A flurry of new Exchange-Traded products

With banks looking for new ways to generate revenue, exchange-traded products have caught their eyes. Deutsche Bank and Lehman Bros. have both begun issuing ETNs, which are, unlike iPath ETNs from Barclays, exotic products allowing you to invest in previously untapped markets.


DB ELEMENT ETNs

Lehman Brothers Opta ETNs

Super Return Conference (Munich, Germany)

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MBS 101

You've heard the acronyms (GNMA, FNMA, FHLC, CMO, MBS, CDO, the list goes on...), now learn what they mean:

Head on over to:

CTools:
MII Resources / 07-08 / General / Investing Resources

or directly:
PIMCO Mortgage Basics*

*Courtesy of PIMCO

Sam Zell opines (with Jack Welch)

A few takeaways from today's interview on CNBC:

On business- It doesn't make sense for a debate to exist about what you will do with your asset. If you don't understand something find out where the information comes from, and stay agile to be able to adjust.

On the economy- The worries over the economy are unfounded and 2008 will be a "reasonable" year. Housing starts have already bottomed out and the recovery will start this spring.

On the markets- There are all kinds of market opportunities in this environment.

On the election- "I've been working on my wife for the last 12 years, and I'm making some progress...logic can overcome liberalism."

The North side of ETFs

For all of those interested in the rapidly growing ETF market, market behemoths may have a new challenger: Northern Trust. That's right, the low-key custody bank is making a run at SSgA and BGI. Filings with the SEC show plans to launch 23 ETFs initially, almost all of which are unique to today's marketplace.

The 23 ETFs Northern Trust plans to launch:

• S&P/ASX 200 Index Fund (Australia)

• BEL 20(r) Index Fund (Belgium)

• Hang Seng China Enterprises Index Fund

• CAC40(r) Index Fund (France)

• DAX(r) Index Fund (Germany)

• FTSE/ATHEX 20 Index Fund (Greece)

• Hang Seng Index Fund (Hong Kong)

• ISEQ 20 Index Fund (Ireland)

• TA-25 Index Fund (Israel)

• S&P/MIB Index Fund (Italy)

• TOPIX Index Fund (Japan)

• FTSE Bursa Malaysia 100 Index Fund

• AEX-Index(r) Fund (The Netherlands)

• PSI 20(r) Index Fund (Portugal)

• RTS Index Fund (Russia)

• FTSE Singapore Straits Times Index Fund

• FTSE/JSE Top 40 Index Fund (South Africa)

• TSEC Taiwan 50 Index Fund

• FTSE 100 Index Fund (United Kingdom)

• FTSE SET 30 Index Fund (Thailand)

• Dow Jones Wilshire 4500 Index Fund

• Dow Jones Wilshire Global Total Market Index Fund

• Tokyo Stock Exchange REIT Index Fund

Information care of P&I.

MII Stockpitch 2008!

CPI = Trouble

The Consumer Price Index (CPI) increased 0.4% in January. The expectatation was for an increase of 0.3%, so at least initially today's data doesn't seem too bad. But the reality is that the CPI is up 4.3% versus a year ago and up at a 6.8% annual rate in the past three months.

Energy prices are up 19.6% versus last year.

Food and beverage prices are up 4.8% versus last year.

Excluding food and energy, the “core” CPI was up 0.3% in January (0.311% unrounded) – the highest one-month increase in more than five years. The core CPI is up 2.5% versus a year ago and up at a 3.1% annual rate in the past three months.

According to FT Advisors' Brian Wesbury & Bob Stein, this data strongly suggests that the Fed "needs to stop ignoring inflation. In the past three months the CPI is up at a 6.8% annual rate. With the exception of the two months immediately following Hurricanes Katrina and Rita this is the largest gain since 1990. At 4.3% consumer inflation is higher than the 3.9% yield on the 10-year Treasury, and that’s before investors pay taxes on the interest. Even “core” consumer prices are accelerating, with ex-food/energy prices up at a 3.1% annual rate in the past three months. Long-term, the five-year moving average of overall inflation remains in a steady uptrend (see chart to the right). Monetary policy has been accommodative since late 2001, which means an already serious inflation problem will continue to climb in the years ahead."

While its impossible to ignore data and even more difficult to disagree with Wesbury & Stein's argument when they have this kind of data to back it up, it has to be acknowledged that M1 growth has been absolutely flat over the last 2-3 years. That, and the weaker economy, suggests that inflation may well tame over the next few quarters. For the market's sake it must or the Fed is going to be very hard pressed to make a claim for more rate cuts.

By the way Wolfe, this supports your post below... credit is given where credit is due, no pun intended.

Into the Clear?

This article from BV talks about the inflationary pressure our economy is under due to increasing commodity prices. Combined with the weak monetary policy in the last 10 years there is too much money out there chasing too few goods. I think this situation we face is unlike any other we have seen before because of globalization. Will the continued growth of developing nations drive commodity prices higher? I don't know, but the Fed should be on alert.

Might Stickers Cure the Economy?

The Shops at Atlas Park has come up with another "brilliant" way to cure the economy. Stickers.

First the "rebate", now stickers. Great.

Here is the story behind it:

Back in the nineteen seventies, the Ford administration asked the public to "Whip Inflation Now” by, among other gimmicks, wearing "WIN" buttons. Inflation was roaring along at seven percent but the public was asked to believe that war-driven spending and an inflated money supply were not the cause of economic troubles. Instead it was magic or something, and little pins could make it go away. That didn’t work out, and it wasn’t until Paul Volker took control of the Fed and raised interest rates that inflation actually got whipped.

Now The Shop at Atlas Part (Glendale, NY) is planning on giving away money ($20k) as well as stickers to stimulate retail shopping. Will this work?


“Giving away $20,000 will not solve a thing. Nor would giving away $342.8 billion dollars, if every shopping center in the country was silly enough to do the same thing,” Michael Shedlock writes. (Hat tip: FT Alphaville.)

This is exactly the same thing the US is doing with the rebate. Stimulus+ (Tax to pay for stimulus)=$0 impact on the economy.

Click here to get a "I Support the Economy Sticker." If sticker. Warning- this is an actual sticker!

Thanks to dealbreaker.com for the picture of the stickers.

A look inside the secretive world of Cerberus

Below is a link to a letter sent to LPs in Cerberus International Partners LP, the Cerberus partnership that purchased Chrysler from DaimlerChrysler last year.

Investors Note

Baseball, Steroids & the Economy

An excerpt from a FT Advisors report this morning:

Let’s hear it for irony. In almost simultaneous events last week Congress attacked baseball players for taking performance-enhancing drugs while at the same time supporting artificial and temporary stimulus for the US economy no matter what the long-term costs...

Many people don’t like professional baseball players using steroids because they mask the underlying ability of the player. They taint the results.

But so does artificial economic stimulus. Monetary policy accommodation can help people feel wealthier for awhile, but it cannot create wealth. In the end, trying to increase spending without increasing the country’s productive capacity is a fool’s errand. Boosting demand without boosting supply causes a misallocation of resources. Like with steroids any boost is temporary and risks longer-term economic problems.

Blu Ray Wins

Well, those of us that have been waiting for this silly Betamax vs. VHS round 2 to be over have finally gotten our wish. To those of you staring at HD DVD players and mountains of HD DVDs or the X-Box 360 HD DVD player, I'm sorry, better luck next time chap. The good news is that now that the format war is over, we can all go be good little consumers and go start buying stuff. I would just like to point out one thing to all of you though, Blu Ray players are REALLY expensive. In fact, right now, one of the most inexpensive players is the Sony PS3, yes boys and girls, the PS3, that lovely console we all forgot about. Anyway, so go out and buy one, and buy some Sony stock too while you're at it because this announcement should be pretty good for PS3 sales once people figure this out. You get a blu-ray player and an opportunity to play good games... if any ever come out. Though it would be really nice to play Grand Theft Auto 4 on something other than the shoddy X-Box 360 controller. To those of you who are more patient, wait till Christmas this year, my bet is that Blu-Ray is going to be the hot ticket item, and it is going to get cheap because the format war is over.

Subprime Primer

A comical look at the subprime mortgage situation.

The Subprime Primer

Credit Default Swaps 101 - NYTimes

Sunday's NYTimes has a nice explanation of Credit Default Swaps (CDS) and the problems arising in that huge market.

This part makes me wonder if JPMorgan really is going to able to skirt all the damage from this debt and derivative fall out:

JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.

Short on JPM, anyone? (Doug Kass said he just recently went short JPM on TV Friday night).

The Rebate and Tax Cuts

This rebate just continues to angry me. Here are a few articles on it and some great analysis by Mark Perry on his blog


Economic Stimulus Math for Economy:

+$100 billion in economic stimulus + (-$100 billion in economic destimulus, higher taxes now or later) = $0 net effect on economy


An article by Artur Laffer on how the rebate is a terrible idea

The proposed rebate of about $600 per man, woman and child is transferred to people based upon some characteristic other than work effort. In fact, if you've worked too hard and earned too much, you won't get a rebate. So in some instances the rebate actually requires the absence of work effort. Now it's true that some of the people receiving the rebate may also be workers, but working is not the reason each person receives the rebate; it's simply because he or she is a human being. Thus rebate recipients are given command over real resources for doing something other than working.

...and finally Greg Mankiw on giving a tax rate to just women. Take a look at the link, it will never pass in Washington but its a great idea and I support any kind of tax cut.

Women have a more elastic labor supply than men. By the Ramsey principle of optimal taxation, familiar to any first year graduate student of public finance, women’s labor income should be taxed less....In modern western societies (and elsewhere) differences in labor supply behavior of men and women are not rooted only in the functioning of markets and firms but originate within the family....family-induced gender difference in access to labor market opportunities is the reason behind the difference in labor supply participation rates and elasticities of men and women.


...and a random picture to lighten up the mood in this post.

Insider Trading

Oleksandr Dorozhko made around $300,000 using insider information. Although he might face criminal charges, he is keeping the money! Apparently a person who gets insider information through 'legal means' (ie bankers, ceo's etc) will be charged with insider trading and will have to forfeit his or her earnings. However if a person 'illegally' obtains insider information (ie hacking or stealing) he or she is not in violation of securities laws at least according to Judge Naomi Reice Buchwald of United States District Court. Dorozhko might be going to jail but he's $300k richer!

Here is the story.

Subprime 101 - A Presentation

How the subprime scam really works.























HT: Barry Ritholtz

Facebook Rebutal

Media has evolved from mass media to "my media" (personalization i.e. ipod and tivo). Now, in 2008, we are in the "we media" with blogging, facebook, youtube, and flickr to name a few. In our busy lives, social networking sites are often the simpliest way to stay in touch and people feel a sense of community. Facebook is ranked 15th among sites with the most traffic (39 million).


Interesting fact of the day: an estimated 62% of all users are considered addicts. For advertisers trying to market to consumers ages 18-24, facebook is a goldmine. I listened to a speech last Thursday by Yahoo! V.P of Political Advertising, Richard Kosinski, who is blown away by the facebook trend. Marketers and advertisers are dying to find ways to reach the mobs of people logging onto Facebook everyday. Advertising tacits are tricky because they risk creeping people out ( for example when Overstock.com and other companies made the deal with facebook to show user's buying information on Facebook). I look forward to seeing how advertisers attempt to integrate their products into facebook.


Check this link out: http://www.quantcast.com/facebook.com results

Estimated Monthly Uniques
U.S. 39 million
Monthly U.S. Uniques


Top Subdomains
Jan 2008
Subdomain % who Visit
facebook.com 100.0%
ak.facebook.com 66.7%
login.facebook.com 44.3%
apps.facebook.com 43.3%
register.facebook.com 39.8%
hs.facebook.com 34.2%
static.ak.facebook.com 29.1%
msu.facebook.com 1.2%
psu.facebook.com 1.1%
ucsd.facebook.com 1.1%
minnesota.facebook.com 1.0%
osu.facebook.com 1.0%
indiana.facebook.com 1.0%
umichigan.facebook.com 1.0%
purdue.facebook.com 0.9%
upload.facebook.com 0.9%
tamu.facebook.com 0.8%
gvsu.facebook.com 0.8%
cmich.facebook.com 0.8%
wisc.facebook.com 0.7%

Take note that Michigan is the 7th largest user of Facebook (ok, so maybe we don't have as much time as MSU (#1) or OSU (#5), but that's still huge.

Washington wants a recession...

... or at least Capitol Hill wouldn't mind one. The atmosphere there is so anti-growth its difficult to even listen to for a few minutes. Today started out with reassuring data and the markets opened higher yet again, looking to continue what has been a very solid week. Then we had to have Sec. Paulson, Chairman Bernanke, and Com. Cox step into the Senate to answer absolutely ridiculous questions about markets, soverign wealth funds, interest rate freezes, foreclosure moratoriums, etc. etc. etc. As you can see from the above chart, stock markets started to fall almost the instant the diatribes began at 10:30am. Everytime I tune into CNBC to listen to one of these Capitol Hill testimonies I cringe listening to the likes of Chuck Schumer and his cadres blast Chairman Bernanke for letting our economy fall over the edge into recession. "You've created this mess of an economy," the Senators say, "and now WE have to rise to the rescue with a stimulus package to make up for your transgressions." "You greedy people have forced innocent homeowners into the streets, and now WE have to keep you from doing business anymore."

Its ridiculous. Its a total subversion of reality to push a political purpose (it happens on both sides of the aisle now, unfortunately). And markets despise it. Will Washington DC please step out of the way and let the US economy do its thing?

I think the answer is NO.

Econ Data 101: Jobless Claims, Trade Deficit

Today's data included the weekley jobless claims and measurements of December 2007's trade deficit.

Jobless Claims: -9k, +12k (4-wk. moving avg.) -- neutral
Trade Deficit: exports +1.5%, imports -1.1% -- semi-positive

First, in the jobless claims, we saw a fall in claims of 9k to 347,000 new claims vs. last week's initial report of 356,000. Consensus was for a drop to 350,000, or 6k below last week's measure. This number leaves us at a 4-wk. moving average of 347,250, or 12k above what it was last week. Let's break this down a bit more. First of all, this data is measuring the number of US workers filing new claims for unemployment benefits for the previous week (the week ending Feb. 9 in this case). Unemployment claims gives us a sense of the state of the overall economy because more employment generates more income, more spending, more profits, etc. Too low a number may be a concern because low unemployment can cause firms to bid up wages, but too high a number suggets the economy is stagnant. A 347,250 4-wk. average is a bit on the high end of the comfort zone, but its not the recession number a lot of people were (are) expecting. Also, economists generally use a 4-wk. moving average to gauge where we are at in the business cycle because it smooths out week-to-week volatilities. So the 12k increase in the 4-wk. moving average (not so good news) counters the 9k drop in the weekly number (good news). Bottom line: not great data, but a relief that it wasn't awful.

The trade balance is the measure of exports minus imports, and for the month of December the US trade deficit contracted by about 7%, from $63b (in Nov.) to $58.7b. This is a sharp fall and it means two things. First, it means that US exports are responding to a weaker US $ and strong foreign demand for our goods and services. Indeed, exports rose 1.5% from Nov. to Dec., which is very good for US exporters. This is exactly the way in which a weak US $ acts as a sort of "safety valve" for the economy... when the US $ weakens in the face of slow growth, exports step up and provide a boost to the economy. The other side of the shriking trade deficit is the fall in imports, which was a -1% change from Nov. to Dec. Given that oil prices (a major US import) were running high during Dec., the fall in imports points to a fall in US aggregate demand. This is the bearish news coming out of the trade balance numbers today. Bottom line: exports boomed on the weaker $, consistent with our forecast from January that exporters would be a big factor in keeping the US out of recession. Imports fell on aggregate demand contractions, but you can't build an economy on aggregate demand (unless, of course, you are a Kenyesian).

Finally, as far as MII and our portfolio is concerned, stock futures moved slightly higher on this news while the yield-curve continued to steepen significantly. A steep yield curve suggests robust growth with inflationary pressures into the future, not consistent with recession. It's possible that we'll get a couple of quarters of negative GDP growth, but I'm still far from convinced. In fact, the trade data should result in an upward revision to the 0.6% Q4 GDP number we saw a couple of weeks ago.

Bill Gates Quits Facebook

From today's WSJ Online:

Microsoft Chairman Bill Gates has stopped using the Web site Facebook, the most damning indictment in a week full of bad press for social-networking technology.

No we can’t be online friends

Social-networking Web sites, which help people share and find information about one another, were supposed to change the way people use the Internet and the way we work. But lately, all we’re hearing about are the problems.

Workers who created profiles on Facebook are horrified to find out they can't be erased, the New York Times reports. Even if you deactivate your account, Facebook still keeps a copy of all the information you ever posted. And, the Times reports, it’s still possible to contact people through deleted Facebook pages.

From someone who deactivated his Facebook account in protest a while ago, I'm semi-pleased to see this article. I'm very skeptical of any corporate strategy which revolves around social networking on the internet. To me, its the epitome of the "new era" type arguments which almost always turn out to be justifications for building "bubbles." The bubbles usually burst too.

40% more to fall...

Discouraging news on the housing front from yesterday's WSJ (subscription required):

Median (home) prices in California peaked in 2006 at 13.3 times per capita incomes. Hard to believe, but true.

They may be down now to about 11.1 times. But that's still way above the ground. Throughout most of the 80s and 90s they ranged between six and seven times incomes.

Just to get down to seven times incomes, prices would have to fall 37% tomorrow.

Those who bought at the peak of the cycle may be pinning their hopes instead on "incomes catching up" instead. But they had better be patient. Even if house prices stayed exactly where they are, it would take around 10 years for rising incomes to bring the ratios back into any sort of alignment.

What is Washington Thinking!!!???

Former Goldman Sachs Chief and current Treasury secretary Hank Paulson has called for the mortgage industry to observe a 90-day moratorium on foreclosures, and a 5-year freeze in mortgage rates on subprime adjustable rate mortgages.... Talk about election politics! How could a republican and former CEO of one of the most respected firms on the street propose what are essentially price controls!!!! Shouldn't we be encouraging free market capitalism?

In my opinion this is throwing kindle into an already roaring blaze!! What this proposal will essentially doing is telling banks "hey, its alright if your lending standards are poor, we'll save you". How do you expect banks to learn from their poor lending habits when interest rates were low? Banks were lending to people who they knew could not pay their mortgages when interest rates rose!

This is not the solution to the problem. Banks are facing huge writedowns? Take it! Its your fault! Firings in the mortgage departments? Sorry, you didn't properly evaluate the risks involved. What needs to be done to prevent another one of these housing debacles is encourage capitalism! Banks know that if they lend to people with sub par credit they will face writedowns, and if you want to please shareholders and make your bank more profitable tighten these lending standards! Thats it!

What's the heck is this government intervention mumbo jumbo all about!!??? Please make it stop!

Queue Shameless BV Promotion: The Crackberry Addiction

So, I'm told that earlier this week there was a blackout in BlackBerry service, and, as a BlackBerry user with a high chemical dependency on said device, I'm shocked to say, I didn't even notice. People are blowing this thing way out of proportion. Now, I'm not one to pick a fight with Rob Cox, but I have to say that he and the rest of the media are being a little bit silly about this whole outage thing. I mean, yes, okay, the service went down and that can cause some serious problems for business users. Yes, business users don't care... at all... about how much they pay because functionality and reliability is the name of the game for them. Yes, none of the big banks have dumped BlackBerrys in spite of the couple blackouts over the last 2 years. I'll also say this: They aren't going to... ever. Barring an AMAZING innovation on the part of some other company, there is no way that any of the major business users of BlackBerrys are ever going to switch. Here's why.

There are NO VIABLE ALTERNATIVES. Yes, there is the iPhone, the BlackJack, the HTC Mobile Devices, Samsung, the Motorola Q, and the Palm Treo, but lets face it, none of those are going to break into the RIM marketshare. With the exception of the Palm Treo, which uses the BlackBerry Enterprise system that all the BlackBerry's use, the rest of these options have absolutely NO fully developed enterprise management solution. I mean sure, the iPhone might eventualy have something nice that could be used, but the iPhone is also full of security flaws that businesses cannot possibly afford to have happen. The Treo is not a real alternative either. The devices are big and clunky, and the BlackBerry models that have recently come out are small, light and incredibly user friendly. The problem that the Treo and all of the other phones mentioned above except the iPhone also share is that they all use Windows Mobile OS. Now I don't know how many of you reading this have ever used a Windows Mobile device, but let me tell you, it isn't fun. It has what I would describe as the clunkiest interface I've ever used in my entire life, and nothing works very well at all. All of this, coupled with the 3G and WiFi that will be added to the next generation of BlackBerry devices (the only drawback that the current models have vs. anything else in the market), has me convinced that RIM is sitting on a gold mine, and it won't be going anywhere for quite some time. I know I can't see myself using anything else for the forseeable future.

Retail Sales up 0.3% in January

The always important retail sales numbers (both core and headline) showed a respectable 0.3% increase in January. This should be compared against an expected 0.4% decrease in headline sales and an expected 0.2% increase in core sales (sales excluding volatile auto purchases).

Retail sales are up 3.0% from January 2007, and up 4.9% from January 2007 excluding autos.

Also, the biggest decline came in building materials, which is a sign of weakness in home building. Everyone already knows home building is weak. What is key is that the weakness did not show up broadly in consumption items, though some economists were a bit reserved because the numbers did show a modest shift away from discretionary towards non-discretionary spending. For example, people were leaving bigger ticket items like dishwashers on the shelf while continuing to scoop up smaller purchases.

What does all this mean for MII? It means that that news of the consumer’s death has been exaggerated. It suggests we have not already entered a recession. It also undermines the theory that we are destined to enter a recession.

The result? The markets, and MII's portfolio, are up.

ALSO: Since last Thursday's HF meeting, where we agreed to hold onto SLB and AAPL despite seeing some unrealized losses, we have seen both of those stocks rebound significantly. SLB is up from 74 to 84; AAPL is up from 120 to 127. Let's stick with long-term investing based on our understanding of market and economy fundamentals.

Update: Mark Perry gives us the graph at the top of this post with this analysis- The chart above...shows annual retail sales growth rates, from the same month in the previous year, and averaged over six months to smooth the data. Notice that the trend over the last 9 months is upward, and it looks nothing like the downward trend in 2001-2002 during and following the last recession (shaded in graph).

yoga--a commodity?

According to U.S. News and World Report, over eighteen million people practice yoga. With a number that seems quite high, the yoga industry is now worth about more than 25 billion dollars. The yoga craze is sweeping the minds of the country in our modern, high-stress society. Yoga started about 3,000 years ago in India, designed as a reverent and strict practice. These yogis did not need anything, only the desire to better themselves. Now yogis need everything from the newest yoga mat bags to hot yoga shoes. Yoga brands and accessories have become a giant business with enormous possibilities for profitability. Not only are Walmart, Target, J. Crew, and countless other companies in the consumer industry selling yoga products now, but sales are through the roof.

Let's talk about Lululemon, the Canadian company that everyone seems to be talking about. Yes, they had a minor seaweed controvery in Novemeber, but they're recovering. Their business is worth more than $150 million dollars with earnings continuing to surpass estimates. Demand seems to be greater than supply and stores are starting to open up in all major cities. With a strong martketing team and unique advertising, people aren't just buying yoga pants, they are investing in a lifestyle.

In middle of the twenty first century, yoga was seen as a hippy and environmentally friendly activity. After the fitness craze took off during the 1970s and 1980s, aerobics and running became the new “it” things to do. As the craze revolutionizes, yoga has evolved as one of the foremost ways to become fit in both mind and body. Celebrities and press had much to do with the trend. At first, these high-profiled elites and yoga moms latched on to the train, but as time goes on everyone from young, old, male, and female are getting into yoga including your favorite sports athletes.

Yoga brands and accessories have become a giant business with huge opportunities. Yoga chains are popping up in small towns to every block in New York. Yogis are using Starbucks and McDonald’s business models to expand the market switching the traditionalist practice into a highly-demanded commodity.

Google 26.3% of the DJIA? Not yet

This week Altria and Honeywell were removed from the index and were replaced by Bank of America and Chevron. I found it interesting that Google wasn't added since it's one of the biggest companies in the world by market cap. Ends up being that the DJIA is a price weighted index (the higher the stock price, the higher the weight in the index). If the makers of the index would have added GOOG to their index it would have been the largest part of the index.. by far..at 26.3%!!!! One of two things needs to happen, split google or change the way they calculate the return on the Dow. Take a look at the chart by B.I.G.

The 2008 Sports Illustrated Swimsuit Issue.....Indicator!

There are a lot of crazy indicators out there. One book to read about these is A Random Walk Down Wall Street by Burton Malkiel. But the most recent one I've seen put out by the Bespoke Investment Group tops them all! If this isn't a sign to jump back into the markets, I don't know what is. Here is the Sports Illustrated Swimsuit Issue Indicator.

Over the last 30 years, an American has appeared on the cover of the annual Sports Illustrated Swimsuit Issue in 15 different years. The average performance of the S&P 500 during those 15 years is a gain of 13.9% with 13 positive years (87%). Of the fifteen years where no American appeared on the cover, the S&P 500 has averaged a gain of only 7.2% with 11 positive years (73%).

Picture is worth a thousand words...

Insider Buying

FT Advisors has some nice factoids out today about last week's market activity. One stat from last Tuesday, Feb. 5, shows that corporate insiders are heavily accumulating shares:

Tuesday, February 5, 2008 — Corporate Shares

CEOs and other executives in Corporate America are buying more shares of their companies' stock than they are selling for the first time since 1995, an indication they believe the market is undervalued, according to Bloomberg. The last seven times insiders bought more than they sold the S&P 500 rallied an average of 21% in the following 12 months.

Traders, Investors, Economists

From FT Advisors:

Traders are different than investors. Traders use capital to finance short-term trading strategies. Investors use capital to finance long-term ownership stakes in good businesses.

Most traders don’t care if the market goes up or down. They can make money either way. And while many investors can roll with the markets’ punches, most investors hope to buy low, sell high, collect dividends, and own good companies that go up.

Both traders and investors think, and talk, about the economy, and react to it, but successful traders and investors often know little about economics.

Traders follow technical indicators – Fibonacci numbers, 200-day moving averages, or trading volume – and become adept at understanding market psychology. Investors think about cash flow, return on investment, p-e ratios, Graham and Dodd, management, and profit margins.

Economists think about money, entrepreneurship, trade, productivity growth, capacity, potential GDP, tax rates, Keynes, Smith, and Friedman. The interesting thing is that none of this happens in isolation.

Traders are watching the market fall apart. Some are selling short and making a profit, but others are seeing their entire leveraged trading strategy blow up in their face. At the same time, long-term investors are watching hard-won profits evaporate. As a result, it’s easy to translate all of this into a view on the economy.

But, just because traders and investors believe a recession might be right around the corner does not mean economists think so, too.

In fact, the “average” economist surveyed by USA Today in late January expects real GDP to grow 1.8% in 2008, while early February surveys by Bloomberg and the Wall Street Journal (taken after the weak January jobs number), show growth of roughly 1.6% this year. In the Bloomberg survey, just 12 out of 62 economists forecast two consecutive quarters of contracting real GDP in 2008.

Despite this, TradeSports.com, which allows bettors to take a position on current issues of the day, places the odds of two consecutive negative quarters of real GDP at 66%.

These odds are well above those of the average economist. This could be because of the prevalence of the pessimistic market view by traders and investors. Traders and investors outnumber economists in reality and on business TV and in the press.

There are many economist jokes – one says, economists were put on earth to make weathermen look good. However, there is no evidence that traders and investors make better economic forecasts than economists themselves.

Market-based prognosticators are watching stock prices fall and leverage in credit markets come unwound. These are serious issues, but neither has led to a recession at any time in history unless the Federal Reserve was following a tight monetary policy or tax rates were being raised.

Because the Fed has never been tight in this business cycle, and after recent rate cuts real interest rates are below zero, there is no risk to the economy from tight monetary policy. At the same time, tax rates remain low and productivity is still strong.

At this point, traders and investors have become much more pessimistic than economists as a whole. But if economists are right (including those here at First Trust), opportunity abounds. The market is cheap.

Rubenstein on Private Equity in 2008

At Davos, David Rubenstein of the Carlyle Group gave his opinion on the future of Private Equity in this video interview: http://dealbook.blogs.nytimes.com/2008/01/24/private-equity-after-the-big-chill/

A bit optimistic perhaps?

Letter to Ben...oh Ben...

With Valentines Day coming up, and not wanting to touch school work my friend Mike wrote this great poem. I present to you our first celebrity blogger.

Dear Uncle Ben,

Roses are red, Violets are blue
Our economy is weak and the dollar is too
With uneasy employment growth and flat consumer spending
It's pretty obvious Ben, that our markets need mending

Although I'm happy with the Fed's rate easing concession
I am about to bet the farm that we will end up in a recession

And while we may actually just skirt an actual decline
Real GDP at less than 1% still isn't fine

Whether it be a contraction in service-sector activity or the Jobless claim data
Ben you should know, that we should do something sooner than latea'

Over the next few months I'm hoping to see resilience in what corporations earn
Because that may provide a floor and assist in avoiding an overall downturn

XOXO,

Mike

Yahoo to reject MSFT deal. Will Microsoft give up?

No way! Expect another offer from microsoft this week in the $35-37 range.

Here is the story

G7 Meeting "Global Growth May Weaken, Market Turmoil to Persist "

The g7 nations are currently meeting in Tokyo to discuss the world economy. The news coming out of the meetings is not too encouraging but at least they say steps are being taken to calm the markets. Below are few quotes and the link to the story.

The problems are going right through all parts of the financial markets and there's not much the G-7 can do about this,'' said Gilles Moec, an economist at Bank of America Corp. in London.`There's a danger that the downturn will become a self-fulfilling prophecy.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Feb. 7 rating downgrades for bond insurers hurt by the subprime slump ``could be a tsunami-like event.''

Downside risks still persist, which include further deterioration of the U.S. residential housing markets'' and tighter credit conditions, G-7 finance ministers and central bankers said in a statement in Tokyo yesterday. U.S. Treasury Secretary Henry Paulson said ``we should expect continued volatility'' in markets as risk is repriced.

The G-7 agreed that China should do more to defuse global trade tensions by allowing the yuan to climb against the dollar and other currencies.

``We encourage accelerated appreciation of its effective exchange rate,'' the statement said. While the yuan has climbed 4.5 percent against the dollar since the October statement, it's risen just 3 percent against the euro in the same period.

Story

A Response to Volatile Markets

Today's markets are volatile and require patience and a cool head...see below for a few thoughts:

Volatile Markets @ Lord Abbett

Speak softly, but carry a big stick.

Check out "2007 Top Trades" in the Hedge Fund resources folder of the MII CTools site. The document, from TraderMonthly, describes the year's top trades and traders, by industry and profit.

Unable to access the MII CTools site? Email Kristina Simmons, Director of Communications (ksimm@umich.edu).

Swoosh! Inside Nike

Everybody mark your calendar. February 12th at 10pm CNBC is running a program on Nike and all the success it has enjoyed. How did this small little company out of Oregon become a world icon? Plus commentary from Phil Knight, Tiger Woods, Michael Jordan, LeBron James, and Sir Charles Barkley.

Internet Disturbance

About a week ago many Middle East and some Asian countries had major internet disruptions but, no one knew what caused it. The proper authorities concluded that a major underwater internet cable was cut by an abandoned anchor off the coast of Alexandria, Egypt. An exercpt:

The cuts slowed businesses, hampered personal Internet usage and caused a flurry of Internet blogger speculation, including mentions of sabotage. Government authorities and FLAG, which stands for Fiber-Optic Link Around the Globe, have refused to comment on the speculation.

There is going to be pressure for someone to come up with a resilient cable that will withstand possible damage. There has got to be some small company that contracts for FLAG who could potentially develop a cable. Or maybe it could be a large telecom company like Alcatel-Lucent? I am going to investigate this further and will update the post if I find anything.

"Affordable Luxary"

"Diageo said Wednesday it will pay $900 million (610 million euros) in a deal with the Nolet family for "perpetual exclusive global rights to sell, market and distribute" Ketel One vodka." -CNBC

In the video the CEO of Diageo was confronted with a question about the impact lower consumer sentiment will have on sales of Kettle One. He replied that people will buy liquor no matter how the economy is doing. Don't people subsitute to cheaper goods when times are rough. Apparently Kettle One is an "affordable luxary" and consumers are still demanding the product. This is a creative description of his pocket, but I think it is usually true for the most part. College kids account for a lot of alcohol consumption, but their drinking habits are significantly different from "normal" people. I think this is a good acquistion for Diageo because it fills a product hole (middle vodka brand) plus they will do a better job increasing the sales of the liquor. Right now 97% of sales are in the U.S. but with Diageo's distribution and marketing advantages they should be able to introduce it in other countries.

TURNING POINT?

Above is the intraday chart of the 10-yr (blue) and S&P 500 (red)

Today might have been a very important day for stock markets.

On Wednesday, Charles Plosser (Philly Fed President) signaled the Fed might be done cutting rates. Wednesday night, tech-bellwether Cisco offered very weak guidance on top of mediocre quarterly results. Thursday morning started with absolutely terrible chain-store sales (among the worst since we've kept such records), housing data was disgusting, and the ECB didn't even consider cutting rates.

All of these things would normally push stocks down and bonds up as investors fret over the incoming economic disaster, and it looked like this was going to happen as stock futures tumbled just prior to the open Thursday morning…

Yet as the day progressed we watched the retail stocks move the market higher, bonds sold off as yields pushed significantly higher, and we finished about 0.8% up on the S&P 500. Now, a 0.8% move isn’t anything to get too excited about, but the definition of a bottom is when negative news doesn’t push a stock or an industry or the market down any further.

That’s exactly what happened today, and it was debated about on Kudlow & Co. Try to watch this great video over the weekend. Do me a favor by posting what your take is.

Blog on!!

Investors want independent research! As Eddy Elfenbein from Crossingwallstreet.com points out, Goldman one month had 408 unique visitors to their research site! miiclub.org has more unique visitors than the most respected investment bank? (haha evil laugh!)

Sure, the Wall Street Journal has some great articles, Bloomberg provides some great up to the minute news on the US and other markets around the world but in my opinion blogs provide the most insightful analysis on stocks and the economy. There are many forms of investing; quant, macro driven, value investing, technical analysis blaa blaa. Many people have made fortunes following these styles and as longs as others follow it, there will be money to be made doing this. It's why technical analysis works, because others follow it! (Otherwise I would say it's BS!) For me, the markets are more driven by emotions and psychology. It's all based on expectations and if these expectations are met or not the stock will move. Blogs provide the best way to read the psychology and emotions behind stocks. Why? Because these bloggers have money invested, their agile and independent and just like you, they can read the emotions behind the stock!

Here a few of my favorite blogs:

www.crossingwallstreet.com
Eddy Elfenbein gives his commentary on the markets, the economy, politics and his personal portfolio. Often funny and always interesting. Always has cool graphs!
www.dealbreaker.com
Think the perezhilton of Wall St! (wow did I just say this)
www.leveragedsellout.com
Humorous site that makes fun of bankers (which I think everyone should on a regular basis)! Visit this site every 3-4 weeks for a good laugh.
www.seekingalpha.com
The 800 pound gorilla of blogs!
www.wallstreetoasis.com
Message board to become a monkey (when I say monkey I mean banker)
http://blogs.wsj.com/deals/
A must read for deals
www.footnoted.org
Michelle Leder examines SEC fillings and I promise she makes them interesting.
http://www.kudlowsmoneypolitics.blogspot.com/
Kudlow. That's it.
http://mjperry.blogspot.com/
Mark Perry! UM Flint economics professor.

There are many more so blog on bloggers, blog on!

Econ Data 101: ISM Services #

If you tuned into the markets at all today you probably heard that the "ISM service index" took a nose dive, and the markets followed it down. Here is a brief explanation of what we're talking about-

What it is: The Institute for Supply Management's (ISM) survey of nearly 400 executives from the services industry about purchase and order activity for the previous month.

What it means, from Bloomberg: "Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM non-manufacturing survey's business activity index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures."

What today's data revealed, from FTAdvisors: "Today’s ISM report on the service sector was horrible. The survey only dates back to 1997, but the business activity index in January fell to its lowest level ever, while the actual decline was the sharpest on record. To find anything even remotely near these weak readings we need to turn back the clock to October 2001, at the depths of the 2001 recession and in the aftermath of 9/11. Then, the survey was exaggerated to the downside as it most likely is today. Other data do not corroborate this weakness, even the ISM manufacturing index rose in January. The steepness and suddenness of the decline in January – even exceeding the aftermath of 9/11 – suggests the figure can sometimes be driven by moods and sentiment rather than underlying economic output. The ISM snapped back quickly after the 9/11-related drop, as it did after the March 2003, Iraq invasion decline, and we expect the same to happen next month. Meanwhile, the prices paid index continues to support our view that inflation is a growing problem."

"horrible" ISM = DOW down 2.9%, S&P down 3.2%

Also worth mentioning was the fact that today's ISM number was released about an hour ahead of schedule because of concerns that the data transmission system had been breached, causing the data to be found by some market participants before the official release time.

Yahoo!

Yahoo! may still be a good buy at this level even after the MSFT announcement. Here are a few scenarios of what might happen according to Citigroup's Mark Mahaney.

• Scenario #1: Yahoo hits the $31 bid. 20% probability.

• Scenario #2: Yahoo rejects the bid; MSFT ups its offer; the deal happens. 40% chance. He considers this the most likely outcome.

• Scenario #3: Another bidder emerges and wins. 5% chance. “We believe that the $45 billion price tag and the strategic value of Yahoo to Microsoft make the likelihood of a successful competing bidder very low,” he writes.

• Scenario #4: Deal blocked by regulators. 10% chance. He notes that the combined companies are at most 30% of total U.S. online advertising, and less than that in Europe.

• Scenario #5: Yahoo/Google (GOOG) search outsourcing deal. 25% chance. “We believe the probability of this is greater than financial markets realize,” he writes. “If Yahoo’s board and management want to remain independent, shareholders will insist on a major value-creating strategy to balance the MSFT bid. This may be the only viable strategy, as it could deliver 25%-plus accretion to YHOO’s cash flow.”

Sino Challenges

Harvard economist Ken Rogoff writes in the FT that the economic slowdown we should be losing sleep over is in China, not the United States. An excerpt:

Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels... Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible. Historically, emerging markets get into trouble when policy reform is moving backwards at the same time as an economic or financial crisis is starting to unfold...

Global policymakers and investors who are losing sleep over US growth ought to pay more attention to rising risks coming from the other side of the globe.

It's all in our heads...

A MetLife survey found that 85% of individuals feel the US economy is heading in a worse direction in 2008 than it was in 2007.

Yet, the same survey found that 85% of individuals feel their own financial situation will be as good or better in 2008 than from 2007.

Could it be that most of us are doing fine, but that we're hearing the relentless recession talk and we're drinking the Kool-Aid?

(HT: Real Time Economics)

Super Bowl

Did the Giants' victory tonight throw all recession fears out the window? Probably not, but when an original NFL team (Giants) wins the Super Bowl the Dow is on average up 14.7% compared to an average return of -2.8% when an AFL team (Patriots) wins. Is this just dumb luck or is there something behind the so called "Super Bowl" effect? I think there might be especially in the modern era when the NFL has become so embedded into society. Most original NFL teams were started in the largest cities and they have enormous fan bases. People get very excited when their team wins and they go out and buy merchandise and are in general happier people which is good for the economy. But what about all the New England fans? Well they may not be happy, but they can throw down the ultimate excuse: "It's just a game."

Obviously this is not a cause and effect relationship, but it may contribute slightly along with other effects to a healthy economy. Please share your opinions and thoughts on this interesting topic!

Sober Up with Nouriel Roubini

Lately I've featured the rather optimistic Brian Wesbury of First Trust Advisors with primetime spots on the MII Blog. Wesbury is very good and is (has been) very bullish on stocks and the economy in the the face of the current slowdown. But there's always room for the other side of the coin, and no one is better to play the bear to Wesbury's bull than Nouriel Roubini (registration required), economics professor at NYU Stern. Roubini weighed in on the current economic environment and the (bleak) outlook for 2008 at the World Economic Forum in Davos. Excerpts from his talk:

The debate today is not any longer on whether we will experience a soft landing or a hard landing in the US; it is rather on how hard the hard landing will be. In other terms on whether the current recession will be relatively mild - say lasting two quarters until the middle of 2008 - or rather be much longer, deeper and uglier and lasting at least four quarters. My view is that the recession will be protracted and painful as a shopped-out, saving-less and debt-burdened consumer is on the ropes and now faltering; while the financial system is on the verge of a systemic crisis that will cause a severe credit crunch...

Indeed the delinquencies and losses in the financial system are spreading from subprime to near prime and prime mortgages; to credit cards and auto loans; to commercial real estate loans; to leveraged loans that financed reckless LBOs; to the losses of the monolines that are effectively bankrupt and at risk of spreading furher massive losses to money market funds and other financial institutions once they get properly downgraded; and soon enough to corporate defaults and junk bonds that will in turn trigger massive losses on credit default swaps; eventual losses in the financial system may add up to more than $1 trillion...

As for decoupling there is no way that the rest of the world can decouple from a US recession. When the US sneezes the rest of the world catches the cold; and unfortunately this time the US will not experience just a case of a mild common cold; it will rather suffer of a painful and protracted episode of pneumonia; thus the real and financial contagion to the rest of the world will be serious...

The Fed will ease aggressively but whatever it does now is too little to late; this easing will not prevent a recession as monetary policy can deal with illiquidity problems but it cannot resolve the deep credit and insolvency issues that plague the US economy; also when there is a glut of capital goods - in 2001 tech capital goods, today a glut of housing, consumer durables and autos the demand for these goods becomes relatively interest rate inelastic; it takes years to clean up this glut and monetary easing does not work as it is like pushing on a string...

U.S. and global equity markets will enter a serious bearish market as a US recession and sharpl global economic slowdown take a toll on investors' risk aversion and firms' earnings and profitability...all risky assets will be under serious pressure in 2008.