A Journal of Independent Research, Analysis,
 Opinion and Insight

  What Others Say

 "Kate Welling (is) a longtime comrade in arms, who is leaving to start her own journalistic venture under the aegis of Weeden & Co.

If there's a job of work Kate hasn't done - and done consummately well - in her over two decades at Barron's, it completely eludes us. Reporter, writer, associate editor, managing editor - she has filled all those roles with unfailing distinction, verve, energy and imagination. She's that exceedingly rare bird in this trade who's tough but fair, smart as a whip but commonsensical, serious but endowed with an engagingly self-deprecating sense of humor.

Kate turned the Q&A into a kind of art form, week after week skillfully extracting invaluable (for her readers) information, disclosure and opinion from Wall Street's and the world's best investors, not a few of whom also rank as among Wall Street's and the world's most inarticulate human beings. Only those of us who have sat in on some of these interviews fully appreciate the miracle that Kate routinely wrought.

We obviously feel an especial loss, since Kate has long been a co-perpetrator of this column and responsible for more than a little of the mischief strewn.

Our sorrow at her leaving is tempered only slightly by the sure knowledge that her talent, temperament and ability make it a cinch that she and her new enterprise will be a resounding success.."

-Alan Abelson, the nonpareil dean of American financial journalism, in his Up and Down Wall Street column, Barron's, March 8, 1999.



"Alan Abelson's words well described your professionalism and capability. Speaking for myself, my words always came out better as a result of your handiwork."

-Leon G. Cooperman, Omega Asset Management


"Wow.  Again, you exceeded my expectations. You captured my sentiments extremely well."

-Mario J. Gabelli, Gabelli Asset Management


"As usual, another spectacular interview.They are like no other in which I participate.  You certainly got the essence of my new ideas. Several of my friends also commented that you also caught the my enthusiasm for my work."

-Ronald Baron, Baron Asset Fund



-Martin E. Zweig, Zweig Advisors Inc.


"You've done it again! I'm agog at your ability to synthesize it all. Thank you for the most beautifully integrated presentation. There is no one else who could present the material in such a balance of intellectual vibrancy and light touch."

-Louise Yamada, Salomon Smith Barney


"I-and no doubt many others-have been enjoying the tour, and anticipating with pleasure the next one, Up and Down Wall Street, with you as the perceptive guide. I like the irreverent style, the "wink in the eye", the wit and the humor, with which you have managed to perform the vital journalistic task of independently analyzing data provided by others, and transmitting the information to the reader with a good dose of skepticism.  It is an elegant accomplishment made all the more noticeable through the colloquialisms with which you so appealingly sprinkle your writings."

-Itzhak Sharav, Ph.D., C.P.A., Columbia Business School


"I had fun during our interview. Thank you for the wonderful piece that resulted."

-Steven Romick, First Pacific Advisors Inc.


"I get squeamish about reading stuff about myself, but so many friends and clients called with compliments about the interview that I sat down and read it. So I saw why they thought it was terrific-You did it.  The bits and pieces and scraps you pulled together to make the material coherent and flowing emerged as a marvelous achievement. My compliments, so to speak, to the chef."

-Justin Mamis, The Mamis Letter



"I've given a number of interviews during my career and none have previously been able to capture my personality and the dynamic investment opportunity of my subject. Your very concise overview is clearly an example of a professional journalist at the height of her profession."

-John R. Tozzi, Cambridge Investments Ltd.


".Although I felt poorly prepared and a little incoherent, you did a masterful job of weaving it into an intelligible piece. I am amazed by the accuracy and could never plead that I was quoted out of context."

-Martin L. Roth, Ferret Capital Management Inc.


"You handled a complex topic beautifully. Congratulations!"

-Charles G. Callard, Callard, Madden & Associates Inc.


"I've been a loyal reader of your work for longer than you look like you've been alive."

-Theodore R. Aronson, Aronson + Partners


"Sometimes the papers get it wrong-but in Alan Abelson's description of you, he got it exactly right.  Having been on the other side of an interview, I concur with every word..."

-James Barksdale, Equity Investment Corp.



The Best Sort of Compliment

Please tell Kate I loved the writing below. It brought a big smile to my face.

Brink Lowery

Foster, Dykema, Cabot & Co.

July 8, 2011



I think the diversity of opinion is great and helps add important perspective to many of us who have our face buried in the micro situation of the companies we are researching. I look forward to your next collection of missives.

Pedro Marcal

Allianz Global Investment Capital

August 27, 2011





Wow!  Once again Kate it has been wonderful to collaborate on many dimensions.  I enjoyed a thought provoking discussion, and was also very thrilled that you put together such a comprehensive and thorough representation of that discussion (w@w- June 24, 2011). 


I have shied away from press/media, as in my experience, an hour-and-a-half of in depth discussion boils down to a weird sound bite taken completely out of context - usually the least important thing that I said in the hour-and-a-half.  Your article in contrast was thoughtful and I felt represented my views (time will tell if they are valid) much better than I ever could!


Please keep in touch, and let me know if/how I can be of help in any way as we go forward.

Dave Edington

Rimrock Capital

June 27, 2011



LIKE A HEART ATTACK IN AN OVERWEIGHT CHAIN-SMOKER, last week's events in the market for subprime mortgages occasioned shudders but hardly surprises.


Headlines about losses on formerly lucrative loans to least creditworthy home borrowers at HSBC Holdings (ticker: HBC), one of the world's largest banks, and New Century Financial (NEW), a small real-estate investment trust specializing in speculative mortgages, unsettled the credit and equity markets. The clearest picture comes in the market for credit derivatives; prices of contracts plunged further and sent the cost of insuring against this gathering storm soaring. The ABX-HE BBB-minus 07-01, which tracks subprime loans, continued its headlong slide by losing nearly 7% last week, according to Markit.com, which keeps these indexes.


"What's extraordinary is that this is news to anybody who's been halfway paying attention," observes former colleague Kate Welling in the Welling@Weeden newsletter following the page-one play given HSBC's hit. Indeed, Jon Laing warned about the risks of subprime loans and New Century in particular in these pages starting back in October 2004 (see "Follow-Up1"). And Jim Grant, another Barron's alum, has been detailing the accelerating deterioration of subprime mortgage-backed securities in his Grant's Interest Rate Observer in recent months.


It has been a long time coming. Observes Jeffrey Rosenberg of Banc of America Securities debt research, HSBC's purchase of consumer lender Household International in November 2002 marked the beginning of the bull phase of the credit cycle.


Last year may have seen the peak. As Jay Diamond of Annaly Mortgage points out, 2006 saw a rush on Wall Street to acquire subprime mortgage originators, starting with Deutsche Bank's purchase of MortgageIT in July followed by acquisitions by Morgan Stanley (MWD), Merrill Lynch (MER) and Bear Stearns (BSC) of Saxon Capital, First Franklin and Encore Credit, respectively. And just recently, Bank of America (BAC) and Countrywide Financial (BSC) have discussed a link to form the nation's largest mortgage-lending group. "While perhaps a viable long-term strategy, we have to wonder about the timing of these acquisitions given where we are in the credit cycle," he concludes.

Randall W. Forsyth

Current Yield: Subprime Hit Finally Arrives

Feb. 12, 2007


• "There Is No Asset Class That Too Much Money Can't Destroy"

The above quote is a Barton Biggs observation in an interview with Kate Welling. The subject was private equity. If you didn't see this "Welling @ Weeden" issue (August 4), check it out. In terms of the longer term outlook for private equity, I'm in 100% agreement with Barton (see my "2006 Outlook", a special research study we published in December 2005). LBO's are now often looked upon as get-rich-quick schemes, at least by their sponsors. In reality it should take years to build value, restructuring a company, be it private or public, and making the operation more efficient. And this is what provides good long term returns for private equity investors.

But today many private equity firms immediately load a company with debt in order to quickly pay themselves huge dividends, drawing out cash and overloading the company's debt levels and debt service costs.
Burger King and Hertz are current examples. In addition, many private equity firms charge hefty professional and advisory fees flowing to the sponsor, not to the investors in the private equity fund. From 1995 through 2003, the 52 LBO debt deals tracked by S&P had a default rate four times the average default rate for typical higher risk corporate loans. With the current flood of deals, this high default rate of 6% for LBO deals seems almost certain to rise. Hedge funds are increasingly active in private equity deals, segregating these investments in so called side pockets. Over the next few years, I suspect many of these side pockets will turn out to have big holes in them, even as the sponsors prosper.
Steve Leuthold
Perception for the Professional

Sept. 5, 2006

The Numbers Behind The Lies

(posted on msn.com 3/6/06)

Economist John Williams says 'real' unemployment and inflation numbers -- figured the old-fashioned way -- may be two or three times what the government admits. Here's why, and what it means for Social Security.


By Bill Fleckenstein


Fun with numbers.


Corporate America likes to play that game, the better to boost stock prices. Folks might be surprised to learn that "Governmental" America also plays the game in its compilation of macroeconomic data. Beneath the surface are undesirable, sobering consequences for us all.


Last weekend, the always-terrific Kate Welling published an interview with an economist named John Williams. It will be available on the free portion of her "pay" site via this link starting March 11. This article is the first one that I have seen in which all the flaws in the government data, pertaining to the Consumer Price Index, unemployment, Gross Domestic Product, etc., are disclosed in one piece by someone who's been following the data for a long time.


I have been aware of nearly all the statistical tricks used by the government since they were implemented. Nonetheless, seeing them collectively described in one article is incredibly sobering. Having said that, there is a bit more "black helicopter" insinuation and fewer data points than I would like to see in an article such as this. However, the main points are the math that most folks need to know, but likely do not.


Once you read it, think about it and understand it, you will see why so many thoughtful people - like Jim Grant, Warren Buffett, Marc Faber, Bill Gross, Fred Hickey and Paul Volcker - have grave concerns about the future of the dollar (due to the macro imbalances that exist today).


In fact, reading this article, you will conclude that there's no way out, short of running the printing presses. The problem with that end game: At some point, foreigners will revolt. One can only hope that, somehow, there will be a way out. But without an understanding of the issues, folks will have no way to react as events unfold, and adjust their assets as we get more clues as to how all this will play out. Thus, I would encourage everyone to print out the article and read it as many times as necessary, in order to gain a full understanding of the issues. Since we don't know at what rate some of these problems will start to impact the markets, all we can do is be prepared -- by having our insurance policies (in the form of the metals and foreign currencies), and then being alert to signs that the beginning of a chain reaction may be under way. Meanwhile, to pique folks' interest in the article, I'm going to take the time to provide some "Cliffs Notes" here.


Jobs data don't count the down-and-out

Williams starts by discussing the headline economic data: "Real unemployment right now - figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression - is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction." (By "real," he means calculating the data the way they used to be calculated, not as inflation-adjusted.)


He then explains how the employment data are compiled, noting that 5 million chronically unemployed people are not included in the statistics. In fact, there are seven or eight different employment statistics. One called U-3 is the official one. The broadest one, U-6, currently shows unemployment as running around 8.4%. As he explains, the one that's the most historically consistent is running around 12%.


On the Potomac: Reverence for reverse-engineering

Williams differentiates between two data-manipulation practices. One is "systemic manipulations, where methodologies are changed." That's done in order to align the government's view of the world with the world, i.e., make things look better than they are. The second practice is out-and-out fudging of the data to produce whatever result is desired. Williams describes instances where various administrations have literally reverse-engineered the data to achieve that result (though politics is not the main purpose of the article).


For those not familiar with "substitution," he explains the practice's evolution in the CPI calculations. The concept of substitution was a concoction of Alan Greenspan and Michael Boskin, who basically argued that if one item were too expensive, consumers would substitute that with a cheaper one. Williams' response: "The problem is that if you allow substitutions, you aren't measuring a constant standard of living. You're measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that's not the original concept behind the CPI."


"That ticking sound? Social Security

Williams says that the government's motive in all of this, if there is a motive (of the government collectively; don't picture a group of men cooking up something in a back room), is its desire to put a favorable spin on all the data. Another motive? Transfer payments like Social Security are indexed to the CPI, and they would be far higher if the CPI were accurate. In fact, says Williams, if the "same CPI were used today as was used when Jimmy Carter was president, Social Security checks would be 70% higher." That's seven-zero.


Though Williams doesn't get much into hedonics, he does talk about the inflation-understating impact of geometric weighting versus arithmetic weighting in the CPI statistics: "Geometric weighting ... has the 'benefit' that if something goes up in price, it automatically gets a lower weight, and if it goes down in price, it automatically gets a higher weight."


Then for the ticking time bomb: Social Security. The proceeds from withholding do not go into a lockbox or trust fund. They are spent, thereby reducing the size of the stated deficit. More importantly, he notes that the government's accounting for the deficit doesn't include any accruals for Social Security or Medicare liability.


In fact, if that were done and the government used GAAP accounting, the deficits for 2003, 2004, and 2005 would each have been around $3.5 trillion. That's a trillion, not billion. In 2004 alone, the deficit on an accrual basis would have been $11.1 trillion, due to a huge one-time spike for setting up the Medicare drug benefits. In essence, as he points out, we're piling up additional liabilities in an amount roughly equivalent to our total GDP every three years.


Lots of these imbalances have existed for some time, and they haven't mattered. Such macro problems only matter when they matter. Once that point in time is reached, events have a way of swiftly getting completely out of control - which is why one has to understand the nuances and be alert for potential signs of chain reaction, as I mentioned earlier.


Charge that Maybach to my imputed income

Returning to the subject of GDP, Williams illuminates a wrinkle that I had not known about, called "imputations": They are "an outgrowth of the theoretical structure of the national income accounts. Any benefit a person receives has an imputed income component. If you're a homeowner, the government assumes that you pay yourself rent on your house, so that's rental income. ... Imputed interest income, for instance, accounted for 21% of all personal interest income in 2002, and was growing at an annual rate of over 8%. Meanwhile, fully 62% of total rental income that year was the imputed variety."


He goes on to point out that folks really aren't doing that well, which is why their incomes aren't growing, which is why they've borrowed money. And that's why understanding the housing ATM is so important - because as that sputters to a halt, folks will be stuck in the same place they were before (which precipitated the borrowing, i.e., not enough income growth). Only now, they're going to be stuck with incremental debt of their own creation.


What festers underneath the data

Next, he strings together the stock-market and housing bubble, for a summation of where we are: "When that (stock) bubble burst (in 2000), without a foundation of strong income growth, or a financially sound consumer, it triggered a recession that was a lot longer and deeper than the government would have you believe.


"In fact, I contend that what we are in now is a protracted structural change that goes back to the beginning of that 2000 recession, which eventually may be recognized as a double-dip downturn. We did have some recovery in 2003, but in 2005, you started to see signs of a downturn in a variety of leading indicators that I use.


"That's not so far off from what I believe. In other words, if you really looked at the data and understood them, you'd see that what appears in the headline numbers is nowhere near what the real supporting data show. Our financial condition is a ticking time bomb. What none of us knows is when it implodes.


Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money.



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