The Big Picture | January 2008

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Overstated Job Growth & the Annual Establishment Survey Benchmarking

Thursday, January 31, 2008 | 08:30 PM

in Data Analysis | Employment | Wages & Income

Tomorrow, we find out just how much the B/D adjustment overstated true job creation in 2007. Every year, the Annual CES benchmark revisions are published in the February NFP. It has all the makings of a potential disaster.

To quote the BLS:

Benchmark revisions reflect a re-anchoring of CES sample-based estimates to incorporate near universe counts of employment. These comprehensive counts of employment, or benchmarks, are derived primarily from employment counts reported on unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.

In other words, the hypothetical Birth Death adjustments should have no impact.

Here's Floyd Norris' take on other, recent, BLS adjustments:

"The American economy appears to have created far fewer jobs this spring than has been reported so far, a new government report indicated yesterday. That could provide further impetus for the Federal Reserve to lower interest rates when it meets Dec. 11.

The report included a sharp downward revision of the government’s estimate of personal income growth for the second quarter. Because the changes were made as soon as better employment figures were available, the revisions made it seem likely that figures on job creation are also likely to be revised downward in coming months.

The new report concluded that personal income from wages and salaries grew at an annual rate of 1.6 percent in the second quarter, far below the 4.5 percent that had previously been estimated."

Note that the personal income data are based in part on BLS Establishment Survey. This income statistics revision implies that tomorrows benchmark revision of NFP may be quite substantial.

~~~

Tomorrow, we'll look into January's shocker of a B/D adjustment -- invariably negative due to holidays . . .

Source:
Estimates May Have Overstated Job Growth
FLOYD NORRIS
NYT, December 1, 2007
http://www.nytimes.com/2007/12/01/business/01spend.html

Technical information: Revisions to CES data for late sample reports, annual benchmarking, and other factors
BLS
http://www.bls.gov/ces/cesregrevtec.htm

Quote of the Day: Ludwig von Mises

Thursday, January 31, 2008 | 03:00 PM

in Federal Reserve | Inflation | Politics

"No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves."

-Ludwig von Mises

hat tip: THE CUNNING REALIST

Influence Ripples + Tipping Points

Thursday, January 31, 2008 | 12:30 PM

in Markets | Psychology/Sentiment | Web/Tech | Weblogs

I was doing some prep work for my panel appearance on next week's MoneyTech conference, when I came across David Armano (Critical Mass) and his neat illustration below.

He created this after reading Clive Thompson's "Un-Tipping Point."

David's supposition? While the Tipping point may be an overstatement, there are many different levels of influencers -- A-listers, Mainstream Media, ordinary bloggers -- but each can influence the other, as well as the general public.

Add to that George Soros' theory of Reflexivity:

(1) Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.

(2) Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the equilibrium process's character is best considered in terms of probabilities.

(3) Investors' observation of and participation in the capital markets may at times influence valuations AND fundamental conditions or outcomes.

Back to David Armano: he visualizes the MSM/Blogosphere/Social Network Universe as shown below. I don't know how to visualize this (4th dimension? different color dotted lines?) but if we were to add Market Reflexivity into the illustration, we would then see another layer of how the market (5? or 1A, 2A, 3A, etc) influences the various parties (1, 2, 3, 4), and how they in term feedback into the market.

>
Visual Thinking

graphic courtesy of David Armano of the Logic + Emotion blog

Neat!

Violence Erupts at Barron's

Thursday, January 31, 2008 | 11:30 AM

in Financial Press | Psychology/Sentiment

Below you will find the cover image art from the past two weeks Barron's. I cant wait to see what this week's version looks like!

Gee, you think the market is getting to these guys?

Soon, some half-assed group will be complaining about violence in the business media . . .

Media Appearance: Fox Business News

Thursday, January 31, 2008 | 08:45 AM

in Media

Good morning.

I have a date today with the lovely Alexis Glick, discussing the Fed, the markets reaction to it, and what it might mean for the future. Sometime between 9:00 am and 9:30, we'll have a short chat.

This is my first visit to Fox Business News.

It should be interesting . . .

~~~

UPDATE: January 31, 2008 9:58am

(Videos below)

That was interesting. The FBN crew seems to be rather aware of the economic problems -- much more so than my last visit.

My favorite part of doing these shows is not the 5 minutes I get to spit out to sentences, but rather, the people I bump into in the Green Room. Today, it was Charles Payne, and of Liz McDonald of Forbes.

Video: The Big Picture

Video: How Low Can the Fed Go?

Financial Sector: More Damage to Come

Thursday, January 31, 2008 | 06:37 AM

in Derivatives | Real Estate | Taxes and Policy | Valuation

Someone needs to inform the SEC that their job is to protect shareholders -- not wayward corporate management.

For an SEC commission staff to even hint that its okay to move sub-prime junk off balance sheets is not only wrong -- its outside of their jurisdiction. That's FASB's purview, not the SEC. The goal should be accurate, transparent accounting -- not sleight of hand and misdirection.

Allowing this kind of misleading reportage is simply unacceptable gimmickry from the regulatory body that is SUPPOSED TO STOP this sort of crap:

"Just when it seemed as if the mortgage mess had hit a new low, now comes this: The Securities and Exchange Commission's staff has granted the subprime-lending industry a huge exemption from the normal rules for off-balance- sheet accounting.

In effect, the move will let home lenders keep their balance sheets looking much smaller and less leveraged, even while the off-the-books loans they made get a makeover.

For months, banking regulators and politicians have been pressing lenders to freeze the interest rates on many adjustable-rate subprime mortgages that are scheduled to reset soon at higher interest rates. The idea is to minimize defaults and foreclosures.

While that's a noble objective, all good deeds must be accounted for, and that's been a sticking point for many banks. Through September, just 3.5 percent of subprime mortgages that reset in the first eight months of 2007 had been modified, according to Moody's Investors Service. Even lenders inclined to help don't want to hurt their financial results. And now they might not have to, thanks to a Jan. 8 letter from the SEC's chief accountant, Conrad Hewitt. . . .

The SEC and the FASB at least should acknowledge this subterfuge for what it is."

Strong words -- but it raises the question: Why is the SEC allowing investors to be misled? Aren't they merely delaying the eventual truth coming out? Why get in the way of that process?

Today's Heard on the Street column notes that some of the bigger banks have been dribbling out the write downs -- and there is very likely more to come:

"After racking up more than $100 billion in mortgage-related losses in recent months, banks and their investors had hoped they were out of the woods. They aren't.

UBS AG's warning yesterday that its 2007 write-downs would be $4 billion higher than it predicted last month signaled that further pain may lie ahead for Wall Street banks still vulnerable to the U.S. housing sector's strife."

And that's before we get to the issue of Counter Party Risk, and the losses that will result if Ambac (ABK) and MBIA don't make good on their derivative trades. Those losses potewntially range form $50 Billion to $150 Billion.

Me? I prefer to rip the band aid off all at once. I find Death by 1000 cuts totally unappealing . . .

Sources:
Subprime Lenders Get Big Accounting Break at SEC
Jonathan Weil
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aPSScH5rRBLM

More Subprime Pain in Store
UBS Write-Downs, Insurer Downgrades Point to More Unraveling
DAVID ENRICH and PETER EAVIS
January 31, 2008; Page C2
http://online.wsj.com/article/SB120174693398030853.html

Banks May Write Down $70 Billion, Oppenheimer Says
Adam Haigh and Eric Martin
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVFVkFUo.XM4

Whiner of First Resort

Thursday, January 31, 2008 | 04:00 AM

in Economy | Federal Reserve

Harvard's Ricardo Hausmann has some tough comments for the US politicians and Fed: Stop whining and take your medicine like a man:

"The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers’ pockets by April at the latest, they say. The Fed cut by another half-point on Wednesday.

The goal seems to be to avoid a 2008 recession at all costs. As Larry Summers, former Treasury secretary, put it, failure to act would make Main Street pay for the sins of Wall Street.

It is easy to lose sight of the overall picture. Main Street consumers have overspent and over-borrowed and are unable to meet their obligations. The fact that households may have so behaved because they were enticed by “teaser loans” does not change the facts; it only assigns blame. Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions . . .

Hence, macroeconomic policy should not be based on a panicky attempt to avoid a 2008 recession at all costs but on a forward-looking strategy that achieves the needed reduction in consumption at the lowest cost in terms of the stable growth. This is not achieved by giving US households a $1,000 cheque by April, a trick that no macro economic textbook would argue is particularly effective. If there is fiscal room – a big if, given the weak structural position of the US government and its likely cyclical worsening – it would be better spent in accelerating investments in plant and equipment via accelerated depreciation schemes, to improve the capacity of the economy to keep on growing after the crisis."

Ouch.

Go read the entire piece . . .

Source:
Stop behaving as whiner of first resort
Ricardo Hausmann
Financial Times, January 30 2008 19:36
http://www.ft.com/cms/s/0/28b464a2-cf50-11dc-854a-0000779fd2ac.html

Open Thread: How About That Fade . . . ?

Wednesday, January 30, 2008 | 07:00 PM

in Federal Reserve | Markets | Trading

Mr. Market got the 50 bps he wanted -- and after a brief 250 point run up in the Dow, gave just about all of it back.

The excuse du jour ~~was that its the traders fault~~ blamed a Fitch downgrade of FGIC, or WIlliam Ackman's comments that MBIA and Ambac each had much bigger than reported losses. Maybe it was the report that S&P may lower or cut $534 billion of subprime debt.

Regardless, the gains were all spit up by the bell.

Question: Will markets rally on this cut, or is the Fed pushing on a string? Y'all discuss this, while I go out for a few drinks. (play nice)

~~~

What say ye?

50 Bps and a Song . . .

Wednesday, January 30, 2008 | 02:17 PM

in Federal Reserve

FOMC statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

http://federalreserve.gov/newsevents/press/monetary/20080130a.htm

Q4 GDP: El Stinko!

Wednesday, January 30, 2008 | 10:17 AM

in Economy | Federal Reserve | Inflation

The Advance GDP report was released today, and it came in at half of the 1.2% consensus: 0.6%. This is a measure of Real growth, and is supposed to be adjusted for inflation.

A few highlights of the data:

• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;

• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;

• Overall, the US economy grew 2.2% for the full year 2007 -- the slowest since 2002 (1.6%)

• Inventory build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.

• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was the second highest PCE # since 2001

• Q4 business spending rose 7.5%. Investment in structures went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.

• Biz spending decelerated in the fourth quarter from Q3's hotter 9.3%.

None of this is a surprise to us, but I have two takeaways:

1) The Fed is likely to cut 50 bps today.

2) If we do, as my odds suggest, have an official recession, it likely hasn't started yet, at least according to the traditional measure: Two consecutive quarters of contracting GDP.

However, there are other ways to measure a recession. As to the official definition of what a recession is, consider Jeff Saut's comments earlier this week:

"The most accurate definition is proffered by the National Bureau of Economic Research (NBER) that frames it this way: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale – retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” Rare indeed, as seen in the recession charts we included in last week’s report and have attached again this week.

By studying the charts, one observes that until recently recessions have been a normal conclusion to the business cycle. As seen, however, recently this has not been the case. In past missives we have railed at the central banks, as well as the politicians, for their continuing efforts to prevent the normal business cycle from playing. They did it again last week when the Federal Reserve panicked and cut interest rates by 75 basis points with a concurrent $150 billion economic stimulus package from the politicos. And if this is a typical recession, such maneuvers will likely ameliorate the downturn. But, what if this isn’t “your father’s typical recession?”

As always, thats smart stuff from Jeff.

Q4 2007 GDP

graphic courtesy of Barron's econoday

Note that this is the first of 3 GDP releases, and may subsequently be revised up or down.

Sources:

GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2007 (ADVANCE)
BEA/Commerce Department, January 30, 2008
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

“Not your father’s typical recession?!”
Raymond James & Associates,, January 28, 2008
http://www.raymondjames.com/inv_strat.htm

U.S. Economy Expanded 0.6 Percent, Less Than Forecast
Shobhana Chandra
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aI8xDNevVoxQ&

GDP Growth Slowed in 4th Quarter, As Housing Continues Its Drag
JEFF BATER
WSJ, January 30, 2008 10:05 a.m.
http://online.wsj.com/article/SB120169953721828519.html

Dude: Settle the F%$# Down

Wednesday, January 30, 2008 | 07:16 AM

in Books | Markets | Psychology/Sentiment

My reputation over the past few years -- fairly or unfairly -- has been that of a Bear.

However, even I want to tell Barton Biggs to settle the f#$% down. Dude, spark up a fatty, and chill out. You are scaring the natives.

What's this about?

Biggs recently published another book, and it sounds a bit like the typical paranoic survivalist tomes:

"Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with "seed, fertilizer, canned food, wine, medicine, clothes, etc.''

The "etc.'' must mean guns.

"A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage,'' he writes in his new book, "Wealth, War and Wisdom.''

We hardly get to cite Biggs here at the TBP -- an alliterative mention in 2004 (Barton Biggs Better Begin Browsing Blogs . . .), when he disasterously shorted Crude Oil in the high $40s (good times), and a mention of his last book is most of our Biggs coverage.

As to Hedgehogging, I must admit to being I was underwhelmed by it. It was marginally interesting in a gossipy kinda way, but I lost interest about half way through.

I haven't seen this book yet, but I admit I am fascinated by the subject. I am not a big believer in either the efficient market hypothesis nor the Wisdom of Crowds -- future discounting mechanism yes, but wisdom? Hardly -- but I do find the subjects intriguing and worthy of further discussion.

War, markets, contrary indicators -- "Buy at the sound of cannons, sell at the sound of trumpets" kinda thing is right up my alley. I may have to check this one out . . .

Source:
Biggs's Tips for Rich: Expect War, Study Blitz, Mind Markets
James Pressley
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=20601088&sid=aImBVle3OMyo&

"Reports of decoupling have been greatly exaggerated."

Wednesday, January 30, 2008 | 04:30 AM

in Economy

So said Simon Johnson, an economic counselor and director of the research department at the IMF, during a recent press briefing.

In its latest forecast, the IMF said the slowing U.S. economy will act as a drag to world-wide growth. That means, in essence, that the problems caused by the U.S. housing slump and meltdown in the market for subprime mortgages are radiating globally.

Look who's a drag on global growth:

"World economic growth will slow significantly in 2008 but the U.S., whose housing downturn is rattling global financial markets, will avoid recession, the International Monetary Fund forecast Tuesday.

The IMF sees world economic growth slowing to 4.1% this year, down from 4.9% in 2007. U.S. economic growth will slow to 1.5% in 2008, Johnson said, down from an estimated growth rate of 2.2% in 2007. The 2008 projection is lower than the IMF's October 2007 prediction of 1.9%."

However, according to the IMF, there will be "no recession in the US" and "no major slow down worldwide."

Sold to you . . .

Source:
IMF Forecasts Global Slowdown As U.S. Provides Primary Drag
TOM BARKLEY
January 29, 2008 1:43 p.m.
http://online.wsj.com/article/SB120162159159725505.html

IMF Sees Slowing World Economy in 2008
CHRISTOPHER S. RUGABER
Associated Press, Tuesday, January 29, 2008; 1:46 PM
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/29/AR2008012901702.html

Open Thread: What's the Fed Gonna Do Tomorrow?

Tuesday, January 29, 2008 | 08:15 PM

in Economy | Federal Reserve | Inflation

Okay, we know the FOMC ends their 2 day meeting tomorrow, and at 2:15pm, the announcement gets released.

What are they likely to do?

a) No cut at all -- 75 bps oughta hold the little bastards;

b) 1/4 point -- that makes 100bps in 8 days;

c) 50 bps -- oh yah, give it to me big boy!

4) 75 bps, just like last week -- daddy likes his sweet sweet junk -- Hmmm, thats the spot

And, what do they say:

a) The risk to the economy remains balanced between slowing growth and inflation;

b) Inflation? Trichet is mad! The risk is to growth;

c) Market turmoil is proof that the mechanical gears of finance are seizing up -- we gotta grease the cog wheels;

d) Run for your lives!

Well, what say ye?

Site of the Day: You Walk Away Dot Com

Tuesday, January 29, 2008 | 03:16 PM

in Real Estate | Web/Tech

Yes, its true: Youwalkaway.com

I couldn't make this up if I tried:

That's just wrong on so many levels . . .

~~~~

UPDATE: January 29, 2008 8:05pm

I see Mish put up a full post on the same subject way earlier today. Check it out . . .

Farewell To Ben Stein

Tuesday, January 29, 2008 | 11:00 AM

in Financial Press | Politics | Real Estate

Its time to bid a not-so-fond adieu to the New York Times columns of Ben Stein.

No, he is not leaving the paper. Rather, we've reached the point where Stein's commentary has become detached from reality, so ridiculously fabricated, that it can no longer be read. Indeed, its become so absurd that not only have I decided to skip reading him, I am immediately making the public commitment to stop commenting on his Tom Foolery.

Quite a bit of electrons and pixels have been spilled needlessly over the past few days in response to his most recent exercise in inane rhetoric, illogic, and fallacious reasoning. (No, I am not referring to this WSJ article). Across the blogosphere, smart insightful people have wasted far too much time and effort dispelling the absurdities that take residence in Stein's columns.

Its time to put a stop to this.

I frequently mention that I loathe ad hominem attacks. They are a lazy way to avoid responding to a challenging argument. However, there comes a certain point in a pundit's career arc where their credibility, intellectual honesty, and quite bluntly, their entire world view comes into question. Mr. Stein is at that point; he has jumped the shark, and its time for the rest of us to move on.

Stein, a former Nixon speechwriter, has made his opposition to Darwinian Evolution public. He is idealogically committed to creationism and intelligent design, and is the star of the upcoming documentary Expelled: No Intelligence Allowed. Once a commentator eschews logic and reason, once they deny science, then their readers are forced to question their entire analytical approach to ANYTHING -- be it economics, markets, stocks, whatever. Ideology trumps facts, theory trumps data. For better or worse, this is the turf Stein has staked out as his own.

But its more than mere creationism. Stein's entire view is a denial of reality. He seems to be committed to throwing up smoke screens, obscuring what is really going on. This is unforgivable.

We see this ideological absurdity carried to an extreme in his recent Sub-prime real estate and finance columns.

I first noticed this inanity int he August 12 2007, column, Chicken Little’s Brethren, on the Trading Floor. Stein made the foolish argument that because sub-prime was so tiny relative to the US Economy, it was meaningless. Imagine an oncologist saying to a patient: "Well, Mr. Jones, relative to your body mass, its only a 15 gram tumor, so I wouldn't worry too much about it."

If Stein actually believed this gross oversimplification, I would dismiss him as just another clueless bobblehead. However, I believe he is marginally more intelligent than that. That makes me wonder if this column is purposefully misstating facts. Remember, Stein does not manage assets for a living, and was a political speech writer for Nixon. Everything he writes has a subtle political connotation -- even if it ends up costing people a lot of money. Thus, the better explanation of his errors is that he is not merely clueless, but willfully misstating the US Economic situation for political purposes.

Perfect example: On October 21, Stein top-ticked the market with this pollyannish column: The Gloomsayers Should Look Up. Then came a dishonest criticism of Goldman Sach's Economist, Jan Hatzius -- who may I point out was correct in raising red flags that sub-prime was an increasing economic problem. Stein criticized Hatzius, writing:

"That worthy scholar recently wrote a detailed paper about how he thought the subprime mess would get worse and worse. It would get so bad, he hypothesized, that it would affect aggregate lending extremely adversely and slow down growth . . . Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see."

Of course, we actually found out later that Goldman had made their bets many, many months before, and that Hatzius, if anything, understated the degree of the problem.

The final straw, as far as I am concerned, came this past weekend.

Rather than admit his error, Stein went a completely different way: He blamed the sell off on traders. (Can Their Wish Be the Market’s Command?) It was the last bit of idiocy from him anyone should tolerate. Forget the fact that Stein missed the importance of the sub-prime debacle, that the economy has continued to decelerate, that the job market continues to soften, that the situation had become dire enough that it forced the Fed to make the biggest single one day emergency cut in its history. Stein chose to ignore all of that -- and blames the sell off on traders.

Compare Stein's work with that of another NYT business columnist, Mark Hulbert: Its always data driven, thought provoking intelligent analysis. Hulbert seems to have no political agenda, no bull or bear bias -- he merely takes a run of interesting data, and reaches supportable conclusions. He is the Anti-Stein.

Other about the blogosphere have similarly identified Stein's foibles:

• Dealbreaker called "bullshit on this uncheckable story Stein uses to illustrate an unsupportable theory."

• Doug Kass has repeatedly taken apart the dissemblings, poor reasoning, and unsubstantiated theories.

• Paul Kedrosky asks "Why does the NY Times continue to run this drivel?"

• Roger Ehrenberg says that Lying with Statistics" is Ben Stein's Modus Operandi

• Henry Blodget says "Ben Stein Is An Idiot"

• Science Blogs agrees, noting: "Ben Stein must be on a campaign to make himself look stupid."

• Yves Smith: Ben Stein Tells Us It's All the Traders' Fault

• Marek Fuchs finally exclaims Ben Stein Must Be Stopped!

This is quite a waste of intellectual firepower.

I'm finished with his misleading political hackery, his absurd wingnuttery. To be blunt, its time for intelligent people to stop wasting time arguing with him, and apply their energies more productively than on his economic Tom Foolery.

There's an idea: I propose the phrase "Ben Steinery" be substituted where ever you would have used the phrase "Tom Foolery" in an economic context.

But read his absurdities, or respond to his inane commentary? I'm done.

Two Day Fed Meeting Begins

Tuesday, January 29, 2008 | 09:00 AM

in Federal Reserve | Markets | Psychology/Sentiment

Let's hope they get the communication thing down a bit better . . .

Monoline Insurance: There's a New Sheriff in Town...

Tuesday, January 29, 2008 | 06:15 AM

in Corporate Management | Credit | Derivatives | M&A | Valuation

The monoline insurers -- the firms that issued default insurance on muni bonds that never default -- have been buried by more than a trillion dollars worth of derivative bets, more than 10% of which have gone bad.

That $130 Billion worth of CDO/CDS exposure makes it highly unlikely that anyone is coming along to rescue this group of risk-loving, derivative-misunderestimating, technically-bankrupt insurance managers. As we mentioned saeveral weeks ago,

While absurd rumors swirled around the unlikely purchase of Ambac (ABK) by Wilbur Ross, various other forces have been moving to make sure that the bond assurance will continue to exist for various state and city projects. Even though Munis very rarely default, the cost of Bond Assurance ends up paying for itself many times over, as it allows cities and towns to pay significantly less in borrowing costs over the life of the bond issuance.

As we mentioned several weeks ago, that was a lovely, low risk business, with little defaults and a steady revenue stream. At one point in time, AMBAC had the highest revenue per employee on the planet. That situation was obviously intolerable, and so managment embraced riskier, higher yielding derivatives. Over that period, the monoline stocks have lost about 90% of their value. (Ouch!)

The latest rumor making the rounds is that Wilbur Ross will buy Ambac. Reports that Ross will invest in the battered bond insurer Ambac have soothed investors. But as Roddy Boyd argues, the deal makes no sense whatsoever:

"If Ross were to purchase Ambac in an "as-is" arrangement, he would be buying an enterprise with a staggering $67 billion in CDO exposure, of which $29.1 billion consists of asset-backed CDO's of increasingly dubious credit quality. The company also has $8.4 billion in sub-prime mortgage paper in its portfolio. All told, Ambac's financials show that the insurer has $14.5 billion of claims-paying resources to support a $524 billion guarantee portfolio, figures so unbalanced that the company's attempt to raise $1 billion or more in emergency capital via an equity or convertible offering had to be scrapped last week."

Now, with the monolines bouncing on the highly unlikely take out by Wilbur Ross, a new sheriff has come to town: Warren Buffett has "agreed" to expand Berkshire's new bond insurer nationwide -- in exchange for faster licensing -- according to a group of U.S. state regulators.

In order to come into one of the most profitable and mismanaged segments of insurance underwriting, Buffett has coyly struck a deal that fast-tracks the messiest part of the business. Now THAT'S bloody brilliant.

Here's Bloomberg's take on the matter:

"Cathy Weatherford, chief executive officer of the National Association of Insurance Commissioners, on Jan. 10 offered to help speed approvals if Buffett's new company agreed to simultaneously apply to all states with a uniform application, NAIC spokesman Scott Holeman said today. "Berkshire has committed,'' Holeman said in an interview.

Berkshire's bond insurer may help stabilize debt markets, which have been roiled by the prospect that MBIA Inc. and Ambac Financial Group Inc., the industry's biggest guarantors, may lose their top credit rankings. A downgrade may affect $2.4 trillion in assets industrywide, and Fitch has already stripped its AAA rating from Ambac after losses tied to subprime loans.

To induce Omaha, Nebraska-based Berkshire to submit the application to all states, NAIC proposed a pilot program waiving a requirement that an insurer using a uniform application have a track record in the type of insurance for which it wants new licenses, Holeman said.

I was originally going to title this "Buffett to Wilbur Ross: Up Yours" but I thought that too harsh. And Ross seems to smart to buy into the Ambacv/MBIA snake oil . . .

Previously:

Counter-Party Risk
Friday, January 18, 2008 | 07:30 AM
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

A Regulator Not Stymied by Red Tape
JOSEPH B. TREASTER
NYT, January 9, 2008
http://www.nytimes.com/2008/01/09/business/09buffett.html

Sources:

Has Wilbur Ross lost his mind?
Roddy Boyd
Fortune, January 25 2008: 4:19 PM EST
http://money.cnn.com/2008/01/25/news/newsmakers/boyd_ross.fortune/index.htm

Buffett's Bond Insurer to Go National, Regulators Say
Josh P. Hamilton
Bloomberg, Jan. 28 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAgiUPbIXPTs

Sales of HD DVD Players Plunge

Monday, January 28, 2008 | 08:58 PM

in Digital Media | Television | Video

No surprise here: Sales of HD DVD Players Plunge After Warner Move:

"One week after Warner Brothers Entertainment announced that it was abandoning its support for the next-generation HD DVD format in favor of the Blu-ray high-definition format, consumers abandoned HD DVD.

What was a 50-50 market split in 2007 for the high-definition players shifted sharply in Blu-ray’s favor in the new year. For the week that ended Jan. 12, Blu-ray hardware captured 90 percent of the market, according to data collected by the NPD Group, a market analysis firm."

Wired had the best take on the matter:

Hey HD DVD: It's Not Just a Flesh Wound

You've got to hand to Toshiba. Even now, when faced with overwhelming evidence that Sony's Blu-ray has won the high def format war, the mortally wounded HD DVD backer just keeps on prolonging the inevitable.

So to the HD DVD camp I say this: You've put up a good fight, guys, but seriously, what are you going to, bleed on Blu-ray? Let's move on with our lives.

Source:
Sales of HD DVD Players Plunge After Warner Move
ERIC A. TAUB
NYT, January 28, 2008
http://www.nytimes.com/2008/01/28/technology/28disc.html

Hey HD DVD: It's Not Just a Flesh Wound
Bryan Gardiner
Wired, January 28, 2008 | 4:22:25 PM
http://blog.wired.com/business/2008/01/hey-hd-dvd-its.html

NPD Confirms Huge Blu-ray Share Jump http://hd.broadcastnewsroom.com/articles/viewarticle.jsp?id=291403

Stimulate This!

Monday, January 28, 2008 | 04:30 PM

in Economy | Politics

Quote of the Day: The Dollar

Monday, January 28, 2008 | 01:15 PM

in Currency

“We want to support your American peso with our strong Canadian dollar.”
-Pink Eyes, lead singer for the punk band Fucked Up

Source:
Outrage, Bile, Hardcore Punk ... and a Sensible Lost-and-Found
KELEFA SANNEH
NYT, November 12, 2007
http://www.nytimes.com/2007/11/12/arts/music/12musi.html

HomeBuilder's vs Financials

Monday, January 28, 2008 | 11:30 AM

in Economy | Finance | Real Estate | Technical Analysis

I'll have something this afternoon on the Housing Market/Homebuilders. Meanwhile, before you get too excited about the Financials (Doug!), have a look at this chart:

Chart courtesy of Jim Walker, Asianomics
>

It suggest quite a few untoward things about the FINs.

Note: I am not implying that they should trade identically to the Homebuilders -- just that its quite possible that there is still more risk in them . . .

>

Source:
Economic Wave Theory
Dr. Jim Walker
Welling@Weedon, 1/25/08
http://tinyurl.com/2yunn4

Dear Ben . . .

Monday, January 28, 2008 | 07:16 AM

in Economy | Federal Reserve | Inflation

Dear Ben,

Well, its been a rough couple of months.

Like most new Fed Chairs, you've had a baptism by fire. First, elevated inflation levels, then, the Housing slowdown, next, a credit crunch, then a substantial market correction, and now, a derivative morass of biblical proportions. Oh, and by the way, we are likely entering a recession, with deflation threats in the future.

All Fed Chiefs seem to get off to a rocky start. If it is any consolation, most of it is not your fault. You inherited a mess from Easy Al. His answer to every problem was "Mo' Money," and that just means "Mo' Problems." The tech/telecom/dot com bubble, the Credit/Housing bubble, the lack of supervision or regulation of bank lending/Housing were all snafus on his watch. You were the relief pitcher who stepped onto the mound, with the count 3 and 0, bases loaded, no outs, down by 5 runs.

In some ways, you have already shown yourself to be Greenie's better. You haven't let the politicos sucker you into the tax/spending debate. You can communicate clearly and effectively in simple English. You haven't endorsed any party's specific wish list. Greenie already mea culpa'd doing that.

However, a few recent issues have developed that shall we gently say were not your finest hours. I don't want to rehash these, I'm sure you are getting more unsolicited advice than you could ever sift through. Far be it from me to give you any advice -- and damn to hell the Fed Chair who listens to bloggers or the media for that matter.

So rather than provide unsolicited prescriptions, please consider the following list as items worthy of further discussion. I am not suggesting solutions or even prioritizing. These are merely some issues you may not be aware of. Call it a leaping point for further discussion on the next FOMC retreat.

Consider:

• Mr. Market is the world's greatest fake out artist. His goal is to confuse the most people he can;

• Human intervention in complex systems often has unintended consequences.

• Wall Street is dominated by Alpha Males. The Street is like a pack of wolves with more than one lead dog. All the Alphas will sometimes challenge the biggest, baddest wolf -- especially if they sense he's vulnerable.

• Which is worse: Inflation -- or deflation?

• What do Central bankers know today they didn't know last year? What have they learned since 2,000? And, since 1973?

• There are deeds, and there is perception. While related, sometimes the two behave independently;

• Has the Business Cycle been defeated? How much can we smooth out the peaks and valleys?
• The United States has seen its global reputation battered in recent years. Other governments -- especially European, but Russia and Central America -- are seeking some payback. I wonder how much the ECB and other Central Banks have bought into that.

• Excesses accumulate in all systems. Sometimes they are specific, and sometimes systemic;

• All Fed Chiefs have had their independence questioned. Some have handled it better than others; Rate all the Fed Chiefs on this issue;

• Is it the mechanic's job to clean the sand out of the gears, or is it to regulate the machinary's speed?

• Which is worse: Over-reactions or under-reactions?;
• History treats idealogues poorly;

• What does it mean to not pop bubbles? Can we do anything other than slowing down a bubble's progress -- but not its ultimate destination? And, how desirable are either of those?

• Communication problems are different then policy issues: Discuss.

• Forecasting the future has proven to be folly. Question: What is the value of the Fed's economic forecasts? Are they just another manufacturer of predictions?

These are just ideas, questions, jumping off points for future discussion. I hope you find them to be helpful exercises.

And I wish you luck in resolving some of the weighty issues facing our economy. You are going to need it . . .