Since I don't think anyone has made mention of it yet, I thought I'd bring up the recent news in regards to Washington Mutual. Within this subprime mess, the company's shares have dropped 70%, they've fired over 3,000 employees, and had about a $2 billion loss last quarter. Oddly enough though, the board of directors have decided that the executive's bonuses will be determined without factoring in the damage from mortgage losses. And because all of their failings can be in some way attributed to mortgage losses, guess what, the board of directors decided that the executives are gonna be getting the same fatty bonuses they'd get if the company had performed well.
Now, I'm not one to be bothered by rich people getting richer - 'cause my hope is to be in that realm sooner rather than later - however, we have the people who are the leaders of a company that has absolutely tanked taking zero blame for the losses. Apparently they effectively claimed that somehow they weren't responsible for any of the problems. Obviously there are certain market conditions that are out of the executives control, but I've always been under the impression that a leader takes the fall for their workers miscues just as the they receive the recognition for their accomplishments. Anyways, I could rant further about this matter as it's simply mind boggling to me, but from this we should take the following two things:
1) Work hard until you become a big shot. After that, you can relax 'cause even if you mess up you'll still make bank.
2) If you get fired 'cause some people above you made some horrible mistakes, tough luck - suck it up.
The article I originally read is in the 3/5/2008 WSJ, which I can't get a link to, but here's a link that says roughly the same thing.
WaMu's Shady Compensation Plan
And forgive my cynicism.
Saturday, March 8, 2008
Friday, March 7, 2008
Guest Post: What Should You Buy?
So what should you buy while our market seems to be in a recession? Materials. Security Services. Buy steel, buy gold, and buy security services.
A great steel stock to invest in would be Companhia Vale do Rio Doce (RIO). RIO is a major competitor in its industry. In the short run, this stock could fluctuate. If you were to buy RIO today, you may not see any profit until late next week.
I feel the same way about Yamana Gold (AUY). Gold will continue to rise. Do not be discouraged by the numbers today. Keep investing in gold.
I have a good feeling about LLL and RTN (L-3 Communications Holdings and Raytheon). I think both these stocks will make you some money if you own them on Monday.
A great steel stock to invest in would be Companhia Vale do Rio Doce (RIO). RIO is a major competitor in its industry. In the short run, this stock could fluctuate. If you were to buy RIO today, you may not see any profit until late next week.
I feel the same way about Yamana Gold (AUY). Gold will continue to rise. Do not be discouraged by the numbers today. Keep investing in gold.
I have a good feeling about LLL and RTN (L-3 Communications Holdings and Raytheon). I think both these stocks will make you some money if you own them on Monday.
Thursday, March 6, 2008
Market Summary: Thurs. March 6, 2008
It was a rough one today to say the least. The major indices broke through technical resistance levels in the afternoon which triggered increased selling pressure. Also, setting new lows over as long-term of a period as we are, it also triggers a good amount of momentum money from people who trade on breakouts. A breakout is when a stock, index, or commodity sets new highs or lows for a certain period of time. Bottom line, as hard as it is to say, if you look at the technicals of the market…we’ve got a lot more pain on the way.
As I said, we broke through lows, the Nasdaq and Russell set new 52 week lows. The S&P and Dow are approaching those new lows over a 17 month period.
Two more firms failed to meet margin calls on portfolios of mortgage backed securities. Carlyle and Thornburg Mortgage were the ones in trouble. Thornburg fell another 50% to around $1.50, in June it was trading at almost $90, 'nuf said. The margin calls which forced these portfolios to liquidate assets (meaning they have to sell, which forces the prices of these “assets” even lower) create more margin calls, and you can see the vicious cycle that could develop. On top of that, it makes all the equity traders understandably nervous, creating lots of pain for us. There are probably more margin calls on the way.
On a similar page, there is increasing “counterparty” risk, the risk that the people you enter into a financial contract with will be able to hold up there end of the bargain. If more of these financial contracts start going bust, it’s going to create a lot more pain and uncertainty in the not so distant future.
5.82% of mortgages are at least 30 days overdue, up 87 basis points from this time last year. And I think this number is only going to grow, mainly because housing prices are falling. The growth in delinquencies will be even greater in states such as
Retailers released same-store sales for last month today. Most of them were bad, look at a chart of American Eagle (AEO). Retailers hit worst were the specialty, niche type companies, i.e. Abercrombie, Nordstrom, American Eagle, etc. but it even extended to the department stores including JC Penny which lost about 10%
Oil was up almost a dollar, another record. Gold was down $11, again this is probably a great dip to buy. Bonds rose as this is the flight to quality. The more people that get scared of the market, the more expensive bonds become. The dollar weakened again, more of the same.
Unemployment insurance fell, but the number of people applying for unemployment benefits rose sharply. This makes tomorrow morning's unemployment number all the more important. If this employment number is bad, we will be down huge tomorrow. The only way we can stave off the momentum guys who will be shorting tomorrow is if the number absolutely rocks. We'll see in the morning.
DJIA 12,040.39 -214.60 (-1.75%)
Nasdaq 2,220.50 -52.31 (-2.30%)
S&P 500 1,304.34 -29.36 (-2.20%)
NYSE Volume 4,293,954,000
2-Yr Bond 1.53% -0.13
10-Yr Bond 3.62% -0.08
30-Yr Bond 4.57% -0.03
Crude Oil (Apr) 105.47 +0.95
Gold (Apr) 977.10 -11.40
Wednesday, March 5, 2008
Market Summary: Wed. March 5, 2008
This morning started very well. Then around lunch time the NYSE suspended trading on Ambac. They suspended trading because of the pending news release that was about to come out (discussed below). The market turned downward almost immediately with the news of Ambac and the release of the Fed’s beige book, and it then shrugged off the Ambac issue and surging oil prices to finish up about half a percent. The Dow gained .3%, the Nasdaq was up .6% and the S&P finished up .5%, led by gains in the energy and basic materials sectors.
Remember last week when Charlie Gasparino broke the story that Ambac was going to come out with a plan to bring in new capital and shore up its AAA rating? Well today they came out with the plan… it was worthless. Look at the one-day chart for ABK. Ambac’s plan: attempting to raise $1.5BN (the street was expecting up to 3) and stop insuring mortgage-backed securities. No kidding? They’re going to stop insuring the stuff that’s driving them broke? Well, that’s good. The market was hoping banks or sovereign funds (funds that run some of the extra money of other countries, you know, the ones that aren’t trillion dollars in debt) would straight up buy a big stake in Ambac. Instead, Ambac HOPES to sell more shares to the public. Even with the injected capital, Ambac may not survive.
Oil rallied 5 points to a record high close of 104.52. Oil is in what momentum traders call a break out, causing a lot of momentum money to back it up, pushing it even higher. Today it was given an extra boost by an unexpected draw in crude and refined fuels in the
Economic news was mixed. Non-farm productivity rose at a 1.9% annualized rate from October to December (1.8% expected). The Fed released a VERY depressing beige book. Eight times a year the Fed releases it’s Beige book in which anecdotal evidence gathered by each Federal Reserve Bank on current economic conditions in its district is published. This one used words and phrases such as, “deteriorating economic activity”, “upward pressure on prices”, “declining home sales”, and a lot of stuff we already knew… they were just extra pessimistic.
In short: Ambac’s plan wasn't great, commodity prices continued to skyrocket, bond yields increased, and the dollar continued to weaken against the Euro (1.5264 dollars per Euro…ow), but strengthened marginally against the yen.
DJIA 12,254.99 +41.19 (+0.34%)
Nasdaq 2,272.81 +12.53 (+0.55%)
S&P 500 1,333.70 +6.95 (+0.52%)
NYSE Volume 4,187,388,000
2-Yr Bond 1.66% +0.01
10-Yr Bond 3.70% +0.07
30-Yr Bond 4.60% +0.08
Crude Oil (Apr) 104.52 +5.00
Gold (Apr) 988.50 +22.20
Buy the Pullbacks
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.
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.
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.
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