"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

29 December 2006

Economic Indicators Weak, Markets at Records with No Fear

Isn't it interesting that the leading indicators of economic weakness, such as a strong one like trucking tonnage, have ROLLED OVER. Of course, the financial markets are hitting multi-year highs and the risk indicators (i.e. ISEE, VIX & VXN) are at near record complacency levels

Trucking: If November was this bad, its going to be ugly in February@AGED

AG Edwards was surprised to see the amount of weakness in truck tonnage for November, which is historically the second strongest month of the year. With tonnage down -8.74% year-over-year in November, well below the firm's -4.85% bearish expectations, the firm questions what February 2007, a historically weak month, will look like.

ISEE 10-day moving average is 141. ISEE 50-day moving average is 141.

Asian markets mainly closed on "record highs"-Priced for perfection- where's the fear?? All the markets are supposed to get pegged to the appreciating Chinese yuan- the global reserve currency heir to the depreciating dollar.

Most Asian Markets End Year on High Note
Friday December 29, 7:08 AM EST

HONG KONG (AP) — Most Asian markets wrapped up the year higher Friday, as Japanese shares hit a new seven-month high and shares in China, Singapore, Australia and New Zealand set record closes. The Nikkei ended 6.9 percent higher than the last trading day last year. It was the fourth straight year of growth for the index amid encouraging signs of an economic recovery, but that growth was well below a 40 percent advance in 2005. The decision by Japan's central bank to raise interest rates in July for the first time in six years then stunted the market's recovery, analysts said.

In Hong Kong, shares edged down from their record high Friday on profit-taking in Chinese banks, closing the year 34 percent higher than last year. The blue-chip Hang Seng Index fell 31.03 points, or 0.2 percent, to 19,970.88. In 2006, the index has risen 5,094.00 points, after hitting an intraday record high of 20,038.00 on Thursday. The market "is likely go even higher next year ... the China growth story and (possible) yuan appreciation are enough to support the market solidly," said Kitty Chan, a director at CASH Asset Management. Part of the index increase was due to the inclusion of China-registered companies, such as China Construction Bank and Sinopec, in the Hang Seng Index since September.

Traders expect China-related stocks to continue leading the market higher next year, provided that liquidity stays in Hong Kong, China's economy continues its rapid expansion and hopes for a fresh round of yuan appreciation don't die down.

SHANGHAI: China's shares soared to a new record high for a fifth straight day, lifted by sharp rises in bank and airline stocks in the last trading session of 2006. The Shanghai Composite Index rose 4.2 percent to close at 2,675.47, more than double its level at the start of the year.

SINGAPORE: Singapore's benchmark Straits Times Index closed the year at a record high, and traders expect it to hit the 3,000 mark in January. The STI rose 22.34 points, or 0.8 percent, to 2,985.83 points, its second straight record high.

SYDNEY: Australian stocks hit a record high on the last trading day of the year as brokers squared positions with some month-end buying in blue chip stocks that underperformed the broader market during the year. The benchmark S&P/ASX 200 index rose 9.4 points, or 0.2 percent, to 5,669.9 points.

TAIPEI: Taiwanese shares ended 2006 by rising to a six-year high, boosted by record highs set in Hong Kong's index on Thursday. The Weighted Price Index of the Taiwan Stock Exchange gained 90.79 points, or 1.2 percent, to 7,823.72, its highest closing level since Aug. 28, 2000.

WELLINGTON: New Zealand's stocks hit a record level for the third day running to end a year in which the local bourse recorded a 20 percent rise in value. The benchmark NZX-50 was up 8 points, or 0.2 percent, at 4,055.47.

Markets in South Korea and Indonesia were closed Friday for a holiday.

28 December 2006

ONE Money Manager Sees Trouble for 2007

A Money Manager Sees Storm Clouds Gathering
By LIZ PEEK, The New York Sun, December 28, 2006

What this positive article on ex-Legg Mason fund manager Dawn Bennett omits is that 17% gains on "defensive strategies" is highly abnormal. She should be looking at 7% returns from a 80 year historical average. Booyah !

Dawn Bennett does not think the sky is falling; she just sees it as seriously askew. She says she is skeptical of the year-end surge in stock prices, and not at all convinced America is in for the much-ballyhooed soft landing. Ms. Bennett heads up the Bennett Financial Group, which she founded earlier this year after leaving Legg Mason, and which currently has about $700 million under management. Her concerns are summarized thus: "There's no way we're not going to feel the effects from 17 interest rate hikes. There's usually a seven-month lag. I can see the Fed having to lower rates in the first six months of 2007."

This is not your normal jolly Christmas conversation. Ms. Bennett's concerns include an expectation that the housing sector is going to get still worse before it gets better, and that the sizeable mortgage credit bubble will cause the consumer to pull in more aggressively. The amount of lending done in the past few years to those with questionable (and unquestioned) credit, stimulated by an expectation of evergrowing home prices, makes Ms. Bennett jittery.

Although others certainly have voiced these concerns, Ms. Bennett's outlook includes a more profound and enduring slowdown in the American economic expansion. Consequently, she is aggressively looking for investment opportunities overseas, as well as trying to plump up domestic returns through purchases of convertible preferreds and other high-yield asset classes.

This year, such measures and a broadly balanced portfolio have resulted in gains for Ms. Bennett's clients (through November) of 17%. Over the past five years her accounts have reportedly grown at nearly 12% per year. Since when did defensive investing become so profitable?

27 December 2006

China Dumps Dollars, Buying Energy Resources

Yuan banknotes

China mulls energy reserves spend-
China has the money to secure future energy reserves

China has signalled that it could use its vast foreign exchange reserves to bolster its strategic energy resources.Vic e-Premier Zeng Peiyan said China needed to speed up the hunt for fresh oil and natural gas supplies. China's foreign exchange reserves are the world's largest at more than $1 trillion (£511bn), supported by the country's strong global exports. China is keen to secure future reserves of oil, coal and other raw materials needed to fuel its booming economy. Earlier this year, Beijing hosted a summit of African leaders, at which access to Africa's natural resources was discussed in return for Chinese investment in Africa's roads and railways.

But, SURPRISE ! No deal for US-China Trade Gap

So China instead makes it clear they are SELLING dollars and buying ENERGY RESOURCES

(What to do with) China's trillion dollar surplus

China should "take advantage of the fact we have quite large foreign exchange reserves to enhance our national strategic energy reserves", Mr Zeng told the standing committee of the Chinese parliament. He added that the country should establish a coal resources reserve system, the official Xinhua news agency reported. Mr Zeng's comments came as Chinese state-run oil refiner Sinopec revealed that it had been handed a 5bn yuan government rebate to compensate it for refining losses. Sinopec, Asia's biggest oil refining company, was hit by a 12.58bn yuan loss during the third quarter of 2006, up from 6.6bn yuan a year earlier. Analysts said the surprise rebate was, in effect, a subsidy for Beijing's refusal to allow Chinese domestic petrol and diesel prices to rise as fast as international markets.

The US Treasury AGAIN claims that China is NOT a currency manipulator and then we get no deal on the lack of yuan re-valuation.

Mr Paulson said China and the US had agreed to "take measures to address global imbalances through greater national savings in the United States, and to increase consumption and exchange rate flexibility in China". However, Mr Paulson and his high-powered delegation failed to agree a firm timetable for a further strengthening of China's yuan. His opposite number, Vice Premier Wu Yi, described the talks as useful "to build mutual understanding," but did not comment on the currency issue herself. "We have reached some consensus, although we remained different on some issues," Ms Wu said at the end of the two-day meeting.


A great post explaining the scam of continual coupon passes

The bubble in the dollar has been enabled by five distinct groups:

1. OPEC;
2. Bank of Japan;
3. Bank of China;
4. The Fed; and,
5. The money center banks.

The first three institutions are enabling the dollar bubble by recycling their dollar into treasuries – vendor financing if you will. However, there seems to be a continual misunderstanding about the role of the fed and the money center banks. The fed previously stated role is to protect the viability of the currency. Of course, we know that this is hogwash. And, its role has now even changed into ‘inflation targeting' and ‘full employment.' Basically, the fed is set up based on the ideas that rising prices are both useful and necessary. So, onward to the trade cycle.

Here is where the general misunderstanding occurs, that there are two classes of credit:

1. Commodity credit; and,
2. Circulation credit.

A healthy economic expansion is based on commodity credit which is the transfer of savings from the saver to entrepreneurs for productive expansion (China). This withholding of consumption allows for ever greater levels of production; and is limited by the amount of saving.

Then there's circulation credit – which is credit granted out of funds especially created for this purpose by the money center banks. Credit is created out of nothing, it's the creation of more fiat money; and is basically inflation. It increases the amount of money – and money substitutes; and is spent as if it were proper money. By increasing the buying power of these debtors – it creates additional demand. Where does this demand manifest itself – short term? In the bond market and in the stock market. For there is a breakdown between commodity credit (previous saving) and circulation credit. And, this increase in circulation credit generates a tendency to drop interest rates blow the height they would have reached without this manipulation.


It's quite surprising to see various bloggers dismiss coupon passes as non-events. IT IS THE PRIMARY TOOL OF THE FED TO BREAKDOWN THE LINK BETWEEN COMMODITY CREDIT AND CIRCULATION CREDIT. The fed certainly places a premium on their coupon pass activity. Here are just a few examples.

In 2005, the fed was concerned with this series of down days.

4/13/2005 1,173.79 (13.97)
4/14/2005 1,162.05 (11.74)
4/15/2005 1,142.62 (19.43)
4/18/2005 1,145.98 3.36
4/19/2005 1,152.78 6.80
4/20/2005 1,137.51 (15.27)

Then what happens? Out of the blue

4/21/2005 1,159.95 22.44

Where did this day come from? Well the next day the fed began a series of coupon passes – and usually there is about a three month period between when the passes start and when the equity markets top out.

4/22/2005 1,152.12 Pass
4/27/2005 1,156.38 Pass
5/10/2005 1,166.22 Pass
5/5/2005 1,172.63 Pass
5/20/2005 1,189.28 Pass
5/25/2005 1,190.01 Pass
5/31/2005 1,191.50 Pass
6/16/2005 1,210.96 Pass
7/22/2005 1,233.68 7.079% Level three months later and 7% higher.

How about this series of days this year?

5/10/2006 1,322.85 (2.29)
5/11/2006 1,305.92 (16.93)
5/12/2006 1,299.32 (6.60)
5/15/2006 1,294.50 (4.82)
5/16/2006 1,292.08 (2.42)
5/17/2006 1,270.32 (21.76)
5/18/2006 1,261.81 (8.51)

The response?

5/11/2006 1,305.92 Pass
5/19/2006 1,267.03 Pass
5/23/2006 1,256.58 Pass
5/31/2006 1,270.09 Pass
6/6/2006 1,263.85 Pass
6/12/2006 1,243.04 Pass
12/22/2006 1,422 8.88%

This one took a while to take hold. But, this along with the pre-election pump – and we are a cool 8.88% higher – with 1 1% down day since July.

Now, the rate of interest really is a market phenomenon; for the market aspects of the economy do structure wages; prices and INTEREST RATES. However, the downward manipulation of interest rates changes the overall calculation of business decisions. And, US interest rates have been decidedly manipulated downward by the aforementioned entities. But, look what this downward manipulation of interest rates has done:

1. The US industrial base has been gutted;
2. Gross mal and mis investment (the variety); and,
3. Gross mal and mis investment (the housing variety).

Actually, this list could go on and on and on. And the fed is now so addicted to this increase in circulation credit that the viability of the currency is in question; raw material prices are soaring; oil and gas prices are soaring. All the while, sans financial earnings & oil and gas; profits from productive industries have significantly declined.

In conclusion, the coupon pass activity, all $44 billion of it, has a massive impact. It's important to note the fed only has open market holdings of $773 billion. And, with the changes in reserve requirements it's really impossible to know the complete impact – or the direct impact - or linkage, to how interest rates swirl around this interference. However, with this activity, with the breakdown between commodity credit and circulation credit, with governmental/fed tampering with the market and market data, the imbalances grow ever greater. When the imbalances of interest rates and markets corrects, the recalculation of the profitability and viability of an endless variety of projects will be thrown into disarray. The artificial prosperity fill quickly fade to foreclosures, failures, unemployment and depression.

The fed is at a crossroads of whether to continue their expansionist policies before a complete breakdown of the entire monetary system or after. I, for one, would rather have the fed, and our government, deal with the public honestly – for once.

26 December 2006

Richmond Fed Confirms Recession Under Way

The latest survey by the Federal Reserve Bank of Richmond confirmed that the revenue growth in the broad service sector slowed in December. NO KIDDING !! Deep discounts totaling 30-50% across broad retail categories got people out on the pre-Xmas weekend. The Richmond Fed claimed that retail sales contracted "slightly" in December, with big-ticket sales items leading the decline in December. Retail inventories fell for the first time in six months, though the contraction was mild. Shopper traffic also slipped, and retailers were less optimistic about sales expectations for the first half of 2007. In short, buyers are cautious and scarce. Booyah for 2007!!

Retail Sales Slip in December, Pulled Down by Big-Ticket Sales; Revenues Continue to Grow at Service-Producing Firms
According to the latest survey by the Federal Reserve Bank of Richmond, revenue growth in the broad service sector slowed in December. Retail sales contracted slightly in December, although sales results from the final weekend before Christmas are not included in this month's survey. Big-ticket sales led the decline in December, but the pace moderated from that of a month ago. Retail inventories fell for the first time in six months, though the contraction was mild. Shopper traffic also slipped, and retailers were less optimistic about sales expectations for the first half of 2007. In contrast, contacts at service-producing firms said revenues grew at a faster pace in December, and they continued to have a bright outlook for the next six months.

Retailers made additional cuts in employment in December, while services firms added to their payrolls. Service sector wages rose at a faster clip in December. Price growth in the broad service sector moderated somewhat, although prices rose more quickly at retail establishments. For the first half of 2007, retailers expected a pick up in price growth, while service-producing firms anticipated slower price growth.

25 December 2006

A U.S. Budget Blows Out, Intelligence Oversight Disappears

For market watchers who care about more than the daytrade or channel trade, the overall signs of budget implosion get more discouraging by the day. No big surprise about lobbyist exploitation of loopholes, to be sure, but these three articles point out something more pernicious: the removal of control of intelligence spending and government war-making policy from the American public. And this after a democratic landslide in the election six weeks ago calling for development of plans for a phased US troop withdrawal, NOT "surge", NOT escalation.

Cloak and Dollar Oversight
Published: December 25, 2006, THE NEW YORK TIMES

The surest way to track power on Capitol Hill is to follow the money through the precincts of “the old bulls” — the ranking committee appropriators who paw the floor at any threat to their authority. All the more interesting, then, that the incoming House speaker, Nancy Pelosi, would risk their ire by forming a select committee to force the two discordant spheres of intelligence committees — budget wielders and policy watchdogs — to find common ground. For decades, rival committees and egos have been at the heart of Congress’s failure to effectively oversee the government’s mass of overlapping spy agencies. The results have been so bad that the 9/11 commission said they contributed to the lack of preparedness for the terrorist attacks.

It should be no great challenge to ensure that intelligence committee lawmakers who must oversee policy and operations have a say in how intelligence budget money is being spent. Right now, they don’t. Pentagon insiders and other lobbyists shrewdly focus on the appropriations committees to have their way, with effectiveness an afterthought. This only deepens, not clarifies, the murky task of oversight.

Whether Ms. Pelosi’s plan will help undo the knotted committee process remains to be seen, but it is an encouraging prod toward joint responsibility. The select committee, with members from the budget and policy spheres, is to review spending requests, make recommendations, hold hearings and assess how well programs are working. The new Senate majority leader, Harry Reid, has promised to study the initiative, and if he does not duplicate it, he should find something even better. It is time to bring the almighty dollar in from the cold as a principal agent in the wily art of avoiding intelligence oversight.

War Profits Trump the Rule of Law, By Chris Floyd
t r u t h o u t | UK Correspondent, Friday 22 December 2006

Slush funds, oil sheiks, prostitutes, Swiss banks, kickbacks, blackmail, bagmen, arms deals, war plans, climbdowns, big lies and Dick Cheney - it's a scandal that has it all, corruption and cowardice at the highest levels, a festering canker at the very heart of world politics, where the War on Terror meets the slaughter in Iraq. Yet chances are you've never heard about it - even though it happened just a few days ago. The fog of war profiteering, it seems, is just as thick as the fog of war.

But here's how the deal went down. On December 14, the UK attorney general, Lord Goldsmith (Pete Goldsmith as was, before his longtime crony Tony Blair raised him to the peerage), peremptorily shut down a two-year investigation by the Serious Fraud Office (SFO) into a massive corruption case involving Britain's biggest military contractor and members of the Saudi royal family. SFO bulldogs had just forced their way into the holy of holies of the great global back room - Swiss bank accounts - when Pete pulled the plug. Continuing with the investigation, said His Lordship, "would not be in the national interest."

It certainly wasn't in the interest of BAE Systems, the British arms merchant that has become one of the top 10 US military firms as well, through its voracious acquisitions during the profitable War on Terror - including some juicy hook-ups with the Carlyle Group, the former corporate crib of George H.W. Bush and George W. Bush and still current home of the family fixer, James Baker. BAE director Phillip Carroll is also quite at home in the White House inner circle: a former chairman of Shell Oil, he was tapped by George II to be the first "Senior Adviser to the Iraqi Ministry of Oil" in those heady "Mission Accomplished" days of 2003. BAE has allegedly managed to "disappear" approximately $2 billion in shavings from one of the largest and longest-running arms deals in history - the UK-Saudi warplane program known as "al-Yamanah" (Arabic for "The Dove"). Al-Yamanah has been flying for 18 years now, with periodic augmentations, pumping almost $80 billion into BAE's coffers, with negotiations for $12 billion in additional planes now nearing completion. SFO investigators had followed the missing money from the deal into a network of Swiss bank accounts and the usual Enronian web of offshore front companies.

Nor was continuing the investigation in the interest of the Saudi royals, whose princely principals in the arms deal were embarrassed by allegations that a BAE-administered slush fund had supplied the fiercely ascetic fundamentalists with wine, women and song - not to mention lush apartments, ritzy holidays, cold hard cash, Jags, Ferraris and at least one gold-plated Rolls-Royce, as The Times reported. One scam - uncovered by the Guardian in a batch of accidentally released government documents - involved inflating the price of the warplanes by 32 percent. The rakeoff was then presumably siphoned into BAE's secret accounts, with some of it kicking back to the Saudi royals and their retainers. Then came a curious intervention. Last month, Dick Cheney traveled to Riyadh for talks with Saudi King Abdullah. There he beseeched the king to step in and help pull America's fat out of the wildfire of Iraq by using Saudi influence on Iraq's volatile Sunni minority, the Scotland Sunday Herald reported.

And given the sad situation of using off-budget finance to conduct an unwinnable war, isn't it time to explore a strategy other than just putting more US soldiers in harm's way???? Even The Nation has concluded that history is doomed to repeat itself. How tragic and unnecessary.

Early next year, the president is going have to submit an emergency appropriations bill to continue to fund the war. The Democrats should respond in two ways. First, if by the time the appropriations bill is submitted, the president is still discussing escalating the war, Democrats should come up with a counter offer: they will only approve enough funding for the current troops and not one more. Second, the funding should only be approved for the first 90 days, after which time the administration will have to report comprehensively to Congress on what progress has been made in bringing the war to a conclusion. It's certainly not an ideal strategy, insofar as it essentially maintains the status quo, but in the in the near term, the first priority for the Democrats has to be to use their newfound ability to stop this war from escalating.

24 December 2006

Easy Money: U.S. Treasury Admits "US is Bankrupt"

In tribute to the Xmas spirit, it's it interesting that the Treasury released a report a week ago Friday at 5:30 pm admitting that the U.S. is bankrupt. Oh, there's some interesting detail about how troubled the economy is, like housing, for example. One straight year of declining residential fixed investment. But the bottom in housing is near, if you believe the dogma from CNBS.
P. 9 : Growth in real GDP continued to increase 2.6 percent in the second quarter; and 2.2 percent in the third quarter of 2006. Holding growth down in the third quarter was a sharp 18.0 percent annual rate decrease in residential fixed investment, extending a string of declines to four quarters in this sector as housing demand weakened.

BTW, the federal debt ceiling was increased again to $9 TRILLION but the debt increased by a WHOPPING $4.9T. Nothing to see.
P. 10: Federal debt is subject to a statutory ceiling known as the debt limit. Prior to 1917, the Congress approved each issuance of debt. In 1917, to facilitate planning in World War I, the law established a dollar ceiling for Federal borrowing, which has been periodically increased over the years. On March 20, 2006, legislation became effective raising the current limit from $8,184.0 billion to $8,965.0 billion.
P. 17: The largest liability in recent years has been Federal debt held by the public and accrued interest, the balance of which increased to $4,867.5 billion in 2006.

But the Treasury admits in budget-speak, the US Government can't afford its scheduled benefits for all you baby boomers. Merry Christmas !
P. 10:The net social insurance responsibilities scheduled benefits in excess of estimated revenues) indicate that those programs are on an unsustainable fiscal path and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance. Delay is costly and choices will be more difficult as the retirement of the ‘baby boom’ gets closer to becoming a reality with the first wave of boomers eligible for retirement under Social Security in 2008.

And this contagion of debt is also a UK dilemma. UK government deficits exceed their annual GDP. And housing price increases are out-of-control there.

Officially, [UK] public sector net debt stands at £486.7bn. That’s equal to US$953.9bn and represents a little under 38% of annual GDP. Add the state’s “off balance sheet” debt, however – including its pension promises to state-paid employees – and the total shoots nearly three times higher. Research by the Centre for Policy Studies in London says it would put UK government deficits at a staggering 103% of GDP.

The official U.S. debt
stands at $8.614 trillion or 67% of (nominal) GDP but when we add in our “off balance sheet” items the national debt stands at $53 trillion or 403% of GDP. Macroblog points out that this economic environment is characterized by "easy money" - If you accept the 10-year/funds-rate spread as being related to the relative ease of monetary policy, then the period from 1993 to 1995 looks relatively stimulative.

Breathtaking ! Have a happy holiday but be careful with that last minute impulse spending...

Sub-prime Mortgage Disaster Underway

Sub-Prime Disaster in the making

Peter Schiff,Dec 23, 2006

A report released this week by the Center for Responsible Lending, a Durham, N.C. based research group, predicted that 1 in 5 sub-prime mortgages originated in the past two years would end in foreclosure. While most on Wall Street dismissed this survey as overly pessimistic, it actually represents a rather rosy outlook.

One of the report's deficiencies is that it fails to account for how the foreclosures it does expect will impact those loans that it regards as safe. A 20% default rate would put millions of homes back on the market, and would also inflict severe losses on sub-prime lenders, causing them to pull in their horns and tighten their lending standards. More inventory and higher rates will put more downward pressure on home prices. Many over-stretched borrowers, who made little or no down payment, will find themselves struggling to make mortgage payments on properties with negative equity. Higher rates and lower prices will also remove the cash out options that many borrowers expected would bail them out of ballooning adjustable rate payments.

Therefore, the secondary effects of the 1 in 5 sub-prime default rate will be a chain reaction of rising interest rates and falling home prices engendering still more defaults, with the added foreclosures causing the cycle to repeat. In my opinion, when the cycle is fully played out we are more likely to see an 80% default rate rather than 20%.

The main problem is that the majority of these loans were made to people who really cannot afford to repay them and were collateralized by properties whose true values were but a fraction of the loan amounts. Once the music stops and prices return to earth, borrowers who put little or no money down may decide to simply mail in their house keys rather than make additional mortgage payments. Why would anyone stretch to spend 40% of his or her monthly income to service a $700,000 mortgage on a condo valued at $500,000, especially when there are plenty of comparable rentals that are far more affordable?

In addition, even those who can comfortably afford to pay may choose not too. Basically, zero-down, non-recourse mortgages give borrowers a free put option should real estate prices decline. The bigger the drop, the more incentive there is to exercise. Rather than throwing good money after bad, borrowers could simply return their over-priced houses back to their lenders and buy one of their neighbor's deeply discounted foreclosures instead.

Also, the idea that sub-prime foreclosures will not affect the broader market is absurd. These loans simply represent the weakest links in the mortgage/housing chain. Once they break the entire chain falls apart. The added demand from these marginal buyers helped produce and sustain the bubble. Remove it and the bubble deflates. Also, falling home prices and rising interest rates effect every homeowner, and the temptation to walk away from an upside down mortgage is not restricted to sub-prime borrowers.

Don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at, download my free research report on the powerful case for investing in foreign equities available at, and subscribe to my free, on-line investment newsletter.

Peter Schiff , C.E.O. and Chief Global Strategist, Euro Pacific Capital, Inc.

UK Rates Going Up, Up, Up !

Further rate rises feared as economy races ahead

Angela Balakrishnan
Friday December 22, 2006, The Guardian

The UK economy expanded at its fastest annual rate for two years in the third quarter, official data showed yesterday, reinforcing City speculation that interest rates may increase further in the new year. The annual growth rate was revised upwards to 2.9% from an earlier rate of 2.7%, the sharpest pace since 2004, according to the Office for National Statistics.The government statistician said growth from July to September was 0.7%, unchanged from th e first estimate released last month. Unless there was an unexpected slowdown, analysts said, Gordon Brown was on course to meet his growth target of 2.75% for 2006.

Article continues
Growth was driven by strong rises in manufacturing, particularly transport equipment, healthy expansion in hotels and catering and continued strength in business and financial services.

The upward revision, analysts said, would raise the rate-setting Monetary Policy Committee's concerns about whether there was enough spare capacity in the economy and boost the chances of a rate rise early next year.[b] "The momentum seen in the third quarter will add to the MPC's suspicions that the economy is currently operating pretty close to full capacity and supports other recent evidence pointing to a further rise in interest rates early next year," said Jonathan Loynes, economist at independent analysts Capital Economics.[/b]

Earlier this week, figures from the CBI, the employers' group, showed a surge in retail sales to the strongest level in two years. Meanwhile data from the British Bankers' Association suggested the two quarter-point rate rises this year had failed to dampen demand in the housing market as mortgage lending hit a record high.

Analysts said soaring house prices were in part due to sustained demand from City employees enjoying hefty bonuses. TUC general secretary Brendan Barber yesterday called for a national debate about boardroom salaries; he said pay at the top was increasing 17 times faster than for the average worker. "Particularly in London, big bonuses and boardroom payouts feed inflation in the property market. Experts estimate that half the City bonus windfalls end up in the property market, with an inevitable effect on house prices," said Mr Barber. "An overheating housing market can tip the balance in the finely balanced discussions by the Bank of England about interest rates. The result can be more expensive mortgages for house buyers."

The ONS data already revealed lower household income due to higher interest rates and inflation, despite gains in wealth from rising house prices and employment. "Disposable income growth is up just 1% on the quarter, below the historical average," said Karen Ward, economist at HSBC. "Taking into account higher inflation, real disposable income growth has been squeezed considerably, rising just 0.2% on the quarter compared to a historical average of 0.7%." Analysts said falling disposable income would dent consumer spending.

Separate data from the ONS showed the current account deficit in the third quarter widened to £9.43bn from £8.26bn in the previous quarter, reversing most of the narrowing seen earlier this year.

23 December 2006

Foreclosures soaring and Mortgage Brokers Exiting

The Mortgage Bust Goes On
WASHINGTON, D.C. - Forbes Magazine, By Matthew Swibel

A record-high 19% of high-cost mortgages originated during the past two years will end in foreclosure, a consequence of the growth in risky mortgage products, according to new data compiled by an industry group.

The nonpartisan Center for Responsible Lending predicts 2.2 million households in this mortgage segment, known as subprime borrowers, either have lost their homes or hold mortgages doomed for foreclosure in the next few years. This estimate comes a week after a grim survey from Fitch Ratings, which studies residential mortgage securities, showing a 16-fold increase in past-due subprime loans in the third quarter of 2006, compared with 1998.

Subprime borrowers, who typically pay interest rates 2% to 3% higher than those with good credit, currently account for a quarter of all mortgage originations. "This is the largest rash of mortgage foreclosures in the modern mortgage market," says Michael Calhoun, president of the Center for Responsible Lending.

The worst-hit areas for rising foreclosures include cities in California, Nevada, New York, New Jersey and the greater Washington, D.C., area that recorded steep housing price appreciation in the past few years. As the market cools, homeowners will find it harder to tap their homes for bigger lines of credit or to take cash out in refinancing. Here comes the pinch: To manage household debt, Americans have used such moves to pull over $2 trillion out of their homes in the past five years. In the first six months of 2006, consumers extracted over $500 billion.

The sharp increase in foreclosures poses "a serious threat to neighborhood stability," said Pat Vredevoogd, president-elect of the National Association of Realtors, in a conference call with reporters on Tuesday. "It can cause all homes in the neighborhood to lose value." The deterioration of homeowners' ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers. "There is considerable discussion by incoming House Finance Committee Chairman Barney Frank [D-Mass.] to enact a predatory lending law for these mortgage lending problems," says Keith Ernst, senior policy counsel for the Center for Responsible Lending.

The Senate Banking Committee's agenda under Sen. Chris Dodd, D-Conn., will scrutinize the home-buying process, too. "The amount of household and mortgage debt as a percentage of disposable income is at its worst levels in over a quarter of a century--putting countless Americans on the financial brink," Dodd told a press conference earlier this month. "In many respects, the American Dream is at risk in a way it has never been before. I do not intend to preside over its demise, but rather to do everything possible for its revival." The growing chorus of concern over mortgage costs and foreclosures could ensnare more than just the lenders like Countrywide Financial (nyse: CFC - news - people ), Wells Fargo (nyse: WFC - news - people ) and H&R Block (nyse: HRB - news - people ) who peddle adjustable-rate mortgages with low teaser rates and interest-only features. On Wall Street, risky mortgages get bundled into large pools of mortgage-backed securities, which now account for 23% of all bond market debt outstanding, making it the largest single segment of the U.S bond market.

Increased regulatory oversight could lead to a demand that mortgage servicers give greater flexibility to delinquent borrowers to avoid foreclosure. This would increase a pool's income, but it would also raise its servicing costs--something investors dearly want to avoid.

In Pictures: Ballooning Foreclosure Rates

Private Equity Firms Strip Mine German Firms

Germans are beginning to resent the leveraging up of bought out firms. Wonder why? Private equity companies have been around for a long time; KKR celebrated its 30th birthday this year. But only recently, especially since the burst of the high-tech stock-market bubble, have investors started turning to them in droves. Funds based on share prices simply weren't churning out adequate profits anymore and private equity funds started growing in popularity. As of 2005, investors had handed over a worldwide total of €261 billion ($342 billion) to private equity funds -- with expectations of high returns.

Be it television stations, large machine builders or auto-parts suppliers, international investors are buying up large swaths of the German business landscape. The new lords of business want one thing: profits, profits, profits. But criticism of the "locust" method of doing business is growing in Germany. There are a number of reasons for the focus on Germany. In recent years, the tight web of ownership woven by the country's largest banks and companies has loosened substantially. Recent years of economic stagnation in Europe's largest economy have also forced German companies to restructure and focus on efficiency. Now, many of them are in great shape, but lack capital. Several are among the market leaders in their sectors -- and they can be had for cheap.

Take German TV, for example. Just last week, two private equity leaders, Permira and Kohlberg Kravis Roberts (KKR), announced they had taken over a majority of Germany's largest private television company, ProSiebenSat.1 Media AG. The plan is to merge the company with SBS Broadcasting, which the two funds bought last year for €2.1 billion ($2.8 billion), and grow it into Europe's leading television company.

A noble goal, perhaps. But all too often, the result looks more like what happened to Cognis. Permira, together with Goldman Sachs, bought the chemical giant for €2.5 billion ($3.3 billion) in 2001. Most of the money for the purchase was financed through new debt, with the buyers only investing €450 million ($590 million) of their own money. Now, five years later, Cognis is deeply in debt and burdened by astronomical interest payments on the loans it took to come up with the purchase price. Permira and Goldman Sachs, meanwhile, have gotten out almost twice what they put in: €850 million ($1.12 billion) has so far been squeezed out of Cognis.

Experts say that this sort of grasping for easy money is what can make private equity firms dangerous. The emphasis is on quick money, short term results, and the highest possible returns for their investors, regardless of what it means for their prey. "Buy it, strip it and flip it," is the industry credo. There are indications, says Dieter Heuskel, head of Boston Consulting in Germany, "of a fundamental shift in ownership structures." He is concerned, he says, "about a massive shift in value and profit from the future to the present." In other words: money now, the future be damned.

22 December 2006

Amgen-Large Cap Biotech with Growth Ahead

Amgen (AMGN-NAZ) is a best of breed large cap biotechnology stock which will now benefit from a recently announced $5B share repurchase program. Amgen is currently trading at $68,50 with a market cap of $80 billion and earnings of $3.93 per share in 2006 and expected $4.41 per share in 2007. This translates to an earnings growth rate of 13% and a PE ratio of only 15.8 going into 2007. PEG (PE to growth ratio) is at 1.2x which is historically inexpensive relative to its 25 PE ratio and accelerating growth. And AMGN is down 15% over the last year, lagging the S&P massively, thereby likely attracting value and reasonably priced growth buyers.

The key attractions of Amgen include:

• Stable to increasing pricing for key existing drug treatments provide cash flow
• Potential treatments for radiation exposure as mandated by HAS are possible
• Opportunities for anti-inflammatory drug treatments are emerging
antibody treatment for multiple bone loss conditions acquired
• US approval for colorectal cancer treatment, European & Asian approval next
• Delays in FDA approval of competing anemia drug from rival Roche
• A recent agreement with Illumina points to major productivity gains from a large, multi-component genetic analysis system for Infinium(R) genotyping involving a study exploring genetic variation in women that may underlie a range of serious illnesses such as heart disease, stroke, diabetes, breast cancer and osteoporosis.

Strong Existing Franchise
Early indicators of Q406 sales of key drugs for cancer (oncology), kidney disfunction, and chronic inflammatory diseases have been strong with slight improvement in pricing. AMGN suffered during the year after 2005 price cuts for its flagship drugs, Epogen (EPO- a synthesized replacement for a kidney hormone which regulated red blood cell production) and Aranesp (another EPO hormone used for treating chemotherapy and kidney failure patients. Epogen, an anti-anemia drug produced by Amgen (AMGN), is taken by most of the 325,000 Americans with kidney failure. Historically AMGN has tended to report stronger Q4 sales (relative to Q3) for its major oncology products. Drug price tracker CMS released the quarterly update on average selling price (ASP) for reimbursement of drugs administered in doctors’ offices effective 1/1/07. The ASP for Amgen’s Epogen and Aranesp were up 1.4% and 3.4% quarter over quarter, respectively, while Johnson &. Johnson’s (JNJ:NYSE) competing drug Procrit was down 0.3%.

Q3 Exceeded Expectations

AMGN beat Q3 estimates recently and raised full year estimates for revenues and earnings. AMGN reported Q3 revenues of $3.61B vs. consensus estimates of $3.62B. Worldwide sales of Aranesp grew 27% to $1.67B, while sales of EPOGEN increased 6% to $633M. AMGN sees adjusted EPS $3.85-$3.95 ex-stock expense (up from $3.75-$3.85) vs. consensus estimates of $3.84 and 2006 rev $14.1B-$14.3B vs. consensus estimates of $14.19B

Key Driver is the AMGN Pipeline

AMGN sports one of the best pipelines in the drug industry, with new products for treatment of colon cancer, osteoporosis (aged bone loss), radiation recovery, and anti-inflammatory conditions either launched or in late stage trials. AMGN recently announced a major new study with a Danish partner Genmab for a blocking agent for IL-15 (a major inflammation condition). This IL-15 blockade has potential utility in a wide variety of inflammatory diseases, such as rheumatoid arthritis, psoriasis, inflammatory bowel disease, lupus, multiple sclerosis, and others. Bone loss represents a significant clinical and economic burden.

In addition, AMGN is moving fast to treat osteoporosis, a major public health threat for an estimated 44 million Americans, or 55 percent of the people 50 years of age and older. In the U.S. today, 10 million individuals are estimated to already have the disease and almost 34 million more are estimated to have low bone mass, placing them at increased risk for osteoporosis. AMGN recently announced progress on Phase Three (pre-Food & Drug Administration approval) trials for their own formulation called Denosumab., which has been very positively peer reviewed by the respected New England Journal of Medicine

In short, Amgen is extremely well positioned to provide well-tolerated and extensively tested treatments for chronic baby boomer afflictions. Buyers should look for AMGN to begins material earnings acceleration in 2008.

Failed Pfizer CEO McKinnell gets $200m Golden Parachute

Crafty ol' Hank McKinnell, ran his drug company into the ground but made off like a bandit! Oh, he was a crook, in my opinion, why isn't he retiring to a jail cell???

Huge pay for ousted CEO of Pfizer
From the Associated Press, December 22, 2006

Pfizer Inc.'s former chief executive, Henry A. McKinnell, who was forced into early retirement in part because of investor anger about his rich retirement benefits, will get a retirement package totaling more than $180 million, a new regulatory filing shows. McKinnell's package, which the company disclosed in a filing with the Securities and Exchange Commission on Thursday, included an estimated $82.3 million in pension benefits, $77.9 million in deferred compensation and cash and stock totaling more than $20.7 million.

Well, ol' Hank has already been called to the Hill to explain why some American go hungry simply because they are forced to choose between food or their medicines. It turns out, one of Hank's own outted him:

In his February 16, 2005 testimony before the Senate Committee on Health, Education, Labor and Pensions, Dr. Peter Rost, Pfizer V-P for Marketing, said: "Every day Americans die because they can't afford life-saving drugs, because we want to protect the profits of foreign corporations. I believe we have to speak out for the people who can't afford drugs, in favor of free trade and against a closed market. Stopping good reimportation bills has a high cost. Not just in money, but in American lives."

Dr. Rost is a whistleblower whose concern is that 67 million Americans are without insurance for drugs. And many of them don't get the drugs they need because they can't afford them, because drugs cost twice as much in the US as in other countries.

But, it's only costing Americans around $40B in drug overcharges...

Dr. Rost has calculated that taxpayers could save $37.8 billion by legalizing drug reimportation. He also debunked the arguments of the big pharmaceutical companies-half of who are foreign companies who, in their own country, abide by their government's "reference pricing" (best price) at which drugs are sold in Europe. These same companies are price gouging the American taxpayer:
"They take out big ads in American newspapers (e.g., Glaxo) and tell us that reimportation is not safe, while they know full well that it's been done safely and cost-effectively in their own home markets, in Europe, for over twenty years." He cited a study reported in The journal Diabetes Care in February, 2004: 28% of older adults with diabetes said they went without food or other necessities to pay for drugs. And another study by the Kaiser Foundation (2001) reported that 15% of uninsured children and 28% of uninsured adults had gone without prescription medication because of cost.

Even more outrageously, ol' Hank (who chaired the Business Roundtable) urged his nicely compensated CEOs at other corporations to gut worker pensions and benefits.

At the urging of the U.S. Chamber of Commerce and the Business Roundtable, an SEC advisory panel recommended in December to exempt 80 percent of public companies from requirements that their financial statement and internal controls be certified by outside accountants. The independent certifications are required by the 2002 Sarbanes-Oxley law, which was enacted after the collapse of Enron and WorldCom. One of the biggest backers of the exemption is the Business Roundtable, chaired by Pfizer CEO Henry McKinnell. Under McKinnell, the Roundtable also is fighting the compensation disclosure rules and is a major backer of efforts to privatize Social Security.

Where is the outrage?

The Continuing Options Backdating Outrage

As if "formal investigations" by the SEC into the widespread practice of options backdating by executives wasn't enough to generate shareholder outrage, now the scale of the ripoff grows daily. Just take a look at the latest mega restatement- telecommunications equipment seller Juniper Networks.

The summarizes:
Juniper (JNPR - commentary - Cramer's Take) said it will take a $900 million charge for stock compensation expenses after auditors found several instances of option backdating. An audit team appointed by the company has found "numerous instances in which grant dates were chosen with the benefit of hindsight as to the price of the company's stock, so as to give favorable prices," Juniper said Wednesday.

The Sunnyvale, Calif., Internet-gear maker, which has been under investigation by federal regulators over possible manipulation of employee stock option grant dates, has now placed itself second on the list behind Broadcom (BRCM - commentary - Cramer's Take) in terms of big option bookkeeping adjustments. Broadcom found it needed to book about $1.5 billion worth of charges to cover misdated option grants.

Yeah, "possible manipulation"...but how come no one has actually put together the whole sleazy story of where options backdating fit into a broader scheme of stock manipulation in the run up to the 2000 stock bubble implosion? Gee, remember all those companies that made gobs of money selling options? What about all the quarters that "beat by a penny"? What was the role of auditors and boards in this scheme? Why is now becoming clear that possibly TWO THOUSAND TWO HUNDRED PUBLIC COMPANIES engaged in options backdating, many for up to a decade? Often, especially with non-independent boards, directors who were supposed to provide oversight for shareholders also got paid.

Sometimes, it didn't even matter if you were dead- or were a compensation consultant, you scored backdated options !

It turns out that there's a complete roadmap of accounting legerdemain published by the accounting sleuths at the Center for Financial Research and Analysis.

For a Brief While, Options Scandals Sent Stocks Diving

Options Scare Hits SafeNet, Juniper
MAY 19, 2006,

Fear about stock-option pricing scandals appeared to grow in scope and scale in the past two days, with new legal action, analyst scuttlebutt, and stock-market scares hitting a handful of companies. SafeNet Inc. (Nasdaq: SFNT - message board) and Juniper Networks Inc. (Nasdaq: JNPR - message board) shares were among the hardest hit, losing 22 percent and 6.5 percent of their value in the market, respectively. Safenet and Vitesse Semiconductor Corp. (Nasdaq: VTSS - message board) are among five companies served with federal subpoenas as authorities peer into stock-option cases that have snowballed into major scandals.

Nowdays, executive cash out by selling their 'nicely-priced options and mega massive salaries, get pardoned by their boards and walk away with a "get-out-of-jail" card from the SEC. One egregious case of Bruce Karrass at KB Homes (see my 21 November 2006 on KBH post for more). But, one must ask, why cheat when the pay packages are so huge ALREADY???

21 December 2006

FedEx Points Out U.S. Recession Has Started

From AP: FedEx 3Q Outlook Overshadows 2Q Earnings

FedEx Corp.'s second-quarter profit gain of 9 percent was overshadowed Wednesday by the outlook for the third quarter. After reporting a strong second quarter that "exceeded analyst expectations", the company said it expected lower third-quarter earnings than last year, largely due to a sluggish U.S. economy and fuel bills.
"We believe FedEx is beginning to see the impact of a slowing economy and as such, management is tempering expectations for the second half of the year," analyst Art Hatfield said in a report for Morgan Keegan.

But international markets are doing well:

"They said themselves that the domestic economy is showing signs of weakness," Broughton said. "FedEx's international business continues to grow and in a down-volume domestic environment, they produced the best operating margins they've ever produced."
In a conference call with analysts, FedEx founder and chief executive Frederick W. Smith said FedEx expects "steady performance" for the fiscal year ending May 31 largely because of a "healthy global economy led by continued strong growth in Asia."

But Smith also acknowledged he expects a "somewhat slower growth in the U.S. economy related to adjustments in housing and manufacturing sectors."

JP Morgan Gets It: FedEx Corp-FDX upside Q2 but Q3 guidance lowered, stock lacks catalyst-Neut@JPMS
The firm is cautious on FedEx because they believe the company will not be immune to the potential weakening demand in the transport industry. They consider FedEx's Q2 report to be positive for UPS based on solid domestic parcel demand.

But, lookie here, NO INFLATION
(This can't be good for Amazon on online shippers...rallying??BS)

FedEx-FDX to boost rates January 1st-Bloomberg
FDX said it would increase U.S. ground shipping rates an average 4.9% next year, its largest increase since 1998. Last month the company said that it would increase rates for FedEx Express air shipments by 3.5%.

20 December 2006

2.2 Million Borrowers Face Foreclosure on Subprime Home Loans

Hmmn, the most vulnerable were sold the most aggressive loans. If these people couldn't afford these loans and have negative equity NOW, just think how tough it's going to be for these people with the Bankruptcy Laws changed....

Billions of Home Ownership Wealth to be Lost by Minority Americans; Chart Contains Detailed MSA-Specific Projections of Home Foreclosure Impacts

WASHINGTON, Dec. 19 /PRNewswire/ -- A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. Titled, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners," the CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL's research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail. "In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans," said Mike Calhoun, CRL president. "At $164 billion, the losses from foreclosures could pay for the college educations of four million kids. For families who lose their houses because their loans fail, savings and economic security will be way out of reach."

Follow-up : Capex to take 'breather' in '07, says Gartner

EE Times reports with a new and bearish forecast in hand, Gartner predicted that capital equipment spending will take a ''breather'' in 2007. Overall capital spending is projected to hit $56.1 bln in 2006, up 18.8% over 2005, according to Gartner. Capital spending is projected to grow only 1% to $56.6 bln in 2007, but it will rebound and grow by 16.1% to $65.7 bln in 2008, according to the research firm. Capital spending will see a decline of 8.3% ($60.2 bln) in 2009, a deficit of 2.6% ($58.7 bln) in 2010 and growth of 16.4% ($68.3 bln) in 2011, according to the firm. Worldwide capital equipment spending is projected to grow 24.9% ($42.4 bln) in 2006, but the industry will soften in 2007 as spending declines 0.7% ($42.1 bln), according to Gartner. The industry will see 20.8% growth in 2008, followed by minus 12.8% in 2009, plus 2.7% in 2010, and positive 16.3% in 2011, according to the firm.

Of course, this forecast does not incorporate any recession in 2007 and assumes a pickup in GDP growth in 2008. May be a bit optimistic on that front...

19 December 2006

ORCL- Missed layup EPS,Weak app licenses, curious accounting for acquisitions (Still taking charges on Siebel acquisition?)

Oracle Earnings Solid, But Slowdown in Software Sales
Posted on Dec 19th, 2006 with stocks: ORCL

Oracle reported F2Q07 earnings post-expenses of $967 million (18 cents/share) on revenue of $4.16 billion; analysts had expected 22 cents/share in earnings before options and acquisition expenses, a number the company met. Shares dropped about 2% after hours following the report, perhaps due to company guidance of a flat F3Q. F2Q earnings were up fully 26% from the year-ago quarter. CEO Larry Ellison, who has pledged to grow earnings 20% annually through organic growth and acquisitions, indicated that deferred revenue over the next three quarters may be greater than expected. The tepid report, however, left some analysts wondering if IT spending in general has become softer in corporate America. Software sales totaled $1.21 billion, up 14% y/y but short of guidance to 15-20% growth. In the conference call, Oracle president Charles Phillips said, "We continue to gain market share in applications from SAP, in middleware from BEA, and in database from IBM." Oracle stock is up over 40% this year.

Goldman Points out that four sectors account for more than 2/3rds of Information Technology (IT) spending- and with manufacturing decelerating, government "flat", financial services would have to rise sharply for their forecast of 6-7% overall growth to be achieved. But how can that happen after a record earnings year and going into a recession???
Their key findings are:

- Server virtualization goes mainstream: Server companies will have to contend with dull 6%-7% type industry revenue growth for several years, in our view…the key beneficiary (of virtualization), by a wide margin, should be VMware, whose intrinsic value within EMC (EMC) continues to grow. Also likely to benefit: Intel (INTC) and AMD (AMD), both of which are developing virtualization-specialized processors…Dell will probably escape the realities of virtualization in 2007 because of easy comparisons, 2008 could be a more difficult hurdle given its exposure to volume servers, which should be hit the hardest.

- Service-oriented architectures go from experimentation to implementation: Middleware sales among large infrastructure vendors should continue to see a tailwind to growth owing to demand for SOA management platforms. This would include Oracle (ORCL), Microsoft, SAP (SAP), IBM (IBM), BEA Systems (BEAS), and TIBCO Software (TIBX)… We expect in 2007 to see increasing effects of a push by the leading applications vendors—Oracle and SAP—into the middleware space, posing a growing competitive threat to incumbent middleware vendors that could dampen pricing and growth in 2008 and beyond for pure-play companies.

- From Web 2.0, we move to Enterprise 2.0: [I]nvestors who ignore this trend will do so at their peril given its ability to dramatically reshape leadership among enterprise technology companies and business models over the next decade…This is also where large IT incumbents such as Microsoft, IBM, Oracle, and SAP will likely do battle with up and coming SaaS vendors as well as Internet giants Google, Yahoo!, and eBay, which view the emergence of Enterprise 2.0 as their entry into the enterprise.

- Power and heat issues come to the fore in the data center: Problems of heat from sprawling server farms and accelerating power costs from servers and air conditioning are driving the need for new technologies in the data center, benefiting companies in both the old and new world.

- Networking: Many tech decisions become network decisions: We expect corporate network spending to continue to outpace overall corporate IT spending in 2007. In addition to a mix of simply end-of-life and capacity-related purchases, we see IT decisions increasingly tied to the network.

• Sources: Oracle F2Q07 Earnings Call Transcript, Bloomberg, WSJ, BusinessWeek
• Related commentary: Goldman On IT Trends: What Tech Companies Stand To Gain?,

* Oracle Investors Should Be Content With Stellent Acquisition -- Barron's

* Oracle Taking On Red Hat in Linux Market

• Potentially impacted stocks and ETFs: Oracle (ORCL) Competitors: SAP (SAP), BEA (BEAS), IBM (IBM) ETFs: iShares Goldman Sachs Software Index (IGV), PowerShares Dynamic Software (PSJ)

18 December 2006

Thank God for Northern Trust - They Actually THINK !

Paul Kasriel is a national resource for financial analysts seeking portfolio managers with a brain.

"I love the Fed’s quarterly flow-of-funds report. It usually is the mother lode of enlightening economic nuggets of information. And the Fed’s latest release on
December 7 of third-quarter data was rich with these nuggets. For starters, the decline in U.S. bond yields in recent months is less of a mystery when you take into consideration the sharp slowdown in the rate of domestic nonfinancial borrowing. Chart 1 illustrates the point. Relative to nominal GDP, nonfinancial domestic borrowing (i.e., the annualized dollar change in debt outstanding) peaked at 19.7% in Q4:2005, moving down to 13.9% in Q3:2006 – the lowest percentage since Q4:2003."

What happens when private equity deals end and fail to prop this charade?

Although not the only nonfinancial sector accounting for this slowdown in borrowing, the household sector was the principal one. Chart 2 shows that after hitting a post-WWII high of 14.6% in Q3:2005, household borrowing relative to disposable personal income (DPI) dropped to 8.8% in Q3:2006 – the lowest since 7.6% in Q3:2001, when the economy was in a recession. Notice in Chart 2 that precipitous declines in this percentage tend to be followed by the onset of economic recessions (indicated by the shaded areas in the chart).

Sales Tax Receipts Point to Recession Underway

PLEEEEZE ! Ignore the hype and the "spontaneous" Creamer high-fiving of absurd pumpy stocks like Under Armor (UARM) on CNBS this AM. Take a little time to read the real statistics on retail sales as reflected in state tax receipts. The Liscio Report details that these promos are NOT being gobbled up by consumers. Instead they are looking for bigger discounts, even when there are MULTIPLE price cuts. Can you say "Housing Market"???

From the Liscio Report: Indicies Look Like Fall of 2000

"The weakening consumption trend is now established, and the majority of our tax contacts expressed real concern about a slowing in sales-tax collections. It now appears clear that consumers are not spending the billions of dollars they have saved on gas in recent months."

Furthermore, when I e-mailed Liscio to share my view that we are entering a recession, here's the response I received: "We note with a shudder that our indexes look a lot the way they did in fall of 2000, especially the weakening and then big drop in the sales tax survey. The SDI led us into the last recession, and the states that led are very weak right now, as well." (The SDI is Liscio's proprietary sales-diffusion index.)

Texas Instruments trims forecast
In another profit warning among chip makers, Texas Instruments (TX, news, msgs) cut its profit and revenue forecast after the close yesterday, citing slower sales of semiconductors. The company also said weak sales could continue into next year.
Texas Instruments said it now expects earnings to be between 37 cents and 40 cents per share, lower than a prior forecast of between 40 and 46 cents per share. Analysts had expected 42 cents per share for the quarter. UFB ! But the stock was up 1.1% this afternoon after an analyst at JPMorgan Chase said this morning that the worst is about to be over for the company.

Inflation Vanquished? Not Even Using False Stats

In "The Big Picture," Barry Ritzholz's refreshing honesty is shown in this post:

"We have long used this platform to provide a reality check on some of the questionable errata we hear from various entities. It seems everyone has an agenda, and whenever we encounter official BS, from the Government, Wall Street, Mutual Funds, the White House, or the Media, it offends us. The dishonest tendency towards spin, the official salesmanship of mendacity raise our hackles. For those who wish to accept the official data at face value, we have two words for you (no, no those two): Good luck!

Today, we will see what we can do to make sense of each of these since we first addressed them last week. Lets start today with a look at our Inflation-free CPI. For this, we go to John Williams' Shadow Stats:

“The unbelievable $5.4 billion monthly decline in the seasonally-adjusted October trade deficit to $58.9 billion from September's $64.3 billion was more than accounted for by an equally preposterous plunge in reported oil import prices, which was on top of price declines in the prior two months that more than accounted for oil's recent drop. Without the phony oil price decline, the trade deficit would have risen to $64.9 billion...

The seasonally-adjusted November CPI-U was unchanged from October, (down 0.15% unadjusted), following October's 0.49% adjusted monthly drop. Of significance, seasonally-adjusted gasoline fell by 1.6%. In conjunction with the retail sales report, this suggests an understatement of gasoline inflation by 3.9% in November, and a corresponding 0.2% understatement of the CPI, which is about how much the CPI came in below market expectations...Annual inflation for the SGS Alternate Measure was 9.4% in November, up from 8.9% in October.” (emphasis added)

Consider actual surveyed fuel costs, via the Energy Information Administration (EIA):

11/06/06 - 220.0
11/13/06 - 223.2
11/20/06 - 223.9
11/27/06 - 224.6
12/04/06 - 229.7
12/11/06 - 229.3

Maybe my math is rusty, but that doesn't look like energy prices came down in November, does it? Another big WTF: Medical care costs, which have inexplicably fallen 3.7% y/y. Bill King points out that "this is a 'substantial slowing' [BLS] from the perennial 4.2% increase we have seen for the past dozen years . . . And where is the inflation from increasing rents that most everyone sees?"

16 December 2006

Dollar Collapse Directly Ahead

Dollar danger directly ahead

Last Wednesday the NYT reported an event that few noticed, but has immense historical significance. The United States Mint, concerned that rising metal prices could lead to widespread recycling of pennies and nickels, has banned melting or exporting them.

For those of you not familiar with economic history this probably doesn't mean much to you (hence the lack of public attention). But those of you that are familiar with historical currency exchange controls, this story is as old as empire. The only difference in this case is that historically this involved precious metals. Today the dollar is worth so little that it involves base metals.

Until 1982, pennies were made of 95 percent copper. The commodity metal value of one of those coins, which still make up a large percentage of the pennies in circulation, is 2.13 cents, according to the Mint.

Ben and Hank's Not So Excellent Adventure

Ben and Hank's Not So Excellent Adventure
by Peter Schiff

This week, in what I believe to be an unprecedented diplomatic pilgrimage, the sitting U.S. Secretary of the Treasury and the Chairman of the Federal Reserve were dispatched to China. Ostensibly they were sent to pressure the Chinese into allowing their currency to appreciate against the dollar. In reality, they were more likely sent there to do just the opposite.

Despite the hawkish public tone coming from Washington, the private dialogue was likely to have been far meeker. My guess is that Bernanke and Paulson kowtowed to America's biggest supplier and largest lender, and pleaded for them to keep the goods and credit flowing. Although it didn't take place in Macy's window, the affair may qualify as the "mother of all butt kissings." The last thing that Paulson and Bernanke want is for the world to recognize the financial precipice upon which the U.S. economy now teeters, and China's unique ability to push it over the edge.

So some even see China as blackmailing the U.S. with a Threat to DUMP ALL Greenbacks:


Tells visiting Bush administration officials they will not sit back and lose their shirts as U.S. Dollar collapses; they are getting out fast and large!!!!!!

China’s currency reserves surpass 1 trillion dollars (DPA)
7 November 2006

BEIJING - China’s foreign currency reserves have topped 1 trillion dollars, setting a new record for the world’s largest currency reserves and sparking a new debate over China’s economic policies. China’s currency reserves increase by nearly 30 million dollars per hour, fuelled primarily by its large trade surplus, which tripled last year to 102 billion dollars, and surging foreign investment....Another factor in China’s large trade surplus is its refusal to allow its currency to float. Foreign governments have charged that China has kept the value of the yuan artificially low, which has made the price of its exports cheaper in other countries.

China became the country with the largest foreign currency reserves at the end of February when it overtook Japan, which had reserves of 881.3 billion dollars at the end of September. China’s reserves were predicted to continue their fast-paced growth. Ba Shusong, an expert for the State Council, China’s cabinet, said he expected the reserves to grow to 1.5 trillion dollars in only two years while the International Monetary Fund predicted they would hit 2 trillion dollars by 2010.

Experts warned of a fast-paced reconstitution of the reserves - 70 per cent of which are believed to consist of US dollars - because such a course could lead to a dramatic fall in the dollar’s value.
Chinese media quoted Zhao Xijun of Beijing’s People’s University as recommending that China use the reserves to import high-tech products or energy facilities, invest in foreign companies or invest in its own underdeveloped social system.

OSTK- The Absurdity of "Buyout" Rumors

The Not-s0-subtle Attack on Put Buyers and Shorts:

A clever blogger has pointed out that many of the LBO "rumors" are pure fabrication and market manipulation attempts. Just spend a little time at "Fly-on-the-Wall" and you'll see that it it cluttered daily with a dozen buyout rumors, especially for junk stocks like Netflix and overpriced tout-momos like RIMM. But the more interesting thing here is that even CNBS is getting into the "buyout rumor" game with that shameless repeat of the SIRI and XMSR satellite radio companies MUST be merged.

From Jeff Matthews' blog:
For starters, while may very well at this moment be the subject of a dozen private equity investment committee meetings—so vast is the pool of private equity these days—the notion of a “leveraged buyout” as reported by the blogger is, I think, a howler, for several reasons.

Reason number one is that has, thus far, proven unable to report an annual profit since its 2002 public offering.

Reason number two is that has frittered away so much cash in the last few years—among other things by buying back its own stock at something like double the current share price—that it has less cash than convertible debt on its books.

Reason number three—and this is something Mr. Rumor apparently never bothered to check—is that has already collateralized “all or substantially all of the Company’s and its subsidiaries’ assets” towards obligations under a Wells Fargo Retail Finance Loan and Security Agreement, fully described in the latest 10Q. (Page 12, footnote 9.)

The restrictions of said Loan and Security Agreement are spelled out quite clearly, and might appear to the average reader to have some bearing on Mr. Rumor's ideas about's future:

15 December 2006

Homebuilders Planning Writedowns- Book Cooking?

From an AP story today: Homies Consider Cooking the Books

The homebuilders might see this as the right time for large writedowns. While market conditions are tough, they still have profits to show this year. Their earnings are likely to deteriorate more in 2007. "Some companies see it as good for them to take a 'big bath' by taking a bigger writeoff sooner," said Robert Dyson, managing director at the accounting firm RSM McGladrey. "Then they get to show a profit improvement in the next year."

But, as Dyson notes, writing down an asset now for recognizing more profit in a later period also could be construed as fraud. "Companies doing so need to be careful to avoid allegations of 'cooked books.' In the end, whether the homebuilders write off more now or later won't have any impact on earnings in the long run. But investors may prefer it done sooner, rather than later.

The key, as noted by Credit Suisse analyst Ivy Zelman, is whether those taking the big charges then can generate higher margins going forward. If they can't, investors could turn on a dime.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)

Moody's may cut KB Home's debt on report delays
Fri Dec 15, 2006 2:03pm ET147
Market View KBH (KB Home )

Legg Mason's Miller sticks with picks, 2007 better???
KB Home to take impairment charge, restate results

NEW YORK, Dec 15 (Reuters) - Moody's Investors Service on Friday said it may cut its ratings on KB Home (KBH.N: Quote, Profile , Research), citing the homebuilder's announcement that it will restate results from 2005 and 2006 because of options expensing errors. KB Home said on Dec. 8 that it expects to take noncash charges in its fiscal fourth quarter ended Nov. 30 that range from $235 million to $285 million due to oversupply of inventory and $90 million for land option contract abandonments.

The company also expects to restate financial reports for 2003 through 2005 and two quarters of 2006 and to adjust results for prior fiscal periods because of options grant measurement errors from 1999 to 2005. It expects a noncash expense of about $41 million spread over several years. "Due to the recent investigation surrounding option backdating, Moody's believes that a material weakness existed pertaining to the company's option granting practices," Moody's said in a statement. "We expect this internal control weakness to be disclosed in the restated 2005 10-K," Moody's said.

KB Home has received consent from its senior note holders and its banking group to amend the indentures and waive default until February 23, 2007 for failure to file its fiscal third-quarter 2006 10-Q in a timely fashion, Moody's said. In reviewing KB Home for downgrade, Moody's will focus on the company's ability to build and maintain liquidity in the face both of a weak housing environment and the worst case scenario of having to fund substantial repayment of its public senior and senior sub notes, Moody's said.

Moody's rates KB Home's senior subordinated debt "Ba2," two levels below investment grade. KB Home's 6.25 percent bond due 2015 last traded at 93.4 cents on the dollar, according to MarketAxess.

© Reuters 2006. All Rights Reserved.

Homie Bond Ratings are ALREADY Bad


Never Argue About a Crazy Market

"you should never argue about a crazy market./ greenberg"
well said..... thanks herb!/
Is it brains or a bull market?
Investors shouldn't lose sight that there are two sides to each trade
"It's said you should never argue with a crazy person. I'll add that you should never argue about a crazy market."
And that pretty much describes where we are - in a market that hangs by the thread of oil until it decides the risk of rising oil prices is irrelevant; in a market that hangs by the thread of the latest economic indicator, until it decides that indicator is irrelevant; in a market that one week is enthusiastic about the Fed's likelihood of cutting interest rates and the next week enthusiastic when it looks like a cut is less likely.
This is a market, as I've written previously, that lacks conviction and will fall in a vacuum on the whiff of something unexpected -......

Is the economy growing or is the economy slowing? YRC Worldwide , a trucker that should have its fingers on the pulse of the economy, says the latter.) Doesn't really matter because, as of today, the market sees both as good.

Not to worry: All that really mattes is "global liquidity," a catch-all to explain the inexplicable.

"Unnatural," is the way market strategist Jeff Saut of Raymond James explains this market in his latest missive. "....
He further marvels at how the SEC caved in to a New York Stock Exchange petition in mid-October to reduce margin requirements "for an already over-margined hedge fund community. And that 'mysterious surprise' gave the major market indices another leg up (read: re-rally)....Why in the world would one introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!" (And to us!)

What about the value of the market relative to earnings? Everybody says it's cheap. Everybody, that is, but John Hussman, of Hussman Funds, who in his weekly commentary writes that at 18-times earnings the market is into its "third phase"( see labels!), ......."

There's no shortage of pundits who would disagree, of course. But that, dear readers, is what makes markets - inverted yields, consumer credit, shaky subprime-mortgages, the weak dollar, uncertain housing, financial leverage and complacency, be damned. Minyanville's Todd Harrison put it best in a column here the other day when he wrote, "For every risk, there is an offsetting reward. And those betting on a year-end ramp would be wise to remember that this is a two-way street." Amen, bro'.

13 December 2006

Mortgage Deliquencies Soar- Bad Lending Intensifies

U.S. mortgage delinquencies jump in third quarter
no wonder the mbs market is demanding higher risk premiums.....

U.S. homeowners had a harder time keeping up with their mortgage payments in the third quarter, the Mortgage Bankers Association said Wednesday, with the delinquency rate rising to 4.67% from 4.39% in the second quarter. A year ago, 4.44% of mortgage holders were 90 days or more past due on their loans. The foreclosure rate inched higher in the third quarter, with 1.05% of mortgages in the foreclosure process vs. 0.99% in the second quarter, the MBA said. While delinquency rates on all types of loans rose in the third quarter, it was the subprime category -- loans made to less creditworthy borrowers, that shot up the most to 12.56% from 10.76% a year ago.

Oh, and a $150,000 loan for $450 per month... UFB!

Oh, Booyah! Retail "Gain" of 1% Due to New Sampling Method

Retail sales based on new sampling- unbelievable

"A new sample was introduced with the September 2006 Monthly Retail Trade Survey (MRTS). The new sample was designed to produce estimates based on the North American Industry Classification System (NAICS). This section describes the design, selection, and estimation procedures for the new sample. For descriptions of the prior samples see the Annual Revision of Monthly Retail and Food Services (formerly called the Annual Benchmark Report for Retail Trade), or prior benchmark reports."

As pondered by a PO'd Bear

"all a scam. this bubble will pop with a huge bang. i mean almost every retailer reported terrible sales for the nov month and here are retail sales good. bull crap its all a lie. was in wmt tonight it was a ghost town. i've ver seen it that slow ever much less a holiday night.."

Lear (LEA) -Little Prospect of Near Term Recovery on Auto Woes

LEA : $30- Little Prospect of Near Term Recovery on Auto Woes

Unrelieved stresses in the supply base in 2007 and a hesitancy by original equipment manufacturers to grant long-term contracts to suppliers in weak financial condition are expected to lead to more bankruptcies over the intermediate term,”
Fitch ratings agency, November 2006

Bottom fishers looking for recovery plays in the beleaguered auto parts industry should not nibble on Lear Corporation (LEA:NYSE), not in 2007 and maybe not even in 2008. Financial performance of LEA deteriorated steadily during 2006, even after management began the year claiming 2006 would be "better than 2005". Of course, its CFO resigned in February 2006. Wall Street analysts looked for a “bottom” during the summer and expected a quarter in earnings for Q206, but LEA lost a dime. When Ford cut Q3 production plans by 3% in the late spring, the tenor of the year was set.

As rock group Led Zeppelin said, “The Song Remains the Same.” LEA’s earnings growth will continue to be impacted by pressure from lower production volumes, higher commodity prices and adverse foreign currency movements. As domestic automakers ended 2004, they were highly optimistic about the coming sales plan for the year. Then 2005 turned into a profit disaster as the Big Three’s efforts to clear inventory using rebates and cash incentives led to record losses. Bondtracker Fitch Ratings auto analyst Mark Oline said on a conference call that “2006 was a year of turmoil in the auto industry and there is no reason to expect that 2007 or 2008 will be any different.” And IRN, a Michigan market researcher, forecasts U.S. 2007 sales of 16.3 million light vehicles, or cars and trucks. That would be the lowest since 1998 and a drop of 300,000, or 1.8%, from 2006's expected sales of 16.6 million vehicles.

The auto parts industry is a good advance indicator of the health of the overall auto industry and the 2007 outlook suggests more margin pressure. “The stresses in the supply chain will continue throughout 2007, as lower production from domestic manufacturers, pricing pressures and high commodity costs prevent any significant improvement in operating results or financial position,” Fitch said. Unrelieved stresses in the supply base in 2007 and hesitancy by original equipment manufacturers to grant long-term contracts to suppliers in weak financial condition are expected to lead to more bankruptcies over the intermediate term,” the ratings agency said.

Since 2002, there have been 11 defaults by U.S. auto suppliers, including four in 2005 and one this year, including Delta Corp, Dana Corp (DCN), Tower Automotive and Collins & Aikman. If you believe the leveraged buyout industry, the auto-parts industry is for sale at liquidation prices and it now controls $1.1T in auto-parts supplier assets - more than twice what they had five years ago, according to Hedge Fund Research. So the industry is being disassembled, either shut down and moved elsewhere or consolidated by hedge funds and vulture “financiers” such as Carl Icahn and Wilbur Ross.

Ross, known for investments in distressed industries, has turned his focus in recent years to the auto parts sector. He has also invested in the steel, coal, textile and financial services industries. The buyout firm Ripplewood Holdings, along with private-equity firm Cerberus Capital Management and hedge fund Appaloosa Management, which already owns a 9% stake in Delphi, are angling for a Delphi take under. Billionaire investor Carl Icahn of American Real Estate Holdings (ACP) wants to buy more of Dana Corp's (DCN) $2.25B unsecured debt, but lawyers aren't returning calls. Icahn, who bought half, or $101.25M, of the Toledo, Ohio, auto-parts supplier's debt in March, has increased his stake in General Motors Corp (GM) in the past year, and bought a 4% stake in LEA during the summer.

LEA has just sold its only potentially profitable systems business, North American interiors, triggering a $675m Q4 charge and surrendering 75% of ownership into a joint venture led by Ross’ International Automotive Components Group (IAC). So all that is left of Lear is its electronics and seating businesses. And another vulture financier, Carl Icahn controls 2.64m shares of LEA after the company sold him $200 million of common stock in a private placement to funds his firm manages. And, mysteriously or not, Deutsche Bank raised its price target on Lear to $28 from $19 in mid October on the Icahn speculation. The offering included 8,695,653 shares of Lear common stock issued at $23.00 per share. So DBAB facilitated the generation of at least a $70 million profit for hedge funds, not including those funds which bought the stock before the deal was announced when it began rallying sharply off $18 in late September. In a word, incredulous.

Despite $4 billion of revenues during Q306, which was $100 million light, LEA reported per share losses of $1.10, twice the consensus estimates of $0.61 in losses. So now LEA carries a market cap is $1.95 billion, long term debt of $2.8 billion, and virtually no shareholders’ equity. In addition, the swing back towards more fuel-efficient car sales from trucks works against a turnaround for LEA which is geared to Ford and GM large SUVs and has now lost the revenue opportunity for GM’s Dodge Ram trucks starting in 2009. Moreover, truck resale values are slipping as used and on-the-lot inventory is at record levels.

The rest of the industry is also reeling.

* Toledo, Ohio-based Dana Corporation (DCNAQ-NAZ) is already operating under bankruptcy protection since March 2006. Dana was a leading supplier of drive train, chassis, structural, and engine technologies for every major vehicle and engine producer in the world. It’s closing eight facilities over two years, sharply reducing US workforce with any remaining production being shifted to Mexico.

* Then take a gander at a hotter segment- aluminum wheel maker Superior Industries (SUP:NYSE). It, too, is investing in Mexico and NOT the U.S. It’s Q306 results were disappointing due to poor capacity utilization as a result of decreasing light truck volumes. Like Dana, it slashed more than 500 manufacturing jobs and closed its Johnson City, TN facility in September after 225 layoffs in June at another plant.

The number of survivors in the “catch the falling knife” profession is few and bloodied.

12 December 2006

MANIPULATION: RayJay Admits "Unnatural Market Action"

Raymond James' Jeff Saut offers his take on the recent market action:

As for the “here and now,” we have deemed the recent performance by the major market indices to be somewhat “unnatural.” Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher.

This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally” vaulted higher without so much as ANY correction. We have suggested this phenomena was triggered by Goldman Sachs' re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.

Following that, the Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve (SPR) until after the winter months, even though the SPR was below prudent norms. This is also a mystery to us, but once again there you have it.

Then, when it looked like the equity markets were set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC, and was granted, a mysterious reduction in margin requirements for an already over-margined hedge fund community. And that “mysterious surprise” gave the major market indices another leg-up (read: re-rally). Again, why in the world one would introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!

Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.

The current unnatural state of the equity markets continues to leave us cautious; although we have learned the hard way it is difficult to “break” the equity markets to the downside during the ebullient month of December.

Barry Ritzholz of Big Picture points out: "Jeff has been around a long time, has a great track record, and is a wizened Market observer. When someone like him says that market action is unnatural, its worth considering . ."

Even the Commercials have increased their SPY short positions steadily this fall and not YET gotten paid.

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