Investment Hawk

First National Bank of St. Ignace - 36 Month CD at 2.3% APY

2011-10-23T18:49:00.001-07:00

Let's hear it for the First National Bank of St. Ignace. The bank has a 36 month CD that is paying 2.3% APY with a $100,000 minimum balance. If you don't want to spend that much, the bank is offering 1.92% APY with just a $1,000 minimum balance.

The bank has 7 branches in the tip-top of Michigan near the Canadian border.

Lessons of European Debt Debacle and US Unemployment

2011-10-06T08:59:00.001-07:00

The debt debacle in Europe continues it's slow unwinding, with governments in the EU unable to take steps to address the exploding debt in countries like Greece, Italy, Ireland, and Spain. The price to shore up the finances of these countries may be over $1 trillion, even as each sovereign country continues to rack up more debt.

At the same time, the US debt continues to grow as the economy remains mired in first gear and US debt also increases to prodigious and worrying levels.

The easy answer is to blame the banks and the politicians for the financial collapse and ongoing lingering recession and economic gloom. After all, 2008 ushered in the end of a thirty year boom started by Reagan that saw growing stock prices and the illusion at least of growing wealth.

But the banks and politicians are not to blame. The blame rests with globalization. I don't say this as an enemy of globalization. I believe an interconnected world is a necessity and will in the end provide the greatest benefit.

Imagine two bodies of water separated by a dam. One body is very high while the other is very low. The developed world is the higher lake, the developing world is the lower. What happens when you remove the dam between them? The water equalizes. The first lake's level drops; the second lake's water level rises - until both are equalized.

That is what is happening today. The developing world (China, India, Russia, Brazil, etc.) is catching up with the developed world. Like the lake equalizing, the standard of living in the developed world must fall while the standard of living in the developing world will rise. In some ways, it is a zero sum game. The hope of course, is that in the course of equalizing, the level will eventually become higher than it would have been in either lake before the partition was removed. But this will take time.

For the last thirty years, and especially the last ten, the developed world has tried to maintain its standard of living via debt. That was not sustainable and 2008 ushered in the crash. Now look at the situation:

Jobs have disappeared and are not coming back.
Wages for many professions are stagnant or falling.
Economic growth is negative or close to zero.

These are the two central problems with the US and Europe. Fix these problems and the debt problems would disappear. But these are not easy problems to fix. They require citizens to take lower pay, to work jobs they may be overqualified for, for companies to ratchet down sales expectations for some time. Eventually, the developed economies will adjust to this new reality and start growing again. But it will be from a lower base than in 2008 and even today.

Housing Prices Continue to Fall

2011-06-01T07:42:00.000-07:00

Housing prices continue to fall. According to the April 2011 Case Shiller numbers, prices are now back to mid-2002 levels. Yikes?

If you're looking to buy a home though, the low prices couples with low interest rates make this a darn good time. Have we seen the bottom? Probably not. But it's a darn better time to buy now than back in 2006. Lord have mercy on those that purchased a home then.

Mortgage Rates Drop to 5-Month Low

2011-05-12T11:08:00.000-07:00

Good news, mortgage rates have dropped to a 5-month low. According to data from Freddie Mac, a 30-year loan dropped to 4.63 percent in the week ended today from 4.71. That news must confound most economists who expected rates to rise as the Fed began to wind down its purchase of US Treasuries. Thirty-year mortgage rates are indexed to 10-year Treasury bills.

It's happy days for homeowners. Housing prices are dropping and mortgage rates are still at record lows. So where's the rush to buy? That's the irony of the situation. Many homeowners no longer have the credit to lock in these great rates. In addition, human psychology works in reverse. If prices are falling, people pull in their spending. When they are rising, the open their wallets. But think about it, isn't now a much better time to buy a house than in 2006?

S&P Warning on US Debt May Be Just What Dr. Ordered

2011-04-19T07:23:00.000-07:00

Yesterday, S&P, the oh-so-accurate rating agency issued a warning on US debt. The warning states that there is a 30% chance that the US's AAA credit rating could be downgraded a notch in the next two years. Now, how they arrived at this percent is beyond me, and probably beyond them. Remember, this is the same agency that gave crap mortgage backed securities investment grade ratings, helping perpetuate the near-collapse of the financial system.

But still, if you are a deficit hawk, as I am, then a warning from the credit agency is welcome, and probably long overdue. It provides deficit hawks with another rallying cry when tackling tough budget negotiations. And is hopefully gives politicians less wiggle room to engage in partisan politics and to fight ideological budget battles.

The reality is that compromise will have to look something like this. The Republicans want to cut deep and the Democrats want to raise taxes and not cut so deep. We're going to need to combine both by cutting deep and raising taxes if we want to get the deficit monster back in the jar. So, you see, both sides can get what they want. It just takes a little compromise. Hopefully the S&P proved itself a little useful and helped prod this compromise forward.

Government Shutdown Averted

2011-04-08T20:10:00.000-07:00

Well, they did it. At the last minute they announced a budget deal to keep the government open for a bit longer. The agreement is reported to cut $39 billion from discretionary spending. It's just a drop in the bucket from a dollars standpoint but the standoff has set the stage for larger battles to come. Right now, I'm feeling a bit encouraged. I actually think we have just the right mix of messianic budget cutters and social liberals. Put them together and you get a nice middle ground where there are significant cuts that put a dent in unsustainable spending, not so big a dent as to sink the economy.

I think the deal will also reassure the global community. American democracy is messy but in the end, it does get the job done. I think you'll see the dollar strengthen a bit over the next couple of weeks. An America heading into economic recovery with the will to get its financial house in order is a country poised to make waves again. Let's keep it going.

Employment Improving; Hope on Horizon for Rates

2011-04-01T12:06:00.001-07:00

The latest Labor Stats are out and they look pretty good, or at least a lot better than they looked two years ago. The Bureau of Labor statistics reported that non-farm payroll increased by 216,000 in March 2011, bringing the unemployment rate down to 8.8%. As the chart below shows, unemployment has been slowly edging down since peaking at 10% in 2009. Still, there is a long way down to go.

So, is there any change that rates will go up anytime soon? Maybe. But as the chart shows, there needs to be a lot more improvement before that maybe becomes a yes. I'm skeptical with big cuts coming in the public sector that unemployment is going to head significantly down anytime soon.

Getting a Jumbo Mortgage

2010-04-06T12:05:00.000-07:00

It's harder than ever to get a jumbo mortgage. Here's some insight from BestCashCow.

Savings Rates and CD Rates Continue Freefall

2010-03-21T18:03:00.000-07:00

Here's what's happening in the saving and cd world. Rates keep a-fallin. Here's a graph that shows what rates have been doing for the last - courtesy - BestCashCow.

And here's what's happening to the spread. Note that the spread between 1-year and 3-year CDs has reached record levels.

So, what does this mean? It means short term rates pegged to the Fed are continuing to crash. Longer-term rates which are less influences by the Fed are crashing less.

Michael Burry Bet Against Wall Street and Won Big

2010-03-03T06:38:00.000-08:00

Vanity Fair has a fascinating article entitled Betting on the Blind Side about investor Michael Burry, an autistic Dr. who recognized the housing bubble in 2004 and figured out a way to short it big time. In essence he shorted it by conceiving of purchasing credit default swaps on sub-prime bonds. At the time, banks and other investors were willing to sell him the insurance for cheap, not recognizing the time bomb which lurked in sub-primes.

It proved to be a very prescient move and the investors in Burry's hedge fund, Scion Capital profited handsomely. Burry himself has made over $100 million.

Burry took the big banks - Goldman, Deutsche Bank, etc. In the end, others jumped into the game after learning from Burry and received much of the accolades for their trading prowess. But according to the article, Burry was the guy who figured it out.

Three key take-aways for me:

Burry's actions support my view that bubbles can be spotted and acted upon. Only those duped by bubbles say they can't be spotted except in hindsight.
Burry shows that contrarian investing is a hugely profitable way to make money - perhaps the only real way to make money.
The article shows that Wall Street often behaves like a bunch of clowns. Most banks didn't understand what Burry was doing even though some basic due dilligence would have uncovered his ideas and layed out the building bubble.

The article is excerpted from a book set to be published in mid-March called The Big Short:Inside the Doomsday Machine. It's written by Michael Lewis who has a long career of getting under the skin of Wall Street. It should be a good read judging by this excerpt.

New Money Babe at BestCashCow

2010-03-01T20:56:00.000-08:00

BestCashCow has a new host for their video shows and she's pretty hot. Looks like there is a new money babe on the circuit.

I like the way she reads the rates:

2010-03-01T06:18:00.001-08:00

The Bureau of Economic Analysis released January data on personal income and spending and the results were mixed. Personal income increased $11.4 billion, or 0.1 percent, and disposable personal income (DPI) decreased $47.6 billion, or 0.4 percent, in January, according to the Bureau of Economic Analysis. The difference had to to do with federal nonwitheld income taxes. I guess that means more taxes were withheld. Income goes up but people have less to spend.

On the other hand, spending increased a bit. Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in January, compared with an increase of 0.1 percent in December. Purchases of durable goods increased 0.7 percent, compared with an increase of 0.6 percent. Purchases of nondurable goods increased 0.8 percent, in contrast to a decrease of 0.8 percent.
Purchases of services increased 0.1 percent, compared with an increase of 0.3 percent.

Here's a chart putting the change in personal consumption expenditures into perspective.

Fed Balance Sheet

2010-02-28T19:24:00.001-08:00

Here's an interesting chart which shows the change in the Fed's balance sheet over the past couple of years.

You can see how the MBS purchases have trended over time. Purchases are definitely down even as their size on the balance sheet grows.

NY Times Article on Savers and the Last Decade

2010-01-01T15:58:00.000-08:00

The New York Times published an article today entitled: For Savers, It Was Hardly a Lost Decade. The article states that:

"If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.
But that is not how most real people invest. They don’t pour everything they have into just one type of asset and then add nothing to it for 10 years. Instead, they buy stocks of all sorts, and bonds and perhaps other things, too. And many millions of them dutifully add more money regularly, usually into a retirement account that they won’t touch for longer than a decade."

It's true that most people dollar cost average but I bet the average portfolio is not very well diversified. I had a portfolio with bond and equities and it took a major beating over the past year. In reality, it has not risen that much this decade, minus the cash I have contributed.

Dollar cost averaging works well for younger savers but not for those approaching or in retirement. The reality is that if you are approaching retirement and can't afford to lose a lot of money, the stock market is not for you. The Dow and the S&P are still significantly off their highs and may never come back. The Nasdaq isn't even close to its high of 5,000. Older investors don't have the luxury of dollar-cost-averaging.

Which means that older investors should have minor exposure to the stock market.

2009 Savings and CD Rate Review

2010-01-01T15:54:00.000-08:00

We all know that 2009 has been a terrible year for savings rates and cd rates. Sol Nasisi over at BestCashCow has put together a nice recap of what rates have done over the past year. He's also compared rates of return for various asset classes. Here's I chart I find very interesting.

Oil was the best investment for the past year. Look at the pathetic returns provided by deposit accounts. Savers have really gotten killed.

BestCashCow Launches Mortgage Rates

2009-09-24T18:27:00.000-07:00

BestCashCow, a site that I write on has just launched comprehensive sections with mortgage rates, home equity rates, and auto loan rates. I've long thought that Bankrate needed a challenger and out of all the finance sites out there, I believe that BestCashCow is best poised to do it. They are building the rates, have a dynamic content system, and also seem to have a vision which is very forward-thinking.

On a personal note, I've enjoyed writing for the site. The site has provided me with a platform to be read by tens of thousands of people and the opportunity to earn some cash. If you're in the financial space and are thinking of writing, check out BestCashCow. It can be instead of a Blog or as an adjunct to a Blog.

Dow Jones and Nikkei Stock Index Comparison

2009-02-27T20:46:00.000-08:00

Sol Nasisi over at BestCashCow just posted an interesting article comparing the Dow over the last twenty years to the Nikkei in its bubble years (1980s). Above is one graph from the article, comparing the two indices.

On the first chart, I performed an analysis that is similar to the one I did comparing the Dow today to its performance during the Great Depression. I graphed the Nikkei from 1970 to 2009. Using the other Y axis, I graphed the Dow from 1988 to 2009. The 0 point on the graph represents the high point of both markets – 1989 for the Nikkei and 2007 for the Dow.
You can see the result. From its high at 0 point to its drop three years later, the Nikkei shed 57% of its value while the Dow has shed 44%. If the Dow was to follow the Nikkei’s lead and drop by 57%, then we could expect it to bottom out at around 5,700 (where the yellow line meets the blue in Year 3).
Is this reasonable? Data from the Nikkei as well as from the Great Depression Comparison seems to show that with severe economic crisis, markets fall by over 50% and often by greater than 60%. In other words, the severity of the crash is proportionate to the level of the run-up. Japan experienced a huge run-up in the 1980s. The US experienced a large run-up before the depression. Both led to a severe crash in the markets. Since all economists seem to agree that we are in the biggest economic crisis since the depression, it’s fair to think that the stock market’s losses will reflect that.

Bank of America Disappoints; Stock Below $10

2009-01-15T19:27:00.000-08:00

I once wrote that Bank of America was a well-run bank that offered a good investment opportunity. I still believe in the long-run, the company is well-positioned to be a dominant player in the financial services space - if it can survive.

Today, as Bank of America sought more money from the Feds, one has to wonder if Ken Lewis perhaps overplayed his strong hand. He had a strong, stable company that was relatively free of many of its peer credit problems. But the purchase of Countrywide and Merrill changed that.

Now, the bank is swimming in losses and forced to go to Washington to money. Bank of America was always looked down upon by NY for being a McDonald's of banks. But I'd rather be a McDonalds than having to go begging.

Obama Bonds, Rates at 0%, Are We Going Route of Japan?

2008-12-08T10:30:00.000-08:00

The evidence seems to be mounting that the economic downturn that most resembles our own is not the Great Depression, but rather the Lost Decade in Japan. In the 1980s, Japan was the rising power that threatened to eclipse the United States. Its cars were dominant, its cash bought up American companies, and its culture and keiretsu culture threatened to overwhelm our form of capitalism. A square mile in downtown Tokyo was reportedly worth more than all of Manhattan.

Them the Japanese bubble popped. Real estate values toppled and brought down the banks (sound familiar). The economy ground to a halt and the government and Central Bank reacted with aggressive fiscal policies.

So, where are the similarities?

Like in the US, the Japanese Central Bank cut interest rates, eventually going to 0%. The US Federal Funds Rate is headed to 0% also.
The Japanese embarked upon massive federal works projects, backed by cheap government debt. Obama plans to do the same.
The Japanese propped up their banks. In the West, we criticized this move and called them zombie banks.

So, how did Japan fair? It's stock market bottomed out 13 years after the bubble burst, having lost 80% of its value. Today, the Nikkei is retesting those lows, meaning that almost 20 years later it is nowhere near its bubble high.

So, are we in a Japan-like repression? Or, will we bounce right back to Dow 14,000 in the next 12 months? Join the discussion.

Ken Lewis and Other Bankers Criticize High Rate Banks

2008-11-18T08:45:00.000-08:00

Lately, many banks have bucked the drop in the Fed Fund rate and are paying decent rates. As I and others have written, some banks are doing it to attract and retain deposits to stay afloat, while other see it as an opportunity to gain market share.

In an article on Bloomberg yesterday, several big bank CEOs criticized the practice.

“You have a whole raft of smaller banks out there, some of which are in difficulty, who are paying rates that are bordering on insanity,” James Wells, chief executive officer of SunTrust Banks Inc., said in a conference call with investors Nov. 13."

Ken Lewis, the CEO of Bank of America said that rival Wells Fargo ( a bank with uncompetitive rates) was a "rational pricer" intimating that high rate banks were not rational.

And one analyst even said that the Wachovia was purchased because the high rates it was offering were hurting other banks.

I think this is wrong. As I wrote on BestCashCow:

Bankers hate high deposit rates because they lower their profit. Of course Ken Lewis wants rates low. It makes his job easier and makes it easier to pay for all of the high rise buildings BofA operates in Charlotte, Boston, NY, and San Francisco. It makes it easier to pay for the Countrywide
and Merrill Lynch acquisitions.

But our goal isn't to make it easier for bankers, it's to get the best return for our money so we can pay the rent, send our kids to college, and maybe retire. Consumers, people like you and me should also be working to maximize our return.

BankMan on the Bank Deals Blog had a similar sentiment, writing:

The thing that I find unsettling about this Bloomberg article is how industry insiders appear to hold contempt against the banks offering the high rates.

I don't blame the bankers for wanting lower rates; it makes them more money. But I also think that as consumers, we have every right to put our money where it's going to earn us the highest return - and right now that's not Bank of America.

Savings Accounts Holding Up

2008-10-25T11:26:00.000-07:00

Here's an interesting post from BestCashCow about how the rate on savings accounts have held up despite a number of Fed rate custs over the last year. As the chart below shows, savings accounts rates have not dropped at the same rate as the Fed Funds Rate or T-bills.

What is says to me is that banks have been hungry for deposit dollars and so they haven't been able to drop rates. This premium will probably continue until the banking crisis is resolved. Banks are trying to hold on to their deposit to prevent the kind of runs that brought down Indymac, WaMu, and Wachovia.

Will Paulson's Plan Work?

2008-09-24T11:24:00.000-07:00

There's lots of interesting discussion about the $700 billion bailout plan engineered by Treasury Secretary Hank Paulson. He and Barnanke are smart guys but that doesn't mean the plan will work. It may not be the right plan, or perhaps doing nothing is a better option. Sol Nasisi on BestCashCow provides some interesting data that seems to be the question: if we restore the banks, is there anyone for them to lend to? The chart below, from the article, shows that consumer debt ratios have risen into record territory, tapping our consumer spending.

Money Market Funds Melting Down

2008-09-18T18:05:00.000-07:00

I just wrote a series of articles on the meltdown that's occurring with money market funds. These are not to be confused with money market accounts, which are FDIC insured. Money market funds are basically mutual fund like vehicles that invest in what are supposed to be safe, short term debt, treasuries, etc. As a result, they very rarely if ever lose value. The price of each money market fund is set to $1 and is called the net asset value (nav). So, if you bought $30,000 in a money market fund, you'd purchase 30,000 shares at $1.

Some of these funds held Lehman bonds and its bankruptcy has blown a hole in their portfolio. As a result, several funds have seen the NAV go below $1, meaning that investors have lost principal. Remember, this almost never happens. Yesterday, the money market fund, the Primary Fund (RFIXX) halted redemptions for seven days until it can recover from a $800 million Lehman-related loss. That means customers with money in that fund can't withdraw it for seven days. When they do, it will remain to be seen if there will be any losses. Usually, the manangers of the fund, make the fund whole, bringing the NAV back to $1.

We also learned today that Putnam closed its $12.3 billion Putnam Prime Money Market Fund while Dryfus and Columbia (a division of BofA) injected funds to keep the net asset value at $1. When Putnam shareholders will get their money back and how much they will get back is unclear. Dryfys and Bank of America are being forced to reimburse their shareholders for losses in several of the funds they manage.

As we saw with auction rate securities, the question of what is a cash equivalent security is being tested. The definition of "safe" is redefined on a daily basis.

At the moment, the safest place to stash your extra cash appear to be FDIC insured savings accounts and money market accounts (not be be confused with money market funds), and FDIC certificates of deposit.

Oil in for a Fall

2008-08-05T12:44:00.001-07:00

Take a look at this chart. It's oil, but it could be housing before the tumble, or even the Nasdaq. What goes up must come down. It's basic physics. Look for oil to be below $100 by January of 2009.

Bank of America Dividend Over 11% - Should You Invest

2008-07-11T08:12:00.000-07:00

Bank of America's dividend is now over 11%. Is this a good investment? Per my article on BestCashCow:

So who is an investor to believe? I personally think Bank of America is a pretty savvy operation and that they knew what they were buying with Countrywide. They probably were able to model a range of losses that they would experience with their porftolio and included that in their business projections. Surely, their data is more accurate than the models created by Wall Street bankers who have no first-hand experience with the mortgage markets.

For more, read the entire article.

Housing Starts Way Down So Far in 2008

2008-06-18T08:47:00.000-07:00

Housing starts are coming way down, almost to 1991 levels. Housing has always been volatile and the recent rise is actually within historical norms.

But what's concerning is that starts will continue to fall. If so, housing will become an even bigger drain on the economy.

Fed Cuts Rates by 50 Big Basis Points

2007-09-18T11:45:00.000-07:00

In a shocker, the Fed today cut both the discount rate and the federal funds rate by 50 basis points. The federal funds rate is now 4.75% and the discount rate is 5.25%.

It's a shocker because most analysts, including myself had thought the Fed would cut by only .25%. Clearly, the Fed is worried about the real estate slowdown. In its statement the Fed said:

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.

Bernanke is really worried about the real estate market hitting a tipping point and bringing the whole economy down with it. He hopes that a relatively drastic reduction in rates will unwind some of the mortgage problems, get lending going again, boost confidence, and help avert a real real estate meltdown.

You can read the full release here.

Making a Call on Jobs Report

2007-09-05T19:24:00.000-07:00

I just made a call on BestCashCow which will either be seen as tremendously brave or tremendously foolish. I predicted that this Friday's job's report would come in at or even slightly above expectations. My thinking is that the economy is still fairly robust, even with the recent sub-prime problems and a surging international economy and rising exports should be enough to outweigh a sliding real estate market.

My call is that job creation will come in somewhere in the 123,000 range as opposed to 103,000 which is what most financial news outlets are now calling. Call me overly optimistic but I like to see the silver lining.

Let me know via the poll on this page what you think.

Jim Cramer and Mad Money

2007-08-30T19:32:00.001-07:00

I posted an article today on BestCashCow about Jim Cramer, the something raving lunatic who spouts stock advice on CNBC's Mad Money. It's easy to dismiss the guy but I'm not so sure it's a wise thing to do. He seems smart, very smart. After all, he has succeeded big as a trader, an entrepreneur, and now a broadcaster.

Maybe he knows what he is talking about. For more, read Maybe Jim Cramer Is Giving Good Advice on Mad Money, by Moi.

Housing Data Shows Subprime Crisis Isn't

2007-08-29T11:19:00.000-07:00

Check out my article on BestCashCow. It juxtaposes some interesting data which seems to show that the sub-prime mortgage crisis is really hype. Take a look and let me know what you think.

Personally, I think that savvy investors will start to realizes this isn't really a subprime crisis but rather an overall credit pullback. The derivate and leverage deals created by the big hedge funds and i-banks have totally magnified this problem, along with the media, and have created a real monster. Some of these institutions may get hurt.

But the fundamentals for real estate actually don't look that bad. I wouldn't expect real estate to appreciate much in the next couple of years but I also don't foresee a crash.

Oh Canada

2007-08-27T19:31:00.000-07:00

I just returned from a trip to Canada and thought I would share my insight with you for a bit. Canada has for the most part escaped most of the credit turmoil in the United States. Its housing market is still very strong. Interestingly though, the Toronto Stock Exchange, the main index in Canada was also hit by the credit turmoil and took a beating.

In my 15 years going to Canada the American dollar has never been weaker. Ten years ago it was .65 Canadian cents to the American dollar. It is now $.95. This means of course, that I have become 40% poorer relative to a Canadian over the last 3 years.

Canada is a commodity economy. It exports vasts amounts of energy and natural resources - cold, copper, lumber, etc. Since I don't see the price of energy dropping any time soon, or the demand for commodities (see India and China) its economic future looks pretty bright.

Will the Candian dollar go to parity against the dollar? I don't know but I wouldn't bet against it.

Neutron Loans

2007-08-18T19:45:00.000-07:00

I learned a new term today, Neutron Loans. The old hands around Wall Street have used the term for mortgage loans, presumably sub-prime which are expected to leave the house but not the buyer.

So this is what these guys think up while they are counting their money. For more, check out my article, Neutron Loans.

Have a nice weekend!

Fed Lowers Discount Rate to 5.75%

2007-08-17T06:39:00.001-07:00

The Fed announced this morning that it was lowering the discount rate from 6.25% to 5.75%. In practical terms it means that banks will be able to borrow fund from the fund at a lower rate. It is meant to make it less costly for those banks that are running into mortgage problems to get access to funds.

Financial markets have been looking for the Fed to do this for the last week. The move itself is a contradiction to the stock market. On the one hand it helps to prop up some beleaguered banks and may diffuse the crisis. On the other hand, it is an admission from the Fed that credit markets are pretty bad.

Carry Trade Redux - Japanese Yen at 13 Month High

2007-08-16T18:55:00.000-07:00

Two weeks ago I warned about the implications of the Carry Trade and what it could mean for the global economy. It appears the dangers have only increased with the Japanese Yen strengthening to a 13 month high against the dollar. Since many US hedge funds have used low interest loans from Japan to finance their leverage, this could have several implications. 1) The cost to service these loans will increase just when the funds are under great pressure from the credit markets; 2) rising Japanese interest rates will drive the debt costs higher; 3) The Japanese may begin to call-in some of their loans, forcing hedge funds and banks to further liquidate their assets.

The Yen/Dollar carry trade is estimated to be $1 trillion dollars so its something to watch closely.

Marketwatch and Art Hogan Talking Down the Market

2007-08-16T18:53:00.000-07:00

How irresponsible can you get? At a time when the markets are already jittery, Marketwatch feeds the panic by featuring an absolutely ridiculous quote on its website today. The quote read as follow:

“This market is going down like free beer - we continue to have concerns on the credit side of the balance sheet, with Countrywide tapping an entire credit line to shore up its business," said Art Hogan, chief market strategist at Jefferies & Co. "I would say if there had been a day when we're trying to price in worst-case scenario, this might be it."

At the time, the market was down less than 100 points and 1%. Come on. Talk about a self-fulfilling prophecy. Sure the market has been battered the last week but we don’t need to be jumping the gun and declaring doom and gloom before it happens.

VMWare and EMC Market Opportunity?

2007-08-15T08:18:00.000-07:00

Jsoc posted an excellent article today on BestCashCow regarding the opportunity with VMWare and EMC. As most of you probably know, EMC spun out a portion of VMWare in a very successful IPO yesterday. VMWare stock rose 75.8% from its opening price and it was the largest and most hyped tech IPO since Google. According to IDC VMWare is the leader invirtualization, a sector that is expected to grow from $5.5 billion last year to more than $11.7 billion in 2011. Virtualization is software that allows companies to partition a single server into multiple ones, saving on hardware purchases and more significantly on operating costs. The software also makes managing large server farms much easier and more flexible. The Boston Globe had a good article on what the company does.

The interesting thing about the IPO is that EMC only spun out 10% of the company. As Jsoc states:

EMC's holdings in VMware are worth 18 Billion. As of today's prices the market is valuing the rest of EMC at only 20 Billion. EMCs total valuation hasn't been this low since 2003. Despite very healthy growth in the underlying business.

EMC is a stable technology growth stock with a really low PE. There seems to be a disconnect between its value and the value of VMWare and I'm thinking of adding to my EMC holdings.

Disclaimer: I currently own a few hundred shares of EMC, having bought most of them when the company was trading in the high 60s during the tech bubble.

Selling Covered Call Options on Goldman Sachs (GS)

2007-08-13T21:29:00.000-07:00

I love trading options. For me, using options is like playing chess while trading stocks is like playing checkers. The multi-variant nature of options is really great and they provide you with so many more ways to profit from what is happening in the financial world. Take Goldman Sachs and recent events in the markets.

Goldman Sachs has shown some great volatility lately as the markets have seesawed from the impact of the sub-prime mortgage fall-out. In my eyes, this volatility makes it a good stock to sell options against. The October 180 calls are priced at $13.00, which is a 7.3% stock premium. The 175 October calls are priced at $16. As the financial markets grind to a halt, it’s hard to imagine Goldman’s stock appreciating much in the next two months. Buy the stock, sell the October 175s or even the 165s and pocket the premium. My guess is that with the erosion of time, the lessening of volatility as the crisis passes, and the downward pressure on the stock, you’ll be able to buy the options back in the low single digits. You can then keep the stock, sell it, or sell some more options to generate more income.

If all of this sounds foreign to you, there is a good primer on BestCashCow regarding selling covered call options.

Mortgages, Interest Rates, Tech and More

2007-08-10T21:05:00.001-07:00

The meltdown in the mortgage market could have been foreseen by anyone who tried to get a mortgage in 2005. At the time, it was possible for anyone to get a loan that far exceeded the ability of someone to repay it. I remember my mortgage broker trying to get me to finance more than I wanted. I politely told him "no." Others didn't and purchased homes they couldn't afford or purchased homes with variable rate mortgages that would wind up becoming unaffordable as rates rose.

Now, hedge funds, investment banks like Goldman Sachs and lenders like Countrywide are feeling the heat. PhilR, a fellow member of BestCashCow just ran an article, Mortgage Crisis Spreads, Wall Street Gyrates, and the Fed May Drop Rates summarizing the gyrations of the last week.

In my opinion the stock market has benefited from the slowdown in housing as assets have flowed from real estate into stocks. I do think this will continue with some rough patches. The Fed just jumped in and pumped $38 billion into the market to reassure it that it wouldn't let liquidity disappear. Others seem to think a rate cut may be coming soon.

To complete the story, MarketWatch is running an article saying that now is the time to look at tech, since it has no exposure to the tech market? I tend to agree. Google looks awfully good as does tech overall. Lots of things are happening on the Web and with wireless and it's hard to imagine that the Nasdaq is going to stay so far below its 2001 high for too much longer.

General Electric - Buy or Not?

2007-08-07T13:00:00.000-07:00

Herman Kline on BestCashCow wrote an interesting article about General Electric entitled General Electric is the Ultimate "Unknowable" Stock . He argued that the company is really a giant investment bank and as other banks have been getting clobbered so should GE. Its PE is much higher than most of the I-Banks at the moment. I think his argument makes sense.