Going Into Fall, Rally Falters

The calls for bottoming have come out of rebounds in Singapore, France, Germany and others, while USA continues to deteriorate, though positive headlines seem to balance those bad. The question these last few weeks has been will America come back strongly, with 4% growth, or will growth be below 2%, perhaps tipping into another recession within a year.

What seems clear to me is that Western consumers cannot spend like they did, so unless the few companies with cash begin battling for market share by expanding, we are in for slow growth. Inflation in food prices with deflation in goods and services seems likely.

Guessing what can grow...

the internet is a low cost comfort, which makes Akami at a PE of 20 and a price of $16-19 seem reasonable.

the FSYS, CELG have returned well. investing in DBA has not.

People's Psychology is Midway through the 60's

Looking over an old New York Times in my bathroom, I enjoyed the photo of a sad video maker, under headlines that amateurs are caught in the middle between Youtube and Warner. She looked so wistful and sad. The photo reminded me of a hippy signalling that the 60's were over. Recalling working for a dot com at the turn of the century, and the dreamlike multifloor stadium new-years party, the explosion of websites, all offering new services, something "like" the arrival of pot and lsd on the social scene, in fashion, and movies - definitely mind expanding, and not all positive. But now we may be getting to the point after the party on the world scene, those tulmutuous later years, just before the grim 70's.

What does this mean for people and profits, well, the profits will fall off, and the people will have to settle down, risk adverse for a period under the tarps.

Second Spring Since the Crisis Beginning

in all economies, there's the push it through mentality, embarassing for Egypt, who read the alarmist news and killed all their pigs. I wonder how many of those were for export? And while the stock markets continue to climb, to a peak, really, it seems, with jutting peaks and crenalations. in the news, all the reporters seem to be rattled, wondering how it is that they didn't see something, and so they're making pig flu into "A" and hundreds into millions; fart - history does repeat itself.

The mentality now with regards to the final stages of the gloabl crisis is blind. I enjoyed how executives last fall spoke of the bad assets passing through the system, like a stomach bug. And now all commentators are talking about pushing it through - enough accounting, and it may be the bottom.

I recall last february asking a friend about his job in three d designing for drug company packaging, and he said the drug industry wasn't touched by anything. Now the drug companies are seeing that I put off getting my teeth cleaned. I don't even get my molar's pulled.


global capacity for auto production is said to be 90 million vehicles - demand is now 60 million.

2009 q1 bottoming?

Deterioration of trade, US home prices, and loans continue but at slower paces giving much joy. With a brief upsurge in trade and even property, March seems to have been a good month for almost everyone. Through some re-valuing of assets (or in the case of Goldman Sachs, leaving a whole month off their statement) US banks have announced profits recently. However now more than 26 banks have been nationalized throughout the US this year alone. Also in the news is China's 6% GDP growth (however electricity use fell). India's 6% GDP forecast. The Brazilian stock index outpacing the 6 week rally in US stocks. Many pundits see hot money riding a shoring up of consumer sentiment, which inevitably will pull back.

The first glimmers of deflation are seen in Spain. China's prices have lost steam amidst ballooning overcapacity (factories under 50% utilization), and while still there are increases in costs of food and services in Beijing, the Consumer Price Index fell 1.6% and 1.2% in Feb and March. With governments around the world expanding money supply, the cast for inflation fears also seems justified. For the first three months of the year, commodities do seem to have leveled, oil tracking between $40-50 a barrel. But underlying price movement here is also a bit of a question. This is a question that should be answered when trade recovers, and at what level.

This stock market rally through 1Q09 seems well orchestrated with announcements just good enough to justify the day's rally. While America's bottoming may be happening, it is more difficult to believe the good news propagated that China's continued deterioration and open-handed money grab is going to undermine the banks within a few years, maybe not unlike what happened in the west after 2001. Other Chinese economists have begun to notice the incredible overcapacity in housing now in China.

A rare bright spot has been the Chinese Bank Regulatory Commission, which has spoken out on both this lax lending and on the need for derivatives to be guided by three principles: transparency, a lack of leverage, and be created in only ways that serve a need in the economy as a whole.

Sell Prudential before Earnings Received Jaded

PRU has me thinking about the danger of debt verses cash flow. How stable is a company's cash flow? What could cut it off? How constricting are debt payments as a portion of cash flow?

For instance Time Warner with reoccurring Network revenue supplying 60% of earnings has its debt paid by 50% of earnings. There is no way they can miss a payment. Or so it would seem. TimeWarner has 30 billion in debt and its market capital is also 30 billion. Prudential holds 30 billion in debt but its market capital isn't even half that, at 14 billion. With that much debt it's a worthy question, what is Prudential's cash flow? Prudential holds only 30% of its assets in mortgages or bonds, generating 8.5 billion in cash and premiums that are paid monthly or yearly totally 11 billion in 2008. Premium income can fall by scared investors taking early withdrawals, as it did in 2004 falling by almost 10%. Earnings in 2008 was 1.4 billion, and 14 billion of prudential earnings are due in 5 years. Of course in 2007, Prudentials earnings record was 3 billion and everyone believed they could pay 14 billion of debt off in five years. Of course this 14 billion will have to be refinanced, but by whom, and at what cost?

Prudential's cash flow is opaque, more than 50% of it in "other assets", more worrisome, still, is that executives could wait so long to disclose their earnings for Other Class assets. Most of these are the worrisome Asset Backed Securities. So likely management does not understand the risks in these assets, either. What is the cash flow they currently deliver? Maybe little to none?

At the end of 2008, TimeWarner made about 3 billion. In five years it has 3 billion in debt due.

Prudential will pay down that debt for which they will need new debt at higher interest. This will constrict future earnings growth by larger and large factors over the next few years, even while mortgages continue to deteriorate, and no one will buy their still undeclared ABS's.

Prudential may well "profit" the most from mark-to-market shenanegans because of their large paper holdings. But will the People still be buying?