Recapping some of the insights from this writer, let’s take a look at Expedia & Priceline, two travel-booking companies.



1. Priceline. http://www.google.com/finance?q=priceline earned $3 billion in revenues  in 2009 with expected earnings to grow 17% in 2010. EBITDA is expected to reach nearly $950 million in 2010, up 12% YoY.
2. Expedia earned $2.3 billion in fees with expected revenues to grow 19% this year with expanding margins.

Accordingly, if one were to value Expedia at EBITDA, then their shares are worth $45, 93% above the current share price. Taking into account that many internet companies trade at less than half that yield, Expedia is still worth 50% above the current share price.

Source

http://seekingalpha.com/article/192388-priceline-is-properly-valued-while-expedia-is-undervalued

Seriously, talk about a great headline. A 46% increase in exports, more than 50% of it attributed to Western nations, signals that the markets are starting to turn around.Exports of textiles, steel products, televisions and motorcycles also rose.

Source

http://www.nytimes.com/2010/03/11/business/global/11yuan.html?hp

The Mortgage Bankers Association, its membership expert in real estate, sold its $90 million headquarters in downtown Washington on Friday for $41 million.

The industry lobbying group has struggled financially in recent years, as the market collapsed and lending dried up, with members dropping out as they lost their jobs. Its membership fell to 2,500 from 3,000, officials said in 2008

“It’s a little bit of irony that in the middle of the mortgage crisis brought on by the bad lending practices of many members of the Mortgage Bankers Association that they got caught up in the same problem,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group

Remember the proverbial run on the bank?

Well, that was the norm before governments decided to backstop entire financial industries  residing within their territory. As a result, the post-Lehman version of “the bank run” will henceforth be referred to as “the country run” and for an example of one in practice, look no further than Greece. The Guardian reports that investors have pulled a stunning $11 to $13.7 billion since the Greek crisis commenced in earnest last November. If true, this is the beginning of the end for the troubled EMU-member country.

The Economist has this preview:

TAX-COLLECTORS and customs officers in Greece have already walked out in protest against planned austerity measures by the government. On Wednesday February 10th it will be the turn of civil servants, doctors and other state workers. A much bigger strike is expected later in the month and past experience suggests that protests could turn nasty. Yet unless Greece gets a grip on its public finances, the government will struggle to finance its loans. Similar anxieties are emerging elsewhere in Europe.

The same applies to  Portugal, Ireland, Greece and Spain  for possible sovereign debt crisis.

What Does Birth-Death Ratio Mean?
A figure that represents the net number of jobs provided from newly started businesses (births) and business closings (deaths) during a period of time, typically a month in conjunction with government-sponsored jobs reports. Birth-death figures are put out by the Bureau of Labor Statistics (BLS) as part of the monthly employment report; they use a rolling average to determine the monthly total based on historical averages over the past several years.

Investopedia explains Birth-Death Ratio
The birth-death ratio is a major component of labor statistics because new businesses and small businesses create many jobs in the overall economy. It would be impossible to survey every company in the United States each month, sample sizes of about 150,000 are used and broad data is extrapolated from there.

Source

http://www.investopedia.com/terms/b/birth-death-ratio.asp

Jamie Dimon, head of JPMorgan (JPM), on what he thinks about the Chinese banking system:

Like many others, they are struggling to do business in Asia. Considering to buy a stake in a bank in China and asked if it makes sense to do so at current prices. Jamie replied that the concept is ok, but not now, too expensive, adding that so far “in China it is a one way street” with them wanting to get all and letting you get nothing, and that there will be more and better opportunities when China has a downturn.

Also, too difficult to know what you are buying: many of them do not yet have integrated systems, possibly a meaningful amount of political loans, etc. [emphasis added]

 

Based on his first year in office, Barack Obama has been a good friend to the stock market. Since 1897, the 33% return in the DJIA during his first year in office has been better than every other President except FDR, who saw a first year rally of 96%.

While conventional wisdom generally says the market likes Republicans better than Democrats, history suggests otherwise – at least during a President’s first year. Since 1897, the median return of the DJIA during the first year of a Democratic President’s term has been 22.6%. Under Republican Presidents, however, the median return of the DJIA has been a much more modest 0.4%.

Berkshire Hathaway Inc.’s planned 50- for-1 stock split will put its shares within reach of investors Warren Buffett once called an “inferior” class.

The proposed split, announced today as part of Berkshire’s takeover of Burlington Northern Santa Fe Corp., would push the price of each Class B share to $66.51from $3,325.35, data compiled by Bloomberg show.

What’s interesting is that, even with the dual share system, Berkshire’s price has effectively prevented many smaller investors from owning shares in the company outright–though it would boost attendance at annual meetings and make Berkshire eligible for more indexes.

Buffett warned 25 years ago that it might also misalign the goals of the company and its investors. Buffett wrote in his 1983 annual report, when the Class A shares traded for about $1,300. “Would a potential one- share purchaser be better off if we split 100-for-1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group.”

The latest release of the Moody’s/REAL Commercial Property Index, while showing a 1% increase in prices since October, the first gain in fourteen months, still continues to suggest that the nation’s commercial property markets are experiencing a tremendous downturn with prices declining a whopping 33.5% on a year-over-year basis and a stunning 43% since the peak set in October 2007.

2009 is a year to remember for many private banking professionals. Hedge funds failed, Bernard Madoff convicted, clients withdrew assets from private banks. The global financial crisis has fundamentally changed how the HNWI clients invest and the wealth management business itself.

Trend 1: Growing Chinese market
Many “new money” acquire their wealth through IPO. According to Ernst & Young’s recently published Global IPO Update, Brazil and China accounted for two-thirds of global capital raised in Q2 2009. This not only means that the economy is growing rapidly in these countries, more importantly it shows that there is a growing demand for private banking and wealth management services in the region.

Private bankers should also note that the growth of the Chinese market is not uniform across all Chinese cities. While Beijing, Shanghai and Shenzhen will spearhead growth, Hong Kong, on the other hand, will likely to have a tough 2010. Hong Kong actually suffered a huge reduction in HNWIs of 61% in 2009, because of the near 50% drop in market capitalization.

Trend 2: Rising compliance cost and lower profit margin
The Bernard Madoff $65 billion Ponzi scheme, among other scams exposed in 2009, alerted regulators in many countries. In order to crack down on false trading activities and tax evasions, governments worldwide demand more oversight of banking operations. As a direct result, banks have to spend more money on compliance and risk management. With a stagnant market in most countries it is almost impossible to increase fees and banks are likely to have to absorb the rising cost. This means lower margin for private banks and flat compensation for bankers.

Trend 3: Diversifying clientele
As the society progresses and becomes more diversified, so is the wealth management market. Customers today are more fragmented than ever before, and banks which are quick to respond benefit from the changing demographic. Islamic private banking, for example, is gaining momentum. HSBC Amanah is promoting Shariah compliant portfolios. In June 09, Morgan Stanley Wealth Management hosted a wealth planning seminar for same sex couples in Beverly Hills. It is likely that other private banks will become more aggressive in targeting demographic segments that have previously been ignored.

Trend 4: Rebuilding client trust will remain a top priority for bankers
The 2009 Capgemini Wealth Report found that more than a quarter of HNWI clients withdrew assets from their firms due to a loss of trust and confidence. There are several high profile client-advisor fallouts in the past 6 months, such as Singaporean tycoon Oei Hong Leong suing Citigroup private bank for a $684 million loss, and US investor Andrea Barron suing UBP for negligence. In Hong Kong, entrepreneur Joyce Tsang (founder of listed beauty salon group Modern Beauty) sued Goldman Sachs advisor for her $2 million loss.

Trend 5: E-trading and online customer service will become key differentiators
While some of HNWIs prefer to deal with their advisors face to face and seldom use email, it is easy to see why the “new money” group, often in their mid thirties and forties, are increasingly turning to online self service.

Trend 6: Singapore will remain a key player in the private banking industry
Singapore is known as “Switzerland of the East”. There are many reasons why it will stay this way for at least another three years. On top of the excellent international reputation and the $300 billion private banking assets the region currently manages, the Singaporean government is aggressive in making the country more attractive to private banks and HNWIs worldwide.

Source: http://blogs.law.harvard.edu/sammy/2009/07/26/private-banking-trends-2010/

OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.

In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.

“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.

Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.

During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war.

So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.

to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).

The reasons for this are many, but some points brought up by Rogers include the following:

• The Chinese want to live like we do;
• They are more eager to work;
• They are better at saving;
• There are 1.5 billion Chinese citizens (and 3 billion people in all of Asia), and we owe them money. They are, according to Rogers, “among the best capitalists in the world.”

There will be some setbacks, of course, Rogers says, but these are opportunities. “If you see setbacks in China, you should pick up the phone and get more involved,” he advised, before adding his favorite refrain, “The best advice of any kind that I can give you is to teach your children and grandchildren Chinese.”

A report from Bank of America Merrill Lynch:

Many funds are buying S&P and NDX future and have covered shorts in the Russell 2000. They note that funds are now crowded in gold trade while some also bought platinum.  Other moves include selling crude oil and reducing longs in heating oil. Meanwhile, on the forex markets, hedge funds are steadily pressing their short on the US dollar dn the market seems to have held onto a crowded long Japanese Yen position.

The report notes very deep short term positions in the 10 year and 30 year treasuries. They have also apparently reduced some of their long 2 Year Treasury positions. These latest moves seem to indicate that hedge funds as a whole are scaling back a bit from the curve steepener trade.
BofA Merrill Lynch Hedge Fund Monitor Oct 2009

I love how Roubini has become a household name (I can say I know him before he became famous!). It seems that the markets are testing the lows quite and despite the fits and starts, we will make a comeback. 

Still, during the bear’s 18 month reign of terror, healthcare has arguably held up the best. Just take a look at Vanguard Healthcare ETF *VHT) vs ETF sector funds like Tech (XLK), Energy (XLE), Consumer (XLY), Utilities (XLU), and Materials (XLB). 

But, the hot money has been pouring into materials and technology. Momemtum investing typically favors growth industries and that will likely come from technology stocks. 

Reference

Nokia (NOK) is the biggest maker of mobile devices. It has 40% of the global market share and dwarfs LG, Samsun, and Motorola. It has the #1 marketshare in nearly all markets and sells over 90% outside of the US.

Its next place of growth will come from cell phone purchasers in places like China and India. It has figured out the manufacturing so well that the company can earn over 15% even on the entry-level units while Samdun, its more profitable competitor, earns about 13%.

Nokia will also try to grow its service offerings to include music and games and GPS. It’s also just a great way to build brand equity.

Right now its main competition is in the smartphone arena where RIM and Apple dominate. Still, Nokia has purchased Symbian and tried to open-source it. It is touch and go because if this model of leveraging the collective intellect fails, they could fall behind in this crucial segment of the market.

Nokia currently has a earnings yield of 12.6% which is really quite cheap for such high markets, return on capital and dividend yield. There are no serious competitors in the low-end market and it is unlikely to be challenged. So Nokia remains a great buy due to a poor longer term outlook that will put a low ceiling on its earnings multiple.

Reference

Given its value proposition, Walmart continues to appeal to a broad segment of the consumer population given the current economic conditions. Did you know that it is now the  largest grocer in the US? (Ahead of Kroger) and along with pharmacy and electronics?

They are doing very well in places like South America. Its PE ratio is at 15x which is higher than the markets but that’s expected because of its regular earnings. Besidse, did you know that their earnings are growing at 10% annually and that is announced a dividend increase? (in this economy?!) 

Reference

 From The Lantern:

He told my staff that it was going to be fun, convivial, no clips, but [it] doesn’t matter, he’s a comedian, he can do whatever he wants.

Was it a fair fight? No, it wasn’t even a fight. I came on with the idea of taking a high road approach and discussing the issues, obviously [Stewart] came on strictly to try to humiliate me. It was brutal. Was he stand-up? Absolutely not.

Did he comport himself as a gentleman? Hardly. It was a deposition; he wants to be a prosecutor.

His goal was just to humiliate and destroy me and probably get me fired, and last I looked, I still have a show.

Cramer said although the interview was allegedly disastrous, “my [ratings] have never been better.”

Reference

In my days at Bear Stearns, there was one report I read every day: The Gartman Letter. Brilliant insights into trading every morning by 10am at latest. So, in looking at some of the trades he’s been making, it seems liek he consistently like to be long cheap retail and short malls. Similarly, he’s long Copper & Aloca (AA) and short the Japanese Yen (forex or (FXY)).

That is mainly because Gartman uses copper as a economic leading indicator–specifically, the Baltic Dry Index and the Transports to see if we are recovering in our economy. Index goes up=good economy.  

Reference

More than 800,000 properties were foreclosed on in Q1 of 2009 according to RealtyTrac’s last report. That’s the highest since they started tracking in 2005 despite a 13% decrease in bank repossessions. The increase was mainly because of a jump in default and auction notice filing. 

…Bloomberg adds, a flood of bank-owned properties are hitting the housing market as the recession deepens. The unemployment rate is now 8.5%–the highest since 1982 and 663,000 jobs were lost. Houses fell by 19%, the fast drop in history (expected though) according to S&P Case/Shiller Index of 20 US cities.  This is with borrowing rates below 5%. (anyone smell another bubble brewing?)

Where’s Ron Paul when you need him?

Reference

So oil has risen quite impressively since dropping below $35 a barrel in mid-February (and its $147 a barrel last year). Currently, it has soared back up to about $50 a barrel and my belief is that it will continue to do so. Why?

1. OPEC, which controls 40% of the world’s supply,  is reducing the amount of oil available
   1. They have reduced production 3x, or 12% of capacity, since September
   2. Fun fact: normally when OPEC issues a cut, they get a 60% compliance, right now it is at 80% compliance
   3. Saudia Arabia accounted for about 46% of the decline in production 
2. The dollar is very vulnerable because of the Fed
3. The low oil prices and tight credit have turned people off to energy investments making future supply low

On April 13, the IEA (International Energy Agency), lowered the demand forecast by 1 million barrels a day and now the world is expected to use about 83.4 million barrels/day in 2009. That’s 2.8% less than last year.

**The current future contracts for benchmark crude settled at $49.66 a barrel on March 21, up 11.3% from 2008.  

Now with a weak dollar and less production, how high will oil go? According to the World Energy Outlook, it will average more than $100/barrel from 2008 to 2015 and go above $200 a barrel by 2030 as demand far, far outpaces supply.

Build Obama, Build.

Reference

His investors are as loyal as those Jonestown Kool-Aid drinkers—and for good reason. His track record has no match. And unlike Bernard Madoff, he’s as open about his methods as Paris Hilton about her sex life.

 Morningstar recently named Warren, Chairman and CEO of Berkshire Hathaway, their new “CEO of the Year.” He predicted the current financial calamity—if not its timing and its intensity—more than five years ago, when he warned against derivatives in his annual shareholder letter, calling those wildly popular financial innovations “ticking time bombs” and “financial weapons of mass destruction.”

Indeed, Berkshire is now one of a handful of true Triple-A balance sheets left in the world. 

Source

http://jeffmatthewsisnotmakingthisup.blogspot.com/2009/01/warrens-worst-year.html

At the end of November 2008, there were a combined 843 ETFs and ETNs–that number should easily top 1,000 by the end of the year.

Meanwhile hedge funds will likely implode from a lost of investor trust  in the Madoff scandal aftermath. A good portion of those investors will likely turn to ETFs.

Source

http://www.etftrends.com/2008/12/10-etf-predictions-2009.html

One of the standard explanations is that bubbles are created when greed takes over from fear: people see prices rising, and at first their fear of getting burned keeps them on the sidelines, but as the bubble continues and other people get rich their own greed increases until it wins out over fear, and they buy into the bubble as well. As a result, some say, we are bound to have bubbles periodically, especially when new investors (esp. young people), who have never experienced a crash, come into the market.

 The fact that we have so few of them is probably a reflection of the size of asset markets (it takes longer to get millions of investors bought into a bubble than a few dozen) more than anything else. The broader point, I think, is that it’s not that useful to say the bubble happened because people were stupid, or greedy, or irresponsible. Yes, people can be stupid, greedy, and irresponsible, but you have to take people the way they are; mass psychological reeducation is not an option. And even if you could reeducate them to the point where they all fully understood the assets they were trading, there would still be bubbles.

Source

http://baselinescenario.com/2008/12/07/financial-crisis-bubbles-causes-psychology/

GM and Chrysler say they need the first installments on a rescue package this month to avoid running out of cash. Ford has requested a $9 billion credit line but said it may not need to tap that resource.

Meanwhile, GM’s Chief Executive Rick Wagoner told Congress: “We’re here today because we made mistakes [...] and because forces beyond our control have pushed us to the brink.”

The three men pledged to work for $1 a year and travel to Washington by car. They were ridiculed at a hearing last month for taking separate private jets and left empty-handed after pleading for $25 billion.

“The collapse of one or both of our domestic competitors would threaten Ford because we have 80 percent overlap in supplier networks and nearly 25 percent of Ford’s top dealers also own GM and Chrysler franchises,” Mulally said.

Source
Image from: http://ec.europa.eu/enterprise/regulation/goods/images/cars.jpg

Talk about change in the casino industry…it was only two years ago when private equity firm, Colony Capital bid $8.8bn on Station Casinos. Harrah’s was bought for $27.8bn and even Fortress Investment and Centerbridge Partners paid $8.9bn for Penn National Gaming Inc.

Fast forward two years, some consultants like Joseph Weinert speculates that as many as 5 of Atlantic City’s 11 casinos could be tied up in Chapter 11 proceedings. As for the deals noted earlier in this posting? Trump Entertainment missed its interest payment, Tropicana has been in bankruptcy since May, and Fortress and Centerbridge paid $225m to break up with Penn National.

So much for what analysts told The Deal in early 2007, “factors including the cost of money, the asset-generating intensity in the gaming business and the clear benefits of scale”…clearly that didn’t work out for close to 50% of the casinos.

Source

http://www.thedeal.com/dealscape/2008/12/when_casinos_gambleand_lose.php

Image from: http://www.destination360.com/north-america/us/nevada/images/s/nevada-silver-legacy-resort-casino.jpg

I’ve heard a few arguments that stocks are cheap because S&P dividend yields are higher than Treasury yields. That assumes S&P dividends will stay at present levels or increase–a really poor assumption.

S&P dividends are being cut and with few corporate profits, it is reasonable to assume that in aggregate, dividend payments will continue to shrink.

Naked Capitalism notes, “cuts are concentrated in financial firms [...] why pay dividends when you are broke and can turn to the Treasury and Fed for a helping hand?.”

From Bloomberg, “Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash.” Meaning, stocks might be considered cheap right now but I certainly wouldn’t attribute it to their dividends!

Source

http://www.nakedcapitalism.com/2008/11/kiss-those-dividends-goodbye.html

It is not surprising that that markets have dipped to single-digit forward P/E multiples. Meanwhile, yields on junk bonds are at their highest since the 1930s.

Source

http://ftalphaville.ft.com/blog/2008/11/21/18554/diminishing-ratios-booming-yields-great-opportunity/

According to Felix Salmon,

The TED spread today is 213bp — more or less exactly where it’s been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman’s collapse.

Sure, Citigroup might sell itself but, as a whole, banks’ capital structure can cope with this: once the common is eroded, the bank belongs to its preferred stockholders. It’s not the end of the world if Citi stock goes to zero, and the Fed has made it very clear that Citi’s senior creditors are going to remain whole.

Source

http://www.portfolio.com/views/blogs/market-movers/2008/11/21/this-is-not-financial-meltdown

With the 3 month treasury bill at 2 basis points, folks can essentially borrow for free. According to some like Joe Balestrino, “Where the credit markets are trading, it is all but implying a 1929 scenario.”

**The 1929 scenario was the Great Depression that ended at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in modern history, and is used in the 21st century as a benchmark in how far the world’s economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 24, 1929, known as Black Thursday. The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.

Source

http://blogs.cfr.org/setser/2008/11/20/not-a-good-sign-the-treasury-once-again-can-borrow-for-free/

Nowhere is counterparty risk higher than in Berkshire Hathaway’s derivative contracts because even if it’s downgraded, it only has to put up a negligible amount of collateral. Net net? In order to hedge their BRK counterparty risk, people have no choice but to buy CDS protection for  BRK, whatever the price. Which would explain why Berkshire Hathaway briefly fell $6,500 per share today to close at its lowest level in over five years. Here’s David Gaffen:

In recent weeks, the credit-default swaps has seen a marked decline in liquidity and trading, a smaller amount of insurance contracts purchased can still cause large shifts in prices of a particular credit-default swap.

Combined with Stempel:

A credit rating downgrade would likely not be material. Berkshire would have to post “nominal” additional collateral on derivatives of “far below 1 percent of assets” even if Berkshire lost its “triple-A” ratings.

Put those two together and things start to come into focus. BRK is definitely a screaming “buy” But, in a Dow 7,500 market, there are lots of screaming buys out there, including ones in Buffett’s portfolio such as Goldman Sachs and General Electric — both of which, unlike Berkshire, have access to unlimited Fed liquidity.

Source

http://www.portfolio.com/views/blogs/market-movers/2008/11/20/whats-happening-to-berkshire-hathaway

A lot of sovereign investors, including China, were starting to dabble in risky assets in the first half of 2007…and promptly got burnt. Right now, they have no interested in any kind of risky US asset and are instead buying Treasuries. In fact, the decline over the last 3 months is more severe than the fall in demand for US corporate bonds last August (think subprime mortgages). While there isn’t much a real risk that the Treasury would default, foreign investors holding long-term Treasuries are clearly taking a lot of currency risk–especially poignant because the dollar is rallying.

The US is taking a risk too because the rising stock of short-term bills held abroad does potentially leave the US more exposed to a rollover crisis.

Typically this fall-off in foreign demand for:

1. foreign purchases of Agencies
2. foreign purchases of US corporate bonds

is associated not just with a credit crisis, but also with a currency crisis. Hrm, anyone else channeling Former Fed chairman Paul Volcker or Ron Paul?

Source

http://blogs.cfr.org/setser/2008/11/18/you-know-it-is-a-crisis-when-the-trade-deficit-was-financed-by-selling-t-bills-to-china-and-european-banks/

From yesterday’s Yahoo:

At their intraday lows, the Dow was below 8000, while the S&P and Nasdaq were below their respective October lows of 840 and 1,504.

“We are buyers as markets approach those levels again,” Barry Ritholtz CEO of Fusion IQ wrote on his Big Picture blog, noting markets typically move in a pattern of “bottom, rally, retest, rally.”

Since major averages subsequently rallied about 18% from their October lows the first time, traders are hoping for a repeat performance.

Wharton Professor Jeremy Siegel puts the fair value of the SP500 around 1380–about 50% above the current level–and significantly higher than his peers who generally place the markets at 1000. He comes to that conclusion by applying a 15x P/E multiple to $92 per share using “normalized SP500 earlier.” The problem is that he doesn’t adequately explain where the $92 came from.

Keep in mind this is the same man who wrote, “I think the stock market will have another winning year in 2008.”

Source

http://www.clusterstock.com/2008/11/professor-jeremy-siegel-stocks-are-dirt-cheap-

One of Goldman Sachs‘s flagship hedge funds, run by two of the Wall Street bank’s most talented traders, has lost close to $1bn since its launch in January.

Goldman Sachs Investment Partners, hailed as one of the biggest hedge fund launches, raised more than $6bn, has lost $989m by September. The fund was down about 13% in the third quarter. Year-to-date performance fell about 15.5% in the year to September.

Like many multi-strategy funds diversified across equity, credit markets and convertible bonds, GS Investment Partners was hit hard by losses on convertible bonds – debt instruments that can convert into equity; returns were called “abysmal.”

Source

http://www.clusterstock.com/2008/11/goldman-hedge-fund-crushed

Harvard University, with an endowment of $36.9 billion, is seeking to offload about $1.5 billion in investments with private-equity firms such as Bain Capital LLC. If the Harvard portfolio trades, the transaction would be one of the largest-ever sale of a private-equity stake. Bids are due this week.

Shares of Blackstone Group LP and Fortress Investment Group LLC, two large U.S. private-equity firms that listed their shares in 2007, each have fallen more than 70% from their IPOs.

Source

http://online.wsj.com/article/SB122575776824995245.html

There is a seasonal tendency for the markets to perform better during the November-through-April period (winter months) than in the other six months of the year.

The best-known academic study of this indicator was conducted by a finance professor at New Zealand’s Massey University and Sven Bouman of AEGON Asset Management, a Netherlands-based pension fund.

In fact, on average, the stock market has produced almost all of its gains during the winter months and nearly flat during the summer months. Those who followed this indicator this past year went to cash at the close of April 30, when the DJIA stood at 12,820. They re-entered at the close this past Friday, when the Dow stood at 9,325. In other words, followers were in the safety of cash during a six-month period in which the Dow dropped 27%.

Source

http://www.marketwatch.com/news/story/story.aspx?guid={B439DD46-773E-4811-99E8-3D88B0A54443}

I guess it isn’t up for debate anymore; the slide started in Asian where the Nikkei fell 9.6% to a 5 year low of 7649.08, followed by HK, Mumbai and Seoul. Europe followed next, where the pan-European DJ Stoxx 600 fell 4.7% to 198.80, dropping below 200 for the first time since mid-2003. The US DJIA fell 312, or 3.6%, to 8378.95…a 5.5 year low.

In Asia, currencies sank across the continent, one big exception was Japan—where the yen jumped to a 13-year high, at 94.6 yen to the dollar late Friday. The flip side is that the Japanese exports will not be more expensive.

September was the worst month for hedge funds since LTCM went down in 1998.

Highland Capital Management LP will close its flagship Highland Crusader Fund and another hedge fund after losses on high-yield, high-risk loans and other types of debt, according to a person with knowledge of the decision.

Highland, whose total assets under management has shrunk to about $33 billion from $40 billion in March, will wind down the Crusader fund and the Highland Credit Strategies Fund over the next three years, said the person, who declined to be named because the decision isn’t public. The hedge funds had combined assets of more than $1.5 billion.

Source

http://www.economist.com/blogs/freeexchange/2008/10/hedge_fun.cfm

The Merrill survey sometimes is an incredibly useful handbook for individual investors. It tells you what the big money crowd is thinking, and feeling, and where they have placed their chips. At market extremes, it is a wonderful contrarian indicator, or “magnetic south,” pointing in exactly the wrong direction.

Thus fund managers were hugely bullish on European equities 16 months ago, just before those markets collapsed, and hugely bearish on Japan back in the spring of 2003, just as it hit rock bottom.

A staggering 93% today are blowing Bronx cheers at analysts’ earnings forecasts. They think corporate earnings will disappoint in the year ahead. Indeed 51% believe forecasts are “far too high.”

Of course this may leave more room for positive surprises than for disappointments.

And it isn’t just the Merrill survey that’s making me itch to be bullish.

Look at the market: It has so far failed to follow up on Monday’s rebound. Everywhere you go, there huge skepticism about any rally. Worldwide share prices are worth 30% less than they were at the start of September, and nearly a fifth less than they were at the start of October, but unlike in 2001, or 2006, no one is calling this “a great buying opportunity.” No one is jumping in.

The Wall Street Journal on Tuesday reported that a number of big hedge fund managers have also been moving heavily into cash in recent days. Some of them are frightened about the market chaos. It makes you wonder why they’re hedge fund managers.

Maybe it doesn’t mean a thing. Maybe the market is about to fall another 2,000 points.

But some old stock market hands sometimes talk about the “golf course” test: Be wary of any asset that fund managers are bragging about on the golf course. In 1999, they were all boasting to each other about all the dotcom stocks in their portfolios. Last year, it was all their emerging markets stocks.

Right now, it seems, everyone is bragging about how much they are holding in cash.

Source

http://online.wsj.com/article/SB122409728479837329.html

Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to “sputter.”

“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index.

Source

http://www.rgemonitor.com/roubini-monitor/254036/bloomberg_october_14_2008_roubini_sees_worst_recession_in_40_years_rallys_end

Despite the confusion caused by the market’s steep plunges and dizzying climbs over the past week, one individual appears confident that now is a time to buy. That investor would be Warren Buffet.

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

[...]

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Source

http://dealbook.blogs.nytimes.com/2008/10/17/buy-american-buffett-says-he-is/

Schell & Logan. Engraving: Harper’s Weekly; May 24, 1884.

Wall Street looking west toward Trinity Church past the statue of George Washington on the steps of the Sub-Treasury building.

On May 14, 1884 a brief panic was caused by the sudden failure of the Grant and Wood Bank. Despite a flurry of unusual activity the Panic was not serious and business soon returned to normal.

Source

http://www.historyimages.com/Vintage-NY/Wall-Street-Panic.htm

Since the Treasury Department has been unsuccessful in restoring confidence, the US is now considering taking ownership stakes in the banks. The hope is that it would quickly restore the banks’ balance sheet and allow banks to resume lending. The idea is gaining traction even among staunch Republicans who have fought most of their careers against laissez-faire economic policies.

This voluntary plan resembles the one announced in Britain. Under their plan, the British government would offer RBS, Barclays, and HSBC up to $87b to shore up their capital in return for perferred shared.

The action comes after an unprecedented coordinated effort by the Federal Reserve and five other central banks, including China, to cut interest rates by .5%. This still failed to stop the financial panic.

Source

http://www.nytimes.com/2008/10/09/business/economy/09econ.html?_r=1&oref=slogin

Check out this short letter to Congress signed by hundreds of well-respected academic economists.  It was written before the rejection from the House yesterday.  As we watch how the bill changes, let’s hope some of these wise economists are actually consulted.

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

U.S. stocks plunged and the Standard & Poor’s 500 Index tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system. The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from American equities. The MSCI World Index of 23 developed markets slid 6.9 percent, the most in 21 years.

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George Soros just sent this email out to his readers,

Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.
Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms.