The Indian Space research organization terminated its Chandrayaan mission yesterday after losing contact with the unmanned vehicle, a setback for the agency which had hoped would get more than double the orbit time from the craft. The Indian space program is symbolic of the nation’s aspirations and, although the mission was not a failure having logged almost 315 days, it was a disappointment to the public.
Here on earth, GDP data released yesterday showed that the Indian economy experienced renewed vigor in the second quarter, expanding by 6.13% year-over-year; the first sequential increase since 2007.
The stimulus programs enacted earlier this year have had a pronounced impact, with increased government expenditures as a major driver (see chart below). Like the Chandrayaan, this figure was both a success and a disappointment for the administration. It came in lower than consensus had anticipated and as reports surface that the official five year economic growth estimates will be lowered to 7.8% (from 9%), the reality of stagnation in some core industries is sinking in.
The glass half full case here is fairly straightforward: Although central government debt has risen significantly to finance stimulus programs, overall debt levels remain at a manageable level of GDP and are primarily domestically funded (see chart below). Additionally, the still low rate environment and negative wholesale inflation levels have created a degree of demand resilience in pockets of the consumer and light industrial sectors.
The glass half empty case is equally easy to digest: Although official trade data for July will be released tomorrow, recent corporate filing data suggests that much of the emerging demand from neighboring China has passed India by (external trade currently accounts for less than a third of GDP by most estimates). With drought conditions declared in 278 districts, the disappointing monsoon rains have left bleak prospects for the harvest that half the nation’s population depends on for their meager livelihood. Although wholesale inflation remains negative, CPI measures have remained worryingly high and Ministry of Finance officials have openly discussed fears of inflationary pressure later in the year.
I have held a negative bias against the Indian Equity market since we started early last year due to overlapping macroeconomic, tactical and fundamental factors and I have not always been right (recall that we were gored by India bulls in the aftermath of the NCP’s national election victory). Although this latest data is definitely encouraging, I still find myself grappling with fundamental doubts that the economy’s trajectory will be sustainable without a more rapidly developing mass-consumer class or more competitive export industries.
We currently have no position in India, long or short.
Director w Barber
Keith and I were going over our First Look in our 8:30 meeting today – as always. The setup here is vital, in that any which way we slice it, we need to bank on an economic recovery in 2010 in order to get the group to work meaningfully from here as we’ve seen a 39% step-up in earnings growth expectations, and we’re trading at peaky 16x multiples on those numbers. Tough to make a long call here without a major earnings outlier or take-out.
But this one is all about duration, or ‘Duration Mismatch’– which is the crux of Keith’s Early Look today. I did not include the chart below in my initial comments, but probably should have. It takes the NTM consensus EPS growth rate and implied multiple back to the turn of the decade (I previously honed in on the past 2 years). What it shows is that coming out of the recession, we saw 100% earnings growth, and had 23x earnings multiples on top of that. I could write a dissertation as to why this time is different because of the dissimilar factors impacting the Consumer, the Economy, and the structural margin changes this industry has gone through.
But the reality is that as long as a chart like this exists, certain people will think it can happen again. Picking the top will be like preparing Fugu – that blowfish sushi that has enough neurotoxin to kill 30 people if prepared wrong.
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I saw a sale event on GILT for Adidas’ Porsche Design merchandise hit my inbox, so of course I initially took it as an opportunity to bash a perennially unprofitable business. But I pinged my colleague and Retail expert Eric Levine for his 2-cents, and wanted to share his unedited response.
McGough: Bad for ADI – again?
Levine: I don’t think so. The market fluffed-off LULU a month or so ago when they had a similar event. This site is probably the best example of a tasteful clearance channel the industry has seen. The reason why it works so well is 1) it’s a limited time event and 2) they merchandise it like the product is being sold at full price. I actually think the brands like it. From a volume standpoint, it’s not big enough for people to get worried. This is not like topsiders showing up at Costco by the pallet-load.
Ben Bernanke and the Half-Baked Fed – Expecto Disaster
Duh! – Goldman’s First Call Clients Do Better
Freedom Of Dis-Information – Will No One Rid Me Of This Meddlesome Newsmedia?
Humans do have a knack of choosing precisely those things that are worst for them.
- Albus Dumbledore, “Harry Potter and the Sorcerer’s Stone”
The case for a single Systemic Risk Regulator was made recently, and eloquently, (Financial Times, 25 August, “Why The Fed Should Be Given More Powers”) by Roger Altman, who has acted at a high level in both the public and private sectors. He is well positioned to see the reasonableness of putting the Fed in charge of systemic risk, and to see the fallacies – wastefulness, political deviousness and outright impossibility not least among them – of alternative proposals.
But Altman winds up his well-reasoned argument in favor of systemic oversight by segueing into an “assumed close” that would make even a stockbroker think twice.
Having rightly argued that the Fed already oversees really big banks, and so could easily add some really, really big banks, some totally large banks, and even some awesomely humongous banks to its docket without learning a new skill set – having accurately pointed out the fecklessness of “today’s crazy-quilt and discredited regulatory system” – having noted in passing numerous institutions such as AIG, Bear Stearns and Long Term Capital Management which, though not tied to the government, were nevertheless bailed out by the Fed – and having nailed the “proposed council of regulators” as a scam designed to permit a small set of bureaucrats with warring political agendas to keep close tabs on each other’s activities – in short, having made plenty of sense in the wind-up, Altman’s pitch is so wild it seems intended to slay the umpire.
“It is true that the Fed did not execute its regulatory duties satisfactorily during the immediate pre-crisis period. But we had the financial equivalent of a perfect storm, and none of the world’s leading regulators saw it coming.”
“… did not execute its regulatory duties satisfactorily…”? Translation: don’t blame the Fed for not knowing what they were doing – they were only the world’s most important central bankers. Look at your own self-directed IRA and tell me if you could have done any better.
“Moreover,” continues Altman, for readers weaned on Shakespearean irony, “the Fed appears to have learnt its lesson.”
We are not quite sure what lesson that was, but we think it may have something to do with parroting every step of Secretary Paulson, keeping our @#$%&*! Mouth shut when Secretary Geithner is in the room, and patiently explaining to Congress, as though they were a roomful of idiot children (perhaps apt, at that…) that we acted on advice of counsel, and counsel told us what we were doing was not illegal – you got a problem with that?
Then – for those of us who find the comedy of Andrew Dice Clay perplexing in its subtlety – Altman drives home the point of this exercise: “Finally, Mr. Bernanke has led the Fed with skill.”
If you are sensitive to the manipulation of language, you will note the jarring switch in Mr. Altman’s presentation. After spending several paragraphs discussing the Fed as an institution, Mr. Altman introduces his endorsement of Bernanke with the word “Finally” – effectively tying Mr. Bernanke’s personal qualifications to the structure and history of an institution. This non-sequitur is precisely – or perhaps we should say, rhetorically imprecisely – the kind of muddled thinking that is being shopped to the public as the major media chime in to help Washington and Wall Street promote their own self-interested narratives. It makes sense to us that the Fed is uniquely situated to take on additional oversight authority – perhaps even significant additional authority.
It does not follow that the current Chairman is the right man for the job.
Contrary to what you were taught in your high school Civics class, those in power rely not on the consent of the governed, but on their ignorance.
Journalist Chris Hedges, in his new book Empire of Illusion, quotes the following statistics gleaned from various nationwide adult literacy organizations, the US Census Bureau, and special reporting by ABC news:
“There are 7 million illiterate Americans. Another 27 million are unable to read well enough to complete a job application, and 30 million can’t read a simple sentence. There are some 50 million who read at a fourth- or fifth-grade level. Nearly a third of the nation’s population is illiterate of barely literate…”
If that doesn’t scare you enough, you may want to read Susan Straight’s essay in the New York Times Book Review (30 August, “Reading By The Numbers”) about Accelerated Reader, “a ‘reading management’ software system that helps teachers track student reading through computerized comprehension tests and awards students points for books they read based on length and difficulty, as measured by a scientifically researched readability rating.”
According to Ms. Straight, the Accelerated Reader program is currently in use in over 75,000 schools, and students compete for points by doing extracurricular reading. In many schools, students with the highest number of points receive prizes. The largest number of points available in the Accelerated Reader system is 44 points for Harry Potter and the Order of the Phoenix. To Kill a Mockingbird is worth only 15 points – “Hamlet”, a mere seven.
If you want to know why there is such an unbridgeable chasm between the Haves and the Have-Nots in this country, you need only look at our educational system. This system has now bred a giant new intellectual middle class – a bourgeoisie of the mind. Can it actually be that we have an educational system in this country that not only rewards children for reading Harry Potter, but penalizes them for reading Shakespeare?
These folks – the ones who read at fifth-grade level and better – are the ones who turn up at town hall meetings, the ones who run our factories and drive our buses and trains, who manufacture and maintain and repair our heavy machinery, who teach our children sixth-grade science. And who vote.
To the Haves and the Have-Nots, we have now added the Think-They-Haves, an intellectual Great Unwashed who believe they understand the world. And while the Haves are busy manipulating the dialogue – and the Have-Nots are cursing and stewing, but largely not voting (so that’s all right, you see) – the Think-They-Haves closely follow everything from Screeching Heads on alleged news television networks, to news media couching obvious political messages in language that no longer maintains even the fiction of impartiality, to editorial pages spewing unsubstantiable venom, to the vapid self justification that passes for political debate – right down to the gorgeous lapidary orations of our President who speaks softly, but has yet to brandish a stick of any consequence.
Eloquent arguments like Mr. Altman’s are key to keeping a lid on dissatisfaction and dissent. Any fiction writer knows the way to draw a reader into a tale is to make the setting and details as realistic as possible. The reader is drawn in, because it is an emotional process, not an intellectual one.
Mr. Altman argues for the Federal Reserve as an institution, the importance of its flexibility at key points in our financial history, and the sheer massiveness of its existing structure – all cogent arguments for a well-tailored expansion of its oversight powers.
But Mr. Bernanke’s personal qualifications to serve as Fed Chairman are not “further” to the historical argument. Chairman Greenspan, whatever his shortcomings may have been, spent over thirty years advising industry, analyzing the details of markets and the global marketplace to come up with business recommendations that made economic sense. By all accounts, he was pretty good at that. After all, it got him to Washington.
Chairman Bernanke has spent his life in academia. Critics worry his finger will not be firm or quick enough on the trigger when it comes time to do the dirty work of tightening. So far, like a rookie stockbroker, he has learned his job on the job, making mistakes with other people’s money.
We are not comforted, because the job of a Fed Chairman is to prevent disaster. Remaining calm in a crisis is hardly an endorsement when the crisis is of one’s own making.
The Wall Street Journal reports (26 August, “Calm In Crisis Won Fed Job”) “Wall Street economists enthusiastically endorsed” President Obama’s re-appointment of Bernanke. Economists polled are overwhelmingly in favor of Mr. Bernanke repeating as Fed Chairman. This crowd – who famously have predicted eight out of the last three depressions – are now being presented to the Think-They-Have readership to affirm Bernanke’s qualifications for the job. People who make a living by consistently getting it wrong for the people who manage your money are falling over one another to endorse the Get-It-Wronger In Chief.
If you are confused by all this, it’s OK. Clearly, you wanted to understand how power works, and you read Harry Potter instead of Shakespeare’s Henry IV plays. You won on points. Congratulations. You probably think Mr. Bernanke is a pretty amazing guy.
If winning isn’t everything, then why do they keep score?
- Vince Lombardi
“Goldman’s Trading Tips Reward Its Biggest Clients”, shrieks the headline on page one of the Wall Street Journal (24 August). This is a revelation on the order of – “Two plus two equals four? Why wasn’t I informed of this?!”
A follow-up story reports (WSJ, 27 August, “Goldman Subpoenaed On Huddles”) that William Galvin, Massachusetts’s chief financial regulator, has subpoenaed Goldman’s records on the weekly trading huddles. “Internal documents reviewed by the Journal show that at times, these short-term trading tips differed from Goldman’s long-term research.”
All indications are that Goldman has compliance procedures in place to ensure that a) the short-term ideas given in these huddles do not conflict with their own published research, and b) the firm’s proprietary traders do not trade on these huddle ideas before the firm’s customers. Lawyers and compliance officers will note that trading ideas can “differ from” published research (see WSJ quote above) without “conflicting” with it. If you don’t like the way that hair splits, write to Congress. Really.
Morgan Stanley publishes short-term ideas on a website, making them available to everyone, and making them transparent for those who wish to compare them with Morgan’s published long-term research. But Goldman appears to be doing nothing more than following the tried-and-true Wall Street practice of giving favored clients a First Call, and we wonder why this is an issue.
First Call is what folks pay for. It is the very definition of scarcity value. Any salesman will tell you their biggest accounts get their first call. That is how they keep them as their biggest accounts. And Goldman’s practice, according to the news reports, appears to be the gold standard in the world of Wall Street research.
First calls are, by definition, immediate action items, and there is no inherent conflict with longer duration research. Short term moves come from many factors which have no connection to company fundamentals. Indeed, since short-term moves are often tied to market forces, political or economic events, or cyclical events such as options expiration, the “huddle calls” typically require a very different risk profile than that associated with the written long-term report. There are legitimately many investors for whom current brokerage standards would deem these huddle calls to be unsuitable investment advice.
Wall Street has always relied on long-term oriented research reports to feed the brokerage model. A research report spells out events which will take time to unfold – typically at least two quarters – giving brokers time to build positions in the stock. Successful retail stockbrokers typically build positions of over 100,000 shares of a stock, and their book will hold five or more such positions. A steady flow of research reports means the brokers roll those positions every two to three months, as the time frame of the reports fall due.
Note that this process does not rely on the research report being accurate. If it works, great. If not – let’s sell this piece of junk that isn’t working, and use the proceeds to buy a new position. Either way, the broker has a document to support selling one stock, and buying another one, generating a double payday. If it’s in print, it must be true.
By attacking the practice of the “huddle”, regulators are questioning the fundamental structure of the Wall Street business model. A new definition of accessibility to information may be in the offing. Meanwhile, legislation and rule-making define what makes market information “available”, and they provide the functional exemption for trading calls to be decoupled from longer-term published research. It will take more than a state regulator going head to head with Goldman Sachs to change fundamental Wall Street practices.
Everyone comes first on Wall Street, Mr. Galvin. But some are more first than others.
Yo – What’s The 411?
The Freedom Of Information Act (FOIA) was signed into law by Lyndon Johnson in 1966. Its purpose is to provide disclosure of information controlled by the government, subject to certain defined restrictions and exemptions.
The latest FOIA filing in the news concerns Bloomberg LP v. Board of Governors of the Federal Reserve System, No. 08-CV-9595 (S.D.N.Y. Aug. 24, 2009). Chief US District Judge Loretta Preska has ruled that the Board of governors of the Federal Reserve System must turn over the names of the banks and other institutions that have borrowed from the Federal Reserve Discount Window.
How bad is that? The Fed is appealing, claiming these institutions will suffer irreparable harm if their identity is released. With so much money on the hook, we wonder at what point sunlight becomes the order of the day.
In a wrinkle designed to make this process unworkable, the Federal Reserve Board deems itself at arm’s length from the individual Fed banks, each of which is a separate corporation. Federal agencies – the Fed board is one – are required to respond to FOIA requests, based on specified procedures. The Federal Reserve Bank of New York (FRBNY) does not consider itself subject to the provisions of FOIA and therefore never implemented FOIA procedures.
FRBNY is the Fed Bank primarily responsible for the Fed’s open market trading – the one that is aggressively hiring Wall Street traders as they expand their brief, taking positions in instruments that never existed before, and using money that never existed before to do it.
In this scenario, the potential for confusion and human error – to say nothing of fraud – is ramping up. It will be increasingly difficult for the public to gain access to what FRBNY is doing, unless the FOIA can be made to stick.
For now, it seems institutions will be identified only when there is a problem that is too big to cover up. The FRBNY will go to Chairman Bernanke, Bernanke will go to Geithner, and Geithner will dump it in President Obama’s lap, making it effectively our problem.
First it was the Bush-Paulson process. Now it is the Obama-Geithner process. But all along it was, and looks set to remain, the Bernanke Fed. This Fed has written an open-ended IOU to the world, based on the evanescent Full Faith and Credit of the US government, issuing debt at a clip that may soon make us pine for the subprime mortgage market.
The Fed Board took the position that discount window borrowings constitute trade secrets of the firms involved, a defined FOIA exemption. Put in plain English: if we tell you which financial institutions come to us because they have liquidity problems, it would reveal that… well… they have liquidity problems.
Put in plainer English: if we tell you which firms are in trouble, then you’ll know.
The Obama Administration’s attempts to overhaul the financial system are thus far focused on depressingly low-hanging fruit, to the extent of appearing profoundly dishonest.
In the wake of BofA and Merrill-gate, the total mess made of the nation’s automotive industry, and what appears to be a long-term accounting shell game at GE, it takes neither imagination nor courage to propose empowering shareholders to restructure boards of directors.
FINRA and the SEC are not breaking new ground when they announce ETFs may not be suitable for all investors. FINRA and the SEC are themselves at fault for never requiring brokers to know anything about these products. Nor does the SEC score points when it draws the line at flash orders, which when used in markets such as Nasdaq actually violate the marketplace’s mandate for price discovery.
Chairman Bernanke, meanwhile, invokes “advice of counsel” in testifying before Congress about his involvement in the BofA takeover of Merrill. Government lawyers told us that what we were doing was all right, he told his interlocutors. Amazingly, it was left at that – no doubt because all members of the Congressional panel have their own lawyers.
Arthur Levitt has been on Bloomberg TV recently, where he spoke bluntly against the nonsensical regulatory debate about short selling; he explained clearly that high-frequency trading is part of how the market works – while flash orders on exchanges are not: the one should be encouraged, as it improves price discovery; the other should be prohibited, because it violates the exchanges’ mandate.
Love him or hate him, Levitt’s tenure as the bull in the SEC’s china shop contributed significantly to the strength of American market capitalism. Under his guidance – some would say “bullying” – as SEC Chairman, the markets were dragged kicking and screaming to an unprecedented level of transparency. Suddenly, Mom and Pop investor could come into the marketplace and feel safe. And they did. And so did the rest of the world.
President Obama – who won an election that could, itself, be characterized as low-hanging fruit – will not score points by advancing a timid program. Underlying the FOIA debate is a deeper truth: that, for every secret unmasked at the top, there are dozens more that remain hidden. There is a reason we call it “rooting out” corruption. The part we can see above ground is not the part we need to worry about.
Malicious In Tent
The night and its sky… its stars, its moon… its moon, and staying awake till the dawn…
- Oum Kalsoum, “’Alf Leyla wa-Leyla”(“One Thousand Nights and a Night”)
In a controversy worthy of Gilbert and Sullivan, the town of Englewood, NJ, has mounted a battle against both Arabs and Jews, focused on the nomadic lifestyle of the one, and the suburban sprawl of the other.
The town of Englewood was abuzz with the rumor that Libya’s Moammar Gadhafi planned to set up his presidential tent in their town during his forthcoming United Nations visit. This was the straw that broke the camel’s hump in another long-simmering source of local friction, the practice of a local synagogue erecting tents to accommodate visitors for bar mitzvahs (weather permitting, obviously – unlike Mr. Gadhafi’s nomadic forebears, the Jews of Englewood enjoy central heating during winter and do not have to make do with the privations of their own desert-dwelling ancestors.)
We can not blame Englewood for wanting to avoid the inevitable demonstrations outside Colonel Gadhafi’s tent, with the attendant overtime bill for law enforcement and clean-up. Also, for all we know, there’s a bar mitzvah scheduled for that week. A pox on both your tents!
The Wall Street Journal found this story too good to resist. They offered it on page one (27 August, “A Tents Standoff Pits A Town Against Gadhafi And A Synagogue”) – complete with an unflattering drawing of Col. Gadhafi looking like third runner-up in the Cheech Marin Look-Alike Contest (Over 60 Category). We thought Gadhafi’s choice might be tied to last month’s highly publicized New Jersey corruption busts – rabbis were featured in the photos, along with Christian politicians, but there was at least one Moslem in the group as well, demonstrating that New Jersey embraces religious tolerance at all levels.
This reminds us of the story of the man who sought psychiatric help because he couldn’t sleep.
“I keep having nightmares, Doc,” he said.
“Tell me about it.”
“Well, I fall asleep, and then I dram I’m a teepee.”
“It’s really scary, and I wake up in a sweat. Then, when I fall asleep again, I have the dream again, only this time I’m a wigwam.”
“Doc, I toss and turn all night, and all night I don’t know whether I’m a teepee or a wigwam.”
“No wonder you can’t sleep,” says the doctor sympathetically. “You’re two tents.”
Latest reports are that the Colonel has pulled up stakes and is considering other arrangements. We would be happy to invite him to camp in our back yard and will gladly serve tea in his tent.
His people can contact our people.
Chief Compliance Officer
According to the Rasmussen Daily Tracking poll, President Obama’s approval rating has hit literally the lowest approval rating of his Presidency. After bouncing back from -14 rating (the difference between strongly approve and strongly disapprove) on August 23rd, his rating is now back in negative double digit territory at -10.
While -10 is not as low as the reading on August 23rd, the internals of the poll have hit serious extremes. Total disapprove is now at 52%, while strongly disapprove is at 42%. Both of these are the worst readings of Obama’s Presidency and these internals suggest that ultimately the index will retest those lows.
In contrast, the Real Clear Politics polling aggregate still suggests that President Obama’s rating remains in positive territory. As of the most recent reading on this poll aggregate, Obama’s approval rating is 51.7, which is positive, but, once again, the worst rating of his Presidency. In addition, this poll aggregate is distorted by an outlier poll from the Washington Post and ABC News which suggested that Obama’s approval rating was 57. If we set aside this outlier, then Obama’s approval rating is even lower in the aggregate.
While we can debate whether President Obama has been effective or ineffective, to some extent that facts don’t lie so the debate is frivolous. Both the Rasmussen Daily Tracking Poll, which is reputed to be right leaning, and the broader poll aggregate from Real Clear Politics suggest that Obama has reached an all time low in approval. He entered the Presidency with sky high approval ratings and has since crashed down to earth, and in rather expedient fashion.
The primary culprit for this decline in approval appears to be the health care debate.
We have a friend that is a partisan Democrat and she outright blames the Republicans for hijacking the debate, and that point has some merit. The Republicans have not offered a real alternative to “Obamacare”, but have rather attacked the proposed legislation based on its potential extreme outcomes. In effect, Republicans have combated the legislation by fear mongering. While this Republican fear mongering has impacted Obama’s popularity and the popular view of healthcare reform, President Obama also shares the blame of the poor perception of heath care reform.
The Dean of Columbia Business School, R. Glenn Hubbard, articulated this point effectively in an op-ed in the New York Times this weekend. As part of the op-ed, he wrote the following:
In the case of health care reform, we also need two debates. The first is over how to reform insurance arrangements to reduce cost growth and provide better value for the money spent. The second should be about access to health care. To achieve these goals, the president could embrace a compromise of tax and regulatory reform for cost containment, and progressive intervention to offer assistance to low-income individuals. But President Obama, like his predecessor, has been unwilling to let go of his campaign goals even as his words fuel intense partisan debate and obstruct his ultimate objective of improving health care value.
Dean Hubbard was comparing his experience attempting to reform Social Security while working for then President Bush, with the current healthcare reform attempt.
Given the sky high costs associated with healthcare in America and the fact that many are uninsured, there is clearly a reform plan that works and will better serve Americans in the future. As with the Social Security debate, the ability for the President to articulate the debate on the correct terms is critical.
President Obama’s primary issue is that he may have actually picked the wrong fight.
While healthcare in the United States certainly has its issues, especially on the cost side, generally speaking voters are not all that dissatisfied with the care they receive. According to another recent Rasmussen poll:
“There’s also the reality that 74% of voters rate the quality of care they now receive as good or excellent. And 50% fear that if Congress passes health-care reform, it will lead to a decline in the quality of that care.”
Thus, according to this poll, American voters are not dissatisfied with their current care, but incredibly concerned that their care will decline if health-care is “reformed”. President Obama is taking his shot with healthcare, but it has had a major impact on his popularity, which will take a long time to recover and likely have a major impact on mid-term elections, and his ability to win future legislative battles.
Daryl G. Jones
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