Archive for December, 2009
#10. Federal Reserve Chairman Ben Bernanke decides pundits were wrong on the housing bubble, so he sets Fed Funds target rate at negative -3.0%. Small businesses start receiving loans.
#9. As part of healthcare reform, Medicare is extended to teens for collagen lip augmentation.
#8. Goldman Sachs, Morgan Stanley, and Citigroup form tri-merger to guarantee they are too big to fail.
#7. Tiger Woods poses in Playgirl to pay for pricey revised terms in his prenup. (see previous post)
#6. Gold spikes to $3,000 per ounce as government subsidizes dental chains in “cash for crowns” gold melting campaign. Consumers get extra cash, but Jujube candy sales plummet. (see previous post)
#5. Bernie Madoff escapes from prison. A cigarette Ponzi Scheme created by Madoff generates enough money to bribe guards.
#4. Apple introduces iPot – a combination iPhone and toilet.
#3. Kazakhstan pays Brazil, Russia, India and China a 5% GDP royalty to be added to the emerging B-R-I-C-K countries. A win-win for all parties, including spelling teachers around the world.
#2. Timothy Geithner retires from Treasury after making millions for being cast as Eddie Haskell in new remake of Leave It to Beaver movie. (see previous post)
#1. Oprah decides to halt her retirement plans. Instead, she signs me to a multi-million dollar deal to co-host a stock & gossip show with her.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including BKF) and AAPL, but did not have any direct positions in any stock mentioned in this article at time of publication (including GS, MS, C, and GLD). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
We laughed, we cried, we kissed another ten years goodbye. It is virtually impossible to cram ten years into one article, nonetheless I will attempt to chronicle some of the central and silly events that bubble up in my memory bank.
- Technology-heavy NASDAQ index peaks at 5,132 before completing its -78% decline by late 2002.
- Y2K (Year 2000) fears do not materialize and technology orders begin downward slide.
- AOL buys Time Warner for $164 Billion in hopes of converging media and internet worlds.
- Al Gore Democratic nominee for the Presidency wins popular vote but loses election to George Bush after effort for Florida recount fails.
- Elian Gonzalez, six-year old boy returned to Cuba.
- Reality TV show Survivor finishes first season with Richard Hatch winning prize.
- Apple introduces iPod digital music player.
- Enron files Chapter 11 bankruptcy.
- Wikipedia online community encyclopedia launches.
- 9/11 attacks occur pushing economy further down.
- Alan Greenspan starts 1st of 11 rate cuts in 2001.
- China joins WTO (World Trade Organization).
- Severe Acute Respiratory Syndrome (SARS), an atypical form of pneumonia, rears its ugly head in the Guangdong Province of China.
- SEC files charges against WorldCom and Tyco international in connection with accounting irregularities
- United Airlines files for bankruptcy.
- American Idol television singing contest begins first season.
- Guantanomo Bay detention camp is opened.
- Federal Funds rate reaches a 45 year low at 1.00% – fuel for future credit bubble.
- $350 billion in tax cuts approved, spanning a ten year period.
- Iraqi Gulf War II commences with “shock and awe” military campaign.
- Space Shuttle Columbia disintegrates upon attempted reentry into the Earth’s atmosphere.
- Broad stock market recovery (>90% of stocks in S&P500 climb), including a +50% rise in the NASDAQ index.
- Martha Stewart indicted for using privileged investment information and then obstructing a federal investigation.
- Arnold Schwarzenegger, movie star, becomes governor of California.
- Google (GOOG) goes public with IPO at $85 per share.
- Mark Zuckerberg unveils Facebook and people begin “friending” each other.
- Comcast makes failing unsolicited bid for Disney. K-Mart buys Sears with aid of Eddie Lampert
- Ronald Reagan, 40th President, dies at 93.
- Janet Jackson and Justin Timberlake experience “wardrobe malfunction” on Super Bowl halftime show.
- Boston Red Sox win their first World series since 1918.
- P&G announces $57 billion acquisition of Gillette. Conoco Philips buys Burlington Resources for over $30 billion. Bank of America buys credit card company MBNA.
- Ben Bernanke is nominated as new Federal Reserve Chairman.
- Hurricane Katrina overwhelms New Orleans as 80% of city becomes covered with water.
- North Korea announces its nuclear weapons arsenal.
- YouTube starts sharing online videos before Google Inc. eventually buys company.
- Lance Armstrong wins 7th consecutive Tour de France.
- Inverted yield curve turns out to be an accurate leading indicator for 2008 recession despite markets advance.
- Internet activity accelerates: Google buys YouTube after News Corp buys MySpace. Twitter is introduced.
- Playstation 3 (PS3) and Nintendo Wii unveiled.
- Merger & acquisition activity reaches $3.79 trillion worldwide, surpassing previous 2000 peak (Thomson).
- Options backdating takes center stage. United Health and technology companies were among those dragged into controversy.
- Housing market peaks.
- Markets continue multi-year rally with three major indexes holding single-digit gains. Emerging markets build on previous year gains – Shanghai composite +97%.
- Monoline insurers MBIA and rival Ambac become early canaries in the coal mine given the greater than $1 trillion in exposure on insuring securities.
- Apple presents the iPhone – part phone, part music, part computer.
- KKR (Kohlberg Kravis Roberts & Co.) and TPG complete $44.4 billion buyout of Texas power company TXU Corp.
- Microsoft Vista operating system introduced after five years of development.
- Housing decline accelerates as Countrywide Financial announces 12,000 job cuts (20% of its workforce), New Century Financial (#2 subprime lender at one point) files Chapter 11 bankruptcy, and two Bear Stearns mortgage based hedge funds go under.
- Chuck Prince, Citigroup CEO, steps down.
- Bank of America agrees to buy Countrywide mortgage company for about $4 billion.
- JPMorgan Chase agrees to buy Bear Stearns for $2 per share in a sale brokered by the Fed and the U.S. Treasury – eventually bid revised upwards to $10 per share (~$1.1 billion) to appease angry shareholders.
- Lehman Brothers goes bankrupt.
- Bank of America agrees to acquire Merrill Lynch for about $50 billion.
- Government takes over AIG after providing insurance company $85 billion loan.
- Goldman Sachs and Morgan Stanley become bank holding companies to improve access to capital.
- Washington Mutual Inc. is seized by FDIC and sold to JPMorgan Chase in the biggest U.S. bank failure in history.
- Wells Fargo & Co., agrees to purchase Wachovia for about $15.1 billion, trumping Citigroup’s bid.
- $700 billion TARP (Troubled Asset Relief Program) eventually approved by Congress to stabilize financial system.
- Eliot Spitzer resigns after prostitution scandal.
- Michael Phelps wins eight gold medals at the 2008 Beijing Summer Olympics.
- Barack Obama inaugurated in as 44th President of the United States. Healthcare reform bills pass in both the House and Senate.
- GM and Chrysler declare bankruptcy.
- Recession ends as stimulus kicks in and inventories rebuild. Government announces new PPIP and TALF programs.
- Warren Buffett pays $26 billion to buy Burlington Northern Santa Fe. Other announcements include: Oracle /Sun Microsystems; Pfizer/Wyeth; Merck/Schering Plough; and Pulte Homes/Centex.
- Commodities and emerging markets rebound. Gold tops $1,000 per ounce.
- Signs of housing bottoming as low mortgage rates, tax credits, and declining inventories create a more constructive environment.
- Madoff goes to prison after he was convicted for a $65 billion Ponzi Scheme.
- Chesley B. “Sully” Sullenberger successfully carries out the treacherous crash-landing of US Airways Flight 1549 into the Hudson River.
- Dubai debt debacle forces Abu Dhabi to lend support to calm global markets.
- Tiger Woods admits transgressions after car crash pushes him into spotlight.
Time will tell what the new year will bring. Stay tuned for some iron clad 2010 predictions coming to an Investing Caffeine blog near you in the not too distant future!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and BAC, AAPL, and GOOG, but did not have any direct positions in the following stocks mentioned in this article at time of publication (including AOL/TWX, VIA/CBS, NWS, TYC, UAUA, MSO, CMCSA, DIS, SHLD, PG, COP, Nintendo, MBI, ABK, MSFT, C, JPM, AIG, MS, WFC, GM, Chrysler, BRKA, ORCL, JAVA, PFE, MRK, PHM, BNI, LCC, GLD, and NKE). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Some call Andrew Ross Sorkin’s new behind-the-scenes book about the financial crisis of 2008-2009 “Too Big to Read” due to its meaty page count at 624 pages (a tad more than my book). But actually, once you crack the first chapter of Too Big to Fail you become immediately sucked in. In creating the “fly on the wall” perspective covering the elite power brokers of Wall Street and Washington, Sorkin utilizes 500 hours of interviews with more than 200 individuals.
Through the detailed and vivid conversations, you get the keen sense of overwhelming desperation and self-preservation that overtakes the executives of the sinking financial system. Some of the chief participants failed, some were triumphant, and some were pathetically bailed out. History will ultimately be the arbiter of whether government and Wall Street averted, mitigated, postponed, or contributed to the financial collapse. Regardless, Sorkin brilliantly encapsulates this emotionally panicked period in our history that will never be erased from our memories.
Here are a few passages that capture the feeling and mood of the book:
Merger Musical Chairs
The terror-induced insanity of merger musical chairs is best depicted through the notepad of Timothy Geithner, then the president of the New York Federal Reserve Bank:
“On a pad that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JP Morgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and CIC. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley. It was the ultimate Wall Street chessboard.”
The book is also laced with financial nuggets to put the scope of the crisis in perspective. Here Sorkin examines the distressed call of assistance from AIG CEO, Bob Willumstad, to Timothy Geithner:
“A bombshell that Willumstad was confident would draw Geithner’s attention-was a report on AIG’s counterparty exposure around the world, which included ‘$2.7 trillion of notional derivative exposures, with 12,000 individual contracts.” About halfway down the page, in bold, was the detail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concentrated with 12 major financial institutions.’”
Bernanke’s Bumbled Spelling Bee
In setting the stage for the drama that unfolds, Sorkin also provides a background on the key players in the book. For example in describing Ben Bernanke you learn he was
“born in 1953 and grew up in Dillon South Carolina, a small town permeated by the stench of tobacco warehouses. As an eleven-year-old, he traveled to Washington to compete in the national spelling championship in 1965, falling in the second round, when he misspelled ‘Edelweiss.’”
On how the precise $700 billion TARP (Troubled Asset Relief Program) figure was created, Sorkin describes the scattered thought process of the program designer Neel Kashkari:
“They knew they could count on Kashkari to perform some sort of mathematical voodoo to justify it: ‘There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly five percent of that is $700 billion.’ As he plucked numbers from thin air even Kashkari laughed at the absurdity of it all.”
Mixed in with the facts and downbeat conversations are a series of humorous anecdotes and one-liners. Here is one exchange between Goldman Sachs CEO, Lloyd Blankfein, and his Chief of Staff Russell Horwitz:
“’I don’t think I can take another day of this,’ Horowitz said wearily. Blankfein laughed. ‘You’re getting out of a Mercedes to go to the New York Federal Reserve – you’re not getting out of a Higgins boat* on Omaha Beach! Keep things in perspective.’”
*Blankfein’s quote: A reference to the bloody D-Day battle.
Too Big to Fail is an incredible time capsule for the history books. Let’s hope we do not have to relive a period like this in our lifetimes. I wouldn’t mind reading another Andrew Ross Sorkin book…just not another one about a future financial crisis.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but did not have any direct positions in any stock mentioned in this article at time of publication (including GS, AIG, WFC, MS, and C). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Stocks can rise and they can fall
Emotions can suffer withdrawal
What remains firm are feelings for those we love
Whether by the Christmas tree or in our hearts above
‘Tis the time of year to give thanks and reflect
But forget not ailing lost souls that deserve our respect
2009 included its share of pain and sorrow
For 2010 I wish all a prosperous and brighter tomorrow
-Wade W. Slome
Plan. Invest. Prosper.
Lieutenant Theo Kojak, played by Telly Savalas in the 1970s television series Kojak, is a bald, hard-nosed New York City police detective who hunts down criminals. Mark Mobius, executive chairman of Templeton Asset Management, is a bald, hard-nosed investment manager devoted to hunting down winning stocks in emerging markets. Expanding on his numerous authored books, Mobius recently decided to write his own blog expanding on his global travels and reporting back his investment findings.
Recently Mobius fielded some questions from his readers, covering emerging markets from China and Brazil to “Frontier” markets like Sri Lanka and Serbia (see also Trade of the Century). Here are a few of the exchanges:
In which countries, regions or sectors are you finding the best values?
“We are finding opportunities in almost all emerging markets. Our ground-up research process locates opportunities in countries where the political or economic outlooks may not, at first appearance, look good. Nevertheless, we generally favor China and Brazil, but also have large positions in Russia, India and Turkey. In terms of sectors, we believe commodity stocks look good because we expect the global demand for commodities to continue its long-term growth. We also favor consumer stocks. With rising per-capita income and strong demand for consumer goods and services in many emerging markets, we believe the earnings growth outlook for these stocks is positive.”
It appears that the financial market has changed, in that one needs to be more skeptical and cautious when investing than in the past. Alan Greenspan said that last year’s crash was unforeseen, and given the uncertainty of the markets and global financing, the big crash could happen again. What say you?
“Actually some analysts did see the crash coming in view of Greenspan’s loose monetary policies. The nature of markets is that there will always be booms and crashes since people tend to get either too optimistic or too pessimistic. The good news is that on average, bull markets have lasted longer than bear markets, and bull markets have gone up in percentage terms more than bear markets have gone down. In terms of other risks, I believe there is still a danger of the unregulated derivatives market.
Do you think Sri Lanka will turn around?
“We believe that Sri Lanka is fundamentally a rich country and that the challenges revolve around how the true potential in tourism, agriculture and industry can be effectively met. We have been investing in Sri Lanka for many years. For us, the biggest challenge in the public market is liquidity. Trading turnover is rather low although we have found some investment bargains.”
Belgrade’s Stock Exchange suffered heavy losses in the 2008 meltdown, with the Belex index falling sharply. I am from Serbia, and so I was thrilled to find out that Franklin Templeton is investing in Serbia.
“Yes, we are interested in the Serbian market and we are now looking at opportunities there. Of course, when markets are down, it is the best time to start looking and Belgrade is definitely on our list. We have already invested in a company in Serbia and look forward to looking more closely at that market.”
While Telly Savalas discovered fame 30 years ago from his Kojak role, Mr. Mobius has spent more than 30 years in the emerging markets chasing successful investments. Franklin Templeton Investors should remain happy if Mobius’ picks continue to shine, like his bald, polished crown.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (EEM, FXI, BKF). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
There is an old saying that lightning does not strike twice in the same place. I firmly believe this principle will apply to stock returns over the next decade. Josh Brown, investor and writer for The Reformed Broker highlighted a chart published by Bloomberg showing the 10-year return for various asset classes. Statisticians and market commentators have been quick to point out that stocks, as measured by various benchmarks, have not only underperformed bonds for the last 10 years, but stock performance has actually also been negative for the trailing decade.
Will this trend persist during the next decade? Will the lost decade in stocks be repeated again, similar to the deflation death spiral experienced by the Japanese? (Read more regarding Japanese market on IC). With the Fed Funds rate at effectively zero, is it possible bonds can pull off a miracle over the next 10 years? I suppose anything is possible, but I seriously doubt it.
Let’s not forget that the P/E ratio (Price-Earnings) pegged by some to be at about 14-15x’s 2010 expected earnings – nestled comfortably within historical bands. Granted, financials and some other sectors were overheated (e.g. certain Consumer industries), but based on next year’s estimates, some industries are already expected to exceed the peak earnings achieved during 2007 (e.g., Technology).
History on Our Side
For the trailing decade using December 20, 2009 as an end point, I arrive at a marginally negative return for the S&P 500 index assuming an average dividend yield of 2.5% for the period. Certainly the negative return would be pronounced by any fees, commissions or taxes related to a 10-year buy-and-hold strategy of the broad market index. This chart gets chopped off in 2005, nonetheless history is on our side, lending support that stock returns have a good chance of improving on the results over the last 10 years.
Equity Risk Premium
The bubbles and scandals that have blanketed corporate America over the last 10 years have made the average investor extremely skeptical. What does this mean for the pricing of risk? Well, if you rewind to the year 2000 when technology exceeded 50% of some indexes, and many investors thought technology was a low risk endeavor, there was virtually no equity risk premium discounted into many stock prices. If you fast forward to today, the reverse is occurring. Investors despise market volatility and arguably demand a much higher risk premium for taking on the instability of stocks. This is the exact environment investors should desire – lots of skepticism and money piled into bonds (See IC article on investor queasiness). As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.” I believe the next 10 years will be a time to be greedy.
The analysis above is obviously very narrow in scope, since we are only discussing domestic stock markets. In my client portfolios I advocate a broadly diversified portfolio across asset classes (including bonds), geographies, and styles. However, in managing bonds across portfolios, I am forced to tactfully include strategies such as inflation protection and shorter duration techniques. With the year-end fast approaching, now is a good time to review your financial goals and asset allocation.
Lightning definitely negatively impacted stocks this decade, but betting for lightning to strike twice this decade could very well turn out to be a losing wager.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in BRKA. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Like a bubble formed from chewing gum, the gradual expansion of the spherical formation occurs much slower than the immediacy of the pop. A minority of investors identified the treacherous, credit-induced bubble of 2008 before it burst, however not included in that group are financial regulators. Now we’re left with the task of cleaning up the sticky mess on our faces and establishing measures to prevent future blow-ups.
George Soros, Chairman of Soros Fund Management and author of The Crash of 2008, has been around the financial market block a few times, so I think it pays to heed the regulatory reform recommendations as it relates to the “Super bubble” of 2008. As you probably know, financial bubbles are not a new concept. Beyond the oft-mentioned technology and real estate bubbles of this decade, bubbles such as the “Tulip-mania” of the 1630s serve as a gentle reminder of the everlasting existence of irrational economic behavior. If the Dutch were willing to pay $76,000 for a tulip bulb (inflation-adjusted) almost 400 years ago, then virtually any mania is possible.
Bubbles and Efficiency
Efficient markets are somewhat like UFOs. Some people believe in them, but many do not. In order to believe in the existence of bubbles, one needs to question the validity of the pure form of efficient markets (read more about market efficiency). Here’s how Soros feels about market efficiency:
“I contend that financial markets always present a distorted picture of reality.”
I believe we will be in a hyper-sensitive period of bubble witch-hunting for a while, as the fresh wounds of 2008-09 heal themselves. If you get in early enough, bubbles can be profitable. Unfortunately, like a distracted teen fixated on the sunbathers at a nude beach, the excitement can lead to a painful burn if preventative sunscreen measures are not taken. Most bubble participants are too exhilarated to carry out a thoughtful exit strategy – the news can just be too tempting to jump off the top.
In his analysis of market regulation, Soros lays some of the “Great Recession” blame on the Federal Reserve and Alan Greenspan (Chairman of Fed):
“Instead of a tendency towards equilibrium, financial markets have a tendency to develop bubbles. Bubbles are not irrational: it pays to join the crowd, at least for a while. So regulators cannot count on the market to correct its excesses…The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. This was composed of smaller bubbles. Each time a financial crisis occurred the authorities intervened, took care of the failing institutions, and applied monetary and fiscal stimulus, inflating the super-bubble even further.”
Soros’ Recipe for Reform
What is Soros’ solution for the “Super bubble?” Here are some recommendations from his Op-Ed in the Financial Times:
- Regulator Accountability: First of all, financial authorities need to accept responsibility for preventing excesses – excuses are not an acceptable response.
- Control Credit: Rather than having static monetary targets such as margin requirements, capital reserve requirements, and loan-to-value ratios, Soros argues these metrics can be adjusted in accordance with the swinging moods of economic cycles. He punctuates the point by saying, “To control asset bubbles it is not enough to control the money supply; you must also control credit.”
- Limit Overheating in Specific Sectors: Had regulators limited lending during the real estate explosion or had the SEC limited technology IPOs in the late 1990s, perhaps our country would be in better financial health today.
- Manage Derivatives and Systemic Risk: Basically what Soros is saying here is that many market participants can become overwhelmed by certain exposures or exotic instruments, therefore it behooves regulators to proactively step in and regulate.
- Manage Too Big to Fail (read related Graham IC article): According to Soros a big reason we got into this trouble relates to the irresponsible proprietary trading departments at some of the larger banks. Responsibly separating these departments and limiting the amount of risk undertaken is an important element to the safety of our financial system.
- Reformulate Asset Holding Rules: Underestimating the risk profile of a certain security can lead to concentration issues, which can potentially generate systemic risk. Soros highlights the European Basel Accord rules as an area that can use some improvement.
Soros admits most, if not all, the measures he proposes will choke off the profitability of banks. For this reason, regulators must be very careful with the implementation and timing of these financial strategies. If employed too aggressively, the economy could find itself in a deflationary spiral. Move too slowly, and the loose monetary measures instituted by the Fed could fan the flames of inflation.
Bubbles will never go away. Eventually, the recent panic-induced fear will fade away and the entrepreneurial seeds of greed will germinate into new budding flowers of optimism. As investors nervously chomp away at their chewing gum, I will patiently await for the next financial bubble to form. I echo George Soros’s hope that regulators prick future “mini-bubbles” before they become “super-bubbles.”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in an security referenced. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.