 | | The Daily Reckoning | Thursday, October 21, 2010 |
- Profits down, bonuses up: It's the Wall Street way!
- Brazil discovers credit...and that's just the beginning of the real estate story,
- Plus, Bill returns with thoughts on "The Gualfines Last Last Stand" from his ranch in Salta, Argentina...
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Why Some People DIDN'T Go Broke In The Bust
From 2008 until now, some people watched their gains go UP...as high as 448%, 556%, and even 579%...
On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it - and so could you.
Click here to watch the free new video that shows you how.
|  | | | A Wall Street Rebound Does Not a Recovery Make | | US Manufacturing Still Struggling as Economy "Recovers" | |  | | Eric Fry |
Reporting from Laguna Beach, California...
No matter how many times the Conference Board reports dismal consumer confidence, or the Institute for Supply Management reports anemic manufacturing activity or the National Association of Realtors reports abysmal home sales, some economist somewhere will track down a hopeful data point and force-feed it into his "improving economy" scenario.
When, for example, the Census Bureau reported a steep 1.3% drop in durable goods orders last month, the chief US economist at Barclays Capital, Dean Maki, crowed, "This is reassuring news. Capital goods spending still seems to be on a very solid underlying trend."
Ah yes, capital goods spending - the sub-sector of the durable goods report that is believed to correlate closely with private-sector business activity.
It's true that capital goods orders rebounded 4.1% in August...after plunging 5.3% in July. Nevertheless, according to Maki's perspective, investors should ignore July's drop in capital goods orders (and also ignore the drop in overall durable goods orders in August). It is the August increase in capital goods orders that matters most, says he, and it is this data point that establishes a "very solid underlying trend."
But as the chart below shows quite clearly, this "solid trend" is looking a bit shaky.
Capital goods orders may have bounced off the bottom of very depressed levels, but they are stalling well below optimal levels. The same could be said for the overall American economy. It is bouncing off of depressed levels. But this bounce seems to contain a strange and unhealthy mix of losers and winners.
Fifteen months after the official end of the 2008-9 recession, America's big metal-bending corporations still aren't bending very much metal. Meanwhile, America's big regulation-bending corporations like Goldman Sachs have returned from the brink of extinction to convert leveraged trading into record profits...or at least record bonuses.
Despite a financial crisis that nearly doomed Goldman Sachs for all- time, the reviled financial firm recently reported all-time record profits. Goldman's third quarter result pulled the company's trailing 12-month profit down from record territory. But that "disappointing" $1.9 billion quarterly profit owed much of its disappointment to the hefty $3.8 billion bonus expense that Goldman set aside during the quarter. For the first nine months of the year, Goldman has booked a net profit of $6 billion, while setting aside $13.1 billion in bonus expense.
Bravo for Goldman shareholders! Double bravo for Goldman insiders!
Elsewhere on Wall Street, a similar story has been unfolding. "Pay on Wall Street is on pace to break a record for a second consecutive year," The Wall Street Journal reported recently. Even though net profits at the top financial firms remain about 20% below the peak levels of 2006, the Journal relates, compensation has increased more than 20% over the same timeframe. And just like that, you've got record compensation. "Financial overhaul has affected the structure [of Wall Street compensation]," says the Journal, "but not the level."
But while prosperity has been quick to return to Wall Street, it has been slow to return to the American manufacturing sector. In the chart below, the yellow line tracks the combined earnings growth of four big "dirty fingernails" American companies: Dupont, Alcoa, Home Depot and 3M. The blue line tracks the same trend for Goldman Sachs. The two lines do not look very similar, do they? The yellow line is downward- sloping and remains well below the high-water mark of 2007. The blue line is upward-sloping and has exceeded the high-water mark of 2007.
And the red line? That's Bank of America's dismal profit trend. The big bank doesn't bend metal, of course, but it does operate in almost every corner of American commerce, both industrial and consumer. Res ipsa loquitur.
And yet, despite the fact that Bank of America is still struggling and most of the manufactures of America are merely kicking the can down the road, quirky signs of apparent economic resurgence appear from time to time.
During a brief jaunt up to San Francisco last weekend, your editor encountered a sold-out city. On Saturday night, every single 4-star and a 5-star hotel in San Francisco was sold out. Not a single luxury hotel room available - which meant that the few available 3-star hotels were asking 4-star prices. Two-star hotels, for their part, were trying to extract three-star prices. But your editor declined the price-gouging and took his lodging dollars up across the Golden Gate Bridge to Marin County.
For less than the price of an overpriced three-star hotel in San Francisco, your editor took a room at the delightful San Anselmo Inn. And with the money he saved, he purchased a fantastic meal at Insalata, a restaurant across the street from the Inn. The restaurant was full, though not jam-packed.
Elsewhere in Barbara Boxer-land, the story was the same. From Carmel to Los Gatos to San Francisco, your editor and his entourage strolled into restaurants that were full, without being jam-packed. They waited 15 to 20 minutes for a table in almost every venue.
But these random, narrowly focused anecdotes do not square with most of the evidence from the front lines of capital formation. A lifelong friend of your editor's - whose family has been operating a very successful specialty steel business in Southern California for the last several decades - is enjoying much less success today than in years past. This steel business that once threw off hundreds of thousands of dollars per month in profit, now throws off red ink every once in a while. On an annual basis the business is still profitable, but topline sales remain about 40% below the peak levels of three years ago.
"Can you see any signs of a pickup in activity?" Your editor asked his friend last week.
"Nope. Nuthin'... We've got the same customers we've always had - at least the ones who haven't gone out of business - but they're all placing much smaller orders than they used to. So the guys who used to place $100,000 orders are placing $10,000 or $20,000 orders. Everyone is cautious. No one wants to hold any inventory. And everybody I know is telling the exact same story."
Busy trading desks in Manhattan and busy restaurants in San Francisco are not signs of recession. But neither are barely profitable manufacturing businesses the signs of recovery.
The current economic rebound still feels more like hope than substance, more like a Wall Street fairy tale than a Main Street reality. On the other hand, the stories of economic vitality that are flowing out of the world's emerging markets seem to be very real indeed. Chris Mayer, editor of Mayer's Special Situations, recently back from Brazil, filed a fascinating first-hand account of the thriving Brazilian real estate market. Read on...
| | | | American Nuke Bomb LOST Under Ancient Ice Fields |
Way back in 1968, an American B-52 crashed in northwest Greenland...
Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet...
But there's an unknown penny stock set to rise 2,000% from this sorry situation.
Sound unbelievable? Watch this presentation for proof...
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| | The Daily Reckoning Presents | | Brazilian Real Estate is a Buy | |  | | Chris Mayer |
Someone once said that if LA threw up on New York, it would resemble São Paulo. That's an imaginative way to describe the sprawling Brazilian metropolis. São Paulo is a bustling, congested city of 11 million people, with another 9 million in the suburbs. Greater São Paulo ranks as the third largest urban area in the world, according to the United Nations, after only Tokyo and Mexico City.
For many, it's an ugly city, but I loved it right away. While gloom and doom hover over the economies of the US and Europe, it is impossible to maintain a sense of pessimism in São Paulo - or even in Brazil, for that matter. It's a showcase for the kind of changes sweeping over the emerging markets.
São Paulo had a humble beginning. Jesuits founded it on the banks of the little Tietê River in the 16th century. It was for hundreds of years an insignificant settlement. Even as late as the 1870s, it had only 26,000 inhabitants, cobbled around narrow streets.
But it would go on to put up perhaps the greatest population growth curve of any major city in human experience (as the Fernand Braudel Institute maintains). A great coffee boom in the 19th century was the kindle that sparked São Paulo's growth. By the 1890s, the population tripled. And today, there are 20 million people in greater São Paulo.
The state of São Paulo has 45 million people and makes up nearly a third of Brazil's economic output. Half of the country's tax base is here. If it were its own economy, the state of São Paulo would be the second largest in South America - behind only Brazil and ahead of Argentina and Colombia. It is also home to Brazil's stock market, the fourth largest in the world by market cap.
São Paulo did not grow up slowly around a center, as did the cities of Europe. Rather, it grew hastily and in an improvised manner. You can see the consequences of that process today. Traffic is horrendous. It can take more than an hour to move only a handful of blocks. The subway system is not up to the task of serving the entire city. And record car sales overwhelm the construction of new roads.
There is also an acute housing shortage, which is where an interesting investment opportunity lies. There are a lot of ways to show the data on housing. One common way to measure housing shortages is to look at how many families have three people per bedroom. This measure shows about 13% of families live in substandard housing. Expressed as a number of units, Brazil needs nearly 6 million new homes.
That's really not surprising when you think of the swelling ranks of the middle class. Millions of people have become consumers in the last decade. Housing has not yet caught up with that demand. By some estimates, Brazil needs to build about 1.6 million homes every year just to keep up with new families entering the market.
In São Paulo, you can also see the shortage in the price of homes. New construction often takes three years. People now taking delivery for housing units bought three years ago find that the value of their dwelling doubled. A recent edition of The Daily Reckoning provided an illuminating contrast between São Paulo's housing market and that of the United States.
Clearly, the São Paulo housing market is in the midst of a boom. All that frothiness has some people worried about a housing bubble. Brazil's mortgage market, too, is in hyper-growth mode. Take a look at the total loans to homebuilders and buyers.
It looks impressive, but the starting base was very low. Brazil's home lending market is still only a fraction of that found in other Latin American countries, such as Mexico or Chile. Brazilians also have much more equity invested in their homes. Typically, loan-to-value is 70- 75%.
Eventually, supply will catch up with demand, and maybe even exceed it. Then you'll have a correction. But that day seems years away.
The best and easiest way to cash in on Brazil's housing boom (other than to buy a property directly) is to buy Gafisa, which trades on the NYSE under the ticker GFA. It is the only Brazilian real estate company trading on the NYSE.
Gafisa has built and sold nearly 1,000 developments and more than 11 million square meters of housing in its 55-year run. Traditionally focused on the high-end market, Gafisa recently bought Tenda to tackle the low end of the housing market.
The stock looks cheap at $16.80 per share, which is only 11 times next year's earnings guess. That's not much for a company that looks to grow at least 20% annually for the next several years. Sales are up eightfold since 2005. Sam Zell, the US real estate mogul, bought his first shares then. Though he sold some recently, he still owns 6% of the company.
Replacement value is about R$5.6 billion, or $3.3 billion at the current exchange rate of 1.69 reais to US$1. The current market cap is $3.5 billion. I'd be more interested in buying the stock below replacement value (about $15.40 per share). Perhaps we'll get that price on a correction.
Gafisa has a good track record, nationally recognized brand names and a strong balance sheet. It looks like a good speculation on the long-term demand for housing in Brazil. I have not officially recommended the stock to my subscribers, but the housing story in Brazil is a very compelling one.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Did you happen to catch Chris's latest research presentation?***
It's a fascinating story about resource riches involving the most unlikely of scenarios. No wonder so few people in the mainstream media are talking about it. But Mayer's on the case. If you haven't had the chance to check out his presentation, do yourself a favor and spend a few minutes listening to it here.
*** An important note: A few folks have written in to say that they'd love to grab a spot on Chris's exclusive mailing list, but didn't have the time to go through the whole presentation. No worries. We think it's a pretty compelling story, which is why we went to the trouble of putting the thing together. But if you're pressed for minutes in the day, you can gostraight to the sign-up page here. That way you can grab a risk-free trial and take 'er for a test drive. If you like what you see, great. If not, just call or write in for a full refund. Easy.
| | | | Iran Threatens Your Money... |
According to Byron King's new presentation, Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year.
Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue.
Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead...
Click here to watch Byron's value-packed presentation now.
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| | | | Bill Bonner | | The Gualfines' Last Last Stand | |  | | Bill Bonner |
Returning with the rest of today's reckoning from Salta, Argentina...
"In the art of killing each other as fast as possible, humanity is progressing splendidly."
- General Ignacio Fotheringham, Commenting on the Remington repeater rifle
"Well, we have an unexpected situation," said Miguel, the farm manager.
We had just arrived at the airport at Salta. We were prepared for bad news. Bad news is what always greets absentee landowners. Especially where we are.
A truck breaks down. One of the employees has an accident. It doesn't rain. A frost has killed all the apples, plums, grapes... A puma has killed calves.
We have a very small vineyard. Each year we await the harvest with the anticipation of a teenager planning his first date. We know something is going wrong.
The first year, the gauchos (who are cattlemen by experience and inclination) waited too long to pick the grapes. By the time they got to it, most of the crop had dried up in the intense heat. The second year, a fungus struck the grapes just weeks before harvest. The work crew didn't know what it was or what to do about it. Almost all the crop was lost. Then, last year was a drought year. Diligent irrigation saved the crop. But then, the bees, deprived of a good crop of alfalfa flowers, took to the fruit of the vine like winged dipsomaniacs. Another crop lost. We got only 60 bottles of wine,
Bad news? We're used to it.
"Everything is okay so far," continued our man on the scene. " But one of the 'pastajeros' is stirring up trouble. He's refused to sign his lease. And he's claiming he has indigenous rights. You know, his family was here forever. He says you don't own the land. He says he owns it.
"And he's going around to the other pastajeros telling them not to pay their rent or sign their leases. This could be bad..."
The pastajeros are people who live up in the mountains on our land, usually many hours - on foot trails - from the ranch house and the main corrals. The furthest away walks ten hours to take his children to school. There they stay, until he comes back for them months later.
There are 25 of these families who live on our land. They are subsistence farmers - with goats, sheep, and cattle that wander around half-wild. Each one has a house and a parcel - often thousands of acres - where he raises his animals and his family. He grows 'choclo,' the local corn...and sells animals from time to time. And when he dies his children have the right to continue. But they acknowledge that they are renting the land; it is not theirs.
"Indigenous rights? I thought the Spanish wiped out the local Indians," we replied.
"They did. Supposedly, they exterminated the Gualfines tribe. They made their last stand right here on the ranch. Up at that place called the 'fortress.' According to legend, they retreated up there...held out as long as they could with bows and arrows...and then, when they ran out of water, they jumped off the cliff to kill themselves.
"Argentina has a bad reputation for its treatment of the Indians. Critics say the Argentines exterminated the native populations. I don't think it is entirely true. Probably no more true than in the US."
The native peoples were a big problem for Argentine settlers. Not so much in this area, but in the vast plain around Buenos Aires and to the south. The natives were fabulous horsemen and apparently knew neither fear nor mercy. At least, according to the accounts not written by them. They raided, killed men, stole cattle, and took women and children as prisoners. At one point, the Indians had 6,000 captives. General de Rosas had to put a whole army in the field in 1835 to liberate them.
There were only an estimated 50,000 or so of these people in an area as big as France, Britain, Germany and Spain combined. But they moved fast. And when the settlers tried to bring them under control, they simply retreated to the mountains. This was the state of things in Argentina for nearly a century, making most of the country a largely uninhabited 'desert.' Then, General Roca "the Fox" took a force of some 6,000 men equipped with the latest Remington repeater rifles and determined to put an end to the Indian problem once and for all. His strategy was new. The Indians weren't prepared for it. Instead of advancing against them from Buenos Aires, he went behind them and cut off their retreat to the mountains. Given the distances involved, his feat was remarkable and daring. But it worked. The Indians had two choices. They could die or they could surrender. Most surrendered, according to the official accounts. After the campaign of 1879, the Indians were no longer a serious threat.
"But who knows?" Miguel continued. "This guy and his family have been on that land forever. And as far as he's concerned he's indigenous to the area. And Evo Morales has kind of gotten all the local people stirred up...given them the idea that they have some rights that you and I don't have. And it doesn't help that you don't live there...and you're a gringo."
"Does this fellow speak Quechua, like Morales? " we asked.
"No, of course not. There aren't really any 'indigenous' peoples here. Like I told you, the Spanish pretty much took care of that. But there are a lot of people with Indian blood. In fact, almost everyone has Indian blood in this area. I mean, all the local people.
"Just like the Argentines...leave the job half done," said Jules.
"Jules, a lot of people up here would not find that very funny."
"Okay...well...seriously...the Spanish murdered the Indians and stole the land. That's what happened throughout all of history...almost everywhere. Homo sapiens probably hunted Neanderthal man to extinction and took his land. Barbarians murdered the Romans and took their land. The Huns murdered everyone in their way and took their land. The Celts invaded Britain and took the land of the Britons. And then the Anglo- Saxons invaded. And then, the Danes invaded. And then, the Normans invaded.
"And then the English invaded Ireland and half the world. Hey, we're Irish. We dispossessed Irish should have some indigenous rights too.
"It just seems ridiculous that these people are claiming title to land that they lost 5 centuries ago. They came as immigrants too. Maybe it was 10,000 years ago. But they're still not really indigenous. They're just earlier immigrants than we are. And they're just sore losers."
"Yes, it is ridiculous. But that doesn't mean it isn't serious," Miguel replied. "This is politics. And in politics, often the most ridiculous thing becomes the law of the land. Especially here in Argentina."
Jules didn't mention it, but recent evidence suggests that the "native Americans" might have been guilty of stealing land too. As we understand it, all known "Indian" peoples in the New World come from the same immigration across the Bering Straits, some 10,000 years ago. But archeologists have found bones that are much more ancient. What happened to these people? No one knows.
"But people in this area never did speak Quechua. They were members of various Diaguita tribes. They were tributary to the Inca. So maybe some of them did speak Quechua...but the tribes here were not Inca and had their own language.
"Which makes it pretty interesting. The local tribes were conquered by the Inca - Morales' people - before they were conquered by our people...Europeans. The Spanish didn't take away the Diaguita's rights, in other words. They didn't have any rights. They were already vassals to the Inca. When the Spanish beat the Inca, the Diaguita...including the Gualfines - were liberated. But, of course, the Spanish didn't stop in Peru. They came down here not too long after. They figured they owned the Diaguita lands too, by right of conquest.
"I guess what really got the situation moving in the wrong direction was what happened at the farm next door. They had a situation where a huge farm had been abandoned for almost 50 years. The owners must have died and forgotten it. It wasn't worth anything much, I guess. But there were hundreds of pastajeros living on the land. So, the government just decided to give the land to the people living there. They're doing the surveying now. And now people are running around saying that the people asserted their indigenous rights, which wasn't exactly true. They asserted squatters' rights. And in that case, it worked, because the owners had disappeared. No one seemed to have a valid title.
"That's not the case here. You have a good title. And when you bought the place, the previous owner had made sure that he had signed contracts with all the pastajeros, which meant that they signed a paper acknowledging that they were leasing the land, not owners of it."
"Then what happened to this guy? What's his beef?"
"Well, the same thing that always happens. The people who've been there for years and years are okay with the system. Besides, they don't really pay us anything much. It's more of a symbolic payment. They give us 5 percent of their animals. But there animals aren't worth anything. They overgraze the land. The animals are unhealthy and skinny. We don't get much for them.
"And we wouldn't really mind if they didn't pay us...but they need to pay us something or they'll be considered squatters and then they'll be able to assert squatters' rights against us.
"This guy left the farm and went to the city. He got a lot of bad ideas in his head. Then, his aunt, who was the person with whom we had the contract, died. He inherited the leasehold, I guess. It's not really clear because it's a special category of leasehold. The pastajeros can pass it along to their children, whether we like it or not."
"Why not just get some guys with shotguns..." Jules suggested. "Ride up on horses...rough him up... Heck, be gentlemanly about it. Don't do it in front of his family. Then, burn down his barn. That's the way they used to do it in the movies."
"Uh...thanks...Jules," Miguel continued. "But you couldn't do that even if you were serious. He no longer lives on the farm."
"What? This is getting more and more complicated."
"Yes, this whole indigenous rights thing is a problem. It's not a legal issue, really. It's political. These guys vote. And there are more of them than there are large landowners like you. I can count the number of landowners in the entire valley on one hand. And half the landowners aren't even local residents, so you can't vote anyway."
Later, we drove up to the ranch. The drive takes 5 hours. It takes you over high mountain passes, along dangerous cliffs, through deserts and a few dust-blown villages. The views are spectacular. It is barren, empty country. We barely passed a single other car the whole way.
"Hard to imagine that we'd have trouble with other people up here," said Jules. "There are so few of them."
When we finally got to the ranch, Jorge and Maria gave us big hugs and kisses. A light wind was blowing from the east. Stars were already out, bright in a moonless sky. Marta prepared tea and then dinner.
Jorge is the capataz, the ranch foreman. He is also about as "indigenous" as they come. We asked him about the problem.
"Indigenous? Santos [the insurgent] is no more indigenous than I am or than we all are. But he moved to the city. And when good peones move to the city they get a lot of bad ideas. I don't like it when they come back. They think they know more than the rest of us. They cause trouble."
"And Omar was a good peone. And then Santos married his aunt. Well, they live together...they're not really married in the church. And so Santos began putting a lot of bad ideas in Omar's head too. And then Omar decided he didn't want to work for us. He'd rather just get welfare payments. They all live on welfare. They get money for each child. And they get money because they can't find jobs. Well, of course they can't find jobs; they live up in the mountains. The only jobs are here with us.
"But Omar's head has been turned. He'd rather get welfare. And did you notice how he greeted you yesterday? You're the 'patron.' He used to greet you properly. But now he's ashamed to be associating with you. He hangs back. He sulks. He avoids me...and you too. He's going to leave. He keeps saying. But he lives in our house - I mean in one of the houses that belongs to the ranch. And he goes into town from time to time and works for a couple days. Then, he doesn't come back.
"He should at least go up and help Felix and Elena. He's Elena's son. You know, it's a little sad. She had lots of children. I don't even know how many. But now she and Felix are up there by themselves. And they're getting old and can't get around very much. Omar should be helping them. He used to be a good peone.
"But that's just the way people are. They start thinking about politics. And they stop caring about anyone else."
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Plaza II
What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this: There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.
Money Printing: How Counterfeiters Saved the World
Why Bernanke’s Money Printing Promises Spell Disaster | Why Inflation is Always a Bad Thing
If you are wondering why I screamed in terror like a sissy little girl and why I seem to have peed in my pants, it’s because of the horror of 5.9% inflation in prices!! This is horrific, as indicated by the use of two exclamation points, and which is so horrific (audience shouts out, “How horrific, Wonderful And Masterful Mogambo (WAMM)?”) that even writing about it requires at least one exclamation point, as I prove thusly!
Doubling the Value of Silver
Alan Greenspan and the Effects of “Creating More” | UK Hacks Away at Budget, Feels “Like an Amputation”
Today, the UK took a chainsaw to its budget to the tune of roughly $120 billion. Unlike the US, the nation feels obliged to implement a few austerity measures that may lend some credibility to its AAA credit rating despite its record budget deficit. The cuts include raising the retirement age, reducing welfare benefits, and making plans to let go of nearly 500,000 government workers.
Gathering Storm: Govt’s, Central Banks Pushing Toward Even Bigger Meltdown
The Top Performing Markets in Emerging Europe | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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