Mish's Global Economic Trend Analysis

High-Frequency Programmers Unhappy Making 6-Figures; Investors Punish Corporate Expansion Plans; Chinese Bank Turmoil; India Develops $35 laptop

Posted: 31 Jul 2010 11:57 AM PDT

Here is some weekend potpourri to ponder, covering a wide variety of global economic topics.

India's $35 Laptops

India develops world's cheapest "laptop" at $35

India has come up with the world's cheapest "laptop," a touch-screen computing device that costs $35. India's Human Resource Development Minister Kapil Sibal this week unveiled the low-cost computing device that is designed for students, saying his department had started talks with global manufacturers to start mass production.

"We have reached a (developmental) stage that today, the motherboard, its chip, the processing, connectivity, all of them cumulatively cost around $35, including memory, display, everything," he told a news conference.

He said the touchscreen gadget was packed with Internet browsers, PDF reader and video conferencing facilities but its hardware was created with sufficient flexibility to incorporate new components according to user requirement.

70% of Companies "Beat The Street" - Here's How

It's easy to beat low expectations

Quel, as they say, surprise! Aluminum Co. of America kicked off the second-quarter earnings season after the markets closed Monday by beating analysts' consensus earnings expectations. Alcoa, which is traditionally the first Dow stock to report, had a profit of 13¢ a share versus forecasts of 11¢.

Then, on Tuesday, Intel Corp., the leading maker of computer chips, also beat expectations, with profit coming in at 51¢ a share versus analysts' forecasts of 43¢. Quel surprise!

Yes, it's the summer earnings derby, whereby the markets pretend to be surprised by companies beating the consensus forecasts, which, by tacit agreement, have been lowballed. The companies give guidance that is conservative. The analysts willingly concur, rolling over and playing dumb.

In the parlance of the Street, it's "grooming." Companies find no advantage in putting themselves out to guide rigorously and precisely; analysts find no advantage in bucking that guidance. It's a convenient dance, a little two-step that works.

Just as companies pretend to offer guidance with a straight face and analysts concur with a nod and a wink, we in the cheap seats must watch the performance in the knowledge it's merely an act. The so-called "whisper" estimates — what the Street really expects — becomes a loud prompting from stage left, theatre of the absurd.

The first-quarter earnings "beat" rate for S&P 500 index was 73%, one of the top "surprise" levels in the past 10 years. But recent beat-analyst-expectations rates have all been near the 70% mark.

If economics is the dismal science, what ironic description does fundamental analysis deserve? Of course, securities analysts can hide in the consensus pack. And, of course, an analyst does himself and his firm no real favour by going out on a limb and going against the crowd. You can be wrong with the rest and not be punished. You cannot be wrong against the rest.

Chinese Banks Face Huge Default Risk

Chinese banks face state loans turmoil

China's banks are facing serious default risks on more than one-fifth of the Rmb7,700bn ($1,135bn) they have lent to local governments across the country, according to senior Chinese officials.

In a preliminary self-assessment carried out at the request of the country's regulator, China's commercial banks have identified about Rmb1,550bn in questionable loans to local government financing vehicles – which are mostly used to fund regional infrastructure projects.

Local governments had, until recently, been on a construction spree on orders from Beijing to prop up the economy in the face of the financial crisis. However, since the start of this year, top Chinese bankers and regulators have been warning that many of the loans used to fund infrastructure spending and a property boom could go bad.

Chinese banks lent a record Rmb9,600bn last year – more than double the new loans issued in 2008. But stern warnings by regulators for the banks to slow down lending appear to be having an effect on the economy. The regulator ordered a stop to this type of lending at the start of the month.

Investors Punish Corporate Expansion Plans

Investors Say No to 'Let's Expand' Companies

Among the lessons from earnings season so far: Now is not the time for optimistic CEOs to tell skittish investors an expansion push is right around the corner.

In a sign that the shell shock from the financial crisis, recession and European sovereign-debt mess hasn't worn off, investors last week punished the stocks of companies that are talking openly about plans to expand.

Delta Air Lines executives spent much of an earnings conference call Monday parrying with analysts over the airline's plans to increase capacity by 1% to 3% in 2011, on top of this year's growth of 1% to 1.5%. Delta Chief Executive Richard Anderson said Delta is committed to "capacity restraint," but the stock fell 2.9% that day. The shares lost 2.3% for the week, compared with a 5.4% gain by the NYSE Arca Airline index.

In contrast, the kinder, gentler approach to production capacity went over much better. Harley-Davidson shares jumped more than 13% on Tuesday after the motorcycle maker announced rosy quarterly results and noted its plans to cut shipments by 5% to 10% in 2010.

On Monday, Texas Instruments CEO Rich Templeton pointed to the chip maker's "steady investments in production capacity," saying they were allowing the company "to meet higher demand levels from customers."

The comments and mildly disappointing quarterly revenue pushed the stock down more than 3% Tuesday, though the shares finished the week up 2.5%. Some analysts worried that the expansion could come back to haunt Texas Instruments if the economy softens. The company stressed that prices it has been paying for additional capacity have been good deals, reducing any potential downside risk.

United Airlines parent UAL Corp. got a pat on the back from analysts for its plans to keep capacity additions relatively muted. Its shares jumped 4.8% on Tuesday after UAL released earnings.

Companies for the most part do not want to expand and are instead hoarding cash while outsourcing everything they can to Asia. Pray tell, where is job growth going to come from?

Programmers Want Bigger Slice of the Pie

High-Frequency Programmers Revolt Over Pay

Pity the programmers toiling away at Wall Street's secretive high-frequency trading shops--places like Goldman Sachs ( GS - news - people ), Citadel and Getco. They wrote algorithms that take advantage of fleeting trading opportunities and bring in up to $100,000 a day. In return, they received a fraction of the pay doled out to their bosses.

Now some programmers feel used and are instigating a revolt. They are doing so by striking out on their own or forming profit-sharing arrangements. Jeffrey Gomberg, 32, worked for a trading firm that paid him a low-six-figure income after four years on the job. His trader colleagues, by contrast, made millions manipulating the algorithms he'd written.

Last year Gomberg and a fellow programmer quit their jobs and cut a deal with HTG Capital Partners of Chicago, whose programmers typically trade on regulated futures exchanges. HTG supplies office space, technology and access to exchanges. Gomberg keeps 40% to 80% of net profits, with the percentage rising as his profits do. More importantly, says Gomberg, the programmers retain ownership of the code they write.

"We designed this deal so we wouldn't lose intellectual property," he says. "If it doesn't work out, we can go somewhere else and take all the software [that we developed]. That's really the key."

Another high-frequency programmer, who spoke on condition that his name not be used, quit two firms that he believed were underpaying him. He says one group was generating $100,000 a day from his high-frequency trading software and paying him $150,000 a year. "I'm on my way to making a ton," he says.

Given that HFT programs put out offers that are not legitimate (thus constituting fraud), I fail to see why HFT should not be banned. Thus not only is HFT not needed, neither are the HFT programmers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECRI WLI in Negative Territory 8 Consecutive Weeks, Index Drops to -10.7

Posted: 31 Jul 2010 02:06 AM PDT

The ECRI's Weekly Leading Indicators (WLI) has now fallen 8 consecutive weeks and has been below -10 for two consecutive weeks.

click on chart for sharper image

Given the July bounce in the stock market, the ever-optimistic me expected some sort of anemic bounce in the WLI as well, but that bounce never came. Of course, it would be helpful to know the makeup of WLI (components and percentages), but unfortunately that information is proprietary.

Nonetheless, we can say there has never been a WLI plunge in history of this depth and duration, nor any dip at all below -10 that has not been associated with a recession.

Whatever the ECRI sees preventing them from issuing a recession alert remains a mystery.

Then again, as I pointed out two weeks ago in ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call? the ECRI is literally paranoid about calling a recession that does not occur. So they wait until it is blatantly obvious we are in one before issuing a warning.

However, in light of today's GDP report sporting 3 Years of Massive Downward GDP Revisions it is becoming increasingly likely that the recession that started in 2007 never ended.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Saturday, July 31, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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