Tuesday, December 7, 2010
Why gold continues to be a good investment
http://www.hulu.com/watch/198845/charlie-rose-all-about-gold-david-einhorn#s-p1-so-i0
Friday, July 16, 2010
Goldman settles with S.E.C.
S.E.C. Settling Its Complaints With Goldman
By SEWELL CHAN and LOUISE STORY
WASHINGTON — Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday.
If approved by a federal judge in Manhattan, the settlement would rank among the largest in the 76-year history of the Securities and Exchange Commission, but it would represent only a small financial dent for Goldman, which reported $13.39 billion in profit last year.
News of the settlement sent Goldman’s shares 5 percent higher in after-hours trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement.
Even so, the settlement is humbling for Goldman, whose elite reputation and lucrative banking business endured through the financial crisis, only to be battered by government investigations that shed light on potential conflicts of interest in its dealings.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert S. Khuzami, the commission’s director of enforcement.
The civil suit brought by the S.E.C. focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, John A. Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal. Mr. Paulson has not been accused of wrongdoing.
Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.
In addition, Goldman acknowledged that the marketing materials for Abacus “contained incomplete information” and that it was “a mistake” not to have disclosed Mr. Paulson’s role. As part of the agreement, the bank also said it “regrets that the marketing materials did not contain that disclosure.”
Goldman’s general counsel, Gregory K. Palm, signed the S.E.C. settlement on Wednesday, though it was not announced until after markets closed on Thursday. Officials said the timing was not affected by the Senate’s approval of an overhaul of financial regulations.
Word that Goldman had settled the case began leaking about 30 minutes before the markets closed and appeared to please investors; some analysts had expected a settlement by this Monday, when Goldman, which had been under pressure by shareholders to reach a settlement, was expected to deliver a formal response to the commission’s complaint.
“We believe that this settlement is the right outcome for our firm, our shareholders and our clients,” Goldman said in a written statement on Thursday.
When the commission filed its case in April, Goldman took a notably defensive stance. The bank had apparently been surprised that investigators did not warn its executives about the case and give them a chance to settle at that time.
Yet Goldman began holding settlement talks with the S.E.C. immediately after the complaint was filed. As the weeks and months dragged on, Goldman executives heard concerns from clients and former executives.
Goldman was bound to face another round of questions from analysts next week, when the bank is scheduled to report its earnings.
The settlement removes a significant problem looming over Goldman, but it could still face other legal problems.
Though Goldman said that it understood the S.E.C. was not planning to bring other cases, the commission continues to investigate collateralized debt obligations, like the Abacus security, issued by Goldman and other banks, and could still take action.
The Justice Department also had been reviewing the Abacus deal, and the S.E.C. could refer other findings to prosecutors.
Goldman faces private lawsuits related to multiple mortgage securities and to its decision not to tell its shareholders last year when it received formal notification that the S.E.C. was investigating the Abacus deal.
“Goldman played fast and loose in the Abacus deal, misled its clients, and got called on it today,” said Senator Carl M. Levin, a Michigan Democrat who led a separate Congressional investigation that examined the Abacus deal.
“A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices,” Mr. Levin said in a written statement. “I hope the Goldman settlement together with the new financial reform law — which prohibits additional unethical practices and conflicts of interest — signal an end to the abusive practices that contributed to the 2008 financial crisis and the beginning of needed Wall Street reforms.”
The settlement announced on Thursday awaits approval by a federal judge, Barbara S. Jones, in the Southern District of New York. A year ago, the S.E.C. suffered a black eye when a different judge in that district rejected a settlement between the commission and Bank of America. The commission settled with the bank later on, after substantially increasing the fine.
Under the proposed settlement, Goldman would pay back the $15 million in profit it made from the Abacus deal and also pay a civil penalty of $535 million. The money would be given to the two banks that had losses on the deal — $150 million to IKB Deutsche Industriebank and $100 million to the Royal Bank of Scotland Group — with the rest, $300 million, going to the United States Treasury as a fine.
Goldman’s settlement requires it to make changes in how it reviews and approves offerings of certain mortgage securities.
Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University and a former Federal Reserve lawyer, said the dollar amount would not dent the public anger at the banks.
“You have to consider the symbolism of the S.E.C.’s case. When it was filed back in April, it completely changed the dynamic on Capitol Hill,” Mr. Hurley said. “Now comes the settlement and it’s $550 million. Well, two weeks ago we were talking about a $19 billion tax on the likes of Goldman. The public wanted to see either more financial pain or actually have a trial.”
Goldman was not the only Wall Street firm to create complex mortgage securities that allowed investors to make negative bets, and the commission continues to look at other deals from across the industry.
Fabrice P. Tourre, the Goldman vice president who was named in the S.E.C. case, was not included in the settlement.
Mr. Tourre took a leave from Goldman after the case was filed. When he appeared before a Senate committee in April, he said he should have pointed out Mr. Paulson’s involvement in Abacus in the deal’s marketing materials. The lawyer for Mr. Tourre did not return a phone call seeking comment on Thursday.
The Goldman settlement would be larger than the $400 million the mortgage giant Fannie Mae, accused of inflating its earnings while lavishing its executives with bonuses, agreed to pay in 2006, but smaller than the $750 million the telecommunications company WorldCom was ordered to pay in 2003 after an accounting scandal. Fannie Mae was seized by the government in 2008, and WorldCom, after emerging from bankruptcy, eventually became part of Verizon.
Sewell Chan reported from Washington, and Louise Story from New York. Edward Wyatt contributed reporting.
By SEWELL CHAN and LOUISE STORY
WASHINGTON — Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday.
If approved by a federal judge in Manhattan, the settlement would rank among the largest in the 76-year history of the Securities and Exchange Commission, but it would represent only a small financial dent for Goldman, which reported $13.39 billion in profit last year.
News of the settlement sent Goldman’s shares 5 percent higher in after-hours trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement.
Even so, the settlement is humbling for Goldman, whose elite reputation and lucrative banking business endured through the financial crisis, only to be battered by government investigations that shed light on potential conflicts of interest in its dealings.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert S. Khuzami, the commission’s director of enforcement.
The civil suit brought by the S.E.C. focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, John A. Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal. Mr. Paulson has not been accused of wrongdoing.
Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.
In addition, Goldman acknowledged that the marketing materials for Abacus “contained incomplete information” and that it was “a mistake” not to have disclosed Mr. Paulson’s role. As part of the agreement, the bank also said it “regrets that the marketing materials did not contain that disclosure.”
Goldman’s general counsel, Gregory K. Palm, signed the S.E.C. settlement on Wednesday, though it was not announced until after markets closed on Thursday. Officials said the timing was not affected by the Senate’s approval of an overhaul of financial regulations.
Word that Goldman had settled the case began leaking about 30 minutes before the markets closed and appeared to please investors; some analysts had expected a settlement by this Monday, when Goldman, which had been under pressure by shareholders to reach a settlement, was expected to deliver a formal response to the commission’s complaint.
“We believe that this settlement is the right outcome for our firm, our shareholders and our clients,” Goldman said in a written statement on Thursday.
When the commission filed its case in April, Goldman took a notably defensive stance. The bank had apparently been surprised that investigators did not warn its executives about the case and give them a chance to settle at that time.
Yet Goldman began holding settlement talks with the S.E.C. immediately after the complaint was filed. As the weeks and months dragged on, Goldman executives heard concerns from clients and former executives.
Goldman was bound to face another round of questions from analysts next week, when the bank is scheduled to report its earnings.
The settlement removes a significant problem looming over Goldman, but it could still face other legal problems.
Though Goldman said that it understood the S.E.C. was not planning to bring other cases, the commission continues to investigate collateralized debt obligations, like the Abacus security, issued by Goldman and other banks, and could still take action.
The Justice Department also had been reviewing the Abacus deal, and the S.E.C. could refer other findings to prosecutors.
Goldman faces private lawsuits related to multiple mortgage securities and to its decision not to tell its shareholders last year when it received formal notification that the S.E.C. was investigating the Abacus deal.
“Goldman played fast and loose in the Abacus deal, misled its clients, and got called on it today,” said Senator Carl M. Levin, a Michigan Democrat who led a separate Congressional investigation that examined the Abacus deal.
“A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices,” Mr. Levin said in a written statement. “I hope the Goldman settlement together with the new financial reform law — which prohibits additional unethical practices and conflicts of interest — signal an end to the abusive practices that contributed to the 2008 financial crisis and the beginning of needed Wall Street reforms.”
The settlement announced on Thursday awaits approval by a federal judge, Barbara S. Jones, in the Southern District of New York. A year ago, the S.E.C. suffered a black eye when a different judge in that district rejected a settlement between the commission and Bank of America. The commission settled with the bank later on, after substantially increasing the fine.
Under the proposed settlement, Goldman would pay back the $15 million in profit it made from the Abacus deal and also pay a civil penalty of $535 million. The money would be given to the two banks that had losses on the deal — $150 million to IKB Deutsche Industriebank and $100 million to the Royal Bank of Scotland Group — with the rest, $300 million, going to the United States Treasury as a fine.
Goldman’s settlement requires it to make changes in how it reviews and approves offerings of certain mortgage securities.
Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University and a former Federal Reserve lawyer, said the dollar amount would not dent the public anger at the banks.
“You have to consider the symbolism of the S.E.C.’s case. When it was filed back in April, it completely changed the dynamic on Capitol Hill,” Mr. Hurley said. “Now comes the settlement and it’s $550 million. Well, two weeks ago we were talking about a $19 billion tax on the likes of Goldman. The public wanted to see either more financial pain or actually have a trial.”
Goldman was not the only Wall Street firm to create complex mortgage securities that allowed investors to make negative bets, and the commission continues to look at other deals from across the industry.
Fabrice P. Tourre, the Goldman vice president who was named in the S.E.C. case, was not included in the settlement.
Mr. Tourre took a leave from Goldman after the case was filed. When he appeared before a Senate committee in April, he said he should have pointed out Mr. Paulson’s involvement in Abacus in the deal’s marketing materials. The lawyer for Mr. Tourre did not return a phone call seeking comment on Thursday.
The Goldman settlement would be larger than the $400 million the mortgage giant Fannie Mae, accused of inflating its earnings while lavishing its executives with bonuses, agreed to pay in 2006, but smaller than the $750 million the telecommunications company WorldCom was ordered to pay in 2003 after an accounting scandal. Fannie Mae was seized by the government in 2008, and WorldCom, after emerging from bankruptcy, eventually became part of Verizon.
Sewell Chan reported from Washington, and Louise Story from New York. Edward Wyatt contributed reporting.
Sunday, May 16, 2010
GS Fraud (continued)
http://www.latimes.com/business/la-fi-hiltzik-20100516,0,770128.column
latimes.com
Investment banks aren't required to act in clients' best interest
Goldman Sachs' conflict of interest might have been evident to buyers if they had been dealing in plain-vanilla securities, rather than the tutti-frutti mishmash Goldman helped concoct.
Michael Hiltzik
May 16, 2010
At a congressional hearing a couple of weeks ago, Sen. Susan Collins of Maine asked a lineup of current and former Goldman Sachs executives a simple question: Did they have a duty to act in their clients', not their firm's, best interest?
The query elicited some impressive verbal contortions. "I believe we have a duty to serve our clients well," one witness replied to the Republican senator. "It's our responsibility . . . in helping them transact at levels that are fair market prices and help meet their needs," said another. "Conceptually it seems like an interesting idea," said a third.
The witnesses could have avoided their discomfiture by sticking to the simple truth. The correct answer to the question of whether investment bankers have a duty to act in their clients' best interest is "no."
We may have put our finger here on one of the major problems with the state of our financial rules and regulations. Investment bankers and their professional cousins, broker-dealers, don't generally owe what's known as a "fiduciary duty" to their clients under federal or state laws (New York's state law is what normally applies).
Efforts in Washington to expand the fiduciary rule beyond its existing application to registered investment advisors have been consistently fought off by Wall Street and the insurance industry. But a new effort to add it to the financial reform bill now being debated by Congress is being mounted by Sen. Ted Kaufman (D-Del.), among others.
Acting in a client's best interest wasn't a burning issue in simpler times, when investment bankers raised capital for their clients through stock or bond offerings, and brokers brought buyers and sellers together for deals in conventional securities. Everyone knew where the dividing line ran between the client's interest and the firm's interest, and how to stay on the right side.
Those days are past. In 2001, Goldman Sachs reported pre-tax earnings of $719 million from investment banking (helping clients raise capital), $2.1 billion from providing brokerage services and $1.2 billion from trading.
Last year, it reported $1.3 billion from investment banking, $1.3 billion from brokerage and $17.3 billion from trading. Anyone detect a trend line there?
A great deal of that trading involved derivatives, which are financial instruments so esoteric that their buyers' and sellers' investment goals, and even the size of their holdings, can be concealed.
"Conflicts of interest have been exponentially exacerbated by the rise of derivatives trading," says John C. Coffee Jr., a Columbia University law professor who recently testified before Congress on the need to tighten fiduciary rules on Wall Street. "Investment banks are no longer in the old world of raising capital. Now you can have a party in a transaction who wants the price to go down."
There's nothing wrong with taking a negative view of the market. Nor, when you're buying or selling, is there anything wrong with obscuring what you really think an asset is worth — skill in doing so is what makes some people better dealmakers, or salespersons, than others.
The problem arises when the broker or banker is the creator of the asset or the deal, and misleads clients about what he thinks is its true nature or true value. This is the sort of thing the Securities and Exchange Commission has accused Goldman Sachs of doing when it marketed a billion-dollar investment linked to subprime mortgage securities without divulging that the deal had been partially crafted by a client who wanted the package to fail.
In that case, the SEC said in its lawsuit over the so-called Abacus deal, Goldman yoked its fortunes to one client at the expense of another. The firm's conflict of interest might have been evident to the buyers if they had been dealing in plain-vanilla securities, an SEC official said, rather than the tutti-frutti mishmash Goldman helped concoct.
That's just the latest example. In 2008, New York Atty. Gen. Andrew Cuomo and the SEC extracted settlements worth more than $50 billion from Bank of America, Goldman Sachs and other institutions over their sales of auction-rate securities. These were investments the banks suggested were as liquid as cash or money-market funds, until the banks pulled the rug out from under the auction-rate market, rendering the securities about as liquid as concrete.
There's no dearth of evidence that Wall Street's definition of "conflict of interest" has gotten looser over the years, like an old sweater stretched hopelessly out of shape. Investment firms' growth strategies call for them to be in so many businesses at once that it's almost inevitable that one department is undermining the interests of the clients of another.
Sometimes the firms admit this is troubling, sometimes they say it's progress. In his testimony, Coffee cited a famous observation by Jack Grubman — who played the dual role of telecom dealmaker and "independent" telecom stock analyst at Salomon Smith Barney during the go-go 1990s — that "what used to be a conflict is now a synergy."
Advocates of extending the fiduciary rule to brokers and investment bankers say the goal is to reacquaint them with traditional morality. Fiduciary duty is not always easy to define, but lawyers often cite the words of Supreme Court Justice Benjamin Cardozo, who described it in 1928 as "not honesty alone, but the punctilio of an honor the most sensitive."
They also maintain that the "suitability" or "know your customer" standard customarily applied to brokers and bankers isn't enough anymore. That rule is designed to keep brokers from putting customers into deals they can't afford or can't understand — like selling an options straddle to an elderly widow, say.
The suitability rule wouldn't stop Goldman Sachs from selling a bucket of subprime mortgage investments to a supposedly sophisticated major European bank with billions in assets, as it did in the Abacus deal. But a fiduciary standard might lead the firm to think twice before forgetting to mention that some of the securities involved in the deal might have been picked because they were expected to lose money.
Not everybody thinks a fiduciary standard will work. "Fiduciary rules are much too vague to have a deterrent effect," says Larry Ribstein, a law professor at the University of Illinois, who testified at the same hearing as Coffee. "They're too nebulous to apply across the board in a statute that applies to the spectrum of relationships" in the financial industry. He says that's particularly true if, as Congress is contemplating, you're going to impose criminal penalties for violations. "There you have a special need to be clear."
Ribstein also contends that applying fiduciary standards to investment bankers would be solving a problem that doesn't exist. If Goldman Sachs withheld from its Abacus clients information it should have disclosed (as the SEC contends), that's fraud, and laws exist to punish it.
Coffee responds that any new law can give financial regulators the power to define how fiduciary rules should apply in any given category of transactions. "Any time you come up with a new statutory scheme you can imagine problems," he told me. "But this is a way for the SEC to get a handle on the growing problem of conflicts of interest."
latimes.com
Investment banks aren't required to act in clients' best interest
Goldman Sachs' conflict of interest might have been evident to buyers if they had been dealing in plain-vanilla securities, rather than the tutti-frutti mishmash Goldman helped concoct.
Michael Hiltzik
May 16, 2010
At a congressional hearing a couple of weeks ago, Sen. Susan Collins of Maine asked a lineup of current and former Goldman Sachs executives a simple question: Did they have a duty to act in their clients', not their firm's, best interest?
The query elicited some impressive verbal contortions. "I believe we have a duty to serve our clients well," one witness replied to the Republican senator. "It's our responsibility . . . in helping them transact at levels that are fair market prices and help meet their needs," said another. "Conceptually it seems like an interesting idea," said a third.
The witnesses could have avoided their discomfiture by sticking to the simple truth. The correct answer to the question of whether investment bankers have a duty to act in their clients' best interest is "no."
We may have put our finger here on one of the major problems with the state of our financial rules and regulations. Investment bankers and their professional cousins, broker-dealers, don't generally owe what's known as a "fiduciary duty" to their clients under federal or state laws (New York's state law is what normally applies).
Efforts in Washington to expand the fiduciary rule beyond its existing application to registered investment advisors have been consistently fought off by Wall Street and the insurance industry. But a new effort to add it to the financial reform bill now being debated by Congress is being mounted by Sen. Ted Kaufman (D-Del.), among others.
Acting in a client's best interest wasn't a burning issue in simpler times, when investment bankers raised capital for their clients through stock or bond offerings, and brokers brought buyers and sellers together for deals in conventional securities. Everyone knew where the dividing line ran between the client's interest and the firm's interest, and how to stay on the right side.
Those days are past. In 2001, Goldman Sachs reported pre-tax earnings of $719 million from investment banking (helping clients raise capital), $2.1 billion from providing brokerage services and $1.2 billion from trading.
Last year, it reported $1.3 billion from investment banking, $1.3 billion from brokerage and $17.3 billion from trading. Anyone detect a trend line there?
A great deal of that trading involved derivatives, which are financial instruments so esoteric that their buyers' and sellers' investment goals, and even the size of their holdings, can be concealed.
"Conflicts of interest have been exponentially exacerbated by the rise of derivatives trading," says John C. Coffee Jr., a Columbia University law professor who recently testified before Congress on the need to tighten fiduciary rules on Wall Street. "Investment banks are no longer in the old world of raising capital. Now you can have a party in a transaction who wants the price to go down."
There's nothing wrong with taking a negative view of the market. Nor, when you're buying or selling, is there anything wrong with obscuring what you really think an asset is worth — skill in doing so is what makes some people better dealmakers, or salespersons, than others.
The problem arises when the broker or banker is the creator of the asset or the deal, and misleads clients about what he thinks is its true nature or true value. This is the sort of thing the Securities and Exchange Commission has accused Goldman Sachs of doing when it marketed a billion-dollar investment linked to subprime mortgage securities without divulging that the deal had been partially crafted by a client who wanted the package to fail.
In that case, the SEC said in its lawsuit over the so-called Abacus deal, Goldman yoked its fortunes to one client at the expense of another. The firm's conflict of interest might have been evident to the buyers if they had been dealing in plain-vanilla securities, an SEC official said, rather than the tutti-frutti mishmash Goldman helped concoct.
That's just the latest example. In 2008, New York Atty. Gen. Andrew Cuomo and the SEC extracted settlements worth more than $50 billion from Bank of America, Goldman Sachs and other institutions over their sales of auction-rate securities. These were investments the banks suggested were as liquid as cash or money-market funds, until the banks pulled the rug out from under the auction-rate market, rendering the securities about as liquid as concrete.
There's no dearth of evidence that Wall Street's definition of "conflict of interest" has gotten looser over the years, like an old sweater stretched hopelessly out of shape. Investment firms' growth strategies call for them to be in so many businesses at once that it's almost inevitable that one department is undermining the interests of the clients of another.
Sometimes the firms admit this is troubling, sometimes they say it's progress. In his testimony, Coffee cited a famous observation by Jack Grubman — who played the dual role of telecom dealmaker and "independent" telecom stock analyst at Salomon Smith Barney during the go-go 1990s — that "what used to be a conflict is now a synergy."
Advocates of extending the fiduciary rule to brokers and investment bankers say the goal is to reacquaint them with traditional morality. Fiduciary duty is not always easy to define, but lawyers often cite the words of Supreme Court Justice Benjamin Cardozo, who described it in 1928 as "not honesty alone, but the punctilio of an honor the most sensitive."
They also maintain that the "suitability" or "know your customer" standard customarily applied to brokers and bankers isn't enough anymore. That rule is designed to keep brokers from putting customers into deals they can't afford or can't understand — like selling an options straddle to an elderly widow, say.
The suitability rule wouldn't stop Goldman Sachs from selling a bucket of subprime mortgage investments to a supposedly sophisticated major European bank with billions in assets, as it did in the Abacus deal. But a fiduciary standard might lead the firm to think twice before forgetting to mention that some of the securities involved in the deal might have been picked because they were expected to lose money.
Not everybody thinks a fiduciary standard will work. "Fiduciary rules are much too vague to have a deterrent effect," says Larry Ribstein, a law professor at the University of Illinois, who testified at the same hearing as Coffee. "They're too nebulous to apply across the board in a statute that applies to the spectrum of relationships" in the financial industry. He says that's particularly true if, as Congress is contemplating, you're going to impose criminal penalties for violations. "There you have a special need to be clear."
Ribstein also contends that applying fiduciary standards to investment bankers would be solving a problem that doesn't exist. If Goldman Sachs withheld from its Abacus clients information it should have disclosed (as the SEC contends), that's fraud, and laws exist to punish it.
Coffee responds that any new law can give financial regulators the power to define how fiduciary rules should apply in any given category of transactions. "Any time you come up with a new statutory scheme you can imagine problems," he told me. "But this is a way for the SEC to get a handle on the growing problem of conflicts of interest."
Wednesday, May 12, 2010
Banks make a profit trading 61 days in a row
http://www.nytimes.com/2010/05/12/business/12bank.html?ref=business
4 Big Banks Score Perfect 61-Day Run
By ERIC DASH
It is the Wall Street equivalent of a perfect game of baseball — 27 up, 27 down, the final score measured in millions of dollars a day.
Despite the running unease in world markets, four giants of American finance managed to make money from trading every single day during the first three months of the year.
Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball. On Sunday, Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history.
But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.
Their showing, disclosed in quarterly financial filings, underscored the outsize — and controversial — role that trading has assumed at major financial institutions. It also drives home the widening lead that a handful of big banks are enjoying over lesser rivals on post-bailout Wall Street.
Experts said it would be difficult to repeat such a remarkable feat this quarter. Even so, the performance could feed the debate in Washington over the role of proprietary trading at banks, as well as sometimes conflicted roles banks play as market makers in matching buy and sell orders.
Risk management experts said the four banks, as well as other Wall Street players, reaped big rewards without necessarily placing big bets that stocks or bonds would go up or down. Instead, they mostly played matchmaker, profiting from the difference between the prices at which clients were willing to buy and sell. Banks said that customer order flows were particularly strong during the period.
“This is not about hitting home runs,” said Jaidev Iyer, who runs his own risk management consulting firm, J-Risk Advisors. “This is just, as we call it, milking the market and your captive client base.”
Still, the quarterly showing was highly unusual. Bank of America said that its trading revenue surpassed $100 million on 26 days, or almost 43 percent of the 61 trading days in the first quarter. It was the first time Bank of America had a perfect quarter since acquiring Merrill Lynch in early 2009.
JPMorgan said that its trading revenue hit $90 million on 39 days during the first quarter, and exceeded $180 million on nine days, or about 14 percent of the time.
A JPMorgan spokesman said the last time the bank had a perfect run was the first quarter of 2003. “The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010,” Morgan said in a regular filing with the Securities and Exchange Commission this week.
Goldman Sachs — which is fighting an S.E.C. suit claiming the bank defrauded customers on a complex mortgage investment — posted its first perfect quarter ever. Goldman made at least $100 million on 35 days during the quarter, and at least $25 million on the remaining trading days.
In the wake of the S.E.C. suit, Goldman’s role as a market maker has come under scrutiny on Capitol Hill. It has staunchly defended its business practices and said it had done nothing wrong.
Gary D. Cohn, Goldman’s president, said Tuesday that the standout quarter highlighted the strength of the trading that Goldman executed for its customers, particularly its fixed income, currency and commodities unit, known as FICC. “Our FICC and equities businesses are largely global market-making businesses where we intermediate flows and commit capital and liquidity and in the process generate revenue including bid-offer spreads,” Mr. Cohn said at a UBS conference in New York. “These franchises create numerous opportunities for the firm.”
Citigroup also had a loss-free first quarter, according to a person briefed on the situation. The bank discloses its trading performance on an annual basis, but big daily losses have been a regular occurrence over the last few years. In 2008, it lost $400 million on 21 of its 260 trading days.
This year, even those that lost money from time to time, performed very well during the quarter. Morgan Stanley said its losses reached as much as $30 million only four days in an otherwise profitable quarter. A Morgan Stanley spokesman said the firm’s last perfect run was the second quarter of 2007.
Given the recent turmoil, last quarter’s strong showing will be hard to replicate. In 2009, the banks posted losses on less than 20 percent of the trading days; during the turmoil of 2008, losses occurred as much as 40 percent of the time.
“It was pretty smooth sailing last quarter,” said William Tanona, an analyst at Collins Stewart. “I would be very surprised to see history repeat.”
Tuesday, April 27, 2010
Goldman Sachs defends itself well
It appears like nothing got solved today on Capitol Hill as Senators from the Permanent Subcommittee on Investigations grilled several Goldman Sachs traders and risk managers about their role in selling mortgage backed securities to clients while failing to disclose that they and John Paulson's hedge fund took the opposite side of the trade and shorted (or bought protection, however you wanna word it) the portfolio. Unlike in previous congressional hearings, the lawmakers actually seemed fairly well versed in the financial lingo and seemed to understand what was going on, but they failed in their attempt to get one of the Goldman witnesses to crack and admit that it was wrong what they did. The witnesses were well 'lawyered' by their firm and managed to waste a lot of time saying things like, "can you repeat the question?," or "what exhibit was that again?," throughly frustrating the members of the committee.
How this whole thing got started was, Paulson called up GS and said he was interested in shorting (betting that they will default and go down in value) certain mortgage backed securities that he thought risky. Goldman's job is to find someone that would take the opposite side of that trade and make money off the transaction. Back in 2006, before the bubble burst, the view that the real estate market would crash was a small minority view. Insurance companies and other firms who bought these AAA securities had years of data to back up that these instruments were relatively safe and carried a nice interest rate with them. Some were even backed by the government. If a client is willing to pay 20 cents on the dollar for a crappy MBS, then who are they to stop them? These companies have their own advisors and analysts that are telling them they're ok to buy. On a basic level GS are a bunch of salesman that want to get the deal closed. Do you think a car salesman tells you every negative thing about the car, how much you should pay for it, before you buy it? Do you think a real estate agent tells you every bad thing about the house so you don't buy it? No, they disclose only what they're required to disclose.
When it comes down to it, it seems no law was broken. In this case, Goldman Sachs merely acted as a market maker and was not required to disclose how they managed the risk on their books or that Paulson was involved in choosing some of the securities in the portfolio. Were they aggressive salesman? Yes. Did they think what they were selling was gonna blow up in their clients faces? No. Investors on the institutional level know that you need a buyer and a seller to make the transaction happen, most of the time it doesn't matter who's on the other side. Back in 2006 John Paulson was not the John Paulson of today. He was a relatively small hedge fund running $300 million (he's now one of the biggest managing $30 billion). When he called Goldman, it shouldn't have set off alarm bells that this whale of a trader wants to do this, so maybe we should watch out. Many hedge funds had the same opportunity to do what he did, but they thought it was too risky. Many did take the long side of the trade, because they thought that prices were good and the market would come back (they got burned).
Now on the other side of the equation, should it be unethical for an investment bank to sell a product to a client that might not know any better before fully giving their opinion? It's a tough question. Part of an investment bank's job is to provide liquidity to markets and find new ways for clients to leverage their assets to get more money to do more things and that's how the economy keeps growing. Maybe the clients should have bought more insurance on their investments or done more due diligence into what they were buying and not just go by that AAA rating which could be manipulated. I'm sure Goldman will walk away paying a relatively small fine, but the industry will surely face more regulation and legislation as a repercussion of this fiasco.
http://www.nytimes.com/2010/04/28/business/28goldman.html?ref=business
How this whole thing got started was, Paulson called up GS and said he was interested in shorting (betting that they will default and go down in value) certain mortgage backed securities that he thought risky. Goldman's job is to find someone that would take the opposite side of that trade and make money off the transaction. Back in 2006, before the bubble burst, the view that the real estate market would crash was a small minority view. Insurance companies and other firms who bought these AAA securities had years of data to back up that these instruments were relatively safe and carried a nice interest rate with them. Some were even backed by the government. If a client is willing to pay 20 cents on the dollar for a crappy MBS, then who are they to stop them? These companies have their own advisors and analysts that are telling them they're ok to buy. On a basic level GS are a bunch of salesman that want to get the deal closed. Do you think a car salesman tells you every negative thing about the car, how much you should pay for it, before you buy it? Do you think a real estate agent tells you every bad thing about the house so you don't buy it? No, they disclose only what they're required to disclose.
When it comes down to it, it seems no law was broken. In this case, Goldman Sachs merely acted as a market maker and was not required to disclose how they managed the risk on their books or that Paulson was involved in choosing some of the securities in the portfolio. Were they aggressive salesman? Yes. Did they think what they were selling was gonna blow up in their clients faces? No. Investors on the institutional level know that you need a buyer and a seller to make the transaction happen, most of the time it doesn't matter who's on the other side. Back in 2006 John Paulson was not the John Paulson of today. He was a relatively small hedge fund running $300 million (he's now one of the biggest managing $30 billion). When he called Goldman, it shouldn't have set off alarm bells that this whale of a trader wants to do this, so maybe we should watch out. Many hedge funds had the same opportunity to do what he did, but they thought it was too risky. Many did take the long side of the trade, because they thought that prices were good and the market would come back (they got burned).
Now on the other side of the equation, should it be unethical for an investment bank to sell a product to a client that might not know any better before fully giving their opinion? It's a tough question. Part of an investment bank's job is to provide liquidity to markets and find new ways for clients to leverage their assets to get more money to do more things and that's how the economy keeps growing. Maybe the clients should have bought more insurance on their investments or done more due diligence into what they were buying and not just go by that AAA rating which could be manipulated. I'm sure Goldman will walk away paying a relatively small fine, but the industry will surely face more regulation and legislation as a repercussion of this fiasco.
http://www.nytimes.com/2010/04/28/business/28goldman.html?ref=business
Thursday, March 11, 2010
March Update--It's Lookin Pretty Good
Well, we've sustained a minor sell-off of about 7% and the risk trade is back on. I believe the leading sectors in the 2nd quarter will be Technology and Financials, as that's where the prospects for growth are the strongest. Goldman (GS) and Citi (C) are leading the charge and BAC, JPM, and a couple foreign banks will follow. Goldman reported good earnings, but the stock tumbled due to speculation of Congressional action banning banks from proprietary trading. As soon as that talk bogged down, Wall St. propped GS back up to the 170's. Citi has been a stale fish for months until it received some positive news :
http://www.americanbankingnews.com/2010/03/10/citibank-stock-hits-fourth-month-high-nyse-c/
It went from $3.50 to near $4.20 in a couple days and continues to climb. Meanwhile, anticipation of Apple's ipad and new iphone coming out in the summer has shot the stock http://www.google.com/finance?q=aapl from under 190 to 225.
The only thing missing from this bull run is the strong presence of the energy and oil & gas sector. For that to significantly run, the economy must mount a significant strong comeback which I'm not sure it's ready to do yet. Financials have been beaten up so badly that they have room to run up just on the basis that they're getting their shit together, selling off some bad assets, issuing tons of debt which eager investors are eating up, and not making so many bad loans anymore! That is why I think that the market as a whole can't move forward until the Federal Reserve begins the process of slowly raising rates. This probably has no chance of happening till at least the end of the year or early next year, but if the economy is truly improving, and that's what everyone says is happening, then the FED must raise rates, even if it's just a quarter of a point. I believe if this happens the market will sell off for a day, but then CONITNUE to move upwards and all sectors will participate!!
http://www.americanbankingnews.com/2010/03/10/citibank-stock-hits-fourth-month-high-nyse-c/
It went from $3.50 to near $4.20 in a couple days and continues to climb. Meanwhile, anticipation of Apple's ipad and new iphone coming out in the summer has shot the stock http://www.google.com/finance?q=aapl from under 190 to 225.
The only thing missing from this bull run is the strong presence of the energy and oil & gas sector. For that to significantly run, the economy must mount a significant strong comeback which I'm not sure it's ready to do yet. Financials have been beaten up so badly that they have room to run up just on the basis that they're getting their shit together, selling off some bad assets, issuing tons of debt which eager investors are eating up, and not making so many bad loans anymore! That is why I think that the market as a whole can't move forward until the Federal Reserve begins the process of slowly raising rates. This probably has no chance of happening till at least the end of the year or early next year, but if the economy is truly improving, and that's what everyone says is happening, then the FED must raise rates, even if it's just a quarter of a point. I believe if this happens the market will sell off for a day, but then CONITNUE to move upwards and all sectors will participate!!
Monday, December 14, 2009
Looking for Action? Look at China!!
This year has been an ideal market for traders. The volatility has made it possible for professionals and amateurs alike to get their accounts back to even and beyond. Emerging market stocks have been rampant all year and in some cases this is just beginning. China is still growing and it's companies service the rising populations in all Southeast Asia. There's a need for more cars and energy especially. Below see some of the companies in the automotive, solar and other energy companies. These aren't buy and hold stocks. Once you take a position, try to figure out the trading range of the stock...if it goes significantly lower from where you bought it, buy more...if you make some money...take profits and buy again when it goes lower. This trend should continue for quite some time. Happy trading!
Where to Profit From China's Pops
By the tickerspy.com Staff
On 11:45 am EST, Monday November 30, 2009
Whether Dubai's debt problems persist is to be determined, but analysts say the impact on Asian banks is minimal.
On U.S. exchanges, Chinese stocks and ADRs are among today's top performers. According to a report by Forbes.com, analysts said Asian banks have limited exposure to Dubai and continued turmoil in the Middle East could lead to additional business from other emerging markets. Meanwhile, isolated news is accelerating select China sectors to massive gains to start the week.
The Chinese Auto Parts Stocks Index is surging by 7% today after the country's largest automaker jumped by 7.5% in Shanghai. According to Bloomberg, a report in the Shanghai Securities News said the Chinese government may extend auto-friendly tax policies into 2010.
Parts players China Automotive Systems (NASDAQ: CAAS - News) and Sorl Auto Parts (NASDAQ: SORL - News) are shooting higher on the news. Wonder Auto Tech (NASDAQ: WATG - News) is also up after reaffirming its goal to achieve 31% compounded annual pro forma net income growth from 2009 to 2011.
In other automotive news, Berkshire Hathaway (NYSE: BRK-A - News, BRK-B - News) earned 6.2% on its Hong Kong-listed BYD (OTC: BYDDF - News) investment following an upgrade to equal-weight from underweight at Morgan Stanley.
Hong Kong Highpower Technology (AMEX: HPJ - News) and China BAK Battery (NASDAQ: CBAK - News) are trailing BYD for the session, but remain among the Energy Storage and Battery Technology Stocks Index's top performers.
The Chinese Solar Stocks Index's largest players are all moving higher today as investors digest the prospects of the country's pledge to cut emissions. According to last week's Bloomberg report, China plans to more than double its environmental protection spending to $454 billion through 2015.
LDK Solar (NYSE: LDK - News), Trina Solar (NYSE: TSL - News), and Yingli Green Energy (NYSE: YGE - News) are all up by more than 2.5% to start the week.
For more performance data and a suite of other metrics on tickerspy's seven Chinese subsector Indexes visit tickerspy.com.
Fun and informative, tickerspy.com is a free investing website where you can track multiple stock portfolios and compare against 250 proprietary Indexes tracking themes from stem cells to green energy to precious metals. Best of all, tickerspy.com lets you spy on the portfolios of nearly 3,000 Wall Street institutions and hedge funds and see graphs of their performance. Try tickerspy.com today and find out how you stack up against investing legends like Warren Buffett!
Where to Profit From China's Pops
By the tickerspy.com Staff
On 11:45 am EST, Monday November 30, 2009
Whether Dubai's debt problems persist is to be determined, but analysts say the impact on Asian banks is minimal.
On U.S. exchanges, Chinese stocks and ADRs are among today's top performers. According to a report by Forbes.com, analysts said Asian banks have limited exposure to Dubai and continued turmoil in the Middle East could lead to additional business from other emerging markets. Meanwhile, isolated news is accelerating select China sectors to massive gains to start the week.
The Chinese Auto Parts Stocks Index is surging by 7% today after the country's largest automaker jumped by 7.5% in Shanghai. According to Bloomberg, a report in the Shanghai Securities News said the Chinese government may extend auto-friendly tax policies into 2010.
Parts players China Automotive Systems (NASDAQ: CAAS - News) and Sorl Auto Parts (NASDAQ: SORL - News) are shooting higher on the news. Wonder Auto Tech (NASDAQ: WATG - News) is also up after reaffirming its goal to achieve 31% compounded annual pro forma net income growth from 2009 to 2011.
In other automotive news, Berkshire Hathaway (NYSE: BRK-A - News, BRK-B - News) earned 6.2% on its Hong Kong-listed BYD (OTC: BYDDF - News) investment following an upgrade to equal-weight from underweight at Morgan Stanley.
Hong Kong Highpower Technology (AMEX: HPJ - News) and China BAK Battery (NASDAQ: CBAK - News) are trailing BYD for the session, but remain among the Energy Storage and Battery Technology Stocks Index's top performers.
The Chinese Solar Stocks Index's largest players are all moving higher today as investors digest the prospects of the country's pledge to cut emissions. According to last week's Bloomberg report, China plans to more than double its environmental protection spending to $454 billion through 2015.
LDK Solar (NYSE: LDK - News), Trina Solar (NYSE: TSL - News), and Yingli Green Energy (NYSE: YGE - News) are all up by more than 2.5% to start the week.
For more performance data and a suite of other metrics on tickerspy's seven Chinese subsector Indexes visit tickerspy.com.
Fun and informative, tickerspy.com is a free investing website where you can track multiple stock portfolios and compare against 250 proprietary Indexes tracking themes from stem cells to green energy to precious metals. Best of all, tickerspy.com lets you spy on the portfolios of nearly 3,000 Wall Street institutions and hedge funds and see graphs of their performance. Try tickerspy.com today and find out how you stack up against investing legends like Warren Buffett!
Tuesday, November 3, 2009
Berkshire Hathaway 50-1 stock split!!
Berkshire Hathaway, Warren Buffet's insurance company, announced that they will be splitting it's company B-stock in a 50-1 split. The notoriously high traded stock will now trade around $65 at these levels making more accessible to everybody. I believe this is now a great pick for your long term portfolio. I imagine it will start to be more aggressively accumulated by institutional money now and will only go up from here.
http://www.marketwatch.com/story/berkshire-approves-50-for-1-class-b-stock-split-2009-11-03
http://www.marketwatch.com/story/berkshire-approves-50-for-1-class-b-stock-split-2009-11-03
Monday, November 2, 2009
The Weakening Dollar Will Eventually Hurt Us
This opinion in yesterday's FT by Nouriel Roubini helps explain what's been driving up the markets and how it can eventually blow up in our faces when the dollar gets stronger. The slingshot performance of the markets in the last week is a preview of what will happen a few months from now.
Mother of all carry trades faces an inevitable bust
By Nouriel Roubini
Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics
http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html
Mother of all carry trades faces an inevitable bust
By Nouriel Roubini
Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics
http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html
Thursday, October 29, 2009
Las Vegas Sands up 17% on earnings
Wynn Resorts Ltd. (NASDAQ: WYNN) may have set a high bar for Las Vegas Sands Corp. (NYSE: LVS) and its earnings report today, but cost cuts helped the company to beat its estimates. Las Vegas Sands reported GAAP net income of $62.4 million, but the non-GAAP operating income was $0.03 EPS and revenue was $1.14 billion. Thomson Reuters had estimates pegged at -$0.01 EPS and $1.17 billion in revenues. That is another instance of cost savings helping the bottom-line more than the top-line seeing improvements.
In the Vegas set it seems that cost savings helped to overcome weak table revenues. What is interesting is that the company said it had a record quarter regarding future group room night bookings. It also noted that it has more groups already on the books for 2010 than it expects to realize for all of 2009.
The company’s annualized cost savings will exceed $500 million across the company and it continues to look for opportunities on the cost front. That was 90% realized for the year as of September 30. Las Vegas Sands’ unrestricted cash balance at the end of the quarter was $3.09 billion and total debt outstanding was $11.76 billion.
Shares closed up 12% at $14.76 today, and shares are trading around $15.48 (5%) shortly after the report in the after-hours session!!
http://247wallst.com/2009/10/29/les-vegas-sands-wins-on-cost-cuts-lvs-wynn/
In the Vegas set it seems that cost savings helped to overcome weak table revenues. What is interesting is that the company said it had a record quarter regarding future group room night bookings. It also noted that it has more groups already on the books for 2010 than it expects to realize for all of 2009.
The company’s annualized cost savings will exceed $500 million across the company and it continues to look for opportunities on the cost front. That was 90% realized for the year as of September 30. Las Vegas Sands’ unrestricted cash balance at the end of the quarter was $3.09 billion and total debt outstanding was $11.76 billion.
Shares closed up 12% at $14.76 today, and shares are trading around $15.48 (5%) shortly after the report in the after-hours session!!
http://247wallst.com/2009/10/29/les-vegas-sands-wins-on-cost-cuts-lvs-wynn/
Tuesday, October 27, 2009
BP's up 5% after earnings report
BP buoys petroleum shares in sector rebound
By Steve Gelsi, MarketWatch
NEW YORK (MarketWatch) -- BP shares paced gainers in the petroleum sector as energy stocks rebounded Tuesday from two straight days of losses and crude prices rose on an expected drop in weekly petroleum inventories.
BP 57.97, +2.49, +4.49%
XOI 1,096, +9.84, +0.91%
Investors sifted through better-than-expected earnings from BP (NYSE:BP) and a steep loss from refining giant Valero (NYSE:VLO) .
Crude oil for December delivery rose 48 cents, or 0.5%, to $79.09 a barrel, rebounding from morning weakness.
Analysts expect a build of 900,000 barrels in U.S. commercial crude stocks for the week ended Oct. 23, according to analysts polled by Platts. They also project a decline of 1 million barrels in gasoline stocks and a drop of 1.1 million barrels in distillate inventories
The NYSE Arca Oil Index (INDEX:XOI) rose 1.6% to 1,104.
The NYSE Arca Natural Gas Index (INDEX:XNG) rose 1.7% to 520.
The Philadelphia Oil Service Index (INDEX:OSX) fell 0.1% to 200.
BP rallied 5.7% to $58.63 after the company's adjusted profit of $4.98 billion soundly beat the analyst estimate of $3.2 billion. Adjusted production rose 4%, and BP's tax rate fell to 29% from 36%.
"BP's contribution to what is becoming a strong third quarter earnings season is likely to meet with broker upgrades, potentially strengthening the current market consensus even further from its current buy status," Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers, told the Houston Chronicle. See full story.
Meanwhile, shares of Valero fell 4.4% to $19.37 after the refiner said it lost nearly $500 million in the third quarter on costs for scaling back operations, and weak margins in the refining sector. See full story.
Among stocks in the spotlight, Cabot Oil & Gas (NYSE:COG) drew an upgrade to overweight from neutral at J. P. Morgan, following the company's third-quarter earnings.
Analysts cited the company's results in the Marcellus and Haynesville regions, as well as its above-average production growth. Cabot's third-quarter operating earnings of 38 cents a share topped J.P. Morgan's forecast of 36 cents a share.
Shares of Cabot rose 10% to $42.13.
National Oilwell Varco (NYSE:NOV) fell 2% to $43.38 after the company drew a downgrade from Tudor Pickering Holt to hold from accumulate.
After an 81% rise so far this year, the stock has reached Tudor Pickering's target valuation. A slower build up in orders from Brazil also removes a potential near-term catalyst to buy the stock, Tudor Pickering said.
"Good company, executing exceptionally, but we've gotten paid for it and now time to wait for re-entry point (maybe high $30's)," the analysts wrote in a note to clients.
http://www.marketwatch.com/story/bp-up-valero-down-in-mixed-energy-sector-action-2009-10-27?siteid=yhoof
By Steve Gelsi, MarketWatch
NEW YORK (MarketWatch) -- BP shares paced gainers in the petroleum sector as energy stocks rebounded Tuesday from two straight days of losses and crude prices rose on an expected drop in weekly petroleum inventories.
BP 57.97, +2.49, +4.49%
XOI 1,096, +9.84, +0.91%
Investors sifted through better-than-expected earnings from BP (NYSE:BP) and a steep loss from refining giant Valero (NYSE:VLO) .
Crude oil for December delivery rose 48 cents, or 0.5%, to $79.09 a barrel, rebounding from morning weakness.
Analysts expect a build of 900,000 barrels in U.S. commercial crude stocks for the week ended Oct. 23, according to analysts polled by Platts. They also project a decline of 1 million barrels in gasoline stocks and a drop of 1.1 million barrels in distillate inventories
The NYSE Arca Oil Index (INDEX:XOI) rose 1.6% to 1,104.
The NYSE Arca Natural Gas Index (INDEX:XNG) rose 1.7% to 520.
The Philadelphia Oil Service Index (INDEX:OSX) fell 0.1% to 200.
BP rallied 5.7% to $58.63 after the company's adjusted profit of $4.98 billion soundly beat the analyst estimate of $3.2 billion. Adjusted production rose 4%, and BP's tax rate fell to 29% from 36%.
"BP's contribution to what is becoming a strong third quarter earnings season is likely to meet with broker upgrades, potentially strengthening the current market consensus even further from its current buy status," Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers, told the Houston Chronicle. See full story.
Meanwhile, shares of Valero fell 4.4% to $19.37 after the refiner said it lost nearly $500 million in the third quarter on costs for scaling back operations, and weak margins in the refining sector. See full story.
Among stocks in the spotlight, Cabot Oil & Gas (NYSE:COG) drew an upgrade to overweight from neutral at J. P. Morgan, following the company's third-quarter earnings.
Analysts cited the company's results in the Marcellus and Haynesville regions, as well as its above-average production growth. Cabot's third-quarter operating earnings of 38 cents a share topped J.P. Morgan's forecast of 36 cents a share.
Shares of Cabot rose 10% to $42.13.
National Oilwell Varco (NYSE:NOV) fell 2% to $43.38 after the company drew a downgrade from Tudor Pickering Holt to hold from accumulate.
After an 81% rise so far this year, the stock has reached Tudor Pickering's target valuation. A slower build up in orders from Brazil also removes a potential near-term catalyst to buy the stock, Tudor Pickering said.
"Good company, executing exceptionally, but we've gotten paid for it and now time to wait for re-entry point (maybe high $30's)," the analysts wrote in a note to clients.
http://www.marketwatch.com/story/bp-up-valero-down-in-mixed-energy-sector-action-2009-10-27?siteid=yhoof
Sunday, October 25, 2009
Thursday, October 15, 2009
BUY OIL OIL OIL SERVICE NAMES!!
Oil is just starting to catch up to gold and other commodities in the last few weeks and it has a long way to go. There is a perfect storm of factors (weak dollar, tremendous uncertainty, a bullish equity market) that is conducive to a commodities boom right now and oil names will benefit. I think the best way to invest on this theme, is to buy oil service companies. Oil service companies are suppliers of equipment or services to oil fields and offshore platforms, such as drilling, exploration, and construction. Transocean, Diamond Offshore, Noble, Halliburton, Baker-Hughes, and Schlumberger are some examples. Instead of picking 1, you can use oil service ETF's which contain a basket of most of these companies. My favorites are: OIH, PXJ, and IEZ. You can use 2x leverage by using DIG and 3x leverage using the ERX, but be careful as you can lose money as quickly as you can make it. If you totally disagree with me, you can short sell with 2x leverage by using DUG. Oil is just gonna get higher from here ($77) over the next couple months.
On another note:
It is possible to manage your investments on your own!! The performance of the stock market in last decade taught us that buying and holding index funds for 30 years is not the best way to manage your money. Do you really want to look back when you're ready to retire and realize you have the same amount or less money than you put in 20 years ago, but if you did it right you could have 10x that or more?? You have to be flexible and aggressive when the markets call for it, and have the discipline to sell and get defensive when times are tough. This can be done...more on this topic later.
Wednesday, October 14, 2009
Dow hits 10,000, how much further can we go?
The Dow hit a psychological milestone today by getting over 10,000, a place it hasn't been in over a year. Now is a good time to look back at your decisions of the past year and evaluate how you've done. Did you stay the course when it looked like the world was going to end at the beginning of the year? Did you abandon ship and get out of the market entirely and switch to cash?? Were you fearless and undeterred and voraciously bought stocks when they were at their cheapest and have since doubled or tripled your money??
I wish I can say I was fearless...that I realized that the recession wasn't going to turn into a depression...that I foresaw March as the greatest buying opportunity in our lifetime. That couldn't be further from the truth. Back then, I was extremely bearish on the banks and the economy. I thought we were headed for an apocalypse. I was so confident that we were gonna crash that I tried to profit from the peril by shorting all the bank stocks, certain that they were gonna go to zero within a month. I was so sure that stocks were going lower that I sold most of my families mutual funds (except for gold) in an effort to avoid further losses. A couple days after I did all this, Vikram Pandit, CEO of Citi announced that their 1st quarter losses were going to be much smaller than previously thought. The market took off. Shortly there after, Wells Fargo was so excited to announce their positive 1st quarter earnings numbers that they announced a week early, catching the markets by surprise...the Dow took off again.
At this point I lost a significant amount of money, but I was still undeterred in my bearish view and believed that this positive upswing was temporary. I couldn't fathom that after months of hearing how bad things are gonna get, that the situation was already starting to get better. Didn't make sense to me. I bet more aggressively against the market in my personal account. Then the federal government announced it was coming to the aid of all the distressed banks and basically decided to help the whole economy by throwing hundreds of billions of dollars and, well you know what happens in the ensuing months.
I remained bearish on the economy till about June. I was constantly waiting for the downturn and placed bearish bets accordingly. I thought my friends that were buying into the rally were nuts. Were they not looking at the same facts that I was??? Finally, I realized that I was playing the stock market that was in my head and not the one that was actually happening right in front of me. Why was I fighting this bullish run? I adopted more of a, "if you can't beat'em, join'em," and things started to get better from there.
The market was on fire and I was finally on the right side of it. The riskiest stocks were the one's going up the most because they got beat up the most. I started investing in commodities, oil and gas stocks, technology, and biotech. There was one pre-conceived notion I had to get out of my head: I had to realize that you will never buy a stock at it's cheapest and you will never sell a stock at the top. I wouldn't buy a stock like Apple because it wasn't at 85 anymore, it was at 95. I kept trying to wait till it got back to 85, but it never did. Finally I decided to stop fighting the tape, suck it up, and buy it at $120. I still hold that position (it's $192 now!). With every stock that you own you have to ask yourself, "would I still buy this stock at this price?" If the answer is no, then you should sell it, if yes, then you should buy more of it.
You don't need a list of 50 stocks in your portfolio, especially if you don't have millions of dollars, you just need to find 4-8 good companies or ETF's, preferably in different industries so you have diversification, and slowly build positions in them over time. For example, I've built the following equity portfolio for one of my young clients and it's done quite well for her IRA:
20% in BP (oil company w/ 6.5% dividend) You can also use the OIH ETF to get oil exposure
20% XLK (technology ETF containing companies such as Apple, Google, RIMM, Intel, Cisco
20% XBI (Biotech ETF--pharma companies have lots of cash and are acquiring smaller biotech firms now cause they can pick them up for cheap valuations, but they are paying large premiums for them so it brings up the whole sector)
20% GLD and GDX (gold ETF and gold miners etf)
20% BIK (Emerging markets BRIC ETF-Brazil, China, Russia, India leading companies)
This is a good and simple aggressive portfolio for a young person who can take risk. She also has corporate bonds which pay steady interest to you and are more conservative.
Will the rally last forever?? Of course not, but you should ride it out while it lasts and make as much money as possible before it turns around. Don't try and pick the point it's gonna pullback, that's a loser's game and you will get burned. There's no reason for the markets to have a major pullback this year. There is too much money on the sidelines and big hedge funds need to show their clients that they're worth the 2% and 20% in fees that they charge so they have to participate in this rally and keep driving the markets up. Do I think we'll go much over 11000?? Doubtful as that bear in me still thinks there's lots of unresolved problems in this economy that need addressing, but I think 10500 is right around the corner.
Sunday, August 30, 2009
Survivor Puts--bonds that elderly should own
Did you know that you can buy bonds issued by companies such as GMAC, Ford, Catepillar, CIT, and others that when the owner of the bonds passes on, the beneficiaries can put the bond back to the issuer and get par for them (100). It's called a Survivor or Death Put. Many of these bonds now are selling at 50 cents on the dollar and you can collect very juicy premiums (10-12% or more) for these bonds while you wait, you just have to be sure that the company isn't going to declare bankruptcy before they pay you off! You can buy a 30 year Ford or Catepillar bond and if the person dies next year, get 100 cents on the dollar for it. Not all bonds have this survivor put, so be sure to ask your advisor to make sure they have them. Is it a little morbid?? Yes, of course it is, but I think if people are over 80 years old, they should all own some of these. It would benefit their heirs greatly.
Happy Investing...
Ivan
Thursday, August 13, 2009
Where to put cash in a rising interest rate environment
Interest rates are about as low as they're gonna get right now. When the economy starts to improve (I'm not sure if that's started to happen yet), the Fed will start rising rates again. Now is the time to figure out what does well in a rising rate environment. Here are some ideas:
Commodities- Gold, silver, oil, natural gas
TIPS (Treasury inflation protected securities)- These are bonds that are issued by the government that adjust their interest rates for inflation, which will also be a natural consequence of all the dollars we've been printing recently. Premium Ginnie-mae paper are also good in a rising rate environment. There's also no credit risk because Ginnie's are a direct obligation of the government.
Short-term paper-- won't be affected too much when rates rise because you're holding them to maturity anyway.
High quality preferred stock- Preferred stock is like a hybrid between a stock and a bond, as it trades like a stock, but it pays you interest. A lot of the banks issue preferred stock that pays 8-9.5%. You're also a little bit higher up in the debt structure, so if a company goes bankrupt and the common stock gets wiped out, preferred stock holders might still get something. Make sure you buy the higher up trust preferreds as you have a better chance of getting something back if the company goes belly up. You can also get preferreds with adjustable or floating rates that go up as rates go up.
Bond funds- There are some great bond managers out there that do a great job making sure you get a decent return in all types of environments. Bill Gross runs the Pimco Total Return fund, which is the largest, is one of the best. They've even managed to be up a couple percent last year and you also get good interest. Other good bond funds are run by Franklin, Oppenheimer, Lord Abbot, and Van Kampen.
Finally, Cal G.O.'s (CA General Obligation municipal bonds)- G.O. Muni's are issued by states, counties, hospitals, school systems and are backed by the full faith and credit of the municipality. There is a great opportunity for Californians to buy Cal GO's because they sold off in the great sell-off of last year and Cali is in bad shape. People must realize though that the state HAS to pay off it's bond debt according to it's constitution. They would have to not pay police officers and fire fighters before they default on their own debt, therefore you're getting a good spread right now (not as good as earlier in the year, but historically still really good) You can get 5% interest and that's tax-free!!
Let me know if you have any other ideas. Leave comments!!
Ivan
Saturday, August 1, 2009
MLP's--A Necessary Component of Your Portfolio
The markets hit new highs for the year today. Nasdaq is up 58% from it's lows in March and crossed 2,000 for the first time since last October. The S&P crossed 1000 and is up 50% from the lows. I guarantee there are people reading this who sold out of positions at the lows and went to cash. It was scary back then and I agree that it was prudent to get out of some of the riskier stocks where bankruptcy was a real possibility (Citi, AIG, even B of A before the gov't came in), and go defensive. Oil went from $147 last July to the low 30's earlier in the year and currently up to $72.
The volatility of the last year is unprecedented and has also provided the opportunity to make a lot of money. If you bought into the stock market 10 years ago, you would have slightly less money than what you started with. That's not exactly a great investment right? Not only did you lose money, you didn't even get to enjoy it. Might as well have taken a nice vacation. You need to have components in your portfolio that you can rely on and you need to have a strategy. Dividend paying stocks and interest paying debt instruments are essential.
Dividends and bonds give your portfolio breathing room of 5-15% that's income you can rely on. When the markets are in a free fall, you have to go back to the basics of the market. What do people need to live on? Food, medicine, and energy come to mind. Where are there monopolies? They still exist. You only have one choice if you want gas and energy in your house right? You look for business' that can survive without needing to borrow money and have cash coming in that you can count on.
There's a group of stocks called Master Limited Partnerships (MLP's), which are primarily comprised of energy pipeline companies that own and lease thousands of miles of pipeline to transport and store natural gas or any other liquid. Many have virtual monopolies in the states that they operate in. The beauty of them is they're tax advantaged so long as they pass on at least 90% or their earnings to their investors. They have a great history of cash distributions anywhere from 7-20%!! They have also outperformed the broader market for the better part of this decade. The group hasn't been immune from the credit crunch though, but that's why valuations are still compelling. They've rebounded nicely with the market since March and the yields are still juicy. My top picks are KMP, OKS, PAA, and EPD. I would choose the larger, more stable ones that can handle their debt during what is sure to be continued tough economic times for years to come. I think can establish a position right now and dollar cost average your price down over time and definitely reinvest your dividends!!
Happy Investing,
Ivan
Thanks for all the emails!! Try to leave some comments too so everyone can be in on the discussion.
Monday, July 27, 2009
ATOAX-WHERE TO PUT SOME CASH
“I want to keep my money in cash and get a decent interest rate, but my savings and money market accounts pay virtually 0%. Even CD rates that my bank offers aren’t that great and you pay taxes on top of that.”
Stop being complacent with your cash when you can safely earn some federally tax-free interest. ATOAX is a great option. Issued by Alpine Funds, this fund endeavors to provide high federal after-tax current monthly income with minimal principal fluctuation, enhancing return by capitalizing on fundamental and technical opportunities in the fixed income markets. The Fund invests primarily in extremely short-term municipal bonds from all over the country, most of which mature in a matter of weeks or months.
Full Disclosure-I can’t call this a ‘cash alternative’ because technically it’s not, there’s no FDIC insurance, these are securities we’re talking about here. Extremely short muni bonds that mature in a week or few months are pretty darn safe and if for some reason one defaults, it wouldn’t affect the fund that much because the risk is spread out.
It only costs .5% to get into the fund and you can take your money out for free after one month. The funds expenses are also minimal. You even get some appreciation, as it’s up 1.89% YTD and 3.72% over the last 3 years with that 3.36% on top of that! I believe a fund like this belongs in everyone’s portfolio.
Happy Investing,
Ivan
http://www.alpinefunds.com/
http://67.134.217.27/default.asp?P=442773&S=442778
http://67.134.217.27/632953.pdf
Saturday, July 25, 2009
Return of Principal
RETURN OF PRINCIPAL--A NEW BLOG by Ivan Fatovic--07/24/09
People's financial goals have changed substantially in the last year. Back in the good old days of the dot com boom, people were upset if their stock portfolio went up only 26% because they heard that their neighbor’s friend became a millionaire after putting ten grand into an internet IPO.
It never crossed your mind that you might lose half your life savings or worse when buying stocks. Times have changed and people have gotten more conservative with their money and even started saving (who’d a thunk it?) People have become skeptical of the market and are now looking for return of their principal instead of return on their principal. What I mean by that is if you give a money manager a hundred grand, the worst thing you expect is to at least get your hundred grand back but hopefully you’d like to get a little more.
Some have dipped their feet back in and made some money in the last few months, but how long is that gonna last? Markets don’t go up forever and we’re bound to have a pullback at some point. Some are even predicting that the worst is yet to come and it’s a year or two out. Some say we are going to be in a secular bear market for the next 8-10 years. What do you think? I personally find it hard to believe that all of a sudden the banks are out of their rut and already making record profits a mere few months after they were telling us that they were on the precipice of destruction in early March. Uncle Sam bailed all the big ones out and some of those institutions have even paid that money back with interest a few months after they got it. So that’s it?? Problem solved?? I don’t think so.
So how should you build your portfolio so if and when the markets crash again, your 401k doesn’t turn into a 201k or worse all over again?? Most people in our business think diversification is one of the main methods to consider when building your portfolio. That’s true to an extent, but just because you have a dozen mutual funds in your portfolio, doesn’t necessarily mean you’re diversified. What you need to find is products that aren’t correlated to each other. You can have a large cap growth fund, a small cap value fund, and a mid cap blend fund and think you’re diversified but really you’re not because those funds tend to move in tandem together, so if the large cap growth is up, there’s a high probability that the other two are up a similar amount (+ or – a few percent), consequently when one’s down they’re all down.
The innovators in retail investing have made it possible so the average investor can spread their risk out among different asset classes like gold, real estate (U.S. and int’l), fixed income (corporate, municipal, and government), private equity, hedge funds strategies, international equity, international emerging debt, and currencies to name some. This kind of asset allocation used to only be available to the super rich, but now all of us have access to most of them thanks to ETF’s (exchange traded funds). ETF’s have also made it possible for investors to short sell entire sectors, which gives you the ability to make money when the markets go down. So what’s the best mix that’ll protect us when times are down while also allowing us to participate in the boom times when they come??
I wanted to introduce this blog by giving a general overview of what I’m going to be discussing and hopefully it will help you build a portfolio that you like for years to come which can help you reach your financial goals in life such as saving up for retirement or buying that first house or coming up with that extra cash to pay off your credit card or student loan. I welcome any feedback or questions, let me know what you think!
A lot of people freaked out last year when they woke up one morning and found out that they’re net worth was about half of what it used to be. Many sold off what they had left and put the rest into their savings or money market earning virtually 0% at the bank. Even CD’s are paying crap these days. Can’t a person earn a conservative 6-10% reliably without having to risk their principal? Well the answer is yes they can. Next time I’ll talk about one of the ways you can safely earn 3.3% federally tax free while being able to sleep at night knowing your principal is safe and have full liquidity. Till then start taking your money out from under the mattress before your daughter replaces it with a new mattress and throws your life savings in the garbage:
http://www.timesonline.co.uk/tol/news/world/middle_east/article6469706.ece
Ivan
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