Tuesday, May 31, 2011

The unemployment problem - Krugman perspective

On Sunday's op-ed page Paul Krugman discussed the serious unemployment problem in the Western world. That's stubbornly high unemployment rates in the U.S. and destructive levels of joblessness in some European countries. He bemoans the "tragedy" and even more so bemoans the come what may attitude by governments who are letting this issue be tangential to goals for economic growth.

The problem is that the 2008/2009 financial crisis left a gaping hole in the economic structure of many countries. It can't be filled with business as usual, as has happened in "normal" recessions of the past 30 years. Job training programs, tax incentives for hiring, and the pace of economic growth that is possible now will not compensate for the loss of the benefits(and flaws) of securitization markets. There will be less credit, less private stimulus, for several more years. Public stimulus is mostly misspent, and although Krugman might not acknowledge that so openly, he knows it.

The man does offer some solutions, some ways that he thinks will take the unemployment rate lower.

His first is to create W.P.A. type work programs "putting the unemployed to work doing useful things like repairing roads" and creating new and improved infrastucture I might add. What a great idea, one that was highlighted by the government but given almost no funds. The great majority of stimulus money went to allowing the federal, state, and local government to continue doing exactly what they had been doing. It was spent to maintain the status quo when seismic structural changes meant that it was just throwing money into a one off one year solution. If this, the recycled W.P.A. idea, was a serious government effort, it could be beneficial.

Krugman's second idea is a "serious program of mortgage modification, reducing debts of troubled homeowners". This is an extremely complex issue. There has been no effort by the Administration or Congress to understand the role of mortgage servicers, one that is very clear in legal precedent and statutory protocols. This must be sorted out. More importantly, this may be the biggest black hole proposal ever. It is possible that there are many problematic "homeowners" who could not support a home short of it being gifted to them. Krugman's thought is not conducive to a rational price clearing point of the market, which is what must happen to get back on a growth track. That may sound heartless but everyone, the great majority of people I would guess, was not just suckered in by mortgage brokers. They knowingly stretched for the American promise of something for nothing. Loan forgiveness will not give them good jobs, assets, monthly payments, or maintenance costs.

The third idea is just really far-fetched, and oddly I agree to some extent that the goal would be attractive. Krugman wants the Fed to manipulate a 4% rate of inflation so that debts could be repaid with cheaper money. To think that markets can be controlled with any precision is not liberal thinking, it's state planning thinking. There are so many ways this could backfire. Economist be practical, you are looking for answers that are not there.

This of course is a presumptuious commentary in the extreme by yours truly, a little followed blogger commenting on a Nobel prize winner and star NYT columnist's thoughts. This is a difficult time, and our penchant for partisan answers will not solve anything. Reaching for simplicity, be it Paul Krugman or the 15 minute man Paul Ryan, will only complicate things.

"Still Bill"

"Still Bill" is a documentary about Bill Withers, with Withers at 70 looking back at his life. It's an unusually pleasant film, gentle, thoughtful, and just nice.

This is the story of Wither's break into the music business at the age of 32, his determination to keep his music straightforward and simple, his unwillingness to cover race defining songs, his devotion to family and his relaxed striving for self-awareness. Any possible areas of controversy are left to the viewer's angst, as the film gives the tools but does not waste energy or emotion on strident commentary.

In an interview with Cornel West and Tavis Smiley, they try to bait Withers into some kind of agitation, but he will have none of it. He either turns their rhetorical questions around and politely throws them back, or he simply refuses to answer. In one sense the almost always obnoxious West seems like a mistake, but in another sense it brings out the character and mindset of Withers in a way that could not be achieved otherwise.

This story of an aging man's look back is full of both fond and painful memories but bitterness or regret is not part of it. He is comfortable with his achievements even as he withdrew from the spotlight over 20 years ago. He reflects that life can be "alright" and that may be as far as it goes. For him he had the next step of life being "wonderful" for a number of years and he appreciates it.

This short film is worth a look.

Monday, May 30, 2011

For the end of May 2011

"The biggest loss of innocence has got to be a refusal ever to believe in coincidence again."

"Bluffing Mr. Churchill", aka "Riptide", by John Lawton

Saturday, May 28, 2011

Eyes Not Sold stats

Not much attention is focused here on anything but writing from time to time. I was surprised to see that statistics are now being kept by Blogspot and have been for two years.

Those two year stats show that 78% of ENS page viewers are from the U.S. Roughly 3% each come from Canada, the Netherlands, and Russia. Germany chalks in at 1.5% and, in order of numbers, Latvia, Slovenia, the U.K., Brazil, and South Korea all come in at around 1%. Latvia and Slovenia? I've actually been to Slovenia twice which is a fairly weird claim to fame. There is a beautiful lake there whose name escapes me, a lake where Tito had his hideaway mansion. The first time there, so was Tito, and later his 20 car Mercedes caravan interrupted a drive to the Adriatic coast for several hours.

Browser activity is 55% Internet Explorer, 24% Firefox, and 14% Safari, with all others in low single digits. Operating systems are 76% Windows, 10% Mac, 4% Blackberry, 3% IPod, 2% IPhone, and others with miniscule shares.

The geographic data is of particular interest. One would think that it is primarily random hits in foreign locales, or does ENS have a few devotees in Russia or other places where no one knows John Borden.

Flowers redux

With the expanded beds for planting, referenced in the last post, today in went Coleus, named by the purveyer Wizard Rose. These are annuals with green leaves centered with reddish purple that has a white border. I know these flowers from my childhood, I know not where.

Hot and humid today, planting again had lost its novelty and became work. Work is not bad either. Let's see if the Coleus growth reawakens the place of the past.

Wednesday, May 25, 2011

Planting my annuals

No market commentary, no politics, no book comments, and no opinions worthy of debate are here today. This post is about planting flowers, inspired no doubt by J's Human Flower Project, a website about flowers that goes way beyond flowers. Flowers are the cover, a beautiful one there.

Here the annuals needed to go in. Almost two weeks ago they were purchased. First was a deck of the usual Impatiens of various colors that were named "Super Elfin Rose", and this year included some unusual bright orange ones that almost looked fake. Second was a deck of Begonias aka "Bada Bing Scarlet", nothing Sopranos about them really but all with the bright green almost shiny leaves and the red flowers struttin' their stuff. Third was Celosia, new here and named "Kimono mix". These are spiky looking flowers, like tiny Christmas trees, with distinct dark reds, bright yellows, and muted purples, all needing direct sun.

When purchased there was a day of planting in the front and side yards that left me surprisingly sore. That was unexpected. I guess all of that bending and standing and kneeling is not routine enough these days. The pleasure of having jeans, hands, and nails covered with dirt must have made for too much enthusiasm. That day accounted for two thirds of the flowers. Then it rained for a week and a half and the remainder sat on the patio table and survived while I contemplated where to plant them, and when I would have the chance.

Then, almost coincidentally, I decided, with the help of my tree service guy who had come by to assess a thinning out job on the giant oak and the gorgeous Sassafras, to remove a rotting formerly white wooden fence that surrounded the backyard. Big job, big improvement, everything looks bigger and removing the fence opened up the opportunity for new beds beneath the six foot shrubs that separate our yard from the next. Rain free finally, today was the second day of planting. Somehow the planting day of two weeks ago seems to have conditioned my body somewhat for the motions required and Advil seems unnecessary.

Today was beautiful, even hot which is fine here. Shirt off and digging in dirt, little pleasures more or less free. Now we wait for the results which by July will likely be fully evident. With a little water early on, these annuals are generally foolproof, as they need to be.

Patience now, and something to look forward to week by week.

Monday, May 23, 2011

Financial market fragility hits the frontal lobe

It's lizard brain time again. Financial markets have participants on edge. Can traders and investors stay calm or are we on the edge of rash decision making and pundit panic.

Continued sovereign debt challenges in Europe are the biggest threat to create systemic issues and credit market uncertainty. The rating agencies that were completely discredited during the financial crisis now move markets dramatically with their pronouncements on sovereign ratings. Now on the defensive, the agencies can only protect their franchises by focusing on the little picture, looking at any constructive outcomes with anxious bowels. We seem to be stuck with them. Who among the smartest ever left their college or MBA program with the goal of working for a rating agency. Anyone?

The other catalyst for Friday's weakness and today's follow-on was the weak sales and earnings numbers reported by The Gap. While corporate earnings in general have been healthy, the skittish market put Gap in the spotlight. Wait a minute. Isn't this the Gap that is going through a multi-year period of management changes, product differention challenges, and a loss of relevance to any specific customer demographic. The market is in the mood to look for problems.

More important to the economy's outlook is the continued near flatlining of the residential housing market. The foreclosure overhang is well known and the incentives for new investment are few. The cyclical trough is in place until at least 2013. Looking at the 1989 to 1995 period as an indicator, the market will eventually clear, but with the absence of vibrant securtization activity it will do so at a lower pricing level.

On the positive side, as often mentioned here, equity markets do not necessarily require that all boats float. With strong corporate earnings and money looking for a home that offers more than a miniscule money market return, a market sell-off that appears to be widely expected may be short-lived. That thought leaves investors with the current dilemma of whether to lighten up and restructure portfolios now in advance of a downturn or to hang tough and look for buying opportunities. The sell now because of the prospect of buying back cheaper in the near future mentality may be dominant at the moment, but is it wise.

It may finally be the time when investments shift dramatically into the safer large cap dividend paying stocks, those with global exposure and staying power. Any such shift will send the averages down at least temporarily and create greater uncertainty in the short term.

In the absence of a crystal ball, many investors will be inclined to inertia if panic can be forestalled. Old "wisdoms" are now coming out of the mouths of pundits such as "sell in May and come back in November" and "as summer approaches investors go on vacation(literally)". Knee jerk comments such as these are of no value. That's not how the market works in our wired and intensely short term focused era, and they are reassuring to hear. If that's the mentality driving the market, it will pass.

These rambling thoughts may congeal into something more coherent soon, the sooner the better from this perspective. Memories of late 2008 and early 2009 are too fresh to promote restful sleep.

Saturday, May 21, 2011

John Lawton's "Troy" series

Troy is a Scotland Yard detective. John Lawton has written a book series of historically based espionage fiction set in the time frame from mid-1930's to the early 1960's that have captured my attention recently. Captured is the right word, as I have read three of these 400+ page books in the last two weeks and am half-way through the fourth in this seven book series. When you can't sleep, books like these are a godsend.

As always with this genre, when a good writer comes along the book cover dredges up a comparison to John LeCarre. That comparison may ring true for many, but not being one that has ever been taken by LeCarre, Charles McCarry comes to mind here. Nothing can really compare to McCarry, but in the sense of creating an alternative world of characters that move in and out of different time frames in no linear order, Lawton is in the same rarified territory. Each book takes a different period or an overlapping one and continues the main story, as if starting with Lawton's first book in 1996 the overall chronology was already in development.

Reading here completely out of order, there is no problem picking up the threads and tying it all together. Introduced to the series by picking up at the local library his most recent 2010 continuation of the series, "The Lily of the Field", I have backtracked to various other periods depending on what the library had to offer. "The Lily of the Field" and "Second Violin"(2007) are both as intensely or perhaps more intensely focused on the historical attributes of their time built around WWII as they are the murder that our detective Troy must solve. "Flesh Wounds"(2005) is set in the late 1950's and, while absorbing, is more focused on the lead characters and the mystery than it is on history and in that sense is, from this perspective, not the stellar read that the previous two mentioned turned out to be. In my hands now, "A Little White Death" is set in the early 1960's and is 100 pages in solely focused on Cold War spy shenanigans and no mystery at all. That's to some extent preferred.

Lawton's writing is for the most part easy flowing and literate, except for the occasional times that he stretches to be consciously literate. McCarry never does that while maintaining an extraordinarily consistent descriptive tone. That's a big difference but the historical work by Lawton is at times exceptional.

As an example, he describes the effort by the English to move an elderly Freud to England after the Nazis had moved into Austria. While Freud wants to stay in Vienna, he is convinced by his English friends that everything will soon deteriorate, and they most certainly do later with the Austrian brown shirts killing and looting indiscrimanately and unchecked in Jewish neighborhoods. Freud reluctantly agreed to leave, and upon doing so the Nazis required him to sign a document saying that he had been treated well by them and could live and work in freedom there etc. When the Nazi functionary arrived with the document Freud obligingly and politely signed and asked if could also write an endorsement. The military functionary allowed it, and Freud wrote "I can heartily recommend the Gestapo to anyone". With great thanks Hitler's emissary left, as did Freud.

Those kinds of anecdotes based on historical research are worth the time with some of these books even if the "mystery" is not the end game in brilliance.

A few of Lawton's books have received recognition in their genre, but "The Lily of the Field" was one of the New York Times Book Reviews top 50 books for 2010. I am not alone.

Thursday, May 19, 2011

NOA - not a good surprise at a small cap

North American Energy Partners(NOA is a small cap Canadian company that provides heavy manufacturing and pipeline development to oil sands projects. Yesterday the stock price fell by 25% and the slide is not yet over today as high volumes continue and the price is now inching down more.

One could say that this is a perfect example of the dangers of investing in lightly covered(by analysts) small cap stocks. The reason for the stock blow-up is an "unexpected" charge for the disruption of an oil sands project whose contract with NOA represented 23% of the company's revenues. Ouch. The interesting, if that's the right word, thing is that the project in question had a fire in JANUARY that caused a shutdown of most of its output. Would some charge not have been obvious to any analyst carefully covering the stock, or so obvious that the company would have publicly alluded to it earlier, and not just as they are closing the books on their fiscal year?

Going into yesterday short interest in NOA represented less than 1% of float, or almost nothing. Of the few and mostly less than familiar firms that covered the stock the ratings ranged from buy to neutral, with one curious sell that emerged from a quant firm on May 13. The best known firm covering the stock from this perspective is Raymond James, and they had a buy. Leading institutional holders Fidelity and Perry Capital presumably are still in the stock as volumes and price action in recent weeks don't indicate any major disruption in the shareholder base.

So for shareholders that bought into an attractive growing NOA several years ago at $15 a share, hopes for a recoup of their investment have been shredded. For shareholders that jumped into a bargain at $3 in 2009, their gains have been almost halved. On both sides of that barbell here, this investor has seen an aggregate profitable investment jump into the red, or maybe just a shade of dirty pink heading to red if the slide continues.

NOA now needs to renegotiate its bank lines as it has breached a covenant. With almost no cash reserve on its books the firm will be at the mercy of its lenders. The deal will almost certainly get done, but the result may be that NOA, practically speaking, now will be working for its bankers and only secondarily for its shareholders. For investors it's become a long term play, and perhaps something to exit with any rebound. As always, buying more at a low has to be considered as an option but with small caps that can be a very risky choice.

Over the last year there have been many market commentators that suggest that the large caps will have a resurgence and that the small cap outperformance can't continue. Yesterday Fidelity S&P index fund was up .70%, their total market index up .90%, and the extended market index fund up 1.54%. There's still gold in those small caps it seems, but surprises can be expected.

Tuesday, May 17, 2011

Akamai - a jewel on sale

A slight slowdown in the rate of revenue growth and the emergence of the small cap cloud competitors has led to a fall in Akamai's stock price in the last six months from $54 to $32. That's a collapse, leading to a current market cap of around $6 billion.

Akamai claims that 20% of the world's internet traffic is delivered over its platform. It has 84,000 servers in 72 countries. The firm has $2.2 billion in shareholders equity and no long term debt. The operating margin is running at around 25%.

Given the prices being paid for properties by technology titans, Skype being a recent example, Akamai must be in the crosshairs of some major firms with cash to put to work. I would expect an offer price at around $44 for this exceptional property. Granite countertops, Sub-Zero, outdoor patio with built in grill and fire pit, it's got it all, you don't need to do a thing, just move in.

Seriously, Akamai must be at the point of being in play or at that threshold. Synergy would hardly be necessary, but there would inevitably be opportunities on both the cost and revenue side at some of the majors and this would only make the deal more valuable. Let's watch.

Enough of the Etrade baby ads

Etrade has apparently survived its fiasco of combining brokerage with mortgage banking. While revenues are flat on TTM basis, the latest quarter actually suggests some modest growth. For the moment at least, the charges from mortgage banking and investments in CMO's seem to be behind them. So what's with continuing with the cute smart baby ads.

This ad campaign is nearing two years old, older than the baby. They are clever, even sometimes funny. They were a pleasant diversion and placekeeper for the brand while repairs were being made. The question now is not whether the ads attract attention or are popular, the question is with whom are they attractive? With serious traders and investors???

Unfortunately they increasingly remind me of WAMU's stupid banker ad campaign that ran until the firm collapsed. Talk about stupid bankers. They were so out of touch that being funny was more important to them than running a sound company.

If only for the employees and shareholders of Etrade, some ads with even a touch of gravitas might seem wise. For each new ad that continues the baby series, I suggest that Etrade create another ad track that features adults talking about investing. It could certainly have a hook that's entertaining, but this baby stuff is getting old, and does not differentiate from the beleagured Etrade of just a year ago to the possibly reviving firm of today.

Monday, May 16, 2011

Follow up to prior post, "banks out of favor"

Two follow up comments to the prior post:

---the big issue for the administration's approach to big banks and the popular approach as well is compensation. The protocol for hiring talent includes significant compensation, compensation almost beyond comprehension for most everyone. With the financial crisis having been survived, that compensation remained largely intact. This outraged many observers, especially President Obama and his inner circle. It's certainly a valid feeling.

Unfortunately it is difficult for one company or one country's firms to decide to pay less than market rates in a competitive global environment. The genie is out of the bottle so to speak. Extraordinary compensation takes place these days in many industries for CEO's and their top tier colleagues, but in financial services it speads broadly to a wide cadre of individuals with distinct specialties that have their own benchmarks. Unlike generic CEO's in other industries these individuals often have very specific and even unique talents and can demand what the market bears. What makes financial services different is that the high compensation spreads well beyond the executive office and numbers well into the hundreds or even thousands of people in many firms. The numbers are big. They reflect the problematic growing disparity of wealth in our country, but at least the recipients of this largesse in financial firms come from a broad swath of our diverse culture and are not just dominated by the fairly homogenous CEO class.

---Loan growth may not be robust but loans are not the way bigger banks make any money. The risk adjusted return on capital for commercial loans is generally breakeven or a loss. Loans do serve as a proxy for other activity in banking so in that sense slow loan growth could mean slower growth of other profitable banking products and services. Loan growth in the consumer area is beginning but is, in comparative terms relative to a few years ago, overwhelmed by the lack of mortgage loan growth. Consumer loans can be profitable, if the risk adjusted product equation is right.

Friday, May 13, 2011

Banks way out of favor

Since the mid-April reporting of first quarter earnings until now, bank stocks have been in significant decline. The numbers reported for first quarter were generally fine but the market had some concerns.

Core earnings in the banking industry showed continued modest improvement and reported earnings were significantly strengthened by declines in reserves for loan losses as the credit environment has improved and as required reserving during the downturn had exceeded what was eventually needed. The short term wisdom of the market is to punish the stocks when they did the large reserving in the first place because the credit deterioration hurt earnings, and then when those excess reserves are reversed and, by accounting necessity, reflected in earnings they are seen as useless because they are not core earnings. Makes sense.

Another major concern is the lack of loan growth across the industry. Banks reflect the economy and our economic recovery is languid, real as in real slow. Loan demand is not strong and banks are not bending credit requirements to attract incremental growth. Even banks have short term memories.

Those are the popular reasons for the weakness. They reflect weak visibility for any near term upside and there are other sectors that are seen to offer better opportunity now.

A major reason for the weakness not often mentioned in the popular pundit world is litigation risk. For major banks the stream of litigation as a follow on to the economic crisis seems to be never ending, and in fact some days it seems to be accelerating. It is clear from the administration and the Congress that there is a green light for regulatory agencies, state governments, and investment enterprises of all stripes to sue the banks. It is clear from recent history that "juries of our peers" faced with complex legal issues will ignore all legal precedent and all enforceable contracts when presented with losses suffered by some while the banks eventually turned the corner after losing billions and got back on track. Suing the banks now is like throwing mud at a wall and seeing what will stick. Some will and sizeable settlements will be reached. It's ugly. For this investor, that is by far the biggest issue.

When the real investors can see a slowdown in the legal attack and a let up in abusive comments and actions by the bitter Obama team and a barbell mix of right and left in Congress, then those investors can look ahead and see that beyond the next few quarters many of our banks have great franchises, have clean balance sheets, are not polluting those clean balance sheets, and have efficient cost structures that have been fine tuned over the last twenty years. They have exceptional technology platforms and are global leaders in many commercial banking products. Retail delivery has continued to advance. Dividends will begin to grow and capital will continue to strengthen. If economic growth, global economic growth, hits a more even stride the banks will have an opportunity for an investor sea change in thinking, a light bulb going on type of reversal in thinking that leads to a significant and possibly rapid turnaround in the stocks.

But that's not now. Maybe in this fast moving world that's a possibility later this year, perhaps it's deferred to 2012. At the moment, the banks are adrift.

A broader concern from all of this is the fact that banks have often been an economic barometer for the overall market. When have the banks had a period of any sustained weakness when the economy does not follow. When has placing the government's heel on the neck of an industry helped it compete globally. The answer my friend... oh, that's not appropriate.