Credit Thaw, LIBOR Trend, Commercial Paper,M Hanson Real Estate, CA Home Sales Report, Earning of Interest ABX, NETL

We have been following the LIBOR story since the beginning of the credit crisis. Conventional wisdom suggests that if the LIBOR rate is going up then there are problems with the credit markets and if rates are going down then credit is flowing freely. This story highlights a possible wrinkle in this theory. Rates are clearly going down but the positive effects associated with the ease may not be felt in the economy which may cause some consternation for policy makers.

Credit thaw is spurring appetite for bank IOUs -

WSJ reports investors have developed a voracious demand for short-term debt issued by U.S. and European banks, and an important global lending benchmark has fallen to an all-time low -- welcome signs that bank credit markets have improved.

But beneath the demand for short-term bank debt, known as commercial paper, and a drop in the London interbank offered rate, or Libor, significant kinks remain lodged in the bank markets: Banks are using the fresh cash to repay existing debt, or simply hoarding it. That cash buildup is potentially stymieing efforts by regulators to circulate funds to borrowers and the most needy banks.

In contrast to the panicked days early this year, bank commercial paper "flies off the screen," said one New York trader. The market for this short-term bank debt runs from 7 a.m. to about 2 p.m. in New York. But investor demand has been so strong that some banks are turning away buyers by late morning... There is the possibility that three-month dollar Libor could fall yet further. The most healthy U.S. and European banks are selling three-month commercial paper at a range of 0.3 percentage point, or nearly 0.2 percentage point below the three-month Libor, according to one New York desk that trades commercial paper. That suggests Libor might fall further if it tracked the cost of selling the short-term IOUs.

In Thursday's post I made reference to the dire condition of the real estate market. The following piece by Hanson Advisors lays credence to that claim. Please read the red highlights closely as they will protect you from the positive spin chicanery evangelized by government.

M Hanson Advisers – Real Estate & Finance:

Late last week, DataQuick released their monthly CA home sales report. June saw more sales and higher prices than May. More sales are better for the market than less, no doubt. But opening a bottle of Dom and slapping a high-five to your real estate investment partner -- or proclaiming a bottom to the CA market on national tv -- would be misguided and ultimately detrimental to your career.

This is especially true given that loan defaults and foreclosures are surging faster than sales, foreclosure-related resales are at a point of maximum demand, and all-important organic sales are off 65% from levels seen just a few years ago. In addition, the primary reason for the recent house price appreciation is due to mid-to-high end price slashing and short sales, which has led to an up-tick in sales, and a subsequent rise in the median due to the mix-shift. (Very important to understand and yet rarely discussed by traditional media sources.)

While lower prices are needed to ultimately put an end to the housing crisis, price dumping leads to increased negative equity across the homeowner population significantly increasing the likelihood of loan default. As you witnessed at the low-to-mid end of the market beginning in 2007, a lot of pain is experienced while a market finds its bottom.

This up-tick in mid-to-high end sales is the leading indicator I have been waiting for that signals the rest of the housing market is finally beginning its mark-to-market. This time around, however, the mid-to-high end earners and consumers are the ones most affected.

The bottom line is that foreclosure-related resales have peaked and organic sales are off 65% from their peak levels. In the foreclosure resale half of the market, supply is once again outpacing demand. The mid-to-high end is being swiftly re-priced lower. This cannot be viewed as a ‘market getting better’.

Earnings of Interest

(Please click on the link above to review previous EPS posts)

Periodically I will post the EPS news of companies we find interesting. This is not a recommendation to purchase or sell the shares. I will not engage in the hackneyed approach of other bloggers and give advice about when to buy or sell. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Of course, if you are an investor in any of the Fortune's Favor Family of Funds or a client of RCM our door is always open. Feel free to call or email questions at any time.

Barrick Gold beats by $0.11, beats on revs (32.86 ) : Reports Q2 (Jun) earnings of $0.49 per share, excluding non-recurring items, $0.11 better than the First Call consensus of $0.38; revenues rose 3.2% year/year to $2.03 bln vs the $1.9 bln consensus. Barrick remains on track with its full year 2009 production guidance of 7.2-7.6 million ounces of gold at net cash costs of $360-$385 per ounce or total cash costs of $450-$475 per ounce. "Our portfolio of operations performed strongly in Q2, exceeding plan, and positioning us well to meet our production and cost targets for the year. The go-ahead decision on Pascua-Lama during the quarter marks an important milestone for Barrick and our strategy of developing long life, low cost mines. Pascua-Lama is expected to be one of the industry's lowest cost gold operations and joins the world-class Cortez Hills and Pueblo Viejo projects in construction. Execution on this new generation of projects, combined with a favorable gold price outlook and our focus on cost management provides the foundation from which Barrick will continue to deliver shareholder value."

NetLogic beats by $0.10, beats on revs (39.43 ) : Reports Q2 (Jun) earnings of $0.35 per share, $0.10 better than the First Call consensus of $0.25; revenues fell 11.0% year/year to $32.5 mln vs the $32.1 mln consensus.

NetLogic guides Q3 above consensus on earnings call (39.43 +0.15) -Update : On call mgmt guides Q3 sales to grow 8% to $46 mln vs $33.69 mln First Call consensus, EPS to $0.32 vs $0.27 First Call consensus. Guidance for Q3 will include the effects of both the acquisitions of network search engine business as well as the pending merger with RMI corporation

Obama on the Recession, Fed's Beige Book, Treasury Auction Results

President Obama says US may be seeing beginning of end of recession -DJ
Sure, and the emperor was wearing clothes...

ECONX Summary of Fed's Beige Book Reports suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level....

Amidst all the positive recession-ending talk looms the dark clouds of a weakening Treasury bond market. As the Beige Book illustrates, the pace of economic decline has slowed but not stopped; in order for any recovery to actually gain traction interest rates must remain low.

The Obama administration's economic policies may be the undoing of his proclamation that the recession end is near. Allow me to explain. Apparently the Administration is employing a very scientific two-pronged approach for economic salvation: 1) If you close your eyes and say 'the recession is ending' enough times it will come true. We will call this the Oz method. 2) With your eyes closed, spend like a drunken sailor.

The problem with this brilliant technique is first, closing your eyes and wishing only works for little girls with pigtails and second, excessive spending leads to a rise in interest rates. The conundrum: spend to get out of the recession but spending leads to Treasury bond weakness/rate increases. The real estate situation in this country remains dire and an increase in mortgage rates will re-accelerate the economic decline.

Our job as investors remains precarious as this equity rally continues to pick up steam. We must monitor the conundrum by paying close attention to Treasury bond auctions. Weakness in these auctions creating interest rate creep will be telling signs of trouble to come.

To that end, I will be periodically posting data from various auctions of government debt. Keep a close eye and look for troubling trends.

Tuesday...
Briefing: 10-Yr:+09/32..3.684%.. USD/JPY:94.5545.. EUR/USD:1.4170
Mixed on Air, Supply: The early bond rally skidded to a halt and prices backed off to new lows on the heels of a good, but not good enough, record $42B 2-yr auction, with added drag coming in front of record 5-and-7yr auctions hitting tomorrow and Thursday....

And then Wednesday...

Briefing: ECONX 5-year Note Auction Results: High Yield 2.689% (2.635% expected); Bid/Cover 1.92x (2009 Avg 2.22x); Indirect Bidders 36.7% (2009 Avg 41.9%)

Previous offering saw $37B, 2.7% yield, with a bid-to-cover of 2.58x and an indirect bidder participation rate of 62.8%.

Slammed: Treasuries were flipped on the poor showing on the record size 5-yr auction, which, even as the bar was set a bit lower after yesterday's only OK offering. The market saw a high yield of 2.689% against the when issued 2.635% while the cover's sub-2.00 demand measure, at 1.92, was ugly and the indirect bidder take was about half of the last outing and also under the year's average. The poor showing really puts a glaring spotlight on tomorrow's already suspect and oddball record 7-yr, with the thinking that if "popular" issues such as 2s and 5s are not up to snuff, the 7s will probably be truly ugly. The 5-yr went to a 2.706% yield from 2.601%, while the 10-yr swung to 3.731% from 3.63% in a flash. The 7-yr just gave up and was clobbered to add nearly 12 basis points to its yield.

FASB Rule Changes, All Hail the Blue Dogs, SOHU/CYOU/GLW Earnings

RCM Comment: We must keep an eye on this major development. If FASB stands firm and makes the changes desired then possibly 3rd and certainly 4th quarter earnings announcements for financial companies should be entertaining. These changes would make it exceedingly more difficult for the financial group to hide and misrepresent the true conditions of the business.

Accountants Gain Courage to Stand Up to Bankers: Jonathan Weil July 23 (Bloomberg) -- Turns out America’s accounting poobahs have some fight in them after all. Call them crazy, or maybe just brave. The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging.

It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month....READ MORE


RCM Comment: Let's take a moment and give the Blue Dogs some credit. At least some group in Washington appears to be awake.

"Blue Dog" Democrats hold health-care overhaul at bay - WSJ
WSJ reports so-called Blue Dog Democrats continued to resist key aspects of their party's health-care overhaul Sunday, despite pressure from party leaders who fear they will endanger President Barack Obama's most ambitious legislative effort. A leader of the fiscally conservative group of representatives said he expects any vote on the House's health proposal would have to wait, likely until after Labor Day. "I think the American people want to take a closer look at this legislation. They want to feel more comfortable with it," Rep. Jim Cooper, a Blue Dog from Tennessee, said on CBS's "Face the Nation." House Speaker Nancy Pelosi disputed any suggestion that the Blue Dogs' protests threatened the bill's passage. "Absolutely, positively not," she said Sunday on CNN's "State of the Union." "When I take this bill to the floor, it will win...We will move forward. This will happen."

Earnings of Interest

Periodically I will post the EPS news of companies we find interesting. This is not a recommendation to purchase or sell the shares. I will not engage in the hackneyed approach of other bloggers and give advice about when to buy or sell. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Of course, if you are an investor in any of the Fortune's Favor Family of Funds or a client of RCM our door is always open. Feel free to call or email questions at any time.

SOHU Sohu.com beats by $0.03, beats on revs; guides Q3 revs above consensus (63.63 )
Reports Q2 (Jun) earnings of $0.79 per share..., $0.03 better than the First Call consensus of $0.76; revenues rose 24.6% year/year to $127.1 mln vs the $123 mln consensus. Gross margin was 77 in 2Q09, compared to 76% in 1Q09, and 76% in 2Q08. Non-GAAP operating profit margin was 43% for 2Q09, compared to 45% in the previous quarter and 41% in 2Q08.


Co issues guidance for Q3, sees EPS of $0.92-0.97; sees Q3 revs of $133.5-137.5 mln vs. $132.18 mln consensus. Assuming no new grants of share-based awards, Sohu estimates share-based compensation expense for 3Q09 to be $4.0-5.0 mln, which includes Changyou's share-based compensation expense for 3Q09 estimated to be $3.5-4.0 mln. Considering Sohu's share in Changyou, the estimated impact of this expense is expected to reduce Sohu's fully diluted EPS for 3Q09 under US GAAP by $0.07-0.09.

CYOU Changyou.com beats by $0.04, beats on revs; guides Q3 revs in-line (41.65 )
Reports Q2 (Jun) earnings of $0.66 per share, $0.04 better than the First Call consensus of $0.62; revenues rose 39.0% year/year to $66.6 mln vs the $65 mln consensus. Revenues from game operations for 2Q09 increased 9% quarter-over-quarter and 42% year-over-year to $64.9 mln. The increases were mainly due to user base expansion and higher APA, which reflect the growing popularity of the co's online games.


Co issues guidance for Q3, sees EPS of $0.75-0.77; sees Q3 revs of $67.0-69.0 mln vs. $68.92 mln consensus. Assuming no new grants of share-based awards, Changyou estimates share-based compensation expense for 3Q09 to be between $3.5-4.0 mln, reducing fully diluted earnings per ADS by $0.07-0.08.

GLW Corning beats by $0.07, beats on revs; sees third-quarter glass shipments flat to up slightly (17.00 )
Reports Q2 (Jun) earnings of $0.39 per share, $0.07 better than the First Call consensus of $0.32; revenues fell 17.6% year/year to $1.4 bln vs the $1.36 bln consensus. Gross margin was 41%, an increase over first-quarter gross margin of 27%. Display Technologies combined glass volume, including Corning's wholly owned business and Samsung Corning Precision Glass Co., Ltd. (SCP), increased 66% sequentially. Volume in the co's wholly owned business improved by 101% sequentially, while SCP's volume increased by 50%.


Co says, "The resurgent demand for LCD glass is propelling us to restore much of our previously idled production capacity as quickly as possible to meet our customers' needs. Approximately 40% of our second-quarter shipments came from existing inventory. We need to- and have- restarted tanks to replace this inventory drawdown to meet third-quarter demand. We believe our third-quarter glass shipments will be flat to up slightly, compared to the very strong second-quarter level. year. We estimate that current inventory supplies are 16% less than the second quarter last year, compared to retail demand that has been running approximately 15% ahead of a year ago. Retail demand is forecasted to continue growing at double-digit rates in the back half of this year. This comparison gives us some comfort about the outlook for the remainder of the year. However, the pace of economic recovery remains uncertain and we are being cautious about the amount of capacity we are restarting for the fourth quarter and for early 2010. As we receive more clarity from our customers on their fourth-quarter outlook, we will make decisions on our fourth-quarter capacity levels. We have increased our forecast for LCD glass market volume in 2009 due to the vitality of LCD TV sales in the first half of the year. We now estimate that total yearly volume will be around 2.3 bln square feet, or about 15% growth over last year. Corning originally expected annual glass volume to be 2 bln square feet and early last quarter revised it upward to a range of 2.1-2.2 bln square feet.

US$ Decline / Equity Market Rally Continued, Obama's Orwellian Comment

Arguments about earnings and "green shoots" are a waste of time and actually a distraction when trying to understand the current strength in the equity markets.

We are confronted with a useless barrage of conflicting opinions as the debate rages on every financial news channel. The image that comes to mind right before I turn off the TV and begin writing this missive is that of the pug, Elvis. He is on the floor beside me ferociously chasing his tail. The similarities are stunning. What's going through his mind we can only guess and when he catches the tail he looks as confused as a TV anchor reading an earnings release.

The explanation for the strength may actually be simple:

1- U.S.$ weakness is leading to the inflation trade. As I've written before, inflation is a currency event not an economic event. Please see the July 21st post for more on this topic.

2- Hedge funds are receiving 0% interest on cash balances held at GSEC and the like.

3- Money market funds pay close to 0% interest and in some documented cases have a negative return.

4- Hedge funds received inflows of $146 billion in the last two months. This new money must be put to work; cash is not an option.

To conclude, the equity markets collapsed last year as massive amounts of hedge fund redemptions forced selling. The markets have exhibited the opposite effect in the last few months as cash inflows have forced buying amid a desire to sell U.S. dollars as the dollar continues to decline.

I'm posting the following story simply because I can't believe it. Words like fatuity, absurdity, hubris and his favorite, audacity (the second usage in the dictionary) come rushing to mind. If this story doesn't disturb you then your name must be Hugo or Fidel or perhaps more appropriately, Orwell.

Obama proposes new transaction fees for financial firms' riskiest investments - WSJ
President Obama said for the first time that the government might assess new fees against financial companies engaging in what he labeled "far-out transactions," in order to protect taxpayers from future bailouts. Mr. Obama on Wednesday compared the possible fees to the assessments that more than 8,000 banks pay the FDIC to guarantee deposits. He didn't describe what sorts of transactions might trigger the fees, though the way he described it suggests the proposal could cover exotic instruments such as credit derivatives that some believe played a key role in escalating the financial crisis. He also indicated that the fees might be levied against transactions the government wants to discourage...

U.S. Dollar Downtrend / Equity Market Rally, Inflation Trade vs. Economic Recovery

Take a good look at the chart above courtesy of "The Market Ticker." The secret to the equity markets' strength recently and perhaps going forward may be revealed by the downtrend highlighted.

Most of the conversations I've witnessed on the topic of the current market rally have centered around the recovery of the economy. I've heard countless arguments about earning rebounds and V shapes.

As readers of this blog it will come as no surprise to you that we at RCM would question the validity of V shapes. We would also caution against extreme excitement over EPS "surprises" and we would suggest there is a significant difference between inventory build and actual sales to consumers. The Intel "beat" should be taken with a Dell "miss" grain of salt.

However, I would like today to suggest that the whole Earnings argument may be mute. The real reason we are seeing equity prices inflate may be tied to the beginnings of the inflation trade. The chart above illustrates a rather precipitous slide in the ongoing demise of the US$. Since the beginning of March the dollar has dropped in value roughly 13%, which has coincided (or more appropriately expressed: created) an equity market reflation trade.

Keeping a close eye on this US$ trend and spending less time worrying about possible recoveries may be the best formula for investment success going forward.

Cable TV / Network TV / On Demand Internet Video, Intel Earnings Revealed

Investment Themes

Investment themes are the building blocks of any successful portfolio.

The themes are created by innovation or paradigmatic shifts in perception that over time drive the herd in a new direction. Our job as portfolio managers is to constantly scour the investment world to discover these themes, track these themes and eventually profit from these themes. To that end, we would like to highlight the following convergence of cable TV, network TV and the burgeoning Internet on demand video platform.

Cable TV subscribers will now be receiving access to programming on the Web. This access is indicative of an infinite video explosion unfolding on the Internet. We expect this theme to gain momentum and offer many opportunities for the intelligent investor to profit. As an example, we believe the companies providing video technology to the Web, those who are making the shift possible with hardware and software designs, will offer a fertile ground for investment. Think of this video explosion as a gold mine. Those who sell the pic and axe tend to be the best investments.

We believe the companies best positioned to benefit from this theme will be the following: Cisco (CSCO), Juniper Networks (JNPR), Netlogic (NETL), Cavium Networks (CAVM), and Ezchip Semi. (EZCH)

As always, timing and fortitude are required for any investment to result in success.
More Nets Join Comcast's Internet TV Test July 14, 2009 PHILADELPHIA -- Comcast Corporation (Nasdaq: CMCSA, CMCSK) today announced that it is partnering with Rainbow Media, Scripps, AETN, MGM Impact, and BBC to bring content from 17 more cable networks to consumers through Comcast’s On Demand Online technical trial, accessible via Comcast.net and Fancast.com. On Demand Online is a new service that will significantly expand the number of top-rated TV choices available online at no additional charge to Comcast’s cable customers.
“We are thrilled to partner with all of these popular cable networks to significantly expand the premium content available for the On Demand Online trial,” said Matt Bond, Executive Vice President of Content Acquisition for Comcast. “Today’s announcement highlights the industry’s growing interest to bring long-form content to consumers via a secure and easy to use online platform. Our goal for On Demand Online is to create a consumer-friendly service that significantly expands customer options to access their favorite TV content on any platform at any time, and we are pleased that so many content providers are partnering with us to make this goal a reality.”

Pay TV's Internet Acid Test
Comcast, TWC Kick Off National Online VOD Trial

Intel Update

If you wish to understand the Intel earning "surprise" and what it means for the economic recovery look no further than the story below. Karl Denninger continues to separate fact from fiction with unparalleled clarity.

SAN FRANCISCO (Reuters) - Intel Corp's quarterly results and outlook blew past Wall Street forecasts on better-than-expected consumer demand for PCs, especially in Asia, setting an auspicious tone for the technology sector.

Uh, well......
Sure, if you just read the PR on the earnings. Someone filed that story before the conference call, or simply ignored it. The strong growth came in Asia, specifically China, which blew out a huge stimulus program. Ok, but it was specifically stated on the conference call that US consumer sales were weak, and repeating what DELL said earlier, so are enterprise sales. Read more...

IBD Editorial, Truth In Lending, The Housing Market, The Financial Crisis, What it Means for The Health Care Overhaul

A must read story from the Investors Business Daily. The story illustrates how government meddling clearly led to the ruination of the housing market and in turn the financial crisis. We must understand what happened and raise our collective voice if we are to save the health care system from a similar fate.

Truth In Lending

By INVESTOR'S BUSINESS DAILY Posted Friday, July 10, 2009 4:20 PM PT
Behind The Meltdown: Many Americans are unaware of the causes of the greatest economic calamity of our lifetime. A new congressional report details how government politicized housing, wrecking the economy.

Rep. Darrell Issa of California, ranking Republican on the House Oversight and Government Reform Committee, has released a report that every American should read.
The analysis details how powerful Democrats in Congress insisted that government-subsidized housing be geared to serve the purposes of social justice at the expense of sound lending.

Here are some highlights of Issa's blow-by-blow account:

• With an implicit subsidy to American homeowners in the form of reduced mortgage rates, Fannie Mae and its sister government sponsored enterprise, Freddie Mac, squeezed out their competition and cornered the secondary mortgage market. They took advantage of a $2.25 billion line of credit from the U.S. Treasury.
• Congress, by statute, allowed them to operate with much lower capital requirements than private-sector competitors. They "used their congressionally-granted advantages to leverage themselves in excess of 70-to-1."
• The two GSEs were the only publicly traded corporations exempt from SEC oversight. All their securities carried an implicit AAA rating regardless of the quality of the mortgages.

(The first three bullets illustrate to perfection what happens when the Gov't interferes with the private market. Take note because now the Obama administration is feeding us the line that increased Gov't involvement in the health care system will create healthy competition. THIS IS A LIE! WAKE UP PEOPLE!)

• The Department of Housing and Urban Development set quotas for GSE investment in affordable housing.
• Encouraged by an inaccurate 1992 Boston Federal Reserve Bank study charging racial discrimination in mortgage lending, the two GSEs were strongly pressured to "lower their underwriting standards, particularly on the size of down payments and the credit quality of borrowers."(Barney Frank was perhaps the loudest voice calling for the subversion of underwriting standards. This is one of the reasons why I have repeatedly called for his removal. My issue with Barney is purely based on facts and not partisan prejudice as some may argue.)
• In 1992, Congress directed HUD to establish multiple quotas requiring mortgage quotes for low-income families.
• In 1995, the Clinton administration issued a National Homeownership Strategy, loosening Fannie and Freddie's lending standards and insisting that lenders "work collaboratively to reduce homebuyer downpayment requirements."
• The administration complained that in 1989 only 7% of mortgages had less than a 10% downpayment. By 1994, it wanted that raised to 29%.
• Reduced underwriting standards spread into the entire U.S. mortgage market to those at all income levels.
• A complete decoupling of home prices from Americans' income fed the growth of the housing bubble as borrowers made smaller down payments and took on higher debt.
• Wall Street firms specializing "in packaging and investing in the lowest-quality tranches of mortgage-backed securities, profited hugely from the increased volume that government affordable lending policies sparked."
• Wall Street firms, homebuilders and the GSEs used money, power and influence to block attempts at reform. Between 1998 and 2008, Fannie and Freddie spent over $176 million on lobbyists.
• In 2006, Freddie paid the largest fine in Federal Election Commission history for improperly using corporate resources to hold 85 fundraisers for congressmen, raising a total of $1.7 million.

As the Issa report points out, "the real tragedy of the government's affordable housing policy is the impact on average Americans, particularly those of modest means. "Millions of these borrowers, who were supposed to have been helped by federal affordable housing policy, have now been forced into delinquency and foreclosure, destroying their asset base, their credit, and in some cases their families."

Japan Shifting Away From the US Dollar, Option Adjust-rate Mortgages Delinquencies, Russia Threatens to Seize ArcelorMittal's Mines

RCM Comment: I am loath to bore you with the same story over and over but the story's far reaching ramifications demand that we cover this story like the wet blanket it represents. You see, there is a fire raging in the U.S.. Our government is burning paper (US$s) at an alarming clip as it spends aggressively to avoid the inevitable. Let's not debate the simple fact that government spending plans have never in history helped drag an economy out of a recession. Even the oft-praised New Deal of the '30s didn't save the country from the depression; WWII accomplished that feat.

So, paper is burning and the only way to get more paper, short of 'cooking the books', is to issue Gov't debt and hope our trading partners continue to fund our addiction. Enter the wet blanket. The cry to dethrone the US$ as the reserve currency is building and now Japan in an 'et tu Brute' moment adds its voice to the majority....

July 13 (Bloomberg) -- Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.” Read more...

RCM Comment: Troubles continue to brew in the real estate arena and by extension the banking sector. The EPS announcements over the next few weeks should be very interesting. Question: Will creative accounting be condemned as it should or will it continue to be ignored as has been the case?
NEW YORK (Dow Jones)--For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis. A further acceleration of troubles among the loans could mean higher-than-expected losses for Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), as well as the Federal Deposit Insurance Corp.'s own insurance fund. "The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Example of creative accounting: WaMu by Karl Denninger

"In March of 2006, Washington Mutual recorded net income of $985 million dollars. 4Q06 they booked $1,058 mln. This last quarter, they booked $784mln. But in those three quarters they booked $194mln, $333mln and $361 million, respectively, in PayOption ARM "Capitalized Interest." This was booked and recognized as EARNINGS.

Now here's the problem: In 1Q 06, 194 million out of $985 is 19.7%. In December, it was 31%. But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels. And what's worse, not one dime of that "income" can be spent! It is entirely phantom. This is the same sort of crap that sunk Lucent and Enron - booking "income" that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!"

RCM Comment: This story does not bode well for emerging market investments...
MT Russia region threatens to seize ArcelorMittal mines - Reuters (29.87 )
Reuters reports Russia's Kemerovo region has notified ArcelorMittal (MT) that it will seize two of the world's largest steel maker's mines if production levels do not increase, a statement from the Siberian region said. "If your team is not able to stabilize production at these facilities, then we propose that you hand them over without compensation," Kemerovo governor Aman Tuleyev said in a telegram addressed to the multinational's chief executive, Lakshmi Mittal, and cited in the statement on the Kemerovo website. Reuters has been unable to reach ArcelorMittal's Siberian operations for immediate comment on the telegram. ArcelorMittal acquired three Siberian coal mines from Russia's Severstal in 2008, becoming one of the few foreign companies to enter the market.

Stalled Stimulus Deters Investment, Subprime Woe Resurfaces, China Attacks US$ Dominance

- If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. –Mark Twain

RCM Comment: The story below illustrates what happens all too often when government oversteps its mandate and attempts to manipulate the private sector. For those of you who approve of big government read this story very closely. Please understand that I respect your ideals and I'm willing to believe as left wing, big government believers you are only trying to promote equality (those who use big government for their own gain e.g. ACORN, I will not waste time addressing). However, reality must trump blind altruism.

Yes, we need to reduce our dependence on foreign oil, but let's do it in a way that promotes private sector innovation not government handouts. If, for example, significant tax breaks were directed at the renewable energy issue the wheels of innovation would already be moving. Private sector innovation has always been the key weapon in the economic arsenal of the USA.

I'm sorry did I just write something? I must have been dreaming. Tax breaks would help everyone equally and this would never do for those controlling Washington. Government handouts, in the form of "stimulus", can be directed at special interest groups and those who donate to political campaigns. Did you really believe Obama's campaign promise to rid Washington of lobbyists and special interests? If, so then you must go directly to jail without passing Go or collecting $200. Your punishment for naivete: stay in jail until the Community Chest gets around to authorizing a "get out of jail free" card. This authorization should take about as long as it takes for the stimulus package to actually stimulate. My advice: bring a good book. Something written by Thomas Sowell perhaps such as "The Housing Boom and Bust".

Stalled stimulus programs deter investments in renewable energy - WSJ
WSJ reports the U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment. New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government. "It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.

Reality vs. "Green Shoot" Redux...Combine this story with the commercial real estate story from the 7/8 post and you get a good idea of the real headwinds facing economic recovery.

Subprime resurfaces as housing-market woe - WSJ
WSJ reports the U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell. While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy. "While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

RCM Comment: I continue to run these stories about the US$ because you must appreciate that change is coming and you need to protect your assets accordingly. Should you need help devising a plan may I suggest you visit our website. I will also entertain any and all questions as promptly as possible whether they are received via blog comments, email or phone.

China attacks dollar's dominance - Financial Times
Financial Times reports China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world's biggest economies. Dai Bingguo, Chinese state counselor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialized nations -- including US President Barack Obama -- in L'Aquila. The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery.

Gordon Brown, Britain's prime minister, said he did not remember Mr Dai making the remarks. But he said the focus should be on moving the world out of recession. "We don't want to give the impression that big change is around the corner and the present arrangements will be destabilized," said Mr Brown. (In other words, Gordon would rather lie about the situation than give an honest impression.)

"We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system," said Mr Dai, according to the Chinese foreign ministry. While he did not name the dollar, Mr Dai was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.

Fear Trade Back? Sergey Aleynikov & HFTs, Goldman's Trading Scandal, 2nd Stimulus, U.S. Office Market Collapse

News that Moves Markets

with RCM Editorial

On Monday I revealed long term trends that, as I said, must be respected. However, today I wish to offer a thought that may help those who wish to trade on a shorter time frame. Government manipulation, with the help of big investment banks, has turned shorter term decision making into a sort of black art form. Many traditional short term traders are becoming increasingly frustrated and chewed up by the seemingly incongruous volatility. Traditional decision making factors e.g. EPS news, technical analysis readings, other company fundamentals, have taken a back seat in the short term, say 3-4 months, to government desired outcomes. It's a brand new world so you must use new tools. Consider this:

The Government felt the need to recapitalize banks in March. So, with the help of GS/JPM and others the manipulation game began to rally the market. "Helicopter" Ben began talking about "green shoots", government statistics "surprisingly" began to look better, and GS proprietary traders made a fortune on the rally because they are just sooo good. Result: A 3 1/2 month equity market rally that led to massive capital raise for the financial space through major secondary offering. GS raised billions with a secondary priced @ $123 up from the Nov. low of $47.41.

However, the equity market rally resulted in a Treasury bond market sell-off and a disturbing hike in interest rates. The "Helicopter" and "Pinocchio" know that rates going up will kill any hope of economic recovery. So, now that suckers have invested billions in the financial space the focus has shifted to supporting the bond market at a time when issuance of new Treasury debt is exploding. Possible Result: Expect an equity market sell-off over the next few months to help support the Treasury bond market and keep yields down. The fear trade is back in vogue.

One more thought, the arrest of Sergey Aleynikov may not be getting the press coverage it deserves. High-frequency trading (HFT) platforms are a major Achilles heel of this market. Joe Saluzzi of Themis Trading wrote a phenomenal piece about HFT that I covered in my July 1st post. Take the time to re read this post to fully comprehend the dangers.

Bloomberg: Goldman May Lose Millions From Ex-Worker’s Code Theft

...At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that "...The bank (GS) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” When I read this I almost fell off my chair. What a blunder by Goldman. In other words, GS uses the code to manipulate markets but in a fair way? Who determines what is fair? Drop the debate of fair or unfair and you can see that GS admits to manipulating the markets! Read more...

Zero Hedge covers this story with the respect it deserves: Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?
Posted by Tyler Durden

We must follow this story closely because program trades now account for about 50% of the volume on the NYSE and if the HFT model somehow grinds to a halt liquidity will plummet potentially wrecking havoc on prices. For more read the A Goldman trading scandal?

And the beat gets louder...
U.S. should plan 2nd fiscal stimulus: Economic adviser - Reuters
Reuters reports the U.S. should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 bln rescue package launched in February, an adviser to President Barack Obama said. "We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday. Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment. "The stimulus is performing close to expectations but not in timing," Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.

Reality vs. "Green Shoot"...
U.S. office market continues to spiral down - Reuters.com
Reuters.com reports the U.S. office market vacancy rate reached 15.9% in Q2, its highest in four years and rent fell by the largest amount in more than seven as demand from companies and other office renters remained weak, real estate research co Reis said. "It's bad," Reis director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning. The weak demand helped push up the average weighted U.S. office vacancy rate 0.70 percentage points during the quarter and 2.7 percentage points compared with a year ago, according to the report released. Asking rent during the quarter fell 1.4% to $28.43 per square foot. Factoring in rent-free months and improvement costs to landlords, effective rent fell 2.7% in the quarter to $23.42 per square foot. The second-quarter drop was more severe than the first quarter's 2.3%, dampening hopes the office market is bottoming out, Reis said. Year over year, rent was down 6.7%, the largest one- quarter decline since the first quarter 2002. "This is really only the third quarter that we've experienced negative effective rent growth," Calanog said. "Last time, the office sector had four years of negative effective rent growth."

China Calls for Dollar Displacement, China Begins to Settle Trades in Renminbi, India Questions US$, Increase in Stimulus Spending?

News That Moves Markets

Good morning readers, this is your Monday wake up call. The US$ is under attack and the budget deficit will continue to expand like the blackhole it is regardless of congressional protestations surrounding fiscal discipline.

Instead of wasting time arguing about the inevitable and fearing the fallout let's position the portfolio to benefit: Short US Treasuries (Long TBT) as the spending increases make it impossible to keep rates under control. Short US$ (Long UDN) as the talk of a new settlement currency turns into reality, and long precious metals as currency devaluation drives asset prices higher. Repeat after me: inflation is a currency event not an economic event.

Timing the entry and exit points will continue to be the toughest part of the above investment approach. As always we will be fighting the government and the spinmeisters every step of the way. This manipulation onslaught can cause pain over a short period of time, but doing the right thing is never easy. While most of the investment community was drowning last year we at Rosenthal Capital Management defended principal and made money precisely because we understood these dynamics and were using the correct road map.

Please understand that the long term investment themes described above and illustrated below must be respected if you want your portfolio to survive.

China officials call for displacing dollar, in time - Reuters
Reuters reports the financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday. The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China's willingness to question the dollar's role could fuel debate. The Special Drawing Right, a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank. "It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.


China begins pilot program to settle trade in Renminbi - NY Times
NY Times reports China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency. Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks. Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China's expanding economy and huge presence in international trade. Hong Kong also kicked off the long-awaited yuan settlement program on Monday. HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.


India open to discussing dollar's status as reserve - Reuters
Reuters reports India is willing to discuss proposals to replace the U.S. dollar as the global reserve currency, Foreign Secretary Shivshankar Menon said on Monday. "This would be one of the ideas which is on the table. There have been ideas expressed and we are ready to discuss all of them," Menon told reporters when asked if India would consider replacing the dollar.


Calls grow to increase stimulus spending - WSJ
WSJ reports Vice President Joe Biden said the Obama administration "misread how bad the economy was" and didn't foresee unemployment levels nearing double digits, in comments likely to intensify calls for the administration to do more to counter job losses... White House economists are discussing whether a second round of stimulus is needed, but a decision isn't expected until at least the fall. "We remain focused on putting thousands of Americans back to work" through implementation of the February stimulus act, an administration official said Sunday. "Any discussion of a second stimulus is premature at this point." That timetable isn't fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness. "A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful," said Phillip Swagel, a professor at Georgetown University's McDonough School of Business. So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending. Many Democrats, too, said they're disappointed with the recovery program so far but, for now at least, are resisting calls for a second package.

Gold Investors Add 43% to Holdings of Bullion / Inflation / Government Suppression of Gold

News That Moves Markets

Demand for physical gold is increasing at a serious clip.

Supply has been declining for quite some time as new discoveries have been limited and production hampered by rising costs combined with the manipulated suppression of gold prices by Central banks.

Central banks are manufacturing copious amounts of worthless paper currencies in a desperate attempt to hold back the tide of inevitable economic hardship.

This type of reckless currency creation will lead to currency devaluation which is commonly referred to as inflation. Beware of those who try to argue this simple fact. They are part of the 'this time it's different' crowd who offered the following opinions:

At the top of the tech. bubble in 2000 they recommended buying YHOO, target $400, because they were sure 'this time is different'

When real estate values skyrocketed in 2005-2006 they forecasted continued double digit annual property value growth because they knew 'this time is different'

When Oil hit $150 a barrel last year they called for $200 oil because obviously 'this time is different'

Now, in their infinite wisdom they offer the sage advice 'inflation will be contained and (wait for it...don't laugh too hard) governments will be able to reduce the stimulus at the right time to avoid inflation because this time is different.

So I now pose the question: Should gold represent a significant portion of your portfolio?

Gold investors add 43% to holdings of bullion - Daily Telegraph
Daily Telegraph reports BullionVault, which says it looks after more gold than many of the world's central banks, reported 43% growth in its clients' physical holdings of the metal in the first half to more than 18 tonnes or $553 mln worth. The addition of almost 5.5 tonnes, or $166 mln worth, was almost twice the growth in BullionVault's clients' holdings in the same period last year and was equivalent to 70% of the growth seen over the whole of 2008. Adrian Ash of BullionVault said: "While politicians argue over 'green shoots' in the economy, the number of private individuals buying physical gold continues to grow. "Central banks are responding to the worst financial crisis in 70 years with an unprecedented experiment in money creation. But there's no evidence yet that quantitative easing has sparked a self-sustaining recovery." He added: "With global interest rates now at zero or near, cash savers are joining stock market investors in seeking a strong crisis and inflation hedge."