Understanding The Fed Via Spinal Tap: Gimme Some Money

Stop wasting my time
You know what I want
You know what I need
Or maybe you don’t

Do I have to come right flat out and tell you everything?

Gimme some money, gimme some money

—Spinal Tap (performing as “The Thamesmen”)

Based upon the revelation that dozens of foreign-owned banks as well as American corporate titans like McDonald’s and General Electric were among the recipients of the Federal Reserve Bank’s $3.3 trillion worth of emergency loans, it’s no wonder that Fed Chairman Ben Bernanke would have preferred not to have been compelled to come right flat out and tell the American taxpayers everything about the way their money was loaned out in the months after the Lehman bust.

As markets everywhere seized, institutions worldwide were begging for someone to “gimme some money’ and the Fed appears to have stepped in as global banker to the world. You can bet this morning as millions of Americans once again ask “where was my bailout?”, that the rising anti-Fed sentiment recently on display in our nation’s capital will continue to intensify.

I’m nobody’s fool
I’m nobody’s clown
I’m treating you cool
I’m putting you down

But baby I don’t intend to leave empty handed
Gimme some money, gimme some money

Expect to hear more put-downs of Bernanke and company as congressional posturing reaches new heights of absurdity, yet despite the outpouring of feigned outrage, Congress is unlikely to do anything substantive to reign in the Fed’s powers since our so-called “leaders” know deep in their hearts that they can’t be trusted with keys to the central bank’s printing press.

Even so, the grandstanding will continue since the calculation has been made that there are more political points to be scored through demagoguery than through public education regarding the central bank’s proper role.

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Since it’s likely that the Fed will seek to strike a cautious tone in coming months, let’s hope that no new crises rear their heads anytime soon.

After reading the details of the emergency lending programs, it’s obvious that things were as bad as or worse than the most pessimistic of us believed back in late 2008-early 2009. I don’t know how you feel, but I’m thankful that we have a truly independent central bank.

Don’t get me wrong
Try getting me right
Your face is OK
But your purse is too tight

Much of the Fed’s recent actions have been designed to force money out of riskless investments by rendering the return on them nil. A concurrent goal has been to get consumers to open their tightly shut purses, and it appears that they are seeing success on both fronts. Money has been returning to the stock market and recent measures of consumer sentiment have been improving dramatically.

Despite the ridiculous media hype over Black Friday and Cyber Monday (Why don’t we just call it “Spending Week” and get it over with?), it appears that folks are starting to return to the shopping aisles, even though many of those are virtual ones embedded within online sites. American corporations are much leaner than they were two years ago, and as consumer spending rises, corporate earnings should get a nice boost.

I’m looking for pound notes, loose change, bad checks, anything
Gimme some money, gimme some money

Meanwhile, our friends across the Atlantic are feeling the pressure as bond vigilantes continue to train their fire on the weakest members of the European Monetary Union. American observers, mindful that German Finance Minister Wolfgang Schaeuble recently characterized the Fed’s QE2 policy as “clueless”, can be forgiven for chuckling as rumors circulate that the ECB is snapping up member country bonds by the fistful. As the specter of sovereign default lurches towards Spain, it increasingly appears that German taxpayers will be footing most of the bill for the profligacy of their continental cousins, and I suspect that more than a few American central bankers are now basking in that most German of emotions, schadenfreude.

Lest they become too cocky, let’s remind those bankers that America has been getting a free pass due to the dollar’s status as the world’s de facto reserve currency. Frightened money has been emigrating to our shores, and in the process that flow has been holding American borrowing costs down. There are lots of indications that the recovery is gathering steam, and if growth improves inflationary pressures are sure to mount. If the Fed is slow to react to those pressures how long will it be until the global erosion of confidence in the dollar prompts US Treasury officials to serenade our foreign underwriters with that now familiar refrain, “gimme some money”?

Go Nigel, Go.

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WikiLeaks: Zardari and the ‘backup plan’

File photo President Asif Ali Zardari speaking with Army Chief General Ashfaq Kayani during a meeting in Islamabad. PHOTO: AFP

WASHINGTON:?Fearing an assassination attempt, President Asif Ali Zardari has made extensive arrangements, revealed a new WikiLeaks cable release.

Zardari had spoken to former US ambassador Anne Patterson in 2009, saying that he had instructed his son Bilawal Bhutto Zardari to name his sister Faryal Talpur as President if he is assassinated, reported The Guardian.

In another cable quoted by the newspaper, US Vice President Joe Biden recounted to Britain’s then Prime Minister Gordon Brown a conversation with Zardari last year. Zardari told him that Kayani and the Inter-Services Intelligence agency “will take me out,” according to the cable.

Another memo cited in The New York Times quotes General Ashfaq Kayani, chief of the military, telling the US ambassador during a March 2009 meeting that he “might, however reluctantly,” pressure Zardari to resign.

Kayani was quoted as saying that he might support Asfandyar Wali Khan, leader of the Awami National League Party, as the new president — not Zardari’s arch-nemesis Nawaz Sharif.

The cables also laid bare US frustrations at what officials see as Pakistan’s refusal to cut off ties with extremists such as Lashkar-e-Taiba, which is blamed for carrying out the bloody 2008 siege of Mumbai.

“There is no chance that Pakistan will view enhanced assistance levels in any field as sufficient compensation for abandoning support for these groups, which it sees as an important part of its national security apparatus against India,” Ambassador Anne Patterson said in a cable quoted by the Times.

The cables also touch on allegations of extrajudicial killings by Pakistani forces, according to the Times.

A cable last year suggested there was credible evidence that the or paramilitary forces killed some detainees after an offensive against Taliban insurgents in the northwestern regions.

The embassy said that news of killings should not be leaked to the press, for fear of offending the Pakistani army. However, this year the United States said it would cut off support for some Pakistani units following the release of a video that appeared to show extrajudicial killings.

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Heartbreak Ahead For JDA Software Bulls

Nov. 30 2010 - 3:09 pm | 444 views | 0 recommendations |

It's not easy going up against Oracle

JDA Software Group (JDAS) is one of November’s Most Dan-ger-ous Stocks. To earn this dubious designation, the company?has mis-lead-ing earn-ings (account-ing prof-its are pos-i-tive and ris-ing while true, eco-nomic prof-its are neg-a-tive and falling) and high val-u-a-tion (very high expec-ta-tions embed-ded in the cur-rent valuation).

Below are the specific red flags my research reveals:

1. Mis-lead-ing earn-ings: JDAS reported a $14.6mm increase in GAAP earn-ings while our model shows eco-nomic earn-ings declined by $12.9mm (a dif-fer-ence of $27.5mm or 155% of reported net income).
2. Very dan-ger-ous val-u-a-tion: stock price of $27 implies JDAS must grow its NOPAT at over 20% com-pounded annu-ally for 10 years. A 10-year growth appre-ci-a-tion period with a 20%+ com-pound-ing growth rate sets expectations for future cash flow performance quite high.
3. JDAS competes with industry giants Oracle (ORCL)?and SAP (SAP), whose businesses are growing stronger while JDAS appears to be weakening. I doubt a comeback is in the cards for JDAS.
4. Free Cash Flow was -$203mm or -15% of the company’s enterprise value last year.
5. Asset write-offs of $21mm or 3% of net assets – this means that management has written off at least $0.03 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds.
6. Off-balance sheet debt of $40mm or 6% of net assets.
7. Outstanding stock option liability of $13mm or 1% of current market value.

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Over-all, the risk/reward of invest-ing in JDAS’s stock looks “very dan-ger-ous” to me. There is lots of down-side risk given the mis-lead-ing earn-ings and red flags while there is lit-tle upside reward given the already-rich expec-ta-tions embed-ded in the stock?price.

Our report on JDAS has detailed appendices for you to see how we perform all calculations. The primary cause of the dif-fer-ence between eco-nomic ver-sus account-ing earn-ings is that JDAS’s NOPAT rose much slower than its invested cap-i-tal. See Appen-dix 4 to learn how JDAS’s NOPAT rose more slowly than Net Income. See Appen-dix 5 for details on JDAS’s invested cap-i-tal and how off-balance sheet debt and asset write-offs are added back to provide a more accurate reflection of the capital invested in the business. Appen-dix 7 (in the return on invested cap-i-tal sec-tion) shows how a slight rise in NOPAT mar-gin paired with a big decrease in invested cap-i-tal turns result in a decrease in return on invested capital (from 6.9% to 4.7%) and eco-nomic earnings.

In a business where investors make money by buying stocks with low expectations relative to their future potential, JDAS fits the pro-file of a great stock to short or?sell.

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WikiLeaks: Pakistan dismisses nuclear fears in leaked cables

"It is time they part with their historical biases against Pakistan," Basit said, referring to Britain and the United States. PHOTO: AFP

ISLAMABAD:?Foreign Office Spokesman Abdul Basit on Wednesday dismissed American and British fears that Pakistan’s nuclear weapons programme could fall into hands of terrorists as laid bare in leaked American diplomatic cables.

Memos obtained by whistleblower site WikiLeaks and reported by the Guardian and The New York Times suggested that the United States was more concerned than it let on publicly about Pakistan’s nuclear arsenal.

“Their fears are misplaced and doubtless fall in the realm of condescension,” foreign office spokesman Abdul Basit told AFP.

“There has not been a single incident involving our fissile material, which clearly reflects how strong our controls and mechanisms are,” he said.

“It is time they part with their historical biases against Pakistan,” Basit said, referring to Britain and the United States.

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WikiLeaks: Gilani open to drone strikes on 'right people'

Documents reveal that Gilani said the government would protest the attacks in National Assembly, then ignore them. PHOTO: EPA

More cables released by WikiLeaks reveal that Prime Minister Yousaf Raza Gilani allowed drone strikes in the tribal areas of Pakistan, saying they would protest the attacks in the National Assembly and then ignore them.

When Interior Minister Rehman Malik advised the US to hold off “alleged Predator attacks until after the Bajaur operation”, Gilani brushed off the remarks saying:

“I don’t care if they do it as long as they get the right people. We’ll protest in the National Assembly and then ignore it.”

The statements were reportedly made during meetings with unnamed US officials in August 2008. The cables also show bureaucrats supporting drones viewing them as a viable solution to loosening Taliban’s grip over the Tribal belt.

US forces inside Pakistan

In another shocking revelation, embassy cables reported that small teams of US special forces have been secretly embedded with Pakistani military forces in the tribal belt helping to coordinate drone attacks and to hunt down Taliban and al Qaeda fighters.

One memo quoted by the Times said that 12 US Special Operations soldiers had deployed with Pakistani troops near the Afghan border.

A report in the Guardian quoted the job of the special forces to be “to provide ‘intelligence, surveillance and reconnaissance’ support – ISR in military jargon – ‘general operational advice’ and to help set up a live satellite feed from American drones flying overhead, presumably CIA-operated Predator and Reaper aircraft. The memo said that the forces had been deployed since 2008 but were limited to a training role. It said that the permission for the active combat deployment “almost certainly” came with the personal consent of the army chief General Ashfaq Kayani.

US presence in the country has been a sensitive issue in Pakistan. Earlier, reports of US military presence in areas around Quetta had drawn?condemnations from opposition parties and the public. The Pakistani government and the United States embassy however had denied reports about the presence of US forces in Quetta.

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Euro Weakens As Bailout Fever Grips Europa From Iberia To Italia

Bailouts batter the euro

EUR/USD: As fear of sovereign debt contagion continues to grip the global markets, the euro is once again under pressure today. With bailouts already in place for Greece and Ireland, investors are now turning their attention toward Portugal and the rest of the peripheral countries. Even though government leaders in Lisbon are denying the need for outside aid, market participants are already planning for that eventuality as the same denials were heard from Greece and Ireland prior to their rescues. As borrowing costs not just in the smaller economic contributors, but also Spain, Italy and even France move higher, the stress on the system is almost palpable. For the moment anyway though, the euro is holding steady just above the psychologically important 1.3000 level after European Central Bank President Jean-Claude Trichet managed to temporarily soothe investors by indicating that bond holders may not face the stiff penalties suggested by German officials. As yields on sovereign debt and the cost of credit default swaps continue to rise though, it is hard to say for how long simple reassurances will be enough.

GBP/USD:? After dropping to a low around 1.5500 just before the opening of the U.S. markets, sterling has managed recover back to the level it started the week.

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There were no major economic releases out of the U.K. today, but with the focus moving away from Ireland’s debt in which Britain’s banks have a very large stake and toward Portugal, Italy and Spain, the pound has received a bit of a reprieve. While concerns of debt contagion are still flaring which could cause some risk aversion and thus a cap on the upward potential for the pound, at least there has been a bit of breathing room created. As we move toward the later part of the US trading day, it would not be a surprise to see the price action in this pair settle down as traders start looking forward to some very important economic announcements out of the UK tomorrow. Those releases include the Nationwide and Halifax House Price Indexes as well as Manufacturing PMI data. Any of these reports has the ability to move markets, but it is still altogether likely that the focus will remain squarely on Europe and that is where market participants will be looking to take their clues on market direction.

USD/JPY: After posting virtually uninterrupted gains against the yen since November 23rd, the dollar corrected substantially over the last 24 hours, falling 100 pips back to 83.40 before finding some temporary support. Since dropping to 83.40 though, it has been a very volatile trade between these two currencies as mixed US economic data pulled and pushed the price of this pair up and down. The S&P Case-Shiller House Price Index was dollar negative, posting only half the expected growth rate with a reading of 0.6%. This report was offset on the dollar positive side though, with both the Chicago PMI and the Conference Board’s Consumer Confidence readings besting expectations. For now, this pair is struggling to find direction and has started to move sideways. Interestingly, if support does hold at the 83.40 level, it would stay very consistent with the three previous 100 or so pip pull backs seen in this pair since the uptrend began November 1st.

AUD/USD:? The downtrend in this pair is still intact with lower highs and lower lows being made, but the momentum seen last week has slowed considerably. The events in Europe have certainly played a role in the recent Aussie weakness; however, the somewhat moderate impact on commodity prices as well as the slight exposure Australia has to European debt have kept the slide in check. What will likely have a much larger impact on the AUD/USD trade are two reports due out later today (U.S.)/tomorrow morning (in Australia). Traders of this pair will certainly want to pay close attention to the quarter-over-quarter Australian GDP figures, but probably just as important will be the Chinese Manufacturing PMI data. If earlier tightening policies implemented in China have slowed their manufacturing rate, the AUD may see some weakness as China is one of the main recipients of Australian exports.

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PIIGS Go On A Diet To Save Room To Eat

The Emerald Isle is the latest bailout recipient to get budgetary religion

It is very cold in London. “This is the coldest it’s been in 25 years,” said a colleague. People are bundled up in scarves and hats. There are patches of ice on the sidewalk. Heck, it could be Baltimore or New York. London is usually milder. It snows occasionally, here, but rarely do you get such a severe cold snap.

Down on the Iberian peninsula, the prime minister of Spain gave speculators a little advice. Don’t sell short Spanish debt, he said. As far as we know, government officials give investment advice that is at least as unreliable as the advice you get from anyone else. But that doesn’t mean Jose Zapatero will be right.

The difference between Europe and the U.S. is that the Europeans have begun to get their fiscal houses in order, sort of. The latest news is that the Irish have committed to lop another 20% off of state spending. The Greeks, Portuguese and Spanish are all headed in the same direction. They’re acting like responsible citizens. In order to convince investors that they’re good for the money, they’ve got to cut spending. If investors lose confidence, they won’t be able to borrow money at low interest rates.

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Let’s get this straight. They’re cutting expenses so they can borrow money? Yep. If they don’t cut expenses, they won’t be able to borrow at decent rates, right? And then what? Then they’ll have to cut expenses even more. So why not just balance their budgets now, so they don’t have to borrow at all?

In America, federal deficits are projected from here to eternity. There is no plan to balance the budget ever again. At least the Europeans are trying to get their budget deficits down to 3% of GDP. Ireland pledged to do so as part of its rescue deal, and to cut 25,00 jobs from the payroll, 10% of its entire workforce.

That was enough to bring out the protestors, even in this bitter cold.

Cutting Expenses to Borrow More Money by Bill Bonner originally appeared in the Daily Reckoning.

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