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GREED born of FEAR |
rffrydr
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 Posted: Sat Aug 04, 2007 9:59 pm Post subject: GREED born of FEAR |
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I believe this relentless bull market for the past half-decade has its paradoxical origns in fear.
Yes, there's the great streamlining, outsourcing, firings; the cash hoards, globalization and overly-developed developing countries. There's technology and, not least of all, there's money. But at the soul of this market, and its driving force, lurks a strange and fascinating perversion of the late-great millenial bubble we couldn't shake--its' "crash."
The 90's bull showed us what can be accomplished; if only in terms of moving price up a curve. Stocks crashed up. But the legacy is bitter and in gathering up the shards of the Enron age a pervasive sense of history took hold. Something of historic proportions had occurred, the information age blossomed from its rich bed of ground-up investors--a fertile soil made of millions plowed under. Never again.
What to make of this new, this historic future? Success was measured in recovery. But lean and mean showed that while the tree may not grow to the sky there was plenty fruit to bear down low. So focus turned to consolidation, dividends, to cash flow....to earnings, --to "yield." The "market" was forgotten even as it was being rebuilt. Nay, even rejected.
So here we have the first of many epigrams describing that old market adage, "To Climb a Wall of Worry"--twisted beyond recognition.
Banks:
| Quote: | HEADLINE: Now banks must relearn their craft JOHN GAPPER
BYLINE: By JOHN GAPPER
BODY:
What is a bank? Fifteen years ago, there was an easy answer to that question. It was a financial institution that lent people money.
That was also the answer to the question on Friday. At the end of last week, commercial banks such as JPMorgan Chase and Citigroup suddenly found themselves on the hook for billions of dollars as the market for loans and bonds to back private equity acquisitions dried up and investors pulled back.
It is a shock to banks to have to hold such big loans on their balance sheets and bear the risk of customers defaulting. Worries about a resulting credit crunch led to a sharp fall in markets last week. But it is worth remembering that, not long ago, banks did this all the time. In the intervening years, they stopped taking such risks and moved into another business. Instead of lending money, they took fees for arranging loans
and getting other investors to bear the risk.
This was a superior way to earn a living. Instead of depending on loan interest and having to write off capital when clients defaulted, they became intermediaries. They took fees, did not risk capital and were clear of the scene when things went wrong. Their return on equity went up, their earnings grew less volatile and investors loved them.
Banks, in other words, turned into investment banks. The latter had to take a bit of risk when underwriting initial public offerings or buying and selling blocks of shares, but they passed it on to investors as quickly as possible. Similarly, banks came to treat loans as just another kind of tradable security to be packaged, sold and forgotten about.
What took them so long?
Well, this is going to sound very strange to younger readers but a long time ago there was no such thing as a credit derivative. Banks shuffled loans around among themselves in syndicates so none was too exposed to the collapse of one company. But they had no way of slicing up loans into tranches, securitising them and selling them to European insurers.
Imagine that!
Once banks could do it, they did. They securitised and sold loans in every market, from residential mortgages to leveraged finance. The hurdle for doing business ceased to be whether a bank trusted a borrower to be a sound long-term credit risk - the craft in which generations of bankers had been trained. Instead, the question was whether it could collect a fee and sell a credit-rated security on to someone else.
Chuck Prince, Citigroup's chief executive, summed up the new world of banking neatly a couple of weeks ago when asked whether private equity buy-outs were about to hit trouble. "As long as the music is playing, you've got to get up and dance," he said. "We're still dancing." A short while after he spoke, the music duly stopped.
Which brings us to Friday.
From the perspective of financial stability, credit derivatives brought a lot to the party. Because credit risk is spread across investment and financial institutions around the world, even multi-billion-dollar failures of companies or funds can be absorbed without any single bank being fatally wounded, as some were in past downturns. But the change in banking created two dangers that are now becoming obvious.
First, lending standards loosened. Banks used to balance two factors in deciding whether to make a loan - how much a borrower would pay in interest and fees and how likely it was to default. They refused to lend if they thought the risk of default outweighed the reward because they would be the ones to suffer. But, as the risk that they would be hit if borrowers ran into problems receded, they became less cautious.
You would have expected this to result in banks arranging more loans for riskier borrowers who paid bigger fees. That is indeed what occurred, both for residential mortgages and private equity. Subprime mortgage borrowers were encouraged to take out those loans not only by intermediaries but also by banks.
Private equity funds are the institutional equivalent of subprime mortgage holders. They have been willing to pay big fees for banks to arrange and securitise high-yield loans and exotic forms of bridging finance. As the private equity market has stuttered, bankers such as Jamie Dimon of JPMorgan Chase grew nervous about such instruments but too late to prevent their banks from getting caught last week.
Second, debt securities have become so complex that investors in them have not understood precisely what kind of credit or market risks they are taking on. That was made clear last month when two Bear Stearns hedge funds investing in collateralised debt obligations got into trouble. Their values fell suddenly although the securities in which they invested were not publicly traded.
Investors are now reading across from mortgage-backed securities to other debt instruments, worrying that the latter face a similar reckoning. The market faces a credit crunch: not the traditional kind in which banks that made losses pulled back from lending but a new variety caused by debt investors worrying that they have been taken for a ride.
So banks find themselves thrust back to their old business. Their balance sheets are stuffed with loans that could be there for a long time. Instead of passing on risk quickly and profitably, they may have to live with it. It is an unfamiliar challenge for a generation that grew up in credit markets but there is a precedent. Welcome to banking.
LOAD-DATE: July 30, 2007 |
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rffrydr
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rffrydr
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| Posted: Mon Jan 23, 2012 8:22 am Post subject: |
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China, not unpredicted here, withstanding, The "Gelded Age" is still with us--and, really, who can blame them. Stocks are but digits in era with more indices than retail investors. Yield is the only thing "real" and the last three years trading has, much to my error, only reinforced the key driver this last decade--fear.
I'm looking for a "burp" in the Telecoms to shake things up a little. They are not the drugs and utes that give luke comfort to timid souls. Indeed, for those fearful ones, they are something of a wild saturday night in the mean city--and priced to perfection.
Verizon and AT&T: it’s not just the yields
The past year has been good for big companies that pay big dividends. There are 27 US companies with enterprise values greater than $40bn paying dividends over 3 per cent, according to Capital IQ. Over the past 12 months these have returned 16 per cent to shareholders, on average, compared with the S&P 500’s 5 per cent. Stocks as diverse as Philip Morris, Bristol-Myers Squibb, Duke Energy, Intel and Chevron have all delivered great performances.
After such a good run, however, the big-cap yield trade may be concealing risks. Consider two examples: Verizon and AT&T, the big, high-yielding US telecoms groups. They have followed the larger trend, returning 19 and 14 per cent, respectively, for investors over the last year.
| Quote: | FROM Lex
The biggest flag would be if these two companies’ free cash flows did not comfortably cover their payouts. On first blush, they appear to do just this. In recent years, AT&T’s dividend has absorbed about two thirds of free cash flow. At Verizon, only about a third of reported free cash flow has gone in dividends historically, but there is a catch: Verizon owns only 55 per cent of its wireless business (Vodafone owns the rest) which account for most of the cash. Bernstein Research estimates that once the minority stake is backed out, Verizon’s free cash flow only just covered its dividend payments in 2011 (though the cash flow picture will improve in 2012).
That leaves little room for error at Verizon (which reports on Tuesday). And there is reason to wonder if dividend growth may be limited at both companies, because revenue growth is threatened. Wireless data growth has accounted for essentially all the sales growth in recent years, and it is now decelerating. The failure of the T-Mobile/AT&T merger could keep price competition humming, too. Investors must keep industry fundamentals, not just yields, in mind. |
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rffrydr
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| Posted: Mon Jan 16, 2012 7:16 am Post subject: |
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Animal Spirits churning again, even in those in hibernation:
http://www.ft.com/intl/cms/s/0/315656f6-3d29-11e1-ae07-00144feabdc0.html#axzz1jZdOgRie
Do not underestimate the "january effect"....those in high finance still with jobs do have to "do" something at this time of year. Lapthorne's got it, a closet bull. Bubbles don't always burst...sometimes they get blown away 
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rffrydr
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| Posted: Sun Jan 08, 2012 9:00 pm Post subject: |
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I had thought, and '09 seemed to have proved, that our collective trip over the precipice brought an end to this trend--in fact it only made the trigger "harrier."
Now, standing at the opposite end of levered Arizona MBS, have we not attained the same end with Manhattan taxi medallions earning 3% (if you're lucky)?
http://www.businessweek.com/magazine/milliondollar-taxi-medallions-11102011.html
 [/quote]
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rffrydr
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| Posted: Tue Dec 06, 2011 4:55 pm Post subject: |
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Basel III reconsidering sovereign composition of Tier-1 as we speak. It's now dawning on them that there is now a profound squeeze on what little still passes for "safe" in this category. Really unworkable at present. Equity and Corporates are being considered.....Indeed, in the end, there will only be one solution: embrace risk. It makes the world go 'round...and down.
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rffrydr
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| Posted: Wed Nov 30, 2011 11:46 am Post subject: |
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Debt and disinflation maybe the supercycle but we currently are still in the throes of the great millennial bust. Sure, investment continues (even perhaps the greatest bubble of all time in RE) but fear drives it. Now, at the same time we're dismantling sovereigns, we're also shrinking the clock. Time, or "investment horizons," have always contracted in bear markets. Now however we break down the quarter, the month, the minute--even the second.
I was wrong thinking '08 was the culmination of this trend. If '82-2000 describes the other side of the mountain we've got some ways to go. So the question is, where will it end?
http://allaboutalpha.com/blog/2011/11/28/the-trouble-with-liquidity/
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rffrydr
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| Posted: Fri Oct 28, 2011 6:56 am Post subject: |
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Volatility is NOT where the action is:
Orlando cited Coca-Cola Co. (KO), Procter & Gamble Co. (PG) and Colgate-Palmolive Co. (CL), which may have the potential to rise to the top of the pack for risk-adjusted returns. New York-based Colgate ranks 24th in the Bloomberg analysis of most return for the least volatility over five years. Atlanta-based Coca-Cola was 80th and Cincinnati-based P&G came in 83rd.
“Their valuation has held up better because of the sustainability of their revenue and earnings stream in a challenging economic environment,” Orlando said.
Proof, once again, market topped at the millenia.
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rffrydr
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| Posted: Wed Oct 05, 2011 10:09 am Post subject: |
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...Yes it was it turned out. In exactly the wrong direction!
Another big mistake of mine is thinking that those who remained from '08 would more readily embrace risk, equity over debt, new over old....and more readily endure pain. Buy and hold has now proven a failure. And '08 is the default move.
A neighbor of mine who just moved because he could not carry his '06 mortgage just received his UBS fund statement for his daughter, set up 15 years ago for $5000. It's worth: $4700. You can guess his attitude toward the market.
From today's TMM:
| Quote: | The trouble with this view is that ALL crises ARE different. But they DO share one common element: the inability of markets point in time to distinguish between a liquidity problem and a solvency problem. To wit, once upon a time, shortly following a financial crisis in one part of the world, credit markets began to seize up as a basket case economy with a large amount of debt started to have problems. It entered an IMF programme, but kept missing its targets. Meanwhile, financial conditions globally tightened, PMIs began to fall sharply and ISM printed below 50. Equity markets fell sharply, and speculation grew about US Investment Bank exposures to this country and a certain systemically important financial entity. Then that country defaulted. Markets panicked, and the equity prices of several investment banks fell as much as 70% from their peaks a month before.
How did it end? Ring-fencing of that certain stressed systemically important entity, liquidity provision by the Federal Reserve and a 30% Q4 rally in the S&P500. For those that haven't guessed already, this was 1998. And it turned out to be a liquidity crisis rather than a solvency crisis. |
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rffrydr
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| Posted: Sat Jun 25, 2011 6:49 am Post subject: |
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Inverse Double bottom?
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rffrydr
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| Posted: Mon Mar 21, 2011 6:07 pm Post subject: |
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It's happenin'--the very same guys that guessed at it can't believe their eyes:
| Quote: | | Mr Johnny Real Money player may well be starting to cry "You know what? If disasters A + B + C +..= 0, then I AM IMMORTAL AND CANNOT BE DESTROYED, FOR I AM UNCH ON MY AUD AND UNCH ON MY JPY and on my short bonds have only just got my feet wet and, as for equities, well they are screaming back too... WOOHAHAHAHA". |
http://macro-man.blogspot.com/2011/03/sky-is-black-with-swans.html
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rffrydr
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| Posted: Mon Nov 08, 2010 7:22 am Post subject: |
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Lookie thar, that disconnect between money and IP since '03--Greenspan's "conundrum."
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rffrydr
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| Posted: Tue Jul 06, 2010 11:37 pm Post subject: |
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Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
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rffrydr
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| Posted: Thu Apr 08, 2010 10:33 am Post subject: |
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...right on cue:
Robert Walberg
| Quote: | It's Deja Vu All Over Again
4/8/2010 12:30 PM EDT
Airline stocks taking flight on news that United Airlines and US Airways are in merger talks. Haven't we seen this movie before? These two struggling carriers have courted each other off and on for a decade. Prior attempts at merging collapsed due to labor issues and I suspect the same fate this time. Management might want a deal to save costs, but the unions aren't going to agree to more job or pay cuts - especially at a time when business is picking up and labor wants to recapture some of its earlier concessions. Separately, why UAL would want to pair up with a carrier that derives most of its revenues from the less profitable US and European markets is almost as mysterious as the stock rallying 8% on the news. Bigger isn't always better. When the deal talk dies off with nothing getting done - again - look for both stocks to give back today's gains and then some. Even if management gets the unions to play ball, and that's a HUGE if, I wouldn't want to own shares of UAL, as US Airways isn't the right partner. This is a clear example of management settling for a partner just so it can say it did a deal. A deal with Continental would at least make more strategic sense. If talks shift in that direction then UAL could hold its gain. Still think the labor hurdle will be huge but at least the synergies would be better. Note that UAL and Continental have also explored a merger in the past. Short-term, the merger talk will buoy share prices throughout the group. Intermediate- to long-term, structurally high labor costs, rising fuel prices and a miserable business model will ground any industry-wide rally. |
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