Monday, November 30, 2009

Mauldin: Why I Am An Optimist

Okay, so I've been a bit negative on things....I get it, the truth hurts. But what sometimes gets lost in the shuffle is that while I'm pessimistic about certain things, at heart I'm an eternal optimist.

A few months ago I was having lunch with a friend and we were talking about energy and cars and solar panels....and the future. My thought was that all of these things were on the verge of technological leaps in ways that none of us could imagine. I was thinking about this conversation when I read John Mauldin's latest piece, I think you'll enjoy it.

Scott Dauenhauer CFP, MSFP, AIF

Leon Jones, CFP - Rest in Peace

I just learned of Leon's death; since I moved out of Orange County we had only kept in touch at conferences, I was saddened to hear of his passing. Leon was one of the good guys, someone you could trust. He was a credit to this profession and I will miss him. We served on the board together of the Orange County FPA chapter. You will be missed friend.


Jones, Jr., Leon, age 57, of Laguna Niguel, passed away Sunday November 8, 2009 at Western Medical Center in Santa Ana. Leon was born to Leon and JoAnne Jones on June 18, 1952 in Virginia. He proudly served as Director for the Lipton Tea Company, Vice President of Calvo, after which, he became self employed as a Financial Advisor. Leon is survived by his beloved wife, Andrea Jones; his son, Kevin Jones and his daughter, Megan Jones, each of Laguna Niguel; his mother, JoAnne Jones and his sister, Sherry Guthrie of Virginia. Arrangements are being handled by Miller Jones Mortuary & Crematory. Funeral Services will be held on Friday, November 13, 2009 at 3:30 p.m. at Coast Hills Community Church located at 5 Pursuit, Aliso Viejo, CA. Leon touched many lives and will truly be missed by all who knew him and loved him. We have started a Leon Jones Memorial Fund at USC/Norris Cancer Hospital if you wish, you may contribute. Miller-Jones Mortuary

Sunday, November 29, 2009

Arnot: What Can't, Won't Be

Rob Arnott (manager of PIMCO All Asset and All Asset Authority) publishes his quarterly commentary, its worth looking at. The debt figures alone are scary.

Scott Dauenhauer CFP, MSFP, AIF

Friday, November 20, 2009

Margin of Safety - Does It Exist?

Benjamin Graham made famous the concept of "Margin of Safety" which basically refers to the price at which an investment will trade that yields minimal downside risk (or acceptable).

At today's stock market valuations there does not appear to be a reasonable "margin of safety". What external market events could cause valuations to contract, perhaps in a severe manner, I've thought of just a few possibilities:

Oil Shock - oil at $200 per barrel (not predicting, but it is now within the realm of possibility through either a falling dollar or a nuclear explosion in Saudi Arabia)

Pandemic - The H1N1 has proven to be more bark than bite (or is that squeel?), but what if it mutates like what happened to cause the Spanish Flu?

Massive California Earthquake (that couldn't happen, forget I even mentioned it)

Bad hurricane season

A major country defaults on its debt, which is widely held (oh wait.....did somebody say Ukraine)

Massive Terrorist attack (or even a small one that strikes the right cord)

Residential and Commercial Real Estate Crash - not the last one, the next one

Global War

Magnetic Pulse bomb

Ben Bernanke re-appointed to the Fed (oh wait.....that already happened!)

Tim Geithner appointed Treasury Secretary (oops.....that happened as well)

Major investment bank reveals massive trading losses due to over-leveraged bets against the dollar or some other asset (this couldn't happen since our banking leaders are at the frontier of managing risk exposure...that was a joke by the way)



Okay, you get the picture. If stocks were trading at 8 or 10 times trailing P/E's perhaps all of the above risks would be worth assuming, however with them trading at 20 times trailing P/E's there does not exist much margin for failure.

The question you have to ask yourself is "Do you feel lucky, Punk?"

Scott Dauenhauer CFP, MSFP, AIF

Meridian Commentary: Monopoly Money

Monopoly, the still popular empire building game was introduced to America during the Great Depression, 1935 - it was an instant hit. Monopoly is my favorite board game, I'd rather play it than poker or video games (though fewer share my passion and thus I rarely get to play - though I can now play it on my iPhone.....not the same). Why bring this up today? I bring it up because the U.S. is beginning to look and sound like a Monopoly board. Not in the since that we are a nation of monopolies - though replacing Boardwalk and Park Place with the Federal Reserve and Wall Street Banks might feel appropriate, but because two of the more popular "properties" the utilities and the railroads are suddenly popular again. I always go for the railroads...consistent income and each additional one you own multiplies the rents.

Warren Buffett just spent a fortune buying....a railroad. In the age of technology and nearly 75 years after railroads appeared on the monopoly game board.....we're still buying them. Then famed Bond Guru Bill Gross yesterday comes out with the notion that one should be buying Utilities. Two investment legends buying old school railroads and utilities during a time that can only be marked by the term Depression. Now, I can't exactly relate the rest of the board game to today's realities - Real Estate is in terrible shape and building homes and hotels seems like a loser's game. What today really feels like in terms of Monopoly is the "hunker down" method of playing - you know, when you are nearly out of cash, but have lots of property (but all different colors and they are all overleveraged) and you realize that one false step (bad roll of the dice) will force you into bankruptcy? Your only play is hope that your roll of the dice gets you to a safe no or low-rent property or jail, God forbid you roll doubles. The hunker down mentality is also that of the Federal Reserve and its member banks (which is ironic considering they can print money and essentially they are the banker). They are just hoping to pass GO enough times to build up their balance sheet (the banks balance sheets) and cash for when the next roll of the dice yields a free pass to Boardwalk...which they just lost to a hedge fund that has now fully leveraged it and is charging outrageous close to passing Go, unfortunately it becomes the last roll as Boardwalk bankrupts - not even China (another player at the table) can bail them out (of course they try).

When will the US hit its Boardwalk moment? Can we Pass Go enough times to rebuild our balance sheets? Should we be buying railroads and utilities? Not since the debut of Monopoly have so many people hoped for a "Chance" card that will either given them the jackpot or send them to jail (where they are relieved of rolling for a bit).

My point...I really just thought it was interesting that two famed investors were buying railroads and utilities, but the more I think about it the more I hope we can get out of this Monopoly game (ironic that the dollar is now being talked about as "monopoly money") and play a game that is based in reality, perhaps the game of Life!

Scott Dauenhauer CFP, MSFP, AIF

Thursday, November 19, 2009

Arnott: CPI is a "massive shell game"

Mr. Arnott said, when the Bureau of Labor Statistics used car prices that were net of the “cars for clunkers” program. That program gave qualifying automobile buyers up to $4,500 in rebates, which the BLS calculated as a price drop.

“That’s pure fraud” in the CPI, Mr. Arnott said, adding that low inflation figures also tend to overstate real GDP growth.

Who pays Federal taxes (and coming Middle class tax increase) has created a wonderful graphic demonstrating who pays what percentage of the Federal income tax.

There are a few takeaways, the first is 47% of the taxable units pay ZERO taxes and the top 1% of income earners pays 40% of our taxes, the top 10% of income earners pay over 70%.

Why is this important? You can only raise taxes on the "rich" so much, there are far too many people in the middle class and a small increase on them equals a huge amount of taxes. Taxes on the middle class are going to go up.

Scott Dauenhauer CFP, MSFP, AIF

China's 14 Dominoes of Destruction

As I understand it China is the rising superpower and will one day rule the world, while that scenario may in fact play itself out, perhaps it will happen differently than people believe (at least today). The dominant trend is that China is the place to be, they are the future.

There is only one problem with such a belief, it rests solely on the belief that communism was simply misapplied in the past, that China has perfected it and the master central planners who repress their citizens (among other things) will finally create the utopia that is the dream of communism.

Communism has never and will never work, not even the so-called "hybrid version" that attempts to fuse some form of capitalism into it. The distortions can only go on for so long, the tastes of freedom and prosperity will only continue to push the Chinese people to destroy their current government.

I'm not saying China will fall this year or next or even within the decade, but as with all Communist Repressive regimes in the past, this too will fail - what takes its place will be the true event of this century.

Wednesday, November 18, 2009

Whitney Fears Stocks

Meridith Whitney called last year's crash...she's back, will the magic work a second time - she's not bullish.

Scott Dauenhauer

SOW: Brokers' Favorites? Funds That Pay Well

Secrets of the Wirehouse:

Surprise, Surprise - turns out that brokers like to sell mutual fund products that pay them more compensation...and these funds tend not to be any better than funds a person could pick randomly on their own.

Perhaps it’s worth it for more investors to read up on mutual funds and pick their own. The first of the two studies mentioned above found that fund buyers who avoid brokers tend to be a little richer and a little better educated than those who don’t, but not much. In other words, many fund buyers who pay brokers can probably do it themselves.

Scott Dauenhauer CFP, MSFP, AIF

Friday, November 13, 2009

SOW: MSSB To Pay 330% Upfront Bonus To Attract Brokers

SOW = Secrets of the Wirehouse.

Morgan Stanley Smith Barney is looking to beef up the number of financial advisors (brokers) they employ. They are offering brokers at other firms up to 330% of their trailing twelve month's commissions as an inducement to leave and come to MSSB.

Does this sound like its in the best interest of the clients? Let's say the broker had $500,000 in sales last year - he/she might be offered $1.65 million to move to MSSB and bring their clients with them. Just who is this broker now beholden too? Do you think they might have to tow the party line after such a big bonus? Is this in the best interest of their clients? Of course not, no fiduciary in their right mind would offer such a package and no fiduciary in their right mind would accept.

Its one thing to offer money in a merger of equals to help offset merger costs, its another when you offer an outright bribe.

This is just another in a long string of things brokerage firms (wirehouses) do that are not in their clients best interest. By the way, who do you think will bail out Morgan Stanley when they get to leveraged and blow guessed right, the taxpayer.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, November 10, 2009

ShadowStats: Unemployment Really at 22%

From a New York Post article on unemployment numbers:

"Starting in the Clinton administration, Americans who told Census Bureau investigators, over a period of a year, that they were too discouraged to even look for a job simply vanished from U-6.

And considering how prolonged today's periods of unemployment can be, there are probably more people simply falling out of the count, although the Labor Department has no idea how many for certain.

My friend John Williams of Shadow Government Stats thinks the true unemployment rate would be 22.1 percent if everyone -- all discouraged former workers, encouraged, involuntary part-timers and the like -- were included.

Here are more numbers to fry your brain and cause a temporary sense of helplessness.

The government's household survey (the one from which the unemployment rate of 10.2 percent comes) showed a "decline in employment" of 589,000 in October, which followed a 785,000 employment drop in September.
That number also includes people who say they retired and others who were fortunate enough to have died during the past month and no longer require a job.

More numbers: Last Friday's 190,000 loss of jobs (from the survey of companies) would have been worse if 86,000 imaginary jobs weren't included to the tally."

Monday, November 09, 2009

Idiocranomics: First Time Homebuyer Credit Extended and Expanded

Not content with creating one housing bubble, our congressmen and women are doing their best (along with the Fed) to create another, passing an extension and expansion of the First Time Homebuyers Credit. This is bad policy and will only make things worse in the end. While it may seem like a gift to those who are buying homes now, it is part of a broader bank bailout and will only prop up housing temporarily. Of course the the massive fraud that has been perpetrated by those taking the tax credit who are ineligible didn't stop Democrats and Republicans from doing what is right by the American people - which would have been to end the credit.

Scott Dauenhauer CFP, MSFP, AIF

Chanos: Ten Lessons From the Financial Crisis That Investors Will Soon Forget (If They Haven't Already!)

22304084 Chanos Presentation

Idiocranomics: Tax Credit Sales (thankfully blocked)

So last week the news came out that Fannie Mae was planning on offloading some "Tax Credits," effectively selling them for 50% on the dollar to Goldman Sachs and Warren Buffet's Berkshire Hathaway. Fannie Mae has no profits and never will, thus the credits are useless to them, why not sell them? The problem is that those credits would be bought for half their value and then used to offset actual taxes owed of their actual value - meaning the sale would lose the Treasury $3 billion. Normally I'm a big fan of lowering taxes, but this didn't seem right - for two reasons:

Reason #1: Why can corporations trade tax credits and individuals cannot? I cannot purchase non-refundable tax-credits from people who could not utilize them, yet corporations can?

Reason #2: We the taxpayers are subsidizing Goldman and bailed Goldman out last year, they would not be here today without us little guys. Now they are paying record bonuses on revenue generated on our backs. They should not be given the opportunity to lower their taxes by buying tax credits at a discount - it is morally unethical in this scenario. As for Warren Buffett.....just imagine the outcry if Halliburton had did the same thing under the Bush administration - the outrage would be epic. Buffet is an insider in the Obama administration and for that reason there cannot be an arms length agreement, he should not be allowed to buy the credits, Buffet should know better.

For once I will praise Tim Geithner (don't get use to it Tim, you are the king of Idiocranomics and I'm sure this decision was made in order to make your week easy, not because it was the right thing to do).

Scott Dauenhauer CFP, MSFP, AIF

Einhorn: Time to Ban Credit Default Swaps

The linked to article is short and gives a great explanation of CDS (Credit Default Swaps) and why they should be banned. I support Einhorn on this, these "financial weapons of mass destruction" are a cancer on our system.


“I think that trying to make safer credit default swaps is like trying to make safer asbestos,” he writes in a recent letter to investors, adding that CDSs create “large, correlated and asymmetrical risks” having “scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay”.

Financial Times and Einhorn explanation of CDS:

CDSs are “anti-social”, he goes on, because those who buy credit insurance often have an incentive to see companies fail. Rather than merely hedging their risks, they are actively hoping to profit from the demise of a target company. This strategy became prevalent in recent years and remains so, as holders of these so-called “basis packages” buy both the debt itself and protection on that debt through CDSs, meaning they receive compensation if the company defaults or restructures. These investors “have an incentive to use their position as bondholders to force bankruptcy, triggering payments on their CDS rather than negotiate out of court restructurings or covenant amendments with their creditors”, Mr Einhorn says.

We have serious issues in our financial system, this is one step we can take to remove the insane amount of leverage currently in our system.

Scott Dauenhauer CFP, MSFP, AIF

WSJ: The Man Who Predicted the Depression

A great piece about an economist that is rarely mentioned by the "well known" economists of today.....probably because they ignored his work, at their peril.

"Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today."

Mises predicted the Great Depression and his work would have led economists to predict today's depression, yet I can tell you that in all my years of studying economics in school - Mises name never came up. Instead all we heard about was Keynes, a man who lost a bunch of money in the great stock market crash of 1929 and then was made famous because his work seemed to indicate that you could get out of a depression via government spending (which FDR used as his basis for increased government intervention). However, Mises had the right prescription:

"Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher."

We have again chosen to side with Keynes, a decision that landed our nation in a perpetual depression under FDR and the reason the unemployment rate today is 17.5% (BLS U-6) and 22% if we use measurements.

We are indeed on a dangerous path.

Scott Dauenhauer CFP, MSFP, AIF

Friday, November 06, 2009

Petition: Too Big Too Fail is Too Big Too Exist

Please click on the headline and sign this important petition

Petition to Treasury Secretary Timothy Geithner

Too Big to Fail is Too Big to Exist

Financial institutions that are “too big to fail” played a major role in undermining the American economy and driving our country into a severe recession.

Financial institutions that are “too big to fail” put taxpayers on the hook for a $700 billion bailout and more than $2 trillion from the Federal Reserve in virtually zero interest loans.

Huge financial institutions have become so big that the four largest banks in America (JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup) now issue one out of every two mortgages; two out of three credit cards; and hold $4 out of every $10 in bank deposits in the country.

Just five banks in America (JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley) own a staggering 95% of the $290 trillion in derivatives held at commercial banks. Derivatives are risky side bets made by Wall Street gamblers that led to the $182 billion bailout of AIG, the $29 billion bailout that allowed JP Morgan Chase to acquire Bear Stearns, and the collapse of Lehman Brothers.

The concentration of ownership in the financial services industry has resulted in higher bank fees and interest rates that consumers are forced to pay for credit cards, mortgages and other financial products.

No single financial institution should be so large that its failure would cause catastrophic risk to millions of American jobs or to our nation’s economic well-being.

No single financial institution should have holdings so extensive that its failure could send the world economy into crisis.

We believe it is time to break up the banks and insurance companies which are too big to fail.

We believe that passage of The Too Big to Fail, Too Big to Exist Act is essential for a strong American economy and a secure future for ourselves, our children, and our grandchildren.

We urge the immediate enactment of the Too Big to Fail, Too Big to Exist Act, which directs the treasury secretary to compile a list of those financial institutions that are too big to fail in the next 90 days, and to break up these banks and insurance companies a year after the legislation is signed into law.

Monday, November 02, 2009

Humor Break: Forklifts and Russian Vodka

FT - Roubini: "Inevitable Bust"

The man who seemed to have called last year's crisis believes that the low interest rates and falling dollar are creating a massive bubble that will end in an "inevitable bust", says Roubini:

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

This is all leading to another asset bubble:

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

So when will this bubble burst? The answer is that the party might go on for sometime, as we've experienced with past bubbles, they can last much longer than anybody expects, Roubini concludes:

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

We don't know the day or the hour, but at some point this new house of cards must fall.

Scott Dauenhauer CFP, MSFP, AIF