September 11, 2012
- The Apple stimulus? How the new iPhone is supposed to pull America out of its economic funk… and a couple of reasons it won’t
- Three charts that indicate (but do not predict) what the Fed will do on Thursday
- As ugly as the AIG bailout was, Chris Mayer sees a compelling investment case…
- “A floating abstraction”: Busting a myth about gold and currencies
- Anonymous (or someone) takes down Agora Financial, if only briefly… What’s propped up stocks for 30 years… the hungry AMT prepares to capture more taxpayers in its greedy maw… and more!
If the Fed can’t save us this week, then it’s up to the ghost of Steve Jobs.
While the Fed makes its Next Big Announcement on Thursday, tomorrow Apple takes the wraps off the iPhone 5 — an event that J.P. Morgan Chase’s chief U.S. economist estimates could add measurably to GDP.
The math is indisputable: Figure 8 million iPhone sales in the final quarter of the year, selling for $600 each (unsubsidized). Subtract $200 per unit for imported components. That’s $3.2 billion in the quarter, or $12.8 billion annualized, or 0.33% GDP growth.
The validity of GDP, in contrast, is highly disputable: “One fatal flaw,” Chris Mayer wrote in July of this all-too-familiar metric, “is that GDP includes government spending. So a government can boost its country’s GDP growth rate by spending a lot of money. It could spend billions digging holes and refilling them. As far as GDP goes, this would be counted as a positive.”
Ditto for when Americans take on consumer debt because they must have the latest and greatest phone.
At a moment like this, Bill Bonner’s line about Americans “buying stuff they don’t need
with money they don’t have” comes to mind…
Not that even they have to: If you pay $649 upfront for a Virgin Mobile iPhone, your cost over a two-year span (talk, text, data and the hardware) is $1,369. And no contract. Naturally, most people will opt for a subsidized $199 iPhone, willingly chain themselves to AT&T for the next two years… and fork over $2,359.
Or maybe they won’t, judging by the Fed’s latest consumer credit numbers.
Total nonmortgage credit shrank $3.28 billion in July, the first decline in 11 months. The “expert consensus” was looking for a $9.1 billion increase. Tellingly, even the growth in student loans is starting to cool.
Major U.S. stock indexes have recovered all the ground they lost yesterday, and then some. At last check, the S&P is back to 1,436.
The indexes sank late yesterday after those consumer credit numbers came out. (You’d think the Street would consider it a good thing that Americans aren’t getting deeper in hock… which is why you don’t work on the Street.)
Today, Fed-induced “hopium” is moving the market up and nothing can stop it — not even Moody’s threat to downgrade the United States’ credit rating if Congress and the White House can’t get the debt-to-GDP ratio under control. (Oy, there’s GDP again.)
We’re not sure what’s new about that situation, which perhaps indicates Moody’s is fishing for an excuse to play catch-up to S&P, which issued its downgrade 13 months ago.
As we said yesterday, and say often, we don’t presume to read the Fed’s mind. We don’t know whether the Fed will opt for “QE now” or “QE later” come Thursday. But we do know how to read some charts.
For whatever it’s worth, three charts are pointing toward “QE later.”
First is one of the Fed’s own metrics, now familiar to 5 readers: It’s the formula involving Treasury Inflation Protected Securities (TIPS), with which the Fed guesses at investor expectations of inflation five years into the future.
At this stage, the number remains well above the 2.2 threshold that’s triggered previous rounds of easy money.
Then there’s the price of oil…
It’s one thing to implement easy money when oil is below $40… or near $70… or even $75. But $97, which is where we stand this morning? Hmmm…
Then there’s Ben Bernanke’s favorite metric to measure whether his policies are working: stock prices…
Each previous round of easy money came after either a crash or a significant correction — not when the S&P is dancing near 4½-year highs.
Of course, none of these charts precludes the possibility of the Fed announcing easy money on Thursday anyway. Gulp…
“As unseemly as it sounds,” writes Chris Mayer, “my take-away from the AIG story is one of opportunity.”
As you might have seen in the news, the U.S. government plans to unload $18 billion of stock in the notorious insurer. That’s about a 50% cut in Uncle Sam’s stake.
True, “This is a reminder that the U.S. government is still in the business of owning major stakes in big companies. The corrective tonic of bankruptcy never got to do its full work.
“But we have to take the world as it is, not how we wish it would be.” Hence, the opportunity. Bruce Berkowitz, manager of the famous Fairholme mutual fund, still owns a big chunk of it.
“Berkowitz is not immortal,” Chris acknowledges. “He’s taken some licks and his reputation is not what it was. But I think he makes a good argument for AIG.”
“There are few occasions,” Berkowitz wrote in his second-quarter letter, “when systemically important franchises sell for half of book value and are profitable. This is one of those times.” Its peers trade for 80-100% of book, and the long-term average for the sector is 130%.
What can we take away from this? “The U.S. government still has large stakes in several financial companies,” Chris writes. “It is still a source of great distortions. However, as it sells these stakes, the overhang from its ownership will disappear. So too might the discounts these stocks trade for. AIG looks like a double,” he concludes, “as these things sort themselves out.”
But not now: “As the market absorbs $18 billion-plus in government sales, this will probably tamp down AIG’s share price.” For Chris’ favorite ideas that are buys, look here.
Precious metals are picking up momentum today. Gold is at $1,736, silver $33.72.
Chalk up most of the metals’ move to dollar weakness, however: The dollar index sits at 80 on the nose — a critical resistance level, as Greg Guenthner pointed out here on Friday.
The euro looks positively perky at $1.2827.
“Traders stuck in an old paradigm are frequently selling gold for the wrong reasons,” writes Louis James over at Casey Research. “The most egregious (or just plain silly) example is that gold often drops when the euro drops.
“This happens, not because there’s anything wrong with gold at such times, but because gold is priced in dollars. Instead of being thought of as a store of value in many investors’ minds, gold is viewed as a hedge against weakness in the dollar.
“But what are dollars priced in? Nothing, actually. Purchasing power is the underlying reality any ‘price’ for dollars should get at, but that’s hard to measure — and the government can’t be trusted to report the truth about this.
“So when the euro gets slammed, the dollar rises, and this apparent ‘strength’ of the dollar makes gold seem less attractive as a hedge, and gold sells off. You can see this inverse correlation between gold and the dollar — as well as a very tight correlation between gold and the euro — in this chart of recent price action.
But Mr. James says that chart obscures an essential fact: “The euro is not backed by gold, nor anything at all. It’s a floating abstraction, even more nebulous than the dollar.”
The supposed gold-euro correlation falls apart when viewed over a longer span of time — say, five years.
“Which of these three,” Mr. James asks rhetorically, “would you like to trust your savings to?”
“Well, that wasn’t pleasant,” blogged our book maven Jeffrey Tucker last night.
If you tried visiting one of our websites, you might have run into trouble: “Go Daddy’s entire universe of hosted sites, as well as domain registrations, blew up in an instant, taking down millions of websites. We don’t use it for hosting, but our domains are there.
“It was the first time for this company after 10 years of uninterrupted service. Some people say it was deliberate hacking in retaliation for Go Daddy’s support of SOPA and PIPA. Maybe. ‘Anonymous’ itself is sending mixed signals.”
Ah, yes… Anonymous. Eighteen months after we introduced you to the “hacker collective,” we’re still not sure what to make of that bunch…
“I agree fully with Dan Amoss’ analysis,” a reader writes after yesterday’s episode. “Those who think Quantitative Easing will somehow benefit stocks over the long term are smoking something stronger than a cigarette.
“Eventually, QE will be inflationary, and artificially keeping interest rates low to zero will have to end. Rates will rise to offset inflationary pressure, and when they do, it isn’t going to be necessarily good for equities or businesses in general. Sorry, Ben, we have been to this movie too many times. Keep up the good work, Dan.”
The 5: “The bull market in stocks since 1982 owes most of its gains to the decline in long-term interest rates,” Dan elaborates. “Falling interest rates lowered the discount rate for capital spending projects, making more and more of them appear profitable.
“You can view public companies as a perpetual series of capital projects — projects with initial cash outlays, future cash flows and discount rates attached to those cash flows. Some companies’ series of projects and related cash flows last a century; some last just a handful of years prior to bankruptcy.
“By manipulating long-term interest rates lower, which in turn increases the present value of capital projects, the Fed has artificially boosted the price of stocks. But Fed printing doesn’t permanently lower the real cost of capital for companies; the effect is only temporary.
“We saw this in the rise and crash of the housing bubble, and sadly, most investors have not learned the core lesson from that ugly, economy-distorting experience. Here is the core lesson: The Fed may be able to influence certain asset prices for a while, but you want to be far outside of the blast radius when the asset class inevitably blows up.”
“Thank you very much for the information about Taxmageddon,” a grateful reader writes.
“One aspect not mentioned — the AMT. Aren’t there changes coming that will result in a huge increase of the number of taxpayers that will have to pay the AMT?”
“I and most everyone I know,” adds another, “am caught in the alternative minimum tax. Many of the brackets, deductions and exemptions become meaningless once you’re in the AMT.”
The 5: Ah yes, the AMT: That brainchild of the ’60s intended to soak the rich. Only Congress never indexed it to inflation. So every year Congress has to pass an “AMT patch” so that large swaths of the middle class don’t get ensnared.
“Lower AMT exemptions will push many more taxpayers onto the AMT for tax years after 2011,” says a report from the nonpartisan Tax Policy Center. Right now, it hits only 4% of taxpayers with incomes of $100,000-200,000, for instance. If Congress doesn’t act, that becomes 80%.
“The AMT exemptions fall to $45,000 for couples and $33,750 for other taxpayers in 2012,” says the report. Unless Congress raises those amounts, over 31 million taxpayers will owe AMT totaling roughly $132 billion in 2012, an average of about $4,200 per affected taxpayer.
Bottom line: The AMT patch is held hostage to everything else that’s unresolved at the moment — income tax brackets, taxes on capital gains, dividends, estate taxes, the Social Security tax cut…
Cheers,
Dave Gonigam
The 5 Min. Forecast
This 11th anniversary of the Sept. 11 attacks falls on a Tuesday – the same day as in 2001.
For Options Hotline editor Steve Sarnoff, the coincidence triggers memories both poignant and absurd. Steve shares his reflections below…
On Sunday, Sept. 9, 2001, I told thousands of people to bet that American Airlines was going down.
You know what happened on the ensuing Tuesday. I really felt like a New Yorker that day. I used to work in the WTC, amid the madness of the gold and silver trading pits. And we had taken a family trip to NYC and had the kids atop the Twin Towers in April of that fateful year.
When trading resumed, I started receiving emails like, “Dear Mr. Sarnoff, I made $250,000 in one day on your American Airlines recommendation, but my account in the Cayman Islands has been frozen by the government. What should I do? Please advise. Many thanks…” You may picture me pushing my chair back from my desk and throwing my arms skyward in the international signal of surrender!
Then I saw Dan Rather on television reporting about how the terrorists were suspected of using the options market to profit from the Sept. 11 attacks. I imagined my subscribers getting grilled by the FBI and testifying, “Sarnoff told me to do it!” So I waited for my phone to ring.
It took several weeks, but ring it did… I agreed to an interrogation by an agent of the FBI and an attorney for the SEC. I felt no need for an attorney and actually had fun with it. The whole thing lasted an hour and I don’t think they asked me a single question that they didn’t already know the answer to. Here are some samples:
Interrogator: Do you fly airplanes?
Sarnoff: No. My idea of adventure is going outside with a wet head.
I: Do you belong to any organizations?
S: Temple Adat Shalom.
I: What kind of stocks do you make recommendations on?
S: All different kinds. You can go to the website and see every recommendation I’ve ever made.
I: We have.
I: Do you have any hobbies?
S: I’m a vegan, and I’m having trouble finding a nonleather belt.
I: I’m a vegan, too. Try pangea.com.
S: Thanks, but you have important work to do, so let’s get back to business.
I: This is part of the business. Why did you think American Airlines was going down?
S: Because it was already going down.
I: Did you talk to anyone at any airline?
S: No, I just sit at my desk, look at my 18th-century Japanese charts and rub my chin.
And so on… At the end of the interrogation, they thanked me and gave one of the greatest compliments I’ve ever received:
I: If the stock market ever doesn’t work out for you, your talents may be better served at Langley.
So that’s the end of it, right? Wrong.
I made a huge mistake. I wished them luck and said:
S: If I can ever be of any assistance, don’t hesitate to call.
A few months later, they did. They wanted to know if I had any information about Marriott Hotels and HSBC Bank. I couldn’t help them (because I don’t talk to anyone, I just look at my charts and rub my chin), but when I subsequently heard news reports of bombings in Bali and Turkey targeting Marriott and HSBC, I knew they were on the trail. So that’s the end of it, right? Wrong.
After Sept. 11, I wanted to send out something uplifting. So I reprinted the poem “Invictus” (see below), with the headline “America Invictus.”
It means “Unconquerable” and was written by a guy who overcame tremendous adversity. Inspiring, right? Well, I start getting emails from subscribers telling me that was the poem read by the Oklahoma City bomber before his execution!?! Oy, I can’t win.
So that’s the end of it, right? Wrong.
Many years later, the Sept. 11 Commission Report is released. Guess who’s in there. It seems I’m the proof that it wasn’t terrorists who used the options market to profit from the fall in American Airlines shares.
There are still, to this day, conspiracy theorists out there that disagree with the government report and wholeheartedly doubt that this supposed Sarnoff character even exists. Really!?!
I sure know how to pick ’em.
Your myth-busting footnote to history editor,
Steve
Invictus
Out of the night that covers me,
Black as the pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
In the fell clutch of circumstance
I have not winced nor cried aloud.
Under the bludgeonings of chance
My head is bloody, but unbowed.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds and shall find me unafraid.
It matters not how strait the gate,
How charged with punishments the scroll.
I am the master of my fate:
I am the captain of my soul.
— William Ernest Henley