Blockbuster/Netflix

Rumors arise that Blockbuster might file for bankruptcy, and Netflix stock goes up 6%. Does that make any sense? Blockbuster freed of all that debt and interest expense becomes a less threatening rival?

Predictions for 2008

1. The Fed funds rate will be flat or down in the first half of the year.

2. Inflation will pick up steadily through the year.

3. The 10-year Treasury will be flat for the first half but reach 5.75% by year-end, incorporating an increasingly discussed “inflation premium”.

4. Earnings on the S&P 500 decline 10%, to around $81.

5. The stock market, after a rocky start, will pick up a little through the middle of Q2 but then dip drastically in the second half. The S&P will end 2008 at 1,160, down 21% for the year.

6. The dollar will continue weak through Q2 and stabilize with the increase in the 10-yr Treasury rate in Q3.

7. China will host the Olympics, having first made sure to get all the dissidents out of the way. Inflation in China will begin to run rampant, but the currency will be flat or rise very modestly. China’s food imports will rise but there will still be shortages and high prices. There will be continued unrest in the countryside. By Q4, China will be on the verge of a steep recession and the stock market bubble will have burst.

9. Russia will become increasingly aggressive. Putin will be Prime Minister, and the constitution will be changed to radically increase the power of the Prime Minister. The Russian internet will be more tightly censored and controlled. Azerbaizhan, Kazakhstan, Ukraine and Georgia will be de-stabilized, and there will be Russian troops on, or even over, the border of one or more of these. The rouble will continue to rise.

10. Africa will continue to be a battleground. Darfur, Congo will continue in civil war. There will be a military coup in Nigeria and trouble will begin again in Angola. Robert Mugabe will finally be toppled in Zimbabwe and civil war will erupt between the Matabele and the Shona. Tensions will be running high in South Africa. In Kenya, Kibaki will resign and it will finally be the turn of non-Kikuyus to start lining their pockets.

11. The Middle East – who the hell knows? but it will be further de-stabilized in 2008. There will be civil war in Iraq, Al-Maliki will leave the country or be assassinated, and Turkey will make incursions into the North, possibly with surreptitious support from the US. Secular youth will make political gains in Iran and possibly in Saudi Arabia, Kuwait, Qatar and/or other more developed Arab countries.

12. Socialism will take hold increasingly in Latin America.

13. Partly as a result of all the foreign turmoil, John McCain will be elected President of the US.

14. Nike’s sneakers will be back in style, and the Patriots will win the Superbowl.

How to treat currency schizophrenia?

I can never figure out currencies, because they're really complicated. The trouble is, the same stuff (money) is used for both spending and saving (or, if you like, investing). Based on money for spending, the dollar looks unreasonably weak. My daughter is spending a semester over in Paris, and it's costing a lot because you don't get so many Euros for your dollar anymore. You'd think that would correct itself: Americans stop buying European stuff, Europeans start buying American stuff, supply and demand shifts, dollar gets stronger. Trouble is, stuff is only a small part of the picture. Last time I looked, which was a while ago, the forex market turnover was about $2 trillion per day -- much more than you could explain just on people wanting to exchange stuff. For the rest of it, I guess, you have to look at the investing side: savers. And they don't care about how much stuff costs in one country or the other, they just go to the currencies with the highest interest rates, which is not the US right now, which is why the dollar is weak. Because of the hyperactivity of the securities markets, the saving/investing aspect of money overwhelms the stuff-buying aspect. It's almost like you need two different forms of money.

I always think there must be an arbitrage here, to take advantage of the different dynamics of stuff-buying dollar and the investment-buying dollar. If there were, then I suppose it would be: buy stuff in the US and sell it overseas. Or look for companies that do this.

Not so strange

I think I get it now: bad economic news increases the danger of a recession, which hits the cyclical semiconductor stocks; it also increases the likelihood of an interest-rate cut, which lifts the more diversified S&P 500.

Strange divergence

It seems almost every time I look at my watchlist these days that the S&P 500 and the SOX (semiconductor) index move in opposite directions. Weird.

Shell Game Continued

So the banks are supplying money to back their SIVs. How is this supposed to help? Where are the banks getting the cash to do this, other than off their own balance sheets, which were exposed to the SIVs in the first place?

Well, the big three behind the deal are going to pull in other banks to help fund the backup pool. Banks that aren't worried about SIVs won't do it -- why should they? Only banks with problem SIVs will participate.

Maybe it's just a back door government bailout. The Treasury helped put the deal together. No doubt they will persuade the Fed to back it -- which is to say, the taxpayer.

Hiding the risk doesn't get rid of it.

Why care about the Fed funds rate?

Everyone's busy wondering whether there'll be a cut in the target Fed Funds rate tomorrow, and if so whether it will be 25 or 50 basis points.

The real question should be: will a cut have any effect on the root problem? If banks are bothered about lending to each other on asset-backed commercial paper and the like because they're afraid of huge markdowns when values become clear, does it really matter whether they're lending at 5% or 6%?