It seems that all of my posts to the blog have been about the incredible level of volatility we'ver been experiencing. Trust me, I long for the day I can submit a posting stating that the week was uneventful!
Yes, it was another volatile week. On the surface of things, it doesn't look too bad. Down 203 Monday, up 890 on Tuesday, down 74 on Wednesday, up 190 on Thursday, and up 141 on Friday. Tuesday was obviously a big day, the second highest point move on the Dow in history. But the rest of the week looks sort of...well...boring.
In reality, it was far more volatile than it looks. The swing from low to high on Monday was over 450 points, most of it in the last 15 minutes of trading! Wednesday was likewise a very volatile day, covering almost 475 points from low to high. This kind of intraday volatility has become the norm, as traders attempt to rapidly digest every bit of news that hits the wires, and try desperately to either profit from it, or curb their losses.
Aside from the market, there was a fair amount of news this week. The Fed cut interest rates another 50 basis points, dropping the Fed Funds rate to 1.0%. GDP came in negative, showing a decline of 0.3% in the third quarter. In addition, personal consumption (a measure of consumer spending) contracted 0.3%, and personal savings rose, indicating that people may be trying to build a cushion in case things get worse. The Personal Consumption Expenditures (PCE) index rose last month, indicating that consumers are spending more money for the same goods than they were the month prior. Versus last year, PCE is up 4.2%. All in all, the economic data was not very good, but that's what we've all been expecting.
Next week could be volatile again due to the election. There are a lot of issues in play during this election, and regardless of the outcome, the next administration has a mess on its hands.
The market had an overall positive week though, which is a welcome sign. I, however, would prefer a number of mildly positive days in a row rather than one or two big ones flanked by wild swings. Going forward, I continue to believe we may have seen the bottom, but I am not convinced that we won't see it again. I believe there will be continued volatility for some time, but that the volatility should be viewed as providing opportunity to purchase quality names at discount prices. I believe that individual stocks are likely to recover ahead of the broad market, so continued market doldrums may not be what is experienced by some investors.
If you have any questions, please feel free to contact me at nsnodgrass@evanstonadvisors.com
Friday, October 31, 2008
Friday, October 24, 2008
It could have been worse
When I flipped on my TV at 5 AM this morning, CNBC had a "Breaking News" icon flashing on the screen. Stock futures were trading limit down, a sign of the selloff turning to panic. As I stated in the blog this morning before the market opened, it was expected to be a wild ride.
Shortly before the market opened, S&P 500 Depositary Receipts (Spiders) were down about 9% in premarket trading. The guest analysts were calling for a huge blowout when trading opened at 8:30 our time (9:30 Eastern). We all sat watching our trade screens as the markets opened...slowly. Of the 40 or so stocks on my screen, only about 10 to 15 started trading at the open. Over the next 10 minutes or so, the rest started trading. The reason that they weren't trading was because of an imbalance of orders at the open - sellers wanted to sell, but buyers weren't saying what prices they'd be willing to but at. Then all of a sudden, it was all open, and trading. Down 200, 300, 400, 430, 440, 450. The slide was slowing down...where was the 1000 point crash they were calling for?
We spent most of the remainder of the day down about 350. Shortly after 1:00 Chicago time the market started climbing out of the hole, and by 2:00 we were down about 150 points. It held that range until the last 5 minutes or so, then slid back to end the day down 312 points. To some, the lack of a major selloff was a disappointment, as they are looking for a final flush out of sellers. This would (to them) signal a bottom.
But the story really isn't about today. It's the whole week. A number of people got excited on Monday as the market rallied 413 points. But the excitement was too early, as the market gave up about 745 points over the next two days. Thursday was somewhat uneventful as recent history goes, with a mere 172 point upswing. By the close of trading today, we had given up about 475 points for the week.
The losses have not been limited to stocks. Gold was trading below $700 today. Oil is below $70 per barrel (a blessing at the gas pump!). OPEC attempted to put a floor under oil prices today by cutting production by 1.5 million barrels per day, but the price of oil fell again anyway. Other commodities are also weak. Right now, nearly everyone is looking for a safe haven. The upside to this is that the US has been seen as the domicile of choice. This has resulted in the dollar strengthening versus the Euro.
We believe that we're going to continue seeing volatility for a while. We do not expect broad stock market stability in the foreseeable future. However, we do see opportunities in specific names, and we are cautiously entering into positions when appropriate. The opportunity is not as broad-based as some might think. This morning we ran a series of screens looking for stocks that met our criteria. Initial filtering produced a couple thousand names, but by the time we analyzed valuation, the list was cut to 20 names. Some of these may be purchased in the coming days, but it will depend largely upon what news is coming out, and how the market is reacting.
As always, if you have any questions, please e-mail me at nsnodgrass@evanstonadvisors.com
Shortly before the market opened, S&P 500 Depositary Receipts (Spiders) were down about 9% in premarket trading. The guest analysts were calling for a huge blowout when trading opened at 8:30 our time (9:30 Eastern). We all sat watching our trade screens as the markets opened...slowly. Of the 40 or so stocks on my screen, only about 10 to 15 started trading at the open. Over the next 10 minutes or so, the rest started trading. The reason that they weren't trading was because of an imbalance of orders at the open - sellers wanted to sell, but buyers weren't saying what prices they'd be willing to but at. Then all of a sudden, it was all open, and trading. Down 200, 300, 400, 430, 440, 450. The slide was slowing down...where was the 1000 point crash they were calling for?
We spent most of the remainder of the day down about 350. Shortly after 1:00 Chicago time the market started climbing out of the hole, and by 2:00 we were down about 150 points. It held that range until the last 5 minutes or so, then slid back to end the day down 312 points. To some, the lack of a major selloff was a disappointment, as they are looking for a final flush out of sellers. This would (to them) signal a bottom.
But the story really isn't about today. It's the whole week. A number of people got excited on Monday as the market rallied 413 points. But the excitement was too early, as the market gave up about 745 points over the next two days. Thursday was somewhat uneventful as recent history goes, with a mere 172 point upswing. By the close of trading today, we had given up about 475 points for the week.
The losses have not been limited to stocks. Gold was trading below $700 today. Oil is below $70 per barrel (a blessing at the gas pump!). OPEC attempted to put a floor under oil prices today by cutting production by 1.5 million barrels per day, but the price of oil fell again anyway. Other commodities are also weak. Right now, nearly everyone is looking for a safe haven. The upside to this is that the US has been seen as the domicile of choice. This has resulted in the dollar strengthening versus the Euro.
We believe that we're going to continue seeing volatility for a while. We do not expect broad stock market stability in the foreseeable future. However, we do see opportunities in specific names, and we are cautiously entering into positions when appropriate. The opportunity is not as broad-based as some might think. This morning we ran a series of screens looking for stocks that met our criteria. Initial filtering produced a couple thousand names, but by the time we analyzed valuation, the list was cut to 20 names. Some of these may be purchased in the coming days, but it will depend largely upon what news is coming out, and how the market is reacting.
As always, if you have any questions, please e-mail me at nsnodgrass@evanstonadvisors.com
We're in for a wild ride...
The market isn't open yet, but the futures market is trading limit down. What this means is that the futures exchanges are not allowing any further selling at prices lower than the limit until the stock exchanges open at 8:30 Chicago time.
Current indications are about a 9% selloff at the open. The "circuit breakers" that stop trading on the stock exchanges will stop all trading for an hour if the Dow declines by 1100 points (given current levels).
This is coming off of awful trading in the overseas markets overnight. Asian markets were off about 10%, and Europe was trading in a similar fashion.
There is some speculation that this is the result of hedge funds unwinding. However, this cannot be verified easily, as hedge funds are pretty opaque.
Many of the analysts speaking in the media are speculating this morning that this may be the final wash out. If it is, a big bounce is expected. It could come as early as this afternoon, or sometime next week. Whether they are right or not is something we will see in the very near future. Our belief is that the selloff is already overdone, and the current panic is setting up some very attractive prices. This does not, however, mean that it's time to jump in with every available dollar. The volatility is going to continue for quite some time, and there will be ongoing opportunities to purchase equities.
Current indications are about a 9% selloff at the open. The "circuit breakers" that stop trading on the stock exchanges will stop all trading for an hour if the Dow declines by 1100 points (given current levels).
This is coming off of awful trading in the overseas markets overnight. Asian markets were off about 10%, and Europe was trading in a similar fashion.
There is some speculation that this is the result of hedge funds unwinding. However, this cannot be verified easily, as hedge funds are pretty opaque.
Many of the analysts speaking in the media are speculating this morning that this may be the final wash out. If it is, a big bounce is expected. It could come as early as this afternoon, or sometime next week. Whether they are right or not is something we will see in the very near future. Our belief is that the selloff is already overdone, and the current panic is setting up some very attractive prices. This does not, however, mean that it's time to jump in with every available dollar. The volatility is going to continue for quite some time, and there will be ongoing opportunities to purchase equities.
Friday, October 17, 2008
300 is the new 30
Several times in the past week I've heard various pundits say "300 is the new 30". This is a reference to the Dow Jones Industrial Average and the level of volatility we have been experiencing. We have seen such dramatic movements in the market on a regular basis that a mere 300 point day up or down now seems commonplace.
Since we keep hearing this, we decided to take a look at just how much volatility there really has been. Since September 1st, there have been 34 trading days. On 28 of those days, we had intraday swings from low to high in excess of 300 points on the Dow. 17 of those were in excess of 400 points, and on 10 days we skipped right over 500 points and had intraday swings of over 600 points. We've had 8 over 700, 4 over 800, 2 over 900, and 1 topped 1,000!
What's more, the volatility has been more pronounced in the past two weeks. In the past two weeks (ten trading days) every single day had intraday swings in excess of 300 points. Seven of those days were in excess of 700 points. Monday of this week was the highest one day point move ever on the Dow, at over 900 points from open to close. Volatility has been unbelievable.
We believe that the economy is going to be rather difficult for the coming year or so. The stock market is usually a pretty good leading indicator of the economy, foreshadowing what's to come by 9 to 18 months. The current dramatic slides in the stock market suggest that the economy will continue to contract, and the contraction could be worse than many expect. However, there are signs that the market is bottoming out. "300 is the new 30" is one of those signs. When everyone begins to get used to bad being normal, it is often time for a turnaround. By contrast, everyone expecting good results from the stock market is usually a sign that a decline is imminent.
In an op-ed piece in today's New York Times, Warren Buffet stated that if things keep going the way they are, his personal portfolio (outside of Berkshire Hathaway) will soon be 100% equities. Until recently, it was 100% US Treasury Bonds. To quote the "Oracle of Omaha" in his NYT op-ed: "bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price." We agree. We are looking to purchase equities in the coming days and weeks. We are not yet ready to over-allocate to them, and our purchases will be made cautiously, but opportunities are becoming more apparent, and we will be taking advantage of them in the near future. Note, however, the emphasis on the word "cautiously". We do not believe that the market as a whole will be stable for quite some time, but prudent stock picking will result in a portfolio of good companies that should be positioned to ride out a rough economic period, and participate well in the eventual recovery.
Since we keep hearing this, we decided to take a look at just how much volatility there really has been. Since September 1st, there have been 34 trading days. On 28 of those days, we had intraday swings from low to high in excess of 300 points on the Dow. 17 of those were in excess of 400 points, and on 10 days we skipped right over 500 points and had intraday swings of over 600 points. We've had 8 over 700, 4 over 800, 2 over 900, and 1 topped 1,000!
What's more, the volatility has been more pronounced in the past two weeks. In the past two weeks (ten trading days) every single day had intraday swings in excess of 300 points. Seven of those days were in excess of 700 points. Monday of this week was the highest one day point move ever on the Dow, at over 900 points from open to close. Volatility has been unbelievable.
We believe that the economy is going to be rather difficult for the coming year or so. The stock market is usually a pretty good leading indicator of the economy, foreshadowing what's to come by 9 to 18 months. The current dramatic slides in the stock market suggest that the economy will continue to contract, and the contraction could be worse than many expect. However, there are signs that the market is bottoming out. "300 is the new 30" is one of those signs. When everyone begins to get used to bad being normal, it is often time for a turnaround. By contrast, everyone expecting good results from the stock market is usually a sign that a decline is imminent.
In an op-ed piece in today's New York Times, Warren Buffet stated that if things keep going the way they are, his personal portfolio (outside of Berkshire Hathaway) will soon be 100% equities. Until recently, it was 100% US Treasury Bonds. To quote the "Oracle of Omaha" in his NYT op-ed: "bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price." We agree. We are looking to purchase equities in the coming days and weeks. We are not yet ready to over-allocate to them, and our purchases will be made cautiously, but opportunities are becoming more apparent, and we will be taking advantage of them in the near future. Note, however, the emphasis on the word "cautiously". We do not believe that the market as a whole will be stable for quite some time, but prudent stock picking will result in a portfolio of good companies that should be positioned to ride out a rough economic period, and participate well in the eventual recovery.
Friday, October 10, 2008
It's over...
Well, for now at least. Tuesday may be a different story.
This was another long week, with every single day closing lower on the Dow Jones Industrial Average. Today looked like it was going to be awful. The Asian markets came unglued last night, and Europe followed suit early this morning. Several markets halted trading because the declines were so deep and rapid.
Our market joined the party this morning, promptly selling off about 700 points. Then, like other days this week, it recovered in rapid fashion, even going back into the black. But once again, the sellers took the lead, and the market traded down 300 - 500 points for most of the day. We were working to prepare a number of trades, and while we were placing them, the market started to trend upward. Just prior to close, it was trading up close to 200 points. Another day of massive swings, this time roughly 900 points from low to high for the day. We did end the day down, but only modestly (at least compared to recent activity) at 128 points lost. Eight down days in a row for the Dow.
But things are starting to look up a bit. IBM had positive news yesterday and GE had okay news this morning. But the earnings news from GE is not what has me interested. Jeff Immelt, the CEO, commented that the company has not had trouble accessing the commercial paper markets. This is a crucial piece of positive information. The commercial paper markets have been virtually frozen, which is part of what has kept investors nervous, as commercial paper provides much of the short term financing utilized by corporations.
Many of you will notice a number of transactions occuring in your portfolio today. We have been going through accounts in an effort to do a bit of "tweaking", adding a few shares here, removing a position there. The purpose is to reduce risk exposure and better position the portfolio for an eventual recovery.
Enjoy the extended weekend....on Tuesday the markets will be open again, and there is likely to be a fair amount of news hitting the wires in the next few days. We expect the volatility to continue, but we believe that we are much closer to seeing the end of the slide, if we have not already seen it.
If you have any questions, please feel free to email me at nsnodgrass@evanstonadvisors.com
This was another long week, with every single day closing lower on the Dow Jones Industrial Average. Today looked like it was going to be awful. The Asian markets came unglued last night, and Europe followed suit early this morning. Several markets halted trading because the declines were so deep and rapid.
Our market joined the party this morning, promptly selling off about 700 points. Then, like other days this week, it recovered in rapid fashion, even going back into the black. But once again, the sellers took the lead, and the market traded down 300 - 500 points for most of the day. We were working to prepare a number of trades, and while we were placing them, the market started to trend upward. Just prior to close, it was trading up close to 200 points. Another day of massive swings, this time roughly 900 points from low to high for the day. We did end the day down, but only modestly (at least compared to recent activity) at 128 points lost. Eight down days in a row for the Dow.
But things are starting to look up a bit. IBM had positive news yesterday and GE had okay news this morning. But the earnings news from GE is not what has me interested. Jeff Immelt, the CEO, commented that the company has not had trouble accessing the commercial paper markets. This is a crucial piece of positive information. The commercial paper markets have been virtually frozen, which is part of what has kept investors nervous, as commercial paper provides much of the short term financing utilized by corporations.
Many of you will notice a number of transactions occuring in your portfolio today. We have been going through accounts in an effort to do a bit of "tweaking", adding a few shares here, removing a position there. The purpose is to reduce risk exposure and better position the portfolio for an eventual recovery.
Enjoy the extended weekend....on Tuesday the markets will be open again, and there is likely to be a fair amount of news hitting the wires in the next few days. We expect the volatility to continue, but we believe that we are much closer to seeing the end of the slide, if we have not already seen it.
If you have any questions, please feel free to email me at nsnodgrass@evanstonadvisors.com
Thursday, October 9, 2008
How far can it drop?
Today was supposed to be a good day. IBM preannounced earnings after the close of trading yesterday, and the market reacted quite positively in afterhours trading. The broader market reacted similarly, starting the day with a quick jump of almost 200 points. IBM opened almost $5 higher than yesterday's close. Tech stocks surged, and the NASDAQ followed suit. But it didn't last long. Within an hour the market went negative. Most of the day we hovered on the downside about 100 points. However, General Motors was listed on CreditWatch Negative by Standard & Poors this afternoon, which sparked intensified selling, and we ended the day off 679 points.
What's the problem? Why is this happening? The problem isn't really related to the stocks in question. These are good companies! The issue comes down to confidence. Right now, there is no confidence that anyone can sort this all out in the near future. Because of that, investors are hoarding cash. To raise cash, they are selling assets.
Solid companies now are now sporting dividend yields of 3% to 4% per year, whereas those same companies were yielding 2.5% a month ago. This is an indication of how much the market is seeking safety. The fact that a solid company is paying a solid dividend just does not matter at this point. Price/earnings ratios are falling toward or into single digit territory - this is a place we have not been for years in terms of stock valuation.
What will bring us out of this? That's the question on everyone's mind. We need something that will restore confidence. We need a sign that the world has not come to an end. As earnings come out over the next few weeks, we may see investors relax. That is, of course, assuming that some bellwether companies make statements assuring investors that their futures aren't bleak. But more than that, we need something to occur to restart the credit pump. As it stands, there is virtually no credit to be had. Without credit, the economy is at a virtual standstill, but at present, banks are not willing to lend because of the issues we've discussed in earlier blog entries.
Can anything the government is doing help? Yes, but it's an issue of not whether the patient is going to get better, but rather how long he will be sick. I saw a quote this morning along the lines of "we all started rejoicing when the ambulance showed up, until we realized we had a reason to call an ambulance in the first place." Without the intervention that the government has taken, we would be in an even worse place at this point.
If you have any questions, please e-mail me at nsnodgrass@evanstonadvisors.com.
What's the problem? Why is this happening? The problem isn't really related to the stocks in question. These are good companies! The issue comes down to confidence. Right now, there is no confidence that anyone can sort this all out in the near future. Because of that, investors are hoarding cash. To raise cash, they are selling assets.
Solid companies now are now sporting dividend yields of 3% to 4% per year, whereas those same companies were yielding 2.5% a month ago. This is an indication of how much the market is seeking safety. The fact that a solid company is paying a solid dividend just does not matter at this point. Price/earnings ratios are falling toward or into single digit territory - this is a place we have not been for years in terms of stock valuation.
What will bring us out of this? That's the question on everyone's mind. We need something that will restore confidence. We need a sign that the world has not come to an end. As earnings come out over the next few weeks, we may see investors relax. That is, of course, assuming that some bellwether companies make statements assuring investors that their futures aren't bleak. But more than that, we need something to occur to restart the credit pump. As it stands, there is virtually no credit to be had. Without credit, the economy is at a virtual standstill, but at present, banks are not willing to lend because of the issues we've discussed in earlier blog entries.
Can anything the government is doing help? Yes, but it's an issue of not whether the patient is going to get better, but rather how long he will be sick. I saw a quote this morning along the lines of "we all started rejoicing when the ambulance showed up, until we realized we had a reason to call an ambulance in the first place." Without the intervention that the government has taken, we would be in an even worse place at this point.
If you have any questions, please e-mail me at nsnodgrass@evanstonadvisors.com.
Wednesday, October 8, 2008
"A long streak of speculative lending got out of hand as banks and even staid industrial companies made a stream of risky loans. Consumer spending on cars and clothes was slipping, but no one seemed to pay attention. The stock market grew shaky in September, and then in October, the bottom fell out." Karen Blumenthal, The Wall Street Journal, October 8, 2008
Sound familiar? She's not referring to our current crisis, but rather to 1929. The start of "The Great Depression" (cue spooky music here). As we all know, the market fell apart, brokers jumped out of windows, banks collapsed, unemployment soared. To this day, those who lived through it have a very different perspective on economics and the use of credit than those of later generations.
Almost anyone you meet has an opinion on the current crisis, and nearly all are doling out large doses of pessimism. People are experiencing dramatic reductions in the values of their homes, their 401k plans are down 30% or more, unemployment is increasing, banks are failing, huge brokerage firms that were staples of the Wall Street landscape no longer exist. Who wouldn't be pessimistic?
It feels like it continues to get worse and worse. The market was off another ___on Monday, followed by a 508 point slide yesterday. The first week of October has seen the same level of losses as the entire month of September, which was pretty ugly in its own right.
At 5:00 this morning, the futures market was pointing to a drop of about 200 points at the open of the market. About an hour or so later, the Fed announced a 50 basis point (1/2 of 1%) interest rate cut. More importantly, the cut had been coordinated with cuts in lending rates by Central banks around the world. The futures reversed course dramatically to an up indication of well over 100 points. But that fizzled too. By the time the market opened, it was down about 200 again. And then the ride began.
Within the first 30 minutes, we swung from 200+ down to about 150 up. Then the sellers took hold again, driving the Dow back down. We gave up the 150, plus another 200+. The rest of the day continued in similar fashion. As I went to lunch, we were on an up trend, and went positive shortly after noon (Central time). For much of the afternoon it appeared we would have a good day. But as I've said time and again, it doesn't count till the market's closed. By the time it finally did, we were down 191 points on the Dow.
So now what? We got the rescue plan going, we've had banks sold to other banks, brokers sold to banks, the government increasing deposit insurance and guaranteeing money market funds, the Treasury buying commercial paper, global interest rate cuts, foreign countries working to stabilize their financial systems, and Presidential candidates weighing in on the crisis. But it doesn't seem to be enough to satisfy the market. The news of each of these moves to improve stability has resulted in another decline in the market. The pessimism is at levels that we haven't seen in decades.
The saying "it's always darkest before the dawn" may be appropriate here. Historically, the best time to begin buying in the market is when common knowledge is "GET OUT OF THE MARKET!!!" It's sort of like a bubble, only in reverse. In a bubble, everyone wants to buy an asset, and they're convinced that the asset can only go up (think dot coms in 2000, real estate for the last 6 years, or Dutch tulips in the 1600s). Our situation now is reversed. Everyone is convinced that the market can only go down from here. This is an indicator that we may be near the bottom. The VIX, a volatility indicator, reached an all time high today. Another indicator that we may be near the bottom.
We have continued to pare holdings that we believe may be sensitive as more information comes to light. At the same time, we are actively looking to purchase stocks and have made a few purchases of companies that look particularly attractive. We have a short list of stocks that we intend to purchase, but we will be selective about the timing of the purchases as new information comes into the market.
I started this entry with a quote that referred to the Great Depression. I'll end it with a little historical perspective:
If one invested $100,000 in July of 1932 (the bottom of the market during the Depression), within 1 month her account had grown to $126,000. By year end it was up to $140,000. At the end of 5 years it had grown to $435,000. In 1950 it broke a half million dollars. She was a millionaire by June 1955. Today, that investment would be worth $25.3 million.
In contrast, our investor's pessimistic friend chose to sit on the sidelines and wait to see if it had really settled out. He missed a lot of the upside. If he waited one year to buy in, his account would have only been worth $159,000 at the end of 5 years. In 1950, he would have only had $243,000, less than half of the above scenario. The story stays the same from there on out: in June 1955 he has half the money his friend does, and today, his account has grown to $12.3 million, less than half of what he would have had if he had invested a year earlier.
The point of this is that we need to keep an appropriate strategy in place, and work within the framework of that strategy as we move forward through these trying times.
If you have any questions, please feel free to email me at nsnodgrass@evanstonadvisors.com
Sound familiar? She's not referring to our current crisis, but rather to 1929. The start of "The Great Depression" (cue spooky music here). As we all know, the market fell apart, brokers jumped out of windows, banks collapsed, unemployment soared. To this day, those who lived through it have a very different perspective on economics and the use of credit than those of later generations.
Almost anyone you meet has an opinion on the current crisis, and nearly all are doling out large doses of pessimism. People are experiencing dramatic reductions in the values of their homes, their 401k plans are down 30% or more, unemployment is increasing, banks are failing, huge brokerage firms that were staples of the Wall Street landscape no longer exist. Who wouldn't be pessimistic?
It feels like it continues to get worse and worse. The market was off another ___on Monday, followed by a 508 point slide yesterday. The first week of October has seen the same level of losses as the entire month of September, which was pretty ugly in its own right.
At 5:00 this morning, the futures market was pointing to a drop of about 200 points at the open of the market. About an hour or so later, the Fed announced a 50 basis point (1/2 of 1%) interest rate cut. More importantly, the cut had been coordinated with cuts in lending rates by Central banks around the world. The futures reversed course dramatically to an up indication of well over 100 points. But that fizzled too. By the time the market opened, it was down about 200 again. And then the ride began.
Within the first 30 minutes, we swung from 200+ down to about 150 up. Then the sellers took hold again, driving the Dow back down. We gave up the 150, plus another 200+. The rest of the day continued in similar fashion. As I went to lunch, we were on an up trend, and went positive shortly after noon (Central time). For much of the afternoon it appeared we would have a good day. But as I've said time and again, it doesn't count till the market's closed. By the time it finally did, we were down 191 points on the Dow.
So now what? We got the rescue plan going, we've had banks sold to other banks, brokers sold to banks, the government increasing deposit insurance and guaranteeing money market funds, the Treasury buying commercial paper, global interest rate cuts, foreign countries working to stabilize their financial systems, and Presidential candidates weighing in on the crisis. But it doesn't seem to be enough to satisfy the market. The news of each of these moves to improve stability has resulted in another decline in the market. The pessimism is at levels that we haven't seen in decades.
The saying "it's always darkest before the dawn" may be appropriate here. Historically, the best time to begin buying in the market is when common knowledge is "GET OUT OF THE MARKET!!!" It's sort of like a bubble, only in reverse. In a bubble, everyone wants to buy an asset, and they're convinced that the asset can only go up (think dot coms in 2000, real estate for the last 6 years, or Dutch tulips in the 1600s). Our situation now is reversed. Everyone is convinced that the market can only go down from here. This is an indicator that we may be near the bottom. The VIX, a volatility indicator, reached an all time high today. Another indicator that we may be near the bottom.
We have continued to pare holdings that we believe may be sensitive as more information comes to light. At the same time, we are actively looking to purchase stocks and have made a few purchases of companies that look particularly attractive. We have a short list of stocks that we intend to purchase, but we will be selective about the timing of the purchases as new information comes into the market.
I started this entry with a quote that referred to the Great Depression. I'll end it with a little historical perspective:
If one invested $100,000 in July of 1932 (the bottom of the market during the Depression), within 1 month her account had grown to $126,000. By year end it was up to $140,000. At the end of 5 years it had grown to $435,000. In 1950 it broke a half million dollars. She was a millionaire by June 1955. Today, that investment would be worth $25.3 million.
In contrast, our investor's pessimistic friend chose to sit on the sidelines and wait to see if it had really settled out. He missed a lot of the upside. If he waited one year to buy in, his account would have only been worth $159,000 at the end of 5 years. In 1950, he would have only had $243,000, less than half of the above scenario. The story stays the same from there on out: in June 1955 he has half the money his friend does, and today, his account has grown to $12.3 million, less than half of what he would have had if he had invested a year earlier.
The point of this is that we need to keep an appropriate strategy in place, and work within the framework of that strategy as we move forward through these trying times.
If you have any questions, please feel free to email me at nsnodgrass@evanstonadvisors.com
I've been called lots of things...
but never "SPAM"!!
Some of you who have tried to check in recently have seen that the service that we use for our update has identified us as spam. According to the "terms of service", they have programs that look for "nonsensical text". Well, apparently they think the current issues in the market and economy are nonsense. We don't, so we'll keep posting.
We have submitted to their requests for review, and expect the blog to be back up within a day or so.
Some of you who have tried to check in recently have seen that the service that we use for our update has identified us as spam. According to the "terms of service", they have programs that look for "nonsensical text". Well, apparently they think the current issues in the market and economy are nonsense. We don't, so we'll keep posting.
We have submitted to their requests for review, and expect the blog to be back up within a day or so.
Friday, October 3, 2008
The Week in Review
As if last week wasn't wild enough?
As we reported on Monday, the House vote on the financial services stabilization plan failed. The failure of the vote caused a 778 point plunge in the Dow Jones Industrial Average. Reports of the day's activity in Washington showed the Democrats being combative, the Republicans being petty, and very few really trying to get anything done. Partisan politics and election year pressures seemed to rule yet again.
The House was not in session on Tuesday due to a religious holiday, but the market rebounded, recovering over half of Monday's losses. The negative sentiment returned Wednesday ahead of a Senate vote on the bill, or some version of it. Wednesday evening, the Senate came in and added modifications to the House bill (including over $100 billion in additional spending to "sweeten" the deal), and it overwhelmingly passed in the Senate. 74 Senators, including both Presidential candidates, voted for the bill. However, this bill isn't quite the same one that the House turned down. The original House bill was reportedly only three pages long. The "sweetened" bill came in at about 450 pages.
Earlier today, the House voted on and passed the Senate bill, and President Bush has stated that he will sign it. The market had been up over 200 points prior to the vote passing, but upon news of the vote, the market sold off, quickly losing almost all 200 points of the gain. During the remainder of the day, the market struggled to remain positive, but closed the day down 159 points. We closed the week off over 800 points.
Wachovia had a deal worked out to sell its banking operations to Citigroup, but that was undone Thursday night when Wells Fargo stepped in and purchased Wachovia. Also on Thursday it was announced that Warren Buffet had purchased $3 billion worth of General Electric preferred stock. The terms were similar to those of last week's purchase of Goldman Sachs preferred stock.
Economically, things are looking pretty shaky. Today's jobs report showed a decline in all sectors except government. Unemployment hit a 7 year high, while factory orders declined 4%. Borrowing at the Fed Discount window has surged - this is usually the last place banks want to go for borrowing, as it has historically been seen as a desperate measure. The issues are not all domestic either, as foreign governments have had to step in and enact their own rescue plans. The European Central Bank and the Bank of England have both moved to make it easier for banks to access liquidity, and South Korea pumped $5 billion into its banking system. We are experiencing a global slowdown.
The plan as passed today should help, at least in terms of aiding in stabilization. Whether or not it will end the crisis remains to be seen. But the crisis, as it stands right now, is largely driven by confidence. If we can regain some confidence that the assets we have deposited with banks, money market funds, and other financial institutions will not simply be wiped out, we will be on the way out of this mess. Right now, a lack of confidence in the system is resulting in banks not even lending to other banks, freezing up nearly all sources of credit. The same lack of confidence has people pulling their money from banks, from money market funds, from virtually all types of financial instruments. I believe the stabilization plan will go a long way to restoring that confidence, at least between the financial services companies. Whether it restores Main Street confidence remains to be seen.
As we reported on Monday, the House vote on the financial services stabilization plan failed. The failure of the vote caused a 778 point plunge in the Dow Jones Industrial Average. Reports of the day's activity in Washington showed the Democrats being combative, the Republicans being petty, and very few really trying to get anything done. Partisan politics and election year pressures seemed to rule yet again.
The House was not in session on Tuesday due to a religious holiday, but the market rebounded, recovering over half of Monday's losses. The negative sentiment returned Wednesday ahead of a Senate vote on the bill, or some version of it. Wednesday evening, the Senate came in and added modifications to the House bill (including over $100 billion in additional spending to "sweeten" the deal), and it overwhelmingly passed in the Senate. 74 Senators, including both Presidential candidates, voted for the bill. However, this bill isn't quite the same one that the House turned down. The original House bill was reportedly only three pages long. The "sweetened" bill came in at about 450 pages.
Earlier today, the House voted on and passed the Senate bill, and President Bush has stated that he will sign it. The market had been up over 200 points prior to the vote passing, but upon news of the vote, the market sold off, quickly losing almost all 200 points of the gain. During the remainder of the day, the market struggled to remain positive, but closed the day down 159 points. We closed the week off over 800 points.
Wachovia had a deal worked out to sell its banking operations to Citigroup, but that was undone Thursday night when Wells Fargo stepped in and purchased Wachovia. Also on Thursday it was announced that Warren Buffet had purchased $3 billion worth of General Electric preferred stock. The terms were similar to those of last week's purchase of Goldman Sachs preferred stock.
Economically, things are looking pretty shaky. Today's jobs report showed a decline in all sectors except government. Unemployment hit a 7 year high, while factory orders declined 4%. Borrowing at the Fed Discount window has surged - this is usually the last place banks want to go for borrowing, as it has historically been seen as a desperate measure. The issues are not all domestic either, as foreign governments have had to step in and enact their own rescue plans. The European Central Bank and the Bank of England have both moved to make it easier for banks to access liquidity, and South Korea pumped $5 billion into its banking system. We are experiencing a global slowdown.
The plan as passed today should help, at least in terms of aiding in stabilization. Whether or not it will end the crisis remains to be seen. But the crisis, as it stands right now, is largely driven by confidence. If we can regain some confidence that the assets we have deposited with banks, money market funds, and other financial institutions will not simply be wiped out, we will be on the way out of this mess. Right now, a lack of confidence in the system is resulting in banks not even lending to other banks, freezing up nearly all sources of credit. The same lack of confidence has people pulling their money from banks, from money market funds, from virtually all types of financial instruments. I believe the stabilization plan will go a long way to restoring that confidence, at least between the financial services companies. Whether it restores Main Street confidence remains to be seen.
Mark to Market
In response to last Friday's blog entry, one of our friends asked about mark to market accounting and what role it plays in the current financial situation.
First, let's explain what mark to market is, because it's been bandied about in the media, but I wonder if many of those talking about it know what it means. To make financial statements useful in analyzing a company, we need to know (among other things) what the company owns. It's relatively easy to figure out when the company's assets are buildings, equipment, inventory, cash, etc. But when it comes to other types of assets, it's not so easy to decipher. So a few years back, the Securities and Exchange Commission adopted new accounting rules requiring that companies show the value of those types of assets utilizing a methodology called "mark to market".
Marking to market requires assigning a value to an asset based on a reasonable estimate of what that asset would bring in a transaction between a willing buyer and a willing seller, in essence, the market value of the asset. For relatively liquid stocks and bonds, that's pretty simple, as you can just look to the price of the most recent trade. But how does one value a mortgage, or a derivative asset based on a pool of mortgages?
Typically, you could look at what similar mortgages are selling for in transactions between mortgage originators and secondary purchasers. And therein begins part of our current problem. As homeowners with adjustable rate subprime mortgages began to see their rates increase, their ability to pay their loans declined. Therefore the value of the loans declined, as the likelihood of receiving repayment fell. So when the bank has to mark the value of the loan to market, they have to reduce the value of the asset on the books.
So what's the big deal? The bank just writes down the value of the loan, right? Well, that's just the beginning of a snowball. Banks are required to maintain adequate levels of assets, based on the value of deposits made by their customers. One of their assets is that loan that just got written down. So now they have to increase capital reserves by selling assets. But no one wants to buy the loan, because it's been deemed to be riskier. So how do you entice a buyer? You lower the price of the asset you are trying to sell. But now your assets become worth even less. Moreover, the market sees that First National Federal is selling its assets at a reduced price....there must be a reason. We now have to assume that all similar assets should also be sold at reduced price. Our snowball is growing.
But wait, it's not over. Many mortgages were originated by banks, and then sold off in neat little packaged products. These products were then sold to investment houses, other banks, hedge funds, foundations, etc. Some of these institutions also have capital requirements, so as the value of the underlying assets is written down, the value of the packaged asset is written down when we have to mark to market. The snowball is rolling faster...
And the hill gets steeper. Some of these packaged products were rolled up into other packages, and the same issues ensue (only magnified). Other investors (typically large banks, insurance companies, and investment bankers like Merrill Lynch, Lehman Brothers, Goldman Sachs, etc.) entered into various types of complex transactions in an attempt to reduce risk on the one hand, and create profit on the other. More assets to mark to market.
It all works fine, until markets begin to freeze up. When markets freeze, we have to mark down the value of the assets. Marking them down translates to a loss on the income statement for an asset you haven't sold. Now your investors begin to sell your stock. Your stock is collateral in a number of the aforementioned transactions. The value of the collateral falls, requiring (per terms of the contracts) that you post more collateral. So you have to sell assets. But there are no buyers, so the value of assets gets written down further. Our snowball is now racing downhill, and there's not much that can stop it.
Mark to market accounting is valid, as it provides more information about potential risks to a potential purchaser (or a current holder) of an asset. However, the way in which it has been implemented is, in my opinion, somewhat faulty. Many of the mortgages that have been written down will never default. At some point in the future, some, if not many, of these same loans will be marked back up in value. We should, at some point, see gains showing up (under current accounting rules) from these same assets that have caused the losses, simply because the mortgages for homeowners that did not default will be written back up. Mark to market can go both ways. It provides additional information regarding the assets owned by a company, but taking any information at face value without understanding it in context can prove to be less than helpful in understanding the true risk profile.
If you have questions regarding this post, please e-mail me at nsnodgrass@evanstonadvisors.com
First, let's explain what mark to market is, because it's been bandied about in the media, but I wonder if many of those talking about it know what it means. To make financial statements useful in analyzing a company, we need to know (among other things) what the company owns. It's relatively easy to figure out when the company's assets are buildings, equipment, inventory, cash, etc. But when it comes to other types of assets, it's not so easy to decipher. So a few years back, the Securities and Exchange Commission adopted new accounting rules requiring that companies show the value of those types of assets utilizing a methodology called "mark to market".
Marking to market requires assigning a value to an asset based on a reasonable estimate of what that asset would bring in a transaction between a willing buyer and a willing seller, in essence, the market value of the asset. For relatively liquid stocks and bonds, that's pretty simple, as you can just look to the price of the most recent trade. But how does one value a mortgage, or a derivative asset based on a pool of mortgages?
Typically, you could look at what similar mortgages are selling for in transactions between mortgage originators and secondary purchasers. And therein begins part of our current problem. As homeowners with adjustable rate subprime mortgages began to see their rates increase, their ability to pay their loans declined. Therefore the value of the loans declined, as the likelihood of receiving repayment fell. So when the bank has to mark the value of the loan to market, they have to reduce the value of the asset on the books.
So what's the big deal? The bank just writes down the value of the loan, right? Well, that's just the beginning of a snowball. Banks are required to maintain adequate levels of assets, based on the value of deposits made by their customers. One of their assets is that loan that just got written down. So now they have to increase capital reserves by selling assets. But no one wants to buy the loan, because it's been deemed to be riskier. So how do you entice a buyer? You lower the price of the asset you are trying to sell. But now your assets become worth even less. Moreover, the market sees that First National Federal is selling its assets at a reduced price....there must be a reason. We now have to assume that all similar assets should also be sold at reduced price. Our snowball is growing.
But wait, it's not over. Many mortgages were originated by banks, and then sold off in neat little packaged products. These products were then sold to investment houses, other banks, hedge funds, foundations, etc. Some of these institutions also have capital requirements, so as the value of the underlying assets is written down, the value of the packaged asset is written down when we have to mark to market. The snowball is rolling faster...
And the hill gets steeper. Some of these packaged products were rolled up into other packages, and the same issues ensue (only magnified). Other investors (typically large banks, insurance companies, and investment bankers like Merrill Lynch, Lehman Brothers, Goldman Sachs, etc.) entered into various types of complex transactions in an attempt to reduce risk on the one hand, and create profit on the other. More assets to mark to market.
It all works fine, until markets begin to freeze up. When markets freeze, we have to mark down the value of the assets. Marking them down translates to a loss on the income statement for an asset you haven't sold. Now your investors begin to sell your stock. Your stock is collateral in a number of the aforementioned transactions. The value of the collateral falls, requiring (per terms of the contracts) that you post more collateral. So you have to sell assets. But there are no buyers, so the value of assets gets written down further. Our snowball is now racing downhill, and there's not much that can stop it.
Mark to market accounting is valid, as it provides more information about potential risks to a potential purchaser (or a current holder) of an asset. However, the way in which it has been implemented is, in my opinion, somewhat faulty. Many of the mortgages that have been written down will never default. At some point in the future, some, if not many, of these same loans will be marked back up in value. We should, at some point, see gains showing up (under current accounting rules) from these same assets that have caused the losses, simply because the mortgages for homeowners that did not default will be written back up. Mark to market can go both ways. It provides additional information regarding the assets owned by a company, but taking any information at face value without understanding it in context can prove to be less than helpful in understanding the true risk profile.
If you have questions regarding this post, please e-mail me at nsnodgrass@evanstonadvisors.com
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