To begin with, I believe agriculture, oil and gold are going to substantially outperform the markets for the rest of the year. However, these sectors have had an incredibly smooth ride upward over the last year plus. That ride upward will probably get more bumpy throughout this year... but not just yet. Why? The people who manage money have a reputation to keep.
The vast majority of money managers report results quarterly. The first quarter of 2008 comes to an end on March 31. Now lets think about this, you're a money manager, you've outperformed the S&P by 10+% thus far this year (as many of the stocks and ETFs in these sectors have), are you going to want to show the people whose money you manage that you own these names? Absolutely. Last year Google would get pops around this time each of the first 3 quarters because if managers didn't have it to show shareholders when they disclose holdings they'd look like idiots.
Now let's remember that people who manage money, hedge funds, mutual funds, all face this pressure, to hold the hot stuff. Therefore, the whales (the groups with all the money) aren't going to be selling a whole lot of any of these sectors this month, especially as we get closer to March 31. So what? So selling pressure on these names will be much less than it otherwise would be, allowing the names to go higher or at least preventing the names from correcting downward. Bottom line: I'm a buyer of these sectors on pullbacks like we saw today.
Quick picks in these sectors:
Ag- I ran a comps analysis mid last week, read through the presentations, the one that stands out is Potash... absolutely kicking ass, but pricey, obviously.
Oil- I like some of the oil service companies more than the drillers (I own TDW, the largest oil rig service vessel operator in the world) also attractive at these levels is BP, the intergrated oil company (one who operates in all facets of the game: drilling, refining, transporting, etc) which is actually adding to reserves and sporting a 5+% dividend, full disclosure: I bought some today.
Gold- Lots of people in the press preach owning gold ETFs, such as GLD, rather than the miners. I agree with them. Owning the miners only exposes you to the risk of a mine collapsing or something like that and with many companies, they hedge their gold, so they're not seeing the full benefit of the increase of the price of gold. If you like the miners, Cramer would send you to AUY or AEM. I've done my homework on both of them, I'd go with GLD, the ETF.
Wednesday, March 5, 2008
Tuesday, March 4, 2008
Investment Bank Extinction?
A recent PE conference held in Munich caused a stir, as Guy Hands, the head of British buy-out shop Terra Firma Capital announced the redundancy of investment bankers. Hands proposes the economic conditions are right for private equity groups and similar buy-out firms to manage purchases without the advice and underwriting investment banks have to offer.
Warren Buffet, the Oracle of Omaha, famously dislikes investment bankers. His firm, Berkshire Hathaway, recently made their largest cash purchase in their company's long history of acquisitions, while employing no advisors (read: investment bankers).
As a little refresher, while investment banks partake in various value-creating activities, their primary function has always been to act as middle men, lining up buyers and sellers of all sorts of financial instruments, like bonds or stocks. This includes actions like taking a firm public (an IPO) and advising on a merger, acquisition, or divestiture.
For example, in an LBO, an investment bank will usually underwrite the debt used by a PE group to purchase a company, then sell the debt off to investors. I-banks have been necessary, because underwriting is difficult and complicated, and also demands an unbiased third party to guarantee that the debt is good.
But what credibility do these banks have after so seriously flubbing these CDOs and CMOs last year? And the fact that the fatty premiums I-banks charge for their services is upwards in the tens of billions of dollars might make their services a hard sell. It is no wonder that PE groups are building their own debt raising branches. And with the cash-rich sovereign wealth funds on the rise, financing is no doubt easier than ever to mitigate for PE groups.
OK, but is this change actually feasible? Are investment banks on the out and out for M&A work? Doubtful. Investment banks have incredible infrastructure set in place, in order to sell all over the world. Furthermore, PE groups can't both reach out for buyers of debt AND try to keep their purchase a secret (obviously a necessary move when acquiring a public company). Some of these issues can be addressed as IT improves, but all that probably means is prices will go down as ibanks lose bargaining power. Anyway, investment banks make plenty of money elsewhere, and the investment bankers will simply take their skills elsewhere (e.g. private equity).
Interestingly enough, the deal structuring for PE groups is nothing to be proud of, either. A PE firm interested in purchasing a company has to deal with information asymmetry - what financial skeletons-in-the-closet are the management hiding from them? A popular way to overcome this is by binding he remaining management to the purchase through heavy investment. Normally, execs who are staying on are required to invest all of their own assets into the success of the firm, purchasing common stock, and pile on personal debt as well. So if the company goes under, they are out of house and home. Sounds like a gamble? Well, at least the rewards are huge.
Warren Buffet, the Oracle of Omaha, famously dislikes investment bankers. His firm, Berkshire Hathaway, recently made their largest cash purchase in their company's long history of acquisitions, while employing no advisors (read: investment bankers).
As a little refresher, while investment banks partake in various value-creating activities, their primary function has always been to act as middle men, lining up buyers and sellers of all sorts of financial instruments, like bonds or stocks. This includes actions like taking a firm public (an IPO) and advising on a merger, acquisition, or divestiture.
For example, in an LBO, an investment bank will usually underwrite the debt used by a PE group to purchase a company, then sell the debt off to investors. I-banks have been necessary, because underwriting is difficult and complicated, and also demands an unbiased third party to guarantee that the debt is good.
But what credibility do these banks have after so seriously flubbing these CDOs and CMOs last year? And the fact that the fatty premiums I-banks charge for their services is upwards in the tens of billions of dollars might make their services a hard sell. It is no wonder that PE groups are building their own debt raising branches. And with the cash-rich sovereign wealth funds on the rise, financing is no doubt easier than ever to mitigate for PE groups.
OK, but is this change actually feasible? Are investment banks on the out and out for M&A work? Doubtful. Investment banks have incredible infrastructure set in place, in order to sell all over the world. Furthermore, PE groups can't both reach out for buyers of debt AND try to keep their purchase a secret (obviously a necessary move when acquiring a public company). Some of these issues can be addressed as IT improves, but all that probably means is prices will go down as ibanks lose bargaining power. Anyway, investment banks make plenty of money elsewhere, and the investment bankers will simply take their skills elsewhere (e.g. private equity).
Interestingly enough, the deal structuring for PE groups is nothing to be proud of, either. A PE firm interested in purchasing a company has to deal with information asymmetry - what financial skeletons-in-the-closet are the management hiding from them? A popular way to overcome this is by binding he remaining management to the purchase through heavy investment. Normally, execs who are staying on are required to invest all of their own assets into the success of the firm, purchasing common stock, and pile on personal debt as well. So if the company goes under, they are out of house and home. Sounds like a gamble? Well, at least the rewards are huge.
Market Summary: Tues. March 4, 2008
The markets looked horrible until about 1pm. We were quickly approaching the January lows and many of the financial stocks broke through critical price levels. This sell-off was accelerated as we finally got a much needed pull-back in almost every major commodity. Gold and oil were down big, and subsequently the energy and agriculture stocks pulled back sharply. I have been mentioning lately that these commodities have gotten “too hot” and you should wait until a pull-back to get in…today was your chance to start a position. I added more shares of Monsanto after it was down 7% today.
Bad news from the financial sector also weighed on the markets. Citigroup was the main laggard after Merrill Lynch cut its earnings estimates and noted more write-downs are on the way. The analyst predicts there will be “$18 billion of credit write-downs related to the company's holdings of sub-prime mortgages, collateralized debt obligations, leveraged loans, consumer debt, real-estate loans and other investments…the analyst slashed his first-quarter estimate for Citigroup to a loss of $1.66 a share from a profit of 55 cents a share and his 2008 profit forecast to 24 cents a share from $2.74” (Source: Bloomberg.com). Goldman Sachs also cut estimates at Citigroup. Wachovia also cut estimates for Goldman, Bear Sterns, Lehman Brothers, and Morgan Stanley. Merrill also cut estimates at Bank of America and Wachovia. Also, the CEO of Dubai International said Citi may need to raise additional capital to offset more losses. CNBC talked about Citi laying off as many as 30,000 workers.
The market turned around at 1pm on news that Ambac’s recapitalization plan is making progress and Cisco’s CEO’s positive comment about the economy. John Chambers, Cisco’s CEO, said he is “even more comfortable” with his company’s long-term growth rate. Amazon also jumped after their CFO reiterated their ’08 revenue guidance (Source: CNNMoney.com).
Fed Chairman Ben Bernanke spoke to the Independent Community Bankers of America and he said that “delinquencies and foreclosures likely will continue to rise for a while longer…and further declines in house prices are likely” (Source: Bloomberg.com).
In other news…
Moody’s downgrades Sallie Mae.
Staples and Barnes & Noble both were down after reporting earnings. Staples offered poor guidance for 2008 and Barnes & Noble was downgraded to neutral.
Apple did not declare a dividend or a stock repurchase program. The company also reiterated its forecast of selling 10 million iPhones in 2008.
DJIA 12,213.80 -45.10 (-0.37%)
Nasdaq 2,260.28 +1.68 (+0.07%)
S&P 500 1,326.75 -4.59 (-0.34%)
NYSE Volume 4,710,605,000
2-Yr Bond 1.65% +0.04
10-Yr Bond 3.63% +0.09
30-Yr Bond 4.52% +0.10
Crude Oil (Apr) 99.96 -2.49
Gold (Apr) 966.20 -18.00
ALM's Effect on the Financial Crisis
For those of you who haven't yet taken FIN 300 or above, this may be a little over your head, but duration is a critical financial concept and I'd encourage you to read this anyways. Briefly, duration is a measurement of how sensitive a cash flow (most typically a bond) is to interest rate fluctuations. The most common duration measurement is called modified duration, which provides a fairly reasonable estimate for price (the present value of cash flows) changes given a small change in the interest rate. For example, if a bond has a modified duration of 2.50, and the interest rate rose one percent, the price of the bond would drop 2.50% percent (remember, interest rate increases equals bonds price decreases). Understand that this is only an estimate, but it is what banks and insurance companies typically use and for fixed cash flows, it is fairly reliable.
Asset/Liability Matching (ALM) is a critical component of financial risk management that all financial institutions use to at least some extent. Basically, the idea is that the companies want the durations of their assets and liabilities to match. So, if you can set up your assets and liabilities in a manner that there durations are equivalent, any movement in interest rates will affect both the assets and liabilities roughly equivalently. Thus, your company won't experience significant write downs whenever interest rates move the "wrong" way.
So anyways, this defensive strategy has been reasonably effective in years past, because for the most part, the cash flows of assets and liabilities were more or less fixed. The problem today is that so many financial institutions are using various obscure derivatives that have cash flows that vary in both timing and amount. More critically, those changes in timing and amount are highly correlated with interest rates. For example, consider a collateralized mortgage agreement (CMO) which produces cash flows based on the mortgage payments of a whole pool of borrowers. If interest rates drop, suddenly not only are the cash flows discounted at a different rate, but people are going to pay off their mortgages much quicker (because they'll refinance their mortgages) and the timing of the cash flows is shifted forward - note that this is actually a bad thing because less interest is being paid. As you can probably imagine, duration quickly loses it's credibility in situations such as these. In fact, their are other measurements that more accurately measure interest rate sensitivity that indicate that duration's sensitivity estimates aren't even close to the actual sensitivity.
So from holding new more complicated derivatives such as CMOs, banks and insurance companies have been exposed to massive amount of risk that they completely overlooked. Suddenly their value assets and liabilities change in markedly different ways leading to potentially large losses in surplus (assets minus liabilities) if interest rates move the "wrong" way. Furthermore, with interest rates being so ridiculously volatile recently, these risks are becoming a greater concern.
Now understand, this is the more or less most basic overview of the situation possible, but hopefully it sheds a little light onto why we actually learn about issues such a duration. If you have any questions or concerns regarding any of this feel free to respond and I'll gladly do my best to clear them up. Also, it should be noted that all this information comes from lectures in my FIN 432 class. I asked the Professor (Steve D'Arcy) for some links regarding this matter, and he explained that this problem is largely overlooked and unreported; thus, there wasn't much pertaining to it that was accessible online.
Asset/Liability Matching (ALM) is a critical component of financial risk management that all financial institutions use to at least some extent. Basically, the idea is that the companies want the durations of their assets and liabilities to match. So, if you can set up your assets and liabilities in a manner that there durations are equivalent, any movement in interest rates will affect both the assets and liabilities roughly equivalently. Thus, your company won't experience significant write downs whenever interest rates move the "wrong" way.
So anyways, this defensive strategy has been reasonably effective in years past, because for the most part, the cash flows of assets and liabilities were more or less fixed. The problem today is that so many financial institutions are using various obscure derivatives that have cash flows that vary in both timing and amount. More critically, those changes in timing and amount are highly correlated with interest rates. For example, consider a collateralized mortgage agreement (CMO) which produces cash flows based on the mortgage payments of a whole pool of borrowers. If interest rates drop, suddenly not only are the cash flows discounted at a different rate, but people are going to pay off their mortgages much quicker (because they'll refinance their mortgages) and the timing of the cash flows is shifted forward - note that this is actually a bad thing because less interest is being paid. As you can probably imagine, duration quickly loses it's credibility in situations such as these. In fact, their are other measurements that more accurately measure interest rate sensitivity that indicate that duration's sensitivity estimates aren't even close to the actual sensitivity.
So from holding new more complicated derivatives such as CMOs, banks and insurance companies have been exposed to massive amount of risk that they completely overlooked. Suddenly their value assets and liabilities change in markedly different ways leading to potentially large losses in surplus (assets minus liabilities) if interest rates move the "wrong" way. Furthermore, with interest rates being so ridiculously volatile recently, these risks are becoming a greater concern.
Now understand, this is the more or less most basic overview of the situation possible, but hopefully it sheds a little light onto why we actually learn about issues such a duration. If you have any questions or concerns regarding any of this feel free to respond and I'll gladly do my best to clear them up. Also, it should be noted that all this information comes from lectures in my FIN 432 class. I asked the Professor (Steve D'Arcy) for some links regarding this matter, and he explained that this problem is largely overlooked and unreported; thus, there wasn't much pertaining to it that was accessible online.
Latest Poll Results
With the higher than expected CPI numbers and rising commodity prices, what will be the Fed's next move?
No Cut - 5 (31%)
25 bp Cut - 11 (68%)
50 bp Cut - 0 (0%)
Raise Rates - 0 (0%)
No Cut - 5 (31%)
25 bp Cut - 11 (68%)
50 bp Cut - 0 (0%)
Raise Rates - 0 (0%)
Market Summary: Mon. March 3, 2008
I thought today (at least the morning) was going to be very bad for stocks – basically a continuation of Friday’s sell-off. We didn’t get much help from foreign markets as Asian sold-off very hard. We had a weak open, choppy trading throughout the day, and ended essentially flat.
In economic news, January construction spending decreased 1.7%, much more than was expected and the homebuilders sold-off on this news. Also, the manufacturing data (ISM Index) came in at 48.3 pretty much in-line with expectations (Source: Bloomberg.com).
Today’s move was supported by gains in crude oil and gold (as well as other commodities) and further declines in the U.S. dollar exaggerated the commodities’ move.
Here are some pretty interesting excerpts from a finance.yahoo.com article (sorry, can’t link it because Yahoo! archives its articles differently than most sites – for more info, search “Oil Jumps to New Record on Dollar's Fall”):
“Many analysts believe oil prices aren't justified by crude's underlying supply and demand fundamentals, and are due to fall at some point. While supply disruptions in Nigeria and the prospect of supply cutoffs from Iraq and Venezuela helped boost oil prices last year, domestic oil inventories are now rising even as a number of forecasters are cutting their demand growth predictions due to the slowing economy.”
“…Analyst estimates vary widely, with some predicting an eventual decline to the $65 or $70 range as supplies continue to grow and demand falls, and others seeing oil rising as high as $120 as investment capital continues to flow into oil markets from overseas. For its part, the Energy Department's Energy Information Administration's latest prediction is that oil will average $86 a barrel in 2008, up 19 percent from 2007, when oil averaged $72 a barrel.”
“The average price of a gallon of gas stood at $3.165 Monday, according to AAA and the Oil Price Information Service. That's down 0.1 cent overnight, but up nearly 70 cents from a year ago. The Energy Department expects gas prices to peak near $3.40 this spring, well above May's record of $3.227, but some analysts predict prices could rise to nearly $4 a gallon.”
Tech stocks were the laggard today after Apple was downgraded. On positive was that CNBC commentators talked about Apple possibly announcing a stock repurchase program at their shareholders meeting tomorrow.
Also, in an interview with CNBC, Warren Buffett said that the
The major financial news came from Citigroup after the bank said Thornburg Mortgage might face bankruptcy after failing to meet $270 million of margin calls. TMA was down 56% on the day! Here’s the Bloomberg.com article describing Thornburg’s financial situation. Standard & Poor’s lowered Thornburg’s credit rating to B- from B. This is very bad news, and I’m surprised the entire market didn’t sell-off more after this report.
Ambac announced they would cut their quarterly dividend to 1 cent from 7 cents. Also, they plan on “suspending all new structured financial business for the next six months and will be discontinuing business in a number of sectors in the global structured finance market” (Source: Briefing.com). Ambac was down almost 11% for the day.
After hours, Intel decreased its Q1 profit forecast because of tightening margins. Look for tech to be the laggard tomorrow morning because of this news (Source: Bloomberg.com).
Everyone keeps talking about this “nice bottom” that we’ve established especially with today’s action (really bad news, but not too bad of a sell-off), but I’m not buying it. I think this is kind of the calm before another storm hits the market. There is so much financial distress in the markets right now, and the only news coming from the financial companies is bad news. The XLF is almost back to its January lows.
Also, gold’s run is pretty ridiculous. All the analysts are setting these outrageous price targets, but I’m approaching this play very cautiously. Commodities are traded very technically (people use the charts to trade) and I’ll take you back to oil’s run to $100. Crude oil hit $100 just like everyone thought it would and then it pulled back sharply and traded sideways for some time. Once oil broke through the $100 mark, it exploded upward. I feel this might be the same thing that happens to gold. Everyone has been talking about $1000 gold for some time and when we finally reach that level, I expect a pull back and some sideways trading. This prediction assumes that gold will only “touch” $1000, not “break through” $1000. We’ll have to wait and see how this hypothesis holds up.
DJIA 12,258.90 -7.49 (-0.06%)
Nasdaq 2,258.60 -12.88 (-0.57%)
S&P 500 1,331.34 +0.71 (+0.05%)
NYSE Volume 4,094,485,000
2-Yr Bond 1.61% -0.04
10-Yr Bond 3.54% +0.01
30-Yr Bond 4.42% +0.01
Crude Oil (Apr) 102.42 +0.58
Gold (Apr) 985.80 +10.80
Monday, March 3, 2008
Market Summary: Fri. Feb. 29, 2008
It was a rough day on Wall Street Friday. People saw green everywhere around campus except on their stock tickers. Not one of the stocks on my watch list was green Friday. The market opened lower and traded lower the entire day because of Dell’s sub-par earnings report Thursday after the close, weakness in the overseas markets, AIG’s big write-down, and not-so-hot PCE (personal consumption expenditure) data.
January personal spending increased 0.4% and personal income increased 0.3%, but a 0.3% increase (market was expecting a 0.2% increase) in the Core PCE cancelled out the personal income gains.
The regional manufacturing data (specifically
AIG reported a Q4 loss of $5.3B Thursday after the bell because of “an $11.1B write-down of derivatives linked in part to sub-prime mortgages.” AIG also hinted at more write-downs when they said “continuing market deterioration would cause [us] to report additional unrealized market valuation losses and impairment charges” in the future (Source: Bloomberg.com). This news from AIG spooked investors and caused the financials to lead the charge downward. That fear that was present in the markets about 4 weeks ago is back (the ^vix jumped to 26.5). If more bad news about financials hits the market, there is still plenty of room to go lower. Everyone keeps saying that “the path of less resistance is lower” and I agree.
UBS also came out with some news that weighed on the financial sector. The bank said write-downs could total $600B. Another analyst at Goldman Sachs estimates $400B in write-downs. Currently, there have been $181B in write-downs (Source: Bloomberg.com).
There was also a report on CNBC that some hedge funds were forced to sell their municipal bonds in order to meet margin calls. This sent municipal bond yields to historic highs. According to the WSJ, “the average AAA-rated 30-year municipal bond yielded 5.14% compared with 4.42% on a U.S. Treasury 30-year bond.”
The Fed announced they will auction $60B through their Term Auction Facility. The $30B auctions will take place March 10th and 24th. These two auctions will bring the total to six. In the statement made by the Fed, they said they will continue to have theses auctions “for as long as necessary to address elevated pressures” (Source: CNBC.com).
Some more things to look at….
1) Bloomberg.com article about Wilbur Ross and how he is helping Assured Guaranty
2) Bloomberg.com article about mortgage defaults and how they have risen to all-time highs
3) Bloomberg.com article about Northrop Grumman and how they won a $35B defense contract
About today: I bought stock (agriculture, energy, and few others) hand over fist right before the close. The inflation story still holds true, and it probably gets stronger as the economy gets weaker because the Fed will be forced to cut rates. Look for a weak Monday morning (Asian will get slaughtered) and another great opportunity to buy good stocks at a discounted price. Let the sellers push the market down for the first hour or so and then jump in and pick out the good stocks.
DJIA 12,266.39 -315.79 (-2.51%)
Nasdaq 2,271.48 -60.09 (-2.58%)
S&P 500 1,330.63 -37.05 (-2.71%)
NYSE Volume 4,343,070,000
2-Yr Bond 1.65% -0.22
10-Yr Bond 3.53% -0.18
30-Yr Bond 4.41% -0.14
Crude Oil (Apr) 101.84 -0.75
Gold (Apr) 975.00 +7.50
Saturday, March 1, 2008
Free Money
In the true spirit of business, if you like free money and/or sports betting, follow your heart and this link to cent sports. They give you 10 cents, you can bet it on sports, if you can turn it into $10 or more you can cash out and they'll send you a check. It's a pretty genius business model. They make money off advertisers and can afford to offer so many dimes cuz its so hard to turn it into $10. Check it out, it's a lot of fun.
Thursday, February 28, 2008
Market Summary: Thurs. Feb. 28, 2008
Oil, the sinking U.S. dollar, and gold continue to steal the headlines as they approach and break through record levels. The dollar hit new lows as the Fed signaled more rate cuts. Foreign investors exchange (sell) their dollars for other currencies and deposit them in foreign banks that earn more interest. Gold continues its march toward $1000 as the Fed continues to hawkishly monitor growth and ignore short-term inflation. Gold acts as a hedge against inflation so investors buy gold for this protection and it causes the price to increase. Oil’s run is a little exaggerated because of the weakening dollar. Crude oil is traded in U.S. dollars and when the U.S. dollar declines it makes foreign currencies relatively stronger. Thus, it is cheaper for foreigners to purchase oil and they are then willing to “pay up” a little to get their oil.
Why was I, along with most novice investors, stumped by the markets’ behavior the past few days? There were plenty of economic reports that came in much weaker than expected, but the markets didn’t sell off that much, or they even rallied in some instances. This was because expectations were already “baked in” to the prices of stocks. Dave mentioned this term a while ago in one of his articles. Investors knew the number was going to be bad and the prices of stocks already reflected the bad news. Here’s what you have to know: surprises and surprises only move markets and stock prices. If people are expecting a good number, the stock is probably accurately priced. But when a company unexpectedly misses margins or revenues in an earnings report, this is a surprise and the market adjusts the price of the stock accordingly. The market has such low expectations – for economic data as well as for many stocks – that when bad news hits the market, stocks barely move.
Now for today’s happenings…This morning, the preliminary GDP number came in at 0.6% (the same as it did last month for the advanced reading), but analysts’ were looking for an increase to 0.8%. Also, the initial jobless claims number was 374K, up from 354K last week. This caused the major markets to open lower.
The market sold off at 10am after Bernanke commented that he expects “there will be some failures” among smaller banks that invested in real estate. He also noted that the big
Sprint lost $29.5B (-$10.36 per share) last quarter because they were forced to write-down almost the entire value (goodwill) of their Nextel acquisition that took place only two years ago. Sprint is losing customers fast and as Dave noted, they are a potential takeover target or they might just go under. They also eliminated their dividend. Without this one-time charge, Sprint would have earned $0.21 per share (Source: Bloomberg.com).
Also, Freddie Mac posted a $2.5B quarterly loss, much greater than anticipated (Source: Bloomberg.com). Apple was up big after they reaffirmed their goal of selling 10 million iPhones (Source: Forbes.com). After hours Dell was down after missing revenues (Source: Reuters.com). Kohl’s Q4 profit declined and their guidance was below Wall Street’s expectations. AIG (financial) lost $5.3B last quarter.
Something to note about the rate cuts…everyone has been calling for lower rates so people (who shouldn’t have bought houses) could refinance. However, the Fed rate cuts have not done anything to lower mortgage rates. According to Freddie Mac, “the rate on a 30-year fixed mortgage rose to an average 6.24 percent this week from 6.04 percent a week earlier…The 15-year fixed mortgage rose to 5.72 percent from 5.64 percent.” Why are rates going up? It’s because banks are not giving out home loans. Banks are “taking these rate cuts and pocketing the money…to shore up their own balance sheets” (Source: CNBC.com).
Tomorrow there are no major earnings reports. Data for the PCE (inflation reading) and regional manufacturing productivity will be released.
DJIA 12,582.18 -112.10 (-0.88%)
Nasdaq 2,331.57 -22.21 (-0.94%)
S&P 500 1,367.68 -12.34 (-0.89%)
NYSE Volume 3,858,809,000
2-Yr Bond 1.87% -0.14
10-Yr Bond 3.71% -0.14
30-Yr Bond 4.55% -0.10
Crude Oil (Apr) 102.59 +2.95
Gold (Apr) 967.50 +6.50
Bull Stocks- Ring Ring
Sprint's Earnings report today only confirms how drastically it is underperforming Verizon and AT&T. However, I covered my S short positions today because I think the company has become a decent takeover target, if for nothing else but their customers. VZ and T can sit and wait for customers to leave S for them, but then customers will mostly split between the 2 and other competitors, or they can go buy S, if for nothing else than their customers. Do I think this will happen? Not necessarily, but it's too big of a risk to have a short position on in my opinion. Should S bounce back into the 9's anytime soon, I would look to buy puts to limit my downside should it get bought out.
The int'l cell service story is a great one, with many great players that are operating extremely well. VIP and MBT are dominating Russia and eastern Europe. MBT is a more established, slower growing company with a nice dividend yield over 3%. VIP is fast growing and expanding into countries (some that have MBT and others that don't). MICC has the broadest exposure with operations in C America, S America, Africa and Asia. It is one of the fastest growing, and focuses on the people who can barely afford cell phones. It does the majority of its business on prepaid cards, and bills by the second instead of the minute.
Bottom line: the wireless provider sector is one to watch, both international and domestic going forward. I think it's a total Bull industry.
The int'l cell service story is a great one, with many great players that are operating extremely well. VIP and MBT are dominating Russia and eastern Europe. MBT is a more established, slower growing company with a nice dividend yield over 3%. VIP is fast growing and expanding into countries (some that have MBT and others that don't). MICC has the broadest exposure with operations in C America, S America, Africa and Asia. It is one of the fastest growing, and focuses on the people who can barely afford cell phones. It does the majority of its business on prepaid cards, and bills by the second instead of the minute.
Bottom line: the wireless provider sector is one to watch, both international and domestic going forward. I think it's a total Bull industry.
Wednesday, February 27, 2008
Market Summary: Wed. Feb. 27, 2008
Ben Bernanke testifying to Congress was at center stage today. The markets were very choppy as investors digested lots of weak earnings and economic data and Bernanke’s statements regarding the economy. We opened slightly lower this morning because the durable orders and new home sales numbers came in much weaker than expected.
“New home sales fell by 2.8 percent last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1995,” according to Yahoo! Finance. “The median price of a new home dropped to $216,000 in January, down 4.3 percent from the December median sales price…that was the lowest median price since September 2004.”
The inventory of unsold homes declined, but “the number of months it would take to exhaust the current inventory rose to 9.9 months, the longest period in more than 26 years. Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the
The durable orders number declined 5.3% (the market was looking for a 4.0% decline) because of weakness in transportation equipment orders and slower demand for aircraft and vehicle parts (Source: finance.yahoo.com).
Both pieces of data were very weak and point to the economy being in a recession. I was surprised that the market did not sell off more on this news, but once again, no one was expecting a good number.
Fannie Mae and Toll Brothers (homebuilder) reported earnings before the bell. Fannie Mae lost $3.6B during Q4 because of increased loan delinquencies. They reported a loss of $3.80 per share while analysts’ were predicting a loss of $1.24 per share. Fannie Mae and Freddie Mac both popped today on news that regulatory restraints on their mortgage investments will soon be lifted. This Bloomberg.com article explains what this means for these two companies.
Toll Brothers also reported disappointing numbers, but managed to finish the day up 3%. They reported $245M in write-downs and overall they lost $96M. Their EPS was -$0.61 compared with the -$0.50 estimate. The only positive was they had sales of $843M compared with the $818M analysts were expecting (Source: finance.yahoo.com).
The market got a boost in the morning from Bernanke’s comments about the economy and the possibility of future rate cuts. He noted that the Fed is eyeing rising commodity costs and that “the economic situation has become distinctly less favorable.” He said the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” This is the statement investors were looking for and the market rallied because there is a chance more rate cuts are coming to stimulate the sluggish economy” (Source: Bloomberg.com).
On this news of potential rate cuts, the dollar sunk to an all-time low against many foreign currencies (check out this Bloomberg.com article). Gold also rallied because it is a hedge against rising inflation. Investors expect inflation to increase as the Fed lowers rates to fight slower growth. Oil was down on a bearish inventory report.
The markets have been very difficult to read the last few days. On what would seem to be bearish data, the market rallies, and what seems to be bullish data, the market sells off. There is an expectation that more rate cuts are coming in the next three weeks and investors are looking past the poor economic reports.
Tomorrow’s earnings reports include Sears, XM, Freddie Mac, Sprint, AIG, Viacom, Dell, Gap, and Kohl’s. In the morning we will also get the preliminary Q4 GDP number and the initial jobless claims number.
DJIA 12,694.28 +9.36 (+0.07%)
Nasdaq 2,354.47 +9.48 (+0.40%)
S&P 500 1,380.02 -1.27 (-0.09%)
2-Yr Bond 2.01% -0.03
10-Yr Bond 3.85% -0.03
30-Yr Bond 4.65% -0.01
Crude Oil (Apr) 99.64 -1.24
Gold (Apr) 961.00 +12.10
Corporate Philanthropy
Back in Davos, the retiring Bill Gates issued a challenge to all of the world's business and political leaders (and Bono, I guess) to add social entrepreneurship to their corporate agendas. Bill "urged them to pair the self-interest that is the hallmark of capitalism with interest in the welfare of others, which he asserted was a second important force of human nature."
One of my fondest interests, microfinance, is a key mechanism in play to achieve these goals. But this article isn't about microfinance. It's about corporate philanthropy.
The collective geniuses at McKinsey produced a survey recently entitled "The State of Corporate Philanthropy," where they surveyed a wide collection of corporate executives from many different industries.
The New York Times reports that Arata Kochi, the chief of the malaria program at the World Health Organization, recently complained to his boss about the Bill and Melinda Gates foundation's influence on the malaria research. The article says:
As information becomes more ubiquitous, easier to access, and more intuitive to search, largely thanks to the internet, press is becoming more free, and companies more and more transparent. It is clear that companies, more so than ever before, are becoming cognizant of their social and environmental responsibilities.
One of my fondest interests, microfinance, is a key mechanism in play to achieve these goals. But this article isn't about microfinance. It's about corporate philanthropy.
The collective geniuses at McKinsey produced a survey recently entitled "The State of Corporate Philanthropy," where they surveyed a wide collection of corporate executives from many different industries.
"In addition to social goals, the vast majority of companies—nearly 90 percent—now seek business benefits from their philanthropy programs as well. When respondents were asked what business goals they try to reach through philanthropy, they most often say their goals include enhancing the corporate reputation or brand (Exhibit 1). And some 80 percent of respondents say finding new business opportunities should have at least some role in determining which philanthropic programs to fund, compared with only 14 percent who say finding new business opportunities should have no weight."Sometimes, these business practices can indeed get in the way of the greater good. The Bill and Melinda Gates foundation, the largest charitable foundation in the world, has completely shaken up the philanthropy industry, by running things like a real business - a tight ship where things are only funded if a return (in this case, a sound success of the project's goals) is certain. The Bill and Melinda Gates foundation is doing wonderful things, but, as we all know, nothing is ever black and white.
The New York Times reports that Arata Kochi, the chief of the malaria program at the World Health Organization, recently complained to his boss about the Bill and Melinda Gates foundation's influence on the malaria research. The article says:
Again, there is a lot more information than this quote leads on about, and I strongly suggest you read the article before you cast your own opinion. Also, keep in mind that the Bill and Melinda Gates foundation (home page)is not-for-profit, while the McKinsey article was focused on for-profit companies.Many of the world’s leading malaria scientists are now “locked up in a ‘cartel’ with their own research funding being linked to those of others within the group,” Dr. Kochi wrote. Because “each has a vested interest to safeguard the work of the others,” he wrote, getting independent reviews of research proposals “is becoming increasingly difficult.”
Also, he argued, the foundation’s determination to have its favored research used to guide the health organization’s recommendations “could have implicitly dangerous consequences on the policy-making process in world health.”
As information becomes more ubiquitous, easier to access, and more intuitive to search, largely thanks to the internet, press is becoming more free, and companies more and more transparent. It is clear that companies, more so than ever before, are becoming cognizant of their social and environmental responsibilities.
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