Naked Investing

Property slump in China

2011-11-22T23:09:00.001-08:00

According to documents obtained earlier this year by the Financial Times, the China Banking Regulatory Commission (CBRC) ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in "stress tests" aimed at determining the health of the Chinese financial system. While Beijing has been trying to rein in sky-high property prices, a China property slump would have a big ripple effect on the global economy. Construction of property accounted for more than 13 per cent of China's economy last year.

In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China's 15 biggest cities, according to government data. Nationwide, transactions dropped 11.6 per cent, up from a 7 per cent fall in September.

The fall-off in transactions has affected developers' cash flows and, in some cases, their ability to repay bank loans.

Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the International Monetary Fund this month as one of the Chinese financial sector's biggest risks.

The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said they did not take into account the impact fewer deals and lower property prices would have on bank collateral.

(source: FT, November 21, 2011)

Gilad Shalit home. Hamas supporters rally near Ramallah, call for renewed terror attacks, soldier kidnappings.

2011-10-19T02:35:00.000-07:00

HaAretz published minute-by-minute report on Gilad Shalit's return home
As you read, note:
08:50 Hamas supporters rally near Ramallah, call for renewed terror attacks, soldier kidnappings.

17:05 The Shalit family arrives in Mitzpe Hila to a ecstatic welcome from hundreds of friends, family and supporters.

	The Shalit family en route to their reunion with Gilad, October 18, 2011.
	Photo by: Yaron Kaminsky

15:26 Shalit will be flown home at 16:00 accompanied by a doctor, reports Channel 2.16:00 The Shalit family is flown home to Mitzpe Hila in a military helicopter, with medical personnel onboard.

14:29 Shalit reported he felt weak and ill during flight from Egypt border and as such will undergo more comprehensive medical check-ups, reports Channel 2.

Israelis waiting to greet Gilad Shalit near Kerem Shalom border crossing with Gaza, Oct. 18, 2011.Alon Ron

1/12

13:58 All prisoners have been transfered to their respective drop-off points. Gilad Shalit has been reunited with this family. The live blogging of the prisoner release ends here.

What do you think about the Shalit prisoner swap? Head over to Haaretz.com on Facebook and share your views

13:28 Netanyahu mentions that this week will be the Jewish holiday of Simchat Torah, when portions of the book Isaiah will be read in synagogues, which discuss the importance of achieving the release of captives.

13:25

	The Shalit family leaves their Mitzpe Hila home en route to reunion with Gilad , Oct. 18, 2011.
	Photo by: Nir Kafri

Netanyahu: I just embraced Gilad and took him to his parents, and told them, I have returned your son to you.

13:23 Netanyahu: I thought about Gilad Shalit stuck in captivity for more than 5 years. I didn't want Gilad Shalit to turn out like Ron Arad, who has now been missing for 25 years. I thought about the pain of Ron Arad's mother until her dying day.

13:21 Netanyahu: I held fast to my insistence that the leaders of Hamas stay in Israeli jails and that they would not return to the territories. In recent months, Hamas compromised on this demand to free their leaders, so I was forced to make a difficult decision. It was the best deal we could make.

13:20 Netanyahu: Today is a happy day and a sad day for Israel. When I returned to the position of Prime Minister in 2009, I had a important task waiting for me: to return our soldier Gilad Shalit home.

13:18 Netanyahu speaks at press conference at Tel Nof Air Force Base.

13:09 Netanyahu meets with Shalit, tells him: How good that you have returned home. Shalit salutes Netanyahu, Netanyahu embraces Shalit.

13:04 After 5 years and 4 months of captivity, Gilad Shalit meets with his family.

	Prisoners to be freed as part of the Shalit swap arrive at Ofer, October 18, 2011.
	Photo by: Tomoer Appelbaum

13:03

Gilad Shalit, in first interview to Egyptian television: I knew people were working to free me, I had access to mass media.

12:45 Gilad Shalit lands in Tel Nof Air Base.

12:25 IDF Spokesperson announces that it has completely carried out its end of the prisoner release deal and that it has released the Palestinian prisoners, with the help of the Red Cross.

12:16

First video released of Gilad Shalit being greeted by IDF soldiers; he is filmed wearing glasses. Channel 2 reports that he was not given sunglasses in captivity, so there is a fear that his eyesight may have deteriorated.

11:53 Palestinian protesters clash with IDF near Ramallah. Protesters are reportedly upset that prisoners will not be released at pre-determined location they were waiting at. Route of the prisoner release convoy was reportedly altered due to protesters burning tires at the scene.

	Red Cross vehicles arriving at the Kerem Shalom crossing, Oct. 18, 2011.
	Photo by: Alon Ron

11:49 IDF Spokesperson: IDF has conducted medical tests on Gilad Shalit and found him to be in good health. He will now be taken to see his family.

11:47 Gilad Shalit in first interview, to Egyptian TV: It's uncomfortable to see so many people at once, after not seeing people for so long.

11:42 Gilad Shalit in first interview, to Egyptian TV: I will endeavor to facilitate peace between Israel and Palestinians.

11:32 Hamas chief Khaled Meshal currently in el-Arish, reports Channel 2.

11:25 Gilad Shalit currently undergoing medical tests in Israel.

11:23 Gilad Shalit, in first interview, to Egyptian television: "I did think that I would be set free. I felt over the last few months that it would happen."

11:22 Gilad Shalit, in first interview, to Egyptian television: "I missed my family, seeing people, and talking."

11:18 Gilad Shalit to Egyptian television: "I will be very happy if the Palestinian prisoners in Israeli jails are released, so long as they don't return to attack Israel."

11:11 Gilad Shalit to Egyptian television: "I was informed of my impending release a week ago."

11:08 Gilad Shalit to Egyptian television: "Hamas treated me well."

11:05 IDF Spokesperson: "Gilad Shalit has returned home"

11:03

OFFICIAL CONFIRMATION: Gilad Shalit has been returned to Israeli soil after 5 years and 4 months in captivity.

10:59 Gilad Shalit is currently at the Israel border crossing.

10:44 Shalit family watches first photos of Gilad Shalit released from captivity in a private room on Tel Nof Air Force Base.

10:38 OFFICIAL CONFIRMATION: Gilad Shalit has returned to Israeli hands after 5 years and 4 months in captivity.

10:28

After confirming that Gilad Shalit is in Egyptian hands, IDF begins transfer of Palestinian prisoners.

10:23 BREAKING: First images of Gilad Shalit broadcast on Egyptian television.

10:16 OFFICIAL IDF CONFIRMATION: Gilad Shalit has been identified alive and well at the Egypt-Gaza border.

10:00 Egypt has agreed to accept Palestinian prisoner Amna Muna.

09:52 Female Palestinian prisoners have relented, begin their way to Gaza.

09:49 Gilad Shalit has spoken to his family by telephone, reports BBC on Twitter.

09:44 Transfer of female Palestinian prisoners to Gaza has begun, reports DPA.

09:37 Prime Minister Netanyahu meets with family of Gilad Shalit at Tel Nof Air Force Base.

09:33 IDF official says that the prisoner exchange deal is being held up because of the two Palestinian prisoners' refusal to be deported to Gaza.

09:31 Unattributed report: Two female Palestinian prisoners refuse to be deported into Gaza.

09:23 Gilad Shalit has arrived in Egypt and is wearing an IDF uniform, reports Channel 2.

09:17 Egyptian television says it will release pictures of Gilad Shalit being transferred.

09:13 Israel official meets Gilad Shalit ahead of return to Israel, reports Channel 2.

08:50 Hamas supporters rally near Ramallah, call for renewed terror attacks, soldier kidnappings.

08:38 Top Hamas official confirms that Gilad Shalit has been transferred to Egyptian hands.

08:34 Dozens of families from Isawiya awaiting Israeli Arab prisoners' release (Haaretz)

08:28 Al-Arabiya reports that Gilad Shalit has been handed over to the IDF; no Israeli confirmation has been given as of yet.

08:24 Gilad Shalit arrives at the Israel-Gaza border crossing.

08:21 The Shalit family arrives at the Tel Nof Air Force Base.

08:18 Noam Shalit: "You can say this is one of the happiest days of my life."

08:11 Israeli Arab prisoners transferred from Prison Service to Red Cross, and from there to a Border Police base near Jerusalem; with that, the Prison Service has completed its role in the prisoner exchange.

08:06 A lot of medical equipment, including dental and x-ray equipment, is brought to Tel Nof Air Force Base.

08:03 IDF Chief of Staff Benny Gantz makes his way to Tel Nof Air Force Base in anticipation of Gilad Shalit's arrival.

08:01 Gilad Shalit's grandfather Zvi arrives at Tel Nof Air Force Base.

07:53 Buses carrying Palestinian prisoners roll out, in effective confirmation of Gilad Shalit's presence in Egyptian hands.

07:41 All Palestinian prisoners are on Red Cross buses awaiting the Egyptian go-ahead for the final exchange to take place.

07:37 A convoy with Israeli Arab prisoners is on its way to an IDF base near Jerusalem, ahead of their impending release.

07:35 Al-Jazeera reports that Gilad Shalit is now held on the Palestinian side of border by Egyptian officials.

07:31 Egypt reports that Gilad Shalit is now in Egyptian hands; Hamas denies exchange has already taken place.

07:20 Reports emerge from Egypt that Gilad Shalit is already en route to the Kerem Shalom border crossing.

07:15 Female Palestinian prisoner Amna Muna, who was supposed to be deported abroad as part of prisoner exchange deal, will instead be deported to Gaza.

06:54 Shalit family departs from North toward IAF Tel Nof base as all Palestinian prisoners arrive at border crossings.

At first, prisoners will be taken off the busses and identified, ahead of being handed over to Egyptian authorities in Kerem Shalom, and the Red Cross in the Ofer Camp prison (Anshel Pfeffer)

06:04 Prisoner convoy from Sharon Prison arrives at Ofer Prison. Two female prisoners and 14 east Jerusalem residents will be moved to a police station near Ma'aleh Adumim and from there to Jerusalem(Anshel Pfeffer)

Another convoy, this one with 147 prisoners will leave for Kerem Shalom and will be followed several other small envoys transporting 40 additional prisoners.

One prisoner will be moved taken to the Katzrin police; two prisoners will arrive at Ayalon Prison and will be released in Lod, and three prisoners that were moved to Megido Prison are residents of Wadi Ara(Yaniv Kubovic)

05:38 Red Cross representatives arrive at Israeli prison, identify prisoners earmarked for release. (Yaniv Kubovic)

05:33 Israeli Border Patrol prepares to close roads leading to Kerem Shalom, forming a ‘sterile zone’ for Palestinian prisoner transfer.(Anshel Pfeffer)

05:16 Second convoy with 147 Palestinian prisoners leaves prison for Kerem Shalom. (Yanir Yagna)

Release of Gilad Shalit

2011-10-17T23:16:00.000-07:00

Officials in the Prime Minister’s Office said that “a brief window of opportunity has been opened that would possibly lead to Gilad Shalit’s homecoming.” In his speech, Netanyahu said that he is thankful he can take part in the mitzvah of “pidyom shvuyim,” freeing the captive, as Shalit should be on his way home “in the next few days.” He emphasized that he instructed the team to sign the deal which was crafted keeping in mind the obligation to Gilad’s family as well as Israel’s security.

Gilad Shalit (born August, 28 1986) was kidnapped from his post on June 25, 2006, by Hamas militants in a cross-border raid near the Kerem Shalom crossing in Israel, and has been held as a hostage at an unknown location in the Gaza Strip by Hamas since then.

For more than five years, Hamas has refused requests from the International Committee of the Red Cross to allow visits to Shalit. Multiple human rights organizations have stated that the terms and conditions of Shalit’s confinement are contrary to international humanitarian law. To date, the only contact between Shalit and the outside world since his capture has been three letters, an audio tape, and a DVD that Israel received in return for releasing 20 female Palestinian prisoners. The current deal consists of the release of over 1,000 Palestinian prisoners serving various terms in Israel.

Listen to a song called “erev chag”, holiday eve, dedicated to Gilad, and our awaiting for his return:

Jeffrey Gundlach on bonds, risky assets and gold

2011-10-12T14:05:00.000-07:00

Jeffrey Gundlach, bond-fund manager and CEO of DoubleLine Capital LP, held a conference call late Tuesday, October 11, discussing whether the risky assets are cheap enough. Not yet. “It’s a dangerous market at the present level, and if anything we’d be inclined to short risk assets.”

DoubleLIne Multi-Asset Growth Fund DMLIX is positioned to benefit from further declines in the price of copper , which Gundlach called a “wonderful indicator” of global economic health. DMLIX is “significantly underweight” commodities in general. Copper’s weakness “shows that the global recession story has some teeth.”

The global-growth slowdown also has driven Gundlach into U.S. dollar-based assets, with no exposure of any kind to non-U.S. stocks. Gundlach' funds are in a low-risk mode . There will be a better entry point into the emerging market equity, energy and commodity complex and equities in general.

Gundlach is bullish on gold, especially shares of gold miners, which under performed metal itself. “Gold could come down to $1,500 or so on a sell-off of commodities and inflation-risk generally.” And at that level he would be a buyer .

Gundlach has owned Treasury bonds for some time and his investors have benefited from the rally, but nowadays he sees long-term bonds as hedges, not investments. In fact, if and when the 10-year Treasury yield touches 1.7% again, Gundlach would be inclined to lighten up on Treasurys. It’s not that he believes inflation is imminent and threatens bond values. It’s more that bonds have rallied tremendously and may have had their best days for capital appreciation. “I don’t think buying Treasurys at 1.7% on the 10-year can be classified as investments.”

Christoph Eibl on the price of Gold as commodity

2011-10-10T00:36:00.000-07:00

Christoph Eibl, founding partner of Tiberius Asset Management, talks about the demand for gold and the outlook for industrial metals. He speaks with Linzie Janis on Bloomberg Television's "Countdown."
Watch the interview with Christoph Eibl on YouTube (Source: Bloomberg, October 4, 2011)

Adrian Mowat on Europe and emerging markets

2011-10-10T00:26:00.000-07:00

Adrian Mowat, Hong Kong-based chief Asia and emerging-market strategist at JPMorgan Chase & Co., talks about global financial markets and his investment strategy. Mowat, speaking with Susan Li on Bloomberg Television's "First Up," also discusses China's economy and Europe's sovereign debt crisis.

Watch the interview with Adrian Mowat on YouTube(Source: Bloomberg, October 10, 2011)

What is in a draft of the 'Volcker Rule' on proprietary trading?

2011-10-08T14:05:00.000-07:00

A draft of the 'Volcker Rule' on proprietary trading has hit the Internet, rocking both Wall Street and Washington and sending financial organizations across the country into a frenzy.
"Billions of dollars are at stake for big banks, which have been working for months to shape the rule aimed at curbing risky trading activities that played a part in the financial crisis," the Wall Street Journal wrote.
The leaked document was labeled as a draft and was authored by FDIC, the Federal Reserve, the Comptroller of the Currency and the Securities and Exchange Commission. It was posted on the American Banker's website .
The Volcker Rule proposal defines proprietary trading, offer limited circumstances under which a bank could invest in a hedge or private-equity fund, and require banks to install internal controls to ensure compliance with the rule. The Federal Deposit Insurance Corp. is set to release proposal on Oct. 11.
From WSJ:

"Officials inside the government agencies that drafted the document fumed about the leak. They worried that it could lead to pressure to change the language ahead of the FDIC's meeting next week. Alternatively, the regulators could feel pressure to refrain from changes that could make it appear that they had given in to industry pressure.[...]
The leak left regulators fuming and opened a new front in Wall Street's battle to soften the blow of the proposed rule. The draft gave banking industry lobbyists several days to discuss it before Tuesday, when the Federal Deposit Insurance Corp. is scheduled to consider issuing a version for public comment."

Many of those who have seen the draft are reportedly concerned that it demands extremely granular policing of traders, as part of the strict compliance program described in the leaked 205-page draft.
From the WSJ:

"Among the many prescriptions for these compliance regimes: Banks with trading assets of $1 billion or more in trading assets and liabilities would have to measure their trading with a variety of quantitative formulas, and periodically report these metrics to regulators. The specific reporting requirements would vary by the scale and scope of a banks' trading activity, according to the document." [...]Critics say that by allowing banks to hedge risks on a portfolio-wide basis, the rule could open the door to more aggressive trading tactics. A bank could claim that its portfolio is at risk from an economic turn, such as a recession, and take positions that protect it from such an event, they say."

Still, like countless other pieces of legislation pushed through under the Dodd-Frank Act, it will likely take many more months if not years before Wall Street firms and regulators know how the rule will actually be applied in practice.

(Source: WSJ, October 7, 2011)

Reflection Series: gold outlook almost a year ago - November 22, 2010

2011-10-04T01:49:00.000-07:00

Christoph Eibl, co-founder and head of trading at Tiberius Asset Management, talks about the outlook for commodities including gold. Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates.(Source: Bloomberg, November 22, 2010)

Meet David Tepper managing Appaloosa

2011-10-03T21:10:00.000-07:00

He is a “distressed-debt specialist”, was once (2003) considered to be “the hottest investor on wall street” and was one of the top 10 money earners in Institutional Investor’s Alpha’s Ranking of the world’s 25 Highest-Paid Hedge Fund Managers in 2004. He also ranked second on the same list in 2003. With an estimated current net worth of around $1.2 billion, he is ranked by Forbes as the 645th richest person in the world.

Tepper was born in Pittsburgh’s East End, the second of three children. During his adolescence he spent plenty of time with his maternal Grandfather, Benjamin Tauberg. The two were huge fans of baseball, especially the Pittsburgh Pirates. Tepper said of the game, "I loved baseball. I lived and died for Roberto Clemente. I knew every player in the major league. You could pull a player’s card, and I could tell you the statistics."

David and his family lived modestly in a four-bedroom plain redbrick row house or terraced house in Stanton Heights. David stuck close to his father Harry and mother Roberta. His father was a bright accountant with a modestly sized firm. His mother was a homemaker, but decided to become an elementary school teacher and taught at different Pittsburgh Public Schools.

David attended Peabody High School where he was good at math but never received an 'A'. Tepper would ask plenty of questions as a student, but didn't study often. Although Math was an easy subject and he could memorize baseball statistics with ease, it did not translate into his academic performance.

David showed an interest in his father’s investments and the numbers associated with them. His father made a hobby of investing in the markets and would share his knowledge with the family over dinner. David showed immediate interest in his first investments, "Pennsylvania Engineering Co" and the soon to be bankrupt "Career Academies", that were given to him by his father.

While in High School he had a hand at Intramural football, but preferred acting because he didn't like the condition of the football field. During his senior year he won the school's best actor award for his role as "the father" in Bye Bye Birdie and received a standing ovation at the awards ceremony.

The University of Pittsburgh would prove to be a stepping stone for David. His grades improved significantly and he paid his way through school by working at the Fine Arts library. He graduated with honors receiving his Bachelor of Arts degree in Economics. He also dabbled in the markets during college.

After graduation he entered the finance industry working for Equibank as a Credit Analyst in the Treasury department. In 1980, unsatisfied with this position he enrolled for his Graduate Degree from Carnegie Mellon University.

Tepper has an uncanny ability to invest in a market outside of his expertise. Tepper was the former head of junk bond trading at Goldman Sachs In 2001 he generated a 61% return by focusing on distressed bonds, and in the fourth quarter of 2005 he pursued what he saw as better opportunities in Standard & Poor's 500 stocks. He makes significant gains year after year by “investing in the diciest of companies,” such as MCI and Mirant. Investments in Conseco and Marconi also led to huge profits for the company’s hedge funds while Tepper “keeps the market on edge.”

On March 19, 2003 David announced he would make a single donation of $55m to Carnegie Mellon University's Graduate School of Industrial Administration. This donation was made after being encouraged by Kenneth Dunn his former professor who became Dean of the school. He accepted the suggestion, but made it a “naming-gift” and suggested the school's name be changed to David A. Tepper School of Business.

Hedge Fund and Private Equity Executives on the Forbes 400 List of Wealthiest Americans

2011-10-03T20:56:00.000-07:00

Double-dip recessions, sovereign debt crises and political gridlock notwithstanding, it's been a good year for hedge fund billionaires.

Alternative investments players make up some 16% of this year's Forbes 400 list of the wealthiest Americans. One of them even cracks the top 10: George Soros, who is now a retired hedge fund manager, did very well for himself in Soros Fund Management's last year of managing money for outside investors. Soros' fortune now totals $22 billion, up almost $8 billion from last year and good enough for seventh place on the list.

No other hedge fund or private equity honcho cracked that elite group, but 18 others made the top 100. And most of them boast larger fortunes than last year, some of them significantly larger.

Despite his miserable year, Paulson & Co.'s John Paulson remains the second-richest hedge fund manager in the country, with a $15.5 billion fortune, 17th on the list and $3.1 billion higher than a year ago. Dell Inc. and MSD Capital founder Michael Dell was one spot behind with $15 billion, followed by Soros' fellow retiree Carl Icahn in 25th place with $13 billion ($2 billion more than last year), Ronald Perelman in 26th with $12 billion ($1 billion more) and James Simons in 30th with $10.6 billion ($1.9 billion more).

Steven Cohen was 35th on the list with $8.3 billion ($1 billion more than last year), Ray Dalio 44th with $6.6 billion (up $1.6 billion), David Tepper in 60th with $5 billion (up $700 million) and Stephen Schwarzman and Sam Zell in 66th with $4.7 billion (up $600 million and $300 million, respectively). Another hedge fund retiree, Caxton Associates' Bruce Kovner, was in 74th place with $4.3 billion ($200 million more than last year).

Two alternatives players dropped off the list this year. Blackstone Group co-founder Peter Peterson has given away a huge chunk of his fortune over the past year, while Maverick Capital Management's Samuel Wyly, who just made the cut last year, fell short this year. Wyly is facing Securities and Exchange Commission fraud charges and this year lost his brother and business partner, Charles Wyly, in a car accident.

(Source: FINAlternatives, Oct 3, 2011)

Hedge Fund and Private Equity Executives
on the Forbes 400 List of Wealthiest Americans

rank	billionaire	firm	net worth
7	George Soros	Soros Fund Management	$22 billion
17	John Paulson	Paulson & Co.	$15.5 billion
18	Michael Dell	MSD Capital	$15 billion
25	Carl Icahn	Icahn Enterprises	$13 billion
26	Ronald Perelman	MacAndrews & Forbes	$12 billion
30	James Simons	Renaissance Technologies	$10.6 billion
35	Steven Cohen	SAC Capital Advisors	$8.3 billion
44	Ray Dalio	Bridgewater Associates	$6.6 billion
60	David Tepper	Appaloosa Management	$5 billion
66	Stephen Schwarzman	The Blackstone Group	$4.7 billion
66	Samuel Zell	Equity Group Investments	$4.7 billion
73	Bruce Kovner	Caxton Associates	$4.3 billion
75	Daniel Ziff	Och-Ziff Capital Management	$4.2 billion
75	Dirk Ziff	Och-Ziff Capital Management	$4.2 billion
75	Robert Ziff	Och-Ziff Capital Management	$4.2 billion
86	Henry Kravis	Kohlberg Kravis Roberts	$3.7 billion
88	Robert Bass	Oak Hill Capital Management	$3.6 billion
91	John Arnold	Centaurus Energy	$3.5 billion
96	George Roberts	Kohlberg Kravis Roberts	$3.4 billion
107	Leon Black	Apollo Management	$3.2 billion
107	Ron Burkle	Yucaipa Cos.	$3.2 billion
107	Paul Tudor Jones	Apollo Management	$3.2 billion
117	Edward Lampert	ESL Investments	$3 billion
139	William Conway	The Carlyle Group	$2.7 billion
139	Daniel D'Aniello	The Carlyle Group	$2.7 billion
139	David Rubenstein	The Carlyle Group	$2.7 billion
150	Daniel Och	Och-Ziff Capital Management	$2.6 billion
159	Stanley Druckenmiller	Duquense Capital Management	$2.5 billion
159	Tom Gores	Platinum Equity	$2.5 billion
166	Julian Robertson	Tiger Management	$2.4 billion
171	Nicolas Berggruen	Alpha Investment Management	$2.3 billion
171	Kenneth Griffin	Citadel Investment Group	$2.3 billion
188	Philip Falcone	Harbinger Capital Management	$2.2 billion
188	Henry Hillman	Hillman Cos.	$2.2 billion
200	Israel Englander	Millenium Partners	$2.1 billion
200	Wilbur Ross	W.L. Ross & Co.	$2.1 billion
200	David Shaw	D.E. Shaw Group	$2.1 billion
227	David Bonderman	Texas Pacific Group	$1.9 billion
227	James Coulter	Texas Pacific Group	$1.9 billion
227	Alec Gores	Gores Technology Group	$1.9 billion
242	Leon Cooperman	Omega Advisors	$1.8 billion
242	Theodore Forstmann	Forstmann Little	$1.8 billion
260	George Argyros	Westar Capital	$1.75 billion
273	Glenn Dubin	Highbridge Capital Management	$1.6 billion
273	Noam Gottesman	Man Group	$1.6 billion
273	Bruce Karsh	Oaktree Capital Management	$1.6 billion
273	Howard Marks	Oaktree Capital Management	$1.6 billion
293	Stephen Mandel	Lone Pine Capital	$1.5 billion
293	Jonathan Nelson	Providence Equity Partners	$1.5 billion
293	Peter Thiel	Clarium Capital Management	$1.5 billion
309	Joshua Harris	Apollo Management	$1.45 billion
309	T. Boone Pickens	BP Capital	$1.45 billion
309	Marc Rowan	Apollo Management	$1.45 billion
312	Louis Bacon	Moore Capital Management	$1.4 billion
312	Thomas Lee	Lee Equity Partners	$1.4 billion
331	Richard Chilton	Chilton Investment Co.	$1.3 billion
331	Marc Lasry	Avenue Capital Management	$1.3 billion
331	Thomas Steyer	Farallon Capital Management	$1.3 billion
359	James Dinan	York Capital Management	$1.2 billion
359	C. Dean Metropoulos	Metropoulos & Co.	$1.2 billion
359	Nelson Peltz	Trian Partners	$1.2 billion
359	Henry Swicea	Highbridge Capital Management	$1.2 billion
375	Thomas Barrack	Colony Capital	$1.1 billion
375	John Henry	John W. Henry & Co.	$1.1 billion

The biggest risk is not to protect your assets now

2011-10-02T22:57:00.000-07:00

Reflection Series: John Godden on managing the capital originating from emerging markets

2011-10-02T21:53:00.000-07:00

The map of the hedge fund world is being redrawn. And following the near total re-charting of investment, away from high-net-worth individuals and towards institutional money, how much of this new investor landscape is likely to be capital originating from emerging markets?

At a macro level, it seems promising. There is already a global shift away from Western economies with their traditional wealth creation founded in industry and service sectors, towards new regions. Emerging economies and their 21st century resources, including energy, low-cost labour and manufacturing, are growing rapidly.

Fast-track growth has alerted hedge fund marketers to the potential in emerging regions, yet there are stumbling blocks. The money may be present, but most emerging market countries are making determined inward investment and, in many cases, are looking to raise external capital to assist with infrastructure development. So investing externally is contrary to such programmes. Additionally, the emerging economies are looking to buy assets that enable them to have ownership/control of upstream/downstream services. They want to control the means of production or ramp up the cost efficiencies of their own products, not flick through manager pitch books.

So why would these countries and their wealth managers be interested in investing in hedge funds and what would appeal to them? Despite a marked preference for internal investment, it does appear that there is a growing attraction of emerging market capital towards the very basic fundamentals of hedge funds. Diversification and non-correlated return streams.

If you have massive exposure to a narrow underlying resource such as oil or outsourcing services, no matter what level of relative value you place on the future value of your own ‘home market’ exposure, it will always be prudent to have a level of differential exposure to act as a hedge against these core exposures. Investing in geographically diversified baskets of equity, credit or real estate does not necessarily hit the right buttons, due to global factors often driving up correlation and thus dulling the diversification impact.

Rather, investing in strategies that are fundamentally differential to their core holdings can be the key. However, it still remains very difficult to execute pure alpha strategies in the Mena region, as the required tool kit, from short equity through to CFDs, is often not available. As such, accessing the returns of many arbitrage strategies requires the use of more mature markets, which can then provide the truly non-correlating return streams.

Of key significance to investors generally at this time is counterparty risk and infrastructure governance. This is perhaps more sensitive for emerging market capital where political and cultural requirements demand particular care. This is a key driver behind an upsurge in interest in pre-formed infrastructures such as Ucits or segregated managed account platforms.

The Ucits brand has travelled very well to investors from emerging markets, who see the Ucits III structure as an important quality mark. The dawn of absolute return ‘Newcits’ appears well supported among wealth managers representing emerging market capital, as they are seen as a safe access method to the alternative asset management skill set.

The massive uptick in the use of managed accounts is a result of fund of hedge funds managers responding to the governance demands made by emerging market origin investors. The ability to gain proper levels of information and investment control are of extreme importance when mandate conditions include avoidance of exposure to certain commercial activities, let alone being able to control unwanted counterparty credit exposures.

So what should a hedge fund marketer put in their bag when heading off to engage with emerging market investors?
The current answer appears to be a range of strategies that are properly non-correlated to the economic interests of the target investor pool. Avoid beta – particularly commodities and equity – and show evidence of differential return shapes (what used to be called alpha). Take the strategies neatly wrapped in a Ucits III or a segregated managed account structure and be just as willing to be guided by their map, as your own route plan.

(Source: John Godden, March 25, 2010)

Barr Rosenberg's mistake

2011-10-02T21:15:00.000-07:00

The Securities and Exchange Commission has charged Barr Rosenberg, a leading academic and quant fund manager, with fraud. Without admitting or denying guilt, Rosenberg has agreed to a consent decree that requires him to pay a $2.5 million fine and bars him from the securities and investment advisor industries.
The 68-year-old Rosenberg owned 21 percent of AXA Rosenberg (ARG) during what the SEC describes as the relevant time when the alleged fraud was committed. He was also the owner of the Barr Rosenberg Research Center (BRRC).
The agency alleges that in late June 2009 a BRRC employee discovered an error in the code of a complex automated optimization model that caused $217 million in losses in about 600 client portfolios. After the employee discussed his finding with Rosenberg and other employees, the SEC claims Rosenberg directed them to keep quiet about the error and not to inform anyone else about it.
Rosenberg also directed that the error not be corrected at the time. “Before and after the discovery, [the firm’s] clients were expressing dissatisfaction with their portfolio’s underperformance,” the SEC said in its complaint.
As a result of Rosenberg’s directives, the SEC contends that ARG’s global CEO did not learn of the errors as soon as he should have and instead found out about them in November 2009.
It is a hard fall for Rosenberg, a supremely wealthy man and widely respected academic, who pioneered the use of quantitative techniques to implement investment strategies for decades.
Clients reportedly were not informed of the error until 2010. In mid-to-late 2009, ARG's board met to discuss the model and its underperformance.The SEC said Rosenberg failed to disclose the error to the board.
When a director inquired about its underperformance, the SEC claims Rosenberg responded that he was "not aware of siginificant" mistakes and added that "if there are any [they] will not be made in the future." ARG's CEO remained in the dark until November 2009 when a BRRC employee felt required to inform him.

Gold ATM machines come to China

2011-10-02T13:56:00.000-07:00

China is one of the world's largest producers and purchasers of precious metals, especially gold and silver. Beijing has now unveiled its first gold ATM machine in a shopping district. More than 2,000 will be installed in the next two years.
Since the beginning of the global economic meltdown, China has been purchasing and producing commodities at a rapid pace. Digital Journal has reported in the past that its central bank has bought gold bullion and state-television outlets have even urged citizens to acquire silver bullion.
Digital Journal has also reported of gold ATM machines being installed in Germany and the United States. Now, China has unveiled its first gold ATM machine in Beijing’s shopping district of Wangfujing Street.
Although it was opened for business on Sunday, it was shut down a few hours later because it was not producing receipts for customers. Operations manager of Gongmei Gold Trading said the technical issues were being repaired, but did not note when the machine will be up and running again.
The machine, built by Germany's Ex Oriente Lux AG, allows customers to purchase one million yuan ($157,000) worth of gold bars and coins in various sizes at regular up-to-date market prices. Gold can be purchased by cash or credit card.
“The people in Asia have a unique taste for gold, especially in China and India, and the channels of investment in China are way too narrow right now,” said Zheng Ruixiang, Gongmei president, in an interview with China Daily. “To puts residents’ cash deposits into gold deposits can reduce cash flow and reduce pressure on commodity prices.”
Chinese officials are planning to install more than 2,000 more machines over the course of the next two years. They will be placed in secure locations, such as private clubs, financial institutions and gold stores.
Since 2000, gold has risen astronomically from $250 per ounce to as high as $1,900. A report from the World Gold Council suggested that China acquired more gold than India.
(Source: Digital Journal, September 28, 2011)s one of the world's largest producers and purchasers of precious metals, especially gold and silver. Beijing has now unveiled its first gold ATM machine in a shopping district. More than 2,000 will be installed in the next two years.

The best bond fund manager Jeffrey Gundlach's story

2011-09-27T15:45:00.000-07:00

TCW Group Inc. decided to oust Jeffrey Gundlach despite being warned that firing the fund manager could trigger redemptions of as much as 70 percent, according to testimony during the six-week trial of the bond- fund manager and his former employer.

Gundlach, who started his own firm within weeks of being ousted and has since attracted $16 billion in assets, yesterday won a $66.7 million jury award against his former employer for unpaid wages, which he has to share with three of his colleagues. He was also found to have breached his fiduciary duty to TCW and misappropriated its trade secrets. The Los Angeles jury awarded the company no damages on the breach claim. A judge will determine damages on the trade-secret claim.

“This trial brought home all of the ugliness and the dirty laundry in the business,” Geoff Bobroff, an independent fund consultant in East Greenwich, Rhode Island, said in an interview. “This would be the most bitter case I’ve seen brought to trial.”

The trial shed light on a decade of tensions between TCW and Gundlach, a former trader who became the company’s star performer over an almost 25-year career there, eventually managing two-thirds of the company’s money. TCW painted him as an arrogant man interested in enriching himself, and a former executive at the firm described him as a “cancer.” Gundlach and his attorneys claimed TCW cheated him out of hundreds of millions of dollars and reneged on a promise not to dilute his stake in the company.

Founder Robert Day at one point contemplated getting rid of Gundlach, 51, then selling the firm to BlackRock Inc. (BLK), according to evidence presented during the trial. His ouster in December 2009 cost the firm $566 million in damages, TCW said in court documents.

TCW, the Los Angeles-based unit of Societe Generale SA, sued Gundlach in January 2010 after more than 40 of its fixed- income professionals joined DoubleLine Capital LP, the asset- management firm Gundlach started after TCW fired him.

The jury found that Gundlach, who countersued, and DoubleLine didn’t act willfully and maliciously in misappropriating trade secrets. Susan Estrich, a lawyer for TCW, said the company will ask the judge to award it $89 million on the trade-secret claim.

“We are very pleased and gratified with the verdict,” Estrich said outside the courtroom. “This was about liability, about standing up for what is right.”

Gundlach said the verdict was “a major win” for DoubleLine.

“In a society governed by lies, truth is considered a cancer,” Gundlach said in a telephone interview.

Gundlach joined TCW in 1985 on a 90-day probation, for about $30,000 a year. TCW needed someone with a “quant” background, which Gundlach had as a Ph.D. candidate in mathematics at Yale University. He didn’t complete his doctoral thesis on the “non-existence of infinity,” which was then considered an unpopular line of thinking among mathematicians, Gundlach said in a 2009 interview.

Gundlach started the TCW Total Return Fund in 1993 and the fund grew as Gundlach’s acumen in picking mortgage-backed securities helped the fund beat peers. By 2001, when Societe Generale acquired TCW, Gundlach had become a substantial shareholder in TCW, with a 4 percent stake.

A consultant who was hired by TCW to advise on options told chief executive officer Marc Sternthat Gundlach’s departure would trigger client redemptions of 60 percent to 70 percent over three years, while keeping 40 percent of clients assets would be a “huge success,” according to court records. The consultant, Woody Bradford, testified that he advised Stern in October 2009 that the best option would be to work out an “arrangement” with Gundlach.

“The case demonstrates the difficulty of running a business when one individual or a group of individuals rise to prominence,” said Bobroff. “That’s a reason why most firms are moving to team management rather than have one or two star managers.”

Public spats are rare in the asset-management industry, where companies typically resolve disputes behind closed doors. In one example that shocked fund managers nearly four decades ago, John Bogle was fired by Boston-based Wellington Management Co. after clashing with the company’s board of directors. He went on to form Vanguard Group Inc. in 1975, which has since become the biggest U.S. mutual fund company.

The relationship between Gundlach and TCW started to sour in 2001, when Societe Generale (GLE) acquired the firm. Gundlach said his stake in TCW fell from 4 percent to the “high 2s,” despite an earlier promise made by Stern that he would “never have the stock taken away” from him, according to court transcripts.

Tensions abated in 2005 after Stern stepped down from active management and the firm created a new leadership team, with Robert Beyer as chief executive officer, William Sonneborn as president and Gundlach as chief investment officer.

“I was really happy” after the change, Gundlach said in his testimony. “I thought it was the greatest thing.”

The new leadership team didn’t last long. A month after unauthorized transactions by traderJerome Kerviel spurred losses at the Paris-based Societe Generale in early 2008, Beyer and Sonneborn tried to engineer a management buyout of TCW from the parent, Gundlach testified. The move angered the French bank because of its “timing,” according to Gundlach.

Sonneborn, who described Gundlach as a “cancer” to the company in conversations with Stern, according to court transcripts, left TCW for private-equity firm KKR & Co. in 2008. Beyer retired in 2009, and Stern returned to lead TCW in June 2009 after Beyer’s departure.

DoubleLine’s attorneys said executives at TCW and its parent had already decided at that time to fire Gundlach. He and other senior managers at TCW had opposed Stern’s return out of retirement and wanted the firm to be run by a management committee instead. TCW said Gundlach’s demands to restructure the leadership and compensation intensified in 2009.

TCW, which said that Gundlach made the equivalent of $20,000 an hour, at one point in the trial compared him to Gordon Gekko, the fictional character who gave the “Greed is Good” speech in Oliver Stone’s 1987 film “Wall Street.” TCW also said Gundlach openly disparaged TCW executives, referring to Day and Stern as “Dumb and Dumber.”

Stern testified that he became suspicious of Gundlach after a series of meetings in September 2009 and instructed TCW’s in- house lawyer to start monitoring the e-mail of Gundlach and others in his group. The investigation showed Gundlach’s people were downloading TCW’s proprietary information and looking for office space, Stern said.

While Gundlach was in talks to join rivals such as Western Asset Management Co. and Pacific Investment Management Co., Day contemplated forcing Gundlach out and selling the firm to BlackRock, according to evidence shown at the trial. Executives at Societe Generale thought the idea of selling TCW to BlackRock “is not really feasible at a good price,” according to an e- mail that was made public.

When those plans fizzled, TCW dismissed Gundlach and acquired MetWest, court documents show.

Gundlach went on to form DoubleLine in December 2009. More than 40 people, including Gundlach’s co-manager on the TCW Total Return fund, Philip Barach, joined him at DoubleLine.

Gundlach’s DoubleLine Total Return Bond fund has surged to $11 billion in assets since it was started in April 2010, a record for the fastest growth among startup mutual funds. TCW’s Total Return Fund has dropped to $5.3 billion from a peak of almost $12 billion before Gundlach was ousted. The DoubleLine fund is up 12 percent in the past year, twice the return of the TCW fund and beating 99 percent of rivals, according to data compiled by Bloomberg.

Brad Brian, DoubleLine’s lawyer, said in his closing statements that handwritten notes from an August 2009 meeting of TCW’s senior executives show they had already decided to fire Gundlach before there was evidence of his people copying TCW data or registering a company in Delaware.

It was “telling,” Brian told the jurors, that none of the executives, including Stern, could recall during their trial testimony what was said during that meeting. Brian said TCW executives don’t want to admit they had made up their minds about firing Gundlach months before they did because it would undermine their damage claims in the case.

Gundlach had negotiated for him and his group to receive 60 percent of the performance fees for the distressed-asset funds he set up in 2007 and 2008. The funds invested in mortgage- backed securities that were downgraded and dropped in value with the collapse of the U.S. housing market. When the funds performed better than expected, Societe Generale and TCW wanted to replace Gundlach with a less expensive asset manager, DoubleLine’s lawyers said.

TCW argued that Gundlach wasn’t entitled to management and performance fees from the funds after his firing.

The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County (Los Angeles).

(Source: Bloomberg, September 16, 2011)

Trader's traits rediscovered

2011-09-26T23:37:00.000-07:00

The University in St. Gallen, Switzerland has come out with a study that compares traders with psychopaths. The surprising result was that not only do traders act like psychos, they’re worse. The “normal people” were 27 traders. Stock guys, FX/commodities traders and derivative types.Even the experts were surprised by the result. The performance of the 27 dealers is even worse than the psychopaths. It’s worth looking at what a textbook definition of a psycho actually is.

1. Considerable superficial charm, verbal facility and average or above average intelligence.
2. Unreliability, disregard for obligations, no sense of responsibility.
3. Untruthfulness and insincerity.
4. Inexplicable impulsiveness.
5. Antisocial behavior.
6. Poor judgment and failure to learn from experience.
7. Total self-centeredness.
8. General poverty of deep and lasting emotions.
9. Lack of any true insight, inability to see oneself as others do.
10. Fantastic and objectionable behavior, after drinking and sometimes even when not drinking--vulgarity, rudeness, quick mood shifts, pranks.
11. An impersonal, trivial, and poorly integrated sex life.

(Source: http://brucekrasting.blogspot.com/ September 26, 2011)

Goldman Sachs Closing Global Alpha Quant Fund

2011-09-16T17:53:00.000-07:00

Goldman Sachs is shuttering a well-known hedge fund that relies on computer-driven trading strategies after the portfolio rang up a hefty loss this year.- Goldman's Global Alpha fund down 13 pct year-to-date, while many other quant funds performing well.

Goldman Sachs is shuttering a well-known hedge fund that relies on computer-driven trading strategies after the portfolio rang up a hefty loss this year.Goldman told investors in the roughly $1.6 billion Global Alpha fund the news Thursday, one day after it announced a management shake-up at the fund that had been the crown jewel of its quantitative trading business. The fund will be closed in the next few weeks.

Global Alpha had tumbled 13 percent by early September, delivering a far worse performance than other hedge funds that rely on computer programs to quickly take advantage of opportunities in the market, people familiar with the number said. These types of funds are supposed to move quickly in and out of stocks, bonds, currencies and other assets and exit positions before losses accrue.

This is the second time in four years the Global Alpha fund -- once one of Goldman's biggest with $12 billion in assets -- has suffered big losses and its performance raises questions about the ability of Goldman Sachs to manage quantitative strategies for its wealthy clients.In fact, people familiar with Goldman Sachs have said the company's decision to liquidate Global Alpha signals its decision to exit quantitative hedge fund strategies altogether. The firm still manages billions in quantitative mutual funds.

Even though Goldman's Global Alpha fund is in the red, most other other quantitative hedge funds are up or are flat for the year. The average quant fund is down less than 1 percent over that period, according to performance tracking service Hedge Fund Research Inc.Mark Carhart, the man who managed the Global Alpha fund with Raymond Iwanowski for more than a decade until 2009, has gained 7 percent net of fees this year at his new hedge fund Kepos Capital, a person familiar with his numbers said.

The new turmoil at Global Alpha comes almost four years to the day after the fund lost 22.5 percent in August 2007, during the early days of the financial crisis. Those losses prompted investors to pull money out.

Even though the fund's performance steadied with a 4 percent gain in 2008 and raced ahead with a 30 percent increase in 2009, assets never recovered. By the time Carhart and Iwanowski left in 2009, the fund had shrunk to $4 billion from its $12 billion peak. Soon after the pair retired, assets shriveled further to about $2 billion. The fund neither gained nor lost money last year, delivering a zero return.

The quantitative group has been beset by departures for some time. More than two dozen left this year alone, people familiar with the numbers said.On Wednesday, Goldman Sachs Asset Management sent a letter to Global Alpha investors notifying them that Katinka Domotorffy, the head of the group's quantitative investment strategies, would retire at year's end. The letter, a copy of which was obtained by Reuters, did not discuss the poor performance of the Global Alpha fund.

What may have hit the Goldman fund especially hard were the unexpected stock market sell offs in early August and recent currency market fluctuations in the wake of the Swiss National Bank's decision to halt the rise of the Swiss franc, people familiar with the fund's models said.Andrew Schneider, president and CEO of Global Hedge Fund Advisors, said the first half of September has been brutal for some large hedge funds, due to unpredictable moves in market direction.

"The volatility has been so high; if you're wrong, especially if you're using margin or leverage, your returns are going to be extremely poor," said Schneider.

Other quantitative hedge funds, however, fared better. James Simons' Renaissance Technologies' Renaissance Institutional Equities fund has gained more than 25 percent this year, said a person familiar with the fund. Another quant fund, QuantZ Capital Management, for instance, is up 12.8 percent through Sept. 6, according to a letter sent to investors.

Alternative innovative investment strategies: QuantShares ETFs

2011-09-14T12:35:00.000-07:00

The quant shop Boston investment manager FFCM LLC chose JP Morgan Securities Services for prime custody of its market-neutral equity ETFs.
http://etfdb.com/issuer/quantshares/analysis/

The QuantShares ETFs will be "market neutral," holding both long and short positions in approximately equal dollar amounts. They are among the first ETFs that will engage in shorting physical securities. FFCM has also chosen J.P. Morgan Clearing Corp. as prime broker for four of its seven new funds.

The new QuantShares ETFs have been created to provide institutional and individual investors with access to several alternative innovative investment strategies, according to FFCM. Claing to offer diversification and risk management, the funds are designed to produce returns with low correlations to the overall equity market. These returns are driven by exposure to well-known factors such as beta, momentum, quality, value, and market cap.

Have you seen Euro banks leverage?

2011-09-13T22:54:00.000-07:00

Jefferies published the comparison of the assets, market cap, leverage and capital ratio for European and US banks. It looks like this.

Andy Xie: This is a consequence of globalization and China's cultural characteristics

2011-09-07T12:30:00.000-07:00

I've never thought Andy Xie with his critical mind would praise China and put down European countries so bluntly. If you had followed Andy Xie, you would think he is a brilliant dissident. There is something wrong with this sudden turn... Judge for yourself:

The United States didn't plot to supplant Britain as the international financial center. It happened because the United States replaced Britain first as the biggest industrial power and trading nation. Wall Street's importance is a consequence of American industrial success.

The most important economic development in the 21st century will be China's rise as the largest industrial nation. I have anticipated this for a long time. This is a consequence of globalization and China's cultural characteristics. The government has adopted supportive policies, i.e., not standing in the way. And no other country is on the horizon to challenge China's industrialization.

Some may argue that things have changed since Pingyao's glory days. The IT revolution has made the physical place for asset trading irrelevant. But Germany's plight is a reminder that when profit sources and financial centers are disconnected, bad things happen.

Germany amassed the world's biggest trade surplus over the past decade, but its financial system has been woefully underdeveloped. So it has had to rely on London bankers to recycle money into other countries. Naturally, London bankers can screw Germany; they're even paid to do so.

A decade or two from now, as a result of this mismatch, Germany may become a poor country. People may look back and pin Germany's downfall to the country's hyper-competitive manufacturing combined with an inadequate financial sector.

http://english.caing.com/2011-09-07/100300519.html

GS on the state of the markets

2011-09-06T17:31:00.000-07:00

GS_StateOf the Markets

Eurozone's confidence dive worst since 2008

2011-09-01T16:34:00.000-07:00

The latest storms in Europe's sovereign debt crisis and stock-market chaos have triggered the deepest collapse in economic confidence in the eurozone since 2008's financial meltdown, gloomy new figures revealed today.

The European Commission's latest snapshot of sentiment across the 17 euro countries revealed plunging confidence among businesses of all types and adds to the welter of dire economic news from the region in recent days.

The closely watched monthly survey showed sentiment falling at the fastest pace since December 2008 in the wake of the Lehman Brothers collapse and will fuel fears of a double-dip recession.

It comes after a month of turbulence which saw the US stripped of its gold-plated AAA credit rating and speculative attacks on Spain and Italy, which forced the European Central Bank to intervene to buy up the bonds of the debt-laden nations.

The eurozone managed growth of just 0.2 percent in the second quarter of 2011 as powerhouse economies like France and Germany stagnated. The commission expects growth to slow down further due to high oil prices in the first half of the year and the recent turmoil in markets. Commerzbank economist Christoph Weil said: "Concerns about euro-area fiscal deficits and the global slowdown are aggravating economic confidence."

The commission's survey is seen as a robust indicator of future activity, but the indicator fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.

Financial information firm Markit added to Europe's worries after its latest survey found the region's crisis closing consumer wallets. Sales fell for the fourth month in a row as retailers "continued to endure challenging conditions", Markit said.

The euro dropped more than a cent against the dollar and also fell against the pound as markets reacted to the poor data. The worries over confidence and growth will increase the pressure on ECB president Jean-Claude Trichet to reverse its previous hard line on inflation after two interest rate hikes earlier this year.

Bank of England Governor Sir Mervyn King has also flagged up the eurozone's woes as the biggest risk to the UK's fragile recovery, as the region accounts for almost half of the nation's exports. The latest business barometer from Lloyds Bank Corporate Markets showed confidence among UK firms slumping at the fastest rate since March 2009.

Reflection Series: Steve Job's family

2011-09-01T16:08:00.000-07:00

The biological father of Steve Jobs has begged him to get in touch 'before it is too late' - 56 years after he gave him up for adoption.

Abdulfattah John Jandali said that he was desperate to speak to his son for the first time before cancer claimed his life, but insists he is not after his son's money.

The 80-year-old said he was overcome with guilt for abandoning the boy but admitted that after all this time he was too proud to make the first move.

Instead he implored the Apple founder to call and arrange a reconciliation.

Frail: Steve Jobs was seen on Friday being helped by a friend in Palo Alto

Mr Jandali's intervention came just days after Mr Jobs stepped down as chief executive of the computing and electronics giant.

Photographs taken since then show him looking more gaunt than ever and have raised renewed fears his long lasting battle with cancer may finally be coming to an end.

Mr Jandali, a Syrian immigrant to the U.S. who now works as vice president of a casino in Reno, Nevada, said he only recently learned that his son went on to found Apple, the second largest company in the world behind Exxon with a net worth £221billion.

He said he has emailed Mr Jobs a few times but has not called for fear he would wrongly think he was after his money.

'This might sound strange, though, but I am not prepared, even if either of us was on our deathbeds, to pick up the phone to call him,' Mr Jandali said.

'Steve will have to do that, as the Syrian pride in me does not want him ever to think I am after his fortune.

'Now I just live in hope that, before it is too late, he will reach out to me, because even to have just one coffee with him just once would make me a very happy man'.

Mr Jandali said that it was 56 years ago that his girlfriend Joanne Simpson fell pregnant and he was forbidden from marrying her.

Without telling him she left their home in Wisconsin and went to San Francisco where she had the baby and gave it up for adoption, he told the New York Post.

The only contact over the years has been the occasional email he has sent marking his son's birthday, but that has been all out of respect for his adopted parents.

Like Mr Jobs his father is a workaholic who has no plans to retire, even though he is 80 years of age.

'Because I really am not his dad,' he said.

'Mr and Mrs Jobs are, as they raised him. And I don't want to take their place. I just would like to get to know this amazing man I helped in a very small way to produce.'

He added that even though he thought of himself as a 'computer dunce' he owns a Mac computer, iPhone and and iPad.

He said: 'I honestly look at these things and cannot believe Steve created them'.

Jobs, who has endured a much-publicised battle with cancer since 2004, has always been fiercely protective of his private life and little is known about the powerhouse behind the Apple brand.

The stereotype of a cool New York sophisticate, he famously wears only black and has a minimalist philosophy so severe that friends recall visiting his mansion to find it virtually empty but for a picture of Einstein, a Tiffany lamp, a chair and a bed.

In the Apple HQ, so great is the culture of secrecy that executives are said to deliberately pass misinformation to colleagues to see who spreads it.

Engineers working on sensitive projects are watched constantly by cameras and have to cover up prototypes with black sheets so no one can see them.

For decades, Jobs, thought to be worth more than $5 billion, has tried to put a metaphorical black sheet over his private life, too, stalking out of interviews and blacklisting publications that did not tell his life story as he presented it.

A biographer has described him as the ‘Jackie Kennedy Onassis of business and technology — a figure who is ubiquitous as a symbol of his times, but little known as a human being’.

Women have been a complicated issue with the man who has been described as the 'God of our consumer age'.

Turn back time: A young Steve Jobs in 1994 with one of the first apple computers.

Friends who knew about his own adoption were horrified when Jobs' first serious girlfriend, a painter named Chris-Ann Brennan, became pregnant in 1977 and he refused to believe he was the father.

The mother initially raised their daughter on benefits. Jobs accepted his responsibilities after a court-ordered blood test proved he was the father.

It wasn’t until he was in his thirties that Jobs discovered his sister Mona and the two became friends.

Although he has been married since 1991 — happily, insist Silicon Valley insiders — to blonde beauty Laurene Powell (they have three children), Jobs previously had a string of well-connected girlfriends.

Deciding the 'young, superintelligent, artistic women' he liked were not to be found in California, in the Eighties he bought a multi-million-dollar apartment at the top of New York’s famous San Remo building on Central Park.

It became his base for periodic visits to the Big Apple where he would take out famous actresses, including Diane Keaton, artists and writers. None of his romances lasted long.

He once dated the folk singer Joan Baez. A college friend believes he became her lover 'because Baez had been the lover of Bob Dylan', with whom he had long been fixated.

His adoptive parents, working-class couple Paul and Clara Jobs, raised him in Mountainview California, were only allowed to sign the adoption papers if they promised to send Jobs to university.

He lasted only a few months at a university in Oregon and then survived on free meals from a local hare Krishna temple before going to India to become a Buddhist.

(DailyMail, August 30, 2011)

Solution to Deficit: Global Fiscal Adjustment

2011-08-25T18:36:00.000-07:00

Goldman Sachs Global ECS Research stresses that large fiscal adjustments are required around the world, particularly in the advanced economies. The IMF projects an average primary deficit (excluding interest) of 5.3% of GDP in the advanced economies in 2011...

GS Global Econ Paper Aug19 2011

Reflection Series: Jonathan Ive, Apple's senior vice-president of industrial design

2011-08-25T15:52:00.000-07:00

Other than Steve Jobs himself, no single figure has defined Apple’s resurgence since 1997 more than Jonathan Ive, the company’s senior vice-president of industrial design.

He's a designer who taps into the wells of unmet consumer need that fuel Apple's ongoing growth. With the exception of Steve himself, he's tuned to the zeitgeist that determines winners more than anyone else at Apple. Moreover, he's able to articulate that vision with consistent grace and precise execution. He's got a track record of hitting home runs. If you want to keep the innovation leadership that makes Apple, well, Apple, then you've got to have the driver's seat firmly bolted to the flow of trend, meaning, and consequence. That's the domain of Design, and Jonathan Ive is your Designer.

Jony Ive is a brilliant designer. That doesn’t mean he would be a great CEO — he certainly doesn’t have the sales flair that defines an Apple product introduction. Still, an interesting and provocative reminder of the need to figure out what comes after Steve.

Hedge funds have opened the biggest short position on the S&P500 since December 2008

2011-08-24T23:39:00.000-07:00

Hedge funds held a net short position of 71,980 short contracts at August 16, according to a monthly report on global asset allocation from Societe Generale, which looks at positions reported to the Commodity Futures Trading Commission. This is the biggest figure seen since December 2008, three months after the collapse of Lehman Brothers, when hedge funds held a net short position of 85,984 short positions.

Alain Bokobza, head of global asset allocation at Societe Generale, and one of the authors of the report, told Financial News: “Active market participants have switched to a massive net short. They have reacted very strongly to the recent economic and political newsflow. It’s a very important figure. It indicates just how pessimistic hedge funds are.”

Bokobza said that there’s a correlation between hedge funds opening the net short position and the S&P500 falling. "They have been partly initiating the fall by opening the net short.”

The S&P500 was trading at 1,192.76 on August 16 and fell to a low of about 1,121.45 on Tuesday.

According to CFTC data, the number of net short contracts hit a high of 127,474 in early September 2007, at the peak of the sub-prime housing crisis. Hedge funds currently account for 14% of total open interest on the S&P500, according to the CFTC.

US markets are poised to digest several events later this week. The Kansas City Federal Reserve’s survey - a regional manufacturing report - will be released tomorrow; a second reading on second-quarter GDP is scheduled for release on Friday; also on Friday, Federal Reserve Chairman Ben Bernanke will speak on the direction of the US economy at an annual conference in Jackson Hol, hosted by the Kansas City Fed; and the final reading of the Reuters/University of Michigan Consumer Sentiment Index is due.

Bokobza said that hedge fund reaction to this newsflow may have an impact on the S&P500. He said: “At some point they will have to take profits and cover their shorts. Technically this will be a bullish indication for equities."

Hedge funds continue to hold a long position in gold, according to the Societe Generale report.

(Financial News, August 24, 2011)

Factory activity plummeted in August

2011-08-24T23:00:00.000-07:00

New data suggests that the US will soon enter recession, if it has not done so already. The figures for the East Coast region shows that factory activity plummeted in August to a level never seen before without the economy being in recession.

Philadelphia leads the way

The index from the Federal Reserve Bank of Philadelphia shows manufacturing output in the Mid-Atlantic region of the US East Coast stood at minus 30.7 in August compared with a gain of 3.2 in July.

The survey was conducted during August 8-16.

The data shows that this month's key purchasing data index from the National Institute for Supply Management could sink as low as 42 from the current figure of 50.9. The close relationship between the two data points is illustrated by the attached graphic. Economists had expected a 1.5 rise in the Philadelphia reading for August.

Any figure of below 50 for the ISM index, due to be released at the beginning of September, indicates the economy is contracting.

That, in turn, would be likely to push down equities. Deutsche Bank strategists said. “Using our often-used relationship between the change in the S&P500 and the ISM this would point to a year on year fall of 22% in US equities. On September 1 last year the S&P 500 was at around 1080 and 22% below this would take us to around 860.”

Things may not get that bad. Deutsche points out that the index hit a low last July and August. A fairer 2010 starting point to calculate a drop could be the beginning of year. This would imply a less frightening drop in the S&P500 to 1000.

Other analysts say the fall in the US equities over the last fortnight has already partly discounted the arrival of recession.

Economists at Germany's Berenberg Bank said current reactions to bad news, or expected bad news, are overdone: "It is the nature of panics and manias that they drive asset prices away from fundamental valuations. For a while, such exaggerations reinforce themselves as investors are inclined to pay more attention to facts, events or mere rumours that seem to justify their current concerns than to longer-run fundamentals.

The Wall Street Journal quotes Eric Green, head of rates research at TD Securities, as expecting a less severe fall in the ISM to between 46 and 47. He said: “We were looking for more weakness on the ISM but nothing like this.”

(Financial News, August 19, 2011)

Tipping Point

2011-08-24T01:15:00.001-07:00

Bill Gross, who runs the world's biggest bond mutual fund at Pacific Investment Management Co., talks about the U.S. debt ceiling compromise passed by Congress and signed into law by President Obama, the outlook for U.S. tax policy and the state of the economy. Gross, speaking with Carol Massar on Bloomberg Television's "Street Smart," also discusses Federal Reserve policy and Pimco's investment strategy in the current climate.

The U.S. economy is “one giant soft patch”

2011-08-24T00:43:00.000-07:00

The U.S. economy is “one giant soft patch” on the verge of a recession, economist David Rosenberg of Gluskin Sheff & Associates Inc. in Toronto, said today.
In a radio interview with Tom Keene on “Bloomberg Surveillance,” Rosenberg said the economy is in a “classic pre-recession pattern” and that “we are on the precipice of the economy contracting between now and the winter.”
Rosenberg called consumer spending, which accounts for about 70 percent of the economy, “the weakest link” and said that “housing is clearly not coming up off the bottom.”
“Capital spending is still positive but not enough to offset the other contractionary forces in the economy,” Rosenberg said.
The economy has slowed from last year. Gross domestic product expanded at a 1.3 percent annual rate in the second quarter after a 0.4 percent pace in the first three months of this year, according to Commerce Department statistics.
The economy expanded at a 3.1 percent pace on average in 2010.
The unemployment rate has been at or above 9 percent since April, according to the Labor Department statistics.
In an interview on Aug. 5, Rosenberg put the odds of a recession at 99 percent. “When you’re running the economy so close to zero, you’re like one little shock away from heading into a recession,” he said.

(Bloomberg, August 22, 2011)

The great bank heist of 2010

2010-12-20T23:13:00.000-08:00

By Brett Arends

Wall Street wins, Main Street pays — again. This was the year America finally took on the power and greed of the Wall Street banks. And the banks won.

They dodged the bullet of real reform, probably for all time. They bounced back to post huge profits, helped by legal theft from the middle class. They completed their takeover of both political parties — and bought themselves a new Congress even more pliable than the old one.

Middle-class America is flattened, devastated and broke. The bankers that caused it all have escaped punishment. They’re raking in huge profits. Oh, and the tax cuts just got extended for high earners, too!
Game over.

Of all the signs of Wall Street’s gloating and arrogance this year, which one stands out the most?

The image of the president of the republic, traveling to New York to reassure them that they wouldn’t suffer too much from new regulations?

Or maybe billionaire Steve Schwarzman, the private-equity oligarch at Blackstone Group, complaining that any attempt to make him pay actual income tax on his income was akin to “when Hitler invaded Poland.”

Not France. Not Belgium. Poland.

In the aftermath, he grudgingly issued a partial retraction.

In any civilized society he would now be pariah. He’d have to eat alone at unfashionable restaurants, and the waiters would spit in his soup.

Instead, as the year drew to a close, I saw him being interviewed on TV, the hosts hanging on his every word.

In 2010, Wall Street’s year, Schwarzman’s only real sin was getting caught flaunting his contempt for the nation.

Far worse went on behind closed doors.

Consider the Dodd-Frank reform act — all 2,300 pages of it. Sure, it fills in a few regulatory gaps, ends a couple of the more gratuitous abuses. You have to throw a few scraps to the masses.

But most of the reforms are meaningless. New rule books and committees. Bah. They’re like half-built fences. Anyone can just walk around them.

As for the new consumer finance watchdog? The agency that’s supposed to stand up to the banks will be housed… within the Federal Reserve. Literally, it will be a tenant of the banking system.

Champions of the “reforms” say this won’t really matter. But if that’s the case, why did Wall Street fight so hard to make sure it happened?
There are no coincidences in Washington.

Meanwhile, missing from this giant “reform” bill was any actual, serious reform like threatening crooked bankers with real jail time. Or ending the “other people’s money” racket of securitization, or smashing “too big to fail” megabanks into smaller firms that can never again threaten the republic.

Instead we’ve enshrined “too big to fail” as national policy. A standing taxpayer guarantee to the biggest banks. What a deal!

It’s amazing when you think about it.

Look at the chaos and catastrophe these guys have left in their wake. One middle-aged man in five is out of work. Tens of millions of families have been financially wiped out. The national debt has nearly doubled.

If inner-city gangs had done this to America, we’d have martial law. If Arabs had done it, we’d have launched another war.

Wall Street bankers? They’ve walked away scot free. And they’re actually being rewarded.

By keeping short-term interest rates near zero, the Fed is basically robbing your grandmother, and other hard-working savers, and giving to Wall Street. The banks borrow from us for free, and then lend us back our own money at interest by purchasing Treasury bonds.

And in a perfect circle of cynicism, the beneficiaries of bailouts are now spending some of their loot lobbying our Congress to overrule us on reform.

The commercial banks and investment firms spent a total of $118 million lobbying just in 2010, according to the Center for Responsive Politics.

That included $4 million spent directly by Citigroup Inc. (NYSE:C) , nearly $3 million by Bank of America Corp. (NYSE:BAC) , $3.5 million by Goldman Sachs Group Inc. (NYSE:GS) and $2.8 million by Schwarzman’s Blackstone.

This is in addition to the vast campaign contributions the top brass at these firms have lavished on pliable congressman, and indirect political lobbying through trade bodies like the American Bankers Association.

But it’s unfair to give the bankers all the credit for subverting democracy.

They couldn’t have done it without the Democrats.

Wall Street has spent years capturing the party establishment.

Think of the lavish campaign checks. The lucrative hedge fund “adviser” jobs. The pervasive influence of pinstriped “progressives” like Larry Summers and Bob Rubin.

This was the year the investment paid off. Big time.

Top Democrats were too terrified of alienating their sugar daddies to pass real reform.

But the joke was on them.

First, Wall Street’s campaign contributions aren’t that important — they only account for about 10% of the party’s money. The Democrats could have lost all of it (an unlikely scenario in any event) and still been in business.

Second, the Democrats would have got a lot more credit — and contributions — from the rest of America if they’d stood up to Wall Street.

And third: Sucking up to Wall Street didn’t help them anyway. Wall Street still turned Republican. The American Bankers Association, J.P. Morgan Chase & Co. (NYSE:JPM) , Citigroup, Bank of America, even Goldman Sachs: This time around, more than half their donations went to the GOP.

Most Americans don’t realize it, but this talk of a “grassroots” and “anti-establishment” election was a bunch of hooey. What really happened was that Wall Street has just bought itself a new, even more compliant
Congress.

The new Republicans are already fawning over the bankers. They’re promising to stop the restrictions on (ahem) “financial innovation.” Congressman Spencer Bachus — the next chairman of the House Financial Services Committee — actually said “Washington and the regulators are there to serve the banks.” Let the good times roll!

It was the greatest heist in history. The bankers pulled it off under everyone’s nose.

(Ref: MarketWatch, December 21, 2010)

State Budgets. Meredith Whitney on California Munis

2010-12-20T09:20:00.000-08:00

Meredith Whitney sat down with Steve Kroft on “60 Minutes” Sunday, December 18, night to rehash her well-known views about the threat the finances of states and localities pose for the economy. “It has tentacles as wide as anythign I’ve seen. I think next to housing this is the single most important issue in the United States and certainly the largest threat to the U.S. economy,” she says.

Reflection Series: Market Prediction by Garrett Jones

2010-12-04T16:46:00.000-08:00

In the “The Sequence of Events in the Cycle," Garrett Jones explained his philosophy on market cycles:

In covering the sequence of events in the Long Wave cycle, we need a starting point. A logical point would be the absolute economic bottom that was the beginning of the cycle we are currently in. That would be 1933. At the bottom of the cycle, we slowly begin to rebuild a devastated economy. After the crash (1929 to 1932), debt is wiped out because most of it results in default. People are hungry and desperate -- so they are willing to work hard. There are no "slackers" because slackers don't get hired. The work that is produced is of the highest quality because there are few jobs available and only the best workers are hired. This philosophy permeates the society. If you want a job, you've got to work hard and produce a top quality product.

The process is slow, but once the economy begins to grow, debt creeps back into the picture. As businesses grow and seek expansion, the most logical and efficient method for acquiring capital is to get a loan. As the cycle progresses, business begins to boom and debt increases at a much faster rate to compensate for the demand (1960s). Demand translates into necessity. The necessity brings on inflation and the inflation begins to rise at an increasing rate (late 1970s). Inflation then peaks due to leverage, reduced returns and increased debt (1980). The peak in inflation is usually followed by a recession lasting a year or two. This is followed by the Plateau Period which is the period following the peak in inflation. I’m sure you have heard the term “necessity is the mother of invention” – the increased demand of the period leading into the peak in inflation brings about a new technology in the Plateau Period. The semi conductor boom of the late 60s led to the computer craze of the 1980s and 1990s – the New Technology.

This ushered in the Information Age at the expense of the Industrial Age. The Plateau Period is characterized by declining rates of inflation; declining interest rates; a psychological return to "normalcy" and a roaring bull market in paper assets. The plateau period is a period of disinflation -- initially, this is inflation where the rate of inflation is declining. This new technology enhances production and, ultimately, leads to overproduction. The high debt and overproduction set the stage for deflation after many years of disinflation during the Plateau Period. The breadth of the stock market peaks (1998) which ultimately predicts a peak in stock prices (2000). This sets up a crash in the stock market (2000 to 2002). At this point in the cycle the stock market is the market of choice and is the vehicle where the vast majority of investment funds reside. Later, this trend changes from disinflation to deflation.

When the stock market peaks and ultimately crashes, it puts extreme pressure on all other investments (2007). At this point, due to the high level of debt and unemployment, people are forced into liquidation -- initially liquidating their investments, but later their homes and other valued possessions. This ultimate liquidation in society brings us to the bottom and completes the cycle. As you can see, each separate phase of the cycle sets up the next. It is perfectly logical -- it should be, Mother Nature doesn't make many mistakes.

Now that we are familiar with the cycle, how do we utilize it? I have said from the very beginning the most important part of the cycle is knowing the sequence of events. The reason you want to know the sequence of events is so you can determine where you are in the cycle. If you know where you are, then you know what economic events should follow. If you know what is coming, you can plan for it and use it to your advantage rather than having it take advantage of you. It's really that simple.

Now that you have a comfortable idea of the cycle from this information, let's see if we can determine where we are in the cycle at this point in time. Once we determine where we are we will then be able to determine what economic events are likely to follow -- in other words, what are the implications of our current position in the overall cycle? Once we know the implications we can act accordingly i.e. we either seek protection or opportunity … or both. Note: For simplicity, the sequence of events in the cycle is listed in bullet points later in this communication.

We have already had the peak in inflation. That was in 1980 when gold hit $877/oz., silver was $50/oz.; Oil was over $40/bbl., CRB futures price index at 337.60, etc. There was a one to two year recession that followed in 1981-82. The stock market took off in 1982 and peaked in 2000. There has been a market crash that was primarily centered in the area of the “new technology”. This was an 83.5% peak-to-valley crash in the NASDAQ 100, the market of choice. That was “the first shoe dropping” i.e. the warning shot for mankind to “pay attention”. There is always a warning. In the prior cycle it was the real estate boom and bust in Florida in 1927. In fact, we have had the same warning this time – once again with Florida real estate.

This was followed by another inflationary run where both the Dow Jones Industrials and the S&P 500 went to an all time high in October 2007, but the institutional index peaked in 2000 and could only generate a 61.8% Fibonacci retracement – thus creating a major divergence with the all time highs of the major indices. Remember, it is the institutions that run the show. This is a very interesting and very major point that was missed by virtually all of Wall Street – but it was blatantly there for all to see.

Wall Street is aware that bear markets correct the bull markets that immediately precede them. The1982-2000 bull market was corrected by the 2000-2002 bear market. In a similar manner, the bull market of 1932-1937 was corrected by the bear market of 1938-1942 … and, the bull market of 1942-1966 was corrected by the bear market of 1966-1982 (with major lows in 1974 and 1982). Unfortunately, most people don’t realize that the larger cycles also have corrections. Markets are constantly in the process of going from one extreme to the other. Larger cycles (Long Wave cycles) comprise three bull markets and roughly cover the time span of an average lifetime. The current Long Wave cycle began with the stock market extreme low in

1932 and corresponds with the extreme economic low in 1933. It completed its ‘orthodox’ high in 2000 with the stock market top and “real value” peak in 1999 (the stock market peak in terms of real value). This was followed by the final thrust higher to the market’s all time peak in October 2007 (a higher market price, but divergence in real value). It is this advance (from the all time stock market low in 1932 to the all time high in 2007) that is now in the process of being corrected. Correcting an advance that spans 75 years is much more significant than merely correcting the advance of the most recent bull market. The chart below will give you an idea of the potential for what can happen when an entire cycle faces a correction. Note that in just the first wave down, the market has corrected almost the equivalent of the entire 2000-2002 bear market.

We live in a world that is defined by cycles. One of the best examples of this is the seasonal growing cycle. We can all readily relate to summer, autumn, winter and spring. Each season comes at the same time every year and has the same characteristics. The seasons can be intense or mild; extended (an Indian summer) or contracted (a short winter); but they happen in order and their characteristics remain the same. The growing season follows the same seasonal pattern and provides an example of why each individual season actually set up the season that follows. For example, in the spring, seeds germinate with the warming temperature and rain to nourish them. In the summer they flourish into mature plants. In the autumn, the plants are harvested. Finally, in the winter, the process rests by going dormant.

This process is classic action in a cycle. Once you have defined the cycle, it becomes quite logical and follows a defined process. As you can see in the seasonal growing cycle, each predecessor phase (season) augments the one that follows. This same process occurs in the economic cycle. By spending some time going over the sequence of events, you will soon see how logical this process is and how well it defines any particular phase of the cycle. It is an incredibly helpful tool in business and investment planning and it brings logic and explanation to difficult economic times that otherwise confuse economists and other economic observers.

THE SEQUENCE OF EVENTS IN THE CYCLE

The Ultimate Economic Bottom (DEBT DEFAULT; BANKRUPTCIES; BANKS CLOSED; ETC.)

Slow Rebuilding Process (LITTLE DEBT; QUALITY WORK; DEBT SLOWLY CREEPS BACK)

Business Expands (LOANS ARE THE MOST EFFICIENT WAY TO FUEL THE GROWTH)

Business Booms (DEBT EXPANDS AT MUCH GREATER RATE TO MEET DEMAND)

Increasing Inflation (DEMAND becomes NECESSITY brings on INFLATION)

Inflation Peak (SHORTAGES; LOWER RETURNS; LEVERAGE; INCREASED DEBT)

Plateau Period (RECESSION; DECLINING INTEREST RATES; DECLINING RATE OF INFLATION; PSYCHOLOGICAL RETURN TO NORMALCY; ROARING BULL MARKET)

New Technology (NECESSITY is the MOTHER of INVENTION-COMPUTERS-INFORMATION AGE)

Overproduction (NEW TECHNOLOGY enhances production and, ultimately, OVERPRODUCTION)

Stock Market Peak (FOLLOWS PEAK IN BREADTH)

Stock Market Crash (PARTICULARLY IN THE AREA OF THE NEW TECHNOLOGY) THERE IS AN INITIAL CRASH IN THE FAVORED MARKET SECTOR FOLLOWED BY A RECOVERY IN STOCK PRICES. LATER THE SECOND DECLINE BEGINS WHERE THE REAL SHARE DEVASTATION OCCURS

Disinflation becomes Deflation (PRICES OF ASSETS FALL)

Bankruptcies and Liquidation (DUE TO DEFLATION, UNEMPLOYMENT & HIGH DEBT LEVEL)

Debt Default (INDIVIDUALS AND CORPORATIONS BELLY UP ON DEBT)

Stock Market Bottom (TOTAL CAPITULATION) AT THIS POINT PEOPLE LITERALLY HATE STOCKS AS THEY HAVE FALLEN TO AN EXTREME LEVEL OF UNDERVALUATION

Economic Bottom (BANK CLOSINGS; DEBT RESTRUCTURING; REMONETIZATION; NEW CURRENCY)

NOTE: WAR IS A PART OF THIS PROCESS, AS WELL. PEAK WARS OCCUR DURING PERIODS OF STRONG ECONOMIC EXPANSION (VIETNAM); ARE A BURDEN ON THE ECONOMY; AND ARE UNPOPULAR. TROUGH WARS FOLLOW A DEPRESSION; HELP THE ECONOMY DUE TO UNEMPLOYMENT AND UNDERCAPACITY; AND ARE POPULAR (WORLD WAR II). TERRORISM AND OTHER SUCH ‘WILD CARDS’ ENTER THE CYCLE AT VARIOUS STAGES. THIS TIME AROUND IT BEGAN IN 1970 WHEN 3 ARAB TERRORISTS ATTEMPTED TO HIJACK AN EL AL BOEING 707 AT MUNICH AIRPORT IN GERMANY.

The Psychology of the Market:

It is important to tie the cyclical information in with the psychology of the market. The market is driven by two forces, fear and greed. It’s interesting to note that both are negative. It is also interesting to be aware that the stock market is unique when compared to other markets – particularly, on a psychological level. If you want to attract buyers in a retail market, you have a “sale” – the attraction is lower prices. In the stock market, you attract participants by raising prices. Go figure.

Anyway, when you analyze the psychology of the market and how it fits in with the sequence of events in the cycle, it is important to be aware of the nuances. I’ve put together two charts that deal with the phase of the market (and the economy) that are the most important. Interesting things occur throughout the cycle, but the real challenge, as one might expect, occurs at its conclusion. During the body of the cycle, the worst you have to deal with is recessions. Some of them have been quite serious, but they are recessions nonetheless. Further, after these recessions conclude, the market and economy have always moved on to new all time highs. This can lull one into complacency and cause one to assuming that you 1) never get anything worse than a recession, and 2) once the recession is over, the market will always rally to a new high. This is a reasonable assumption throughout the cycle … and a very dangerous assumption as you approach the end of a cycle.

It is psychology and emotion that drive markets – both up and down. The chart that follows shows the most basic of the emotions that have driven the market over the past 15 years. The chart tells a lot. First of all, you have had two bull cycles and two bear cycles. It is obvious that the strongest motivator is fear. Markets can move up quickly, but they fall much faster. For example, have you ever noticed that you can run faster when you are feeling fear than when you are feeling greed? The market reacts the same way.

The following chart shows essentially the same thing as the above chart, but it breaks down the emotions from basics to specifics. The distinctions are very important because the basics don’t do justice to the reality of the situation. The move from 1994 to the market top in 2000 was a mania, driven by technology stocks. It was a “new economy” and the pundits said the extreme valuations were justified because “it’s different this time” -- a comment made at every major market top in US stock market history. After the mania, the market had the initial collapse where the S&P fell by about 50%, but the real story was in the technology stocks where the decline was much larger. The NASDAQ 100 had a peak-to-valley collapse of 83.5%. That was the “first shoe dropping” and a serious warning to “smart money” investors.

In the stock market, “smart money” is not defined as educated people with money. As we have recently seen, these people have gotten hurt just as badly as those with less savvy and far less money. An argument can be made that the CEOs of Lehman, Bear Stearns, Wachovia, Merrill Lynch and others were the dumbest of all – and these are very smart people with an abundance of money. They are not “smart money”. Smart money is that rare investor who inherently has a feel for where we are in the cycle and acts on those feelings. These are people with “anticipatory intelligence”. Everyone else essentially “fights the last war” i.e. they assume what is happening will continue – therefore, any change will be a surprise.

Following the mania and the initial collapse is the denial phase. A snappy rally ensues and everyone is bullish again and expecting the worst is over. These feelings carry into a peak of hope where there is knowledge of serious problems such as debt, deficits, war, derivatives, lack of leadership and a myriad of other such negatives – however, they are digested and, essentially ignored. At the peak of the hope phase, some markets set new all-time highs (such as the Dow Jones Industrials and the S&P 500) and some don’t (such as the NASDAQ and the Institutional Index).

This is followed by the recognition phase – where the market crashes and creates a year like 2008 where you have the worst performing year for the stock market in 77 years (and 2009 beginning with the worst performing January in history). In the recognition phase, everyone realizes there are problems and that the problems are quite serious. There is general recognition that there is no quick fix.

The next phase is the reprieve phase. Here the market rallies because there is a belief that 1) the worst is over and, 2) the government’s actions will help to solve the problem(s). This is a dangerous phase because it gets everyone leaning in the wrong direction. When it becomes clear that the worst is nowhere near being over and the government’s actions have actually exacerbated the problem, it leads into the liquidation phase. This is where people sell their assets because they need the money to survive. This malaise continues and spreads throughout the society – it is accompanied by fear and anger. At the extreme of this phase, you enter the final phase – CAPITULATION. Markets are always in the process of moving from one extreme to the other. At this point, the market is at the opposite extreme of the bull market top – it is at its lowest ebb. It is a time where everyone hates the stock market – including those who are employed by it (in one form or another). People swear they will never buy another stock for the rest of their lives. The capitulation phase, by definition, is the best buying opportunity you will ever have – unfortunately, most will never benefit from it because the market psychology is so overwhelmingly negative that everyone will hate everything about the stock market at that point. In fact, at the point of capitulation people hate all forms of investing because everything they have ever believed in has been devastated.

In many ways, the recognition phase is the most critical phase of the cycle because there is recognition of the problem, but no one has any idea of what to do about it. There is no guarantee how long the reprieve phase will last, but you can count it will last long enough for most investor to believe “the worst is over”. This has been a very large and extended cycle – which means that the downside will almost assuredly be extreme – it already has been and it’s far from over. This is the final chance to prepare for the final two phases (liquidation and capitulation). It will be difficult to do because all the “professionals” who did so poorly in the recognition phase will make a comeback during the reprieve phase. These people who completely missed the top will now chime in and say the worst is over. They don’t understand the cycle; they didn’t see the fall coming; and they don’t understand what caused it, but they will be the biggest cheerleaders that the bear is dead. Ironically, most investors will remain with these people even though they have proven they have little to no ability in markets that go in a direction other than up. Now, at the most critical stage of the cycle, people will continue to trust their funds to people who have just proven their worth in turbulent markets. In addition, these questionable “professionals” have zero knowledge of the long wave cycle. They will parrot what the financial news media says and assure you that the worst is over. Most likely, they will be correct for awhile.

You now have the information in your hands to be your own best advisor, however, the “smart money” player realizes that knowledge is only one part of the equation for success. There are two other mandatory components. The first is discipline. Knowledge without discipline is like having money without a place to intelligently spend it. The third component is experience. You have a roadmap – one that took me decades to perfect. The combination of knowledge, discipline and experience will allow you to navigate the roadmap.

AUTHOR’S COMMENT: If you take the time to learn the sequence of events in the cycle, you will have a very valuable tool that will assist in business and investment planning and providing you with the knowledge and peace of mind in knowing where you are in the cycle. Knowing what is next to come in a cycle removes the element of surprise and replaces it with expectation. Expectation allows one to plan and take advantage of the situation as opposed to having the situation take advantage of you. In closing, the quotations by Marx, Twain, and Livermore on page 2 are interesting, but the focus should be on the content of the article. No one really knows if a quote from someone in the past is valid or not. At this phase in the cycle, it is absolutely imperative to be focused on where we are in the cycle and the extreme implications of being there. If you missed seeing the top in 2000 or the more recent top in October 2007 and were hurt by what followed, you now have no excuse to not be paying attention.

Important: Note that the charts are all updated to October 2009 with the exception of the chart on page 8 which was not updated. The purpose is so you can see what my expectation for the market was on February 24, 2009 when this report was initially written. If you compare the chart on page 8 with the chart below – the expectation became reality. That is the benefit of learning the sequence of events in the cycle. When you consider that bearishness and fear were extreme in February 2009, it was impressive to predict 1) the market going lower, and 2) then having a sharp rally into this time period. It is also important to be aware that my Special Alerts called the July 2007 top and the October 2007 top as indicated with the arrows below. Clearly, expecting that top would have saved one from losing a lot of money. In a similar manner, expecting the March bottom would have saved further loss and presented an opportunity. Without question, the study of the sequence of events in the cycle can be quite helpful to an investor or businessman.

The chart below shows the two “bubble” tops of this decade in the stock market. The 2000 top was the Tech Bubble and it resulted in an 83.5% peak-to-valley loss in the NASDAQ 100 (the leading market index at that time). The 2007 top was the Stocks Bubble and it resulted in the worst loss for the benchmark S&P 500 Index in 77 years – down 57.7%. These losses were absolutely devastating for most investors and money managers. In fact, the recent decade is the worst performing decade in US history.

I was interviewed by Dave Allman of Wall Street Uncut in June 1999 when the stock market and technology stocks in particular were in an explosive move to the upside – an extremely bullish time. I commented that I expected two more rallies and then expected the market to top – so the 2000 top was not a surprise either – it was an expectation. That is the significance of learning the sequence of events in the cycle – it provides a roadmap of sorts and helps to remove the surprises.

As you can see, the Reprieve rally began as expected. Bullish sentiment was 2% (an obvious extreme). The rally got everyone bullish – with bullish sentiment well over 90% at times. The belief is that “the worst if over” and we are in a new bull market. What you must not forget is that this is followed by the Liquidation phase of the cycle and, ultimately, Capitulation. The cycle suggests a depression with the potential to be worse than the Great Depression. This phase of the cycle separates almost everyone from their money – the rich and poor as well as the intelligent and the ignorant. It is an “Equal Opportunity Destroyer”-- it has already devastated a number of rich and intelligent people – yet another hint as to where we are in the cycle … but will anyone listen? Frankly, that is the whole reason for studying the Long Wave Cycle – to give you an advantage in knowing what to expect. The market’s job is to fool most of the people – particularly at critical points – and we are about to enter the most critical phase in the past 80 years.

Andy Xie on G-20 in Seoul

2010-11-14T23:18:00.000-08:00

The G-20 in Seoul was supposed to be a pressure cooker for China. Geithner coordinated a united front against China before the ministerial gathering by signaling that the euro and yen were high enough, emerging economies could restrict capital inflows and resource exporters would be exempt from the proposed 4 percent limit over GDP of the current account surplus ceilings. The coast was clear for everyone except China. The hope was for the G-20 to gang up on China at the Summit. Instead, it became a festival of global backlash against the Fed's QE 2. Some people are just too clever for their own good.

How are emerging economies curbing capital inflows?

A war of words is unfolding before the Summit and the battle lines have been clearly delineated. Germany is leading the charge against QE 2. China is more than willing to echo the sentiment. On the other side, the U.S. is leading the push for capping current account surpluses. It is backed by India's support for its QE 2. But an element of the absurd is at play here by targeting surpluses. Why isn't the onus on the largest deficit economies to rein in the deficits on their own?

The piling of sandbags against a deluge of hot money has begun. Taiwan is restoring restrictions on foreign holdings of local currency bonds. Korea is proposing a hefty tax on foreign holdings of its bonds. China is stepping up checks on sources of foreign capital inflows. Most of its foreign exchange reserves are not from trade surpluses, but from hot money. If the government is really serious, it could surely stop the inflows.

The fight against inflation is heating up too. Australia just raised interest rates again. China increased its deposit reserve ratio. The market is pricing in four rate hikes in the next 12 months. I think the rate hikes will continue. India's central bank just raised its interest rates too, in an effort to curb real estate loans.

When the U.S. is engaging in super loose monetary policy, emerging economies must curb capital inflows and increase interest rates to fight inflation and asset bubbles. It seems that the Fed's QE 2 has convinced everyone of this path. The measures may have come too late for some. Inflation in emerging economies may be already in double digit territory. It seems underreporting CPI has become fashionable, under the pretenses of prolonging an economic boom. The consequences could be severe.

Negative real interest rates and an increasingly large current account deficit are a lethal combination for emerging economies. History has shown repeatedly that it leads to crisis. Brazil and India are in that camp today. Brazil is running a surplus. But, it is too small to offset the Fed's impact on commodity prices. When commodity prices are so high, a country like Brazil should run a large surplus like Russia. India is running a huge deficit outright. Its real interest rate is severely negative by some measurement. Its boom continues because the Fed's policy encourages speculative capital to fund its deficit and support its currency value.

China and Russia have inflation too. But they have large current account surpluses and wouldn't have a liquidity crisis when the Fed is forced to abandon its policy. Brazil and India don't have the same cushion. Unless they tighten substantially in the coming year, they may feature big time in the looming 2012 crisis.

Can rich countries grow?

Germany is upset with the U.S.'s policy and for good reason. A decade ago, it was left for dead. Its economy was saddled with high cost commodity industries. As East Asian countries like China and Korea were charging into them, few thought Germany had a chance. The Germans didn't give up. They cut costs dramatically, even wines, to the Frenchmen's astonishment. In addition, they innovated and turned many commodity businesses into IPR-dependent ones. With low costs and pricing power, Germany is enjoying the fruits of an export boom. But, the Americans want to turn it into an exchange rate issue. It is facing many issues that Germany faced before. Instead of restructuring, it is looking for a quick way out through devaluation.

Even though Germany is very competitive, it's not growing rapidly like an emerging economy – and it shouldn't. High growth belongs to emerging economies. If rich economies try to grow fast, it will run huge deficits and lose wealth. The reason is globalization.

Information technology created the 21st century multinational corporation and made the current wave of globalization different from the previous ones. A multinational corporation is a company in name and substance. But it has the breadth of empire. It has transformed the world through investment and trade into one economy. Both demand and supply are global now. Cost arbitrage by multinational corporations have made it necessary for labor in developed economies not to compete against that in the developing economies. The wage difference is too big to be bridged in the foreseeable future. This force ensures that demand stimulus in developed economies will lead to widening trade deficit and limited impact on employment.

Europe and Japan have accepted this reality and have gone into the wealth preservation mode: focusing on pricing power, not volume in exports, targeting low growth rates and cushioning displaced workers with benefits. The U.S. is in so much trouble because it wants to grow out of its problems. When labor costs ten times that in developing countries and, adding to this is the fact that the other side has ten times as many people, this sort of thinking seems irrational. Yes, technology and quality can improve exports. But, this will barely affect trade volume. When the U.S.'s best product idea – the iPhone – doesn't lead to a rise in production at home, one should be wary of optimistic sound bites.

The U.S. government wants to change the global reality by rearranging the exchange rates. If this idea works, one must lift the standard of living in countries like China and India instantaneously to that in developed economies or lower the U.S.'s living standard to that of China and India's. Neither is possible. The political atmosphere in the U.S.'s requires solutions that generate instantaneous effects. The world can't offer that. As long as the U.S. continues to search for the impossible, the world will be a dangerous place.

Where are the real fault lines?

Rising incomes and widening wealth gaps are a global phenomenon. The top 1 percent of the U.S.'s population takes one fourth of the national income and 40 percent of the wealth. China's household income is below 40 percent of GDP, probably the lowest in the world.

The process of globalization should lead to increasing gaps in wealth. It is demonstrated in the strong balance sheets and good earnings of the top global companies, even as major economies struggle with low growth rates and high unemployment rates. But, globalization is not the only reason, and may not be the most important one in explaining highly concentrated wealth.

Financial bubbles, created by loose monetary policy from people like Alan Greenspan, are the most important factor for the rising inequality. The bubbles mislead low income people to borrow and spend on fictitious paper wealth. Their debt becomes the profits for a few. When the bubble bursts, the lower income groups spend less and cut the labor demand for themselves. Lower income demand usually produces lower income employment.

China's low consumption is due to excessive government power, not from low exchange rates. The force that pushes the economy forward is the government's desire and plans for big investment. It then raises money through taxes, property sales or state monopolies overcharging. Under such a system, consumption can't possibly play a leading role. Focusing on the exchange rate won't solve anything and may make the situation worse.

How will the U.S. treasury market fare?

The U.S. is obsessed with manipulating demand, through lowering or increasing debt cost, to manage its economy. It doesn't recognize that supply side management is the key in an era of multinational corporation-led globalization, because the latter doesn't provide instant gratification. Under political pressure to bring down unemployment rates quickly, it will continue to muck around with the money supply and the dollar's value in search of a quick fix. It will stop only when it can't do so anymore. Only a collapse of the treasury market can play that role.

The U.S. government is running a budget deficit close to 10 percent of GDP. The U.S. runs a current account deficit of nearly 5 percent of GDP. The dollar is so weak that inflation is likely to run above average. But, the treasury yields are close to historical lows. Investors justify their holdings by assuming that they can sell to the Fed at higher prices. This perceived Bernanke "put option" is similar to the Greenspan "put option." Investors bought crazy financial instruments, because they counted on Greenspan to bail them out in a crisis. But these maneuvers only work on the market's faith. But the Fed cannot buy all the treasuries out there. It will cause hyperinflation.

The trigger for the crisis will be something that panics treasury holders. It could be the worry over another maxi-dollar devaluation or inflation. Most American policy thinkers don't believe that inflation will come. Otherwise, they would have to pull back the dollar printing presses. But, when one looks at food and oil prices, it seems it's only a matter of time before inflation hits the U.S. via emerging economies and commodities.

Brace yourself for turbulence ahead. Unfortunately, it will likely end with another crisis. Hopefully, the world will be better off after 2012.

(Ref. Group Study Questions, for 20, Nov 12, 2010)

How will Republican House affect the Treasury yields?

2010-10-28T00:12:00.000-07:00

Just as Bill Clinton was forced to abandon spending initiatives after Republicans took over the House and Senate in the 1994 elections, President Barack Obama's agenda may be constrained as voter concerns over the budget deficit grows. The latest Bloomberg News polls show likely voters favor Republicans.

With spending held in check, 10-year Treasury yields fell to 5.57 percent by the end of 1995 from 8.03 percent after the November 1994 election while stocks rallied and the Federal Reserve cut interest rates as the economy slowed. The Fed is now debating how to bolster growth after reducing benchmark rates to almost zero failed to lower the unemployment rate.

“There are parallels,” said Thomas di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “The Republicans will draw a line in the sand about what money can be spent. That's very supportive of the bond market.”

Yields on Treasuries due in five years or less are already at record lows, providing less scope for a rally like in 1995 when they gained 18.5 percent as measured by Bank of America Merrill Lynch index data. Even so, yields are unlikely to rise to levels that restrict the economy as lawmakers tangle over spending. Treasuries have returned 8.45 percent this year.

“Gridlock is good,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion.

The median estimate of 59 economists, strategists and analysts surveyed by Bloomberg News is for the 10-year yield to rise to 3.25 percent by the end of 2011, from 2.56 percent on Oct. 15. A month ago, the median estimate was 3.5 percent.

The yield on the benchmark 2.625 percent note due in August 2020 rose 17 basis points last week. Two-year note yields dropped as low as 0.327 percent on Oct. 12 before finishing the week at 0.359 percent, while five-year yields, which closed at 1.19 percent on Oct. 15, touched 1.07 percent on Oct. 8.

Ten-year yields fell 6 basis points, or 0.06 percentage point, to 2.50 percent at 1:44 p.m. in New York. Five-year notes yielded 1.12 percent, while the two-year rate was 0.35 percent.

Democrats have controlled the House of Representatives and Senate since Obama was elected, as during the first two years of the Clinton administration. The Senate has 59 Democrats, while the House is divided 255 to 178, with two seats vacant.

The U.S. government posted its second straight federal budget deficit in excess of $1 trillion from costs associated with the bailout of the financial system. The $862 billion in fiscal stimulus spending passed by Congress in 2009 has helped push the total amount of marketable Treasury debt outstanding to $8.5 trillion from less than $6 trillion at the start of 2009.

The results of a Bloomberg National Poll released last week shows more than half of likely voters agreed the federal budget deficit is “dangerously out of control and threatens our economic future.” The poll interviewed 721 likely voters and has a margin of error of plus or minus 3.7 percentage points.

The most motivated voters -- those who say they will definitely vote and are extremely interested in the election -- lean Republican over Democrat, 51 percent to 37 percent.

Senator Orrin Hatch, who is line to chair the Senate Finance Committee if Republicans win control in the Nov. 2 elections, said he sees fewer prospects for bipartisanship in the next Congress. Democrats have created strains by expanding government the last two years, particularly taking power from states under a health-care program he helped establish for lower-income children, he said.

“I've got to say, that was almost the final straw to me,” the Utah senator said in an interview on “Political Capital with Al Hunt” on Bloomberg Television. “I'm certainly not going to let them keep spending and taxing us and building more government.”

From a deficit of $203.1 billion in 1994, Clinton worked with a Republican Congress to produce a $70.2 billion surplus by 1998, the first since 1969 when Republican Richard Nixon was President and Democrats controlled both houses. The surplus reached $236.9 billion in 2000.

Obama may veto efforts to block spending and make it more difficult for elected officials to reach agreements on extending the tax cuts enacted under the George W. Bush administration, continuing unemployment benefits and spending on infrastructure, said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York. The firm is one of 18 primary dealers of U.S. securities that trade with the Fed and are obligated to bid at Treasury debt auctions.

“The problem is right now you actually need action to be taken,” said Misra, who predicts that 10-year note yields may fall as low as 2 percent. “It's a negative for the economy, but it will keep a bid in Treasuries.”

Fiscal stimulus can work with monetary policy to boost an economy. Christina Romer, the former chairman of Obama's Council of Economic Advisers, said the President pushed the largest possible stimulus bill, the American Recovery and Reinvestment Act, through Congress, though ideally it should have been larger.

“Given how we were just falling off the edge of a cliff, that act absolutely was crucially important to stopping the fall and helping us to turn the corner,” Romer said in an interview last week with Bloomberg Television. “Given where we were, we needed to do more.”

Chances for additional fiscal stimulus aren't good because people now “treat it like a dirty word,” Romer said. “We need some more of it. And it's something that would help put people back to work.”

Economists have slashed their GDP growth estimates for 2010, to 2.7 percent from 3.3 percent in May, based on the median of 83 economists surveyed by Bloomberg. For 2011, it's 2.45 percent. Fed Chairman Ben S. Bernanke said in an Oct. 15 speech that additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said in remarks to a Federal Reserve Bank of Boston conference.

Gridlock in Congress also may be unable to reduce the deficit, potentially damping demand for Treasuries at a time when some parts of the market are signaling the securities are too expensive.

A Fed measure of risk in Treasuries that includes expectations for interest rates, growth and inflation shows the securities are the most overvalued since the financial crisis in December 2008, just before 10-year note yields almost doubled in the following six months.

Last week yields on 30-year bonds rose 23 basis points to 3.98 percent, or a record 1.42 percentage points more than 10- year rates in a sign that bond investors expect moves by the Fed to spark growth and inflation will work.

“The market is buying into the Fed mantra that it will work to get us out of this low inflationary environment,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, another primary dealer.

While spending cuts are usually good for bonds, they may hurt companies that count on federal contracts. A Goldman Sachs Group Inc. index of corporations getting 20 percent or more of revenue from government lagged behind the Standard & Poor's 500 index last quarter after beating it since September 2009.

Bethesda, Maryland-based Lockheed Martin Corp., which gets almost all its revenue from defense projects, has fallen 5 percent since July as the S&P 500 rallied 15 percent. Tenet Healthcare Corp., based in Dallas, depends on the U.S. for half its revenue and is trailing the market by 7 percentage points.

The September employment report, which showed state governments cutting positions for teachers and other workers, leading to a 95,000 drop in payrolls, is a sign that lack of federal spending to help municipal governments is hurting the recovery, said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont.

“If they're going to play that game of chicken, it could be to the point where they throw cold water on the economy,” said Brownlee, whose firm manages $22 billion. “We've got more problems than answers.”

(ref: Bloomberg News, October 19, 2010)

Gundlach's `No Normal' pressure cooker

2010-10-23T13:14:00.000-07:00

Jeffrey Gundlach, the lone bond manager to beat Bill Gross in the past 5, 10 and 15 years, said there won’t be any “new normal” to guide investors until policy makers repair the damage caused by the financial crisis.

“I think ‘no normal’ is a good phrase, as opposed to ‘new normal,’ ” Gundlach, chief executive officer of DoubleLine Capital LP, said during an interview in his office in Los Angeles. “Some major policy shift has to happen that will turn everything on its ear. So this idea that we’ll go into some quasi-similar paradigm, some sort of new thing -- no way.”

Gross and Mohamed El-Erian, co-chief investment officers at Pacific Investment Management Co., use “new normal” as shorthand for their forecast that the U.S. will endure below- average economic growth of 2 percent or less for the next three to five years and unemployment peaking at 10.5 percent to 11 percent, from 9.6 percent in August. It’s entered the Wall Street lexicon to describe a post-crisis world in which the U.S. and Europe no longer offer the best investment prospects.

Gundlach, who until December managed the top-ranked TCW Total Return Bond Fund, doesn’t disagree with Pimco’s outlook. His point is that “new normal” fails to recognize that all previous economic and investment assumptions have been permanently altered by the financial crisis.

“Massive” policy changes will be required to bolster the economy and cut the U.S. budget deficit, projected to be at about $1.47 trillion, Gundlach said. The timing and nature of the potential regulatory changes are unpredictable, causing him to shorten the length of time he holds investments.

“You cannot go on with these policies for too very long,” said Gundlach, 50. “The problem is the debt burden is very high to begin with and it’s growing fast.”

The U.S. government will have to increase tax rates, now at historic lows, as it tries to reduce its budget deficit, Gundlach said. It will also have to wean itself from borrowing money to stimulate the economy, he said.

Pimco developed the concept of “new normal” about a year- and-a-half ago as an “attempt to move the general thinking beyond the notion that the crisis was a mere flesh wound, easily healed with time,” El-Erian, 52, said in an interview.

“The crisis cut to the bone, resulting from an extraordinary, multiyear period of debt and credit entitlement which was anything but normal,” he said.

New normal was less about what should happen than “what was likely to happen given our analysis of national and global factors,” El-Erian said.

In an April speech at Princeton University in New Jersey, Christina Romer, then head of the White House Council of Economic Advisers, said she found the fatalism of the new normal distressing. She said that shorter-term cyclical events such as the decline in demand for goods and services were the real drag on job creation.

“Unemployment is high fundamentally because the economy is producing dramatically below its capacity,” Romer said. “That is, far from being the new normal, it is the old cyclical.”

In September, as she exited the Obama administration, Romer said she had underestimated the severity of job cuts and that this “has not been a normal recession.”

Gundlach managed the TCW Total Return Bond Fund until Dec. 4, when he was ousted as chief investment officer of TCW Group Inc. after the company accused him of planning to start his own investment firm. Gundlach said he was fired to reduce expenses.

Co-manager Philip Barach and more than 40 members of Gundlach’s team followed him to DoubleLine, which started three fixed-income mutual funds and plans an exchange-traded fund focusing on emerging-market bonds. Assets in DoubleLine Total Return Bond Fund, run by Gundlach and Barach, have grown to $2.7 billion since its inception on April 6, according to data compiled by Bloomberg.

TCW Total Return under Gundlach averaged gains of 7.5 percent in the five years ended Dec. 4, topping Pimco Total Return Fund, which rose 7 percent in the same period. The TCW fund also beat Gross in the 10- and 15-year periods. He’s the only intermediate-term bond manager to post higher returns than Gross, 66, in each of the three periods, according to Chicago- based Morningstar Inc.

Pimco Total Return is the world’s largest mutual fund, with $252 billion in assets.

DoubleLine Total Return Bond Fund has increased 15 percent from inception through Oct. 4, compared with 7.3 percent by Pimco Total Return, Bloomberg data show.

Gundlach, who is known for his expertise in mortgage-backed securities, was early to spot signs of trouble in the U.S. property market, and by August 2006 he had started a distressed real-estate fund to take advantage of declining prices. He correctly called an end to the five-year property boom and said falling real-estate prices would weaken the U.S. economy.

“He is considered a wunderkind in the bond-fund world,” Jeff Tjornehoj, a senior research analyst at fund researcher Lipper in Denver, said in an interview. “He’s not as well-known as Gross, but he’s well-respected, and part of that reputation comes from being at the right place at the right time.”

Gundlach wasn’t immune to fallout from the subprime- mortgage collapse, investing in securities that lost value during the crisis. Under Gundlach, TCW became the biggest manager of collateralized-debt obligations, with $41.3 billion under management as of Sept. 30, 2007, according to data from Standard & Poor’s. Gundlach has said his CDOs got out of high- risk home loans early in the credit crisis and missed the worst of the losses from those securities.

Confidence in financial markets collapsed in 2008 after the debt securities derived from defaulted properties -- many of which were purchased with subprime loans -- became so toxic that credit dried up for companies and individuals. The bankruptcy of Lehman Brothers Holdings Inc. and ensuing panic-selling of all but the safest government bills and bonds prompted an unprecedented $1.49 trillion rescue of banks and the economy, now recovering from the worst recession since the Great Depression.

The economy grew at a 1.7 percent annual rate during the second quarter, compared with 3.7 percent in the first three months of the year, according to government data.

“The GDP isn’t really growing now, counting all this debt that is being used to prop up consumption over the short term,” Gundlach said.

That the stock market hasn’t declined this year amid predictions of a global economic slowdown and the debt crisis in Europe is “impressive” and signals demand from investors looking for higher returns as interest rates have hovered near zero for the last two years, Gundlach said.

The MSCI AC World Index has climbed 1.8 percent this year, while the Standard & Poor’s 500 Index has advanced 2 percent.

Gundlach said he is less bearish on the market than he was in 2006 and 2007, largely because he was worried about the solvency of the nation’s banks and because securities were “egregiously overvalued.” The S&P 500 peaked at 1,565.15 in October 2007, falling to a low of 676.53 in March 2009.

Investor demand for dividend-paying stocks bears the hallmarks of the next investment “disaster,” he said.

“People that think dividend-paying stocks are a good bond surrogate are greatly mismatching the risk,” he said. “This has the characteristics of something that could potentially be a debacle.”

Gundlach said equities haven’t declined enough to be attractive investments, especially shares of investment banks such as Goldman Sachs Group Inc. He compared bank stocks to those of airlines, as they haven’t made money for investors over the long term. In the past five years,airline stocks fell at an annual rate of 4.9 percent, compared with a decline of 11 percent for financial stocks.

“Banks and investment banks are horrible investments at the top of a debt cycle,” Gundlach said.

As concerns over regulation and the economy have increased, Gundlach said he’s investing in government bonds as well as mortgage-backed securities that will do well as they rebound from deeply discounted values. DoubleLine’s funds, including the Core Fixed Income Fund, haven’t completely sold holdings in 10- year Treasuries, which have the potential to do “reasonably well” in a weak economy where interest rates are low, Gundlach said. The securities can hold up in the event of deflation, which Gundlach said is a possibility.

The funds are also invested in non-guaranteed mortgage securities that Gundlach and his team believe are trading below what they are worth. These bonds, if purchased at the correct valuation, aren’t sensitive to interest-rate increases and inflation, or rising prices.

“It’s the ultimate inflation hedge,” Gundlach said.

In the past couple of months, DoubleLine also bought below investment-grade corporate bonds because they will be in favor for at least a year and yields are 7 percent to 8 percent. Gundlach doesn’t like junk bonds in the long term because there is risk of default, he said.

Gundlach, who joined TCW in 1985 as a quantitative analyst, later became a fund manager and was named chief investment officer of the Los Angeles-based company in 2005. TCW fired him last year, saying that Gundlach had threatened to leave and take key employees with him. Gundlach said he was dismissed so the company could cut costs.

TCW sued Gundlach and three other former employees in January, alleging they secretly downloaded proprietary information that was used to form DoubleLine. Gundlach has sued TCW, claiming he is owed as much as $1.25 billion in anticipated fee income, and said the allegations that he used information from TCW are untrue.

Assets in TCW Total Return, now managed by a team overseen by Tad Rivelle, have fallen by more than half to $5.3 billion since Gundlach’s departure. It has returned an average of 8.7 percent over the past five years.

DoubleLine started with backing from Howard Marks’s Oaktree Capital Management LP, a Los Angeles-based firm that focuses on high-yield and distressed debt. DoubleLine Total Return Fund had the fastest start for a mutual fund, according to Morningstar. It took 16 years for the TCW Total Return Bond Fund to reach $2 billion in assets under management, Gundlach said.

DoubleLine’s assets under management have risen to $5.5 billion, helping the firm turn profitable, according to Gundlach.

(Bloomberg, October 5, 2010)