Professor Elam

Bank of America Manages Its Balance Sheet

Wed March 24 2010

Lehman was involved in repurchase agreements that allowed it to move assets off its balance sheet for the end of the quarter reporting, and then bring them back. They would want to do this as a bank has to maintain a certain ratio of equity underlying those assets, in this case a scant 3%. 

Turns out Bank of America is still doing the same thing!  And for the same reason, they own more than they should. So B of A has borrowed more money to exceed its limit on assets so it can trade these 'securities' around and claim to make money. The counterparty referred to in the article is MUFJ is Mitsubishi Bank of Tokyo. Perhaps the other side of the world is out of sight, out of mind, eh?

Hot Pursuit

Tuesday March 21 2010

Another theme of this blog is the importance of Design. We suggested that Design be incorporated into an MBA program at two different schools. It would not be necessary to hire specific teachers for this idea, just start emphasizing what good design can mean in terms of bringing product to the market, see our post on high and low end marketing today. 

 Here is exactly what we mean, the police car re designed. Police cars are modified plain jane passenger cars. This Atlanta company has re thought what a police car should look like, and lots of depts are showing an interest. Read about it in this Wired article. 

There have long been companies that built fire engines, this is the first I know of to focus on police cars. 

Well Priced Adequacy

Tuesday March 23 2010

Here is a great article pointing out that companies targeting the high end, Apple, and the low end, Accer, are doing well. Those in the middle, not so well. 

Nokia has twenty times the market share of Apple in phones but makes the same money. Interestingly the market for luxury cars is still quite good, I am stunned at the number of high priced small volume cars that seem to be selling. GM meanwhile is lost in the middle. 

The Accer strategy, like SW Airlines, is not to make a cheap but a reasonably good product that has the advantage of a lower price, great idea. Kind of like A & M San Antonio. 

Retirement Copmputations

Tuesday March 23 2010

Many retirement plans have been sort of backloaded, in that one's retirement compensation is set using the last three or five years of compensation. So, figures out a way to sit in a better paying job the last few years and it really boosts the retirement pay. Now Florida is saying no to such schemes. The problem of course is that there is no way the money paid to the system those last three to five years finances the increase in payout. Social security also suffers from this problem, as the article says, the states that cannot print money are putting a stop to this. 

It's All About Trust

Tuesday March 23 2010

"We are at the point right now," Stevens said, "where no one trusts the American housing finance system."

One of the reasons America has built large capital markets is trust. Accountants express independent opinions on financial statements. This gives investors confidence that they are reading the truth. Failure to adhere to those standards destroys that fragile trust, the result is that investors shun the markets. 

And so here we are. Read the last sentence in this article, shown above,  about FNM FRE FHA. 
Those three entities package and re sell mortgages. Yet some of their packages rated AAA turned out to be junk, now investors do not want to buy the mortgages. If this happens please understand that means game over, real estate can only turn over if someone can re sell the mortgage, gain new cash, and lend on another mortgage. Absent this cycle, either the buyer pays cash or the seller carries the note, period. 

Otherwise housing prices collapse to what cash people have. This is why audit failures at FNM and Lehman have had such repercussions. 

US Pays more Interest than BRK

Monday March 22, 2010

It's official, the US is now paying higher interest rates than Berkshire or Lowe's. 

So much for the AAA rating, the ratings services are always behind the curve on this sort of thing. 

What's It Take to Get Kicked Out?

Monday March 22, 2010

CPAs were fined and forbidden to practice before the SEC for three years. Seems these two were cooking the books, no doubt to up the stock price. Hmm, do you suppose they owned some stock?

This is all pretty typical, some CPA that certainly knows better cooks the books, gets his hand slapped, and after a period of supposed contrition, can go right back to accounting for public companies. 

What is your reaction to this sort of thing?

Note to readers, I replaced the original linnk  which would not connect with one that does, this is more descriptive of what went on, click and read.

A Socionomic Look at Pop Culture

Sunday March 21 2010

Tom Wolf opened his best seller The Right Stuff with a search team in a swamp near an Air Force Base. Lots of pilots go down, why?  Lots of reasons but among them was the techie that was so intent on watching the instruments he did not look outside the canopy, and notice the ground looming ahead. Pilots able to overcome all the distractions and pull out against any condition had in Wolf's words, The Right Stuff. No one exemplified that better than Chuck Yeager, the first man to break the sound barrier. 

Socionomics is the social science of prediction. It is all about looking outside the canopy of conventional indicators to examine what people are really doing. The collective mood of those market participants will determine what happens. So, let's look.

USA Approval of Congress has never been lower with over 60% believing every member of Congress should be replaced. Yet Congress will no doubt pass the unpopular health care bill today

Mexican border towns have literally turned into a Mad Max scenario of anarchy, 4,000 murders in the last two years. Says one professor, "It's a crisis of the state that cannot protect its citizens and it not accountable to them. "  Those that can flee the country. 

Kaliningrad, Russia,  Thousands defied police amid the rain calling for Putin's resignation....widespread frustration with Russia's most serious economic down turn in more than a decade. 

Islamabad Pakistan  Tribal leaders pull together in an unusual display calling for the ouster of the Taliban from their country. 

Greece  Greek leaders in response to the German suggestion that they sell a few islands demand the return of Greek gold stolen by the Nazis in WWII, Prof Elam comment,  yeah this Greek default thing is really fixed

Okay admitedly someone somewhere is always upset yet all this flies in the face of the green shoots everywhere recovery that governments claim to be underway. Our govt literally owns the brokers and banks that have run up the stock market with TARP money to give an illusion of improvement. We suspect the real indicators are demonstrating in streets around the world. 

Gold and The Dollar

Sunday March 21 2010

Is there a compelling reason to buy gold now?  The cable TV channels have everyone from someone claiming to be  a former Treasury big wig to Gordon Liddy, famous Federal Inmate Bigwig, telling us to buy gold.   Such magazine cover story headlines usually occur at market tops, not bottoms. Let’s take a look at the slow moving monthly chart.

As gold is being touted as an alternative to money, we put it In green on this chart. It was no hedge against anything going into the 2001 low where it dropped from $400 to a final give up $270 or so. But as the Dollar topped at 120 on the right hand scale shown in red and black bars, Gold rallied as the Dollar fell .

Now the MACD at bottom has made a second higher low shown by the pink arrow at right. In the main chart to avoid too many lines, the pink arrows high light the previous support at 60 for the Dollar, now turned to resistance on the way up.  But clearly the big picture here is that gold and the Dollar have undergone a ten year reversal,  one out of the doghouse, gold, and now top dog, so to speak.

 

We put in the same four wave counts from the weekly chart, and they are pretty clear here I think. Note that gold has clearly fallen with the dollar, each has been in a sideways fourth wave for the last two months. And note at bottom that the MACD appears to be turning up.

Finally this is a an hourly chart for the last three months. NOTE, gold in green has made lower highs!  This is not the sign of a bull phase !   The Dollar made higher highs before correcting in a fourth wave during March, it leaped up in Friday trading as stocks and gold fell.   By the way we are showing UUP for the dollar and GLD for gold as stockcharts has intraday data for those ETFs but not for the actual commodity.  Cash gold dropped $20.40 this past Friday.

Bottom line, we think gold has further downside short term and the dollar more upside.

 

  

Of Course China will Lead

Sat March 20 2010

Check out this set of photographs of the new lab Applied Materials has constructed in China. 

Here is a deflationary comment about why Applied is there. 

Xi’an has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month."

Applied says that 'obviously' they have not given up on the US. As a market I suspect that is right, as a place to hire and research, looks like the future is clear to me. 

Xi'an,Xi'an, in central China, has 47 universities and other institutions of higher education. In China, engineers with a master's degree can be hired for $730 a month.in central China, has 47 universities and other institutions of higher education. In China, engineers with a master's degree can be hired for $730 a month.