Why I am an Optimist

Why I am an Optimist

Courtesy of John Mauldin at Thoughts from the Frontline

Subprime Dubai
More Government Data Fun:
Unemployment Claims Were Not Down
Why I Am Optimistic About the Future
The Millennium Wave
New York and My Own Psychic Income

I admit that of late my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they’re going to serve up a lot of economic pain. But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. This week we look at why 2007 will not be the good old days we will yearn for in 20 years, after we briefly visit Dubai and the latest unemployment numbers.

Subprime Dubai

While we in the US spent our Thursday eating turkey and watching football, the rest of the world’s markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt. This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?) And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. Today the US markets experienced their own sell-off, though not as deeply as the rest of the world.

As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US treasuries, everything else went down. Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?

To get an answer, let’s look at some facts about Dubai. It is one of the Arab Emirates; but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing. It is a small country, with a little under 1.5 million residents, but with less than 20% being natural citizens – the rest are expatriates. The gross domestic product is around US $50 billion.

(Note: http://www.ameinfo.com/67802.html and then converting the currency, I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)

Dubai has become a byword for thinking large. The world’s tallest building, underwater hotels, the largest manmade islands (plural), indoor snow skiing in the desert… For links to more information try this from Wikipedia: "The large-scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world, such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world’s second tallest, and most expensive hotel, the Burj Al Arab." The list goes on and on.

UBS suggests that the $80-90 billion in debt may not include rather large off-balance-sheet debt (where have we seen that one?). So, a country with a GDP of $50 billion borrows $100 billion. They build massive projects, which are now among the most expensive real estate in the world. The latest manmade island plans for one million people to buy property there. Seriously. Talk about Field of Dreams.

Then came the credit crunch. Property values dropped by as much as 50%. Sales, say the developers in understatements, have slowed. Seems there was a lot of debt used to speculate on real estate, not to mention buying Barney’s, Las Vegas casinos, banks, etc. And while US banks have little exposure, it seems England has about 50% or so of the debt, with the rest of Europe having the lion’s share of the remainder. Admittedly, the estimates seem to confuse the debt of Dubai with that of Abu Dhabi, so it is hard to know a reliable number, other than that European banks are the most exposed.

Now, here’s the deal. Abu Dhabi has the world’s largest sovereign wealth fund, at over $650 billion. Dubai has a "mere" $15 billion. If they cared to, Abu Dhabi could write a small check and make all the problems disappear. It just seems that they are not ready to do that, at least not yet. Abu Dhabi already got the world’s tallest building on past debt problems.

Construction and real estate were as much as 25% of the economy. Let’s see. Large leverage with maybe $5 billion in interest in a $50 billion economy that is 25% construction? A construction and real estate-driven economy. A real estate bubble. Sound like California, Florida, Spain? How can this be a surprise, except that everyone expected big brother Abu Dhabi to pick up the check?

While Abu Dhabi did advance $5 billion earlier, Dubai is not letting that money out of the country. There are projects to be finished, you understand. From where I sit, this is just rather hard-headed negotiations, a restructuring of who owns what and who will get what assets. It will all settle out. Given the massive losses that world banks have already taken, this is rather small potatoes.

So why the reaction by the markets? Because I think many participants know that the potential for there to be a serious correction is quite real. When anything as relatively small as Dubai spooks the market, it should serve as a warning sign. The world has priced in 5% GDP growth for the US and much of the developed world in the equity and commodity markets. Either we have to get that or the markets are going to have to come back to the reality of what I think is going to be a much lower growth figure.

But in any event, one of the lessons to be learned is that investors should pay attention to where the leverage is. Unsustainable debt trends end in tears. They always do. Spain, Greece, Italy, the UK, and Japan will all have to face major restructuring in the next decade due to leverage. And we in the US will also find that we cannot grow debt at our current levels. Will we pare our debt willingly or be forced to by the market? Either way, it will make for a less than optimal economy over the coming years. Muddle Through, indeed.

More Government Data Fun:
Unemployment Claims Were Not Down

The headlines said that initial claims dropped to 466,000 here in the US, finally falling below 500,000. This was greeted with proclamations of recovery. First, let me say that 466,000 people filing for unemployment is still way too high. That is a lot of people losing their jobs, and when we first crossed over 450,000 a few years ago that level was seen as a sign of recession.

Second, the headline number was a seasonally adjusted number. The actual number was 543,926. What is happening is that we are coming off of wickedly high numbers in 2008 and a seasonal number that was much lower in the preceding years. It is another part of the Statistical Recovery. And this trend is likely to keep on for the rest of the quarter. My friend John Vogel, who analyzes the unemployment numbers for me each week, shows pretty convincingly that the average for this current quarter will be over 500,000 per week on a non-seasonally adjusted basis. This is less than a 10% drop from last year for the same quarter. Job losses are continuing to mount, and we are on our way to an 11%-plus unemployment number by next summer. Statistical Recovery, indeed.

Why I Am Optimistic About the Future

I am optimistic by nature. An entrepreneur friend of mine gave me a term that I have grown to love. She calls it "psychic income." It’s that bit of hoped-for future income that is in our minds, that drives some of us, inflicted with the entrepreneurial gene, to do the next deal, make the next big plan, scheme yet another scheme to finally hit whatever counts as the big one for each of us. How much better would our life be, how our problems would go away, if only this one thing would come about! It has not yet become real income, yet we live and act as if it is almost real. We can feel it getting ready to happen. It is still in our heads, this psychic income. Yet it is in some ways real for us.

I get my propensity for psychic income naturally. My Less-Than-Sainted Dad lived on psychic income. He was always trying to invent something or launch a new business. He had large ups and downs, and at times we would be now classified as below the poverty line. Not that I knew that as a kid. Mostly, Dad lived in his dreams, though often alcoholic ones, of a better future, but he never gave up. In his mid-70s he was re-inventing the small printing press in his garage, with plans for national production. It was only after we had to take his car from him in his mid-80s that he quit. It was a very sad day. I now know we had not just taken his car, but far more than that: his dreams, his psychic income.

For some, I should note, psychic income is not just about money. It may be about the next promotion or the next big discovery. For some of us, it is just having our ideas accepted and validated in the court of human opinion. It is simply what drives us.

I graduated from seminary in the winter of 1974, entering the workforce in the hard year of 1975. We were coming off a recession, about which I technically knew little. I did know jobs were tight. I was unknowingly faceing another eight years of high unemployment, a tumultuous stock market, rising commodity prices, high inflation, and rising interest rates. Japan was just beginning to be a real force in the world. People were still buying bomb shelters, as Russia was a feared and powerful enemy. As the price of gold rose, there were those who told us the dollar would soon be worthless (the Fed was a problem and the deficit was out of control), and so we needed to buy yet more gold and also a year’s worth of dried food.

Not the best time to start a business; yet within a year or so, I ended up starting my own print brokering business, as jobs were scarce and that is what I knew. I often get letters from readers giving me grief about my rich hedge-fund friends and our fabulous wealth, and how little we relate to the real world. And for some of my rich hedge-fund friends, that may be true (although for most of my friends that is not true). And I am sadly far from rich, although I have dreams.

I remember waking up in the late 70s at 2 AM with a knot in my stomach, because a small bank was in trouble and had called my loan (an amount which now seems so small, but at the time it was all the money in the world). How would I make payroll? Gas and food? I know what it is like to work long hours and live on a very tight budget, with some months being behind on everything, while all the while your family is growing.

But I got lucky, and through a series of events got into the investment publishing field in the early ’80s, then partnered in an investment firm, and then went on my own in 1999. I stuck this letter on the internet in August of 2000, and things just took off.

But how many setbacks, bumpy rides, and false starts have I gone through over the decades? Frankly, I try to forget. But the point is that each of those episodes was another learning opportunity. And I woke up the next morning and started trying to figure it all out.

But it’s not just me, it’ is tens of millions of entrepreneurs and businessmen and women in the US, and hundreds of millions worldwide, that have the same ambitions and drive. Every night we go to sleep on our psychic income, and every day we get up and try to figure out how to turn it into real income. And some of us are talented or lucky (that would be me) enough to make it happen.

Long-time readers know that I think we are in the midst of a secular bear cycle, much like 1966-82. The next decade is likely to produce less than average growth, due to structural problems and the bad choices we have made with personal and government debt. I am perfectly cognizant that unemployment will be over 10% for a protracted time. That is tragic for those unemployed and underemployed. I realize the entire developed world has huge and seemingly insurmountable pension and medical obligations over the next few decades, which we cannot possibly hope to meet. The level of angst that we will live through as we adjust will not be fun.

But the point is, that is just what we do – we live through it. In spite of the problems, we get up every day and figure out how to make it. Would it be better if we could get our act together in (pick a country) and not be forced to adjust because we have come to the end of the line? Yes, I know we will likely have some very tumultuous times ahead of us, making business and investment decisions more than a little difficult.

So what? The future is never easy for all but a few of us, at least not for long. But we figure it out. And that is why in 20 years we will be better off than we are today. Each of us, all over the world, by working out our own visions of psychic income, will make the real world a better place.

The Millennium Wave

Let’s look at some changes we are likely to see over the next few decades. My view is that we have a number of waves of change getting ready to erupt on the world stage. The combination of them is what I call the Millennium Wave, the most significant period of change in human history. And one for which most of us are not yet ready.

Some time next year, we are going to see the three-billionth person get access to the telecosm (phones and internet, etc.). By 2015 it will be five billion people. Within ten years, most of the world will be able to access cheap (I mean really cheap) high-speed wireless broadband at connection rates that dwarf what we now have.

That is going to unleash a wave of creativity and new business that will be staggering. That heretofore hidden genius in Mumbai or Vladivostok or Kisangani will now have the ability to bring his ideas, talent, and energy to change the world in ways we can hardly imagine. When Isaac Watts was inventing the steam engine, there were a handful of engineers who could work with him. Now we throw a staggering number of scientists and engineers at trivial problems, let alone the really big ones.

And because of the internet, the advances of one person soon become known and built upon in a giant dance of collaboration. It is because of this giant dance, this unplanned group effort, that we will all figure out how to make advances in so many ways. (Of course, that is hugely disruptive to businesses that don’t adapt.)

Ever-faster change is what is happening in medicine. None of us in 2030 will want to go back to 2010, which will then seem as barbaric and antiquated as, say, 1975. Within a few years, it will be hard to keep up with the number of human trials of gene therapy and stem cell research. Sadly for the US, most of the tests will be done outside of our borders, but we will still benefit from the results.

I spend some spare study time on stem cell research. It fascinates me. We are now very close to being able to start with your skin cells and grow you a new liver (or whatever). Muscular dystrophy? There are reasons to be very encouraged.

Alzheimer’s disease requires somewhere between 5-7% of total US health-care costs. Defeat that and a large part of our health-care budget is fixed. And it will be first stopped and then cured. Same thing with cancers and all sorts of inflammatory diseases. There is reason to think a company may have found a generic cure for the common flu virus.

A whole new industry is getting ready to be born. And with it new jobs and investment opportunities.

Energy problems? Are we running out of oil? My bet is that in less than 20 years we won’t care. We will be driving electric cars that are far superior to what we have today in every way, from power sources that are not oil-based.

For whatever reason, I seem to run into people who are working on new forms of energy. They are literally working in their garages on novel new ways to produce electric power; and my venture-capital MIT PhD friend says they are for real when I introduce them. And if I know of a handful, there are undoubtably thousands of such people. Not to mention well-funded corporations and startups looking to be the next new thing. Will one or more make it? My bet is that more than one will. We will find ourselves with whole new industries as we rebuild our power grids, not to mention what this will mean for the emerging markets.

What about nanotech? Robotics? Artificial intelligence? Virtual reality? There are whole new industries that are waiting to be born. In 1980 there were few who saw the rise of personal computers, and even fewer who envisioned the internet. Mapping the human genome? Which we can now do for an individual for a few thousand dollars? There are hundreds of new businesses that couldn’t even exist just 20 years ago.

I am not sure where the new jobs will come from, but they will. Just as they did in 1975.

There is, however, one more reason I am optimistic. Sitting around the dinner table, I looked at my kids. I have seven kids, five of whom are adopted. I have two Korean twins, two black kids, a blond, a (sometimes) brunette, and a redhead. They range in age from 15 to 32. It is a rather unique family. My oldest black son is married to a white girl and my middle white son is with a black girl. They both have given me grandsons this year (shades of Obama!). One of my Korean daughters is married to a white young man, and the other is dating an Hispanic. And the oldest (Tiffani) is due with my first granddaughter in less than a month.

And the interesting thing? None of them think any of that is unusual. They accept it as normal. And when I am with their friends, they also see the world in a far different manner than my generation. (That is not to say the trash talk cannot get rather rough at the Mauldin household at times.)

I find great cause for optimism in that. I am not saying we are in a post-racial world. We are not. Every white man in America should have a black son. It would open your eyes to a world we do not normally see. But it is better, far better, than the world I grew up in. And it is getting still better.

My boys play online video games with kids from all over the world. And the kids from around the world get on the internet and see a much wider world than just their local neighborhoods.

Twenty years ago China was seen as a huge military threat. Now we are worried about them not buying our bonds and becoming an economic power. Niall Ferguson writes about "Chimerica" as two countries joined together in an increasingly tight bond. In 20 years, will Iran be our new best friend? I think it might be, and in much less time than that, as an increasingly young and frustrated population demands change, just as they did 30 years ago. Will it be a smooth transition? Highly unlikely. But it will happen, I think.

I look at my kids and their friends. Are they struggling? Sure. They can’t get enough hours, enough salaries, the jobs they want. They now have kids and mortgages. And dreams. Lots of dreams. That is cause for great optimism. It is when the dreams die that it is time to turn pessimistic.

I believe the world of my kids is going to be a far better world in 20 years. Will China and the emerging world be relatively better off? Probably, but who cares? Do I really begrudge the fact that someone is making their part of the world better? In absolute terms, none of my kids will want to come back to 2009, and neither will I. Most of the doom and gloom types (and they seem to be legion) project a straight-line linear future. They see no progress beyond that in their own small worlds. If you go back to 1975 and assume a linear future, the projections were not all that good. Today you can easily come up with a less-than-rosy future if you make the assumption that things in 20 years will roughly look the same as now. But that also assumes there will not be even more billions of people who now have the opportunity to dream up their own psychic income and work to make it happen.

We live in a world of accelerating change. Things are changing at an ever-increasing pace. The world is not linear, it is curved. And we may be at the beginning of the elbow of that curve. If you assume a linear world, you are going to make less-than-optimal choices about your future, whether it is in your job or investments or life in general.

In the end, life is what you make of it. With all our struggles, as we sat around the table, our family was content, just like 100 million families around the country. Are there those who are in dire distress? Homeless? Sick? Of course, and that is tragic for each of them. And those of us who are fortunate need to help those who are not.

We live in the most exciting times in human history. We are on the verge of remarkable changes in so many areas of our world. Yes, some of them are not going to be fun. I see the problems probably more clearly than most.

But am I going to just stop and say, "What’s the use? The Fed is going to make a mess of things. The government is going to run us into debts to big too deal with? We are all getting older, and the stock market is going to crash?"

Even the most diehard bear among us is thinking of ways to improve his personal lot, even if it is only to buy more gold and guns. We all think we can figure it out or at least try to do so. Some of us will get it right and others sadly will not. But it is the collective individual struggles for our own versions of psychic income, the dance of massive collaboration on a scale the world has never witnessed, that will make our world a better place in the next 20 years.

All that being said, while I am an optimist, I am a cautious and hopefully realistic optimist. I do not think the stock market compounds at 10% a year from today’s valuations. I rather doubt the Fed will figure the exact and perfect path in removing its quantitative easing. I doubt we will pursue a path of rational fiscal discipline in 2010 or sadly even by 2012, although I pray we do. I expect my taxes to be much higher in a few years.

But thankfully, I am not limited to only investing in the broad stock market. I have choices. I can be patient and wait for valuations to come my way. I can look for new opportunities. I can plan to make the tax burden as efficient as possible, and try and insulate myself from the volatility that is almost surely in our future – and maybe even figure out a way to prosper from it.

A pessimist never gets in the game. A wild-eyed optimist will suffer the slings and arrows of boom and inevitable bust. Cautious optimism is the correct and most rewarding path. And that, I hope, is what you see when you read my weekly thoughts.

New York and My Own Psychic Income

This week I go to New York to be with Todd Harrison and so many friends at the annual Festivus, put on by the folks from Minyanville. Then the theater on Saturday with Barry and Toni Habib to see Gods of Carnage. Then back home for the rest of the month, turning to book writing and waiting for my granddaughter to appear.

And speaking of psychic income, I remarked to some of the kids the other day that for the first time in my life I have no psychic income. There is no scheme I am working on that will change the world, no dramatic visions of grandeur. Just working on improving what we do in the best ways we can, which should be enough; but for me it is a different feeling. I worried that I was losing my edge, my drive.

"Dad," said Tiffani, hopefully prophetically, "that just means the best and most exciting thing of all is actually going to happen. Finally."

I love the future. It is going top be the best thing ever. Have a great week.

Your going to have fun on the ride analyst,

John Mauldin

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Disclaimer here.>>

 

Can Dopamine Make Your Future Look Brighter?

Our choices are dramatically influenced by the chemicals circulating through our bodies – so how much free choice do we really have? Is free will just an illusion?  - Ilene

Can Dopamine Make Your Future Look Brighter?

By John Cloud, courtesy of TIME

Humans have expended a great deal of intellectual energy over the past few thousand years trying to understand the morality (or amorality) of seeking pleasure. Most of philosophy begins with the question of what defines the (or a) good life. But what if the answer to what makes us happy comes down to how much of a particular chemical is circulating in our brain at any particular moment?

(As with risk taking, romantic love, religousness…. – Ilene)

The neurotransmitter dopamine isn’t quite that powerful, but evidence has been mounting for the past 40 years that its activity is key to helping the brain recognize experiences that cause pleasure. The more dopamine a certain event (having sex or eating ice cream, say) triggers, the more strongly that event gets hard-wired in the brain, and the more intensely your brain drives you to revisit it.

That knowledge also helps the brain figure out how much pleasure it can expect from future experiences and, therefore, influences virtually any decision you make about what you might like or not like: whether you should buy the red shirt or black one, whether you’ll enjoy watching Top Chef over Mad Men, whether you should leave your job or whether you should move in with your boyfriend.

Now a new paper in the journal Current Biology shows for the first time that by tinkering with levels of dopamine in the brain, researchers were be able to influence people’s future decisions in a reliable, predictable way. Led by Tali Sharot and Tamara Shiner of the the Wellcome Trust Center for Neuroimaging at University College London, scientists presented 61 healthy volunteers with 80 different vacation locations, such as Brazil, Thailand and Greece, and asked the volunteers to rate how happy they thought they would be visiting each place. Later, 29 of the participants were given 100 mg of levodopa (or L-DOPA), a drug that increases dopamine in the brain; the other 32 were unwittingly given a sugar pill. Forty minutes later, each participant was given a questionnaire about their emotional state, then a list containing half of the previously rated destinations. They were asked to imagine themselves vacationing in each of the far-flung locations.

The next day (once the L-DOPA had cleared from the body), all the participants were brought back and presented with 40 pairs of vacation spots, each pair containing locations to which they had given equal ratings in the first part of the experiment. Participants were asked to pick which of each pair of places they would prefer to visit. It turned out that those who had imagined themselves vacationing the previous day under the influence of dopamine were significantly more likely to predict they’d be happier in those same spots. That same preference didn’t occur in the placebo group.

The findings suggest that when dopamine is present during an imagined event — that is, even when you’re not actually experiencing it in person — it still influences how much pleasure the brain will expect from it in the future. Researchers think the extra shot of dopamine may aid learning — that is, it boosts your brain’s learned association between pleasure and whatever experience you’re thinking about at the time. Or perhaps, the authors speculate, the extra dopamine makes us simply want something more while we’re imagining it. In other words, it would be useful to have a bit of L-DOPA handy now, while you’re preparing for your future visit to the in-laws’ over the holidays.

The interesting thing was that the presence of dopamine didn’t make participants feel any happier at the time they took it. According to the questionnaires that the volunteers filled out, there was no difference in the current emotional state of people who got the sugar pill versus those who got L-DOPA, while they were imagining their vacations. But the drug did change people’s predictions about their future emotional state.

It’s possible, then, that the more dopamine that is active in your brain, the more likely you are to view the future as rosy, which raises at least two questions: how do I get more dopamine, and is there such a thing as too much?

The answer to the latter question is, yes. Although dopamine may be crucial to making decisions about future pleasure, too much of it might distort those decisions. A surplus of dopamine is at the root of addiction, for instance: Cocaine, for one, works in part by preventing brain cells from reabsorbing dopamine that the brain has released in connection with pleasurable sensations. And once the brain has learned to like cocaine, it causes all kinds of self-destructive behavior to satisfy its cravings.

Too little dopamine, meantime, can lead to movement disorders like Parkinson’s disease. An excess is thought to be a cause of schizophrenia. The research suggests that most of us should not try to manipulate our dopamine levels with drugs. On a therapeutic level, however, interfering with the chemical could lead to new treatments for conditions as varied as drug addiction and mental disease.

See also:  Why dopamine makes you take risks, TIME.

And: The Chemistry of Depression, About.com

A third substance that may play a role in mood is dopamine. Dopamine is associated with the reward, or reinforcement, that we get which causes us to continue participating in an activity. It has been implicated in such conditions as Parkinson’s Disease and schizophrenia. There is also some evidence that, at least for a subset of patients, dopamine plays a role in depression.6 Dopaminergic substances and stimulants have been used as antidepressants when other measures have failed.7 Some studies have investigated dopaminergic agents as a rapid method of relieving depression (in contrast to medications which may take up to six weeks to exhibit their full effect).8

Although agents that work selectively on dopamine have the benefit of fast action, they have also exhibited some properties which have kept them from being as widely used as other antidepressants. Dopamine is a neurotransmitter that is associated with addiction and it’s production is stimulated by drugs such as cocaine, opiates and alcohol (which may explain why depressed persons choose to self-medicate with drugs and alcohol.9) Drug specifically targeted at dopamine, for example amineptine (Survector), present the potential for abuse.10 For this reason, amineptine is not approved for use in the US or Britain at this time.

 

Flu News: D225G Follow-up

Flu News: D225G Follow-up

By Ilene with guest expert Dr. Henry Niman

Dr. Henry Niman heads the research company Recombinomics Inc. Recombinomics has a small group of researchers who analyze the sequence data from viral samples isolated from patients diagnosed with swine flu.

I spoke with Dr. Niman last week about the evolution of the H1N1 virus as it circulates through the world’s population. These changes are natural—and Dr. Niman’s research on the subject allowed him to predict how the virus would change as infection rates increase and time goes on. The outbreak in Ukraine was initially described in many media reports as a new lung-blackening “mystery disease,” leading to many false and misleading Internet stories. According to Dr. Niman, it was clear from the start that H1N1 was killing an unusually high number of previously healthy young adults.

H1N1 infection seemed to cause more severe illness in Ukraine, and Ukraine officials asked the WHO for assistance. The WHO interfaced with Ukraine labs in Kiev and sent groups into western Ukraine to survey the problem and gather information. As part of the investigation, the WHO sent samples to Mill Hill in London, one of several regional centers that performs genetic analysis for the WHO.

Subsequently, the WHO issued several non-informative reports but held the sequences at Mill Hill for analysis. Dr. Niman wrote a number of commentaries on the rising death toll and the need to make the sequences public. He predicted the deaths would be associated with a receptor binding domain change in the wild-type H1N1 virus (the predominant virus) to a variant form, characterized by the D225G genetic marker. Wild-type H1N1 has a D at position 225 of the viral protein Hemagglutinin (HA), and is referred to as D225. The variant protein, D225G, has a genetic change causing a change in position 225 of the protein. “D” is the symbol for the aspartic acid which is present at position 225 of the wild-type protein. Glycine, symbol G, replaces aspartic acid in D225G variants. Hemagglutinin is one of two surface proteins projecting out from the surface of the virus. The function of the HA protein is to bind viral particles to susceptible cells in the host animal.

The receptor binding domain change D225G causes the virus to bind to receptors in the lungs rather than in the upper airways where D225 would bind. Dr. Niman’s prediction was based on his analysis of the public database for H1N1 sequences, descriptions of fatal cases, and what the WHO did and did not say in their reports.

Before releasing the sequence information, the WHO issued an update claiming that the data showed no significant changes and suggested that the swine flu vaccine would remain effective in cases with the D225G variant. They also indicated that a second regional center, the CDC in Atlanta, had been brought in.

The sequences were released on November 18 at GISAID, a public database that requires registration and is password protected. Reporters are not registered for access, and even if they were, most are not able to read the sequences. Because Dr. Niman has access to and expertise in analyzing genetic sequences, he became an important, if somewhat controversial, source of information.

Dr. Niman found that the released sequences confirmed that the predicted genetic change, D225G, was in four of ten samples. The sequence data was followed by demographic data which indicated that the four patients with D225G were the four patients who had died, suggesting that this change was indeed significant. The WHO hadn’t reached this conclusion itself, and Dr. Niman feels the WHO’s failure to recognize the importance of the D225G change is irresponsible.

Further, Dr. Niman observed that D225G has been identified in lung tissue of patients who died from the effects of cytokine storms. A cytokine storm, or hypercytokinemia, “is a potentially fatal immune reaction consisting of a positive feedback loop between cytokines and immune cells, with highly elevated levels of various cytokines. The primary symptoms of a cytokine storm are high fever, swelling and redness, extreme fatigue and nausea. In some cases the immune reaction may be fatal.” Wikipedia.  “Cytokines are any of a number of substances that are secreted by specific cells of the immune system which carry signals locally between cells, and thus have an effect on other cells.” Wikipedia.

It would be interesting to learn whether the D225G variant was also present in lungs of patients who died without signs of cytokine storms, and those who did not die at all, though lung tissue is not typically sampled from recovered patients. Statistical information regarding the increased ability of D225G to provoke cytokine storms is, in some cases (e.g. live patients) challenging to gather.

Recently, antigen characterizations have been released. A throat sample from of one of the four fatal cases was tested and the isolated virus was designated a “low reactor” by Mill Hill and/or the CDC. The antibody titer (amount of antibody against the virus) stimulated by the test sample was at least four times lower than expected. “Low reactors give a reduced titer of AT LEAST 4 fold, which would lower activity below the traditional cut-off of 40, which is a very low bar. Not all patients with a titer of 40 will avoid infections.”

The low reactor designation contradicts the WHO’s statement on vaccine activity, because it suggests that the available flu vaccines are considerably less effective against the D225G variant than the wild-type D225 viruses.

According to Dr. Niman, the “low reactor” designation could seriously impact those who developed a borderline response to the vaccine. Nevertheless, Dr. Niman still believes it is a good idea to be vaccinated: “I think the vaccine still protects against more isolates that do not have changes at position 225 and should be taken.”

Dr. Niman expects viral samples from the other three fatal Ukraine cases would be low reactors, if tested. Conversely, he expects samples from patients without the D225G marker to stimulate the normal antibody response. His predictions, which have so far proved prescient, should be confirmed by further research and appropriate testing.

In summary, evidence presented by Dr. Niman supports his conclusion that the D225G marker is associated with greater invasive activity in the lungs, and the occurrence of cytokine storm reactions.  Further studies are warranted to draw more definitive conclusions.  For instance,

1. The D225G genetic marker is poorly recognized by the immune system according to data collected from one sample—is this result confirmed in other cases?
2. Is the D225G variant statistically more likely to be recovered from fatal cases?
3. Is the D225G variant statistically more likely to be present in cases showing cytokine storm activity in the lungs?

How well the D225G variant transmits is another unanswered question. According to Dr. Niman, D225G is likely transmitting as a mixture with the wild type virus, so replicating natural conditions would be difficult, but data on transmission via multiple ratios would be interesting.  An alternative view, suggests that the transmission of the D225G variant may be less efficient compared to the wild-type virus.  (The D225G change in 2009 H1N1 influenza virus is not a concern.)

For more information on the D225G genetic change, see also Swine Flu News: What is the significance of D225G?.

Today, November 28, the WHO acknowledged that the D225G change in one patient would have likely resulted in failure of the flu vaccine. Dr. Niman writes about this development in WHO Confirms D225G Vaccine Failure.

One isolate from Ukraine with the mutation had changed so that swine flu vaccine probably would not protect against it well, Britain’s national medical laboratory reported Friday.

Flues mutate so fast, Dr. Fukuda cautioned, that announcing each change is “like reporting changes in the weather.”

The above quote from tomorrow’s NY Times piece by Donald McNeil, acknowledges the vaccine failure for viruses with D225G.  However, although WHO has publicly confirmed the failure, they don’t think an announcement is required.  Thus, they continue to offer altering opinions on the significance of D225G, which directs H1N1 to the lung and was present in four of four fatalities in Ukraine.

The associate of D225G with the Ukraine fatalities led to a survey of samples in Norway, where D225G was found in three patients (two who died and 1 who was in serious condition).  Similarly, France found D225G in two fatal infections, including one who was Tamiflu resistant.

However, even though this change is drawing additional attention daily, WHO has taken a position that the vaccine failure against H1N1 with this D225G is not worthy of an announcement.

This mindset is significant cause for concern and is hazardous to the world’s health.

On a final note, the death rate in children continues to rise and this trend will continue, at least until the counting starts over. Dr. Niman writes: ”35 fatal pediatric deaths in week 46 in the US will be published on Monday. The 35 ties that weekly record set two weeks ago, and the new entries raise the 2009/2010 season total to 178, which is a new record.  The 138 last week represented the highest tally since [reporting] adolescent fatalities became mandatory, when 142 died in 2003/2004.  178 is a new all time high, but it will be broken each week until there is a break, which may not happen in 2010.” Week 46 Sets Record H1N1 US Pediatric Fatalities

For more detailed information, please visit at Dr. Niman at Recombinomics.  He has posted a number of articles within the last two days–here are some excerpts with a couple of my comments.

Worldwide Transmission of D225G
Recombinomics Commentary
November 27, 2009

The recently released sequences from patients in Ukraine provided valuable insight into the pathogenicity of H1N1 and the genetic change associated with the total destruction of both lungs in fatal cases. The description of the patients and the spread of receptor binding domain change, D225G, to multiple genetic backgrounds via recombination led to the prediction that D225G would be found in the lung samples from fatal cases.  The release of the sequences by Mill Hill confirmed the prediction.  Sequences from 10 isolates were released and all four fatal cases had D225G.  Moreover, all 9 cases from western Ukraine, which were from three Oblasts (Ternipol, Lviv, and Khmelnitsy) were from the same sub-clade as the fatal cases, but the samples from the upper respiratory tract did not have D225G. The absence of D225G from the upper respiratory tract is not a surprise because the specificity of D225G included…receptors which are present in the lungs. Thus, the sub-clade with D225G can expand and cause a cytokine storm which destroys the lungs. Moreover, sequences with D225G have been designated as low reactors by Mill Hill, raising concern that immune responses and vaccine will select for D225G.

My comment: “a clade is a group of organisms including a common ancestor and all the next generations of that ancestor.”  Simple English Wikipedia.  “A sub-clade is a group of sequences within a clade that are closely related to each other.” Dr Niman.

Although D225G transmits from patient to patient, only the samples from the fatal cases, which were from lung and throat samples were positive for D225G. The sequences from Ukraine led other countries to more fully investigate samples. Norway, which had seen an increase in fatalities announced the detection of D225G in two fatal and one severe case.

The finding of D225G in four of four fatal cases in Ukraine leaves little doubt that the polymorphism is transmitting and the recent classification of Ukraine sequences carrying D225G suggests the spread will accelerate….

More surveillance of low respiratory tract infections would be useful.

WHO Silence on D225G Immune Escape Raises Concerns
Recombinomics Commentary
November 27, 2009

The [D225G] change affects receptor binding specificity and allows the virus to bind [targets] on the lung, and also affects the antigenic site.

The failure of the WHO or CDC to comment on the low reactor status of the Ukraine sequences from fatal patients is also cause for concern…

My comment: it appears that the D225G variant is not as susceptible to the immune response stimulated by available vaccines. The WHO previously said the D225G change was not significant.  At least in one test, the D225G sample proved to be a “low reactor.” Because D225G appears to be circulating as a mixture with the wild-type virus, immune responses that fail to target D225G might shift the ratio in favor of D225G, leading to more severe cases.  More studies should be done to confirm this finding.

D225G and H274Y in Fatal Infection in France
Recombinomics Commentary
November 27, 2009

[There were] two fatal cases in France with D225G.  Moreover, one of the two cases also had Tamiflu resistance, presumably H274Y.

…The same strain in two patients who had no link to swine or each other signaled efficient transmission.  The same is true for D225G.  It is in multiple patients in multiple countries and appearing at increasing frequencies at the same time.

WHO Mis-statements in D225G and H274Y Raise Concerns
Recombinomics Commentary
November 27, 2009

Preliminary tests reveal no significant changes in the pandemic (H1N1) 2009 virus based on investigations of samples taken from patients in Ukraine. Analyses are being performed by two WHO influenza collaborating centres as part of the global influenza surveillance network.

Preliminary genetic sequencing shows that the virus is similar to the virus used for production of the pandemic influenza vaccine, reconfirming the vaccine’s efficacy at this time.

The above WHO comments in their latest Ukraine outbreak update are unfortunate.  The comments were made after sequences had been generated which showed that four of four fatal cases in Ukraine had the receptor binding domain change D225G. This change had been predicted because it is the type of change expected for the large number of deaths which were linked to the rapid destruction of both lungs.  D225G had been identified in 1918 and 1919 lung samples from fatal infections and analysis of the change identified a change in receptor binding specificity…  The failure of WHO to consider such a change significant raises serious concerns about the agency’s credibility and scientific underpinnings.

Moreover position 225 is in one of the known antigenic sites, so to declare a confirmation of vaccine efficiency was false…

The failure of WHO to correctly report on the receptor binding domain after the sequences had been generated destroys confidence in the agency at a most crucial time.  In addition to targeting of the lungs and a reduction in vaccine efficiency,Tamiflu resistance is on the rise and one of the fatal D225G cases in France also has H274Y, raising concerns at a time when WHO is posting situation updates which are not credible.

They then compound this lack or credibility by claiming that the D225G, which is four unrelated cases in Western Ukraine are “spontaneous” which is also the characterization of oseltamivir resistance, H274Y.  These claims have no scientific basis and are simply absurd…

WHO Silence on D225G Vaccine Mismatch Confuses Media
Recombinomics Commentary
November 28, 2009

The vaccine can still prevent the virus from entering body cells to reproduce. These new changes should instead encourage all French to go to be vaccinated with adjuvant.

The above translation is from a French story on the discovery of D225G in two fatal French cases, one of which was also Tamiflu resistant.  Because of the failure of WHO to disclose the “low reactor” status of Ukraine H1N1 with D225G, media reports are distributing the false information, stating that the activity of the vaccine is unaffected by D225G.

This misinformation is fueled by the WHO update on Ukraine, which stated that the vaccine appeared to be unaffected based on the sequence.  For the “low reactor” the HA only had one amino acid difference, which was D225G.

As has been noted daily in new media reports, D225G is widespread,…

The designation of a “low reactor” means that the titer of a reference anti-sera is reduced by at least 4 four.  A four fold reduction in titer is typically called a mis-match and mismatched vaccines are a concern because a vaccination will not eliminate the new changes that reduced the titer, but will eliminate the wild type that competes with the variant.  Therefore the use of a poorly match vaccine leads to increased vaccine resistance and in this case would select for D225G.

The failure of WHO to address this issue is the height of irresponsibility.  Although the NY Times noted the Ukraine low reactivity due to D225G, it is not clear that the WHO comments were in response to the vaccine failure, since similar statements were made at the WHO virtual press conference and the reactivity of the vaccine was not addressed…

Therefore a statement by WHO is long overdue to end that false information distributed through media reports…

WHO Weather Report on Ukraine H1N1 D225G Required
Recombinomics Commentary
November 28, 2009

The question is whether this mutation again suggests that there is a fundamental change going on in viruses out there or whether there is a turn for the worse in terms of the severity.  I think that the answer right now is that we are not sure.  I want to answer why we are not sure in a way which explains why more investigations are needed. As you know these influenza viruses change frequently.  Their gene properties change because these are viruses which frequently undergo mutations and so mutations in and of themselves are not necessarily important and in fact, if every mutation was reported out there, it would be like reporting changes in the weather -

The above comments from Keiji Fukuda at Thursday’s virtual press conference are in context, which highlights the need for additional data on D225G.  However there is a large body of evidence on this change and the Ukraine data is the most current and quite compelling.  Ten samples were collected from ten patients and nine represented the same sub-clade. However, only four were from tissues from fatal cases, but all four had D225G. In contrast, nasopharyngeal washes were collected from the five surviving patients in western Ukraine and all sequences were the same sub-clade, but did not have D225G. The finding of D225G in 100% of the fatal cases raises concerns, but the number of such cases is small…

An aggressive campaign on this change is warranted because the only reported tested sample for antigenicity was found to be a low reactor, and the only amino acid change in the HA sequence was D225G.  Since the same sub-clade was found in earlier collections in Norway, and the cases positive forD225G were fatal or severe, more interest in the change has been generated, but media reports state that the vaccine is effective against D225G, when the data presented on the Mill Hill characterization sheet at GISAID cites the antigenicity as being “low reactor”, signaling a need for a new vaccine…

Finding a receptor binding domain change which alters specificity in 100% of fatal cases is cause for concern, and release of additional sequence data is overdue, since some still need a weatherman to know which way the wind is blowing.

H1N1 RBD Changes at 225 Create Vaccine Mismatch Concerns
Recombinomics Commentary 14:22
November 29, 2009

Antigenic characterisation:

A/California/7/2009 like. Low reactor

The above characterization of A/Lviv/N6/2009, which was placed on deposit at GISAID by Mill Hill, raises concerns about the evasion of pandemic H1N1 sequences which change position 225. The above isolate has only one amino acid change in HA, D225G, which strongly implicates D225G in the low reactor results. A low reactor reduces the titer by four fold or more, which signals a mismatch. Mismatched vaccine create the potential for the section of the variant, which could create problems since D225G was found in four of four fatal cases in Ukraine, and several countries (Brazil, Ukraine, Norway, France, China) found D225G in fatal and or severe cases.

Moreover, since D225G changes receptor specificity, it may transmit undetected because of an emphasis on nasal pharyngeal samples where levels would be expected to be lower.  This was seen in five additional nasopharyngeal washes from Ukraine survivors, who were infected with a sub-clade that matched the fatal cases, but lacked the D225G.

My comment: A vaccine that is effective only against the wild type D225 HA protein would select for the D225G variant, so the ratio of D225G to the wild-type virus would increase.

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Wells Fargo Chief Economist: “There is no clear, easy way out for housing”

Wells Fargo Chief Economist: "There is no clear, easy way out for housing"

Courtesy of Mish 

In light of a weakening Case Shiller housing index, fears rise that Home Prices May Be Nearing a New Dip.

Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.

The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.

A report from the Federal Housing Financing Agency showed that prices were flat in September from August.

The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.

“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”

He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.

The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.

The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.

Pay Option Arm Time Bomb

If there is no clear, easy way out for housing, then there is no clear, easy way out for Wells Fargo. Wells is sitting in a huge pile of Pay Option Arms in bubble states like California, where prices still have a long way to correct.

iStockAnalyst comes to a different conclusion and states Wells Fargo’s Option ARM Problem Is Not That Bad.

I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.

Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…

In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.

Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:

…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

11% Decrease Forecast For 2010

Inquiring minds might be interested in noting Fiserv Case-Shiller Home Price Insights: U.S. Housing Prices Forecast to Decrease 11 Percent over the Next Year.

The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.

“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”

One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.

Cumulative Declines

Calculated Risk has this chart that nicely shows cumulative declines.

click on chart for sharper image

Extend And Pretend

Los Angeles, San Francisco, and San Diego are all down over 38% from the peak. The Wells Fargo Chief Economist expects a further 10% decline in prices, essentially the same as Case-Shiller.

Yet out of a portfolio of $100 billion in Option ARMs, Wells Fargo assumes that virtually none of those will recast at 125% of the original mortgage balance. That is a preposterous amount of mark-to-fantasy pricing.

Wells Fargo is simply refusing to recast problem loans, putting off today’s problem hoping it will not be as big a problem later. I have news for Wells Fargo. This problem can only get worse with age. There is no good reason to assume home prices will rebound before 2012, and in fact prices might fall for much longer.

In the meantime, most Option-ARM holders are only making the minimum payment with negative amortization increasing monthly. When those loans do recast, anyone in their right mind will hand over the keys. Given that buyers of high-priced homes are more apt to be in a right mind than buyers of low-priced homes, expect to see Wells Fargo the proud owner of a huge number of homes when those loans do recast.

In the meantime, Wells Fargo is collecting insufficient rent on properties it will own in due time. How long the market let’s Wells get away with this extend and pretend fantasy remains to be seen, but eventually it is guaranteed to sink Wells in due time.

Mike "Mish" Shedlock

 

Dubai World & Bear Stearns: Coal Mine Canaries?

Dubai World & Bear Stearns: Coal Mine Canaries?

Courtesy of Joshua M Brown, The Reformed Broker  

Embiggen: click here!

http://thereformedbroker.com

The meme going around now is that the Dubai debt thing is only the start of a wave of sovereign defaults, including Latvia and Greece, coming soon. While this could be the case, I actually see a lot more similarities between what the Bear Stearns blow up ultimately meant to the residential real estate market versus what the default of Dubai World could mean for the commercial real estate market.

While I make no predictions or forecasts on this site whatsoever, I would be remiss if I did not point out some of these similarities (see above chart).

Commercial real estate has long been thought of as 2010’s big meltdown and the proverbial “next shoe to drop”. Nowhere has the worship and commensurate overbuilding of commercial real estate been better exemplified than in the United Arab Emirates.  At one point in 2005, it was estimated that 25% of all the cranes in the world were operating within the UAE.

Like California and South Florida came to represent the worst of the residential RE bubbles, the explosion in spending and financing for commercial RE has its international Ground Zero in Dubai.  Everyone from the major banks to the private equity cabal to Donald Trump has a stake in this story.

We’ll see whether this story is “contained” or if it is just the harbinger of a re-marking of commercial RE portfolios around the world.

Full Disclosure:  Nothing on this site should ever be construed as research, advice or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

 

After Dubai, Is Greece Next?

After Dubai, Is Greece Next?

Courtesy of Joe Weisenthal at Clusterstock

After you’ve gotten your Dubai fill, take a break and check out the situation in Greece.

Here’s the Telegraph from earlier this week:

When the European Central Bank’s Jean-Claude Trichet said last week that certain sinners on the edges of the eurozone were "very close to losing their credibility", everybody knew he meant Greece.

The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU’s soft South.

"As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece," said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.

The newly-elected Hellenic Socialists (PASOK) of George Papandreou confess that the budget deficit will be more than 12pc of GDP this year, four times the original claim of the last lot. After campaigning on extra spending, it will have to do the exact opposite. "We need to save the country from bankruptcy," he said.

Good luck. Communist-led shipyard workers have already clashed violently with police. Some 200 anarchists were arrested in Athens last week after they torched streets of cars in a tear gas battle.

Read the whole thing >

 

‘Black Friday’ Lures Shoppers; Frugality Hits Videogames

‘Black Friday’ Lures Shoppers; Frugality Hits Videogames

Courtesy of Mish  

Aggressive Bargains Lure Hordes of Shoppers, but They’re Still Slow to Open Wallets says the Wall Street Journal in ‘Black Friday’ Tests Economy.

Retailers succeeded in enticing deal-hungry shoppers into their stores on Friday, but at the checkout lines many people were sticking to the most deeply discounted items. That may prove to be a disappointment to executives at the nation’s major chain stores, which have been battered by the recession. Many have been hoping that, once in the stores, consumers would spend a little more freely than they did a year ago.

Brian Dunn, chief executive of Best Buy Co., said Friday that consumers were snapping up lower-priced electronics such as netbook computers, digital cameras and smaller flat-screen televisions. "But this is not a year where wallets are expanding," Mr. Dunn said. "There will be winners and losers this season in retail, and the differences will be pronounced."

One bright spot in the retail picture has been online sales — but even there much of the traffic has been driven by deep discounts at mass merchants’ sites and at giant Amazon.com Inc.

The frantic Black Friday promotions, which began well beforehand this year, were driven by a troubling reality for retailers: many shoppers say they plan to spend less this season. "I don’t think there’s a lot of impulse shopping going on," said James Fielding, president of Walt Disney Co.’s Disney Stores. "People are just being realistic about their personal situation and the economy."

Frugality Hits Videogames

Game makers are finding that the once insatiable demand for videogames has hit the brick wall of consumer frugality, at least according to pre-event sales.

The Wall Street Journal reports Videogame Sales Running Out of Gas Ahead of Holiday.

Videogame sales—the bright spot in last year’s dismal end-of-year shopping quarter—are showing signs of weakness, foreshadowing a tough holiday. Sales of some of the most anticipated titles have already disappointed and, others won’t be on store shelves in time.

Early sales of what were expected to be big holiday games—specifically Activision Blizzard Inc.’s "Guitar Hero 5" and MTV Games’ "The Beatles: Rock Band"—have so far been relatively modest. Both games, released in early September, dropped out of the top 10 best-selling games after a month, selling fewer than 100,000 copies each in October, according to NPD Group.

Overall, videogame sales including consoles fell 19% in October to $1.07 billion from a year ago, according to NPD. Software sales alone fell 23%. "October unfortunately is a good predictor of what’s going to happen in November and December," said Jesse Divnich, a videogame analyst with research firm Electronic Entertainment Design & Research.

Deep Discounts

• Best Buy is offering Electronics Arts Inc.’s "Dragon Age" for $34.99, a $25 discount.
• Wal-Mart is throwing in two free games and a Blu-ray movie disc, a $139 value, on purchases of the $299 Sony Playstation 3 game console.
• Sony Corp. and Microsoft Corp. recently cut the prices on models of their Playstation 3 and Xbox 360 gaming consoles by $100 to $299.99.
• Nintendo cut the price on its Wii console by $50 to $199.99.

Fewer game console sales is good news. Kids need more exercise, more outdoor activities, and when indoors play more educational games instead of videogames. Moreover parents need to stop wasting money they do not have.

Instead of videogames, how about a nice board game like Risk or an educational game such as Scrabble? And if you really want to save money, just get a deck of cards and play Euchre. It’s much more sociable and the cost of a deck of cards is just a couple bucks.

By the way, stores may have lured shoppers with bargains, but the big question is "Did they make any money?"

Mike "Mish" Shedlock

 

Gammon’s Black Holes

All signs indicate Gammon’s Black Holes are about to get bigger… – Ilene

Gammon’s Black Holes

Courtesy of Eric Falkenstein of Falkenblog

In 1968, the poverty rate in the US was 12.8%. Since then, we have introduced or vastly expanded the following:

food stamps
job training courses
community development block grants
urban redevelopment schemes
medicaid
aid to families with dependent children (AFDC)
social security disability income
section 8 housing grants
emergency assistance to needy families with children
college scholarship aid
free and reduced price lunches
child care
housing projects
head start

Currently, the poverty rate is around 12.3%. More importantly, most of our cities have become unlivable, so that most college-educated families simply do not live within the city borders of Cleveland, Detroit, Philadelphia, Newark, etc. More programs, worse results.

Dr. Max Gammon was a British physician who noticed that although government spent significantly more on health care than it had previously in the 1960s, the National Health Service didn’t seem any better for it. After an extensive study of the British system of socialized medicine, Gammon formulated his law: "In a bureaucratic system, increase in expenditure will be matched by fall in production…such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of emitted production."

 

Online Shopping Traffic Up 10%; Walmart, Target Draw Crowds; Guilt Buying

Online Shopping Traffic Up 10%; Walmart, Target Draw Crowds; Guilt Buying

Courtesy of Mish

Market Research Findings is reporting Black Friday Traffic To Online Shopping Sites Grows 10 Percent.

Despite Challenging Economy, Black Friday Traffic To Online Shopping Sites Grows 10 Percent Year Over Year

Nielsen Online, a service of the Nielsen Company, reported today that Web traffic from home and work to the Holiday eShopping Index increased 10 percent year over year on Black Friday, growing from 28.8 million unique visitors in 2007 to 31.7 million unique visitors in 2008 across more than 120 representative online retailers.

Holiday eShopping Index Category Growth

Consumer Electronics was the fastest growing product category on Friday, increasing 219 percent from the previous Friday, November 21st. Shopping Comparison/Portals and Toys/Videogames took the No. 2 and No. 3 spots, with 83 and 73 percent Web traffic growth, respectively.

“Even with the weakening economy, an unstable stock market and a rising unemployment rate, Black Friday traffic to online retail sites grew at a double digit rate this year,” said Ken Cassar, vice president, industry insights, Nielsen Online. “Consumers are continuing to shift their holiday shopping to the Web for the convenience of not having to fight the crowds and to further stretch shrinking budgets. The fact that the Shopping Comparison/Portals category was the second fastest growing segment indicates that consumers continue to see the Web as the source for determining the best deals and prices of the season, which we expect to be top of mind for holiday shoppers this year.” Cassar continued, “With the season underway and consumers back at work, it will be interesting to compare activity for Cyber Monday and to see if the initial growth rate we saw on Black Friday holds up throughout the holiday shopping season.”

Black Friday Top 10 Online Retail Destinations

eBay was the top online retail destination on Black Friday with 9.8 million unique visitors, while Amazon and Wal-Mart followed with 8.4 million and 6.0 million unique visitors, respectively. Among the top ten online retail destinations, Circuit City was the fastest growing on Friday, increasing 352 percent over the previous Friday. Best Buy ranked No. 2 with a 196 percent increase in Web traffic and Target rounded out the top three with a 136 percent week over week growth.

Shoppers Seek ‘Elusive Game’ 

Bloomberg is reporting Shoppers Seek ‘Elusive Game’ at U.S. Best Buy, Target

Shoppers took advantage of Black Friday discounts to snap up televisions, laptop computers and robot hamsters at Best Buy Co., Target Corp. and Toys “R” Us Inc. stores from New Jersey to Texas.

Wal-Mart Stores Inc., the world’s largest retailer, drew crowds with $298 Hewlett-Packard laptop computers and other doorbuster specials that went on sale at 5 a.m. Best Buy Inc., the biggest electronics chain, had bigger early-morning crowds than last year, Chief Executive Officer Brian Dunn said. The lines in front of the stores were longer, and the company’s Web site attracted more visitors, Dunn said.

“Those are both directionally important indicators for us,” Dunn said in a Bloomberg Television interview.

“I do this because of my family,” Eihab Elzubier, a truck driver, said as he stood at the head of the line outside a Best Buy in Greensboro, North Carolina, before the store opened this morning. He arrived at 9 a.m. yesterday and kept his place in line with help of his wife, mother and sister.

$1,000 Savings

Elzubier, 41, figured the 20-hour wait will save him as much as $1,000. He planned to buy a 42-inch Samsung flat-panel TV for $547.99, a Sony laptop computer for $399.99, a Compaq laptop for $179.99, software and accessories.

The 12,000-car parking lot at Taubman Centers Inc.’s Woodfield Mall in Chicago was 35 percent full by 6 a.m., compared with 28 percent last year, Bill Taubman, chief operating officer of Taubman Centers, a U.S. real estate investment trust with 24 malls, said in a telephone interview.

“There’s a little more traffic than last year across the board, maybe 10 percent,” he said.

Feelin’ Guilty? 

Note the sentiment "I’m doing this for the family" or "doing this for the kids". That actually is a direct lie. They are doing it because it would make them feel guilty to not buy toys for the kids.

In other words they are doing it for themselves, so they feel good.

If someone wants to do something for the family they would buy a freezer and stock it with food items on sale, not flat-panel TVs and other junk that will likely be discounted even more after Christmas.

Buying stuff you cannot afford and do not need can never truly be "for the kids". And if it’s not for the kids, who is it for?

The Next Guilt Trip

The next guilt trip comes when shoppers have to pay the bills or when they lose their job wishing they had that money back to live on.

Mike "Mish" Shedlock

 

The bust in Dubai and exogenous shocks

The bust in Dubai and exogenous shocks

Courtesy of Edward Harrison at Credit Writedowns

By now you have heard that Dubai World, the investment company, has asked its creditors for a six-month delay in repaying its debt (see articles in links).  This is what is commonly referred to as default. Now many are wondering if Dubai the country is on the verge of default and asking who is most exposed. Markets are selling off in a major way. While this situation has been building for sometime, the announcement was an unexpected shock – an exogenous event – which has some talking about Creditanstalt and 1931.

Dubai is not an oil-rich country. It certainly has the greatest population amongst the United Arab Emirates, but oil and natural gas provide only 6% of income to the country. The country’s oil is expected to be depleted in as little as 20 years. Dubai is now much more dependent on its services like sporting events, trade and entrepôt services, and financial services and especially on property. So, when the Dubai property bubble went spectacularly bust in the credit crisis, Abu Dhabi, a UAE emirate with considerably more oil revenue, stepped into the breech in February.

Now, mind you Abu Dhabi’s sovereign wealth fund was rumoured to have lost a 12-figure sum in the financial meltdown in part because sovereign wealth funds from the Mideast recklessly poured capital into the American and European banking sector. Still, its support for Dubai calmed investors. 

Even before the Abu Dhabi bailout, I thought the Dubai property boom and bust was a marvel to watch.  In January, I commented:

I am fascinated by Dubai. They don’t have oil and they massively overbuilt. I would very much like to keep tabs on this economy because its position in the Middle East makes it a symbol for much of the interconnected financial bubble-like world we have just exited.

I think of the events in Dubai as having a bit of the butterfly effect to it – with everything selling off because of this one isolated incident. That was my thinking when I wrote the paragraph above 10 months ago, but I had since lost this particular storyline out of sight.  If there was to be any global butterfly-effect contagion, I have been looking more to the Baltics and their property bubble (see this October post for an example).

But now that Dubai is back in the news, I have looked back in my archives to see what (if any) links I have had on the situation in the country. The last two were in April about developers defaulting and in May about an S&P debt downgrade. Since then – as the global equity markets have turned up – nothing.

What does this tell me? First and foremost, it hints at the fragility of this recovery and the real risk exogenous shocks pose.  We are barely recovering now and a lot of debt and unemployment put us at stall speed, making the risk posed by events of this nature that much greater.

More importantly, however, the Dubai World events underline the unpredictability of exogenous shocks. All of these potential crisis situations — dollar carry trade unwind, debt crisis in the Baltics, oil price spike, an unexpected surge in interest rates, war in the Middle East — are still there lurking in the background. We don’t see coverage in the press on them everyday, but they are still there

I have been optimistic about the near-term prospects for the global economy in large part due to the myriad pro-cyclical effects of recovery. Longer-term, however, there are some serious obstacles to a sustainable recovery.  This is not a garden-variety recession and recovery. It is a recession within a longer-term depression.  And while we are in a technical recovery, I believe much of the fundamental problems which triggered this downturn are still there, lurking. The debt troubles at Dubai World bring this point home.

 

New York to use eminent domain to build a basketball stadium

New York to use eminent domain to build a basketball stadium

Courtesy of Edward Harrison at Credit Writedowns

The New York State Court of Appeals has ruled that the Atlantic Yards basketball project can go forward as planned, dislocating the residents in the Brooklyn, NY area where the stadium is to be built.  In essence, the decision means the state can evict you from your own home, seize your property, and give you what it believes is a fair price without your consent to build a sports arena.  The power of the state is breathtaking.

The Wall Street Journal reports:

New York’s highest court ruled that it is lawful for the state to seize private land for use by private developers, clearing a hurdle for a new basketball arena and marking a victory for local governments hoping to spur development.

Tuesday’s 6-1 ruling by the New York State Court of Appeals allows the contentious $4.9 billion, 22-acre Atlantic Yards project in Brooklyn to proceed. The project, being developed by Forest City Ratner Cos., could eventually include office towers and apartments as well as an arena for the NBA’s New Jersey Nets.

The decision is a blow to private-property owners who have argued that they are defenseless in protecting their ownership rights once a government deems their land necessary for eminent domain, or the "public good." But it boosts developers and government entities in New York that have sought to boost local economies by offering incentives for private developers.

The court’s decision echoes one handed down by the U.S. Supreme Court in 2005, when the justices found it was constitutional for a New London, Conn., economic-development corporation to seize private homes and businesses to build a research campus for Pfizer Inc. That decision, Kelo v. City of New London, Conn., set off a firestorm of protest, prompting many lawmakers around the country to amend laws to prevent governments from seizing private land in some cases. New York, however, didn’t change its constitution.

In Tuesday’s decision, the New York appeals-court judges ruled that the constitution allows the state entity to seize the downtown Brooklyn land to improve blighted conditions. The land owners had argued that the area was a stable neighborhood, and wasn’t blighted.

But the court ruled that if the definition of blight is to be changed in New York, it would be a matter for the legislature, not the courts.

The lone dissenter in the case, Judge Robert S. Smith, wrote: "It might be possible to debate whether a sports stadium open to the public is a ‘public use’ in the traditional sense, but the renting of commercial and residential space by a private developer clearly is not."

The decision, based on the eminent domain doctrine, is predicated on the greater good theory where your property rights are trumped by the larger public interest.

Below, the Wall Street Journal’s Stephen Moore discusses why he is opposed to the New York state seizing private land for this basketball arena.

The U.S. Supreme Court decision mentioned above in favor of eminent domain in Kelo v. City of New London, Conn set this decision up.  In essence, if a state or local government deems a private project – funded by private monies and profiting private enterprises – to be in the public interest, it can seize your property to allow this project to occur.  In the New London case, residents were evicted to make way for a luxury hotel and up-scale condos, from which private developers profit handsomely.

Kelo was an outrageous example of cronyism, whereby government can abuse its power to enrich specific private interests. If you recall, in a recent post on the role of government, I said that those looking for small government:

see government as a parasite which, while necessary in small measure, always and everywhere raises the specter of despotism and cronyism. In this view, government must be kept as small (and as local) as possible because it feeds on society and on power to usurp property and wealth for its own use and that of its cronies.

Both this case and Kelo are textbook examples of why some favor small government.  But , realistically, small government is no panacea for cronyism. Increased checks and balances could be helpful here – one reason it is disturbing that the judicial branch of government, rather than acting as a check on state power is now adding to it.

In this poor economic environment, eminent domain for private projects is even more of a threat because of the lure of tax revenue. If a cash-strapped municipality wants to avoid bankruptcy, it will be susceptible to private interests with these kinds of offers.

Expect to see a lot more of these eminent domain projects unless laws are passed to stop this abuse of state power.

 

China And The Environment: Go Blow Yourself

China And The Environment: Go Blow Yourself 

Courtesy of Karl Denninger of The Market Ticker

Their claims of "carbon reduction" are simple lies:

BEIJING (Reuters) – A top Chinese climate envoy said Friday only emissions curbs carried out under its newly announced carbon intensity targets that have international financial support will be open to outside scrutiny.

In other words they will lie.  Just as they do about virtually everything else.

Yu Qingtai, China’s climate change ambassador, added that most of the country’s emissions-curbing plans would likely not fall into the category of "measurable, reportable and verifiable."

And they’re telling us they’re going to lie.  Thank you very much, Mr. Chaingang, er, "Chinaman."  Now go blow a stallion.

Beijing insists that rich, industrialized countries should continue bearing most of the burden in reducing greenhouse gases and that developing nations like China and India must not be subject to mandatory emission reduction targets in any new deal.

That’s because China is committed to this sort of "carbon reduction":

Are we tired of this crap yet in the civilized world?

Well of Emptiness: Family Day at the New York Stock Exchange

Well of Emptiness: Family Day at the New York Stock Exchange

Courtesy of Jesse’s Americain Cafe

Today was ‘Family Day’ at the New York Stock Exchange. No it is not the day in which the boys celebrate the families which they have made homeless, the retirements they have ruined, and the faces they have ripped with their lugubrious bump and grind.

It is a day on which the junior people, semi-professional greeters, and B class spokesmodels who are stuck working on a long holiday weekend bring their kids to play on the big empty floor, growing emptier by the day as volume migrates to the Matrix, and the dark pools of the vampire squids. The better to eat you with, my dear.

And befitting a day of low volumes and maximum cynicism, the futures did almost exactly what we thought they might do and, after a well managed performance, absolutely nothing has been decided. We were thankful for a low open and an opportunity cover short positions, and then a nice long drift higher to let the long sides of our hedged positions go. And of course, shorts back on into the close, with moderation we hasten to add. No underestimating Tim and Ben here.

Another Sunday night is in the cards. Remember those? The long nights in which the players hold their collective breath while Asia opens, and then Europe, to see if the rest of the world is buying it, or continuing to sell it. When press releases from corporate giants and their government functionaries begin to leak the true estimates of the damage, shortly after they announce ‘the fix’ for the problem that they most recently swore great oaths did not exist.

The story of a potential sovereign default such as that of Dubai is not so much which banks are holding the actual loans, but rather, which counterparties are holding the Credit Default Swaps, and to what degree. This is still a derivatively challenged system, oversexed, overlevered, and unfortunately over here.

If it turns out that AIG is a counterparty on the wrong side of the banks again, it really would be a bit much, and Timmy should be fired the following day if he dares to utter the "B word."

There is a lot of theater in the markets and the media, all designed to shape perception, which is the last resort of the financial engineers and their corrupt politicians.

That is not a segway necessarily to the Jobs Summit wherein The One will sequester with the nation’s leaders of a sort, and puzzle out what can be done to ‘get more jobs.’ So far the Obama Administration has resembled that of Herbert Hoover, rather than that of Franklin Roosevelt.
 

"Hoover quickly developed a reputation as uncaring. He cut unemployment figures that reached his desk, eliminating those he thought were only temporarily jobless and not seriously looking for work. In June 1930 a delegation came to see him to request a federal public works program. Hoover responded to them by saying: "Gentlemen, you have come sixty days too late. The Depression is over." He insisted that "nobody is actually starving" and that "the hoboes…are better fed than they have ever been." He claimed that the vendors selling apples on street corners had "left their jobs for the more profitable one of selling apples." Digital History Herbert Hoover and the 1930s

Have a pleasant weekend, and for our American readers, a tumultuous ‘black Friday.’ The results of the annual consumer binge will be portrayed and flayed to beat the band in the days to come. Remember that "you get what you pay for" but you also "pay for what you get," unless you are one of the bureaucractically blessed few who receive beyond all bounds of effort and any conceivable personal labour.

Here is the updated scorecard for the markets.

 

How Much Has Angelo Moskov's QVT Lost In Dubai; Another Year, Another DB Prop Casualty?

How Much Has Angelo Moskov’s QVT Lost In Dubai; Another Year, Another DB Prop Casualty?

Courtesy of Tyler Durden

Is another Deutsche Bank (ex) prop group about to blow up on Dubai World? First, of course, we had Boaz Weinstein who lost so much money on the basis trade implosion last year, the DB accountants are still unsure how to quantify the P (not so much) & L, and now QVT Financial, originally also a prop trading group at DB until 2003, seems to have lost a boatload on the Dubai fiasco. The WSJ reports that QVT, headed by one Angelo Moskov, is "spearheading efforts to rally holders in bonds in Dubai World subsidiary Nakheel, including hedge funds and other money managers in New York and London… About 15 or 20 investors in bonds of Dubai World’s real-estate subsidiary have come together in an effort to explore their options, after suffering huge losses."

As traditionally those most exposed within any given committee are presented the privilege to "head" such ad hoc initiatives, we are fairly certain that the QVT gentlemen have absorbed the lion’s share of said "huge losses." And as the bonds have dropped from 110 to 40 in two days, and are trading below such liquidating names as Nortel, with other credits fully on the government’s bailout/subsidiary payroll, this could easily be the single worst performing issue of 2009. Thus not one year seem to pass without what seemingly is yet another major Deutsche Bank legacy blow up.

To be fair, it is still not clear how many other funds could have been impacted by the Dubai Thanksgiving massacre, as well as what is the full exposure of the QVT-led group:

It is unclear what percentage of all bondholders the group represents, with at least some funds choosing not to join because they don’t believe legal action will be successful. Some market specialists estimate that as many as half of bondholders were international buyers, with the rest owned by United Arab Emirates banks.

Among options bondholders are exploring is the possibility of seizing Dubai land that is being used to secure the bonds [good luck there]. But Julian Lim, a London-based bond analyst at Nomura, says there are question marks about the value of the land backing the bonds. In addition, it is unclear whether bondholders would even be able to seize the property given that local courts may consider those assets sovereign entities of Dubai, he added.

So while Goldman (as of yet) does not appear to have been impacted by the Persian Gulf debacle, it is poetic justice that the entity likely to suffer the greatest losses absent another Fed or UAE backstopped bailout of Dubai, will be a former Goldman employee: below is Mr. Moskov’s professional career via Bloomberg:

Having worked at the triumvirate of Wall Street banks for several brief 2 year stints before opening QVT in 2003 as a Deutsche Bank prop trading spin off, Mr. Moskov, then 35, must have certainly learned from the best, not only in how to impress people courtesy of brief 2 year stints at several trading position, but that selling 3 year CDS can easily be the most profitable trade ever (sorry, CDS humor) if you know you won’t have to be there to pick up the pieces when the shit hits the fan. We have inquired with insiders as to what QVT’s total exposure in Nakheel is and will bring such information as we get it.

 

Fall Of The Republic

This is very long political/controvercial movie – what do you think?  Please share thoughts. - Ilene

Fall Of The Republic – The Presidency Of Barack H Obama – The Full Movie HQ

 

Early Reports Point Toward A Nationwide Black Friday Shopping Frenzy

Early Reports Point Toward A Nationwide Black Friday Shopping Frenzy

Courtesy of John Carney of Clusterstock

If local media reports are accurate, shoppers have turned out in huge numbers across the country for Black Friday.

We did a survey of local news sites to gather the latest Black Frdiay news. And it looks very good for retailers.

Cincinnati, Ohio: "A long line of shoppers looking for the best priced toys for Christmas waited outside a Western Hills Toys R’ Us store on Glenway Avenue, since late Thursday night to be among the first in line. After the doors opened at 12 a.m., there were some reports that Cincinnati police had to be called to bring order to a disorderly line of shoppers. Some of them said an argument between several groups of shoppers got out of hand and forced the police to called for help…At the new Wal-Mart superstore in Fairfax on Red Bank Road, over a thousand people came early Friday morning, to be in the right line to get some of the doorbuster sales the chain was offering…Many retailers warn that they have severely cut back on what they have ordered."

Weston, Wisconsin: "The line leading to Target in Weston stretched at least three blocks as people got ready for Black Friday shopping Friday."
 
Framingham, Massachusetts: "Dondrae May, a manager at Best Buy’s Framingham, Mass., store, said shoppers started lining up at 4 p.m. Thursday for the 5 a.m. opening for the limited early morning specials like the $299 32-inch Dynex flat-panel TV.

He noted that crowds were larger than last year and that shoppers were filling their basket with more items than a year ago, when they were shellshocked following the ballooning of the financial meltdown. The biggest draws were laptops, TVs and GPS systems, he said."

Aurora, Illinois: "Black Friday shoppers got an early start this year, causing a 2-mile traffic back-up near Chicago Premium Outlets in Aurora…Starting about 11 p.m. Thursday, cars began lining up to get into the mall, according to Illinois State Police…The mall opened at midnight, and the heavy traffic remained for several hours, State Police said."

Somewhere In Middle Georgia: "400 early birds waited in the dark for Belk to open this morning at 4:00 am.

"There was a huge crowd when I got here at 3 o’clock this morning," said Belk’s General Manager, Darwin Saunders.  "One of the first customers I talked to, she said she got here at 12:30 am and had been standing at the door waiting for us to open."

South Portland, Maine: "Eager shoppers lined up as much as nine hours in advance to catch Black Friday deals.

At Target in South Portland, shoppers gathered at 8:00 PM on Thanksgiving to be first in line when the doors opened at 5:00 AM.

Other early openers include the Bangor Mall, which also opened up at 5:00 AM.  Folks started shopping at the Maine Mall at 6:00 AM and the Auburn Mall at 7:00 AM.  Toys R Us was the first to open, however, letting shoppers in at midnight."

Galesburg, Illinois: "Early morning — Black Friday — large crowds of Christmas shoppers are not unexpected. But, the number of shoppers out before dawn today in Galesburg appeared to be as many or more than last year, even with unemployment at 11.5 percent."

Bloomington, Minnesota: "At the Mall of America in Bloomington, a Black Friday wallflower in years past, when the doors opened at 4 a.m. about 2,500 people were in line, attracted by goodie bags promised to the first 300 shoppers."

See Also:

Black Friday Sales Frenzy Explodes As Americans Kiss Recession Goodbye

Apple Black Friday: $300 Off MacBook Pros, $180 Off iMacs (AAPL)

Black Friday: Roku Offering 50% Off Its Web TV Gadget Today (NFLX, AMZN)

 

SP 500 Daily Chart: The Silence of the Turkeys

SP 500 Daily Chart: The Silence of the Turkeys

Courtesy of Jesse’s Café Américain

While Americans were celebrating their Thanksgiving Day holiday, the rest of the world gobbled 40 points from the December SP 500 futures.

Bears are doing high fives and the serial top callers are rolling.

Let’s see if the correction will continue after the pilfering pilgrims are back on their prop desks.

Then again, maybe the Reverend Lloyd is just bringing in the sheaves. Why waste a crisis?

Up the trend, then down again. Trend is the trend, until it is not.

This *could* be the November selloff that was expected. Le Prop is on the short side to an acceptable degree. It could be a short ride, and so not taking it heavily short until we break this trend.

Until that point we either buy weakness and sell strength within the trends, or sit on our hands and do nothing.

Why is gold selling off, isn’t it supposed to rise in times of crisis? Well, it did, and quite impressively, in the past week or so, in anticipation of this major failure in the world of paper finance. And now there is selling on the news.

Those who look for a one to one linear correlation between action and reaction will be sadly disappointed and confused, because that is not how the game is played by the banks. They trade in information, in dark pools and private whispers, and the dollars are the means of keeping score.

This is why timing buys and sells is so difficult, especially in hotly speculative markets like the US equity market, just for an example, because the game you are allowed to see on the table is not necessarily the one that is really being played. So better to play the long trends, where the short term does not matter.

But all is not lost. We still have a feeling that the word has gone out from Timmy to Lloyd that the puppies will not buy their puppy chow if the markets are gloomy, and this is why we are in a flat to rising trend in stocks.

Keep in mind that there is always an up and down movement within the trends, especially those whose action is artificial. We are nearing the downstroke on the charts on the overnight trade, which catches most small players unable to adjust and set up to take losses both in the running of their stops, and the severe adjustment from panic selling on the open.

So that’s our play, but if we break the trend, well, it’s a nice time to be in that safe harbor after all.

Dubai’s Move On Debt Rattles Markets Worldwide – New York Times

US Dollar Index at 6:30 AM EST

 

Fall Of The Republic

Have a couple of hours? What do you think of this politically controversial movie–how much is true and how much reflects conspiracy theory extremism? – Ilene

Fall Of The Republic – The Presidency Of Barack H Obama – The Full Movie HQ

 

Geithner’s Disgrace

Geithner’s Disgrace

By Eliot Spitzer, courtesy of Clusterstock

From Slate: The issue has been festering for months…

A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

Barofsky’s report reads like a case study in failed negotiation. The New York Fed didn’t have the backbone to stand up to Wall Street, didn’t understand its capacity to protect taxpayers, and didn’t appreciate that its responsibility was to taxpayers.

Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG’s counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG’s default in the absence of a federal bailout to get concessions from AIG’s creditors. Why not?

Keep reading at Slate >

See Also:

Jim Rogers: Tim Geithner Has Been Wrong About Everything His Entire Career

How Tim Geithner Screwed Us All

White House Not Yet Actively Considering Throwing Geithner Under The Bus

Yes, Let’s Tax The Speculators

Yes, Let’s Tax The Speculators

Should we use taxes to deter financial By Paul Krugman, courtesy of Clusterstock

Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree — and they’re right.

Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.

Keep reading at the NYT >

 

THE 10 TRADING COMMANDMENTS

The Pragmatic Capitalist summarizes the commandments.  To see the Todd’s video, click here.  – Ilene

THE 10 TRADING COMMANDMENTS

Courtesy of The Pragmatic Capitalist and Minyanville

Good stuff here from Minyanville’s Todd Harrison’s.  His 10 trading commandments:

1.) Respect the price action but never defer to it.

2.) Discipline trumps conviction.

3.) Opportunities are made up easier than losses.

4.) Emotion is the enemy when trading.

5.) Zig when others zag.

6.) Adapt your style to the market.

7.) Maximize your reward relative to your risk.

8.) Perception is reality in the marketplace.

9.) When unsure, trade “in between.”

10.) Don’t let your bad trades turn into investments.

 

David Rosenberg: Okay, Fine, The Jobs Numbers Are Getting Better

David Rosenberg: Okay, Fine, The Jobs Numbers Are Getting Better

Courtesy of Henry Blodget at Clusterstock

David Rosenberg hasn’t wavered a bit on his view that the economy’s still in horrendous shape and the 70% market boom of the past eight months has been a violent bear-market rally.

But even Dave is now having to admit that the jobs picture is getting better, albeit slowly. 

The current rate of initial claims, Dave says, is consistent with modest job growth.  So we could see payrolls growth as early as December.

[This week's initial jobless] claims number cannot be dismissed out of hand despite the help from some aggressive seasonal factors. 

For the week ending October 24, they were at 532,000; on October 31, they were 514,000; on November 7, they were 505,000; on November 14, they were 501,000; and as of November 21, they had declined to 466,000.  So the trend is clearly down — falling now for four weeks in a row.  This is the lowest level on claims since the week of September 13, 2008 and this figure has not been below 500,000 since the opening week of 2009; and as an exclamation mark, the four-week moving average also dipped to 496,500 from 513,000 — first time below the 500,000 mark in a year. 

The Conference Board’s Consumer Confidence Survey data did show yesterday that in November people were having a tougher time finding a new job than at any other time in the past 26 years, so keep in mind that the claims numbers reflect firings, not hirings.   The firings have now abated, but it remains to be seen how the job market evolves with a record 9.3 million Americans working part-time who would rather have a full- time job (double the norm) and with the workweek at a record low of 33 hours.  All companies have to do is take the workweek back up to where it was when the
recession began and right there it would create the equivalent of two million new jobs (but without actually adding headcount); or take the number of people that were furloughed into part-time back onto full-time, which would also be equivalent to de facto job creation of two million jobs.

The firings have now abated, but it will be interesting how the job market evolves with a record 9.3 million Americans working part- time and the workweek at a record low of 33 hours.

If we see confirmation of this 466,000 number in next week’s data, it would be a pretty safe bet to say that claims have finally gravitated into a 450,000- 475,000 range, which in the past was consistent with very modest job growth, but growth nonetheless.

Economists have had trouble this cycle because of the nature of the recession being a credit contraction and asset deflation phase as opposed to a garden-variety inflation/excess inventory downturn, so relying on the past has been tricky and faulty.  Be that as it may, look for upward revisions now for the December 4th release of Street estimates for nonfarm payrolls (the consensus is currently at -120,000, which that could now come down to -100,000 or lower) and talk will soon grow of a positive-print as early as the December or January Nonfarm payroll reports.  

See Also:

Jim Rogers: Tim Geithner Has Been Wrong About Everything His Entire Career

Gold Tumbles, As Nervous Investors Want Greenbacks Instead

JP Morgan: Stop Freaking Out, The UAE Can Easily Save Dubai

 

JP Morgan: Stop Freaking Out, The UAE Can Easily Save Dubai

Good morning!  Hope everyone had a great Thanksgiving. – Ilene

JP Morgan: Stop Freaking Out, The UAE Can Easily Save Dubai

Courtesy of Vincent Fernando at Clusterstock

Kian Abouhossein at J.P. Morgan delivers some excellent insight into the Dubai crisis. The wealthy UAE will be able to easily bail out Dubai if need be, this time. It just might not be so optimistic to do so in the future.

We are less concerned for global banks about Dubai World’s direct $59bn outstanding debt exposure with $4.3bn due to mature in Dec-09 and a further $4.9bn in 1Q10, considering “only” $13bn of syndicated loans across global banking sector based on Dealogic data. Assuming a 10% “hold” strategy, the most exposed banks would be RBS with $0.23bn, DB and CS with $0.17bn each.

…

The view from our MENA team is that this event reflects cash flow challenges rather than refinancing ability. They believe that obligations on Dubai World and its property unit Nakheel PJSC are likely to be fulfilled at the new May 2010 earliest repayment date, and that Dubai should be eventually be able to fulfill its debt obligations maturing in the short-term ($4bn in Dec-09, relating to Dubai World, and $9 to $10 in 2010) with continued Abu Dhabi support. Abu Dhabi is strong financially with fiscal and current account surpluses, ~$150bn in FX reserves and a ~$300bn sovereign wealth fund. However it seems that Abu Dhabi will no longer be happy to underwrite all debt, and rather will differentiate more strongly between supporting Dubai’s strategically important assets (such as DEWA, and Dubai Ports), and the non strategic assets – hence the concurrent timing of the Dubai World debt restructure and the Abu Dhabi underwritten government of Dubai debt raising.

Here’s one rough measure of relative bank exposure to Dubai, based on Dubai World syndicated loans since 2007. Overall, JP Morgan believes the exposures are relatively small compared with the major banks involved.

Here’s probably a better estimate of relative exposure, by loans made to the UAE as a whole. The amount of direct loan exposure to Dubai specifically, within this UAE-wide figure, are apparently very difficult to know.

Conclusions for some of the major banks exposed:

…

Overall we would argue the UAE direct loan exposure risk is to some extent over-discounted within global banks except for some selective banks. In terms of spillover effect there is a larger concern for IBs considering mark-to-market risk exposure as well as IB revenue exposure to EM, in our view. Current events considered support of our preference for quality credit exposed banks over IBs as discussed in our report “Switching preference from IBs to Credit banks on regulatory changes” 9 Sept 09. Our top picks remain: SocGen, Unicredit, BBVA, DnBNor, NBG and HSBC.

(Via JP Morgan, Kian Abouhossein, "UAE – Exposure at Risk analysis", 27 November 2009)

See Also:

Black Friday: Asian Markets Walloped After Dubai World

Just How Scroomed Are HSBC And Standard Chartered On Dubai’s Default?

US Futures Plunge 2% On Dubai Default News

 

 

US mint suspends production of gold and silver eagles

US mint halts sales of gold and silver eagles

Courtesy of Project Mayhem at Zero Hedge

 US mint suspends production of gold eagles, gold once again hits all-time highs, Tungsten comes back in fashion, Council on Foreign Relations propaganda rag asserts total dollar collapse "well before 2030".

The Council on Foreign Relations propaganda rag Foreign Affairs latest issue states:

At the same time, inreasing U.S. demands on foreign investors would probably become unsustainable and produce a severe drop in the value of the dollar well before 2030, possibly bringing on a hard landing.

-Foreign Affairs, Volume 88, No. 6, November / December 2009, p22.
 

In another case of "color me unsurprised" the US mint has suspended the production of gold and silver eagles citing "depleted inventories of the metals". As can be seen by our wonderful colored chart, sales have skyrocketed indicating public non-confidence in the US dollar. Or better yet, public non-confidence in hallucinated ETF computer-pixels.

For those wishing to look beneath the surface, this is simply another confirmation of supply tightness in the gold market. Though officially the US mint has run out of blanks, it would make more sense that the Western oligarchs have simply decided is enough is enough and do not wish to further feed the fire of gold price appreciation until 2010.Perhaps it is simply not ‘that time’ yet, which would make sense considering the leaked information out of Bilderberg 2009 that the world is not yet ripe for the much-anticipated global currency crisis. But it’s coming. We even have idiots on CNBC proclaiming global currency destruction , remember? Something has to give and the easiest failure will be in the multi-trillion FOREX markets.

But good luck getting your gold coins at spot. Or silver coins for that matter, (which as we all know are poised for explosive gains sometime in the next five years). In the meantime, we have the brewing scandal in the LBMA ‘good delivery’ markets, which may or may not be related the the suspension in production of gold and silver eagles. For those not aware, there is a possible scandal in the "highly liquid" international gold market, after gold bars were discovered in Hong Kong which were actually technically advanced fakes with tungsten metal inside. This is possible because tungsten has almost identical mass as gold. With the addition of transition metal alloys, such fakes can be indistinguishible from the real deal except with drilling the bars and conducting assays.

Of course, the various funds around the world will be quick to assure you that you have not been duped, because it IS after all the LBMA market, and such a market could never have possibly been contaminated with fake bars. Something is to be said for this since retail customers have not complained, and you’d expect jewelery manufacturers to be pissed if they were delivered tungsten , no?  But the international fraudsters in the banking system are both clever and arrogant. It is certainly possible there is systemic fraud confined to the ETFs where generally the "bars" stay in the vault, rarely delivered, and the paper claims are what trade. Perhaps this gradual erosion of confidence is part of the reason gold and silver coin sales are skyrocketing.

Regardless of the tungsten scandal, entities such as BullionVault are definitely more trustworthy than JP Morgan’s hallucinated gold ETF, but there are a few questions. Trust is only as good as the weakest counterparty in the chain. Through published correspondence by Bullionvault clients, we know ZERO assays of gold bars were conducting during last years’ fund audit. That is, no bars were drilled. Bars were precisely weighed — but as we all know now, tungsten metal alloys can be constructed to milligram tolarances which would be undetectable without assay. Hopefully these technically advanced gold bar fakes were confined to China.

As for the mint suspension of coins, the move may backfire and drive prices up even further, perhaps even with Butler’s premium appearing in gold and silver eagles, at least temporarily. Of course, with the US government’s repeated suspension of gold and silver coin production, we know they are no longer meeting their obligations to the public under the law. Shocking, I know.  

As for gold, it is quietly meandering around the end-of-year target ($1200)  I  issued approx 3 months ago.

Soon enough this will all blow sky-high…

 

DUBAI: A STARK REMINDER OF HOW FRAGILE THE ECONOMY IS

DUBAI: A STARK REMINDER OF HOW FRAGILE THE ECONOMY IS

Courtesy of The Pragmatic Capitalist

Foreign markets are getting hammered overnight and futures in the U.S. are down 3% as news of a potential default at Dubai World reignites fears of the credit crisis.   We have been absolutely hammering home the fact that the “solution” to the credit crisis was in fact, not a solution at all.   There remain massive debt issues home and abroad and Dubai is only the latest example of such.

Although details are still emerging, the Dubai news will prove to be more company specific than Lehman Bros. was.   I don’t believe the news is a reason for investors to panic as loan losses from a potential Dubai default would represent a meager portion of total banking assets.  Contagion does not appear to be a large concern either, but perhaps more important is the reminder that Dubai sends – these problems of massive global debts are far from being settled despite all the v-shaped economic recovery chatter.  Dubai’s standstill is a reminder that real estate markets around the world remain unhealthy and susceptible to sudden and dramatic downturns.  Whether this is a minor tremor in commercial real estate (and potentially a sign of impending aftershocks in residential) has yet to be seen, but make no doubt – we are not out of the credit crisis woods.

This does little to change my cautious investment outlook.  We have been almost entirely cash since selling into the rally over a month ago at S&P1,100 and remain cautious on markets heading into the year-end.  This confirms my belief that the recovery is very fragile and the road ahead is likely to be difficult primarily due to the fact that our cancer (debt) is still very much alive.  The governments in the U.S. and abroad have done little to attack this problem.   Unfortunately, I believe this is unlikely to be the last of these reminders in the coming years.  These debts are likely to plague the economy until we find leaders that are courageous enough to stand up to the banks and the fiscally irresponsible participants of the global economy.

Thanks to Zero Hedge for the Barclays piece.  It’s worth a quick read.