Tuesday, July 27, 2010

Odds on second recession?

Talk about a frightening subject from so many prospectives.  If the economy does slip in to another recession, a back-to-back recession, history has shown that this could lead to near reckoning. That's why all markets - bond, stock, commodities and currencies - are so tepid recently. So it was great to hear what CIBC in their wisdom had to say on the matter... 

CIBC says there is Slim odds on second recession

They may slow down but they won't be double-dipping.


Through its Recession Probability Index, CIBC is predicting the economies of both the U.S. and Canada will slow in growth but the threat of a double-dip recession is unlikely.

"We're not in material danger of a rude double dip in the next two quarters," said Avery Shenfeld, chief economist at CIBC. "The probability estimate is likely more consistent with a slowdown rather than a true double-dip recession but, given the uncertainties, fiscal tightening ahead and the potential for a slow economy to be vulnerable to shocks, we will keep an eye on our new indicator nevertheless."

Examining trends in a number of indicators, including credit spreads and interest rates, the Recession Probability Index is predicting the odds of another U.S. or Canadian recession occurring in the next six months is very low.

Although both consumers and investors alike fear another recession is on the horizon, Shenfeld says such instances are very rare. As far as the U.S. is concerned, he expects sluggish job growth will ensure the government will keep the stimulus taps open.

For Shenfeld, healthy corporate profits, strong market liquidity, steep bond market curves and tight corporate spreads are all signs that Canada and the U.S. will avoid a double-dip recession.

"Certainly, there are reasons for concern," he cautions. "The U.S. economy has been propped up by fiscal stimulus that is now winding down. Job growth has lacked its typical post-recession vigour, leaving a household sector swamped with bad mortgages having few reasons to accelerate spending. But there is still a base of ongoing support coming from healthy corporate profits and a wide-open tap on monetary stimulus.

"That has us projecting a sharp deceleration in U.S. growth, but not an outright recession, with a similar fate in store for Canada."
 
Saverio Manzo
http://www.saveriomanzo.com/

Monday, July 26, 2010

How to tell how well an economy is fairing

Research believes both the U.S. and the global economy are
likely to show accelerating growth trends over the next year. Large globally diversified and vertically integrated
transport and logistic companies like FedEx and United Parcel Service
(UPS) are usually among the first to see improving economic trends
, since
these companies operate in every facet of the U.S. and global economy.

For example, when inventory restocking begins, or when consumers
buy computers or eBay items or books from Amazon.com, or when a
manufacturer orders parts, or in many other situations through the
global supply chain, FedEx and UPS are among the companies that fulfill
those orders. As such, they have a broad view into the global economic
picture. And Jim Corridore, an S&P equity analyst, thinks they are starting
to see improving trends.

In addition, due to the geographically
diversified nature of these two
particular companies, S&P Equity
Research thinks they are likely to
continue to see growth in Asia and
developing markets. Corridore
thinks this geographical diversification
could provide avenues of revenue
growth even if the United
States and Europe do not recover as
fast as expected, providing a measure
of protection against a longer
recovery timetable. The two companies
also have a pretty wide moat,
says Corridore. In the United States,
they are the only two companies that
provide door-to-door air express and
ground delivery. Globally, they compete
with very few competitors,
including DHL, which recently
retreated from the U.S. market. Of
course, they also compete with each
other, with price competition cropping
up from time to time as the companies attempt to take each
other’s market share.

Both these companies could show
strong growth in revenues and earnings
over the next year, says
Corridore, who thinks the stocks are
likely to benefit from the improved
earnings he foresees, along with
improving investor sentiment on the
industrials sector as good economic
news comes in.

Another reason he thinks the large
scale logistics companies are likely to
do well in the coming months is the
benefits he sees of their owning their
own fleet of planes and trucks at a
time when trucking, ocean, and air
cargo carriers are raising prices
sharply. Though they do not own
cargo ships, FedEx and UPS utilize
their own fleets of planes and trucks.

This practice, he says, should allow
for sharp improvement in operating
margins for both companies if volumes
and pricing continue to
improve as the U.S. and global economic
growth forecasts get stronger.
Source: S&P Equity Research


Saverio Manzo
www.saveriomanzo.com

Thursday, July 22, 2010

Grandich with some more interesting comments

The following question was set out for Peter G to answer:

"Do you think a conservative US gov’t can actually bring back economic prosperity with some tax cuts and de-regulation or is the US headed for a total collapse that will require starting over with a stable currency and little or no debt?"

Answer:
"It may seem to simple to some, but we can never really make any progress fixing the numerous problems we face in America until Americans in general come to terms with one thing – We’ve too much stuff! Wall Street and Madison Avenue have for years portrayed a myth that more money equals more happiness, and America has bought into it hook, line and sinker. You’ll know we are finally making progress when you see them closing down public storage facilities versus opening new ones. I don’t believe Americans are remotely close to taking the pain needed to fix things and will only seek quick fix solutions that do more harm than good. I don’t think either political party has the answer.

I will also mention two things:

1- The next war in America will be among classes of people. One group that holds the key are seniors. Look for them to become major players as things get worse.

2- Another myth Wall Street help create was the so-called “Golden Years”. Not only are seniors not going to experience the fables portrayed in the commercials from financial institutions, but the whole retirement thing is not spiritually correct. I don’t know of one bible verse that teaches us to work like dogs for 75%+ of our lives, gather up all the assets we can and then live the final years in some sort of special comfort that our slave days allowed. In fact, as Christians we fail by putting our trust in material things when scripture teaches us such choices will only have bad consequences.

people have said to me how nice it was for my wife and I to take in my soon to be 89 year old mom as if we did something special. Excuse me but that’s what all generations before us did as normal. Families lived with one another, not scattered in retirement homes, assisted living, nursing homes and the like. It isn’t easy but it’s nothing special."

More and more global "gurus" are sharing this view. Whats in store for our future?

Saverio Manzo
www.saveriomanzo.com

Wednesday, July 14, 2010

Why Supermodels Are Like Toxic Assets

Fascinating economic discussion from 3 Quarks Daily, on how the market for supermodels functions:

“[Supermodel] Coco is what economists would call a winner in a “winner-take all market,” prevalent in culture industries like art and music, where a handful of people reap very lucrative and visible rewards while the bulk of contestants barely scrape by meager livings before they fade into more stable and far less glamorous careers. The presence of such spectacular winners like Coco Rocha raises a great sociological question: how, among the thousands of wannabe models worldwide, is any one 14 year-old able to rise from the pack? How, in other words, do winners happen?

The secrets to Coco’s success, and the dozens of girls that have come before and will surely come after her, have much less to do with Coco the person (or the body) than with the social context of an unstable market. There is very little intrinsic value in Coco’s physique that would set her apart from any number of other similarly-built teens—when dealing with symbolic goods like “beauty” and “fashionability,” we would be hard pressed to identify objective measures of worth inherent in the good itself. Rather, social processes are at work in the fashion modeling market to bequeath cultural value onto Coco. The social world of fashion markets reveals how market actors think collectively to make decisions in the face of uncertainty.”

What does this mean for finance? Consider:

“This social side of markets, it turns out, is key to understanding how investors could trade securities backed with “toxic” subprime mortgage assets leading us into the 2009 financial crisis . . .These formal and informal mechanisms result in a classic cumulative advantage effect in which successful goods accrue more success (also known as “the rich get richer” phenomenon, or by Biblical reference, the Matthew Effect) . . . In behavioral economics, a model’s success is a case of an information cascade. Faced with imperfect information, individuals make a binary choice to act (to choose or not to choose) by observing the actions of their predecessors without regard to their own information. In such situations, a few early key individuals end up having a disproportionately large effect, such that small differences in initial conditions create large differences later in the cascade.

Herding and cascades are rather problematic to financial markets; they leads investors to artificially bid up asset values, thereby leading to bubbles and eventual crashes, even if investors knew better all along, which, it turns out in the housing market, they largely did.

But because investors, like fashionistas, react to each other as well as to the aggregate traces of fellow investors’ actions, they exacerbate systemic risk.“ (emphasis added)

An unusual and interesting article worth reading.
source: Barry Ritholtz

Saverio Manzo
www.saveriomanzo.com

Sunday, July 11, 2010

The Con of the Decade Part I

This may be an understatement... it could well prove to be the con of the past 100 years. A great summary of what mortgage mess the US finds themselves still in and and the impact on future government spending, the decline of the US dollar and rising rates to come. How will we fare, here in next-door Canada ally?

The con of the decade (Part I) involves the transfer of private debt to the public (the marks), who then pays interest forever to the con artists.

I've laid out the Con of the Decade (Part I) in outline form:

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating unlimited demand for fraudulently originated loans.

2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.

3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.

The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

I would like to acknowledge Allan Dover and B.C. of Imperial Economics for helping to clarify my thinking on these topics.

Saverio Manzo
www.saveriomanzo.com

Friday, July 9, 2010

Trillion Dollar Generation: time for a make-over

A great piece written by our friend, Peter Grandich:

Peter Grandich contends that the next great crisis to hit America will not be the result of terrorism or environmental issues, but the aging of America. Grandich discusses the top three categories in which the tidal wave will hit.

The Economy
Of all the groups of people in the U.S. right now, the seniors are hurting the most. Why? Because there were always three absolutes they could count on that are no longer a sure thing:

First, is their ability to live off their investments. Baby Boomers were raised to believe that if they saved enough during their working years, when they retired they could live off the interest of their savings. Obviously, with interest rates on CDs at 3 percent or less, that’s no longer true. To make matters worse, they “chased yield”—trying to make up some of their losses on riskier investments like real estate, which tanked even harder.

The second thing that has clobbered the Baby Boomers financially is the decline of their two most important investments: their stock portfolios and their homes. Everybody knows what happened there. Boomers planned on cashing in when they liquidated homes and stocks, which are now worth a fraction of just a few years ago…and they do not have the years to wait for a rebound.

Finally, they always knew that no matter what, they’d have good, affordable health care, thanks to government-sponsored programs like Medicare and Medicaid. Yet, the only conceivable way forward from here is a dramatic change in the way medical coverage is provided, which will impact seniors financially and physically.
Political and Social Effects
A few years ago there was a dramatic shift in America’s population, and for the first time in our country’s history we have more people over 65 than under 18. That’s important because seniors are now the single largest voting block and possess the most net wealth of any age group in the country.

We have yet to see the senior community flex its political muscles, but I fear the result nationally will be what we’ve been seeing in towns across America: school budgets and programs for younger families will be voted down because they don’t benefit seniors.

We have a political, social and economic battle of the classes brewing between the empty nesters and the young families. The Boomers won’t want to pay for schools since their kids are all grown, yet the younger Americans won’t want to pay for unlimited hip replacements and elder surgeries because they just can’t afford it.

Impact on Business
As far as businesses are concerned, I think the aging of America will obviously be a boon to healthcare companies, but I also see it affecting the home building industry. Big homes are becoming dinosaurs. As we get older, homes are shrinking. In the future, builders who build McMansions will not do as well as those who deal in senior housing and communities.

Also, industries that deal with purely discretionary spending will be hurt as times get tougher. Baby Boomers on a fixed income will ask themselves, “Do I buy this $400 autographed football, or do I buy groceries and medication?” There’s a real opportunity for social media that specializes in seniors, as well as the leisure and entertainment of seniors. They are the group that has most of the wealth in America.

A real negative of the aging Baby Boomers can be seen in the growth of the reverse mortgage business. Reverse mortgages have become popular among seniors who receive payments from the bank against the equity in their homes. Essentially, what they are doing is pawning their homes. The problem with that is the worth of the house is wealth that could or was going to be passed on to the next generation, but now wealth is going to the bank or mortgage company.

Twenty years ago, they predicted that the “great wealth transfer” would take place when the Boomers passed their homes and estates on to their children. Now it is going to the mortgage companies, not to the families.
Written by Peter Grandich

ww.saveriomanzo.com

Thursday, July 8, 2010

CASH on balance sheets of Businesses at 37 year high: Good News?

Liquid Assets and CASH on balance sheets of Corporate America at 37 year high

A Bullish Sign?

A number of analysts have concluded the sudden increase in liquid assets on the balance sheets of corporations is a bullish sign for the equity markets. One rationale is based on a possible increase in corporate mergers and acquisitions (M&A) activity. History has shown that corporations with large amounts of cash will pursue acquisitions, either of competitors or as extensions of their corporate strategy. With interest rates for prime corporate borrowers at attractive historical rates and the current modest rates of overall economic growth, the argument for increase in M&A activity as a means of growth is a persuasive one. If a company can’t achieve its long-term growth targets via internal growth, M&A (especially acquisitions) can become an attractive alternative.

Another view is that corporations are conserving cash and liquid assets until signs of basic improvement in the macroeconomic outlook justify spending and investing. While this was noted as a bullish argument in the last section, the market bears note that a reluctance to anticipate a strong recovery by corporations is a tacit expression that the risk of sliding back into a second (double-dip) recession is a possibility, albeit an unlikely one.

Whether bullish or bearish, the rapid growth in corporate liquid assets does reflect one undisputable fact: This sector of the economy generally responded quickly and effectively to the Great Recession, cutting costs, shedding excess inventory and curtailing unnecessary investments. As a result, corporations are poised to perform well based on the overall strength of the current economic recovery. Earnings growth over the past five quarters has been impressive. However, whether this trend and rate of earnings growth can continue will increasingly depend on what happens to the top line (revenues). And in turn, much of what happens here will depend upon the willingness of consumers to regain confidence in the economic outlook and resume spending.
Source: American Century Investments

Saverio Manzo
www.saveriomanzo.com

Tuesday, July 6, 2010

on Achieving Happiness

This being my 100th Blog post! I thought I would share the wisdom of the awe-inspiring, highly acclaimed James Montier. I rank James as one of the top 5 all-time best investors, and here I share some of his ideas and insights on living a happy, meaningful life. In today's' challenging environment, we can all use it. Enjoy. Saverio

We seek to explore one of Adam Smith’s obsessions: what it means to
be happy. We also discuss why that’s important to investors, and
how we can seek to improve our own levels of happiness. The list
below shows our top ten suggestions for improving happiness.

Don’t equate happiness with money. People adapt to income shifts
relatively quickly, the long lasting benefits are essentially zero.

Exercise regularly. Taking regular exercise generates further energy,
and stimulates the mind and the body.

Have sex (preferably with someone you love). Sex is consistently
rated as amongst the highest generators of happiness. So what are you
waiting for?

Devote time and effort to close relationships. Close relationships
require work and effort, but pay vast rewards in terms of happiness.

Pause for reflection, meditate on the good things in life. Simple
reflection on the good aspects of life helps prevent hedonic adaptation.

Seek work that engages your skills, look to enjoy your job. It
makes sense to do something you enjoy. This in turn is likely to allow
you to flourish at your job, creating a pleasant feedback loop.

Give your body the sleep it needs.

Don’t pursue happiness for its own sake, enjoy the moment. Faulty
perceptions of what makes you happy, may lead to the wrong pursuits.
Additionally, activities may become a means to an end, rather than
something to be enjoyed, defeating the purpose in the first place.

Take control of your life, set yourself achievable goals.

Remember to follow all the rules.
-James Montier, 2004


Saverio Manzo
www.saveriomanzo.com

Monday, July 5, 2010

Upward Pressure on Oil Prices due to Gulf Deepwater Drilling Moratorium

If crude oil output is lower than currently expected, oil prices could move higher than expected. This is good news for Canada (Canadian oil producers)

As crews struggle to contain the crude oil
and natural gas billowing from BP’s ruined Deepwater Horizon drilling
rig in the Gulf of Mexico (GOM), concerns
are starting to mount about the effect the
U.S. government’s response will have on
future crude oil supplies.

On May 27, U.S. Interior Secretary Ken Salazar extended the
GOM moratorium on deepwater drilling to
six months. Although a Louisiana federal
district court judge overturned the six
month deepwater drilling moratorium on
June 22, the federal government is expected
to appeal the ruling and request a stay on
the injunction. On June 23, Salazar told a
Senate Appropriations subcommittee that
he would be issuing a new deepwater
drilling moratorium, but did not say when
it would be issued.

S&P Equity Research expects a moratorium to have an enormous
impact on short-term drilling activity in the
GOM, but a delayed negative impact on oil
and gas production levels — which could
force prices higher.


OPEC member nations currently
have a fairly large amount of spare
capacity, about 6 million b/d, according
to IEA estimates. While that likely
would be enough to make up for lost
production even under a worst-case
scenario, the impact of a potential loss
of as much as 1 million b/d “can’t be
ignored,” Tanaka said. The IEA latest
midterm estimate puts OPEC spare
crude capacity at 3.5 million b/d by
2015, making oil prices vulnerable to
potential delays.

Saverio Manzo
www.saveriomanzo.com