Friday, September 29, 2006

H-P: Comedy or Tragedy?

"I think I did something for the worst possible reason -- just because I could. I think that's the most , just about the most morally indefensible reason that anybody could have for doing anything. When you do something just because you could ... I've thought about it a lot. And there are lots of more sophisticated explanations, more complicated psychological explanations. But none of them are an excuse ..." - Bill Clinton

From what I've read and heard this week most folks were generally annoyed with the media soaking up bandwidth over the H-P soap opera. But I'm deeply troubled after listening to Dunn and Hurd. In my humble opinion there appear to be a row of giant pink elephants in the room that somehow remain unobserved.


H-P employed some of the finest business and legal minds our country can produce, yet after each one testified that, indeed, the whole thing was obviously immoral and wrong, they complained Congress needs to enact laws to make pretexting clearly illegal. Clearly immoral or clearly wrong apparently aren't enough.

Dunn and a growing list of executives have resigned- not for shame... hey, they did nothing clearly illegal!- but because they will be working 24/7 on their legal defense. Dunn unintentionally provided the best knee-slapper of the day when she said she thought the phone records were accessed through sources in the public domain. She's positioning herself as the Ken Lay of H-P.

In contrast, Hurd is positioning himself as the antidote to H-P's diseased board. By God, he's going to push hard to get to the bottom of the whole thing! But he also repeated his mantra, being careful to use the future tense, that he takes "full responsibility"... a clever way to reasssure Wall Street by forecasting his continued reign, while he disarms critics (though without any tangible consequences).

In all the coverage so far nobody seems curious why Tom Perkins was the only one to resign in protest (before it became fashionable to do so).

In one of many ironies, before the sordid details about the investigation were leaked (yes, there was a leak about a leak investigation), the Board considered the secret investigation a success. After all, despite the methods used to obtain the information, when they learned which board member was doing the leaking he was confronted and forced out. Only now, with copious amounts of sunshine disinfecting the boardroom, they offer apologies all around.

Bottom line, here's what we learned this week: a) as long as the stock price is up 50 cents, the media give you a get out of jail free card; b) The H-P Way is now a joke (watch for that one to be quietly dropped); and c) the public now sees what H-P insiders have complained about for years: a culture of backstabbing by petty tyrants refined to an art form.

Thursday, September 28, 2006

Credit Default Swaps Now Total $283 Trillion

"Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another." - Warren Buffet

Mike Panzner has an eye-popping chart comparing the notional value of Credit Default Swaps outstanding to various other recent bubbles.

Conveniently enough, the online Journal's MORNING BRIEF provides a primer on the subject. I've included the passage in full.
Treating Derivatives As a Transnational Risk

Senior officials at the Federal Reserve, the Securities and Exchange Commission and its British counterpart today issued an unusual joint warning that the financial risks of an increasingly global and mushrooming derivatives market are too big for any one country to oversee.

But first, a look at just how big that market is getting: Last week the International Swaps and Derivatives Association said that at the end of June, the outstanding nominal value of swaps and derivatives was $283.2 trillion. As the New York Times pointed out over the weekend, that's a lot of money, vastly superior to the combined gross domestic products of the U.S., European Union, Canada and China -- a paltry $34 trillion -- or the value of all U.S. homes, which is about the same amount. "To be sure, notional value is an exaggerated term as it greatly overstates the amount at risk in many contracts," the Times noted. "But the growth rate is real, and in the fastest-growing area of swaps -- credit default swaps -- notional value is closer to the amount at risk, because such swaps promise to make up the losses if a borrower defaults on the notional amount."

Today, New York Fed chief Timothy Geithner, SEC Commissioner Annette Nazareth and Sir Callum McCarthy, chairman of the U.K.'s Financial Services Authority, write in the Financial Times that the financial innovation fueling the creation of derivatives transactions often drives the market faster than the pace of improvement in market infrastructure. "In a more integrated global market, we will increasingly find ourselves compelled to pursue borderless solutions," they argue. "In the case of derivatives, a local or national solution would have been insufficient to protect domestic financial markets from the risks posed by market practices." Their comments follow a meeting hosted by the New York Fed yesterday where 16 leading global investment banks, institutional investors and international regulators discussed ways to upgrade back-office systems for derivatives trading. That meeting followed a similar gathering last year, where delays in the processing of derivatives were judged so serious they could create systemic problems if not addressed, the FT reports.

The participants in yesterday's meetings reported significant progress in cutting those backlogs -- something the regulatory trio calls "encouraging" -- but said the industry still has a serious problem with the backlogs in the equity-derivatives market. "Often it takes a crisis to generate the will and energy needed to solve a problem," the regulatory trio says, and "here, the industry deserves credit for acting in advance of a crisis." But more action seems to be needed by a financial industry that will closely watch their comments, as the FT reports. While U.S. and European regulators have cooperated extensively under the radar, until now national agencies have handled problems in their own markets. For example, the meltdown of Long Term Capital Management in 1998 was led by the New York Fed with the help of Wall Street. But with hedge funds among the biggest traders of derivatives, the potential cross-border vulnerability to market problems has increased. Earlier this month, the U.S. hedge fund Amaranth's big loss in the American gas markets set off a massive sale of its loans in London.

A Watched Pot Never Boils

How painful is this week's CNBC spiral of confusion as they feed the beast that is television?

From this morning's tortured interviews with folks on the floor searching for the meaning of life (that HAD to be a Monty Python parody- right?), to C-SPANesque silence as a parade of loser H-P geeks took the 5th (one of whom apparently overslept and showed up wearing what looked like wrinkled pajamas), only to be followed by cymbals crashing as we abruptly shifted to the Four Seasons Hotel for a Power Lunch infomercial with another ex-con, Martha Stewart.

The apparent shift change in CNBC's control room, right in the middle of the testimony of H-P's former Chair, once again swung the blinding TV lights on what is quite possibly the stupidest group of Television interns in the Free World.

How else do you explain such a basic lack of understanding or context?

Wednesday, September 27, 2006

Dumb and Dumber

Nicholas Andre: Where's all the money?
Lloyd: That's as good as money, sir. Those are IOUs. Go ahead and add it up, every cents accounted for. Look, see this, that's a car, 275 thou- might want to hang on to that one.
Dumb and Dumber, from the movie.

Mr. Jacobs says she explained that the group needed people with good credit ratings to be used for real-estate investments that would be made as a group, not individually. Mr. Jacobs, who was living with his mother at the time and says he couldn't afford to buy a home of his own, says he understood that he wouldn't have to make any payments or assume any financial obligations but would receive payments for letting the group use his credit record.

"It sounded pretty good," Mr. Jacobs says. "Everything I asked them, they had an answer for.

Mr. Jacobs and others who joined the group say they were rushed into signing documents without being given time to read them. Within weeks of signing those papers, Mr. Jacobs says, he received two payments, totaling $7,000, from the Penns. After a few more months, however, he began to get calls from Countrywide representatives demanding mortgage payments. Mr. Jacobs says it turned out that two loans, totaling more than $200,000, had been taken out in his name and that he owned two houses. He says he now thinks the houses might be worth only around $40,000 apiece.

Others who signed up for the group say their credit ratings have been so devastated that they can no longer buy anything on credit. "My dad brought me up to pay my bills before I eat," says Nancy Muse, who heard about the group from a friend who used Ms. Penn as a hairdresser. Months later, Ms. Muse found out she was in trouble when she inquired about buying a modular home for herself. A representative of the home-building company checked her credit and told her she already owned four homes.
Dumb and Dumber, from Page One of today's Wall Street Journal: Town's Residents Say They Were Targets of Big Mortgage Fraud.

I'm having ALL TIME HIGHS for Lunch!

For two months now we have been told weak housing, poor job numbers, lousy wages, CPI/PPI rolling over (because nobody has pricing power), awful Philly Fed numbers, declining demand for all sorts of energy, and so forth, are good for the market because the Fed will have to cut rates.

(Frankly, I was starting to think what we really needed to smash those stubborn all time highs was a good old fashioned natural disaster. Better yet, some sort of Biblical cataclysm!)

Now we have futures rolling over because of weak durable goods. WTF?! Nobody gives a $#&! about that stupid number! Who's the moron selling on that? That's BAD news you idiot!

Wait... Never mind. Art Hogan just predicted new highs by lunch.

Can you imagine the frustration over at CNBC HQ if we stop within 50 points and roll over? Do you realize how much time and money has been put into the special music and graphics and *whoosh* noises?

Tuesday, September 26, 2006

Conundrum... on Steroids?

In a previous post I wondered if we were at a Fork in the Road, given the ramp in equities, despite a sharp drop in yields. Since then the broader market has flirted with 5-year highs, while the long end of the yield curve has plummeted (a drop of 75 bips in 3 months is absolutley huge). In a nutshell, the stock market is pricing in better than expected growth, yet the bond market is pricing in a sharp slowdown or even recession, not to mention a bold projection that the Fed will have to cut rates in the next year or so.

Bill Gross weighs in with a breezy AMEN!
Currently, PIMCO’s best 60/40 bet is a cyclical one that proposes that the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving towards a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates... The U.S. bond bull market, which began almost two months ago, remains in its infancy but the best way to play it is via durations above index and concentrated in the front-end of the curve.
Pual Volker is not so sure.
``I am a little bit more worried about inflation'' ...While the inflation rate isn't ``high'' or ``running away,'' Volcker said, ``it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word -- psychological pressure, political pressure -- there is not to do anything about it.''

``A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that that nothing very startling will happen in terms of restraint'' on inflationary pressures, said Volcker. ``That is reflected in attitudes pretty broadly. But once people are convinced that that's the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.''
Dallas Federal Reserve President Richard Fisher is on the same page.
Several surveys of business executives have been released in the past week, all of which underscore the slower growth beginning to prevail. This includes recent surveys of the manufacturing sectors of the megastate of Texas by the Dallas Fed; the survey of the smaller but nonetheless meaningful production of eastern Pennsylvania, southern New Jersey and Delaware by the Philadelphia Fed; the National Federation of Independent Business; the Business Roundtable; and Duke University’s Global CFO Survey.

Lumping it all together, I am reminded of Mark Twain’s oft-quoted quip: “Wagner’s music is better than it sounds.” The outlook for economic growth may well be better than it sounds. At the same time, the inflation dynamic may be worse than it sounds.

As I sit at the FOMC table, I continue to fret more about inflation than I do about growth. While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation.

Markets are known to enjoy uncanny predictive powers, with some suggesting lead times of as much as 12 months. But right now the stock and bond markets are more like nervous needles on data dependent gauges. Thus the stock market sees healthy business conditions for the current quarter, at the same time the bond market sees inflation "leveling off". It is unlikely that tug of war will remain in such perfect balance indefinitely.

Friday, September 22, 2006

A New Bullish Thesis

Lots and lots of chatter out there about the inverted yield curve (you can do a google search and find more than you can ever read, and/or you can check out this very good interactive chart for a quick refresher).

Conventional wisdom tells us the structure of our current yield curve- in addition to a number of other variables- puts a material probability on a recession.

Meanwhile, there's a considerable number of economists and strategists that say just the opposite.

RealMoney contributor and ING Guru Jim Griffin is one of them.

Mr. Griffin has written an excellent "executive summary" of a more comprehensive piece in The Economist. Frankly, I'm surprised this hasn't received more attention this week.

Bulls, Bears, and fence-sitters alike, will find both worthwhile reading.


The Developing World Reaches Maturity
by Jim Griffin, Economic Advisor

If you would like a concise but comprehensive big picture of the economic backdrop for many of the concerns that get priced on a daily basis in financial markets, the current edition of The Economist includes a survey of the world economy that provides just such a synthesis. If you tend to get buried in the details of your daily grind, I recommend it to you.

Its primary point is that while the developed and emerging parts of the global economy are now in rough balance in terms of contribution to total global output, they are at a tipping point in terms of their relative importance going forward. If, like me, you have tended to think of the developed world as the global engine and the emerging markets as the caboose, a not unreasonable orientation given 19th and 20th century history, it is now time to consider swapping ends on that arrangement.

Much of what is written in this survey will not be new to you. What is different, intriguingly so, is the conclusion drawn: that the emerging world may be nearly ready to fly on its own. It may soon be ready to drive its own growth and development, with less dependence on rich world assistance in the forms of capital and technology transfer or demand propulsion. It may also, before too long, reverse the polarity of cause and effect in global economics: That old image of the United States sneezing and the rest of the world catching cold may once have been appropriate but in the years ahead the causation may run the other way between the developed and developing parts of
the world.

Unlike the parade of 30-second sound bites we're used to, this bullish thesis deserves thoughtful consideration. However, I should point out it is also possible the US could have a recession while the rest of the world plods along without us (think: Japan in the 1990's).

H-P's CEO Mark Hurd Live Webcast

HP's CEO is on CNBC, live, as I type. For those without access, or looking for info after the fact, here are my notes, literally taken on the fly...

CEO Mark Hurd:

"I'm going to start by blaming this whole debacle on those people stealing strawberries... [unintelligible voice of HP lawyer]... er... leaking confidential info. We don't allow leaks... unless of course it was a part of the Board's strategy. So I must say I was shocked- SHOCKED!- to discover there have been non-Board-strategy leaks going on here."

"Today I will cover the details of our investigation in vague generalities. We intend to use the same long drawn out strategy we always use, say, when rolling out new products... or designing our packaging... or even deciding which types of that sticky tape stuff we should put on those things that keep the plastic bags closed on our products. We have been in a series of meetings, will continue to attend meetings, and have already scheduled additional meetings. However, so far we don't know anything, because our meetings have been primarily about the upcoming meetings. Also, naturally, we've reorganized the investigation team twice. All this to say, you can rest assured we will make this as complicated as humanly possible in the finest traditions of H-P."

"Yes I attended a meeting where I voted for it before I voted against it. I also may have left the meeting to use the bathroom during any criminal activity that is likely to be revealed in the future. I DID score on some KONA 1, but I didn't read it, and I didn't like it. Most importantly, I_DID_NOT_GET_TRACER_TECHNOLOGY_FROM_THAT_WOMAN, MS. PATRICIA."

"I apologize to all H-P employees that we were caught. As our employees know, H-P has designed incredibly invasive systems that leave digital tracks all over the place. I mean, Hello!, it's not like the days when David Packard could just reach over and run something through a shredder! But no excuses, the fine people of our company deserve better than this, and Chairman Dunn has resigned as a result of not taking the proper steps to ensure plausible deniability."

"Speaking of our employees, I'd appreciate it if you'd get back to work. Please stop emailing and talking endlessly on the phone with each other about this mess- trust me, we know who you're talking to, and [unintelligible voice of H-P attorney]... well, I think you know what I mean [muffled laughter]."

"In conclusion, let me share several buzz words: integrity, hard work, The H-P Way, blah blah blah, yadda H-P Way yadda yadda."

"...Black Gold, Texas Tea..."

RealMoney's Christopher Edmonds always has a well balanced view of the energy sector. In his latest review of oil and gas (available on's free site) he says this recent selloff is more of a seasonal issue- not a sign of a serious change in trend. Thus a buying opportunity for the long term.

High prices in the oil patch may slump temporarily, but demand for crude oil and products remains robust.

In fact, demand continues to creep higher from a base of 84 million barrels per day.

Without additional supply in the coming years, this trend will push the current limits of global production, now in the range of 85 to 86 million barrels per day.

Some have argued that gasoline demand dropped as a result of high prices in recent months. In fact, the data indicate otherwise.

When gas prices rose from $2 to $3 a gallon in the U.S., consumer demand remained surprisingly strong. Recent declines in demand are the result of typical seasonal patterns, namely a slowdown in driving as the summer-vacation season winds to a close.

Demand for crude, both domestically and globally, remains firm and should stay brisk for the foreseeable future.

More importantly, he names names for those wanting to take a shot at what he thinks will be strong earnings (and presumably healthy guidance).

As an aside, the best argument I've seen from the Bulls for persistent strength in energy is actually the same one used by the energy/oil price bears: deepwater discoveries (that link leads to an article- with a Peak Oil bias- about the challenges of Chevron's newest development).

The bears say these new discoveries prove technology will solve our problems. I'm no energy/oil expert, but I look at reaching almost a mile and a half down to the floor of the Gulf of Mexico, then drilling another four or five miles, into a pile of rocks, right in the middle of hurricane alley, and says to myself, "Self, if the supply of oil isn't a problem then who in their right mind needs to go there":

We've come a long way from the day when a guy could find the sticky stuff while out shootin for some food, and up from the ground would come a bubblin crude.

Wednesday, September 20, 2006

A Butterfly Flapping it's Wings in Thailand?

During the summer of 1997 an "ex-Pat" client kept trying to tell me there was a very serious crisis unfolding in Asia. She was "involved" on the ground, so to speak, and convinced it would spread globally. I kept responding "Nobody here cares about Asia" (pointing out our market was doing great, and Americans are famously uninterested in world affairs). At one point she shared with me how and where the dominoes were falling, which had started with the currency implosion in Thailand. Somewhat embarrassed, I once again explained nobody cared about Asia- worse yet, there's maybe 10 people in this country that can even find Thailand on a map.

By summers end I became a believer, and of course it turned out she was right. Emerging markets were shellacked, and eventually the US experienced a fairly ugly selloff.

However, that big ugly Asian Contagion correction was a distant memory very quickly, as the US was preoccupied with the design/engineering of the largest bubble in the history of the world.

In fact, a year later, when the Russians defaulted on their bonds, Americans were completely unaware, or had no idea what it meant. The correction that came following the LTCM debacle was so brief, most dip buyers were up big before their trades settled.

Investors had been trained like pavlovian dogs to buy every single selloff with both hands and feet. The more severe the crisis the bigger the reward for stepping up to the plate.

Someone called it the Greenspan Put, which at some point got twisted into a slogan on Wall Street, as the public was reassured at any and every turn: "Greenspan won't let the baby boomers get hurt."

Of course the Y2K bubble got so big even the Fed reached a point where they decided it would be prudent to step back and let the markets clear. And when it became an absolute rout, and they started cutting rates, all the King's horses and all the King's men couldn't put Humpty together again.

It turned out serious problems suddenly mattered. And there was no quick fix. As John Kenneth Galbraith observed, "recessions catch what the auditors missed." Not only did the auditors miss a heck of a lot, but we learned a bunch of them were up to their ears in the financial engineering, too.

Fast forward to our current moment in time and we find the senior indexes in the neighborhood of those old highs. Our clients are generally happy, business is good. Buying on the dip, say, if there's a bombing in London, remains a sure-fire winning strategy.

Fact is, from what I see, investors want more risk. There may be a bunch of them crowding into puts or double short Q's, looking to score in October, but that's just a trade- they don't actually think anything bad is going to happen!

We need to remember that at the bottom of this increasingly complex system there are... regular people. They will once again reach a point where the pile gets too high. Or something bad will happen- and this time it will matter for some odd reason. There will still be business cycles, rising unemployment, painful recessions, stock market crashes.

And some of those gunning for new all time highs on the Dow- even if the market keeps going for a while- are liable to find themselves hitching their wagon for a round trip.

P.S. I hear a hedge fund lost $5 Billion in one week... wonder if we should be long gas?!

Monday, September 18, 2006

Three Charts

First two charts lifted off Mike Panzer's site- always interesting to stop by and see where his imagination leads.

Third chart lifted off via the Kirk Report (Charles Kirk says he's a speed reader- I believe it).

Jeff, the "OldProf", over at the Dash of Insight blog has some first rate analysis that questions the data sources for two of the above charts. This is a good example why I'm becoming a regular reader over there.

Sunday, September 17, 2006

Dr Hussman Gets Technical

Dr. John Hussman's weekly market commentary is always time well spent. This week he points out some interesting divergences.

The NYSE registered 193 new highs on Friday. This was fewer daily new highs than we observed two weeks ago, and less than half the number registered in early May. Weekly new highs also fell far short of the April-May period. Despite the recent advance in the major indices, the Dow, S&P 500, Nasdaq and Russell 2000 all remain below their April-May highs. Since early April, when our measures of market action shifted from neutral to unfavorable, the S&P 500 has delivered a total return about equal to the return on risk-free Treasury bills (within a fraction of 1%). This simply is not a market that is “running away,” but rather one that is range-bound and now strenuously overbought.

Trading volume has also been dropping off substantially. While the link between trading volume and subsequent market action is not reliable as a single indicator, trading volume has a very useful role in either confirming or diverging from the indications given by prices, breadth, and other internals.

Even outside of our own measures of market action, the weakness in investor sponsorship here can be seen in generally followed indicators. Lowry's, for example, observes that trading volume has fallen off substantially as the recent rally has progressed, while the apparently strong breadth of the NYSE has been driven mostly by interest-sensitive stocks.

Dr. Hussman also points out the divergence in the quality of the market breadth.
The next chart depicts market breadth on two measures. The violet line shows the overall NYSE advance-decline line. The blue line is the NYSE advance-decline line restricted to common stocks (excluding preferred stocks, which behave essentially like bonds). Notice that in recent weeks, the recovery in common stocks has been very muted. This is also evident in the advance-decline profile of other exchanges.

Turns Out We Have Less Than a Year

You can ignore each of my previous reports on two predictions that we have about a year before the market crashes. As you can see, from the graphic display of the economic cycle, we're at the top now.

As usual, John Mauldin's weekly letter is a worthwhile read.

I won't parse the thing here since Barry Ritholtz already beat me to it, via a very good discussion in his comments section (scroll down once you link to his page).

Put This on Your Radar

In my previous post I made light of Hedge Fund King Steven Cohen's prediction that the market has about a year before everything goes gunnybag.
He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

The Cunning Realist complains Charles Krauthammer agrees, though not for the same reasons.

The signal [from President Bush's press conference last week] is unmistakable. An aerial attack on Iran's nuclear facilities lies just beyond the horizon of diplomacy. With the crisis advancing and the moment of truth approaching, it is important to begin looking now with unflinching honesty at the military option...

Then, without flinching, Krauthammer bravely addresses the costs of military action:

Economic. An attack on Iran is likely to send oil prices overnight to $100 or even to $150 a barrel. That will cause a worldwide recession perhaps as deep as the one triggered by the Iranian revolution of 1979...

Military. Iran will activate its proxies in Iraq, most notably, Moqtada al-Sadr's Mahdi Army... Among the lesser military dangers, Iran might activate terrorist cells around the world...

Diplomatic. There will be massive criticism of America from around the world.

These are the costs. There is no denying them. However, equally undeniable is the cost of doing nothing...

One might wonder why anyone would knowingly walk into another mideast cesspool. Krauthammer answers.
Against millenarian fanaticism glorying in a cult of death, deterrence is a mere wish. Is the West prepared to wager its cities with their millions of inhabitants on that feeble gamble?

These are the questions. These are the calculations. The decision is no more than a year away.

Whether you agree with any of these dire predictions- and I've only used two examples- is really not the point here. What matters is whether the political and/or financial media's echo chambers begin to pierce investor consciousness, which could create a self-fulfilling prophecy. And having gone for so long without so much as a 10% correction in the senior averages, complacency is certainly reaching uncomfortable levels. (Not to mention oil is tumbling partly due to a complete flip of conventional wisdom about Iran supposedly making concessions at the negotiating table.)

Mr. Krauthammer predicts IF we attack Iran, then we'll wreak ecomic havoc. Mr. Cohen predicts IF hedge funds, crowded into the same trades, get jammed in the exits, then we'll see a market meltdown.

I'm saying, IF we simply see consensus build for either one of those sorts of events, then we'll discount the hell out of it before the first shot is fired.

Put another way, John Maynard Keynes once said figuring out the stock market is like trying to predict the winner of a beauty contest: beauty may be in the eye of the beholder, but you have to bet on the contestant everyone else will consider the most beautiful. (Or in this case, the most ugly.)

Most of us prefer to focus on the strength of the economy, inverted yield curves, corporate earnings, and other variables in our comfort zone. However, especially in the case of future Nuclear Power Iran, considering the sort of increasingly militant rhetoric the Cunning Realist has railed against (here, here, and here, for example), we need to put this on the radar.

Friday, September 15, 2006

The Hedge-Fund King Is Getting Nervous

The Weekend Journal has a rambling piece about Steven Cohen, the SAC Capital Hedge Fund founder and trading guru. It's mostly a fluff piece, but still a fascinating story all the same.

The author received rare access to Mr. Cohen's business (Cohen sits in the center of a giant room full of traders), and home ("name dropping" every major painter that ever lived- and how much he paid for each).

More importantly, Mr. Cohen opens up about the crowded hedge fund trading, and what that probably means in the not too distant future.

[Cohen's] success has inspired a generation of scrappy Wall Streeters -- some of them with no experience whatsoever handling other people's money -- to open their own hedge funds.

That quick-trading game is now over, says Mr. Cohen. With about 7,000 hedge funds competing for investment ideas, good stock investments are getting more scarce. "It's hard to find ideas that aren't picked over, and harder to get real returns and differentiate yourself," he says. "We're entering a new environment. The days of big returns are gone."

To make matters worse, the stock market, he says, is no longer as forgiving for investors. The tailwind of low interest rates, low inflation and strong corporate profits, he says, has been lost. There are no more easy pickings, he says...

The throng of rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries that some of his largest holdings are also favored by other hedge funds. A rush for the exit could spell trouble. He says he expects that eventually there will be a sudden and sharp reversal in the stock market -- but he's not worried about that happening this year. "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts.

"Hedge funds are bigger than they used to be. Their positions are bigger," he says. "I worry that if everyone were to sell, could we get out?"...

As is typically the case with a "Rags to $3 Billion in Riches" story, the whole thing is a good inspirational read. But I also thought it was interesting the way the author came full circle in the final paragraphs.

Mr. Cohen concedes that holding investments longer and betting bigger could lead to lower returns. A year ago, SAC told investors the fund was aiming to return between 10% and 15% a year, people familiar with the matter say.

That isn't the only risk. These days, many of Mr. Cohen's big bets are popular with other hedge-funds. SAC's top holding in August, Time Warner Inc., is held by 79 other hedge funds, according to Goldman Sachs Group Inc. Atlanta-based energy company Mirant Corp., another big holding, is held by 97 hedge funds. If the funds tried to bail out of these stocks en masse, share prices would likely tumble.

Mr. Cohen says he worries about whether SAC's investments are beginning to look like those of any other hedge fund. What's worked for SAC in recent years, he says, may not work going forward.

On June 9, around midday, Mr. Cohen walked off SAC's trading floor and slumped into a chair. The markets had been choppy all week. He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

"The hedge-fund run is not over," he said. "I think the game is changing, and if it is, I have to react. We won't go off the ledge with everyone else."

I've got good news and bad news.

The bad news is the market is going to hell when all these hedge funds realize they're the ones that have run the whole thing up in the first place. The good news is you've got about a year. (Seriously, regardless whether it takes a week, month, or year, I've got a feeling Cohen comes in to work everyday and keeps one hand on the panic button.)

Whose Ox is Being Gored?

Bloomberg's Caroline Baum has a fantastic assessment of the current US monetary policy. Some of it gets a little wonky, but it is well thought out.

The main point is how long the Fed has been inclined to strip out "volatile" food and energy.

Recently some soft but solid voices have started to challenge the Fed's choice of a core index, in part because oil prices have been ``volatile'' in one direction -- up -- for most of the last three years.

But there was also this passage that struck me a certain way:

U.S. policy makers have long defended the practice of using a core inflation measure as a check on how they're doing. The public, of course, sees this as just another gimmick the government uses to pull the wool over its eyes.

The concept of stripping out historically volatile food and energy prices from inflation indexes is ``an issue of trying to forecast more effectively the overall inflation rate,'' Federal Reserve Chairman Ben Bernanke explained in the Q&A following an Aug. 31 speech in Greenville, South Carolina.

A second reason for targeting core inflation ``has to do with policy making,'' he said. In order to offset the immediate effect of an increase in energy prices, the Fed would have to ``force down wages and other prices quite dramatically to keep the overall price level from rising,'' he said. The alternative is to allow ``first-round effects to pass through'' and try to ensure that the energy-price spike doesn't pass through to other prices and wages.

Stop and think about that for a moment. Out of 300MM Americans and/or 6 Bln inhabitants of planet Earth, a handful of politically appointed economists get to decide who has pricing power, not to mention what a complex $12 Trillion economy can handle in the way of full employment, cost of funds, and so forth, as well as all that flows from said targets.

Where is it they say the road leads that is paved with good intentions?

GM and Ford Follow Up

I've been wary about GM and Ford for years now, really even before their absurd $10/share earnings guidance that they continued to reaffirm until it had become a gigantic joke (remember, the company said over and over again they'd hit those numbers this year, 2007 at the latest).

Today's reaction- esp with Ford- reminds us there are a lot of folks renting these names only as long as they have momentum.

And as Scott Moritz reminds us, "[Ford] warned that it doesn't expect to turn a full-year profit on its core North American car operations till 2009."

Meanwhile, "GM has also been grappling with significant turnaround challenges. The No. 1 U.S. automaker reported a second-quarter loss of $3.2 billion, or $5.62 a share, due to huge restructuring charges."

"Conventional wisdom is that you can't turn a ship as big as GM around quickly," General Motors said at the time. "We aim to prove that conventional wisdom wrong."

Look, that's just crazy talk. It might be encouraging if we all just got off a time machine and got handed the current mess. The fact is both companies have known about the liabilities, the slide in market share, and on and on, for years and years. This is an example where "conventional wisdom" merely requires the skill of observation.

Of course both companies are finally getting more serious, the unions so far seem to be persuaded that they need to bring something to the table (although my sense is the rank and file have not yet caught up to the union leadership on this), but face it: these guys are in a hole and have yet to stop digging.

What's worse, if a company is not currently making an obscene amount of money considering the supposed strength of the economy, historically low interest rates, productivity, yadda yadda, then why in the world should anyone think they'll survive the next recession (by that I mean the common stock)?

And don't confuse this with the current debate about whether or not we are actually headed into a recession even as I type. Instead, just ask yourself this: "Would you agree we'll have a recession at some point in the future?... What are the chances it could arrive before 2009 (when Ford hopes to be profitable)? And while Ford and GM are restructuring for the umpteenth time, who really believes Toyota, et al, are going to rest on their laurels?"

Thursday, September 14, 2006

Lots of Interest in Short Interest

Most of us that have been through a few market cycles keep short interest on our radar. I don't have a level that tells me anything in particular, more of a rough gauge of how many folks have crowded into the bearish trade.

But in recent years I've seen a fair amount of commentary that indicates record high short interest- followed by even higher records- is not what it seems. That's because there are increasingly complicated program trades and derivative-type hedges that use shorts, puts, calls, and other sorts of exotica, in an effort to target a particular niche or strategy.

For example, over on Minyanville, John Succo provides one of the most clear explanations I've seen of how this can actually work.

My fund is a very large short seller of stock and we represent a decent percentage of total short interest out there. But the reason we are short stock is because people sell calls. I have described these funds that buy stock and sell calls and deem it "income" for their investors. In reality, these funds can be very dangerous and risky if the market begins to decline. I can almost guarantee you that if the market drops enough, the risk will force these managers to sell stock to protect that "income."

So as these trades occur, funds buying stock and selling calls (which is a net bullish strategy), I take the other side on a ratio to create a volatility trade. I will never be forced to cover my short stock as it rises and in fact will short more. So instead of the comment "a rising market will force short sellers to cover" being accurate, in fact, as the market rises I will actually sell more shares short to hedge my exposure to the long call option.

Change of subject: while you're there, check out Kevin Depew's Five Things You Need to Know. Mr. Depew somehow manages to distill each day's market buzz into a very funny and easy to read column. Seriously good stuff.

You Don't See This Everyday

Bloomberg reports a Federated Investors mutual fund manager is predicting a big decline in the market. And he's doing something about it.

Steven Lehman, whose $3 billion Federated Market Opportunity Fund has beaten more than 90 percent of its peers during the past five years, is more bearish than any time since stock markets peaked in 2000.

The 49-year-old manager more than doubled the fund's cash holdings in the past year to 36 percent and put 34.5 percent in bonds. He has another 5 percent in options that rise in value when equity prices fall. Lehman has just 12 percent of the Federated fund's assets in stocks, the least since the fund opened six years ago. The rest is in preferred shares and convertible bonds.

``I've positioned the portfolio for what I think will be a very difficult bottom here in the U.S. market and I'm waiting,'' Lehman said in an interview from his office in Pittsburgh. Falling home prices and weaker consumer spending will slow economic growth and hamper gains in corporate earnings, he said.

No commentary required. Be interesting to watch this fund and see what happens.

How Low Will Home Prices Go?

Over the past few years a standard single family home around here would be on the market for approximately 4 hours. Never even got the realtor sign in the ground. When we were looking three years ago I had a real estate manager friend call me before the houses would even hit the MLS system. It was so competitive we just wanted a shot at it before everyone and his brother hit the same driveway. Turned out my tipster didn't even help because the homeowner selling, and all their neighbors, had already tipped off a few dozen others before I ever received a call.

Lately everything has changed. Totally.

For example, a neighbor has been trying to sell for 6 months, has lowered the price a little, did a bunch of work on the house, yadda yadda, but there hasn't been any takers. But they don't think prices have dropped- just too many other houses for sale this summer.

Terry Cullen's article in today's WSJ is a great story about what so many people are seeing in their own real world experiences since the market turned.

Terri and Her Sister Tour Open Houses To Gauge the Local Real-Estate Market

...our neck of the woods has seen some of the steepest home-price increases in the nation over the last several years. In the second quarter of 2006, the median price for a single-family home in our region was $393,600, more than double the median of $188,200 in 2000, according to the National Association of Realtors...

[But] recently she's seen reasons for hope: Far more homes were showing up in their price range, and others she'd seen a year ago were being relisted at reduced asking prices. Melissa decided it was time to look around again, and last weekend she asked me to come along on a tour of open houses in her price range. My sister had a list of homes she'd found online, but I suggested we tour as many open houses as we could to get a feel for the market...

What we saw was bleak news for sellers in our region, but good news for buyers like Melissa and Joe: block after block of open-house signs. In fact, we were hard-pressed to find a street that didn't have at least one home for sale -- and many had more than one. What's more, most of the 20 or so homes we visited were vacant -- a sign that homeowners have moved on and are motivated to sell, or that speculators are looking to unload properties before prices go any lower. (Asked why one home was vacant, one agent said frankly: "This was a 'flip' that flopped.")...

After our exhausting open-house blitz, Melissa asked for my thoughts. Though I'm too young to have experienced the 1980s real-estate market implosion, something told me that things are going to get a lot worse for sellers before they get better. To get an expert's take, I asked Robert J. Shiller, a Yale economics professor, for his insight on where the East Coast real-estate market may be headed...

"We don't know exactly what's going to happen because we've just experienced the biggest housing boom this country has ever seen," he says. In addition to homeowners struggling to sell existing homes, construction is at near-record levels: The last time this much inventory entered the market was 1950, when builders were building suburban homes for soldiers returning from war, he says...

Despite evidence of a cooling real-estate market, Melissa and Joe decided they weren't quite ready to wade back in: They'll take the market's temperature again in the spring.

So we've got lots of sellers that can't fathom a drop in price along with buyers that are learning it pays to be patient. That's a huge spread between the bid/ask.

Wednesday, September 13, 2006

Peak Oil: Don't Worry, Be Happy

In Thursday's Wall Street Journal (sub required) we learn once and for all this whole Peak Oil thing is a bunch of nonsense.

Producers Move to Debunk Gloomy 'Peak Oil' Forecasts

Leading players in the petroleum industry, including Saudi Arabia and Exxon Mobil Corp., are aggressively arguing that plenty of crude oil remains for world consumption, in an effort to counter critics who contend crude output is about to plateau...

Yesterday, Abdallah S. Jum'ah, chief executive of Saudi Arabian state-owned Saudi Aramco, the world's largest oil company by production, argued during a speech in Vienna that the world has more than a century's worth of crude left at current production rates. His talk followed similar remarks by a senior Exxon executive this week. Spokesmen for Exxon and Aramco said they aren't coordinating their remarks...

At an OPEC seminar yesterday, Mr. Jum'ah of Aramco said the world had produced only about one trillion barrels, or about 18%, of the earth's producible potential of 5.7 trillion barrels of oil. "That fact alone should discredit the argument that peak oil is imminent, and put our minds at ease concerning future petroleum supplies," he said. The remaining 4.7 trillion barrels should be enough to last more than 140 years at current output rates, he said...

Mr. Jum'ah's speech came two days after Exxon's Australia chief, Mark Nolan, told an industry conference in Adelaide, Australia, that "the end of oil is nowhere in sight." Mr. Nolan cited a U.S. Geological Survey estimate of more than three trillion barrels of conventional recoverable oil resources, of which one trillion barrels has been produced. Conservative estimates of heavy-oil and shale-oil resources push the total to four trillion barrels, while a 10% increase in recoverability will deliver an extra 800 billion barrels, Mr. Nolan said.

A cynical person might think this news, coming from companies whose very existence depends on the sticky stuff, is an effort to keep oil prices from rising too far, too fast, thus accelerating the adoption of alternatives.

For example, this fella apparently don't appreciate all the hard work these oil companies are doing to lower prices on the products said oil companies sell:

Saudi Arabia, with a quarter of the world's proven crude reserves, has an interest in countering developments that would reduce demand. "If you are sitting on the world's biggest oil deposits, you would want to prevent the premature development of alternatives to oil," said Herman Franssen, president of International Energy Associates, a consulting firm in Bethesda, Md.

Ah, but Abdallah Jum'ah knew he would say that.

In an interview, Mr. Jum'ah said the Saudis "don't mind the development of alternatives to oil," because increasing energy demand means the world needs supplemental energy sources. But he objected to government subsidies and other supports that lead people to believe that alternatives like ethanol are a "panacea" that is "around the corner," he said.

Got that? Government subsidies, like, say, this one given to Chevron, are just wrong. And leading people to believe some panacea is around the corner is, like, oh I don't know, saying technology will solve the problems we're currently having getting oil and refined products to consumers.

Whatever. Either way I'm not going to worry about it, since I don't have to conserve energy and technology will bail me out.

What I'm Watching

Commodities. Especially oil and copper. (link to chart over at Chairman Mao)

Mid-term elections. Get the latest rundown from the Wall Street Journal's Morning Briefing (sub required). Bush and Rove are working hard to regain momentum. Most experts agree it's hard to see the Democrats turning over very many seats, as both parties enjoy extremely high re-election rates among incumbents anyway. But I still think the mood is shifting.

Advance/Decline line.

Short Interest still very high.

Gaps faded. I'll get more concerned when I see the pre-market/market open higher, only to close lower. That pattern is frequently a tip that momentum and individual traders are anxious to get in early, while the smart money lightens up through the rest of the day. There have been times in the past where this pattern persisted for some time before the market rolled over ugly.

Sentiment surveys still bearish (although this week should change that). Businessweek explains.

Hedge Funds closing in on Fiscal Year End. This Heard on the Street column mentions some of the most expensive money market funds available to wealthy investors.
Some of the most hallowed names in the hedge-fund world are producing very human returns this year.

They've been dogged by confusion about where interest rates, stocks and commodity prices are heading, and poor bets on emerging markets and housing-related shares...

Overall, hedge-fund returns are in line with markets. Merrill Lynch's hedge-fund index is up about 4% through Aug. 28, compared with a 7.2% gain for the DJ World Index, a rise of 4.3% for the Standard & Poor's 500-stock index, and a gain of 2% for the Lehman Brothers bond index. But hedge funds that focus on stock picking -- so-called long-short managers who buy some stocks and bet against others -- are up a meager 1.4% so far this year, according to the Dow Jones Equity Long/Short (U.S.) Index.

Jubak: I'd like to see more articles like this. And fewer like this. (No offense, Mr. Jubak.)

Tuesday, September 12, 2006

Yahoo Adds Seeking Alpha; CNBC doth Protest Too Much

Update: As usual, I see Barry Ritholtz over at the Big Picture beat me to the punch. Interesting to see a number of very smart folks with the same reaction to the interview noted below.

This morning I looked up and noticed Yahoo Finance Manager, Peggy White, getting grilled by TV tough guys Joe Kernan and Charles Gasparino. Ms. White was announcing the addition of content from Seeking Alpha to the news feed at Yahoo Finance.

Beginning today, consumers researching specific stocks on Yahoo! Finance will find Seeking Alpha stock market content on the stock quote pages of the web site. The agreement brings users access to a new breed of financial analysis, opinion and commentary from money managers, finance professionals and industry experts.

"Financial blogs play an increasingly important role in covering today's global investment markets, and the addition of Seeking Alpha content to Yahoo! Finance brings a new collection of viewpoints to millions of investors," said David Jackson, chief executive officer of Seeking Alpha. "Working with Yahoo! Finance allows us to provide a new audience with a wide range of well-argued opinions and analysis that complements the financial news already provided by traditional media outlets."

In response to a series of rude questions, Ms. White explained a team of editors would review the content for accuracy.

Mr. Kernan laughed at that, due to his grave concerns that bloggers, which he compared to the Wild Wild West of Yahoo's bulletin boards, would be able to just throw out anything and everything.

Charlie Gasparino taunted: "will the editing process be better than the Wall Street Journal?!"

This sort of paternal instinct, especially coming from unindicted co-conspirator CNBC, is a little hard to swallow by anyone with a memory of the $Trillions vaporized after the Y2K bubble popped.

And don't get me wrong, I appreciate Mr. Kernan's vigilance over the rest of the country- nay, the world!- although I don't remember a trace of CNBC editorial concern until well after stock market implosion damage was done.

All this as that Pulitzer Prize winning piece seriously examining the behavior of CNBC "Bubbleheads" still collects dust on the shelves over at the Wall Street Journal (What? Oh yeah. I forgot... they're partners).

Regardless, as Peggy White chuckled out a "Thank you for having me", she must have been thinking of CNBC's abysmal ratings compared to the "viewership" over at her corner of the media jungle (as in, "Well that interview sucked... but then again, nobody's watching.").

[Note: Using Hewlett-Packard (symbol HPQ), since they're in the news today, here's an example of the integration of Seeking Alpha into the news thread found on Yahoo Finance. Nice. The more diversity the better.]

OK, enough about that.

Update: I've submitted this piece to the editors over at CNBC and The Wall Street Journal... but, so far, no response.

Let me wrap this up with a massively bold and forward looking prediction: Joe Kernan will have his spurs on when CNBC discovers the Wild Wild West that is the internet...

...because NBC is testing a new website for CNBC even as I type.

NBC is testing a new website for CNBC. The site will charge subscriptions for access to all interviews and features run on the cable channel, as well as real-time charts and a search engine.

The site, which will take advantage of the fact CNBC’s content is digital and easily transferable to the internet, will launch in the US at the end of the year and be rolled out internationally.
So they've apparently gotten rid of all those VHS machines at CNBC HQ, and now- Hey, this is cool!- can take advantage of CNBC's digital content. Very clever they.

Monday, September 11, 2006

Cramer: What Traders Learned from 9/11

Jim Cramer's reflections upon 9/11 are an odd play-by-play of those first moments- when we still thought it was just a plane crash.

But Cramer inadvertantly reveals a rare- and much more important- view of what traders are doing in our markets every day. I've cut and pasted Cramer's build up to my larger point (my emphasis added).

At the very moment we first saw the smoke -- not even the flames -- on television, I was online with a bunch of traders and at the risk of sounding callous, I want to tell you what went through our heads. Maybe enough time has passed that you won't judge me harshly for what we were thinking, maybe enough time has passed that you can recall the moments between the "accidental fire" catching our attention and the discovery that we were under attack, that there was no accident and that the world as we knew it was changing.

At first we all asked, "How bad?" I must have gotten six or seven "How bad(s)?" via instant messenger in the first two minutes. Given that we didn't know it was a terrorist act, I shot back the same IM to everyone: "?????" Others came back with everything from "seems weird" to "time to buy." No one said sell, not one of my friends. More importantly, no one said, "This is it, the big one." No one was thinking that way. And no one was thinking that anybody was going to die, least of all people we knew.

One grizzled trader -- I will keep them all nameless -- IM'd me: "Futures down big, bringing in short." Many brokerages make active markets in everything every morning; this morning was no different, and you could trade millions of dollars worth of stuff freely -- as almost everyone I knew did. I came back with: "Wise, don't take short off all at once." That wasn't reflecting any knowledge whatsoever about what was happening at the WTC, it was simply about discipline.

Another trader IM'd, "Stocks indicated down big, buying right here." I asked, "Know anything?" He answered quickly, "Doesn't matter, can't be that bad, gotta bring em in, gotta buy something, too much for sale." Had to bounce, I thought, had to.

You must remember the unimaginable was happening, but it is the trader's job to imagine. All of these IMs were about imagining. You have to trade. You can't not trade. Everyone was trading. They were trading, in retrospect, with no knowledge at all.

There is an enormous percentage of the population- including a lot of folks in the financial media- that assume the big guns are firing off trades with an edge that they hold over the market.

Todd Harrison frequently refers to this curious habit as "a bunch of gunfighters standing in a circle shooting at each other."

Just once I'd like to turn up the volume on CNBC and hear someone say, "the market spiked higher before anyone had time to read the Fed Minutes... then sold off a few minutes later before anyone stopped to think about the fact that the Fed keeps telling us they have crossed into the Twilight Zone, and they don't have the foggiest idea what they're doing anymore! Therefore, with the blind leading the blind today, the market closed up a hundred points.... and when we come back, more blind people will talk about what they'd do if they were qualified to sit on the Fed."

Sunday, September 10, 2006

If a Forest Falls on a Tree Does it Make a Sound?

"Everybody's Doing It"

Sunday's New York Times has a review of 3 internet services that offer to write term papers for college students. Since this was among the most emailed stories in the NY Times this weekend I thought I'd find a scathing rebuke from the author, for what is obviously cheating, or at least some attempt at humor ("kids these days!"). Instead, in sterile prose, he simply fussed about the lack of quality relative to the cost, wondered oh-so-carefully if they were written in the same country that answers Dell Computer's phones (wink, wink- if you know what I mean), and then generally concentrated on the only question bothering every college student in America emailing this story back and forth over the weekend: WILL I GET CAUGHT?!

“Damn!” a little comic-strip balloon says. “I’ll have to cancel my Saturday night date to finish my term paper before the Monday deadline.” [Can't make this stuff up: check out the comic strip banner.]

Well, no, she won’t — not if she’s enterprising enough to enlist Term Paper Relief to write it for her. For $9.95 a page she can obtain an “A-grade” paper that is fashioned to order and “completely non-plagiarized.” This last detail is important. Thanks to search engines like Google, college instructors have become adept at spotting those shop-worn, downloadable papers that circulate freely on the Web, and can even finger passages that have been ripped off from standard texts and reference works.

A grade-conscious student these days seems to need a custom job, and to judge from the number of services on the Internet, there must be virtual mills somewhere employing armies of diligent scholars who grind away so that credit-card-equipped undergrads can enjoy more carefree time together.

Remarkably, in what is obviously a related story, the Wall Street Journal notices Ivy League Schools are bending over backwards to attract the retarded children of the rich/famous and/or powerful. Why? Because rich/famous and/or powerful people suddenly want to give loads of money to said institutions that demonstrate they're open minded about the subtle artistic strengths of certain progeny.

What makes Duke and Brown, among other institutions, stand out, is the way in which they ramped up and systematized their pursuit: rejecting stronger candidates to admit children of the rich or famous, regardless of their ties to the university.

In the world of higher education, children of the rich and famous are known as "development cases," pursued by presidents and fund-raisers often to the dismay of admissions staffs. Duke landed the children of fashion mogul Ralph Lauren and other corporate titans. Some of them became major donors, helping boost Duke's endowment from 25th in 1980 ($135 million) to 16th in 2005 ($3.8 billion).

Brown raised its profile by enrolling children or stepchildren of politicians and celebrities, including two presidents, three Democratic presidential nominees, two Beatles and seven Academy Award winners. A particularly controversial case was the son of Hollywood superagent Michael Ovitz, whose application sparked a debate within Brown.

This success, however, carries a cost. As the number of applicants has soared in recent years, premier schools admit as few as one in 10 students, a far more selective rate compared with a generation ago. To make room for an academically borderline development case, a top college typically rejects nine other applicants, many of whom might have greater intellectual potential.

Meanwhile, H-P Spying on it's Own Board Members, as well as numerous reporters, has been met with a yawn by the markets (H-P Shareholders Appear Unfazed), and whatever is less than a yawn by the current CEO (See Hurd's email to H-P employees).
Tom Dresslar, a spokesman for the California Attorney General Bill Lockyer's office, said that H-P has been "fully cooperating" with the state's investigation and that prosecutors hadn't yet issued any subpoenas in the matter.

The attorney general did, however, obtain a warrant last week to obtain from a telecom-service provider the phone records of a person or persons involved in the investigation, according to Dresslar.

"We believe crimes have been committed," he said. "We'll go where the investigation leads us and bring charges based on the evidence."
Pretexting is a growing problem, and the state of California is investigating a number of so-called data brokers concerning the practice, Dresslar added. Read more on pretexting (Stealing Phone Records Has a Long History).

Based on California laws that were passed during the late 1980s, it is illegal to obtain or use an individual's private information using unauthorized means, the Lockyer spokesman said. Beyond any possible criminal violations, H-P board members who approved the investigation may be liable for civil penalties. [Do we really need a panel of lawyers? How 'bout this: was it fair? Was it honest? How would you really feel if they tapped your phone?]

Speaking of "wiretapping", Newsweek's story of former GOP Congressman Dick Armey's disbelief in the Bush Administration's rush to invade Iraq adds to the pile of elected government officials that should have known better... and should have said something. Note the article's focus is on Armey, but unintentionally discloses the weak Democratic role due to the then-quickly approaching 2002 mid-term elections- providing a more thorough explanation of so many votes "in favor of the Iraq War before they voted against it", so to speak. Note also the extraordinary sense of being there, during a profound example of group think, that only comes once someone inside the room breaks their silence. Regardless of our own personal bias, there's enough clear information emerging now to shame both sides of the political aisle.

The president’s message was direct. There was no time to wait. The showdown with Saddam Hussein, the dictator of Iraq, had to start right away...

Listening to the president, Senator Majority Leader Tom Daschle felt trapped. House and Senate members were gearing up for the final stretch of the campaign—with control of the Senate up for grabs. Bush was informing them that the national debate would now focus on Iraq...

Daschle was thinking of one man: Karl Rove. The previous January, Rove, Bush's master strategist, had telegraphed his intention to use terrorism and national security issues to hammer Democrats in the fall campaign. “We can go to the country on this issue,” Rove had proclaimed at a Republican gathering, because the American people "trust the Republican Party to do a better job of strengthening America’s military might and thereby protecting America.”...

... in the Cabinet Room , watching Bush pressure his congressional colleagues, Armey realized that Bush was serious, that he seemed committed to launching a war and overthrowing Saddam. He thought of another president from Texas, Lyndon Johnson, and what a reckless war had done to his administration. Armey, who had not said anything else about Iraq after his Iowa outburst [where he said Saddam was not a threat, just a blowhard], decided this was the moment to speak his mind directly to Bush. "Mr. President," he said, "if you go in there, you're likely to be stuck in a quagmire that will endanger your domestic agenda for the rest of your presidency."

...When Armey finished, Cheney spoke. It would be a good idea, the vice president said curtly, if Armey would not dissent from the president’s position in public. Frankly, Armey replied, I didn’t realize there was a specific White House position yet. Then Bush, according to Armey, "asked me if I would withhold any public comments until I had all the briefings. So I could understand how necessary this was." The president was saying, wait until you've seen the intelligence. That would prove why urgent action—maybe even a war—was required.[Thereafter, Armey remained unconvinced, yet quiet.]

Upon exiting the meeting, the congressional leaders stood on the White House driveway and issued brief remarks for the assembled reporters. Senator John McCain said Bush had made a “convincing case” for action. House Speaker Dennis Hastert commented that he expected Congress would vote on a resolution before the elections. House minority leader Dick Gephardt, who during the meeting had indicated he was willing to work with Bush to convince Americans that Saddam's WMDs were a real danger, said that Bush had to demonstrate to the public that “this is something that we need to do and to take seriously.” Daschle, more guarded, repeated the concerns he had raised inside: “What new information exists? What has changed in recent months or years?” He added that he was “hoping for more information and greater clarity” in the weeks ahead. Armey walked by the TV cameras, saying nothing. But he still had his questions. Why a war? Why now?

A few weeks ago The San Francisco Chronicle brought us up to speed on the options scandal in a piece titled, Options scandal? Ho-hum. In it the author explained the backdating brouhaha seemed to be much ado about nothing. more companies get pulled into the fray -- the number of firms under scrutiny has passed 100 and grows larger by the day -- the shock seems to be wearing off.

"If enough companies are implicated, it's seen as systematic risk, like exposure to rising oil prices," says Todd Fermandez, a senior research analyst at Glass Lewis & Co., which researches investment risk for large investors. [Hey! I was just thinking that!]

Of course any good journalist with two hands will always include the obligatory naysayer- you know, just in case the story blows up (or the market goes down).

Steve Sidener, an attorney who represents shareholders (though none in backdating suits so far) says that stocks trade mainly off revenue and that backdating has no impact on revenue, past or future. But, he says, it would be a mistake to conclude that backdating doesn't matter.

"It goes to honesty and or trustworthiness. If you are backdating options, you also might be cutting corners and cooking books in other areas," he says.

Frankly, I could continue... but you get the gist.

Friday, September 08, 2006

Bloomberg: H-P Chair Might Resign

I contacted H-P to get the details on this Pre-text Messaging stuff. I'll update this post once they write me back.
Thank you for contacting HP. For your convenience, a copy of your message is listed below.

I've used HP Pavillion machines in my money management firm for several years. A day or two ago I caught the tail end of a report on CNBC that HP was offering "Pretext Messaging"(not sure I got the correct terminology..???). Was "PM" pre-installed on our machines, or is this like AOL/Yahoo's "IM" that needs to be downloaded. I called technical support but I had a hard time understanding the person- or maybe I'm using the wrong terminology and just confused both of us. Anyhoo, they directed me to use this part of the H-P site, and said I'd be contacted by email (if this is the wrong department please forward to the correct person!).


P.S. love HP stock too! So glad you're kicking Michael Dell's butt!!

Update: So far this is all I've got.

Thank you for taking the time to send us your feedback regarding privacy at HP. HP is committed to protecting our customers' privacy and your feedback is very important to us...

This information will only be used to reply to your feedback. HP will not sell, rent, or lease your personal information to others. Please see our online privacy statement for more information.

[On a personal note, I can't begin to tell you how nice it is to do business with a company that has such a well-defined Privacy Policy... lots of companies think they're the CIA or something!]

Charter Communications

Wonder what's brewing over at Charter (CHTR). I'm not involved, but I notice it's one of the best performing stocks on the planet for the past few months. What really caught my eye was that sharp reversal, after a rather ugly day that saw something on the order of 80MM shares traded. The only "news" I see is their debt swap in August, but it seems like they do one of these every 6 months or so. Anyhoo, might be nothing... but it certainly makes you wonder, no?

Dollar vs Gold

I'm neither a forex expert nor a gold bug, but I've been around long enough to know why there are times when both are important. Bill Cara has forgotten more about the two than I'll ever know, and today's post on the subject is an interesting read. I would just add two cents- if it's even worth that much- I think there a quite few more factors that impact the Dollar and Gold, and there have been many times both traded together for periods of time. Having said that, no argument that's a very interesting chart.

Thursday, September 07, 2006

A Sample of What I'm Watching

The market is a little wobbly lately, after a classic summer rally. A lot of smart folks don't trust that low volume bounce off the June lows. Makes sense. But I think it helps to "zoom out" sometimes and look at a long term chart. This is especially true of the Semi ETF (symbol SMH). The 5 year chart shows we are simply near the bottom of a range, and reminds me how many times we've heard tech is poised to re-establish its leadership position. On the other hand, if this bounce fails and we break below, say, 30, I think the rest is obvious. Whether you're Bull or Bear this could be a very important tell.

James "RevShark" DePorre, who blogs on the premium RealMoney site has a piece available for free on He has always amazed me with his sixth sense for the market. I also like the way he blends technical analysis with common sense.
The recent low-volume rally created what is known as a "bearish wedge" pattern in the major indices. This is simply an uptrend on light volume with no consolidation along the way. It is vulnerable to sharp selloffs because the market players who are accumulating gains along the way are likely to sell quickly and aggressively to lock in profits once things start to slip. This selling has a tendency to gain momentum and feed on itself because no one wants to see their recent gains suddenly turn into losses.

Most polls agree the Republicans are struggling right now. This is a good article among a few hundred on the subject I found with a simple search. But I don't need the media to tell me the GOP is in trouble. Frankly, I have been shocked by the number of friends- some of whom are lifelong Republicans- that have told me they will flat out "protest vote" for Democrats across the board in November. At first I took it as an idle threat. Now that I've heard the same intense frustration a dozen times it makes me wonder if voters are going to get out the broom.
The investing part of this issue is important too. During the time my party has been spending like a bunch of drunken sailors, which has included a massive increase in defense spending, the defense contractors have had a huge run. No surprise there. But I noticed a few months ago, Boeing, for example, stopped going up, despite what has been continuously good news flow (note Boeing's weakness continued during the recent rally). It's possible this is an example of the market looking over the horizon, because it's pretty clear the enormous rate of change in defense spending after 911 has hit a plateau. In addition, if the economy is indeed slowing, cyclical stocks will certainly struggle. [Note: I'm NOT making a political statement here. Any observer of history will remember these war time surges in spending have normally been followed by 1) inflation, and 2) a public backlash that leads to cuts in defense. This is a brief glimpse of my post-war/post-Bush thesis that I need to address more fully. The key point here concerns a potential sea change in the public's mood toward the deficit stimulus that has no doubt been a contributor to the overall liquidity sloshing around in the system.]

Short interest continues to set new records. Explains some of the distrust of the recent rally, since short covering tends to be artificial. See MarketThoughts for an interesting summary of recent market stats such as these. Also makes me wonder how far and fast we can go down when there are that many hedge funds crowded over on one side of the boat.

Ten year yield (and inverted yield curve). As I said in a previous post: market going up, bond yields down a lot... someone is very wrong here. Or if we paraphrase one of my all time favorite Greenspan quotes: "Rising [risks] have been advertised for so long, and in so many places, that anyone who has not appropriately hedged his position by now, obviously, is desirous of losing money." Or maybe that explains the record short interest?