Mish's Global Economic Trend Analysis |
- G-20 Agrees to Postpone Agreement
- Measuring the Success of Bernanke's QE II "Virtuous Circle"
- Irish, Portuguese, Spanish Bond Whacked; France Joins Germany in Proposals to Make Bondholders Share the Pain; Trichet Supports "Extend and Pretend"
- Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?
G-20 Agrees to Postpone Agreement Posted: 11 Nov 2010 09:13 PM PST Anyone with an ounce of common sense knew the G-20 conference would be a failure. The only question was what form the failure would take. In the typical conference of this nature there is some early fireworks and then a coming together in a "Kumbayah" agreeing to agree moment. This year, differences are so huge, the G-20 could not even agree to agree. Instead they agreed to postpone agreement. Don't let the following headline fool you, look beneath the surface: G20 leaders near agreement, if not progress The G20 will agree to setting vague "indicative guidelines" for measuring global imbalances and hammer out the details next year, G20 sources said on Friday, effectively calling a timeout to let tempers cool after heated debate over currencies.Grinding Towards Accord? Please consider the following fluff statements in the Bloomberg article G-20 Grinds Towards Currency, Trade Accord After Talks South African Finance Minister Pravin Gordhan said leaders and their aides had made progress in coming to agreement on how to address global imbalances.Some work needs to be done? Really? That's like planning a trip to Mars, drawing a picture of a rocket ship with a crayon and proudly announcing "some work needs to be done". Moreover, Gillard's statement looks nonsensical in light of positions taken by China, Brazil, and Germany. "Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's Ministry of Commerce, told reporters in Seoul late yesterday. "Quantitative easing will have a very big impact on developing countries including China."Trade War Looms Yahoo!Finance has a much more believable headline. Please consider Specter of trade war looms as G-20 nations gather Leaders of major economies faced the urgent task at their summit Friday of resolving currency disputes that have raised fears of a global trade war.G-20 Countries Can't Even Agree on the Agenda In case you missed it, here is the key sentence from the above article: "So far, G-20 countries haven't agreed on an agenda, let alone solutions to the problems that divide them." Not only is there "some work" to be done as Australian Prime Minister Julia Gillard gingerly puts it, the G-20 committee cannot even agree to an agenda! Hells bells, they cannot even agree on whether or not the results should be "measurable" or "quantitative and qualitative." I believe that proves my allegation that Geithner's Four-Point Plan for the G-20 is Nothing but a Wish-List Thus, unless things change rapidly in the next few hours, the only recognizable achievement of from the G-20 summit, will be an agreement to postpone the agreement. How comforting. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Measuring the Success of Bernanke's QE II "Virtuous Circle" Posted: 11 Nov 2010 05:15 PM PST One easy way to measure success is against stated goals. With that in mind, let's take another quick look Bernanke's op-ed piece in the Washington Post describing the need for, and the benefits of another round of Quantitative Easing. Please consider What the Fed did and why: supporting the recovery and sustaining price stability by Ben Bernanke, October 15, 2010. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August."Virtuous Circle" Examined Certainly Cisco's warning yesterday does nothing to support the contention that lower corporate bond rates will spur investment. Please see Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?) However, lower corporate rates have created a bubble in junk bonds, hardly a measure of success. Bernanke wants to drive the long-end of the yield curve lower. This is something we can easily measure since his announcement. Yield Curve September-November 2010 The above chart hardly represents a stunning measure of success vs. the stated goals. However, if one wants to measure failure by the number of complaints from our trading partners then QEII was a resounding failure. The list of complaints about QEII is long and growing: South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy. To top it off the German Finance minister went so far as to call "clueless". There is some dispute as to the exact translation of the German quote, but none of the translations are very polite. The stock market, gold, silver, and commodities have certainly been on a tear, but the bottom line is that gold is reacting to the liquidity, but the consequences to the real economy are negative. Small Businesses Hurt by QE II Inquiring minds are digging into the November NFIB Small Business Trends Report for clues about the health of the economy and the plight of small businesses. Once again the number one problem facing small business owners is lack of sales. The second biggest concern is taxes. In spite of a huge surge in commodity prices, inflation barely registered as a concern. From the NFIB Report ... OPTIMISM INDEXVirtually none of that is supportive of the claim QE II was going to prove an economic benefit. Most Important Problem Please compare inflation to sales, taxes, competition from big business, and taxes. Inflation barely registers. Sales and Taxes are Two Biggest Problems Inflation Is A Non-Issue Historically inflation measured as a big concern in the mid-to-late 1970's. Inflation concerns spiked again in the summer of 2008 along with gas prices. In spite of a huge recent rally in commodities there is no fear of inflation now. From the report "Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years." The number of business owners raising prices is a net negative 5%. The profit squeeze continues as small businesses are not able to pass along rising input prices. The result is easy to spot: " far more owners report that earnings are deteriorating quarter on quarter than rising." Measures of Success If success is measured by increased speculation in commodities, junk bonds, and the herding of investors into gold and silver, then the Fed's policies this year have been a resounding success. Otherwise the Fed's policies, including QE II have been an abject failure. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Posted: 11 Nov 2010 11:39 AM PST A pair of articles on Bloomberg highlight the ongoing mess in Europe. Please consider Irish Debt Falls for 13th Day on Default Concern; Bunds Climb Irish government bonds tumbled for a 13th day on mounting concern that the nation will be forced to restructure its finances.Ganging Up on Bondholders Bloomberg reports France Joins Germany Ganging Up on Bondholders French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.Nonsense from Trichet Trichet's idea of a solution is "don't talk about it and the problem will go away". Well it won't. Nor will "extend and pretend". The US made a serious mistake in not making bondholders share the pain in US bank bailouts. As a result, US banks are still undercapitalized, crippled, and unwilling to lend. The reality is there is no painless solution no matter what Trichet, any central bankers, or any politicians think. A further reality is that Ireland made a huge mistake in agreeing to horrendous austerity measures instead of just plain defaulting. That would have forced the restructuring issue to the forefront, long ago. And as long as we are talking about realities, here is an obvious one that Trichet does not seem to understand: What can't be paid back, won't. By the way, these renewed concerns about Europe are on balance, US dollar supportive. Those Who Take Risks Should Pay For Them Three cheers to Merkel for stating this reality "We can't constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks." Here's one more reality for the road: Those who take the risks should pay for them. It's the only thing that makes any sense. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Posted: 11 Nov 2010 01:52 AM PST Cisco was hit in afterhours trading on Wednesday following a rare revenue warning. Futures are down but dip-buying strength has been so insane lately that one must wonder if there will be any follow through. Regardless of what the stock does, the huge warning may portend the end of the ramp in capital spending on technology by corporations. If so, what's left of the recovery (if anything) is all on the backs of consumers. While pondering that grim setup, please consider Cisco Forecasts Fall Short of Estimates; Shares Slide Cisco Systems Inc., the largest maker of computer networking equipment, forecast sales and profit for this quarter that fell short of analysts' estimates, sending the shares down as much as 15 percent in late trading.Spare Me The Whine I am not a fan of corporate taxes. However, I am less of a fan of allowing giant corporations send jobs and cash overseas, then beg for a repatriating holiday, lather-rinse-and-repeat. I talked about this exact setup on November 1, in Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions. Google pays a tax rate of 2.4% thanks to tax laws. That happens via strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich". Meanwhile, small businesses in the US get hit with 35% corporate tax rates, and may pay high state tax rates on top of that. The equitable thing to do is treat small businesses and giant corporations alike. If anything, and to help bring jobs and cash back to the US, taxes on profits held in the US ought to be lower than profits held overseas. That would have Cisco moving that cash back to the US in a hurry, and not to the disadvantage of small businesses either. Whatever the tax rates is, it ought to be fair and equitable. On this score, granting special breaks to companies holding cash overseas just increases the likelihood that future cash and hiring will be overseas, regardless of what nonsense Chambers spews about increasing headcount here. Flashback 10/30/07: Cisco to triple headcount in India to 10K by 2010 John Chambers said Monday that Cisco plans to scale-up its headcount in India to 10,000 by 2010, reports the Rediff news. Cisco currently employs about 3,000 there. In December, the company selected India as the site for its Cisco Globalization Center East. The campus in Bangalore, which will house the 3,000 employees, will be inaugurated today. In addition to increasing headcount, Chambers said that Cisco will shift 20 percent of its upper management staff, across all functions, to India. It will pour $1.1 billion into the area, too. The investment is slated to include $750 million on research and development, $150 million on Cisco capital, $100 million on venture capital, $100 million on expanding customer support and $50 million on campus in Bangalore.Now Cisco want to bring $30 billion back to the US, saving the company as much as $10.5 billion in taxes, while it will increase its US workforce (type and quality of employees is unspecified) by a few thousand workers IF a "favorable law is passed". Two years from now, rest assured those hires (if any) will be laid off in some corporate restructuring plan. Cash Cow - Who has the Cash? In case you are wondering where the cash is, company by company, please consider Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company With that out of the way let's return to the main theme. Cisco Order Slippage The Wall Street Journal reports Cisco Stock Falls as CEO Cites Order Slippage Cisco Systems Inc. reported solid quarterly results but then disappointed investors with a bearish forecast that called into question the strength of technology spending, citing weakening orders from U.S. cable-TV operators and government agencies.The Cable Surprise In a twist of unpublished fate, on Wednesday morning I received an Email from "Cable Guy" who wrote ... Hello MishOver 500,000 People Quit Cable Last Quarter Please consider Over 500,000 People Quit Cable Last Quarter Ryan Lawler at GigaOm added up the numbers and reports over 500,000 subscribers canceled cable in the last quarter. He looked at the subscription numbers reported from four of the five largest cable companies.I got that link from "Cable Guy" and I asked him about the expansion at Verizon, DirecTV, and AT&T. He responded "Dish and Direct are just undercutting (intro offers) to pull TV viewers. However, they will lose customers as soon as the intro is out and they raise prices. Verizon and AT&T's increased share is for internet. " "Cable Guy" also has a pizza delivery business and sells pizzas at night, attempting to make ends meet. He notes "I have not raised prices for 4 years! I can't. But my costs of doing business has gone up by 30%." NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses Cable Guy's (Pizza Guy's) experiences are exactly what the NFIB reports on small businesses for months on end. I talked about that in NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers INFLATIONSurprise, Surprise, Surprise I graciously send a tip of the hat to Gomer Pyle. Nonetheless, I feel obliged to point out that if anyone was surprised by the Cisco announcement it certainly was not Cisco insiders. Cisco Insiders Sell 6,620,750 Buy 0 Shares in Last Six Months Inquiring minds are taking a peak at Cisco Systems, Inc. Insider Transactions Insiders bailed hand over fist. In fact, they sold 60% of their holdings! But hey who could possibly have known? Then again, it appears with Cisco, it's always a good time to sell. CEO Chambers' Transactions
I went through all recent insider transactions and stripped out those of CEO John Chambers. To highlight one example, on May 17, Chambers exercised a right to buy and immediately sold (and then some), 1 million shares netting a mere $14,752,500. Bear in mind, that is a single transaction. To show just how deserving Chambers is, please consider the following chart. Cisco Monthly Chart click on chart for sharper image Chambers became CEO of Cisco in January 1995. If you bought and held then, congratulations you were a winner for 3+ years or so. Then for the next 11 years you watched Chambers makes hundreds of millions cashing out options while you made nothing. Share Buybacks Masked Dilution Please consider Share Repurchases + Hoarding Cash = Stock Price Underperformance by Joseph Levy on Seeking Alpha. Cisco Systems, Inc. (CSCO) - The company has not paid any cash dividends to shareholders and currently has no plans to do so in the future. [Mish Note: Cisco has announced unspecified dividend plans as mentioned above] In the five fiscal years ending July 2010 they repurchased 1.631 billion of its shares paying out $37.931 billion, or an average price of $23.26.What's the Point? In a February 2009 post, Brad Reese on NetworkWorld provides additional figures dating back to 2002 and asks Cisco stock repurchases ... what's the point? Shareholder Rape What's the point? It should be obvious. Cisco gets to pretend it is increasing shareholder value while corporate insiders get to dump massive numbers of shares over the years. It's as if the company exists for the primary reason of granting insiders options to sell shares which the company "graciously" repurchases while waving a flag of "increasing shareholder value". This is nothing more than shareholder rape. Chambers Not Worth a Dime Public companies are owned by shareholders. Officers control day-to-day operations but the goal of the corporation (and therefore the goal of the CEO), is to increase shareholder value. By that measure (increasing shareholder value), Chambers has been worthless for over 10 years. However, the fact that he has taken out 10's of millions of dollars in stock options proves he is a magician. Magicians are obviously worth every penny, because no one seems to care. Former Countrywide CEO Angelo Mozilo, was a tremendous magician, perhaps one of the best ever. Mozilo cashed out over $1 billion worth of stock options and shares while running Countrywide to virtual bankruptcy. In the wake of the collapse, Mozilo was accused of fraud. In a travesty of justice Countrywide CEO Mozilo settles with SEC for $67.5M Countrywide CEO Angelo Mozilo has agreed to a $67.5 million settlement to avoid trial on fraud and insider trading charges that alleged he profited from risky mortgages he signed off on before the collapse of the housing market.After taking out $1 billion, a mere $67.5 million fine was quite the Houdini escape act in and of itself. The kicker is "$25 million of Mozilo's restitution will come from an escrow fund the company set up to cover shareholder litigation and Mozilo has no obligation to pay the remaining amount, according to the settlement agreement." Excuse me for asking the obvious, but what the hell is the point of fining someone $42.5 million if the settlement requires no obligation to pay? Is this a great country (for corporate insiders) or what? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
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