Although the stock market has had an extraordinary rebound, what are the thematic tendencies we see. The last two months have been an exercise in return to risk and practically anything has been a profitable buy, but some areas are the tea leaves of the future.
We have seen the strongest move in our gold holdings. In the past twenty trading days, the S&P 500 index has risen approximately 4.5% while our gold investments have risen approximately 25%.
Our commodity stock fund and emerging market holding have advanced in the area of 15% over the same period. The other sector above 10% growth has been developed international markets.
At first blush one could reach the conclusion that money is flowing out of the US equity markets on a relative basis. The treasury bond market has sold off modestly in the past month and our negative US dollar investment has been moderately higher. Deeper analysis agrees with the first impression.
On balance I believe the guidance of the market leads one to be more wary of US Dollar denominated assets. The strength of the US dollar has been substantial over the past year but principally because of its position as the continuing global reserve currency and more importantly by the fact that as bad as the US economy has been, other economies, in Europe in particular have been worse.
As global recovery takes place over the next years, the green shoots of globalization will benefit other less debt burdened economies and the US dollar decline, higher interest rates and higher inflation are on the other side of the current deflationary environment.
John Barnyak
President
www.stonehouseasset.com
Wednesday, May 20, 2009
Now Back to Regularly Scheduled Programming
Just how high can a dead cat bounce? That is the question most investment managers are asking. The historical strong bounce since the March 6th market low has so many attributes that make caution the theme of the hour.
On a per-share basis, first-quarter earnings on the index came in a tad over $10. With forecasters looking for $40 or a bit higher for the full year, which means the S&P 500 is selling for over 20 times 2009 earnings. That is by no means a bargain or near historical market lows in recessions. The market which was at a reasonable value in early March is no longer so.
Despite the appearance of improving credit conditions, lending is still not flowing. Consumer credit is shrinking rapidly. Commercial Real Estate continues to collapse. Today Saks attempted to raise capital to pay down existing debt. Morgan Stanley floated a bond proposal of approximately $190 Million secured by owned real estate. The market's response was to require 15%. That is hardly a ringing endorsement for loosening credit.
Historically, new bull markets do not begin with the leadership of the sectors which led the bear market down. This rally has been largely the result of a bounce of the trash equity that collapsed, particularly banks and financial firms. It would be unusual that a new bull market would find leadership from the likes of Bank of America and Citigroup such as we have thus far seen.
The rebound of the market has had extraordinary and unusual aspects brought about by the enormous influx of government liquidity and curious market manipulation through futures markets. It has the look of a heavy thumb on the scale. While I expected liquidity would lead the market to regain its footing, I certainly underestimated its extent and effect.
As market bottoms go this one is still quite young, particularly considering the uniquely bad condition of the economy. The dotcom market collapse took more than one year to settle down. We appear to be in about the ninth month of a must more serious credit collapse. I think it reasonable to expect this will take at least as long to stabilize. The press and governmental positive spin has been remarkable and I doubt sustainable without pause.
John Barnyak
President
www.stonehouseasset.com
On a per-share basis, first-quarter earnings on the index came in a tad over $10. With forecasters looking for $40 or a bit higher for the full year, which means the S&P 500 is selling for over 20 times 2009 earnings. That is by no means a bargain or near historical market lows in recessions. The market which was at a reasonable value in early March is no longer so.
Despite the appearance of improving credit conditions, lending is still not flowing. Consumer credit is shrinking rapidly. Commercial Real Estate continues to collapse. Today Saks attempted to raise capital to pay down existing debt. Morgan Stanley floated a bond proposal of approximately $190 Million secured by owned real estate. The market's response was to require 15%. That is hardly a ringing endorsement for loosening credit.
Historically, new bull markets do not begin with the leadership of the sectors which led the bear market down. This rally has been largely the result of a bounce of the trash equity that collapsed, particularly banks and financial firms. It would be unusual that a new bull market would find leadership from the likes of Bank of America and Citigroup such as we have thus far seen.
The rebound of the market has had extraordinary and unusual aspects brought about by the enormous influx of government liquidity and curious market manipulation through futures markets. It has the look of a heavy thumb on the scale. While I expected liquidity would lead the market to regain its footing, I certainly underestimated its extent and effect.
As market bottoms go this one is still quite young, particularly considering the uniquely bad condition of the economy. The dotcom market collapse took more than one year to settle down. We appear to be in about the ninth month of a must more serious credit collapse. I think it reasonable to expect this will take at least as long to stabilize. The press and governmental positive spin has been remarkable and I doubt sustainable without pause.
John Barnyak
President
www.stonehouseasset.com
Passing the Torch
I spent the past few days blissfully seeing my elder son graduate from college. Walking through the town with him as he moved from person to person, hugging so many friends we'd never met, hearing adulation from teachers and staff I had to keep reminding myself that this WAS the same person who lay on the couch unmoving for days it seemed. The same young man who told me he had joined the army and was to report for basic training in three days after he kept it a secret for months from us. The same son who made it back from Iraq safe and sound. No, this is not the same son I moved into a freshman dormitory. This is a calmer, more mature, self reliant young man. I look forward to getting to know him.
The challenges ahead will be many and different, but he has already faced many and Sunday afternoon was the proof that he could handle them. To paraphrase Yogi Berra, he came to a fork in the road and he took it.
Congratulations son,
Dad
Thursday, May 14, 2009
Make an offer he can't refuse
"I'd hoped that we could come here and reason together. And as a reasonable man I'm willing to do whatever is necessary to find a peaceful solution to this problem." Vito Corleone
This from Bloomberg today:
"The big news from Goldman and Massachusetts Attorney General Martha Coakley this week was a $60 million settlement, under which the investment bank resolved her office’s investigation into its packaging of mortgage securities backed by subprime home loans. Per the usual custom in such accords, Goldman didn’t admit any wrongdoing.
The odd part is that Coakley’s office didn’t accuse Goldman of any wrongdoing, either. It filed no lawsuit. And it made no allegations that Goldman had violated any statutes or rules."
It seems to me there are two possibilities here. Either the state of Massachusetts is shaking down Goldman in a protection money racket. Or the state of Massachusetts is taking hush money. The third, Goldman Sachs is just charitable didn't pass the sniff test.
John Barnyak
President
www.stonehouseasset.com
More Moral Hazard
All of us have heard the tale of woe from borrowers who find themselves underwater on loans that they probably shouldn't have qualified for in the first place. The rallying cry of libertarians is that they shouldn't have taken on obligations they couldn't handle. While there is truth to that its not that clear cut. Who among us has not said at some point, "well lets give it a shot and see what happens"? Sure its kool-aid, but that's why they make it taste so good.
Today we see a rather extreme example of the misplaced incentive to throw money down a hole. The Yellowstone Club is/was a playground of the ultrawealthy which came unraveled in the financial meltdown and is now in bankruptcy. In a very unusual ruling by the judge a secured loan made by Credit Suisse has been downgraded to true junk. The $375 million first lien loan has been put behind ALL other creditors, included unsecured.
The judges rationale is the utter haphazard lending practice and disregard for risk assessment. CS asked for NO financials or verifications. The judges ruling:
"The only plausible explanation for Credit Suisse's actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may. The only equitable remedy to compensate for Credit Suisse's overreaching and predatory lending practices in this instance is to subordinate Credit Suisse's first lien position to that of CrossHarbor's super-priority debtor-in-possession financing and to subordinate such lien to that of the allowed claims of unsecured creditors."
As long as they could slice and dice and sell the loan through securitization and pocket a nice $7.5 million fee go for it! The judge's ruling speaks volumes of the decreasing tolerance for such behaviour regardless of the contractual aspects. Could common sense be about to devour legal precedent?
John Barnyak
President
www.stonehouseasset.com
Wednesday, May 13, 2009
Tales of the Unexpected
With apologies to Roahl Dahl and his collections of short stories titled Tales of the Unexpected, I doubt some of recent financial surprises would have risen to the level of "unexpected", although maybe spooky. Today Bloomberg reported consumers' retail spending unexpectedly dropped in April, "indicating that rising unemployment is prompting consumers to conserve cash."
Another half million people lose their jobs and then, bless their souls, they spend less money. I suspect some out of work real estate writers, (charming fixer upper; cozy eat in kitchen) have been picked up by the financial press. Who wants to buy a bank handyman special? Nothing a lick of paint and some air freshener can't make right.
John Barnyak
President
www.stonehouseasset.com
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