Are Central Bankers Throwing Life Preservers or Anchors?

Central banking 101 seems to view "financial rescue" as a virtuous deed. We saw this tenet put into action in the subprime crisis and it is about to emerge again in the coming European sovereign debt bailout. The problems are kicked down the road rather than addressed. CB101 states that it is better for all taxpayers to suffer later, so that creditors and investors don't feel immediate pain. It was put into effect to rescue Fannie and Freddie, and, it appears, the Germans and IMF are about to do an encore with troubled Euro zone borrowers.

Belt tightening is the solution. But, as proven by the recent strikes in Greece, politicians, and their constituants, don't have the stomach for actual solutions. Anchors disguised as life preservers are more palatable. Loan guarantees and public ownership do not solve problems, they only transfer and redistribute the problem. More debt doesn't cure a debt induced ailment. But it does if you are a central banker.

If failure isn't an option and if entitlement cutting isn't viable, what is left in the CB101 playbook. First, defer as long as possible. Put as much lipstick on the debt pig as possible. When she is no longer pretty to anyone, inflate the debt repayment to a manageable level. The bond market is starting to get it "a little" as yields have been moving upward. The Chinese get it "a lot" as they are diversifing their holdings and attempting to minimize the impact of upcoming reflation. There is no other option and smart creditors see the future clearly. The process to protect buying power has begun and will continue.

What might be done to counteract CB101? Equities should do better over time as businessmen tend to be nimble. But, my bet is that markets will offer a much lower entry point prior to reflation in ernest. Midwestern farm ground, even though prices have increased, should hold capital together and produce a modest return. Municipal bonds are going to get very risky as they carry not only interest rate risk, but, increasingly, default risk. Cities, states, and special improvement districts have serious problems, on balance sheet and off. A short term government bond ladder has merit only if one can stomach book losses and hold until maturity. Byron Wein, strategist at Blackstone, opined yesterday that fed funds would go from zero to two percent by yearend 2010. If his view is correct, I'd be patient till later this year and then build that ladder. But, consider quality corporate bonds for additional yield, and if you believe my statement that businessmen are nimble, and safety. Finally, gold, even though it doesn't produce any income and supply never goes away, should gain luster in face of bond inflation.

The next time you see Jean Claude Trichot or Ben Bernancke toss a life preserver, don't get giddy and think good times are here again, get wary and think capital preservation.

$30B For Small Business Lending A Boon To Banks

Jobs, Jobs, Jobs is the new mantra. One conventional way to create jobs is t0 foster a healthier small business climate as it is accepted that job growth begins with mom and pop companies. Since the administration has decided that small business job creation will not be encouraged by lower taxes, and instead will let the Bush tax cuts expire, the next best initiative would be to rev up small business lending.

This new program is unlikely to produce the intended results. Whether the funding is doled out directly from government agencies or through bank SBA [ Small Business Administration ] lending, it will help banks more than small business. Why? Because the banks have the collateral already pledged and assigned and stand in a first lien position. Any new lending would be junior to the banker and that would only make the bank loans more secure, thereby helping bank balance sheets and loss reserves. If a bank would agree to additional lending, it would likely be with a government SBA guarantee. That would likely lessen their exposure. Again, that helps the lender. Finally, should another lender appear, government or financial, that wanted the entire business then they would need to payoff the bank's first lien.

We are not going to get a big bang for our bucks here if the goal is job creation. The Administration will get publicity for their claim that they are stoking the engine of growth, small business, but, in reality, they are again helping lenders and taxpayers will be footing the bill through either additional government borrowing or guarantees. The unintended consequence here is not totally bad as the financial firms do need to reduce poorer quality assets if they are going to regain a firm footing for the future.

This $30 Billion will improve bank credit quality, lessen the need for loan loss reserve growth, and future FDIC assessments as the FDIC may end up as the biggest winner since fewer community banks may fail. But don't look for job growth as businesses don't add jobs until they see demand and banks don't release collateral until they see cash or a guarantee.

Shameless Plug Time--Buy Men Who Are Making America

Technology is passing me by. Not only has Amazon's Kindle been very successful, the wife is buying one to avoid touching the lousy newsprint newspapers now use, but Apple has announced the debut of their new ITablet. Holding a book in one's hand will soon be reserved for us dinosauers. I hope assimilation takes awhile as I still have inventory in the basement!

Sales have slowed, so it's time to plug Men Who Are Making America again. The economy may be bad, but that isn't the reason my email inbox, bkabourek@gmail.com, isn't full of orders. The reason is that the books are downstairs and I rarely think about promoting the book. Apple has now reminded me.

So, if you like real books, order Men Who Are Making America by B.C. Forbes. It's a good read and can be put on a bookshelf. Try that with a Kindle. As always, you can send a personal check after you've received the book. Just send an email and tell me the number you want and the mailing address.

Read about the Business Titans that the book covers, and cost, on the leftmost column of this blog as I don't feel like typing it again.

End of shamless plug. Almost. Let's start a crusade: send a check to Haitian relief and

an order to the crustycreditanalyst for Men Who Are Making America. Now I'm done.

Mama Fortuna's Crystal Ball Is Getting Clearer

We all know two givens: the economy is lousy and, at some point, it will get better. Prognosticators, from CNBC talking heads to Mama Fortuna, have all been seeing blurry images of the future. Is the crystal ball half full or half empty? Since March, fueled by government largesse, investors thought they were seeing a return to better times. But they weren't peering deep enough into the ball. They saw what they wanted to see, became believers, and stopped gazing.

There are a few other givens that you don't need a crystal ball to devine. A massive, debt induced recession will not be cured in two years; stocks will not go straight back down; interest rates are going to continue to rise; and no one knows how to effectively time markets, certainly not the CNBC folks and not even Mama Fortuna.

If rates are going up and we're going to be battling the effects of excess debt for years, it's not wise to own leveraged companies even if they were the stars of 2009. A declining market doesn't make short selling a riskless endeavor. Market bouncebacks can be violent to the upside and make borrowing stock a lousy investment. M&A will be big this year and being on the wrong side of a large buyout premium can be painful. Long positions should be in quality, dividend paying, low debt companies. I'd write covered calls against those securities.

As uncle Warren says:" the first rule of investing is don't lose the investment." My crystal ball is telling me to be very cautious the next few years, take advantage of rising interest rates, and don't fully commit to equities unless we see a huge downdraft, and then continue to be wary.

Mama Fortuna's crystal ball is now clearly telling me to quit typing as there is an angry lady on the veranda who has been waiting to play gin.

Finally Something I Can Agree With Obama On- I like The Dog In The Picture

The title and the picture have nothing to do with this posting. I just liked the dog since it looks like our Gertie. Gertie, by the way, is proving to be smarter than our President as she has no dilusions about who she is, or what she wants. She doesn't confuse herself with Hugo Chavez' dog while Barrack does seem to be channeling Hugo in his quest to turn the USA into a South American economy. Enough about dogs. As far as Obama, he may not be the cause of the market sell off, but his rhetoric and posturing sure are not helping the situation.

A brief review of my last several posts makes me look pretty prescient. While I said start getting ready for another slide, I didn't really expect it to occur immediately. Any brilliance I possessed is luck. I was confident in the direction and very lucky on the timing. Happily I took my own advise and haven't been beaten up.

The big question is how long and how deep will the sell off be? Wish I knew. I listened to an hour presentation yesterday by Bob Doll, Chief Investment Officer of Blackrock, who was coherent and logical, as he always is, and made a good case for 2010 being a positive year for equities. I can't fault his logic, but my stomach thinks otherwise. He gets paid better than me, has better data at his disposal, and has spent more time thinking through various scenarios, but if he is right, it will be one helluva roller coaster ride getting there. He named all the headwinds that we will face, but thought that massive stimulus and inventory rebuilding will lead stocks higher. It could happen, but I don't think it will.

In a nutshell, you don't need inventory if people don't buy. Sales tax receipts say the consumer isn't buying. Business won't replenish inventory, again, unless the consumer starts to step up and feel better. That won't happen without a much more robust job market. That appears years away. All of the bailouts,stimulus and jobs spending has spooked the public and ultimately it will spook the bond market. Visions of the future are presented daily from Greece, Iceland, Ireland, Portugal, and Spain. These evolving problems will translate into higher US interest rates and compete with equities. Higher bond yields mean that equities will need higher earnings yields, the inverse of the P/E, and earnings will not grow enough to compensate for declining P/Es.

I have no confidence in Obama being a positive in our recovery. He's ideologically opposed to being business friendly. Therefore, I don't think the consumer, nor business, is going to start gaining confidence and our economy will remain weak. China and Brazil will not grow at levels to ignite our economy. The only potential bright spot for 2010 is the same one i identified last year and that is M&A as solvent companies need to grow somehow and when organic growth isn't available, you do acquisitions. Lazard remains the purest play in M&A and is huge in restructurings which we will see lots of as the world sputters.

Mr. President, for popularity purposes, you need to be seen more with dogs. I like dogs, especially little white dogs.

What Will Monday Bring?

After three days of misery, caused by a combination of potential Chinese fiscal restraint and Obama political expediency regarding bank and Fed bashing, investors are recooperating and wondering what Monday will bring. I believe we will see more selling as everyone knew stock prices were too high, but were playing a game of musical chairs as they wanted to continue to make money while momentum was pushing equities upward. Everyone thought they could exit before the downdraft.

Just as Massachusetts changed the political landscape, the past three days have reinforced what investors knew, but didn't want to accept. Stock valuations had been too high and everything was not improving. We aren't in for a quick bounce back. Gains should be protected and speculations reduced. Selling will continue, causing a significant sell off until prices reflect a more reasonable multiple of earnings growth.

As I laid out a few days ago, my positions have been lightened with only about 25 percent in stocks. The remaining 25 percent still hurts. I feel lousy. Recently opened short positions in DFS and COF have paid handsomely. A large long position in K-12 has been reduced to only 5000 shares as I wanted to capture the gain and I felt the company would tread water till next September when school districts and parents decide on internet education decisions. Luckily LRN hasn't gone down in the downdraft and I've been able to sell at good gains. My remaining positions are largely concentrated in emerging markets and international companies. I haven't decided what to do with those.

While the past three days have been painful, the percentage decrease has been minimal. I'll look for more vulnerable companies over the weekend and sell them on Monday. Some up days will present themselves, but the tide has changed and investors are starting to treasure capital which means selling. My suggestion is to lessen long positions and add negative positions. As Charles Barkley says " I could be wrong, but I doubt it."

Sales Tax Receipts Reveal A False Recovery

The concensus view is that the Recession is over and the economy will grow at a 2-3% pace in 2010. All prognosticators hedge their bets by reminding the public that the recovery may not feel good and employment may not grow robustly, but GDP will be increasing so we are on the way to prosperity again.

I haven't joined that camp. You cannot solve a debt crisis by simply swapping the obligor of the debt. Instead of over-extended consumers and real estate developers, we now have the US government, ultimately the taxpayer, on the hook. The big question is how long before we must face the music.

The stock market's current game of musical chairs is about to end. Everyone, including myself, thinks they will be able to find an available chair as the music stops. That's not reality. A significant test is coming soon. While 4th quarter earning reports are likely to look good when compared to a vile 4th quarter in 2008, that will only mask the state of the economy. The Liscio Report has noted recently that preliminary sales tax receipts for the current period are down dramatically. They have not been bouncing back as the job losses shrink, the GDP rises, and the stock market flourishes. Real money that the states receive, from consumers, is shrinking. Hence, the market has gotten ahead of itself. This will be an eye opener for all playing the musical chairs game.

My ultimate goal, as a retiree, has been to transition from a heavy dose of equities to a more conventional fixed income strategy. That hasn't been easy as yields have been so low on bonds and the government's spending ultimately will cause current holdings to lose value as rates rise. And rise they will. While I've admitted to playing the musical chairs game, I've started to lessen positions as of last Friday. When it becomes well known that sales tax revenues, about the only calculation available that isn't an estimate, are not improving, the stock market "should" pull back. Timing is difficult, if not impossible, so if the music plays for much longer I will rue my decision. But, I'll be well rested and still have my principal and rates have been rising. Even if you are old life is a journey.

So Cold I Might As Well Write

The nipples on my man-boobs are hard, but you can't tell as I'm wearing three layers of clothes and have a fire in the fireplace. As a "snowbird", I'm in Florida for six months and it shouldn't be this cold. I know I won't receive any consolation back home in Nebraska, so I might as well gripe to readers. The weather sucks so lets talk investments.

I'm having trouble concentrating on my typing as I'm powerfully drawn to the set of real tatas to my left. Unfortunately, of late, you won't see any of those either in Florida as they too are clothed in three or four layers. What does this have to do with investing money? Not a thing.

Everyone that is in the stock market has ben enjoying themselves. retirees and those that are sitting out the rally are miserable and going broke. Those straddling the fence need to be nimble as the game of musical chairs is in full swing. How long will the music continue to play? Warren Buffett once said that you can go broke waiting to be right and he's not only the guru, he's correct. This party could go on for quite awhile with the Fed's cheap money and support. But the rest of the world's central banks aren't as accomodative.

The wheels are starting to fall off in Europe and a German led bailout doesn't seem imminent, so the weak sisters will have to pay higher interest rates to roll over their debt. That thought process will be catchy and investors will look askance at other countries that are spiralling out of control besides Greece, Ireland, Iceland, Italy, and Dubai. U.S. rates are going up and they will continue to march upward much to Obama's chagrin and the retirees glee. At some point in the process the stock market starts to look not as attractive as we still have all of our economic problems and, finally, an alternative investment. Remain nimble with equity investments as problems lie ahead. I just don't know when the tipping point will occur. One thing I do know is that it is easier to concentrate with the nipple image at the top of the page and out of sight!

My portolio is about 50% invested in equities at present. I wish it was fully invested, but I like sleeping at night and as an oldster, I don't have the ability to rebound over a long period of years. I continue to write covered calls and gather dividends during the march of the music. Those types of stocks will decrease less and at a slower pace than the market in general, but even conservative stocks will go down when the market swoons.

Watch bond yields and lighten up as they rise. Ten year yields have been on a march and should continue to increase, but concentrate on the shorter maturities. As they move, exit or lessen your equity positions unless you have long time horizons and no need for cash.

Cabela's Remains Inexpensive

I opened a position in Cabela's about two weeks ago at $12.00. At the time it was selling for about 3.5Xebitda and less than book value. I didn't catch the bottom, but CAB has moved up about $2.50 quickly.

Besides being a retailer, CAB has a large credit card bank, World's Foremost Bank, that not only confuses the numbers, but scares investors. Cabela's runs a conservative book of credit and has experienced better deliquencies and charge-offs than it's industry peers. It also securitizes asset backed bonds and, like other banks, faces the prospect of putting those assets back on their balance sheet and having capital available for support. There was a dilution worry.

The company addressed the new accounting issue that causes the securitizations to come back on the balance sheet by increasing their line of credit and making allowances to contribute enough capital to its subsidiary, WFB, so there won't be any dilution. At 4Xebitda[ttm] CAB sells at a discount to competitor DKS and most other retailers. Earnings have been decent even during the past year so, with the credit card concerns waning, the stock could march upward to 6Xcashflow which would be $20. It hasn't been at that price in the past several years, but I'm hoping.

Since I was becoming light headed and buying retailers, I also bought PSMT. It is the reincarnation of Price Club. When Price Club sold out to Costco, the owners opened up a Central American operation that now has 25 warehouse clubs. I've convinced myself that this is an international diversification investment, not another retailer.

I'm attempting to stay nimble as I still do not see a lot of sustainable signs of prosperity.

Waiting For The Next Shoe To Drop

Everyone feels better after the market's spectacular rally in 2009. Almost everyone is leery of the sustainability of such a rapid rebound. The investment world continues to play financial musical chairs even though they collectively know better. The Fed's zero interest rate policy has taken safer investments off the table and the Government's spending will ensure future inflation that will harm bond holdings. So, equities continue to march upward. But, for how much longer?

At some point, even the brave and foolish will become fearful. Since everyone is playing the same game, investing in stocks since there isn't an alternative, the rush out the door, when the time comes, will be crowded and painful. What might cause that panic? Here are some guesses.

So far Australia has raised rates twice lately and a Scandinavian country also increased short term rates and has signaled that they were starting to take stimulus funds out of the system. Other countries are starting to talk the talk. A rate increase trend could signal that the U.S. won't be too far behind.

Iran's latest announcement, that they will build another ten enrichment facilities, was not the news that Israel and Obama peacemakers had hoped for. The deadline nears. When the Israelis attack, Iran will retaliate somehow. The markets won't like it and prices will tumble during the panic stage.

Soft demand has held oil prices down. Middle East turmoil would accelerate price spiking and have an immediate, negative impact on the economy. Even without war, the declining dollar and flight to commodities may drive oil higher with the same result.

A failed Treasury auction where buyers demand significantly higher yields than anticipated, would signal to the world that the world views the U.S. as a weakened credit and not worthy of cheap interest rates.

Dubai's debacle is being softened by the UAE's potential willingness to help. Greece, Ireland, Spain, Italy and a few other Euro zone countries are also having significant problems with their sovereign debt chewing up a high percentage of GDP. Will the Germans come to their aid? A major country default or restructuring would not be pretty.

Jobs, jobs,jobs are on everyones mind. We've all heard that job growth is a lagging indicator and that we will start to see job creation in 2010 as the recession has officially ended. A stubborn jobs number; one that continues to stay negative well into 2010, could ruin any rebound in confidence and affect the market.

After passage of a healthcare bill, immediate work on Cap & Trade could cause further concern as the impact on the economy from both of those gigantic, negative pieces of legislation will tax both business and the consumer.

Finally, maybe we'll wake up and realize that the "new normal' doesn't justify current stock prices. My bet is that won't happen, but one of the other scenarios, or one I didn't anticipate, I've listed will cause stocks to find a lower level. Cash will feel comfortable, even if it earns little, if the market tumbles during the first half of 2010.