Posts Tagged 'Bernanke'

Slovenia Could Imperil EU Bailout; Operation Chubby Checker a/k/a Operation Twist; The Recession is here.

Little old Slovenia, that old communist country, could be the fly in the ointment. The government fell last night and elections are not yet scheduled but the party that seems to be in favor of assuming power is apparently less benevolent than the outgoing politicians. Slovenia’s Democratic Party is also much less benevolent than the US Democrats but I guess the word “Democrat” has different definitions in former communist countries than here. They believe that countries like Greece should pay the piper themselves and that it shouldn’t fall on the Slovenians to give up their hard earned cash to profligate spenders. The issue with this is that the approval of the new ESFS proposal requires unanimous approval from all 17 members . If the Democratic Party does assume power, there is no guarantee the Slovenians vote to approve the bailout making for, at least, some suspense. The markets don’t need more uncertainty.

Alpha Natural Resources noted slowing demand in Asia for coal as one reason why they cut guidance today. This is not a good sign. China was supposed to be a bastion of strength. Copper, FCX, at lows, transports getting smeistered, these are the front end of the recession. I’m short CNX and BTU. The rails, who of course benefit from coal shipments, are feeling tremendous pain. CSX had already lowered guidance as did FDX.

In 2002, Bernanke made a speech about Kennedy’s use of Operation Twist and it wasn’t so favorable (link below) Granted the speech referred to Japanese deflation issues but is nonetheless very telling. Quote is from the footnote 11.

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

“An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to raise short-term yields and lower long-term yields simultaneously by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was rather small in scale, did not involve explicit announcement of target rates, and occurred when interest rates were not close to zero.”

Like Chubby Checker, the inventor of the only twist that worked, this move will be for entertainment purposes only since it will have less of an affect on the economy than Chubby’s record sales. And it will hurt the banks.

HPQ – sell it. The Board should be fired. You approve such a radical change in direction such as buying an overpriced software company and the spinning off of your PC business and then you fire the CEO. Can you think of a worse nightmare for a CEO than having the stock decline when you are hired then spike when you get fired. Whitman, a brilliant internet pioneer, is not the answer. EBAY is a retailer, HPQ is, well what is it? It’s a declining hardware business. ORCL isn’t buying HPQ. $60 billion is an awful big price tag for a “told you so” by Hurd even if it were his decision which it’s not.

Most troubling about the bank debt downgrades is the reason. It’s crazy logic. Does Moody’s see a need for the government to bail out the banks? If so, their debt won’t be worth anything so the downgrade should be to junk. If the Lehman deja vu isn’t an issue, then there shouldn’t be a downgrade.

Guess what? I’m still bearish.

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Yesterday’s Blog – Nat Gas; Netflix (NFLX) Hastings Has A Solution for Europe; President Obama, Merkel,

My sources provided unique insights into the European Finance Ministers’ Meeting in Poland this past weekend:

Germany: I would like to invite Herr Geithner to our little party.

Poland: Whatever you say, boss.

Austria: Absolutely not. He has no personality and is way too American, always telling people what to do.

France: It’s a long trip and he probably won’t even come. He’ll probably just send a really big check as a gift with his regrets.

Belgium: Rubbish. I heard he’s in debt over his head and his boss is soon to be out of a job which means he’s also on borrowed time.

Germany: Look, I am paying for the party and I want him to come. Hopefully, he says nein and sends a check. If we don’t invite him we stand no chance of getting anything from him.

Austria: Fine. He’s your friend but I’m warning you that if he starts bossing us around, I won’t be able to hold my tongue.
And so it went.

NFLX continues to be a short, the CEO’s mea culpa aside, if for no other reason than content costs will significantly crimp margins. Perhaps the Europeans should look at Hastings strategy and separate insolvent Greece from the rest of the union, the Greeks being the NFLX version of a legacy DVD business. Apparently, Hastings doesn’t want his company’s valuation in the market to be painted with the broad brush of a declining or slower growth business so he is separating the 2 businesses. Perhaps Merkel et al should invite him to their next get together. At least he is sure to bring the entertainment.

So here I am in Nashville sitting at the gate waiting for my flight to Newark. CNN is on and everyone seems to be transfixed by the conversation leading up to the President’s speech on deficit reduction and taxes. I don’t think I have ever seen this level of interest before. Most have barely taken a bite of their deep fried bagels – everything is deep fried here, even the sushi. This is America, Nascar country as their attire attests, Dale Junior’s number featured prominently. I often wonder why they revere Junior given he’s crossed the finish line about as often as an Obama legislative proposal on taxes.

Like an Earnhardt fan, expectations were apparently incredibly high going into the weekend. But like an Earnhardt fan, the experience only resulted in disheartening disappointment. I’ve noted before that our two party system can’t agree on much these days so any expectation that the Euro’s 17 backers, some with effectively more than 2 party systems, will agree on a bailout measure for the banks and the PIIGS in a compressed time frame is folly.

Merkel is losing her mandate as yet another election pointed out this past weekend as her FDP partner suffered defeat. This conceivably puts Europe in a precarious position without a strong voice. Clearly, the coalition is fracturing, unable to even offer a carrot to the markets when they knew one was so desperately needed. Expectations are possibly higher for the FOMC to release a Q3 type statement on Weds. But even if they do, it will only provide a short term lift to the market for the economic fundamentals continue to worsen. Yes there are pockets of strength, the high end has been the savior, and the Apple ecosystem has done more than its share, but there is no disputing the declining economic picture and I would not continue to look for the upper end consumer to thrive, not in the face of higher taxes. Bullish prognosticators note the decline in the averages from the peak as more than having discounted any perceived economic malaise while hanging onto the belief that we are in a soft patch. Need I remind them that when the market rose to such heights, the global economy was on an upswing and the European sovereign mess just a twinkle in a dollar bull’s eye. Now the economy has slowed, if not reversed, and the collapse of the potential for a collapse of the Euro is real.

But the President has an answer for us. He wants to tax investment income as ordinary income, essentially removing any incentive for assumption of risk. In a perilous market environment, why put any capital at risk if there is little chance for reward? Less investment means less money sloshing around the economy and fewer jobs being created. And while we’re watching the acrimony in Washington, how about drafting the rest of us into a financial civil war, dividing the citizenry into two classes, pitting one against the other, all in the name of politics?

None of this is positive for the economy or the markets which is why I continue to be bearish

I added to my Euro short against the dollar on Thursday and still believe par is where the Euro will ultimately reside even if the new Troika comes out with a bailout package. Actually, that will further fortify my already strong conviction. Given my view on the slowing world economy – yes, even China will slow – I have exited my energy positions for the most part recalling that crude got decimated in the ’08 financial meltdown as demand suffered and speculative traders lost their appetite for risk (and their margin). The one bright spot is LNG as global demand is increasing sharply as a function of Japan and Germany using less nuclear power and Japan, China and India looking for a next generation solution to their burgeoning energy demands supposedly willing to pay as much as $20/btu all in. As more tankers and terminals are built for export, this will help sop up our overabundance of natural gas. And although I have little faith it will happen, should the administration ever propose a real energy policy, that, by the way would also create a number of jobs, natural gas would have to be in the equation.

I guess I’m not really surprised by the muted reaction in gold to all the negativity since gold is a risk asset and the appetite for risk is waning once again and margin requirements more lofty. It’s not a bad thing to see a high flying trade enter into a consolidation phase. I will keep my eye on it, looking for opportunity but will probably miss it again.


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