Two weeks ago the stock market did something notable-- it rallied on extremely bad news. Two Mondays ago the retail figures were reported, they were horrible, and the stock market rallied. Then on Friday of the same week, the unemployment numbers came out, the worst in 35 years, and the market rallied 250 points. This is important, because it certainly looked like the market was "peeking around the corner" and trying to anticipate the state of the economy in mid/late 2009.
For the last 3 months, the stock market has varied between being priced for Depression (value stocks) and a deep Recession (growth stocks). A little perspective is in order here. Just as the peak of the 1999/2000 tech bubble looked like it was "different this time" in an optimistic sense, this trough of 2008 looked like it was "different this time" in a pessimistic sense. The only thing we can point to is that in both instances, the extreme view over time is not likely to be warranted; in other words, when the markets price assets for the extreme case, that is your point of exit or entry to either maximize your selling prices or minimze your buying prices. The truth is that a "normal" market is somewhere between the extremes.
While it doesn't look like we're going to get a Santa Claus rally in the stock market, let us remember that the purpose of all of our getting is understanding. A year like 2008 makes us reflect on those things which are truly important-- our friends, our families, our children, our health. Merry Christmas.
Tuesday, December 23, 2008
Thursday, November 13, 2008
Break Out the Dramamine
Break out the Dramamine, because we're in a market see-saw. October absorbed the full force of the Panic of 2008. The Dow Jones Industrial Average over a 6 day period lost over 20% in market capitalization. However, having said that, the last week of October we experienced a powerful rally, taking the Dow Jones from 8175 to 9625 on Election Day (a 17% rally from the recent bottom). So as of October 31, 2008account valuations will look bad, but recall that just 3 weeks ago it was much worse in terms of market sentiment at the height of the Panic. Fortunately since that already infamous time, the credit "freeze" has thawed considerably, and it "appears" that the market has been creating a range of price support in the Dow 8200 range. This range could drift lower in the next few months (short term), and the market has a great deal of price support in the 7700 range, which we actually visited, albeit briefly, intra-day on October 10.
This will all eventually pass.
By focusing on the long term, and being patient, we will eventually get through this mess, and the markets will eventually recover. For most accounts, where appropriate, recently I raised some cash from assets that I estimate will take longer to recover than U.S.stocks. I will be focusing very selectively and patiently on making purchases in the low 8000 price level on the Dow, during times of pessimism, and raising cash in subsequent Bear market rallies. By doing this, I hope to bring some additive returns to your portfolios on the margins as we look forward over the next (at least) 2 quarters. The next 2 quarters of earnings will be bad, though the trick is realizing that the stock market will eventually look past the short term earnings announcements and begin to look for signs of recovery. This is what the stock market does; it acts as a time machine looking at the future. So eventually, when the gloom and doom looks pervasive, as it did just 3 weeks ago, something will improve.
-ACC
This will all eventually pass.
By focusing on the long term, and being patient, we will eventually get through this mess, and the markets will eventually recover. For most accounts, where appropriate, recently I raised some cash from assets that I estimate will take longer to recover than U.S.stocks. I will be focusing very selectively and patiently on making purchases in the low 8000 price level on the Dow, during times of pessimism, and raising cash in subsequent Bear market rallies. By doing this, I hope to bring some additive returns to your portfolios on the margins as we look forward over the next (at least) 2 quarters. The next 2 quarters of earnings will be bad, though the trick is realizing that the stock market will eventually look past the short term earnings announcements and begin to look for signs of recovery. This is what the stock market does; it acts as a time machine looking at the future. So eventually, when the gloom and doom looks pervasive, as it did just 3 weeks ago, something will improve.
-ACC
Volatility Reigns Supreme
We will get through this volatile market. Today the market had its biggest 1-day rally in 75 years. However, the markets have been in a free-fall over the last 4 weeks, with seemingly no end in sight. With all the fear and uncertainty, we have blood in the streets, and we are approaching the point of what Sir John Templeton would call “maximum pessimism”, which traditionally has been a good time to invest (even when we are not sure where the bottom is). Some high quality institutions are trading at less than the cash value on their books. We are all long term investors, even those investors who have just started, or are about to enter, retirement (since the average retirement lasts 20 years). On Friday markets were at a price level last seen in the 2002/2003 time frame. Since we have been in a very technically driven negative environment, in technical terms we have a lot of “price support” between Dow 7500-8500. This was hardly comforting on Friday, and despite today’s rally, we may touch these levels again as the market attempts to create a “bottom”, and we have all become even longer term investors due to this violent price volatility.
In looking through Client accounts, you own strong companies with strong products and services that were purchased attractively, and many of these companies are quite defensive in nature. Most accounts contain huge doses of high quality health care companies, oil drilling, food, tobacco, alcohol, consumer products/staples, since I typically try to diversify “away from” undue risks in trouble areas. Over the years I have been sometimes questioned for being too conservative in the choice of business enterprises in which to invest, though ACC Clients have at least the comfort that the companies invested in have a bright future, despite the short-term swing in prices. Despite this, the spillover effect from the financial companies is what we are currently swimming in. This weekend’s G7 meeting has resulted in a coordinated global effort to prevent large institutions from failing, and to inject capital directly into banks; this is very positive in the sense that it will help to prevent a situation of fewer and fewer counterparties to absorb “counterparty risk”.
One of the Warren Buffett maxims I try to adhere to is: own quality companies where we can sleep at night even if the stock exchange was closed for 5 years. Had I the foresight of hindsight (i.e. crystal ball), we would of course all be sitting in cash in the beginning of September and starting to buy in here with a 5 year outlook. I still continue to make slight changes in portfolios to take advantage of current prices where possible with a long term perspective, and with new cash am slowly building positions. Companies with solid balance sheets and big dividend payments look attractive, since there are many solid companies with dividends of 4-6% right now, which exceeds the yields on Treasury securities by a lot (granted not as “safe” as a Treasury, but still extremely attractive). With all the “flight to quality”, many investors have flocked to money market and Treasury securities; this trade will eventually reverse as equity yields compete with bond yields. Municipal bonds nationwide have had a tough September and October, but are good relative values at this time, especially relative to Treasury securities on a price and yield basis.
All investors, including myself, have been disappointed with the current economic and market situation, and please know that I am here piloting the ship through these troubled waters. I know you have placed your trust in me, and I will continue to do the best job possible in this environment.
-ACC
In looking through Client accounts, you own strong companies with strong products and services that were purchased attractively, and many of these companies are quite defensive in nature. Most accounts contain huge doses of high quality health care companies, oil drilling, food, tobacco, alcohol, consumer products/staples, since I typically try to diversify “away from” undue risks in trouble areas. Over the years I have been sometimes questioned for being too conservative in the choice of business enterprises in which to invest, though ACC Clients have at least the comfort that the companies invested in have a bright future, despite the short-term swing in prices. Despite this, the spillover effect from the financial companies is what we are currently swimming in. This weekend’s G7 meeting has resulted in a coordinated global effort to prevent large institutions from failing, and to inject capital directly into banks; this is very positive in the sense that it will help to prevent a situation of fewer and fewer counterparties to absorb “counterparty risk”.
One of the Warren Buffett maxims I try to adhere to is: own quality companies where we can sleep at night even if the stock exchange was closed for 5 years. Had I the foresight of hindsight (i.e. crystal ball), we would of course all be sitting in cash in the beginning of September and starting to buy in here with a 5 year outlook. I still continue to make slight changes in portfolios to take advantage of current prices where possible with a long term perspective, and with new cash am slowly building positions. Companies with solid balance sheets and big dividend payments look attractive, since there are many solid companies with dividends of 4-6% right now, which exceeds the yields on Treasury securities by a lot (granted not as “safe” as a Treasury, but still extremely attractive). With all the “flight to quality”, many investors have flocked to money market and Treasury securities; this trade will eventually reverse as equity yields compete with bond yields. Municipal bonds nationwide have had a tough September and October, but are good relative values at this time, especially relative to Treasury securities on a price and yield basis.
All investors, including myself, have been disappointed with the current economic and market situation, and please know that I am here piloting the ship through these troubled waters. I know you have placed your trust in me, and I will continue to do the best job possible in this environment.
-ACC
Tuesday, September 30, 2008
Congress To The Rescue
Oh great, we're all waiting for Congress to "save us" from ourselves in terms of a Bailout Package to deal with bad mortgage paper.
The history of where we are is long and undistinguished. It all started with Jimmy Carter's signing into law the Community Reinvestment Act of 1977, expanding the charter of Fannie Mae and Freddie Mac to increase home ownership. Bill Clinton also got into the act in 1995 and 1998, pushing for further home ownership, as well as the beginnings of the "sub-prime" segment of the market. George W. Bush called for further home ownership for lower income people in 2005. Along the way, efforts to put a lid on Fannie Mae and Freddie Mac were thwarted-- bills to address the oncoming threat posed to the system failed in Congress in 2003 and 2005.
With all of this, we now see the disastrous effects of relaxing the loan underwriting process, including "no doc" loans to people who were under-qualified to make a home purchase. Then we saw the rise of the "zero down payment interest only Adjustable Rate Mortgage", followed by the "negative amortization ARM". These work fine as long as home values are rising, and as long as interest rates do not rise; unfortunately the exact opposite occurred.
The United States is a country built upon credit, and periodically we undergo a financial crisis, a credit bubble, irrational exuberance or whatever other term we want to use. But the reality is that it is *not* irrational to borrow heavily when interest rates are so low; the Fed was basically begging people to borrow. In fact, on a 6% fixed rate mortgage, once you subtract the tax savings on the mortgage, and then subtract the inflation rate, the government is practically paying us to own a home. When home values go up, local tax revenues go up too; when people quit their jobs to flip houses, Federal tax receipts go up. Our long history of pushing the "dream" of home ownership has finally caught up with us, and the message is: there's no free lunch.
And as much as I am opposed to a bailout or rescue package, the alternatives look pretty grim. If the Paulson plan were implemented, Congress would basically take hold of $700 Billion of bad mortgage paper, create a market for it, buy credit-starved institutions some time and liquidity, and eventually (probably) sell the mortgage paper at a later date for a profit. The estimate is that the $700 Billion would buy about $2 Trillion in bad paper (i.e. 30 cents on the dollar). To a market guy like me, this looks like the "trade" of a lifetime, and one that could not only work, but put a huge positive number back into the Treasury at a later date. However, it has to work politically, with checks and balances (not a bad thing). But we're 34 days away from a Presidential election, and therein lies the rub.
The history of where we are is long and undistinguished. It all started with Jimmy Carter's signing into law the Community Reinvestment Act of 1977, expanding the charter of Fannie Mae and Freddie Mac to increase home ownership. Bill Clinton also got into the act in 1995 and 1998, pushing for further home ownership, as well as the beginnings of the "sub-prime" segment of the market. George W. Bush called for further home ownership for lower income people in 2005. Along the way, efforts to put a lid on Fannie Mae and Freddie Mac were thwarted-- bills to address the oncoming threat posed to the system failed in Congress in 2003 and 2005.
With all of this, we now see the disastrous effects of relaxing the loan underwriting process, including "no doc" loans to people who were under-qualified to make a home purchase. Then we saw the rise of the "zero down payment interest only Adjustable Rate Mortgage", followed by the "negative amortization ARM". These work fine as long as home values are rising, and as long as interest rates do not rise; unfortunately the exact opposite occurred.
The United States is a country built upon credit, and periodically we undergo a financial crisis, a credit bubble, irrational exuberance or whatever other term we want to use. But the reality is that it is *not* irrational to borrow heavily when interest rates are so low; the Fed was basically begging people to borrow. In fact, on a 6% fixed rate mortgage, once you subtract the tax savings on the mortgage, and then subtract the inflation rate, the government is practically paying us to own a home. When home values go up, local tax revenues go up too; when people quit their jobs to flip houses, Federal tax receipts go up. Our long history of pushing the "dream" of home ownership has finally caught up with us, and the message is: there's no free lunch.
And as much as I am opposed to a bailout or rescue package, the alternatives look pretty grim. If the Paulson plan were implemented, Congress would basically take hold of $700 Billion of bad mortgage paper, create a market for it, buy credit-starved institutions some time and liquidity, and eventually (probably) sell the mortgage paper at a later date for a profit. The estimate is that the $700 Billion would buy about $2 Trillion in bad paper (i.e. 30 cents on the dollar). To a market guy like me, this looks like the "trade" of a lifetime, and one that could not only work, but put a huge positive number back into the Treasury at a later date. However, it has to work politically, with checks and balances (not a bad thing). But we're 34 days away from a Presidential election, and therein lies the rub.
Thursday, September 11, 2008
Fannie and Freddie In Conservatorship. More Moral Hazard Ahead?
Since July 2007, the financial system has been an absolute mess. This of course has led to liquidity concerns among certain banks, and most recently to the virtual collapse of Fannie Mae and Freddie Mac. This is truly unprecedented. We now have two publicly traded companies (Fannie and Freddie) that were both "implicitly" backed by the U.S. Government, and due to the latest round of liquidity concerns and bad loans, the U.S. Government has made it an "explicitly" backed relationship.
While I decry bailouts and moral hazard, I honestly do not see any other options with this. And the lawyers actually made a smart move too, putting Fannie and Freddie into Conservatorship, rather than Receivership. Why is this important? Well, the distinction is that in receivership, a company continues operations until it completely winds down its commitments (i.e. this would have led to a run on the banks, institutions that trade mortgage backed products would have been destroyed, or in other words, the entire system would have frozen up). By putting these entities into Conservatorship, they continue operations with U.S. Government oversight, the Government backs the paper, liquidity continues, and the market for mortgage backed products continues, though sluggishly.
Famed investor Jim Rogers noted that "the U.S. has become more Communist than China". What he means is that we have virtually created a system where Risk has been Socialized for the benefit of wealthy people, and Rewards are still benefiting wealthy people. I absolutely agree with this assessment, and the risk premium is a big factor in investing. If investors and Wall Street types continue to have their risks socialized via de facto government bailouts, what's to stop them from taking even more undue risks in the future? This is just a reward for moral hazard in the system.
While I decry bailouts and moral hazard, I honestly do not see any other options with this. And the lawyers actually made a smart move too, putting Fannie and Freddie into Conservatorship, rather than Receivership. Why is this important? Well, the distinction is that in receivership, a company continues operations until it completely winds down its commitments (i.e. this would have led to a run on the banks, institutions that trade mortgage backed products would have been destroyed, or in other words, the entire system would have frozen up). By putting these entities into Conservatorship, they continue operations with U.S. Government oversight, the Government backs the paper, liquidity continues, and the market for mortgage backed products continues, though sluggishly.
Famed investor Jim Rogers noted that "the U.S. has become more Communist than China". What he means is that we have virtually created a system where Risk has been Socialized for the benefit of wealthy people, and Rewards are still benefiting wealthy people. I absolutely agree with this assessment, and the risk premium is a big factor in investing. If investors and Wall Street types continue to have their risks socialized via de facto government bailouts, what's to stop them from taking even more undue risks in the future? This is just a reward for moral hazard in the system.
Thursday, August 7, 2008
Lucky 8's?
In China, the number 8 is a sign of luck, which is why they chose 8/8/08 to begin the Olympics in Beijing. It's supposed to be the luckiest day of the century.
Unfortunately, China has been hammered over the last several weeks and months with unlucky things like devastating earthquakes, terrible weather, tsunami warnings, a huge algae probelm in the ocean (caused by excessive pollution and human waste), air quality that resembles another planet, and pollution so bad that China has ordered many factories to be shut down for the last month. They are even shooting special cannisters into the atmosphere to attempt to clear the air. And certain athletes have been denied travel-visas due to their political points of view.
So China, all I can say is..... Good Luck!
Unfortunately, China has been hammered over the last several weeks and months with unlucky things like devastating earthquakes, terrible weather, tsunami warnings, a huge algae probelm in the ocean (caused by excessive pollution and human waste), air quality that resembles another planet, and pollution so bad that China has ordered many factories to be shut down for the last month. They are even shooting special cannisters into the atmosphere to attempt to clear the air. And certain athletes have been denied travel-visas due to their political points of view.
So China, all I can say is..... Good Luck!
Friday, July 11, 2008
Ben Bernanke, Rock Star?
We've heard it all before-- Too Big To Fail. And honestly, some of these institutions, like Freddie Mac and Fannie Mae, are too big to fail. The problem we face is what to do with them... privatize them, bail them out, put them into conservatorship? How do we prevent even more moral hazard in the financials? There are no do-overs here. And the banks are facing their own pressures.
Two weeks ago, Bernanke and the Fed did nothing, and in so doing, they sent a message to the market that was implicitly "we're too worried about the banks and financial system to tackle inflation". So instead of raising rates by .25% and creating a stock market rally based on inflation fighting, and sending an implicit message that the banks will be fine, the market has lost 1000 points in 2 weeks. Had Bernanke and the Fed raised rates slightly, the entire psychological composition of the market would have changed: we'd be fighting inflation, people would invest in the market, financials would be able to raise capital from investors, liquidity would increase... instead, we are where we are.
Nice going Bernanke-- you're a rock star.
Two weeks ago, Bernanke and the Fed did nothing, and in so doing, they sent a message to the market that was implicitly "we're too worried about the banks and financial system to tackle inflation". So instead of raising rates by .25% and creating a stock market rally based on inflation fighting, and sending an implicit message that the banks will be fine, the market has lost 1000 points in 2 weeks. Had Bernanke and the Fed raised rates slightly, the entire psychological composition of the market would have changed: we'd be fighting inflation, people would invest in the market, financials would be able to raise capital from investors, liquidity would increase... instead, we are where we are.
Nice going Bernanke-- you're a rock star.
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