The days of the large investment banks are over. Most people know that Bear Stearns, Lehman, and Merrill are not here anymore. Of course, Merrill is part of Bank America but it is a shadow of its former self. Goldman and Morgan Stanley are now commercial banks and the large banks have been considerably weakened.
For decades, Wall Street has attracted some of the brightest young men and women to generate enormous profits for their firms and themselves. Investment banks handsomely rewarded creativity, intelligence, trading ability, risk taking, salesmanship, and investment acumen. Profits were high and multimillionaires were created. Much of that wealth helped to spur the financial crisis we have today.
However, without independent investment banks, risk taking is likely to diminish and the entrepreneurial spirit will vanish. We contend that the Wall Street landscape will evolve over the next few years. Perhaps the commercial banks won't be able to attract many of the rocket scientists and medicine and education will benefit from this migration. This would be a welcome trend for the future of the United States.
What will Wall Street look like in a few years? If the traditional bonus system is being eliminated, their will be a mass exit from the big banks. Many new boutique firms will open their doors. These firms will allow for the entrepreneurial spirit to be rekindled and profits to soar again. The Wall Street tycoon won't be a hedge fund manager or a prop trader at a large bank but it may be the CEO's of a new M&A boutique or a bankruptcy advisory firm or a small high yield sales and trading operation. Many new firms will open their doors as the exodus of brains and talent leave traditional Wall Street in search of big bonuses and freedom to prosper in an entrepreneurial environment again.
Friday, January 30, 2009
It Was Fun For A Few Days But...
President Obama isn't ready for a stock market rally. The new administration is working on cleaning up the mess in the financial system and focusing on stimulating the depressed economy. However, before the good news can be seen, there is plenty of ugliness around. Every day companies are reporting very negative earnings and this will continue for a few more weeks.
The good news is that more companies have been accessing the credit markets to raise fresh capital but not everybody has that luxury. It is a long difficult process but as the economy gets closer to a bottom, (which could be a year from now or more) the credit markets will gradually start to function more normally. We also need Wall Street to function more normally. Therefore, a plan to recapitalize the banks may only be successful politically if the Wall Street firms drastically change their bonus system. This is the new hot topic and much debate will be had.
All of the above led to concerns in the stock market which dropped about another 3% yesterday and may continue its downfall again today. GDP will be reported and promises to be ugly. We can be assured of one thing, volatility will continue.
The good news is that more companies have been accessing the credit markets to raise fresh capital but not everybody has that luxury. It is a long difficult process but as the economy gets closer to a bottom, (which could be a year from now or more) the credit markets will gradually start to function more normally. We also need Wall Street to function more normally. Therefore, a plan to recapitalize the banks may only be successful politically if the Wall Street firms drastically change their bonus system. This is the new hot topic and much debate will be had.
All of the above led to concerns in the stock market which dropped about another 3% yesterday and may continue its downfall again today. GDP will be reported and promises to be ugly. We can be assured of one thing, volatility will continue.
Thursday, January 29, 2009
It Is Still All About The Economy, Again
The markets enjoyed a nice rally yesterday with the S&P up 3.36% and the DOW up 2.46%. The financials, home builders, auto parts companies, and gaming enterprises all had rallies yesterday. The concept of a Bad Bank being set up by the government was well received by investors as a way to clean up the balance sheets of banks and improve the flow of credit again. This proposal combined with a stimulus plan might jolt the economy ultimately so GDP could grow again.
The ideas are encouraging and investors drove stock prices higher. The only question now is what are the details of the plans?, how long will they take to effect the economy?, and when can we expect earnings to improve? Unfortunately, the consumer needs to replenish his net worth and companies still need to deleverage.
The bottoming process is ongoing but this recession is going to be long and deep. Government's programs will be instrumental in moving the economy forward but corporate earnings won't get better for a while; unemployment will continue to increase; and housing prices will continue to decline. Today investors received news that durable goods declined 2.6% in December while jobless claims rose 588,000. This is a clear sign that the economy is still getting weaker.
We said at the beginning of the week that we may get an Obama rally and markets have risen nicely for the last few days but volatility is still apparent and markets won't go straight up. Today's weak economic news will be combined with more lousy corporate earnings to keep the lid on stocks until the market can accurately discount the timing of the bottom of the economic cycle.
The ideas are encouraging and investors drove stock prices higher. The only question now is what are the details of the plans?, how long will they take to effect the economy?, and when can we expect earnings to improve? Unfortunately, the consumer needs to replenish his net worth and companies still need to deleverage.
The bottoming process is ongoing but this recession is going to be long and deep. Government's programs will be instrumental in moving the economy forward but corporate earnings won't get better for a while; unemployment will continue to increase; and housing prices will continue to decline. Today investors received news that durable goods declined 2.6% in December while jobless claims rose 588,000. This is a clear sign that the economy is still getting weaker.
We said at the beginning of the week that we may get an Obama rally and markets have risen nicely for the last few days but volatility is still apparent and markets won't go straight up. Today's weak economic news will be combined with more lousy corporate earnings to keep the lid on stocks until the market can accurately discount the timing of the bottom of the economic cycle.
Wednesday, January 28, 2009
Has The Rally Begun?
The S&P 500 rose 1% yesterday and after the close Yahoo reported better than expected earnings to give futures a little lift. However, the rumors of an Obama plan to set up a Bad Bank to relieve banks of their toxic assets is what investors are anxious to see. If the financials can improve their balance sheets and become liquid again, the credit markets are likely to open up more. A free flowing credit market will result in new lending and possibly a jump start to the weakened economy.
This is the big Tea Leaf all investors are looking for. If the Obama financial team can also introduce a credible plan to stimulate housing, the 2 big cogs in the depressed economy will be positively impacted.
The only downside is the structure of the Bad Bank. How much do they pay for the bad assets and how do they pay for it? It would be a good idea for the government to join forces with private equity firms and hedge funds to form a partnership in owning the Bad Bank. Such an enterprise would placate taxpayers and investors. The private sector would likely price the distressed securities correctly and give not only themselves an ability to earn a good return but improve the chances of the government not throwing away more of the public's money.
This morning Wells Fargo reported very weak earnings but said they won't be asking the government for more money and it's not cutting its dividend. Their numbers after adjustments seem to have beat analysts' expectations. The stock is reacting well as it rises 20% this morning. The results coupled with the Bad Bank concept is driving their stock as well as most financials higher.
A strong financial sector is what the market needs to get the Obama rally. Yesterday may have been the first day of such a move but today we should see a strong carry through. Enjoy the ride as volatility is still in the market and many more negative surprises are likely to pop up on the way.
This is the big Tea Leaf all investors are looking for. If the Obama financial team can also introduce a credible plan to stimulate housing, the 2 big cogs in the depressed economy will be positively impacted.
The only downside is the structure of the Bad Bank. How much do they pay for the bad assets and how do they pay for it? It would be a good idea for the government to join forces with private equity firms and hedge funds to form a partnership in owning the Bad Bank. Such an enterprise would placate taxpayers and investors. The private sector would likely price the distressed securities correctly and give not only themselves an ability to earn a good return but improve the chances of the government not throwing away more of the public's money.
This morning Wells Fargo reported very weak earnings but said they won't be asking the government for more money and it's not cutting its dividend. Their numbers after adjustments seem to have beat analysts' expectations. The stock is reacting well as it rises 20% this morning. The results coupled with the Bad Bank concept is driving their stock as well as most financials higher.
A strong financial sector is what the market needs to get the Obama rally. Yesterday may have been the first day of such a move but today we should see a strong carry through. Enjoy the ride as volatility is still in the market and many more negative surprises are likely to pop up on the way.
Monday, January 26, 2009
Will We Get A Geithner Run?
The markets were relatively flat today as they bounced up and down but ended higher by about 1/2%. Companies keep reporting mostly negative news. Investors are assuming the worst so perhaps stocks need to see dire news to aggressively sell.
On the economic front, the leading indicators advanced .3% which was way above the expectations of a .2% decline. This was topped off with a bigger than expected rise in existing home sales. Perhaps the economy will start to see some positive tea leaves but most companies don't see the light at the end of the tunnel.
Early this evening perhaps brought the news the markets need. Treasury Secretary Geithner was confirmed and sworn in. The Obama administration can now move forward with a stimulus package as it tries to jump start the morbid economy. More companies should report dismal earnings and bleak futures and weak economic news will likely persist but the prospects of a stimulus package and a cleaning up of the financial industry mess could give us a little bit of the Obama rally everyone is hoping for.
On the economic front, the leading indicators advanced .3% which was way above the expectations of a .2% decline. This was topped off with a bigger than expected rise in existing home sales. Perhaps the economy will start to see some positive tea leaves but most companies don't see the light at the end of the tunnel.
Early this evening perhaps brought the news the markets need. Treasury Secretary Geithner was confirmed and sworn in. The Obama administration can now move forward with a stimulus package as it tries to jump start the morbid economy. More companies should report dismal earnings and bleak futures and weak economic news will likely persist but the prospects of a stimulus package and a cleaning up of the financial industry mess could give us a little bit of the Obama rally everyone is hoping for.
Friday, January 23, 2009
The Pain Continues
The markets continued to flounder yesterday. Microsoft surprised investors by reporting their numbers early and with disappointing results. We also had housing prices declining 1.8% last month with slowing new building activity. The economy is weak here and abroad and the market doesn't see any upturn in the near future.
Until the economy has prospects of bottoming, investors will stay on the sidelines. GE reported this morning and they too had weak earnings but not worse than expected. Google reported after the close yesterday and joined Apple with very strong earnings. There are so few companies doing well these days that the markets just keep trending lower.
It is important to stay liquid and buy quality as this ride will remain bumpy. We have said for a long time that this recession will be longer and deeper than most expect and unfortunately, it looks like the markets are starting to believe it too.
Until the economy has prospects of bottoming, investors will stay on the sidelines. GE reported this morning and they too had weak earnings but not worse than expected. Google reported after the close yesterday and joined Apple with very strong earnings. There are so few companies doing well these days that the markets just keep trending lower.
It is important to stay liquid and buy quality as this ride will remain bumpy. We have said for a long time that this recession will be longer and deeper than most expect and unfortunately, it looks like the markets are starting to believe it too.
Wednesday, January 21, 2009
Obahma Taketh and Obama Giveth
Today we had a reversal of yesterday in the markets. On Tuesday the financials plunged and today they rebounded as it appeared Mr. Geitner was going to be getting the nomination for Secretary of the Treasury. However, the biggest impetus was the news that Bank of America chief Ken Lewis bought stock yesterday in his own company. That was followed up at the end of the day with news that Jamie Dimon bought $11.5mm of J.P. Morgan stock last week. It certainly seems like a good signal for a bottom in the financials.
If we get some good signs of help in the housing market, the market could get ready to run for awhile. After the market closed, Apple defied gravity by announcing very strong fourth quarter numbers and the stock soared. This should set the tone for tomorrow's stock market opening.
The stock market regained most of yesterday's lost ground but with China's economy only growing 6.8% in the fourth quarter, there isn't much follow through in Asia over night. Our markets will continue to key off of earnings reports and ultimately the foreign markets will take their queue from the United States.
If we get some good signs of help in the housing market, the market could get ready to run for awhile. After the market closed, Apple defied gravity by announcing very strong fourth quarter numbers and the stock soared. This should set the tone for tomorrow's stock market opening.
The stock market regained most of yesterday's lost ground but with China's economy only growing 6.8% in the fourth quarter, there isn't much follow through in Asia over night. Our markets will continue to key off of earnings reports and ultimately the foreign markets will take their queue from the United States.
Will The Apple Shine
We have been skeptical of Apple's growth for awhile and have expected its stock to trade lower. Of course, the stock is lower but so far it is related to Steve Job's health. We don't have any special insight into Apple's earnings but this is a company that has been loved by most. We have assumed the market can't finish its down downward trend until a stock like Apple disappoints investors.
Today, Apple reports its numbers and any slowing of its business may upset investors and drag the broader markets lower. Stay tuned.
Today, Apple reports its numbers and any slowing of its business may upset investors and drag the broader markets lower. Stay tuned.
The O(bomb)a Period Has Begun
President Obama is ready for action and it looks like his first move was to take the financials out to the woodshed and shoot them. Every major banking institution's stock including Citigroup, Wells Fargo, J.P. Morgan, and BankAmerica were down double digits yesterday. The broad markets also crawled under a rock as the DOW was down 4% and the S&P and NASDAQ were down more than 5%.
The new administration had indicated that the balance of the TARP money was going to focus on helping the small guy and not the big banks. Of course, some plan to stabilize the financial system is necessary but a lack of any details led the market to assume the worst. The markets felt ugly all day but after noon when our new President was sworn in, the volume of the downtrend picked up considerably. All the DOW stocks were down and most of the NYSE stocks followed along.
It is still "All About the Economy". Volatility in the markets resumed its upward trend and fear was everywhere. Stocks won't go to zero but buying opportunities will develop. It is earnings season and we can expect mostly disappointing numbers. Analysts will continue to lower estimates and that should lead us to the bottom of the market. In the past two weeks the rally in the high yield and loan markets has cooled and drifted downward. Perhaps the year-end rally in the credit markets was just short covering but we believe they just ran up too fast. The credit markets will lead the stock market and until they stage a broad rally, the stock market won't.
Perhaps stocks will bounce early this morning but a huge sell-off would probably be better. Markets try to maximize pain and another huge down day might scare enough investors out of the market so we can finish the bottoming process and move onto better times.
The new administration had indicated that the balance of the TARP money was going to focus on helping the small guy and not the big banks. Of course, some plan to stabilize the financial system is necessary but a lack of any details led the market to assume the worst. The markets felt ugly all day but after noon when our new President was sworn in, the volume of the downtrend picked up considerably. All the DOW stocks were down and most of the NYSE stocks followed along.
It is still "All About the Economy". Volatility in the markets resumed its upward trend and fear was everywhere. Stocks won't go to zero but buying opportunities will develop. It is earnings season and we can expect mostly disappointing numbers. Analysts will continue to lower estimates and that should lead us to the bottom of the market. In the past two weeks the rally in the high yield and loan markets has cooled and drifted downward. Perhaps the year-end rally in the credit markets was just short covering but we believe they just ran up too fast. The credit markets will lead the stock market and until they stage a broad rally, the stock market won't.
Perhaps stocks will bounce early this morning but a huge sell-off would probably be better. Markets try to maximize pain and another huge down day might scare enough investors out of the market so we can finish the bottoming process and move onto better times.
Friday, January 16, 2009
Merrill Really Did Go Bankrupt
The infamous weekend when Lehman went bankrupt and Bank America bought Merrill was just rewritten. Today it was announced that the government is giving Bank America another $20 billion plus a guarantee for $118 billion of Merrill assets against loss. It certainly looks like that acquisition was now completed with taxpayer help.
Citigroup also weighed in today by announcing they will split the company into 2 pieces. It looks like a good bank and a bad bank. Citi made this announcement as it struggles to survive and sell more assets.
Both companies reported weak earnings but their liquidity is a little better in the short-term. It is time to read the tea leaves again. This is clearly a day that is a significant piece in the bottoming process as systematic risk was avoided. Two of the three largest banks are still functioning and the government will continue to support them. We now think Citi's good bank can be sold to an entity like Goldman.
2009 should produce many bankruptcies in the financial sector but the large ones which can produce systematic risk will not. The markets should become more comfortable with these events. Housing will get worse, unemployment will rise, industrial production will decline, and earnings will be bleak but the financial system will not fail. It is only about when will the economy bottom. The markets will start to feel better as all the bad news is forecast.
Next week we could see a little bit of an O'Bama rally but volatility will continue. Keep liquid, buy quality and good times will come.
Citigroup also weighed in today by announcing they will split the company into 2 pieces. It looks like a good bank and a bad bank. Citi made this announcement as it struggles to survive and sell more assets.
Both companies reported weak earnings but their liquidity is a little better in the short-term. It is time to read the tea leaves again. This is clearly a day that is a significant piece in the bottoming process as systematic risk was avoided. Two of the three largest banks are still functioning and the government will continue to support them. We now think Citi's good bank can be sold to an entity like Goldman.
2009 should produce many bankruptcies in the financial sector but the large ones which can produce systematic risk will not. The markets should become more comfortable with these events. Housing will get worse, unemployment will rise, industrial production will decline, and earnings will be bleak but the financial system will not fail. It is only about when will the economy bottom. The markets will start to feel better as all the bad news is forecast.
Next week we could see a little bit of an O'Bama rally but volatility will continue. Keep liquid, buy quality and good times will come.
Wednesday, January 14, 2009
Financial Lead the Way, Down
It looks like the whole financial sector has a problem. The sector was down about 5.5% today with commercial banks down over 6%. Citi was off about 24% and BofA was off about 8% as it might need more government help as it tries to swallow Merrill. Tomorrow JP Morgan is reporting its 4th quarter earnings and it won't be pretty. None of this should be a shock but investors are acting quite surprised.
It was a weak stock market throughout the day as the DOW closed down a little under 3% while the S&P was off 3.35%. It was hard to find many stocks that were up today. In fact, out of 1841 stocks on the NYSE only 109 rose and all the DOW stocks were down. The technicals may have been bad today but tomorrow could be worse.
After the close, Steve Jobs announced that he is taking a leave of absence from Apple as his medical condition is more serious than he said last week. The stock dropped about 9.5% on the day and is right on top of its year low. We have written about our concerns with owning Apple stock but it was related to a possible slowing of their business. Should Mr. Jobs' absence be followed up with weaker earnings than expected, the stock will move a lot lower.
As for tomorrow, the negative news from Apple and BofA after the close will lead the market down. Of course, weakness in Asia tonight won't help either. Most Asian markets are off about 5% so far.
The economic weakness is being translated to the commodity markets as gold, copper, oil, natural gas, and aluminum continued their declines today. The deflationary environment we are in is likely spooking commodity traders. Fear is rising again as the VIX is close to 50. Expect more volatility in stocks until we get through earnings season. At that point all the bad news may be out.
The United States had its credit rating affirmed by S&P but there was some concern expressed. Greece on the other hand wasn't so lucky. We would expect other country downgrades in this environment which should keep global fear at a peak. These are treacherous times and caution is important. Make sure you have plenty of liquidity as the markets seem to want to head lower in the short-term. The bottoming process isn't over but new opportunities are around the corner. If you missed some buying opportunities on October 10th or November 21st, stay tuned. The day with some new lows is probably within a week or two of occurring again.
It was a weak stock market throughout the day as the DOW closed down a little under 3% while the S&P was off 3.35%. It was hard to find many stocks that were up today. In fact, out of 1841 stocks on the NYSE only 109 rose and all the DOW stocks were down. The technicals may have been bad today but tomorrow could be worse.
After the close, Steve Jobs announced that he is taking a leave of absence from Apple as his medical condition is more serious than he said last week. The stock dropped about 9.5% on the day and is right on top of its year low. We have written about our concerns with owning Apple stock but it was related to a possible slowing of their business. Should Mr. Jobs' absence be followed up with weaker earnings than expected, the stock will move a lot lower.
As for tomorrow, the negative news from Apple and BofA after the close will lead the market down. Of course, weakness in Asia tonight won't help either. Most Asian markets are off about 5% so far.
The economic weakness is being translated to the commodity markets as gold, copper, oil, natural gas, and aluminum continued their declines today. The deflationary environment we are in is likely spooking commodity traders. Fear is rising again as the VIX is close to 50. Expect more volatility in stocks until we get through earnings season. At that point all the bad news may be out.
The United States had its credit rating affirmed by S&P but there was some concern expressed. Greece on the other hand wasn't so lucky. We would expect other country downgrades in this environment which should keep global fear at a peak. These are treacherous times and caution is important. Make sure you have plenty of liquidity as the markets seem to want to head lower in the short-term. The bottoming process isn't over but new opportunities are around the corner. If you missed some buying opportunities on October 10th or November 21st, stay tuned. The day with some new lows is probably within a week or two of occurring again.
Goldman-Citi
The landscape of financial institutions has been changing rapidly over the past year. The use of leverage is yesterday's game and underwritten toxic waste has been an albatross on most balance sheets. Whether it is sub prime mortgages, CDO's, leveraged loans, or consumer credit, losses have appeared everywhere and promise to dent balance sheets for the remainder of 2009. This reality is finally forcing Citigroup to dismantle its financial supermarket created by Sandy Weill.
On November 24th, 2008 we discussed some of the details of the Citigroup government bailout. We viewed the transaction as a stabilization deal until Citi sold more assets to reduce its balance sheet. The government deal was great for Citi but not the taxpayers as much of the balance sheet risk was now being assumed by the Government. It seems like Citi's new focus will be to rid itself of many assets until it looks like a commercial bank focusing on corporations and wealthy individuals.
Here comes Goldman Sachs. The Goldman business model is also in transition. It needs to transform its business and do so with less leverage and more prudent risk taking. We believe Goldman is looking to do a transformational deal to jump start its future growth. Goldman management is the brightest on Wall Street and they will be patient until they figure out the correct path and seize upon the right opportunity.
A slimmed down Citi who caters to wealthy individuals and corporations with a global reach and a consumer deposit base could be the match Goldman management may be waiting for. It could take some time for this type of transaction to develop but Citi could become a distressed entity as it tries to sell assets quickly and Goldman will be on the sidelines watching.
A joint Goldman-Citi entity could be the bank of the future which dominates global commerical banking and advisoryservices but also has a consumer deposit base. There would be plenty of management overlap which could be eliminated and the sales and trading operations would also need to be rationalized.
Goldman needs a large deal to take them to the next level in its move to once again be a dominant force. It appears to us that Citi is one of the few obvious candidates who could help them achieve those goals.
On November 24th, 2008 we discussed some of the details of the Citigroup government bailout. We viewed the transaction as a stabilization deal until Citi sold more assets to reduce its balance sheet. The government deal was great for Citi but not the taxpayers as much of the balance sheet risk was now being assumed by the Government. It seems like Citi's new focus will be to rid itself of many assets until it looks like a commercial bank focusing on corporations and wealthy individuals.
Here comes Goldman Sachs. The Goldman business model is also in transition. It needs to transform its business and do so with less leverage and more prudent risk taking. We believe Goldman is looking to do a transformational deal to jump start its future growth. Goldman management is the brightest on Wall Street and they will be patient until they figure out the correct path and seize upon the right opportunity.
A slimmed down Citi who caters to wealthy individuals and corporations with a global reach and a consumer deposit base could be the match Goldman management may be waiting for. It could take some time for this type of transaction to develop but Citi could become a distressed entity as it tries to sell assets quickly and Goldman will be on the sidelines watching.
A joint Goldman-Citi entity could be the bank of the future which dominates global commerical banking and advisoryservices but also has a consumer deposit base. There would be plenty of management overlap which could be eliminated and the sales and trading operations would also need to be rationalized.
Goldman needs a large deal to take them to the next level in its move to once again be a dominant force. It appears to us that Citi is one of the few obvious candidates who could help them achieve those goals.
It's Still "All About The Economy" II
Today the Government announced bleak retail sales numbers. Most investors should have expected bad numbers but the markets will clearly continue their downward trend of the past week. The import price index, which was also released, indicates the economy is in a deflationary spiral. The only positive news seems to be a 16% mortgage application increase last week.
Markets were virtually flat yesterday but there was uncertainty in the air. The Citigroup sale of Smith Barney is the beginning of the unraveling of the Weill empire and investors are a little jittery about the losses Citi continues to incur. As we have been saying, Citi needs to sell more assets and it appears that it will happen sooner than later.
Ben Bernanke may have spooked the market a little as he gave a talk to the London School of Economics yesterday as he talked about Tarp, the stimulus package, and other Fed tools to prop up the economy. The conclusion in investors minds is there is still plenty of work to do before the good times return. Most financial institutions were weak yesterday and there are rumors that HSBC may need to raise $30 billion.
Nobody who reads this blog should be that surprised. The recession will be longer and deeper than most investors expected and markets will adjust accordingly. Earnings reports will shed some reality as we saw Deutsche Bank announce a $6 billion loss today and other disappointments are on the way.
Stocks will move through its bottoming process but it won't always be fun. The key will be to focus on the credit markets as they improve and set stocks up for some positive momentum.
Markets were virtually flat yesterday but there was uncertainty in the air. The Citigroup sale of Smith Barney is the beginning of the unraveling of the Weill empire and investors are a little jittery about the losses Citi continues to incur. As we have been saying, Citi needs to sell more assets and it appears that it will happen sooner than later.
Ben Bernanke may have spooked the market a little as he gave a talk to the London School of Economics yesterday as he talked about Tarp, the stimulus package, and other Fed tools to prop up the economy. The conclusion in investors minds is there is still plenty of work to do before the good times return. Most financial institutions were weak yesterday and there are rumors that HSBC may need to raise $30 billion.
Nobody who reads this blog should be that surprised. The recession will be longer and deeper than most investors expected and markets will adjust accordingly. Earnings reports will shed some reality as we saw Deutsche Bank announce a $6 billion loss today and other disappointments are on the way.
Stocks will move through its bottoming process but it won't always be fun. The key will be to focus on the credit markets as they improve and set stocks up for some positive momentum.
Tuesday, January 13, 2009
Markets Don't Go Straight Up
Alcoa reported weak earnings last night. The aluminum market is being significantly affected by the weak global economy and is expected to be in the doldrums for a while. Alcoa's management is retrenching accordingly to adapt to the soft market and will do what is necessary to maintain its dividend which they have paid for 60 years. After listening to the earnings call last night, it is clear that when the economy starts to bottom out, this company will be well positioned to take advantage of the new opportunities. Stocks were weak again yesterday as they have been for a few days now.
We expect to see many earnings reports which will disappoint investors but the overall credit markets should continue to improve. The leveraged loan and high yield markets took a breather yesterday and traded off a little but they have been on a good run. We could see some more weakness but their march upward should continue.
2009 has started off with lower oil prices, weaker economic news, global tension, and stronger credit markets. Investors will continue to remain skeptical of when the economy will bottom but it will. Housing prices are still declining and the financial sector is still weak but a new stimulus plan and a focused President could help the bottoming process. A year from now stocks will be higher but volatility remains in the short-term.
We expect to see many earnings reports which will disappoint investors but the overall credit markets should continue to improve. The leveraged loan and high yield markets took a breather yesterday and traded off a little but they have been on a good run. We could see some more weakness but their march upward should continue.
2009 has started off with lower oil prices, weaker economic news, global tension, and stronger credit markets. Investors will continue to remain skeptical of when the economy will bottom but it will. Housing prices are still declining and the financial sector is still weak but a new stimulus plan and a focused President could help the bottoming process. A year from now stocks will be higher but volatility remains in the short-term.
Sunday, January 11, 2009
The Recession Marches On
The markets were down over 4% this week and everybody seems surprised. The credit markets continue to improve but until loans and bonds move up another 15 or 20 points, it is unlikely we will get a sustained rally in stocks. The recession is going to be longer and deeper than most people think and the next few months will be the worst time for the economy.
The jobs report showed official unemployment stood at 7.2% but in reality it is much higher as many people who lost their jobs have given up looking for new ones. We expect the official number to rise above 10%. The consumer is not spending and manufacturing is coming to a screeching halt. Eventually the housing market will bottom but first prices will likely decline a little more so that combined with low mortgage rates, the housing stock will start to look very compelling. A bottom in housing and strong credit markets will be the beginning of an economic recovery.
One positive note this week is Citigroup. We have been saying for a long time that Citi still has many problems and the government rescue was structured to force Citigroup to merge with another entity or start to sell assets. It looks like the first phase in that process is happening as Morgan Stanley prepares to buy a majority of Smith Barney. Expect Citi to sell its asset management unit and a bunch of other non critical assets. Citibank is going to return to having a commercial bank emphasis with a much smaller footprint.
Stocks will head higher again but not before it is evident that the recession is going to end within 6 to 9 months. It is possible that 2009 remains weak and the recession lasts into 2010. We expect to see rallies in the market in the next six months that get tempered by the economic realities. Money can be made in the market but one needs to be smart and careful. 2009 will bring many corporate bankruptcies so avoid companies with big debt maturities.
Continue to buy large liquid companies and diversify amongst industries. Our suggested portfolio at the end of the year had fixed income ideas as well as gold and some special situations. Individuals can't always take advantage of the distressed opportunities in the credit markets so we rely on stocks where the managers focus on those areas. This is a tough market for any professional so be conservative as you invest and maintain plenty of cash as we march through uncertain times.
The jobs report showed official unemployment stood at 7.2% but in reality it is much higher as many people who lost their jobs have given up looking for new ones. We expect the official number to rise above 10%. The consumer is not spending and manufacturing is coming to a screeching halt. Eventually the housing market will bottom but first prices will likely decline a little more so that combined with low mortgage rates, the housing stock will start to look very compelling. A bottom in housing and strong credit markets will be the beginning of an economic recovery.
One positive note this week is Citigroup. We have been saying for a long time that Citi still has many problems and the government rescue was structured to force Citigroup to merge with another entity or start to sell assets. It looks like the first phase in that process is happening as Morgan Stanley prepares to buy a majority of Smith Barney. Expect Citi to sell its asset management unit and a bunch of other non critical assets. Citibank is going to return to having a commercial bank emphasis with a much smaller footprint.
Stocks will head higher again but not before it is evident that the recession is going to end within 6 to 9 months. It is possible that 2009 remains weak and the recession lasts into 2010. We expect to see rallies in the market in the next six months that get tempered by the economic realities. Money can be made in the market but one needs to be smart and careful. 2009 will bring many corporate bankruptcies so avoid companies with big debt maturities.
Continue to buy large liquid companies and diversify amongst industries. Our suggested portfolio at the end of the year had fixed income ideas as well as gold and some special situations. Individuals can't always take advantage of the distressed opportunities in the credit markets so we rely on stocks where the managers focus on those areas. This is a tough market for any professional so be conservative as you invest and maintain plenty of cash as we march through uncertain times.
Thursday, January 8, 2009
Retailers Report the Bloody Truth
Back in September we were expecting a very weak Christmas season for the retailers. Today many of the retailers reported very bleak same-store-sales for December led by a big disappointment from Walmart.
The stock market was quite weak yesterday and we can expect the same today. Reality is setting in as company's like Intel come out with bleak forecasts. The market is still in the bottoming process and given the recession is going to be long and deep stocks can't go straight up. President-Elect Obama is adding to the somber mood as he is starting to add his own dose of negative economic comments.
Consumers are weak, businesses are weak, financial institutions are weak, and thus the markets are weak. The only bright spot is the continued improvement in the credit markets. It is a long ride but in three or four years we will look back and realize that this is one of the greatest opportunities to create wealth. It won't be easy but prudent investing will be needed to navigate the trip.
The stock market was quite weak yesterday and we can expect the same today. Reality is setting in as company's like Intel come out with bleak forecasts. The market is still in the bottoming process and given the recession is going to be long and deep stocks can't go straight up. President-Elect Obama is adding to the somber mood as he is starting to add his own dose of negative economic comments.
Consumers are weak, businesses are weak, financial institutions are weak, and thus the markets are weak. The only bright spot is the continued improvement in the credit markets. It is a long ride but in three or four years we will look back and realize that this is one of the greatest opportunities to create wealth. It won't be easy but prudent investing will be needed to navigate the trip.
Wednesday, January 7, 2009
Markets Don't Go Straight Up
It's still "All About the Economy". The ADP employment report indicated that companies eliminated 693,000 jobs in December. This was about 200,000 more lost jobs than expected. As we have been saying, this recession will be longer and deeper. Alcoa and Time Warner also came out with weak business outlooks. This is a tough environment and the market will continue to meander its way through these difficult times.
Stocks were up about .75% yesterday on average volume. As we said yesterday, each day we still have fear for what is going to happen each day. The corporate bond and loan markets continue to do well but the stock markets still have hope in them. A bottom may have been hit in stocks but the ride will continue to be bumpy. Companies are now starting to report their quarterly earnings and everyday should bring new surprises. Don't be too aggressive but continue to read the tea leaves.
Stocks were up about .75% yesterday on average volume. As we said yesterday, each day we still have fear for what is going to happen each day. The corporate bond and loan markets continue to do well but the stock markets still have hope in them. A bottom may have been hit in stocks but the ride will continue to be bumpy. Companies are now starting to report their quarterly earnings and everyday should bring new surprises. Don't be too aggressive but continue to read the tea leaves.
Tuesday, January 6, 2009
Can Bernanke Drive the Stock Market?
Yesterday, the S&P was down about .5% and the DOW was off almost 1%. The advanced decline ratios were also weak but no new trend seemed to be evident. We have been discussing the need for corporate bonds and loans to continue their rally before the stock market can head much high and start a sustained bull market. Today, there is a rumor that the Federal Reserve is going to focus on buying unwanted loans and bonds to stimulate those markets. If successful, Mr. Bernanke will be the stock market's hero.
Oil prices continue to rise as does copper. Perhaps the Israeli conflict and the Russian dispute with the Ukraine created the impetus for such moves but perhaps a bottoming of the economy is also being seen by the market. We don't know what the truth is but the tea leaves must be watched. At year-end we listed some stocks that could do well over the next few years and lately we have been buying long-term calls on stocks that could perform well should the stock market surprise everyone this year and go up 25-40%. We think this is a possibility and so we want to add some big upside to the portfolio. We are focused on cyclicals that have dropped 80-90% which could rebound strongly if the economy starts to turn up in the next year or so.
Of course, we still remain fearful every day as to what the market will do. Even though we have seen some good returns in the last ten days, it is hard to get too excited. Therefore, as the market rises, we buy puts on the S&P with some of our profits to protect the portfolio from negative surprises.
Bull markets climb "walls of worry". Many investors are worried and the market is still climbing. Negative economic news and poor corporate earnings are announced every day but the stock markets seem to be absorbing them better. Have low interest rates, massive liquidity, and fiscal stimulus already started to change investor psychology? The VIX fear factor has been declining and the credit markets are improving. Perhaps we are in a new bull market already and in three months we can look back and be happy we participated in some of those gains. It is not time to gamble in the market but large liquid companies are still the proper recipe but we are now sprinkling in some good upside while protecting the downside.
Oil prices continue to rise as does copper. Perhaps the Israeli conflict and the Russian dispute with the Ukraine created the impetus for such moves but perhaps a bottoming of the economy is also being seen by the market. We don't know what the truth is but the tea leaves must be watched. At year-end we listed some stocks that could do well over the next few years and lately we have been buying long-term calls on stocks that could perform well should the stock market surprise everyone this year and go up 25-40%. We think this is a possibility and so we want to add some big upside to the portfolio. We are focused on cyclicals that have dropped 80-90% which could rebound strongly if the economy starts to turn up in the next year or so.
Of course, we still remain fearful every day as to what the market will do. Even though we have seen some good returns in the last ten days, it is hard to get too excited. Therefore, as the market rises, we buy puts on the S&P with some of our profits to protect the portfolio from negative surprises.
Bull markets climb "walls of worry". Many investors are worried and the market is still climbing. Negative economic news and poor corporate earnings are announced every day but the stock markets seem to be absorbing them better. Have low interest rates, massive liquidity, and fiscal stimulus already started to change investor psychology? The VIX fear factor has been declining and the credit markets are improving. Perhaps we are in a new bull market already and in three months we can look back and be happy we participated in some of those gains. It is not time to gamble in the market but large liquid companies are still the proper recipe but we are now sprinkling in some good upside while protecting the downside.
Monday, January 5, 2009
Apple of Your Day
The mystery about Steve Jobs' weight loss is now known. He has a hormone imbalance that is easily treatable and he is not dying nor stepping down as CEO of Apple. The markets can now breathe easier on this topic.
Last week, we had a New Years' rally. Stocks went up on light volume. When all the sellers were on vacation, the buyers were able to push up stocks. This week will determine the true test of its resiliency. There is a rumor of an Obama tax cut as part of the stimulus plan which would probably be welcome news. The economy is not getting better any time soon and will likely get worse in the next few months. The markets will continue to keep a close eye on the economic tea leaves and we may even get a real Obama rally but we anticipate even a strong rally will run into some headwinds until the accelerating economic decline slows down.
2009 will continue to see analysts downgrade their recommendations on stocks and companies will also report lower earnings than expected. Bankruptcies will be a weekly story, consumers will default on all types of loans, and Israeli type conflicts will abound. Expect the stock markets to be choppy with some strong rallies in between. The credit markets are starting to improve but until the corporate loan and bond markets move up dramatically, we are unlikely to see a new bull market in stocks.
Last week, we had a New Years' rally. Stocks went up on light volume. When all the sellers were on vacation, the buyers were able to push up stocks. This week will determine the true test of its resiliency. There is a rumor of an Obama tax cut as part of the stimulus plan which would probably be welcome news. The economy is not getting better any time soon and will likely get worse in the next few months. The markets will continue to keep a close eye on the economic tea leaves and we may even get a real Obama rally but we anticipate even a strong rally will run into some headwinds until the accelerating economic decline slows down.
2009 will continue to see analysts downgrade their recommendations on stocks and companies will also report lower earnings than expected. Bankruptcies will be a weekly story, consumers will default on all types of loans, and Israeli type conflicts will abound. Expect the stock markets to be choppy with some strong rallies in between. The credit markets are starting to improve but until the corporate loan and bond markets move up dramatically, we are unlikely to see a new bull market in stocks.
Thursday, January 1, 2009
2009: Here We Are
2008 ended on an up note. The economic data was weak and will continue to be weak but we can at least start the year with a clean slate. 2009 promises to be filled with many surprises, both good and bad. It is important to invest in strong liquid companies and try to prepare for the unknown. Risk management was clearly missing in 2008 but should be the key focus for investors, banks, investment banks, corporations, non-profit entities, and every ordinary citizen.
We don't know where the Black Swan will appear but it will. A week ago, we tried to highlight the good surprises and the bad surprises that might affect the markets in 2009. Invest smartly, diversify one's risk, and try to prepare for the unknown. A year from now oil could be at $80 and the stock market could be 40% higher but from now till then a major war could break out and cause instability in many markets. We don't know what is going to happen but it is important to be able to capture the upside with good surprises and minimize the damage when a negative event appears.
Let's be opportunistic as we start 2009 but be cautious as we meander through this difficult economy and uncertain stock market.
We don't know where the Black Swan will appear but it will. A week ago, we tried to highlight the good surprises and the bad surprises that might affect the markets in 2009. Invest smartly, diversify one's risk, and try to prepare for the unknown. A year from now oil could be at $80 and the stock market could be 40% higher but from now till then a major war could break out and cause instability in many markets. We don't know what is going to happen but it is important to be able to capture the upside with good surprises and minimize the damage when a negative event appears.
Let's be opportunistic as we start 2009 but be cautious as we meander through this difficult economy and uncertain stock market.
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