Friday Lite

It's been a hectic last few days and the moving truck arrives later this morning - the week ahead will be anything but normal around here and I think I'm now officially a week behind on answering some mail . Sorry.

We don't actually move until next Friday and the computer stays with me so there will be something showing up between now and then, but who knows what or when. The usual schedule should resume sometime soon after Memorial Day.

Last chance to guess the mid-year price of oil and gold

This is your last chance to guess the mid-year price of oil and gold and win big! For details see last Friday's post - all entries must be received by the end of the day today and they can be made on this post, last week's post, or via email. If all goes well, the entries will be tabulated next week and a new chart will appear here, similar to the one below from last December.
The combined difference between the guessed values and the closing prices on June 29th will determine a winner who will receive a free one-year subscription to Iacono Research.
This is what the top ten looked like last time.
Not having had time to go through the guesses, there's no clear sense of anything other than that TJ just doesn't like to be part of the crowd ($55 and $600). But that's OK, I feel that way a lot too.

Mortgage lending is self-regulating too!

A few years back, long before the word "subprime" entered the vernacular, the nation's central bankers spoke glowingly about hedge funds and financial derivatives, highlighting the good they were doing for the world while at the same time brushing off the increased systemic risk they posed, claiming that these groups were "self-regulating".

On many occasions Alan Greenspan said, "Hands off those hedge funds".

The same line of reasoning is now being applied to the subprime mortgage lending implosion that is slowly sweeping the country. Yesterday, Fed chief Ben Bernanke delivered a speech on mortgage lending that sounded eerily similar to comments made by his predecessor about hedge funds and derivatives.

Credit market innovations have expanded opportunities for many households. Markets can overshoot, but, ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit.

We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well-being, access to credit, and opportunities for homeownership of many of our fellow citizens.

And of course the Fed will be there to mop things up in the event that the subprime contagion and other malinvestments begin to affect the broader economy in a significant way later this year or next year.

Thoughts from The Money Show

Unfortunately, the notes taken at The Money Show earlier this week are now packed away and not easily accessible, so all that can be offered here are a few thoughts.


Overall it was a great learning experience - not necessarily what the speakers had to say, but getting a feel for who attends these shows and the mood of the crowd was invaluable.

• Greyhairs! - as someone in their mid-forties, I was a real youngster in a crowd of 10,000 (over four days). The average age had to be late fifties or more - nearly every session was a veritable sea of gray hair when viewing the audience from behind.
  
  
• Bull vs. Bull - Martin Weiss had some of the most memorable comments on the day I visited. During the Bull vs. Bear debate he remarked that everyone is bullish on foreign stocks and that maybe that's not a good sign.
  
  
• Exhibitors - The number of natural resource companies with booths in the exhibit hall was striking. The combined total of gold miners, silver miners, numismatic coin dealers, and energy companies about equaled the combined total of everything else.
  
  
• Trading Systems - Selling software to help people trade stocks has got to be one of the most profitable businesses out there today. They had some of the biggest and flashiest booths with some of the biggest LCD monitors and they just made it sound soooo easy - just like on TV. There must be a perpetual stream of new customers who buy this stuff, lose money, then give up within a year.

If anything else of note comes up after we unpack, this topic will be revisted.

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Throwing money at the problem

It's too early to really say with any certainty, but so far the whole idea that Bill Gross (aka "The Bond King") at Pacific Investment Management Co. (aka Pimco) would team up with former Fed chairman Alan Greenspan (aka "The Maestro") just seems odd.

First, and most importantly, they appear to have very different views on the future path of interest rates, the former Fed chairman seeing an upward path and the manager of the world's largest bond fund seeing them going down.

Of course if you manage a bond fund, you'd better tell the world that interest rates are going down - since the price of bonds moves in the opposite direction as interest rates, predicting higher interest rates is akin to a stock promoter telling potential customers that he sees share prices going down.

In this story($) from the Wall Street Journal, Fed-channeler Greg Ip explains the new working relationship:

Under the arrangement, signed this week, Mr. Greenspan will participate once each quarter in a strategy session with executives of Pimco, based in Newport Beach, Calif., including Mr. Gross. He will also speak with them as often as twice a week via conference call and email. Dropping a self-imposed prohibition he has observed since leaving the Fed in January 2006, he will also discuss Fed interest-rate policy with the firm, provided those conversations are private.

With about $680 billion under management, 95% of it in fixed income, Pimco and Mr. Gross regularly move the bond market. But their influence pales in comparison with that once wielded by Mr. Greenspan, nicknamed the "Maestro," after the 2000 biography of the same name by Bob Woodward.

Since his retirement, the 81-year-old Mr. Greenspan has roiled markets several times with comments to paying, often-private, audiences. A week after he left office, his comments to a private Lehman Brothers event were interpreted as meaning interest rates were headed higher. In February, his suggestion that the U.S. could slip into recession this year was blamed by some for helping trigger a global stock selloff.

Some outsiders have criticized these comments as making life difficult for his successor, Ben Bernanke.

Mr. Greenspan said in an interview that he didn't comment on Fed policy for a year because of his knowledge of confidential Fed deliberations in his last days there, and to avoid comparisons with Mr. Bernanke. "Now that more than a year has elapsed, private conversations [about monetary policy] are appropriate," he said. "I will continue to refrain from public comments on monetary policy."

Mr. Gross said Mr. Greenspan's words as Fed chairman were constrained by his position. "Now that he's on the team, we would expect for him to be open and expressive in terms of his views." For example, he said Pimco's Fed watchers, Paul McCulley and Richard Clarida, will run their Fed analysis by Mr. Greenspan.

Mr. Gross has long had a reputation as one of the savviest bond-fund managers around. His main charge, Pimco's $104 billion Total Return Fund, has beaten 97% of the competition in the past ten years, with a 6.9% average annual return, according to Morningstar Inc. Lately, however, Mr. Gross's fund has been struggling. In the past year, the fund has trailed roughly three-quarters of similar funds, and so far this year, it is in the bottom 20% of its peer group.

In addition to differences on the interest rate outlook, Bill Gross and other folks at Pimco have been ardent critics of the mess that was left behind when Ben Bernanke took over at the Federal Reserve in February of 2006 - the housing boom that is slowly going bust.

One staff member has gone so far as to write about how he sold his overpriced Southern California digs and is now renting while he awaits the slow-coming, but inevitable plunge in home values.

According to the WSJ report, in 2005, the Bond King told BusinessWeek, "I like Bernanke better. Greenspan's approach in terms of throwing money at the problem, lowering rates whenever there was a crisis -- it appears to have worked. At the same time, it has led to a substantially leveraged U.S. economy. That's the legacy he leaves Mr. Bernanke."

In the most recent Investment Outlook at Pimco, the tone has changed dramatically:

China may still be exporting deflation to Asia and Euroland, but it clearly is beginning to export mild inflation to Japan and the U.S. And, although China and other BRICs/developing nations will undoubtedly remain mercantilistic exporters for years to come, an internal orientation is developing which at the margin absorbs excess savings, increases aggregate demand, and tilts global inflation upward. Importantly, special consultant to PIMCO Alan Greenspan has pointed out that the process of transitioning hundreds of millions of workers from planned economies to a market environment may peak in the next 2-3 years in terms of its rate of growth, reducing the disinflationary impact.

With a bond fund that has performed poorly lately, it now sounds like Bill Gross is the one "throwing money at the problem" - if there's one thing that a retired Alan Greenspan is not, it is cheap.

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SoCal real estate sales for April

Yesterday, DataQuick reported on Southern California real estate sales for the month of April. Sales volume hit lows not seen since 1995 - if any of you were around here at that time, you'll remember what things were like back then. Not good.

Though prices remain relatively stable, sales volume in the Inland Empire counties of Riverside and San Bernardino are declining rapidly - last to the party, first to leave it appears.

Click to enlarge

With builder incentives and similar enticements by homeowners looking to snare one of the dwindling number of willing buyers, it's fair to say that home prices have declined more than is shown in the chart below. Also, the steep decline in sales volume in more affordable areas tends to push the median price up.

But probably the most important factor in the relative stability of home prices is that some people are still paying 2005-2006 prices when they really don't have to. If you're a seller, it must be kind of like hitting the lottery when you get a qualified buyer in 2007 who has heard nothing about a "housing bubble" - they fall in love with your house and they think they're getting a bargain at $15,000 off the asking price.

Click to enlarge

As shown below, there are now four counties with year-over-year price declines in the most recent report. Long-time sub-zero dwellers San Diego and Ventura County rebounded but remained in negative territory in April - they were joined by both Orange County and Riverside County with slight declines.

This is the first time that four counties have posted year-over-year declines since, well, probably 1995.

Click to enlarge

With sales volume at these levels and continuing to trend downward, the stand-off between buyers and sellers will probably be resolved over the next few months. Current odds do not favor the seller.

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Notes from Las Vegas

After every visit to Las Vegas, it becomes more clear that it probably wouldn't exist in its present form without the help of Alan Greenspan's eighteen and a half years at the Federal Reserve. With new condos and new hotels still springing from the desert floor, money seems to continue to flow freely as an entire culture appears to have been transformed from cautious savers to bold speculators.

It's not as if gambling is anything new in society - it's just never been this widespread or as socially accepted ... "loved", some might say.

They say the average visitor spends a total of 14 hours gambling during their stay. We'll come in far, far below that mark and may not even register a positive number - the cost of everything else is draining us dry after only one day.

The monorail went up in price from $3 per ride last August to $5 today and reasonably priced rooms seem to be a thing of the past. Didn't they used to have reasonably priced food here too - as a way of drawing you closer to the gambling gaming?

The town appears to be booming, though the local real esate market may no longer be.

REPOS and no more "$0 Down"

Passing through Palmdale and Victorville on the way out here, it was nearly impossible not to notice the change that has swept through the real estate market just by looking at signs on the side of the road.

There is now a big REPOS sign in front of the real estate office on the main street east from the 14 freeway and all the flashy signs inducing first time buyers in Victorville to take the plunge have come down.

Maybe the chart to the right from yesterday's Wall Street Journal story($) has something to do with it.

In these areas, there are just so many homes that have been built in recent years that all they really had to do to slow things down appeciably was to stop making mortgage lending any looser.

Now that lending standards are getting tighter - no more no money down and no more low monthly payments - the reversal looks to be accelerating.

A one year anniversary and a one day special

Commemorating the one-year anniversary of the launch of the companion website in this post from last May, today, for one day only, the introductory annual subscription rate for Iacono Research will again be offered.

Follow this link for the original rate of just $99.

As noted last week, free trials have been extended to a full 30 days and the special subscription offer above is being extended throughout that period for those on free trials as of today. So, if you are unsure or would like to have a leisurely look around, be sure to sign up for a free trial by the end of the day.

Guess the mid-year price of oil and gold

This is just another reminder that you also have a chance to win a one-year subscription by guessing the mid-year price of oil and gold - full details can be found in last Friday's post and guesses will continue to be accepted through Friday (current subscribers can win a free one-year extension).

The final results from the contest concluded in December are shown below.
Make your guesses either on this post or via email. A final reminder will be provided on Friday, after which a new graphic will be prepared. Good luck to all.

The Money Show

Most of the day today will be spent at The Money Show - look for a few comments later today or tomorrow.

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We're Off to The Money Show

We'll be in Las Vegas for the next couple days to attend The Money Show - the laptop is in tow, but there's no telling what or when something will appear here next.

Never having been to this type of conference before, it's hard to know what to expect. Hopefully it will be only a tiny fraction of the size of Comdex in the 1990s - they really got out of hand there toward the end of the tech bubble.

Ten years ago, they used to charge $250 a night during mid-week for the crappiest casino hotel room in town and companies would happily pay it - the show was so big it felt like it was spilling over into Arizona.


After a quick look at the program guide, there appear to be lots of interesting sessions. Anything involving Peter Schiff and Martin Weiss should be good - this one sounds like it should be fun to watch:

The Perennial Struggle: Should Investors Run with the Bulls or Hibernate with the Bears?

• Howard Gold
• Joe Battipaglia
• Louis Navellier
• Martin Weiss
• Peter D. Schiff

A lot of the goofy personalities from the Fox News weekend business shows will be there too - I hope I don't run into either Tobin Smith or Charles Payne (if I hear Brenda Buttner yelling at Toby, I might just make a quick exit).

If nothing else, it should provide some indication of the general mood of the public regarding investing in natural resources. There are lots of energy companies on the list of exhibitors along with a few gold, silver, and uranium mining companies.

In looking closer at the detailed program information, there are actually quite a few topics that are of interest to me:

Natural Resource Stocks for Diversity and Profit
Tocqueville Asset Management

• Energy Metals Corporation
• Minco Gold Corporation
• U.S. Geothermal, Inc.

John Carter - Trade the Markets, Inc.
Buying and Selling Gold—Trading Stocks, Futures, and Bullion for Both Short-Term Income and Longer-Term Wealth Creation

David Bond - Silver Valley Mining Assn.
Discover Silver's Future within Idaho's "Silver Valley": A Prolific Past and a Flourishing Future

John Netto - One Shot--One Kill Trading
How to Diversify Your Portfolio with Commodities

James Trippon - Trippon & Company
Retired Millionaire's Guide to Not Running Out of Money

John P. Dessauer - John Dessauer's Investor's World
The Shocking Truth About the Dollar, the US Current-Account Deficit, and Corporate Profits

Sean Brodrick - Red-Hot Canadian Small-Caps
Uranium: The White-Hot Metal You Can't Afford Not to Own

To be honest, I have no idea what "One shot, one kill trading" might be about as it relates to investing in commodities - it sounds dangerous (and loud).

This was originally intended as a quick get-away to visit relatives before the big move up north later this month - now it's starting to feel like work.

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The US Congress just doesn’t do macro

It sounds like both the United States Congress and Stephen Roach were in rare form last week as the subject of currency manipulation by Asian exporters was discussed. From this account of what happened, it looks like trade sanctions are coming.

Even the old timers in the Congress had never seen anything like it. On May 9, the US House of Representatives held what was billed as a tripartite hearing of three subcommittees on “Currency Manipulation and Its Effects on US Businesses and Workers.” I was one of the “expert witnesses” at this hearing – invited to submit a written statement and then, along with the other six members of the witness panel, to present a five-minute oral summary in front of the assembled legislators (my written statement, “A Slippery Slope,” was published as a Morgan Stanley Special Economic Study on May 9). The hearing concluded with an extensive question and answer session. It was an experience I will never forget. My worst fears were realized. At the end of over three hours of grueling give and take, I left Capitol Hill more convinced than ever that the protectionist train has left the station.
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In terms of the substance of the debate, three things surprised me about this hearing: First, while the bulk of the discussion was about China, anti-Japan sentiment was formally brought into the picture for the first time. The issue was the yen – characterized by the Congress as the world’s most undervalued major currency. While the absence of explicit intervention by Japanese authorities over the past three years was duly noted, many representatives took the position that there has been unmistakable “implicit manipulation” of the yen. Second, the case against China was framed mainly around the concept of the “illegal subsidy” – WTO-compliant jargon that frees up Congress to impose sweeping countervailing duties on Chinese exporters. Taking a cue from Federal Reserve Chairman Ben Bernanke’s mid-December 2006 speech in China, Congress seems willing to support the Hunter-Ryan bill (H.R. 782), which argues that an undervalued RMB qualifies as a subsidy that is grounds for a WTO dispute (see Bernanke’s December 15, 2006 speech, “The Chinese Economy: Progress and Challenges”). Third, the congressmen present at this hearing were highly critical of the US Treasury’s bi-annual foreign exchange review process and its failure to cite China for currency manipulation. This puts the House on a similar track as the Senate – especially that espoused by the leadership of the Senate Finance Committee, whose Chairman (Max Baucus) and ranking minority member (Charles Grassley) endorsed a similar approach last year. That is the first hint at a reconciliation strategy between the two chambers of Congress – particularly important if they are to go into a joint conference later this year after passage of their own trade bills.

Notwithstanding these new developments, the most important message is that Congress remains unwavering in its determined approach to move from rhetoric to action in 2007 on matters of trade policy.
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There’s always a chance that I’m over-reacting to an escalation of Congress’s rhetorical assaults on China – that this will just be another year of bluster. Anything is possible when it comes to Washington. But I have spent more time on Capitol Hill in the past three months than at any point since I left the Fed in 1979. Since mid-February, I have testified three times on US-China trade frictions, and in each of these instances, I have seen steady progression toward a protectionist endgame. On the basis of everything I have heard over the past several months, I remain more convinced than ever that Congress has finally thrown down the gauntlet. The May 9 tripartite hearing hammered that point home with disturbing clarity. As Barney Frank, Chairman of the House Financial Services Committee, said, “This problem is not going away. We are going to have to act.” If Congress changes its mind and backs away, it fears it will lose all credibility on this key issue with American workers. With respect to China, I am afraid that means the US Congress has now gone past the point of no return.

Other accounts of the session dealt with the implications of revaluing the Chinese currency. Elected officials were warned that retaliating against China would be "a policy blunder of monumental proportions" (the same phrase he used to characterize Alan Greenspan's 2001-2004 interest rate policy) and that the low U.S. savings rate was responsible for the U.S. trade deficit (i.e., the U.S. just spends too much using borrowed money).

He added that the Chinese are not likely to follow the example of the 1985 Plaza Accord where Japan allowed their currency to strengthen by almost 50 percent against the dollar in order to counter a trade imbalance leading to asset bubbles and the 1990s deflation that persists to this day.

This might get very interesting, very soon.

ooo

This week's cartoon from The Economist

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