Combined post Friday

Hi All, apparently some regions couldn't see the thursday post for some reason. So I'm leading with a Tech File entry and following up with economic analysis including expanding on some of thursdays concepts as well as some new notes. Make sure to scroll down for the market surprise.

== The Polaroid Returns ==

Possibly the only downside to the digital camera revolution has been the descent of the instant-print camera. They are still for sale, but as most stores eliminate the old film cameras they tend to eliminate the Polaroid type as well. Well, the Polaroid company has created a spinoff called "Zink" that is coming to market with the gadget shown above. It's a bluetooth gadget the size of a fairly flat but large cell-phone that can accept pictures from your phone or camera (via cable or bluetooth) and then print color glossies on the spot.

A few months ago I would have thought there was no market for this. Then I was at an event where someone brought the amazing HP A432 portable (no kidding, this thing is pretty small and cheap yet makes fairly good pictures). It was the complete hit of the party. Everyone was taking and printing pictures and playing with the multiprint settings. It even kept the kids busy while the adults talked. Now I'm convinced there is a large market for cheap, portable photo printers.

The Zink device also has another neat feature: no ink! The paper is the picture-in waiting and while the paper is sure to be pricey, at least you will know the price per image up front and you won't have to worry about the logistics of keeping both paper and ink packages handy. The Zink product could be the purse or backpack equivalent of the HP product linked above. Someone will throw it on the table at a coffee meet and people can send cute pictures to it. Sounds crazy, but unwrap an HP A432 at a party with some digital cameras and you'll be a believer.

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The Jobs Surprise for Friday

Tomorrow mornings jobs report probably won't be a big shock, but the thing that news outlets are likely to pick up on will be the Labor Department's benchmark revisions, a wonky statistical revision that comes out only every year or so. It will attempt to show how many jobs were created between April 2005 and March 2006 that were NOT in the BLS jobs reports.

Follow that?

This is the report of jobs that were previously missed. And it should be HUGE. I'm guessing in the 750,000 to 1 million range. To put that in perspective that's about 6 months worth of jobs creation.

If you want to know why exactly the payroll surveys miss so many jobs you can review this article of mine from 2006, where I pointed out this was happening. As pointed out in the article even people like me (who do QUITE well, but who have their own business instead of working as an employee) are technically unemployed as far as the usual job reports are concerned.

Wait a minute? I wrote about this surprise back in mid 2006? Am I frustrated that it went unrecognized for so long? Not at all. Having a better grasp on the economy has made me, and anyone who bought into my portfolio calls, some nice money.

Back on topic, the market will probably be reading headlines tomorrow that some huge extra number of jobs was created. Unfortunately that isn't really good news for the market. The job growth happened through 2006, so the economic growth from those jobs has already shown up in earnings. The bad side of jobs growth, however, is wage inflation and then price inflation. The market will probably see the massive jobs boost as a dangerous sign of inflation, and recently inflation is one of the few things that can discourage the market.

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• For anyone thinking of an analyst position on Wall Street, read here for an all-to-true brief rundown of a typical work day for a Street analyst.
• John Ogg, writing on 24/7 Wall Street, muses about a trade that could work — going long Dell and short Hewlett-Packard. “Your premise would hinge on the fact that the best part of a run has been seen in HPQ and most of the worst has been seen in DELL,” he writes. “So this is not without risk, but it looks much different compared to trying to do this a year ago or 6 months ago.” (via WSJ.com)
• Nouriel Roubini notes the effects of an effective peg on the dollar maintained by Chinese banking authorities is having on that country’s assets. “With deposit rates so low and capital controls, the 50% of GDP savings of the Chinese needs to go somewhere. And increasingly, the liquidity created by the fixed exchange rate is now going into the stock market,” he writes. “So the fixed rate regime is an indirect cause, through liquidity and credit creation, of the equity market frenzy and bubble. And with deposits rates and sterilization bond rates being so low, increasingly the hot money — that is flowing into China because of the leaky capital controls on inflows — is going directly into the stock market, thus feeding the bubble frenzy.” (via WSJ.com)

Invest Well,
FW

How China could sink Wall Street

If you buy lots of things on credit but can pay your interest, your business will probably survive. But as soon as the bank decides they don’t want to lend you any more money, you have a problem. Other banks are likely to decide they don’t want to lend to you either and things can go from bad to worse in a hurry.

In November (the most recent numbers available) the United States had a trade deficit of $58.2 billion. That is to say that we received goods worth $58.2 billion more than we shipped out. That would be the buying more than you pay for part.

In November the net foreign acquisition of long maturity U.S. Securities measured $58 Billion. In other words the people we bought the goods from in other countries collectively turned around and cashed in their I.O.U.s for American Debt. That would be the part where our trade partners are lending us money.

So far so good, right?

Well, the tide may be turning. That $58 billion in November was down 23% in one month from $74.9 Billion in October. That would be the part where the banker is deciding they maybe don’t like lending to us anymore.

For the time being business (and buyouts in particular) have been riding the cheap loans available due to massive capital inflows from overseas. Buyouts today use far fewer junk bonds and far more bank lending, which is cheaper and made possible by combining bank lending into Collateralized Debt Obligations which in turn have been feeding overseas interest in investing in the US.

If the interest in buying our debt goes down the price of borrowing will rise as borrowers have to pay more interest to attract money. This would probably make leveraged buyouts less attractive while simultaneously raising the cost of doing business. Such a double whammy combined with slowing profit growth would probably hammer the markets.

Got it so far? Less desire for our debt equals higher interest on corporate loans plus higher business costs equals a declining market.

The logic is good, but what about counter-forces? The usual savior of a lively capitalist system is another mechanism taking up the slack. In this it might mean the Federal Reserve lowering interest rates to help business. Unfortunately one of the main reasons people are no longer buying as much US debt is that many of the other central banks around the world are raising interest rates, making it more profitable to buy their debt. In this particular case as the US lowers rates to help the economy, the loan market may get worse before it gets better.

For the moment there is still strong enough cash inflow to keep things going, especially in the private debt market, but this concern is one of the reasons the market has been dropping recently even as oil drops (the other reason the market is down would be weak earnings, but I’ve already written about that).

There are a number of potentially nasty scenarios out there, which led the World Economic Forum to argue in their 2007 report that people have fundamentally underestimated the risks in the world. Experts express that risks have been rising all across the 23 areas the group studies.

These world risks are NOT typically priced into the market right now, which suggests that when one or more shocks hit we could be in for a serious crash. This increased risk is also why I have not recommended any bond purchases yet. Right now I can get 5.05% on my cash holdings, and the only bonds paying more than that are too risky or too long to be worth it.

I realize I’m sounding like a broken record here, but I really can’t stress enough: Position yourself defensively. If you go through the archives you’ll see I’ve called a number of entry and exit points and a number of times when things wouldn’t happen (which is far harder to do as a writer, since it’s so boring).

Invest Well,

FW