Tuesday, June 30, 2009
Rolling Stone on Goldman Sachs
Rolling Stone's Matt Taibbi recently published a colorful and slightly biased history of Goldman Sachs. (Read it here for free.) It gets good at the end when the author suggests Barack Obama and Al Gore are puppets in Goldman’s plan to rip off America through cap-and-trade.
Monday, June 15, 2009
Stocks Could Fall in the Near Term
As expected, stocks have climbed significantly since March lows. However, I'm getting nervous that stocks have rebounded too much too fast. Here's a report I helped author and publish Thursday, June 11 for Forbes Special Situation Survey subscribers.
Special Report
Although the Federal government now owns large chunks of formerly blue-chip companies, it seems investors have overcome their fear that capitalism is about to end. In fact, they now seem to believe that the worst of our financial and economic crisis is over. As a result, they are once again willing to put money at risk as evidenced by a number of factors. Spreads between yields on corporate bonds and Treasury securities have shrunk, the CBOE Volatility Index has declined significantly, and stock prices are up 40% from their March 9 lows. Yet despite this increased appetite for risk, we remain concerned that stocks will see another pullback. While there is plenty of evidence that the economy is deteriorating at a slower rate, we see nothing to suggest it is getting better.
First quarter earnings provided one catalyst for the stock market’s rally. Earnings were down from a year ago, but for the most part, they were better than expected. Many of the positive surprises were due to lower raw material and energy costs as well as layoffs and other aggressive cost cutting activities. More recently, however, commodity prices have been on an upswing. The Goldman Sachs Commodity Index, a composite of energy, metals, and agricultural goods, is up 41% from its recent low. The Energy Information Administration, which in January had forecasted an average price of $43.25 for a barrel of crude oil for 2009, recently upped its forecast to $58.70. With oil currently selling for more than $70 per barrel, it may have to revise its forecast again. This rapid rise in commodity prices will squeeze gross profit margins for many companies.
Furthermore, corporate layoffs have pushed the unemployment rate to 9.4%, its highest level since 1983. Yet those fortunate to remain employed are getting squeezed. A recent survey conducted by Challenger, Gray & Christmas indicates that 52% of companies have cut or frozen salaries. Many have eliminated benefits such as contributions to 401(k) plans. On top of this, the national average price of gasoline is up almost 60% since the start of the year. Less income and higher gasoline prices will reduce consumer spending, the most important component of GDP.
In addition, housing, where all the problems began, remains troubled. Sales may be stabilizing, but prices are still plunging. The government tried to help by forcing mortgage rates to below 5%. However, the long-end of the Treasury yield curve has suddenly jumped and so have mortgage rates. Higher mortgage rates will only prolong the housing crisis.
In short, the economy is still deteriorating. Yes, things may be getting worse at a slower rate, but they are still getting worse. We agree that a rally off the March 9 lows was fully justified. We also agree that even at current prices stocks are attractive from a long-term perspective. However, we also believe stocks have climbed too far too fast and a retest of the lows is inevitable. We are not suggesting you sell and get out of the market. Instead, take advantage of a pullback if it occurs to put more money into your favorite stocks.
Special Report
Although the Federal government now owns large chunks of formerly blue-chip companies, it seems investors have overcome their fear that capitalism is about to end. In fact, they now seem to believe that the worst of our financial and economic crisis is over. As a result, they are once again willing to put money at risk as evidenced by a number of factors. Spreads between yields on corporate bonds and Treasury securities have shrunk, the CBOE Volatility Index has declined significantly, and stock prices are up 40% from their March 9 lows. Yet despite this increased appetite for risk, we remain concerned that stocks will see another pullback. While there is plenty of evidence that the economy is deteriorating at a slower rate, we see nothing to suggest it is getting better.
First quarter earnings provided one catalyst for the stock market’s rally. Earnings were down from a year ago, but for the most part, they were better than expected. Many of the positive surprises were due to lower raw material and energy costs as well as layoffs and other aggressive cost cutting activities. More recently, however, commodity prices have been on an upswing. The Goldman Sachs Commodity Index, a composite of energy, metals, and agricultural goods, is up 41% from its recent low. The Energy Information Administration, which in January had forecasted an average price of $43.25 for a barrel of crude oil for 2009, recently upped its forecast to $58.70. With oil currently selling for more than $70 per barrel, it may have to revise its forecast again. This rapid rise in commodity prices will squeeze gross profit margins for many companies.
Furthermore, corporate layoffs have pushed the unemployment rate to 9.4%, its highest level since 1983. Yet those fortunate to remain employed are getting squeezed. A recent survey conducted by Challenger, Gray & Christmas indicates that 52% of companies have cut or frozen salaries. Many have eliminated benefits such as contributions to 401(k) plans. On top of this, the national average price of gasoline is up almost 60% since the start of the year. Less income and higher gasoline prices will reduce consumer spending, the most important component of GDP.
In addition, housing, where all the problems began, remains troubled. Sales may be stabilizing, but prices are still plunging. The government tried to help by forcing mortgage rates to below 5%. However, the long-end of the Treasury yield curve has suddenly jumped and so have mortgage rates. Higher mortgage rates will only prolong the housing crisis.
In short, the economy is still deteriorating. Yes, things may be getting worse at a slower rate, but they are still getting worse. We agree that a rally off the March 9 lows was fully justified. We also agree that even at current prices stocks are attractive from a long-term perspective. However, we also believe stocks have climbed too far too fast and a retest of the lows is inevitable. We are not suggesting you sell and get out of the market. Instead, take advantage of a pullback if it occurs to put more money into your favorite stocks.
Sunday, May 31, 2009
Understanding the Dow Jones
I apologize for the lack of new posts. I've been spending a lot of time studying for the Chartered Financial Analyst exam. It turns out I've been wasting my time because this brief video clip explains it all.
Monday, March 16, 2009
The American Taxpayer is Getting Bamboozled!
You heard me: bamboozled. After taking tens of billions of dollars of our taxpayer money, AIG is doling out $165 million in bonuses to its Financial Products unit. This is the unit that has recklessly sold trillions of dollars worth of CDSs, or default insurance.
Don't get me wrong. I fully support paying out bonuses to top producers in profitable business units. But that principle does not apply here. This is outrageous. Let's get their names and make 'em famous.
Don't get me wrong. I fully support paying out bonuses to top producers in profitable business units. But that principle does not apply here. This is outrageous. Let's get their names and make 'em famous.
Thursday, March 12, 2009
March 12, '09. What a Day.
February retail sales were better than expected.
Bank of America's CEO, Ken Lewis, says business is profitable again.
GM says they don't need a previously requested $2 billion government loan.
Standard & Poor's says GE's credit is in better shape than we thought.
Congress and the SEC are finally going to review the mark-to-market rule, which arguably largely responsible for the credit market freeze.
And Bernie Madoff finally goes to jail.
Any one of these headlines would've caused the markets to rise, but we got them all at once. Three consecutive days of market gains is tough to get, but we got it. In the last three days, the Dow Jones roared ahead by 623 points to close at 7170 today. That's a 9.5% gain in your stock portfolio in under a week.
Bank of America's CEO, Ken Lewis, says business is profitable again.
GM says they don't need a previously requested $2 billion government loan.
Standard & Poor's says GE's credit is in better shape than we thought.
Congress and the SEC are finally going to review the mark-to-market rule, which arguably largely responsible for the credit market freeze.
And Bernie Madoff finally goes to jail.
Any one of these headlines would've caused the markets to rise, but we got them all at once. Three consecutive days of market gains is tough to get, but we got it. In the last three days, the Dow Jones roared ahead by 623 points to close at 7170 today. That's a 9.5% gain in your stock portfolio in under a week.
Tuesday, March 3, 2009
It's Not Just About Length, Ladies
Many ask, "How Long will this Recession Last?"
If payrolls fall by 1 job, consumer spending falls by 1 cent, home prices fall by $1, investment accounts fall by 1%, etc., then we are in recession. This type of recession could last for years, but would it really be that bad?
Depth Matters
An updated official estimate of economic activity said Q4 (Oct-Dec 2008) GDP fell 6.8%. A month ago, that estimate was 3.8%. In other words, the recession is deeper than what officials had initially measured. A recent survey revealed that economists were expecting a 5.4% decline. In other words, the recession is also deeper than what was expected.
Among other things, a deeper recession means more jobs are being lost and less money is being earned.
How Many Hairs are Attached to This Thing?
Think of the recession like you would a Brazilian wax. If you pull the waxing strip slowly, it will last a long time. If you pull it quickly, the pain is substantial but it's over quickly. Regardless, the number of hairs attached to the strip also reveal something about how much pain you will feel.
Recessions take the economy to a base level from which growth can start again. There's a bottom somewhere. We can get there quickly, or we can get there slowly. (Many, including myself, would argue it's better to get there quickly.) But remember, it may be just as important to ask "where is that bottom?" as it is to ask "when will we get there?".
If payrolls fall by 1 job, consumer spending falls by 1 cent, home prices fall by $1, investment accounts fall by 1%, etc., then we are in recession. This type of recession could last for years, but would it really be that bad?
Depth Matters
An updated official estimate of economic activity said Q4 (Oct-Dec 2008) GDP fell 6.8%. A month ago, that estimate was 3.8%. In other words, the recession is deeper than what officials had initially measured. A recent survey revealed that economists were expecting a 5.4% decline. In other words, the recession is also deeper than what was expected.
Among other things, a deeper recession means more jobs are being lost and less money is being earned.
How Many Hairs are Attached to This Thing?
Think of the recession like you would a Brazilian wax. If you pull the waxing strip slowly, it will last a long time. If you pull it quickly, the pain is substantial but it's over quickly. Regardless, the number of hairs attached to the strip also reveal something about how much pain you will feel.
Recessions take the economy to a base level from which growth can start again. There's a bottom somewhere. We can get there quickly, or we can get there slowly. (Many, including myself, would argue it's better to get there quickly.) But remember, it may be just as important to ask "where is that bottom?" as it is to ask "when will we get there?".
Sunday, March 1, 2009
Gov't Aid is Actually a Hindrance. Might be a Good Thing.
During my sophomore year of college, I asked my parents for $100 to help with some of my expenses. They were more than happy to help. But they made me regret asking.
They would call me almost everyday, asking if I was okay. They'd ask if I was starving. When I visited, they'd question me about any new clothes. They would tell me I should only wait for sales. They'd constantly lecture me about going out to eat. If I had to go out to eat, they would tell me how I should order. They actually told me not to fly home for Thanksgiving because I would be flying back for Christmas in just few weeks. Et cetera, et cetera, et cetera...
In hindsight, I would've rather starved then ask for that money. But I can't say I didn't learn a valuable lesson: never ask parents for money, EVER AGAIN.
Banks with TARP Money
The government has been giving a lot of shit to banks who have taxpayer money via the TARP. Among other things, the government wants to put a cap on compensation. More recently, Morgan Stanley and Northern Trust have come under pressure for sponsoring golf tournaments.
Gov't Mismanagement
Maybe, managers don't need to be paid much and banks don't need to sponsor events. But when you cap pay, you lose top performers to the competition. Many boutique banks are already reporting an influx of this type of talent. When you stop sponsoring events, you risk losing the reputation of your brand.
Like Depositing Money at the DMV
You see, the government wants banks to be run like the Post Office and the DMV. Dirty floors, limited hours, and long lines. It's cheaper to fund operations, but they'll lose a lot of business to the competition. And this is not what I want when my tax dollars are being used to invest in these very institutions.
Payback Time
This bank bailout came with a lot of strings attached. It turns out that government aid is actually a hindrance. Gov't influence is destroying the value of these firms. The managers realize this, and they'll never forget it.
Goldman Sachs and JP Morgan said they never wanted TARP money, and they plan to pay it back ASAP. Northern Trust says they're doing everything they can to pay back the TARP money. They HATE having the government this close.
A Bright Future
I've become much more responsible with my personal finances. Nowadays, I don't think just about earning money. I think about earning and saving enough money so that I never have to ask for money out of desperation from anyone ever again.
Once the banks start paying back the government money, I believe that they'll do whatever they can to keep the government away.
They would call me almost everyday, asking if I was okay. They'd ask if I was starving. When I visited, they'd question me about any new clothes. They would tell me I should only wait for sales. They'd constantly lecture me about going out to eat. If I had to go out to eat, they would tell me how I should order. They actually told me not to fly home for Thanksgiving because I would be flying back for Christmas in just few weeks. Et cetera, et cetera, et cetera...
In hindsight, I would've rather starved then ask for that money. But I can't say I didn't learn a valuable lesson: never ask parents for money, EVER AGAIN.
Banks with TARP Money
The government has been giving a lot of shit to banks who have taxpayer money via the TARP. Among other things, the government wants to put a cap on compensation. More recently, Morgan Stanley and Northern Trust have come under pressure for sponsoring golf tournaments.
Gov't Mismanagement
Maybe, managers don't need to be paid much and banks don't need to sponsor events. But when you cap pay, you lose top performers to the competition. Many boutique banks are already reporting an influx of this type of talent. When you stop sponsoring events, you risk losing the reputation of your brand.
Like Depositing Money at the DMV
You see, the government wants banks to be run like the Post Office and the DMV. Dirty floors, limited hours, and long lines. It's cheaper to fund operations, but they'll lose a lot of business to the competition. And this is not what I want when my tax dollars are being used to invest in these very institutions.
Payback Time
This bank bailout came with a lot of strings attached. It turns out that government aid is actually a hindrance. Gov't influence is destroying the value of these firms. The managers realize this, and they'll never forget it.
Goldman Sachs and JP Morgan said they never wanted TARP money, and they plan to pay it back ASAP. Northern Trust says they're doing everything they can to pay back the TARP money. They HATE having the government this close.
A Bright Future
I've become much more responsible with my personal finances. Nowadays, I don't think just about earning money. I think about earning and saving enough money so that I never have to ask for money out of desperation from anyone ever again.
Once the banks start paying back the government money, I believe that they'll do whatever they can to keep the government away.
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