Daily Dose of Optimism

Ticker Sense: 2007 Financial Blogger Outlook

Ticker Sense, a great blog from Birinyi Associates, recently solicited my feedback for their 2007 Financial Blogger Outlook Survey. The results of their survey?

[Financial bloggers] average forecast [is] a change of +2.39% for the S&P 500, +2.20% for the Dow, and +3.47% for the Nasdaq.

By way of comparison to the Street, that's pretty conservative. Major Wall Street brokerages are forecasting an average gain of +8-10%.

I provided my generally bullish overally market forecast (+12% on the year, at the time I submitted my picks) along with answers to the rest of their questions. Find the results in three posts, here, here and here. - Ed

Ken Fisher's Latest Column

Ken Fisher's latest column is up at Forbes.com. If you hurry, you can read it for free (registration required) at Forbes.com before they add it to the $5 archive. In this month's edition, Ken calls Congress for the Republicans, and has some interesting stock picks, two of which I have selected below. - Ed

Link: Fear Will Fade - Forbes.com.

Readers didn't much believe me last month when I said the Republicans wouldn't lose Congress in November. If I'm right and these skeptics are wrong, fears of a big political fallout will fade--which is bullish--and you should buy now before the fear fades. No surprise that readers have this view, since the media are close to unanimous in decreeing that the probability of a Democratic victory is high.

[...]

Germany's  SGL Carbon (6, SGG)  has fallen 33% since May and has yet to recover as it supplies primarily the hard-hit steel and semiconductor industries with carbon and graphite products, which include electrodes, laboratory components and furnace linings. If the economy doesn't roll over, SGL Carbon is too strong not to bounce back. It sells at 80% of sales and 15 times 2007 earnings. 

The Chinese stock market fell in 2003, 2004 and 2005.  China Netcom Group (36, CN) didn't suffer that fate and in fact was in public hands only for the third of those years. Still, in that backdrop you can buy it at only one times revenue, seven times trailing earnings and three times cash flow (in the sense of net income plus depreciation).

With $10 billion in revenue and 120 million voice customers and 13 million broadband customers in ten northern provinces, it is one of China's biggest telecom firms and will move up smartly when the Chinese market recovers.

Great Graph From Business Week About Jobs

Many healthcare jobs are quasi-governmental jobs, so this graph is basically saying that the housing boom and government employment is what has led recent job growth. That's frightening! - Ed

Three Gems from the Daily Reckoning

(1) I'm pulling two quotes together here, one on the general sorry state of education, and our love of mythology. I think the combination of our attraction to myths with a centralized educational system is why even those who get an "education" can remain uninformed:

"All centralized systems mean the rule of the few; and educational machinery is among the most centralized of all systems.

People occasionally appreciate the truth in the same way they appreciate a good joke. It breaks the monotony. But it is to falsehood that they look to organize their lives. Myths stick to them like burrs to a sweater.

If the modern American really wants to know what his fathers meant by democracy, he will never learn it in school. He must make the supreme and awful sacrifice. He must get out and think."

(2) Even amongst those receiving an education, the simple demographics of student choices are not a good sign for our economic direction:

"The challenge of the 21st-century 'knowledge economy' lies in the lack of a competitive barrier around workers in many easily exportable industries. What can be produced in Ohio can now be produced in Guangdong province for a fraction of the price, so the loser in this situation is unionized labor in Ohio. Don't think for a minute that union-focused Democrats have abandoned their political playbook.

The service economy workers, whose jobs cannot be exported for practical reasons, are supported by the global competitiveness and productivity of the knowledge workers. Their jobs and wages are highly leveraged to American competitiveness, which, by objective standards, has been losing ground to emerging Asian economies. For every "platform company" like Apple Computer, there are dozens of slipping "old economy" companies like GM and Ford, around which local service economies are built.

The U.S. economy may be the most productive and has the advantage of reasonable property rights, but its longstanding position at the top has bred complacency, particularly among consumption-obsessed younger generations. The "We think, they sweat" dream of the future U.S. role in the global economy is overly simplistic. It's also dismissive of the fact that undergraduate engineers produced by Chinese and Indian schools outnumber those produced by U.S. schools by a factor of at least 10-to-1.

(3) Finally, a DR classic. Wannabe capitalists - the new American personality:

The LA Times has decided to take a look at CEO compensation. In a study of 100 large California companies, the paper found that executive compensation has risen to 6.6% of net income. Why would shareholders give so much of their money away?

We venture an answer: It is late in the game and because they are not really capitalists. They are but pseudo-capitalists...capitalist wannabe’s...lumpencapitalists. They have let themselves be out-maneuvered by the managers they employ.

Instead of properly exploiting the working classes, the new “mass capitalists” are being gouged by their managers."

Japanese Interest Rates and US Equity Market Volatility

For those of you wondering why US and global markets experienced such rapid declines over the past month or two, let me draw your attention to some information you may have missed. Basically, the Bank of Japan indicated back in March that it planned to end its zero-interest rate policy.

How do low bond yields overseas affect international markets? Via the mechanism of the "carry trade":

“Carry trading” is not something the average reader is likely to run across in his spare time. What it amounted to was borrowing yen at low interest rates, converting them to dollars and re-investing the money at a higher rate of return. Simple enough in theory, but you need large amounts of money to do it. And it involves a fair amount of risk; while yen lending rates may be low, a rise in the value of the yen could wipe you out. [...] As the real cost of money rises in Japan [via higher interest rates], the yen carry trade stops working. It needs to be “unwound.”

To get a sense of how this works, see current Japanese government bond yields, and compare with US and Brazil. Imagine earning that spread with huge leverage. Here's the explanation of how Japanese liquidity impacted US market volatility (from May 30th):

“The Bank of Japan is signaling an end to its zero-interest-rate policy. Speculators who have been borrowing Japanese Yen are simply racing to the exits,” said Dan Amoss, a commodities expert and contributing editor to The Daily Reckoning.

Amoss believes that traders are dumping assets in hopes to eliminate credit balances in Japan before rising Yen value and spiking interest rates spoil profitable investments. “Speculators are relieving the pressure on their short Yen positions through the liquidation of whatever assets they had been buying.”

A serious depression scare in 1999 caused the Bank of Japan to cut interest rates to zero. Savvy U.S. speculators and hedge funds took out enormous loans from Japanese banks and invested in a variety of international bonds and commodities.

Interesting. A recent headline from Bloomberg (June 15) indicate that the Bank of Japan is backing away from any moves in the near term due to its impact on the Japanese equity markets:

The Bank of Japan kept its key interest rate near zero percent two days after the Nikkei 225 Stock Average sank to the lowest in almost seven months.         

The decision by Governor Toshihiko Fukui and his eight board colleagues, who have signaled since March they're preparing to increase rates, was unanimous, the bank said in Tokyo today.

Markets make big moves on the marginal liquidty created by hot money. For more global impact of this news, see my earlier post on the Saudi Arabian Stock Market Crash. - Ed

Tadawul (Saudi Arabia) Stock Market Crashes; Saudi King Abdullah Plans "Risk-Free Fund"

The Saudi Arabian stock market has been through a spectacular boom-bust cycle driven by a speculative frenzy over the boom in oil prices along with government sanctioned mass participation in the market:

In the past three years, up to nine million Saudis, or half the population, have started playing the market in the conservative desert state, whose strict brand of Islam outlaws standard forms of gambling.

They were encouraged by a government which hoped the bourse would enable citizens to share in the economic boom that has come with a rise in world oil prices not seen since the 1970s. It hoped that would help to iron out some of the country's huge disparities of wealth.

This rosy scenario of shared wealth ended badly after the Saudi Arabian Capital Markets Authority ("CMA") engaged in a ham-handed attempt to regulate speculative excesses:

The March 14 plunge was a severe reaction by speculators when the CMA decided to impose a daily price movement band of 10 percent.

The April 11 crash was a response to the CMA suspending two dealers on suspicions of market manipulation.

The lack of corporate transparency, small-time and first-time investors’ ignorance of the fundamentals of investments, and the long-term phenomenon of unmonitored margin lending by banks were some of the other factors that aggravated the plunge.

The resulting 50% crash produced a pretty ugly looking chart for the Tadawul Market Index:

Market strategists have also theorized that the Saudi crash put pressure on the US markets:

A lot of the selling in the U.S. stock market over the past two weeks was sparked by hedge funds invested in Saudi Arabia, said Jeffrey Saut, market strategist for Raymond James & Associates in St. Petersburg. He said the funds needed to raise cash, but their Saudi positions were illiquid, so they sold U.S. stocks instead.

Saudi investors are understandably upset:

Saudis hit by a recent stock market crash are resorting to car stickers to vent their anger at the wealthy speculators who have been blamed for the decline. The English-language stickers reading "Big Thieves!" show a stock market ticker and the names of some popular listed firms. [...]

The stock market crash, which affected more than 3.5  million middle income investors, has delayed the marriages of many people this summer, Asharq Al-Awsat newspaper reported. Every summer, tens of thousand of Saudis get married but this year, the number is expected to drop by more than 50 percent.

Saudi King Abdullah has a surefire plan:

BBC: Saudi King Plans "Risk-Free Fund" - Saudi Arabia's King Abdullah plans to set up a risk-free investment fund in a bid to attract small investors to the country's flagging stock market.

Saudi citizens will be able to invest up to 500,000 riyals ($133,000; £70,600), in the bourse - buying and selling on the market for two years. The individuals can keep any gains but the state will absorb losses.

King Abdullah did not give a starting date for the scheme - which could attract up to 3 million investors. However he said he was "determined" to implement it.

"The fund will be for people of limited income, employees and others...this group matter most to me," he said. "If they win then this is their luck, with God's will, and if they lose, then their capital is preserved with us," the monarch said.

Ah, it's nice to know oil dollars go to such productive uses. The BBC was kind enough to also note that the mass disruption of a market crash could increase the possibility of repercussions both within and beyond Saudi borders:

"Poverty and unemployment affect terrorism and instability and the king knows the result of this decision, which has important political significance"

I find this all very interesting, and it's suprising how little coverage this got in the US press - so much for those "efficient markets for information" that the internet is supposed to create.  - Ed

Debt & Trade Deficits: The Servant Becomes a Master

Thought for the day:

"This week’s Barron’s cover headline is: “Paying Up! Strapped for cash, U.S. states and cities are selling toll roads to foreign companies willing to pay rich prices.”

The money leaves home a servant; it comes back a master. We buy flat-screen TVs and Chinese tea. The money does our bidding.

But then, the overseas suppliers end up with a net trade surplus over $800 billion a year. What do they do with the money? It comes back to us. They buy our factories, our T-bonds...and now, our roadways.

Now, we are their servants - their clients, their customers, their employees, their debtors, their lackeys, their proles, and their lumpen." (Link)

Cruise ships and US economic priorities

Check out the nifty comparison below from the WSJ - I believe the largest US ship is...a cruise ship. While I can't say for certain that the Royal Caribbean "Freedom of the Seas" is the largest US sailing ship (because I'm too lazy to do the requisite searches to confirm this), it's a nice symbol of the US as a lumpen-luxury haven. (Royal Caribbean is headquartered in Florida). A peaceful world is a beautiful thing, but it's telling that the largest US ship serves no commercial purpose beyond entertainment for citizens of the most entertainment-saturated country on earth.

It's also interesting that this cruise ship is longer than an aircraft carrier, and that the cruise ship, not the aircraft carrier, bears the name "Freedom of the Seas," as I would argue that it's clearly the carrier that bestows the freedom on the cruise ship, and not the other way around, despite what Royal Caribbean and other economic determinists might try to argue.

I believe the longest ship in the world is the Hellenspont Metropolis of Greece (a double-hull crude oil carrier), at about 1,200 feet long. I'd love to make a joke about the Hellenspont Metropolis being used to carry crude oil to the US, but I'm fairly certain it is based in the Marshall Islands, and serves Asia. - Ed

UK Edition: Western Debt Bubble Showing First Signs of Distress...

The Guardian reports:  Record numbers of consumers - some as young as 19 - gave up the struggle last year to pay off debts amassed as a result of credit-driven spending sprees and filed for bankruptcy or voluntary insolvency, the government said yesterday.

Insolvency practitioners blamed Britain's "live-now-pay-later" culture and the ease of obtaining loans for the 45% increase in the number of individuals going broke in England and Wales in 2005 and said the total was likely to rise from 67,500 to at least 100,000 in 2006.

Firms expect the first quarter of 2006 to be even worse than the final three months of 2005 and are already reporting a sharp increase in the number of consumers calling helplines as a result of the debts amassed during shopping binges over Christmas and the New Year. There is no sign of the upward trend in insolvency coming to an end, they said.

Economist + Free Time + Quicktime = Nifty Yield Curve Movie (Update)

Updat: Link added to this post. - Ed

While searching for free information on bonds on the web, I found an interesting Quicktime movie of how the yield curve has changed (by month) from 1950 to 2000. An interesting visual review of quite a lot of data. Interesting to note how high rates were in the early 80s, and how much they've come down today. - Ed