Posts Tagged ‘Financials’

What does $700-billion buy?

Thursday, October 9th, 2008

By the time the Treasury makes its first investment in the Financial sector $700-billion may be enough to buy the entire sector. Take a look at the chart below. As of today, $700-billion buys you 55% of ownership of all financials.

What does $700-billion dollars buy?

Chart: Bespoke Investment Group

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Tags: Chart, Dollar, Financials
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Highs and Lows of the Week

Friday, September 19th, 2008

The following chart shows how the ten sectors of the S&P 500 performed this week in the context of the government’s credit market intervention. Only energy (on oil’s price recovery) and financials (on bailout) made progress while eveything else was down.

It was a crazy week in stocks too. Merrill Lynch (MER) was the best performer on news that it was being acquired by Bank of America (BAC) and AIG was the worst performing stock on news that it would receive a two-year $85-billon loan from taxpayers.

Charts: Bespoke Investment Group

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Tags: Chart, Credit, Credit Market, energy, Financials, Miscellaneous, S&P 500
Posted in Markets, inflation | No Comments »

Rob Fraim’s Call on Energy

Wednesday, September 17th, 2008

September 17, 2008 - The fall in the price of oil during the past two months may not have surprised everyone, but its dramatic nature and swiftness was unexpected. One analyst who got it right was Rob Fraim of Mid-Atlantic Securities. With crude down by almost 40%, a new report on energy has just been published by Rob.

This report is worth perusing for two reasons: (1) Rob has a good long-term track record in this sphere, and (2) a common-sense approach and findings with which I mostly concur. Here are some excerpts from his current report.

Today I will tackle one of the (many) issues with which market participants are grappling. And I will have a sector recommendation that has “hero or a goat” implications for the writer of this missive.

I am cogitating on the disruptions and disasters in the financial sector – and the implications for the broad market. At some point you will hear from me on that subject as this mess unfolds and I feel that I have actionable thoughts to share.

Today though – we talk energy.

I’ll probably get tons of e-mail taking exception to my conclusions and citing multitudinous arcane bits of Economist World data. And I will gladly receive these and will appreciate the input. But that doesn’t have to mean that I will necessarily agree or find reason to change my conclusions.

I am approaching this … and I don’t want to use the word “gut feeling” – given that I believe that I have sound reasons for my opinion on this – but there is a certain amount of “feeling” involved in the process and conclusions. What I see in market action, what I hear from clients, what I sense in the mood of market participants, what I observe in the market’s reaction to events. And with all due respect to economists, the market is often more art than science. So I don my proverbial beret, pick up my figurative brushes and paint, and present my art project. Some fact, some feel, lots of opinion.

What a bleak mood in the energy patch. What a sickening slide. What the h*** happened? What an … opportunity?

Back on June 10, in a piece I wrote entitled “Oil – Whither Goest Thou? ”I gave the opinion that crude oil – then at $136 a barrel was overextended and due for a correction. I said that the $100 or so area looked about right. Of course oil promptly rallied to $147 or whatever it was and I was a stoopie-head for a little while. But since then, well … hey, hey what a genius, huh?

You don’t believe that I actually got something right? OK, you force me to quote/copy/paste. Here is an excerpt from the June 10 flash in which I recommended lightening up on energy stocks:

“Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.

“This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.

“… It would not surprise me to see $100-105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.”

Of course after that I went on to elaborate brilliantly (oh all right it wasn’t that brilliant, but I did elaborate) on the reasons why I was – at that time, in June – becoming cautious on energy. Recapping (sans the details) the reasons for the selling recommendation were:

a) Demand destruction resulting from changing consumer and transportation industry driving habits and vehicle choices

b) The potential for a rise in the US dollar

c) Slowing demand for China with the Olympics build-out winding down

d) Modest production growth – specifically from Russia

e) Comments from the Saudis saying that there was no justification for the rise in oil prices that had occurred.

Hmm … not too shabby on those points if I do say so myself.

And then I stated the following:

“When the crowd is virtually all leaning in one direction on a sector, you have to take advantage of it at some point. You just have to. Right now everybody says that financials are garbage and energy is gold, and we of course know all of the reasons for both. But just you wait and see… 12 months, 18 months out – when quality banks have risen 30% in price – the analysts will fall in love with them again. And if energy stocks go down 20% the cries to sell will erupt. We have to take the opposite side of the masses sometimes. We. Just. Have. To.”

So as it turns out I was reasonably on target with those comments and the call to reduce energy holdings for a while. (You know what they say about even a blind squirrel finding an acorn every now and then.) Now the burning question on the minds of my readers is this: “What now, Rob?” Well, again, I don’t know how many minds are burning and hearts yearning to hear the answer, but I’ll take a crack anyway.

I don’t expect a huge rally in oil in the near term, but I do believe the correction has just about run its course. Recently when crude approached $100 on the way down, OPEC began the “defending” process by announcing some production cutbacks – hoping to maintain $100 as floor of sorts. But now with the disruptions across all segments of the market, oil prices have moved right through that level – particularly yesterday as panic hit all markets, trading below $92 as I write this. I would not be surprised to see OPEC coming back with more production curtailments.

I am somewhat more bullish on natural gas prices than many analysts I have read, more based on seasonality, but also because of increased focus on natural gas use. (We’ve all seen the Boone Pickens/Aubrey McClendon ads. And we are approaching an election – what politician is going to badmouth natural gas? Heck, Nancy Pelosi said that it isn’t even a fossil fuel. As to the seasonality play, I have had some success through the years in buying natural gas stocks in the fall prior to our entering the heating season for a trade out as spring approaches.

So, I’m kind of reasonably positive on oil itself – the commodity – for the short term. I’m growing more bullish on natural gas – against the opinion of some smart people who feel otherwise.

The key point though is that I am getting significantly more interested in the stocks of the energy companies. Why? Because it doesn’t take $140 oil for the energy companies to make a lot of money. They do very nicely at $100 and the resultant decline in gasoline prices (once we get past this hurricane pricing anomaly) will calm down some of the finger-pointing and windfall profit-espousing by the politicians.

And the prices of the energy company stocks – oil and gas producers, drillers, coal companies, energy trusts, MLPs, alternative energy … the whole bunch of them – have just absolutely plummeted over the last couple of months and it (again I hate to use the word but here I go) feels like a bit of a selling crescendo taking place.

I have made the comment to a number of people the last few days that it seems that we have margin clerks running billion dollar portfolios. We know there was a liquidation of a large energy-focused hedge fund recently. The sector action of late feels/smells/acts like there is more forced selling taking place. And as one astute observer pointed out to me, in addition to the margin clerks, you have to factor in the risk management people at the funds. Forced selling of another sort. On top of that there seem to have been some significant fund redemption requests at hedge funds – particularly by fund-of-fund groups, which are notoriously fickle and prone to pull out.

So now that everything energy-related has been hammered we hear all of the after-the-fact cautionary/bearish thoughts: China doesn’t want any energy anymore … all commodities are going to fall another 50% they say … the economy is going to totally destroy energy demand … we’re all going to bike to work and cook on campfires … we’re going to be awash in cheap oil … blah, blah, yadda, yadda.

We’ve heard it all lately. I’m just not totally buying it. I’m not convinced that the big picture has shifted totally.

I believe that the stocks of energy companies have more than discounted the decline we have seen and then some. 50% declines in stock prices have not been out of the ordinary. I don’t think you have to be a raging, snorting bull on the commodities themselves to believe that the producers of energy products and services will be very nicely profitable – even at today’s lower-than-before prices for oil and gas.

And my very astute friend Jeffrey Saut at Raymond James (who has been spot on about energy and who has become more bullish of late) pointed out something very interesting yesterday. Evidently China – the previous “buyer at the margin,” the force that kept sopping up all supply for so long, which contributed to the big rise in energy before – has been pretty much out of the energy markets for a couple of months. The reason: pollution concerns during the Olympics and the Paralympics (the games for those with disabilities.) Many factories and industries were shut down and idled during that period so as to improve air quality during a time of so many visitors and so much world attention being focused on China. (We know China is image-conscious. Just ask the little girl who was not considered pretty enough to sign the anthem live and was replaced by a more attractive lip-syncher.)

The Paralympics end on September 17, and this means that China may very soon reopen manufacturing and transport – particularly so since there is a massive earthquake rebuilding to be done. And they could well be back in the energy market as buyers almost immediately – like on the 18th. The implications for the energy commodities are positive and a psychology shift in those markets could quickly spill over to the beaten up stocks of the energy companies.

Big picture, let’s not forget a few key energy points:

1. Production in many places is peaking or has peaked. Mexico appears to have peaked and Russia – a recent source of supply and the currently the 2nd largest oil producer – is doing things in a way that is short-term profitable for them, but long-term counterproductive. They are investing very, very little in new exploration (the capital intensive part of the business) – opting instead to try to squeeze out production from existing fields. That’s cheaper production for them in the short run, output has peaked and they are depleting those fields. Ultimately, they stand to be left with played out reserves and few new prospects – since they are skimping horribly on cap-ex and exploration now. It’s like the landlord who spends all the rent and doesn’t maintain the building. Eventually it catches up to him as the structure falls apart. Or the pharmaceutical company that does no R&D even though patents are expiring. Russia is milking the cow but not feeding it.

2. The low-lying fruit in the oil business has been picked. The potential “super giants” being explored and developed now – Brazil’s Carioca/Sugarloaf and the Bakken formation in the US for example, while exciting are also challenging and very expensive to produce on a per barrel basis. Same with the huge Canadian tar sands projects. Tar sand fields have been known of for years, but until oil reached high prices it was economically impractical to extract oil there.

There is still plenty of oil out there, but it is not the cheaply available, “poke a stick in the ground and watch it flow” type of oil. Prices will have to remain high to justify development.

3. While the world got a bit “China and India crazy” there for a while as regards energy consumption, the basic premise remains valid. As these huge populations become more urban and industrialized in nature – with cars, the need for electricity, etc. – there will be growing demand for the foreseeable future. Oh there will be the month-to-month ups and downs of course and everybody will obsess about that. But big picture – demand grows.

4. Alternative energy sources – and look, I’m a big believer that we have to develop new ways to provide power – are a long way from meeting our energy needs. And while they may do so one day, for now those needs must be met from both traditional (fossil) and progressive (alternative) sources. I believe that we need to break the oil addiction via new sources. But that is a process over a generation of time, not an immediate reality. For now, to quote Mr. Pickens, we have to drill, drill, drill.

5. We need more electrical power. Badly. Some experts say as many as 30 new power plants are needed ASAP. We might be oil addicted, but we are electricity junkies of the first magnitude. Computers, multiple TV sets, cell phones, iPods, recessed lighting all over the house, floodlights in the yard, plug-in cars on the way, so many appliances and gadgets in every home that it would have seemed like The Jetsons to a 1960s observer. And what runs power plants? While it might be alternative sources as time goes on, right now and for a good while to come, it’s fuel of the old-style. Natural gas and coal mostly.

6. And speaking of natural gas, I like Pickens’ idea of automobile conversion. We have lots of natural gas produced domestically and it is comparatively clean and certainly readily available. And what does that mean for the future price of natural gas? The same natural gas that runs the power plants being used to run our cars? Not too hard to figure out.

7. If this financial system mess puts pressure on the US dollar that has the obvious effect of causing oil prices to rise, all other things being equal, as it will take more dollars to exchange for one barrel.

By the way, I recently talked to a coal industry contact – a coal broker – who said that although the stock market doesn’t indicate it, the coal business is not bad at all. Pricing is off of the peaks, but still pretty strong and holding. He said that a lot of buyers – utilities in particular – have been playing a waiting game, looking for lower prices. But with winter approaching they don’t have much time left to get their supplies locked in. Some of the buyers have tried to play hardball with him – saying that they would just buy cheaper from someone else. But there isn’t much of “someone else” out their. Demand season is coming up and there’s not a lot of excess.

Additionally, people forget that most coal is sold under long-term contracts, not in the spot market. So the stock market got spooked about falling oil and gas prices and extrapolated that to coal – when in fact these short-term energy market gyrations have less impact on earnings than they do in other energy areas. Heck, lower fuel prices actually kind of help the coal companies in one regard since they are big fuel users for their equipment.

Coal got nutty a few months back and stock prices were way overdone to the upside as hot money chased the relatively small market cap of the whole sector. But after 50% to 60% declines across the board for the coal stocks over the last little bit? Getting very interesting I think.

Oil, coal, natural gas, alternative energy sources, E&P companies, drillers and service companies, energy trusts, MLPs…all have their own particular appeal in a portfolio. I cannot discuss specific companies here, but if you would like to know which stocks I like in which areas, drop me a note or give me a call.

I thought about finishing up this little blurb and sending it out earlier today, but it has been busy – for obvious reasons with the whole Lehman/Bank of America/Merrill Lynch/AIG/Washington Mutual/etc. etc. mess today. And as it turns out it was just as well, since the energy sector (using oil as a proxy) and the market in general have clearly been weak. Some will attribute the $4 drop in crude today to economic weakness and upcoming lower demand. I tend to believe that it is more a function of forced selling, an aversion to risk in the markets, and the old “sell what you can not what you want to” phenomenon. I don’t know exactly where oil bottoms, nor would I be likely to be correct in pronouncing an exact moment for the general market decline.

But I am intrigued enough by energy sector valuations and energy sector prospects to recommend “re-loading” positions starting right now.

As always, I hope that I’m right in the first minutes and days after such a call. But I probably won’t be. However for the weeks and months ahead … I have a good level of confidence in the ultimate success of the idea.

Source: Rob Fraim, Mid-Atlantic Securities, September 16, 2008.

Courtesy: Investment Postcards

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Tags: Banks, Brazil, China, Commodities, Crude Oil, Dollar, Economy, energy, energy sector, energy stocks, Financials, Focus, Gold, India, Investment Postcards, jeffrey saut, Market Cap, Markets, Mexico, Mid-Atlantic, Natural Gas, Oil and Gas, Oil Prices, pickens, Rob Fraim, Russia, The Big Picture, Trading, US Dollar
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Energy-Led Correction: Capitulation Selling Underway?

Saturday, September 13th, 2008

BCA Research postulates that commodities are in a bull market consolidation and that it does not appear to be over. The consolidation of commodities prices has caused a fair bit of confusion for those who are long commodities or commodities stocks. In the meantime, financials appear to be doing the opposite, staging a bear market rally.

This activity in the market provides a clear view of the unfolding dichotomy; Commodities Bull vs. Financials Bear. The following piece from BCA does a good job of describing the commodity side of the story.

10:42:00, September 11, 2008

The recent commodity price weakness is a bull market consolidation but does not appear over. Signs of continued cyclical downside risks are allowing for a selling climax.

The deteriorating cyclical demand backdrop for oil and related products, signaled by declining U.S. demand and decade-low SUV sales, allows for a washout in energy prices. Commodities could overshoot to the downside if economic weakness continues to spread, causing a further liquidation in global decoupling bets. In addition, the waning “paper demand” for commodities as an asset class is a near-term wild card. The U.S. political attacks and the price correction itself may spur further liquidation before the wave of index-related inflows resume. That said, a notable offset is that lower energy and food prices will ultimately allow global policymakers to become more dovish and protect growth. Bottom line: It is unlikely that the cyclical trough in commodity prices has been reached. A renewed dollar plunge, improved Chinese economic expectations and/or geopolitical stress events would bring forward the bottom. Barring that, commodities are likely to face downside risks until later this year.

Source: BCA Research

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Tags: asset class, Commodities, Dollar, energy, Financials, Food prices
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Donald Coxe’s Investment Recommendations, September 2008

Saturday, September 13th, 2008

We are big fans of Donald Coxe, Chief Strategist, BMO Capital Markets, whose track record on calling the “macro” market conditions and opportunities has, more often than not, been reliable. In this period, where it appears the market has no direction, his views are especially welcome.

Here, we provide a summary of his recommendations from Basic Points, September 2008, for your review.

The current commodity bear market will turnaround when financials rollover.
The “Frannie” bailout is Act II in a play whose plot will thicken
When financials roll over, gold and gold stocks will recover
Inflation remains above central bank targets
Oil will fall further. OPEC production cut not impressive enough to support prices.
Any civil strife in Nigeria could put upward pressure on oil
We expect oil to trade between $80 -130/bbl next year (though not a reliable forecast)
We are more confident in predicting $150/bbl in three years
The corn crop will be a “barn buster.” Corn in “modest” contango for next two years. Translation: Fertilizer, seed and equipment stocks are relatively cheaper now, than in the past four years.
The sharp drop in oil prices and “dramatic” bank bailouts should have been a catalyst for market
S&P needs to break 1310 to “take away the bearish condition of market.”
Real yield on 10-yr Treasuries is -145 bps. Treasuries are overvalued
Biggest near-term surprise could come from recovery in Natural Gas, barring sunspot activity, and/or historic correlations of oil/gas reassert themselves.
C$ under pressure from falling commodity prices, but Canada’s fiscal health makes C$ a strong alternative to the greenback
US election campaign could be a risky period geo-politically as “foreign adventurers” may try to take advantage of the distraction. Rogues should remember that Bush is still president for another 4 months
We have no idea how long it will be until we can say, “Wow, I wish I’d loaded up then!” on commodity stocks. “We remain certain that day is coming.”

The complete text can be read here.

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Tags: Basic Points, BMO, BMO Capital Markets, Canada, contango, Correlation, Donald Coxe, energy, Financials, Gold, gold stocks, inflation, Markets, Natural Gas, Oil Prices, upw, Value
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Ackman Spares Lehman, Sounds Off on “Frannie”

Friday, September 12th, 2008

Make sure you watch this interview from September 10, 2008, when Bill Ackman guest hosted CNBC’s Squawk Box following the Frannie Bailout:

William Ackman, activist-Hedge Fund Manager of Pershing Square Capital Management, appearing on CNBC’s ‘Squawk Box’ expressed compassion for Lehman’s woes, stating that they had been picked on enough. He has been a big winner in this year’s credit market debacle, having been short Freddie and Fannie paper and investing in credit default swaps in both throughout the turmoil, as well as being short Lehman Bros., via put options, more recently.

Pershing bought put options on Lehman as a market hedge rather than a bet against the company.

Ackman has been outspoken critic, crusader, and speculator, putting his neck and reputation on the line, while blowing the whistle on the subprime mortgage, and credit default swap mess at the monolines and banks. We have followed Ackman’s views and actions during the “Nightmare on Wall Street.” Seems only a few people have wanted to listen while guys like Ackman and GreenLight Capital’s David Einhorn, have gone against the grain of those who claimed the “end of the crisis was in sight”, or that we had “rounded the corner on the problem.”

The pair have been vilified at times for outing discrepancies in moneycenter bank financial reporting, as hundreds of billions of dollars were bring written down.

Watch this video from June 5, 2008, where Ackman and Einhorn make a rare appearance together on CNBC’s Squawk Box.

The “Frannie” Bailout was also discussed. Earlier this year, Ackman proposed a solution for Freddie Mac and Fannie Mae that was strikingly similar solution to the government’s bailout plan, with a few differences.

Ackman used his hour on “Squawk Box” to also sound off about federal regulators’ seizure of Fannie Mae and Freddie Mac. While he praised regulators’ move to look beyond financial statements in determining Fannie’s and Freddie’s solvency, he said the bailout is only a temporary solution, which he said was reflected in the market’s extreme volatility over the past two days. He said where the regulators went wrong is that the restructuring involves the government investment taking junior status to an insolvent capital structure. He added that the “equity is deeply out of the money” because Fannie’s and Freddie’s assets are not greater than their liabilities. He reiterated his plan to eliminate subordinate debt at the mortgage intermediaries and convert some portion of the senior debt to equity, creating for solvency.

Ackman took his plans for Freddie and Fannie a step further, calling for a merged “Super GSE”, which CNBC’s Carl Quintanilla coined “Frannie.” Ackman said merging the mortgage giants would create economies of scale and improve their liquidity. And where would Frannie live? Ackman proposed Frannie move out of the Beltway and onto Wall Street in close proximity to the major investment houses where it could potentially poach talent.

Ackman has not only been a recipient of winfalls from the fallout in financials, he has also been incredibly successful on the long side of the market. Ackman is reported to have earned a $600-million gain this week, resulting from his investment in Longs Drug Stores by CVS Caremark. In the following video segment from September 10, 2008, Ackman, who makes a point of saying that he “rarely talks about stock recommendations,” discusses what he deems instead to be an “interesting opportunity.” Make sure you watch this; its very interesting.

Ackman also advised investors to go long on Longs Drug Stores, which had agreed to be acquired by CVS Caremark Corp. for $71.50 per share, or $2.9 billion, including debt just a week after Ackman filed a 13D with Longs disclosing that he had purchased a roughly 8.8% stake in Longs in common stock between the end of June and the end of July, paying between $40.47 and $45.92 per share and boosted his stake in the company to 23.6% through total return swap arrangements.

If you haven’t seen these interviews, make sure you do. They’re highly informative.

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Tags: Banks, Credit, Credit Market, Dollar, energy, Fannie Mae, Fed, Financials, Freddie Mac, Grain, GSE, liquidity, Mining, Mortgage, Value, Video
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Few Gain, Many Lose from Frannie Bailout

Monday, September 8th, 2008

UK Banks Top Gainers Post Frannie Bailout

UK bank shares are having a huge day (above are the 9:20 a.m. (Eastern Time) prices of UK bank stocks, September 8, 2008), following this weekends Frannie bailout announcement.

It appears that the short squeeze in bank stocks is in this morning’s trading.

Here are some excerpts from the saavy folks at DealBook.

Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.

Golden Parachutes all around:

Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay…

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million

Its not clear that these former Frannie executives will actually get compensated.

But worst of all, long investors in either are getting killed:

The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.

As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares. Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment.

“I am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,” Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller, told The Times.

And the few investors that gain:

Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to The Times, which cited a person with direct knowledge of a recent investment letter.

In the end, American taxpayers have been handed the bill, helping the rest of us around the world sleep a little better at night, now that a great deal of credit risk has been been mitigated.

Thank you Secretary Paulson.

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Tags: Banks, Fannie Mae, Financials, Freddie Mac, GSE, Paulson
Posted in Banks, Credit Markets, Economy, Financials, Investment Strategy, Markets | No Comments »

Let Fannie, Freddie Fail: Jim Rogers

Monday, September 1st, 2008

Fannie Mae and Freddie Mac should not be saved if they go bankrupt, and economic stimulus packages do more harm to economies in the long run than good in the short term, Jim Rogers, CEO of Rogers Holdings, told CNBC Friday, August 29, 2008 at 3:15AM from Singapore.

View Part 1, Click Play

View Part 2, Click Play

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Tags: Derivatives, Fannie Mae, Financials, Freddie Mac, Jim Rogers, Mortgage
Posted in Banks, Credit Markets, Economy, Financials, Geo-political, Gold, Markets, Monetary Policy, Strategy, US Stocks, wisdom | No Comments »

Would Benjamin Graham Buy Financials Today? [no!]

Sunday, July 27th, 2008

Jason Zweig has an interesting column today in the WSJ:

Inquiring minds want to know: What would Graham do?

This column, named after Benjamin Graham’s classic book on value investing, launched only two weeks ago — and several readers have already asked whether Graham would be loading up on financial stocks now. Unfortunately, I can’t ask the great investor directly. Graham died in 1976. But a close look at his writings suggests that the answer is unambiguous: No.

That may seem surprising. After all, by mid-July, the Dow Jones Wilshire Financials index was down 46% from one year earlier. It’s such big red numbers that get value investors licking their chops.

Even after rising over 30% in the past week, the 1,001 financial stocks tracked by Dow Jones Indexes are trading at an average of just 1.1 times their book value (assets minus liabilities). Before bank stocks climbed part way out of the crypt, you could buy Wachovia Corp. for 51% of reported book value. If that isn’t Ben Graham territory, what is?

To see why I think Graham would sit on his hands, you need to understand his crucial distinction between investment and speculation. “An investment operation,” he wrote in his first book, Security Analysis, “is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Trained as a mathematician and Greek and Latin scholar, Graham crafted his definition with the stark rigor of a Euclidean theorem. He wanted no weaseling about what he meant. All three, not just one or two, conditions have to be met: Your analysis must be thorough, your principal stay safe and your expectations be reasonable. “Thorough analysis” demands “the study of the facts in the light of established standards of safety and value,” while “safety of principal” means “protection against loss under all normal or reasonably likely conditions or variations.”

You cannot even pretend to be protected against loss while real estate prices — the wobbly foundation for most financial stocks — are still crumbling.

Nor can you study the facts when it’s unclear what the facts are. Each quarter, the banks set money aside in reserve against losses on their loan portfolios and say they believe those reserves should be adequate. The next quarter, they find out they were wrong. Loan-loss provisions at Washington Mutual, for example, have mushroomed from $967 million to $1.5 billion to $3.5 billion to $5.9 billion over the past four quarters.

Graham says that “You must never delude yourself into thinking that you’re investing when you’re speculating” is a reminder that no one really knows when the real estate crisis ends, or what the true situation of the financials firms balance sheets really are like.

As Zweig states, “For many banks, the nightmare has only begun.”

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Tags: Bank stocks, Banks, Fed, financial stocks, Financials, Real Estate, Trading, Value, Video
Posted in Markets | 1 Comment »

Video: Nouriel Roubini (3 Parts)

Friday, July 25th, 2008

Nouriel Roubini, NYU Stern School of Business, opines about the market, the credit crisis, and the housing market in this 3 part interview:

Bear Market Only Half Over, But It’s Not Armageddon

More Than $1 Trillion Needed to Solve Housing Crisis

‘They’re All Toast’: Roubini Says Brokers, Even Goldman, Can’t Stay Independent

Sources:
Video Interview on Tech Ticker: Roubini: “Bear Market Only Half Over, But It’s Not Armageddon”

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Tags: Banks, Brokers, Economics, Financials, Housing Market, Nouriel Roubini, RGE Monitor
Posted in Credit Markets, Financials, Gold, Markets, Monetary Policy | No Comments »

Horizons BetaPro Bull Plus and Bear Plus ETFs

Friday, July 11th, 2008

Canadian investors looking for the equivalent of the popular Proshares which are available on American exchanges can do so via Horizons BetaPro ETFs which trade on the TSX. These ETFs allow investors with long-only accounts to easily bet against the market or hedge their bets. The Horizons BetaPro ETFs provide either double or double the inverse of the daily returns of the asset classes they track. In the current market environment, the HBP Financials Bear Plus ETF (up 31.4%) and HBP Nymex Crude Oil Bull Plus (up 113.8%) have been huge winners.

These ETFs are advised by ProFund Advisors LLC, founder and PM of Proshares.

Below is a listing of Horizons BetaPro ETFs and their YTD returns. YTD returns are not available for the funds launched this year.

HBP ETFs

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Tags: Agricultural Grains, Bear Plus, Bull Plus, ETF, Financials, Horizons BetaPro, Howard Atkinson, JovFunds, Mining, Natural Gas, Nymex, Proshares, S&P 500, TSX 60, ultrashort, US Dollar
Posted in Agriculture, Canadian Stocks, Commodities, Crude Oil, ETF, Emerging Markets, Financials, Fixed Income, Gold, Markets, Oil & Gas, US Stocks, mining stocks | No Comments »

The Bonfire of the Vanities, the Sequel

Thursday, June 26th, 2008

June 26, 2008 - Andrew Ross Sorkin, of the New York Times, writes about how prophetic Tom Wolfe’s declaration was on the day of the Blackstone debut: “We may be witnessing the end of capitalism as we know it.”

When you get to the end of an era, marking the timeline with watershed events is always therapeutic. Here are some excerpts from Sorkin’s NYTimes article:

… Mr. Wolfe must be in attendance — was that the Blackstone Group, the big private equity firm, was minutes away from going public, the largest initial public offering in the United States since 2002. (At the time, he told The New York Observer that a friend was giving him a tour.)

Just then, a CNBC reporter pulled Mr. Wolfe aside to ask him what he made of all the hubbub. Mr. Wolfe paused for a moment to contemplate his answer.

And then, with a wry smile, he delivered a prophetic declaration: “We may be witnessing the end of capitalism as we know it.”

One year later …

Blackstone’s stock has gone nowhere but down since it went public, dropping nearly 50 percent from its high the day it started trading. But that’s the least of it.

The once mighty Wall Street investment banks have been brought to their knees, sending out pink slips to more than 83,000 employees worldwide, racking up billions of dollars in losses as a results of their foolish forays into subprime mortgages. Bear Stearns all but went out of business before being “saved.” Some hedge funds have gone belly up.

Those lords of private equity, many of which were preparing to follow Blackstone into the public markets, have been put on semipermanent hiatus. (Kohlberg Kravis Roberts & Company refuses to withdraw its I.P.O filing, almost a year after submitting it, with no immediate hope in sight.) Their deal-making has all but stopped.

As Mr. Wolfe nicely put it, “It sounds like even the firms that aren’t in trouble are in trouble.”

And, what of credit …

And yet, there has been a perverse, and misguided, optimism that somehow the situation will improve in the second half of 2008. How? Sure, the big banks may take fewer write-downs — but there is no way of knowing that. The news a few days ago that the big bond insurers were being downgraded will create new havoc — and losses — for holders of toxic subprime debt. Indeed, the bigger issue is what kind of business is going to generate any return for its investors. When you can’t lend or trade — and you can’t invest with the leverage that juiced returns to support seven- and eight-figure bonuses — how exactly are you going to make money?

“It has always interested me that the word ‘credit’ comes from the word ‘credere,’ which means ‘to believe,’ ” Mr. Wolfe said. “It only works if people believe in it.” He’s right, of course: one reason the credit markets have tanked is that people don’t believe anymore.

Complete Article:

A “Bonfire” Returns as Heartburn, Andrew Ross Sorkin, NYTimes, June 24, 2008

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Tags: Andrew Ross Sorkin, Banks, Bear Stearns, Blackstone, capitalism, Dealbook, Financials, Markets, Tom Wolfe
Posted in Banks, Credit Markets, Economy, Financials, Markets, Satire, US Stocks | No Comments »

Don Coxe’s Recommendations (Basic Points, 04/29/2008)

Monday, May 5th, 2008

May 5, 2008 – Here we feature the recommendations of Don Coxe, BMO Capital’s Chief Investment Strategist. As usual, his paragraphs are eloquent and provide significant guidance.

Don Coxe’s Investment Recommendations, excerpted from Basic Points, The Hinge of History II, April 29, 2008

1. In long-only equity portfolios, continue to underweight Wall Street banks and others that have been reporting high exposure to perfumed products of indeterminable value, including those which last year revealed—under duress— high exposure to SIVs. Within the financials, emphasize those whose loan losses are of the traditional, cyclical variety—not in derivatives or in untraditional banking businesses. Good banks that have stuck to their knitting—and whose CEOs compensation has suffered along with their stock prices—should be retained.

2. In long/short portfolios, be long commodity stocks and short bank stocks that make headlines for untraditional losses. That trade hasn’t been working lately, but it remains an overall portfolio risk-reducer. The list of banks that have shown great skill and profitability by going heavily into new kinds of products and new kinds of accounting is roughly as long as the list of major copper, oil and gas producers that profited by selling heavily forward.

3. A financial-led bear market within a financial-led recession can be particularly perilous if central banks run out of ways to reflate the system—and surprisingly benign if the central banks’ rescues remain timely. To date, the central banks have been up to the job—if propping up a badly-behaving financial sector is a key component of their job descriptions. Result: the overall stock market has outperformed our expectations. We still don’t like the risk/reward ratio.

4. Dividends become more attractive as central banks cut rates. The problem for investors is that many of “The Great Dividend-Paying Stocks” are financials that have been reporting ghastly blunders. In many cases, their payout ratios have climbed far above the 50% threshold that has made these stocks better investments than bonds. Opportunities remain—and dividends may be the only positive return most US stocks will deliver this year.

5. Although North American consumers have yet to see the cost pass-through in major foodstuffs of $6 corn and $8 wheat, it will come sooner or later. Based on past periods of food inflation, one of the first consumer cutbacks is on eating out. Restaurant stocks are especially unappetizing when food costs soar out of control.

6. Gold has pulled back from its high because the dollar stopped falling and the bank bailouts seem to be working. Remain overweight gold as a clear-cut hedge against further bad news on both those fronts.

7. The Canadian dollar decoupled from the euro, failing to rally to new peaks—which makes little sense to us. US clients should continue to use Canadian government bonds and Canadian short-term investments as alternatives to Treasuries and US cash.

8. Within the commodity group, continue to accumulate the leading agricultural stocks. Given the spectacular performance of the fertilizer stocks, the best bargains currently on offer are in the farm machinery companies. The global food crisis will almost surely cripple the opposition to GM seeds, which means the seed stocks have great upside room.

9. Within debt portfolios, continue to emphasize inflation hedge bonds—preferably in strong currencies. Treasuries remain overvalued, despite the recent strong run-up in yields from barely-observable levels.