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Asia, Greece and More

February 16, 2010


Good morning. It was a very interesting week for the market last week. The SPY advanced 1.38 (or .9%) on the week to close at 108.66, after actually trading lower on last Friday than the close of the week before. It was actually a fairly impressive rally off the lows last Friday, as the low opening was associated with negative market news from both Europe and Asia. The European news was that fourth quarter growth rate in the 16 nation region fell to only .1% in the fourth quarter, after showing a more promising .4% growth in the third quarter. Greece led the way with a .8% decline in the quarter, while Germany fell to zero growth from .7% positive in the third quarter. France actually increased, from .2% in the third to .6% in the fourth, but the whole region was down 2.1% from last year’s fourth quarter and a total of 4% for the year, not good. It is true that Greece is a small country, but the fact that it needs to borrow 20% of its GDP to remain afloat this year is certainly troubling, and their numbers (in percentage terms) are not too different from ours in the U. S. The second thing that is troubling about Europe (again, with implications here) is that all this is happening after unprecedented fiscal stimulus from both the European Union and the debt build up in the individual countries. If you view those countries like our states (without the ability to print money) the parallels are striking.

The Asian news is quite different. The Chinese government raised the reserve requirement on Friday for the second time in the last year, as a runaway money supply is causing rampant speculation in property and record loans. Their current reserve requirement level is 16% for big banks (ours is 10% on transaction accounts, zero for others). This was brought about, in part, by Chinese Banks lending more in January of this year than in the final three months of last year. This 1.39 trillion yuan of loans boosted the Chinese M2 (broad based money supply) up 26% in the month vs. a previous prediction of 17% for the whole year. It seems the combination of runaway lending and dollars and other currencies from outside the country have China well on its way to overheating on a massive scale. One thing that would solve a lot of problems for them, and for a lot of other countries, would be to let the Chinese currency appreciate to a more justified level, but the Chinese government seems adamantly opposed to letting that happen.

So, really, what does this fairly detailed discussion of world news have to do with us and our investing (or shorter term trading)? Unfortunately, it affects everything, at least for a while. We are seeing every day markets being dragged up and down, lots of times outside of normal trading hours, by this international news and the massive amounts of currency flows that accompany any shift in political or monetary policy in governments around the world. It also begs the question if individuals or nefarious firms are making serious market gains by front-running this sometimes not too well guarded political information. In other words, your or my buy in IBM or some other stock (complete with all the “homework” and study) can easily be trumped (especially in the short term) by some political or monetary move that has international funds leaving or entering the U.S. One has only to look at the situation in Australia, as the appreciation in the Aussie dollar was followed almost every day by a similar appreciation in Aussie Bank Stocks. It would be very mistaken in this environment to have been happily long those stocks under the impression that it was some sort of fundamental strength that you had researched that was causing those stocks to go up. Don’t get me wrong, I would love it if you or I had been long those stocks as they went up; just understand why it was happening. It was a currency phenomenon mostly, not your or my research indicating a possible dividend increase or something. On a lot of days, the currency move, the move in metals, and the move in stocks, is all the same trade to a large extent. We just need to realize that and act accordingly.

So what about our recovery, and our situation in the U.S? I think we are still in trouble, and until we (population and government) choose to understand the nature and depth of the problems solutions will continue to evade us. Top that off with a generation, political and otherwise, that seems to spend a lot of waking hours pointing fingers and taking credit for nothing of substance. We have an administration that says their stimulus package has saved almost a million jobs (again, this amazing messing with the economic numbers is a 25+ year phenomenon, not a Obama creation). This number (with some justification) comes from a calculation that says that states collectively had to lay off 600,000+ people due to being in debt, I believe, somewhere in the neighborhood of $20B. The Federal government, through one of the stimulus packages (hard to keep track), essentially gave the states a like amount of money. This money, in the minds of the administration, plugged the dike and caused the states (at least temporarily) to not have to lay off an additional 600,000 to 1M people. So in their somewhat inverted logic, they “saved” a like number of jobs.

The problem is that nothing was solved in the states, in the way of dealing with the crisis on their own. The almost incredible shift downward in wages, pensions, and wealth, certainly when compared to consumer prices, in the private sector in the last 20 years has yet to be felt in the public sector. These states need to address those issues, not go about business as usual with a borrowed check from Uncle Sam. I am all for a bus driver making $50,000 a year with hospitalization and pension, would love it to be more, but know it is non-sustainable if the people he or she is driving are being ratcheted down to $30,000 or are not working. In California, probably the first state on schedule to hit the Bankruptcy Court (barring a miracle) I can see no economic way that prison guards (and others) retire after 20 years. I will not opine on how tough the job is, or whether it is deserved (like fireman here in Chicago), but I will certainly state that if a person gets the job at 25 and lives to 95 the rest of society cannot pay him or her 70 years for 20 years work. How that message gets out, and how challenging and painful the transition will be, is pure speculation at this point, but it will happen, probably in Bankruptcy.

As long as I am on a roll, I might as well bring up the subject of fraud. I really believe that the amount of fraud (no surprise for other Illinois residents) has reached the stage where it is impeding any kind of advancement, both economic and social. This is not pointing fingers at Bush and Obama (other than for not doing their job and enforcing the law) but really at a lot of people we may actually know. I have always thought the Homeland Security Bill was an underhanded way to reward any and all of Bush’s hack cronies, and the constant dribble of stories regarding contracts won and sold to sub-contractors at a fraction of the award, equipment bought that was non-productive, etc. is enough to drive someone to revolution. The Katrina fiasco, with some people cashing multiple checks that were not theirs, some people selling trailers to the government somehow containing formaldehyde (did not know that caustic chemicals was an option), others getting clean-up contracts that were subbed out multiple times for less money each time, etc. This year we have the Obama White House admitting to over $90B in fraud in federal programs like Medicare and Medicaid (as he seeks to expand the programs), an increase over the $70 some Billion in the last year of the Bush Presidency. Ninety billion, in stealing! In my lifetime the entire Federal budget was less that what is stolen now! We are talking about normal Americans stealing our money, from the doctor cashing duplicate checks for the same procedure, to the trailer manufacturer selling trash at full price, to the victim of the hurricane cashing his neighbors check. Why has none of this been fixed, or even addressed? Or is it OK, as long as the people stealing supported you for election? Why don’t we wake up someday to find that 200 physicians have been arrested for Medicare fraud and we demand our money back, surely we must know who sold us the crummy trailers for top dollar, why are they protected? Something is very wrong here, and we are all suffering by it.

Did anyone (other than me) see the look of panic on the faces of the Senators during the Paul Volker testimony? He actually wants to put a few common sense restrictions on large Banks, and made a very sound case for it. However, he was talking to a group of people that have probably received multiple checks from these same institutions over the years, and were no doubt aware of the insane Supreme Court decision that would now allow these same Banks to contribute without limit to anyone opposing anyone daring to try and put through meaningful regulation. They looked terrified. It was not a good day for what we foolishly think is still government by the people.

So what of the investment world? There is still no return to speak of on any sort of low risk money balances. That, as it continues, is probably one of the sneakiest and deadly forms of taxation I have seen or read about. We are keeping the system jammed with money, so no bank has to pay anything of mention to any depositor, without any requirement in an oligarchic system to limit the amount the same banks can charge on loans. So small business loans are still probably in the 7+% range, and credit card loans can exceed 25%. The three people most responsible for the bank bailout, Bernanke, Paulson, and Geithner, are all taking bows that the money has come back quick, but how did the banks get it so quick? From you and me! How many people do you think have a $100,000 deposit at an IRA in a bank, making 1-2%, while carrying a credit card balance of $5-10,000 at the same bank. They are interest down on the deal, while loaning the bank $90,000. Talk about a tax!

Anyway, the lack of interest affects not only money balances here at PTI and everywhere, but in the prices of the calls we sell for the PIP. Low interest lowers call prices. I do think it is prudent right now for my clients to have a reasonable amount of cash on hand; I do not like the fact that we are not earning anything on those balances. I give us a reasonable chance of a double dip recession, especially in light of the 1.9M more people out of work announced last week that were seemingly uncounted. If it does happen I want to have my clients protected and cash rich. If we somehow manage to avoid another downturn I also want to be positioned to participate in another market leg up, so we are being vigilant in maintaining at least some upside potential. It is hard to do, with the only real upside movement coming from a narrow basket of stocks that seem overvalued. I am looking specifically at staying long the financials and taking a long look at beaten down alternative energy, steel, and coal stocks. If the economy surprises me and advances from here, it will really surprise me if it does so without including financials, energy, and steel. So I am looking to be long those areas while being careful with the market generally.

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