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Headlines I Skipped 01.31.15

by John Jazwiec

Merkel Won't Cancel Any Greek Debt

 MERKEL

 

Skipped it. I don't get it. I asked her nicely yesterday. I reminded her of the history of Germany and how she personally benefited from selfless acts of others. But it's also possible Merkel only read the history of Germany from 1933 to 1945. Clausewitz said "war is politics by other means". Maybe Merkel sees "economics as war by other means". 

 

McDonalds Will Now Accept Hugs As Payment

 

Skipped it. It's not going to work. Any two people in a McDonalds are too fat to hug. And it's impossible to hug any human being through a drive through window.

 

Super Bug Fear Meets Super Bowl With Sexy Ad For Antibiotic Free Burger

 

Skipped it. I once had an agency make a video of a normal mom shopping for size 12 clothes. At a user conference I met the actress. She was skinny. I asked her is she had lost weight. She said no; the camera puts on 15 pounds. She told me the "skinny" actors you see, really only weigh less than 80 pounds and eat water and seaweed. When you see a skinny women hawking hamburgers - even if they are antibiotic free - you can be sure they haven't ate a hamburger for a long time. 

 

Ryan Gosling Hasn't Been This Funny In Years

 

Skipped it. I didn't know Ryan Gosling was funny before. And remind me, who is Ryan Gosling again?

 

If You Want To Burn Fat Cardio May Not Be Enough

 

Skipped it. Of course cardio is not enough to burn fat. Do you want to know the secret for losing fat? Stop feeding your face with too much calories. Especially calories you buy from hugging McDonalds. 

 

Bruce Jenner To Become A Woman

 

Skipped it. Not because I am anti-transgendered. I am too socially liberal to cast dispersions on human sexuality choices. But switching genders at 65? What's the dream? You feel like you are Katharine Hepburn trapped in a man's body?

 

Rick Perry's Attorneys Are Hoping The Third Time's A Charm

 

Skipped it. I don't care if Rick Perry is acquitted from his felony charge. No amount of political handlers can ultimately rise Perry's IQ into the third digits. 

 

McDonalds CEO Stepping Down

MCDONALDS CEO

 

Skipped it. Hugs as payment? Enough said. 


Where's The Effect Of Lower Gas Prices?

by John Jazwiec

As the meme goes ... the US economy is based on 70% consumption ... and lower gas pump prices should expand the US economy. 

It's a great narrative. Except it's not true. 

1. The average American household is saving $42 per month at the current gas pump prices. Economists and investors are trying to figure out why durable good orders are down and transportation (the supply chain to bring goods or the parts of goods to the market) stocks are down. This is the answer. $42 a month, allows the average American household to treat themselves, to going out to eat one more time a month; but it's not enough to get people to buy new washer and dryers. 

2. Offsetting Regional Wealth Effects. Fracking boom towns from North Dakota to Texas are seeing the value of their real estate falling. Wealth effect - people buying more when their real estate is rising - also works the opposite way when real estate is falling. 

3. Offsetting Regional Job Layoffs. Less upstream oil production - extracting oil out of the ground vs. operating existing oil wells - mean less labor being required. Unemployed people don't have any money to spend.

In conclusion, where's the effect of lower gas pump prices, is not a positive answer for the economy. Too little savings are being offset by regional wealth effects and job layoffs. 

In other words, lower oil prices, are actually a drag on the US economy. Not an economic stimulus. 


Angela Merkel: Leaders Make Weather!

by John Jazwiec

Angela Markel.

You are the most powerful person in Europe. You don't have domestic rivals. You have been reelected three times. Europe needs saving and it can't be saved without you. You have the political ability to explain to Germans how they have to sacrifice to save the EU and the Euro. But you keep playing it safe.

Of all people, Ms Merkel, you should know that leaders make political weather. 

You owe your own political success and the democracy, liberty and capitalism you rule, due to other political weather risk-takers. 

No Marshall Plan? A West Germany that would have taken longer to feed its people and re-industrialize. A West Germany that could have easily chosen communism. 

No Nato? A West Germany that couldn't defend its boarders. 

No Helmut Kohl? No reunification of West and your own East Germany. 

The Marshall plan cost the US $103 billion in today's dollars. Nato's costs the US about a billion dollars a year. German reunification, over a period of 20 years, cost 2 trillion euros, or an average of 100 billion euros a year.

Peer Steinbrück, an SPD candidate for the chancellorship, once asked "Aren't we willing to pay a tenth of that over several years for Europe's unity?".

So I ask you the same question today. Hasn't it dawned on you, that you stand on the shoulders of great leaders, who sacrificed, so you could emerge from East Germany and rule a powerful Germany? Perhaps it can be argued that the Marshall Plan and Nato were US ideas. But Germany foot the bill for German reunification. It was a gusty and risky decision by Helmut Kohl.

And you not following suit? Are you a leader that isn't willing to bet your job by taking the political risk of uniting Europe? It seems so. Which makes you a political hack and not a true great world leader. 


Germany And The Euro: The Original Sin

by John Jazwiec

Most mainstream financial journalism talk about the Euro as a troika. Namely the EU (European Union), ECB (Europe Central Bank) and the IMF (International Monetary Fund - Europe's version of the US's World Bank). 

Yesterday I added Germany and it's banks to the troika and called them the four cohorts. 

The original sin of the Euro, was it was set up for Germany. 1. A shared currency would lower the cost of German exports (it did and has). 2. Germany's banks - taking advantage of German high savings rates - could invest seamlessly across the Eurozone thus enlarging it's loans and loan returns (enlarging its loans it did, but not its loan returns). 

This kind of loan demographic expansion was flawed from the beginning.

German banks loaning money to Germans and German companies, is like community banks loaning money to community residents and community companies. Generally speaking, community banks have the best returns because they know their community.

Once community banks merged, and interstate banking was legal again, demographic linkage deteriorated. Returns on assets shrank. And bad loans were made. And "poof" you get a 2008 banking crisis. 

In the case of Germany, the same thing happened, but unlike the US, EU countries are not states of one country and other EU countries - anyone who has every traveled or done business knows this - don't have the same cultures. 

So Greeks asked for loans from German banks and German banks were happy to oblige; as was the original plan. But like the toxic mortgage crisis, German banks neither lacked the proper documentation nor could look past the short-term benefit of their bank balance sheet's growing and didn't stay current with loss write-downs (discounting bad loans and reflecting them on their balance sheet). 

Throughout history, you don't get a debt crisis, without banks making bad loans and desperate people asking for more debt than they can afford. And that is exactly how the Greek crisis started and why the four cohorts don't have any good options today. 

When all is said and done, Germany, not Greece is ground zero. Germany either has to forgive bad loans (politically challenging, because all the average German sees, is they save money and the Greeks "irresponsibly" spend it) OR Germany (not Greece, and not the so-called "PIGS") leaving the Euro (which would crush Germany's export led economy with the reestablishment of the Deutsche Mark - roughly doubling its export price).

The latter option would also lead other Euro countries to feel more free to simply default on their loans. And because Germany is no longer a part of a shared union; they would have to sue for "pennies on the dollar". In the former option, Germany would stand to gain more "pennies on the dollar" through loan write-offs and loan modifications. 

The ironic thing is that both Greek and German citizens are politically in the dark. All Greeks see is austerity and they are rejected it. And all Germans see is dead-beat Greeks and they want all their money back. 

Either way, at some point, Germany's popular three-time elected Chancellor, Angela Merkel, is going to have to explain this complexity to the German people.

If they want to maintain being a growing export led economy into the future, they need the Euro to last. And to make it last, its going to cost plenty of German money. 


Greece And The Euro: No Good Options

by John Jazwiec

In Greece yesterday, the far-left, anti-austerity party Syriza won one seat short of the majority (150 seats out of the necessary 151 seats). It's simply a matter of hours before they co-opt another party to form a ruling majority. 

This puts the Euro - ECB, EU, IMF and German Banks - in a no win position. 

If the four Euro cohorts, cede to Greece's anti-austerity plans, world-wide markets will lose faith in the Euro, because it will greatly diminish the possibility that other EU nations will stick with austerity.

If Greece leaves the Euro, then the last believers in a irreversible single currency, will begin to price into the Euro the exit of EU peripheral nations. 

On Friday, EU/USD equalled 1.1271. This morning it opened below 1.1150. Normal currency markets move within 0.0001 each day. They don't move by 0.0021. That's 21X normal intra-day trade. 

We are either seeing the death of the Euro, or more substantiation that there is money to make by shorting the Euro. Add in ECB QE - designed to lower the value of the currency to make exports grow to enhance economic growth - and shorting the Euro is an easy investment. But as Greece reminds us, any short of the Euro, should be executed sooner than later. It just might not be around forever. 


2015 - The Year Of Living Dangerously?

by John Jazwiec

am not young or old. But I think I have enough perspective on the relative historical nature of the world and its business and financial markets, to form rather rational opinions. 

I have never, ever, seen so much world-wide unstability, as I see today.

And ground zero is in Europe and in the Middle East.

Europe

1. The Ukraine is heating up again. Some of this maybe linked to Moscow. But if it is, the ground has been fertile for a long time. Western Ukraine is agrarian and Eastern Ukraine is industrial. And Kiev has been historically corrupt; even after two so called "Orange Revolutions". Picture Kiev as 19th-century Chicago and Ukraine as 19th-century Illinois. Western Ukraine is a bunch of small plots of lands (land was dolled out to families after the fall of communism) and Eastern Ukraine is made up of decaying company towns like my boyhood home of Elgin, and Rockford. Western Ukraine is poor due to under-capitalization and looks longingly to Europe for hope. While Eastern Ukraine is poor due to its only trade being with Russia and looks longingly to Russia. With a currupt Kiev, there is no strong unifying federalism possible. The only way to keep the Ukraine from destabilizing Europe is a recognition that it may have to be split into two.

2. Russia continues its downward spiral. The combination of economic sanctions and plunging oil prices are attacking the heart of Putinism. Putinism with Russia is amoral. Russia - a country of nine time zones - has never been stable without authoritarian rule. There are only two ways to stabilize Russia. One is for it to become more socialist/communistic again. The other is to rally people around the flag and confront Eastern Europe. 

3. Eastern Europe, every day. has to look to it left and to its right. It looks to its right and is legitimately concerned with Russian kidnappings and Russian air incursions. And it looks to its left and sees Western Europe preoccupied with their own problems. 

4. Western Europe. This probably needs its own blog post. But to be succinct, Western Europe is plagued by not enough of a unifying political force, its own oil dependency, economic recession and deflation, aging demographics, a large Islamic immigrant population that is not socially and economically enfranchised and a porous Turkish border leading up to a build up of terrorist cells. In Chicago, African-American and Latino social and economic disenfranchisement, kills thousands of people every year and it's called crime. In Western Europe, Islamic immigrant social and economic disenfranchisement kills less people but more randomly and is called terrorism. While the US has a rich history of being a melting pot for immigrants, Western Europe does not. African-American and Latino disenfranchisement are exceptions due to a lack of education and a corruption of families and neighborhoods. Islamic immigration disenfranchisement in Western Europe isn't educational or familial in nature. The former fights back by controlling turf with illicit trade. The latter fights back with a well-educated understanding of the historical nature of random terrorism leading to social instability. For all the reasons stated above, Western Europe is more destabilized than ever. 

The Middle East

1. Libya without Gaddafi is a failed state.

2. Egypt, had to restore and has to maintain its authoritarian government because it is sandwiched between Libya and the Hamas-controlled Gaza Strip. Almost certainly, the same independence forces, that led to a series of revolutions, will be back at it again; threatening to destabilize a nation that the world and Israel can't afford to be destabilized. 

3. Israel is in a no-win situation. 

 

4. Syria is a failed state with no good options for the world. Picking between Assad gaining control after genocide is politically impossible. And finding "moderates" that are capable of not being pro-Assad and are numerous and organized enough to fight ISIS without any ground presence is logisitically impossible. Does the reader want to know why Israel, who hates Assad and once-in-a-while conducts highly accurate bombings, nonetheless has historically wanted Syria to be stabalized at any cost? Now you know. 

5. Turkey continues to look out for Turkey. It doesn't want ISIS destabalizing it. So they allow safe-passage to ISIS into Europe in exchange for keeping the peace. 

6. Afghanistan, now without Nato and the US, is now going to have to deal with the Taliban on its own. The annual spring Taliban offensive has been replaced with a year-round Taliban offensive. Its hard to imagine any stable Afghanistan in the short-term without Taliban rule. And Taliban rule provides safe haven for terrorists. 

7. Pakistan continues to look out for Pakistan. 

8. Iraq continues to be balkanized between Sunni, Shia and the Kurds. And this disorder provides more territory for ISIS to maintain. It's hard to see Iraq not becoming more unstable in the future. 

9. Pro-West Yemen has capitulated to terrorism. Terrorists now have complete safe haven in Yemen. 

10. Saudi Arabia, which faces the repercussions of lower oil prices, along with a failed system of exporting its bad people to keep social order in a country with such wealth polarization, now has added a Yemen enemy border to its historical Persian Gulf enemy Iran. It also faces a future of a new generation of Saudi kingdom-ship succession as the last old brother - King Salman - assumed the role after the death of King Abdullah last week.

All of this instability doesn't even factor in the growing pains of China and Indochina; with a bellicose and nuclear-armed North Korea. 

2015 is shaping up as a year of living dangerously. Maintaining world-wide stability is going to be a tall order. And the world's business and financial markets have not yet factored all of this in. 


Ernie Banks, Mr. Cub - Was So Much More

by John Jazwiec

Growing up in Chicago, perhaps my only childhood memory as a little kid, was the Chicago Cubs and the meltdown of the 1969 team. I was too young to understand it, but my parents and my neighborhood were deeply impacted. It was as if someone died.

Now in retrospect, I understand what 1969 meant. I now know that my grandparents lived their entire lives hoping to see the Cubs go to the World Series. Their parents didn't watch the games on TV of course. But they did see in 1908 - the last World Series championship - in person (and not at Wrigley Field).

After 1969, I can remember my own naive passion for the Cubs beginning. By 1984, when the Cubs again came close to going to a World Series, and blew it, I became a self-loathing fan. By the famous collapse in 2003, the Steve Bartman game, I was in rural England trying to buy a company. I was - by happenstance - with another Cub fan. We plugged our computers into an old dial up line. We saw what had happened and could only laugh in a futile way that was so Cub-esque. 

I am sure that being a baseball fan - in every old city - is not so much a matter of sports, but a matter of generational continuity. For my children, they come from a lineage unbroken, from their great-great grandfathers and grandmothers. 

And so, upon hearing the death of Ernie Banks - Mr. Cub - a piece of all us died, as it did in 1969. 

But for me, Ernie Banks was much more than a first-vote Hall of Famer. Ernie was loved by my parents and grandparents, because he was smart, and because he was always optimistic. 

The importance of that, can't be minimized. My grandparents became more racially accepting because of Ernie. My parents never even spoke about the color of his skin. My first professional boss was a women of color and it didn't seem anything out of the ordinary. And by the time of my children ... they wondered why someone's skin even mattered. They would go on to have non-white friends and non-white boyfriends and girlfriends, just as my wife and I had. 

It's impossible to separate civil rights progress and sports. My great grandparents cheered on Joe Lewis vs. Max Schmeling in the "Battle Of The Century". And Jessie Owens in the 1936 Olympics. Even though they were 1/2 Germanic . My parents had Ernie Banks, Billy Williams and Fergie Jenkins (all in the Hall of Fame). My wife and I never needed sports heros to become color blind (my wife dated a Brooklyn Dodgers Hall Of Famer's son, and didn't even know who his father was). 

Ernie Banks, although he faced racism, after leaving the Negro leagues and becoming a Cub in 1953, never rebelled. He didn't have to. People let their racist guard down because he was so beloved. He taught generations, something more than MLK, and the civil rights movement. He was simply a man. A hero, who was also a lovely man who could be loved and respected, in a totally unconscious way.

The great Bill Murray, named his son Homer Banks Murray. That's how much Ernie Banks transcended an entire city. We could all imitate his batting style. Not because of his hitting prowess; but because we all wanted to be Ernie. 

So thank you old friend. Know that my family and an entire city mourns your passing. We will always remember you wanting to see the Cubs win a World Series in your lifetime. And we wanted it most of all, because we thought it would make you happy.

And that is your legacy. You turned the most racist of older-generations into people who could love without worrying about the color of a person's skin. They spawned future generations that couldn't even understand what all the fuss was about. You left our world a better place. And your 512 home runs are only an asterisk in our hearts today.


Death By Euro III - Feel Free To Short It!

by John Jazwiec
 

In the first 23 days of this year, the Euro fell well below it's support level of 1.18 euro/$1.00, to 1.12 euro/$1.00. 

Please read up above, my January 7th blog, "Death By Euro". It underpins this blog. 

Technical Analysis 

The next support level is just above 0.80 euro/$1.00. If you were to short the Euro today, it's almost certain your inevitable returns would be at least (1.12-0.85 or 0.27/1.12) 24%. 

The Euro will almost certainly test the next support level. There is no bet to made when that happens. Meaning at the support level, there is a 50% chance it will fall lower and a 50% chance it will bounce up. 

But by shorting it today, and putting a sales order just comfortably above the next support level, there are tremendous returns to be had.

Fundamental Analysis 

The ECB is trying to break the back of deflation. Which is Europe's most dangerous economic problem amongst many economic problems. 

ECB President Mario Draghi said Thursday the central bank will buy 60 billion euros ($69 billion) of public and private-sector debt every month until at least September 2016, or even later if needed. The move is aimed at supporting growth and lifting inflation expectations in the eurozone.

Conclusions

I am not a professional investor. In fact all of my money is liquid. But if I can see why it is obvious to short the Euro; you can bet professional investors see the same thing. 

What does that mean? Even though the Euro should academically fall steadily from today until September of 2016; professional investors short positions will drive the Euro down faster in practice. 

So if you want to short the Euro, the sooner the better. I would not be greedy. I would short it to fall 10%. That has a 100% chance of happening. And - heaven forbid the Euro breaks up - you don't want be stuck shorting a currency that no longer exists. 


Is Margin Correlated to Market Corrections? - China

by John Jazwiec

China, announced a crackdown on lax margin requirements by brokerages, this morning.

It sent their stock market down by 7.7%. 

The US - as I have written before - has better financial oversight than China. A while back, on December 9th, I wrote - 

The Chinese stock market slide 8% - akin to the Dow Jones dropping 1,500 points - as China's security clearing house disqualified risky bonds (junk bonds) as collateral for repo's (short term loans up to 182 days). The classification of what is a risky bond is 60% of the Chinese repo market.

The US knows this is the tip of the iceberg. In the US, and western countries, assets that are worth less than debt, are written down. If something is worth $80 and debt is $100, the banking system and GDP reflects a 20% write-down. There is no such mechanism in China.

Not only does China's repo market look risky, but so do the municipal bonds that have funded Chinese city's high rises and infrastructure. These municipal bonds mature in the next year. 

Now a little more than a month later, another gut punch has been deilvered, that shows China is risky to do business in. 

It also maybe the canary in the coal mine. Are higher margins correlated to market corrections? More reason to say yes. Do higher margins have a negative causation affect on stock prices. Still unknown. But today's news from China, isn't comforting.

 


Is Margin Correlated to Market Corrections?

by John Jazwiec

Screen Shot 2015-01-16 at 8.41.54 AM

A quick little primer. In the interest of enhancing stock market gains for its clients; stock brokers allow their clients to trade on margin (loan). Say you put $1 million into your brokers account. According to Regulation T of the Federal Reserve Board, you can buy enough stock so that 50% is on margin. Hence you now have enough money to buy $2 million in stock. 

On the positive scenario side - lets say all of your stocks went up 10% and you sold them. 10% of $2 million is $200K. Since you only invested $1 million of your own money, a $200K return, becomes a 20% return.

Now lets look at the down side of the same trade. Brokerages have margin calls. One has to read the fine print. While the rules of the Federal Reserve - 50% of margin upon initial purchase and 25% on maintenance - many brokerages up the maintenance to 40%. If your maintenance - due to your stocks falling - dips below 40% - the brokerage has the right to sell your stocks to get back to 40%. The problem is, if the stocks you pick are down sharply, the sales price at the time of the margin call will be dropping, and getting back to 40% will be difficult and in theory impossible. 

But lets just say you sell your $2 million of stocks well before a margin call. Say they fell by 20%. In this case, your loss would be 40%. 20% of $2 million is $400K. 

Hence this primer shows how margin can enhance greed and fear. 

In the dot.com crash and the 2008 financial crisis, the inflation-adjusted amount of margin was high and thus margin was correlated to market correction. But correlation and causation are two separate things. So I can't say for certain what today's high margin means for the health of the stock market. 

But if - and it's a big if - market contrarian theory is correct, bull markets crash when everyone only sees upside, and bear markets end when everyone only sees downside.

If this is correct, given returns can be enhanced by margin leverage (debt), it maybe a sign that everyone only sees upside. And if market contrarian theory is right, high margin means, any correction, will slide stocks lower than if there was no margin. 


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From athletic scholar and satirist to computer programmer to CEO success, John Jazwiec brings a unique and often eccentric perspective to business and supply chain challenges. Exploring how they can be solved through the leadership and communication insights found in untraditional sources. This CEO blog demonstrates how business insights from books on history to the music of Linkin Park can help challenge and redefine “successful leadership.” Read Jazwiec’s Profile >>

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