Archive for the ‘Side Notes’ Category
Tuesday, May 12th, 2009Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Since the beginning of the current financial crisis thousands of businesses and individuals have filed bankruptcy in America. Most of America has no protection from bankruptcy. The US government has invented a term “too big to fail” which seems to have immunized the nation’s largest businesses from bankruptcy.
Companies that have been labeled “too big to fail” directly and indirectly (suppliers) employ millions of people. Over the past year the Government contributed billions of US tax payer money to these behemoth companies to prevent them from meeting a self inflicted fate.
The recent optimism over banks seems somewhat over exaggerated considering we have already given hundreds of billions of dollars to these banks and they need 75 billion more. The treasury secretary has been quoted that he believes the banks can “earn their way out” of this crisis. Tax payer allowed these once doomed banks to raise their profit margins so they can “earn their way out” of the hole they dug themselves into (i.e. questionable credit card practices that has taken recent political stage).
The US auto industry has been dying slowly for decades. Two out of the three US auto manufacturers were pulled from the thaws bankruptcy late last year. Now one of them has already entered bankruptcy and the other is all but guaranteed to file. So this intervention by the US government just ended up being a waste of taxpayer money.
Bankruptcy is a clear case that capitalism is successful. It is Business’s form of natural selection. A business goes bankrupt when supply exceeds demand and or new innovation trumps the old. Bankruptcy makes room for new businesses that are better suited for the times. Since bankruptcy is such an integral part of capitalism and the evolution of business, what happens when you manipulate natural selection?
Tags: bank stress test, bankruptcy, banks, capitalism, too big to fail
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Friday, May 1st, 2009In the first week of March 2009, the sentiment on Wall Street was very negative. Analysts started adjusting their earnings expectations down to match sentiment. By the end of the week the sellers were overtaken by buyers and now the stock market has moved over 20% in record time.
The general expectation was that the stock market would retrace some in April due to earnings season. So far nearly two thirds of earnings released have beaten expectations. Since expectations have been better than expected, the stock market has held up.
Sales and earnings for most of the companies who released are way off over last year. Companies who beat typically had their earnings expectations adjusted lower at one point during the first quarter.
When the market was heading into the abyss of 6500 on the Dow Industrial average, Wall Street lowered their expectations of the future. Expectations now are being raised since the market has made a record jump to speedy recovery.
Wall Street seems to always over shoot their expectations. When they are bearish, the worst is expected. When Wall Street is bullish, the best case is expected. Expectations are just that, what someone expects to happen.
The markets generally move on expectations. If expectations are high then the bear is advantaged. If expectations are low, then the bulls have the leg up. Can the lofty expectations being set now be achieved? Some of Wall Street is starting to forecast the conclusion to this financial crisis by summer’s end, what if it does not happen?
Tags: earnings, expectations, financial crisis, wall street
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Wednesday, April 29th, 2009Every month the Conference Board releases the results of a poll conducted by TNS of 5000 US Households. This poll is meant to capture the mood of the average US household during the month in question and apply a number to it. If the mood of US households is improving then supposedly this is a sign of improved consumer spending and better conditions on Main Street.
The questions asked during this poll focus on both present conditions and future outlook. This sampling of US households is asked to give their current individual condition and forecast the US economy as it relates to them.
The most recent poll released on April 28, 2009 showed an increase in US Consumer Confidence from 26.0 to 39.2. In this most recent poll the Present Situation Index increased slightly from 21.9 to 23.7. The Expectations Index rose dramatically from 30.2 to 49.5. From this poll it clearly shows currently that expectations outweigh existing conditions. This sampling of US Households has increased its optimism for the future.
Over the past two months Washington and Wall Street have increased their confidence dramatically as well. Washington has made comments hinting that we have possibly seen the worst and Wall Street has rallied to lofty levels in record time.
Both Washington and Wall Street have made extra efforts to remain optimistic. Washington now takes great care in releasing information in not to disrupt the Markets too much. Wall Street seems to have teamed up to shift their majority view from bearish to bullish. In my opinion it also appears that the financial press seems to praise the bulls and shun the bears.
Propaganda is the dissemination of information that is meant to influence the opinions or behaviors of people. Wall Street and Washing are focusing on the glimmers of light at the end of the tunnel. The light could be real or it could be a train coming, but we are still for the most part in the dark.
Wall Street and Washington have something to gain by keeping the US household positive. Wall Street wants US Households to invest their hard earned money into the market so they can make money. Washington wants US households to feel they are succeeding in solving to problems so they can keep “political will” on their side and succeed in their political agenda.
Is Consumer Confidence a gauge of Main Street finances or a measure of success in political and corporate propaganda?
Tags: cenference board, consumer confidence, main street, wall street, washington
Posted in Economics, School, Side Notes | No Comments »
Sunday, April 26th, 2009So the long awaited earnings season is upon us and overall the market is holding up rather well. Earning either miss, meet or exceed expectations. Surprisingly many companies are exceeding expectations, even though the last quarter had been extremely challenging. But does missing, meeting or exceeding earnings expectation constitute good earnings?
On Thursday April 23rd, 2009 Microsoft released earnings that met expectations. Expectations were for 39 cents (excluding 6 cents in charges) a share which they met. Year over year earnings fell 32% from the same period last year. 60 days ago earnings estimates were for 40 cents a share.
On Thursday April 23rd, 2009 American Express released earning which exceeded expectations. Expectations were for 12 cents a share and they reported 31 cents a share. Year or year earnings fell 56% from the same period last year. 60 days ago earnings estimates were for 28 cents a share.
On Thursday April 23rd, 2009 Amgen reported earnings which missed expectations. Expectations were for $1.15 a share and they reported $1.08 a share. Year over year earnings fell 4% from the same period last year. 60 days ago earnings estimates were for $1.16 a share.
All three companies’ earnings are down year of year. The company who exceeded expectations actually saw the largest decrease in earnings year over year. The company who missed expectations saw the smallest decline in earnings year over year.
What are more important, expectations or actual earnings? Earnings are the product of companies; expectations are the product of Wall Street. In the above examples the expectations seemed to give the assumption that the company whose earnings are down the most year over year is doing better than the other two examples. What do you think?
Tags: analysts, earnings, Stock Market, wall street
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Monday, April 20th, 2009
Hundreds of years ago Kings and Queens where captivated by Alchemists who claimed to be able to turn ordinary metal into gold. Alchemist preyed on the wealthy to pay for their lifestyle and experimentation into this so called science of the time. By all accounts some alchemists where true believers, but more were just looking to dupe the wealthy out of their riches.
Today most of us view Alchemy as ridiculous and wonder how so many people in such great power could believe in it. Although today most of us think that the so called science of Alchemy is ludicrous, for some reason we still seem to believe that it is possible to turn ordinary metal into gold, figuratively.
This association was never more obvious than during the technology bubble 10 years ago. A person or group with just an idea was able to solicit millions from investors, before there was even a product. Most of Wall Street made speculations of wealth on the notion of near limitless growth which we now view as absurd. Even after those failed speculations we continue to put faith in Wall Street.
Looking at today it is understandable how the practice of Alchemy had captured the minds of yesterday for so long. As yesterday, on Wall Street there seems to be true believers and frauds (i.e. Bernie Madoff) in the art of turning ordinary metal into gold.
I do not believe all investment advice is the practice of alchemy. I will say though that the use of speculation in investment advice does seem to prey on mans’ fascination of turning ordinary metal into gold.
The mystery and lure of Alchemy was spread by stories from witnesses to this incredible act of turning ordinary metal into gold. It was not until the late 1700’s that this art of deception was revealed. A book was published on how these alchemists deceived witnesses. How many stories have you heard of someone who invested in a stock that made them extremely wealthy (i.e. Microsoft)?
Tags: bubble, stock market history, wall street
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Monday, March 30th, 2009So it seems like the consensus of Wall Street professionals is that we cannot just buy and hold stocks or mutual funds (for the short term). Apparently stocks are trading more on momentum and less on fundamentals.
So basically we are now being told that this market has very little to do with the fundamentals and everything to do with speculation right now. Now if you have a 5 to 10 or 20 year outlook then this is a cheap market according to Wall Street. Keep in mind if the market goes down another 50% from here, then the market would need to go up 100% just to get back to where you started from.
If fundamentals are really not playing a factor and it is all about speculation then aren’t we really just gambling with our money? At least if I go to a casino the rules are the rules and they can’t change in the middle of the game. Is the real goal of investing in the stock market to roll the dice?
Look at the products that being introduced into this market. I especially have noticed the increased popularity of “ultra” short or long Exchange Traded Funds (ETFs). On any given trading day these products typically show up on the most active securities list. These products promise a multiplier effect on the sector, index or commodity that you are investing (betting?) in. If you are Long Financials with an ETF “ultra” fund 3x, then if the Financials go up 2% the ETF is suppose to go up 6% (vice versa on a down day). Does this product sound like an investment?
Investors make stocks grow for the long term because they typically”buy and hold “stocks. Does this market seem like it is mostly made up of investors or speculators?
Tags: buy, etf, fundamentals, hold, long, mutual funds, short, speculation, Stock Market, trading
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Sunday, March 29th, 2009The following two charts are disturbingly similar side by side:
First is the Dow Industrial Average over the last from 1928 till 2006:
Dow Industrial Average 1928 till 2006
The second chart is total US debt as a percentage of GDP from 1923 till 2006:
Percentage of Total US debt to GDP 1923 till 2006
In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.
In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.
The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?
I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?
Tags: credit, debt, dow, gdp, market, money, recession, risk, stock, stock market history
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Saturday, March 28th, 2009Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.
From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.
In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.
From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.
So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.
I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.
Dow Industrial Average from 1929 till 1980
Tags: average, crisis, demand, dow, economy, index, industrial, market, stock, stock market history, supply, USA
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Thursday, March 26th, 2009The Federal Reserve and the US Treasury Department have made dramatic moves (at a heavy taxpayer cost) over the past few months to artificially suppress rates to reduce the cost of lending. Unfortunately these actions also reduce money market yields.
Recently large banks have been revealing their surprisingly profitable beginning of the year. I would note that these so-called profits are actually not including further write downs on bad loans they have made.
Are credit card rates at all time lows? Interestingly the other day I received a notice in the mail from a credit card indicating that they were raising their profit margin (prime plus their margin). My credit rating has not changed. Are they raising their profit margins on their good standings customers to help pay for the bad ones? Am I paying for their credit rating being reduced?
So even though prime is at a very low at 3.25% it seems as though credit card rates have managed to stay the same. Could mortgage rates actually be lower than they are now? Are banks gouging us to claw back from the grave?
Consumer spending is down and savings rates are on the rise. It seems to me that the people would rather make more money on their savings than letting banks make more money off of us.
Tags: banks, credit card, federal reserve, money, rates, saving, treasury, write down
Posted in Federal Reserve Actions, Side Notes | No Comments »
Monday, March 23rd, 2009At the beginning of the year I was under the impression that US markets were for the most part “Free Markets”. Recently these free markets have been coming under attack by the United States government. Seems lately like every week our government is formulating a new plan for recovery and forgetting the previous weeks plan. Lately I am likening the US Government to a child with ADD. Every week we are told to have patience, but every week those same preachers are no practicing their own advice.
My personal opinion on the government’s role in coping with an economic crisis is to uphold its current laws and not to create laws out of anger. I would wager that there are many responsible individuals (i.e. fraudulent mortgage practices) who perpetuated and fueled this economic mess illegally that we could prosecute and start on the road of closure. Instead we are focused on issues that stir the social unrest pot and steers a nation down the path of emotional and irrational rule.
I would plead to our leaders to start taking their roles as leaders and not as members of the mob. We are all taught that “fighting solves nothing”, it is just simple wisdom.
Tags: free market, goverment, market, money, stock, USA
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