Archive for October, 2008
Deleveraging Forces Liquidation
Friday, October 31st, 2008
“When investors are in trouble, they sell what they can, not what they would like to.”
The current issue of The Economist features an excellent article about the forced selling that has been the key feature of this bear market, caused by the violent trading days that have come in the wake of the deleveraging of many banks and hedge funds as they need to get their balance sheets in order.
Here are some excerpts:
… the speed of market movements suggests another factor has been even more important. When investors are in trouble, they sell what they can, not what they would like to. It looks as if they have been dumping a whole range of assets.
Emerging stockmarkets, for example, have lost more than half their value this year, while emerging-government bonds were yielding more than eight percentage points above Treasury bonds, at least until a rally on October 28th. Leveraged loans (debts to finance management buy-outs) are trading at just 70 cents on the dollar.
… Who is being forced to sell? One obvious answer is banks that have ended up owning far more risky assets than they would like. Barclays Capital put $970 million of leveraged loans up for sale in October; in the face of disappointing offers, it ended up selling just 30% of the lot. Other banks have been winding down their trading, a big source of revenue earlier this decade, in an attempt to reduce risk.
Another group of sellers is the hedge funds. After a disappointing performance this year, many are facing calls for redemptions from clients and are having to sell assets to raise cash. But their problems also stem from their use of leverage, or borrowed money.
People who read this post also read these:
Tags: Banks, Commodities, Dollar, Markets, Trading, Value
Posted in Markets | 1 Comment »
The Teflon Maple Leaf: TD Securities
Friday, October 31st, 2008
Eric Lascelles, TD Securities’ Chief Economics Strategist, points out that the Canada has the highest sovereign debt ratings in the world, in his latest report, “The Teflon Maple Leaf.”
Lascelles points to several key areas:
- A peek at the latest sovereign credit default swap data reveals that Canada is now regarded as quite possibly the world’s safest sovereign country in terms of the solvency of the country’s government.
- On the surface, this seems surprising given how closely Canada is linked into the U.S. economy and into commodity prices, and how both of those two erstwhile pillars have recently crumbled.
- But a closer look reveals that there may be some method to the market’s madness - Canada is indeed in a remarkably good position by several metrics, which we pursue in this piece.
- We should begin by noting that we believe Canadian bonds should continue to underperform the U.S. because sovereign debt concerns have not played a major role in the market to date, and because Canada’s economic prospects are somewhat better than in the U.S. and so less rate cutting will be needed.
- However, should the market begin to differentiate between countries based upon their debt-to-GDP ratios and other measures of fiscal pressure, Canadian bonds would ultimately be a winner in that contest. At present, there is little evidence that this is happening - case in point, both Japanese and U.S. debt continue to be happily purchased, yet the Japanese debt burden is extremely high and the U.S. debt burden is growing quickly. Nor do we necessarily expect this to change. But should the market grow more fickle about what it buys, there could be a quick reversal and this would prompt us to favour Canada over the U.S. in bonds.
- Third, throughout the credit crunch, Canadian bonds have been less volatile than in the U.S., and this speaks in no small part to the relatively more stable fiscal and economic foundations in Canada. We expect this trend of relative stability to continue.
The Teflon Maple Leaf, October 31, 2008, Eric Lascelles, TD Securities Inc.
People who read this post also read these:
Tags: Canada, CDS, Credit, Economics, Economy, Japan
Posted in Markets | No Comments »
Better To Be Late, Amid Credit Crises: Thomas Barrack, Jr.
Thursday, October 30th, 2008
Thomas J. Barrack Jr., billionaire and Founder of Colony Capital, which controls $39-billion in real estate assets, in his recent newsletter, “Is the world going to an [Extinction Level Event?” provides his assessment of the state of the markets, and shares the following:
Why the Banks Have Most Likely Not Hit Bottom
• Corporate earnings from most sectors will be weak and capex programs will be slashed.
• Hedge funds will continue to be tortured by redemptions and their interplay with banks was
incestuous.
• The effect of hedge funds pulling out of the market will chill many sources of corporate
finance - Redemptions are massive.
• Counterparty risk in the CDS market will remain a bit of a mystery.
> CDS was equally as bad at the plate as equity and debt players
> The governments infusion of equity collapsed the CDS spreads
• CDS payments and failures at levels that are unfathomable - watch Lehman reconciliations on
Tuesday, Oct. 21st.
• The housing market will remain anemic.
• Insurance companies, automakers, airlines and shippers are all in trouble.
• State and municipalities are also Fed borrowers.
• Corporate refinancings at $150 billion a quarter with no one to refinance.
• Massive margin calls on the titans of America which will cause collapse in the corporate
equities they own.
• Forced liquidations.
• LBO restructurings and covenant violations.
• No DIP financing for bankruptcies, only liquidations.Long-term Consequences
The good news is that all we care about at the moment is SURVIVAL. We need to fight every day to monitor and steward the best deals we can find — the ones we own. However, eventually we will need to examine the long-term effects of our triage.
• Huge inflationary pressures. Inevitable higher interest rates and taxes.
• Massive national debt and budget deficits.
• Are we deferring the pain like Japan did?
• $11.3 trillion national debt is really $55 trillion due to OBL (off balance-sheet liabilities).
• Implications of investment losses for pension funds and endowments?Bottom Line
The game is afoot and not over. Don’t panic and don’t be euphoric. The discoveries will be constant and unsettling. Fortunately, the world powers have committed to win it. Now we all have to figure out what exactly that means. Based upon our past experience at implementing bank takeovers and “distressed asset” management and dispositions, we suggest that we all buckle our seatbelts for a longer ride with lots of ups and downs before we arrive to safety.
From Bloomberg, October 10, 2008:
“For once, it will be better to be late rather than early,” Barrack said in a four-page letter to investors on Oct. 8, a copy of which was obtained by Bloomberg News. “There is no bottom because no one believes the messenger.’
“As all markets come to the realization that we are now in a worldwide systemic recession — not just a credit crunch — things may get worse,” the Los Angeles-based Barrack, 61, wrote in the letter, titled “In God We Trust — But Not Counterparties.”
“The massive restructurings, refinancings and re-pricings that will now take place, cascading from the financial world to the industrial world, will be legend. The complexities, repercussions and consequences to all parties are indeterminate.”
From Donald Trump’s Blog, the Donald quotes his good friend’s (Thomas Barrack Jr.) newsletter:
Why Can’t Anybody Find the Bottom?
It all boils down to trust! The mantra of the country is “In God We Trust–but not counterparties.” No buyer trusts any seller, banker, insurer or intermediary. No investor trusts any depository, insurer, broker-dealer or advisor. No Main Street citizen trusts Wall Street, and neither Main Street or Wall Street trusts the government. No counterparty in any transaction has confidence in the other. Values at every level have been artificially adjusted and when the air comes out of the “speculative hope certificates” everyone is pointing fingers at each other for fault and retribution.
The Worst is in Front of Us
Counterparties are renegotiating, borrowers are violating covenants, banks are finding any excuse not to fund existing commitments, insurers are negating liability, and renegotiations of responsibility and liability are being conducted at every level of the capital structure across the spectrum of companies.
There is no bottom because no one believes the messenger. With trillions of dollars of re-pricing occurring in these markets there is no hurry to catch the falling knife. There will be ample time once that last “dead cat bounce” has bounced and the government launches a coherent and consistent program. For once it will be better to be late rather than early.
Bottom Line: This is Not the Bottom.
Thomas J. Barrack Jr., “Is the World Going To ELE?”, October 14, 2008
Source: NakedShorts.com, Colony Capital
People who read this post also read these:
Tags: Banks, CDS, Credit, Dollar, energy, Fed, Housing Market, inflation, interest rates, Japan, Markets, Real Estate, Recession, spreads, Value
Posted in Economy, Markets | No Comments »
The Age of Prosperity is Over: Arthur Laffer
Thursday, October 30th, 2008
Arthur Laffer, the Reagan-era economist, famous for defining Supply-Side economics and developing what is now referred to as the Laffer Curve, has written an Op-Ed piece in the Wall Street Journal (October 27, 2008).
The Age of Prosperity is Over, October 27, 2008. This is a must read.
Seymour Schulich provides a foreword to this article:
“This piece from an American friend gives a clear picture of where the U.S. is heading and the price to be paid for allowing unregulated hedge funds and derivative activity.
The next commodity boom will set new price records. It is galling to see the u.s. dollar sell at a huge premium. I think our Canadian dollar is the best buy in the world today.”
Best Regards, Seymour Schulich
Here are some excerpts:
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
Regarding past Presidents and central bankers:
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
Hat Tip: John Budden, BeEarly.com
The Age of Prosperity is Over, Wall Street Journal, October 27, 2008.
People who read this post also read these:
Tags: Alan Greenspan, Banks, Dollar, Economics, Economy, Markets, Mortgage, REW, Value
Posted in Credit Markets, Markets | No Comments »
BRICs Lay Foundation Stability: Merrill Lynch
Thursday, October 30th, 2008
Alex Patelis, Head of Global Economics, Merrill Lynch discusses the strength of BRIC (Brazil, Russia, India, China) countries in the midst of the global credit crisis, and how well suited they are to recover strongly.
Patelis points out that close to 90% of global GDP growth will come from emerging markets economies in 2009, and goes one step further saying that he would not be surprised if global growth would come exclusively from emerging markets. They are underlevered, strong domestic economies, where consumption growth is being fuelled by income growth, and strong savings rates. In particular, he favours China and India.
Click image to watch video
People who read this post also read these:
Tags: Brazil, BRICs, China, Credit, Credit Crisis, Economics, Emerging Markets, GDP Growth, India, Markets, Russia, Savings Rate, Video
Posted in Markets | No Comments »
Resurgent Yen a Global Destabilizer
Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year:
- The Carry Trade and Markets? What is the relationship?,
- Resurgent Yen is Scary News,
- Why the selloff in commodities and emerging markets?,
- More Carry-Trade commentary
- More volatility coming and more ETF options
- Yen’s Strength [has been] profoundly negative for global markets
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
People who read this post also read these:
Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
Posted in Markets | No Comments »
China’s Bold Economic Policy Moves
Wednesday, October 29th, 2008
CLSA Asia-Pacific Markets, a division of Credit Lyonnais/Credit Agricole, are one of the best groups of analysts providing background on China.
Included here are excerpts from a report by CLSA’s macro strategist Andy Rothman regarding China’s recent decision to stimulate its housing sector.
Beijing is cutting mortgage rates to as low as 5.23 percent, reducing required down payments to buy a home from 30 percent to 20 percent for first-time buyers, comparatively still far above what most Americans have put up to purchase a house, and also lowering some taxes and fees.
CLSA views the government’s action as a move to get people to invest their wealth in real estate, which will serve to shrink an overbuilt housing inventory and help keep the broader economy from slowing down further.
“Beijing had succeeded in cooling off price growth, taking it from 25 percent year over year last fall to about zero year over year today. And, having achieved the objective of avoiding a bubble, the last thing the Communist Party wanted to do was crash the property market.
“(This week’s) policy changes will have two effects:
“First, they make home-buying more affordable, with a combination of lower interest rates, lower down payments and lower transaction fees.
“But the second effect is most important, as affordability has never been the big problem in China. (The) measures represent the government reversing its anti-property stance adopted one year ago. Back then, Beijing said, in effect, ‘we will do our best to depress prices and discourage home-buying.’ Consumers responded rationally by delaying purchases.
“Now, the government is saying, (my words), ‘we encourage home-buying and you should anticipate that property prices will start rising again.’
“With affordability good, household debt almost non-existent, and banks ready to lend (they are all controlled by the Party), homebuyers will return to the market in response to Beijing’s message.
“(The) move can be considered part of an overall effort to give a light stimulus to the economy, but in my view is primarily focused on the real estate sector. These changes also illustrate that the Party is capable of taking proactive steps to deal with a changing economic environment.”
People who read this post also read these:
Tags: Asia, Banks, China, Credit, Economy, Focus, interest rates, Markets, Mortgage, Real Estate
Posted in Markets | No Comments »
Mobius: Brazil will Lead Recovery
Wednesday, October 29th, 2008
In a webcast interview with Times Online UK, Mark Mobius discusses why he believes Brazil will lead the recovery in Emerging Markets.
Press Play to listen here:
People who read this post also read these:
Tags: Brazil, Emerging Markets, Mark Mobius, Markets, UK
Posted in Markets | No Comments »
Jeremy Grantham: Silver Linings and Lessons Learned
Wednesday, October 29th, 2008
Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, who manage approximately $120-billion in assets, well known among institutional investors but relatively unknown to retail investors. Here are some highlights from both parts of Grantham’s October 2008 newsletter “Reaping the Whirlwind,” and ”Silver Linings and Lessons Learned.”
Part 1, “Reaping the Whirlwind,” published 2 weeks ago:
“At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.
“Fixed income has wide areas of very attractive, aberrant pricing.
“The dollar and the yen look okay for now, but the pound does not.
“Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!
“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
“As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”
You can read ”Reaping the Whirlwind,” in its entirety by clicking here where Grantham has published his views on the fallout from the financial crisis and the investment opportunities he sees.
Part 2, ”Silver Linings and Lessons Learned”, published early this week:
“When asked by Barron’s on October 13 if we would learn anything from this ongoing crisis, I answered, ‘We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term. That would be the historical precedent.’
“That is unfortunately likely to be the case. But over the next several years at least, there are many silver linings and valuable lessons to be learned.
“Chief among the many benefits of this crisis are unprecedented opportunities for investing in some fixed income areas where some spreads are so wide as to reflect severe market dysfunctionality.
“As of October 18, we also have moderately cheap US and global equities for the first time in 20 years. Probably quite soon, global equities too will offer exceptional opportunities after the additional pain that is likely to occur in the next year.
“We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.
“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”
You can read ”Silver Linings and Lessons Learned,” in its entirety by clicking here where Grantham has published his comments on lessons learned from the credit crisis, as well as his proposed strategy.
Source: Jeremy Grantham, GMO, October 2008.
Courtesy: Prieur du Plessis, Investment Postcards
People who read this post also read these:
Tags: Barron's, Commodities, Credit, Credit Crisis, Dollar, EFU, Fixed Income, inflation, Investment Postcards, S&P 500, Silver, spreads, US Stocks, Value
Posted in Markets | No Comments »
Jeff DeGraaf: Turning Point Tuesday?
Tuesday, October 28th, 2008
Jeff DeGraaf, ISI head of technical analysis says Tuesday’s rally is far more credible than the past rally a couple weeks ago.
“This is the 6th best rally in the S&P since 1925,” he says. “If you look at volume and breadth it makes me more bullish than I’ve been in quite a while.”
With sentiment so bearish, “we have a condition that would set itself up for some type of mean reversion probably to 1100,” he says.
Short assets vs. assets shows that there is far more money betting the market down than up, and today’s rally is more reliable than the most recent one.
As a result, “the best market strategy right now is a call spread on the S&P selling the upside around 1100,” he concludes.
What’s the bottom line? Sell the rip!
To see DeGraaf’s entire analysis please watch the video.
People who read this post also read these:
Tags: S&P500, Technical Analysis, Video
Posted in Markets | No Comments »
Warren Buffett on Charlie Rose
Monday, October 27th, 2008
Warren Buffett, the Oracle of Omaha, interviewed by Charlie Rose earlier this month. This 55-minute in-depth interview is definitely worth watching:
People who read this post also read these:
Tags: Video
Posted in Markets | No Comments »
Paul Krugman on Charlie Rose
Monday, October 27th, 2008
Paul Krugman, 2008 Nobel Laureate for Economics, was interviewed by Charlie Rose late last week. This is worth watching:
People who read this post also read these:
Tags: Economics, Video
Posted in Markets | No Comments »
Howard Marks: The Limits to Negativism
Sunday, October 26th, 2008
Howard Marks, Chairman, Oaktree Capital Management, has recently published his latest memo The Limits to Negativism, sharing his most recent perspective on the market. For a certain strata of Wall Street denizens, Marks’ writings are equally anticipated to those of Warren Buffett’s.
Marks is the chairman of Oaktree, the low-profile but powerful L.A-based firm that manages more than $50 billion in alternative investments, mostly in fixed-income strategies. He’s been writing memos to clients since 1990, but a cult following developed after a missive he penned on Jan. 1, 2000 titled “bubble.com.” A few months before tech stocks imploded, Marks sounded a warning. “To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train,” he wrote. “To say they have benefited from a boom of colossal proportions and should be examined skeptically is something I feel I owe you.”
Back on March 23, 2008 we published excerpts from Howard Marks memo, The Tide Goes Out. This most recent memo is a fascinating read from one of the most important people in the market, and we feel that it is a must read. It is broken out into several well defined subsections, and we are sure that you will find it eloquent and enlightening. Here are some excerpts from the memo of October 15, 2008, The Limits to Negativism.
The Swing of Psychology
The last few weeks witnessed the greatest panic I’ve ever seen, as measured by its severity, the range of assets affected, its worldwide scope and the negativity of the accompanying tales of doom. I’ve been through market crashes before, but none attributed to the coming collapse of the world financial system.
It’s worth noting that few of the recent sharp price declines were associated with weakness in the depreciating assets or the companies behind them. Rather, they were the result of market conditions brought on by psychology, technical developments and their interconnection. The worst of them reflected a spiral of declining security prices, mark-to-market tests, capital inadequacy, margin calls, forced selling and failures.
For forty years I’ve seen the manic-depressive cycle of investor psychology swing crazily: between fear and greed – we all know the refrain – but also between optimism and pessimism, and between credulity and skepticism. In general, following the beliefs of the herd – and swinging with the pendulum – will give you average performance in the long run and can get you killed at the extremes.
The Black Swan
The message of The Black Swan is how important it is to realize that the things everyone rules out can still come to pass. That might be generalized into an understanding of the importance of skepticism.
I’d define skepticism as not believing what you’re told or what “everyone” considers true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick (an overused word these days); a follower, not a contrarian.
Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. The idea being marketed by an investment banker or broker has been prettied up for presentation. And usually it’s been doing well, making the tale more credible. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity.
Regarding Bear Markets
In “The Tide Goes Out” in March, I listed the stages of both bull and bear markets. I said that in the terminal third stage of a bull market, everyone is convinced things will get better forever. The folly of joining that consensus is obvious; people who invest thinking there’ll never be anything to worry about are sure to get hurt.
In the third stage of a bear market, on the other hand, everyone agrees things can only get worse. The risk in that - in terms of opportunity costs, or forgone profits - is equally clear. There’s no doubt in my mind that the bear market reached the third stage last week. That doesn’t mean it can’t decline further, or that a bull market’s about to start. But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing.
The excesses, mistakes and foolishness of the 2003-2007 upward leg of the cycle were the greatest I’ve ever witnessed. So has been the resulting panic. The damage that’s been done to security prices may be enough to correct for those excesses - or too much or too little. But certainly it’s a good time to pick among the rubble.
Marks often ends with a quote from Warren Buffett, and often it’s the same one:
The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
Make sure you read the complete text. It is a must.
Thank you Mr. Marks.
Source: Howard Marks, Oaktree, October 15, 2008, The Limits to Negativism
People who read this post also read these:
Tags: Black Swan, Markets, Silver, upw
Posted in Markets | No Comments »
Warren Buffett on Buying Now
Sunday, October 26th, 2008
Warren Buffett’s recent contribution to the New York Times is an excellent piece of what he is renown for. Make sure you read “Buy American. I am.“
Here is a nugget:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
People who read this post also read these:
Tags: Warren Buffett
Posted in Markets | No Comments »
Commodity Snapshot
Sunday, October 26th, 2008
Judging by the way that commodities prices have literally been “drawn and quartered” since July, its obvious that the market has been forced into liquidation by the massive unwinding or rather de-levering caused by the near failure in the credit market, and the assumption of debt by governments and central banks around the world.
Gold, notably, has traded lower during this anomalous selling-spree, even though it has long been regarded to be the real asset choice of those wanting to protect against financial risk. Perhaps its simply either that gold is highly liquid at a time of great need and is being sold off, or there has been a substantial amount of central bank intervention by way of shorting gold in the futures market. Either way, given the sheer amount of money supply growth, by contrast, gold is very cheap. Which brings us to platinum. Take a look at these charts:
Platinum, which is 30X rarer than gold closed at $793, only $83 premium to the price of gold. At peak earlier this year, platinum traded at a $1,300 premium to gold.
Oil is continuing to get cheaper. OPEC held an emergency meeting, agreeing to cut production by 1.5 -million barrels. News of this had no effect on oil prices, not even an intermediate effect; it closed on Friday at $64.15. Which begs the question: Is OPEC really a cartel? They seemed content to sit back and watch gleefully as the price shot up to 147, but have been unable to do anything to stop its slide to current levels, not even a substantial cut in production. Or so it seems.
Is the imminent food crisis over? Are fears of oil shortages overwrought?
Right now, it looks like nobody cares. They just want their money out, and at any price.
As Warren Buffett has put it so eloquently in his recent NYTimes Op-Ed piece, Buy American. I am, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Charts: Bespoke Investment Group
People who read this post also read these:
Tags: Banks, Chart, Commodities, Credit, Credit Market, Dollar, EFU, energy, Gold, Oil Prices, Platinum, Silver
Posted in Agriculture, China, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Gold, Markets, Oil & Gas, energy, inflation | No Comments »
Hendry: 10-20 Years to Recover Thanks to ECB
Thursday, October 23rd, 2008
Hugh Hendry, CIO, Eclectica Asset Management told Power Lunch Europe that it will take 10-20 years to heal from the current turmoil in markets. This is a must see interview.
click image for video
Here is the summary of the interview:
Hendry has avoided risk the last few years. His hedge fund is up 20% YTD and 42% this month. He has been investing more heavily in long term US treasuries recently. Hendry is looking at increasing the risk exposure in his hedge-fund’s portfolio.
He pointed to Mervyn King’s hinting toward the “R” word as putting it mildly, that the big “D” is in the forecast.
“It’s not a question of losing out in a recession, I’m talking about 10 or 20 years before we recover from this. This is a catastrophe,” Hendry told “Power Lunch Europe.”
Hendry made an example of Hungary. He lambasted the Hungarian central bank governor, Mr. Andra Simor, who described the situation as akin to “the slower antelopes in a chase being devoured by lions one after the other.”
This stems from Hendry’s past involvement in discussions with European financial officials about European convergence.
Hendry specifically alludes to discussions he’d had with the Hungarian governor in particular regarding the integration of Hungary into the EU and that he warned against the way in which they planned to finance their move with Swiss Francs and Yen via the carry trade.
While in violin-playing posture, Hendry claimed,”It’s tragic.”
“What it [the reel] doesn’t reveal is that I sat there, he just said, you’re rubbish. I’m Hungary. I’m going join the EU. My interest rates are 8% and they’re going to be 4%. You’re a fool, You can’t catch me Mr. Lion, I can outsmart you, I can outrun you. And I said “I dare you.”
I said, “I’ll give you a head start.”
They suspended all economic rationality. Mortgages were given to poor people in Swiss Francs and Japanese Yen. They took on an enormous foreign exchange risk, because they thought that the little antelope could outrun the lions of economic intelligence. And you can’t.
Hendry said, “You can game the system, but you can’t beat it.”
There’s nothing crude, there’s nothing moral here. They were wrong.”
Dominoes. Iceland, Hungary, Latvia, Bulgaria, Eastern Europe, the dominoes are crashing. There’s economic disequilibrium. The economic chaos which we ignored for 5 years because we were bribed to ignore it, because they paid high interest rates. It was a bribe to ignore reality. But in a world where everything is falling down, the dominoes just crash. There is no answer.
Hendry’s beef is with EU and UK regulators and officials.
“I’m the heretic. I was laughed at, scoffed at, dismissed, ignored, at a time when investment bankers who advise governments, and who manage money, took reckless risk upon reckless risk.
We reached a point at which the Royal Bank of Scotland had a bigger balance sheet than the economy. Everyone looked the other way. Its not a question of losing out in a recession. I’m talking about 10 or 20 years before we recover from this. This is a catastrophe.
Forget about Mervyn King, UK Finance Minister, saying the “R” word. You wait until he says the “D” word.; depression. We had interest rates in the UK at 5% for a year as everything collapsed.
There’s a notion of stall speed. Never allow an aircraft to reach stall speed. That is the pledge central bankers must make. ” We won’t allow the economy to reach stall speed,” because everything below that you’re pushing on a string.
Interest rates in the UK will be 2% at the end of next year, and they’ll be 2% at the end of the year after that.
The ECB, the most hideous, intellectually conceited group of bankers, raised interest rates this summer; history will send the ECB to damnation because they have sent us to damnation. That’s the reality.
Thank you Mr. Hendry.
People who read this post also read these:
Tags: Carry Trade, COT, ECB, Economy, energy, Euro, Fed, Hugh Hendry, interest rates, Japan, Markets, Mortgage, Recession, SMI, UK, Video
Posted in Markets | No Comments »
Andrew Lahde: Sayonara!
Wednesday, October 22nd, 2008
Andrew Lahde, the hedge fund manager, who last year, was catapulted into the limelight when he successfully returned 886% to investors, betting against subprime mortgages, closed up shop last month, claiming that counterparty problems were making it far too difficult and stressful for him to want to keep on going.
Below is Lahde’s farewell and f— you letter to those who deserve it.
Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.
I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.
Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.
With that I say good-bye and good luck.
All the best,
Andrew Lahde
People who read this post also read these:
Tags: Bear Stearns, Canada, capitalism, energy, Euro, Focus, FT.com, Mortgage
Posted in Markets | No Comments »