing to indicate that the downtrend that's been in place since the first of the month is coming to an end. This oversold bounce could easily continue, but it's difficult to believe we can pull off another V-shaped bounce back to highs like we did in March and April. If the S&P 500 can close above the 50-day moving average and not retest today's lows for a while, there may be a foundation to build on. But at this point, there's no reason to think this market is going to quickly return to health.

Some key big-cap momentum names like AAPL and NFLX performed well, and oils bounced big, but the bounces in individual stocks weren't particularly vigorous. Stocks like PCLN, SINA and LVS still look quite poor technically.

More Kim Mania

An in-depth, high-level strategic egg discussion.....

Tuesday, May 24, 2011


When St. Louis Federal Reserve President James Bullard speaks, Wall Street listens. Here are the headlines:

* Bullard Says FOMC Likely to Go on Pause After QE2 Ends in June
* Bullard Says Fed May Tighten Even With Unemployment High
* Bullard Says He Believes 1st Qtr Growth May Be Revised Up
* Bullard Says Europe Not Now a Global Macroeconomic Shock
* Bullard Says 'Imperative' for Congress to Fix Debt, Deficit
* Bullard Says 'We Are in Sustainable Recovery at This Point'

Run, don't walk, to read Barry Ritholtz's 'On Investing: The Many Hats of Great Investors' in The Washington Post.

The two-year U.S. note auction was strong "thanks" to the renewed safety trade evident in the marketplace now. The yield was .560%, which is slightly better than expected. Bid to cover at 3.48 (about 0.10 better than the previous few auctions) and the percentage of indirect bidders at 31%.

Who is the large gold call option buyer -- and what does it mean?

Over the course of the past few months, one large buyer has accumulated approximately 50,000 gold call option contracts -- most of the calls are strikes between $1,600 and $1,800 an ounce and for expirations between August and December. In total, as much as $50 million in call premium has been paid out by the purchaser.

As the gold futures market is roughly 10x to 15x the size of the gold options market, this is a huge bet in absolute dollars relative to the liquidity of the market.

Considering that the calls are well out-of-the-money (gold, on a futures basis, today trades at $1,512), the call option is all premium and, as such, is a decaying asset. So, given the size of the purchase, the buyer is not likely an individual hedge fund -- more likely, it is a central bank or a sovereign fund.

It is interesting to note that all of the buyer's options mature after QE2, so the buyer might believe, for example, that the institution of QE3 holds a greater probability to be implemented than the consensus is currently forecasting.

The buyer is clearly betting on a large run-up in the price of gold during the summer and fall months.

With all this leverage in the hands of one owner, a sharp price appreciation in the price of gold could cause the shorts (on the other side of the call option trade) to continuously buy futures and further contribute to a rising gold price in order to maintain a flat delta.

Probably In A Trading Range; And Probably At Or Near The Bottom Of Said Range...

If memory serves, and it honestly may not, this is typical May stuff - especially if some of the previous months of the year were strong - which during this year so far they were. So, the market from time to time finds plenty of reasons to sell, to raise cash.

For the second day in a row, the market is unable to put together a bounce. We started off with some minor strength but it fizzled out and we drifted around the rest of the day before we closed weak again. Breadth turned negative over the course of the day and volume was light. It wasn't terrible action, but it was lifeless and the buyers aren't generating any energy.

We are still oversold, but action like today's helps to remove some of the pressure and makes a strong, reflexive bounce less likely. Oversold conditions can be relieved either by reversing or by churning -- and this market is doing some very heavy churning as it goes nowhere.

Many players look for leadership names to find comfort; we ain't seeing many save for CRM, GMCR, SODA and LNKD. Key sectors like banks, chips and retail are slipping and the money doesn't seem to have found any place to go.

More Kim Wisdom

Yes Kim, it's called F...O...O...D. Millions of your own people will never see
any of this....

Monday, May 23, 2011


BRK.B shares have become very cheap, and its share price is at an historically wide discount to intrinsic value.

Though an important component of the company's investment portfolio is financial, it has a noticeable nonfinancial component to its operations.

The yield on the U.S. 10-year note broke below 3.10%. This is a reflection of lower growth and inflationary expectations.

"The generation that had information, but no context. Butter, but no bread. Craving, but no longing."

-- Meg Wolitzer (referring to today's high school students), The Uncoupling

Back in 1930, Laurel and Hardy introduced their catchphrase, "Well, here is another nice mess you have gotten me into," which brings me to the role of technology (especially social networking) and the (potential) mess that it might get some into.

In The New York Times magazine section over the weekend, Bill Keller writes an intriguing column entitled "The Twitter Trap," which highlights social media as an enemy of contemplative thought.

Nicholas Carr's "Is Google Making us Stupid?"cover story in The Atlantic from 2008 argues that the Internet has had detrimental effects on cognition that diminish our society's capacity for concentration and contemplation.

Technology brings with it progress and enhancements to our life and, often, savings to consumers -- we generally gain more than we lose -- but there is a downside to its transformative role and the staccato pace that accompanies its innovation.


* The television muffled creativity, discourse and interaction.

* The typewriter killed penmanship.

* The pocket calculator reduced a generation's math skills.

* GPS impaired our sense of direction.

* Texting diminished our language skills and our vocabulary.

* Our memory capacities have been weakened by Google.

* The ephemeral nature of social media such as Facebook and Twitter, creates stunted relationships and has damaged our attention span -- they are almost asocial.

"Before we succumb to digital idolatry, we should consider that innovation often comes at a price. And sometimes I wonder if the price is a piece of ourselves." - Bill Keller, "The Twitter Trap"

To some degree, technological innovation has penalized patience, limited the emphasis on wisdom and has even de-emphasized intimacy. We may be at risk of losing our souls, and, in the long run, our relationships are worse off.

And what about our investing? What role has technology had on influencing our analysis, our actions and our investment results?

Here are some examples of technology as a disruptive force in investing:

* Portfolio insurance was an important contributing factor, if not the cause, of the October 1987 stock market crash.

* Quantitative models/strategies have likely fostered and exaggerated group/stock moves to levels above and below intrinsic value.

* High-frequency trading was likely the catalyst to the May 2010 stock market flash crash.

* A dependency on 140 characters while tweeting and/or the use of message boards simplify a trade or investment.

Fast and simple can be superficial, stupid and harmful to one's investment/financial well-being as there is no substitute for doing your homework.


* A low in bond yields: The continued drop in the yield on the 10-year U.S. note to 3.15%. While auction supply has been large, the yield on the 10-year US note has dropped to 3.10%. Taken in isolation yields are signalling lower domestic growth and inflation.

* A double dip in housing: A still-large shadow inventory of badly delinquent and foreclosed homes continue to weigh on home prices, which resumed their fall in first quarter 2011. April housing starts (523,000 vs. expectations of 570,000 and March's 585,000) and permits confirmed a continued weak residential real estate market. The National Association of Homebuilders confidence index was still mired near all-time lows. A double dip in housing appears increasingly likely. Though new housing production is now at a record-low percentage of GDP, another leg lower will adversely impact consumer confidence and, as reflected in the continued weakness in bank stocks, could impair lending.

* Worrisome group rotation: The continued improvement (absolutely and relatively) of the consumer nondurable sector. The staple sector - for example, CL, CLX, PEP, PG and so on -- regained its leadership role last week, which is another (technical) warning sign.

* Weakening commodities: We have witnessed a decline in the price of copper (to below its 200-day moving average), oil and other major industrial commodities. The downward trend in commodity prices (and industrial and materials share prices) continued with a vengeance late last week, and this trend continues this morning (led by a $3-per-barrel drop in oil) as the U.S. dollar gaps higher in early-Monday-morning trading.

* Economic indicators flash caution: A multiyear low in the Baltic Dry Index, a weak household jobs survey, the ISM nonmanufacturing index falls to the lowest level in nine months and, for the fourth straight week, we get an initial jobless claim print above 400,000. A weakening Philly Fed purchasing managers index (PMI), a disappointing Empire State manufacturing index, and a poor April industrial production report (unchanged compared to +0.4% expectations and +0.7% in March) led an array of economic indicators last week that conspired to create more economic ambiguity for 2011-2012 (and to threaten the view of a smooth and self-sustaining recovery). Over there, it was reported this morning that the May eurozone PMI sunk to 55.4% from 57.8% (consensus was for only a -0.4% decline). The flash May China PMI fell to 51.1%, the worst print in nearly a year.

* Emerging weakness in non-U.S. markets: A break is developing in the natural-resource-based regional markets of Australia, Mexico, Canada and Brazil. Emerging markets continued to break down in response to the descent in commodity prices.

Market Recap

The market has been hinting recently at greater weakness, so it isn't surprising that we had a gap down to start the week after news of problems with Greek and Italian sovereign debt. What is surprising is that we just sat all day and did nothing more. The bulls couldn't bounce us and the bears couldn't make another low. We just meandered around aimlessly on around 4-to-1 negative breadth, which made it impossible to do much in either direction.

The bad news is that the S&P 500 broke below the 50-day simple moving average and is threatening the uptrend line that has been in place since August. We still aren't far from recent highs, but we've had a series of lower highs and a couple failed bounces, so it looks like a downtrend is starting to take firmer hold.

The fact that there was so little dip-buying interest and no real bounce after the intense early selling is worrisome. We should see the bargain hunters showing better interest, but they stood aside and didn't do much other than take a stab at a few things like AAPL and CMG.

The fact that there's no leadership other than a few defensive names tells you that there's no big rush to jump in. When things improve, we should have some leadership emerge and then it will broaden as market players regain confidence. Right now, there is nothing they really want to hold and most of the positive action is just some oversold bounces in stocks that have been hit very hard.

Saturday, May 21, 2011


Financials are really faltering these days.....Not good.

I heard that Norway has stopped payment to Greece.....

Writing on the topic of the Japanese stock market, it is boring, frustrating and painful but, in the fullness of time, could make investors rich.

Bottoms are made on very bad news, and tops are made on good news. In my view, the news in Japan is not likely to get worse.

NMR is an interesting speculation priced below $5 a share. (Nomura shares sold at $22 in April 2007, at over $9 a share in 2009 and over $8 a share in early 2010.) The investment bank stands to profit if the Japanese rebuild is as strong as I anticipate.

Looking at a chart of the Japanese stock market, it is clear their market has experienced one of the most drawn out and pronounced secular bear markets in history. One can argue that no country in modern history has moved so swiftly from worldwide adulation to total dismissal, or even contempt, as did Japan.

The tipping point was 1990. In the 15 years that followed, amid crashing stock and property markets and mountains of debt, scores of corruption scandals, vast government deficits and stagnating growth, Japan mutated from being a giver of lessons to a recipient of lectures (which were all but ignored by the politicians).

It's hard to say that Japan isn't now cheap on a valuation basis -- the market sells at book value and at half of sales. In fact, one can make the case on valuation alone that the Nikkei is as cheap as the U.S. market was at its generational low in March 2009.

There is both a mystical and fundamental side to the bull case for Japan.

There is the mythology in Japan that the major earthquakes that have haunted the country have presaged major cultural and social changes:

* The 1855 Tokyo earthquake marked the beginning of the end of 200 years of isolation; it was followed by a Japan that was more industrial and open to the world.

* The 1923 quake signaled a new age of aggressive militarism and an obsession with Asian conquest that culminated in World War ll.

* The Kobe earthquake of 1995 is thought by many to have signaled the end of the postwar industrial boom and marked the beginning of recession and deflation.

So, though possibly far-fetched, it is conceivable that the effects of the earthquake are analogous to "creative destruction" and could kick-start the lethargic Japanese economy and end the long period of stagnation.

The earthquake damage and the nuclear crisis led to an enormous supply shock. Electric power was rationed and ruined production facilities were shut down at a time during which Japanese companies had been paying down debt, but now companies are going to have to borrow money to rebuild. This could activate loan demand, and production shortages should narrow the output gap and maybe even trigger modest inflation.

Here are seven fundamental reasons for my optimism on investing in Japan:

1. Expectations are low or nonexistent for the Japanese economy to turn around. Economic dislocations caused by the earthquake have threatened near-term GDP forecasts, but be reminded that the U.S. stock market's generational low in Markch, 2009 was achieved under similar economic uncertainty. Moreover, there is widespread optimism that the worldwide recovery will be smooth and self-sustaining -- as such, it could facilitate a meaningful improvement in Japanese exports.

2. Since the devastating earthquake and tsunami on March 11, the Japanese market is down by about 7% while the Morgan Stanley World Index is up smartly.

3. The condition of the Fukushima Daiichi nuclear power plant has been stabilized.

4. The electrical supply outlook has improved. According to Goldman Sachs, Tokyo Electric Power Company's electricity output by this summer should not force large-lot users to restrict electricity usage.

5. The Japanese government appears to be implementing fiscal stimulus that is reasonable in scale and timely in policy. The Kan administration has submitted a first fiscal-year 2011 supplementary budget, and a second supplementary budget is expected by the end of June.

6. Japan's monetary policy is market-friendly/economic-friendly. Base money growth has surged since the March nuclear accident. In mid-March, the Bank of Japan increased its asset purchase program, and in early April, the Bank of Japan announced a new loan program geared toward assisting financial institutions in their response to the likely increase in reconstruction funding demand.

7. Finally, the post-recovery future for Japan will hopefully accelerate reforms (e.g., free trade agreements). It might also lead to accelerated production diversification (and more M&A activity) and rising demand for alternative energy technologies.

Currencies Rule The Stock Market

A poor finish took some of the luster off a pretty good intraday reversal by the bulls. This morning it looked like a stronger U.S. dollar was going to put the sellers in the driver's seat but the euro came back to life, despite worries about Greek sovereign debt and that brought in the buyers. The euro faded again and the dollar strengthened in the final hour of trading and that was all that was needed to turn us back down.

Breadth was very unimpressive at almost 2-to-1 negative and the leadership in gold was puzzling given that the dollar was positive. Retailers and banks were particularly weak, which is not a good combination.

If we take a step back and look at the bigger picture, what we have is a market that has attempted to bounce back after breaking down to start the week. We had a pretty good rebound Wednesday and Thursday, but it is running out of steam and market players are a little nervous that we may finally see a failed bounce rather than another of those V-shaped recoveries.

The bulls have gotten very used to this market quickly and easily bouncing back after a brief struggle and they are hopeful that will happen again.

Presented Without Comment (Click On The Post To See The Whole Thing - It'll Make Sense At That Point....)


Which one has more candlepower, the idiot or the beast?

Which one is the idiot? Which one is the beast?

But on a serious note, notice there's no food in the trough.......typical, as Kim certainly looks well-fed......

Thursday, May 19, 2011


Favorite low-priced long speculation: NMR

Relative to the money it makes and as measured by equity capitalization to sales, LinkedIn might just be the costliest stock extant.

Run, don't walk, to read Knowledge@Wharton's weekly issue that deals with everything economic in the Middle East.

The May Phily Fed saw big drop in new orders to 5.4 from 18.8, shipments also dropped big time to 6.5 from 29.1. As well, inventories turned negative, though employment was better at 22.1 vs 12.3.

The Philly Fed joins the Empire survey as a disappointing data point.

Look for the May national ISM to drop perilously close to 50 later this month.

April home sales declined by nearly 13%, and months of inventory increased to over 9.2 months.

Finally, the leading economic indicators stunk up the joint.

All in all, not a great day for the bullish cabal that endorses a smooth and self sustaining recovery.

My guess is that the Fed will discontinue investing in maturing securities in late 2011. And within a month or two of that action, a rise in the fed funds rate will come. Finally, by mid-2012 asset sales should be expected.

There is little there there in the Glencore and LinkedIn deals.

"It is far better to grasp the universe as it really is than to persist in delusion, however satisfying and reassuring."

-- Dr. Carl Sagan

Color me the skeptic, but one of my few comments regarding both the Glencore and the LinkedIn, IPOs is to quote Warren Buffett: "Price is what you pay. Value is what you get".

The Bears Aren't Playing Well

Once again the bears demonstrated their ineptitude. We had a gap-up open on top of a weak oversold bounce and some poor economic news, but the pessimists just couldn't press when they had the opportunity. Weakness in the dollar was really all that mattered. There is a Pavlovian stock-buying response to any downtick in the dollar, and that held us aloft today.

Volume continues to be light and breadth was just about flat on the Nasdaq, but this is the setup that the bulls have be able to handle quite well. There is plenty of overhead resistance, especially as the S&P 500 heads for 1350, but that's just one of those quaint old considerations that haven't mattered in the last couple years.

We still have a good setup for the bears, but they need to show some resolve and make the bulls at least a little nervous over the possibility of a failed bounce. It is almost sad how badly the bears have done despite having some negatives to work with.

I'm sure I don't need to point out that there was endless chatter today about the LNKD IPO. Perhaps it has been entertaining, but from what I read it sure wasn't very helpful for anyone who actually traded the stock. It was just an overhyped situation that attracted a lot of hot money because there wasn't much else of interest. It closed a bit weak, and that should help to cool the momentum quickly. It was interesting but not very meaningful.

LNKD Opened At $83, From $45, 980X Annualized P/E

And so some aspects of the internet bubble are back. LNKD played allocation games with its stock, ensuring a huge pop a la 1999....The market cap of LinkedIn at $83, based on 94.5 million shares, is $7,843 million. Taking out $297.6 million in cash means $7,546 million in Enterprise Value. The relevant metrics are:

* Revenues (pro rated annualized): $375.6 million or Price/Revenue 20.9x
* EBITDA (pro rated annualized): $53.2 million or EV/EBITDA 141.8x
* Net Income (pro rated annualized): $8 million or P/E 980x

Too high, way, way too high....

Wednesday, May 18, 2011


In an Op-Ed in today's Wall Street Journal, Meredith Whitney targets state budget problems and contends that this issue will be an important headwind to domestic economic growth.

Many Technicians Are Looking To Put On Shorts....

We had a classic low-volume, oversold bounce off of support today, which old-time technicians might think is a potentially good short setup. Prior to June 2009, that wasn't a bad bet. But in this market, the smart move has been to buy short setups rather than sell them.

The textbook short setups haven't worked well for the bears, but you have to wonder when that might change. Logically, this is not a market that should go straight back up, especially if the U.S. dollar doesn't collapse once again. We've had clear distribution lately and plenty of repair work needs to be done to individual charts. Market players are conditioned, however, to jump in on a bounce and keep on pushing. It has worked so often that it would be foolish to rule out.

We'll see Thursday if the bulls have the juice to keep it going, but I'm more skeptical this time than I have been in the past.

Tuesday, May 17, 2011


Commodities Complex Continues to Fall

In late April, the rumors were that Soros was dumping his commodity holdings. Soros's 13F filing shows that he sold much of his GLD position and reduced holdings in individual gold stocks.

Run, don't walk, to read Gary Shilling's tome, "Still Home Sick," on John Mauldin's Outside the Box (registration required).

Spanish Bonds

With sovereign debt issues intensifying, it is interesting to note that last night, over there, there were two good auctions in Spain.

Spain sold one-year paper at a 2.6% yield. The previous auction was done at 2.8% and the bid to cover improved from 1.6x to 2.5x.

Spain also sold 18-month paper, yielding "only" 3.1% (vs. 3.4% previously), and, there too, the bid to cover was better at 4.1x (compared to 2x).


We were oversold enough for the market to bounce, and eventually did after an early struggle, but it wasn't anything particularly impressive. We still had negative breadth and plenty of red, but some of the high-beta big caps like AAPL, GOOG and BIDU managed to attract some flippers looking for action. They might not stick around for long, but the market looks and feels much better when we have some buying of the most popular names.

Better action in the afternoon took the S&P 500 above its 50-day moving average, but we remain in a very precarious technical position. If we move up to the 1,335 to 1,340 level, you can bet the bears are going to look for a bounce to actually fail. They have had little luck with that thinking in the past two years, but this market does not look very healthy and the chances of another bout of selling look higher than they have in a long time.

Investors looking for their pitch in this market will be fine.

BATS: Value Added From The Latest Publicly-Traded Exchange

Last week we learned that the BATS, locally based and the third- largest U.S. stock exchange operator, filed for an initial public offering as it seeks cash to compete amid the busiest period for industry takeovers. In other words, in the great scramble for consolidation in a market place fragmented beyond repair, BATS suddenly realized it is woefully behind, and needs cash to compete with such HY-funded LBOs as the now off-the-table Nasdaq acquisition of NYSE. Which in turn makes BATS itself a possible acquisition target. As such, I decided to take a quick look at typical value added provided by the exchange and its constituent robots. As many trading charts these last several years show, it is none other than some BATSy algo that enjoys testing the stupidity of other robots by sending out a bid about 10% from the NBBO. What is impressive is how many algo's that are stupid enough to fall for this bottom fishing strategy. And that is true price discovery. Ironically, perhaps we need many more such BATS algos to push prices to real fair market value.

So Much For MCD's Jobs Renaissance - They'll "Hire" Computers In The Future...

If nothing else, last month's 62,000 minimum wage, part time-job expansion program by McDonalds generated lots of commentary on whether it should or should not be counted in the April NFP number. While paying a bunch of people (sub) minimum wage will have precisely 0.00% impact on GDP, the possibility that America could convert even more full-time into part-time jobs, generating a few more press opportunities for the teleprompter was certainly bullish, and it sure generated a lot of contradictory blog posts. Alas, even paying minimum wage appears to be too much of a chore for the world's largest burger chain. Enter computers. From Fox Biz: "McDonald's is jumping on the technology bandwagon with a new system that will soon change the way European customers order food -- picture computers instead of humans asking whether customers prefer fries and supersizes. The fast-food restaurant, known for its golden arches, Big Mac burgers and Happy Meals, will replace cashiers with touch-screen terminals and swipe cards at its 7,000 chain restaurants in Europe, according to the Financial Times. That would mean, in part, the end of cash payments." Also picture no more millions of job applicants for something, anything at the Golden Arches. And like that another several million of America's lower class are about to become outsourced to robots.

Monday, May 16, 2011


Tough, tough market.

Unpredictable and increasingly volatile, without any leadership except the global consumer non-durables.

Not a good sign.

Bill Gross recently discussed the bond market, the U.S. deficit and Greece.

His key points include:

* Treasury Secretary Tim Geithner gave the U.S. debt limit "wiggle room."
* QE3 will take the form of language instead of buying.
* The IMF can do its job without Dominque Strauss-Kahn.


* A low in bond yields: The continued drop in the yield on the 10-year U.S. note to 3.15%. Last week, despite a large supply overhang, there was no change in the 10-year U.S. note yield. Several Treasury auctions were easily absorbed.

* A double dip in housing: A still-large shadow inventory of badly delinquent and foreclosed homes continue to weigh on home prices, which resumed their fall in first quarter 2011. There was little in the way of new or meaningful housing statistics last week. That said, mortgage rates did hit a five-month low and both refinancings and purchase applications improved.

* Worrisome group rotation: The continued improvement (absolutely and relatively) of the consumer nondurable sector. Last week consumer nondurables continued their leadership role.

* Weakening commodities: We have witnessed a decline in the price of copper (to below its 200-day moving average), oil and other major industrial commodities. The downward trend in commodity prices (and industrial and materials share prices) continued with a vengeance last week.

* Economic indicators flash caution: A multiyear low in the Baltic Dry Index, a weak household jobs survey, the ISM nonmanufacturing Index falls to the lowest level in nine months and, for the fourth straight week, we get an initial jobless claim print above 400,000. The University of Michigan survey improved. On the other hand, the Small Business Optimism Index dropped to an eight-month low. Meanwhile the initial jobless claims stayed higher than 400,000 for the fifth straight week.

* Emerging weakness in non-U.S. markets: A break is developing in the natural-resource-based regional markets of Australia, Mexico, Canada and Brazil. Emerging markets continued to break down in response to the descent in commodity prices.

I don't necessarily admire GS as a company; or a number of decisions its leaders have made over the last 5 years or so. That said, let's take a look at the bullish case for Goldman.

To me, buying Goldman Sachs is analogous to when Whitney Tilson and Glenn Tongue were deftly buying BP after it had experienced the threatening oil spill and its shares plummeted.

The issues Goldman has with the government are its oil spill.

Based on my analysis and for the first time in quite a while, Goldman represents a potentially interesting value investment.

Its shares have gone done in a straight line from over $170 a share in January to its current level of about $141 a share during a potent bull market run for the indices.

Frankly much of Goldman's government "problems" (brought up in Dick Bove's research) are not new -- they have been known for several years.

And I have read Mike Taibbi's Rolling Stone article. It was an entertaining read, but much of it was hyperbolic. Taibbi's articles always are.

I understand that today's Goldman Sachs is not John Whitehead's Goldman Sachs. I don't intend to be an apologist for the brokerage -- as with numerous other financial institutions, mistakes were made in a relatively freewheeling, overly leveraged and under-regulated period. And, as a consequence, Goldman Sachs has become the whipping boy, with all the attendant valuation vulnerability and uncertainty.

But I am also mindful of what both former Gov. Jon Corzine and Omega's Lee Cooperman said about Goldman on CNBC last week:

1. The best and brightest still reside there;
2. Goldman generally conducts itself in an ethical manner (it is part of the company's heritage); and
3. The company will rebound from the errors made in the last cycle.

With the shares trading at around $141 a share, there appears to be good value relative to the company's current stated book of $130 a share (which should rise to $140 a share by year-end 2011.

So, I now have the opportunity of partnering with Goldman's partners (the smartest guys in the room) without paying a premium to book value.

This is a bet I am willing to make given its leadership in trading (agency and proprietary), mergers and acquisitions and general investment banking strengths. Moreover, as measured against its peers, Goldman Sachs has the strongest capital position and is the brokerage closest to meaningful capital return (through buybacks). And, even with the institution of Dodd-Frank legislation, Goldman's earnings appear to be capable of growing at 10%-15% a year, and the company has more than $40 billion in revenues (annualized) and "earnings power" in excess of $20 a share.

The risk, as I (and others) see it, is that Goldman is seen as a continued "target" of legislators and politicians -- contributing, potentially, to a secular contraction in its P/E multiple.

How Long Will This Downturn Last?

Although the senior indices tried to hide it for most of the day, they stumbled into the close and more accurately reflected the downright miserable action. We had an OK bounce attempt early but never gained much traction, and then the big-cap momentum stocks were pretty much slaughtered. AMZN, PCLN, GOOG, AAPL, NFLX and others were hit hard as the hot money ran for safety. AAPL is a particularly cheap stock with no one - apparently - left to buy it. Even if Jobs never comes back, one to two years from now, buying today at about $330 will look like an absolute steal....

This was one of those days where it was very easy to take some nasty hits if you hadn't taken defensive steps as stocks weakened last week. These are the days that make you glad that you didn't ignore the poor technical action, even though the market has made that approach look quite foolish far too often.

Though the indices aren't in terrible shape, the average momentum stock, small-cap and commodity play is broken. All three groups have been struggling since the beginning of the month and today helped to cement the fact that they are in a downtrend.

The S&P 500 managed to hold a few cents above the low of earlier this month and is still above the 50-day simple moving average, but that is cold comfort if you were holding any momentum names today.

The market is a bit oversold now, and we'll likely see a bounce attempt soon, but how big will it be and how long will it last? Investors will be just fine.

Friday, May 13, 2011


I don't even know what to say about the Yahoo situation.

All I can write is that it reminds me of a line in Roman Polanski's film, when Walsh tells Jake: "Forget it, Jake. It's Chinatown."

It's Time To Buy GS

At $140, the shares are trading at my projection of year-end 2011 book.

The better-than-expected GDP almost guarantees tightening by the ECB over the next few months.

Boost The Oil Margin Requirements

It's the term "speculator" that raises all the hackles, as in, "I blame the speculators for the price of oil and how much you pay at the pump." When you say that, you always sound naive, as if the "speculators alibi" is just sour grapes and what's really at stake is simply true supply and demand.

After all, the market -- any market -- is too big to be influenced by non-commodity producers or buyers, right? But time and again we have seen the financial buyers overwhelm those who need to take delivery. Just a fact of life. At any given moment, only so much of a commodity can be brought to market, and if that marginal amount can be snapped up by a group of hedge funds, it is completely reasonable that they can move the market up until we reach a level of substitution; or if there is no substitution, then demand destruction.

In fact, the notion that the financial buyers have no real impact was totally dispelled in 2008 when oil reached $147. Did anyone think that was really demand from actual buyers who needed fuel? Only a moron would think that. The simple truth is that a small amount of money relatively, the money a smallish hedge fund might have under management, can easily control $5 billion (as we know from a fund that lost $500 million in the oil collapse last week). If you do the math, you know that the money put up that was lost was nowhere near how much was actually purchased. Given the total groupthink of this hedge fund business, it is reasonable to presume that others were doing the same strategy, playing keep-away from those who needed the oil. When you couple in the $2 billion front-month buying that Dan Dicker from Realmoney.com talks about, you have the possibility of $20 billion, easily, buying up oil in the financial markets with no intention of using it.

Given that the actual markets aren't that deep -- it is totally reasonable that the price at the pump is NOT set by the users and producers at all. Why else would the biggest oil producer withdraw from the market if we weren't in actual glut but artificial height for the commodities themselves? In fact, can you think of a situation where commodities became dominated by financial buyers that a bubble didn't form, from tulips, to gold in the '70s, to silver in the '80s, to housing (through CDOs) in the 2000s, to oil in 2008? It's the nature of the bad beast, and is not only ludicrous to say that's NOT what is happening but it is empirical!

I think that commodity allocation for funds is vital. They should own oil. It's a great asset that has appreciated long term. They can participate through the futures market, that's fine. But oil, unlike every other commodity, has national implications. The market has to be truer -- meaning more responsive to increased production -- than it is.

The president should sell futures against the Strategic Petroleum Reserve to knock down the phony price to more reasonable actual prices. In other words it is the futures, which are priced at the margin by the financial buyers, that simply need to be overwhelmed by an organization that is NOT trying to maximize its wealth. You get a government operator who actually wants to make less on oil and cares more about the health of the nation than the profit, and that institution can knock things down for certain. The president has a strategic imperative to keep the country safe from an oil embargo. But he can also avoid a recession by beating the financial buyers back. Think of it. The oil companies sure don't. They get to piggyback off the speculators by simply not taking the other side of the futures trade.

That's what they did in 2008. They just didn't bring any futures market pressure to bear.

Oil's not cotton. It's not even corn. Reasonable prices levered to actual consuming customers should be a national imperative. Either have the government raise the margins to drive these marginal buyers out, or sell futures against the Strategic Petroleum Reserve. In no way am I advocating that financial players shouldn't be involved. I am simply saying that if we make it so there's so little money that needs to be put up, the potential to want to corner or at least have mindthink to move prices up is too great.

We don't need as many buyers of oil if we can avoid it. The best way to do it is to make people put up a lot of cash, as the actual physical buyers have the capability of doing (they are not using leverage).

Just like in 2000, when the Federal Reserve could have used its power to control margined buying of stocks -- something that would have avoided the dot-com bust that hurt so many -- if the government steps in now and says it thinks it's prudent to see margin rates reach 50% of use, we wouldn't lose any of the true financial allocators and the market would be returned to actual physical demanders versus the financial demanders. And given all of the supply out there, the price would be dramatically reduced, which would eliminate a proximate cause of a dynamic slowdown.

Dollar Dominated

The indices were close to flat for the week but it made for challenging trading as they danced to the tune of the U.S. dollar. We were up on a weaker dollar for three days and down sharply on a stronger dollar for two days. Nothing much else mattered, so if you weren't in tune with currencies, you weren't in tune with this market.

Although the indices didn't move much and are still in trading ranges with some underlying support, there is some troubling action under the surface. The trading in key individual names such as AAPL, GS, DE, BIDU, MCP and a host of oil and commodity names was quite poor. There were very few pockets of momentum, and it was most troubling that even on positive days there was a distinct lack of energy.

Another area of concern is the strength in defensive stocks such as PG, CPB, JNJ and PEP. Those aren't names that attract money when people are optimistic about the market. It is where funds park some cash when they have to be invested but want to play it safe.

On the other hand, I don't how many times in the past couple of years we've had a long list of fundamental negatives and weakening technicals but still came roaring back just when it looked like the bears might finally catch a break. Anticipating downside momentum has been a recipe for losses, so it's awfully difficult to have a high level of confidence that now is the time things are going to take a turn for the worse.

Thoughts For Thursday, 5/12/2011

The worsening action in financials combined with the extraordinary action in the consumer nondurables is bearish.

We had a host of economic releases on Thursday.

In response to strong sales, business inventories expanded by 1%, putting the inventory-to-sales ratio at 1.23 -- the lowest level in history.

Initial jobless claims of 434,000 were slightly above expectations.

Retails sales grew 0.5% -- a tad below consensus, but March was revised up from 0.5% to 0.9%.

But April's print was something of a money illusion as gasoline propelled the number higher. As proof, excluding gasoline and autos, the gain was only +0.2%, which was well below the expectations of +0.5%.

On the inflation front, producer prices were up by 0.8% -- a tick or two higher than expectations -- as inflation slowly leaks into the system.

* Plosser forecasts U.S. economic growth of 3% to 3.5% in 2011, 2012
* Plosser sees unemployment declining to 7% to 7.5% by the end of 2012.
* Plosser expects unemployment to fall to 8.5% by the end of 2011.
* Plosser says first-quarter weakness "is likely to be transitory."
* Plosser says that the recovery is likely to become "more broad-based."
* Plosser expects "moderate growth in consumer spending."
* Plosser expects "strong advances in business spending."
* Plosser sees inflation risks "clearly to the upside."
* Plosser says that much of current inflation is likely to be temporary.
* Plosser says the Fed "must be prepared" to act "aggressively."
* Plosser reiterates the call for the Fed to adopt and "inflation objective."
* Plosser sees the possibility that the FOMC will "go on hold" with policy.
* Plosser says "it'd be nice" if the Fed had a plan for the future.
* Plosser says QE2 is "done for all intents and purposes."
* Plosser says there will be no QE3 "unless something dramatic happens."
* Plosser says the Fed is "actively discussing" how to remove stimulus.
* Plosser sees no "disruptive effects" when bond purchases end.
* Plosser "wouldn't be surprised" if the Fed had to act this year.


1. Tax cut! High energy prices are a greater economic risk than lower energy prices. And the $0.25-plus decline in gasoline prices will put more than $35 billion back into the consumers' pockets.

2. Food fight might be over. As gasoline represents over 4% of CPI and food represents nearly 14%, the inflationary threat might be muted now as expectations for a hot CPI subsides. The Bernank's view that higher energy and food prices are transitory could prove to be correct.

3. The Fed will remain on hold. Lower commodity prices, elevated employment claims and so on suggest that the Fed will stay on hold for some time to come.

4. Corporate profitability prospects are improving. If commodity prices continue to drop, corporate profit-margin concerns will also abate.

5. The stock market benefits. Over any long-term period, lower energy prices are a net positive for equities.

Run, don't walk, to check out a bunch of valuable reads from Knowledge@Wharton.

* "What's Behind Microsoft's $8.5 Billion Takeover of Skype?"

* "The EU in 2013: Debt Defaults and More?"

* "With Its New Music Storage and Player, Can Amazon Deliver in the Cloud?"

* "Revitalizing the Private Mortgage Market: 'Skin in the Game' and the Consequences for Future Homebuyers"

Market Recap For Thursday, 5/12/2011

After a very ugly start the markets recovered quite nicely, but it was mainly a dollar-driven, dead-cat bounce. Market players remain intently focused on the U.S. dollar, and since it's jumping around so much it makes for unconvincing buying. There is no reason to believe that the dollar rally is over, and it's going to add a big dose of uncertainty to a market that doesn't seem to care about anything else.

The bounce put the major indices back into the middle of a trading range. According to the technicians, the 1,329 level of the S&P 500 is a key underlying support. As long as it holds there, it will be alright. We came within a few points of testing it this morning, but the bounce kicked in and took us out of the danger level. Upside resistance for the S&P 500 is Tuesday's high of 1,359. If it regains that level, look for a short squeeze and some scrambling by underinvested bulls.

Wednesday, May 11, 2011


So Long, Raj

Let his downfall be a lesson to others.

Frankly, I say good riddance, and I am of the strong belief that the authorities should throw the keys away, in order to set an example to others.

Unfortunately the temptation to cheat in the investment business -- and the rewards it generates -- make the Raj case all too common.

Good Results in Treasury Auction

Yield on the 10-year falls to 3.21%.

The results of the 10-year U.S. note auction were good, with a bid-to-cover ratio of 3.00, indirects taking down 47.2% and directs taking down 8.4%.

The yield, at 3.21%, was 2 basis points below the when-issued and the lowest yield in six or seven months.

Commodities are getting crushed.

With homeowners drowning in negative equity, the outlook is grim for the next few years, as a high level of foreclosures will expand the shadow inventory of unsold homes that will continue to haunt the industry.

"Well, I hope it's a long ceremony, 'cause it's gonna be a short honeymoon."

-- Dark Helmet, Spaceballs

Housing is an important driver to economic growth -- in the last cycle, it was the most important driver (as the real estate market contributed to over 40% of the growth in jobs in the early 2000s). After the fall, the diminished ranks of realtors, mortgage bankers, title insurance agents and the like became part of our country's structural unemployment problem.

Importantly, housing has a broad multiplier effect on the domestic economy. Think appliances, floor covering, paint and so on. And the memory of a 30%-plus drop in home prices -- housing is the consumer's most important financial asset -- impacts overall consumer confidence and spending plans.

The continued weakness in residential real estate helps to explain the underperformance of many regional and money center banks (and their inability to generate incremental top-line and bottom-line growth), a continuing reminder of the excesses of the last lending cycle of the early 2000s.

A rising stock market and improving sector performance in retail does not necessarily equate to an improving economy.

It remains my view that economic indicators are, at best, offering a mixed view and, at worse, are flashing caution. The latter view is best expressed in a deteriorating housing market, a multiyear low in the Baltic Dry Index, a weak household jobs survey, the ISM nonmanufacturing index falling to the lowest level in nine months, an eight-month low in small business confidence and, for the fourth straight week, we an initial jobless claim print above 400,000.

Bad Day For The Bulls

We had a minor bounce in the final few minutes of trading, but it was a very rough day for the bulls. We had weakness across the boards as oil- and commodity-related selling spilled over to just about everything else due to the stronger U.S. dollar.

The bulls lamented that lower oil and commodities are a market positive, which is why retailers showed some relative strength. They are overlooking the fact that the market has been going up on the weak dollar and rising oil and commodities for months. Apparently, that correlation is only supposed to work when it favors the bulls.

Regardless of the reason for the weakness, it left much of the market in very poor technical shape. We are still holding key support levels and a positive report from CSCO is helping after hours.

The biggest negative isn't the major indices but the action in individual stocks. You have oils like NOV and financials like JPM and WFC breaking down and little life in the key momentum names. A few stocks, like AMZN and NFLX are holding up though.

"The People Vs. Goldman Sachs" - Taibbi's Magnum Opus

Taibbi in Rolling Stone:

They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.

The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.

To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison. But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis. What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed.

But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences. Thus, while much of the Levin report describes past history, the Goldman section describes an ongoing? crime — a powerful, well-connected firm, with the ear of the president and the Treasury, that appears to have conquered the entire regulatory structure and stands now on the precipice of officially getting away with one of the biggest financial crimes in history.

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.


When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn't answered the question, Blankfein simply peered at Levin like he didn't understand.


This isn't just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial — it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.

Tuesday, May 10, 2011


In view of the Skype deal, it seems likely that the next Microsoft dividend hike could be more generous than expected.

While the price is high and execution will be the key (as the Skype product will be delivered across several product lines in business, mobile and games), Microsoft is using its non-U.S. taxed cash balances overseas (which would normally not be available in the U.S. without taking a huge tax hit).

As such, it won't be dilutive to Microsoft's non-GAAP EPS, but it will still be slightly dilutive to GAAP EPS.

The Housing Market Is Still Drowning in Debt

Foreclosures and badly delinquent loans will serve as a drag upon the industry.

Higher rates of negative equity are creating a lot of latent vulnerability in the housing stock, where if the household then encounters some economic shock, like the loss of a job or divorce or death, then that household is much, much more likely to go into foreclosure. So it just means that with higher rates of negative equity, we are going to see elevated rates of foreclosure for the net two to three years.

- Stan Humphries, Zillow

The U.S. housing market is in worse shape than it even appears -- a weakened residential real estate market will serve as an important headwind to domestic economic growth in the years ahead.

Moreover, any additional shock or weakness to domestic economic growth and/or employment will have a further adverse impact on housing.

According to Zillow, homeowners are drowning in negative equity, with an all-time high of 28.4% of all single-family home mortgages suffering this plight. The problem is especially acute in Atlanta (55.7% negative equity rate), Denver (41%) and Chicago (45%).

But, in the aggregate, the situation is worse than meets the eye for several reasons.

According to Mark Hanson:

[The above statistics] rarely include second mortgages or firsts that were refinanced after the purchase, where cash out was pulled and the loan amount was increased, as most negative equity estimates are based on the original purchase price of the house itself. Zillow, for example, uses original purchase prices.

Hanson also points out:

[W]ith respect to negative equity as it relates to the housing market and repeat buyers, effective negative equity is far greater. This is because to rebuy, a homeowner has to sell, which means paying off the first and second mortgages, paying a realtor 6% and putting 10% to 20% down on the new purchase. When you lower the negative equity thresholds to real life, effective negative equity is epidemic and will keep the organic buyer -- especially at the mid to high end -- at bay for a generation.

I previously expected the housing market to scrape around the bottom, as affordability is at a multi-decade high, mortgage rates remain low, new-home production is negligible (and housing expenditures as a percentage of GDP is at an all-time low), normal population and household formation growth create latent demand for homes and the benefit of home ownership over renting has widened.

"We see something close to stability at these much-reduced home prices in the medium to lower part of the housing market."

-- Warren Buffett, May 2, 2009, at the Berkshire Hathaway (BRK.A/BRK.B) Annual Meeting

Unfortunately, they were far too optimistic.

Reflecting the above, foreclosures and badly delinquent loans will serve as a drag upon the industry in the months (and maybe years) ahead.

I now expect another leg down in home prices of at least 5% this year.

I would avoid any housing-related equities, many of which have had their shares rise in expectation of a housing turn, which has not occurred and is not likely to occur anytime soon.

All in all, I believe MSFT is misusing nearly $8 billion of capital.

Headlines Misleading

The headlines in the popular business media today say, "Microsoft, Skype Deal Lifts Stocks." That is a nice, simple, straightforward explanation for the strong action, but it probably isn't the case. A more accurate explanation is that the weaker dollar, stronger China exports and the likelihood of another Greek bailout are driving the action.

It probably doesn't much matter what the explanation for the buying is anyway. We just have another one of those low-volume, V-shaped bounces occurring, and market players were determined to keep on pushing once they caught the bears and underinvested bulls off balance again.

This sort of straight-up action after a bout of ugliness like we had last week is just routine for this market. Once we start to recover, we seem to immediately forget any and all recent worries, no matter if the issues still exist.

Monday, May 9, 2011


Three earthquakes in Alaska, Australia and on the coast of the Philippines have been reported.

A contagion of black swans?

Howard Marks lists 20 most important things:

1. Second-Level Thinking
2. Understanding Market Efficiency and Its Limitations
3. Value
4. The Relationship Between Price and Value
5. Understanding Risk
6. Recognizing Risk
7. Controlling Risk
8. Being Attentive to Cycles
9. Awareness of the Pendulum
10. Combating Negative Influences
11. Contrarianism
12. Finding Bargains
13. Patient Opportunism
14. Knowing What You Don't Know
15. Having a Sense of Where We Stand
16. Appreciating the Role of Luck
17. Investing Defensively
18. Avoiding Pitfalls
19. Adding Value
20. Pulling It All Together

Second-level thinkers ask the following questions:

* What is the range of likely future outcomes?
* What outcome do I think will occur?
* What is the probability I am right?
* What does the consensus think?
* How does my expectation differ from the consensus?
* How does the current price for the asset comport with the consensus view of the future and with mine?
* Is the consensus psychology that's incorporated in the price too bullish or bearish?
* What will happen to the asset's price if the consensus turns out to be right and what if I am right?

Bulls Win Today, But Is It Real?

The indices finished solidly higher, breadth was close to 2-to-1 positive, and the dollar weakened, which boosted oil and commodities. Overall, it was a fine day for the bulls, but it lacked energy and looked like little more than an oversold bounce after the weak action we suffered last week.

This is the point where the market has consistently caused difficultly for the bears over the last couple years. It looks like we have the potential for a failed bounce, but then the bulls never back down, and before you know it, we have another V-shaped move back up to new highs.

There are a number of headwinds for the bulls at this point, with earnings season winding down, seasonality turning negative and the end of QE2 in sight, but we have had no shortage of negatives for most of the time that the market has rallied.

So Much For Pimco Buying Bonds: Duration Weighted Treasury Exposure Hits Whopping -23% Short, Cash Surges To Unprecedented $89 Billion...

So much for all the conspiracy theories that Bill Gross was capitulating in his short position against US debt even as he continued to bash US fiscal and monetary policy. According to just released April data for the flagship Pimco $240 billion Total Return Fund (which saw a $4.2 billion increase in AUM in the month), Bill Gross actually added to his short position against US government debt, bringing total market value exposure to 4% of AUM or ($10) billion. More amazing is that on a Duration Weighted Exposure basis, the firm's Treasury short is 23%! So much for that change in outlook. Additionally, Gross also sold another $8.3 billion in mortgage securities, bringing the April total to a nominal $57.8 billion. Spring cleaning at casa de Bill continued across all fixed corporate income as well, dropping the firm's exposure to IG by $1.6 billion and to HY by $2.1 billion. The only two securities which saw a token increase was in Non-US developed markets and Emerging Markets, to $14.4 billion and $26.5 billion, respectively. Yet the biggest shocker of all, is that Gross has now brought his cash position to an all time unprecedented high of $89.1 billion! That's right, PIMCO is charging a substantial asset management fee when 37% of all assets are in cash. One would think the mattress would cost far less. Either Gross is expecting a huge collapse in the bond market (so contrary to prevailing though), or this could well be the bet that buries the Allianz subsidiary.

Looking at the maturity exposure there are no surprises: in keeping with the firm's move to almost an all cash fund, Effective Duration dropped to the second lowest in history, or 3.42 years. As the chart below shows, Gross' exposure to debt with a maturity under 5 years is a whopping 83%. Which begs the question: just how terrified is Gross of inflation to be cutting virtually any and all 5 year+ exposure. And yes, if the firm was expecting a deflationary collapse, the duration exposure would be flipped upside down.....

Sunday, May 8, 2011

HK Mercantile Exchange's (1) Kilo Gold Contract To End Comex Gold Futures Trading (And "Bang The Close") Monopoly.....

About 30 years ago, Nelson Bunker Hunt, while trying to demand delivery for virtually every single silver bar in existence, and getting caught in the middle of a series of margin hikes (does that sound familiar?), accused the Comex (as well as the CFTC and the CBOT) of changing the rules in the middle of the game (and was not too happy about it). Whether or not this allegation is valid is open to debate. We do know that "testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective." One wonders how many short positions current Comex board members have on now. Yet by dint of being a monopoly, the Comex had and has free reign to do as it pleases: after all, where can futures investors go? Nowhere... at least until now. In precisely 9 days, on May 18, the Hong Kong Mercantile exchange will finally offer an alternative to the Comex and its alleged attempts at perpetual precious metals manipulation.

From Commodity Online:

The Hong Kong Mercantile Exchange (HKMEx) has received authorisation from the Securities and Futures Commission and will make its trading debut on May 18, 2011 with the 1-kilo gold futures contract offered in US dollars with physical delivery in Hong Kong.

The ATS authorisation grants HKMEx the right to offer market participants, through its member firms, the use of its state-of-the-art electronic platform to trade commodities. The Exchange will begin trading with at least 16 members including some of the world’s largest financial institutions as well as several well-established brokerages in Hong Kong.

“We are very excited about this historic day. It allows us to establish a liquid and vibrant international commodities exchange based in Hong Kong, linking China with the rest of Asia and the world,” said Barry Cheung, chairman of HKMEx. “Global demand for core commodities has in recent years been driven by Asia, especially China and India. However, market participants in the region have had to rely on Western exchanges for price discovery, bearing the basis risk exposure in the process. Our new platform will offer Asia a bigger say in setting global commodity prices. It will also enable market participants to more actively manage their risk exposures, using products tailored to Asian market needs.”

HKMEx’s broking members at launch include BOCI Securities Ltd, Celestial Commodities Ltd, CES Capital International Co. Ltd, Chief Commodities Ltd, ICBC International Futures Ltd, Interactive Brokers LLC, KGI Futures (Hong Kong) Ltd, MF Global Hong Kong Ltd, Morgan Stanley Hong Kong Securities Ltd, OSK Futures Hong Kong Ltd, Phillip Commodities (HK) Ltd, Tanrich Futures Ltd and TG Securities Ltd. Its three clearing members are Interactive Brokers (UK) Ltd, MF Global UK Ltd and Morgan Stanley & Co International Plc.

And while the Chinese market is far more bubbly when it comes to gold and silver purchases, it remains to be seen just how happy a gambling addicted Chinese population will take to spurious and conveniently timed margin hikes that take the air out of the next parabolic move up in gold and silver (my guess is not very).

Far more importantly, the Comex monopoly appears to be over, and in the future the exchange will have to be far more sensitive about angering broad swaths of the population using 5 consecutive margin hikes in 9 days. The new exchange will also make the now traditional "banging the close" operation (or "banging the whatever" as the May 1 15% drop from $49 to $42 in minutes demonstrated) obsolete, as traders will have options of where to route orders from the hours of 0800 HKT to 2300 HKT.

Bottom line: if Chinese demand for gold and silver is as strong as it was a week ago, and it is, the recent Comex-directed plunge in precious metals is about to the BTFDed.

From the HKMex:

HKMEx is introducing a 32 troy ounce gold futures contract useable by a wide range of market participants to execute hedging, arbitrage and other investing strategies. Moreover, the HKMEx gold futures contract has the following important characteristics designed to meet the needs of a marketplace which lacks an international price-setting mechanism in the Asian time zone:

* Secure physical delivery in Hong Kong meeting international standards
* Trading execution on an advanced and robust electronic platform
* World-class clearing functionality
* Extended Asian day trading hours to tap into global market liquidity
* Contract specifications tailored to market participants in Asia

Gold is one of the world’s most important and actively traded commodities. Demand for the metal is driven by three main factors: the jewellery market, industrial manufacturing and financial investment. In addition, gold is relatively unique in that it is used as both a commodity and a monetary asset.

Although gold has a long trading history in Asia, the majority of price formation for gold is today concentrated in the North American and European markets. In recent years, the introduction of gold futures trading in Asia has tapped into latent trading demand that is primarily driven by strong economic development in China and India.

Hong Kong is historically one of the world’s leading gold centres and has a natural geographical advantage in Asia. Hong Kong’s vibrant financial infrastructure ensures access to leading market participants and deep regional and international pools of liquidity.

Trading hours for the HKMEx gold contract will extend from 0800 HKT to 2300 HKT, opening with TOCOM in Japan and encompassing the London Bullion Market Association AM Fixing, the opening of COMEX, and the LBMA PM Fixing. The HKMEx opening auction will run from 0730 to 0800.

While gold futures trading on Asian exchanges has demonstrated significant growth, there is currently no contract that is or will likely become a regional benchmark contract for gold pricing. Without a regional benchmark, true price discovery for gold is either confined to the local in-country market or must depend on the European or North American markets. In-country markets generally restrict foreign participation and often subject it to adverse currency restrictions or tax treatment. Meanwhile, global benchmark pricing from the western hemisphere provides imperfect hedging for Asia’s trading community.

HKMEx is well positioned to address the demand of Asia’s trading community for the establishment of a gold futures contract as the regional benchmark.

Friday, May 6, 2011



The real issue here is which European banks now own Greece's debt and are carrying it par.

Well, whatever people say about Greece, the reality is that the markets are assuming that the country will default. This observation from Hussman Funds' recent commentary explains it very succinctly:

I should probably note that Greek 2-year government yields have shot to about 24%, compared with about 2% for 2-year German bunds.

Assuming a 35% haircut in the event of debt restructuring (65% recovery), that spread implicitly puts the probability of a Greek debt default at [(1-exp(-(.24-.02)*2))/(1-.65) = ] about 100%."

Twenty-four percent! It's all over but the shouting.

The real issue here is not whether Greece will repay its debt -- it won't and can't -- but which European banks now own that debt, and are carrying it par. I suspect there are some essentially bankrupt European institutions that are loaded with Greek, Portugeuse and Irish debt, but they cannot admit it yet. Unfortunately, there is no European AIG to act as a conduit to bail out the European banking system.

The Crack in Commodities

Sudden, violent and unexpected corrections are usually precursors of a meaningful change in long-term trend.

The huge bull was completely driven by the Fed's desire to create inflation. By printing massive quantities of dollars, the Fed devalued the currency and accordingly drove higher the prices of almost every commodity of which you can think. The U.S. dollar is trading at 30-year lows against baskets of other currencies.

Perhaps when Bernanke claims that inflation is "transitory," this is not an observation but a signaling of policy intentions? Using harsh monetary levers, central banks can halt inflation overnight. Back in the 1980s, Brazil was grappling with hyperinflation and stopped it cold by freezing bank accounts. No cash, no rising prices. Amazing how that works. That won't happen here, but we know QE2 is ending, and perhaps the implications of that effective tightening are starting to be recognized by the markets.

Get Defensive? Or A New Leg Up Coming?

Once again, strength in the dollar prevented the market from putting together a strong oversold bounce. The day started off nicely on "better-than-expected" jobs news but talk about an emergency meeting in Europe about Greek debt put pressure on the euro and pushed up the dollar. The stronger dollar slowed down the bounce attempts in oil, metals and commodities and that kept things contained.

The good news was that we saw 2-to-1 positive breadth and many of the stocks that broke down this week did come back a little. However, the bad news is that it was a pretty routine oversold bounce -- and not a particularly strong one at that. Many charts are still busted and the risk that they could roll over again is high.

Overall, even after an ugly week, the indices are only a minor amount off of recent highs. The average momentum and commodity stock suffered much more but it was not a total collapse. It is very unusual for the market to go straight down after making a high. Normally, a market that has been uptrending for a while has a supply of dip-buyers who provide support during pullbacks. There are usually a series of bounces and failures before we see a real major change in the trend.

The biggest problem this market faces right now is that the leadership has been pretty much destroyed.

Is America Transforming Itself Into A Part-Time Worker Society? Plus, Thoughts On The Household Survey

While the total payroll number increased by 244K, the household survey indicated a drop of 190K. This may be simply due to a calendar shift in which the Household survey catches up with the Establishment Survey. Observing the Household data breakdown into full time and part time workers, we see that the drop was actually more pronounced: while the March full time (112.755 MM) and part time (27.087MM) total summed nicely to the total headline number of 139,864, off by just 2K, the April data indicated that the component breakdown highlighted a much more pronounced drop in the headline number than the 190K indicated. Summing up the components adds to 139.572 MM, 102K less than the total 139.674 MM disclosed. In other words, the true drop when summed across components was not 190K, but 290K. And next, for the focus of this post, we look at whether this drop occurred in full time or part time jobs. To my complete lack of surprise, of the 290K drop, 291K was from full time jobs. As for part time jobs, you guessed it, increased by 1,000 in April. No need to outsource to Asia any more: America now outsources jobs to temp agencies. And so the transition of America into a part-time worker society.

Labor Participation Rate Unchanged At 25 Year Low Of 64.2%; For Third Straight Month

One of the key metrics in today's report: April civilian non-institutional population at 239,146, a meager rise of 146k from March, and the Civilian Labor Force also barely growing from 153,406 to 153,421 means that for the 3rd straight month the Labor Force Participation Rate remained at a 25 year low of 64.2%.....

Thursday, May 5, 2011


Interest rates are low, but for how long?

The are no clear/easy solutions to the government's mounting debt load, which is likely to foster debate for some time.

Long-term bond yields have been coming down recently, hinting at an economic slowdown.

China's central bank has said that controlling inflation is its top priority. Inflation was recently estimated at 5.4% in March, the third straight month it exceeded the government's target of 4%. And similar to many things coming out of China, I would suspect the real numbers are higher than this headline figure. China has already raised its one-year lending rate to 6.31%, and more hikes are coming -- you can be sure. So inflation is a big problem in China, and the tightening cycle is likely to reach worrisome levels in order to deal with it.

A coincident issue is the property bubble China is experiencing in real estate. The property bubble there is said to be of epic proportions, and we know how the recent real estate bubble in the U.S. ended. It wasn't pretty. China has raised reserve requirements at its biggest banks to a record 20.5%, and implemented several other measure aimed directly at speculation in real estate lending. It is extremely hard to deal with bubbles and engineer a soft landing afterward. Economists liken it to landing a plane in a parking lot. Central banks don't have a great track record in this regard, and China's central bank is experiencing this for the first time in recent history.

The third major issue I see is all of the excess capacity being built. China's controlled economy is building massive infrastructure, office buildings, housing, commercial developments, etc. as far as the eye can see. This is due to the millions of residents moving from the rural parts of the nation into the industrialized economic centers. The problem is, they are all extremely poor. Most can't afford any of the things that are being built, and so they lay idle. At some point, this, too, is likely to become a problem, and my worry is that all of the above come to a head at the same time.

I'm Expecting Some Upside Movement Soon

After a gap-down open, the bulls looked like they were going to put together an oversold bounce attempt, but they were unable to overcome strength in the U.S. dollar. The euro fell sharply against the dollar as less hawkish comments by the European Central Bank this morning caused commodities to spike lower, and funds were forced to unwind short dollar/long oil-and-commodities trades that have worked for so long.

The commodities markets were under pressure all day, but losses in oil and silver accelerated sharply this afternoon as both fell about 10% while gold got knocked down by about 3%.

The futures market is highly leveraged, so when commodities fall this far this fast, there is likely to be some forced selling in more liquid markets, such as equities, in order to cover losses. The biggest worry now is that the margin selling is not yet finished. If the dollar remains strong and there is no bounce in commodities, the downward pressure is going to be significant, even though we are already extremely oversold.

There was a little better action in momentum stocks and small caps, mostly from bounces in stocks that broke down badly this week. We were overdue for some sort of a relief rally, but so far it has not been very impressive at all.

At this juncture, the bears may have the edge, but it seems to me this sell-off has about run its course.

The Fascinating Scheme Of Nelson Bunker Hunt

Over 30 years ago, a man by the name of Nelson Bunker Hunt hatched the perfect plan: protect his inherited wealth (which then was one of the largest legacy fortunes in the world) from the inflationary destruction of "paper" assets by converting his assets into silver, and in the process cover the silver market, and send the price of silver to an inflation adjusted price of over $140 (nearly three times higher than the nearly record nominal silver price hit last week). Understandably, Hunt's name has appeared very often in the popular media in recent months, since after all it was the "Hunt" price that the May 1 silver smackdown (which will most certainly never be investigated) that sent silver from $48 to $42 in seconds that was being protected by the paper cartel. Yet just who is Nelson Bunker Hunt? And how did he cover the silver market when he did? What exactly did he do, and is someone doing a comparable silver cornering right now? And, most importantly, why? The answers, all of which are provided in this September 1980 Playboy article reprint, will surprise and astound many, primarily due to the myriad parallels between the world of the 1970s and our own. What follows is one man's attempt to escape from the "system."

From "Silverfinger"

IN THE SUMMER of 1979, an invisible hand reached out from an island in the Atlantic and quietly began tightening its grip on the world’s supply of silver. The fingers of that hand extended to London, New York, Dallas, Zurich and Jidda. But the only visible clue to its existence was a newly formed Bermuda shell corporation called International Metals Investment Company Ltd. That dull sounding little trading company was not just another offshore tax scam but the operating front for a secret partnership seemingly capable of controlling the world price and supply of silver.

Silver Finger by Harry Hurt III - September Issue 1980 - Playboy

Wednesday, May 4, 2011


XL Getting Sold Too Hard

The market is overreacting to an announcement.

XL is down because management said it would likely, for the time being, "pause" in its buyback program, as it might be more profitable (given the potential for rising premium rates) to write more new business.

Lousy ISM Non-Manufacturing Data

This was the lowest print since April 2008.

The ISM Non-manufacturing Index stunk up the joint, coming in at 52.8% vs. 57.3% last month. The consensus forecast was 57.5%.

This was the lowest print since April 2008.

Most conspicuous was the large decline in the new orders index, which fell to the lowest level since December 2009.

Stated simply, this index is signaling a weakening domestic economy.


* Despite outsized catastrophe losses, the drop in book value was only 2.5%, to $29.03 per share.

* Cash and investments are 3.3x equity, which will drive strong returns in the quarters ahead.

* XL has more than $4 billion of excess capital, nearly three-fourths of which will be used to buy back stock. During the quarter the company purchased $165 million of stock (7.3 million shares at $22.83 a share). Share purchases, in light of the current 17% discount to book value, are importantly profit-accretive, and $690 million is still outstanding in the company's buyback program.

* Property and casualty insurance reserves are considerably redundant. Reserve releases should buoy earnings in the years ahead.

* Premium growth was 9.2%, well above expectations, as new business initiatives have improved, renewals were strong and reinsurance results were better.

* Overall pricing is starting to improve. ("The conversation has changed.")

More Downside To Come?

The selling was intense enough this morning to produce an oversold bounce around midday, but it picked up again in the final hour and the markets closed solidly in the red. Like Tuesday, intense selling in oil, precious metals, commodities and high-beta big-caps was not fully reflected in the senior indices. The S&P 500 and Dow Jones Industrial Average did weaken, but they grossly understate the damage that has been done to a whole slew of stocks.

Breadth was better than 2-to-1 negative with just semiconductors in the green, mostly due to continued strength in INTC. Other than that, and a few defensive names like PG and CL, there is no leadership in this market right now.

The big question to ponder is whether this poor action is the start of a downtrend or just some aggressive profit taking after a good run. The severity of the selling in the leadership groups looks like more than just some routine consolidation; however, this market has consistently come back very strong just when it looks like it is ready to crack.

Given the amount of technical damage that has been done to so many stocks, particularly the high momentum names, we shouldn't expect anything more than an oversold bounce at this point. Earnings season is winding down and seasonality is increasingly negative, so the bulls have fewer positive catalysts.

4th Hike In 8 Trading Days - CME Raises Silver Margins By 17%....

Nobody could have reasonably foreseen this. Nobody. At this point there is nothing left to comment on what is a concerted action to "mitigate" any and all risk in the commodity market but could as well be classified as executive order 6102.5.

Tuesday, May 3, 2011


Berkshire Ready to Make Its Move?

Based on its large financial holdings, I would expect Berkshire Hathaway to make a nice move now.

Clorox Comments Support My Consumer Thesis

The headlines on Clorox support my view on the weak foundation of the consumer.

Headlines out just now (below) on CLX are generally supportive of my view of slowing economic growth, rising input costs and the weak foundation of the consumer.

* Clorox Ceo Says `Not Satisfied' With Results
* Clorox Says Global Environment Not as Strong as Expected
* Clorox Says Consumers Under `Considerable' Financial Pressure
* Clorox Says Seeing Cost Increases for Nearly All Inputs

Ag, energy and high-growth stocks are faltering.

GM Sales Surprise

General Motors' April sales (+27%) were well above expectations.

Run, don't walk, to read about the world according to Dr. John Hussman.

Maybe We Should Quit Spending So Much Of Our Treasure On The 'Global War On Terror'

George W. Bush used to ask “why haven’t we found bin Laden?” with such regularity that an exasperated official once suggested sending a one-sentence reply back to the president. “Because he’s hiding.”

Now, almost a decade after 9/11, and according to President Obama, Osama bin Laden has finally been found and killed. His death offers an opportunity to declare an end to the “war on terror”. This is not the same as saying that the US and Europe can now stop worrying about terrorism. The west will need a serious counter-terrorism policy for many years to come.

But the Bush-inspired drive to make terrorism the main piece of US foreign policy was a mistake. A big one. The declaration of a “Global War on Terror” distorted American foreign policy and led directly to two wars – in Iraq and Afghanistan. The war on terror has guzzled billions of dollars in wasteful spending and spawned a huge and secretive bureaucracy in Washington. The death of bin Laden gives President Barack Obama the cover he needs to start quietly unwinding some of these mistakes.

Getting the terrorist threat into perspective is difficult. The attacks on New York and Washington were so horrific that they are seared into the memory. It is also clear that al-Qaeda has spawned affiliates that may now be just as dangerous as the original al-Qaeda franchise, run by bin Laden from Pakistan. Intelligence officials say that dangerous plots are being hatched by branches of al-Qaeda in Yemen, Somalia and north Africa – and there is no reason to disbelieve them.

And yet, look at the numbers, and it becomes clear that the threat of terrorism has been seriously hyped. In a book published a couple of years ago John Mueller, an academic from the US, pointed out that the number of Americans killed by terrorists since 1960 is “about the same as the number killed over the same period by accident-causing deer”. In a report for the Rand Corporation, Brian Jenkins made a similar point: “The average American has about a one in 9,000 chance of dying in an automobile accident and about a one in 18,000 chance of being murdered.” However, in the five years after 9/11, and including the people killed there, “an average American had only a one in 500,000 chance of being killed in a terrorist attack”.

Yet incredible resources have been poured into the “war on terror”. In a report on “Top Secret America” published last year, the Washington Post pointed out that: “In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons.” And that is just the organisations created since 9/11. The CIA and the National Security Agency were hardly modest or under-resourced organisations before the “war on terror”.

By 2010, the US intelligence budget was $75 billion a year – a more than twentyfold increase since 9/11. That figure does not even include military activities run by the intelligence agencies, such as the drone attacks in Pakistan. Given all this, it is astonishing that it took a decade to track down bin Laden.

Nonetheless, the success in killing the leader of al-Qaeda – combined with warnings of new terrorist plots– may actually give a further boost to intelligence spending. This possibility is increased by the news announced last week that General David Petraeus, an empire-builder with a following on Capitol Hill, has been appointed as head of the CIA.

In fact, while good intelligence work is vital, there is plenty of evidence of massive waste and duplication in the US intelligence effort. According to the Washington Post, there are no fewer than 51 federal agencies entrusted with monitoring the flow of money to terrorist networks. The NSA intercepts 1.7 billion e-mails and phone calls every day – far more than could ever be usefully analysed.

An excessive concentration on intelligence-gathering is not just a waste of time and money. More important, it also distorts US foreign policy – as a dangerous merger takes place between intelligence and military capabilities. The line has already been blurred by the CIA’s role in fighting the Afghan war. It will be further eroded by the appointment of a general to run the CIA. Meanwhile, as the spies and soldiers are showered with money, conventional diplomacy and development aid have been run on a relative shoestring.

Given the flow of resources, it is hardly surprising that US foreign policy has become so militarised over the past decade. And yet the results have been dismal. The war in Iraq cost hundreds of thousands of lives and probably made the terrorist threat worse. The utility of waging a decade-long war in Afghanistan also comes into question – now that we have confirmation that al-Qaeda’s leadership was based deep inside Pakistan.

Meanwhile, as America poured money and resources into the GWOT, the truly epoch-making changes of our time were taking place in east Asia. The rise of new economic powers such as China and India – and the relative decline of the US – will ultimately shape the next century far more than the terrorist threat. But handling the rise of China and reviving the US economy are difficult and lengthy challenges – offering none of the emotional satisfaction of blowing away “America’s most wanted”.