Sir Newton died a broke man and a virgin; no problem with the latter. Unfortunately he was caught up in the South Sea Bubble and so were many others. Last weeks actions were uneventful, but ( I ) don’t let CNBC and other major publications to change my opinion. I received a few calls last week wondering about the market action and my response was “so what”. Of course, readers of this blog are not surprised by the market action.
I was very forward with the liquidity problems in the previous two entries and I maintain my stance. Consequently, I placed my chips (read: money) on a free-fall in the financials because it was cheap insurance. I purchased out-of-the-money puts expiring in January ’09 on the XLF, the financials ETF. My only regret is that I didn’t purchase enough, the logic for the purchase was simple, the financials represent over 20% of the S&P, an inverted yield curve, liquidity drying up, and sub-prime issues would be sand paper action to their profitability. Currently that investment is up a little under 200% in two months time and I plan to hold it for a while. (Side note: Last week, Citigroup was down 7.4% and Goldman Sachs down 6.5%, both over 1.5X the market).
The Dow fell 4.2 % last week, which is nothing; there wasn’t a free-fall or a crash. It was similar to a person having 100 dollars in their pocket and purchasing a Big-Mac Value meal. As a devout, disciplined, shameless Sir Buffett fan, a value investor such as myself wants to see cheap stocks, because after-all: “Price is what you pay, Value is what you get!” For six months I have been whining about the limited opportunities in the market to a close friend and I welcome a little throbbing with open arms because it means I will pay a lower price for the same value.
The Junk Bond Debacle in 1989 had similar ingredients that Chrysler and Alliance Boots went through this past week. Banks are in the business of taking deposits and making loans to customers at a higher margin, when managed well they are enormously profitable. Last week, the auction of bonds to leverage Chrysler and Alliance Boots were not kindly met. Thus, banks that are in the business of deposits and loans are holding on to these companies in the meantime. This is not an enormously profitable venture when credit spreads are widening. If you can believe it and you should, six months ago Hugo Chavez borrowed at 6.7%. This is a remarkably low rate for a person who has threatened to default. These are “Criminal Lenders” according to Jim Grant and “For many ignorance is bliss.”
Currently, around 200 Billion dollars worth of deals are on bank balance sheets waiting to be leveraged. And 40 LBO’s (leveraged buy-outs) have been pulled thus far because of non-existent risk appetite. Moreover, foreclosures around the country have placed residential property on bank shoulders as well. This is a headwind for an industry that has been very strong the past few years. And because I am in the prediction mood, allow me to make a new one. The Enron/Worldcom/Tyco Etc. type of accounting that made for solid horror stories and great Court TV will have nothing on these “Criminal Lenders” and 15 to 1 leveraged stories. Because…
People that have homes will default on their credit cards, luxury spending, cars, (fill in the blank) before they default on their homes. Owning a home in the
On October 19, 1987 Sir Fisher stated in an interview, “The consumer has a high degree of loans outstanding that to me looks abnormally high in relation to his income.” That was right before the ’87 crash! I talked about this in the first post and I sincerely believe that although corporate balance sheets are flush with cash, the consumer is not. Tim Bond of Barclays Capital recently stated “It is the excess leverage of the lenders, not the borrowers which is the source of systematic problems.” There is an old saying, something along the lines of when the
Last week, When CountryWide CEO Angelo Mozilo stated that even the prime customers are having problems making payments and targeted 2009 as a change of tides, he wasn’t kidding. Suddenly, the quote by Wells Fargo CEO posted in the very first blog has more validity attached to the substance. More banks have “Real Estate Loan Exposure” that you can think and at some point liquidating the positions will be made at 50 cents on the dollar. The 725% increase in
Since 1890, the market has fallen more than 300 points on 15 occasions, this past weeks’ 312 point fall was the 698th worst in percentage terms. It is very important to put this in context and not be prey to Bubble vision’s (CNBC) baseless rhetoric. It is however important to know that Risk Appetite for leveraged transactions are non-existent. The only asset classes that went up were: 1) U.S. Dollar, 2) Crude Oil, 3) Treasury Bonds. One of the above doesn’t fit the bill.
To Conclude…
My father listens to Persian radio and there is a guy who always talks about the financial markets and liberally hands out advice. I don’t know him at all, but when passing by I often hear similarities in our stories and my father nods and raises an eyebrow to me as if this is something that I need to hear. And my reaction is always the same, “I told you this 6 months ago, Surprised?” That my friend is the story of Wall Street, where people put trust and belief in a person they have never met, and suddenly you have given access to your wealth. Thankfully, the guy is pretty logical, but the story has value.
So there you have it, I have condensed all of the previous weeks culprits to give you a macro version; something that I really don’t like doing because it is never-ending and unproductive. Top-down research is always inferior to bottom-up analysis. Originally, my intentions were to talk about Oil and possible investments, which is a topic that I love to research. In 2005 I completed a 25 page research paper about Uranium and Nuclear Energy with details of Hulbert’s Peak, I want to revisit it. Socrates said, “An unexamined life is not worth living.” Personally, I believe that an unexamined portfolio of investments is not worth owning and constantly question to death every company.
Rule of My Blog
That is why every subject talked about in this blog is carefully and mindfully stated, because it is not worth mentioning if I couldn’t support the other side, and I can. The market is something I love to read, discuss, and write about.
