I am outta here, off to the big Kansas City Shadow Fed/Maine Fishing Trip.
I understand some interesting guests are going to show -- Paul McCulley, Steve Liesman, and others. I have my camera, and I will run plenty of snaps.
I have a bunch of posts set to launch, and I expect to comment tomorrow on NFP data.
Kansas City Shadow Fed / Maine Fishing Trip Recap (July 24, 2007)
Placid Times Ahead?
Barrons AUGUST 6, 2007
Placid Times Ahead? PDF
Alpha Into Beta
All About Alpha has a great Andrew Lo graphic depicting how Alpha eventually morphs into Beta:
A picture of the “betafication” of alpha
29 July 2008
What will happen to the quants in August 2017?
MIT and AlphaSimplex
Adding Alpha to Portfolios
While I am traveling, I wanted to CHERRY PICK a few charts from my day job: Fusion IQ:
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These signals, used with FUSION IQ’s rankings, can add serious alpha to your portfolio.
70+ add and rising, add to longs…
40- and falling, sell or avoid…
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Q2 GDP 1.9%; Q4 GDP = -0.2%; New Jobless Claim +448k
Across the board, this was simply a horrible, recession set of data:
Initial Jobless Claims: 448k. That's the worst level since April 2003.
Q2 GDP: 1.9%, well below consensus of 2.3%.
Q4 GDP Revisions: Revised from +0.6 down to -0.2%; The first negative quarter (Don't say we didn't warn you) since Q3 2001.
Q1 GDP Revisions: Revised down to 0.9% from 1.0%
Note -- I expect these revisions will get revised even lower in the future.
Consumer Spending: Despite $100 billion in rebate checks, consumer spending was up only .56% -- the bulk of which was (undercounted) food and energy inflation. Nominal spending for the quarter was 3%.
Inflation: The personal consumption expenditure price index rose at a 4.2% annual rate.
Revisions: A major set of revisions, and nearly all were negative. The economy contracted in the last three months of 2007, providing the first negative quarterly GDP data. Q4 GDP 2007 was revised to a negative number from +0.6% to -0.2%. And, this is very likely to be revised even lower in the future.
Just nasty numbers across the board.
One last "surprise" -- Bill King observes that the GDP Price Index inexplicably tanked to 1.1% in Q2; 2.4% was expected. Nominal GDP declined to 3% from Q1's 3.5%. Thus, the Q2 GDP benefited by 1.5% points, thanks to the mysteriously collapsing GDP Price Index, down to 1.1% from Q1's 2.6%.
Hence, I expect Q2 2008 GDP to eventually get revised downwards to 0.4% -- or worse.
Here are the charts:
Real GDP Growth
Chart courtesy of Barron's Econoday
New Jobless Claims
Chart courtesy of Barron's Econoday
Larry, you have some 'splainin to do!
James, are you really going to make me wait for that Bladerunner DVD?
Recessions Often Begin With Positive GDP Data (May 2008)
GROSS DOMESTIC PRODUCT: Second Quarter 2008 (Advance)
BEA, JULY 31, 2008
Summary of GDP Revisions
U.S. economy suffers fourth-quarter contraction
Revisions show spending slower, profits higher than previously thought
MarketWatch, 9:01 a.m. EDT July 31, 2008
What Does the 45% Increase in Bankruptcies Say About the Birth/Death Adjustment?
"The climate is turning desperate for small businesses. They are in crisis, and, as these numbers show, it's getting worse and worse."
- George Cloutier, founder of American Management Services
This is especially relevant in light of tomorrow's Employment Situation Report.The consensus is for -72,000. ADP, which has reverted back to worthlessness the past 7 months, was plus 9,000.
Small businesses were the justifications for the Birth/Death model, which we have discussed ad nauseum.
The original criticism was that the BLS Establishment Survey was not picking up this engine of job creation -- those firms with less than 100 employees.
Over the past 3 years, we've been focusing a lot on the "Birth" portion of the B/D index. BLS uses new state incorporation filings in order to hypothesize new small business formation. We have argued their emphasis on this has artificially created NFP data that is far better than the reality it purports to represent.
So here's my question for those so inclined to consider such things: Why is the BLS B/D Model creating more jobs in 2008 than it did in 2007? Why is BLS claiming that the economy is more vibrant, and that even more new businesses are blossoming this year over last?
What about the "Death" portion?
One would think that something titled Birth/Death might actually look at business deaths, aka bankruptcies, partnership dissolutions, and corporate closures.
Somehow, we have yet to see these demises reflected strongly in the BLS employment data. And that is surprising, given the 45% commercial filings in 2008's first halof.
Here's a recent analysis from McClatchy:
"Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.
Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.
From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.
States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.
It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.
Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.
The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.
Its about time for the BLS to acknowledge the flaws in this hypothetical adjustment, and return to actually measuring -- versus imagining -- new job creation . . .
BLS BS Exposed: Commercial Bankruptcies Soar
Global Economic Analysis (July 2008)
BLS Data Sources:
BLS Establishment Survey
CES Net Birth/Death Model
CES Birth/Death Model Frequently Asked Questions
Historical Net Birth/Death Adjustments
Accounting for Business Births & Deaths in CES
Jurgen Kropf, Sharon Strifas, Monica Traetow
U.S. Bureau of Labor Statistics, March 2002
Commercial bankruptcies soar, reflecting widening economic woes
McClatchy Newspapers, July 18, 2008
The "No Loss Sale" Rule
David Weidner's new column (out tomorrow) proposes outlawing the sale of any stocks for a loss.
Cox: But I was getting a pedicure the other day and I thought, 'Why not just short selling?' What about ALL selling?' Why not make a rule that prohibits selling a stock for a price lower than the last trade. We'd stop losses altogether. Everyone would make a profit. Unlike some of these other measures you've heard today, it wouldn't cost taxpayers a penny. So, what do you think of the Cox No-Loss Sale rule?
The no-loss sell rule
What if we tried a new strategy in the next six months?
MarketWatch, 12:01 a.m. EDT July 31, 2008
FASB: OK For USA to Turn Japanese
Just when you think there is a glimmer of hope that some of these ne'er do well, lying, cheating, sniveling, cowardly bank CEOs might finally be forced to step up to the confessional and tell all, this comes along: FASB Postpones Off-Balance-Sheet Rule for a Year.
Which makes me wonder: How precarious is the financial health of the US banks and brokers that they need yet another year before they can, oh, I don't know -- disclose what they own on their balance sheets?
"The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.
FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.
"We need to get a new standard into effect,'' Linsmeier said, though ``it's not practical'' to begin requiring companies to put assets underlying securitizations onto their books this year.
FASB proposed having companies put new securitization structures on their balance sheets for fiscal years starting after Nov. 15 this year. The Securities Industry and Financial Markets Association and the American Securitization Forum complained that the changes, which could affect as much as $11 trillion of off-balance-sheet entities, may make companies appear short of capital to regulators and lenders. Financial companies' responses may in turn worsen the credit crisis by further constraining lending and investing, they said."
The longer they wait, the worse it ultimately will be. The long Japanese Recession (1989-2003) was caused by precisely this refusal to take the markdown, and engage in all manner of delays, excuses, procrastinations. Eee-diots -- This only will make it worse!
Here's the money quote:
"Under FASB's Statement 140, one of the rules the board is considering changing, the trusts can remain off-balance-sheet if their activities are "significantly limited'' and "entirely specified'' in the legal documents that created them."
Man, if ever a legal clause was made to be folded spindled and mutilated, this was it.
Question: How can anyone value a financial company if they cannot tell what are on their balance sheets?
Answer: You cannot. If you buy a financial under these conditions, you are flying blind.
Investment Thesis: Ritholtz Rule #1: Know What You Own.
Whoever buys Financials under these circumstances loses the right to whine down the road about companies not being forthcoming. If you own them, don't complain when you get what you deserve.
FASB Postpones Off-Balance-Sheet Rule for a Year
Jody Shenn and Ian Katz
Bloomberg, July 30 2008
No Shorting. That's the Rule.
A long/short hedge fund manager of my acquaintance went to short some Morgan Stanley (MS) via a B/D that clears through Wachovia:
The Trader comes back: "Wait a second -- that's on the list -- I cant short that."
The Fund Manager says: No, I don't want to Naked Short it, we have already located a borrow -- this is a clean, legitimate short sale.
Trader: Nope, we clear through Wachovia -- and its on the list - NO SHORTING THESE 19 PRIMARY DEALER NAMES -- PLUS FANNIE AND FREDDIE -- AT ALL.
Fund Manager: That's ridiculous -- how can you not execute a legitimate borrowed short?
Trader: Wachovia. Dems da rulez. You have to go elsewhere.
Fund Manager: Consider it done.
Postscript: FM added to his Morgan short elsewhere, and initiated a new Merrill Lynch (MER) short. I don't know what it says about Wachovia that they won't even allow shorts in those names (deep doodoo??).
I am paraphrasing Jim Grant, but "Shorting is the financial world's equivalent of free speech."
Bank CEOs: I Said WHAT ?
Via Portfolio, comes this list of great CEOs quotes:
1. John Thain, Merrill Lynch
"We're very confident that we have the capital base now that we need to go forward in 2008."
January 18, 2008.
"...Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market."
March 8, 2008
"We have more capital than we need, so we can say to the market that we don't need more injections. We can confirm that we have tackled the problem."
March 16, 2008
2. Dick Fuld, Lehman Brothers
"Do we have some stuff on the books that would be tough to get rid of? Yes. Am I worried about it? No. If you have some repricing of these things will we lose some money? Yes. Is it going to kill us? Of course not."
--Richard Fuld, Lehman Brothers C.E.O. (Financial Times).
4. Ken Thompson, Wachovia
"The mortgage market is going to be a great market in this country for a long time. We've got population growth. We've got people who are always going to want to live in homes that they own. It's going to be a great market."
--on CNBC May 15, 2006.
5. Martin Sullivan, AIG
"But because this business is carefully underwritten and structured with very high attachment points to the multiples of expected losses, we believe the probability that it will sustain an economic loss is close to zero."
-- speaking to investors on December 5, 2007
6. John Mack, Morgan Stanley
"Well, number one, I think this firm has the capacity to take a lot more risk than it has in the past. So from that aspect, we're really using our talent in a more productive way than we have had in the past. I am comfortable with the risk...I think we probably have one of the best overall risk managers in Tom Daula, who oversees all firm risk, and also Zoe growing up on the sales and trading side, mainly trading side risk management, it's a very strong combination. So I'm comfortable with it. Do we take a lot of risk? Yes."
--April 2007 shareholder meeting.
7. Ken Lewis, Bank of America
"We believe that in the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets. This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country. We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets."
--August 22, 2007 press release
The entire list -- and a lot more quotes -- are at Portfolio.com
Hat tip: Doug Kass
"I Said What?!"
Portfolio, Jul 30 2008