If you haven't caught the Forbes cover article this month (written by Steve Forbes), then it's time you headed over to the Forbes site and get your read on.
-AvgJoe
Friday, October 24, 2008
Monday, October 13, 2008
The market's flubber bounce
I've been sitting here for a few minutes now wondering what exactly you say on a day like today. Happily, it doesn't involve finding some new way to describe a continually plunging stock market. In fact, quite the opposite. I'm sure you've seen already, but each of the three major US indexes is up more than 11%. Let me just go ahead and repeat that: over 11%.
How does this rank historically? From what I've got from Yahoo!Finance, it looks like this is the sixth largest percentage gain on the Dow (note: ignore the hoopla over the point gain, that's meaningless -- focus on the percentage). Ominously, all of the single-day percentage gains higher than today's were during the Great Depression.
Now I know this will make everyone jump to the conclusion that this means we're in the same situation as back then. I don't believe it does, so I'm not going to drag out the comparison any further.
What I will say is that there are two primary factors that are going to be front and center for me going forward: 1) the economy's reaction to the global efforts to jump start the credit markets and 2) how far the repricing of risk goes and how persistent it is. The reason for #1 is that if the economy falters then the companies that we're investing in (broadly) will be hurt by pinched sales and profitability. Simple as that.
#2 comes from the fact that over time investors tend to determine their required returns differently depending on how scared they are. People are very scared right now and want a big return to take pretty much any risk. If that continues to be the case, valuations for stocks will continue below what they had been before this drop began.
As for tomorrow... who knows? It's hard enough evaluating the market when fundamentals are in the driver seat. When investor psychology takes over -- particularly when there are a lot of unknowns -- things get interesting.
-AvgJoe
How does this rank historically? From what I've got from Yahoo!Finance, it looks like this is the sixth largest percentage gain on the Dow (note: ignore the hoopla over the point gain, that's meaningless -- focus on the percentage). Ominously, all of the single-day percentage gains higher than today's were during the Great Depression.
Now I know this will make everyone jump to the conclusion that this means we're in the same situation as back then. I don't believe it does, so I'm not going to drag out the comparison any further.
What I will say is that there are two primary factors that are going to be front and center for me going forward: 1) the economy's reaction to the global efforts to jump start the credit markets and 2) how far the repricing of risk goes and how persistent it is. The reason for #1 is that if the economy falters then the companies that we're investing in (broadly) will be hurt by pinched sales and profitability. Simple as that.
#2 comes from the fact that over time investors tend to determine their required returns differently depending on how scared they are. People are very scared right now and want a big return to take pretty much any risk. If that continues to be the case, valuations for stocks will continue below what they had been before this drop began.
As for tomorrow... who knows? It's hard enough evaluating the market when fundamentals are in the driver seat. When investor psychology takes over -- particularly when there are a lot of unknowns -- things get interesting.
-AvgJoe
Sunday, October 12, 2008
Finance on SNL
So who couldn't use a laugh right now? (and if you answered "not me" then you need a laugh more than the rest of us)
Check out this Update from Saturday Night Live. About halfway through is the "Fix It" bit, which is pretty much how I feel at this point.
-AvgJoe
Check out this Update from Saturday Night Live. About halfway through is the "Fix It" bit, which is pretty much how I feel at this point.
-AvgJoe
Thursday, October 09, 2008
Run and hide or stay and fight?
That's a really good question right now, especially since the Dow finished today down 39.4% from last year's peak. That's worse than the 37.8% drop that the Dow saw from peak to trough during the post-Internet Bubble blow-up. It now only trails two periods of stock market malaise -- the Great Depression and the extended down market during the late 60's and 70's.
During the Great Depression stocks declined 89% from summer 1929 to summer 1932, then spiked back up from 1932 to 1937 only to plunge another 52% from 1937 to 1942. In all it took 25 years for the Dow to recover its 1929 high.
After peaking in early 1966, the Dow had plunged 42% by Fall of 1974. And though '74 was the bottom, the market bounced up and down until 1982 when it finally started showing some real life again.
So are we in for a long period of terrible stock performance? I don't think so. Now I fully realize that I have been wrong on a lot over the past year, and certainly wasn't on the leading edge of this recent melt-down (and my portfolio shows this). I've now jumped on the "cyclical bear market" bandwagon, but, as others more prescient than myself have pointed out, this bear market really started back at the turn of the millennium. Right now we're down about 27% from the peak of 2000. And if you'd invested in the Dow in early 1998, you would have been roughly flat over the past 11 years. In other words, if this is a cyclical bear market, then we're well into it.
But that doesn't really help with the pressing question does it? So what do we do with our money? Well, I don't have the answer for any particular individual (when you need the money is a big question), but I'll tell you what I'm doing: I'm staying put. The problem with starting to freak out right now, or with trying to guess where the bottom is, is that there's a good likelihood that you'll miss out on some of the recovery -- which can happen fast.
How fast? After the bottom in 1932, the Dow rallied over 70% in two months. After bottoming out again in 1938, the market bounced back up over 20% in the next five months. May of 1970 was one of the many bottoms during that period and the market was up almost 35% over the next year. December of 1974 was the bottom of that period and over the next six months the Dow was back up 43%. And I could go on.
The point is that as violent and fast as this decline has been, the recovery can be equally so and trying to guess when to get out and when to get back in is more likely to get you in trouble than really get you market beating results. When markets start trading more on emotion than fundamentals, keeping a cool head is your best weapon.
If you've been investing all along in stable companies with good balance sheets that produce a good or service that's in real demand, then staying put is probably your best bet.
-AvgJoe
During the Great Depression stocks declined 89% from summer 1929 to summer 1932, then spiked back up from 1932 to 1937 only to plunge another 52% from 1937 to 1942. In all it took 25 years for the Dow to recover its 1929 high.
After peaking in early 1966, the Dow had plunged 42% by Fall of 1974. And though '74 was the bottom, the market bounced up and down until 1982 when it finally started showing some real life again.
So are we in for a long period of terrible stock performance? I don't think so. Now I fully realize that I have been wrong on a lot over the past year, and certainly wasn't on the leading edge of this recent melt-down (and my portfolio shows this). I've now jumped on the "cyclical bear market" bandwagon, but, as others more prescient than myself have pointed out, this bear market really started back at the turn of the millennium. Right now we're down about 27% from the peak of 2000. And if you'd invested in the Dow in early 1998, you would have been roughly flat over the past 11 years. In other words, if this is a cyclical bear market, then we're well into it.
But that doesn't really help with the pressing question does it? So what do we do with our money? Well, I don't have the answer for any particular individual (when you need the money is a big question), but I'll tell you what I'm doing: I'm staying put. The problem with starting to freak out right now, or with trying to guess where the bottom is, is that there's a good likelihood that you'll miss out on some of the recovery -- which can happen fast.
How fast? After the bottom in 1932, the Dow rallied over 70% in two months. After bottoming out again in 1938, the market bounced back up over 20% in the next five months. May of 1970 was one of the many bottoms during that period and the market was up almost 35% over the next year. December of 1974 was the bottom of that period and over the next six months the Dow was back up 43%. And I could go on.
The point is that as violent and fast as this decline has been, the recovery can be equally so and trying to guess when to get out and when to get back in is more likely to get you in trouble than really get you market beating results. When markets start trading more on emotion than fundamentals, keeping a cool head is your best weapon.
If you've been investing all along in stable companies with good balance sheets that produce a good or service that's in real demand, then staying put is probably your best bet.
-AvgJoe
Wednesday, October 08, 2008
For the last time, this isn't just about Wall Street!
I'm going to puke if I hear the phrase "Wall Street bailout" uttered one more time. Ooops, just puked, I guess somebody, somewhere just said it again. Why? Because people around the US still seem to believe that this is a bailout that "helps Wall Street, even after Wall Street destroyed our economy."
There's two parts to this, and in this blog I'm going to cover Wall Street destroying our economy. Did Wall Street play a part in what is going on? Sure! But there's no way that any of this could have happened without the help of good ol' Main Street.
Oh no Average Joe, you're not going to say something bad about the good, hard working people on Main Street, are you?
You bet I am.
Look, I don't have anything against Main Street -- heck, I'm part of Main Street and I'm getting nothing but lumps from what's going on right now. But at the core of all of the problems -- which has already been pretty well hammered home -- is the demise of waves of mortgage loans, subprime and not.
What Wall Street did was complicated, but the problems that it created are relatively simple. They took mortgage loans, packaged them into securitized vehicles, and sold them off to third party investors. This allowed lending banks to lend more because the securitizations took loans off of their books, and it also made investors more inclined to dip their toes into riskier credit profiles because they believed that the securitization vehicles were priced and structured such that they would still deliver acceptable returns.
Unfortunately, Wall Street used faulty assumptions -- like that the real estate market doesn't go down -- and so when the supposedly unthinkable started to happen, the value of all these securitized securities (most of us know them as MBSs, CDOs, etc) tanked. This caused cascading problems because many of these securities were rated very highly and therefore treated as gold by many banks, insurance companies, etc. The end result, among other things, is the credit lock-up that everyone is so scared of right now.
That's a very very brief overview of Wall Street's hand in this mess, but I certainly didn't want to ignore their handiwork. Now on to Main Street.
This is even simpler. If the core of the problem here is defaulting mortgages then we've got a heck of a lot of people out there that took out loans (which, remember, are agreements to pay back a certain amount of money) and decided not to pay them back. Easy as that. Now this is where the staunch defenders of Main Street come in with vehement arguments, so let's take a look at a few of them:
1) "But there was predatory lending!" -- I fully accept that there were lenders out there that were out and out fraudulent and hid details of the loans from people. But let's think about the scope of this mess and consider whether we really believe that there was really that much fraud out there. Without solid proof I'm very skeptical of that many predatory loans being foisted on people. In fact, I'll go ahead and give you 5% of the defaulting loans over the past couple years as predatory and fraudulent -- I think that's a pretty high percentage, but that still leaves 95% that we have to explain.
2) "People didn't understand the terms of the loan!" -- This argument just makes me shake my head. I think about the amount of research the average Joe Sixpack will do when trying to figure out what TV to buy and I wonder why we don't expect a commensurate amount of proactive research out of Joe Sixpack when he's looking to take out a loan for, say, $200,000. If you don't fully understand what you're signing your name to, why in the world would you borrow that kind of money??
3) "The mortgage brokers misled the buyers!" -- Fraud notwithstanding (see above for fraud), the mortgage brokers are salespeople. I'm not saying that they should be holding back information, but at the end of the day their job is to sell a loan to the home buyer, not make sure that the home buyer is getting the best deal possible. Referring back to #2, how many of those Joe Sixpack TV buyers implicitly trust the Best Buy salesmen? Yet they seem to expect that mortgage brokers are the guardians of their best interests.
I could go on, but I think you get the point. The bottom line is that I think we're overlooking the whole concept of personal responsibility when it comes to people taking out these huge loans. And when we talk about buying up faltering mortgage loans and renegotiating them with the home owner -- I mean, come on, talk about moral hazard!
Forgive me if this seems one-sided -- I do fully believe that most of the people that are defaulting should never have been given the money in the first place, let alone at the terms they got it on. But I think that when we're talking about the ingredients for the current mess it's a big mistake to leave the borrowers out of the equation, and that's exactly what has happened. Give Joe Sixpack a free ride and you're basically telling him that it's OK to take out a loan and then blame the lender when you realize that you got yourself in over your head.
Will the rhetoric change? Not a chance. During an election year (and really, what isn't an election year?) there's no way your going to hear anyone from the government scold the normal, everyday, hard working Americans. When they're getting ready to hit the voting booth, they can do no wrong!
So I'll keep cringing at the characterization of the current economic mess, but at least I've logged my protest. Am I selling out my fellow average Joes? I don't think so, I think I'm just asking for the best out of them. I think we can be a country that lives to a higher standard, and that means owning up to mistakes all around.
-AvgJoe
There's two parts to this, and in this blog I'm going to cover Wall Street destroying our economy. Did Wall Street play a part in what is going on? Sure! But there's no way that any of this could have happened without the help of good ol' Main Street.
Oh no Average Joe, you're not going to say something bad about the good, hard working people on Main Street, are you?
You bet I am.
Look, I don't have anything against Main Street -- heck, I'm part of Main Street and I'm getting nothing but lumps from what's going on right now. But at the core of all of the problems -- which has already been pretty well hammered home -- is the demise of waves of mortgage loans, subprime and not.
What Wall Street did was complicated, but the problems that it created are relatively simple. They took mortgage loans, packaged them into securitized vehicles, and sold them off to third party investors. This allowed lending banks to lend more because the securitizations took loans off of their books, and it also made investors more inclined to dip their toes into riskier credit profiles because they believed that the securitization vehicles were priced and structured such that they would still deliver acceptable returns.
Unfortunately, Wall Street used faulty assumptions -- like that the real estate market doesn't go down -- and so when the supposedly unthinkable started to happen, the value of all these securitized securities (most of us know them as MBSs, CDOs, etc) tanked. This caused cascading problems because many of these securities were rated very highly and therefore treated as gold by many banks, insurance companies, etc. The end result, among other things, is the credit lock-up that everyone is so scared of right now.
That's a very very brief overview of Wall Street's hand in this mess, but I certainly didn't want to ignore their handiwork. Now on to Main Street.
This is even simpler. If the core of the problem here is defaulting mortgages then we've got a heck of a lot of people out there that took out loans (which, remember, are agreements to pay back a certain amount of money) and decided not to pay them back. Easy as that. Now this is where the staunch defenders of Main Street come in with vehement arguments, so let's take a look at a few of them:
1) "But there was predatory lending!" -- I fully accept that there were lenders out there that were out and out fraudulent and hid details of the loans from people. But let's think about the scope of this mess and consider whether we really believe that there was really that much fraud out there. Without solid proof I'm very skeptical of that many predatory loans being foisted on people. In fact, I'll go ahead and give you 5% of the defaulting loans over the past couple years as predatory and fraudulent -- I think that's a pretty high percentage, but that still leaves 95% that we have to explain.
2) "People didn't understand the terms of the loan!" -- This argument just makes me shake my head. I think about the amount of research the average Joe Sixpack will do when trying to figure out what TV to buy and I wonder why we don't expect a commensurate amount of proactive research out of Joe Sixpack when he's looking to take out a loan for, say, $200,000. If you don't fully understand what you're signing your name to, why in the world would you borrow that kind of money??
3) "The mortgage brokers misled the buyers!" -- Fraud notwithstanding (see above for fraud), the mortgage brokers are salespeople. I'm not saying that they should be holding back information, but at the end of the day their job is to sell a loan to the home buyer, not make sure that the home buyer is getting the best deal possible. Referring back to #2, how many of those Joe Sixpack TV buyers implicitly trust the Best Buy salesmen? Yet they seem to expect that mortgage brokers are the guardians of their best interests.
I could go on, but I think you get the point. The bottom line is that I think we're overlooking the whole concept of personal responsibility when it comes to people taking out these huge loans. And when we talk about buying up faltering mortgage loans and renegotiating them with the home owner -- I mean, come on, talk about moral hazard!
Forgive me if this seems one-sided -- I do fully believe that most of the people that are defaulting should never have been given the money in the first place, let alone at the terms they got it on. But I think that when we're talking about the ingredients for the current mess it's a big mistake to leave the borrowers out of the equation, and that's exactly what has happened. Give Joe Sixpack a free ride and you're basically telling him that it's OK to take out a loan and then blame the lender when you realize that you got yourself in over your head.
Will the rhetoric change? Not a chance. During an election year (and really, what isn't an election year?) there's no way your going to hear anyone from the government scold the normal, everyday, hard working Americans. When they're getting ready to hit the voting booth, they can do no wrong!
So I'll keep cringing at the characterization of the current economic mess, but at least I've logged my protest. Am I selling out my fellow average Joes? I don't think so, I think I'm just asking for the best out of them. I think we can be a country that lives to a higher standard, and that means owning up to mistakes all around.
-AvgJoe
For the last time, this isn't just about Wall Street!
I'm going to puke if I hear the phrase "Wall Street bailout" uttered one more time. Ooops, just puked, I guess somebody, somewhere just said it again. Why? Because people around the US still seem to believe that this is a bailout that "helps Wall Street, even after Wall Street destroyed our economy."
There's two parts to this, and in this blog I'm going to cover Wall Street destroying our economy. Did Wall Street play a part in what is going on? Sure! But there's no way that any of this could have happened without the help of good ol' Main Street.
Oh no Average Joe, you're not going to say something bad about the good, hard working people on Main Street, are you?
You bet I am.
Look, I don't have anything against Main Street -- heck, I'm part of Main Street and I'm getting nothing but lumps from what's going on right now. But at the core of all of the problems -- which has already been pretty well hammered home -- is the demise of waves of mortgage loans, subprime and not.
What Wall Street did was complicated, but the problems that it created are relatively simple. They took mortgage loans, packaged them into securitized vehicles, and sold them off to third party investors. This allowed lending banks to lend more because the securitizations took loans off of their books, and it also made investors more inclined to dip their toes into riskier credit profiles because they believed that the securitization vehicles were priced and structured such that they would still deliver acceptable returns.
Unfortunately, Wall Street used faulty assumptions -- like that the real estate market doesn't go down -- and so when the supposedly unthinkable started to happen, the value of all these securitized securities (most of us know them as MBSs, CDOs, etc) tanked. This caused cascading problems because many of these securities were rated very highly and therefore treated as gold by many banks, insurance companies, etc. The end result, among other things, is the credit lock-up that everyone is so scared of right now.
That's a very very brief overview of Wall Street's hand in this mess, but I certainly didn't want to ignore their handiwork. Now on to Main Street.
This is even simpler. If the core of the problem here is defaulting mortgages then we've got a heck of a lot of people out there that took out loans (which, remember, are agreements to pay back a certain amount of money) and decided not to pay them back. Easy as that. Now this is where the staunch defenders of Main Street come in with vehement arguments, so let's take a look at a few of them:
1) "But there was predatory lending!" -- I fully accept that there were lenders out there that were out and out fraudulent and hid details of the loans from people. But let's think about the scope of this mess and consider whether we really believe that there was really that much fraud out there. Without solid proof I'm very skeptical of that many predatory loans being foisted on people. In fact, I'll go ahead and give you 5% of the defaulting loans over the past couple years as predatory and fraudulent -- I think that's a pretty high percentage, but that still leaves 95% that we have to explain.
2) "People didn't understand the terms of the loan!" -- This argument just makes me shake my head. I think about the amount of research the average Joe Sixpack will do when trying to figure out what TV to buy and I wonder why we don't expect a commensurate amount of proactive research out of Joe Sixpack when he's looking to take out a loan for, say, $200,000. If you don't fully understand what you're signing your name to, why in the world would you borrow that kind of money??
3) "The mortgage brokers misled the buyers!" -- Fraud notwithstanding (see above for fraud), the mortgage brokers are salespeople. I'm not saying that they should be holding back information, but at the end of the day their job is to sell a loan to the home buyer, not make sure that the home buyer is getting the best deal possible. Referring back to #2, how many of those Joe Sixpack TV buyers implicitly trust the Best Buy salesmen? Yet they seem to expect that mortgage brokers are the guardians of their best interests.
I could go on, but I think you get the point. The bottom line is that I think we're overlooking the whole concept of personal responsibility when it comes to people taking out these huge loans. And when we talk about buying up faltering mortgage loans and renegotiating them with the home owner -- I mean, come on, talk about moral hazard!
Forgive me if this seems one-sided -- I do fully believe that most of the people that are defaulting should never have been given the money in the first place, let alone at the terms they got it on. But I think that when we're talking about the ingredients for the current mess it's a big mistake to leave the borrowers out of the equation, and that's exactly what has happened. Give Joe Sixpack a free ride and you're basically telling him that it's OK to take out a loan and then blame the lender when you realize that you got yourself in over your head.
Will the rhetoric change? Not a chance. During an election year (and really, what isn't an election year?) there's no way your going to hear anyone from the government scold the normal, everyday, hard working Americans. When they're getting ready to hit the voting booth, they can do no wrong!
So I'll keep cringing at the characterization of the current economic mess, but at least I've logged my protest. Am I selling out my fellow average Joes? I don't think so, I think I'm just asking for the best out of them. I think we can be a country that lives to a higher standard, and that means owning up to mistakes all around.
-AvgJoe
There's two parts to this, and in this blog I'm going to cover Wall Street destroying our economy. Did Wall Street play a part in what is going on? Sure! But there's no way that any of this could have happened without the help of good ol' Main Street.
Oh no Average Joe, you're not going to say something bad about the good, hard working people on Main Street, are you?
You bet I am.
Look, I don't have anything against Main Street -- heck, I'm part of Main Street and I'm getting nothing but lumps from what's going on right now. But at the core of all of the problems -- which has already been pretty well hammered home -- is the demise of waves of mortgage loans, subprime and not.
What Wall Street did was complicated, but the problems that it created are relatively simple. They took mortgage loans, packaged them into securitized vehicles, and sold them off to third party investors. This allowed lending banks to lend more because the securitizations took loans off of their books, and it also made investors more inclined to dip their toes into riskier credit profiles because they believed that the securitization vehicles were priced and structured such that they would still deliver acceptable returns.
Unfortunately, Wall Street used faulty assumptions -- like that the real estate market doesn't go down -- and so when the supposedly unthinkable started to happen, the value of all these securitized securities (most of us know them as MBSs, CDOs, etc) tanked. This caused cascading problems because many of these securities were rated very highly and therefore treated as gold by many banks, insurance companies, etc. The end result, among other things, is the credit lock-up that everyone is so scared of right now.
That's a very very brief overview of Wall Street's hand in this mess, but I certainly didn't want to ignore their handiwork. Now on to Main Street.
This is even simpler. If the core of the problem here is defaulting mortgages then we've got a heck of a lot of people out there that took out loans (which, remember, are agreements to pay back a certain amount of money) and decided not to pay them back. Easy as that. Now this is where the staunch defenders of Main Street come in with vehement arguments, so let's take a look at a few of them:
1) "But there was predatory lending!" -- I fully accept that there were lenders out there that were out and out fraudulent and hid details of the loans from people. But let's think about the scope of this mess and consider whether we really believe that there was really that much fraud out there. Without solid proof I'm very skeptical of that many predatory loans being foisted on people. In fact, I'll go ahead and give you 5% of the defaulting loans over the past couple years as predatory and fraudulent -- I think that's a pretty high percentage, but that still leaves 95% that we have to explain.
2) "People didn't understand the terms of the loan!" -- This argument just makes me shake my head. I think about the amount of research the average Joe Sixpack will do when trying to figure out what TV to buy and I wonder why we don't expect a commensurate amount of proactive research out of Joe Sixpack when he's looking to take out a loan for, say, $200,000. If you don't fully understand what you're signing your name to, why in the world would you borrow that kind of money??
3) "The mortgage brokers misled the buyers!" -- Fraud notwithstanding (see above for fraud), the mortgage brokers are salespeople. I'm not saying that they should be holding back information, but at the end of the day their job is to sell a loan to the home buyer, not make sure that the home buyer is getting the best deal possible. Referring back to #2, how many of those Joe Sixpack TV buyers implicitly trust the Best Buy salesmen? Yet they seem to expect that mortgage brokers are the guardians of their best interests.
I could go on, but I think you get the point. The bottom line is that I think we're overlooking the whole concept of personal responsibility when it comes to people taking out these huge loans. And when we talk about buying up faltering mortgage loans and renegotiating them with the home owner -- I mean, come on, talk about moral hazard!
Forgive me if this seems one-sided -- I do fully believe that most of the people that are defaulting should never have been given the money in the first place, let alone at the terms they got it on. But I think that when we're talking about the ingredients for the current mess it's a big mistake to leave the borrowers out of the equation, and that's exactly what has happened. Give Joe Sixpack a free ride and you're basically telling him that it's OK to take out a loan and then blame the lender when you realize that you got yourself in over your head.
Will the rhetoric change? Not a chance. During an election year (and really, what isn't an election year?) there's no way your going to hear anyone from the government scold the normal, everyday, hard working Americans. When they're getting ready to hit the voting booth, they can do no wrong!
So I'll keep cringing at the characterization of the current economic mess, but at least I've logged my protest. Am I selling out my fellow average Joes? I don't think so, I think I'm just asking for the best out of them. I think we can be a country that lives to a higher standard, and that means owning up to mistakes all around.
-AvgJoe
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