What is wrong with the US economy? Part 2

[OmCheeto]

The purpose of hedge funds is to insure or 'hedge' against changes in the market.
So the banks that just betted on ever rising house prices and mortgages are now demanding a bailout while those hedge funds that thought - it couldn't go on like this and must crash, are criminals profiteering from peoples losses?

The key word I see here is "insure".
You can correct me if I'm wrong as I'm still not sure I understand the whole picture.

Most people pay insurance on their house so that if it burns down, the insurance company will buy them a new one.

Hedge fund managers use someone else's money to pay insurance so that if someone else's house burns down, the insurance company is supposed to buy the hedge fund manager a thousand houses?

Just because there's no law against doing something doesn't mean you're not a crook.

 

[mheslep]

Retail sales fall by record amount in October
http://news.yahoo.com/s/ap/economy

Somebody has figured out how to sell retail in this market. Walmart 3rd qtr sales are up 7.5% over last year, earnings up 9.8%, far better than the pack. Part of it is credited to the last stimulus package, which could now rightfully be called the Walmart stimulus package.

Wal-Mart Stores, Inc today reported its sales and earnings for the quarter ended Oct. 31, 2008. Net sales for the third quarter of fiscal year 2009 were $97.6 billion, an increase of 7.5 percent from $90.8 billion in the third quarter last year.

http://www.marketwatch.com/news/story/Wal-Mart-Reports-Third-Quarter/story.aspx?guid={C362A8EA-9571-4583-BB82-672D627C13BC}

On Thursday, after a week of bad news from retailers such as Best Buy Co. and Starbucks Corp., Wal-Mart said earnings for the third quarter rose 9.8% while sales rose 7.5%. At stores open at least a year, sales rose 3%, twice as much as a year before, and far better than nearly every other U.S. retailer...

For every $1 spent in the last year on goods other than cars in the U.S., 8.2 cents went to a cashier at a Wal-Mart store or a Sam's Club, the company's membership warehouse chain, according to Michael Niemira, chief economist at the International Council of Shopping Centers...

Even with unemployment rising, Wal-Mart said that it had hired 33,000 new employees in the 12 months prior to October. Its U.S. work force now stands at 1.45 million, making it an economic driver for millions of other jobs dependent on Wal-Mart...

About 18 months ago, Wal-Mart forged a plan to turn things around. It slowed new store growth in the U.S. and returned to its low-cost roots. It also began executing a makeover featuring a sunny new logo, a heavily publicized environmental campaign, tidier stores, and a more targeted mix of free-trade Argentine wines and high-definition videogames to go along with the diapers and dog food.

http://online.wsj.com/article/SB122656558027724083.html
sub'd requ'd

 

[mgb_phys]

Hedge fund managers use someone else's money to pay insurance so that if someone else's house burns down, the insurance company is supposed to buy the hedge fund manager a thousand houses?

Hedge funds are supposed to allow you to hedge against changes in the market.
So if you are a pension fund with lots of investments in the stock market you might hedge this by buying a something that goes up when the market goes down - like gold.

Another way to hedge is to short stock, ie bet that it will go down when everyone else is betting it will go up. Shorting stock isn't necessarily wrong, it's like betting that the Chicago Cubs will NOT win this years world series - it might be a safer bet than trying to pick who will win.

Hedge funds normally lose, after all if you are betting against the market and you are as good as everyone else in the market you will lose. In general most people in the market do worse than average - a few do very well. The very best tend to be hedge funds, they charge the most fees, take the biggest cut and get the best people.
This does sometimes fail - there was a super 'dream team' hedge fund which was so famous it could never make any money, because as soon as it tried to bet against the market - the market assumed it must know something and immediately followed, so it could never get ahead!

 

[Astronuc]

Somebody has figured out how to sell retail in this market. Walmart 3rd qtr sales are up 7.5% over last year, earnings up 9.8%, far better than the pack. Part of it is credited to the last stimulus package, which could now rightfully be called the Walmart stimulus package.

That's great - cheap stuff, low wages. How many PFers would be satisfied doing their respective work for Walmart wages.

If Walmart is so great, why do they have such a low dividend/yield.

Share price $54 +/- $1 today.
Market Cap: 209.13B
P/E (ttm): 15.81
EPS (ttm): 3.36
Div & Yield: 0.95 (1.80%)

Walmart is great if one owns 100,000 or 1 million shares. It's great for the Walton family and upper management. It's not particularly great for most of the employees, or other retail businesses, or domestic manufacturers.

Based on yield GE is a much better investment.
Market Cap: 159.19B
P/E (ttm): 7.86
EPS (ttm): 2.036
Div & Yield: 1.24 (7.60%)

 

[mheslep]

That's great - cheap stuff, low wages. How many PFers would be satisfied doing their respective work for Walmart wages...

Well Walmart was known for hiring smart 20 somethings to manage the super stores - $100k/yr. But good grief, this thread is not all about jobs for PFers.

 

[edward]

I have a big problem with a fund that is betting huge sums that another persons endeavor will fail. There is way too much of a chance for some kind of corrupt behavior.

It is like taking out insurance on a neighbors cattle then opening up a rifle rage adjacent to the pasture.

 

[edward]

Well Walmart was known for hiring smart 20 somethings to manage the super stores - $100k/yr. But good grief, this thread is not all about jobs for PFers.

The only people making $100K at Walmarts are the Pharmacists.

http://www.payscale.com/research/US/Employer=Wal-Mart_Stores,_Inc/Salary

 

[mgb_phys]

If Walmart is so great, why do they have such a low dividend/yield.

cheap retailers will do really well in a rescession, low prices and no name brands tend to sell better if people have no money. Add in chinese manufacturers who can now be squeezed a little more.
Why would they pay a dividend? That says they think the money would be better given back to shareholders than invested in the business. What are the shareholders going to do with - put it in a bank?
Right now Walmart are probably buying up cheap real estate for new stores, especially since construction companies are probably willing to bid below cost to keep plant working.

Based on yield GE is a much better investment.

I'm surprised GE are doing so well, with their leasing and GE captical business they are more of a bank than a manufacturer so you would have expected them to have that income invested in high yield sub-prime mortgages. Either their fund managers were very conservative or very lucky!

 

[russ_watters]

If you want to know what is wrong with our financial system…read the following and do your evaluation.
http://www.counterpunch.org/martens11132008.html
A Credit Crisis or a Collapsing Ponzi Scheme?

The description in that article bears no resenblance to the reality of how investing works. I have an IRA and a 401K, both invested in S&P index funds. My money is my money - the company I invested with (two different ones) do not get to do whatever they want with it and I can easily move the investments to another company.

No, investments are not pyramid schemes.

 

[russ_watters]

Most people pay insurance on their house so that if it burns down, the insurance company will buy them a new one.

Right...

Hedge fund managers use someone else's money to pay insurance so that if someone else's house burns down, the insurance company is supposed to buy the hedge fund manager a thousand houses?

Just because there's no law against doing something doesn't mean you're not a crook.

So why is one a legitimate investment and the other is not? Either way, you are betting on the possibility of a fall. Just so we're clear on this, that "someone else's money" is their clients who are paying them to invest in the hedge fund. They are doing exactly what they are paid to do! Where do you see a crime?

 

[russ_watters]

If Walmart is so great, why do they have such a low dividend/yield.

Because dividends are falling out of fashion since they cut into a company's ability to grow.

Walmart is great if one owns 100,000 or 1 million shares. It's great for the Walton family and upper management. It's not particularly great for most of the employees, or other retail businesses, or domestic manufacturers.

It's great for the employees if the alternative is not having a job. And it is good enough that people line up by the thousands for jobs when they open. And other businesses? Welcome to capitalism, Astronuc. That's how it works.

Based on yield GE is a much better investment.
Market Cap: 159.19B
P/E (ttm): 7.86
EPS (ttm): 2.036
Div & Yield: 1.24 (7.60%)

Huh? Do you do any investing? People don't buy stocks to earn money off dividends anymore, they buy stocks to earn money from growth. Walmart's share price is even with where it was 5 years ago, while GE is trading at just over half what it was 5 years ago. GE is a company with limited growth potential, so the dividends are all people have to hang their hat on. Walmart's growth potential is so large that you don't want it to pay you dividends and cut into that growth.

 

[Proton Soup]

Because dividends are falling out of fashion since they cut into a company's ability to grow.

yeah, and i think it has a lot to do also with income taxes. most people don't really want their stock to pay dividends if it's not in a tax shelter account. the company just keeps reinvesting dividends, and you don't actually have potential capital gains tax to pay until you decide to sell the stock.

 

[russ_watters]

Here's an interesting article about how to become the CEO of a big-box retailer: http://retailindustry.about.com/od/retailjobscareers/a/ceocareerpath.htm

You'll find that a pretty good fraction of them rose through the ranks of the working stiffs. For example:

The Career Path of Brad Anderson, CEO, Best Buy

Born in Sheridan, WY
Son of a Lutheran minister
Below average high school student
A.A. degree, Waldorf College
B.A. degree in sociology, University of Denver
Attended Northwestern Seminary, St. Paul, Minnesota
Commissioned salesman, Sound of Music stereo
Store manager, Sound of Music
Sales manager, Sound of Music
Vice president, Best Buy
Executive vice president, Best Buy
Board of directors, Best Buy
President and COO, Best Buy
CEO, Best Buy

 

[Astronuc]

Bill Gates and Steve Jobs are striking examples of starting at the bottom and working to the top.


Meanwhile - Worst May Be Yet to Come for Citi
http://dealbook.blogs.nytimes.com/2008/11/14/worst-may-be-yet-to-come-for-citi/

After a year of red ink, a months-long plunge in its share price and a $25 billion government rescue, you might think the worst was over for Citigroup.

It is probably not.

Citigroup, which a decade ago set out to rewrite the rules of American finance, is bracing for still more pain now that a recession is at hand, The New York Times’s Eric Dash writes. Loans that the financial giant made to consumers in good times are going bad in growing numbers. For the moment, profits seem as elusive as ever, analysts say.

Once the most valuable financial company in America, Citigroup is withering along with its share price, which this week sank into single digits for the first time in a dozen years. The company is also shrinking in another painful way: by cutting, and cutting, and cutting jobs. Another round of pink slips is expected next week.

As Vikram S. Pandit completes his first year as chief executive, many analysts say Citigroup has lost its way. Insiders say the company is racked by office politics at a critical moment in its history.

Mr. Pandit is struggling to regain his grip on the company, which operates in scores of countries, after his attempt to buy Wachovia was upended by Wells Fargo. That misstep left Citigroup grasping for a new strategy to lure deposits and build up its branch network in the United States.

“Citi doesn’t have a credible management team, they don’t have a credible board,” Christopher Whalen, managing partner at Institutional Risk Analytics, told The Times. “If you look at their loss rate, it is almost inevitable that Citi is going to be asking the government for more money next year.”

. . . .

http://en.wikipedia.org/wiki/Vikram_Pandit#Career

 

[mheslep]

I have a big problem with a fund that is betting huge sums that another persons endeavor will fail. There is way too much of a chance for some kind of corrupt behavior.

I believe the main argument in favor of shorts is in fact to counter corrupt behavior, a balance of power theory if you will. Consider: your cattleman's endeavor begins to publicly sell stock. They then immediately have an interest in talking up the value of that stock, as does everybody else that has bought the stock. Even the competitors generally go along, as they hope for a rising tide floats all boats gambit. It is the short seller that has the motive to come in and say 'you guys are full of it, your cows are sickly, and the boss is embezzling'. It was the short sellers who first began to rain on the Enron parade.

This is not to grant the shorters some kind of halo, they need rules just like everyone else.

 

[mheslep]

The only people making $100K at Walmarts are the Pharmacists.

http://www.payscale.com/research/US/Employer=Wal-Mart_Stores,_Inc/Salary

I said the big, high volume super center stores. And then add bonus.

Anecdotal blog info:

Store Manager starting pay $90,000-$100,000 <depends on store volume> Bonus 0%-100%
...
A store manager's salary ranges from $80-$110K/yr, depending on sales volume.

http://www.indeed.com/forum/cmp/Wal--mart/Wal-Mart-Salaries-Bonuses-Benefits/t9640

 

[jal]

Here a wonderful insider story
http://tinyurl.com/64mm8l

The End
by Michael Lewis Nov 11 2008

I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

 

[Jimmy Snyder]

I believe the main argument in favor of shorts is in fact to counter corrupt behavior, a balance of power theory if you will. Consider: your cattleman's endeavor begins to publicly sell stock. They then immediately have an interest in talking up the value of that stock, as does everybody else that has bought the stock. Even the competitors generally go along, as they hope for a rising tide floats all boats gambit. It is the short seller that has the motive to come in and say 'you guys are full of it, your cows are sickly, and the boss is embezzling'. It was the short sellers who first began to rain on the Enron parade.

This is not to grant the shorters some kind of halo, they need rules just like everyone else.

You needn't assume evil behavior in order to justify short selling. They moderate bubbles. Without shorts, the market would have gone higher than it did and would have fallen faster. I think buying on margin is the greater culprit.

 

[Astronuc]

Citigroup to raise card rates, cut jobs
http://marketplace.publicradio.org/display/web/2008/11/14/citigroup/

Jeremy Hobson: Citigroup plans to start raising interest rates on credit cards for some of its customers. The move is intended to make up for a decline in credit card revenue due to fewer offers going out and smaller payments coming in. It's perfectly legal, but analysts say an interest rate hike of a few percentage points won't solve Citi's problems, problems made worse because of where many of Citi's consumer deposits are.

Felix Salmon (Portfolio.com): One of the huge differences between Citibank and any other American bank is that most of Citibank's deposits are abroad./p>

Salmon: That means they're not insured by the FDIC and that means that the people who have money on deposit with Citibank have good reason to want to move that money somewhere safer.

And with an ever tumbling stock price, Salmon says, a run on the bank becomes much more likely. That's why Citi's unsuccessful offer to buy Wachovia was such a big deal. Citi wanted more branches in the U.S. so it could hold more FDIC-insured deposits. Eileen Fahey is a managing director at Fitch Ratings. She says Citi is now at a competitive disadvantage because other U.S. banks have acquired their rivals.

Eileen Fahey: All of those benefiting from larger deposit bases in the U.S. and Citigroup's been challenged on that front.

The challenges appear more dire by the day. A number of Citi's executives reportedly bought over a million shares of the company's stock yesterday. That wasn't enough to boost the value or investor confidence that Citi can rebound on its own.

. . . .

And today is redemption day for some hedge funds.
http://marketplace.publicradio.org/display/web/2008/11/14/hedge_fund_dday/

Next week could be another volatile week in the stock markets.

 

[OmCheeto]

It was the short sellers who first began to rain on the Enron parade.

So did the short sellers in this case know there was something fishy about Enron? Or were they just guessing? I'd like to know why Joe the Shorter should profit at others expense, when the only difference between the two is that Joe has been told by his second cousin at Enron that the books are cooked.

http://www.independent.co.uk/news/b...ctice-that-should-be-stamped-out-874717.html" What is short selling, and is it a practice that should be stamped out?
By David Prosser, Deputy Business Editor
Wednesday, 23 July 2008

Why are we asking this now?

It has emerged that Morgan Stanley, one of two huge investment banks that has been helping HBOS to raise £4bn from shareholders, was at the same time selling the company's shares short – betting that the Halifax Bank of Scotland group would fall in value. Morgan Stanley has not broken the law, or breached any City rules, but its dealings have certainly raised eyebrows. And this is the latest in a series of controversies in recent months relating to short selling.

...

Is short selling just another example of City excess?

Yes...

* Making money as companies lose their value is simply profiting from other people's misery
* Short selling is very often associated with murky – and even illegal – market practices
* Hedge funds, often owned by a small group of traders, make massive profits from driving down share prices

I guess as long as it is only our eyebrows that get raised when this stuff happens, it will remain a legitimate practice.

Is short selling just another example of City excess?

No...
* Betting on a share-price fall is no less legitimate an investment than gambling that the market will rise
* City regulators already police the financial markets to curb illegal practices and catch those who flout the rules
* Some instances of short selling are just a way of reducing the risk of very large "long" investments

The key words and phrases here are: "gambling", "curb illegal practices", and "Some instances"

Even when trying to defend short selling, it still sounds crooked.

 

[Art]

The Eurozone is officially in recession for the first time in its history, i.e. since the Euro was adopted.

Note: the only Eurozone country to show positive growth for the last quarter was France. France also hasn't seen a collapse in housing prices or loan defaults as they never had a housing bubble or a loan financed feeding frenzy.

Russ pay note. It seems slow and steady can indeed win the race.

 

[russ_watters]

Note: the only Eurozone country to show positive growth for the last quarter was France. France also hasn't seen a collapse in housing prices or loan defaults as they never had a housing bubble or a loan financed feeding frenzy.

Russ pay note. It seems slow and steady can indeed win the race.

We'll have to drop pretty far to get back down to their level. Don't hold your breath.

 

[Art]

We'll have to drop pretty far to get back down to their level. Don't hold your breath.

Well you are on your way with a 0.3% drop in GDP for the 3rd Qtr. http://www.bea.gov/newsreleases/glance.htm

It doesn't seem to have sunk in with some people yet that those countries who financed growth through massive borrowings are poised on the edge of total economic collapse.

The only way to avoid immediate disaster is for everybody to go back to playing the game of let's pretend everything in the garden in rosy but so far there is little sign of this happening as the banks still can't resist their natural urge to screw everybody around them. Even if they do play the game it still only puts off the inevitable as the fact still remains there are trillions of $ 'invested' with zero assets to back them up.

 

[misgfool]

Note: the only Eurozone country to show positive growth for the last quarter was France. France also hasn't seen a collapse in housing prices or loan defaults as they never had a housing bubble or a loan financed feeding frenzy.

Russ pay note. It seems slow and steady can indeed win the race.

France has no hope of catching US in it's own game. US is way too flexible and dynamic. And as long as there exists a stubborn state called France Europe has no chance.

 

[Art]

France has no hope of catching US in it's own game. US is way too flexible and dynamic. And as long as there exists a stubborn state called France Europe has no chance.

The US has been slipping for some time now. In the early 90''s it had a per capita GDP lead of 34% over the UK. In Jan this year the UK overtook the US for the first time in 100 years. France which had a similar gap in the 90's is only 8% behind the US now and obviously if they can avoid the level of recession the UK and the US will suffer this gap will close quickly.

 

[jal]

Search the blogs for The G-20’s Secret Debt Solution
Price of gold $10,000 /oz.
This solution will put the wealth into the hands of those that have gold. That means that the wealth will shift to India, and far east. (That is where the wealth happens to be at the moment).
For the ordinary folks it means that you will lose big time on the saving that you have.
It can't happen without a revolt. This is a way to reward those who borrowed too much.

 

[mgb_phys]

Price of gold $10,000 /oz.
This solution will put the wealth into the hands of those that have gold. That means that the wealth will shift to India, and far east.

The wealth will shift to Canda, Australia and S Africa. The nice thing about gold is that you can get more of it.

 

[mgb_phys]

France which had a similar gap in the 90's is only 8% behind the US now and obviously if they can avoid the level of recession the UK and the US will suffer this gap will close quickly.

GDP is a poor measure of a country's wealth or standard of living.
An ad-executive in a New York apartment with a $M mortgage, taking out huge credit card loans to buy foriegn cars counts as a boost to GDP.
A french farmer living in a house his grandfather built, growing food and selling it locally counts as nothing.

 

[russ_watters]

GDP is a poor measure of a country's wealth or standard of living.

Not true, but if you really think so, could you provide an example of a country with a high per capita gdp and a poor standard of living?

An ad-executive in a New York apartment with a $M mortgage, taking out huge credit card loans to buy foriegn cars counts as a boost to GDP.

Yes... and he has a pretty high standard of living, doesn't he?

A french farmer living in a house his grandfather built, growing food and selling it locally counts as nothing.

And he has a far lower standard of living than that ad-exec.

 

[russ_watters]

Well you are on your way with a 0.3% drop in GDP for the 3rd Qtr. http://www.bea.gov/newsreleases/glance.htm

France still has a ways to go to catch up.

It doesn't seem to have sunk in with some people yet that those countries who financed growth through massive borrowings are poised on the edge of total economic collapse.

That might carry some weight if France's public debt wasn't larger than the US's as a fraction of GDP.

 

[Art]

That might carry some weight if France's public debt wasn't larger than the US's as a fraction of GDP.

According to the OECD France's household indebtedness as of 2006 was 89% of annual income whereas the US's was 140%.

France's national debt is indeed a long term problem but in the short term with their higher personal debt servicing repayments coupled with the credit crunch cutting off access to new loans the US consumer has less disposable income available to bolster the economy to steer it out of recession.

 

[Art]

GDP is a poor measure of a country's wealth or standard of living.
An ad-executive in a New York apartment with a $M mortgage, taking out huge credit card loans to buy foriegn cars counts as a boost to GDP.
A french farmer living in a house his grandfather built, growing food and selling it locally counts as nothing.

I'd be the first to agree that per capita GDP is far from perfect as a measure of the standard of living as it says nothing of how the wealth is distributed or the quality of life but is still the best figure available to draw comparisons between one country and another.

An example of how it can produce a perverse result; Compare a society where people live within walking distance of their jobs against a society where people need to travel long distances to work. The cost of the car and the fuel needed to get to work add to GDP whilst the walker adds nothing and yet the walker's circumstances are inarguably better than the long distance commuter's when it comes to quality of life.

Overall though I think it is fair to say in most countries there is a strong correlation between per capita GDP and the standard of living.

 

[mheslep]

...An example of how it can produce a perverse result; Compare a society where people live within walking distance of their jobs against a society where people need to travel long distances to work. The cost of the car and the fuel needed to get to work add to GDP whilst the walker adds nothing and yet the walker's circumstances are inarguably better than the long distance commuter's when it comes to quality of life.

Inarguably? If people have the option of commuting vs walking to work and chose the walking distance job Id agree. If a person walks to some grinding, back breaking job, say on the farm, only because they have no other means of transportation then I would not agree.

 

[mheslep]

The US has been slipping for some time now. In the early 90''s it had a per capita GDP lead of 34% over the UK. In Jan this year the UK overtook the US for the first time in 100 years. ...

? 2007 GDP per capita numbers: UK $34,139, US $45,489, or 33% greater in the US. Certainly this gap was not closed as of January 2008. Do you mean some other metric instead?
http://stats.oecd.org/wbos/Index.aspx?datasetcode=SNA_TABLE1

 

[mgb_phys]

Not true, but if you really think so, could you provide an example of a country with a high per capita gdp and a poor standard of living?

Japan? The rent on 20m^2 apartment in the middle of Tokyo contibutes a lot to GDP but not a lot to your standard of living.

An ad-executive in a New York apartment with a $M mortgage, ... Yes and he has a pretty high standard of living, doesn't he?

Right up to the point that he losses his job.

A french farmer living in a house his grandfather built, growing food and selling it locally counts as nothing. ... And he has a far lower standard of living than that ad-exec.

That may describe all that is wrong with the US economy ;-)

The problem with GDP is that it measures amount of money flowing around. It doesn't matter what that money is being spent on or if it is borrowed or earned.
As an example - they GDP of New Orleans has increased massively. The cost of rescues, clean up and reconstruction all add to the GDP. It's not clear that hurricanes do as much for standard of living.