GS catching up on our conversations on demographics

We’ve often discussed demographics as a critical long (very long) term indicator – and, by the way, the message ain’t good. Goldman is finally catching up on the conversation. The main idea is that by looking at demographics, both on a national and world level, we can anticipate major trends in spending, real estate, and price pressures. For years, the developed world has known that it is facing a declining demographic profile brought on declining fertility rates and just the sheer size of the baby boomer generation. The emerging markets, meanwhile (except for China), maintained a younger average age, higher fertility rates, etc. Additionally, the savings profile in the emerging markets has helped sustain the overspending of baby boomers – and that was at the time when baby boomers were in a position to save on their own if they so chose, which they didn’t.

And now, the baby boomers are entering a phase of declining savings, and are facing structural challenges that will need to be financed. Goldman starts to analyze them. Here are the main highlights:

• Demographics are a major determinant of long-term current account trends.
• Countries with a high proportion of ‘prime savers’ (those aged between 35 and 69) are more likely to run current account surpluses.
• We show how demographic shifts have influenced global current account trends in the past 30 years, and what they imply for the next 20 years and beyond.
• We have seen some rebalancing from the extremes in 2008 but the process is not yet complete.
• Demographic shifts point to a cleaner split between emerging markets (mostly in surplus) and developed markets (mostly in deficit) in the future than is evident in the current, more complicated picture.
• Emerging markets (EM) could continue to lend to developed markets (DM) on average.
• Demographic forces may help keep global real rates low.
• The development of EM capital markets may be important in offsetting demographic pressures for capital flows from the EM to the DM world.

For the full article, click here.

What’s surprising today?

Markets are down, European liquidity is strained (check out LIBOR-OIS), oil is under $74 (under $73 as I update this), Spanish banks are sick, and more, all of which we’ve been discussing the past few months, and none of which is surprising. I thought that instead of talking about the same stuff we already know, I’ll point out some surprising moves today (in no particular order):

• Treasuries are going higher in a safe-haven bid (or maybe deflation sign), but gold isn’t. Gold has gotten the safe haven bid along with treasuries for a while, but today, that relationship isn’t holding. Who’s liquidating and why?
• The euro is acting much stronger than I would expect. Up 1.7%? What’s the unwind? Are investors covering euro shorts here or initiating new USD shorts? Not sure, but it’s surprising given the bad news out of Europe.
• Yen’s continued strength is surprising. The carry trade continues to get unwound and the yen is finding a bid. Will it break below 84? I’m short the yen for fundamental reasons (including bad demographics, insane debts, and lower exports due to world slow-down), but maybe the unwind can provide more support for a long time coming.
• Goldman staying strong is surprising. XLF is weak, but somehow GS is bucking the trend.
• AAPL upgraded by JP Morgan. Are they dumb? Or am I so behind in my understanding of tech that when I see all of Apple’s products as luxury retail I’m being the dumb one?
• I don’t want to jump on the bandwagon, but I am pretty surprised that BP can’t get a handle on this leak. I’ve heard reports that there are thousands (yes, thousands) of suck and salvage ships waiting to be deployed but being held up for political reasons. I’m not deep enough in the space to know if that’s true, but if it is, it’s an embarrassment for BP but even more so for our leaders (on all sides). The entire situation (except the accident) is surprising.
• Anyone buying Tesla shares is surprising.
• 3x levered bond ETF’s? Now? That’s surprising, but maybe I shouldn’t be.

I’ll stop there for now.

While you were talking about GS, Portugal happened

First, read this article from the NY Times.

LONDON — Next target: Portugal.

Speculators have begun to zero in on another small member of Europe’s troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.

Guess what – when governments told you that Greece was contained, they were wrong.

Guess what else – the stability of the euro is temporary.

Guess what else – the Greek bailout won’t help the euro long term.

Guess one last time what else – even after we all pass the Greek and Portuguese mishmash, Spain is coming up with the same issues.

This is not the time to buy dips, but rather, it’s the time to wait for serious undervaluation in any position. The real money and returns are made in the waiting.

For some further readings, click here for an article from BusinessWeek.

Goldman’s plight might be the spark, but it ain’t all that

If you live in a cave and haven’t heard, the SEC came out in the middle of the day on Friday to charge Goldman with fraud over a securitization deal it helped underwrite for Paulson. Lots of nuance and many details to follow, but the gist seems to be that Paulson materially influenced the collateralized assets that he was trying to short and GS may have mislead ACA, the outside management firm hired to lend the deal some credibility. Now, the SEC isn’t charging Paulson (yet?) nor ACA (yet?), but rather is focusing on a single deal and a single senior VP at GS. In the worst case scenario for GS (best case for the SEC), GS misled and committed the fraud and will pay a fine. In the best case scenario for GS (worst case for the SEC), GS was marginally ignorant, and the SEC will once again look like it doesn’t understand the firms and securities it’s supposed to oversee.

Did the SEC really need to come out with this news in the middle of the day? By focusing on one transaction and not a pattern, will financial reform ever be effective? Is this politically driven by higher-ups?

Goldman will end up figuring this all out (and probably finding a way to profit from it), but this story shouldn’t be the focus going forward. The real focus is GLD and Paulson’s positions. Gold lost 2% on Friday. Why? Some are speculating that Paulson will need to raise cash in anticipation of redemptions, or other reasons. If that is the case, the market might be front-running Paulson by selling off any positions in which he is a large investors, GLD being one of them. Check out this news story. If that is indeed the case, then the following weeks could see a lot of volatility in Paulson’s names:

Top 10 Holdings as of 12/31/09

SPDR Gold Trust

GLD

NYSE

31,500,000

$3,380,265,000

17.08%

FINANCIAL

Bank of America Corporation

BAC

NYSE

151,034,229

$2,274,575,000

11.49%

FINANCIAL

AngloGold Ashanti Limited

AU

NYSE

42,849,864

$1,721,708,000

8.7%

BASIC MATERIALS

Citigroup Inc.

C

NYSE

506,700,000

$1,677,177,000

8.47%

FINANCIAL

Boston Scientific Corporation

BSX

NYSE

99,135,000

$892,215,000

4.51%

HEALTHCARE

Comcast Corporation

CMCSA

NASDAQGS

44,000,000

$741,840,000

3.75%

SERVICES

Sun Microsystems, Inc.

JAVA

NASDAQGS

74,000,000

$693,380,000

3.5%

TECHNOLOGY

Capital One Financial Corporation

COF

NYSE

17,000,000

$652,800,000

3.3%

FINANCIAL

Suntrust Banks Inc.

STI

NYSE

30,380,700

$616,424,000

3.11%

FINANCIAL

Kinross Gold Corporation

KGC

NYSE

31,500,000

$583,322,000

2.95%

BASIC MATERIALS

Source: DaveManuel.com

Lots of gold exposure and lots of financial exposure. One thing that’s particularly telling was how quickly and how far GS fell on the news, while the market stayed relatively firm. Both sides are telling, depending on whether you’re a bull or bear. The bears will point out that a minor piece of news sent GS down 13%, meaning there are no buyers out there. The bulls will point out that the market was relatively stable and held up well, showing resilience in the face of bad news. I’m biased in that the valuations of the market lead me to look for weaknesses. GS is just one example yesterday and it overshadowed GOOG, which was down 7.5% despite positive earnings.

It will take time to understand the full ramifications of the case, but at first go, it looks like the SEC might be focusing on the trees over the forest (disclosure issues are minor compared to the prop trading conflicts of interest – which this case doesn’t have!!). That being said, eventually the market will continue to use the news as an excuse to realign valuations, so it’s only a matter of time.

Position limits – have we learned nothing?

I can’t put my finger on it, but I know it’s all related. Writing about it definitely helps clarify, but then again, it makes me more flabergasted. I’m speak of the direction our policy – on multiple fronts - is headed.

From healthcare to contract law to trading, policy makers seem to believe that government and bureaucracies are the best allocators of resources, best sources of price discovery, and most efficient providers of services, while at the same time believing that increased regulation can encourage wage growth, competitiveness, and productivity. For fun, here’s an article, sent by a friend on the impact of some of these policies: http://victorhanson.com/articles/hanson071809.html.

Today, I won’t go into healthcare (although for those interested, there’s an interesting interview with Daniel Palestrant, CEO of Sermo, an online physician’s community, about the fact that the AMA is not accurately representing the doctors of this country: http://www.cnbc.com/id/15840232?video=1196233131&play=1. I spoke to Daniel and the interview doesn’t do their research justice, and his attack on Howard Dean only scratched the surface of the hypocracy of the current leadership.) Instead, I’ll mention that the current debates on The Hill about speculative limits in commodities scare me. In the 1970′s, with inflation running rampant, the Nixon administration, in its misdirected brilliance, decided to place price controls on everything from meat to lumber. Well, the small time players got hurt and the guys who were smarter went around the price controls and played in the futures markets. Now, we have a new administration thinking they need to control prices and better yet, control volatility. Well, someone should point out that speculators play on both sides; they provide better liquidity, more price discovery, and smaller spreads. Without speculators, hedgers wouldn’t be able to trade and everyone from small time farmers to large conglomerates like General Mills would face increased costs of business. In and of itself, more players do not lead to increased volatility – quite the contrary.

http://www.marketwatch.com/story//spotlight-on-goldman-as-commodities-hearings-begin-2009-07-28

So GS is on the hotseat again, this time for being too large a player in the hedging space. But that’s what they do. They provide an investment opportunity to pension plans and institutional players and then hedge. Should you place speculative limits? Fine, but let’s define speculation and hedging differently. Not all natural hedgers are pure hedgers. For example, many oil companies and airlines and producers take speculative risk beyond the positions their hedging. Same is true for “speculators”, some of whom are actually hedging different risks in their portfolios. The definitions, in my opinion, actually become so nuanced and convoluted as to be virtually irrelevant. I wish someone from GS would get up and say that and more importantly that someone in DC would listen.

CIT on the brink, GS gets upgrade?

What’s going on today? CIT, a major ABS lender is on the brink of bankrupcy and GS gets a price target of $186?

CIT started as a company specializing in factoring. Monetize your A/R for a chunk of change. Securitization made financing even cheaper. Biggest competitor was GE Capital. Difference? GE gets government assistance to prop it up. CIT is let down.

In the meantime, GS is on track to report stellar earnings. Well, they’re the only ones left standing. They got government backing when they needed it. More importantly, they got bailed through AIG, which few realize. They come out smelling like roses, but I’m not buying it. As one of our readers recently pointed out this is companies gaming the bureacracy, not companies adding to GDP or productivity or creativity or anything.

This just doesn’t add up for me.

Goldman Reverses U.S. Stock Advice, Says Shun Overseas Sales

Nov. 6 (Bloomberg) — Goldman Sachs Group Inc. strategists
advised U.S. stock investors to buy companies that generate most
of their sales in America and avoid those with high overseas
revenue, reversing a strategy they had advocated through July.

David Kostin, who leads Goldman’s New York-based portfolio
strategy team, recommended shares of 50 companies that get a
large percentage of sales in the U.S., including Union Pacific
Corp. and Kohl’s Corp., on expectations that foreign economies
will deteriorate at a faster pace. Money managers should reduce
holdings of companies with the most non-U.S. sales and sell short
those with high revenue from western Europe, according to a
research note dated yesterday.

http://www.bloomberg.com/apps/news?pid=20601213&sid=al..sz9RIqTA&refer=home

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