Some interesting moves today after the close... moves that made me think about the difference between being famous or infamous.
First, Ken Lewis announced his retirement from Bank of America as of the end of this year. The stock immediately rose in after hours trading, even though Cuomo says he's still coming after BoA. How humilitating it must be to know that investors think your company will be better off without you. Ken Lewis had a huge part in building up the financial supermarket concept... and yet all he'll be remembered for is his flame out at the end.
At least that's better than John Thain's fate - he'll always be the guy with a penchant for decorating... and an exquisite commode. Oh yeah, and didn't he do something in the investment business too?
Michael Vick, on the other hand, was given yet another shot at redemption today. Nike has decided to take what I hope is an educated gamble on Vick... again. This could either be very very good for them... or end in a greater-than-Thainsian blaze of glory.
At least this business is never boring.
Wednesday, September 30, 2009
Thursday, September 17, 2009
What's driving this thing?
I've been doing a lot of research with my friend JT Smith (CIO of Aristar Funding), trying to figure out exactly what was driving this market.
The 'this market is cheap' argument hasn't made any sense to me for some time. Cheap does NOT refer to stock prices relative to where they've been, contrary to what is implied by a lot of folks. Historically, bear markets have bottomed at roughly 7-8x earnings. We only got to 10.2x forward earnings at the bottom in March - not low enough for my liking. Now we're trading at... sit down... 17.8x FORWARD earnings. Put another way, the S&P is more expensive than it has been in the past FIVE YEARS or more.
I might be 'of a certain age,' but my memory isn't so weak that I can't remember that the economy at least appeared to be much more robust at almost any time in 2004, 2005 or 2006 than it does now. And yet we're paying significantly more for a dollar of next year's S&P earnings now? Makes no sense. Unless...
What if this market isn't discounting future earnings right now? It's my belief that a lot of times the animal spirits of the market discount things without really knowing what it is they're discounting. So, what if... just what if... this market is actually discounting the inflation that almost certain to come? Gold over $1000 an ounce is telling us that either everyone is scared to death of this market (not confirmed by the VIX), or that inflation might be rearing it's ugly head. And yesterday's rumors that two Fed officials were ready to vote to tighten! Even today's Philly Fed numbers pointed out that the Prices Paid component is ticking up. Inflation.
Yeah, I know we've been seeing deflation in food and consumables. But that can turn quickly. And more importantly... how else are we going to dig ourselves out of this debt pit unless we pay it off with cheaper dollars?
If we're heading into inflation, folks, the game plan changes.
The 'this market is cheap' argument hasn't made any sense to me for some time. Cheap does NOT refer to stock prices relative to where they've been, contrary to what is implied by a lot of folks. Historically, bear markets have bottomed at roughly 7-8x earnings. We only got to 10.2x forward earnings at the bottom in March - not low enough for my liking. Now we're trading at... sit down... 17.8x FORWARD earnings. Put another way, the S&P is more expensive than it has been in the past FIVE YEARS or more.
I might be 'of a certain age,' but my memory isn't so weak that I can't remember that the economy at least appeared to be much more robust at almost any time in 2004, 2005 or 2006 than it does now. And yet we're paying significantly more for a dollar of next year's S&P earnings now? Makes no sense. Unless...
What if this market isn't discounting future earnings right now? It's my belief that a lot of times the animal spirits of the market discount things without really knowing what it is they're discounting. So, what if... just what if... this market is actually discounting the inflation that almost certain to come? Gold over $1000 an ounce is telling us that either everyone is scared to death of this market (not confirmed by the VIX), or that inflation might be rearing it's ugly head. And yesterday's rumors that two Fed officials were ready to vote to tighten! Even today's Philly Fed numbers pointed out that the Prices Paid component is ticking up. Inflation.
Yeah, I know we've been seeing deflation in food and consumables. But that can turn quickly. And more importantly... how else are we going to dig ourselves out of this debt pit unless we pay it off with cheaper dollars?
If we're heading into inflation, folks, the game plan changes.
Tuesday, September 8, 2009
Bet you dollars to donuts
Actually, if the dollar keeps sliding, donuts might be the better investment soon. Yeah, the DXY Index was lower when Lehman collapsed last year, but beyond that, we're at pretty much the lowest levels we've seen in a long time.
What's it mean? Well, first of all it means that those commodities valued in dollars become more expensive for the American consumer. If you're a Middle Eastern country selling oil, you need the same buying power when you jaunt off to Paris regardless of what the dollar is doing vs the Euro... so the price of oil and gold go up. For that reason alone, I'm a little skeptical of the folks who are saying that the rise in the oil price is a reflection of stronger economic activity. But I'm a skeptic.
And let's look at the poor consumer again. So now energy prices are going up. And home prices still stink. And they have no credit available. And their retirement accounts are worth 40% less than at the top of the market. But those retail stocks are going to have earnings rebounds just like a coiled spring because of cost cutting. Whatever.
One more thought on the whole dollar/hard commodities thing - could people be piling into those commodities because of a fear of inflation? Yep. Does it make sense? In my mind, yes. How else are we going to pay off this amazing amount of federal debt that we have but to create inflation and pay it with cheaper dollars? And what holds value in inflationary times? Hard commodities.
Yeah, you can guess where I've got client money right now. Go ahead. If you get it right, I'll buy you a donut.
What's it mean? Well, first of all it means that those commodities valued in dollars become more expensive for the American consumer. If you're a Middle Eastern country selling oil, you need the same buying power when you jaunt off to Paris regardless of what the dollar is doing vs the Euro... so the price of oil and gold go up. For that reason alone, I'm a little skeptical of the folks who are saying that the rise in the oil price is a reflection of stronger economic activity. But I'm a skeptic.
And let's look at the poor consumer again. So now energy prices are going up. And home prices still stink. And they have no credit available. And their retirement accounts are worth 40% less than at the top of the market. But those retail stocks are going to have earnings rebounds just like a coiled spring because of cost cutting. Whatever.
One more thought on the whole dollar/hard commodities thing - could people be piling into those commodities because of a fear of inflation? Yep. Does it make sense? In my mind, yes. How else are we going to pay off this amazing amount of federal debt that we have but to create inflation and pay it with cheaper dollars? And what holds value in inflationary times? Hard commodities.
Yeah, you can guess where I've got client money right now. Go ahead. If you get it right, I'll buy you a donut.
Tuesday, September 1, 2009
View from the Top
For those of you who haven't been to the Seattle area, that's Mount Rainier up there, taken from the SE side of the mountain. I took the picture a couple of weeks ago. Mountain tops are beautiful, aren't they? Problem is you can't stay at the top forever, you eventually have to go back down the other side.
In my opinion, today's sell off has been a long time coming. Of course, if you've read this blog at all, seen me on TV, heard me on radio, or seen me quoted in print... you already knew that.
What really killed me this morning was listening to some folks trying to hype the economic releases as positive. Look, we're in a pretty down time right now. If you don't think that the folks who put out those releases are trying to highlight the happiest stuff they can, you're naive. Let's take them one by one.
ISM Manfacturing: Headline number was better than expected, coming in at 52.9 vs expectations for 50.5. HOWEVER, you have to look behind the headline number. Looks like Cash for Clunkers is part of the pop – drew down inventories and there’s some restocking going on there. Is it sustainable? No, but the lower level wasn’t sustainable either. Employment is still declining – manufacturers aren’t confident about this or they’d be hiring. Prices paid is going up, which could mean that inflation is coming down the road, perhaps at a faster pace than most expect.
Yes, right now we're dealing more with deflation than inflation. But what if we can't sell bonds and need to increase interest rates? Yes, the dollar has been getting stronger. For me, that's a head scratcher. I certainly don't think the US is the safety currency or economy at this point. In fact, for our clients, I'm deliberately betting that the dollar gets weaker, strengthening commodities.
Pending Home Sales: Those are sales contracts... NOT completed sales. People still have to get loans, which are darn hard to get these days. Which leads to my next topic...
Construction Spending: This is the one that kills me... Year over year residential spending is down 26.4% (not-seasonally adjusted). But everything's okay folks. Really.
If you need a reason that the market tanked today, part of it was the stuff above. Part of it was what's coming down the pike at us. If you want more insight into what joy may be coming, follow jtsmith24 on Twitter - smart guy, good insights into the economy. You can follow me there too (PattyEdwards) for more timely, intraday, updates.
Take some profits folks. There's no reason to be a hero.
Thursday, August 27, 2009
Adult beverage recommended before reading
Someone asked me the other day via Twitter if I'd seen Dick Hoey's comments on the Kudlow show where he asserted that bulls follow forward-looking indicators while (and I'm paraphrasing here) bears are looking in the rear-view mirror. PUHLEASE.
At this point, I'd say that it's the bears who have some sembelance of reality in their view points, and not just because I am one. But let's walk through some points one by one.
Home Prices
Yes, I'm worried about home prices. I'm a little concerned that they're 33% below the peak. But not so much because of the lost wealth (which is a tragedy) but because of how that will affect consumers, banks, builders, and a host of others. Let's see, consumers can't take money off their home equity loans to buy stuff in the future because many of them are underwater. Consumers also can't sell those homes because they won't come out whole, ruining the whole set of industries that really thrived on the idea that homes were meant as an investment instead of shelter.
Let's not forget that banks are stuck with ever-increasing amounts of Real Estate Owned on balance sheets because they can't sell them without tanking the housing market even further.
Builders, well there's a bit of insanity going on there, just because they still exist in the size they do. Prices start to stabilize (a false tell in my eyes because of the REO from the banks, not to mention the homes that were on the market, got pulled because they didn't sell for months on end and are now back on the market) and the builders start to build again. An article on Bloomberg this week said they're buying land again. The only analogy that I can come up that fits this lunacy is that it's like cooking Thanksgiving dinner 7 nights in a row, even though the refrigerator is so full that you don't know how you'll EVER get through all those leftovers.
Retirement Savings
Even after the 'Rally of the Century' that we've had since March, the S&P is down 40% from the October 2007 high. My client base is mostly individuals... individuals who came to my firm after seeing their retirement savings cut in half, in many cases within 10 years of when they had at least hoped to retire. Guess what kids - those folks aren't going to be spending the way they were in the past. They can't! They're saving every last penny they can at this point, hoping to build that nest egg back up so that they can at least retire within a few years of when they had originally hoped. And you know what... their money that we currently have in places other than the stock market? They're not so excited to put it back in. These folks have been burned a lot in the past few years. The stock market just doesn't have the allure it used to for them.
Consumer Debt Levels
Not only are consumers trying to save everything they can right now, but many of them are in debt up to their eyeballs. I know I've shown this chart before, but it's such a lovely picture, let's put it up again (Parental Warning: not suitable for small children):
Yeah. Pretty, eh? Household debt at the level of GDP. Think it's changed much in the past few months? Nah. Me neither. If it took years to get it to a sustainable/decent level back in the 30's why would we expect anything different now? Because it's different this time? Right. Tell it to someone else.
This debt is going to be a ball and chain around the ankle of the consumer for a long time to come. A LONG TIME. Those "coiled springs" that so many analysts keep talking about in reference to the retailers who have cut costs and just need the consumer back before earnings take off like rockets... BUNK. By the way, can I remind everyone that at least until recently the consumer drove 70% or so of the economy. Guess what is also probably going to change? Yeah. That.
Coming Mortgage Resets
I've shown this graph before too... but just in case anyone missed it...
Please notice all the resets of Alt-A and Option ARMS that are coming in the next 18 months or so. Any (honest) mortgage broker will tell you that both of those categories have the capability of being even worse than the Subprime mortgages. I've heard that up to 50% of the folks with those loans that haven't even reset yet can't make their payments. Guess what happens when they DO reset? Yep. Ugly. Really ugly.
But there's no housing problem.
And I haven't even gotten to the accounting changes coming for the banks that put all the toxic waste back on the balance sheets. But that's another post.
Cheers!
At this point, I'd say that it's the bears who have some sembelance of reality in their view points, and not just because I am one. But let's walk through some points one by one.
Home Prices
Yes, I'm worried about home prices. I'm a little concerned that they're 33% below the peak. But not so much because of the lost wealth (which is a tragedy) but because of how that will affect consumers, banks, builders, and a host of others. Let's see, consumers can't take money off their home equity loans to buy stuff in the future because many of them are underwater. Consumers also can't sell those homes because they won't come out whole, ruining the whole set of industries that really thrived on the idea that homes were meant as an investment instead of shelter.
Let's not forget that banks are stuck with ever-increasing amounts of Real Estate Owned on balance sheets because they can't sell them without tanking the housing market even further.
Builders, well there's a bit of insanity going on there, just because they still exist in the size they do. Prices start to stabilize (a false tell in my eyes because of the REO from the banks, not to mention the homes that were on the market, got pulled because they didn't sell for months on end and are now back on the market) and the builders start to build again. An article on Bloomberg this week said they're buying land again. The only analogy that I can come up that fits this lunacy is that it's like cooking Thanksgiving dinner 7 nights in a row, even though the refrigerator is so full that you don't know how you'll EVER get through all those leftovers.
Retirement Savings
Even after the 'Rally of the Century' that we've had since March, the S&P is down 40% from the October 2007 high. My client base is mostly individuals... individuals who came to my firm after seeing their retirement savings cut in half, in many cases within 10 years of when they had at least hoped to retire. Guess what kids - those folks aren't going to be spending the way they were in the past. They can't! They're saving every last penny they can at this point, hoping to build that nest egg back up so that they can at least retire within a few years of when they had originally hoped. And you know what... their money that we currently have in places other than the stock market? They're not so excited to put it back in. These folks have been burned a lot in the past few years. The stock market just doesn't have the allure it used to for them.
Consumer Debt Levels
Not only are consumers trying to save everything they can right now, but many of them are in debt up to their eyeballs. I know I've shown this chart before, but it's such a lovely picture, let's put it up again (Parental Warning: not suitable for small children):
Yeah. Pretty, eh? Household debt at the level of GDP. Think it's changed much in the past few months? Nah. Me neither. If it took years to get it to a sustainable/decent level back in the 30's why would we expect anything different now? Because it's different this time? Right. Tell it to someone else.
This debt is going to be a ball and chain around the ankle of the consumer for a long time to come. A LONG TIME. Those "coiled springs" that so many analysts keep talking about in reference to the retailers who have cut costs and just need the consumer back before earnings take off like rockets... BUNK. By the way, can I remind everyone that at least until recently the consumer drove 70% or so of the economy. Guess what is also probably going to change? Yeah. That.
Coming Mortgage Resets
I've shown this graph before too... but just in case anyone missed it...
Please notice all the resets of Alt-A and Option ARMS that are coming in the next 18 months or so. Any (honest) mortgage broker will tell you that both of those categories have the capability of being even worse than the Subprime mortgages. I've heard that up to 50% of the folks with those loans that haven't even reset yet can't make their payments. Guess what happens when they DO reset? Yep. Ugly. Really ugly.
But there's no housing problem.
And I haven't even gotten to the accounting changes coming for the banks that put all the toxic waste back on the balance sheets. But that's another post.
Cheers!
Sunday, August 23, 2009
Happy Happy, Joy Joy
Tonight Jack Welch (yes, that Jack Welch) said that it's a 50/50 chance that we go down again. Watching Twitter is important folks, 'cause that's where he said it... right after a diatribe about the Red Sox. Glad to know that even someone who might know a little about the financial world doesn't think I'm totally out in left field. (All puns intended... all the time.)
What is most interesting to me is that both Meredith Whitney and Dick Bove, two of the top bank analysts out there, believe that there are somewhere around another 200+ banks to go under before this whole whatever-we're-calling-it is over. As of Friday night, we're over 80 failures this year. And the thing that I don't think Wall Street gets is that each of these 'too little to care if they fail' banks affects a lot of folks on Main Street. Want everyone else back in the market, Wall Street? Start to care if other peoples' pools are polluted.
The biggest announcement of the past week, though, and one that got virtually no press, was the announcement that the FDIC is looking to relax the rules for Private Equity getting involved in the banking sector. Gee, color me cynical, but why would they do that? Ummmm, maybe because they already know that based on the losses they already know about they need to raise fees to banks. And ummm... maybe because they know there are lot of other failures to come?
But everything is just fabulous out there. Go long in the market folks. Go ahead, I dare you. I'll even sell you the stock you want to buy. Color me generous.
What is most interesting to me is that both Meredith Whitney and Dick Bove, two of the top bank analysts out there, believe that there are somewhere around another 200+ banks to go under before this whole whatever-we're-calling-it is over. As of Friday night, we're over 80 failures this year. And the thing that I don't think Wall Street gets is that each of these 'too little to care if they fail' banks affects a lot of folks on Main Street. Want everyone else back in the market, Wall Street? Start to care if other peoples' pools are polluted.
The biggest announcement of the past week, though, and one that got virtually no press, was the announcement that the FDIC is looking to relax the rules for Private Equity getting involved in the banking sector. Gee, color me cynical, but why would they do that? Ummmm, maybe because they already know that based on the losses they already know about they need to raise fees to banks. And ummm... maybe because they know there are lot of other failures to come?
But everything is just fabulous out there. Go long in the market folks. Go ahead, I dare you. I'll even sell you the stock you want to buy. Color me generous.
Tuesday, August 18, 2009
What goes up... must come down...
All of the sudden, I find myself with increasing company in the bear camp. I don't know whether to dance the bear dance with my new found friends, or defect to the bull camp. But I'm pretty sure that I heard some dancing music warming up.
So the market is trading at 16.8x 2010 earnings. That seem extreme to anyone else? And not only does no one in the bull camp seem to expect any revenue growth this year, it seems like maybe not much is expected next year. So we're cost cutting our way to properity then? Right. Pardon my skepticism, but I just can't help myself - probably the fault of my parents that taught me that thinking for myself might not be such a bad idea.
I run a number of different valuation models that I've developed over the last ::bleep:: (substitute 'many', it will do just as well) years in the industry. Last night my earnings momentum model that usually gives me 100 or more stocks on which I can do more fundamental work rendered a list of ... wait for it... nineteen (19) stocks. NINETEEN. On another growth model that I developed over the past 3 years or so, a multifactor model that requires revenue growth to support the earnings growth, I usually get a list of 300+ names. This week? Right around 100.
So what can I take from this? As of right now, given today's valuations and earnings/revenue prospects for stocks, revenue growth is an almost extinct animal.
If you're good with cost cutting as the only way of getting out of this lovely little economic scenario, good for you. But don't use my money to invest, 'k?
So the market is trading at 16.8x 2010 earnings. That seem extreme to anyone else? And not only does no one in the bull camp seem to expect any revenue growth this year, it seems like maybe not much is expected next year. So we're cost cutting our way to properity then? Right. Pardon my skepticism, but I just can't help myself - probably the fault of my parents that taught me that thinking for myself might not be such a bad idea.
I run a number of different valuation models that I've developed over the last ::bleep:: (substitute 'many', it will do just as well) years in the industry. Last night my earnings momentum model that usually gives me 100 or more stocks on which I can do more fundamental work rendered a list of ... wait for it... nineteen (19) stocks. NINETEEN. On another growth model that I developed over the past 3 years or so, a multifactor model that requires revenue growth to support the earnings growth, I usually get a list of 300+ names. This week? Right around 100.
So what can I take from this? As of right now, given today's valuations and earnings/revenue prospects for stocks, revenue growth is an almost extinct animal.
If you're good with cost cutting as the only way of getting out of this lovely little economic scenario, good for you. But don't use my money to invest, 'k?
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