Bespoke's International Snapshot

Bespoke Investment Group
click through for charts of international markets trends.

Econobrowser: Recessions at the State level

Econobrowser post the first of two articles on recessions at the state level, with very interesting live charts. Click the link to view. i want him to follow up explaining how to make those charts.

HSM: How cheap are gold stocks relative to bullion?

from Humble Student of the Markets.

The Economist: how to Smite Smoot

No one running for national office seems to support free trade anymore and this is very dangerous for the U.S. and world economies. The Economist addresses this citing an new study which discusses the enormous costs of protectionism and the bounties from a combination of free trade and more immigration. ( legal immigration)

How to smite Smoot

Mar 27th 2008
From The Economist print edition

Gains from immigration could be even greater than those from more trade

IN JUNE 1930 the Smoot-Hawley tariff act turned a stockmarket collapse into a crippling, decade-long Depression. Now, politicians seem to be preparing for protectionism even while financial meltdown is going on. Barack Obama and Hillary Clinton vie with each other to be nasty about the North American Free-Trade Agreement. Last year the European Union dropped the principle of “free and undistorted competition” from its Lisbon treaty.

All the more reason, then, to welcome a study* by two eminent trade economists, Kym Anderson of the University of Adelaide and Alan Winters of the University of Sussex. They estimate the losses from such protectionism as already exists; calculate the potential gains that might accrue if—a big if—protectionist temptations were ignored and, more intriguingly, estimate the possible benefits if further migration were encouraged as well.

and continuing:

The authors show that if you use more realistic assumptions, estimates of the cost of protection actually rise from anywhere between $460 billion a year to over $2.5 trillion. (The wide range is the result of using “computable general-equilibrium models”, which are only as good as the assumptions you feed into them.) Whatever the exact amount, these are large sums and far greater than once-fashionable alternatives, such as bilateral deals.

But more trade in goods is only part of economic liberalisation. Another is trade in “factors of production”—like labour. The authors look at what might happen if the share of foreign workers grew to 3% of the labour force of rich countries. This would involve an increase, they say, of 14m people over 25 years (roughly 500,000 a year). The global gains, the authors reckon, would be $675 billion a year by 2025. Even if you subtract the cost of moving to the host country for immigrants and the social-welfare benefits they may get when they arrive, the net benefits are at least twice as much as a Doha agreement (and could be reaped by rich countries unilaterally, if they wanted).

Note these numbers start from where we are now and don't include the costs that further protectionsism being proposed by Clinton, Obama, Schumer, Graham and others pandering to ingnorant populism.

Related link: Free trade benefits

Economist: European Bond Spreads Widen

From The Economist:

The interest-rate spread between Germany's government bonds and those of other euro-area countries has widened sharply. The shift is most marked for countries with shaky public finances: Italy's public debt was 105% of its GDP last year; the ratio in Greece was 93%. Both countries are set to run budget deficits of 2-3% of GDP this year.

BMO: Coxe Weekly

The Bank of Montreal weekly conference call from Donald Coxe (which seems to be freely available since it is not password protected) is very interesting.

Idiot's Guide To Improving Your Credit Score

WSJ: At the Barricades of the Gender Wars

In the Wall Street Journal this article citing Hillary supporters who blame opposition to her on gender bias. From the article:

When Sen. Clinton started her presidential campaign more than a year ago, she said she wanted to shatter the ultimate glass ceiling. But many of her supporters see something troubling in the sometimes bitter resistance to her campaign and the looming possibility of her defeat: a seeming backlash against the opportunities women have gained.

Just as Barack Obama's campaign has been empowering for African-Americans, Sen. Clinton's run has inspired women across the country, drawing millions to the polls and putting her in a neck-and-neck battle for the nomination. She has already gone farther than any woman before her -- a source of great pride for her women supporters.

The article has much more both pro and con on this topic but the whole thing annoys me. How can Hillary or Barack be seen as underdogs struggling against gender or race bias. The two of them crushed their white male opponents with ease. Are people out there who oppose these candidates because of gender or race? Sure but far more oppose them for legitimate concerns. I have not had a single discussion with anyone opposing either of these candidates for those reasons. I have heard them supported for those reasons.
The truth is opposition to Hillary comes from those who view her as unprincipled, untrustworthy and greedily ambitious like her husband with the added burden of being unlikeable. Obama is likeable but has no real track record with the added burden of rascist black supporters.

Obama was winning this contest by keeping race out of the debate until Jeremiah Wright hateful rhetoric became public. Hillary was doing much better when she was running as a Senator and a leader rather than a flag bearer for the women's movement.

We are trying to elect a President not a special interest group. I don't know who I am going to vote for in this election. I do know I am going to vote against any incumbent office holder. Throw the bums out. Send a message.
( hat tip Instapundit who has many relevant links as usual)

"Chickens of Identity Politics Come Home to Roost?"

A Will Rogers Market

Will Rogers once reportedly said "it isn't the return on my money that I am concerned about. it is the return of my money." That is the problem in the credit markets lately. Prieur du Plessis thinks it is late in the game for the flight to safety in bonds:

US Long Bonds in Injury Time

Since the advent of the credit crisis, stock markets, real estate and the US dollar have been the subject of investors’ angst. However, two markets – commodities and long bonds – have remained in bullish trends. That, at least, is the way it looked until recently.

The Reuters/Jeffries CRB Index hit a peak on March 13, and I argued in a subsequent post that although a correction was overdue, the long-term trend was still upwards.

But what about the outlook for US bonds, especially as yields have edged up since the recent lows of 3.314% (March 17) and 4.165% (March 20) for the 10-year and 30-year Treasury Note respectively?

The graph below shows the long-term movement of the yield on the US 10-year Treasury Note, indicating that long-dated US bonds have experienced a multi-year bull market and are trading at levels last seen more than 40 years ago as far as nominal yields are concerned and 28 years ago in real terms. Thinking of which, the only investors who first-hand experienced the last major bear market in bonds (from 1971 to 1980) are now all on the wrong side of 50!

He continues with charts and illustration at this link: Investment Postcard From Capetown.
I agree with Mr. Du Plessis comments but we must not forget that if the Fed moves fail to stem the tide of credit contraction we could see a situation like Japan experienced, where even 0% rates couldn't stimulate activity. Japanese bond prices went far higher than anyone thought possible because people wanted to be sure of the return OF their money.

This Is Scary For Us "Stout" Types

A Gentle Reminder That Fat Will Eat Your Mind

That excess visceral fat you're carrying causes chronic low-level inflammation, which damages you in all sorts of ways. One of those ways is atherosclerosis, which tends to up and kill you without warning. In fact, eating all the food required to gain a large amount of visceral fat causes a feedback loop in your metabolism that spirals down into insulin resistance and diabetes - both of which make the effects of having a lot of visceral fat that much worse and that much more rapid.

But that extra fat won't just make you much more prone to be frail, and it won't just try to kill you - it'll also eat your mind. Researchers are coming to view Alzheimer's disease as analogous to diabetes, a result of lifestyle choices for most, touching on many of the same metabolic processes as diabetes, and the risk factors seem to be much the same.

Suddenly I feel less jolly. Perhaps I will revisit my diet plan.
Thanks to Instapundit for pointing to this article. ( I think)

Click the link and Read This

This is hilarious: The Most Entertaining Trial Ever


UPDATE link is no longer working. I will try to find another source.

Buffett or Schwarzman

Bloomberg: Buffett Shows Schwarzman Berkshire's Free Money Beats LBO Model

March 26 (Bloomberg) -- Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world's richest person.

Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., has $59 billion in cost-free money from insurance premiums to invest. Schwarzman's New York-based Blackstone Group LP, manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts.

Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting Buffett's model will prevail, at least for now. Berkshire climbed 5.4 percent since the subprime-lending crisis sent the Standard & Poor's 500 Index tumbling as much as 19.7 percent from its Oct. 9 peak. Blackstone dropped 43 percent in the same period.

``There's a massive, massive advantage for Buffett in this kind of market,'' said Guy Spier, chief investment officer of New York-based hedge fund Aquamarine Capital Management LLC. ``All the leveraged finance has dried up, so he's going to have a much better time finding things to buy.''

Disclosure I own both securities, Berkshire for many years Blackstone for a few days.

ALEA: Where are the Treasuries?

From the Alea blog:
Outstanding: $4,513 bn [marketable securities only, including TIPS]
In “foreign” hands: $2,402 bn
At the Fed: $677 bn
That leaves only $1,434 bn for U.S investors. Any flight to safety will create “short squeezes.”
Net Issuance was negative in january and usually is very negative in april, may and june.

Bexpoke: Consumer Confidence

Two charts from Bespoke. incidently, I only post some of Bespoke's free content. They offer a lot more for a very reasonable subscription.
If you compare the low points on these charts like where we are now to the stock market charts you will find they identify better buying levels than selling levels.

An open Letter To Obama

Lionel Chetwynd writes an open letter to Obama. He begins like this:

Dear Senator Obama:

I have now read and reread your speech, understanding you take this to be a “teaching moment,” I have applied myself to its lessons. But some questions have arisen and I need a little more clarification.

You tell me Reverend Jeremiah Wright’s horrendous remarks will take on a different meaning if I will but contextualize them and understand he has seen terrible things in his time, a burden shared by all African-Americans. A fair proposition; from Kant to Auden and beyond we learn we define by comparison and only by internalizing can we grasp true meaning. So I have done precisely that: looked inside myself to understand how hatred might need to be contextualized.

I urge you to read the entire letter.
I would remind Senator Obama that understandable is not a synonym for acceptable.

Chinese Shoot At Monks and Nums

Those fun loving Chinese communists are at it again. From TimesOnLine via Instapundit:

Paramilitary police opened fire on hundreds of monks, nuns and Tibetans who tried to march on a local government office in western China yesterday to demand the return of the Dalai Lama.

Residents of Luhuo said that a monk and a farmer appeared to have been killed and about a dozen people wounded in the latest violence in Tibetan areas of China.

I haven't heard about Cindy Sheehan and her crowd organizing any protests over this outrage. I guess they cannot figure out how to blame Bush.

Jeff Saut

Jeff Saut of Raymond James in his weekly comment which should be read

The call for this week: How bullish are “Double Nine-To-One” signals? According to professor David Aronson, as reprised by Mark Hulbert, “[we used] data from the beginning of 1942 through fall of 2006, and looked at what happens in the stock market in the 60-trading-day period following a . . . Double Nine-To-One signal, versus what happens the rest of the time. In those 60-trading-day windows, the S&P 500 index produced an average annualized return of over 22%, on the assumption that an investor entered the market on the close the day after the Double Nine-To-One signal was triggered and held until the end of the 60^th trading day. In the non-signal periods the return averaged 4.5% annualized.” When we combine the “Double Nine-To-One” signal, the 90% Upside Day, the observed downside non-confirmations, the most bearish sentiment readings in 15 years (read: bullishly), and a host of positive finger-to-wallet ratios, we can’t help but remain bullish in the short/intermediate term, thinking the downside retest of the January “lows” will be successful. Yet by far the most stock-bullish event occurring last week was the “dive” in the Commodity Research Bureau’s index of leading commodities as can be seen in the nearby chart from our friends at the invaluable service www.thechartstore.com.

Abnormal Returns: Great set of Sunday Links

The excellent Abnormal Returns site has especially good links this Sunday. i won't link to them but if you click through you will find some good articles.

WSJ: Thorp and Gross interview

The Wall Street Journal interview of Ed Thorp and Bill Gross:

Mr. Thorp: In the last 15 years or so, there has been a large flow of capital into the hedge-fund world, from $100 billion in the early 1990s to $2 trillion now. But the amount of available investing opportunities hasn't increased that much. That has led to the over-betting phenomenon Bill and I were talking about, or gambler's ruin.

Hedge funds started using a great deal of leverage to increase returns. But you can get wiped out if you bet too aggressively. A classic example is Long-Term Capital Management [the huge hedge fund that blew up in 1998]. We'll probably be seeing more of that now.

Mr. Gross: It's true that the available edge has been diminished, and that led to increased leverage to maintain the same returns. It's the leverage, the over-betting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people.

Mr. Thorp: Any good investment, sufficiently leveraged, can lead to ruin.

Tigerhawk: Actualizing Religious Freedom

Tigerhawk commenting on this news that a famous Italian intellectual fromerly a Muslim has converted to Catholicism:
An Italian journalist conspired with the Pope today to exercise actual freedom of religion:

Pope Benedict led the world's Catholics into Easter on Saturday at a Vatican service where he baptized a Muslim-born convert who is one of Italy's most famous and controversial journalists....

One of the seven adults he baptized on Saturday night was Magdi Allam, 55, an Egyptian-born journalist who, as deputy director of the leading newspaper Corriere della Sera, is one of Italy's best-known intellectuals.

Allam, a fierce critic of Islamic extremism and a strong supporter of Israel, is protected by a police escort because of threats he has received.

WELL-KEPT SECRET

His conversion to Christianity was a well-kept secret, disclosed by the Vatican in a statement less than an hour before the Easter eve service started.

Think, for a minute, about the implications of that last sentence: "His conversion to Christianity was a well-kept secret...." How can anybody possibly argue that Islam is not attacking the most fundamental freedoms of the West and winning when the Pope must keep the conversion of a Roman secret for fear of violence against the worshiper and the Church?

Thanks once again to the The Instapundit for noting this Tigerhawk post.

Infectious Greed: Quote of the Day

Paul Kedrosky at InfectiousGreed awards the Quote of the Day

S&P said Lehman has a stable base of funding and strong fundamentals, but "could suffer severely if there was an adverse change in market perceptions, however ill-founded." (S&P via Reuters)

Paul adds:

"Right. Like, for example, if there was a new S&P credit downgrade report warning investors that things at Lehman could get bad if there was a change in market perceptions? I get it."

I figure S&P would just like to be able to say they issued a warning about something before it fell apart even if they don't think it is going to happen. I find it hard to believe the rating agencies are even still in business. They have zero credibility now.

Howard Marks On Bull And Bear Markets

From the Wall Street Journal and Howard Marks letter to his investors "The tide goes out":
(The journal link has much more )

To aid in your consideration of the future, I’ve formulated the converse of the above, the three stages of a bear market:

• the first, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
• the second, when most investors recognize things are deteriorating, and
• the third, when everyone’s convinced things can only get worse.

Certainly we’re well into the second of these three stages. There’s been lots of bad news and writeoffs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem insolvable.

I liked this comment:

Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for.

Bespoke: on One and Two % Days

Bespoke:

A whopping 44 of the last 90 trading days have been moves of 1% (+/-) or more in the S&P 500. Fifteen of the last 90 trading days have been 2% days. Below we provide a historical rolling 90-day sum of 1% and 2% days in the index. While we've been constantly reading and hearing that the current period of volatility is unlike anything ever seen before, it isn't.

BCA: Fannie and Freddie Unbound

From Bank Credit Analyst:

The joint initiative announced by Fannie Mae, Freddie Mac, and their regulator, the OFHEO, should provide a strong boost to the mortgage market and allow prime MBS and other high-quality credit spreads to tighten.

Just What The World Grain Market Doesn't Need

The Instapundit links to this news item from ScienceDaily:

Wheat Killer Detected In Iran: Dangerous Fungus On The Move From East Africa To The Middle East

ScienceDaily (Mar. 17, 2008) — A new and virulent wheat fungus, previously found in East Africa and Yemen, has moved to major wheat growing areas in Iran, reports the UN's Food and Agricultural Organization. The fungus is capable of wreaking havoc to wheat production by destroying entire fields.

There are many links to other articles on the fungus at the Science Daily site and at another blog the Instapundit links to: BigBlog

Wheat has had a huge bull run on tight supplies caused mostly by rapid demand growth. Widespread crop problems now would cause enormous difficulty with world food supplies.

Fed Cuts Funds Rate to 2.25%

Fed Funds cut to 2.25% down 75 basis points.
Bespoke provides this nice chart of the fed funds rate going back to the 70's.


Update: Just found this T-Bill chart posted at CrossingWallStreet on Monday. The chart shows 3 month treasury bill yields at 50 year lows.

New Instrument For Investing in Chinese or Indian Currency

From Index Universe.Com :

Morgan Stanley has teamed up with Van Eck Global to launch currency exchange-traded notes offering exposure to the Chinese renminbi and the Indian rupee. The Market Vectors - Chinese Renminbi/USD ETN (NYSE Arca: CNY) and Market Vectors - Indian Rupee/USD ETN (NYSE Arca: INR) are the first exchange-traded products to offer exposure to those two currencies.

These are interesting securities and Index Universe has a nice summary explanation. Up until now it has been very hard to invest in these currencies. Remember this is units of the currency per dollar so a declining number means the dollar is losing ground. Both of these countries is experiencing increased inflation and allowing their currency to rise is a partial solution to that particular problem.

BCA: Gold $1000

Bank Credit Analyst:

Gold punched through the $1000 mark and the precious metal is being propelled higher by building rate cut expectations and a soft U.S. dollar.

Watch for those front page headlines, if you are not getting them then we aren't ready to correct.

Even Better Bear Stearns Chart

From Bespoke a series of great charts on how much the brokerage stocks are down. I only show the Bear Stearns chart but the others are interesting too. click through to Bespoke to see them.

Bear Market

From Bloomberg:

March 16 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''

And further down in the article a perfect example of why you don't add to losing trades:

Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11.

Shareholders to get about $2 per share of J P Morgan stock for their Bear Stearns shares which were near $150 a year ago. Not Good!

BCA UK

The Bank Credit Analyst today:
"The U.K. housing market is cooling rapidly, and will force the Bank of England (BoE) to ease policy aggressively in the coming months."



BCA Research - Independent Investment Research Since 1949

Jeff Saut on 90% days

Jeff Saut of Raymond James in his weekend commentary talked about "90%" days and what to expect. based on what has happened since it is worth a reread:
That said, last Thursday qualified as yet another 90% Down Day (volume and points lost were greater than 90%). As the astute Lowery’s service notes, “This was the 2nd 90% Down Day within four trading days, and the 7th within the past three months. Past experience shows that 90% Down Days are typically followed by one of three patterns: (1) a 90% Up Day occurring quickly after the 90% Down Day would suggest that a sustained rally lasting about two or more months is likely; (2) the absence of a 90% Up Day during a snap-back rally would suggest that a brief recovery rally lasting 2 to 7 trading days would most likely be followed by new lows in price and additional 90% Down Days. Such rallies should be used to sell stocks; (3) the lack of any snap-back rally within a few days after the last 90% Down Day would suggest a sustained market decline is underway that will probably produce additional 90% Down Days.” Indeed, we think this is “kiss and tell” week and we continue to trade, and invest, accordingly.

I have not seen the stats for yesterday's big up day but even it it wasn't 90% it was big and worth noting. The market needs to follow through to the upside this week to encourage some more investors to jump in.

Raymond James | Investment Strategy by Jeffrey Saut

Faber: Winning By Not Losing

Mebane Faber on Winning by not Losing an approach I agree with for asset management:

Winning By Not Losing

I published a paper last year to focus on the topic in the title of this blog post - "A Quant Approach to TAA". It took inspiration from the Policy Portfolios of the Harvard and Yale endowments to come up with a simple strategic asset allocation - 20% each in US Stocks, Foreign Stocks, US Government Bonds, REITs, and Commodities. This portfolio can be easily implemented with low-cost ETFs or mutual funds, and rebalanced every so often. It then applied a smiple tactical overlay to reduce risk and drawdowns - ie winning by not losing. This technique would have had you out of US Stocks the end of 2007, out of Foreign Stocks the end of January, and out of REITs way back in June of last year. And of course you would still be happily in 20% bonds, 20% commodities, and 60% cash.

Follow the link in the paragraph quoted to find Faber's paper.

Bespoke on Largest Dow Up days

Bespoke's post:

Hussman On The Commodities Run

John Hussman discusses the commodity runup and a signpost to watch for clues to when it might end.
I am pasting in the discussion but this is only a portion of his commentary which i read regularly.

It is accurate intuition that commodities are
generally stronger in economic expansions than they are in
contractions, but that intuition can fail when U.S. real interest rates
are negative. At those times, the heavy downward pressure on the U.S.
dollar tends to be supportive for commodities. Given that commodities
have already had an extremely strong run, it would be overly
speculative to take positions here on the expectation that the run will
continue, but the evidence suggests that we should expect a serious
break only when the rate of inflation breaks.

As
a simple way to capture the pattern, we can define the economy as
“strong” or “weak” depending on whether the ISM Purchasing Managers
Index is above or below 50. We can capture real interest rate pressures
by noting whether the latest year-over-year CPI inflation rate is above
or below the 10-year Treasury yield. This is not a true “real” interest
rate measure, but it generally captures periods where recent inflation
is high or accelerating and bond yields are not particularly supportive
of the U.S. dollar. Using the recent CPI inflation rate (overall, not
core) also introduces a “trend following” component, since rising food
and energy prices will push up that year-over-year rate as well.

Most
of the past half-century has been associated with an ISM above 50 and a
CPI inflation rate below the 10-year Treasury yield. During these
periods, the CRB index has increased at a modest average rate of about
4.3% annually. When the ISM has been below 50, with CPI inflation below
10-year Treasury yields, the CRB has declined at an average rate of
-5.4% annually. So there is certainly evidence to suggest that
commodity prices are vulnerable during periods of economic weakness.

When
CPI inflation is running higher than 10-year Treasury yields, the
pattern is different. This doesn't happen often, but the return
differences are large enough to be statistically significant despite
the small sample size. During these periods of downward real interest
rate pressure, the CRB has advanced at an average rate of 10.0%
annually when the ISM has been above 50, and 39.6% annually
when the ISM has been below 50. This result has been largely due to
downward pressure on the value of the U.S. dollar.

In
short, my impression is that the commodities run, though increasingly
extended and dangerous, may have a final push due to further weakness
in the U.S. dollar. Most likely, as we approach the second half of
2008, rising credit problems will reduce monetary velocity enough to
finally put a lid on the rate of inflation. At the point where the
year-over-year CPI rate drops below 10-year Treasury yields, most of
the damage to the U.S. dollar will likely have been done (even if the
economy weakens further), and that's probably when commodities will
become poor speculations

Hussman Funds - Weekly Market Comment

Speaking of Instability.

Now this is unstable.

MISH: Does Stability Breed Instability?

Mike Shedlock who has been terrific on the subprime and credit crisis has a great post with some good charts (including the one above) showing the disconnect between longer term treasury yields and mortgage yields. He asks the question "does stability breed instability?" I would answer not necessarily but stability with the Greenspan put does breed instability. Assuming the Fed is going to insure stability encourages excessive leverage and excessive leverage guarantees instability.

Levered players tend to favor "liquid markets" because the relative ease with which they can slip into and out of those markets makes the leverage seem safer because one can always get out. Every so often, and this is one of those times, the market reminds these people that liquidity is not a fixed constant but another variable. Liquidity is inversely correlated to crisis. To illustrate the point I remember being in the bond pits during the 1987 market crash. One day the bid ask spread in the bond price was one thirtysecond of a point wide ($31.25 between bid and offer on $100,000 of bonds) with thousands of contracts bid for and offered. The very next day the bid ask spread for the same contract was one full point wide ($1000.00) with one hundred contracts bid or offered if one was lucky. That occurred in one of the most liquid markets in the world. Liquidity happens when traffic is heavy in both directions when everyone heads the same way, not so much.

The unwinding of leverage in the credit markets has completely erased the normal liquidity in the credit markets by sidelining so many of the participants. Cutting the Fed Funds rate in this environment is like handing out two for one coupons for circumcision. There just aren't that many takers.

Bargains exist in credit securities right now but not many bargain hunters. The Fed and Treasury need to engineer a quick dollar intervention to shake out the short dollar speculators and send a message to potential overseas buyers of long term credit market instruments that the US government is not going run a continuing policy of benign neglect of the dollar. A few of them might just begin to look for bargains. The Fed cannot quickly cure the housing situation and it does not need to. Mr. Bernanke needs to concentrate on finding a way to put a bid in the credit markets.

MCGovern: Freedom Means Responsibility

Thanks to the Instapundit for pointing out this outstanding editorial in the Wall Street Journal Opinion page by former Senator George McGovern. This may be the first time I have ever agreed with McGovern but I could not agree more this time.

Since leaving office I've written about public policy from a new perspective: outside looking in. I've come to realize that protecting freedom of choice in our everyday lives is essential to maintaining a healthy civil society.

Why do we think we are helping adult consumers by taking away their options? We don't take away cars because we don't like some people speeding. We allow state lotteries despite knowing some people are betting their grocery money. Everyone is exposed to economic risks of some kind. But we don't operate mindlessly in trying to smooth out every theoretical wrinkle in life.

The nature of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best to educate them, but without diminishing choice for everyone else.

U.S. Greenhouse Gas Emissions Are Down

Jeff Jamaleldine

Please read this story:

The Good German

I welcome this brave young man as a citizen and will remember his words:

"But someone has to achieve that peace."

This is a disgrace!

From Pajamas Media:

Thousands of foreign students are in U.S. flight schools illegally. Annie Jacobsen exclusively reveals an internal memo on the Transportation Security Administration’s failure to enforce the law.

Read the whole thing if you want to be infuriated.
This is a disgrace and and a number of higher ups should be fired. Complete bungling by a Republican administration and I am no Bush basher. Oh and for those of you who lean left remember it likely would be worse with the democrats. One more reason to Throw the Bums Out. Do not vote for any incumbents in the coming national elections. Get rid of all of them from both parties and send a message.


Hat Tip to the Instapundit

Critical Juncture

The credit markets are in complete disarray. The money and bond markets which are normally very organized around the inexorable mathematics of yield calculations are offering all kinds of illogical prices, when there are any prices. The stock market seems to be frozen in a range like a deer in the headlights ready to go one way or the other but unable to choose a direction. The price of actual physical stuff ( gold, crude oil, wheat etc.) is levitating as money flees the dollar but resists going to other froms of paper. Oh, woe is me! What to do?
Well turning to golf terminology, break out a sleeve off golf balls and tee one up. (Remember a sleeve of golf balls is 3 balls and I said tee one up) I don't have anyway of knowing if this is a bottom, the panic may worsen and the economy collapse. But the level of pessimism in the media and the attention on page one to various problems in arcane areas of the market like structured finance and municipal bonds tells me for sure this is not a top.
Here are some interesting comments from respected sources:

Stock markets are a forward looking mechanism and will turn positive long before the economic statistics improve. The quotes and table below are from the Puru Saxena newsletter:

Turning back to the current situation in the US, opinion is divided as to whether the US will slip into recession, thereby triggering a global bear-market. It is my view that when adjusted for true inflation, the world’s largest economy is already in recession. However, I doubt very much if the official statisticians working in Washington will ever admit to a recession in this election year. So, I would have to conclude that at least in the eyes of the mainstream media, the US will avoid a recession not least due to all the help being provided by the officials.

It is interesting to note that during previous recessions in American history, government-sponsored stimulus packages arrived around the time when the business cycle was bottoming out and a recovery was already underway. Here are the dates when anti-recession packages were announced followed by
the dates when the recessions ended:

October 1949 – recession ended in October 1949

April and July 1958 – recession ended in April1958

May 1961 and September 1962 – recession ended in February 1961

August 1971 – recession ended in November 1970

March 1975 – recession ended in March 1975

January and March 1983 – recession ended in November 1982

December 1991 and April 1993 – recession ended in March 1991

June 2001 – recession ended in November 2001

So, given the fact that Mr. Bush has already unveiled his stimulus package and the Federal Reserve is busy recapitalising the banking system via a steep yield-curve, I am willing to bet that after some more weeks of choppy trading and base formation, the global stock markets should trend higher. If this is the case, my preferred investment themes (natural resources, BRIC economies, Asian infrastructure and the US technology sector) should continue to outperform the other sectors and markets.

and from The Investment Scientist via A Dash Of Insight both very interesting sites:

Periods of 200+ bp rate cuts	S&P 500 1 year return	Small Value 1 year return	S&P 500 3 year return	Small Value 3 year return
Oct 1957 - Mar 1958	32%	64%	55%	106%
Apr 1960 - Jan 1961	11%	23%	25%	47%
Apr 1970 - Nov 1970	8%	12%	10%	-1%
Jul 1974 - Oct 1974	21%	34%	25%	149%
Apr 1980 - May 1980	-19%	46%	46%	175%
Jan 1981 - Feb 1981	-14%	10%	20%	131%
Jun 1981 - Sep 1981	4%	25%	143%	141%
Apr 1982 - Jul 1982	52%	96%	78%	174%
Aug 1984 - Nov 1984	24%	31%	41%	39%
Sep 1990 - Mar 1991	8%	29%	19%	89%
Sep 2000 - May 2001	-15%	19%	-11%	57%
Average	13.5%	35.4%	31.8%	100.5%

So I am doing some small buying of equities and I am probably early, I often am, but the pessimism everywhere gives me comfort.

Chart above courtesy of Investors Intelligence and Fullermoney

Mish on Ambac: "Thud"

Mike Shedlock on the Ambac announcement and following price flop.
Best two lines:

Splitting a rotten apple in two does not give you half a good apple.
You cannot stay in business, by not doing business, no matter what the business is.

I wonder when the rating agencies are going to become shorts. Surely they are accomplices in the intellectual fraud that is the rating of CDO's. Mr. Buffett I know you have been a fan of and an investor in Moody's but, I think it is time to sell before the lawsuits hit.

Samizdata On Tax Havens and Individual Liberty

Samizdata has a short and well written post in support of tax havens. i would crib the whole thing but that is inappropriate so here is a little.

Another issue, of course, is this: democracy and liberty are not the same thing, a point that has been remarked at this blog many times before. For sure, democracy may - may - be the least-worst way to kick out a government and replace it with a hopefully better one, but the idea that freedom comes from letting 51% of the electorate steal from 49% of the electorate has precious little to do with liberty. The right to own property and enjoy its fruits unmolested is as important as freedom of speech or the right to self defence. Tax havens rile communitarians precisely because they are a standing reproach to the looters who use democratic mandates to justify their depredations.

Remember the politician who is willing to rob Peter to pay Paul can count on the vote of Paul.

Municipal Bonds Take A Shellacking Yield more Than Treasuries

Municipal bonds got whacked as the turmoil surrounding insurance forced some selling by a couple of hedge funds into a weak market and prices cratered.
Wall Street Journal:

Months of turmoil in the municipal-bond market, long a placid haven for individual investors, reached a boiling point Friday -- as hedge funds were forced to unwind complicated bets and in the process dump billions of dollars of the securities.

As a result of that surprising forced selling, yields on debt from municipalities and other tax-exempt issuers jumped to their highest levels in history, when compared with safe debt issued by the U.S. government. The average AAA-rated, 30-year municipal bond yielded 5.14% Friday afternoon, compared with 4.42% on a U.S. Treasury 30-year bond.

Aleph Blog asks: I try in my writings to be low hype, so I avoid brash headlines. Every now and then, though, one has to pound the table. With muni bonds today, there are some screaming bargains out there, even if you can’t benefit from the tax deduction. When have we ever seen muni yields at significant premiums to taxable Treasury yields? I can’t think of such a time in my investment lifetime.

Update: Monday morning Bloomberg posted this very good explanatory article:
Auction Supply `Tsunami' Foreshadows Deeper Municipal Losses

Associated Press Against Free Speech

The Associated Press is bullying a blogger (Snapped Shot ) for criticizing their photoshopped photographs. They are hiding behind Fair Use clauses and copyright laws but the truth is this is using a corporate legal staff to force a small independent voice to shut up because he cannot afford the legal costs of protecting his free speech rights. Isn't this the opposite of what a free press should be doing?
Jules Crittenden is all over it: Legal Jihad

Hat Tip: Instapundit

Update: (also via Instapundit) Duke University officials follow up their stunning rejection of "innocent until proven guilty) with an effort to suppress free speech. American Thinker has the story.
When I was going to school in the late 60's the free press and the universities were places that revered Individual rights, freedom of speech, and concepts like innocent until proven guilty. And we liked it that way.

Berkshire Annual Report and Shareholder letter.

Berkshire annual and quarterly reports.

Link to all Buffett's letters to shareholders

A couple of interesting excerpts:

Our direct currency positions have yielded $2.3 billion of pre-tax profits over the past five years,
and in addition we have profited by holding bonds of U.S. companies that are denominated in other
currencies. For example, in 2001 and 2002 we purchased €310 million Amazon.com, Inc. 6 7/8 of 2010 at
57% of par. At the time, Amazon bonds were priced as “junk” credits, though they were anything but.
(Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find
them anywhere except at the finance departments of some leading business schools.)
The Euro denomination of the Amazon bonds was a further, and important, attraction for us. The
Euro was at 95¢ when we bought in 2002. Therefore, our cost in dollars came to only $169 million. Now
the bonds sell at 102% of par and the Euro is worth $1.47. In 2005 and 2006 some of our bonds were
called and we received $253 million for them. Our remaining bonds were valued at $162 million at
yearend. Of our $246 million of realized and unrealized gain, about $118 million is attributable to the fall
in the dollar. Currencies do matter.

and

We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for
$488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the
company was worth about $100 billion. By 2007, two factors had materially increased its value: the price
of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas
reserves. In the second half of last year, the market value of the company rose to $275 billion, about what
we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion.

Warren Buffett is known as a long term buy and hold investor but he has been a great bond trader over the years.

WSJ: Jolie 1, Obama 0

James Taranto in The Wall Street Journal writes:

Jolie 1, Obama 0
Actress Angelina Jolie recently visited Iraq in her role as a "goodwill ambassador" for the U.N. High Commissioner for Refugees. In a Washington Post op-ed, Jolie urges a continued U.S. presence in Iraq for humanitarian reasons:

and

It's quite a contrast with the attitude of Democratic presidential front-runner Barack Obama, who said last summer that even preventing genocide was not a sufficient reason for a continuing presence in Iraq. What does it say about the Democratic Party that it seems poised to nominate someone who, on the most pressing concern of the day, is less morally serious than a Hollywood starlet?

I applaud Angelina Jolie for stating a position that will be wildly unpopular in Hollyweird. She has also earned the right to be called a star rather than a starlet.