Friday, September 28, 2007
Thursday, September 27, 2007
"That's right, the world's best known value investor wants to own a company that could very likely have zero book value. A buyer of businesses with reliable earnings streams now wants to get into trading? Buffett is the guy who had an unpleasant time running the ego factory at Salomon Brothers, and now we are told is looking at Bear? The man who is the chief spokesperson for the "Derivatives are financial WMDs" -- he's a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters?
As we noted yesterday, much of the broker's reported earnings gains are accounting sleight of hand. Bear Stearns' earnings benefited from a drop in the value of their own debt -- about $225 million. Some people have estimated that the gains from such write downs were 140% of the quarterly earnings. "
Maybe the rumors are true.....I seriously doubt it.
Wednesday, September 26, 2007
A friend brought this to my attention (thanks Nathan). The link above is to the executive summary. The full report is 36 pages and can be accessed through this link as well. I cannot give it a strong enough recommendation for those who will take the time to read it. This combined with another paper over the weekend echoes several thoughts I have had for a little over a year now though definitely not as well developed or researched as these respected papers. I probably should not be reading these things because it makes me more bearish than I already am and though I think it is an inevitable, who knows when it finally happens. Like I said I have been thinking along those lines for over a year but my guess is we are several years before the system really breaks down. (yet it could be a month) There is just no way to predict the timing.
All these papers have a unique twist or suggestion to help solve the problem. This paper argues that raising interest rates to keep capital in the East Asia countries just prior to Asian Currency Crises was the wrong move and what they should have done (and suggesting to the U.S.) is move interest rates close to zero and dramatically raise taxes while tightening spending dramatically. This is a fairy tale as I cannot imagine a political environment that would allow this to happen but understanding the solution to the ailment can potentially give you a better understanding how to preserve capital and even benefit from the upheaval.
One thing is for sure. Asian currencies are dramatically undervalued compared to the U.S. dollar (have been for years) and the longer this persists, the worse the outcomes, the worse we will be hurt, and more we lose global dominance (if you want to argue we have it now), both economically and militarily we will end up losing. The precursor of what happened leading up to 1929 with the Great Depression and Great Britain losing their position as the worlds superpower to the United States is happening again where the United States could lose it to our Asian neighbors. Asian countries will be hurt when this thing finally blows up but the the debtor nation, the U.S., will be hurt far more.
Tuesday, September 25, 2007
Very bad numbers today. Target warns, (that is the big one in my opinion) as does Lowe's, and Lennar disapoints while housing numbers hit economist forecasts and the market manages to finish up. Mind boggling it seems!
1. "We will not have any more crashes in our time."- John Maynard Keynes in 1927
2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
"There will be no interruption of our permanent prosperity."- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928
3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."- Calvin Coolidge December 4, 1928
4. "There may be a recession in stock prices, but not anything in the nature of a crash."- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."- Irving Fisher, Ph.D. in economics, Oct. 17, 1929
"This crash is not going to have much effect on business."- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929
"There will be no repetition of the break of yesterday... I have no fear of another comparable decline."- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929
"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices." - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929
6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929
"Buying of sound, seasoned issues now will not be regretted" - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929
"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom." - R. W. McNeal, financial analyst in October 1929
7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929
"Hysteria has now disappeared from Wall Street."- The Times of London, November 2, 1929
"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before." - Business Week, November 2, 1929
"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..." - Harvard Economic Society (HES), November 2, 1929
8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall." - HES, November 10, 1929
"The end of the decline of the Stock Market will probably not be long, only a few more days at most." - Irving Fisher, Professor of Economics at Yale University, November 14, 1929
"In most of the cities and towns of this country, this Wall Street panic will have no effect."- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929
"Financial storm definitely passed."- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929
9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
"I am convinced that through these measures we have reestablished confidence." - Herbert Hoover, December 1929
"[1930 will be] a splendid employment year."- U.S. Dept. of Labor, New Year's Forecast, December 1929
10. "For the immediate future, at least, the outlook (stocks) is bright." - Irving Fisher, Ph.D. in Economics, in early 1930
11. "...there are indications that the severest phase of the recession is over..." - Harvard Economic Society (HES) Jan 18, 1930
12. "There is nothing in the situation to be disturbed about." - Secretary of the Treasury Andrew Mellon, Feb 1930
13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity." - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930 "
... the outlook continues favorable..." - HES Mar 29, 1930
14 "... the outlook is favorable..." - HES Apr 19, 1930
15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930
"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..." - HES May 17, 1930
"Gentleman, you have come sixty days too late. The depression is over."- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..." - HES June 28, 1930
17. "... the present depression has about spent its force..." - HES, Aug 30, 1930
18. "We are now near the end of the declining phase of the depression." - HES Nov 15, 1930
19. "Stabilization at [present] levels is clearly possible." - HES Oct 31, 1931
20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."- President F.D. Roosevelt, 1933
Monday, September 24, 2007
Lowe's and Target both warned after the bell about earnings. Target to me is the more notable of the two cutting same store sales forecast from a 4 to 6% range to a 1.5 to 2.5% range calling September traffic "weak." Target is down 4% after the bell. Lowe's is down 6%. Lowe's could be shaken off as housing related but Target is great baramoter for measuring the appetite for spending in the middle class. In September it looks like it may be puking instead of digesting. If we get horrible housing numbers tomorrow morning like I suspect tomorrow could be a very ugly day in the markets.
I have been thinking alot about the dollar. Calculated Risks blog has taken the position that the dollar may be much closer to the bottom than the top. I am starting to think they may be right though I am nowhere going to bet on it. I think Europe may be on the tipping point for their own massive slowdown. This could cause their interest rates to fall quicker than what most expect helping making the dollar much more competitive. Where the dollar could get hurt for quite awhile is against our Asian trading partners who may exhibit surprising economic strength even in the face of an American slowdown. Just speculating. I can easily envision a scenario where the dollar index goes down quite a bit more, just not convinced it is a done deal.
Friday, September 21, 2007
Interesting article. Has raised cash and either sold out of reduced some of his long term favorites including Wal-Mart.
This is the key to markets. Are stocks cheap or are they not? Hussman, Grantham, and others believe markets are very expensive on a normalized earnings basis due to record high profit margins that will revert to the mean. I strongly agree with them that margins will revert. The big question is timing. Whether we have started to revert or it is still 3 to 5 years out I do not know. That is million dollar question because whoever is right on that should have a lock on what the market will do.
That is why you focus on individual companies.
Thursday, September 20, 2007
Sounds a little draconian and I usually try to balance this with an equal bullish thesis. Truth almost always lies in the middle but it is amazing how similar this sounds like Bill Gross Plankton Theory written in the 70s.
Everyone is talking about the housing and mortgage market now. Next year (maybe about this time) my guess is it will be the corporate bond markets. Some of the deals that have gotten done are just insane. I should know, I looked at many of them. Fighting the credit CLO crazy in the last year until very recently was like trying to stop a waterfall with a comb. You either closed your eyes and did the deal or got left behind. Similar to I am sure what went on in the U.S. mortgage market. You could see how the deal was not any good and how it was not pricing risk correctly but if you said no somebody else said yes and you were left with dollars that if you did not utilize investors would ask back. The housing market started turning south really about, I don't know, call it 18 months ago. The credit markets stopped its foolishness about two months ago. Timing these things is horrible but defaults will rise and the ease of credit to these questionable borrowers will be missing for alot longer than most people expect.
Something I thought was interestng. (Thanks Ron)
The post previous to this one I also found interesting.
Wednesday, September 19, 2007
Bretton Woods II?? Wow.
Excerpts from the 1st
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries
Excerpts from the 2nd
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
She said foreign control over 44pc of the US national debt had left America acutely vulnerable.
"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings."
There is always another view.
Tuesday, September 18, 2007
WOW!! 50 bips and 334 points later and my guess is Bernanke and company are sharing a bottle of scotch patting each other on the back somewhere in New York City.
I was probably surprised as much if not more than anyone about the 50 bip cut compared to the 25. Surprised is not the right word, shocked may be. I am a value guy which means I tend to worry more than most and there are several worrying things about all of this.
First let me review how wrong I was on many fronts. 1) That the FED cared about the dollar. Maybe Volcker did but it is apparent that this FED does not. 2) Bernanke had more backbone than Greenspan. This shows signs of panic not strength. 3) Bernanke lets his yes's be yes's and his no's be no's. Grant it new data can can change viewpoints but John Kerry's Flip Flop Flip Flop may be applicable. 4) We would at least test the lows again set back in August before we set new highs. Still not a done deal but it looks like new highs may be in the cards. We shall see. This was conventional thought (probably why it hasn't worked out that way). I am sure some of you can expand this list.
Let's look at the good and the bad.
First the good.
1) Look at the markets. We are way up. By definition doesn't that mean good?
2) Psychologically it could change some things. This is the potential biggest bonus from today's move. The markets need to function and so much of that is trust. This should help on that end. In fact my hope is that is what Bernanke is thinking. I even mentioned this a couple of days ago to a friend. That he will cut by 50 bips firing as much ammunition at once in a huge gamble that it will solve things at least on the psychological fronts. If this is what he indeed bet on and it works it will be stroke of financial genius.
3) Should help on the margin to lower the cost of borrow especially for corporations rolling over commercial paper.
4) It helps the richer get richer. Definitely gives a shot in the arm for potential Wall St. bonuses.
5) ........ maybe you can think of another one.
1) The dollar - strong move down after the announcement. This really could get ugly.
2) Leads to inflation - look at oil and gold after the announcement. WOW
3) Despite the Fed's strong words, the Fed has shown words are cheap.
``It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke Aug. 31
To quote another blog "They have instead shown they have become Wall Street's bitch."
4) Maybe this was the right move. Does the FED know something we don't?
5) This really doesn't change much for the housing picture. In fact the cost of long term borrowing went up. Any one notice what the 10 year and the 30 year did after the announcement? Price down, yield up. This is saying inflation could be a problem.
Who knows what the market is going to do over the next few months. I cannot see how this good for America long term unless the FED knows a bunch more than what they are letting on. Instead it seems to be a panicky move by Bernanke. http://www.minyanville.com/articles/BAC-WFC-housing-treasuries-TOL/index/a/14142 Remember he was along side Greenspan voting for the FED cuts who started all this. I guess I should not have expected anything differently.
Once again long term, actions like this are bad bad bad. http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&
This quoted Jim Rogers and Marc Faber (before the rate cut) both who are have been around the block once or twice. Few excerpts.
Faber and Rogers, who both spoke today before the Fed decision on rates, said the central bank should raise borrowing costs to quell inflation and support the U.S. currency.
Hmmmm - didn't head that advice.
``They should do something to stop inflation as soon as they can,'' said Rogers, the 64-year-old chairman of Beeland Interests Inc. ``If you don't do something now, if you don't nip it in the bud, it gets much worse down the road.''
That has been my fear.
``It's suicidal to cut interest rates"
Well we committed suicide times 2.
At this point the market could go up another 1000 points in the short term. Analysts will probably hit the streets tomorrow pointing out how cheap stocks are with such a friendly FED. Looking at history again it is very hard to bet against the markets after the Fed started cutting interest rates. 2001 being the blaring exception. Also looking at history we may be setting up for 1998 -2002 all over again. Massive formation of a bubble as a result of huge injections of liquidity followed by a massive crash. Where would the bubble be this time? Commodities and emerging market, they have a ways to go though before in my opinion they are in bubble territory.
I really need to get working on my speech tomorrow. So I will leave it here. It is easy to be pessimistic. For today we probably should take it for what is is and enjoy how our portfolios look after today for most of the people in the United States. Alot of people feel richer. Someday you have to pay the piper and though I did not live through it, I have read enough to know that inflation is a horrific nightmare to try and fight once it gets started. At almost any cost it is better to feel some short term pain than experience long term inflation. I hope Bernanke does not lose sight of this.
Monday, September 17, 2007
Concerning Northern Rock. Interesting videos.
After the bell closed though the Bank of England is stepping in with some heavy ammunition.
The chancellor of the exchequer, Alistair Darling, this evening promised that the government will guarantee all savings deposits at Northern Rock amid concern that Britain is plunging into its worst banking crisis in decades.
Full article here. http://business.guardian.co.uk/story/0,,2171255,00.html
All this while the U.S. equity markets sort of wink at it finishing down about .5%.
I don't think Australia guarantees any deposits.
Little fires are popping up all over the place as the fireman from the government are getting run ragged jumping from location to location.
Sunday, September 16, 2007
I also started, devoured, and finished Fortune's Formula - The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street. Awesome book!! I could not put it down. It is a book on probabilities, risk, the founder of information theory - Claude Shannon (who by the way had an unverified better investing record than Buffett using a buy and hold bottom up fundamental analysis strategy) , the Kelly Formula, the mafia, and a host of other things. I thought it was masterfully written bringing everything together while not losing the reader. It gets pretty thick in certain parts of the book but the author is masterful at breaking down complex concepts and explaining them in every day terms. Truly an incredible book. I had heard about the Kelly Formula but had never really studied it. A must read!!
I also read numerous articles and started reading the 10ks of Landamerica (LFG) and Fidelity National Finacial (FNF). These guys are title insurers and are just getting rocked in the market. I really do not understand the business model at all and was just trying to understand how they make money. How does the business work. Unfortunately I did not get as far as I wanted.
Well we should see Volatility with a massive capital V this week. Talk about all kind of things to happening from inflation numbers being released, to here is what is actually happening for the Investment Banks with four reporting, to the Fed walking a tightrope over the Niagara Falls blindfolded attempting a double somersault. I wonder how much more the market can go up. We are 4% from the all time high. It appears alot of good news is baked in.
Get front seats ladies and gentleman. We may have a fireworks show and the most exciting things is we don't know if the blasts will be up or down. Fun fun.
I also have a busy week with several things on the hedge fund coming down the pipe and a presentation I have been asked to give to the local Rotary Club. I better get working.
Thursday, September 13, 2007
The Fed is in trouble and anybody who thinks it is a forgone conclusion that the Fed will do this or that needs to reexamine their analysis. On one hand you have the well rehearsed credit crunch and the horrible residential market. You now have all kinds of signs pointing to a potential severe commercial construction slowdown.
On the other hand you have the dollar crumbling and a surging commodity boom. In the last month the soft commodities have been on a tear, soybeans are up close to 20%, corn up around 8%, wheat up almost 30%. Not to be outdone hard commodities in the last month have followed suit with copper up over 10% and gold up almost 8%. Then lets not forget about energy with oil crossing $80 and gasoline sure to follow. Then as I have been saying for awhile now the China deflation story seems to now be over (Look at "ahead of the tape" in today's WSJ. It does a good job of discussing this reversal) and inflation in imported goods may be the new norm. Looking at all of this, the Fed would normally be looking to maybe raise rates.
Anyway if a gun was forced to my head and I had to guess I would wager that the government made sure the employment numbers last Friday were negative to enable to the Fed to save face and give them maximum flexibility in what they are going to do. (I tend toward conspiracy to much) Either way though the Fed has to be looking at all of this and shaking their head. They are in trouble if they don't and in trouble if they do.
The hope at this point is that a 50 bip cut is already priced into the dollar and anything less will actually cause a rally in the dollar. This may in the short term help stem the rally in dollar denominated commodities but whether they cut by 25 bips or 50 bips it does not really solve anything? Even if it helped it will take at least 6 months to work through the system. The hope is that the world growth will keep the U.S. from a recession. I have to wonder though if that occurs what the price will be. Rules will have changed. Instead of us leading the way others will be. In the past if we had an economic slowdown the world was going to follow and we could lower interest rates and save our brothers and sister who made poor investments in housing or whatever. Not any more. If we enter into anemic growth or even a recession and worldwide growth simply slows but continues at a strong pace we cannot respond as we have in the past and cut rates and save ourselves with the dollar just getting puked. Can you see us lowering interest rates to 2.5% while interest rates are 5% overseas and world growth continues? Talk about a true dollar crumble!! Talk about inflation!! Of course our ego centered socity will not see this and that we do not control the world and those in Washington will be mud slinging and screasming and doing flips saying we need to do something not realizing that we are the ones who have created all this.
Once again the Fed is left with the hope they can manipulate the psychology of investors and ensure a slow decline versus a fast decline that tends to be much more destructive. I am not talking about the stock market but the needed decline in housing prices and the needed continued adjustment to the risk premium. If this is your only hope and your the Fed, you have got to be nervous.
Well I am out for the weekend. I probably won't be back until Monday. Everyone enjoy the weekend and remember.....stick to fundamentals.
There's a fine, fine line between investment grade and junk
There's a fine, fine line between liquidity and a crunch
And you never know 'til you settle up if the credit is benign
There's a fine, fine line between a gain and a painful decline
There's a fine, fine line between the theories and the facts
And there's a fine, fine line between what's solid and what cracks
And now my holdings badly misbehave and my losses aren't confined '
Cause there's a fine, fine line between a gain and a painful decline
For years I piled on debt and smiled as my profits soared
(I even bought a solid gold toilet, yeah)
Now I see that I can't be levered this much any more
(panicking, I'm panicking, I think I've soiled myself)
Bernanke, please save me, cut rates, oh I implore...(please, even 50 bps)
There's a fine, fine line between a bull and a bear
And there's a fine, fine line between delight and despair
I'm hoping I'll avoid the pain to come from trades yet to unwind
But there's a fine, fine line between a gain and a crippling, crushing, mortally wounding decline(help me)
Do not really buy it but its interesting.
I tell you what though there may have been some manipulation on August 20th. In my mind it will go down as the day of the stock market crash that never happened. When treasuries and other forms of debt had the biggest moves since 1987. You had absolute panic and crash type reactions everywhere but the equity markets. If I remember correctly the markets even ended up ever so slightly.
Wednesday, September 12, 2007
Many of you may have seen this but I thought this was very good and wanted to make several comments. Unlike many events in financial history the 1987 stock crash does not have all that much written on it. You have a book written on RJR Nabisco, a book on 1998 and LTCM, a book chronicling things like Tulip Mania and the South Seas Stock Bubble but nothing major written that I have seen on the biggest one day equity % drop in American history. This is not a compare and contrast to today but rather what happened in 1987 and possible reasons. It is a history lesson and because of my love for market history I wanted to put it on here.
Most of the literature you do read write almost exclusively on the evils of what is now defunct portfolio insurance. Well in my mind this may have complicated the outcome but it wasn't the cause. I think this article points that out implicitly pointing out that:
By the end of the day, the Nikkei index had dropped 15 percent—the biggest one-day decline since its creation in 1949. In Hong Kong, the index plunged 45 percent, causing the market there to be shut for nearly a week. The FTSE, London’s benchmark, was down 12 percent. Of 23 major markets, 19 lost at least one-fifth of their value during the terrible month of October.
Well guess what? None of these markets had portfolio insurance. I get alot of eye rolling from my buddies everytime I bring up the dollar over the past year but I think currency fluctuations play one of the biggest factors in big market swings (the panics, crashes) and it is so rarely talked about. It is the most fundamental economic piece of any sovereign nation. The dollar being the dominate currency the past 60 years makes it paramount to the global stability and global growth.
Today we are on the cusp of potentially having a crises because of the dollar. Currency typically fluctuate around each other which is fine as long as the moves are not gigantic and do not happen to quickly. If you look at curencies moving around the dollar, the dollar continuously moves up and down but typically in a band of around 20% or so over several years. It will weaken and then strengthen in a continuous pattern. Today we are right at the lowest levels in history for the dollar. A sudden or dramatic break to the downside could have serious consequences in the United States and worldwide. I thought one of the more interesting points of the link above was how much the dollar was in flux preceding the 1987 crash. I did some additional research and discovered some interesting things. The trade weighted index of the US Dollar peaked in 1985 right around 140. It moved almost straight downward until the crash in 1987 to around 88. That is a huge move in two years!! This led to some of the things happening right before the 1987 crash.
Referring to the large move down Thursday October 15th
Others believed the fall was triggered by Treasury Secretary James Baker, who said that the United States could “accommodate further adjustments” in the value of the dollar—code for a willingness to accept further declines in the U.S. currency.
and over the weekend before black Monday:
Adding to the overheated climate was growing friction between the United States and West Germany over currency valuations. Baker said on “Meet the Press” on Sunday, October 18, “We will not sit back in this country and watch surplus countries jack up their interest rates and squeeze growth worldwide on the expectation that the United States somehow will follow by raising its interest rates.” Questioned moments after the show (and off-camera) by an influential economist, Henry Kaufman, about the wisdom of making such a strong statement, Baker replied, “Henry, some things need to be said.”
with Volcker piping in:
Paul Volcker, whose tenure at the Fed ended two months before Black Monday, has written that the crash can be traced to “the feeling that the promising efforts toward coordination of economic and exchange rate policies were breaking down.” The editorial page of The Wall Street Journal was a vocal proponent of the same idea, citing the brewing feud between the Bundesbank and Baker, the Treasury secretary, as well as the longer-term problem of the dollar’s continued depreciation. “We think the threat the market saw was a dollar collapse, the severing of international cooperation and the victory of protectionism around the world,” said a Journal editorial on the first anniversary of Black Monday.
all this led to:
Connecting the problems abroad with the scrum between Baker and the Bundesbank, Reynolds concluded the crash was part of an “international financial panic.” In this view, global forces overwhelmed the good news at home (solid economic growth, a lower-than-expected budget deficit, and moderate interest rates).
This article gives many other possible reasons and I am sure they all played a part. Like I said I am not trying to do a comparison contrast because I do not think one necessarily exists necess, I am just showing again why the Fed is going to have difficulty lowering interest rates beyond an initial 50 bips. The dollar is back to the forefront of what investors need to be keeping an eye on and back as one of the factors dictating monetary policy. Many investors, especially my age, have no concept whatsoever how currency can play such a big part in global equity markets. One of the reasons is because it really has not in the past 10 years but in the last 100 years it has had a major impact numerous times. You hear about the unwinding of the Yen carry trade today but currently it goes much deeper than that.
The Fed is handcuffed to a certain extent and it will be interesting to see how it all plays out.
Tuesday, September 11, 2007
I think if there is a legitimate bull argument this is it. The world economy buys us out of a recession. Export numbers today were very strong.
The value of U.S. exports of goods and services to the rest of the world increased 2.7% in July, the fastest seasonally adjusted growth in more than three years, the Commerce Department reported Tuesday.http://www.marketwatch.com/news/story/exports-grow-fastest-pace-3/story.aspx?guid=%7B825A89C4%2DD6D5%2D4F5E%2D9477%2D4F51852DA12A%7D
Monday, September 10, 2007
One of the reasons why I think the housing downturn will be worse than 1990-1992 downturn
So why is everyone so worried? Well, in addition to the recent seizing up of the ABCP market, which comprises 50% of the over $2 trillion commercial paper market, this housing cycle looks different than any we have seen. To this point, we have included two charts at the end of this report. We suggest studying them carefully. What you find is that the 1988 – 1992 housing cycle peaked in the first quarter of 1988 (1Q88) followed by a decline in “For Sale Inventories” until the cycle troughs in the 4Q91 (some 15 quarters later, which is typical). Scarily, the current cycle peaked in the 1Q04, yet inventories have continued to rise, hitting an all-time high in 2Q07. And they are still rising! Moreover, in the 1988 – 1992 cycle vacancy rates among single family homes for rent stayed relatively flat. In this cycle they have risen dramatically. How this plays out is anyone’s guess, but clearly somebody is pretty worried.
Which leads me to think they are wrong on this.
As with all bubbles, however, this one too has burst. Nevertheless, we have opined that historically real estate has never pulled the economy into recession since it is an “effect” and not a “cause.” For example, in the early 1970s we moved to Atlanta and considered buying a $200,000 condominium. By 1975 that same condo was selling at bankruptcy auction for under $30,000. What happened? Well the “cause” was a rise in the price of crude oil with a concurrent rise in interest rates. The “effect” was a crash in real estate prices accompanied by a severe recession. Therefore, to think that real estate is going to pull the country into a recession one has to believe real estate has become so entwined in the economic fabric of the country that it has morphed from an “effect” into a “cause.” While we are not there yet, we do believe the odds of a recession have risen.
No, the bubble was so big and the bursting will be as well (Newton's Third Law) that the effect from the bubble burst will be a turn down in the economy. I am risking saying "it is different this time" which are the 5 words put together that I hate the most but bubbles cause things that otherwise would not happen to happen.
Most interesting takeaway I thought and hardly surprising.
In other housing news, a large, private homebuilder is about to declare bankruptcy, and Bank of America and/or Wachovia could be on the hook for its debt. In the public arena, another homebuilder is unable to renew its credit lines and may face the same fate.
Number 8 of this list was dead on.
``The support that Asia has shown in buying U.S. Treasuries has been a major supporter of keeping long-term interest rates lower than where they probably would be,'' said Gary Pollack, who oversees $12 billion as head of fixed-income trading in New York at the private wealth management unit of Deutsche Bank AG, Germany's biggest bank. ``This could put some upward pressure on yields in the United States.''
U.S. long-term interest rates would be about 90 basis points, or 0.90 percentage point, higher without foreign government and central bank buyers, according to a 2006 study for the Fed by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville.
Merrill Lynch's main index of U.S. government securities returned 3.3 percent for July and August. For investors in Japan, the biggest holders outside the U.S., the index lost 3.1 percent after accounting for changes in the currency.
Friday, September 7, 2007
* The big news of course was the jobs news that came out. What I thought was even more telling going forward was the dollars move The dollar index move was huge. It was not just the Yen but across the board the dollar got crushed. This I think was the result of it now being almost a certainty that a Fed rate cut is now coming. I will repeat the fact that I do not think the Fed can cut like they normally or otherwise would if the dollar was strong. Investors I think are going to be severely disappointed with the Fed cuts over the six months. People forget that IOUs overseas is the same as you or I who owe money on a car or our house with some bank somewhere. They essentially dictate the terms. If all of a sudden we lower interest rates and those terms are not acceptable, down goes the dollar. You control your destiny as long as you don't owe money. Once you owe money you cede some of that control over to someone else. That fact doesn't change just because your a sovereign nation.
* One interesting thing to me is that on Friday and today some of the biggest bright spots was the big investment banks. Morgan Stanley, JP Morgan, Lehman, Goldman were all either not down much or up on Friday and all are up today. They have been following the market or leading it down. Interesting divergence.
* Today the Dow Transport Index is retesting its lows from several weeks ago. It the first meaningful index that is retesting the August lows. Will be worth keeping an eye on for a couple of days.
Thursday, September 6, 2007
Most of my readers read calculated risk but this was so good I wanted to make sure everyone saw it and wanted to add a few comments. The stock market continues to climb the wall of worry though besides the NASDAQ, the Dow and S&P really haven't gone anywhere. From the first big bounce the S&P and Dow are essentially where they were a little over two weeks ago on August 22nd. It looks good on a graph though with higher highs and higher lows. The market seems to be clinging to the hope that a rate cut will solve everything on Sep 18th. (I am still not 100% convinced the Fed will make a cut) A rate cut to me shows there is something wrong. There is so much on the line right now. Trillions of dollars. Do you really think you will hear anything majorly negative out of the people who really are in the know? These guys are the ones who also have the most to lose. Over the weekend the typical comments where like what Joseph Ackerman, CEO of Deutsche Bank, offered that, "There have been signs that the markets began to stabilize and liquidity is returning a bit but, without a doubt, some 'blocked' transactions will take some time to work through." At the same time though across the street Axel Weber, president of the Bundesbank, said "the current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside of the traditional banking sector." ????? I mean these people are from the same side of the world seeing the same things and coming to drastic different conclusions. One says the market is stabilizing and the other says the financial markets are showing all kind of signs of a banking crises.
The conflict isn't just with peoples opinions. It is also with the economics numbers coming out. Yesterday the economic numbers (housing) were horrendous. Today numbers outside of housing were pretty good. Calculated Risk I thought did a great job of showing a very plausible theory as why. I also think it implicitly shows (though he did not discuss directly) why the worst is still ahead. Bubbles throw everything out of whack. Normal relationships still usually follow but the timing is off because there is more fuel to burn through before you run out. The housing bubble was so big and the short term benefits so big from people who benefited from the bubble that there are extra reserves to burn through before the gauge reaches empty.
Not only that but remember that typically you see 9 months for the economy to be affected by a rate cut from the time of the cut. Well what we just went through was multiple rate hikes essentially. As I have said before the market did overnight what the Greenspan was unable to do in all of his rate hikes. LIBOR continues to climb. Tighter standards are being seen everywhere from housing (duh), to commercial deals, private equity, to refinancing. This takes time to slow the economy down and unfortunately I just cannot see how we do not enter into at least a mild recession. It is possible of course but history is firmly against not having a recession after a massive bubble but people like Mr. Ackerman will continue to hope that this time is indeed different. That this bubble does not cause a true bubble outcome, that 12 months ago will return very soon. Why? Simply because he (along with others), have the most to lose.
This is a DCF I just ran across that a blogger created off of Mohnish Pabrai's book Mosaic. So simple. It is amazing how the more simple something is often times the more useful. If it is selling as a $.50 dollar off of a reasonable fcf analysis you bet you probably got some decent margin of safety and you should take a close look.
So the art is calculating what the free cash flow is in year one. What is the true free cash flow? Is there any reason why this year was different from a normal year either higher or lower? How does free cash flow grow with revenue? Is this sustainable? Boom you have a decent guess. Not that complicated where you need pages of pages to create your model that gives you the false sense of security because somehow it is detailed.
Wednesday, September 5, 2007
I hope this is some kind of spoof. I see no evidence that it is. If it isn't I will just shake my head and offer no comment. No comment.
Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower.
Oklahoma -- "Anyone know if they're hiring at the local car dealership?"
Florida State -- "Do you think Florida is a better football or basketball school? I just can't decide!"
UCLA -- "How is it you play in the Rose Bowl six times a year, but never in January?"
Virginia Tech -- "Why aren't you wearing that throwback No. 7 jersey to the game today?"
Florida -- "Dillard's is having a sale on jorts."
USC -- "Any decent running back can make a fourth-and-2."
Texas A&M -- "Stadium-wide group hugs at the end of a game always make the loss easier to take, right?"
Notre Dame -- "Was it on the eighth day God gave you your last national championship?"
Texas -- in triplicate, as fans of various rivals made sport of the Longhorns' recent spate of legal issues -- "I hear Mack Brown is using a police scanner for recruiting purposes."
"Book 'em, Horns."
Tuesday, September 4, 2007
Another great transcript. Not as good as the Wesco one but still high quality. It just talks business. It is so easy to talk about looking at a stock from a business perspective and not paper but it is hard to always keep it in the forefront. Sequoia is one of the best at buying great businesses. All the dialogue is about how to look at companies. Highly recommend.
I was not going to put this out there because the orginal document said it was for subscribers only but then Tilson put it on his Website so I thought I would post the link.
I thought it was one of the top 5 things I have read in the last six months. Better than the Berkshire notes. It is dripping with wisdom.