FULL DISCLOSURE

I was driving back from Las Vegas the day the Vioxx storm hit Merck, the giant drug maker.

At the time my partner and I had an office in Henderson, a burgeoning LV suburb, and our home base in Newport Beach. My partner had an extensive background in real estate and insurance, once having his own real estate school and multiple RE offices, before deciding to downsize and simplify life.

We split the blood, sweat and toil right down the middle at the firms. He handled the RE and I did the equity and commodity side. The bottom of the LV housing market had yet to drop. Three of our clients earlier requested a meeting to discuss timing.

All had leveraged multiple real state deals, buying up large numbers of houses to rent for the positive cash flow and later dump into strength. Variable interest rates were low and home prices were rising faster than Usain Bolt runs a 100 meters. It was a sweet, money-making deal.

A few years later things started to change. Prices were going up so fast that all of a sudden cash flows turned negative on any new deals. The low hanging fruit was all but gone. Our clients requested another meeting again to discuss timing. This time we urged them to TP&H. Take all profits and hide. And after some lively exchanges over two days, that's what they did. 

For the next several months prices continued up and we caught some hell. Then one evening the Fat Lady's limousine quietly rolled into the City of Lights.

The first thing we did when we returned to the office the afternoon of the Vioxx news is start looking at Merck puts, not to buy but to sell. We knew the stock was in deep, but it would most likely survive. Remember there are no absolutes. Sometimes most likely is the best you're going to get.

Pharmaceutical research was hardly new to me. Merck had once been a $90 number with an outstanding research crew. The MSM focused, as is their want, on the short-term drama, the heart attacks and the sensational side. The bigger issue was would Merck survive and in what form and what was their defense?

Several years ago a colleague got sued by his ex-live-girl friend. It was about the money. He hired a noted female attorney. Both sides remained intractable. Three days before the case was going to trial he settled. When I asked why over lunch one day, he told me they had negotiated a lesser, known amount, even though he didn't want to give her a nickel. The trial was set for the Palm Springs area.

Then he added: "I got one of the best female attorneys around telling me the jury will probably be nine women, all housewives, and three men. She'll take the stand, start crying, talk about your wealth, and then the number if she wins is open-ended. Do you want to risk it."

Some time later he laughingly told me he got off easy. We knew Merck wasn't going to get off easy. But selling puts with a decent premium at the right time, like those houses a few years later, to get the stock possibly put to us in the high 20s and low 30s even if they cut out the dividend looked like a good risk-reward scenario.

One of the attorneys who successfully argued Merck's case at the time is now CEO. Not too long ago he persuaded the former successful head of research during Merck's glory days to come out of retirement. 

Merck's like most of us, got some problems. But from where we sit, they got a lot more things going for them.

And for the sake of full disclosure, we still own some of that stock.

CONTRARIAN BLOOD

If there's an ounce of contrarian blood in you, take a look at FCX and NEM, two equities that are about as unwanted as rain at a picnic. Both are near their 52 week lows. Both are in the mining and metals business, two sectors about as unwelcome as a case of the aviary flu at a chicken farm.

See YUM for the correlation there.

There's a reason for rain and there's a reason for unwanted. Meteorologists are the original hedge crowd: 30% chance of rain, sleet or indigestion after that huge Thanksgiving feast.

Meteorology has some science behind it. Key word some. Unwanted equities frequently have some science behind their status, too, the numbers. In this case, the global GDP numbers for starters. Right now they resemble my first love without make-up. I always had a thing for less attractive attractive ladies. You just know 'em when you see 'em.

WEEKEND READS

LA Banker And Ex-General And Syria
http://labusinessjournal.com/news/2013/apr/26/l-banker-announce-syria-reconstruction-fund/

Twin Bubbles?
http://www.futuresmag.com/2013/04/26/where-is-the-larger-bubble-sp500-index-or-us-treas?ref=hp&t=financials&page=2

Time Market Go Google
http://money.cnn.com/2013/04/26/investing/google-search-markets/index.html

The Fat Lady Hasn't Sung Yet
http://www.minyanville.com/trading-and-investing/commodities/articles/Jim-Rogers-Thinks-Gold-Will-Resume/4/26/2013/id/49504

Charts From BEA
http://www.scribd.com/document_downloads/direct/137332780?extension=pdf&ft=1367018424&lt=1367022034&source=embed&user_id=215643384&uahk=fmv8mK0N0rVjdcpnzmivhmT9xJY

All Things To All Folks
http://www.washingtonpost.com/blogs/post-politics/wp/2013/04/24/the-white-houses-all-of-the-above-energy-strategy-goes-global/

THE ONE YOU DON'T SEE

We just wrote a piece about Sallie Mae's bond offering recall, saying risk outweighed reward.

Another story in today's WSJ suggests the market is raising rates ahead of the Fed--as is usually the case--concerns mortgage securities backed by loans without government guarantees.

 Once upon a time it was a huge market. It's a market the government hopes to rekindle for obvious reasons, not the least of which is confidence in the whole damn mortgage system.

In January premiums on deals sold as low as "0.97 percentage point for a yield of less than 2%." Like these Sallie Mae bonds, investors seem to be shying away from mortgage backed securities as more are hitting the market.

Now those mortgage securities are yielding nearly 2.6%, 1.75% premium above the interest rate benchmark. Concern centers on higher interest rates down the road. Refinancing of these mortgages has decelerated significantly. Investors don't want to get squeezed in an interest rate hike.

How much farther down the road, well, according to another story today, Bernanke and crew are already dipping their big toe into what effect an interest rate hike would have on those TBTF banks.

Stay tuned. In boxing we have a saying: it's the one you don't see that does the damage.


http://online.wsj.com/article/SB10001424127887323335404578445210965385442.html?mod=ITP_moneyandinvesting_2

BRIEFS

Looks like Spain has caught the California disease: high unemployment and a rising exodus.

Irrespective of the reasons, it's the same message: lack of responsible leadership.

According to Spain's National Statistics Institute, unemployment hit 27.2 percent, which means it most likely even higher. Governments are not known for their being forthright when it comes to negatives news.

A record 6.2 million are out of work, the INE recently reported, and the total number escalated from 26 to 27.2 percent in the first quarter of this year.

http://www.marctomarket.com/2013/04/spain-update-running-from-bulls.html#more
------
A lot of smart people think the next bubble to go pop is student loans.

As the percentage of borrowers more than 90 days delinquent rises and concerns about these loans grow, it looks as if investors are starting to send a message: nada mas.

At least that's the message about the more risky tranches of these loans if the recently canceled Sallie Mae bond offering means anything.

These bonds offer higher yields in the main, but those yields depends on how they get packaged. Sallie Mae, the largest non-government student lender, on Thursday had to recall an offering that had been on the market for two weeks owing to lack of interest.

Market translation: not enough reward for level of risk.

http://online.wsj.com/article/SB10001424127887323335404578444832431703020.html?KEYWORDS=sallie+mae
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FRIDAY READS

Latest GDP Data
http://blogs.wsj.com/economics/2013/04/26/economists-react-persistent-but-underwhelming-growth/

Looking Ahead http://www.nytimes.com/2013/04/25/business/janet-l-yellen-possible-fed-successor-has-admirers-and-foes.html?pagewanted=all&_r=0

Death Of Gold Exaggerated
http://www.futuresmag.com/2013/04/25/gold-rises-most-since-september-as-central-banks-j?ref=hp

Liberty Or Surveillance: Your Choice
http://reason.com/archives/2013/04/25/america-made-a-pact-with-the-devil-after

This Ain't Pennies
http://dealbook.nytimes.com/2013/04/25/soros-takes-big-stake-in-j-c-penney/

Oxy Reports
http://labusinessjournal.com/news/2013/apr/25/lower-oxy-profit-better-expected/

FLAWED STUDIES

How do you tell a flawed study when you see one?

For most it isn't easy unless you've been around the study business and spent lots of time in the world they're studying. In this case Type 2 diabetes.

The first thing you know all studies have an agenda, though the people involved will deny it. The second thing you want to know is who funded it. 

The third thing is how they arrived at the magical number nearly all studies spout. Again, in this case 22%.

The next thing you know every study needs a quote from a so-called expert. And an independent one all the better. This time a statistical one who overwhelms us with the brilliant line: 

"The bottom line is that sugary soft drinks are not good for you - they have no nutritional value and there is evidence that drinking them every day can increase your relative risk for type 2 diabetes," he said in an emailed comment.

Can and relative are interesting choices to describe your everyday risk. Driving on a California freeway everyday can increase your relative risk having an accident too. And we'll put our evidence up against his any time.

The tip off in this study is: "Fruit juice consumption was not linked to diabetes incidence."

That tells you fruit juice makers are not the bad guys--yet. Next time you buy a bottle or can of fruit juice check out how much sugar it contains, if you can. 

If you check online you'll see this story was picked up by ABC News and blasted over other outlets.

http://www.reuters.com/article/2013/04/25/us-diabetes-drinks-idUSBRE93N1DL20130425

THURSDAY READS

DEFENSE WINS FOR NOW
http://online.barrons.com/article/SB50001424052748703889404578442853939461028.html?mod=BOL_hpp_highlight_bottom#articleTabs_article%3D3

DEFAULTS ALARMING
http://blogs.wsj.com/developments/2013/04/24/despite-improvement-in-loan-mod-defaults-report-raises-alarms/

CAN YOU DECIDE?
http://investorplace.com/2013/04/should-i-buy-exxonmobil-shares-3-pros-3-cons/

DO BUYBACKS REALLY BUY LOVE?
http://blogs.wsj.com/moneybeat/2013/04/24/for-its-next-feat-apple-will-win-back-investors-with-buybacks/

ONCE IT GETS STARTED
http://www.bloomberg.com/news/2013-04-05/japan-s-new-stimulus-may-trigger-yen-avalanche-soros-says.html

EXOTIC PERMUTATIONS

If the name of the title sounds like one of those fancy spas executives often frequent, in this case it's code for unintended consequences.

But like one of those spas it pretty nice duty if you can get it.

He added that this wasn't specifically contemplated when such plans were devised a dozen years ago to give executives a way to sell some shares of their own companies despite being exposed to nonpublic information about it. It is, he said, an "exotic permutation."

http://online.wsj.com/article/SB10001424127887323696404578300073046959086.html?mod=ITP_pageone_0

CLASSIC EXAMPLE

The NYT motto reads "All the news that's fit to print."

After you read the posted story you should know why it ought to say: "All the news that's fit to spin."

Let's start at the top, the title: "The Incredible Shrinking Budget."

The only thing incredible about the incredible shrinking budget is whoever wrote this headline. If nothing else it shows you what contempt the NYT has for you.

The article claims the deficit is not only falling but falling rapidly. They then quote a report from Goldman Sachs aka in many eyes as Government Sachs. This is the same GS that shorted gold then put out a report to clients that gets spread to the public by MSM to short gold.

For anyone but GS that's called front running; it's illegal for you and me. It's also designed to pry the retail crowd loose from their metal ETFs and send a message about the economy.

Take a closer look at the paragraph below.

“Revenues have also exceeded expectations, with a 12 percent gain fiscal year to date. What is more notable is that the strength in revenues preceded the payroll tax hike at the start of the year, and the spending decline does not seem to reflect sequestration, which has just started to take effect.” To translate: the deficit could come in even smaller than currently anticipated because of spending cuts and higher tax rates.

To begin with, there's more qualifiers ("does not seem, "could come") in there than you'll see next month at the Indy 500.

The strength in revenues was no surprise. People cashed in some winnings to avoid higher taxes that they knew are coming. This was true at the state level also. Even tax-crazy California reported higher revenue.

This next paragraph would be even funnier if not for such blatant cheerleading. The growing economy, bolstering tax revenues, reducing the need for spending on unemployment insurance, the budget is finally coming into balance. Enough already.

"Washington has gotten its act together" and they write this BS with a straight face. The next time Washington gets its act together will be the first time.

On the face of it, this sounds like something to applaud: The growing economy is bolstering tax revenue and reducing the need for spending on programs like unemployment insurance. Washington has gotten its act together. The budget is finally coming back into balance. Indeed, Goldman now expects the budget deficit to fall to just 2.7 percent of economic output by the 2015 fiscal year. Many economists consider budget deficits that small to be sustainable — particularly if the federal government is investing in public goods like schools and roads — with the accrued debt paid off by later years’ economic growth.

This next paragraph is their coup d' gras, the final haymaker to knockout sequestration.

But a number of budget experts are booing rather than applauding, including the fiscal hawks at the International Monetary Fund. Last week, the fund nudged down its estimates for United States growth in 2013 and 2014. It said it saw many bright spots in the American economy, including the strength of the private sector, but it criticized Washington for imposing too much austerity, too soon, and thus sapping strength from the recovery and preventing the unemployment rate from coming down faster.

There always has to be another reason for the failure of the unemployment rate to decline. It couldn't be lousy government policy in the first place owing to huge budget deficits, big debt and out-of-control slopping at the public trough.  

You can't blame the author, though. She probably doesn't know yet: she's just another pawn. Toss her a by-line, a few chips, some guacamole and she's good to go.

http://economix.blogs.nytimes.com/2013/04/22/the-incredible-shrinking-budget-deficit/