FEARS OF STAGFLATION – Stagflation is the scary tandem of weak growth and soaring inflation. There hasn’t been serious stagflation, when inflation and unemployment hit double digits, since the 1970’s (oil-price shock) and early 1980’s (anticipated 9% per year consumer price inflation for 10 years). Rising commodity prices and an ailing dollar lead to concerns for inflation, while a housing downturn and slowing productivity growth lead to concerns of a recession.
IMPROVING BALANCE SHEETS DUE TO BOND MARKET MESS – Due to the falling prices of their corporate bonds, banks are generating profit from the falling value of their debt. Example. A $100 million bond was issued by a bank. The $100 million bond falls in value by $5 million (5%). The decline in the bond’s value means the bank’s liabilities fell by $5 million. This is equivalent to a gain that ends up on the income statement and boosts profits. This allows firms to book hundreds of millions of dollars in profit. These gains will only offer a slight respite from the overall market woes.
Sunday, September 30, 2007
WEDNESDAY SEPTEMBER 26TH 2007
HOUSING CHILL GROWS WORSE, BITES CONSUMERS – Home inventories soared to an 18-year high according to data released yesterday. The problems stem from an oversupply of homes and turmoil in the mortgage market. Home builders are divided on how drastically to cut prices to put a dent in supply. Hovnanian Enterprises Inc discounted certain homes up to 30%. D.R.Horton discounted homes up to 50%. Individual homeowners have been slower than builders to bring down their prices. Mortgage companies are scaling back their loans to people with poor credit, while increasing loans that can be insured by the Federal Housing Administration. The housing market is worrying consumers. Consumer confidence fell this month to its lowest level in two years. Consumer confidence dropped from 105.6 in august to 99.8 in September. The survey ended on September 18th, the day before the fed cut rates. Optimists believe that the cut in rates will help keep the economy out of recession.
BED BATH CAN GO BEYOND TAKEOVER TALK – Shares of BBBY have been volatile lately due to caution related to Bed Bath’s exposure to the housing meltdown and the potentially shaky customer. BBBY was considered a potential target, until the recent dry up in the leveraged buy-out market. Investors have been hurt as this speculation no longer serves as a boost to its share price. The avoidance of a take-over could be BBBY’s saving grace as many buy-outs are typically loaded up with debt. Bed bath and beyond has a solid balance sheet. The company should be in better position than its competitors to weather a downturn.
TECH STOCKS GET GIDDY - Tech companies are experiencing strong demand from outside of the US, especially the emerging markets (orders expanding at a rate in the upper teens). New technology is prompting an increase in read demand all along the tech food chain that will translate into stronger profits for a broad range of tech companies. The weakening dollar is a short-term positive (bigger profits for tech companies that earn as much as 50% of profits over-seas) as well as a long-term positive (more competitive prices win recurring business.) After bottoming at about 18 P/E, Tech stocks are now trading at a 19.5 P/E, about 1 pt lower then it was a year ago.
BED BATH CAN GO BEYOND TAKEOVER TALK – Shares of BBBY have been volatile lately due to caution related to Bed Bath’s exposure to the housing meltdown and the potentially shaky customer. BBBY was considered a potential target, until the recent dry up in the leveraged buy-out market. Investors have been hurt as this speculation no longer serves as a boost to its share price. The avoidance of a take-over could be BBBY’s saving grace as many buy-outs are typically loaded up with debt. Bed bath and beyond has a solid balance sheet. The company should be in better position than its competitors to weather a downturn.
TECH STOCKS GET GIDDY - Tech companies are experiencing strong demand from outside of the US, especially the emerging markets (orders expanding at a rate in the upper teens). New technology is prompting an increase in read demand all along the tech food chain that will translate into stronger profits for a broad range of tech companies. The weakening dollar is a short-term positive (bigger profits for tech companies that earn as much as 50% of profits over-seas) as well as a long-term positive (more competitive prices win recurring business.) After bottoming at about 18 P/E, Tech stocks are now trading at a 19.5 P/E, about 1 pt lower then it was a year ago.
MONDAY SEPTEMBER 24TH 2007
DERIVATIVES PREDICT MARKET- Credit-default swaps are contracts between two investors that transfer the risk of a company defaulting on its loans. Those who tracked this complex credit derivative through indexes (examples: Credit Derivatives Research Index, ABX Indexes) were able to see the summer's meltdown coming. This year, several indexes based on derivatives of high yield bonds, started selling off before indexes base on high yield bonds dropped. I.E. Moves in the derivatives foreshadowed the recent market drop. These derivatives are changing the way investors think. A downturn can reignite fears of a credit crunch.
POSSIBLE RATE INCREASE DUE TO INFLATION CONCERNS - Federal Reserve cut interest rates last week in order to address the risk of recession and a break down in credit markets. In doing so, the central bank revived the fear of inflation. Fed is walking a tight rope: if they cut rates too little - recession fears will return, if they cut rates too much - inflation could loom. Worries are spreading in the bond market that inflation may force the Fed to raise interest rates early next year (treasury-bond yields shot up last week). Inflationary pressures are evident in the pricing of gold, agricultural products, energy, and the dollar.
RECESSION PROOF PORTFOLIO - Expecting a bumpy road, investors are prepping portfolios by increasing exposure to the usual slump-resistant sectors: consumer staples, health care, and utilities. They are also increasing exposure to large cap companies with international exposure (global growth, decreasing dollar). Investors look for stable, steady-growth companies with an attractive free cash-flow yield (a measure of a company's cash-generating power), and good margins. Financial companies with mortgages on their books were typically recession proof because investors expected people to pay their mortgages even if they had to scrape together everything they had. Investors should be pickier this time around.
POSSIBLE RATE INCREASE DUE TO INFLATION CONCERNS - Federal Reserve cut interest rates last week in order to address the risk of recession and a break down in credit markets. In doing so, the central bank revived the fear of inflation. Fed is walking a tight rope: if they cut rates too little - recession fears will return, if they cut rates too much - inflation could loom. Worries are spreading in the bond market that inflation may force the Fed to raise interest rates early next year (treasury-bond yields shot up last week). Inflationary pressures are evident in the pricing of gold, agricultural products, energy, and the dollar.
RECESSION PROOF PORTFOLIO - Expecting a bumpy road, investors are prepping portfolios by increasing exposure to the usual slump-resistant sectors: consumer staples, health care, and utilities. They are also increasing exposure to large cap companies with international exposure (global growth, decreasing dollar). Investors look for stable, steady-growth companies with an attractive free cash-flow yield (a measure of a company's cash-generating power), and good margins. Financial companies with mortgages on their books were typically recession proof because investors expected people to pay their mortgages even if they had to scrape together everything they had. Investors should be pickier this time around.
FRIDAY SEPTEMBER 21ST 2007
INFLATION RELIEF IN ETHANOL - Price of ethanol soared to record levels (+ $4 a gallon) with increasing focus on production of alternative fuels. Corn is a key ingredient in ethanol. An increase in the price of corn not only increased the price of corn-based food products, it increased the price of meat and dairy products as well (corn is a primary animal feedstock). In recent months, Ethanol has dropped to $1.70 a gallon. Corn prices followed suit, down 25% of its high, possibly lending to a future relief in inflation.
GOLDMAN SACHS VERSUS BEAR STERNS – During a brutal third quarter in which mortgage markets and costly borrowing decreased revenue for big banks, Goldman Sachs reported its second best quarter performance ever (Shorted home loans and securities tied to them, 900 mill gain from the sale of a holding.) Bear Sterns, on the other hand, lost two-thirds of its profit from the same period last year (88% decline in fixed income revenue.)
GOLD TO 27-YEAR HIGH – The combination of a weaker dollar and increasing inflation fears lead to a run up in fold futures. Gold is frequently bought when the dollar sags, as a currency hedge. Traders believe gold is still trading off the 50 basis-point rate cut, which lead to fears on inflation.
GOLDMAN SACHS VERSUS BEAR STERNS – During a brutal third quarter in which mortgage markets and costly borrowing decreased revenue for big banks, Goldman Sachs reported its second best quarter performance ever (Shorted home loans and securities tied to them, 900 mill gain from the sale of a holding.) Bear Sterns, on the other hand, lost two-thirds of its profit from the same period last year (88% decline in fixed income revenue.)
GOLD TO 27-YEAR HIGH – The combination of a weaker dollar and increasing inflation fears lead to a run up in fold futures. Gold is frequently bought when the dollar sags, as a currency hedge. Traders believe gold is still trading off the 50 basis-point rate cut, which lead to fears on inflation.
THURSDAY SEPTEMBER 20TH 2007
WORLD ECONOMY in FLUX AS AMERICA DOWNSHIFTS - After 16 years during which the U.S. mainly borrowed and bought while much of the rest of the world lent and sold the global economy appears to be undergoing a fundamental shift. American exporters are finding eager overseas markets for the products. U.S. consumers are beginning to temper their free-spending ways as the housing boom turns to bust. China, the Middle East, central Europe and Africa are absorbing more of the world's imports. The result: Instead of depending as heavily on the U.S. for demand, the world economy could become more evenly balanced.
Fed Rate Cut Could Burn Goldman Later - Goldman is still the golden child of Wall Street's investment banks. Deutsche Bank analyst recommends buying Goldman's stock, citing its big presence in fast-growing China, among other things. J.P. Morgan analyst likes Goldman's highly diversified business. Goldman has $61 billion of short-term debt on its balance sheet, plus an additional $7.1 billion in longer-term debt that will have to be rolled over into 2008. Some are concerned that the Fed Reserve's rate cuts this week backfired and cause inflation to go higher, leading to a rise in Treasury bond rates. If T-bond yields keep rising, Goldman would have to refinance that debt at higher interest rates, a direct hit to its bottom line. In other words, Goldman may shine for now, but higher inflation could cause it to lose its luster next year.
Emerging Markets and Oil Bubble Up - Emerging markets might be the next bubble. Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets posting the biggest gains. The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging market economies more than any others.
Fed Rate Cut Could Burn Goldman Later - Goldman is still the golden child of Wall Street's investment banks. Deutsche Bank analyst recommends buying Goldman's stock, citing its big presence in fast-growing China, among other things. J.P. Morgan analyst likes Goldman's highly diversified business. Goldman has $61 billion of short-term debt on its balance sheet, plus an additional $7.1 billion in longer-term debt that will have to be rolled over into 2008. Some are concerned that the Fed Reserve's rate cuts this week backfired and cause inflation to go higher, leading to a rise in Treasury bond rates. If T-bond yields keep rising, Goldman would have to refinance that debt at higher interest rates, a direct hit to its bottom line. In other words, Goldman may shine for now, but higher inflation could cause it to lose its luster next year.
Emerging Markets and Oil Bubble Up - Emerging markets might be the next bubble. Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets posting the biggest gains. The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging market economies more than any others.
WEDNESDAY SEPTEMBER 19TH 2007
Fed Cut Aims to Contain Damage - Stocks soar as Bernanke tackles credit crunch with half-point move. Federal Reserve Chairman moved aggressively to stop the spreading credit crunch from sinking the nation's economy with a surprising half-percentage-point cut in interest rates, casting aside for now worries about appearing to bail out investors.
Inflation Phobic Breathe Easier For the Moment - When the Fed cut rates by .5 point, it cautioned that "some inflation risks still remain." Some investors concluded that not only did the risks remain, they'd just gotten worse. Long-term bond investors consider inflation their biggest enemy because it eats at returns. In a sign that investors sought protection from inflation, prices for 10-year Treasury inflation-protected securities, which compensate investors for rising consumer prices, rose. Typically, when the Fed starts cutting, inflation isn't high up on investor's worry list. But yesterday's cut came at a time of good global growth with many emerging market economies running, if anything, too hot.
Why Firms Like Smucker May Feel Pinch of Debt Crunch - Many companies invested in mortgage-backed securities since they seemed like a safe way to diversify some of its investments. The issue for investors now is how these companies determine the "fair" value of their mortgage-backed securities in the current environment, and whether they are telling the whole story about how easily these assets can be liquidated - and for how much. When the credit market is liquid, determining the fair value of mortgage-backed securities can be easy, since there is an abundance of bid and offer quotes. But when things are tight, as they are for certain mortgage-related debt securities now, assessing fair value is difficult because there are far fewer buyers than sellers.
Inflation Phobic Breathe Easier For the Moment - When the Fed cut rates by .5 point, it cautioned that "some inflation risks still remain." Some investors concluded that not only did the risks remain, they'd just gotten worse. Long-term bond investors consider inflation their biggest enemy because it eats at returns. In a sign that investors sought protection from inflation, prices for 10-year Treasury inflation-protected securities, which compensate investors for rising consumer prices, rose. Typically, when the Fed starts cutting, inflation isn't high up on investor's worry list. But yesterday's cut came at a time of good global growth with many emerging market economies running, if anything, too hot.
Why Firms Like Smucker May Feel Pinch of Debt Crunch - Many companies invested in mortgage-backed securities since they seemed like a safe way to diversify some of its investments. The issue for investors now is how these companies determine the "fair" value of their mortgage-backed securities in the current environment, and whether they are telling the whole story about how easily these assets can be liquidated - and for how much. When the credit market is liquid, determining the fair value of mortgage-backed securities can be easy, since there is an abundance of bid and offer quotes. But when things are tight, as they are for certain mortgage-related debt securities now, assessing fair value is difficult because there are far fewer buyers than sellers.
TUESDAY SEPTEMBER 18TH 2007
SURPRISES LOOM REGARDLESS OF FED’S MOVE - Fed is expected to lower target rate for overnight loans between banks by .25 -.5 point. If it cuts by .25 point, some investors will think it is behind the curve. If it cuts by .5 point, some may worry that things are worse than they look.
YIELD CURVE IS BANKS’ SILVER LINING - The yield curve is the difference between short-term and long-term interest rates on Treasury. The yield curve matters for the bottom line of financial companies, especially banks. They can borrow or take in deposits at lower short-term rates and lend that money out long term at a higher rate and pocket the difference. For banks, the greater the spread between short and long rates, the better. When the curve is "flat", where long term and short term rates are similar - there is little profit. In anticipation of the Fed's rate cut, the yields on the Treasury two-year note and 10-year note have reached their widest gap since April 2005. Of course, snapping up bank stocks right now runs counter to widespread concerns about the near-term impact that mortgage-lending and other credit market woes will have on the bottom line of the banks. But some say that is what makes this a buying opportunity.
YIELD CURVE IS BANKS’ SILVER LINING - The yield curve is the difference between short-term and long-term interest rates on Treasury. The yield curve matters for the bottom line of financial companies, especially banks. They can borrow or take in deposits at lower short-term rates and lend that money out long term at a higher rate and pocket the difference. For banks, the greater the spread between short and long rates, the better. When the curve is "flat", where long term and short term rates are similar - there is little profit. In anticipation of the Fed's rate cut, the yields on the Treasury two-year note and 10-year note have reached their widest gap since April 2005. Of course, snapping up bank stocks right now runs counter to widespread concerns about the near-term impact that mortgage-lending and other credit market woes will have on the bottom line of the banks. But some say that is what makes this a buying opportunity.
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