Foreigners Caused America’s Financial Crisis? A Closer Look

Monday, February 1st, 2010

In his State of the Union address, President Obama reiterated his ambitious agenda to improve the economy and enact sweeping financial reform aimed specifically at the Big Banks. The European Union is also pursuing similarly ambitious changes aimed at preventing another crisis in the future.

At the World Economic Forum in Davos, Switzerland, where more than forty heads of state met, the proposals for financial regulatory reform were part of the focus of deliberation.

There is undeniably an inexorable drive on both sides of the Atlantic to find new ways to tighten bank and capital market regulations in response to an international financial crisis triggered by the bursting of a U.S. property price bubble and the resulted global domino effects.

Foreigners to Blame?

The financial crisis of 2007–2010 has been called the worst since the Great Depression of the 1930s.  Many causes have been proposed and recently, MIT economist Ricardo Caballero made a suggestion that caught the attention of TIME:

“There is no doubt that the pressure on the U.S. financial system [that led to the financial crisis] came from abroad….Foreign investors created a demand for assets that was difficult for the U.S. financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the U.S. unsafe.”

Did foreign investment demand really “make the U.S. unsafe”? Let’s go back and take a closer look.

Close Point of Origin – Housing

Most economists and pundits seem to agree that the collapse of the U.S. real estate market in 2006 was the close point of origin of the crisis. The housing bubble bursting caused the values of securities tied to real estate pricing to plummet, thus damaging financial institutions globally.

Sophistication Beyond Comprehension

Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address the 21st century financial markets.

However, the entire financial system had become fragile as a result of one factor, among others, that is unique to this crisis - the transfer of risky assets from banks to the markets through creation of complex and opaque financial products.

In fact, these derivative products are so complex that they mystified even Alan Greenspan, the former chairman of the Federal Reserve.

Unknowing & Unwilling Participants

The banks’ strategy of unloading risk off balance sheets backfired when investors, foreign or otherwise, finally became aware of the complexity and risk underlying these asset backed securities.

A vicious cycle of asset liquidation and price declines was set in motion thereafter as these securities were brought back into the balance sheets, banks had to record losses based on the fair value accounting. Global financial integration made possible for the crisis to spread virtually worldwide.

So, how did we get here?

FSMA – Root of Crisis

The root cause of the financial crisis that led to the current recession may be traced back to the Financial Services Modernization Act of 1999 (FSMA), also know as the Gramm-Leach-Bliley Act (GLBA). The FSMA essentially repealed part of the Glass-Seagull Act of 1933 that prohibited the integration of investment bank, a commercial bank, and/or an insurance company into one entity.

The repeal fostered the consolidation of banks, securities firms and insurance companies, which ultimately lead to “too big to fail.” As a result, these institutions have bulked up their profits primarily through areas far beyond the traditional banking. Some have bought or sponsored hedge funds, while others have moved to invest their own money in the markets.

The investment banking units, far more profitable than the banking operations, have grown dramatically since the FSMA, and the related excessive risk taking along with the subsequent offloading to market played a far more significant role than others in the crisis.

Bigger & Back to Risk

After the collapse of Lehman Brothers about 18 months ago, many of these Wall Street companies were in danger of going under only to be rescued by federal bailout programs. The Trouble Asset Relief Program (TARP) practically guaranteed banks easy profit by providing capital at virtually zero interest cost.

Now, big banks are getting even bigger after scooping up smaller competitors weakened by the housing collapse. According to Bloomberg, the six biggest financial institutions now hold assets equivalent to 62% of the economy, up from 58% before the crisis and 20% in 1994.

There are also indications that some big financial institutions are going back to the same risk taking practices that got us into this crisis. The USA Today recently pointed to an independent research by the Demos highlighting that through the third quarter of last year, big banks were increasingly reliant on trading revenue and were taking on more risk in their investment portfolios.

In essence, government guarantees designed to spur lending by letting banks borrow cheaply were instead funding banks’ speculative investments and fueling soaring profits.

Their size and complexity raise the risk of a future financial crisis.

Foreigners Do Not Bring Systemic Risk

In the end, foreigners demand did not bring about the systemic risk. It is the lack of check-and-balance in our system allowing a concentration of risk into the hands of a few that almost brought the world to an utter collapse.

The drivers for enacting the Glass-Seagall Act in 1933 are the same as those for financial reform in 2010. However, a meaningful and globally consistent financial reform seems unlikely amid divided politicians and special interests fighting for short-term advantage.

Endgame and checkmate could come when unfettered financial institutions again push the economy to the brink, and there is no resources left for another bailout or rescue.

Tags: Ambitious Agenda, Credit Rating Agencies, Davos Switzerland, Deliberation, Domino Effects, Financial Institutions, Financial Sector, Foreign Investors, Great Depression, Housing Bubble, International Financial Crisis, Investment Demand, No Doubt, Obama, Point Of Origin, Regulatory Reform, Ricardo Caballero, S Real Estate, State Of The Union Address, World Economic Forum
Posted in Markets, Oil and Gas | No Comments »

Mental Midgets and Moral Pygmies

Thursday, December 10th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

I have arrived at the fourth and final letter in our series about macro themes likely to shape the future. The topic this month is the role of the consumer; the fact that he has over-extended himself financially in recent years and the implications of that. Please allow me to start with a disclaimer: this topic is so vast that I cannot possibly cover every aspect of it. One area which I don’t touch on, for example, is the effect lower consumer spending will have on corporate earnings. Also, I fully accept that not all countries are as leveraged as the UK and the US; the following is predominantly a discussion about the Anglo-Saxon model. Accept the letter in that spirit and you should enjoy it.

Up to the neck in debt

It is really quite simple. The problem is leverage - leverage at every level of the economy. The consumer is up to his neck in debt, but so are our banks and our governments (or, at the very least, they soon will be). In the US (chart 1a), total leverage has risen from a post World War II level of about 150% of GDP to roughly 350% of GDP today with households and the financial sector responsible for most of that growth. Meanwhile, in the UK (chart 1b), total leverage has grown from 200% of GDP to a mind-boggling 500% of GDP in little over 20 years with households and financial companies also accounting for most of that growth.

Chart 1a: Total US debt as % of GDP

Source: Deutsche Bank

So, while it is true that governments on both sides of the Atlantic are currently taking on potentially dangerous amounts of debt, it is not quite true that they are behind the excessive creation of debt over the past few decades. If anything, they should be accused of naivety, ignorance and perhaps even stupidity for allowing the current situation to develop in the first place.

Midgets and pygmies

Now, why didn’t anyone see this coming? Why did our ‘midget’ leaders permit leverage to grow out of control? Well, as a starting point, it is important to understand that, from the consumer’s point of view, increasing leverage has been a logical response to the lower macro-economic volatility experienced over the past 25-30 years. As demonstrated by Dr. Woody Brock at SED (chart 2), household income has become much more stable in recent years with volatility on personal income being cut in half when compared to the 70s and by almost 80% when compared to the 40s. As a consumer, it is perfectly rational to increase financial leverage if you experience rising income stability. What is less rational is to take it to the extreme, as both US and UK consumers have done in the past 6-7 years (note how the slope of the US debt-to-income ratio in chart 2 steepens post year 2000).

Chart 2: Development of US household debt

Source: Strategic Economic Decisions, Inc.

Click here for the full report.

* Niels Jensen has 25 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Source: Niels Jensen, Absolute Return Partners LLP, December 8, 2009.

Tags: 1a, Absolute Return, Anglo Saxon, Consumer Spending, Corporate Earnings, Current Situation, Dangerous Amounts, Deutsche Bank, Executive Partner, Financial Sector, GDP, Governments, Growth Chart, Households, Leverage, Mental Midgets, Niels Jensen, Stupidity, T Touch, World War Ii
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If Stocks Tank, Shouldn’t Gold Soar?

Tuesday, November 17th, 2009

November 13, 2009
By Jeff Reckseit

The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.

————-

Large banks and more recently pension funds have suddenly become infatuated with gold.  They chant the mantras that gold bugs have known for years: gold is a store of value; owning gold is financial insurance; an ounce of gold will always buy a good suit.  The idea is that if the economy continues to weaken and share prices decline, a strategic allocation of the precious metal will hedge and offset some of the losses in the financial sector.

On the surface it seems to make sense and it’s hard to argue with the logic.  Even so, logic can sometimes get twisted, whereas facts cannot.  The evidence is found in the chart we describe as “All the Same Market.” Gold, stocks, currencies (versus the dollar), oil, grains, meats, softs, all decline in a deflationary environment.  As liquidity dries up and credit contracts, people, businesses, and institutions sell everything to get dollars.  Cash is once again king.  This is bearish for gold.

Looked at another way:  as the dollar advances from its lows, things denominated in dollars lose value against the dollar.  As long as the dollar remains the global senior currency, assets will depreciate:  not just stocks and commodities but residential and commercial property, works of art, collectible cars, pretty much everything.  Of course, this outlook presumes a deflationary environment and that’s been our view for quite some time.  But that’s another conversation.  The topic here is stocks down/gold up - or not.

The long-time editor of the Elliott Wave Financial Forecast Short Term Update, Steven Hochberg summed it up succinctly in a recent issue:

“The other important aspect to a dollar bottom is the implication to all the other markets that have been moving opposite to this senior currency. The start of a major dollar rally should roughly coincide with a turn down in stocks, commodities, oil and the precious metals. So there are likely to be important trend reversals across nearly all major markets.”

Don’t fall into the trap of group-think.  If investing was that easy we’d all have (insert your own private fantasy).

————-

For more information, download Robert Prechter’s free Independent Investor eBook. The 118-page resource teaches investors to think independently by challenging conventional financial market assumptions.

Tags: Collectible Cars, Commodities, Credit Contracts, Currency Assets, Elliott Wave, Ewi, Financial Forecast, Financial Insurance, Financial Sector, Financial Wisdom, Gold, Gold Bugs, gold stocks, Hochberg, Independent Investor, Infatuated, Mantras, oil, Ounce Of Gold, Pension Funds, Precious Metal, Stocks And Commodities, Time Editor
Posted in Gold, Markets | No Comments »

Jim Rogers on USD, China, and Commodities

Tuesday, November 3rd, 2009

Lindsay Whipp of the Financial Times sits down with Jim Rogers in Tokyo for a four-part interview covering the US dollar, China, commodities and crisis-related issues.

Part 1: Rogers sees brief dollar rally
He says he has increased his dollar holdings in anticipation of a rally in the US currency, but the dollar is still broadly set for a lasting decline.

Click here or on the image below to view the video clip.

Part 2: Rogers still a China bull
He says he’s not buying Chinese stocks, but sees the renminbi rising despite its effective peg to the dollar.

Click here to view the video clip.

Part 3: Rogers backs commodities for the long run.
He says he’s fully expecting another leg up in commodities, and that real assets represent the best hedge against future inflation.

Click here to view the video clip.

Part 4: Rogers on the “bigger picture”.
He says he fully expects more pain in the financial sector, with many of the problems at the heart of the crisis simply being “papered over”.

Click here to view the video clip.

Source: Lindsay Whipp, Financial Times (here, here, here and here), November 2, 2009.

Tags: Advertisement, Anticipation, Buying Stocks, China, China Crisis, Chinese Stocks, Commodities, Decline, Emerging Markets, Financial Sector, Financial Times, Heart, Image, inflation, Jim Rogers, November 2, Peg, Rally, Real Assets, Renminbi, Tokyo, Us Currency, Video Clip, Whipp
Posted in Commodities, Markets | No Comments »

Richard Bernstein: Once a huge market bear, now a bull

Tuesday, October 27th, 2009

The article below is a guest contribution by Edward Harrison, writer of the widely-read Credit Writedowns blog.

Richard Bernstein has done a huge reversal in the last few months from touting low-risk stocks to high-beta ones. He has gone from a preference for consumer staples to one for consumer cyclicals (XLY). And he has gone from lugubrious doubter of a sustainable recovery to an almost V-shaped optimism.

What is remarkable about the transformation is the dichotomy between his views and his former Merrill Lynch colleague David Rosenberg’s. The two were tied at the hip at Merrill, producing research that was out of step with the bullish consensus yet painstakingly substantiated.

Just five months ago, back in May, I caught Bernstein on Bloomberg and he was questioning whether we would get any recovery at all.  I wrote then:

“Richard Bernstein asks a very good question in a wide-ranging interview with Bloomberg.  Now that the so-called green shoots are dominating the news coverage and the S&P 500 is up a massive 34% from its March lows, one might think we are due for a pretty Robust V-shaped recovery.  Is that what the future holds?

“Bernstein doesn’t think so.  He thinks the recovery will be more muted than most people think.  For this recovery to have any legs Bernstein believes we need to move away from the ‘credit-induced’ dynamic of the previous 5 to 15 years.  This necessarily means that financials will not be leaders in a sustainable bull market because we will have a lot less leverage in the system. This also means that the core earnings power in the sector is a lot less than people think. Bernstein thinks the financial sector has gotten way ahead of itself - a view I am beginning to share after today’s junk rally.”

Bernstein went on to say that there was still huge overcapacity in financial services and that we needed to shed this capacity if we wanted to see a good return on investments in the sector. At the time, I was more bullish on the financial sector (although I also worried expectations were getting ahead of themselves; I am now bearish). I saw upside because the overcapacity coupled with low interest rates was an invitation to seek risk, a view that has been borne out in recent months.

“As to the bailouts and the government plan, Bernstein believes that the government is attempting to keep the excess capacity in the financial sector alive.  His basic point is that bubbles create overcapacity (think tech stocks).  This is the case in finance.  The sector must shrink.  In my own, there are only two ways a sector in over-capacity can perform.  They can have poor earnings (Bernstein’s first point) or they can seek heavy risk taking and reach for yield.”

Just as I am switching the other way, so too is Bernstein.  Witness the latest Bernstein appearance on CNBC last week.

“It seems even the most bearish market mavens can’t fight the bullish momentum in this stock market. Wait until you find out who’s now a buyer of stocks.

“Richard Bernstein, the former Merrill Lynch chief investment strategist, and one of the biggest bears we know is changing his tune.

“People like me have underestimated the rebound, Bernstein says. What’s made him a believer?

“You might remember the last time Bernstein was on Fast Money he told the traders - at the foundation of the stock market and the recovery is jobs. The market can’t sustain itself unless people are brining home the bacon.

“And although the unemployment rate continues to rise Bernstein is more focused on initial jobless claims which he and many others consider a leading indicator. And that number has started to decline.

“In fact, when they were reported last week new jobless claims dropped to the lowest level since January. And that trend combined with low inflation likely means Americans will regain their appetite for spending.

“Another way of saying that is - the economy is slowly getting better. ‘if you believe in the recovery this is the prime time to be a value investor.’”

Bernstein added that one wants to load up on risk now if one believes in the recovery. Junky names are the best as they have more leverage to a rebound.  This is certainly the play right now (but I think it has more to do with interest rates than recovery). I had seen Bernstein saying exactly this last month, but he was not yet confident that the jobs picture had turned. Apparently, he is now and recommends going all-in, a recommendation I would view with skepticism.

Source: Edward Harrison, Credit Writedowns, October 25, 2009.

Tags: Bloomberg, Bullish Consensus, Consumer Cyclicals, Consumer Staples, Core Earnings, David Rosenberg, Dichotomy, Edward Harrison, Financial Sector, Five Months, Good Question, Huge Market, Lows, Merrill Lynch, Overcapacity, Return On Investment, Return On Investments, Richard Bernstein, Risk Stocks, Sustainable Recovery, Xly
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Overweight Canadian banks?

Monday, September 21st, 2009

Darko Mihelic, financial sector analyst at CIBC World Markets believes there is a viable case for investors to overweight bank stocks. All but CIBC recently beat the street, and healthily. So what do you do?

Andrew Willis, Globe and Mail columnist writes:

This situation leaves analysts with two options. Door No. 1 is to tell institutional clients that the banks stock are expensive, and likely to tumble, or at least go sideways, and should therefore be under-weighted in portfolios. Much of the Street is pitching this strategy right now. It’s not without risk: The banks make up a substantial portion of the equity benchmark, and if they continue to rally, anyone underweight banks will underperform.

Mihelic’s case is:

On Friday, Mr. Mihelic rolled out his estimates for 2011 earnings at the major Canadian banks. His crystal ball says the banks will, on average, see their profits rise 27 per cent from what they are expect to post in 2010.

…

“Valuing the bank stocks on reasonable valuation parameters, the group appears to have approximately 17 per cent total return upside from current levels, on average.”

…

“Near-term challenges could affect the stocks since the group “looks” expensive on fiscal 2010 estimates,” said Mr. Mihelic. “. However, we believe investors can go overweight with the group and use short-term noise as an opportunity.”

Read the whole article here:

The case for overweighting banks - The Globe and Mail.

Tags: Andrew Willis, Bank stocks, Banks, Benchmark, Canada, Canadian Banks, CIBC World Markets, Columnist, Crystal Ball, Earnings, Estimates, Financial Sector, Globe And Mail, Globe Mail, Institutional Clients, Investors, Parameters, Portfolios, Profits, Substantial Portion, Term Challenges, Term Noise
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Techniques used by false prophets and charlatans

Friday, September 4th, 2009

This is a guest contribution by Damien Hoffman, editor-in-chief of the very popular Wall St Cheat Sheet blog. Make sure to put this site on your must-read list.

Nouriel Roubini and His Acolytes

Following the incredible popularity of my post “Is Nouriel Roubini a False Prophet?“, I’ve decided to do a little introductory lesson for those more interested in avoiding charlatans …

Cold Reading is a primary set of techniques employed by phony psychics and market prognosticators. When cold reading, the primary objective of the sender is to ensure that the recipient perceives the statement/prophecy to be a hit. Here are a few classic techniques used by Ms. Cleo and Nouriel Roubini:

TECHNIQUE 1. The “Rainbow Ruse”: Indicate one trait and, at times, the opposite.

For example: “The bad news out of the financial sector will continue to flow, and on the days that it does, the market will take a hit,” said Chris Johnson, chief investment officer at Johnson Research. “But select stocks will outperform the rest of the market,” he said, “particularly in technology.”

“Robert Loest, portfolio manager at Integrity Funds, said that a late December rally could depend on what the Fed does on Dec. 11.”

TECHNIQUE 2. “Barnum Statements”: General statements that fit most people (can also be combined with “Forking” - see below).

For example: “I think we’re going to have a tremendous amount of volatility and basically stay in a trading range until we get information on first-quarter earnings,” said Dan Genter, president at RNC Genter Capital Management.

TECHNIQUE 3. “Fuzzy Facts”: General broad statement likely to be right.

For example: “An end of the year run is not necessarily off the table,” said Art Hogan, chief market analyst at Jefferies & Co. He said that Wall Street still needs to work its way through a lot on the financial side. Yet, the broad selloff of recent weeks may have primed stocks for a bigger bounce back, particularly in the areas of the market that are unaffected by the credit market mess. “But there’s no question of volatility,” he said. “It’s going to be very bumpy through the end of the year.”

TECHNIQUE 4. “Good Chance Guess”: Like a Fuzzy Fact, these are guesses as to facts which are highly likely to register a hit.

For example, a psychic might say, “I see a blue car,” or “a house with number 2 in address,” or “I see a painting on the wall, it might be of somebody who has passed or somebody who is alive, I’m not sure?”

TECHNIQUE 5. “Lucky Guess” / “Forking”: A compounded guess - one that contains 2, 3, or more parts.

If one guess is a hit the recipient will typically say “wow,” even if the others were a miss. This was one of Roubini’s strategies.

For example, “7,000 is going to be a resistance area in the Dow. Otherwise, if it breaks through, resistance should become support and we are next likely to see some resistance at the 7,400 area. If it breaks through there we should see a run at 7,600 and then possibly new highs.”

A subset of this is one noted by Charles Kirk at The Kirk Report: “make so many predictions that you can later say you were right no matter what.” This is Jim Cramer’s forte and most other gurus out there.”

TECHNIQUE 6. “Push Statements”: State something wrong and keep pushing it!

For example, something like “The subprime scare is pushing stocks down and may spill over into the general economy causing recession and global slowdown.”

TECHNIQUE 7. “Russian Doll”: Statement with many possible layers of meaning. Keep working this until you get a hit.

For example, “Market participants were concerned about Wall Street which sold off sharply Monday as concerns about a weakening credit market wiped out investors’ enthusiasm about strong retails sales over the holiday weekend. For a brief period today, there was a twinge of optimism that the stock market would be able to score back-to-back gains. Reports of stronger than expected retail traffic over the Thanksgiving holiday contributed to that view. However, it wasn’t long before concerns about the financial sector (-4.1%) took hold again and knocked the market down to size.”

TECHNIQUE 8. “Peter Pan/Pollyanna”: Tell them what they want to hear.

“After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that’s the biggest factor in Americans’ personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector.”

TECHNIQUE 9. “Certain Predictions”: Predictions with no time frame.

“The market is very likely to make new all time highs despite the recent sell off.” This was another favorite by Roubini.

OTHER TECHNIQUES:

“SELF-FULFILLING”

For example, the psychic might say, “You will make a new start.” The market commentator might say, “The market may see new lows before turning higher and cause uncertainty among traders creating risk.”

“VAGUE PREDICTIONS”

For example, “The market is now looking toward 2008 and a slowdown, and I find it hard to believe that we can have a year-end rally. But there are some reasons to believe that Wall Street might see a typically upbeat December and an end of the year “Santa Claus” rally.” Clearly, in this case the speaker is predicting A or B and if either occurs they are right.

“UNVERIFIABLE STATEMENTS OR PREDICTIONS”

For example, ex post facto word fitting like “The pull back to resistance level provided support for the overnight rally. The Asian traders encouraged by strength in the yen decided to bid up the S&P in the night market.”

Note: These techniques should be differentiated from conditional propositions given by a speaker who tells you what action you should take if X or Y happens. For example, a extraordinary mentor should say, “If the market does X, then you should do why. However, if the market does N, then you should do M.” This way, the speaker is admitting they cannot predict the future, yet are still offering conditional propositions to take beneficial action.

This post was researched by my friend Dan who has a passionate interest in educating people about subversive rhetorical techniques. Thanks Dan!!

Source: Damien Hoffman, Wall St. Cheat Sheet, September 3, 2009.

Tags: Acolytes, Charlatans, Chief Investment Officer, Chief Market, Cold Reading, False Prophet, False Prophets, Financial Sector, Fuzzy Facts, Introductory Lesson, Jefferies, Management Technique, Market Analyst, Market Prognosticators, Ms Cleo, Nouriel Roubini, Phony Psychics, Quarter Earnings, Rnc Genter Capital Management, Selloff
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Roubini’s Canada Outlook: Supported by Easier Credit and Commodities Recovery

Tuesday, August 18th, 2009

Nouriel Roubini’s RGE Monitor recently published “Are There Bright Spots Amid the Global Recession?,” which provides a comprehensive global economies roundup, and says that Canada’s economy will lag that of the US, though it is supported by easier credit conditions, stronger banks, and the commodities recovery.

Canada

Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support).  However, a more consolidated financial sector with lower leverage, lower default rates, as well as a revival of domestic demand, should support recovery in 2010, albeit one characterized by below- potential growth.  Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.

Source: RGE Monitor, August 5, 2009

Tags: Bank Of Canada, Banks Canada, Canada, Canadian Dollar, Canadian Households, Commodities, Commodity Prices, Counterparts, Default Rates, Energy Output, Financial Sector, G7, Global Economies, Global Recession, Leverage, Natural Gas, oil, Rebound, Recovery Canada, Revival, Roubini, Roundup
Posted in Commodities, Markets | No Comments »

Bill Gross: Investment Outlook (August 2009)

Thursday, July 30th, 2009

Bill Gross shares his latest take on markets, the economy and investing in his August 2009 investment outlook, “Investment Potions.”

Here are a few excerpts:

On price vs. performance - getting the potion you paid for…

But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game.

What investors need to do in this new normal market…

Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae. The latest quarterly earnings report from Goldman Sachs may be an indicator that the financial sector is getting some color in its cheeks, but it doesn’t really let you know what needs to happen in order for the real economy to stabilize as well.

Read the whole newsletter here, or click on the image below.

Source: PIMCO, August 2009 Investment Outlook

Tags: Barron, Basis Points, Bill Gross, Common Sense, Con Game, Financial Sector, Goldman Sachs, Gross Investment, Investment Outlook, Investment Strategies, Looking For Love, Love Potions, Market Investors, Minutiae, Money Market Funds, Portfolio Bond, Potion, Quarterly Earnings Report, Stock Funds, Term Statistics
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Wall Street slumps on economic fears

Sunday, May 24th, 2009

Stock markets came under pressure over the past few days as skepticism crept in that economic green shoots could be withering. On top of that, fears that the the US could be facing a credit rating downgrade (are the rating agencies now relevant again?) also caused losses for the US dollar and bonds.

These issues, together with another dose of discussion about the repayment of TARP funds, featured prominently in this week’s video clips. Commentators included in the selection below include James Galbraith, Jim Bianco, Robert Shiller, Sam Stovall, Bill Gross, David Rosenberg, Jim Rogers and Steve Leuthold.

The compilation kicks off with a top-quality interview with James Galbraith, saying that the banks can hardly lose but the rest of us aren’t so lucky, and concludes with the “American Casino” movie trailer.

Yahoo Finance, Tech Ticker: Galbraith - banks can hardly lose
“Big banks have raised billions since the stress tests and policymakers are now turning their bailout affections to life insurers and automakers. Is the government trying to tell us the crisis in the financial sector (proper) is over?

“While it’s too soon to say they’re out of the woods, ‘the government has set up a situation where the banks can hardly lose’, says James Galbraith, economist, professor and author of ‘The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too’.

“Beyond the TARP funds - which Galbraith calls an ‘unproductive use of Federal borrowing’ - banks are benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. ‘A bank doesn’t have to do anything to make money,’ he says. ‘The banks’ return on equity is going to be very good. They’re going to be able to restore their finances.’

“While this is good for banks and a justification for the sector’s recent rally, the problem is the government’s ‘free money’ program means banks have little or no incentive to do any actual lending. Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, Galbraith says. Furthermore, anyone hoping for a return anytime soon to the salad days of the mid-2000s is delusional.”

Source: Yahoo Finance, Tech Ticker, May 21, 2009.

CNBC: Geithner - banking hearing
“Treasury Secretary Timothy Geithner gives his testimony before the Senate Banking Committee on TARP.”

Source: CNBC, May 20, 2009.

CNBC: Implications of repaying TARP
“Repaying TARP and what that means, with Bob Jones, Old National Bancorp; Lou Brien, DRW Trading Group strategist; and Jim Bianco, Bianco Research president.”

Source: CNBC, May 19, 2009.

CNBC: Credit card overhaul
“The Senate voted overwhelmingly on Tuesday to rein in rate increases and excessive fees, and the House could pass this legislation tomorrow [Thursday]. CNBC’s Bertha Coombs has the details.”

Source: CNBC, May 20, 2009.

Business Week: The Fed is in no rush to raise rates
“Tame inflation means Bernanke has time. With so much idle labor and production capacity, the economy would have to grow beyond the most opimistic forecast for three years before wages and prices felt any notable upward pressure.”

Source: Business Week, May 20, 2009.

Financial Times: Robert Shiller on the outlook for house prices
“Robert Shiller of Yale University talks to Martin Sandbu about the outlook for housing and equity markets, the value of sovereign debt, and the government response to the economic slowdown.”

Source: Financial Times, May 19, 2009.

Fox Business: S&P’s Sam Stovall - recovery by 3Q

Source: Fox Business, May 19, 2009.

Political Math: The national debt road trip
“How do the Obama deficits compare with past presidents? And how did the national debt get so big anyway. This video tries to answer those questions by looking at the debt as a road trip and seeing how fast different administrations have been traveling.”

Source: Political Math (via YouTube), May 15, 2009.

CNBC: US could lose AAA rating
“Investors are concerned the US will follow the UK and lose its AAA rating, according to Bill Gross, Pimco, and that could be driving today’s drop in the dollar.”

Source: CNBC, May 21, 2009.

The Wall Street Journal: Market focus on dollar weakness
“The US dollar could be on the brink of a major drop in value as investors and central bank reserve managers start to question their appetite for Treasurys and the greenback’s safe-haven status wears off, prominent currency watchers warn. The euro and even embattled sterling have shot higher against the US currency in recent days despite a lack of meaningfully positive economic news.

“Now some heavyweight strategists think the euro could sweep up to 9% higher against the dollar in a matter of weeks, in a move that could prompt a new era of official intervention in the currency markets.”

Source: The Wall Street Journal, May 21, 2009.

John Authers (Financial Times): Low volatility
“When volatility is down it means investors are getting calmer. But equity volatility currently seems to have a stronger impact on currencies.”

Click here for the article.

Source: Financial Times, May 21, 2009.

Bloomberg: David Rosenberg says US stocks may retest March lows
“David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, talks with Bloomberg’s Erik Schatzker about the outlook for the US stock market. Rosenberg, former chief North American economist at Bank of America-Merrill Lynch, also discusses the state of the global economy, consumer spending and the currency market.”

Source: Bloomberg, May 21, 2009.

CNBC: Rogers - markets yet to bottom
“Markets have yet to see the bottom, warns Jim Rogers, chairman of Rogers Holdings. He tells Michael Yoshikami, president & chief investment strategist of YCMNET Advisors, CNBC’s Martin Soong & Amanda Drury why. He also reveals what he is buying.”

Source: CNBC, May 20, 2009.

Bloomberg: Leuthold says he may boost stock holdings to 70%
“Steve Leuthold, chairman of Leuthold Weeden Capital Management, talks with Bloomberg’s Betty Liu about the outlook for the US stock market. Leuthold, whose Grizzly Short Fund returned 74% last year, also discusses his expectations for the economy, attempts by banks to repay funds from TARP and investments in gold and silver.”

Source: Bloomberg, May 20, 2009.

Financial Times: Indian Congress victory welcomed by business
“James Lamont, FT South Asia bureau chief, on the reasons for the Congress Party’s unexpected victory in the Indian elections and the key role of party leader, Sonia Gandhi.”

Source: Financial Times, May 18, 2009.

CNBC: Rogers - choose silver over gold
“Although Jim Rogers owns gold, he sees better returns in agricultural commodities and silver. Rogers & Michael Yoshikami, president & chief investment strategist, YCMNet Advisors talk strategies with CNBC’s Martin Soong, Amanda Drury & Sri Jegarajah.”

Source: CNBC, May 20, 2009.

CNBC: OPEC wary of rising oil prices
“‘Certainly OPEC’s members are happy, but in the back of their minds they’re looking at the oil price rally coming against a background of rising oil inventories and contracting economic indicators,’ Harry Tchilinguirian of BNP Paribas told CNBC Tuesday.”

Source: CNBC, May 19, 2009.

CNBC: America’s big money bet on Africa
“Insight on why the American investor loves Africa, with Quintin Primo, Capri Capital Partners.”

Source: CNBC, May 21, 2009.

Vimeo: American Casino movie trailer

American Casino movie trailer from Leslie and Andrew Cockburn on Vimeo.

Source: Leslie and Andrew Cockburn, Vimeo, March 2009.

Tags: Affections, American Casino, Automakers, Bailout, Bill Gross, David Rosenberg, Emerging Markets, Financial Sector, India, James Galbraith, Jim Bianco, Jim Rogers, Life Insurers, Money Program, Return On Equity, Robert Shiller, Sam Stovall, Slumps, Steve Leuthold, Stock Markets, Stress Tests, Treasuries
Posted in Commodities, Credit Markets, Economy, Gold, Markets, Oil and Gas, Outlook | No Comments »

Paulson & Co. Accumulating All Things Gold

Wednesday, May 20th, 2009

MarketFolly.com has been diligently tracking the activities of 35+ hedge fund managers, and one of the most notable of these has been John Paulson (no relation to Treasury secretary), founder of Paulson & Company, the King of the “Subprime Meltdown.”

According to SEC filings covered below, Paulson has recently accumulated some very large positions in gold and gold producers.

Many have been critical of hedge funds and their activities over the past year, particularly in the financial sector, and Paulson, a target, has unapologetically, but humbly, faced the markets’ scorn for profiting so triumphantly off the subprime and credit crisis of the last 2 years.

What is worth noting is that in the early days of Paulson’s bets against the housing and financials market, which he began accumulating years before the crisis unfolded, is that he faced the professional burden of being early, and grappling with both his partners, as well as the agony of the rising housing market’s ability to outlast and wrest away, the convictions of the majority of those who said it couldn’t last.

Fittingly, below is the graphic from the end of 2007, which shows how successful Paulson and Company was already, well before the credit crisis and last year’s collapse in financial markets.

(click image to enlarge)

Here we quote MarketFolly.com, its analysis of Paulson’s SEC filings:

The second hedge fund in our series is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. And, in the first part of 2009, he had also profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals there. Unfortunately for Paulson, one of his co-portfolio managers has left to start his own fund, and we’ll be keeping an eye on that. At the end of 2008, Paulson’s Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more information on how Paulson performed in 2008, be sure to check out their year end letter & report.

Paulson began shorting collateralized debt obligations and buying credit default swaps back in 2005 as he had conviction in his bet. His Credit Opportunities fund launched in 2006 with $150 million aimed to short subprime mortgage backed securities. This fund enjoyed immediate success, causing him to launch the Credit Opportunities II fund. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%. Such sterling performance led Paulson’s hedge funds to be the #1 and #4 funds as ranked in Barron’s hedge fund rankings (top 100). Paulson’s funds earned this distinction due to their solid 3 year annualized performance metrics. Additionally, Paulson sits at #3 on Alpha’s hedge fund rankings list for 2009, which is compiled based on assets under management (aum).

Obviously, such great performance has led to many other accolades for Paulson on a personal level. Recently, Paulson graced Forbes’ billionaire list, but that one is almost a no-brainer. More notably, he was among the top 25 highest paid hedge fund managers of 2008. In terms of recent portfolio performance, Paulson’s Advantage Plus Fund returned 4.8% through April as noted in our round up of hedge fund performance numbers.

The following were their long equity, note, and options holdings as of March 31st, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions(Brand new positions that they initiated in the last quarter):

SPDR Gold Trust (GLD)
Gold Fields (GFI)
Gold Miners ETF (GDX)
Anglogold Ashanti (AU)
Capital One Financial (COF)
JPMorgan Chase (JPM)
Petro-Canada (PCZ)
Schering Plough (SGP)
Wyeth (WYE)

Some Increased Positions (A few positions they already owned but added shares to)

St Jude Medical (STJ): Increased by 134%
Peoples United Financial (PBCT): Increased by 12%
Kinross Gold (KGC): Increased by 8%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)

Rohm & Haas (ROH): Reduced by 11.5%

Removed Positions (Positions they sold out of completely)

BCE (BCE)
Genentech (DNA)
Istar Financial (SFI)
Merrill Lynch (MER)
NRG Energy (NRG)
National Citty (NCC - inactive, acquired by PNC)
Northern Trust (NTRS)
Teva Pharma (TEVA)
Time Warner Cable (TWX)
Tronox (TRXAQ)
UST (UST)
ProShares Ultrashort Financial (SKF)
Wachovia (WB)
Wells Fargo (WFC)

Top 15 Holdings (by % of portfolio)

1. SPDR Gold Trust (GLD): 30.37% of portfolio
2. Wyeth (WYE): 13.96% of portfolio
3. Rohm & Haas (ROH): 13.44% of portfolio
4. Boston Scientific (BSX): 8.4% of portfolio
5. Gold Miners ETF (GDX): 6.81% of portfolio
6. Kinross Gold (KGC): 5.87% of portfolio
7. Philip Morris International (PM): 3.42% of portfolio
8. Petro-Canada (PCZ): 2.96% of portfolio
9. Schering Plough (SGP): 2.26% of portfolio
10. Mirant (MIR): 2.22% of portfolio
11. Gold Fields (GFI): 2.21% of portfolio
12. JPMorgan Chase (JPM): 1.65% of portfolio
13. Anglogold Ashanti (AU): 1.15% of portfolio
14. St Jude Medical (STJ): 0.91% of portfolio
15. Embarq (EQ): 0.81% of portfolio

The first major move that everyone will be talking about is Paulson’s big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio. Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros). Still though, that’s quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio. Previously, we had posted up when he started his large stake in Anglogold Ashanti. Now though, he has boosted his stake in Kinross Gold (KGC) and he has also started new positions in Gold Fields (GFI) and the Gold Miner ETF (GDX). Gold is clearly the name of the game for Paulson at present. And, such a massive position in gold and gold miners has to be for more than merely a hedge.

One other thing to consider with Paulson’s portfolio is that these holdings listed above are only his long equity holdings. The main reason why we bring this up is because the holdings above represent only a piece of his overall portfolio pie. Many of the positions above are merger arbitrage and event driven positions. While his gold stakes may be a large part of the assets disclosed in this filing, they are not quite as big when you compare them to his total assets under management. So, keep that in mind.

As many are already aware, Paulson bet against subprime and made a ton of money. As such, a lot of his holdings are in other markets. And, since the SEC only requires funds to disclose their equity, options, and note/bond positions, there is much of Paulson’s portfolio left unseen. Besides any omitted positions in mortgage backed securities or other markets, we also do not get to see Paulson’s shorts. The only short positions we can ever see in these filings (as per SEC regulations) are via positions in put options. And, Paulson does not have any such positions.

Another major move Paulson made last quarter was to buy a new stake in Wyeth (WYE). They brought their new WYE position all the way up to their #2 holding, which will turn a few heads. Aside from those major moves, Paulson also still retains the rest of his merger arbitrage style positions in Boston Scientific and Rohm & Haas, which we’ve covered previously. Additionally, Paulson still holds a position in Mirant (MIR), whom he filed a 13G on back in January.

We also noticed that Paulson essentially swapped out of Merrill Lynch, Northern Trust, Wells Fargo, and Wachovia in favor of Capital One and JP Morgan Chase. While this move is intriguing, it is fairly insignificant (at least at this time). All his financial positions are relatively tiny to his overall portfolio, with JPMorgan being the largest at only 1.65% of their portfolio, which is not saying much. We’ll have to monitor this development going forward to see if Paulson is getting constructive here, or mainly using these as proxies for something else in the shorter-term.

Assets from the collective holdings reported to the SEC via 13F filing increased from $6 billion last quarter up to $9.36 billion this quarter. Overall, Paulson is a great fund to keep an eye on simply because they nailed the crisis and have a solid track record. However, much of his portfolio is not present in these 13F filings, so take everything with a grain of salt. If you want to keep an eye on someone else who had worked with Paulson in betting against subprime, then check out our recent piece on Kyle Bass of Hayman Capital, where we divulge his latest prediction.

Source: MarketFolly.com, May 19, 2009

Tags: Agony, Amp Company, Assets Under Management, Brainer, Brains, Canada, Collapse, Collateralized Debt Obligations, Credit Crisis, Credit Default Swaps, Credit Opportunities, ETF, Financial Markets, Financial Sector, Forbes Billionaire List, Gold Producers, Hedge Fund Managers, Hedge Fund Performance, Hedge Funds, Highest Paid Hedge Fund Managers, Housing Market, Massive Returns, Mortgage Backed Securities, Opportunities Fund, Paulson, Performance Metrics, Personal Level, Portfolio Managers, Sec Filings, Sterling Performance, Subprime Meltdown, Talented Individuals, Target, Treasury Secretary, Uk Banks
Posted in Gold, Markets | No Comments »

The $33,000,000,000,000 question

Friday, May 8th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

Is the crisis really over?
Commercial paper spreads have come down dramatically. Libor rates are (hmm - almost) back to normal. Even high yield spreads are narrowing. It certainly appears as if the credit crisis is well and truly over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming freight train.

No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as ‘just’ another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible?

The great bank illusion
The current bull market began in earnest in the second week of March, but what really got everyone going were the surprisingly good Q1 US bank earnings which were reported during the first half of April. Most commentators interpreted the numbers as the clearest piece of evidence yet that we are now firmly on the road to recovery.

Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy - courtesy of the US tax payer - a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!

Liquidity is trapped
The problem for the rest of us is that the banks are not sharing the candy they have been handed. Much of the liquidity created by the central banks remains trapped in the financial sector. Quite simply, the multiplier is not doing its job, as many banks prefer to hoard cash rather than increase lending at this juncture.

This is both good and bad news at the same time. Good because it implies that we probably do not have to worry too much about the inflationary effect of the aggressive monetary easing currently taking place; bad because it means that the economy is not going to kick back to life as quickly as everyone would like - and expect

Meanwhile investors are growing cautiously optimistic about the GDP outlook for the second half of the year with many now forecasting modest growth – at least in the United States. Only a fool would suggest that GDP would shrink by 5-10% per quarter in perpetuity, as has been the case over the past two quarters. The economic slowdown is now decelerating and, as I pointed out last month, there are good reasons why we may see a temporary lift in economic activity later this year, but it will almost certainly prove transitory.

Click here for the full report.

* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Tags: Absolute Return, Armageddon, Bear Market, Car Manufacturers, Central Banks, Commentators, Credit Crisis, Executive Partner, Financial Sector, Freight Train, high yield, Hoard Cash, Job Banks, Libor Rates, liquidity, Market Rally, Million Cars, Multiplier, Niels Jensen, Tax Payer, Us Bank
Posted in Credit Markets, Economy, Markets | No Comments »