(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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