The Banking Sector Takes a Dump
The Philadelphia Banking Index Chart has lost 22% thus far in 2007.
These 25 banks share price is "weighted" (ala the Dow Industrial 30 companies making up its index) and the overall index is a clear picture of the health of the banking sector.
Eventhough Bear Stearns is not a "bank" in the sense you and I would open a checking or savings account with them and do our banking there, Bear Stearns is where the current malaise in banking started.
Note the trendline broke down in August of 2007 after the big Bear Stearns hedge funds declared bankruptcy on the last day of July this past Summer.
Back on July 31, 2007, Bear Stearns two hedge funds . . . the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund . . . both declared Chapter 15 bankruptcy.
Chapter 15 covers cross-border petitions and was used because the funds are technically registered in the Cayman Islands.
Weeks before the funds were declared bankrupt, Bear Stearns added a $1.6 billion bailout of funds to meet margin calls. At that time, one fund was declared "basically worthless" while the other fund was worth 9 cents on the dollar.
In my mind, Bear Stearns was the tipping point of crashes in hedge funds, housing, credit lending, banks, insurance companies which insure mortgages, and so on.
Since the Bear Stearns hedge fund blow up, the Banking and Securities sectors have taken one hit after another. And the Banking Index chart has decidedly broken through what was once a 12 year old UP trendline.
Where will it end? When will it end?
Why buy banks now when the trend is now down?
Why not wait and invest your money in safer places until all the excess of bad bets in Housing, Banking, Wall Street Securities firms, Insurers, etc., have been bled out of the credit markets.
There is nothing that says the banking sector can't have years of downtrending pressure on its stocks. Indeed, with Citicorp, our nation's largest bank, being rumored to a bankruptcy or at least a breakup of its different lending units, we could see a replay of Japanese banks during their 15 year slide in profits and housing and commercial real estate bets, from 1990 to 2005.
If our Housing Crash started in August 2005, what's to stop us from going through 2020 with depreciating home prices pegged next to our inflation?
People keep telling me it can't happen here.
And yet many of these same people said in 2004 that there was no such thing as a Housing Bubble.
If you are thinking about investing in a bank stock now, I say why take the chance? Surely there are better places to invest your money than banks. Wait this out. And let's discuss safer bets in future posts to this blog.
Precious Metals and Commodities are Still Outperforming the Markets and Especially the US Dollar
A local business owner says to me the other day, "Why buy gold? Gold is determined in dollars right? Everytime the dollar goes down, gold is worth less."
I sez, "Gold has appreciated more this year then the dollar has depreciated. Hence, I am way ahead of bank CDs, Treasuries, and anything else you think "safe"."
I then asked him where he banks. He told me TIB bank. He keeps his money in a "safe" 5.5% money market account. I asked him if he knew if TIB bank sweeps his money into SIVs nightly or is invested in risky investment instruments? He said he did not know, but that he wasn't bothered because the bank is insured by the FDIC.
To which I asked, "Do you have any idea how long it took insurers to pay off FDIC deposits in the 80s S&L fiasco? Sometimes months and years. If you want to wait on your money, which has depreciated 10% alone this year, you will possibly see further losses due to dollar depreciation."
For the record, the US Dollar Index closed at 83.94 on the last day of 2006.
The US Dollar Index closed at 75.80 yesterday. Thats a 10% drop this year when rounded off. (See my chart below.)
(double click chart to enlarge)Yesterday, it closed at $782.02.
Rounding off, gold has gained 23% this year. (My gold stocks have done even better.)
Conclusion: As long as the dollar depreciates less than my gold appreciates, my worth in inflation pegged dollars is increasing.
Meanwhile, my friend keeping dollars in a 5.5% money market account has already lost 4.5% on the value of the deposited dollars with his interest (not all of it collected yet, I might add) figured in.
People keep telling me gold is a fool's play. Meanwhile, it's been one of the best real hedges against the turmoil and volatility in this market.
Why Do They Call Them "Hedge Funds"?
I'm just a high school educated (a few years of college classes added on) deejay in a Country Western bar, yet I am outperforming not only the stock markets by a factor of 4 or 5 this year, but I am also "still in business" making money on my investments while many a Phd in finance has been kicked to the curb after bankrupting investors this year.
Phds. running "hedge" funds which have blown up and taken rich people's life savings down the drain, are showing how Orwellian the world of finance has become.
"Hedging" to me means reducing risk.
Hedge funds, however, run by the best and brightest finance minds in the country, went after higher returns using riskier and riskier schemes just to produce better returns.
What rich folk didn't understand was the Phds' greed glands: the bigger the possible gain off those 20% of all profits made from wild ass bets, the more risk was "extruded" from their rational brain and secreted out their butts.
Risk became a dis-remembered word by greedmonsters.
For those of you who don't have at least $500,000 or so to open an account with a hedge fund, you might count your lucky stars you never fell for this kind of following setup:
Hedge funds usually charge a 1 or 2% upfront fee.
But then the directors of hedge funds get 20% fees of any profits made.
That's right.
If they make you say $100,000 in profits in one year, you only get $80,000. Whatsmore, if you invested $500,000 as start up capital, the "directors" take another 1 or 2% ($5,000 or $10,000) for upfront "managment" fees.
The kicker?
If they lose 40% of your money in a month or by year's end, say, your hedge fund portfolio is down 73%, these brilliant money managers suffer none of your pain. Hell, if they lose all your money, these guys will still have their homes in the East Hamptons to go soak their sociapathic pysches.
Do you think losing your money hurts these guys? No. They will not earn any 20% of any investor's gains when they showed losses. But at the same time, they lose none of their own "capital" as it was other people's money . . . not theirs . . . which they were gambling away on insane financial products and derivatives which higher minds such as Warren Buffet will tell you not even he can understand.
What ever happened to the sound investment advice from Peter Lynch, Warren Buffet, Anton Van Den Berg and other greats to invest in "what you know"?
In my way of thinking, this set up for hedge fund director remuneration did not induce the best and brightest to use safer "hedges" to build safer profits.
By feeding the Wall Street sharks on 20% profits on any gains, the memory of risk faded day by day to where risk became something that only happened to lesser mortals back in the 1930s or the 1980s. Risk today was well managed and "contained". Didn't the mainstream press earlier this year tell us over and over that the damage was "contained" from sub-prime? And now look.
When the greed glands took over and everybody in the investment banking and brokerage offices was making million dollar bonuses . . . including secretaries and aides . . . there was no stopping the unchecked desires to eat any type of paper instrument with outlandish returns, because nobody was paying attention to a "Black Swan Event" which finally came in the form of Bear Stearns this past summer.
And now those "Black Swan" events are happening every day in the financial markets all around the planet.
Can it get worse?
You bet it can.
Just read your history.
Meanwhile, the little darlings on Wall Street aren't suffering eventhough they are losing their respective firms billions of dollars.
According to the latest tally by Bloomberg, Wall Street plans $38 billion in bonuses while shareholders lose.
Is this a great country or what?
p.s. I leave you with a few scraps of food for thought:
From a March 2005 Guardian article quoting a Warren Buffet annual letter to shareholders in Berkshire Hathaway:
Mr Buffett said in the last 10 years foreign powers and their citizens had accrued about $3 trillion worth of US debt and assets such as equities and real estate. At current rates, he predicted that in another 10 years' time the net ownership of the US by outsiders would amount to $11 trillion.
"This annual royalty paid [to] the world would undoubtedly produce significant political unrest in the US. Americans ... would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an 'ownership society' will not find happiness in - and I'll use hyperbole here for emphasis - a 'sharecropper's society'."
Lastly, a quote from Ray Dallio of Bridgewater Associates in Barron's, May 26th 2007 edition, three month's before the first big hedge fund blow up at Bear Stearns:
"Hedge funds and private-equity firms today are like the dot-coms in 2000: Ask for money and you'll get it. They bid up the prices of everything. The amount of money flowing is almost out of control, and it's making everything overvalued. A client of mine said it's like there are 11,000 planes in the sky and only 100 good pilots -- an accident is bound to happen."
3 comments:
Rock,
Great to read that you are doing well - as you already know, there is no price that you can put on your own personal state of mind and overall well being. It was always interesting to me to see how hard average Joes like us would work as locals down in the keys -- and constantly have to prove to everyone that it isn't always mojitos and hammocks down in the southernmost city.
I'm on the fool every day, and overall just a much more informed investor than I was a year ago...who knows what the next several years will bring! I still owe the first few shares of JNJ to you though.
Things are going well in Orlando - if you're ever in town, let me know and I will buy you a Bud (or Coke, or Pepsi, or Whole Foods, etc etc).
Cheers Rock.
-Scotty B
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