Sat 31 Jan 2009
Posted by Author under Music
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Oops, I didn’t have time last night to update my Friday Night Lights chill-out music section. Well, I guess one can relax just as good on Saturday.
Here is one of my favorite songs by music maestro Ulrich Schnauss. You’ve probably never heard his name, but if you watched the Superbowl 2008 commercials you did hear one of his songs during one of the GM commercials. Check out “Blumenthal”:
Thu 29 Jan 2009
Posted by Author under General Observations
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Looks like today we gave back all of yesterday’s gains and then some. We do that a lot. One could also say we are going sideways and probably will keep going in that direction until there is a little more clarity regarding when this mess is FINALLY GOING TO BE OVER. (I’m reminded of Kenan Thompson as Oscar Rogers on SNL in his “Fix it” skit).
We’re essentially bumbling around at the bottom, rallying violently on every scrap of news that give us hope, but then inevitably sell off again in the constant onslaught of bad news. Every day we are facing more job losses, dismal earnings, Meredith Whitney’s latest bank bash, and much, much more.
Sometimes we rally in spite of bad news. Sometimes we don’t. Sometimes we completely overreact to information that has been out there for at least three months already, and should have been more than discussed to death. Though it never seems to fail to surprise in a bad way.
Tomorrow we’ll get the latest GDP number for Q4 2008. Looking at the 50 % haircut the markets have already “experienced”, a pretty bad number should be more than priced in. But yet, I’m sure once we see the -5 % (or worse ) reading on our screens tomorrow the markets will freak, as if they could not possibly have seen that one coming.
But even that selloff won’t matter. Losing 10 % in three days is irrelevant because you can all get it back three days later. All the current bad news is priced in and won’t move the markets in any direction. To go significantly lower we need events that are significantly worse than what the market already expects. I don’t even want to speculate what that may be. And to go significantly higher we either need a) unexpected good news (as in “housing is bottoming”) or b) an absence of bad news. I think we will see b) before a). But even b) is not really near. So I guess we’ll just keep on grinding sideways.
In other news: I do enjoy Twitter. I was lucky that pretty much all my market calls so far worked out, but then again, I was quite general with some of them. I shall twitter more in the future.
Tue 27 Jan 2009
Posted by Author under ETF, Trading
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Remember Healthshares, the family of ETF’s focusing on 15 more or less narrow medical research areas? After languishing for over a year in the markets, they were all finally closed down a few months ago due to lack of investor interest.
Claymore today introduced a new ETF that just like Healthshares should find no home in any serene investor’s portfolio. FAA, the first index fund for a global index of Airlines, really doesn’t fill any hole that needs to be filled, except for the pie hole of whoever sold this idea to Claymore.
The airline sector sucks in every aspect imaginable. With exception of Southwest it seems like pretty much every airline in the U.S. is constantly in and out of bankruptcy protection. The average long-term performance of the sector is abysmal. They are susceptible to any kind of economic bad news, oil price shock, terrorist attack, plan crash, biological scare, you name it. They have huge fixed costs that pretty much put the final nails in their coffins during recessions.
If you want a good laugh, look at the factsheet of this thing:
* Huge historical underperformance? Check (-6 % per year over the last 7 years).
* Twice as much risk as the MSCI World Index? Check (Standard Deviation: 35.28 % for airlines vs. 15.53 % for MSCI)
* Negative correlation to oil? Check. (So if oil goes up, airlines tend to go down. Great hedge for oil price shocks – NOT)
So why in the world would you want to own this thing? Maybe if you love planes. Certainly not if you love money.
Tue 27 Jan 2009
Posted by Author under General Observations
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Financial stocks are rallying after hours on news that the government might soon install a bad bank.
Mike Mayo, a banking analyst from Deutsche Bank, agrees with me that it would be a terrible idea to start nationalizing left and right. Interestingly, the solution he mentions is very similar to what I proposed here on SereneInvesting.com last week. One of my ideas dealt with the government offering insurance for the banks. The government would take any losses first, but it would be fully reimbursed over a longer timeframe and Mike essentially suggests the very same thing.
Just remember: you read it here first.
Tue 27 Jan 2009
Posted by Author under Trading
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Here are some quick market thoughts: Asia up strong, Europe currently down but they had a strong day yesterday. Futures are very green at the moment, probably due to positive earnings from Texas Instruments and Travelers.
Two indicators can derail the positive mood however: the Case-Shiller home price index coming out at 8 ET and the Consumer Confidence / Richmond Fed Manufacturing Index one hour later. Bad numbers are priced in, but if they come in way worse than expected they may derail an advancement for a while.
Interesting will be to see the market’s ability to absorb $ 245 billion of commercial paper that companies sold to the Federal Reserve which needs to be rolled this week.
Mon 26 Jan 2009
Posted by Author under Blog
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I’m currently working on adding a Twitter box to this page so that I can provide short market comments during the day. I usually do not have time to write lengthier posts until I’m home from work, so that would be a good way to keep this page interesting during market hours. Let’s see if I can get this done in a timely fashion (I’m somewhat of a low-tech guy in a high-tech world).
Mon 26 Jan 2009
Posted by Author under General Observations
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Another example of why it usually pays off to wait with your judgment until you hear both sides of the story was delivered today when John Thain explained last week’s allegations in a memo.
The $ 1 million remodeling job apparently wasn’t done recently, but more like a year ago when dinosaurs roamed the earth and banks were still generally trading above book value. Oh, and it wasn’t for his office alone, but also covered two conference rooms and a reception area.
This makes it only slightly more understandable though. Regardless of the prevailing economic environment, executives should be a good steward of their shareholders money. Spending $ 300,000 per room, more than the average American house costs, is tantamount to throwing money out the window. He can do that with his own money anytime, but not with shareholder funds. Thain promised to reimburse Bank of America for the expenses, but it still leaves a very shallow aftertaste. You can bet that without the controversy he would not have done that.
On the other hand, his explanation regarding the bonus payments makes sense. The term “bonus” implies for the average American monies they receive for extraordinary performance. Understandably most people were outraged when they heard about billions of dollars of bonus payments paid to Merrill employees at the end of the year, even though the bank almost collapsed.
But two things need to be kept in mind: not every single department of Merrill sucked and if you punish your best performers even though they had nothing to do with the legacy problems of the bank you’re basically asking them to leave, hurting your franchise. Secondly, regardless of the term “bonus”, these payments do not require extraordinary performance and are simply part of your overall compensation package. This is similar to cutting your salary in two parts, calling the first 50 % your salary, and the second 50 % “bonus”, regardless of your actual realized performance on the job.
When you work for Wall Street your basic salary is usually much lower than your bonus, at least for most front office jobs. Stopping all bonus payments to everybody would equal a salary reduction of 50-70 % for many top bankers. While this may certainly be fair for bad performers (and boy, did we have enough of those last year), there are still enough people out there who did a good job and who had nothing to do with the downfall.
Mon 26 Jan 2009
Posted by Author under Trading
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Unless I’m mistaken we can blame some analyst from Goldman Sachs today for killing off the nice advance that we saw earlier. I saw the headline come across that according to him, financials would be just as heavily regulated as utilities going forward. This made financials almost turn on a dime as investors / daytraders pondered the idea of diminished return opportunities in that sector.
Anybody interested in buying financials at this level might consider using any of the three preferred stock ETFs instead: PFF, PGF, or PGX. All three have a heavy concentration in financials. PGF is actually a pure play on that sector with 100 % exposure. The other two are slightly more diversified, but really only slightly.
At this point in the game it’s fairly obvious that the government is willing to do anything it can to avoid another bank collapse. This may mean a gradual dilution of common shares for the weakest players. However, after the fiasco of wiping out the preferred stockholders of Fannie and Freddie I’m reasonably certain that the government will try to avoid doing that same mistake again.
Sun 25 Jan 2009
Posted by Author under Trading
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Over at seekingalpha.com Gary Gordon is asking the question : “Where have all the contrarians gone?” He’s looking at a list of 14-15 newly minted ETFs that are less than one year old and the rating they receive from Street.com. Not surprisingly almost all of them are labeled “Sell”.
If anybody ever wonders why successful investing is hard, then here is his answer. It requires you to look beyond the prevailing current doom & gloom. This means you need to have courage. Courage and faith.
During good times most people will agree with you and say “Amen” when you tell them that to be successful you need to be buy when there is blood on the Street. Alas, when there actually *is* blood on the street the same people will be out of their mind with fear and frantically pull their money out. “Preservation of principal” will be their new mantra. If you then dare to suggest that maybe now was a better time to buy than to sell, they’ll look at you like you’re crazy. Next thing you’ll hear are the most dangerous words in investing: “This time it is different”.
“The age of capitalism is over”, they’ll say.
“The US consumer is completely tapped out”, they’ll say.
And one of my favorites: “The US will be a third world economy soon.”
You know, every now and then, very few and far between though, the world does change and things *are* different indeed. For example, in the 50s, when the average stock dividend yield fell below the yield on bonds, people suggested to pull the money out of stocks, fearing that stocks were overpriced based on a valuation metric that had worked for a certain while. Needless to say, they would have been out of stocks since then and would have missed a very nice return on investment (plus they would have gotten killed in the 70s in bonds).
But can anyone tell me the when the last time was that people were this negative all over the place and there were actually right over the LONG run? Please do not point out the fact that in the Great Depression stocks fell 90 %, and based on that the bottom today may still be nowhere in sight. What these people usually don’t mention is the incredible bull run from the early 20s to 1929, when stocks on average went up 300-400 % in just a few short years. When they started falling they did fall hard, but they bottomed out around a 12 year low.
A 12 year low, huh? What a coincidence. That’s pretty much where we’re at today.
Do you think the world was looking pretty at that low? Do you think people generally agreed that the worst was over and better times would be just around the corner? No way. The night is always darkest just before the dawn and the economic situation always looks worst at the turning point.
Had you bought during the Great Depression after stocks had fallen 50 %, you’d have had to wait around 5-6 years with dividends to recoup your investment, despite stocks having fallen much further right after your initial purchase. Not terribly exciting, but certainly a far cry from the “25 years” that people always talk about when they discuss how long it took to recover your money had you bought at the top of 1929 right before the world went to hell.
What if this time isn’t different? What if things will bottom out this year and get better? How much return do you think you’d have made had you bought anywhere close to the bottom of the Great Depression?
Sat 24 Jan 2009
Posted by Author under Housing
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This morning I noticed a story on Yahoo about six difficult home loan workouts. Is it just me or do details in some of these stories not really add up unless you assume facts, which, had they actually been included, would make you feel less sorry for these people? Is it just me or are some of these stories just outright ridiculous when you turn on your brain?
Sue Wright’s story about a failed loan workout in Las Vegas mentions that they’ve lived in their home for 15 years, but are well underwater on the mortgage. Unless you assume that they lived there but didn’t own the house until maybe 2-3 years ago, this doesn’t make sense. I don’t think your average house purchased 15 years ago in Vegas lost value compared to then. Interest only loans were also not available back then, so the Wright’s should have had some principal paydown by now, at least in the 20% area or so. So if you assume that they did actually own the property all this time, then what probably happened is that they did one or more cash out refi’s as house prices were going to the moon. Unless they used all this cash to pay for unexpected medical emergencies, should you feel sorry for these people?
Chancey’s story is similar. Apparently she lived in her home for 23 years, but because of family health problems, divorce, and economic factors all “conspiring” against her, she’s never been able to substantially pay down the loan. Sorry, but this also only works if you assume cash out refi’s along the way. Had she not taken money out of the house, it’d now be getting close to being paid off after 23 years.
Next comes Richard, the retired high-steel construction man. His story absolutely takes the cake. All of a sudden, completely unexpected and surely just because of greedy bankers, his adjustable mortgage reset and he was facing higher payments. He actually does have $370,000 equity in that duplex (not to mention that he owns a $500,000 second home in Florida), but what does he do once he runs into cash flows problems? He doesn’t consider taking responsibility for being overly levered. No, instead he tries to make the bank take the loss, so that he can hang on to his wealth currently tied up. Wow, are we really expected to feel sorry for this man? I didn’t even mention that his spouse is a retired attorney who owns five cottages. Are the people who put together these stories effing kidding us?!
Ron Nash, our motivational speaker in the next story, decides to walk out on his upside down mortgage. I mean, why not? Why actually honor contractual obligations if it doesn’t make sense to you anymore? After all, contracts are only good for as long as they’re beneficial to you, or not? If they stop serving you, just ignore them and let the bank take the loss. Would you hire such a guy for your next motivational event? Once again, are we supposed to be angry at his bank for not throwing $240,000 his way when he asked for a reduction in principal? Dude, you bought too much house on a highly fluctuating income. Dude, you suck at personal finance. Don’t make others pay for your problems.
In our sixth and final story, Ken Mobley needed some urgent cash for the holidays, so he calls his bank and asks for a two-month postponement of his mortgage payments. Eh…where I come from spending on holidays is still discretionary, not mandatory or contractual. Why again would you get mad at your bank for not agreeing to this? You’re essentially not honoring your obligations to buy some Christmas gifts. What a joke.
It’s just so sad how our media continually spins their “greedy bankers, poor borrowers” stories. Over and over again, on TV, online, and probably in print as well. Where are the stories that ask for sacrifice and personal responsibility on behalf of everybody? Both Wall and Main Street caused and are actively contributing to this downturn. It doesn’t even seem to occur to the people featured in the stories on Yahoo that maybe some of their troubles are of their own making. Yet all they do is complain about how the bank didn’t streamline the process of throwing money their way.
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