Monday, December 8, 2008

Princeton Economist Alan Krueger reads my blog!

Or perhaps we all just like to use Starbucks as our underemployment example.

Either way, Krueger's NY Times article is a great read on the unemployment situation, especially on how it is affecting college graduates. To read it, Google "The Job Market for College Graduates"

Saturday, December 6, 2008

Unemployment, Underemployment, and Non-Farm Payrolls

Source: BLS release, December 05, 2008, Page 19

Don't be fooled by the headline unemployment figure, as it is a misleading indicator of the overall employment picture.


The headline unemployment figure, U-3, does not include marginally attached workers (which includes discouraged workers) nor does it include those who are employed part time for economic reasons nor does it include the underemployed.

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

Discouraged workers are marginally attached workers who have given a job-market related reason for not currently looking for a job.

Part time workers are: persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for part-time work.

In other words that former accountant next door who now works 20 hours a week at Starbucks, is considered employed under the headline unemployment figure, even though he is clearly both severely underemployed and only working part-time.

The airline mechanic who was laid off and now changes oil at your local Pep Boys every weekend to make ends meet is also considered employed in the headline figure.

The ATT engineer who now works as a "consultant" is also considered employed in the headline figure.

A much better measure of the true employment health of the nation is U-6, which includes discouraged workers, marginally attached workers, and those employed part-time as a result of economic conditions. Unfortunately, no figure exists which also includes underemployment (such as the accountant working full time as a barista), probably because it would be difficult to accurately calculate.

The U-6 unemployment figure, which encompasses those who are discouraged, marginally attached, or part-time due to economic conditions, gives us a better clue as to what is happening in the labor market.

In November 2007, for every 100,000 members of the labor force who were employed, there were 4,700 people out of work (the headline rate of 4.7%). There were also:

4,700 + d
------------ = 0.049
100,000 + d

d = ~200 discouraged workers (workers who want a job but have given up and gave job market conditions as the reason)

4,700 + d + m
---------------- = 0.055
100,000 + d + m

m = ~800 marginally attached workers (600 marginally attached workers not in the discouraged workers subcategory, they gave 'personal' reasons as the reason for giving up, 200 in the discouraged workers category who gave job market conditions as the reason for giving up)

4,700 + d + m + p
------------------- = 0.084
100,000 + d + m + p

p = ~3,000 workers doing part time work due to economic conditions

Given the 154,000,000 people in the labor force, approximately 7,200,000 were unemployed, 300,000 were discouraged workers, 1,200,000 were marginally attached workers, and 4,600,00 were working part time due to economic conditions.

One does not actually have to work backwards from the headline percentages, which inevitably leads to some rounding errors and imprecision (unemployment figure goes only to the tenths) as the BLS kindly provides detailed actuals in the release, which I've summarized in a convenient table (I'm a big fan of visuals).

There are three million more people in November 2008 compared to November 2007 who are headline unemployed. However, examining the data, it becomes readily apparent that there are many more workers in November 2008 compared with the same time last year who are either discouraged or have been forced to replace full time work with part time work. In fact, there are seven million more people in November 2008 compared to November 2007 who are either headline unemployed, discouraged workers, or replacing full-time work with part-time work due to economic conditions. That is absolutely disastrous.

Worse, it is more likely than not, though there is no BLS measure or data out there that I know of for job quality, that there has likewise been an increase in the number of people replacing their prior employment for which they were trained for with unrelated jobs (think along the lines of VP Dick Harper, in Fun With Dick and Jane). Given the large number of workers who have been doing part-time work in lieu of full-time work thanks to economic conditions, some re-allocation of employment resulting in underemployment is not a far fetched thought, but makes the employment situation and its economic impact more dire than the headline figure suggests.

So the moral of the story is that you absolutely should look at the headline unemployment number, U-3, the total unemployment number U-6, and both the percentage point change as well as the absolute change in unemployment for both U-3 and U-6 in order to get the accurate employment picture. Using the headline number on its own can lead to disaster.

The non-farm employment change revisions for September and October were quite bad
(EDIT: transposed the months in the original post, corrected):

September original: -284,000 jobs
September revision: -119,000 jobs
September revised: -403,000 jobs

October original: -240,000 jobs
October revision: - 80,000 jobs
October revised: -320,000 jobs

Non farm employment change for November (i.e. November) was a total disaster:

Consensus forecast: -335,000 jobs
Actual change: -533,000 jobs

The job loss rate seems to be accelerating...

Wednesday, November 5, 2008

Welcome to..

Welcome to U.S.S.A!

Slightly apocalyptic but an interesting read.

Monday, November 3, 2008

Obama is largely responsible for the recent market downturn

Of all the nonsensical banter and useless commentary Larry Kudlow makes, this one takes home the grand prize: the stock market has been pricing in an Obama win and this accounts for a significant portion of the recent down turn (the implication being that if McCain were expected to win, the markets would have performed better).

Well, luckily we can test this statement....sort of. The prediction markets currently have Obama at 90% and McCain at a 10% probability of winning the presidential election. Come tomorrow, if pricing in the presidency has accounted for any significant portion of the markets movement, assuming everything else constant, the stock market should have large intraday volatility, as the expectation value will rise to 100% by the end of the day for either Obama or McCain, in fact we would expect a volatile market for an Obama win and an extremely volatile market for a McCain, win given current expectation values.

We shall see...I think Kudlow has turned into a bit of a raving maniac (perhaps he always was). I doubt a pricing in of an Obama presidency accounts for any significant portion of the recent down turn, rather it's been a whole lot of magic gone bad: magical accounting, magical bond ratings, and magical financial products gone awry.

btw: I just went short GBP long USD. Long story short, the whole of Europe is roughly 6-12 months behind the US in terms of economic fallout, and Britain, especially British property in the south of England, has been propped up by Middle Eastern petro money (look at PM Brown go begging to the Sheiks) that is now fleeing for the dollar. I expect the CDS auction for the three Icelandic banks to be disastrous (higher payouts on the part of CDS sellers than even the Lehman auction, something like 97 cent payout on the dollar with the debt worth 3 cents on the dollar) with a large ripple effect through Great Britain and the Continent. Frankly, Iceland is economically in the crapper, and I would bet top dollar that it will try to join the Europen Union (already it is a member of the European Economic Area). Things don't look so great for Europe at the moment.

Friday, October 31, 2008

Conference Board Consumer Confidence Index as a Contrarian Indicator?

This Wednesday's Wall Street Journal had a graph of the Conference Board Consumer Confidence number on its front page.

It jumped out at me as soon as I saw it: it looked like it had potential as an excellent contrarian indicator, and was reminiscent of technical analysis oscillators such as stochastics.

I dug up a 40 year log graph of the S&P 500 overlaid with the Consumer Confidence index, and extended it to now using the most recent data. It seems that when we're talking about investment timescales (holding periods of say 1 year or more versus trading timescales of under a year), when consumer confidence is at historical lows, it seems to signal market bottoms and excellent periods for accumulation, whereas when consumer confidence is at historical highs, as it was in mid 2007, it seems to signal market tops and excellent periods for selling.

Friday, October 24, 2008

Earnings season

Earnings season is upon us. May god have mercy?

On another note, what is up with Larry Kudlow on CNBC.

He has turned into a ranting, populist-elitist perma-bull. Or maybe I just never noticed he was a ranting, populist-elitist perma-bull. I am seriously sick of his responding to any market strategist with a rational, well thought out negative outlook with "CAPITALISM IS GREAT. AMERICA IS THE GREATEST COUNTRY IN THE WORLD" and "but but but this and that". Then he'll turn around and defend executive compensation at companies that grossly underperformed compared to their peers (the elitist part of that populist-elitist equation). He seriously sounds like a child who got his ass kicked in fantasy football now listing the reasons why he should have won and not the other guy. Larry, I really respect your economics background but.. seriously..get a grip.

Another guy I can't stand is the one who looks like a lawn mower went down the middle of his head. Do you not look in the mirror? Are you trying to look like Dilbert's boss? Get rid of the reverse mohawk, you look retarded.

Lastly is the turd in the newsroom, the one with the glasses and the gigantic forehead that is even larger than Rihanna's, Dennis Kneale, who makes quite possibly the dumbest remarks I have ever heard in relation to finance. Where did they get this guy? He makes Maria Bartiromo seem like a financial Einstein.

More of Jim Cramer, less of the dummies. Amen.

Wednesday, October 15, 2008

Ranking Commercial Banks, Homebuilders, Insurers

I created this in mid-June, but it still might be of some use going forward. It's a relative ranking along with a bankruptcy rating:

I'm a big fan of visual displays and built the spreadsheet accordingly:

Maroon = very likely to go into bankruptcy, conservatorship, or forced marriage
Red = significant likelihood of bankruptcy, conservatorship, or forced marriage
Orange = weak capital position
Yellow = decent capital position
Bright green = strong capital position

Monday, October 13, 2008


What direction do you see the woman rotating in?

Can you reverse it?

If I use my main vision window she always rotates clockwise.

I seem to be able to reverse her direction of rotation it if I start with peripheral vision, which orients her rotation counterclockwise rather than clockwise.

Just a fun little exercise in perspective.

Where to go from here?

Time to jump back in to the long side on equities?

Frankly, I don't know.

I'm thinking the economic numbers coming out later this week will be quite ugly.
Then there's the matter of the CDS auction for WaMu next week.
Then there's the matter of the CDS auction for Iceland's 3 banks, sometime in the next month.

Tuesday has no real economic numbers, but we get a slew the rest of the week: Retail sales, CPI, TIC Purchases, and building permits. These are all lagging indicators and will probably be abysmal.

Will the market discount them as irrelevant, as worsening primarily because of the credit crunch rather than real factors or as relevant evidence of a truly momentous downturn in the business cycle only partially or minimally related to the credit crunch? I don't know, I'm not psychic.

Standing aside is a position and its often the hardest one to take, but I see no clear trade at this juncture.

Saturday, October 11, 2008

VIX 75?

A VIX level of 75? Seems a bit like capitulation to me.... thinking of shorting VIX CFE futures...

Friday, October 10, 2008

CDS Cascade

A credit default swap cascade would be horrible.....

CDS is zero sum, but if the cash transfers for the current CDS defaults on Lehman, WaMu, Landsbanki, Glitnir, and Kaupthing go from the weak to the strong and thereby triggering additional credit events on the counterparties who have written the CDS ... it will be a total disaster.

The rush to have these CDS's placed on an exchange seems to be a desire to figure out the CDS web, in other words, make transparent who is on the line for what... but that in itself will not prevent a cascade.


Monday, October 6, 2008

Dow below 10,000

The Dow is below 10,000.

Stay in treasuries...

Monday, September 29, 2008

Oh well, guess I'll stay in bonds

Treasuries are rockin...I guess I'll stay there.

Hopefully the equity in question will drop even further.

A fitting tribute to today. Good job Pelosi... good job.

Tuesday, June 10, 2008

Pick-a-Pay or Pick-a-Prayer?

Ever see the movie Aliens?

In this movie classic, there are hostile alien creatures whose facehugger larvae spring from their eggs onto the faces of their host victims, with the requisite screaming and hysteria of the hosts. However, within a few minutes the facehuggers fall off, and the hosts wake up, seemingly returning to normal.

But all is not normal... soon the hosts feel something throbbing... deep under their ribs.. and then one-by-one a gruesome alien burst out of their chests, instantly killing him. The hatched aliens then proceed to go on a killing rampage.

While the market has seen its fair share of chest bursts over the past 18 months: writedowns for subprime loans and actual subprime portfolio losses, a variety of commercial banks, investment banks, and MBS REITs are still incubating chest bursters of a different breed, in the form of Option ARMs and Alt-A loans.

In order for us to full comprehend the magnitude of the issue, we have to first understand exactly how Option ARMs and Alt-A mortgage loans were issued and how they operate.

Option ARM
A) Option ARM Minimum payment mortgage borrower
B) Option ARM Interest only payment mortgage borrower
C) Option ARM Fully amortizing payment mortgage borrower

X) Alt-A: Intended recipient mortgage borrower
Y) Alt-A: Little white liar mortgage borrower
Z) Alt-A: Big fat liar mortgage borrower

Friday, June 6, 2008

Crude Oil Posts Record Gain of $11/bbl, Record close at $138.54

Crude oil (CL) posted the greatest dollar gain in its trading history today, up $11 per barrel for the front month July contract, closing at a record high of $138.54, and briefly trading as high as $138.80.

Factors at play (from greatest to least importance IMHO):
1) Lehman Raises 2008 Oil-Price Forecast, Profit Outlook for Oil Producers
2) Israeli politician threatens Iran with attack over nukes
3) Nigerian Oil Union Says Chevron Unit Hasn't Met Demands, Threatens Strike

I closed out the XTO long today at $67.50 and the FSLR short at $253. Currently investigating a new energy equity play.

Close Trade: First Solar and XTO

Closed XTO long and First Solar short this morning, at $67.50 and $253 respectively, for ~14% net gain, grossing a 20% gain on XTO plus an 8% loss on the FSLR short weighted ~80:20.

Forgot to mention, Bob Simpson is the Warren Buffet of natural gas and, to a lesser extent, oil. He is, at heart, a super efficient capital allocator. For a buy-and-hold portfolio XTO seems like a good match: as long as Bob is a the helm, XTO returns will outstrip its peers

Thursday, June 5, 2008

Hedging Rationale

What's the point of hedging oil price risk in a long XTO position with a short FSLR position? Why not short USO or crude futures directly?

The rationale is my expectation for divergent responses, both in FSLR's stock to oil price increases versus decreases at the current extremes and in comparison to XTO's stock.

Fear is generally a more powerful motivator than greed in extreme situations. For example, the magnitudes of the largest 1 day declines in the DJIA are far greater than the magnitudes of the largest 1 day advances in the DJIA. One can also see this phenomenon in market bubble formation versus subsequent bursting, typically the bubble bursting is far faster than the bubble formation.

I expect that if we have a sizeable pullback in oil prices from this new extreme high, perhaps analagous to August-September 2006 correction from the then extreme high of $80, FSLR will have an even larger pullback, as solar PV companies tend to have, while XTO has historically had a more muted response by comparison, thanks largely to its hedging and conservative approach.

I also expect that if we have an increase in oil prices, with the recent FSLR CEO sale controversy and its extraordinarily high valuation, XTO will have a more sizeable response compared to FSLR, relative to their betas.

More on First Solar and XTO

I've done some additional fundamental research into FSLR's CdTe solar panel technology and I'm increasing my XTO long:FSLR short ratio to 4:1 from 2:1. While the FSLR P/E ratio of 100 seems stratospheric and its future earnings potential, even as a best-of-breed company, seems priced into the stock, the competitive advantages of FSLR's technology are compelling enough to change the hedging ratio.

CEO Ahearn's sale of half his shares was a bonehead move, but I'm not convinced it signals dark days ahead for FSLR.

Fundamentally FSLR seems to be the only company to have large scale commercialized thin-film CdTe panel production at prices which are even remotely competitive without government subsidies. In fact with an all-in cost per peak watt of approximately $1.30, FSLR's costs are far lower than any other commercial a-Si or multicrystalline Si panel manufacturer (Google funded NanoSolar claims to have a CIGS-based panel with sub-$1/peak watt manufacturing costs, but I'll reserve judgment until there's full scale production). The recent drastic reduction of government solar subsidies in Spain and Germany, two of the largest global solar markets, may make FSLR's manufacturing cost advantage even more valuable.

On another note, West Texas Intermediate Crude Oil (CL) is up today on ECB inflation expectations. The PV solar sector is likewise in the black.

With the 2:1 hedge ratio and entrance into an FSLR short at $245 for the hedge, I'm in the black for the day, though not as much as I would be without the hedge. I've increased my XTO:FSLR hedging ratio to 4:1.

Wednesday, June 4, 2008

Trading Pair: First Solar and XTO Energy

First Solar's (FSLR) CEO sells half his holdings in the company, revealed on Monday.
The stock trades at a P/E > 100.
Only product is CdTe thin-film solar panels.
Chart technicals show Aug 2007 trendline broken today, EMA 100 broken today, and double top formation: in other words the stock technicals seem to be screaming "short me".

Currently I have a very concentrated long position in XTO, but I'm thinking of adding a short on FSLR. Should oil prices drop, FSLR will fall faster than a bat out of hell, making it a good hedge for oil production equities. The whole solar sector seems to be well correlated with the crude strip. However, XTO Energy is primarily a natural gas producer. Still, the correlation between NG and CL has been fairly large as of late and XTO has recently added about 10,000 bpd capacity with its Bakken play.

Fundamentally there should be a correlation between FSLR and the NG strip, not FSLR and the CL strip, since solar photovoltaic electric generation largely displaces natural gas based electric generation.

No one has really used fuel oil for electric production in the last five years, too expensive on a dekatherm basis compared to natural gas for marginal electric production, dual fire generation has been on gas since 2002, and anyone who can convert from fuel oil to natural gas has converted.

Hence the widening spread between NG and CL on a dekatherm basis: CL and its derivative, fuel oil, have more than doubled from last year's lows but the substitution effect is no longer present in full, as fuel switching from fuel oil to natural gas has already largely occurred to the maximum physical extent possible. Limited substitution effect = limited ability of CL rise to cause a rise in NG prices.

I'm looking at a $245 entry for the FSLR short, and targeting the 200 day EMA around $205 for exit, in a 2:1 XTO long:FSLR short ratio, beta ratio between the two is 4:1.

Monday, May 19, 2008

Global Financial Centers: Hong Kong or Shanghai to be the third?

Current Global Financial Centers

New York City: Currency, Equities, Banking, Leveraged Finance, Corporate Law, Energy
London: Currency, Equities, Banking, Metals, Interest Rates, Corporate Law, Shipping

Current Specialist Financial Centers

Bermuda: Reinsurance
Chicago: Futures and Commodities
Tokyo: Japanese Equities
Hong Kong: Chinese Equities
Singapore: Asian Derivatives & Commodities

A recent report by the Corporation of London highlights key features of global financial centers:

"Part of the continuing appeal of London to foreign companies is its cosmopolitan status. Frankfurt and Tokyo, for example, are primarily market places for domestic participants to which foreign players are granted access. London, and to a lesser extent, New York are characterised by foreigners trading with each other. In an increasingly international economy, London seems to have a solid future as a global financial centre."

The report goes on to discuss perceptions on the emergence of a third global financial center, which they claim will likely be Shanghai:

"We examined perceptions about whether the two global centres of London and New York were all that the world economy needs or whether there is scope for a new, third, global financial centre. Views on a third global financial centre are split. Most people, however, agree that if a third global financial centre develops it is most likely to be in China and probably in Shanghai. It is unlikely that Hong Kong, Singapore or Tokyo will ever become more than regional financial centres."

However, Hong Kong continues to be well ahead of Shanghai in public offerings of Mainland Chinese companies as evinced by the following graphic:

Graphic courtesy NYT

In fact, as China's torrent of public offerings and its enduring demand for commodities continues unabated, debate has become increasingly rancorous over which city in China can become the third global financial center.

Beijing, while the host of the 2008 Olympics, is mainly a government and tourism oriented city, not a major business powerhouse. The only two contenders are Shanghai and Hong Kong: Shanghai being the historical business center of China, and Hong Kong rising to pre-eminence in the 1950's as a result of Communist takeover of the rest of the mainland and the resulting influx of entrepreneurs/capital from other parts of China.

Even the NY Times is getting wind of the battle, highlighting the increasingly public duel between the two cities in its piece: Hong Kong and Shanghai Duel for Financial Capital

Why all the Hong Kong and Shanghai hubbub? China is mapping out a new national financial regulatory policy and each of the two cities wants to be the main beneficiary. Trillions are at stake.

The Corporation of London writes:

"Respondents to our surveys believe that the two most important competitive factors for the formation of international financial centers are:

1) Availability of skilled personnel
2) Nature of the regulatory environment"

Personally I have little first-hand experience with either city, please comment with your thoughts...

New Blog

I'm moving over to this new blog, Contango Corner. Unfortunately, there's no way to move the old posts other than copying and pasting, which resets the date stamp, but bear with me while I move everything