Alan Abelson

Given my limited exposure to English world and limited knowledge of English writers, Alan Abelson is the best, best writer of all. I read his articles every week (wouldn't it be wonderful if he can write daily, so we don't have to turn to Krugman who starts to either make everyone as angry as he is or bore everyone to death with all the money he requests to print), My dream is some day I can write half good (maybe in Chinese) as Abelson does.

Worse Than You Ever Dreamed

By any yardstick, last week measures up as chock full of exciting events. The Middle East continued to erupt in a half-dozen or so places. Iran decided it would like to take a look at the Suez Canal, so it sent a couple of warships to Syria via the canal, and Israel—who would have guessed?—didn't cotton to the idea. Egypt revived in a somewhat different context the old Abbott and Costello routine about who's on first (just leave out the "on").

President Obama unveiled his budget proposal, which drew tepid cheers from Democrats and screaming derision from knife-wielding Republicans, a splendid example of bipartisanship in action. Colorado banned welfare cards at strip clubs, which holds grave implications for naked shorts, one of Wall Street's favorite illicit sports. New York City found $2 billion it didn't know it had—somebody must have put it back.

Ben Bernanke flew off to Paris for a meeting of the Gang of 20 as much as anything to get away from his congressional tormentors, not a few of whom are after his scalp (they better hurry, the poor guy seems to be losing his hair fast). But wouldn't you know, no sooner did he set foot in Gay Paree than he was scolded by the gaggle of mucky-mucks from other nations in the G-20 about our nation's feckless financial ways. They couldn't wait to queue up to voice their complaint about QE1 and QE2 serving as a covert devaluation of the precious greenback.

Lest we give you the impression the week was filled with cacophony and uprisings and that sort of unsettling stuff, there were some quite positive happenings as well. We discovered that all the talk of America's decline, as evidenced in the apparent end of the nation's technological superiority, is just so bunk.

What opened our eyes to that bracing insight was a brochure we received from a company describing its ground-breaking invention: a video tombstone starring the deceased. It enables the viewer to see and hear him as he actually was while still alive. Literally—a voice from the grave and a face to go with it.

We've been saving the best for last: Equities extended their gaudy winning streak, blithely ignoring such trivia as disappointing retail sales and intimations that inflation's demise has been greatly exaggerated. This has been the most resilient market we've ever had the pleasure of witnessing. Enjoy it, by all means, as long as it lasts. You won't lack for company, as pros and the public are piling in, but keep in mind that an excess of bullishness, as manifestly exists today, has been know to lead to a fall.


PLEASE DON'T TELL WIKILEAKS, if only because they don't know how to keep a secret. It concerns housing. Everyone knows, of course, that it's in the pits. Considerably less well known is just how deep those pits really are.

Which explains our squeamishness about the news getting around, as it might temper—and we stress might—the irrational exuberance (the pithy phrase may be Alan Greenspan's most enduring legacy from his many years running the Fed) that has rocketed the stock market to 32-month highs and climbing.

Conceivably, the revelation we're about to share with you could put at least a temporary pall over hopes for the long-awaited and often prematurely heralded housing recovery, and the very last thing we want to do is make investors or plain old civilians unhappy. For most people, their house, be it ever so humble, is their largest single investment. (And all these years we've been suffering under the delusion that a house was, pure and simple, to live in. It came to wear an "investment" label during the wild years of the last decade, when it was viewed as an ATM and an asset that could only appreciate in value.)

As Stephanie Pomboy in her always lively MacroMavens dispatch points out, the acrid aftermath of the big bust in housing has failed to dissipate and adamantly hangs on. The average homeowner with a mortgage, she notes, has a scant 2.6% equity in his house, and the already towering delinquency and foreclosure rates seem headed for a new thrust upward, with interest rates creeping up and jobs remaining anything but easy to come by.

Hardly surprising, then, that demand for mortgages has sagged to a 27-month low, an evil omen for something even vaguely resembling a decent recovery in housing.

What's more, if CoreLogic is right, things are a heck of a lot worse than most of us dreamed. CoreLogic, in case you wondered, is a demon data collector of, among other things, property and mortgage info that it peddles to business and Uncle Sam. Last week, it released a report that expresses grave doubts as to the accuracy of the widely followed calculations of home sales and other critical items by the National Association of Realtors, claiming they are seriously flawed, tending to understate the bad news, while inflating not-so-bad by 15% to 20%.

By way of example, according to the Realtors' reckoning, existing-home sales last year declined 5%, to 4.9 million. By CoreLogic's count, however, existing-home sales totaled a meager 3.6 million, a drop of 12% from the '09 total. The disparity between the two is also graphically evident in their respective gauges of the size of the inventory of unsold houses. The Realtors figure the overhang is around nine months worth of supply, but CoreLogic counts the visible inventory of homes with a "for sale" out in the front yard at 16 months. Normal is six or seven months.

CoreLogic suggests the wide spread between itself and the Realtors is possibly explained by the difference in how the two gather the data and by out-of-date benchmarks (which the Realtors say they aim to recalibrate). The Realtors canvass multiple listing services and large brokerages. CoreLogic compiles its data from publicly available records stored in courthouses. Historically, CoreLogic adds, its survey pretty much agreed with 85% to 90% of the Realtors' count, but began to diverge in earnest about 2006, when the housing market was smoking.

Home prices, meanwhile, have been caught in another downward spiral, reflecting a lack of demand and a huge supply, the bitter fruit of the great bust that followed the wild and woolly boom and a prime victim of the jobless recovery in the economy at large. If current trends persist, those already sharply lower prices, CoreLogic predicts, by spring will be down more than 10% from last year's comparable stretch.

It's too early, perhaps years too early, to sound the all-clear for housing and obviously, the bedraggled home builders.

So far as we know, there never has been a vibrant economy that was saddled with the housing sector in extremis. Maybe this is the one time it's different.

But don't bet on it.


ONE BIG WINNER IN THE FIERCE RALLY of the last five months or so has been the chip companies. A peek at the chart of the Philadelphia Semiconductor Index shows an almost perpendicular rise, from around 300 in September to around 470 last we looked.

Sparking this brisk run, you won't be shocked to learn, is the flood of new electronic gadgets—smartphones, tablets and a whole roster of new and (to some people, exciting) products, all of which translate into demand for chips.

In his latest edition of the High-Tech Strategist, Fred Hickey, whose presence also graces the Roundtable, has some kind words for Intel (ticker: INTC), No. 1 in semiconductors. The company, he notes, reported a bang-up fourth quarter and strong guidance for the present three months.

Like Microsoft, he goes on, the stock remains unloved for reasons beyond his ken. Intel shares are selling at only 10.5 times earnings; the company has boosted its dividend and plans to increase its share-buyback program by $10 billion and this year's capital spending by a whopping $9 billion. As Fred drily remarks, "These are not actions typically taken by a management worried about its future."

He takes care to separate the wheat from the chaff among the chip companies. He also alludes to a surplus of inventory built up last year.

A research study released last week by IHS iSuppli, which specializes in tech services, warns swollen chip inventories could prove a problem. Global stocks of chips held by suppliers, it estimates, were at their highest level since the second quarter of 2008—just before the chip makers took gas.

IHS reckons semiconductor revenue growth of 5.6% in 2011, down sharply from last year's 31.8%, but thinks that if growth actually comes in as forecast, "the current inventory level should be manageable." Strikes us as an ambiguous attempt at reassurance, since it is unclear what "manageable" connotes.

Much less equivocal is what IHS sees as the consequences if growth is less than predicted. Then, those bloated inventories become a headache, are dumped on the market, causing chip prices to tumble faster than usual. This could "amplify the size and duration" of a downturn or even a significant slowdown in semiconductors.

Won't be great for their stocks, either.

Marc Faber still expects Stock Market Correction

After his Jan. 26 statement, “Treasuries are the best place to be for the next 10 days,” Marc Faber, editor of the Gloom, Boom & Doom Report, reiterates his forecast for a correction for the U.S. equities market and a decline for emerging markets equities of a much larger magnitude.

A growing number of investors follow Dr. Faber because of his likewise growing reputation for not only predicting global markets with more accuracy than other market analysts but also for his colorful and crowd-pleasing drubbing and debunking the “liars” at the U.S. Fed. In short, Faber has become a iconic folk hero who speaks to power through truth, while navigating the financial waters for investors as his bread and butter trade.

Following his bold prediction of a strong rally for stocks during the nail-biting hysterics of the March 2009 equities meltdown, Faber now predicts that the nearly two-year long rally is overdue for a 10% correction for U.S. equities, while emerging markets could experience a much deeper sell off soon of as much as 30%.

Faber’s thesis is predicated on the fact that “the U.S. economy has performed so well over the past 18 months since the March 2009 lows,” while emerging stock markets of Asia have already priced in much of its economic recovery.

He also points to Asia’s accelerating inflation rate in food and energy prices as a hindrance to its population’s relatively low purchasing power parity with the U.S.

“My concern is this: We have money printing around the world—in particular, in the U.S.–and that has led to very high food inflation and inflation in energy prices,” Faber told CNBC’s Becky Quick on Jan. 19.

“And in low-income countries like China, India, Vietnam, and so forth, energy and food account for a much larger portion of personal disposable income than in the United States,” he explained.

In the past, Faber has repeatedly said that inflation is a unfair tax on the poor anywhere in the world, but can be devastating to populations in countries such as China, India and Vietnam where per capita purchasing power parity equates to $7,400, $3,400 and $3,100, respectively, compared with approximately $47,000 per American.

Faber routinely blames central bankers (headed by the U.S. Fed) for inflation of money supplies and the pass through effects of higher prices in food and energy as a predictable result of central bank “money printing.” More money spent on food and energy, he says, impacts discretionary spending in Asia more than it impacts American and European spending.

Moreover, Faber anticipates that central banks in emerging economies to tighten monetary policy to ward off threats of population uprisings in protest of the higher cost of living as already witnessed in Tunisia and Egypt. The other option available to Asian central banks is to do nothing and allow inflation to continue, he said.

“Both [alternatives] are not particular good for equities.”

“I believe that the U.S. and Europe have a better chance than the emerging markets that have become—I wouldn’t say necessarily have become expensive—but certainly not great values anymore.”

However, in the longer term, Faber likes emerging economies over developed ones in the many years to come as debtor nations struggle with overall burdensome debt levels. He suggests investors wanting exposure to China, India and Southeast Asian countries of Thailand, Malaysia, Vietnam and Indonesia could find good entry points following his forecast correction.

The FOMC is Right to Stay the Course on QE2

The Fed has come in for a surprising amount of criticism since its decision in the fall of 2010 to launch a new round of monetary easing — Quantitative Easing 2. Ben Bernanke and his colleagues are right not to give in to these attacks.

Critiques seem to be of four sorts. (Some are mutually exclusive.)

1) “QE is weird.” Quantitative Easing entails the central bank buying a somewhat wider range of securities than the traditional short-term Treasury bills that are the usual focus of the Fed’s open market operations. This has been a bold strategy, which nobody would have predicted 3 or 4 years ago. But it has been appropriate to the equally unexpected financial crisis and recession. Some who find QE alarmingly non-standard may not realize that other central banks do this sort of thing, and that the US authorities themselves did it in the more distant past. It is amusing to recall that when Ben Bernanke was first appointed Chairman, some reacted “He is a fine economist, but he doesn’t have the market experience of a Wall Street type.” The irony is that nobody who had spent his or her career on Wall Street would have had the relevant experience to deal with the shocks of the last three years, since none of them were there in the 1930s. But as an economic historian, Bernanke had just the broader perspective that was needed. Thank heaven he did.

2) “Monetary easing under current circumstances has no effect.” It is true that, with short-term interest rates already near zero for the last two years, further monetary expansion is likely to be of less help than in a normal recession. (The classic “liquidity trap” has been re-born as the “zero lower bound.”) But monetary policy can work through other channels besides short-term interest rates. Seven such mechanisms are: long-term interest rates, expected inflation, the exchange rate, equity prices, real estate prices, commodity prices, and the credit channel. QE is worth a try, given that the economy is still weak and given the constraints that keep fiscal policy sub-optimal.

3) “Monetary ease will lead to inflation. What we need now, if anything, is monetary tightening.” This is the view, for example, expressed recently by some conservative economists, including John Taylor. It seems to me way off base. With unemployment far above the natural rate, GDP well below potential, and inflation (slightly) below target, it is clear that the Fed’s November 3 decision to ease further was appropriate.

4) “The Fed is firing a volley in a destructive international currency war.” This is the criticism that has come from some of our trading partners: in particular, China, Germany and Brazil. I don’t generally do “My country, right or wrong.” But my country is right on this one. Monetary easing is not a beggar-thy-neighbor policy. The colorful phrase “currency wars“ seems to have confused some people. The current situation is precisely the point of floating exchange rates: when some countries feel that their high unemployment calls for monetary expansion (US) at the same time that others feel that their overheating calls for monetary tightening (Brazil, India, Korea, China…), an appreciation of the latter currencies against the former is precisely the way that floating rates accommodate the differences. This is why Milton Friedman favored floating rates, so that each country could pursue its own desired policies independently. I realize that the pressure which US monetary easing puts on countries like China to allow appreciation is unwelcome. China is finding it increasingly difficult to cling to its exchange rate target by means of controls on capital inflows and sterilized foreign exchange intervention. But capital flows are a far more legitimate way to let China feel the pressure than the alternative: Congressional threats to impose WTO-inconsistent tariffs on Chinese imports if it won’t allow faster appreciation of the yuan.

I was glad to see that today’s decision by the Federal Open Market Committee to stay the course was unanimous. The Fed is right not to give in to misguided criticisms. This is what we have central bank independence for.

How to Short the U.S. Government

With the threat of a bond market crash on the horizon, a series of new products promise to turn a profit by selling short Treasury bonds. But not all of them deliver for buy-and-hold investors – and some of may perform no better than the bond indexes they're supposed to short.

Last week, ProShares launched a new exchange-traded fund that lets investors short Treasury inflation-protected securities, or TIPS – the ninth such exchange-traded product to debut since 2008. Already investors have put more than $7.3 billion into funds that short U.S. government bonds. Since January 2010, two have more than doubled in size and one has more than tripled. And the iPath Treasury 10-Year Bear ETN ( DTYS: 55.36, -0.30, -0.53% ) , launched last August, is now 22 times the size it was six months ago.
The growing popularity of these funds is easy to understand. They basically allow investors to bet that interest rates will rise, causing bond prices to fall, says Robert Whitelaw, the chair of the finance department at New York University's Stern School of Business. Today's low rates and the prospect of future growth and inflation make rising rates likely, says Bret Barker, a fixed income specialist at TCW. Some investors may also have concerns about the country's high debt level, Barker says: Treasury prices would fall if investors around the world starting dumping Treasurys on worries about the U.S.'s ability to pay off its debt, just as prices on Greek and Irish debt fell last year.

But investors who buy these arguments shouldn't necessarily buy inverse Treasury ETFs. Most of the products are designed to give investors the inverse of the daily performance of a benchmark long Treasury index. The key word is daily: That means that returns are compounded every day. Over a month you don't get the negative of the total monthly return, but the compounded version of negative daily returns, says Whitelaw. "They're actually not the same thing." As a result, an ETF that tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index ( TLT: 89.92, +0.40, +0.44% ) is down 5.27% since August 2009, while the inverse product that tracks the same index has fallen 6.16%.

The problem with compounding, mathematically, is that a loss always has a bigger impact than a gain, says John Gabriel, an ETF strategist at Morningstar. If you have $100 in an investment that gains 10% one day, you now have $110. Lose 10% the next day, and you're not even – you're in the hole, down to $99.

Add leverage, as many of these products do, and the "volatility drag" from daily compounding bites even harder, Gabriel says. Take our hypothetical $100 investment that gains 10% and then loses 10% - a two-times leveraged product would end those two days at $96 (up 20% to $120, then down 20% of that, which is $24). The real-world results prove the point: Since the Direxion Daily 20 Year Plus Treasury Bear 3x Shares ETF was launched in April 2009, the ETF that tracks long-duration Treasuries is down 13.24%, but its leveraged inverse twin is down 20.05%. That's not tracking error – these ETFs are delivering exactly the results they're designed to. "The problem with inverse ETFs is not that they're bad, it's that they don't give people exactly what they think they're getting," Whitelaw says.

Investors using these products do need to make sure they understand how they work, says Andy O'Rourke, Direxion's chief marketing officer. Because they have a daily performance goal, investors should watch their performance daily, O'Rourke says. "Volatile periods will hurt the expected performance, but if we see a period where interest rates start rising slowly but steadily, that's going to be fortuitous for a leveraged fund. If it is a steady trend, you'll actually see the performance be more than 3 times the index's return," he says.

For buy-and-hold investors, the lesser-known exchange-traded notes are actually a better solution, Gabriel says. Instead of rebalancing daily, these products provide investors with returns calculated at maturity or redemption, at a rate of 10 cents per one-point move in the underlying index. For November through January, for example, the Barclays Capital Long Bond US Treasury Futures Targeted Exposure Index is down 12.72% and the iPath US Treasury Long Bond Bear ETN ( DLBS: 55.39, -0.09, -0.16% ) is up 13.89%. Because of their different design, this and the other two iPath ETNs that short Treasuries ( DTYS ( DTYS: 55.36, -0.30, -0.53% ) and DTUS ( DTUS: 51.09, -0.17, -0.33% ) ) could comfortably be held for longer periods, Gabriel says.

Alternatively, investors could seek out a variety of assets that do well in periods of growth and inflation, including stocks , Mahn says. Unless an investor has a strong conviction about a very short-term move in Treasurys, "the longer-term view is just not to own them, period, and to own other assets," Barker says.



Read more: How to Short the U.S. Government - SmartMoney.com http://www.smartmoney.com/investing/etfs/how-to-short-the-us-government-1297787508930/#ixzz1E5nznxt6

Bernanke, BLS Lie About Inflation: Dr. Doom Faber

In its latest release, the Bureau of Labor Statistics said the consumer price index (CPI) increased 0.5 percent in December, while the latest figures in for the euro zone show the inflation rate rose to 2.4 percent in January.

“I guarantee you … the annual cost of living increases are more than 5 percent, and the Bureau of Labor Statistics is lying,” Faber told CNBC at the Russia Forum in Moscow.

“Mr Bernanke is a liar; inflation is much higher than what they publish. I would imagine for most households it’s between five and eight percent per annum in the United States and in Western European countries maybe a little bit lower but also around four and five percent per annum,” he said.

In addtion, Faber said high food prices, which have sparked political unrest in Egypt, would next cause turmoil in Pakistan.

“You may not have the problem in Saudi Arabia and the Emirates because there the governments can heavily subsidize food if they want to, but I’m particularly worried that what has happened in Egypt will happen in Pakistan,” he said.

Asked whether Pakistan would indeed see an Egypt-style uprising, he said: “I think that will be the case.”

“I think Egypt is a reminder to people that politics and social events and geopolitics have a meaningful impact on asset markets,” Faber said, adding that what the world was currently witnessing was “a wake up call where the US outperforms emerging markets for a while.”

“That doesn’t mean that the US goes up. It just may go down less than the others,” he said.

Turning to the global economic recovery, Faber said the West was bottoming out and recovering, which meant the global economy looked “OK” for the next six months.

But “we’re all doomed in the long run,” he said.

“We have to realize it’s an artificial recovery driven by ultra-expansionary, monetary policies and also ultra-expansionary fiscal policies.

In other words, the deficits of governments are huge and that will lead down the road to renewed problems,” he said.