Friday, January 31, 2014

Bernanke: The Man Who Saved The World - And Got Almost Crucified For That

(Drivebycuriosity) - I want to thank Ben Bernanke. The chairman of the most important central bank of the world will leave office tomorrow Saturday February 1st. He did a great job. And in spring 2009 he saved the world. 

I remember the situation then very well. I was writing market comments for a German online service, 2 or 3 a day.  And every evening I posted a Wall Street closing comment.

Early 2009 the market was ruled by panic. Almost everybody was extremely pessimistic. Stocks were totally out of favor. Many dumped their stock portfolios blindly out of fear of a coming armageddon. Short selling (borrowing stocks from the bank and selling them immediately in the hope to buy them later back much cheaper) was a viable business model. Herds of hedge funds and other speculators were attacking everybody who seemed vulnerable by short selling stocks & bonds and buying derivates which were bets on a bankruptcy of a company or a country. Thus the stock market was in a downward spiral which paralyzed the whole economy. Companies ceased investing & hiring.

Bernanke stopped the downward spiral. He and the Federal Reserve Bank broke the massive pessimism by pumping billions of dollars into the ailing economy. The massive stimulus programs - quantitative easing Q1,2 & 3 - and the zero interest policy of the Fed were necessary to squeeze the extreme paralyzing fear out of the markets.

Here some tidbits from Bloomberg (bloomberg): November 25, 2008 the Fed launched the first round of quantitative easing, or QE1, and announced to buy up to $500 billion in mortgage-backed securities (MBS) and $100 billion in housing agency debt. December 16, 2008 Bernanke & Co. cut overnight federal funds rate to between zero and 0.25%. March 18, 2009 the Fed announced they will expand QE1 with additional $750 billion in MBS, $100 billion in housing agency debt and $300 billion in Treasury securities. They also vowed for first time to hold short-term rates near zero "for an extended period."

It needed some time, but it worked: In June 2009 the U.S. economic recession ended! The 18-month downturn was the longest and deepest since the Great Depression.

Many criticize Bernanke that Q1,Q2 & Q3 started & fueled a massive rally on the global stock markets. But rising stock prices were necessary to restore confidence into the economy and to break the panic mood. Gaines on the stock market also lifted the wealth of many Americans and encouraged them to spend more for consumer goods (wealth effect). Thus Bernanke initialized a global economic recovery which is now self-sufficient and sustainable.

Bernanke is hated because he ruined the strategy of many hedge funds and other short sellers who tried to earn fortunes from a meltdown of the economy.

China: Happy Year Of The Horse?

(Drivebycuriosity) - Today the Chinese celebrate New Year, the begin of the "year of the horse". Last year, the "year of the snake", delivered mixed results: China`s economy grew 7.7%, the same rate as in 2012, but the Shanghai Composite Index, a gauge for Chinese stocks, lost 11%. What can you expect from a snake? Maybe the "horse", which stands for speed, will be more investor friendly.

In spite of annual growth rates of 7% plus Chinese stocks are in a bear market: From its peak of around 3,400 points in summer 2009 the Shanghai Composite had been falling around 40% to around 2,000 points through the end of 2012. Since then the index has been glued to the 2,000 mark.

It seems that Chinese stocks are trapped in a pessimism bubble. Investors are obsessed with the negative aspects and are blind for the ongoing strength of the broad economy. For years China bears like New York Times correspondent Paul Krugman and Jim Chanos, a hedge fund manager and notorious short seller, have been banging the "China crash drum"  (driveby). The China crash callers claim that China is suffering from huge structural problems like too high debts and too huge investments into real estate which would cause a "hard landing" of the Chinese economy.

This view is strongly biased as the annual growth rates of 7% plus show. China is rapidly transforming into a consumer economy like  the U.S. and other modern countries. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales (growth rates 13% plus) demonstrate.

Last year Beijing announced a new economical reform to bolster China`s transformation. "The Economist" calls the announcements the most wide-ranging and reform-tinged proposals for economic and social change in many years (driveby). According to Bloomberg the announced changes are aimed at giving more influence to market forces and loosening government controls.

The reforms include:

- an end of the strictly one-child-only policy which should reactivate China`s slacking population growth, giving consumer spending a boost
- allowing farmers to sell their communally owned land at market prices  which - according to the bank Société Générale - will boost farmers’ income, thus providing them with the start-up capital to settle in the city
- permitting private investments in state-owned companies which should make them more efficient

The country will be still controlled by the communist party which will keep her monopolistic political power. But citizens and entrepreneurs gain more economical freedom. This means less Mao Zedong, who had enforced the strict control over everything by the communist party, and more market economy in the spirit of Adam Smith, Friedrich Hayek and Milton Friedman, who called for the "freedom of choice".

The reforms should bolster consumer spending and stabilize the economic growth in the range of 7%. China also could get some tailwinds from the advancing global economy. Especially the recovery of battered Europe should rekindle China`s exports.

All 3 factors: consumer spending, reforms & exports could work together amplifying each other. 

History shows that any bubble has to burst sometime. Maybe the "year of the horse" is the time when the China pessimism bubble pops and the stock market recovers.

Monday, January 27, 2014

Culture: Street Art - Steve Jobs In Memoriam

(Drivebycuriosity) - This evening`s meltdown of Apple (stock is down minus 8% after hours) reminded me again of Steve Jobs. The technology visionary also became an icon of pop culture, kind of.

On the streets of Manhattan you can see a very special Jobs portrait. His face is dissipated on a row of fencing posts on Bond Street in Lower Manhattan. You can see the image just from a certain angle. Most passenger seem to overlook the picture. I tried to capture the portrait in these pictures.

I guess this method is called lamella technology, but I am not sure. Anyway it is a fascinating way to remind of him.

New York City: Pullino`s R.I.P.

(Drivebycuriosity) - Pullino`s has closed its doors. It seems the popular pizza place at Manhattan`s East Houston Street is a casualty of the gentrification. Owner Keith McNally, one of the leading entrepreneurs of New York`s restaurant scene (Balthazar, Minetta Tavern, Pastis, Schiller´s and more), wants to open there a French restaurant called Cherche Midi. It`s all business.

I will miss Pullino`s. Their pizza didn`t quite come up to my European experiences. American pizza has nothing to do with the Italian original, which was invented in Napoli (Naples). But I enjoyed the ambiance there. The library of bottles on the walls gave the place a special aura. In the evening hours the restaurant was crowded with cool people. And if you had a solitary brunch there you found a lot of magazines. 

I remember especially the morning after the blizzard of Christmas December 25th 2010. Manhattan was covered with 20 inches of fresh snow, many streets were filled up, almost every place was closed, but Pullino`s  was a friendly and warm oasis in a polar dessert and served brunch. Priceless.

R.I.P. Pullino`s

Sunday, January 26, 2014

Movies: I, Frankenstein

(Drivebycuriosity) - In the year 1818 the English author Mary Shelley published her book "Frankenstein; or, The Modern Prometheus". The gothic novel was not just a horror story it also touched questions about science, technology (genetic engineering) and philosophy. The makers of the movie "I, Frankenstein" instead focused on a fantasy spectacle (imdb). There Frankenstein´s creature survives to the presence and got involved into a war between gargoyles, who want to protect humankind, and demons, who want to rule the world. Frankenstein isn´t a monster anymore, instead he is a suffering individual which has gained some diligence over the centuries. The film tanked at the box office, maybe it was wrongly tagged as a horror movie.

"Frankenstein" reminded me of the "Underworld" series by the same producers, which also described a war between fantasy creatures, but lacked the sex appeal. I missed especially Kate Beckinsale who´s  tight leather outfit was the greatest attraction of "Underworld".

"Frankenstein`s" cinematography wasn`t bad, even that the film looked like a low budget production. The rare 3D effects were a bit too frugal for my taste. According to Wikipedia the film was shot in Australia, even the outdoor impressions of a allegedly medieval cathedral, maybe to save a lot of money (wikipedia). But my wife and I had fun anyway, because we had expected just a simple entertainment - and that was what we got.

I enjoyed watching Bill Nighy, who also had important parts in the "Underworld" series. Again he displayed a mixture of coolness and goofiness. Aaron Eckhart, as Frankenstein´s creature, didn`t deliver an Oscar worth performance, but did a solid job as a suffering outsider. 

"I, Frankenstein" is a passable entertainment for those who like the genre and don`t have too high expectations.

Saturday, January 25, 2014

Stock Market: The Correction - A Sinister Song In The Clouds?

(Drivebycuriosity) - Finally, the correction is here. Yesterday the S&P 500, the gauge for the U.S. stock market, dropped 2.1%. It lost around 3% for the whole week.

Many had been praying for this correction. The S&P 500 had risen smoothly 17.5% over 142 trading days since the last 5% pullback, representing the third longest winning streak since 2000 (financialpost).

According to the media the recent sell off was triggered by the meltdown of emerging market stocks and disappointing economic news from China. Stock markets from India to Brazil have been under pressure spooked by fears that the tapper (the U.S central bank is winding down their massive bond purchases) might raise interest rates which could hurt the already fragile emerging economies. And on Thursday China reported a surprising slow down of their manufacturing growth, nursing fears the world’s second-largest economy could cool to much. But on Friday interest rate dropped sharply (good for emerging markets?) and the stock market in Shanghai closed with a plus of 0.6% and gained around 2.5% for the whole week. So what?

I believe the selling didn´t had any fundamental causes. It was rather just one of the usual hiccups that accompany every rally, a phenomena of mass psychology & weird herding behavior - just a sad "#song in the clouds".

Therefore I reckon that this correction will be short lived and moderate and not the end of the bull market as the perma bears (Roubini, Faber, Shiller & Co.) want to make us believe.

I am encouraged by the now running earnings seasons (companies are reporting their Q4 numbers) has started encouraging. Of the 102 companies in the S&P 500 that have reported earnings to date for Q4 2013, 63% have reported earnings above analyst expectations (marketwatch). On a market-capitalization basis, weighted earnings of S&P companies that have reported so far grew 10%, above the 8% in the third quarter (marketwatch). Next week we expect numbers from Amazon, Apple, Caterpillar, Facebook, ExxonMobil, Google and more.

Rising company earnings (and profit margins) have been driving the rally since spring 2009. The recent earning season is backing my view that we are in a new industrial & technological revolution. As I had explained in a recent block post (driveby) technology will generate rising profits for years and thus financing a secular bull market. And the recent correction will be forgotten soon.

Wednesday, January 22, 2014

Movies: Inside Llewyn Davis

(Drivebycuriosity) - Modern cinema wouldn`t be the same without the Coen Brothers. Joel & Ethan Coen delivered a list of movies which belong to my all-time favorites (for instance "No Country for Old Men, "Fargo", "Barton Fink"), but also films I could do without (especially "The Ladykillers"). Therefore I was cautiously curious for the newest Coen Brothers opus "Inside Llewyn Davis" (imdb).

The film meanders somewhat between the tops and flops of their oeuvre. It describes one week in the pathetic life of a folk singer-songwriter in legendary Greenwich Village (New York City) in the early 1960s (wikipedia). It is a somewhat sad story about dysfunctional relationships & economical misfortune blended with the typical dry Coen Brothers` humor and a dose of surrealism. 

I had some problems with the casting. I didn´t get why they choose the Latin American actor Oscar Isaac for the role of Llewyn Davis, who's name signals an Irish ancestry. Isaac, who is known for action movies like "Sucker Punch" and "The Bourne Legacy", seems to be a stranger in the Greenwich Village scene of this days. I also was irritated by Justin Timberlake as a fellow Greenwich Village folk singer. Timberlake stands for contemporary soft pop and easy listening and looked a bit lost in the bohemian ambiance the movie describes. But, maybe this casting is part of the special Coen Brother humor and might even has a philosophical connotation about our roles in life.

The rest of the cast was as great as you can expect from such ambitious filmmakers. John Goodman gave a powerful and on the same time hilarious performance. Carey Mulligan made her beauty and her talents more visible than in "The Great Gatsby" and "Shame". It was glad to see F. Murray Abraham again, even in a short role. The actor played unforgettably Mozart`s nemesis Salieri in "Amadeus" around 30 years ago.

But my favorite actor was a orange colored cat (or where there more?) who´s spontaneity added some goofiness to the plot and made me laugh to tears. 

Bruno Delbonnel´s cinematography gave the movie a lot authenticity and beauty.  His Oscar nomination is well deserved.

If I had 10 stars to spend I would give 6 to "Inside Llewyn Davis"  (including 2 for the cat and 2 for cinematography).

Tuesday, January 21, 2014

New York City: Get Used To The Polar Vortex

(Drivebycuriosity) - I seems the U.S. are under the control of the polar vortex. Arctic air is streaming from northern Canada southward and freezing the midwestern and eastern parts of the country.

At the north east coast this chilly air is blending with a humid depression from the Atlantic ocean causing heavy snow fall. The streets and parks in New York City are turning into a winter landscapes. Even the usually crowded Bryant Park in the center of Manhattan got a winterly fairy tale scenery.

Here are some impressions from the Times Square area and Bryant Park. Enjoy.

Monday, January 20, 2014

Culture: Pixies @ The Capitol Theatre, Port Chester, New York

(Drivebycuriosity) - Finally. I got the chance to see "The Pixies". They are a legend and influenced the alternative rock scene in the late 1980s and the 1990s. They disbanded in 1993, but reunited in 2004, still lead by founder Black Francis (pixies  wikipedi).

Yesterday`s show at the Capitol Theatre in Port Chester, a suburb of New York City, was quite something. I was impressed how powerful and fresh the band performed after all these years. Frontman & founder Black Francis presented his somewhat quirky but catchy compositions with force. His voice, which often climbed to falsetto, gave the songs their characteristic life.

The founder, who also played rhythm guitar, got congenial support from Joey Santiago (lead guitar), Paz Lenchantin (bass) and David Lovering (drums). I remember especially Santiago`s  mesmerizing solo which showed what rock musicians are capable off. Together they delivered a virtuous mixture of pop melodies, surf and death metal attacks. The swinging "Where is my mind" and other pieces provoked the audience to dance ignoring the seating in the theater house.

The light show translated the songs into cinematic tableaus and created surrealistic pictures. Some of the illumination effects reminded of the beginning of the film "Alien" when spaceship "Nostromo" is approaching an unknown planet and the machines are slowly starting to awake.

Thanks a lot to Black Francis & Pixies.

Economy/Stock Markets: Will Profit Margins Kill The Rally?

(Drivebycuriosity) - Since spring 2009 U.S. stocks have been rising more than 160%. The rally has been driven by company profits which have been climbing with a similar rate. The ubiquitous priests of doom claim that the rally will soon come to an end because profits will have to fall. Those bears refer to the fact that the profit margins of the companies (earnings in percent of the revenues) have climbed to a historical unprecedented high of around 10%.

As you can see in the chart above profit margins have averaged about 6.5% over the last 65 years and every time they’ve gotten well above that 6.5% range they’ve come back to earth (if the image doesnt function you can find it here:   pragcap   Google also shows a lot similar charts google).

I don´t agree. I believe that there are at least 2 reasons that profit margins will stay high and could even go higher:

1. The recent rally in company margins reflects a new industrial revolution. Since the early 18th century automatization has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs and higher profit margins. Since the early 18th century the technological process has been rising our wealth significantly while simultaneously reducing our working hours.

It seems that this process is accelerating again. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are beginning to use 3D-printers to become more cost efficient and flexible.

This developments are boosted by the rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on.

2. The recent jump of the profit margins also reflects the rise of the emerging markets. China & Co. create additional markets. Therefore companies can produce more which translates into shrinking average production costs (economies of scale). Emerging markets also deliver cheap supplies (most computers, tablets & smartphones are manufactured there) which reduces the production costs further.

All these developments are working together and are aggravating each other.  The blog "Continuations" speaks about "lightly organized global networks" (continuations). The described processes seem to accelerate again and to provide a surge of productivity & efficiency which should to keep profit margins above 10% or even to drive them higher. This should translate into further strong gains on the stock markets.

Sunday, January 19, 2014

Culture: American Apparel Mannequins - Back To Nature?

(Drivebycuriosity) - Shopping windows have to catch the attention of passengers. Often they entertain, sometimes they provoke.  The fashion chain American Apparel has a tradition in provocation.

Now their shop on Houston Street on New York`s Lower East Side has something special: Their shopping window displays mannequins with clearly visible pubic hair.

The public relation coup got a lot media echo of course. Even papers in overseas reported about the hairy display (dailymail). The German media site "Der Spiegel" titled his report "back to nature" (Zurück zur Natur spiegel).

Last December the New York Times had an article about an alleged comeback of the pubic hair (nytimes). Maybe so. But I remember the film "Blue is the warmest color", where the girls were neatly shaved (driveby). Their behavior showed one reason why they did that. At least no compass was needed.

Thursday, January 16, 2014

Culture: Carrots And Sticks - The Strategy At Frick Collection, New York City

(Drivebycuriosity) - Museums need tons of money. American museums usually collect their funds from donors, like the Guggenheim Museum, the Museum of Modern Art and the Metropolitan Museum of Art and others. But museums also charge entrance fees and they sell memberships to bolster up their revenues.

I seems that the Frick Collection, a fine art museum on Manhattan´s Upper East Side (, uses a special strategy to gain more paying members. I call it carrots and sticks.

They charge $20 for admission (seniors $15, students $10). On Sundays visitors pay what they wish. A membership, which includes unlimited admission for one year and other benefits, costs usually $75 (there are different rates for students, couples and people who live outside New York City) .

I understand that a membership is a way for affluent people to support culture and the museums. But people who have just an average income and have to pay high rents in New York City usually skip costly memberships, considering that the metropolis has more gorgeous museums which also offer costly memberships.

This week I learned - somewhat belatedly - that the Frick has an exhibition of Dutch Masters, including Vermeer´s "Girl with a Pearl Earring" and Fabricius`"The Goldfinch", which got popularized by Donna Tart´s bestseller with the same name. This show ends next Sunday January 19th. Therefore I figured that there would be long lines.

Online advance tickets for the show were already sold out!. But tickets were still offered for purchase at the admissions desk. How can a online ticket, a virtual item, be sold out, when the physical access is still available? Anyway, people who wanted to see the show shortly before it ends had to choose between waiting in the line or buying a membership. I guess this is a strategy, the "stick", to encourage interested persons to buy a membership.

I decided to wait in line and to buy an advance ticket for the next day at the admission desk for me and my wife because she has a regular office job and doesn´t have the time on weekdays to wait in line (The museum closes at 6 pm). The last weekend of the show could have much longer lines or even be sold out.

Yesterday around 11.10 am I arrived at the Frick Collection to buy a ticket for admission today at 12pm. There already  was a waiting line which reached around 3 corners - maybe the length of 1 1/2 blocks. The line moved very slowly because the museum staff allowed just a small group of people to enter the building at a time. During the waiting time a member of the museum staff approached people in the line and offered a membership which permitted to skip the line and to access the show immediately. Shortly before the entrance there also was a sign that announced that visitors could skip the line by buying a membership.

I refused - as most of the waiting people - did. Finally, around 12.45 I arrived at the museum´s box office and got the timed tickets for today.

The show was great. Yesterday while waiting in the line I heard the comment "a once in the lifetime event". Absolutely! - Membership or not.

Tuesday, January 14, 2014

Stock Market 2014: What We Can Learn From The Consumers

(Drivebycuriosity) -  How is the U.S economy doing? Thanks very well. This morning we learned that consumers are still on spending spree. In December retail sales increased 0.2% (plus 4.7% from December 2013). Excluding cars, demand jumped by the most in almost a year, reported Bloomberg (bloomberg). Thus they again disproved the gloomy predictions that holiday sales will be weak because consumers allegedly will cutting back.

The numbers show that consumers are still optimistic - in spite of all the fear mongering in the media. They are still benefitting from the healing job market (in spite of the sluggish numbers reported last Friday), rising home prices and the stock market rally (wealth effects).

This optimism is a good omen for 2014. I reckon that climbing consumer spending in the coming months will drive the whole economy higher which should translate into further rising company earnings & profits. Thus the rally on the stock market should continue in spite of all the skeptical comments in the media.

I think investors could learn something from the consumers.

Monday, January 13, 2014

Stock Market: Ignore Goldman Sachs, Follow Google, Suntory & Co.

(Drivebycuriosity) - Today the stock market dropped sharply (S&P 500 minus 1.3%). According to the media investors responded to Goldman Sachs. Yesterday the bank published a warning that the U.S. stock market is expensive after the huge rally of 2013. Goldman Sachs claims that the stock market valuation (price earning ratios) is lofty and already higher than the historical average (businessinsider).

Leading companies think otherwise. Today were 3 important mergers announced (or at least intended):

Google paid $3.2 Billion for Nest, a home automation startup who´s products include Internet-connected thermostats and smoke detectors.

Charter Communication offered $61 Billion for Time Warner Cable and got rejected by the object of desire who claims that the price is too low.

Suntory, a gigantic Japanese producer of spirits, wants to buy the maker of Jim Bean whiskey for $13.6 Billion.

Those mergers show that Goldman Sachs` warning is just noise. The buyers don´t believe that stocks are lofty valued. Instead their offers signal that Google, Suntory & Co. think that stocks are still cheap, otherwise they wouldn`t take the costs & risk of a merger. Those companies should have a much better understanding of their markets than a bank. Maybe investors should ignore Goldman Sachs and follow the buyers.

Sunday, January 12, 2014

Movies: Why The New York Times Got It Wrong

(Drivebycuriosity) - Are there too many movies? The New York Times seems to think so. "Flooding theaters isn`t good for filmmakers or filmgoers", writes the paper in today´s Sunday edition. The article (by their film critic Manohla Dargis  nytimes) is called "an appeal for sanity". The authors focuses on the independent scene (low budged films produced outside the big studios) and complaints that too many independent movies get squeezed into the movie theaters. I highly disagree.

The author counts that "nearly 900 film reviews ran in The New York Times in 2013". Therefore the author saw "too many lackluster, forgettable and just plain bad movies pouring into theaters, distracting the entertainment media and, more important, overwhelming the audience". Maybe so.

But I am a frequent movie goer - and I love the variety. The more movies are in the cinema, the greater is the selection I can choose from, the greater is the serendipity to find a movie that really hits the spot. Last year I picked for instance movies like "Europa Report", "Kiss of the Damned" and "In the House" and many more which I enjoyed a lot (driveby).

The NYT complains that there is not much screen space available so the majority of the films can bee seen just a short time in the theaters and then will switch into the digital realm. There is just a small window for seeing those films on the big screen. I agree, but I believe a small window is better than no window. And I enjoy watching the down streams from Netflix and Amazon Instant Video. Viva la variety. I perceive the claim "overwhelming the audience" as elitist, arrogant and undemocratic.

I also believe that the high competition pressure, created by the flood of movies, is generally good for the quality of movies. Competition doesn´t necessaryly create better ideas and plots, of course, but the makers will take more efforts in writing and selecting scripts. And cinematography, editing, soundtracks and even the acting, important parts of any movie, benefit a lot from competitive pressure.

I believe that the negativity of the NYT article is based on the traditional liberal attitude of the paper. Liberals don´t understand economics and they don´t believe in competition. Liberals prefer regulation. They want that an authority decides for you, in this case they cry for an authority who picks the movies you should watch. This reminds me of China where the government decides how many children people can have, how many political parties they can  elect (just one) and how many and what kind of movies they can see.

American media complain often about censorship in China and they demand more freedom for other countries - why do they want to restrict freedom of choice at home in the USA?

Thursday, January 9, 2014

Culture: Graffiti - Beauty Lies In The Eyes Of The Beholder

(Drivebycuriosity) - Beauty lies in the eyes of the beholder (Plato). You could certainly say this of graffiti. Some call them beautiful, others see them just as filth, garbage and vandalism.

Anyway. Some of the ubiquitous images you can find almost everywhere are at last interesting. But that is a matter of opinion too.

WhenI am walking on the streets my eyes are always open for graffiti - and I take often picture. Some of the graffiti seem to have a hidden message, a cryptic memo from an alternative universe maybe. Some are mysterious, some show a bit elegance, others are more on the explosive side.

I like the dynamics of the spray lines, sometime they play with colors, other use various shades of black & grey.

Here are some tidbits of my collection.

Maybe you will enjoy it.