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General Electric: Not Quite a Value Trap, More Like a Value Pit
GE is widely owned by pension plans and especially by individual retirees. I call these people Grandma Millie. They don't care all that much about capital appreciation but really need GE to keep paying consistent dividends. If the dividend is cut (ignore for the moment whether this is necessary or a good idea), not only will they not get their monthly checks but they'll also lose another 20-40% of their capital. From a political perspective, that's simply unacceptable. Remember that Grandma Millie is a pathetic figure, and she also votes. GE Capital (the real problem here anyway) is already a bank and will get as much government money as GE requires to continue paying out. The government has shown no inclination at all to let companies like this fail; GM is in drastically worse shape and is both far smaller and less widely held than GE but is still being saved at great but largely unknowable cost.
Remember, Grandma doesn't care much about dilution and frankly neither should you: we're talking about a yield north of 7%. Worst case, you pocket that income for a few years while the balance sheet is cleaned up courtesy of the taxpayers, then you recover the rest of your capital when business conditions improve. Considering that this yield is around 3x what you can get in Treasuries (and is tax-preferred, at least for a little while), the risks would have to be enormous to justify staying away. There are four basic outcomes possible here: total loss, dividend suspension for 3 years, dividend cut to 20c and left there for 3 years, and no change. What probabilities are you assigning to these outcomes that justify your bearishness? Remember, we're comparing this with other 20-30 year investments like the Long Bond. Even if we assigned these pessimistic probabilities like 10%, 30%, 50%, and 10%, you're still way ahead (as a reminder, a 20c dividend would imply a yield just under double that on the long bond).
Of course, even without a bailout, GE has several quality businesses and remains quite profitable (more than enough to cover the dividend). It's not out of the question that it will survive in its current form without any help at all. Some of their business units also stand to benefit from infrastructure investment, and there are some longer-term global growth themes here to boot.
I didn't like GE at 30. I bought some below 20, and I'm buying more now. Despite the risks, which are real, there are too many ways to profit by owning this company to ignore it as a value pit. And the price, finally, is right. It's not clear to me that there's much scope left for profitable shorting here, but maybe you could squeeze out just a bit more profit. But where do you exit? This sucker ain't going to zero. The short-term picture here is very murky; longs and shorts could each find themselves losing 25% in a 3-month period. And your own disclosure tells me you see it the same way, even while you're bashing. The long-term picture is not murky at all; this is a profitable company with good growth prospects that already has almost unlimited access to government money and is widely held by a politically strong voting bloc.
If I still haven't convinced you, at the very least you should be buying the notes. I can see absolutely no excuse for avoiding those. Even if they end up getting downgraded, so what? It's not like you aren't going to get your principal and interest. The real worry you should have with both the stock and the paper isn't that GE stops paying you but that what they pay you might no longer be worth anything. Offset that risk by shorting the Great Treasury Bubble.
Consumers Spending Less Than Justified by Actual Income
Write it down and take it to your gold-filled safe: unless incomes start rising rapidly, consumer spending has a long way left to fall.
Is It Time to Buy Gold?
This is really the only thing you need to know; the rest of your article goes on to muddle and confuse this clear and simple statement of fact. The dollar monetary base has more than doubled in the last year, and most other fiat paper issuers have made similar moves. There's the first half of your statement. For the second half, observe predictions from HSBC and others that 4th quarter US GDP will likely come in at a -6% annualised rate and that 2009 GDP will likely fall from 2008 by anywhere from 0 to 1%, estimates that will probably be cut several more times. All that fiat paper isn't chasing the same amount of stuff, it's chasing less of it. If people are willing to sell things to you at prices that don't reflect that reality because they are desperate to pay their dollar-denominated debts, consider it an opportunity. In the long run those sellers will all bust out or pay off those debts and they WILL demand prices that reflect the quantity of fiat paper available relative to the quantity of goods and services. All you are seeing right now is a short squeeze in fiat paper that, like many market imperfections, has caused price to deviate from value. It's an arbitrage opportunity, and like many more traditional arb plays (look at even the T-bond market) right now, it's not getting any action even though there is literally free money to be had.
How you can get from your correct and succinct explanation of inflation and how it triggers higher prices to "we have deflation now" is mind-boggling. Do you disbelieve the Fed's own figures about its balance sheet? Is there something else out there that suggests that the money supply is in fact shrinking? Do you have data to suggest that output is rising at more than a 100% annualised rate? You haven't presented any, but you have to if you want to state that there is deflation. This failure makes the rest of your arguments crumble.
Should you own gold? Only if you think you can't get a positive real return from something else. If you'll be satisfied with zero change in your assets' purchasing power while you own them, gold is the only game in town. The dollar and other fiat paper is no substitute for gold as a store of value, and doesn't even deliver any nominal returns right now. Therefore there is no reason to own it other than raw speculation - "the trend is your friend". If you're a momentum trader, the dollar and Treasuries probably look great right now, just like oil did in June. If you're nimble enough, you can make money this way. I don't bother because there are risk-free opportunities lying in plain sight.
Otherwise, your choice is between gold and the various capital assets offered by the world's corporations - bonds and equities. Because few if any bonds are denominated in gold, they are much more risky than the fundamentals of the debt itself would suggest. With the money supply increasing at more than 100% per year it's hard to make a case for bonds even if you knew with absolute certainty that a bond yielding 20% and rated B- should really be rated AAA, as it has zero chance of default. Much like a bad poker play, you'll probably make a little money quite often on such a trade, but you'll occasionally lose your whole stack; the trade has an infinite-term expected value well below zero. The law of large numbers is against you here. Equities? Good luck.
As you can see, the question is not really "should I own gold?" but rather "what capital assets are available at prices that offer me a positive expected real return over the time frame of interest?" If there are none, then you should own gold simply because zero is larger than any negative number. Gold is the only meaningful standard of value for long-term investors and the default asset when no attractive investments are available. But it is not itself an investment, nor is it a vehicle for speculation. I would suggest that most people should have most of their assets in gold right now, simply because most corporations have only marginal businesses that require an infinite supply of cheap money to achieve profitability. Until those corporations fail or address the deficiencies of their businesses, it will be a difficult market in which to make money. If you are certain that your information is better than the market's, a modest investment in superior businesses is always a good move. And the numerous arbitrage opportunities available today demand at least some attention from any but the most casual trader: a glaringly ragged yield curve for fixed-income arbs, or perhaps the simple fact that the dollar is overvalued on the short squeeze. If you have trading capital, are willing to accept small but certain gains, and can hang onto your positions indefinitely, these opportunities are too good to ignore. But you always have to price your gains in gold, and you should never be without a healthy holding of it. It's your capital base and it gives you the strength to stick with good trades even when the market moves against you.
Marc Faber on the Economy, Gold, WWIII
Lenders, Loan Modifications and Coming 'Cram-Downs'
John, I appreciate your comments on why modifications often fail, which are well thought-out, but quite frankly they've really stuck in my craw. When you say "only the monastic will avoid default" and "They do not have the basic financial skills to assess prudent action..." my immediate response is So What? Perhaps the lenders should give them a pamphlet to help them learn their chants. At minimum, any judicially-enforced cram-down should come with an automatic wage garnishment for the amount of the new payment (whether it's 50% or 40% or 36% of income), enforced until all loans against the underlying collateral are paid in full. It's remarkable how resourceful people can be when they have to be, and how profligate they can be when permitted.
Let's put some numbers to this. Joe makes $80k a year. He lives in a house for which he paid $500k; he owes $445k at 6.5% and the property could be sold today for $320k. He's paying $3450 a month (52% of his gross income), of which about $2300 is tax-deductible interest and another $450 is federally-deductible property tax (he lives in California and pays 1.1%). His monthly take-home pay is approximately $5750. After making his onerous mortgage payment, Joe has $2300 left. Note that we're assuming Joe is single and has no dependents; if this is not the case, he probably pays almost no taxes at all and his take-home pay will be higher still.
My question to my fellow readers is this: what is it that's so all-fired important to Joe's monastic lifestyle that he needs $2300 a month for it? Robes, rosaries, and bibles aren't very expensive. Let's keep going with this and make up an example budget for Joe.
Housing: $3450
Savings/retirement: $500
Groceries: $500 (Joe eats meat every day and has a thing for lobster)
Utilities: $350 (Joe lives in the desert and air conditioning is expensive)
Car note: $500 (Only poor, smelly people ride the bus)
Car expenses and fuel: $200
Laundry and miscellaneous household costs: $100
Clothing and other durables: $150
Total: $5750
Monastic? Try decadent. Joe is living like a king on a pretty ordinary paycheck despite being in debt up to his eyeballs. He's even putting away money! He'll be in trouble if he loses his job, to be sure. But the reality is that even if we cut his pay by 30% he could continue making his mortgage payments if he decided to forgo the lobster, ride the bus or trade in his Acura for a 9-year-old Toyota, turn his thermostat up a bit in the summer, and save a little less. He now takes home $4350 a month. His new budget looks like this:
Housing: $3450
Savings/retirement: $100
Groceries: $250 (Joe has meat four days a week, lots of rice and beans)
Utilities: $250 (Joe likes to set his thermostat at 82 in summer)
Car expenses and fuel: $225
Laundry and miscellaneous household costs: $75
Total: $4350
We're starting to approach monastic here. But notice that Joe's housing payments are now a whopping 74% of his gross pay!
So, sorry, I'm just not seeing it. The reason Joe doesn't make his mortgage payment isn't that he can't, it's that he doesn't want to (and probably doesn't even know what his income and expenses even are, so trying to set out a reasonable budget isn't even possible). Under circumstances like these, lenders should be able to obtain garnishment orders for delinquent loans if the collateral is under water and the borrower's remaining income would be sufficient to sustain life and health. In truth, even with a supposedly inconceivable 74% mortgage burden, Joe is living a lot better than 80% of the people alive today. He could cut another $400 or so from his new spartan budget without threatening his life or health (and he'd still be living better than nearly anyone in Africa or Asia). More to the point, he'd still be making his mortgage payment every month.
Too many people have insane ideas about what the essentials really are. If you've lost a lot of money on your house and money is tight, you don't get to just stop paying. You cancel the cable TV subscription, quit eating out, and rein in your spending. No doubt there are people who truly are at rock bottom already; as a lender I would be happy to work with such a borrower even if it means a principal reduction simply because I can see that he or she really is doing everything possible to pay, and is therefore likely to continue to do so if we can come up with some reasonable terms. But in our example above, Joe isn't even trying. He's not a very sympathetic figure; as little love as I have for banks (hint: none at all), they're in the right here almost every time. Suck it up and pay your debts, and learn a tough lesson your good-for-nothing parents should have taught you.
The Intrinsic Value of Gold
I could quite reasonably argue that the real value of gold looks like a flat line, but the units on the Y axis would have to be "goods and services" - and now I'm on my way toward computing the value of the units in which the sizes of various good and service markets are usually quoted by sources like Bloomberg and the BLS; i.e., a serious article. More trivially, I could simply decide to graph the market price of the US dollar, in ounces, adjusted such that the value of an ounce of gold never changes. But I'd still have to work out the value of the dollar at each point in time.
That's fantastically hard to do. I know you haven't done it, not only by reading your article but simply because you wrote it. If you had a reliable formula for determining the value of the dollar at a point in time, two things would occur:
1. You would be so wealthy that you'd hire someone else to write a much more detailed - but subtly wrong - article for you, and
2. Your enormous wealth combined with your constant arbitrage profits would make the market price of the dollar dramatically less volatile than it is.
Keep trying, please.
Scenarios for 2009: Straight Lines, Double Dips, Moonshots, EKGs
We've reached a point where yields are so low, and weakness so pronounced and widespread, that both sides of the barbell mean higher Treasury yields. A dramatic deepening will mean a supply explosion and real risk of default - the FTQ trade will mean selling, not buying, Treasuries. On the other hand, a recovery will allow the massive increases in the money supply to find their way into prices, and if nothing else those fat juicy yields on corporate paper and even stocks will be too attractive to justify sitting around getting 2.6%.
About the only way Treasury yields fall further is if the world collectively loses its mind (wouldn't be the first time, to be sure). Maybe multiple rounds of deep competitive devaluations could do it? Aliens showing up from Barsoom to buy up all the bonds? Congress suddenly refusing to allow more deficit spending? Just kidding on that last one, of course.
After the automaker bailout fails, the White House weighs its options.
LET THEM DIE.
Yellen's sentiment was echoed by Chicago Fed president Charles Evans, though he tempered his enthusiasm for wide-scale stimulus by calling current policy 'sobering.' "By historical standards, our current fiscal debt is not unusually large; but our expected future obligations are enormous." (full speech)
1. If you are rich, we will keep you rich.
2. If you are poor because you have no marketable skills and don't care to acquire any, spend too much, and/or can't be bothered to look after yourself, we will give you money to support your bad habits.
3. If you are not "you" in (1) or (2), you are "we" in (1) and (2), and if you don't like it you're welcome to join "you" in (2) by accepting an unlimited stay in federal prison.
Some days it sounds a lot better than working for a living.
On Jan 04 10:34 PM Jackson Cash wrote:
> Translation:
>
> 1. If you are rich, we will keep you rich.
>
> 2. If you are not, even if financially prudent, your money will
> go towards number one.
GMAC: Happy to Lend You Some of Your Own Money
Two questions should come to mind here even if you're part of the "pragmatic" or "utilitarian"... school of thought; i.e., a mainstream thinker. (Those of us who are principled don't care about these questions because the move is obviously damnable regardless.)
First, is this actually helpful to the economy? In other words, how much marginal demand for GM automobiles is out there between 621 and 700 that could not obtain financing anywhere else, or would not buy under the terms previously on offer but would now? That range of credit scores covers something like 25% of potential buyers. Given that around 5% of surveyed individuals intend buying a car in the next six months, if we assume that 1/3 of them will not consider GM at any price and the most hopeless credit risks have already excluded themselves from answering the survey, we might conclude that at most 0.8% of all households are in play at all, or about 800,000 of them. Not all who wouldn't have bought GM before will do so now, but let's be generous and suppose that half will. That would be enough to increase GM sales by about 800,000 vehicles per year, less than 10%. In fact this is probably generous. But notice that most if not all of these sales are simply being taken away from other vendors, meaning only a very slight net win for the US economy (after all, the "foreign" carmakers still have dealers, service shops, and usually manufacturing operations in the US anyway). Most of the benefit here accrues specifically to GM, not to the economy writ large.
Second, even if we suppose that encouraging people to "buy stuff" and giving them money to do so is a sound strategy, should we really be encouraging them to buy cars specifically? After all, there are already plenty of cars out there, and they pollute, place great strain on locally-funded infrastructure, and due to resource and space constraints provide much less marginal utility as their number increases. Worse still, a cheap car with interest-free financing is like a cheap puppy with interest-free financing. Most of the individuals who might take advantage of these offers really cannot afford the cost of owning and operating a vehicle, or a second vehicle. They have little or no savings and marginal jobs and should really be focused on saving and paying down existing debt (hint: you don't get a credit score of 650 without having some unpaid debts lying around). In many cases we have to believe that both these people individually and the economy as a whole would be better off if they moved closer to work and walked, took the bus or train, or bicycled. No doubt there are exceptional cases, but by and large there should be real questions about encouraging this particular purchase.
So on balance it looks like the taxpayer is handing GM at most an additional 800,000 sales per year, many of them taken from other vendors. In addition to the up-front costs, he is also on the hook for additional road work and construction (paid out of already barren city and state coffers), the cost of pollution cleanup and/or environmental degradation, and the likelihood that more bailouts will be required elsewhere as more new car owners on marginal credit decide to make their car payments instead of paying on existing debts.
A better strategy would be to simply give GM the marginal revenue from another 800,000 sales (call it $20b) and tell them that it has to be used in one of two ways: to downsize their brand and dealer fleets, or as severance payments for UAW workers. The net effect on GM's balance sheet would be better, the net effect on the Treasury's balance sheet would be no worse, and the net effect on individual Americans' collective balance sheets would be better. There would also be intangible quality of life improvements (cleaner air and water, less traffic congestion) due to having slightly fewer cars on the road.
Another option would be to use the money to support a prepackaged bankruptcy filing. It's going to be hard for GM/GMAC to obtain the financing they'll need to get through the filing. No doubt the taxpayers will be providing that, too, when the time comes. It would have been better to just make that move at the beginning rather than throwing some away now and then providing the loans later after the initial "investment" is written off.
There can't be too many people who profited from this move. With the possible exception of GM dealers and perhaps the UAW workers in their 40s and 50s who would (and will) be laid off when GM downsizes, it's likely that every single American lost money on it. That enrages those of us who value free markets, small and limited government, and low taxes, but as I've shown here it should enrage even mainstream observers as well. This is entirely consistent with a thoroughly corrupt and incompetent system of government that continues to fail its stakeholders.
Even if GM (GM) is too big to fail, the threat of bankruptcy, or even downsizing, has potential customers looking elsewhere.
First, let's accept that there is some utility value to owning a vehicle. If you're using it specifically for work purposes (as a taxi driver, trucker, or farmer) it is also an income-producing asset. That's not what we're talking about here; for most people the marginal utility of a vehicle is whatever it gives them that other transportation options of comparable cost would not. A concrete example might be a man who would ordinarily commute by himself but would use a car on weekends to carry four or five people more cheaply than the cost of four or five bus fares, and a couple of times a year might go to locations not served at all by transit, saving the cost of renting a car, hiring a taxi, or not making the trip. Those savings minus the extra costs of commuting by car instead of other means is marginal utility. To compute it, you must first know your cost of commuting by car and by some other method.
Wherever you work, chances are good there is housing within walking distance (more than 50% of Americans now live in "urban areas", in which this is almost invariably true). In most climates, that means you can walk to work at least 70% of the time. Often it means you can walk 100% of the time and your commuting cost is zero. One can also extend this logic to other modes - bicycling, bus, streetcar, train, etc. In most cases, the subsidised cost of transit will be lower than the subsidised cost of owning and operating a car (and removing the subsidies would exaggerate the difference, not eliminate it). Computing this cost involves many variables but will usually boil down to straightforward addition for each of two or three main options.
Next, you must determine the cost (to you or to everyone, as your economic philosophy dictates) of owning and operating a car. This is a basic financial exercise and we needn't go into detail.
Finally, you must subtract these two figures, and compare the result with the marginal utility to you of owning and operating a vehicle. If the latter is higher, you probably should own some kind of vehicle. If not, you shouldn't. I assert that if everyone actually performed this activity, there would be many millions, probably many tens of millions, fewer car owners in the US alone. As a result, the allocation of resources would also be much more efficient (i.e., more market participants would be acting rationally) even before we consider the mutually reinforcing staggering malinvestment in suburbia borne of these irrational choices. If you want to dispute this assertion, you need to show either that I'm significantly understating the utility of a vehicle to a very large number of people or significantly overstating the costs of owning one. You have no realistic hope of making the latter argument and you've made no attempt at the former, only an emotional response. And while it's not directly relevant, I'll also note that at present anyone suggesting that carmaking capacity is not excessive (because, of course, everyone NEEDS a car!) is also arguing with the tape: sales are terrible.
Want to try again, or should we just agree to let GM die and save ourselves a couple hundred bucks apiece in bailout costs?
First-Ever Airlines ETF Set for Takeoff
In fact what we really need a very trivial ETF: long the entire market, but short airlines and retailers. Perfect for the long-term investor looking for a low-cost holding that's guaranteed to beat "the market".
Dow Will Equal Gold in 2009
Mission Impossible? Obama Must Rebuild Confidence in Federal Government
If Mr. Obama wants my confidence, he will:
1. Ask Congress to approve, and the states to ratify, a Constitutional amendment making gold and silver the only legal tender for government business and permanently fixing the value of the dollar at 1/1000 oz gold plus 1/100 oz silver,
2. Immediately close most executive departments and fire all their staff,
3. Ask Congress to terminate all bailout programs of any type and description,
4. Begin an investigation of the FDIC's longstanding practice of undercharging banks and failing to adequately account for risky bank activities in setting premiums,
5. Ask Congress for legislation abolishing the Federal Reserve Bank,
6. Instruct the Treasury Department to establish banking regulations requiring that all banks retain in their physical possession an amount of gold and/or silver equal in value to at least 50% of all outstanding demand deposits and at least 33% of all outstanding time deposits,
7. Abandon any attempt to appoint Eric "Censorship for All" Holder to the Attourney General's post,
8. Fire Tim Geithner and appoint in his place Rep. Ron Paul of Texas as his new Treasury Secretary.
If even half of these steps were taken, both my personal opinion of Mr. Obama as a leader and my financial confidence in the United States would immediately and dramatically increase.
So far, however, he's done pretty much the opposite of all of these, so I'll stick with gold, thanks. In *that* I do have confidence. In 5000 years it's never let anyone down.
Michael Lewis and David Einhorn team up on an exceptional NY Times op-ed, The End of the Financial World as We Know It. One of many money quotes: "Our leaders