Everyone Is Ready For Greek Exit From Euro, What's The Hold Up?

I'm so tired of hearing about Greece I seriously considered not even making this post. But it is amazing how European officials continue to delay and deny the inevitable Greek exit from the Euro. Despite the denials of the inevitable, plans continue to be put in place for this eventuality. I discussed this briefly in my post in January "The List of Companies & Governments Preparing for Euro Breakup Grows". This list is only growing....

This list now officially includes De La Rue. Here is the description of De La Rue via their website.

"the world’s largest integrated commercial security printer and papermaker, De La Rue is a trusted partner of governments, central banks, issuing authorities and commercial organisations around the world.

The Group is involved in the design and production of over 150 national currencies and a wide range of security documents including passports, driving licences, authentication labels and tax stamps. In addition, the Group manufactures sophisticated, high speed, cash sorting equipment."

  As reported May 18th by Reuters:

"De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday."

The Wall Street Journal also touched on it "From a Greek Drama to a Greek Drachma?"  (May 18th)

"...it emerged Friday that De La Rue, the U.K.-based banknote printer, has discreetly started to prepare for the revival of the drachma (or an alternative currency).

An industry participant, who confirmed a report in Friday’s Times of London, stresses that the development is driven by De La Rue itself for its own commercial reasons, as opposed to it being the result of a direct request from the Bank of Greece or any other government agency.

[The Bank of Greece has repeatedly declined to respond to questions as to whether it is preparing a contingency on banknotes and Friday again declined to respond.]"

Also, as reported today by Reuters "Insight: European firms plan for Greek unrest and euro exit" some specific companies making preparations also include

• Drugmakers GlaxoSmithKline and Roche
• Europe's No 2 electrical retailer Dixons
• Diageo the world's biggest spirits group
• BMW
• Mobile phone giant Vodafone

Per Reuters:

"British electrical retailer Dixons (DXNS.L: Quote) has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot."

 "As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.

Those preparations include sweeping cash out of Greece every night, cutting debts, weeding out badly paying customers and readying for a switch to a new Greek drachma if the country is forced to abandon the euro"

"The London-based Association of Corporate Treasurers says businesses should take precautions such as demanding cash on delivery and writing sales contracts in another currency such as pounds or dollars."

Add to this list Lloyd's of London. As reported by the The Guardian:

"The Lloyd's of London insurance market has reduced its exposure "as much as possible" to the crisis-hit euro zone in preparation for a collapse of the bloc's single currency, its chief executive told the Sunday Telegraph newspaper."

""I don't think that if Greece exited the euro it would lead to the collapse of the euro zone but what we need to do is prepare for that eventuality," he said."

"On Wednesday, Reuters reported that each euro zone country was preparing a contingency plan for the eventuality of Greece leaving the single currency."

And add HSBC as The Independent reports:

"HSBC has set out contingency plans for all its 15 Greek branches to cope with a return of the drachma.  

Iain Mackay, HSBC finance director, said it had made "preparations at multiple levels" to cope with the currency's re-emergence from an 11-year hibernation should Greece leave the euro. The bank has already reduced its exposure to Greece but has also trained staff at its branch network to be ready should the worst happen. This includes work to manage IT systems, branch funding, how to deal with customers and how to update ATM systems to dispense drachmas."

So why is everyone making all these plans when the president of the Eurogroup, Jean-Claude Juncker, said that talk of a Greek exit was "nonsense, propaganda" and that their "working assumption is that Greece will stay as a member of the euro area."? Oh, I don't know......Maybe because this is the same Jean-Claude Juncker who said that "When it becomes serious, you have to lie" as can also be seen in the video below. Very bad audio but you can clearly hear it at the 20sec mark.

Everyone has had plenty of time to prepare for a Greek exit from the Euro. It is time to implement the 13 Steps For A Greek Exit From The Euro. The more denials, the more can kicking, the more money wasted delaying the inevitable.

Why Is Barron's More Bullish Online Than in Print? (Picks & Pans Breakdown)

Barron's keeps track of its stock "picks and pans" going back to 2007. Barron's defines and tracks those picks as follows:

"This feature tracks the performance of stocks Barron's has written about -- both favorably and critically. For stocks featured in Barron's print magazine, prices are measured from the Friday before publication date to their current price. For stocks featured on Barrons.com, prices are measured from the trading day of publication date to their current price. This list includes U.S. stocks only, including ADRs, but not foreign stocks."

On some occasions I have found these picks also include ETFs. However, what I found interesting when browsing this list is the ratio of bullish picks to bearish picks. Both the magazine and online feature much more bullish picks than bearish picks, and I guess that makes sense...people in general like to hear about opportunities rather than risks (and their average reader probably doesn't short to a great degree). But the most interesting thing was how much more bullish Barron's was online than in print.

As you can see in the chart below, in Barron's magazine they wrote about 4 stocks favorably for every 1 stock they wrote about critically. However, online that ratio jumped up to 7.5 to 1.

Since 2007, Barron's documented 718 stocks which they wrote about in their magazine either "favorably" or "critically" (they categorize them as bullish or bearish). Only 144 were "bearish". Meanwhile,they documented a total of 782 stocks online.....but only 92 of those were "bearish". You can see below how this disparity has grown over the last 3 years (only in 2009 was the magazine more bullish than online). Of the 42 online picks since 2011...only 2 were "bearish" and there have been none this year.

Barron's is often bullish with it's stock picks -- especially online. However, it's track record would indicate that it is only their bearish picks -- and ONLY those featured in their magazine which tend to more consistently pan out. That is completely the opposite of their bearish picks online -- those stocks you would usually be better of buying (note that in 2011 they only made 2 bearish picks online and while they were correct on Japan they got killed on Monster "MNST")

Interestingly, this same general pattern holds shorter-term. Barron's also measures the performance of the picks from the time of the pick until the end of the year in which they made the pick. For instance, if it was picked today it would measure it's performance until 12/31/12. So some picks are being measured up to a year and some possibly as short as a few days.

So both short and long-term the story appears to be that Barron's bullish picks are a coin toss (or worse), while their critical thoughts on stocks in the magazine might be worth heeding, whereas their critical thoughts expressed online might well be a contrarian indicator! So I guess the question is why the huge difference in their bearish picks online vs the magazine?

My 3 Favorite Mutual Fund Managers for Navigating the Market Going Forward

The mutual fund world has no shortage of managers. But when it comes to finding managers which have a rock solid understanding of market history, a real grasp of the true drivers of long-term investment returns, a strategy for capturing those returns over time, an eye for avoiding market fallacies that lead the herd and most importantly -- know what it means to be stewards of Other People's Money. Well, that list is much shorter.

Most of the investment landscape is filled with products in a race of relative performance. It is rarely about making decisions to maximize long-term returns. Too often it is only about making decisions to outperform some index -- without making any decisions that might lead to temporarily underperforming that index, even when it is the best long-term decision. Therefore, it is a world of closet indexers and many of those who don't closet index still wouldn't dare be anything other than 100% invested.

While there are some very good managers who only manage funds with less flexible investment mandates, my purpose here is to highlight my 3 favorite mutual fund managers with the flexibility for navigating the markets . This isn't about past performance -- these are the managers I would feel most comfortable allowing to manage my money over the next full market cycle for the reasons described at the start of this post. Is it subjective? Of Course! This is MY list (and in no particular order).

Rob Arnott (Pimco All Asset and Pimco All Asset All Authority)

At Pimco essentially everything is managed "in-house". That is except for these 2 funds sub-advised by Rob Arnott of Research affiliates. These are tactical asset allocation strategies and the only limitation for Rob is that he must use Pimco Funds and abide by these very loose guidelines.

Rob Arnott is a great "big picture" guy and truly understands valuation. He is also well known for his fundamental indexes.

John Hussman (Hussman Strategic Growth)

This is not Hussman's only fund but it is his flagship fund and where he has the majority of his own investable assets. Hussman invests the portfolio like a traditional equity fund and then "hedges" using index options and futures based on his outlook for the market in general -- which has resulted in a highly hedged stance most of the time.

Someone might look at his performance year-to-date (-6.8%) while the market is up 11.1% or point to his performance over most of the rally since 2009 and think I'm crazy. Hussman is catching a lot of flak recently and you can see his response in one of his commentaries from February "Notes on Risk Management - Warts and All". But as I said before -- this isn't a backward looking list of my favorite mutual fund managers.  

There aren't many that understand the drivers of long-term returns more than Hussman and I think his ability to stay true to his strategy will prove out in the long run (the next full market cycle). Even if you don't invest in his fund, his weekly commentaries are always worth the read.

Ben Inker (GMO Benchmark-Free Allocation and Wells Fargo Advantage Absolute Return)

This is less a story just about Ben Inker himself and more about all the people at GMO including Jeremy Grantham and a more recent addition of James Montier. It is a good meeting of the minds there at GMO and their Asset Allocation Team.

The GMO Benchmark-Free Allocation Fund is actually not open but they started a distribution agreement with Wells Fargo in March. Therefore the strategy can be accessed in mutual fund format through the Wells Fargo Advantage Absolute Return Fund. I personally like the GMO name for the fund better -- but I am assuming for marketing reasons Wells Fargo chose the "Absolute Return" name. I am personally not a fan of most "Absolute Return funds" I see in the market, as most are nothing more than a giant ball of derivatives (but that's another story). 

Wells Fargo already had a fund (Wells Fargo Advantage Asset Allocation) sub-advised by GMO but the investment mandate did not give GMO very much flexibility in the allocation. You can see the difference this flexibility made below.

Jeremy Grantham talks about the advantages of flexible investment mandates, as well as the "career risk" it introduces in GMO's most recent quarterly letter (definitely worth the read).

There you have it!

It is important to remember this is not my 3 favorite managers for the next month, or the next year. These are my favorite mutual fund managers for the next full market cycle. Some will perform better than others during different parts of the cycle. For instance, if the market were to begin falling tomorrow, based on current positioning, I would expect John Hussman's Strategic Growth to perform best, then Rob Arnott's All Asset Strategy (either one), then Ben Inker's Benchmark-Free strategy. And obviously opposite if it continued up.

20 Largest Private Companies in the U.S.

Here is a look at the 20 largest private companies in the U.S.

Interesting how many of them (8 of the 20) are in some way highly involved in food -- Cargill, MARS, Publix, C&S Wholesale Grocers, US Foods, H-E-B, Meijer and Reyes Holdings (and although not grouped as such below, you could arguably add Love's Travel Stops, Pilot Travel Centers and Aramark to that group -- bringing it to 11 of the 20). Think any of these will go pubic?

Click image to enlarge

by hightable. Browse more infographics.

Sheila Bair's Humorous & Sadly Ironic Rant

Usually this is something I would just post on Facebook or retweet on Twitter but this from Sheila Bair (formerly from the FDIC) I just had to post for those that may only follow my blog. Funny and sadly ironic -- definitely check out the whole thing here "Fix income inequality with $10 million loans for everyone!" .

Here is a piece from the Washington Post....

"For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)"

and some more.....

"Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? 

That couldn’t happen here. This is America. Why should hedge funds and big financial institutions get all the goodies?  

Anyway, check out the whole thing .

Sorry, only the Fed and their friends at the banks get free money. Can't let that money get out to the general public -- That's inflationary! Gotta bailout only a select group of people so not too much of that money gets out into the general economy....that way inflation stays where they want it.....in asset prices.....

Related Post: Some Commentators Still Clueless That Fed's Zero Interest Rate Policy (ZIRP) Is A Backdoor Bank Bailout

The Lovely World of S&P Analyst Price Targets

If you want a good chuckle you can always turn to a S&P stock report. Take for example their recent research report on Netflix. Right there at the top of the report they blessed the stock with a "Buy" rating and slapped a 12-month price target of $135 on it. Who can complain with a 17% gain? Looks like it's time to buy!

Oh wait, what is this on page 3?

Gotta love it! So on the one hand their analyst is saying 'Buy" because with a price target of $135 it is 17% undervalued. Then your later being told that, by the way, our "proprietary quantitative model" says you should lose about 42% listening to that Analyst.

This isn't some one-off thing, in fact, it is amazingly common. How about Boeing? Looks like another buy! Price Target $86. Not a bad 16% gain.

Oh wait......

Sorry, S&P actually says you should lose 27%.

So how about something your not being told to buy? Chipotle...

Don't worry, your not the only person wondering why something has a "Hold" rating when it's price target is 11% lower. However, to the analysts credit the "hold" rating was put on when it was trading at $378 (but don't give too much credit -- why is he recommending to hold something he thinks should go down in price?)

Worse yet, not only does the analyst think it's overvalued but so does S&P's "fair value calculation". By 30% in fact. Yet still no "Sell" rating?

I think you get my point......These "Price Target's" are pure humor. And as you may have guessed, the corresponding star ratings provide nothing useful in performance -- and actually have detracted as you can see in the below performance of their "All Stars" basket of stocks vs the regular S&P 500.

You gotta love these "useful" price targets!

It's Official! "It Is Ridiculous To Be Bearish"!

It's official everybody! "it is ridiculous to be bearish". If you didn't know, now you know! At least that's what Thomas Lee, chief equity strategist at JPMorgan says according to USA Today:

"Stocks are levitating like a balloon" adds Thomas Lee, chief equity strategist at JPMorgan. With stocks undervalued, underowned and cash-rich U.S. companies strong, "it is ridiculous to be bearish," says Lee, adding that the S&P could even take out its record high of 1565.15, set in October 2007."

Now that the S&P 500 (at 1403) is approaching Thomas Lee's original target (1430) for 2012, the "non-ridiculous" equity strategist needs to raise his target, it "could even take out it's record high of 1565". After all, how is JP Morgan gonna sell everyone stocks if their equity strategist doesn't say stocks are going higher?

Thomas had essentially the exact same forecast last year. And, yes, on the very day (April 29th) that markets peaked last year (at 1363) he came out with an increase to his forecast to 1475. At which point the market preceded to fall 19% and finish the year where it started. But seriously everyone, "It is ridiculous to be bearish". 

I mean, you have to be crazy! This guy knows cheap when he sees it. Just look at what he was saying in June 2008 when the S&P 500 was (interestingly enough) at 1360. According to bloomberg:

"The biggest rise in the unemployment rate since 1986 is an ``aberration'' and investors who sold equities today are ``completely misreading'' the outlook for economic growth, according to JPMorgan Chase & Co."

The Dow Jones Industrial Average fell as much as 412 points today after the Labor Department said the jobless rate increased by half a percentage point to 5.5 percent, the highest since October 2004, as an influx of students into the workforce drove the biggest jump in teenage unemployment since at least 1948.

``The surge in unemployment is probably an aberration,'' Thomas J. Lee, the New York-based chief U.S. equity strategist at JPMorgan, said in an interview. ``It's not because there were fewer jobs, it's because there were more people looking for jobs. Stocks are completely misreading the situation.''  

Ya, the surge in unemployment to 5.5% was an aberration. Mish Shedlock over at his blog even called him out at the time in his post "aberration in clear thinking by JP Morgan". So what was Thomas Lee's projection given this "aberration"?

"The strategist said the Dow industrials posted a 30 percent average gain in the 12 months following a jump in the unemployment rate by half a point or more since 1950. A rise in joblessness of that magnitude has occurred 16 times during that period, he said."

"Lee expects the Standard & Poor's 500 Index to climb to 1,450 by the end of this year, according to a Bloomberg News survey on June 2."

The market eventually bottomed 54% below his target. But on the bright side, his target is now less than 50 points away........almost 4 years later.

The reality is it's "ridiculous" to not realize that valuations are NOT cheap EXPENSIVE based on measures that actually have a correlation to longer-term returns. As illustrated in this chart from Doug Short.

I think this is a better representation of expected longer-term returns (chart represents "real" inflation adjusted returns)

Or possibly this, as shown by John Hussman in "Warning: A New Who's Who of Awful Times to Invest"

Can markets go higher? Of course, they always can. But bull markets don't start at a PE10 ratio of 22 (but many losses have resulted from these levels). And the only thing that would be "ridiculous" would be taking this guy seriously. Clearly, his target will always be "higher".

A Few Crazy Predictions in Global CFO Survey

Duke University and CFO magazine recently released their quarterly Global Business Outlook Survey for the first quarter of 2012. In the survey about 450 CFOs gave their best predictions for the S&P 500. Here are some of their predictions (based on the median response)

- Expected return over next 10 years = 6%/yr
- 10% chance return will be less than 2%/yr over the next 10 years
- 10% chance return will be greater than 10%/yr over the next 10 years
- Expected return over the next year (from 2/17) = 6%
- 10% chance return will be negative over the next year (from 2/17)
- 10% chance return will be greater than 10% over the next year (from 2/17)

Now none of those may seem too crazy. Except I think it is borderline delusional to believe there is only a 10% chance of a negative return over the next year considering current valuations. But if you want to see some truly wacko predictions, take a look at the extreme answers given in the "minimum" and "maximum" response column for each question.

A few of my favorites

- Someone thinks there is only a 10% chance the return over the next year will be LESS than 70%!?!

- Someone thinks the average annual return over the next 10 years will be 60%/yr!?!

- Someone thinks there is only a 10% chance the average annual return over the next 10 years will be LESS than 70%/yr!?!

So what we have there is either some truly crazy CFOs or some CFOs that need to take classes in reading comprehension before completing the next survey.

13 Steps For A Greek Exit From The Euro

Everyone by now should know it is in Greece's best interest to exit the Euro. In fact, it is so clear that it appears the only reason for these ongoing "bailouts" is to buy time putting in place the systems needed for the transition. So I present to you the 13 steps for a Greek exit from the Euro courtesy of a paper from Variant Perception "A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution" (it is worth a read in it's entirety, but it is long).

"1. Convene a special session of Parliament on a Saturday, passing a law governing all the particular details of exit: currency stamping, demonetization of old notes, capital controls, redenomination of debts, etc. These new provisions would all take effect over the weekend.

2. Create a new currency (ideally named after the pre-euro currency) that would become legal tender, and all money, deposits and debts within the borders of the country would be re-denominated into the new currency. This could be done, for example, at a 1:1 basis, eg 1 euro = 1 new drachma. All debts or deposits held by locals outside of the borders would not be subject to the law.

3. Make the national central bank solely charged, as before the introduction of the euro, with all monetary policy, payments systems, reserve management, etc. In order to promote its credibility and lead towards lower interest rates and lower inflation, it should be prohibited from directly monetizing fiscal liabilities, but this is not essential to exiting the euro. 

4. Impose capital controls immediately over the weekend. Electronic transfers of old euros in the country would be prevented from being transferred to euro accounts outside the country. Capital controls would prevent old euros that are not stamped as new drachmas, pesetas, escudos or liras from leaving the country and being deposited elsewhere. 

5. Declare a public bank holiday of a day or two to allow banks to stamp all their notes, prevent withdrawals of euros from banks and allow banks to make any necessary changes to their electronic payment systems 

6. Institute an immediate massive operation to stamp with ink or affix physical stamps to existing euro notes. Currency offices specifically tasked with this job would need to be set up around the exiting country. 

7. Print new notes as quickly as possible in order to exchange them for old notes. Once enough new notes have been printed and exchanged, the old stamped notes would cease to be legal tender and would be de-monetized. 

8. Allow the new currency to trade freely on foreign exchange markets and would float. This would contribute to the devaluation and regaining of lost competitiveness. This might lead towards a large devaluation, but the devaluation itself would be helpful to provide a strong stimulus to the economy by making it competitive. 

9. Expedited bankruptcy proceedings should be instituted and greater resources should be given to bankruptcy courts to deal with a spike in bankruptcies that would inevitably follow any currency exit.

10. Begin negotiations to re-structure and re-schedule sovereign debt subject to collective bargaining with the IMF and the Paris Club. 

11. Notify the ECB and global central banks so they could put in place liquidity safety nets. In order to counteract the inevitable stresses in the financial system and interbank lending markets, central banks should coordinate to provide unlimited foreign exchange swap lines to each other and expand existing discount lending facilities. 

12. Begin post-facto negotiations with the ECB in order to determine how assets and liabilities should be resolved. The best solution is likely simply default and a reduction of existing liabilities in whole or in part. 

13. Institute labor market reforms in order to make them more flexible and de-link wages from inflation and tie them to productivity. Inflation will be an inevitable consequence of devaluation. In order to avoid sustained higher rates of inflation, the country should accompany the devaluation with long term, structural reforms." 

However, there is one very important thing officials must continually do before implementing this 13 step program. Deny, Deny and Deny some more.

That very important step is still not being ignored by Eurozone chief Jean-Claude Juncker, as Reuters reports today:

"We've got a 17-member euro zone. Greece's exit is not a working hypothesis for us," Juncker told the European Parliament's economic committee.

Suuuure. And I agree with Variant Perception below

"Any euro exits would likely happen quickly and in rapid succession and would be done in a “surprise” announcement over a weekend while capital controls and bank holidays are imposed."

"Almost all emerging market devaluations were “surprise” devaluations, and there is no reason to believe that any exit from the euro would not be a surprise as well."

"In devaluations, the announcements are typically made over the course of a weekend, particularly when capital controls can be imposed. If necessary, Monday and Tuesday could be declared bank holidays as well. This was the case, most notably, with Argentina in 2002 where the announcement was made Sunday and then two days of bank holidays were declared." 

Those with their money in Greek banks aren't being stupid.

Another nice paper on the subject of a Greek exit if you have the time is "More Pain, No Gain for Greece" from the Center for Economic and Policy Research.

Consumer Spending: Where does your money go?

According to an ongoing Gallup poll the average American reports spending $66 per day, not including the purchase of a home, car, or regular household bills. This is down from $104 per day reported in January 2008, the month after the recession started (isn't it great the recession is over!)

Below is a nice infographic from Credit Donkey on how households spend their money. How does your spending stack-up? I'm definitely over on the percent I'm allocating to the "away from home" food budget. Ah, the downfall of city living!  

Am I the only one surprised that the average person in the US still writes about 8 checks per month?