After experiencing the worst one day loss on Monday since the market crash on October 19, 1987, markets rallied hard, with the Dow closing up nearly 500 points. There were several reasons for the gain.
1. The market was oversold
When only one stock in the S&P 500 goes up and the downside volume to upside volume is 26.5:1, as it was on Monday, a snapback rally is no surprise.
2. Belief that the government will still bail out the market.
This was the main reason why the market was up. Frankly, I am in disbelief of the market's credulity on this one. Yesterday, I wrote that Washington has no credibility on Wall Street, given that the House sandbagged the market, voting down TARP. I was wrong. Apparently Washington has a great deal of credibility on Wall Street, despite getting blindsided yesterday. I want Washington to do something, but there is a part of me that would like to see this fail just to wring the gullibility out of Wall Street. If the legislators fail and a bill does not pass and the market falls another 1000 points, then Wall Street will have no one to blame but themselves.
3. Suspension of mark-to-market accounting
Investors were under the impression that mark-to-market accounting, FASB 157, would be suspended. The SEC released a statement clarifying the interpretation of mark-to-market but did not say it would be suspended. The idea is that banks would not have to mark down their assets to recent market transactions if FASB 157 were suspended. The proponents argue that current market transactions represent distressed sales and not the true value of the underlying assets, but companies have to mark their assets to those unrealistic levels. Suspending the accounting rule will stop the death spiral of financial companies.
I think this is a canard. It would be yet another gimmick akin to suspending short selling. Financial companies are not collapsing because of mark-to-market accounting. They are collapsing because they did really dumb things and took on too much debt. Investors aren't stupid. Increasing opacity in the financial statements does not help investors understand the risks of the company in which they are investing. Compare the likes of AIG, Freddie Mac, Fannie Mae, Bear Stearns, IndyMac, and Lehman with the likes of US Bancorp and Wells Fargo. The former collapsed because they made bad business decisions whereas the latter are near 52 week highs because they didn't over-lever their balance sheets and make stupid investments.
Also, there are pools of capital out there waiting to invest in distressed assets. However, few transactions have occurred. Many of these pools of capital have long-term lock-ups of three or more years. They can handle the volatility of mark-to-market accounting if distressed sales are below intrinsic value because their investors cannot call their capital. Yet, few transactions are being done. Why? Could it be that the funds do not believe that the assets for sale are ridiculously cheap?
4. Stocks did not collapse so traders bought.
This is perhaps the most discouraging reason for the market's gain today. The willingness to buy in front of news after a hard down day does not seem to me to be behaviour one sees at the bottom. I would have preferred that investors puked out stocks rather than believe Washington will come to their rescue and buy the dips hopefully.
5. The possibility of an increase in FDIC insurance.
Today, the government of Ireland guaranteed bank deposits. There was chatter that the FDIC may increase insurance from $100,000 to $250,000. Some were saying that deposit insurance may become unlimited. Never mind that the FDIC might not be capitalized enough to handle all the bank failures to come, the government stepping up to guarantee all deposits was probably the single most bullish news today as it would make bank runs less likely. It could tank the dollar, but there are so many factors that could also tank the dollar, what's another one, eh?
6. ECB rate cut
Rumours had it that the ECB would cut rates soon. This very well may be true. The bank will start cutting rates shortly. Given the incredible stresses on the financial system, the rate cut may come sooner rather than later.
7. Money market pressures ease.
Slightly. The TED spread was over 3.5% today before easing to 3.15%, still very high but not as high as earlier in the day. The 3-month Treasury bill oscillated between 0.5% and 1% while swap spreads, though still high, were lower than yesterday. The Fed has pushed in an enormous amount of liquidity over the past few weeks to meet the insatiable demand for dollars. You could see the tremendous volatility in the Fed funds market, with rates as high as 7% this morning and falling to 0.125% this afternoon. Such volatility has been the norm as of late. This is why I'm not sure rate cuts by the Fed would be helpful in the near term.
8. Better than expected economic news
Forgotten by many was that the Chicago PMI and the Conference Board's consumer confidence index came in better than expected this morning.
9. Month and quarter end.
Month and quarter ends often bring unusual activity.
Volume was lighter than yesterday. Upside volume was 9.1:1 to downside volume, good but was dwarfed by Monday's 26.5:1 volume to the downside. It appears that the rally merely brings the indices back to within range where one would expect the market to start selling off again.
I keep hearing investors claim the market is cheap. I do not think so. I use $75 as my normalized earnings estimate, assuming a 7.5% margin, which is well above the long-term average of 6%. At $75, the market is trading at 15.5x earnings. That is not cheap. It is not expensive but it is not where bear markets have historically bottomed.
The average bear market since World War II has generated losses of 28%. To the lows yesterday, the market was down 30%, top to bottom. I contend that the worst credit crisis since the Depression will not lead to an average bear market in stocks.
The two worst bear markets during this time were 1973-74 and 2000-02, both of which saw declines of 50%. I do not think the decline in this bear market will be 50%, but instead will be somewhere between 30% and 50%. I'll pick 40% because it is a nice round number, which would take us to around 1000 on the S&P 500.
I do not know if the near-term bottom is in but I highly doubt the ultimate bottom is in. Thus, rallies remain to be sold.
Tuesday, September 30, 2008
SP500 to 1000 as bottom
After experiencing the worst one day loss on Monday since the market crash on October 19, 1987, markets rallied hard, with the Dow closing up nearly 500 points. There were several reasons for the gain.
1. The market was oversold
When only one stock in the S&P 500 goes up and the downside volume to upside volume is 26.5:1, as it was on Monday, a snapback rally is no surprise.
2. Belief that the government will still bail out the market.
This was the main reason why the market was up. Frankly, I am in disbelief of the market's credulity on this one. Yesterday, I wrote that Washington has no credibility on Wall Street, given that the House sandbagged the market, voting down TARP. I was wrong. Apparently Washington has a great deal of credibility on Wall Street, despite getting blindsided yesterday. I want Washington to do something, but there is a part of me that would like to see this fail just to wring the gullibility out of Wall Street. If the legislators fail and a bill does not pass and the market falls another 1000 points, then Wall Street will have no one to blame but themselves.
3. Suspension of mark-to-market accounting
Investors were under the impression that mark-to-market accounting, FASB 157, would be suspended. The SEC released a statement clarifying the interpretation of mark-to-market but did not say it would be suspended. The idea is that banks would not have to mark down their assets to recent market transactions if FASB 157 were suspended. The proponents argue that current market transactions represent distressed sales and not the true value of the underlying assets, but companies have to mark their assets to those unrealistic levels. Suspending the accounting rule will stop the death spiral of financial companies.
I think this is a canard. It would be yet another gimmick akin to suspending short selling. Financial companies are not collapsing because of mark-to-market accounting. They are collapsing because they did really dumb things and took on too much debt. Investors aren't stupid. Increasing opacity in the financial statements does not help investors understand the risks of the company in which they are investing. Compare the likes of AIG, Freddie Mac, Fannie Mae, Bear Stearns, IndyMac, and Lehman with the likes of US Bancorp and Wells Fargo. The former collapsed because they made bad business decisions whereas the latter are near 52 week highs because they didn't over-lever their balance sheets and make stupid investments.
Also, there are pools of capital out there waiting to invest in distressed assets. However, few transactions have occurred. Many of these pools of capital have long-term lock-ups of three or more years. They can handle the volatility of mark-to-market accounting if distressed sales are below intrinsic value because their investors cannot call their capital. Yet, few transactions are being done. Why? Could it be that the funds do not believe that the assets for sale are ridiculously cheap?
4. Stocks did not collapse so traders bought.
This is perhaps the most discouraging reason for the market's gain today. The willingness to buy in front of news after a hard down day does not seem to me to be behaviour one sees at the bottom. I would have preferred that investors puked out stocks rather than believe Washington will come to their rescue and buy the dips hopefully.
5. The possibility of an increase in FDIC insurance.
Today, the government of Ireland guaranteed bank deposits. There was chatter that the FDIC may increase insurance from $100,000 to $250,000. Some were saying that deposit insurance may become unlimited. Never mind that the FDIC might not be capitalized enough to handle all the bank failures to come, the government stepping up to guarantee all deposits was probably the single most bullish news today as it would make bank runs less likely. It could tank the dollar, but there are so many factors that could also tank the dollar, what's another one, eh?
6. ECB rate cut
Rumours had it that the ECB would cut rates soon. This very well may be true. The bank will start cutting rates shortly. Given the incredible stresses on the financial system, the rate cut may come sooner rather than later.
7. Money market pressures ease.
Slightly. The TED spread was over 3.5% today before easing to 3.15%, still very high but not as high as earlier in the day. The 3-month Treasury bill oscillated between 0.5% and 1% while swap spreads, though still high, were lower than yesterday. The Fed has pushed in an enormous amount of liquidity over the past few weeks to meet the insatiable demand for dollars. You could see the tremendous volatility in the Fed funds market, with rates as high as 7% this morning and falling to 0.125% this afternoon. Such volatility has been the norm as of late. This is why I'm not sure rate cuts by the Fed would be helpful in the near term.
8. Better than expected economic news
Forgotten by many was that the Chicago PMI and the Conference Board's consumer confidence index came in better than expected this morning.
9. Month and quarter end.
Month and quarter ends often bring unusual activity.
Volume was lighter than yesterday. Upside volume was 9.1:1 to downside volume, good but was dwarfed by Monday's 26.5:1 volume to the downside. It appears that the rally merely brings the indices back to within range where one would expect the market to start selling off again.
I keep hearing investors claim the market is cheap. I do not think so. I use $75 as my normalized earnings estimate, assuming a 7.5% margin, which is well above the long-term average of 6%. At $75, the market is trading at 15.5x earnings. That is not cheap. It is not expensive but it is not where bear markets have historically bottomed.
The average bear market since World War II has generated losses of 28%. To the lows yesterday, the market was down 30%, top to bottom. I contend that the worst credit crisis since the Depression will not lead to an average bear market in stocks.
The two worst bear markets during this time were 1973-74 and 2000-02, both of which saw declines of 50%. I do not think the decline in this bear market will be 50%, but instead will be somewhere between 30% and 50%. I'll pick 40% because it is a nice round number, which would take us to around 1000 on the S&P 500.
I do not know if the near-term bottom is in but I highly doubt the ultimate bottom is in. Thus, rallies remain to be sold.
1. The market was oversold
When only one stock in the S&P 500 goes up and the downside volume to upside volume is 26.5:1, as it was on Monday, a snapback rally is no surprise.
2. Belief that the government will still bail out the market.
This was the main reason why the market was up. Frankly, I am in disbelief of the market's credulity on this one. Yesterday, I wrote that Washington has no credibility on Wall Street, given that the House sandbagged the market, voting down TARP. I was wrong. Apparently Washington has a great deal of credibility on Wall Street, despite getting blindsided yesterday. I want Washington to do something, but there is a part of me that would like to see this fail just to wring the gullibility out of Wall Street. If the legislators fail and a bill does not pass and the market falls another 1000 points, then Wall Street will have no one to blame but themselves.
3. Suspension of mark-to-market accounting
Investors were under the impression that mark-to-market accounting, FASB 157, would be suspended. The SEC released a statement clarifying the interpretation of mark-to-market but did not say it would be suspended. The idea is that banks would not have to mark down their assets to recent market transactions if FASB 157 were suspended. The proponents argue that current market transactions represent distressed sales and not the true value of the underlying assets, but companies have to mark their assets to those unrealistic levels. Suspending the accounting rule will stop the death spiral of financial companies.
I think this is a canard. It would be yet another gimmick akin to suspending short selling. Financial companies are not collapsing because of mark-to-market accounting. They are collapsing because they did really dumb things and took on too much debt. Investors aren't stupid. Increasing opacity in the financial statements does not help investors understand the risks of the company in which they are investing. Compare the likes of AIG, Freddie Mac, Fannie Mae, Bear Stearns, IndyMac, and Lehman with the likes of US Bancorp and Wells Fargo. The former collapsed because they made bad business decisions whereas the latter are near 52 week highs because they didn't over-lever their balance sheets and make stupid investments.
Also, there are pools of capital out there waiting to invest in distressed assets. However, few transactions have occurred. Many of these pools of capital have long-term lock-ups of three or more years. They can handle the volatility of mark-to-market accounting if distressed sales are below intrinsic value because their investors cannot call their capital. Yet, few transactions are being done. Why? Could it be that the funds do not believe that the assets for sale are ridiculously cheap?
4. Stocks did not collapse so traders bought.
This is perhaps the most discouraging reason for the market's gain today. The willingness to buy in front of news after a hard down day does not seem to me to be behaviour one sees at the bottom. I would have preferred that investors puked out stocks rather than believe Washington will come to their rescue and buy the dips hopefully.
5. The possibility of an increase in FDIC insurance.
Today, the government of Ireland guaranteed bank deposits. There was chatter that the FDIC may increase insurance from $100,000 to $250,000. Some were saying that deposit insurance may become unlimited. Never mind that the FDIC might not be capitalized enough to handle all the bank failures to come, the government stepping up to guarantee all deposits was probably the single most bullish news today as it would make bank runs less likely. It could tank the dollar, but there are so many factors that could also tank the dollar, what's another one, eh?
6. ECB rate cut
Rumours had it that the ECB would cut rates soon. This very well may be true. The bank will start cutting rates shortly. Given the incredible stresses on the financial system, the rate cut may come sooner rather than later.
7. Money market pressures ease.
Slightly. The TED spread was over 3.5% today before easing to 3.15%, still very high but not as high as earlier in the day. The 3-month Treasury bill oscillated between 0.5% and 1% while swap spreads, though still high, were lower than yesterday. The Fed has pushed in an enormous amount of liquidity over the past few weeks to meet the insatiable demand for dollars. You could see the tremendous volatility in the Fed funds market, with rates as high as 7% this morning and falling to 0.125% this afternoon. Such volatility has been the norm as of late. This is why I'm not sure rate cuts by the Fed would be helpful in the near term.
8. Better than expected economic news
Forgotten by many was that the Chicago PMI and the Conference Board's consumer confidence index came in better than expected this morning.
9. Month and quarter end.
Month and quarter ends often bring unusual activity.
Volume was lighter than yesterday. Upside volume was 9.1:1 to downside volume, good but was dwarfed by Monday's 26.5:1 volume to the downside. It appears that the rally merely brings the indices back to within range where one would expect the market to start selling off again.
I keep hearing investors claim the market is cheap. I do not think so. I use $75 as my normalized earnings estimate, assuming a 7.5% margin, which is well above the long-term average of 6%. At $75, the market is trading at 15.5x earnings. That is not cheap. It is not expensive but it is not where bear markets have historically bottomed.
The average bear market since World War II has generated losses of 28%. To the lows yesterday, the market was down 30%, top to bottom. I contend that the worst credit crisis since the Depression will not lead to an average bear market in stocks.
The two worst bear markets during this time were 1973-74 and 2000-02, both of which saw declines of 50%. I do not think the decline in this bear market will be 50%, but instead will be somewhere between 30% and 50%. I'll pick 40% because it is a nice round number, which would take us to around 1000 on the S&P 500.
I do not know if the near-term bottom is in but I highly doubt the ultimate bottom is in. Thus, rallies remain to be sold.
Monday, September 29, 2008
-777.7 Shorters all hit a big lottery
Today was an amazing day.
I truly did not expect the house to kill the bailout bill.
Neither did the market, as the Dow dropped 777.7 points, the worst one day decline since the 1987 crash.
The leaders of the country played a stunning game of political brinkmanship, with the majority of Republicans voting against the bill, in part due to a stridently partisan speech given by Nancy Pelosi.
Blame is to be had on all sides. The Democrats tried to attach amendments to the bill having nothing to do with the crisis which would instead satisfy their backers, such as passing laws forcing boards to have union representation.
The Republicans were no better. Tonight on CNBC's Fast Money, a Texas GOP Congressman who voted against the bill offered several so-called free market solutions to the credit crisis, one of which was cutting capital gains taxes, a mind-boggling display of economic cluelessness and/or craven ideological and political pandering.
The White House also deserves more than its fair share of blame. For so long, the mantra from Bush and Co. was that the economy was fundamentally strong. The Bush administration's disdain and contempt for others who were not onside bred suspicion and hostility, such that the White House no longer has the moral suasion to lead when leadership is most required. Given the administration's lack of credibility, it is not surprising Congress would be highly skeptical of the White House, especially when the original proposal appeared to abrogate the constitution.
However, the reason why the House failed to pass the bill was that constituents were overwhelmingly against it. Representatives in swing states voted against the bill, fearing they would lose their seats in November.
Well, democracy is messy, but The People may have sealed their own fate. C'est la vie. That is their right. But whatever one might have thought about the bill, the markets - both stocks and credit - certainly hated that it failed to pass.
Perhaps over the long run, the bill's failure is a good thing. It may be that a purging of the markets will clean out the excesses so rampant in the financial system today.
Or, it may induce a terrible crash and reductions in credit, with tremendous ramifications throughout the broad economy.
There has been talk in certain quarters of another 1930s-style Depression. That will not happen. There are too many structural stabilizers in the system to prevent such a catastrophe. But we could experience a sharp recession.
If we do have a significant economic contraction, this is the recession we should have had after the collapse of the Tech Bubble. At the time, the authorities made a conscious decision to implement policies to avoid a severe recession, particularly Alan Greenspan's decision to lower the Fed funds target to 1% and keep it there. However, fiscal policy and the decision to give Americans a massive tax cut without any reductions in spending also contributed to this mess.
The primary effects of these policies were to push the pain further into the future, and to create even bigger problems in the housing and debt markets. Now, the chickens have come home to roost, and the problems are far worse than if we had just taken our medicine during the early part of the decade.
So what to do now?
First, the market usually does not bottom the day after it closes on its lows. Thus, it is highly unlikely today was the bottom. Expect the market to fall further.
Second, it is my guess - and I strongly emphasize the word "guess" - that a near-term bottom is approaching in terms of time. In terms of return, I have no idea. I have no clue if the near-term bottom is 200 or 2000 points away. My intuition tells me that we are going to hit a bottom sometime within the next two weeks. But that does not mean there will not be acute pain before then.
Next, we are working without a net. Washington has no credibility on Wall Street. Despite the platitudes on television from the politicians tonight about getting a bill done, there is no reason to believe them, nor is there any reason to believe any new bill would be effective.
Now, I do not think that Paulson's plan would have stopped the rot in the system. But I do believe the bill would have cushioned the fall.
The effect of Paulson's bill, however, may have been to prolong the adjustment process, spreading the pain out over time. We may go through a traumatic period, but a shorter period compared to the Paulson plan, where the excesses are purged quicker. If so, this will ultimately be good for the market and the economy over the long-term.
Finally, in a bear market, the most important thing is to protect your capital. If you are long and cannot take the pain, get out. There will always be opportunities in the future.
The lower we go, though, the higher the future returns become. Every drop in the market decreases the values of stocks and increases the potential returns over time.
You have to decide where you are on this risk/return spectrum.
I am very, very short at the moment. I covered a small portion this afternoon and will be looking to cover more into further weakness.
I also intend to start adding to long-term positions. I believe that some stocks are getting to levels where historically, they have been doubles or triples a few years out.
But in the meantime, we are in unchartered waters.
I truly did not expect the house to kill the bailout bill.
Neither did the market, as the Dow dropped 777.7 points, the worst one day decline since the 1987 crash.
The leaders of the country played a stunning game of political brinkmanship, with the majority of Republicans voting against the bill, in part due to a stridently partisan speech given by Nancy Pelosi.
Blame is to be had on all sides. The Democrats tried to attach amendments to the bill having nothing to do with the crisis which would instead satisfy their backers, such as passing laws forcing boards to have union representation.
The Republicans were no better. Tonight on CNBC's Fast Money, a Texas GOP Congressman who voted against the bill offered several so-called free market solutions to the credit crisis, one of which was cutting capital gains taxes, a mind-boggling display of economic cluelessness and/or craven ideological and political pandering.
The White House also deserves more than its fair share of blame. For so long, the mantra from Bush and Co. was that the economy was fundamentally strong. The Bush administration's disdain and contempt for others who were not onside bred suspicion and hostility, such that the White House no longer has the moral suasion to lead when leadership is most required. Given the administration's lack of credibility, it is not surprising Congress would be highly skeptical of the White House, especially when the original proposal appeared to abrogate the constitution.
However, the reason why the House failed to pass the bill was that constituents were overwhelmingly against it. Representatives in swing states voted against the bill, fearing they would lose their seats in November.
Well, democracy is messy, but The People may have sealed their own fate. C'est la vie. That is their right. But whatever one might have thought about the bill, the markets - both stocks and credit - certainly hated that it failed to pass.
Perhaps over the long run, the bill's failure is a good thing. It may be that a purging of the markets will clean out the excesses so rampant in the financial system today.
Or, it may induce a terrible crash and reductions in credit, with tremendous ramifications throughout the broad economy.
There has been talk in certain quarters of another 1930s-style Depression. That will not happen. There are too many structural stabilizers in the system to prevent such a catastrophe. But we could experience a sharp recession.
If we do have a significant economic contraction, this is the recession we should have had after the collapse of the Tech Bubble. At the time, the authorities made a conscious decision to implement policies to avoid a severe recession, particularly Alan Greenspan's decision to lower the Fed funds target to 1% and keep it there. However, fiscal policy and the decision to give Americans a massive tax cut without any reductions in spending also contributed to this mess.
The primary effects of these policies were to push the pain further into the future, and to create even bigger problems in the housing and debt markets. Now, the chickens have come home to roost, and the problems are far worse than if we had just taken our medicine during the early part of the decade.
So what to do now?
First, the market usually does not bottom the day after it closes on its lows. Thus, it is highly unlikely today was the bottom. Expect the market to fall further.
Second, it is my guess - and I strongly emphasize the word "guess" - that a near-term bottom is approaching in terms of time. In terms of return, I have no idea. I have no clue if the near-term bottom is 200 or 2000 points away. My intuition tells me that we are going to hit a bottom sometime within the next two weeks. But that does not mean there will not be acute pain before then.
Next, we are working without a net. Washington has no credibility on Wall Street. Despite the platitudes on television from the politicians tonight about getting a bill done, there is no reason to believe them, nor is there any reason to believe any new bill would be effective.
Now, I do not think that Paulson's plan would have stopped the rot in the system. But I do believe the bill would have cushioned the fall.
The effect of Paulson's bill, however, may have been to prolong the adjustment process, spreading the pain out over time. We may go through a traumatic period, but a shorter period compared to the Paulson plan, where the excesses are purged quicker. If so, this will ultimately be good for the market and the economy over the long-term.
Finally, in a bear market, the most important thing is to protect your capital. If you are long and cannot take the pain, get out. There will always be opportunities in the future.
The lower we go, though, the higher the future returns become. Every drop in the market decreases the values of stocks and increases the potential returns over time.
You have to decide where you are on this risk/return spectrum.
I am very, very short at the moment. I covered a small portion this afternoon and will be looking to cover more into further weakness.
I also intend to start adding to long-term positions. I believe that some stocks are getting to levels where historically, they have been doubles or triples a few years out.
But in the meantime, we are in unchartered waters.
Saturday, September 27, 2008
Marc Faber Report Card
Let's talk about interest rates. Marc, you've been uncharacteristically quiet. Aren't you feeling well?
Faber: I am well and happy because I talked about many of these issues a year ago and recommended shorting the brokers. Subprime is a symptom of a much wider problem: the huge credit bubble built over the past 25 years. It is just the appetizer to something bigger, which will lead to relative illiquidity in the world. I travel around the world regularly, and every place I've gone has had a boom. The U.S. already would be in recession if government statistics were correct. The rest of the world will see a meaningful slowdown because global financial connectivity is greater than ever before.
The Fed brought about the latest boom by cutting the federal-funds rate from 6.5% in January 2001 to 1%. It kept fed funds at 1% until June 2004, even though the recovery in the U.S. began in November 2001. In other words, almost three years into a recovery [then-Fed Chairman] Alan Greenspan still had the fed-funds rate at 1%. This led to huge liquidity in the system -- asset bubbles, debt growth and growth in the trade and current-account deficits. Now those deficits are shrinking. This is an unfriendly environment for economic growth, financial markets and even industrial commodities. But it is friendly for the U.S. dollar.
Faber: I took a taxi from Times Square to lower Manhattan this morning and paid $14. In Europe the ride would have cost me three times as much. Prices in the U.S. are relatively inexpensive, as Abby learned at breakfast in Paris. This reminds me of other economies in which prices became low and inflation picked up. The taxi driver will increase his price massively sooner or later. Let me stress that weak currencies don't produce inflation. Inflation in the system produces a weak currency.
Faber: U.S. exports have gone up a bit, especially because of price increases in agricultural commodities and some capital goods. But the number of inbound and arriving containers at U.S. ports is down year on year, as are rail-car loadings. The trucking index is down. These statistics point to a recession in the U.S.
Faber: Scott, your fiscal policy will be another disaster superimposed on a disastrous monetary policy.
Faber: The average citizen will be in a recession anyway, because inflation will be higher than the benefits he gets from the tax cuts you propose. I also see a stagflation scenario similar to the 1970s, with high volatility in financial markets. Corporate earnings get squeezed nicely, with S&P earnings falling
Faber: U.S. policy is misguided in targeting consumption, not investments.
Faber: Equity prices have increased in dollar terms, but in euros the S&P 500 is down about 45% from its peak in 2000 and the Nasdaq is down 60%. Measured in gold, the markets have done horribly and the economy has been in a recession for a long time. I'm not bullish about U.S. stocks, but everything is so bad on a global basis that they might do better on a relative basis. That doesn't mean they go up, but the U.S. market might go down less than China, India, Vietnam and some of the other markets that are in cuckoo land. These markets have gone up because people believe in decoupling. Economically we could see a decoupling, whereby the U.S. is in a recession and China still grows by 5% or 10%. The financial markets won't decouple. Unless, Mario, they reintroduce that uptick rule.
Five years ago I visited family offices and financial institutions that had practically no exposure to international stocks. Today the same people have 50% of their money in emerging markets. Valuations in these markets aren't compelling any more, except for real estate in emerging economies.
Marc, what do you think of gold?
Faber: There are times when stocks do fantastically well and there are times when commodities do well. On a relative basis, gold became unbelievably inexpensive in the years 1999 to 2001. Now, prices have gone up. We had a bubble in Japan in 1989. Then we had the Nasdaq bubble, and bubbles in countries like China, and in the credit markets. The last big bubble to burst will be gold.
Black: If gold rallies at least 15%, to $1,000 an ounce, wouldn't it be better to buy an exploration and production company that could rally more?
Faber: Not necessarily. You want to own gold because you think something will go wrong, leading to deflation or hyperinflation. Mines can be expropriated. Also, exploration companies are like biotechnology and nanotechnology companies. One in a hundred will succeed.
Faber: A company like this is likely to be bought by a major miner, because the majors, like big pharmaceutical companies, don't spend much on research. They would rather buy
Marc, man of the world and proprietor of Marc Faber Ltd. in Hong Kong, says all asset markets are oversold "in the very short term" and due to rebound strongly, although he doubts they'll go to new highs. Equity investors, he grouses, still are focused on buying the dips, not selling the bounces, and sentiment is negative not because they have liquidated their shares, but because they're sitting on large losses. Emerging markets, he adds, have "considerable downside risk," but recoveries of 10% to 15% are common in bear markets. Marc's picks this year are mostly pans -- of several currencies and emerging-market shares.
2008 Barron's Roundtable Members
Marc Faber, Managing director, Marc Faber Ltd., Hong Kong
Thanks, Abby. Marc, what have you got for us?
Faber: We aren't dealing purely with market forces today, but with an economy that is largely manipulated by central banks, which create excess liquidity by cutting interest rates dramatically and letting credit growth accelerate dramatically. I'd like to read a quote from a German newspaper published in 1923, when Germany was dealing with hyperinflation: 'There have been extraordinary rises in the quotations for all shares, the chief cause being the catastrophic change in the economic situation.' In other words, you could have a slump in the economy, yet share markets could go up simply because of excessive liquidity and interest rates being cut, theoretically, to zero.
Since 2002, all asset prices have risen substantially. Against this backdrop, I'll focus on pair trades -- assets that will perform better in the next three to six months relative to others. The U.S. is in a bear market, and earnings will disappoint here and worldwide. Cost pressures will diminish profit margins. The stock market doesn't have a bubble valuation, though the Standard & Poor's 500 is selling at a higher price-earnings multiple than is evident. Take out the energy sector and the S&P has a P/E of 20, not 15. If earnings decline -- partly because the energy sector won't have higher earnings this year than last, and also because the financial sector has diminishing earnings and the economy is in a recession -- then the S&P isn't cheap.
Cohen: If you were to sector-weight the S&P with the same sector weights as in Europe, the P/Es are identical.
Faber: I didn't say Europe is cheap. Stocks in the U.S. probably are cheaper than 10-year Treasuries. Cash has been a disastrous investment for the past 40 years because the purchasing power of money has diminished. I don't find any great values in the stock market now. If people want to buy stocks, stick to the recommendations I made last year. [You'll find them listed free of charge on Barron's Online, www.barrons.com, under the 2007 Roundtable Report Card.]
I still like gold, cotton and sugar. My new recommendation is to short the British pound against the yen. The pound, as Felix explained, is overvalued. It doesn't have a lot of upside potential compared to the dollar. It is probably less risky to short it against the yen than the dollar. [The pound has fallen 3.3% against the yen since Jan. 7. Faber remains short the pound.]
You can also short the euro against the yen. The euro is a relatively expensive currency and European economies aren't going to perform well. Europe also had a lot of excesses, and the ECB [European Central Bank] will cut rates dramatically. Central-bank monetary policies are leading to the competitive devaluation of currencies.
Zulauf: Which is good for gold.
Faber: I suppose so. Since 2001, emerging stock markets have significantly outperformed the U.S. It's not that I am bullish about the S&P 500 or the Dow Jones [industrial average], but they may go down less than emerging markets. If there's a strong rally in financial assets, it could be that the Dow outperforms emerging markets. I would short an emerging-market index via the ProShares Short MSCI Emerging Markets exchange-traded fund. You could also short the FXI, the iShares FTSE/Xinhua China 25, which mimics the 25 largest Chinese stocks listed in Hong Kong and China. And, there's an ETF, the ProShares UltraShort FTSE/Xinhua China 25, which appreciates twice as much when the Chinese market goes down.
In the long run, the U.S. dollar will go down, but because of the diminishing current-account deficit, it doesn't have huge downside risk now. Negative sentiment on the dollar reached an extreme recently, with many front-page articles noting its decline.
Sentiment on the dollar was very bearish a year ago, too. Sentiment in this case didn't count.
Faber: It has reached extremes. It also has depreciated considerably against the euro. Today, I would buy the dollar.
At the moment, there is a war: The private sector is cutting credit and the central banks are cutting interest rates because they are desperate to revitalize credit growth. In the long run, the central banks will win, but in the next six to 12 months, relative credit contraction isn't going to be good for any asset class. In a year's time, the S&P 500 will be lower than it is today.
Marc Faber's Picks 1/4/08
Investment Ticker Price Currency Pair Trades
Short the British pound/Buy the Yen £1=¥211.97
Short the Euro/Buy the Yen €1=¥160.09
Buy the U.S. Dollar /Sell the Euro €1=$1.47
Short Emerging Markets
Buy: ProShares Short MSCI Emerging Mkt.
EUM $75.40
Short: iShares FTSE/Xinhua China 25 Index
FXI 163.61
Buy: ProShares UltraSht FTSE/Xinhua China 25
FXP 82.51
Buy
iShares MSCI Japan Small Cap*
SCJ $49.94
Short
DryShips
DRYS 73.17
Future Investment Opportunities:
Cambodia
*Buy after a 10% correction.
Source: Bloomberg
My next recommendation is a shipping short. I turned bearish about home-building stocks in 2005, and felt the troubles in the housing market would hurt the subprime-lending industry and spread to other sectors of the economy -- in particular, consumption. Private consumption now accounts for more than 70% of U.S. GDP, which is why I'm negative about the U.S. economy. The problems here will also affect other economies. The Chinese stock market is closely correlated with the Baltic Dry Index, a shipping index. Tanker rates have plunged, but the Baltic Dry Index is still in the sky. If you can't short the index, short DryShips [DRYS]. The BDI has fallen 28% since Jan. 7. Faber suggests remaining short DryShips.
Any other ideas, Marc?
Faber: Two trades today are totally out of favor. One is betting on the dollar, and the other is buying Japanese shares. I go to seminars, and whereas 10, 15 years ago there were hundreds of people attending the Japanese sessions, today there are hundreds attending sessions on investing in Vietnam. Nobody goes to the Japanese sessions anymore. It's remarkable that people talk about equity valuations being low in the U.S. compared with bond yields, while valuations in Japan are very low compared to the Japanese bond yield. Buy the Japanese stock market on a correction of 10% or so.
What would you buy?
Faber: Give your money to a good money manager, or just buy the index. The small-cap index is interesting. You can buy the iShares MSCI Japan Small Cap Index, an ETF.
Faber: Many countries have opened up following the breakdowns of communism and socialism. China began opening in 1978, proceeding at different times and in different sectors. The same has occurred since the late '90s in India, and more recently, Vietnam. One country in Asia hasn't begun to attract a lot of attention, but has great potential. It is Cambodia. You can't play Cambodia now, but some Cambodia funds will be launched this year.
Eastern Europe has climbed the value scale. There isn't a big difference anymore between, say, Slovenia and Austria. Go further east, into Ukraine, and you'll find big opportunities in real estate, in particular agricultural land.
Basically, investors should avoid correlated assets such as the S&P 500 and the FTSE index, emerging markets, art prices and real estate in financial centers. I'm ultra-bearish about the financial sector, as it will contract for many years, not just one year. I wouldn't buy Citigroup [C] here, or Merrill Lynch [MER]. And as much as I like Abby, I wouldn't buy Goldman Sachs [GS]. I anticipate the day when half of Wall Street will be looking for jobs as drivers of tractors and combine machines.
Faber: I am well and happy because I talked about many of these issues a year ago and recommended shorting the brokers. Subprime is a symptom of a much wider problem: the huge credit bubble built over the past 25 years. It is just the appetizer to something bigger, which will lead to relative illiquidity in the world. I travel around the world regularly, and every place I've gone has had a boom. The U.S. already would be in recession if government statistics were correct. The rest of the world will see a meaningful slowdown because global financial connectivity is greater than ever before.
The Fed brought about the latest boom by cutting the federal-funds rate from 6.5% in January 2001 to 1%. It kept fed funds at 1% until June 2004, even though the recovery in the U.S. began in November 2001. In other words, almost three years into a recovery [then-Fed Chairman] Alan Greenspan still had the fed-funds rate at 1%. This led to huge liquidity in the system -- asset bubbles, debt growth and growth in the trade and current-account deficits. Now those deficits are shrinking. This is an unfriendly environment for economic growth, financial markets and even industrial commodities. But it is friendly for the U.S. dollar.
Faber: I took a taxi from Times Square to lower Manhattan this morning and paid $14. In Europe the ride would have cost me three times as much. Prices in the U.S. are relatively inexpensive, as Abby learned at breakfast in Paris. This reminds me of other economies in which prices became low and inflation picked up. The taxi driver will increase his price massively sooner or later. Let me stress that weak currencies don't produce inflation. Inflation in the system produces a weak currency.
Faber: U.S. exports have gone up a bit, especially because of price increases in agricultural commodities and some capital goods. But the number of inbound and arriving containers at U.S. ports is down year on year, as are rail-car loadings. The trucking index is down. These statistics point to a recession in the U.S.
Faber: Scott, your fiscal policy will be another disaster superimposed on a disastrous monetary policy.
Faber: The average citizen will be in a recession anyway, because inflation will be higher than the benefits he gets from the tax cuts you propose. I also see a stagflation scenario similar to the 1970s, with high volatility in financial markets. Corporate earnings get squeezed nicely, with S&P earnings falling
Faber: U.S. policy is misguided in targeting consumption, not investments.
Faber: Equity prices have increased in dollar terms, but in euros the S&P 500 is down about 45% from its peak in 2000 and the Nasdaq is down 60%. Measured in gold, the markets have done horribly and the economy has been in a recession for a long time. I'm not bullish about U.S. stocks, but everything is so bad on a global basis that they might do better on a relative basis. That doesn't mean they go up, but the U.S. market might go down less than China, India, Vietnam and some of the other markets that are in cuckoo land. These markets have gone up because people believe in decoupling. Economically we could see a decoupling, whereby the U.S. is in a recession and China still grows by 5% or 10%. The financial markets won't decouple. Unless, Mario, they reintroduce that uptick rule.
Five years ago I visited family offices and financial institutions that had practically no exposure to international stocks. Today the same people have 50% of their money in emerging markets. Valuations in these markets aren't compelling any more, except for real estate in emerging economies.
Marc, what do you think of gold?
Faber: There are times when stocks do fantastically well and there are times when commodities do well. On a relative basis, gold became unbelievably inexpensive in the years 1999 to 2001. Now, prices have gone up. We had a bubble in Japan in 1989. Then we had the Nasdaq bubble, and bubbles in countries like China, and in the credit markets. The last big bubble to burst will be gold.
Black: If gold rallies at least 15%, to $1,000 an ounce, wouldn't it be better to buy an exploration and production company that could rally more?
Faber: Not necessarily. You want to own gold because you think something will go wrong, leading to deflation or hyperinflation. Mines can be expropriated. Also, exploration companies are like biotechnology and nanotechnology companies. One in a hundred will succeed.
Faber: A company like this is likely to be bought by a major miner, because the majors, like big pharmaceutical companies, don't spend much on research. They would rather buy
Marc, man of the world and proprietor of Marc Faber Ltd. in Hong Kong, says all asset markets are oversold "in the very short term" and due to rebound strongly, although he doubts they'll go to new highs. Equity investors, he grouses, still are focused on buying the dips, not selling the bounces, and sentiment is negative not because they have liquidated their shares, but because they're sitting on large losses. Emerging markets, he adds, have "considerable downside risk," but recoveries of 10% to 15% are common in bear markets. Marc's picks this year are mostly pans -- of several currencies and emerging-market shares.
2008 Barron's Roundtable Members
Marc Faber, Managing director, Marc Faber Ltd., Hong Kong
Thanks, Abby. Marc, what have you got for us?
Faber: We aren't dealing purely with market forces today, but with an economy that is largely manipulated by central banks, which create excess liquidity by cutting interest rates dramatically and letting credit growth accelerate dramatically. I'd like to read a quote from a German newspaper published in 1923, when Germany was dealing with hyperinflation: 'There have been extraordinary rises in the quotations for all shares, the chief cause being the catastrophic change in the economic situation.' In other words, you could have a slump in the economy, yet share markets could go up simply because of excessive liquidity and interest rates being cut, theoretically, to zero.
Since 2002, all asset prices have risen substantially. Against this backdrop, I'll focus on pair trades -- assets that will perform better in the next three to six months relative to others. The U.S. is in a bear market, and earnings will disappoint here and worldwide. Cost pressures will diminish profit margins. The stock market doesn't have a bubble valuation, though the Standard & Poor's 500 is selling at a higher price-earnings multiple than is evident. Take out the energy sector and the S&P has a P/E of 20, not 15. If earnings decline -- partly because the energy sector won't have higher earnings this year than last, and also because the financial sector has diminishing earnings and the economy is in a recession -- then the S&P isn't cheap.
Cohen: If you were to sector-weight the S&P with the same sector weights as in Europe, the P/Es are identical.
Faber: I didn't say Europe is cheap. Stocks in the U.S. probably are cheaper than 10-year Treasuries. Cash has been a disastrous investment for the past 40 years because the purchasing power of money has diminished. I don't find any great values in the stock market now. If people want to buy stocks, stick to the recommendations I made last year. [You'll find them listed free of charge on Barron's Online, www.barrons.com, under the 2007 Roundtable Report Card.]
I still like gold, cotton and sugar. My new recommendation is to short the British pound against the yen. The pound, as Felix explained, is overvalued. It doesn't have a lot of upside potential compared to the dollar. It is probably less risky to short it against the yen than the dollar. [The pound has fallen 3.3% against the yen since Jan. 7. Faber remains short the pound.]
You can also short the euro against the yen. The euro is a relatively expensive currency and European economies aren't going to perform well. Europe also had a lot of excesses, and the ECB [European Central Bank] will cut rates dramatically. Central-bank monetary policies are leading to the competitive devaluation of currencies.
Zulauf: Which is good for gold.
Faber: I suppose so. Since 2001, emerging stock markets have significantly outperformed the U.S. It's not that I am bullish about the S&P 500 or the Dow Jones [industrial average], but they may go down less than emerging markets. If there's a strong rally in financial assets, it could be that the Dow outperforms emerging markets. I would short an emerging-market index via the ProShares Short MSCI Emerging Markets exchange-traded fund. You could also short the FXI, the iShares FTSE/Xinhua China 25, which mimics the 25 largest Chinese stocks listed in Hong Kong and China. And, there's an ETF, the ProShares UltraShort FTSE/Xinhua China 25, which appreciates twice as much when the Chinese market goes down.
In the long run, the U.S. dollar will go down, but because of the diminishing current-account deficit, it doesn't have huge downside risk now. Negative sentiment on the dollar reached an extreme recently, with many front-page articles noting its decline.
Sentiment on the dollar was very bearish a year ago, too. Sentiment in this case didn't count.
Faber: It has reached extremes. It also has depreciated considerably against the euro. Today, I would buy the dollar.
At the moment, there is a war: The private sector is cutting credit and the central banks are cutting interest rates because they are desperate to revitalize credit growth. In the long run, the central banks will win, but in the next six to 12 months, relative credit contraction isn't going to be good for any asset class. In a year's time, the S&P 500 will be lower than it is today.
Marc Faber's Picks 1/4/08
Investment Ticker Price Currency Pair Trades
Short the British pound/Buy the Yen £1=¥211.97
Short the Euro/Buy the Yen €1=¥160.09
Buy the U.S. Dollar /Sell the Euro €1=$1.47
Short Emerging Markets
Buy: ProShares Short MSCI Emerging Mkt.
EUM $75.40
Short: iShares FTSE/Xinhua China 25 Index
FXI 163.61
Buy: ProShares UltraSht FTSE/Xinhua China 25
FXP 82.51
Buy
iShares MSCI Japan Small Cap*
SCJ $49.94
Short
DryShips
DRYS 73.17
Future Investment Opportunities:
Cambodia
*Buy after a 10% correction.
Source: Bloomberg
My next recommendation is a shipping short. I turned bearish about home-building stocks in 2005, and felt the troubles in the housing market would hurt the subprime-lending industry and spread to other sectors of the economy -- in particular, consumption. Private consumption now accounts for more than 70% of U.S. GDP, which is why I'm negative about the U.S. economy. The problems here will also affect other economies. The Chinese stock market is closely correlated with the Baltic Dry Index, a shipping index. Tanker rates have plunged, but the Baltic Dry Index is still in the sky. If you can't short the index, short DryShips [DRYS]. The BDI has fallen 28% since Jan. 7. Faber suggests remaining short DryShips.
Any other ideas, Marc?
Faber: Two trades today are totally out of favor. One is betting on the dollar, and the other is buying Japanese shares. I go to seminars, and whereas 10, 15 years ago there were hundreds of people attending the Japanese sessions, today there are hundreds attending sessions on investing in Vietnam. Nobody goes to the Japanese sessions anymore. It's remarkable that people talk about equity valuations being low in the U.S. compared with bond yields, while valuations in Japan are very low compared to the Japanese bond yield. Buy the Japanese stock market on a correction of 10% or so.
What would you buy?
Faber: Give your money to a good money manager, or just buy the index. The small-cap index is interesting. You can buy the iShares MSCI Japan Small Cap Index, an ETF.
Faber: Many countries have opened up following the breakdowns of communism and socialism. China began opening in 1978, proceeding at different times and in different sectors. The same has occurred since the late '90s in India, and more recently, Vietnam. One country in Asia hasn't begun to attract a lot of attention, but has great potential. It is Cambodia. You can't play Cambodia now, but some Cambodia funds will be launched this year.
Eastern Europe has climbed the value scale. There isn't a big difference anymore between, say, Slovenia and Austria. Go further east, into Ukraine, and you'll find big opportunities in real estate, in particular agricultural land.
Basically, investors should avoid correlated assets such as the S&P 500 and the FTSE index, emerging markets, art prices and real estate in financial centers. I'm ultra-bearish about the financial sector, as it will contract for many years, not just one year. I wouldn't buy Citigroup [C] here, or Merrill Lynch [MER]. And as much as I like Abby, I wouldn't buy Goldman Sachs [GS]. I anticipate the day when half of Wall Street will be looking for jobs as drivers of tractors and combine machines.
Thursday, September 25, 2008
Banks vs Wall Street
Don't confuse speculators with the banks and Wall Street. There is an enormous gulf between the two. The fact is the banks did create loans and loan structures that encouraged excessive borrowing. Merrill used to encourage homeowners to take out home equity loans and put the money in stocks. Homeowners did not create option ARMs or understand them. Banks created then and sold them. The public did not slice, dice and engineer toxic securities from their mortgages. Wall Street did that.
Does the public have culpability for their stupidity and greed? Of course they do and they are paying for it. Look at foreclosures. That can't be a pleasant experience. However, the Street has to take its share of blame for creating the speculative fires and then pouring gas on them.
Most "speculators" had nothing to do with the creation of this mess. They do not lend money or create securities. They trade. And most of us do it with our own money.
Does the public have culpability for their stupidity and greed? Of course they do and they are paying for it. Look at foreclosures. That can't be a pleasant experience. However, the Street has to take its share of blame for creating the speculative fires and then pouring gas on them.
Most "speculators" had nothing to do with the creation of this mess. They do not lend money or create securities. They trade. And most of us do it with our own money.
Wednesday, September 24, 2008
Setting Main Street vs. Wall Street
The vilification of Wall Street is taking full force. It is the worst form of scapegoating, denial, and mistakes were made (but not by me). It is similar to the criticisms of the legal profession where the intransigence, unreasonableness, and greed of the litigants is blamed on the representatives who are doing the job set out for them in the system. The current crisis originated in the greed and failure to save by homeowners, their use of real estate borrowing for consumptive lifestyles. Their failure to save, their spendthrift ways are all being loaded on to the investment community who were doing their function within the system. Now emails are floating around fighting the bailout of billionaires on Wall Street. You are an easy scapegoat. No matter that the speculator helped provide the liquidity to create trillions in new wealth. No matter that the long held family home is valued at many multiples of it's purchase price. It is the most culpable real estate speculator and overextended consumer that now point the finger in the attempt to avoid their own errors, lack of judgment. With an election coming up, the politicians, the worst of all, are jumping on the BANDWAGON. The cycle is ending. The funny thing is that equities are barely down a 1/5 and they are throwing out the baby along with the bathwater. But it's good. We really don't need the big firms anymore with universal access and electronic execution. Truth is we really don't need big government either, but its turn comes next.
For the speculator, many new niches and many opportunity will arise. The government will be the ultimate slow mover. As they try to enter the market, as we have seen this last week, there are big waves kicked up. The least qualified populate government functions. Small and fast moving adaptors can thrive in such an environment. Seems that many big hedge funds are going down or weakening. The white shoe brokers are weak. The change will be good. It's just like evolution and climatic change. New species will arise. Many will perish unless they adapt. Even the data itself is reinventing itself with data over a year old being almost irrelevant. As Lack says, regulation will be a joke. Every rule will create a dozen loopholes to exploit that the slow moving professors never thought about. THEY can't control the markets. The big illusion is that government can cure the problems when in fact, THEY are the problem.
For the speculator, many new niches and many opportunity will arise. The government will be the ultimate slow mover. As they try to enter the market, as we have seen this last week, there are big waves kicked up. The least qualified populate government functions. Small and fast moving adaptors can thrive in such an environment. Seems that many big hedge funds are going down or weakening. The white shoe brokers are weak. The change will be good. It's just like evolution and climatic change. New species will arise. Many will perish unless they adapt. Even the data itself is reinventing itself with data over a year old being almost irrelevant. As Lack says, regulation will be a joke. Every rule will create a dozen loopholes to exploit that the slow moving professors never thought about. THEY can't control the markets. The big illusion is that government can cure the problems when in fact, THEY are the problem.
Friday, September 12, 2008
We're Still a Long Way from a Real Banking Crisis
So far this year, 11 U.S. banks have failed (FDIC data here), out of 8,451 FDIC-insured banks, matching the 11 bank failures in 2002. The last time more than 11 banks failed was 1994, when 15 banks failed on the tail end of the S&L crisis (see chart above). In total, almost 3,000 banks failed during the 15-year S&L crisis between 1980 and 1994.
The FDIC has currently identified 117 "problem banks" (through June 2008) with assets of $78 billion (data here), the highest level since 2002 when there were 136 "problem banks" following the 2001 recession (see chart below). This compares to the 1990-1992 period when there were more than 1,000 problem banks in each of those three years at the end of the S&L crisis, along with a recession in 1990-1991.
As a percent of total commercial bank assets (data here), the assets of troubled banks are currently at 0.71% (through second quarter), the highest level since 1995, but far below the 20-25 % levels in the early 1990s (see chart below).
We still have more than three months to go in the year, and there will certainly be more bank failures to come in 2008. There are also two more quarters of banking data to be reported, and there will probably be more banks added to the problem bank list. But at least back to the 1930s, there has never been a 5-year period of banking stability like 2003-2007 when only 10 banks failed, and the banking industry has probably never been in a better position to absorb a shock like the current subprime problems.
Problem banks are still a relatively small share (1.38%) of the 8,451 commercial banks, 98.62% of banks are not "problem banks," the assets of the problem banks represent less than 3/4 of 1% of total commercial bank assets, and therefore 99.29% of commercial bank assets are not in "problem banks."
The FDIC has currently identified 117 "problem banks" (through June 2008) with assets of $78 billion (data here), the highest level since 2002 when there were 136 "problem banks" following the 2001 recession (see chart below). This compares to the 1990-1992 period when there were more than 1,000 problem banks in each of those three years at the end of the S&L crisis, along with a recession in 1990-1991.
As a percent of total commercial bank assets (data here), the assets of troubled banks are currently at 0.71% (through second quarter), the highest level since 1995, but far below the 20-25 % levels in the early 1990s (see chart below).
We still have more than three months to go in the year, and there will certainly be more bank failures to come in 2008. There are also two more quarters of banking data to be reported, and there will probably be more banks added to the problem bank list. But at least back to the 1930s, there has never been a 5-year period of banking stability like 2003-2007 when only 10 banks failed, and the banking industry has probably never been in a better position to absorb a shock like the current subprime problems.
Problem banks are still a relatively small share (1.38%) of the 8,451 commercial banks, 98.62% of banks are not "problem banks," the assets of the problem banks represent less than 3/4 of 1% of total commercial bank assets, and therefore 99.29% of commercial bank assets are not in "problem banks."
Wednesday, September 10, 2008
Random Thoughts
The action on the first day of the month of September was highly unusual, and apparently at that time the employment number had leaked so the moves after that first day were much more likely to happen than before. After such bad starts the rest of the week has a standard deviation of 30 and only 50% chance of rise.
The 40 point S&P decline on Thursday was the fourth largest decline on a Thursday ever. By that time, the news was out, and the increase in unemployment was icing on the cake.
All this occured in conjunction with repeated highs in the fixed income prices around the world, and declines in the omniscient market in Israel below the round and Japan near three year lows of 12000 on the Nikkei.
To me, the key event was the raising of the Swedish discount rate during the night Thursday, causing an immediate 1% decline in all European equities. How come they weren't keyed in like the others to the forthcoming announcement?
The most hurtful piece of mass psychology was the naive notion about stocks having to go down because the P/E of 25 was the highest in 15 years, and that was bearish. Earnings are forecast next quarter to be the highest increase ever of 50% and you would think that people are taught to look at the future rather than the past for moves in markets.
There were many good economic numbers and bad economic numbers in the past week relative to expectations. What is it that caused the employment number to be the focus, other than the desire to paint the economy as weak before the election for obvious reasons of agrarianism? More important, why should a decline in employment at this stage be bearish for stock markets?
The one factor that made it seem so much like the end of the world was the the four day move down in S&P from the Thursday 8 28 close of 1298 to the Tuesday 9 04 close of 1236, a decline of 62 points was the second worst start of a week since the beginning of 2002, the only comparable being the four day move on 1 17 2008 before the French bank inside trading activity.
The 40 point S&P decline on Thursday was the fourth largest decline on a Thursday ever. By that time, the news was out, and the increase in unemployment was icing on the cake.
All this occured in conjunction with repeated highs in the fixed income prices around the world, and declines in the omniscient market in Israel below the round and Japan near three year lows of 12000 on the Nikkei.
To me, the key event was the raising of the Swedish discount rate during the night Thursday, causing an immediate 1% decline in all European equities. How come they weren't keyed in like the others to the forthcoming announcement?
The most hurtful piece of mass psychology was the naive notion about stocks having to go down because the P/E of 25 was the highest in 15 years, and that was bearish. Earnings are forecast next quarter to be the highest increase ever of 50% and you would think that people are taught to look at the future rather than the past for moves in markets.
There were many good economic numbers and bad economic numbers in the past week relative to expectations. What is it that caused the employment number to be the focus, other than the desire to paint the economy as weak before the election for obvious reasons of agrarianism? More important, why should a decline in employment at this stage be bearish for stock markets?
The one factor that made it seem so much like the end of the world was the the four day move down in S&P from the Thursday 8 28 close of 1298 to the Tuesday 9 04 close of 1236, a decline of 62 points was the second worst start of a week since the beginning of 2002, the only comparable being the four day move on 1 17 2008 before the French bank inside trading activity.
Back to US
Just came back from Australia, it's been a hell of a summer for me, traveling three countries and each with 20+ hours flights. Just as the market, which traveled further.
Subscribe to:
Posts (Atom)