I was reading a story about the disconnect between the fed lowering rates and how it simply isn't being passed on to consumers. [more]
I worked in banks through a period where people lost their homes due to dramatic increases in interest rates. The experience left me cautious about debt and to pay a bit more to ensure better financial security. I wish I'd known what Greenspit had been up to as I'd have gone short terms the whole ride and I would have saved money. [more]
How do these things happen? [more]
In Biggest Sucker of All Nations I expressed my feeling about Canada having its pension money in the markets. I think this is Canada's biggest risk in the market mess that appears to be unwinding. [more]
I wrote a series in December that I had to break up into six different parts, so it is incredibly long, but I think important to look at. This is my original work, I haven't seen anyone write about this, or think through how lowering interest rates stimulated the economy at the same time was putting an irrecoverable choke hold onto it. [more]
Looks like someone is suggesting bankrupcy for Vallejo, CA in order to dissolve union contracts and start over from scratch for wages. [more]
Headline reads "Fannie Mae Posts Worse Than Expected Loss."
Worse than expected by whom? Oh, those "expert" analysts...
Those are the ones that are saying things should pick up in the second half of this year...
I just saw it and with what I saw, I am relieved... [more]
CR has a post on the number of banks at risk and on a watch list. [more]
Office Supply reported earnings today. Despite having 15% fewer shares than at their peak of number of shares, their earning plummetted to 7c/share, or 10c adjusted. [more]
This story is too weird...
What a statement of due diligence in home sales...
Well, I am not even going to pretend to understand this one... [more]
Some are actually falling guillotines.
Counterpunch has an article with a quote I like about the monetary system that is an excellent image of deflation at work: [more]
I have found option calculations for how much has been robbed from investors completely and utterly shocking, but, as if that wasn't enough, here's an article about repricing options. [more]
Minyanville had a very good post looking at oil, "stagflation", inflation, deflation, economic growth, etc. [more]
Debt is the main reason for my negative view of the market. Historically I have not found a single example of an economy where excessive debt played out well. Either economies cut back when they could make choices about how to cut back, or they were forced to cut back and had little control of who and what got slaughtered. [more]
Common Sense Forecaster has an well written post on de-leveraging. [more]
Well, they say that it is only a small percentage of municipalities that end up going bankrupt, but news about one on the verge of bankrupcies isn't going to help the troubled markets... [more]
The gross imbalance between long term debt and short term is getting close to endgame. [more]
I am sure I did a post about lawsuits coming to town over this mess... [more]
Mish has a good post, Financial Services Bloodbath. The article quoted is from the finanical sector, but part of the quote is of particular interest: [more]
On more than one occassion I have written that the British Pound is going down further. They have enormous spending on social programs and an excessive welfare spending, but exceptionally low spending on education. [more]
I missed that David Walker had resigned, but what a great role he is taking. [more]
I have a number of reasons for not being in the market: [more]
Reported today is that import prices have increased by 1.7% this month and analysts only expected 0.3 to 0.4%. [more]
The "jingle mail" concept of homeowners walking away is catching on with banks. Banks are being advised to walk away from big buy-out deals. [more]
The market has to go back to what makes a market health, and about 12% of the markets in the financial sector has historically been health. I have buffalo dung in my yard and that's about what I think of all the arguments for "financial innovation" that some argue justify the change. [more]
There already have been some Alt-A write downs, but it seems to me that the focus of the financial losses so far has been the subprime. [more]
I have been waiting to see rates increase, but this I never expect. According to a Bloomberg report the rates in an auction for these municipal bonds soared to 20% from 4.3% a week ago. [more]
Calculated Risk is report on the declining market in Southern Califormia. So sales are down 44% and price is back to levels of 3 years earlier... [more]
The developments in this market are fasinating... [more]
Well, if this isn't the last straw in the domino...
Be careful out there, this has huge implications on the market.
Here is an example of how companies will be facing a squeeze because of debt, this example in the health sector. The company had float rate debt insured by Ambac, sending the rate from 3.06% to 6%. In this example the rise in interest rate costs about 1/4 of the operating profit. [more]
The financial markets seem extremely unstable. I find the data around what is happening unsettling, yet some of the things you would expect to happen with it seem to defy gravity and remain supported as if by magic.
Today I was reading a piece on Safehaven by Peter Schiff and how he describes treasury bills as the mother of all bubbles. He outlines his thesis:
"For years I have predicted that the falling dollar, persistent trade deficit, and the lack of domestic savings would combine to send long-term interest rates sharply higher. The effects of these fundamental drivers would undermine the Fed's efforts to lower short-term rates and compound the problems for the housing market and the U.S. economy. Yet as of today, the yield on the thirty-year Treasury bond still stands below 4.5%, within 40 basis points of a generational low. Either this is the one piece of the puzzle that I somehow got wrong, or other factors are working to temporarily confound fundamental economics and prop up the bond market. As you might imagine, I am confident that it is the latter and consider the U.S. Treasury market to be the mother of all bubbles."
It makes sense to me, Americans have little savings these days and are dependent on others to borrow from. Currently I wouldn't touch anything US as I have so little trust in their currency. Being Canadian and knowing what Canada has been through to get our debt under control, well that is the path the US must follow and to me it means the US dollar will weaken. Our dollar declined about 25% relative to the US dollar from when we first started working on our debt problem in 84 to the hardest years when taxes were so high, 54.9% in the highest tax bracket, which was reached at a mere $80k/year. I have no doubt that Canada is going to go through a rough time as well, but we get to start with a surplus budget, better savings and less debt.
Every time I look at the US debt it looks as bad as Canada looked in 84. It took us more than 10 years to balance the budget. Canada's economy is 1/10th of the US. Our weak dollar meant tourism expanded. A weak US dollar can increase tourism there as well, but they need 10x as much expansion for the same effect, yet the tourism market is fairly fixed. That they are a bigger economy to me means that they will hardly feel increased tourism from Canada. We have 1/10th of their population for travel and they have 10 times as many to split it into. Between our two countries, we got 100 times the tourism benefit of a weaker dollar than Americans will get. Say 1% take vacations per year, well, that would mean we got 3 million visitors, or about 10% of our population. To go the other way, 1% of Canada is 300,000 and that is 0.1% of the US population. Probably the same could be said for our exports.
So, the level of debt means the dollar has to decline further, and going down to about half of where it is now would not surprise me. It means that I need a 5-10% premium, depending on the number of years, just to maintain my investment. I wonder if I have just been breezing over treasury bonds in my reading list, or if everyone is all of a sudden noticing something about treasury bonds. Accrued Interest looks at yesterday's 30-year Auction. The "coupon" rate of interest is 4 and 3/8th.
With the auction, if you were buying a 30-year treasury bond priced to pay $100 in 30 years at the current 4.449% yield you'd pay $98.780998 today according to the press release. A lot can happen in 30 years and I can't imagine buying such a thing for under 10%. At 10% interest the purchase price for such a bond declines to $46.76, a 53.24% decline in today's purchase price.
Consider what was posted:
"Consider the facts. The Treasury announces to the entire galaxy that its selling $9 billion in 30-year bonds. They get a yield of 4.449%. According to Bloomberg News, the pre-auction trading had indicated the yield would be 4.41%, indicating the actual results were a 4bps miss. Did the auction go poorly? It sure did. Not only was it a 4bps miss in yield, but 89% of it was purchased by dealer firms, which indicates that actual end buyers only stepped up for 11% of the sale.
But what happened next can't fully be explained by those auction results. The 30-year continued to sell off, rising another 10bps in yield to 4.558, or -1.6% in price, over the next hour. It strains logic to say that the Treasury holds an auction, the price is somewhat disappointing, so therefore the price should be an additional 1.6% lower."
Minute changes in the 30 year yield has enormous changes for the bond price, and these long term rates are unnaturally low right now. I think the price going lower is perfectly logical. A yield of 4 and 3/8th percent is grossly inadequate for pricing the risk for tying the money up for 30 years.
If currency declines by 20% and inflation goes to 5% the loss of buying power is enormous, and this is not an excessive example of possibilities. At the very least, this ought to be the bench mark minimum for pricing risk into a 30 year treasury bond. At this modest realm of possibilities you would lose 27.72% of your buying power over 30 years when you finally got you $100 back. The $100 would actually only buy $18.18 worth of goods, but the interest payments over the years would amount to $54.09 of buying power. In order for such a treasury bill to actually pay this level of risk it would have to be priced at 5.85% or 5 and 7/8th percent is the closest. This ought to have been the floor investors insisted upon.
These are the kinds of investments that pension plans can hold because they are "safe" and government guaranteed. The problem is that they have grossly inadequate risk for inflation and currency declines priced into them.
Today the markets are a very risky place with a shadow banking system that simply makes it impossible for investor to be making informed choices. Treasuries are a safe place to park while the markets are working through the financial losses, and that inflates their price and keeps a level of demand for them. Thirty year bonds have considerable risk to trading down on the purchase price due to the excessively low yields, so although they have a perception of being safe, they have high risk of losing enormous buying power and being repriced downwards. Once investors feel the markets are safe again, the return demanded on these is likely to increase back to reasonable levels. [more]
Finanical Armageddon has posted an interview with Jeremy Grantham, who calls this financial crisis the worst we've had in the post-war era. [more]
First, I am not going to pretend to understand something that I truly do not understand. And I also lack the interest to put the time in to study it well enough so that I have an level of understanding that I'd feel confident about. [more]
If you haven't gotten it yet, Bill Gross has said it best... [more]
Since the market melt down last summer I believe Canada has $32 billion dollars "frozen," but I have not seen details of where the hits have come except the Yukon government. The $36.5 million dollars frozen there is actually a significant amount of money when you consider the low population. I believe it works out to about $1200/person. [more]
If you have been following the market that financial institutions need to raise more capital because of losses should be no surprise. The ease at which the financial institutions have raised cash has completely surprised me, even MBIA getting over subscribed to their $750 million offering this week and raising $1 billion instead, but then the shares were discounted by about 15%. But they could have discounted them to half and I still wouldn't have touched it. I am going on memory here, but it seems to me that it was originally 50 million shares being added to 125 million shares, a 28% dilution, and the over subscription means more like a 33-34% dilution. Doesn't that even just complete throw off your investment? [more]
Sometimes I read some of the editorials over on Stockhouse, and today I was looking at Steven Saville. Past work of his has included excellent arguments that the rise of commodity prices, copper, nickel, zinc, lead, etc., is due to the dramatic increase in M2 and M3 money supply. In the past he has made a convincing argument that these commodities are simply priced to the money supply. He makes some good arguments why gold ought to be in an investment portfolio. For me, today's post was only so-so. [more]
Seems that the types of job losses have masked the extent of the job losses. You have far more jobs related to housing that are self-employed jobs than other sectors, such as mortgage brokers, individual contractors, etc. [more]
To quote directly from the MGP website"The Mackenzie Gas Project is a proposed 1220-kilometre natural gas pipeline system along the Mackenzie Valley of Canada's Northwest Territories to connect northern onshore gas fields with North American markets." The proposal has the pipeline going through about 200km to the east of where I am currently living in the North West Territories. [more]
Ouch, when Buffett speaks, his words can be strong... [more]
The markets are holding up amazingly well for the cliff diving the indicators are now showing. [more]
This one caught me by surprise... Allied Van Lines has filed for bankrupcy protection. They have their home relocate program and they got hit with have agreements to buy the homes and then having to sell them at a loss... [more]
I was reading an article on the trickle down effect of the wealthiest Americans not spending. [more]
The price of credit is increasing. From the WSJ today, [more]
Everyday the financial news just seems to get worse. This past week the S&P had its best one week rally since 2003, but I strongly question the wisdom of people buying into this rally. If you look at 2007 earnings of the S&P were down a whopping 48%. The get-it-wrong-more-than-right analysts are predicting a 21% increase in 2008 over the 2007 numbers. That would put the 2008 S&P earnings at about 63% of 2006 earnings. [more]
Like other costal cities, Australia has a severe affordability problem. Unlike the US they have not had their housing market decline and their mortgage backed securities haven't caused any losses... yet. [more]
I was reading an excellent piece by Nobel Prize winer Joesph Stiglitz on his thoughts on the World Economic Forum.
One of the things that he said that is proving to be a lesson that Wall Street sociopaths, morons, idiots, scam artists, con men, swindlers bankers refuse to acknowledge (or perhaps once a swindler always a swindler) that Stiglitz said is:
Bankers – and the rating agencies – believed in financial alchemy. They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings. But one lesson of modern finance theory is that, in well functioning financial markets, repackaging risks should not make much difference. [more]
If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream. There might be some money in repackaging, but not the billions that banks made by slicing and dicing sub-prime mortgages into packages whose value was much greater than their contents.
It seemed too good to be true -– and it was.
Read the Bloomberg article on how JPMorgan Chase targets small school districts that were struggling for cash. [more]
I am of the opinion that Google is full of hype that has sent its share price beyond reasonable valuations. No question the growth story is good, but investor expectations go far beyond reality.
I have done a couple posts looking at Google and tried to demonstrate how this growth rate stuff for pricing investments is increasingly nonsense as the growth rate get higher. The example I used previously is:
| Daily rate|| Compounded rate|
|A|| 8%|| 10,000,000,000%|
|B||8.1% ||13,000,000,000% |
|B minus A|| 0.1%||3,000,000,000% |
|C|| 0.0%|| 0%|
|D||0.1% || 27%|
|D minus C||0.1%||27%|
The difference in the rate being compounded each day of the year in the two examples is a mere o.1% difference yet with the high rate the magnitude of the difference at the end of 240 compounding periods is enormous, 3 billion percent versus just 27 percent. As the growth rate become large the numbers you get back a equally nonsense and this is the basis of the theory people have used in justifying Google's price because of "growth."
So, lets have a look at Google's eps:
1This is a quarterly rate of return (loss).2The rate must be taken to the 4th power to get the annualized rate. 3This is what the annualized rate of return is if it was constant back to Q4 2003.
| Quarter|| Earnings/ share||1% increase over last Quarter||2Annualized Quarter Growth||3Annual Growth to Q4/04|
|Q1 2005|| 1.29||81.7%||990%||674%|
The rate of growth is clearly declining, as this graph shows: (continued in the comment) [more]
I am reading John Mauldin and he points out there would be less job losses from recession because of how much smaller the manufacturing sector is and how those jobs tend to be cyclic, increasing and declining with the business cycle, which is part of what he claims led to the 9-10% unemployment of the 70s and 80s. He says today a 10% decline in manufacturing would only be a 2% increase in unemployment. [more]