Amazon Cuts Off Hawaii Affiliates

Two down and more to go!

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Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them in order to avoid collecting sales tax in the state.

Following in the footsteps of North Carolina and Rhode Island, lawmakers in Hawaii have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

Hawaii’s governor has until July 15 to potentially veto the legislation, but it has an effective date of July 1.

http://online.wsj.com/article/SB124638801268074915.html#mod=testMod

Quarter End Sector Performers

How I know real estate hasn’t hit bottom…

Well, I don’t KNOW, but I have a pretty good feeling.

Sign 1: I met with a large real estate investor the other day and he told me about a building on the market. I’ll tell you the details in a second, but let’s start backwards. The price was $0 – seriously. The seller would literally give me the building for free, just to take it off their hands. Sound tempting? The building is a class A building in a midsize city. Until recently, it had a AAA tenant renting the entire building (except for some small spaces on the first floor). The tenant decided to leave and subsequently bought their own building. So now this building for sale is sitting empty: A few hundred thousand feet of space that now need to be restructured for multiple small tenants (if you’re lucky enough to get them at all), facing lower rents (rents in the area are down by about 30%), paying taxes and maintenance, etc. The building would require roughly 5 years (in a reasonable scenario) to be cashflow positive. The IRR on the project, even if the building was purchased for $0 doesn’t meet the necessary hurdle rates for most of the investors who can sustain the 5-10 years of negative cashflows.

Sign 2: Look at the leases being signed in major metropolitan areas and you’ll see an interesting sign. In NYC, leases a few years ago for class A buildings was hovering in the $80-$90/sq ft area. 5-10 year leases that are up for renewal are facing serious headwinds. Tenants want to sign at the $50-$60/sq ft range, but landlords don’t want to lock that in for 10 years, or even 5, knowing full well that locking in one tenant at that rate will lead to others and to a depreciation on the market value of the property by roughly 30% (in line with the rents). So landlords are pushing for shorter leases on less space (since tenants are dropping out relatively consistently).

That being said, are there opportunities? Sure, but from a macro-perspective, as long as real estate doesn’t show signs of stabilizing (meaning rent yield going higher on both residential and commercial) there will probably not be stabilization on the economic front either.

Amazon Ends Business With Rhode Island Affiliates

This is the last thing that states need to be dealing with to shore up their depleting reserves.  Its protectionism on a different scale.

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Amazon.com Inc. ended its business relationships with marketing affiliates in Rhode Island so the online retailer could avoid collecting sales tax in the state.

Rhode Island’s state legislature recently passed a bill that would force companies to collect sales taxes if they have online-marketing affiliates—businesses that get a sales commission by featuring links to outside e-commerce sites on their own Web sites—in the state.

http://online.wsj.com/article/SB124630810805070105.html#mod=testMod

Connect the Dots 6-28-09 Part I

Connect the dots for this week will be in two parts. Part I, will be our usual weekly monitors and a some thoughts from me on how we’re positioning some portfolios and our considerations. Part II will be posted by Thatsabet and will provide a top down view of the market, including some major charts to consider and actionable ideas.

Connect the dots 6-28-09 Part I:

We’ll start with the monitor. Green shoots. Brown shoots. Who knows? The answer…no one. We are at a point where the markets can go either way and I wouldn’t be surprised. Why? They can go down easily as the economic recovery is not realized. Fear can grip this market in a heartbeat. On the other hand, we can have a liquidity generated pop that will force cash into equities, and squeeze any shorts. Which means, if you are going to play, now more than ever, choosing your spots is critical. We’ll see it more when we look at the relative returns, but even looking at the YTD numbers, the interesting numbers are not the ones in green, they’re the ones that are in the red or flat.

The SPX and DOW Industrials are flat for the year. Utilities and transports, negative. The next most interesting mover is UNG, down 36%! In the meantime, we see Treasuries going down significantly, with yields rising 56% (10-year) while emerging markets EEM up 30%. Does this continue? Hmmmm. I’m now looking at the laggards for opportunities: utilities, water, Japan, and natural gas for starters. I’m staying away from currency bets, although there seem to be significant opportunities there. The reason I’m staying away is because I doubt I’ll be able to take a position and hold it with the recent volatility we’ve seen and the large players involved. Every government is now trying to bolster exports with a weaker currency and they are all losing. To me, the beneficiary will end up being Japan…they’ve already gone through the domestic cleansing and equity fallout while still maintaining the manufacturing capacity.

The relative view tells us an interesting story. YTD the SPX is flat, but that is not the whole picture. By looking at the sectors, we can see that there have been significant movers underlying the flat facade. The story of the week (on a relative basis) was definitely energy. Yet, I can’t help but feel that the fact that oil has held up and gone up in the face of a severe recession will signal positive news for the associated stocks. Natural gas is trickier. Speaking to funamental guys, I’ve heard both stories, and don’t hear a concensus at these levels. Some are pointing to reserves and long contracts as the investment opportunity, not UNG. I think there is something to it, since UNG is forced to buy the current contracts.

In my mind, the story of the week is the changing face of Iran and now the coup in Honduras. Iran is The Soviet Union before the fall. Very soon there will be a choice forced on the leadership: close up or open up. They will not be able to stay in between any longer. If they choose to close up, they will go the way of North Korea, Cuba, China circa mid-1400′s, and an array of others from history. It will be incredibly painful for their citizens, but the only way for the ruling class to maintain power. On the other hand, if they open up, the ruling party will go down and probably go down quickly. They will not be able to manufacture a quasi opening such as China and will lose control. In the chaos, anything can happen, probably, net good. Obama need not do anything right now. It’s a lose-lose situation for him, but I worry that he will become complacent.

Separately, there was a coup in Honduras, and contrary to the limited coverage on CNN (http://www.cnn.com/2009/WORLD/americas/06/28/honduras.president.arrested/index.html), I think it does not bode well for the US relations in the region, albeit in a twisted way. Follow me here: the coup was led by militants against a president that was anti-American. There are rumors that the US was aware and tacitly approved of the coup. Hopefully, this will have no lasting impact on the way the US is viewed in the region, but I tend to think that it will have a net negative impact on US-Latin American relations.

Lastly, I can’t NOT mention Michael Jackson, since everyone else is…on second thought…that’s precisely the reason to leave it off there.

Stay tuned for Part II from Thatsabet.

Where’s the Gold?

I am far from a gold bug. Gold always seems to me to be a relative play in the sphere of other currencies and subject to the same greed, fear, and everything in between that every other asset class is subject to. That being said, there is no doubt that interest in the shiny stuff has been increasing for about 10 years now. More recently, I read ongoing reports of more and more money managers and financial advisors piling in, mostly through paper gold (e.g. GLD or futures). In light of that, the following article is incredibly interesting and scary. The main contention is that there is some weird stuff going on with the actual, physical gold that is difficult to explain and might have vast implications for the markets, both physical and paper versions.

http://www.huffingtonpost.com/nathan-lewis/wheres-the-gold_b_216896.html

Culligan lobbies hard as water softeners become a drought issue

The company behind the renowned “Hey Culligan Man!” advertising campaign of the 1950s has launched a political and public relations offensive to kill a bill targeting its signature product.

That proposal would allow regulators to ban conventional water softeners that discharge salt into municipal sewer lines. The mineral makes it tough for sanitation districts to clean and reuse their sewage, which is an increasingly crucial source of irrigation water in drought-plagued California.

http://www.latimes.com/business/la-fi-culligan26-2009jun26,0,73558.story

California set to issue IOUs as fiscal crisis weighs

LOS ANGELES/NEW YORK (Reuters) – California’s controller said on Wednesday that he would have to issue IOUs in a week if lawmakers can’t quickly solve a $24 billion budget deficit, and the state’s treasurer plans to tap a reserve fund to meet debt service costs.

The measures came as a budget crisis deepened in the most populous U.S. state and the gridlocked legislature failed to pass a proposed $11 billion in cuts.

“Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state’s bills beginning on July 2.

“The state’s $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall,” Chiang said. “Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.”

http://news.yahoo.com/s/nm/20090625/ts_nm/us_california_debt

More thoughts on TBT

For starters, I received a lot of feedback on my post 2 weeks ago where I mentioned feeling uncomfotable with TBT. We didn’t get out much higher than here, but I can tell you that I still feel uncomfortable with TBT as the vehicle of choice. There are 3 questions that we ask ourselves at each juncture:

1. What is the investment thesis?
2. Is this thesis the best allocation of our cash at this time?
3. Is this the right vehicle to implement our thesis?

The thesis behind TBT (for us, at least) is that at some point foreign governments will require higher interest rates, that at some point investors in general will want to sell some of their Treasury holdings, that at some point government spending will outstrip the US borrowing capacity, and other variations of the same theme. That thesis may or may not be right at these levels, but at some point in the future there is a good chance (again, in our minds) that this will occur. Second, is this thesis worth an allocation? Yes. Simply put, there is a higher return associated with this thesis than keeping our money in cash. Lastly, is TBT the right vehicle? Not for us. Multiple things are working against TBT as our vehicle of choice. For starters, the levered nature and daily resets work against us and eat our returns. Next, TBT has been the vehicle of choice for hedge funds and retail investors alike, and we don’t like being in the same trade as so many others. Lastly, there is more return available in understanding why Treasuries will rally or sell-off and implementing THAT thesis rather than just taking a short Treasuries (long TBT) position.

THAT thesis that I’m mentioning is more convoluted, and has been the ongoing debate on these pages of inflation vs. deflation, currency death sprials, etc. Until we get a handle on THAT thesis, we’re staying on the sidelines. For us, that’s the right trade; maybe because it is also the hard trade.

Russia considers banks bail-out

This should help keep a bid in OIL!

Russia is considering a banking bail-out that will go further than measures taken by the US, as fears grow that bad loans could paralyse the economy.

Igor Shuvalov, deputy prime minister, will consider taking stakes in troubled banks when a group of experts on the crisis meets on Friday to discuss ways to recapitalise the country’s banking system, according to a draft proposals seen by the Financial Times.

The proposal, one of several under consideration, would see the government issue OFZ treasury bills, a type of bond, to boost the balance sheets of the biggest banks. In return the state would get preferred shares. Unlike the US bank bail-out, the Russian scheme would see the government take board seats and get veto rights at the banks it bails out.

http://www.ft.com/cms/s/0/67bf237c-61a7-11de-9e03-00144feabdc0.html

FT:Inflation – the real threat to sustained recovery

By Alan Greenspan

Published: June 25 2009 15:49 | Last updated: June 25 2009 15:49

REAL Home Ownership.

Below is data (chart form) showing The Federal Reserve US Households Owners Equity in Real Estate from  1949 until current. Is this a trend reverting statistic? or is the game over?

International Responses to the Crisis Timeline (Sept 2008 – Oct 2008)

http://www.ny.frb.org/research/global_economy/IRCTimelinePublic.pdf?bcsi_scan_447638299E31E942=0&bcsi_scan_filename=IRCTimelinePublic.pdf

Gerstner Says Short-Term Gains Should Be Taxed at 80%

June 25 (Bloomberg) — Louis Gerstner, the former International Business Machines Corp. chief executive officer, said that short-term investment gains should be taxed at 80 percent as a way to counter the culture of greed on Wall Street.

“If you buy something — a stock or a bond — in the morning, and you sell in the afternoon, the tax probably ought to be 80 percent,” said Gerstner, also a former chairman of Carlyle Group, the world’s second-largest private equity firm.

“If you hold it for six months, maybe it ought to be 60 percent,” Gerstner told Bloomberg Television.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFcXAGUYZSVw

Dow Theory Sell Signal in the offing?

If the two Dow averages weaken further, they could dip below
their respective May lows. Those lows are 8212 for the Industrials and 2999 for the Transports. If they both did that it would
constitute a Dow Theory sell signal.