by Bryce

We have recently witnessed the steepest rally since the Great Depression. The market averages are up in excess of 25% in a month and continue to behave well under less than favorable news. While this is great from an investment perspective, I would just like to point out a few facts/opinions as it is easy to be caught up in all the recent optimism when in actuality things haven’t improved much. The facts below were provided by The Economist, April 11-17th 2009 edition.  (more…)

by Keith

Yesterday I posted my thoughts on how I felt the market would drop for several reasons. The most relevant to this post was the release of job numbers. As expected, layoffs increased and unemployment is now at 8.5%. Despite an initial drop, the market did not react negatively to this news by finishing in positive territory. I find it frightening the recent trend in the market to shrug off negative information. This is especially disconcerting since unemployment numbers are traditionally one of the last numbers to buck the trends in a recession. Clearly investors feel that actions currently in place by the movers and shakers has “fixed” the situation, and are comfortable investing in the long term. Clearly we must act accordingly and focus on long term investment, since the short term implications of this are highly uncertain.

by Keith

For the sort of multi-day rally we witnessed today, we can normally expect to see some sort of recoil. In addition, we have seen a possible trend develop with decreases prior to the weekend. Job loss figures will be announced tomorrow morning, and I am not optimistic. I expect these numbers to increase from the previous month. Ultimately you must ask yourself how much weight the enthusiasm from earlier in the week will defend against bad job numbers? Myself being the pessimist feel I must guard against what is simply a rally in a bear market.

by Bryce

The short-term attention span of many people and similarly the media with respect to investing never ceases to amaze me. As mentioned by Forrest in “Has anything Changed,” are companies worth 20% more than they were two weeks ago? The common sense answer is no and yet their values as reflected by the equity markets indicates otherwise. I am by no means complaining about the recent rally but I would like to provide some perspective. 

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By Forrest Lowell

News Flash! The American economy is worth 7% more now than it was 24 hours ago! Of course the economy is not worth more today than yesterday; 20,967 more people are unemployed, thousands more just defaulted on their mortgage, millions of homes went unsold, 10’s of millions of square feet of commercial property continue to be unrented, and the tax payer just lost another trillion dollars. All in all I would say it was a pretty crappy day, unless of course you owned anything with a ticker symbol, then you think today was fantastic. But one needs to ask themselves if anything has changed.

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by Bryce

The most recent fiasco on behalf of politicians is a perfect example why politicians should refrain from attempting to run business operations and stick to regulating them. On top of that, this hysteria is reducing confidence on both ‘Wall Street’ and ‘Main Street.’ While the $165 million bonuses paid by AIG are absurd for a company who should be bankrupt, the fact of the matter is that they are not bankrupt because ‘we’ keep giving them money. Politicians had the chance to include language to restrict bonuses and yet they did not. Contractually, AIG was bound to pay the bonuses  unless it filed for bankruptcy which ‘we’ seem to find non-plausible (to which I agree). I am by no means a lawyer but perhaps there was some justification to break the contracts under ‘unjust enrichment’? I have faith in the American people and if the French at Societe Generale can bow to pressure and drop their stock options then I would expect nothing less of their Americans counterparts. 

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by Matthew Lu.

The employees at AIG do not deserve their bonuses; certainly they are dishonorable, and they definitely deserve to be denounced. But there is much more at stake here than a few hundred employees and several million dollars.

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I think it is fascinating to watch OPEC almost panic over such “low” prices for oil, they have already announced production cuts of about 4.2 million barrels a day and quite a few members are asking for more at their next meeting in Vienna. A cut of 4.2 million barrels a day brings their official quota down to 24.84 million b/d which is now less than a third of global oil production. OPEC does not like to talk about it officially but it is widely believed that they would like oil in the $75-$100 dollar a barrel range. It appears that they are willing to go to great lengths to achieve this which is absolutely great news for Exxon Mobile and the oil sector in general. It appears that OPEC is willing to decrease their influence on the oil markets just to increase the price; to me this is an obviously self defeating plan that is great for both America and America’s oil industry. I am perhaps over simplifying my next statement but I think the oil markets will go something like the following. OPEC is going to keep decreasing production to push the prices up allowing two things to happen; One, Exxon and the other Integrated Oils will invest to increase production in both oil and natural gas because it will immensely profitable for them, and two, the American economy will more rapidly move away from oil in all aspects. Primarily the American and world economies will move towards a natural gas and renewable energy based industry which will further decrease the influence of OPEC over the western world. The US has an ungodly amount of natural gas already proven and I think we have just begun to explore. There is one part of my theory that I am still not entirely sure about, and that is whether the American people will accept paying a bit more for oil supplied by American companies vs. importing it from the middle east. As I see it now the integrated oils and other American companies control the refining capacity in the US and can choose which oil is supplied to them. I would think Exxon would choose to supply their refineries with Exxon produced oil first and imported oil second, but there might be considerable pressure on this decision if the imported oil is considerably cheaper. The easiest and most likely solution to this part of the equation is from Washington D.C. Whether it is some sort of tariff put on oil from the Middle East or a gas tax here in the states so the price of oil is less of a factor in the price of gasoline, I think there is the political will to do something. There are obviously many holes in my belief of what is to come in the energy sector and I will address them in posts to come in the future, but please feel free to point out any and all issues you see and potential solutions. I guess if there is one take away for the stock market it is buy Exxon Mobile and never look back. They are the definition of American capitalism and have rarely let their shareholders down; they did not over invest at $147/barrel and are not under investing now at $43/barrel.

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As was widely reported today GE’s credit rating was downgraded to AA+ by S&P.  For the sake of argument (heavily sarcastic tone) we will assume that the ratings agencies are not criminals that deserve to be thrown in jail, but are actually highly trained professionals in the science of risk management.  GE’s credit ratings had been rated with a “negative” outlook for the better part of the credit crisis with S&P probably the first of the three ratings agencies to downgrade the company to one notch below the highest possible.  This change of ratings is actually a relief for me as a shareholder and here is why.  There has been some speculation, and I agree, that the ratings agencies have over corrected to being too conservative after being almost criminally negligent for the better part of the middle years of this decade.  So if in this environment GE’s stock has been pummeled because of their perceived exposure to further credit risk, and an overly conservative ratings agency gives it a rating of AA+ with a stable outlook, how can you not love the company!?  In the worst credit market in the past 70 years GE is still rated only one notch below the debt of the United States government, not bad GE.

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Tomorrow the FASB is possibly going to issue guidance on how to apply the mark-to-market rule for the financial industry.  Right now assets on a bank’s balance sheet have to be valued at what the bank could go out to the market place and sell them right now.  Of course the problem being that there is almost no market right now for securitized mortgages in the US with “bad” loans in the portfolio.  This is forcing the banks to write down the value of these assets to very low levels which affects the amount of capital that they have to provide in order to properly leverage their balance sheet.  Capital is basically the banks own money, they keep this money in a big room and then loan out the depositors money.  If a bank has $50 billion in capital and $500 billion dollars in outstanding loans then their leverage is 10 to 1.  the problem over the past year is that the value of the mortgages are in question.  If the bank lent a person 100% the value of the home and the value of the house has fallen 50%, the homeowner might choose to walk away from the house and let the bank sell it.  If this happened to 10% of the mortgages the bank owns they would have to “write off” 25 billion dollars against their capital, decreasing their total capital to 25 billion and while only decreasing their loans outstanding to $450 billion.  This would increase their leverage to 18x, even though 90% of their loans are performing just fine.

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