Monday, October 19, 2009

Euro & The Dollar/Source of Problems: No Real Wage Growth/GCI/Value of GE Entertainment Compared to the Cost of Acquiring its Constituent Parts

1. Euro and U.S. Dollar: I do not own the Euro, and have no inclination to buy that currency. I noted a chart in a NYT article on Saturday that showed debt as a percentage of GDP in the Euro zone compared to the U.S. The European nations are running up far more debt as a percentage of GDP than the U.S. I previously referenced the following interactive map at the Economist web site, which allows me to examine country by country, several different ratios, including public debt as a GDP %, Public Debt per Capita, and Yearly Rate of Change. France, for example, has debt as a % of GDP at 75.5%; Britain at 65%; Germany at 75.5%; and Italy at 113.3%. Compared to those figures, the U.S. almost looks responsible at 49.1%. GDC The short rates in the Euro zone are higher than the U.S. but only by a tad: ECB: European Central Bank home page Certainly, the difference in the short rates is insufficient to justify the strength of the Euro against the dollar. Unemployment in the Euro zone hit 9.5% in July, the highest rate in more than 10 years, so that number is similar to the U.S. NYT The strength of the dollar also places European manufacturers at a disadvantage compared to U.S. multinationals and consequently may cause a reversal of July's gains for countries like France and Germany. Even though the U.S. was the epicenter of the near collapse of the world's financial system, I would expect the U.S. to recover stronger and more quickly than the Euro zone countries, and that belief is supported by recent economic data such as the ISM reports on manufacturing and service industries. Yet, the Euro hit a 14 month high against the U.S. dollar last week: Euro

Proshares does have an Ultra Short ETF for the Euro. ProShares ETFs - UltraShort Euro These ultrashort products have difficulty maintaining linkage to the index being tracked for more than a day. This particular product has declined from close to $26 in early March to around $17.42 as of Friday's close. I have owned some of these double shorts and traded them successfully for the most part so far. The double short ETFs for the S & P 500, the S & P 400, and the Russell 2000 indexes came in handy last year. I have experimented some with the double shorts for the long treasury bonds, though I have no position in them now. My positions have been small, used as hedges, and I will monitor the tracking issue daily once I have bought one of these volatile and risky securities. If I bought one on a currency, it would be primarily as a bet. However, there is an internal debate here at HQ about whether a purchase of the double short for the EURO would be more of a hedge than a bet. The LB has been attempting to make the case that buying the double short for the Euro, and consequently going long the U.S. dollar, is in effect a hedge for the current positions in commodities as well as international bonds and stocks.

2. Taliban & Al Qaeda: Some have argued that there is not a firm link between the Taliban and Al Qaeda now, that the Taliban has learned its lesson about harboring Al Qaeda and providing them with a sanctuary to train for terrorist attacks against the civilized world. This argument is advanced now by those who want the U.S. to disengage from Afghanistan. In a series starting this Sunday in the NYT, David Rohde details his capture and 8 months of captivity by the Taliban affiliated with Sirajuddin Haqqani. He was soon surprised by the goals of Haqqanis' followers, the creation of "a fundamentalist Islamic emirate with Al Qaeda" as their ally. And he was surprised to find out that Pakistan allowed these extremists to operate openly a mini-state in Waziristan. His description of the pathologies of these fanatics would equally fit those Mexican gangsters so aptly described in a NYT front page article from Saturday. Mexican Drug War

Possibly, Pakistan has finally come to a realization that cooperation with these gangsters threatens their national security, and that members of Pakistan's ISI cooperating with the Taliban are nothing more or less than traitors to the Pakistani state. Pakistan has finally moved into South Waziristan on Saturday, which is the stronghold for both the Taliban and their Al Qaeda allies. NYT Winter is approaching, and I would doubt that much serious damage will be done other than to scatter the militants.

An article this morning points out how the Taliban is financing their operations in part with hundreds of millions raised via the opium trade. NYT Maybe one option for a surge would be to take control over areas where this crop is grown and the Taliban is capable of exercising control or influence now. One province in Afghanistan, Helmand, is the world's largest Opium growing region: Helmand Even with some increased attention to this province, there are inadequate troops to clear it and the current U.S. policy appears to be to ignore the poppy crops as shown in this 60 minutes story: 60 Minutes This is impossible to understand. The explanation given is that the U.S. wants to win over the hearts and minds of the local farmers who grow the crops. If the area was cleared of the Taliban, which has not happened over the past eight years of conflict, then the farmers could be incentivize to grow other crops. The fact that the Taliban has resisted any past attempts to clear this province proves its importance to them.

3. Debate between Brett Arends and Dave Kansas: Back to the 1930s?: Brett Arends says Yes and Dave Kansas says No I would just highlight a few salient points. Wages in the U.S. have not kept up with inflation for 30 years according to Arends. He further argues that bond prices, particularly the longer dated treasury prices, are signaling problems ahead. Arends argument about bond prices does not take into account the impact of the current Fed policy in creating an artificial demand for treasuries and corporate bonds, through the Fed's own purchases of treasury paper and GSE mortgage securities and the herd buying of bonds caused by the abnormally low Federal funds rate. If the FED moved the Federal Funds rate to 2% and ceased the quantitative easing program, I would anticipate a firming of the U.S. dollar, a rise in yields for longer date bonds, and a reversal of the what I view now as the herd buying of taxable bond funds.

Still, there are fundamental structural problems. Wages are not keeping up with inflation, and jobs are being lost. That is the fundamental problem. When you layer that on top of a parabolic move in asset prices for homes caused by improvident extensions of credit, then the primary source of the recent financial crisis can be placed in proper context. Then, as Arends noted, household debt as a percentage of income has increased to unsustainable levels. I use the household debt as a percentage of disposable income: What Will Produce Growth after the Age of Leverage? The charts contained in this PDF from Invesco, which I have linked in several posts, highlight the problem Arends uses the figure that household debt now equals 59 weeks of income compared to 32 weeks of income thirty years ago. In whatever way the numbers are crunched, the problem comes back to too much debt and not enough income or income growth.

The USATODAY recently ran a story that average wages have fallen 1.4% this year adjusted for inflation. Adjusted for inflation, wages declined -.4% in 2000; -.7% in 2003; -.2% in 2004; -.4% in 2005; and -1.2% in 2007. During that period, home prices were increasing at a rate substantially higher than inflation. In fact, the Case Shiller index of home prices for 10 large metropolitan areas, adjusted for inflation, increased 92% between 1996 to 2006, three times faster than the increase for the prior 100 years combined. Unrealistic Expectations

Nonetheless, I would go with Dave Kansas on the question asked, as long as the time period is the next decade, while recognizing that the fundamental structural problems raised by Arends are far from any kind of positive resolution.

This is a link to a chart of real wages in the U.S in constant 1982 dollars: Wages and Benefits: Real Wages (1964-2004) With real wages not increasing, a worker can not afford to increase consumption. Consumption by American families has increased, however, with the assumption of more debt. From 2002 to 2007, the debt was in part financed by using the home as an ATM, borrowing against what ended up being illusory equity created by the real estate bubble, which had its origins in easy credit.

But, no matter what happens, the Masters of Disaster will end up on top, heads they win, tails everyone else loses.

4. Gannett (owned): Maybe the worm has started to turn for Gannett. Excluding items including an impairment charge, Gannett reported earnings of 44 cents in the third quarter, beating the 38 cent estimate, on a 18% decline in revenue. This one was bought at $7.75 and $10.68: item # 6 Gannett?

5. GENERAL ELECTRIC (own common shares): In a NYT story this morning, it was pointed out that the figure being bandied about for the transaction with Comcast valued GE's entertainment assets at less than what GE paid for them. Those assets were assembled at an approximate cost of 33 billion and media reports peg the current valuation at around 24 billion: GE/NBC At a minimum, those kind of figures raise some serious questions about the real skills of GE's management, as opposed to the what is commonly perceived about their alleged prowess, particularly when coupled with the woes of GE Capital.

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