On the list of Madoff victims published in both the New York Times and Bloomberg is an organisation who are given as having a paltry $1.4m exposure. This is the Caisse des Dépôts et Consignations (CDC).

La Caisse is a pioneer - founded in 1816 it has evolved into France's sovereign wealth fund with €221bn of assets at end 2007. Its business review highlights some of its noble missions: provision of public housing, paying for university and hospital renovations, financing small and medium sized French businesses, undertaking renewable energy projects and so forth. Or as President Sarkozy put it in January this year to a press corps more interested in his wooing of Carla Bruni:

"The Caisse des Dépôts is an instrument of this policy of defending and promoting the nation's primordial economic interests"

But just what are some of the investments supporting these primordial economic interests? And readers ought to know before the partial answer below that there is surely no nation on earth that takes its leisure time as seriously as France (c/f the 35 hour week).

So look no further* than a wide assortment of ski, holiday and leisure resorts (Parc Asterix included) when giving thanks to the good works of the CDC. These investments, though labelled "regional development services" by the CDC, are arguably much more consistent with the enduring labour rights legacy of the remarkable architect of modern French socialism Léon Blum (note to Madame Aubry: he stopped at a 40 hour week).

As for Madoff, the CDC say that they carry no direct exposure: the $1.4m sat in fund of funds. Which, considering CDC has €16bn in mutual funds (as at year end 2007), is an amazing piece of fortune. Or skill.

Joyeuse fêtes et vive la France.

*OK, there is

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My local rag is not part of any of the well-known international media stables. It is a small island, fairly insular, reflective of the mainstream paper. One of the most durable sections has been the Agony Aunt column (sample letter: "Afraid friend is dating a bisexual").

Some things, however, are international.

Its uncritical report of this week's parliamentary debate for an increase in the public debt ceiling was littered with "we are in good shape", "banking sector is sound" and similar citations. Notwithstanding the stark reality that these are in context depressingly misrepresentative assessments of the risk horizon they are, of course, well-intended utterances meant to maintain confidence and smooth furrowed constituent brows.

But to what point must matters degrade until soothing chatter and presentationally inspired policy placebos are recognised as delusional? Recent history says right up to the moment when the wheels fall completely off the wagon.

Take, for example, the identically themed statements issued since 2007 beginning first in the US housing sector. Many pundits, some miscalculating the importance of perceived self-interest, were caught saying as early as 2007 that the worst was past. Many firms and business associations, as late as this summer (the Confederation of British Industry comes to mind) were caught issuing public releases of an overconfident and complacent nature.

20/20 hindsight one might conclude - easy to call them delusional post case. However, they were readily identifiable, more often than not, as delusional at the time of release.

The result is that credibility has been systematically sacrificed on the alter of good intentions whilst appropriate and imaginative forward planning has not, usually, been timely. Why it is policy makers and administrators, above all, do not grasp this obvious truth is a mystery: a little naked honesty clears the thinking admirably and represents a wise longer term political investment.

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Eliminates (some) double counting, updates Tremont* exposure. Grand total sits at $23.3bn (vs $24.1bn in prior graph). Mr Madoff might have bailed a Detroit car maker or two with that...

(Data via FT. Link here)

Significant caveat: graph data nearly certain to contain overlaps between Tremont, Fairfield and other names.

*Tremont estimated to have $3.3bn, not $1bn, of exposure said the FT citing unnamed sources. Union Bancaire Privée and Fortis numbers are also estimates.

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...admitted exposure to date:

(data from FT Alphaville)

Denunciations of the US regulatory regime for not detecting the scheme have been prominent over the weekend. In the UK the loudest has probably come from Nicola Horlick of Bramdean Alternatives who had 10% of funds under management with Mr Madoff.

There is, as usual, a depressing lack of self-blame by such professional money managers. Everyone claims, legal ramifications uppermost, that they (or, more helpfully for our Learned Legal Friends, qualified proxies) undertook amazing due diligence. It must therefore be the fault of regulators.

Regulators will doubtless carry their fair share of blame. But the most interesting question remains one of fiduciary duty. Investment fund clients do not make contracts with market supervisors.

So how exactly does a fund carry out thorough due diligence on what is in all essence a black box system pleading commercial secrecy?

It, I submit M'Lord, cannot. Next to the alleged and astoundingly stable returns of over 1% per month come rain or shine marketed by Mr Madoff it appears only the prudent and intellectually honest honoured their fiduciary duty to protect and preserve clients' capital in the face of the uncertain and unknown.

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He began earlier this year by wanting to "whip" Switzerland for harbouring German tax dodgers. He forecast the demise of the USA as a financial superpower. And now, Germany's Finance Minister Peer Steinbrück (FT profile here), has only gone and again said what plenty think. The key passage from That Newsweek Interview is below - obviously Herr Steinbrück is not gunning for the diplomatic portfolio.

The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure? (link)

He might have added something along the lines of "talk about trying to buy an election!" but, perhaps, with one eye on the German €31bn plan, refrained.

But still, it is surely a good thing the "crass Keynesiansm" has been put on the debating table rather than swallowed entirely untempered by every single major economic power as part of their ongoing spectacle of one upsmanship using Other People's Money.

Not that the fiscal boosters will see it that way.

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This section from FT Alphaville's Markets Live, an excerpt from a Nomura report, caught my eye yesterday:

DSGi is priced to fail, in our view. We believe the probability of this is over-stated, and see significant upside potential to DSGi’s share price. We therefore upgrade the stock to a Buy rating. DSGi has a number of strategic options, including disposals which could help to raise cash, pay down debt and increase headroom versus covenants. This will see DSGi trade through peak and allow it to execute its transformation plan. Execution of the plan will be key as the market continues to deteriorate. Failure to execute effectively could see further downside risk. We believe management is well positioned to see DSGi through the cycle. (link)
There is contrary. And then there is what FT Alphaville term kamikaze. But far be it for anyone to suggest that the analyst in question is out on a weekend pass - DSG shares have risen +70% on the back of this call.

Still, DSGi is one of those short list short favourites of mine. And everyone else until this bounce. The case against is brief: catastrophic UK high street retail environment for discretionary electronics; cash bleeding away; mucho leverage; and covenants most definitely under dire threat.

The elegant 5 point plan cited on FT Alphaville assumes a smooth and timely disposals process and wholly ignores Murphy's Law. The key lesson of Mr Murphy is that models fail. DSGi's has and it cannot today be repaired. It will be an expensive failure unless you believe, ardently, in the "transformation" (to what?) story.

The price approaches shortdom once more.

Top 10 Murphy Sub-laws:
  1. Just when you see the light at the end of the tunnel, the roof caves in.
  2. Anything you try to fix will take longer and cost more than anticipated.
  3. The things that go missing end up broken.
  4. If there is a worst time for something to go wrong it will happen then.
  5. If you make it idiot-proof someone will make a better idiot.
  6. If everything seems to be going well you have overlooked something.
  7. The cool solutions are never cheap.
  8. Everyone has a plan for getting rich that won't work.
  9. The repair guy will never have seen a model quite like yours before.
  10. Smile! Next year will be worse.

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Stay cheerful heading into the weekend:


Whats the difference between Vladimir Putin and George Bush?
Putin nationalises only profitable assets….

What do you say to a hedge fund manager who can't short-sell anything?
Quarter pounder with fries please.

How do you get a banker out of a tree?
Cut the rope.

What’s the capital of Iceland?
About €3.50.

You know it’s a credit crunch when…
...your builder asks to be paid in Zimbabwean dollars.

What’s the difference between a no-claims bonus and a banker’s bonus?
You lose your no-claims bonus after a crash.

How many Keynesian economists does it takes to change a light bulb?
All of them if you want to generate employment, more consumption and shift the aggregate demand curve to the right..

A priest, a rabbi, and a mortgage broker were all caught in a shipwreck. Sharks were soon circling around. The sharks eat the priest. The rabbi starts praying fervently, but to no avail, as the sharks eat him as well. The mortgage broker is really getting worried, as a shark is coming for him. But instead the shark puts him on its back, carries him to shore, and lets him off. The mortgage broker asks, “How come you didn’t eat me too?” And the shark replied, “Professional Courtesy!”

Bradford & Bingley employees are dismayed they were given no notice of the takeover by Santander. A spokesman explained: “Nobody expects the Spanish acquisition.”

Gordon Brown, Alistair Darling and Peter Mandelson are flying to a world economic summit. Peter looks at Alistair and chuckles: ‘You know, I could throw a £50 note out of the window right now and make one person very happy.’ Alistair shrugs his shoulders and says: ‘Well, I could throw five £10 notes out of the window and make five people very happy.’ Gordon says: ‘Of course, but I could throw ten £5 notes out of the window and make ten people very happy.’ The pilot rolls his eyes, looks at all of them, and says: ‘I could throw all of you out of the window and make the whole country happy.


Spank the banker

NB: Jokes from all over but most can be found at Credit Crunch Jokes

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Screw the pooch non-farm payroll numbers in the last hour, far worse than consensus. Even the increase in unemployment rate to 6.7%, better than expectations by a tenth of a percent, appears due to contraction of the labour pool.

(Graphic from Bureau of Labor Statistics release here)

More focus, if that is possible, is now fixed on housing and foreclosures. Factors that recently looked major positives for home owners- cheaper petrol and lower mortgage rates on the back of the Fed's plan to buy $600 billion of Government Sponsored Entity and mortgage backed security obligations - now look seriously mitigated by the scale of emerging job losses (although caveats on single data points apply).

Société Générale published a useful, pre-data release tour d'horizon and commentary on the problems of and choices for tacking foreclosures today (see especially page 2) - here is a small excerpt:

"There are two major problems that emerge from foreclosures. First, they continue to add to excess inventory, forcing even deeper cuts in housing starts and exerting further drag on the economy. Secondly, foreclosures have put significant pressure on home prices which compounds the problems for financial institutions.

There is a circular relationship between foreclosure rates and home price declines. A drop in prices not only reduces recovery rates on defaulted loans, but it also raises the incentive to default, further boosting foreclosure rates. One estimate quoted by Bernanke is that about 15% to 20% of all mortgage loans in the US are “under water”. That means that almost 1 out of every 5 mortgage holders has a fairly strong incentive to walk away."

And, crunched between the systemic financial problem and worsening macroeconomic outlook, this is what a small but key piece of that circular relationship looks like - pending urgently desired relief:

(data from the US Census Bureau release of 26 November)

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A small addendum to the last gold entry.

A performance graph of gold versus the similarly scarce, but more industrial demanded (particularly since 2000), platinum is below.

(graphs from TradingEconomics)

Similar overall performances but, on this tiny sample, more than double the price dispersion for platinum.

This reflects platinum's growing exposure to the industrial economy since 2000. Before then something like half of production was met by industrial demand. Forecast data for 2008 shows this share up to nearly three quarters of the total.

Which, then, is the more surprising? That platinum remained so closely correlated to gold as a safe haven product for so long? Or that it fell out of the matrimonial bed so disastrously this year?

Without the long history of gold it appears that platinum does not, scarcity and all, enjoy similar caché as a hedge/haven. For this producers can thank their exposure to catalytic converters and media coverage of Detroit Goes to Washington.

But, with flat and problem-riddled supply and industrial demand that has grown over the last 6 years at the direct expense of jewelery, platinum's crash this year still looks mighty odd.

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It “looks as if the bottom has been made” earlier this year. (Bill Miller, December ‘08)
“stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months” (Jeremy Siegel, October ’08)
“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.” (Warren Buffett, October ’08)


"Stocks are reasonably cheap, not spectacularly cheap”..."With the S&P at 900, stocks are cheap in the U.S. and cheaper overseas. We will therefore be steady buyers at these prices."...[but]..."Two to one it will be down quite alot next year" (Jeremy Grantham, November ’08 and link to excellent interview)
“this is not a time to be committing large amounts of money. Stocks are cheap but they can get cheaper; we know that. We got back to the Dow having a multiple of 5.9 in December of '74, which was the foundation of Warren Buffett's wealth because he started buying at that level” (Donald Coxe, November ’08)


“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates. That world, however, is in our past not our future.” (Bill Gross, December '08)
Stocks “are still expensive on any historic valuation method…We may be hitting ‘a’ bottom. I don't know if it's ‘the’ bottom.” (Jim Rogers, November ’08)


(graph from Robert Shiller, updated and annotated by the scribe)

Ad: Free subscriptions for qualified pros. Full catalogue here

(BusinessWeek offer is a free trial)

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Tidy infographic from Le Monde aiming to put G20 fiscal stimulus plans into their budgetary context:

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AIG, if nothing else, have learned very fast from their dealings with Goldman Sachs. If you are going to take bets you don't really, really understand you ought to scour the republic's villages for idiots upon whom you can lay off the risk.

And so, via a Wall Street Journal report, AIG are setting expectations for another re-negotiation with the US Treasury. A couple of priceless (or maybe not so priceless) quotes from CEO Liddy:

(on the Government's AIG stake of 79.9%) "It kind of chokes out any private market investment"
"in financial services if your name is besmirched it can be hard to recover from that."

On that last point, a note to man-of-the-world but Brooklyn-born Geithner: in administration too.

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Apparently, the persistent resistance to narrowing of the Libor:OIS spread since 12 November is all about year-end funding according to this Bloomberg report.

That's great news! No need to worry about diminishing returns of the various liquidity "facilities" (note to self, check the definition of that word): the Primary Dealer Credit Facility; the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility; the Term Securities Lending Facility etc etc.

So, rest easy, for the slight widening of the spread over the last month will be reversed by Christmas when banks will, perhaps, gift taxpayers some more of their precious assets.

UPDATE, 3 December - Just off DJ Newswires (excerpt only):

"The cost of borrowing longer-term U.S. dollars in the interbank market fell Wednesday after the Federal Reserve announced it would extend the terms of three of its recently implemented emergency liquidity facilities in light of the ongoing strains in financial markets.

The Fed said its Primary Dealer Credit Facility (PDFC), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Term Securities Lending Facility (TSLF) would run until the end of April 2009."

Here's wishing for the programmes' (continued) success.

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…a go run him belly.'* This, for non-West Indian readers, is a Jamaican proverb cautioning that what tastes oh so sweet now does not digest too well later. Think asset backed securities and Citigroup, for example.

But also bear it in mind, maybe, when considering investing in, rather than simple hedging with, bullion (though it’s doubtful the downside runs would be of subprime severity).

Is gold an especially attractive asset right now? There are reasons to think so:

  • recessionary global conditions and systemic weakness in financial systems in the US and EU are pushing interest rates down. The relative cost of holding physical gold over sovereign bonds is thus particularly low;
  • bullion is safe harbour against volatile equities (and financial systems), an asset with no counter party worries;
  • few signs that mine production is set to materially increase. [An aside - my personal nightmare is, having loaded up on gold, waking up to headlines that South Africa’s Gold Fields, for example, have discovered an enormous vein 50 metres below the surface (rather than at their current 3,000m depth) and doubled the world’s known reserves at a stroke. However, despite technology and miners’ best efforts that has not happened. Yet];
  • poor, apparently, dollar prospects. Over 60% of the change in the price of gold is explained by movement in the dollar/euro rate. With the Federal Reserve and US Treasury flooding the banking system with liquidity the chance that they fail to mop up it all up in time to stop inflation once expansion starts is a gold catalyst in waiting. However, this is not entirely convincing - there is also reason to believe that, in relative terms, the dollar economy may end up faring better than the euro area;
  • lower energy prices, while not doing much for bullion, should be improving miners’ margins making them an attractive proxy; and
  • with rumours swirling of eventual diversification out of dollars and into gold by Asian central banks, there is a potential shoot the moon deal for gold bulls

On the other hand, gold is not only a store of value - it is also a genuine commodity. There are industrial and commercial (jewellery) markets for it and these are also sensitive to market cycles (ie this demand element is down).

Then there are the stories of ongoing forced gold sales to cover losses of other asset classes. Furthermore, and despite the Central Bank Gold Agreement (CBGA) which aims to minimise market disruption, should a sovereign government decide to join this action – and with Keynes partying like mad there may be the temptation - there would be significant downward pressure on bullion.

This includes the potential action by the IMF, party to the CBGA and third largest official holder of bullion, to dump stock (pending US Congressional approval). Originally conceived in late 2007/early 2008 as a way to strengthen the organisation’s finances the growing role of the IMF in stabilising member nations might, possibly, widen the scope of sales (should they ever materialise).

I’d spare a place for the high gold to oil ratio as an additional counter argument but it probably says a lot more about the oil markets than bullion prices.

Lots of speculation, then, around gold. Which amounts in the aggregate, I think, to an argument for its exclusive use as a portfolio hedge. Perhaps the key argument against it as a pure investment is that competing asset classes are, at today’s levels, obviously cheap. Some, like corporate bonds, are building up a momentum of positive news flow via Bloomberg et al. But even lowly equities harbour some very interesting prospects. And both can offer capital appreciation as well as a revenue stream - and thereby highlight the opportunity cost of gold.

So why, and this is said with an open mind, would one want it as a major investment class?

*ska fans can hear Desmond Dekker use it here in “It mek”

Photo credit: Joe Lencioni

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GE say in a press release 8 minutes ago and just ahead of their Financial Services Meeting webcast (link here, starts in a couple):

GE will also update that its fourth quarter earnings per share are trending toward $.50-.52, the low end of its previously guided range of $.50-.65.

For the champs of managed earnings that sounds a bit ominous. Tune in for more...

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Official - the National Bureau of Economic Research (NBER) today declared that the United States is in recession:

The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession. (link)

I wonder if one might very respectfully suggest that the NBER work to improve the timeliness of its declarations? I realise the committee wants to be sure but a year is what it took to construct the Empire State Building (and Disneyland if that's significant). Seems like calling a recession "officially"' might be a task requiring less time.

Plus if they'd delayed another month the Intrade bet would have been void.

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(UPDATE: saw this on December 2. Maybe the mop up is not as simple as implied in my post)

A Dutch friend, trying one day to explain the reasons for canine biological deformities, coined the term ''overfucked''. That is, excessive in-breeding. The finer points of dog rearing are of little interest to me. But an apt turn of phrase, albeit crude, who doesn't appreciate those?

Anyway, the deeper public hands delve into public purses to buy or accept as collateral suspect assets, the more the Dutch explanation rings in my ears. Are financial markets becoming monetarily overfucked just ahead of massive electorally-promised fiscal stimuli? Are a convoy of inflationary 18-wheelers truly about to crush Lucky, our doggy economy?

A couple of fine links on the sterilization processes used by the US authorities may fill in the wonk lacking in this vulgar post. The answer is, as usual in the dismal science, that no one knows. The gold market, at least, does not yet appear alarmed and this, insofar as monetary policy is concerned, is a nod to history which shows that the artful timing of liquidity mop ups is hardly an impossible feat. The post-1987 period, for instance, is one regularly cited example of the Fed conducting an efficient and effective open-market mop up operation.

So it is probably not the operational skills of central bankers at stake - unless, perhaps, a large swathe of the assets and collateral the taxpayer has been exposed to becomes definitively impaired.

The unique historical US twists seem now to be the sheer scale of intervention, the implications of the nation's net debt position and the process by which the imminent President Obama New Deal II fiscal stimulus is monetized. This is not purely central banker domain. It is the beckoning, possibly, of a dominant period of economically volatile political horse trading.

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The first snow fall of the season here (at under 400 odd metres, that is) can only mean two things: excited, ski obsessed children; and it's at last time to burn in the fireplace those all-wood, decade-old Ikea shoe stands hoarded for no apparent reason until the realisation dawned that they are perfect tinder.

Ikea are a major fire hazard. Anyone familiar with the layout of their shops knows the lower level, between the wicker products, linen and heaving crowds, is not the place to be caught in a conflagration. Whatever they did for my house price by locating in Grenoble I run the risk of never realising by continuing to frequent the ground levels of their shop. If, that is, the quality of their restaurant pork doesn't get me first.

More importantly (at least in macro economic terms) is that Ikea is possibly the largest mover of Chinese wood and packaging products and is especially sensitive to changes in freight rates: transportation costs can easily be more expensive than the direct cost of production itself.

So the collapse in freight rates is, at least for Ikea, a Good Thing. They will not be amongst those manufacturers unable to (anecdotally for there is no central data base tracking this) obtain letters of credit and ought to be able to name their shipping price.

What is more, those decisions about shifting production away from remote but no longer all that cheap locations are also on the back burner again as rates fall. Shame this all doesn't outweigh the Bad Thing of falling demand though.

Not that will stop me being press ganged into attending those themed dinner nights they keep running to pull in punters (instead of lowering furniture prices). But there are a finite quantity of Swedish meatball or herring-based dishes I'll be roused for before requiring discounts on their principal products.

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France lost Agincourt and ever since (it seems) has been trying to win it back. Or at least morally, according to sections of the unbiased British press.

Revisionism may take that battle; and clearly that plucky spirit (which some north west of the Channel confuse with being a poor loser) lived on for much of the last year in the halls of the marketing guild charged with churning French property.

However, as much as La Fédération Nationale de l'Immobilier (FNAIM) has twisted and turned to plug a round hole with a square peg...

“the risk of subprime contagion is limited…the USA is not in France” (October 2007)
…a «subprime» crisis scenario can be dismissed in France…credit conditions remain good despite a tightening of rates.” (December 2007)
“In spite of a decline in prices of -1.0% during Q1 2008, the market environment does not look positioned to enter a scenario of generalised price declines.” (April 2008)
"The idea that there are direct risks of contagion to the French property market from the year-old US subprime crisis well deserves rejection." (July 2008)

...it too eventually bowed to the inevitable arrows (and hammers) of subprime-led credit archers:

"...prices of existing house stock are now oriented towards a decline...expect stagnating prices, or even drops, by year-end." (October 2008)

The moral is, when it is important, smile politely but don't listen to people paid on commission. A more accurate and prescient "forest" view was/is available from the quarterly survey of property developers (via INSEE, latest here) in combination with house starts & permits (Société Générale research).

And if the ongoing trend of new apartments is a sign then a quick turnaround is a long shot.

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...where there was much cheering that the US indexes rose three days in a row for the first time since July. "Very significant" was the consensus. Post-close one floor trader was collared and came up with the thesis:

  • Citi rescue key to investors confidence
  • $800bn consumer targeted Fed plan announced at the day's start crucial and shows the Fed/Treasury "get it"
  • Shortened Thanksgiving trading week provides time to digest the benign significance of it all
  • Investors should therefore start to believe this is the bottom and make merry post hols

This may all be true despite its suspiciously familiar smell and hint of holiday demobilisation madness. But pre-open index futures yesterday were deeply red and even with yet another large Federal/Treasury plan - this time worth $800bn and aimed at the hitherto politically pissed off Main Street - still only finished marginally up.

$800bn is, as Bill Poole poetically put it just after the announcement, a "spit in the ocean". Not to mention it carries no guarantees other than its cost to taxpayers.

Short/medium follow-through potential unproven.

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A simple message: employment leads consumer credit (the bulk of which is mortgage related) - and when jobs are scarce the working population eschew borrowing.

Yesterday's announcement by the Fed that it was injecting $800bn in the economy to strengthen credit markets for the consumer - home owners, students, Hummer drivers and the Holy Grail that is small business - seems to ignore this. It may, perhaps more than briefly, lower borrowing rates. That would be great for refinancing. But it won't mitigate the job cycle - supply cannot in this case create demand. Unless, of course, it is given away (that Son of TARP announcement next week, maybe).

As good fortune would have have it, though, President-elect Obama is on hand with the New Deal II. Fiscal stimulus plus the massive - massive - liquidity injections the US has undertaken will do the job. Of that one may have no doubts.

Course, now that the US Government is in the business of holding preference shares, buying impaired credit assets, accepting the flimsiest of collateral and guaranteeing the walking-dead institutions of Fannie Mae, Freddie Mac, Ginnie Mae etc one may wonder if they are still, also, in the business of not targeting asset prices.

A legitimate question, surely. Doubtful that the taking of large losses against the public purse has suddenly become politically acceptable. Which points towards any policy that increases the value of the assets underlying the People's Portfolio as a Good Thing. Even the double digit percentage increase of the national debt and risk of dollar collapse down the road.

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From Chart of the Day:


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They listened to Sheriff Brody after all (although whether this will prove big enough is unknown). Just across the wires at 07h27 GMT...

(excerpt, Dow Jones Newswires. Full release here)

Which gives the TARP a New Number Number 1 (see New York Times graphic below, not yet reflective of this second TARP infusion to Citi) and marks the commitment of circa 50% of its funds which, if you remember the spiel of its boosters, aren't likely to be totally spent and in any case represent a great deal for the taxpayer.

But, to get back on track, according to the WSJ (link below):

The plan would essentially put the government in the position of insuring a slice of Citigroup's balance sheet. That means taxpayers will be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour

It also - belatedly - marks cards on dividend policy for recipients of public money.

(excerpt, full link here. Hat tip, Simon).

Related links:
WSJ: U.S. Agrees to Rescue Struggling Citigroup
FT: Citigroup gets $20bn bail-out

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In its latest weekly sales report - more reliable these days than the official ONS numbers - the John Lewis Partnership (JLP) once again does not disappoint with the narrative.

The title from this post comes direct from the Waitrose supermarket report - a division which will have to shift plenty more poinsettias to avoid a year over year decline in revenue for the Partnership: total JLP sales in week 16 were down 9.1%.

But, barring an unexpectedly radical upward shift in seasonal flower demand or like miracle, a deep JLP revenue decline is a foregone conclusion due to the performance in the department stores:

And which is the category that, despite never knowingly being undersold, is not moving? Unsurprisingly, in an atmosphere where redundancy stalks and property is plunging, it is their rather nice home & garden products - off 18.7%.

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As the investment world got a few peaks into those parts of the Citi balance sheet that were previously well-cloaked, prior fears that things were bad suddenly crystallised into just how bad.

Cue that line from Jaws when Paulson - I mean Sheriff Brody - first claps eyes on the beast. And down goes Citi equity by 23% in one day. UPDATE: And 26% the next.

It is a wonder of circumstance that Mr Pandit - essentially a hire that cost circa $800m - is the CEO at all. But timing without luck for the long haul won't be enough. Then there is the experience factor: Citi has 387,000 staff (clearly a moving number), nearly 50 times more than Mr Pandit has previously managed. All to do.

Meanwhile, for your continued viewing pleasure of that "mindless eating machine" that is the SIV - I mean shark - enjoy this:

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Although British Land today announced some, well, disturbing numbers they were still considered good compared to rival Land Securities. Nonetheless, this is a story with previous.

Back in October, 2007 British Land pulled the sale of their £1.7bn Meadowhall shopping centre in Newcastle saying, in a statement somewhat guilty of complacency, that:

"the uncertainty in financial markets has made the prospect of realising an appropriate value unlikely" (ie "we can't find a buyer").

At the time Chief Exec Stephen Hester, relatively recently installed from the banking industry, added cheerfully:

"While we would have liked to find investment partners for Meadowhall, the centre's prospects together with the success of our extensive disposal programme elsewhere, make the decision to hold a relatively painless one"


Come February 2008 and Mr Hester was heard announcing that British Land valuers were being "encouraged" to write down assets (painlessly, presumably). In spite of this discovery that it is actually markets that set "appropriate value" Mr Hester, still to all intents and purposes eminently content, suggested that the good thing about the speed asset deterioration was that it:

"augurs well for a shortened duration of the downcycle".


But enough stick. Fast forward to November and where is serial optimist Mr Hester to be found these days as British Land enjoys the "shortened" two year downturn with an 11% decline in its property portfolio? Why, he is over in the CEO position at the Royal Bank of Scotland.

In his brief tenure in this new role Mr Hester has already provided the business public with quotes that contrast interestingly with his prior Panglossian output:

  • There are no "sacred cows'' (such as Meadowhall Shopping Centers) on the RBS balance sheet
  • insightfully, "the Royal Bank of Scotland did get itself over-extended at the peak of the bull market"
  • decisively, "a sharp restructuring is needed to ensure that the strength of our underlying businesses shines through"
  • with the ring of confession, "None of us has a crystal ball, but I suspect it will get worse before it gets better"
  • (and maybe choicest of the lot) previous RBS management had fostered a "bull market culture"

None of which indicates, of course, Mr Hester to be either clever or stupid or without a sense of irony. But it does prove his gift for the political (did I mention amongst his first RBS acts was the prudent but ass-covering hire of Mckinsey to review RBS from top to bottom?), the value of great timing and the blessing of being lucky.

That does not make him immune to this which Mr Hester described as "a trashy piece of journalism". As the well-renumerated head of the one of the largest lenders to the UK's non fox-hunting population he will need to get used to it.

Related links:
British Land: "the worst should now be behind us"

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If anyone still believes that job cuts have nearly run their course in the UK they ought to take a look at the weekly sales data from the John Lewis Partnership, think twice and hope it's a blip.

Some interesting accompanying textual highlights though:
  • "a strong result in handbags"
  • "enhanced candleshop...continued to put on significant advances"
  • "best week ever for Wii sales"
  • "high-definition televisions and Blu-ray DVD players took a leap forwards"
With commentary like that it's hard to work out where the 9.7% decline came from.

In fairness, the total numbers (these are just those of the department store division) were better (off -4.1%) thanks to a strong performance from Waitrose supermarkets. This was due in large part, according to the group, to its "wine promotion'' although it's not yet clear if that's where the growing redundancy cheques are being spent.

Related links:
Reuters report on John Lewis weekly data

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I recently took possession of a Nokia E71. Having previously been of the telephones are for telephoning school it has been an eye opener - at last a telephony gadget that is also a genuine productivity helper (or at least it is the way I work) rather than a massive time-sink.

Nokia not only produces such great devices: it is a fine operating company, too, now leveraging a great manufacturing base, supply chain and emerging market position to expand into services (c/f, for example, its acquisition of Navteq for $8.1bn in July 2007).

Not that the services move is necessarily a winning deal. Navteq may generate $450m of revenue this year (at an operating margin of circa 20%) against its hefty price tag; and future analyst projections may be 'J' shaped. But it is still fair to say that service as a company-transformer is unproven: Nokia is hardware (over 38% of the global handset market) with a user base getting on for 450 million.

Unfortunately for its service aspirations, most of that is in India and China where a €30 phone does not run Nokia Maps. Although the firm no doubt plan to leverage the low end base with cheaper email, net access etc offerings that is a way off. Right now the challenge is making the return on acquisitions work on high end smart phones. And here it competes with the iPhone, Blackberry and assorted other contenders.

Anyway, the real point is that alongside the execution challenge consumer demand is withering across all geographies - and faster than most thought. To this even Nokia must bow. Communications Equipment has badly underperformed the broader market (see graph below) and within that Nokia ADRs have lost over 67% year-to-date.

This is better than Motorola but worse than Blackberry maker Research in Motion or Palm - and on that latter count one truly has to wonder why. It is not as though the end of the tunnel is visible.

One explanation is that Palm's R&D is now led by Jon Rubenstein late of Apple (where he came up with the iMac and iPod). Still, finding robust purchase - much less robust growth - in the thin soil of anaemic demand is impossible no matter how near the tree Mr Rubenstein fell. Even the mighty Mother Fruit herself, currently basking in a pe ratio of over 16.5, may well discover the same - apples to oranges it may be yet Nokia's pe is 7.5.

Next year and 2010 eps estimates are comforting for both. But in this sector those contain even more guesswork than usual.

Disclosure: Short Motorola

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Vive la différence

Monday, November 17, 2008 | | 0 comments »

Vive la différence. The country records marginally positive GDP growth meaning, of course, that it is time for industrial action! This week France can look forward to:

  1. Air France doing a four dayer at a lost revenue cost (according to CEO Spinetta and it usually pays to be wary of nice round numbers) of €100m. I feel some genuine pain from this action given that my children's drama teacher (not that they need one) rang from Martinique to claim/say she is ''stuck'' there until further notice.
  2. SNCF, never knowingly absent from a strike party, have joined in in sympathy. ''Sympathy'' (apparently) because for years their drivers have been retiring on full benefit at age 50 due to the uniquely stressful nature of their employ. Piloting a 747? Stress? Mon ami, you should try running the 05h13 from Gare du Nord...
  3. School teachers do it Thursday and in this case with fair reason. This is a nation with a (theoretical) 35 hour week where the children were, until this school year, doing 75% of that from age 6 compressed into four and a half days per week. Unpaid. They are now down to around 70% over four days - but the load on teachers is set to rise nonetheless.
  4. Others joining in (on Saturday) include postal employees, some telecoms workers, public television journalists and - my favourite - civil servants tasked with manning the unemployment centres.
Just wait till GDP turns negative and see what we get then.

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OK, the Baltic Dry Index (BDI) not nil but minus 9. The point is that on the day that China announces a stimulus package equal to 14% of its GDP (but over 2 years) the BDI falls 1%.

Not exactly a ringing endorsement from the index which would be more accurately termed the Beijing Demand Index. While it's true that the magic of GUBAP* may be at work these are still Very Large Numbers not to react to.

So, as has been found further west, announcing such sums is one thing. Deploying them optimally (not to mention with noticeable effect) quite another.

Excellent run down from FT Alphaville here (and won't someone please tell them to put a direct link to Alphaville on the front page of the new FT site format).

*Generally Unacceptable Beijing Accounting Principles

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December 20, 1999 SPX +20% year-over-year:

October 24, 2008 SPX -43% year-over-year (and -38% vs December 20, 1999):

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The AIG saga rolls on. It has been gnawing away at me: where did it go wrong? Was there a sign?

Thinking back now it's obvious. It began in early 2008 with James Bond telling me to buy face cream. Que?

Yet consider the subliminal messages:

  • "There comes a time when you've got to invest for the future" = the system will COLLAPSE without this bailout
  • "Vita-Lift Double Lifting moisturiser" = one shot of taxpayers' money may not be enough
  • "Wrinkles appear reduced" = wrinkles appear reduced
  • "Skin feels tautened" = skin feels tautened
  • "The future of your skin is in your hands" = you are toast if you don't buy in
  • "You're worth it" = You're not. I am

The New York Times put these points to those involved and got this:

"A spokeswoman for the Fed declined to comment. A spokeswoman for the Treasury did not return a call for comment. A spokesman for A.I.G. declined to comment."

Which is not entirely dissimilar to the responses drawn by the Bloomberg inquiry after old stock of the initial product - Vita-Lift Single Lifting moisturiser - was tried in September:

Fed: "What AIG did with its money, you should call AIG"

Treasury: "The Fed had the lead on this one: It's their loan. I don't know how I could be more clear.''

AIG: declined further comment

Got to laugh. Pending arrival of Vita-Lift Triple Lifting moisturiser.

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These stories appeared over the weekend providing further grist to the mills of shipping Cassandras. One of the interesting indirect links to these cancellations is the announcement, also over the weekend, of the giant Chinese fiscal package intended to unlock its domestic demand.

Shipping and China are a couple fused at the hip. The explosion of the Baltic Dry Index until this summer dates, essentially, from the massive increase in Chinese steel production in 2006 (and requisite iron ore imports). From that point the country became a consistent net exporter of steel (and churned out 35% of global supply). Obviously not the only factor that drove freight rates but a very significant one.

Here matters become trickier. Steel employs several million in China on the back of large energy subsidies and has been artificially nurtured to its current size. Large scale job losses are an unacceptable socio-political outcome. Conversely, for a global industry the bane of which has usually been overproduction that is not optimal.

Bit of a circle of little virtue. China has arguably kept workers (and the world's shippers) happy via subsidised over investment in the steel industry. It previously blunted World Trade Organisation censure over low grade exports by moving massively into high grade steel industries such as shipyard construction and vessel production. But maintaining employment via subsidy and loophole becomes an albatross when global demand tapers off.

And now the Chinese authorities are planning to perform a related crowding-out trick, except at over 20 times the scale (with the proviso that they have not thus far revealed how they arrived at the apparent $586bn), on the domestic economy. From the WSJ article above:

"The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies."
Shippers, previously amongst the most liberalised market industries, will be hoping those first two items feature prominently in the central planners' intentions if they are to avoid a lengthy industry restructure.

Meanwhile, free markets - led with some optimism by miners and construction equipment - rally. Why wait for the detail?

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"Same same. But different."

A familiar reply, reportedly, to tourists in Thailand asking about the provenance of market goods ("Is this real Gucci?") or directions back to the hotel ("I don't think we came this way"). And also one to keep in mind this market cycle.

Same downturn format as prior cycles. But different. There are several examples in this growing trough of economic models breaking down - or just temporarily behaving oddly non-linearly, if one prefers. Take this one, for instance.

Exhibit 1: Global Liquidity and the S&P 500

The parting of ways of the last few data points is not unprecedented. And given the state of bank balance sheets it is understandable. But it is still unusual.

With significant - and increasing - amounts of liquidity building up (the latest data point for September represents a 17% year-on-year increase in this measure of global liquidity), ever greater public sector market participation and languishing equity one does wonder what issues are gathering strength for further down the track.

Sources: Federal Reserve Statistical release and St Louis Fed (FRED)

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"Circumstance has handed the IMF the chance to prove its inherent worth to its members. Hopefully the organisation will take it."
When I wrote that on 27 October about IMF conditionality and the luggage the dogma was producing for the organisation it was without believing a scant 2 days later this press release (or any sort of suppleness at all) would appear.

This is a huge and welcome departure from trend and potentially a key weapon to defend developing/emerging markets against credit crisis fallout: it puts content ($100bn) where before there was mainly style. Conditionality is not going anywhere. But under this facility it is now, as circumstance demands, more pragmatic, less dogmatic and carries less (if any) of a stigma.

Well worth listening through Mr Strauss-Kahn's press conference (click image below for link) and reading this analysis by the Wall Street Journal. The Managing Director's comments on stroppy, IMF-hating Argentina, from 7'30" to 9' 36"are particularly diplomatic (and entertaining).

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It has been awhile since the Baltic Dry Index (BDI) featured here. May 22, in fact, when some scepticism was shown at a Marketwatch.com headline “Shipping Index underlines global resilience”.

The argument then was that supply constraints, not demand, were priming record prices. Of course, it is true that shipyards had been building up the order book for years. But port infrastructure lagged significantly. While spanking new shipyards in China were on track to double ship capacity by 2010 existing vessels were waiting 3 weeks to be loaded in Australia and Brazil. Still, the ‘Supercycle’ thesis (alongside that of ‘decoupling’) was ever present holding it all up and keeping everyone happy.

And then, in 7 autumnal weeks, the violins went from Vivaldi to a composition by your 2-year-old non-prodigy. The BDI slipped under 6,000 right down to 925. Suddenly, unpleasant thoughts dawned: the US consumer, 20% of global consumption, might start to save; construction projects are being shelved the world over; and China will not be able to offset its falling exports by stoking domestic demand. Notably, the forward freight agreement market captured little inkling of this collapse.


So gone are the heady summer days when buyers would pay the same price for a 7 year old capesize ship as they would for a new one of similar tonnage. Gone are the amazing shipping IPOs (often sponsored, incidentally, by private equity). And gone will be much of the capital of the buyers and financiers who until mid-2008 judged that the outlook for freight rates justified bubble prices. [UPDATE: see what I mean?]

Entertainingly, gone also will be the leverage serial price gougers of China inputs – notably that of iron ore extractors like BHP Billiton and Rio Tinto – enjoyed for so long. They may not be looking forward to the next round of negotiations when the past slapping of 75% increases (an annual norm it seemed) are certain to bite back. Already China’s steel mills by some reports are reducing production as inventory levels build.

But despite the collapse in rates alongside the threat of serious shipping over-capacity some will be pleased. Scrappers have been living off crumbs for many years as ship owners kept in service vessels that, in leaner times, would have long been sent to the breakers. They are contemplating a feast of business, a potential investment opportunity covered here back in August 2007.

What is left for shippers? Some (small) comfort, perhaps, can be found in the following chart:

This relationship is not as dead as it looked in December when credit market fear drove yields down extra low. In the short term, rates seem set to rebound modestly - pending new news on the credit crisis and global downturn.

NB: "and all the boards did shrink" - coerced poetry in youth worth something after all. Full Rime here.

Ad: Free subscriptions for qualified pros. Full catalogue here

(BusinessWeek offer is a free trial)

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Diverting 4 odd minute report from the UK's Channel 4 (24 October):

And now, "Tory boom and bust" being a thing of the past, Britain will get a taste of Labour's version.

NB: Thanks, Simon.

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As the Great Unwind continues with the carry trade, Japan is sensing an economic bonking of almighty proportions by the appreciating yen - crushed exports, spectre of deflation etc etc. So they put in the bat call to friends in the G7 and painfully extracted this excerpt via an unscheduled Sunday statement:

“We are concerned about the recent excessive volatility in [Japan’s] exchange rate and its possible adverse implications for economic and financial stability…We will continue to monitor markets closely and co-operate as appropriate.”

Just to make sure everyone got the message – communiqué speak can be tricky - Christine Lagarde, the French finance minister clarified yesterday:

“We wished to support this possible intervention of the Japanese authorities, knowing it would be about a purely Japanese intervention.”

One analyst, Mr Mellor, quoted in the Bloomberg link above implies this is a step towards G7 activism at some future point. However, talk is cheap and it sounded alot more like 'We’re right behind you (all the way back here, in fact)'. The study quoted further down in the article (direct link to the paper here) lends academic credence to this obvious point.

Somewhat separately, and very unfairly for the admirable Madame Lagarde, her quote unfortunately recalls another high flying (but otherwise entirely dissimilar) female French politician who produced an incredible series of gaffes in her brief tenure as Prime Minister including, to her discredit, attribution of the following characterisation of Japan:

  • a “nation of ants" and "yellow dwarfs" who "sit up all night thinking of ways to screw us" (link).

Realpolitik comes in many flavours with the result, apparently, that the coordination seen on 9 October by the sparkly new virtual global central bank only comes into play when the pain is equitably distributed (which may, with the attendant G7 coordination, come along presently). Another Edith demonstrates:

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With no chance of making the "too big to fail" argument US builders are doing what they must to survive: slashing prices to clear inventory. But with inventories still at historical nose-bleed levels there is some way to go yet.

Latest data points:
New houses for sale = 394,000
New Houses sold = 464,000

NB: US Census Bureau report here

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