French Riviera Economics

The Big Picture has an intriguing post on the solution to all this mess. I'm trying to think of the real world equivalent of this. It seems to go something like this: The gov't gives money to mortgage holders, who then pay off their mortgages thus transferring the money to the banks and getting rid of all the debt in the system, and the government takes back the money they gave mortgage holders in the first place through taxes on the banks. The original mortgage holders now own houses outright, but their houses are worth far less than the original mortgage values.

But of course the gov't is not taxing banks right now...quite the opposite, in fact. Which leaves the government, i.e. you and me, with a load of debt.

Inflating our way out seems similar to this scenario, as well, though you can't inflate your way out of debt if you don't have an income stream that keeps up with inflation. With 15.9% underemployment, that's just not going to work for the US consumer.

Insider Selling

A Barron's article noted the crazy pace of insider selling for the past month, at the pace of 8.3x the number of shares bought by insiders. April is on pace to see only $353MM of shares bought by insiders, the lowest monthly total since July 1992.

Shareholders Be Damned! by Alan Abelson. http://online.barrons.com/article/SB124061355986854673.html?page=2

I just got back from speaking to the Rebsamen Trust Portfolio Management class, the Sam Walton College of Business's student managed equity fund. It so happened that the current students were also interviewing applicants for next year's class tonight, and I got to flex some alumni muscle and interview a few of the candidates. While a little disappointed in myself for being so easy on them, I did get some interesting results from the one question I asked all 13 of the students I interviewed: When will the recession end?

The results: 12 of 13 were self-described "negative" on the economy, with end of recession predictions ranging from first half 2010 to "if it recovers."

The lone bull's opinion: "Second half of 2009. I just think President Obama is going to restore hope in consumers with all his plans and that's going to turn the economy around."

The WSJ Special

Here's the highlight reel of today's exceptional issue of the Wall Street Journal:

Sales-Tax Revenue Falls at Fastest Pace in Years

Tax Receipts are perhaps the best indicator of money being earned. Why? Because no one pays taxes they don't have to. That doesn't, then, bode well that the Journal reports that the 41 states that have reported first quarter '09 tax receipts so far are on average down 12.8% from the same quarter one year ago. It is well documented that financial sector driven recessions are accompanied by increased government debt--the debt increases not from massive bailouts, but from a drop in tax receipts.


CSX Profit Hurt By Lower Volumes

The rail company CSX reports that first quarter freight volumes were down 17.4%, leading to a 30% drop in profits. I must be honest, I'm not sure if this is a leading, lagging, or coincident indicator, but I do know it's not good. Please inform if anyone knows.


Cargill's Proft Declines 68% as Demand Weakens

Despite cries of "all is well!," a la Doug Nedermeyer from various agribusiness companies (Mosaic, Monsanto, Potash), Cargill posts a 68% drop in earnings with only their energy unit beign profitable.


Deere Combines Equipment Divisions

In a bid to save a few simoleans, Deere has combined it's agriculture equipment and consumer & commercial divisions, cutting about 200 slaried jobs.


Rural Housing Stranded--Or a Blessing in Disguise?

Congress has eliminated an interest rate subsidy program designed to build and renovate low-income housing in rural areas. Anecdotal evidence (Wynne, AR banned low-income housing decades ago) would suggest this is growth positive.

Thoughts on the Bean Market

Continuing a six week rally fueled by export demand from China and fund buying, front month beans touched a 2 ½ month high today before selling off in the second half of the day. Rumors of 6-7 cargos of US beans ordered by China drove up prices in the early part of the pit session before a report from a state backed market information provider reported that Guangzhou customs authorities found ten cargos of beans to contain a virus, sparking profit taking by longs on fears future shipments would be delayed or rejected. While the rally has caused Midwest spot prices to flirt with six month highs, the increase is due to pure price movement as basis remains at the same to slightly lower levels over that time frame.
While Chinese imports for several raw goods have increased, I am skeptical that China’s economy has turned the corner yet and will continue to drive demand throughout the year. Fund buying has been driven by the rally in equities and increased risk taking across the board. None of you need to be told that fund money can shift like the wind, nor how strong of a wind it is. Bean futures are now technically overbought to the extent as they were in late December. Additionally, May futures speculative positions are net long more than 3x the open shorts as we enter the last seven days of trading on the May option. Given these circumstances, it may be a good time to take a short May beans punt via writing calls on volatility spikes or shorting futures on price spikes.
The finding of the bean pod mottle virus in Chinese cargos is interesting, in that it brings forth the question: Do the Chinese want to limit bean imports? If it is in China’s interest to delay shipments, this will certainly be used as the reason. I am of the opinion that the Chinese have been and continue to quietly do what they can to forestall unrest in the populous, particularly in rural areas. On a time frame of several months, this includes boosting food stocks, which would explain the surprising Q1 demand for beans. Another part of quelling unrest is putting cash in the hands of those in the countryside.
The Chinese government has pursued both of those options through purchasing domestic beans for its stores at a market premium price of 3.7yuan/kilo ($6.83/bu). These purchases, however, are limited to higher quality beans, growers with beans that don’t measure up the quality standard must sell locally at a lower price. In the chief bean growing area of Heilongjiang Province, growers are blaming imported beans for the fall in price from a July ’08 high of 6.0yuan/kilo to the current market price of about 3.25yuan/kilo. Heilongjiang oil fat producers, a major buyer, are claiming that 3.3yuan/kilo is their breakeven price and that they cannot buy local or imported beans at that price. While slowing imports and thus raising bean prices would normally help growers and hurt oil fat producers, netting out any benefits, food oil prices have been on a massive rally driven by tightening supplies in the palm oil market (Indonesian palm oil futures are up 45% from the beginning of the year).
The meaning of all this? Higher oil prices mean oil fat producers have a higher breakeven, and thus higher bean prices can send some money to all levels of the soybean industry. If food oil prices remain elevated (or the Chinese think they will) then by slowing bean imports Chinese officials can not only increase cash flows to bean growers and crushers but quell the unrest caused by imports at the same time.

Everyone seems jaded these days, but if you woke up from a year's slumber this morning and read Bill Gross's April investment letter you would no doubt be shocked. Here are a few points he makes:

• For the past 10, 25, and 40 year periods stocks have underperformed bonds
• For the past century home prices have not even kept up with inflation
• Global wealth has decreased by 40% from the top
  
• Levering to delevering + globalization to deglobalization + lax regulation to reregulation = increased risk premiums & lower asset prices

On the last bullet point, the three components leading to lower prices are each individually tectonic shifts, much more so when they happen coincidentally. Gross's summation: The standard assumptions underlying pension and foundation investing are being challenged. No shit.

An excerpt:

II. The Future of Investing
Whether evolution or revolution it is important to recognize that the aftermath of an economic and investment bubble transitioning from levering to delevering, globalization to deglobalization and lax regulation to reregulation leads to an across-the-board rise in risk premiums, higher volatility and therefore lower asset prices for a majority of asset classes. The journey to a new stasis is a destructive one insofar as it affects previously assumed wealth. Rough estimates suggest that as much of 40% of global wealth has been destroyed since the beginning of this delevering process. In essence, asset prices, which are really only the discounted future value of wealth creation, go down – not only because that wealth creation slows down but because it becomes more uncertain. In such an environment, equity interests in the form of stocks, real estate or even high yield bonds become re-rated. Those who believe that capitalism is and will remain a going concern and that risk taking – over the long run – will be rewarded, must recognize that those rewards spring from beginning prices and valuations that correctly anticipate the global economy’s future growth path and volatility. In terms of that old maxim “buy low – sell high,” this means at the minimum that an investor during this period of re-rating must “buy low.”

In turn, investor preferences towards risk taking, even when correctly calculated and modeled must be considered. Peter Bernstein has for several years counseled that policy portfolios structured for the long run and based on historical return statistics should be reconsidered. The standard pension or foundation approaches to policy portfolios are being challenged, he asserts, and PIMCO agrees. Stocks for the long run? Home prices that cannot go down? The inevitable levering of asset structures to double or quadruple returns relative to risk-free assets? These historical axioms must now be questioned. In fact, as of March 2009, the superiority of risk-asset returns are not what many assume them to be. For the past 10, 25, and 40 years, for example, total returns from bonds have exceeded those for common stocks.¹ Home prices have declined a staggering 30% since their peak in late 2006, and have barely kept up with inflation for the last century according to Case-Shiller statistics. Commercial real estate when ultimately mark-to-market over the next several years will likely show similar results. In short, our stereotyped conceptions of what makes money are being challenged. As Bernstein says, there is no predestined rate of return. And a PIMCO corollary would counsel that future rates of return will be dependent on the beginning price and future growth rates and risk preferences that cannot necessarily be derived from historical models. Government policies will also play an important role, especially insofar as they impact long-standing property rights and capital structures. What I have previously described as a CQ – a common sense quotient – may take precedence over IQ and quantitative analysis in future years. How much of a benefit, for instance, did the renowned risk modeling of some of our major competitors produce over the past several years in terms of their bond funds and derivative-related products as compared to PIMCO’s? We invite comparison, not only of our own risk models, but our collective common sense quotient.

Source: The Future of Investing: Evolution or Revolution. Bill Gross. http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+April+2009+Evolution+or+Revolution+Bill+Gross.htm