The Big Picture |
- Succinct Summation of Week’s Events (4.1.11)
- Currencies: Global Tactical Asset Allocation (GTAA)
- When Will China Overtake America?
- Employment Indexed to Beginning/End of Recession
- MISH Jumps the Shark
- Ignore the hawks says Dudley, all ok
- A Closer Look at NFP (Fool’s edition)
- Daily Show: Bad News Baier
- How to Make a Little Money in Digital Publishing
- Interest Rate Policy on the Brain
| Succinct Summation of Week’s Events (4.1.11) Posted: 01 Apr 2011 12:30 PM PDT Succinct summation of week’s events: Positives:
Negatives:
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| Currencies: Global Tactical Asset Allocation (GTAA) Posted: 01 Apr 2011 11:44 AM PDT |
| When Will China Overtake America? Posted: 01 Apr 2011 11:00 AM PDT
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| Employment Indexed to Beginning/End of Recession Posted: 01 Apr 2011 09:00 AM PDT Want a decidedly different way to think about the post recession employment situation? Try indexing the jobs recovery to the beginning and end of Recessions (see chart below). That relative perspective informs you as to what the last business cycle recession we saw way back in 1990. Whenever economists talk about Post WW2 recession/recoveries, what they mean is “a cycle like 1990.” Note that we haven’t had an ordinary recession/recovery cycle like 1990 in the 21 years since (perhaps this helps to explain why economists as a group have stunk the joint up). The 2001 contraction was a post-market bubble/crash recession. The booming economy and technological gains drove things for a decade until they went full on bubble. That ultra-low rate driven recovery took 47 months — an unusually long time — for jobs to come back. The 2007-09 contraction was a credit crisis driven recession. Its depth and breadth make it different than ordinary cyclical recessions. It was caused in part by the Fed action following the 2001 recession. > Employment Indexed to Beginning/End of Recessionclick for larger graph > I cant wait to see WTF the next recession is going to look like . . . |
| Posted: 01 Apr 2011 07:46 AM PDT I like Mike Shedlock — but I have no idea what to make of this foolishness he recently posted: That “source” Mish is citing is a (WTF?) IBD Editorial — an editorial page notorious for their hard right views. They do not believe that radical deregulation of the financial markets had anything to do with causing the crisis. I wont even bother debunking the foolishness there — it is a flat earth argument that has been thoroughly discredited. Dude, you have put out enough intelligent commentary over the years that I was willing to skip past the populist ravings, the anti-union screeds, the gold buggery, even the cranky end of world nonsense that seems to be in fashion. But you need to ask yourself: Are you Seeking the Truth — Or Obscuring It? This foolish posts suggest the latter. Please let me know when you return to the former. Until then, there are more accurate and intellectually honest things awaiting my time . . . > Previously: |
| Ignore the hawks says Dudley, all ok Posted: 01 Apr 2011 07:30 AM PDT Countering the more hawkish tone in Fed speeches given by Fisher, Plosser, Kocherlakota and Lacker, the Fed’s Vice Chairman is taking the exact opposite tact and saying that there is nothing to fear with inflation and sees no reason to pull back from stimulus. Adults can always disagree when looking at the same set of facts but to see no reason to pull back from a tripling of their balance sheet and virtually zero interest rates is a view that is tough to square with and highlights that this Fed is run by the most extreme doves the institution has ever seen. He also said the rise in commodity prices has “virtually nothing” to do with Fed policy. They take a lot of credit for lifting stock prices and tightening corporate credit spreads but commodity prices are somehow in its own fundamental universe according to the Vice Chairman of the Federal Reserve. I grit my teeth. |
| A Closer Look at NFP (Fool’s edition) Posted: 01 Apr 2011 07:07 AM PDT Today’s Nonfarm payroll employment report showed an increase by an above consensus 216,000 in March. This was a decent number, a step showing marginal improvement. But as per our earlier discussion, the change in March’s net employment was about 0.1%; the upside surprise was about 10% higher than consensus. In other words, the entire employment difference between forecast estimates and actual release was 0.01% of total employment. Put that way, its hard to get terribly excited one way or another. Let’s take a closer look at the April Fools release:
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| Posted: 01 Apr 2011 06:35 AM PDT I tweeted about this earlier this week: Doesn’t quite finish strong, but hits all of the right hypocrisy points: Bret Baier needs to be warned that bias is seeping into Fox News after his boss admits to mischievously speculating about Obama. |
| How to Make a Little Money in Digital Publishing Posted: 01 Apr 2011 06:00 AM PDT The Wall Street Journal publishes some numbers from the few digital-only publishing houses and they are not comforting. The big six book publishers are faced with fewer retail location now that Borders is closing stores and Barnes and Noble is devoting more selling space to merchandise and the Nook. But trying to run a publishing house on e-book sales alone is going to be tough. All three houses Jeffrey Trachtenberg contacted claimed $1 million in sales this year or last. But Open Road, the start-up financed by $7 million of Jerry Kohlberg’s money, is already gasping for more. With a burn rate of nearly $5 million a year, it is no wonder that Kohlberg claims he’s closing another round of financing. Open Road really needs the money. Looking at the numbers presented in the Journal’s article, you’ve got to wonder who’s dumb enough to put up cash here. Open Road is carrying huge expenses–19 employees, 13 of which are marketing in a medium with few natural marketing outlets (the bulk of the business takes place on Amazon)–but has only been able to muster $1 million in sales. The article has Open Road claiming they’ll increase their sales to $10 million in 2011 but doesn’t offer much to justify that claim. The CEO says they sold 16,400 “downloads” one week last month but that only annualizes to a doubling of sales, not a 10-fold explosion. Let’s hope Kohlberg’s investors got a little more insight or, at least, better math. Open Road claims 400,000 downloads since last May off 420 titles published. That’s fewer than 1,000 copies of each title sold if we’re averaging out the titles. So to get to 10 times the revenue, it would appear that Open Road is going to need 10 times the titles or 4200 new ebooks in the next year instead of the 2,000 they project in 2011. Let’s put that number in perspective. Random House publishes somewhere around 2000 new titles a year in the US. The revenues they generate $1 billion in revenue worldwide. Even making some conservative assumptions, Open Road is hoping in their best-case scenario to generate 2% of the Random’s revenue (I’m lowballing the US number at $500m) from the same number of titles. Yes. Digital publishing has a much lower cost of goods and cost of selling (though Open Road seems to be proving that wrong by spending $400,000 a month in overhead, god knows on what.) But the disparity between the two models suggest that being a digital publishing house is a non-starter. It’s true that my calculations above are based upon average numbers. Publishing is a hit business. So there’s no such thing as an average title. Even publishing backlist titles as Open Road is mostly doing, the sales are going to be skewed to a few titles that sell well. A real big hit could make it easier for Open Road to open up the market and reach its target revenues. In the old book business, you bought hits by buying big properties that came on the market. In the digital book business, you’ve got to hope that you find the next Amanda Hocking. How you predict that in advance, as Open Road is doing, is anybody’s guess. The $10 million investors are being told that Open Road will make next year is probably not a random number. It’s just a product of what the company needs to try to keep a straight face. The way Open Road is paying authors, it would need to generate that much in sales just to yield the $5 million in needs to cover operating costs after the cost of sales. Open Road is paying authors 50% of what it receives from the publisher. If Open Road had $1 million in revenue over the past year, it kept only $500,000 against it’s $5m tab. Sales and margins will have to keep increasing to justify that kind of outlay. Sadly, digital-only publishing isn’t a high margin business for publishers. With 400,000 downloads generating $1 million, Open Road is seeing a neat $2.5o per download. Since Open Road receives 70% of the selling price, the average title at Open Road is selling for less than $4.00. That means Open Road’s best sellers aren’t premium titles. The prestigious titles listed in the chart accompanying the story all sell for $7.50 or more. For Open Road’s margins to expand, it will have to find the kind of must-read frontlist books that the traditional publishers are best at finding. Indeed, just last week Amanda Hocking decided that for the right up-front price, she would be happy to let St. Martin’s Press handle her publishing so she can concentrate on writing. What Open Road hopes to concentrate upon to increase its revenue 10-fold in the coming year (and presumably some smaller multiple again the next year) remains a mystery. > Source: http://online.wsj.com/article/SB10001424052748704355304576214891415953116.html |
| Interest Rate Policy on the Brain Posted: 01 Apr 2011 05:30 AM PDT Interesting commentary this morning from an institutional research shop: ~~~ Policymakers in both Europe and the U.S. have begun to hedge against the risk of a stronger economic performance in the second half of the year, and as policymakers have hedged, traders have scrambled to adjust. You get a much clearer sense for the market's expectations for Fed policy by looking at the super-liquid Eurodollar futures market than by watching, say, the stock market or even the short end of the Treasury curve (although the 2-year yield isn't a bad proxy). Below I've pasted charts which show Eurodollar calendar spreads which approximate rate hike expectations for the second half of this year (left chart) and for 2012 (right chart) over the last two years. As you can see, traders have become more hawkish in recent days. click for larger graphs Eurodollar futures aren't a perfect proxy for hike expectations because as unsecured, wholesale loans between banks, they are not risk-free like Fed Funds are. However, they are extremely liquid and at the moment there isn't any interbank risk premium anyway (this is what is meant by "accommodative financial conditions"). So, they're a good enough indicator for our purposes. Here's what's going on with these charts:
Meanwhile, the ECB is poised to raise its minimum bid rate to 1.25% from 1.00% next week, effectively separating its interest rate policy from its liquidity policy – something which the Fed has said that it too can accomplish now that it has the power to pay interest on reserves. Bank of England Governor Mervyn King is also under pressure to address rising inflation, and the upshot of it all is that the hawks have gained the upper hand. Maybe it's because I saw the man behind the curtain in 2008 and 2009, but I just can't take any of this "strategy" seriously. The Fed right now is like a player – as in, "don't hate the player, hate the game" type of player. The market is the one being seduced. Easy monetary policy is – you guessed it – the booze. Does the seduced party care about or even remember what the player says over drinks? The cheesy lines, the forced confidence – the player thinks these things matter but the seduced party has already made up their mind. As long as the player doesn't screw up massively and keeps the drinks coming, the night is going to go well. It's the same with the Fed and the market. I'll spare you the detailed explanation since I'm pretty sure you can figure it out on your own. Suffice it to say that we're at that stage of the night where the player feigns concern over how much the seduced party has had to drink. It's all part of an age-old script but the lines themselves do not matter. Meanwhile, I'm sitting at the other table, drinking a cranberry juice and watching the whole thing go down. Play on, player – as the kids say. I see no signs that this odd bull market can't continue (see my March 28th Uptick for my reasoning). The margin of error separating Europe from a liquidity crunch and debt deflation narrowed again this morning thanks to the news flow out of Ireland and Portugal, and the U.S. consumer remains on life support, but promises have been made to markets and I see no sign of a breach of contract. If the markets can produce new highs in the coming weeks, the economy will lurch forward as well, burdened though it is with debt. Those betting on rate hikes will prosper until chaos strikes (who knows what form it will take) and reveals the vulnerabilities of this new system. |
Too funny, via 
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