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Are Stocks Always Best for the Long Run?

July 8th, 2009 admin No comments

John Lounsbury submits: Barry Ritholz (The Big Picture) has a great graphic comparing the results of investing in two different vehicles on January 1, 1994 here . The graph is shown below: Complete Story »

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Dan Dorfman: The Fat Lady Hasn’t Sung Yet

July 6th, 2009 admin No comments

Enough already of all those silly, unduly sunny and unrealistic economic predictions that are proving to be as accurate as those woefully inept forecasts we get from the local weatherman.

One of the latest such nonsensical predictions, a declaration by General Electric’s CEO, Jeffrey Inmelt, that “the (economic) crisis is over,” couldn’t have come at a worse time, judging from the bum tidings that followed his glowing forecast.

Abraham Lincoln once said “Tis better to be thought a fool than to speak and remove all doubt.” Maybe Inmelt ought to take note of that observation.

Judging from Thursday’s dismal economic disclosure–higher than expected June layoffs of 467,00, the 18th consecutive month of job losses–the GE boss is obviously way off base. Those layoffs boosted the unemployment rate to 9.5%, the loftiest level in 26 years, and the number of unemployed Americans to 14.7 million.

Also raising serious questions about Inmelt’s rosy outlook are several other harsh economic facts that he ignored–namely:

–The rising number of foreclosed and abandoned homes, now at roughly 2 million.

–The ongoing surge in credit card defaults and delinquencies, prompting credit card companies to curb consumer borrowing.

–Falling incomes and stagnation in wage growth, leading to sharp cutbacks in consumer spending.

–Sharply declining values and mounting delinquencies in commercial real estate. The shoe, it’s widely felt, has already dropped in this area, based on the mushrooming number of empty and boarded-up retail outlets and restaurants and the ballooning amount of vacant office space.

Judging from the market’s immediate reaction to the jobs news–a wicked 223-point dive that day in the Dow Jones Industrials–obviously a lot of investors are signaling that they, too, believe Inmelt is all wet in his positive economic outlook. Importantly, those job losses–which are widely expected to head higher–raise renewed doubt about the widespread bullish argument that all the bad news is already discounted in the marketplace.

For some thoughts on where we stand now, I rang up veteran investment adviser Martin Weiss, who made some super economic forecasts last January, among them warnings of massive job cuts, much steeper real estate losses, major financial problems at the giant banks and an inevitable Wall Street meltdown. His current outlook–if he’s right again–suggests Inmelt, economically speaking, could probably use a seeing-eye Lucky or Lucy.

Weiss, 62, known in Wall Street as the Grim Reaper and head of Weiss Research in Jupiter, Fla., concedes there has been a temporary economic stabilization in some sectors. But he hastens to note that’s by no means unusual after the precipitous economic declines of 6.3% in the fourth quarter of last year and 5.5% in the first quarter of this year.

The economy, as Weiss sees it, “is at a high between the storms,” a prelude, he believes, to a good deal more economic anguish.

Why more anguish? For starters, Weiss, author of the Ultimate Depression Survival Guide, currently on the New York Times’ best seller list, contends the administration–in its efforts to revitalize the economy–is addressing the symptoms, not the causes, such as the housing crisis, the shortage of liquidity and the excess debt in the world economy. The government may be pumping liquidity back into the system and has said it would back millions of dollars of credit, but the fact is, says Weiss, “the credit and liquidity crises have not been resolved.”

Making matters worse, he says, are the next time bombs. For starters, he points to the remaining toxic asset problems, notably the bad debts on the books of financial institutions. “They haven’t removed all the garbage, which is still poisoning the economy,” he says.

Weiss is by no means alone in his worries about toxic assets because the extent of this problem is still an unknown at many banks, in turn leading to more cautious lending practices and an unwillingness to take risk despite Uncle Sam’s billions of dollars of bailout money. Alarming here is said to be the threat of more–or perhaps substantially more–bank writeoffs

The financial plight of California, a $1.8 trillion economy which is unable to come up with a working budget, is defaulting on its short-term obligations and is broke, is viewed as another time bomb. As such, Weiss sees a rash of downgrades of the state’s credit by the credit agencies, which will make it either extremely expensive or impossible for California to roll over its maturing debt. Weiss also raises the risk that California’s financial woes could spread to other state governments.

Yet a couple of other ticking time bombs, according to Weiss, are the prospects of a big selloff in insurance stocks, followed by a slew of industry bankruptcies, and falling long-term Treasury bond prices, a reflection of the burgeoning deficit and increasing concerns about the credit of the U.S. Treasury and the stability of the dollar.

Wall Street estimates, factoring in the stimulus package, call for the GDP to grow 0.5% in the current quarter following an expected 2% decline in the second quarter, and gains of 2% in the fourth quarter and 2%-2.5% in the first period of next year. Too exuberant, our bear says. Given his worries and bleak outlook, Weiss expects a resumption of a large economic decline later this year or in early 2010 on the order of about a 6% GDP retreat.

What are the implications for the stock market? Weiss’s outlook: another bloodbath, with the Dow Industrials tumbling to about 5,000 later this year or in early 2010. Describing the market as grossly overvalued on current price-earnings multiples, which Weiss notes are totally inconsistent with those at the bottom of bear markets, he thinks investors would be well advised to sell into every rally. “And I would do it before it’s too late and time runs out,” he says.

“It ain’t over till it’s over” was one of Yogi Berra’s more colorful Yogi-isms. That’s precisely Weiss’s view when it comes to the sagging economy and the falling market. He takes it one step further, predicting a lot more chaos before it’s all over.

Dandordan@aol.com

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Sarah Newman: Declare Your Food Independence

July 3rd, 2009 admin No comments

What is more emblematic of this country’s deep rooted commitment to rebelling against the status quo than the impending July 4th holiday? It’s a holiday which celebrates the collective commitment to individual liberties, freedom and democracy. As part of our individualistic spirit, how often do you seem to hear lately about people removing themselves from “grids.” I’m referring to energy grids, food grids, education grids and any other behemoth industrial structure that stagnates our growth, individual freedom and ability to operate outside of the confines of our sometimes restrictive corporate or government structures. While this should be a day that we each take the time to read the Declaration of Independence and Bill of Rights and celebrate heroes like Paul Revere, instead we ususally opt to take to our backyards to grill, baby, grill.

I’m not asking you to give up your cherished grilling time, but each of us has the opportunity this holiday to make a radical political statement by declaring our food independence. What does this mean? Well, it means a lot to each one of us as unique individuals. But, collectively, it’s about saying ‘no’ to our industrial food system which is feeding us an unhealthy corn-based diet that is contributing to skyrocketing obesity rates, helping to fuel global warming, scaring us with constant food recalls and offering us foods that barely resemble food (a friend recently received a piece of sausage resembling a Pabst beer bottle. American kitsch? Yes. Healthy? No.).

It’s time that we return to our roots. Literally. We need to support a food system that offers us healthy, safe, sustainable, fresh foods. And what better time to begin than on Independence Day? Below are some tips for how to launch your food independence to have a healthier, fun holiday.

1. Skip the so-called “meat” hot dogs and choose veggie ones instead. I know this might be blasphemous for me to write, but unless you are getting meat from humanely-raised, grass-fed beef, you’re more likely to be consuming a hot dog filled with antibiotics, hormones, chemicals and corn. Not so yummy, eh? Instead, join with millions of others who will be enjoying veggie hotdogs during July-National Veggie Hotdog month; they’re tastier, healthier, have less environmental impact and are humanely raised.

2. Ok, so option 1 might have been a bit extreme for some of you. If you choose to eat meat this holiday weekend, check out Eat Wild for local, grass-fed beef and dairy sources.

3. Grill some fresh farmers market veggies. Skip the vegetables shipped thousands of miles and instead choose produce grown by a farmer near you. The Eat Well Guide is a handy online-tool that will allow you to find local farms and farmers markets.

4. Go on a corn-free diet. Corn is everywhere; it’s an ingredient in the food and perhaps even the packaging of a zillion products in our kitchens.

5. Don’t eat anything you can’t pronounce (excluding hard to pronounce international dishes like souffle or babaganouj). Don’t eat anything with more than 5 ingredients (this is care of the food guru Michael Pollan).

6. See Food, Inc. This eye-opening movie connects the dots to explain who and how our food system really operates. It will make you want to change how you eat.

7. Plant a garden in your home or join a community garden.

8. Choose sustainably raised seafood. Not to rain on your parade, but many fish-stocks are dwindling at alarming rates and many fish are filled with chemicals like mercury. Make sure you eat fish that are safe for you and the planet.

9.Start a compost bin. You’ll have lots of kitchen scraps from your farmers market produce which can be turned into nourishing, rich soil that can then be used on your new garden.

10. Choose hormone-free dairy. Do you really want to your sparkler-topped July 4th ice cream sundae to be made with hormone-laden dairy? Me neither. Choose organic dairy or soy ice cream.

Sarah’s Social Action Snapshot originally appeared on Takepart.com


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Does Anybody Still Use Second Life? And If So, How Much Is It Worth Today?

July 3rd, 2009 admin No comments

Analyst firm Next Up Research has published an extensive report on Linden Lab, the San Francisco company behind virtual world Second Life. The research is based on aggregate data and is available on SharesPost, a site set up to trade shares of privately held companies (if you register, you can download the report for free from that page, or you can find other valuation reports on companies like Facebook and LinkedIn). The report goes rather deep into the valuation of the Linden Lab, which it pegs at somewhere between $658 million and 700 million.

More on that later.

Now that Linden Lab has been around for nearly 10 years, and with its product Second Life celebrating its sixth birthday since launching publicly in June 2003, we thought it would be a good idea to take a close look at the report and see how the company’s doing according to the analysts.

First of all, you may be wondering if anyone is still using Second Life at all. The answer is yes, and users are very active on there. During the past 30 days, one million users logged in, according to Second Life’s own statistics. In average time spent per user per week, Second Life in fact trounces all other MMORPGs, including World of Warcraft and Civilization IV. In another testament to the service’s apparent stickiness, the number of hours users spend on Second Life has been increasing steadily and is currently at historic highs, totaling approximately 124 million hours in the first quarter of this year.

More importantly, Next Up says in-world transactions have recovered after a significant drop in September 2007 – when gambling was banned in the virtual world – and has been steadily increasing ever since December 2007.

Which brings us to the valuation, or at least the estimated value Next Up claims Linden Lab is worth after running a couple of calculations. Using publicly-traded online gaming companies as a proxy, Next Up pegs the median enterprise value (EV)/ Revenue multiple for that group at 7.2x off of 2009 revenues. Subsequently applying this self-proclaimed “conservative” multiple of 7x to the estimated revenue of Linden Lab ($100 million for this year), the current target valuation amounts up to $700 million.

That seems like a stretch. In November 2007, the last time we asked ourselves how much Second Life is worth, we came out somewhere between $500 million and $1 billion. The current estimated enterprise value calculated by Next Up falls pretty much right into the middle of that range.

Next Up defends the 7x multiple variable by referring to a two-year-old M&A deal. When Disney acquired Club Penguin for $350 million in cash back in August 2007, it paid out at least a comparable multiple based on Vlub PEnguin’s projected revenue for the year (between $50 and $65 million), despite the fact that it reaches a narrower demographic profile. But things have changed since then: stocks have tanked, valuations have dropped, the IPO market has pretty much dried up and VC-backed liquidity is at a record low. So that implies a major discount, with a valuation between $300 million to $500 million, which is decent but not spectacular, assuming Next Up’s revenue projection is accurate.

Here’s what else Next Up says could have a negative impact on Second Life’s valuation:

- the aging population of its main target markets (U.S. and Europe) and less of a presence in developing nations where its main target audience (people from 13 to 45) is quickly gaining in size.
- limited amount of premium subscriptions (about 1% or 170,000 users)
- possible taxation on virtual monetary transactions in a variety of countries
- cost and complexity of running the technical infrastructure behind the virtual world

If you’re interested in the virtual worlds or Linden Lab in particular, there’s a ton of information and speculation about the market to be found in the report, even if we focus mostly on the financial side of things. To conclude, here are two charts from the report, one on the estimated valuations based off of different calendar years and one on the post-money valuations after the various funding rounds raised by the company.

Information provided by CrunchBase

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Dice Reports Murky Waters For Tech Jobs

July 3rd, 2009 admin No comments

After months of dismal unemployment numbers, this morning’s continued growth in the unemployment rate from 9.4% in May to 9.5% for the month of June reinforces the fact that the U.S. is still very much in the midst of recession. Additionally, the U.S. Department of Labor reported today that employers cut 467,000 jobs in June, compared to 322,000 jobs in May. Unfortunately, the tech industry is still feeling the heat of the recession, with the rate of available jobs not improving much from the past few months, according to technology jobs site Dice.com.

Tom Silver, senior vice president of Dice.com, told us this morning that Dice.com is reporting a 44% year-over-year drop in job listings for the month of June. May’s year-over-year decline hovered around 45%. And Silver also points to a rise in the Department of Labor’s unemployment rate for the “PC and Mathematics sector,” (the area best associated with the tech sector). June’s unemployment rate for the tech sector almost tripled year-over year, from 1.9% in June of 2008, to 5.4% in June of 2009. While Silver says that the tech job market is certainly better than during the fourth quarter of 2008 and the first quarter of 2009, the number of job opportunities have remained stagnant over the course of the past few months.

According to the techCrunch layoff tracker, layoffs in the tech sector may be slowing down, which we reported in May. Layoffs are still taking place—the tracker has increased by 10,000 lost jobs over the past two months to a total of 340,000 individual layoffs. But there is a marked difference in the pace of layoffs from late 2008 and the first quarter of 2009, when layoffs were increasing by 100,000 every few weeks For instance, it only took three weeks for cumulative tech layoffs to go from 200,000 to 300,000 in February and five weeks for layoffs to go from 100,000 to the 200,000 mark before that in January.

Though companies are cutting back and limiting hiring for the near future, Silver says that there are still certain jobs within the tech sector that are in demand. Developers who are skilled in the areas of virtualization and IT security are among those in high-demand. And Silver maintains that tech companies are always in need of talented and skilled programmers. But for all the marketing and business development folks out there, demand usually picks up in line with the economy.

You can check out CrunchBoard for tech job listings.

Photo Credit: Flickr/Lisa Brewster

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TBD’s Deadpool Date Finally Determined

July 1st, 2009 admin No comments

Back in 2007 I did a column on TeeBeeDee, a social network aimed at baby boomers. I’d spent some time looking at the space, and thought TBD was the best designed site, avoiding Eons age restrictions and fascination with death and building something a bit broader than Gather. The site borrowed heavily from what worked on sites like Yelp and Facebook, the design was delightful and it gave you fun, addictive get-to-know-me activities. I was also incredibly impressed by its founder Robin Wolaner. (Pictured)

But there was still a central question: Would a social network aimed at baby boomers appeal to the demographic? As it turned out, no. The site is shutting down. Below is the letter to users from Wolaner.

A Message I Didn’t Want to Send
June 30, 2009

I regret to have to inform you that TeeBeeDee will be shutting down by July 13, 2009. We thought we had raised sufficient money to get us to a sustainable business, but many factors changed in the 2 years since our launch. As you have no doubt noticed in the past few months, we lacked the resources to continue developing the product to meet the needs of our community.

We will have much to say to you, and to each other, in these next two weeks. Just as we’ve shared the experiences of our lifetimes here at TeeBeeDee, we will be sharing this goodbye. For me, I can say that the people I have met at this site, and those with whom I’ve worked these past years, have been a revelation. I have learned so much from so many of you. We have thrilled to marriages, and romances, and lifelong friendships, and support to those in need. Anyone who says “virtual” friendships are less than real ones, didn’t spend time in this community.

Kat has posted tips about how to save what matters to you at TBD. And 500 TBDers have already joined a network at Ning: http://www.teebeedee.ning.com to stay connected.

As the founder, I’d like to close by saying that while our business opportunity proved disappointing, the contributions from our members rarely disappointed. I am proud to call so many of you my friends, and thank you for caring about TeeBeeDee.

Robin

Founder/CEO

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Marshall Auerback: Risk of Major Social Upheaval Likely if Bank Bonanza Continues

June 25th, 2009 admin No comments

State and local governments have been forced into draconian budget cuts, firing workers who are among the most reliable in making their mortgage payments — when they have jobs: firemen, policemen, teachers, civil servants.

Yet the Obama administration won’t spend even a small fraction of what it has wasted on the banks to cover state shortfalls. The guarantee of $5.5bn in short term notes for California was deemed to be fiscally irresponsible, yet hundreds of billions have already been allocated to the likes of Citigroup, AIG, and Goldman Sachs, all of whom have already beefed up salaries and bonuses as they emerge from the embrace of the federal government.

Good for the banks, bad for the economy

Banks are also benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. A bank doesn’t have to do anything to make money. The banks’ return on equity is going to be very good. They are going to be able to restore their finances.

While this is good for banks, is it good for anyone else? The problem is the government’s “free money” program means banks have little or no incentive to do any actual lending. Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, especially given the ongoing weakness in the real estate market. Growing income inequality will likely be perpetuated and exacerbated with all of the resultant social strains. And in the meantime, the siren songs will grow that we are a nation addicted to debt, deficit spending our way to economic disaster.

Housing bubble lessons

Policy makers were slow to recognize the importance and magnitude of home price deflation. Keynes, Minsky, and Fisher understood that balance sheets matter to income and cash flow outcomes — it is not just the other way around, as convention has it, where income and cash flow results passively accumulate on balance sheets at a glacial pace.

The New Keynesians like Bernanke should have recognized this through their “financial accelerator” channels approach, but the near-ZIRP (zero interest rate policy) QE (quantitative easing) approaches have so far proven to be too little, too late. Moreover, there is now a wing of investors feeding fears that “monetization” and significant fiscal expansion may constrain the Treasury’s room to manoeuvre further. The upshot is that we have missed a golden opportunity to deal with the growing problem of income inequality. Instead, we have the paradoxical spectacle of an ostensibly progressive Democrat administration, and a Democratically controlled Congress, presiding over one of the most regressive wealth transfers in history.

As Keynes and Minsky realized a lifetime ago, durable asset markets, such as housing, do not clear as easily as markets for Chiquita bananas. This is especially true after asset bubbles have introduced structural excesses in parts of the capital stock — what the Austrians call “malinvestment” or distortions to the production structure. When there are large outstanding stocks of durable assets relative to the potential flow supply, lower prices are not necessarily the cure for low prices, as the traders in the Chicago pits are wont to assert. The bias toward viewing markets as self-regulating, self-adjusting mechanisms does not hold equally well across all markets in all conditions, as this generation has been brainwashed to believe.

Rather, lower prices can beget a stock overhang of existing owners who want to sell, especially if expectations about “normal” or future values are closely coupled with recent spot price trends. Following an asset bubble, when conventions about normal supply prices (or even legitimate valuation models in general) have been ruptured, recent price momentum does tend to become the main guide to expectations, as the trend extrapolating traders win the day against fundamental driven investors during asset bubbles.

Obama, Geithner, and Summers misguided

Obama, Geithner, and Summers misplaced their faith in lower prices as the cure to an excess supply situation in a durable asset market. They also they failed to understand that while lower spot prices may reduce new production, the desired selling out of existing stocks can swamp this flow supply reduction. Because of these misconceptions, they now think they face the choice of either having to let it all meltdown, or else using policy to synthetically reproduce the prior bubble credit conditions.

Or consider this analysis another way, from the increasingly prevailing view that US policy makers are somehow edging us toward a hyperinflationary abyss. Money created has to be spent on goods and services to get higher product prices. Professional investors are working with very simple quantity theory approaches. They are not thinking about transmission mechanisms from money to prices. There is no auction market for M1 and the CPI that automatically settles at the end of each day. The only auction market is spending by public and private sectors on produced goods and services each day, week, month, quarter or year.

Government is the only one increasing spending. The fact that nominal GDP is still falling tells us that the private sector is trying to save more than government is deficit spending, which is deflationary, not inflationary. Even arch monetarists such as Milton Friedman conceded that the path to inflation from money creation was through nominal GDP.

In an inflation, people are eager to trade money holdings for produced goods and services or tangible assets. In a hyperinflation, even more so.

That is not what we have today. Banks are hoarding $1 trillion of cash on their balance sheets. Companies are in cash conservation mode and stripping down inventories, headcounts, and reducing capital spending. Households are saving and building exposure to near cash instruments.

Robust stimulus needed

When an economy experiences sharp and sustained shifts in private liquidity preferences, the policy response must be to create money and additional aggregate demand via government fiscal stimulus, or let debt deflation rip. The latter tends not to be terribly acceptable to democracies for the obvious reasons which Fisher had to learn first hand.

Statements by President Obama that “we are out of money” do not help, because they imply that there is an operational constraint on fiscal policy, beyond which the government dare not go. They feed the prevailing paradigm about “debt sustainability” and “national solvency” and thereby work at cross purposes. What President Obama, Fed Chairman Bernanke, and Treasury Secretary Geithner must say is that until the government deficit spending and the improvement in the trade balance exceeds desired net private sector saving, we can create all the money we want – it simply will not be enough to driver final product prices higher unless and until we succeed in restoring aggregate demand to sufficiently high credible levels where a self-sustaining economic recovery can take place.

In one sense, it is pointless blaming Wall Street for exploiting a system heavily rigged in its favour. They know that the game is stacked in their favour, so they are rationally taking advantage. But the sickest part about the whole episode is that the casino rule makers, Obama, Geithner and Summers, are perpetuating a flawed game that they had in their power the chance to end. In my more cynical moments, I have to wonder why TARP, which is essentially a purchase of financial assets (and, hence, better left in the hands of the Fed, as Treasury is supposed to buy ‘real things’) was placed in the hands of Treasury. It’s almost as if this was planned deliberately so as to provide the anti-government folks with a cudgel with which to beat back supporters of activist government. My issue with Obama and his fiscal package is the same as Rob Johnson’s: taxpayer money is being deployed in hugely inefficient ways like Citi, BofA, AIG, and GM and discrediting fiscal policy in the process. Contrast this with the achievements of the New Deal. As Adam Cohen in his new book, Nothing to Fear.

“[WPA] workers constructed or repaired more than 125,000 buildings, including 83,000 schools; 800 aiports; 950 sewage plants; and 650,000 miles of roads. They built or improved 78,000 bridges and 25,000 playgrounds; terraced 271,000 acres of eroded land; and taught two million people to read. They also ran a famous Federal Art Project, which hired destitute artists to create murals for public buildings, posters, and paintings. The WPA produced a highly regarded series of state guidebooks and an acclaimed collection of interviews with former slaves, and it played a major role in building the San Antonio Zoo, New York City’s LaGuardia and Washington’s Reagan airports, and the presidential retreat at Camp David. In 1965, on the program’s thirtieth anniversary, The New York Times quoted a dispossessed North Carolina tenant farmer living in an abandoned gas station, who had been rescued by a WPA job. ‘I’m proud of our United States, and everyting I hear The Star Spangled Banner I feel a lump in my throat,’ he said. ‘There ain’t no other nation in the world that would have had the sense enough to think of WPA.”

This kind of puts the paucity of Obama’s fiscal goals in stark relief, doesn’t it?

The key is building a political case for the stimulus. This means getting people around a common objective where everybody is perceived to be benefiting and that the sacrifices are being borne fairly. This was clearly the situation in WWII when the budget deficit as a percentage of GDP got as high as 30.3% of GDP, yet nobody complained about the “sustainability” of government expenditures. The upshot was that by 1946, the GDP per capita was 25 percent higher than it had been in the last peace years before the War. GDP per capita continued to grow during the Marshall Plan years. Despite giving away two percent of U.S. GDP, American residents (and taxpayers) experienced a higher standard of living each year. And nobody spoke about us running out of money.

Bank bonanza must end

By contrast, the current bonanza for banks is neither economically efficient, nor politically sustainable.

What is driving the change in portfolio preference shifts is not only a misguided paradigm, but also an inability for the Obama administration to make a sensible, coherent case in what they are doing and why they are doing it. Their actions, in fact, seem to suggest that everything is ad hoc and that they are operating out of their depth, in effect continuing the same policies of the Bush/Paulson period, but on a much greater scale.

Ironically, this ultimately will also prove highly inimical to the interests of finance itself. When most of the home owning voters cannot pay their major debt or have no incentive to pay their mortgage debt, there will either be a debtors revolt that society will sanction or there will be a bailout of such a magnitude that mega moral hazard will affect private lending forever. Once these things happen, you will no longer have the social rules for private risk based lending. In other words, financial markets will be unlike anything ever seen before in private economies. Is this really what Wall Street wants, let alone American society as a whole?

Both FDR and JFK had a brain trust that could help forge public opinion. Obama has his halo, Geithner, and Summers. We’ve known from the start that was a misstep.

In the meantime, beyond automatic stabilizers, the door appears to be shutting to further active fiscal ease. I wonder if the stage is already being set for tax hikes, as rumors of a federal VAT (value added tax) have been floating around of late. Add this to rising commodity prices and interest rates, and the profile of any recovery may become increasingly in question, a la 1937-8. Add to that additional bank write-offs, further credit contraction and a minimalist welfare system which leaves nothing in the way of social cohesion, and the prospects for major social upheaval look dangerously likely. What is missing is a vision of a new growth path for the US. If a public backlash is to be marshalled to something more than retribution, that needs to come to the fore. Once you get beyond the pothole and school patching, what industries can be pushed forward through public seed capital or public private partnerships? The economist Hy Minsky pointed out a better way to solve both the liquidity and the income problem, while also providing full employment: by channeling government expenditure through an employer-of-last-resort program.

The current crisis could have been mitigated if increased household consumption had been financed through wage increases and if financial institutions had used their earnings to augment bank capital rather than employee bonuses.

The current system has failed because it was built on an incentive system that did just the opposite.

This piece was originally posted on New Deal 2.0

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Dan Dorfman: Everything Is Not Coming Up Roses

June 25th, 2009 admin No comments

Billionaire money manager George Soros, Federal Reserve chief Ben Bernanke and the National Association of Business Economists, all agree: The U.S economic crisis is just about history. Plenty of Wall Streeters buy this rosy view, theorizing that this fall will mark the end of the nasty recession and produce a conspicuous economic upswing that will subsequently drive stock prices higher.

On top of that, just about anyone on Wall Street who is anyone is saying pretty emphatically that this year’s fourth quarter will produce positive economic growth (which is the basis of the recent sizzling 40% rally in the S&P 500 from its March low).

The problem, though, is what often looks likes a sure thing — such as the fact Tiger Woods would absolutely win the recent U.S. Open, which he didn’t — frequently turns out not to be anything but a sure thing.

Meanwhile, given ballooning unemployment, the sharp slowdown in consumption, no letup in the steady stream of foreclosures, rising interest rates and the threat of a new inflationary outbreak, skeptics abound, a number of whom argue that talk of a sunnier outlook at this time, given the slew of land mines all around us, is little more than economic hogwash.

One of them is Madeline Schnapp, the skipper of economic research at TrimTabs Investment Research of Santa Rosa, Ca., partly owned by Goldman Sachs and one of the country’s leading liquidity trackers. Her view: Not everything is coming up roses.

“A financial collapse is now history, but the notion of a return to a full-scale recovery in the fourth quarter or positive economic growth in the period just doesn’t make any sense,” she says. “We’re recovering from the worst economic downturn since the Great Depression and that’s not going to happen overnight.” Forecasts of positive growth this fall are a fantasy, she observes, because they’re based on hope and expectations, not reality.

Her fourth quarter GDP outlook: “It will be another quarter of negative growth.” In contrast, many economists are looking for positive GDP growth for the period of about 3% to 3.5%. For the current quarter, the consensus calls for a retreat of 3.5%, following a decline of a revised 5.5% in the first quarter and a drop of 6.1% in last year’s fourth quarter.

Why such an economic bear? For starters, Schnapp — who might aptly be called “Lady Doom” — says real-time indicators suggest the U.S. economy is still contracting rapidly. Kicking off, she points to the prospects of a wave of defaults in Alt-A mortgages (low-risk, low-rate loans that are better than sub-prime and less than prime and are often made with little or no proof of a borrower’s income). About 3 million U.S. borrowers have Alt-A mortgages and 36% of them have missed at least one payment in the last 12 months. Moreover, almost 16% of all Alt-A mortgages issued since January of 2006 are said to be 60 days late. All told, there are about 3 million Alt-A mortgages totaling $1 trillion

Schnapp also notes that wages plunged 6.1% year-over-year in the past four weeks, much steeper than the 4.8% year-over-year decrease in May. That means, she explains, $250 billion less this year in consumer pocketbooks. She also notes that income tax withholdings plunged an adjusted 8.8% year-over-year in the past two weeks, indicating wage declines and job losses have accelerated.

The labor market, as Schnapp sees it, is still in horrible shape. Granted, she observes, weekly unemployment and continuing unemployment claims have declined slightly, but they remain at high levels, while online job demand appears to have stabilized at an extremely low level. As for housing, she says the notion that it’s starting to recover is nonsense. Aside from the growing defaults in Alt-A mortgages, California foreclosures are up 156% since March.

Another big worry, according to Schnapp, is the huge government debt. Spendthrift Uncle Sam, she points out, has to sell $1.5 trillion of new debt every quarter just to finance the deficit and pay down existing debt.

Her worrisome economic bottom line: “How can anyone say the economy is out of the woods?” Taking that concern a step further, she feels the economy is unlikely to expand until well into 2010.

Interestingly, despite Wall Street’s feverish, go-go pitch to entice investors to put more money to work in the stock market, would-be equity buyers remain extremely cautious. Indicative of this, though investors are sitting on mounds of cash (about $3.5 trillion in money-market funds alone), much of it is being channeled into asset-preservation U.S. Treasury securities and FDIC-insured savings accounts. For example, from March through May, Treasuries and savings accounts posted an inflow of $615 billion.

Schnapp apparently thinks those cautious investors are on the right track. Her outlook: a U-shaped market (where stocks languish at a large bottom before rising), versus a V-shaped forecast (where stocks go up and down sharply). As the folks at TrimTabs see it, there’s a time to buy stocks and a time not to buy stocks, and now is the time not to buy unless the loss of money is irrelevant.

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Taibbi’s Goldman Sachs Takedown In Rolling Stone: Bank Has ‘Unprecedented Reach And Power’

June 25th, 2009 admin No comments

With a subtitle like “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again” run, don’t walk, to your nearest kiosk and buy Matt Taibbi’s latest piece in Rolling Stone magazine. One of the best comprehensive profiles of Government Sachs done to date. Speaking of GS, they sure must be busy today, now that Bernanke is about to be impeached and take the fall for all their machinations.

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Wikinvest Hopes Redesign Will Attract The Yahoo Finance Crowd

June 25th, 2009 admin No comments

Finance sites like Yahoo Finance and Google Finance haven’t changed much in the past ten years. The fonts are different. Maybe there’s some more real-time quotes and fancier, interactive charts. But at their core they all follow pretty much the same formula: dump as much data on the individual investor as they can and let them figure it out. Wikinvest, which started out as a crowd-sourced investing site, is trying to change all of that with a complete redesign that is being turned on tonight for members who log in.

Over the past two years, Wikinvest has become a great resource for researching stocks but some of its most interesting data was hidden away. It is not a daily habit like other finance sites, attracting only about 500,000 unique visitors a month. The redesign aims to change that by putting all of Wikinvest’s industry- and company-specific data front and center. Each stock page has a chart, key metrics, a news feed, wiki analysis, and opinions from bulls and bears.

But there is a new data central tab which presents financial data in new ways. For each metric, whether it is revenues, operating margins, or debt-to-equity ratios, Wikinvest tells you whether the number you are looking at is high, low, or average compared to the industry. It also computes trends for you such as revenue growth and net income growth. Hovering over an one of these numbers produces a mini chart graphing the trend over time.

Beyond that, though, Wikinvest shows industry metrics which can give investors insights into the health of the company. For instance, the industry metrics it shows for Google include ad revenue growth, paid clicks increase, and market share of searches. All of these also have their own little charts, each of which are embeddable. Here are the charts for ad revenue growth and licensing growth:

You can also create charts which compare Google to Microsoft, Yahoo, and eBay across a variety of metric. Here is one comparing advertising revenues:

The whole point is to make the data intelligible. If you don’t know what the Price to Sales ratio means, you can click on it and get a definition

In addition to making all the data come more alive, Wikinvest also now has a news feed for each stock. But instead of showing articles tagged with the ticker symbol, which is now overused by every finance news site from Forbes.com to the Motley Fool, it matches words in articles to its own database of 100,000 keywords associated with different companies. Its news feed shows headlines and snippets of text from 200 trusted sources, ranging from Bloomberg and the New York Times to wonkish finance and economic blogs. This casts a wider net and brings back different types of headlines than you might find on Yahoo Finance, although it may be too wide a net. I am not sure why a Forbes story about the hospital where Steve Jobs got his liver transplant comes up on the Yahoo stock page.

Is that enough to make it the new Yahoo Finance? No, but at least it’s something different.

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