Friday, May 30, 2008

Features of the week

Get set for our, "Features of the week".

1. US economy: first-quarter growth estimates raised.

2. Fresh fears for US economy as corporate profits tumble again.

3. Marc Faber: credit crunch will continue and spread.

4. Banks establish central clearing facilty for OTC credit derivatives.

5. The CFTC investigates crude oil trading practices, and announces closer crutiny of commodity index funds.

6. Are index investors driving commodity prices?

See also: "Index Speculators responsible for commodity prices?", and Hard Assets Investor's interview with Bob Greer, manager of Pimco's RealReturn funds.

7. Pimco's June 2008 Investment Outlook focuses on suspicious inflation measurements and inflation-themed investments.

8. Agflation: Reuters global coverage.

9. Is the Dollar Doomed? Presentation by Dr. Benn Steil.

10. "Greenspan's incessant contradictions". - Brady Willett.

11. New tax law for US exiles - WSJ tax report.

"Now, after years of threatening to do so, Congress has passed a law that will tax the assets of those who leave for good on their way out the door, as if they were selling those assets."

Sounds like the ultimate "leaving town tax".

12. Ken Heebner: America's hottest investor.

13. Munehisa Honma (Homma): best hedge fund manager ever?

14. FT Video: Nouriel Roubini on US recession, housing, and the stock market.

15. Brazil leads the world's largest equity markets, while Vietnam's stock market continues to slump on inflation.

16. Mark Mobius sees opportunity in frontier markets.

17. Oil exporters are unable to keep up with demand.

18. $200 oil? Q&A with Paul Horsnell of Barclays Capital.

19. Oil and the World War III portfolio.

20. "Peak Water" and conserving water resources.

21. Google, Chevron back solar thermal power.

22. Burma's citizens take up aid burden (with audio slideshow).

23. John Lydon: "I'm fat, I'm 50, and I'm back".

Thanks for reading Finance Trends Matter. Y'all come back now...

Wednesday, May 28, 2008

Whitney: Credit crunch "far from over"

Meredith Whitney, the Oppenheimer & Co. analyst whose skeptical view of the investment banking industry has made her a star on Wall Street, says the credit crunch is far from over.

Whitney recently joined Bloomberg TV to talk about the credit crisis, consumer lending, the outlook for the mortgage securitization market, and the health of the US consumer.

In spite of all the highly-publicized problems that have plagued the credit markets since last July, Whitney feels that the crisis is "far from over" as many of those problems will "bleed into the consumer".

She follows by saying that bank managements will be caught off guard by problems associated with consumer credit losses and will have to "reverse a tremendous amount of revenues".

Problems associated with consumer credit losses will mark the second wave of this credit crisis. To quote from a recent Forbes article on Whitney's views:

"The first wave of the crisis affected trading books, but the second wave will hit lending. This is because consumers got accustomed to the same "a rolling loan gathers no loss" mentality, Whitney says. As long as housing values continued to rise, borrowers could refinance in perpetuity to avoid default."

Banks are expected to reign in consumer lending, removing $2 trillion of available credit lines in the process. This will, in effect, "extract...over $2 trillion of liquidity from the consumer balance sheet", Whitney noted in her Bloomberg interview.

The Forbes article sums up the problem:

"New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors," Whitney says.

Are rising consumer defaults and higher bank loss rates ahead?

See also:

Whitney says Credit crunch "far from over" (transcript).

Whitney: Credit Crisis will run into 2009.

The rise and rise of analyst Meredith Whitney: Michael Lewis.

Tuesday, May 27, 2008

Index investors driving commodity prices?

Recent surges in commodity prices have brought attention to the increased role commodity index investors have taken in the futures markets.

The upsurge in commodity index investing has led some observers to claim that commodity prices are being pushed higher due to the growing involvement of these long-focused funds, which buy and hold distant-month futures contracts in order to gain exposure to rising commodity prices.

Are commodity index investors to blame for higher commodity prices, or have they simply become the new scapegoat in the attack on speculators?

John Mauldin recently addressed this issue in a recent edition of his Frontline Thoughts newsletter.

In a section entitled, "Those Nasty Index Speculators", Mauldin looks at recent comments made by hedge fund manager Michael Masters on the issue of index fund involvement in the commodity markets, and offers a rebuttal to Masters' claim that index funds are a main factor driving higher commodity prices and the virtual stockpiling of much needed commodities.

Here, Mauldin quotes from Masters' testimony:

"There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.

"Index Speculators' trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits."

There is also the question of certain loopholes which allow investment funds to avoid position limits in the futures markets, an issue discussed in our recent post on food prices. Mauldin addresses this point here as well.

"What about position limits? Aren't there real limits to the amount of a physical commodity that a fund or speculator can accumulate? Masters points out that there is, but the CFTC has given investment banks a loophole, in that they can sell unlimited size positions in the OTC swap markets if they hedge the positions.

So, a hedge fund could buy $500 million worth of wheat, which would be way beyond the actual market position limit, through a swap with a Wall Street bank, without having to worry about position limits. And there is no doubt that large purchases of any commodity will drive up prices, at least in the short term.

What does Masters think Congress should do? Prohibit pension funds from commodity index buying, close the swaps loophole on speculative positions, and make the CFTC (Commodity Futures Trading Commission) provide more transparency as to who is buying commodities. That would stop those nasty index speculators from driving up food and energy prices. Prices would come back down and we could all go back to driving our SUVs without having to worry about the cost."

But, as Mauldin points out, there is more to the issue than that:

"It is not that simple. While there is no doubt that excess demand in the form of index buying can have a very real effect -on prices, it is not the whole story.

What an index funds does is buy a futures contract for a given commodity when money is first invested. Say that contract is six months out. When the contract is one month from expiration or delivery, the index fund sells that contract and buys another contract six months out. They sell before the contract could have an effect on the cash price of the physical commodity. The cash price is determined by supply and demand."


For more on Mauldin's (and Bob Greer's) take, read the whole article.

But the debate linking higher commodity prices to index investors and increased speculation does not end there. We have plenty more for you on the subject, with everyone from Tim Iacono to GaveKal research and FT Alphaville weighing in. Read on at the related links below.

"Fun with the Masters Report" - Mess That Greenspan Made

"More fun with the Michael Masters report" - MTGM

"Commodities spiral - are speculators to blame?" - FT Alphaville

"Government meddling on food prices" - Finance Trends Matter

"On agricultural commodity prices" - Finance Trends Matter

"Pension execs called on carpet" - Pensions & Investments

Monday, May 26, 2008

New stuff + your feedback

Hey everyone, just wanted to let you know about some recent improvements and new additions to the site. Comments and suggestions are welcome, so let me quickly describe the new features.

First, I moved the site search bar and subscribe/bookmark buttons to the top portion of the blog homepage. These tools are now more visible "above the fold", having been moved up from the bottom of the righthand navigation column.

I hope this will making searching for relevant posts and information more convenient for all our readers. The Google Custom search bar is a great tool for finding relevant information quickly, so we definitely don't want this feature languishing towards the bottom of the page where new visitors are less likely to see it and use it.

Same thing goes for our handy "Subscribe" and "Bookmark" buttons. They're both moving right on up where everyone can see them. We want to make it easier for you to subscribe to our site feed and share this site with your colleagues and friends!

We're also going to be swapping out a few links in the "Links" and "Blogs" section of our navigation bar. Just a bit of housekeeping to remove inactive links in favor of new and better stuff.

Which reminds me: here's another area where your suggestions can really help. I'm looking for a great commodities-focused blog to link to in our "Blogs" section, and am currently trying to run a down list of currently active, well-run blogs in this area.

If you know of a good blog devoted to futures trading, commodities, or the resources sector in general, please let me know about it, and I'll add it to my list. Thanks!

Please let me know if you have any questions about these site features, or any ideas for future improvements. Your comments and suggestions are always welcome and appreciated.

Friday, May 23, 2008

Features of the week

Warren Buffett goes to Europe, private equity jaunts through Africa, and investors venture into Cambodia. All this and much more in our, "Features of the week".

1. Government's "numbers racket" is about to blow up in our faces.

2. If inflation is low, then why are bond prices falling and yields rising?

3. The market is beginning to think that the Fed will raise interest rates.

4. Africa investment pioneers in private equity initiative.

5. Jim Rogers and Marc Faber advise private-equity investors in Cambodia.

6. The oil market's historic swing to contango: has peak oil "tipped"?

7. Running on empty? Fears over world oil supply move into the mainstream.

8. Gasoline near $4 shortens Memorial Day trips.

9. Backlog of unsold US homes hits record.

10. "Inside the Middle Class: Bad Times Hit the Good Life" (Pew Research).

11. FT Video: Chad Hurley on the future of YouTube and online video.

12. David Gordon on the so-called "Libertarian Paternalism" espoused in Nudge (Thaler, Sunstein).

13. How much could you have if Social Security was your money?

14. Uncommon wisdom shared in our "Planning for Retirement" series.

15. Robert Hirsch and T. Boone Pickens talk oil on CNBC.

16. The Art Trading Fund gets Saatchi tips on the hottest artists around.

17. The Oracle has landed. Warren Buffett goes to Europe and tells audiences in Switzerland and Milan about Berkshire Hathaway's search for European businesses and his personal investment philosophy (Bloomberg Video).

Thanks for reading Finance Trends Matter. Enjoy your holiday weekend!

Thursday, May 22, 2008

Planning for Retirement (Part 3)

Today we complete our series on retirement planning with a look at the final segments in Financial Sense Newshour's recent "Planning for Retirement" broadcasts.

Part 1 of our post series gave an overview of the current global Boomer retirement wave, and an intro to the first part of FSN's "Retirement" programs.

Part 2 focused on the the second part of the FSN broadcasts, and the lessons given on sound retirement budgeting and management of expectations.

Now in Part 3, we'll look at the final segments in FSN's "Planning for Retirement" special and wrap up all the program links and transcripts in one easy to reach place. Plus, we'll add a little bit of wisdom to our discussion of retirement, courtesy of The Financial Philosopher.

Everything you hear and read in these programs, transcripts, and posts is derived from the personal experience and wisdom of the authors and program hosts. My knowledge in this area of personal finance is totally limited; as experienced, thoughtful investment managers and financial planners, theirs is great. So our aim is to learn from the best!

Now, on with the show.

In the third segment of FSN's "Retirement" broadcast, hosts Jim Puplava and John Loeffler discuss longetivity and healthcare in retirement, adjusting your investments to deal with inflation, reducing living costs and taxes through downsizing and relocation, and working during retirement.

In the fourth and final segment of FSN's "Planning for Retirement" broacast, Jim and John discuss the difficulties in negotiating your way through our currenting health care system, assessing future health care costs, the need for sound estate planning and the drafting of wills and DPA ("durable power of attorney").

Here are links to the entire Financial Sense Newshour "Planning for Retirement" program series. A written program transcript is included with each episode. Part 1, Part 2, Part 3, Part 4.

Now, a lot of what Jim and John discussed in their "Retirement" program series dealt not only with the sound planning/nuts and bolts of a retirement plan, but with managing one's expectations and rethinking the idea of life during retirement.

With that in mind, let's finish our discussion with a bit of wisdom from Kent Thune, The Financial Philosopher. Here is Kent's, "Five-Minute Retirement Plan".

I hope this piece lends a bit of added perspective and liberates your thinking on the subject of retirement, no matter what your age may be. Enjoy!

If you found this post useful, please share it with a few friends or bookmark it to your favorite link-sharing service (Stumble Upon, Digg, Delicious, etc.). You can use our "bookmark" button at the bottom of this post to share on any of these services.

Thanks for reading, and we'll see you on Friday for our, "Features of the Week".

Tuesday, May 20, 2008

Planning for Retirement (Part 2)

In Part 1 of our "Planning for Retirement" post series, we started with a brief overview of the Baby Boomber retirement schedule and the problems and changes that could arise out of this huge demographic shift.

We also looked to the retirement wisdom imparted by investment manager and Financial Sense Newshour host Jim Puplava, and his co-host John Loeffler, in their recent FSN radio broadcast, "Planning for Retirement - Part 1".

Today we'll continue with part two of the FSN radio broadcasts.

In this segment, Jim and John continue their discussion of mass Boomer retirement, while emphasizing the need for sound budgeting and planning. An important part of retirement planning would come under the heading of "expectations management."

According to Puplava, many retirees are already starting to see some shocks from the falling values of their homes and investment portfolios. As a result of this, some current and future retirees may feel the urge to take on greater speculative risk in their savings and investments.

Program transcript excerpt:

"And last week, we talked about the budget. We talked about breaking the budget between fixed and variable expenses. And then we talked about expenses subject to inflation, expenses that weren’t subject to inflation and a lot of people are looking at changing their retirement dates.

In fact, it was amazing, there was an article in the Wall Street Journal this week, and it was on the front page and it said, “Americans are delaying retirement as housing and stocks swoon.” And they give the example, of about four or five couples, one guy was an executive for IBM and he was looking at his 401(k) program and also looking at selling his house, downsizing his house, taking the proceeds, getting a cheaper home to live in, taking some of the excess paying his house and then also where his retirement plan.

Well, guess what? At the end of the year it was a bad year for him last year, this year he was down 20% on his portfolio; the proceeds from the house – they had to drop the value of their house a lot more than they were anticipating. So you’ve got millions of retirement age Americans who are stung by this recent economic pall who are suddenly having to reassess their plans with many forced to quickly change course."

As you can see from Jim's example above, one of the main issues facing retirees will be a need for reappraisal of retirement expectations, in terms of both lifestyle and monetary comfort.

With sound planning, you may be able to secure a very enjoyable and fulfilling retirement, but it might not conform to the image of so many personal finance and lifestyle magazine covers.

For more on managing retirement expectations, and planning wisely in your investments and retirement expenses, see the Financial Sense Newshour's program, "Planning for Retirement - Part 2".

Be sure to catch part three of our retirement post series, when we'll look ahead to the concluding segments in the FSN "Planning for Retirement" programs.

We'll also outline some of the main points discussed in the program series, and top it off with a little bit of enlightened thinking on the issue of retirement. Hope to see you then!

Monday, May 19, 2008

Planning for Retirement (Part 1)

Back in April, the Financial Sense Newshour produced a series of program segments devoted to the issue of retirement planning.

Today we're going to look at the first installment of FSN's retirement special, and guide you to the archived broadcast link and a written transcript of this program.

But first, a quick overview. Why is retirement such an important topic?

Retirement is currently a very big issue not only in America, but in other developed nations as well. These countries face a demographic overhang of "baby boomers" facing retirement, and there is no shortage of news stories and articles covering this trend.

How will these nations deal with the structural changes taking place as a result of this mass retirement? Are individuals in North America, Europe, and Japan ready for this shift? Are Americans better prepared or less prepared for retirement than their counterparts in other nations?

A recent Financial Post article entitled, "Ill-prepared spendthrifts", speaks to some of these questions. Excerpt:

"Being ill-prepared for retirement appears to be a global phenomenon. The largest global retirement study of its kind, released yesterday by HSBC Insurance, has identified an entire demographic cohort it calls the "IP" generation -- as in Ill Prepared for Retirement.

Failure to prepare for retirement is directly related to overspending and low savings rates, says University of Virginia business professor Ronald Wilcox, author of Whatever Happened to Thrift? [Yale University Press, 2008].

He says North American savings rates of negative 1% are lower than the plus 2% of the United Kingdom, or the 10%-plus of Germany and France, and even higher savings rates in Asia. He suggests the failure of profligate North American Baby Boomers to save means they will eventually pressure governments to introduce "measures that transfer wealth from the people who have saved responsibly to those who have not."

"The U. S. really sticks out," Wilcox said yesterday, "American citizens are less prepared to shoulder their burden relative to their counterparts in other developed nations."

Unfortunately, this seems to be a global phenomenon. High taxes and low savings levels in many developed nations have left a large number of Boomers ill-prepared and desperate to implement tax-thy-neighbor policies for transference of wealth (government-sponsored theft).

Keep your eyes and ears open to this, as wealth transfer and onerous taxation are key themes for the future, and all these things are discussed in the Financial Sense Newshour retirement programs.

Now let's get started with Part 1 of the Planning for Retirement series.

In the intro to the first part of this program series, FSN hosts Jim Puplava and John Loeffler discuss the differences in retirement for baby boomers, as compared to that of preceding generations.

"Now, you look at our generation. Both you and I are boomers, John. We didn't -- well, I have had my own business now for almost three decades but other than that, most boomers have had three or four, five job changes, maybe two or three career changes in the sense that you may have started out in one field, you moved over to another field.

The pension systems changed in this company. Companies downsized as the country changed from a manufacturing to a service to a financial economy, so a lot of these structural changes in the economy have taken place. And now, you have the largest population in US history heading into retirement. That's going to have a profound change, I think, both economically and in the financial markets."

Jim and John follow up their discussion on the changing face of retirement with an overview of some important considerations for retiring individuals.

There's a lot of ground covered here in the opening segment of this series, from some very straight talk on Social Security and Medicare, to inflation and the expected rising costs for food, services, health care. You might find some very worthwhile insights here.

Listen to the FSN "Planning for Retirement - Part 1" program.

Tune in tomorrow for Part 2. See you then!

Friday, May 16, 2008

Features of the week

Yes, it's time for our, "Features of the week"! Enjoy.

1. Oil sets record near $128; pump price at high too.

2. Saudis decline Bush's request for more oil. Hint: Maybe its because they don't have any spare capacity?

3. Cheap oil may be history as $100 becomes the norm.

4. Myanmar cyclone leaves 500,000 children in need of help.

5. Bloomberg video: "Feast to Famine: The Facts Behind the Food Crisis".

6. Global stock markets: performance and valuation scorecard (Prieur du Plessis - Investment Postcards).

7. Major asset class 1,3,5,10 and 15 year returns (Richard Shaw - QVM Group).

8. "Why all roads lead to inflation" - Bill Fleckenstein.

9. Peter Schiff on the, "Ticking Credit Card Time Bomb".

10. Calculated Risk looks at non-borrowed reserves and the Fed's balance sheet.

11. BusinessWeek profiles Phil Falcone of Harbinger Capital.

12. ABX index looks to regain some of its old spark.

13. As food costs rise, farmers cling to subsidies.

14. Food for Thought - Absolute Return Letter (via John Mauldin).

15. Intel Capital chief Arvind Sodhani warns of cleantech bubble.

16. There is nothing governments can do about rising oil prices: Richard Heinberg (Australian Broadcasting Corporation video interview).

17. Fed eyes move to tackle asset bubbles. The very bubbles they help create...

18. China earthquake donation guide (China Law Blog).

19. Doris Buffett, the Sunshine Lady (Controlled Greed).

Thanks for reading Finance Trends Matter.

If you've enjoyed reading the blog and would like to keep up with all our new posts, subscribe to our blog feed.

Have a great weekend!

Wednesday, May 14, 2008

CPI reports and other misinformation

I wasn't planning to post anything today, until I saw Bear Mountain Bull's take on the April CPI report. Quote:

"In what is probably the sickest joke that our government plays on its people on a monthly basis, the April CPI report was released this morning, reporting an increase of only 0.1% in “core” inflation. Never mind the largest increase in food inflation in 18 years."

You might want to go on over there and have a quick look at the BMB gang's reaction to this latest marvel of government trickery and statistical illusion.

Be sure to check out Barry Ritholtz's post, "US Inflation Miracle Continues", as well. Search through his previous posts on "inflation, ex-inflation" while you're there.

Also, if you haven't read Kevin Phillips' recent Harper's Magazine article on the government's reporting of economic statistics, now would be a great time to read it and get a little added perspective on the matter.

Tuesday, May 13, 2008

Barron's on Credit Default Swaps

Credit default swaps (CDS) have become an increasingly well-known financial instrument in recent years.

Originally developed for insuring against debt default and hedging against, or speculating on, changes in credit spreads between debt instruments, CDS have grown into a $62 trillion market and are now the most widely traded credit derivatives.

Barron's has put their focus on the CDS market in a recent piece entitled, "Credit-Default Swaps: Weapons of Mass Speculation". Here are some excerpts from that article.

"DON'T KNOW MUCH ABOUT derivatives called credit-default swaps, or CDS? There's no reason one should. Even today, CDS, which represent bets on the default risk of various debt issues, remain an obscure corner of the global-finance market, inhabited mostly by big banks and brokerages, hedge funds and other institutions. Denizens of the CDS market strike customized insurance deals covering all manner of debt, from corporate, sovereign and municipal bonds to asset-backed securitization paper. There's no formal clearing house for this over-the-counter market. Nor is there much public reporting of the pricing of the trades.

But don't be fooled by the low profile of the business. In the decade since credit- default swaps were invented, the market has exploded in size, to some $62 trillion of CDS deals outstanding from just $1 trillion in 2000, according to industry estimates. This dwarfs the size of the underlying bond issues.

Beyond concerns about its size, the CDS market seems to have become a weapon of mass speculation that is destabilizing international debt and even equity markets. That looks to be true in the subprime-debt-induced crisis of recent months that still has the credit markets in a deep-freeze. At the height of the crisis, in the first quarter, the price of credit-default insurance for key financial companies zoomed to once-unimaginable heights, signaling rightly or wrongly the imminent default of their debt issues."

I won't be able to properly judge the article until I've read it from start to finish (skimming through parts for now), but so far, it seems that Barron's' take on the subject is tailor-made to fit the retail investor's limited understanding of the subject.

You won't find me claiming to be an expert on any segment of the credit derivatives market, but I have to wonder whether this piece is an honest account of the market or an introductory set-up to attack short-sellers who have used the CDS market to profit in their short bets against financial companies (the article goes on to detail Bill Ackman's short campaign against Ambac and MBIA).

Glancing through this piece, it's not difficult to size up the author's slant on this subject. Take the Barron's "Bottom Line" article summation, for example:

"The $62 trillion CDS market has become a destabilizing influence in the bond and stock markets. Rumor-mongering by CDS holders helped drive down many financial shares."

So, as you might have guessed, this is not an "up" piece.

What are your thoughts on the CDS market and Barron's coverage of this topic?

Related articles and posts:

"Credit default swap" - Finance Trends Matter

"Credit default swaps and financial WMDs" - The Big Picture

"Bill Ackman and David Einhorn on CNBC" - Finance Trends Matter

"Watchdog wants credit derivative controls" - Financial Times

Monday, May 12, 2008

Bill Ackman and David Einhorn on CNBC

Caught this one over the weekend and thought you might enjoy this.

CNBC had long/short investors William Ackman, of Pershing Square Capital Management, and David Einhorn, of Greenlight Capital, on Squawk Box last Friday; The Big Picture shares the video highlights with us.

Topics of discussion include the panel's defense of short-selling, the advantages of long/short portfolios, Bill Ackman on valuing long-term investments, the importance of mark-to-market accounting, and more.

You may remember Ackman for his famously thorough research in advancing his short positions in Ambac and MBIA. David Einhorn is often associated with his long-running battle with Allied Capital, detailed in his new book, Fooling Some of the People All of the Time.

Enjoy the CNBC clips and the discussion.

For more on Ackman and Einhorn's investment ideas, see our December 2007 post, "Time to buy financials?".

Sunday, May 11, 2008

Jukebox

Following up on our recent post of David Bowie's 1974 appearance on the Dick Cavett show, here's a little added something from the same time period:

BBC's 1974 Bowie tour documentary, Cracked Actor.

If you watch David's sit-down interview with Dick Cavett, you'll hear the two discussing the idea that "the lives of the rock stars are really not as strange as the lives of the fans".

Watching Cracked Actor, it's interesting to see this point bared out at a certain point in the documentary. As far as Bowie's mid-70's fanbase is concerned, there really seems to be some truth to this statement!

What exactly does this film document? Here's a quick summary from our YouTube host:

"In 1974, David Bowie embarked on an extensive tour of America. Performing over 70 concerts and taking 6 months, Bowie and his band stepped on stage each evening to deliver a highly tuned and finely timed performance that was the Diamond Dogs show. It included some of the most spectacular and expensive stage effects and scenery ever seen, even by today's standards.

In September of the same year, a BBC television film crew was invited to follow David Bowie mid-tour in and around Los Angeles during his week-long stay there, as part of the DIAMOND DOGS/PHILLY DOGS tour. This highly acclaimed 55-minute documentary film, entitled 'Cracked Actor' was first broadcast on 26th January 1975 as part of BBC-TV's Omnibus series."

Friday, May 09, 2008

Features of the week

Lots of energy related news in this week's "Features", and plenty more besides...

1. Oil climbs above $126, as commodities benefit from dollar flight.

2. Putting $120+ oil in perspective: Jim Rogers, Bill Powers, Matt Simmons.

3. (Video) T. Boone Pickens discusses wind power and energy policy during the Milken Institute Global Conference.

4. Citigroup (NYSE:C) plans to shed $400 billion in assets as part of Vikram Pandit's rebuilding plan.

5. Uh oh: Zimbabwe bank officials now praising our officials.

6. FT correspondent Jack Fairweather describes changing perspectives in Iraq.

7. Post-election violence in Zimbabwe escalates.

8. Tea with Greenspan down 65%, and other casualties of a weak economy.

9. "Why not let the markets set prices?", asks Peter Schiff.

10. Mish on tax rebates and "economic stimulus nonsense".

11. Icap founder Michael Spencer launches a new Africa and Middle East investment fund.

12. Calling oil wrong: misinterpreting the forward market price curve.

13. Election year + $124 crude oil = silly solutions: Caroline Baum.

14. Recession is in the eye of the beholder: Financial Philosopher.

15. The housing crisis is over, says Cyril Moulle-Berteaux. Discuss.

16. Hedge funds: Some winners in the tumult are emerging.

17. Saluting Generation X without irony. (Hat tip to Abnormal Returns).

18. David Bowie chats with Dick Cavett and performs a few songs in this 1974 Dick Cavett Show appearance (Part one, part two, part three, part four, part five). A preview to our weekend jukebox feature.

Thanks for reading Finance Trends Matter. Hope you've enjoyed this week's posts.

We are always pleased to welcome new readers and regular visitors. If you would like to bookmark this site for future reference or share our posts with others, please do so.

You can also subscribe to our site feed and read all our updated posts in your favorite feed reader.

Enjoy your weekend!

Thursday, May 08, 2008

Art inflation: a $120 million Mao

$100 million dollars just doesn't go as far as it used to.

It seems today you can't even buy a modern masterpiece for that price without bumming an extra $20 mil or so from your friends...

Details from Bloomberg:

"An Andy Warhol portrait of Mao Zedong may fetch an artist record of $120 million in a private sale in Hong Kong, Christie's International said.

Christie's is shipping Warhol's ``Mao,'' a silkscreen-on- canvas portrait more than 14-feet (4.3 meters) tall, to Hong Kong in late May for display at the city's main convention center, to allow potential buyers to view the work, said Ken Yeh, Christie's deputy chairman in Asia.

``That is a huge price to pay for a painting,'' said Elaine Holt, a Hong Kong-based curator at Opera Gallery, which specializes in Western artworks. ``Considering how well-known Warhol is in China and how wealthy some Chinese are, I wouldn't be surprised if a mainland collector bought the painting.''"

The sale of Warhol's Mao painting is amazing not only in terms of the price it is expected to bring, but also because of its expected (and recently expanded) pool of potential buyers.

That a collector from the Chinese mainland would pay this price, for a painting done by a Western artist, might have been unthinkable only a few years ago.

But given the painting's historical significance to Chinese collectors, and Asia's growing demand for Western contemporary art, it seems that the large Mao could have a willing Chinese buyer at this extraordinary price.

"Yeh said Asia's buyers now account for between 5 percent and 10 percent of Western postwar and contemporary art purchases, compared with 1 percent about five years ago.

``We have been cultivating our Asian buyers,'' said Yeh. ``There's now greater awareness and that helps demand.''

In November 2006, Hong Kong real estate magnate Joseph Lau paid $17.4 million for a smaller Warhol Mao portrait, a record at that time. Lau is chairman of Chinese Estates Holdings Ltd."

The road to $120 million was paved with the enormous sums recently paid out for other notable Warhol works.

"Warhol's 1963 ``Green Car Crash,'' an acid-green painting of a gruesome car wreck, sold in New York for an artist auction record of $71.7 million last May at Christie's. A Warhol portrait of Elvis Presley sold privately last year might have fetched more than $100 million, Yeh said in a phone interview from New York."

Now for a little price comparison. I was curious to know how current prices for Warhol's paintings compared to those achieved at auction in the past (say, 10, 20, 30 years ago).

So I reached for my nearby copy of The Andy Warhol Diaries (a fascinating record of prices, culture, lifestyle, and events in 1970s-1980s New York) to look for mention of past prices.

Searching with Amazon's online reader made finding the relevant entries much easier. Here are excerpts from two different entries in 1978 (five years after the Maos were painted) that offer a record of that period's auction prices for Warhol's work.

From the entry dated November 3, 1978:

"The Elvis at the Parke Bernet auction on Thursday went for $85,000. It was estimated to go between 100 to 125. The market's peaked for contemporary art. Todd Brassner said the Mao was about to go for $4,000 and he bid it up to $5,000 and then somebody else got it so he was thrilled."

From an earlier entry dated May 18, 1978:

"Bob had gone to the auction, and he called me at Diane's to say that a big Disaster went for $100,000 but a medium-sized Mao only went for $5,000. That sounded okay, so I told him we could still kick up our heels, I was relieved that the paintings sold okay."

I wonder how Andy would react to today's prices?

For more on the 2000s' global art boom, see:

"Art as Investment, Inflation Hedge" - Financial Sense Online.

"That booming art market" - Finance Trends Matter.

"Grantham and Faber on bubbles" - Finance Trends Matter.

Wednesday, May 07, 2008

Oil at $120, soon to be $200?

"Wait, wait, wait. $200 oil? Just let me get my head together a minute man...I'm still trying to get used to the idea of $120 a barrel."

The internal monologue of the average American (in dazed hippy-speak) when considering recent oil prices and the prospect of much higher prices to come?

Okay, I'm speculating here. I can't see inside the average person's head, and he probably doesn't even talk like Tommy Chong.

But I think we can say that your average American Joe has probably been surprised by the extent and duration of this nine-year uptrend in crude oil prices. Especially when you consider that this protracted price rise was accompanied by a constant, sustained chorus for "lower oil prices ahead!" from many of the media's talking heads.

And believe me when I say that if you have a car (or two, or three, or an Elvis-sized fleet), this is one commodity market you are likely to have kept up with. Even if you don't like to read the financial papers or watch business news on tv, you've probably glanced up at that sign in your gas station parking lot and shaken your head in disbelief a few times.

Now that crude oil prices have climbed above the $120 mark, some analysts, like Goldman Sachs' Arjun Murti, are already making forecasts for $150-$200 oil. And you know what? I think a growing number of people are starting to realize that these prices are not that crazy, given current (and projected future) global supply and demand fundamentals.

We've talked a lot about higher crude oil and energy prices here in the past. For those who might like to revisit some of the earlier forecasts of tight oil supplies and higher prices, here are a few items of interest that will add some perspective on the current state of high energy prices.

1. Our August 2006 interview with energy investor, Bill Powers, of Powers Asset Management.

2. Jim Rogers forecasts tighter oil supplies and $150-$200 oil in this late 2007 CNBC interview.

3. Matthew Simmons tells Bloomberg (in early 2007) that oil is priced more cheaply than store-bought water and higher oil prices are sure to come.

What do you envision: higher oil prices to come, or the start of a longer-term drop in prices?

Medvedev steps up

Dmitry Medvedev became Russia's new president today, succeeding Vladimir Putin.

It is expected that Putin will continue to exercise his power as Russia's Prime Minister and the leader of the United Russia Party.

More on this from Bloomberg:

"Dmitry Medvedev was sworn in as Russia's third president, succeeding Vladimir Putin, with promises to fight corruption and inflation in partnership with a predecessor who may try to overshadow him."

"...The new president submitted Putin's nomination as prime minister to the State Duma hours after taking the oath of office. The lower house of parliament will consider the nomination tomorrow. Putin is also head of the United Russia party, which dominates parliament, possibly setting up a battle for leadership."

As President of Russia, Medvedev will have to address certain economic questions, including the rise of inflation.

"Medvedev, 42, a longtime Putin ally, assumes control of a country in its 10th straight year of economic growth. Russia, the world's biggest energy exporter, has benefited from record oil and gas prices, with the economy growing at an average 7 percent a year. That growth has pushed up wages, the ruble and inflation, making Russia less competitive. Medvedev has vowed to curb inflation, without presenting a program for doing so.

`Inflation Problem'

``Economically we have a big inflation problem,'' Michael Ganske, head of emerging market research at Commerzbank AG, said in a Bloomberg Television interview. ``This is the problem Medvedev needs to solve to broaden his political base and gain the support of the public.''

And as the Financial Times points out, Russian inflation might not only become a growing national problem, it may also provide the impetus for a power struggle between Medvedev and Putin.

"Others agree that, once in office, Mr Medvedev will realise the extent of his powers and succumb to temptations to bolster his position. Mr Putin, suggests Mr Makarkin, will also not want to undermine the office of president - not least since he wants to be able to one day return as head of state.

All of which opens the way for possible clashes. One early test could be spiralling inflation, which hit 14 per cent in April.

"Mr Medvedev will not want to take responsibility for skyrocketing inflation," says Mr Volk. "So who is to blame? The government - the prime minister? So this could become a source of tension and the outcome of this tension is unclear." "

We'll certainly be keeping an eye on these trends inside of Russia.

For more info on Dmitry Medvedev, please see this recent (March 24, 2008) interview with the Financial Times.

Monday, May 05, 2008

A rally with serious muscle (?)

Dow Theory Letters writer Richard Russell is still bullish on the action in the US market averages.

In recent weeks, Russell has become increasingly convinced that the strong action in the Dow Industrials and Transports off their January lows could signal an "all clear" for the economy and a surprise continuation of the recent upward trend in the US stock market.

He elaborated his position in a recent contribution to Barron's magazine entitled, "A Rally With Serious Muscle". Here are a few excerpts from that piece:

"Dow Theory bolsters the bullish case. On Jan. 22, the Dow transports recorded a low, along with the industrials. A rally ensued, followed by a decline in which the industrials broke to a further low that was "unconfirmed" by the stronger transportation average. From there, the transports headed higher, dragging the industrials along.

In April, both the industrials and the transports rallied above their February peaks. This was a Dow Theory bull signal and reconfirmation of the primary bull trend. Recently, both averages climbed to new recovery highs, another sign the market was ignoring depressing business and economic news.

A final study contributing to the bullish case is the short interest on the NYSE. It has reached a record 15.2 billion shares. In order to make money, short sellers need a declining market, preferably one that's falling amid rising volume, which is unlikely to occur. My guess is the short-sellers eventually will have to cover their positions -- that is, repurchase the borrowed shares they had sold -- resulting in a potentially explosive rally."

We last mentioned Russell's views on the market in our March 27 post, "Stock market wrap up".

In recent weeks and months, Richard Russell's readings of a possible continuation of the long-term bull market have provided an interesting contrary opinion to the who see the current market action as nothing more than a bear-market rally.

Still, (to my mind) there seems to be some disagreement between Dow Theorists as to whether or not the market has confirmed a bullish primary trend.

As noted in the exerpt above, Russell sees the April move by the Industrials and Transports above their February peaks as a, "Dow Theory bull signal and reconfirmation of the primary bull trend".

Meanwhile, as we noted back in our April 11 "Features" post, newsletter writer Tim Wood had pointed out that the recent upward moves in the Dow averages were not enough to confirm a primary bull trend, as they had not broken through their last joint highs reached in July, 2007.

Here's an excerpt from Tim's April 4 "Market Wrap-Up" piece:

"In looking at the chart below you can see that both averages last made joint highs back in July. In Dow Theory terms, this was known as a “secondary high point” in which both averages confirmed one another. From those highs, both averages moved into their August “secondary low points.”

It was the rally out of that low in which things began to deteriorate. As the Industrials pressed higher into their October highs, the Transports lagged, and in doing so failed to confirm the Industrials. This created a Dow Theory non-confirmation at the October secondary high points and is illustrated by the blue trend lines on the chart below. I wrote about this at the time and explained that upside non-confirmations served as warnings that something was wrong."

So it looks like we have some difference of opinion as to what constitutes a confirmation of a primary bullish trend.

Russell's thoughts on the market's discounting abilities are intriguing, but at this point, I'd say we might need to go back and see what exactly constitutes a primary bull trend, from a Dow Theory perspective.

Is the recent upward move by the averages above their February peaks enough to qualify as a bull signal? Or do they need to exceed their joint highs of July 2007 to reestablish the bullish trend?

A quick check of my copy of John Murphy's Technical Analysis of the Financial Markets reveals the following passage: "Dow...felt that both averages must exceed a previous secondary peak to confirm the inception or continuation of a bull market."

Does that mean Tim Wood is right in saying that the "secondary peak" was the joint highs recorded in July 2007? Is this still a bear market, in Dow Theory terms?

What do you say? Are we in a bull market or a bear market rally?

Sunday, May 04, 2008

Buffett on recession, future deals

Berkshire Hathaway's (BRK.A) annual shareholders' meeting has accounted for the usual glut of Warren Buffett-related news items over the weekend.

Let's take a quick look at some of the highlights from the, "What Warren said" files.

MarketWatch reports that Berkshire Hathaway is eyeing German family-owned businesses as possible acquisition targets.

"Berkshire Hathaway Inc. is interested in acquiring family-owned businesses in Germany, Chairman Warren Buffett said Saturday.

Buffett is planning to travel to Germany and three other European countries in a few weeks to try to raise Berkshire's profile in the region, he said.

"We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway," Buffett said. "If they care about their business we are their best call."

"We're nowhere near as prominent in Europe as we should be," he said."

Does Germany have some form of US-style estate tax which prompts families to sell their businesses, or are the Mittelstand companies hampered by red-tape and excessive regulation?

I am curious to know.

In any case, Berkshire Hathaway has gone global in its hunt for future acquisitions and investment opportunities.

And that's not all that Warren had to say. Both he and Charlie Munger weighed in on the risks to the financial system (Buffett feels the risks are declining) and the likelihood of a US recession (WB says we're in one now).

Here are Buffett's thoughts on the US economic picture (Reuters):

""The U.S. is in recession as I define it," Buffett said at a news conference. "I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too."

There you have it. Read on at the links below for more.

See also:

"Buffett: Recession has hit main street" - CNBC.

"Buffett hints at targets for his global buying spree" - Bloomberg.

"Live blog of Munger & Buffett Q&A session w/ shareholders" - CNBC.