Optimism Abounds

Capital One CEO sees flat to shrinking credit card industry

SAN FRANCISCO (MarketWatch) -- The credit-card industry probably won't grow or will shrink in coming years as a powerful wave of consumer de-leveraging washes over the business, Capital One Financial Chief Executive Richard Fairbank said Wednesday.

No. No. That's not the optimistic part. Keep reading.

"It's very healthy to have a de-leveraged consumer," Fairbank added. "We as lenders will be paid through better credit performance."

Bingo! That's what I love about optimism. You give an optimist a lemon and he turns it into lemonade.

Analyst Picks and Pans: Capital One, AmEx, Discover, AMD

Shares of Capital One Financial Corp., Discover Financial Services and American Express Co. rose on Aug. 24 after Barclays Capital analyst Bruce Harting upgraded the companies, saying credit card issuers will see earnings steadily increase in the next three to five years.

Harting cited recent signs of stabilization in the rate of defaults. He expects the three companies to post positive earnings in 2010, more normalized earnings by second half of 2011, and historical above average earnings-per-share by 2012.

Wow. Historical above average earnings-per-share by 2012? That sounds a bit optimistic too. Does he know about the "powerful wave of consumer de-leveraging" washing over the credit card business in the coming years?

Dictionary.com's Optimistic

1. disposed to take a favorable view of events or conditions and to expect the most favorable outcome.

Stagflationary Thoughts

Cheap Dollars Meets Debt - Result Stagflation

Two separate articles in the Telegraph newspaper, when combined, underline a major medium term risk to the US economy.

The first is an article by Liam Halligan, chief economist at Prosperity Capital Management in which he explores the well covered concerns of the Chinese about quantitative easing in the US, pumping billions into providing liquidity to the US economy by way of buying treasury bills.

This article speaks of inflationary forces.

The other article is by Ambrose Evans-Pritchard in which he catalogs the statistics for the US economy and by implication much of the western world.

This article speaks of deflationary forces.

Here's the attempt to make sense of the two articles and how they could both be right.

So here is the potential double whammy of rising inflation as the currency slides, pushing up the cost of imports and sparking commodity rises. At the same time, the country faces an excess of capacity and lack of demand as consumers remain retrenched rebuilding their personal balance sheets. This is called stagflation, leading to rising prices but ever falling demand.

That's been the thinking since I became a bear back in 2004. It's why I named myself Stagflationary Mark. We've seen a mini-round of stagflation as oil climbed to $140+. I think we'll see more mini-rounds of stagflation heading forward (possibly intensifying as part of Alan Greenspan's Age of Turbulence, as the bubble "Maestro" ought to know).

I can't speak for the timing and once again, I could very well be wrong. That said, I continue to stick to the long-term stagflation story, and so far its conclusions have served me rather well. It's been a decent bet for most investors over the last decade. Although oil did crash, it is far more expensive than it was a decade ago. Gold and silver have certainly done well. Inflation protected treasuries and I-Bonds have done very well too when compared against the stock market (and with a lot less volatility).

Over the short to mid-term I am not nearly so confident though. Deflation did hit with a vengeance and could strike again without much notice (perhaps this very Christmas season). However, the operative words are "did" and "could" though. As seen here, we've only had one month of deflationary activity so far this year. It was the modest -0.1% in March. That's it.

Since hitting the deflationary bottom in December of 2008, seasonally adjusted consumer prices are actually up 1.8% in 8 months. That's a 2.7% annual rate. It also puts today's one-tenth of one-percent three-month (need a magnifying glass to see the yield) treasury bills severely underwater once inflation is factored in. Those treasury bills didn't do so well in the 1970s either for what it is worth.

So far we seem to be doing a fine job fending off the Great Depression by destroying our currency. Should the bulls actually be right and we manage to fend it off permanently, it could very well leave a destroyed currency in its wake. Won't that be fun! There's all this talk of exit strategies. Can't you just picture the Fed un-printing money and credit? Just jam it back into the printing press from the other side. That's what I always say!

StockTwits vs. James Bond vs. Goldman Sachs

Traders turn to StockTwits for ideas

About 90,000 people have signed up to the site which sees those trading the market tweet their view on a stock. These are then displayed in a rolling format on StockTwits. Of the 90,000 about 15,000 tweet.

Meanwhile...

Firm brings choppers, spy cameras to oil data game

Kentucky-based Genscape Inc, which has been selling power supply data since it was founded in 1999, has been flying a helicopter over the nation's top oil storage hub in Cushing, Oklahoma, every Friday since January, snapping photos to see how full the tanks are.

The data from the pictures, along with infrared scans for tanks with fixed instead of floating roofs, is analyzed by a sophisticated computer program back at the head office to calculate the volume of oil in storage.

This is a reminder to me that the odds of making serious money as a modern worker in the day trading industry are laughably small. I simply do not have a helicopter and therefore would not be able to compete effectively. I also do not have the resources of Goldman Sachs. Go figure.

Goldman's big rebound raises some eyebrows

But critics accuse the investment bank of greed and profiting from others' weak spots, and they haven't been kind in characterizing Goldman. Nobel laureate economist Joseph Stiglitz at Columbia University likens Goldman's business to gambling, because in the last two quarters the largest growth came from its trading desks. In the second quarter, its revenue from trading and investing in stocks, bonds and currencies nearly doubled to $10.8 billion.

"Goldman's activity is of negative social value. Its recent profits came from trading, which basically amounts to profiting from insider information at the expense of others," says Stiglitz.

And lastly...

Investors are thrilled yet anxious about stock market rally

"I'm scared, I'm scared, I'm scared," Leon said. "Why are we up, especially with unemployment as high as it is? I don't feel great because I worry that we could have a 500- or 600-point drop in a day and I won't be quick enough to pull out of it in time."

...

"Every single day I get ready to click the sell button and pull my chips off the table," Murphy said. "It's confusing, and I'm afraid of what to do and afraid we could be in a bubble. The market's looking floppy, and the reasons for growth don't make sense."

...

Anthony Costantino, who lives in downtown L.A. and works in the billing department of a nonprofit organization, just opened an account that he plans to fill with technology stocks at a clip of $500 a month. He knows he's missed the rally since March but believes a bigger surge lies ahead.

California's Recovery (Musical Tribute)

September 16, 2009
Forecast: State's Recovery Pushed to 2011

California’s economy will continue to shed jobs at a rapid rate through the rest of this year and the job picture will remain flat for 2010. Growth will only resume in 2011, according to the latest UCLA Anderson Quarterly Forecast to be released early Wednesday.



The song was released in 1972 and the clip above is from 1973. Once sarcasm is factored in, I really think the words and the mood do justice to California's economy. Here's something else from 1973.

1973 oil crisis

The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression to have a persistent economic effect.

September 8, 2009
Another oil bubble? We can only speculate

If the call by Gordon Brown, the prime minister of the UK, and Nicolas Sarkozy, the president of France, in The Wall Street Journal in July for the International Organisation of Securities Regulators to oversee the oil futures market is followed up, and the plans of the US Commodities Futures Trading Commission to place limits on aggregate positions on oil futures contracts are implemented, it would put a brake on speculation in the oil market and thereby reduce the likelihood of another bubble emerging.

I have an alternate theory. Once global investors are told that speculating in oil will no longer be tolerated, then global investors will want to invest in oil even more.

Imagine a headline in the news that said the government was limiting toilet paper speculation by putting a cap on how much toilet paper we could buy. What are the odds we'd be able to find ANY toilet paper in ANY store the next day?

May 8, 2006
Why Price Controls Don't Work

When prices spike as they have with gasoline, lawmakers who don't understand the free market think enacting price controls will solve the problem. In reality, price controls do the opposite, as the lawmakers in Hawaii learned the hard way...

In any event, let's hope that the price of oil does not continue to outperform the stock market into the distant future. You know what a big fan I am of commodity driven stock markets ensuring our long-term financial prosperity. Not!

Kroger Sees Deflation

2nd UPDATE:Kroger 2Q Net Falls 7.9%, Cuts Forecast; Shrs Dn

The grocer also saw deflation spread to "most grocery categories" for the first time in several quarters. Consumer products companies, facing declining tonnage, are lowering prices and putting more money into promotions.

I'm seeing some of this in the grocery store flyers.

For example, last week I bought a case (24 cans) of Campbell's Tomato Soup for just 50 cents each at Albertsons. This week, I'm seeing that same deal show up at both Albertsons and QFC (Kroger).

Here's the interesting part. The sale at Albertsons wasn't just offering it at 50 cents a can. They also showed you the price for a full case right in the flyer. I can't remember ever seeing that before. Just how much tomato and chicken noodle soup is out there?

This week QFC (Kroger) will be earning my Jello business. At 75 cents for a 6oz package, I'll be buying quite a bit of it. I'll be combining some of the Jello I already have with their 59 cent per pound bananas. Probably wash some of it down with their $1.99 per gallon milk.

You know what? It's hard to be a hyperinflationist right now (not that I ever really was). The richest people of the world better back up the truck on oil (again!) or I'm going to feel rather silly altering my short-term inflationary mood to positive.

If we can't even inflate the price of canned soup at a time when many people have lost their jobs, then we've got little chance digging our way out of the deflation in discretionary items and housing.

I don't mind being wrong about my inflationary mood though. As a saver, I'm never going to actually root for more inflation. I'm just not so sure the stock market is pricing in even more deflation. Meredith Whitney's recent prediction that housing prices will drop 25% from here fell mostly on deaf ears.

Seasonally Adjusted Cargo Traffic

Calculated Risk just posted a chart showing port traffic in and out of Los Angeles and Long Beach. I've used a seasonal adjustment program in the past to watch that same data. It has been a while so I thought I'd share some new updated charts.



On a seasonally adjusted basis, inbound container traffic clearly put in a bottom in February of 2009 (at roughly the same time the stock market did). What the future holds is anyone's guess. My personal guess is that we have a snowball's chance in hell of getting back to that unsustainable exponential red trend line though.



On a seasonally adjusted basis, outbound container traffic put in a bottom in December of 2008. We are now back on the exponential trend line.



Does total port traffic try to get back to the "normal" growth story or does it flounder in a sea of stagnation? Only time will tell. You can pretty much guess what I think, based on what I named my blog (and myself) in August of 2007 (while we were still firmly on that red exponential trend line).

See Also:
Trend Line Disclaimer

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program

The Great Depression vs. Our Recession

TIMELINES OF THE GREAT DEPRESSION

1920s: "Technological unemployment" enters the nation's vocabulary; as many as 200,000 workers a year are replaced by automatic or semi-automatic machinery.

1928: The construction boom is over.

One year later: Stock market crash begins October 24. Investors call October 29 "Black Tuesday."

Two years later: The unemployment rate climbs from 3.2 to 8.7 percent.

Three years later: ...unemployment rises to 15.9 percent.

Four years later: ...unemployment rises to 23.6 percent.

Five years later: Unemployment rises slightly, to 24.9 percent.

Our Timeline

2000s: As seen here, "Business Week estimates that 1 percent productivity improvement can eliminate up to 1.3 million jobs."

2007: The construction boom is over.

One year later: Stock market crash begins October 2. Investors call it "Panic of 2008."

Two years later: The unemployment rate climbs from 4.4 percent to 9.7 percent (March of 2007 to August of 2009).

Three years later: ________?

Four years later: ________?

Five years later: ________?

Modeling Bond Default Risk, 1995 Style (Musical Tribute)

Modeling Bond Default Risk, 1995 (pdf)

This practice note was prepared by a work group organized by the Committee on Life Insurance Financial Reporting of the American Academy of Actuaries.

AIG is/was an American insurance corporation. On September 28, 2008, the Federal Reserve created an $85 billion credit facility to enable the company to meet increased collateral obligations.

The static default assumptions (where default losses are level over the modeling period for a specific asset quality and grade) can consider assumptions developed from at least three experience period reviews: a 10- to 20-year historical analysis, a more recent historical review (3 to 5 years), and a short-term best estimate set of assumptions looking forward.

Here's a glimpse of what a hypothetical 100-year historical analysis might have found.