1-2 Knockout

Because Teen Retail @ or > 2007 Valuations Makes Sense

Welcome to the New Pigovian Era

Ok, big freaking deal, another few cents tax on a can of soda.  We've already got ridiculous cigarette taxes, fat (unfortunately not fat people) taxes, this tax, that tax, everywhere a tax-tax.

Its not like this is anything new, Government has been taxing and subsidizing the constituency whenever they determine the "market" is not properly allocating resources to optimize the "greater good" to society.

As a non-crazy free-marketer I'm generally against Government intervention (and the always unintended consequences thereof), but when I put my Libertarian ideals aside for a minute, I can't really deny that Pigovian taxes/subsidies may be acceptable, especially in such tenuous times as these. 

However, I say this with the uber-important caveat that "asymmetrical" and ad hoc taxes/subsidies will only further screw up an already screwed-up system.  Let me explain:

Imagine if (when) the US Government instituted a gasoline tax similar to that in the UK - all $3.50/gallon of it - because as we all know cars and foreign oil are bad, or whatever.  Now putting aside logistical issues like revenue/expense alignment, rolling implementation, lead times, etc, and this may not be such a bad idea, IFF the proceeds of the tax are used to incentivize the (approximate) opposite action the tax is used to punish.  

In this case, perhaps funds would be used to build energy-efficient, low-pollution, convenient (this part always gets dropped in practice) high speed rail in and among our major metro centers.  This is a (not great) example of "symetrical" pigovian tax/subsidy. 

"Asymetrical" applications, unfortunately, seem to be go-to strategy our current Administration uses to get what they want (whatever that is).  In order to save hundreds of thousands of union jobs (and Democratic votes), the administration is quick to effectively subsidize the purchase of Chryslers, GM's, and Fords (and/or their parent companies).  Heaven forbid they subsidize cars built by non-US domiciled firms actually made IN the US, by (non-union) US workers, but I digress. 

Now the Gov't has to fund these subsidies somehow, but as far as I can tell instead of finding an opposite (or other "matchable") externality to tax, money is just coming from anywhere and everywhere they can "find" it.  Tax the "rich" (i.e. middle class).  Tax future generations (don't get me started).  Just Do It ^TM and worry about how the hell to pay for it later, much later.

So, in conclusion - and before this rant gets too out of control - I just want to clarify that for the 20th time I'm non-partisan and contrary to what the lefty/crazies will undoubtedly presume, I am not explicitly criticizing the Obama Administration.  If you understand my point, as much as it pains me to admit, I'm saying increased Government involvement may, in some situations, not be as evil as many of us often presume.   However, it seems to me that Newton's 3rd law should govern the application of Pigovian taxes and subsidies whenever practicable.  At this point, its painfully apparent that the Government is going to get involved in everything one way or another.  So, if we can't stop the Gov't from getting involved, perhaps we can at least try to affect what form said involvement takes.

Apologies for the myriad shortcuts and overgeneralizations.

Goodnight!

Thoughts

Over the course of the past few months, I've been increasingly asked for my thoughts on several econo-political topics, including, but not limited to "the bailout(s)," industry-specific solutions, regulatory overhaul, and others.

Those of you who've read my work over the course of the past year may also be wondering where or how I weigh in on these issues, and/or why I've remained relatively silent on issues which one would expect I'd be quite vocal.

To be honest, the only quasi-explanation I have to offer is that I just don't know.

Unlike professional writers, analysts, and pundits who depend on their words for sustenance, I have the convenience of not saying anything if/when I don't have anything good/useful/interesting to say.  The events that have transpired over the past year or two (including those preceding events over decades past) have been a bit overwhelming, in terms of the time and knowledge required to not only stay abreast of, but more importantly to understand.  While I'm hardly disappointed to still remain otherwise employed (knock on wood), I simply haven't had time to wrap my head around much of this information, at least not to the point where I would risk what little (if any) reputation I've managed to nurture by spouting off some uninformed nonsense the likes of which I've previously accused others. 

Thus, while I haven't yet developed a comprehensive solution to our various ills, there is a slightly smaller issue into which I've put some time and effort.

Like many people, as I see the news scroll by on my monitor, I'm often overcome by feelings of anger and disappointment.  I'm particularly enraged (although unsurprised) with the constant interference of pandering politicians and poorly-informed punditry presenting opinion as fact or careful analysis.  That every Joe and Jane Schmo with a keyboard gets to voice their often similarly uninformed opinions reminds me of Steve Carrell's character in Anchorman when he declares "I DON'T KNOW WHAT WE'RE YELLING ABOUT...LOUD NOISES!"  The complex, interrelated issues at hand seem to be way beyond the knowledge, experience, and understanding of virtually everyone, and yet everyone still has an opinion, everyone knows who was at fault, who we need to blame, and how we'll magically "fix the economy," whatever that means.

Various media participants and outlets have done their part to contribute to the hype and hysteria, often inciting outrage and chaos, when there is often little-to-no reason for doing so, other than to sell papers/eyeballs.  To be sure, much of my ire has been focused on the media, specifically, the part that  covers (or attempts to, as it were) business, finance, and economic happenings.  Even to those of us who are actually trained, experienced, and possibly still work in such fields, there is much disagreement over what/how/why things happened as they did, and perhaps more importantly, how to "fix it."  Yet we've seen the same sort of behaviour from virtually every media outlet that I described in the above paragraph, speaking very loudly and authoritatively on topics of which they don't appear to have the slightest understanding.  Just pick up any daily Newspaper or click on over to Fox News or CNN to see some of the ridiculous crap being peddled by the "fair and balanced" media.  (Just to be sure, the previous sentence applies to both sides, and everyone in-between.)

Despite a keen awareness that most reporting these days is unfortunately nothing but filler between advertisements, I've found it difficult to contain my immense dissapointment with the way inherently complicated concepts have been grossly over-simplified, mis-interpreted, and mangled over-and-over in popular media, of both the new- and main-steam varieties.  To be sure, its altogether unsurprising to witness such a non-phenomenon when sensationalism and incendiary "reporting" are - or are perceived to be - the largest drivers of revenue for most media outlets.  Contrarily, when there is - or there is perceived to be - little/no incentive to present  balanced, well-argued/researched, and transparent information, it comes as no surprise that such things are few and far between. 

In fairness, there are several media outlets who have found a way (not necessarily a profitable one perhaps) to practise what I'd call "responsible reporting" when it comes to these matters, and I applaud them for their efforts.  These are the outlets I visit on a regular basis, and its little secret who they are.  However, such outlets unfortunately represent a disproportionate minority, and are thus not nearly as popular as their sensationalist, more irresponsible brethren.  

Of course this is hardly the biggest problem at stake, but it is perhaps one of the few that we have any ability to affect.  Especially in such turbulent times, we should be extremely cognizant of the material presented to the general public, and the light in which this information is presented. 

I say this because frankly, I'm not quite sure how to properly enunciate my fear that the various braintrusts  (legislatures, the SEC, FDIC, Board of Directors of most banks, the general populace, etc) will, in trying to "stabilize" the economy, actually send us further into the abyss.  If there were an ETF or other instrument to short the testicular fortitude of our Congressional and other "leaders" tasked with addressing our economic woes, I would be into that trade in serious size.  I have little-to-no faith in their ability to understand the issues in front of them, and even less faith that the group as a whole will make the tough choices conducive to long-term sustainability and economic health.  If what we've seen from both sides is any indication, we should expect more of the same short-term "solutions" which have generally failed to address any underlying issues, and quite likely prolonged the pain, and simply delayed confronting the real issues until a later date.

Showering the masses or individual companies with money (the exact faucet, pressure, and distribution pattern used is irrelevant here) may seem like the most politically expedient option, but as many others far more informed than I have argued, is actually counter-productive at a certain point.  Eventually, we have to pay the piper and reduce leverage across the board to sustainable levels.  (I'll leave it to 1-2 to discuss this in greater detail if he feels compelled to do so, since going down that path is a far-longer discussion than I'm interested in having here.)

So, perhaps if we can find a way to incentivize the media to be more careful about what information they present, and how it is presented, perhaps we can affect public opinion, and thereby affect the decisions made by the powers that be. 

I realize that this is far easier said than done, but to oversimplify, I believe that those of us who "know" have a civic duty to share that knowledge with those who do not, especially when it just so happens that doing so may very well be critical to ensuring our future employment. 

Some have argued that trying to improve the quality of business reporting is a fools errand, a futile effort.  One follower on Twitter pointed out that if one possesses a functional understanding (or even capacity to understand) the material, they one will most likely pursue a more-lucrative career in the field rather than reporting on it.  This may be true for many people for whom money is the primary motivator, however I know several people who forgo financial gain to report upon and analyze business and business news (for example, I don't do this for the money).  Some of these people even have undergraduate or even advanced degrees in the fields which they cover, as shocking as that might seem.  

The other solid criticism seems to be that news outlets and reporters wouldn't have much, if any incentive to comply with our requests.  Judging from traditional media's well-documented aversion to change, this is a legitimate criticism for which I don't have a fantastic response.  It would seem that any concerted effort to affect change would have to first gain sufficient visibility and popularity so as to make our stamp of approval an important sales/marketing tactic, or on the other hand, such that not having our support was perceived to be sufficiently detrimental to that outfit's credibility that they comply out of perceived necessity.  This is a bit of a catch-22, as 1-2 was quick to point out when we spoke about this a few days ago, but one that I don't think is insurmountable.

I envision a largely-volunteer Non-Profit, at the core of which is a proprietary, secure database of business professionals and academics willing to make themselves available to whatever degree they're comfortable with to reporters and journalists.  There are enough of us who make our thoughts, opinions, and analysis available for free already that I don't think this is asking too much.  Think of something along the lines of Linkedin, except with the added ability of anonymity for those who need to remain so for professional concerns.  These volunteers would be able to create a profile with whatever level of detail on their background, knowledge, experience, etc they feel comfortable providing.  Reporters and journalist members would then be able to search the database for those with knowledge/experience on the subject matter they're covering. 

Additionally, the website would allow volunteer members (like FT Alphaville's Long Room) to post corrections, criticisms, etc, on poor business/financial/economic reporting.  This could even be extended to a ranking of various media outlets.  In turn, this could be used to present awards each year for the best, most improved, etc ones, and also highlight repeat offenders so that the general public could be made aware which outlets they should avoid or take with a grain of salt.

Perhaps I'm delusional, perhaps I'm insane, but to me, this seems like a worthwhile cause.  There's virtually no overhead besides maintaining the website, plenty of business professionals with newfound time on their hands, and a general politico-economic state of affairs that makes today a more important time than ever to put our knowledge and experience to good use.

Let me know what you think. 

Good idea?  Bad Idea?  I'm a stupid schmuck?  Whatever, just let me know.  If this turns out to be a horriffic idea, then so be it, however if enough of you are with me then I stand ready to make this (or something like it) happen.  Lets see how it goes.

 

Why MFs Ride the Failboat -- A response to MarketSci

This morning Mike at MarketSci pondered why mutual fund managers just can't seem to get it right, yet he can (he has an audited track you can check):

"...why the mutual fund industry, with such a low hurdle to clear, doesn’t reach out to folks like me to apply some of our concepts to their more fundamental approach to investing; in other words, why they don’t think outside their little box.

Can anyone honestly tell me that a developer who has produced as much positive consistent alpha as we have couldn’t apply those concepts to a mutual fund and produce that magical and much sought after 1-2% annual outperformance? I think not."

My humble response (please excuse grammar and typographical errors):

Even though I am in what I would call “the brunch” phase of my career (early in the morning, but well awake long enough to clear the sleep from my eye), I have worked in just about every facet of asset management, and I am consistently befuddled by the poor performance of professional money managers. That said, I posit a few ponderables about WHY they are so bad:

1) Incentives/Risk Aversion: as you know, most money managers are really asset gatherers, skimming their fees off the top of AUM, not performance. Unfortunately this leads to an asymmetric risk aversion model of money management. Rightly or wrongly people benchmark their manager’s performance against a well known benchmark (simple framing heuristic). Since I am sure you are familiar with the risk-aversion “S” curve I won’t get into the details, but suffice it to say the visceral reaction an investor (client) has to underperformance is far more pointed than their reaction to outperforming the benchmark. Money flows more swiftly out of funds that underperform by, say, 200bps, than it flows in for 200bps of outperformance. Gathering assets takes time; losing them doesn’t. Since there is little payoff for marginal outperformance (zero profit participation), and a heavy penalty for marginal underperformance, PMs manage towards an alpha of zero (after fees): hug the benchmark and your career is safe. Furthermore, a single drawdown of any magnitude is likely to stain ones reputation for years, whereas (again) a single positive year is likely seen as “lucky” or flash in the pan. (This is nothing new, but it’s still true).

2) Regulations: while there are some (albeit a minuscule number) of actively managed funds that actually manage concentrated or unique strategies, the majority of funds are boxed in by diversification rules, bans against shorting, etc. As you know, the greater diversity assets you hold the closer you are going to perform “as the market” (for the few novices in the crowd just look at the Dow and SPX correlations…they are incredibly high even though the two indices have different methodologies, weightings, sector exposures, etc) in fact, if i recall correctly, after about thirty stocks you are at a .8-.9 correlation and beta to the market. Today it is (near) impossible to run a portfolio that DOESNT act like the funds respective “market”, simply because of the forced diversification.

It is also incredibly difficult to change ones investment/trading strategy in a fund that requires are the requisit fillings, risk analysis, and BoD approval. Therefore it’s tough to be agile and “try new things”.

3) Assets kill performance: on top perverse misalignment of incentives “asset gathering” promotes, the game of “getting big and collecting fees” is antithetical to efficient investing. A) As you grow in size your trading agility decreases as your ideal position sizes are corrupted by a major exogenistic (non investment) factor: moving the market. The elasticity of prices with respect to liquidity severely hinders a funds actual investment universe and forces PMs down their “best ideas curve”. B) Since there are “upper bounds” in how much you can invest in any one stock (by virtue of point “A”) you are forced to go down your investment prospects list to simply have somewhere to park excess cash. PMs aren’t paid for holding cash (it’s seen as the client’s role to measure their risk tolerance and balance accordingly), and the presence of cash reserves may (rightly or wrongly) signal that the PM is out of ideas (a negative signal).

4) Client representatives/Buyside advisors: these geniuses love to take complex situations and boil them down to nothing more than a series of comps from traditional style-box analysis. If you can’t be bucketed into a well defined style pension/insurance/RIA advisers won’t even look at you. God forbid they have to take the time to understand products and explain a complex subject to their clients. Rather they prefer to simply have a matrix by which they can punch in return streams and holdings then say “XYZ is best, look at their Sharpe!” When I launched one of those fabled HF Replication products the toughest hurdle to clear was figuring out how to “box” the fund–not the mechanics, not the methodology, they only asked “what box would this go in?”

5)Finally, to sum everything up, MF companies are big, slow moving organizations. On top of the regulatory hurdles most funds are seen not as alpha generators, but as product shelf fillers. A “good” mutual fund shop has a product for every “box” and they need to keep their presence in each category regardless of performance or rationality. If a PM on, say, a large cap value fund underperforms heavily then the PM is simply replaced because every platform needs a LCV fund. To the contrary, should you outperform your market, but exhibit any kind of style drift, you can just as easily be canned because people will complain “they dont know what they’re buying”. And god help you if you come up with a new investing metric to base your analysis on—you’ll have to prove it works to your handy dandy risk department for well over 6 months, but which time it’s probably arbed out anyways.

At the end of the day it’s the structure of the system that has set portfolio managers up to fail–all in the name of “protecting” retail investors. The only places you see demonstrable alpha is in the HF community because they can trade nimbly, react quickly, generally aren’t big enough to move markets, and have an aligned incentive structure. Is it perfect? No! But you are never going to eliminate all principal-agent problems, which is what this REALLY comes down to. HFs are just allowed to act as better agents.

Krugman: Sixteen Years (of Intellectual Dishonesty)

Sometime around 5am this morning (sleep is for the weak) I read a week-old post from our favorite economist liberal acolyte, Nobel Laureate Paul Krugman.  Beginning his career as a caterpillar economist (churning out paper after paper by candlelight from the drafty Princetonian economics basement) he apparently cocooned sometime ago and morphed into a beautiful butterfly (aesthetically pleasing, but lacking substance or utility) for the NYT and democratic party.

His post was an exercise in Japanese efficiency, and Cinema Code era innuendo.

Its title: Sixteen Years.

Its lone content:

"A Tale of two presidents."

The sinister elegance of his post is just how little Mr. Krugman says.  By intentionally structuring his "argument" (Clinton > Bush => Liberals > Conservatives) without actually forming a logical line of reasoning or corroborating commentary he is able to "appeal to popularity", since he knows his readership, and then compel the reader to draw Krugman's known conclusion, which was probably presupposed by said readers.  

Now, before I get any further, you, dear readers, must realize that this I am not about to argue the merits of one party's policies versus another, or the merit of our previous two presidents.  As always we welcome and enjoy your comments, but if you want to argue about the efficacy of economic policies, POTUS' effect on the economy, etc wait for another post.

This is about intellectual dishonesty.   

"There are lies, damn lies, and statistics." -- Mark Twain (Attributed)

"Torture the statistics long enough and they'll confess to anything." --Widely Attributed

Mr. Krugman surely tortured these statistics, but like a first year associate in AG Cuomo's office, it didn't take long for the data to cave. And we all know, because John McCain reiterated ad nauseum during the elections, "Coerced confessionals are of limited value."   While this kind of "analysis" may be acceptable in the nether regions of New Jersey (and the newly mortgaged NYT basement) I am pretty sure most high school math teachers would fail a student this intellectually dishonest.

To wit, his chart:

• truncated the data stream as to eliminate any context of historical levels, volatility, highs, lows, etc.--without context data are meaningless;
• used an abridged timeseries when the full series tells the opposite story (democrats have a negative average growth in employment, republicans have a positive);
• doesn't adjust for economic policy lag;
• implies that the president alone (or in majority) controls the factors of production, employment, and output without exogenistic factors.

Utilizing the exact same data set he used I came up with the following...and this tortured soul confessed to a different crime entirely:

   

NB: 1) Party in Control is defined in the spirit of Krugman's post and reflects the party of the sitting POTUS.
       2) As mentioned in the chart, all years are offset (t+2) to account for economic lag/momentum.

	Republicans	Democrats
Months	384	349
Average Growth (PIC)	2.32%	-0.38%
Avg. Growth (month)	0.07%	-0.01%

If you look in the expanded data series you can see a few things

• His narrative of "good pres / bad pres" and thus the ideological extension doesn't hold water.  Republicans presided over a positive average growth rate of 2.32% per PIC period, while the democrats presided over negative changes in employment participation.
• The range has extremes at 55 (low) and 64 (high), and has a standard deviation of 2.9% for a series that extended sixty years it's pretty tough to give any credibility that any move less than 1SD are de minimus, no matter how much you scale the data (heck, even i had to adjust the Y axis to get this chart look readable);
• Lastly, even if you accept that a 1-2% (see what I did there) change is a "big move" you are still left with the rather obvious exogenistic variables (everything that isn't "president in power"), like Congress, Fed policy, Global economic growth, etc.

No doubt some of you will rail that I am reading my own story into his blurb, and that may be true, but if you look at the comments on his post he succeeded in drawing out the reactions he wanted without even making an argument.  Go ahead, read them, you can leave 1-2 for a second.

What was so irking about his post wasn't his conclusion (I couldn't have cared less), but rather the way he played with cheap synecdoche, ambiguity, and blatant intellectual dishonesty.

One thing I know for sure is that compliance would have my head were they to find a chart this blatantly cherry-picked in a deck. 

You're better than this, Krugman.

Fail of the Week: Grassley/Levin Hedge Fund Regulation Act

The latest bullshit populist bill to come out of the brain trust that is the U.S. Senate, per the WSJ, is aimed at those dastardly Private Equity and Hedge Fund robber-barons, o noesssss!

That this issue is once again on the table is hardly surprising in and of itself, but - and I didn't think this possible - somehow, the proposal is actually more ridiculous than it was the first time we heard about it, ya' know, back in the good ol' days when Steve Schwarzman was still ballin' out, and Trader Monthly was actually still in business.

Anyhoo, the gist of the Hedge Fund Transparency Bill, introduced last week by Chuck Grassley (R - Iowa) and Carl Levin (D - Michigan), essentially comes down to forcing Hedge Funds, Private Equity, Venture Capital, and similar funds with > $50mm AUM to disclose to the SEC, at minimum:

1. The names of the companies and natural individuals who are the beneficial owners of the hedge fund and an explanation of the ownership structure.
2. the names of any financial institutions with which the hedge fund is affiliated.
3. the minimum investment commitment required from an investor.
4. the total number of investors in the fund; the name of the fund's primary accountant and broker.
5. and the current value of the fund's assets and assets under management.

The rationale here is that hedge funds have gotten so big, and so entangled that they pose a serious systemic threat to the U.S. and Global financial system.  One would be hard pressed to refute this basic allegation, although methinks its hardly enough to rationalize raining down with righteous regulatory indignation on the bulk of the alternative asset management industry.  Unsurprisingly, we see our old friend, the classic Bloomberg-esque "Hedge funds for dummies" introduction, below which they cite several other factors (non sequiturs, mostly) supporting their call, among them:

• Endowments and Pensions, the same ones that poor Joe & Jane 6-pack depend upon for their economic well being, have increasingly invested in HF's, leaving these poor innocent folks dangerously exposed to losses..  No mention of the fact that this concern could be tempered by oh, I don't know, actual oversight of the Pensions/Endowments by their boards, managers, and existing regulators, of course.
• A rambling description of how, as far as I can tell, the failure of Bear Stearns HGSCELF lead to Merrill being sold to BoA and every other bank on The Street being forced to take TARP money.
• The claim that, as SEC Commissioner Luis Aguillar stated in a speech on January 9, 2009, the SEC "currently lacks tools in the hedge fund arena to provide effective oversight and supervision," somehow, someway, this Bill will render the SEC effective, despite effectively zero evidence to support that conclusion.
• Somehow, an operation with $50mm AUM is deemed to be included in the single entity "Hedge Funds," and thus necessarily part of the axis of financial evil.  This makes sense, clearly.

The best part of this whole clusterfuck might be that necessarily, these guys must be delusional/dense/retarded to think that the Securities & Exchange Commission, which failed so epically over the course of the past several yours, is up to the lofty task of doubling (or worse) their responsibilities and workload. Clearly, the same group that totally missed the boat on Madoff, despite being spoon-fed 10 years worth of virtually every detail of the scam is up to the task.

For sure, all criticism should end here, QED, but just for shits & giggles, we move on...

Given the requirements spelled out in the numerical list above, the only thing this Bill actually achieves is to guarantee employment of the lawyers, bankers, and accountants whose job it is to devise ways to obfuscate relationships between owners, clients, affiliates, and investors.  Someone should remind these two asshats to be careful what they wish for, since given the populist leanings of those in power, they very well might just get exactly what they're wishing for.

Why Do I Keep Having to Repeat Myself?

Pardon the language in advance, but this crap is seriously starting to piss me off!  How many times do we need to get burned until we just lose the stupid smile of blind hope and accept the fact that the economy is FUBAR?  Look, I'm all for optimism, especially in times like these when there really isn't too much to be hopeful about, but unbridled optimism in the face of an ever-growing body of evidence that suggests the next year or two are going to be quite unpleasant serves to both postpone the inevitable pain while magnifying its extent.

Step #1 is admitting you have a problem, which in this case is that the entire global economy has been, and still is completely predicated on the use of unsustainable amounts of leverage.  This, in turn, drove up the price for virtually all assets, financial or otherwise.  Does anyone really think Oil got up to $140/barrel because some schmuck spotlight-craving Analyst from Goldman or T. Boone Pickens "prognosticated" that it was destined to go $200+? 

Please, gimme a break.

While it was certainly not the only cause, leverage-induced speculation played no small part in the spectacular run-up, and subsequent crash in the world price of oil when/as said leverage dried up.  This is but one small example used to prove a point, one which I expect every single person reading this site should know like the back of their hand:  Leverage kills.

So where does this leave us now, you ask?

Let us not kid ourselves, this is no startling revelation: we need to commit to a massive deleveraging on every single level, from the Federal Government all the way down to individual families and businesses.  Most efforts thus far have for the most part focused on coming up with ways to delay this necessary and inevitable process, which, while politically expedient, not only fails to address the underlying issue, actually adds to the eventual pain. 

A gradual, measured effort to reduce leverage across the board will infringe on most everyone, however, by doing so we avoid the otherwise inevitable collision course (to zero, and beyond!)  which we seem so intent on taking.  No one ever said its going to be pleasant - it won't be - however, denial never works out in the end, and the sooner we fast-forward to the "Acceptance" phase, while perhaps counterintuitive, the better-off we'll be for it. 

(One, small) Case-in-point, I've been reading a recent report on consumer Credit Card ABS from the brain trust over at Moodys, and to be honest, its taken me the past 2 weeks to figure out how to deal with it.  From the very beginning, the thing just screams "professionalism", with an incomplete/incoherent sentence on the very first page (pg 2 in the pdf), and a general lack of attention to detail throughout.   Their numbers and commentary just don't seem resolve with each other, or with the pile of evidence presented elsewhere, to the point that it might as well be from the National Association of Realtors (masters of economic projection alchemy that they are). 

Their 2008 unemployment estimate is 5.7%, which is well and good in whatever alternate universe these guys reside, however, back in the realm of reality, the most recent unemployment data show the actual number is 7.2%, which makes their # only what, ~25% off the mark?  They've settled on a 0.0% change for total retail sales in 2008, despite the fact that the numbers have been revised downward after the fact of late, and not insignificantly so, which is to say nothing of the fact that the recent sales #'s from the Census  are themselves not exactly inspiring, to say the least.  To be fair, Moodys' figures aren't totally off-the-mark, however, even as "base-line" values, they appear to be too optimistic to us. 

A foundation of questionable assumptions upon which to base one's analysis and associated conclusions is never a good start, but no, the over-achievers from Moodys build upon it with questionable methods, circuitous logic, and the sort of reasoning-by-hope seldom seen outside the most delusional cult compounds.  Let me translate (loosely):

"Oh, well as long as x, y, and z don't all happen, which they usually don't generally speaking, your ABS notes will retain their ratings...unless of course, these things, which we acknowledge may happen, well, actually do, in which case you're probably screwed, but, as we said, historically/generally speaking, everything should be totally copacetic, k?"

Take a gander at the report, its really not that far off from the above, I mean, hell, where did predicting the future based off the past ever come back to bite anyone in the butt?  To their credit (no pun intended), they actually make a few good points, but fail to really connect the dots, so-to-speak.  I mean, its not like anyone can seriously make the case that consumer ABS is comprised of "prime" credits go the way of oh, residential mortgages, for example, right? 

Of course, its little/no surprise that a Ratings Agency would be more focused on finding a way to keep the crap they're paid to rate Grade-A certified, instead of, oh I dunno, providing an honest and frank opinion as to how aforementioned crap will be affected if (read: when) shit really starts hitting the fan.  Heaven forbid institutional investors have to alter their charters so as not use  "Big 3" Ratings to determine what they can and cannot hold, alas!

When taken out further though, we're lead to an interesting yet altogether unsurprising conundrum: 

Besides Roubini (or any of the other "Dr. Dooms"), the "financial media," and perhaps Jim Chanos, who has any incentive to tell it like it is, or very likely will be?  Surely not anyone whose living depends on functioning capital markets, that;s for sure.  Nor should we expect any politician to commit assured career suicide and tell the American people that 1 out of every 10 of their friends is going to be out of a job for the next two or three years, 1/30 will be kicked out of "their" house, but its all OK, because its only temporary, and after that, things are going to be better than ever.  Not an ice cube's chance in hell, not even from the Great Messiah Obama, Himself (although to be fair, I'm guardedly optimistic that he won't do anything profoundly stupid, but I digress).

So, what the hell are we supposed to do then, once we do accept the facts?  How does the U.S. Government (and Governments of the World) come together to attempt to execute the largest, most massively complicated deleveraging in the history of the term?

Frankly, I haven't gotten that far yet, however I stand by my above point, that postponing the inevitable will be a massively painful and horrifically catastrophic course of action.  In terms of the mechanics of an alternative solution, I leave that to you, our readers.  Go ahead, drop a comment, enlighten me.

Um, Not Your Best Timing, Mr. Wynn

As Long or Short Capital detailed back in May, 2008, Wynn Resports issued $4.4mm shares for proceeds of $660mm of stock at $154, and subsequently bought 2.4mm shares back a mere QUARTER later with the stock trading at ~$95.  Despite dropping to the mid-to-low $50's in the interim, I think its safe to say this move was still a shrewd gaming of your own dumbass investors. 

(As an aside, in the commentary to said LoSC article, I pointed out how shorting Giant Interactive  at ~$16 was a good trade.  Long story short, I'm a wuss, didn't pull the trigger, and now the stock trades around $6.  Shit!)

Moving on. 

Earlier, I finally saw the commercial for Steve Wynn's new hotel/casino in Las Vegas, the completely non-egotistically-named "Encore" on CNBC.  Naturally, this has been in the planning/construction phase for years, but uh, from the guy who shorted his own company's stock, you'd think that maybe, just maybe he'd have had the foresight to see that the Resort/Casino industry was in for a few years of serious pain, no?

Alas, maybe Sir Wynn (not to be confused with this Win) knows something we do not. 

Presented without further comment for your viewing pleasure (ed: Give the tanning/botox/creepy old man schtick a break, Steve):

Question:

Which group is more full of shit?

1. National Association of Realtors 

With the market correction nearing an end, home prices are expected to rise again...Real Estate remains the best investment available. (NAR, 2006)

Oh, wait, you mean home prices actually FELL in 2007? AND the Case-Shiller Index fell by almost 10% in 2007 and ~22% since 1/2007?

D'oh!  (for even more fun, try this set of mindboggling mathematical impossibilities from NAR's most recent "Economic Report")

or

2. National Retail Federation

The National Retail Federation today released its forecast for the upcoming 2008 holiday season, projecting that sales will rise 2.2 percent this year to $470.4 billion. (NRF, 9/2008)

Whoops, turns out total sales actually FELL 2.3% from 2007 #'s.  Typo, perhaps?

I know, you're all completely and utterly shocked (SHOCKED!) that these trade groups blatantly lie over-and-over again, yet are still quoted and even looked to for unbiased information by consumers and media outlets.  I remember one morning a few months ago watching CNBC when they announced the NRF's holiday sales predictions and, despite being maybe 1/2 awake, having a nice little chuckle to myself, as I was reminded of one of my favorite quotes:

No man has ever gone broke underestimating the intelligence of the American people.

--P.T. Barnum (attr.)

Just for shits & giggles, can any of you lawyer types out there figure out a way to sue the National Association of Realtors for their role ("now is the best time to buy!", "prices always go up!", etc, ad nauseum) in the real estate collapse? 

(Detroit's) Back in (the) Black (or not...)

So I spent a little time over the past day or two going through the recently released Automaker Bailout Bill, which apparently is to be called, the ‘‘Auto Industry Financing and Restructuring Act," or "AIFRA", as the cool kids call it.  Lacking a password to unlock the original, and being way to unambitious to crack it, unfortunately I wasn't able to upload my annotated version, so lets go through this thing the hard way:

Section 2.a: Findings

 The Congress finds the following:
(1) A combination of factors, including errors in the business model of domestic automobile manufacturers...

What, what is this?  A tacit admission that they dug their own grave?  REALLY?  Can someone else verify this is, indeed, the FIRST finding?  Right there, up-front, fo serious?