Professor Elam

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  • Professor Elam

    The Grinch Arrives Early

    Friday Sept 16, 2011

     

    The Grinch Arrives Early

     

    The devious, anti-holiday spirit of the character has led to the name "Grinch" becoming a term used to describe a person opposed to Christmas time celebrations  or to someone with a coarse, greedy attitude. 

    Dr. Seuss creation, The Grinch

    Seasonally the stock market usually makes a low in September or October. That sets the stage for a rally into the next year, usually beginning in November. This year, the Grinch, who throws a wrench in things, arrived early, August 8-9 to be specific. And European antics have further taken investor eyes off the ball. Let’s take a look.

    The era of financial asset domination fittingly ended with the dot.coms in March of 2000. The cheerleading for the NASD at 5,000 was accompanied by a new wave of companies, raising lots of money in public offerings, but making no money in their operations. And so, that provided a fitting end to the financial bull market from 1982-2000. While investors were gaga over stocks, the real buys of course were in commodities. By March, 2000 crude oil has just pulled itself up from $12 to $30.

    Since then stocks have trended sideways while commodities of all types have had spectacular run ups, oil hit $145 in 2008, and co fell back to $35. But, remember that price?  Yes, the correction for oil in 2008 stopped at the top for oil from year 2000,which was the mid $30s.  

    Different markets move at different rates of speed. Imagine a crowded highway of eighteen wheelers,  motorbikes, economy cars, and luxury sport models all speeding along. They speed up and slow down at different rates  rom one another.

    The same thing has happened since 2000 and will continue to happen.

    Crude oil lost 25% of its value from late July to August 8. The Energy Service Sector swooned along with it. Now, Patterson PTEN, and crude oil, are slowly making a series of higher lows. Crude oil actually flashed a buy signal on our weekly charts, the first since its high in May. The Grinch low for Fall, 2011 is in. We are likely to experience a continued slow rally in stocks and oil and energy service for another couple of months. This, as we said in the opening, has surprised investors  expecting, a seasonal low later this fall. But after all, if one has been watching the news ‘across the pond,’ it was easy to be distracted.

    The Club Med countries, Portugal, Spain, Greece, threw financial parties giving  the French and German banks some real headaches. The reason is that those banks lent money to the countries which were clearly violating their European Union fiscal accords. Portugal, Spain, Greece (and Italy)  spent and promised more than they took in, period, never mind the fancy financial jargon. Now they are unable to pay pensioners, the bills, and their creditors, the banks.

    The result has been a literal repeat of 2008 for European banks. BNP Paribas (France)  and Deutsche Bank  (Germany) both had their stock prices cut in half from July to September.  Investors feared a Greek bankruptcy would spread domino like across the Mediterranean leaving the banks holding worthless bonds (Remember the Trojan Horse, beware Greeks bearing gifts?)

    With European banks melting like ice cream cones on July 4, German Prime Minister Merkel declared no such Greek bankruptcy would happen on her watch!  And so for the time being, the bleeding has stopped. The EU Central Bank  and other Central Banks are loaning dollars to  the French and Germans. And so, the latest once every two months European ‘fix’ for Club Med is in, for now.

    Not surprisingly, the exact recent low for the US Dollar occurred May 1, just as oil, stocks and banks began tanking. The buck advanced above its daily moving averages. I suspect the Dollar will consolidate those gains for the next couple of months while oil, stocks, and even European Banks breath a sigh of relief. The Grinch has been chased away for the time being.

    Investors cheered on luxury goods maker Ralph Lauren which hit a new high this week.

    And so, confidence returns to the fashion runway, and the oil field, for the next couple of months, or weeks. 

     

  • Professor Elam

    More College Grads File for Bankruptcy

    Thursday Sept 15, 2011

    Professor Sam Rock and I  authored a paper on the Higher Education Bubble for the last SWTLC. Click here and read the latest numbers, filings among recent college grads are way up. But bad news, bankruptcy will not discharge a student loan. 

    This is why it is imperative to prepare yourself for the job search ahead. Do not think that simply graduating with a piece of paper will be a ticket to success. The competition in a  no job growth economy is fierce.

    Yesterday in one class, only one student could name the current German Prime Minister. This is unacceptable and a good example of what I am talking about. There is  a financial crisis in Europe and the PM of German is at the center of it. The reason is that Germany is the strongest economy in mainland Europe. Graduates will need to be conversant in the world events of a global economy. 

    The purpose of this blog is to widen your view of world affairs. I hope that you will take advantage of all the hyper links not to mention the links in the side bar. 

  • Professor Elam

    Another Rogue Trader

    Thursday Sept15, 2011

    UBS  has reported a loss of some $2 Billion due to unauthorized ( and I might add unsuccessful) trades by someone in their London Office. So much for the security of Swiss banks!  Please read this article as it details the recent international banking problems, as well as the concern of the Swiss legislature for its two largest banks.

    You will also learn there was a large loss at Societe General a few years back. And before that a Rogue Trader literally destroyed Barings Bank in England. I suggested to Jim Hackard that we show that movie this spring in our Second Saurday Series. 

    There are important lessons here for both accounting and particularly non accounting majors. As a manager you want strong Internal Controls. Internal controls are a system that insures things are properly functioning. It makes incidents like this difficult to 'pull off.'  Aside from the money which was lost, this of courses give another poor public perception of UBS which was already reeling from its sub prime difficulties. And I suspect a few people will lose their jobs. 

    Indeed it is hard to imagine how a Swiss Bank which certainly has an internal audit department.What one wonders were they doing while this was happening?  Certainly a loss of that magnitude did not happen in a trade or two. Discussing all the internal controls necessary to prevent something like this is beyond a blog post. Section 404 b of SARBOX requires an examination of internal control by the external auditor. 

  • Professor Elam

    New Orleans Receivables Exchange TRE

    Tuesday Sept 13, 2011

    In Acct 3301 Monday I discussed the process of extending credit to customers. I mentioned that one has to do an aging of receivables to stay on top of this. Once an account is over 90 days delinquent it is hard to collect.

    In today's WSJ (have you subscribed yet?) the NYSE Euronext Exchange is going to promote 

    The Receivables Exchange to its customers. Please click and watch the explanatory video, now why didn't I think of this?

    The video explains that many firms have 60% of their working capital tied up in receivables. It may take 60 days to collect them. In the meantime they may be shut out of bank borrowing. The solution provided by TRE is an e bay style world wide auction. You list your receivables for sale and define the terms of the sale, ie you want X % of the outstanding amount and this is a description of the customer base. Then it goes on the auction block. Hedge funds, insurance companies, all over the world can buy the paper. 

    And so as Dodd Frank restricts banks the internet creates alternate financing. See the WSJ editorial today on Bank of America slashing 30,000 jobs world wide. The requirement to restrict ATM fees cost BAC $475 million. At a time when we need to create jobs, it appears Congress does not understand that earning money creates, not destroys jobs. 

    Update

    A good post from Chelsea, notice the unintended consequence of prohiibting banks from charging for valuable servicees. The economy is a two sided equation, take away one side and there is a subtraction on the other, thanks for the insight.

  • Professor Elam

    McGraw Hill Splits, the Company not the Stock

    Monday Sept 12, 2011

    An alert TAMU SA student brought this article on McGraw Hill to my attention. Please read it as we will discuss this in class.

    Why did the shareholders want it to split to four companies?

    Why did MH say two was the right number?

    How does splitting the company result in increasing shareholder value? Or does it really?

    What effect has S & P had on the company, MH owns S & P.

  • Professor Elam

    My E Mail was Hacked

    Sunday September 11. 2011

    My att.net e mail has been hacked and stolen. A Hacker has gotten control of it. The Hacker sent a ridiculous e mail to many of my friends and co workers. The e mail claimed I was broke and locked out of my hotel room in Spain, of all places. I am of course teaching college in San Antonio. 

    I called Yahoo and got a message that they have massive call volume. Apparently I am not alone in experience this problem with Yahoo  e mail.The message refers one to help page, of course, which does nothing to fix the problem. 

    ATT outsourced their e mail to Yahoo and cannot do anything about it. 

    Yahoo turned down a MSFT offer to purchase the company not long ago, it now trades at a much lower price. Yahoo fired its CEO this past week. So lots of problems at Yahoo. 

    I have used dennis.elam@att.net for this blog as a link so that will also have to be re-set. 

    So for now please use this e mail to reach me

     

    dennislelam@gmail.com

     

     

  • Professor Elam

    113 Weeks of Unemployment

    Thursday Sept 8, 2011

    Debra Saunders notes that advocacy groups like American 99ers Union want their unemployment benefits extended from 99 weeks (two years) to 113 weeks. As one of you noted in a comment on the blog, don't these guys plan to go back to work?  Remember that unemployment benefits come from taxes on employers so higher unemployment taxes have to cut into actual job creation, again just one more reason not to hire someone. As she say, since you can only get the unemployment check ( and stay home to visit with Oprah and Judge Judy) by staying unemployed, it's hard to see the benefit. 

    My personal experience with such folks is that after they pass the three month mark, no job seems good enough. It just gets easier to rationalize being unemployed. 

    As Previously mentioned, it seems the better idea is to have the check dwindle each week to remind the person that being unemployed is not their new job. Remember the endless benefit extensions for Katrina evacuees, same thing. 

  • Professor Elam

    US Hits Builders with Pay Probe

    Thursday Sept 8 2011

     

    The lead article in today's WSJ, http://www.wsjcom, reports that the Labor Dept  is investigating pay practices at major home builders. Labor is demanding names, addresses, ss numbers, pay rates and hours over the last two years. Supposedly this is an investigation of pay practices. Labor is investigating Lennar, Pulte, DR Horton, and KB Home. 

    In theory one Fed Agency does not share information with other agencies like the IRS. Do you believe that?

    Yesterday in 3301 Class I mentioned the onerous burden of record keeping, here is such an example with the Labor Dept on a fishing expedition. What is really going on?

     

    I suspect yes it is a wage and hour probe, a search for underage workers, but gee, do you suppose Labor will share these reports with the IRS to see if those names and social security numbers reported the money on their income tax returns?  Individuals in the house building field are notoriously itinerant moving from job to job, and often do not file or report. 

    Another issue is whether someone is a bonified employeed, who gets a W 2, or a contractor who gets a 

    Form 1099. I will explain more on this in class, it is an important subject. The IRS only recognizes one class as independent contractors, realtors. 

    To be an ind contractor one has to determine one's own hours, the nature of the work, and use one's own tools. Often particularly small builders will claim that actual employees are ind contractors. The difference, with an ind contractor the employer does not have to match SS or pay FUTA or SUTA. 

    At  a time when unemployment is going up, this is just one more reason to not hire any one for any reason, the fear of Federal Investigation. 

  • Professor Elam

    The Dollar Also Rises

    wed Sept 7, 2011

    While we can debate the best calls here or what is truly useful, the clear winner in the worst call so far was my suggestion last year to purchase UUP, a bet on the US Dollar. The same bet on TLT paid off very well this year and we hope that you banked those profits this past month. 

    Indeed I am still the battered but unrepentant owner of 200 shares of UUP at 22.51. But the last few days amid all the red flashing prices on computer screens, one green beacon stood out, the world stampeded into the US Dollar. The Swiss finally intervened to bring down their Franc against the Euro which also helped boost the Dollar. Greek debt is not long for this world sporting a  one year yield of 70%.While the Dollar trend is still down, it is surely significant that this currency alone rallied world wide. 

    Charles Smith has a new book out on the failure of conventional economics.  I will be reading and studying and reporting to you. But he makes an excellent case that the modern state (government) depends on people earning high taxable incomes that it can tax to expand its role. This is precisely what we are seeing in the current administration which wants to raise taxes everywhere, and the Bush administration that announced the high rate would 'only' be 35%. 

    Smith suggests that a lower grade lifestyle, more independence from the state, will eventually starve the government of the tax revenue it needs to survive. 

    The continued march to higher unemployment will certainly do that. The whole point of my theme of The New Civil War is in fact to ask, how long will the producers, ie the right to work states, support the failed business models of the union shop states and their permanent high unemployment?  Indeed it looks like the next election will give us an opportunity to find out. 

    We have been tracking these developments for you. Recall that

    Emerging Markets topped November 2010

    The US Markets topped internally February 2011

    More to the point, silver and oil both topped about May 1, 2011

    Since then oil has stair stepped down in convincing fashion. Recall that the Arab Spring, no matter who wins, can only result in increased oil production. 

    Please re visit our post this weekend on how 

    Energy Service

    Banking

    Summation index of stocks

    are all repeating their Summer of 2008 patterns. 

    Smith's thesis makes sense, as does Mish at Global Economic Analysis. All the world is trying to succeed by exporting goods to other countries. They all produce more than their own populations can absorb, so the markets must expand, hence we hear the mantra of globalization.But everyone cannot have a positive balance of trade, someone has to import That someone has been the US with a negative balance of trade. The world has grudgingly taken our lower priced dollars in exchange for its goods to keep their economies alive. Now with backs against the wall, a torrent of cheap goods amid rising world wide unemployment has brought the specter of deflation stalking the world markets. Real estate in the US collapsed first, but the limited experience with real estate in other countries simply exported the speculative real estate boom elsewhere. And so Canadian and Australian real estate has soared to unsustainable levels. 

    Think about it, high unemployment is the market saying that wages are too high, there are alternatives. And so law school grads work by the hour like so many pineapple sorters in the field. College grades find themselves in permanent 'temp' jobs. Indeed why would an employer move from an easily dismissed temp employee (no unemployment benefit liability) to all the woes and uncertainty of a full time employee? Jack Welch outsourced GE's work to China to keep costs low, his successor has run out of the same options. As the WSJ detailed yesterday, GE has underperformed the SPX since Welch's exit.

    The one growth area has been government where the union shop lives on. But now the cost of government has risen to near half the GDP, or have we exceeded it already?  No matter with more calls for higher taxes it is just matter of time when not whether we get there. Greece is the poster child of where that takes an economy.

    Okay enough economic theory for now. The strong dollar overhangs stock market speculation. Stock prices are the counter party to currency values.  We already have that handy Dollar Proxy, oil, in free fall. As the Dollar advanced, world stock prices fell. Recall our recommendation to use the rally that has apparently started today to exit existing stock positions.

    Dollar UUP versus Stocks

    Screen shot 2011-09-07 at 7.39.07 AM

    Stocks are the black bars, UUP is the red green line which is the US Dollar. Despite all the negative news that the dollar is trash, it has been exhibiting a potential bottom at 21 on UUP while the SPX traced out its final highs from February to July. And then, collapse. The overvaluation of stocks has folks exchanging stocks for Dollars, something the currency markets have denied could happen. But here we are. 21.80 to 22 remains big resistance for UUP. 

    But the puzzle pieces are falling into place. Emerging markets falling, silver and oil falling, now stocks which are valued in Dollars. The rush to the exits is underway. 

    Thanks for reading our blog.  

     

  • Professor Elam

    The End Game is at Hand

    Wed Sept 7, 2011

    Here is a fascinating look at how conventional economics has failed.

    Charles Smith suggests that Marx had it right in terms of production finally overwhelming consumption, hence we are in a deflationary environment. 

    The blog link contains some graphs showing that labor's cut of the pie is shrinking. This explains the rise of government unions and the last ditch labor efforts to resurrect Detroit, which Obama claims to be doing. 

    This may be my first on line book purchase!