There are hopeful signs that a bottom is forming in the battered stock market. The market surged upward yesterday when the vice chairman of the Federal Reserve hinted that the Fed would be more open to additional rate cuts than had been previously communicated.
Perhaps most positive the market traded "even" today in spite of two big up days in a row. Tonight Chairman Bernake, speaking at the Charlotte Chamber of Commerce, more broadly confirmed that additional rate cuts are likely.
Other signs of a bottom is that several banks have received significant capital infusions. Other well regarded "big investors" are starting to take advantage of beaten down shares in companies like E-Trade. UBS made a decision to more their SIV's onto their balance sheet.
Financials have strengthened. Oil is backing away from $100, for now. Big tech growth stocks have quickly bounced back and are trading close to their previous levels.
There is still a long way to go, but signs are promising. Tomorrow's debate will be between those that are inspired by the prospect of rate cuts and those that fear that the need for more substantial cuts means we are headed for recession.
Thursday, November 29, 2007
Hell Freezes Over
http://www.post-gazette.com/pg/07333/837824-100.stm
John Murtha, Democrat Party thug in residence, just returned from a Thanksgiving trip to Iraq. Congressman Murtha has been one of the most vocal critics of the Iraq war and has led many of the behind the scenes shenanigans to undermine our troops.
Now he is reporting back that "the surge is working"! I never thought I'd hear those words from the congressman. Nancy and Harry have to be so disappointed.
John Murtha, Democrat Party thug in residence, just returned from a Thanksgiving trip to Iraq. Congressman Murtha has been one of the most vocal critics of the Iraq war and has led many of the behind the scenes shenanigans to undermine our troops.
Now he is reporting back that "the surge is working"! I never thought I'd hear those words from the congressman. Nancy and Harry have to be so disappointed.
Sunday, November 25, 2007
Housing's Wealth Effect - I'm Skeptical
There is no question that home prices are pulling back. This pullback is most pronounced in parts of the country that say the most rapid price appreciation, such as Florida and California. Many other parts of the "heartland" did not experience the same degree of price run-up and not see the same amount of depreciation.
There have been lots of stories in the media about how the run-up in housing prices, facilitated by record low interest rates, has fueled a wealth effect. In other words, people felt more wealthy due to the appreciation in their houses. There has also been a lot of commentary about homeowners using the increased equity as an "ATM", funding spending and lifestyle changes. Now that home prices are headed down, the worry is that consumers will spend less - pushing the U.S. into recession.
I am skeptical of the the whole wealth effect argument and the effect to which the majority has been using their house as a "piggy bank". This skepticism is purely anecdotal and based on my own musings. I have friends that made a lot of money flipping beach property during the bubble. I also have friends that made money but also got caught holding Florida real estate they cannot afford to sell.
But for the average family that was not speculating in an overheating market, I don't see the ATM argument - that surplus home equity was the driver of the consumer economy. Yes, if you bought a house in an inflated market in the last 18 months, it is possible to be upside down. But the majority of homeowners have held their homes longer, or sold a home at an inflated price and bought another at a similarly inflated price, the angst is just not there.
I just don't buy the fact that people are spending more or less based on home values being up or down. Plus, if you've had your home for a while it is likely that you have an equity line of credit that can be drawn on anyway - no cash-out refinancing required. More than half of all homeowners own their homes outright.
Yes, you can refinance and take cash out of your house. But homes are mostly illiquid. Jobs and rising income and stock market gains have a much greater impact in people feeling wealthy - and therefore the money they spend. In other words, if people have a decent job with rising wages, they are going to spend that money regardless of the value of their home.
It is the American way.
There have been lots of stories in the media about how the run-up in housing prices, facilitated by record low interest rates, has fueled a wealth effect. In other words, people felt more wealthy due to the appreciation in their houses. There has also been a lot of commentary about homeowners using the increased equity as an "ATM", funding spending and lifestyle changes. Now that home prices are headed down, the worry is that consumers will spend less - pushing the U.S. into recession.
I am skeptical of the the whole wealth effect argument and the effect to which the majority has been using their house as a "piggy bank". This skepticism is purely anecdotal and based on my own musings. I have friends that made a lot of money flipping beach property during the bubble. I also have friends that made money but also got caught holding Florida real estate they cannot afford to sell.
But for the average family that was not speculating in an overheating market, I don't see the ATM argument - that surplus home equity was the driver of the consumer economy. Yes, if you bought a house in an inflated market in the last 18 months, it is possible to be upside down. But the majority of homeowners have held their homes longer, or sold a home at an inflated price and bought another at a similarly inflated price, the angst is just not there.
I just don't buy the fact that people are spending more or less based on home values being up or down. Plus, if you've had your home for a while it is likely that you have an equity line of credit that can be drawn on anyway - no cash-out refinancing required. More than half of all homeowners own their homes outright.
Yes, you can refinance and take cash out of your house. But homes are mostly illiquid. Jobs and rising income and stock market gains have a much greater impact in people feeling wealthy - and therefore the money they spend. In other words, if people have a decent job with rising wages, they are going to spend that money regardless of the value of their home.
It is the American way.
Year-end Market Resistance and Support
The market bounced a bit Friday across the board in a holiday shortened session. The S&P 500 is close to the August lows. If it can build on Friday's boost then the next major resistance level is 1490. If it breaks below about 1410 there could be some real damage on technical selling. Between here and 1490, expect professional traders to by dips and sell into strength. In a solid breakout above 1490 expect more sustained buying into strength.
The Nasdaq bounced Friday after hitting almost exactly a 10% decline to 2575 from the highs. I believe that when stocks do begin a move up tech will recover the fastest - especially big tech that is leveraged to international growth. Certainly there will be some buying of techs if they stay above the 2575 level.
This week will contrast economic data confirming that the economy is slowing with the usual year-end optimism and holiday retail sales that appear to be off to a strong start.
Recessions typically occur when consumers significantly reign in spending or when credit markets seize up. We certainly have a long ways to go before the credit markets can regain a robust level of liquidity. The consumer is the wild card. However, Americans have an ability to spend any money they have and then some, regardless of the economic conditions.
The subprime mortgages that will default is not enough to cause a recession on its own. But if it causes the above to take place then it certainly can happen. Aside from the lack of fully functioning credit markets, the most important drivers of the consumer will be jobs and income. I will be watching these two items closely.
Disclosure: at the time of this posting the author was long SPY.
The Nasdaq bounced Friday after hitting almost exactly a 10% decline to 2575 from the highs. I believe that when stocks do begin a move up tech will recover the fastest - especially big tech that is leveraged to international growth. Certainly there will be some buying of techs if they stay above the 2575 level.
This week will contrast economic data confirming that the economy is slowing with the usual year-end optimism and holiday retail sales that appear to be off to a strong start.
Recessions typically occur when consumers significantly reign in spending or when credit markets seize up. We certainly have a long ways to go before the credit markets can regain a robust level of liquidity. The consumer is the wild card. However, Americans have an ability to spend any money they have and then some, regardless of the economic conditions.
The subprime mortgages that will default is not enough to cause a recession on its own. But if it causes the above to take place then it certainly can happen. Aside from the lack of fully functioning credit markets, the most important drivers of the consumer will be jobs and income. I will be watching these two items closely.
Disclosure: at the time of this posting the author was long SPY.
Saturday, November 24, 2007
Why Are Government Schools So Expensive?
One average, private elementary and secondary schools spend about a third less than government run schools while achieving superior education outcomes. Spending on public schools as a percentage of personal income has soared from 2.3% in 1950 to 4.5% in 1999. Why are the government-run schools so expensive?
First, the growth of personnel in the public school systems is nothing short of astounding. During the period from 1979 to 2000 student enrollment increased by 13%. But education personnel increased by 61%! Even worse, only 40% of school employees are actually teachers.
Second, government school employees are paid on average 35% more than private school employees. Government school teachers' benefits also far exceed their private school counterparts. These differences are largely due to the stranglehold the teacher unions have on our public school system.
Third, it is common to offer tenure to public school teachers. This tends to concentrate teachers in the highest salary levels. Private schools typically do not offer tenure and as such have a more normal distribution of salary levels and attrition.
First, the growth of personnel in the public school systems is nothing short of astounding. During the period from 1979 to 2000 student enrollment increased by 13%. But education personnel increased by 61%! Even worse, only 40% of school employees are actually teachers.
Second, government school employees are paid on average 35% more than private school employees. Government school teachers' benefits also far exceed their private school counterparts. These differences are largely due to the stranglehold the teacher unions have on our public school system.
Third, it is common to offer tenure to public school teachers. This tends to concentrate teachers in the highest salary levels. Private schools typically do not offer tenure and as such have a more normal distribution of salary levels and attrition.
Why Do Only the Wealthy Have School Choice?
The elementary and secondary public school system remains the only exclusive government monopoly in America. Milton Friedman, a brilliant economist, strongly advocated abolishing the public school system in favor of private education funded through vouchers.
Liberals and the Democrat Party have resisted school choice for decades. The teacher unions (who largely vote Democrat) are one of the largest and most powerful unions in the U.S. They seem more concerned with preserving their monopolistic status and expanding their membership than on what is best for educating our children.
The liberal argument against school choice, whether facilitated through vouchers or through tax credits, can be summed up with three points:
Interestingly, a recent court decision mean that children requiring special education can move their child to a school that can best serve him. So the wealthy and special education children have school choice. The middle and lower class majority do not.
Unfortunately, like all monopolies, the government elementary and secondary school system provides results that are mediocre at a very high cost. The average cost per child has soared to more than $9,000 annually for government schools. Private schools on average spend far less than this - more on the order of a little more than $6,000. Success of Catholic schools in producing excellent educational outcomes while spending much less than government schools is well documented. This is especially significant because the demographics of Catholic schools includes a large percentage of lower and middle income students.
Providing 100% funding through vouchers for families to send their children to private schools would save money. The cost of the private schools would be less than educating the student in a government school - and the cost of educating the student in the public school would not be incurred. So if the government monopoly schools were shut down the cost of providing elementary and secondary education to America's children would be reduced by a third.
It turns out that there is a wildly successful model in the U.S. for 100% school choice. Our nation's higher education system of colleges and universities is the envy of the world. Students from all over the world strive to come to the U.S. to take advantage of this educational excellence. Students can choose to apply to any schools they desire. Hillary Clinton's current proposal to provide tax credits to help fund college educations is essentially the same as a voucher or tax credit to enable school choice for a larger number of students.
The requirement that all children of a certain age have to attend school should be retained. If schools choice was implemented in full, what would develop is a range of educational options with different price points and different special offerings. All schools would be accredited and would have to cover a certain core curriculum.
If schools execute poorly and don't meet minimum requirements, they lose their accreditation and eventually get shut down. Government monopoly schools are never shut down. They just continue to fail a new generation of students.
Education is too important to leave it as a government monopoly. The costs are too high and the performance unacceptably low. Providing a constant amount of funding per child for families to choose their schools would create a robust and diverse set of educational options just as our higher education system does today. Wealthy families could still chose to pay more for higher priced educational options. But at least they would not be paying twice. For everyone else a better education with options for all types of students and talents at a lower cost would be achieved.
Liberals and the Democrat Party have resisted school choice for decades. The teacher unions (who largely vote Democrat) are one of the largest and most powerful unions in the U.S. They seem more concerned with preserving their monopolistic status and expanding their membership than on what is best for educating our children.
The liberal argument against school choice, whether facilitated through vouchers or through tax credits, can be summed up with three points:
- Providing vouchers or tax credits to families who send their children to private school amounts to subsidizing private education at the expense of public schools.
- There is a limited amount of money available to fund education. Our public schools are already squeezed financially and diverting money to school choice vouchers or credits means that less money can be spent for children in public schools.
- Education is too important to leave to private enterprise.
Interestingly, a recent court decision mean that children requiring special education can move their child to a school that can best serve him. So the wealthy and special education children have school choice. The middle and lower class majority do not.
Unfortunately, like all monopolies, the government elementary and secondary school system provides results that are mediocre at a very high cost. The average cost per child has soared to more than $9,000 annually for government schools. Private schools on average spend far less than this - more on the order of a little more than $6,000. Success of Catholic schools in producing excellent educational outcomes while spending much less than government schools is well documented. This is especially significant because the demographics of Catholic schools includes a large percentage of lower and middle income students.
Providing 100% funding through vouchers for families to send their children to private schools would save money. The cost of the private schools would be less than educating the student in a government school - and the cost of educating the student in the public school would not be incurred. So if the government monopoly schools were shut down the cost of providing elementary and secondary education to America's children would be reduced by a third.
It turns out that there is a wildly successful model in the U.S. for 100% school choice. Our nation's higher education system of colleges and universities is the envy of the world. Students from all over the world strive to come to the U.S. to take advantage of this educational excellence. Students can choose to apply to any schools they desire. Hillary Clinton's current proposal to provide tax credits to help fund college educations is essentially the same as a voucher or tax credit to enable school choice for a larger number of students.
The requirement that all children of a certain age have to attend school should be retained. If schools choice was implemented in full, what would develop is a range of educational options with different price points and different special offerings. All schools would be accredited and would have to cover a certain core curriculum.
If schools execute poorly and don't meet minimum requirements, they lose their accreditation and eventually get shut down. Government monopoly schools are never shut down. They just continue to fail a new generation of students.
Education is too important to leave it as a government monopoly. The costs are too high and the performance unacceptably low. Providing a constant amount of funding per child for families to choose their schools would create a robust and diverse set of educational options just as our higher education system does today. Wealthy families could still chose to pay more for higher priced educational options. But at least they would not be paying twice. For everyone else a better education with options for all types of students and talents at a lower cost would be achieved.
The Triumph of Conservative Free Market Capitalism
The age of monarchs and a peerage economy ended with the French Revolution. The age of empire was largely past by the end of WW II. The 20th century saw a fierce competition of economic and political models to determine the answer for our time. The three most prominent models were free market capitalism, socialism, and communism.
Communism is a rejection of the individual for total collectivism. All parts of the economy are owned collectively by "the people". As such, the representatives of the people, the "Party" and its government centrally planned and controlled every aspect of production and trade. Theoretically everyone shared equally in the success and failure, with no bourgeois capitalists to accumulate a larger portion of the country's wealth. Politically all discourse and commentary was completely controlled by the state. The implementation of Communism was a totalitarian state; individual civil rights did not exist.
Socialism favors heavy government intervention and control of key aspects of infrastructure and the economy. While not as centrally planned as Communism, there is a large degree of state ownership and control of key sectors. Socialism relies on heavily regulating companies and many aspects of production and trade to achieve social goals such as massive entitlements for the population. While typically democratic in nature, Socialism still favors collectivism over individual responsibility and success.
Free market capitalism promotes less regulation, low taxes on savings, investment and capital, and minimal government intervention in the economy. Free market capitalism is most often combined politically by political conservatives who favor individual rights and responsibility. When combined together an operating model emerges that encourages entrepreneurship and investment and rewards success. Capitalism relies on the fact that "markets" are more efficient that government planning to achieve economic success.
The failure of Communism's central planning model has been universal. One of the last holdouts, Cuba, is economically devastated. Buildings and infrastructure are crumbling. Most of the cars are patched together models from the 1950s that were there when Batista was overthrown.
But throughout the world conservative principals combined with free market capitalism are exploding. The world watched closely as America emerged from WWII as the greatest economic power ever known. As the 2oth century progressed the dominant success of free market capitalism as the surest path to prosperity became undeniable. The implementation and refinement of supply-side principles during the Reagan administration capped a century of economic and political success.
Today, this amazing phenomenon is transforming the world. Free market capitalism and conservative principles are being implemented in country after country. In fact, only in the U.S. are these conservative, free market principles not considered highly progressive.
France has elected a conservative President intent on reforming an economy and society that have stagnated for so long under the shackles of socialism, unionism and protectionism. Supply side tax policy is being implemented throughout the world. 18 countries now have a flat tax. Poland has announced its intention to implement a 15% flat tax. Germany, France and the U.K. have slashed their corporate tax rates. The "Irish Miracle" speaks for itself. A new National Bureau of Economic Research study has found that countries with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
Capitalism is transforming Vietnam in a way that Johnson, McNamara and Westmoreland could not. China continues to be a totalitarian state, but capitalist reforms have resulted in an exploding economy that is building a middle class that is demanding greater individual rights. The market capitalization of the global stock market stood at about $13 trillion in 1994. Today, it is over $50 trillion! Free market capitalism has created a synchronized global economic boom that is unprecedented.
Conservative, progressive free market capitalism has become the greatest agent for positive change in the world. Let's call it "Market Liberalism". Only in the U.S., where the Democratic Party and its liberal surrogates wage war daily on prosperity and individual success, do we risk retreat from the most successful political and economic model ever seen.
Communism is a rejection of the individual for total collectivism. All parts of the economy are owned collectively by "the people". As such, the representatives of the people, the "Party" and its government centrally planned and controlled every aspect of production and trade. Theoretically everyone shared equally in the success and failure, with no bourgeois capitalists to accumulate a larger portion of the country's wealth. Politically all discourse and commentary was completely controlled by the state. The implementation of Communism was a totalitarian state; individual civil rights did not exist.
Socialism favors heavy government intervention and control of key aspects of infrastructure and the economy. While not as centrally planned as Communism, there is a large degree of state ownership and control of key sectors. Socialism relies on heavily regulating companies and many aspects of production and trade to achieve social goals such as massive entitlements for the population. While typically democratic in nature, Socialism still favors collectivism over individual responsibility and success.
Free market capitalism promotes less regulation, low taxes on savings, investment and capital, and minimal government intervention in the economy. Free market capitalism is most often combined politically by political conservatives who favor individual rights and responsibility. When combined together an operating model emerges that encourages entrepreneurship and investment and rewards success. Capitalism relies on the fact that "markets" are more efficient that government planning to achieve economic success.
The failure of Communism's central planning model has been universal. One of the last holdouts, Cuba, is economically devastated. Buildings and infrastructure are crumbling. Most of the cars are patched together models from the 1950s that were there when Batista was overthrown.
But throughout the world conservative principals combined with free market capitalism are exploding. The world watched closely as America emerged from WWII as the greatest economic power ever known. As the 2oth century progressed the dominant success of free market capitalism as the surest path to prosperity became undeniable. The implementation and refinement of supply-side principles during the Reagan administration capped a century of economic and political success.
Today, this amazing phenomenon is transforming the world. Free market capitalism and conservative principles are being implemented in country after country. In fact, only in the U.S. are these conservative, free market principles not considered highly progressive.
France has elected a conservative President intent on reforming an economy and society that have stagnated for so long under the shackles of socialism, unionism and protectionism. Supply side tax policy is being implemented throughout the world. 18 countries now have a flat tax. Poland has announced its intention to implement a 15% flat tax. Germany, France and the U.K. have slashed their corporate tax rates. The "Irish Miracle" speaks for itself. A new National Bureau of Economic Research study has found that countries with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
Capitalism is transforming Vietnam in a way that Johnson, McNamara and Westmoreland could not. China continues to be a totalitarian state, but capitalist reforms have resulted in an exploding economy that is building a middle class that is demanding greater individual rights. The market capitalization of the global stock market stood at about $13 trillion in 1994. Today, it is over $50 trillion! Free market capitalism has created a synchronized global economic boom that is unprecedented.
Conservative, progressive free market capitalism has become the greatest agent for positive change in the world. Let's call it "Market Liberalism". Only in the U.S., where the Democratic Party and its liberal surrogates wage war daily on prosperity and individual success, do we risk retreat from the most successful political and economic model ever seen.
Friday, November 23, 2007
A Plan Only Politicians Could Conceive
I wrongly assumed that Congress was in recess for the traditional Thanksgiving break. As it turns out the Democratic majority is fielding a "designated floor leader" to conduct official Senate business each day. Today's session: about 1 minute long. The number of Senators in session? One lonely Democrat.
What is the purpose of this bizarre tactic? The Democrats are terrified of President Bush making recess appointments for vacant positions that require Senate confirmation while Congress is adjourned. I have not heard of this being done before.
The Constitution instructs that the President nominate candidates for leading executive branch positions, such as ambassadors, and federal and Supreme Court judges. The Senate must confirm or reject these candidate by a vote of the Senate. The problem is that the Senate continues to refuse to hold a vote on many, many candidates. This serious constitutional inaction leaves the positions vacant, which is not particularly helpful to a functioning executive or judicial branch.
A good example is U.N. Ambassador Bolton. The Democrats were grumpy because apparently Mr. Bolton had been mean to some of them when he was at the State Department. President Bush nominated him for the job of Ambassador to the U.N. The Democratic Senate refused to allow a confirmation vote.
President Bush finally did the only thing he could. He made a recess appointment temporarily installing Mr. Bolton as ambassador. When the next session of Congress began, the Democrats still refused to hold a confirmation vote and Ambassador Bolton had to leave the post. The unfortunate truth is that as ambassador Mr. Bolton provided exactly the right kind of tough but pragmatic leadership the U.S. needed in the United Nations.
Neither party is blameless regarding this constitutional process over the years. President Clinton made 140 recess appointments; President Bush has made 165 to date. But the Democrats have taken it to a new level of partisanship in their dealings with President Bush. If the Democrats don't like the candidates nominated, don't vote for them. Hold an up or down vote like the Constitution mandates and move on.
Refusing to bring these nominations up for a vote is a serious dereliction of constitutional duty. The President has the right to nominate whoever he thinks is right for the job and the Senate has the duty to confirm or reject the candidate with an up or down vote.
The amazing part is that the 1 minute a day sessions are accomplishing as much as the regular full-length sessions for the Democratic majority - mostly nothing with a lot of silly politics thrown in.
What is the purpose of this bizarre tactic? The Democrats are terrified of President Bush making recess appointments for vacant positions that require Senate confirmation while Congress is adjourned. I have not heard of this being done before.
The Constitution instructs that the President nominate candidates for leading executive branch positions, such as ambassadors, and federal and Supreme Court judges. The Senate must confirm or reject these candidate by a vote of the Senate. The problem is that the Senate continues to refuse to hold a vote on many, many candidates. This serious constitutional inaction leaves the positions vacant, which is not particularly helpful to a functioning executive or judicial branch.
A good example is U.N. Ambassador Bolton. The Democrats were grumpy because apparently Mr. Bolton had been mean to some of them when he was at the State Department. President Bush nominated him for the job of Ambassador to the U.N. The Democratic Senate refused to allow a confirmation vote.
President Bush finally did the only thing he could. He made a recess appointment temporarily installing Mr. Bolton as ambassador. When the next session of Congress began, the Democrats still refused to hold a confirmation vote and Ambassador Bolton had to leave the post. The unfortunate truth is that as ambassador Mr. Bolton provided exactly the right kind of tough but pragmatic leadership the U.S. needed in the United Nations.
Neither party is blameless regarding this constitutional process over the years. President Clinton made 140 recess appointments; President Bush has made 165 to date. But the Democrats have taken it to a new level of partisanship in their dealings with President Bush. If the Democrats don't like the candidates nominated, don't vote for them. Hold an up or down vote like the Constitution mandates and move on.
Refusing to bring these nominations up for a vote is a serious dereliction of constitutional duty. The President has the right to nominate whoever he thinks is right for the job and the Senate has the duty to confirm or reject the candidate with an up or down vote.
The amazing part is that the 1 minute a day sessions are accomplishing as much as the regular full-length sessions for the Democratic majority - mostly nothing with a lot of silly politics thrown in.
Thursday, November 22, 2007
Google Continues to Expand Search Dominance
According to comScore, total U.S. search queries in the U.S. were up 11.8% from October, and 26% year over year. Results from comScore shows further evidence that Google continues to tighten its grip on the U.S. search market:
Even without taking additional market share there is growth in the U.S. and internationally. Take the year over year increase in searches for the U.S. of 26%. Even without increasing market share, or finding new channels for search advertising, the size of the market expanded dramatically over the past year.
Despite these types of concerns, last week the first $900 price target for Google was issued by UBS. Google made a strong move up to $660 on Wednesday in a terrible tape for the market as a whole.
Disclosure: at the time of this posting the author was long GOOG, MSFT and BIDU.
- Google - 58.5%, up from 57% one month earlier, and 49% one year ago.
- Yahoo - 22.9% share in October, down from 23.7% in September, and 28.7% a year ago.
- Microsoft - 9.7% share, down from 10.3% a month ago, and 11% a year ago.
- AOL - 4.2%, down from 4.3% a month ago, and 6.2% a year ago.
- Ask.com - 4.7% share, flat with a month ago, but down from 5.2% a year ago, despite heavy advertising.
Internationally, Google is even stronger:
- Google - 69.4% share, down from 69.8% a month ago.
- Yahoo - 14.4% share, down from 14.9%.
- Microsoft - 2.5% share, down from 2.6%
- AOL - flat at 0.4%.
- Ask.com - flat at 0.2%.
- Baidu - 8.8% share, up from 7.7%
- Naver.com had 4.4% share, up from 4.3%.
Even without taking additional market share there is growth in the U.S. and internationally. Take the year over year increase in searches for the U.S. of 26%. Even without increasing market share, or finding new channels for search advertising, the size of the market expanded dramatically over the past year.
Despite these types of concerns, last week the first $900 price target for Google was issued by UBS. Google made a strong move up to $660 on Wednesday in a terrible tape for the market as a whole.
Disclosure: at the time of this posting the author was long GOOG, MSFT and BIDU.
Boumediene v. Bush and the Rights of Enemy Combatants in Wartime
On December 5th the U.S. Supreme Court will take up the case of Boumediene v. Bush which involves the rights of unlawful enemy combatants, such as those being held in Guantanamo. The Cato Institute is holding a forum to debate both sides of the issue on December 3rd. As the ultimate arbitrator of what is constitutional, the court's decision will be closely watched.
In ex parte Quirin, 1942, during World War II, German spies and saboteurs were caught operating in the U.S. The court upheld the government's ability to hold and try these "unlawful combatants" by military tribunal. As such they were tried and subsequently executed by hanging.
The Supreme Court wrote in its decision (emphasis added):
"By universal agreement and practice, the law of war draws a distinction between the armed forces and the peaceful populations of belligerent nations and also between those who are lawful and unlawful combatants. Lawful combatants are subject to capture and detention as prisoners of war by opposing military forces. Unlawful combatants are likewise subject to capture and detention, but in addition they are subject to trial and punishment by military tribunals for acts which render their belligerency unlawful. The spy who secretly and without uniform passes the military lines of a belligerent in time of war, seeking to gather military information and communicate it to the enemy, or an enemy combatant who without uniform comes secretly through the lines for the purpose of waging war by destruction of life or property, are familiar examples of belligerents who are generally deemed not to be entitled to the status of prisoners of war, but to be offenders against the law of war subject to trial and punishment by military tribunals."
The Cato Institutes' description of its forum states:
"The war on terror has presented U.S. courts with many thorny legal issues relating to civil liberties and national security. On December 5 the Supreme Court takes up the case of Boumediene v. Bush, which centers on the right of "enemy combatants" being held in Guantanamo Bay to have their detention reviewed by American civilian courts. On one hand, what right does the president have to hold people indefinitely without recourse to judicial review? On the other, does the Constitution really require that everyone picked up by our military in wartime have access to our courts? Fundamentally, how do you balance liberty and security during a war without end where the enemy doesn't play by the traditional laws of war?"
I expect the Cato Institute debate and the Supreme Court deliberations to be quite spirited.
In ex parte Quirin, 1942, during World War II, German spies and saboteurs were caught operating in the U.S. The court upheld the government's ability to hold and try these "unlawful combatants" by military tribunal. As such they were tried and subsequently executed by hanging.
The Supreme Court wrote in its decision (emphasis added):
"By universal agreement and practice, the law of war draws a distinction between the armed forces and the peaceful populations of belligerent nations and also between those who are lawful and unlawful combatants. Lawful combatants are subject to capture and detention as prisoners of war by opposing military forces. Unlawful combatants are likewise subject to capture and detention, but in addition they are subject to trial and punishment by military tribunals for acts which render their belligerency unlawful. The spy who secretly and without uniform passes the military lines of a belligerent in time of war, seeking to gather military information and communicate it to the enemy, or an enemy combatant who without uniform comes secretly through the lines for the purpose of waging war by destruction of life or property, are familiar examples of belligerents who are generally deemed not to be entitled to the status of prisoners of war, but to be offenders against the law of war subject to trial and punishment by military tribunals."
The Cato Institutes' description of its forum states:
"The war on terror has presented U.S. courts with many thorny legal issues relating to civil liberties and national security. On December 5 the Supreme Court takes up the case of Boumediene v. Bush, which centers on the right of "enemy combatants" being held in Guantanamo Bay to have their detention reviewed by American civilian courts. On one hand, what right does the president have to hold people indefinitely without recourse to judicial review? On the other, does the Constitution really require that everyone picked up by our military in wartime have access to our courts? Fundamentally, how do you balance liberty and security during a war without end where the enemy doesn't play by the traditional laws of war?"
I expect the Cato Institute debate and the Supreme Court deliberations to be quite spirited.
Stem Cell Ethical Dilemma Solved
Stem cells - perhaps no other development in medical research offers the potential for so much good. But in order to produce stem cells, an egg had to be fertilized, creating a human embryo. In the process of harvesting the stem cells, the embryo is destroyed.
For those who believe that life starts at conception, the moral argument against stem cell research was the same as abortion. Now, a new breakthrough has been made that creates stem cells my manipulating several genes in skin cells. No embryos have to be created and destroyed in the process.
What is remarkable about this is that the new technique is much less complicated and less expensive than the original method. Due to concerns of the ethics of of embryonic stem cells, the Bush Administration helped to fund the research that resulted in this new breakthrough.
There are many, many laboratories that have a vested interest in the embryonic method, and will resist the change in method. But the simplicity, economics, and ethics of the new method will win the day. The following is a very interesting article profiling the work of James Thompson, a pioneer in the original stem cell method as well as the new breakthrough.
http://www.nytimes.com/2007/11/22/science/22stem.html?ref=us
For those who believe that life starts at conception, the moral argument against stem cell research was the same as abortion. Now, a new breakthrough has been made that creates stem cells my manipulating several genes in skin cells. No embryos have to be created and destroyed in the process.
What is remarkable about this is that the new technique is much less complicated and less expensive than the original method. Due to concerns of the ethics of of embryonic stem cells, the Bush Administration helped to fund the research that resulted in this new breakthrough.
There are many, many laboratories that have a vested interest in the embryonic method, and will resist the change in method. But the simplicity, economics, and ethics of the new method will win the day. The following is a very interesting article profiling the work of James Thompson, a pioneer in the original stem cell method as well as the new breakthrough.
http://www.nytimes.com/2007/11/22/science/22stem.html?ref=us
Wednesday, November 21, 2007
Democratic Congress In Recess - How Would We Know?
Nancy Pelosi and Harry Reid continue their successful campaign to accomplish virtually nothing. With the Thanksgiving recess upon us Harry Reid is off to South America and Nancy Pelosi is off to wherever she goes when Congress is not in session.
The two biggest issues facing Congress were left unresolved: at least temporarily patching the Alternative Minimum Tax (AMT), and passing a funding bill for Iraq and Afghanistan that President Bush will sign into law.
50 millions Americans will now have their tax refunds delayed by 10 weeks due to Congress' inaction on the AMT.
The Democrats are in a difficult position on funding for Iraq. The far left wing of the party continues to fanatically demand immediate and unequivocal withdrawal. But the dramatic success of the troop surge combined with General Petreaus' change in on the ground tactics have weakened the Democrat's leverage for legislating an abrupt surrender.
I don't think that Congress' already low approval rating is going to helped any by Nancy and Harry's failure to deal with these two time-sensitive issues.
The two biggest issues facing Congress were left unresolved: at least temporarily patching the Alternative Minimum Tax (AMT), and passing a funding bill for Iraq and Afghanistan that President Bush will sign into law.
50 millions Americans will now have their tax refunds delayed by 10 weeks due to Congress' inaction on the AMT.
The Democrats are in a difficult position on funding for Iraq. The far left wing of the party continues to fanatically demand immediate and unequivocal withdrawal. But the dramatic success of the troop surge combined with General Petreaus' change in on the ground tactics have weakened the Democrat's leverage for legislating an abrupt surrender.
I don't think that Congress' already low approval rating is going to helped any by Nancy and Harry's failure to deal with these two time-sensitive issues.
The Real Problem with Mortgage Losses - Magnification through Leverage
The amount of subprime mortgages as a part of the whole mortgage industry is fairly small. The subprime mortgages that are destined for foreclosure will be larger than normal, but certainly not all of them. The biggest problem is not the number of non-performing loans, but the fact that the confusion and reduction in liquidity are a governor on credit as a whole for both individuals and business.
Profits may be the "mother's milk of capitalism". But credit greases the skids.
Jan Hatzius is the chief U.S. economists for Goldman Sachs, the investment bank most often cited as being the smartest of the smart money. Hatzius challenged statements by some that the mortgage losses being experienced were insignificant as a part of the whole industry because of the way the mortgages have been "leveraged up".
If highly leveraged investors in mortgage securities such as banks, S&L's, broker-dealers, Freddie and Fannie, and hedge funds account for $200 billion of mortgage-related credit losses, and they lever up 10 times, that hit results in a $2 trillion reduction in credit, calculates Hatzius.
This could cause a credit contraction equal to 7% of total debt, resulting in recession.
Profits may be the "mother's milk of capitalism". But credit greases the skids.
Jan Hatzius is the chief U.S. economists for Goldman Sachs, the investment bank most often cited as being the smartest of the smart money. Hatzius challenged statements by some that the mortgage losses being experienced were insignificant as a part of the whole industry because of the way the mortgages have been "leveraged up".
If highly leveraged investors in mortgage securities such as banks, S&L's, broker-dealers, Freddie and Fannie, and hedge funds account for $200 billion of mortgage-related credit losses, and they lever up 10 times, that hit results in a $2 trillion reduction in credit, calculates Hatzius.
This could cause a credit contraction equal to 7% of total debt, resulting in recession.
Freddie and Fannie Cannot Solve the Mortgage Mess
James Lockhart heads up the Office of Federal Housing Enterprise Oversight (OFHEO). The OFHEO provides regulatory oversight to Freddie Mac and Freddie Mae and is supposed to stop these government chartered entities from reckless behavior. Given the history of these two agency's track record of all sorts of inept and fraudulent deeds, including cooking the books to the tune of billions of dollars, serious adult supervision seems wise.
Freddie Mae manipulated earnings and was caught in a massive accounting fraud that took place between 1998 and 2002.
In 2006 the Washington Post reported the following:
"Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.
Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.
[SEC and OFHEO] portray the District-based mortgage funding giant -- a linchpin of the nation's housing market -- as governed by a weak board of directors, which failed to install basic internal controls and instead let itself be dominated and left uninformed by chief executive Franklin Raines and Chief Financial Officer J. Timothy Howard, who both were later ousted.
The result was a company whose managers engaged in one questionable maneuver after another..."
Fisher Investments republished an article from Bloomberg yesterday that smugly downplayed the problems at Freddie and Fannie. The article points out that the losses are just small fraction of the their total loan portfolios. It also states that the capital requirements of the firms are arbitrary and can be changed. Senator Charles Shummer has strongly pushed for raising the limits on the amount of loans that Freddie and Fannie can purchase.
But here is the problem. Freddie and Fannie have a history of fraud and reckless behavior. Congress has still not passed legislation to reform these entities. They are leveraged 50 to 1. They are already operating under capital standards that are much less rigorous than banks. Neither firm is fully in compliance with the consent degree that was agreed to as a result of all the shenanigans, although Fannie is farther along than Freddie. To pick up for the loss of liquidity in the mortgage market Freddie and Fannie are already buying 60% of the conforming mortgages in the U.S., up from 40% last year.
Ben Bernake suggested that the limits be raised on the size of loans that can be purchased by Freddie and Fannie to include so-called jumbo loans. This is also a terrible idea. The management teams reconstituted after the fraud are thin. Freddie and Fannie do not have any experience with jumbo loans and no models for risk management of these mortgages. They already have their hands full doing what they know correctly - providing liquidity for standard, conforming loans. Again, let's be clear that neither firm has even been able to get into compliance with the consent decrees with the SEC and OFHEO.
Allowing these firms to take on even more capital risk without the appropriate reforms seems like a very bad idea.
Freddie Mae manipulated earnings and was caught in a massive accounting fraud that took place between 1998 and 2002.
In 2006 the Washington Post reported the following:
"Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.
Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.
[SEC and OFHEO] portray the District-based mortgage funding giant -- a linchpin of the nation's housing market -- as governed by a weak board of directors, which failed to install basic internal controls and instead let itself be dominated and left uninformed by chief executive Franklin Raines and Chief Financial Officer J. Timothy Howard, who both were later ousted.
The result was a company whose managers engaged in one questionable maneuver after another..."
Fisher Investments republished an article from Bloomberg yesterday that smugly downplayed the problems at Freddie and Fannie. The article points out that the losses are just small fraction of the their total loan portfolios. It also states that the capital requirements of the firms are arbitrary and can be changed. Senator Charles Shummer has strongly pushed for raising the limits on the amount of loans that Freddie and Fannie can purchase.
But here is the problem. Freddie and Fannie have a history of fraud and reckless behavior. Congress has still not passed legislation to reform these entities. They are leveraged 50 to 1. They are already operating under capital standards that are much less rigorous than banks. Neither firm is fully in compliance with the consent degree that was agreed to as a result of all the shenanigans, although Fannie is farther along than Freddie. To pick up for the loss of liquidity in the mortgage market Freddie and Fannie are already buying 60% of the conforming mortgages in the U.S., up from 40% last year.
Ben Bernake suggested that the limits be raised on the size of loans that can be purchased by Freddie and Fannie to include so-called jumbo loans. This is also a terrible idea. The management teams reconstituted after the fraud are thin. Freddie and Fannie do not have any experience with jumbo loans and no models for risk management of these mortgages. They already have their hands full doing what they know correctly - providing liquidity for standard, conforming loans. Again, let's be clear that neither firm has even been able to get into compliance with the consent decrees with the SEC and OFHEO.
Allowing these firms to take on even more capital risk without the appropriate reforms seems like a very bad idea.
Tuesday, November 20, 2007
Perspective on Housing's Decline. Impact on Consumer?
The decline in the housing market continues to be severe. Credit derivative instruments backed by mortgages, commonly called Structured Investment Vehicles (SIV) still can not be accurately priced. "Shoes" continue to drop. Today Fannie Mac took a $2B write-down and the stock took a 30% haircut. This is curious because Fannie Mac and Fannie Mae do not own sub-prime securities. I need to further investigate this to better understand the source of the write-downs by these government chartered entities.
I continue to believe that the biggest problem with the sub-prime slime is a lack of understanding of what exactly is contained in these SIV's. This exacerbates the illiquid nature of these instruments, making them impossible to sell and very difficult to "mark to market".
Nevertheless, at the end of the day, it seems likely that the mortgage mess and credit liquidity issues will work themselves out. But it is certainly going to take much longer than anyone thought it would.
Housing is 5% of the economy. A large number but not so large that it can bring down everything else. The Federal Reserve can not cut interest rates enough to save the housing sector. Its demise is inevitable. But the surge in exports facilitated by the falling dollar has almost exactly offset the decline in the housing sector as a percent of GDP. And Fed cuts can stimulate other parts of the economy such as capital investment.
The truth is that the losses taken in these large write-downs may or may not turn out to be ultimately realized. The financial firms are taking their best guess at what the losses may be, but the losses could end up being less once the credit markets truly get moving again and a more accurate "mark to market" can be ascertained. One "tell" that the losses may be overstated is the rapid growth in distress funds that are raising huge sums of capital to buy up these depressed securities. Money is also pouring into hedge funds, with similar implications.
78% of Americans think the economy is getting worse. Whether this is true or not is open to debate. But this is the consumer sentiment. As in another recent post I conveyed my view that jobs and income are more important to consumerism than sentiment. The bottom line is that if people have disposable income they spend it. Gallup data shows that there is not a strong correlation between consumer sentiment and spending.
I continue to believe that the biggest problem with the sub-prime slime is a lack of understanding of what exactly is contained in these SIV's. This exacerbates the illiquid nature of these instruments, making them impossible to sell and very difficult to "mark to market".
Nevertheless, at the end of the day, it seems likely that the mortgage mess and credit liquidity issues will work themselves out. But it is certainly going to take much longer than anyone thought it would.
Housing is 5% of the economy. A large number but not so large that it can bring down everything else. The Federal Reserve can not cut interest rates enough to save the housing sector. Its demise is inevitable. But the surge in exports facilitated by the falling dollar has almost exactly offset the decline in the housing sector as a percent of GDP. And Fed cuts can stimulate other parts of the economy such as capital investment.
The truth is that the losses taken in these large write-downs may or may not turn out to be ultimately realized. The financial firms are taking their best guess at what the losses may be, but the losses could end up being less once the credit markets truly get moving again and a more accurate "mark to market" can be ascertained. One "tell" that the losses may be overstated is the rapid growth in distress funds that are raising huge sums of capital to buy up these depressed securities. Money is also pouring into hedge funds, with similar implications.
78% of Americans think the economy is getting worse. Whether this is true or not is open to debate. But this is the consumer sentiment. As in another recent post I conveyed my view that jobs and income are more important to consumerism than sentiment. The bottom line is that if people have disposable income they spend it. Gallup data shows that there is not a strong correlation between consumer sentiment and spending.
Monday, November 19, 2007
Dead Cat Update II
Well, today's action on Wall Street continued a gruesome downward trend. All of the major indexes were down about 1.6%, including a 218 point decline for the Dow Industrials. Citigroup dropped another 5% on further downgrades and concerns that its write-offs due to subprime exposure could rise to $15B.The "dead cat" looks like it got backed over by a SUV. The market traded in a fairly tight range for most of the day. A mid-afternoon rally petered out and the sell-off into the close was on.
After the bell Hewlett Packard reported another terrific quarter. I guess we'll see tomorrow if this is enough to shake the tech sector out of its doldrums. Hewlett Packard did not see the same type of softness in the U.S. enterprise area commented on by Cisco and IBM. Hewlett Packard's earnings are more strongly influenced by consumers than some of the other big tech firms.
The light volume this week due to the Thanksgiving holiday makes it difficult to draw any conclusions from the action. The reduced liquidity means that moves up or down are likely to be exaggerated.
Disclosure: at the time of this posting the author was long CSCO and HPQ.
Sunday, November 18, 2007
IPCC Assessment Report IV "Climate Change 2007" - A Reaction
Reading the United Nations' Intergovernmental Panel on Climate Change's (IPCC) just released Assessment Report IV - Climate Change 2007 (Summary for Policy Makers) I found myself a bit frustrated. There is much that is true in the report. But there is an exclusive focus on negative results of the slight global warming we have experienced in the last 150 years. There are also omissions that seem particularly gratuitous. And, by my review of the scientific literature, some clear falsehoods. There are no citations.
The exclusive focus on negative effects of global warming is perhaps most pronounced in the comments on health. But there are also positive affects from a slight warming of the planet. Bjorn Lomborg is a professor in the Business School of the University of Copenhagen and the author of The Sceptical Environmentalist. In his writings he points out that some global warming will increase the occurrence of diseases such as malaria but the number of deaths that are reduced globally is greater that those that are caused.
The report discusses how global warming will melt the ice sheets in the polar regions and in Greenland. However, there is no mention that the Antarctic ice sheet is actually increasing. In Greenland some glaciers are declining but there is no mention that some are increasing.
The reports states that "Average Northern Hemisphere temperatures during the second half of the 20th century are very likely higher than during any other 50-year period in the last 500 years and likely the highest in at least the past 1300 years (italics theirs)."
This is simply not true. The "hockey stick" chart showing the temperatures in the 20th century shooting up dramatically is often cited as proof of the dramatic rise in human caused global warming. But this rise in temperature has been a positive development because it finally signaled the final end to the "Little Ice Age" that cooled the earth for hundreds of years.
This was preceded by the extremely warm period of the middle ages which allowed crops to be grown in northern latitudes not possible previously and for the Vikings to establish permanent colonies on Greenland. When the Little Ice Age arrived all of this reversed. Viking colonies had to be abandoned and crops failed.
An analysis of the temperatures shows a rise in temperatures, signaling the end of the Little Ice Age, through about 1940. Since human industrial output was minimal during this period this warming could not have been caused by human activity. Then, from 1940 to 1970 temperatures fell again. Since the early 1970's temperatures have increased. However, it should be noted that some of the recent temperature increases cited by the IPCC contain spurious data that have not adequately corrected for urban "heat sinks". These data anomolies have been recently highlighted in peer reviewed scientific journals.
The statement by the IPCC report that our current temperatures are the highest in 500 years and probably the highest in 1300 years is probably based on temperature proxy analysis by Mann, et al., 1998. Mann's study attempted to reconstruct historical temperatures largely based on interpretation of tree rings. But further analysis of Mann's data determined that here were data errors. But the good news is that we do not need to rely on temperature proxies. There are direct means of reconstructing the historical temperatures.
The best of these direct means is the Greenland bore hole analysis. This analysis, published in the peer reviewed scientific journal Science (Dahl-Jenson et al. 1998 Science, 282, 268-271 "Past Temperatures Directly from the Greenland Ice Sheet". The Greenland bore hole analysis has been confirmed by a borehole reconstruction in the Ural Mountains published in Global and Planetary Change (Demeshko, D., V.A. Schapov, Global and Planetary Change, 2001)
The IPCC's statement that this is likely the highest temperature in 1300 years is simply not true. the A National Academy of Science review panel concluded in 2006 that the only conclusion that can be made is that the planet is warmer now that anytime in the last 400 years. Since this 400 year period concluded with the emergence from the Little Ice Age this is a very positive development.
The exclusive focus on negative effects of global warming is perhaps most pronounced in the comments on health. But there are also positive affects from a slight warming of the planet. Bjorn Lomborg is a professor in the Business School of the University of Copenhagen and the author of The Sceptical Environmentalist. In his writings he points out that some global warming will increase the occurrence of diseases such as malaria but the number of deaths that are reduced globally is greater that those that are caused.The report discusses how global warming will melt the ice sheets in the polar regions and in Greenland. However, there is no mention that the Antarctic ice sheet is actually increasing. In Greenland some glaciers are declining but there is no mention that some are increasing.
The reports states that "Average Northern Hemisphere temperatures during the second half of the 20th century are very likely higher than during any other 50-year period in the last 500 years and likely the highest in at least the past 1300 years (italics theirs)."
This is simply not true. The "hockey stick" chart showing the temperatures in the 20th century shooting up dramatically is often cited as proof of the dramatic rise in human caused global warming. But this rise in temperature has been a positive development because it finally signaled the final end to the "Little Ice Age" that cooled the earth for hundreds of years.
This was preceded by the extremely warm period of the middle ages which allowed crops to be grown in northern latitudes not possible previously and for the Vikings to establish permanent colonies on Greenland. When the Little Ice Age arrived all of this reversed. Viking colonies had to be abandoned and crops failed.
An analysis of the temperatures shows a rise in temperatures, signaling the end of the Little Ice Age, through about 1940. Since human industrial output was minimal during this period this warming could not have been caused by human activity. Then, from 1940 to 1970 temperatures fell again. Since the early 1970's temperatures have increased. However, it should be noted that some of the recent temperature increases cited by the IPCC contain spurious data that have not adequately corrected for urban "heat sinks". These data anomolies have been recently highlighted in peer reviewed scientific journals.
The statement by the IPCC report that our current temperatures are the highest in 500 years and probably the highest in 1300 years is probably based on temperature proxy analysis by Mann, et al., 1998. Mann's study attempted to reconstruct historical temperatures largely based on interpretation of tree rings. But further analysis of Mann's data determined that here were data errors. But the good news is that we do not need to rely on temperature proxies. There are direct means of reconstructing the historical temperatures.
The best of these direct means is the Greenland bore hole analysis. This analysis, published in the peer reviewed scientific journal Science (Dahl-Jenson et al. 1998 Science, 282, 268-271 "Past Temperatures Directly from the Greenland Ice Sheet". The Greenland bore hole analysis has been confirmed by a borehole reconstruction in the Ural Mountains published in Global and Planetary Change (Demeshko, D., V.A. Schapov, Global and Planetary Change, 2001)
The IPCC's statement that this is likely the highest temperature in 1300 years is simply not true. the A National Academy of Science review panel concluded in 2006 that the only conclusion that can be made is that the planet is warmer now that anytime in the last 400 years. Since this 400 year period concluded with the emergence from the Little Ice Age this is a very positive development.
A Compelling Case that Waterboarding is Torture
An adaptation of this blog article by Malcolm Nance was published in today’s Atlanta Journal Constitution. Malcolm Nance is the author of “The Terrorists of Iraq – Inside the Strategy and Tactics of the Iraq Insurgency.” He is a counter-terrorism and terrorism intelligence consultant for the U.S. government’s Special Operations, Homeland Security and Intelligence agencies. He testified about 10 days ago at a House oversight hearing on torture and enhance interrogation techniques.
Mr. Malcolm makes a very strong and compelling argument that waterboarding is torture, "period". It would certainly be difficult to challenge his credentials on this matter.
http://smallwarsjournal.com/blog/2007/10/waterboarding-is-torture-perio/
Is there any situation where the United States should use this or other extreme interrogation techniques? I'm not prepared to say never, ever, ever. But it should be in the very rarest of occurrences where there is a dramatic and immediate danger, and only then with the direct approval of the President. No "plausible denial" allowed.
On a related note, given some of the recent discussions related to the confirmation of Attorney General Mukasey, the U.S. military just reaffirmed that waterboarding is absolutely prohibited by its services.
Mr. Malcolm makes a very strong and compelling argument that waterboarding is torture, "period". It would certainly be difficult to challenge his credentials on this matter.
http://smallwarsjournal.com/blog/2007/10/waterboarding-is-torture-perio/
Is there any situation where the United States should use this or other extreme interrogation techniques? I'm not prepared to say never, ever, ever. But it should be in the very rarest of occurrences where there is a dramatic and immediate danger, and only then with the direct approval of the President. No "plausible denial" allowed.
On a related note, given some of the recent discussions related to the confirmation of Attorney General Mukasey, the U.S. military just reaffirmed that waterboarding is absolutely prohibited by its services.
Global Warming - Now I've Heard It All
The Washington Post, under the byline of Marc Kaufman, published an article stating that the decomposition of trees damaged by Katrina and Rita will "add significantly to the greenhouse gas buildup - ultimately putting as much carbon from dying vegetation into the air as the rest of the American forest takes out in a year of photosynthesis." The title of the reprint in the Atlanta Journal Constitution is Katrina, Rita: Carbon disasters.
Now I don't know if the math for carbon dioxide released into the atmosphere is correct - let's assume it is. But I'm sorry, there are hurricanes and typhoons and tsunamis and tornados and volcanic eruptions and every other sort of natural process that affect the ecological ebb and flow of the planet. How much greenhouse gas is put into the atmosphere by a single volcanic eruption?
Yes, Katrina and Rita were very damaging. But hurricanes have been occurring since time immemorial. The last two hurricane seasons resulted in no serious damage to the U.S. coastline. I don't see any articles about how this lack of destruction is reducing greenhouse gas in the atmosphere! Another flaw in the report is that there is no mention of how many years it will take for the decomposition process, and therefore the evenutal release of carbon, to occur; 15 years, 20 years, 25 years? This constitutes a serious lack of journalistic context.
This is just the latest in hypersensitive obsession with every sort of greenhouse gas emission. Some others that have been in the news lately include:
Now I don't know if the math for carbon dioxide released into the atmosphere is correct - let's assume it is. But I'm sorry, there are hurricanes and typhoons and tsunamis and tornados and volcanic eruptions and every other sort of natural process that affect the ecological ebb and flow of the planet. How much greenhouse gas is put into the atmosphere by a single volcanic eruption?
Yes, Katrina and Rita were very damaging. But hurricanes have been occurring since time immemorial. The last two hurricane seasons resulted in no serious damage to the U.S. coastline. I don't see any articles about how this lack of destruction is reducing greenhouse gas in the atmosphere! Another flaw in the report is that there is no mention of how many years it will take for the decomposition process, and therefore the evenutal release of carbon, to occur; 15 years, 20 years, 25 years? This constitutes a serious lack of journalistic context.
This is just the latest in hypersensitive obsession with every sort of greenhouse gas emission. Some others that have been in the news lately include:
- Recommendation that we increase the consumption of Kangaroos because they give off less methane gas through their normal digestive processes than cows.
- Concern that methane gas produced by cows are going to create an ecological disaster for the planet.
- Global warming activist Heather Mills suggested that instead of Cow's milk we drink dog, cat or rat milk instead, since animals raised for agricultural purposes are destroying the earth.
Are these really the problems we should be spending time and effort on: decaying trees and farting cows? I'm not sure what is involved with milking a rat, but I'm sure our technologically sophisticated society can figure it out!
Saturday, November 17, 2007
Capital Gains Tax Cuts Double Projected Tax Revenues
The Bush tax cuts on capital gains have had a dramatically positive effect on the economy as well as caused tax revenues to the federal government to surge. This is one of the major reasons that the deficit has been reduced to historically low level 1.2% of GDP.Here is a chart that was shown on CNBC’s Kudlow & Company the other night. It shows that after the Bush capital gains tax cuts capital gains tax revenues soared (as in doubled).
This was part of a debate between Art Laffer (on the supply side) and James Surowiecki, financial columnist at The New Yorker (for the anti-supply side) – a very interesting discussion.
American Consumerism's Demise Greatly Exaggerated
With the credit morass, deflation in the housing sector, and high energy prices some have predicted that the American consumer is in retreat. Surveys such as the University of Michigan Consumer Sentiment Index certainly have shown some erosion in psychology. But at the end of the day what matters most are jobs and income.
There has been a slight increase in unemployment the last few quarters, up from 4.5% to about 4.7%. This is still a very strong employment number - 5% unemployment is traditionally considered by economists to be "full employment". Last month's job creation number was a substantial 166,000.
Real disposable income (income you get from working, after taxes, after inflation) is growing at better than 4 percent. That is really strong earnings growth.
Gas prices are high, but money spent on gas as a percent of disposable income, has decreased from about 2.7% in 1995 to only about 2% today. Energy consumption necessary to produce a dollar of GDP has fallen by 50% since 1970. Energy prices do not have the same affect on our economy that they did 30 years ago.
It is hard to drag down an economy that has a strong services and consumer base.
There has been a slight increase in unemployment the last few quarters, up from 4.5% to about 4.7%. This is still a very strong employment number - 5% unemployment is traditionally considered by economists to be "full employment". Last month's job creation number was a substantial 166,000.
Real disposable income (income you get from working, after taxes, after inflation) is growing at better than 4 percent. That is really strong earnings growth.
Gas prices are high, but money spent on gas as a percent of disposable income, has decreased from about 2.7% in 1995 to only about 2% today. Energy consumption necessary to produce a dollar of GDP has fallen by 50% since 1970. Energy prices do not have the same affect on our economy that they did 30 years ago.
It is hard to drag down an economy that has a strong services and consumer base.
Supply Side Economics - Attack and Response
Jonathan Chait from The New Republic just published a book attacking supply side economics. A good deal of the book seems to be a series of Ad Hominem attacks on various economists. Larry Kudlow, of CNBC’s Kudlow and Company said that Mr. Chait “wrote a very nasty book, in my opinion bereft of logic…”
Art Laffer recently wrote an excellent paper responding to Mr. Chait’s emotional arguements with facts. It also has some very interesting data on income inequality and comparative standard of living improvements of different racial groups. Here is a link to Mr. Laffer's paper which I highly recommend reading.
http://www.nationalreview.com/kudlow/laffer_onslaught_partI_10-31-07.pdf
Steve Moore, writing for the editorial board of the Wall Street Journal, also conveyed insight highlighting the expansion of supply side economics around the world. Here is an excerpt.
"...What the critics have no plausible answer for is this: If the supply-side tax rate reduction model is truly so abhorrent, why are so many nations around the world latching on to it? What explains the Irish Miracle? Why are Germany, France and the U.K. slashing their corporate tax rates? Why are there 18 countries with flat taxes? Are their leaders deranged, or been bamboozled by crackpots? Perhaps a better explanation is that they know intuitively what a new National Bureau of Economic Research study has found: Nations with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
History is clearly not on the side of the antisupply-side attack dogs, and they're losing the policy debate every day in political capitals around the world. Poland just announced it wants to implement a 15% flat tax by 2009. But the American left's obsession with the notion that tax rates don't matter tells us something important about the future. They are preparing the ground for massive tax increases if and when they capture control of the presidency...."
Art Laffer recently wrote an excellent paper responding to Mr. Chait’s emotional arguements with facts. It also has some very interesting data on income inequality and comparative standard of living improvements of different racial groups. Here is a link to Mr. Laffer's paper which I highly recommend reading.
http://www.nationalreview.com/kudlow/laffer_onslaught_partI_10-31-07.pdf
Steve Moore, writing for the editorial board of the Wall Street Journal, also conveyed insight highlighting the expansion of supply side economics around the world. Here is an excerpt.
"...What the critics have no plausible answer for is this: If the supply-side tax rate reduction model is truly so abhorrent, why are so many nations around the world latching on to it? What explains the Irish Miracle? Why are Germany, France and the U.K. slashing their corporate tax rates? Why are there 18 countries with flat taxes? Are their leaders deranged, or been bamboozled by crackpots? Perhaps a better explanation is that they know intuitively what a new National Bureau of Economic Research study has found: Nations with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
History is clearly not on the side of the antisupply-side attack dogs, and they're losing the policy debate every day in political capitals around the world. Poland just announced it wants to implement a 15% flat tax by 2009. But the American left's obsession with the notion that tax rates don't matter tells us something important about the future. They are preparing the ground for massive tax increases if and when they capture control of the presidency...."
More Congressional Silliness
Nancy Pelosi and her intrepid House Democrats have now passed 40 bills seeking to impose artificial timelines or other limitations that will impede our success in Iraq and Afghanistan. None of these bills has become law, nor did any of them have any chance of sustaining a presidential veto.
Now they have done it again, passing a bill that only funds our troops for 4 months and mandates troop withdrawals. Of course this bill has no chance of becoming law either. There is an oft quoted definition of insanity as "doing the same thing over and over again but expecting different results".
I guess the Democrats believe that they are making a political point, since even they must realize that as a matter of law these repeated votes are meaningless. But with an approval rating of 11%, one wonders if the political point is worth it.
Unless a funding bill is passed soon that will be signed by President Bush the military will have to begin cutting spending. Secretary Gates has instructed the Defense Department to cancel numerous military contracts and to lay off 100,000 civilian workers.
Your move Nancy.
Now they have done it again, passing a bill that only funds our troops for 4 months and mandates troop withdrawals. Of course this bill has no chance of becoming law either. There is an oft quoted definition of insanity as "doing the same thing over and over again but expecting different results".
I guess the Democrats believe that they are making a political point, since even they must realize that as a matter of law these repeated votes are meaningless. But with an approval rating of 11%, one wonders if the political point is worth it.
Unless a funding bill is passed soon that will be signed by President Bush the military will have to begin cutting spending. Secretary Gates has instructed the Defense Department to cancel numerous military contracts and to lay off 100,000 civilian workers.
Your move Nancy.
Dead Cat Update
Well, last Tuesday was the very definition of a "dead cat bounce". Most of us thought there would be some positive follow through. Unfortunately the market continued to grind lower. There were some hopeful signs on Friday as a number of beaten down stocks closed up some after trading in a tight range all day.For me personally the last month has been really tough. But I plan to sit down on Monday and re-group. Next week should not be particularly meaningful due to low holiday volume.
I have taken advantage of the pullback to add to beaten up tech positions in Apple, Google, EMC, Hewlett Packard, Dell and Cisco. In the energy sector I purchased Transocean at its lows from last week and added to my position in Devon Energy. I reduced my position in Cameco. In the infrastructure sector I added to my positions in Shaw Group and Jacobs Engineering.
I sold a number of positions that have stagnated and don't appear that they will do anything one way or the other in the foreseeable future.
After Tuesday's huge rally the S&P 500 closed at about 1481. On Wednesday the S&P 500 bounced along unable to break through major resistance at 1490 before heading down again on Thursday. Friday was slightly up but with options expiration it is hard to draw any conclusions from it.
If Hewlett Packard posts a strong quarter, which I expect it to, after the bell on Monday that may be the catalyst to get tech stocks moving up again. Analysts will be watching closely to see if HP reports some of the same domestic weakness, particularly in the financial sector, that was highlighted by Cisco. Certainly Google is at a much more attractive entry point right now. For the aggressive traders out there, the same is true for Baidu.
China has me pretty nervous right now. I will be watching closely in case China continues to break down. I have a lot of confidence long term in China Mobile. I am strongly considering reducing my China Life Insurance position in half. Too much of it's profits are coming from investment gains in an overheated market. However, same store sales were up 18% last month in China, validating two points: consumerism is on the rise in China; inflation is becoming a real problem.
Next week I am going to look at how to best set up for the rest of the year. I still believe the market will be higher on January 1 than it is today. I am considering setting up long option vertical spreads using January '08 expiration on the SPY and perhaps on the QQQQ. This will allow me to profit from a rise between now and then while not having to put up much capital.
President Sarkozy's Vision for a Renewed French-American Relationship
Ten days ago French President Sarkozy spoke to a joint session of the U.S. Congress. My college French is hopelessly rusty. But his enthusiasm for France, his commitment to a French resurgence, his genuine appreciation for America's standing and contributions to the world, and his belief that France and America must stand together as "independent partners" as Lafayette and Washington once did, was unmistakable in any language.
President Sarkozy's meditation on the American contribution to freeing France and the world from tyranny in WWI and WWII was especially poignant.
"And as they listened to their fathers, watched movies, read history books and the letters of soldiers who died on the beaches of Normandy and Provence, as they visited the cemeteries where the star-spangled banner flies, the children of my generation understood that these young Americans, 20 years old, were true heroes to whom they owed the fact that they were free people and not slaves. France will never forget the sacrifice of your children.
To those 20-year-old heroes who gave us everything, to the families of those who never returned, to the children who mourned fathers they barely got a chance to know, I want to express France's eternal gratitude.
On behalf of my generation, which did not experience war but knows how much it owes to their courage and their sacrifice; on behalf of our children, who must never forget...I want to express the deep, sincere gratitude of the French people. I want to tell you that whenever an American soldier falls somewhere in the world, I think of what the American army did for France. I think of them and I am sad, as one is sad to lose a member of one's family."
This speech had to be an uncomfortable moment for some the most liberal members of Congress. Their almost visceral disdain for America comes through daily. Now they have lost an "ally" of those in the world that share their views.
France has stagnated economically and politically for too long under the shackles of socialism, unionism and protectionism. President Sarkozy is committed to reverse the decline of France under the likes of Chirac and Mitterand and once again assume a role of prominence in the world.
President Sarkozy concludes with these remarks:
"It is this ambitious France that I have come to present to you today. A France that comes out to meet America to renew the pact of friendship and the alliance that Washington and Lafayette sealed in Yorktown.
Together let us be worthy of their example, let us be equal to their ambition, let us be true to their memories!
Long live the United States of America! Vive la France! Long live French-American friendship!"
The complete text of the speech is available in the link below.
http://www.nysun.com/article/66054?page_no=1
President Sarkozy's meditation on the American contribution to freeing France and the world from tyranny in WWI and WWII was especially poignant.
"And as they listened to their fathers, watched movies, read history books and the letters of soldiers who died on the beaches of Normandy and Provence, as they visited the cemeteries where the star-spangled banner flies, the children of my generation understood that these young Americans, 20 years old, were true heroes to whom they owed the fact that they were free people and not slaves. France will never forget the sacrifice of your children.
To those 20-year-old heroes who gave us everything, to the families of those who never returned, to the children who mourned fathers they barely got a chance to know, I want to express France's eternal gratitude.
On behalf of my generation, which did not experience war but knows how much it owes to their courage and their sacrifice; on behalf of our children, who must never forget...I want to express the deep, sincere gratitude of the French people. I want to tell you that whenever an American soldier falls somewhere in the world, I think of what the American army did for France. I think of them and I am sad, as one is sad to lose a member of one's family."
This speech had to be an uncomfortable moment for some the most liberal members of Congress. Their almost visceral disdain for America comes through daily. Now they have lost an "ally" of those in the world that share their views.
France has stagnated economically and politically for too long under the shackles of socialism, unionism and protectionism. President Sarkozy is committed to reverse the decline of France under the likes of Chirac and Mitterand and once again assume a role of prominence in the world.
President Sarkozy concludes with these remarks:
"It is this ambitious France that I have come to present to you today. A France that comes out to meet America to renew the pact of friendship and the alliance that Washington and Lafayette sealed in Yorktown.
Together let us be worthy of their example, let us be equal to their ambition, let us be true to their memories!
Long live the United States of America! Vive la France! Long live French-American friendship!"
The complete text of the speech is available in the link below.
http://www.nysun.com/article/66054?page_no=1
Thursday, November 15, 2007
The Clinton's Obsession with Approval Over Principles
At the last Democratic debate Hillary was soundly criticized for not being willing or able to give a straight answer to a simple question: did she, as a Senator from the state of New York, support New York Governor Elliott Spitzer's proposal to issue drivers licenses to illegal aliens?
To recover from this snafu, the day after the debate the Clinton campaign issued a statement saying that she "broadly supports state efforts to license illegals." Senator Clinton also said, “I broadly support what governors like Elliot Spitzer are trying to do.” An article published by http://www.cnn.com/ the same day states, "Clinton added that the policy of simply giving licenses to illegal immigrants is not something she thinks any governor would seek out." I think that means she is hedging her "clarification".
Shortly after this, under severe criticism within his state and out, Governor Spitzer withdrew his plan of issuing drivers license to illegals, saying something about underestimating opposition to the whole idea.
Now the Clinton campaign has issued a new statement. "I support Governor Spitzer's decision today to withdraw his proposal. As president, I will not support driver's licenses for undocumented people..."
So she tried to finesse taking both sides of the issue in the debate. Then she issued a clarification stating that she did support Governor Spitzer's plan. Now she says she will not support driver's licenses for illegals.
The problem with Hillary Clinton is that we'll never know what she really thinks. She only says what she believes is politically expedient. For Hillary Clinton, it is not about having positions guided by principle. It is about saying what will get her elected.
Contrast this with President Bush. Love him or hate him, he certainly is not running his administration based on polling data. He is doing what he believes is right, regardless of the poll numbers.
President Clinton's administration was driven by polls and focus groups. Almost every word, phrase and nuance was the product of focus group testing. It was not so much governing as it was a non-stop campaign.
Mike Luckovick, the political cartoonist for the Atlanta Journal Constitution, had his take on the Clinton's obsession with focus group testing over principles.
To recover from this snafu, the day after the debate the Clinton campaign issued a statement saying that she "broadly supports state efforts to license illegals." Senator Clinton also said, “I broadly support what governors like Elliot Spitzer are trying to do.” An article published by http://www.cnn.com/ the same day states, "Clinton added that the policy of simply giving licenses to illegal immigrants is not something she thinks any governor would seek out." I think that means she is hedging her "clarification".
Shortly after this, under severe criticism within his state and out, Governor Spitzer withdrew his plan of issuing drivers license to illegals, saying something about underestimating opposition to the whole idea.
Now the Clinton campaign has issued a new statement. "I support Governor Spitzer's decision today to withdraw his proposal. As president, I will not support driver's licenses for undocumented people..."
So she tried to finesse taking both sides of the issue in the debate. Then she issued a clarification stating that she did support Governor Spitzer's plan. Now she says she will not support driver's licenses for illegals.
The problem with Hillary Clinton is that we'll never know what she really thinks. She only says what she believes is politically expedient. For Hillary Clinton, it is not about having positions guided by principle. It is about saying what will get her elected.
Contrast this with President Bush. Love him or hate him, he certainly is not running his administration based on polling data. He is doing what he believes is right, regardless of the poll numbers.
President Clinton's administration was driven by polls and focus groups. Almost every word, phrase and nuance was the product of focus group testing. It was not so much governing as it was a non-stop campaign.
Mike Luckovick, the political cartoonist for the Atlanta Journal Constitution, had his take on the Clinton's obsession with focus group testing over principles.
Tuesday, November 13, 2007
UFO's OK, Policy Correspondence Is Not
Hillary Clinton was on the defensive at the last Democratic presidential debate because the Clintons will not release White House papers and correspondence involving Hillary Clinton during President Clinton's administration. It seems like an obvious request to see these papers and correspondence. After all, Hillary is claiming her participation in her husbands administration as on the job experience that makes her the best qualified and most experienced candidate.
Tim Russert came under withering attack by the loyal Clintonistas after the debate for his questioning of her on this matter and not letting her waffle on New York Governor Spitzer's ill conceived plan to give legal drivers licenses to illegal aliens. In fact, the Clinton camp has made threatening statements toward Wolf Blitzer who is scheduled to moderate the next Democratic debate. This is pure thuggery and Bill and Hillary should be ashamed of themselves. But Mr. Blitzer is no Tim Russert when it comes to asking tough questions. I don't think they have anything to worry about.
Now comes this story. The Clinton Presidential Library has just released, pursuant to a request under the Freedom of Information Act, records from the Clinton Administration pertaining to UFO's!
http://www.foxnews.com/story/0,2933,311545,00.html
I guess seeing the Clinton administration's correspondence and deliberations on UFO's is less damaging to Hillary's presidential campaign than her involvement and correspondence regarding policy issues such as health care.
Now that is really funny.
Tim Russert came under withering attack by the loyal Clintonistas after the debate for his questioning of her on this matter and not letting her waffle on New York Governor Spitzer's ill conceived plan to give legal drivers licenses to illegal aliens. In fact, the Clinton camp has made threatening statements toward Wolf Blitzer who is scheduled to moderate the next Democratic debate. This is pure thuggery and Bill and Hillary should be ashamed of themselves. But Mr. Blitzer is no Tim Russert when it comes to asking tough questions. I don't think they have anything to worry about.
Now comes this story. The Clinton Presidential Library has just released, pursuant to a request under the Freedom of Information Act, records from the Clinton Administration pertaining to UFO's!
http://www.foxnews.com/story/0,2933,311545,00.html
I guess seeing the Clinton administration's correspondence and deliberations on UFO's is less damaging to Hillary's presidential campaign than her involvement and correspondence regarding policy issues such as health care.
Now that is really funny.
How High Can a Dead Cat Bounce?
I admit that I am not a great predictor of the stock market's performance from one day to another. But given today's rally after almost a week of the stock market savagely selling off, I'll give the next few days a shot. Is it a dead cat bounce? Or is it a start of a traditional year-end rally?
First of all, the S&P 500 reached 1481 today, 9 points away from a major resistance level at 1490. I'm not a big technician but there are lots of people that will be paying attention to this. If the S&P 500 can build a solid base above the 1490 level over the next few days that will be bullish for the market continuing to move back up.
There is no doubt that tech stocks were oversold after yesterday. But that doesn't mean they can't still go down - a lot. One analyst issued a bullish note on Baidu this morning saying that the vicious sell off offered an entry point into a stock that had gone straight up the last month. All of the big tech high fliers made strong moves up today including Google, Apple, Research in Motion, Cisco and Baidu. Even EMC, which has made a dramatic reversal, started to move up again today.
In a volatile market like this you know the market is going to continue to make sharp moves up and down. You just don't know when. In a situation like this professional traders will sell into the strength and then buy weakness. Once technical resistance is solidly breached the pros will be more comfortable buying strength.
This is options expiration week which makes everything more unpredictable for the next few days. If tech stocks begin trading in a solid up pattern tomorrow it would not surprise me if the upward trend accelerates as investors and money managers become fearful that tech stocks will recover and that they risk missing the move. The battle tomorrow will be between "selling into strength" and "chasing the rally".
Will nervous traders cash in today's profits or will buyers overwhelm sellers tomorrow?
Oil was down a good bit today, causing the refiners to rally strongly. Shoulder season for the refiners is about over and the cracking spreads are widening again. The refiners could be in for a good run.
The financial sector has bounced strongly the last few days. Some of this is hedge funds covering short positions to lock in profits they made on the way down. Some of it is genuine recovery. But I think the financials will go down more before the credit mess is cleaned up. In no way have all the impacts of subprime damage been revealed. The SIV fund being created by the big banks with the supervision and encouragement of the U.S. Treasury Department will not stop the demise - just make the demise more orderly.
The lone victor on the investment firm front seems to be Goldman Sachs. For I think the eighth time Goldman Sachs, this time through a presentation by the CEO at a conference, reiterated that Goldman had no serious write downs due to subprime. The eighth time must have been the charm because just after this pronouncement the stock shot up continued rallying into the close.
The tape will continue to be choppy the rest of this week. After options expiration I am can see some further retrenchment, but overall I am optimistic about going into a relatively strong year-end run. Good luck tomorrow.
Disclosure: at the time of this posting the author was long GOOG, RIMM, AAPL, CSCO, BIDU, EMC, TSO, VLO, SPY, and GS and short USO.
First of all, the S&P 500 reached 1481 today, 9 points away from a major resistance level at 1490. I'm not a big technician but there are lots of people that will be paying attention to this. If the S&P 500 can build a solid base above the 1490 level over the next few days that will be bullish for the market continuing to move back up.
There is no doubt that tech stocks were oversold after yesterday. But that doesn't mean they can't still go down - a lot. One analyst issued a bullish note on Baidu this morning saying that the vicious sell off offered an entry point into a stock that had gone straight up the last month. All of the big tech high fliers made strong moves up today including Google, Apple, Research in Motion, Cisco and Baidu. Even EMC, which has made a dramatic reversal, started to move up again today.
In a volatile market like this you know the market is going to continue to make sharp moves up and down. You just don't know when. In a situation like this professional traders will sell into the strength and then buy weakness. Once technical resistance is solidly breached the pros will be more comfortable buying strength.
This is options expiration week which makes everything more unpredictable for the next few days. If tech stocks begin trading in a solid up pattern tomorrow it would not surprise me if the upward trend accelerates as investors and money managers become fearful that tech stocks will recover and that they risk missing the move. The battle tomorrow will be between "selling into strength" and "chasing the rally".
Will nervous traders cash in today's profits or will buyers overwhelm sellers tomorrow?
Oil was down a good bit today, causing the refiners to rally strongly. Shoulder season for the refiners is about over and the cracking spreads are widening again. The refiners could be in for a good run.
The financial sector has bounced strongly the last few days. Some of this is hedge funds covering short positions to lock in profits they made on the way down. Some of it is genuine recovery. But I think the financials will go down more before the credit mess is cleaned up. In no way have all the impacts of subprime damage been revealed. The SIV fund being created by the big banks with the supervision and encouragement of the U.S. Treasury Department will not stop the demise - just make the demise more orderly.
The lone victor on the investment firm front seems to be Goldman Sachs. For I think the eighth time Goldman Sachs, this time through a presentation by the CEO at a conference, reiterated that Goldman had no serious write downs due to subprime. The eighth time must have been the charm because just after this pronouncement the stock shot up continued rallying into the close.
The tape will continue to be choppy the rest of this week. After options expiration I am can see some further retrenchment, but overall I am optimistic about going into a relatively strong year-end run. Good luck tomorrow.
Disclosure: at the time of this posting the author was long GOOG, RIMM, AAPL, CSCO, BIDU, EMC, TSO, VLO, SPY, and GS and short USO.
Democrat's Political Advantage on Iraq War Slipping Away
This is a great analysis of the political maneuvering of both parties regarding the Iraq War, including some interesting polling data.
http://www.politico.com/news/stories/1107/6845.html
http://www.politico.com/news/stories/1107/6845.html
Monday, November 12, 2007
Agenda-Driven Sensation Trumps Heroic Bravery
Michael Murphy recently became only the third solider in the Middle East conflicts to be awarded the Medal of Honor. He is the first Navy Seal to be awarded the Medal of Honor, our nation's highest honor for military combat service, since the Vietnam War. Michael Murphy was killed in Afghanistan in a two hour firefight with the Taliban. Although mortally wounded he bravely continued to fight and saved his team against frightful odds.
The Abu Grab story was on the front page of the New York Times approximately 60 times, including 30 days in a row. You would have thought this was the most important story of our time. It was an unfortunate incident. But you would have thought is was as important as the National Enquirer's loyal paparazzi pursuing Brittany Spears to her next train wreck. The front page for 30 days in a row? This is a prime example of agenda-based "journalism".
Michael Murphy's Medal of Honor award was pushed all the way back into the "Metro" section of the New York Times. He was a local kid from New Jersey.
It just makes you wonder.
The Abu Grab story was on the front page of the New York Times approximately 60 times, including 30 days in a row. You would have thought this was the most important story of our time. It was an unfortunate incident. But you would have thought is was as important as the National Enquirer's loyal paparazzi pursuing Brittany Spears to her next train wreck. The front page for 30 days in a row? This is a prime example of agenda-based "journalism".
Michael Murphy's Medal of Honor award was pushed all the way back into the "Metro" section of the New York Times. He was a local kid from New Jersey.
It just makes you wonder.
Are Energy Companies the Bad Guys?
Perhaps no other industry draws more consistent criticism from the liberal Democrats than "Big Energy". There is a constant subtle and not at all subtle accusation that the big energy companies manipulate oil and gasoline prices. That they are cheating the government by not paying royalties based on a "technicality". That they are making "windfall" profits that border on unethical. That they are reaping billions in tax loopholes.
The possible manipulation of oil and gas prices by big American oil companies has been investigated over and over again by Congress. This must be the most investigated topic in American history after the Kennedy assassination. There has never been a single finding of any manipulation.
Here is the Democrat's dirty little secret when it comes to this type of liberal populism: the big public oil companies like Exxon Mobile and Chevron only control about 10% of the world's known oil reserves. The other 90% is controlled by sovereign foreign governments. Russia has all but nationalized Gasprom and Lukoil. The vast oil reserves of the Middle East are all under government control. The list goes on: PetroChina (China), PetroBas (Brazil), Venezuela and Hugo Chavez's recent nationalization of the country's oil industry. It is not possible that companies controlling only 10% of the world's known reserves can set prices.
Harry Reid and Nancy Pelosi have all but accused the oil companies of stealing from the American taxpayers due to the way contracts were negotiated with the oil companies for leases during the Clinton administration. The issue is that they believe the oil companies are not paying enough royalties due to the way the lease was negotiated. The Democrats have stated that they need to pass legislation that will fix this mistake.
The government negotiated a drilling lease. This is a legal contract. Now the government is saying that they can simply pass legislation that will change the contract. This is chilling. The Democrat's position is that they don't like the deal so they are just going to unilaterally modify a binding legal contract to make it more favorable to the government. When a government with a sweep of its pen can ignore a legal contract to seize more money, without any legal due process, then our country just became less free.
Regarding the well publicized "windfall" profits. Yes, the profits in absolute terms have been quite large because these are some of the largest companies in the world. But the profit margin for Exxon Mobile is a little over 11%. This is more than grocery stores but far less than many, many industries. Apple's profit margin is a little over 14%. Should we pass windfall profit legislation to confiscate these profits from Apple?
The truth is that the oil industry is hugely capital intensive. Any retained earnings (earnings that are not paid out in dividends) net of share buybacks has been completely reinvested into exploration and maximizing production from older fields (this is what we want, right?). Even with this Exxon has not been able to replace its reserves at the same rate they are being depleted.
The so-called loophole that provided a tax benefit to the big oil companies was actually a measure passed by Congress to encourage difficult and increasingly expensive domestic exploration and production (all the easy oil has been found). In other words, it was a tax credit that made it economically viable for this difficult domestic exploration. Now that this has been repealed, the oil companies will have no choice but to pursue less expensive finds in foreign countries. This just increases the percentage of oil we have to import from other countries.
As usual the facts are not on the Democrat's side.
The possible manipulation of oil and gas prices by big American oil companies has been investigated over and over again by Congress. This must be the most investigated topic in American history after the Kennedy assassination. There has never been a single finding of any manipulation.
Here is the Democrat's dirty little secret when it comes to this type of liberal populism: the big public oil companies like Exxon Mobile and Chevron only control about 10% of the world's known oil reserves. The other 90% is controlled by sovereign foreign governments. Russia has all but nationalized Gasprom and Lukoil. The vast oil reserves of the Middle East are all under government control. The list goes on: PetroChina (China), PetroBas (Brazil), Venezuela and Hugo Chavez's recent nationalization of the country's oil industry. It is not possible that companies controlling only 10% of the world's known reserves can set prices.
Harry Reid and Nancy Pelosi have all but accused the oil companies of stealing from the American taxpayers due to the way contracts were negotiated with the oil companies for leases during the Clinton administration. The issue is that they believe the oil companies are not paying enough royalties due to the way the lease was negotiated. The Democrats have stated that they need to pass legislation that will fix this mistake.
The government negotiated a drilling lease. This is a legal contract. Now the government is saying that they can simply pass legislation that will change the contract. This is chilling. The Democrat's position is that they don't like the deal so they are just going to unilaterally modify a binding legal contract to make it more favorable to the government. When a government with a sweep of its pen can ignore a legal contract to seize more money, without any legal due process, then our country just became less free.
Regarding the well publicized "windfall" profits. Yes, the profits in absolute terms have been quite large because these are some of the largest companies in the world. But the profit margin for Exxon Mobile is a little over 11%. This is more than grocery stores but far less than many, many industries. Apple's profit margin is a little over 14%. Should we pass windfall profit legislation to confiscate these profits from Apple?
The truth is that the oil industry is hugely capital intensive. Any retained earnings (earnings that are not paid out in dividends) net of share buybacks has been completely reinvested into exploration and maximizing production from older fields (this is what we want, right?). Even with this Exxon has not been able to replace its reserves at the same rate they are being depleted.
The so-called loophole that provided a tax benefit to the big oil companies was actually a measure passed by Congress to encourage difficult and increasingly expensive domestic exploration and production (all the easy oil has been found). In other words, it was a tax credit that made it economically viable for this difficult domestic exploration. Now that this has been repealed, the oil companies will have no choice but to pursue less expensive finds in foreign countries. This just increases the percentage of oil we have to import from other countries.
As usual the facts are not on the Democrat's side.
A Realistic Energy Plan for America
Liberals and their Democratic Party have a fatal flaw. They can't make the tough decisions. They can't make the "least bad choice". Being able to make the least bad choice is one of the most important attributes of leadership. There is no greater example of this than America's energy policy.
Our country has not had a real energy policy for decades. We continue to import a greater and greater percentage of the oil we use. Gas prices are at all time highs. We are even beginning to import natural gas, a resource that we have historically been self-sufficient in. We now import about 60 percent of our oil, and it increases every year. The Democrats huff and puff about but do nothing.
In the 2004 Congressional campaign Nancy Pelosi boldly claimed that she had a plan to have the U.S. energy independent within 10 years. The central tenet of her plan was a "Manhattan Project" to discover new types of alternative fuels combined with higher MPG fleet standards and other miscellaneous conservation measures. Of course like most of what Nancy said nothing has come of it. In the absence of any party leadership the Democrat's collective position seems to essentially be to subsidize and promote corn-based ethanol, raise the MPG fleet requirement, and promote conservation.
We absolutely need to promote and reward conservation. But corn-based ethanol is a flawed solution. It takes more energy to create a galleon of ethanol than we get out of it. The diversion of farm production to corn to support ethanol production is reducing farm production of other agricultural commodities such as wheat and cotton. It is a boondoggle of epic proportions.
The result has been rising food prices as there is less corn and wheat for food. Wheat recently reached $7 a bushel! Corn prices have have raised the cost of everything from breakfast cereal to tortillas. Beef is typically "finished" with corn to achieve the best quality. Corn has driven beef prices up as well. So we are subsidizing an energy product that takes more energy to create that it provides while raising everyone's food costs. If you think this makes sense then please post your reasoning.
Hydrogen fuel cell technology continues to be a very difficult problem to solve. Plus, free hydrogen is not an easy to obtain element on an industrial scale. But hopefully this will prove a good solution someday.
All of non-ethanol alternative energy technologies such as wind power, solar and geothermal can only provide a limited amount of our energy needs. But we should fully and aggressively deploy all of these technologies to the extent they are economically viable. But for the foreseeable future they can supplement, but not provide all of our energy needs.
Our country has not had a real energy policy for decades. We continue to import a greater and greater percentage of the oil we use. Gas prices are at all time highs. We are even beginning to import natural gas, a resource that we have historically been self-sufficient in. We now import about 60 percent of our oil, and it increases every year. The Democrats huff and puff about but do nothing.
In the 2004 Congressional campaign Nancy Pelosi boldly claimed that she had a plan to have the U.S. energy independent within 10 years. The central tenet of her plan was a "Manhattan Project" to discover new types of alternative fuels combined with higher MPG fleet standards and other miscellaneous conservation measures. Of course like most of what Nancy said nothing has come of it. In the absence of any party leadership the Democrat's collective position seems to essentially be to subsidize and promote corn-based ethanol, raise the MPG fleet requirement, and promote conservation.
We absolutely need to promote and reward conservation. But corn-based ethanol is a flawed solution. It takes more energy to create a galleon of ethanol than we get out of it. The diversion of farm production to corn to support ethanol production is reducing farm production of other agricultural commodities such as wheat and cotton. It is a boondoggle of epic proportions.
The result has been rising food prices as there is less corn and wheat for food. Wheat recently reached $7 a bushel! Corn prices have have raised the cost of everything from breakfast cereal to tortillas. Beef is typically "finished" with corn to achieve the best quality. Corn has driven beef prices up as well. So we are subsidizing an energy product that takes more energy to create that it provides while raising everyone's food costs. If you think this makes sense then please post your reasoning.
Hydrogen fuel cell technology continues to be a very difficult problem to solve. Plus, free hydrogen is not an easy to obtain element on an industrial scale. But hopefully this will prove a good solution someday.
All of non-ethanol alternative energy technologies such as wind power, solar and geothermal can only provide a limited amount of our energy needs. But we should fully and aggressively deploy all of these technologies to the extent they are economically viable. But for the foreseeable future they can supplement, but not provide all of our energy needs.
So we will continue to need additional sources of energy for some time. The liberal mantra is no drilling in the U.S., no drilling on the continental shelf, no drilling in ANWR, no new coal, no new nuclear, more regulation for the automotive industry and no new refineries. This means the U.S. is left with no choice but to import increasingly larger amounts of oil from countries that are not our friends. It means that we are hostage to a refining capacity with zero margin for error. It is an economic issue; it is a national security issue. We are transfering vast wealth to other countries because of these liberal lines in the sand.
The GOP has repeatedly attempted to implement a balanced and responsible energy policy that is realistic. The best thinking of the GOP along with my additional ideas includes this balanced approach:
- Expand our nuclear industry. Nuclear power generates zero greenhouse gases. Opponents believe that the radioactive byproduct of these plants is unacceptable. But in the balance, nuclear power is far and away the cleanist way to generate electricity. By opposing nuclear power, liberals simply cause us to burn more coal.
- Drill for oil on the continental shelf. This drilling is targeted for 150 to 200 miles off-shore. New drilling technology is now available making off-shore areas accessible that were beyond our reach even a few years ago. Concerns have been raised about ruining the aesthetics of our coastline. But at 150 miles offshore, this drilling activity will be far beyond the the 12 miles that can be seen on a clear day.
- Drill for oil in the Arctic National Wildlife Refuge. The actual area needed to exploit this vast reserve is quite small vis a vis the total size of the refuge. No people will ever go there otherwise.
- Expand the use of coal using clean technologies. We are the Saudi Arabia of coal. The Powder Basin reserve in Wyoming contains vast fields of easily mined, low sulfur coal. If we want energy independence clean, or at least cleaner, coal has to be part of the solution.
- Add additional refining capacity. This alone will keep gas prices lower. There has not been a new refinery built in the U.S. in 35 years.
- Reduce the number of special gas formulations required during the summer. There are something like 40 different formulations required in various markets, each one tailored to the specific area. The large numbers of different formulations shortens refinery runs and reduces refining throughput. Using some common sense and reducing the number of formulations to, say 10, that would achieve 80 percent of the benefit would help immensely.
- Promote conservation.
- Promote alternative energy that makes economic and common sense. Aggressively deploy new, less expensive solar technologies. Take greater advantage of our country's wind resources.
- Encourage free market solutions to better gas mileage. With $90 oil and $3.50 gas there will be a lot of enterprising efforts to achieve this. The recent surge in hybrid vehicles is a great example of the free market achieving dramatically higher gas mileage.
Each of these has its critics. There is no single or perfect answer. But the liberal position of just ignoring the problem while it gets worse is no solution. Do we really want the leaders of our government to not be able to deal with reality - to not make the "least bad choice"?
The GOP continues to provide this leadership. If the Democrats can't lead, then at least they should allow someone else to develop realistic and balanced policies.
Sunday, November 11, 2007
Stock Market Q&A
Several colleagues of mine recently asked for my thoughts on several sectors along with a number of option positions. Here are my responses.
I have a great paper profit regarding Rio Tinto's (RTP) spike up due to a takeover offer from BHP. What should my next move be? – I am never comfortable with trying to arbitrage takeover bids. If it was me I’d probably sell all the calls. Trying to time the absolute top is usually a fool’s errand. If you want to be a more aggressive, sell half of the calls. Then you are playing with the house’s money on the chance of a higher bid. For another aggressive play, sell all the calls you have and buy new calls at a higher strike price (option strategy called a “rollup”). That way you protect much of the gain you’ve made and the most you can lose is the cost of the new options with the higher strike. I am currently long FCX.
Is the Dow oversold after last week's downturn? - I agree that the DOW is oversold, but the technicals continue to break down. The faster transparency is achieve regarding write-offs and any other exposure from the credit mess the faster the market will rebound.
Is the Nasdaq oversold after last week's tech plunge? - The Nasdaq sold off hard last week but it is still up more than 15% YTD. That is a good return for any year. All of the high growth big cap techs have run up huge the last couple of months. It is certainly not a surprise to see profit taking and retrenchment. Think of it this way. Google lost $77 a share last week. But it could drop another $50 and still be $121 higher than the August lows. I am optimistic for a strong tech run into year end. I continue to be long GOOG, APPL, CSCO, EMC and RIMM.
Is the correction in the XLF (financial services sector ETF) at a bottom? - It is too early to get into the XLF. There are just too many other things that can make money without getting into the middle of this mess. Just because the financials are done reporting next week doesn’t mean the bad news is all out. These guys still have no idea what they own and what it will ultimately be valued. I do continue to be long GS.
Will the commodities exchanges (CME, NMX, ICE) continue their strong bullish move? - This highly volatile market with strong upward pressure on oil and commodities in general is just printing money for the exchanges. I continue to love this sector. I am long ICE.
Is Newmont Mining still bullish? I haven’t done any work on Newmont so I can’t comment. I do like the sector and continue to be long FCX. The buzz in the sector is one of continued consolidation.
Should I continue to be long Foster Wheeler (FWLR) call options? – I haven’t done any work on Foster Wheeler but continue to believe that we are in a long term bull market in infrastructure. This industry has historically traded at a discount due to its boom and bust nature. I believe that the best of the engineering and construction firms are undervalued despite a huge move up. Backlogs continue to grow every quarter. Wall Street has not fully revalued these firms for a secular bull market verses a boom and bust market. I am long JEC and SGR.
What is your opinion about continuing to hold long Freeport McMoran (FCX) call options? - I continue to believe in the FCX story. I own both the common and some calls. They are achieving tremendous efficiencies from the merger and have already made better than expected progress in reducing the debt load from the merger. The CEO is saying that they will be able to shift from debt reduction to returning money to the shareholders as early as next year.
Are Transocean (RIG) long calls still a good bet? - I have owned RIG in the past and wish I had held onto it. So long as oil stays above, say $60 a barrel, the deepwater exploration companies are going to be in great demand. I like RIG. My one note of caution is regarding your options position. When the merger with SantaFe is finalized, which is soon, there will be a $33 cash dividend paid out to the shareholders. Usually when there is a big cash dividend like this the shares will drop by a corresponding amount afterword. That is not a problem if you are long the common stock because it is a wash. But with calls, you risk the share price dropping without receiving the dividend. I haven’t researched your particular situation, but I strongly advise that you do and make the appropriate move before the merger is finalized. I am long DVN.
Should I continue to be bullish on DRYS long calls? – I haven’t done the work on DRYS but am long QMAR. I like like the sector. It has taken a hit recently but so long as China is having to bring in coal, ore, etc. this sector should do well for the time being. Just be careful to watch as new ships are built. I’m sure at some point this sector will be overbuilt and will move lower.
Should I continue to be long January '08 Slumberger calls (SLB)? – I don’t have any oil servicers right now, but I probably should. Similar to my comments on RIG, so long as oil stays above $60 then the oil servicers will make a ton of money. The stocks should continue to perform well. Halliburton is a better "value" than SLB in my opinion.
What about long Research in Motion (RIMM) calls? - RIMM is a monster. But it got slaughtered with all the big tech last week. However, on a bullish note, late last week one analyst (UBS maybe?) raised his 12 month price target to $180. I think RIMM is going to continue to do great. They have so much upside in their rapidly expanding international operations it should be a long term winner. I am long RIMM.
I have a great paper profit regarding Rio Tinto's (RTP) spike up due to a takeover offer from BHP. What should my next move be? – I am never comfortable with trying to arbitrage takeover bids. If it was me I’d probably sell all the calls. Trying to time the absolute top is usually a fool’s errand. If you want to be a more aggressive, sell half of the calls. Then you are playing with the house’s money on the chance of a higher bid. For another aggressive play, sell all the calls you have and buy new calls at a higher strike price (option strategy called a “rollup”). That way you protect much of the gain you’ve made and the most you can lose is the cost of the new options with the higher strike. I am currently long FCX.
Is the Dow oversold after last week's downturn? - I agree that the DOW is oversold, but the technicals continue to break down. The faster transparency is achieve regarding write-offs and any other exposure from the credit mess the faster the market will rebound.
Is the Nasdaq oversold after last week's tech plunge? - The Nasdaq sold off hard last week but it is still up more than 15% YTD. That is a good return for any year. All of the high growth big cap techs have run up huge the last couple of months. It is certainly not a surprise to see profit taking and retrenchment. Think of it this way. Google lost $77 a share last week. But it could drop another $50 and still be $121 higher than the August lows. I am optimistic for a strong tech run into year end. I continue to be long GOOG, APPL, CSCO, EMC and RIMM.
Is the correction in the XLF (financial services sector ETF) at a bottom? - It is too early to get into the XLF. There are just too many other things that can make money without getting into the middle of this mess. Just because the financials are done reporting next week doesn’t mean the bad news is all out. These guys still have no idea what they own and what it will ultimately be valued. I do continue to be long GS.
Will the commodities exchanges (CME, NMX, ICE) continue their strong bullish move? - This highly volatile market with strong upward pressure on oil and commodities in general is just printing money for the exchanges. I continue to love this sector. I am long ICE.
Is Newmont Mining still bullish? I haven’t done any work on Newmont so I can’t comment. I do like the sector and continue to be long FCX. The buzz in the sector is one of continued consolidation.
Should I continue to be long Foster Wheeler (FWLR) call options? – I haven’t done any work on Foster Wheeler but continue to believe that we are in a long term bull market in infrastructure. This industry has historically traded at a discount due to its boom and bust nature. I believe that the best of the engineering and construction firms are undervalued despite a huge move up. Backlogs continue to grow every quarter. Wall Street has not fully revalued these firms for a secular bull market verses a boom and bust market. I am long JEC and SGR.
What is your opinion about continuing to hold long Freeport McMoran (FCX) call options? - I continue to believe in the FCX story. I own both the common and some calls. They are achieving tremendous efficiencies from the merger and have already made better than expected progress in reducing the debt load from the merger. The CEO is saying that they will be able to shift from debt reduction to returning money to the shareholders as early as next year.
Are Transocean (RIG) long calls still a good bet? - I have owned RIG in the past and wish I had held onto it. So long as oil stays above, say $60 a barrel, the deepwater exploration companies are going to be in great demand. I like RIG. My one note of caution is regarding your options position. When the merger with SantaFe is finalized, which is soon, there will be a $33 cash dividend paid out to the shareholders. Usually when there is a big cash dividend like this the shares will drop by a corresponding amount afterword. That is not a problem if you are long the common stock because it is a wash. But with calls, you risk the share price dropping without receiving the dividend. I haven’t researched your particular situation, but I strongly advise that you do and make the appropriate move before the merger is finalized. I am long DVN.
Should I continue to be bullish on DRYS long calls? – I haven’t done the work on DRYS but am long QMAR. I like like the sector. It has taken a hit recently but so long as China is having to bring in coal, ore, etc. this sector should do well for the time being. Just be careful to watch as new ships are built. I’m sure at some point this sector will be overbuilt and will move lower.
Should I continue to be long January '08 Slumberger calls (SLB)? – I don’t have any oil servicers right now, but I probably should. Similar to my comments on RIG, so long as oil stays above $60 then the oil servicers will make a ton of money. The stocks should continue to perform well. Halliburton is a better "value" than SLB in my opinion.
What about long Research in Motion (RIMM) calls? - RIMM is a monster. But it got slaughtered with all the big tech last week. However, on a bullish note, late last week one analyst (UBS maybe?) raised his 12 month price target to $180. I think RIMM is going to continue to do great. They have so much upside in their rapidly expanding international operations it should be a long term winner. I am long RIMM.
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