Greece Defaults!

     Today Friday October 28^th Greece defaulted on its’ bonds by forcing bond holders to take a “voluntary” 50% haircut.  The ECB is trying to say that this is not a default but what else could this be.  Where I come from if you are saying you will only pay me half of what you owe me- it is a default.  You can label it whatever fantasyland term that you want but a 50% reduction in payment is a default.  

     I am not the only one saying this.  It appears now that Fitch, the big global rater, has said so as well.  The ISDA (International Swaps and Derivatives Association) is taking a different tack.  They are claiming that this is not a CDS triggering move by Greece.  I think they are trying to save two of their biggest users Bank of America and Goldman Sachs from having to payout and risking putting their weak balance sheets into risk of bankruptcy.   If Fitch sticks with their claim that this is truly a default it sets a bunch of potential lawsuits in New York and London.  Ultimately I believe that this is truly a default.

     Imagine you borrowed money from your friendly neighborhood loan shark.  A month later you walked in and told them they will have to take a 50% haircut on what you owe them.  How do you think they would take it?  Would it help if some pin stripe suit wearing guy from the bank told them that this was “voluntary”?  I think you would quickly find out that this is a default and you would have at minimum both your legs broken or pay with your life.  I think Greece and the rest of PIGS will soon find this out.  

     I would recommend only keeping FDIC insured limits in bank accounts with Bank of America and closing all brokerage accounts with Bank of America/Merrill Lynch and Goldman Sachs.  The brokerage accounts are only covered by industry provided insurance that will easily be swamped if and when these giants fail.  You will get your securities back after a few weeks but your money market funds are not really that protected.  You will not be able to trade any securities held in street name, i.e. any security where you do not have a physical certificate with your name printed on the shares, until they sort through your account and transition it to another broker.

Full Disclosure

     As of October 28^th I still have my personal and business accounts with Bank of America but they are well below the FDIC limits.   I do not trade with any of the banks mentioned about.  I also do not own any of their securities directly.  I do own a Proshares ETF that shorts financial companies which BoA and Goldman Sachs are part of.

    

Possible Price Fixing on Large TV’s

     Are the large TV manufactures up to price fixing again?  In 2010 a number of flat screen TV manufactures pleaded guilty to fixing prices of TV’s made between 1996 and 2006.  They included giants Samsung, Sharp, and Toshiba – just to name a few.  Are they up to the same thing again?

     If you have been in the market for a large screen TV (over 42 inches) this year you might have noticed that prices seem to be running a good $300 to $500 above where they were selling last year.  It does not matter if you are shopping on Amazon, Best Buy or HH Gregg the prices all seem to be higher.  The manufactures all seem to be blaming the cost of rare earth magnets from China.  I for one do not believe that to be the case.

     Lately the TV companies have been trying to shove 3D down our throats but nobody seems to want this feature.  I have spoken to my local Best Buy and HH Gregg managers and they are all saying the same thing.  These high prices are killing them.  They said their sales of large TV’s are down 30% to 40% depending on size.  Sony just said a similar thing in their latest quarterly release, blaming the lack of demand for their poor performance.  Normally when a manufacture has excess inventory and sales were declining they would simply lower prices until they found equilibrium.   Not this time.  They seem to be only throwing in free 3d glasses and blue ray players and only taking minor price cuts.  To me these are signs that they are trying to artificially keep the prices high.  Are they inclusion or not is hard to say but it seems to be all manufactures.

     Where will this end?  I feel eventually the damn will burst and this cartel will need to lower prices just to clear out inventory.  This type of regime works good in the short run especially in a high demand markets, like 1996 to 2006 when the product is new and easy money led to an artificial increase in demand.  When we are near or in a recession, like we are currently in the US, these cartels fall apart when one player panics and drops their price.  This happens frequently in the airline industry.

     Wait a few more months and the price of those TV’s that you want will plummet.   I for one am waiting Samsung to drop the price of their 60 inch LED Smart TV with 240 Hz to the $1,500 to $1,800 range.  Today it sits at $2,400 to $2,900 depending on the store.

Full Disclosure

I am a cheap bastard and will wait for my price.  I really do not need a new TV but would like one.

Deflation American Style

     The US is experiencing a large bout of deflation presently brought on mainly through the collapse of asset values and credit via the shadow banking system.  In the 2000’s a lot of the growth in debt was through the shadow banking system – basically non-bank finance companies backed by hedge funds, corporations, and special investment vehicles (SIV).  In the US, like a lot of other places around the world, people and governments levered up on cheap money.  This increase in leverage brought demand forward initially and as time went by it feed on itself to create asset inflation (mainly in real estate, stocks, and bonds).    

     The asset inflation (real estate, stocks, bonds, etc.) is where the easy money showed up first unlike past inflationary periods where it would show up in every day products and commodities that produce the everyday products.  The reason it showed up in assets first this time had a lot to do with China’s increase in production and the deflation that it brought.  Since China was exporting deflation and importing cash they experienced an epic bubble of their own- some say the largest ever.    

     Now that the world appears headed towards another recession what is causing it?

The Cause

• In 2001 after the September 11^th disaster the Federal Reserve fanned the flames of an already hot housing market by lowering interest rates to generational lows.

• US consumers took the bait and started refinancing their existing homes, extracting what looked like equity out to be able to purchase more and more consumer items and upgrade their lifestyles (houses, cars, vacations, etc.)

The Effect

• The consumers took on more debt even when their incomes were stagnating or in a lot of cases declining.  It made them feel richer.  This worked simply because their monthly payments for the same house declined due to a refinance (if they did not extract any cash) or stayed the same or increased slightly (if they extracted cash).

• This increase in demand for everything led to increase demand for items purchased overseas

• The overseas economies boomed because they were able to profit from low commodity prices and cheaper labor to create the stuff we were buying

• The US boomed because demand for low skill labor rose as demand for houses increased  

• China boomed because they were able to profit from the consumerism in the US and the growth in infrastructure projects the Chinese government initiated to help propel China into the modern age. 

• The growth in demand from China led to a growth in demand for all type of commodities.  This gave way to growth in Australia and Canada. 

• Australia and Canada also lowered their interest rates that helped kick off a boom of their own in property prices

Further Effects

      Eventually cheap money burns itself out.  Everyone that can take on debt takes it on.  What are left are risky borrowers and mal-investments.  Even people that were considered good risks during the boom started to become bad risks as the odds of them paying all the bills decreases as the burden increases.  The cycle started to reverse itself.  More and more US property holders defaulted putting the US banking system in question and the shadow banking system on the brink.  This ultimately led to a lot of large banks needing a bailout in 2008 and an unprecedented growth the Federal Reserve balance sheet as they loaned banks and shadow banks 100’s of billions.   The thought was that this liquidity would stop a systemic event where you had cascading bank failures that caused other banks to fail.  The only thing this money did was kick the can down the road.

     Elsewhere other countries flooded their banking systems with extremely large doses of easy money and liquidity. This money had to go somewhere.   In systems like Australia, Canada, and China the money flooded in to help push their property prices even higher since their people still had the capacity to borrow money.    In the US and UK the money went into speculative assets like hedge funds and derivatives and not into the population in general since the population was still dealing with a debt hangover and had little room for more debt absorption.

As the snowball rolls down the hill it grows

      When the finance market cooled in 2008 China dumped an extreme amount of stimulus into the economy which increased China’s appetite for commodities.  It also caused China to build massive amounts of condos that were way too expensive for the ordinary Chinese citizen to afford.  There is a rumored 64 million unoccupied condos in China that were built in the last 3 years with easy money.  There are literally ghost towns designed for 5 to 10 million people where barely 1 million live today.

     The commodity boom led by China’s growth plus lower interest rates led to booms in house prices in Australia and Canada.  All three markets are now experiencing property bubbles that are in various stages of deflating.  This will crush all three markets and lead to long-term subpar performance.

     To recap instead of one market blowing up (US) because of the cheap money policies of the early 2000’s we now have many more markets blowing up because of their own cheap money policies initiated to replace the demand lost from US growth.

The Ultimate Effect

     Instead of biting the bullet and let banks and shadow banks fail in 2008 we propped up a failing system that is looking weak again.  To do the original backstop for the banks the US government had to go deeper into debt.  This time around there does not seem to be the willingness nor the capacity to do the same thing.  Ultimately a lot of these banks and shadow banks will fail.  I have previously mentioned my views on Bank of America and Goldman Sachs in other posts.  I think they will ultimately fail and need to be bailed out.      

    The US government is now considerably weaker also.  They will ultimately need to cut their budget causing the US to go in and out of recession over the next decade as the economy adjusts to not having a big government.  This is a good thing in the long run.  In the short run it is not clear who will pick up the slack.

     The shrinking of the government, lack of demand for loans, deleveraging by individuals, and shunning of credit in all forms are all deflationary.  The only people looking to purchase assets right now are looking to us cash and little or no debt.  They have lots of different assets to choose from.  There are more assets available than demand causing asset prices to decline.    Until we finish going through this process of shrinking government, deleveraging our personal balance sheets, and building up equity our economic growth will be anemic.  

Conclusion

     Overall, the world looks like one big sea of risk with very little positive upside.  At this moment I think it is best to let the markets ride with cash on the side or bearish bets if you are able to take on additional risk.  The US stock market is starting to look attractive but not downright cheap.  Wait a few weeks and I think a definite buying opportunity is around the corner.  Given our decreased growth outlook I would strongly look towards stocks with large dividends to help generate cash flow in a probably sideways market.   

Odd ball trading pattern

     Is it me or do we seem to be in an odd ball trading pattern since early August?  Since the plunge in stock prices in early August we have been range bound eerily like it is controlled by a computer.  Every time we approach the 10,700 mark on the Dow we pop right back up again to 11,500 range within days.  Is this program trading?  Futures trading?  ETF influence?  

     I am not sure what is causing this 10% trading range.  One thing I have noticed a lot lately is that market trades seem to end in weird digits.  A perfect example happened this week when I placed two market trades for Walgreens on September 28^th.  They were round lot trades for 100 shares each coming within a few minutes of each other.  Instead of getting prices like $33.12 or $33.275 I got prices like $33.1197 and $33.1171.  To me these look like front running trades where a superfast computer sees my order and buys the shares before me and sells them to me at a fraction of a cent more.  Not much of an issue from my standpoint since these are buy and hold trade I plan on holding for 18 months plus.  Pure profit for the traders.  They claim they add liquidity but to me this is the banks acting like a tick sucking off money.  Ultimately the SEC will need to act to stop this abuse.

     What concerns me the most is the frequency that I am now seeing this happen.  I have to start questioning are these front running of trades plus algorithm trades done by hedge funds manipulating the market and causing it to be range bound?  I have noticed that many of my friends who used to actively trade shares now rarely mention any stock holdings.  Many I know have totally left the stock market to use the cash to purchase real estate now that that asset is near historic lows.

     Given the Federal Reserve desire to manipulate the interest curve and finance in general to falsely prop up the US banking industry and theoretically the economy, I am wondering if this iss part of Operation Twist.  Could they be giving large banks money to help prop up the stock markets?  I am totally speculating here but I would not think I am too far from reality.

     History shows that whenever someone tries to manipulate the market it always comes back and bites them in the ass.  Knowing this and speculating about the above would it be wise to purchase some short ETF’s now?  I leave that to you to work out.

Full Disclosure

     I own shares in Walgreens (buy and hold mentioned above) and a couple of short ETF’s and Bear funds.  I am weighted about 60% short or cash and 40% long.