Anglo Advice Aims To Push Greece Out Of Euro

Greece now has the theoretical cover to abandon the continent's experiment with a common currency:

THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy. 

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

If I were conspiratorially inclined, I'd ask which clan of aristocratic billionaires is funding the CEBR.  Has the House of Windsor thrown in its lot with Atlanticists who no longer see a unified Europe as being in the elite's interests?  This would be tantamount to the rebirth of Great Britain's historic role as the guarantor of the balance of power in Europe.  Note the timing mentioned in the article; the CEBR's chief expects a Greek decision this week that will herald the euro's "last weekend." 

Maybe things could unravel rather quickly.  Have you forex dudes sold your euros yet?  I've still got some old pre-euro continental coins laying around somewhere, so they might be useful as more than just museum pieces. 

The Limerick of Finance for 05/30/10

Americans with debt are stressed out
High living was what it's about
These people are broke
Their net worth's a joke
Wild spending they'll now do without

The Haiku of Finance for 05/29/10

Spain loses rating
Bonds headed for the basement
Too big to bail out

Unions Demand Taxpayer Backstop For Orphaned Pensioners

The recession has really put the squeeze on the underfunded pension plans.  For whatever reason - poor asset allocation choices, optimistic discount rate assumptions - pension plans aren't going to be there for many future retirees.  Nevertheless, unions feel entitled to ask for taxpayer bailouts of their pension plans:

The Teamsters union’s Central States pension fund faces insolvency within 10 to 15 years unless Congress acts to stabilize the fund, its executive director said this week.

It doesn't hurt to have academic backing for the bailout argument:

"Orphaned" retirees from companies that went out of business shouldn't have their pension benefits cut if they are "partitioned" from the original plan, said Norman Stein, a University of Alabama professor who testified for the Pension Rights Center.

IMHO that's a weak argument.  Employers with sense should point to the nonpartitioned nature of current plans as a mitigating factor against burdening themselves with higher contributions to subsidize "orphaned" employees of bankrupt former employers.  Partitioning employees places another unfundable burden on the federal government's balance sheet.  The PBGC is already feeling the effect of partitioning:

A Chicago-area pension fund that faced insolvency by 2013 will be split in two, with workers from bankrupt firms receiving benefits from the Pension Benefit Guaranty Corp.


That "partition" means companies contributing to the plan will no longer cover the benefits of "orphaned" retirees or workers from companies that went out of business.

Partitioning is good for businesses in the short run but bad for taxpayers in the long run as it increases the likelihood that the PGBC will need a taxpayer bailout.  Union leaders are doubtless emboldened by the administration's bailout of GM and Chrysler, which handed much of the post-bankruptcy value of those firms to their union workers.  Is it any wonder that unions feel entitled to bailouts?  Unfortunately, the growing insolvency of the federal government will bring the entitlement era to a close.  The only question is when, not if, this occurs.

The Haiku of Finance for 05/27/10

Job growth in health care
Soon to be rationed away
Go pick crops instead

Job Of The Future: Home Health Aide Vs. Subsistence Farmer

Yahoo! loves to publish front-page stories for job seekers.  The jobs they publicize tend to be those that appeal to desperate job seekers.  Themes favor some combination of low entry requirements and minimal time spent in educational preparation.  Today's article is particularly amusing, focused on health care jobs:

The Jobs of the Future


Occupations with the largest percentage growth expected through 2018:
• Biomedical Engineers 72%
• Network Systems Analysts 53%
• Home Health Aides 50%
• Personal, Home-Care Aides 46%
• Financial Examiners 41%
• Medical Scientists 40%
• Physician Assistants 39%
• Skin-Care Specialists 38%
• Biochemists, Biophysicists 37%
• Athletic Trainers 37%

The apparent premise is that continued growth in health care as a sector of the economy will generate the expected percentage growth in each job category listed.  I've got bad news for these job seekers.  What can't go on forever, won't go on forever.  This year's health care reform law is a boon for insurers in the short term but has so many long-term disincentives for drivers of cost growth (rationing requirements will appear at some point) that the overhead represented by these jobs will eventually wither away. 

The home health aide category is hilarious.  Where exactly are Baby Boomers going to find the money to spend on home health aides when they haven't saved for retirement?  They'll find that the wait for an assigned home health aide will be stretched out to an indefinite point under their insurance plan's rationing regime.  Job seekers looking for work as home health aides are in for a shock.  We may have to redefine home-based health care downward to the point that barracks-style living spaces for multitudes of seniors displaced from foreclosed retirement communities are considered "homes," because that's all that America will be able to afford in its impoverished future. 

I can think of one job category that is poised for massive growth in the near future:  subsistence farming.  Job seekers with little education are tailor-made for that one.

The Haiku of Finance for 05/26/10

BP took shortcuts?
The stock should take a haircut
Here come the lawsuits

Don't Follow Bad Advice

Brokerages don't make money by giving sound investment advice that helps a client meet their goals and stay within their risk tolerance.  They make money by getting clients to do something - anything - even if it hurts the client's long-term interests.  Financial media are their cheerleaders because ads pay the bills.  Check out the bad advice on display today.

SmartMoney thinks investors should buy tech stocks.  I'll bet they said the same thing before the dot-com crash.  The NASDAQ still hasn't recovered ten years later.  Maybe they should rename themselves DumbMoney.

Morgan Stanley wants you to buy global stocks.  The global economy is heading back into recession.  Thanks for nothing, Morgan Stanley.  What ever happened to that little triangle they had over their brand name?  Wasn't it supposed to point towards everything that goes up?

Marketwatch is pushing econometric models that have turned bullish.  Stock pumpers like to say "the trend is your friend" when they want your money. 

Equity research is usually designed to help a brokerage's sales force at the expense of clients.  Don't fall for some glib line just because it comes attached to an authoritative-looking logo. 

The Haiku of Finance for 05/25/10

Let's drill, baby, drill
Oil service fleets will clean up
Lots of future spills

Tidewater's Offshore Future

Here's one of the reasons I was willing to go long Tidewater, in addition to its admirable long term fundamentals.  Offshore oil drilling has a bright future in the U.S.:

Drilling for oil and natural gas off the Virginia coast has been touted as a potential economic boon for the state and Hampton Roads that would create thousands of jobs and generate billions of dollars in investment in the region.
(snip)

In March, President Barack Obama opened the door for Virginia to become the first Atlantic state where oil could be drilled off the coast. Plans for a lease sale in 2012 appeared to be moving forward until an oil rig exploded, killing 11 workers and spewing oil into the Gulf of Mexico.

Look past the noise over the BP Deepwater Horizon disaster and see the future.  A transitional era to renewable energy sources will last decades.  American society can't function without a steady supply of petroleum.  The low-hanging fruit has been picked, so future oil supplies will be more difficult to extract.  Deep ocean rigs drilling for oil in the Gulf of Mexico and elsewhere will need service fleets, and Tidewater has that capability in abundance. 

Full disclosure:  Long TDW with covered calls; no position in BP. 

Updating the Alpha-D for May 2010

Time for an update. 

All of my short option positions expired with two exceptions.  First, my KEX short puts expire next month.  Second, my short puts on TDW were exercised against me as the stock declined in price.  That's okay, since I like Tidewater and plan to hold that stock for at least ten years.  It's P/E ratio is ridiculously low right now and I plan to initiate formal coverage of the stock soon. 

I am now writing covered calls on my long position in TDW.

I renewed my short straddles on FXI and GDX.  I did not change my holdings in either of those underlying securities.

My long puts against IYR and LMT remain in place. 

Global Governorate Makes Play To Strengthen EU

The global ruling class is betting that the EU $1T bailout plan will work at least long enough to convert the EU into a truly federal government.  Their next step is to put firm legal structures in place to prevent defaults from tearing up the union:

European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts.

This is a healthy step towards a true United States of Europe.  I have no idea whether it will work, as it does not come with an enforcement mechanism.  If the EU falls apart, our rulers will need another 20 years or so to erect a replacement.

I'm agnostic on the question of whether the world needs a formal global command structure to manage its political and economic affairs.  The system we've had for the past three centuries or so seems to work just fine, with aristocratic houses (Rothschild, et al.) working covertly for stability, fun, and profit.  Carroll Quigley anticipated an endgame in his opus Tragedy and Hope as the problems of a technologically complex Western Civilization grew too intractable for anything but a formal governance structure to handle.  The trouble with a formal structure is that those who haven't yet bought in to the concept - primarily nationalist politicians - will foul things up if they don't go along with the program. 

Treasury Too Optimistic About Bailout Recovery

Are you sick of the bailout drama yet?  If you're not fed up with higher loss estimates for automakers, check out how the Treasury thinks the bailout will end:

The Treasury Department indicated Friday it expects taxpayers will lose billions less from the financial bailouts than earlier estimated. The problem is, its revised forecast assumes Treasury's shares of bailed-out companies are gaining value despite this week's plunge in stock prices.

After this week's market action, any future estimate of recovery based on strong growth in stock prices needs to be heavily discounted.  I think the government uses the same recovery models for the BP oil spill in the Gulf of Mexico.  Lots of rosy assumptions and fuzzy math don't make for sober analysis, but somehow the public just sits back and accepts this at face value.

Dow Down, Jobless Claims Up

I'm pressed for time right now so don't expect my usual supreme brilliance.  You'll have to settle for brilliance that's merely far above average.  Anyway, the Dow sucked rotten eggs today:

Stocks took their deepest plunge in more than a year Thursday as fears grew that Europe's debt crisis could spread around the world and undermine the U.S. economic recovery. The possibility has been brewing for weeks, but analysts said some investors are just waking up to it.

Yeah, "some investors" are the ones who don't read my blog.  Don't look too far for a cause of the market's woes.  Besides Greece and the usual suspects, joblessness is coming back with a vengeance:

The number of people filing new claims for unemployment benefits unexpectedly rose last week by the largest amount in three months. The surge is evidence of how volatile the job market remains, even as the economy grows.

Come on, what's with this "as the economy grows" caveat?  Last quarter's growth numbers will be revised downward anyway. 

The Haiku of Finance for 05/19/10

Fed to sell assets?
That means home prices plummet
An end to rebound

Equity Analysts Can't Analyze

Once in a while someone will ask me what makes me think I can perform investment analysis better than someone with a long history on Wall Street.  My answer usually incorporates my lack of conflicts of interest that would otherwise make me biased to the upside.  Now I have even more ammo for my contentions:

Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

Those experts aren't so hot after all.  I think it pays to be cynical.  Perhaps someday you'll agree with me.

Hedge Funds Look East To Greener Pastures

Tectonic plates take billions of years to move.  Geopolitical changes happen more rapidly.  Financial moves can happen with lightning speed.  I'm surprised it's taking this long for fund managers to relocate the center of their activities to the Far East:

As regulators in developed markets step up oversight of hedge funds, these free pools of capital are increasingly set to make their home in Singapore and Hong Kong.

That will accelerate the flow of talent and foreign funds into Asia's top two financial centers, at a time when asset managers are already eyeing the region's rising wealth and strong economic growth.

Hedge funds didn't cause the credit crunch but they make convenient scapegoats for politicians who can't sell their electorates on lower living standards.  I'm no fan of most hedge funds' business propositions, nor do I think they add liquidity to markets.  This news merely illustrates the gradual eastward shift in civilization's center of gravity.  The 21st Century belongs to Asia and to a lesser extent the global South. 

I haven't been to Hong Kong since 2001.  I remember that about one third of the cars on the road were luxury cars - Lexus, Jaguar, and the like.  Those Hong Kong roads are going to get a bit more crowded.  Hedge fund managers don't take the subway. 

More Auto Losses For You To Absorb With Your Taxes

Did you think automotive companies had paid back their bailout bucks?  They pulled off that trick with new bailout loans.  Good news got the early press, but the bad news can never be avoided.  Automakers just aren't a good investment for Uncle Sam:

The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.

This story was published at 9:25PM EDT, after market hours.  The MSM seems to be pretty determined to keep things like this out of the headlines, in the hope that the incumbent party won't be hurt in November's elections.  Much of the money that you (the taxpayer!) are funneling into this debacle goes right to the Teamsters for their get-out-the-vote campaign.  I'm pretty sure that I predicted back in late 2008 on this blog that capital allocation in America would be very politically bent from now on. 

I am cynical and brilliant.  Thank you very much for noticing. 

Full disclosure:  No position in any automaker's stock. 

The Haiku of Finance for 05/17/10

Euro could snowball
No, not like Buffett's "Snowball"
More like a landslide

China Puts Off Dollar Diversification (For Now, Anyway)

Flight to quality is a relative term.  Global bond investors seek shelter in dollar-denominated assets when other currencies look weak.  That's what's driving Chinese money into Treasuries:

China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt.

I guess China is no longer so enthralled with dethroning the dollar as the world's reserve currency.  Such a move would imply having something stable on hand as an alternative, and the euro may not have enough life left in it to fit the bill.  Note to IMF:  Bring on those gold-backed SDRs. Those should be Plan A, not a periodic trail balloon. 

Helicopter Ben gets a reprieve on lifting interest rates to keep investors at the table!  Note to Fed:  Don't get too excited, as the euro's brittle condition does not mean bond investors give ZIRP a ringing endorsement. 

The Limerick of Finance for 05/16/10

Greek debt is still set to blow
And take all of Europe in tow
More financiers say
"Can they pay it? No way!"
We will soon see how far this will go

Greece Threatens US Banks Instead Of Paying Debts

What to do when you can't solve your own financial problems?  Blame someone else:

Greek Prime Minister George Papandreou is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.

U.S. investment banks probably do deserve some blame for selling garbage products to sovereign clients.  They also weren't the only banks doing this, so why not sue European banks as well?  Maybe Greece doesn't want to antagonize the rest of Europe any more than it has already now that the bailout's terms have been set.  BTW, the article also mentions another German economist who doubts Grece's ability to pay up. 

I'm certain that Greece will have as much success suing Goldman Sachs et al. as the SEC will have in pursuing fraud charges; that is, zero success.  Bankers own governments now.  Greece got the memo but used it to wrap a gyro instead of reading it. 

The Haiku of Finance for 05/15/10

Euro goes down low
ECB sees great crisis
Bluster won't save it

The Shock and Awe Have Already Worn Off In Europe

Markets are finally hearing the other shoe drop.  The EU/IMF bailout isn't even a week old and investors are already seeing through to its end-game.  European austerity measures will destroy growth prospects:

Stocks tumbled for a second day Friday after concerns grew that the deep spending cuts under Europe's bailout plan would slow a global recovery.

Europe's healthier economies (all two of them, France and Germany) are now playing chicken to see who will abandon the euro first.  Sacre bleu, perhaps France will bolt:

Share prices have dropped across Europe and the euro has slid to an 18-month low against the dollar on fears that the eurozone bailout of Greece will fail and reports that French president Nicolas Sarkozy threatened to pull his country out of the single currency altogether to force Germany to agree to the rescue plan.

Mon Dieu!  Okay, that's all the French I know.  The EU and IMF can forget about shocking and aweing the markets with any further bailouts.  Successive interventions, if we start measuring from the U.S.'s first efforts in 2008, are yielding progressively shorter half-lives.  Mr. Market simply ceases to be shocked by announced interventions nor awed by their increasingly fleeting impact. 

Double-Dip About To Sink Oil

A few weeks ago, some commentors on Seeking Alpha decided they didn't like my skeptical analysis of SandRidge Energy.  Their reasoning?  The oil reserves of its newest acquisition would be worth more if the price of oil continued to rise.  I love it when I'm right:

Oil prices fell to near $73 a barrel Friday amid expectations a slower economic recovery in debt-saddled Europe will weigh on crude demand and rising U.S. crude stocks.

Granted, we're not into a double-dip yet, but I'm waiting for the next sovereign debt shoe to drop in Europe.

It's funny when hayseeds jump onto investment websites and complain that MBA-level financial analysis is gibberish.  I guess some amateur investment "experts" think a new oil derrick out in the sticks is invariably a bullish sign.  Hey critics, SD's long-term debt increased by $41.8mm in Q1.  I'd like to see how they'll climb out from under that burden while the price of oil keeps falling.  Their net realized crude price per barrel was almost twice as high as it was in Q1 2009, when they were hemorrhaging money, and they only eeked out a measly $0.01/share net income. 

Full disclosure:  No position in SD at this time. 

The Haiku of Finance for 05/13/10

The gold ATM
Dispensing glitter for cash
The sheiks will line up

There's Gold In Them Thar ATMs

Prospectors during California's Gold Rush used to look for gold in them thar hills. Modern gold bugs now have it much easier:

Amid fears over the strength of nearly every major currency, Abu Dhabi's top hotel has come up with a new type of ATM for their most risk-averse guests. The Emirates Palace is giving those staying there the chance to withdraw gold from the world first ever gold dispenser. 

With gold prices at record highs amid fears that the EU's rescue package will drive inflation higher, the ATM monitors the daily price of gold and offers small gold bars that weigh up to 10 grams with customized designs.

I suppose Abu Dhabi needs this new twist to lure high-rolling tourists.  The emirate is trying to emulate Dubai's development binge; I think it's funny that sheiks still think they can build opulent megaprojects on a foundation of sand.  Abu Dhabi does have the advantage of significant oil reserves, whereas Dubai's have pretty much run out, so the sheiks can keep indulging their development dreams for some time.

The Haiku of Finance for 05/12/10

Special drawing rights
Prototype new currency
Gets ready to launch

Spain Prepares for Austerity And Recession

Spain prepares for austerity:

Spain became the latest euro zone country to announce sweeping austerity measures on Wednesday as the executive European Commission sought unprecedented power to pre-vet national budgets.

Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets.

The country must be aware of the deflationary impact these measures will have on its economy.  A double-dip recession for much of Europe is virtually assured now.  I find it telling that the U.S. is urging action prior to each announced decision at every key step of this bailout.  Future historians will identify Tim Geithner and Ben Bernanke as the architects of the EU/IMF bailout. 

Elites have had a lot to say about "global governance" in recent years.  They can now put their theories to the test.  John Robb at Global Guerrillas argues that the West's nation-states will lose their battle with the global financial marketplace and he is largely correct.  Transnational institutions like the EU and IMF are useful proxies for the global marketplace.  One path to prosperity is correctly anticipating the elite's next move.  I'll hazard a guess:  The evolution of IMF special drawing rights into a true global currency, probably backed by a basket of commodities.  All it needs is a catchy name that dosen't translate into anything offensive in a widely-used language. 

GM Has Learned Nothing About Financing

There's dumb, and then there's dumber.  Dumb was allowing automobile financing in the first place as it encouraged auto companies to cannibalize next year's sales to meet the next quarter's earnings forecasts.  Dumber is reinstating such lending after it contributed to the bankruptcy of an auto manufacturer:

General Motors Co. executives want their own auto-financing arm so they can offer more competitive lease and loan deals, according to a person briefed on their plans. 

The executives want to buy back the auto financing business from the former GMAC Financial Services or start their own operations, said the person, who asked not to be identified because the plans have not been made public.

 
GM must be angling for a return trip to bankruptcy court.  Maybe the unions want to force out other shareholders (including the government?!) by making them so sick of losses that they throw in the towel.  That way the unions can own the rest of the company.  With unlimited lending from Uncle Sam's next TARP (remember, this administration is very union-friendly), they can finance even more uncompetitively priced cars at 0% just to avoid further pension and health plan givebacks. 

My scenario isn't all that fanciful.  Are America's corporate executives and union leaders really this dumb?  I'm afraid so, readers. 

Full disclosure:  No position in GM, GMAC notes, or anything else from these people, thankfully.

The Haiku of Finance for 05/10/10

Euro "Hail Mary"
CEOs aim to catch cash
Bonus touchdown dance

Eurozone Throws Hail Mary Pass, CEOs Ready To Catch

Predictably, global equity markets shot skyward when the Eurozone announced its euro stabilization package.  Even more predictable is the eventual result of this ginormous new debt backstop.  All we need to do is look at the progress made on Uncle Sam's similar attempts.  Check out the latest results of the U.S.'s first stab at assuming the debt of a bankrupt entity:

Fannie Mae has again asked taxpayers for more money -- this time $8.4 billion -- after reporting another steep loss for the first quarter. The taxpayer bill for rescuing Fannie and its sibling Freddie Mac has grown to $145 billion -- and the final tally could be much higher.

The sad thing is that sober commentators (like your humble blogger) know how the euro rescue story will end.  Our ruling elite ought to know, but either really doesn't know or pretends not to know just to fleece the taxpayers who are now on the hook to support the "sick men" of Europe.  I strongly suspect that the Eurolords and their friends on this side of the Atlantic really are setting up the middle classes for one final push over the cliff, with a firm plan to grab one final payout before it all comes down:

America's top CEOs are set for a once-in-a-lifetime pay bonanza. 

Most of them got their annual stock compensation early last year when the stock market was at a 12-year low. And companies doled out more stock and options than usual because grants from the previous year had fallen so much in value that many people thought they'd never be worth anything. 

But stock prices have generally surged ever since. Even with last week's sharp declines, CEOs still have enormous gains on paper.

Do you really need to read any more?  This euro bailout was designed to ramp up the markets just so insiders can cash out one more time.  These bailouts are nothing but handouts, gifts to corporate masters who relish the thought of lording over the grubby peons farther down the ladder.  I only regret that I couldn't grab my share this time around.  Big deal.  There will be plenty of money to be made on the downside as 2010 gives way to a replay of 2008. 

News Flash: Fed Launches Hyperinflation To Save Euro

The Anglo-West's ruling class is pulling out all the stops to save its supranational governing structures.  The Fed is loaning massive dollars to Europe:

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.


Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

Since these are swaps, the EU has to put up something as collateral.  Guess what that means!  The Fed will be adding more junk assets - sovereign debt from Greece, and perhaps even Spain and Portugal - to join the junk mortgage assets on its balance sheet that it still can't unload in the markets. 

This also means that the Fed will have to create more dollars out of thin air just to make the swaps.  Does your wallet feel lighter?  It will once all of these newly created dollars start circulating.  Watch commodity prices head up all over the world in 2011. 

Wow.  The Fed has cast the die for hyperinflation and the eventual replacement of the U.S. dollar.  I won't speculate on what will replace it.  It is far more important to think about the kind of political regime that will replace what currently exists in the West. 

There Is Such A Thing As Too Much Education

Society's leaders continue to advocate education as necessary for financial and social success:

President Barack Obama, addressing graduates at historically black Hampton University on Sunday, said that it is the responsibility of all Americans to offer every child the type of education that will make them competitive in an economy in which just a high school diploma is no longer enough.

Unfortunately for most college graduates, this kind of advice comes at least a decade too late.  Some degrees still have fairly high ROIs but these will be arbitraged down as more students pursue these degrees.  My own MBA in finance isn't worth anything in the job market because I don't have a privileged family pedigree to back it up.  People who've actually done the math on payoffs from college are starting to learn the truth:

As the price of a college degree continues to rise, there's growing evidence that the monetary payoff isn't quite as big as often advertised. The best estimate now is that a college degree is worth about $300,000 in today's dollars—nowhere near the $1 million figure that is often quoted.

Subtract the interest payments on student loans and the ROI of your typical bachelor's degree will be in negative territory soon enough.  This may be a moot point as further credit contraction will dry up traditional sources of student loans. 

Politicians, particularly at the left end of the polity, depend on campaign contributions from teachers' unions for their continued livelihood.  Even conservative politicians go along with this scam because the system worked quite well for them.  All those years spent drinking and carousing in the Ivy League paid off with dynastic alliances, trophy marriages, and elite family introductions to movers and shakers.  Those options aren't available to the hoi polloi, but that doesn't stop the elites from encouraging them to waste money on college scams.  Elected officials will thus continue to talk up the value of consumer acquiescence to the education racket's greed. 

The best advice I can give to anyone genuflecting at the "more education" altar is to consider something else first.  Working in entry-level jobs and developing a plethora of real skills will pay off in the austere decades ahead once middle-class workplaces have dried up and blown away.  Don't get some worthless credential just to impress an employer.  I'm more impressed with people who work for themselves.

The Limerick of Finance for 05/09/10

The IMF gave Greece a loan
To backstop Greek debt that banks own
A short while has been bought
It will all be for nought
The euro will sink like a stone

The Haiku of Finance for 05/08/10

Euro can't survive
EU can't stabilize Greece
Start the countdown now

Cyberdefense Hawks Try To Scare Up Some Profits

The path to extraordinary profits for defense contractors follows some tried and true methods.  This template has been refined through decades of Cold War contracts, not to mention supplemental appropriations for Iraq and Afghanistan.  First, scare people into fearing something:

The US must prepare itself for a full-scale cyber attack which could cause death and destruction across the country in less than 15 minutes, the former anti-terrorism Tsar to Bill Clinton and George W Bush has warned.

Richard Clarke claims that America's lack of preparation for the annexing of its computer system by terrorists could lead to an "electronic Pearl Harbor".

Next, position yourself as the single most qualified provider of a solution:

Good Harbor is led by Richard A. Clarke, a contributor to ABC News (including World News Tonight and Good Morning America) who teaches at Harvard's Kennedy School of Government, and is a #1 best-selling author and frequent writer on terrorism and security issues. He leads consulting projects for Good Harbor in the areas of security risk management, cyber security, and counterterrorism.

Finally, establish a history of making consistent campaign contributions to federal elected officials.  Presto!  You're all set to win massive contracts from DOD and DHS.  While you're waiting for Uncle Sam to pay up, you can chase contracts from allied governments:

Abu Dhabi has also signed contracts with several U.S. firms, including Good Harbor Consulting. Good Harbor has been operated by former White House counter-insurgency adviser Richard Clarke.

 

Happy profiteering!  I'm getting in line myself. 

Full disclosure:  Alfidi Capital LLC is registered in the U.S. government's contractor database.  It has not performed any contract work for the U.S. government up to the time this post was published.  Alfidi Capital and its CEO have no business relationship with any firm mentioned in this post.

US Banks And Their Heavy PIIGS Exposure

How in the world did I miss this one?  US banks have a ton of exposure to the European debt crisis:

JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote.

No wonder the administration is closely monitoring the situation.  Speculation about "sabotage" in the markets is a smokescreen to deflect public attention from the administration's real focus:  The credit markets may seize up all over again if the TBTF banks are unable to stay solvent, just like September 2008.  The only things keeping the banks afloat now are FASB-approved accounting fraud and the FDIC's unwillingness to force mortgage asset writedowns.  A sudden bond default from a PIIGS country would absolutely clobber JPM and MS. 

French banks aren't the only ones who'll need a bailout if things get worse.  On the other hand, the second go-round of the credit crunch could offer us a chance to experiment with something besides bailouts.  We could try seizure, equity cramdowns, forced asset selloffs, bank breakups, and prosecutions.  If the White House wants my advice, they know where to reach me. 

Full disclosure:  No position in JPM or MS at this time.

The Haiku of Finance for 05/07/10

Wall Street down this week
Waiting for Europe to sink
So who caused the plunge?

Europe Peering Over Brink While San Diego Tries To Step Back

The prevailing wisdom holds that Greece's insolvency is mainly a problem for European banks and others holding sovereign debt.  CDS prices on the PIIGS continue to climb:

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened.

This panic among CDS insurers is enough to force up the yields on the sovereign debt of Portugal et al.  Major bondholders like PIMCO booked some terrific gains these past years when governments fell in love with deficit spending.  Their bond portfolios rose when central banks raced to ZIRP.  Now the bill is coming due and bond funds - along with those hedge funds that thought the smart move was to bet on debt-fueled fiscal stimulus - are going to be hurt.  Greeks couldn't care less that their public employees' intransigence on benefits is a proximate cause of this mess. 

Some government entities learn faster than others that fiscal profligacy must end.  San Diego is firing its first salvo in what will prove to be a long battle against public employee unions.  This battle will rage in seats of government all across America as elected officials come to grips with pension plan deficiencies.  If only European capitals could adopt some of San Diego's common sense.  Hey, SDCERA, are you still exposed to credit default swaps through D.E. Shaw? 

Full disclosure:  No position in bond funds at this time.

Goldman Sachs And Galleon Group - What's The Connection?

Let's keep kicking Goldman Sachs!  It's so much fun and it doesn't cost a penny.  Their CEO seems to have job security:

Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein may take comfort from Wall Street’s legal history: Even after being sued for fraud by regulators and paying multimillion-dollar fines, the biggest financial firms rarely depose their leaders.

It's harder than you think to fire a guy heading a firm under investigation for criminal fraud.  For one thing, Warren Buffett gave him a ringing endorsement at Berkshire's annual meeting.  CEOs directly implicated in corporate wrongdoing are more at risk of dismissal.  Maybe GS's critics would have a stronger case if they can trace wrongdoing directly to the boardroom:

Rajat Gupta, the Goldman Sachs Group Inc. director who is being investigated by U.S. authorities over his links to Galleon Group LLC founder Raj Rajaratnam, had a long-standing business relationship with the billionaire hedge fund manager.

You may recall that Galleon Group is a hedge fund whose principals are under investigation for insider trading.   Goldman Sachs was allegedly one of the stocks Galleon illegally traded.  Was Galleon using info from inside Goldman in its trading?  If so, how high up were their sources?  Goldman's senior folks have some explaining to do. 

Full disclosure:  No position in GS at this time. 

WPO Trying To Sell A Weakened Newsweek

I'm aware of the irony in linking to a New York Times story for this development.  The Washington Post Co. is putting Newsweek up for sale:

As the American conversation has become harder to sum up in a single cover, that era seems to be ending. The Washington Post Company announced Wednesday that it would sell Newsweek, raising questions about the future of the newsweekly, first published 77 years ago.

Wow, this comes barely a day after a reader prompted me to look into the drag on WPO's earnings from their declining print media holdings.  They may just be going through the motions in looking for a buyer, as a turnaround effort just isn't worth it.  I say just shut Newsweek down and write it off as a tax loss.  I used to read it as a teenager and remember being very disappointed at the lack of depth in their political and business reporting.  Thankfully, I eventually discovered The Economist. 

Maybe WPO should also throw in the towel on their namesake daily newspaper and just make it an online political portal.  That way they can go head-to-head with The Huffington Post.  The WPO ten years hence will look nothing like its historical incarnation.  BTW, Berkshire Hathaway was once a textile maker and now does something completely different; its new mission includes part ownership of WPO.  Times change.

Full disclosure:  No position in WPO at this time.

YRC Worldwide's Turnaround Isn't Working

YRC Worldwide is still losing money:

YRC Worldwide reported a net loss of $274 million on $1.1 billion in revenue in the first quarter of 2010, despite deep cuts in operating expenses from a year ago.

Losing 25% of your topline while YOY volume declined is a death spiral.  Companies that lose as much money as YRCW don't have the luxury of waiting a long time to see the results of their turnaround effort.  YRCW is making all the right moves in reshuffling its board but it's still hamstrung by its unionized workforce.  Pension plan contributions coming due are another facet of the problem YRCW faces in dealing with unionized drivers who think they can play a game of chicken in negotiations.  These problems may be insurmountable.

Full disclosure:  No position in YRCW at this time. 

Follow-up on WPO (for Hondo!)

Here's a longer response to a comment from one of my readers in response to my post about WPO.

Thanks Hondo. I haven't read the Barron's article. My criticism was of print media in particular, not necessarily WPO as a whole. Media companies will have to continue to diversify their business models to stay viable.

Buffett himself acknowledges how weakness in print media can drag down the rest of the firm:

For the newspaper industry, however, setbacks are more troubling. "It blows your mind how fast" the newspaper industry is losing ground, Buffett explained, according to coverage by The Wall Street Journal's MarketBeat blog. However, as Barron's pointed out last month, Berkshire Holding Washington Post earns most of its revenue from its Kaplan private-education subsidiary, which could be worth more than the firm's current market cap alone.

Looking at WPO's 10-K from March 2, their Education division has shown steadily increasing revenues since 2007.  Meanwhile, the Washington Post's paid daily circulation declined to 615,628 in 2009 from 657,918 in 2007.  The MD&A's discussion reflects the firm's focus on shifting the firm more into the education services market, with mention of Kaplan's serial acquisitions and strong revenue growth.  It also mentions declines in print advertising revenue in 2009 (23% at the Post, 37% at Newsweek).

Indeed, WPO's management sees the handwriting on the wall.  Shareholders should welcome continued progress away from the print media business segment.  Weakness in print is clearly what's dragging down ROE at WPO!

The Haiku of Finance for 05/03/10

Two airlines link up
Routes to cut and fuel to share
Plus more baggage fees

United And Continental Will Face Peak Oil Together

Peak Oil theorists allege that airlines are like a canary in a coal mine.  Their health provides early warning of energy shortages as they must pay a premium for fuel.  The merger of United Airlines and Continental will put this proposition to the test:

United Airlines has agreed to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top U.S. cities.

The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.

The good news for investors is that an airline with global reach and over $7B in cash can withstand plenty of economic turbulence.  The bad news is their focus on business travelers.  I still believe the global economy will experience a second phase of its Great Recession.  Businesses facing declining earnings will cut back on nonessential expenses like business travel.  Furthermore, the declining availability of cheap petroleum (Peak Cheap Oil) will put a permanent floor under fuel prices this decade, permanently raising variable costs across the entire transportation sector. 

Don't forget that United has already been through a bankruptcy this decade in the aftermath of 9-11.  This industry isn't exactly immune to shocks whether they're endogenous (crashes, hijackings) or exogenous (fuel costs). 

Feel free to take a chance on playing this merger if you understand the airline industry.  I'll pass and wait for clearer skies.

Full disclosure:  No position in UAUA or CAL. 

The Haiku of Finance for 05/02/2010

Big fat Greek bailout
Euro weakens day by day
Nothing has been solved

Learning to Love Goldman at Berkshire's Annual Meeting

I published a recent post imagining how Warren Buffett could his justify his bet on Goldman Sachs.  I doubt that he took my advice, but he and I might be on the same wavelength:

Berkshire Hathaway CEO Warren Buffett declared his support for Goldman Sachs Group Inc. CEO Lloyd Blankfein Saturday, and said he has no plans to sell his company's stake in the bank.

I'm no fan of Goldman Sachs, but their ability to influence the federal government's regulatory mechanisms offers them a durable competitive advantage that Buffett ought to love.  Come to think of it, Berkshire Hathaway is going to need every ounce of influence that GS can steer its way.  The firm has billions in custom-made, long-dated European puts and other derivatives outstanding that might be subject to collateral requirements under new legislation.  Warren Buffett feels that his company should be compensated if it is forced to re-write these special contracts. 

Maybe Goldman Sachs is teaching the Oracle of Omaha how to ask for a stealth bailout.  That would cause me to re-evaluate my esteem for the man and Berkshire "Too Big To Fail" Hathaway. 

Full disclosure:  No position in GS or Berkshire Hathaway at this time.