Archive for May, 2008
Saturday, May 31st, 2008
In his recent speech at Yale Class Day, Tony Blair had the following to share with students. The speech is well worth reading on many fronts, but if you’re an investor, then you’ll be interested in knowing what one of the great leaders of the free world has to say about what this century holds for both the West and the East.
For the first time in many centuries, power is moving East. China and India each have populations roughly double those of America and Europe combined.
In the next two decades, these two countries together will undergo industrialisation four times the size of the USA’s and at five times the speed.
We must be mindful that as these ancient civilisations become somehow younger and more vibrant, our young civilisation does not grow old. Most of all we should know that in this new world, we must clear a path to partnership, not stand off against each other, competing for power.
The complete speech can be read here:
Wednesday, May 28th, 2008
Liz Moyer, Forbes
Bank analyst Meredith Whitney says the credit crisis will extend well into 2009, if not beyond. This means more pressure on financial stocks and bank balance sheets; banks have added $25 billion to loss reserves so far, but face mounting consumer credit losses in a second wave of the crisis that some bank executives have acknowledged will be worse than the first, which has cost hundreds of billions of dollars in write-downs and losses.
Wall Street’s originate-to-distribute model, designed to mitigate risk by spreading it around, actually exacerbated those risks. It encouraged banks to loosen lending standards because more loan volume meant higher profits; then it led to over-leverage, and finally to complacency. More and more paper dollars were created for trading on the assumption that housing prices would always go up. The first wave of the crisis affected trading books, but the second will hit lending. As long as housing values were rising, borrowers could refinance in perpetuity to avoid default. Losses mounted when the refinancing option disappeared. Banks relied too heavily on the securitization markets to boost lending to consumers, particularly in the form of mortgages.
In time, some lending will return, but the sky-high revenues of recent years will be hard to reclaim, says Whitney. The banking sector’s pullback in lending will cause further painful losses. Whitney believes banks will have to reserve an additional $170 billion through the end of next year just to keep up with estimated loan losses. “New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors,” Whitney says.
Hat Tip: BMS Inc.
Tags: Bank analyst, bank balance sheets, Bank Executives, Banks, BMS Inc., CIBC, Credit, Credit Crisis, Credit Market, Dollar, Economy, financial stocks, liquidity, Liz Moyer, Markets, Meredith Whitney, Mortgage, Oppenheimer, Trading, usd, Value, Wall Street
Posted in Credit Markets, Markets | Comments Off
Monday, May 26th, 2008
May 26, 2008 – Pimco’s Bill Gross makes a most humorous analyses, drawing parallels that the hordes are marching on the new Rome (America), and that its time to act. Make sure you read this must read, the June 2008 Investment Outlook, by Bill Gross. At the end, Gross puts forth his recommendations.
What this country needs is either a good 5 cent cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” -”what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher – Democrat or Republican – should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.)
It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense or self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up-physically, intellectually, and institutionally-and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
Tags: Alps, America, Bill Gross, BRICs, Britney Spears, cent, Emerging Markets, energy, energy discussion, EUM, Fixed Income, Healthcare System, Hordes, Illinois, inflation, Investment Wisdom, Lincoln, Lindsay Lohan, Markets, philosophy, PIMCO, preacher, risk, Rome, Value
Posted in Markets, Outlook | Comments Off
Wednesday, May 21st, 2008
Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, an Financial Times investigation has discovered.
Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.
News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.
Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations – derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.
The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.
On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.
In a statement to the FT, Moody’s said: “Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.
“However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”
Credit ratings are hugely important within the financial system because many investors – such as pension funds, insurance companies and banks – use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.
The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.
S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”
Related links: CPDOs expose ratings flaw at Moodys – FT.com
Tags: Banks, Blog, CDS, Credit, Credit Bubble, Credit Market, debt product, Dollar, Economy, error gave top ratings to debt products, Euro, Financial Times, Fixed Income, FT.com, Insurance, Market Declines, Markets, Moody, oil, Standard, Standard And Poor
Posted in Credit Markets, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off
Wednesday, May 21st, 2008
May 21, 2008 – Courtesy: Nick Barisheff, Bullion Management Group - Bullion Management Group manage the Bullion Fund, a Canadian mutual fund that invests in Gold, Silver and Platinum bullion directly. The Bullion Fund trades at net asset value, and in the case of the precious metals themselves, at spot price. The following chart tells an important story about the value of diversification in changing markets.
Many investors believe the myth that gold is a risky investment, while blue chip US stocks are safe investments. The table above, which shows the performance from January 2000 to March 2008 of the individual stocks that made up the Dow Jones Industrial Average in January 2000,clearly refutes this myth. The table shows that many of the blue chip giants, such as GE and Microsoft, have lost over 70% of their value in US dollars. On the entire portfolio of Dow stocks, the equity loss has averaged 24.5%. For Canadian or European investors, additional currency exchange losses of 45% and 35% would have to be added to the equity losses. These losses are higher than the Index itself, which showed a slight increase of 6.7%, as eight of the original stocks have been replaced and the Index is weighted according to market capitalization. Unlike the Index, many investors with a buy-and-hold strategy would not have been in a position to simply replace the stocks. The picture for the NASDAQ Composite Index is even worse. While the Index itself is down by over 50% from its March 2000 high, the average performance of the actual stocks that made up the NASDAQ is even more dismal. Many of the 3,032 NASDAQ stocks that made up the Index in 2000 have lost all of their value, and have been replaced. Those who lost all of their investments with these stocks cannot simply replace them as the Index does. An allocation to “risky” gold, which can never decline to zero, would have at least mitigated these losses through the positive returns of over 224% that it generated over the same period.
Tags: Barisheff, Bullion, Bullion Fund, Bullion Management Group, Canadian Market, Chart, Currency, DJIA, Dollar, Dow 30, Euro, GE, Gold, Market Cap, Markets, Metals, Microsoft, Nasdaq, Nasdaq 100, Nasdaq Composite, Nick Barisheff, Platinum, precious metals, Silver, United States, US Dollar, US Stocks, Value
Posted in Canadian Market, Gold, Markets, Silver, US Stocks | Comments Off
Tuesday, May 13th, 2008
May 12, 2008 – GreenLightAdvisor.com recently interviewed [Part 2] Derek Webb, Portfolio Manager, Webb Asset Management. Here are some excerpts from Part II, in which Mr. Webb shares his strategy for earning superior investment income in volatile and range bound markets while minimizing downside risk. Here are some excerpts:On the investment income dilemma…
When you look at Canadians, they love their income; but where is the income coming from? Most funds are getting around this now by paying you back your own capital, so there it is. They offer 6-8%; the reality is nothing out there yields more than 5% and it costs 2% to run a fund plus an advisor gets 1%. The math just doesn’t add up. On top of that we have inflation. You don’t want that in a fund – where people are just paying you back your own money. To me it’s like investing in a utility where they have to sell a power plant each year to pay you your distribution. You would never invest in that company because long term the price of the stock is coming down.
How do we get around this? How do we do it? We spent a lot of time looking at this and the solution that we came up with is the following: Objective:
- Produce some decent high yields – we divided our strategy into 4 silos or buckets.
- Structure it so that it is tax efficient
Portfolio Strategy - For the full explanation, please read the complete interview:
Bucket #1 – Income Trusts
Income trusts have gotten a bad rap, but they are not bad especially if…
Bucket #2 – Earnings Driven Stock Buy Writes
We are buying the earnings driven stocks that we own in our hedge fund. How do we get income out of these stocks?
Bucket #3 – Value Stock Buy Writes
Bucket #3 is comprised of stocks that are not earnings related, but rather are washed out names, like banks. Let’s say banks trade sideways for the next 3 years…
Bucket #4 – Writing put options against short positions
Legally in Canada, we are allowed to be 20% short in a mutual fund and we are always 20% short because we have a very good short model. It’s very predictive, meaning simply,…
DW: It’s definitely lower than owning the stocks outright, and lower than a dividend fund.
Its lower risk than if you own a bank stock straight out vs. writing the call options on the same bank stock. Let’s say you own the bank at 100 and you write calls at 105…
GLA: Would you consider this suitable for a retired investor?
DW: Yes, certainly. Personally I think this is great for anybody, universally. It’s great for somebody who wants to grow capital, and it is great for somebody who wants a tax preferred income in retirement.
Visit Webb Asset Management for more information.
Tags: advisor, bank, Banks, Canadian Market, covered options, Derek Webb, Earnings, Earnings Discipline, earnings driven, Excerpts, Hedge Fund, high yield, inflation, Information, interview, Investment Strategy, Markets, option premium, option yield, Portfolio Manager, strike price, Value, wamfunds.com, Webb Asset Management
Posted in Canadian Market, Markets | Comments Off
Tuesday, May 13th, 2008
May 12, 2008 – GreenLightAdvisor.com recently interviewed [Part 1] Derek Webb, Portfolio Manager, Webb Asset Management. Here are some excerpts from Part 1, in which Mr. Webb shares his outlook and his thoughts about how he trades in volatile and range bound markets. Here are some excerpts:
Regarding the Fed’s recent moves…
Anytime the Fed puts this much liquidity in to the system it’s like blowing into a pipe; all that pressure has to go somewhere—When the Fed drops hay bails of money out of the helicopter, those hay bails of money are like molecules. They have to attach themselves to something.
When you look at the huge amount of money put into the system because of the Long Term Capital Meltdown and Russia—now that liquidity event created the internet bubble. This is no different.
All of this liquidity is going to find a home. I’ll tell you that I think it’s finding its home right now. Fundamentally I am very bullish because of all this liquidity.
On his investment focus…
Through our quantitative homework we found that the delta or change in earnings is the only thing that’s predictable in terms of determining the direction of a stock’s price. That’s all we focus on; that’s all our research focuses on. So, where is that delta accelerating right now—it’s in commodities. Agriculture is number one, Oil and gas are number two, some base metals number three, like copper—The shine has kind of come out of precious metals in the short run, but I don’t think that trade’s over, I think it’s more of a seasonal thing right now.
On when to sell:
[Firstly], If we saw one analyst lower EPS forecasts for Potash, for example, WE WOULD BE OUT. Analysts are out there doing site visits. They’re doing their homework – as long as they’re raising their numbers we’re going to be long. As soon as we would see them hold steady or lower their numbers we would be out.
Secondly, if the earnings themselves just start to de-accelerate, meaning we are looking at a smooth line of earnings, not to get complicated, but we look from 3 quarters ago out to the next quarter and if that rate of change de-accelerates were out.
Thirdly, one negative earnings surprise and we’re out.
And lastly, if the relative strength indicator of the stock de-accelerates were out.
We’re ruthless on all our positions.
And lastly, if the relative strength indicator of the stock de-accelerates were out.
PART 1: Derek Webb Interview, GreenLightAdvisor.com.
Visit Webb Asset Management for more information.
Tags: Agriculture, analyst, bifurcation, Commodities, Derek Webb, Earnings, Excerpts, Fed, Focus, Information, Internet Bubble, interview, Investment Strategy, liquidity, Long Term Capital, Markets, Metals, Mining, Monetary Policy, oil, Oil and Gas, Portfolio Manager, Potash, precious metals, Russia, Us Federal Reserve, wamfunds.com, Webb Asset Management
Posted in Commodities, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off
Monday, May 12th, 2008
Quotable – A lesson from Livermore we keep re-learning
It was the change in my own attitude toward the game that was of supreme importance to me. It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating. I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.- Jesse Livermore
Courtesy of Victor Adair
Monday, May 12th, 2008
May 12, 2008 – Jerome Booth, Head of Research at Ashmore Investment Management, UK, has written an insightful article for FT.com, Insight: A Global Rebalancing Act, May 12, 2008. Here are a few excerpts:
Gross national savings are over 30 per cent of GDP on average in emerging countries, and for a decade private and official savers in these countries have been investing overseas – in the US and Europe – under the impression that these were safer markets than at home. Yet the dollar is far from the safest currency and not the store of value it was. US Treasuries are not zero risk – the implicit myth in the term “the risk-free rate”. Treasuries have currency, curve and volatility risks. Investors in triple A structured credit got a shock when they realised their investment was risky.
Likewise emerging market savers are getting a shock about Treasuries and other US and European assets. The money is returning home, and the move is structural, not cyclical. The global imbalance of a negative US personal savings rate on the one hand being financed by high emerging savings on the other is starting to reverse.
With this reversal, or rebalancing, is coming, we believe, a currency realignment and a series of investment booms across emerging economies as investment focus shifts. Rather than using “decoupling” in describing the impact of the credit crunch on emerging markets, we should use “negative correlation”.
The policy asymmetry between the US and emerging markets is that the emerging markets, with undervalued currencies, have an additional degree of freedom. They have the choice to mess up (do nothing) or control inflation (let the currency rise, raise interest rates). In our view, emerging market central banks will largely pass this test and do the sensible thing, though this is not what the market appears to have priced in yet.
As recently as ten years ago, emerging markets still held their hands out for development loans and foreign aid. Today, their fiscal prudence and wealth has put them in the position of bailing out the western banking system.
Why are investors taking so long to realize this critical distinction and its meaning?
Tags: Ashmore Investment Management, Banking System, Banks, BRICs, Central Banks, Correlation, Credit, Currency, Desc, Dollar, Emerging Market, Emerging Markets, Euro, Europe, Excerpts, Focus, FT.com, GDP, Head of Research, inflation, interest rates, Investment Management, Jerome Booth, Markets, Savings Rate, UK, United Kingdom, United States, Value
Posted in Credit Markets, Emerging Markets, Markets | Comments Off
Monday, May 12th, 2008
May 9, 2008 – Courtesy of BMO Capital Markets – Douglas Porter, Deputy Chief Economist, BMO, from Focus (Economic Research), May 9, 2008.
Just imagine where oil prices would be if the U.S. economy was not in a recessionette. Oil galloped above $125 this week, more than doubling in the short space of a year. Can we all agree that this formidable surge is much more than just a weak US$ story? After all, oil prices are also up 75% in euro terms over the past year and 83% in Canadian dollar terms.
And, this is a lot more than just due to supply disruptions in Nigeria, Venezuela, or Timbuktu. This latest oil shock is a global event, with wide-ranging implications. Here are some of the most important (in no particular order):
1) Headline inflation is poised to pop further globally. The risk for central bankers is that sustained strength in headline inflation may yet alter inflation expectations.
2) Soaring energy prices could put further upward pressure on food costs, aggravating an already dire set of circumstances.
3) Global growth may take a hit, with the U.S., Europe and Japan particularly at risk. Just the run-up in energy prices since Q1 will cost U.S. consumers more than $100 billion annually—gobbling up the tax rebates.
4) Sovereign wealth funds, already wielding enormous power, will become even more powerful, particularly those from the Middle East and Russia.
5) China’s trade surplus should narrow meaningfully. A rapidly rising import bill for energy and other commodities, strains in its major export markets (the U.S., Japan and Europe), strong domestic demand, and a rising currency all point to a drop in China’s trade surplus. Still, its stock of foreign assets will continue to grow quickly for a while yet.
6) Canada’s trade surplus will hold up better than expected, providing important support for the loonie. While it hasn’t worked in 2008, the rule-of-thumb is that every $10 rise in oil translates into a 3-to-5 cent gain in the Canadian dollar. At the very least, record oil prices will keep the CAD from retreating.
7) Canada’s regional imbalances will continue to widen. Soaring energy costs, a strong currency and a suffering U.S. economy spell trouble for Ontario and Quebec with a capital T.
8) The relative outperformance of the TSX versus the S&P 500 and other major markets will continue. While most of the world has seen serious setbacks this year, the TSX came within a few points of its all-time high this week.
9) Interest rates are unlikely to come down much further. The Fed’s lingering inflation concerns will be stoked by record crude, and definitely ditto for the ECB.
10) First it was food riots in the world’s poorest countries. Will we now see some serious unrest in countries further up the chain amid soaring energy costs?
Amid surging global commodity prices, Canada now boasts one of the lowest inflation rates in the world at 1.4% y/y. Among major and even semi-major countries, only Japan is now lower at 1.2%, and it is rising rapidly. In fact, among the world’s top 40 economies, Canada is one of only five countries to have recorded a drop in its inflation rate from a year ago. And three of those other countries still have inflation rates of at least 5.5% (India, Argentina and Turkey). Britain is the other country with lower inflation than a year ago, and the BoE is also cutting rates. Among the top 40 economies, the median inflation rate has vaulted from 2.5% a year ago to 4.3% now (Spain, Australia, Korea and the U.S. are all fairly close to both those figures). Canada, meantime, has gone from 2.3% to 1.4%—i.e. from close to the middle of the pack to near the low. Thank you loonie, and with an assist from the GST cut.
Tags: Argentina, Australia, BMO, BMO Capital Markets, Britain, Cad, Canadian Market, cent, Chief Economist, China, Commodities, Commodity, Currency, Deputy Chief Economist, Dollar, Douglas Porter, ECB, Economics, Economy, energy, Energy Costs, Energy Prices, Euro, Europe, Fed, Federal Government, Focus, Food Costs, Food Riots, India, inflation, interest rates, Japan, Korea, Markets, Middle East, Nigeria, oil, Oil Prices, Oil Shock, Ontario, Outperformance, Porter, Quebec, Recession, record oil prices, risk, Russia, S&P 500, Setback, Spain, Top 40, Turkey, UK, United States, upw, usd, Venezuela
Posted in Canadian Market, Commodities, Economy, Energy & Natural Resources, Markets, Oil and Gas, US Stocks | Comments Off