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.
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