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Nikhil Nichani
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  • HSBC CEO to step down end of year.

    September has not even ended, and another executive of HSBC is headed out the door.  After much speculation on Michael Geoghegan’s future, the Financial Times this morning report that HSBC’s CEO will resign at the end of the year.  HSBC’s culture has been to assign group CEOs as the chairman, however that seemed highly unlikely in Geohegan’s case which caused reports to be published in the media about Geohegan giving the board an ultimatum, which the group denied immediately.  According to the Financial Times, head of HSBC’s investment banking unit, Stuart Gulliver will replace Geoghegan as CEO.

    HSBC’s stock is down 6.3% on the London Stock Exchange YTD, while the ADS is down 7% on the New York Stock Exchange.  Despite its USA retail operations, HSBC Bank USA N.A., taking a significant hit during the global financial crisis, the group overall managed to be one of the few banks whose future was not in doubt.  The company reported 1H profits had doubled to $6.76 billion, but reported higher costs which caused concern to a lot of investors and analysts.   The stock has been in a tight trading range since the summer of 2009, and a boardroom battle can prove to take a toll on its stock in the near future, especially with uncertainty about a double dip recession. 

    Disclosure: No positions
    Tags: HSBC
    Sep 23 3:54 PM | Link | 1 Comment
  • The entire system is in limbo

    For much of the last month, I’ve been very bearish on the short term outlook for treasuries, and I still am. Yields on the United States treasuries are at an absurdly low level, last seen in 2008 when the entire financial system was on the brink of collapse. As the days go on, more and more market professional and analysts are predicting that the entire bond market is in a huge bubble and is standing on the edge of a cliff. As likely as they may seem, these low yields are now going to be the norm for the next few years. Don’t get me wrong, at the pace money has been flowing into treasuries, there is bound to be a short term pull back and we could easily see 30 year yields at 5% in the very near future, but how long can we expect them to stay at those levels, especially with the economic outlook for the country so gloomy. A short term rise in interest won’t hide the long term problem the United States is facing. The bond market is in a bubble that no one doubts, but that bubble isn’t bursting anytime soon.
    Let’s face it; the markets have entered a stage of limbo, where you can’t turn to anywhere to get a safe, adequate return. Not only are treasuries offering horrendous yields, equity markets are failing to appeal to a lot of institutional and individual investors due to companies holding onto their cash and not willing to pay out strong dividends.
    S&P 500 Dividend Yields

    S&P’s dividends are still facing record lows. Since the March 09 bottom, equities have rallied immensely, and many companies whose futures were in doubt have been beating earning expectations quarter after quarter, yet there is no willingness of these companies to raise dividends and instead keep the cash on their books.
    S&P 500 P/E Ratio

    Historically, a P/E ratio of 20+ for the S&P 500 has proven to be too high for the market and the prices in relevance to earnings have fallen following such periods. The equities market pulled back again after briefly crossing P/E of 20 this year. With a historically high P/E ratio and historical low yields, the broader equities market doesn’t look that attractive.

    10 Year Yields

    Bond yields, as unattractive as they are, have been even lower than their current level in their history. In the 1940, 10 year treasuries hit their all time historic low of just a couple of basis points below 2%. Since then, bonds have never really threatened to be that low, until the past two years. But there is something significantly different about the unattractiveness of bond yields in the 1940s compared to today. When bond yields bottomed in the 40s and money started moving out of the bond market, the stock market looked extremely attractive. The S&P 500 yielded close to 8% back when treasury yields bottomed, compared with 2.05% today, and had a P/E ratio of just below 10, compared with 19.75 of today. So you have to wonder. Is the bond market really that expensive? Is the stock market really that cheap? Or are they both nothing more than a suicide mission?
    The mess that has been created by the recession of 2007-2008 is one that is going to be really tough to clean up. Unemployment number sit at 9.5%, but anyone who has been in America long enough knows that even those numbers are sugar coated. And unless there is sufficient number of jobs in the economy, a recovery will never be sustained; no matter how many stimulus packages the government presents or how many dollars the Fed pumps into the economy. In the short run, will we dip into another recession? Who knows? But we all know what we face isn’t a short run problem, but a long run problem. The economy is on the brink of deflation and Bernanke has absolutely no idea what to do. As an after math of the financial crisis, the Fed was forced to lower interest rates to 0% in order ease the flow of capital throughout the economy. Then the fed spent billions of dollars to bring even more money into the system through the purchases of MBS and such, and the US government followed with TARP, and various other stimulus programs. Yet two years later, here we are in the same situation. High unemployment, banks not lending, money not flowing in the economy, houses not being sold, and now we face the threat of deflation. The Fed knows it can’t contract the money supply, nor can it raise it any more due to fears of hyper inflation, so it plans to use the proceeds of its maturing MBS to purchase US treasury debt to at least keep the money supply stable. This will thus keep the demand for treasury high for the short run, and there it is highly unlikely the Fed will raise interest rates let alone in an economic period like this, but also with billions of dollars of bonds in its balance sheet that will lose value if rates are to go up.
    If our economy is to go into deflation, bond rates will not go up as everyone expects them to. However, an ultimate fate of rapid inflation in the near could be disastrous for our economy because Bernanke cannot afford to raise interest rates with the condition the job and financial markets are in right now. No one running the system knows what to do because we have caused our self to stand in the middle of a ring of fire that is closing in on us, where there is no exit to it besides running through one corner of the flames and getting brutally burned in the process.

    Disclosure: No positions
    Tags: SPY, Bonds, US Market
    Aug 19 9:35 PM | Link | 2 Comments
  • Is Gold Really As Risk Free As It Seems?

    In the 90s, the hot thing to invest in were internet stocks.  In the 2000s, it was a house.  In 2008, it was oil.  And finally in 2010, it is gold.  In today's time, gold is marketed everywhere, with commercials on the radio to economists making prediction for $10000 an ounce of gold in the near future.  These predictions might bring back a lot of memories to those who experienced the predictions of the internet stock days and the housing days and when oil was trading close to $150 a barrel.  Back in the 90s, internet stocks were supposed to hit $1000 a share for almost every company, taking the Dow with them to 20-30,000.  Then when that market crashed, focus shifted onto housing, and housing prices were supposed to rise forever because technically, our country hasn't seen a bad enough housing market before.  Then there was oil, shooting through the moon everyday.  The higher it went, the more ridiculous the predictions got with people predicting $300 a barrel.  Today, Gold presents the same exact risks and the same exact aftermath as all the instances in the past I just mentioned .

    Gold prices have been on a rapid incline for the majority of the last 3-5 years.  Over the last year, gold prices are up near 25%.  In the last three years, gold is up an outstanding 78.4%.  That is a huge price gain for just a three year period.  A big part of the reason for this jump in prices was because people started seeking shelter from the free falling equity and housing markets in 2007 and 2008, and demand for gold rose through the roof.  However it didn't stop there.   Once money started flowing into equities again, gold didn't stop its bullish run.  Since the equity bottom in March of 09, gold is up roughly 29%.  This rapid gain in prices should start raising some serious red flags.  Even though equity markets have rallied big time since March, uncertainty about the economy as been high which caused gold prices to rise as well.  But with stocks still seeming relatively cheap for the long run compared to bonds, one has to wonder exactly how much longer money will stay in gold.  The higher gold goes, the more expensive it becomes and the more prone it becomes to large scale pull back once money starts flowing into other assets.

    Gold presents no physical risk to its investor, as it will always be around and it will always be valuable no matter what kind of market conditions we are in.  But it presents an enormous nominal risk to every investor, and the higher it goes the greater that risk.  Gold is no different from any other asset in this world, and it will also face the force of gravity over time.  A  78% rise in three years should definitely be raising some eyebrows, and I would highly recommend any investor in gold to start taking their profits and look for other assets.  Gold may even go up a little bit from here to $1300, but the nominal risk involved compared to the downside that is looming for gold is pointing towards the asset not being a safe investment like the entire investing world takes it to be, and definitely puts your earnings from it in harms way.  Always remember, its essential to be on the right side of the bull and bear markets, but it is absolutely critical to understand that no bull market goes on forever.  And the larger the bull market, the more horrifying the preceding bear market will be.

    Disclosure: No Positions
    Tags: Gold
    Aug 10 10:49 PM | Link | 3 Comments
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