Buffett's Latest NYT Op-Ed: The Greenback Effect [View article]
Market ace, I think the contraction in credit is certainly helping to hold prices lower for the time being, but this contraction is very small compared to the long-term effect of the new dollars in the system. The loose monetary policy has not been effective yet because the velocity of money has been so low. But once the economy begins to turn (I say Economy - not Market) the velocity will pick up and inflation will quickly become a serious issue.
At that point, the Fed will have the dubious choice of either raising rates to fend off inflation (which would kill the expansion) or keeping rates low to continue to encourage the recovery (which leaves us with inflation). I'm pretty sure I know which direction will be chosen.
Treasury's Pricing of TARP Warrants: No Way Out [View article]
Your points on the potential for corruption (or just the perception of corruption) are valid, but the biggest issue appears to be this administration's aversion to free markets. A dutch auction of some sort where market participants as well as the individual banks participate in bidding for these warrants would not only bring the US taxpayers the greatest return for the risk taken over the last 6 months, but would also lead to better liquidity, confidence, and price discovery in the banking industry.
Good catch - interesting article. Hopefully we can get some revision to this measure before its too late.
Much has been said about the AMOUNT of money flooding the US economy but as you alluded to, the VELOCITY of that money is equally important. The government can pump capital into the financial institutions, the automakers and even directly to consumers, but until that capital is put to work, it doesn't have much of an effect.
But the rub is that when the velocity actually picks up (banks start lending, treasuries expire, consumers spend) the inflation will hit HARD and QUICK. All of the sudden the billions and even trillions that have been pumped into the economy and have sat dormant become alive at once. The Fed could find out that it is much more difficult to REMOVE stimulus than it is to implement it.
So at that point, inflation will be very dangerous and gold will become valuable nearly overnight. I think we need to be careful about being lulled to sleep by discussions of deflation or the new sophistication of monetary and fiscal policy. We should see a sharp increase in inflation in 2009 and investors should prepare accordingly.
Burton A. J - because they would immediately move from "troubled" to "failed." No one wants to do business with a troubled bank. The entire system is built on trust and if you know first hand that a bank is troubled then it is only a matter of time before depositors pull out leaving the bank insolvent.
Ray - I agree with you mostly. The issue is not necessarily that we need MORE regulation as much as we need to require adequate disclosure. If banks were required to show just how ugly their balance sheets were (bring all those skeletons out of the closet and open your book to the public), there would no longer be an incentive to act irresponsibly. Consumers could easily see who were the stalwart banks and the market share would increase. Being responsible at this point would be akin to being profitable. Instead of heavy handed regulation, we need to properly align the incentives so that responsible business practices are rewarded, not discouraged.
A Stock Market Rally Does Not a Recovery Make [View article]
Banks are certainly still sitting on toxic waste which could cause considerable losses in the coming quarters. But CIT showed us that liquidity is at least temporarily available as the industry appears to believe that the Fed will STILL step in and support. That expectation can help grease the wheels and add private liquidity, but the precident is dangerous.
Essentially, the loose monetary policy is "giving a drunk another drink" and while it may alleviate the headache today, it does little to reform the long-term addiction to excessive debt which is so ingrained in both the consumer and business markets. Whatever happened to expanding your net worth or business based on hard work and conservative fiscal discipline - instead of excessive borrowing?
Rises in bond yields and commodity prices also correspond with rises in unemployment and an increased savings rate. Since GDP is still geared toward consumer spending (68% at last count), that's bad news for an economic recovery.
I share your concern over a potential decline in the market and while we may not see the fear levels of the mid 600's on the S&P - we should see investor confidence get hit. Consumer names may be the first to get hit as these names have rallied more sharply than peers and an emotional retail investor is more likely to liquidate these names.
Good article - enjoyed the insight - hang in there with your short picks,
I like NITE as well. Their sale of Deepwater should allow management to concentrate on their core business. The team is usually talented at making wise acquisitions, but this was an exception (or maybe being in the wrong place at the wrong time as we entered the recession).
Once the sale is complete and the balance sheet has a bit more strength, NITE could pick off some of its competition adding synergies by buying similar platforms and integrating back office functions.
TARP Funds to Common Stock: More Accounting Games [View article]
OK, I agree with you that this move is wrong. The government should not be in the business of OWNING free market enterprises...
But as far as this "not changing anything" I think you've missed the point. Originally TARP funds were set up as a liability. That means the Banks actually have to pay this money back. Preferred shares are debt plain and simple.
Converting this capital to common equity actually takes the capital OFF the liability side and yet leaves the assets intact. This move essentially means that the banks don't have to return the capital. Instead, other common shareholders are on the hook for the capital. (I say other common shareholders because the government claims that it eventually intends to sell the shares)
Now in the case of Citigroup where the government will own 36% of the stock, that is a huge seller waiting in the wings. The common stock will have a hard time rising to a strong fundamental value when you have such a large shareholder with a stated intent to sell.
But the bottom line is that Citi is no longer liable to repay the TARP money - that's good for the long-term viability of the company, and great for existing bondholders... but it's a pretty tough pill to swallow for existing shareholders. The one good side for shareholders is that there is now less of a chance that Citi will go bankrupt leaving them with nothing.
Obama Versus the Credit Card Companies [View article]
Good Article Mark - I love your perspective on taking personal responsibility for individual decisions on credit, mortgages and the overall financial picture. It will be interesting to see what "recourse" consumers have available to them once everything moves through congress. I have a feeling the credit card industry could resemble the historical asbestos companies who have been litigated into oblivion.
I do think that this news is actually relevant to Visa and MasterCard. If regulations are passed aiming to restrict the credit card lenders, it will actually have an effect on the processors (although its an indirect effect). Eventually the banks will respond by cutting the available balances (already happening) which reduces the spending power of consumers. And I don't buy the fact that debit transactions will make up for this deficiency. If consumers are required to buy only what they can afford, we will see spending drop and thus revenue for V and MA drop as well.
But up to this point I have been early on my bearish calls here. its amazing how the habit of spending can continue despite economic difficulty. Eventually the facts will come home to roost... But timing is difficult.
The volatility is certainly picking up (both on positive and negative days). That has me trading smaller and managing risk more carefully. But it also seems to point to "churning" where investors are skittish and could very easily be convinced to throw in the towel and send markets lower.
I'm particularly concerned when looking at charts of major indices - noting that the small cap and higher risk indices have very decidedly broken their uptrends, while the Dow and to some extent the S&P is still hanging on. It seems the appetite for risk is diminishing which will initially hit the small cap growth sector, but in time should erode into the blue chip universe.
I'm picking up short exposure and yes it has me nervous. I'm one who got my hand slapped late this summer as well, but the risks are in full force. Beginning to build short exposure slowly and will pyramid as confirmation and profits accumulate.
TERM LIMITS - how refreshing would it be to get new minds, new ideas, and fresh energy in Washington? The American people are tired of career politicians. We need representatives who actually LIVE in the economic and social environments which they influence.
Still Substantial Risk in Credit Card Investments [View article]
Kewgardens - I chose Visa because it has a bit of a higher multiple, although the pattern on MA may be a bit more attractive as a short. I'm not real comfortable with a pairs trade here - I think both are vulnerable and largely indifferent between the two.
Echo - I understand the bullish argument here. I just don't agree with it. Debit card revenues may help keep both companies from totally imploding, but I don't believe the transition will fulfill future growth expectations.
Taperx - The International growth does bear mentioning. But the recession is global in nature and former expectations for huge international expansion have been toned down.
374347 - Inclusion in an index may have a short-term effect on a stock but eventually prices will be determined by fundamentals. I have found it very difficult to make money by trading ahead of expected index changes
Finally, Rohan - This is the primary bullish argument for these stocks... "They have no credit risk." You are absolutely correct. I'm not basing any short bias on the fear of default. But as BANKS experience defaults, they will issue fewer cards and constrict open lines of credit. This will certainly cause decreases in credit card purchases. As far as debit cards go, if people don't have the money to spend on credit, why do we expect them to have cash to spend out of bank accounts (using debit cards)? I think the issue is much more contraction of consumer spending and much less of an argument of HOW that spending is transacted.
Thanks everyone for the insightful comments! Zach zachstocks.com
Looking at a longer-term chart for both gold and silver, it's clear that we are not anywhere close to a speculative bubble. Gold is moving in a relatively predictable fashion based on its multi-year base and until we get a 30 or 40% move above the breakout in a few months time there is little reason to worry about a bubble.
Silver is in an even better technical spot as we are still working off the selling pressure from 2008. I would not worry about significant resistance until we approach $20 and even that would likely be short-lived. Remember, silver is consumed where as gold is largely placed in vaults. Expect silver to outperform over the coming months
Buffett's Latest NYT Op-Ed: The Greenback Effect [View article]
At that point, the Fed will have the dubious choice of either raising rates to fend off inflation (which would kill the expansion) or keeping rates low to continue to encourage the recovery (which leaves us with inflation). I'm pretty sure I know which direction will be chosen.
zachstocks.com
Treasury's Pricing of TARP Warrants: No Way Out [View article]
Good catch - interesting article. Hopefully we can get some revision to this measure before its too late.
Zach
zachstocks.com
Don't Miss the Coming Gold Bull [View article]
But the rub is that when the velocity actually picks up (banks start lending, treasuries expire, consumers spend) the inflation will hit HARD and QUICK. All of the sudden the billions and even trillions that have been pumped into the economy and have sat dormant become alive at once. The Fed could find out that it is much more difficult to REMOVE stimulus than it is to implement it.
So at that point, inflation will be very dangerous and gold will become valuable nearly overnight. I think we need to be careful about being lulled to sleep by discussions of deflation or the new sophistication of monetary and fiscal policy. We should see a sharp increase in inflation in 2009 and investors should prepare accordingly.
Thanks for the good article!
Zach
zachstocks.com
Blacklist Grows for Troubled Banks [View article]
Ray - I agree with you mostly. The issue is not necessarily that we need MORE regulation as much as we need to require adequate disclosure. If banks were required to show just how ugly their balance sheets were (bring all those skeletons out of the closet and open your book to the public), there would no longer be an incentive to act irresponsibly. Consumers could easily see who were the stalwart banks and the market share would increase. Being responsible at this point would be akin to being profitable. Instead of heavy handed regulation, we need to properly align the incentives so that responsible business practices are rewarded, not discouraged.
Thanks for the comments guys,
zachstocks.com
A Stock Market Rally Does Not a Recovery Make [View article]
Essentially, the loose monetary policy is "giving a drunk another drink" and while it may alleviate the headache today, it does little to reform the long-term addiction to excessive debt which is so ingrained in both the consumer and business markets. Whatever happened to expanding your net worth or business based on hard work and conservative fiscal discipline - instead of excessive borrowing?
zachstocks.com
Still Believe in the Downside [View article]
I share your concern over a potential decline in the market and while we may not see the fear levels of the mid 600's on the S&P - we should see investor confidence get hit. Consumer names may be the first to get hit as these names have rallied more sharply than peers and an emotional retail investor is more likely to liquidate these names.
Good article - enjoyed the insight - hang in there with your short picks,
Zach
zachstocks.com
NITE Could Make Your Day [View article]
Once the sale is complete and the balance sheet has a bit more strength, NITE could pick off some of its competition adding synergies by buying similar platforms and integrating back office functions.
The stock is attractively priced. I have an article about the company: zachstocks.com/2009/03.../
FD: long position in the ZachStocks Growth Model
TARP Funds to Common Stock: More Accounting Games [View article]
But as far as this "not changing anything" I think you've missed the point. Originally TARP funds were set up as a liability. That means the Banks actually have to pay this money back. Preferred shares are debt plain and simple.
Converting this capital to common equity actually takes the capital OFF the liability side and yet leaves the assets intact. This move essentially means that the banks don't have to return the capital. Instead, other common shareholders are on the hook for the capital. (I say other common shareholders because the government claims that it eventually intends to sell the shares)
Now in the case of Citigroup where the government will own 36% of the stock, that is a huge seller waiting in the wings. The common stock will have a hard time rising to a strong fundamental value when you have such a large shareholder with a stated intent to sell.
But the bottom line is that Citi is no longer liable to repay the TARP money - that's good for the long-term viability of the company, and great for existing bondholders... but it's a pretty tough pill to swallow for existing shareholders. The one good side for shareholders is that there is now less of a chance that Citi will go bankrupt leaving them with nothing.
Zach
zachstocks.com
Obama Versus the Credit Card Companies [View article]
I do think that this news is actually relevant to Visa and MasterCard. If regulations are passed aiming to restrict the credit card lenders, it will actually have an effect on the processors (although its an indirect effect). Eventually the banks will respond by cutting the available balances (already happening) which reduces the spending power of consumers. And I don't buy the fact that debit transactions will make up for this deficiency. If consumers are required to buy only what they can afford, we will see spending drop and thus revenue for V and MA drop as well.
But up to this point I have been early on my bearish calls here. its amazing how the habit of spending can continue despite economic difficulty. Eventually the facts will come home to roost... But timing is difficult.
Zach
zachstocks.com
At the Bull-Bear Crossroads [View article]
I'm particularly concerned when looking at charts of major indices - noting that the small cap and higher risk indices have very decidedly broken their uptrends, while the Dow and to some extent the S&P is still hanging on. It seems the appetite for risk is diminishing which will initially hit the small cap growth sector, but in time should erode into the blue chip universe.
I'm picking up short exposure and yes it has me nervous. I'm one who got my hand slapped late this summer as well, but the risks are in full force. Beginning to build short exposure slowly and will pyramid as confirmation and profits accumulate.
zachstocks.com
Congressional Healthcare Games [View article]
zachstocks.com
Still Substantial Risk in Credit Card Investments [View article]
Capella and other education names: zachstocks.com/2008/12.../
VMWare: zachstocks.com/2008/12.../
Blue Nile: zachstocks.com/2008/12.../
Las Vegas Sands: zachstocks.com/2008/08.../
among others. There are plenty of names to be wary of as you say. Good luck with RIMM and TIF and thanks for the dialog
Zach
zachstocks.com
Still Substantial Risk in Credit Card Investments [View article]
Echo - I understand the bullish argument here. I just don't agree with it. Debit card revenues may help keep both companies from totally imploding, but I don't believe the transition will fulfill future growth expectations.
Taperx - The International growth does bear mentioning. But the recession is global in nature and former expectations for huge international expansion have been toned down.
374347 - Inclusion in an index may have a short-term effect on a stock but eventually prices will be determined by fundamentals. I have found it very difficult to make money by trading ahead of expected index changes
Finally, Rohan - This is the primary bullish argument for these stocks... "They have no credit risk." You are absolutely correct. I'm not basing any short bias on the fear of default. But as BANKS experience defaults, they will issue fewer cards and constrict open lines of credit. This will certainly cause decreases in credit card purchases. As far as debit cards go, if people don't have the money to spend on credit, why do we expect them to have cash to spend out of bank accounts (using debit cards)? I think the issue is much more contraction of consumer spending and much less of an argument of HOW that spending is transacted.
Thanks everyone for the insightful comments!
Zach
zachstocks.com
Can Gold Go Even Higher? [View article]
Silver is in an even better technical spot as we are still working off the selling pressure from 2008. I would not worry about significant resistance until we approach $20 and even that would likely be short-lived. Remember, silver is consumed where as gold is largely placed in vaults. Expect silver to outperform over the coming months
zachstocks.com/2009/09.../
I'm Slowly Rebuilding My Chinese Position [View article]
Oh well, good thing i'm not sensitive
On Sep 01 01:25 PM TraderMark wrote:
> p.s. not sure why you got 2 negative thumbs up. You didnt pump iamned.com
> did you?? ;)