A Federal regulator in California allowed IndyMac Bank to pre-date capital infusion before it went bankrupt. It is suspected that his office may have allowed other institutions to do the same….. We need regulators to regulate regulators!!!
It is proposed that cows should bear carbon taxes for emitting 4 tons of methane gas a year. Are we that desperate to fix our deficits?
An article in last week’s Barron’s drew a close parallel between Madoff’s Ponzi and the social security, Medicare programs. If a ponzi is essentially making the future investors pay for the returns of the present investors, how is the Social security and Medicare programs different?
Investing in stock markets is becoming increasingly about investing in bubbles and I am frequently asked when and where will be the next bubble? Right now we have a cash bubble that the Fed is trying to burst with zero interest rate policy. With huge amount of dollars along with other currencies being printed, the next bubble will be even bigger. We as a society have lived long beyond our means with negative savings, cheap loans and high leverage that we can not bear any pain of loosing our comforts. Afraid to go into depression when our life style curtails, we require stimulant after stimulant to be constantly stimulated.
Lot of comparisons are drawn between U.S and Japan’s recession. We are certainly not like Japan in many ways and should not be too quick to draw parallels. After all economics is social science and should not be applied like the universal laws of science. While there are some similarities like the aging population, we will behave differently from the Japanese to the stimulus in many ways. I certainly hope so for our sake.
One of the universal laws that can be applied to money is that it goes where opportunities for growth and returns are. The 0% policy failed to stimulate Japan as low cost yen found its way to other countries where it found better growth and return opportunities. This phenomenon is commonly called the “Carry Trade”. The future consumer growth and investment opportunities will be relatively higher in the developing world and dollar will see its way to these countries but there will be a lot of opportunities here in the U.S to stay. Our baby boomers are still resilient and love to work and spend. These will be their golden years and they will make it so. And the U.S is still the center of research and development and innovation that attracts investments from all over the world. With likelihood of some of the excess low cost dollars moving to the developing world, chances of hyperinflation should also dissipate. However its not only U.S that is dropping its rate close to zero, so are other developed nations in Europe and also Japan. Their currencies will compete with U.S $ in the new frontier but I think U.S $ is much better placed in winning as many of these developing countries are pegged to $U.S and therefore the $ carry trade will limit the currency risk. I just hope that this is the likely scenario not a wishful thinking. Nevertheless one thing is likely to be certain in this scenario; The developing world may get a boost that will be much bigger than the one they got from low cost yen.
Have a great new year.
Friday, December 26, 2008
Thursday, December 25, 2008
Market Follow-up Dated Dec 19 2008
Chrysler is Shut but not Closed.
Madoff is out on bail???? Did the judge give any thought to where the bail money would come from?
Blame the Arabs again, Its interesting that all the bad things are most of the time out side of the border. Like El Nino and the other Spanish name that I do not remember, and West Nile virus etc. but its always California sunshine and Kansa blue sky. We blamed Arabs for not producing enough oil when they were producing at capacity and selling to whoever wanted. However It wasn’t the actual crude but the oil futures that was in demand and has now put us in the past. The price mechanism for crude that is denominated in U.S$ is our creation not OPEC’s, and so are the hedge funds. Yesterday, in all eagerness we blamed OPEC again for being opportunist and divisive for curtailing 2 million barrels a day. Well what do you do when the bath tub is full? With oil inventories high to the extent that oil tankers instead of transporting oil have become floating storage tanks for crude, one held by pirates that markets couldn’t care about, what do we want OPEC to pump extra oil for? To pump it back in the ground? My call on Oil last week was premature as oil has come down since last week. There is currently $7 spread between January oil @ 35 and February Oil @ 42.
Fed did the right thing by aggressively reducing interest rates down close to zero, with the idea of easing credit and taking away any incentive for hoarding cash that fed would like to see it go back into the system. With treasuries bills giving close to zero and occasionally negative, the Fed can no longer purchase short term treasuries as there is no room for the yields to go lower. Purchasing Long term treasuries is not much of an option as it would flatten the yield curve taking away any incentive for the financial industry to lend. The Policies seem to be working as the LIBOR spreads have been narrowing and also we can’t be in a constant state of panic. With no choice of buying treasuries, the Fed will resort to buying other papers like Mortgage, Commercial paper and other kinds of instruments related to Consumer loans that will by-pass the banking system and come directly to the main street. Despite low Treasury yields, the Fed will not be issuing bonds as it would counter productive to suck money from the system. The Fed will have to resort to printing dollars to manage any lag between demand for currency coming from the stimulus and economy and the restricted supply from the financial institutions and funds parked in savings and cash. Many doubt the Fed's ability to manage the current crisis given the loss of wealth of 7.4 Trillion dollars and getting bigger. Much of the wealth destruction is of wealth that was created by financial engineering levrage that over-inflated values. What matters is Income generation and savings going forward. Its always better to have secured income and savings than to have wealth with no income. Even though that is the ultimate goal but then why do we keep working for more? I think the Fed will be able to achieve it here in U.S, but in a global recession many of the emerging markets do not have the luxury of dropping interest rates as they face inflation caused by fall in currency values. They will have to wait for the U.S to turn around to see their money supply increase from exports. Until then keep you investments in U.S as it will take the lead in recovery.
People looking for an opportunity to get into the market or tempted by the markets low value should consider that even though market is normally 6 months ahead, certain inevitables of a recession are yet to be seen i.e lay-offs particularly in Tech and corporate bankruptcies. Tech is mainly a gizmo for corporations as much as for individuals and kids. Companies are not looking at up-grading their technology while they are trying to save their capital. Nobody gets a security system installed while the house is on fire. Corporate Bankruptcies will occur as always with individual bankruptcies also the export earnings component of S&P 500 which at one point was 37% will shrink considerably due to deepening recessions in other parts of the world and strengthening dollar. My advice: Don’t be a hero unless you want to be.
Madoff is out on bail???? Did the judge give any thought to where the bail money would come from?
Blame the Arabs again, Its interesting that all the bad things are most of the time out side of the border. Like El Nino and the other Spanish name that I do not remember, and West Nile virus etc. but its always California sunshine and Kansa blue sky. We blamed Arabs for not producing enough oil when they were producing at capacity and selling to whoever wanted. However It wasn’t the actual crude but the oil futures that was in demand and has now put us in the past. The price mechanism for crude that is denominated in U.S$ is our creation not OPEC’s, and so are the hedge funds. Yesterday, in all eagerness we blamed OPEC again for being opportunist and divisive for curtailing 2 million barrels a day. Well what do you do when the bath tub is full? With oil inventories high to the extent that oil tankers instead of transporting oil have become floating storage tanks for crude, one held by pirates that markets couldn’t care about, what do we want OPEC to pump extra oil for? To pump it back in the ground? My call on Oil last week was premature as oil has come down since last week. There is currently $7 spread between January oil @ 35 and February Oil @ 42.
Fed did the right thing by aggressively reducing interest rates down close to zero, with the idea of easing credit and taking away any incentive for hoarding cash that fed would like to see it go back into the system. With treasuries bills giving close to zero and occasionally negative, the Fed can no longer purchase short term treasuries as there is no room for the yields to go lower. Purchasing Long term treasuries is not much of an option as it would flatten the yield curve taking away any incentive for the financial industry to lend. The Policies seem to be working as the LIBOR spreads have been narrowing and also we can’t be in a constant state of panic. With no choice of buying treasuries, the Fed will resort to buying other papers like Mortgage, Commercial paper and other kinds of instruments related to Consumer loans that will by-pass the banking system and come directly to the main street. Despite low Treasury yields, the Fed will not be issuing bonds as it would counter productive to suck money from the system. The Fed will have to resort to printing dollars to manage any lag between demand for currency coming from the stimulus and economy and the restricted supply from the financial institutions and funds parked in savings and cash. Many doubt the Fed's ability to manage the current crisis given the loss of wealth of 7.4 Trillion dollars and getting bigger. Much of the wealth destruction is of wealth that was created by financial engineering levrage that over-inflated values. What matters is Income generation and savings going forward. Its always better to have secured income and savings than to have wealth with no income. Even though that is the ultimate goal but then why do we keep working for more? I think the Fed will be able to achieve it here in U.S, but in a global recession many of the emerging markets do not have the luxury of dropping interest rates as they face inflation caused by fall in currency values. They will have to wait for the U.S to turn around to see their money supply increase from exports. Until then keep you investments in U.S as it will take the lead in recovery.
People looking for an opportunity to get into the market or tempted by the markets low value should consider that even though market is normally 6 months ahead, certain inevitables of a recession are yet to be seen i.e lay-offs particularly in Tech and corporate bankruptcies. Tech is mainly a gizmo for corporations as much as for individuals and kids. Companies are not looking at up-grading their technology while they are trying to save their capital. Nobody gets a security system installed while the house is on fire. Corporate Bankruptcies will occur as always with individual bankruptcies also the export earnings component of S&P 500 which at one point was 37% will shrink considerably due to deepening recessions in other parts of the world and strengthening dollar. My advice: Don’t be a hero unless you want to be.
Unemployment data - Dec 10, 2008
Employment figures showed a steep decline in November. Oct and Sept were also adjusted downward. In absolute terms this was the 5th sharpest decline in payrolls in 70 years. It is expected that unemployment will reach 9%. This will put more pressure on the Govt to take bigger and swift action. They do recognize that the country's Infrastructure does need an overhaul and may target a major part of stimulus to such projects. But being a consumer society, consumers will also get a decent chunk of change. I am sure that the first one to start spending will be the govt. So the Industrials may be a good buy sometime later. I could not help noticing the muted reaction by the market to these dismal unemployment figures. Does this indicate that we may have reached the bottom? Probably so but who cares, it still is not the reason to buy. As many analysts have been blaming the market for its over-reaction all this while, I guess now they can blame the economy for over-reacting. After all Afghanistan has not yet declared a recession.
Commodities along with soft metals continue decline and lot of us wonder what's the deal with gold shouldn't it be going up. The recent drop in gold has been due to de-leveraging and redemptions by hedge funds which seems to be nearly complete. While analysts favor the so called strong demand and supply fundamentals for gold, I have always wondered about the demand side of the equation. We don't consume gold do we? In any case gold still happens to be a currency of trust that is not printed and manipulated by any govt and will always have a place in portfolios of investors who don't trust anything else. Remember when every stock was valued in oil. i.e how many barrels for GE stock… or Gold vs S&P. That equation undervalues stocks and over values gold by a significant margin. This margin will close with stocks catching up to gold before gold moves up and it certainly will move up in the long run.
Commodities along with soft metals continue decline and lot of us wonder what's the deal with gold shouldn't it be going up. The recent drop in gold has been due to de-leveraging and redemptions by hedge funds which seems to be nearly complete. While analysts favor the so called strong demand and supply fundamentals for gold, I have always wondered about the demand side of the equation. We don't consume gold do we? In any case gold still happens to be a currency of trust that is not printed and manipulated by any govt and will always have a place in portfolios of investors who don't trust anything else. Remember when every stock was valued in oil. i.e how many barrels for GE stock… or Gold vs S&P. That equation undervalues stocks and over values gold by a significant margin. This margin will close with stocks catching up to gold before gold moves up and it certainly will move up in the long run.
Q1 2009 - December 10, 2008
I do think that next quarter will be disappointing as companies will report earnings depressed by credit issues in the economy here and globally in the current and past quarter. There might be some hope of added business in the first quarter as companies come-up with new budgets but I would not count much on it as many of them will be slashed. The anticipated govt and state spending will take its time to work through the complex system to show any impact in the earnings till end of next year.
Meanwhile I think European banks will have more skeletons to show from their closets related to their exposure to emerging markets. Both default and currency. You will see some acquisitions in Pharma and Financial sector. I don’t think the banks will feel comfortable to lend as long as the economy goes deeper into recession. So credit should remain relatively tight, after-all its not just the banks who have to de-leverage but the entire nation has to. It will be a while before all of us de-leverage. The govt program to bring the mortgage rate down to 4.5 for new home purchases for qualified buyers with good credit only will do little to prop-up employment as it will only impact the existing inventory. Plus I think the effort should be to provide credit relief to employers and not to home buyers.
The only thing that is positive is that the U.S consumer is saving 300 Billion and the rising Dollar. I think on risk return basis, dollar and Yen may be the best bet in the short run. High grade corporate debt over the medium term. For the long term I still prefer large cap dividend yield for companies that have always believed in dividend sanctity and operating cash flows. Closed end funds over open fund and ETFs due to discount to NAV available in closed end funds. The wide spread between the NAV and Price has been persistent over the past year and people who bought these attractive have not had any relief from narrowing of the spread and it probably won’t till we see some positive signs out of the economy.
Meanwhile I think European banks will have more skeletons to show from their closets related to their exposure to emerging markets. Both default and currency. You will see some acquisitions in Pharma and Financial sector. I don’t think the banks will feel comfortable to lend as long as the economy goes deeper into recession. So credit should remain relatively tight, after-all its not just the banks who have to de-leverage but the entire nation has to. It will be a while before all of us de-leverage. The govt program to bring the mortgage rate down to 4.5 for new home purchases for qualified buyers with good credit only will do little to prop-up employment as it will only impact the existing inventory. Plus I think the effort should be to provide credit relief to employers and not to home buyers.
The only thing that is positive is that the U.S consumer is saving 300 Billion and the rising Dollar. I think on risk return basis, dollar and Yen may be the best bet in the short run. High grade corporate debt over the medium term. For the long term I still prefer large cap dividend yield for companies that have always believed in dividend sanctity and operating cash flows. Closed end funds over open fund and ETFs due to discount to NAV available in closed end funds. The wide spread between the NAV and Price has been persistent over the past year and people who bought these attractive have not had any relief from narrowing of the spread and it probably won’t till we see some positive signs out of the economy.
Inflation vs deflation - Dec 12, 2008
There is a recession in thinking. Apparently the Think Tanks are not able to think due to lack of funding from various industries and of course lobbyists that support them. What were they thinking!! I gues there are just tanks now.
Neal Kashkari of the U.S Treasury said earlier during the week that the Treasury would make money from the bail-out. I suppose the next plan is to have an IPO or contract it out to the highest bidder from the junk bond industry.
Inflation / Deflation
There is a big debate about what we should be worried about, inflation or deflation? Out of the two scenarios the Fed will choose inflation over deflation for sure. To stop deflation they need to create inflation. Given the momentum in the economic slide and the urgency of the matter the Fed and other Central Banks except for China (only 568 Bil) have poured Trillions of Dollars into the system by way of Money, Gtees and Commitments. In current state of panic, pressure and criticism they are likely to go overboard. Deflation control will lead to Inflation control. The best Investment to hold in Deflation is U.S $ and in Inflation its Gold. Equities are best held when it’s neither or when they are oversold. But are they?
U.S treasury’s total outstanding funding and commitments are said to be close to $7.8 Trl. The U.S treasury has said that they will not borrow to fund it, which means that they will print money and expand their balance sheet. We have analysts that believe this would not impact inflation as inflation is a function of demand and supply and there is enough idle capacity to meet the boost in demand that will come about with added money in the system. A service based economy like the U.S can easily expand capacity with people, laptop and Blackberry to go. Plus manufacturing base in China can be expanded in a short period with govt “influence” there. However they fail to see the bottle necks in the value chain in commodities / material and energy sectors that will eventually start to put pressure on prices. Any indication of such pressure will have hedge funds going for such investments in force and simply expedite the process. What matters is when will such a pressure build in these bottle necks? It does take a while as the commodity component is considered to be getting smaller and smaller in products. e,g a Cereal component in a cereal box is very small compared to cost of packaging. Printing, distribution, marketing etc. This is the reason why the fed is more worried about deflation and will tackle inflation later.
Much anticipated Bear Rally.
We have multiple channels with 24hrs of market news, screens with 10 boxes with analysts and portfolio managers giving there last 5 minute take on the market and the Internet where people are constantly told to expect a Bear Rally. With so much of media coverage about it, who would participate in it and for how long? That is why nobody is falling for it as everyone knows, just like all other previous bear rallies this one should not have many legs and should fizzle soon. Unless it’s a slow uptrend.
Neal Kashkari of the U.S Treasury said earlier during the week that the Treasury would make money from the bail-out. I suppose the next plan is to have an IPO or contract it out to the highest bidder from the junk bond industry.
Inflation / Deflation
There is a big debate about what we should be worried about, inflation or deflation? Out of the two scenarios the Fed will choose inflation over deflation for sure. To stop deflation they need to create inflation. Given the momentum in the economic slide and the urgency of the matter the Fed and other Central Banks except for China (only 568 Bil) have poured Trillions of Dollars into the system by way of Money, Gtees and Commitments. In current state of panic, pressure and criticism they are likely to go overboard. Deflation control will lead to Inflation control. The best Investment to hold in Deflation is U.S $ and in Inflation its Gold. Equities are best held when it’s neither or when they are oversold. But are they?
U.S treasury’s total outstanding funding and commitments are said to be close to $7.8 Trl. The U.S treasury has said that they will not borrow to fund it, which means that they will print money and expand their balance sheet. We have analysts that believe this would not impact inflation as inflation is a function of demand and supply and there is enough idle capacity to meet the boost in demand that will come about with added money in the system. A service based economy like the U.S can easily expand capacity with people, laptop and Blackberry to go. Plus manufacturing base in China can be expanded in a short period with govt “influence” there. However they fail to see the bottle necks in the value chain in commodities / material and energy sectors that will eventually start to put pressure on prices. Any indication of such pressure will have hedge funds going for such investments in force and simply expedite the process. What matters is when will such a pressure build in these bottle necks? It does take a while as the commodity component is considered to be getting smaller and smaller in products. e,g a Cereal component in a cereal box is very small compared to cost of packaging. Printing, distribution, marketing etc. This is the reason why the fed is more worried about deflation and will tackle inflation later.
Much anticipated Bear Rally.
We have multiple channels with 24hrs of market news, screens with 10 boxes with analysts and portfolio managers giving there last 5 minute take on the market and the Internet where people are constantly told to expect a Bear Rally. With so much of media coverage about it, who would participate in it and for how long? That is why nobody is falling for it as everyone knows, just like all other previous bear rallies this one should not have many legs and should fizzle soon. Unless it’s a slow uptrend.
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