Mid January Linkfest: Review / Preview

Another week in the books, and some more red ink spilled.

This week, Gold was the big winner (+3%), while Crude Oil gave up the most ground (-5.3%). The S&P500 slipped 0.8%, the Dow dropped 1.5%, the Russell 2000 lost 2.3%, while the Nasdaq fell 2.6%. REITs, US Treasuries and the Dollar were also in the green.

On a 52 week basis, the Dow is now flat, the S&P500 is off 2.1%, the Nasdaq is 2.5% underwater, and the Russell is in a full fledged meltdown off 11.3% for the past year. 

This week, the rubber meets the road when a number of brokerage and banks report what is likely to be disappointing earnings. Citigroup (C) reports earnings on Tuesday, J.P. Morgan Chase (JPM) reports Wednesday, while Merrill Lynch (MER) reports the quarter’s profit on Thursday. We will also hear more about Prince Alwaleed bin Talal’s plan to (once again) bail out Citigroup. Look for the stock to pop on the news Monday morning.

Also on deck: Tech giants Intel (INTC) and IBM on Tuesday and Thursday respectively. These two bellwethers, along with General Electric (GE) on Friday, could provide some insight into broader tech and industrial spending.

The week is loaded with economic reports:  we get two inflation data points — PPI on Tuesday, and CPI Wednesday. The consensus for December Retail sales (TUE) is a 0.0% (the range was -0.4%  to  0.3%). But the gov’t data point under-reports the inflationary component, so a flat month is in reality a negative one.

The Housing Market index is Wednesday, and Thursday are Housing Starts. The week wraps up Friday with Consumer Sentiment and Leading Indicators.

Enough Ben Steinery! On with the linkfest:


Where Market Surprises Lurk in 2008: Most strategists predict the stock market will have problems in the first half of the year, as housing troubles and slowing consumer spending weigh on corporate profits. Things could improve later in 2008, thanks to expected interest-rate cuts by the Federal Reserve. Most experts anticipate a strong year for foreign stocks, as growth abroad powers ahead.  (Wall Street Journal) 

• On a releated note, we took the top spot in the WSJ 2007 Forecasts (and were near the top in BusinessWeek). A review of 2007 and our forecasts for 2008 are here; Our appearance on CNBC’s Squawk on The Street discussing both of these is here

Techs Are New Year’s Flop:  Tech stocks are proving to be the biggest disappointment of the new year. As the housing market softened, mortgage investments soured and the economy showed signs of slowing as 2007 unfolded, investors profited by shifting to technology stocks. Technology companies have big sales overseas, where growth has stayed strong, and sell mostly to businesses, so they are less vulnerable to slowdowns in consumer spending. Now, however, tech stocks are suffering the brunt of the stock market’s recent beating. Intel Corp., for example, is down 15% this year, Google Inc. is down 6% and Apple Inc. has fallen about 10%. (free Wall Street Journal)

5 Stages of Market Grief:
One of the most intriguing things I find about the market is how the
collective psyche sometimes resembles a singular entity. In particular,
I have been fascinated by the commentary we have heard from some
quarters regarding deep and obvious flaws in the present macro
environment. I spent a lot of time over the holidays  (skeptically)
reading commentary from various pundits. There was something strangely
familiar in the absurdly erroneous observations, but I couldn’t place
my finger on what it was — until Friday . . .    

• Another new Barron’s blog: Stocks to Watch Today

Fascinating: Interview with a Hedge Fund Manager: I didn’t go to
school. I did not major in economics. I learned the old-fashioned way
by apprenticing to a very talented investor, so I wound up getting
into the hedge fund business before I think many people knew what a
hedge fund was. I’ve been doing it for over ten years. I didn’t
even know what a hedge fund was when I first had this opportunity.
I’m sure today I would never get hired.

The January Effect’s disappearing act 

• We had two interesting discussions this week on markets and their meanings

Confusing Cause & Effect: Elections and Markets

Why Prediction Markets Fail

• Shorter Floyd Norris: Bankers are
idiots, can’t do basic math, have little in the way of risk
Where does that leave them? Lobbying for FASB rule changes. The longer version can be found here: Banks Plead They Can’t Follow Rules (NYT)  see also NY probes Wall St. banks over subprime data

Stephan Roach, writing in FT, states America’s inflated asset prices must fall: With one bubble begetting another, America’s imbalances rose to epic proportions. Despite generally subpar income generation, private consumption soared to a record 72 per cent of real gross domestic product in 2007. Household debt hit a record 133 per cent of disposable personal income. And income-based measures of personal saving moved back into negative territory in late 2007. None of these trends is sustainable. It is only a question of when they give way and what it takes to spark a long overdue rebalancing. A sharp decline in asset prices is necessary to rebalance the US economy. It is the only realistic hope to shift the mix of saving away from asset appreciation back to that supported by income generation. That could entail as much as a 20-30 per cent decline in overall US housing prices and a related deflating of the bubble of cheap and easy credit. (FT)   

Basis Capital is trying to reclassify redemptions from investors as creditors of the fund   

Pyramids Crumbling: BIll Gross writes "today’s banking system as pointed out in recent Investment Outlooks, has morphed into something entirely different and inherently more risky. Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party’s accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant "black swan" run that might break them.  (PIMCO)

The Amaranth Debacle: What Really Happened   

Julian Robertson’s `Tiger Cubs’ Beat Hedge-Fund Rivals in 2007:  Hedge-fund managers known as the Tiger Cubs because they learned to pick stocks at Julian Robertson’s Tiger Management LLC beat their peers in 2007 by profiting from the most volatile equity markets in five years.Chase Coleman’s Tiger Global Management LLC in New York, which was backed by Robertson, returned 71 percent after fees, fund investors said. John Griffin, the former Tiger Management president who oversees $7 billion at New York-based Blue Ridge Capital LLC, posted a 65 percent increase.Tiger alumni including Lee Ainslie, Andreas Halvorsen, Paul Touradji, Stephen Mandel, Bill Hwang and Chris Shumway showed gains last year ranging from 27 percent to 51 percent, said investors, who asked not to be identified because the returns aren’t public. The average stock hedge fund rose 10.7 percent last year, according to Chicago-based Hedge Fund Research (Bloomberg)

ETF Tricks: Check out some new opportunities, and new hazards, in this fast-changing arena. (Forbes)

Third Reich to Fortune 500: Five Popular Brands the Nazis Gave Us    

• How Warren Buffett’s Berkshire Hathaway (BRK) got into monoline municipal insurance: A Regulator Not Stymied by Red Tape   (NYT)


The Wall of worry continues to build:

How Good Were Holiday Sales Really?   

The Economic Outlook: Q&A with Treasury Secretary Henry Paulson on the price of oil, China and who’s to blame for the credit crunch. (Newsweek)

The over-extended, debt-laden consumer

Economy Hit  As Consumers Tighten Belts: The consumer leg of the economy, which has been remarkably stable throughout the housing downturn, may now be tottering. The Dow Jones Industrial Average tumbled 246.79 points, or 1.9% to 12606.30 yesterday on the back of fresh signs that consumer spending is slowing. In an indication that even well-heeled shoppers may be cutting back, luxury jeweler Tiffany & Co. said that its U.S. sales slumped during the holiday period. American Express Co. warned late Thursday of rising delinquencies and slowing spending among its cardholders. (Wall Street Journal)

Merrill: Recession is already here   

What Are the Prospects for a Two Recession Bush Presidency?    

Recession pain likely to linger: Most of those using the R word are still projecting relatively narrow declines. They generally see the unemployment rate rising to around 5.5 to 6 percent during the downturn. Some believe that if consumers cut back on spending, it will be only a modest decline. Many of those economists caution that even if they’re right about a mild recession, the pain won’t end once the economy starts to grow again  (CNNMoney)

Economists say 2008 will be a year to forget   (Marketwatch)



Pending Home Sales Index & NAR Housing Market "Bottoms"   

As housing slumps, realtors quit "It’s a gold-rush mentality," says Michael Davis, an economist at Southern Methodist University’s Cox School of Business in Dallas. He has been struck by how many agents, brokers, and investors, acting against conventional wisdom of portfolio management, converted large percentages of cash holdings into only a single and somewhat risky investment: property. "I don’t know whether they’re ignorant or optimistic, perhaps a little of both," says Dr. Davis. (CS Monitor) See also Nearly 90,000 mortgage jobs eliminated   

• An asinine column in the Sunday NYT argues that the real problem during the credit bubble was Predatory Borrowing . . . Rather pathetic analysis.

Lender stung by fears on finances: The New York Times reported Tuesday that court records showed that Countrywide fabricated documents related to the bankruptcy case of a homeowner in Pennsylvania who was targeted for foreclosure, apparently bolstering concerns that the lender acted improperly. (L.A. Times)      

The Effective Nationalization of the U.S. Mortgage Market in Q3 07   

Housing: No room for bulls: Even a few months ago, it seemed like a good idea to hold a debate between real estate bulls and bears. But with home sales spiraling and the outlook getting gloomier, it was hard to find a single optimist at a recent panel discussion on the forecast for the housing market. Panel Discussion here

More Cash Down In These ‘Declining Markets’ Home buyers and sellers in the Washington area face a new challenge: Most of the region has been tagged a "declining market" by the powerful loan underwriters who review mortgage applications.That means appraisals are receiving an extra dose of scrutiny, and lenders are asking some buyers to come up with more down-payment cash.Such a broad-brush treatment of the diverse Washington market risks weakening prices in neighborhoods that, so far at least, have been holding their own.  (Washington Post)   

Lots of Fed speak this week

•  Bernanke: Calling Recessions Is Tough, and I Should Know: “Let me tell you a story. Before I got this job, before I was even on the [Federal Reserve] board, I was a member of the NBER business cycle dating committee which is actually the official body that determines the dates of the R-word as you referred to it. And one of the things that was striking about that operation is we didn’t even sit down and think about it until six months after the event. And the reason we didn’t do that was because economic data being as volatile as they notoriously are and as subject to revisions as they notoriously are, you really can’t make a determination about that kind of thing until well after the event. And so that’s what we did in that particular episode.   

Greenspan’s Reputation at Risk as Recession Odds Grow: The next bubble to deflate may be Alan Greenspan’s reputation. Hailed as perhaps the greatest central banker who ever lived (BR: By who?) when he left the Federal Reserve in 2006, Greenspan is under attack from critics ranging from the New York Times to economists at the American Enterprise Institute for his handling of the 2000-2005 housing boom. The former Fed chairman has taken to the media to defend himself, writing in the Wall Street Journal and appearing on network television. (Bloomberg)

The Fed’s Message Is Getting Lost in Translation

Now were really in the shit Pelosi and Bernanke to discuss economy:  Federal Reserve Chairmen Ben Bernanke will meet on Monday with House of Representatives Speaker Nancy Pelosi to discuss how they can work together to boost the U.S. economy, a spokesman for Pelosi said.ADVERTISEMENT Falling home values, higher oil prices and a decline in the stock market have raised concerns that the United States could slip into recession this year. (AP)


Melinda Gates goes public (Fortune)

What I learned about network television at Dateline NBC:
One might have thought that the television industry, with its history
of rapid adaptation to technological change, would have become a center
of innovation for the next radical transformation in communication. It
did not. Nor did the ability to transmit pictures, voices, and stories
from around the world to living rooms in the U.S. heartland produce a
nation that is more sophisticated about global affairs. Instead, the
United States is arguably more isolated and less educated about the
world than it was a half-century ago. In a time of such broad
technological change, how can this possibly be the case?
(Massachusetts Institute of Technology)

Bloomberg gathering data to gauge support  (MSNBC)

Minority vote moves center stage: With nomination contests in lily-white Iowa and New Hampshire settled, minority voting power now moves into the spotlight.ADVERTISEMENT Historical realities suggest that blacks and Hispanics won’t play much of a role in determining the Republican Party presidential nominee. But this year’s Democratic primary and caucus schedule was designed specifically to give increased influence to minorities, particularly Latinos.  (AP)

Prius outsells Ford Explorer

What Are They Thinking? In the past week, I have been in the car coming home late from work, with the presidential debates are on the radio. It is very discouraging to listen to what passes for economic literacy among the candidates. In reality, many candidates are espousing policies that are quite dangerous at worst, or simply misleading at best. Far too many in both parties tell a frustrated America what it wants to hear, rather than the economic reality. The Republicans have some of the worst offenders.    


The Untold Story: How the iPhone Blew Up the Wireless Industry (Wired)   

•  Very funny! This Video Makes Bill Gates Look Cooler Than Steve Jobs   

The Search Party: In June, 2006, Sergey Brin, one of the co-founders of Google, went to
Washington, D.C., hoping to create a little good will. Google was
something of a Washington oddity then. Although it was a
multibillion-dollar company, with enormous power, it had no
political-action committee, and its Washington office had opened, in
2005, with a staff of one, in suburban Maryland. The visit, which was
reported in the Washington Post, was hurried, and, in what was regarded
by some as a snub, Brin failed to see some key people, including
Senator Ted Stevens, of Alaska, who was then the chairman of the
Commerce Committee and someone whose idea of the Internet appeared to
belong to the analog era. (He once said that a staff member had sent
him “an Internet.”) Brin told me recently, “Because it was the last
minute, we didn’t schedule everything we wanted to.” It probably didn’t
help that his outfit that day included a dark T-shirt, jeans, and
silver mesh sneakers. (The New Yorker)

10 Tech predictions for 2008    

Where planets can form, they do New work by a team of US astronomers has shown that wherever there is room for a planet to form around a young star, it does. The researchers predicted the existence of an unknown planet circling a star more than 200 light-years from Earth.  (BBC)

Compressed air car on track for production this year (Autoblog)   



Weekend Jazz: On the 25th anniversary of Donald Fagen’s brilliant solo debut disc, The NightFly

CD Sales Plummet 15%; Digital Sales Gain 45%   

Salon asks, Is it possible to be too aware of our own consciousness? A
psychologist and a philosopher teamed up to document inner
experience. Describing Inner Experience?: Proponent Meets Skeptic

• Jeff Matthews says, "Enough with all the 1001 XXXX Before You Die books . . . 

How To Mind Control Customer Service Reps   

Rules of thumb.org


How we looked in the 1970s. (Frightening)


That’s all from the NorthEast, where we await a Nor’Easter — and a half a foot of snow. Drive safe!


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What's been said:

Discussions found on the web:
  1. John Borchers commented on Jan 13

    I’d like to see an article about the difference between The Great Depression and the Savings and Loan Scandle in BR’s opinion.

    The way I see it in Wikipedia our current situation, mortgages used to finance purchases of other items, is much closer to what happened during The Great Depression than in the Savings and Loan where many bad mortgages were issued when interest rates were very high.

  2. jombi commented on Jan 13

    One thing that we often forget is the ‘human’ element…

    The consumer is very much human and can sometimes…no….many times… over exaggerate his or her state of wellness and many times his or her state of sickness… (Cause of the housing bubble, rampant spending, and debt || The coming recession). That being said, I have read that there is a feeling as though the ‘hype’ regarding the coming recession is largely irrational fear…There are many data points that show that it is not due in large part to ‘irrational fear’… But lets go with that thinking… Given the evidence that people often over exaggerate their state of ‘wellness’, the corollary which is often demonstrated is that they will often do so in times of ‘sickness’. The same way people were cheering on the housing boom they are fleeing and flipping out in equal number and measure…For the Fed, if they were doing their jobs, the question and focus would be to find out how these irrational states and thinking are induced, as they have a great effect on consumption and the economy, and how to promote a better state and mode of operation…. But this wouldn’t be good for business I guess…

    The evidence is very clear as to who and what is causing these unstable states amongst the populous and it is sad that they got soo greedy and carried away that they put their cash cow in the emergency ward and put the whole ‘system’ at risk. Now they come running in w/ an adrenaline shot as if that is going to make things better in the long run….

    Those very far and disconnected from the middle and lower rungs of a society are often out of skew in terms of their measure of ‘wellness’ and ‘sickness’ of this group. So, I subscribe to no opinions from this ‘group’ unless it is backed by hard data. Also, I don’t subscribe to the opinions of this ‘group’ due to the fact that they have consistently been wrong about things in terms of down-turns time and time again. After all, it pays for them to be wrong ;) … $$$ & Self-serving bias.


    I guess there is a silver lining in everything -> From the article : “Yet retailers with exposure to emerging markets such as China and India may be able to offset the weakness in the United States, according to a report by Deloitte Research.” or maybe not…..

    It’s hilarious because many of these seasoned executives don’t understand the culture of these regions nor have they changed the culture enough, in numbers, in these regions to spawn the type of consumption that is necessary to ‘prop’ things up.

    The logic and the thinking behind ‘everything will be alright’ and that this is only a U.S problem in scope are baseless and at some points irrational…. The logic is so self-serving that it is borderline ridiculous….

    As a whole… Looking at the big picture.. I see an economy and a society (the U.S) that has been in large part built and centered around mindless consumption and credit for way too long. Combine this with ‘capitalism’ and you have a system that will trend towards the mindless promotion of ‘consumption’ and spending beyond one’s means (you always can achieve more). Money being the mechanism by which this system functions, you will have people seeking ‘mindless’ and an ‘anything goes’ means to seek it (money) out… Anyone felt uneasy about the last 10 years as this system has basically ran a muck in these areas?

    During down times, people often reflect on ‘what went wrong’ and reflect on their decisions…. Sadly, most Americans have their head in the dirt and they aren’t going to see this ‘down turn’ until it smacks them in the face…
    If a widespread societal aspiration of : ‘mindless consumption’ and ‘debt+credit’ caused this mess and the down-turn hits people hard, expect people to come out of the ‘R’ (emergency ward) with a very different ‘outlook’. If everyone’s ‘out’ is the global (non-U.S) growth then where do you think the U.S is going to be? So what then is the strategy, suck one society dry and move to the next?

    And no… There is no bailout for this one… You better believe the fed is having a tough time right now trying to decide what to do… The curtains have been pulled away and everyone sees what is going on behind the scenes…. Cut rates and face an equal huge decline in dollar value and an equal rise in inflation… The credit engine is dead….

    It’s time to get healthy and do the right thing. Banks and creditors aren’t really looking to do the right thing and are on to their tricks yet again… They are playing around the world begging for money in exchange for a ‘cut’ (diluting shares), sell-off (get the fed and thus me and you to finance their recovery through the tax breaks and #’s game they play..). This is not the right or healthy thing to do but I guess it looks real good on paper…. Time will tell :)

    So, measuring things in terms of health… What these banks are doing is not healthy….. You wouldn’t cheer on your neighbor who is selling his soul and your property value to make his/her monthly financial obligations so why do you do this for these corporations?

    You wouldn’t be disillusioned that someone who pumps themselves more and more with steroids before a game is going to be healthy in the long term so why do you think employment #’s are any different?

    I see the numbers both here and there but the extrapolation for the argument against a coming down turn just seem a bit off….

    And yes…Some will do well and prosper during this time.. But only those who were prepared and played it ‘healthy’ from the start….

    Those who didn’t will ‘fail’ and if the fed/govt. tries to prop these clowns up they better be prepared for the fallout that will come because of it ..

    In either case, it is apparent that those companies that are ‘healthy’ are in small supply with those being ‘sick’ in large numbers. It is also apparent that the fed and international investors will do whatever they have to in order to keep the party going… So, it should come to no surprise that when those ‘sick’ ones leave the party and miraculously end up home the next day that you wakeup to a foul smell of puke in your family car in the morning followed by “I’m sorry dear… But someone had to take them home right?” ;)

    It’s time for some stocks picks for the week !!!

  3. Rich Lather commented on Jan 13

    “Although not shown in this table, Amaranth
    had positions in natural gas futures contracts well out until 20009 maturity.”

    No wonder they went under

  4. Winston Munn commented on Jan 13

    Speaking of surprises, where are the derivitive losses hiding?

    An interesting observation from Berkshire Hathaway’s 2005 report:

    “A business in which huge amounts of compensation flow from assumed numbers is obviously fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables and a far-off settlement date, their respective firms must subsequently value these contracts whenever they calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences – and I’m personally familiar with several that were huge – tend to be tilted in a direction favoring higher earnings at each firm. It’s a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable.”

    With over $2 trillion as the estimated derivitives exposure, how much will the losses be and who will be the losers?

    Everyone in the whole world cannot be on the right side of these trades – where are the losses?

  5. Rich Lather commented on Jan 13

    W. Munn,
    I’ve been asking that too, with no clear cut answers. globaleconomicanalysis has mentioned a few in the past.

  6. Pat Gorup commented on Jan 13

    Actually, last week’s biggest winner was silver which saw a 6% increase. That would be twice that of gold. I wish you would give silver and the “other” precious metals the same coverage and consideration that you give gold. But hey, my gain.

  7. tom a taxpayer commented on Jan 14

    I think I see the FED calvary coming.
    Fed ACTION may come sometime this week as banks and brokerages report earmings. This week’s reports of reduced earnings, increased write-offs, and assorted other dirty laundry have the potential to cause a lot of pain for banks and brokerages. The Fed knows this.

    By the way, isn’t it amazing how soiled…how filthy dirty is the laundry of the bankers and brokers? Are they incontinent?

    My guess is the Fed is prepared to ACT either preemptorily or sometime later in the week as the bank and brokerage casualities increase. Let’s face it. If the Fed is going to ACT at all before its normal meeting, it’s most likely to be this week in which the piggy banks are cracked open.

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