Today’s Daily Angle comes from Wikinvest Wire member Rolfe Winkler of OptionARMageddon.com. You can read the full article on on Rolfe’s blog.

The treasury may convert its stake in Citi from preferred to common equity. Converting to common is a significant step on the way to nationalization because it means Citi’s shareholders would see their ownership stake significantly diluted. Why is the stock up on the news that shareholders are getting diluted? Because the only shareholders left are betting on the long shot: maybe the Obama administration will bail them out. This latest move inches the administration closer to nationalization, but suggests they’re still hesitant to pull the trigger. Maybe, just maybe, it will use taxpayer cash to absorb toxic assets. And then shareholders would make a killing.

More interesting to me is the section of the article regarding the Fed’s new focus on tangible common equity. As regular readers of OptionARMageddon are aware, we’ve been focused on this metric for some time. We even got into a long distance argument (viaFT Alphaville) with high-profile bank analyst Dick Bove about the significance of the measure. Good to see that the government is finally focusing on the right number.

The WSJ article mentions Citi’s tangible common equity of 1.5%. New readers may be interested in the calculation of tangible common equity for all of the banks. You can find it here. (and if you want to convert tangible leverage to a % along the lines of the WSJ piece, just divide one by the tangible leverage ratio highlighted in yellow. For Citi, it’s 1 / 66 = .015 or 1.5%)

Anyway, on to the news. (From the WSJ):

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%, these people said…

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The problem with this approach is that it is another half-measure that only delays the inevitable…

Read the full article on Option ARMageddon

Today’s Daily Angle comes from Wikinvest Wire member Blain Reinkensmeyer of StockTradingToGo.com. You can read the full article on on Blain’s Blog.

Ever since the Madoff Scandall was revealed, the SEC has stepped up its efforts to uncover other ponzi schemes, fraud, and basically any illegal wrong doing surrounding investors and money. The SEC efforts have been very noticeable as case after case is now being brought to light.

Three of the recent cases put forth by the SEC are sufficiently horrific to merit featuring right here (in no particular order):

1.  SEC Uncovers Ponzi Scheme Targeting Deaf People


Hawaii-based Billions Coupons and its CEO Marvin R. Cooper, “raised more than $4.4 million from 125 investors since at least September 2007 by holding investment seminars at community centers for investors who were deaf.” But it gets worse as Cooper, “pocketed at least $1.4 million in investor funds to pay personal expenses as well as purchase a new home.” Nice…

2. UBS hides $14.8 Billion in customer assets away in Swiss Accounts to avoid taxes


“The Justice Department claimed in the lawsuit that as many as 52,000 U.S. customers hid their UBS accounts from the government in violation of the tax laws. As of the mid-2000s, those secret accounts held about $14.8 billion in assets, the Justice Department said, citing a UBS document filed with the lawsuit.”  The SEC has filed a lawsuit to force USB to reveal all 52,000 identities and yesterday UBS, “agreed to pay $780 million for helping U.S. customers avoid taxes.”

3. SEC Charges Stanford for $8 Billion ponzi scheme using CDs


“Stanford’s Antigua-based bank, Stanford International Bank, sold roughly $8 billion of certificates of deposit to investors through a network of financial advisers by promising ‘improbable and unsubstantiated’ high interest rates, the regulator said in a statement. The rates were ’supposedly’ earned through the bank’s investment strategy, which ‘purportedly’ allowed the bank to achieve double-digit returns on its investments for the past 15 years, the SEC added.” The CFO James Davis and CIO Laura Pendergest-Holt are also being charged.

The recent activity and findings spur some interesting questions, the answer to which I would love to know…

What will the SEC possibly discover next? What was the SEC doing the last x years? Why did it take Madoff to trigger the SEC to flex its muscles?  How many ponzi schemes are there going on right now, seriously?

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

The jobs picture is looking grim. Jobless claims for the week ending 14 Feb 2009 were 627,000, pushing the average to 619,000. Additionally, nearly 5 million people are staying on the unemployment roles, the highest figure ever. But, it should be a given that jobless claims have increased in this cycle — the U.S. population has increased. What do these figures really mean?

The number itself is largely meaningless except as a talking point for journalists comparing this recession to previous downturns. How many times have you heard the phrase: “this is the largest number since 1982?” Dozens of times, I bet. Unemployment is a lagging indicator and doesn’t tell us anything about whether the economy is going to rebound. What we need to divine from the number is how it predicts future employment, and therefore future spending and economic growth. That’s going to be important whether you are looking for a job investing money or are looking to strategize for your business.

Here’s my brief look into how one can do that (for a more in-depth analysis, see my October post “The Economy’s Four Horsemen“). When the economy starts to slow, it is usually starts with consumers pulling back somewhat, followed by business realizing they need to pull back in turn. This leads to job losses and a further pull back. The cycle of retrenchment eventually ends and consumers begin spending again. But, what you should notice is that consumers lead and companies follow. That means employment falls only after it is apparent that the economy is slowing, and employment continues to fall even after the economy starts to pick up. So, employment is a lagging indicator.

What is not a lagging indicator is the increase in unemployment. In business cycles I have studied, the 6-month or 12-month change in unemployment is a good gauge of the economy. Translation: if you can compare today to six months ago and the jobs picture looks worse (on a relative basis) than it did last month when you did the same exercise, that means the economy is deteriorating.

Now, there are any number of ways to represent this comparison. You can look at the 12-month change in the unemployment rate. You can use the look at the 12-month change in the number of unemployed, and so on. One of my best metrics is jobless claims. More precisiely, I look at the “12-month change in the 4-week average unadjusted number of initial unemployment claims.” That’s a mouthful, so let’s call this stat the “jobless claims change (JCC).”

What the JCC tells us is the rate of deterioration or improvement in the employment market, which very much more of a coincident or leading indicator than unemployment (see my post “Another Perfect Recession Indicator” for more). If the JCC increases a lot and is still increasing, that means the jobs picture is getting worse at a more rapid rate, which means that the economy is also deteriorating.

Below are two charts for jobless claims.

Today’s Daily Angle comes from Wikinvest Wire member Contrarian Profits. You can read the full article on the Contrarian Profits blog.

After passing much of 2008 standing thankfully on the sidelines, we believe that with current valuations, opportunities have returned for putting capital back into long-term positions inemerging markets. In fact, we believe that emerging markets will recover faster and outperform developed markets over the long term. In our December 2007 edition of Without Borders we wrote:

“So much money has been sloshing around the globe in search of an “above average” return that even risky assets have been bid up tremendously. At this stage, however, with new holes in the financial dike showing themselves almost weekly – more holes, we suspect, than officialdom has fingers – the money flows are building toward a reversal. This will hammer the emerging markets the hardest because, historically, in times of crisis, capital packs up its bags and goes home. When that happens, shares of good companies get sold at the falling bid simply because the seller must get liquid, whether to calm his fears or to cover his losses elsewhere. Asset prices become screaming passengers strapped into a luge ride.

“This creates opportunity, of course. Even though the economies of all the most prospective emerging-market countries are strong enough to weather any likely storm, their financial systems aren’t. This is emphatically true in India, China, Brazil, and other fast-track economies. Even so, when foreign financial capital has fled, the physical and human capital will remain, it will still be valuable, and good investments will be cheap in the extreme. But the opportunity won’t be available for everyone – just the investors who’ve been patient.”

Then in April 2008, we gave our presentation on “Bottom Fishing for Stocks in Emerging Markets,” during which we highlighted that the single most important factor in emerging-market stock markets is capital flows. In the emerging markets, the time to invest is when capital has fled the country.

We know we disappointed the crowd when we said that there was not one emerging market we found attractively priced and that shorting in emerging markets is almost impossible, so our strongest recommendation was to do nothing.

It’s quite a skill to do nothing and do nothing well. We sidelined ourselves and watched, staying away from emerging markets for most of 2008.

But now… finally, the catastrophic sell-off in global financial markets had the effect that we expected: there was a huge sucking sound coming from public equity and currency markets in Russia, Brazil, China, Taiwan, Malaysia, India, South Korea, Colombia, Chile, etc. Foreign institutional investors came face-to-face with the reality of lower risk tolerance and deleveraging and were forced to sell. Everything.

The ensuing flight to quality left emerging markets and their currencies decimated… but herein lies the opportunity. We just hope the IMF and World Bank will run out of money or leave them alone, thereby preventing the return to the boom/bust cycle of the 1990s.

Bullish long-term outlook

Remember, the sell-off in emerging-market equities, bonds, and currencies reflects a rush for the exit sparked by global deleveraging and a need to raise cash, rather than any change in the fundamentals. When the current turmoil subsides, we believe that emerging markets will fare better than developed markets and will outperform the latter over the long term. As such, we find that current valuations are solid entry points for putting our hard-earned capital into long-term positions. Consider:

• Emerging-market economies will prove resilient during this economic slowdown and may account for all of world economic growth in 2009 as developed markets slow to zero.
• Emerging economies are not nearly as dependent on consumer spending and almost not at all exposed to consumer credit.
• Emerging markets by and large suffer neither the demographic imbalance nor the entitlement imbalance that plague the developed nations.
• Corporate and personal balance sheets in emerging markets are stronger than those in the developed markets.
• In many emerging markets (Brazil, most of South East Asia, India) as well as several African nations, domestic or regional demand is now more important than exports for GDP growth.
• Among stronger economies, high foreign-exchange reserves and lower foreign debt levels act as insurance against the global slowdown; reserves have grown six-fold to over $4 trillion over the last ten years.
• Over the past ten years, emerging-market companies have produced higher profits with lower (but not necessarily low) leverage, while profits expanded annually by double digits during the past ten years.

Cash Rich, Resource Rich

Compared to the late 1990s Asia crisis, the present situation is much more stable for emerging markets. While we expect current account surpluses to deteriorate given the global slowdown and recessionary pressures, emerging markets will face this challenging period with cash in their bank accounts.

The importance of this change cannot be overstated.

Much like individual households that stash away something for a rainy day, many emerging-market countries now have a greater reserve of wealth with which to buffer financial market headwinds. This gives them the option of taking fiscal stimulus measures to offset the effects of a developed-markets slowdown without having to go into debt. While we decry these neo-Keynesian actions as throwing water on an electrical fire, historically they have boosted share prices.

As part of their fiscal stimulus, we also expect to see higher infrastructure spending by countries with the financial muscle to do so. China, for example, which is projected to have more than 200 cities with populations exceeding one million people by 2025, up from just 23 in 2005, announced in early November 2008 a two-year infrastructure investment and stimulus package of up to 4 trillion yuan ($586 billion). While much of this stimulus will come in the form of strong-arming banks, there will be substantial cash injections in the Chinese economy, and they have the cash to do it: highways, railroads, and airports. The government hopes that this stimulus package will also encourage increased consumer consumption. All this is good news for raw-materials companies, one of which is an undervalued Chinese cement company that is a cornerstone of our portfolio.

The turning point

Emerging markets will be the catalyst for global economic recovery, not the West. Like China, many emerging markets that have been saving for a rainy day have the cash and political will to spend on development projects that require raw materials. Others, like Chile and Angola, have the raw materials to sell. Even more so, a few countries like Brazil and Saudi Arabia have both. The economy will get jumpstarted with these countries initiating their own trade without the leadership or consumptive traditions of the Western world.

Perhaps even more pointedly, we foresee a highly inflationary environment over the next several years… all of the dollars with which President Obama will be flooding the world will have to find a home somewhere. This will more than likely spark another commodities boom, which is supported by the world’s ever-growing demographics, resource scarcity, and climate-change legislation.

As such, resource-rich emerging markets are going to find themselves being the future home to foreign investment capital again. Institutional capital will trickle, then gush into these markets as the world wakes up one day and finds oil and copper trading at twice their present levels.

Consequently, today’s emerging markets will be the net recipients of the future inflation that is being created by the West.

Capital Flow Conclusions

We have long said that capital flows are the most important indicator for emerging equity markets. Investor outflows in the second half of 2008 already equal one-third of the total inflows into emerging-market equity funds over the prior five years. This is a positive sign for contrarians looking for a bargain. There has been a bloodbath, and this is a buying signal.

We recognize that the ride will likely be bumpy. Fiscal stimulus, trillion-dollar deficits, and politicoramus bickering may cause a roller-coaster ride to the top… but the evidence strongly suggests that, once institutional funds finally realize that U.S. Treasuries are a fool’s bet, remaining capital will be on the hunt and flowing back into emerging markets. The window is open, and we are dedicating our efforts to finding the most undervalued companies with rock-solid management and balance sheets.

Source: Another Look at Emerging Markets