Investment Mercenaries

Seth Klarman's Rare Interview

2012-02-19T08:09:00.000-08:00

A fabulous interview with an investment heavy weight, Seth Klarman:

An Interview with Seth Klarman and Charlie Rose from Facing History and Ourselves on Vimeo.

Great Interactive Piece from the BBC on the Eurozone Debt Issue

2011-11-26T19:50:00.001-08:00

A really interesting piece from the BBC showing the extent of the interconnectedness of the debt web that has been spun over the years. This epitomizes the debt problems of the Eurozone. Have fun playing it with it all. Click the link above or copy and paste this one: http://www.bbc.co.uk/news/business-15748696

David Rosenberg on Wealthtrack using the D word

2011-11-12T08:56:00.001-08:00

Consuelo Mack of Wealthtrack does some great in depth interviews with the leading financial minds out there. David Rosenberg former Merrill Lynch economist and now economist of Gluskin Sheff is one of those great leading minds. I have followed him for some time now and his analysis is top notch. He called the financial crisis and the recession of 2008. Many detractors will point to him not seeing the 2009-11 rebound in stocks. However his strategy of bonds, income producing stocks, and precious metals has been very successful with incrementally less risk. Now he is using the D-word, Depression, to describe the times we are in. I tend to agree with him believe it or not. I don't think it's as visible as it was in the 1930s. We have social safety nets that have been hiding the stress. Food stamps being an example of this stress. They have increased in usage since the start of the financial crisis and are up to 15% of the population using them. The Huffington Post has further details on this. Whether we call it a Great Depression or not remains to be seen and will be determined in large part by governmental policy snafus. At the very least we are in a balance sheet recession. Which are financial in nature and are long drawn out affairs. I think the label of "depression" will come well after the fact so don't expect it to become mainstream anytime soon.

Luckily for us David Rosenberg does take an optimistic twist at the end. Which I feel is very important as we go through tougher times. We will get through this and political/leadership change in the developed world will eventually occur and help. In addition deleveraging and time will be the most helpful. Watch it all and enjoy:

The Debt Star

2011-11-09T22:03:00.000-08:00

Funny, but true... unfortunately:

Hugh Hendry Latest at London School of Economics

2011-11-03T00:32:00.000-07:00

This series is by far the best of Hugh Hendry out there that I have seen. Not only does it go over his various trades, but also his thought process on them. What I like as well is you really learn about Hugh and get a feeling for his process and who he is as an individual. It's almost like you were at the conference and having a personal conversation with him. They're great videos and a treasure for all of us to review and reflect on:

Part 1:

Part 2:

Part 3:

Part 4:

Part 5:

Europe's Treaty of Debt

2011-10-30T23:25:00.000-07:00

A great video clip on some of the problems with Europe's latest treaty to solve their debt crisis. Mainly the problem of giving a lot of power and immunity to an unelected political body.

The “Tug-a-war” of 2011 Continues between Market Bulls vs. Bears!

2011-10-29T13:23:00.000-07:00

The Bulls have regained the momentum! Anticipation & initial good news from the European Debt crisis had markets rebounding from 5 straight months of losses in one of the better months on record. Europe’s take on its heavily indebted nations for the last 18 months has been really a policyof “kicking the can down the road”. The best analogy I heard was they were not only kicking the can down the road but when they ran out of road they began paving more road to continue the kicking! As is all too clear with our own politicians nothing ever seemsto get done until there is a major crisis at hand. This is truly a step in the right direction for Europe as they are actually trying to restructure Greek debt with the “voluntary” 50% reduction. Coupled with other bullish winds of healthy corporate balancesheets, low interest rates, accommodative Central Banks, and Government intervention has given strength to the rally.

However one still has to be cautious in a market environment where a lot of the factors that gave us the summer downturn are still real & present. Sovereign nation debt is still growing at alarming rates in the Developed world as Economic Growth sputtersbehind. The little economic growth we have had has in fact been showing signs of slowing since summer. The recession threat might be greater then what most experts think. The stock & commodity markets have also shown an amazing amount of correlation to governmentand central bank intervention. It was relatively easy to predict this summer’s market downturn when the market was no longer supported by Federal Reserve Bank’s QE2 (Quantitative Easing). Lastly the lack of political leadership to make difficult/unpopular decisionsfrom the developed world has been troubling. A lot of the structural imbalances built up over the years in our economy still have not been addressed.

Predictions of the future however are always difficult and unpredictable. A balanced approach with emphasis on “playing defense” during the next 6-18 months in my opinion is still the prudent move. I am happy to see the European leaders finally comingto the realization of needing to restructure Greek debts. This is a big start to dealing with the world’s debt problem but the details of the EU summit still need to be ironed out. In addition the Europeans will have to deal with the much larger debt problemsof Ireland, Portugal, Spain, and Italy.Time will tell.

Rob Arnott's latest: We're in a Recession

2011-10-23T10:34:00.000-07:00

Rob Arnott talks with Market Watch about his views that the US is already in a recession, China's soft landing, and taking incremental risk. Enjoy:

Ray Dalio's Latest Interview with Chralie Rose

2011-10-22T16:47:00.000-07:00

Anytime you have the opportunity to listen/watch Ray Dalio of Bridgewater Associates talk than you are better off having done so. His approach to global economics and assessment of the "machine" is truly revealing to his success as an investor. Whether you agree with him or not on the various subjects how he comes to his conclusions is what fellow mercenaries should study and emulate. Follow the link to Charlie Rose's website and enjoy!

Hugh Hendry's Latest Media Appearance

2011-10-02T23:46:00.000-07:00

Hugh Hendry is back after a hiatus from making media appearances. According to him his new "CEO" has requested that he not make anymore media appearances. Luckily for us he was a able to sneak on to a BBC radio show to give his views of the European Crisis. Enjoy:

and the long version of the video:

California's Financial Woes Look to Continue

2011-10-01T19:09:00.000-07:00

Michael Lewis' newest article over at Vanity Fair, California and Bust is an eye opening article and somewhat depressing. He covers quite a bit including defending Meredith Whitney, interviewing Arnold Schwarzenegger, and going to the city level where most of the pain is being felt. I implore you to read it in its entirety as it is well written and his premise is unique. My critical comments would be that he didn't go after the public sector unions and come to the conclusion that FDR had done in his presidency that they should not be allowed. On the flip side the public workers were unionized long before the most recent devolution of America/California society. Read it yourself and see what conclusions you come to.

Lewis' article inspired me to find the great work that Mish over at his Global Economic Trend Analysis has done on the subject of California. I have been meaning to post these links for sometime now. Mish's blog has done us all a wonderful service by discussing a lot of California's budget problems. Here are his solutions to budget crises in January 2008 & 2011:
Mish's California Budget Proposal
&
California Budget Balancer Interactive Map from LA Times Misses the Mark

Mish:
"Look at this disgusting list of California Agencies.

I sorted out some but not all of the more ridiculous ones.

Does the state need a ....

Acupuncture Department
Office of AIDs
Air Research Board
3 different agencies for alcohol and beverages
2 Apprenticeship Councils
Art Council
Asian Pacific Islander Legislative Caucus
Bureau of Automotive repair
Barbering board
Biodiversity council
Calvet Loan program
Climate Change Portal
Coastal Commission
Cool California
4 Delta agencies
Digital Library
Bureau of Electronic and Appliance Repair
Employment Training Panel
Energy Commission
Equalization Board
2 Fair Employment agencies
Film Commission
Flex Your Power
Healthy Family Program
Hearing Aid Dispensers Bureau
Home Furnishings Bureau
Humanities Council
Independent Living Council
Indoor Air Quality Program
Economic Development Bank
Interagency Ecological Program
Labor and Workforce Development
Latino Legislative Caucus
Learn California
Little Hoover Commission
Maritime Academy
Managed Risk Board
Museum for History
MyCali Youth Portal
Native Heritage Association
Natural Community Planning Program
Naturopathic Medicine Community
Outreach
Peace Officer Standards Board
Postsecondary Education Commission
Prison Industry Authority
Privacy Protection Office
Psychology Board
Railroad Museum
Recovery Task Force
Refugee Branch
Regents of the U of C
Save Our Water commission
Smart Growth Caucus
Status of Women Commission
Take Charge California
We Connect
Wetlands Information System
Workforce Investment Board

California does not need ANY of those. Moreover I assure you I missed dozens more that could be cut back if not eliminated entirely. What the heck do those cost? And how much can be saved by my suggestions above."

A great quote from Mish... Read both of the links in their entirety. They are excellent. California has had 2+ years of massive budget problems. Early this year it was at the tune of a $25 billion deficit.

My take on this is simple and sensible. People of California and the United States need to ask themselves, "what kind of Government do you want and what are you willing to do to pay for it." I don't think that California residents realize what the costs are of having a fully intrusive government that tries to be all things to all people. Californians already have some the highest taxes in the union with little to show for it. Why not have the state focus on some of the more important aspects of basic governance: education, public safety, public health, infrastructure, and certain basic safety nets. Sure those basics are in need of massive reform, but at least the effort and focus could/should be on them. However if you think that California (and the US for that matter) is too far gone like Michael Lewis hints at then it might have to get a lot worse before it gets better. As time progresses I am leaning towards the later option and holders of local/city municipal bond should be prepared on what that may look like.

Kyle Bass on CNBC discussing the latest on the European Crisis

2011-09-19T22:44:00.000-07:00

Kyle Bass from Hayman Capital was on CNBC's Strategy Room last Wednesday to discuss the European Crisis. He parses through the noise on the situation with how "the period we are going to go through, people are going to lose a lot of money." Flat out he doesn't believe that Greece and the PIIGS are not going to have an orderly default, but the world is not going to end. He does see a recession on the way as I do. The video is top notch:

NCAA Hypocrisy Exposed by the Mercs & South Park

2011-09-14T22:40:00.000-07:00

NCAA major sports programs are a big business... no a huge business. I find the hypocrisy of the NCAA Division I sports stifling. My doubts started when College Football refused all common sense and the spirit of competition when they rejected a playoff system. The vested interests of the bowl system, TV rights, etc. were not budging. I am fine with folks making money, but when the NCAA wrap themselves up in academics and the tradition of the bowls I call hypocrisy! The more I looked into the more the whole system absolutely stinks.

The NCAA loves to espouse academics and will parade it out or hide behind it at the first sign of trouble. Truth being told when it comes to academics the graduation rates of the "student athletes" is extremely low. Especially for the players who come from the top programs. Overall and there is some debate with the statistics, but ESPN reports grad rates at 69% for Division I football. You can see where all the schools individually rank at Scout.com. For reference this year's current college #1 ranked team, Oklahoma, is at an embarrassing 45% graduation rate. When comparing the racial divide between graduation rates of whites to blacks the numbers are even worse. 59% was the graduation rate from last years champion, Auburn. However 94% of Caucasian players graduated compared to the 48% of African Americans. That's a -46% difference! So you better hope these kids have a chance at the NFL, right?? Yeah, hmmm, well at least 90% of the 2500 Division I football players that run out of eligibility never play a single down in the NFL according to this ESPN article. The article is full of NCAA hypocrisy and is a must read. NFL has been known to stand for "Not For Long" and most players don't even make it to "full career" of 5 years. If that isn't enough information for you the Huffington Post does a good job exposing some of the questionable data that NCAA puts together in its statistics about student athlete academics.

Now that we've proven the sham of NCAA Student Athlete academics. The NCAA likes to play upon most of our fond memories of college that most of us share. They constantly talk up tradition and the spirit of history. I love history! Well guess what? The NCAA could really care less with their most recent antics. They have been turning a blind eye to conference realignment for the sake billion dollar TV contracts that the players will never see a dime of. Rose Bowl champion Texas Christian University, TCU will be playing sports in the Big East Conference?!?! Texas A&M is looking to jump ship to South East Conference, SEC. Oklahoma & Oklahoma State are contemplating a jump to the already crowded PAC-12. Why? For the TV contracts of course! Guess what if you are player in one of the big powerhouse schools if you accept any form of payment or trade you are suspended or kicked out of the league. The latest (ESPN) is the star quarterback, Terrell Pryor, from Ohio State was suspended and forced to try the NFL because he received a couple hundred dollars and some tattoos for signing his own jersey of the school he plays for! Meanwhile one injury could've ended his career and his earning potential. He would have little to show for it. However the school would have made 10s of millions on TV contracts, tickets sales, video game sales, memorabilia, etc. I don't have time to rant about the coaches who make millions in the face of their unpaid players....

The more I have looked into it, the more disenfranchised I have become of big time college sports. Worse is I hate the rank hypocrisy that is thrown in your face as a sports fan. And I am a huge sports fan. I am as big of a capitalist as any out there and don't have any problem with any coach or school making money. When you use the government and "non-profit" institutions to manipulate & oppress others so they can't get the same opportunity that's when I have a problem! One of the reasons I am a sports fan and a capitalist at heart is I love competition. However there isn't a level playing field for those that risk it all, the kids/students/players. So let's call the situation what it really is: SLAVERY. South Park doesn't pull any punches when it mocks the whole sham. Enjoy and remember careful what you support when you spend your money and time watching collegiate athletics.

Crack Baby Athletic Association
Get More: SOUTH
PARK Eric Cartman,Kyle Broflovski,more...

Epic Nadal vs Djokovic US Open Final

2011-09-13T00:16:00.000-07:00

This is one of the greatest tennis matches I have seen in a long time. The score doesn't do justice to the pace of play and competitiveness of the match. Djokovic and Nadal played a knock down drag out fight of a match. The crowd was loud like a Davis Cup match and both players were going blow for blow like a pair boxers throwing haymakers at each other. This YouTube clips is one of many great epic points that seem to come at the biggest parts of the match, break points, set points, etc. One of the games lasted over 17 minutes and the total time of the match was close to 4 hours. Unbelievable Final! Enjoy:

Rob Arnott Discusses the Euro Crisis

2011-09-12T07:30:00.000-07:00

Rob Arnott always has interesting insight on the markets and in this video from the Breakout Blog of Yahoo! Finance is no exception. Talking Euro crisis and potential effects with Jeff Macke:

Inside 9/11 a Must Watch on the 10th Anniversary of the Attack

2011-09-10T22:09:00.000-07:00

In my opinion this 2006 National Geographic released "Inside 9/11" documentary is one of the best out there. It tells the whole story from before and during the traumatic attack. The 10th anniversary of the attack is tomorrow and will be on everyone's mind. We should never forget about those that will do us harm, those who gave their lives that fateful day, and those who continue to protect us from terrorists. So if you haven't seen Inside 9/11 please make a point to watch it tomorrow on National Geographic Channel or buy the DVD.

Swedish Model? Nope I'll go with the Icelandic Model

2011-09-08T00:17:00.000-07:00

As much as I would like to debate the pros & cons of hot Swedish models vs hot Icelandic models. I will choose to bring to your attention to the bank crisis models of each country... so sorry to disappoint. I did however provide a photo.

To give you a brief overview for the links I will start with the Swedish banking model. In the late 1990s Sweden had a banking crisis. Instead of kicking the can down the road by bailing them out they put them into receivership wiped out stock holders & made the bond holders take haircuts. After the banks were recapitalized they recovered in relatively short order. Completely unlike our current crisis or please see Japan as the poster child. Barry Ritholtz over at the Big Picture blog has discussed this at length. Please follow the links to learn more:
Go Swedish, part 47
How-to Guide for Fixing America's Banks
Who Bears the Costs of Post-Crisis Recovery?

The Tiny Country of Iceland did the same as Sweden to the chagrin of the international banking community. The British & Dutch governments were also upset because their countries had the bulk of deposit coverage when they failed. In short Parliament via popular sentiment defied the Prime Minister and told the investors in these ridiculously leveraged banks to pound sand. The people of Iceland came out in force to demand that no unnecessary debt burdens would be put on their shoulders. After a short painful process of inflation through the resulting currency depreciation Iceland is on the road to recovery. Real recovery not some debt induced Keynesian short term recovery. The proverbial rip the band-aid off versus slowly pulling it off.. Basically the opposite of Japan, Europe, and the United States' solution. For further information definitely follow the Wikepedia link to learn more.

One more wrinkle to the Icelandic situation and why I will put them over the top on the "model" battle. They are prosecuting those in power that let the craziness of leverage & poor lending practices prevail. Rightly so!!! We still haven't prosecuted anyone of substance for the fraud and excess that went unchecked. Here is the link please read on!
Iceland tries ex-premier over collapse

Amazon's Blatant Bribery

2011-09-05T13:47:00.000-07:00

Do I use/like Amazon.com? Yes!
Do I think California taxes are too high? Yes!
Do I generally think businesses are taxed too much? Yes!
Do I think certain businesses should get special treatment? Absolutely not!

So it's unbelievable to me that Amazon would be so bold to try to "buy" a special tax deal from the state of California. Reuters is reporting that Amazon is offering up to 7,000 jobs if California drops its online sales tax for 2 years.

To me business/capitalism needs a level playing field where competition is key. The businesses are forced to compete by giving benefits to the end consumer of a better product or service. When businesses have an unfair advantage that skews the marketplace. In this instance Amazon has the ability to undercut brick & mortar businesses in California by about 9-10%. (Unbelievable state & local taxes are that high. We get so little for it too) This hurts a lot of small business too. And leads me to the point that is unseen by many. That of course is that large businesses have the unfair advantage of being able to negotiate special tax treatments or deals that small businesses just can't. They also have a vast team of accountants and lawyers that are able to expose the tax loopholes. Not withstanding a lot of the loopholes in corporate tax code is designed to be exposed by "privileged businesses" in privileged industries. The most notable example is all the special benefits and treatments for real estate & construction of late. (Not shocking a disproportional of resources & energy went to fueling that bubble) I feel strongly simplifying the tax code and yes, even reducing tax rates benefit business, job creation, and in particular small business. Many studies have proven that small business is the real driver of jobs, not larger businesses and especially not government.

A note to investors of Amazon. Be careful of the effects of these new tax laws on Amazon's bottom line. Margins are already thin and the share price is already at "explosive growth" valuation with P/E ratio of 92 based on the closing price on 9/2/11. Is Amazon an innovative company in retail & cloud computing? Yes. I will still continue to use them because I hate wasting time driving to the mall and shopping when I can do it from the friendly confines of home. This by no means is a recommendation to buy or sell AMZN. Just make sure to do your homework with this investment or other for that matter.

Bank Regulators Cutting the Red Tape and Screwing the Rest of us

2011-09-01T21:52:00.000-07:00

Caption: "June 3, 2003: Determined to cut red tape and reduce the regulatory burden are (l-r), Office of Thrift Supervision Director James Gilleran, Jim McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, FDIC Vice Chairman John Reich and Ken Guenther of the Independent Community Bankers of America"

Mentioned in William Black's: The Great American Bank Robbery

Hmmm I wonder if this will end badly??? This one you can chalk up to the Bush Administration & Alan Greenspan for leading the charge to make regulators useless. Greenspan was the most egregious by favoring "competition" between the regulators where banks had the ability to choose and change the regulators on a moments notice. So "regulators" jumped over each other to try to win business by being the most lenient. Well they won but America lost.

William Black: The Great American Bank Robbery

2011-09-01T21:19:00.000-07:00

Dr. William Black a former regulator during the savings & loans crisis and white collar crime expert is discussing "The Great American Bank Robbery". I had seen this video a couple of years ago and should've posted it then, but it is just as important now as it was then. I recommend that if you have high blood pressure and get angry easy than please don't click the play button. I wish Black was in charge during the run up of the financial crisis or at the very least be there in 2008-9 to clean up the trash and throw a bunch of these banksters into the slammer. Again nobody from the major banks, brokerages, or mortgage origination companies have been thrown in jail from the pervasive fraud that was perpetrated on the United States & the world!! This is really the most troubling for me because it corrupts our market based economy. I am all for capitalism, but there needs to be a referee and consequences for crime and failure.

Watch the video and spread the word about the fraud!

August... What a month! Now what?

2011-08-31T20:58:00.000-07:00

Today was the last market day of the bumpy month of August. We saw a ton of volatility in the beginning and a market rebound off the lows at the end of the month. Many have asked what are the reasons for the rebound and what is the near future outlook? Besides the traditional oversold bounce from such a violent move downward the market has been helped in my opinion by Ben Bernanke and the central bank signaling/hinting at major monetary stimulus. The minutes that came out recently and the debate during the meeting makes this more of a certainty.

Back in March I discussed my Thoughts on the End of QE2 and what would likely occur in the aftermath. It appears that my forecast has been accurate... so far. It certainly looks like there is high probability of a “QE3” or other major intervention into the markets. With those hints the markets have responded and are up 8% since Bernanke and the Fed met on August 9th. This is playing out eerily similar to what happened last year and could be beneficial to the stock markets believe it or not. However there are some factors out there that may not lead to the same repeat. Three factors that prevent me from getting out of defensive positioning at this point are: 1. that the economic numbers & 2. the European crisis are worse than this time last year. 3. The last monetary stimulus “medicine” was beginning to show some troubling side effects. Side effects like a run up on commodity prices and risky assets. The medicine didn’t prevent the weak economic numbers discussed in factor 1 that were showing up before the stimulus had been withdrawn (6/30/11). In addition I would like to see some technical breakout on the S&P 500 index to show that this August has been put behind us. Until then be careful out there because the bear doesn't look like its hibernated just yet.

Continued Keynesian Policy Failure Undressed!

2011-08-23T23:02:00.000-07:00

A Guest Post (Keynesian Solutions- After Total Failure- try, try again) over at Zerohedge does us all a great service with their undressing our "current" government policy wonks. Current is kinda a misnomer when you consider Keynesian economics have been of every major institution and taught in schools across America since the 1930s! The post is thorough and a must read in its entirety. These paragraphs some it up perfectly:

The Keynesians had their chance. They controlled the Presidency and both houses of Congress. A Keynesian runs the Federal Reserve. They implemented everything they proposed. The $862 billion porkulus program, the $700 billion TARP program, home buyer tax credits, energy efficiency credits, loan modification programs, zero interest rates, QE1 and QE2. They increased social welfare transfers for Social Security, Unemployment Compensation, food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a 35% increase in four years. No one has foiled their plans. The Tea Party didn’t really exist until 2010. They didn’t lose the House until November 2010. They cannot blame the Tea Party extremists, but they do.

The Keynesians have successfully increased Federal spending by $1.1 trillion, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they call the Tea Party extremists. Domestic investment is still 9% below 2008 levels as the Federal government has crowded out the small businesses that create the jobs in this country. And now the Keynesians declare we need more stimulus, more programs, more debt, more quantitative easing and lower interest rates. It just wasn’t enough the first time. You have to give the Keynesians credit. Despite the utter absolute failure of every scheme they have implemented, they will worship their models and theories until they successfully collapse our economic system. Then they’ll blame the Tea Party terrorists who foiled their plans.

None of the Keynesian solutions worked during this crisis, just as they didn’t work during the Great Depression. The solution was simple, yet painful. The banking system needed to be saved, not the banks. The bad debt needed to be purged from the system. Wall Street criminals needed to be prosecuted. Bondholders and stockholders needed bear the losses from their foolish investments. Saving and investment in the country needed to be encouraged, while borrowing and consuming needed to be discouraged. Our leaders have failed to lead. The American people have failed to accept the consequences of their actions. And now we are going to pay a heavy price as Ludwig von Mises predicted:

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

Please spread these posts around as hopefully more and more will demand a stop to this madness. It must be stopped.

Another favorite Merc: Kyle Bass of Hayman Capital

2011-08-22T23:58:00.000-07:00

I am a big fan of Kyle Bass and his insights. His analysis seems spot on again in this CNBC clip:

Geithner doing his best to strangle small business

2011-06-23T23:08:00.000-07:00

After a month long slumber from posting I have been rudely awaken by "Tiny" Tim Geithner boldly admitting to being in favor of higher taxes for small businesses. I found the link through the Drudge Report. Normally I would give the out of context quotes the benefit of the doubt. (Geithner saying taxes need to go up on the wealthy) However based on the actions of this administration and Tiny Tim, I will not give the benefit of the doubt. Mainly that they refuse to address long term structural deficits in the form of entitlements and they add to the entitlements in the form of health "reform". The Obama administration has done nothing to correct the hidden low effective tax rates born by large business. In a sense they will effectively punish the small business owners and the working (productive) wealthy. If you want to go after somebody go after the "helicopter rich" folks ($2mil+) that earn their monies through capital gains (private equity comp), stock options, and other benefits. The constant solution for Obama has been to focus on raising taxes/revenues versus taking care of the spending problems. I don't pray at the "no tax anytime" alter of most Republicans, but the vast majority of the gaping budget hole has to be filled with cuts.

My solution is level the playing field with my version of the Carrot & the Stick. The Carrot: lower corporate tax rates for all business. The Stick: eliminate all subsidies in the form of corporate welfare & simplify the tax code. Loopholes are created and exploited by the larger corporations. Small biz doesn't have the ability to employ legions of lawyers & accountants nor has the ability maneuver operations oversees. This all would be revenue neutral and in time would grow revenues as business and capital infusion will sustain new business activity.

Until there are real solutions that fix these long term structural problems business and individuals will be frozen in uncertainity and we as a country will not be able to heal from the decades of profligate spending & excess. Expect a muddle through economy at best and continued pressure on capital markets absent of temporary government & monetary intervention.

Hugh Hendry's 'Greatest Hits'

2011-05-16T23:23:00.000-07:00

It's been awhile since I have posted... I have been a busy Merc. I do have some posts in the pipeline. In the meantime enjoy Hugh Hendry and his greatest hits video:

Osama Bin Laden the Coward

2011-05-02T22:07:00.000-07:00

There is a ton of different takes on the news of Osama Bin Laden's death. What I will add to the mix is something others have stated before this weekend's news. Basically Bin Laden is an absolute coward confirmed with where he's been "hiding" the past 5+ years. This is not a "freedom" fighter battling in the front lines with his "troops". He was certainly not a field general living in caves in a tough environment. Nope this born into luxury pile of horse excrement ended his life in luxury before the seal team double tapped him in the dome. Living in a resort town confirms the fraud as he always was. 72 Virgins... nope there is a special place in hell for this asshole.

Is Obama Serious?

2011-04-24T21:20:00.000-07:00

President Obama ceases to amaze me with Yahoo News' report "Team to probe oil market fraud, manipulation." Talk about a red herring issue. Seriously Obama!?!? Oil market manipulation??? How about the fact your government's borrowing 40 cents on every dollar spent? The last couple years have been some of the largest deficits in the history of the United States. Or perhaps its the Federal Reserve Bank blatantly printing money over the last couple of years? Unbelievable that folks don't call him out on this chicanery. The same ol' politics as usual is one of the most disappointing issues that I have with Obama as president. He promised "change" and its been anything but when it comes to transparency and shifty politics.

Tax exemptions for Munis in Jeopardy?

2011-04-13T23:04:00.000-07:00

The Bond Buyer reports on congress looking into possibly doing away with the tax exemption on new Municipal Bond offerings. This is a risk that most will hush away as an impossibility. However Investment Mercenary favorite Jeffrey Gundlach hasn't nor have I. See: Gundlach: Two Ways to Lose in Munis

Senators Ron Wyden (D) & Dan Coats (R) introduced tax-reform legislation to eliminate the tax exemption. They would institute in its place a tax credit scheme to allow certain tax advantages with the bonds. If the budget deficits continue with no realistic plan this sacred cow for high tax states & investors could be in trouble. The budget problem is dire as I outlined in the post: Budget Crises Averted??? To fix the mess nothing will be safe when it comes to cutting or raising taxes.

Here are the consequences I see initially if this was ever to pass.
The Bad:

Municipalities would see their interest costs go up significantly
At this current time it would crater an already skittish market
Less benefit for wealthy individuals to fund municipalities
Municipalities would be forced to compete with other debt financing in the market place

The Good:

Municipalities would be forced to compete with all other debt financing creating a level playing field
Competition would force municipalities have the same stringent accounting as other bonds
Lower income investors would receive a much better yield that leads to a better tax benefit

My initial take would be that it in theory this could work as an overall benefit. What wouldn't, as it states in the article, is adding different tax rates and making our tax code more convoluted. As an aside I find it humorous that the politicians that are proposing this are the ones who's state's would have the most to benefit. Neither of their states have high personal income taxes. In fact Senator Wyden's state Oregon doesn't even have an income tax. Regardless don't right this or future legislation off that could effect muni tax-free interest.

Fukushima nuclear accident is now at the same rating as Chernobyl.

2011-04-11T22:52:00.001-07:00

Today's news of Fukushima getting the same severity level as Chernobyl is a big deal. A very big deal. In a months time the Soviets had mobilized 500,000 troops & "volunteers" to fight the meltdown in Chernobyl. Japan has a few hundred people working on it. Oh by the way Chernobyl had one reactor meltdown versus at least 2 of the 6 reactors at Fukushima. Crazy people aren't more pissed about the lack of transparency & effort from the Japanese government. The good news is the amount of radiation released is supposedly 10% of the levels of Chernobyl. The bad news is the problem hasn't been contained in Fukushima. The silver lining to this news is that by recognizing the severity of the situation (albeit late) Japan and the world can mobilize with maximum effort.

Bloomberg is on top of it with more details.

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Arnott: Market Hyped Up on Stimulus

2011-04-10T22:26:00.000-07:00

Another great Mercenary is Rob Arnott of Research Affiliates. His viewpoints are always welcomed and this Morningstar video is no exception. A key part in the interview is at minute 2 as he expresses his caution and thoughts on the Stimulus. Where he explains his concerns of $4 Trillion of borrowed stimulus getting a measly 1/2 Trillion in economic output. Well put Rob!

Arnott: Market Hyped Up on Stimulus

Budget Crises Averted???

2011-04-09T12:35:00.000-07:00

Congratulations to our fine politicians for working long hours to come together to make a budget for 2011! Problem solved, we can all go about are daily life... Poppycock! They say a picture is a worth a thousand words and Michael Ramirez's Political Cartoon from IBD is no exception to that rule. I thank Barry Ritholtz's Big Picture Blog with finding this gem and calling it: "Our Absurd Budget Debate"

My take on it is simple and is best summed up when I talk to different people about it.
Liberal Friend: "We need to not spend as much on defense and foreign wars"
Hunter: Yes you are 100% correct!

Conservative Friend: "We need to cut spending on entitlements like Medicare & Social Security"
Hunter: You're damn right we need to!

Liberal Friend: "If our country eliminated the corporate tax loop holes & corporate welfare/subsidies we could start to get this budget under control."
Hunter: Absofucklutely we should do that and create a level playing field for business! I'm looking at you General Electic!

Conservative Friend: "Our government bureaucracy has grown so large and bloated we need to eliminate programs and privatize where we can."
Hunter: You my friend are preaching to the choir!

Liberal Friend: "We are going to have to increase revenues in the forms of taxes."
Hunter: Damn, you are right. I don't like it but we are going to have to fix this mess. I say we eliminate some of the 3.8million pages of IRS tax code by getting rid of a ton of deductions and raising the effect tax rate. Taxes are going to have to go up in one form or another.

Conservative Friend: "The country/states/cities spend too much on inefficient unionized government workers that have higher pay and outrageous benefits compared to those they take from in the form taxes."
Hunter: So you're saying that we shouldn't pay somebody more in their lifetime for not working (pensions) versus working. Then not allow them to collectively bargain against the "people" where there is no alternative, but to be forced to work with the union & its demands. It sounds like there is zero competition. Well that doesn't make sense at all. Why wouldn't anybody want to curtail their power and cut where you can? That's brilliant!

Well what does this dialog sound like? It's AUSTERITY and its coming to a neighborhood near you. We can deal with our problems by easing into austerity and "lick our wounds" over time. Or we can continue to procastinate and get 100% Austerity sooner then we think when our economy & government collapses. Then we might be looking at possible a deflationary depression or a hyper-inflation crisis. Not fun.

I don't find these problems and solutions difficult to identify no matter what political side of the fence you come from. We all have to live together so let's come together and fix this mess. The sacred cows of both political parties will have to be put to the alter! People should be pissed off and demand this political charade stop!

Footage of the Highway to Fukushima

2011-04-08T22:23:00.000-07:00

Hat tip to Zero Hedge for finding this alarming video!

Gundlach: Two Ways to Lose in Munis

2011-04-07T22:42:00.000-07:00

More Gundlach from Morningstar's interview and this time discussing Municipal Bonds. I agree with Gundlach. My take is that yields are better then last year this time, but there is pain to be had. There is going to weakness in price and most muni bond holders are not accustomed to volatility. The panic will create opportunities because most bonds should survive the crisis. I have warned folks if they are confident in their holdings and can stomach "paper" losses they should be okay. Those that are more tactical it makes sense to have some dry powder ready for the next 12-18 months. That could be said for a number of different asset classes... Anyways enjoy Gundlach and his new facial hair.

Gundlach: Two Ways to Lose in Munis

Gundlach: Stock Market Will Have Trouble Topping Bonds

2011-04-06T21:02:00.000-07:00

The Mercs are always a fan of anything from the bond maven Jeffrey Gundlach. Follow the link and enjoy!

Gundlach: Stock Market Will Have Trouble Topping Bonds

95% LTV hurray for Australia!

2011-04-05T22:50:00.001-07:00

As I'm working on part 2 on my aussie housing bubble problem I stumbled upon this brief headline from the online/magazine publication The Advisor: industry news for mortgage and finance brokers. Which by the way is gold mine of all things bubbly in Australia. Do not think this will be the last time I will post something originating from this publication! The link below is an article talking about one of the majors joining the ranks of 95% LVR or what we in the states call Loan To Value (LTV).

"The Commonwealth Bank has become the latest in a long line of lenders to increase its maximum LVR. Over the weekend, the major announced it would allow all new mortgage customers to borrow up to 95 per cent of the value of a property."

"CBA’s general manager retail products Michael Cant said the decision to increase its maximum LVR was a response to growing competition for a smaller number of borrowers.

“We are certainly looking to grow our lending to the home loan market,” he said."

http://www.theadviser.com.au/breaking-news/5019-major-increases-max-lvr

The money part of the quote: "...was a response to growing competition for a smaller number of borrowers." Umm that sure sounds like a ponzi scheme to me! They seem to be running out of greater fools and they need to ratchet up the risk another notch to keep this thing afloat.

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Radiation Dose Chart

2011-04-05T00:14:00.000-07:00

Follow the link from the Big Picture blog to get an idea of radiation dosage. I have been meaning to post this for some time...

It puts these posts into prospective and is a good guideline for what's going on in Fukushima
-Footage of the Highway to Fukushima
-Best/Scariest Chernobyl Documentary: Battle for Chernobyl

Link Source:
http://www.ritholtz.com/blog/2011/03/radiation-dose-chart-2/

Best/Scariest Chernobyl Documentary The Battle of Chernobyl (HQ)

2011-04-04T23:57:00.000-07:00

The Housing Bubble isn't gone it just moved; Part 1

2011-04-04T22:08:00.001-07:00

I find it unbelievable that after what the US & Europe have been through over the last 4+ years with the housing bust that folks around the world would be more vigilant to preventing it from occurring. Well at least temporarily from occurring. History teaches us that humans are bound to repeat similar mistakes. Mark Twain's quote says it best, "history doesn't often repeat itself but it sure does rhyme". Anytime I can quote Twain I take that opportunity! Well the shocker in all of this is Australia hasn't learned 1 bit from the suffering of Europe and the US. Their major banks have all the greatest hits from the housing bubble. I am going to pick on one of their banks but most of them are doing similar irresponsible lending practices. Hell they are trying to out compete each other in the quest of market share without regard to the consequences.

I am going to feature Westpac Bank Corp one of the larger Aussie & New Zealand banks out there. All of this information I will be commenting on is in plain sight and can be gathered on Westpac's website. First I will rattle off some of the terminology like the Rocket & Flexi First Option Loans. Interest Only up to 10 years with Low Doc loan Applications: "If you're self-employed and don't have documentation proof, we can still help." Combination loans that combine a fixed and variable component to the loan. 100% offset loan accounts that act like a margin account. Then a laundry list of different options of: Top-up, Redraw, Portability, Repayment Holiday, Parental Leave, Reduced Repayment, Progress draws for Construction, Smart Pay, and Funds Access. Wow! That my friend is a lot of financial innovation. Now granted some of the options can be useful and are nice. You can put lipstick on the pig, but a pig is a pig. Guess what? Debt is still debt no matter how you dress it up too.

I am in debate with a leading Australian bank analyst and he has passed on some of his reports countering my belief that Housing Bubble in Australia is a major danger. After I look through it I will pass on some of the findings.

*Disclosure: No position in Westpac Bank corp as of the date of this post

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The Mercenaries are now on Twitter!

2011-03-19T16:30:00.000-07:00

Come follow my tweets on Twitter.

@InvestmentMercs

Quantitative Easing Explained

2011-03-19T10:13:00.000-07:00

Thoughts on the End of QE 2

2011-03-14T00:46:00.000-07:00

Merrill Lynch's Jeffery Rosenburg came out with a fantastic research report on February 16th titled "Double Rainbow". It was an excellent report plus it made me laugh. Unfortunately I can not post it here, but it inspired me to jot some thoughts down of how my best guest of the end of QE2 will play out. Here are those thoughts:

It’s going to get real interesting this summer as QE 2 is schedule to stop. The markets more than ever are being driven by government policy. As a market purist I am not too comfortable with that, but it is what it is. The $100+ billion/mo of “jet fuel” being added to the system through QE 2/POMO is a potent medicine and it has worked thus far. Asset prices are up and company balance sheets are better than they have been in awhile. The wealth effect is beginning to work as “retail” has started the inflows into Equity Mutual Funds. This could carry the market beyond June, but any speed bump (like the Greece crisis after QE 1 or the current middle east turmoil) could scare retail out again. Some research speculate that with the state of the current US deficits it is impossible for the Fed not to start up QE 3. All of these factors can be viewed as positive.

The flip-side is that there is more and more political/international pressure against continuing that policy. The Fed is not getting the desired “good inflation” in housing. Plus the side effects of the medicine are starting to show up in spots that the Fed can’t be too happy with (food, energy, precious metals, etc.). This should have a detrimental effect on an already over levered consumer. Will companies be able to push that commodity inflation on to the consumer without any ill effects? Pricing power has been weak thus far and that has to be concerning to margins. Leverage is still prevalent in the system and deleveraging hasn’t or (better yet) allowed to take its course. I see more cons than pros.

Right now I am bubblish and will hunker down May/June to see how things play out. For fun… my “crystal ball” says that June/July we see the S&P 500 meet a lot of the economist 2011 year end predictions. However by late summer we should see a correction of about 15% and the bearded one institutes QE 3 with an initial market reversal to the positive side. (I don’t think Bernanke will institute QE 3 without a little pain to back him up.) My grand fear is this time it doesn’t work because of the previously outlined bad inflation, margin collapse, higher rates, asset price exhaustion, etc. Plus most of stimulus 2.0 will wear off in 2012 and then we are back to the feared potential tax hikes in 2013. I don’t see what bullets the Fed has to use at that point and we see another bear market with downside of around 30%. 2012 will be a tough year indeed.

My New Blog: The Wedge Effect

2008-12-21T20:03:00.000-08:00

Believe it or not I am back blogging! This time I have been motivated with the unintended consequences of all of this government intervention. The Wedge Effect is the increase of interest rates and risk premium of all other capital assets. I will be reporting on the effects and also current events that relate to a more intrusive government in our markets. Take a look:

The Wedge Effect Blog

Time permitting I will continue to blog for you mercenaries out there.

The Media Misses the Forest from the Trees with Sub-Prime Scare

2007-04-25T21:34:00.001-07:00

Is it me or is the Main Stream Media (MSM) taking the easy way out on the deflating housing bubble. We have finally passed the stage of denial of the falling values and are now approaching acceptance of them. Most likely by the fall of 2007, we'll be moving on to panic stage after a dismal spring-summer peak buying season passes. Currently the easy way out to explain why home prices are falling and our economy is slowing is to blame it on some shady loans in sub-prime. If you came from another planet and began reading today's business news you would think the entire housing bubble could be blamed on the segment of sub-prime and shady loans. However the MSM is completely missing the forest from the trees because it was a convergence of numerous factors that helped spur massive home speculation.

Yes problems with sub-prime are showing up now, but it was only a symptom of the great housing bubble not the disease. Plus the real shady loans, 110% financing, 40-50yr mortgages, neg-ams, and ninja loans (no income-no job-no assets) haven't even reared their ugly head yet! They showed up around 2005. Why did this happen, well I will tell you why. From 2002-04 a massive amount of people were hired to meet the demand for new homes, refinances, and other real estate activities. This just led to a feeding frenzy of increased real estate activity as more and more people fueled the rise of prices and the rise of the Real Estate Industrial Complex. No Dick Cheney and the black helicopters were not behind this, it is just an easy way to describe everyone (REIC: agents, lenders, builders, title, escrow, appraisers, etc) that has vested interest in real estate activity. Continuing: Greed took greater hold with speculators buying 2nd, 3rd, and 4th homes which artificially inflated prices and created jobs for the REIC. While the REIC reciprocated and encouraged more and more speculators and buyers to join in. In economics this is your typical multiplier effect. As values skyrocketed home affordability was falling like a rock. But REIC and the general buying public didn't want the gravy train to stop and that is where the true sub-prime stepped in to extend the bubble for another year and half.

Here is a simple way that the media should be describing the entire situation out there: The housing market got way ahead of itself and now its coming back to earth! The simple economic term says it all: revision to the mean. Or here is yet another way of putting it: the housing bubble was one big bender of a party and now the inevitable hangover is here. Those at the party tried in vain to keep it going with redbull/vodkas, cocaine and on the housing side you had low rates, creative financing, and general propaganda. Now they enter the long and drawn out hangover which for housing means long periods of price declines to high inventory from inactivity, etc. Ahhh, but I digress.

So when somebody tries to blame this housing decline or anything else for that matter on just one factor, take it with a grain of salt. There are a lot factors to this housing hangover and there is a lot of blame to go around: Greenspan & his artificially low rates, Bush's idealistic ownership society, sub-prime, REIC, yen-carry trade, a greedy uneducated public, black helicopters, etc. America and the media need to wake up and take responsibility for this mess that we all had some stake in creating! One tree of this mess is sub-prime, while the forest are all these factors together that created one of the largest bubbles of history, the late and great housing bubble.

Inflation & Ski Resorts

2007-04-11T22:04:00.000-07:00

Has anyone noticed the recent proliferation of higher and higher ski pass prices. Within in the last five years I have seen prices in Tahoe go from the high $40's to around $70 a ticket. The worst in my opinion has been the escalation at Mammoth Mountain. In little over 4 years their tickets have gone from $61/day to $80/day. That is an inflation rate of 7% and who knows what the increase in price will be with the new renovations they're doing. I have one of their discount season passes that has gone from $499 to $550 this year alone!

Yes this anecdotal evidence, but this inflation problem is starting to rear it's ugly head in more places. Even more worrisome with inflation is it's a lagging indicator meaning we are getting the hangover from the easy money over the last 5 years. Too much money following too few goods. Now that our economy has slowed down we are left to play in the mess Greenspan made (http://themessthatgreenspanmade.blogspot.com) at the turn of the century. Welcome to Stagflation! Stagnate growth + inflation of the 1970's.

Before you go play hopscotch on the freeway, remember domestic company balance sheets are in great position and are economy is more efficient then ever. The effects of the past monetary binge and now the housing crash are going to test our economy. So far the economy is with standing the onslaught....

The Truth about Executive Compensation

2006-10-25T00:19:00.000-07:00

I am getting a little off track, but this is something I have wanted to blog about for a long time. Thanks to Keith over at Housing Panic, "The Housing Bubble Blog with Attitude" I have been inspired to write about this subject. Here is the link to his post and to one of my favorite blogs:

http://housingpanic.blogspot.com/2006/10/petscom-all-over-again-as-reic-starts.html

His post is in response to the Countrywide CEO Mozilo, who was compensated $160 mil last year. Now I am no friend of the Real Estate Industrial Complex (REIC). I am almost positive there will be Enron like hearings in the near future in regards to fradulent real estate practices. My post however is in regards to all executive compensation and how populist regulation can have the opposite effect. The problem with over compensation is a result of the proliferation of stock options. However this is only a symptom of the real disease which was the cause and effect of liberal "tinkering". The main source of the problem is a law that was passed by President Clinton & his Democratic congress in 1993. As with most liberal policy it sounds good on the surface and means well, but of course had the opposite effect. Did you know that currently companies are prohibitted from deducting any salary of $1 mil or more? Well in 1993 congress passed the law, which is now part of section 162(m) of Internal Revenue Code, in response to the public uproar of compensation paid to top execs. This effectively created a boom of stock options for execs & employees (mostly execs). Plus congress exempted incentive-based pay from this law and the IRS ruled that option grants was incentive-based pay. This is why there is more excessive compensation than ever because companies can pay them for "free", by just issuing out more stock. Most executive compensation is well over 80% stock options. Big fund companies and fellow executive stockholders rarely complain about these options. Now if the liberals didn't tinker & regulate then most of the compensation would be in the form of salary and be put on the balance sheet for everyone to see. Leave it to the government to screw it up.

The countrywide CEO is a prime example of what is wrong with the system. Pump up the stock or ride a bubble and then cash out and let some other poor sucker deal with it. Coincidence with the internet boom, you bet. That is why congress needs to abolish the law on executive compensation. It seems ass backwards, but it's the obvious solution.

Why Real Estate Investing is Just Hype

2006-10-22T10:52:00.000-07:00

This post is a counter to all of the hype surrounding the real estate “investing” world. It is now almost commonplace to hear ordinary Americans looking at real estate as an investment instead of a place to live. What they don’t realize is the deck is stacked against them in regards to costs & returns. Real Estate has suddenly turned into a one stop shop for all things including an ATM/Bank, children’s college savings, retirement account, etc. Well here are my problems with single family home dwellings as an investment properties (multiple properties) for most Americans.

Operating/maintenance costs are high: This is probably the most significant overlooked cost for investors. Yes there are interest & tax expenses and yes they are tax deductible, but it costs money. Plus your interest rates are going to be higher because the home is non-owner occupied. Then you have the choice of having a management company or yourself taking responsibility of your tenants and their needs. There is a cost which can range from 15-30% of your rental income. Or you can utilize your time and liability risk to do it yourself. Remember not all tenants are created equal and a horrible tenant can become an absolute nightmare and sap your time. If you bought an older property, be prepared to dole out some cash for major repairs.
Buying costs you time and money: This is also underestimated because most folks believe the costs are taken care of by the seller. Guess again they are some hidden ones. Most notably an agent will have a conflict of interest to only show their broker/companies listing. This can lead to paying more for a property. Also there is the costs of your loan which can range anywhere to 1-3% of the sale. The time spent buying house can be substantial when considering: looking at all properties, haggling with the seller on price & contingencies, and getting all of the inspections & paperwork done.
Selling costs you time and money: Here is what really gets you when you decide to finally sell your investment property. You will be looking at an agent’s fee of close to 4-6% off the sale to get listed and marketed. God forbid you have to sell in a market like 2006-‘07 or you can add closing costs to that fee too. Then of course there is the time and energy to get your house in shape and to show it constantly. Another little known issue is your house just got a couple years older, while newer and better houses are entering the market.
No capital gains tax breaks for non-owner occupied homes: This is the most glaring issue, especially for flippers. This will literally eat what ever profits you have left after the aforementioned costs. Your capital gain is going to be taxed at ordinary income rates. This means you’re going to be taxed at federal & state level from 25-46% on your gain depending on how much you income and if your state taxes you.
The returns are mostly based on extraordinarily high amounts of leverage: For almost everybody you have to be leveraged with a down payment of around 20%. In an up market that can turn a 5% home value increase to a rate of return of 20%. Well guess what happens if the home value goes down 5% when you want to sell? Now you have a 20% loss. Hmmm your value goes down 10% and you’re looking at 50% loss on your money. But housing always goes up right? According to Yale Professor Robert Shiller prices have only increased at rate of under inflation of 3%/yr. (the long term data is very difficult get a reading on because houses were much smaller in the 1950’s compared to now)

Again I am not advocating that nobody should invest in real estate, but that people need to realize that there are better investments out there instead of a 2nd or 3rd home. I believe real estate investing becomes more attractive if you are a real estate agent, mortgage broker, contractor, etc. because you are able to get some rebates into your investment. Also if this is your primary job, you do it on a daily basis, and you have the time to invest. Most folks are not able to dedicate adequate time to real estate because they have a regular job. A house is a place to live and homeownership is great for that. So lets all keep that in prospective.

Public Debt vs. Personal Debt

2006-10-10T21:27:00.000-07:00

The idea behind a democratic nation, is that it should be reflective of its people. This is the case in regards to the United States and her people. However when it comes to American spending habits this is definitely an unwanted correlation. Why? Well for one thing the monthly US household savings rate have been negative multiple times over this last year (savings rate of -0.4%). This data is tracked over at the Commerce Department's Bureau of Economic Analysis. The worrisome issue is that our Federal Government is on the same path. However how can you blame one without blaming the other for financial mismanagement. Here are some statistics on the US public debt in terms of Gross Domestic Product or GDP , according to the CIA Factbook.

The United States Public Debt: 64.7% GDP (2005)
French Public Debt: 66.2% GDP (2005)
British Public Debt: 43.1% (2005)
Swedish Public Debt: 50.4% (2005)
Chinese Public Debt: 24.4% (2005)
Japanese Public Debt: 158% GDP (2005)
Bangladeshi Public Debt: 44.5% GDP (2005)

What do these statistics tell us? For one our debt level is the same or worst then some of the major European nanny states. We have 3x the public debt of that of China one of the emerging super powers. Japan on the other hand has 1.5x more public debt then we do in the US. Forshadowing??? Well Japan was put into difficult economic times in the early 1990's with a stock market crash followed by a major housing crash and then subsequent deflation. Remember they went into deflation with massive governmental expenditures & a central bank cutting interest rates to effectively zero! What can we learn from this is that Japan went to a more socialists slant with heavy deficit spending on social & government programs. They have been in a 15 year slump and only when former prime minister Koizumi put forward real reforms aimed at pro-business and the break up of the giant governmental institutions have they shown signs of life.

We are most likely in for some troubling economic times due to a variety reasons including a debtor society. The government in our case is really representative of its people. However usually people in rough economic times cut spending and so should the government. Government rarely cuts spending and either cuts taxes or raises them. Why is it so wrong for them to cut frivolous spending? American consumers will likely cut its frivolous spending on Hummer's, plasma TVs, and granite countertops. SO I would hope the government will cut its frothy bureaucracy and little used social programs. This investment mercenary isn't holding his breath....

Stock buybacks & what it might mean

2006-09-01T02:15:00.000-07:00

Here is an excerpt from the Wall Street Journal 8/27 by Scott Patterson:

"If businesses move to pay out more of their earnings, investors will reap a windfall. But corporations have increasingly been either hoarding their cash or using it to buy back shares. The rate of dividend increases has recently shown signs of slowing down, while share buybacks are surging, says Mr. Silverblatt of S&P.

In the second quarter, companies in the S&P 500 put more than $116 billion into buybacks, up 43% from a year ago. Dividend payouts were up 11.1% from last year, to $54.5 billion. "

Be afraid, very afraid. Look at all the stock buybacks from a lot of the major US companies. Most recently the $3 Billion buyback from Boeing. That is an important signal because it shows that companies don't want to invest, take on risk, or extra capacity. Why? Because they feel there is going to be a major economic slow down and are preparing accordingly. They are hunkering down for the winter my friends and so should you.

On the flip side this why being a shareholder of a stock can be advantageous. Buybacks & dividends are the benefit of being one and is the company's way of giving back and rewarding your investment.

Source: wsj.com, 8/27/2006

An old Chinese curse: "May you live in interesting times"

2006-08-15T21:55:00.000-07:00

This curse is the dilemma that we live in currently. The go-go days of the 90's are over. We now live under the threat of World War III with Islam. In my humble opinion it has been ongoing in which we are reminded constantly like last week's foiled British airline bombing. What does this have to do w/ investments? America is still living with the mind set of the 1990's. Everyone is living in a dream world where you can get rich quick whether it was the tech boom, housing boom, commodities boom, etc. Folks are spending money way beyond their means and living paycheck to paycheck. The margin for error is getting slimmer by the minute.

An alternative way to invest in these times can be the variable annuity w/ living benefits. The beauty of this investment is that you can invest in mutual funds within the annuity and the insurance company will "insure" your investment. There are essentially two layers of protection that they can give you: Death Benefits & Living Benefits. Death benefits are utilized by those that are looking for estate planning techniques for their heirs. My focus today is on the living benefits that can guarantee a certain rate of return for a specified time. Two riders that can help protect your investment are known as the guaranteed Minimum Income Benefit (GMIB) and the guaranteed Minimum Accumulation Benefit (GMAB). I am going to use the GMIB for an example: John Doe, a 50yr old, puts $100,000 in a Variable Annuity and elects the GMIB rider. The rider in this example will guarantee a rate of return compounded 5% for the next 15yrs. So lets say when Mr. Doe at age 65 decides to retire and his account loses money and is only valued at $80,000, he's screwed right? No because the GMIB account is at $200,000. That's the beauty of this type of investment. If the markets in the future react like they have always done in the past you will never have to use this rider, but it is there for reassurance.

So what's the catch? There are a few of them.

This annuity and rider will cost you 2-4% in fees. Finding one w/ low fees is paramount and these extra fees might be worth letting you sleep easier at night.
The rider's protection will only last for about 10-20yrs or only give you a maximum of 200-300% appreciation. That is why annuities are better for your 45-60yr old demographic.
You must give up liquidity and keep you money with the insurance company. If you leave the company the benefit goes away. People needing the money within 8-10 years should look elsewhere
In order for the benefit to be activated you must annuitize (take distributions) which locks you into the contract permanently.
The guarantee is only as good as the insurance company. If the company goes belly up you may not get that guarantee, so invest in big highly rated companies.
The US stock market has never lost money in any 15 year interval since 1926. Do you really need the protection?

I still believe and invest in capital markets, but for those that are more risk averse and don't want the low returns of cash or CD's this is a viable alternative. Please look at the find print (prospectus) and shop around to interview brokers & advisors. Since there is so much fine print your going to have to really go out on the ledge and trust in who you go with. Use your gut feeling and if they don't mention the downsides runaway! If you have a question feel free to leave a comment about it.

California Foreclosures up 104.4%

2006-07-31T22:48:00.000-07:00

The Los Angeles Daily News has come out with a new article about California foreclosures increasing 104.4% from a year ago. Granted the foreclosure rates were abnormally low over the last couple years, but nevertheless, it is the trend I am following. Follow the link below:

http://www.dailynews.com/search/ci_4099727

These are dangerous numbers that are trending upward at a rapid pace. Here is a perfect example of a mercenary in the article:

"While the nation's foreclosure rate has certainly shifted into a higher gear since last year, low unemployment and home price appreciation in most housing markets have held foreclosures in check," Saccacio said in a statement.
The company forecasted a slowdown in foreclosure rates in its first quarter report and now expects that if the summer delivers its typically high number of home buyers, rates won't increase too rapidly.

This mercenary Saccacio is the CEO of RealtyTrac.com and guess where his interests are.... The spin that this fella tries to put on these horrible numbers is amazing. I think we already know what the summer has brought and that is less buyers and more inventory. Expect housing to continue its decline with a few hopeful bounces in the process. Unfortunately these bounces will only hurt more homeowners because it will give them the false reality of future increases.

A common question that I have come across is: "where do I get access to the foreclosure market" or "when is the best time to go after foreclosures?" Well my answer has been that you need to wait for a large sustained glut of foreclosure inventory. When I mean "sustained" it has to be at least 2yrs and when I mean "a glut of inventory" it needs to 5x larger then normal. Why? Well the reason people can make money on foreclosures is because the banks own the house. Banks are definitely not in the business of holding, buying, or selling property and will unload a house below a depressed market value. Right now house flippers and real estate "investors" have the foreclosure market relatively saturated because they see this as the next great thing. Go ahead and do a web search on foreclosures to get an idea of what I am saying. Remember in foreclosure auctions your buying the house as-is. There is some risk in this with termites, mold, foundation issues, etc that can make your new acquisition worthless.

Be forewarned!

Article Source: Los Angeles Daily News

Increase of Minimum Wage = Even More Inflationary Pressures

2006-07-29T13:18:00.000-07:00

Rumor has it that there are votes in the house for a potential increase of minimum wage from $5.15/hr to the proposed $7.25/hr. I know the intentions can be good, but this will have a major effect on the weakening economy in the form of slowing growth and fanning the flames of inflation even further. Legislation like this are what can be the straw that breaks the camel's back. I think the timing for this is very troublesome. Plus states like California already have increased their minimum wages and plans to further increase it.

High wage inflation can have devastating results when mixed into the economy as a whole. Especially during this time when we see inflation rising in almost every indicator: headline, core, CPI, PCE, unit labor cost, wage costs, ECI, etc. I hate to be so negative, but we are entering a time of Stagflation (stagnant growth - high inflation) and possible recession. Expect a bumpy ride for at least the next year, the question of how long and bumpy remains to be seen.

Startling Numbers with Higher Interest Rates

2006-07-06T12:22:00.000-07:00

There has been a lot of talk of the housing market bubble and when it will pop, etc. I do not have a crystal ball, but I will say this, the market in the next 2-3yrs in for a major correction. Unlike the liquidity of the stock market the housing market is slow to move and we will not see the repercussions until really 2007. We are seeing the beginnings with a massive increase in inventory. I have put together some numbers over the last year to show how the interest rates are going to contribute to this correction.
Last year at this time:

Fed rate was at 3.25%
ten year treasury bond was at 4%
prime was at 6.25% (Adjustable Rate Mortgage based on)
30 year mortgage fixed rate was at 5.5%

Now today these numbers have changed drastically:

Fed rate at 5.25%
ten year treasury bond at 5.25%
prime at 8.25%
30 year fixed rates at 7% (APR)

So what do these numbers mean to you? Unless you're a finance nerd like me, then this means absolutely nothing. So let's put it in terms we all can understand: How much is this going to cost me?

Last year if you were looking to buy a $500,000 home with 20% down:

$400,000 loan amount
5.5% 30yr fixed
$2,271/mo

Now another way of looking at that number is what with today's rates of 7% would the payment of $2,271/mo get you house wise?

A $341,348 mortgage or
$426,685 house instead of a $500,000 house
That's a 15% decline in purchasing power!!!

Has your job given you a raise 15% in the last year? For most American wages have been stagnate over the last 5 years. If you have an ARM loan depending on several factors you're going to have 16-20% decline purchasing power. Let's see what happens if you go 100% financing:

$400,000 5.5% fixed loan
$100,000 6.25% Interest Only Equity Line
$2792/mo

With today's rates lets see what $2,792/mo gets you?

$341,348 1st mortgage
$75,758 2nd
$417,106 house instead of a $500,000 house
That's a 17% decline in purchasing power!!!

The market has yet to price this in to the real estate market, but when it does you can expect a minimum 20% decline over the next year or two. These numbers a just based on the increase of rates, they don't even take into consideration the froth of the market and the unusual appreciation over the last 5-7 years. The numbers don't lie.

Rates for Developed Countries

2006-06-10T00:02:00.000-07:00

Here is what central bank rates have been doing over the years. You can really see how low the US went in comparison to the rest of the other countries. And why the years of easy money is now taking effect in the form of inflation. Like a giant oil tanker that takes a long time to turn, the fed has a similar feel for the delayed reactions when it comes to raising & lowering rates.

Image Source: WSJ.com

Reagan & Volcker vs. Bush & Bernanke

2006-06-04T21:44:00.000-07:00

There have been a lot of questions & guessing on what the future holds with respect to inflation and whether the Fed will continue to tighten. I feel it is necessary to put my two cents in and cover it by an angle that nobody else has seen. My opinion is that inflation is here and will be with us going forward. We have been blessed to have a 20+ years of low inflation brought on by Ronald Reagan's reforms and Fed Reserve Volcker's monetary tactics. Their successors have more or less followed the same path that those two had set forth. The fiscal path of less taxation & government and pro business & globalization of George H. W. Bush, Bill Clinton, & George W. Bush. Also the monetary path that Greenspan and now Bernanke have followed is an aggressive and occasionally activist Fed chairmanship that fought inflation hard. So why are we not in perfect harmony with a philosophy that has had such great success? One would think there would be no need to worry about inflation because we know how to fight it. Well like our bacteria friends that can stay contained for some time, all it takes is an opening. And they, like inflation, expose the host's weakness at a torrentual pace. A trifecta of events has converged to create a gaping "hole" for inflation to come through. These three factors are a maturing globalized economy, Bush's fiscal policy, and Greenspan's monetary policy.

During Reagan's time the framework of a globalized economy came to America. Japan was putting pressure on the US economy with cheaper better built goods and technology. Taiwan and parts of east Asia were major manufacturing hotbeds. The US economy adapted and the economies were working together where made in USA was no longer as essential. George H. W. Bush pushed for NAFTA and Clinton followed through with it. Clinton also "opened" up China to the west and into a major trading partner and manufacturer. The technology & information revolution brought the world closer together and allowed for aggressive competition. Businesses were able to utilize technology into coordinating raw materials, parts, manufacturing, shipping, wholesale, and retail into effective supply chains that were a part of global landscape. Prices during the 1980's-present were being pushed down by technology and finding cheaper labor. From Japan, Taiwan, East Asia, parts of Latin America, South Korea, Eastern Europe, China, and India capital would find the cheapest labor. However with these emerging market economies GDP growing by leaps and bounds wage pressures have followed suit. Has the developed world lost its sources of cheap labor? In the short term yes. You look around the globe and parts of Latin America, the underdeveloped and unstable world of Africa, and the politically backward and anti-growth Middle East economies have a long ways to go before they can be fully integrated as a partner (not just an exporter) in the global economy. Suddenly a factor of keeping inflation low is no longer in the equation.

George W. Bush's major tax cuts have been a major and effective economic stimulus that has helped rescue a free falling economy. However the cuts were not followed by any real cuts to government programs and spending. So in a sense a flood of money entered the economy financed by the treasury department and foreign treasury holders. The administration has caused the twin deficits to form which has been at the heart of the trouble the value of the dollar has been having since the turn of the century. I am always in favor of putting more money in individuals hands then the inefficient and bureaucratic government, but there needs to be cuts too. This major influx of cash was efficiently put into the consumer wallet and began the multiplier effect. By itself the policy is solid, but with the other two major factors it creates a perfect storm.

Alan Greenspan in 2001 saw a weakening economy pumped up by a giant peace dividend and a stock market bubble. He began his quest of lowering the federal funds rates from their high of 6.50% and living up to his "Greenspan Put" he pushed them lower and lower. With the weakened economy, the upheaval of September 11th occurred and Greenspan began throwing everything including the kitchen sink at the economy. In one year the rate had gone from 6% to 1.75%, by mid 2003 the federal funds rate was at 1.00%! Many other central banks around the world followed suit by cutting their rates. Not until June 2004 did Greenspan start a gradual rate increases that we have been on for the last 2 years. With the Federal Funds rate at 5% rates are closer to their normal habitat, but the fact is the US and the world had years with a major influx of liquidity. Not only did it cause a glut of liquidity, a red hot housing market spurred on by low rates flooded the economy with even more money. It easy to Monday morning quarterback Greenspan's decisions now; he made these decisions in trying times. The fact remains that it would appear that he left rates too low for too long causing inflation to have a place to roost. The scary part is compared to other central banks the US early on had been more aggressive in raising rates and tightening then most of the world. With our integrated world this leads to more and more liquidity.

Going forward from this analysis it is easy to get depressed or mad at the three factors, but on an individual basis they are good practices for the economy. The fact remains that there is too much money chasing too few goods. This is seen with the increases of prices of hard assets like commodities, real estate, etc. Do I expect inflation to return to 1970's level probably not, but do I expect it to remain low like the past 20+ years, doubt it. In the short term I expect inflation to hover around 5%, where it goes from there is really up to Ben Bernanke. Does he care about keeping inflation in check or will he try to please the economy and stop raising rates. The first would most likely cause a real recession and the later would cause a stagflation scenario after awhile. I would prefer Bernanke becoming an inflation hawk regardless of the consequences. My worry is if he uses the technique of breaking the back of inflation and it has little effect because of the world liquidity glut and leaves the US economy in the gutter and a inflation still running a muck. I, like many others, do not envy his position and the pitfalls at every decision Bernanke makes in the near term. As your investment mercenary I feel it is important for my readers to be cognizant of the consequences of Bernanke's decisions and what led up to them. I think most pundits either don't think inflation is an issue or understand one or two of the reasons for its cause in 2006. Again a maturing globalized economy + Bush's tax cuts + Greenspan's monetary policy has led to a real and present danger of inflation that must be dealt with at any costs.

Top 8 Dangerous Investment Mercenaries

2006-05-25T13:06:00.000-07:00

8. Accountants: It's in their best interest to make sure you get as much back from the gov as possible, but they can over charge when a lot of times you can do it by yourself.

7. Financial Advisors/Planners: These mercenaries are obliged by regulation to ensure they are held to a fiduciary obligation, but as with all professions there are bad apples that hide behind their credentials.

6. Bankers: For better or worse they can only offer their bank's products, but they all have different payouts so watchout.

5. Attorneys: Competent attorneys are crucial and can be a great help in protecting you & your assets, however use caution because more litigation = more fees and remember to shop around for a good one.

4. Stock Brokers: These mercenaries have taken a beating since the late '90s when they were at their peak. Most are glorified salesmen that follow orders from the top when it comes to investments and aren't afraid to charge a hefty commission, but the good ones can have the potential to make you a lot of money.

3. Realtors/Real Estate Agents: These folks are primed to take a beating that will be similar to the one stock brokers took after the tech boom. Currently realtors are playing to investor's greed and pushing a losing investment (in the short term). When the market normilizes after the boom & bust period they can help bring value to an important avenue of investing. I will pay good money to see one say at this point that a client should wait to buy as prices come down.

2. Insurance Salesmen: These folks can offer a necessary product to prevent some risks associated with life. Their track record as shifty mercenaries has been seen well documented in their long history. And they have never been afraid to sell overpriced unnecessary insurance to those of niave nature.

1. Mortgage Brokers/Loan Officers: These newly esstablished #1 dangerous mercenaries can screw you in many different ways without your knowledge. Home loans are highly regulated, but to those that do not have a financial or loan background can lose their shirts in hidden cost and exotic loans. Exotic loans to non sophisticated buyers who are unaware of their consequences will cause much hardship in the coming years. These guys are in the zero sum game of loans and all they care about is closing a deal. I have worked with them in the past and they can be very dangerous.

This is the current form of the list and will be updated w/ new revelations & comments as they come. Again all 8 mercenaries can be great assets to have, but be cautious when dealing with them.

Debut of the Mercenaries

2006-05-24T23:38:00.000-07:00

This is a debut of an new investment blog which hopefully readers will find informative and helpful in the dog eat dog world of investments. I hope to cover most methods of investment that interest myself & other bloggers which will give you further insight. As the name entails most people that will help in advising like brokers, realtors, bankers are essentially mercenaries. Like past warfare, mercenary soldiers with no allegiance were paid to fight battles for kings, states, and nations alike. In modern civilian life these warriors have weapons of information, corporate backing, and market insight available for hirer for a certain fee or commission. Similar to their past brethren these mercenaries can have ulterior motives and can be unpredictable. However if chosen & motivated correctly these mercenaries can be an crucial to the success to those who employ them. I too am a mercenary, but I will be working for free and will try my best to guide you to investment success and away from disaster.