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508 Comments

    • Tue Dec 2nd 12:15 PM
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      Rating: 0 0
      Commented on:
      Is the Fed Taking a Step Toward Explicit Quantitative Easing?
      Bernanke and company obviously have no idea how they're going to reduce the Fed's balance sheet when they finally decide the time has come to do so. Not only will it probably be too late by that time anyway, but the balance sheet will then likely be so huge that any timely reduction to a reasonable size would throw the markets into far greater turmoil than they are in today. There is a limit to how many long bonds the market can absorb at any one time, and we're talking here about hundreds of billions of dollars worth of bonds. At least. When the Fed belatedly realises that it's time to rein in their inflationary policies, it will probably have at most a few months to dump those bonds if it wants to prevent hyperinflation. Treasury normally auctions off around $10b in long bonds two to four times a year. We're talking about dumping at least twenty times that amount of bonds in the span of two quarters or less. Worse still, demand for these instruments will already be under siege as inflationary pressures build up.

      The Fed is talking about acting to reinforce a cyclical trend. That's very unusual behaviour for a central bank, and very dangerous. If the Fed wanted to help restore normal market conditions, it should be selling Treasuries, not buying them. Or do they think the 10-year at 2.6% is "normal"? If so, we need to check the air inside their buildings. They are continuing to make the fundamentally incorrect assumption that lower interest rates on Treasury debt spur investment. This is simply false. It is not even clear that it makes people stop buying Treasuries - just look at the last 6 months. All it does is inflate the Treasury bubble to even greater dimensions and ensure that its bursting will be all the more catastrophic.

      In short, it's hard to think of a worse plan. Dropping money from helicopters actually sounds refreshingly sane and effective after hearing this one.
      View article »
    • Mon Dec 1st 00:30 AM
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      Rating: 0 0
      Commented on:
      Bailouts: Unfair to Non-Bailees
      Andy,

      Sometimes, perhaps. Tomorrow might be a good time. But you're making a very fundamental error: a short position in anything that produces dollars is risky and therefore (except for very specific opportunities based on company-specific factors) any short position in common stocks is a short-term trade. You cannot use it to make money over the long term and in most normal markets it is not profitable to hold broad-based short positions at all. More generally, when you are short stocks you are fighting the Fed. Don't do that. If you want to short something, short Treasuries - they have no upside at this point and in any case will not be helped by anything the "authorities"... are likely to try. And be sure to keep your collateral in gold, not dollars. Otherwise you are giving the powers that be an easy way to bash your portfolio senseless while doing what they wanted to do anyway. Don't let them.

      It sounds like you're angry. I am as well. But I won't be joining you; a sober assessment demands a different strategy. Good luck to you.
      View article »
    • Tue Nov 25th 12:32 PM
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      Rating: 0 0
      Commented on:
      Equity, The Blind Optimist
      Please explain how to "inflation-proof&... bonds. Certainly issuers could structure them in ways that would do so (denominating them in gold, including embedded puts, etc.), but they aren't likely to have any incentive. On the other side of the transaction, there is no cost-effective way to hedge out inflation. Sure, you can short Treasuries of similar duration or take part of your allocation and use it to buy gold futures instead, but you'll always end up giving away a huge chunk of your income. I would be very interested to see a low-cost, non-distorting inflation hedging strategy for holders of 10-year investment-grade corporates.

      I doubt there is such a thing, and if my doubts are confirmed I will take that to mean what I have always suspected: bondholders are rubes, and the higher the credit grade the dumber they are. The reason hedging inflation out of a bond portfolio costs so much is that inflation takes that much. The market consistently underprices inflation; even so, a modest 2% out of a 5% nominal yield is killer. The real yield on AAA-AA corporate bonds is not much above zero, and if held in taxable accounts - I sing with joy at paying taxes on inflation "gains" - could well be negative. And it's not clear that the higher yields in the BBB space adequately compensate for credit risk; certainly anyone who bought them a year ago is wishing he hadn't, even if he plans to hold to maturity. At least junk buyers have the opportunity to benefit from mispricing of credit risk; with today's 20% yields a cagey researcher can pound the ground and maybe make a little money. There an inflation hedge makes a lot of sense; while gullible Mr. Market is busy listening to the government instead of looking at his own expenses, you might get a hedge out of him that costs you only 2-3%. That's a relatively minor chunk of your 20% yield, especially if 800 of those basis points are due to excessive pessimism. Even so, as an unleveraged trade this isn't going to make you a lot of money, and leveraged junk bond deals are just asking for trouble.

      All of what you say about equities is true, but that doesn't mean interest rates don't need to rise as well. It would be quite reasonable to see the S&P 500 yielding 10% with 5-year BBB+ paper at 9.5%. Personally, I suspect that when the market wakes up to a $10T Fed balance sheet sometime next year and the true impact of that starts to sink in, 5-year Treasuries will yield 9% or more. Failed Treasury auctions wouldn't surprise me, either. So it certainly wouldn't surprise me to see corporates and dividend yields much higher than those numbers. The real interesting question is whether dividend yields of 12% could ever be sustainable; in the 1970s we saw P/Es as low as 7, and we'd need to be below that for 12% to work. In other words, interest rates that adequately compensate investors for both credit risk and inflation would almost guarantee that either dividend yields remain well below bond yields or the stock market collapses completely. Interesting times.
      View article »
    • Mon Nov 24th 19:37 PM
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      Rating: 0 0
      Commented on:
      Target Decides to Let Stock Languish
      Too bad. Ackman is smart enough to know that retailers are worthless. At least the REIT would always be worth something even after Target itself goes under. Instead the property will be auctioned off by creditors after the inevitable bankruptcy and shareholders will get nothing. Sure, not doing this deal means that filing is a little farther out, but it's still coming sure as the sunrise.
      View article »
    • Mon Nov 24th 18:32 PM
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      Rating: +2 -2
      Commented on:
      Mission Impossible? Obama Must Rebuild Confidence in Federal Government
      The problem of confidence in government is not unlike the problem of confidence in banks. Install stodgy, conservative, traditionalist businessmen in senior managerial positions, borrow as little as possible for terms that match your investments, and spend money on only the best investments, and I'll have confidence. That is not in any way what the government looked like under Bush, and it is not what the Obama administration is shaping up to look like, either. Spending is too high. Borrowing is too high. The thresholds to be met for new spending are far too low if indeed they exist at all. Government is reaching ever farther into people's lives, imposing new intolerable burdens and constraints every day, without any checks and balances or possibility of appeal. It does too much, spends too much, and tries to be too much to too many.

      If Mr. Obama wants my confidence, he will:

      1. Ask Congress to approve, and the states to ratify, a Constitutional amendment making gold and silver the only legal tender for government business and permanently fixing the value of the dollar at 1/1000 oz gold plus 1/100 oz silver,

      2. Immediately close most executive departments and fire all their staff,

      3. Ask Congress to terminate all bailout programs of any type and description,

      4. Begin an investigation of the FDIC's longstanding practice of undercharging banks and failing to adequately account for risky bank activities in setting premiums,

      5. Ask Congress for legislation abolishing the Federal Reserve Bank,

      6. Instruct the Treasury Department to establish banking regulations requiring that all banks retain in their physical possession an amount of gold and/or silver equal in value to at least 50% of all outstanding demand deposits and at least 33% of all outstanding time deposits,

      7. Abandon any attempt to appoint Eric "Censorship for All" Holder to the Attourney General's post,

      8. Fire Tim Geithner and appoint in his place Rep. Ron Paul of Texas as his new Treasury Secretary.

      If even half of these steps were taken, both my personal opinion of Mr. Obama as a leader and my financial confidence in the United States would immediately and dramatically increase.

      So far, however, he's done pretty much the opposite of all of these, so I'll stick with gold, thanks. In *that* I do have confidence. In 5000 years it's never let anyone down.
      View article »
    • Mon Nov 24th 15:03 PM
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      Rating: 0 0
      Commented on:
      The End of the Gold Carry Trade
      All very reasonable, except that you wouldn't ordinarily want to buy securities with more duration than the length of your lease. At least not if you're genuinely looking to exploit an arb opportunity rather than make a directional bet on interest rates. If your lease is for 1 year, you wouldn't want to own Treasuries maturing more than 13 months out; if interest rates rise, your losses on the notes could erase much of your free money. Margins here are very thin, so if you bought the 10-year against a 1-year gold lease, a few ticks on the note would make this trade a loser. Now, if the Fed gave you a perpetual 3% lease, they might as well have given you a printing press. But I doubt those are the terms.
      View article »
    • Mon Nov 24th 10:47 AM
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      Rating: 0 0
      Commented on:
      Has Gold Become Correlated to the Stock Market?
      It depends how you're measuring things. A credit crunch is a short squeeze in paper money, so if you're pricing other assets in paper terms it should not be surprising to see correlation during such a squeeze. Instead, price stocks in gold. If they're genuinely "correlated"... you should see something that looks more or less linear with low volatility and a clearly-defined trading range.

      Instead of that, you see this: stockcharts.com/h-sc/u...=$SPX:$GOLD&p=D&am...

      With a 6-month range almost 50% wide, several 10%+ up and down days, a 34% drop in that time, and no clearly-defined trading range, I find it difficult to argue that holding stocks and holding gold offer similar returns. The proper way to price all assets is in gold. Over the last 6 months, gold has offered the same return it always does: zero. In that same time, stocks are down something like 1/3 and paper money (in the form of US dollars) is up about 10%. Don't those figures look a lot more like what you'd expect? A short squeeze in paper money has pushed its price higher. Stocks, a leveraged inverse play on paper money due to their financing needs, are lower by a larger amount. Seems perfectly reasonable, no?

      Don't let the price of paper money deceive you into absurd conclusions about the markets. Price everything in gold and it will all make sense.
      View article »
    • Mon Nov 24th 00:49 AM
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      Rating: 0 -1
      Commented on:
      When Will the Dow Jones Reach a Bottom?
      Priced in dollars, the bottom can't be too far off. Probably no more than a few months and at most another 10 or 20%. In real terms, however, there may not be a bottom at all. Ask the Japanese.
      View article »
    • Mon Nov 24th 00:34 AM
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      Rating: +1 0
      Commented on:
      Obama's Choice of Geithner for Treasury Sends Currencies Up
      1. Like others in power, ignore brewing crisis for 4 years.

      2. Toss a few hundred billion of taxpayers' and savers' money down the toilet bowl in an ineffective response to said crisis.

      3. Get promoted to SecTreas.

      Now why didn't I see that coming?

      Geithner is a terrible pick, but that seems to be par for the course in the new administration. Thank you, sameold.gov. Inspiring.
      View article »
    • Sat Nov 22nd 16:27 PM
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      Rating: +1 0
      Commented on:
      Congress Should Address Capital Gains and Corporate Taxes Differently
      If the socialists raise my capital gains tax by 5 points, I will invest about 25% less in investments subject to capital gains. If they raise my income tax rate by 5 points, I will instruct my employer to reduce my salary by about 13%. If the dividend preference is eliminated, I will invest about half as much in dividend-paying securities. Simply put, I am not willing to pay any more taxes - in absolute terms - than I am paying today. Any attempt to make me do so will not only fail to increase the tax take but will actually reduce it as I will spend less on taxable goods and services. This is my stand. You will get nothing more from me. If you want to reward people for working less and investing less, I'll play. If this is to be a race to the bottom, I intend to win it. The end game consists of me sitting on a pile of gold (good luck taxing me when I "sell" it), doing absolutely no work, and collecting government checks every month. That's what these policies encourage, so really I'm only doing what I'm being paid to do. Good luck building a strong economy out of "bums" like me.
      View article »
    • Sat Nov 22nd 16:10 PM
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      Rating: +1 0
      Commented on:
      Geithner!
      How is this good news? Geithner's been a core member of the group that's overseen both the lack of oversight, excessive leverage, and artificially low interest rates that allowed the credit disaster to brew and the timid, more-of-the-same response to it that has thus far been both costly and ineffective. Yes, the bankers are probably happy with the pick; they likely feared Volcker or an unknown quantity or for that matter anyone who isn't firmly in their pocket and willing to inflate away savers' assets for the good of their fraternity brothers from Yale. And even if you like Geithner, wasn't he doing important enough work at the NY Fed to keep him there? Who will replace him? Surely whoever's in charge there is at least as important as SecTreas since by definition the Fed can never be bankrupt but the United States already is.

      This is just one more awful pick from the sameold.gov team. Are those of you who voted for this man disillusioned yet? I'll lay 2-to-1 you will be by inauguration day.
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    • Wed Nov 19th 11:42 AM
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      Rating: 0 0
      Commented on:
      All the Gold in Saudi Arabia
      Which currency will outperform gold? None of them; they are all being printed in excessive quantities. What will outperform gold in the long run are quality stocks. Always. Gold is the fundamental store of value and the standard by which all investment must be measured; it is not itself an investment and its long-run return is always zero. Successful businesses create value. Gold stores value. See the difference?

      This is a good time to store up value. Gold is the only way to do so. Therefore this move should surprise no one. What is surprising is the number of people trying to store value in paper money. When the short squeeze in paper money (that's what a credit crunch is) ends, they are going to find themselves in deep trouble.
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    • Wed Nov 19th 10:42 AM
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      Rating: 0 0
      Commented on:
      Surprising Call for Return to the Gold Standard
      A gold standard provides a feedback mechanism, true. But that feedback can hit too late to do any good, as we saw in the late 1920s. The gold standard structure from 1933 to 1971 was especially pernicious as it was external-facing only. We often saw significant price inflation internally, and America's gold was called away by foreign central banks profiting from gold/dollar arbitrage. Since Americans could not participate in this trade, they were simply being stripped of their wealth by an artificially strong dollar abroad and an artificially weak dollar at home. So they bought ever more imported goods and found their exports ever less competitive. The end result was an erosion of the manufacturing base, a habit of importing more than is healthy, and the eventual meltdown of that system as the gold was depleted.

      To really solve the problem, you have to get rid of paper money altogether. If all money must be physically struck in gold or silver of fixed purity, the feedback is immediate: when you go to expand the money supply, you find that you are out of metal and cannot do so. If you want to get more metal, you have to pay miners to do hard, dangerous work, often in remote and inhospitable locations. This leads naturally to the idea that an entity charged with right-sizing the money supply is pointless and powerless, so we might as well just eliminate it and let the market solve that problem too. A constitutional amendment affirming the perpetual right of the people to circulating precious metal money as the sole standard of value would go a long way toward mitigating (not entirely preventing) future bubbles.
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    • Tue Nov 18th 10:48 AM
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      Rating: 0 0
      Commented on:
      The Fed: Now the World's Largest Private Bank
      On Nov 18 10:26 AM nickgogerty wrote:

      > any bets on when the US T-bond at AAA drops to A?

      Let's consider a similar example. A house is offered at $500,000 and is actually worth $300,000. There are two ways for this market to repair itself: the seller can reduce his asking price to something close to $300,000, or the value of the dollar can fall by 40%. In either case, the house becomes properly priced and can trade.

      The analogy here is, of course, the rating.
      View article »
    • Sun Nov 16th 12:51 PM
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      Rating: 0 0
      Commented on:
      Hormel Foods Could Be a Good Addition to Your Shopping List
      "maybe the company benefits from the hoarding of canned goods"

      Keep laughing. Time will come you'll offer me $100 for a can of their chili and I'll laugh in your face. Is there silver in that silly piece of paper? No? Then you're in the wrong place; the line for your ration of stale bread and government cheese starts over there on 6th street.

      You've stumbled onto a solid idea, but your mainstream thinking leaves you incapable of taking it to its logical conclusion. Notice that during previous recessions, price, P/E, EV/EBITDA, and P/TB all rose, usually to cycle highs. See anything troubling in the last year's worth of charts? The market seems to be expecting exactly what I am: HRL will relatively outperform, just as its products will remain relatively inexpensive and therefore attractive to impoverished people. At the same time, its absolute profits are sure to shrink as input costs explode higher in the coming bout of hyperinflation. Remember, the market doesn't care about your input costs. If 20% of the people are out of work and another 40% had their savings inflated away, the demand curve is going to move in and your margins are going to get squeezed. Yes, you'll still make money if your product is a life essential and you can make and sell it for less than your competitors, but you're going to make less and the money you do make will be worth much less. No one wants to pay 14x earnings for anything right now, and for good reason: in another few years you'll be able to buy Treasuries with yields twice that high, and in any case we now have to discount the risk of nationalisation when pricing almost any US company, regardless of industry.

      All that said, I consider HRL a takeover target, though not in the usual sense. A productive global company that serves agriculture - say, DE - would do well to secure a food processor. They'll need something to do with all the payments-in-kind they'll be receiving for their farm machinery, etc., and it will give them an irresistable perk to offer their employees: a hot meal every day.
      View article »