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Retailers’ Growth Plans Up 40%

February 28, 2011 by · Leave a Comment 

With shoppers returning to the malls, retail expansion plans have kicked in to higher gear. ”Following the strong performance during this year’s holiday sales season, many chains further upped their growth plans. Right now, expansion plans are up 40% over last year’s levels,” said Garrick Brown, ChainLinks Retail Advisors research director. ChainLinks Retail Advisors today released its inaugural version of its National Retailer and Restaurant…

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Blackstone Wins Centro’s Huge U.S. Retail Portfolio

February 28, 2011 by · Leave a Comment 

Following a competitive bidding process, Sydney, Australia-based Centro Properties Group and its managed funds agreed to sell all of its U.S. assets and platform for $9.4 billion to BRE Retail Holdings Inc., an affiliate of Blackstone Real Estate Partners VI LP. Centro Properties Group controls 588 U.S. shopping centers in 39 states totaling about 96 million square feet. While, the group returned a profit in the second half of last year, the heavily…

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A Look At The Lawsuit Against Michael Lewis, In Which We Find That Brad Pitt Has Bought The Movie Right To "The Big Short"

February 28, 2011 by · Leave a Comment 

“Earlier today, some hilarious news hit the tape after it was made public that disgraced CDO trader Wing Chau has decided to go nuclear and sue Michael Lewis and Steve Eisman due to their all too honest representation of the Harding Advisory asset manager, in Lewis’ book “The Big Short”… In early 2007, with subprime-mortgage defaults soaring, Wing F. Chau teamed with Merrill Lynch & Co. to create a $300 million pool of assets that shared a name with the main character in The Matrix movies who discovers reality isn’t what it seems… Eight months after the deal closed, Neo [CDO] defaulted, wiping out most of its investors. It was one of seven transactions that Chau, 43, hatched with Merrill and Citigroup Inc.”

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Dudley Says `Considerably Brighter’ Outlook No Reason to Withdraw Stimulus

February 28, 2011 by · Leave a Comment 

““A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course.” ” — Welcome to la-la land, folks. The Fed will keep printing no matter what.

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JPMorgan Fighting 10,000 Lawsuits

February 28, 2011 by · Leave a Comment 

“JPMorgan Chase is a defendant in more than 10,000 legal proceedings and may be $4.5 billion short of reserves needed to cover those costs in a worst-case scenario, the firm said in a regulatory filing on Monday. ” — What?! We thought JP Morgan had all the money in the world…

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Fannie Mae’s Latest Housing Survey Shows Many Have No Idea What’s Happening

February 28, 2011 by · Leave a Comment 

“ I’ve always understood one thing about the crisis that I think many other observers have missed… as the pain increases, and as more and more people are directly affected by the foreclosure crisis… more will start to question what caused this terrible tragedy. And as that happens, as more and more people start to realize that it wasn’t the borrowers over-borrowing… it was the bankers over-borrowing that caused the collapse of our financial and credit markets and left our housing markets in a literal free fall.”

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Man Drives Car Through Bank of America’s Lobby – Police Investigate, Unsure of Motive

February 28, 2011 by · Leave a Comment 

“Well, I wouldn’t worry too much about uncharacteristic behavior, after all… there is a bank involved. I mean, if Elias had driven through the glass front doors of a furniture store at 4:00 AM, I’d say that would be unusual behavior, but a Bank of America office? Why that’s pretty much like a public service, don’t you think?”

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The West Speaks of a No-Fly Zone Against Libya while Stocks Around the World Rally

February 28, 2011 by · Leave a Comment 

By Michael Trinkle, ForexTraders

Unrest in the Middle East seems to be entering a new stage where more frequent and decisive intervention by the so-called international community will have a role in determining the fate of regimes and dictators. NATO, U.S., and the U.N. are reported to be discussing the possibility of an imposition of a no-fly zone over the Libyan air space in order to prevent Mr. Gaddafi`s air force from targeting the population and the armed opposition that is supported by it. We believe that the practical impact of such a decision will be limited. But for future crises, it may well be that a precedent established in Libya could have wide-reaching consequences, one example being the possibility of Western military meddling in Iran with clearly momentous implications.

The only reason that we are not observing comparisons of the Arab Revolution to the French or Russian Revolutions is the lack of any ideological innovation guiding the activists, militants and demonstrators. While the grievances voiced by the  population are general and are shared globally, the concerns of groups leading the protests remain local, and do not enjoy meaningful international  reflections. Vaguely defined demands, hatred of entrenched rulers, a network of loose alliances, and the lack of strong leadership are characteristic of the Arab Revolution, but perhaps many are making too much of this lack of organization since it is only at the later stages of revolutionary events that the true owners of the upheaval, the real drivers of the action come to the surface of the chaotic froth that keeps being reported on news sources. In many other aspects, the Arab Revolution is as significant and comprehensive as the previous significant upheavals in human history. It is influencing a vast area and a large population, and it is a seemingly unstoppable movement depending on novel techniques and methods, and it seems to be setting forth changes that are irreversible. The crucial component of driving ideology may be injected into the structure at a later point, and it may be anything from Western-style democracy, to religious fundamentalism among many other possibilities.

Meanwhile, markets are doing very well, with the USD up againt the yen, but lower against the GBP and the Euro, as both of them benefit from the improvement in risk sentiment following yet more positive U.S. data. But the Chinese are continuing to speak of tightening, and preparing the ground for potentially drastic action by reducing growth estimates for this year, and focusing on inflation as their main issue. Premier Wen was quoted today as repeating comments to this effect, and we do not have any reasonable grounds for doubting their sincerity at this stage. All this means that, even if the U.S. economy continues to grow, commodity prices and EM economies will be subject to strong downside growth pressures in the near future justifying a good deal of caution as traders aggressively build up their existing portfolios in anticipation of continuing bull dynamics. This outlook remains predicated on the tentative assumption that the Middle East situation will not deteriorate significantly, and is therefore only useful as a base scenario around which we will continue to construct the more nuanced cases of analysis.

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Public Pension and Healthcare Costs and Financial Common Sense

February 28, 2011 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS

NOTE ON MALWARE WARNING: My blog seems to have been flagged by Google as containing malware links, but I have gone through the Google malware detection process and found nothing.

If we set aside ideological biases and seek financial common sense, we can see that the public sector costs are simply unsustainable.

I’m going to ask you to do something very difficult before reading further: please leave your ideological biases, certainties and emotions at the door, for the goal here is Financial Common Sense, something which is in desperately short supply in the “debate” over public employees and their unions, taxes and State budgets.

Let’s scrape away all the ideological baggage and just look at the numbers, shall we? If you must assign a point of view, then let’s take the POV of someone who is, broadly speaking, sympathetic to unions and wants to “do the right thing” but who is also a private sector worker who has seen his/her income and assets fall in the past three years even as inflation, official and otherwise, has further eroded the purchasing power of his/her stagnant income. As a result, paying higher taxes is a direct reduction in disposable income and thus a serious sacrifice.

There are about 106 million private sector wage earners and about 24 million public sector employees in the U.S. for a total of about 130 million jobs.

Here is a graph of the GDP growth of the U.S. since 2000. Broadly speaking, GDP grwoth is the foundation of higher taxes and higher incomes. If GDP is flat, then household incomes are also flat. The State (broadly speaking, all government) cannot increase taxes above the growth rate of the GDP without crimping private-sector households.

For context on Central State borrowing (Federal deficits): Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

2008: $458 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.5 trillion (est.)
2012: $1.6 trillion (est.)

(CBO estimate for 2011)

total: $6.258 trillion in five years.

And this isn’t even the real total being added to the national debt, as “supplemental appropriations” for war costs and other large expenditures are “off budget” and not included in the “official” Federal deficit. The same is also true of funds appropriated to bail out mortgage giants Freddie Mac and Fannie Mae and other financial institutions. (source)

This is why gross debt increased by $1 trillion fiscal year 2008, $1.9 trillion in 2009 and $1.7 trillion in 2010—considerably higher than the “official” deficit numbers. This is roughly 11.5% of the nation’s GDP, and $4.6 trillion in a mere three years.

Note that the 2009 $787 billion Stimulus Spending runs its course in 2011 (a few billion remain to be spent in 2012 and beyond) and the hated TARP bailout of banks and Wall Street officially ended in 2010. So higher spending and deficits in 2012 cannot be attributed to “recessionary” spending measures. (Recall that the recession officially ended in August 2009.)

Federal spending has leaped up $1.5 trillion—a staggering 60%–in just six years,from 2004 to 2010, and $1 trillion—36%–just since 2007. Though the Great Recession officially ended in mid-2009, Federal deficits just keep going up.

Meanwhile, the U.S. economy has been treading water. In adjusted-for-inflation dollars, the U.S. Gross Domestic Product (GDP) in 2010 was almost precisely the same as it was in 2007: $13.363 trillion in 2007 and $13.382 trillion in 2010.

Remove this extraordinary rise in Federal spending, and the GDP would have declined by about 11%.

Does anyone seriously think this is sustainable in the long term? Of course not. But the players–the State and its fiefdoms, including public employees, and the State’s partner, the Financial Cartels/Elites–are all pleased to continue the charade as long as “the music keeps playing,” i.e. the public and the global bond market keep acting as if it is all sustainable.

Anyone who thinks the U.S. economy is suddenly going to start growing rapidly organically–that is, via private-sector growth, not ever-rising Federal borrowing and spending–is delusional.

Now let’s overlay the pension costs for public employees in one small city as an example of what’s happening to pension costs nationally. Let’s take the city of Berkeley, Calif., which provides substantial services to its 102,000 residents (about 30,000 of whom attend or work for the University of California) but in general goverance is typical of many other town-gown cities in the U.S.

While these numbers may be higher than your local city, county and state, they track national trends in public pension and healthcare costs.

As we can see, pension costs are rising significantly faster than GDP. Even if we assume the $2 million pension costs in 2000 were far below what should have been paid, and kick that starting point up to $10 million (the light-blue line), the line doesn’t really change: it’s still a steep ascent while GDP is either flat (i.e. dependent on unprecedented Federal borrowing and spending) or declining (if we factor out the massive Federal spending spree).

Next, let’s add public employee healthcare costs, which according to the Berkeley Voice newspaper, have been rising an average of 11% per year in the decade since 2000.

Here is what happens to $1 in healthcare costs which increase 11% per year:

1 (2001)
2.08 (2008)
3.15 (2012)
4.78 (2016)

By 2012, these costs have more than tripled and by 2016 will have jumped five-fold. Once again: does anyone seriously believe these trends are sustainable?

Here is another chart to ponder:

Many public employee pension and benefit packages were “sweetened” during the 1990s stock bubble, based on the hopelessly unrealistic expectation that pension funds could count on huge annual capital gains increases from stock and bond funds to pay for higher pensions and benefits.

Adjusted for inflation, stock gains since 2000 have been negative, even counting dividends. The S&P 500 has declined from over 1,500 in 2000 to around 1,300 in 2011: a 13% decline that must be added to a reduction in purchasing power (inflation) of another28%. Not counting dividends of around 2% a year, that’s a decline of 42%. Just to stay even with inflation, the SPX would have to be above 1,900 now.

A 2% annual dividend yield compounded since 2000 turns $100 into $124.34. So buy and hold pension funds have experienced a 24% gain since 2000 and a 42% decline: net-net, an 18% decline.

So much for 8% returns forever.

These charts make it clear where we’re going in terms of public pension and healthcare costs. The real economy isn’t growing at all, or is actively shrinking if we remove massive Federal stimulus, and long-term returns in stocks are negative.

But let’s make the happy-story assumption the U.S. economy is about to resume its long-term GDP growth rate of abour 2% per annum.

A 2% (inflation-adjusted) growth rate in the real economy compounds to a 24% increase over 11 years, while an 11% annual increase in pension and public employee healthcare costs compounds into a 315% increase.

Is that disparity sustainable? Clearly, it is not.

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Saddling up with Death

February 28, 2011 by · Leave a Comment 

The Daily Reckoning

–If Dr. Marc Faber is right, and the whole financial system we live in is basically doomed, then how advisable is it to keep acquiring financial investments like stocks and bonds? This is the question we began this week of reckoning with. It’s a pretty important one. And to be honest, the answer is very much up in the air.

–The case your editor made in the special edition of the Daily Reckoning over the weekend is simple:

The major global economic powers have been engaged in a contest of competitive currency devaluations. The result is the gradual dilution of the purchasing power of paper money, reflected in the rising prices of tangible goods (commodities)….The currency war is starting to produce geopolitical casualties.

–The point went a bit further. The more powerful geopolitical factors become in markets, the better it should generally be for tangible assets. It follows (we claim) that the owners and producers of tangible assets would start to command a premium in the share market too. That’s the general idea.

–The idea is attractive because it’s supported by inflationist policies of the world’s central banks. These policies are designed to keep cheap credit flowing into the financial system to keep financial asset prices higher and help banks (and whole countries) stay solvent. But that’s not all.

–It just so happens these policies have undermined faith in paper money and led to politically destabilising inflation (without growth!).  This inflation has hit first and hardest in those countries most vulnerable to higher food and energy prices. Hence the bull market in popular revolution.

–And so here we are wondering whether you can really profit from the Great Arab Revolt. Are energy and commodity stocks good hedges against inflation? And will shares resist the downward pressure on asset prices if quantitative easing prices fail?

–None of these are really new questions. It’s just that the last few weeks have made these questions more urgent. The answers will start to be revealed. And of course, there are going to be winners and losers. If you haven’t given these questions much thought, now would be a good time.

–The default and usually reliable position is to invest along the primary trend in the market.  In normal times, tomorrow is pretty much like yesterday and the improvements in life are incremental. For investors, that means that if you get your asset allocation right, and then pick a few proxies within the winning asset class, your investment strategy doesn’t have to be complicated.

–A simple version of that advice is this: buy stocks when they’re in a bull market. On that subject, Vale, the world’s largest iron ore producer, reckons the bull market in iron ore is going to last another three or four years. Vale’s marketing chief Jose Carlos Martins says that for this year, “I do not see a big change in the fundamentals.” That means more demand from China and high ore prices.

–“For sure, more iron ore will come into production—not only from Vale but from iron producers, but not an extent that could change the fundamental market situation,” he’s quoted as saying in today’s Australian Financial Review.  “We see every year China steel production growing. For this year, what they talk about is five per cent growth. And five per cent growth, only in China, will demand more than 50 million tonnes of iron ore.”

–The current spot iron ore price is already at record levels. If you believe the arguments made by David Gruen in this paper over at the RBA site, then the re-emergence of China and India into the global economy means that a “structural change” in Australia’s economy. And what is that change?

–Well, in his latest issue of the Australian Small-Cap Investigator, Kris Sayce argues that the Chinese demand for ore has, in effect, created a new class of companies in the ore industry that simply couldn’t exist without this structural change. It’s the same industry with a new breed of competitors thriving in a newly created ecosystem of opportunity, so to speak.

–These companies are not what you’d call classic “disruptive technology companies.” They don’t even really fit in with the “creative destruction” metaphor that describes how new start ups displace static incumbents. But Kris argues they still have the basic characteristic you’re looking for in a growth stock: the ability to capture quick profits and share price gains in a brand new market.

–Iron ore is not a brand new market, of course. But lower-quality ore deposits with shorter mine lives are not the kind of projects that would be worth pursuing in a normal commodity cycle. There are plenty of high-grade, economic, and large resources in the Pilbara. And most of them are locked up by a handful of companies you may already own (like BHP and Rio Tinto).

–Kris has argued, then, that small-cap investors can benefit from the tangible asset boom by punting on companies that have small production targets, but are riding along in the slipstream of an epic bull market in iron ore. That is one way of taking a position on global events that comes down to buying Aussie shares.

–The success of that strategy comes down, in part, to how quickly supply of key commodities can catch up with demand (assuming demand doesn’t fall a lot, which is a whole other debate). This gap between supply and demand varies from commodity to commodity. You have to look at it on a case by case basis. This is what Dr. Alex Cowie did last year when he recommended tin, copper, and potash companies. There’s plenty of evidence that it’s a great strategy.

–For example, resource investor and fund manager Eric Sprott reckons there is a massive shortage in silver. You can watch Sprott make the case here.  But the short version of the case is that Sprott reckons just seven large silver investors own close to 520 million ounces of silver. He concludes that investment demand for silver has been so strong that there’s very little non-mine supply sliver left for everyone else.

–A market that small—the silver market is only about $22 billion a year—with that big a gap between demand and supply is a market with enormous explosive potential.  That could mean explosion in the positive sense (much higher prices) or explosive in the negative sense (investors get blown up if silver prices fall dramatically, as they would if industrial demand fell in a global slowdown).

–Our colleague Greg Canavan, with his grounding in the principles of sound money, has argued that sliver (along with gold) is being remonetised into the world’s financial system. This means central banks are holding silver as a reserve asset. And it means more and more individual portfolios are including an exposure to precious metals, both shares and bullion.

–Silver is money, just as gold is money. They have the inherent benefit of being harder to produce than pieces of paper. Owning them is one way to preserve the value of your savings while the world’s complicated financial architecture falls apart.

–If you’re still not sure that gold is really money, ask yourself why Egypt has banned gold exports, according to the Middle East News Agency. It’s a capital control that prevents money from leaving the country in times of civil unrest. Get used to it. You’ll be seeing a lot more of it as the petro-dollar standard unravels.

–And speaking about petro dollars, what about oil and energy shares? Well, we wrote about them this weekend. The revolutions in North Africa and the Middle East almost certainly mean higher oil prices. But it also means renewed investment in unconventional energy projects. At the very least, countries will try to geographically diversify their long-term energy supplies.

–But the truth of the matter is the Middle East is home to the world’s largest, low-cost energy reserves. You can find energy in other places. It’s going to cost you, though. That could benefit Australia, with its coal, uranium, LNG, and other gas resources.

–Sinopec, one of China’s energy titans, is already on the case. Bloomberg reports that Sinopec and Conoco Phillips have both agreed to become part owners and customers of Origin Energy’s liquefied natural gas (LNG) project in Queensland. This, by the way, was also a story that Kris Sayce was way out ahead of, and for the same reasons (a new market ready to be exploited by agile first and second movers).

–Our own view, when it comes to the energy patch in Australia, is that all the low-hanging fruit has probably already been picked. When you see multi-nationals and oil majors splashing billions in cash, it means the smaller companies have already done a lot of the groundwork in establishing the viability of the business. It’s an easy way for larger companies to add to reserves without doing their own exploration.

–If you’re going to make money on tangible energy assets that haven’t yet been revauled, you’re going to have to either take a punt on much smaller exploration companies that have not been “de-risked” or do something else. We’ll get to the “something else” in a moment. But just remember, the “de-risking” of a project is littered with landmines that could blow up a share price (again in the negative way). You may get rewarded for your risk…just be sure you know what you’re getting into.

–As for the “something else,” look for other unconventional energy projects that are not LNG. There is a whole development model for one such industry that’s already established. It worked a treat in the States for increasing natural gas supply and driving up small companies hundreds of percent. That’s the story we told in the last issue of Australian Wealth Gameplan.

–That’s a brief and incomplete look at how some of the team here in St Kilda are using the share market to hedge against everyone else being doomed. Tomorrow, we’ll explore the doom more fully, including famine, pestilence, and war. And we’ll see if there’s really any way to ride with three of the four horsemen to higher profits, or if it’s a bad idea to saddle up with that gang at all. Until then….

Dan Denning
For Daily Reckoning Australia

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