Posts Tagged ‘Financial Instruments’
Fight Back Against Wealth Destruction
Saturday, December 5th, 2009
By Frank Holmes
CEO and Chief Investment Officer, US Global Investors
A bill taking shape in the U.S. House would hurt you by imposing a transaction tax on hard working middle-class Americans who buy and sell stocks, bonds and other financial instruments. The sponsors say this tax would raise $150 billion a year for federal debt reduction and job creation, both of which are certainly worthy goals. But this bill is a flawed tax-and-spend effort that amounts to an assault on middle-class savers and investors, who are the economic engine of the world’s strongest nation.
I understand why it’s important to help the disadvantaged, particularly during times of stress, but this legislation would cripple the nation’s important financial industry, destroy tens of thousands of high-tax-paying jobs (and in doing so drive up the deficit) and punish millions of investors trying to grow their wealth (on which they already pay taxes).
Look at Venezuela to see what happens when governments take over too much of the economy. Despite being one of the world’s largest oil and hydroelectric energy producers, Venezuelans have to deal with rampant blackouts due to the government’s inefficient operations and the government-dominated oil industry’s production has declined to mid-1990s levels. Now President Hugo Chavez, a socialist, is threatening to nationalize the nation’s banks, and he wonders why his countrymen are nervous.
I have no doubt that the congressmen drafting the bill believe they are helping the country, but its unintended consequences on savers, investors and the economy as a whole could be catastrophic. It’s important to send a powerful message opposing this bill in our role as guardians of good government. This is a chance to take control of your destiny – to express your concern about taxing money that is important for your retirement and for the formation of the capital needed to create jobs in America.
Several petitions are circulating in opposition to the bill, including this one that has already collected more than 60,000 signatures. You can also write to your representatives in Washington – whether you’re a Republican or a Democrat, it’s vital that you make your voice heard on this important issue that would hurt all investors and the country as a whole.
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Tags: Blackouts, Chief Investment Officer, Countrymen, Economic Engine, Energy Producers, Federal Debt Reduction, Financial Instruments, Frank Holmes, Global Investors, Hugo Chavez, Hydroelectric Energy, Inefficient Operations, Mid 1990s, No Doubt, oil, President Hugo Chavez, Stocks Bonds, Taking Shape, Transaction Tax, Unintended Consequences, Worthy Goals
Posted in Markets | No Comments »
Why the Economy Will Remain Weak
Wednesday, July 1st, 2009
The paragraphs below are excerpts from the well-respected Comstock’s weekly market commentary, arguing that the stock market rally has probably exhausted itself in the absence of a strong economic recovery - an event unlikely to materialize any time soon. (As an aside, traveling through Europe at the moment it is also hard to see a quick resumption of decent growth in this region given the extent of the economic malaise.)
“The term ‘green shoots’ appears destined to go down in history with other unfortunate themes such as ‘a goldilocks economy’; ‘it doesn’t matter if internet companies have no earnings’; ‘high P/E ratios don’t matter’; ’subprime loans aren’t important’; ‘foreign economies have decoupled from the US’; ‘there’s plenty of liquidity’; and the classic ‘home prices never go down’.
“Whenever a herd of investors latches on to a popular theme, that theme most often proves to be wrong. So far the ‘green shoots’ theory merely signifies that the economy is declining at a slower pace after the global credit crisis that emerged last fall. From this point we will see either continued recession or a recovery so weak it will still seem like recession.
“The key factor to consider is that the current recession was caused by a credit crisis following an artificial boom and therefore bears more resemblance to the great depression following 1929 or Japan after 1989 than it does to the series of recessions experienced in the post World War ll period.
“After the collapse of the dot-com boom in 2000 to 2002 the Fed held interest rates at historically low levels for an extended period of time, and with the help of lax mortgage standards, complex securitized financial instruments and irresponsible ratings agencies, fostered a climate that resulted in a massive housing boom. Households were able to cash out their vastly increased home values through refinancing and home equity loans that allowed them to spend freely and reduce their savings even though wage growth was exceedingly sluggish. The consumer boom also led to the global buildup of capacity to satisfy the demand that was artificially induced by the free flow of credit that was mistaken for an abundance of liquidity by most economists and strategists.
“Now the piper must be paid. Despite the deep recession to date, the consumer is being forced to adjust to a far lower level of spending. When that level is eventually reached the economy can again grow in a robust manner, but we are not near that point now. The massive fiscal and monetary stimulation put into effect over the last nine months has mitigated the credit crisis and prevented a global collapse, but has not avoided the need for the economy to readjust to a new set of circumstances. We are still faced with historically high debt levels, a low household savings rate and a subdued housing industry. Reducing debt and getting the savings rate up will take an extended period of time.
“Furthermore, as a result of reduced consumer spending there is also an excess of capacity that will impede capital expenditures as well. And let’s not forget that foreign nations that have become dependent on the US consumer for growth (read China) will have to find another way.
“To briefly illustrate the nature of the adjustments ahead, consider the following. From 1955 to 1985 consumer spending accounted for between 61% and 64% of GDP. On March 31, this percentage had risen to 70.5%, an amount that is unsustainable given the artificiality of the boom that caused it. For the percentage to drop to a more traditional 65% of GDP, spending would have to decline by 7.8%. While this will not happen all at once, it will be a drag on consumer spending for some time to come.
“Similar reasoning is applicable to household debt and savings. Household debt has averaged 55% of GDP over the last 55 years and was still at 64% as late as 1995. It has since soared to 100%, giving a big boost to spending. Even if debt remains at a high level the absence of any further increase takes away a significant past source of growth.
“The household savings rate mostly stayed in a range of between 7% and 11% of consumer disposable income in the decades prior to 1992, and steadily declined to around zero by 2008 before rising to 5.7% in the current recession. In the absence of rising home values and the virtual disappearance of mortgage equity withdrawals that, at its peak, accounted for an annualized 12% of consumer spending, the savings rate could easily climb back to more traditional 9%. This would be yet another drag on spending.
“All in all the recession we are now experiencing is not a typical post-war decline, but the end of an era, and getting the economy back on its long-term growth trajectory will take an extended period of time. For the stock market this means a reduced level of corporate earnings and subdued P/E ratios. In this light we think that the big earnings increases forecast for 2010 are far too high. It is likely the recent rally has gone about as far as it can go without some proof that the economy can recover at a strong pace, and we think that this proof is not likely to come anytime soon.”
Source: Comstock Partners, June 25, 2009.
Tags: Collapse, Credit Crisis, Economic Malaise, Economic Recovery, Financial Instruments, Global Credit, Goldilocks Economy, Great Depression, Home Equity Loans, Home Values, Internet Companies, liquidity, Market Commentary, Market Rally, Recession, Recessions, Resemblance, Resumption, Stock Market, World War Ll
Posted in Gold, Markets | No Comments »
The Man Who Made Too Much: The Other Paulson
Sunday, January 11th, 2009
Portfolio.com’s February 2009 issue profiles John Paulson, the now legendary hedge fund manager whose record payday in 2007-’08 came as a result of doing what can only be described in its entirety as “shorting Subprime.” What’s remarkable about his feat is that there was no simple way to do so at the time 2 years ago. No subprime instruments existed that one could short, and no representative futures or other derivatives were available to make this a strategy that others, no less, Paulson, could employ in order to facilitate his gigantic bet against subprime mortgages and housing.
This is this weeks must-read piece. Here are a few excerpts to whet your appetite:
Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he’s paying the price.
By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.
Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under.
The article also features an eye-opening conversation between Jim Chanos and Bear Stearns’ Alan Schwartz:
Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.
The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.
“Jim, hi, it’s Alan Schwartz.”
“Hi, Alan.”
“Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”
“Alan, how do I know everything’s fine? Is everything fine?”
“Jim, we’re going to report record earnings on Monday morning.”
“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”
“Well, yes, to some extent, but we should be fine.”
“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’ So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.”
Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was announced. “I thought, That f*cker was going to throw me under the bus no matter what.”
Then, Paulson’s outlook:
Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says.
Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says.
About his recent presentation:
Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?”
Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out
Tags: Alan Schwartz, Bear Stearns, Bet, Calamity, Coversation, Derivatives, Financial Crisis, Financial Instruments, George Soros, Hedge Fund Manager, Issue Profiles, Jim Chanos, Lehman Brothers, Litany, Megatrade, No Apologies, Paulson, Recent History, Subprime Mortgages, Time 2, Wagers
Posted in Credit Markets, Economy, Markets, Outlook | No Comments »
John Paulson Investing in Distressed Debt - 2009 Outlook
Monday, January 5th, 2009
John Paulson, founder of $36-billion hedge fund company, Paulson & Company, (no relation of Secretary Paulson) and now famed for shorting “sub-prime,” is looking to invest in (long) opportunities in the distressed credit market.
John Paulson, who runs the $36 billion hedge fund firm Paulson & Co, is looking to buy distressed mortgages and distressed debt, despite being bearish on the overall economy, Bloomberg reported.
Paulson wrote in a 2009 outlook to investors that he is interested in investing in debt restructurings, bankruptcies, strategic mergers and financial recoveries, the agency said.
His largest fund, the $13 billion Paulson Advantage Plus, has risen about 38 percent through Dec 19, the agency said, citing the undated report.
Creative Capital’s Spencer Ante shares his notes on Paulson’s outlook for 2009:
A big bank invited Paulson on the call with wealth managers to offer his thoughts on the economy and his detailed investment strategy for profiting from today’s financial chaos. With $36 billion under management, Paulson & Co. is one of the 10 largest hedge fund managers in the world, and he recently testified before Congress.
Interestingly, many of the strategies being employed by Paulson’s funds have nothing to do with public equity markets, the focus of most individual investors. Other than shorting financials and doing arbitrage plays on mergers and acquisitions, the focus of Paulson’s funds involve buying arcane financial instruments such as mortgage-backed securities, bonds of distressed companies and defaulted debt securities of bankrupted companies.
This is heavy-duty stuff that most people won’t be able to take advantage of. But given Paulson’s foresight and cojones it’s fascinating to see how some people are finding a way to profit from the losses of others. Crisis = opportunity.
Among the highlights:
- He thinks the housing market won’t bottom until 2010, with housing prices to falling another 10% to 20% from current levels before they bottom.
- The financial sector has only written off half of the toxic assets on its balance sheet, so avoid investing in financials for now.
- He sees no threat of inflation in the short term but it will be hard to contain once the economy rebounds.Here are the notes:
We believe it will be the worst recession since WWII and possibly the Great Depression.
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[!AdServe:bigbox!]Reasons:
1. The decline in housing that shows no signs of stabilization.
We expect housing prices to fall another 10% to 20% from current levels before they bottom.
2. Consumer: the consumer can no longer borrow to the extent they have in the past.
3. Global crunch: pressuring economy. Global stocks down 50%
- We think the headwinds are very strong.
- We don’t believe we are through the crisis in the financial area.
- Total write-downs will approach $ 1.8 trillion.
We are about halfway through the writedown process.
Most investors who invested capital in banks have lost money.
Hence the government increasing its role in recapitalizing the banks.- The terms are going to become increasingly onerous, which will put pressure on the equity of financial institutions.
- We are very bullish on the investment opportunities available.
- The stress in markets have caused many prices to fall.
- The best opportunities for us in 2009 and 2010:
* Distressed mortgages. We’ve been buying the triple AAA tranches of these securities. Quite aggressively buying them at yields in the 20% to 25% range. We like mortgage securities because they self liquidate.
* Distressed debt, both leveraged loans and high yield debt; we’ve started to allocate money to that area. It’s very tricky. Targeting companies that will not go bankrupt. Yields north of 30%. There are thousands of issues out there.
* Bankruptcies: defaulted debt securities of bankrupted companies. i.e. Tribune Co. Those bonds went from 80 cents to 27 cents on dollar for senior secured loans. $110 billion in bankrupt bonds. There is a tremendous amount of supply but limited buyers. We are finding attractive opportunities. 2 to 4 times multiple
* Merger arbitrage: a lot of money has come out of the sector. We focus on the corporate strategic deals for all stock. i.e. Merrill Lynch and BofA. We buy Merrill and short BofA to lock in the spread. 31% return currently. Arbing National City/PMC, Wachovia/Wells Fargo. Returns are in 30% to 60% range. 3-6 month time frame. These are some of the highest spreads we’ve seen. Most successful deal we’ve seen was Budweiser/InBev.
* Debt restructuring: GMAC, we buy the old bonds and swap them for new bonds.
* As we get further on in the cycle investing in financials that are recapitalizing will be an attractive area. It is premature to make those investments today. After most of the writedowns are done. That will represent a highly attractive long-term investment opp.
Factors driving home prices down:
* high percent of foreclosures; banks must sell homes quickly. Current inventory of homes is 11 months. Banks have to lower prices to sell homes. Takes 12 months to foreclose home. The backlog of homes is enormous.
* Limitations on financing: 40% of mortgages made during boom would not get made today. Need income and down payment. The pool of potential acquirers is more limited.
* We are going into a recession, which reduces the pool of buyers.Why buy these securities?
We factor these declines as much as 25% into our analysis. We then estimate default percentages. Then estimate losses in pools and cash recoveries.I don’t think we’ll hit the bottom until 2010.
How much will the bold moves by Washington help?
There’s a limit to what you can do. You can’t help people who can’t afford their mortgages.How much leverage do your funds use?
Generally our funds don’t use leverage. There’s a thing called Reg T. It calls for 50% margin. That’s the only type of leverage our base funds use.Over last 5 years our base fund equity to capital under management was 90%. Peak was 33%.
Inflation?
The economy is unlikely to see inflation in the short term.But once the economy returns to moderate growth that’s when it becomes an issue.
It will be hard for the government to contain inflation at that point.
Raising interest rates or lowering gov spending could slow the economy.
Source: Reuters, December 31, 2008
Tags: Arbitrage, Bankruptcies, Bloomberg, Creative Capital, Debt Securities, December 31, Distressed Companies, Distressed Debt, Economy, Financial Chaos, Financial Instruments, Financial Recoveries, Finding A Way, Hedge Fund Company, Hedge Fund Managers, Individual Investors, Investing, Investment Strategy, Investors, Mergers, Mergers And Acquisitions, Mortgage Backed Securities, Mortgages, Outlook, Public Equity, Report Source, Restructurings, Reuters, Wealth Managers
Posted in Bonds, Credit Markets, Economy, Markets, Outlook, US Stocks | 1 Comment »
