Friday, October 5, 2012

Why today's Job Number is Bullshit

Jack Welch was spot on regarding his skepticism of today's jobs report.
What the report didn't tell you was that 342,000 Americans dropped out of the workforce.
This article from UPI sums it up pretty well:
The Labor Department report said 12.1 million people were unemployed, a drop of 456,000 from the previous month.

That figure is critical because 342,000 more people dropped out of the workforce than gained employment in September. The September rate fell to 7.8 percent in part because it reflected an increase in the number of jobs initially reported in July and August. 
Although the number is officially described as representing people who elected to care for a relative at home or return to school, many did so because they were simply too discouraged to continue looking for work.
So what is the 'real" unemployment number for our country? It's a guesstimate at best as there's no way to measure all those who have run out of unemployment benefits and stopped looking for work all together. The Romney camp estimates the true number to be closer to 11%. They arrive at that figure by by applying the labor force participation rate from when Obama took office to today's population:
"The labor force participation rate in January 2009 was 65.7 percent," Williams said. Since then, the rate has fallen to 63.3 percent. "Had the rate remained the same, the labor force would be about 160,158,000. At that labor force level, the unemployment rate would be 10.7 percent."
As noted in this article, though, it's also impossible to guage the number of retirees during the recession. This was documented in this report by the Chicago branch of the Federal reserve.

What is clear is that this 7.8% number will be put out to the electorate as a sign of recovery. I'll expect to hear it in the upcoming debates. The headlines and pundits have filled the web with it today
To that I'll simply ask "then why didn't the markets explode today?"

I've been neutral about the Presidential race up until now, as neither candidate represents what I'm looking for in a leader. I've also resisted most of the tin foil hat conspiracy theories and muck slinging.

But when something this blatant is put forth as this- it compels me to choose the lesser of two evils.

Thursday, October 4, 2012

The Dallas Earthquakes - Good for HEK?

According to Cliff Frohlich, associate director and senior research scientist at the University of Texas at Austin's Institute for Geophysics, the earthquakes that occured this past weekend near Dallas appear to be connected to the past disposal of wastewater from local hydraulic fracturing operations.

During hydraulic fracturing, or "fracking," millions of gallons of high-pressure, chemical-laden water are pumped into an underground geologic formation (the Barnett Shale, in the case of northern Texas) to free up oil. But once fractures have been opened up in the rock and the water pressure is allowed to abate, internal pressure from the rock causes fracking fluids to rise back to the surface, becoming what the natural gas industry calls "flowback," according to the Environmental Protection Agency.

"That's dirty water you have to get rid of," said Frohlich. "One way people do that is to pump it back into the ground."

In a study he recently published in the journal Proceedings of the National Academy of Sciences, Frohlich analyzed 67 earthquakes recorded between November 2009 and September 2011 in a 43.5-mile (70 kilometers) grid covering northern Texas' Barnett Shale formation. He found that all 24 of the earthquakes with the most reliably located epicenters originated within 2 miles (3.2 km) of one or more injection wells for wastewater disposal.

The injection well just south of DFW airport has been out of use since September 2011, according to Frohlich, but he says that doesn't rule it out as a cause of the weekend's quakes. He explained that, though water is no longer being added, lingering pressure differences from wastewater injection could still be contributing to the lubrication of long-stuck faults.
"Faults are everywhere. A lot of them are stuck, but if you pump water in there, it reduces friction and the fault slips a little," Frohlich told Life's Little Mysteries. "I can't prove that that's what happened, but it's a plausible explanation."

Heckmann Corporation (HEK) operates as a services-based company focused on total water and wastewater solutions for shale or unconventional oil and gas exploration and production. The company offers water delivery and disposal, trucking, fluids handling, treatment, temporary and permanent pipeline facilities, and water infrastructure services for oil and gas exploration and production companies. It operates multi-modal water disposal, treatment, trucking, and pipeline transportation operations in select shale areas in the United States, including the Eagle Ford, Haynesville, Marcellus, Utica, Barnett, and Tuscaloosa Marine Shale areas

If a definitve link between the Dallas earthquakes and fracking is established I see two possible outcomes. The first is a moratorium on fracking. This doesn't seem likely given the strong push for energy independence and overall fragile state of the economy. The second scenario is regulation that the water used in the fracking process must be thoroughy cleaned and used at / or transported to ground level.

That's what Heckman does.

Wednesday, September 5, 2012

The Organic Food Lie and it's Implications for Whole Foods

  We are a gullible culture. Whether it's the internet telling you that vaccinating your children causes autism or commercials convincing you that Enzyte will turn you into John Holmes, no one has ever gone broke underestimating the intelligence of the American public.

Now the curtain has been pulled back on another steaming pile of bullshit designed to separate you from your money - organic foods. A study just published in the Annals of Internal Medicine concludes there is no evidence "organically grown" fruits, veggies or meat are any more nutritious than the regular stuff you get off the shelves at your local supermarket.

Organic Food is more expensive because you believe it is healthier. And when you believe that, you subconsciously will believe it tastes better. Even if you couldnt pick the organic product in a blind taste test:


Which brings me to Whole Foods (WFM) - the Wall Street growth darling that's just off it's 52 week and all time highs. WFM is typically 15%-30% higher than your local supermarket. Food prices are already skyrocketing due to the drought. Add in the sheer brilliance of using 40% of the corn crop to produce ethanol and I believe there is a perfect storm brewing on the horizon for Whole Foods.

It won't happen overnight - the last big hit to WFM was during the 2008 recession when the stock dropped 77% . A good indicator their top is coming will be when same store sales growth starts to tank. Current guidance for Fiscal year 2012 sales growth is 15.6%-15.8%, while same store sales growth for 2012 is 8.6%-8.8% - so far they are hitting their targets.

For me the question is how long until their customer base wakes up and realizes they have been overpaying for a lie  

Monday, September 3, 2012

US Companies prepare for Greek Exit from Euro

Did anyone really think Austerity would work?

In this New York Times article US companies reveal contingency plans for the inevitable removal of Greece from the Eurozone

Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.     
Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.
No one knows just how broad the shock waves from a Greek exit would be, but big American banks and consulting firms have also been doing a brisk business advising their corporate clients on how to prepare for a splintering of the euro zone. 
That is a striking contrast to the assurances from European politicians that the crisis is manageable and that the currency union can be held together. On Thursday, the European Central Bank will consider measures that would ease pressure on Europe’s cash-starved countries.
JPMorgan Chase, though, is taking no chances. It has already created new accounts for a handful of American giants that are reserved for a new drachma in Greece or whatever currency might succeed the euro in other countries. 
Stock markets around the world have rallied this summer on hopes that European leaders will solve the Continent’s debt problems, but the quickening tempo of preparations by big business for a potential Greek exit this summer suggests that investors may be unduly optimistic. Many executives are deeply skeptical that Greece will accede to the austere fiscal policies being demanded by Europe in return for financial assistance. 
Greece’s abandonment of the euro would most likely create turmoil in global markets, which have experienced periodic sell-offs whenever Europe’s debt problems have flared up over the last two and a half years. It would also increase the pressure on Italy and Spain, much larger economic powers that are struggling with debt problems of their own. 
“It’s safe to say most companies are preparing,” said Paul Dennis, a program manager with Corporate Executive Board, a private advisory firm.
In a survey this summer, the firm found that 80 percent of clients polled expected Greece to leave the euro zone, and a fifth of those expected more countries to follow. 
“Fifteen months ago when we started looking at this, we said it was unthinkable,” said Heiner Leisten, a partner with the Boston Consulting Group in Cologne, Germany, who heads up its global insurance practice. “It’s not impossible or unthinkable now.” 
Mr. Leisten’s firm, as well as PricewaterhouseCoopers, has already considered the timing of a Greek withdrawal — for example, the news might hit on a Friday night, when global markets are closed. 
A bank holiday could quickly follow, with the stock market and most local financial institutions shutting down, while new capital controls make it hard to move money in and out of the country. 
We’ve had conversations with several dozen companies and we’re doing work for a number of these,” said Peter Frank, who advises corporate treasurers as a principal at Pricewaterhouse. “Almost all of that has come in over the transom in the last 90 days.”

He added: “Companies are asking some very granular questions, like ‘If a news release comes out on a Friday night announcing that Greece has pulled out of the euro, what do we do?’ In some cases, companies have contingency plans in place, such as having someone take a train to Athens with 50,000 euros to pay employees.”

The recent wave of preparations by American companies for a Greek exit from the euro signals a stark switch from their stance in the past, said Carole Berndt, head of global transaction services in Europe, the Middle East and Africa for Bank of America Merrill Lynch.

“When we started giving advice, they came for the free sandwiches and chocolate cookies,” she said jokingly. “Now that has changed, and contingency planning is focused on three primary scenarios — a single-country exit, a multicountry exit and a breakup of the euro zone in its entirety.”

Banks and consulting firms are reluctant to name clients, and many big companies also declined to discuss their contingency plans, fearing it could anger customers in Europe if it became known they were contemplating the euro’s demise.

Central banks, as well as Germany’s finance ministry, have also been considering the implications of a Greek exit but have been even more secretive about specific plans. 
But some corporations are beginning to acknowledge they are ready if Greece or even additional countries leave the euro zone, making sure systems can handle a quick transition to a new currency. 
In Europe, the holding company for Iberia Airlines and British Airways has acknowledged it is preparing plans in the event of a euro exit by Spain.
We’ve looked at many scenarios, including where one or more countries decides to redenominate,” said Roger Griffith, who oversees global settlement and customer risk for MasterCard. “We have defined operating steps and communications steps to take.” He added: “Practically, we could make a change in a day or two and be prepared in terms of our systems.”
In a statement, Visa said that it too would also be able to make “a swift transition to a new currency with the minimum possible disruption to consumers and retailers.”

Juniper Networks, a provider of networking technology based in California, created a “Euro Zone Crisis Assessment and Contingency Plan,” which company officials liken to the kind of business continuity plans they maintain in the event of an earthquake.
“It’s about having an awareness versus having to scramble,” said Catherine Portman, vice president for treasury at Juniper. The company has already begun moving funds in euro zone banks to accounts elsewhere more frequently, while making sure it has adequate money and liquidity in place so employees and suppliers are paid without disruption. 
FMC, a chemical giant based in Philadelphia, is asking some Greek customers to pay in advance, rather than risk selling to them now and not getting paid later. It has also begun to avoid keeping any excess cash in Greek, Spanish or Italian bank accounts, while carefully monitoring the creditworthiness of customers in those countries.

“It’s been a very hot topic,” said Thomas C. Deas Jr., an FMC executive who serves as chairman of the National Association of Corporate Treasurers. Members of his group discussed the issue on a conference call last Tuesday, he added. 
American companies have actually been more aggressive about seeking out advice than their European counterparts, according to John Gibbons, head of treasury services in Europe for JPMorgan Chase. Mr. Gibbons said a handful of the largest American companies had requested the special accounts configured for a currency that did not yet exist.

“We’re planning against the extreme,” he said. “You don’t lose anything by doing it.”

Friday, August 31, 2012

Full Transcript of Bernanke Speech

WASHINGTON (MarketWatch) — The following is the text of Federal Reserve Chairman Ben Bernanke’s speech at Jackson Hole, as prepared for delivery:
“When we convened in Jackson Hole in August 2007, the Federal Open Market Committee’s (FOMC) target for the federal funds rate was 5-1/4 percent. Sixteen months later, with the financial crisis in full swing, the FOMC had lowered the target for the federal funds rate to nearly zero, thereby entering the unfamiliar territory of having to conduct monetary policy with the policy interest rate at its effective lower bound. The unusual severity of the recession and ongoing strains in financial markets made the challenges facing monetary policymakers all the greater.

Today I will review the evolution of U.S. monetary policy since late 2007. My focus will be the Federal Reserve’s experience with nontraditional policy tools, notably those based on the management of the Federal Reserve’s balance sheet and on its public communications. I’ll discuss what we have learned about the efficacy and drawbacks of these less familiar forms of monetary policy, and I’ll talk about the implications for the Federal Reserve’s ongoing efforts to promote a return to maximum employment in a context of price stability.
Monetary Policy in 2007 and 2008 
When significant financial stresses first emerged, in August 2007, the FOMC responded quickly, first through liquidity actions–cutting the discount rate and extending term loans to banks–and then, in September, by lowering the target for the federal funds rate by 50 basis points. 1 As further indications of economic weakness appeared over subsequent months, the Committee reduced its target for the federal funds rate by a cumulative 325 basis points, leaving the target at 2 percent by the spring of 2008.
The Committee held rates constant over the summer as it monitored economic and financial conditions. When the crisis intensified markedly in the fall, the Committee responded by cutting the target for the federal funds rate by 100 basis points in October, with half of this easing coming as part of an unprecedented coordinated interest rate cut by six major central banks. Then, in December 2008, as evidence of a dramatic slowdown mounted, the Committee reduced its target to a range of 0 to 25 basis points, effectively its lower bound. That target range remains in place today.

Despite the easing of monetary policy, dysfunction in credit markets continued to worsen. As you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary steps to provide liquidity and support credit market functioning, including the establishment of a number of emergency lending facilities and the creation or extension of currency swap agreements with 14 central banks around the world.2 In its role as banking regulator, the Federal Reserve also led stress tests of the largest U.S. bank holding companies, setting the stage for the companies to raise capital. These actions–along with a host of interventions by other policymakers in the United States and throughout the world–helped stabilize global financial markets, which in turn served to check the deterioration in the real economy and the emergence of deflationary pressures.
Unfortunately, although it is likely that even worse outcomes had been averted, the damage to the economy was severe. The unemployment rate in the United States rose from about 6 percent in September 2008 to nearly 9 percent by April 2009–it would peak at 10 percent in October–while inflation declined sharply. As the crisis crested, and with the federal funds rate at its effective lower bound, the FOMC turned to nontraditional policy approaches to support the recovery. 
As the Committee embarked on this path, we were guided by some general principles and some insightful academic work but–with the important exception of the Japanese case–limited historical experience. As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing. I will discuss some of what we have learned, beginning with our experience conducting policy using the Federal Reserve’s balance sheet, then turn to our use of communications tools. 
Balance Sheet Tools

In using the Federal Reserve’s balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities–specifically, Treasury and agency securities, which are the principal types of securities that the Federal Reserve is permitted to buy under the Federal Reserve Act.3 One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors’ portfolios.4 For example, some institutional investors face regulatory restrictions on the types of securities they can hold, retail investors may be reluctant to hold certain types of assets because of high transactions or information costs, and some assets have risk characteristics that are difficult or costly to hedge.

Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan’s deflationary trap.5
Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.

With the space for further cuts in the target for the federal funds rate increasingly limited, in late 2008 the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). In November, the FOMC announced a program to purchase a total of $600 billion in agency MBS and agency debt.6 In March 2009, the FOMC expanded this purchase program substantially, announcing that it would purchase up to $1.25 trillion of agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt.7 These purchases were completed, with minor adjustments, in early 2010.8 In November 2010, the FOMC announced that it would further expand the Federal Reserve’s security holdings by purchasing an additional $600 billion of longer-term Treasury securities over a period ending in mid-2011.9 
About a year ago, the FOMC introduced a variation on its earlier purchase programs, known as the maturity extension program (MEP), under which the Federal Reserve would purchase $400 billion of long-term Treasury securities and sell an equivalent amount of shorter-term Treasury securities over the period ending in June 2012.10 The FOMC subsequently extended the MEP through the end of this year.11 By reducing the average maturity of the securities held by the public, the MEP puts additional downward pressure on longer-term interest rates and further eases overall financial conditions.
How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.
Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions. 
While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.

To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with caution. It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models; for example, restrictive mortgage underwriting standards have reduced the effects of lower mortgage rates. Further, the estimated macroeconomic effects depend on uncertain estimates of the persistence of the effects of LSAPs on financial conditions.17 Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks. 
Now I will turn to our use of communications tools. 
Communication Tools

Clear communication is always important in central banking, but it can be especially important when economic conditions call for further policy stimulus but the policy rate is already at its effective lower bound. In particular, forward guidance that lowers private-sector expectations regarding future short-term rates should cause longer-term interest rates to decline, leading to more accommodative financial conditions.18
The Federal Reserve has made considerable use of forward guidance as a policy tool.19 From March 2009 through June 2011, the FOMC’s postmeeting statement noted that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”20 At the August 2011 meeting, the Committee made its guidance more precise by stating that economic conditions would likely warrant that the federal funds rate remain exceptionally low “at least through mid-2013.”21 At the beginning of this year, the FOMC extended the anticipated period of exceptionally low rates further, to “at least through late 2014,” guidance that has been reaffirmed at subsequent meetings.22 As the language indicates, this guidance is not an unconditional promise; rather, it is a statement about the FOMC’s collective judgment regarding the path of policy that is likely to prove appropriate, given the Committee’s objectives and its outlook for the economy.
The views of Committee members regarding the likely timing of policy firming represent a balance of many factors, but the current forward guidance is broadly consistent with prescriptions coming from a range of standard benchmarks, including simple policy rules and optimal control methods.23 Some of the policy rules informing the forward guidance relate policy interest rates to familiar determinants, such as inflation and the output gap. But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates.

Has the forward guidance been effective? It is certainly true that, over time, both investors and private forecasters have pushed out considerably the date at which they expect the federal funds rate to begin to rise; moreover, current policy expectations appear to align well with the FOMC’s forward guidance. To be sure, the changes over time in when the private sector expects the federal funds rate to begin firming resulted in part from the same deterioration of the economic outlook that led the FOMC to introduce and then extend its forward guidance. But the private sector’s revised outlook for the policy rate also appears to reflect a growing appreciation of how forceful the FOMC intends to be in supporting a sustainable recovery. For example, since 2009, forecasters participating in the Blue Chip survey have repeatedly marked down their projections of the unemployment rate they expect to prevail at the time that the FOMC begins to lift the target for the federal funds rate away from zero. Thus, the Committee’s forward guidance may have conveyed a greater willingness to maintain accommodation than private forecasters had previously believed 
The behavior of financial market prices in periods around changes in the forward guidance is also consistent with the view that the guidance has affected policy expectations.

Making Policy with Nontraditional Tools: A Cost-Benefit Framework 
Making monetary policy with nontraditional tools is challenging. In particular, our experience with these tools remains limited. In this context, the FOMC carefully compares the expected benefits and costs of proposed policy actions.

The potential benefit of policy action, of course, is the possibility of better economic outcomes–outcomes more consistent with the FOMC’s dual mandate. In light of the evidence I discussed, it appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation, though we are less certain about the magnitude and persistence of these effects than we are about those of more-traditional policies.

The possible benefits of an action, however, must be considered alongside its potential costs. I will focus now on the potential costs of LSAPs.
One possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets. As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities; the supply of those securities is large but finite, and not all of the supply is actively traded. Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery. As the global financial system depends on deep and liquid markets for U.S. Treasury securities, significant impairment of those markets would be costly, and, in particular, could impede the transmission of monetary policy. For example, market disruptions could lead to higher liquidity premiums on Treasury securities, which would run counter to the policy goal of reducing Treasury yields. However, although market capacity could ultimately become an issue, to this point we have seen few if any problems in the markets for Treasury or agency securities, private-sector holdings of securities remain large, and trading among private market participants remains robust.

A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability. It is noteworthy, however, that the expansion of the balance sheet to date has not materially affected inflation expectations, likely in part because of the great emphasis the Federal Reserve has placed on developing tools to ensure that we can normalize monetary policy when appropriate, even if our securities holdings remain large. In particular, the FOMC will be able to put upward pressure on short-term interest rates by raising the interest rate it pays banks for reserves they hold at the Fed. Upward pressure on rates can also be achieved by using reserve-draining tools or by selling securities from the Federal Reserve’s portfolio, thus reversing the effects achieved by LSAPs. The FOMC has spent considerable effort planning and testing our exit strategy and will act decisively to execute it at the appropriate time. 
A third cost to be weighed is that of risks to financial stability. For example, some observers have raised concerns that, by driving longer-term yields lower, nontraditional policies could induce an imprudent reach for yield by some investors and thereby threaten financial stability. Of course, one objective of both traditional and nontraditional policy during recoveries is to promote a return to productive risk-taking; as always, the goal is to strike the appropriate balance. Moreover, a stronger recovery is itself clearly helpful for financial stability. In assessing this risk, it is important to note that the Federal Reserve, both on its own and in collaboration with other members of the Financial Stability Oversight Council, has substantially expanded its monitoring of the financial system and modified its supervisory approach to take a more systemic perspective. We have seen little evidence thus far of unsafe buildups of risk or leverage, but we will continue both our careful oversight and the implementation of financial regulatory reforms aimed at reducing systemic risk.

A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent. Extensive analyses suggest that, from a purely fiscal perspective, the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt.27 And, of course, to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve’s balance sheet.
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant. 
Economic Prospects

The accommodative monetary policies I have reviewed today, both traditional and nontraditional, have provided important support to the economic recovery while helping to maintain price stability. As of July, the unemployment rate had fallen to 8.3 percent from its cyclical peak of 10 percent and payrolls had risen by 4 million jobs from their low point. And despite periodic concerns about deflation risks, on the one hand, and repeated warnings that excessive policy accommodation would ignite inflation, on the other hand, inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the Committee’s 2 percent objective and inflation expectations have remained stable. Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.
Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators–such as the labor force participation rate and the number of people working part time for economic reasons–confirm that labor force utilization remains at very low levels. Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend.28 In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January. Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time. 
In light of the policy actions the FOMC has taken to date, as well as the economy’s natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment. Some have taken the lack of progress as evidence that the financial crisis caused structural damage to the economy, rendering the current levels of unemployment impervious to additional monetary accommodation. The literature on this issue is extensive, and I cannot fully review it today.  
However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years.

Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds. First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.

Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge.30 It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.

Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today. More recently, however, a major source of financial strains has been uncertainty about developments in Europe. These strains are most problematic for the Europeans, of course, but through global trade and financial linkages, the effects of the European situation on the U.S. economy are significant as well. Some recent policy proposals in Europe have been quite constructive, in my view, and I urge our European colleagues to press ahead with policy initiatives to resolve the crisis. 

Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound.31 I was reacting to common assertions at the time that monetary policymakers would be “out of ammunition” as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

As I have discussed today, it is also true that nontraditional policies are relatively more  difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.
As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Sunday, August 26, 2012

BOA & Goldman Notes to investors - Market on Borrowed Time

Good article from Business Insider where Ethan Harris of BOA says he's very concerned about the market due to the on going Eurozone problems and the pending fiscal cliff in Q4
In our view, the markets have been lulled to sleep by a temporary remission in negative macro news.We remain very concerned about the outlook. In our view, the markets have been lulled to sleep by a temporary remission in negative macro news. The better US data probably reflects a combination of the usual random variation and weather distortions. Mild weather boosted the winter statistics, there was a payback in the spring and now the data are settling into a weak trend...
We believe the Euro zone crisis is far from over. At this stage the policy pattern for Europe is well established: (1) A funding problem in one of the peripheral countries arises; (2) policy makers engage in brinkmanship with the core demanding austerity and the periphery demanding bailout; (3) the markets start to melt down; (4) policy makers do just enough to satisfy the markets, but not cure the underlying problem. There is nothing merry about this go around. Over time it undercuts the foundations of the Euro zone. The economy steadily slides into recession, populist parties grow in strength and the markets become increasingly fragile. For the US and the rest of the world this means ongoing collateral damage, primarily through confidence and Capital Markets.
The worst of the US fiscal crisis also lies ahead. Note that in the uncertainty shock literature, the impact of the shock grows exponentially as the day of reckoning approaches. The cliff is slowly working its way into corporate thinking. The real test will come in the fourth quarter when the cliff will be just months away and the incentive to delay spending and investment decisions will peak. The timing is tough, but we would expect some weakening in the September data and very soft numbers in the October to January period. We are keeping a close eye on corporate commentary, confidence surveys, indicators of hiring and capital goods orders.
Economist Michael Hanson points out an interesting circular relationship between the stock market and Fed policy:
Risk of a sell-off is high
Economist Michael Hanson points out an interesting circular relationship between the stock market and Fed policy. There are some who believe the Fed will not launch QE3 so long as stock prices remain high, yet the stock market is high because it anticipates QE3. Should the Fed disappoint at the September 12-13 FOMC meeting, the risk of a stock sell-off is high. S&P 500 support on a correction is in the 1360-1325 area. Additional support is at 1300-1250. Attention will be on the Jackson Hole symposium next week to get a feel for the Fed’s tone
Our strategists see an unusually high number of macro catalysts over the next 3-6 months that could take markets lower. We expect economic growth to disappoint in the second half of the year in anticipation of the fiscal cliff. This would exacerbate any slowdown from the deepening recession in Europe and decelerating growth in emerging markets. There is also the ongoing tension in the Middle East, the potential for a US credit downgrade and accelerating downward analyst estimate revisions. To top it off, September is seasonally the weakest month of the year for stock price returns.
The BofA strategists conclude that with the VIX at record low levels, those looking to hedge against a correction should buy put options on stocks while they are cheap, echoing a message several Wall Street analysts have relayed on television and in client notes over the past week.

David Kostin Goldman Sachs Chief U.S. Equity Srategist ,writes to clients that "portfolio managers have been swayed by"hope over experience"
A look at the 2011 SP 500 tading pattern explains the reason for our belief that the market has an asymmetric risk profile and offers more downside than upside. Last year the deadline for Congress to raise the federal debt ceiling was known months in advance. Nevertheless, Congress was unable to reach an agreement that satisfied all factions. Investors were stunned and the S&P 500 plunged 11% in 10 trading days (and more than 17% from the level one month prior to the deadline). Eventually Congress reached a compromise on raising the debt ceiling.
We believe the uncertainty is greater this year than it was 12 months ago...Political realities and last year’s precedent suggest the potential that Congress fails to reach agreement in addressing the “fiscal cliff” is greater than what most market participants seem to believe based on our client conversations. In our opinion, equity investors seem unduly complacent on this issue. Portfolio managers have been swayed by hope over experience.
Kostin thinks the S&P 500 has quite a way to drop from here:
Assigning a P/E multiple to various ‘fiscal cliff’ and earnings scenarios is difficult because ultimately we expect Congress will address the situation. But investors must confront the risk they may not act until the final hour. Exhibit 4 contains a matrix of potential year-end 2012 S&P 500 index levels based on different ‘fiscal cliff’ resolutions and multiples. Our 1250 target reflects our ‘fiscal cliff’ assumption and a P/E slightly below 12x. Full expiration with P/E of 12x equals 1120 (-21%). A 14x P/E and full extension implies 1540 (+9%), but the two outcomes are not equally likely in our view.
Fiscal cliff market outcomes 


Saturday, August 25, 2012

China: Mounting Piles of Unsold Product

An article from the New York Times Thursday, says there is a tremendous glut of inventory.

GUANGZHOU, China - After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.The glut of everything from steel and household appliances to cars and apartments is hampering
China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
“Across the manufacturing industries we look at, people were expecting more sales over the summer and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”
Problems in China give some economists nightmares, in which the United States and much of the world slip back into recession, in the worst case, as the Chinese economy sputters, the European currency zone unravels and policymakers in the United States are paralyzed by political gridlock.
China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad at a time when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

Thursday, August 23, 2012

Short SP 500 - Falling in the channel

As predicted we had another down day on the SP 500.

What we didn't get was an opening bump in order to get a better short position

Since we broke through R1 - I'm confident the target bottom of the channel / 50 DMA around 1368 will be reached

For those that don't trade the e mini futures contracts, you can either play SPY or SDS the 2x short ETF. My choice would be to short SSO the 2x Bull ETF, but no shares seem to be available.

The corresponding trade on SDS would be a Buy @ or near 14.51, with a stop loss at 14.30 and a target price around 15.41

That trade would represent 6.2% gain with 1.4% risk

Wednesday, August 22, 2012

Short Term Follow Up

We printed a doji today with a lower high and lower low. We did see a bounce off the R1 1405 area I mentioned yesterday.

My guess is tomorrow the Bulls will try to run it back up to the top of the channel early. My inclination is to short that as I don't think they have the firepower to break through R2 at 1431.
I also see MACD rolling over as well as declining RSI

A stop will be placed 1433 in case I am wrong

Tuesday, August 21, 2012

Short Term - We are at the top of channel

Of course just as finish my Bullish Longer Term assessment of the SPX - We print a shooting star which could (should) signal a reversal down in the current channel.

I thought we would have seen this around Aug 6 based on the time frames since the June 4 Low.

If you're playing this short the R1 at 1405 is a likely target and now support - Likewise this is a good place to buy if you believe it's going higher.

Should that fail then the pivot and 50 DMA converge almost exactly at 1365.

Bear Case is Gone.... for now

I find it very difficult not to be a Bear right now -  for reasons like this:
  • Economy / unemployment 
  • Overall mediocre earnings 
  • No QE3 is coming
  • Greece default still looming
  • Fiscal cliff in 2012
Yet the market continues to move higher. and as Jesse Livemore said so succinctly:

"They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side"
In this case though Price is the ultimate arbiter and price tells us the market is going higher.

Here's a three year weekly chart of S&P 500. The Andrews Fork (blue), Channel (black) and trend from the June 4 bottom (green) all point one direction - up. That it broke into the upper half of the Andrews Fork off the June lows was the final decision point for me.

Even the Euro appears to be breaking out of it's consolidation pattern:

When price tells me it's time to sell - I'll listen, But for now it's the Bulls Market

Sunday, August 19, 2012

How to Protect Yourself from Credit Card & ATM Skimming

Identity theft, via Credit / Debit cards and ATM skimming is now a billion dollar a year crime.
If you're not aware how the crime works, crooks can buy a magnetic stripe reader like this off the Internet for as low as $20.

They can affix the device to a gas pump or ATM and when you insert your card, they read all of the information. In some cases a camera may be installed to watch the pinpad (where you enter your PIN ) or your zip code. Sometimes they will just loiter in the vicinity and watch you punch in the numbers.

Once the data is stored they download it to a computer and will either order product from merchants that don't require extra information like the 3 digit CVV code on the back or they can simply buy blank cards and load your credit card information to it. Once they have a loaded card, they'll use it at gas stations or self check-out at various stores.

Another way the scam works is they will give the skimmer to a waiter / gas station attendant / clerk and pay them to harvest the information. In this scenario the accomplice will write down the CVV after the skim has happened making it even easier for thecrime to happen. So how can you protect yourself?

Here are a few easy steps:
  1. If using an ATM, gas pump or any other manual device - grab the plastic area where the card inserts, If it feels loose or looks different than other readers - Don't use it and alert the store / bank branch etc.
  2. Shield the keypad as you enter your PIN #. Simply place your hand over the pad and block it from view
  3. At bars or restaurants walk with the staff to the credit card terminal when it's time to pay. Seriously. Explain to them "why" and you may be doing them a favor so they don't get ripped off.
  4. Use cash - although as someone who travels for a living I know this isn't always practical or safe in every instance.
  5. Have your bank or card provider put you on alert for any suspicious activity. Many do this already but in some smaller banks you'll need to request this service.
You've probably seen videos like these on your local TV news.
 In case you haven't I've picked out some of the better ones:

The Glamorous Life of Business Travel

Mr. Cain Thaler's excellent blog of his clusterfuck trip on UAL reminded me of this piece I wrote several years ago, back when I labored under the delusion I would someday write comedy that people would laugh at and possibly pay to read

I'm a road warrior. Not like Mad Max, or the clowns that used the nickname in professional wrestling years ago. No, I'm a true road warrior. Funny thing is my wife, family and friends keep telling me just how “lucky” I am to live this glamorous lifestyle. Want to know just how glamorous it is? Well I’m just the guy to tell you.

You see, I'm the guy who has to book his own flights, hotel and rental car and takes an hour doing it so I can find the best deal to keep my expense account below the GNP of some third world nations. Of course I’m the guy who, once he finds the right price, has his internet explorer lock up and lose all the information I just entered. Later, I guarantee I’ll run into someone who will brag he bought his ticket at for 50% of what I paid.

I'm the guy who goes online the day before his flight to print my boarding pass in advance. This way I can at least miss one line at the airport. But god forbid if my flight’s on Southwest where I have to log on exactly 24 hours prior to departure or risk sitting in the center seat of row 30 between large, talky individuals headed to the national Beanie Babies convention. These are the same folks who simply must tell me about how they acquired “Stretch the Ostrich” at a garage sale for only five bucks after talking the owner down from seven.

I'm the guy that gets up at 4:00 AM, showers, dresses and drives an hour to the airport so I can wait in line to take off my shoes, belt, cell phone and glasses and cram them into a little rubber tote. I'm the guy who crams his toothpaste (which will explode), Visine (which will evaporate), hair gel (which will leak) and toothbrush (which will be covered by the aforementioned ingredients) into a little plastic bag for the scrutiny of highly trained security personnel making less than the greeter at my neighborhood Wal-Mart.

To be honest I’ll have to forgo the hair gel in a couple more years and hope hair in a can comes in a convenient 5 oz. travel size.

I’m the guy who won’t beep going through the metal detector because I do it 4 times a week But I’m also the guy who invariably will be right behind someone who hasn’t flown since 1988 and wonders why he can’t bring his pool cue, Zippo lighter and thermos of Jim Beam and coffee on board.

And even though I don’t beep, I’m the guy who gets the random security screening pat down (grope) and watches as a highly trained security agent rips through my neatly packed shirt, slacks and ties like the discount table at Old Navy.

I'm the guy who wonders around the terminal like it’s an Easter egg hunt searching for the open 110v outlet to plug my dying laptop and cell phone into. It’s because in addition to the 60 e-mails I received since I logged off at 6:00 PM the previous night, I need to finally get around to naming and categorizing the 300 or so digital photos I took of my kids and uploaded into a file called "my pictures".

Sometime between takeoff and landing I’ll also need to finish a PowerPoint that won’t induce a coma on my prospective audience. Of course that assumes my flight will actually depart on time and I won't sit on a tarmac for two hours while some strange circumstance prevents our departure to the friendly skies. You know the type. It’s the voice over the intercom just as we’re pulling away from the gate saying “This is your captain, we seem to have a small problem”.

I'm the guy that always, and I do mean always sits on the plane behind someone who absolutely must recline his seat. Yes, for the comfort he derives from tilting back three degrees, my five inches of leg room turns into three and the tray table holding my PC jams directly into my sternum, And I guarantee I'm the guy who will always be in front of, next to or directly behind the toddler who screams in decibels only heard at a Metallica concert as his ears pop from the cabin pressure change.

I’m also 99% sure the stewardess…. errrr ..flight attendant will run over my foot with the beverage cart. Then she will pop open your can of Coke right next to my head spewing a fine mist of sticky carbonation on the side of my head and sport coat.

 Later, I’ll be the guy in the bathroom trying to use wet paper towels to clean it off. You’ll know it’s me because this process willleave little fibers on my jacket making it look like it just came out of a dryer full of beach towels.

Once we land, I’ll hope my phone has at least 2 bars so I can faintly hear the half dozen voice mails that I received, I’ll be the one frantically pushing 1 so the message will rewind between the snap, crackle, pop of my “so clear you can hear a pin drop” of my cellular provider.

Of course all of this is really a moot point because the guy next to me will be shouting into his cell phone there’s no way the human cannonball should have been voted off America's Got Talent last night. His opinion on that is obviously mission critical to Howard Stern, Sharron Osbourne & Howie Mandell

I’m also the guy that will get hit in the head by the lady trying to get her 80 lb. roll on out of the overhead bin. Somehow, the wheeled behemoth was wedged, you guessed it, right on top of my carry on bag.

Did I mention I’ll also be the guy that ruins his shirt with the defective iron later in the hotel?
Luckily the effects of the concussion are mild and I stumble through the airport in search of the rental car shuttle. As you may guess I’m also the guy who misses that bus by 30 seconds and gets to stand next to the dozen nicotine addicts who must make up for their 180 minutes of cold turkey abstinence by chain smoking an entire pack of camels.

When I get to the rental lot I will be the guy who’s name doesn’t show up on the LCD board. As the attendant proceeds to explain that they are out of cars, I’ll be the one remembering the rental car scene from Seinfeld where Jerry says “you know how to *take* the reservation, you just don't know how to *hold* the reservation. And that's really the most important part of the reservation: the holding. Anybody can just take them”. I also shed a hidden tear that there will never be a show that funny on TV again.

Once I actually do get a car, I’ll be the guy you’re honking at for driving slowly coming out of the airport. It’s not that I don’t know how to drive; it’s just that my rental car didn’t come with instructions on how the electric seats, defogger or instrument panel work. So I can’t really see, reach the pedals or determine how 15 KPH converts to the local speed limit. Nine times out of ten I’m also the guy your local law enforcement gives a $200 “welcome to Denver” citation five miles from DIA. I’ll also be the guy trying to read the wrinkled Google map or figure out why my GPS keeps telling me its “recalculating new coordinates”.

An hour later, I’ll be that guy in the wrinkled suit that had to park a half mile from the entrance to the hotel. That entrance will always be uphill. And it will be raining... or snowing. Even in Texas. The strap for my laptop bag will be broken and I’ll look like a Kosovo refugee as I stagger into the Hotel.

And of course, all they will have left are smoking rooms. Next to the elevators. And the ice machines.
During the night my heater will sound like a Harley as it kicks on and off every 20 minutes changing the room air from arctic to sauna and back again. Maybe I’ll get lucky and the condensation from the temperature inversion will take the wrinkles out of slacks.

Who am I kidding? At this point I’ll be thrilled if there’s enough hot water for a three minute shower. I contemplate the nearby meal choices of KFC, Taco Bell or a $12 hamburger in the bar downstairs and decide that my ever increasing waist line probably will provide me enough sustenance to make it through until the breakfast bar opens at 6:00 AM. I’ll have to be quick though as the Quaker instant oats are always the first thing to go.

So I settle in, plug up my dead laptop and promptly learn it will cost me $10 to connect to the “high speed wireless” network my hotel so graciously provides. After agreeing to this reasonable sum, I am repeatedly informed “The wireless network is not connected” as I attempt to connect. I call the front desk to inform them and they kindly provide me with an 800 number that is answered by “Bob”.
Strangely though, Bob’s accent doesn’t make him sound like a “Bob”. At this point, I really don’t care as my e-mail correspondence, has reached triple digits. Once I’ve performed the ritual of shutting down and rebooting windows, twice, Bob apologizes for what must be the tenth time and concludes it must be a problem on their end.

At this point I thank “Bob” for his assistance close the laptop and pick up the phone to call home.
On the other end my lovely wife’s first question?  “So how was your day, honey?”

What to do in case of a Malware Attack

What prompts me to write this is today I clicked on a link in Digg and it launched a malware attack on my computer. Luckily when the pop up happened I knew what to do - which was NOT click on anything in the webpage. I just opened my task manager and stopped Internet Explorer before any damage could be done.

I'm fortunate it was a lower grade attack and that solved the problem. I've dealt with this shit before so hopefully this may be helpful to some of you

For those not familiar with Malware - it is a malicious software that can attack your computer via an e-mail attachment or script running on a web page. Malware includes computer viruses, worms, trojan horses, spyware, adware, and other malicious programs.

One of the most common attacks I see lately is when a web page seizes control of your browser (like Internet explorer) telling you your PC is infected - here is a screenshot of one of the variety of different attacks also known as scareware

Once infected your machine will be locked out of websites, your antivirus turned off and most, if not all, internet communications blocked.

The goal of this particular product is not just to load your PC with virus, but to also con you into paying the website for the "cure" to fix the Malware. You'd be surprised at how many people actually do this.

Here are a few easy steps to prevent Malware attacks and also to deal with them if you become infected

Not getting the Malware is the best possible option, but you'll find it hidden in some of the most popular websites including Digg, Reddit and Google image search results. Here are a few tools, listed in no particular order you may want to install

1. Firefox Browser - No Script and Adblock + pop-up - Both of these tools are pretty effective in preventing scripts from running on web pages
2. Internet Explorer - No scripting plug ins available but you can filter active x components and has a pop up blocker that works sometimes
3. Web of Trust - a plug in warning system that blocks known Malware websites (also works well for Parental controls) in IE or Firefox
4. Malwarebytes - a Free Malware identification and elimination tool. Running a scan weekly is a good way to identify and kill malicious software. This is a great product and they even offer forums full of people very willing to try and help
5. Spybot Seek and Destroy - Another free Malware tool that works very well
Some of the Malware out there can totally disable any of these tools. In those cases there are a couple things you can try. Restart the machine in Safe mode then run Malwarebytes or Spybot is the first. Depending on the Malware it may fix the problem or you may have to try to restore to a previous date.

The worst case scenario is a total wipe of your machine and starting over. This is quite painful and, if you have to do it, hopefully you have all of our files, documents, pictures, etc. backed up

Good Luck and please feel free to ask any questions

Saturday, August 18, 2012

The Twitter Black Market - Selling Followers on ebay - Business is Booming

According to a report from barracuda labs, there is an exploding underground economy for twitter users going on right now

The Market place is ebay and other websites. Right now there are 196 listing to buy twitter followers with prices starting at $15 per 20,000

So who buys twitter followers? Commercial products, political campaigns or anyone wanting to look more popular

The irony, according to barracuda labs, is a large number of these "followers" are actually fake accounts:
For the past 75 days, we have been investigating the business of trading Twitter followers on eBay and other websites searched from Google. As it turns out, this underground economy on Twitter is blooming! The results show that this Twitter business is growing very fast to form a series of underground markets.
As part of this study, beginning in May 2012, our team set up three Twitter accounts and purchased between 20,000 and 70,000 Twitter followers for each of them from eBay and another website searched from Google. After collecting these followers’ profiles via Twitter API, as well as additional information from eBay sellers and Google search results, we found many interesting highlights of this business, summarized as follows into 3 categories

Dealers (those users who create fake accounts and sell followings):
  • There are 20 eBay sellers and 58 websites (within top 100 returns of searching “buy twitter followers” in Google) where people can buy (fake) followers
  • Twitter username is used to purchase, no authentication is required
  • The average price of buying 1000 followers is $18
  • A Dealer can control as many as ~150,000 or more Twitter followers (contact @kashifrox)
  • A Dealer can earn as much as $800/day for 7 weeks of selling followings if they can control 20,000 fake accounts (estimated on several random fake accounts reaching 2000 followings in 7 weeks and assume each following involved a minimum $20 purchase)
  • In addition to selling followings from these fake accounts, there are numerous opportunities for expansion into other services: selling tweets/re-tweets to earn additional profits
Abusers (those users who bought followers (most of which are fake) in order to look more popular or to use the accounts for selling ads):
  • There were 11,283 Abusers identified (each has at least 470 fake followers; magic number 470 is explained later, hint: it is related to @GregoryDEvans)
  • The average Abuser has 48,885 followers
  • 53% of Abusers have 4,000-26,000 followers
  • 75% of abusers have set a URL in their profiles (compared to 31% for random Twitter users)
Fake Accounts (created by dealers for selling followings or tweets business):
  • There were 72,212 unique fake accounts identified
  • 61% of these fake accounts are less than 3 months old (since April 16th, 2012)
  • Average age of these fake accounts is 19 weeks or about 5 months
  • 55% of fake accounts have ~2000 followings
  • The average number of following for a fake account is 1,799
  • The oldest fake account @krails is created on Jan 15th, 2007
Considering there were more than 11,000 Abusers identified from only 3 purchases we made, we are amazed by the size of market for selling and buying Twitter followers.
Several quick conclusions about these statistics:
  • Dealers are controlling the following speed and total following number of these fake accounts to avoid being suspended by Twitter. Dealers built various business services from the controlled accounts, as every cent is still money, e.g., selling 2000 re-tweets for $5 at here.
  • Half of the abusers have 4,000-26,000 followers, which makes them the most likely to be “cheating” group; and 3/4 of Abusers have set a URL in their profiles, meaning they might buy followers for website promotional purposes.
  • Fake accounts normally follow a lot of people, but normally no bigger than 2001 followings, indicating Twitter may internally uses this number as a cutoff for abused account detection.
  • Still, these statistics of fake followers can be easily used for detection purposes. However, Dealers can apply obscure techniques to make them hard to detect, e.g., randomly following some famous and some average people, or posting tweets grabbed from the Twitter stream, etc. This is one reason that the prices of followers vary dramatically on eBay and other online websites, ranging from $2 to $55 per 1,000 followers. The higher the price is, the more real these followers look.
  • On the other side, Abusers can try to avoid being caught as well, by buying followers multiple times from different services. For example, since March 2nd 2012, the world’s “Top One” security expert Gregory D. Evans (@GregoryDEvans) seemed to be purchasing 4 times to gain at least 50,000 new followers from several resources, which we do not know. But, by running an overlapping check between his followers and our purchased followers, we found 470 fake accounts shown in both list. Bingo! That is also the **magic** number used in our study to detect all other Abusers.
Even Mitt Romney's Campaign fell victim to the ruse
Most interestingly, during our investigation, Republican nominee for US President Mitt Romney has been scrutinized recently for his abnormal increase in new followers (@mittromney), indicating that these followers had been purchased in the same way as the Dealers/Abuser scenario from our study. We do note that these followers could have been purchased by either himself, his associates or by his opponents. Particularly, on July 21st, 2012, his follower number went from 673,002 to 789,924, representing a gain of 116,922 or 17%. As this story picked up momentum, we quickly pulled his newest followers since the big breakout, (resulting in 152,966 new Twitter accounts), and can disclose several interesting statistics of these followers.
Statistics of Romney’s newest 152,966 Twitter followers(between Jul 21st and Jul 26th 2012):
  • The number of Romney’s followers increased 17% (or 116,922) on a single day Jul 21, 2012, going from 673,002 to 789,924
  • 25% of these followers are less than 3 weeks old (created after July 17th 2012), 80% of them are less than 3 months old
  • 23% or about 1/4 of these followers have no tweet
  • 10% of these account has already been suspended by Twitter
Based on the above distinguishable features, we believe most of these recent followers of Romney are not from a general Twitter population but most likely from a paid Twitter follower service. Also notice that Romney’s newest followers did have few different statistical features than our purchased followers (e.g. much newer than ours), indicating his followers were purchased from a different data resource than ours.

It is important to note that authentication is not required when buying Twitter followers from eBay or other websites. It is possible for anyone to buy followers for other Twitter users. That being said, Romney’s newest followers could have been paid for by himself, his associates or by his opponents. So far, there is not a feasible way to confirm who is responsible.

Finally, creating fake Twitter accounts and buying/selling followers is against Twitter’s ToS, and gradually erodes the overall value of the social network. Twitter keeps on detecting fake accounts and followings, and suspending them in last few years. However, if they do not move faster and smarter, these fake accounts will continue to be created, blended into the massive Twitter population, bringing bigger and bigger impact.

This underground Twitter business is blooming.