David Kotok On Dow 13k: ‘Meaningless’

new york stock exchange nyse trader

Yesterday was the day of Dow 13,000! Or at least it was, briefly. 

And today, Morning Money’s Ben White has a great quote from Cumberland Advisors David Kotok Cumberland on the (in)significance of this market level:

Dow 13,000 is a meaningless number. Is there any difference between 12,999 and 13,001? It’s a headline only because no one has anything better to do. The best advice I can give to your professional colleagues who make it a headline number is to go search for a local warehouse fire to cover…”

Of course, he’s technically correct. That said, the Dow reaching a high it hasn’t touched since 2008 crystallizes the narrative of a recovering economy and a resilient stock market.

Cumberland goes on to say that the real story that journalists should be covering, beyond the all important local wharehouse fire, is Greece.

We seem to remember more than a few headlines on that topic yesterday.


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Government Spending Is Down, But These 4 Charts Show One Area Where Public Sector Hiring Is Booming

As we’ve mentioned before, the decline in government spending under the Obama Administration is a seriously under-appreciated fact. 

But even despite the decline in spending, there is one area where federal government hiring has really ramped up: financial industry regulators (Bloomberg chart of the day, via Zerohedge).

After all, implementing and enforcing Dodd-Frank is a huge task in and off itself and on top of new regulations, federal watchdogs are amping up their enforcement of existing laws.

Take a look at how overall employment has ramped up and also the comparisons of different agency staffing levels in 2004 and projected levels in 2013 (as Zerohedge notes, the FDIC’s gains are big):

regulator employees

regulator employees

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A Great Reminder Of Why Exchange Traded Funds Can Be A Rip-Off

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We just got back from spending some time at Bloomberg Portfolio Manager Mash-Up Conference this afternoon. 

On a panel focused on alternative assets, Frank Holmes, CIO at U.S. Global Investors, made a great point about ETFs.

It’s one we’ve heard before, but most individual investors still haven’t caught on: when you buy ETFs or ETNs, particularly ones tracking less liquid assets, you can end up buying at values that are higher and selling at values that are lower than the actual market prices for the underlying assets.

Due to market volatility and the way exchanged traded products are priced for individual investors, the price you pay when you buy can be as much as a percent more than the same assets are valued at on the market and the price you get when you sell can be just as much less.

Combine this structural problem with the fact that individual investors too often play the losers’ game of buying and selling during big market swings when volatility is high and the problem is compounded.

So next time you’re thinking about adding to you Russian metals and mining exposure, remember that even a no fee exchange traded product can come with costs.

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HULKAMANIA: Is The S&P Being Set Up For An Atomic Legdrop?

For those out there (your author included), who think that technical analysis is the financial equivalent of palm reading, this chart from Kid Dynamite (via Counterpartiesgives the mysterious adn myopic medium the send up it deserves.

As you can see, it’s clear that the S&P Is Completing A ‘Hulkmania’ Formation:


For an in-depth investigation into the key indicators that point to the Hulkmania formation, read the pul post here > >

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SOROS: Wage Stagnation Is HELPING The U.S. Economy

Over the weekend, George Soros went on Fareed Zakaria’s CNN show GPS and laid out the factors that are helping pull the U.S. economy into a recovery. 

Among the factors he highlighted was wage stagnation.

How could wage stagnation, a negative long-term trend, be helping the American economy? It’s simple: by making the American labor force more globally competitive.

In years to come, a lack of real income growth is likely to remain problematic for many Americans, but Soros is right to point out how a much maligned trend may perversely play to our advantage in the short- to medium term.

Watch what Soros has to say here:

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Here’s The Real Problem With Investing In The Carlyle IPO

David Rubenstein Lemonade

The big news in the Carlyle IPO story is that the private equity firm and its founder David Rubenstein dropped a plan that would have prohibited shareholders from filing class-action lawsuits.

Great news, right! Buy, buy, buy on Carlyle shares? 

Not so fast.

There’s a fundamental problem with investing in public equity private equity firms — and it’s not just Carlyle.

And it’s not just the awful historical track record these investments have displayed. Take Blackstone’s much hyped IPO. Share performance since offering? Down 52%.

There’s something more basic going on that makes the public equity of PE firms bad news—at least if you don’t know what you’re getting into.

There are three ways to get economic exposure a specific private equity firm:

1) Be an investor in a fund. In recent weeks this has been the subject of intense scrutiny on the impact of PE to society and employment broadly.

In terms of returns, most rigorous academic analysis shows that private equity funds, net of fees, return about what the S&P 500 does.

So for group #1, economic return is not terrible but probably not worth the fees.

2) Be a manager of the fund(s) and own controlling equity in the private LLC. Speaking of fees, these are the guys that get the fees. The benchmark is a 2% asset management fee and a 20% performance fee, which generally has some hurdle before it kicks in (say, 8%). These same managers also tend to own some type of controlling equity in the corporate entity itself as well as the funds.

Group #2 makes a killing, especially at the biggest PE firms. We all know their names, how much they’re worth, how many houses and planes they have, etc.

They have access to performance fees, management fees, invest in the funds themselves and if all goes really well, they get to sell some of the equity they hold at the corporate level to the public. It’s a great business model for the managers. Maybe one of the best ever created. 

3) Buy publicly traded equity in the manager.  Now things get tricky. First of all, the equity you are buying is unlikely to be run of the mill, General Electric-style equity. In Blackstone’s case, you are buying units in a general partnership. But your ‘units’ are generally stripped of governance and voting rights and may even exclude the controlling shareholders (the managers) from necessarily acting in your best economic interests. This is an oversimplification, yes, but a largely accurate one. Please, no angry comments from corporate lawyers. 

And a detailed look by the New York Times’ Deal Professor at Carlyle’s share structure makes the case that it’s worse than Apollo, Blackston or KKR in restricting right of owners of public equity. Even with the class action lawsuit prohibition dropped, the fundamental conclusion is stinging:

“Carlyle is taking advantage of IPO [investors' lack of concern for shareholder rights] to push through what can only be described as a shareholder’s corporate governance nightmare.”

In short, you are along for the ride with the management team and they owe you no responsibility to act in good faith.

So you don’t get a lot of things. What do you get? You get the earnings of the corporate entity once performance hurdles have been met and the managers have been paid their fees and other expenses have been dealt with.

The problem is that the best place to be, economically speaking, is in group #2. That’s not too surprising, since group #2 set up this the economics of this whole thing to begin with.

Group #3 is last in line, economically speaking, as is always the case with equity holders. But what’s different about private equity is that what comes before you as an equity holder is not what comes before an equity holder in GE. Far from it. 

It’s a much longer journey for economic value to reach you and there are incredibly effective mechanisms set up to capture as much of value for the managers before it gets to you.

So if you’re buying shares in the Carlyle IPO, your ability to file class action lawsuits should be the least of your considerations.

Rubenstein himself said the point of the IPO was for him to ‘liquefy’ his holding in the firm. This is the point of all IPOs, of course. 

The key difference is that when he does liquefy his stack, what investors get in return has largely been stripped of earnings power.

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MIKE MAYO: Banks Are ‘Masking Horrible Operating Performance’

gold mask

The Wall Street Journal has an article this morning detailing how banks are boosting earnings by releasing reserves to counter loses from bad loans.

Mike Mayo, the well-known bank analyst at CLSA (a division of Credit Agricole), is none too pleased. 

Mayo accuses banks of papering over the deteriorating performance of their businesses:

The [reserve] releases are “masking some horrible operating performance,” said Mike Mayo, a banking analyst for Crédit Agricole Securities. “The bottom line is your earnings power is decreasing.”

Why is Mayo so upset? Banks hold reserves against potentially bad loans on their books. That’s nothing new or nefarious. As banks officially write of loans as uncollectable, they release their reserves to cover those losses.

But what the Journal article investigates and Mayo is so agitated about is something slightly different: banks are releasing reserves that are greater in value than the bad loans they are writing off.

This boosts earnings in the short-term, but is by definition unsustainable and banks must eventually set aside additional reserves. However, if they economy improves along with loan performance, the amount of the new reserves may not need to be as great as they were immediately following the financial crisis.

The article notes that the “top 10 U.S.-owned commercial banks released $4.3 billion in reserves in the fourth quarter…boosting after-tax earnings by $3.5 billion.”

Banks counter that “reserve releases are justified by declines in bad loans and the economy’s improvement” and are fully acceptable under accounting guidelines.

But analysts feel differently:

“It’s cotton candy,” said Matt McCormick, a portfolio manager and banking analyst with Bahl & Gaynor Investment Counsel in Cincinnati. “It looks good, but it’s not going to be substantial for you.”

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The Top 10 US Stocks Hedge Funds Love

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Hedge fund managers can be a secretive crowd. Trading strategies are closely guarded, and regulation is largely spurned.

However, they are required to report their largest stock holdings to regulators, and Bloomberg Markets Magazine listed the top ten most held stocks in their February issue.

So here they are. You may not be a Jim Chanos or a Ray Dalio, but maybe you can learn something.

El Paso Corporation

Ticker: EP

Value held: $3.5 billion

2011 Total Return: 82.1%

Source: Bloomberg

Motorola Solutions

Ticker: MSI

Value held: $3.2 billion

2011 Total Return: 26.3%

Source: Bloomberg

Sears Holdings

Ticker: SHLD

Value held: $3.2 billion

2011 Total Return: (18.2)%

Source: Bloomberg

See the rest of the story at Business Insider

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Tim Geithner Will Not Stay For A Second Term

tim geithner gives a stern look at indian economic forum

Bloomberg is reporting that Secretary of the Treasury Tim Geithner will not remain in his post if the President wins a second term.

In an interview with Bloomberg TV, Geithner made the following comments:

“He’s not going to ask me to stay on, I’m pretty
confident…I’m confident he’ll be president. But I’m also confident he’s going to have the privilege of having another secretary of the Treasury.”

Speaking from Charlotte, North Carolina ahead of a planned trip to Davos for the Annual Meeting of the World Economic Forum, Geithner told Bloomberg he was not concerned about financial firm’s complaints over implementation of the Dodd-Frank bill:

“I would not worry too much about them…I would worry more about the basic confidence of Americans that they’re going to face more opportunities, more likely to find a job, keep a job, save for college, save for a dignified retirement.”

Full video below (via Bloomberg TV):

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VIDEO: James Gorman Just Said Morgan Stanley Would ‘Be Fine’ If Europe Exploded

James Gorman Davos

From Davos, Maria Bartiromo interviewed Morgan Stanley’s CEO James Gorman on CNBC.

Their conversation ranged from the Voelker Rule to the bank’s MBIA settlement to the possibility of returning capital to shareholders this year.

But Gorman’s strongest statement was on Morgan Stanley’s exposure to Europe. This is what he had to say (skip ahead to the 9:20 mark below for these comments):

“If you had all sovereigns, all corporates and all financial institutions in Europe blow up at the same time, Morgan Stanley would still be fine. The global markets would not be fine…the risk around our profile and exposure to Europe I thought was absurd in the fall and I think we proved that with the disclosures we’ve put put out and what we’ve done to derisk since.”

This statement goes several levels beyond a typical CEO statement in its strength and broad reach and cuts against our previous reporting indicating that Morgan Stanley remains massively exposed to European sovereigns.

Indeed, it is hard to understand how Morgan Stanley, or any other financial institution in the world, would ‘be fine’ if all European sovereigns, corporations and financial institutions collapsed simultaneously.

It is a statement you are unlikely to hear Gorman utter again and one he may end up regretting.

But Gorman will be on Bloomberg TV later today, so we’ll get a chance to see if he sticks with this statement or backtracks.

Here’s the full video (Via CNBC):

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