The Daily Reckoning U.S. EditionHome . Archives . Unsubscribe 
The Daily Reckoning | Wednesday, September 1, 2010
-------------------------------------------------------
Strategic Short Report Presentation Reveals...
Hidden Gov't Documents Let You Predict Stock Moves
Imagine what you could do with this intelligence...
Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too!
Click here to watch the new presentation now.
America is Losing Her Way
A Brief Introduction from Eric Fry...
Daniel Lobe
The last time I saw Daniel Loeb, I was riding in his private jet from Miami to New Jersey. Danny is a fascinating guy - a California surf rat turned New York hedge fund manager.
In other words, he's not your run-of-the-mill financial type. He came into the business through the backdoor and succeeded on the strength of his talents, wits and determination. He manages $3.4 billion in his hedge fund named Third Point Partners L.P. (For those folks who do not surf or who have never visited the beaches of Southern California, "Third Point" is the most distant of the three main surf breaks in Malibu).
Danny has done very well for himself, but only because he has done very well for his clients. Making money is all his clients really care about. But how he makes money is all that any of the rest of us really cares about. Danny is an "activist investor," which means that he attempts to influence the results of his investments, rather than passively buying shares of a given stock and hoping for the best.
Often, the actions of this activist investor upset the status quo - annoying those who happen to reside in the crosshairs of his activism. Thus, for example, when Danny found fault with the CEO of Star Gas Partners a few years back, he made his thoughts public...very public. Danny wrote:
"It is time for you to step down from your role as C.E.O. and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites."
Obviously, Danny doesn't worry about making enemies. Which is probably a good thing, since Danny has made almost as many enemies as he has made millions of dollars for his clients.
True to form, Danny just published a fascinating letter critiquing the Obama Administration. But Danny's letter is as much a lament of the current course of America's econo-political trends as it is a critique of Obama & Co. In short, Danny believes the Obama Administration is making mistakes - this would be the same Obama Administration that Danny helped to vote into office and for which he helped to raise hundreds of thousands of dollars.
I think you will appreciate Daniel Loeb's investment insights...even if you do not agree with his politics. Please read on:
A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government. - Thomas Jefferson, Writings, 1743-1826
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of the people. - Thomas Jefferson, Letter to Thomas Cooper, 1802
One of the traditional methods of imposing statism or socialism on a people has been by way of medicine. It's very easy to disguise a medical program as a humanitarian project. Most people are a little reluctant to oppose anything that suggests medical care for people who possibly can't afford it. - Ronald Reagan, 1961
You know, there's a lot of talk in this country about the federal deficit. But I think we should talk more about our empathy deficit - the ability to put ourselves in someone else's shoes; to see the world through the eyes of those who are different from us - the child who's hungry, the steelworker who's been laid-off, the family who lost the entire life they built together when the storm came to town. When you think like this - when you choose to broaden your ambit of concern and empathize with the plight of others, whether they are close friends or distant strangers - it becomes harder not to act; harder not to help. - Barack Obama, Xavier University Commencement Speech, 2006
It is that fundamental belief, I am my brother's keeper, I am my sister's keeper that makes this country work. It's what allows us to pursue our individual dreams and yet still come together as one American family. E pluribus unum. Out of many, one. - Barack Obama, Democratic National Convention Speech, 2004
I think when you spread the wealth around it's good for everybody. - Barack Obama's Comments to Joe "the Plumber" Wurzelbacher, 2008
Review and Outlook
As we entered the second quarter of 2010, many measures of confidence and economic activity were showing consistent improvement, leading us to increase our exposures in select undervalued companies that we thought would benefit from a favorable economic environment. Most pundits initially attributed the subsequent turn in the markets and investor sentiment to the Greek crisis, concern over the Euro, the Oil Spill in the Gulf, and vague rumors concerning faltering Chinese growth. However, it is apparent to us that the turning point in both investor and consumer confidence came on April 16th, with the filing of the government's suit against Goldman Sachs over its mortgage CDO activities.
This politically-laced lawsuit was a tipping point for shaky investor confidence against an increasingly worrisome landscape of new laws and proposed regulations that are perceived by many market participants to promote "redistribution" rather than growth, and are contrary to free market ideals.
As every student of American history knows, this country's core founding principles included non-punitive taxation, Constitutionally- guaranteed protections against persecution of the minority, and an inexorable right of self-determination. Washington has taken actions over the past months like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.
For example, a well-intentioned government program gone awry is the new CARD Act that restricts banks from repricing interest rates on borrowers who fail to meet their revolving credit obligations. The effect of this legal prohibition has been to force the banks to raise the interest rate paid by all borrowers, to compensate for losses they are now being forced to take on delinquent borrowers. The effect is a redistribution of wealth from people who pay their debts on time to those who do not.
Laws and regulations such as these justifiably raise questions about this government's commitment to free-market capitalism and the articulated rule of law. Arguably unconstitutional Bills of Attainder, such as the special "Enterprise Tax" proposed to be levied on hedge fund managers and other managers of private partnerships who wish to sell their management companies (ostensibly in order to extend unemployment benefits beyond the current 99 weeks) send a vivid message that this Administration is operating from a playbook quite different from the one we are used to as American business people; a thought that chills all participants in these free markets.
On the other hand, it is not hard to understand the source of the popular distrust in capitalism today. Many people see the collapse of the sub-prime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors, and overmatched regulators not just asleep, but comatose, at the proverbial switch. When we hear the chorus of former executives and regulators exclaim that the crisis was "impossible to see coming", while at the same time walking away with millions or going on to greater levels of responsibility in government, it is both puzzling and demoralizing. It is easy to see why so many people have concluded that the entire system is rigged.
This crisis of trust in our system is not limited to inept executives in regulated financial institutions that bury their shareholders and then walk away with ill-gotten sacks of loot. Having analyzed hundreds of proxy statements from the outside and having had the "pleasure" of sitting on several corporate boards, giving me a chance to walk the sausage factory floor, I have personally witnessed the incompetence of many boards of directors. One can only conclude that the incentive systems put in place for directors reward luck and station more than they do talent, skill or creation of shareholder value.
Not all boards are bad, of course. Private equity firms have a terrific model of appointing energetic members of their firms and outside experts to oversee the affairs of the companies they govern. They tend to have real "skin in the game", spend days reviewing strategy and other matters, and have their own staffs to analyze numbers produced by the company. Board fees tend to be irrelevant to the members of such firms as they are keenly focused on strategies to deleverage and to create long/medium term shareholder value.
Even some public companies have similarly engaged corporate boards.
However, individuals who rely on the stipends they receive from numerous corporate boards and thus appear motivated primarily to ensure continuing board fees, first-class air travel and accommodations, and a steady diet of free corned beef sandwiches until they reach their mandatory retirement age populate many of the boards we have come across.
All of the above leads us to conclude that America faces not only a crisis of confidence among consumers unwilling to spend and businesspeople unwilling to invest, but also a crisis of leadership. So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.
As capital allocators, it is important to remain dispassionate amid the volatility. We have given a great deal of thought about the impact that public policy has on individual companies, industries, and the economy generally. It was this decision framework that led us to shed our investments in large cap US banks in January due to concerns over increasing regulatory headwinds (in advance of the announcement of the Volcker Rule). We have also sold other regulated industries and eliminated our position in Wellpoint, an HMO that is a statistically cheap stock owned by several hedge funds, but which we saw as being overly exposed to unpredictable government regulation.
On the other hand, our perspective on the government's increased willingness to use its regulatory muscle enhanced our short positions in the for-profit education space. Indeed, this summer certain government actions taken regarding these companies served to accelerate the unfolding of our thesis on these names.
As we discussed in June's letter and on our Quarterly Investor Call a few weeks ago, we began to bring our gross and net exposures down significantly throughout May, primarily in our equities portfolio. We continued this process through the remainder of the Second Quarter, carving out most positions without definitive hard catalysts on the equity side, also reducing positions in Europe, and avoiding sectors entirely where US government intervention remains likely. Gross and net exposures in our portfolio today are at their lowest levels since March 2009, and have been decreasing all summer in accordance with our political and economic framework.
One can hope only that this Administration, composed of brilliant academics that have had experience in creating the very regulation and overseeing the very institutions that have failed, has learned from its mistakes and will set us down the right path. Perhaps our leaders will awaken to the fact that free market capitalism is the best system to allocate resources and create innovation, growth and jobs. Perhaps they will see the folly of generating greater deficits by "investing" in programs that lead to corruption and distortions of the system. Perhaps too, a cloven-hoofed, bristly haired mammal will become airborne and the rosette-like marking of a certain breed of ferocious feline will become altered. In other words, we are not holding our breath and are focused instead on navigating these murky waters for the benefit of our funds.
[Ed. Note: Third Point LLC is a registered investment adviser based in New York, with approximately $3.4 billion of assets under management. The firm was founded in 1995 by Daniel S. Loeb, who is CEO and oversees all investment activity. Third Point employs an event driven, value oriented investment style.]Free Presentation Reveals - Government Retirement About to Belly-Flop
Government-sponsored retirement is a myth. It's a great, big magic trick. Starting September 30, the government "safety net" officially begins to shrink.
The smartest folks are getting ready now...
For details - watch this shocking new presentation. Inside, you'll also learn how to collect thousands of dollars each year in "pension checks" from the government's "other" retirement program.
You owe it to your future to watch this new presentation. To do so, simply turn on your speakers and click here.Bill Bonner Misguided Gratitude for Government Stimulus
Reckoning from Paris, France...
Bill Bonner
Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn't help. The Dow couldn't manage a rally. It rose just 4 points.
The British newspaper, The Telegraph, has the story:"It's pretty clear the US economy has hit a wall," said Barry Knapp, head of US equity strategy at Barclays Capital. "The macro picture is dominating and, right now, it's not clear what's going to get the market out of this spot."
As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn't take it too, were we in their position. They urged the Obama team to undertake massive programs of "stimulus." Now that the stimulus hasn't worked, they say it wasn't massive enough.
Those fears took centre stage again during the final day of trading.
In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board's index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.
The day's rally proved short-lived, however, after the minutes of the Federal Reserve's latest meeting returned investors to the summer's familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed's Open Market Committee saw "increased downside risks to the outlook for both growth and inflation".
That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.
And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!
In today's Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a "standard macro-economic model" to determine that without the feds' intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.
Oh man, oh man...we're so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.
But wait a minute, this "standard macro-economic model" sounds great and all...but we can't help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such...it tells us what will happen, right? And Wolf says it's "standard," so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can't help wonder if this was the same model they used when they forecast that unemployment wouldn't go over 8% - if Congress agreed to the stimulus bill the administration proposed. Must have been a different one... Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.
And it's still over 9% - almost 2 years after the stimulus effort got underway.
So, maybe this "standard macro-economic model" is full of... But let's imagine that it isn't. Let's allow our imaginations to take flight...to soar...to loose themselves from the gravity of worldly cares or practical reality. Let's imagine that these economists have a clue!
Imagine that the feds had done nothing - which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover's term in 1930...and for all the years that preceded them...all the way back to the founding of Rome. Now, let's imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% - three times more than the actual loss...and half the loss of the Great Depression. Well, that would have been a disaster, right?
Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay...well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque...when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions' worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We'd be surprised if there weren't more errors...far more than 12% of GDP.
Now ask yourself...what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?
We don't know how many mistakes there were. We don't know how far GDP SHOULD go down. And we don't know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways - by panic, default, bankruptcy, restructuring, and reconstruction.
We don't know. We'll never know. But there is no reason to think we'd be any worse off if we'd found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.
And more thoughts...
But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.
Two bits of good news, actually.
First, the café across the street from our office serves a proper café au lait. A real one.
In Paris these days, if you ask for a "café au lait" they mark you as a foreigner. Parisians ask for a "café crème." Trouble is, the café crème doesn't have much milk in it. It tends to be a bit watery and bitter.
A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way - unless you ask them specifically. Fortunately, the one across the street still does it the right way.
Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.
Here's the story from John Cloud (originally appearing in Time Magazine):Why Do Heavy Drinkers Outlive Nondrinkers?
Bill Bonner
One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don't drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.
But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that - for reasons that aren't entirely clear - abstaining from alcohol does actually tend to increase one's risk of dying even when you exclude former drinkers. The most shocking part? Abstainers' mortality rates are higher than those of heavy drinkers.
Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don't have as many family members and friends who can notice and help treat health problems.
But why would abstaining from alcohol lead to a shorter life? It's true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors - job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don't get the stress-reducing benefits of a drink or two after work.)
But even after controlling for nearly all imaginable variables - socioeconomic status, level of physical activity, number of close friends, quality of social support and so on - the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.
The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.
These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.
The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There's also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.
That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.
for The Daily Reckoning
Wednesday, 1 September 2010
Posts
