(28 Nov) The markets were open for a half-session on Friday. And, as was the case with many other value-conscious shoppers, market participants jumped in to continue to take advantage of the markdowns.
Let's do a little re-cap of the market this week and see if we can divine anything from what's going on.
Trends?
The markets gained more than 12 percent this week. This was the best weekly performance since 1974. For further perspective on the fact that we're not as bad off as many have been proclaiming, that move came off a low of about 565 on the Dow Jones. Friday's closing Dow number was 8829. The theory of market relativity writ large, it appears.
Putting it mildly, we still have some climbing to do to get back to October, 2007 levels. The S&P 500 is still down 43 percent from that level...over 24% of the drop having occurred between this past October and November. That is, truly, old news and, based on my experience, anything short of the planet blowing up has been factored into stock prices. That's why the markets have been going up, even though the news coming out is bad. That news is reflecting events already past.
With the Federal Reserve committing as much as $800 billion to help revive the lending markets, instead of just giving it to the banks, there was a definite improvement in mortgage rates as well this week. Average rates for a 30 year fixed rate loan are down about a half point since a month ago and, I believe, we'll see some further easing too.
As with the lending market allocation just mentioned, there is a whole bunch of money that is scheduled to be put into the economy - most of it hasn't even been placed yet. The ripple effect of that will help kick the economy again. Yet another reason the markets are moving higher.
Like the Carly Simon song title - it's all about anticipation...
Housing
I think a Morgan Stanley analyst said it best, "the U.S. housing market slump has been so severe, it’s almost 'impossible' for declines in residential construction to hurt the world’s largest economy as much in 2009."
Just to help put just how big our economy truly is into perspective, housing - and its related industries, only account for 3.3% of the total US Gross Domestic Product. The average is only 4.5%. Not to minimize the impact of those whose livelihoods have been affected, I think the whole impact of the housing thing has been primarily psychological. Everybody lives somewhere, so the impact feels greater.
Population growth, pent-up demand and the "new and improved" lower rates will move - if history is any guide - to help us to move through this more quickly than many are projecting today.
What about tax-free bonds?
In this, so-called, black swan market - so called cuz how many times have you seen one of those guys - no asset class has been spared from downward price movements. For those who want to pick up some great income opportunities, a whole lot of municipal bonds are looking pretty good in here.
According to my buddies at Forbes magazine, the upside of this is that individual investors have access to tax-free returns that, literally, have never been seen since we stated keeping track of such things. This is due to the forced selling by banks and insurance companies created by their need to offset their mortgage-related losses and compounded by the foolish mark-to-market requirements.
Whatever the reasons, here's the scoop in a nutshell.
First, for some perspective about how unusual a situation we're in. For about the past 15 years, the average AA rated state bond - the interest from which is free from Federal income tax - has paid about 88% of the rate that a US Treasury bond maturing in 20 years does. Basically, the difference is/was due to the tax advantage.
So, the Forbes folks say that today's average AA rated (that's just one level done from AAA, the absolute highest quality) state bond is about 5.3%. That rate is 120% of that paid by the current 20 year US Treasury bond. Holy comoly! That's nuts. Put another way, if you're in the 28% Federal tax bracket, this means that you'd have to be getting 7.36% on a taxable investment of the same quality. That's called the taxable equivalent yield.
Summary
I have no crystal ball. I'm not privy to any secret or inside information. I, for sure, cannot offer any guarantees. However, based on 35 years of being involved with markets and investing, let me put it this way.
If I had all the money in the world, I would be investing hugely in quality equities, bonds and real estate - right now.
I will quote St. Warren of Buffet from a lecture he gave in the 1950s. "You try to be greedy when others are fearful and you try to be fearful when others are greedy."
What he said.
Friday, November 28, 2008
Wednesday, November 26, 2008
Mortgages. markets and some Thanksgiving thoughts
(26 Nov) Looks as if the plan that the Federal Reserve unveiled yesterday to buy $600 billion in various mortgages had a definite impact on lending rates.
The average rate for a 30 year fixed rate mortgage dropped to around 5.50% after starting the day at an average of 6.38%. That’s the biggest one day drop in 7 years. Or, as the president of PMC Mortgage said rather succinctly I thought, “instead of buying stocks in stupid banks, the government finally is going to make a move to clear assets from the market.”
Bankers being bankers have not been letting loose much money for lending, even in light of 7 drops by the Fed in its key rate. The reference for mortgage rates is the US Treasury note that matures in 10 years. Even though most loans are written for 30 years, the average life of them is about 7 years due to sale or refinance…that’s the reason for the linkage. In any regard, the difference (spread) between the 10 year note and the average 30 year fixed mortgage rate was up to 2.80% - that was the widest since 1986.
The bad news is that none of the sub-prime loans are covered in the deal, so look for more foreclosures coming from that front through the first half of next year.
The markets, as seen by a real pro
I’ve been following and subscribing to the wisdom of Don Hays for, at least, 20 years. He has been a great predictor of trends and directions over the years. He puts out a letter regularly and, due to the recent market actions, has given his subscribers permission to share the contents with whomever we wish. Below are the crux of his thoughts…
“You only learn in bear markets, and I look back and see how my career, which obviously has impacted my overall life dramatically, has only been enhanced by that very trying period from 1969 to 1982 when the stock market went no-where for 13 years, and I had to innovate and learn to survive. And then the 1987 crash, which defied all logic from history as so many people were comparing that to their projection from the 1929 “Black Friday,” and expecting a similar massive consumer break-down and depression in its wake. The 1987 CRASH experience is what precipitated our official introduction of our Asset Allocation model. So this massive deleveraging that has overwhelmed the stock market can either project you to new heights of your financial life, or it can devastate you forever. It is a time of learning and innovation. I’m talking to myself as well as you. It’s scary…..and exciting.
We live in a new world, a new global world, and new innovations that have come on the scene have their huge potential, but as is so obvious now, also huge risks. Paulson and Bernanke are examining the new discovery and understanding of this massive financial disease, studying the new operating procedures to stop the hemorrhaging of blood, and instituting new operating procedures that will be more effective than anything that could have been “learned” or enacted during all those years when greed was clouding the eyes.
They are not throwing away all the wisdom of the ages, but modifying old procedures, adding new ones if necessary, and developing new instruments, and instituting new guidelines. Good investors, all over the world, those that will go on to higher heights, are doing exactly the same. It is a new world, an evolution of new opportunities, and with the huge new source of billions of investors and workers, and emerging economies, the potential is even greater than before. You are seeing the most unified global effort ever before in history attacking this red alert. It could never have happened without a threat of destruction that demanded unification and effective guidelines for the new global economy.
The October 10th internal bottom still looks very good, and the “researchers” for the first time really made some progress in the last two days to help this patient to regain its health. The stock market rallied strongly, but in truth, it only barely erased the blood hemorrhaging of the last few days. You can see in mortgage rates, in the price of lumber, and with many other signs how the market’s barometer yesterday.
But still, despite the fact we still have to sweat out each morning’s dismal economic statistic—and the natural emotional swing in the futures’ contracts, this is not a cyclical type bottom, it is a secular type bottom. This is one of those rare experiences that you only get a few times in your entire life-time. Remember, this is new territory for us all, but the evidence really, really looks good. It is a rare experience that we get our barometers—Psychology, Monetary and Valuation in their current Most Bullish status at the same time. It only happens in the most extreme secular type of market conditions.”
This guy is not given to overstatement so his thoughts should be given high regard.
Thanksgiving
All of us who live here should be giving thanks, simply for the fate that allowed us to do so. I thought I’d add some items of interest – to me, anyway – to add to your day.
* The earliest attested Thanksgiving celebration was in September, 1565, in what is now St. Petersburg, Florida. (If you’ve ever been there, I think you’d agree that some of the original celebrants are still around…)
* The Pilgrims spent two months at sea. By the time of their first celebration, 10 months later, they had erected 7 houses, a meeting house and 3 storehouses.
* Squanto was a Wampanoag Indian who had spent 9 years in England and acted as the intermediary between the rest of his tribe, in particular Massasoit. (Massasoit was a title meaning Great Sachem or chief. His real name was Ousamequin. Spelling class must have been tough for those guys…)
* Since they hadn’t come upon any turkeys as yet and potatoes hadn’t been imported or cranberries discovered, their feast – which was really a series of meals over a week – likely had fish, cabbage, onions, corn, duck and venison as the main ingredients.
* A lady named Sarah Josepha Hale – the author of “Mary had a little lamb” and noted magazine editor – was the force behind convincing Abe Lincoln to declare a national Thanksgiving holiday on the last Thursday of November.
* Minnesota is our top turkey producing state – as you can tell by their Senate race, methinks.
* The first Macy’s Thanksgiving parade was in 1924, featuring animals from the Central Park Zoo. The big balloons were added in 1927.
* The first nationally broadcast football game - on radio – was the Lions v. the Bears in 1924. They played in front of an overflow crowd of 26,000…
The markets are closed on Thanksgiving and only open for a couple hours on Friday, so it’s not too likely much of note will be done before next Monday.
Have a wonderful time and give thanks for all that’s important to you!
The average rate for a 30 year fixed rate mortgage dropped to around 5.50% after starting the day at an average of 6.38%. That’s the biggest one day drop in 7 years. Or, as the president of PMC Mortgage said rather succinctly I thought, “instead of buying stocks in stupid banks, the government finally is going to make a move to clear assets from the market.”
Bankers being bankers have not been letting loose much money for lending, even in light of 7 drops by the Fed in its key rate. The reference for mortgage rates is the US Treasury note that matures in 10 years. Even though most loans are written for 30 years, the average life of them is about 7 years due to sale or refinance…that’s the reason for the linkage. In any regard, the difference (spread) between the 10 year note and the average 30 year fixed mortgage rate was up to 2.80% - that was the widest since 1986.
The bad news is that none of the sub-prime loans are covered in the deal, so look for more foreclosures coming from that front through the first half of next year.
The markets, as seen by a real pro
I’ve been following and subscribing to the wisdom of Don Hays for, at least, 20 years. He has been a great predictor of trends and directions over the years. He puts out a letter regularly and, due to the recent market actions, has given his subscribers permission to share the contents with whomever we wish. Below are the crux of his thoughts…
“You only learn in bear markets, and I look back and see how my career, which obviously has impacted my overall life dramatically, has only been enhanced by that very trying period from 1969 to 1982 when the stock market went no-where for 13 years, and I had to innovate and learn to survive. And then the 1987 crash, which defied all logic from history as so many people were comparing that to their projection from the 1929 “Black Friday,” and expecting a similar massive consumer break-down and depression in its wake. The 1987 CRASH experience is what precipitated our official introduction of our Asset Allocation model. So this massive deleveraging that has overwhelmed the stock market can either project you to new heights of your financial life, or it can devastate you forever. It is a time of learning and innovation. I’m talking to myself as well as you. It’s scary…..and exciting.
We live in a new world, a new global world, and new innovations that have come on the scene have their huge potential, but as is so obvious now, also huge risks. Paulson and Bernanke are examining the new discovery and understanding of this massive financial disease, studying the new operating procedures to stop the hemorrhaging of blood, and instituting new operating procedures that will be more effective than anything that could have been “learned” or enacted during all those years when greed was clouding the eyes.
They are not throwing away all the wisdom of the ages, but modifying old procedures, adding new ones if necessary, and developing new instruments, and instituting new guidelines. Good investors, all over the world, those that will go on to higher heights, are doing exactly the same. It is a new world, an evolution of new opportunities, and with the huge new source of billions of investors and workers, and emerging economies, the potential is even greater than before. You are seeing the most unified global effort ever before in history attacking this red alert. It could never have happened without a threat of destruction that demanded unification and effective guidelines for the new global economy.
The October 10th internal bottom still looks very good, and the “researchers” for the first time really made some progress in the last two days to help this patient to regain its health. The stock market rallied strongly, but in truth, it only barely erased the blood hemorrhaging of the last few days. You can see in mortgage rates, in the price of lumber, and with many other signs how the market’s barometer yesterday.
But still, despite the fact we still have to sweat out each morning’s dismal economic statistic—and the natural emotional swing in the futures’ contracts, this is not a cyclical type bottom, it is a secular type bottom. This is one of those rare experiences that you only get a few times in your entire life-time. Remember, this is new territory for us all, but the evidence really, really looks good. It is a rare experience that we get our barometers—Psychology, Monetary and Valuation in their current Most Bullish status at the same time. It only happens in the most extreme secular type of market conditions.”
This guy is not given to overstatement so his thoughts should be given high regard.
Thanksgiving
All of us who live here should be giving thanks, simply for the fate that allowed us to do so. I thought I’d add some items of interest – to me, anyway – to add to your day.
* The earliest attested Thanksgiving celebration was in September, 1565, in what is now St. Petersburg, Florida. (If you’ve ever been there, I think you’d agree that some of the original celebrants are still around…)
* The Pilgrims spent two months at sea. By the time of their first celebration, 10 months later, they had erected 7 houses, a meeting house and 3 storehouses.
* Squanto was a Wampanoag Indian who had spent 9 years in England and acted as the intermediary between the rest of his tribe, in particular Massasoit. (Massasoit was a title meaning Great Sachem or chief. His real name was Ousamequin. Spelling class must have been tough for those guys…)
* Since they hadn’t come upon any turkeys as yet and potatoes hadn’t been imported or cranberries discovered, their feast – which was really a series of meals over a week – likely had fish, cabbage, onions, corn, duck and venison as the main ingredients.
* A lady named Sarah Josepha Hale – the author of “Mary had a little lamb” and noted magazine editor – was the force behind convincing Abe Lincoln to declare a national Thanksgiving holiday on the last Thursday of November.
* Minnesota is our top turkey producing state – as you can tell by their Senate race, methinks.
* The first Macy’s Thanksgiving parade was in 1924, featuring animals from the Central Park Zoo. The big balloons were added in 1927.
* The first nationally broadcast football game - on radio – was the Lions v. the Bears in 1924. They played in front of an overflow crowd of 26,000…
The markets are closed on Thanksgiving and only open for a couple hours on Friday, so it’s not too likely much of note will be done before next Monday.
Have a wonderful time and give thanks for all that’s important to you!
Monday, November 24, 2008
Citi news
(24 Nov) A troika of Federal agencies (the Treasury, Federal Reserve and the FDIC) threw Citigroup a life preserver over the weekend and gave hope to other financial institutions. This combined to help give many market participants a more positive view of things and continued to rally the averages after Friday's jump.
The three agreed to guarantee 90% of losses above the $29 billion in "underperforming" loans that were identified. In payment for that, Citi is issuing $27 billion in a preferred stock, yielding a very nice 8% return. There are also warrants (instruments that can be converted into common shares) that give a 4.5% stake in the corporation.
This gives Citi room to maneuver now.
Why did they do it?
To give strength to the financial markets was, I believe, the main reason. The financial stocks have been the real anchor on the markets all year and in the past couple weeks, in particular. This was as much about the stock price as anything. Citi had not seen any run on its deposits.
From an accounting standpoint, if the max loss on the loans is calculated, it appears that the low-end price for the assets would be about 82 cents on the dollar. This translates into a write-down of about 18.5%. This allows the bank to avoid being crushed by these stupid mark-to-market rules as well as the short sellers that have been set free by ignorant regulators.
So now, the bank - by not having to do a fire sale of $306 billion in assets due to that bogus mark-to market rule - can hold the assets instead. These forced sales have been the cause of much grief for financial firms, to say nothing of their shareholders. The Fed move support should give support to the share prices as well.
Mark to market analogy
My close, personal friend (well, actually, I have had lunch and talked with him) Brian Wesbury, the chief economist at First Trust, has come up with this analogy to explain this problem. To wit:
"While the intervention is good on the surface, it is really just a convoluted financial arrangement to avoid the damage caused by forcing firms to mark assets to “fair value” in the midst of a financial tsunami.
If homeowners in Montecito, CA, were forced to mark their homes to market when forest fires were one mile to the east of them and the Santa Ana winds were blowing hard, many would have been bankrupt. But, when the winds shifted and came from the ocean, these homeowners were made solvent again. What’s worse is that in the case of the financial system, mark-to-market accounting can actually make the Santa Ana winds blow harder."
Marking assets to the market is kind of like getting comparable values for an appraisal on real estate. You look around for similar properties that have sold recently to give you an idea of what yours may be worth. Well, the auditors at banks - not your life of the party guys to begin with - say that, in order to be most conservative in their accounting, the assets - of all qualities - must be marked (priced) based on what similar assets are being sold at.
Imagine that there is a fire sale, so to speak, at a financial institution. Do you think those assets will be fairly priced? No. Nonetheless, the auditors say, look at those prices - ours need to reflect those. So, the assets are marked down. Then - it gets better - since the asset values have been diminished, the bank has to raise additional capital in order to be in compliance with the Fed regulations. This, then, puts the hammer down on the ability to keep lending.
This imbalance can't be fixed until the system stabilizes. However, the rules that were put in prevent the system from becoming stable. Add to that the short-sellers who are aware of all this and, here we are.
It's like a snake eating its own tail...
Not good for the gander
Citi has been given a bulletproof vest that no one else has. This problem of market marking has only been minimized for them. Other financial institutions are still subject to the effect of those inane rules and the short sellers who follow them.
Exec pay rules and the likely elimination of dividends to the common shareholders for a while will be in the future of other financials who want to get some help it seems to me.
One last market note
In terms of stock market returns, Ibbotson Associates has some data that certainly seems to make the case for the long-term investment view.
In the '90s, the Standard & Poors 500 had an average annual rate of return of 18.2%. Anyone remember? So far, the 00s appear to be living up to their numeric designation. Through September, the average annual rate of return on the S&P has been 0.94%. Not as good, it would appear.
Here's the long view.
When you meld the last 18 years together, however, the average annual rate of return is - 10.5%...right in line with its historical return.
To me, this reinforces my long-held belief that on a short-term basis, the market is unknowable. On a long-term basis, it's inevitable...
The three agreed to guarantee 90% of losses above the $29 billion in "underperforming" loans that were identified. In payment for that, Citi is issuing $27 billion in a preferred stock, yielding a very nice 8% return. There are also warrants (instruments that can be converted into common shares) that give a 4.5% stake in the corporation.
This gives Citi room to maneuver now.
Why did they do it?
To give strength to the financial markets was, I believe, the main reason. The financial stocks have been the real anchor on the markets all year and in the past couple weeks, in particular. This was as much about the stock price as anything. Citi had not seen any run on its deposits.
From an accounting standpoint, if the max loss on the loans is calculated, it appears that the low-end price for the assets would be about 82 cents on the dollar. This translates into a write-down of about 18.5%. This allows the bank to avoid being crushed by these stupid mark-to-market rules as well as the short sellers that have been set free by ignorant regulators.
So now, the bank - by not having to do a fire sale of $306 billion in assets due to that bogus mark-to market rule - can hold the assets instead. These forced sales have been the cause of much grief for financial firms, to say nothing of their shareholders. The Fed move support should give support to the share prices as well.
Mark to market analogy
My close, personal friend (well, actually, I have had lunch and talked with him) Brian Wesbury, the chief economist at First Trust, has come up with this analogy to explain this problem. To wit:
"While the intervention is good on the surface, it is really just a convoluted financial arrangement to avoid the damage caused by forcing firms to mark assets to “fair value” in the midst of a financial tsunami.
If homeowners in Montecito, CA, were forced to mark their homes to market when forest fires were one mile to the east of them and the Santa Ana winds were blowing hard, many would have been bankrupt. But, when the winds shifted and came from the ocean, these homeowners were made solvent again. What’s worse is that in the case of the financial system, mark-to-market accounting can actually make the Santa Ana winds blow harder."
Marking assets to the market is kind of like getting comparable values for an appraisal on real estate. You look around for similar properties that have sold recently to give you an idea of what yours may be worth. Well, the auditors at banks - not your life of the party guys to begin with - say that, in order to be most conservative in their accounting, the assets - of all qualities - must be marked (priced) based on what similar assets are being sold at.
Imagine that there is a fire sale, so to speak, at a financial institution. Do you think those assets will be fairly priced? No. Nonetheless, the auditors say, look at those prices - ours need to reflect those. So, the assets are marked down. Then - it gets better - since the asset values have been diminished, the bank has to raise additional capital in order to be in compliance with the Fed regulations. This, then, puts the hammer down on the ability to keep lending.
This imbalance can't be fixed until the system stabilizes. However, the rules that were put in prevent the system from becoming stable. Add to that the short-sellers who are aware of all this and, here we are.
It's like a snake eating its own tail...
Not good for the gander
Citi has been given a bulletproof vest that no one else has. This problem of market marking has only been minimized for them. Other financial institutions are still subject to the effect of those inane rules and the short sellers who follow them.
Exec pay rules and the likely elimination of dividends to the common shareholders for a while will be in the future of other financials who want to get some help it seems to me.
One last market note
In terms of stock market returns, Ibbotson Associates has some data that certainly seems to make the case for the long-term investment view.
In the '90s, the Standard & Poors 500 had an average annual rate of return of 18.2%. Anyone remember? So far, the 00s appear to be living up to their numeric designation. Through September, the average annual rate of return on the S&P has been 0.94%. Not as good, it would appear.
Here's the long view.
When you meld the last 18 years together, however, the average annual rate of return is - 10.5%...right in line with its historical return.
To me, this reinforces my long-held belief that on a short-term basis, the market is unknowable. On a long-term basis, it's inevitable...
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